Vermont Mut. Ins. v. Sheehan . . . CV-94-424-SD 01/15/97 UNITED STATES DISTRICT COURT FOR THE

DISTRICT OF NEW HAMPSHIRE

Vermont Mutual Insurance Company

_____ v. Civil No. 94-424-SD

Sheehan, Phinnev, Bass & Green, P.A.

O R D E R

This dispute arose out of payment by Vermont Mutual

Insurance Company for the defense of its insured, Peterborough

Savings Bank, against legal challenge to a foreclosure sale

handled on behalf of the Bank by Attorney Daniel Sklar as a

member of the law firm of Sheehan, Phinney, Bass and Green.

Background

The Bank held a mortgage on an automobile dealership

business. Arista Chevrolet-Oldsmobile, Inc., that was owned and

operated by one Giacalone. Giacalone subsequently filed for

bankruptcy in the United States Bankruptcy Court for the District

of New Hampshire. The Bank retained the Sheehan law firm to

represent its interests as mortgagee of the Arista property in

the Giacalone bankruptcy proceedings. Sheehan appointed Attorney

Sklar to handle the Bank's case. Acting as attorney for the Bank, Sklar obtained relief from

the automatic stay under the Bankruptcy Code and conducted a

foreclosure sale of Arista property in Peterborough, New

Hampshire, on June 29, 1982. The Bank purchased the property at

the foreclosure sale, and with the advice of Sklar prepared,

filed, and recorded foreclosure deeds and supporting affidavits

and statements as was required under New Hampshire law. Revised

Statutes Annotated (RSA) 477:32. Sklar reported in those

instruments that the Bank purchased the property for $404,000.

On November 30, 1983, Sklar wrote to the Bank asserting that

the $404,000 purchase price in the recorded instruments was the

result of a 'scrivener's error,' and that the Bank had actually

only bid $69,000, which was the amount due the Bank on the

Giacalone mortgage. Sklar then sent the Bank a "Corrective

Foreclosure Deed" and a "Corrective Affidavit of Sale" to execute

and record in order to correct the alleged error in the original

instruments concerning the amount of consideration paid by the

Bank. The Bank sent these corrective documents to their general

counsel, Roderick Falby, for review.

Falby contacted Thomas Richards, a partner in the Sheehan

law firm, to express concern about Sklar's request for corrective

documents. After doing some investigation by speaking with

Sklar, Richards reassured Falby that the matter was being handled

appropriately and told him that "our office will stand behind our

2 work." Then Richards instructed Sklar to send Falby a letter

explaining more fully the reasons for requesting corrective

documents.

This letter initiated back-and-forth correspondences between

Sklar and Falby concerning the potential effects of and efforts

to correct Sklar's alleged error in recording the purchase price

paid by the Bank. The meaning of these correspondences is an

important source of contention between the parties.

On December 2 , 1983, Falby wrote to Sklar: For the record, we disagree that there was a "scrivener's error" in the instruments. The fact is that, on your advice, the Bank actually bid $404,000 at the sale. This is a problem which has been previously brought to your attention.

I have permitted the [Bank] to execute the corrective foreclosure deed and corrective affidavit of sale, and they are enclosed . . . .

. . . [T]he bank expects you and your firm to accept responsibility for the results of the bid and improper instruments. We will assume that you, by recording all instruments in the . . . Registry of Deeds, have consented to accept such responsibility.

Plaintiff's Objection, Exhibit A-l, at 1.

On December 6, 1983, Sklar responded that:

. . . . [W]e do not anticipate the need for anyone to assume any responsibility for any potential claim arising from the improper instru­ ments which were originally filed. Nevertheless, as Tom Richards indicated to you during your telephone conversation, we fully intend to stand behind the services we performed on behalf of the [Bank] and, therefore, we will indemnify and

3 defend them for any claims arising out of this s ituation.

Defendant's Motion for Summary Judgment, Exhibit A-l, at 2.

Almost three years after these correspondences, Giacalone,

the Bank's mortgagor, brought suit against the Bank. Counts II

and III of Giacalone's complaint regarded the amount of the

Bank's bid at the foreclosure sale and the preparation, filing,

and recording of false and fraudulent deeds, affidavits, and

statements with respect to that sale.

Vermont Mutual, as the Bank's insurer, paid the costs of

defending against Giacalone's claims, which amounted to nearly

$200,000. The insurance contract between Vermont Mutual and the

Bank provided.

In the event of any payment under this policy the Company shall be subrogated to all the insured's rights of recovery against any person or organization and the insured shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights.

Plaintiff's Motion for Summary Judgment, Memo at 3. The trial of

the Giacalone actions began in 1992 in Hillsborough County (New

Hampshire) Superior Court, Southern District, and ended with jury

verdicts in favor of the plaintiffs. The Sheehan law firm con­

tributed a portion of the money due to Giacalone, and, in return,

the Bank executed a release of the Sheehan law firm for any legal

claim the Bank may have had against Sheehan. However, the

release provided that:

4 It is acknowledged and understood that this Release in no way affects or limits the claims, if any, which the Bank's insurer, Vermont Mutual Insurance Company, may have against the Releasees and/or Daniel W. Sklar for the recovery of attorney's fees and disbursements relative to Vermont Mutual[]'s defense of the Bank . . . .

Plaintiff's Motion, Memo at 9.

Vermont Mutual brings a four-count complaint against the

Sheehan law firm seeking to recover the amount expended in

defending the Bank in the Giacalone proceedings. Count I alleges

that Sheehan breached a contract formed between Sklar, on behalf

of Sheehan, and the Bank, thereby entitling Vermont Mutual, as

the Bank's subrogee/assignee pursuant to the insurance contract,

to seek damages against Sheehan. Count II seeks specific

performance of that contract. The complaint also asserts a claim

premised on a theory of implied indemnity (Count III) and on a

theory of restitution/quantum meruit (Count IV).

Sheehan seeks summary judgment on all four counts. Vermont

Mutual seeks summary judgment on the issue of liability for Count

I 's breach of contract claim.

Discussion

Under Rule 56(c), Fed. R. Civ. P., summary judgment is

appropriate when there is no genuine issue as to any material

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

law. Vermont Mutual argues that it is entitled to summary

5 judgment on its breach of contract claim because, as a matter of

law, a binding contract was formed between Sheehan and the Bank

based on the contents of Sklar's letters to Falby. Vermont

Mutual claims entitlement to pursue the Bank's breach of contract

claim because the Bank was obligated under the insurance contract

to assign its legal rights to its insurer, Vermont Mutual.

