Lohnes v. Level 3 Communications, Inc.

United States Court of Appeals
For the First Circuit

No. 01-1613

PAUL R. LOHNES,

Plaintiff, Appellant,

v.

LEVEL 3 COMMUNICATIONS, INC.,

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Edward F. Harrington, Senior U.S. District Judge]

Before

Selya, Circuit Judge,

Coffin, Senior Circuit Judge,

and Lipez, Circuit Judge.

Michael Eby, with whom Robert E. McLaughlin, Sr. and Gilman,
McLaughlin & Hanrahan LLP were on brief, for appellant.
Joseph E. Jones, with whom Fraser, Stryker, Meusey, Olson,
Boyer & Block, P.C., Paul G. Lannon, Jr., and Holland & Knight
LLP were on brief, for appellee.

November 30, 2001
 SELYA, Circuit Judge. The primary issue raised in this

appeal is whether the terms "capital reorganization" and/or

"reclassification of stock," as used in a stock warrant,

encompass a stock split. Asserting the affirmative of this

proposition, a warrantholder, plaintiff-appellant Paul R.

Lohnes, claims that a stock split effectuated by defendant-

appellee Level 3 Communications, Inc. (Level 3) triggered an

antidilution provision in the warrant that automatically

increased the number of shares of stock to which he was

entitled. Level 3 resists this claim. The district court

concluded that the language of the warrant could not reasonably

be construed to encompass a stock split and, accordingly,

granted Level 3's motion for summary judgment. Lohnes v. Level

3 Communications, Inc., 135 F. Supp. 2d 105, 106 (D. Mass.

2001). We affirm.

I. BACKGROUND

Consistent with the conventional summary judgment

praxis, our account of the relevant facts construes the record

in the light most favorable to the nonmoving party (here, the

appellant). McCarthy v. N.W. Airlines, Inc., 56 F.3d 313, 315

(1st Cir. 1995).

The appellant is both a trustee and a beneficiary of

C.E.M. Realty Trust (the Trust). In February of 1998, the Trust

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leased 40,000 square feet of commercial space to XCOM

Technologies, Inc. (XCOM). The details of the lease transaction

need not concern us, save for the fact that, as part of the

consideration, XCOM issued a stock warrant to the appellant.

The parties negotiated the principal terms of the warrant — the

number of shares, the exercise price, and the expiration date —

and XCOM's lawyer then drafted the document. The warrant

specified that its exercise would be governed by Massachusetts

law. It empowered the holder to purchase, at his discretion but

within a fixed period, 100,000 shares of XCOM common stock at

$0.30 per share.

Unbeknownst to the appellant, XCOM's days as an

independent entity were numbered. Shortly after the appellant

executed the lease and accepted the warrant, Level 3 acquired

XCOM in a stock-for-stock transaction and converted XCOM into a

wholly-owned subsidiary. As part of this transaction, Level 3

agreed to assume XCOM's warrant obligations and satisfy them

with shares of Level 3's common stock (using a designated share

exchange formula). Following this paradigm, the appellant's

unexercised warrant for XCOM shares was duly converted into a

warrant to purchase 8,541 shares of Level 3's common stock. The

appellant does not challenge this conversion (which took effect

in April of 1998).

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 The next significant development occurred on July 14,

1998. On that date, Level 3's board of directors authorized a

two-for-one stock split, to be effectuated in the form of a

stock dividend granting common shareholders one new share of

stock for each share held.1 The board set the record date as

July 30, 1998. On July 20, Level 3 issued a press release

announcing the stock split, but it did not provide the appellant

with personalized notice.

The split occurred as scheduled. Adhering to generally

accepted accounting practices, Level 3 adjusted its balance

sheet to account for the split by increasing its common stock

account in the amount of $1,000,000 and reducing paid-in-capital

by a like amount. These accounting entries had no net effect on

either the retained earnings or the net equity of the company.

1 A corporation effects a "stock split" by increasing the
number of shares outstanding without changing the proportional
ownership interests of each shareholder. Companies typically
execute a stock split by issuing a "stock dividend" to current
shareholders, i.e., "paid in stock expressed as a percentage of
the number of shares already held by a shareholder." Black's
Law Dict. 493 (7th ed. 1999) (cross-referencing definition of
"dividend"). Stock splits lower the price per share, thereby
fostering increased marketability and wider distribution of
shares.
Technically, not all stock dividends are stock splits, and
the two may, in limited instances, receive different accounting
treatment. In the instant matter, however, "stock split" and
"stock dividend" are two sides of the same coin, and we use the
terms interchangeably.

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 Despite the sharp reduction in the share price that

accompanied the stock split, the appellant paid no heed until

approximately three months after the record date. When his

belated inquiry revealed what had transpired, the appellant

contacted Level 3 to confirm that the stock split had triggered

a share adjustment provision, thus entitling him to 17,082

shares (twice the number of shares specified in the warrant).

Level 3 demurred on the ground that the warrant did not provide

for any share adjustment based upon the occurrence of a stock

split effected as a stock dividend.

