Rhode Island Corp. v. McInnis

• Court: Court of Appeals for the First Circuit
• Decided: September 7, 1995
• Docket: 94-1767
• Status: Published

Opinion

USCA1 Opinion

United States Court of Appeals
                            United States Court of Appeals

                                For the First Circuit
                                For the First Circuit

                                 ____________________



        No. 94-1767



              RHODE ISLAND DEPOSITORS ECONOMIC PROTECTION CORP., ET AL.,



                                Plaintiffs, Appellees,



                                          v.



                            JOHN A. HAYES AND IOLA HAYES,



                               Defendants, Appellants,



                                          v.



                              STEVEN M. MCINNIS, ET AL.,



                                Defendants, Appellees,



        No. 94-1768



              RHODE ISLAND DEPOSITORS ECONOMIC PROTECTION CORP., ET AL.,



                                Plaintiffs, Appellees,



                                          v.



                                ROBERT P. MCGOLDRICK,



                                Defendant, Appellant,



                                          v.



                              STEVEN M. MCINNIS, ET AL.,



                                Defendants, Appellees.

                                 ____________________



                    APPEALS FROM THE UNITED STATES DISTRICT COURT



                          FOR THE DISTRICT OF MASSACHUSETTS



                       [Hon. Rya W. Zobel, U.S. District Judge]
                                           ___________________

                                 ____________________



Before



                                Torruella, Chief Judge,
                                           ___________

                          Boudin and Stahl, Circuit Judges.
                                            ______________



                                 ____________________



            Mark A. Stull  with whom Dennis  F. Gorman and Fletcher,  Tilton &
            _____________            _________________     ___________________

        Whipple, P.C. were on brief for appellants.
        _____________

            Allen  N.  David with  whom Harvey  Weiner, Maureen  Mulligan, and
            ________________            ______________  _________________

        Peabody & Arnold were on brief for appellees.
        ________________


____________________



                                  September 7, 1995

                                 ____________________



STAHL,  Circuit  Judge.     Limited  partners   who
                      STAHL,  Circuit  Judge.
                              ______________



            personally  guaranteed  the  partnership's  obligations  to a



            credit union seek indemnification  on their guaranty, as well



            as damages, from the attorney (and his law firm) representing



            the partnership.  The district court entered summary judgment



            for the attorneys.  We now affirm.  



                                          I.
                                          I.
                                          __



                       FACTUAL BACKGROUND AND PRIOR PROCEEDINGS
                       FACTUAL BACKGROUND AND PRIOR PROCEEDINGS
                       ________________________________________



                      During the  heady  late eighties,  Carol  Lavin,  a



            Jamestown, Rhode  Island real estate agent,  conceived a plan



            to  purchase and develop luxury homes on an eighty-acre tract



            of land located in Jamestown.  Lavin, a novice at real estate



            development,  enlisted her  husband Kevin  Lavin, her  sister



            Janice  Barron, and  her brother-in-law  James Barron  in the



            project.   The new venturers were  equally unknowledgeable in



            the nuances of real estate development. 



                      Lavin   approached   the  parcel's   owners,  David



            Henderson and  Donald Huggins  ("sellers"),  who indicated  a



            willingness to sell  their land for  $2.7 million.   Although



            the  price  seemed  high,  the Lavins  and  Barrons  remained



            interested.  However, to make the deal work, they needed more



            capital than they had.   In order to remedy  this deficiency,



            Carol Lavin  and Janice Barron contacted  dozens of potential



            investors,  including  appellants  John  and  Iola  Hayes and



            Robert McGoldrick.  During the summer of 1987, the Lavins and


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                                          3



Barrons  met  with  the  Hayeses and  McGoldrick  on  several



            occasions  to   discuss  the  project.     A  rosy  financial



            projection of the completed development forecast a $2 million



            profit  for  the  venturers.   Eventually,  the  Hayeses  and



            McGoldrick, with a  vision of high returns,  agreed to invest



            in  the scheme.    Like the  Lavins  and Barrons,  the  three



            investors had no prior experience in real estate development.


