
USCA1 Opinion

	




                            United States Court of Appeals                            United States Court of Appeals                                For the First Circuit                                For the First Circuit                                 ____________________        No. 94-1617                           INDUSTRIAL GENERAL CORPORATION,                                 Plaintiff, Appellee,                                          v.                         SEQUOIA PACIFIC SYSTEMS CORPORATION,                                Defendant, Appellant.                                 ____________________                     APPEAL FROM THE UNITED STATES DISTRICT COURT                          FOR THE DISTRICT OF MASSACHUSETTS                    [Hon. Richard G. Stearns, U.S. District Judge]                                              ___________________                                 ____________________                                        Before                            Cyr and Stahl, Circuit Judges,                                           ______________                           and DiClerico, District Judge.*                                          ______________                                 ____________________            Stanley  W. Wheatley  with whom  Gordon &  Wise was  on brief  for            ____________________             ______________        appellant.            Walter  J. Connelly  with whom  Lyne,  Woodworth  & Evarts  was on            ___________________             __________________________        brief for appellee.                                 ____________________                                   January 11, 1995                                 ____________________        _____________________        *Of the District of New Hampshire, sitting by designation.                      STAHL,   Circuit   Judge.      Industrial   General                      STAHL,   Circuit   Judge.                               _______________            Corporation's   ("IGC")   subsidiary,   Plastek   Corporation            ("Plastek"),   supplied   molded   plastic  parts   to   Moog            Electronics  ("Moog") for  use in electronic  voting machines            Moog was assembling for  Sequoia Pacific Systems  Corporation            ("Sequoia").   After Moog failed  to pay Plastek  $80,100 for            supplied  parts,  Plastek  sued Sequoia  alleging  breach  of            contract  and violation  of  Mass. Gen.  L.  ch. 93A,     11.            Following a  seven-day trial, the jury returned a verdict for            Sequoia  on the  breach of  contract claim.   In  an advisory            verdict on the  93A claim,  it found that  Sequoia had  acted            "unfairly."    The district court eventually  agreed with the            advisory finding and further held that Sequoia had breached a            fiduciary duty  it owed to  Plastek and entered  judgment for            Plastek on the 93A claim.  Because we find that  no fiduciary            relationship existed between Plastek and Sequoia,  we reverse            the court's  chapter 93A judgment.1                                          I.                                          I.                                          __                       FACTUAL BACKGROUND AND PRIOR PROCEEDINGS                       FACTUAL BACKGROUND AND PRIOR PROCEEDINGS                       ________________________________________                      In  1984,  Sequoia  began  to  design  and  develop            computerized  electronic voting  machines which  it hoped  to            sell  to  local election  boards.   During  that same   year,            Sequoia  Associates,  a  partnership  and  one  of  Sequoia's                                            ____________________            1.  The  breach of  contract claim  is not  at issue  in this            appeal.                                         -2-                                          2            stockholders, had explored the possibility of acquiring IGC's            predecessor-in-interest,  Walco   National,  Inc.  ("Walco").            Though the  Sequoia Associates-Walco deal  ultimately failed,            because of the  acquisition negotiations, Sequoia  Associates            had  become  familiar  with Walco's  Plastek  division, which            produced molded  plastic parts.  Recognizing  that the voting            machines would use plastic  parts, Sequoia Associates advised            Sequoia of Plastek's molding abilities.  The introduction was            fortuitous, as Sequoia was under time constraints to complete            the project and had been unable to locate a suitable supplier            for the needed plastic parts.                      Commencing in mid-1985, Sequoia and Plastek entered            into  a  series of  contracts  providing  that Plastek  would            develop prototype  molds and, later, produce  prototype parts            for  use in the voting machines  project.  Meanwhile, Sequoia            and  Moog  entered into  agreements  for Moog  to  assemble a            number  of prototype  voting  machines.   In connection  with            these agreements,  Sequoia instructed  Plastek  to ship  some            prototype  parts to Moog.   Sequoia paid Plastek  in full for            the   prototype  molds   and   prototype   parts  and   these            transactions  are not  in dispute.   