COSTELLO v. GRUNDEN (June 28, 2011)

Several senior Comdisco, Inc. employees participated in the company's shared investment plan (SIP) program. Under the program: a) participants purchased Comdisco stock, b) the purchase was funded exclusively by personal loans, c) the participants executed promissory notes in their personal capacities, d) Comdisco guaranteed the loans, e) the lender remitted the loan proceeds directly to Comdisco, f) Comdisco held the shares, g) there were several restrictions on the ability to sell the stock, and h) participants delivered a blank stock power to Comdisco. Although some SIP participants later sold their stock and made healthy profits, others were still holding the stock when Comdisco went into bankruptcy. As part of the settlement on the guarantee, the lender assigned its rights under the notes to the Comdisco Litigation Trustee. The Trustee brought suit against the participants and moved for summary judgment against two of them. Judge Gettleman (N.D. Ill.) granted the Trustee's motion for summary judgment, rejecting the defendants' defenses. The court then granted the Trustee's motion for summary judgment against the remaining defendants on the bases of his earlier ruling and his rejection of the additional defense. Defendants appeal. The Seventh Circuit issued an opinion on October 18, 2010. On June 16, 2011 the Court granted a petition for panel rehearing and vacated the October opinion and judgment.

In their opinion, Judges Kanne, Rovner, and Tinder vacated the summary judgments in favor of the Trustee and remanded for further proceedings. The defendants raised several arguments on appeal. First, the defendants argued that the district court erred in not allowing them to assert violations of Regulations G and U as affirmative defenses. The Court agreed. It concluded that a private right of action under either § 7(d) or § 29(b) is not a prerequisite to asserting a violation of Regulation G or U as an affirmative defense. It also concluded that the "zone of interests" prudential standing requirement does not apply when a party uses a violation of the statute or regulations defensively. Second, the defendants argued that the district court erred in concluding that Comdisco and the lender did not violate the regulations. Again, the Court agreed. With respect to Comdisco, the Court concluded that the Trustee did not raise it in his summary judgment papers. With respect to the lender, the Court identified genuine issues of fact with respect to the good faith non-reliance exception. Third, the defendants challenged the summary judgment ruling on the § 10(b) illegality defense. The Trustee originally only argued that the defendants could not prove falsity. In his reply brief, he then argued that defendants had to establish all elements of the defense. The Court concluded that the defendants did not have to present their evidence on the other elements of the defense and that the district court erred in granting summary based on lack of scienter. The Court also held that the district court erred in applying a heightened "strong inference" of scienter requirement. Fourth, the defendants argued that the notes are unenforceable due to violations of § 17(a) of the Securities Act. Because the Trustee defended the district court's ruling only on lack of scienter, the Court vacated the judgment for the same reasons it vacated with respect to the illegality defense. Fifth, the defendants challenged the district court's extension of its ruling with respect to the first two defendants to the other defendants. The district court's ruling with respect to the first two defendants was that the misrepresentations were expressions of legal opinion and therefore could not support a fraud claim. But the later defendants identified an exception to that general rule. The district court erred in that it never considered the argument. Finally, the defendants argued that the district court erred in granting summary judgment on their excuse-of-nonperformance defense. Based on its earlier rulings that summary judgment on the counts alleging statutory and regulatory violations was improper, the Court also concluded that summary judgment on the excuse-of-nonperformance defense was improper.