McAdams v. Massachusetts Mutual Life Insurance

United States Court of Appeals
For the First Circuit

Nos. 04-1567
04-1715

MICHAEL Q. McADAMS and FARRELL D. ODOM,
on behalf of themselves and all others similarly situated,
and BERRY BOYD et al.,

Plaintiffs, Appellants,

v.

MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY and
MASSMUTUAL BENEFITS MANAGEMENT, INC.,

Defendants, Appellees.

APPEALS FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Michael A. Ponsor, U.S. District Judge]

Before

Lynch, Circuit Judge,
Cyr, Senior Circuit Judge,
Howard, Circuit Judge.

Brent J. Kaplan, with whom Thomas J. Gallo and Robins, Kaplan,
Miller & Ciresi LLP, were on brief, for appellants.
Thomas J. Dougherty, with whom Kurt Wm. Hemr and Skadden,
Arps, Slate, Meagher & Flom LLP, were on brief, for appellees.

December 1, 2004
 LYNCH, Circuit Judge. Michael Q. McAdams and Farrell D. Odom,

former general agents for the Massachusetts Mutual Life Insurance

Company ("MassMutual"), filed suit against MassMutual on behalf of

themselves and all other similarly situated MassMutual general

agents. The claims are Massachusetts state law claims and

jurisdiction is premised on diversity. Plaintiffs participated in

a non-qualified deferred compensation plan; they allege that the

plan was managed by MassMutual in violation of the contract

underlying the plan, the implied covenant of good faith and fair

dealing in the contract, and a fiduciary duty running from

MassMutual to plan participants. They also allege violations of

Massachusetts General Laws Chapter 93A, which prohibits unfair and

deceptive trade practices.

Specifically, McAdams and Odom allege that MassMutual

unlawfully assessed a tax charge against participants' deferred

compensation earnings that was designed to fully offset the tax

costs to MassMutual from running the plan. Under the contract,

they argue, no such charge can be assessed, and even if such a

charge could be assessed, the charge assessed by MassMutual was, in

reality, far too high merely to offset MassMutual's tax costs.

MassMutual admits that such a tax charge was assessed but argues

that the contract allowed it and that the amount of the charge was

reasonable.

After discovery, the district court dismissed all of McAdams's

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and Odom's claims on summary judgment and also, after denying a

motion for class certification, dismissed all of the actions of

thirty related plaintiffs. Because the undisputed record shows

that MassMutual's actions remained well within the bounds of

discretion permitted to MassMutual by the contract and by the

underlying covenant of good faith and fair dealing, we now affirm

the district court.

I.

We recount all facts in the light most favorable to the party

opposing summary judgment, McAdams and Odom in this case. Dwan v.

City of Boston, 329 F.3d 275, 277 (1st Cir. 2003).

McAdams and Odom worked as general agents for MassMutual in

Texas; they ran and owned fairly large (forty- to eighty-person)

agencies that sold insurance and other products for the company.

Both of their general agencies sold deferred compensation plans to

their customers. These general agents were not classified as

employees of MassMutual and in fact were closer to independent

contractors than to employees -- for example, the general agents

did not receive a salary from MassMutual and did not send profit

and loss statements for their general agencies to MassMutual,

although MassMutual did pick up certain expenses, such as rent.

A. The Deferred Compensation Plan

MassMutual first established a deferred compensation plan for

general agents in 1967; this first plan allowed for accumulation of

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deferred amounts of earned income at a fixed interest rate. The

plan at issue here was created in 1970. The new plan, unlike the

old, provided an option, should MassMutual wish to provide it, of

investing deferred compensation in stocks (a higher-risk, higher-

return option) rather than investing in a fixed income account.

McAdams first began deferring compensation with the plan in 1983;

Odom in 1986. All of the related plaintiffs (whose claims in the

putative class have been joined in this consolidated appeal) were

general agents who deferred compensation under this plan. At least

117 general agents were participants in this plan at some point.

The deferred compensation plan was created and advertised as

a perk for the general agents. As one MassMutual employee noted in

a communication with the general agents, "There is no purely

corporate reason for [this] plan. It is provided for the benefit

of our General Agents solely." Like most deferred compensation

plans, the general purposes of this one were to provide a

convenient "vehicle to save additional funds for retirement" and,

most importantly, to "shelter current contributions from current

income taxation . . . and to allow assets to accumulate tax free."

Personal income tax would only need to be paid by participants on

this compensation when it was actually disbursed to the general

agents (upon retirement or death); in the meantime the deferred

compensation could accumulate income on the investment free and

clear of the personal income tax.

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 Because the general agents are not "employees" as that term is

used by the IRS, MassMutual could not create a "qualified" deferred

compensation plan for the general agents but instead had to create

a "non-qualified" plan. This had important tax consequences.

Money can accumulate in qualified plans, which are considered

separate entities from the employer, without any adverse tax

consequences for the employer at any time, but the same is not true

of non-qualified plans. The money invested in non-qualified plans

is considered part of the employer's assets and thus the employer

has to pay tax on the funds invested in the plan (although the

employer may get a tax deduction later, when the deferred

compensation is actually disbursed to the general agents).

Article V of the plan's standard contract, which was signed by

MassMutual and by all the plan participants (including McAdams and

Odom), provided that MassMutual could choose two different ways of

dealing with compensation deferred under the plan: it could either

invest such compensation separately from its general reserves and

assets (say, in a trust or mutual fund) or it could commingle this

compensation with its general reserves and assets.

Article V explains how investment earnings would be credited

to general agents' accounts under each of these two choices. The

first paragraph of the Article notes that if MassMutual invests the

deferred compensation separately, then

it shall credit to the General Agent's account from time to
time whatever net earnings the assets so invested have

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 produced. Net earnings from separate investments for purposes
of this Agreement shall mean gross earnings, including but not
limited to, interest, dividends, realized and unrealized
appreciation or loss in the value of such investments, less
all expenses and taxes attributable to the making, carrying
and liquidation of such investments, including but not limited
to, an appropriate accrual of taxes for unrealized
appreciation in the value of the investments. [MassMutual]
alone shall determine the amount of net earnings that will be
credited to the General Agent's account; and such
determination of net earnings, including the determination as
to charges for expenses and taxes, shall be final.

