Kansallis v. Fern

• Court: Court of Appeals for the First Circuit
• Decided: November 2, 1994
• Docket: 93-2381
• Status: Published

Opinion

USCA1 Opinion

UNITED STATES COURT OF APPEALS
                                FOR THE FIRST CIRCUIT
                                 ____________________

        No. 93-2381

                               KANSALLIS FINANCE LTD.,

                                Plaintiff, Appellant,

                                          v.

                               DANIEL J. FERN, ET AL.,

                                Defendants, Appellees.

                                 ____________________

        No. 94-1010

                               KANSALLIS FINANCE LTD.,

                                 Plaintiff, Appellee,

                                          v.

                               DANIEL J. FERN, ET AL.,

                               Defendants, Appellants.

____________________

                    APPEALS FROM THE UNITED STATES DISTRICT COURT

                          FOR THE DISTRICT OF MASSACHUSETTS

                     [Hon. D. Brock Hornby, U.S. District Judge*]
                                            ___________________

                                 ____________________

                                        Before

                                 Selya, Circuit Judge,
                                        _____________
                            Coffin, Senior Circuit Judge,
                                    ____________________
                              and Stahl, Circuit Judge.
                                         _____________

____________________

             * Of the District of Maine, sitting by designation.


____________________

            James  W. Murphy  with whom  Frederic L.  Ellis was  on  brief for
            ________________             __________________
        Kansallis Finance Ltd.
            Eric Lund  with whom Susan R.  Riedel was on  brief for Daniel  J.
            _________            ________________
        Fern, et al.

____________________

                                   November 2, 1994
                                 ____________________


COFFIN, Senior  Circuit Judge.  Plaintiff  Kansallis Finance
                       _____________________

          Ltd.  ("Kansallis")  brought  this diversity  suit  against  four

          lawyers, asserting  that they  were vicariously liable  for fraud

          committed  by their purported law partner.  A jury trial resulted

          in judgment  for the  defendants, Daniel Fern,  Richard Anderson,

          Robert Donahue and Charles Sabatt.  Both plaintiff and defendants

          now appeal, raising challenges to the sufficiency of the evidence

          to support  various fact-findings,  as well as  two questions  of

          Massachusetts  law on  which there  is either  conflicting or  no

          clearly established  precedent.   We uphold the  factual findings

          and  certify the  legal  questions to  the Massachusetts  Supreme

          Judicial Court ("SJC").  

                                      Background
                                      __________

               This  lawsuit   stems  from  a  loan   and  lease  financing

          transaction  whose precise details are not relevant to any of the

          issues  on appeal.   What  is important  is that,  in advance  of

          consummating the  loan, Kansallis sought and  obtained an opinion

          letter from  defendants'  purported law  partner, Stephen  Jones,

          which  was  issued  on  letterhead  captioned  "Fern,   Anderson,

          Donahue,  Jones &  Sabatt, P.A."   The  letter contained  several

          intentional misrepresentations concerning the transaction and was

          part  of a conspiracy by Jones and  others (though not any of the

          defendants  here)   to  defraud  Kansallis.     Jones  was  later

          criminally  convicted for  his part  in the conspiracy,  in which

          Kansallis  lost more than $880,000.  Unable to collect from Jones

          or any  of the  loan's guarantors, Kansallis  sought compensation

-3-


from defendants on  the theory  that they and  Jones were  either

          actual  partners or  partners  by estoppel,  and  that they  were

          liable  for the  fraudulent  opinion letter  Jones  caused to  be

          issued on the firm stationery.1

               The case  went to trial.  Both the judge and jury found that

          Jones  and the  defendants were  partners at the  relevant time,2

          but, for  different reasons, they concluded  that defendants were

          not liable for Jones's conduct.   The jury's verdict was based on

          its  findings  that Jones  did not  have  authority to  issue the

          opinion  letter  on  behalf  of  the  partnership,  and  that the

          issuance of the  opinion letter was not  within the scope of  the

          partnership.   The  district court  made independent  findings of

          fact  on  plaintiff's   claim  under  a   Massachusetts  consumer

          protection statute, Mass. Gen. L.  ch. 93A.  Unlike the jury,  it

          found  that  the  partnership  had clothed  Jones  with  apparent
                                         ___

