Bank v. IBMC

• Court: Court of Appeals for the First Circuit
• Decided: November 5, 1996
• Docket: 96-1355
• Status: Published

Opinion

USCA1 Opinion

United States Court of Appeals

                                For the First Circuit

                                 ____________________


No. 96-1355



            MICHAEL D. BANK, THOMAS M. DUSEL AND ROBERT J. M. O'HARE, JR.,

               IN THEIR CAPACITY AS TRUSTEES OF 400 WYMAN STREET TRUST,



                                Plaintiffs, Appellees,



                                          v.



                    INTERNATIONAL BUSINESS  MACHINES CORPORATION,



                                Defendant, Appellant.


____________________



                     APPEAL FROM THE UNITED STATES DISTRICT COURT



                          FOR THE DISTRICT OF MASSACHUSETTS



                     [Hon. Joseph L. Tauro, U.S. District Judge]
                                            ___________________



                                 ____________________



                                        Before



                                 Selya, Circuit Judge,
                                        _____________

                     Coffin and Campbell, Senior Circuit Judges.
                                          _____________________



                                 ____________________



            J. Charles  Mokriski with whom Kenneth  E. Werner  and Jonathan I.
            ____________________           __________________      ___________

        Handler were on brief for appellant.
        _______

            Saul  A. Schapiro with  whom David  W. Rosenberg was  on brief for
            _________________            ___________________

        appellees.


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                                   November 5, 1996

                                 ____________________



COFFIN, Senior Circuit Judge.   The parties in this  case --
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          International  Business Machines  Corp. (IBM)  and the  400 Wyman



          Street  Trust (the Trust)1 -- comprise  a partnership created for



          the purpose  of developing  and operating  an office building  in



          Waltham, Massachusetts.  The Trust secured an opportunity for the



          Partnership  to reduce its debt by purchasing its own mortgage at



          a substantial  discount.  IBM opposed the deal.  The issue before



          us is whether IBM's veto is absolute, or whether the dispute must



          be arbitrated; under the  Partnership Agreement, the answer turns



          on whether  the proposal involves an acquisition  of "an interest



          in  real property" or a "refinancing."  The district court deemed



          it a  refinancing,  and  granted  the Trust's  motion  to  compel



          arbitration.  See Bank  v. International Business Machines Corp.,
                        ___ ____     _____________________________________



          915  F. Supp. 491, 498 (D. Mass.  1996).  The issue is close, but



          we  conclude  that  the  refinancing  provision  is  inapplicable



          because  the  proposal  that  has  been presented  so  far  lacks



          refinancing content.  Consequently, we reverse. 



                                I. Factual Background
                                   __________________



               IBM and the  Trust entered into  the Partnership in  October



          1986.   The Partnership Agreement specifies  that the Partnership



          would  seek to  finance  the construction  and  operation of  the



          office  building with a non-recourse loan, and a $75 million loan


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               1 Michael D. Bank, Thomas M. Dusel and  Robert J. M. O'Hare,

          Jr., are named  as parties in  their capacity as trustees  of the

          Trust.   For the sake  of convenience, we  refer to the appellees

          simply as "the Trust" throughout the opinion.



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imposing  no liability  on  either  party  for repayment  of  the



          principal was, in fact, obtained from Citicorp Real Estate, Inc.



               The  Trust  is  the  managing partner  of  the  Partnership,



          holding a 51% interest.  IBM has a 49% interest.  Under the terms



          of the Agreement, the Trust contributed the undeveloped parcel at



          404 Wyman  Street, valued at  $19.3 million,  and IBM  made a  $1



          million  capital  contribution  as  well  as  a  long-term  lease



          commitment.   IBM also  agreed to provide  additional capital  as



          needed until its equity  reflected its 49% share in  the venture,



          creating an approximately $17.5 million  potential obligation for



          IBM at the outset of  the undertaking.  None of that  capital has



          been contributed to date.