Dissatisfied by Level 3's response, the appellant

exercised the warrant and received 8,541 shares of Level 3's

common stock. He then sued Level 3 in a Massachusetts state

court alleging breach of both the warrant and the implied duty

of good faith and fair dealing. Citing diversity of citizenship

and the existence of a controversy in the requisite amount,

Level 3 removed the action to the federal district court. See

28 U.S.C. §§ 1332(a), 1441. The parties then engaged in a

protracted period of pretrial discovery.

Discovery closed on October 30, 2000. Thereafter,

Level 3 moved for summary judgment. See Fed. R. Civ. P. 56.

The appellant's opposition to the motion included, inter alia,

the affidavit of Jonathan C. Guest, whom the appellant held out

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to be a securities expert. Level 3 moved to strike the Guest

affidavit.

In due course, the district court ruled that, as a

matter of law, a stock split, effected as a stock dividend, did

not constitute a "capital reorganization" as that term was used

in the warrant and, accordingly, granted the motion for summary

judgment. Lohnes, 135 F. Supp. 2d at 106. In its rescript, the

court neither referred to the Guest affidavit nor ruled

explicitly on Level 3's motion to strike that affidavit. This

timely appeal ensued.

II. METHODOLOGY OF REVIEW

We begin our analysis by outlining the legal framework

that governs our review. Next, we apply well-worn principles of

contract interpretation to resolve the appellant's contention

that the terms "capital reorganization" and "reclassification of

stock" encompass a stock split implemented as a stock dividend.

In this endeavor, our principal task is to determine the

ambiguity vel non of the disputed terms. Thus, we investigate

whether either term is reasonably susceptible to the

interpretation urged by the appellant. As part of this

exercise, we consider (and reject) the appellant's belated

attempt to introduce expert testimony bearing on this question.

We conclude by addressing the appellant's claim that Level 3

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breached the implied duty of good faith and fair dealing

inherent in the warrant.

We set out upon this odyssey mindful that the entry of

summary judgment is justified only "if the pleadings,

depositions, answers to interrogatories, and admissions on file,

together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that the moving party

is entitled to a judgment as a matter of law." Fed. R. Civ. P.

56(c). Once a defendant moves for summary judgment and places

in issue the question of whether the plaintiff's case is

supported by sufficient evidence, the plaintiff must establish

the existence of a factual controversy that is both genuine and

material. Garside v. Osco Drug, Inc., 895 F.2d 46, 48 (1st Cir.

1990). To carry this burden, the plaintiff must "affirmatively

point to specific facts that demonstrate the existence of an

authentic dispute." McCarthy, 56 F.3d at 315.

We review the district court's entry of summary

judgment de novo. Suarez v. Pueblo Int'l, Inc., 229 F.3d 49, 53

(1st Cir. 2000). Thus, we are not wed to the district court's

reasoning but may affirm its order on any independently

sufficient ground. Houlton Citizens' Coalition v. Town of

Houlton, 175 F.3d 178, 184 (1st Cir. 1999); Polyplastics, Inc.

v. Transconex, Inc., 827 F.2d 859, 860-61 (1st Cir. 1987). In

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conducting our analysis, this court — like the district court —

must scrutinize the record in the light most favorable to the

party opposing summary judgment and indulge all reasonable

inferences in that party's favor. Garside, 895 F.2d at 48.

These principles have a nuanced application when a

motion for summary judgment hinges upon an issue of contract

interpretation. In that type of situation, we have counseled

that:

While an argument between parties about the
meaning of a contract is typically an
argument about a "material fact," summary
judgment is not necessarily foreclosed.
Even if there is ambiguity in the language .
. . the evidence presented about the
parties' intended meaning may be so one-
sided that no reasonable person could decide
the contrary.

Allen v. Adage, Inc., 967 F.2d 695, 698 (1st Cir. 1992)

(citations omitted). Accordingly, summary judgment may lie

against a party who fails adequately to support its proposed

interpretation of a purportedly ambiguous contract term. See,

e.g., In re Newport Plaza Assocs., 985 F.2d 640, 645 (1st Cir.

1993); FDIC v. Singh, 977 F.2d 18, 21 (1st Cir. 1992); see also

Edmonds v. United States, 642 F.2d 877, 881 (1st Cir. 1981)

(holding that there must be more than one "plausible definition"

of contractual language to create a fact question).

III. THE CONTRACT INTERPRETATION CLAIMS

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 A stock warrant is an instrument that grants the

warrantholder an option to purchase shares of stock at a fixed

price. See Black's Law Dict. 1441 (7th ed. 1999); II James Cox

et al., Corporations § 18.15 (1995 & 1999 Supp.); 6A William

Meade Fletcher, Fletcher Cyclopedia of the Law of Private Corps.

§ 2641 (perm. ed. 1997); see also Tribble v. J.W. Greer Co., 83

F. Supp. 1015, 1022 (D. Mass. 1949) (holding, under

Massachusetts law, that a stock warrant is "a contract by which

the corporation gives an irrevocable option to the holder to

purchase authorized corporate stock within a period of time at

a price and upon terms specified in the contract"). Against the

backdrop of this well-established definition, we turn to the

appellant's contract interpretation claims. We divide our

discussion into seven segments.

