Court Opinion

ID: 2962441
Source: CourtListenerOpinion
Date Created: 2015-09-21 20:57:50.077561+00
Date Added: 2024-06-11T11:37:18.659851
License: Public Domain

USCA1 Opinion

	

                            UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                 ____________________          No. 93-1464                          AMERICAN TITLE INSURANCE COMPANY,                                Plaintiff, Appellant,                                          v.                             EAST WEST FINANCIAL, ET AL.,                                Defendants, Appellees.                                 ____________________          No. 93-1506                          AMERICAN TITLE INSURANCE COMPANY,                                 Plaintiff, Appellee,                                          v.                             EAST WEST FINANCIAL, ET AL.,                                Defendants, Appellees,                                  __________________                            BAY LOAN AND INVESTMENT BANK,                                Defendant, Appellant.                                  __________________                    APPEALS FROM THE UNITED STATES DISTRICT COURT                           FOR THE DISTRICT OF RHODE ISLAND                     [Hon. Ernest C. Torres, U.S. District Judge]                                             ___________________                                 ____________________                                        Before                                 Selya, Circuit Judge,                                        _____________                            Bownes, Senior Circuit Judge,                                    ____________________                               and Cyr, Circuit Judge.                                        _____________                                 ____________________            Max Wistow, with whom Stephen P. Sheehan, and Wistow & Barylick            __________            __________________      _________________          Incorporated were on brief for plaintiff.          ____________            Howard E.  Walker, with whom  Hinckley, Allen & Snyder  were on            _________________             ________________________          brief for defendant, Bay Loan and Investment Bank.                                 ____________________                                  February 22, 1994                                 ____________________                      BOWNES, Senior  Circuit Judge.   Plaintiff American                      BOWNES, Senior  Circuit Judge.                              _____________________            Title  Insurance Company  ("American  Title") commenced  this            action under 28 U.S.C.    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").                         ________________                      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            _________                                         -2-                                          2            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.                                          I.                                      BACKGROUND                                      BACKGROUND                                      __________                      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                                            ____________________            1.  The  convictions were, in large part, affirmed on appeal.            See United States  v. Brandon, Nos.  1447, 1465-71 (1st  Cir.            ___ _____________     _______            Jan. 31, 1994).            2.  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                                         -3-                                          3            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.                         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.                                            ____________________            Motel.                                         -4-                                          4                      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                                            ____________________            3.  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.                                         -5-                                          5                      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.                      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.                                         II.                                         -6-                                          6                                      DISCUSSION                                      DISCUSSION                                      __________                      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.                      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 (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,                                    ___ _____________________    _______            111 S. Ct. 1217, 1221 (1991); Blanchard v. Peerless Ins. Co.,                                                       _________________            958 F.2d 483, 487 (1st Cir. 1992).                                         -7-                                          7            A.  Apparent Authority            A.  Apparent Authority                __________________                      American Title  appeals from  the district  court's            finding  that Marderosian had apparent authority to issue the            clean title policies to Bay Loan.4                      "To establish  the apparent  authority of                      an  agent to do a certain act, facts must                      be   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."            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.                                _______                                            ____________________            4.  Hereinafter, references to Bay Loan apply equally to East            West.                                         -8-                                          8                      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.                      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   27 comt. a (1957).                      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                                         -9-                                          9            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:                           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.                           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.                           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.                                         -10-                                          10            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.                      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            B.  The Policy Exclusion                ____________________                      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.,                                _________    ___________________________            282 A.2d 584, 587 (R.I. 1971).                      The  parties agree that Rhode Island law applies to            this   defense.    Although  Rhode  Island  courts  have  not                                         -11-                                          11            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);            _________                                         -12-                                          12            Conanicut Marine Serv., Inc. v.  Insurance Co. of N. Am., 511            ____________________________     _______________________            A.2d 967, 970 (R.I. 1986) (same).                      After  stating  the  correct  legal  standard,  the            district  court found  that American  Title had  not met  its            burden of proof.  The court added that,                      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.            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.                      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)            ___ _____     ___________________                                         -13-                                          13            (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:                      (1) a manifestation by the principal that                      the   agent  will   act   for  him,   (2)                      acceptance   by   the    agent   of   the                      undertaking, and (3) an agreement between                      the parties that the principal will be in                      control of the undertaking.            Lawrence v.  Anheuser-Busch, Inc.,  523 A.2d  864, 867  (R.I.            ________     ____________________            1987)  (citing Restatement  (Second) Agency     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).                      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.                      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                                         -14-                                          14            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 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            C.  Damages                _______                      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                                         -15-                                          15            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                      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.                      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.                         ________                                            ____________________            5.  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.            ___ _________________                                         -16-                                          16                      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.                      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                                            ____________________            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.                                         -17-                                          17            bank's security caused by the title defect or the amount that            is unrecoverable on the borrower's defaulted notes.                      With respect to the mortgagee's policies at issue            we held that "a mortgagee-insured'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.            ________                      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                                         -18-                                          18            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,            butthat evenifit could,itsclaims wereprematureunder Falmouth.                                                                ________                      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:                            ________                      I think  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:                      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                                            ____________________            7.  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.                                         -19-                                          19                      are.   And  I think  that  would be  easy                      enough to do.            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.                      After all  was said  and done,  the district  court            held that,                      the only  reasonable reading  of Falmouth                                                       ________                      is  that a  mortgagee  must pursue  legal                      action  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.            American Title II, 817 F. Supp.  at 260.  It then found  that            _________________            Bay Loan had not reached this point on its claims.  Id.                                                                  ___                      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                                         -20-                                          20            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.                      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.                  ________                      As evidenced by  its remarks at  the outset of  the            trial, Bay  Loan anticipated  that the  district court  would                                         -21-                                          21            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."                        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                                             ____________________            8.  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.                                         -22-                                          22                      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,                           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.            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.                      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.                      There was another reason that compelled a dismissal            with  prejudice.  American  Title maintains that  it "mooted"                                         -23-                                          23            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   753 (1972) (condition to  party's duty to perform            can be eliminated  by a mere voluntary expression  of party's            willingness to waive it).                      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                                            ____________________            9.  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.                                         -24-                                          24            insurer, where  those actions  are wholly  irrelevant to  the            measure of the insured's recovery.                      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            D. The Kirschner Unit               __________________                      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.                      Bay  Loan's  title  policy  provides  coverage  for            losses   arising  out  of  "the  priority   of  any  lien  or                                            ____________________            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.                                         -25-                                          25            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:                      Bay Loan  did proffer  evidence regarding                      the value of The Charlestown Motor Inn as                      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.            Id. at 261.            ___                                         -26-                                          26                      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, 114 S. Ct. 324 (1993); Harrison                            _____ ______                         ________            v. Sears, Roebuck & Co., 981 F.2d 25, 32 (1st Cir. 1992).               ____________________                      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.                                           -27-                                          27                      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                      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                                            ____________________            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?                                          -28-                                          28            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.                      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,  No. 93-1158, slip  op. at 8-9 (1st  Cir. Dec.            _____________            10,  1993) ("[D]etermining  damages .  . .  falls  within the            sound judgment and discretion of the factfinder  and will not            be overridden without substantial cause.").                      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                                            ____________________            12.  The  prior  mortgage  on   The  Charlestown  Motor   Inn            originally covered the  entire motel.  After  the condominium            declaration  was  recorded,   however,  the  prior  mortgagee                                         -29-                                          29            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.                                         III.                                      CONCLUSION                                      CONCLUSION                                      __________                      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.                                               ____                      No costs to either party.                                            ____________________            released sixteen of the units from his prior mortgage.  These            units are  currently the subject  of a quiet title  action by            Bay Loan.                                           -30-                                          30