793 F.2d 1 (1st Cir. 1986), 85-1485, Union Mut. Life Ins. Co. v. Chrysler Corp.

Docket Nº:85-1485, 85-1486 and 85-1504.
Citation:793 F.2d 1
Party Name:UNION MUTUAL LIFE INSURANCE COMPANY, Plaintiff, Appellant, v. CHRYSLER CORPORATION, et al., Defendants, Appellees. UNION MUTUAL LIFE INSURANCE COMPANY, Plaintiff, Appellee, v. CHRYSLER CORPORATION, Defendant, Appellee, Appeal of COMPUTER SYSTEMS OF AMERICA, INC., et al., Defendants, Appellants. UNION MUTUAL LIFE INSURANCE COMPANY, Plaintiff, Appell
Case Date:March 25, 1986
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

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793 F.2d 1 (1st Cir. 1986)



CHRYSLER CORPORATION, et al., Defendants, Appellees.



CHRYSLER CORPORATION, Defendant, Appellee,


Defendants, Appellants.



CHRYSLER CORPORATION, Defendant, Appellant.

Nos. 85-1485, 85-1486 and 85-1504.

United States Court of Appeals, First Circuit

March 25, 1986

Argued Dec. 5, 1985.

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[Copyrighted Material Omitted]

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Margaret H. Marshall with whom Jessica Block, John A. Tisdale and Csaplar & Bok, Boston, Mass., were on brief for Union Mut. Life Ins. Co.

Douglas G. Moxham with whom Michael R. Heyison and Hale & Dorr, Boston, Mass., were on brief for Computer Systems of America.

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Robert D. Cultice with whom George W. Mykulak and Goldstein & Manello, Boston, Mass., were on brief for Chrysler Corp.

Before CAMPBELL, Chief Judge, BOWNES and BREYER, Circuit Judges.

BREYER, Circuit Judge.

These appeals arise out of claims that the Chrysler Corporation and Computer Systems of America, Inc. ("CSA") each breached a contract. One contract, called the Lease, obliged Chrysler to pay $27,475 and later $29,291 per month for nine years as rent for some computer equipment. Union Mutual Life Insurance Company (which took Chrysler's promise as security for a loan) says Chrysler broke its promise to pay this rent.

The other contract, called the Sublease, allowed CSA to sublet the equipment from Chrysler and rent it to others, while obliging CSA to pay rent equal to what Chrysler owed under the Lease. Chrysler says that CSA breached its promise to pay the rent due under the Sublease.

Each defendant replied that it was not obliged to pay, in Chrysler's case because it had been released from its obligations, and in CSA's case because CSA had exercised its right to set aside the Sublease obligation. The court below rejected these defenses. A jury found that the Sublease bound CSA. The district court itself found (on the basis of affidavits, the Lease, and other documents) that Chrysler broke its Lease agreement, and the court entered summary judgment in favor of Union Mutual and against Chrysler.

All three parties now appeal. After reviewing the record, we conclude, with some exceptions, that the district court was correct.


We first set out a simplified account of the relevant background. In essence, in 1974, Chrysler decided to rent IBM computer equipment from CSA, a computer leasing company. CSA needed financing to buy the equipment. Chrysler and a CSA limited partnership (called CSA No. 332) signed a Lease, in which CSA No. 332 promised to provide the equipment and Chrysler promised to pay rent of first $27,475 and later (after the equipment was upgraded in 1976) $29,291 each month for about nine years (from 1974 to 1983). The Lease embodied Chrysler's ironclad promise to pay the rent. It used form language designed to prevent Chrysler from asserting defenses against paying or (in colloquial 'financing' jargon) to ensure that Chrysler paid its monthly rental "come hell or high water." The parties' object in using this strong language was apparently to induce a lender to provide the $1.7 million needed to finance the IBM equipment while taking as security Chrysler's promise to pay the rent.

Union Mutual agreed to lend the money. It accepted as collateral a security interest in the computer machinery itself and an assignment of Chrysler's Lease promise. Evidently, Union Mutual (correctly) believed that a secured interest in the machinery alone would not sufficiently protect its loan, perhaps foreseeing that rapid advances in computer technology might render these machines obsolete before the loan was paid back. In Union Mutual's view, Chrysler's 'ironclad' promise, taken together with the machinery, offered sufficient security for the loan.

