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-727, -736, -740, -746,
-763, -764, -767—Robert W. Gettleman, Judge.
A RGUED A PRIL 6, 2010—D ECIDED JUNE 28, 2011
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 grants of summary
judgment in favor of the plaintiff-appellee, John W.
Costello, Litigation Trustee under the Comdisco Litigation
2 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
Trust, and against defendants-appellants in an action to
enforce certain promissory notes. We originally issued an
opinion on October 18, 2010, affirming in part and
vacating in part. Defendants-appellants filed a petition
for panel rehearing, and we requested an answer, which
was filed. By separate order we granted the petition and
vacated the October 18, 2010 opinion and final judgment.
For the reasons that follow, we vacate the grants of sum-
mary judgment in favor of the Trustee and remand for
further proceedings consistent 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 (the “Bank”). To secure the loans, the Borrowers
executed promissory notes (“SIP Notes” or “Notes”) in
their personal capacities. Comdisco chose to deal with
Bank One because of the bank’s experience in developing
and implementing SIPs for other companies.
Comdisco guaranteed the loans as provided in a
Facility and Guaranty Agreement between Comdisco and
the Bank (the “Facility Agreement”). The Comdisco
guaranty was “a condition to the loan arrangement” with
the Bank. (SA:244.) Comdisco received the loan proceeds
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 3
directly from the Lenders and held the SIP shares. It
seems probable that without the guaranty, most of the
loans would not have been made. SIP participants were
required to purchase a minimum of 8,000 shares of
Comdisco stock. At $34.50 per share, that resulted 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 borrower (05-745) for almost ten times
his net worth, and to two other borrowers (05-735 &
05-726) for more than five times their net worths.
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 explaining the terms of
the SIP Program (the “SIP Materials”). The SIP presenta-
tion and SIP Materials informed the prospective partici-
pants of various restrictions on their ability to sell the
SIP shares and that they would be obligated for a
specified time period to share any gains on the sale of
the shares with Comdisco. More specifically, they were
informed of restrictions including (a) Comdisco would
hold a borrower’s shares until the borrower’s loan
from Bank One was discharged; (b) the borrower had
to deliver to Comdisco a stock power, endorsed in blank,
concerning his or her shares (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
4 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
had to execute an irrevocable Letter of Direction with
Comdisco and the Bank to ensure that all cash dividends
on the shares went into the borrower’s account at Bank
One to pay the principal and 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 SIP
Program was structured so that, with a few exceptions, the
SIP shares could not be sold during the first year of the
program. 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]
employment or [sold] the shares within three (3) years
after purchase. In either event, the Company [was]
entitled to 50% of any gain upon sale.” (SA:207.) The SIP
participants were required to notify Comdisco of any
intention to sell their SIP shares because Comdisco had
the right to repurchase the SIP shares. The SIP Materials
indicated that the promissory notes to be executed in
connection with the loans had a fixed maturity date and
a final balloon payment of principal and interest due
at maturity. The materials also indicated that Comdisco
would guarantee the SIP Notes.
The SIP Materials stated that “the Loan is not secured
by the stock” (SA:226) and 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
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 5
technically secured by the securities . . . and this is not a
margin account.” (SA:355.) During the SIP presentation,
however, Comdisco was 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.) In addition, the language of the Notes reflected
that the stock was “Restricted Stock” and the Facility
Agreement, which was incorporated into the terms of
the Notes, likewise referred to the SIP shares as
“Restricted Stock.”
Comdisco 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 incon-
sistent with Regulation G or Regulation U; and
(e) Comdisco’s performance of its obligations under each
Loan Document (including the Facility Agreement, each
6 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
Note, and each Letter of Direction), to which it was a
party would violate any applicable legal requirement.
The SIP Materials included Comdisco, