USCA1 Opinion
United States Court of Appeals
For the First Circuit
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No. 96-1355
MICHAEL D. BANK, THOMAS M. DUSEL AND ROBERT J. M. O'HARE, JR.,
IN THEIR CAPACITY AS TRUSTEES OF 400 WYMAN STREET TRUST,
Plaintiffs, Appellees,
v.
INTERNATIONAL BUSINESS MACHINES CORPORATION,
Defendant, Appellant.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Joseph L. Tauro, U.S. District Judge]
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Before
Selya, Circuit Judge,
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Coffin and Campbell, Senior Circuit Judges.
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J. Charles Mokriski with whom Kenneth E. Werner and Jonathan I.
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Handler were on brief for appellant.
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Saul A. Schapiro with whom David W. Rosenberg was on brief for
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appellees.
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November 5, 1996
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COFFIN, Senior Circuit Judge. The parties in this case --
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International Business Machines Corp. (IBM) and the 400 Wyman
Street Trust (the Trust)1 -- comprise a partnership created for
the purpose of developing and operating an office building in
Waltham, Massachusetts. The Trust secured an opportunity for the
Partnership to reduce its debt by purchasing its own mortgage at
a substantial discount. IBM opposed the deal. The issue before
us is whether IBM's veto is absolute, or whether the dispute must
be arbitrated; under the Partnership Agreement, the answer turns
on whether the proposal involves an acquisition of "an interest
in real property" or a "refinancing." The district court deemed
it a refinancing, and granted the Trust's motion to compel
arbitration. See Bank v. International Business Machines Corp.,
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915 F. Supp. 491, 498 (D. Mass. 1996). The issue is close, but
we conclude that the refinancing provision is inapplicable
because the proposal that has been presented so far lacks
refinancing content. Consequently, we reverse.
I. Factual Background
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IBM and the Trust entered into the Partnership in October
1986. The Partnership Agreement specifies that the Partnership
would seek to finance the construction and operation of the
office building with a non-recourse loan, and a $75 million loan
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1 Michael D. Bank, Thomas M. Dusel and Robert J. M. O'Hare,
Jr., are named as parties in their capacity as trustees of the
Trust. For the sake of convenience, we refer to the appellees
simply as "the Trust" throughout the opinion.
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imposing no liability on either party for repayment of the
principal was, in fact, obtained from Citicorp Real Estate, Inc.
The Trust is the managing partner of the Partnership,
holding a 51% interest. IBM has a 49% interest. Under the terms
of the Agreement, the Trust contributed the undeveloped parcel at
404 Wyman Street, valued at $19.3 million, and IBM made a $1
million capital contribution as well as a long-term lease
commitment. IBM also agreed to provide additional capital as
needed until its equity reflected its 49% share in the venture,
creating an approximately $17.5 million potential obligation for
IBM at the outset of the undertaking. None of that capital has
been contributed to date.
In 1995, the Trust attempted unsuccessfully to negotiate a
restructuring of the loan ("the Note"), whose remaining principal
balance was about $72 million. The lenders,2 however, offered to
sell the note in its entirety for about $54 million. IBM
contended the price was too high and expressed its unwillingness
to make the purchase. Because the offer would expire soon, the
Trust caused its corporate affiliate, Wyman Loan Corp. (Wyman
Loan), to buy the Note and then proposed that it be resold to the
Partnership at its cost. IBM refused to go along with the
purchase, prompting the Trust to file a demand for arbitration
with the American Arbitration Association. Two days later, on
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2 By this time, the Note had been transfered to a consortium
of foreign banks, for whom Citicorp served as agent.
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June 14, 1995, IBM sent the AAA a letter stating its view that
the issue was not arbitrable under the Partnership Agreement.
The arbitrability issue is rooted in Exhibit D of the
Agreement, which is titled "Major Decisions," and which sets out
several categories of significant decisions that may be made by
the Partnership and the procedures for reaching them and
resolving disputes. Section A of the Exhibit lists five Major
Decisions, including "acquiring any land or other real property
or any interest therein . . . ." For decisions falling within
Section A,
(a) either Partner . . . may withhold its approval for
any reason, or for no reason, in its sole and complete
discretion, without regard to whether the withholding
of such approval is unreasonable or arbitrary . . . .
Major Decisions falling within Section C, by contrast, may not be
made unreasonably or unilaterally and a deadlock on one of them
will trigger the Agreement's arbitration provisions. Section
C(13) covers "refinancing of any part or all of the Project."
IBM contends that the Note purchase would constitute the
acquisition of an interest in real property, and thus that its
opposition to the deal ends the matter. The Trust, however,
insists that the purchase is part of a refinancing. Although the
letter proposing the transaction refers only to the purchase, the
Trust maintains that the proposal embraces the expectation of
added capital from IBM (consistent with the $17.5 million
obligation) and new third-party financing of the balance. As
noted, IBM's objection to a refinancing is arbitrable under the
Agreement.