Thus, the Article explicitly indicates that when MassMutual invests

money deferred under the plan in separate accounts, MassMutual is

allowed to deduct any expenses, including taxes, that those

investments cause. The purpose here seems to be to ensure that

MassMutual does not lose money by administering any separate

investments under the plan: if these investments lead to any

expenses or taxes, these will be paid for by the plan participants

and not by the plan administrator, MassMutual.

The third and last paragraph of Article V discusses the

crediting of earnings to deferred compensation accounts when this

compensation is not separately invested but instead is kept within

the company's general reserves and assets. MassMutual will then

"credit interest on that portion . . . of the account not

represented by separate investments of [MassMutual] assets. Such

interest shall be credited to the account from time to time, in

lieu of net earnings from separate investments of [MassMutual]

assets, at a rate determined from time to time by the Company."

The interpretation of this provision lies at the heart of the

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current dispute between McAdams, Odom, and MassMutual.

B. MassMutual's Administration of the Plan

MassMutual chose to invest the deferred compensation

separately for only a few years early on, from 1970 through 1975;

during this period the money was invested in a separate trust

administered by a bank. From 1976 onward, MassMutual ceased making

separate investments of deferred money. Instead, participants were

generally offered two options. First, they could "shadow" certain

equity accounts (Oppenheimer funds, for example). In this shadow

option, the rate of return on the participants' accounts for a

given year would track whatever was the rate of return for the

shadowed account. In other words, MassMutual would pretend the

money had actually been invested in the shadowed account even

though it had not been.

Second, participants could instead choose a fixed interest

option, in which their accounts would be credited with a fixed rate

of return every year. This fixed rate seems to have been designed

to be equivalent with the return on long-term, money-based (low-

risk) accounts (like bonds or certificates of deposit).

In 1983, MassMutual began imposing a tax charge on the

earnings of deferred compensation that used the shadow account

option. This tax charge varied from 1983 to 1993, but tended to

hover around 30% (although it was much lower in a few years). From

1994 to 2001, the rate of the tax charge on this option remained

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constant at 34.16%. MassMutual began in 1983 taking into account

tax charges on the credited earnings of deferred compensation

placed in the fixed account option; a formal tax charge for this

option was put in place in 1987. This formal rate was 40% for

1987, 34% for 1988 through 1993, and 35% for 1994 through 1999.

These tax charges reduce the rate of earnings on deferred

money: the tax charge is multiplied by the gross rate of earnings

(either the periodic rate of return on the shadowed account or the

fixed interest rate determined by MassMutual) to determine a net

earnings rate that is actually credited to the general agents'

accounts. Thus, a nine percent gross rate of return would be

reduced to about six percent after the tax charge. If a general

agent chose the shadow option and the shadowed fund were to have

lost money during a given period, then the result of the tax charge

would actually be to reduce the agent's loss. No tax charge is

assessed against the principal; only the rate of earnings is

reduced by a tax charge. The rate of the tax charge has been

roughly equal to MassMutual's marginal tax rate.1

1
The tax charge for the fixed interest rate option has merely
equaled MassMutual's federal corporate income tax rate on simple
income. MassMutual thus simplified by assuming that all deferred
money placed in the fixed interest option was held as cash (rather
than bonds or something else). In reality, this money was held as
part of MassMutual's general cash reserves, which apparently
reflected a mix of asset types.
The tax charge on the shadow option was a bit more complex;
the company followed the practice of treating this money as though
it was actually invested in a shadowed fund, and so the tax charge
on all shadowed accounts equaled an approximate "weighted average"
of the federal marginal tax rates on the various types of income
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 MassMutual has stated many times that the purpose of this tax

charge is roughly to offset the tax costs to MassMutual from

running the plan and to place it in a revenue-neutral position

relative to where it would be if it instead paid compensation to

the general agents immediately. It is true that MassMutual is

later able to deduct compensation to its general agents, but only

when it actually pays out this compensation. The deferred

compensation plan, by forcing MassMutual to keep general agent

compensation in its coffers longer than it otherwise would, burdens

it with two additional tax costs: 1) it gets a deduction on the

principal only a number of years down the road, rather than

immediately, and 2) it is now forced to pay taxes on any earnings

that are accumulated on this extra principal. The tax charge is

designed to offset these tax costs to MassMutual.

The undisputed facts show that MassMutual's tax charges have,

in a rough sense, correctly achieved this stated goal of tax

neutrality from MassMutual's perspective. A November 13, 1986

found in all of these funds, such as dividend income, capital
gains, and bond income, as well as simple income. In treating this
income as though it were actually being taxed at the same rate as
the shadowed funds, MassMutual was, of course, using a fiction.
This shadowed money was really held in MassMutual's general
reserves, and thus its effective tax rate was dependent on the mix
of assets in those general reserves. But the fiction was not
unfair; it treated general agents approximately the same way they
would have been treated if they had actually put their money in the
fund that was being shadowed.
At any rate, this difference in method of calculation had
little impact on the ultimate rate: the rates for the fixed
interest and shadow options were generally similar.
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memorandum from Douglas Jangraw, an actuary for MassMutual who was

