Pride Hyundai, Inc. v. Chrysler Financial Co.

United States Court of Appeals
For the First Circuit

No. 03-1905

PRIDE HYUNDAI, INC., BLACKSTONE SUBARU, INC., d/b/a PRIDE
HYUNDAI OF SEEKONK, PRIDE DODGE, INC., and
PRIDE CHRYSLER-PLYMOUTH, INC.,

Plaintiffs, Appellants,

v.

CHRYSLER FINANCIAL COMPANY, L.L.C.,

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF RHODE ISLAND

[Hon. William E. Smith, U.S. District Judge]

Before

Boudin, Chief Judge,
Lynch, Circuit Judge, and
Howard, Circuit Judge.

Preston W. Halperin, with whom Christine L. DeRosa and
Shechtman Halperin Savage, LLP were on brief, for appellants.
Jonathan D. Deily, with whom Richard C. Maider and Deily,
Mooney & Glastetter, LLP were on brief, for appellee.

May 27, 2004
 LYNCH, Circuit Judge. In July 2001, Massachusetts, along

with virtually every other state, revised Article Nine of its

commercial code. It appears that this is a case of first

impression under Massachusetts law as to the revised § 9-204.

Of primary concern here are revisions that altered § 9-

204, which deals with the enforceability of dragnet clauses in

secured commercial lending agreements. Dragnet clauses purport to

secure all of a debtor's obligations to a creditor, regardless of

whether those obligations arise prior to, concurrent with, or after

the instrument containing the dragnet clause itself. See generally

Bruce A. Campbell, Contracts Jurisprudence and Article Nine of the

Uniform Commercial Code: The Allowable Scope of Future Advance and

All Obligations Clauses in Commercial Security Agreements, 37

Hastings L.J. 1007 (1986). The Official Commentary to the amended

§ 9-204 explicitly disavowed prior case law that had interpreted

dragnet clauses using special interpretive tests, such as whether

the obligations created along with the dragnet clause were of the

same or similar type or class as other obligations.

Our interpretation of the revised § 9-204 is informed by

a second change to Article Nine that was also made by the 2001

amendments. The amendments expanded the definition of good faith

required in all contracts under Article Nine to include "the

observance of reasonable commercial standards of fair dealing."

Mass. Gen. Laws ch. 106, § 9-102(43). It appears that this

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expansion of the definition of good faith has also not yet been

addressed by Massachusetts' highest court.

At stake is whether a commercial lender, Chrysler

Financing Company (CFC), violated its contractual obligations or

its duty under Mass. Gen. Laws ch. 93A not to engage in unfair and

deceptive practices. These claims by the commonly-owned Pride car

dealerships, plaintiffs, are primarily premised on CFC's

unwillingness to release its first position security interest in

Pride's assets. CFC insists that Pride deposit 1.5% of the value

of certain outstanding contracts in a non-interest bearing account

for the payment of contingent future debts that might arise in

conjunction with those contracts. Pride argues that these

contingent retail financing debts are not secured and thus that CFC

has no right to insist on such a deposit before releasing the

security interest. CFC, in turn, contends that these future debts

are indeed secured by a dragnet clause in its 1995 and 1996

wholesale financing agreements with Pride, that its actions are

reasonable, and thus that there is neither a chapter 93A violation

nor a breach of contract.

The district court ruled for CFC on all claims and denied

any relief to Pride. Unfortunately, neither party brought the 2001

amendments or Official Commentary to the district court's

attention, instead relying on the now apparently disavowed case

-3-
law. This court notified the parties of the issue and sought and

received additional briefing on the effect of the amendments.

We now affirm. We do so, not surprisingly, on grounds

different from the district court. The clear language of the

dragnet clause in the wholesale finance agreements secures Pride's

contingent retail finance debt to CFC and there is no evidence that

application of the dragnet clause was not in good faith or would

violate "reasonable commercial standards of fair dealing." Mass

Gen. Laws ch. 106, § 9-102(43).

I.

The plaintiffs, Pride Hyundai, Blackstone Subaru, Pride

Dodge, and Pride Chrysler-Plymouth (collectively "Pride") are four

car dealerships that are owned by Alfredo Dos Anjos. In early 1987

one of the Pride dealerships, Pride Chrysler-Plymouth, entered into

a retail financing agreement with the defendant, CFC.

Retail financing agreements facilitate a dealership's

financing of its customers' automobile purchases. Customers who

purchase cars from a dealership frequently do not pay all of the

purchase price up front, but instead finance their purchases using

an installment contract with the dealership. These installment

contracts allow the customer to pay for an automobile over the

course of an extended period of time, lasting up to seven years.

Generally, though, dealerships do not have the resources to

maintain numerous customer installment contracts for prolonged

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periods of time, so they seek retail financing agreements with

credit companies.

Retail financing agreements allow a dealership to sell,

via assignment, numerous installment contracts to a large lender,

here CFC, with relatively minimal transaction costs. They do so by

setting forth in advance the terms by which the lender will

purchase the installment contracts from the dealer. These terms

include a formula for the price that the lender will pay for a

given installment contract; the formula takes into account factors

such as the amount financed in the installment contract and the

length of the repayment term. Dealerships typically have retail

financing agreements with multiple lenders, in part because these

agreements only set the terms for future purchases and do not

require the lender to purchase a minimum amount of installment

contracts. The market for installment contracts is described in

the industry as the retail paper market.