On September 14, 1987, Carol Lavin,  Janice Barron,



            and  John  Hayes met  with appellee  Steven McInnis,  a Rhode



            Island attorney, about  legal representation for  the project



            ("September  14 meeting").   The  participants  discussed the



            project's form  and financing.  McInnis was  advised that the



            Hayeses and McGoldrick wished to  limit their investment to a



            total  of $200,000  (based  on a  $100,000 investment  by the



            Hayeses and  a $100,000  investment by McGoldrick).   McInnis



            suggested that rather than a general partnership  they form a



            limited partnership,  with the Hayeses and  McGoldrick as the



            limited partners and  the Lavins and  Barrons as the  general



            partners.   McInnis  indicated that  the prospective  limited



            partners (that is, the Hayeses and McGoldrick), might want to



            retain  their  own attorneys  to  represent  their interests.



            McInnis  agreed to  draft  the partnership  agreement and  to



            represent  the limited  partnership,  later named  Cedar Hill



            Developments, L.P. ("the partnership").


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                                          4



Sometime   after  the  September  14  meeting,  the



            Hayeses and McGoldrick (hereinafter, "limited  partners") and



            the  Lavins  and  Barrons (hereinafter,  "general  partners")



            discussed whether  they should  retain  separate counsel,  as



            suggested by  McInnis.  By deposition,  general partner Lavin



            testified, "we  all  decided  as  a group  to  let  [McInnis]



            represent us,"  and she  later communicated this  decision to



            McInnis.  In his  pretrial deposition, McInnis testified that



            "they [the general and  limited partners] indicated that they



            wished  me to perform certain tasks on behalf of the `group,'



            . .  . but it was  phrased more in the  context of performing



            certain, in their view,  relatively routine tasks required by



            either  the  bank or  the buyers  and  the seller."   McInnis



            denies  ever  agreeing  to  represent  the  limited  partners



            individually.  Throughout  the course of the  representation,



            all attorneys fees were billed to the partnership and paid by



            partnership funds.



                      The parties to  the transaction eventually hammered



            out the details of the transaction.  Of the $2.7 million sale



            price,  $300,000  was  to be  in  cash,  $900,000  was to  be



            financed  by the sellers (secured by a second mortgage on the



            parcel), and $1.5 million  was to be financed through  a bank



            loan.  In addition, the sellers were each to  receive a 12.5%



            limited partnership interest. 


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                                          5



Meanwhile,  Carol  Lavin attempted  to  secure bank



            financing.  The going  proved difficult.  Three institutions,



            including  the Marquette  Credit Union  ("Marquette"), turned



            down the group's loan application.  Later, Marquette reversed



            its position and  agreed to loan up  to $3.5 million  for the



            purchase  and  development  of  the  land.    However,  as  a



            condition  for  the  loan,   Marquette  required  a  personal



            guaranty  from  the Lavins,  the  Barrons,  the Hayeses,  and



            McGoldrick.  The Marquette commitment letter,  dated November



            6,  1987,  stated that  the  limited partners  would  have to



            guaranty  the loan personally  in the event  of a partnership



            default.   At some  point during  November 1987,  Carol Lavin



            informed   McInnis   of  Marquette's   guaranty  requirement.



            McInnis,  however, did  not participate  in the  negotiations



            with  Marquette,  and at  no point  did  any of  the partners



            request his participation.  Marquette prepared the guaranty.



