16 F.

3d 449

AMERICAN TITLE INSURANCE COMPANY, Plaintiff,

Appellant,
v.
EAST WEST FINANCIAL, et al., Defendants, Appellees.
AMERICAN TITLE INSURANCE COMPANY, Plaintiff,
Appellee,
v.
EAST WEST FINANCIAL, et al., Defendants, Appellees,
Bay Loan and Investment Bank, Defendant, Appellant.
Nos. 93-1464, 93-1506.

United States Court of Appeals,

First Circuit.
Heard Jan. 4, 1994.
Decided Feb. 22, 1994.

Max Wistow, with whom Stephen P. Sheehan, Providence, RI and

Wistow & Barylick Incorporated were on brief for plaintiff.
Howard E. Walker, Providence, RI with whom Hinckley, Allen & Snyder
were on brief for defendant, Bay Loan and Investment Bank.
Before SELYA, Circuit Judge, BOWNES, Senior Circuit Judge, and
CYR, Circuit Judge.
BOWNES, Senior Circuit Judge.

Plaintiff American Title Insurance Company ("American Title") commenced

this action under 28 U.S.C. Secs. 2201 and 2202 seeking a declaratory
judgment that it was not liable under lender title insurance policies issued to
defendants Bay Loan & Investment Bank ("Bay Loan") and East West
Financial Corporation ("East West"). Bay Loan and East West counterclaimed
for breach of contract and bad faith refusal to pay and sought payment under
the policies. After a bench trial the district court (Boyle, C.J.) found that
defendants were entitled to coverage under the insurance policies, and granted

declaratory judgment in their favor. The court found that defendants'

counterclaims for damages were premature and dismissed them without
prejudice. Both parties appealed, and in March 1992, we remanded the case for
a "total new trial on the merits" because Judge Boyle had improperly allocated
the burden of proof on the issue of apparent authority. See American Title Ins.
v. East West Financial Corp., 959 F.2d 345, 349 (1st Cir.1992) ("American
Title I ").
2

On remand the case was assigned to Judge Torres and retried. It has now
worked its way back up to us. American Title and Bay Loan appeal from
various aspects of the judgment entered below. See American Title Ins. v. East
West Financial Corp., 817 F.Supp. 251 (D.R.I.1993) ("American Title II "). We
affirm the district court's ruling on liability and its dismissal with prejudice of
Bay Loan's claim under one of the insurance policies, but reverse its dismissal
without prejudice of Bay Loan's claims arising under the remaining policies.

I.
BACKGROUND
3

We describe only those facts pertinent to the legal issues presented on these
appeals. In the late 1980s, Peter Brandon, one of the principals of Dean Street
Development Company ("Dean Street"), offered investors a deal for motel
condominium units. "Buyers were promised a deal where no money down was
required; guaranteed they could not lose money; and assured that they would
receive a five percent return on the initial purchase price in five years."
American Title I, 959 F.2d at 346. The deal collapsed and Brandon and his
associates were convicted of defrauding Bay Loan out of millions of dollars by
fraudulently representing the existence of down payments required by Bay
Loan from the investors on whose behalf the loans were made.1

Dean Street bought operating motels in Rhode Island and used purchase money
mortgages to finance each purchase.2 It would then "condominiumize" each
motel and market titles to the individual units. Dean Street arranged financing
for the buyers through East West and Bay Loan. East West originated the loans
and then sold them to Bay Loan, which actually advanced the funds.

Closings on the individual units were conducted at the law offices of George
Marderosian in Providence, Rhode Island. Although Marderosian's original
involvement in these transactions was as Dean Street's lawyer, he eventually
came to represent both Dean Street and the buyers in these transactions. All of
the buyers consented to this arrangement. Marderosian also served as

"settlement agent" or "closing attorney" at the closings and was an authorized

agent of American Title.
6

Because Dean Street could not obtain partial releases on its purchase money
mortgages, it had to sell a number of condominium units before enough funds
were raised to discharge the prior mortgages. Once enough units were sold,
closings were held on each unit, and East West bundled the loans and sent them
as a package to Bay Loan. Among the documents forwarded to Bay Loan were
the closing documents along with mortgages and title insurance policies on the
individual condominium units.

All of this was done before Bay Loan formally purchased the loans from East
West. Although Bay Loan retained the right to reject any loan, it never
exercised this right. When a loan was approved, Bay Loan would wire the
proceeds to East West, and East West would distribute the funds to
Marderosian's trust account. Even though the prior mortgages had not yet been
paid off, the title insurance policies issued by Marderosian were ostensibly
"clean." That was, they indicated that the units were not subject to any prior
defects, liens or encumbrances.

