United States Court of Appeals
For the First Circuit
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No. 99-2175
DAVID BERMAN,
Plaintiff, Appellee,
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FHS PROPERTIES LIMITED PARTNERSHIP,
BY ITS GENERAL PARTNER, FORT HILL LAND COMPANY,
Plaintiff, Appellant,
v.
B.C. ASSOCIATES; BC PHASE 2 ASSOCIATES
LIMITED PARTNERSHIP; DONALD J. CHIOFARO,
AS GENERAL PARTNER IN BC ASSOCIATES AND
BC PHASE 2 ASSOCIATES LIMITED PARTNERSHIP;
THEODORE OATIS, AS GENERAL PARTNER IN
BC ASSOCIATES AND BC PHASE 2 ASSOCIATES
LIMITED PARTNERSHIP,
Defendants, Appellees.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Morris E. Lasker,* Senior U.S. District Judge]
____________________
Before
Torruella, Chief Judge,
* Of the Southern District of New York, sitting by designation.
Lipez, Circuit Judge,
and Keeton,** District Judge.
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Mitchell H. Kaplan, with whom Kathleen A. Burdette and Choate,
Hall & Stewart were on brief, for appellant.
John D. Donovan, Jr., with whom Randall W. Bodner, Justin J.
Wolosz and Ropes & Gray were on brief, for appellees B.C. Associates,
et al.
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August 2, 2000
____________________
** Of the District of Massachusetts, sitting by designation.
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TORRUELLA, Chief Judge. This is an appeal from the final
judgment of the United States District Court for the District of
Massachusetts, issued on remand following a prior appeal to this Court,
declaring that the "Deficit Loan" made by BCA1 to Fort Hill Square
Associates accrued compound interest. FHS Properties Limited
Partnership contests the award of compound, rather than simple,
interest. For the reasons discussed below, we agree with the appellant
that the district court's award of compound interest was in error.
BACKGROUND
The facts of this case were thoroughly laid out by this Court
in FHS Properties Ltd. Partnership v. BC Associates, 175 F.3d 81, 82-84
(1st Cir. 1999). Due to the narrow scope of this second appeal, we
need not rehash the complicated details of the structure and history of
the real estate development project that is the basis for this suit.
For our purposes, it is only relevant that BCA and FHS are the managing
partners of two partnerships that developed and now own International
Place, a two-tower office complex in downtown Boston. The project was
planned in two phases, one for each tower, with two separate and
distinct partnerships. In April 1991, BCA paid $5.6 million, from its
own funds, to settle a law suit brought against the first partnership
1 The appellees are BC Associates ("BCA-1"), BC Phase 2 Associates
Limited Partnership ("BCA-2"), and Donald Chiofaro and Theodore Oatis,
the general partners of BCA-1 and BCA-2. We will refer to them
collectively as BCA.
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by certain limited partners who challenged the financing of the second
phase of the project.
FHS brought this action to clarify whether BCA's settlement
payment was a partnership expense. The district court concluded that
BCA was entitled to indemnification payments from the partnership in
the amount of $2.1 million, accruing interest at 6% per annum.
However, in FHS Properties, we held that BCA's payment met the
conditions of a "deficit loan" under the partnership agreement, which
among other things entitled BCA to interest at a rate of 18% per annum.
See id. at 86-87. Accordingly, we reversed the district court's
judgment and remanded for proceedings consistent with our opinion.
FHS then moved for the district court to enter final judgment
specifying whether the interest on the deficit loan would be simple or
compound. The deficit loan provision provides only that such loans
"shall bear interest at an annual rate which is two percentage points
above the so-called 'Prime rate' . . . or at 18% per year, whichever is
greater."
After a brief discussion of Massachusetts law2 relating to
the availability of compound interest, and without any discussion of
the facts of the case, the district court concluded that the interest
should be compounded, "because compounding is the equitable means of
2 Section 21 of the Partnership Agreement expressly provided that the
interpretation of its terms is governed by Massachusetts law.
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fully compensating a creditor-partner under the Deficit Loan
provision." FHS Props. Ltd. Partnership v. BC Assocs., No. 94-CV-
11346-MEL, slip. op. at 2 (D. Mass. Aug. 26, 1999).
