Eureka Broadband Corp. v. Wentworth Leasing Corp.

United States Court of Appeals
For the First Circuit

No. 04-1577

EUREKA BROADBAND CORPORATION,

Plaintiff, Appellee,

v.

WENTWORTH LEASING CORPORATION,

Defendant, Appellant.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Richard G. Stearns, U.S. District Judge]

Before

Selya, Circuit Judge,

Stahl, Senior Circuit Judge,

and Lynch, Circuit Judge.

Herbert Lemelman, with whom Kirk Y. Griffin was on brief, for
appellant.
Jeffrey R. Martin, with whom Michael P. Murphy and Burns &
Levinson LLP were on brief, for appellee.

March 7, 2005
 SELYA, Circuit Judge. This litigation arises out of a

dispute between the parties to a pair of substantially identical

finance leases. Following a bench trial, the district court found

in favor of the lessee, awarded substantial damages, and dismissed

a counterclaim. Resolving the lessor's appeal requires us to visit

precincts bounded by the Uniform Commercial Code (hereinafter

variously "UCC" or "Code") and to explore the intersection between

the Code and the common law of fraudulent misrepresentation.

Although our analysis differs in some respects from the trial

court's, we nonetheless reach the same ultimate conclusion and

affirm the judgment.

The facts are largely uncontradicted. Plaintiff-appellee

Eureka Broadband Corporation is a Delaware corporation that

maintains its principal place of business in New York.1 Eureka

installs fiber optic systems in large office buildings and

generates revenues by charging access fees to commercial carriers

desirous of providing telecommunication services to tenants. In

June of 2000, Eureka decided that it needed certain equipment in

order to pursue its business interests. Defendant-appellant

Wentworth Leasing Corporation, a Massachusetts firm headquartered

in that state, offered to facilitate acquisition of the equipment

1
Eureka is the corporate successor of Gillette Global Network,
Inc. Some of the events material to this case occurred before
Eureka's succession. For simplicity's sake, we treat Eureka and
Gillette as one and refer to them throughout as Eureka.

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through a finance lease. Stan Pearson — who is Wentworth's sole

shareholder and only employee — personally conducted the

negotiations.

The parties structured the transaction as a conventional

finance lease. Eureka identified the equipment it needed and

Wentworth agreed to purchase that equipment for $841,000 from

CopperCom, Inc., a Florida-based vendor. Eureka would then lease

the equipment from Wentworth for forty-eight months at a monthly

rent of $22,486. At the end of the forty-eight month term, Eureka

would have an option to buy the equipment.

As a condition precedent to the actual execution of the

lease documents, Wentworth required Eureka to demonstrate

creditworthiness and to pay a commitment fee equal to one month's

rent. Eureka sent the commitment fee to Wentworth early on and

forwarded the necessary financial information in August of 2001.

Wentworth agreed to the lease on September 6, 2001, but added the

further condition that Eureka post a security deposit equal to the

first and last months' rent. On the same day that it acquiesced in

this further condition, Eureka accepted delivery of the equipment

from CopperCom and executed a delivery and acceptance agreement in

which it authorized Wentworth to release payment to CopperCom.

On December 20, 2001, the same parties entered into a

second lease for additional equipment, some of which came from

CopperCom and some from Marconi Communications, Inc. The terms of

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the second lease were substantially identical to those of the

first, except that the monthly rent was $17,057. On December 21,

2001, Eureka mailed Wentworth a check for $51,171 to cover the

security deposit and the first month's rent. At about the same

time, Eureka accepted delivery of the additional equipment.

On December 22, 2001, CopperCom sent an invoice to

Wentworth for the agreed purchase price of the equipment covered by

the first lease. It sent another invoice on December 28 for the

equipment covered by the second lease. For reasons that are not

entirely clear from the record, Marconi did not submit an invoice

to Wentworth, but, rather, billed Eureka directly.