The parties orally agreed that Marderosian would use the loan proceeds to
discharge the prior mortgages so that Bay Loan's mortgage would be primary.
Bay Loan soon discovered that the prior mortgages were not being discharged.
This was because Marderosian had been "diverting" the loan proceeds to Dean
Street instead of using them to discharge prior mortgages. American Title II,
817 F.Supp. at 255. Dean Street, or more precisely, Peter Brandon converted
the funds for personal use. The prior mortgagees foreclosed, thereby
extinguishing Bay Loan's mortgages.3

Consequently, Bay Loan filed a notice of claim with American Title under the
title insurance policies. In response American Title filed an action in the United
States District Court for the District of Rhode Island seeking declaratory
judgment relieving it from liability under the policies. Bay Loan and East West
counterclaimed for breach of contract and bad faith refusal to pay. In an opinion
dated April 10, 1991, Judge Boyle held that American Title was liable under
the title insurance policies, but dismissed defendants' counterclaims as
premature. Both sides appealed.

10

We remanded the case for a new trial because Judge Boyle had erroneously
burdened American Title with disproving Marderosian's apparent authority to
issue "clean" title insurance policies on its behalf. We held that the burden was

on the defendants to prove the existence of Marderosian's apparent authority.

After the second trial, Judge Torres found that Bay Loan's claim with respect to
the insurance policy relating to the unit owned by Norma Kirschner in The
Charlestown Motor Inn (the "Kirschner unit"), was not premature. The court
found that Bay Loan failed to prove its damages on that claim and dismissed
the claim with prejudice. It, however, dismissed without prejudice Bay Loan's
claims under the remaining policies. These appeals ensued.
II.
DISCUSSION
11

As a preliminary matter, we disagree with Judge Torres' conclusion that the

case was remanded for something short of a "total new trial on the merits." See
American Title II, 817 F.Supp. at 256-58. Therefore, Judge Torres' "alternative
findings," and not Judge Boyle's earlier findings are currently before this court
for review.

12

We review the district court's factual findings for clear error. Fed.R.Civ.P.
52(a); Dedham Water Co. v. Cumberland Farms Dairy, 972 F.2d 453, 457 (1st
Cir.1992). Under this standard, we must affirm the district court unless, after
reviewing the entire record, this court "is left with the definite and firm
conviction that a mistake has been committed." United States v. United States
Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 541, 92 L.Ed. 746 (1948); see
also Boston Beer Co. v. Slesar Bros. Brewing Co., 9 F.3d 175, 180 (1st
Cir.1993) (noting that "the clear error hurdle is ... quite high.") (quoting Lenn v.
Portland Sch. Comm., 998 F.2d 1083, 1087 (1st Cir.1993)). The same standard
applies to mixed questions of law and fact. Rulings of law, however, are subject
to de novo review. Boston Beer Co., 9 F.3d at 180. In diversity cases, questions
of local law, in this case Rhode Island law, are given plenary review. See Salve
Regina College v. Russell, 499 U.S. 225, 230, 111 S.Ct. 1217, 1221, 113
L.Ed.2d 190 (1991); Blanchard v. Peerless Ins. Co., 958 F.2d 483, 487 (1st
Cir.1992).

A. Apparent Authority
13

American Title appeals from the district court's finding that Marderosian had
apparent authority to issue the clean title policies to Bay Loan.4

14 establish the apparent authority of an agent to do a certain act, facts must be

"To
shown that the principal has manifestly consented to the exercise of such authority or
has knowingly permitted the agent to assume the exercise of such authority; that a

third person knew of the fact and, acting in good faith had reason to believe and did
actually believe that the agent possessed such authority; and that the third person,
relying on such appearance of authority, has changed his position and will be injured
or suffer loss if the act done or transaction executed by the agent does not bind the
principal."
15

Calenda v. Allstate Ins. Co., 518 A.2d 624, 628 (R.I.1986) (quoting Soar v.
National Football League Players Association, 438 F.Supp. 337, 342
(D.R.I.1975), aff'd, 550 F.2d 1287 (1st Cir.1977)); see also Menard & Co.
Masonry v. Marshall Bldg., 539 A.2d 523, 526 (R.I.1988) (agent's apparent
authority arises from principal's manifestation of such authority to party with
whom agent contracts and that person's belief that the agent has authority to
bind principal to the contract). Of course, this determination is factual in nature.
Calenda, 518 A.2d at 618.