          authority  to issue the letter  on its behalf.   Nonetheless, the

          court  went on  to  hold, as  a  matter of  law, that  "innocent"

          partners may not be  held vicariously liable under 93A  for their

          partners' fraudulent acts.  In other words, the court held that a

          partner, entirely unaware  and uninvolved with  another partner's

          fraud, is  immune from vicarious  liability under 93A,  even when

                              
          ____________________

               1    Jones did  not personally sign the  letter, but instead
          arranged for a  third party  to do  so.   Both the  jury and  the
          district court  found that,  by this  conduct,  Jones adopted  or
          ratified the issuance of the opinion  letter.  Since no party has
          appealed these findings, we take them as given.

               2    The district court  also found that, even if  they were
          not actual partners, they were partners by estoppel.  

                                         -4-


the conduct constituting the fraud was authorized.     The  court

          also found that the  conduct giving rise to  the 93A claim  arose

          "substantially in  Massachusetts," thus making it  subject to the

          statute.  See Mass. Gen. L. ch. 93A,   11.  
                    ___

               On appeal, each side challenges the factual findings adverse

          to  its  position.   Kansallis  also  asserts  two  legal errors.

          First,  it  finds  error in  the  court's  ruling that  vicarious

          liability  cannot attach to  "innocent" partners in  a 93A claim.

          Instead, based  on the court's  fact-finding that the  letter was

          issued with the firm's apparent authority, Kansallis asserts that

          normal principles of vicarious liability as among partners should

          apply  to make defendants liable  for Jones's fraud.   Second, it

          argues that the jury's  finding that the letter was not issued in

          the  ordinary course  of the  partnership was  made only  upon an

          erroneous jury instruction.  Specifically, Kansallis submits that

          it was error to charge the jury that, for the letter to have been

          issued in the  course of  the partnership, Jones  must have  been

          motivated  at  least  in   part  by  the  intent  to   serve  the

          partnership.   It argues that, while such  motivation is required

          in an  employer-employee context, no such  requirement is present

          here. 

                                      Discussion
                                      __________

               We  first review the  evidence to support  the various fact-

          findings.   Because  we  affirm  these  findings,  we  are  faced

          squarely  with the two legal issues raised by Kansallis.  Finding

          no clearly  established precedent  on one of  the questions,  and

-5-


conflicting  precedent on the other,  we certify both  to the SJC

          pursuant to its Rule 1:03.

          I.   Sufficiency  of  the Evidence  to Support  the Fact-Findings
               ____________________________________________________________

               Defendants argue that it was error for both the jury and the

          judge to find that they were  Jones's partners.  They also submit

          that it was error for the  judge to find that the partnership had

          granted Jones apparent authority to cause the letter to be issued

          on  its  behalf.    Finally,  they  find  error  in  the  judge's

          determination  that the  conduct  giving rise  to  the 93A  claim

          occurred  primarily  and   substantially  within   Massachusetts.

          Plaintiff, for its part,  asserts that it was error for  the jury

          to decide that defendants  had not granted authority to  Jones to
                                         ___

          issue  the opinion  letter.   We find  no merit  in any  of these

          contentions. 

          A.   Partnership
               ___________

               Under Massachusetts law, a partnership "is an association of

          two  or more  persons  to carry  on as  co-owners a  business for

          profit."  Mass. Gen. L. ch. 108A,   6.  See also Loft v. Lapidus,
                                                  ___ ____ ____    _______

          936  F.2d  633,  636  (1st  Cir.  1991).    Several  factors  are

          considered  to  determine  if  a  partnership  exists.    A  non-

          exhaustive  list includes: whether there is  "(1) an agreement by

          the  parties  manifesting  their  intention  to  associate  in  a

          partnership (2) a sharing  by the parties of profits  and losses,

          and (3) participation by the parties in the control or management

          of the enterprise."  Fenton v. Bryan, 33 Mass. App. Ct. 688, 691,
                               ______    _____

