Veranda Beach Club Ltd. Partnership v. Western Surety Co.

Citation: 936 F.2d 1364Docket: Nos. 90-1096 to 90-1099, 90-1857, 90-1871 and 90-1872

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

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Three sets of appeals arise from a judgment by the United States District Court for the District of Massachusetts, stemming from a failed commercial transaction. The jury ruled in favor of FRG Ventures, Inc. (FRG) against Robert Mongillo, while Edward W. Mongillo Company and Western Surety Company were found not liable. Another plaintiff, Faneuil Hall Capital Group, Inc. (Faneuil), did not recover any damages. All parties, including FRG, Mongillo, and Faneuil, have appealed the judgment. Upon review, no reversible errors were identified, leading to the affirmation of the lower court's judgment.

The background involves the attempted acquisition of the Veranda Beach Club, a luxury time-share resort in Florida, by FRG through the formation of the Veranda Beach Club Limited Partnership (VBCLP). FRG negotiated to purchase unsold ownership intervals from Vacation Equities, Inc., and enlisted Faneuil to secure financing. Faneuil arranged a loan exceeding $4 million from Union Trust Bank, which required a bond for loan repayment. 

Mongillo, an employee of EWM Co. and an agent for Western Surety, misrepresented his ability to provide the necessary bond through his firm, Insurance Risk Management, Inc. Following a meeting where he was informed of Faneuil's need for a bond, Mongillo forged a document claiming Western Surety's willingness to issue the bond. Faneuil, unaware of the forgery, proceeded to structure the loan transaction based on these false representations. During the closing process in April 1984, it was revealed that the bond and related documents were fraudulent, leading to the suspension of the closing.

Plaintiffs provided relevant information to Western Surety for bond issuance, but the company declined after ten days, leading VacEq to cancel the purchase agreement. In August 1984, VBCLP and Faneuil filed suit against Mongillo, EWM Co., Western Surety, and IRM, with Faneuil accusing Mongillo and EWM Co. of misrepresenting their authority and breaching their contract to provide a valid bond. The lawsuit also alleged reliance on Mongillo's apparent authority, negligence by Western Surety in supervising Mongillo, and violations of Mass. Gen. L. ch. 93A by all defendants. The district court consolidated the cases, aligned FRG as a plaintiff, and assigned a magistrate judge for trial, which began in September 1989. The court directed a verdict for EWM Co. after the plaintiffs’ case and prepared two verdict forms based on the jury's findings. The jury ultimately ruled in favor of FRG against Mongillo for $2,300,000. Post-trial motions were denied, and various issues were raised on appeal, detailed in an appendix. Faneuil contested the dismissal of a negligent entrustment claim against Western Surety, which was struck pre-trial due to Faneuil's failure to preserve it, as noted by the magistrate. The trial court’s broad discretion under Fed. R. Civ. P. 16(f) for sanctions in case management was affirmed, and the magistrate's actions were reviewed only for abuse of discretion.

Faneuil's challenge to the preclusive order regarding the negligent entrustment claim is deemed misdirected, as the critical issue is not whether the claim was included in the original complaint but whether it was adequately developed during pretrial proceedings. Parties must clearly identify claims for trial, and adherence to Civil Rule 16 is essential in this process. The pre-trial order supersedes pleadings, establishing the issues for trial. Faneuil's record shows a failure to advance the negligent entrustment theory in pretrial submissions, instead focusing on agency liability related to Western Surety’s agent, Robert F. Mongillo. A mere reference to negligent entrustment in the lengthy complaint was insufficient to preserve the claim for trial. Consequently, the court determined that Faneuil’s inattention to properly preserving the negligent entrustment issue violated Rule 16, justifying the dismissal of the claim without abuse of discretion.

Additionally, during the trial, the court admitted evidence of Robert F. Mongillo's plea colloquy and criminal conviction for mail and wire fraud, despite objections. Mongillo contends that there was inadequate foundation linking him to the convicted individual. However, the court's discretion in establishing an evidentiary foundation, as governed by Fed. R. Evid. 104(b), affirms that the trial judge's role is to assess whether the jury could reasonably find the conditional fact by a preponderance of the evidence, without weighing credibility or making definitive findings.

