United States Court of Appeals
For the First Circuit
No. 06-1332
IN RE: ADVANCED CELLULAR SYSTEMS, INC.;
ADVANCED PAGING SYSTEMS CORP.,
Debtors.
------------------------
PUERTO RICO TELEPHONE COMPANY, d/b/a VERIZON WIRELESS,
f/k/a CELULARES TELEFONICA, INC., f/k/a VERIZON WIRELESS
PUERTO RICO, INC.
Creditor, Appellant,
v.
ADVANCED CELLULAR SYSTEMS, INC.;
ADVANCED CELLULAR PAGING SYSTEMS CORP.,
Debtors, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Salvador E. Casellas, Senior U.S. District Judge]
Before
Lynch, Circuit Judge,
John R. Gibson,* Senior Circuit Judge,
and Howard, Circuit Judge.
*
Of the United States Court of Appeals for the Eighth Circuit,
sitting by designation.
Ricardo F. Casellas, with whom Ricardo L. Ortiz Colón and
Fiddler González & Rodríguez, P.S.C. were on brief, for
appellant.
Carmen D. Conde Torres with whom C. Conde & Associates was
on brief for appellee.
March 28, 2007
HOWARD, Circuit Judge. This appeal concerns a contract
dispute that arose during the course of a bankruptcy proceeding.
The debtor is Advanced Cellular Systems, Inc., a reseller of
cellular telephone numbers and services in Puerto Rico. Through an
arrangement with the Puerto Rico Telephone Company, Advanced
Cellular purchased cellular services and telephone numbers from
Puerto Rico Telephone at wholesale prices and resold them to
consumers at retail prices. The relationship between Advanced
Cellular and Puerto Rico Telephone was governed by a contract
entered into in 1986 and by subsequent tariffs filed by Puerto Rico
Telephone with the Puerto Rico Telephone Authority. In April 1998,
Puerto Rico Telephone ended its relationship with Advanced Cellular
because of Advanced Cellular's allegedly delinquent debts.
Thereafter Advanced Cellular filed for bankruptcy
protection under Chapter 11 of the Bankruptcy Code, and Puerto Rico
Telephone filed a proof of claim for the disputed debt in the
amount of $1,655,391.96. Advanced Cellular objected to this claim,
asserting that, in fact, Puerto Rico Telephone owed Advanced
Cellular money.1 It based this objection on several grounds,
including that Puerto Rico Telephone owed Advanced Cellular
reimbursements in the sum of $1,334,204.62 for the fraudulent use
1
The bankruptcy court limited its consideration of Advanced
Cellular's objection to whether it owed funds to Puerto Rico
Telephone. The court dismissed without prejudice Advanced
Cellular's claim that Puerto Rico Telephone owed it money.
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of telephone numbers that it had purchased from Puerto Rico
Telephone.
The type of fraud at issue is commonly referred to as
cloning. Cloning occurs when a third party uses a device to steal
the identifying information of an authorized cellular telephone
number through the air waves and then uses the stolen information
to make calls that appear to have originated from the authorized
number. Cloning surfaced in the cellular telephone industry in the
early 1990s. In response to this problem, which placed significant
financial strain on Advanced Cellular and Puerto Rico Telephone's
other resellers, Puerto Rico Telephone began to reimburse resellers
for losses suffered from cloning. To receive reimbursements,
Puerto Rico Telephone required resellers to submit claims within 90
days of billing.
During the course of their relationship, Advanced
Cellular received over $5,750,000 in reimbursements for cloning
from Puerto Rico Telephone. The dispute in this case centers on
$1,334,204.62 in claims made by Advanced Cellular that Puerto Rico
Telephone had denied because they were filed outside of the 90-day
window. Before the bankruptcy court, Puerto Rico Telephone claimed
that it had no contractual obligation to reimburse Advanced
Cellular for cloning claims at all, and therefore had the
discretion to deny claims that were untimely. Advanced Cellular
countered that Puerto Rico Telephone was contractually responsible
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for losses incurred due to cloning and that the 90-day claim window
was arbitrary and unreasonable.
The bankruptcy court agreed with Advanced Cellular. It
concluded that the parties' agreement did not have a specific
provision regarding cloning but that Puerto Rico Telephone had a
contractual duty to maintain and operate the cellular network. The
court determined that this duty included an obligation to take
responsibility for cloning. It also concluded that it "defied
common sense" to believe that Puerto Rico Telephone would have
reimbursed over $5 million of cloning claims made by Advanced
Cellular if there were no obligation to do so. Finally, the court
ruled that the 90-day window for reimbursement claims was
unreasonable and that Puerto Rico Telephone "had a duty . . . to
allow Advanced Cellular a reasonable time, such as 120 days, to
submit their [sic] fraud claims." The court accordingly disallowed
Puerto Rico Telephone's proof of claim.2
Puerto Rico Telephone appealed to the district court,
which affirmed. The district court addressed a provision of the
tariff not explicitly mentioned by the bankruptcy court that
2
While the cloning fraud issue accounted only for
$1,334,204.62 of the $1,655,391.96 that Puerto Rico Telephone
claimed, the bankruptcy court concluded that Advanced Cellular was
entitled to other credits in the sum of $709,277.04. It therefore
held that Advanced Cellular was entitled to a total credit of
$2,043,480.27, which exceeded Puerto Rico Telephone's entire claim.
