Computer Systems v. Unum Life

• Court: Court of Appeals for the First Circuit
• Decided: September 21, 1992
• Docket: 92-1087
• Status: Published

Opinion

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.

                                 ____________________
                                 ____________________

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]
                                           ___________________

                                 ____________________
                                 ____________________

                                        Before
                                        Before

                                 Breyer, Chief Judge,
                                 Breyer, Chief Judge,
                                         ___________

                             O'Scannlain,* Circuit Judge,
                             O'Scannlain,* Circuit Judge,
                                           _____________

                               and Cyr, Circuit Judge.
                               and Cyr, Circuit Judge.
                                        _____________

                                 ____________________
                                 ____________________

Douglas G.  Moxham with  whom Geoffrey  R. Bok  and Lane  & Altman
            Douglas G.  Moxham with  whom Geoffrey  R. Bok  and Lane  & Altman
            __________________            ________________      ______________
        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
        _______  __________________     _______________________
        for appellees.
        for appellees.

                                 ____________________
                                 ____________________

____________________
                                 ____________________

*Of the Ninth Circuit, sitting by designation.
        *Of the Ninth Circuit, sitting by designation.

CYR,  Circuit Judge.    Appellant  Computer Systems  of
                    CYR,  Circuit Judge.
                          _____________

          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
                                      __________

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
                              
          ____________________

               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
                                          ____

          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
           ____

          advanced  technology  (e.g.,  upgrading  to model  "E,"  "S,"  or
                                 ____

          "J").2     Computer   system  technology   reconfigurations   are

____________________

               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
                                      __________

          A.  The Lease
          A.  The Lease
              _________

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
             __ ____

          the  relevant  lease  terms are  ambiguous  and  present a  mixed

          question  of law and  fact appropriate for  "clear error" review.
                              
          ____________________

               3Immediately prior to the expiration of the lease term, UNUM
          contracted with  IBM to downgrade the system to a 200 Base, i.e.,
                                                                      ____
          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.,
                          ______     _____________________________________

          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
                  _______________________    _________________________

          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.
          ____________                                                  ___

          Fashion House, Inc.  v. K  Mart Corp., 892  F.2d 1076, 1083  (1st
          ___________________     _____________

          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
                           _______________     ______________

          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

____________________

               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,
                                  ___ _______________

          492 N.E.2d at 758; see also Fashion House, Inc., 892 F.2d at 1083
                             ___ ____ ___________________

          (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.
          _______________________________

          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
          ___________________

          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.
                                                                    ___ ___

          id.,  346 N.Y.S.2d at 321 ("'replace,'  given its plain, ordinary
          ___

          meaning,  means to  supplant  with a  substitute or  equivalent")
                                                               __________

          (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,
                                  ________    _________

          982  (1985) aff'd, 69 N.Y.2d  769, 505 N.E.2d  623 (1987) (citing
                      _____

          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,
                    ___  ____   __________    ______________

          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.
          ______    __________________________

          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,
                                  ______________________________     _____

          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.
                                            ___  ____  _____    ___________

          Co.,  66  N.Y.2d  669,  486  N.E.2d  827,  829 (1985)  (extrinsic
          ___

          evidence may aid in  interpretation of ambiguous contract); Pease
                                                                      _____
                              
          ____________________

               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
          ________________    ________

          often  can gain  interpretive  guidance from  conduct of  parties

          under contract);  Edison v. Viva  Int'l, Ltd., 421  N.Y.S.2d 203,
                            ______    _________________

          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
                                      ________________________________

          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
                                              _______________

          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
                            ___   _______

          "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

____________________

               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
                                                                        ___

          River View Ass'n. v. Sheraton Corp. of America, 306 N.Y.S.2d 153,
          _________________    _________________________

          156  (1969),  aff'd.,  27  N.Y.2d  718,  262  N.E.2d  416  (1970)
                        _____

          ("[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
                              
          ____________________

               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
              _____________________

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.
                                                         _______________

          Allied Marine Indus., Inc., 827 F.2d 850, 853 n.3 (1st Cir. 1987)
          __________________________

          (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).
                            _____________

          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.
          _______________________     ______________

          1985) (citing Hayford v. Wentworth, 97  Me. 347, 350, 54 A.  940,
                        _______    _________

          941 (1903)) (emphasis added).  See In re Lyford, 22 B.R. 222, 224
                                         ___ ____________

          (Bankr.  D.  Me. 1982)  (applying  Hayford  factors to  determine
                                             _______

          whether cab and  chassis were  accessions to truck).   All  three

          elements  in the Hayford accession test must be met, but "special
                           _______

          prominence  must be attached to the intention of the party making

12

the  annexation."  Id.   The party asserting  the accession claim
                             ___

          bears the burden  of proof.   Hayford v.  Wentworth, 97 Me.  347,
                                        _______     _________

          350, 54 A. 940; Franklin Property Trust, 489 A.2d at 14.
                          _______________________

                    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.
                                    ___  ____  _______    _________________

          Ins. 
          _____

13

Co., 895 F.2d  830, 840 (1st Cir. 1990)  (citing Anderson v. City
          ___                                              ________    ____

          of  Bessemer City, 470 U.S. 564, 573-74 (1985)) (no "clear error"
          _________________

          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.
                    _______________________________________

14