Veranda Beach Club Limited Partnership v. Western Surety Co., Frg Ventures, Inc., Veranda Beach Club Limited Partnership v. Western Surety Co., Robert F. Mongillo, Veranda Beach Club Limited Partnership v. Western Surety Co., Faneuil Hall Capital Group, Inc.

Citations: 936 F.2d 1364; 20 Fed. R. Serv. 3d 409; 33 Fed. R. Serv. 809; 1991 U.S. App. LEXIS 11811Docket: 90-1096

Court: Court of Appeals for the First Circuit; June 10, 1991; Federal Appellate Court

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Three sets of appeals are examined from a multifaceted judgment in the United States District Court for the District of Massachusetts, stemming from a failed commercial transaction involving the Veranda Beach Club, a luxury time-share resort in Longboat Key, Florida. The jury ruled in favor of FRG Ventures, Inc. against Robert Mongillo, while other defendants, Edward W. Mongillo Company and Western Surety Company, were found not liable. Another plaintiff, Faneuil Hall Capital Group, Inc., did not receive any damages. Appeals were filed by FRG, Mongillo, and Faneuil, but the court found no reversible error, leading to an affirmation of the lower court's judgment.

In 1983, FRG, led by principals Peter Peggs and Peter Hutchings, sought to acquire equity in the Veranda Beach Club by forming the Veranda Beach Club Limited Partnership (VBCLP). FRG negotiated a deal with the resort's owner, Vacation Equities, Inc., to purchase unsold unit weeks. To secure necessary financing, FRG engaged Faneuil, which arranged a loan of over $4 million from Union Trust Bank, contingent upon obtaining a bond for repayment. Faneuil's executive vice president, John Eller, met Mongillo at a Christmas party, who proposed that his company, Insurance Risk Management, Inc., could provide the required bond, underwritten by Western Surety.

Mongillo provided Faneuil with a forged Western Surety bond and supporting documents, falsely indicating Western Surety's willingness to issue a financial guaranty bond to Union Trust. Faneuil, unaware of Mongillo's deception, structured a loan transaction involving Union Trust and VBCLP. During the closing in Baltimore on April 25, 1984, Mongillo presented what appeared to be a legitimate bond, but when Union Trust inquired about flood insurance, they discovered the bond was fraudulent. Subsequently, Western Surety confirmed they had no knowledge of the bond, leading to the suspension of the closing and the cancellation of the purchase agreement by VacEq.

In August 1984, VBCLP and Faneuil filed lawsuits against Mongillo, EWM Co., Western Surety, and IRM, alleging misrepresentation, breach of contract, reliance on apparent authority, negligence by Western Surety in supervising Mongillo, and violations of Massachusetts General Laws Chapter 93A. The cases were consolidated, and a magistrate judge was appointed for the trial, which began in September 1989 and lasted nearly three weeks. At the end of the plaintiffs' case, the court directed a verdict in favor of EWM Co. and decided to submit special questions to the jury, resulting in a verdict against Mongillo for $2,300,000 awarded to FRG alone. Post-trial motions were denied, and various issues were raised on appeal, with some deemed meritless. An appendix was included detailing the jury's responses and the verdict slip.

Faneuil's claim for negligent entrustment against Western Surety was dismissed by the lower court, which found that Faneuil failed to preserve this claim adequately during pretrial proceedings. The court's action was based on Fed. R. Civ. P. 16(f), which allows sanctions for non-compliance with pretrial orders. The magistrate noted that Faneuil did not adequately articulate its negligent entrustment theory in any pretrial documents, and that previous references in the original complaint were insufficient to establish the claim for trial. The court emphasized that parties must clearly define the issues they wish to pursue in pretrial submissions, as the pretrial order supersedes the pleadings and outlines what will be addressed at trial. Faneuil's attempts to rely on vague references were deemed inadequate, leading to the conclusion that the negligent entrustment claim was not properly developed for trial. The magistrate's decision to impose sanctions was reviewed only for potential abuse of discretion, affirming that clarity and specificity in pretrial submissions are critical.