Eureka made monthly lease payments to Wentworth through

January 2002. There was a rub, however: Wentworth never paid a

dime to either CopperCom or Marconi. Both vendors soon began

dunning Eureka, which repeatedly requested that Wentworth

remunerate the vendors. Wentworth turned a deaf ear to these

importunings. Eventually, Eureka's patience wore thin. On

February 22, 2002, it advised Wentworth that it would withhold

future rent payments until it received confirmation that Wentworth

had paid CopperCom and Marconi. Despite this warning, Wentworth

remained delinquent.

Matters came to a head in March, when Marconi brought

suit against Eureka for the purchase price of its equipment. To

settle the suit, Eureka returned Marconi's wares and paid it

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$180,000. Eureka separately settled with CopperCom before any

litigation was commenced; to consummate that settlement, it

returned CopperCom's equipment and tendered a "small" payment (the

record is tenebrous as to the precise dollar amount).

On April 11, 2002, Eureka wrote to Wentworth demanding

return of all rent previously paid (totaling $163,601). When

Wentworth demurred, Eureka brought a diversity suit in the federal

district court. See 28 U.S.C. § 1332(a). Its complaint contained

counts sounding in breach of contract, unjust enrichment, and

fraud. Wentworth answered the complaint and counterclaimed for

breach of the lease indentures.

Following a bench trial, the district court reserved

decision. It subsequently handed down a rescript containing

detailed findings of fact and conclusions of law. Eureka Broadband

Corp. v. Wentworth Leasing Corp., No. 02-11068, 2004 WL 344425 (D.

Mass. Feb. 24, 2004).

The court first dismissed Eureka's claim for unjust

enrichment on the ground that an adequate remedy at law existed.

Id. at *3 n.6. Next, it addressed the breach of contract count.

With respect to the Marconi equipment, the court held that no sale

between Marconi and Wentworth had occurred because Marconi had

never invoiced Wentworth. Id. at *4 n.8. Inasmuch as there had

been no sale, Wentworth had no right to charge rent for the Marconi

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equipment and Eureka was entitled to a full refund. Id. Wentworth

has not challenged this ruling on appeal.

As to the CopperCom equipment, the court found that

Wentworth was obligated by the lease terms to purchase the

equipment from CopperCom, but it never paid (nor, for that matter,

had any intention of paying) CopperCom for the equipment. Id. at

*4. That failure constituted a breach of contract and entitled

Eureka to cancel the leases. Id. at *3.

The court then proceeded to the fraudulent

misrepresentation count. In the court's view, Wentworth was liable

to Eureka on this claim because it had fraudulently induced Eureka

to enter into the leases in reliance on its false promise to

purchase and pay for the equipment. Id. at *5.

To wrap up the liability phase, the court ruled in favor

of Eureka on Wentworth's counterclaim. Id. It then turned to

damages and determined that Eureka was entitled to recover the same

damages on both the breach of contract and fraudulent

misrepresentation counts.2 Id. These damages equaled the total

amount of the rental payments Eureka had made to Wentworth. Id.

2
Of course, despite the two bases for recovery, Eureka could
only collect the awarded damages once. See Freeman v. Package
Mach. Co., 865 F.2d 1331, 1345 (1st Cir. 1988) ("[A] plaintiff is
entitled to only one full recovery, no matter how many different
leal grounds may support the verdict."); Szalla v. Locke, 657
N.E.2d 1267, 1270 (Mass. 1995) (refusing to allow duplicitive
recovery for quantum merit and deceit when the two claims arise
from the same facts and compensate the same loss).

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 The court also made two other awards, neither of which is

directly challenged in this appeal. First, it awarded

consequential damages of $5,068 for reasonable expenses that Eureka

had incurred in responding to the Marconi suit. See id. at *3 n.7.

Second, it awarded Eureka attorneys' fees for the prosecution of

the action on the ground that Wentworth had acted vexatiously.3

Id. at *5.