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The district court was persuaded that the proposed decision
to purchase the Note should be categorized as a refinancing under
C(13) of the Agreement. It was influenced, inter alia, by the
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fact that purchase of the mortgage would not result in an
"acquisition" of property because the Partnership already owned
404 Wyman Street, and by a belief that no substantive difference
existed in this context between the proposed purchase and a
restructuring of the original Note, which IBM had conceded would
fall within C(13). See 915 F. Supp. at 496-98.
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Though these points have force, we have concluded that the
proposal as presently articulated is not arbitrable.3 We explain
our reasoning in the following section.
II. Discussion
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Our review of the district court's grant of the motion to
compel arbitration is de novo, as it involves the purely legal
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task of interpreting the Partnership Agreement. See, e.g.,
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PaineWebber Inc. v. Elahi, 87 F.3d 589, 592 (1st Cir. 1996);
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Commercial Union Ins. Co. v. Gilbane Bldg. Co., 992 F.2d 386, 388
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(1st Cir. 1993).
One difficulty in this case is that, to a point, both
parties are right. Notwithstanding the district court's effort
to view property ownership in the "everyday" sense, there seems
no doubt that the purchase of a mortgage conveys some interest in
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3 Our disposition on the refinancing question makes it
unnecessary to consider IBM's alternative argument that the Trust
is foreclosed from compelling arbitration because it breached its
fiduciary duties to the Partnership in causing its affiliate to
purchase the Note.
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the mortgaged property to the purchaser. Indeed, even the
district court acknowledged that a mortgagee has a legal interest
in the property secured by the mortgage. See 915 F. Supp. at 497
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("While the mortgagee may technically have legal title to the
mortgaged property, the mortgagor is considered the 'owner' of
property."). See also Maglione v. BancBoston Mortgage Corp., 29
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Mass. App. Ct. 88, 90, 557 N.E.2d 756, 757 (1990); 7 Mass. Jur.
23:3 at 383 (1993). Thus, if it purchases the Note, the
Partnership would acquire at least a technical new interest in
the office building, and the proposal therefore could be treated
as a "Section A" major decision.
On the other hand, the proposal grew out of refinancing
negotiations. The offer by Citicorp and its associates to sell
the mortgage back to the Partnership at a substantial discount
directly stemmed from the Partnership's efforts to renegotiate
the terms of its original financing; the purchase apparently was
intended to be part of an alternative method by which the
Partnership could restructure and reduce its debt. Thus, in
context, the acquisition of a property interest arguably is a
step preliminary and subordinate to the effort to refinance.4
Indeed, IBM recognized both in a hearing before the district
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4 In fact, we acknowledge the possibility that, in
designating the acquisition of an interest in property as a
Section A decision on which the partners had complete discretion,
the partners were contemplating the purchase of property other
than that which the Partnership already "owned." Unlike the
district court, however, see 915 F. Supp. at 497, we do not
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believe the Agreement contains such a limitation and therefore do
not reject Section A as wholly inapplicable to the acquisition of
a mortgage interest.
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court and in its briefs on appeal that a refinancing proposal
that included a specified amount of increased equity probably
would fall under the refinancing provision.
We need not at this juncture determine the validity of this
proposition, for the proposal was not presented as such. Instead
of recommending a multi-step refinancing plan that begins with
purchase of the mortgage, the Trust has offered a proposal that
makes no reference to financing terms. Although certain details
of financing in so complex a business environment may need to
remain imprecise until the transaction is close to completion,
the proposal at the moment lacks any refinancing structure.
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We acknowledge the Trust's argument that the Agreement fills
in crucial gaps through the provision that governs IBM's
obligation to contribute capital and another provision that
refers generally to the pursuit of financing from third parties
or partners. See 3.2(c), 3.3.1. Even taking the proposal
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together with the Agreement, however, the recommendation is
without substance; it includes neither the amounts to be sought
from lenders nor any other details about possible interest rates,
the duration of a mortgage, how soon such financing could or
should be obtained, or the nature of the liability to be assumed.
We conclude that this defect renders resort to C(13) premature.
In sum, though the Trust's proposal to purchase the mortgage
foreshadows a refinancing scheme, we hold that it is as yet
without sufficient form to trigger the arbitration provision.
Because the Trust has so far proposed no more than a mortgage
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redemption -- which would result, unquestionably, in the
acquisition by the Partnership of a greater interest in real
property -- IBM has veto power under Section A of Exhibit D.
We note that, in so concluding, we have credited neither
party's assertions concerning the other's self-serving motives.
Our determination that arbitration may not be compelled at this
time is based solely on the Trust's failure to submit an actual
refinancing plan; we offer no view on the legitimacy of seeking a
capital contribution from IBM under section 3.2(c) of the
Agreement as part of such a plan.
Reversed.
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