Court Opinion

ID: 194726
Source: CourtListenerOpinion
Date Created: 2011-02-07 02:23:35+00
Date Added: 2024-06-11T15:11:20.585550
License: Public Domain

United States Court of Appeals
                    For the First Circuit
                                         

No. 92-1758

              FOCUS INVESTMENT ASSOCIATES, INC.,

                    Plaintiff, Appellant,

                              v.

          AMERICAN TITLE INSURANCE COMPANY, ET AL.,

                    Defendants, Appellees.

                                         
No. 92-1766

              FOCUS INVESTMENT ASSOCIATES, INC.,

                     Plaintiff, Appellee,

                              v.

          AMERICAN TITLE INSURANCE COMPANY, ET AL.,

                    Defendant, Appellant.

                                         

        APPEALS FROM THE UNITED STATES DISTRICT COURT

               FOR THE DISTRICT OF RHODE ISLAND

     [Hon. Francis J. Boyle, Senior U.S. District Judge]
                                                       

                                         

                            Before

                   Torruella, Circuit Judge,
                                           
               Campbell, Senior Circuit Judge,
                                             
                  and Stahl, Circuit Judge.
                                          

                                         

Steven E. Snow with  whom Partridge, Snow &  Hahn was on brief for
                                                 

appellant/cross-appellee Focus Investment Associates, Inc.
Max Wistow  with whom  Stephen P.  Sheehan and  Wistow &  Barylick
                                                                  
Inc.  were   on  brief  for  appellee/cross-appellant  American  Title

Insurance Company.
William H.  Jestings with  whom Patricia A.  Buckley and  Carroll,
                                                                  
Kelly & Murphy were on brief for appellees Tobak and Abrams & Verri.
          
Robert S. Bruzzi was on brief for appellee Owen B. Landman. 
                

                                         

                         May 11, 1993
                                         

          STAHL, Circuit Judge.   In these cross-appeals,  we
                              

explore,  inter alia,  the  parameters of  a title  insurance
                    

company's duty  to disclose title  defects to its  insured, a

lender-mortgagee.   The district court, finding  that no such

duty existed, granted a  post-judgment motion for judgment as

a  matter  of  law  in  favor  of  defendant  American  Title

Insurance Co.  ("American"), thus  nullifying a  jury verdict

awarding $286,000 in  negligence damages  to plaintiff  Focus

Investment  Associates, Inc. ("Focus").1   Focus appeals that

ruling,  as  well  as  others  related   to  it.    American,

meanwhile,  argues that  the jury's  $49,000 damage  award on

Focus's  contract claim  may  have  resulted  from  erroneous

instructions  and  should  therefore  be vacated.    For  the

reasons that  follow, we  affirm the judgments  against Focus

and vacate the judgment against American.2

                    

1.  See generally  Focus Inv. Assocs. v.  American Title Ins.
                                                             
Co., 797 F. Supp. 109 (D.R.I. 1992).
   

2.  Prior to trial, Fed. R. Civ.  P. Rule 50 had already been
amended to abolish the  different designations between a pre-
judgment "motion  for directed verdict"  and a  post-judgment
"motion  for judgment n.o.v."  Both motions are  now known as
"motions for judgment as a matter of law."  As the applicable
standards under the two denominations do not differ, we will,
for purposes of consistency, refer to the motions at issue as
though they were submitted  and ruled upon under  the amended
Rule.  See Davet v. Maccarone,  973 F.2d 22, 26 n.4 (1st Cir.
                             
1992) (discussing amendment to federal rule and  substituting
appropriate nomenclature).

                             -3-
                              3

                              I.
                                

                       Background Facts
                                       

          Unless otherwise indicated, the following facts are

undisputed.    Focus,   a  family-owned  and   operated  Ohio

corporation,  invests money  from  a family  trust and  makes

loans  secured by interests in  real estate.   On December 6,

1988, Laurence  J. Shapiro, a now-deceased  Boston-based real

estate   developer  and  mortgage   broker,  contacted  Focus

President Edward  Sarbey3 to solicit placement  of a $250,000

short-term  loan  to  George  Marderosian,  a  Rhode   Island

attorney.    Shapiro  explained  that  Marderosian  was  lead

attorney in  a real estate enterprise,  which urgently needed

to fund  operational cash  shortfalls.  Shapiro  indicated to

Focus that  Guardian Mortgage  Corp., a loan  company Shapiro

operated,  would make and close the loan, and then assign all

loan documents to  Focus, in return  for Focus's funding  and

purchase of the loan.

          Shapiro represented to Focus that the loan would be

fully secured by second mortgages on twelve condominium units

valued at $1.14 million,  subject only to Attleboro Pawtucket

Savings   Bank's  ("Attleboro")   first   mortgage  with   an

                    

3.  Shapiro and  Sarbey became  acquainted when the  two were
neighbors in  Boston, prior  to Sarbey's relocation  to Ohio.
According  to  Sarbey, Shapiro  originally  recommended loans
secured by  real estate as  a safe and  profitable investment
idea.   Prior to the loan here at issue, Shapiro had arranged
several other loans for Focus.

                             -4-
                              4

approximate  balance  of $720,000.   As  additional security,

Focus  was to  be given  a  second mortgage  on Marderosian's

home, which,  according to  Shapiro, had  an equity  value of

$100,000 to  $150,000 over and above The  Boston Five Corp.'s

first mortgage.   Finally, Shapiro and  Marderosian agreed to

personally guarantee  the loan, and  to assign  to Focus  the

proceeds of  a consulting agreement between  Shapiro and Dean

Street  Development, a  Marderosian client.   Based  on these

representations, Focus agreed to purchase and fund the loan.

           Shapiro  hired defendant James Tobak, an associate

of  defendant law  firm Abrams  and  Verri, to  represent the

lender's  interests4 and close the loan deal.  On December 6,

1988,  Tobak   transmitted  to   Sarbey  facsimiles   of  the

promissory  notes,  mortgages,  and  guarantees  executed  in

connection with the loan.  The following day,  Tobak informed

Sarbey  that Focus's  mortgages  had been  recorded and  that

title insurance had been obtained.  He  then requested Sarbey

to  wire  the  loan proceeds  to  Abrams  and  Verri's escrow

account, which Sarbey did  the same day.    The loan  closing

took  place December 8,  1988.  The terms  of the loan called

for  an annual  interest  rate of  20  percent, with  monthly

                    

4.  Focus  claims  that  Tobak   was  hired  to  protect  its
interests,  while  Tobak  claims  he  was  hired  to  protect
Shapiro's and Guardian's interests.  We address this dispute-
-which  turns on  the identity  of the  actual "lender"--more
fully infra at 15.
           

                             -5-
                              5

interest payments of $4,166.67  to begin on January  6, 1989.

Final repayment was due on April 6, 1989.