Faneuil's filings indicated that the negligent entrustment claim was effectively abandoned as the trial approached, leading the court to conclude that Rule 16 had been violated. This violation would unfairly prejudice Western Surety if the issue was permitted to proceed, justifying the dismissal of the negligent entrustment claim without an abuse of discretion. The court referenced relevant case law affirming that a trial court is not required to consider unannounced alternative theories of recovery disclosed late in the process. 

In terms of evidentiary rulings, the court admitted evidence of Robert F. Mongillo's plea colloquy and criminal conviction over objections regarding the connection between him and the criminal defendant. Mongillo's challenge lacked merit, as the trial judge has broad discretion in establishing the foundation for evidence admission. The foundation was deemed sufficient based on deposition excerpts that confirmed Mongillo's identity and involvement in relevant transactions, making the argument against the connection appear unreasonable. The court emphasized that it is unnecessary for a factfinder to disregard clear and compelling evidence.

Mongillo contends that the probative value of evidence regarding his criminal conviction was overshadowed by its prejudicial impact, as per Fed. R. Evid. 403. He argues that the plaintiffs presented sufficient independent evidence of fraud, making the conviction's admission excessive. However, the court finds the conviction's admission not overly cumulative, as it confirms the plaintiffs' claims about Mongillo's fraudulent actions. The court asserts that trials are inherently prejudicial, and Rule 403 addresses only unfair prejudice, not prejudice in general. The trial court's evaluation of the probative value versus unfair prejudice is given significant deference on appeal, with alterations only warranted in extraordinary circumstances, which are not present here.

Regarding the license suspension, evidence of Mongillo's 1979 suspension by the Connecticut Division of Insurance was allowed, but details about the incident leading to the suspension were excluded. The court permitted knowledge of the suspension by EWM but barred evidence of EWM's payment of an administrative fine. FRG argued that the excluded evidence should have been admitted under Evidence Rule 404(b) to demonstrate EWM's prior forgery ratification, implying either an agency relationship or likelihood of similar conduct in a related transaction.

The admissibility of evidence under Rule 404(b) involves a two-step analysis: first, determining its "special relevance" beyond merely indicating a defendant's bad character; second, weighing its probative value against its prejudicial impact under Fed. R. Evid. 403. The lower court excluded the proffered details as unduly cumulative and possibly lacking necessary relevance. The appellate court agrees that these rulings fell within the trial court's discretion, noting that the excluded facts would not significantly aid in proving an agency relationship from 1983-1984.

To establish apparent authority, plaintiffs needed to demonstrate that EWM's actions led them to believe Mongillo was an authorized agent. However, there was no evidence that the plaintiffs were aware of EWM's alleged ratification of Mongillo's past misconduct or that they relied on any such support regarding the Veranda Beach matter. Furthermore, to prove vicarious liability, it was essential to show that Mongillo was acting within the scope of his employment and motivated by a desire to benefit EWM, which the excluded evidence failed to support. The court's discretion in excluding this evidence on relevancy grounds was upheld, particularly regarding details surrounding Mongillo's 1979 suspension.

During discovery, FRG submitted requests for admission under Fed. R. Civ. P. 36(a). Mongillo, representing EWM Co., invoked his Fifth Amendment privilege and refused to answer several requests. At trial, FRG sought to present the requests and Mongillo's non-responses to the jury to imply an adverse inference against EWM. The court ruled this evidence inadmissible as it was cumulative of already established information. FRG's argument that Mongillo's designation to answer the requests was relevant to proving the agency relationship was deemed unconvincing, as the requests specifically pertained to his role in the Veranda Beach transaction, which only he could answer. While Fed. R. Civ. P. 36(a) does not require requests to be answered by the most knowledgeable person, it mandates that the respondent conduct a reasonable inquiry. Mongillo's exclusive position as the only corporate officer capable of responding rendered any lack of information or knowledge insufficient as a defense.

The argument presented by FRG is flawed as it misinterprets the nature of the Fifth Amendment privilege against self-incrimination, which is a personal right that cannot be claimed by or attributed to a corporation. Citing United States v. White, it is established that an individual's invocation of this privilege in a civil case cannot negatively impact their corporate employer without additional justification. Consequently, FRG's assertion that Mongillo's use of his Fifth Amendment right should be viewed unfavorably towards EWM is unfounded.

