Continental Insurance v. Bahnan

United States Court of Appeals
For the First Circuit

No. 99-1579

CONTINENTAL INSURANCE COMPANY,

Plaintiff, Appellee,

v.

ANTHONY BAHNAN,

Defendant, Appellant.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Nathaniel M. Gorton, U.S. District Judge]

Before

Selya, Circuit Judge,

Campbell, Senior Circuit Judge,

and Lynch, Circuit Judge.

John W. Spillane, with whom Spillane & Spillane, LLP was on
brief, for appellant.
James T. Hargrove, with whom Dana F. Rodin, Timothy N.
Schofield, and Goulston & Storrs, P.C. were on brief, for
appellee.

June 26, 2000
 SELYA, Circuit Judge. Continental Insurance Company

issued a Business Owners Xtra (BOX) policy to Anthony Bahnan.

The policy covered a three-family house situated at 17 Mott St.,

Worcester, Massachusetts. A fire occurred a few months after

coverage had attached, and Bahnan made a claim. In the course

of the ensuing investigation, Continental came to suspect that

Bahnan had misrepresented the condition of the premises. From

that point forward, the parties' relationship became

adversarial.

For purposes of this appeal, we need not recount the

ebb and flow of subsequent events, save only to note that

Continental, though rejecting Bahnan's claim, paid the actual

cash value of the fire loss to the mortgagee designated in the

policy (one Gordon Koury). We shall return to the Koury payment

shortly. Before doing so, however, we deem it fitting to

describe the underlying litigation.

In a variation on the usual insured/insurer pas de

deux, Continental seized the initiative. It sued Bahnan in the

district court under diversity jurisdiction, see 28 U.S.C. §

1332(a), seeking to recoup the Koury payment and to collect

other damages. Its complaint contained a claim for intentional

misrepresentation as well as a claim for deceptive business

practices under Mass. Gen. Laws ch. 93A. Bahnan answered the

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complaint and launched a fleet of counterclaims (some of which

also invoked chapter 93A).

Following a period of pretrial discovery, Continental

moved for summary judgment on the counterclaims. See Fed. R.

Civ. P. 56. The district court granted this motion as to five

counterclaims, leaving the other four intact. See Continental

Ins. Co. v. Bahnan, C.A. No. 94-11304, slip op. (D. Mass. Nov.

6, 1997) (Bahnan I). Next, the court conducted a five-day jury

trial on Continental's misrepresentation claim and Bahnan's

breach-of-contract counterclaim. The jury, in answer to a

special question, found that Bahnan had knowingly misrepresented

a material fact when procuring the policy. Consequently, it

awarded Continental damages of $56,000 (to reimburse it for the

Koury payment and certain other expenses) and returned a take-

nothing verdict on the tried counterclaim.

Under Massachusetts law, claims premised on chapter 93A

are triable to the court, not to the jury. See Nei v. Burley,

446 N.E.2d 674, 677 (Mass. 1983). In pursuance of this mandate,

Judge Gorton addressed the parties' chapter 93A claims after the

trial and resolved them in a written rescript. See Continental

Ins. Co. v. Bahnan, C.A. No. 94-11304, slip op. (D. Mass. Feb.

18, 1999) (Bahnan II). Neither side enjoyed any affirmative

success: the court found in Bahnan's favor on Continental's

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chapter 93A claim and in Continental's favor on Bahnan's

surviving chapter 93A counterclaims. This appeal followed.

Bahnan serves up a salmagundi of arguments. We have

reviewed the record with care, and we are satisfied that these

arguments lack force. None requires extended discussion.

Hence, we offer only a few relatively brief comments, responding

to Bahnan's most loudly bruited points.

First: The district court instructed the jury on the

law of agency as it pertains to the attorney-client

relationship. Bahnan assigns error. We detect none.