heavily involved with calculating the tax charge, states that

because MassMutual ultimately gets a deduction for "interest

credited" to participant accounts (when that money is actually paid

out), "the current tax charge is probably excessive and should

either be eliminated or reduced." But this analysis was either a

mistake or, as Jangraw explains in an affidavit and in his

deposition, reflected the results of a partial analysis that

considered only the tax cost due to credited interest and not the

tax cost due to the principal. Several other memoranda written by

Jangraw, on October 21, 1986, December 4, 1986, January 10, 1987,

and December 1, 1993, all concluded and clearly demonstrated that

the tax charge was appropriately calculated when both tax costs to

MassMutual (the principal cost and the earnings cost) are

considered.2

A January 26, 1995 memorandum from Jangraw stated that the tax

charge, although it did not make a general agent any worse off from

2
The record has one other piece of evidence which plaintiffs
argue demonstrates that the tax charge was incorrectly calculated.
An outside consultant hired by MassMutual during a 1992 committee
review of deferred compensation plans stated, in a "position
paper," that "we feel that the way the rate is currently calculated
results in a rate which is too low. We do not feel that the
ultimate company tax deduction was taken into account when the rate
is calculated." This point, which is made only cursorily and
without any supporting documentation in the paper, simply seems to
be based on a misunderstanding of the charge, as noted by Margaret
Sperry, a manager and lawyer for MassMutual, who corrected the
consultant about his mistake. It is, in any event, insufficient to
support the inferences needed to withstand summary judgment.
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a tax perspective than if she had taken her compensation

immediately rather than deferring it, did "essentially put[] the

participant in a neutral position relative to where he or she would

have been had they taken their compensation immediately." But an

attachment to this memo, along with two other documents, a 1994

fact sheet sent from MassMutual to its participating general agents

and the "written version" of a 1994 discussion between a MassMutual

officer and a group of general agents, clarifies this remark

considerably. The 1994 fact sheet notes that the tax-charged

deferred compensation plan would not always be better for employees

than taking compensation immediately; however, it would be better

whenever "[the general agent's] marginal tax rate is greater than

the 34.16% tax charge." In other words, it would generally be

better whenever the total of the general agent's marginal personal

federal income tax rate, marginal personal state income tax rate,

and marginal payroll tax rate were greater than the rate of the tax

charge. This seems to have been a common situation.

The tax charge was a rough calculation that reflected some

simplification;3 it is undisputed in the record that certain things

were not considered in the calculation. First, the charge did not

take into account the fact that unrealized gains in equities were

3
Jangraw noted in his deposition testimony that the purpose of
the plan was to keep the cost to the company "approximately"
neutral while at the same time not having too high "an
administrative burden on the plan administrators." There was thus
some interest by MassMutual in not making the plan unreasonably
complex.
-11-
not taxed until those gains were realized (the stocks were actually

sold). There was a reason for that. Three memoranda from Jangraw

-- dated March 15, 1993, January 26, 1995, and April 26, 1995 --

offer several reasons why unrealized gain had not historically been

factored into the calculations. First, the effect on the tax

charge is "not that significant": the January 1995 memo stated that

studies had shown that the tax charge percentage would change by

only about 3%, from 34.16% to "roughly 31%." This change would

have only a very small impact on the net interest rate credited to

the general agents' accounts. Jangraw also stressed that

calculating this sort of gain would add quite a bit of

administrative complexity to the calculation of the tax charge;

the reduction would depend on the specific characteristics of funds

and on the length of deferral for individual general agents.

The tax charge has also never taken into account a certain tax

that the company was sometimes subject to, the add-on tax. This is

a special tax, assessed between 1984 and 2000 and paid by mutual

fund companies, based on surplus equity. The liabilities

established by the plan reduce the amount of the surplus and

therefore theoretically might justify a lower tax charge. A 1987

internal committee (including Jangraw, Margaret Sperry, and four

other MassMutual employees) concluded that the tax charge was

generally correctly calculated, except for the add-on tax factor,

which the committee felt should be included in the tax charge

calculations. Some calculations in that report suggested that
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reflecting the add-on tax might result in a 1.50% increase in the

net return rate of earnings that general agents received. There

was testimony from Sperry and Jangraw that these calculations were

"hypothetical" and were based on an "assumption" that Jangraw said

he did not remember and Sperry said was probably not backed by any

data. Sperry stated that the add-on tax was zero for 10 of the 17

years between 1984 and 2000, and was less than one percent for five

more years. So only in two years did the add-on tax exceed one

percent. Jangraw testified that a conscious decision was made not

to adopt the committee's recommendation by including the add-on

tax, but he does not remember why. The answer may be

simplification of the calculation.

One simplification adopted by the company worked clearly to

the advantage of the general agents. MassMutual did not reduce net

rates of return for state taxes.

Aside from the tax charge, the evidence demonstrates that for

the fixed interest rate option but not the shadow account option,

MassMutual also reduced the gross rates of returns that it posted

to the general agents' accounts by two other, very small charges.

First, there was an administrative charge designed to offset

MassMutual's costs of administration. This ran at 20 basis points,

resulting in a two-tenths of one percent reduction in the net fixed

interest rate. For all non-qualified benefit plans that MassMutual

administered, this apparently resulted in an annual provision of

about $200,000 for the approximately five people who spent the
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majority of their time working on these plans, which seemed "quite

reasonable" to Jangraw in a December 1, 1993 memorandum.

Second, there was a charge which had been called conflicting

things: it was sometimes referred to as a "profit charge" and

sometimes as a "risk charge." Jangraw and another actuary (and

senior vice-president) with MassMutual, Isadore Jermyn, both

explained that the purpose of this charge is not to allow

MassMutual to make a profit, but rather to offset the risk of rapid

asset loss associated with holding additional capital; this offset

was required by the National Association of Insurance

Commissioners. The amount of this risk or profit charge was also

quite small, running at 40 basis points before 1993 and 50 basis

points after 1993. Jangraw concluded in his December 1, 1993

memorandum, after performing some calculations and considering the

"risk-based capital requirements associated with these [deferred

compensation] accounts," that the "40-50 basis point [risk] charge

does not seem unreasonably high." Thus the total effect of the

expense and risk charges was only to subtract six- or seven-tenths

of one percent from the gross rate of return.