A strong foundation was established prior to the admission of the plea colloquy into evidence, supported by excerpts from Mongillo's deposition. These excerpts confirmed key facts about Robert F. Mongillo, including his birthdate, education, and involvement in a transaction related to Faneuil and Veranda Beach from 1983-1984. The criminal defendant admitted similar details in the plea colloquy, making claims of insufficient connection between the individuals unpersuasive. The court noted that the law does not require ignoring evident facts.

Mongillo argued that the probative value of the conviction was overshadowed by its prejudicial effect, asserting that the plaintiffs presented enough independent evidence of fraud, making the conviction's introduction excessive. However, the court found no unfair cumulative effect; the conviction corroborated the plaintiffs’ claims regarding Mongillo’s orchestration of fraudulent activities. The court emphasized that trials inherently involve prejudice, and only unfair prejudice is prohibited by Rule 403. The trial court's assessment of probative value versus unfair prejudice is given significant deference on appeal.

Regarding Mongillo's license suspension, evidence of a 1979 suspension for misconduct was admitted, while details about the incident leading to the suspension were excluded. The court allowed the fact that EWM knew of the suspension but barred evidence of EWM paying part of the fine. FRG argued that the excluded evidence should have been admitted under Evidence Rule 404(b) to demonstrate EWM's past ratification of forgery, which could imply an agency relationship or likely ratification of the Veranda Beach transaction. The trial court conducted a two-step analysis for admissibility under Rule 404(b), ultimately excluding the evidence due to its cumulative nature and insufficient relevance.

Rulings by the trier of fact were within their discretion, as the facts in question did not significantly support the establishment of an agency relationship between the plaintiffs and EWM for the period of 1983-1984. To prove apparent authority, the plaintiffs needed to demonstrate that EWM's actions led them to believe Mongillo was an authorized agent, which was unsupported by evidence. There was no indication the plaintiffs were aware of any supposed ratification by EWM of Mongillo's past misconduct, nor proof that they relied on such ratification in the Veranda Beach matter. For vicarious liability, it was necessary to show that Mongillo’s actions aligned with serving EWM's interests, which the excluded evidence failed to establish. The court maintained discretion in determining the relevance of evidence, and its decision to exclude evidence related to Mongillo's 1979 suspension was justified.

During discovery, Mongillo, representing EWM Co., refused to answer requests for admission, citing his Fifth Amendment privilege against self-incrimination. FRG aimed to present these requests and responses to the jury to infer negative implications against EWM, but the court ruled against this, citing the cumulative nature of the information. FRG's argument that Mongillo’s designation to answer requests was relevant to proving agency was found unconvincing, as the requests pertained specifically to Mongillo's role in the Veranda Beach transaction rather than the nature of his relationship with EWM. While Fed. R. Civ. P. 36(a) does not mandate that the most knowledgeable person respond to such requests, it does require the responding party to conduct a reasonable inquiry into the requests' subject matter.

Mongillo was the sole officer of EWM Co. capable of responding to requests related to a case. The distinction between addressing requests directly or indirectly was deemed inconsequential. Importantly, the Fifth Amendment privilege against self-incrimination is personal and cannot be attributed to a corporation; thus, Mongillo's invocation of this right does not adversely affect EWM. FRG's argument that this privilege could be used against EWM was rejected as unfounded.

The court examined whether the lower court erred in directing a verdict in favor of EWM Co. Plaintiffs argued that there was sufficient evidence for EWM’s vicarious liability for Mongillo’s actions or that he had the authority to contract on its behalf. The court emphasized that, when reviewing evidence for a directed verdict, it must be viewed favorably to the nonmovant, and a mere scintilla of evidence is insufficient to counter such a motion. 