The rulings that resulted in the $709,277.04 credit in favor of
Advanced Cellular have not been appealed.
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provided that Advanced Cellular "shall be solely responsible for
any . . . fraudulent use, by any person, of any number or numbers
assigned" to it. The court interpreted this provision to apply
only to fraud committed by "authorized users" of numbers assigned
to Advanced Cellular. Because cloning is fraud conducted by
unauthorized third parties, the court concluded that this provision
did not govern. The court also concluded that this provision could
not apply to cloning because Advanced Cellular's relationship with
Puerto Rico Telephone had commenced in 1986, which was at least
five years before cloning emerged as a problem in the cellular
telephone industry.
Having concluded that the fraudulent use provision did
not apply, the district court adopted the bankruptcy court's
rationale that Puerto Rico Telephone was responsible for cloning
because of its contractual obligation to operate and maintain the
cellular network and because of its actions in reimbursing sellers
for cloning losses. The court also upheld the bankruptcy court's
ruling that the 90-day filing window was unreasonable because
Puerto Rico Telephone could not "unilaterally condition its own
preexisting obligation" to assume responsibility for cloning.
Puerto Rico Telephone timely appealed.
We review the bankruptcy court's findings of fact for
clear error and its rulings of law de novo. Palmacci v. Umpierrez,
121 F.3d 781, 785 (1st Cir. 1997). In so doing, we provide "no
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particular deference" to the district court's conclusions. In re
Healthco Int'l, Inc., 132 F.3d 104, 107 (1st Cir. 1997).
The validity of Puerto Rico Telephone's proof of claim
rests primarily on the plain meaning of the relevant tariff, and so
we look to Puerto Rico law to guide our analysis. See Raleigh v.
Ill. Dep't of Revenue, 530 U.S. 15, 20 (2000) ("The 'basic federal
rule' in bankruptcy is that state law governs the substance of
claims.") (citing Butner v. United States, 440 U.S. 48, 57 (1979)).
Puerto Rico Telephone argues, as it has throughout this litigation,
that the tariff's fraudulent use provision unambiguously placed the
risk of loss from cloning on Advanced Cellular. As the parties
agree that the tariff binds them, we turn to consider this
provision.
The tariff provides that Advanced Cellular, as a
reseller, "shall be solely responsible for any . . . fraudulent
use, by any person, of any number or numbers assigned to" it.
Cloning is a form of "fraudulent use" as it involves a misstatement
by a third party that the party is an authorized user of a cellular
telephone number; cloning is conducted by "any person," cf.
DIRECTV, Inc. v. Budden, 420 F.3d 521, 528 (5th Cir. 2005)
(describing the phrase "any person" as broad); and cloning involves
the making of telephone calls by third parties impersonating
authorized users of "numbers assigned to" Advanced Cellular. Under
this plain reading of the fraudulent use provision, Advanced
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Cellular assumed responsibility for losses from cloning.
Advanced Cellular offers several unavailing arguments in
an attempt to undermine this straightforward reading of the
fraudulent use provision.3 First, it points out that its
relationship with Puerto Rico Telephone began in 1986, before
cloning had surfaced as a problem. Based on this fact, it argues
that the fraudulent use provision cannot be interpreted to reflect
an intent to assign responsibility for losses from cloning. While
it is true that the parties' initial agreement was signed in 1986,
the tariff was not filed until 1994, after cloning had emerged.
Moreover, even if the risk of cloning was unanticipated when the
tariff was adopted, Advanced Cellular agreed to broadly assume the
risk of all fraudulent use. If Advanced Cellular meant to agree to
assume a narrower risk, it was incumbent upon it, especially as a
sophisticated party, to make the limitation clear. See MBIA Ins.
Corp. v. Royal Indem. Co., 426 F.3d 204, 218 (3d Cir. 2005) (where
sophisticated parties include broadly worded clauses in contracts,
courts will likely assume that they "said what they meant and meant
what they said").
Second, Advanced Cellular contends that the fraudulent
use provision was intended to apply only to fraud perpetrated by
"authorized users" of the cellular numbers assigned to it and
3
We reject Advanced Cellular's contention that Puerto Rico
Telephone waived reliance on the fraudulent use provision. The
argument was squarely raised in the bankruptcy and district courts.
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therefore does not cover cloning perpetrated by unauthorized third
parties. The fraudulent use provision does not, however, refer to
"authorized users" but rather to "any person," a term with a common
meaning broad enough to encompass fraud committed by third parties.
See Metlife Capital Corp. v. Westchester Fire Ins. Co., 224 F.
Supp. 2d 374, 382 (D.P.R. 2002) (stating that under Puerto Rico law
contractual terms should generally be assigned their common
meanings). Indeed, the phrase "authorized user" appears in other
provisions of the tariff, which strongly suggests that this was not
the intended meaning of "any person" in the fraudulent use
provision.
