
USCA1 Opinion

	




        September 21, 1992  UNITED STATES COURT OF APPEALS        September 21, 1992  UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                FOR THE FIRST CIRCUIT        No. 92-1087        No. 92-1087                          COMPUTER SYSTEMS OF AMERICA, INC.,                          COMPUTER SYSTEMS OF AMERICA, INC.,                                Plaintiff, Appellant,                                Plaintiff, Appellant,                                          v.                                          v.                         UNUM LIFE INSURANCE COMPANY, ET AL.,                         UNUM LIFE INSURANCE COMPANY, ET AL.,                                Defendants, Appellees.                                Defendants, Appellees.                                 ____________________                                 ____________________                     APPEAL FROM THE UNITED STATES DISTRICT COURT                     APPEAL FROM THE UNITED STATES DISTRICT COURT                          FOR THE DISTRICT OF MASSACHUSETTS                          FOR THE DISTRICT OF MASSACHUSETTS                       [Hon. Rya W. Zobel, U.S. District Judge]                       [Hon. Rya W. Zobel, U.S. District Judge]                                           ___________________                                 ____________________                                 ____________________                                        Before                                        Before                                 Breyer, Chief Judge,                                 Breyer, Chief Judge,                                         ___________                             O'Scannlain,* Circuit Judge,                             O'Scannlain,* Circuit Judge,                                           _____________                               and Cyr, Circuit Judge.                               and Cyr, Circuit Judge.                                        _____________                                 ____________________                                 ____________________            Douglas G.  Moxham with  whom Geoffrey  R. Bok  and Lane  & Altman            Douglas G.  Moxham with  whom Geoffrey  R. Bok  and Lane  & Altman            __________________            ________________      ______________        were on brief for appellant.        were on brief for appellant.            Evan  R. Chesler  with whom  Cravath,  Swaine  & Moore,  Arnold P.            Evan  R. Chesler  with whom  Cravath,  Swaine  & Moore,  Arnold P.            ________________             _________________________   _________        Messing, Kevin J.  Lesinski and Choate, Hall  & Stewart were on  brief        Messing, Kevin J.  Lesinski and Choate, Hall  & Stewart were on  brief        _______  __________________     _______________________        for appellees.        for appellees.                                 ____________________                                 ____________________                                 ____________________                                 ____________________        *Of the Ninth Circuit, sitting by designation.        *Of the Ninth Circuit, sitting by designation.                    CYR,  Circuit Judge.    Appellant  Computer Systems  of                    CYR,  Circuit Judge.                          _____________          America,  Inc. ("CSA")  initiated the  present action  in Suffolk          Superior Court  against  UNUM Life  Insurance  Company  ("UNUM"),          claiming that UNUM had converted computer equipment which CSA had          acquired by  accession either  under the  terms  of its  computer          lease with UNUM or  under the common law doctrine  of accession.1          The complaint alleged that accession occurred as a consequence of          a  reconfiguration of  the  IBM computer  UNUM  leased from  CSA.          Following a three-day bench  trial, the district court determined          that the changes made to the computer were not permanent and that          the reconfigured  components were "readily removable."   Based on          its  interpretation of the lease  and the intent  of the parties,          the court found no accession.  CSA appealed.                                          I                                          I                                      BACKGROUND                                      BACKGROUND                                      __________                    The IBM 3090 computer system located at UNUM's facility          in  Portland,  Maine, was  purchased from  IBM  in 1985  by CSA's          predecessor in interest  and leased  to UNUM.   According to  the          terms  of  the  lease,  UNUM  was  permitted  to reconfigure  the          computer, subject to certain  conditions.  First, "[a]ll repairs,          replacements  and  substitutions  of  parts  . . . .  [would]  be                                        ____________________               1UNUM removed the  case to the United  States District Court          for  the  District  of  Massachusetts.    CSA  filed  an  amended          complaint,  adding  International  Business Machines  Corporation          ("IBM")  as a defendant and alleging that IBM had converted CSA's          property by reconfiguring the computer for UNUM.                                          2          considered accessions  to, and immediately upon  the installation          thereof, [would] be deemed  for all purposes part of,  the Equip-          ment[,]   and   title   thereto   [would]  be   immediately   and          automatically vested in [CSA]."  Second, UNUM was allowed to "add          additional equipment," the title  to which would not pass  to CSA          by accession  provided it  was "readily  removable"  in a  manner          which  would not reduce the "value or usefulness of the Equipment          below the value or usefulness which it would have had without any          such additional  equipment."   