The facts revealed that Mongillo was an agent for Western Surety and worked for EWM, a family-owned business, from 1960 until 1983. He held various positions, including president, treasurer, and director, while owning stock in the company. In 1983, he formed IRM, a shell corporation with no real business activity or connection to EWM, essentially serving as a façade for his operations. EWM, on the other hand, was a legitimate company with proper business structure and licensing. In early 1984, Mongillo misrepresented that IRM had secured a bond from Western Surety by sending a forged commitment letter, further demonstrating his fraudulent conduct.

Negotiations were conducted based on a dubious commitment letter, with the understanding that IRM would collect both the bond premium and service fee at closing, transferring these funds directly to its Delaware account. Neither Western Surety nor EWM Co. would receive any proceeds. Regarding vicarious liability, Massachusetts law holds that employers may be liable for intentional torts committed by employees if within the scope of their employment. The Massachusetts Supreme Judicial Court has established a three-part test for this determination: the conduct must align with the employee's job, occur within authorized time and space, and be motivated in part by a desire to benefit the employer.

Mongillo, employed by EWM Co. to sell bonds, committed the fraud from his office during work hours. However, the evidence did not support that he intended to benefit EWM Co. Instead, communications indicated that Mongillo acted to benefit himself through IRM, as he explicitly noted that IRM would manage the transaction and receive the payments. The plaintiffs argued Mongillo’s actions aimed to secure future business for EWM Co.; however, this reasoning was deemed convoluted, as it suggested he sought to advance his own interests rather than those of EWM Co.

Legally, the plaintiffs referenced *New England Acceptance Corp. v. American Mfrs. Mut. Ins. Co.*, arguing that an agent's intent to benefit the principal isn't necessary for establishing employer liability. In that case, agents acted solely for their own gain, yet the court held the employers liable because the agents had been placed in a position to commit fraud while ostensibly acting on behalf of the companies, thus extending liability regardless of any benefit to the employer.

The central issue with the New England Acceptance decision lies in its outdated status relative to the Massachusetts Supreme Judicial Court's (SJC) current vicarious liability standard. A federal appeals court must adhere to the state's highest court rulings on state law, which prevents undue reliance on New England Acceptance to the detriment of Wang Laboratories. Even if New England Acceptance is still relevant, it is distinguishable from the current case for three key reasons: 

1. In New England Acceptance, the defendants’ management was aware of the relevant transaction, whereas there is no evidence that EWM Co. had any knowledge of the Veranda Beach scam beyond the actions of the tortfeasor, Mongillo.
2. The agents in New England Acceptance were acting with apparent authority for the defendant insurers, while here, EWM Co. lacked such authority.
3. The agency law principle cited in New England Acceptance pertained to employers being the issuers of the relevant instruments, which differs from the current situation where EWM is being sued as an agent, not as the principal issuer of the bond.

Consequently, the magistrate correctly ruled that EWM could not be held vicariously liable for Mongillo's actions. Regarding apparent authority under Massachusetts law, it requires the principal's conduct to create a reasonable belief in the agent's authority. However, evidence did not support that EWM engaged in conduct leading the plaintiffs to reasonably believe Mongillo had the authority to bind the firm. The facts indicate that Mongillo was acting on his own behalf via his company, IRM, with the plaintiffs being aware of this distinction. Although Mongillo was an officer of EWM and utilized its resources, these actions reflect his personal conduct rather than any conduct by EWM that could establish apparent authority.

A ruling in Sheinkopf v. Stone determined that a lawyer's use of his firm's resources for personal gain did not establish apparent authority under Massachusetts law. The court emphasized that drawing inferences from weak evidence was inappropriate, and there was no proof of detrimental reliance on EWM's part. The plaintiffs mistakenly trusted Mongillo, disregarding his relationship to EWM. Although Eller testified that Mongillo had previously worked for EWM, he did not assert this influenced Faneuil’s decision-making regarding the bond arrangement. The evidence indicated that Mongillo explicitly represented IRM, not EWM, undermining any claims of reasonable reliance on EWM's involvement.