This timely appeal ensued. In it, Wentworth raises only

four issues. First, it argues that the district court erred in

finding that it breached the lease agreements with respect to the

CopperCom equipment. Second, it asserts that the fraudulent

misrepresentation count should have been dismissed as a matter of

law. Third, it questions the measure of damages with specific

reference to the rent refund. Finally, it asseverates that the

district court erred in rejecting its counterclaim, which it now

characterizes as sounding in conversion. In mulling these

assignments of error, we review the district court's legal

3
While the case was awaiting trial, Pearson, without Eureka's
knowledge or consent, printed postcards, embossed with Eureka's
corporate logo, and mailed them to roughly 100 of Eureka's clients
(whose names were obtained from the creditworthiness information
originally furnished by Eureka to Wentworth). These postcards
directed the recipients to mail future payments to Eureka at a post
office box. Some of those customers took the postcards at face
value and made remittances accordingly. The post office box had,
however, been rented by Pearson, who pocketed the funds. After the
trial had ended, the district court ordered Wentworth to reimburse
Eureka for these misappropriations. Wentworth has not appealed
from that ukase.

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conclusions de novo and its findings of fact for clear error.

Sierra Fria Corp. v. Donald J. Evans, P.C., 127 F.3d 175, 181 (1st

Cir. 1997). The lease indentures contain choice-of-law provisions

commemorating the parties' agreement that Massachusetts law should

govern any disputes, and we honor that agreement. See, e.g.,

McCarthy v. Azure, 22 F.3d 351, 356 n.5 (1st Cir. 1994) (observing

that "a reasonable choice-of-law provision in a contract generally

should be respected").

While we ultimately approve the district court's

conclusion that Wentworth is liable to Eureka with respect to the

CopperCom equipment, we are skeptical about its rationale. The

district court held that Wentworth breached its obligation to

purchase the equipment by not paying the vendor. But "purchase" is

not a synonym for "pay," and it is at least arguable that, here,

there was a sale (albeit a sale on credit), which was complete upon

delivery of the equipment without regard to payment. See Mass.

Gen. Laws ch. 106, §§ 1-201(32), 2-103(1)(a), 2-103(1)(d), 2-

106(1), 2-401(2). Moreover, the parties dispute whether Wentworth

had an obligation to Eureka to pay the vendors. See Midwest

Precision Servs. v. PTM Indus. Corp., 887 F.2d 1128, 1131-32 (1st

Cir. 1989) (noting that in a finance lease the contracts between

the lessor and the lessee and the lessor and the vendor are

separate and independent).

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 In all events, we need not probe the point too deeply, as

we find fully supportable the district court's alternate holding

that Wentworth is liable to Eureka for the same damages on the

fraud count. On appeal, Wentworth does not challenge the substance

of that ruling. Rather, it argues in its brief that the UCC

preempts (and, thus, precludes the maintenance of) a common law

action for fraudulent inducement to contract. At oral argument,

Wentworth's counsel made the additional argument that even if

Eureka were entitled to sue on this theory, it suffered no damages

as a consequence of the fraud. These arguments are bootless.

Wentworth's first contention is clearly incorrect.

Section 1-103 of the Code, Mass. Gen. Laws ch. 106, § 1-103,

provides that "[u]nless displaced by the particular provisions" of

the Code, "the principles of law and equity, including . . . fraud

[and] misrepresentation . . . shall supplement its provisions."

Nothing in the Code explicitly preempts common law actions for

fraudulent misrepresentation, and courts have entertained such

actions in commercial cases. See, e.g., Vision Graphics, Inc. v.

E.I. Du Pont de Nemours & Co., 41 F. Supp. 2d 93, 100 (D. Mass.

1999); see also Nat'l Shawmut Bank v. Vera, 223 N.E.2d 515, 518

(Mass. 1967) (stating that the Code is to be supplemented by the

existing common law "[u]nless displaced by the particular

provisions of the code itself" (citation and internal quotation

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marks omitted)). Consequently, we see no reason why such an action

could not be maintainable in the circumstances of this case.

This conclusion is reinforced by another section of the

Code, which provides that the "[r]ights and remedies for material

misrepresentation or fraud include all rights and remedies

available under this Article for default." Mass. Gen. Laws ch.

106, § 2A-505(4). It would make no sense for the Code to address

the remedies for fraud if, as Wentworth contends, the UCC

pretermits actions for fraud.