          604 N.E.2d 56, 58 (1992).  See  also Mass. Gen. L. ch. 108A,    7
                                     ___  ____

-6-


(providing additional  rules for  determining the existence  of a

          partnership).    While  a  partnership  undoubtedly  requires  an

          agreement  among the  partners,  that agreement  need  not be  in

          writing.   Rather, intent to carry on business as partners may be

          inferred from  the partners' words and  acts.  Loft, 936  F.2d at
                                                         ____

          636-37.  

               We  uphold  the fact-findings  below on  the existence  of a

          partnership unless that determination  was clearly erroneous, id.
                                                                        ___

          at  636,  a  standard  that  requires  "'the  definite  and  firm

          conviction that  a mistake  has been committed,'"  American Title
                                                             ______________

          Ins. Co. v. East West Financial, 16 F.3d 449, 453 (1st Cir. 1994)
          ________    ___________________

          (quoting United States v. United States Gypsum Co., 333 U.S. 364,
                   _____________    ________________________

          395 (1948)).

               The evidence adduced at trial was sufficient  to support the

          finding that defendants and Jones were indeed law partners at the

          time  the  fraudulent   opinion  letter  was   issued.    It   is

          uncontroverted that  Daniel Fern and Richard  Anderson became law

          partners in the early  1960s and that Robert Donahue  and Stephen

          Jones joined that partnership in the 1970s.  Defendants  maintain

          that, while  Sabatt joined the firm in the early 1980s, he did so

          as  an  employee only.   They  also  submit that  the partnership

          dissolved in  1981  and,  while all  four  defendants  and  Jones

          continued   to   share   office   space,   secretarial  services,

          letterhead,  a central card file  of clients, and  so forth, they

          did so as a  professional association of individual practitioners

-7-


only, laying much emphasis on the fact that their letterhead used

          the denomination "P.A." after listing their names.

               The jury and district court were entitled to  discredit this

          defense.   The record shows that Fern, Anderson, Donahue, Jones &

          Sabatt filed partnership tax returns for several years past 1981,

          the  year  the partnership  allegedly  dissolved,  and that  each

          partner's share of profits  was calculated in the same  manner in

          1980, when the  firm was admittedly a partnership, as  it was for

          several years thereafter.   Receipt of  a share of  profits in  a

          business  is itself prima facie  evidence of a  partnership.  See
                                                                        ___

          Mass. Gen. L. ch.  108A,   7(4).  In  addition to the indicia  of

          partnership  already  described,   the  firm's  internal  ledgers

          referred to itself  as a  partnership, the phone  at the  "shared

          office  space"  was  answered  in  the  name  of  the  firm,  and

          defendants advertised themselves as a firm in both the phone book

          and  the  lawyer's directory  Martindale-Hubbell,  held accounts,
                                        __________________

          investments  and insurance in the  name of the  firm, and renewed

          their  lease in the name  of the firm  -- specifically describing

          themselves  as a  partnership.3   Though they  offer explanations
                              
          ____________________

               3    The original lease  was made in  1974, when Sabatt  had
          not yet joined  the firm, in the name of "Fern, Anderson, Donahue
          & Jones, a partnership  consisting of Daniel J. Fern,  Richard C.
          Anderson, Robert J. Donahue and Stephen C. Jones."  When the firm
          renewed its  lease in 1983,  it did not advise  the landlord that
          the partnership had "dissolved"  or that Sabatt had been  named a
          partner.  We also  note that Jones and defendants  Fern, Anderson
          and Donahue were co-owners  of certain accounts without defendant
          Sabatt.  Thus,  the renewed lease, as well as  those accounts for
          which  Sabatt  was not  listed as  a  co-owner, only  bolster the
          finding  of partnership  as  between Jones  and defendants  Fern,
          Anderson  and  Donahue.    Nonetheless,  the  totality  of  other
          evidence is sufficient to  support the finding by both  the judge

                                         -8-


for  these  circumstances  consistent   with  the  absence  of  a

          partnership, it was  not clear  error to come  to the  conclusion

          that  defendants were law partners at the time the opinion letter

          was issued.  