A. Applicable Legal Principles.

Time-honored principles of contract law govern our

analysis. We begin with bedrock: the determination of whether

a contract is ambiguous is a question of law within the province

of the judge. Fashion House, Inc. v. K Mart Corp., 892 F.2d

1076, 1083 (1st Cir. 1989); RCI N.E. Servs. Div. v. Boston

Edison Co., 822 F.2d 199, 202 (1st Cir. 1987). Contract

language ordinarily is considered ambiguous "where an

agreement's terms are inconsistent on their face or where the

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phraseology can support reasonable differences of opinion as to

the meaning of the words employed and obligations undertaken."

Fashion House, 892 F.2d at 1083.

A court's determination that a contract is or is not

ambiguous has important implications. If a court holds that a

contract is unambiguously worded, it typically will construe the

document based upon the plain and natural meaning of the

language contained therein. Smart v. Gillette Co. Long-Term

Disability Plan, 70 F.3d 173, 178 (1st Cir. 1995); Hiller v.

Submarine Signal Co., 91 N.E.2d 667, 669 (Mass. 1950). For the

most part, a court interpreting an unambiguous agreement need

not consult extrinsic evidence to impart meaning to its terms.

Smart, 70 F.3d at 179. A court may, however, consider extrinsic

evidence for the limited purpose of evaluating whether a term is

ambiguous in the first place, but only if the extrinsic evidence

"suggests a meaning to which the challenged language is

reasonably susceptible." Id. at 180.

If, however, ambiguity looms — that is, if "the plain

meaning of a contract phrase does not spring unambiguously from

the page or from the context" — then the interpretive function

involves a question of fact. RCI N.E., 822 F.2d at 202. In

such cases, a court may consider extrinsic evidence insofar as

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it sheds light on what the parties intended. Robert Indus.,

Inc. v. Spence, 291 N.E.2d 407, 409 (Mass. 1973).

B. Parsing the Warrant.

The warrant at issue here contained a two-paragraph

antidilution provision which, upon the occurrence of certain

described events, automatically adjusted the number of shares to

which the warrantholder would be entitled upon exercise of the

warrant. In all, share adjustments were engendered by five

separate contingencies: capital reorganization,

reclassification of common stock, merger, consolidation, and

sale of all (or substantially all) the capital stock or assets.

However, the warrant did not explicitly provide for an

adjustment of shares in the event of a stock split. The

appellant attempts to plug this lacuna by equating a stock split

with a capital reorganization and/or a reclassification of

stock. This argument brings the following paragraph of the

antidilution provision into play:

Reorganizations and Reclassifications.
If there shall occur any capital
reorganization or reclassification of the
Common Stock, then, as part of any such
reorganization or reclassification, lawful
provision shall be made so that the Holder
shall have the right thereafter to receive
upon the exercise hereof the kind and amount
of shares of stock or other securities or
property which such Holder would have been
entitled to receive if, immediately prior to
any such reorganization or reclassification,

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 such Holder had held the number of shares of
Common Stock which were then purchasable
upon the exercise of this Warrant.

Building upon the premise that either "capital reorganization"

or "reclassification of stock" encompasses a stock split, the

appellant concludes that Level 3's stock split activated the

share adjustment mechanism set forth in the quoted paragraph.

As said, the appellant bears the burden of establishing

the existence of a genuine issue of material fact. Given the

circumstances of this case, the only way for him to succeed in

this endeavor is by showing that one of the disputed terms

("capital reorganization" or "reclassification of stock") is

shrouded in ambiguity, that is, that reasonable minds plausibly

could reach opposite conclusions as to whether either term

extended to stock splits. To appraise the success of the

appellant's efforts, we ponder each term separately.

C. Capital Reorganization.

Since the warrant does not elaborate upon the meaning

of "capital reorganization," we turn to other sources.

Massachusetts law offers no discernible guidance. Outside of

Massachusetts, the closest case is Prescott, Ball & Turben v.

LTV Corp., 531 F. Supp. 213 (S.D.N.Y. 1981). There, the

plaintiffs owned debentures, issued pursuant to a trust

indenture, which were convertible into common stock of LTV Corp.

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(LTV). LTV's board ratified a spin-off proposal calling for the

distribution of all the shares of a wholly-owned LTV subsidiary

to LTV's common stockholders on a pro rata basis. The

distribution stood to reduce LTV's stated capital and retained

earnings by $62.4 million and $30.3 million, respectively. Id.

at 215. The plaintiffs argued that the proposed distribution of

the subsidiary's stock entailed a capital reorganization that

triggered an antidilution provision contained in the trust

indenture.2 The defendants countered that the spin-off was

merely a dividend, and, therefore, did not trigger the share

adjustment machinery established in the antidilution provision.

The Prescott court sided with the defendants. It noted

that the "only way" the defendants could prevail was if the

terms of the trust indenture made it unambiguously clear that

the parties did not intend to treat the spin-off as a capital

2This provision read in pertinent part:

[E]ach Debenture shall after such capital
reorganization . . . be convertible into the
kind and amount of shares of stock or other
securities or property of the Guarantor . .
. to which the holder of the number of
shares of Common Stock deliverable
(immediately prior to the time of such
capital reorganization . . .) upon
conversion of such Debenture would have been
entitled upon such capital reorganization.

