Costello v. Grundon

In the

United States Court of Appeals
For the Seventh Circuit

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

JOHN W. C OSTELLO, not individually,
but as Litigation Trustee Under the
Comdisco Litigation Trust,
Plaintiff-Appellee,
v.

S TEVEN R. G RUNDON, et al.,
Defendants-Appellants.

Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
Nos. 1:05-cv-763, -727, -767, -740, -746,
-764, -736—Robert W. Gettleman, Judge.

A RGUED A PRIL 6, 2010—D ECIDED O CTOBER 18, 2010

Before K ANNE, R OVNER, and T INDER, Circuit Judges.
T INDER, 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 Litiga-
2 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

tion 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 pur-
chasing 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 per-
sonal capacities. Bank One had developed and imple-
mented 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 condi-
tion 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
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 3

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 (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 Materi-
als”). The SIP Materials included the SIP Plan Sum-
mary; 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 pack-
age of Bank One’s documents. The Bank’s package con-
sisted of a form of Note; the Facility Agreement; a Letter
of Direction; a Loan Application; an Account Applica-
tion; 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
4 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

were obligated for a specified time period to share any
gains on the sale of the shares with Comdisco. More spe-
cifically, 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 Direc-
tion 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 excep-
tions. 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)
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 5

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 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 an-
swered:
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.)
6 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

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 care-
fully reviewed the Facility Agreement.” (SA:225.) In the
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 7

Facility Agreement, Comdisco represented and war-
ranted 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 Sys-
tem.” Comdisco further represented and war-
ranted 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 violate
or be inconsistent with the provisions of Regula-
tion G [or] . . . Regulation U . . . .
(SA:283-284.)
In discussing Comdisco’s Guaranty, the Facility Agree-
ment repeatedly referred to the “collateral securing the
Guaranteed Debt.” However, section 7.06 of the Facility
Agreement provides:
No Collateral. Notwithstanding any reference
herein to any collateral securing any of the Guar-
8 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

anteed Debt, it is acknowledged that, on the
date hereof, neither the Company nor any Bor-
rower has granted, or has obligation to grant, any
security interest or other lien on any of its prop-
erty (including, without limitation, the Restricted
Stock) to the Lenders as security for the Guaran-
teed Debt.
(SA:290.) “Guaranteed Debt” is defined as the principal
and interest on the loans to the borrowers, plus any
other fees of borrowers owing pursuant to the Notes.
(SA:288.)
The Borrowers elected to participate in the SIP
Program, executing a SIP option exercise form and a
Letter of Direction, authorizing the Bank to pay the pro-
ceeds of the loan to Comdisco. Each of them also exe-
cuted an SIP Promissory Note. The proceeds of the SIP
Loans were remitted to Comdisco as consideration for
the purchase of the SIP Shares. Comdisco caused the
appropriate number of shares to be allocated and trans-
ferred to its Registrar and Transfer Agent, Mellon
Investor Services, LLC, for the benefit of the Borrowers.
The Borrowers opened accounts at the First National
Bank of Chicago in order to receive distributions of
stock dividends that were used to offset payments due
under the SIP Notes.
Within six months, Comdisco’s stock split, doubling the
number of shares each SIP Participant had obtained. And
in just over two years, Comdisco’s stock was trading at
$53 per share. Several participants decided to sell their
shares and did so at a price that not only satisfied their
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 9

loan obligations but also earned them a profit, even
after sharing with Comdisco the required 50% of the
balance of the gain realized on the sale after payment
of principal, interest, and fees due on the loan. However,
the tide turned and in July 2001, Comdisco filed for
bankruptcy. This was an event of default under the
Notes and caused Bank One to accelerate all amounts
outstanding on the Notes. The bankruptcy also triggered
an event of default under the Facility Agreement. The
Lenders filed a proof of claim in Comdisco’s bankruptcy
for approximately $133 million. Comdisco settled its
guarantor obligation to the Lenders for a payment of
over $126 million in exchange for the Lenders’ assign-
ment of all rights under the Notes against the Borrowers
to the Comdisco Litigation Trustee. The bankruptcy court
approved the settlement, and the district court held
that the Trustee is the holder of the Notes with all rights
of enforcement.
In 2005, the Trustee filed separate actions against each
Borrower, seeking to enforce the SIP Notes. The Borrowers
raised many affirmative defenses, including fraud and
duress. The Trustee moved for summary judgment
against two of the defendants, James Duncan and Lyssa K.
Paul. Duncan and Paul filed a cross-motion for sum-
mary judgment, arguing that the Notes were unen-
forceable based on violations of federal margin regula-
tions. In December 2007, the district court denied their
cross-motion and granted the Trustee’s motion. The
court ruled that the Trustee had proved his prima facie
case on the SIP Notes and rejected the defendants’ “pri-
mary defense that the SIP Program was fraudulent”
10 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

(SA:177), concluding that Comdisco’s alleged misrepre-
sentations were expressions of legal opinion, which could
not support a fraud claim. (SA:178). The court found
that the defendants had not shown reliance on the alleged
misrepresentations. (Id.). The district court also rejected
the defendants’ argument that the loans were unenforce-
able because they violated Regulation U, after concluding
that the defendants could not assert the alleged illegality
of the loans as an affirmative defense. (SA:180.) As for
the negligent misrepresentation defense, the court found
based on the record that the defense was not available
as against Comdisco or the banks. The district court
rejected all other affirmative defenses.
The Trustee subsequently moved for summary judg-
ment against the remaining defendants, incorporating
its memorandum in support of its summary judgment
motions against Duncan and Paul. The defendants
amended their affirmative defenses, asserting that
Comdisco committed securities fraud and violated securi-
ties laws and that the violations constituted breaches
of contract which excused the Borrowers’ nonperfor-
mance. The Trustee supplemented his memorandum to
address the new defenses. The district court granted
summary judgment to the Trustee, concluding that the
SIP Plan did not violate the margin regulations and, even
if it had, the defendants had no evidence of scienter
and thus could not establish the Rule 10b-5 claim in
their fifth affirmative defense. The court also decided
that even if there was a technical violation of any reg-
ulation, such a violation did not render the Notes unen-
forceable because the defendants were not within the
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 11

“zone of interests” protected by the regulations. The
district court entered judgments, and the Borrowers
appealed.
Within one year of the entry of the judgments, the
Trustee filed a Motion for Correction, or in the Alterna-
tive, Modification of Judgment Pursuant to Federal Rule
of Civil Procedure 60. The motion states that “due to an
inadvertent oversight, the judgments understated the
amounts of interest owing under the promissory notes on
which judgment was entered.” (60SA:147.) The Borrowers
opposed the motion on procedural grounds, arguing
that any relief, if available, was available only under
Rule 60(b)(1). The district court indicated that it was
inclined to grant the Trustee’s Rule 60(a) motion,
and we granted the district court leave to rule on the
Rule 60(a) motion. The district judge entered Rule 60(a)
Amended Final Judgment Orders, nunc pro tunc to the
dates of the prior judgments (October 2008), increasing
the judgment amounts entered against the Borrowers
who are the appellants in the cases before us by over
$1 million. Amended Judgments were entered and the
Borrowers timely appealed. The appeals were con-
solidated for disposition. Additional facts are discussed
later in this opinion as appropriate.

II. ANALYSIS
The Borrowers argue that the district court erred in:
(1) concluding that they could not assert violations of
Regulations G and U as affirmative defenses; (2) con-
cluding that Comdisco and Bank One did not violate
12 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

the Regulations; (3) placing the burden of proving a
violation of the Regulations on the Borrowers; (4) con-
cluding that even if the Borrowers proved regulatory
violations, they could not avoid summary judgment in
favor of the Trustee based on such violations; (5) granting
summary judgment on the affirmative defenses based
on violations of Section 10(b) of the Securities Exchange
Act of 1934 and SEC Rule 10b-5, illegality under Sec-
tion 17(a) of the Securities Act of 1933, and the excuse-of-
nonperformance; (6) extending its Duncan/Paul summary
judgment rulings to these Borrowers; and (7) granting
the Trustee’s Rule 60(a) motion and increasing the
amount of the original judgments. We will address each
argument as necessary.