                      On  December  11,  1987,  the  general  and limited



            partners convened  at  McInnis's  office  to  sign  documents



            effecting the formation of the partnership and executing bank



            documents  including  the  guaranty.   There  is  conflicting



            evidence in  the record  as to  whether the  limited partners



            knew  of  the  personal  guaranty requirement  prior  to  the



            December 11 meeting, although all three appear to have signed


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                                          6



the  commitment  letter.1   In  any event,  at  this meeting,



            McGoldrick clearly evidenced his understanding of  the nature



            of his obligation, for he explicitly stated that he knew that



            he was  making himself personally liable for  the entire loan



            in the  event of  a default.   For  their  part, the  Hayeses



            recall nothing  about the  meeting or the  commitment letter,



            although  they acknowledge  their  signatures  appear on  the



            guaranty  agreement.  At no time, either prior to signing the



            commitment letter  or prior  to signing the  guaranty itself,



            did any of  the partners  request McInnis  to intervene  with



            Marquette to  seek removal  or modification of  the guaranty.



            Closing on the sale occurred on December 15, 1987.



                      The  development  quickly floundered.   Ultimately,



            only three homes were ever sold.  By August 1988, the Hayeses



            had retained separate counsel.  At that time,  they demanded,



            futilely,  a  return of  their  capital  contribution and  "a



            release  from  all  Limited  Partnership  obligations."    By



            January  1989, the  partnership defaulted  with more  than $2



            million outstanding.   Marquette failed in  early 1991.   Its



            receiver  held a foreclosure sale on April 17, 1991, at which



            it purchased the development for $850,000.



                      The   receiver  and  its  successor,  Rhode  Island



            Depositors Economic Protection Corporation ("DEPCO"), sued on


____________________



            1.  The  Hayeses  now state  that  they  are uncertain  about

            whether their signatures appear on the commitment letter.



                                         -7-
                                          7



the guaranty  to recover  $2,004,446, plus interest  and late



            charges.   The limited  partners, in turn,  instituted third-



            party  claims against  McInnis and  his law  firm, Cameron  &



            Mittleman      (collectively,      "attorneys"),      seeking



            indemnification and damages.   The district court granted the



            summary  judgment motions  of  both DEPCO  and the  attorneys



            against the limited  partners.  This appeal ensued.  However,



            because of  a  prior settlement  with DEPCO,  only the  third



            party claims are now on appeal.



                                         II.
                                         II.
                                         ___



                                      DISCUSSION
                                      DISCUSSION
                                      __________



                      The limited  partners raise two principal issues on



            appeal:  first, whether  they are entitled to indemnification



            by the attorneys for the amount owed to DEPCO, plus costs and



            attorneys  fees; and  second,  whether they  are entitled  to



            damages against the attorneys under theories  of malpractice,



            breach of  contract, and misrepresentation.   After  reciting



            the standard of review, we discuss each argument in turn.



            A.  Standard of Review
            ______________________



                      Summary judgment  is  appropriate when  the  record



            reflects "no genuine issue as to  any material fact and . . .



            the moving  party is entitled  to a  judgment as a  matter of



            law."  Fed. R. Civ. P.  56(c).  We review a grant  of summary



            judgment  de novo.  See, e.g.,  Colonial Courts Apartment Co.
                      __ ____   ___  ____   _____________________________



            v. Proc Assocs., 57 F.3d 119, 122 (1st Cir. 1995).  We review
               ____________


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                                          8



the  record  in the  light  most favorable  to  the nonmoving



            party, and indulge all  reasonable inferences in that party's



            favor.  Id.
                    ___



            B.  Indemnification Claim
            _________________________



                      The limited  partners argue that the attorneys must



            indemnify  them because of negligence on  the part of McInnis



            and because of alleged  violation of Massachusetts securities



            laws.  We find indemnification inapposite in this context.  



                      We  begin with general  principles.2   "The concept



            of indemnity is based  upon the theory that one  who has been



            exposed to liability solely  as the result of a  wrongful act



            of  another  should be  able  to  recover from  that  party."



            Muldowney  v. Weatherking  Prods.,  Inc., 509  A.2d 441,  443
            _________     __________________________



            (R.I. 1986)  (citation omitted).   Thus,  one party  may seek



            full reimbursement from another  when he has fully discharged



            a  common, as opposed to "joint," liability.  W. Page Keeton,



            et  al., Prosser and Keeton on the Law of Torts   51 (5th ed.
                     ______________________________________



            1984) (hereinafter, "Prosser & Keeton").  Stated another way,



            "[i]f another person has  been compelled to pay  damages that



            should  have been paid  by the wrongdoer,  the latter becomes



            liable to the former."  Muldowney, 509 A.2d at 443.  
                                    _________



                      The Rhode Island Supreme  Court has made clear that



            an indemnification  cause of  action lies in  two situations:


____________________



            2.  The  parties do not  dispute that the  substantive law of

            Rhode Island applies.



                                         -9-
                                          9



first,  when  there  is  an   express  contractual  provision



            creating a  right of indemnity;3 and,  second, when equitable



            principles give  rise to  a right  to indemnification.   Less



            clear  is the  status  of a  third  theory, that  of  implied



            contractual  indemnification.   Although courts  have assumed



            that an  implied contractual indemnification cause  of action



            exists, see, e.g., A  & B. Constr.,  Inc. v. Atlas Roofing  &
                    ___  ____  ______________________    ________________



            Skylight Co., 867  F. Supp.  100, 107 (D.R.I.  1994); Roy  v.
            ____________                                          ___



            Star Chopper  Co., 442  F. Supp.  1010,  1019 (D.R.I.  1977),
            _________________



            aff'd,  584 F.2d 1124 (1st Cir. 1978), cert. denied, 440 U.S.
            _____                                  _____ ______



            916  (1979),  the  Rhode   Island  Supreme  Court  has  never



            explicitly so held.  For our purposes, we will assume that it



            does.  



                      Rhode  Island courts  will  allow  indemnity on  an



            equitable theory when three conditions obtain:



                      First, the party  seeking indemnity  must

                      be liable to a  third party.  Second, the

                      prospective   indemnitor  must   also  be

                      liable  to the  third party.   Third,  as

                      between  the  prospective indemnitee  and

                      indemnitor,  the  obligation ought  to be

                      discharged by the indemnitor.



            Muldowney, 509 A.2d  at 443-44.  The limited  partners' claim
            _________



            fails on the second and third prongs.  We know of no cause of



            action under which DEPCO would be able to proceed against the



            attorneys, a  point  which the  limited partners  essentially



            concede  in  their brief.    By  implication, therefore,  the



                                
            ____________________



            3.  No such agreement exists in this case.



                                         -10-
                                          10



limited partners' claim also fails on the third prong.  "`The



            purpose  of  an indemnity  action  is  to  require the  party



            primarily  liable  to  hold  harmless  the  party secondarily



            liable.'"   Id.  at 444 (quoting  Helgerson v.  Mammoth Mart,
                        ___                   _________     _____________



            Inc.,  335 A.2d  339, 341  (R.I. 1975)).   Even  assuming the
            ____



            attorneys were negligent or disregarded securities laws, that



            does nothing to absolve the limited partners of their primary



            liability on the guaranty.  



                      For similar reasons,  the limited partners' implied



            contractual   indemnification   claim   also    fails.   "[A]



            contractual right  to indemnification  will  only be  implied



            when there are unique  special factors demonstrating that the



            parties  intended  that  the  would-be  indemnitor  bear  the



            ultimate  responsibility . . .  or when there  is a generally



            recognized special relationship between the parties."  Araujo
                                                                   ______



            v. Woods  Hole, Martha's Vineyard, Nantucket  S.S. Auth., 693
               _____________________________________________________



            F.2d 1,  2 (1st Cir. 1982) (citing Roy, 442 F. Supp. at 1019)
                                               ___



            (other citation omitted).  The limited partners fail to point



            to anything in the  record demonstrating the parties intended



            that the attorneys would bear ultimate responsibility for the



            guaranty.  Further, even  assuming a separate attorney-client



            relationship  existed  between the  limited partners  and the



            attorneys,  that is  not  the kind  of "generally  recognized



            special  relationship"   that  gives  rise   to  an   implied



            indemnitee-indemnitor relationship.   Cf. Prosser &  Keeton  
                                                  ___


