United States Cellular Investment Company of Los Angeles, Inc., Plaintiff-Counter-Defendant-Appellant v. Gte Mobilnet, Inc., Erroneously Sued as Gte Wireless Incorporated Contel Cellular, Inc., Erroneously Sued as Gte Wireless Incorporated, Airtouch Cellular, Inc., Airtouch Communication, Inc., Defendants-Counter-Claimants-Appellees, Bell Atlantic Corporation, Defendant-Intervenor-Appellee
Docket: 00-56267
Court: Court of Appeals for the Ninth Circuit; February 20, 2002; Federal Appellate Court
United States Cellular Investment Company of Los Angeles, Inc. (U.S. Cellular) appealed a summary judgment from the district court favoring its partners, AirTouch Cellular and GTE Wireless Incorporated, regarding a limited partnership agreement for cellular service in Los Angeles. U.S. Cellular alleged that a partner breached the agreement by transferring its partnership interests without consent. The Ninth Circuit affirmed the district court's decision, agreeing that the partnership agreement was not violated.
The limited partnership, established in 1982, includes U.S. Cellular (5.5% limited partner interest), AirTouch Cellular (40% general partner and 42.3% limited partner interest), and GTE Wireless (12.2% limited partner interest). The partnership agreement, based on a standardized Form Partnership Agreement, contains restrictions on the transfer of partnership interests. Specifically, Section 13.1 requires consent from all partners for a general partner to transfer its interest, while Section 11.1 grants limited partners a right of first refusal before any transfer of limited partnership interests.
The dispute originated from the formation of Cellco, a partnership between Bell Atlantic Corporation and Vodafone AirTouch PLC, with Vodafone being the parent of AirTouch Cellular. In 1999, they entered an Alliance Agreement for a U.S. wireless network, requiring Vodafone to transfer its U.S. wireless assets to Cellco. However, instead of directly transferring AirTouch Cellular's partnership interests, AirTouch Communications transferred its stock to Cellco in April 2000, allowing AirTouch Cellular to maintain its partnership interests while being wholly owned by Cellco. U.S. Cellular filed a lawsuit to block the stock sale, arguing that AirTouch Cellular was merely a "shell entity" and that the stock transfer constituted an asset transfer violating the agreement's anti-transfer provisions. During discovery, AirTouch Cellular officials asserted its operational status, having significant assets and partnerships beyond Los Angeles. The district court denied U.S. Cellular's request for a Temporary Restraining Order, stating the anti-transfer provisions applied only to direct partnership interest transfers. After an unsuccessful appeal, U.S. Cellular amended its complaint to seek damages, asserting that the stock ownership change required consent under the agreement and alleging that AirTouch Cellular effectively withdrew as the general partner, triggering dissolution provisions. The district court granted summary judgment for the defendants, agreeing that U.S. Cellular's interpretation of the agreement was incorrect. Summary judgment decisions are reviewed de novo, considering whether any genuine issues of material fact exist and if the law was applied correctly. The court also reviews whether contract language is ambiguous and if the contract is open to a proposed interpretation.
The district court's exclusion of evidence during summary judgment is subject to an abuse of discretion standard, where such abuse occurs if the court's decision is arbitrary or unreasonable. The decision not to allow further discovery under Federal Rule of Civil Procedure 56(f) is similarly reviewed for abuse of discretion, which can be found only if the requesting party diligently pursued prior discovery and demonstrated that additional discovery would have affected the summary judgment outcome.
The central issue is the interpretation of anti-transfer provisions in the Los Angeles Partnership Agreement. U.S. Cellular contends these provisions broadly cover the transfer of AirTouch Cellular's stock to Cellco and argues the district court erred by (A) granting summary judgment based on its interpretation of the agreement, (B) striking declarations intended to provide extrinsic evidence of intent, and (C) denying its Rule 56(f) request for additional discovery.
Under California law, the interpretation of contracts aims to reflect the parties' mutual intent at the time of contracting. The district court found no genuine issue of material fact regarding the contract's construction, concluding that the plain language of the agreement does not restrict the legitimate sale of a partner's stock. The anti-transfer provisions specifically address the transfer of partnership interests, with no mention of stock sales. U.S. Cellular argues that the parties intended to restrict indirect transfers of partnership interests through stock sales. However, California courts have distinguished between stock transfers and asset transfers, indicating that stock transfer does not equate to transferring the corporation's assets, a principle that U.S. Cellular attempts to differentiate based on the nature of the assets involved.
The analysis in Ser-Bye and Richardson focuses not on the specific assets in a transfer, but on the entity that owns those assets and the contract's nature. California courts presume that parties contracting with a corporation understand the corporate form. If parties intend to limit a corporation's capacity for legitimate transactions, such limitations must be explicitly stated in the agreement. In Ser-Bye, the court clarified that a covenant against assigning the lease referred to the lease as a whole, not just shares in the corporation. It emphasized that if the parties meant for stock transfers to be considered lease assignments, this should have been clearly articulated in the lease.