Prescott, 531 F. Supp. at 215.

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reorganization. Id. at 217. Finding the terms of the trust

indenture to be unambiguous, the court ruled that:

The plain language of the Trust Indenture
contemplates an exchange or alteration in
the existing ownership form of the interest
held by LTV common shareholders before a
particular transaction can be classified as
a capital reorganization for purposes of the
Trust Indenture. No such exchange or
alteration is involved in the proposed
distribution of the [LTV subsidiary's]
stock. The proposed distribution therefore
does not activate the [antidilution
adjustment provision in] the Trust
Indenture.

Id. at 219-20.

The district court deemed Prescott dispositive, see

Lohnes, 135 F. Supp. 2d at 106, and indeed, Prescott bears

several similarities to the case at bar. In neither instance

was the term "capital reorganization" defined in the controlling

document or in the applicable state law. Moreover, the Prescott

court was required to apply principles of contract law to

construe the letter of the controlling document and determine

whether a share adjustment provision designed to prevent

dilution was triggered by a stock dividend. Finally, neither

case involved an exchange of existing shares; rather, the stock

split orchestrated by Level 3 was effected by distributing

additional shares to its existing shareholders in much the same

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manner that shares in the wholly-owned subsidiary were

distributed to LTV's stockholders.

Despite these similarities, we stop short of endorsing

the district court's declaration that Prescott should be given

controlling effect. The Prescott court, finding cases from

other jurisdictions and general financial terminology to be of

"little help," ultimately restricted its analysis to the four

corners of the trust indenture there at issue. 531 F. Supp. at

218. In contrast, we consider ourselves bound to grapple with

the intricacies of Massachusetts law and, in performing that

task, to search for guidance in case law from other courts, the

statutes of foreign jurisdictions, and common financial usage —

all of which are appropriate benchmarks for gauging the

reasonableness vel non of the appellant's sweeping definition of

"capital reorganization." Thus, we treat Prescott as suggestive

evidence that stock splits do not constitute capital

reorganizations, but refrain from according it decretory

significance.

Also of interest is Wood v. Coastal States Gas Corp.,

401 A.2d 932 (Del. 1979). There, a corporation's preferred

shareholders challenged a settlement that required the parent

corporation, inter alia, to spin off a subsidiary and distribute

a portion of the subsidiary's stock to the parent company's

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common shareholders. Id. at 935-36. The preferred shareholders

argued that the spin-off constituted a recapitalization, thereby

triggering an antidilution adjustment in their stock

certificates. The court rejected this argument, holding that

the settlement plan did not constitute a recapitalization. Id.

at 941. Like Prescott, this case suggests that the term

"capital reorganization" is not so elastic as the appellant

claims, but it does not fully answer the question that we must

decide.

Moving beyond the case law, 3 the meaning of the term

"capital reorganization" in common legal parlance seemingly

belies the appellant's ambitious definition. The preeminent

legal lexicon defines "reorganization," in pertinent part, as a

"[g]eneral term describing corporate amalgamations or

readjustments occurring, for example, when one corporation

acquires another in a merger or acquisition, a single

corporation divides into two or more entities, or a corporation

3
The appellant attempts to leverage a solitary dictum from
Commissioner of Internal Revenue v. Marshman, 279 F.2d 27 (6th
Cir. 1960), into a broad proposition that stock splits are the
functional equivalent of capital reorganizations. The
reference, contained not in the Marshman court's analysis but in
its factual overview, id. at 29, had no bearing on the merits of
the case (which dealt with the tax liabilities stemming from a
husband's surrender of a stock-purchase option, pursuant to a
divorce and property settlement). Accordingly, Marshman does
not advance the appellant's cause.

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makes a substantial change in its capital structure." Black's

Law Dict. 1298 (6th ed. 1990). The first two prongs of this

definition are clearly inapposite here. That leaves only the

question of whether a stock split entails a "substantial change

in [a corporation's] capital structure." We think not.

First and foremost, the accounting mechanics that

accompany a stock split are mere window dressing. See generally

Robert S. Anthony & James S. Reece, Accounting Principles 37-39

(7th ed. 1995). To be sure, a stock split effected through the

distribution of shares in the form of a stock dividend results

in an increase in the common stock at par account and an

offsetting decrease in additional paid-in capital, id., but this

subtle set of entries has no effect on total shareholder equity

or on any other substantive aspect of the balance sheet. See

FASB, Accounting Research Bulletin No. 43; see also III Cox,

supra § 20.20 ("A share split-up does not, however, make any

representations as to any accumulation of earnings or surplus or

involve any increase of the legal capital."). Because a stock

split does not entail a substantial change in a corporation's

capital structure, the unelaborated term "capital

reorganization" cannot plausibly include a stock split effected

as a stock dividend.

D. Reclassification of Stock.

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 We turn next to the phrase "reclassification of stock."