Further, the trial court instructed the jury that Faneuil needed to be recognized as a joint venturer with FRG to recover damages, as agents of disclosed principals cannot benefit from contracts made on their behalf. Faneuil contested this instruction, arguing that the jury could have ruled in its favor based on tort or promissory estoppel, regardless of joint venture status. The factual background includes that FRG hired Faneuil in 1983 for financing services, which transitioned to a formal agreement in April 1984, where Faneuil would receive a 45% interest in operating profits and losses instead of a monthly fee.

Faneuil did not need to invest capital or assume risks to receive profits and cash flow from the partnership. Expert testimony suggested that the property's potential value post-closing could have reached $2,800,000, yet it was anticipated that initial operating costs would lead to losses. The jury determined Faneuil and FRG were not joint venturers and that Mongillo did not recognize Faneuil as a principal or intend for it to benefit from his promise to obtain a bond. Despite this, Faneuil argued it could recover for negligent or intentional misrepresentation, but the court disagreed.

For negligent misrepresentation claims, Massachusetts case law indicates that a third party can recover if the promisor is aware that the third party is relying on their performance. However, the jury found Mongillo did not see Faneuil as an intended beneficiary, indicating he had no reason to know of Faneuil's reliance on his promise. Evidence showed Faneuil acted as a consultant for FRG, not as a principal. Even if Faneuil's representative claimed otherwise, the jury was not obligated to accept this assertion. Ultimately, the relationship between Faneuil and FRG resembled that of agent and client rather than partners, and there was no substantial reason for Mongillo to view Faneuil as a beneficiary of his promise. Moreover, Faneuil's tasks did not depend on Mongillo's performance, as it could seek financing independently.

No error was found in the rejection of Faneuil's claim for intentional misrepresentation. For this claim, Faneuil needed to prove that Mongillo induced detrimental action or inaction on its part, which it failed to do. The jury concluded that Mongillo made no promises to Faneuil, undermining any assertion of intentional inducement. Additionally, Faneuil presented no evidence of detrimental reliance or opportunities lost while negotiating with Mongillo.

Faneuil's tort claims also lacked proof of damages. As a prospective limited partner, Faneuil was entitled to 45% of the partnership's profits and cash flow, but no evidence of expected profits or distributions was provided. Expert testimony indicated potential gains for FRG from acquiring the Veranda Beach property but did not address Faneuil's situation, emphasizing that profit-and-loss interests differ from equity interests. The absence of concrete economic evidence rendered Faneuil's claims speculative, failing to establish recoverable damages, which is essential in tort cases.

Faneuil's reliance on promissory estoppel was similarly unsuccessful. The doctrine requires that a promise be expected to induce action or forbearance, which was not substantiated by the evidence. The jury found that Mongillo did not expect Faneuil to rely on his promise, and there was no proof that Faneuil lost other opportunities or suffered damages due to reliance on any alleged misrepresentations.

Lastly, regarding jury deliberations, the jury indicated that Mongillo acted with apparent authority from Western Surety but ultimately rendered a verdict against Mongillo alone. FRG argued for judgment against Western Surety based on the jury's findings.

The court brought the jury back to address inconsistencies between their initial verdict and their answers to special questions. After deliberating for about fifteen minutes, the jury returned with the same answers to the special questions, except for Questions No. 3 and 4a, which were answered negatively, resolving the inconsistency. The jury then issued a verdict favoring FRG against Mongillo, awarding $2,300,000.

According to Fed. R. Civ. P. 49(b), the trial court may ask a jury for both a general verdict and written answers to specific factual issues. If there is an inconsistency between the answers and the general verdict, the court can choose to enter judgment based on the answers, return the jury for further deliberation, or order a new trial. FRG argued that the trial court erred in resubmitting the case to the jury, claiming the original answers were not inconsistent with the general verdict.

FRG's argument is deemed weak, as they assert that the absence of an explicit verdict for or against Western Surety warranted the court's use of the first Rule 49(b) option. However, the verdict form provided clear instructions for the jury to indicate which defendants were found liable. The jury's initial return naming only Mongillo indicated a finding in favor of Western Surety, consistent with the legal principle of expressio unius est exclusio alterius.

