COSTELLO v. GRUNDON

Decision Date18 October 2010
Docket Number10-1058,08-3966,10-1046,08-3981,10-1056,10-1043,08-3967,No. 08-3961,08-3990,10-1049,08-3989,08-3988,10-1059.,10-1045,08-3961
Citation625 F.3d 342
PartiesJohn W. COSTELLO, not individually, but as Litigation Trustee Under the Comdisco Litigation Trust, Plaintiff-Appellee, v. Steven R. GRUNDON, et al., Defendants-Appellants.
CourtU.S. Court of Appeals — Seventh Circuit

625 F.3d 342

John W. COSTELLO, not individually, but as Litigation Trustee Under the Comdisco Litigation Trust, Plaintiff-Appellee,
v.
Steven R. GRUNDON, et al., Defendants-Appellants.

Nos. 08-3961, 08-3966, 08-3967, 08-3981, 08-3988, 08-3989, 08-3990, 10-1043, 10-1045, 10-1046, 10-1049, 10-1056, 10-1058, 10-1059.

United States Court of Appeals,Seventh Circuit.

Argued April 6, 2010.
Decided Oct. 18, 2010.


625 F.3d 343

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John E. Frey, Jonathan W. Young (argued), Wildman, Harrold, Allen & Dixon, Chicago, IL, for Plaintiff-Appellee.

Jeff D. Harris (argued), Figliulo & Silverman, Chicago, IL, for Defendants-Appellants.

Before KANNE, ROVNER, and TINDER, Circuit Judges.

TINDER, Circuit Judge.

This consolidated case comes to us on appeals from the district court's grant of summary judgments in favor of the plaintiff-appellee, John W. Costello, Litigation Trustee under the Comdisco Litigation Trust, and against defendants-appellants in an action to enforce certain promissory notes. For the reasons that follow, we affirm in part and vacate in part the grants of summary judgment in favor of the Trustee and remand for further proceedings not inconsistent with this opinion.

I. BACKGROUND

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. To secure the loans, the Borrowers executed promissory notes (“SIP Notes” or “Notes”) in their personal capacities. Bank One had developed and implemented SIPs for other companies and promoted the SIP concept to Comdisco. Comdisco chose to deal with Bank One because of the bank's experience with SIPs for other companies.

Comdisco guaranteed the loans as provided in a Facility and Guaranty Agreement between Comdisco and the Lenders. The Comdisco guaranty was “a condition to the loan arrangement” Comdisco had made with the First National Bank of Chicago. (SA:244.) Comdisco received the loan proceeds directly 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

625 F.3d 347

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 (05-745) for almost ten times his net worth, and to two others (05-735 & 05-726) for more than five times their net worth.

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 (approximately 240 pages) explaining the terms of the SIP Program (the “SIP Materials”). The SIP Materials included the SIP Plan Summary; Questions and Answers; Comdisco, Inc. Shared Investment Plan; the Facility and Guaranty Agreement between Comdisco and Bank One, individually and as agent (the “Facility Agreement”); a form of Master Promissory Note; and an Appendix that included a package of Bank One's documents. The Bank's package consisted of a form of Note; the Facility Agreement; a Letter of Direction; a Loan Application; an Account Application; and a letter from Bank One, stating that the Bank had to receive a completed personal financial statement to complete the loan application.

The SIP Presentation and SIP Materials informed the prospective participants of various restrictions on their ability to sell their SIP Shares and that SIP Participants were obligated for a specified time period to share any gains on the sale of the shares with Comdisco. More specifically, the shares were restricted in that: (a) Comdisco would hold a borrower's purchased shares until that borrower's loan to Bank One was discharged; (b) the borrower had to deliver a stock power, endorsed in blank, concerning his or her shares to Comdisco (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 borrower had 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 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 language of the Notes reflected that the stock being purchased was “Restricted Stock” and the Facility Agreement, which was incorporated into the terms of the Notes, referred to the SIP Shares as “Restricted Stock.”) The SIP Program was structured so that the SIP Shares could not be sold during the first year of the program, with a few exceptions. An “[SIP Participant was] entitled to 100% of the gain, after payment of all amounts due on the loan, unless [the Participant] voluntarily terminate[d] [his/her] employment or [sold] the shares within three (3) years after purchase. In either such event, the Company [was] entitled to 50% of any gain upon sale.” (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, that at maturity a final balloon payment of principal and interest would be due, and that Comdisco would guarantee the SIP Notes.

The SIP Materials stated that “the Loan is not secured by the stock” (SA:226) and

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that 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 not technically secured by the securities ... and this is not a margin account.” (SA:355.) During the SIP Presentation, an unidentified person 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:

No, and the reason being is they are restricted from the standpoint that the company has certain rights with respect to that stock, depending upon your employment. And also there's restrictions under the terms of the bank loan that you have that there are certain things that will happen with the proceeds to the extent that you sell it before the bank loan is paid off.

So while it is not technically a secured loan, the company retains the stock physically and you cannot pledge that for other loans.

(SA:365.)

Comdisco also 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 to which it was a party would violate any applicable legal requirement. The SIP Materials included Comdisco, Inc.'s 1998 Stock Option Program, which provided in Section 6.11:

No Illegal Transactions. The Program and all Stock Options granted pursuant to it are subject to all laws and regulations of any governmental authority which may be applicable thereto; and notwithstanding any provision of the Program or any Stock Options, Participants shall not be entitled to exercise Stock Options or receive the benefits thereof and the Company shall not be obligated to deliver any Common Stock or pay any benefits to a Participant if such exercise, delivery, or payment of benefits would constitute a violation by the Participant or the Company of any provision of any such law or regulation.

(SA:237-238.)

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 will represent that you have carefully reviewed the Facility Agreement.” (SA:225.) In the Facility Agreement, Comdisco represented and warranted that:

The 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, conflict with, or constitute a default under the certificate of incorporation or bylaws of the Company, any Requirement of Law....” (SA:283.) The Facility Agreement was included within the meaning of “Loan Document”; “Requirement of Law” included “the Securities Act of 1933, the Securities Exchange Act of 1934, [and] Regulations G [and] U ... of the Board of Governors of the Federal Reserve System.” Comdisco further represented and warranted that:

No part of the proceeds of any Loan will be used in a manner which would violate, or result in a violation of, Regulation G [or] ... Regulation U.... Neither the making of any Loan hereunder nor the use of the proceeds thereof will

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violate or be inconsistent with the provisions of Regulation G [or] ... Regulation U....

(SA:283-284.)

In discussing Comdisco's Guaranty, the Facility Agreement repeatedly referred to the “collateral...

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