Appeal from the United States District Court for the Eastern District of Wisconsin.
Before CUMMINGS, Chief Judge, SWYCERT, Senior Circuit Judge, and POSNER, Circuit Judge.
CUMMINGS, Chief Judge: On August 30, 1979, Thomas Trecker filed a lawsuit under Section 10(b) of the 1934 Securities Exchange Act (15 U.S.C. § 78j(b)) and SEC Rule 10b-5 (17 C.F.R. § 240.10b-5). The defendants in the action were Dane T. Scag, Trecker's erstwhile business partner; Wisconsin Marine, Inc. ("WMI"), the business Trecker and Scag had founded together; and Ransomes, Sims and Jefferies, Ltd. ("Ransomes"), a British corporation that purchased a sizable interest in WMI in the summer of 1978.*fn1 The gravamen of Trecker's suit was that these defendants had first failed to disclose, and later misrepresented, facts that would have altered Trecker's decision to sue in state court to have his shares in WMI redeemed. According to Trecker, no sooner had he been paid $402 a share for his stock in WMI than an almost identical number of shares was sold to Ransomes for nearly four times that amount.
Judge Gordon wrote three opinions in the case. First he denied the defendants' motions to dismiss, except as to possible misrepresentations made after the entry of judgment in Trecker's state court suit. They had come too late, the judge ruled, to ground a Rule 10b-5 suit, but they might be evidence of the intent behind the defendants' earlier nondisclosure. 481 F. Supp. 861, 865 (E.D. Wis. 1979). Trecker has not argued on appeal that the partial dismissal was erroneous. Later Judge Gordon granted the defendants' motion for summary judgment on the basis that Trecker's suit was time-barred, 500 F. Supp. 752 (E.D. Wis. 1980), and that the nondisclosure was neither material nor deliberate, 514 F. Supp. 364, 367-368 (E.D. Wis. 1981). We vacate the grant of summary judgment on all three issues -- the statute of limitations, materiality, and scienter -- and remand the case to Judge Gordon for further proceedings.
Background of the Litigation
The origin of this dispute was Trecker's and Scag's decision to go into business together in 1971. Scag contributed $150,000 and Trecker $100,000 to buy the assets of a company that manufactured snow blowers, lawnmowers, and related equipment. They issued shares in the same ratio as they had contributed capital -- 600 shares to Scag and 400 to Trecker. They also drafted a stock buy-lack agreement: it provided for either to have his shares redeemed by the corporation in the event of his death or voluntary or involuntary departure from the company. WMI began operations in January 1972, but it could not afford to employ Trecker full-time as the parties had contemplated. In December 1973 Trecker asked to be bought out under the terms of the agreement. Scag "accepted Trecker's request with regret" (Scag App. 112), not no action was taken -- and indeed no meetings of the three-man board of directors were held -- until December 1976.
In 1974 a fire damaged WMI's plant. Trecker, Scag, and their wives (who were sisters) guaranteed a $500,000 loan to rebuilt. At least one of Trecker's motives was to protect his investment and restore the company to marketable condition (Trecker affidavit, Trecker App. 122). He and Scag agreed to sell the business, but their efforts in 1974, 1975, and early 1976 met with no success. In late 1975 or early 1976 the business began to prosper, and Scag changed his mind about selling. He made additional investments in the company and issued himself additional shares, diluting Trecker's interest from 40% to 34.2%.*fn2
In December of 1976 the board of directors met to consider Trecker's renewed demand to be bought out and rejected it.Though WMI's plight had improved since 1973, it still had no cash to finance the redemption and all its assets were pledged as collateral for loans. However, when Treckler brought suit in state court a week later, seeking specific performance of the redemption agreement or the dissolution of the corporation, the company did not use its illiquidity as a defense or excuse. Instead it argued that Trecker had failed to tender his stock; that the agreement for the $500,000 rebuilding loan prohibited redemption; and that Trecker's continued participation in the business after his 1973 demand for redemption waived his rights (Trecker affidavit, Trecker App. 124). The state court ultimately found that: (1) Trecker had a right to have his stock redeemed and was entitled to specific performance (opinion of February 21, 1978); (2) his shares should be valued as of December 31, 1976, the end of the quarter closest to his 1976 demand (opinion of May 17, 1978); and (3) the company would be allowed to pay the money ($160,845 for the stock and $5,026 in interest) in three installments extending from May 23, 1978 to October 1979, to ease its cash-flow problems (id. ). Judgment was entered on May 23, 1978.*fn3
Meanwhile, while the state court action was pending Scag had initiated negotiations to sell WMI to Ransomes, a British firm with which WMI already had a distributorship agreement. Scag asserted, and the state and federal judges both believed, that he had taken this step because he anticipated that WMI would lose the state court action and need funds to pay Trecker. Scag wrote to Ransomes' management in December 1977, visited Ransomes' headquarters in Ipswich, England, in late January of 1978, and signed a letter of intent on February 24, 1978, just three days after the first state court decision. The final terms of the Ransomes-WMI deal, which were hammered out in the spring of 1978, were as follows:
(1) Trecker's stock must be fully redeemed as a precondition.
(2) Ransomes would pay $124,176 toward the expenses of the redemption and make a $500,000 contribution to WMI capital; it would receive shares equalling a 34.1% interest in WMI, and no additional shares would be issued to dilute its interest.
(3) By September 1979 Ransomes would either exercise an option to acquire the balance of WMI's shares or cancel the deal and have its entire $624,176 refunded.
(4) Scag would remain as president of WMI for five years.
The parties disagree about whether Trecker had any right to know about these terms or the negotiations that preceded them, and they disagree, as we shall see, about the meaning of term (2). But it is undisputed that Treckler, who remained a nominal member of WMI's board of directors until the May 1978 state court judgment, had no actual knowledge of ...