A party is entitled to an instruction on its theory of

the case as long as that theory is legally valid and factually

supported. See Febres v. Challenger Caribbean Corp., ___ F.3d

___, ___ (1st Cir. 2000) [No. 98-1916, slip op. at 10]; United

States v. DeStefano, 59 F.3d 1, 2 (1st Cir. 1995). Bahnan does

not question the wording of the instruction that the court gave

in this instance, but alleges that it lacked sufficient

grounding in the record and therefore should have been left

unsaid. The nisi prius roll belies this allegation.

To put matters into perspective, it should be noted

that Bahnan predicated his breach-of-contract counterclaim on

Continental's refusal to pay him for the fire damage to the

insured structure. Continental defended on several bases,

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including the ground that it had rescinded the policy. The

evidence at trial suggested that an attorney, Edward G.

Shamgochian, had accompanied Bahnan when the latter gave his

pre-suit examination under oath to the insurer, see Mass. Gen.

Laws ch. 175, § 99; that Shamgochian conducted himself in a

manner consistent with that of a lawyer representing a client;

and that Shamgochian thereafter communicated with Continental's

counsel on Bahnan's behalf. The evidence also showed that, when

Continental purposed to rescind the policy, it corresponded with

Shamgochian and, in the end, sent the refund-of-premium check to

him (for forwarding to Bahnan).

This evidence adequately underpinned Continental's

argument that Bahnan acquiesced in the rescission by cashing the

check. Similarly, it justified the district court's decision to

instruct on the attorney-client relationship, notwithstanding

denials by Shamgochian and Bahnan that such a relationship had

been forged. Given standard principles of agency law and

Shamgochian's actions on Bahnan's behalf, the record supported

— even though it did not compel — a finding that Shamgochian

acted for Bahnan and that delivery of the refund-of-premium

check to him, along with explanatory correspondence, was the

functional equivalent of delivery to Bahnan. See Hudson v.

Massachusetts Prop. Ins. Und'g Ass'n, 436 N.E.2d 155, 159 (Mass.

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1982); Jones v. Harrar, 95 N.E.2d 646, 648 (Mass. 1950); see

also Levin v. Berley, 728 F.2d 551, 553 (1st Cir. 1984)

(explaining that a client is chargeable with knowledge gleaned

by his attorney).

At any rate, the lower court instructed on the law of

agency and the attorney-client relationship only in regard to

Question No. 2, which asked: "Did Bahnan prove that Continental

breached the insurance contract?" The court painstakingly

explained to the jurors that this interrogatory related to

Bahnan's breach-of-contract counterclaim and Continental's

rescission defense. The jurors were told not to consider

Question No. 2 at all if they answered Question No. 1 in the

affirmative. Because the jurors replied "yes" to Question No.

1 (finding, in effect, that the policy was void ab initio by

reason of Bahnan's material misrepresentation), they never

reached the rescission issue and thus had no occasion to

consider the challenged instruction. Accordingly, any error was

harmless. See Faigin v. Kelly, 184 F.3d 67, 87 (1st Cir. 1999);

Mutual Fire, Marine & Inland Ins. Co. v. Costa, 789 F.2d 83, 88

(1st Cir. 1986); cf. Evans v. Avery, 100 F.3d 1033, 1041 (1st

Cir. 1996) ("Jurors are presumed to follow the court's

instructions. . . .").

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 Second: Bahnan's second critique of the charge — his

contention that the district court erred by neglecting to

instruct that only misrepresentations made with respect to

conditions precedent to coverage or matters specifically

prescribed by Mass. Gen. Laws ch. 175, § 99 could serve to annul

the policy — is procedurally defaulted and substantively flawed

to boot.

The record makes manifest the procedural default.

Simply put, Bahnan failed to register this objection at the time

and in the manner dictated by Fed. R. Civ. P. 51. We have been

implacable in our insistence upon strict compliance with the

letter of Rule 51, see, e.g., Faigin, 184 F.3d at 87; Toscano v.

Chandris, S.A., 934 F.2d 383, 384-85 (1st Cir. 1991); McGrath v.

Spirito, 733 F.2d 967, 968-69 (1st Cir. 1984), and there are no

excusatory circumstances here.