A. Regulations G and U
The Borrowers’ amended affirmative defenses allege
that Comdisco and the Bank violated Regulation G or U
by: (1) extending credit to the Borrowers, (2) arranging
for the extension thereof, and (3) failing to obtain executed
forms from the Borrowers as prescribed by the Federal
Reserve Board. Specifically, the Borrowers contend that
Comdisco violated Regulation G by extending purpose
credit to each Borrower (in the form of Comdisco’s guar-
anty to the Bank) secured by his margin stock in an
amount exceeding 50% of the purchase price of that
stock.1 They claim that the Bank violated Regulation U

1
Regulation G provided: “Limitation on extending purpose credit.
No lender . . . shall extend any purpose credit, secured directly
(continued...)
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 13

by arranging for Comdisco to extend credit to the Bor-
rowers on better terms and conditions than it could
legally extend credit under Regulation U and by ex-
tending purpose credit (the loan) to each Borrower,
indirectly secured by his margin stock in an amount
exceeding 50% of the purchase price of that stock. 2 In
addition, the Borrowers allege that both Comdisco and
the Bank committed “purpose statement” violations of
Regulation G or U by failing to obtain from each Bor-
rower a Federal Reserve Form G-3 or U-1.3

1
(...continued)
or indirectly by margin stock in an amount that exceeds the
maximum loan value of the collateral securing the credit as
set forth in § 207.7 of this part [’The maximum loan value of
any margin stock . . . is fifty per cent of its current market
value.’]” 12 C.F.R. § 207.3(b). Unless otherwise noted, all
citations in this opinion are to the 1998 edition of the Code
of Federal Regulations, which contains the versions of the
regulations in effect at the relevant time.
2
Regulation U provided: “Arranging credit. No bank may
arrange for the extension . . . of any purpose credit, except upon
the same terms and conditions under which the bank itself
may extend . . . purpose credit under this part.” 12 C.F.R.
§ 221.3(a)(3). It also provided: “Extending credit. No bank shall
extend any purpose credit, secured directly or indirectly by
margin stock, in an amount that exceeds the maximum loan
value of the collateral securing the credit.” Id. § 221.3(a)(1).
3
Regulation G required that in the case of extension of credit
secured directly or indirectly by margin stock, “the lender
shall require its customer to execute Form FR G-3.” 12 C.F.R.
§ 207.3(e). And Regulation U required a bank that extends
(continued...)
14 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

We begin with the Borrowers’ contention that the
district court erred in granting summary judgment on the
ground that Comdisco and the Bank had not violated
Regulations G and U. The Borrowers assert that in
moving for summary judgment the Trustee did not chal-
lenge whether Comdisco violated Regulation G. It seems
that they are correct. (See SA:442—Consolidated Supple-
mental Mem. Supp. Pl.’s Mots. Summ. J. Against SIP
Defs. 10 (“the SIP Defendants have not and cannot
prove that the Lenders violated the margin restrictions
set forth in Regulation G or Regulation U.”) (emphasis
added)). As such, the Borrowers were under no obliga-
tion to present all of their evidence of Regulation G viola-
tions in order to defeat the Trustee’s summary judg-
ment motion. See, e.g., Sublett v. John Wiley & Sons, Inc., 463
F.3d 731, 736 (7th Cir. 2006) (“As a general matter, if the
moving party does not raise an issue in support of its
motion for summary judgment, the nonmoving party is
not required to present evidence on that point, and the
district court should not rely on that ground in its deci-
sion.”); Pourghoraishi v. Flying J, Inc., 449 F.3d 751, 765
(7th Cir. 2006) (“The party opposing summary judg-
ment has no obligation to address grounds not raised in
a motion for summary judgment.”). (Of course, the Bor-
rowers would have had to prove Regulation G violations
to obtain summary judgment in their favor.) It would be
unfair to uphold a grant of summary judgment in favor

3
(...continued)
such credit in an amount greater than $100,000 to “require
its customer to execute Form FR U-1.” Id. § 221.3(b).
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 15

of the Trustee based on the lack of evidence that Regula-
tion G was violated because the Borrowers did not have
a fair opportunity to respond to such an argument.
As for the Bank’s alleged violations of Regulation U,
the Trustee argued that the Bank had not relied on the
SIP Shares as collateral, thus asserting the good-faith
non-reliance exception to the meaning of “indirectly
secured.” See 12 C.F.R. § 221.2(g)(2)(iv) (stating that
“indirectly secured” “[d]oes not include . . . an arrange-
ment [under § 221.3(g)(1)] if: . . . [t]he bank, in good
faith, has not relied upon the margin stock as collateral
in extending . . . the particular credit”); 12 C.F.R. § 221.117
(discussing when a bank in “good faith” has not relied
on stock as collateral). This good-faith non-reliance ex-
ception only applies to extension or maintenance viola-
tions; it does not apply to arranging violations. See 12
C.F.R. §§ 221.2(g)(2)(iv), 221.117(a). (Nor would this
exception have any applicability to Comdisco and its
alleged violation of Regulation G.)
Furthermore, whereas the burden of establishing the
affirmative defense of illegality would be on the Bor-
rowers, the Trustee bore the burden of proving the good-
faith non-reliance exception. Cf. Knox v. Cook County
Sheriff’s Police Dep’t, 866 F.2d 905, 907 (7th Cir. 1988)
(stating that the statute of limitations is an affirmative
defense but the burden of proving an exception thereto
is on the plaintiff). The record establishes genuine issues
of material fact as to whether the Bank meets the two
criteria that indicate that it has not relied on the stock
as collateral such that the exception applies:
16 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

(1) the bank had obtained a reasonably current
financial statement of the borrower and this state-
ment could reasonably support the loan, and
(2) the loan was not payable on demand or
because of fluctuations in market value of the
stock, but instead was payable on one or more
fixed maturities which were typical of maturities
applied by the bank to loans otherwise similar . . . .
12 C.F.R. § 221.117(b). The Borrowers’ financial state-
ments support a reasonable inference that the Bank
did not rely on them to support the loans. 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. The transcript of the SIP Presentation lends sup-
port to the inference that the Bank did not rely on the
financial statements; Comdisco’s representatives essen-
tially said as much to the prospective SIP Participants.
See SA:367 (“Obviously, most of us don’t have a credit
that can support a quarter million or half million, what-
ever the number is, of loans, but there is a Comdisco
guaranty there. However, if someone is in bankruptcy,
[the Bank] probably would not let [the loan] go through.
They look for the obvious ones.”). In addition, in
arguing that it satisfied the good-faith non-reliance ex-
ception, the Trustee did not argue that the SIP Notes
were “payable on one or more fixed maturities which were
typical of maturities applied by the bank to loans otherwise
similar . . . .” 12 C.F.R. § 221.117(b) (emphasis added). Thus,
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 17

the Trustee did not carry his burden in proving that the
Bank satisfied the good-faith non-reliance exception.
In determining whether Regulations G and U were
violated, the district court considered whether the SIP
Shares directly or indirectly secured the loans or the
guaranty. The court wrote that “[t]he restrictions placed
on the SIP shares do suggest that the shares indirectly
secured the loans, and if the court were writing on a
totally clean slate, it might agree with defendants’ argu-
ment. But the slate is not entirely clean. . . .” The court
then considered that prior to implementation of the SIP
Program, Comdisco, through its outside legal counsel,
Lola Hale, had sought an opinion from the Federal
Reserve Bank that the SIP loans would not be directly
or indirectly secured by the securities purchased
through the SIP Program. Hale received a response in the
form of a letter from James B. McCauley, Senior Attorney
for the Federal Reserve Bank of Chicago. The McCauley
letter opined that the “proposed transaction d[id]
not constitute a loan secured ‘directly or indirectly’ by
the purchased stock as contemplated by Regulations G
and U.” (SA:512.) The letter stated that “[t]his opinion
relies heavily upon your assertion that ‘there is no refer-
ence . . . either in the note or in the Facility Agreement
to any restriction on the transfer of the securities to be
purchased . . . nor do those securities form collateral for
the Note.’ ” (Id.) McCauley also wrote that “[t]he legal
18 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

staff of the Board of Governors[ 4 ] has been consulted . . .
[and] has concurred in this opinion,” but emphasized
that the opinion was a staff opinion only—not that of the
Board and that “different facts could compel a different
conclusion.” (SA:513.)
The Borrowers correctly pointed out to the district
court that Hale’s letter to the Federal Reserve Bank re-
quested concurrence only that Bank One’s loan would
not be deemed to be, directly or indirectly, secured by
the securities purchased. Hale did not ask whether
Comdisco’s guaranty would be directly or indirectly
secured by the stock, whether Comdisco’s guaranty
would violate Regulation G, or whether Bank One would
commit an “arranging” violation of Regulation U. The
Borrowers also stated that Hale’s letter failed to men-
tion several restrictions on the stock, including that
Comdisco had a right of first refusal on a sale of the
shares; Comdisco’s Compensation Committee could im-
pose restrictions on the timing, amount, and form of the
sale of the shares; and the stock could not be pledged as
collateral for any other loan. In addition, the Notes and
Facility Agreement referred to the stock as “Restricted
Stock”, and the Facility Agreement used the phrase
“collateral securing the Guaranteed Debt” in reference to
the Restricted Stock. (SA:605.) The district court agreed
that Hale’s letter did not provide a complete list of the
restrictions on the stock, but concluded that it set out the

4
Presumably the Board of Governors of the Federal Reserve
System.
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 19

“key restriction” that “any outstanding amounts on the
loan would be paid from the proceeds of any sale of the
stock at any time.” (AA:11.) The court found this restric-
tion to be the most suggestive “that the loans (or guaran-
tee) were indirectly secured by the stock because it is
this restriction that would most likely ensure repayment
of the loan.” (AA:11-12.) Because the Bank was informed
of this restriction, the court gave the opinion in the
McCauley letter substantial weight and concluded that
the SIP Plan did not violate Regulation G or U. (AA:12.)
The Borrowers contend that the district court erred in
deferring to the McCauley letter. The Trustee responds
that it is unclear whether the district court gave a height-
ened level of deference to the letter and, in any event, the
court was entitled to defer to the letter’s reasoning. Al-
though the district court’s decision states that it was
giving the staff’s opinion “substantial weight,” other
language in the decision implies that the court may
have deferred to what it believed (mistakenly) was an
official opinion of the Federal Reserve Board. The
court stated that the Board and its staff have primary
responsibility for interpreting the Exchange Act and its
regulations and that the staff’s opinion is entitled
to substantial weight, citing Ford Motor Credit Co. v.
Milhollin, 444 U.S. 555, 568 (1980) (holding deference
to official staff opinions of Federal Reserve Board inter-
preting the Truth in Lending Act and Regulation Z,
unless irrational, was appropriate), and Revlon, Inc. v.
Pantry Pride, Inc., 621 F. Supp. 804, 815 (D.C. Del. 1985)
(“this Court will accord substantial weight to the
[Federal Reserve Board] staff’s opinions”). The reliance on
20 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

