Zayre Corp. v. Computer Systems of America, Inc.

• Decision Date: 01 October 1987
• Citation: 24 Mass.App.Ct. 559,511 N.E.2d 23
• Parties: ZAYRE CORP. et al. 1 v. COMPUTER SYSTEMS OF AMERICA, INC., et al. 2
• Court: Appeals Court of Massachusetts

Page 23

511 N.E.2d 23

24 Mass.App.Ct. 559

ZAYRE CORP. et al. ¹ v. COMPUTER SYSTEMS OF AMERICA, INC., et al. ²

Appeals Court of Massachusetts Suffolk.

Argued April 10, 1987.

Decided July 31, 1987.

Further Appellate Review Denied Oct. 1, 1987.

Douglas G. Moxham (Peter J. Macdonald, Boston, with him), for defendants.

Lawrence M. Slater (Marc C. Laredo, Boston, with him), for plaintiffs.

Before GRANT, CUTTER and SMITH, JJ.

CUTTER, Justice.

Computer Systems of America, Inc., and Keohane (see note 2, jointly referred to as CSA) appeal from a judgment of the Superior Court dismissing their counterclaims against Zayre Corp. (Zayre) and Comdisco, Inc. (Comdisco). Zayre and Comdisco by their complaint had sought declaratory relief against CSA. This complaint now has been waived. The five-day trial of this case, in January, 1986, before a Superior Court judge sitting without a jury, dealt only with the CSA counterclaims, which are summarized in the margin. ³ The judge, on February 18, 1986, made comprehensive findings (on which the facts stated below are based in major part), rulings, and a decision adverse to CSA.

Background Facts and Findings

Zayre is the owner of a chain of discount department stores. On October 26, 1973, Zayre, as lessee, and CSA, as lessor, entered into an eight-year lease of a computer system. The leased system consisted of a basic IBM 370/168 central processing unit (CPU) and some peripheral items, in the aggregate hereafter referred to as the CSA system. Zayre used the CSA system from a single computer center to perform a great variety of merchandise and financial functions (by the use of leased telephone lines) for all its retail stores (about 250 in number).

Because of rapid expansion between 1973 and 1979, Zayre needed to increase its computer capacity. Robert Hernandez, Zayre's manager of management information systems, prepared a report on Zayre's computer needs which concluded that the CSA system was operating at full capacity and that Zayre should increase computer power at once. The report offered seven alternative plans for increasing Zayre's computer capacity and recommended that Zayre add an attached processor (AP) to its existing CSA system. This, it was expected, would double the system's capacity. ⁴

After discussion, members of Zayre's operating management initially adopted Hernandez's recommendation that the CSA system be upgraded. Hernandez's immediate supervisor, Charles Whittle, disagreed with Hernandez's recommendation, however, because it would require that the computer not be operated for a significant period ("downtime"). ⁵ Whittle reported his disagreement to his immediate superior Mervyn Weich. Weich, nevertheless, adopted Hernandez's recommendation in a memorandum of October 26, 1979, to Zayre's president, Maurice Segall.

Zayre decided, both for financial and operating reasons, that it wanted to own, not lease, its computer system. CSA did not want to sell the system in place on Zayre's premises because of adverse economic and tax consequences. ⁶ Accordingly, Zayre sought bids for a comparable (already updated) system from various companies, ⁷ including CSA and Comdisco. (See note 1, supra.) Comdisco offered by letter of January 8, 1980, (a) to install for Zayre an already upgraded, "Model 3," IBM 370/168 computer and (b) to take from Zayre a sublease of the CSA system. Zayre's management determined that Comdisco's proposal was the best available and on March 6, 1980, executed a sales agreement for the Comdisco system and an agreement for a sublease (to Comdisco) of the 1973 CSA system. These two agreements were not to take effect unless CSA consented to the sublease to Comdisco of the CSA system. ⁸

On March 6, 1980, Zayre wrote to CSA requesting CSA's consent to the sublease to Comdisco of CSA's system. By a letter of March 10, 1980, CSA replied to Zayre's request and outlined various conditions to giving consent. On March 19, 1980, Comdisco replied to CSA, enclosing a copy of the proposed sublease. This letter of March 19, from Mr. Philip Hewes, assistant corporate counsel of Comdisco, to Mr. Keohane, president of CSA, said in part, "Comdisco is a leasing company and is proposing [further] to ... sublease the [CSA] [e]quipment to one or more end users." ⁹

The judge found that, in the letter of March 19, 1980, Mr. Hewes also informed CSA that "Comdisco had ... 'no plans for the [CSA] equipment because the delivery date is not until May, 1980....' Comdisco in fact planned [immediately] to ... terminate the [1973 l]ease after CSA's consent to the sublease ... and intentionally did not inform CSA of that intent in order to induce CSA to consent to the sublease. On March 21, 1980, CSA consented to the sublease subject to the letters from Comdisco to CSA, [including that] dated March 19, 1980.... CSA relied on the representations contained in the letters of Comdisco signed by [Mr.] Philip Hewes, dated March 19, 1980, and [one of] March 21, 1980, [not here relevant].... CSA believed, based on its knowledge of the business and financial standing of Comdisco, that Comdisco would continue the [1973 l]ease ... by subleasing the equipment to other users. If CSA had known of Comdisco's intent to terminate the [1973 l]ease ..., CSA would not have consented to the sublease."