In evaluating the directed verdict favoring EWM, plaintiffs argue that there was adequate evidence to establish the firm's vicarious liability for Mongillo's actions or to show that he was authorized to act on its behalf. Under appellate review standards, evidence must be viewed favorably to the nonmovant, and a directed verdict is acceptable if reasonable people could only reach one conclusion that favors the movant. Courts are restricted from assessing witness credibility or resolving testimonial conflicts; a mere scintilla of evidence is insufficient to impede a directed verdict, especially when the burden of proof lies with the objecting party.

Mongillo's background reveals that he was an agent for Western Surety, initially serving as president of EWM, a family-owned business, from 1960 until his wife's succession in the early 1980s. He held stock in EWM and maintained his business office there. In 1983, he created IRM, a Delaware corporation solely owned by him, which had no operational business activities, employees, or ties to EWM, effectively functioning as a sham entity. Conversely, EWM was a legitimate and functional company with its own governance and licensing as an insurance agent.

In early 1984, Mongillo received bond-related materials at EWM and subsequently sent a letter on EWM stationery to Faneuil, falsely claiming that IRM had secured a bond from Western Surety. The accompanying commitment letter, which appeared authentic, was actually a fabrication by Mongillo, including a forged signature.

Negotiations were conducted based on a false commitment letter, with both the bond premium and service fee to be collected by IRM at closing, and these funds were to be immediately wired to IRM's Delaware account, leaving Western Surety and EWM Co. without compensation. In terms of vicarious liability under Massachusetts law, an employer can be held liable for an employee's intentional tort if it occurs within the scope of employment. The Massachusetts Supreme Judicial Court has established a three-part test for this determination: the conduct must be the type the employee was hired to perform, occur substantially within authorized time and space, and be motivated at least in part by a desire to serve the employer. Mongillo, employed by EWM Co. to sell bonds, committed fraud from his office during work hours. However, the evidence suggested that Mongillo acted solely for his benefit and that of IRM, not EWM Co. The magistrate found no evidence of Mongillo intending to serve EWM while perpetrating the fraud, noting he made it clear that IRM was responsible for the transaction and would receive all financial benefits. Plaintiffs argued that Mongillo's actions were intended to secure future business for EWM, but this reasoning was deemed flawed as it implied Mongillo's primary goal was to benefit IRM. Legally, plaintiffs referenced a precedent where an agent's intent to benefit the principal was not essential to establish scope of employment, which involved agents committing fraud for personal gain. The case noted upheld a judgment for the plaintiff despite the agents acting solely for their benefit.

Companies are liable to the plaintiff for losses incurred due to fraudulent acts by agents, regardless of whether the companies benefited from these transactions or the agents acted solely for personal gain. The decision in New England Acceptance, an intermediate appellate court ruling, is viewed as outdated following the Supreme Judicial Court's (SJC) vicarious liability standard established in Wang Laboratories. Federal courts must adhere to the highest state court's rulings on state law, making New England Acceptance less authoritative than Wang Laboratories.

Key distinctions between New England Acceptance and the current case include: the lack of knowledge by EWM Co. regarding the fraudulent activities, absence of apparent authority for the agents in the present case, and the different roles of the defendants—whereas in New England Acceptance, defendants were both employers and issuers of the fraudulent instruments, EWM is only being sued as the agent involved in the fraud. Therefore, the magistrate correctly concluded that EWM cannot be held vicariously liable.

Apparent authority under Massachusetts law arises when a principal's conduct leads a third party to reasonably believe that an individual has the authority to act as their agent. This involves agency by estoppel, where the principal cannot deny the agent's authority if the third party changes their position based on that belief.

There was insufficient evidence to suggest that EWM Co. engaged in conduct that would lead the plaintiffs to reasonably believe that Mongillo had the authority to bind the firm. The court determined that Mongillo was acting independently through his straw corporation, IRM, and that the plaintiffs were aware of this but chose to proceed regardless. Although Mongillo was an EWM officer and utilized EWM resources for his activities related to Veranda Beach, this did not demonstrate EWM's involvement or authority in the transaction. Previous case law, such as Sheinkopf v. Stone, supports the notion that merely using a firm's resources does not establish apparent authority. 

