Katz v. Comdisco, Inc.

117 F.R.D. 403, 1987 U.S. Dist. LEXIS 9150
CourtDistrict Court, N.D. Illinois
DecidedOctober 7, 1987
DocketNo. 86 C 444
StatusPublished
Cited by29 cases

This text of 117 F.R.D. 403 (Katz v. Comdisco, Inc.) is published on Counsel Stack Legal Research, covering District Court, N.D. Illinois primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Katz v. Comdisco, Inc., 117 F.R.D. 403, 1987 U.S. Dist. LEXIS 9150 (N.D. Ill. 1987).

Opinion

MEMORANDUM ORDER

BUA, District Judge.

Based on defendants’ alleged misrepresentations concerning the tax liability of Comdisco, Inc., plaintiffs raise claims of federal securities law violations, common law fraud, and negligent misrepresentation. Plaintiffs, wishing to bring this lawsuit as a class action, have moved to certify a class of purchasers of Comdisco stock during the period of the alleged misrepresentations. For the reasons stated herein, plaintiffs’ motion is granted in part and denied in part.

FACTS

Comdisco is a Delaware corporation whose executive offices are located in Rosemont, Illinois. The corporation’s common stock is traded On the New York Stock Exchange. Comdisco buys, sells, and leases new and used IBM computer equipment. The company frequently engages in a subleasing scheme: selling computer equipment to a customer, leasing it back for a period of eight years, then subleasing it to a third party for a shorter period of time. Typically, after subleasing its equipment to third-party users, the company enters into a lease agreement with a financial institution. Under this agreement, Comdisco assigns its lease rentals to the financial institution in exchange for the present value of those rentals discounted at a fixed rate of interest. For tax and accounting purposes, the company has treated the proceeds of such assignments as loans payable by Com-disco. Consequently, on its federal income tax returns, Comdisco has not reported these discounted lease rentals as income.

In early 1983, the Internal Revenue Service (“IRS”) commenced an audit of Corn-disco’s tax returns for fiscal years 1980, 1981, and 1982. During the audit, the examining agent for the IRS questioned Corn-disco’s practice of excluding its discounted lease rentals from the income that it reported. On July 2, 1984, the IRS agent issued a “30-day letter,” tentatively pro[406]*406posing adjustments in Comdisco’s tax liability. In the 30-day letter, the agent concluded that the company’s discounted lease rentals were taxable income, and that Comdisco owed an additional $210 million in taxes for the years 1980-1982. Comdisco then filed a protest with the IRS’s District Director, challenging the agent’s findings. Persuaded by Comdisco’s arguments, the reviewing IRS appellate officer remanded the case to the examining agent in early 1985. On remand, the agent continued to contend that Comdisco had improperly excluded its discounted lease rentals from its reported income. On October 31, 1985, the agent issued a “90-day letter,” an official notice of Comdisco’s tax deficiency. According to the 90-day letter, the company owed approximately $200 million in back taxes. On January 9, 1986, Comdisco filed a petition in the United States Tax Court to challenge the Notice of Deficiency. Ultimately, on April 7, 1986, the IRS agreed to reduce Comdisco’s tax liability for 1980-1982 to approximately $6 million.

Plaintiffs’ claims arise from allegations that Comdisco and its officers withheld from the investing public important information about the IRS audit and the company’s potential tax liability. From the audit’s commencement in early 1983 until the filing of the tax appeal in January 1986, Comdisco made few public references to the ongoing IRS investigation. The corporation’s 1983 Annual Report briefly mentioned the audit, but downplayed its significance: “[N]o final adjustments have been proposed and no provision for additional taxes is deemed necessary.” Comdisco, Inc., 1983 Annual Report 39. After issuance of the 30-day letter, Comdisco declared that “[proposed adjustments claim a significant amount of additional taxes,” but the company also expressed the belief that it would prevail on appeal. Comdisco, Inc., 1984 Annual Report 28. Even after it received an official Notice of Deficiency, Comdisco elected not to disclose the precise magnitude of its potential tax liability. Instead, the company merely reiterated its 1984 statement that the proposed tax adjustments were “significant,” but that most of the adjustments would probably be overturned on appeal. Comdisco, Inc., 1985 Annual Report 28. Not until January 9, 1986, when Comdisco filed its appeal in Tax Court, did the company publicly disclose the full extent of its potential tax liability. The day after the announcement, the price of Comdisco stock fell sharply.