          Among the loan documents, Focus received two  title

insurance  policies  issued   by  American's   policy-issuing

attorney, defendant  Owen Landman.  The  first policy insured

Focus's second mortgage on 12 condominium units.   The policy

showed title to the units to be vested in the  name of George

A.  Marderosian, Trustee  of the  River's Edge  Realty Trust.

Excepted  from coverage  under the  first policy was  a first

mortgage with a  principal balance of  $720,000.  The  second

policy insured Focus's second mortgage on Marderosian's home,

excepting  a  first  mortgage  in  the  principal  amount  of

$150,000.

          Near the  end of December  1988, Shapiro died.   In

January, February and  March 1989, Marderosian made  payments

to  Focus totalling  $23,200.   However, as  of the  April 6,

1988, due date, the balance of the principal and the interest

due under the terms  of the promissory note remained  unpaid.

In the  course of  considering its response  to Marderosian's

non-payment,  Focus discovered  that  its  mortgages did  not

occupy  a  second  position   on  either  of  the  collateral

properties.   With respect to the  condominium units, Focus's

mortgage  was  in  fifth   position.    Focus's  mortgage  on

Marderosian's home  was in fourth  position, behind mortgages

held by C & K Investments ($100,000) and Bank of New England-

                             -6-
                              6

Old Colony ($50,000), as  well as the first mortgage  held by

Boston  Five Corp.  In addition, at the time Focus's mortgage

was recorded,  title to the  condominium units was  vested in

Capital Center Development, not  Marderosian.  Neither of the

title  insurance policies  reflected  the  existence  of  the

senior mortgages  nor did the condominium  policy reflect the

actual ownership.

          The  title  insurance  policies  in  question  were

issued by defendant Landman, whom American had appointed as a

policy-issuing attorney  in April 1980.   Landman, who shared

office  space with Marderosian, was listed as "Of Counsel" on

the Marderosian law firm  letterhead.  Landman testified that

he issued the  title policies at  Marderosian's request.   He

conducted no independent title  search, but instead relied on

Marderosian's  representations   as  to  the   ownership  and

mortgage status of the collateral properties.

          In July 1989, Attleboro foreclosed its mortgage  on

the  condominium  units.    The foreclosure  sale  price  was

$220,000  less than  the  balance  of  Attleboro's  mortgage,

leaving nothing for a  second mortgagee.  Shortly thereafter,

Marderosian's  home  was  bid  in at  foreclosure  by  second

mortgagee C & K Investments, which assumed liability for  the

principal  balance  of  $150,000  remaining  on  Boston  Five

Corp.'s first mortgage and paid an additional $49,000,  for a

total purchase price  of $199,000.  Thus, $49,000 in proceeds

                             -7-
                              7

remained  after  satisfaction   of  the  Boston  Five   Corp.

mortgage.

          On  November  11,  1989,  Focus  filed  a diversity

action  against  American, Landman,  Tobak,  Abrams &  Verri,

Shapiro's estate,  and Marderosian.  The nine-count complaint

sought  damages  from  American   for  breach  of  the  title

insurance  contract, negligence in searching title, negligent

hiring,  retention  and  supervision  of  Landman,  negligent

misrepresentation of Focus's mortgage position, and bad faith

refusal to settle.   Focus accused  Landman of negligence  in

searching title and  negligent misrepresentation.   Tobak and

Abrams & Verri were charged with negligent misrepresentation,

legal malpractice, breach of contract and breach of fiduciary

duty.    Finally,  Focus   sought  to  enforce  the  personal

guaranties  tendered by  Shapiro and  Marderosian.   Prior to

trial, Marderosian filed  a motion to dismiss, to which Focus

did not object, apparently  because it thought Marderosian to

be  judgment-free.   The district  court granted  the motion,

with prejudice. 

     At trial,  Focus  argued that  the  terms of  the  title

insurance  contract  obligated  American  to  pay  Focus  the

$49,000  that would  have  been  available  to Focus  had  it

actually been  the  second mortgage  holder on  Marderosian's

home.    In  addition,  Focus  sought  to  recover  the  loan

proceeds, plus costs  and interest from  defendants American,

                             -8-
                              8

Landman,  Tobak,  et  al.,  theorizing  that  but  for  their
                         

tortious conduct,  Focus never  would have made  the loan  to

Marderosian.  

          At  the close  of Focus's  case-in-chief, American,

Landman,  Tobak, and Abrams &  Verri moved for  judgment as a

matter of law.   The court reserved decision on  the motions.

The  defendants renewed their motions at the close of all the

evidence.   Focus also moved for judgment  as a matter of law

on American's affirmative defense of usury.  The court denied

Focus's  motion  and  reserved  decision on  the  motions  of

American and Landman.  The court granted the motions of Tobak

and Abrams  & Verri, ruling  that Focus's failure  to present

expert testimony  with respect  to an attorney's  standard of

care under the relevant circumstances  was fatal to the claim

of legal malpractice.

          The jury found American liable on both contract and

negligence grounds, awarding damages of $49,000 and $286,000,

respectively.   The  jury also  found Landman  negligent, but

awarded  no damages.    Following trial,  American moved  for

judgment  as a  matter  of  law  on  both  the  contract  and

negligence counts.  The  district court, ruling that American

owed  Focus no duty with respect to the title search, granted

the motion on the negligence  count, while denying the motion

on  the contract  claim.   On  June  18, 1992,  judgment  was

entered in accordance with these rulings.

                             -9-
                              9

          Both  Focus  and American  appealed.   Focus claims

that judgment  as  a  matter  of  law  was  improper  because

American  was under a duty  to Focus to  perform a reasonable

title search.   Focus  also  argues that  the district  court

incorrectly ruled  that expert testimony was  necessary on an

attorney's standard of care, and that even if  such testimony

was required, it  was supplied via the testimony of attorneys

Tobak and Marderosian.  American  appeals on the ground  that

the district court incorrectly charged the jury that it "may"

return  a  verdict  for American  if  it  found  the loan  to

Marderosian usurious,  when in  actuality a finding  of usury

would mean that a jury "must" rule in favor of American.5  

                             II.
                                

                        Focus's Appeal
                                      

A.  Judgment as a Matter of Law
                               

          The bulk of Focus's appeal is aimed at the district

court's grant of judgment as a matter of law against Focus on

its  various claims of negligence.   In reviewing  a grant of

judgment  as a matter of law, the evidence and all reasonable

                    

5.  Focus   also  argued   that  American   should  be   held
vicariously liable  for the negligence of  its alleged agent,
Landman.   The  district court  ruled  that Landman  was  not
American's agent,  and Focus  appeals that decision  as well.
The  only asserted  basis  for Landman's  negligence was  his
failure to  independently search  title prior to  issuing the
policies in question.   Because,  as will  be explained  more
fully, infra, we find that a title insurer owes no duty to an
            
insured with respect to  a title search, we need  not resolve
the agency issue.