It remained the  responsibility of          the lessee, however,  to remove any  additional equipment at  the          expiration  of the  lease and  to "restore  the Equipment  to the          condition it was  in immediately  prior to the  addition of  such          additional equipment (normal  wear and tear  excepted)."  At  the          end  of the lease  term, the  lessee was  required to  return the          equipment  to the  lessor "in  the same operating  order, repair,          condition and appearance as when received . . . ."                    At  the  time  it was  leased  to  UNUM,  the IBM  3090          computer was a model  200 Base, i.e., it contained  two processor                                          ____          engines and utilized what is known as a "Base" technology system,          readily  reconfigurable  to  accommodate  more  processor engines          (e.g., upgrading  the computer  to a model  400 or 600)  and more           ____          advanced  technology  (e.g.,  upgrading  to model  "E,"  "S,"  or                                 ____          "J").2     Computer   system  technology   reconfigurations   are                                        ____________________               2Computer models are defined both by the number of processor          engines and the type of technology.  Computer models can  also be          varied  with respect to memory type and channel capacity.  An IBM          3090 system can be configured in more than 2 million ways.                                          3          accomplished with thermal conductive  modules ("TCM's") which are          simply  "plugged"  into the  computer  mainframe.   The  computer          leased to UNUM was reconfigured initially to a  400 Base, then to          a model 600E, and finally,  in March 1990, to a model  600J.  The          technology installed  to  effect the  "E"  and "J"  upgrades  was          leased to UNUM by Bell Atlantic Systems Leasing ("BASLI").  Prior          to the final upgrade to "J" technology, CSA notified UNUM that it          would claim title  to any "TCM's" containing the  "J" technology.          At the end of the lease term, UNUM returned the IBM 3090 Base 200          computer to  CSA.3   CSA  commenced the  present action  claiming          entitlement  to an IBM 3090  200 computer system  with "J" rather          than Base technology.4                                          II                                          II                                      DISCUSSION                                      DISCUSSION                                      __________          A.  The Lease          A.  The Lease              _________                    CSA  contends that  the  lease agreement  with UNUM  is          unambiguous and its interpretation presents a legal issue subject          to de novo review.  UNUM and  IBM, on the other hand, insist that             __ ____          the  relevant  lease  terms are  ambiguous  and  present a  mixed          question  of law and  fact appropriate for  "clear error" review.                                        ____________________               3Immediately prior to the expiration of the lease term, UNUM          contracted with  IBM to downgrade the system to a 200 Base, i.e.,                                                                      ____          a  system  equivalent to  that originally  leased  by UNUM.   The          downgrade required no more than 100 hours.               4CSA claims neither the four processors installed to upgrade          the  leased computer  from  model  200  to  model  600,  nor  the          companion technology.                                          4          As we  conclude that  the  pertinent terms  are ambiguous,  their          interpretation poses a mixed  question of law and fact  under New          York  law,5 Meyer v. Certified Moving & Storage Co., 556 N.Y.S.2d                      _____    ______________________________          63,  65 (1990); Kenyon v.  Knights Templar &  M. Mut. Aid Ass'n.,                          ______     _____________________________________          122  N.Y. 247,  25 N.E.  299 (1890),  which we  review for  clear          error.  American Title Ins. Co. v. East West Financial Corp., 959                  _______________________    _________________________          F.2d 345,  346 (1st Cir. 1992)  (mixed questions of  law and fact          reviewed  for clear error); LoVuolo  v. Gunning, 925  F.2d 22, 25                                      _______     _______          (1st Cir. 1991) (same).   A dispute as to whether  the terms of a          contract  are ambiguous presents a question of law for the court.          See, e.g.,  Amusement  Business Underwriters  v.  American  Int'l          ___  ____   ________________________________      _______________          Group,  Inc.,  66 N.Y.2d  878, 489  N.E.2d  729, 732  (1985); cf.          ____________                                                  ___          Fashion House, Inc.  v. K  Mart Corp., 892  F.2d 1076, 1083  (1st          ___________________     _____________          Cir. 1989) (ambiguity determination is for the  court).  Contract          terms are ambiguous where "[r]easonable minds could differ" as to          their meaning.   Van Wagner Adv.  v. S & M  Enters., 501 N.Y.S.2d                           _______________     ______________          628, 631, 492 N.E.2d 756, 758 (1986).                    At issue under the  terms of the UNUM lease  is whether          the    computer    modifications    were     "replacements"    or          "substitutions," which became accessions  to the CSA computer, or          "additional  equipment," which  did  not.   