          B.   Authority
               _________

               Both parties  urge us to overturn the findings below related

          to authority: defendants argue that the evidence was insufficient

          to  support the district court's finding that there was authority

          to issue the letter,  while plaintiff asserts that, based  on the

          evidence, it was  error for the  jury to find  that there was  no

          authority.    Despite  the  apparent  incongruity   of  different

          conclusions by the jury and judge on this question, we hold  that

          neither  one is clearly erroneous.  While the evidence was strong

          enough to permit a finding  of apparent authority, it was not  so
                    ______

          overwhelming as to require one.
                             _______

               Massachusetts law recognizes apparent authority where

               "conduct by the principal  . . . causes a  third person
               reasonably to believe  that a particular  person . .  .
               has  authority to  enter into  negotiations or  to make
               representations as his agent."  If a  third person goes
               on  to   change  his  position  in   reliance  on  this
               reasonable  belief,  the  principal  is  estopped  from
               denying that the agency is authorized.

          Hudson  v. Massachusetts  Property Ins.  Underwriting  Ass'n, 386
          ______     _________________________________________________

          Mass.  450, 457, 436 N.E.2d 155, 159 (1982) (quoting W.A. Seavey,

          Agency    8D, at 13 (1964)) (citations omitted); accord Putnam v.
                                                           ______ ______

          DeRosa,  963 F.2d  480, 484  (1st Cir.  1992).   Whether apparent
          ______

          authority  exists is a question of fact.  Consolidated Rail Corp.
                                                    _______________________
                              
          ____________________

          and jury that Sabatt was also a member of the partnership.

                                         -9-


v. Hallamore Motor Trans., Inc., 394 Mass. 56, 59 n.2, 473 N.E.2d
             ____________________________

          1137, 1139  n.2 (1985).   We  thus affirm  unless there has  been

          clear error.  Fed. R. Civ.  P. 52(a); American Title Ins. Co., 16
                                                _______________________

          F.3d at 453.

               As indicated,  the district  judge, making findings  of fact

          independently of the jury on the cause of action under 93A, found

          that  Jones  did have  apparent  authority to  issue  the opinion

          letter on behalf  of the partnership, and that  Kansallis changed

          its  position in reasonable reliance on that authority.  There is

          sufficient evidence in the record to support this conclusion.  In

          general,  defendants manifested  to  the world  signs that  could

          reasonably  lead  third  parties  to  believe  they  were  a  law

          partnership,  each authorized to act  and speak on  behalf of the

          firm: their shared letterhead, offices, and office support staff,

          their  common  office  signs  and  joint  listings  in  telephone

          directories  and  Martindale-Hubbell.    But  more  specifically,
                            __________________

          defendants manifested to Kansallis a relationship with Jones that

          led Kansallis to believe Jones was authorized to issue the letter

          on  behalf  of the  partnership: they  caused  their phone  to be

          answered in the firm's name, thus making reasonable the inference

          that  Kansallis's lawyer's phone calls to  Jones were answered in

          the  firm's name; they allowed Jones unrestricted use of the firm

          stationery; and they erected  no general limitations or clearance

          procedures for  the issuance  of legal  opinion  letters on  firm

          stationery.  By  doing so, they  encouraged Kansallis to  believe

          that  the  firm, and  not just  Jones,  stood behind  the opinion

-10-


letter.   Whether they had done enough to make Kansallis's belief

          reasonable is a question that is "uniquely within the competence"

          of the fact finder.   Devaux v. American Home Assurance Co.,  387
                                ______    ___________________________

          Mass. 814,  819, 444 N.E.2d 355,  358 (1983).  There  is no clear

          error in the judge's decision that it was reasonable.