               In 1995,  the Trust attempted unsuccessfully  to negotiate a



          restructuring of the loan ("the Note"), whose remaining principal



          balance was about $72 million.  The lenders,2 however, offered to



          sell  the note  in  its  entirety for  about  $54  million.   IBM



          contended  the price was too high and expressed its unwillingness



          to make the purchase.   Because the offer would expire  soon, the



          Trust  caused its  corporate affiliate,  Wyman Loan  Corp. (Wyman



          Loan), to buy the Note and then proposed that it be resold to the



          Partnership  at its  cost.   IBM  refused to  go  along with  the



          purchase, prompting the  Trust to file  a demand for  arbitration



          with  the American Arbitration  Association.  Two  days later, on


____________________



               2 By this time, the Note had been transfered to a consortium

          of foreign banks, for whom Citicorp served as agent.



                                         -3-



June 14,  1995, IBM sent the  AAA a letter stating  its view that



          the issue was not arbitrable under the Partnership Agreement.



               The arbitrability  issue  is  rooted  in Exhibit  D  of  the



          Agreement, which is  titled "Major Decisions," and which sets out



          several categories of significant decisions  that may be made  by



          the  Partnership  and  the   procedures  for  reaching  them  and



          resolving  disputes.  Section A  of the Exhibit  lists five Major



          Decisions, including  "acquiring any land or  other real property



          or any  interest therein . .  . ."  For  decisions falling within



          Section A,



               (a)  either Partner . . . may withhold its approval for

               any  reason, or for no reason, in its sole and complete

               discretion, without  regard to whether  the withholding

               of such approval is unreasonable or arbitrary . . . .



          Major Decisions falling within Section C, by contrast, may not be



          made unreasonably or unilaterally  and a deadlock on one  of them



          will  trigger the  Agreement's  arbitration provisions.   Section



          C(13) covers "refinancing of any part or all of the Project."



               IBM  contends that  the Note  purchase would  constitute the



          acquisition  of an interest in  real property, and  thus that its



          opposition  to the  deal ends  the matter.   The  Trust, however,



          insists that the purchase is part of a refinancing.  Although the



          letter proposing the transaction refers only to the purchase, the



          Trust  maintains that  the proposal  embraces the  expectation of



          added  capital  from  IBM  (consistent  with  the  $17.5  million



          obligation) and  new third-party  financing of  the balance.   As



          noted,  IBM's objection to a refinancing  is arbitrable under the



          Agreement.



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The district court was  persuaded that the proposed decision



          to purchase the Note should be categorized as a refinancing under



          C(13)  of the Agreement.   It was influenced,  inter alia, by the
                                                         _____ ____



          fact  that  purchase  of the  mortgage  would  not  result in  an



          "acquisition" of  property because the  Partnership already owned



          404  Wyman Street, and by a belief that no substantive difference



          existed  in  this context  between  the proposed  purchase  and a



          restructuring  of the original Note, which IBM had conceded would



          fall within C(13).  See 915 F. Supp. at 496-98.
                              ___



               Though these  points have force, we have  concluded that the



          proposal as presently articulated is not arbitrable.3  We explain



          our reasoning in the following section.



                                   II.  Discussion
                                        __________



               Our  review of the district  court's grant of  the motion to



          compel  arbitration is de novo,  as it involves  the purely legal
                                 __ ____



          task  of  interpreting the  Partnership  Agreement.   See,  e.g.,
                                                                ___   ____



          PaineWebber  Inc. v.  Elahi, 87  F.3d 589,  592 (1st  Cir. 1996);
          _________________     _____



          Commercial Union Ins. Co. v. Gilbane Bldg. Co., 992 F.2d 386, 388
          _________________________    _________________



          (1st Cir. 1993).



               One  difficulty in  this  case is  that,  to a  point,  both



          parties are  right.  Notwithstanding the  district court's effort



          to  view property ownership in  the "everyday" sense, there seems



          no doubt that the purchase of a mortgage conveys some interest in

                              
          ____________________



               3  Our  disposition on  the  refinancing  question makes  it

          unnecessary to consider IBM's alternative argument that the Trust

          is foreclosed from compelling arbitration because it breached its

          fiduciary duties to  the Partnership in causing its  affiliate to

          purchase the Note.