                             -10-
                              10

inferences  therefrom  must be  examined  in  the light  most

favorable to the nonmovant.  Lowe v. Scott, 959 F.2d 323, 337
                                          

(1st Cir. 1992).  Judgment as  a matter of law is appropriate

only  when the evidence, so viewed, is such that a reasonable

jury could reach only one conclusion.  Id.   
                                          

B. The Negligence Claims6
                        

     1.  The Title Search
                         

          Focus essentially argues, as  it did at trial, that

American--via  its   agent,  Landman--failed  to   conduct  a

reasonable title search prior  to issuing the title insurance

policy  to  Focus.   Had  American  done  so, and  thereafter

disclosed to  Focus the correct number  of superior mortgages

on the proffered collateral, Focus claims it never would have

made the loan to Marderosian.   At the heart of this argument

is the question of  whether a title insurance company  can be

held liable for  failure to search  title and disclose  title

defects to its insured.  This is apparently an issue of first

                    

6.  We note that the jury was not given separate instructions
relative   to  each  of  Focus's  negligence  claims  against
American--e.g.,    searching    title,     misrepresentation,
supervision, etc.--but instead was given a verdict form which
asked only, "Do you find American Title liable for negligence
in issuing the title insurance policies?"  Therefore, because
the record  does not  indicate which  theory the  jury relied
upon to  make  its $286,000  negligence award,  we, like  the
district court,  must examine each theory  individually.  See
                                                             
Welsh  Mfg., Div.  Of Textron  v. Pinkerton's, 474  A.2d 436,
                                             
441-42 (R.I.  1984) (when multiple theories  of liability are
submitted to a jury, which then is asked  to return a general
verdict, each  theory must be tested  separately to determine
whether submission to the  jury is appropriate) (citing Davis
                                                             
v. Caldwell, 429 N.E.2d 741, 742 (N.Y. 1981)).
           

                             -11-
                              11

impression in Rhode  Island, and thus  we will seek  guidance

from, inter alia, analogous decisions of other jurisdictions.
                

See  Sainz Gonzalez  v. Banco  de Santander-Puerto  Rico, 932
                                                        

F.2d 999, 1001 (1st Cir. 1991) ("A diversity court faced with

a paucity of  apposite decisional law may  look to `analogous

decisions  . .  .  and any  other  reliable data  tending  to

convincingly  show  how the  highest  court  in the  relevant

jurisdiction  would decide the  issue.'")(quoting Redgrave v.
                                                          

Boston Symphony  Orchestra, Inc., 855 F.2d 888, 903 (1st Cir.
                                

1988) (en banc)).   We  review de novo  the district  court's

state law  determination.   Salve Regina College  v. Russell,
                                                            

111 S. Ct. 1217, 1223-25 (1991).

          It is true, as Focus asserts, that some courts have

concluded that  a title  insurance company  may be  liable in

tort if it negligently fails to discover and disclose a title

defect  to its  insured.   See,  e.g.,  Red Lobster  Inns  of
                                                             

America v. Lawyers Title  Ins. Corp., 656 F.2d 381,  383 (8th
                                    

Cir.  1981) (applying  Arkansas law);  Bank of  California v.
                                                          

First American Title  Ins. Co., 826  P.2d 1126, 1128  (Alaska
                              

1992); White v.  Western Title  Ins. Co., 710  P.2d 309,  315
                                        

(Cal. 1985);   Ford v.  Guarantee Abstract &  Title Co.,  553
                                                       

P.2d  254, 266 (Kan. 1976);  Heyd v. Chicago  Title Ins. Co.,
                                                            

354  N.W.2d 154, 158 (Neb. 1984).  See generally Joyce Dickey
                                                

Palomar, Title Insurance Companies' Liability for Failure  to
                                                             

Search Title and  Disclose Record Title, 20 Creighton L. Rev.
                                       

                             -12-
                              12

455  (1986-87).  In each  of those cases,  however, the title

insurance company  either had  expressly agreed to  provide a

title report or had issued to the insured a preliminary title

report which failed to disclose a title defect which was then

excluded from coverage under the policy.  In such situations,

          two distinct responsibilities are  assumed [by
          the insurer]; in rendering the  first service,
          the insurer  serves as an abstractor  of title
          and must  list all  matters  of public  record
          regarding   the   subject   property  in   its
          preliminary  report.   When  a  title  insurer
          breaches its duty to abstract title accurately
          it may be held liable  in tort for all damages
          proximately caused by such breach. 

Ford, 553 P.2d at 266 (citations omitted).  
    

          In   the  absence   of  an   express   contract  or

preliminary  title report,  however,  courts  have  uniformly

declined  to hold  a  title insurance  company  liable for  a

negligent  title search.  See, e.g., Brown's Tie & Lumber Co.
                                                             

v.  Chicago Title  Co., 764  P.2d 423,  425-27  (Idaho 1988);
                      

Roscoe v. United States  Life Title Ins. Co., 734  P.2d 1272,
                                            

1274  (N.M. 1987);  Grunberger v.  Iseson, 429  N.Y.S.2d 209,
                                         

210-11  (N.Y. App.  Div.  1980); Greenberg  v. Stewart  Title
                                                             

Guar. Co., 492 N.W.2d 147 (Wis. 1992); see also Walker Rogge,
                                                             

Inc. v. Chelsea  Title and  Guar. Co., 562  A.2d 208,  217-19
                                     

(N.J. 1989) (collecting cases).

          Here, American neither contracted to  provide Focus

with a  title report, nor  provided Focus with  a preliminary

title report.  Thus, we agree with the district court that in

                             -13-
                              13

trying to recover its  loan loss under negligence principles,

Focus seeks  to expand its relationship  with American beyond

the bounds of  the title insurance policy  and thereby impose

upon American a duty neither undertaken nor imposed by  law.7

                    

7.  The  cover sheet  of the  policies here  at issue  states
that:

          SUBJECT TO THE EXCLUSIONS  FROM COVERAGE,
          THE  EXCEPTIONS  CONTAINED IN  SCHEDULE B
          AND THE PROVISIONS  OF THE CONDITIONS AND
          STIPULATIONS   HEREOF,   AMERICAN   TITLE
          INSURANCE COMPANY .  . .   insures . .  .
          against loss or damage, not exceeding the
          amount of insurance stated in  Schedule A
          .  .  .  sustained  or  incurred  by  the
          insured by reason of:

          1.   Title  to  the  estate  or  interest
          described  in  Schedule  A  being  vested
          otherwise than as stated therein;

          2.  Any defect  in or lien or encumbrance
          on such title;

                           . . . . 

          6.     The  priority   of  any  lien   or
          encumbrance over the  lien of the insured
          mortgage;

                           . . . . 