Milhollin and Revlon suggests that the district court
thought the opinion was from “the Federal Reserve Board.”
But the McCauley letter is not an official staff opinion
of the Federal Reserve Board. McCauley works for the
Federal Reserve Bank of Chicago, not the Federal Reserve
Board. The Board and the Banks are “two expressly
independent statutory entities.” Research Triangle Inst. v.
Bd. of Governors of the Fed. Reserve Sys., 132 F.3d 985, 989
(4th Cir. 1997). The Board is created and empowered by
subchapter II of Title 12 of the United States Code, 12
U.S.C. §§ 241-250; the Federal Reserve banks are created
and empowered by subchapter IX, 12 U.S.C. §§ 341-361.
The authority to apply and enforce § 7(d) of the Securities
Exchange Act is delegated to the Securities Exchange
Commission, 15 U.S.C. §§ 78u(d), 78u-3(a)—not the
Federal Reserve Bank of Chicago. And the authority to
undertake “administrative lawmaking” is delegated to
the Board of Governors. 12 U.S.C. § 248(k). Although the
Board may delegate certain of its functions to Federal
Reserve banks, functions “relating to rulemaking or
pertaining principally to monetary and credit policies”
may not be delegated. 12 U.S.C. § 248(k). Although
McCauley consulted with the staff of the Board of Gover-
nors and the staff agreed with his opinion, the McCauley
opinion was not published in either the Federal Reserve
Regulatory Service, the looseleaf service published by the
Board which includes official staff opinions, see 12 C.F.R.
§ 261.10(d)(4), or any other official source.
The Trustee asserts that “the best reading” of the dis-
trict court’s opinion is that it followed Krzalic v. Republic
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 21

Title Co., 314 F.3d 875, 879 (7th Cir. 2002) (explaining
that an agency’s less formal pronouncements may be
entitled to some deference), and gave the McCauley
letter something less than Chevron-style deference, see
Chevron USA, Inc. v. Natural Resources Defense Council, Inc.,
467 U.S. 837 (1984). This appears to be deference under
Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944) (an
agency’s interpretation may be entitled to some deference
according to its “power to persuade”). See United States v.
Mead Corp., 533 U.S. 218, 235-38 (2001). Yet it is unclear
how the Trustee reaches this conclusion. Neither
Krzalic, Chevron, nor Skidmore was mentioned in the
district court’s opinion. Nonetheless, the McCauley letter
is some indication that the regulations were not
violated and the court could consider it according to its
persuasiveness. Cf. Skidmore, 323 U.S. at 140 (informal
agency “opinions . . . while not controlling upon the courts
by reason of their authority, do constitute a body of
experience and informed judgment to which courts . . .
may properly resort for guidance”); see also Sehie v. City
of Aurora, 432 F.3d 749, 753 (7th Cir. 2005) (considering
but ultimately finding unpersuasive opinion letters of
the Department of Labor (“DOL”) interpreting the
meaning of a regulation promulgated under the Fair
Labor Standards Act (“FLSA”)).5

5
The opinions were issued by the Wage and Hour Division of
the DOL, which was authorized to administer and enforce
the FLSA and promulgate regulations thereunder. See Levinson
v. Spector Motor Serv., 330 U.S. 649, 676 (1947). Here, the
(continued...)
22 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

But more importantly, given the omissions in Hale’s
letter and the qualifications to McCauley’s opinion, it
cannot be said that the record conclusively establishes
that the SIP Plan did not violate Regulation G or U. In
United States v. Mead Corp., the Court reiterated Skidmore’s
holding that “an agency’s interpretation may merit
some deference whatever its form, given the ‘specialized
experience and broader investigations and information’
available to the agency . . . .” 533 U.S. at 234 (quoting
Skidmore, 323 U.S. at 139). The Court instructed that the
determination whether Skidmore deference is owed turns
on the “ ‘thoroughness evident in [the agency’s] consider-
ation, the validity of its reasoning, its consistency with
earlier and later pronouncements, and all those factors
which give it power to persuade . . . .’ ” Id. at 228 (quoting
Skidmore, 323 U.S. at 140); see also Am. Fed’n of Gov’t Emps.
v. Rumsfeld, 262 F.3d 649, 656 (7th Cir. 2001) (“informal
[agency] interpretations are entitled to respect to the
extent that they have the power to persuade”) (quotations
omitted). Given the omissions in Hale’s letter, the
McCauley opinion is not persuasive on the question
of whether Comdisco or the Bank violated Regulation G
or U. We note the district court’s statement that if it
were writing on a totally clean slate, it might have
agreed with the Borrowers that the SIP Shares indirectly
secured the loans and guarantee. But the court thought
it owed the McCauley opinion some deference, without

5
(...continued)
Federal Reserve Bank of Chicago is not authorized to admin-
ister and enforce Regulation G or U.
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 23

examining its thoroughness, validity, consistency, and
persuasiveness. (SA:11.)
We emphasize that the issue is not whether the
stock directly secured the Bank’s loans, but whether
the stock indirectly secured the loans and/or the guar-
anty. In arguing that the stock did not indirectly secure
the loans, the Trustee contends that the Borrowers
have failed to identify any restriction or limitation on
the stock itself requiring that the stock or its proceeds
be used to pay the Bank. In response, the Borrowers
identify several restrictions on the SIP Shares, which
they claim implicate 12 C.F.R. § 221.2(g)(1)(i), which
states that “Indirectly secured (1) Includes any arrange-
ment with the customer under which: (i) The customer’s
right or ability to sell, pledge, or otherwise dispose
of margin stock owned by the customer is in any way
restricted while the credit remains outstanding.” The
Trustee replies that the identified restrictions all operate
in favor of Comdisco, not the Bank, and, as a result,
the shares cannot amount to an indirect security—
at least not in favor of the Bank.
The Trustee claims that there was no restriction in the
SIP Notes or any other transaction document providing
that the SIP Shares could not be pledged as security for
other loans. But the Trustee cannot dispute that there
were restrictions on the SIP Shares and the SIP Partic-
ipants were at least told that they could not pledge the
shares as collateral for other loans. Furthermore, he
asserts that even if the stock was restricted, the definition
of “indirectly secured” is not satisfied because the Bank
in good faith did not rely on the stock as collateral for
24 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

the loan. See 12 C.F.R. § 221.2(g)(2)(iv). According to the
Trustee, the undisputed facts show that the Bank did
not rely on the stock as collateral because: (1) the Bor-
rowers—not Comdisco or the Bank—controlled the
stock, (2) the Bank structured the transaction so it
could collect the principal and interest without having
to liquidate the stock in the event of default on the
loans; and (3) the Bank could rely on Comdisco’s
guaranty in the event of defaults on the loans. We are a
bit confused by the assertion that the Borrowers con-
trolled the stock. This assertion conflicts with the record
evidence that the shares were held by Mellon Bank,
Comdisco’s transfer agent, in a special account that only
certain Comdisco officers could sign to release the
shares to ensure that the shares would not be sold or
transferred without paying off the Note. (SA:496) Also,
the accounts were described as “inaccessible” (id.), pre-
sumably meaning that they were inaccessible to the
SIP Participants. In addition, each SIP Participant had
executed a stock power in blank that was held by
Comdisco or Mellon Bank and would allow the holder
to sell the shares in the open market or transfer the
shares to itself. (Id.)
We are unsure how the second fact relied on by the
Trustee indicates that the Bank in good faith did not rely
on the stock as collateral for the loans. It seems that the
Borrowers are right—this seems to be simply a restate-
ment of the fact that the loans were not directly secured
by the shares. Also the Trustee overlooks the two
factors specifically mentioned in 12 C.F.R. § 221.117(b) as
some indication that the bank had not relied upon the
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 25

stock as collateral—that “the bank had obtained a rea-
sonably current financial statement of the borrower
and this statement could reasonably support the loan”
and “the loan . . . was payable on one or more fixed
maturities which were typical of maturities applied by
the bank to loans otherwise similar except for not in-
volving any possible question of stock collateral. As
stated earlier, the Borrowers’ financial statements sup-
port a reasonable inference that the Bank did not rely
on them to support the loans.
Next, the Trustee argues that the SIP Shares were not
collateral for Comdisco’s guaranty. He points to the lack
of any right of Comdisco to sell the SIP Shares without
authorization from the SIP Participants. The Trustee
seems to overlook the fact that each of the SIP Participants
had to deliver to Comdisco a stock power endorsed in
blank with respect to the SIP Shares. Thus, each participant
effectively authorized Comdisco to sell his or her SIP
Shares. The Trustee’s argument is unpersuasive.
The Trustee claims “the Bank could not have relied on
the stock as collateral because it had Comdisco’s
guaranty, and . . . Comdisco had sufficient assets to
satisfy its obligations under the guaranty without re-
sorting to the stock.” This unsupported conclusory asser-
tion does not establish as a fact that the Bank did not
rely on the stock as collateral. The Trustee offers no
explanation why the Bank could not have relied on both
the stock and the guaranty, and we are unaware of
any. The Bank relied on Comdisco’s guaranty, which
one could reasonably find was secured by the stock.
26 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