Two Massachusetts cases seem worthy of mention. In the first,

a corporation took advantage of a new statute authorizing the

issuance of preferred stock and amended its charter to divide

its previously undifferentiated stock into common and preferred

shares. Page v. Whittenton Mfg. Co., 97 N.E. 1006, 1007-08

(Mass. 1912). The Massachusetts Supreme Judicial Court approved

the corporation's actions. It held that a corporation could

classify stock into common and preferred shares (providing

preferred shareholders with cumulative dividends and a

liquidation preference) so long as that classification was

effected through a charter amendment. Id. at 1007. Although

Page uses the verb "classify," we view what transpired as a

reclassification. See XIII Oxford English Dict. 339 (2d ed.

1989) (defining "reclassify" as "[t]o classify again; to alter

the classification of").

In Boston Safe Deposit & Trust Co. v. State Tax Comm'n,

163 N.E.2d 637 (Mass. 1960), the court considered the tax

implications of a reclassification of stock. The

reclassification in question involved the partial substitution

of redeemable, convertible, cumulative, nonvoting shares for

nonredeemable, nonconvertible, noncumulative, voting shares.

Id. at 642. The court held that the reclassification

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constituted a taxable event under Massachusetts law. Id. at

643.

Our reading of the Massachusetts cases leads us to

conclude that the sine qua non of a reclassification of stock is

the modification of existing shares into something fundamentally

different. At the end of the day, the stockholders in Page held

a different class of shares, while the stockholders in Boston

Safe gained some privileges while losing the right to vote.

Thus, Page and Boston Safe, respectively, illustrate two ways in

which a security can be altered fundamentally: (a) by changing

the class of stock, or (b) by modifying important rights or

preferences linked to stock.

Stock splits effected as stock dividends do not entail

any such fundamental alteration of the character of an existing

security. For example, Level 3's stock split in no way altered

its shareholders' proportionate ownership interests, varied the

class of securities held, or revised any of the attributes

associated with the stock. What is more, the stock split did

not have a meaningful impact on either the corporation's balance

sheet or capital structure. For those reasons, we perceive no

principled basis on which to stretch the definition of

"reclassification of stock" to encompass a stock split.

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 A rule promulgated by the Securities and Exchange

Commission confirms our intuition. This rule extends the

protections of the Securities Act of 1933 to shareholders who

are offered securities in a business combination and are

required to decide "whether to accept a new or different

security in exchange for their existing security." SEC Rule

145, 17 C.F.R. § 230.145 (preliminary note). While the rule

extends to reclassifications of stock, it explicitly exempts

stock splits from the reclassification rubric. See SEC Rule

145, 17 C.F.R. § 230.145. The upshot of this carve-out is

unmistakable: the SEC does not consider shares received in

conjunction with a stock split to constitute a "new or different

security."

To cinch matters, while no Massachusetts statute

defines the term "reclassification of stock," two states have

enacted pertinent statutes. Under Louisiana law, a

reclassification of stock is defined as

amendment of the articles to change the
authorized number of shares of an existing
class or series; to authorize shares of a
new class or series; to change the
designation, par value (including change of
par-value shares to shares without par value
or vice versa), preferences, limitations or
relative rights, including cancellation or
modification of the right to receive
accumulated dividends which have not been
declared, or variations in relative rights,
of the issued, and authorized but unissued,

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 shares of any existing class or series; or
to change the issued shares of any existing
class or series into a greater or smaller
number of shares of the same class or series
(subject to such changes as the
reclassification may make in the
designation, par value, preferences,
limitations or relative rights or variations
in relative rights, thereof) or of another
class or series, and to cancel any issued
shares in connection with a reduction in the
number thereof.

La. Rev. Stat. Ann. § 12:1 (West 2000). The stock split

effected by Level 3 implicates none of the categories

established by the Louisiana legislature.4

Pennsylvania's statutory definition goes one step

further; it expressly provides that the term "reclassification"

excludes "a stock dividend or split effected by distribution of

[the company's] own previously authorized shares pro rata to the

holders of shares of the same or any other class or series

pursuant to action solely of the board of directors." 15 Pa.

Con. Stat. Ann. § 1103 (West 2001).

4 While Louisiana's definition of "reclassification of stock"
encompasses a "change in the issued shares of any existing class
or series into a greater or smaller number of shares of the same
class or series," we believe that a stock split effected as a
stock dividend does not trigger this contingency. The stock
split at issue did not involve a change in the "issued" Level 3
shares, but, rather, the issuance of new Level 3 shares. The
distinction is subtle, but it is real: the Louisiana
reclassification rubric is designed to have effect when changes
in the voting rights, proportional ownership, and dividend
entitlement of previously issued shares are on the agenda. That
was not the case here.

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 Although this case must be decided under Massachusetts

law, we regard these statutes and rules as relevant and

informative. Cf. Ambrose v. New Engl. Ass'n of Schs. & Colls.,

Inc., 252 F.3d 488, 497-98 (1st Cir. 2001) (noting that, in

exercising diversity jurisdiction, a federal court should

consult case law from other jurisdictions when the forum state's

highest court has not yet spoken). Moreover, they afford

enlightenment as to common usage and as to what a reasonable

person would (or would not) consider to be encompassed within

the ambit of a particular term. So viewed, these statutes and

rules reinforce our intuition that the term "reclassification of

stock" does not encompass a stock split.5

To say more on this point would be supererogatory.