               Likewise,  there is  no clear  error in the  jury's contrary

          conclusion.   The opinion  letter was  not signed by  any of  the

          named partners,  nor in the name  of the firm, as  is customarily

          the practice for legal opinion letters.  Rather, it was signed by

          an  individual who  turned  out to  be  an employee  of  Iyanough

          Management  Co., a  company of  which Jones  was a  principal and

          which  Jones  used  to  facilitate  the  fraud.     The  Iyanough

          employee's name  nowhere appeared  on the law  firm's letterhead.

          Indeed,  Kansallis's New  York  lawyer, who  dealt directly  with

          Jones  in  the  transaction,  specifically asked  him  to  revise

          language  in  the  letter  so that  the  crucial  representations

          concerning  the transaction were  made by the  collective "we" --

          ostensibly  the firm  --  and not  the  individual "I."4    Thus,

          whether the  letter spoke on  behalf of  the firm already  was an

          important concern to Kansallis's lawyer,  and the jury was within

          its  purview to  decide  that she  should  have obtained  further

          assurances  before   concluding  that   it  did.     Under  these
                              
          ____________________

               4    It  is only the conduct  of the principal,  and not the
          conduct  of  the  agent,  that  may  create  apparent  authority.
          Sheinkopf v. Stone,  927 F.2d 1259, 1269 (1st Cir.  1991).  Thus,
          _________    _____
          the  fact  that  Jones  made  this   change  in  language,  which
          undoubtedly  heightened Kansallis's  belief that  the firm  stood
          behind  the  letter,  does   not  help  Kansallis  show  apparent
          authority.  

                                         -11-


circumstances, the  jury's finding that Jones  was not authorized

          to  issue the  letter  on  the  firm's  behalf  was  not  clearly

          erroneous. 

          C.   Whether the  93A Claim Arose Substantially  and Primarily in
               ____________________________________________________________
               Massachusetts
               _____________

               Appellees assert that the district court erred in concluding

          that  the conduct giving rise to the 93A claim occurred primarily

          and  substantially within Massachusetts,  thus making the conduct

          subject to the statute  under Mass. Gen. L. ch. 93A,    11.  They

          rely  on the  facts  that  the  opinion  letter  was  drafted  by

          Kansallis's lawyers in New York and that a central element of the

          conspiracy  -- making  fraudulent U.C.C.  filings --  occurred in

          Maine.   Notwithstanding these facts, the  partnership existed in

          Massachusetts and  the crucial letter  that formed the  basis for

          the  entire  cause of  action  by linking  defendants  to Jones's

          liable conduct was executed there.  Further, the fraud culminated

          there  because Kansallis disbursed the "loan  money" to Jones and

          others in Massachusetts.  Finally, we note that   11 provides  an

          exemption from 93A liability, available as a defense, rather than

          a jurisdictional  prerequisite to suit, and  thus defendants bear

          the  burden  of  proving  a  lack   of  primary  and  substantial

          involvement  in  Massachusetts.     See  ch.  93A,      11  (last
                                              ___

          paragraph).  There is no clear error here. 

          II.  Legal Issues
               ____________

               Kansallis's legal challenges are not so easily resolved.  It

          argues  that the district court erroneously  concluded that, in a

          cause of action  pursuant to 93A, general principles of vicarious

                                         -12-


liability5 are  inapplicable to "innocent partners,"  i.e., those

          who  were entirely  unaware and  uninvolved with  their partner's

          actionable conduct, even if such conduct was authorized.  We have

          found no controlling Massachusetts precedent on this issue, which

          is determinative  of the  93A claim.   We  therefore think  it is

          appropriate to  certify the question  to the SJC.   See Nieves v.
                                                              ___ ______

          University  of Puerto  Rico,  7 F.3d  270,  274 (1st  Cir.  1993)
          ___________________________

          (absent controlling  state law  precedent, federal  appeals court

          sitting  in  diversity  has   discretion  to  certify  state  law

          questions  to  highest state  court);  SJC  Rule 1:03  (accepting

          certified questions  that  are claim-determinative  and on  which

          there is no SJC controlling precedent).

