Industrial General Corp. v. Sequoia Pacific Systems Corp.

United States Court of Appeals
United States Court of Appeals
For the First Circuit
For the First Circuit

No. 94-1617

INDUSTRIAL GENERAL CORPORATION,

Plaintiff, Appellee,

v.

SEQUOIA PACIFIC SYSTEMS CORPORATION,

Defendant, Appellant.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

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

Before

Cyr and Stahl, Circuit Judges,

and DiClerico, District Judge.*

Stanley W. Wheatley with whom Gordon & Wise was on brief for

appellant.
Walter J. Connelly with whom Lyne, Woodworth & Evarts was on

brief for appellee.

January 11, 1995

*Of the District of New Hampshire, sitting by designation.

STAHL, Circuit Judge. Industrial General
STAHL, Circuit Judge.

Corporation's ("IGC") subsidiary, Plastek Corporation

("Plastek"), supplied molded plastic parts to Moog

Electronics ("Moog") for use in electronic voting machines

Moog was assembling for Sequoia Pacific Systems Corporation

("Sequoia"). After Moog failed to pay Plastek $80,100 for

supplied parts, Plastek sued Sequoia alleging breach of

contract and violation of Mass. Gen. L. ch. 93A, 11.

Following a seven-day trial, the jury returned a verdict for

Sequoia on the breach of contract claim. In an advisory

verdict on the 93A claim, it found that Sequoia had acted

"unfairly." The district court eventually agreed with the

advisory finding and further held that Sequoia had breached a

fiduciary duty it owed to Plastek and entered judgment for

Plastek on the 93A claim. Because we find that no fiduciary

relationship existed between Plastek and Sequoia, we reverse

the court's chapter 93A judgment.1

I.
I.

FACTUAL BACKGROUND AND PRIOR PROCEEDINGS
FACTUAL BACKGROUND AND PRIOR PROCEEDINGS

In 1984, Sequoia began to design and develop

computerized electronic voting machines which it hoped to

sell to local election boards. During that same year,

Sequoia Associates, a partnership and one of Sequoia's

1. The breach of contract claim is not at issue in this
appeal.

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stockholders, had explored the possibility of acquiring IGC's

predecessor-in-interest, Walco National, Inc. ("Walco").

Though the Sequoia Associates-Walco deal ultimately failed,

because of the acquisition negotiations, Sequoia Associates

had become familiar with Walco's Plastek division, which

produced molded plastic parts. Recognizing that the voting

machines would use plastic parts, Sequoia Associates advised

Sequoia of Plastek's molding abilities. The introduction was

fortuitous, as Sequoia was under time constraints to complete

the project and had been unable to locate a suitable supplier

for the needed plastic parts.

Commencing in mid-1985, Sequoia and Plastek entered

into a series of contracts providing that Plastek would

develop prototype molds and, later, produce prototype parts

for use in the voting machines project. Meanwhile, Sequoia

and Moog entered into agreements for Moog to assemble a

number of prototype voting machines. In connection with

these agreements, Sequoia instructed Plastek to ship some

prototype parts to Moog. Sequoia paid Plastek in full for

the prototype molds and prototype parts and these

transactions are not in dispute. Later, Plastek produced

production molds, for which Sequoia also paid in full.

In the latter part of 1985, Sequoia decided to

contract with a manufacturer to assemble the Sequoia-designed

voting machines. Sequoia would then purchase the machines on

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a "turn-key" basis,2 thus relieving it of both the burden of

carrying the inventory of parts required for assembly and the

burden of assembly itself. Sequoia awarded the initial

manufacturing contract to Momentum Technologies, Inc.

("Momentum"). Moog sued Sequoia, claiming that one of their

earlier prototype-assembly contracts contained a promise to

award Moog a contract for an actual production run of at

least 5,000 machines. In settlement, Sequoia agreed to award

Moog a contract to manufacture 500 machines with Momentum

manufacturing the balance of Sequoia's requirements.