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                                          11



51  (special  relationships include,  inter  alia, employer's
                                                  _____  ____



            vicarious liability for the tort of a servant; an independent



            contractor, or an innocent partner,  or a carrier held liable



            for  the acts of another; an automobile owner held liable for



            the conduct of  the driver).  While  we do not  foreclose the



            possibility that an intent  to indemnify could possibly exist



            in the  attorney-client context, there is  simply no evidence



            supporting such a conclusion here.4



                      To sum  up, because there was  no express agreement



            to indemnify, and because the record  does not support either



            of the  other theories  of indemnification, we  conclude that



            the district  court properly  granted summary judgment  as to



            this claim.



            C.  Damages Claims
            __________________



                      The  limited  partners  also  asserted  claims  and



            sought  damages  for   professional  negligence,  breach   of



            contract,   and  misrepresentation.     The   district  court


____________________



            4.  The    limited   partners   argue   that   a   claim   of

            indemnification lies whenever a putative  indemnitor fails to

            perform  his   "contractual  obligations  in   a  workmanlike

            manner."   Without  regard  to whether  the limited  partners

            state  a correct principle of  law, their argument is without

            force  because,  as we  discuss  fully  below, there  was  no

            contractual relationship between the limited partners and the

            attorneys.   Nor do we  agree with the  limited partners that

            they   acceded   to   enforceable   rights   as   third-party

            beneficiaries of  the contract between the  attorneys and the

            partnership.    We detect  no  evidence  indicating that  the

            partnership engaged  the attorneys' services with  the intent

            to  benefit the limited partners.  Cf. Davis v. New Eng. Pest
                                               ___ _____    _____________

            Control Co., 576 A.2d 1240, 1242 (R.I. 1990).  
            ___________



                                         -12-
                                          12



determined that the limited partners' claims were time-barred



            as  they filed the present action more than three years after



            discovery of  the attorneys' alleged negligence.   Because we



            conclude that no attorney-client relationship existed in this



            case, we do not reach the statute-of-limitations issue.



                      Recovery  under the  damages  claims  rests on  the



            premise  that an attorney-client relationship existed between



            the limited  partners  and the  attorneys.5   See  Church  v.
                                                          ___  ______



            McBurney,  513 A.2d 22, 23 (R.I. 1986).  To determine whether
            ________



            such a relationship existed  in this case, we start  with the



            basic  proposition that  a  partnership is  a singular  legal



            entity, and  that when that  entity retains an  attorney, the



            partnership is the  client.   See, e.g., Ronald  E. Mallen  &
                                          ___  ____



            Jeffrey  M. Smith, Legal Malpractice    20.7, at  260 (3d ed.
                               _________________



            1989) (hereinafter, "Mallen & Smith").  Thus, an attorney for



            a  partnership  or for  a  general partner  does  not thereby



            undertake  representation  of  limited  partners.   Id.    An
                                                                ___



            attorney,  however,  may  expressly  or  impliedly  undertake



            simultaneous representation  of the partnership and a partner



            or limited partners.  Id. at 261.
                                  ___



                      The  Rhode Island  Supreme Court  has often  stated



            that   an  attorney-client  relationship  is  contractual  in



            nature,  and thus  is  the product  of  an agreement  of  the


____________________



            5.  For  purposes  of  its  discussion,  the  district  court

            assumed that such a relationship existed in this case.