16

Bay Loan presented evidence that Marderosian was authorized to write title
insurance policies for American Title, that he possessed all of the necessary
forms for doing so, and that he carried a "To whom it may concern" letter from
American Title announcing his position as an authorized agent of that
company. Moreover, it is undisputed that American Title never informed Bay
Loan that Marderosian was not empowered to issue clean title policies in the
face of prior undischarged liens unless the funds required to pay them were in
the agent's possession and the lender was an institution.

17

American Title argues that, because there were substantial deviations from
accepted business practices in the Dean Street transactions, Bay Loan's reliance
on Marderosian's apparent authority was unreasonable and therefore his acts
should not be imputed to American Title. See, e.g., Sheldon v. First Federal
Savings & Loan Ass'n, 566 F.2d 805, 809 (1st Cir.1977) (third party must
exercise due care before relying on an agent's apparent authority); Restatement
(Second) Agency Sec. 27 comt. a (1957).

18

American Title illustrates three departures from the "usual methods of

conducting business": (1) conducting apparently final closings prior to Bay
Loan's actual approval of the borrower, (2) Marderosian's issuance of clean title
policies to Bay Loan prior to Bay Loan providing the funding to discharge the
prior mortgages, and (3) Bay Loan's receipt of HUD 1's which indicated that
the seller would receive all of the loan proceeds without diminution for
amounts needed to discharge prior mortgages. The same arguments were
presented to the district court which found the following:

19

Here, there was no reason for East West or Bay Loan to believe that there was

19

Here, there was no reason for East West or Bay Loan to believe that there was
anything improper about issuing the policies before prior mortgages were
discharged. It was common practice among title attorneys to use the proceeds
of purchase money mortgages to discharge prior mortgages after closing.
Although it was less common for an attorney to issue a title policy before prior
mortgages were discharged, that practice was acceptable when the attorney had
adequate assurances that the funds required to pay such mortgage would be
forthcoming and that the mortgagees would, in fact, execute discharges.

20

In this case, East West and Bay Loan had no cause to be concerned about the
availability of funds necessary to pay prior mortgages because Bay Loan itself
was the source of those funds. Furthermore, unless the funds were advanced,
Bay Loan would not have been at risk because it would have had no mortgages.
Finally, East West and Bay Loan had no reason to doubt Marderosian's
assurances that the proceeds of their loans would be used to discharge prior
mortgages. Indeed, it would be unreasonable to conclude that they would have
made such loans if they suspected otherwise.

21

In short, under the circumstances, it was perfectly reasonable for East West and
Bay Loan to believe that Marderosian was authorized to issue "clean" title
policies.

22

American Title II, 817 F.Supp. at 259. We have conducted an exhaustive

review of the record and can find no compelling evidence to the contrary. Bay
Loan plausibly explained why each "departure" was not sufficient to raise any
eyebrows at the time it occurred. The district court credited Bay Loan's
explanations.

23

With the benefit of hindsight American Title has strung together distinct aspects
of these transactions and argues that Bay Loan's belief in Marderosian's
apparent authority was clearly unreasonable. The question we must ask,
however, is whether Bay Loan's reliance on Marderosian's apparent authority to
issue "clean" title policies was reasonable in light of what Bay Loan knew at
the time. The district court found that it was, and we affirm.

B. The Policy Exclusion

24

As its second rationale for relief, American Title argues that Bay Loan is not
entitled to recovery because the title policies exclude coverage for
encumbrances "created, suffered, assumed or agreed to by the insured
claimant." Where an insurance company seeks to deny coverage under a policy
exclusion, it carries the burden of proving that the exclusion applies. Pickering

v. American Employers Ins. Co., 109 R.I. 143, 282 A.2d 584, 587 (1971).
25

The parties agree that Rhode Island law applies to this defense. Although
Rhode Island courts have not interpreted this clause, courts in other
jurisdictions have generally held that "the insurer can escape liability only if it
is established that the defect, lien or encumbrance resulted from some
intentional misconduct or inequitable dealings by the insured or the insured
either expressly or impliedly assumed or agreed to the defects or
encumbrances." Brown v. Saint Paul Title Ins. Corp., 634 F.2d 1103, 1107-08
n. 8 (8th Cir.1980) (Missouri law); see also First Nat. Bank of Minneapolis v.
Fidelity Nat. Tit. Ins. Co., 572 F.2d 155 (8th Cir.1978) (under Nebraska law
insurer must establish by a preponderance that the insured agreed that its
mortgage would occupy a secondary position to the preexisting mortgage);
accord American Sav. & Loan Ass'n v. Lawyers Title Ins. Corp., 793 F.2d 780
(6th Cir.1986) (Tennessee law); Transamerica Title Ins. Co. v. Alaska Fed.
Sav. & Loan Ass'n, 833 F.2d 775 (9th Cir.1987) (Alaska law). This
construction of the exclusionary clause comports with Rhode Island law. See
Bartlett v. Amica Mut. Ins. Co., 593 A.2d 45, 48 (R.I.1991) (exclusionary
clauses subject to more than one interpretation are to be construed in the
manner most favorable to the insured); see also Sentry Ins. Co. v. Grenga, 556
A.2d 998, 999 (R.I.1989) (insurance contract provisions subject to more than
one interpretation are construed strictly against the insurer); West v.
Commercial Ins. Co., 528 A.2d 339, 341-42 n. 2 (R.I.1987) (same); Conanicut
Marine Serv., Inc. v. Insurance Co. of N. Am., 511 A.2d 967, 970 (R.I.1986)
(same).