Moog's finances during this period were shaky,

though the extent of Sequoia's knowledge of Moog's condition

was disputed at trial. The district court credited the

testimony of Edmund Lonergan, Sequoia's former technical

director, who at trial testified by deposition that he

developed a "gut feeling" that Moog was not "financially

strong enough to manufacture all the units per our

[settlement] agreement with them." Lonergan alerted his

superiors at Sequoia. James Larkin, Sequoia's chief

financial officer, testified that he knew Moog had a cash-

flow problem and that he agreed to a billing arrangement

designed to improve Moog's cash situation.

2. Under a turn-key arrangement, an assembler contracts to
produce a product for a buyer that is ready to operate at the
"turn of a key."

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Sequoia informed Plastek that the machines would be

assembled by contractors and that Plastek's agreement for

production parts were to be made directly with those

assemblers. Complying with this directive, both Moog and

Momentum contracted directly with Plastek and other suppliers

for the voting machine parts.

In June and July 1986, Moog issued to Plastek

purchase orders for production parts.3 Plastek sent

acknowledgement of the orders to Moog. Plastek manufactured

the parts and shipped them to Moog on a net 30 day basis.

Plastek invoiced Moog directly and the invoices stated, "Sold

to Moog." The shipments were carried on Plastek's books as

Moog account receivables. Plastek never conducted a credit

check on Moog, nor did any Plastek official inquire of

Sequoia about Moog's financial situation or creditworthiness.

After the Moog-Sequoia settlement was in place,

things began to deteriorate at Moog. Moog quickly fell

behind on its production schedule. Eventually, Sequoia

determined that Moog would be unable to timely perform its

contract and, in September 1986, requested Moog to transfer

all work-in-progress to Momentum. Sequoia paid Moog in full

3. About this time, Momentum also issued purchase orders to
Plastek. Plastek shipped the parts to Momentum and Momentum
paid the invoices for them in full.

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for its work-in-progress, including the amount Moog owed

Plastek for the production parts.

Moog, however, never paid Plastek. Plastek sought

to collect its unpaid balance from Moog with no success. In

November 1986, well after the work-in-progress transfer had

taken place, Plastek alerted Sequoia of its problems with

Moog. By early 1987, Moog was insolvent. In February 1987,

Plastek notified Sequoia that it was holding Sequoia

responsible for the unpaid Moog balance. Five months had

passed since Plastek had shipped and invoiced its parts to

Moog.

In 1989, Plastek, through its parent, IGC, brought

the present action in Massachusetts Superior Court seeking

recovery for breach of contract and for violation of Mass.

Gen. L. ch. 93A, 11. Sequoia removed the case to federal

district court with jurisdiction grounded in diversity of

citizenship. After discovery, the district court denied

Sequoia's motion for summary judgment. The district court

held a seven-day jury trial in February 1994. The district

court instructed the jury to answer questions on a special

verdict.

The jury returned a verdict in Sequoia's favor on

the breach of contract claim. With regard to the chapter 93A

claim, the jury found that Sequoia acted "unfairly" in

"failing to disclose what it knew about Moog's financial

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stability." However, the jury did not find that Sequoia's

acts were deceptive or that its actions were knowing and

willful. The district court, essentially agreeing with the

jury, found that Plastek was in a position of "trust and

dependence" relative to Sequoia and that Sequoia had acted

"unfairly in failing to disclose the fact that Moog was an

unreliable customer." Industrial Gen. Corp. v. Sequoia Pac.

Sys. Corp., 849 F. Supp. 820, 824 (D. Mass. 1994). The

district court entered judgment in favor of IGC for

$80,100.69 plus costs. This appeal followed.

II.
II.

DISCUSSION
DISCUSSION

Sequoia argues that the district court committed

clear error in three respects: by finding (1) that Sequoia

and Plastek had a fiduciary or quasi-fiduciary relationship;

(2) that Sequoia possessed knowledge of material facts that

it did not disclose to Plastek; and (3) that Sequoia's

failure to disclose material facts regarding Moog's financial

condition was causally related to Plastek's damages. After

reciting the standard of review, we take up Sequoia's first

argument. Because we conclude that no fiduciary relationship

existed between these parties, we do not reach the other

claims of error raised by Sequoia.