                                         -13-
                                          13



parties and may be implied from their conduct.  Again, absent



            such a  contractual  relationship, the  attorneys would  have



            owed no duty  to the limited partners.  See  Church, 513 A.2d
                                                    ___  ______



            at 23.  We have said that, to imply a contract, including one



            between  an attorney and a client, the law requires more than



            an individual's  subjective, unspoken belief that  the person



            with whom he is dealing has become his lawyer.  Sheinkopf  v.
                                                            _________



            Stone, 927 F.2d 1259,  1260 (1st Cir. 1991).  Rather, if such
            _____



            a  belief is "to  form a foundation for  the implication of a



            relationship of trust and  confidence, it must be objectively



            reasonable under the totality of the circumstances."  Id.
                                                                  ___



                      Although  the  existence   of  an   attorney-client



            relationship  is  critical  to  their  success,  the  limited



            partners  offer only  minimal  argumentation  on this  point.



            After  close  examination,  we  conclude   that  the  limited



            partners'  claim  ultimately  rests  on  a subjective  belief



            completely  unsupported by  any indicia  that the  belief was



            objectively  reasonable or that the limited partners actually



            relied  on such  a belief.   Cf.  id. at  1266.   The limited
                                         ___  ___



            partners   point  principally   to  events   surrounding  the



            September 14  meeting as  evidence establishing  that McInnis



            agreed to represent their  interests separately.  However, at



            that  meeting McInnis recommended  that, because of potential



            conflicts  of interest,  the limited  partners might  wish to



            retain separate counsel.   Later, after  consultation between


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                                          14



the general and limited  partners, general partner Lavin told



            McInnis that  the "group"  wanted McInnis to  represent them.



            Even construed in a light  favorable to the limited partners,



            we think  McInnis was reasonable in  understanding "group" to



            mean  the limited partnership as an entity.  Beyond this, the



            limited partners  point to  nothing that would  indicate that



            McInnis  agreed to  represent  them as  limited partners  and



            McInnis denies  having ever  agreed to represent  the limited



            partners.   Cf. Mallen & Smith   7.2 (whether attorney-client
                        ___



            relationship  created  depends  on  intent  of  the  parties,



            including that of  the attorney).   After the  nature of  the



            limited partners'  liability became  clear to them,  they did



            not seek  McInnis's help. Instead, two of  them (the Hayeses)



            sought separate counsel.



                      In  contrast,  the  record  strongly  supports  the



            implication  that  the   only  attorney-client   relationship



            involved in this transaction was that between McInnis and the



            partnership.   Again,  McInnis made  clear that he  agreed to



            represent the partnership while  suggesting that the  limited



            partners  seek   separate  counsel.    Although   not  itself



            determinative, McInnis  billed the partnership  directly, and



            the partnership paid all  fees out of partnership funds.   At



            least   through   August   1988,   the   scope  of   McInnis'



            representation appears to have  been limited to preparing the


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                                          15



partnership    agreement,   reviewing    partnership's   loan



            documentation, and reviewing the purchase and sale agreement.



                      In the final analysis, we conclude that the limited



            partners  rely  on  nothing  more  than  repeated  conclusory



            assertions  about  the  nature  of  their  relationship  with



            McInnis, assertions  that are  completely unsupported  by any



            objective indicia.   That  is not  enough to survive  summary



            judgment  on  the  question  of  whether  an  attorney-client



            relationship actually  existed.   See Sheinkopf, 927  F.2d at
                                              ___ _________



            1266.   Consequently,  the  district court  properly  granted



            summary judgment on appellants' claims for damages.6



                                         III.
                                         III.
                                         ____



                                      CONCLUSION
                                      CONCLUSION
                                      __________



                      For  the foregoing  reasons,  the  decision of  the



            district court is affirmed.
                              affirmed.
                              ________


____________________



            6.  Appellants present  a third theory of  recovery, grounded

            in Rhode Island's consumer protection statute.  See R.I. Gen.
                                                            ___

            L.   6-13.1.   By its terms, that statute  authorizes actions

            by either  the Attorney  General or  persons who  purchase or

            lease "goods  or services  primarily for personal,  family or

            household  purposes."  Id. at   6-13.1-5.2(a).  We agree with
                                   ___

            the  district court  that the  limited  partners do  not fall

            within this narrow definition.  



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                                          16