Thus, there is at least a reasonable inference that the
Bank indirectly relied on the stock as collateral for
the loans.
If Comdisco committed “extending” violations of Reg-
ulation G, then it seems that the Bank likewise com-
mitted “extending” violations of Regulation U. And it
necessarily would follow from such violations that the
Bank also committed “arranging” violations of Regula-
tion G. See 12 C.F.R. § 221.3(a)(3) (“No bank may
arrange for the extension . . . of any purpose credit, except
upon the same terms and conditions under which the
bank itself may extend . . . purpose credit under this
part.”). See 12 C.F.R. § 221.118 (referencing 12 C.F.R.
§ 207.103; see §§ 207.103(a)(3), 207.103(g)). In addition,
the record establishes that neither Comdisco nor the
Bank provided Form G-3 or Form U-1 to the Borrowers.
Thus, if the guaranty and loans were secured directly
or indirectly by the stock, then both Comdisco and the
Bank would have committed “Purpose Statement” viola-
tions of Regulations G and U as well. See 12 C.F.R.
§ 207.3(e) (in the case of extension of credit secured
directly or indirectly by margin stock, “the lender
shall require its customer to execute Form G-3); 12 C.F.R.
§ 221.3(b) (requiring a bank when extending credit
secured directly or indirectly by margin stock in
an amount exceeding $100,000 to obtain an executed
Form U-1 from its customer).
We do not decide whether Comdisco or the Bank vio-
lated Regulation G or U, however. Even assuming a
violation, as addressed below, the district court correctly
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 27

decided that the Borrowers could not assert such a vio-
lation as an affirmative defense.

B. Assertion of Violations of Regulations G and U as
Affirmative Defenses
The Borrowers argue that the district court erred in
concluding that they had no private right of action
under § 7(d) or § 29(b) of the Securities Exchange Act
of 1934 and therefore lacked standing to assert the
alleged violations of Regulations G and U as affirmative
defenses.6 The district court’s decision followed Blair v.

6
Section 7(d) provides in pertinent part: “It shall be unlawful
for any person not subject to subsection (c) of this section to
extend or maintain credit or to arrange for the extension or
maintenance of credit for the purpose of purchasing or
carrying any security, in contravention of such rules and
regulations as the Board shall prescribe to prevent the excessive
use of credit for the purchasing or carrying of or trading in
securities in circumvention of the other provisions of this
section.” Section 29(b) provides: “Every contract made in
violation of any provision of this chapter or of any rule or
regulation thereunder . . . the performance of which involves
the violation of, or the continuance of any relationship or
practice in violation of, any provision of this chapter or any
rule or regulation thereunder, shall be void (1) as regards the
rights of any person who, in violation of any such provision,
rule, or regulation, shall have made or engaged in the perfor-
mance of any such contract, and (2) as regards the rights of any
person who, not being a party to such contract, shall have
(continued...)
28 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

Bank One, N.A., 307 B.R. 906 (N.D. Ill. 2004), appeal dismissed
in light of settlement, which relied on Bassler v. Cent. Nat’l
Bank, 715 F.2d 308 (7th Cir. 1983). The Borrowers con-
tend that the district court’s reliance on Bassler and Blair
was misplaced.
In Bassler, a borrower sought to void a group of
loans that were obtained to finance the purchase of
stock. The borrower claimed that the lender violated § 7(d)
of the Securities Exchange Act of 1934 and Regulation U
by failing to obtain a Regulation U statement from him.
He also alleged that the lender violated § 10(b) of the
Securities Exchange Act of 1934 and SEC Rule 10b-5 by
failing to disclose that the stock was worthless. Bassler
held that neither § 7(d) nor § 29(b) conferred a private
right of action in investment borrowers as against invest-
ment lenders. Id. at 313. We considered the Act’s main
purposes which were “to give a Government credit
agency an effective method of reducing the aggregate
amount of the nation’s credit resources which can be
directed by speculation into the stock market and out of
other more desirable uses of commerce and industry,” id.
(citing H.R. Rep. No. 1383, 73d Cong., 2nd Sess. 8 (1934))
and “to safeguard the national economy,” id. The House
Report noted that the Act’s main purpose was not the

6
(...continued)
acquired any right thereunder with actual knowledge of the
facts by reason of which the making or performance of such
contract was in violation of any such provision, rule, or regula-
tion . . . .” 15 U.S.C. § 78cc(b).
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 29

protection of the small speculator, though that would be
achieved as well. Nothing suggested a Congressional
intent to create a private right of action in borrowers as
against lenders. We therefore concluded that the dis-
trict court properly dismissed the plaintiff’s claim that
the loans were void based on violations of Regulation U. Id.
Blair arose from Comdisco’s bankruptcy. Bank One
filed a proof of claim for the outstanding loans to SIP
Participants. Comdisco objected on the grounds that
the loans violated margin regulations. Several SIP Partici-
pants (including most of the Borrowers in our case)
intervened. The bankruptcy court held that neither
Comdisco nor the intervenor borrowers had statutory
standing to challenge the legality of the loans under-
lying Bank One’s claim. On appeal to the district court,
Comdisco and the borrowers asserted that the loans
violated Regulation U and that § 7(d) and § 29(b) of the
Securities Exchange Act provided them a defense to
Bank One’s claim. Comdisco and the SIP Participants
argued that Bassler was not controlling because they
asserted the regulatory violation as an affirmative
defense, not a separate cause of action. The district court
rejected this argument as one “of semantics.” Blair, 307
B.R. at 909. Although the district court noted that the
intervenor borrowers had moved for declaratory judg-
ment rather than asserting a defense (whereas Comdisco
filed an objection to Bank One’s claim), the court held
that neither § 7(d) nor § 29(b) provided Comdisco or the
SIP Participants with a defense to Bank One’s claim and
they therefore had no standing to challenge the legality
of the loans. Id. at 909-10.
30 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

Thus, the Borrowers’ argument that the district court
misplaced its reliance on Blair because the intervenors
did not raise § 29(b) defensively lacks any traction. The
Blair court concluded that “no matter what the label,
this cause of action does not exist under § 7(d) and
§ 29(b)”—because the intervenor SIP Participants and
Comdisco sought a declaration that the loans were void
because of the alleged margin violations, “Bassler controls.”
Id. at 910. The court reasoned that “Congress did not
intend to protect investors with § 7. . . . [T]he main pur-
pose of § 7 was to control the excessive use of credit
in security transactions.” Id. (quotation omitted). It also
concluded that Bassler’s holding was not limited to a
technical violation of Regulation U but also reached
direct, substantive violations, including where the bank
loans financed 100% of the stock purchases. Id.
Shearson Lehman Bros., Inc. v. M & L Invs., 10 F.3d 1510
(10th Cir. 1993), provides additional authority for the
conclusion that the Borrowers cannot assert violations
of margin regulations as an affirmative defense. In
Shearson, a stockbroker brought a breach of contract
action and the purchasers asserted an affirmative
defense for nonpayment based on the stockbroker’s
violation of Regulation T, a margin regulation con-
cerning extensions of credit by brokers and dealers. The
court found that the stockbroker violated the regulation,
which required the holder of a cash account to “promptly
liquidate” in the event of a purchaser’s failure to make
timely payment. Id. at 1514. However, the court con-
cluded that there is no affirmative defense to a breach of
contract claim for Regulation T violations. Id. at 1516.
The court stated that its conclusion was “most consistent”
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 31

with the policy behind Regulation T and other regula-
tions—to protect the market in general—not to benefit
individual investors. Id. It also reasoned that the regula-
tions placed the burden of compliance with margin re-
quirements on both broker and client, so it would be
inconsistent to place the burden of noncompliance on
brokers in contract disputes. Id.
We find the reasoning of Bassler, Blair, and Shearson
persuasive. Even if Comdisco and the Bank violated
Regulation G or U, the Borrowers’ illegality defense
based on such a violation fails. There is nothing inher-
ently illegal in a contract to borrow money to purchase
stock, and a regulatory violation does not make such
a contract “illegal.” See ADM Investor Servs., Inc. v. Collins,
515 F.3d 753, 755-56 (7th Cir. 2008). Furthermore, Reg-
ulations G and U were not designed to protect indi-
vidual investors such as the Borrowers; they were
designed to protect the general public. See id. (“balky
customers are not in the zone of interests protected by
margin-posting requirements”). To allow the Borrowers
to assert the margin violations as an affirmative defense
to the Trustee’s action on the Notes would place the
Borrowers in a “heads I win, tails you lose” position. See
Bache Halsey Stuart, Inc. v. Killop, 509 F. Supp. 256, 259
(D. Mich. 1980). If the value of the Comdisco stock went
up—as it did for a while—the Borrowers gain on their
investment. And if the stock goes down, the Borrowers
can void the loan contract and lose nothing. See id. We
have little doubt that if Comdisco had not filed bank-
ruptcy and its stock had continually soared in value, the
Borrowers would not be before us now seeking to void
32 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