Significantly, for the fixed interest rate option, the rate

was then increased above its otherwise net value (after tax,

expense, and risk charges) by a subsidy. The amount of this

subsidy has varied widely, but it hovered between 254 basis points

and 48 basis points between 1987 and 1999. It would have

approximately at least canceled out the expense and risk charges in
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all but one year, 1999.

It was common for insurance companies with deferred

compensation plans for general agents to impose tax charges. Some

1994 research found that the rate of return that MassMutual

credited on its fixed interest rate option was about the same as

the rates of return for four of the five insurance companies that

offered similar plans (the other company offered a substantially

higher rate of return). MassMutual employees were attuned to

standard industry practice and considered it when setting their

rates of return: this was one purpose for the subsidy.

In 1999, MassMutual discontinued the tax charge due to

complaints from general agents, but only for prospective

contributions; for equity reasons, contributions made before 1999

would continue to be reduced by the amount of the tax charge.

C. MassMutual's Efforts to Inform Agents about the Tax Charge

There is no evidence that MassMutual ever tried to hide the

fact that it was assessing a tax charge; there is, in fact,

considerable evidence that it communicated what it was doing to

the general agents.

This is very clear from 1993 onward. Throughout 1993 and

1994, the tax charge was a constant topic of discussion between

MassMutual and the general agents at the various meetings of the

general agents. In 1993, a MassMutual employee wrote a letter to

all general agent participants in the deferred compensation plan,

explaining the development of the credited rates of return. The
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letter clearly identifies the tax charge as an issue, explains its

rationale, and suggests that general agents "check with their

investment/financial advisors" to see if the plan is beneficial to

them.

In 1994, the company sent two letters, on July 15 and December

20, discussing the tax charge in question and answer format. The

July 15 memorandum answered the question, "What is the tax charge?

How is it determined?," explained why a more complex, fund-specific

type of tax charge was not used on the shadow account option, and

noted that in the event of losses on a shadowed account, the effect

of the tax charge would actually be to reduce the losses. The

December 20, 1994 memorandum went further; it included explanations

of the three issues described above and also explained precisely

when participating in the plan was likely to be worthwhile for

agents. In general, the memo emphasized, both through words and

through a tabular illustration, that participation was likely to be

a good idea whenever the rate of the tax charge was lower than the

participant's own, personal marginal tax rate (including federal

income, state income, and payroll taxes).4 The memorandum also

4
The memo actually noted that the issue of whether the plan
was beneficial to the general agents was a bit more complex. The
discussion included "some important qualifiers": 1) "changes in tax
rates have a big impact on the financial advantages of [the plan],"
2) because the plan is nonqualified, the general agents would have
mere unsecured general creditor status if MassMutual were to
declare bankruptcy, and 3) general agents should put as much money
as possible into 401(k) plans before putting money into this plan,
because 401(k)'s have more advantageous tax treatment.
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stressed that "[i]n the final analysis, the decision to participate

or not, should be made after fully considering all of your tax and

retirement planning strategies."

The evidence on MassMutual's communications before 1993 with

its general agents is considerably sparser. One employee, Robert

Massaro, testified that he began working with the compensation

committee of the general agents' association in 1986; thereafter,

he would refer issues dealing with the tax charge back to the

company when general agents would raise them "[f]rom time to time."

There was some more specific evidence that the tax charge was the

subject of discussion between some general agents (perhaps only

retired general agents) and company employees at a conference in

the late 1980s. A letter sent from MassMutual to Odom's general

agency in 1989 referenced this conference and explained the tax

charge.

In a letter, McAdams stated that he became aware of the tax

charge a "few years" after 1983. A 1990 letter from MassMutual to

McAdams in March 1990 noted in passing that "we adjust the unit

values for taxes" and this indicated to McAdams that a tax charge

was applied. McAdams certainly understood the tax charge by 1991

or 1992, when he discussed the issue at length with MassMutual's

CEO at a general agents' conference. Finally, the company always

sent periodic balance statements to each of its participants; these

statements did not include any reference to the rate or dollar

value of the tax charge, however. They merely showed the total
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gain or loss on a participant's account.

II.

McAdams and Odom filed suit against MassMutual in U.S.

District Court for the District of Massachusetts on December 28,

1999, on behalf of themselves and all others similarly situated.

They alleged that MassMutual's use of the tax charge and related

charges constituted a breach of contract, a breach of the covenant

of good faith and fair dealing, a breach of fiduciary duty, fraud,

negligent misrepresentation, and a violation of Massachusetts

General Laws Chapter 93A, section 11.

MassMutual moved to dismiss the complaint for failure to state

a claim. Senior Judge Freedman granted this motion in part and

denied it in part on December 13, 2000. McAdams v. Mass. Mut. Life

Ins. Co., No. Civ. A.99-30284-FHF, 2000 U.S. Dist. LEXIS 22068 (D.

Mass. December 13, 2000). The court held that on the contract

count, the "language, at best [for MassMutual], presents an

ambiguity with regard to whether the Agreement authorizes

MassMutual to deduct the tax charge from funds invested in the

general reserves and assets." Id. at *12. The court emphasized

that the agreement expressly provides for a deduction of taxes

where deferred accounts are separately invested, but the portion of

the agreement dealing with situations where the deferred accounts

are not separately invested but instead are placed in MassMutual's

own general reserves and assets does not contain this express

language. The court also noted the principle that ambiguous
-18-
language is to be construed against the drafter, in this case

MassMutual. Id.

The court held that plaintiffs' breach of covenant of good

faith and fair dealing count also had to stand, because the

allegation that MassMutual breached the contract and "capitalized

on [its] position as the administrators of the [p]lan would amply

justify recovery." Id. at *14. The court refused to dismiss the

fiduciary duty count as well, holding that McAdams and Odom had

alleged enough facts to withstand dismissal of the fiduciary claim

because "the defendants maintained the dominant voice in the

management of the deferred compensation incomes." Id. at *17.