Since Level 3's declaration of a stock split did not authorize

a new class of stock, change the shareholders' proportionate

ownership, alter the par value of the shares, or otherwise

modify shareholders' voting rights or preferences, that action

did not constitute a reclassification of stock.

5
We note that the corporate codes of two other states
likewise contain references to stock reclassifications that
fortify our reading of Massachusetts law. See Cal. Corp. Code
App. § 1902 (West 2000) (listing accounting requirements for
"reclassification of outstanding shares into shares of another
class"); Md. Code Ann., Corps. & Ass'ns § 2-208 (West 2000)
(requiring filing of supplemental articles if "board of
directors classifies or reclassifies any unissued stock by
setting or changing the preferences").

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 E. The Overall Plan of Reorganization.

The appellant also makes a conclusory claim that the

July 1998 stock split was part and parcel of a comprehensive

corporate reorganization (and, thus, animated the warrant's

antidilution provision). He did very little to develop this

claim below, and he has not remedied that shortfall on appeal.

For that reason, we deem the claim abandoned. See United States

v. Zannino, 895 F.2d 1, 17 (1st Cir. 1990) (explaining that, to

preserve a point for appellate review, "[i]t is not enough

merely to mention a possible argument in the most skeletal way,

leaving the court to do counsel's work").

In any event, the claim lacks merit. As best we can

understand it, the appellant hypothesizes that the stock split

was an offshoot of a corporate reorganization launched by Level

3 in 1997. In that year, Level 3 shifted direction away from

construction and mining activities in order to pursue its

interests in communications and business services. Between

August 1997 and May 1998, the company dramatically modified its

capital structure by splitting off its construction business and

eliminating two series of stock. Although none of these

transactions involved XCOM or otherwise impacted the appellant,

he implies that the July 1998 stock split, effected to increase

the marketability of the company's shares as a prelude to

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raising capital in the public markets, should be viewed as an

essential component of the company's overall capital

reorganization and stock reclassification, thereby triggering

the warrant's antidilution provision.

We reject the appellant's intimation that the stock

split is magically transformed into a capital reorganization or

reclassification of stock based upon its inclusion in a long-

term business plan that also contains a number of more complex

financial maneuvers. Taken to its logical extreme, the

appellant's argument invites us to deem any corporate activity

engaged in by Level 3 while in the midst of reorganizing its

capital structure as a capital reorganization and

reclassification of stock. We are unable to perceive any

principled basis on which we could accept this invitation.

F. The Expert's Affidavit.

Striving to stem this tide, the appellant hawks an

affidavit from a Boston attorney specializing in securities law

and corporate finance. This affidavit arguably embodies an

expert opinion that the phrases "capital reorganization" and

"reclassification of stock" each cover stock splits. The

appellant seeks to forestall summary judgment on the strength of

this opinion.

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 We need not evaluate the affidavit's probative value.

Level 3 responded to it by filing a motion to strike and, even

though the district court neither referenced the affidavit nor

acted explicitly on Level 3's motion to strike, the most

sensible reading of the record is that the court impliedly

granted the motion. Cf. Wimberly v. Clark Controller Co., 364

F.2d 225, 227 (6th Cir. 1966) ("While it is certainly the better

practice to specifically rule on all pending motions, the

determination of a motion need not always be expressed but may

be implied by an entry of an order inconsistent with granting

the relief sought.").

It has long been accepted that a trial court may

implicitly deny a motion by entering judgment inconsistent with

it. In re Grand Jury Subpoena (Newparent, Inc.), ___ F.3d ___,

___ (1st Cir. 2001) [No. 01-1975, slip op. at 24]; Lewry v. Town

of Standish, 984 F.2d 25, 27 (1st Cir. 1993). In the same way,

a court may grant a motion by taking an action consistent with

the relief sought in the motion. E.g., Smartt v. Coca-Cola

Bottling Corp., 337 F.2d 950, 951 (6th Cir. 1964). So here: we

think that the lower court, by disregarding the Guest affidavit,

plainly signaled its approval of the motion to strike.

Disregarding the affidavit was amply justified in this

instance. The Civil Rules mandate that, in the course of

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pretrial discovery, "a party shall disclose to other parties the

identity of any person who may be used at trial to present

[expert opinion evidence]." Fed. R. Civ. P. 26(a)(2)(A).

Furthermore, a party retaining an expert must also submit to

opposing counsel a detailed report covering, inter alia, the

expert's qualifications, the gist of his opinion, and the

sources of information underlying that opinion. Id.

26(a)(2)(B).

These directives are mandatory and self-executing. In

Massachusetts, Local Rule 26.4 implements them and delineates

special procedures regarding the automatic disclosures required

by Rule 26(a)(2). See D. Mass. R. 26.4(a) (stating that, unless

otherwise ordered, such disclosures "shall be made at least 90

days before the final pretrial conference").6 The appellant made

none of these disclosures during the discovery period and his

submission of the Guest affidavit on February 9, 2001 — more

than three months after the close of discovery and fewer than

three weeks before the scheduled final pretrial conference — was

nothing short of a sneak attack.