On the other hand, Sheehan argues that it is entitled to

summary judgment on the breach of contract claim because (1)

Sklar did not manifest the necessary contractual intent to defend

the Bank in an action by the mortgagor Giacalone, (2) the Bank

did not provide consideration to support any promise contained in

Sklar's letter, (3) Sklar was not authorized to bind the Sheehan

firm to that alleged promise, _qr (4) Vermont Mutual should not be

permitted to pursue the legal rights of the Bank. If Sheehan

demonstrates that any reasonable jury would find for Sheehan on

any one of these four issues, then summary judgment in favor of

Sheehan is appropriate. However, Vermont Mutual must show that

any reasonable jury would find against Sheehan as to all four

issues in order to support summary judgment in its favor.

For the reasons that follow, this court agrees with Vermont

Mutual that Sheehan was bound by contract to indemnify and defend

the Bank in the Giacalone action. Having failed to do so,

Sheehan is liable, as a matter of law, to Vermont Mutual as

6 subrogee of the Bank's legal claims against Sheehan for breach of

contract.

1. Manifestation of Contractual Intent

The parties dispute whether Sklar manifested the requisite

contractual intent to indemnify and defend the Bank against

claims brought by the Bank's mortgagor, Giacalone.

New Hampshire law applies the objective theory of contracts,

under which language appearing plain and unambiguous on its face

is taken at its plain meaning to express the intent of the

parties. Echo Consulting Services v. North Conway Bank,

,

(1995) . Because meaning varies with

context, the usefulness of the plain meaning rule runs out beyond

a certain point in contract interpretation. So, "[i]n ascer­

taining intent, the language of the agreement is not completely

dispositive . . . . Intent, therefore, should be determined not

only in light of the instrument itself, but also in view of the

surrounding circumstances." Rogers v. Cardinal Realty, Inc.,

,

(1975). If the language examined

in light of the context of use is susceptible to more than one

reasonable interpretation, the contract is deemed ambiguous. In

such a case, the bar of the plain meaning rule is lifted, and

extrinsic evidence is admissible to clarify the ambiguity.

7 Here, the contractual language is contained in a letter from

Sklar assuring Falby that "we fully intend to stand behind the

services we performed on behalf of the [Bank] and, therefore, we

will indemnify and defend them for any claims arising out of that

situation." Defendant's Motion for Summary Judgment, Exhibit A-

1, at 2. On its face, the meaning of this language appears

manifest; namely, a broad promise of indemnity attaching to "any

claim." Under the plain meaning rule, Sheehan would be held to

the terms of this broad promise. However, Sheehan seeks to avoid

application of the plain meaning rule by offering an alternate

interpretation that, according to Sheehan, is reasonable when the

ambient light of context is shed upon the language. Sheehan

urges that Sklar's letter could have the narrower meaning that

Sheehan would indemnify and defend the Bank only against any of

the property's junior lienholders that challenged the foreclosure

in mortgagor Giacalone's bankruptcy proceedings. Basically,

Sheehan argues "any claims arising out of that situation" does

not mean "all claims," but rather only the subset brought by

junior lienholders.

As the touchstone of contract interpretation under New

Hampshire law is objective reasonableness, the question is

whether the narrow meaning offered by Sheehan could occur to a

reasonable person in Falby's position reading Sklar's letter. If

not, then Sheehan will be held to the sole reasonable interpreta- tion or plain meaning of the language as a broad promise of

indemnity for "any claim." If, however, Sheehan's alternate

interpretation is reasonable, the contract will be deemed

ambiguous, and extrinsic evidence will be admissible for

clarification.

However, this court finds that the narrower meaning offered

by Sheehan is an unreasonable interpretation of the language of

Sklar's letter to Falby. Since Sklar's letter referred generally

to "any claim," a reasonable person reading the letter would

conclude that Sklar meant all foreseeable claims arising out of

the foreclosure sale. Otherwise, Sklar would have specifically

referenced those claims that, while foreseeable, were not within

the group of claims for which Sklar was willing to assume the

risk. Or Sklar would have referenced the subset of the foresee­

able class of potential plaintiffs included in the premise and,

by implication, the reference would have excluded the rest.

Without either an exclusionary or an inclusionary reference in

the letter, a reasonable person would be left with the conclusion

that "any claim" meant any foreseeable claim. The foreclosure

sale conducted by Sklar for the Bank adjusted the legal rights of

many interested parties, including not only the junior lien­

holders, but also the mortgagee Giacalone. If the foreclosure

sale was handled improperly, it was foreseeable that any of the

interested parties, including Giacalone, would pursue legal

9 action against the Bank. Since Giacalone was within the

foreseeable class of potential plaintiffs, Sklar's promise to

"defend and indemnify for any claim" extended to action brought

by Giacalone.

Next, Sheehan points to the fact that Sklar prefaced the

"defend and indemnify" language with a reference to a previous

conversation between Falby and Richards. Sklar's letter read:

" [A]s Tom Richards indicated to you . . . we fully intend to

stand behind the services we performed . . . and, therefore, we

will indemnify and defend [the Bank] for any claims arising out

of this situation." Defendant's Motion, Exhibit A-l, at 2.

According to Sheehan, the reference would lead a reasonable

person in Falby's position to understand that any promises

contained in Sklar's letter were not meant to go beyond the scope

of Richards' promises during the previous conversation. Richards

made only vague promises to "stand behind our work," and the

scope of Sklar's letter should be deemed no greater, according to

Sheehan.

On the contrary, a reasonable person in Falby's position

would draw only one conclusion about the meaning of Sklar's

letter. The language clearly indicates an intent to go beyond

the scope of Richards' promise. The letter reiterates Richards'

vague promise to "stand behind our work," but continues, "there­

fore, we will indemnify and defend the [Bank]," indicating

10 Sklar's intent to clarify and give content to Richards' vague

promises. That Sklar's promise goes beyond Richards' promise is

clear; the only question is how much further does it go. There

is nothing in the reference to Richards' promise that sheds light

on the intended scope of Sklar's promise. For that reason,

Sheehan cannot rely upon the reference to Richards' promise to

narrow the plain meaning of Sklar's promise.