Later,  Plastek produced            production molds, for which Sequoia also paid in full.                      In  the latter  part  of 1985,  Sequoia decided  to            contract with a manufacturer to assemble the Sequoia-designed            voting machines.  Sequoia would then purchase the machines on                                         -3-                                          3            a  "turn-key" basis,2 thus relieving it of both the burden of            carrying the inventory of parts required for assembly and the            burden  of  assembly itself.    Sequoia  awarded the  initial            manufacturing   contract   to  Momentum   Technologies,  Inc.            ("Momentum").  Moog sued Sequoia,  claiming that one of their            earlier prototype-assembly  contracts contained a  promise to            award  Moog a  contract for  an actual  production run  of at            least 5,000 machines.  In settlement, Sequoia agreed to award            Moog  a contract  to manufacture  500 machines  with Momentum            manufacturing the balance of Sequoia's requirements.                      Moog's  finances  during  this  period  were shaky,            though the extent of  Sequoia's knowledge of Moog's condition            was  disputed  at trial.    The district  court  credited the            testimony  of  Edmund  Lonergan,  Sequoia's  former technical            director,  who  at  trial  testified by  deposition  that  he            developed  a "gut  feeling"  that Moog  was not  "financially            strong  enough   to  manufacture   all  the  units   per  our            [settlement]  agreement  with them."    Lonergan alerted  his            superiors  at  Sequoia.     James  Larkin,  Sequoia's   chief            financial  officer, testified that  he knew Moog  had a cash-            flow  problem and  that he  agreed to  a billing  arrangement            designed to improve Moog's cash situation.                                            ____________________            2.  Under a  turn-key arrangement, an assembler  contracts to            produce a product for a buyer that is ready to operate at the            "turn of a key."                                           -4-                                          4                      Sequoia informed Plastek that the machines would be            assembled by  contractors  and that  Plastek's agreement  for            production  parts  were  to   be  made  directly  with  those            assemblers.   Complying  with this  directive, both  Moog and            Momentum contracted directly with Plastek and other suppliers            for the voting machine parts.                        In  June  and July  1986,  Moog  issued to  Plastek            purchase  orders  for   production  parts.3    Plastek   sent            acknowledgement of the orders  to Moog.  Plastek manufactured            the parts and  shipped them to  Moog on a  net 30 day  basis.            Plastek invoiced Moog directly and the invoices stated, "Sold            to Moog."  The  shipments were carried on Plastek's  books as            Moog account  receivables.  Plastek never  conducted a credit            check  on  Moog, nor  did  any  Plastek official  inquire  of            Sequoia about Moog's financial situation or creditworthiness.                      After the  Moog-Sequoia  settlement was  in  place,            things  began to  deteriorate  at Moog.    Moog quickly  fell            behind  on its  production  schedule.    Eventually,  Sequoia            determined  that Moog would  be unable to  timely perform its            contract and,  in September 1986, requested  Moog to transfer            all work-in-progress to Momentum.  Sequoia paid Moog in  full                                            ____________________            3.  About this time, Momentum  also issued purchase orders to            Plastek.   Plastek shipped the parts to Momentum and Momentum            paid the invoices for them in full.                                           -5-                                          5            for  its  work-in-progress, including  the  amount  Moog owed            Plastek for the production parts.                       Moog, however, never paid Plastek.  Plastek  sought            to collect its unpaid balance from Moog with no success.   In            November 1986, well after  the work-in-progress transfer  had            taken  place, Plastek  alerted Sequoia  of its  problems with            Moog.  By early 1987, Moog was insolvent.  In February  1987,            Plastek  notified  Sequoia   that  it  was  holding   Sequoia            responsible  for the  unpaid Moog  balance.  Five  months had            passed since Plastek  had shipped and  invoiced its parts  to            Moog.                      In 1989,  Plastek, through its parent, IGC, brought            the present  action in  Massachusetts Superior  Court seeking            recovery for  breach of contract  and for violation  of Mass.            Gen. L. ch.  93A,   11.  Sequoia removed  the case to federal            district court  with  jurisdiction grounded  in diversity  of            citizenship.   After  discovery,  the district  court  denied            Sequoia's motion  for summary  judgment.  