Among  the  relevant  Conditions  and  Stipulations  are  the
following:

          6.  DETERMINATION AND PAYMENT OF LOSS
               (a)    The  liability of  [American]
          under this policy shall in no case exceed
          the least of:
               (i)  the actual loss  of the insured
          claimant; or
               (ii) the amount of  insurance stated
          in Schedule A . . . .

                           . . . .

                             -14-
                              14

See  Horn v. Lawyers Title Ins.  Co., 557 P.2d 206, 208 (N.M.
                                    

1976) ("The rights and duties of the parties are fixed by the

contract  of title insurance.").8   In the absence  of a duty

to  search title,  as  a  matter  of law,  there  can  be  no

liability for failing to do so.  See Banks v. Bowen's Landing
                                                             

Corp.,  522 A.2d 1222, 1224-25  (R.I. 1987) (if  no duty runs
     

from  defendant to plaintiff, an issue which is to be decided

by  the court, the trier of fact  has nothing to consider and

judgment  as a matter of law must be entered).9  Accordingly,

we find that the district court correctly granted judgment as

                    

          11.  LIABILITY LIMITED TO THIS POLICY
               This  instrument  together with  all
          endorsements  and  other instruments,  if
          any, attached hereto by [American] is the
          entire  policy  and contract  between the
          insured and [American].
               Any claim of loss or damage, whether
          or  not based  on  negligence, and  which
          arises out  of the status of  the lien of
          the insured mortgage or  of the title  to
          the estate or  interest covered hereby or
          any action asserting such claim, shall be
          restricted   to    the   provisions   and
          conditions   and  stipulations   of  this
          policy.

8.    To the extent that a title insurer searches title prior
to issuing a policy, it does  so only for its own benefit, to
ascertain its risk of  liability under the policy as  it will
except from coverage any title defect it does discover and be
liable for  damages caused by  undiscovered--and unexcepted--
defects.  See Greenberg, 492 N.W.2d at 150. 
                       

9.  To  the extent,  therefore,  that Focus  claims that  the
existence  of a  duty was  a question for  the jury,  such an
argument is legally incorrect.  Banks, 522 A.2d at 1225.
                                     

                             -15-
                              15

a matter of law  on Focus's claim of negligence  in searching

title.

     2.  Negligent Misrepresentation
                                    

          As  we  have  said,  each of  the  title  insurance

policies here at issue excepted  from coverage only one prior

mortgage,  thereby   insuring  Focus's  position   as  second

mortgagee  on  both  the condominium  units  and  Marderosian

residence.  Focus argues that the policies therefore amounted

to a false representation  that its mortgages were in  second

position,   which  representation   was  due   to  American's

negligence.  Consequently, Focus argues, because it relied on

these  representations  in  deciding  to  make  the  loan  to

Marderosian,  American is  liable for  Marderosian's default.

Although we agree with the district court that American, as a

matter  of  law,  was  not  liable  to  Focus  for  negligent

misrepresentation, our reasoning  differs somewhat from  that

of the district court.   See Banco Popular de Puerto  Rico v.
                                                          

Greenblatt, 964  F.2d 1227,  1230 (1st Cir.  1992) (appellate
          

court can  affirm a judgment on  any independently sufficient

ground reflected in the record).

          We  have  stated  that   "[t]itle  insurance  is  a

contract of indemnity, not guarantee."  Falmouth Nat. Bank v.
                                                          

Ticor Title Ins.  Co., 920  F.2d 1058, 1062  (1st Cir.  1990)
                     

(applying Massachusetts law) (citations omitted).  Therefore,

by issuing a policy, "an insurer does not guarantee the state

                             -16-
                              16

of the title, but rather, agrees to indemnify the insured for

any loss." Id.  "Put another way, it is not the mortgage note
              

that  is insured,  but rather,  what is  insured is  the loss

resulting  from  a  defect  in  the  security."  Id.  (citing
                                                    

Southwest Title Ins. Co. v. Northland Bldg. Corp., 552 S.W.2d
                                                 

425, 430 (Tex. 1977)).   Moreover, a title insurer  "does not

guarantee either  that the  mortgaged premises are  worth the

amount  of the  mortgage or  that the  mortgage debt  will be

repaid."  Blackhawk Prod. Credit Assoc. v. Chicago Title Ins.
                                                             

Co., 423 N.W.2d 521, 525 (Wis. 1988) (citations omitted).  As
   

the  title insurance  policies  issued by  American were  not

representations of  title, they cannot,  as a matter  of law,

form the basis of a claim of negligent misrepresentation.10

                    

10.  Not only  are the district  court's decisions  regarding
the title insurance  policies in accord  with those of  other
jurisdictions, they are supported  by logic as well.   In our
view, Focus's  position  is tantamount  to  a buyer  of  life
insurance  claiming that  his policy  is a  guarantee against
death.    Focus's  claim  that it  relied  on  the  insurance
policies  as  evidence  that no  undisclosed  superior  liens
existed  simply  flies  in the  face  of  the  fact that  the
policies were issued to  protect Focus against losses it  may
suffer   from  undisclosed  superior  liens.    Moreover,  an
insured's losses are limited to situations where the security
of  the insured lien is actually  impaired by the undisclosed
superior lien.  "The  mere fact of an undisclosed  prior lien
is  insufficient to establish this  claim; a showing that the
prior lien renders  the insured lien `insecure'  must be made
as  well."    Blackhawk,  423  N.W.2d  at  525-26.  (citation
                       
omitted).   In other words, if  the lien held  by Focus would
have  been  valueless  without  the undisclosed  lien,  Focus
cannot  claim any loss due to the presence of the undisclosed
lien.    This explains  the  jury's $49,000  award  under the
contract, because between the two collateral properties, only
that  amount--left  over from  the  foreclosure  sale of  the
Marderosian residence--would have been  available to Focus as

                             -17-
                              17

     3.  Negligent Hiring, Retention and Supervision
                                                    

       In addition to claims of negligence in searching title

and  negligent  misrepresentation,  Focus asserted  at  trial

claims   directly  against  American  for  negligent  hiring,

retention  and supervision  of its  policy-issuing attorneys,

Landman and  Marderosian.  The  district court found  none of

these theories to be legally supportable.  We agree.