A. Standard of Review

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On review, questions of law are determined de novo.

See, e.g., American Title Ins. v. East W. Fin. Corp., 16 F.3d

449, 453-54 (1st Cir. 1994). Findings of fact "shall not be

set aside unless clearly erroneous." Fed. R. Civ. P. 52(a).

A finding of fact is "`clearly erroneous' when although there

is evidence to support it, the reviewing court on the entire

evidence is left with the definite and firm conviction that a

mistake has been committed." Anderson v. City of Bessemer

City, 470 U.S. 564, 573 (1985) (citation omitted); see also

Tresca Bros. Sand & Gravel, Inc. v. Truck Drivers Union,

Local 170, 19 F.3d 63, 65 (1st Cir. 1994) ("the central

finding . . . `will be given effect unless, after reading the

record with care and making due allowance for the trier's

superior ability to gauge credibility, [we form] a strong,

unyielding belief that a mistake has been made'") (quoting

Dedham Water Co. v. Cumberland Farms Dairy, Inc., 972 F.2d

453, 457 (1st Cir. 1992) (other citation omitted)).

B. Chapter 93A and Massachusetts Common Law Governing

Fiduciary Relationships

Section 11 of the Massachusetts unfair trade

practices statute, Mass. Gen. L. ch. 93A, grants a cause of

action to persons engaged in commerce who suffer a loss

because of the unfair acts or practices of another person

engaged in commerce. Though the statute does not define the

term "unfair," courts applying section 11 have developed a

standard under which the "`objectionable conduct must attain

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a level of rascality that would raise an eyebrow of someone

inured to the rough and tumble of the world of commerce.'"

Quaker State Oil Ref. Corp. v. Garrity Oil Co., 884 F.2d

1510, 1513 (1st Cir. 1989) (quoting Levings v. Forbes &

Wallace, Inc., 396 N.E.2d 149, 153 (Mass. App. Ct. 1979)).

Further, a chapter 93A claimant must establish that "the

defendant's actions fell `within at least the penumbra of

some common-law, statutory, or other established concept of

unfairness,' or were `immoral, unethical, oppressive or

unscrupulous,' and resulted in `substantial injury . . . to

competitors or other businessmen.'" Quaker State, 884 F.2d

at 1513 (quoting PMP Assocs., Inc. v. Globe Newspaper Co.,

321 N.E.2d 915, 917 (Mass. 1975)).

"`Although whether a particular set of acts, in

their factual setting, is unfair or deceptive is a question

of fact, the boundaries of what may qualify for consideration

as a chapter 93A violation is a question of law.'" Shepard's

Pharmacy, Inc. v. Stop & Shop Cos., 640 N.E.2d 1112, 1115

(Mass. App. Ct. 1994) (citation omitted). Here, the unfair

conduct complained of is Sequoia's failure to disclose Moog's

precarious financial condition. A commentator has noted that

section 11 "probably does not contain a general duty of

disclosure" and where the statute does give rise to such a

duty, it "should be limited to situations which even at

common law sometimes required disclosure," including

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instances where the defendant is a fiduciary. Michael C.

Gilleran, The Law of Chapter 93A 4:10 (1989 & Supp. 1994).

The theory presented to the jury and later adopted by the

district court was that Sequoia stood in fiduciary

relationship to Plastek and, consequently, a duty to disclose

arose. We agree with the district court that if a fiduciary

relationship existed, its breach would have constituted a

chapter 93A violation.

As noted above, the district court found that

Plastek was in a position of "trust and dependence" with

respect to Sequoia and that it subsequently abused this

relationship when it failed to disclose what it knew of

Moog's financial difficulties. The crux of the present

dispute, therefore, is whether the Sequoia-Plastek

relationship was fiduciary in nature.

