United States Court of Appeals
United States Court of Appeals
For the First Circuit
For the First Circuit
No. 94-1617
INDUSTRIAL GENERAL CORPORATION,
Plaintiff, Appellee,
v.
SEQUOIA PACIFIC SYSTEMS CORPORATION,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Richard G. Stearns, U.S. District Judge]
Before
Cyr and Stahl, Circuit Judges,
and DiClerico, District Judge.*
Stanley W. Wheatley with whom Gordon & Wise was on brief for
appellant.
Walter J. Connelly with whom Lyne, Woodworth & Evarts was on
brief for appellee.
January 11, 1995
*Of the District of New Hampshire, sitting by designation.
STAHL, Circuit Judge. Industrial General
STAHL, Circuit Judge.
Corporation's ("IGC") subsidiary, Plastek Corporation
("Plastek"), supplied molded plastic parts to Moog
Electronics ("Moog") for use in electronic voting machines
Moog was assembling for Sequoia Pacific Systems Corporation
("Sequoia"). After Moog failed to pay Plastek $80,100 for
supplied parts, Plastek sued Sequoia alleging breach of
contract and violation of Mass. Gen. L. ch. 93A, 11.
Following a seven-day trial, the jury returned a verdict for
Sequoia on the breach of contract claim. In an advisory
verdict on the 93A claim, it found that Sequoia had acted
"unfairly." The district court eventually agreed with the
advisory finding and further held that Sequoia had breached a
fiduciary duty it owed to Plastek and entered judgment for
Plastek on the 93A claim. Because we find that no fiduciary
relationship existed between Plastek and Sequoia, we reverse
the court's chapter 93A judgment.1
I.
I.
FACTUAL BACKGROUND AND PRIOR PROCEEDINGS
FACTUAL BACKGROUND AND PRIOR PROCEEDINGS
In 1984, Sequoia began to design and develop
computerized electronic voting machines which it hoped to
sell to local election boards. During that same year,
Sequoia Associates, a partnership and one of Sequoia's
1. The breach of contract claim is not at issue in this
appeal.
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stockholders, had explored the possibility of acquiring IGC's
predecessor-in-interest, Walco National, Inc. ("Walco").
Though the Sequoia Associates-Walco deal ultimately failed,
because of the acquisition negotiations, Sequoia Associates
had become familiar with Walco's Plastek division, which
produced molded plastic parts. Recognizing that the voting
machines would use plastic parts, Sequoia Associates advised
Sequoia of Plastek's molding abilities. The introduction was
fortuitous, as Sequoia was under time constraints to complete
the project and had been unable to locate a suitable supplier
for the needed plastic parts.
Commencing in mid-1985, Sequoia and Plastek entered
into a series of contracts providing that Plastek would
develop prototype molds and, later, produce prototype parts
for use in the voting machines project. Meanwhile, Sequoia
and Moog entered into agreements for Moog to assemble a
number of prototype voting machines. In connection with
these agreements, Sequoia instructed Plastek to ship some
prototype parts to Moog. Sequoia paid Plastek in full for
the prototype molds and prototype parts and these
transactions are not in dispute. Later, Plastek produced
production molds, for which Sequoia also paid in full.
In the latter part of 1985, Sequoia decided to
contract with a manufacturer to assemble the Sequoia-designed
voting machines. Sequoia would then purchase the machines on
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a "turn-key" basis,2 thus relieving it of both the burden of
carrying the inventory of parts required for assembly and the
burden of assembly itself. Sequoia awarded the initial
manufacturing contract to Momentum Technologies, Inc.
("Momentum"). Moog sued Sequoia, claiming that one of their
earlier prototype-assembly contracts contained a promise to
award Moog a contract for an actual production run of at
least 5,000 machines. In settlement, Sequoia agreed to award
Moog a contract to manufacture 500 machines with Momentum
manufacturing the balance of Sequoia's requirements.