26

After stating the correct legal standard, the district court found that American
Title had not met its burden of proof. The court added that,

27
Marderosian
had apparent authority to issue "clean" title policies on behalf of
American Title. In doing so, he acted as American Title's agent, not Bay Loan's
agent. Moreover, East West and Bay Loan justifiably relied on Marderosian's
representations that he would use the loan proceeds to discharge prior mortgages and
were unaware that he did otherwise. Therefore the defects in title against which the
policies insure were neither created, suffered nor assumed by East West or Bay
Loan.
28

American Title II, 817 F.Supp. at 263. We agree with the district court that Bay
Loan did not act in the manner which would bar recovery under the policy
exclusion. It is uncontroverted that Bay Loan relied on Marderosian to pay off
the prior mortgage and believed that it would be paid off in the normal course.
It is also undisputed that Bay Loan intended that the proceeds from its loans be

used to pay off the prior mortgages, and that its mortgages be the only
encumbrances on the properties. The continued existence of the prior
mortgages was unintended by Bay Loan.
29

On appeal American Title maintains that Bay Loan is vicariously liable for the
acts of Marderosian as its agent. See Baker v. ICA Mortgage Corp., 588 A.2d
616 (R.I.1991) (mortgagee's liability for embezzlement by closing attorney
rests upon proof of agency). Three requirements are required to establish the
existence of an agency relationship under Rhode Island law:

30 a manifestation by the principal that the agent will act for him, (2) acceptance by
(1)
the agent of the undertaking, and (3) an agreement between the parties that the
principal will be in control of the undertaking.
31

Lawrence v. Anheuser-Busch, Inc., 523 A.2d 864, 867 (R.I.1987) (citing

Restatement (Second) Agency Sec. 1(1) comt. b (1957)). Further, the principal
must have the right to control the work of the agent, and the agent must act
primarily for the benefit of the principal. Id. (citing cases).

32

American Title offered testimony that, generally speaking, an attorney who

serves as the "settlement agent" or "closing agent" at a closing is an agent of the
lender and is responsible for disbursing loan proceeds on the lender's behalf. In
addition, Marderosian designated himself on the HUD 1 form as the "settlement
agent." There was also testimony from representatives of East West and Bay
Loan that could have supported a finding that Marderosian acted as Bay Loan's
agent at the closings.

33

On the other hand, our review of the record reveals that there was no express
agreement in this regard between Bay Loan and Marderosian. Furthermore,
Bay Loan did not provide any instructions to or exert any control over
Marderosian, and Bay Loan did not participate in the payment of Marderosian
as closing attorney. In addition, the record is unclear as to how Marderosian
became the closing agent in the first place. The district court found that
Marderosian was not Bay Loan's agent. "Where there are two permissible
views of the evidence, the factfinder's choice between them can not be clearly
erroneous." American Title I, 959 F.2d at 346 (quoting Cumpiano v. Banco
Santander Puerto Rico, 902 F.2d 148, 152 (1st Cir.1990) (quotation omitted))
(internal quotation marks omitted). Accordingly, we affirm the district court's
finding that the continued existence of the prior mortgages was not "created,
suffered, assumed or agreed to" by Bay Loan within the meaning of the policy.

C. Damages

34

The title policies insure Bay Loan "against loss or damage ... sustained or
incurred by the insured by reason of ... [t]he invalidity or unenforceability of
the lien of the insured mortgage ... [or t]he priority of any lien or encumbrance
over the lien of the insured mortgage." American Title's liability is limited to
the lesser of: (1) Bay Loan's actual loss; (2) the amount of insurance; or (3) the
indebtedness secured by the insured mortgage at the time of the loss. Only the
first of these remained unknown prior to trial. Both parties and the district court
acknowledged that, because Bay Loan's mortgages were rendered worthless
when the prior mortgagee foreclosed, its actual loss under each policy would be
the lesser of (1) the amount uncollectible from the defaulting borrower, or (2)
the fair market value of the unit at the time the prior mortgagee foreclosed.5

35

The district court dismissed, without prejudice, Bay Loan's policy claims in
connection with all but the Kirschner unit on the ground that its claims were
premature under Falmouth Nat. Bank v. Ticor Title Ins. Co., 920 F.2d 1058 (1st
Cir.1990). On appeal, American Title argues that the district court should have
reached the merits of Bay Loan's damage claims with respect to all eighty units.