6In the case at bar, the final pretrial conference was
scheduled to be held on February 26, 2001. Counting backwards
ninety days, the Local Rules required the parties to make the
disclosures in question by November 28, 2000.

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 The expert disclosure requirements are not merely

aspirational, and courts must deal decisively with a party's

failure to adhere to them. The Civil Rules provide in pertinent

part that a party who "without substantial justification fails

to disclose information required by Rule 26(a) . . . is not,

unless such failure is harmless, permitted to use as evidence .

. . any witness or information not so disclosed." Fed. R. Civ.

P. 37(c)(1); see also D. Mass. R. 26.4(b)(1) (providing for

preclusion of expert witnesses not seasonably identified). We

have explained before that Rule 37(c)(1) "clearly contemplates

stricter adherence to discovery requirements, and harsher

sanctions for breaches of this rule, and the required sanction

in the ordinary case is mandatory preclusion." Klonoski v.

Mahlab, 156 F.3d 255, 269 (1st Cir. 1998).

On the face of things, there are two possible reasons

why Rule 37(c)(1) might not apply in this situation. First, the

rule places a burden on the objecting party to move for

preclusion. But that requirement was satisfied here: Level 3

filed a timely motion to strike the expert's affidavit. In the

context of a summary judgment proceeding, that was tantamount to

a motion for preclusion. Second, Rule 37(c)(1) traditionally

has been invoked to bar expert testimony at trial. Withal, the

rule's phraseology applies with equal force to motions for

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summary judgment. See Fed. R. Civ. P. 37(c)(1) (stating, inter

alia, that the court may preclude a party who fails to satisfy

the disclosure requirements of Rule 26(a) from "us[ing] as

evidence at a trial, at a hearing, or on a motion any witness or

information not so disclosed"). The case law confirms our

reading of the rule. E.g., Trost v. Trek Bicycle Corp., 162

F.3d 1004, 1007-09 (8th Cir. 1998) (applying Rule 37(c)(1) to

exclude, during the summary judgment stage, affidavits by

experts who were not adequately disclosed before the close of

discovery); Black v. Columbus Pub. Schs., 124 F. Supp. 2d 550,

561 (S.D. Ohio 2000) (same).

We are cognizant that Rule 37(c)(1) contains a narrow

escape hatch that allows the court to admit belatedly proffered

expert evidence if the proponent's failure to reveal it was

either substantially justified or harmless. Neither branch of

the exception applies here. The appellant's response to the

motion to strike Guest's affidavit was completely bereft of any

explanation for neglecting to identify the expert before the

close of discovery, and prejudice is apparent. The appellant's

failure to unveil his expert until after Level 3 had moved for

summary judgment deprived Level 3 of the opportunity to depose

the proposed expert, challenge his credentials, solicit expert

opinions of its own, or conduct expert-related discovery. This

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is exactly the type of unfair tactical advantage that the

disclosure rules were designed to eradicate. See Thibeault v.

Square D. Co., 960 F.2d 239, 244 (1st Cir. 1992) (explaining

that expert disclosure rules were promulgated to facilitate a

"fair contest with the basic issues and facts disclosed to the

fullest practical extent"). Accordingly, we hold that the

district court appropriately disregarded the belatedly proffered

affidavit based upon the appellant's total failure to comply

with the disclosure provisions set forth in Rule 26(a)(2).

G. The Denouement.

Without the affidavit, the appellant plainly is fishing

in an empty stream. We have found no legal usage of the terms

"capital reorganization" or "reclassification of stock" that

supports the proposition that a reasonable person plausibly

could have believed that either term encompassed a stock split.

This is made crystal clear when one contrasts the warrant

received by the appellant with a warrant issued by XCOM

approximately ten months earlier to a different party — a

warrant that contained more than six full pages of antidilution

protections (including explicitly-worded share adjustments for

stock splits and stock dividends). Moreover, the appellant has

failed to adduce any credible evidence that the parties here

somehow intended to adopt such an unusually expansive

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interpretation of the terms "capital reorganization" and/or

"reclassification of stock."

If more were needed — and we doubt that it is — the

maxim expressio unius est exclusio alterius instructs that,

"when parties list specific items in a document, any item not so

listed is typically thought to be excluded." Smart, 70 F.3d at

179. Here, the warrant's antidilution protection extended

expressly to five designated contingencies: capital

reorganizations, reclassification of the common stock, merger,

consolidation, or sale of all (or substantially all) the capital

stock or assets. Since nothing within the four corners of the

warrant hints at additional contingencies, we apply this maxim

and conclude that the parties intended stock splits to be

excluded from the list of events capable of triggering the share

adjustment machinery.

The appellant is left, then, with his reliance on the

principle of contra proferentum — the hoary aphorism that

ambiguities must be construed against the drafter of an

instrument. E.g., Merrimack Valley Nat'l Bk. v. Baird, 363

N.E.2d 688, 690 (Mass. 1977). This reliance is mislaid. In

order to invoke this principle, the proponent first must

demonstrate that there is an ambiguity. Shea v. Bay State Gas

Co., 418 N.E.2d 597, 602 (Mass. 1981). Here, the appellant has

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failed to show that the interpretation which he urges is, "under

all the circumstances, a reasonable and practical one." Id.