The trial court is given substantial discretion in determining the clarity of jury responses to verdict forms. As established in case law, the court's decision to uphold the inconsistency between the general verdict and the special answers was within its rights under Rule 49(b), and its procedural choices are afforded considerable respect during appeals.

A trial court's discretion in procedural matters, particularly under Rule 49(b), must be evaluated based on the context surrounding any inconsistencies that arise. In this case, the court provided a thorough rationale for resubmitting the issue to the jury in its post-trial memorandum. The argument that the magistrate abused his discretion by prompting the jury to deliberate further is dismissed as trivial. The opposing party contends that the magistrate's instruction regarding apparent authority improperly influenced the jury's decision-making, suggesting they could disregard the law for a more favorable result. However, previous cases cited by the opposing party demonstrate that juries must be free from coercion during deliberations, but those cases involved new information being introduced. In contrast, the magistrate's reiteration of the original instruction was consistent with prior guidance and did not introduce new substantive information. Therefore, the magistrate acted within his discretion, and the jury's change in findings regarding apparent authority does not indicate a disregard for the law, contrary to the opposing party's claims, which rely on a distinct case with differing circumstances.

The court addressed the issue of a jury's negligence findings and damage award, noting that the applicable law barred plaintiffs who were over 50% negligent from recovering damages. After a juror inquiry, the jury determined the plaintiff was 49.9% negligent and awarded $150,000. The Third Circuit reversed the district court's acceptance of this verdict, asserting that the jury had improperly adjusted its findings to achieve a predetermined outcome. The court emphasized that while it typically does not scrutinize a jury’s reasoning, it must intervene when the jury blatantly disregards its responsibilities, as evidenced in the case at hand compared to the more blatant manipulation seen in a prior case, Riley.

The jury's original inconsistency was resolved straightforwardly without evident manipulation, contrasting with the Riley case's obfuscation. The quick deliberation time of the jury was not deemed sufficient grounds to invalidate their verdict, as courts do not monitor deliberation duration. The verdict's consistency with the evidence is paramount.

In addressing Mongillo’s remaining appeals, the court found little merit, particularly regarding the denial of his post-trial motions for judgment notwithstanding the verdict (n.o.v.) and a new trial. Mongillo argued that conditions precedent to a loan agreement had not been met, which should absolve him of liability for a deal that would have failed. However, the court upheld that evidence indicated compliance with the loan conditions had been waived, and Mongillo failed to meet the standard for overturning the verdict.

The appellate court affirms the trial court's actions, emphasizing that the jury's determination of disputed facts must be respected, and the credibility of witnesses or the weight of evidence cannot be reassessed under the current standard of review. A new trial is warranted only when there is a clear weight of evidence against the verdict or a risk of miscarriage of justice. The court finds no abuse of discretion in denying Mongillo’s motion for a new trial, as there was plausible evidence regarding the bank’s waiver of transactional conditions. Additionally, a contrary verdict does not justify a new trial if the evidence is not overwhelmingly in favor of one side. 

Regarding jury instructions, the court states that the judge is not required to customize instructions to a party's preferences, provided the overall instructions accurately convey the relevant law. Mongillo's claim that the jury should consider the lack of experience in managing a time-share resort is rejected, as the given instructions were deemed sufficient. 

On the issue of damages, Mongillo argues that the jury’s assessment lacked support due to the absence of evidence regarding FRG's management capabilities. However, the court recognizes that management skill is only one of many factors affecting damages and that such considerations fall to the factfinders rather than an appellate court. The court reiterates that assessing damages is inherently imprecise and subject to various interpretations and methodologies.

Evidence presented indicated that FRG could have secured an equity position of $2,300,000 from acquiring Veranda Beach, which was thwarted by Mongillo's actions. During cross-examination, weaknesses in the plaintiff's expert testimony were emphasized, but once the sufficiency threshold is met, the jury, not the trial or appellate courts, determines witness credibility. The jury's discretion allows for a range of verdict outcomes, provided they align with the evidence and do not offend the court's conscience.

