IBM Corp says that lessor Comdisco subleased and then illegally sold pieces of a 3090 computer belonging to IBM Credit Corp. IBM and IBM Credit not only sued Comdisco but launched a propaganda war against the leasing company. IBM Credit’s president, Harry Kavetas, starred in an accusatory video presentation shown to IBM and IBM Credit sales reps. Press kits describing Comdisco’s alleged misdeeds were faxed off to the media. In short, the IBM/IBM Credit onslaught looked like the Big Blue/Big Greenback equivalent of Operation Desert Storm, with New York law firm Cravath, Swain & Moore in the role of the Allied Command. How exciting! A perfect war drama… but for one twist of the plot: neither IBM nor IBM Credit owns the computer on which the blitzkrieg was predicated.

Series of pratfalls

While IBM’s Desert Storm has not been downgraded to Hot Air the lawsuit has been amended and will continue – the latest mishap is only one in a series of pratfalls taken by IBM’s management and its litigation squad. But the belated revelation that the computer at the heart of the twice-amended lawsuit is owned by Greenwich Liberty 1985 Limited Partnership – a company formed solely to take advantage of legal loopholes that enable its partners to beat the taxman – nevertheless sheds new and unflattering light on the plaintiffs. Greenwich Liberty 1985 Limited Partnership is one of several organisations formed by IBM Credit Corp to obtain leasing-related tax deductions that were unavailable to IBM as a manufacturer of capital equipment. Under US tax laws that prevailed during the 1980s (and were subsequently changed to reduce or eliminate tax shelters), depreciation, a capital expenditure allowance called investment tax credit and other benefits accrued to buyers of capital equipment, including computers. These buyers could be finance companies or end users. Manufacturers could claim the same deductions if they leased what they made, but the financial basis for the deduction was manufacturing cost, not sale price. Because mainframes cost only about 20% of their sale price to actually build, IBM (like many other American manufacturers) sought a way to increase its deductions. The solution was complex. IBM formed a leasing subsidiary – IBM Credit – and the subsidiary organised investment partnerships, among them Greenwich Liberty. While US law requires that the equipment owned by such partnerships be leased for profit rather than held mainly or solely to accrue tax benefits, the advantages of this type of deal depend greatly on tax reduction. In the Greenwich Liberty 1985 Limited Partnership, IBM was joined by Merrill Lynch and, industry sources believe, Metropolitan Life Insurance, two companies with urges to invest wisely, snatch wealth out of the hands of the tax authorities, and throw gobs of money into tax shelters based on computer leasing deals. As the general partner in the scheme, IBM Credit has the authority to litigate on behalf of the partnership and an obligation to fight if the partnership’s assets are threatened. So, by amending its lawsuit against Comdisco to include Greenwich Liberty, IBM Credit may only be doing its duty. However, IBM Credit and IBM instituted a lawsuit that could cost in the hundreds of thousands of dollars before seeking a negotiated settlement of its differences with Comdisco. The limited partners may have to pay big bills as a result of this battle, however the court case turns out. The change in IBM’s complaint, which was made on August 23, is not the first such revision. IBM instit uted its lawsuit on January 24, filing a complex complaint in Delaware’s Chancery Court. Chancery Court is an equity court, a part of the state’s judicial system that adjudicates suits that could result in a legal ban on or enforcement of some action. In this case, IBM and IBM Credit sought court orders prohibiting Comdisco from removing components of subleased computers that it reconfigures during the normal course of remarketing. IBM and IBM Credit asserted that Comdisco’s activities violated its contracts and the law, th

at Comdisco had cost the companies money and that in the absence of a prohibition Comdisco would eventually cause the plaintiffs great harm. The judge saw the issues differently, however, and on July 2 tossed out IBM’s case. Delaware law, said the court, deals with all IBM/IBM Credit’s allegations and provides a mechanism for claims of monetary damage to be litigated and assessed. That puts the case under that state’s other civil court system, a law court called Delaware Superior Court. IBM refiled in Superior Court on July 19. The amended suit focused on events surrounding the lease of a single mainframe system that was initially installed at software company Applied Data Research. ADR was later acquired by Computer Associates, which is named as a co-defendant in the second suit. Several other lessees whose names appeared in the Chancery Court suit were dropped from the Superior Court complaint. When IBM filed its amended complaint it had problems notifying Computer Associates. IBM eventually completed proper service as required by law, but for several days after IBM began proceedings none of the parties could find any proof that a process server or other official had formally told Computer Associates about the legal assault that had been launched against it.

Clumsily executed

But that is not all that may be going awry with IBM’s clumsily executed foray against Comdisco and, now, Computer Associates. The very basis of the partnership that actually owns the mainframe at issue – the US tax code – views computers quite differently than do IBM and IBM Credit. The kinds of reconfiguration undertaken by Comdisco when it subleased the 3090 from Computer Associates are considered immaterial under the law that provides tax deductions for IBM Credit and its partners in Greenwich Liberty. By contrast, the lawsuit and its interpretation of the lease and sublease contracts it issues take a far more restrictive position. In short, IBM and IBM Credit have staked big money on one view of reconfiguration in order to escape taxation and quite another in their lawsuit. Like the errors that forced IBM to amend its complaint, the various postures taken by IBM when it fits the manufacturer’s purposes are unlikely to have an impact on the property law issues that form the basis of the litigation. However, the unfolding events have obviously embarrassed IBM, which decided to not merely sue but also to conduct a smear campaign aimed at Comdisco. For its part, Comdisco has stuck to its policy of permitting its customers to sublease mainframes and to reconfigure them as necessary during the course of a sublease. Even Comdisco’s public relations defence has maintained a more reasonable tone. The result is that the independent lessor now holds the high moral ground, largely because IBM has slipped into the gutter. – Hesh Wiener Copyright (C) 1991 Technology News of America Co Inc. All rights reserved.