Additionally, there was no evidence of detrimental reliance or any change in position attributable to EWM. The plaintiffs' trust was placed solely in Mongillo, independent of EWM’s role. Eller's testimony, which suggested that Mongillo's past dealings with EWM led to an assumption of authority, did not establish a reasonable basis for reliance, especially since Mongillo explicitly stated he was acting on behalf of IRM. 

Ultimately, liability must be based on concrete evidence rather than speculation, and the trial court was not required to draw speculative inferences from the evidence presented. Attempts to associate EWM with Mongillo’s actions were deemed insufficient to advance claims of vicarious liability or apparent authority to a jury. Furthermore, the magistrate ruled that for Faneuil to recover against any defendant, it needed to establish that it was a joint venturer with FRG; otherwise, Faneuil was merely an intermediary and could not recover for any wrongs against FRG.

When an agent contracts on behalf of a disclosed principal, the benefits and obligations of that contract do not extend to the agent. Faneuil contends that the jury instruction regarding its status as a joint venturer was erroneous, arguing that it could still recover under tort or promissory estoppel theories. In 1983, Faneuil was hired by FRG to secure financing for Veranda Beach, receiving $5,000 monthly until payments ceased in February 1984. Their relationship transitioned to a written agreement on April 16, 1984, which stipulated that Faneuil would act as a Limited Partner and utilize its best efforts to secure financing, earning a 45% share of operational profits and cash flow without needing to contribute capital or assume financial risks.

Expert testimony indicated that the property at closing would have been worth significantly more than its purchase price, leading to potential equity of $2.3 million for FRG, although initial costs might cause losses in the early years. The jury concluded that Faneuil and FRG were not joint venturers, that Mongillo did not consider Faneuil a principal, and that he did not intend for Faneuil to benefit from his promise to obtain a bond. Faneuil argued it could recover for negligent or intentional misrepresentation; however, the jury found Mongillo did not see Faneuil as an intended beneficiary, which is crucial to establishing negligent misrepresentation. Consequently, the jury's findings were well-supported and negated Faneuil's claims for recovery.

Faneuil was engaged by FRG to facilitate a deal and interacted with Mongillo in this capacity, but the jury was not required to accept Eller’s self-serving testimony regarding Faneuil’s intentions to become a limited partner. The jury could reasonably view Faneuil as a consultant rather than a principal in the transaction. The comparison to a lawyer on a contingent fee basis illustrates that Faneuil remained an agent for FRG, not a partner, with Mongillo having no reason to consider Faneuil a beneficiary of his promise. Moreover, Faneuil's hired services did not depend on Mongillo’s performance, allowing Faneuil to seek financial backing independently. 

Regarding the claim of intentional misrepresentation, Faneuil failed to demonstrate that Mongillo induced it to act detrimentally, as the jury found no promises made by Mongillo and Faneuil did not show evidence of detrimental reliance or lost opportunities. Additionally, Faneuil's claims were undermined by a lack of evidence for damages; it could not prove expected profits or cash distributions from the partnership, nor did it provide economic evidence of how the transaction would impact it as a non-equity participant. The distinction between profit-and-loss interests and equity interests was emphasized, and the need for concrete evidence of damages was highlighted. Overall, Faneuil's inability to prove recoverable damages was critical to the failure of its claims.

The dismissal of claims for fraud and misrepresentation against the defendant was upheld under Massachusetts law due to the plaintiff's failure to demonstrate that any cognizable harm resulted from the defendant's actions. In the context of promissory estoppel, the court noted that for a promise to be binding, it must be shown that the promisor reasonably expected to induce reliance and that such reliance occurred, which must prevent injustice if the promise is not enforced. The court found that Faneuil's reliance on this doctrine was unsubstantiated for similar reasons as previously discussed, specifically that there was no evidence Mongillo expected Faneuil to rely on his promise or that Faneuil suffered any damages as a result.

Regarding the jury's deliberation, an initial inconsistency arose when the jury indicated Mongillo acted with apparent authority from Western Surety but delivered a verdict solely against Mongillo. The court brought the jury back to clarify this inconsistency. After further deliberation, the jury maintained their findings but altered two answers to eliminate the inconsistency, ultimately rendering a verdict against Mongillo for $2,300,000. 

