Lohnes v. Level 3 Communications Inc

• Decision Date: 05 November 2001
• Docket Number: No. 01-1613,01-1613
• Citation: 272 F.3d 49
• Parties: (1st Cir. 2001) PAUL R. LOHNES, Plaintiff, Appellant, v. LEVEL 3 COMMUNICATIONS, INC., Defendant, Appellee. Heard
• Court: U.S. Court of Appeals — First Circuit

Page 49

272 F.3d 49 (1st Cir. 2001)

PAUL R. LOHNES, Plaintiff, Appellant, v. LEVEL 3 COMMUNICATIONS, INC., Defendant, Appellee.

No. 01-1613

United States Court of Appeals For the First Circuit

Heard Nov. 5, 2001

Decided November 30, 2001

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Edward F. Harrington, Senior U.S. District Judge] Michael Eby, with whom Robert E. McLaughlin, Sr. and Gilman, McLaughlin & Hanrahan LLP were on brief, for appellant.

Joseph E. Jones, with whom Fraser, Stryker, Meusey, Olson, Boyer & Block, P.C., Paul G. Lannon, Jr., and Holland & Knight LLP were on brief, for appellee.

Before Selya, Circuit Judge, Coffin, Senior Circuit Judge, and Lipez, Circuit Judge.

SELYA, Circuit Judge.

The primary issue raised in this appeal is whether the terms "capital reorganization" and/or "reclassification of stock," as used in a stock warrant, encompass a stock split. Asserting the affirmative of this proposition, a warrantholder, plaintiff-appellant Paul R. Lohnes, claims that a stock split effectuated by defendant-appellee Level 3 Communications, Inc. (Level 3) triggered an antidilution provision in the warrant that automatically increased the number of shares of stock to which he was entitled. Level 3 resists this claim. The district court concluded that the language of the warrant could not reasonably be construed to encompass a stock split and, accordingly, granted Level 3's motion for summary judgment. Lohnes v. Level 3 Communications, Inc., 135 F. Supp. 2d 105, 106 (D. Mass. 2001). We affirm.

I. BACKGROUND

Consistent with the conventional summary judgment praxis, our account of the relevant facts construes the record in the light most favorable to the nonmoving party (here, the appellant). McCarthy v N.W. Airlines, Inc., 56 F.3d 313, 315 (1st Cir. 1995).

The appellant is both a trustee and a beneficiary of C.E.M. Realty Trust (the Trust). In February of 1998, the Trust leased 40,000 square feet of commercial space to XCOM Technologies, Inc. (XCOM). The details of the lease transaction need not concern us, save for the fact that, as part of the consideration, XCOM issued a stock warrant to the appellant. The parties negotiated the principal terms of the warrant -- the number of shares, the exercise price, and the expiration date -- and XCOM's lawyer then drafted the document. The warrant specified that its exercise would be governed by Massachusetts law. It empowered the holder to purchase, at his discretion but within a fixed period, 100,000 shares of XCOM common stock at $0.30 per share.

Unbeknownst to the appellant, XCOM's days as an independent entity were numbered. Shortly after the appellant executed the lease and accepted the warrant, Level 3 acquired XCOM in a stock-for-stock transaction and converted XCOM into a wholly-owned subsidiary. As part of this transaction, Level 3 agreed to assume XCOM's warrant obligations and satisfy them with shares of Level 3's common stock (using a designated share exchange formula). Following this paradigm, the appellant's unexercised warrant for XCOM shares was duly converted into a warrant to purchase 8,541 shares of Level 3's common stock. The appellant does not challenge this conversion (which took effect in April of 1998).

The next significant development occurred on July 14, 1998. On that date, Level 3's board of directors authorized a two-for-one stock split, to be effectuated in the form of a stock dividend granting common shareholders one new share of stock for each share held.¹ The board set the record date as July 30, 1998. On July 20, Level 3 issued a press release announcing the stock split, but it did not provide the appellant with personalized notice.

The split occurred as scheduled. Adhering to generally accepted accounting practices, Level 3 adjusted its balance sheet to account for the split by increasing its common stock account in the amount of $1,000,000 and reducing paid-in-capital by a like amount. These accounting entries had no net effect on either the retained earnings or the net equity of the company.

Despite the sharp reduction in the share price that accompanied the stock split, the appellant paid no heed until approximately three months after the record date. When his belated inquiry revealed what had transpired, the appellant contacted Level 3 to confirm that the stock split had triggered a share adjustment provision, thus entitling him to 17,082 shares (twice the number of shares specified in the warrant). Level 3 demurred on the ground that the warrant did not provide for any share adjustment based upon the occurrence of a stock split effected as a stock dividend.