Accordingly, we have no occasion to apply the principle of

contra proferentum.

IV. THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING

Although the terms "capital reorganization" and

"reclassification of stock," as they appear in the warrant, are

inherently unambiguous and do not encompass stock splits, the

appellant mounts one further attack. He posits that Level 3 had

a legal obligation, under the implied contractual covenant of

good faith and fair dealing, to provide him with personalized,

advance warning of the stock split. The appellant further

argues that Level 3 breached this obligation by failing to

advise him specifically about the adverse impact that the stock

split would have on the warrant if the appellant did not

exercise it before the record date. This argument lacks force.

Under Massachusetts law, every contract includes an

implied duty of good faith and fair dealing. Anthony's Pier

Four, Inc. v. HBC Assocs., 583 N.E.2d 806, 820 (Mass. 1991).

This implied covenant forbids a party from doing "anything which

will have the effect of destroying or injuring the rights of the

other party to receive the fruits of the contract." Drucker v.

Roland Wm. Jutras Assocs., 348 N.E.2d 763, 765 (Mass. 1976)

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(quoting Uproar Co. v. Nat'l Broadcasting Co., 81 F.2d 373, 377

(1st Cir. 1936)).

The most prominent flaw in the appellant's attempt to

wield this club is that he misperceives the fruits of the

bargain that he struck. After all, a warrantholder does not

become a shareholder unless and until he exercises his purchase

option. See Gandal v. Telemundo Group, Inc., 23 F.3d 539, 546

(D.C. Cir. 1994); see also Fletcher, supra at § 2641 ("A warrant

holder becomes a shareholder on the date that he or she attempts

to exercise his or her warrant."). Consequently, a

warrantholder's right to insist that the corporation maintain

the integrity of the shares described in the warrant, if it

exists at all, must be found in the text of the warrant itself.

Helvering v. S.W. Consol. Corp., 315 U.S. 194, 200-01 (1942).

Put another way, the fruits of the contract were limited to

those enumerated in the warrant.

An examination of the warrant reveals quite clearly

that Level 3 was not contractually bound to provide the

appellant with individualized notice of the stock split. The

warrant contained language stating that "[u]ntil the exercise of

this Warrant, the Holder shall not have or exercise any rights

by virtue hereof as a stockholder of the Company." This

disclaimer hardly could have been written more plainly.

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 Furthermore, the warrant contained a notice provision

which, by its terms, pertained to "notices, requests and other

communications hereunder." Applying the settled definition of

"hereunder," Level 3 was only obligated to provide notice for

events contemplated in the warrant agreement. See VII Oxford

English Dict. 165 (2d ed. 1989) (defining "hereunder"). Because

the warrant contained no provision that even arguably required

Level 3 to furnish individualized notice of the stock split to

the appellant, the failure to give such notice could not

constitute a breach of the implied duty of good faith and fair

dealing.7

An illustrative case is FDIC v. LeBlanc, 85 F.3d 815

(1st Cir. 1996). There, the defendant acquired a parcel of

property with borrowed funds, securing the loan with a mortgage

and personal guaranty. Id. at 817. The FDIC, as receiver,

succeeded to the lender's interests. Id. at 818. When it

sought to collect on the guaranty, the defendant asserted that

it had breached the implied duty of good faith and fair dealing

under Massachusetts law by refusing to take steps desired by the

7
We note in passing that Level 3's general press release
announced the stock split ten days in advance of the record date
and provided the appellant with constructive notice of the stock
split. Thus, the appellant had ample opportunity to exercise
the warrant and avoid the dilutive effects of which he now
complains.

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defendant but not required by the loan documents. Id. at 821-

22. Discerning no evidence that the FDIC had deprived the

defendant of the benefits of the loan agreement, we upheld an

order for summary judgment in favor of the FDIC. Id. at 822.

We emphasized that, in the absence of an agreement to do

particular acts, Massachusetts law imposed no obligation on the

FDIC to take the "affirmative steps" that would have benefitted

the borrower. Id. While we readily acknowledged that the FDIC

had taken a "hard-nosed" approach, we pointed out that it had

"no duty at all" under the loan documents to act in the

borrower's interest. Id. So it is here: Level 3 was under no

obligation to act affirmatively by providing the appellant with

individualized notice in the absence of a provision to that end

in the warrant itself.

V. CONCLUSION

We need go no further. In light of the appellant's

inability to show that a reasonable person plausibly could

construe either "capital reorganization" or "reclassification of

stock" to include stock splits, we conclude that these terms, as

they appear in the warrant, were unambiguous and did not cover

the contingency of a stock split effected as a stock dividend.

It follows that the stock split in question here did not trip

the warrant's antidilution provision. By like token, Level 3

-35-
did not breach the implied covenant of good faith and fair

dealing by neglecting to give special notice beyond what the

warrant itself required. The bottom line, then, is that the

district court was correct in granting Level 3's motion for

summary judgment.

Affirmed.

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