FRG contended that the trial court erred by resubmitting the matter to the jury instead of entering judgment based on the original answers. FRG argued that the original answers regarding apparent authority were consistent with the general verdict and that the magistrate should have resolved the matter without further jury consideration. However, the court dismissed FRG's arguments as lacking a solid foundation.

The verdict form included spaces for the jury to identify liable defendants. The court instructed the jury that they could find one or both liable, and if they found only one, they should cross off the other. The jury initially named Mongillo as the liable party, which indicated a finding in favor of Western Surety by crossing out the other defendant's name. The trial court is afforded significant discretion in assessing the clarity of the jury's responses to the verdict form, as supported by precedent. The court ruled that the general verdict conflicted with specific jury answers regarding apparent authority, allowing it to choose among three procedural alternatives under Rule 49(b). The court justified its decision to resubmit the matter to the jury in a post-trial memorandum, asserting that any claim of abuse of discretion is unfounded. FRG argued that the magistrate improperly suggested the jury could ignore legal requirements while reconsidering its findings, citing cases where trial courts were criticized for coercing jurors. However, those cases were deemed irrelevant as they involved new substantive information being presented to jurors. In this instance, the jury was simply reminded of prior instructions regarding apparent authority and Western Surety's liability.

The instruction reiterated after the jury's inconsistency was deemed appropriate and within the instructor's discretion. It is unreasonable to interpret this as an allowance to ignore conflicting facts that did not align with the jury's sense of justice. FRG argues that the jury's sudden change regarding apparent authority indicates a disregard for the law to achieve a desired outcome, citing *Riley v. K Mart Corp.*, where a jury altered its findings to enable a recovery that the law prohibited. However, the current case differs significantly from *Riley*; the jury only had one clear inconsistency to resolve, which it addressed straightforwardly without manipulation. The jury's rapid decision-making is not a valid reason to overturn the verdict, as courts recognize that deliberation duration does not inherently reflect the validity of the jury's conclusions. The final analysis of the jury's findings must consider their consistency with the evidence rather than the speed of their deliberation. Mongillo's other appeals, including the denial of post-trial motions for judgment n.o.v. or a new trial, lack substantial merit, particularly his claim regarding unmet conditions precedent in the loan agreement between FRG and Union Trust.

The borrower was required to provide $300,000 and a $1,000,000 letter of credit at closing, neither of which was produced. Mongillo argues he should not be liable for a deal that would have failed regardless. The standard for reviewing the denial of judgment notwithstanding the verdict (n.o.v.) aligns with that for a directed verdict, requiring evidence to be viewed favorably to the nonmovant. Mongillo failed to meet this standard, as testimony indicated that compliance with the bank's commitment letter conditions was waived. The trial court's deference to the jury's resolution of the facts is affirmed, as the evidence did not suggest a miscarriage of justice or warrant a new trial. The district court’s discretion in denying a new trial is upheld, with the court noting that the weight of the evidence did not overwhelmingly favor Mongillo, and the mere possibility of a different verdict does not justify a new trial.

Regarding jury instructions, Mongillo contends the magistrate erred by not instructing the jury to consider FRG's inexperience in managing a time-share resort. However, established precedent dictates that jury instructions should be evaluated as a whole, and the presiding judge is not obliged to customize them to a party's preferences. The instructions given were deemed correct and comprehensive. Mongillo further claims the jury's damage assessment was unsupported by evidence, arguing that the concept of equity in time-share operations is meaningless without considering management skill.

Absence of evidence regarding FRG's capability to operate Veranda Beach undermined the foundation for awarded damages. While management skills are essential, other factors like diligence and luck also play critical roles. Emphasis on one attribute should be directed to factfinders rather than appellate courts. The process of converting legal damages into monetary amounts is inherently imprecise, with multiple acceptable methods for assessment. Evidence presented indicated that FRG could have secured an equity position of $2,300,000 if the acquisition had occurred, but cross-examination raised concerns about the validity of this claim. Credibility issues are for the jury to resolve, not appellate courts. Juries can determine damages within a broad range as long as the verdict is justifiable and does not violate judicial conscience. In a separate matter, the court awarded Mongillo $4,000,000 under Massachusetts General Law Chapter 93A for engaging in unfair and deceptive practices, finding that his actions directly impacted FRG's ability to complete the purchase. The court ruled that FRG reasonably pursued a bond despite the failed transaction, ultimately determining the damages sustained amounted to $2,000,000, which were doubled due to Mongillo's willful misconduct. Chapter 93A aims to ensure fairness in business practices by prohibiting deceptive acts in trade and commerce.