Since the narrow meaning proposed by Sheehan is unreason­

able, this leaves the plain meaning of the letter as determina­

tive of Sklar's contractual intent. Thus, the promise extends to

"any claim" arising out of the foreclosure proceeding, including

legal action brought by the mortgagor Giacalone.

2. Consideration

The next question is whether Sklar's promise is supported by

consideration. Generally, promises unsupported by consideration

are not legally enforceable. Ca l a m a r i & P e r i l l o , T he L a w o f C o n t r a c t s §

4-1, at 132 (2d ed. 1977). Under New Hampshire law, "considera­

tion may consist either in a right, interest, profit or benefit

accruing to the promisor or a detriment to the promisee."

Corning Glass Works v. Max Dichter Co..

(1960).

Vermont Mutual contends that the Bank suffered the necessary

detriment by signing the corrective instruments, sending them to

the Sheehan firm, and allowing them to be recorded. In short,

11 the Bank suffered detriment by cooperating with Sheehan in

correcting the errors in the original filings.

The parties dispute whether the Bank's cooperation can be

properly characterized as detrimental. Vermont Mutual argues the

cooperation was detrimental because the Bank was exposing itself

to additional litigation risks should the filing of corrective

documents lead to legal challenge to the foreclosure sale.

Sheehan argues that the Bank's cooperation does not constitute

detriment because the net result was a benefit accruing to the

Bank. The original filing allegedly erroneously recorded a

consideration paid by the Bank of substantially more than

Giacalone's mortgage liability to the Bank. The property's

junior lienholders would be entitled to claim against the Bank

for the erroneous "surplus." Thus, the corrective filings

benefitted the Bank by setting the record straight and dispelling

the false impression that "surplus" was created at the fore­

closure sale. The parties dispute whether cooperation resulted

in a benefit or a detriment to the Bank's interests.

However, this dispute between the parties misunderstands the

nature of consideration. Consideration simply consists of

performance or a promise to perform an act that one is not

legally obligated to perform or refrain or a promise to refrain

from exercising a legal privilege to act. Calamari & Perillo,

supra. § 4-1, at 134. Under this standard, it is irrelevant that

12 the act constituting detriment, all things considered, advances

the promisee's best interest and is thus beneficial. An act done

in the face of a legal privilege to do otherwise constitutes

detriment, regardless of whether the act inhibits or advances the

promisee's overall interests.

Here, while possibly under an obligation to correct the

defective filing, the Bank was not under any legal obligation to

cooperate with Sheehan, and by doing so it suffered sufficient

legal detriment.

The next element of consideration is whether the detriment

is "bargained for" in exchange for the promise. "This means that

the promisor must manifest an intention to induce the performance

or return promise and to be induced by it, and that the promisee

must manifest an intention to induce the making of the promise

and to be induced by it." R estatement (Se c o n d ) o f C o n t r a c t s § 81 cmt.

a (1981). The detriment and the promise bear a reciprocal rela­

tion of inducement--the detriment induces the promise, and the

promise induces the detriment.

Sheehan argues that the Bank's cooperation was not induced

by Sklar's promise to "indemnify and defend." According to

Sheehan, the Bank cooperated to decrease their exposure to

litigation, and would have cooperated whether or not Sklar made

the alleged promise. As evidence, Sheehan points to a letter

from Falby stating: "I permitted [the Bank] to sign the revised

13 affidavit on the understanding that all parties . . . had agreed

that the revised affidavit would solve the problem." Defendant's

Objection, Exhibit B-l. Since the Bank would have cooperated,

even in the absence of Sklar's promise to "indemnify and defend,"

the promise did not induce the detriment, and thus adequate

consideration is absent (or so Sheehan argues).

However, for consideration to be found, the actions

constituting detriment need not be motivated solely or primarily

by the promise. "[T]he fact that a promise does not of itself

induce a performance or return promise does not prevent the

performance or return promise from being consideration for the

promise." R estatement, supra, § 81(2), at 206. Consideration can

be found where the promise is one of several motivating factors

that caused the promisee to undertake the detrimental act, even

if the promise was not the determinative motivating factor.

Calamari & Perillo discusses this example. "A is moved by

friendship to sell his horse to B for $100,000. If there is an

actual agreement to exchange the horse for the money a contract

is formed even though A's primary motive in entering into the

transaction was friendship." Ca l a m a r i & Perillo, supra, § 4-5, at

142 .

Thus, the Bank could have been committed to cooperating with

Sheehan regardless of whether Sklar promised to indemnify and

defend the Bank. Nonetheless, Sklar's promise induced the Bank's

14 cooperation because the security of an indemnity promise from

Sklar provided additional motivating force to the Bank's decision

to cooperate by removing the element of risk from that decision.

The promise provided the Bank one more reason to cooperate among

several other reasons that may have been more compelling and even

determinative.

The next issue is whether the timing of the detriment in

relation to the promise said to induce it precludes a finding of

consideration. The Bank's acts constituting detriment were

executed before Sklar's promise was made. In his letter of

December 2 , 1983, Falby wrote: "I have permitted the [Bank] to execute the corrective foreclosure deed and corrective affidavit

of sale, and they are enclosed . . . ." Plaintiff's Objection,

Exhibit A-l. Sklar's promise was contained in a letter dated

four days later on December 6, 1983. Thus, the Bank's acts of

cooperation said to constitute detriment were fully executed

before Sklar promised to indemnify and defend the Bank.

The general rule is that "past consideration is not

consideration." Ca l a m a r i & Perillo, supra, § 4-2, at 135.

Detrimental acts fully executed before the return promise was

given could not have been induced by that promise. The detriment

was already suffered, and a promise given later appears purely

gratuitous.

15 However, the general rule is inapplicable in cases such as

this where the promisee performs the acts constituting detriment

under the express condition of receiving a return promise in the

future. In his December 2, 1983, letter to Sklar, Falby indi­

cated that the Bank had only cooperated because it "expected

[Sklar and Sheehan] to accept responsibility for the results of

the bid and improper instrument." In such a case, performance of

the detrimental act constitutes an offer to a reverse unilateral

contract which is accepted by the post-performance promise. Id.

§ 2-15, at 54-55. Thus, the fact that the detriment was suffered

before the promise was given does not preclude a finding that the

detriment was induced by the promise.