The  district court            held a seven-day jury  trial in February 1994.   The district            court  instructed the jury  to answer questions  on a special            verdict.                      The jury  returned a verdict in  Sequoia's favor on            the breach of contract claim.  With regard to the chapter 93A            claim,  the  jury  found  that Sequoia  acted  "unfairly"  in            "failing  to disclose  what  it knew  about Moog's  financial                                         -6-                                          6            stability."  However,  the jury did  not find that  Sequoia's            acts  were deceptive  or that  its  actions were  knowing and            willful.   The district court, essentially  agreeing with the            jury,  found that  Plastek was  in a  position of  "trust and            dependence" relative  to Sequoia  and that Sequoia  had acted            "unfairly  in failing to disclose  the fact that  Moog was an            unreliable customer."  Industrial  Gen. Corp. v. Sequoia Pac.                                   ______________________    ____________            Sys.  Corp., 849  F. Supp.  820, 824  (D. Mass.  1994).   The            ___________            district  court   entered  judgment  in  favor   of  IGC  for            $80,100.69 plus costs.  This appeal followed.                                         II.                                         II.                                         ___                                      DISCUSSION                                      DISCUSSION                                      __________                      Sequoia  argues that  the district  court committed            clear error in three  respects:  by finding (1)  that Sequoia            and Plastek had a fiduciary  or quasi-fiduciary relationship;            (2) that  Sequoia possessed knowledge of  material facts that            it  did  not  disclose  to Plastek;  and  (3)  that Sequoia's            failure to disclose material facts regarding Moog's financial            condition was  causally related to Plastek's  damages.  After            reciting the standard  of review, we take up  Sequoia's first            argument.  Because we conclude that no fiduciary relationship            existed between  these parties,  we  do not  reach the  other            claims of error raised by Sequoia.            A.  Standard of Review            ______________________                                         -7-                                          7                      On review, questions of law are determined de novo.                                                                 __ ____            See, e.g., American Title Ins. v. East W. Fin. Corp., 16 F.3d            ___  ____  ___________________    __________________            449, 453-54 (1st Cir. 1994).   Findings of fact "shall not be            set  aside unless clearly erroneous."  Fed. R. Civ. P. 52(a).            A finding of fact is "`clearly erroneous' when although there            is  evidence to support it, the reviewing court on the entire            evidence is left with the definite and firm conviction that a            mistake  has been committed."   Anderson v.  City of Bessemer                                            ________     ________________            City, 470 U.S. 564,  573 (1985) (citation omitted); see  also            ____                                                ___  ____            Tresca  Bros.  Sand &  Gravel, Inc.  v. Truck  Drivers Union,            ___________________________________     _____________________            Local  170,  19 F.3d  63, 65  (1st  Cir. 1994)  ("the central            __________            finding . . . `will be given effect unless, after reading the            record  with care  and making due  allowance for  the trier's            superior ability  to gauge  credibility, [we form]  a strong,            unyielding belief  that a  mistake has been  made'") (quoting            Dedham Water Co.  v. Cumberland Farms  Dairy, Inc., 972  F.2d            ________________     _____________________________            453, 457 (1st Cir. 1992) (other citation omitted)).            B.   Chapter  93A  and  Massachusetts  Common  Law  Governing            _____________________________________________________________            Fiduciary Relationships            _______________________                      Section  11  of   the  Massachusetts  unfair  trade            practices statute, Mass. Gen.  L. ch. 93A, grants a  cause of            action to  persons  engaged in  commerce  who suffer  a  loss            because  of the  unfair acts  or practices of  another person            engaged  in commerce.  Though the statute does not define the            term "unfair,"  courts applying  section 11 have  developed a            standard under which the "`objectionable  conduct must attain                                         -8-                                          8            a level of rascality  that would raise an eyebrow  of someone            inured  to the rough and  tumble of the  world of commerce.'"            Quaker  State Oil  Ref. Corp.  v. Garrity  Oil Co.,  884 F.2d            _____________________________     ________________            1510,  1513  (1st Cir.  1989)  (quoting Levings  v.  