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USCA1 Opinion
September 21, 1992 UNITED STATES COURT OF APPEALS
September 21, 1992 UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
FOR THE FIRST CIRCUIT
No. 92-1087
No. 92-1087
COMPUTER SYSTEMS OF AMERICA, INC.,
COMPUTER SYSTEMS OF AMERICA, INC.,
Plaintiff, Appellant,
Plaintiff, Appellant,
v.
v.
UNUM LIFE INSURANCE COMPANY, ET AL.,
UNUM LIFE INSURANCE COMPANY, ET AL.,
Defendants, Appellees.
Defendants, Appellees.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Rya W. Zobel, U.S. District Judge]
[Hon. Rya W. Zobel, U.S. District Judge]
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____________________
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Before
Before
Breyer, Chief Judge,
Breyer, Chief Judge,
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O'Scannlain,* Circuit Judge,
O'Scannlain,* Circuit Judge,
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and Cyr, Circuit Judge.
and Cyr, Circuit Judge.
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Douglas G. Moxham with whom Geoffrey R. Bok and Lane & Altman
Douglas G. Moxham with whom Geoffrey R. Bok and Lane & Altman
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were on brief for appellant.
were on brief for appellant.
Evan R. Chesler with whom Cravath, Swaine & Moore, Arnold P.
Evan R. Chesler with whom Cravath, Swaine & Moore, Arnold P.
________________ _________________________ _________
Messing, Kevin J. Lesinski and Choate, Hall & Stewart were on brief
Messing, Kevin J. Lesinski and Choate, Hall & Stewart were on brief
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for appellees.
for appellees.
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*Of the Ninth Circuit, sitting by designation.
*Of the Ninth Circuit, sitting by designation.
CYR, Circuit Judge. Appellant Computer Systems of
CYR, Circuit Judge.
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America, Inc. ("CSA") initiated the present action in Suffolk
Superior Court against UNUM Life Insurance Company ("UNUM"),
claiming that UNUM had converted computer equipment which CSA had
acquired by accession either under the terms of its computer
lease with UNUM or under the common law doctrine of accession.1
The complaint alleged that accession occurred as a consequence of
a reconfiguration of the IBM computer UNUM leased from CSA.
Following a three-day bench trial, the district court determined
that the changes made to the computer were not permanent and that
the reconfigured components were "readily removable." Based on
its interpretation of the lease and the intent of the parties,
the court found no accession. CSA appealed.
I
I
BACKGROUND
BACKGROUND
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The IBM 3090 computer system located at UNUM's facility
in Portland, Maine, was purchased from IBM in 1985 by CSA's
predecessor in interest and leased to UNUM. According to the
terms of the lease, UNUM was permitted to reconfigure the
computer, subject to certain conditions. First, "[a]ll repairs,
replacements and substitutions of parts . . . . [would] be
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1UNUM removed the case to the United States District Court
for the District of Massachusetts. CSA filed an amended
complaint, adding International Business Machines Corporation
("IBM") as a defendant and alleging that IBM had converted CSA's
property by reconfiguring the computer for UNUM.
2
considered accessions to, and immediately upon the installation
thereof, [would] be deemed for all purposes part of, the Equip-
ment[,] and title thereto [would] be immediately and
automatically vested in [CSA]." Second, UNUM was allowed to "add
additional equipment," the title to which would not pass to CSA
by accession provided it was "readily removable" in a manner
which would not reduce the "value or usefulness of the Equipment
below the value or usefulness which it would have had without any
such additional equipment." It remained the responsibility of
the lessee, however, to remove any additional equipment at the
expiration of the lease and to "restore the Equipment to the
condition it was in immediately prior to the addition of such
additional equipment (normal wear and tear excepted)." At the
end of the lease term, the lessee was required to return the
equipment to the lessor "in the same operating order, repair,
condition and appearance as when received . . . ."
At the time it was leased to UNUM, the IBM 3090
computer was a model 200 Base, i.e., it contained two processor
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engines and utilized what is known as a "Base" technology system,
readily reconfigurable to accommodate more processor engines
(e.g., upgrading the computer to a model 400 or 600) and more
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advanced technology (e.g., upgrading to model "E," "S," or
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"J").2 Computer system technology reconfigurations are
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2Computer models are defined both by the number of processor
engines and the type of technology. Computer models can also be
varied with respect to memory type and channel capacity. An IBM
3090 system can be configured in more than 2 million ways.
3
accomplished with thermal conductive modules ("TCM's") which are
simply "plugged" into the computer mainframe. The computer
leased to UNUM was reconfigured initially to a 400 Base, then to
a model 600E, and finally, in March 1990, to a model 600J. The
technology installed to effect the "E" and "J" upgrades was
leased to UNUM by Bell Atlantic Systems Leasing ("BASLI"). Prior
to the final upgrade to "J" technology, CSA notified UNUM that it
would claim title to any "TCM's" containing the "J" technology.