These findings were warranted by the documentary evidence and also by reasonable inferences drawn from the testimony of Mr. Hewes that prompt termination "was one of the options that ... [Comdisco] had under the terms of the transaction" with Zayre and "that the company had a very strong intention and probability of terminating that lease." Mr. Hewes also testified, in effect, that the existence of par. 8 (see note 9, supra ) in the proposed sublease, a copy of which was sent to CSA, was a principal basis for Comdisco's position that CSA was on notice of the possibility (and even the likelihood) that Comdisco would ask Zayre to terminate the 1973 lease.

In any event, CSA on March 20, 1980, did consent to the sublease to Comdisco, subject to certain conditions designed to protect CSA's interest in the CSA system and to enable CSA to ascertain the location of the system from time to time. By the sublease Comdisco agreed "to indemnify and assume all of the costs [to Zayre] associated with ... [a] termination" of the 1973 lease of the CSA system requested under § 12.2 of the 1973 lease. On April 7, 1980, Comdisco by letter asked Zayre to terminate the 1973 lease, and on April 25, 1980, Zayre did so on the ground that the leased equipment was "surplus" to Zayre's requirements. In a letter of May 2, 1980, CSA objected that Zayre was not entitled to terminate the 1973 lease under § 12.2 of that lease.

Various negotiations then took place between CSA and Comdisco. To permit the whole matter to be dealt with pending the determination of the rights of the parties under the 1973 lease, and reserving those rights, CSA on October 27 sold its interest in the leased equipment to Comdisco for $660,472.11 which was the termination value of the equipment referred to in § 12.2. ¹⁰

The judge compared (a) the CSA system installed in Zayre's premises (i.e., the IBM 370/168 equipment slightly supplemented by Zayre between 1973 and 1979) with (b) the already upgraded 370/168 computer to be purchased (and actually purchased) from Comdisco. Largely on the basis of exhibits before him, the judge concluded that the upgraded equipment, supplied by Comdisco, "increased Zayre's central processing capacity from 2 MIPS [one MIPS is the capacity to handle one million instructions per second] to 3.6 MIPS, allowed for expansion of memory capacity from 4 megabytes [storage capacity expressed in number of characters available for instant recall] to 7 megabytes ..., provided for two processors to run simultaneously (versus one in the CSA system), provided for 8 channels (versus 7 in the CSA system), and allowed Zayre to run a multiple virtual system [MVS], ... a new operating system that had been introduced by IBM since the installation [in 1973] of the CSA [s]ystem.... [The system purchased from Comidsco] also allowed Zayre to operate with new software equipment which could not be operated on the CSA System." The judge found that "Zayre could have arrived at its new computer configuration by updating and changing the CSA System. These updates and changes would have resulted in adverse financial problems to Zayre as a result of computer downtime ¹¹ and [x] Zayre would have been left with a basic IBM 370/168, on which IBM notified customers of its intent to discontinue maintenance service." ¹² The judge concluded that "the CSA System had become obsolete for Zayre's purposes in late 1979."

Discussion

The trial judge's decision on CSA's counterclaims (see note 3, supra ) is discussed in the following parts 1 to 6, inclusive.

1. The present case involves in most respects the same provision, i.e., § 12.2 of CSA's apparently standard computer lease form, considered in Computer Syss. of Am., Inc. v. Western Reserve Life Assur. Co. of Ohio, 19 Mass.App.Ct. 430, 438, 475 N.E.2d 745 (1985, hereafter the Western Reserve case). In that decision, a panel of this court considered a situation in which the lessee of computer equipment determined that the CPU of its leased computer was inadequate and decided to buy for itself a larger CPU than that leased by it from CSA. The input/output (I/O) equipment of its old system was still usable. The opinion held that, in the situation then before this court, analysis of § 12.2 permitted termination of the lease only as to the CPU. 19 Mass.App.Ct. at 434-435, 475 N.E.2d 745. The parties in that case had negotiated unsuccessfully "for replacement of the CPU with a larger CPU." The old I/O equipment in the Western Reserve case "could be used with either CPU and was in fact used with the new CPU" for a period of time. 19 Mass.App.Ct. at 433 n. 4, 475 N.E.2d 745.

This court decided (at 435) t...