The question of whether, in a particular factual

setting, a fiduciary relationship exists is a question of

fact. See, e.g., Broomfield v. Kosow, 212 N.E.2d 556, 560

(Mass. 1965). Our review of factual assessments made by

Massachusetts courts suggests that a fiduciary relationship

will frequently be found where certain indicia are present.

First, a party owed a fiduciary duty is often in a position

of great disparity or inequality relative to the other party.

See, e.g., Kosow at 560. Second, a fiduciary duty (and

breach thereof) will be found to exist where the disparity in

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relationship has been abused to the benefit of the more

powerful party, particularly where unjust enrichment would

result. See, e.g., id.; Warsofsky v. Sherman, 93 N.E.2d 612,

615 (Mass. 1950).

Further, in the commercial context, other indicia

of fiduciary relationships are generally present.

Massachusetts courts have stated that, though business

transactions conducted at arm's length generally do not give

rise to fiduciary relationships, such a relationship can

develop where one party reposes its confidence in another.

See, e.g., Warsofsky, 93 N.E.2d at 615. Importantly,

however, courts have repeatedly cautioned that "`the

plaintiff alone, by reposing trust and confidence in the

defendant, cannot thereby transform a business relationship

into one which is fiduciary in nature.'" Superior Glass Co.

v. First Bristol County Nat'l Bank, 406 N.E.2d 672, 674

(Mass. 1980) (quoting Kosow, 212 N.E.2d at 560). In

determining whether such a transformation has taken place,

courts look to the defendant's knowledge of the plaintiff's

reliance and consider the relation of the parties, the

plaintiff's business capacity contrasted with that of the

defendant, and the "readiness of the plaintiff to follow the

defendant's guidance in complicated transactions wherein the

defendant has specialized knowledge." Kosow, 212 N.E.2d at

560.

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C. The Relationship Between Sequoia and Plastek

After a careful review of the whole record, and in

light of the foregoing discussion of Massachusetts cases, we

cannot agree that the facts in this case establish that

Sequoia occupied a fiduciary position with regard to Plastek.

We think that the district court's conclusion to the contrary

rises to the level of clear error.

In finding that a fiduciary relationship existed,

the district court placed heavy reliance on its conclusion

that Sequoia "managed" the entire transaction, a conclusion

based upon the following facts: (1) that Sequoia designated

Moog as the general contractor; (2) that Sequoia "generated

the purchasing orders and effectively authored the contract

between Plastek and Moog"; and (3) that Sequoia continued its

relationship with Moog "for no purpose other than to

extricate itself from a legal imbroglio of its own making."

Industrial Gen. Corp., 849 F.Supp. at 825.

We think the district court's conclusion is

mistaken for two basic reasons. First, it rests on a

subsidiary factual finding that we believe is clearly in

error. Upon careful review of the record, we think the

court's assertion that "Sequoia generated the purchasing

orders and effectively authored the contract between Plastek

and Moog," id., substantially misstates what transpired. To

be sure, Sequoia officials directed Plastek to deal directly

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with Moog. However, as both Sequoia and Plastek officials

testified, Moog issued purchase orders for the production

parts and Plastek acknowledged those orders.4 Notably,

there is no evidence that Sequoia directed or was in any

other way involved with Plastek's fateful decision to ship

the production parts to Moog on a net 30 day basis. Second,

and more importantly, we do not think that Sequoia's overall

"management" role is sufficient to transform the parties'

relationship into a fiduciary one. We note that the

transaction involved here is not uncommon in the commercial

world. Under a turn-key arrangement, a manufacturer agrees

to deliver to a buyer a completely assembled product that is

ready to function. It is the manufacturer's responsibility

to acquire needed parts, even if acting at the direction of

the turn-key buyer. Accordingly, as we have just noted, the

two voting machine manufacturers, Moog and Momentum, issued

purchase orders to Plastek. Plastek, in turn, sent

acknowledgments. Plastek shipped those orders, pursuant to

its own credit policies, on a net 30 day basis. Critically,

Plastek did not conduct a credit check before shipping the

parts to Moog nor did it take any other steps to protect

itself against nonpayment.