36

In Falmouth we held that a bank's claim for damages under a mortgagee's title
insurance policy was premature because the amount of the loss was not
"definitely fixed." The relevant provision, which also appears in Bay Loan's
title policies, provides: "When liability has been definitely fixed in accordance
with the conditions of this policy, the loss or damage shall be payable within 30
days thereafter." (emphasis added). In fact, there is no material difference
between Bay Loan's policies and the policy construed in Falmouth.

37

In Falmouth, the insured brought an action against its title insurer for failure to
pay a loss under a mortgagee's title insurance policy after liability had been
determined against the insurer by the Massachusetts Supreme Judicial Court
(SJC) in a related action. The SJC remanded the case for further proceedings.6
The insurance company moved to dismiss the action for failure to state a claim
arguing that the bank's "actual loss" could not be determined until the state
court determined the value of the property on remand. The bank argued that
liability was definitely fixed by the SJC's ruling, and that the insurance
company was liable for the principal and accrued interest outstanding on the
buyer's mortgage note. The district court agreed with the insurance company,
and we affirmed.

38

In affirming the dismissal, we construed the terms of the title insurance policy,
focusing on the issue of when a loss is "definitely fixed" and payable to the
insured. We distinguished owner's title insurance policies, in which loss is
measured by the decrease in market value caused by a title defect, and

mortgagee's title policies in which a bank's loss equals the lesser of the decrease
in market value of the bank's security caused by the title defect or the amount
that is unrecoverable on the borrower's defaulted notes.
39

With respect to the mortgagee's policies at issue we held that "a mortgageeinsured's loss cannot be determined unless the note is not repaid and the
security for the mortgage proves inadequate.... Such is the case because it is
only after the insurer or the insured sues on the note and the debtor fails to pay,
that the actual loss can be determined." Falmouth, 920 F.2d at 1063 (citations
omitted). The bank took the position that the insurer should be required to pay
the outstanding principal, interest and late payments due on the debt, and
subrogate to the bank's rights. We rejected this argument because the insurance
policy gave the insurer the option to either pay the bank's actual loss, or
purchase the indebtedness and subrogate to the bank's rights against the
mortgagors. We held that to require the insurance company to pay the
indebtedness before the "actual loss" is ascertained, "would have the effect of
amending the policy by making subrogation mandatory rather than optional."
Falmouth, 920 F.2d at 1063.

40

We turn our attention to the case at hand. At the commencement of the second
trial, Bay Loan took the position that because it had commenced suits against
all the defaulting borrowers, it had satisfied the requirements of Falmouth at
least with respect to some of the units.7 American Title was of the opinion that
Bay Loan would not be able to prove the fair market value of the individual
units, but that even if it could, its claims were premature under Falmouth.

41

When the district court asked Bay Loan what the court should do if some but
not all of the claims were premature under Falmouth, Bay Loan responded as
follows:

I42think that the appropriate relief in those circumstances if the Court rules that
Falmouth does apply in part to this case, would be for the Court to make appropriate
findings and conclusions which would be necessary as to those borrowers for whom
we have fulfilled the requirements of Falmouth. The same findings and conclusions
would ultimately apply presumedly to the others.
Bay Loan added:
43
About
the measure of the recovery ... we contend that the measure of recovery is the
fair market value of the condominiums at the time they were lost at the foreclosure
of senior liens and we are prepared to prove what that value was. If the Court finds
that some other measure would be more appropriate or if the Court should disagree

with our valuation and decide they were worth some different amount, you know,
appropriate findings and conclusions could be made so that as litigation with other
borrowers is resolved, either by judgments or by bankruptcies or however they get
resolved, both Bay Loan and American Title would know what the other's rights are.
And I think that would be easy enough to do.
44

As the trial progressed, it became clear that Bay Loan would not be able to
prove the fair market value of the individual condominium units. Sensing as
much, at the close of the evidence Bay Loan admitted that its claims were
premature under Falmouth. American Title responded that, in order to put an
end to this litigation, it would concede that the fair market value of each unit
would always be less than the uncollectible debt owed by each defaulting
borrower. American Title reiterated this point in its closing argument.