The retail financing agreement between Pride Chrysler-

Plymouth and CFC also provided that if a customer paid off the

installment contract before maturity or defaulted -- either one of

which decreases the value of the contract to CFC -- then Pride

Chrysler-Plymouth would be liable to CFC for a portion of the

unrealized purchase price. The parties term these contingent

liabilities "charge-backs": the dealership is charged back a

portion of the unrealized profit stemming from the installment

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contracts, thus splitting the risk inherent in the financing

between both the lender and the dealership. Although the retail

financing contract does not create an interest securing these

contingent liabilities, it does provide that the dealership must

maintain a minimum reserve balance in an account held by CFC for

the purpose of paying these charge-backs. The balance of this

charge-back account must be either $1,000 or 1.5% of the value of

the installment contracts purchased, whichever is greater. The

account is non-interest bearing; once CFC is paid from the charge-

back account the final amount it is owed, the balance remaining in

the account is returned to Pride Chrysler-Plymouth.

In late 1994, CFC attempted to expand its business

relationship with the Pride dealerships beyond the retail financing

it had been providing to Pride Chrysler-Plymouth. William Nicolo,

a dealer relations manager for CFC, approached Dos Anjos and

suggested that CFC enter into retail financing agreements with Dos

Anjos's other Pride dealerships. Nicolo also proposed that the

Pride dealerships obtain their wholesale inventory financing (also

known as floor plan financing) from CFC. In contrast to the retail

financing agreements, such wholesale financing agreements provide

capital directly to the dealerships so that they can purchase their

inventory of automobiles. Dos Anjos testified that he was told by

CFC's Zone Manager for Boston, William Harrington, that in exchange

for Pride's wholesale financing business, CFC would purchase 100%

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of the installment contracts generated by Pride's customers.

Harrington was apparently responsible for CFC's retail paper

business in Boston. Nicolo testified that he, and not Harrington,

was centrally involved in the contract negotiations between CFC and

Dos Anjos in 1994 and that he had not had discussions with Dos

Anjos about how many installment contracts CFC would purchase.

In 1995 and 1996, Dos Anjos transferred both the retail

and wholesale financing of the four plaintiff dealerships to CFC in

a series of agreements. First, on January 26, 1995, Dos Anjos

transferred both the wholesale and retail financing for Blackstone

Subaru to CFC. He did the same for the Pride Dodge dealership one

month later. A little over a year later, on April 29, 1996, Dos

Anjos entered into a retail financing agreement (but not a

wholesale financing agreement) with CFC for the Pride Hyundai

dealership. On August 29, 1996, four months later, Dos Anjos

transferred to CFC the wholesale financing for Pride Chrysler-

Plymouth and Pride Hyundai, both of which already had retail

financing agreements with CFC.1 Additionally, at some point

unspecified in the record, but prior to 1999, Dos Anjos and CFC

also entered into wholesale financing agreements for two other

1
The delay in transferring the wholesale financing of these
two dealerships to CFC was the result of problems with the
dealerships' previous wholesale financier, Bay Bank. Bay Bank
refused to release its first priority security interest in the two
dealerships' assets because of an ongoing dispute.

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dealerships, Pride Ford and Pride Kia, which are not parties to

this action.

The parties agree that each of the retail financing

agreements for the dealerships were the same in all material

respects. Thus, as best we can tell from the record, a separate

charge-back account existed for each of the Pride dealerships.

Both parties admit that at least until 2000, CFC did not enforce

the requirement that these accounts be maintained at 1.5% of the

value of the outstanding installment contracts, which would have

been substantially larger than the $1,000 minimum balance.

Unlike the retail financing contracts, each of the

wholesale financing contracts -- which are all identical --

contains a sweeping security provision known as a dragnet clause.

This clause provides:

3.0 Security - Debtor hereby grants to Secured Party a
first and prior security interest in and to each and
every Vehicle financed hereunder . . . . The security
interest hereby granted shall secure the prompt, timely
and full payment of (1) all Advances, (2) all interest
accrued thereon in accordance with the terms of this
Agreement and the Promissory Notes, (3) all other
indebtedness and obligations of Debtor under the
Promissory Notes, (4) all costs and expenses incurred by
Secured Party in the collection or enforcement of the
Promissory Notes or of the obligations of the Debtor
under this Agreement, (5) all monies advanced by Secured
Party on behalf of Debtor for taxes, levies, insurance
and repairs to and maintenance of any Vehicle or other
collateral, and (6) each and every other indebtedness or
obligation now or hereafter owing by Debtor to Secured
Party including any collection or enforcement costs and
expenses or monies advanced on behalf of Debtor in
connection with any such other indebtedness or
obligations.

-8-
(emphasis added). CFC apparently includes such dragnet clauses in

all of its wholesale financing agreements. Indeed, when one of Dos

Anjos's assistants, the general manager of Blackstone Subaru, asked

about changing some terms in the wholesale financing agreement, he

was informed that CFC would not modify any portion of the contract

because it was a standard lending document used with all dealers.