To appreciate the illogic of the contrary conclusion, one

must only consider the outcome if the situation were reversed and

Sklar had sent the letter containing the promise before the Bank

performed the detrimental acts. Sklar would have been saying, "I

will promise to indemnify and defend if you perform the acts of

cooperation," and a binding unilateral contract would have arisen

when the Bank performed the requested acts. It should make no

difference that contractual relations were initiated by the

Bank's performance of the detriment with the expectation that the

relation would be sealed by a return promise from Sheehan.

This court concludes that the Bank's acts of cooperation

constituted legal detriment and were induced by Sklar's promise

16 to indemnify and defend the Bank. There was sufficient con­

sideration to support Sklar's promise to indemnify and defend the

Bank.

3. Lack of Authority

Sheehan seeks to avoid the binding force of Sklar's promise

by arguing that Sklar was not authorized to bind Sheehan to a

defend and indemnify contract with the Bank. Vermont Mutual

contends that the lack of authority argument must be disregarded

because it is an affirmative defense that was not raised in the

pleadings. Sheehan did not raise the lack of authority defense

in its answer or its amended answer, but rather waited until

filing an objection to the Bank's summary judgment motion to

raise the argument. In the alternative, Vermont Mutual contends

that, even if the lack of authority defense is considered, it

must be rejected on the merits.

To resolve this dispute, the court must address two related

issues--one procedural and the other substantive. The procedural

issue is which party bears the burden of pleading the agency

relations between Sklar and Sheehan. If that burden falls on

Sheehan, its failure to plead the affirmative defense in its

answer and amended answer may constitute grounds to disregard the

defense. The substantive issue is which party has the burden of

proving authority or lack thereof. Allocating the burden of

17 proof is a necessary predicate to determining which party

prevails on the merits.

Which party bears the burden of pleading the agency issue is

a federal procedural question, but state law controls the burden

of proving agency, or lack thereof. Under the doctrine of Erie

Railroad Company v. Tompkins,

(1938), a federal court

in a non-federal matter must follow the substantive law of the

state in which it is sitting. Thus, state law clearly governs

the substantive question of which party has the burden of proof

on the issue of agency. Palmer v. Hoffman,

(1943) .

However, when the Federal Rules of Civil Procedure cover an

issue, the Erie rule's mandate to apply state law becomes inap­

plicable. Hanna v. Plumer,

(1965). The Federal

Rules contain provisions allocating the burden of pleading in

federal court, and these provisions displace state law

counterparts. Rule 8, Fed. R. Civ. P.

Under Rule 8, defendants carry the burden of pleading

affirmative defenses. "Want of authority," the defense at issue

here, is not in Rule 8's enumerated list of affirmative defenses.

However, the list in Rule 8 is clearly illustrative, and not

exclusive, providing for "any other matter constituting an

avoidance or affirmative defense." Federal courts with apparent

unanimity require "want of authority" to be pled affirmatively.

See, e.g.. Local Joint Exec. Board of Spokane v. Spokane Lodge

18 No. 28, Benevolent & Protective Order of the Elks,

(9th Cir. 1971); Radio Corp. of America v. Radio Station

KYFM, Inc.,

(10th Cir. 1970) ("The defense of

want of authority is an affirmative defense."); Frank Forton &

Co. Inc. v. Cook Electric Co.,

, 493 n. 3 (7th Cir.

1966) (en banc). To treat the "want of authority" defense

otherwise than these courts would be to undermine the purpose of

the Federal Rules in providing uniform guidelines for federal

procedural matters. Thus, under Rule 8, Sheehan carries the

burden of pleading "want of authority."

The general rule under Rule 8 is that failure to raise an

affirmative defense in the pleadings constitutes a waiver of the

right to raise the defense. See American National Bank v.

Federal Deposit Insurance Corp.,

(11th Cir.

1983). However, this general rule has been relaxed when the

plaintiff receives notice of the affirmative defense by some

means other than the pleadings within a pragmatically sufficient

time to respond. The defense will be considered despite the

tardiness with which it was pled. Moore, Owen, Thomas & Co. v.

Coffey,

(6th Cir. 1993).

Despite Sheehan's failure to plead the defense in either its

answer or its amended answer, its burden of pleading under Rule 8

will be discharged if Vermont Mutual received notice of the

defense in a "pragmatically sufficient time" to respond. There

19 is some dispute as to when Vermont Mutual got wind that Sheehan

was asserting a lack of authority defense. Sheehan argues that

Vermont Mutual was put on notice by the content of conversations

between the parties' attorneys at the pretrial conference held at

the courthouse on Nov. 14, 1994. Vermont Mutual denies that such

conversations contained any reference to Sheehan's plan to raise

the defense. But at the very latest, Vermont Mutual received

notice of the lack of authority defense when Sheehan filed its

objection to Vermont Mutual's motion for partial summary judg­

ment. The objection memorandum raised the "lack of authority"

defense in contesting the propriety of partial summary judgment

in favor of Vermont Mutual. Since this objection was filed,

Vermont Mutual has had ample time to conduct discovery on the

issue of agency between Sklar and Sheehan. Further, Vermont

Mutual has pointed to nothing in the discovery process that it

would have conducted differently had notice been forthcoming in

the pleadings. Thus, Sheehan's objection memorandum put Vermont

Mutual on notice of the "want of authority" defense at pragmati­

cally sufficient time, and consideration of the defense despite

its absence from the pleadings will not prejudice Vermont Mutual.

Turning to a consideration of the merits of the defense,

Sheehan argues that it is entitled to summary judgement on the

contract claim because Sklar was not authorized to bind Sheehan

to the contract in issue. New Hampshire state courts have yet to

20 allocate the burden of proving authority, or lack thereof in

agency disputes. And the fact that the defendant has the burden

of pleading "lack of authority" under federal procedural law has

no bearing on the substantive question of how the burden of proof

should be allocated under New Hampshire law. The federal

precedents cited above, holding that lack of authority is an

affirmative defense, do not assist the endeavor at hand. Rather,

this court must anticipate how the courts of New Hampshire would

allocate the burden of proving this issue.

Generally, in allocating burdens of proof, a relevant factor

has been which party's contentions deviate more significantly

from the most likely state of affairs. Edward C l e a r l y , M c C o r m l c k on

Evldence, g e n . e d . § 337, at 787 (2d ed. 1972) . The law presumes

that events occurring in the past happened as they were most

likely to happen, unless the evidence affirmatively indicates

otherwise. So, the party advancing the more unusual contentions

bears the burden of proving them.