In Richardson, the plaintiff corporation sought to sell its restaurant assets and assign a lease, but the lessor objected based on a lease provision requiring consent for assignments. After revising the agreement to sell stock instead, the lessor argued this was a circumvention of the consent requirement. The trial court ruled in favor of Breg, affirming that the lease provision did not restrict stock transfers, acknowledging the separateness of the corporate entity.
When U.S. Cellular partnered with AirTouch Cellular, it recognized AirTouch's corporate status and noted that the partnership agreement did not limit stock sales. The court found that the sophisticated nature of the parties indicated they would have clearly stated any intention to restrict stock sales if that were their aim. U.S. Cellular claimed that anti-transfer provisions in the partnership agreement extended to stock transactions, citing two other cases. However, those cases upheld restrictions on stock sales under similar provisions.
In Oregon RSA, the court determined that a limited partner's stock sale without providing a right of first refusal breached the implied covenant of good faith and fair dealing in the partnership agreement. Similarly, in Boise City MSA, a stock sale was deemed a subterfuge to circumvent anti-transfer provisions, violating the partnership agreement. Both cases involved stock transfers through "shell" entities created solely to evade contractual restrictions.
In contrast, the stock sale in this case involved AirTouch Cellular, which was a legitimate corporation before and after the sale, and Cellco, the purchaser, is a bona fide corporate partnership. U.S. Cellular has retracted claims that AirTouch Cellular is a shell, which is significant since both Oregon RSA and Boise City MSA emphasize that the violation stemmed from the use of shell entities.
The district court's opinion in Oregon RSA elaborated on the prohibition against using corporate structures to evade obligations. Had the partnership interest been sold directly to PTCI, it would have triggered the right-of-first-refusal clause. However, the current sale involved legitimate corporate entities, and the partnership agreement does not indicate an intention to restrict normal stock sales that result in ownership transfers. The plain language of the partnership agreement and its performance history suggest that the parties did not intend for corporate stock transfers to activate the anti-transfer provisions.
Under California law, courts can consider the actions and conduct of parties during the execution of a contract to ascertain their intent, particularly when no disputes have arisen. The interpretation of a contract based on the parties' actions, while aware of its terms, carries significant weight and is typically upheld by courts if reasonable. When ambiguity arises, trial courts may look at how the parties understood the agreement prior to any dispute, and findings based on that understanding are usually not overturned on appeal.
In the case of the Los Angeles Partnership, ownership transfers occurred numerous times over 17 years without soliciting votes from limited partners, and U.S. Cellular did not contest these transfers as violating anti-transfer provisions. Notably, two prior transactions were similar to the contested stock sale. Additionally, U.S. Cellular has previously argued in other litigation that the anti-transfer provisions do not apply to stock sales, which diminishes its current claims regarding these provisions.
U.S. Cellular contends that the district court erred by not considering extrinsic parol evidence that could support a different interpretation of the anti-transfer provisions. However, the court did not abuse its discretion in excluding this evidence. U.S. Cellular sought to introduce declarations from individuals involved in drafting the partnership agreement, asserting that the anti-transfer provisions were meant to apply to stock sales. The court deemed this extrinsic evidence inadmissible in its summary judgment ruling.
In a case involving a fully integrated contract under California law, the district court ruled that U.S. Cellular's parol evidence was inadmissible. The court found that the declarations submitted by U.S. Cellular were irrelevant and that the partnership agreement was not open to the interpretation U.S. Cellular proposed. Citing Pacific Gas. Elec. Co. v. G.W. Thomas Drayage, Rigging Co., the court emphasized the need for a preliminary evaluation of credible evidence to ascertain the parties' intentions before considering extrinsic evidence. The district court provisionally received certain declarations but ultimately determined the contract's language was not susceptible to U.S. Cellular's interpretation, thereby ruling the extrinsic evidence inadmissible. U.S. Cellular further appealed the denial of its request for additional discovery time under Federal Rule of Civil Procedure 56(f), seeking depositions to clarify the circumstances around the agreement. However, as the anti-transfer provisions were not legally open to U.S. Cellular's interpretation, the court concluded that further discovery could not have produced facts to counter the summary judgment. Thus, the denial of the discovery request was deemed not an abuse of discretion.
U.S. Cellular sought relief under Rule 56(f) for additional discovery regarding its claim that AirTouch Cellular had "withdrawn" as a general partner of the Los Angeles Partnership by transferring its stock and ceding control to Cellco. The district court granted summary judgment to the defendants regarding the withdrawal claim and denied U.S. Cellular's request for further discovery, determining that a change in the ownership of a general partner does not equate to "withdrawal" under California law. U.S. Cellular cited California Corporations Code § 15642(a), arguing that it applies in this case; however, the court noted that § 15662, which outlines the methods for withdrawal, does not include stock transfer as a valid method. The court emphasized that the permissive language "may" in the statute does not imply alternative withdrawal methods, but rather focuses on whether AirTouch Cellular actually withdrew, which it did not. Consequently, the court affirmed the district court's judgment. Relevant partnership provisions highlighted include the necessity for unanimous consent for transfers and the conditions under which a general partner may withdraw, which requires prior notice and agreement from the other partners.