In a subsequent ruling, the court awarded $4,000,000 against Mongillo under Massachusetts General Laws Chapter 93A, finding he engaged in unfair and deceptive practices that prevented the Veranda Beach purchase. The court determined that FRG's damages amounted to $2,000,000, which were doubled due to Mongillo's willful misconduct. Chapter 93A aims to foster equitable relationships between consumers and businesses, prohibiting unfair or deceptive acts in commerce. Claims of unfair practices related to common law fraud or breach of contract fall under this statute. Chapter 93A claims are adjudicated by the court, not a jury, and if a willful violation is established, the court may award damages of up to three times the actual amount.

Mongillo argues that the magistrate incorrectly assessed damages under Chapter 93A by suggesting that the loss from the fraud should be limited to the cost of a replacement bond, despite evidence indicating that FRG mitigated its damages effectively after the closing failed. The court emphasizes that a party is not required to predict the best outcome in hindsight when mitigating damages. FRG's actions were deemed reasonable, thus the court affirms the damage assessment without alteration. It concludes that the trial was fair and free from significant legal errors, thereby leaving the judgment intact. Costs will be charged to the appellants. The document also includes jury questions related to Mongillo's alleged breach of contract, fraudulent promises regarding a bond, and the authority under which these actions were taken, ultimately guiding the jury to determine the existence of contracts and any damages incurred.

If the jury affirmed that Robert F. Mongillo intended Faneuil Hall Capital Group, Inc. to be the intended beneficiary of his promise, and if he made fraudulent or negligent misrepresentations believing Faneuil Hall was a principal in the Veranda Beach property acquisition rather than merely an agent, the jury must determine the allocation of damages between FRG, Inc. and Faneuil Hall Capital Group, Inc. The document notes that after redeliberation, the jury's answers to Questions No. 3 and 4a changed to negative. The arrangement allowed VacEq to sell unit weeks until shortly before closing, when remaining units would transfer to VBCLP. VBCLP was to assume VacEq's operating account at closing. FRG did not file a separate complaint but adopted Faneuil's. A default was entered against IRM, and during the trial, VBCLP's action was dismissed without appeal. Evidence rules are referenced: Fed. R. Evid. 104(b) allows admitting evidence based on a condition of fact, while Fed. R. Evid. 404(b) restricts using evidence of other crimes or acts to prove character but permits it for motives or intent. The excerpt includes requests for admission regarding Mongillo's representations about the financial guaranty bond and his failure to inform relevant parties that the bond was invalid prior to a specific meeting. The propriety of a corporate officer's personal rights in such admissions is not addressed.

The corporation cannot appoint an agent who may invoke the Fifth Amendment, as this would allow the corporation to claim personal privileges on behalf of its agents. A relevant motion to address this issue was not filed by FRG, which leaves the matter unexamined. Eller was listed as president of IRM in Delaware filings, alongside Elio and his wife as directors, but both denied any acceptance or knowledge of their listed positions, attributing the use of their names to Mongillo's unauthorized actions. Mongillo had also misused materials provided by Western Surety to create false documentation. 

Faneuil contests that the court erred in its jury instructions regarding promissory estoppel, arguing that it failed to inform that a third party could recover damages. The jury's responses to related questions were found to be aligned, and Faneuil's argument is deemed insufficient due to the overall weakness of its position on damages, which are crucial under Massachusetts law. The magistrate's insistence on resubmission of jury instructions, despite acknowledging other options post-trial, is not considered reversible error. 

Mongillo's argument against the jury finding a waiver of conditions based on conduct is dismissed as unreasonable, as it misapplies precedents pertaining to parties directly involved in a contract. Lastly, it is noted that nonparties to a contract do not have standing to claim breaches that would have benefited them financially. Claims under Chapter 93A against other defendants were ultimately ineffective.