Under the literal language of this dragnet clause in the

wholesale financing agreements, all of Pride's obligations to CFC,

including those under the retail financing agreements, are secured

by virtually all of Pride's assets.2 Moreover, this security

interest applies not only to past obligations, but also to all

subsequent obligations as well (including future obligations that

might arise under then-unsigned retail financing agreements). If

applied in this way, the effect of the dragnet clause would be to

alter the balance in the retail financing agreements, which do not

themselves create a security interest in the dealer's assets apart

from the minimum reserve balances in the charge-back accounts. It

was the industry norm then that the terms of retail financing

2
The security interest included not only all of Pride's
vehicles purchased with funds from the wholesale financing
agreement, but also "all Chattel paper, Accounts whether or not
earned by performance and including without limitation all amounts
due from the manufacturer or distributor of the Vehicles or any of
its subsidiaries or affiliates, Contract Rights, Documents,
Instruments, General Intangibles, Consumer Goods, Inventory of
Automotive Parts, Accessories and Supplies, Equipment, Furniture,
Fixtures, Machinery, Tools, and Leasehold Improvements . . . ."

-9-
agreements did not provide for a security interest in the

dealership's assets.

If CFC had not also been Pride's retail finance provider

(and entered into no other financing contracts with Pride) the

dragnet clause would likely have been irrelevant. But because CFC

provided Pride with retail financing, the literal language of the

dragnet clause created a new dynamic between the parties. It was

possible for Pride to incur obligations, in the form of charge-

backs, under the retail financing agreements that now were secured

by virtually all of Pride's assets, not just the sum in the charge-

back accounts created by the retail financing agreements. If read

that way, the dragnet clause would have the effect of reducing

Pride's flexibility in changing the supplier of its wholesale

financing so long as there were outstanding installment contracts

from which future liabilities might arise.

The business relationship between CFC and Pride was

generally harmonious until October 1997; CFC purchased most, but

not all, of Pride's installment contracts until that time. But it

appears that CFC had been suffering significant losses in its

retail paper business, and in October it replaced Harrington with

a new Zone Manager for Boston, Robert DiClemente.

From the start of his tenure, DiClemente purchased

significantly less retail paper from Pride than had his

predecessor. Pride says that this, in turn, limited its ability to

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sell cars and led to significant losses. Pride says that at least

partially as a result of these losses, it defaulted on its various

financing agreements with CFC. Pride thus entered into a new

agreement with CFC on March 15, 1999, in which Pride agreed, inter

alia, to release CFC from any liability arising up to that point3

in exchange for CFC's agreement not to exercise its various rights

arising from Pride's default.

Around the same time that it entered into the refinancing

agreement with CFC, Dos Anjos began to seek new wholesale financing

for two of his dealerships, Pride Ford and Pride Kia, neither of

which is a party here. Dos Anjos began negotiating with Ford Motor

Credit Company (FMCC), and on July 26, 1999, wrote to CFC asking it

to release its security interests in the two dealerships' assets,

which CFC retained in connection with those dealerships' wholesale

financing agreements. FMCC would not provide the Pride Ford and

Pride Kia dealerships with wholesale financing without a release of

CFC's security interest in their assets. CFC, in turn, responded

that it would only release those security interests in exchange for

a $50,000 deposit into Pride Dodge's charge-back account, which

would secure any of Pride's liability arising from potential future

charge-backs in connection with the installment contracts that CFC

3
The district court found that this release was enforceable
and thus did not consider any of Pride's claims to the extent that
they relied on conduct that occurred prior to the release. Pride
does not appeal this ruling.

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purchased from the two dealerships. After some negotiation, Pride

finally agreed to CFC's terms and paid the $50,000. CFC, in turn,

released its security interests in the two dealerships' assets and

FMCC became the primary wholesale and retail financier for Pride

Ford and Pride Kia.

The already deteriorating relationship between Pride and

CFC was further jeopardized in 1999 when Pride discovered that CFC

had been incorrectly calculating the amount of the charge-backs

that Pride owed under the retail financing agreements. After

examining Pride's concerns, CFC officials agreed that it had been

over-charging Pride on the charge-backs, although the cumulative

amount of these over-charges was apparently a matter of some

dispute within CFC. In June of 2000, Pride and CFC negotiated a

resolution of the dispute in which CFC credited a total of

$276,680.31 to Pride's various charge-back accounts. Apparently,

DiClemente was able to convince other CFC officials to resolve the

charge-back dispute on these terms in order to preserve CFC's

relationship with Pride.

Despite the resolution of the charge-back dispute, Pride

decided that it no longer wanted to maintain its wholesale

financing relationship with CFC and began to search for another

lender.4 Because potential new lenders would require a first-

4
Pride began negotiating with Manufacturers and Traders Trust
Company (M&T), but these negotiations ultimately stalled when CFC
would not release its security interest. When M&T and Pride were

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position security interest in Pride's assets before they would

extend wholesale financing, Pride contacted CFC to negotiate the

release of its security interest. DiClemente responded with a

phone call to Matthew Ferucci, Pride's comptroller and executive

manager, in which he expressed outrage that Pride would terminate

its relationship with CFC immediately after CFC had agreed to

credit Pride approximately $275,000. DiClemente stated that CFC

would not release its security interest unless Pride deposited 3%

of the value of the outstanding installment contracts in the

various dealerships' charge-back accounts and threatened that he

would start to purchase fewer of Pride's installment contracts.

Ferucci responded by asking which provision of the wholesale

contract authorized CFC to require such a deposit as a precondition

to releasing its security interest.