               Kansallis  raises another legal issue  on which we also need

          guidance from the SJC.  The district court charged the jury that,

          in  order to  find  defendants vicariously  liable  based on  the

          theory  that  Jones's  conduct  was  within   the  scope  of  the

          partnership, it would have to find, inter alia, that Jones acted,
                                              __________

          at least in  part, with  the intent to  benefit the  partnership.

          This seems to be the rule  as articulated in Wang Laboratories v.
                                                       _________________

          Business Incentives,  398 Mass. 854,  859, 501 N.E.2d  1163, 1166
          ___________________

          (1986).   However, there is no motivation requirement in the test

          articulated by  New England Acceptance v.  American Manufacturers
                          ______________________     ______________________

                              
          ____________________

               5    See  Mass. Gen.  L.  ch. 108A,     13 ("Where,  by  any
                    ___
          wrongful act  or omission of any partner . . . with the authority
          of  his  co-partners,  loss or  injury  is  caused  to any  [non-
          partner],  or any penalty is incurred,  the partnership is liable
          therefor  to the same extent as the partner so acting or omitting
          to act.").

                                         -13-


Ins. Co., 373 Mass. 594, 597, 368 N.E.2d 1385 (1977) (adopting as
          ________

          its  own  the  appeals  court  holding  that  principals  may  be

          vicariously liable  for the acts  of their agents  "regardless of

          the fact that  the [agents]  were acting entirely  for their  own

          purposes").  In light  of this apparent conflict, and  since Wang
                                                                       ____

          did not directly cite  to or overrule New England  Acceptance, we
                                                _______________________

          also consider it wise to refer this question to the SJC.

               In certifying these questions, we wish to make it clear that

          we would  welcome any other direction from  the SJC that it deems

          useful in resolving these issues.  

                                      Conclusion
                                      __________

               For these  reasons, we  affirm the various  fact-findings by

          the  district judge and jury and certify  two questions of law to

          the Supreme Judicial Court of Massachusetts.

-14-


UNITED STATES COURT OF APPEALS

                                FOR THE FIRST CIRCUIT

                                 ____________________

          No. 93-2381

                               KANSALLIS FINANCE LTD.,

                                Plaintiff, Appellant,

                                          v.

                               DANIEL J. FERN, ET AL.,

                                Defendants, Appellees.

                                 ____________________

          No. 94-1010

                               KANSALLIS FINANCE LTD.,

                                 Plaintiff, Appellee,

                                          v.

                               DANIEL J. FERN, ET AL.,

                               Defendants, Appellants.

                                 ____________________

                                    CERTIFICATION

                                 ____________________

For  the reasons  discussed  in our  opinion  in this  case,

          Kansallis  Finance, Ltd. v. Daniel  J. Fern, Richard C. Anderson,
          ________________________    _____________________________________

          Robert  J. Donahue, and Charles  M. Sabatt, Nos.  93-2381 and 94-
          __________________________________________

          1010,  we certify  the following  questions to  the Massachusetts

          Supreme Judicial Court:

          1.   Under Massachusetts  law,  to find  that  a certain  act  is

          within the scope of a partnership for the purpose of applying the


doctrine  of vicarious  liability, must  a plaintiff  show, inter
                                                                      _____

          alia,  that the act was taken at least in part with the intent to
          ____

          serve or benefit the partnership?

          2.   May  defendants be found  vicariously liable  for authorized

          conduct by their  partner that  violated Mass. Gen.  L. ch.  93A,

          even  if they were entirely  unaware of and  uninvolved with that

          conduct?

               In asking these questions, we would, of course, also welcome

          any discussion of relevant Massachusetts law the Supreme Judicial

          Court deems appropriate.  The Clerk  of the Court is to  forward,

          under the  Official Seal  of this  Court, the  Certification, our

          opinion, and the briefs and appendix filed by the parties, to the

          Massachusetts Supreme Judicial Court.

                                             United States Court of Appeals
                                             for the First Circuit

                                             By:                 
                                                  _______________
                                                  Bruce M. Selya
                                                  Circuit Judge   

-2-