If more were needed — and we do not think that it is

— Bahnan's proposed instruction was inaccurate. Under

Massachusetts law, any material misrepresentation, whether made

before or after a policy issues, may serve as a basis for

avoiding coverage. See Shapiro v. American Home Assur. Co., 584

F. Supp. 1245, 1249 (D. Mass. 1984); Hanover Ins. Co. v. Leeds,

674 N.E.2d. 1091, 1096 (Mass. App. Ct. 1997); see also Mass.

Gen. Laws ch. 175, §§ 99, 186. Since Bahnan's proffered

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instruction erroneously limited material misrepresentations to

those touching upon either conditions precedent or specific

statutory requirements, the court properly rebuffed it.

Virtually by definition, a trial judge does not err when he or

she denies a party's request for a jury instruction that is

legally incorrect.1 See Febres, ___ F.3d at ___ [slip op. at

14]; Faigin, 184 F.3d at 87.

Third: Bahnan also calumnizes the district court for

refusing to charge the jury that Continental's handling of the

mortgage claim breached its contractual obligations. This

attack reflects a gross misunderstanding of both the applicable

law and the provisions of the BOX policy. We explain briefly.

At the time of the fire, Koury was owed approximately

$90,000 on the mortgage note. Continental paid him the actual

cash value of the loss ($50,000). Refined to bare essence,

Bahnan's position is that: (a) Continental was legally

obligated to take an assignment of the note and mortgage

coincident with its payment to Koury, and (b) its failure to do

so breached the policy. Bahnan is wrong on both counts.

1Bahnan seems to suggest that the district court's "material
misrepresentation" instructions, as given, were wide of the
mark. To the extent that he links that argument to his
"conditions precedent/specific statutory requirements" argument,
we reject it for the reasons stated in the text. In any event,
Bahnan did not lodge a contemporaneous objection to this aspect
of the district court's charge, and we see no plain error.

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 The BOX policy contains a rather conventional "mortgage

payable" clause that reads in pertinent part:

If we pay the mortgage holder for any
loss or damage and deny payment to you
because of your acts or because you have
failed to comply with the terms of this
policy:
• the mortgage holder's rights under
the mortgage will be transferred to us
to the extent of the amount we pay;
and
• the mortgage holder's right to
recover the full amount of the mortgage
holder's claim will not be impaired.

At our option, we may pay the mortgage
holder the whole principal on the mortgage
plus any accrued interest. In this event,
your mortgage and note will be transferred
to us and you will pay your remaining
mortgage debt to us.

Under this proviso,2 the insurer's obligation to the mortgagee

is independent from its obligation to the mortgagor (typically,

the named insured). See Pierce v. Sentry Ins., 421 N.E.2d 1252,

2The substance of this clause tracks the corresponding
statutory requirement for standard fire insurance policies
written in Massachusetts, viz.:

[W]henever this company shall be liable to a mortgagee
for any sum for loss under this policy for which no
liability exists as to the mortgagor, or owner, and
this company shall elect by itself, or with others, to
pay the mortgagee the full amount secured by such
mortgage, then the mortgagee shall assign and transfer
to the company interested, upon such payment, the said
mortgage together with the note and the debt thereby
secured.

Mass. Gen. Laws ch. 175, § 99.

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1254 (Mass. App. Ct. 1981). Where, as here, the insurer has a

defense as to the insured/mortgagor, but none as to the

mortgagee, it may pay the mortgagee the lesser of the actual

cash value of the loss sustained or the full amount secured by

the mortgage. See Eliot Five-Cent Sav. Bank v. Commercial Union

Assur. Co., 7 N.E. 550, 552 (Mass. 1886). Only if the insurer

chooses the latter course is it entitled to an assignment of the

note and mortgage.