45

After all was said and done, the district court held that,

46 only reasonable reading of Falmouth is that a mortgagee must pursue legal action
the
against a defaulting borrower until a reasonable lender would write off the debt as
uncollectible or, to put it another way, until the anticipated cost of further
proceedings against the borrower would be greater than any amount that is likely to
be recovered.
47

American Title II, 817 F.Supp. at 260. It then found that Bay Loan had not
reached this point on its claims. Id.

48

American Title makes two principal arguments on appeal. First, it maintains

that Falmouth did not prevent the district court from reaching the merits of Bay
Loan's claims since we have never "held that suit against the borrower is
required before a court may conclude that no actual loss has been sustained on
a title policy, based upon the insured's failure to prove the other elements that
are required to make a claim of damages." Plaintiff-Appellant Brief at 42.
Alternatively, American Title contends that the district court abused its
discretion in dismissing the claims without prejudice because the Falmouth
issue was "mooted" by its concession that the uncollectible balances due from
borrowers would always exceed the value of the collateral. Because American
Title is assigning error to the district court's legal conclusion based upon its
reading of Falmouth, our review is plenary.

49

We note first that this case proceeded in a manner wholly unlike Falmouth. The
present case was not decided through a motion to dismiss for failure to state a
claim made by the insurer. In contrast, American Title advocated that the

district court reach the merits of Bay Loan's claims. Here, the insured's claims
went to trial, and the insured was afforded a full and fair opportunity to prove
the amounts by which its collateral was impaired by the prior mortgages. In
fact, as we noted above, at the commencement of the trial, Bay Loan explicitly
stated that it planned to prove the fair market value of all the individual
condominium units, even where its claim in connection with that unit was
premature under Falmouth.
50

As evidenced by its remarks at the outset of the trial, Bay Loan anticipated that
the district court would make factual findings as to the fair market value of each
unit, and that those findings would be binding, in the future, on claims that
were still premature. Bay Loan made its position clear, put its best foot
forward, and attempted to prove the fair market value of the individual units.
Furthermore, it is apparent that, long before American Title made its
concession, Bay Loan recognized that the fair market value of each unit would,
in all likelihood, be less than the uncollectible debt owed by the defaulting
borrowers. This is reflected in Bay Loan's statement that the fair market value
of each unit would be "the measure of [its] recovery."

51

Under these circumstances, we believe that the district court committed

reversible error by rigidly applying Falmouth to the present case, and failing to
reach the merits of Bay Loan's claims. Falmouth was not intended to afford an
insured-mortgagee second and third opportunities to prove something that it had
otherwise been unable to prove. Once Bay Loan made its position clear and
proceeded full steam ahead on all of its claims, it was incumbent upon the
district court to adjudicate each claim on the merits.8

52

Only with respect to the claim under the Kirschner policy did the district court
reach the merits of Bay Loan's damages claim. The court found that,

53

Bay Loan has been afforded every opportunity to prove the amount by which
the value of its security in the Kirschner unit was diminished by the title
defects. Since it has failed to do so, its counterclaim for damages under the
Kirschner policy is dismissed with prejudice.

54

American Title II, 817 F.Supp. at 261. There is no indication in the record that
Bay Loan's proof on the other units was, or would have been, different in any
material respect from its proof on the Kirschner unit. Bay Loan anticipated that
the district court would find that it had proven the fair market value for each of
the units, and that upon maturity of its claims, that value would be the measure
of its recovery under the title policies. Since Bay Loan has tried but did not

prove this value for any of the units, it should have to bear the consequences of
its failure.
55

In short we rule that the district court misconstrued the scope of Falmouth and
that Bay Loan was given every opportunity to prove damages but was unable to
do so. This is not a case where the district court foreclosed any avenues of
proof. There is no reason why Bay Loan should be granted a third opportunity
to prove damages.

56

There was another reason that compelled a dismissal with prejudice. American
Title maintains that it "mooted" the Falmouth issue, and that Bay Loan's claims
were therefore ripe for adjudication on the merits. This argument has merit.
Under the policies, the Falmouth requirements are conditions precedent to the
insurance company's obligation to pay under the policies. Where, as is the case
here, the insurer agrees to waive one of the conditions, this waiver is effective,
and the insurer becomes obligated to pay under the policy. See generally Arthur
L. Corbin, 3A Corbin on Contracts Sec. 753 (1972) (condition to party's duty to
perform can be eliminated by a mere voluntary expression of party's willingness
to waive it).

