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
-8-
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.
-10-
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.
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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
-13-
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
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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
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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).
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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
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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.
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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
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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
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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
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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
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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
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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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