The district court did dismiss the Chapter 93A count because

Chapter 93A does not apply to "purely private transactions." This

plan was a purely private transaction because it was never offered

to the general public and only applied to a small subset of general

agents. Id. at *20-*21. The district court also dismissed the

fraud and negligent misrepresentation counts as pled without the

requisite specificity of fact. Id. at *19-*20. The court granted

leave to amend the complaint, but McAdams and Odom did not do so.

McAdams and Odom then moved to certify the class;

certification was denied by Judge Freedman on May 15, 2002.

McAdams v. Mass. Mut. Life Ins. Co., No. Civ. A.99-30284-FHF, 2002

U.S. Dist. LEXIS 9944 (D. Mass. May 15, 2002). On June 13, 2002,

thirty-five former general agents moved for leave to join or

intervene in the McAdams/Odom suit. Judge Freedman denied that
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motion on March 26, 2003. On April 7, 2003, thirty of these

thirty-five filed individual actions in district court based on the

same basic legal theories.

After a period for discovery, MassMutual moved for summary

judgment on all remaining claims, and District Court Judge Ponsor

granted the motion in its entirety on March 26, 2004. The court

focused on what it saw as the central issue, the problem of

contract interpretation. It held that the language in the general

reserves section of the contract authorizing MassMutual to credit

"interest . . . to the account from time to time . . . at a rate

determined by the Company" was unambiguously "a broad grant [of

discretion] to MassMutual . . . . [It] gives the defendants

expansive discretion to determine the rate in any rational manner

it sees fit." The express mention in the contract of deductions

for taxes and expenses where money is separately invested and the

absence of this express language in the section dealing with

situations where the money is kept in MassMutual's general reserves

did not properly lead to an application of the expressio unius est

exclusio alterius maxim to deny MassMutual's ability to deduct

taxes from these types of accounts because the "glaring omission of

any limitation on [MassMutual's] discretion . . . trump[ed] any

attempt to attribute significance to a lack of an itemization of

factors." The court concluded that "[a]bsent demonstrable bad

faith, fraud or egregiously unreasonable behavior," MassMutual

could do whatever it wanted with the rate of return on the deferred
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funds.

The court concluded that the claims for breach of fiduciary

duty and breach of the covenant of good faith and fair dealing also

failed. The court noted that it was "questionable" whether

MassMutual was a fiduciary, but even if it was, neither fiduciary

duties nor the duties imposed by the covenant of good faith and

fair dealing were violated. Plaintiffs had offered only a

"difference in opinion" as to how to calculate the rate of return;

there was no showing that MassMutual's method was a result of bad

faith. Moreover, the court emphasized the "transparency" of

MassMutual's conduct, and the fact that McAdams and Odom continued

to defer even after they were well aware of the tax charge.

Finally, the court concluded that McAdams's own claims would be

dismissed regardless because of a release he signed with MassMutual

in 1998.

On May 5, 2004, after having issued an order to show cause why

summary judgment should not be granted, the district court granted

summary judgment against the thirty general-agent plaintiffs in the

related cases as well.

All of the plaintiffs filed timely appeals, and the appeals of

the thirty related plaintiffs were consolidated with the appeal of

McAdams and Odom by this court. The plaintiffs have not raised the

issue of fraud or negligent representation before us; this claim is

waived. The claims of breach of contract, breach of covenant of

good faith and fair dealing, breach of fiduciary duty, and
-21-
violation of Chapter 93A are before us.

III.

All of the claims were denied either on a Rule 12(b)(6) motion

to dismiss or on summary judgment; our review is de novo. Kolling

v. Am. Power Conversion Corp., 347 F.3d 11, 13 (1st Cir. 2003);

Martin v. Applied Cellular Tech., 284 F.3d 1, 5 (1st Cir. 2002).5

A. Breach of contract

Whether a contract is ambiguous is an issue to be determined

by the court. Alison v. Byard, 163 F.3d 2, 6 (1st Cir. 1998).

Ordinarily, contracts are construed by a court "as a matter of law"

unless there are material disputes as to extrinsic facts bearing on

the correct interpretation. Fenoglio v. Augat, Inc., 254 F.3d 368,

370 (1st Cir. 2001) (quoting Principal Mut. Life Ins. Co. v. Racal-

Datacom, Inc., 233 F.3d 1, 3 (1st Cir. 2000)). This is true even

in "close cases"; the jury does not become involved when words and

context alone are used, but only when extrinsic evidence is at

issue. See Fishman v. LaSalle Nat'l Bank, 247 F.3d 300, 303 (1st

5
The choice of law clause in the agreement states that
Massachusetts state law applies to "[a]ll questions pertaining to
the construction, validity and effect of the provisions of this
Agreement." In the briefs before this court, both sides have cited
Massachusetts law for all of their claims, including the fiduciary
duty and 93A claims. Because of this implicit agreement between
the parties that Massachusetts law should apply to all claims, we
apply it in this diversity case without inquiring further. Hershey
v. Donaldson, Lufkin & Jenrette Sec. Corp., 317 F.3d 16, 20 (1st
Cir. 2003).
-22-
Cir. 2001).6 Words are not viewed in isolation within a contract.

The meaning of a contract cannot be understood merely by "isolating

words and interpreting them as though they stood alone." Starr v.

Fordham, 648 N.E.2d 1261, 1269 (Mass. 1995) (quoting Boston

Elevated Ry. v. Metro. Transit Auth., 83 N.E.2d 445, 451 (Mass.

1949)). Contracts must, in other words, be read as a whole. Id.

Even if a contract might arguably appear ambiguous from its

words alone, the decision remains with the judge if the alternative

reading is inherently unreasonable when placed in context.

Contract interpretation under Massachusetts law depends heavily on

context and recognizes that words can have different meanings in

different contexts. See id.; Shea v. Bay State Gas Co., 418 N.E.2d

597, 600 (Mass. 1981). Thus, agreements should be construed "with

reference to the situation of the parties when they made it and to

the objects sought to be accomplished." Starr, 648 N.E.2d at 1269

(quoting Bryne v. City of Gloucester, 8 N.E.2d 170, 171 (Mass.