Bahnan's argument merges (or, at least, blurs the

distinction between) the alternate pathways that this paradigm

creates. There is an option, and that option is quite clearly

the insurer's. When the insurer elects the former course — as

it did here — it is entitled to limit its payment to the

mortgagee to the actual cash value of the loss sustained. In

that event, however, it has no right to demand an assignment of

the note and mortgage, but, rather, must leave the mortgagee

free to pursue a claim for the unpaid balance of the

indebtedness.3 See Eliot Five-Cent Sav. Bank, 7 N.E.2d at 552.

3
We are unimpressed by Bahnan's citation to Money
Store/Mass., Inc. v. Hingham Mut. Fire Ins. Co., 708 N.E.2d 687
(Mass. App. Ct. 1999). Even if supportive of Bahnan's theory —
a dubious proposition — that opinion was overruled on further
review by the Supreme Judicial Court, see 718 N.E.2d 840 (Mass.
1999), and has no precedential force.

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 Fourth: Contrary to Bahnan's importunings, the jury's

verdict was supported by substantial evidence in the record.

For example, Continental presented proof from which a factfinder

reasonably could conclude that Bahnan, when applying for the

policy, had submitted a false lead paint compliance letter

regarding the second-floor apartment. It also adduced competent

evidence that this submission was material to the risk because,

without the compliance letter, the underwriters would not have

authorized issuance of the policy. No more was exigible to

justify a finding that the policy was void (and, hence, a

verdict for Continental). See Barnstable County Ins. Co. v.

Gale, 680 N.E.2d 42, 44 (Mass. 1997) (explaining that a fact is

"material" so long as it would naturally be expected to

influence an underwriter's judgment in determining whether to

issue a policy).

Fifth: Shifting his focus from the trial to the

antecedent summary judgment ruling, Bahnan asseverates that the

district court erred in disposing summarily of two counterclaims

that aspired to invoke Mass. Gen. Laws ch. 93A, § 9. We think

not.

Broadly stated, chapter 93A was designed to foster more

civilized behavior in the business world. See Arthur D. Little,

Inc. v. Dooyang Corp., 147 F.3d 47, 55 (1st Cir. 1998); Quaker

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St. Oil Ref. Corp. v. Garrity Oil Co., 884 F.2d 1510, 1513 (1st

Cir. 1989). To achieve this laudable end, the statute prohibits

those engaged in trade or commerce from utilizing "unfair or

deceptive acts or practices" in the course of business

transactions. Mass. Gen. Laws ch. 93A, § 2. The statute

enforces this proscription in various ways, including the

creation of private rights of action. See, e.g., id. §§ 9, 11.

By their terms, however, the two sections of chapter 93A that

create private rights of action are mutually exclusive: section

11 entitles "[a]ny person who engages in the conduct of any

trade or commerce" to bring an action for unfair or deceptive

practices, whereas section 9 grants essentially the same

entitlement to aggrieved consumers. Withal, section 11 affords

no relief to consumers and, conversely, section 9 affords no

relief to persons engaged in trade or commerce. See Employers

Ins. of Wausau v. George, 673 N.E.2d. 572, 579 (Mass. App. Ct.

1996); DiVenuti v. Reardon, 637 N.E.2d 234, 239 (Mass. App. Ct.

1994).

Viewed in this light, Bahnan's asseveration that the

district court mistakenly pretermitted his section 9 claims

depends on how he is classified. The district court concluded,

as a matter of law, that Bahnan's ownership of the Mott St.

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property constituted an engagement in trade or commerce. See

Bahnan I, slip op. at 9-10. We agree with this taxonomy.

The undisputed facts show that Bahnan rented out the

subject property, and that he himself lived elsewhere.

Moreover, he applied for and received a business owner's policy,

and in the process completed a commercial insurance application

in which he described his business as "apartments." That ends

the matter: as used in chapter 93A, "trade or commerce"

specifically includes "the offering for sale, rent or lease

[and] the sale, rent, lease or distribution of any . . .

property." Mass. Gen. Laws ch. 93A, § 1(b). It follows

inexorably that the district court appropriately closed the door

on Bahnan's section 9 counterclaims. See Linthicum v.