Forbes &                                                    _______      ________            Wallace, Inc.,  396 N.E.2d 149,  153 (Mass. App.  Ct. 1979)).            _____________            Further,  a chapter  93A  claimant must  establish that  "the            defendant's  actions fell  `within at  least the  penumbra of            some common-law, statutory,  or other established concept  of            unfairness,'  or  were  `immoral,  unethical,  oppressive  or            unscrupulous,' and resulted in  `substantial injury . .  . to            competitors or  other businessmen.'"  Quaker  State, 884 F.2d                                                  _____________            at 1513  (quoting PMP Assocs.,  Inc. v. Globe  Newspaper Co.,                              __________________    ____________________            321 N.E.2d 915, 917 (Mass. 1975)).                      "`Although  whether a  particular set  of acts,  in            their  factual setting, is unfair or  deceptive is a question            of fact, the boundaries of what may qualify for consideration            as a chapter 93A violation is a question of law.'"  Shepard's                                                                _________            Pharmacy, Inc. v.  Stop &  Shop Cos., 640  N.E.2d 1112,  1115            ______________     _________________            (Mass. App. Ct. 1994)  (citation omitted).  Here,  the unfair            conduct complained of is Sequoia's failure to disclose Moog's            precarious financial condition.  A commentator has noted that            section  11  "probably does  not  contain a  general  duty of            disclosure"  and where the statute  does give rise  to such a            duty,  it "should  be  limited to  situations  which even  at            common   law   sometimes   required  disclosure,"   including                                         -9-                                          9            instances where the  defendant is  a fiduciary.   Michael  C.            Gilleran, The  Law of Chapter 93A   4:10 (1989 & Supp. 1994).                      _______________________            The theory presented  to the  jury and later  adopted by  the            district  court   was  that   Sequoia   stood  in   fiduciary            relationship to Plastek and, consequently, a duty to disclose            arose.  We agree with the district  court that if a fiduciary            relationship  existed, its  breach would  have constituted  a            chapter 93A violation.                          As noted  above,  the district  court found  that            Plastek  was  in a  position of  "trust and  dependence" with            respect  to  Sequoia and  that  it  subsequently abused  this            relationship  when it  failed  to disclose  what  it knew  of            Moog's  financial  difficulties.   The  crux  of the  present            dispute,   therefore,   is   whether    the   Sequoia-Plastek            relationship was fiduciary in nature.                      The  question of whether,  in a  particular factual            setting,  a fiduciary  relationship exists  is a  question of            fact.   See, e.g., Broomfield  v. Kosow, 212  N.E.2d 556, 560                    ___  ____  __________     _____            (Mass.  1965).   Our  review of  factual assessments  made by            Massachusetts  courts suggests that  a fiduciary relationship            will frequently  be found where certain  indicia are present.            First, a party  owed a fiduciary duty is often  in a position            of great disparity or inequality relative to the other party.            See,  e.g.,  Kosow at  560.   Second,  a fiduciary  duty (and            ___   ____   _____            breach thereof) will be found to exist where the disparity in                                         -10-                                          10            relationship  has  been abused  to  the benefit  of  the more            powerful  party, particularly  where unjust  enrichment would            result.  See, e.g., id.; Warsofsky v. Sherman, 93 N.E.2d 612,                     ___  ____  ___  _________    _______            615 (Mass. 1950).                      Further,  in the commercial  context, other indicia            of   fiduciary   relationships    are   generally    present.            Massachusetts   courts  have  stated  that,  though  business            transactions conducted at arm's  length generally do not give            rise to  fiduciary  relationships, such  a  relationship  can            develop where  one party  reposes its confidence  in another.            See,  e.g.,  Warsofsky,  93  N.E.2d  at  615.    Importantly,            ___   ____   _________            however,   courts  have   repeatedly  cautioned   that  "`the            plaintiff  alone, by  reposing  trust and  confidence in  the            defendant,  cannot thereby transform  a business relationship            into  one which is fiduciary in nature.'"  Superior Glass Co.                                                       __________________            v.  First  Bristol County  Nat'l  Bank, 406  N.E.2d  672, 674                __________________________________            (Mass.  1980)  (quoting  Kosow,  212  N.E.2d  at  560).    