These  terms are  not          defined  in the  lease, nor  do the  terms themselves,  either in          context or  in  isolation, make  manifest  the intention  of  the                                        ____________________               5The parties do  not dispute the  applicability of New  York          law,  as  the  lease provides  that  it  "shall  be governed  and          construed  for all purposes under and in accordance with the laws          of the State of New York."                                          5          parties with respect to the accession of TCM's utilized to recon-          figure the computer technology  in the present case.   As of  the          time the lease was executed, IBM had not  yet informed the public          whether upgrades would  be accomplished by  the removal of  parts          and the insertion  of others (as happened here) or  simply by the          addition  of more  parts.   Thus,  it  does not  appear that  the          parties could  have formed a mutual intention, at the time of the          lease,   as  to   whether  upgrades   were   to  be   treated  as          "substitutions" or "additions."  We therefore conclude that these          terms were ambiguous.   See Van Wagner Adv., 501 N.Y.S.2d at 631,                                  ___ _______________          492 N.E.2d at 758; see also Fashion House, Inc., 892 F.2d at 1083                             ___ ____ ___________________          (contract  language  usually   considered  ambiguous  "where  the          phraseology can  support reasonable  difference of opinion  as to          the meaning of the  words employed and obligations undertaken.").          Where  "a contract  is thought  ambiguous, the court  may receive          extrinsic  evidence, even  parol evidence,  to determine  whether          uncertainty exists."  Id. (citing Sunstream Jet  Express, Inc. v.                                ___         ____________________________          International  Air Service  Co., 734  F.2d 1258,  1268 (7th  Cir.          _______________________________          1984)).                    CSA claims that the removal  of the Base technology and          the  successive installations  of  the "E"  and "J"  technologies          resulted in  "substitutions" and "replacements" under  the lease,          which  meant that  CSA acquired  title to  the "J"  technology by          accession under the  terms of  the lease.   CSA rests its  entire          argument  on the ground that the "plain, ordinary meaning" of the          lease  compels a finding of accession.  See Olenick v. Government                                                  ___ _______    __________                                          6          Employees Ins.  Co., 346  N.Y.S.2d 320, 321  (1973) (interpreting          ___________________          insurance contract  according to its "plain,  ordinary meaning").          According to CSA, a "replacement" or "substitution" plainly means          a thing "put in  the place of another."   On the other  hand, the          term    "additional  equipment,"  according to  CSA,  entails  an          installation "without  the corresponding removal  of functionally          equivalent parts."   As it  is undisputed  that other  components          were  removed from the computer when the TCM's containing the "J"          technology were installed, according to CSA the "J" TCM's clearly          were  "replacements" or  "substitutions" under  the terms  of the          lease and became accessions  to the CSA-owned computer.   But cf.                                                                    ___ ___          id.,  346 N.Y.S.2d at 321 ("'replace,'  given its plain, ordinary          ___          meaning,  means to  supplant  with a  substitute or  equivalent")                                                               __________          (emphasis added).                    CSA  further  contends  that  the TCM's  could  not  be          considered  "additional  equipment" because  the  lease prohibits          "add[ing]  to  the  Equipment  additional equipment  not  readily          removable or, even if readily  removable, which cannot be removed          without reducing  the value or usefulness of  the Equipment below          the value or usefulness which it would have had without  any such          additional equipment."  According to CSA, given the time required          to  remove  the TCM's  and the  fact that  without any  TCM's the          computer  will  not  function  and   is  reduced  in  value   and          usefulness, the  TCM's could not be  "additional equipment" under                                          7          the lease.6                    Under New York law, "[i]n the interpretation of leases,          the  same  rules  of  construction  apply  as  are applicable  to          contracts generally."   Tantleff v. Truscelli,  493 N.Y.S.2d 979,                                  ________    _________          982  (1985) aff'd, 69 N.Y.2d  769, 505 N.E.2d  623 (1987) (citing                      _____          George Backer  Management Corp. v.  Acme Quilting Co.,  46 N.Y.2d          _______________________________     _________________          211, 385  N.E.2d 1062, 1065 (1978)).   The intent  of the parties          governs.  See, e.g.,  Richardson v. Steuben County, 226  N.Y. 13,                    ___  ____   __________    ______________          19, 122  N.E. 449, 450  (1919) (in interpreting  contracts courts          must  seek "the true intent  of the parties  who executed them");          Lipsky v. Commonwealth United  Corp., 551 F.2d 887, 896  (2d Cir.          ______    __________________________          1976) ("essential tool in properly interpreting a contract  is to          first ascertain the  intent of the  parties") (applying New  York          law).   The "intention  of the parties  must be  gleaned from all          corners of  the document, rather  than from sentences  or clauses          viewed in isolation."   Tougher Heating & Plumbing Co.  v. State,                                  ______________________________     _____          423 N.Y.S.2d  289, 290-91  (1979).  