Third, according to Advanced Cellular, the fraudulent use
provision was meant to apply only to losses from stolen cellular
telephones. This argument fails because the tariff contains a
specific provision directly related to stolen telephones.4 It is
well-established that courts should avoid interpretations that
render a provision of an agreement surplusage. See Restatement
(First) of Contracts § 236 (1932). To interpret the fraudulent use
provision to apply only to losses from stolen cellular telephones
would violate this principle because it would render the provision
directly related to the issue meaningless.
4
Under this provision, Advanced Cellular was responsible for
losses from stolen telephones until it informed Puerto Rico
Telephone of the loss.
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Fourth, Advanced Cellular asserts that a provision in the
1986 agreement concerning Puerto Rico Telephone's responsibility
for maintaining the cellular network makes it liable for cloning.
The provision states, in relevant part, that Puerto Rico Telephone
is responsible for "mistakes, omissions, interruptions, delays,
errors or defects in transmission" that result from its failure "to
maintain proper standards of maintenance and operation" of the
cellular network. Through this provision, Puerto Rico Telephone
appears to have taken responsibility for technical problems in
service. Cloning by third parties is different in kind from these
sorts of difficulties, as it is the product of wrongful human
conduct, not a system malfunction. In any event, the network
maintenance provision does not specifically cover losses from
fraudulent use, and therefore, the provision that speaks directly
to this issue governs. See Bank v. IBM Corp., 145 F.3d 420, 427-28
(1st Cir. 1998).
Finally, Advanced Cellular relies on Puerto Rico
Telephone's policy of reimbursing timely cloning fraud claims from
resellers to argue that Puerto Rico Telephone was contractually
obligated to provide such reimbursements. It contends that this
evidence shows the parties' intent because Puerto Rico Telephone
would never have reimbursed such claims unless required to do so by
contract.
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Under Puerto Rico law, "[i]f the terms of a contract are
clear and leave no doubt as to the intentions of the contracting
parties, the literal sense of its stipulations shall be observed."
P.R. Laws Ann. tit 31, § 3471. Consequently, a court may not
consider extrinsic evidence at all, if it finds that the terms of
an agreement are clear. Borschow Hosp. & Med. Supplies, Inc. v.
Cesar Castillo, Inc., 96 F.3d 10, 15 (1st Cir. 1996); Vulcan Tools
of P.R. v. Makita U.S.A., Inc., 23 F.3d 564, 567 (1st Cir. 1994).
An agreement is clear when it can "be understood in one sense
alone, without leaving any room for doubt, controversies or
difference of interpretation." See Catullo v. Metzner, 834 F.2d
1075, 1079 (1st Cir. 1987) (internal citation omitted).
As discussed above, Advanced Cellular unambiguously
assumed the risk of losses from cloning through the tariff's
fraudulent use provision. Therefore, extrinsic evidence is not
admissible to assist in the interpretation of the provision.5 See
Mercado-Garcia v. Ponce Fed. Bank, 979 F.2d 890, 894 (1st Cir.
1992). In a similar circumstance, we affirmed the exclusion of
extrinsic evidence of a party's attempt to accommodate the other by
not enforcing clear contractual terms. See Executive Leasing
Corp. v. Banco Popular de P.R., 48 F.3d 66, 69 n.5 (1st Cir. 1995).
5
Advanced Cellular argues only that Puerto Rico Telephone's
conduct in reimbursing cloning claims is relevant to interpreting
the contract. It does not argue that this conduct demonstrated a
modification or other alteration of the parties' agreement.
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We determined that, because the meaning of the contract at issue
was clear on its face, the party's subsequent conduct was not
admissible to alter the contract's unambiguous terms. Id. So too
here.6
In sum, the tariff's fraudulent use provision
unambiguously placed the risk of loss from cloning on Advanced
Cellular, and it was error to credit Advanced Cellular for the
cloning claims not reimbursed by Puerto Rico Telephone. We
therefore vacate the judgment and remand for further proceedings
consistent with this opinion.7
So ordered.
6
Even were we to consider extrinsic evidence concerning Puerto
Rico Telephone's conduct in reimbursing cloning claims, we do not
think that it bears the weight placed upon it by the bankruptcy
court. There was evidence that cloning fraud was causing Puerto
Rico Telephone's resellers substantial financial difficulties.
Even though not contractually obligated to do so, it would not
"def[y] common sense" for Puerto Rico Telephone to assume losses
stemming from cloning in the hope of forestalling its resellers
from suffering crippling losses that could force them out of
business.
7
Puerto Rico Telephone argued in its brief that we should
decide the legal significance of an alleged admission by Advanced
Cellular that it owed Puerto Rico Telephone in excess of $700,000.
At oral argument, Puerto Rico Telephone conceded that this claim
had not been resolved by the bankruptcy court and therefore should
not be decided as part of this appeal. Puerto Rico Telephone may
pursue this argument on remand.
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