4. Sequoia did issue purchase orders for prototype parts

(for which it subsequently paid) but, as noted above, these
orders are not at issue here.

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While the Sequoia-Moog settlement did serve to

extricate Sequoia from an untimely legal battle, that

agreement could not and did not advance Sequoia's interests

at the expense of Plastek. Sequoia remained liable to Moog

for the costs of the production parts and, when the work-in-

progress was transferred from Moog to Momentum, Sequoia paid

Moog in full for the parts Moog had acquired from Plastek.

Our conclusion that Sequoia's "management" role is

an insufficient basis to transform this relationship into a

fiduciary one is reinforced by reference to the indicia

outlined above. First, we find no great disparity in the

Sequoia-Plastek relationship. The record indicates that both

Sequoia and Plastek were experienced in the commercial world.

Further, the facts suggest that, because Sequoia was

operating under a tight deadline and had encountered

difficulties in locating an adequate plastic parts supplier,

Plastek was not altogether without leverage in the

relationship. Second, to the extent a disparity existed in

Sequoia's favor, we again fail to see how the relationship

was abused to the benefit of Sequoia. The effect of the

judgment below will not be to remedy unjust enrichment or,

for that matter, any other benefit accruing to Sequoia.

Sequoia would simply be paying again for the same parts it

had already purchased from Moog. Third, the district court

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did not find that Sequoia had knowledge of Plastek's alleged

reliance on the trust and dependence it had reposed in

Sequoia. Our own review of the record reveals nothing that

would have alerted Sequoia to a heightened fiduciary status

or that Plastek was relying on Sequoia to guarantee payment.

With specific regard to the Moog sales, at no point did

Plastek officials make inquiry of Sequoia regarding Moog's

finances or creditworthiness, and Plastek waited months

before alerting Sequoia of its problems with Moog. Even if

we were to agree with the district court that Plastek, having

been "lulled by Sequoia's blandishments and visions of lucre,

looked to Sequoia to watch out for its interests," Industrial

Gen. Corp., 849 F. Supp. at 823, the record is devoid of any

evidence that Sequoia knew of this reliance. In short, the

facts overwhelmingly suggest that to the extent Plastek

reposed "trust and dependence" in Sequoia, it did so

unilaterally.

Finally, we observe that our conclusion comports

with the so-called "rascality" standard underlying section 11

unfairness claims. We agree with the district court's

conclusion that Plastek was "naive, inattentive and

altogether too trusting of Sequoia," Industrial Gen. Corp.,

849 F.Supp. at 825-26, and that its complacency may have been

due, in part, to the fact that Plastek and Sequoia "were not

strangers to one another" given the initial exploration by

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one of Sequoia's principals into acquiring Walco (the

predecessor-in-interest of Plastek's parent company). By

extending credit to Moog and assuming -- perhaps through

naivete, inattention and trust -- that Sequoia would pick up

the tab, Plastek clearly made a costly mistake. Though

Sequoia might have chosen to share with Plastek its concerns

about Moog's finances as they developed, we do not think that

its failure to do so would make Sequoia a commercial rascal.

Under the clearly erroneous standard, we are not

free to reverse merely because we disagree with the district

court's conclusions. Rather, we must have the strong,

unyielding conviction that the district court was mistaken.

This standard is especially important in a case like this

where the district court made a factual determination based

on evidence adduced during a lengthy and exhaustive trial.

We emphasize that we have thoroughly and carefully examined

the record. Based on the record as a whole, and in light of

similar factual evaluations made by Massachusetts courts, we

are of the unyielding belief that the district court's

conclusion that a fiduciary relationship existed between

Sequoia and Plastek was mistaken. Because there was no

fiduciary relationship, no duty to disclose existed and thus

no cause of action lies under section 11, chapter 93A.

III.
III.

CONCLUSION
CONCLUSION

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For the foregoing reasons, the decision of the

district court is reversed and the case is remanded for

proceedings consistent with this opinion.

Each party shall bear its own costs.
Each party shall bear its own costs

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