the Notes. The district court correctly decided that the
Borrowers could not assert violations of Regulations G
and U as affirmative defenses.
The Borrowers try in vain to persuade us that they
may assert the alleged margin violations as affirmative
defenses. They first contend that no private right of
action is necessary to assert a plaintiff’s violation of
federal law as an affirmative defense. Yet the cases upon
which they rely actually support the Trustee’s view that
an illegality defense is available only to those whom
the statute at issue was designed to protect. See Kaiser
Steel Corp. v. Mullins, 455 U.S. 72, 86 (1982) (defense
under § 8(e) of the National Labor Relations Act could
be “raised by a party which § 8(e) was designed to
protect, and where the defense is not directed to a collat-
eral matter but to the portion of the contract for which
enforcement is sought”); Transamerica Mortg. Advisors, Inc.
(TAMA) v. Lewis, 444 U.S. 11, 17 (1979) (holding that
the Investment Advisors Act implies a limited remedy
to void an investment advisors contract while recog-
nizing that the Act was “intended to benefit the clients
of investment advisers”); Mills v. Elec. Auto-Lite Co., 396
U.S. 375, 381 (1970) (provision at issue “was intended
to promote the free exercise of the voting rights of stock-
holders” (internal quotations omitted)); Rush-Presbyte-
rian-St. Luke’s Med. Ctr. v. Hellenic Republic, 980 F.2d 449,
455 (7th Cir. 1992) (noting that illegality may be a
defense to contract but not allowing hospital’s failure to
comply with statutory certification requirement to be
used as a defense to contract action for payment of
hospital bills); Bankers Life Co. v. Denton, 458 N.E.2d 203,
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 33

205 (Ill. App. Ct. 1983) (allowing mortgagees to assert
noncompliance with HUD mortgage servicing require-
ments as an affirmative defense to a foreclosure action
because it was necessary “to effectively insure that the
interests of the primary beneficiaries of the H.U.D. mort-
gage servicing requirements are being protected”). Other
cases they cite involved contracts the subjects of which
were themselves illegal or “infected by an illegal conflict
of interest”; as a result, the contracts were unenforceable.
See United States v. Miss. Valley Generating Co., 364 U.S.
520, 566 (1961) (allowing nonenforcement of contract
infected by an illegal conflict of interest on the part of the
government official who participated in contract negotia-
tions in violation of federal conflict-of-interest statute
aimed at ensuring honesty in government’s business
dealings); E. Bement & Sons v. Nat’l Harrow Co., 186 U.S.
70, 88 (1902) (assuming that only the Attorney General
could bring an action to enforce the Sherman Act and
allowing the defense that the contract is illegal under the
antitrust laws); Kessinger v. Standard Oil Co., 245 Ill. App.
376, 1925 WL 4623, at *4 (1925) (holding tenant could not
recover against appellant where his cause of action
was founded on his own violation of the law which
prohibited the tenant’s action of excavating and taking
sand from river).
Johnston v. Bumba, 764 F. Supp. 1263, 1279 (N.D. Ill.
1991), aff’d, 983 F.2d 1072 (7th Cir. 1992), also cited by the
Borrowers, did allow a defendant to assert as a defense
to an action to recover on a promissory note that the
securities were sold in violation of the securities laws.
However, our affirmance in Johnston did not adopt or even
34 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

address the district court’s ruling that the defendants
prevailed based on the securities law violations. Instead,
we affirmed on the alternate ground that plaintiffs failed
to prove the amount due on the note.
The Borrowers then argue that they may assert
the defense of illegality to an action on the Notes under
Illinois law. While Illinois recognizes illegality as an
affirmative defense to a breach of contract action, the
defense applies where the contract itself is illegal. See,
e.g., Kramer v. McDonald’s Sys., Inc., 396 N.E.2d 504, 508-09
(Ill. 1979) (holding Illinois’s Uniform Limited Partner-
ship Act prohibited a limited partner from taking col-
lateral to secure repayment of his capital contributions
and franchisor had standing to assert this as a defense
to limited partner’s conversion action); Cothran v. Ellis,
125 Ill. 496, 498-99 (1888) (assuming that a note repre-
senting debt for gambling transactions would be
against public policy); Am. Buyers Club of Mt. Vernon, Ill.,
Inc. v. Grayling, 368 N.E.2d 1057, 1058-61 (Ill. App. Ct. 1977)
(holding that an unconscionable contract for “member-
ship” in a “buyer’s club” that violated Regulation Z and
the Truth in Lending Act in failing to disclose finance
charges was void and note was unenforceable). Further-
more, where, as here, the statute allegedly violated “is
federal, federal law determines . . . whether the statute
was violated but also, if so, and assuming the statute
itself is silent on the matter, the effect of the violation
on the enforceability of the contract.” N. Ind. Pub. Serv. Co.
v. Carbon Cnty. Coal Co., 799 F.2d 265, 273 (7th Cir. 1986)
(“supposing that the contract does violate section 2(c)
of the Mineral Lands Leasing Act, this does not neces-
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 35

sarily make it unenforceable”); see also Kelly v. Kosuga, 358
U.S. 516, 519 (1959) (“the effect of illegality under a
federal statute is a matter of federal law”); Sola Elec. Co.
v. Jefferson Elec. Co., 317 U.S. 173, 176 (1942) (“When
a federal statute condemns an act as unlawful the
extent and nature of the legal consequences of the con-
demnation . . . are . . . federal questions, the answers to
which are to be derived from the statute and the federal
policy which it has adopted.”). Thus, the effect of an
alleged violation of Regulation G or U on the enforce-
ability of the Notes is determined by federal—not Illinois—
law.
The Borrowers next argue that § 29(b) permits them to
assert violations of Regulations G and U as affirmative
defenses. The principal authority they cite is TAMA v.
Lewis, which held that there is a limited private remedy
under the Investment Advisers Act of 1940 to void an
investment advisors contract, see 15 U.S.C. § 80b-1-15. In
so holding, the Court stated that the Act was “intended
to benefit the clients of investment advisers.” 444 U.S. at
17. The Court said:
the statutory language itself fairly implies a right
to specific and limited relief in a federal court.
By declaring certain contracts void, § 215 by its
terms necessarily contemplates that the issue of
voidness under its criteria may be litigated some-
where. At the very least Congress must have
assumed that § 215 could be raised defensively
in private litigation to preclude the enforcement
of an investment advisers contract.
36 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

Id. at 18. The Court stated that “this Court has previously
recognized that a comparable provision, § 29(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78cc(b),
confers a ‘right to rescind’ a contract void under [that
statute].” Id. at 18-19 (citing Mills, 396 U.S. at 388).
In Mills, stockholders sought to set aside a corporate
merger, alleging it was accomplished through a
materially false and misleading proxy statement in vio-
lation of the Securities and Exchange Act’s disclosure
requirements. The Court observed that the provision
relating to proxies was “intended to promote ‘the
free exercise of the voting rights of stockholders’ by
ensuring that proxies would be solicited with ‘explana-
tion . . . of the real nature of the questions for which
authority to cast his vote is sought.’ ” Mills, 396 U.S. at 381.
The Court held that the stockholders had a cause of
action; to hold otherwise would frustrate the con-
gressional purpose. Id. at 382-83. The Court instructed
lower courts that this conclusion “implie[d] nothing
about the form of relief to which they may be entitled,” id.
at 386, and in selecting a remedy, courts “should exercise
the sound discretion which guides the determinations
of courts of equity[.]’ ” Id.; see also Rondeau v. Mosinee Paper
Corp., 422 U.S. 49, 64 (1975) (“Mills could not be plainer
in holding that the questions of liability and relief are
separate in private actions under the securities laws,
and that the latter is to be determined according to tradi-
tional [equitable] principles”). Mills explained that § 29(b)
did not require that the merger be set aside just because
the merger agreement was a “void” contract.” Id. at 386-87.
Rather, it precluded the guilty party from enforcing the
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 37

contract against “an unwilling innocent party” and ren-
dered “the contract merely voidable at the option of the
innocent party.” Id. at 387. Neither TAMA nor Mills
involved an alleged violation of Regulation G or U. Thus,
neither case recognized that investors are among those
the Regulations were designed to protect. (And it was
not determined that the Borrowers were “unwilling
innocent parties” anyway.)
The Borrowers also cite to Sundstrand Corp. v. Sun Chem.
Corp., 553 F.2d 1033, 1036-37, 1051 (7th Cir. 1997), and
Sundstrand Corp. v. Standard Kollsman Indus., Inc., 488 F.2d
807, 816 (7th Cir. 1973), for the proposition that “Section
29(b) can be asserted defensively . . . to defeat the enforce-
ment of contracts, and if successful, outright dismissal of
the contract claim . . . .” In Sun Chemical Corp., we affirmed
the dismissal of a counterclaim based on a stock option
transfer agreement that was made in violation of § 10(b)
and Rule 10b-5. We concluded that the agreement was
void under § 29(b) based on the violations. 553 F.3d at
1051. However, courts have implied from § 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 a private
right of action for fraud. See Blue Chip Stamps v. Manor
Drug Stores, 421 U.S. 723, 731 (1975). As discussed, the
Borrowers have no private right of action to assert Reg-
ulation G or U violations.
The Borrowers also rely on § 29(c), which they say
implies a right to assert a Regulation G or U violation
38 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

defensively under § 29(b). 7 Notably, no authority is
offered to support this view. And nothing in the Securities
Exchange Act compels the conclusion that Congress
specified in § 29(c) the few circumstances under which a
contract made or performed in violation of § 7(d) may
escape invalidation under § 29(b). Moreover, § 29(c)
preserves the validity of a loan made in violation of the
margin regulations unless the person making the loan
has “actual knowledge” that the loan violated the reg-
ulations. The record at this stage does not establish that
the Bank or Comdisco had such knowledge. The district
court found that Comdisco and the Bank obtained the
advice of outside counsel, who obtained an opinion
that the loans did not violate the regulations, before
making any representations as to the SIP Plan’s compli-
ance. Such a finding seems at odds with an inference
that Comdisco or the Bank had actual knowledge of the
alleged violations of the regulations.
We find no error in the district court’s conclusion that
the Borrowers lack standing to raise a violation of Regula-
tion G or U as an affirmative defense.

