USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 93-2381
KANSALLIS FINANCE LTD.,
Plaintiff, Appellant,
v.
DANIEL J. FERN, ET AL.,
Defendants, Appellees.
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No. 94-1010
KANSALLIS FINANCE LTD.,
Plaintiff, Appellee,
v.
DANIEL J. FERN, ET AL.,
Defendants, Appellants.
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APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. D. Brock Hornby, U.S. District Judge*]
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Before
Selya, Circuit Judge,
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Coffin, Senior Circuit Judge,
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and Stahl, Circuit Judge.
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* Of the District of Maine, sitting by designation.
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James W. Murphy with whom Frederic L. Ellis was on brief for
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Kansallis Finance Ltd.
Eric Lund with whom Susan R. Riedel was on brief for Daniel J.
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Fern, et al.
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November 2, 1994
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COFFIN, Senior Circuit Judge. Plaintiff Kansallis Finance
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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
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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
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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
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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
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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.
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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.
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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
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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
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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
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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
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issue the opinion letter. We find no merit in any of these
contentions.
A. Partnership
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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,
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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,
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604 N.E.2d 56, 58 (1992). See also Mass. Gen. L. ch. 108A, 7
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(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
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636-37.
We uphold the fact-findings below on the existence of a
partnership unless that determination was clearly erroneous, id.
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at 636, a standard that requires "'the definite and firm
conviction that a mistake has been committed,'" American Title
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Ins. Co. v. East West Financial, 16 F.3d 449, 453 (1st Cir. 1994)
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(quoting United States v. United States Gypsum Co., 333 U.S. 364,
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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
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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
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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,
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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
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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
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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
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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
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overwhelming as to require one.
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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
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Mass. 450, 457, 436 N.E.2d 155, 159 (1982) (quoting W.A. Seavey,
Agency 8D, at 13 (1964)) (citations omitted); accord Putnam v.
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DeRosa, 963 F.2d 480, 484 (1st Cir. 1992). Whether apparent
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authority exists is a question of fact. Consolidated Rail Corp.
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and jury that Sabatt was also a member of the partnership.
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v. Hallamore Motor Trans., Inc., 394 Mass. 56, 59 n.2, 473 N.E.2d
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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
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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,
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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
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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
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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
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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,
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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.
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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
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Massachusetts
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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
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paragraph). There is no clear error here.
II. Legal Issues
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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
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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.
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University of Puerto Rico, 7 F.3d 270, 274 (1st Cir. 1993)
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(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,
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at least in part, with the intent to benefit the partnership.
This seems to be the rule as articulated in Wang Laboratories v.
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Business Incentives, 398 Mass. 854, 859, 501 N.E.2d 1163, 1166
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(1986). However, there is no motivation requirement in the test
articulated by New England Acceptance v. American Manufacturers
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5 See Mass. Gen. L. ch. 108A, 13 ("Where, by any
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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.").
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Ins. Co., 373 Mass. 594, 597, 368 N.E.2d 1385 (1977) (adopting as
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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
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did not directly cite to or overrule New England Acceptance, we
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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
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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.
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UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 93-2381
KANSALLIS FINANCE LTD.,
Plaintiff, Appellant,
v.
DANIEL J. FERN, ET AL.,
Defendants, Appellees.
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No. 94-1010
KANSALLIS FINANCE LTD.,
Plaintiff, Appellee,
v.
DANIEL J. FERN, ET AL.,
Defendants, Appellants.
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CERTIFICATION
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For the reasons discussed in our opinion in this case,
Kansallis Finance, Ltd. v. Daniel J. Fern, Richard C. Anderson,
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Robert J. Donahue, and Charles M. Sabatt, Nos. 93-2381 and 94-
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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
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alia, that the act was taken at least in part with the intent to
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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:
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Bruce M. Selya
Circuit Judge
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