Plaintiffs Moise Katz and Lowell Kousins held shares of Comdisco stock on the day the company announced its appeal of the $200 million tax assessment. Both Katz and Kousins had purchased Comdisco stock after the IRS had begun its audit. Katz acquired 50 shares of Comdisco stock on January 7, 1986, only two days before the company disclosed the amount of its potential tax liability. Kousins both bought and sold Comdisco stock at various times during the course of the audit.

Plaintiffs allege that Comdisco and its officers engaged in a common scheme to mislead the public by concealing material information about the company’s potential tax liability. Plaintiffs further assert that this nondisclosure scheme achieved its intended result: the artificial inflation of the market price of Comdisco stock. Based on these allegations, plaintiffs seek damages from Comdisco and its officers under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a) (1982), and Securities and Exchange Commission (“SEC”) Rule 10b-5, 17 C.F.R. § 240.10b-5 (1983). In addition to asserting that defendants violated federal securities law, plaintiffs raise common law claims of fraud and negligent misrepresentation against defendants.

Katz and Kousins wish to assert these claims on behalf of a class of similarly situated Comdisco shareholders. The named plaintiffs have moved to certify a class consisting of all persons and entities who purchased Comdisco stock in the open market between September 1, 1983 and January 9, 1986. The proposed class would not include the defendants, family members of Comdisco’s officers and directors, subsidiaries and affiliates of Comdisco, or the successors or assigns of any of the defendants.

[407]*407DISCUSSION

Before granting a motion for class certification, this court must determine whether the proposed class satisfies four prerequisites:

One or more members of a class may sue or be sued as representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class.

Fed.R.Civ.P. 23(a). In addition, this court must find “that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy.” Fed.R.Civ.P. 23(b)(3).

Free access — add to your briefcase to read the full text and ask questions with AI

Related

Bolden v. Walsh Group
282 F.R.D. 169 (N.D. Illinois, 2012)
In Re Remec Incorporated Securities Litigation
702 F. Supp. 2d 1202 (S.D. California, 2010)
Ross v. Abercrombie & Fitch Co.
257 F.R.D. 435 (S.D. Ohio, 2009)
Kohen v. Pacific Investment Management Co. LLC
244 F.R.D. 469 (N.D. Illinois, 2007)
Lehocky v. Tidel Technologies, Inc.
220 F.R.D. 491 (S.D. Texas, 2004)
Bovee v. Coopers & Lybrand
216 F.R.D. 596 (S.D. Ohio, 2003)
Weikel v. Tower Semiconductor Ltd.
183 F.R.D. 377 (D. New Jersey, 1998)
Pickett v. IBP, Inc.
182 F.R.D. 647 (M.D. Alabama, 1998)
Kalodner v. Michaels Stores, Inc.
172 F.R.D. 200 (N.D. Texas, 1997)
Rowe v. Marietta Corp.
955 F. Supp. 829 (W.D. Tennessee, 1996)
Zirn v. VLI Corp.
681 A.2d 1050 (Supreme Court of Delaware, 1996)
Cobb v. Monarch Finance Corp.
913 F. Supp. 1164 (N.D. Illinois, 1995)
Ziemack v. Centel Corp.
163 F.R.D. 530 (N.D. Illinois, 1995)
Gilbert v. First Alert, Inc.
904 F. Supp. 714 (N.D. Illinois, 1995)
In Re Soybean Futures Litigation
892 F. Supp. 1025 (N.D. Illinois, 1995)
Vickery v. Jones
856 F. Supp. 1313 (S.D. Illinois, 1994)
Jaroslawicz v. Safety Kleen Corp.
151 F.R.D. 324 (N.D. Illinois, 1993)
Gaffin v. Teledyne, Inc.
611 A.2d 467 (Supreme Court of Delaware, 1992)
In re Bally Manufacturing Securities Corp. Litigation
141 F.R.D. 262 (N.D. Illinois, 1992)

Cite This Page — Counsel Stack

Bluebook (online)
117 F.R.D. 403, 1987 U.S. Dist. LEXIS 9150, Counsel Stack Legal Research, https://law.counselstack.com/opinion/katz-v-comdisco-inc-ilnd-1987.