Moog's finances during this period were shaky,
though the extent of Sequoia's knowledge of Moog's condition
was disputed at trial. The district court credited the
testimony of Edmund Lonergan, Sequoia's former technical
director, who at trial testified by deposition that he
developed a "gut feeling" that Moog was not "financially
strong enough to manufacture all the units per our
[settlement] agreement with them." Lonergan alerted his
superiors at Sequoia. James Larkin, Sequoia's chief
financial officer, testified that he knew Moog had a cash-
flow problem and that he agreed to a billing arrangement
designed to improve Moog's cash situation.
2. Under a turn-key arrangement, an assembler contracts to
produce a product for a buyer that is ready to operate at the
"turn of a key."
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Sequoia informed Plastek that the machines would be
assembled by contractors and that Plastek's agreement for
production parts were to be made directly with those
assemblers. Complying with this directive, both Moog and
Momentum contracted directly with Plastek and other suppliers
for the voting machine parts.
In June and July 1986, Moog issued to Plastek
purchase orders for production parts.3 Plastek sent
acknowledgement of the orders to Moog. Plastek manufactured
the parts and shipped them to Moog on a net 30 day basis.
Plastek invoiced Moog directly and the invoices stated, "Sold
to Moog." The shipments were carried on Plastek's books as
Moog account receivables. Plastek never conducted a credit
check on Moog, nor did any Plastek official inquire of
Sequoia about Moog's financial situation or creditworthiness.
After the Moog-Sequoia settlement was in place,
things began to deteriorate at Moog. Moog quickly fell
behind on its production schedule. Eventually, Sequoia
determined that Moog would be unable to timely perform its
contract and, in September 1986, requested Moog to transfer
all work-in-progress to Momentum. Sequoia paid Moog in full
3. About this time, Momentum also issued purchase orders to
Plastek. Plastek shipped the parts to Momentum and Momentum
paid the invoices for them in full.
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for its work-in-progress, including the amount Moog owed
Plastek for the production parts.
Moog, however, never paid Plastek. Plastek sought
to collect its unpaid balance from Moog with no success. In
November 1986, well after the work-in-progress transfer had
taken place, Plastek alerted Sequoia of its problems with
Moog. By early 1987, Moog was insolvent. In February 1987,
Plastek notified Sequoia that it was holding Sequoia
responsible for the unpaid Moog balance. Five months had
passed since Plastek had shipped and invoiced its parts to
Moog.
In 1989, Plastek, through its parent, IGC, brought
the present action in Massachusetts Superior Court seeking
recovery for breach of contract and for violation of Mass.
Gen. L. ch. 93A, 11. Sequoia removed the case to federal
district court with jurisdiction grounded in diversity of
citizenship. After discovery, the district court denied
Sequoia's motion for summary judgment. The district court
held a seven-day jury trial in February 1994. The district
court instructed the jury to answer questions on a special
verdict.
The jury returned a verdict in Sequoia's favor on
the breach of contract claim. With regard to the chapter 93A
claim, the jury found that Sequoia acted "unfairly" in
"failing to disclose what it knew about Moog's financial
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stability." However, the jury did not find that Sequoia's
acts were deceptive or that its actions were knowing and
willful. The district court, essentially agreeing with the
jury, found that Plastek was in a position of "trust and
dependence" relative to Sequoia and that Sequoia had acted
"unfairly in failing to disclose the fact that Moog was an
unreliable customer." Industrial Gen. Corp. v. Sequoia Pac.
Sys. Corp., 849 F. Supp. 820, 824 (D. Mass. 1994). The
district court entered judgment in favor of IGC for
$80,100.69 plus costs. This appeal followed.
II.
II.
DISCUSSION
DISCUSSION
Sequoia argues that the district court committed
clear error in three respects: by finding (1) that Sequoia
and Plastek had a fiduciary or quasi-fiduciary relationship;
(2) that Sequoia possessed knowledge of material facts that
it did not disclose to Plastek; and (3) that Sequoia's
failure to disclose material facts regarding Moog's financial
condition was causally related to Plastek's damages. After
reciting the standard of review, we take up Sequoia's first
argument. Because we conclude that no fiduciary relationship
existed between these parties, we do not reach the other
claims of error raised by Sequoia.