About a month after DiClemente's phone call to Ferucci,

on January 18, 2001, CFC's attorney sent a letter to Pride

informing it that CFC would require Pride to deposit 1.5%, rather

than 3%, of the value of the outstanding installment contracts in

the accounts before CFC would agree to release its security

interest in Pride's assets. This amounted to $415,569. The letter

asserted that CFC was entitled to require such a deposit because

its security interest, contained in the wholesale financing

unable to reach agreement, Pride agreed to pay M&T approximately
$2,900 in attorneys' fees expended by M&T on the matter.

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agreements' dragnet clause, covered not only Pride's wholesale

liabilities, but also Pride's contingent liabilities arising out of

the retail financing agreements.

Over the course of the next few months, Pride and CFC

attempted to negotiate a settlement of their dispute. As the

negotiations stalled, Pride intentionally defaulted on several of

its contractual obligations under the wholesale financing

agreements in order to express its displeasure with CFC. Pride

did not provide CFC with monthly financing statements, did not

attempt to resolve Pride's working capital or net worth shortages,

and refused CFC access to its dealerships' books and records. CFC,

contractually entitled to terminate immediately its wholesale

financing of Pride, nonetheless decided to try to resolve the

dispute through further negotiations. At a meeting in June 2001,

Pride, through Dos Anjos, offered to deposit one million dollars

into an account controlled by CFC in exchange for the release of

the security interest, so long as CFC paid interest on the deposit.

CFC refused this offer, claiming that it was not authorized to pay

interest to its debtors. Dos Anjos, in turn, refused to cure

Pride's defaults under the wholesale financing agreements.

Negotiations continued, but to little avail. Pride

offered, on June 13, 2001, to begin providing CFC with monthly

financing statements if CFC would calculate the actual amount of

exposure on the charge-backs and would agree to a letter of credit

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instead of cash in exchange for the release of the security

agreements. CFC responded on June 15 by expressing its willingness

to consider a letter of credit in lieu of cash, refusing to perform

any actual calculation of retail charge-back exposure, and noting

that Pride would still be in default of several provisions in the

wholesale financing agreements even were it to resume providing CFC

with monthly financing statements.

On August 9, 2001, Pride filed suit against CFC in Rhode

Island Superior Court. CFC promptly removed the case to federal

court. On November 14, 2002, CFC sent a letter to Pride in which

it suggested that it would "freeze" $250,000 of Pride's money

contained in an account held by CFC, which could be used to satisfy

any liability of Pride during the pendency of the litigation. CFC,

in turn, offered to continue providing Pride with wholesale

financing during the litigation, despite Pride's defaults, and to

"allow the Pride entities a period of time within which to replace

its [sic] wholesale credit facilities." Pride ultimately agreed to

this arrangement after negotiating terms to ensure it preserved its

litigation rights. It then amended its complaint, pursuant to Fed.

R. Civ. P. 15(b), to include CFC's conduct in the November 14, 2002

letter.

Pride's suit alleged that CFC had (1) violated the

covenant of good faith and fair dealing; (2) tortiously interfered

with prospective contractual relationships; and (3) violated Mass.

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Gen. Laws ch. 93A. Pride also sought a declaration from the

district court that CFC was not entitled to insist on a deposit of

1.5% of the value of the outstanding installment contracts because

the dragnet clause in the wholesale financing agreements does not

secure the liability that might arise out of future charge-backs.

Although Pride admitted that its only monetary loss was the $2,900

that it paid to M&T, see supra note 4, it also sought attorneys'

fees under Chapter 93A. See Mass. Gen. Laws ch. 93A, § 11. CFC

counter-claimed, also seeking declaratory relief on the existence

of a security interest in Pride's contingent liabilities from the

retail financing agreements. CFC further claimed that it was

entitled to attorneys' fees under the wholesale financing

agreements.

A bench trial was held between March 24, 2003 and April

2, 2003. On May 29, 2003, the district court issued an opinion in

which it rejected each of Pride's claims.5 The opinion also

granted CFC declaratory relief, finding that the dragnet clause in

the wholesale financing agreements does apply to the contingent

liabilities arising out of both past and future retail financing

agreements and thus that CFC is entitled to insist on 1.5% of the

value of the outstanding installment contracts as a condition

5
Pride does not appeal the district court's decision regarding
the tortious interference with prospective contractual relations
claim.

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precedent to releasing its security interest in Pride's assets.6

Applying Massachusetts law, the court determined that Pride's

obligations under the wholesale financing agreements are similar in

kind to its obligations under the retail financing agreements and

thus that the dragnet clause in the former was intended to secure

the obligations arising out of the latter.

II.

A. The Dragnet Clause

Both Pride and CFC agree with the district court's

holding that Massachusetts law applies to determine the scope of

the dragnet clause in the wholesale financing agreements.7 Because

the contract interpretation issues we address are purely questions

of law, and there is no factual dispute, our review is de novo.

Coady v. Ashcraft & Gerel, 223 F.3d 1, 10 (1st Cir. 2000).

6
The district court deferred ruling on the availability of
attorney's fees for the defendant until the conclusion of this
appeal.
7
The analysis would be the same, however, even were we guided
by Rhode Island law, the other potential source of law. This is
because Rhode Island, like Massachusetts (and every other state),
recently adopted the revised provisions of Article Nine on which we
rely for our analysis. Compare Mass. Gen. Laws ch. 106, § 9-204,
with R.I. Gen. Laws § 6A-9-204.