57

Moreover, as a practical matter, once American Title made its concession, Bay
Loan's pending actions against the debtors became irrelevant to the damages
calculation. In other words, the resolution of those claims would not affect the
amount of Bay Loan's recovery from American Title.9 Falmouth does not
require an insured to expend time, effort and money in actions to collect against
defaulting borrowers as a prerequisite to establishing damages against the
insurer, where those actions are wholly irrelevant to the measure of the
insured's recovery.

58

Thus, the district court should have reached the merits of Bay Loan's claims,
and dismissed them with prejudice. We reverse the district court's without
prejudice dismissal of these claims. Our disposition of the evidentiary issue
raised on Bay Loan's appeal of the dismissal of the Kirschner claim would not
alter this conclusion. Because Bay Loan did not appeal from the district court's
dismissal without prejudice of its claims, even if we were to reverse the
challenged evidentiary ruling, only the Kirschner unit would enjoy the benefit
of that ruling.

D. The Kirschner Unit

59

As previously indicated, the district court found that Bay Loan's claim under

the title policy covering the Kirschner unit was not premature.10 But, the court
found that Bay Loan was unable to prove its damages on this claim, and
therefore dismissed it with prejudice. Bay Loan appeals this ruling primarily on
the ground that the district court improperly excluded the testimony of its
expert appraiser.
60

Bay Loan's title policy provides coverage for losses arising out of "the priority
of any lien or encumbrance over the lien of the insured mortgage." (emphasis
added). Each insured mortgage at issue here corresponds to an individual
condominium unit. Accordingly, Bay Loan was required to prove its actual loss
with respect to each individual condominium unit--in this case the Kirschner
unit. Bay Loan planned to do this by having an expert appraiser testify as to the
fair market value of The Charlestown Motor Inn as an operating business. See
American Title II, 817 F.Supp. at 261. American Title objected to the
admission of this testimony on the ground that, without more, the value of the
motel was not probative of the value of each individual condominium unit.
After allowing Bay Loan to make an offer of proof, the court sustained the
objection. The court later explained:

61 Loan did proffer evidence regarding the value of The Charlestown Motor Inn as
Bay
an operating motel on the theory that the value of each individual unit is a
proportionate share of that amount. However, that approach ignores the fact that
what American Title insured was title to and the validity of Bay Loan's mortgage
liens on individual condominium units. It did not insure the motels as going
businesses or the value of individual units calculated as a percentage of the motel's
value. Those two values may differ just as the total value of ten residential lots
comprising a city block may be considerably different from the value of those lots
when combined to form one parcel of commercial real estate.
62

Id. at 261.

63

Bay Loan argues that the district court abused its discretion in excluding the
proposed testimony because it should be allowed to value the individual units
by looking at the motel qua motel, since that represented the highest and best
use for the units. Bay Loan also argues that the value of the motel represented
the best available evidence of the value of the individual units since the units
could not be independently appraised. We address these contentions seriatim
keeping in mind that a district court's decision to exclude evidence is reviewed
under an abuse of discretion standard. Losacco v. F.D. Rich Constr. Co., 992
F.2d 382, 385 (1st Cir.), cert. denied, --- U.S. ----, 114 S.Ct. 324, 126 L.Ed.2d
270 (1993); Harrison v. Sears, Roebuck & Co., 981 F.2d 25, 32 (1st Cir.1992).

64

Bay Loan's first contention is wide of the mark. Although it might be that the
"highest and best" use for the individual condominium units would be as rooms
in an operating motel, this is not what was insured. As the district court pointed
out, what was insured was "title to and the validity of ... mortgage liens on
individual condominium units." Id. While it is true that a number of these units
were located in the same motel, the insurance was not issued on this basis and
did not insure the condominium units as potential rooms in a motel. We think
the district court's "city block" analogy clearly illustrates the basic flaw in Bay
Loan's approach.

65

Next, Bay Loan maintains that the value of the motel is admissible as the "best
available evidence" of the value of the individual condominium units. Even
though the "proportionate share" motel's value (i.e., the value of the motel
divided by the number of individual condominium units), might be the best
evidence of the value of each unit, it is not necessarily so. See Allison v. Ticor
Title Ins. Co., 907 F.2d 645 (7th Cir.1990). A given unit might be worth more
or less than the value of the motel divided by the number of units. It was Bay
Loan's responsibility to introduce evidence as to the value of each unit so that
the district court could make a determination of damages. As the record plainly
indicates, Bay Loan did not intend to offer any evidence which would connect
its expert's opinion on the value of the entire motel, to the value of individual
condominium units.11

66

Had Bay Loan's expert witness been prepared to testify that, although he could
not directly appraise individual units, the proportionate value of the motel was
relevant in determining the value of the units, we might be inclined to side with
Bay Loan. See Allison v. Ticor Title Ins. Co., 979 F.2d 1187 (7th Cir.1992)
(holding that district court did not abuse its discretion by admitting evidence of
lodge's value where value of individual units in the lodge was at issue,
particularly where expert witness testified that he looked at the proportionate
value of lodge in valuing the individual units). Because this was not the case,
we cannot see how the court's ruling amounted to an abuse of discretion.