Moreover,  when the  contract          language  is ambiguous, extrinsic  evidence, including  course of          performance  by the  parties and  standard industry  practice, is          relevant  in determining intent.  See, e.g., State v. Home Indem.                                            ___  ____  _____    ___________          Co.,  66  N.Y.2d  669,  486  N.E.2d  827,  829 (1985)  (extrinsic          ___          evidence may aid in  interpretation of ambiguous contract); Pease                                                                      _____                                        ____________________               6According to  the terms  of  the lease,  "[o]ther than  the          repairs, replacements and substitution of parts [all of which are          the property  of the Lessor] .  . . and the  additional equipment          permitted under   12, Lessee  shall not add any equipment  to the          Equipment or alter or modify the Equipment in any manner."  Thus,          any reconfiguration must be  either a "repair[], replacement[ or]          substitution" or "additional equipment."                                          8          &  Elliman, Inc. v. Weissman, 167 N.Y.S.2d 601, 602 (1957) (court          ________________    ________          often  can gain  interpretive  guidance from  conduct of  parties          under contract);  Edison v. Viva  Int'l, Ltd., 421  N.Y.S.2d 203,                            ______    _________________          205  (1979) ("contract must be  construed according to the custom          and use  prevailing in a particular  trade").  "[W]hen a  term or          clause is  ambiguous and the determination of the parties' intent          depends upon the  credibility of extrinsic  evidence or a  choice          among  inferences to be  drawn from extrinsic  evidence, then the          issue  is one  of  fact."   Amusement  Business Underwriters,  66                                      ________________________________          N.Y.2d at 880, 489 N.E.2d at 732.                    The CSA  argument assumes that  the terms of  the lease          are  unambiguous  and  must  be  interpreted  without  resort  to          extrinsic evidence.  The   district   court   implicitly   found,          however,  and we  agree, that  "substitution,"  "replacement" and          "addition"   are  terms   about  whose   meaning  in   the  lease          "[r]easonable minds could differ."  Van Wagner Adv., 501 N.Y.S.2d                                              _______________          at  631, 492  N.E.2d  at 758.   The  district court  resolved the          ambiguity through resort  to the  state of the  knowledge of  the          parties  as  to  upgrades at  the  time  of  the lease,  industry          practice, the commercial purpose  to be served by the  lease, and          the conduct of the parties under the lease.                    Based on  its consideration of the  extrinsic evidence,          the  court  determined  that  the  parties  did  not  intend  the          interpretation proposed  by CSA.   According  to  the court,  the          parties did not intend the term "substitution" to encompass every          circumstance in which a part is removed and another is put in its                                          9          place, but only those circumstances in which an "equivalent" part          is put back in which  "does the same thing" as the  removed part.          The district court "read the term 'substitution' as  referring to          equivalence."     See   Olenick,  346   N.Y.S.2d  at   321.     A                            ___   _______          "replacement,"  on   the  other  hand,   would  contemplate   the          installation of a new part of  the exact same type as the removed          part.7   In other words, "substitutions"  and "replacements" were          found to refer  to installations which maintain the  equipment in          its state or  condition at  the onset of  the lease;  "additional          equipment" contemplates modifications.  Since  the "J" technology          UNUM installed was in no sense merely "equivalent" to the removed          TCM's,   the  district   court  found   that  it   constituted  a          modification which  CSA did  not acquire  by accession under  the          terms of the lease.  We find no error.                    First, a  UNUM employee involved in  the negotiation of          the original lease  presented testimony  to the  effect that  the          parties intended  section 12 ("additions") to  mean upgrades, and          section 8  ("substitutions"  and "replacements")  to  mean  parts          installed in place of failed parts  and not as upgrades.  Second,          the district court's interpretation is supported by evidence that          mixed ownership of base machines and upgrades is  common industry                                        ____________________               7As the court said:                    Replacement would mean, for example, putting in an               item that  has the same part  number.  So you  take out               item, that is part  number 123, and you put  in another               one  that is part number 123.   Substitution means part               number 123 is unavailable, but you [have] 345 that does               the same thing, so you put in 345.                                          10          practice.   No witness  identified  an instance  in the  computer          industry  where the  owner of  a base  system was  found  to have          acquired  title by  accession to  any computer  upgrade involving          advanced technology.   Third, CSA's conduct during the lease term          cast  doubt on its current contention that it, rather than BASLI,          owns the  "J" technology.8  Fourth,  unlike CSA's interpretation,          the district court interpretation  makes sound commercial  sense.          Under  the  CSA  interpretation,   CSA  would  acquire  title  to          technology  worth more  than  $2,000,000, without  payment.   