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 1. The Law Applicable to Dragnet Clauses in
Massachusetts

Article Nine of the Uniform Commercial Code, as adopted

by Massachusetts prior to 2001,8 specifically permitted the use of

dragnet clauses. Mass. Gen. Laws ch. 106, § 9-204(c) (1979)

(amended 2001) ("Obligations covered by a security agreement may

include future advances or other value whether or not the advances

or value are given pursuant to commitment as defined in subsection

(1) of section 9-105.").

On July 1, 2001, a revised version of Article Nine of the

Uniform Commercial Code became effective in Massachusetts. It has

since been adopted by all fifty states. Kenneth Misken, Survey of

Legislation: Revised Article 9, 24 U. Ark. Little Rock L. Rev. 415,

415 (2002). It is this revised version of Article Nine that

applies to the interpretation of the dragnet clause at issue here:

suit was filed in this case on August 9, 2001, more than a month

after the revised Article Nine became effective. See Mass. Gen.

Laws ch. 106, § 9-702(a) & (c) (the Act "applies to a transaction

or lien within its scope, even if the transaction or lien was

entered into or created before this act takes effect" unless, inter

8
The Uniform Commercial Code was first adopted by
Massachusetts in 1957. See Mass. Gen. Laws ch. 106, § 1-101. A
revised version of Article Nine that contained a provision
authorizing dragnet clauses was adopted in 1979. See Mass. Gen.
Laws ch. 106, § 9-204 (1979) (amended 2001).

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alia, the "action, case, or proceeding commenced before th[e] act

takes effect").

The revised version of Article Nine includes two

significant changes for purposes of this case. First, and more

generally, it alters the meaning of the duty of good faith in the

Article Nine context. Nat'l Conference of Comm'rs on Unif. State

Laws, Uniform Commercial Code Revised Article 9 Secured

Transactions § 9-102, cmt. 19 (1998) (hereinafter "U.C.C.").

Previously, the applicable definition was contained in § 1-201(19),

which only imposes on parties a duty of "honesty in fact in the

conduct or transaction concerned." Mass. Gen. Laws ch. 106, §

1-201(19). The amendments provide that for Article Nine purposes,

"[g]ood faith means honesty in fact and the observance of

reasonable commercial standards of fair dealing." Id. § 9-102(43).

Naturally, there has been controversy over this new standard. Cf.

R. Wilson Freyermuth, Enforcement of Acceleration Provisions and

the Rhetoric of Good Faith, 1998 BYU L. Rev. 1035, 1064 n.84

(discussing the controversy surrounding the broadening of the

definition of good faith in Articles 3, 4 and 4A in 1990).

Second, the amendments include a modified version of § 9-

204, the provision that deals with dragnet clauses. Like its

predecessor, the revised § 9-204 explicitly permits the use of

dragnet clauses, stating that "[a] security agreement may provide

that collateral secures . . . future advances or other value,

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whether or not the advances or value are given pursuant to

commitment." Mass. Gen. Laws ch. 106, § 9-204 (2001); see U.C.C.,

§ 9-204, cmt. 5 ("Under subsection (c) collateral may secure future

as well as past or present advances if the security agreement so

provides.").

Although the language of § 9-204 was only slightly

modified by the 2001 amendments, the Official Commentary to the

provision was substantially changed. It now provides:

Determining the obligations secured by collateral is
solely a matter of construing the parties' agreement
under applicable law. This Article rejects the holdings
of cases decided under former Article 9 that applied
other tests, such as whether a future advance or other
subsequently incurred obligation was of the same or a
similar type or class as earlier advances and obligations
secured by the collateral.

Id. § 9-204, cmt. 5 (emphasis added). As in most states, this

Official Comment was not enacted into law by Massachusetts. See

2001 Mass. Adv. Legis. Serv. 26, § 39. For this reason, it does

not enjoy the same status as does the text of § 9-204. See Szabo

v. Vinton Motors, Inc., 630 F.2d 1, 4 (1st Cir. 1980) (interpreting

Massachusetts law and noting that although the Official Comments

"are powerful dicta. . . . it is the Code provisions and not the

Comments which control" (internal quotation marks and citation

omitted)); Consol. Film Indus. v. United States, 547 F.2d 533, 536

(10th Cir. 1977) ("We are unwilling to follow the Comment in

preference to the words of the statute and particularly so in view

of the fact that Utah has not chosen to adopt it."). And as Pride

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observes in its supplemental briefing, the changed language of the

amended § 9-204 does not appear materially different from its

previous version.9

Most states, including Massachusetts, choose not to enact

the Official Commentary to Code provisions such as Article Nine.

See 1 E.A. Farnsworth, Farnsworth on Contracts § 1.9. (3d ed. 2004)

(observing that most states do not enact the Official Commentary to

the Code into law); see also Contrail Leasing Partners, Ltd. v.

Consol. Airways, Inc., 742 F.2d 1095, 1101 (7th Cir. 1984) (noting

that Indiana has not enacted the Official Commentary into law, but

Arkansas has). The majority approach nonetheless tends to give

"considerable weight to the comments." 1 Farnsworth, supra, §

1.9a; see also JOM, Inc. v. Adell Plastics, Inc., 193 F.3d 47, 57

n.6 (1st Cir. 1999) ("UCC Official Comments do not have the force

of law, but are nonetheless the most useful of several aids to

interpretation and construction of the [UCC]." (internal quotation

marks omitted)). The SJC follows this majority viewpoint,

routinely treating Official Comments to the Code that have not been

enacted as highly persuasive authority. See, e.g., Commerce &

9
Pride, relying on one commentator, urges in its supplemental
briefing that "the best approach is to disregard Comment 5 to
Revised Section 9-204 as unsupported by the statutory text of that
provision" because otherwise "the pressure will be on the courts to
find equity doctrines to limit the exalted position of the secured
creditor under Revised Article 9." Secured Transactions Under the
UCC § 7C.04[3] (Matthew Bender 2003). For the reasons that follow,
we reject this position.