The absence of an agency relationship between two parties is

generally the norm, and existence of such relation the exception.

Agency is a unique relationship that confers a power on one party

to bind another to legal obligations. Re s t a t e m e n t o f A g e n c y 2 d § 5,

at 26 (1958). Such a power is extraordinary, and the existence

of an agency relationship between two parties cannot be presumed.

So, a plaintiff seeking to hold an alleged principal to legal

21 obligations flowing from the acts of an agent bears the burden of

proving the existence of an agency relationship. Once the agency

relationship is established, it is more probable than not that

the agent is authorized to conduct transactions that similarly

situated agents are usually and ordinarily authorized to conduct.

Pettit v. Doeskin Prods.,

(2d Cir. 1959) . The

burden then shifts to the principal to show that the agent lacked

authority to conduct usual and ordinary transactions. However,

the plaintiff retains the burden of proving the agent authorized

to enter extraordinary and unusual contracts. Alvev v. Butchka-

vitz,

(Va. 1954). What is ordinary and usual

obviously depends of the facts and circumstances of the

particular case.

.

Sheehan appointed Sklar, one of its agents, to handle the

Bank's foreclosure, and with that appointment flowed authority,

the quantity and quality of which is defined by that which

"ordinarily and usually" accompanies such appointments, unless

Sheehan affirmatively demonstrates otherwise. Appointment of an

agent to represent one of the principal's clients ordinarily

includes authority to undertake the transactions reasonably

necessary to carry out the representation. When the agent

creates the risk of adverse legal action for the client during

the course of the representation, assumption of that risk through

a promise of indemnity may be reasonably necessary to carry out

22 the representation. Otherwise, the client would likely refuse

continued cooperation, and the objects of the representation

would go unrealized. That the agent would have such authority is

especially true in a case such as this where losing the client's

continued cooperation could result in the legal liability of the

principal. If the Bank refused to cooperate in correcting the

original, erroneous documents, the Sheehan law firm would have

potentially faced legal liability as a result of the erroneous

filing. In securing the Bank's continued cooperation with an

indemnity promise, Sklar was doing what he deemed necessary to

protect his principal and his client from legal liability arising

from a situation that he caused in the course of the representa­

tion in the foreclosure proceedings.

Since authority to enter a contract such as the one at issue

here would ordinarily be vested in an agent in Sklar's position,

Sheehan bears the burden of proving that Sklar was unauthorized

to bind Sheehan to the terms of his promise. In order to carry

this burden to survive a motion for summary judgment, Sheehan

must come forward with sufficient evidence so a reasonable jury

could find that Sklar lacked authority. Anderson v. Liberty

Lobby. Inc.,

(1986). The question is not

"whether there is literally no evidence favoring the non-moving

party." Herbert v. Mohawk Rubber Co..

(1st

Cir. 1989). "If the evidence is merely colorable, or is not

23 significantly probative, summary judgment may be granted." Mack

v. Great Atlantic & Pacific Tea Co.,

(1989) .

As evidence, Sheehan offers the affidavit testimony of Sklar and

Richards in which they deny having authority. Sklar recounts:

" [a]s an associate, I was aware that I did not have authority to

bind the firm to defend and indemnify the [Bank] for any and all

claims which might ever arise." Sklar Affidavit (attached to

Defendant's Objection as Exhibit A). Richards confirms: " [a]s an

associate. Attorney Sklar was not authorized to make any

agreement with Attorney Falby on behalf of the firm, nor was he

instructed by me to do so." Richards Affidavit (attached to

Defendant's Objection as Exhibit B(A)).

The affidavits of Sklar and Richards are insufficiently

probative of Sklar's lack of authority to carry Sheehan's burden

of proof on the agency issue. First, both affidavits expound

legal conclusions claiming nothing more than that Sklar did not

have authority to bind Sheehan; however, neither affidavit sets

forth specific facts upon which those legal conclusions are

based. This court is under no obligation to draw speculative

inferences of fact from those affidavits, Mesnick v. General

Elec. C o .,

(1st Cir. 1991), and raw legal

conclusions are hardly probative evidence. Second, Sklar's

affidavit is inconsistent, claiming that, on the one hand, he was

aware that he did not have authority to bind the firm to "defend

24 and indemnify the [Bank] for any and all claims which might ever

arise relating to the foreclosure of the Arista property," but

going on to claim that his promise to "indemnify and defend" was

limited to defending against junior lienholders who challenged

the foreclosure. This amounts to a concession that he believed

himself to be authorized to bind Sheehan to this more limited,

narrow promise. The subtle distinction Sheehan is asking this

court to draw between authority to make the narrower promise to

defend against only junior lienholders, which was concededly

conferred upon Sklar, and the authority to make the broader

promise to defend against any and all claims, which was allegedly

withheld from Sklar, is unsupported by the evidence.

Furthermore, the evidence offered by Sheehan tends to

disprove only one type of authority; namely, express authority,

for which the manifestation of intent to confer authority on the

agent must flow from the principal to the agent. However, appar­

ent authority may arise from a manifestation from the principal

to a third party that the agent is authorized to act on the

principal's behalf. In this case, apparent authority could arise

from a manifestation from the Sheehan law firm, as principal, to

the Bank that Sklar was authorized to bind Sheehan. Both Sklar's

and Richards' affidavits relate only to the scope of agency

manifestations from Sheehan, the principal, to Sklar, the agent.

Neither affidavit makes any mention of the nature of manifesta-

25 tions from Sheehan to the Bank which may form the basis of

Sklar's apparent authority.

In the absence of sufficient evidence to negate the

existence of Sklar's authority to enter the contract to indemnify

and defend, the issue must be resolved in favor of Vermont

Mutual. The risk of nonproduction falls on Sheehan, as the party

with the burden of proof, and that risk has here materialized.