Wentworth's position rests entirely on its reading of

section 2-702 of the Code, which limits a seller's right to recover

goods to the procedures described in that section, even in cases of

"fraudulent or innocent misrepresentation of solvency or of intent

to pay." Mass. Gen. Laws ch. 106, § 2-702(2). That provision,

however, deals exclusively with the relationship between buyers and

sellers. As Wentworth vigorously argues when it suits its

perceived advantage, the contracts between Wentworth and CopperCom

and those between Wentworth and Eureka are distinct and

independent. See Midwest Precision Servs., 887 F.2d at 1131-32.

As (i) the relationship between Wentworth and Eureka is not that of

seller and buyer, and (ii) Article 2A of the Code contains no

comparable provision applicable to leases, we are satisfied that

section 2-702 is not an impediment to Eureka's right to bring an

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action for fraudulent inducement. The district court therefore

acted impeccably in allowing the fraud count to proceed.

As said, Wentworth mounts no challenge to the substance

of the district court's holding that it is liable on the fraud

count. Thus, any such argument has been forfeited. Kearney v.

Town of Wareham, 316 F.3d 18, 22 (1st Cir. 2002); United States v.

Zannino, 895 F.2d 1, 17 (1st Cir. 1990). In all events, our review

of the record satisfies us that the district court's conclusion is

amply supported.

To prevail on a claim of fraudulent misrepresentation

under Massachusetts law, the plaintiff must show that the defendant

"made a false representation of a material fact with knowledge of

its falsity for the purpose of inducing the plaintiff to act

thereon, and that the plaintiff reasonably relied upon the

representation as true and acted upon it to his damage." Russell

v. Cooley Dickinson Hosp., Inc., 772 N.E.2d 1054, 1066 (Mass. 2002)

(citation and internal quotation marks omitted). The district

court found that Wentworth intentionally made a false statement of

material fact by holding itself out as a finance lessor when it had

neither the capacity nor the intention to pay for the equipment.

Eureka, 2004 WL 344425, at *5. We agree that, in the context of a

finance lease transaction, a finance lessor implicitly represents

both its ability and its intention to pay for the goods to be

leased. If knowingly false, implicit representations may be

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treated as actionable misrepresentations. See V.S.H. Realty, Inc.

v. Texaco, Inc., 757 F.2d 411, 414-15 (1st Cir. 1985) (applying

Massachusetts law). So it is here.

We hasten to add that Wentworth's misrepresentation was

plainly material. The very purpose of seeking a finance lessor is

to access capital and, thus, facilitate acquisition of desired

equipment. See Shawmut-Canton LLC v. Great Spring Waters of Am.,

Inc., 816 N.E.2d 545, 549 n.6 (Mass. App. Ct. 2004) (holding that

a misrepresentation is material when it is one of the principal

grounds that caused the plaintiff to enter the contract).

The remaining elements of the cause of action also were

proved. The district court found that Eureka relied on Wentworth's

misrepresentation by entering into the finance leases. Eureka,

2004 WL 344425, at *5. It further found that the adverse claims

subsequently lodged by CopperCom and Marconi and the sequelae of

those claims sufficed in combination to demonstrate that this

reliance was detrimental. Id. These findings are clearly correct

and virtually unchallenged.

We say "virtually" because Wentworth's brief might be

read to suggest that Eureka failed to show detrimental reliance

because it got what it bargained for: possession of the equipment

for four years. To accept that suggestion, however, would be to

blink reality. While it is possible that Eureka eventually might

have prevailed in litigation with CopperCom and Marconi, Eureka

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never bargained for the headaches associated with defending itself

against the adverse claims occasioned by Wentworth's fraudulent

misrepresentations.

To cinch matters, the UCC implies in all commercial

leases a warranty of lack of interference with use or enjoyment of

the leased goods. See Mass. Gen. Laws ch. 106, § 2A-211. For this

warranty to be breached, it is not necessary that a third party

have an insuperable claim to possession of the goods; it is

sufficient that the third party's claim is colorable. See Frank

Arnold Contractors, Inc. v. Vilsmeier Auction Co., 806 F.2d 462,

464-65 (3d Cir. 1986). Whether or not the vendors' claims to the

equipment would ultimately have proved to be valid, they were at

least colorable.