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Indus. Ins. Co. v. Bayer Corp., 433 Mass. 388, 394-96 (2001);

Lafayette Place Assocs. v. Boston Redevelopment Auth., 427 Mass.

509, 525-26 (1998); Chokel v. First Nat'l Supermarkets, 421 Mass.

631, 638-39 (1996); Zapatha v. Dairy Mart, Inc., 381 Mass. 284,

292-93 (1980). The Official Commentary here was made widely

available prior to the state's enactment of the Code: the revised

Article Nine, along with the Official Commentary, was published

three years prior to its adoption in Massachusetts.

Use of the Official Comment here would mean that the

Massachusetts cases analyzing dragnet clauses -- all of which

consider real estate mortgages, where Article Nine does not apply,10

see Mass. Gen. Laws ch. 106, § 9-204(c) -- are inapplicable in the

Article Nine context. These real estate cases have specifically

used the approach repudiated by the Official Comment, construing

dragnet clauses "to apply to only debts of the general kind of

those specifically secured, or which bear a sufficiently close

relationship to the original indebtedness, that the [c]onsent of

the debtor can be inferred." Foxborough Savings Bank v. Ballarino,

180 B.R. 343, 346-47 (D. Mass. 1995) (internal quotations and

10
For this reason, the Massachusetts cases on dragnet clauses
were not themselves directly affected by the amended Massachusetts
Commercial Code. See Safe Deposit Bank & Trust Co. v. Berman, 393
F.2d 401, 403 (1st Cir. 1968) (noting that "Massachusetts law has
shown itself sensitive to" certain considerations in the real
estate mortgage context, "[b]ut in this case we deal with the
Uniform Commercial Code and must look to its terms and spirit for
guidance").

-22-
citations omitted) (quoting Financial Acceptance Corp. v. Garvey,

6 Mass. App. Ct. 610, 613 (1978)); see In re Goodman Indus., 21

B.R. 512, 516 (Bankr. D. Mass. 1982); Debral Realty, Inc. v.

Marlborough Coop. Bank, 48 Mass. App. Ct. 92, 94-95 (1999).

Although these cases interpreted dragnet clauses contained in

mortgages of real property, some courts elsewhere, but not in

Massachusetts, had found that similar principles applied in the

Article Nine context. See, e.g., In re Kazmierczak, 24 F.3d 1020,

1022 (7th Cir. 1994); In re Estate of Simpson, 403 N.W.2d 791,

792-93 (Iowa 1987); In re Johnson, 9 B.R. 713, 716 (Bankr. M.D.

Tenn. 1981).

Ultimately, our role in this diversity case is to predict

what the Massachusetts Supreme Judicial Court would do if it were

faced with this issue. See In re Mi-lor Corp., 348 F.3d 294, 305-

06 (1st Cir. 2003). We think that the SJC would adopt the approach

to dragnet clauses in the Article Nine context that is contained in

the Official Commentary to the revised Code. The parties in

transactions involving dragnet clauses are typically sophisticated

market actors. Commercial parties on both sides of a transaction

may have good reasons to enter into a security agreement that

secures not only present liabilities, but also future liabilities

of a different class or type. Such an arrangement allows future

credit to be extended between the parties on a secured basis

without the additional transaction costs that would accompany the

-23-
execution of a new agreement for each such transaction. See 2

Clark, The Law of Secured Transactions under the Uniform Commercial

Code § 10.01[3] (2000) ("Article 9 makes it clear that [future]

advances become part of the obligation secured by the collateral

without the necessity of new security agreements accompanying the

future advances.").

Additionally, the approach set forth in the Official

Commentary provides the benefit of greater certainty to

sophisticated commercial actors about the circumstances in which

dragnet clauses will be enforced. One of the primary shortcomings

of comparing types of debt is that the inquiry is inherently

uncertain. See Campbell, supra, at 1040. Commercial parties place

considerable value on having a clear set of legal background rules

against which to order their affairs. See Robert E. Scott, A

Relational Theory of Default Rules for Commercial Contracts, 19 J.

Legal Stud. 597, 598 (1990). And the Code itself says that it

should be construed according to its underlying purposes and

policies, one of which is "to simplify, clarify and modernize the

law governing commercial transactions." Mass. Gen. Laws ch. 106,

§ 1-102.

Massachusetts may also view the amendment to § 9-204 and

the approach articulated in the Official Commentary to work in

tandem with Article Nine's expanded definition of good faith. The

risk that creditors may abuse broad dragnet clauses is offset by

-24-
the expansion of the duty of good faith to include a standard of

commercial reasonableness.11

Given the approach advocated in the Official Commentary

to the code, the competing policy considerations, the code's

expanded definition of good faith, and the fact that the

Massachusetts cases interpreting dragnet clauses in real estate

mortgages do not apply Article Nine and were decided before the

2001 amendment, we think it reasonably clear that the Massachusetts

SJC would not make enforcement of dragnet clauses in the Article

Nine context vary according to the similarity of the types of

obligations at issue. Instead, as the Official Commentary puts it,

Massachusetts would simply "construe the parties' agreement under

applicable law."