The actual transaction was more complex than just described, in part because (for reasons extraneous here) the parties brought another entity, the Shawmut Bank, into the arrangement. The Bank acted as a trustee for CSA and Union Mutual. The Bank took an assignment of the Lease and the equipment from CSA No. 332; it assigned both to Union Mutual as collateral for the $1.7 million loan; it agreed to apply the rental payments Chrysler owed under the Lease to loan repayments owed to Union Mutual. A new CSA partnership (No. 403) became the beneficial owner of the equipment. The parties agreed that Shawmut (though technically the "borrower") would play an entirely administrative role; and they executed a comprehensive

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exculpation and indemnity agreement absolving Shawmut of liability under this arrangement.

We need not dwell on the complex details of the arrangements with Shawmut, however, except to mention that in all relevant respects Chrysler knew about them. For our purposes, the essential elements of the transaction consist of CSA's promise to provide equipment, Chrysler's ironclad promise to pay rent, and the assignment of Chrysler's promise (with Chrysler's knowledge and consent) to Union Mutual as security for the $1.7 million loan.

The second contract involved in this case is a Sublease made in 1977. Chrysler by then had decided it did not want to continue renting the equipment. CSA agreed to take the equipment back. Rather than simply terminating the Lease to Chrysler, however, CSA subleased back the same equipment that it had leased; and, in return for the equipment, CSA promised to pay to Chrysler under the Sublease precisely the same $29,291 per month that Chrysler was obliged to pay under the Lease. This apparently self-cancelling transaction makes sense once one remembers that Chrysler's promise to pay rent under the Lease then ran not to CSA, but to Union Mutual, which had taken an assignment of the promise as security. CSA began to send the $29,291 to Shawmut each month; and Shawmut dutifully sent the money on to Union Mutual as repayments (principal and interest) of the loan.

Although CSA for a time complied with its Sublease obligations, in fact CSA and Chrysler had a serious dispute about the validity of the Sublease. During the course of negotiations over the Sublease in early 1977, Chrysler officials began to dither about whether they really wanted to keep, or to give up, the equipment. The parties signed the Sublease, but CSA officials gave Chrysler an option to back out. They also insisted on having the same option themselves. This withdrawal option was embodied in a written "side letter" agreement.

The side letter says that the options expire on March 1, 1977. But CSA argues that Chrysler officials extended CSA's "back-out" option until sometime after March 27. This last date is important, because on that day IBM announced lower prices for its computer equipment--and Chrysler's rented equipment consequently fell in value. In any event, CSA backed out (or tried to back out) of the Sublease near or just after March 27. In Chrysler's view CSA was too late; in CSA's view its renunciation of the Sublease was timely in light of recent conversations with Chrysler officials.

Despite the dispute, CSA took back the equipment (though saying at the time that it did not consider itself bound by the Sublease). CSA sub-subleased the equipment at a profit, and sent $29,291 to Shawmut each month for four years. Then, in 1981, when the Lease (and Sublease) still had two more years to run, CSA stopped paying. Union Mutual demanded payment first from CSA, then from Chrysler. When both refused to pay, Union Mutual sued both of them. Chrysler in turn crossclaimed against CSA.

As we have previously mentioned the district court decided that Chrysler had no valid defense to Union Mutual's suit for payment under the Lease. It held that the affidavits and other papers showed the absence of any "genuine issue as to any material fact." Fed.R.Civ.P. 56. The jury then decided that CSA was bound by the Sublease. In addition, the court found that because of the Sublease, CSA and its president, Frank Keohane, must indemnify Chrysler for the payments it must make to Union Mutual. Union Mutual settled its direct claim against CSA.

We turn now to the issues the parties raise on this appeal.


The CSA Defendants

The CSA defendants include CSA and CSA President Frank Keohane. The jury found that CSA was bound by its Sublease

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promises. The district judge, after making any necessary additional factual determinations (see Fed.R.Civ.P. 49), held that CSA was liable for breach of the Sublease and must indemnify Chrysler insofar as Chrysler was liable to Union Mutual. He also held that Frank Keohane was personally liable to indemnify Chrysler. These defendants attack each of these determinations.

A. The Breach of Contract

1. CSA argues that the district court should have granted it a new trial in respect to the jury's key findings about the Sublease, namely that CSA tried to back out of the Sublease too late; its option to do so had expired. The jury made these findings in response to two special questions:

Question 1. Did Chrysler (through [its employee] Harris, acting within the scope of his actual or apparent authority) and CSA make an oral contract modifying their earlier written contract (the sublease and side letter of January 21, 1977) to provide that the time within which either party could cancel the sublease was extended for a period that included March 27, 1977?

Answer YES or NO. NO

Question 4. Did Chrysler (through Harris, acting within the scope of his employment) make a representation or representations to CSA that...

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