At the end of the lease term, UNUM returned the IBM 3090 Base 200
computer to CSA.3 CSA commenced the present action claiming
entitlement to an IBM 3090 200 computer system with "J" rather
than Base technology.4
II
II
DISCUSSION
DISCUSSION
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A. The Lease
A. The Lease
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CSA contends that the lease agreement with UNUM is
unambiguous and its interpretation presents a legal issue subject
to de novo review. UNUM and IBM, on the other hand, insist that
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the relevant lease terms are ambiguous and present a mixed
question of law and fact appropriate for "clear error" review.
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3Immediately prior to the expiration of the lease term, UNUM
contracted with IBM to downgrade the system to a 200 Base, i.e.,
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a system equivalent to that originally leased by UNUM. The
downgrade required no more than 100 hours.
4CSA claims neither the four processors installed to upgrade
the leased computer from model 200 to model 600, nor the
companion technology.
4
As we conclude that the pertinent terms are ambiguous, their
interpretation poses a mixed question of law and fact under New
York law,5 Meyer v. Certified Moving & Storage Co., 556 N.Y.S.2d
_____ ______________________________
63, 65 (1990); Kenyon v. Knights Templar & M. Mut. Aid Ass'n.,
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122 N.Y. 247, 25 N.E. 299 (1890), which we review for clear
error. American Title Ins. Co. v. East West Financial Corp., 959
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F.2d 345, 346 (1st Cir. 1992) (mixed questions of law and fact
reviewed for clear error); LoVuolo v. Gunning, 925 F.2d 22, 25
_______ _______
(1st Cir. 1991) (same). A dispute as to whether the terms of a
contract are ambiguous presents a question of law for the court.
See, e.g., Amusement Business Underwriters v. American Int'l
___ ____ ________________________________ _______________
Group, Inc., 66 N.Y.2d 878, 489 N.E.2d 729, 732 (1985); cf.
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Fashion House, Inc. v. K Mart Corp., 892 F.2d 1076, 1083 (1st
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Cir. 1989) (ambiguity determination is for the court). Contract
terms are ambiguous where "[r]easonable minds could differ" as to
their meaning. Van Wagner Adv. v. S & M Enters., 501 N.Y.S.2d
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628, 631, 492 N.E.2d 756, 758 (1986).
At issue under the terms of the UNUM lease is whether
the computer modifications were "replacements" or
"substitutions," which became accessions to the CSA computer, or
"additional equipment," which did not. These terms are not
defined in the lease, nor do the terms themselves, either in
context or in isolation, make manifest the intention of the
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5The parties do not dispute the applicability of New York
law, as the lease provides that it "shall be governed and
construed for all purposes under and in accordance with the laws
of the State of New York."
5
parties with respect to the accession of TCM's utilized to recon-
figure the computer technology in the present case. As of the
time the lease was executed, IBM had not yet informed the public
whether upgrades would be accomplished by the removal of parts
and the insertion of others (as happened here) or simply by the
addition of more parts. Thus, it does not appear that the
parties could have formed a mutual intention, at the time of the
lease, as to whether upgrades were to be treated as
"substitutions" or "additions." We therefore conclude that these
terms were ambiguous. See Van Wagner Adv., 501 N.Y.S.2d at 631,
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492 N.E.2d at 758; see also Fashion House, Inc., 892 F.2d at 1083
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(contract language usually considered ambiguous "where the
phraseology can support reasonable difference of opinion as to
the meaning of the words employed and obligations undertaken.").
Where "a contract is thought ambiguous, the court may receive
extrinsic evidence, even parol evidence, to determine whether
uncertainty exists." Id. (citing Sunstream Jet Express, Inc. v.
___ ____________________________
International Air Service Co., 734 F.2d 1258, 1268 (7th Cir.
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1984)).
CSA claims that the removal of the Base technology and
the successive installations of the "E" and "J" technologies
resulted in "substitutions" and "replacements" under the lease,
which meant that CSA acquired title to the "J" technology by
accession under the terms of the lease. CSA rests its entire
argument on the ground that the "plain, ordinary meaning" of the
lease compels a finding of accession. See Olenick v. Government
___ _______ __________
6
Employees Ins. Co., 346 N.Y.S.2d 320, 321 (1973) (interpreting
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insurance contract according to its "plain, ordinary meaning").
According to CSA, a "replacement" or "substitution" plainly means
a thing "put in the place of another." On the other hand, the
term "additional equipment," according to CSA, entails an
installation "without the corresponding removal of functionally
equivalent parts." As it is undisputed that other components
were removed from the computer when the TCM's containing the "J"
technology were installed, according to CSA the "J" TCM's clearly
were "replacements" or "substitutions" under the terms of the
lease and became accessions to the CSA-owned computer. But cf.