2. Interpreting the Parties' Agreement

The applicable law for construing the parties' agreement

is the Massachusetts Commercial Code, in particular Articles One

(general provisions) and Nine, see 1 Farnsworth, supra, § 1.9a

(Article One applies whenever another Article of the code applies),

11
This new requirement at least partially mitigates the concern
of one commentator that the approach in the Official Commentary
does not "protect debtors from 'surprise' security agreements where
the circumstances suggest that the debtor did not really consent to
the interest." Secured Transactions Under the UCC, supra, § 2.04.
To the extent that the scope of a security agreement is a
"surprise" to a debtor because of commercially unreasonable actions
taken by the creditor, then the dragnet clause may be limited by
operation of the duty of good faith rather than an artificial and
unpredictable requirement of relatedness.

-25-
as well as background Massachusetts principles of contract

interpretation.

The usual rule in Massachusetts is that "where the

wording of the contract is unambiguous, the contract must be

enforced according to its terms." Liberty Mut. Ins. Co. v. Gibbs,

773 F.2d 15, 17 (1st Cir. 1985) (internal quotation marks omitted);

see Boston Edison Co. v. Fed. Energy Regulatory Comm'n, 856 F.2d

361, 365 (1st Cir. 1988). The language used in the dragnet clause

here is unambiguous: all future and past debts, without exception,

are secured under the plain meaning of the clause's terms. Cf. In

re Conte, 206 F.3d 536, 538-39 (5th Cir. 2000) (applying Texas law

and concluding that the text of a dragnet clause is unambiguous).

Pride argues that it did not subjectively intend the

dragnet clause to cover the retail finance agreements, and so the

clause cannot do so. Dos Anjos testified that he would never have

entered into the wholesale financing agreements if he believed that

they secured debts arising out of the retail financing agreements.

But the language of the dragnet clause is plain, and trumps Dos

Anjos's testimony. Unless the written agreement is somehow

uncertain or equivocal, evidence of subjective intent cannot alter

its plain meaning. ITT Corp. v. LTX Corp., 926 F.2d 1258, 1264

(1st Cir. 1991) (applying Massachusetts law); Commercial Union Ins.

Co. v. Walbrook Ins. Co., 7 F.3d 1047, 1052 (1st Cir. 1993) (same).

-26-
 More relevant is Pride's argument that its course of

dealing with CFC, as well as industry custom, established that

neither party expected that the security interest in the dragnet

clause would cover the contingent charge-back liabilities. Pride

points out that its retail financing agreements with CFC, some of

which Pride entered into prior to the execution of the wholesale

financing agreements, never required any security interest for the

contingent liabilities that might arise thereunder, and that this

practice is the industry norm. Massachusetts law provides that

"[t]he express terms of an agreement and an applicable course of

dealing or usage of trade shall be construed wherever reasonable as

consistent with each other; but when such construction is

unreasonable express terms control both course of dealing and usage

of trade and course of dealing controls usage of trade." Mass.

Gen. Laws ch. 106, § 1-205.

Ultimately this argument goes nowhere because on the

evidence there is no tension among the parties' course of dealing,

industry norms, and the express terms of the dragnet clause. The

parties' relationship was fundamentally changed when they entered

into a wholesale financing relationship. Once the major debt

between CFC and Pride -- that arising out of the wholesale

financing agreements -- was placed on a secured basis, it was

reasonable for the parties to agree that all of the debts arising

out of their future dealings would also be secured. This

-27-
arrangement would facilitate future lending between the parties by

assuring that such lending would also occur on a secured basis.

Nevertheless, that does not end the matter. We must

still determine whether applying the dragnet clause would violate

the duty of good faith, which now includes a requirement of

"reasonable commercial standards of fair dealing." Mass. Gen. Laws

ch. 106, § 9-102(43). Although Pride argues that applying the

dragnet clause here would violate public policy, in substance

Pride's claim is one of "reasonable commercial standards of fair

dealing" that fits with the revised Article Nine's duty of good

faith. The argument is that applying the dragnet clause in the

wholesale financing agreements to the contingent charge-back

liabilities would effectively stymie Pride's ability to switch from

CFC to a new wholesale lender. Pride's potential charge-back

liability lasts until every retail installment contract is paid in

full, which can take up to seven years from the time the automobile

consumer enters into the contract with the dealership. If CFC

maintained a first position security interest in all of Pride's

assets for this contingent debt, Pride says, then Pride would be

unable to switch wholesale lenders until all of the installment

contracts were completed. This is because the practice of

virtually all lenders is to require a first-position security

interest in a dealership's assets before they will provide

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wholesale financing, and CFC would possess that interest to secure

the payment of uncertain future liabilities.

The problem with this argument is that Pride could have

negotiated with CFC a commercially reasonable arrangement to

release its first-position security interest in Pride's assets. As

the facts of this case amply demonstrate, all Pride had to do was

to offer CFC sufficient assurances of payment of the contingent

liabilities in order to get CFC to release its first position

security interest. CFC was willing to release its security

interest in Pride's assets, and thus allow Pride to find new

wholesale financing, if Pride posted 1.5% of the value of the

outstanding installment contracts in an account controlled by CFC.