DISCUSSION
The appellant challenges the district court's award of
compound interest, arguing that under Massachusetts law, a court does
not have discretion to award compound interest in the absence of an
express provision in the contract. The appellee acknowledges this
general rule but contends, however, that there is an equitable
exception that was rightfully invoked in this case where FHS behaved
inequitably.
Whether Massachusetts law permits a court to fashion an
equitable remedy of compound interest on a contractual debt is a
question of law, which is, therefore, subject to de novo review. See
Negrón v. Caleb Brett U.S.A., Inc., 212 F.3d 666, 668 (1st Cir. 2000);
New England Mut. Life Ins. Co. v. Baig, 166 F.3d 1, 3 (1st Cir. 1999).
Because we conclude that Massachusetts law does not permit the award of
compound interest in a case such as this, when the partnership
agreement specifies an interest rate per annum, we need not address
whether the comparative equities of the parties support the district
court's exercise of discretion in awarding compound interest.
In Massachusetts, compound interest is generally disfavored.
See Ellis v. Sullivan, 134 N.E. 695, 697 (Mass. 1922) (recognizing an
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"'ancient unwillingness to allow compound interest'" (quoting Lewin v.
Folsom, 50 N.E. 523, 524 (Mass. 1898))). As early as 1906, the Supreme
Judicial Court of Massachusetts decreed that interest is simple,
"unless there is an express agreement to the contrary." Inhabitants of
Tisbury v. Vineyard Haven Water Co., 79 N.E. 256, 257 (Mass. 1906); see
also Coupounas v. Madden, 514 N.E.2d 1316, 1321 (Mass. 1987); Von
Hemert v. Porter, 52 Mass. 210, 218 (Mass. 1846); D'Annolfo v.
D'Annolfo Constr. Co., 654 N.E.2d 82, 85 (Mass. App. Ct. 1995).
Consequently, compound interest is only permitted in certain
proceedings in equity or by express statutory or contractual authority.
See Dunne v. City of Boston, 671 N.E.2d 518, 520 (Mass. App. Ct. 1996);
see also Shapiro v. Bailen, 199 N.E. 315, 316 (Mass. 1936) (recognizing
exception in equity); Ellis, 134 N.E. at 697 (same).
It is undisputed that the deficit loan provision in the
partnership agreement does not expressly provide for the compounding of
interest. Indeed, it provides only that a deficit loan "shall bear
interest at an annual rate . . . [of no more than] 18% per year."
Furthermore, the overwhelming majority of Massachusetts cases equate an
interest rate "per annum," whether in a contract or a statute, with
simple interest. See, e.g., Coupounas, 514 N.E.2d at 1322; De Córdova
v. Weeks, 140 N.E. 269, 269-70 (Mass. 1923); Tisbury, 79 N.E. at 257;
D'Annolfo, 654 N.E.2d at 85. But see Ellis, 134 N.E. at 696-97
(allowing compound interest at stated rate per annum in equity
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proceeding where debtor deliberately withheld interest payments).
Thus, the designated interest rate of "18% per year," construed in its
"usual and ordinary sense," Hakim v. Massachusetts Insurer's Insolvency
Fund, 675 N.E.2d 1161, 1164 (Mass. 1997) (citing Cody v. Connecticut
Gen. Life Ins. Co., 439 N.E.2d 234 (Mass. 1982)), unambiguously
indicates that the deficit loan accrues simple interest. The parties
to the partnership agreement would, therefore, reasonably have expected
the deficit loan provision, as drafted, to call for simple interest.
We are not moved by the appellee's contention that such a
reading of the provision unfairly penalizes BCA because the loan
repayment will come, in part, from its own partnership profits. Such
is necessarily, and thus foreseeably, the circumstance with every
deficit loan by its terms, and the provision could have been drafted
accordingly to provide for compound interest. We enforce the contract
as written, and "'are not free to revise or change'" it. Hakim, 675
N.E.2d at 1164 (quoting Continental Cas. Co. v. Gilbane Bldg. Co., 461
N.E.2d 209 (Mass. 1984)); see also Alison H. v. Byard, 163 F.3d 2, 6
(1st Cir. 1998) (quoting Liberty Mut. Ins. Co. v. Gibbs, 773 F.2d 15,
17 (1st Cir. 1985)). Thus, as a matter of contract law, the award of
compound interest was in error.