In                                     _____            determining  whether such  a transformation has  taken place,            courts look  to the defendant's knowledge  of the plaintiff's            reliance  and  consider  the  relation of  the  parties,  the            plaintiff's  business capacity  contrasted with  that of  the            defendant, and the "readiness of the plaintiff to follow  the            defendant's guidance in complicated transactions  wherein the            defendant has  specialized knowledge."  Kosow,  212 N.E.2d at                                                    _____            560.                                         -11-                                          11            C.  The Relationship Between Sequoia and Plastek            ________________________________________________                      After  a careful review of the whole record, and in            light of the foregoing  discussion of Massachusetts cases, we            cannot  agree  that the  facts  in this  case  establish that            Sequoia occupied a fiduciary position with regard to Plastek.            We think that the district court's conclusion to the contrary            rises to the level of clear error.                      In  finding that a  fiduciary relationship existed,            the district  court placed  heavy reliance on  its conclusion            that Sequoia  "managed" the entire  transaction, a conclusion            based  upon the following facts:  (1) that Sequoia designated            Moog as  the general contractor; (2)  that Sequoia "generated            the purchasing  orders and effectively authored  the contract            between Plastek and Moog"; and (3) that Sequoia continued its            relationship  with  Moog  "for   no  purpose  other  than  to            extricate  itself from a legal  imbroglio of its own making."            Industrial Gen. Corp., 849 F.Supp. at 825.            _____________________                      We  think   the  district  court's   conclusion  is            mistaken  for  two  basic reasons.    First,  it  rests on  a            subsidiary  factual finding  that  we believe  is clearly  in            error.    Upon careful  review of  the  record, we  think the            court's  assertion that  "Sequoia  generated  the  purchasing            orders and effectively authored the contract  between Plastek            and Moog," id., substantially  misstates what transpired.  To                       ___            be sure, Sequoia officials  directed Plastek to deal directly                                         -12-                                          12            with Moog.   However, as both  Sequoia and Plastek  officials            testified, Moog  issued  purchase orders  for the  production            parts  and  Plastek  acknowledged  those  orders.4   Notably,            there  is no  evidence that  Sequoia directed  or was  in any            other way  involved with  Plastek's fateful decision  to ship            the production parts to Moog on  a net 30 day basis.  Second,            and more importantly,  we do not think that Sequoia's overall            "management"  role  is sufficient  to transform  the parties'            relationship  into  a  fiduciary  one.    We  note  that  the            transaction involved  here is not uncommon  in the commercial            world.   Under a turn-key arrangement,  a manufacturer agrees            to  deliver to a buyer a completely assembled product that is            ready to  function.  It is  the manufacturer's responsibility            to acquire needed parts,  even if acting at the  direction of            the  turn-key buyer.  Accordingly, as we have just noted, the            two  voting machine manufacturers,  Moog and Momentum, issued            purchase  orders   to  Plastek.    Plastek,   in  turn,  sent            acknowledgments.  Plastek  shipped those orders,  pursuant to            its own credit policies,  on a net 30 day basis.  Critically,            Plastek  did not conduct  a credit check  before shipping the            parts  to Moog  nor did  it take any  other steps  to protect            itself against nonpayment.                                            ____________________            4.  Sequoia  did issue  purchase orders  for prototype  parts                                                         _________            (for which it  subsequently paid) but, as noted  above, these            orders are not at issue here.                                         -13-                                          13                      While  the Sequoia-Moog  settlement  did  serve  to            extricate  Sequoia  from  an  untimely  legal   battle,  that            agreement could  not and did not  advance Sequoia's interests            at the expense of  Plastek.  Sequoia remained liable  to Moog            for  the costs of the production parts and, when the work-in-            progress was transferred from  Moog to Momentum, Sequoia paid            Moog in full  for the parts Moog had  acquired from Plastek.                       Our conclusion that  Sequoia's "management" role is            an insufficient  basis to transform this  relationship into a            fiduciary  one  is reinforced  by  reference  to the  indicia            outlined above.   First, we  find no great  disparity in  the            Sequoia-Plastek relationship.  The record indicates that both            Sequoia and Plastek were experienced in the commercial world.            