7
Section 29(c) provides in part: “Nothing in this chapter shall
be construed (1) to affect the validity of any loan or extension
of credit . . . unless at the time of the making of such loan or
extension of credit . . . the person making such loan or exten-
sion of credit . . . shall have actual knowledge of facts by
reason of which the making of such loan or extension of
credit . . . is a violation of the provisions of this chapter or any
rule or regulation thereunder . . . .” 15 U.S.C. § 78cc(c).
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 39

C. Section 10(b) of the Securities Exchange Act of
1934 and SEC Rule 10b-5 8
The Borrowers argue that the grant of summary judg-
ment in favor of the Trustee on the § 10(b) illegality
defense should be vacated as well. The Trustee sought
summary judgment on this defense solely on the basis
that the Borrowers could not prove any false statement
(“falsity”). He did not contest that they could establish
the intent to deceive or reckless disregard for the truth
(“scienter”). Then, in reply, he argued that because he
had sought summary judgment based on the falsity
element, it became the Borrowers’ burden to establish
all elements of the § 10(b) defenses.

8
Section 10(b) makes it “unlawful for any person, directly
or indirectly, . . . [t]o use or employ, in connection with the
purchase or sale of any security . . . any manipulative or
deceptive device or contrivance in contravention of such rules
and regulations as the [Securities and Exchange] Commission
may prescribe as necessary or appropriate in the public inter-
est or for the protection of investors.” 15 U.S.C. § 78j(b). SEC
Rule 10b-5 makes it “unlawful for any person . . . (a) To
employ any device, scheme, or artifice to defraud, (b) To
make any untrue statement of a material fact or to omit to
state a material fact necessary in order to make the state-
ments made, in the light of the circumstances under which
they were made, not misleading, or (c) To engage in any act,
practice, or course of business which operates or would
operate as a fraud or deceit upon any person, in connection
with the purchase or sale of any security.” 17 C.F.R. § 240.10b-5.
40 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

As the moving party, however, the Trustee bore the
initial burden of identifying the basis for seeking sum-
mary judgment. See Logan v. Commercial Union Ins. Co., 96
F.3d 971, 979 (7th Cir. 1996) (“Only after the movant
has articulated with references to the record and to the
law specific reasons why it believes there is no genuine
issue of material fact must the nonmovant present
evidence sufficient to demonstrate an issue for trial.”)
(citing Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986)). The
party opposing summary judgment is not required to
respond to grounds that were not raised by the movant.
See, e.g., Sublett v. John Wiley & Sons, Inc., 463 F.3d 731, 736
(7th Cir. 2006) (“[I]f the moving party does not raise
an issue in support of its motion for summary judg-
ment, the nonmoving party is not required to present
evidence on that point, and the district court should not
rely on that ground in its decision.”); Pourghoraishi v.
Flying J, Inc., 449 F.3d 751, 765 (7th Cir. 2006) (“The
party opposing summary judgment has no obligation to
address grounds not raised in a motion for summary
judgment.”). The fact that the Borrowers filed an expan-
sive response brief, a Rule 56.1 response, and a statement
of additional facts does not alter this rule. The responsive
filings did not create a right in the Trustee to raise in
reply new challenges to the Borrowers’ evidence as to
all other aspects of the § 10(b) illegality defense. Tellingly,
the Trustee offers no authority to support his novel
view that this “rather unusual course of the motion for
summary judgment” made it necessary and proper for
him to attack the additional elements on which he had
taken a pass initially. Granting summary judgment on
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 41

the basis of the newly raised scienter argument, as the
district court did, raises important fairness concerns. And
this is especially true where the Borrowers had alerted
the district court in their motion to strike that they had
additional evidence supporting the scienter element.
The Trustee asserts that the Borrowers deprived them-
selves of the opportunity to present evidence on the
scienter element: They offered some, but not all, of their
evidence to establish scienter. We are unaware of any
authority that required the Borrowers to marshal all the
evidence that they had on an issue that was not asserted
by the party seeking summary judgment. Had the
scienter issue been properly placed in issue, the Bor-
rowers may have presented other evidence, or sought an
extension and discovery under Rule 56(f). The Trustee
criticizes the Borrowers for not seeking leave to file a sur-
reply. But “there is no requirement that a party file
a sur-reply to address an argument believed to be im-
properly addressed. . . .” Hardrick v. City of Bolingbrook,
522 F.3d 758, 763 n.1 (7th Cir. 2008). And a party need not
“seek leave to file a sur-reply in order to preserve an
argument for purposes of appeal. . . . ” Id.
The Borrowers were not wrong in their understanding
of their summary judgment obligations. While their
choice may have been strategic—no one doubts that they
could have sought leave to file a sur-reply and/or filed
a Rule 56(f) affidavit—we are not about to insist that
they have done so when the rules and case law give
them options on how to proceed. Although the Borrowers
addressed the newly raised arguments in their motion
42 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

to strike, the assertion of argument did not obligate them
to present all of their evidence. Argument is not a substi-
tute for facts supported by evidence as necessitated by
Rule 56. Summary judgment is proper only if, inter alia,
the nonmoving party has adequate notice and a rea-
sonable opportunity to present its evidence in response
to the movant’s summary judgment materials. Cf. Miller
v. Herman, 600 F.3d 726, 733 (7th Cir. 2010); Golden
Years Homestead, Inc. v. Buckland, 557 F.3d 457, 462 (7th
Cir. 2009). The Borrowers did not have such an opportu-
nity to be heard on the scienter issue.
On a related point, the Borrowers indicate that the
district court held them to a heightened standard of
proof of scienter. (“Scienter” refers to “a mental state
embracing intent to deceive, manipulate, or defraud.”
Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976).)
Citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551
U.S. 308, 323 (2007), the district court looked for evi-
dence that would raise a “strong inference” of scienter.
Tellabs dealt with the heightened pleading standard
for private securities fraud suits under the Private Se-
curities Litigation Reform Act (“PSLRA”), § 21D(b)(2) of
which provides that a complaint shall allege “facts
giving rise to a strong inference that the defendant
acted with the required state of mind.” 15 U.S.C. § 78u-
4(b)(2). Neither the PSLRA nor Tellabs changed the well-
established summary judgment standards. See Mizzaro
v. Home Depot, Inc., 544 F.3d 1230, 1239 (11th Cir. 2008)
(noting that the PSLRA pleading standard is not the
same as the summary judgment standard). Indeed,
the Court expressly stated that “the test at each stage
[pleading, summary judgment, and judgment as a
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 43

matter of law] is measured against a different backdrop.”
Tellabs, 551 U.S. at 324 n.5. On summary judgment, a
court may not weigh the evidence or decide which infer-
ences should be drawn from the facts. Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 255 (1986); Kodish v. Oakbrook
Terrace Fire Prot. Dist., 604 F.3d 490, 507 (7th Cir. 2010).
Rather, the court’s task is a pointed one: to determine
based on the record whether there is a genuine issue
of material fact requiring trial. Celotex Corp., 477 U.S. at 330;
Anderson, 477 U.S. at 249; Kodish, 604 F.3d at 507. The
district court erred in holding the Borrowers to proof
of facts that would raise a strong inference of scienter.
The district court had the discretion to rule on the
summary judgment motions without relying on the
newly raised arguments in the Trustee’s reply. To be
sure, upon reviewing the Trustee’s reply brief and
learning that the newly raised arguments might have
merit, the court could have offered the Borrowers an
opportunity to file a sur-reply and additional evidence.
It did not. Instead, it denied their motion to strike
as moot. But the Borrowers’ legitimate arguments
against consideration of the newly asserted grounds for
summary judgment did not become moot by the simple
fact that the district court (1) decided to consider them and
(2) decided them favorably toward the Trustee. The
analogy offered by the Borrowers is apt: “It would be as if
the plaintiff moved for a jury trial and the judge, without
ruling on the motion, conducted a bench trial, rendered
judgment for the defendant, and then dismissed the
plaintiff’s motion as moot.” Aurora Loan Servs., Inc. v.
Craddieth, 442 F.3d 1018, 1027 (7th Cir. 2006). And because
44 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