Archambault, 398 N.E.2d 482, 487 (Mass. 1979) (holding that "a

person who rents real property is engaged in 'trade' or

'commerce'").

Sixth: Relatedly, Bahnan protests the district court's

adverse ruling on a counterclaim that invoked an unfair claim

settlement practices statute, Mass. Gen. Laws ch. 176D. The

district court jettisoned this counterclaim at the summary

judgment stage, declaring that "[c]hapter 176D . . . does not

create a private right of action for individuals injured by such

practices." Bahnan I, slip op. at 7. The correctness of that

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ruling cannot seriously be questioned. See Andrews-Clarke v.

Travelers Ins. Co., 984 F. Supp. 49, 53 & n.20 (D. Mass. 1997);

Mahaney v. John Hancock Mut. Life Ins. Co., 380 N.E.2d 140, 142

(Mass. App. Ct. 1978); see also Pariseau v. Albany Int'l Corp.,

822 F. Supp. 843, 845 (D. Mass. 1993).

Bahnan's fallback position is that a violation of

chapter 176D sometimes may translate into a violation of chapter

93A (which does create private rights of action). This is true

as far as it goes — but it does not go far enough to do Bahnan

any good. A violation of chapter 176D may form the predicate

for a cause of action under section 9 of chapter 93A, but not

under section 11. See Transamerica Ins. Group v. Turner Constr.

Co., 601 N.E.2d 473, 477 (Mass. App. Ct. 1992). Since Bahnan's

access to chapter 93A is limited to section 11, see supra, he

cannot maintain a derivative chapter 176D claim. See Polaroid

Corp. v. Travelers Indem. Corp., 610 N.E.2d 912, 917 (Mass.

1993); Transamerica, 601 N.E.2d at 477.

Seventh: Bahnan has one more shot in his sling. He

asserts that, in Bahnan II, the district court should have

regarded Continental's supposed infractions of chapter 176D as

per se violations of chapter 93A or otherwise treated them

"favorably" (whatever that may mean). The case law refutes this

assertion. There is no one-to-one relationship between chapter

176D and chapter 93A. After all, violations of chapter 176D run

the gamut from those that are somewhat technical to those that

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are gravely offensive. Given this range, conduct that abridges

the unfair claim practice statute may or may not abridge the

unfair trade practice statute. See F.C.I. Realty Trust v. Aetna

Cas. & Sur. Co., 906 F. Supp. 30, 32 n.1 (D. Mass. 1995); Kiewit

Constr. Co. v. Westchester Fire Ins. Co., 878 F. Supp. 298, 301-

02 (D. Mass. 1995); Employers Ins. of Wausau, 673 N.E.2d at 579.

In all events, it is unnecessary to pursue this point.

The district court, which saw and heard the witnesses, concluded

that Continental had not sailed too close to the chapter 176D

winds; to the contrary, the company "conducted a reasonable and

timely investigation before refusing to pay Bahnan's fire loss

claim." Bahnan II, slip op. at 7. We review the court's

findings of fact in a jury-waived trial only for clear error.

See Cumpiano v. Banco Santander P.R., 902 F.2d 148, 152 (1st

Cir. 1990). This standard extends to whether a particular act

or series of acts, analyzed in context, are unfair or deceptive

within the purview of chapter 93A. See Ahern v. Scholz, 85 F.3d

774, 797 (1st Cir. 1996).4 We are persuaded here, on whole-

record review, that the court's finding that Continental

satisfied the imperatives of chapter 176D was amply supported by

competent and credible evidence. So, too, were the court's

4In this instance, Continental says that its conduct did not
implicate chapter 93A as a matter of law. Defining the outer
boundaries of what may qualify for consideration as a breach of
chapter 93A presents a question of law, thus engendering plenary
review. See Ahern, 85 F.3d at 797. We need not conduct such
review here, as the district court's ruling is sustainable as a
matter of fact.

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fairness determinations under chapter 93A. We need go no

further.

Affirmed.

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