That ends this aspect of the case. We hold, without

serious question, that the need to respond to the demands for

payment by CopperCom and Marconi and to defend against the Marconi

litigation were sufficient to establish that Eureka's reliance on

Wentworth's fraudulent misrepresentation redounded to its

detriment. The district court's finding of liability on the fraud

count is, therefore, impervious to attack.

Having found no basis for disturbing the district court's

determination as to liability on the fraud count, we next consider

Eureka's remedy. The UCC provides that in cases of fraud or

misrepresentation, the injured party is entitled to the same

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remedies as are available in cases of default. Mass. Gen. Laws ch.

106, § 2A-505(4). Those remedies include the right to "cancel the

lease contract" and to "recover so much of the rent and security as

has been paid and is just under the circumstances." Id. § 2A-

508(1).

Eureka availed itself of the first of these anodynes by

withholding rent payments after it became clear that Wentworth

intended to stiff the vendors. Wentworth protests that this action

was impermissible under the UCC because of the so-called "hell or

high water" provision. Broadly stated, that provision makes a

finance lessee's obligation to pay rent irrevocable and independent

of any broken promise on the part of the lessor. See id. § 2A-407;

see also AT&T Credit Corp. v. Transglobal Telecom Alliance, Inc.,

966 F. Supp. 299, 303-04 (D.N.J. 1997) (holding, under § 2A-407,

that a finance lessee was not entitled to withhold rent as a remedy

for the lessor's garden-variety breach of contract). Were this a

simple breach of warranty case, Wentworth's protest might have some

bite.4 But there are a few exceptions to the applicability of

section 2A-407, including an exception for cases of fraud. Section

2A-508 of the Code specifically provides that, in cases of fraud,

4
For this reason, we do not rest our holding on Wentworth's
breach of the implied warranty of noninterference. Although we
have little doubt that Wentworth breached that warranty, such a
breach typically gives rise to an action for damages and would
neither defeat the "hell or high water" clause nor entitle the
aggrieved party to cancel the leases. See Mass. Gen. Laws ch. 106,
§ 2A-508(4).

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the victim is entitled to the remedies for default, including

cancellation. See Mass. Gen. Laws ch. 106, § 2A-508(1); see also

id. § 2A-407 cmt. 5 (suggesting that the "hell or high water"

provision is not apposite in cases of fraud). By electing to

cancel the leases, Eureka discharged all remaining executory

obligations of both parties, including any obligation to pay rent.

See id. § 2A-505(1).

Wentworth's fallback position, raised for the first time

at oral argument in this court, is that Eureka suffered no harm

from Wentworth's failure to pay because Eureka still got a valid

right to possess the equipment for the stated lease term. There

are two answers to this belated argument. The short answer is that

the argument was not raised below and, thus, is foreclosed.5 See

United States v. Slade, 980 F.2d 27, 30 (1st Cir. 1992) ("It is a

bedrock rule that when a party has not presented an argument to the

district court, she may not unveil it in the court of appeals.").

The slightly longer, but equally dispositive, answer is

along the lines of the answer to Wentworth's plaint that there was

no detrimental reliance. See supra at 12-13. Whether or not

Eureka had a good right to possession, it nonetheless incurred

unavoidable costs in responding to the vendors' demands for payment

and in defending against Marconi's replevin suit. These costs were

5
Indeed, the argument is doubly foreclosed because Wentworth
failed to advance it in its brief on appeal. See Pratt v. United
States, 129 F.3d 54, 62 (1st Cir. 1997).

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the fruits of Wentworth's fraud, easily foreseeable by Wentworth at

the time it misrepresented its ability and intention to pay for the

goods. See Mut. Fire, Marine & Inland Ins. Co. v. Costa, 789 F.2d

83, 88-90 (1st Cir. 1986).