the district court’s decision does not explain why it
thought the motion to strike was moot, we are unsure how
much consideration was given to that motion.
The Trustee submits that we can affirm the grant of
summary judgment on the § 10(b) illegality defense on
several alternative grounds—there is no evidence of any
fraudulent misrepresentation, the Borrowers seek an
unwarranted extension of the private right of recovery
under § 10(b), they have no evidence of a manipulative
or deceptive device, the alleged misrepresentations re-
garding Regulations G and U were not made “in con-
nection with the purchase or sale” of a security, the
Borrowers cannot prove reliance, and they cannot show
that any alleged misrepresentation was material. The
Trustee cites Ruth v. Triumph P’shps, 577 F.3d 790 (7th
Cir. 2009), for the proposition that “ ‘[w]e may affirm
summary judgment on any basis supported in the re-
cord.’ ” Id. at 796 (quoting Klebanowski v. Sheahan, 540
F.3d 633, 639 (7th Cir. 2008)). This statement was made
in the context of addressing the appellant’s claim that the
appellee could not make a particular argument because
it had not cross-appealed—a procedural situation quite
different from what we have here. Ruth and the cases
it cites stand for the broad proposition that we may
affirm a judgment on a basis supported in the record
even when the district court did not rely on that basis.
Neither Ruth nor any case it cites addresses whether
we may affirm a grant of summary judgment on alterna-
tive grounds that were not raised until the filing of a
reply brief. Although “we may affirm a grant of sum-
mary judgment on any alternative basis found in the
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 45

record as long as that basis was adequately considered by
the district court and the nonmoving party had an op-
portunity to contest it,” Best v. City of Portland, 554
F.3d 698, 702 (7th Cir. 2009), we may not affirm on an
alternative basis that was not raised in support of sum-
mary judgment, id. at 703 (reversing grant of summary
judgment and remanding where “there [was] not enough
of a record . . . to affirm on an alternative basis”).
Here, the alternative bases argued by the Trustee
were not raised in the district court until the filing of the
reply, and the Borrowers did not have an adequate op-
portunity to contest them. Further, it is unclear whether
the district court gave any consideration to these other
grounds. Thus, it would be unfair to affirm summary
judgment on these alternative bases, and we decline
the Trustee’s invitation to do so.

D. Section 17(a) of Securities Act of 1933
As an affirmative defense, the Borrowers claimed that
the Notes are unenforceable because Bank One and
Comdisco violated § 17(a) of the Securities Act of 1933, 15
U.S.C. § 77q(a). Specifically, they alleged that “[t]he
materially false and misleading statements, omissions,
and course of conduct of Bank One and Comdisco were
made and employed as part of a scheme in order to
deceive the SIP Participant, to obtain the SIP Participant’s
property, and to operate as a fraud upon the SIP Partici-
pant . . . .” The version of § 17(a) in effect at the time of
the transactions at issue read:
46 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

It shall be unlawful for any person in the offer or
sale of any securities by the use of any means or
instruments of transportation or communication
in interstate commerce or by use of the mails,
directly or indirectly—
(1) to employ any device, scheme, or artifice to
defraud, or
(2) to obtain money or property by means of any
untrue statement of a material fact or any omission
to state a material fact necessary in order to make
the statements made, in light of the circumstances
under which they were made, not misleading, or
(3) to engage in any transaction, practice, or
course of business which operates or would oper-
ate as a fraud or deceit upon the purchaser.
15 U.S.C. § 77q(a).
The Borrowers contend that the grant of summary
judgment on their § 17(a) defense should be vacated
because the district court did not articulate any basis
independent of its holding that Regulations G and U were
not violated for granting summary judgment on that
theory. The Trustee responds that the court relied on
other bases and implies that it concluded that the Bor-
rowers failed to establish that Comdisco had the
requisite scienter to establish a § 17(a) violation. He also
argues that the Borrowers have waived any other argu-
ments they may have regarding the § 17(a) defense by
failing to assert them on appeal, which is correct. See
Local 15, Int’l Bhd. of Elec. Workers v. Exelon Corp., 495 F.3d
779, 793 (7th Cir. 2007).
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 47

The district court’s reasoning for granting summary
judgment on the § 17(a) defense is cryptic. The Trustee
may defend the district court’s judgment based on any
argument raised below, Truhlar v. U.S. Postal Serv., 600
F.3d 888, 892 (7th Cir. 2010), provided “the alternative
basis has adequate support in the record,” Camp v. TNT
Logistics Corp., 553 F.3d 502, 505 (7th Cir. 2009). However,
the Trustee has chosen to defend on only one ground:
the Borrowers’ failure to establish that “Comdisco had an
intent to deceive, manipulate or defraud.” (Appellee Br. 59
(AA:12.)) The problem with this: as discussed, the
district court erroneously granted summary judgment on
the ground that the Borrowers failed to offer evidence
of scienter.9 Therefore, the grant of summary judgment
on the § 17(a) defense should be vacated.

9
Proof of scienter is an element of a violation of § 17(a)(1), but
not § 17(a)(2) or (a)(3). Aaron v. SEC, 446 U.S. 680, 695-97 (1980);
see also Mueller v. Sullivan, 141 F.3d 1232, 1235 (7th Cir. 1998).
The Borrowers’ allegations that the “materially false and
misleading statements, omissions, and course of conduct of
Bank One and Comdisco were made and employed as part of a
scheme to deceive the SIP Participant . . . and to operate as a
fraud upon the SIP Participant” (SA:136) seem to fall within
§ 17(a)(1). In their reply, the Borrowers imply that their
defense falls under § 17(a)(2) or (a)(3). The district court
may consider the matter if necessary; we are not deciding the
issue here.
48 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

E. Extension of the Court’s Duncan/Paul Rulings
The Borrowers contend that the district court erred in
extending its December 2007 summary judgment rulings
in Duncan/Paul. The court’s opinion states that “[t]he
instant defendants raise the same counterclaims and
defenses and the court’s ruling in [Duncan/Paul] will not
be revisited” (AA:7) and that they “have raised a
number of arguments, all of which have been rejected
in earlier opinions and will not be addressed again.”
(AA:13.) The Borrowers argue that such language
shows that the district court did not reach the substance
of their defenses but merely gave its earlier rulings pre-
clusive effect. Although one might draw such a conclu-
sion if the quoted language is taken out of context, we
do not read this language in a vacuum. The record
reveals that the district court gave the Borrowers an
opportunity to present their own arguments and
evidence and gave them some consideration. We under-
stand the district court as saying that it was adopting
both its prior rulings and its supportive reasoning.
(Whether the grant of summary judgment was proper
based on the same grounds on which it was granted
against Duncan and Paul is another question addressed
below.)
The Borrowers challenge the grant of summary judg-
ment on the fraud set-off defense, which they assert was
based on a lack of evidence of reliance (an essential ele-
ment) by Duncan or Paul. See Linhart v. Bridgeview Creek
Dev., Inc., 909 N.E.2d 865, 870 (Ill. App. Ct. 2009). In the
Duncan/Paul decision, the district court did note Duncan’s
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 49

and Paul’s lack of an attempt to show reliance on the
alleged misrepresentations. But the principal ground
for the court’s ruling was that the alleged misrepresenta-
tions were representations of legal opinion, which
cannot support a claim for fraud. (SA:178 (citing City
of Aurora v. Green, 467 N.E.2d 610, 613 (Ill. App. Ct. 1984)
(“As a general rule, one is not entitled to rely upon a
representation of law since both parties are presumed
to be equally capable of knowing and interpreting the
law.”)). Thus, it is not surprising that the court did
not view the Borrowers’ declarations, which seem to
support a reasonable inference of reliance, as requiring
a result different from that reached in Duncan/Paul.
(The Trustee does not argue that the Borrowers’ affidavits
could not support a reasonable inference of justifiable
reliance; he merely criticizes them as self-serving. (See
Appellee’s Br. 60-61 (recognizing that appellants offered
“affidavits that detail their purported reliance on
the Bank’s alleged false and misleading statement re-
garding compliance with the margin regulations”))). As a
result, he has waived any such argument for purposes
of this appeal.10 See, e.g., O’Neal v. City of Chicago, 588
F.3d 406 (7th Cir. 2009) (failure to make argument on
appeal amounts to waiver).

10
In connection with the § 10(b) illegality defense, the
Trustee did assert that the Borrowers could not show reliance.
But he has not defended the application of the Duncan/
Paul rulings to the appellants based on non-reliance, and we
will not make a party’s argument for him. Vaughn v. King,
167 F.3d 347, 354 (7th Cir. 1999) (“It is not the responsibility
of this court to make arguments for the parties.”).
50 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