A. Standard of Review
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On review, questions of law are determined de novo.
See, e.g., American Title Ins. v. East W. Fin. Corp., 16 F.3d
449, 453-54 (1st Cir. 1994). Findings of fact "shall not be
set aside unless clearly erroneous." Fed. R. Civ. P. 52(a).
A finding of fact is "`clearly erroneous' when although there
is evidence to support it, the reviewing court on the entire
evidence is left with the definite and firm conviction that a
mistake has been committed." Anderson v. City of Bessemer
City, 470 U.S. 564, 573 (1985) (citation omitted); see also
Tresca Bros. Sand & Gravel, Inc. v. Truck Drivers Union,
Local 170, 19 F.3d 63, 65 (1st Cir. 1994) ("the central
finding . . . `will be given effect unless, after reading the
record with care and making due allowance for the trier's
superior ability to gauge credibility, [we form] a strong,
unyielding belief that a mistake has been made'") (quoting
Dedham Water Co. v. Cumberland Farms Dairy, Inc., 972 F.2d
453, 457 (1st Cir. 1992) (other citation omitted)).
B. Chapter 93A and Massachusetts Common Law Governing
Fiduciary Relationships
Section 11 of the Massachusetts unfair trade
practices statute, Mass. Gen. L. ch. 93A, grants a cause of
action to persons engaged in commerce who suffer a loss
because of the unfair acts or practices of another person
engaged in commerce. Though the statute does not define the
term "unfair," courts applying section 11 have developed a
standard under which the "`objectionable conduct must attain
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a level of rascality that would raise an eyebrow of someone
inured to the rough and tumble of the world of commerce.'"
Quaker State Oil Ref. Corp. v. Garrity Oil Co., 884 F.2d
1510, 1513 (1st Cir. 1989) (quoting Levings v. Forbes &
Wallace, Inc., 396 N.E.2d 149, 153 (Mass. App. Ct. 1979)).
Further, a chapter 93A claimant must establish that "the
defendant's actions fell `within at least the penumbra of
some common-law, statutory, or other established concept of
unfairness,' or were `immoral, unethical, oppressive or
unscrupulous,' and resulted in `substantial injury . . . to
competitors or other businessmen.'" Quaker State, 884 F.2d
at 1513 (quoting PMP Assocs., Inc. v. Globe Newspaper Co.,
321 N.E.2d 915, 917 (Mass. 1975)).
"`Although whether a particular set of acts, in
their factual setting, is unfair or deceptive is a question
of fact, the boundaries of what may qualify for consideration
as a chapter 93A violation is a question of law.'" Shepard's
Pharmacy, Inc. v. Stop & Shop Cos., 640 N.E.2d 1112, 1115
(Mass. App. Ct. 1994) (citation omitted). Here, the unfair
conduct complained of is Sequoia's failure to disclose Moog's
precarious financial condition. A commentator has noted that
section 11 "probably does not contain a general duty of
disclosure" and where the statute does give rise to such a
duty, it "should be limited to situations which even at
common law sometimes required disclosure," including
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instances where the defendant is a fiduciary. Michael C.
Gilleran, The Law of Chapter 93A 4:10 (1989 & Supp. 1994).
The theory presented to the jury and later adopted by the
district court was that Sequoia stood in fiduciary
relationship to Plastek and, consequently, a duty to disclose
arose. We agree with the district court that if a fiduciary
relationship existed, its breach would have constituted a
chapter 93A violation.
As noted above, the district court found that
Plastek was in a position of "trust and dependence" with
respect to Sequoia and that it subsequently abused this
relationship when it failed to disclose what it knew of
Moog's financial difficulties. The crux of the present
dispute, therefore, is whether the Sequoia-Plastek
relationship was fiduciary in nature.
