Costello v. Grundon
Decision Date | 28 June 2011 |
Docket Number | 08-3989 No. 08-3990 No. 10-1043 No. 10-1045 No. 10-1046,10-1049 No. 10-1056 No. 10-1058 & 10-1059,No. 08-3961 No. 08-3966 No. 08-3967 No. 08-3981 No. 08-3988,08-3961 No. 08-3966 No. 08-3967 No. 08-3981 No. 08-3988 |
Parties | JOHN W. COSTELLO, not individually, but as Litigation Trustee Under the Comdisco Litigation Trust, Plaintiff-Appellee, v. Steven R. Grundon, et al., Defendants-Appellants. |
Court | U.S. Court of Appeals — Seventh Circuit |
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
Nos. 1:05-cv-727, -736, -740, -746,
-763, -764, -767—Robert W. Gettleman, Judge.
Before KANNE, ROVNER, and TINDER, Circuit Judges.
TINDER, Circuit Judge. This consolidated case comes to us on appeals from the district court's grants of summary judgment in favor of the plaintiff-appellee, John W. Costello, Litigation Trustee under the Comdisco LitigationTrust, and against defendants-appellants in an action to enforce certain promissory notes. We originally issued an opinion on October 18, 2010, affirming in part and vacating in part. Defendants-appellants filed a petition for panel rehearing, and we requested an answer, which was filed. By separate order we granted the petition and vacated the October 18, 2010 opinion and final judgment. For the reasons that follow, we vacate the grants of summary judgment in favor of the Trustee and remand for further proceedings consistent with this opinion.
The defendants-appellants (the "Borrowers") are former high-level employees of Comdisco Inc., who participated in Comdisco's shared investment plan (SIP) program ("SIP Program") offered in early 1998 by purchasing shares of Comdisco stock. One hundred percent of the stock purchase price was funded by personal loans from participating banks ("Lenders") represented by First National Bank of Chicago (later Bank One) as their agent (the "Bank"). To secure the loans, the Borrowers executed promissory notes ("SIP Notes" or "Notes") in their personal capacities. Comdisco chose to deal with Bank One because of the bank's experience in developing and implementing SIPs for other companies.
Comdisco guaranteed the loans as provided in a Facility and Guaranty Agreement between Comdisco and the Bank (the "Facility Agreement"). The Comdisco guaranty was "a condition to the loan arrangement" with the Bank. (SA:244.) Comdisco received the loan proceedsdirectly from the Lenders and held the SIP shares. It seems probable that without the guaranty, most of the loans would not have been made. SIP participants were required to purchase a minimum of 8,000 shares of Comdisco stock. At $34.50 per share, that resulted in a minimum purchase price and loan of $276,000. The loans' principal amounts ranged from $276,000 to $1,725,000. Loans were made in excess of $1,000,000 to one borrower (05-737) who reported no net worth to the Bank, to another borrower (05-745) for almost ten times his net worth, and to two other borrowers (05-735 & 05-726) for more than five times their net worths.
Comdisco introduced the SIP Program to prospective participants during a weekend meeting in Palm Springs, California. Prospective participants had to attend the meeting or listen to the presentation. The Borrowers received a binder of materials explaining the terms of the SIP Program (the "SIP Materials"). The SIP presentation and SIP Materials informed the prospective participants of various restrictions on their ability to sell the SIP shares and that they would be obligated for a specified time period to share any gains on the sale of the shares with Comdisco. More specifically, they were informed of restrictions including (a) Comdisco would hold a borrower's shares until the borrower's loan from Bank One was discharged; (b) the borrower had to deliver to Comdisco a stock power, endorsed in blank, concerning his or her shares (a blank stock power is generally required when an institution holds securities as collateral for a loan so the institution may transfer and sell the stock to satisfy the debt); (c) the borrowerhad to execute an irrevocable Letter of Direction with Comdisco and the Bank to ensure that all cash dividends on the shares went into the borrower's account at Bank One to pay the principal and accrued interest on the loan; (d) the proceeds from a permitted sale of the stock had to "first be used to repay the Loan," interest and fees at Bank One; (e) the borrower paid a prepayment penalty to Bank One if the loan was paid early; and (f) the certificate representing the borrower's shares contained a legend as to the stock's restricted status. The SIP Program was structured so that, with a few exceptions, the SIP shares could not be sold during the first year of the program. An (SA:207.) The SIP participants were required to notify Comdisco of any intention to sell their SIP shares because Comdisco had the right to repurchase the SIP shares. The SIP Materials indicated that the promissory notes to be executed in connection with the loans had a fixed maturity date and a final balloon payment of principal and interest due at maturity. The materials also indicated that Comdisco would guarantee the SIP Notes.
The SIP Materials stated that "the Loan is not secured by the stock" (SA:226) and the "SIP shares do not serve as collateral for the loan . . .[;] the loan is not a margin loan." (SA:229.) When presenting the SIP Plan, Comdisco advised prospective participants that the "loan is nottechnically secured by the securities . . . and this is not a margin account." (SA:355.) During the SIP presentation, however, Comdisco was asked, "[C]an th[e] shares be used as security for other transactions or collateral for other type[s] of loans?" A Comdisco representative answered:
Comdisco provided prospective SIP participants with information regarding whether (a) the proposed loans were margin loans; (b) the proposed loans were secured by the stock; (c) the stock could be pledged for another loan; (d) the proposed loans would violate or be inconsistent with Regulation G or Regulation U; and (e) Comdisco's performance of its obligations under each Loan Document (including the Facility Agreement, eachNote, and each Letter of Direction), to which it was a party would violate any applicable legal requirement. The SIP Materials included Comdisco, Inc.'s 1998 Stock Option Program, which stated in a section titled, "No Illegal Transactions":
The SIP Materials described the Facility Agreement as "the agreement between Comdisco and [Bank One] establishing the loan program" and stated that "[b]y signing the Note, you . . . represent that you have carefully reviewed the Facility Agreement." (SA:225.) In the Facility Agreement, Comdisco represented and warranted that "[t]he execution and delivery of, and performance by the Company of its obligations under, each Loan Document to which it is a party will not result in a breach or violation of [or] conflict with . . . any Requirement of Law," (SA:283), which included "the SecuritiesAct of 1933, the Securities Exchange Act of 1934, [and] Regulations G [and] U . . . of the Board of Governors of the Federal Reserve System." (SA:276.) Comdisco further represented and warranted:
In discussing Comdisco's guaranty, the Facility Agreement repeatedly referred to the "collateral securing the Guaranteed Debt." However, the Agreement also provided:
The Borrowers elected to participate in the SIP Program, executing a SIP option exercise form and a...
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