Nonetheless, the district court’s analysis falters. The
Borrowers argue that they identified a line of cases that
recognizes an exception to the general rule that legal
opinions cannot support a fraud claim, which the
district court never considered. See West v. W. Cas. & Sur.
Co., 846 F.2d 387, 394 (7th Cir. 1988). In West, we recog-
nized that under Illinois law, “[a] statement that,
standing alone, appears to be a statement of opinion,
nevertheless may be a statement of fact when con-
sidered in context.” Id. at 393. We then quoted an Illinois
Supreme Court opinion:
Wherever a party states a matter which might
otherwise be only an opinion, but does not state
it as the expression of the opinion of his own,
but as an affirmative fact material to the transac-
tion, so that the other party may reasonably treat
it as a fact and rely upon it as such, then the state-
ment clearly becomes an affirmation of the fact
within the meaning of the rule against fraudulent
misrepresentation.
Id. (quoting Buttitta v. Lawrence, 178 N.E. 390, 393 (Ill.
1931)). Thus, whether a statement is one of fact or
opinion is an issue of fact. Id. (“Whether a statement is
one of fact or of opinion depends on all the facts and
circumstances of a particular case.”). Factors to be consid-
ered in determining this issue include “the access of the
parties to outside information,” the parties’ relative
sophistication, and whether the speaker has specialized
knowledge. Id. at 393-94. Therefore, “it is not ‘the form of
the statement which is important or controlling, but the
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 51

sense in which it is reasonably understood.’ ” Id. at 394
(quoting Prosser and Keeton on Torts § 109, at 755
(W. Keeton 5th ed. 1984)). The district court’s opinion
does not reflect consideration of whether the alleged
misrepresentations should be considered statements of
fact or opinion under this authority.
The Trustee further argues that the district court
did not have to address the fraud set-off defense in order
to rule in his favor because the court concluded that
the Borrowers failed to present evidence of scienter,
which is necessary to prove a fraud set-off claim. As
discussed, ruling on the basis of a lack of scienter was
error. E.g., Sublett, 463 F.3d at 736 (“[I]f the moving
party does not raise an issue in support of its motion
for summary judgment, the nonmoving party is not
required to present evidence on that point, and the
district court should not rely on that ground in its deci-
sion.”). So, too, it would be error to extend the Duncan/
Paul rulings on the basis of a lack of evidence of scienter—
particularly where the Trustee did not even argue below
that a failure of proof of scienter warranted summary
judgment on the fraud set-off defense. Cf. Best, 554 F.3d
at 702. The district court erred in granting summary
judgment to the Trustee on the fraud set-off defenses.
The Borrowers also challenge the district court’s failure
to address the merits of their negligent misrepresenta-
tion set-off defense. In the Duncan/Paul summary judg-
ment ruling, the court held that the record did not
support the claim that either Comdisco or the Bank was
“in the business of supplying information for the
52 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

guidance of others in their business transactions” (SA:182),
which is necessary for that defense. The Borrowers
submit that they had such evidence but the court did not
consider it. The Trustee has not challenged this asser-
tion on appeal, and our review of the materials cited by
the Borrowers indicates that they may have enough
evidence to raise an issue of fact on this matter. The
questions whether they have presented enough evidence
to satisfy the “in the business of supplying informa-
tion” element and whether they can ultimately prevail
on their negligent misrepresentation defense are left for
the district court’s determination.

F. Excuse-of-Nonperformance Defenses
The Borrowers’ next challenge the grant of summary
judgments on their excuse-of-non-performance defenses.
Under Illinois law, they argue, the Bank’s compliance
with § 17(a), § 10(b), and Regulation U were implied
terms of the parties’ contracts and, by failing to comply
with these laws, the Bank breached the contracts, excusing
their performance.1 1 The Trustee does not dispute that
under Illinois law, laws in existence at the time a
contract is executed, absent contractual language to the
contrary, are deemed part of the contract “as if they were
expressly . . . therein.” Selcke v. New England Ins. Co., 995
F.2d 688, 689 (7th Cir. 1993); see also Ill. Bankers Life Ass’n

11
It seems that the district court misunderstood the defense
as based on a prior breach of contract by Comdisco.
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 53

v. Collins, 341 Ill. 548, 552 (1930). Thus, § 17(a), § 10(b)
and Regulation U are implied terms of the Notes. The
Borrowers then assert that “a party cannot sue for breach
of contract without alleging and proving that he has
himself substantially complied with all the material
terms of the agreement. . . .” George F. Mueller & Sons, Inc.
v. N. Ill. Gas Co., 336 N.E.2d 185, 189 (Ill. Ct. App. 1975).
Yet only a material breach of a contract term will ex-
cuse the other party’s nonperformance. Elda Arnhold &
Byzantio, L.L.C. v. Ocean Atl. Woodland Corp., 284 F.3d
693, 700 (7th Cir. 2002); Sahadi v. Cont’l Ill. Nat’l Bank &
Trust Co. of Chi., 706 F.2d 193, 196 (7th Cir. 1983) (referring
to this proposition as “black letter law in Illinois”).
The Trustee responds that the Borrowers have waived
any breach by accepting the loan proceeds, participating
in the SIP Program, and failing to object to the SIP
Program or Notes until they had lost the opportunity to
profit. As the party claiming waiver, the Trustee had
the burden to prove that the Borrowers (1) knew of their
right to assert the Bank’s breaches, and (2) intended
to waive the alleged breaches. Ryder v. Bank of Hickory
Hills, 585 N.E.2d 46, 49 (Ill. 1991). Yet he did not do so
in this court or below. Furthermore, the Trustee’s
reliance on the Borrowers’ failure to raise any objection
to the SIP Program or Notes reveals the weakness of his
position. “An implied waiver may arise when conduct
of the person against whom waiver is asserted is incon-
sistent with any other intention than to waive it.” Wolfram
P’ship, Ltd. v. LaSalle Nat’l Bank, 765 N.E.2d 1012, 1026
(Ill. App. Ct. 2001). Implied waiver arises “where (1) an
unexpressed intention to waive can be clearly inferred
54 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

from the circumstances or (2) the conduct of the waiving
party has misled the other party into a reasonable belief
that a waiver has occurred.” Id. The Trustee has not
identified the facts in the record that would support a
finding of implied waiver. Thus, he has not adequately
developed this waiver argument, and the result is a
waiver of the argument. See, e.g., Argyropoulos v. City of
Alton, 539 F.3d 724, 738 (7th Cir. 2008).
With respect to the Bank’s alleged violations of § 17(a)
and § 10(b), the Trustee has argued that the SIP Loans
were not illegal, emphasizing alleged compliance with
the margin regulations. (Appellant’s Br. 61 (“Defendants
finally argue that their failure to pay on the SIP Notes
is excused because the Bank breached its own con-
tractual obligations by not complying with the margin
regulations.”)). But the excuse-of-non-performance de-
fense is based not only on alleged margin rule viola-
tions but also on violations of § 17(a) and § 10(b). And
while the Trustee argues that the Borrowers were not
in the zone of interests protected by the margin regula-
tions, he does not make such an argument with respect
to § 17(a) or § 10(b). Given our conclusion that the grant
of summary judgment on the § 17(a) and § 10(b) de-
fenses was error, the grant of summary judgment on
the excuse-of-non-performance defense was also error. It
remains to be decided, though, whether the Bank’s
alleged noncompliance with applicable laws was a
material breach.
Assuming a violation of Regulation U, the Trustee
argued below that under the principles of ADM Investor
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 55

Services, such a violation would not excuse the Borrowers’
nonperformance. The district court agreed, concluding
that like the investor in ADM, the Borrowers were not
in the “zone of interests” protected by the margin regula-
tions. The Borrowers maintain that reliance on ADM
Investor Services was misplaced because the margin rule
violated in that case (and in Merrill Lynch, Pierce, Fenner &
Smith, Inc. v. Brooks, 548 F.2d 615 (5th Cir. 1977) (per
curiam) cited by ADM), was not incorporated into
the parties’ contract. That is a difference, but it is not
dispositive. In ADM Investor Services, we concluded that
the trader was not excused from paying on his futures
contract because of the merchant’s noncompliance with
the board of trade’s margin requirements. ADM Investor
Servs., 515 F.3d at 755-57; see also Thomson McKinnon
Secs., Inc. v. Clark, 901 F.2d 1568, 1570-71 (11th Cir. 1990)
(holding trader could not defend against broker’s action
for nonpayment based on broker’s alleged violation of
exchange rules by overextending credit where the rules
were incorporated into the parties’ agreements and the
trader asked the broker to ignore a rule). In reaching this
conclusion, we reasoned that “margin requirements in
futures markets are not designed to protect investors . . .
from adverse price movements. . . . [B]alky customers
are not in the zone of interests protected by margin-
posting requirements.” ADM Investor Servs., 515 F.3d
at 756-57.
The Borrowers assert that Regulation U was not
intended to protect banks, but that it and other margin
regulations were intended to “protect the general public.”
(Appellant Br. 77.) They take this language from ADM
56 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.

Investor Services but fail to put it into proper context.
There, we said that Federal Reserve margin regulations
“could be seen as an effort to protect the general public
from the effects of investors’ and brokers’ activities.” Id.
at 756. Thus, we understood that margin regulations
such as Regulation U were intended to protect “the
general public”—not individual investors such as the
Borrowers. Our recognition that the Federal Reserve
regulates securities transactions “as part of its control of
the aggregate money supply,” id., confirms this. It is
difficult to see how excusing the Borrowers’ performance
here would protect the general public, rather than
merely protect the Borrowers from what turned out to
be a bad investment. Nor can we see how excusing re-
payment of the loans would lend stability to the ag-
gregate money supply.

III. CONCLUSION
For the foregoing reasons, the district court’s grant of
summary judgments in favor of the Trustee are A FFIRMED
with respect to the Borrowers’ lack of standing to assert
the alleged violations of Regulations G and U as affirma-
tive defenses, but V ACATED with respect to the following
affirmative defenses: illegality under § 10(b) of the Securi-
ties Exchange Act of 1934 and SEC Rule 10b-5, illegality
under § 17(a) of the Securities Act of 1933, set-off for
fraud, set-off for negligent misrepresentation, and excuse-
of-nonperformance, and R EMANDED for further pro-
ceedings not inconsistent with this opinion. Given our
disposition of the appeals from the grants of summary
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 57

judgment, the appeals from the Amended Judgments
are D ISMISSED A S M OOT.
We appreciate the substantial efforts that the district
court and counsel have expended in these matters to
this point. However, for reasons discussed above, there
is more to be done before this litigation can be put to rest.

10-18-10