          Rhode   Island  law   does  recognize   the  direct

liability of  an employer to third parties for damages caused

by employees or agents who were negligently hired, trained or

supervised.  Welsh Mfg., 474 A.2d  at 438.  This liability is
                       

based  on a failure to exercise reasonable care in hiring and

retaining a person who  the employer knows or should  know is

unfit for the job, and who therefore exposes third parties to

unreasonable risks of  harm.  Id.  at 440.   With respect  to
                                 

American's selection  and retention  of Landman as  a policy-

                    

a second mortgagee.  With respect to the rest of  the loan to
Marderosian, Focus was simply  insufficiently collateralized.
In making this  last statement, we reject  Focus's claim that
American's negligence  resulted in a confused  state of title
that "chilled" the foreclosure  sales and thereby reduced the
equity  available  to a  second  mortgagee.   Although  Focus
presented  expert  evidence  at  trial  indicating  that  the
collateral  properties  had  a  market  value  exceeding  the
foreclosure sale price, those experts testified that although
foreclosure  itself would  reduce a property's  market value,
they  did not consider the  effects of a  foreclosure sale on
the  value  of the  property at  issue  in arriving  at their
appraisal.    Finally,  there   was  no  explanation  of  how
American's  alleged  negligence--as opposed  to Marderosian's
actions--created   the   title  confusion,   the  foreclosure
situation or the resulting depressed value.  

                             -18-
                              18

issuing attorney,  however, the record is  devoid of evidence

that  American knew  or should  have  known that  Landman was

unfit  for the position.  Nor was any evidence presented that

Landman  exhibited  any job-related  deficiencies  during the

nine-year period  he served  American.  Accordingly,  we find

Focus's negligent  hiring and retention claims  to be legally

insufficient.

          Focus next argues  that American's failure to  give

Landman personal  instructions  or training  with respect  to

title  insurance  or  title  searching,  failure  to  conduct

seminars  or courses,  and  failure to  audit Landman's  work

constituted negligence  and resulted  in Focus's loss  on the

Marderosian  loan.    As  we have  stated  already,  however,

American  was under  no duty  to provide  Focus with  a title

report,  and  any  title  search  undertaken  by  Landman  or

American was for  American's benefit, not Focus's.  Thus, any

failure on American's part to train Landman is not actionable

by Focus.  

          Finally,   to  support   its  claim   of  negligent

supervision,  Focus  argues that  if  American  had a  system

whereby it could have ascertained which property interests it

already insured,  it would  have discovered the  senior liens

not disclosed on the policies  issued to Focus, since earlier

policies on  the same properties  showed additional different

encumbrances.  Focus's  argument fails, however,  because, as

                             -19-
                              19

American  correctly  points  out,  title policies  issued  at

different times  may show different encumbrances  on the same

property  simply because  the  encumbrances may  have changed

over time due to refinancing or discharge.  Therefore,  Focus

has failed to indicate how such a cross-checking system would

have yielded any relevant information.

          In  the  end,  with   respect  to  all  of  Focus's

negligence claims, Focus received what it bargained  for -- a

title insurance policy which  promised to indemnify Focus for

any  losses suffered as a result of Focus not having a second

mortgage  on the relevant collateral properties.  As the only

equity available to  a second mortgagee was  $49,000 from the

foreclosure  of  the  Marderosian  residence,  that  was  the

"actual loss"  within the  meaning of  the policy,  see supra
                                                             

note  7,  and thus  the only  loss  American was  required to

indemnify.   Focus was not  legally entitled to anything else

from American.

C.  Legal Malpractice
                     

          The district court granted  judgment as a matter of

law in favor of Tobak and Abrams &  Verri, holding that Focus

needed to present  expert testimony to the  jury with respect

to the duty of care owed  by an attorney in Tobak's position.

Focus first argues that no such expert testimony was required

because the standard of care of an attorney  "in representing

a  lender" is  within a  layman's common  knowledge.   In the

                             -20-
                              20

alternative, Focus  argues that  the jury was  presented with

such  evidence  via  the  testimony  or cross-examination  of

Tobak, Landman  and Marderosian.  After  careful analysis, we

are unpersuaded by Focus's contentions.  

          As an initial matter, we  note that in arguing that

no expert testimony was required relative to the duty owed by

a lender's attorney, Focus has, in our view, misapprehended a
          

critical concern of the district court.   In granting Tobak's

motion,  the  court   emphasized  the  confusion  surrounding

Tobak's  actual  role in  the  loan process,  and  found that

Focus's failure to present  evidence which would have clearly

established Tobak's  role was  a serious  matter, as  was its

failure to  present evidence  indicating exactly what  is the

standard of care for an attorney performing that role.11

                    

11.  Specifically, the district court stated:

          My  understanding is that the argument is
          that  Mr. Tobac  (sic) allegedly  gave an
          opinion upon which  the Plaintiff  relied
          that  each of  the mortgages  in question
          were  second  mortgages.    There  is  an
          underlying factual issue here  of whether
          or not in the first  place the defendant,
          Tobac  (sic),  and   his  law  firm  were
          engaged  for the purpose  of providing an
          opinion with respect to the effect of the
          two mortgages.  I'm  satisfied . . . that
          this  is  a  circumstance  in  which it's
          necessary to have  available to the  jury
          expert opinion  with respect to  the duty
          of  an  attorney  in  Mr.  Tobac's  (sic)
          situation.   Particularly in light of the
          fact  that his  situation  is unclear  to
          begin with as to just exactly what he was
          hired to do.  What his engagement was.

                             -21-
                              21

     1.  The Need for Expert Testimony
                                      

          It  is well settled  under Rhode Island  law that a

legal malpractice plaintiff must  prove the "want of ordinary

care and skill"  by the defendant.   Holmes v.  Peck, 1  R.I.
                                                    

242, 245  (1849).   While there is  no Rhode Island  case law

addressing  the   issue  of  expert  testimony   in  a  legal

malpractice case,  a review of other  jurisdictions indicates

that  the  most  widely  accepted   rule  is  that  a   legal

malpractice   plaintiff   must   present   expert   testimony

establishing  the appropriate  standard  of care  unless  the

attorney's  lack of  care and  skill is  so obvious  that the

trier of  fact can resolve  the issue as  a matter  of common

knowledge.  See generally, Michael A. DiSabatino, Annotation,
                         

Admissibility  and   Necessity  of  Expert  Evidence   as  to
                                                             

Standards of Practice  and Negligence  in Malpractice  Action
                                                             

Against  Attorney, 14 A.L.R. 4th  170 (1982) (and cases cited
                 

therein).    Cases which  fall  into  the "common  knowledge"

category  are  those  where  the  negligence  is  "clear  and

palpable,"  or  where  no  analysis  of  legal  expertise  is

involved.  See   e.g.,  Collins v. Greenstein,  595 P.2d  275
                                             

(Haw.  1979)  (no  expert  testimony  required  for  jury  to

evaluate attorney's failure  to file  suit within  applicable

limitations period); Suritz  v. Kelner, 155 So.  2d 831 (Fla.
                                      

Dist.  Ct. App.  1963)  (no expert  testimony required  where

attorney  directed clients not to answer interrogatories even

                             -22-
                              22

though judge had  directed clients  to answer  on penalty  of

dismissal), cert. denied, 165 So. 2d 178 (Fla. 1964); Olfe v.
                                                          

Gordon,  286  N.W.2d 573  (Wis.  1980)  (no expert  testimony
      

required   where   attorney   failed   to   follow   client's

instructions because claim was not based on exercise of legal

expertise). 