We also find that the measure of damages employed by the

trial court was reasonable in the circumstances of this case. The

Code provides in pertinent part that a lessee may recover from a

lessor in default "so much of the rent and security as has been

paid and is just under the circumstances." Mass. Gen. Laws ch.

106, § 2A-508(1)(b). Awarding Eureka the full amount of the rent

it had paid — $163,601 — was "just" in the circumstances of this

case. After all, Eureka's costs plainly exceeded the aggregate

rent payments (to cite only one example, it returned the leased

equipment and paid Marconi $180,000 to settle the Marconi suit).

Accordingly, we discern no basis for setting aside the district

court's determination that it was "just" to award Eureka the

entirety of the rent paid, along with other damages, for an

aggregate award of $168,669.

There remains Wentworth's asseveration that the lower

court erred in dismissing its counterclaim. In the court below,

Wentworth cast its counterclaim as one for breach of contract. In

this court, Wentworth shifts gears and maintains that Eureka

converted its property by returning the equipment to the vendors

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without Wentworth's permission. Under either approach, the

district court's ruling is unimpugnable.

Wentworth's breach of contract theory rehashes its

misguided argument about the effect of the "hell or high water"

clause. Citing that clause, it posits that Eureka was required to

continue rent payments to Wentworth regardless of any misconduct on

Wentworth's part. As discussed above, that argument wilts in the

face of the district court's supportable finding that Wentworth

fraudulently induced Eureka to enter into the leases. See supra at

14-15.

Wentworth's conversion theory is forfeit. See Slade, 980

F.2d at 30. Even if it were properly preserved, it would not

profit Wentworth. For one thing, it seems unlikely that Wentworth

could state a valid claim for conversion given the district court's

finding that Wentworth never intended to pay for the equipment.

See Restatement (Second) of Torts § 895 cmt. k (1977) (noting that

a plaintiff cannot maintain an action for conversion against a

defendant who acts on the authorization of another having a

superior claim to the property).

For another thing, Wentworth has adduced no evidence

showing that it was damaged by what it now calls Eureka's

"conversion." Assuming, arguendo, that Wentworth was the rightful

owner of the equipment and that Eureka acted wrongfully in

returning the equipment to the vendors, Wentworth still would owe

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the vendors the purchase price. By returning the equipment, Eureka

settled that debt on Wentworth's behalf and any damage Wentworth

suffered from the alleged conversion would have to be offset by the

benefit so conferred. See Restatement (Second) of Torts, supra §

920 ("When the defendant's tortious conduct has caused harm to the

plaintiff or to his property and in so doing has conferred a

special benefit to the interest of the plaintiff that was harmed,

the value of the benefit conferred is considered in mitigation of

damages, to the extent that this is equitable."); see also Burke v.

Rivo, 551 N.E.2d 1, 6 (Mass. 1990). While it is theoretically

possible that Wentworth's damages as a result of the alleged

conversion exceeded its debt to the vendors, Wentworth has

presented no evidence to that effect. Thus, there is no basis for

disturbing the dismissal of the counterclaim. See McDonald v.

Rockland Trust Co., 798 N.E.2d 323, 325 n.1 (Mass. App. Ct. 2003)

(affirming summary judgment for the defendant in a conversion

action where the plaintiff had failed to adduce evidence of

damages).

We need go no further. Courts must be ever mindful that

the UCC, like other statutes, should be interpreted with common

sense in light of individual circumstances. See Roberts v. Enter.

Rent-A-Car Co., 779 N.E.2d 623, 629 (Mass. 2002). This case

exemplifies that tenet. Whether or not Wentworth may in some

hypertechnical sense be said to have fulfilled its obligations to

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Eureka under the finance leases, its overall conduct was entirely

contrary to the obligations of good faith and fair dealing imposed

on all commercial transactions. See Mass. Gen. Laws ch. 106, § 1-

203. Whether Eureka's response was letter perfect under the

circumstances is not the issue; it is sufficient that Wentworth's

deplorable course of conduct plainly harmed Eureka and that

Eureka's curative actions were reasonable. Thus, as the district

court correctly found, Eureka was entitled to be made whole.

Affirmed.

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