4. Subrogation

Sheehan argues that permitting Vermont Mutual to assume and

pursue the Bank's legal claims as assignee/subrogee violates

public policy. The attorney-client relationship existed between

Sheehan and the Bank, and Vermont Mutual was only tangentially

tied to that relationship through its insurance contract with the

Bank. According to Sheehan, Vermont Mutual should not be

permitted to invade the sanctity of that relationship by suing

for breach of the relationship's duties owed to the Bank.*

Vermont Mutual seeks to pursue the Bank's legal claims

against Sheehan under a theory of legal assignment or, alterna­

tively, equitable subrogation. According to Vermont Mutual, a

*As Vermont Mutual points out, this argument is most appropriately aimed at Count III of the complaint for implied indemnity. However, since this court ultimately rejects the argument, it will assume that the argument could be viable for all counts in the complaint.

26 contract provision in its insurance policy with the Bank requires

the Bank to assign all its legal rights of recovery against any

person to Vermont Mutual upon payment under the policy. In the

alternative, a transfer of legal rights from the Bank to Vermont

Mutual is appropriate, according to Vermont Mutual, under the

doctrine of equitable subrogation, which substitutes one person

in the place of another with reference to a legal claim when so

demanded in the interests of justice and equity. Both doctrines,

assignment and subrogation, would fully provide Vermont Mutual

with the relief it seeks, as the two are identical in effect,

transferring rights from one party to another.

Sheehan urges the court to follow lines of authority from

other states holding that claims sounding in legal malpractice

are nonassignable.

The harmful consequences of legal malpractice are economic

in nature, and claims arising out of pecuniary harm, rather than

personal injury, are generally treated as freely assignable

choses in action. Dumas v. State Farm Auto Ins. Co., Ill N.H.

43, 46,

(1971); Hedlund Mfg. Co. v. Weiser,

Stapler & Spivak,

(Pa. 1988). However, some

courts have deviated from this general rule when considering the

assignability of legal malpractice claims, relying on policy

considerations that are said to justify the exception. Goodlev

v. Wank & Wank. Inc..

, 87 (Cal. Ap p . 1976). On

27 the other hand, other courts have refused to create an exception

to the general principle favoring free assignability of claims.

Oppel v. Empire Mutual Ins. Co.,

(S.D.N.Y. 1991);

; Richter v.

Analex Corp.,

(D.C. 1996) .

Sheehan urges this court to hold that New Hampshire law

prohibits assignment of legal malpractice claims. However,

whether legal malpractice claims are assignable is an unsettled

issue of state law, as the Supreme Court of New Hampshire has

thus far remained silent. While a New Hampshire superior court

has decided the issue. Home Builders Assoc, of N.H. v. Coopers &

Lvbrand, No. 91-E-123, slip op. at 16 (Super. Ct.) (Smukler, J.,

1996), this is merely "data from which the law must be derived.

Commissioner v. Estate of Bosch,

(1967), rather

than a definitive statement of New Hampshire law.

On the other hand, subrogation may be granted without

resolving unsettled principles of New Hampshire law. Subrogation

flows from equity and, because of its equitable origin and

nature, is not governed and controlled in its operation by strict

legal rules. 73 Am. J u r . 2 d Subrogation § 12 (1974). One court

has said the following about this equitable tool:

The principle to be derived from the doctrine of subrogation is that it is born of equity and results from the natural justice of placing the burden where it ought to rest. It does not flow from any fixed rule of law, but rather from

28 principles of justice, equity and benevolence. It is a purely equitable result, depending like other equitable doctrines upon the facts and circum­ stances of each particular case to call it forth. It is a device adopted or invented by equity to compel the ultimate discharge of a debt or obliga­ tion by him, who, in good conscience, ought to pay it.

Commercial Union Fire Ins. Co. v. Kelly,

(Okla.

1964) (emphasis added). Given the flexible nature of equity,

subrogation would remain a potentially appropriate remedy even if

New Hampshire courts held that legal malpractice claims were non­

assignable. 73 A m . J u r . 2 d Subrogation, supra § 21 (discussing

fact that subrogation is "quite commonly allowed" for claims

otherwise nonassignable). A federal or state court in New

Hampshire may grant equitable subrogation regardless of the state

of New Hampshire law on the assignment of legal malpractice

claims.

Since this court proceeds in the periphery of settled New

Hampshire law, federalism concerns counsel hesitancy in making

broad statements of law that go beyond the necessities of the

case. Vermont Mutual seeks to proceed under either legal assign­

ment or equitable subrogation, but granting relief under the

latter absolves this court of any duty to settle the state law

question of whether legal malpractice claims are freely assign­

able. This court relies on the narrower grounds of subrogation

and makes no comment, either explicitly or implicitly, on whether

29 the Bank's legal malpractice claim against Sheehan is assignable

to Vermont Mutual under New Hampshire law.

Vermont Mutual ought to be permitted to pursue the Bank's

claims against Sheehan, and equity considers done that which

ought to be done. In determining whether equitable subrogation

is appropriate, courts generally examine principles of equity and

considerations of public policy. 6A Appleman, Insurance L aw and

Practice, § 4054, at 142 (1972) . Both public policy and the

equities of this case support transferring the Bank's rights to

Vermont Mutual so it can proceed against Sheehan.

Subrogation rests on the equitable principle that no one

should be enriched by another's loss and that financial burden

ought to be shifted from an innocent party who originally pays to

the one whose culpable conduct caused the loss. To trigger the

hand of equity, the legal wrongdoing said to justify shifting the

financial burden must have caused the loss. Paten Scaffolding

Co. v. William Simpson Constr. Co.,

,

(1967) (as respects subrogation of insurer, liability

of wrongdoer may be based not only on tort, but also upon breach

of contract, so long as there exists necessary causal relation­

ship between wrong and damage). Thus, "there is no . . . general

agreement in decisional law as to the right of the insurer to be

subrogated to collateral rights which the [insured] may have

against persons who did not cause the loss." In the Matter of

30 Future Mfg. Coop., 165 F. Supp. Ill, 113 (N.D. Cal. 1958). For

instance, "when an insured vendor has been indemnified by his

insurer for loss of property subject to a sales contract, the

tendency has been to give the vendee the benefit of the vendor's

insurance rather than to subrogate the insurer to the vendor's

right to recover the purchase price from the vendee."

at

114 .

In such a case, the insurer and the vendee are in equipoise

on the scales of justice. No considerations of fairness mandate

shifting the loss one way or another because both parties are

equally obligated by binding promise to pay for the lost

property. Equity has no justification to interfere with the

legal distribution of rights between the parties and ought to

leave the parties as it finds them.