                                         -5-



the  mortgaged property  to  the  purchaser.   Indeed,  even  the



          district court acknowledged that a mortgagee has a legal interest



          in the property secured by the mortgage.  See 915 F. Supp. at 497
                                                    ___



          ("While the  mortgagee may  technically have  legal title to  the



          mortgaged property,  the mortgagor  is considered the  'owner' of



          property.").   See also Maglione v. BancBoston Mortgage Corp., 29
                         ___ ____ ________    _________________________



          Mass. App. Ct. 88, 90, 557 N.E.2d 756, 757 (1990); 7 Mass. Jur.  



          23:3  at  383 (1993).    Thus,  if  it  purchases the  Note,  the



          Partnership would  acquire at least  a technical new  interest in



          the office building, and the proposal therefore could be  treated



          as a "Section A" major decision.



               On  the other  hand,  the proposal  grew out  of refinancing



          negotiations.  The offer  by Citicorp and its associates  to sell



          the  mortgage back to  the Partnership at  a substantial discount



          directly stemmed  from the  Partnership's efforts  to renegotiate



          the terms of its original financing;  the purchase apparently was



          intended  to  be  part of  an  alternative  method  by which  the



          Partnership  could restructure  and reduce  its debt.   Thus,  in



          context,  the acquisition  of a property  interest arguably  is a



          step  preliminary and  subordinate to  the effort  to refinance.4



          Indeed,  IBM recognized  both  in a  hearing before  the district

                              
          ____________________



               4  In   fact,  we  acknowledge  the   possibility  that,  in

          designating the  acquisition  of an  interest  in property  as  a

          Section A decision on which the partners had complete discretion,

          the partners  were contemplating  the purchase of  property other

          than  that which  the Partnership  already "owned."   Unlike  the

          district court,  however,  see 915  F. Supp.  at 497,  we do  not
                                     ___

          believe the Agreement contains such a limitation and therefore do

          not reject Section A as wholly inapplicable to the acquisition of

          a mortgage interest.



                                         -6-



court and in  its briefs  on appeal that  a refinancing  proposal



          that  included a  specified amount  of increased  equity probably



          would fall under the refinancing provision.  



               We  need not at this juncture determine the validity of this



          proposition, for the proposal was not presented as such.  Instead



          of recommending  a multi-step  refinancing plan that  begins with



          purchase of the mortgage,  the Trust has offered a  proposal that



          makes  no reference to financing terms.  Although certain details



          of financing in  so complex  a business environment  may need  to



          remain imprecise  until the  transaction is close  to completion,



          the proposal at the moment lacks any refinancing structure.
                                           ___



               We acknowledge the Trust's argument that the Agreement fills



          in  crucial  gaps  through   the  provision  that  governs  IBM's



          obligation  to contribute  capital  and  another  provision  that



          refers generally to the  pursuit of financing from third  parties



          or partners.   See     3.2(c), 3.3.1.   Even taking  the proposal
                         ___



          together  with  the  Agreement,  however, the  recommendation  is



          without substance; it  includes neither the amounts  to be sought



          from lenders nor any other details about possible interest rates,



          the  duration of  a mortgage,  how soon  such financing  could or



          should be obtained, or the nature of the liability to be assumed.



          We conclude that this defect renders resort to C(13) premature.



               In sum, though the Trust's proposal to purchase the mortgage



          foreshadows  a  refinancing scheme,  we hold  that  it is  as yet



          without sufficient  form  to trigger  the arbitration  provision.



          Because the  Trust has so  far proposed no  more than a  mortgage


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redemption  --   which  would  result,  unquestionably,   in  the



          acquisition  by the  Partnership of  a greater  interest in  real



          property -- IBM has veto power under Section A of Exhibit D.



               We note  that, in  so concluding,  we have credited  neither



          party's  assertions concerning the  other's self-serving motives.



          Our determination that arbitration  may not be compelled at  this



          time is based solely on  the Trust's failure to submit  an actual



          refinancing plan; we offer no view on the legitimacy of seeking a



          capital  contribution  from  IBM  under  section  3.2(c)  of  the



          Agreement as part of such a plan.



               Reversed.
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