Dissatisfied by Level 3's response, the appellant exercised the warrant and received 8,541 shares of Level 3's common stock. He then sued Level 3 in a Massachusetts state court alleging breach of both the warrant and the implied duty of good faith and fair dealing. Citing diversity of citizenship and the existence of a controversy in the requisite amount, Level 3 removed the action to the federal district court. See 28 U.S.C. §§ 1332(a), 1441. The parties then engaged in a protracted period of pretrial discovery.

Discovery closed on October 30, 2000. Thereafter, Level 3 moved for summary judgment. See Fed. R. Civ. P. 56. The appellant's opposition to the motion included, inter alia, the affidavit of Jonathan C. Guest, whom the appellant held out to be a securities expert. Level 3 moved to strike the Guest affidavit.

In due course, the district court ruled that, as a matter of law, a stock split, effected as a stock dividend, did not constitute a "capital reorganization" as that term was used in the warrant and, accordingly, granted the motion for summary judgment. Lohnes, 135 F. Supp. 2d at 106. In its rescript, the court neither referred to the Guest affidavit nor ruled explicitly on Level 3's motion to strike that affidavit. This timely appeal ensued.

II. METHODOLOGY OF REVIEW

We begin our analysis by outlining the legal framework that governs our review. Next, we apply well-worn principles of contract interpretation to resolve the appellant's contention that the terms "capital reorganization" and "reclassification of stock" encompass a stock split implemented as a stock dividend. In this endeavor, our principal task is to determine the ambiguity vel non of the disputed terms. Thus, we investigate whether either term is reasonably susceptible to the interpretation urged by the appellant. As part of this exercise, we consider (and reject) the appellant's belated attempt to introduce expert testimony bearing on this question. We conclude by addressing the appellant's claim that Level 3 breached the implied duty of good faith and fair dealing inherent in the warrant.

We set out upon this odyssey mindful that the entry of summary judgment is justified only "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). Once a defendant moves for summary judgment and places in issue the question of whether the plaintiff's case is supported by sufficient evidence, the plaintiff must establish the existence of a factual controversy that is both genuine and material. Garside v. Osco Drug, Inc., 895 F.2d 46, 48 (1st Cir. 1990). To carry this burden, the plaintiff must "affirmatively point to specific facts that demonstrate the existence of an authentic dispute." McCarthy, 56 F.3d at 315.

We review the district court's entry of summary judgment de novo. Suarez v. Pueblo Int'l, Inc., 229 F.3d 49, 53 (1st Cir. 2000). Thus, we are not wed to the district court's reasoning but may affirm its order on any independently sufficient ground. Houlton Citizens' Coalition v. Town of Houlton, 175 F.3d 178, 184 (1st Cir. 1999); Polyplastics, Inc. v. Transconex, Inc., 827 F.2d 859, 860-61 (1st Cir. 1987). In conducting our analysis, this court -- like the district court -- must scrutinize the record in the light most favorable to the party opposing summary judgment and indulge all reasonable inferences in that party's favor. Garside, 895 F.2d at 48.

These principles have a nuanced application when a motion for summary judgment hinges upon an issue of contract interpretation. In that type of situation, we have counseled that:

While an argument between parties about the meaning of a contract is typically an argument about a "material fact," summary judgment is not necessarily foreclosed. Even if there is ambiguity in the language . . . the evidence presented about the parties' intended meaning may be so one-sided that no reasonable person could decide the contrary.

Allen v. Adage, Inc., 967 F.2d 695, 698 (1st Cir. 1992) (citations omitted). Accordingly, summary judgment may lie against a party who fails adequately to support its proposed interpretation of a purportedly ambiguous contract term. See, e.g., In re Newport Plaza Assocs., 985 F.2d 640, 645 (1st Cir. 1993); FDIC v. Singh, 977 F.2d 18, 21 (1st Cir. 1992); see also Edmonds v. United States, 642 F.2d 877, 881 (1st Cir. 1981) (holding that there must be more than one "plausible definition" of contractual language to create a fact question).

III. THE CONTRACT INTERPRETATION CLAIMS

A stock warrant is an instrument that grants the warrantholder an option to purchase shares of stock at a fixed price. See Black's Law Dict. 1441 (7th ed. 1999); II James Cox et al., Corporations § 18.15 (1995 & 1999 Supp.); 6A William Meade Fletcher, Fletcher Cyclopedia of the Law of Private Corps. § 2641 (perm. ed. 1997); see also Tribble v. J.W. Greer Co., 83 F. Supp. 1015, 1022 (D. Mass. 1949) (holding, under Massachusetts law, that a stock warrant is "a contract by which the corporation gives an irrevocable option to the holder to purchase authorized corporate stock...