However, in this case, the scales tip in favor of Vermont

Mutual. On the one hand, both Sheehan and Vermont Mutual were

under contractual obligation to indemnify and defend the Bank.

Vermont Mutual's obligation flowed from its insurance contract

with the Bank, and Sheehan's from Sklar's promise. Further, the

loss from legal challenge to the foreclosure proceedings would

have occurred regardless of whether Sheehan breached Sklar's

promise to indemnify and defend. Sheehan's legal wrongdoing, the

breach of Sklar's promise no more caused the Bank's loss than did

Vermont Mutual. It could be argued that Vermont Mutual and

31 Sheehan stand on equal footing as to which party, in terms of

fairness, should bear the loss, as both are under equally binding

contractual obligations to pay.

But Sheehan was promising to indemnify and defend for loss

occasioned by its previous mistakes in conducting the foreclosure

sale for the Bank. This is not the case of co-guarantors against

loss, neither more culpable than the other. Here, Sheehan's

promise to indemnify amounts to an assumption of responsibility

for the adverse financial consequences of its previous mistake,

and Sheehan's conduct was causally connected to underlying loss.

Thus, even though both parties, Sheehan and Vermont Mutual,

promised to indemnify the Bank for the loss at issue, equity

demands that Sheehan remain primarily liable.

Turning now to whether public policy supports equitable

subrogation, this court concludes that it does. As noted

earlier, several courts have concluded that public policy dis­

favors assignments of legal malpractice claims. Goodley, supra,

133 Cal. Rptr. at 87. However, with respect to subrogation, as

distinguished from assignment, the relevant policy considerations

weigh differently. Even if the courts prohibiting assignment of

legal malpractice claims are deemed to have correctly evaluated

the policy considerations relevant to the issue of assignment,

subrogation in this case nonetheless comports with sound public

policy.

32 The policy said to disfavor assignment of legal malpractice

claims does not, likewise, disfavor equitable subrogation with

equal force. See Hospital Services Corp. of R.I. v. Pennsylvania

Ins. C o .,

(R.I. 1967) (discussing distinction

between assignment and subrogation).

The leading statement of those policy considerations is

found in Goodlev. The court was fearful that free assignability

"could relegate the legal malpractice action to the market place

and convert it to a commodity to be exploited."

Creating a

market in claims against allegedly negligent lawyers would,

according to the Goodlev court, increase the number of legal

malpractice claims. The Goodlev court could not, however, have

been concerned about a general increase in legal malpractice

claims, which would of course be desirable if more meritorious

claims found their way to court. Justice demands that merito­

rious claims be redressed so as to maintain checks on substandard

legal representation. Increased legal malpractice litigation is

only an undesirable state of affairs if a disproportionate number

of unmeritorious claims results. Thus the Goodlev court must

have feared that a market in legal malpractice claims would

result in more unmeritorious claims being pursued.

But equitable subrogation does not threaten to convert the

legal malpractice claim into an exploitable economic commodity.

Subrogation is effectuated by the hand of equity, which operates

33 outside the marketplace. Markets are fueled by voluntary trans­

actions, like those possible under a regime of free assign­

ability. Transfer by subrogation occurs by operation of law, and

is distinguishable from voluntary market exchanges like assign­

ments. The market produces speculators in freely transferable

commodities, but equity approves only those transfers dictated by

considerations of justice, forestalling the emergence of specula­

tors in legal rights. Subrogation of an insurance company to the

malpractice claim of its insured is not a market transaction, and

the insurance company is not a speculator in the law seeking to

reap a profit from the misfortunes occasioned by attorney negli­

gence. Approving such limited transfers falls far short of

creating a regime in which legal malpractice claims become an

instrument of profit.

The next consideration that caused the Goodley court to

create an exception to assignability was the "personal nature of

the attorney's duty to the client."

A market in legal

malpractice claims would sanction transfers to "economic bidders

who have never had a professional relationship with the attorney

and to whom the attorney has never owed a legal duty."

In

187 9, the Supreme Court held that an attorney generally owes no

duty to third persons who are not privy to the attorney-client

relationship. Savings Bank v. Ward.

(1879).

34 As the Goodlev court recognized, permitting free assignability

would do damage to this privity requirement.

However, the privity requirement has been considerably

narrowed with exceptions. In New Hampshire, the "privity rule is

not ironclad . . . and courts have been willing to recognize

exceptions particularly where . . . the risk to persons not in

privity is apparent." Simpson v. Calivas,

,

(1994); Robinson v. Colebrook Savinas Bank, 10

, 385,

(1969). New Hampshire courts

find exceptions to privity more readily when harm to a party

outside the attorney-client relationship is foreseeable. "A

common theme to these cases, similar to a theme of cases in which

we have recognized exceptions to the privity rule, is an emphasis

on the foreseeability of injury to the intended beneficiary."

Simpson, supra,

.

An assignee of legal malpractice claims is generally

unconnected by prior ties to the attorney, the client, or the

representation. Such a random assignee has not been harmed at

all by the attorney's negligence, much less "foreseeably harmed."

Thus, exceptions to the rule of privity are generally unwarranted

for assignments of legal malpractice claims. However, when, as

here, the negligence of the insured's attorney occasions the

incidence of an insurance company's liability under an insurance

contract, the foreseeability of the harm suffered by the insur­

35 ance company renders an exception to the privity requirement more

appropriate. Thurston v. Continental Casualty Co.,

(Me. 1989) (holding that legal malpractice claims may be

assigned when the assignee has an intimate connection with the

underlying suit). The insurance company is not simply a random,

unconnected party that acquired the legal malpractice claim in

the market. Rather, the insurance company has a pre-existing

contractual relationship with the insured. When an attorney

injures the insured through malpractice, it is foreseeable that

the injury would be passed on to the insurance company under its

contract. The foreseeability of injury to the insurance company

of the negligent attorney's client justifies relaxation of

privity requirement in this case.

Another policy said to disfavor assignment is protection of

attorney-client privilege. In the malpractice action by the

assignee, the attorney will be able to divulge privileged

communications of the client assignor in defense. Otherwise

privileged communications of the client may be disclosed without

the client's formal waiver of the attorney-client privilege.

However, in this case, Sheehan has not pointed to any privileged

communications the Bank seeks to protect which Sheehan plans to

disclose in its defense. Allowing subrogation in this case will

not do damage to the attorney-client relationship.