Claims of unfair or deceptive acts under Massachusetts General Laws Chapter 93A can be associated with common law fraud or breach of contract. Chapter 93A claims are tried in court rather than by jury. If a court finds a "willful or knowing violation," it must award damages of one to three times the actual damages incurred. In the case at hand, Mongillo argued that the damages assessed should have been limited to the cost of a replacement bond, despite evidence that FRG mitigated its losses effectively after a failed closing. The court ruled that FRG acted reasonably and was not required to foresee the best course of action. Consequently, the damage assessment under Chapter 93A was upheld. The court concluded that the trial was fair and free from significant legal errors, affirming the judgment and ordering costs to be taxed against the appellants. The jury was presented with questions regarding Mongillo's breach of contract and whether he made false promises, with the potential for promissory estoppel to apply if no contract was established.

The jury found that Robert F. Mongillo acted with apparent authority from Western Surety Company when entering into a contract but did not make fraudulent or negligently false promises to benefit the company. Mongillo was found to have made false promises with the apparent authority of Western Surety. The plaintiffs, F.R.G. Inc. and Faneuil Hall Capital Group, Inc., sustained damages totaling $2.3 million. The jury answered negatively to questions regarding whether the plaintiffs entered into a joint venture contract for the acquisition of the Veranda Beach Club property and whether Mongillo intended Faneuil Hall Capital Group to be the intended beneficiary of his promise. Additionally, it was determined that Mongillo did not misrepresent Faneuil Hall Capital Group as a principal in the acquisition. The verdict was finalized on October 13, 1989, with an award of $2.3 million to the plaintiffs against Mongillo. The document notes the jury's answers remained consistent after redeliberation, except for two questions that were changed from affirmative to negative.

Evidence of other crimes, wrongs, or acts is generally inadmissible to prove a person's character for conformity of action, per Fed. R. Evid. 404(b). However, such evidence may be admissible for purposes like proving motive, opportunity, intent, or absence of mistake. In the case at hand, EWM Co. sought admissions regarding Robert Mongillo's authority and actions related to a financial guaranty bond. Specifically, it was asserted that Mongillo acted with Western’s authority and did not inform relevant parties about the bond's invalidity prior to an April 25, 1984 meeting. The document also notes that the propriety of a corporate officer's personal rights in corporate admissions was not addressed, referencing United States v. Kordel regarding the limitations on a corporation's ability to invoke personal privileges. 

Additionally, while IRM's filings inaccurately listed Eller and Elio as executives, both denied these claims and Mongillo's misuse of their names. Mongillo had previously received materials from Western Surety that he misused to create fraudulent documentation. Faneuil claimed judicial errors regarding jury instructions on promissory estoppel, particularly relating to a third party's potential recovery and the conditions for jury consideration. Under Massachusetts law, damages are required for a promissory estoppel claim. The jury's responses to questions were consistent, leading to changes in subsequent submissions. Lastly, the magistrate's belief about his options under Rule 49(b) was deemed a non-reversible error.

The magistrate had the option to resubmit the case and ultimately determined that resubmission was the "clearly appropriate" course of action. The case cited, Riley, differs fundamentally because it pertains to Fed. R. Civ. P. 49(a), which does not explicitly allow for the resubmission of inconsistent jury answers, unlike Rule 49(b), which accommodates potential conflicts and allows for more jury discretion in reconciling inconsistencies. Mongillo's argument that a waiver of conditions requires "clear, decisive, and unequivocal conduct" is dismissed as unreasonable. The cited cases pertain to parties attempting to bypass written contract provisions, which is not applicable here since the involved parties mutually agreed to waive certain conditions. A nonparty to a contract cannot claim a breach of contract simply because the contract's execution could have benefited them financially. Additionally, the claims under Chapter 93A against other defendants were found to be unproductive.