67

Finally, Bay Loan contends that notwithstanding the exclusion of this evidence,
it still proved its damages with respect to the Kirschner unit. We review the
district court's determination of damages for clear error. Soto v. United States,
11 F.3d 15, 18 (1st Cir.1993) ("[D]etermining damages ... falls within the
sound judgment and discretion of the factfinder and will not be overridden
without substantial cause.").

68

The only evidence offered by Bay Loan with respect to its damages on its claim

under the Kirschner policy was the sale price received by the prior mortgagee
when he foreclosed on seventeen of the thirty-three units in The Charlestown
Motor Inn, one of which was the Kirschner unit.12 What Bay Loan fails to
realize is that the sale price obtained by the prior mortgagee at foreclosure
represents the value of approximately one-half of the entire motel, not the value
of seventeen individual condominium units. In fact, the parties stipulated that
the prior mortgage covering these seventeen units was not subject to the
condominium declaration. Because Bay Loan did not introduce any evidence of
a correlation between the value of one-half the motel and the value of the
Kirschner unit, we can find no error, clear or otherwise, in the district court's
findings and ruling.
III.
CONCLUSION
69

We affirm the judgment of the district court as to American Title's liability

under the title insurance policies at issue here. We also affirm the district
court's dismissal with prejudice of Bay Loan's claim under the Kirschner
policy. We reverse the district court's dismissal without prejudice of Bay Loan's
claims under the remaining policies. Those claims are ordered dismissed with
prejudice.

70

No costs to either party.

The convictions were, in large part, affirmed on appeal. See United States v.
Brandon, 17 F.3d 409 (1st Cir.1994)

Although Dean Street purchased seven motels, only four are at issue in this
proceeding: The Charlestown Motor Inn, The Hillside Motel, The Sand Castle
Motel, and The Sandpiper Motel

Bay Loan lost its security interest in all twenty-four units at the Sand Castle
Motel, two of the thirty-nine units at the Sandpiper Motel, and seventeen of the
thirty-three units at the Charlestown Motor Inn. Bay Loan paid off the prior
mortgage at the Hillside Motel in order to preserve its security interest in all
thirty-seven units at that motel

Hereinafter, references to Bay Loan apply equally to East West

A more detailed explanation of the "actual loss" calculation can be found in the

district court's opinion. See American Title II, 817 F.Supp. at 260-61
6

In that action, as a result of the SJC's ruling, the buyer of the mortgaged
property was required to reconvey it to the seller. The seller was required to
remit the purchase price with appropriate adjustments (e.g., passage of time and
improvements on the land). The terms of the reconveyance were the subjects of
the remand

The parties did not stake out positions on Falmouth prior to the first trial
because the decision in Falmouth was not handed down until the day before
that trial commenced

Moreover, we note that one of our principal concerns in Falmouth was the
bank's attempt to make subrogation mandatory by requiring the insurance
company to purchase the outstanding indebtedness prior to a determination of
the actual loss. Here, Bay Loan has not advanced this argument, but has
acknowledged that its measure of recovery is the fair market value of the
individual units at the time the prior mortgagee foreclosed

In fact, Bay Loan could have realized a windfall as a result of this concession.
If Bay Loan had succeeded in proving the fair market value of a given unit, and
subsequently recovered substantial sums from the corresponding debtor such
that the fair market value of the unit exceeded the amount still owed by the
debtor, then Bay Loan would have recovered more than it was entitled to
recover under its title insurance

10

With the consent of American Title, Bay Loan settled its claim against
Kirschner for $15,000. American Title II, 817 F.Supp. at 260

11

After Bay Loan made its offer of proof, the following dialogue took place:
THE COURT: And who is going to make that link, me, the Court?
BAY LOAN: Well, the Court is the trier of fact in this case, that's true.
THE COURT: Well, it has to have facts to try, doesn't it?

12

The prior mortgage on The Charlestown Motor Inn originally covered the entire
motel. After the condominium declaration was recorded, however, the prior
mortgagee released sixteen of the units from his prior mortgage. These units are
currently the subject of a quiet title action by Bay Loan