See                                                                        ___          River View Ass'n. v. Sheraton Corp. of America, 306 N.Y.S.2d 153,          _________________    _________________________          156  (1969),  aff'd.,  27  N.Y.2d  718,  262  N.E.2d  416  (1970)                        _____          ("[P]arties  to an  agreement  are presumed  to  act sensibly  in          regard  to it  and an  interpretation that  produces  an absurdly          harsh  result is to be avoided").  Sixth, the sensible functional          distinction  the district  court  drew  between replacements  and          modifications  best comports  with the  terms of  the lease  as a          whole.   For  example, the  same  section that  accords accession          rights to  the lessor  in respect  to "repairs,  replacements and          substitutions"  prescribes the  lessee's  duty to  "maintain  the          Equipment   in  good  operating  order,  repair,  condition,  and          appearance. . . ."  Finally, the district court supportably found          that the "J" TCM's were "readily removable"  and thus the sort of          "additional equipment" UNUM was allowed to add under the terms of                                        ____________________               8Prior to the expiration of the lease, CSA attempted to sell          the 200 Base computer at a time when it was  about to be upgraded          to  200E.  Under CSA's  accession theory, however,  it could have          acquired  title  to  the "E"  technology  at  no  cost merely  by          awaiting its installation.                                          11          the lease.          B.  Doctrine of Accession          B.  Doctrine of Accession              _____________________                    Alternatively,  CSA  claims ownership  of  the enhanced          technology under  the  common law  doctrine  of accession.    The          parties agree that Maine common law controls.  Mathewson Corp. v.                                                         _______________          Allied Marine Indus., Inc., 827 F.2d 850, 853 n.3 (1st Cir. 1987)          __________________________          (appellate court will accept  parties' "expressed preference" and          "implicit concession"  as to controlling law,  where "[t]hey have          briefed  the question in those terms and the district court ruled          on that basis."); In re Pioneer, 729 F.2d 27, 31 (1st Cir. 1984).                            _____________          Under  Maine  law,  three  factors govern  whether  an  accession          occurs.                    [A] chattel  is  not merged  into the  realty                    unless (1) it is physically annexed, at least                    by  juxtaposition,  to  the  realty  or  some                    appurtenance  thereof, (2)  it is  adapted to                    and usable  with that  part of the  realty to                    which  it  is  annexed,  and (3)  it  was  so                                             ___                    annexed with  the intention,  on the part  of                    the person making the annexation, to  make it                    a permanent accession to the realty.          Franklin Property Trust v.  Foresite, Inc., 489 A.2d 12,  14 (Me.          _______________________     ______________          1985) (citing Hayford v. Wentworth, 97  Me. 347, 350, 54 A.  940,                        _______    _________          941 (1903)) (emphasis added).  See In re Lyford, 22 B.R. 222, 224                                         ___ ____________          (Bankr.  D.  Me. 1982)  (applying  Hayford  factors to  determine                                             _______          whether cab and  chassis were  accessions to truck).   All  three          elements  in the Hayford accession test must be met, but "special                           _______          prominence  must be attached to the intention of the party making                                          12          the  annexation."  Id.   The party asserting  the accession claim                             ___          bears the burden  of proof.   Hayford v.  Wentworth, 97 Me.  347,                                        _______     _________          350, 54 A. 940; Franklin Property Trust, 489 A.2d at 14.                          _______________________                    The district  court supportably found, on  the basis of          testimony it explicitly credited, that  the time taken to  remove          the  "J" TCM's and restore  the original base  technology was not          out  of proportion to the  time required for  an ordinary upgrade          and therefore that the "J" TCM's were "readily removable."  Thus,          it was not clear error to conclude that no physical annexation of          the technology occurred.  See, e.g., Peckham v. Continental  Cas.                                    ___  ____  _______    _________________          Ins.           _____                                          13          Co., 895 F.2d  830, 840 (1st Cir. 1990)  (citing Anderson v. City          ___                                              ________    ____          of  Bessemer City, 470 U.S. 564, 573-74 (1985)) (no "clear error"          _________________          where  district  court   adopts  plausible  view  of   evidence).          Furthermore, no  evidence was  produced at  trial that any  party          involved in the TCM installation ever anticipated, let alone that          UNUM intended, that the TCM's would become accessions to the CSA-          owned computer.   The uncontradicted  testimony was  to the  con-          trary.   Accordingly, the  district court determination  that CSA          did not acquire the "J" TCM's by accession under Maine common law          must be affirmed.                    The district court judgment is affirmed.                    _______________________________________                                          14