Nevertheless, the appellee argues that compound interest was
appropriate in this case because the jury found FHS's conduct to be
inequitable. To that end, the appellee argues that equitable
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principles governed this case from the beginning, and that this Court
should look to equity and not contract for just compensation. For
support, the appellee directs the Court to its Answer, its submissions
of special verdict questions for the jury, and the language of the
district court's Memorandum and Decision to award compound interest.
After a thorough review of the record and briefs, we cannot
agree. BCA's position throughout the trial was that the $5.6 million
settlement payment qualified as a deficit loan under the terms of the
partnership agreement. Only as an afterthought, once the case had been
submitted to the jury, did BCA raise the issue of compound interest as
a matter of equity.
Furthermore, we are not convinced that the district court
reached the decision that interest should be compounded as a matter of
equity. To be sure, the district court used the word "equitable" in
its conclusion. However, there is no subsequent analysis of the
equities of the case to support the appellee's contention that the
award of compound interest was based on FHS's misconduct. Absent a
discussion of the equities, the more plausible reading of the opinion
is that the court was interpreting and applying the terms of the
deficit loan provision.
In any event, accounting for "equitable considerations" does
not convert a contract action to one in equity. We have not been
presented with any authority establishing that the district court had
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the discretion to depart from the terms of the contract based on
equitable considerations. The majority of cases on which the appellee
relies for the proposition that a court has discretion to award
compound interest involve proceedings in equity. See Chokel v. First
Nat'l Supermarkets, Inc., 660 N.E.2d 644, 652 (Mass. 1996) (appraisal);
Sarrouf v. New England Patriots Football Club, Inc., 492 N.E.2d 1122,
1129 (Mass. 1986) (appraisal); Shapiro, 199 N.E. at 122 (bill in equity
to restrain foreclosure); Ellis, 134 N.E. at 63 (accounting). We are
aware of only two compound interest cases that originate in the
enforcement of contracts, Buckley & Scott Utilities v. Petroleum Heat
& Power Co., 48 N.E.2d 154 (Mass 1943), and Howes v. Warren, 73 N.E.2d
834 (Mass. 1947). In neither case, however, was the district court
called upon to interpret and apply a provision of a contract, and they
are, therefore, inapplicable.
Buckley involved an exclusive franchise agreement, but the
action itself was deemed an action in equity to recover damages. See
Buckley, 48 N.E.2d at 156. The trial court concluded that the
defendant violated its obligations under the franchise agreement and
proceeded to assess the value of the damages. The Supreme Judicial
Court of Massachusetts affirmed the award of compound interest on the
judgment dating back to the date of the writ, in part relying on a
Massachusetts statute, G.L. ch. 235, § 8, that set the conditions for
computing interest on a judgment. See id. at 160. Thus, the award and
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interest was set by the court and did not originate in the terms of the
contract, as it does in this case.
In Howes, a contractor sued to recover for labor and
materials expended in the alteration and repair of the defendant's
house. See Howes, 73 N.E.2d at 834. The defendant challenged an
auditor's assessment of the fair value of the contractor's work.
Although the trial court agreed with the defendant that the auditor's
assessment was unjustified, the court revalued the contractor's work
based on the auditor's subsidiary findings and awarded judgment for the
plaintiff plus interest compounded as of the date of the filing of the
writ. See id. at 835. Relying on Buckley, the Supreme Judicial Court
affirmed the order for compound interest paid on the court's judgment
to the plaintiff. Again, the court's issuance of a one-time award plus
interest stands in sharp contrast to the enforcement of the deficit
loan provision and its stipulated interest rate.
In summary, whether the district court was accounting for
equitable considerations or was interpreting the terms of the deficit
loan provision, it erred as a matter of law in awarding compound
interest.
CONCLUSION
Because there is no authority to depart from the general rule
that compound interest shall not be allowed unless expressly stated in
the agreement, and because it is undisputed that the partnership
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agreement does not provide for compound interest, we conclude that the
award of compound interest in this case was improper. The district
court's judgment is reversed and remanded for proceedings consistent
with this opinion. Costs against the appellee.
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