Further,  the  facts   suggest  that,  because  Sequoia   was            operating   under  a  tight   deadline  and  had  encountered            difficulties in locating an adequate plastic parts  supplier,            Plastek  was   not  altogether   without   leverage  in   the            relationship.  Second, to  the extent a disparity  existed in            Sequoia's  favor, we again  fail to see  how the relationship            was  abused to  the benefit  of Sequoia.   The effect  of the            judgment below will  not be to  remedy unjust enrichment  or,            for  that  matter, any  other  benefit  accruing to  Sequoia.            Sequoia  would simply be paying  again for the  same parts it            had  already purchased from Moog.   Third, the district court                                         -14-                                          14            did not find that Sequoia had  knowledge of Plastek's alleged            reliance  on  the trust  and  dependence  it  had reposed  in            Sequoia.  Our own  review of the record reveals  nothing that            would have  alerted Sequoia to a  heightened fiduciary status            or that Plastek was relying  on Sequoia to guarantee payment.            With  specific  regard to  the Moog  sales,  at no  point did            Plastek officials  make inquiry  of Sequoia  regarding Moog's            finances  or  creditworthiness,  and  Plastek  waited  months            before alerting Sequoia of  its problems with Moog.   Even if            we were to agree with the district court that Plastek, having            been "lulled by Sequoia's blandishments and visions of lucre,            looked to Sequoia to watch out for its interests," Industrial                                                               __________            Gen. Corp., 849 F. Supp. at 823, the record is  devoid of any            __________            evidence that Sequoia knew  of this reliance.  In  short, the            facts  overwhelmingly  suggest  that  to the  extent  Plastek            reposed  "trust  and  dependence"   in  Sequoia,  it  did  so            unilaterally.                      Finally,  we observe  that our  conclusion comports            with the so-called "rascality" standard underlying section 11            unfairness  claims.    We  agree with  the  district  court's            conclusion   that  Plastek   was   "naive,  inattentive   and            altogether too trusting  of Sequoia," Industrial Gen.  Corp.,                                                  ______________________            849 F.Supp. at 825-26, and that its complacency may have been            due, in  part, to the fact that Plastek and Sequoia "were not            strangers to  one another"  given the initial  exploration by                                         -15-                                          15            one  of  Sequoia's  principals  into   acquiring  Walco  (the            predecessor-in-interest of  Plastek's  parent company).    By            extending  credit to  Moog  and assuming  -- perhaps  through            naivete, inattention and trust -- that Sequoia would pick  up            the  tab, Plastek  clearly  made a  costly  mistake.   Though            Sequoia might have chosen to share with Plastek  its concerns            about Moog's finances as they developed, we do not think that            its failure to do so would make Sequoia a commercial rascal.                      Under  the clearly erroneous  standard, we  are not            free to reverse merely because we  disagree with the district            court's  conclusions.    Rather,  we must  have  the  strong,            unyielding conviction that the  district court was  mistaken.            This  standard is  especially important in  a case  like this            where the  district court made a  factual determination based            on evidence  adduced during  a lengthy and  exhaustive trial.            We emphasize  that we have thoroughly  and carefully examined            the  record.  Based on the record as a whole, and in light of            similar  factual evaluations made by Massachusetts courts, we            are  of  the  unyielding  belief that  the  district  court's            conclusion  that  a  fiduciary  relationship  existed between            Sequoia  and Plastek  was  mistaken.   Because  there was  no            fiduciary relationship, no duty  to disclose existed and thus            no cause of action lies under section 11, chapter 93A.                                         III.                                         III.                                         ____                                      CONCLUSION                                      CONCLUSION                                      __________                                         -16-                                          16                      For  the  foregoing reasons,  the  decision  of the            district court  is  reversed and  the  case is  remanded  for            proceedings consistent with this opinion.                      Each party shall bear its own costs.                      Each party shall bear its own costs                      ___________________________________                                         -17-                                          17