The question of whether, in a particular factual
setting, a fiduciary relationship exists is a question of
fact. See, e.g., Broomfield v. Kosow, 212 N.E.2d 556, 560
(Mass. 1965). Our review of factual assessments made by
Massachusetts courts suggests that a fiduciary relationship
will frequently be found where certain indicia are present.
First, a party owed a fiduciary duty is often in a position
of great disparity or inequality relative to the other party.
See, e.g., Kosow at 560. Second, a fiduciary duty (and
breach thereof) will be found to exist where the disparity in
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relationship has been abused to the benefit of the more
powerful party, particularly where unjust enrichment would
result. See, e.g., id.; Warsofsky v. Sherman, 93 N.E.2d 612,
615 (Mass. 1950).
Further, in the commercial context, other indicia
of fiduciary relationships are generally present.
Massachusetts courts have stated that, though business
transactions conducted at arm's length generally do not give
rise to fiduciary relationships, such a relationship can
develop where one party reposes its confidence in another.
See, e.g., Warsofsky, 93 N.E.2d at 615. Importantly,
however, courts have repeatedly cautioned that "`the
plaintiff alone, by reposing trust and confidence in the
defendant, cannot thereby transform a business relationship
into one which is fiduciary in nature.'" Superior Glass Co.
v. First Bristol County Nat'l Bank, 406 N.E.2d 672, 674
(Mass. 1980) (quoting Kosow, 212 N.E.2d at 560). In
determining whether such a transformation has taken place,
courts look to the defendant's knowledge of the plaintiff's
reliance and consider the relation of the parties, the
plaintiff's business capacity contrasted with that of the
defendant, and the "readiness of the plaintiff to follow the
defendant's guidance in complicated transactions wherein the
defendant has specialized knowledge." Kosow, 212 N.E.2d at
560.
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C. The Relationship Between Sequoia and Plastek
After a careful review of the whole record, and in
light of the foregoing discussion of Massachusetts cases, we
cannot agree that the facts in this case establish that
Sequoia occupied a fiduciary position with regard to Plastek.
We think that the district court's conclusion to the contrary
rises to the level of clear error.
In finding that a fiduciary relationship existed,
the district court placed heavy reliance on its conclusion
that Sequoia "managed" the entire transaction, a conclusion
based upon the following facts: (1) that Sequoia designated
Moog as the general contractor; (2) that Sequoia "generated
the purchasing orders and effectively authored the contract
between Plastek and Moog"; and (3) that Sequoia continued its
relationship with Moog "for no purpose other than to
extricate itself from a legal imbroglio of its own making."
Industrial Gen. Corp., 849 F.Supp. at 825.
We think the district court's conclusion is
mistaken for two basic reasons. First, it rests on a
subsidiary factual finding that we believe is clearly in
error. Upon careful review of the record, we think the
court's assertion that "Sequoia generated the purchasing
orders and effectively authored the contract between Plastek
and Moog," id., substantially misstates what transpired. To
be sure, Sequoia officials directed Plastek to deal directly
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with Moog. However, as both Sequoia and Plastek officials
testified, Moog issued purchase orders for the production
parts and Plastek acknowledged those orders.4 Notably,
there is no evidence that Sequoia directed or was in any
other way involved with Plastek's fateful decision to ship
the production parts to Moog on a net 30 day basis. Second,
and more importantly, we do not think that Sequoia's overall
"management" role is sufficient to transform the parties'
relationship into a fiduciary one. We note that the
transaction involved here is not uncommon in the commercial
world. Under a turn-key arrangement, a manufacturer agrees
to deliver to a buyer a completely assembled product that is
ready to function. It is the manufacturer's responsibility
to acquire needed parts, even if acting at the direction of
the turn-key buyer. Accordingly, as we have just noted, the
two voting machine manufacturers, Moog and Momentum, issued
purchase orders to Plastek. Plastek, in turn, sent
acknowledgments. Plastek shipped those orders, pursuant to
its own credit policies, on a net 30 day basis. Critically,
Plastek did not conduct a credit check before shipping the
parts to Moog nor did it take any other steps to protect
itself against nonpayment.