          On the  other hand, in cases  where legal expertise

is  an  issue, "a  jury  cannot  rationally apply  negligence

principles  to professional conduct  absent evidence  of what

the   competent  lawyer   would   have  done   under  similar

circumstances .  . . "   Lenius v. King, 294  N.W.2d 912, 914
                                       

(S.D. 1980).   See  also, Lentino  v. Fringe  Employee Plans,
                                                             

Inc., 611 F.2d 474 (3d Cir. 1979) (where attorney was accused
    

of malpractice for failing to  properly advise a pension fund

on  the tax consequences of a  pension plan amendment, expert

testimony would be  required due to the necessary analysis of

the  tax code,  regulations,  and revenue  rulings) (applying

Pennsylvania  law);  Willage  v.  Law Offices  of  Wallace  &
                                                             

Breslow,  P.A., 415  So. 2d  767 (Fla.  Dist. Ct.  App. 1982)
              

(expert testimony  required where malpractice case  was based

on  attorney's failure  to  call a  particular witness,  when

attorney feared damaging cross-examination of witness).

          Here, Tobak testified that  he was hired by Shapiro

and Guardian, together referred to as "the lender," to review

loan  documents,  and  in  order  to  do  so,  he  relied  on

                             -23-
                              23

information provided to him by his client.  He testified that

nothing  he reviewed indicated to  him that the  loan was not

proceeding as planned.  Sarbey also testified that it was his

understanding that Tobak  was representing "the  lender," but

because, in his opinion, Focus was the lender, Sarbey thought

that Tobak was representing Focus.  Essentially, Focus argues

that Tobak was employed by Focus and committed malpractice by

relying  on the  documentation  he was  presented and  simply

reviewing it without making an independent investigation.  In

our view, regardless of who Tobak  represented, Focus's claim

clearly implicates  the issue  of Tobak's application  of his

legal  expertise to  the situation.  Accord, Fall  River Sav.
                                                             

Bank  v. Callahan,  463  N.E.2d  555  (Mass. App.  Ct.  1984)
                 

(approving  trial  court's  use of  supplemental  sources  to

augment  expert  testimony   in  malpractice  trial of  title

attorney).   Accordingly,  we  find that  the district  court

decided  correctly  that  expert  testimony  was  required to

establish the standard of  care applicable to an attorney  in

Tobak's position.

     2.  Trial Testimony as Expert Testimony 
     2.  Trial Testimony as Expert Testimony
                                            

            On  appeal, Focus  asserts that  it "adduced  the

requisite standards of  care of a  closing attorney, a  title

attorney,  a settlement  agent  and a  fiduciary through  the

testimony   of  James   Tobak,   Owen  Landman   and   George

Marderosian."  This  argument misses the point, and serves to

                             -24-
                              24

highlight the controversy  surrounding Tobak,  for Focus  has

again, as  it  did  before  the  district  court,  failed  to

indicate which role Tobak occupied.  Thus, even assuming that

the testimony of the three defendants did adduce the  claimed

standards, the jury could only speculate as to which standard

applied to Tobak. See Lenius, 294 N.W.2d at 914 (jury may not
                            

be  permitted to  speculate  as to  standard of  professional

conduct).   Given  the parties'  dispute over  the employment

issue, we believe that the district court correctly concluded

that  the  jury should  have  been  presented with  testimony

concerning the role assumed by--and concomitant duties of--an

attorney  in Tobak's position; that is, hired by a party who,

on paper, is the lender,  but in reality is a  broker through

whom  the loan proceeds will  pass.  Because  Focus failed to

clear  that hurdle, we need  not address the  adequacy of the

testimony that  was introduced  at trial. Instead,  given the
                   

factual and legal landscape, we find that  the district court

correctly concluded  that expert  testimony on the  nature of

Tobak's  role was  both required  and lacking,  and therefore

properly  granted judgment  as a  matter of  law in  favor of

Tobak and Abrams & Verri.12

                    

12.  Focus  argues  for the  first  time on  appeal  that the
district  court  erred  because if  the  jury  had  found for
American  on its  usury  claim, then  Tobak  would have  been
liable  to  Focus  for  failing  to   apprise  Focus  of  the
illegality.    We  do  not  reach  this  issue,  but  instead
reiterate  our familiar  position  that arguments  not raised
before  the district court "cannot  be surfaced for the first

                             -25-
                              25

                             III.
                                 

                      American's Appeal
                                       

A.  Usury
         

          Under Rhode Island law, loans which call for annual

interest  payments in  excess  of 21  percent are  considered

usurious,  and are  therefore void  and uncollectible.   R.I.

Gen.  Laws      6-26-2,  6-26-4  (1956)  (1992  Reenactment);

DeFusco  v. Giorgio, 440 A.2d  727, 731-32 (R.I.  1982).  The
                   

result is the same whether or not the lender intended to make

a  usurious loan.   In  re Swartz, 37  B.R. 776  (Bankr. R.I.
                                 

1984).   Here, there is  no dispute that  the promissory note

given  to  Guardian  by  Marderosian and  assigned  to  Focus

provided for  20 percent  annual interest.   American claims,

however,  that Shapiro's  assignment  to Focus  of a  $56,500

consulting fee  paid to Shapiro by  Marderosian's client Dean

Street    Development--an     assignment    which    occurred

contemporaneously  with  the  Marderosian   loan  agreement--

constituted  a  separate,  hidden  interest  payment  on  the

Marderosian loan, bringing the actual annual interest rate on

the loan to 88 percent.

          According to American's theory,  as a result of the

usurious--and  therefore  void--mortgage,  Focus   failed  to

acquire an insurable property interest and therefore suffered

                    

time on appeal."   Goldman v. First National Bank  of Boston,
                                                            
No. 92-1773, slip op. at 5, n.4 (Feb. 18, 1993).

                             -26-
                              26

no damage  as a result  of any title  defects.   The district

court denied Focus's motion  for judgment as a matter  of law

with respect  to usury, and  allowed the  issue to go  to the

jury, giving the following instruction in the context of  the

contract claim:

               Defendant  contends   that  payments
          under a consulting agreement  executed at
          the same time as  the loan agreement were
          in reality interest payments on the loan.
          If  you  find by  a preponderance  of the
          evidence  that  the consulting  agreement
          was  really a pretext  for the payment of
          an illegal rate of interest, then you may
                                                   
          find  that  the  loan  was  unlawful  and
          return  a verdict  for  Defendant on  the
          contract claim. 

(Emphasis added).  American timely objected, arguing that the

use of the word "may" impermissibly gave the jury  discretion

to find for Focus even  if it found the loan to  be usurious.