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id., 346 N.Y.S.2d at 321 ("'replace,' given its plain, ordinary
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meaning, means to supplant with a substitute or equivalent")
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(emphasis added).
CSA further contends that the TCM's could not be
considered "additional equipment" because the lease prohibits
"add[ing] to the Equipment additional equipment not readily
removable or, even if readily removable, which cannot be removed
without reducing the value or usefulness of the Equipment below
the value or usefulness which it would have had without any such
additional equipment." According to CSA, given the time required
to remove the TCM's and the fact that without any TCM's the
computer will not function and is reduced in value and
usefulness, the TCM's could not be "additional equipment" under
7
the lease.6
Under New York law, "[i]n the interpretation of leases,
the same rules of construction apply as are applicable to
contracts generally." Tantleff v. Truscelli, 493 N.Y.S.2d 979,
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982 (1985) aff'd, 69 N.Y.2d 769, 505 N.E.2d 623 (1987) (citing
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George Backer Management Corp. v. Acme Quilting Co., 46 N.Y.2d
_______________________________ _________________
211, 385 N.E.2d 1062, 1065 (1978)). The intent of the parties
governs. See, e.g., Richardson v. Steuben County, 226 N.Y. 13,
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19, 122 N.E. 449, 450 (1919) (in interpreting contracts courts
must seek "the true intent of the parties who executed them");
Lipsky v. Commonwealth United Corp., 551 F.2d 887, 896 (2d Cir.
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1976) ("essential tool in properly interpreting a contract is to
first ascertain the intent of the parties") (applying New York
law). The "intention of the parties must be gleaned from all
corners of the document, rather than from sentences or clauses
viewed in isolation." Tougher Heating & Plumbing Co. v. State,
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423 N.Y.S.2d 289, 290-91 (1979). Moreover, when the contract
language is ambiguous, extrinsic evidence, including course of
performance by the parties and standard industry practice, is
relevant in determining intent. See, e.g., State v. Home Indem.
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Co., 66 N.Y.2d 669, 486 N.E.2d 827, 829 (1985) (extrinsic
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evidence may aid in interpretation of ambiguous contract); Pease
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6According to the terms of the lease, "[o]ther than the
repairs, replacements and substitution of parts [all of which are
the property of the Lessor] . . . and the additional equipment
permitted under 12, Lessee shall not add any equipment to the
Equipment or alter or modify the Equipment in any manner." Thus,
any reconfiguration must be either a "repair[], replacement[ or]
substitution" or "additional equipment."
8
& Elliman, Inc. v. Weissman, 167 N.Y.S.2d 601, 602 (1957) (court
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often can gain interpretive guidance from conduct of parties
under contract); Edison v. Viva Int'l, Ltd., 421 N.Y.S.2d 203,
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205 (1979) ("contract must be construed according to the custom
and use prevailing in a particular trade"). "[W]hen a term or
clause is ambiguous and the determination of the parties' intent
depends upon the credibility of extrinsic evidence or a choice
among inferences to be drawn from extrinsic evidence, then the
issue is one of fact." Amusement Business Underwriters, 66
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N.Y.2d at 880, 489 N.E.2d at 732.
The CSA argument assumes that the terms of the lease
are unambiguous and must be interpreted without resort to
extrinsic evidence. The district court implicitly found,
however, and we agree, that "substitution," "replacement" and
"addition" are terms about whose meaning in the lease
"[r]easonable minds could differ." Van Wagner Adv., 501 N.Y.S.2d
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at 631, 492 N.E.2d at 758. The district court resolved the
ambiguity through resort to the state of the knowledge of the
parties as to upgrades at the time of the lease, industry
practice, the commercial purpose to be served by the lease, and
the conduct of the parties under the lease.
Based on its consideration of the extrinsic evidence,
the court determined that the parties did not intend the
interpretation proposed by CSA. According to the court, the
parties did not intend the term "substitution" to encompass every
circumstance in which a part is removed and another is put in its
9
place, but only those circumstances in which an "equivalent" part
is put back in which "does the same thing" as the removed part.
The district court "read the term 'substitution' as referring to
equivalence." See Olenick, 346 N.Y.S.2d at 321. A
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"replacement," on the other hand, would contemplate the
installation of a new part of the exact same type as the removed
part.7 In other words, "substitutions" and "replacements" were
found to refer to installations which maintain the equipment in
its state or condition at the onset of the lease; "additional
equipment" contemplates modifications. Since the "J" technology
UNUM installed was in no sense merely "equivalent" to the removed
TCM's, the district court found that it constituted a
modification which CSA did not acquire by accession under the
terms of the lease. We find no error.