4. Sequoia did issue purchase orders for prototype parts
(for which it subsequently paid) but, as noted above, these
orders are not at issue here.
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While the Sequoia-Moog settlement did serve to
extricate Sequoia from an untimely legal battle, that
agreement could not and did not advance Sequoia's interests
at the expense of Plastek. Sequoia remained liable to Moog
for the costs of the production parts and, when the work-in-
progress was transferred from Moog to Momentum, Sequoia paid
Moog in full for the parts Moog had acquired from Plastek.
Our conclusion that Sequoia's "management" role is
an insufficient basis to transform this relationship into a
fiduciary one is reinforced by reference to the indicia
outlined above. First, we find no great disparity in the
Sequoia-Plastek relationship. The record indicates that both
Sequoia and Plastek were experienced in the commercial world.
Further, the facts suggest that, because Sequoia was
operating under a tight deadline and had encountered
difficulties in locating an adequate plastic parts supplier,
Plastek was not altogether without leverage in the
relationship. Second, to the extent a disparity existed in
Sequoia's favor, we again fail to see how the relationship
was abused to the benefit of Sequoia. The effect of the
judgment below will not be to remedy unjust enrichment or,
for that matter, any other benefit accruing to Sequoia.
Sequoia would simply be paying again for the same parts it
had already purchased from Moog. Third, the district court
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did not find that Sequoia had knowledge of Plastek's alleged
reliance on the trust and dependence it had reposed in
Sequoia. Our own review of the record reveals nothing that
would have alerted Sequoia to a heightened fiduciary status
or that Plastek was relying on Sequoia to guarantee payment.
With specific regard to the Moog sales, at no point did
Plastek officials make inquiry of Sequoia regarding Moog's
finances or creditworthiness, and Plastek waited months
before alerting Sequoia of its problems with Moog. Even if
we were to agree with the district court that Plastek, having
been "lulled by Sequoia's blandishments and visions of lucre,
looked to Sequoia to watch out for its interests," Industrial
Gen. Corp., 849 F. Supp. at 823, the record is devoid of any
evidence that Sequoia knew of this reliance. In short, the
facts overwhelmingly suggest that to the extent Plastek
reposed "trust and dependence" in Sequoia, it did so
unilaterally.
Finally, we observe that our conclusion comports
with the so-called "rascality" standard underlying section 11
unfairness claims. We agree with the district court's
conclusion that Plastek was "naive, inattentive and
altogether too trusting of Sequoia," Industrial Gen. Corp.,
849 F.Supp. at 825-26, and that its complacency may have been
due, in part, to the fact that Plastek and Sequoia "were not
strangers to one another" given the initial exploration by
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one of Sequoia's principals into acquiring Walco (the
predecessor-in-interest of Plastek's parent company). By
extending credit to Moog and assuming -- perhaps through
naivete, inattention and trust -- that Sequoia would pick up
the tab, Plastek clearly made a costly mistake. Though
Sequoia might have chosen to share with Plastek its concerns
about Moog's finances as they developed, we do not think that
its failure to do so would make Sequoia a commercial rascal.
Under the clearly erroneous standard, we are not
free to reverse merely because we disagree with the district
court's conclusions. Rather, we must have the strong,
unyielding conviction that the district court was mistaken.
This standard is especially important in a case like this
where the district court made a factual determination based
on evidence adduced during a lengthy and exhaustive trial.
We emphasize that we have thoroughly and carefully examined
the record. Based on the record as a whole, and in light of
similar factual evaluations made by Massachusetts courts, we
are of the unyielding belief that the district court's
conclusion that a fiduciary relationship existed between
Sequoia and Plastek was mistaken. Because there was no
fiduciary relationship, no duty to disclose existed and thus
no cause of action lies under section 11, chapter 93A.
III.
III.
CONCLUSION
CONCLUSION
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For the foregoing reasons, the decision of the
district court is reversed and the case is remanded for
proceedings consistent with this opinion.
Each party shall bear its own costs.
Each party shall bear its own costs
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