36 Thus the policy disfavoring transfer of legal malpractice

claims by assignment does not as strongly disfavor transfer by

subrogation. Furthermore, there are policy arguments favoring

subrogation that do not factor into the consideration of whether

legal malpractice claims should be assignable.

The issue of whether legal malpractice claims are assignable

is generally a question of which of two parties, the assignor or

assignee, is the more appropriate champion of the claim. Regard­

less of which party the law favors, the claim will be brought by

either the assignor (if the assignment is prohibited) or the

assignee (if the assignment is permitted). Either way, the

negligent attorney will be made to answer for their negligence.

On the other hand, if equity refuses to subjugate the insurer to

the rights of the insured, legal malpractice that is compensated

by insurance companies will go unvindicated. The victim of

malpractice that has been reimbursed by an insurance company has

no incentive to proceed against the negligent attorney. The

insurance money renders the victim whole and removes the need to

expend resources pursuing a legal malpractice claim, even if the

law permitted double recovery. Thus, forbidding subrogation of

the insurance company effectively extinguishes the legal

malpractice claim, and the malpracticing attorney would escape

the consequences of his malpractice.

37 Such a result would undermine the aim of civil remedies for

legal malpractice to deter substandard practice of law. The

law's deterrence effect is related to the incidence of successful

enforcement. Leaving legal malpractice claims fallow by denying

subrogation to insurance companies threatens to diminish the

prescriptive force of law in this area. Prohibitions against

assignments will not produce such consequences because the claim

will still be prosecuted by the assignor.

In sum, considerations of equity and public policy support

subrogation of Vermont Mutual to the claims of the Bank against

the Sheehan law firm. It would be inequitable to allow Sheehan

to avoid responsibility for the financial loss that it caused

Vermont Mutual as the insurance company of Sheehan's client, the

Bank. There is not a single viable policy argument disfavoring

subrogation in this case. This court holds that subrogation is

appropriate here, but reiterates the narrowness of this holding

as implying nothing about the state of New Hampshire law on the

assignability of legal malpractice claims.

Sheehan advances one last ground for summary judgment.

Sheehan argues that Vermont Mutual cannot be allowed to proceed

against Sheehan because the Bank already released Sheehan of any

obligations. As part of the settlement negotiations following

the Giacalone action, the Bank executed a release of Sheehan.

Vermont Mutual only claims rights against Sheehan as the subrogee

38 of the Bank. According to Sheehan, since the Bank's rights were

extinguished by release, Vermont Mutual can claim no rights

through the Bank.

Vermont Mutual argues that the release executed by the Bank

contained language preserving Vermont Mutual's rights:

this Release in no way affects or limits the claims, if any, which the Bank's insurer, Vermont Mutual Insurance Company, may have against the Releasees . . . for recovery of attorney's fees and disbursements relative to Vermont Mutual Insurance Company's defense of the Bank in [the Giacalone actions] .

Defendant's Objection, Exhibit B-2. Sheehan responds that this

language meant to preserve only Vermont Mutual's direct rights

against Sheehan, but not the indirect rights as the Bank's

subrogee. The parties dispute the intended scope of this

preservation clause.

However, the intent of the Bank and Sheehan in executing the

release can have no bearing on the rights of Vermont Mutual.

Instead, the effect of the release depends on whether Vermont

Mutual's rights vested before the Bank's rights were extinguished

by the release. See Calamari & Perillo, supra, § 18-16, at 650

(discussing circumstances under which defenses good against the

assignor (such as release) are likewise good against the

assignee). Generally, an assignee or subrogee does not acquire

rights that are any broader than those of the primary right

holder. The doctrine of subrogation is not an independent source

39 of rights, but rather merely transfers rights without altering

their scope and contours. Thus, defenses valid against the

primary right holder are equally valid against the subrogee, and

a party obligated to perform may set forth a release executed by

the primary rightholder as a defense to action brought by a

subrogee. After execution of a release, there is nothing left to

pass by subrogation.

However, once the rights of a subrogee are vested, those

rights become immune from any post-vesting agreement between the

primary rights holder and the party obligated to perform. Id.

Vesting shifts the primary party in interest from the assignor to

the assignee and terminates the former's power to alter or defeat

the rights of the latter. Thus, post-vesting release agreements

between the primary right holder or assignor and the party obli­

gated to perform have no effect on the rights of the subrogee.

The question here is whether Vermont Mutual's rights as the

Bank's subrogee vested before the Bank executed the release of

Sheehan. There is some authority holding that a subrogee's

rights are vested upon full payment of the loss to the primary

right holder. General Exchange Ins. Corp. v. Young.

,

(1948) (at the moment an insured vehicle is

damaged or destroyed by a third person's fault, the collision

insurer has a contingent interest in any recovery of damages,

which interest becomes a vested right when the insurer discharges

40 its policy obligation to the insured). However, such a rule

works unfairness upon the party who is ostensibly released from

legal obligations and discourages settlement negotiations and

compromise. The rule would presumably operate regardless of

whether the party who is originally liable has notice of the

grounds for subrogation. Thus the liable party may give up

consideration for a release that proves ineffectual against the

vested rights of an insurance company who has previously

compensated its insured for the loss suffered.

To prevent such double jeopardy, the subrogee's rights

should not be deemed vested until the liable party receives

notice of the grounds for subrogation. Upon receiving such

notice, any release executed between the liable party and the

insured has no effect on the vested rights of the insurance

company.

Here, Vermont Mutual's rights against Sheehan were vested

before the Bank executed the release of Sheehan. The clause in

the release purporting to preserve Vermont Mutual's rights was

clear and unmistakable notice to Sheehan of Vermont Mutual's

claim as the Bank's assignee/subrogee, hence the release had no

effect on Vermont Mutual's claim against Sheehan.

41 Conclusion

For the above reasons, the court conditionally grants

plaintiff's motion for partial summary judgment (document 11) on

the issue of liability for Count I's contract claim unless the

defendant produces sufficient evidence to create a genuine issue

of fact concerning Sklar's authority to bind Sheehan to an

indemnity contract. Any such production must be filed not later

than Monday, February 17, 1997. Defendant's motion for summary

judgment (document 20) is denied.

SO ORDERED.

Shane Devine, Senior Judge United States District Court

January 15, 1997

cc: Michael Lenehan, Esq. Ellen E. Saturley, Esq.

42