The court  did  not  change  the instruction,  and  the  jury

awarded  Focus  $49,000  under  the  title  insurance  policy

covering  the mortgage  on  Marderosian's home.   On  appeal,

American  claims that  the  "may" instruction  was clear  and

harmful error entitling  it to  a new trial.   After  careful

review, we agree.

          Interestingly, Focus does  not directly dispute the

central thesis of American's  appeal--the failure of the jury

instruction  to conform to the law  of usury as it relates to

insurable  interests.     Instead,  Focus   argues  that  (1)

American,  or  anyone else  other  than  the borrower,  lacks

                             -27-
                              27

standing to raise the  usury defense; (2) American  failed to

establish  a  prima  facie case  of  usury;  and,  (3) it  is

"obvious" that the jury found that the loan was not usurious,

therefore  rendering  any error  harmless.    Finding all  of

Focus's arguments unpersuasive, we address each in turn.

     1.  Standing
                 

          It is  ordinarily true, as Focus  asserts, that the

defense  of usury  is  personal to  the  borrower or  one  in

privity with  the borrower,  and unavailable to  strangers to

the  usurious  transaction. See  generally,  45  Am. Jur.  2d
                                          

Interest  and Usury    288 (1969) (and  cases cited therein).
                   

This  custom allows a debtor who  does not wish to invoke the

protections  of usury  laws to pay  off the debt  to which he

agreed.   See DeFusco, 440 A.2d at 732 (although Rhode Island
                     

usury  laws  manifest strong  public policy  against usurious

transactions,  "we  do  not  believe  that   the  Legislature

intended thereby to preclude a debtor from  waiving a defense

of usury under all circumstances"). Focus relies on a host of

cases, all  of which  restate the general  proposition stated

above.   E.g., Securities Exch.  Comm'n v. First  Sec. Co. of
                                                             

Chicago, 366 F. Supp. 367, 373 (N.D. Ill. 1973); Iamartino v.
                                                          

Avallone, 477 A.2d  124, 128 (Conn.  App. Ct. 1984);  General
                                                             

Electric Credit Corp. v. Best Refrigerated Express, Inc., 385
                                                        

N.W.2d  81, 83 (Neb. 1986); Pinnix  v. Maryland Casualty Co.,
                                                            

200  S.E. 874, 879 (N.C.  1939); Benser v. Independent Banks,
                                                            

                             -28-
                              28

735 S.W.2d  566, 569 (Tex.  1987).  In  each of  these cases,

however, the  party asserting the usury  claim was attempting

to  avoid  repayment  of  a debt,  and  was  prohibited  from

interposing  the claim.  See,  e.g., Pinnix, 200  S.E. at 879
                                           

("to allow a  stranger to interpose the defense of usury to a

contract  with which the maker is  in all respects satisfied,

and by the terms of which he desires to abide, and upon which

he is liable for a deficiency judgment,  would be exceedingly

unfair to a debtor who  desires to perform his contract. .  .

.").  Unlike  the usury  theorists in  those cases,  however,

American  is not  attempting to  step into  the shoes  of the

borrower,  Marderosian,  and  void  the loan.    Rather  than

asserting  usury as  a  defense  to  repayment of  the  loan,

American  instead  argues that  the  usurious  nature of  the

Marderosian   loan   rendered   Focus's   mortgage   interest

uninsurable.  Indeed, there appears to be no dispute that had

Focus  not acquiesced  to  Marderosian's motion  to  dismiss,

Marderosian  would have  had the  right to interpose  a usury

defense.   Thus,  while American's  claim does  implicate the

question  of usury, Focus's  "personal defense" theory--while

accurate--is, in  our view, misplaced.   Accordingly, we turn

to the substance of American's argument.

          "In order for recovery  [on an insurance policy] to

be  had, it  is  essential that  the  claimant show  both  an

existing contract  of insurance and an  insurable interest in

                             -29-
                              29

the property.   No insurable interest  existing, the contract

is considered absolutely void . . . "  4 John A. Appleman and

Jean  Appleman, Insurance  Law  and Practice,    2121  (1969)
                                            

(footnotes omitted);  Cronin v. Vermont Life Ins.  Co., 40 A.
                                                      

497  (R.I. 1898).   In  what is  apparently the only  case to

address the  issue, the Minnesota  Supreme Court held  that a

usurious mortgage cannot give  rise to an insurable interest.

Phalen Park  State  Bank v.  Reeves, 251  N.W.2d 135,  138-39
                                   

(Minn.  1977).   Phalen  was a  mortgagee's  suit on  a  fire
                       

insurance policy.  The court accepted the insurance company's

argument  that   the  bank,   by  charging  interest   on  an

undisbursed  portion  of  the  loan,  effectively  charged  a

usurious  rate  of  interest.    The  Phalen  court  used two
                                            

separate analytical  paths to  reach its conclusion,  both of

which  are applicable here and inevitably lead us to the same

determination.

          First, Phalen  restated the general  rule that  one
                       

has an  insurable interest in  property "by the  existence of

which  he will gain advantage, or by the destruction of which

he  will suffer a  loss."  Id.  at 139 (quoting  Harrison  v.
                                                          

Fortlage, 161 U.S. 57, 65  (1896)); see also Appleman, supra,
                                                            

   2123,  2188.   Because,  however, a  usurious mortgage  is

void, and the  mortgagee, therefore, has no  right to collect

principal  or interest, no loss will occur if the property is

destroyed.  Id.          The  second  rationale  employed  by
               

                             -30-
                              30

Phalen  follows from the premise  that where a  state views a
      

particular legal scheme as reflecting the highest concern for

public welfare, strict adherence to that scheme applies, even

in  collateral  matters.    Thus, given  that  the  Minnesota

Legislature  declared usurious  transactions to  be  void, an

obvious  expression of  high public  welfare concern,  Phalen
                                                             

held  that no insurable interest  could arise from a usurious

mortgage. Id.  The Phalen  court relied in part on   Mackie &
                                                             

Williams Food Stores, Inc.  v. Anchor Casualty Co., 216  F.2d
                                                  

317  (8th Cir. 1954), a case in which an automobile purchaser

failed  to comply  with statutory  conveyancing requirements.

Where Missouri's transfer documentation requirement was found

to reflect public welfare  concern in preventing transfers of

stolen automobiles, the court held that the purchaser did not

obtain  an  insurable  interest.    Id.  See  also,  Cherokee
                                                             

Foundries,  Inc. v.  Imperial Assurance  Co., 219  S.W.2d 203
                                            

(Tenn. 1949) (purchaser of real property pursuant  to an oral

sales contract  did not  acquire  insurable interest  because

contract was unenforceable under the statute of frauds).