First, a UNUM employee involved in the negotiation of
the original lease presented testimony to the effect that the
parties intended section 12 ("additions") to mean upgrades, and
section 8 ("substitutions" and "replacements") to mean parts
installed in place of failed parts and not as upgrades. Second,
the district court's interpretation is supported by evidence that
mixed ownership of base machines and upgrades is common industry
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7As the court said:
Replacement would mean, for example, putting in an
item that has the same part number. So you take out
item, that is part number 123, and you put in another
one that is part number 123. Substitution means part
number 123 is unavailable, but you [have] 345 that does
the same thing, so you put in 345.
10
practice. No witness identified an instance in the computer
industry where the owner of a base system was found to have
acquired title by accession to any computer upgrade involving
advanced technology. Third, CSA's conduct during the lease term
cast doubt on its current contention that it, rather than BASLI,
owns the "J" technology.8 Fourth, unlike CSA's interpretation,
the district court interpretation makes sound commercial sense.
Under the CSA interpretation, CSA would acquire title to
technology worth more than $2,000,000, without payment. See
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River View Ass'n. v. Sheraton Corp. of America, 306 N.Y.S.2d 153,
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156 (1969), aff'd., 27 N.Y.2d 718, 262 N.E.2d 416 (1970)
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("[P]arties to an agreement are presumed to act sensibly in
regard to it and an interpretation that produces an absurdly
harsh result is to be avoided"). Sixth, the sensible functional
distinction the district court drew between replacements and
modifications best comports with the terms of the lease as a
whole. For example, the same section that accords accession
rights to the lessor in respect to "repairs, replacements and
substitutions" prescribes the lessee's duty to "maintain the
Equipment in good operating order, repair, condition, and
appearance. . . ." Finally, the district court supportably found
that the "J" TCM's were "readily removable" and thus the sort of
"additional equipment" UNUM was allowed to add under the terms of
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8Prior to the expiration of the lease, CSA attempted to sell
the 200 Base computer at a time when it was about to be upgraded
to 200E. Under CSA's accession theory, however, it could have
acquired title to the "E" technology at no cost merely by
awaiting its installation.
11
the lease.
B. Doctrine of Accession
B. Doctrine of Accession
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Alternatively, CSA claims ownership of the enhanced
technology under the common law doctrine of accession. The
parties agree that Maine common law controls. Mathewson Corp. v.
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Allied Marine Indus., Inc., 827 F.2d 850, 853 n.3 (1st Cir. 1987)
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(appellate court will accept parties' "expressed preference" and
"implicit concession" as to controlling law, where "[t]hey have
briefed the question in those terms and the district court ruled
on that basis."); In re Pioneer, 729 F.2d 27, 31 (1st Cir. 1984).
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Under Maine law, three factors govern whether an accession
occurs.
[A] chattel is not merged into the realty
unless (1) it is physically annexed, at least
by juxtaposition, to the realty or some
appurtenance thereof, (2) it is adapted to
and usable with that part of the realty to
which it is annexed, and (3) it was so
___
annexed with the intention, on the part of
the person making the annexation, to make it
a permanent accession to the realty.
Franklin Property Trust v. Foresite, Inc., 489 A.2d 12, 14 (Me.
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1985) (citing Hayford v. Wentworth, 97 Me. 347, 350, 54 A. 940,
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941 (1903)) (emphasis added). See In re Lyford, 22 B.R. 222, 224
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(Bankr. D. Me. 1982) (applying Hayford factors to determine
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whether cab and chassis were accessions to truck). All three
elements in the Hayford accession test must be met, but "special
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prominence must be attached to the intention of the party making
12
the annexation." Id. The party asserting the accession claim
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bears the burden of proof. Hayford v. Wentworth, 97 Me. 347,
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350, 54 A. 940; Franklin Property Trust, 489 A.2d at 14.
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The district court supportably found, on the basis of
testimony it explicitly credited, that the time taken to remove
the "J" TCM's and restore the original base technology was not
out of proportion to the time required for an ordinary upgrade
and therefore that the "J" TCM's were "readily removable." Thus,
it was not clear error to conclude that no physical annexation of
the technology occurred. See, e.g., Peckham v. Continental Cas.
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Ins.
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13
Co., 895 F.2d 830, 840 (1st Cir. 1990) (citing Anderson v. City
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of Bessemer City, 470 U.S. 564, 573-74 (1985)) (no "clear error"
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where district court adopts plausible view of evidence).
Furthermore, no evidence was produced at trial that any party
involved in the TCM installation ever anticipated, let alone that
UNUM intended, that the TCM's would become accessions to the CSA-
owned computer. The uncontradicted testimony was to the con-
trary. Accordingly, the district court determination that CSA
did not acquire the "J" TCM's by accession under Maine common law
must be affirmed.
The district court judgment is affirmed.
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Document Info
Docket Number： 92-1087
Filed Date： 9/21/1992
Precedential Status： Precedential
Modified Date： 9/21/2015