1937) (internal quotation marks omitted)). This sort of contextual

6
Even where there are ambiguities in the language and there is
relevant extrinsic evidence, there is support for the view that
under Massachusetts law the judge decides the issue if all of this
extrinsic evidence is undisputed, even if the outcome is debatable.
See Fishman, 247 F.3d at 303; Atwood v. City of Boston, 37 N.E.2d
131, 134 (Mass. 1941). And of course, judges interpret even
ambiguous contracts involving disputed extrinsic evidence where the
evidence is so one-sided that no reasonable finder of fact could
decide for the alternative interpretation. Boston Five Cents Sav.
Bank v. Sec'y of Hous. and Urban Dev., 768 F.2d 5, 8 (1st Cir.
1985). These rules about extrinsic evidence are not necessary to
decide this case, because the meaning of this contract is clear
after looking at its language and context.
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evidence is not the kind of evidence that is intended to be barred

by the parol evidence rule if no ambiguity is found; rather,

context should be used as a tool to find unambiguous meaning in the

first place. See Robert Indus., Inc. v. Spence, 291 N.E.2d 407,

409-10 (Mass. 1973); see also SAPC, Inc. v. Lotus Dev. Corp., 921

F.2d 360, 361 n.2 (1st Cir. 1991). On the basis of such context,

this court has often affirmed entry of summary judgment in contract

cases. See Nat'l Tax Inst., Inc. v. Topnotch at Stowe Resort &

Spa, No. 03-1924, 2004 WL 2494967, at *3-*4 (1st Cir. Nov. 5,

2004); Fishman, 247 F.3d at 302-03.

Here, importantly, we see no material disputes as to extrinsic

facts. The contract may be interpreted on the face of the document

itself against a contextual understanding of the nature of various

types of deferred compensation plans.

Plaintiffs argue the contract is not ambiguous and it does not

permit the assessment of any tax charges when separate investments

are made. They also argue that if there are any ambiguities, they

must be construed against MassMutual. Only as a last resort do

they argue that if there are any ambiguities, and they cannot be

resolved against MassMutual, then a jury should resolve them.

The precise language being construed is contained in paragraph

three of Article V and provides:

If during any period . . ., [MassMutual] . . . makes no
separate investments of its property, . . . it shall then
credit interest on that portion or all of the account not
represented by separate investments of [MassMutual] assets.
Such interest shall be credited to the account from time to
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 time, in lieu of net earnings from separate investments of
[MassMutual] assets, at a rate determined from time to time by
[MassMutual] . . . .

This language must be understood in the context of paragraph one of

that article, which governed separate investments:

If [MassMutual] invests its property separately . . . , it
shall credit to the General Agent's account from time to time
whatever net earnings the assets so invested have produced.
Net earnings from separate investments for purposes of this
Agreement shall mean gross earnings, including but not limited
to, interest, dividends, realized and unrealized appreciation
or loss in the value of such investments, less all expenses
and taxes attributable to the making, carrying, and
liquidation of such investments, including but not limited to,
an appropriate accrual of taxes for unrealized appreciation in
the value of the investments. [MassMutual] alone shall
determine the amount of net earnings that will be credited to
the General Agent's account; and such determination of net
earnings, including the determination as to charges for
expenses and taxes, shall be final.

The district court found paragraph three to be unambiguous:

"It is a broad grant to MassMutual to determine, as it sees fit,

the rate of interest credited to the accounts of the general

agents." More specifically, the court determined that the clause

requiring the company to credit interest "at a rate determined from

time to time by [MassMutual]" permitted MassMutual to deduct

expenses and taxes in determining that interest. We agree with

this narrower formulation. Specifically, we reject the plaintiffs'

argument that in the face of an explicit contractual grant of

authority to the company, the company could not deduct expenses and

taxes unless the contract permitted it to do so in haec verba.

Plaintiffs point to the term "interest," ignoring the phrase

that interest is to be credited "at a rate determined from time to
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time by the company." "Interest" has been defined as "[t]he

compensation fixed by agreement or allowed by law for the use or

detention of money . . . esp., the amount owed to a lender in

return for the use of borrowed money." Black's Law Dictionary 829

(8th ed. 2004). The term does not preclude deduction of expenses

incurred in determining the rate of return. Here the deferred

compensation is invested with the common assets of the company.

The making of investments itself involves costs and any sensible

rate of return accounts for those costs. The fact that this is an

unqualified plan means that the company has additional taxes it

must pay (unlike a qualified plan). The decision to account for

those taxes in setting the rate of interest is within the literal

language affording the company the discretion to set the rate of

interest.

The reasonableness of this reading is reinforced by the fact

that the company is explicitly granted the authority in the first

paragraph to deduct from net earnings, when funds are invested

separately, "all expenses and taxes attributable to the making,

carrying and liquidation of such investments." The clause in

paragraph three gives the company even broader authority. It would

be unreasonable to interpret that broader grant of authority in

paragraph three as not encompassing powers explicitly authorized in

the narrower grant of authority in paragraph one. In this

situation, the principle of expressio unius est exclusio alterius

has no place.
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 Nothing in industry custom operates to render this clear

reading suspect. Most others in the industry follow the same

practices as MassMutual. At least one company does not, but we do

not know its precise contractual arrangements.

The canon of construing an ambiguous contract against the

drafter does not change the result. First, there is no ambiguity.

Second, as said in National Tax Institute,

[T]he canon is a qualified one . . . a default rule that
arguably has more force where the parties differ in
sophistication or where standard forms are used (e.g.,
insurance contracts). In any event, the canon has little to
do with actual intentions and should only be used, as a last
resort, if other aids to construction leave the case in
equipoise.