          Here, under either approach,  a finding of usury in

the   Marderosian-Focus  transaction   would   lead  to   the

inexorable conclusion that the mortgages received by Focus as

collateral were  not insurable  interests.   As to  the first

theory, as  we have already noted,  usurious transactions are

void under  Rhode Island law.   Thus,  if the loan  is indeed

                             -31-
                              31

usurious,  Marderosian could  legally  avoid  repayment,  and

recoup any  sums already paid.   Cf. Keenan v.  Coppa, 195 A.
                                                     

485 (R.I.  1937).  Therefore,  because a usurious  loan would

leave  Focus with  no enforceable right  in the  mortgages at

issue, a jury finding of  usury would necessarily leave Focus

with no insurable interest. 

          As  to  Phalen's  second  path,  the  Rhode  Island
                          

Supreme Court  has  unequivocally acknowledged  that  state's

strong  public  policy  against  usurious  transactions.  See
                                                             

DeFusco, 440 A.2d  at 732.   Therefore, if Focus's  mortgages
       

were acquired through a  usurious transaction, violative of a

strong public policy, that public policy would apply to other

matters.   Under  those  circumstances, Focus  would have  no

insurable interest.   Accord Bankers  & Shippers Ins.  Co. v.
                                                          

Blackwell,  51 So. 2d 498 (Ala.  1951) (trucking company held
         

to  have  no insurable  interest  in  freight where  carriage

contract was illegal). See also, Mackie &  Williams, 216 F.2d
                                                   

at  320;   Cherokee  Foundries, 219  S.W.2d  at 206.    Focus
                              

counters by arguing that Phalen is, by its own terms, limited
                               

to  its  facts,   and  that  a  later  Minnesota   case  both

distinguished and  minimized the  importance of Phalen.   See
                                                             

Midwest Fed. Sav. and Loan Ass'n  v. West Bend Mut. Ins. Co.,
                                                            

407 N.W.2d 690 (Minn. Ct. App. 1987).  We are unpersuaded. 

          It is  true, as Focus  points out, that  the Phalen
                                                             

majority concluded its opinion  by stating: "[W]e stress that

                             -32-
                              32

our  holding has resulted from  and is limited  to the unique

facts  and circumstances presented in  this case.   We do not

intend  by this decision to  depart from the  general rule in

this  state  that the  defense of  usury  is personal  to the

borrower."    Id. at  141.    Nowhere, however,  does  Phalen
                                                             

indicate   what  "unique   facts   and  circumstances"   were

presented.    Irrespective   of  this  qualifying   language,

however,  Phalen's  holding   remains  inescapable--that   no
                  

insurable  interest can  arise  out of  a usurious  mortgage.

Moreover,  as   we  previously  noted,   the  "general  rule"

regarding usury is inapposite to this case, where American is

not asserting a usury  defense, as such. Finally, even  if we

were   to   accept  Focus's   argument   concerning  Phalen's
                                                             

limitations, we note that Phalen's conclusion with respect to
                                  

usury  was but  a  small part  of  a broader  inquiry;  i.e.,

whether  an insurable  interest can  arise out  of a  void or

unenforceable contract.   The answer generally  appears to be

negative.   See  supra  pp. 27-29.    Nor does  Midwest  help
                                                       

Focus's cause.  In Midwest, the  court precluded an insurance
                          

company  from asserting  a usury  defense in  an action  by a

mortgagee seeking recovery under a fire policy.  Although the

court  cited  Phalen for  the  "general  rule" regarding  the
                    

personal nature of the usury defense, Id. at 695, the court's
                                         

decision--and that  of the trial  court, see id.  at 695--was
                                                

based on a Minnesota statute which precluded all corporations
                                                             

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from invoking a usury  defense. Id.  Notably,  the "insurable
                                   

interest" aspect  of Phalen  was never addressed  in Midwest,
                                                            

much less limited  or distinguished.  Finally,  to the extent

that Midwest can be  construed to run counter to  Phalen, the
                                                        

latter  remains  the  pronouncement  of  Minnesota's  highest

court.   Based on the foregoing, we find that American could,

under these circumstances, properly raise its usury argument.

     2.  Prima Facie Case
                         

          To support its claim of usury, American argues that

Shapiro's assignment  of rights under  a consulting agreement

with  Dean Street Development  constituted hidden, additional

interest,  apart from  the  20 percent  rate  charged in  the

Marderosian  loan documents.   Under  American's theory,  the

actual  interest rate  was  88 percent.    Focus responds  by

relying on the apparent separateness  between Marderosian and

the parties to  the consulting fee.  Implicitly, the district

court rejected Focus's prima facie argument, as it denied its

motion for directed verdict on the usury issue.  We reject it

as  well.    In  short, Focus's  argument  ignores  authority

holding that

           "[u]sury is not  determined merely  from
          what    the    parties   represent    the
          transaction  to  be, but  the  court will
          look  to  the   whole  transaction,   the
          surrounding       circumstances,      the
          occurrences  at  the time  of  making the
          agreement,  and  the  instruments  drawn.
          Whether  a transaction legal  on its face
          is, in  fact, merely  a  device to  cover

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          usury generally is a question of fact for
          the jury." 

45 Am. Jur.  2d Interest  and Usury    112 (1969) (and  cases
                                   

cited therein) (footnotes omitted).

          Here, there is evidence that the loan proceeds were

intended for Dean Street Development, a Marderosian client in

need  of "discreet" funding and there is no question that the

assignment from  Shapiro to Focus  was finalized at  the same

time as the loan from Focus to Marderosian.  Finally, the sum

payable under the assignment  were due to be repaid  April 6,

1989, the same  day as the loan.  Focus  argues that the loan

and   assignment   were   entirely   separate   transactions,

characterizing  the assignment as  nothing more  than Shapiro

sharing his  broker's commission with  Focus, a  non-usurious

transaction.   While the jury, of course, is entirely free to

accept  either version of the  facts, it is  quite clear that

American has at least made out a prima facie case of usury.

     3.  The Instruction
                        

          As the  above discussion makes clear,  if, in fact,

the jury were to find the loan to Marderosian usurious, then,

as a matter of law, Focus would have no insurable interest in

the  collateral mortgages.  Therefore, the instruction, which

used the  permissive "may,"  allowed for  both  a finding  of
                                              

usury and a verdict  for Focus on  its contract claim.   This

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                              35

was  error.13   Accordingly,  American is  entitled to  a new

trial   on  Focus's  contract   claim,  accompanied   by  the

appropriate instruction on usury.  

                             IV.
                                

                          Conclusion
                                    

          For the  reasons stated herein, the  judgment below

is  vacated insofar  as it  awarded damages  to Focus  on its
    vacated
           

contract claim, and affirmed in all other respects.
                    affirmed
                            

                    

13.  We find  nothing in the  record to support  Focus's bald
assertion  that the error was harmless because "it is obvious
that the jury found that the loan was not usurious."

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