Indeed, that is precisely the type of arrangement that the parties

came to when Pride switched to FMCC for the wholesale financing of

Pride Ford and Pride Kia.12

Pride's response is that this resolution is commercially

unreasonable because it gives the lender, here CFC, all of the

negotiating leverage in the determination of what exactly

constitutes adequate assurances of payment. For instance, Pride

12
There was some testimony at trial that the $50,000 deposit
Pride made in connection with CFC's release of its security
interest in Pride Kia's and Pride Ford's assets was actually more
than 1.5% of the value of the outstanding installment contracts for
those two dealerships.

-29-
insists that CFC's request that it post 1.5% of the value of the

outstanding installment contracts was unreasonable.13

This argument is unavailing. To the extent that such

leverage might allow a lender to insist on unreasonably high

assurances of payment for the contingent liabilities -- assurances

that are, perhaps, designed to thwart a dealership's ability to

find a new wholesale lender -- the duty of good faith and statutory

regimes such as Chapter 93A would apply. See Mass. Employers Ins.

Exch. v. Propac-Mass, Inc., 420 Mass. 39, 43 (1995). But to the

extent that the lender is simply in a more favorable bargaining

position than the dealership to insist on full protection for the

payment of the contingent liabilities, that is a result of the

parties' agreement. Here, there was no evidence that CFC's

requirement that Pride deposit 1.5% of the value of the outstanding

installment contracts was unreasonable. The district court found,

to the contrary, that this demand was perfectly reasonable. That

finding flowed naturally from the fact that the retail financing

agreements provided that Pride was supposed to have deposited 1.5%

of the value of the installment contracts in a charge-back account

when those contracts were purchased. The fact that this

requirement was never previously enforced does not undercut its

value as evidence that the 1.5% requirement was eminently

13
CFC first insisted on 3% of the value of the outstanding
contingent liabilities and then retreated to 1.5%.

-30-
reasonable. Whether enforced or not, Pride had agreed to the 1.5%

figure well before it found itself in a less favorable bargaining

position.

Of course, a particular application of a dragnet clause

might violate a state's public policy even if the clause were

commercially reasonable. See, e.g., Cont'l Grain Co. v. Beasley,

628 So. 2d 319, 322 (Ala. 1993) (public policy against use of

predispute arbitration agreements). And, in fact, Massachusetts

has, by statute, extended special solicitude to car dealerships.

See Mass. Gen. Laws ch. 93B. But that solicitude does not reach

this far. Section 9-204 of the Massachusetts code makes it obvious

that the concept of a dragnet clause does not on its face violate

public policy, and nothing in Chapter 93B alters this result in the

automobile dealership context.

Given the clear and unambiguous language of the dragnet

clause in the wholesale financing agreements, the lack of any

evidence of a violation of the duty of good faith, and the absence

of other special circumstances rendering such an interpretation

unreasonable or against public policy, we hold that the dragnet

clause did apply to the contingent debt arising out of the retail

financing agreements.

B. Pride's Other Claims

Pride also appeals the district court's related order

that it deposit 1.5% of the unpaid balance of all outstanding

-31-
installment contracts in an account controlled by CFC. Pride's

argument is that CFC was entitled to withhold 1.5% of the price of

each installment contract at the time it purchased the contract

from Pride. By failing to avail itself of this right when it

purchased the installment contracts, Pride says that CFC waived the

right. Pride's waiver argument ignores the likelihood that CFC may

have thought that its security under the dragnet clause did not

require it to enforce the minimum balance requirement unless

conditions changed.

In any event, as the district court rightly held, the

source of CFC's right to insist on a 1.5% deposit was never claimed

to be any provision of the retail financing agreements, but instead

stemmed from CFC's security interest via the dragnet clause. By

demanding a 1.5% deposit, CFC was simply requiring that Pride post

a sum of money to secure potential charge-back liability before it

was willing to release its security interest.

The other claim that Pride presses on appeal is that CFC

violated Chapter 93A in multiple respects, most notably by refusing

to release its security interest before Pride posted 1.5% of the

value of the outstanding installment contracts. This argument,

once again, is largely resolved by our holding that the dragnet

clause applied to the outstanding contingent liabilities. CFC had

every right to insist on reasonable assurances that these

liabilities would be paid before it released its security interest

-32-
in Pride's assets. However, CFC was not free to insist on

unreasonably high deposits as a pre-condition to releasing its

security interest, especially if it was doing so as a method of

locking in its wholesale financing of Pride. Here, though, we have

already concluded that the requirement of a 1.5% deposit of the

value of the outstanding installment contracts was not

unreasonable.

We also reject Pride's argument that CFC violated Chapter

93A by its conduct during the pendency of this litigation. Pride

says that in a letter dated November 14, 2002, CFC threatened to

terminate Pride's wholesale financing unless it executed new retail

and wholesale financing agreements. The district court found that

this letter "simply acknowledged that Pride has refused to sign

CFC's new wholesale contracts . . . and presented Pride with

various alternatives to resolve the conflicts between the parties."

The district court concluded that this conduct was not

"unscrupulous, oppressive, or deceitful," and Pride once again

offers no reason for us to question this conclusion.

III.

The judgment against Pride is affirmed; Pride's

contingent obligations under the retail financing agreements are

secured by the dragnet clause in the wholesale financing

agreements. CFC did not violate Mass. Gen. Laws ch. 93A and was

entitled to require that Pride deposit 1.5% of the value of the

-33-
outstanding installment contracts as a condition of releasing its

first-position security interest in Pride's assets.

Costs are awarded to CFC. So ordered.

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