Nat'l Tax Inst., 2004 WL 2494967, at *2. Here, the parties are

extremely sophisticated and there is no need to turn to a last

resort canon.

B. Implied Covenant of Good Faith and Fair Dealing

McAdams and Odom respond that MassMutual's assessment of the

tax charge was a breach of the implied covenant of good faith and

fair dealing in two senses: that there could be no consideration of

taxes at all in the setting of the interest rate and that the

particular rates set violate the covenant. Under Massachusetts

law, every contract implies such a covenant. Anthony's Pier Four,

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

of the covenant is not to add terms to a contract; indeed, it may

-27-
not do so.7

The Massachusetts Supreme Judicial Court recently reinforced

this understanding of the covenant. In Uno Restaurants, Inc. v.

Boston Kenmore Realty Corp., 805 N.E.2d 957 (Mass. 2004), the court

held that a directed verdict should enter against a claim of breach

of the covenant. The court stressed that

[t]he covenant may not . . . be invoked to create rights and
duties not otherwise provided for in the existing contractual
relationship, as the purpose of the covenant is to guarantee
that the parties remain faithful to the intended and agreed
expectations of the parties in their performance.

Id. at 964; see also Sparks v. Fid. Nat'l Title Ins. Co., 294 F.3d

259, 274 (1st Cir. 2002) ("An implied covenant . . . imposes on the

parties the obligation . . . to act in good faith to accomplish the

purposes of their agreement. It does not, however, add new

substantive obligations to their contractual undertakings.")

(citation omitted).

This contract, read in light of the covenant of good faith and

fair dealing, constrains MassMutual's contractual discretion

somewhat. See 2 E. Allan Farnsworth, Farnsworth on Contracts §

7.17, at 365 (3d ed. 2004) (covenant is often used to limit

discretion where the terms of the contract give one side discretion

over another). There is obviously a requirement that the company

7
We note that the breach of implied covenant claim alleged
here is not the theory recognized in Fortune v. Nat'l Cash Register
Co., 364 N.E.2d 1251, 1255-59 (Mass. 1977). There is no claim here
that plaintiffs' employment was terminated to avoid paying them
benefits earned and due.
-28-
act in good faith; the lack of good faith can be inferred from

"unreasonable[ness] under all the circumstances." Nile v. Nile,

734 N.E.2d 1153, 1160 (Mass. 2000); see Krapf v. Krapf, 786 N.E.2d

318, 324-25 (Mass. 2003). While, as MassMutual urges, an

"arbitrary and capricious" use of discretion would certainly

violate the covenant, the Massachusetts courts have also used the

language of "unreasonableness," which is the usage we employ. See

Nile, 734 N.E.2d at 1160.

The core of the covenant is to ensure that one party does not

deprive another of the "fruits of the contract." Anthony's Pier

Four, Inc., 583 N.E.2d at 820 (quoting Drucker v. Roland Wm. Jutras

Assocs., Inc., 348 N.E.2d 763, 765 (Mass. 1976) (internal quotation

marks omitted)) (emphasis added). "The covenant is preserved so

long as neither party injures the rights of another to reap the

benefits prescribed by the terms of the contract." Uno Rests., 805

N.E.2d at 964 (emphasis added).

The general agents argue that such deprivation is precisely

what happened here. They argue that by assessing the tax charge,

MassMutual was wiping out the whole point of the deferred

compensation plan, which was to allow the general agents to invest

money tax free until it was actually distributed to participants.

The agents believe that the company's imposition of an annual tax

charge based on its corporate tax liability completely frustrated

this purpose and deprived the agents of the benefits of this type

of plan.
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 This argument is misplaced because it focuses merely on the

phrase "deferred compensation plan" and not on the contractual

language of the second sentence of paragraph three. We have

interpreted the contract as giving MassMutual discretion to

consider taxes, expenses and other costs in setting the rate of

interest. A proper exercise of this discretion cannot deprive the

agents of the fruit of the contract. As Uno Restaurants makes

clear, the covenant cannot be used to contradict clear contractual

terms. The agents' first argument on the covenant claim was thus

resolved in our discussion of the contract claim.

There remains the possibility that MassMutual might have

exercised its discretion to set a rate so unreasonably as to

violate the covenant. Plaintiffs make exactly that argument.

McAdams and Odom argue that unreasonableness is shown by the fact

that MassMutual was told that its basic methodology for calculating

the tax charge was wrong and resulted in an excessive charge on

several occasions; its continuing use of the methodology showed bad

faith. But the evidence indisputably shows that the basic method

was, after several minor simplifications, correct; the occasional

criticisms of it were themselves based on errors.

The general agents next stress that the refusal to reduce the

tax charge due to the add-on tax and the tax treatment of

unrealized gain shows MassMutual's bad faith. The evidence is

undisputed that MassMutual made these two simplifications because

it understood that they cut down on the company's administrative
-30-
costs without having a significant impact on the tax charge rate.

And not all of the simplifications ran against the general agents:

the failure to consider state corporate income taxes when setting

the tax charge probably aided general agents considerably.

The agents also unsuccessfully argue that the expense and

risk/profit charges on the fixed interest option violate the

covenant of good faith and fair dealing. In theory these are, like

the tax charge, reasonable attempts to allow MassMutual to break

even and avoid losses from administering the deferred compensation

plan. In practice, the assessment of these charges has not been

unreasonable; the charges have been approximately correct after

some sensible simplifications. At any rate, these two charges have

been quite small and usually have been far more than offset by the

subsidy added by MassMutual to fixed interest rate returns.

We note finally that a lack of transparency, with other

evidence, may be important evidence in supporting a breach of the

covenant of good faith and fair dealing. Bad faith may be shown

partially by the fact that a party is trying to hide what she is

doing from the other party in order to disadvantage that party.

For example, where a party uses discretionary rights under a

contract pretextually, as cover for a hidden and illicit motive, an

inference of bad faith may be warranted. See Anthony's Pier Four,

Inc., 583 N.E.2d at 820-21; Starr v. Fordham, 648 N.E.2d 1261, 1266

(Mass. 1995) (finding breach of covenant on partnership contract

where partners unfairly reduced one partner's share by fabricating
-31-
a list of negative factors and by "select[ing] performance criteria

in order to justify the lowest possible payment to the plaintiff").

Here, MassMutual was reasonably transparent about what it was doing

and why. The 1993 and 1994 communications marked a substantial

attempt to inform the general agents about the workings of the tax

charge and about whether it would still be a good idea for the

agents to participate in the plan. Even before 1993, MassMutual

was not trying to hide anything; there is evidence that it tried to

communicate the tax charge to the general agents on some occasions

in the 1980s.

Based on the evidence, no reasonable finder of fact could

conclude in the plaintiffs' favor on the covenant claim.

C. Breach of Fiduciary Duty

Under Massachusetts law, the question of whether one party

owes fiduciary duties to another is a question of fact. Indus.

Gen. Corp. v. Sequoia Pac. Sys. Corp., 44 F.3d 40, 44 (1st Cir.

1995). Key factors in this fact-specific inquiry include one

party's lack of sophistication relative to another on the relevant

issues, and whether one party has granted another party a great

deal of discretion. Patsos v. First Albany Corp., 741 N.E.2d 841,

849-51 (Mass. 2001).

We need not decide whether there is a disputed issue of fact

concerning the existence of a fiduciary relationship between

MassMutual and any or all of the general agents, because even if

fiduciary duties existed, there was no breach. The core fiduciary
-32-
obligation in this sort of context is a duty on MassMutual to

exercise any discretionary power that it has in good faith, with

prudence and after serious consideration, and reasonably according

to the purposes of the agreement and standard fiduciary principles.

See Ventura v. Ventura, 555 N.E.2d 872, 875 (Mass. 1990); Briggs v.

Crowley, 224 N.E.2d 417, 421-22 (Mass. 1967); Copp v. Worcester

County Nat'l Bank, 199 N.E.2d 200, 203 (Mass. 1964). This

obligation was met here: the tax charge was both created and

applied in a manner that was well thought out and reasonable in

light of the plan's purpose, and there was no bad faith.

Sometimes, there may be a breach of a fiduciary duty if the

fiduciary fails to disclose certain information. Puritan Med.

Ctr., Inc. v. Cashman, 596 N.E.2d 1004, 1010 (Mass. 1992).

MassMutual has satisfied any such obligation by making, as already

explained, considerable efforts to pass information about the tax

charge on to the general agent participants.

D. Chapter 93A

Massachusetts General Laws, Chapter 93A, section 11 protects

against unfair and deceptive trade practices. A dispute must

involve a "commercial transaction" to fall into the reach of the

statute. Szalla v. Locke, 657 N.E.2d 1267, 1270 (Mass. 1995). The

Massachusetts Supreme Judicial Court has interpreted this to

include only transactions that are "offered generally by a person

for sale to the public in a business transaction" and to exclude

transactions that "are principally 'private in nature,'" such as a
-33-
dispute between employer and employee. Manning v. Zuckerman, 444

N.E.2d 1262, 1265-66 (Mass. 1983). MassMutual argues that the

dispute at issue here is private in nature, and thus no 93A claim

can lie; plaintiffs counter that such a claim is stated because

they are independent contractors and not employees. Whether an

independent contractor can recover for a 93A violation is unclear

under Massachusetts law. See Schinkel v. Maxi-Holding, Inc., 565

N.E.2d 1219, 1224-25 (Mass. App. Ct. 1991). The issue may hinge

not on the label of "independent contractor," but on a fact-

specific, case-by-case analysis into the type of relationship that

the independent contractor has with the company at issue. See

Linkage Corp. v. Trs. of Boston Univ., 679 N.E.2d 191, 207 (Mass.

1997) (corporation that worked for a university as, according to

the contract, independent contractor rather than employee or agent,

could maintain 93A action against university); Benoit v. Landry,

Lyons & Whyte Co., 580 N.E.2d 1053, 1053 (Mass. App. Ct. 1991)

(real estate salesman could not use 93A even if he was an

independent contractor). Because the state law is unclear, we

decline to decide the 93A claim on this ground.

Even if the transaction between MassMutual and the general

agents was commercial in nature and the claim should have survived

a Rule 12(b)(6) motion to dismiss for failure to state a claim,

MassMutual's actions in this case did not violate Chapter 93A, as

amply demonstrated by the summary judgment record. Plaintiffs do

not argue that there is any additional evidence pertinent to this
-34-
claim that is not on this record. Conduct that is "'in disregard

of known contractual arrangements' and intended to secure benefits

for the breaching party" falls afoul of Chapter 93A. Anthony's

Pier Four, Inc. v. HBC Assocs., 583 N.E.2d 806, 821 (Mass. 1991)

(quoting Wang Labs., Inc. v. Bus. Incentives, Inc., 501 N.E.2d

1163, 1167 (Mass. 1986)). Here, MassMutual did not disregard the

contract and behaved reasonably in its application of the contract.

A 93A claim is based on unfairness or deception, not a mere

"difference of opinion": "a good faith dispute as to whether money

is owed, or performance of some kind is due, is not the stuff of

which a c. 93A claim is made." Duclersaint v. Fed. Nat'l Mortgage

Ass'n, 696 N.E.2d 536, 540 (Mass. 1998). MassMutual's actions were

all fair, reasonable, in good faith, and transparent; the general

agents' differences of opinions do not come close to raising a

violation of Chapter 93A.

Given the way we have resolved the case, we need not consider

the general agents' motion to certify the class, MassMutual's

statute of limitations defense, or MassMutual's assertion that

McAdams released his own claims.

IV.

The district court's grant of summary judgment on all claims

for MassMutual is affirmed. So ordered. Costs are awarded to

MassMutual.

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-36-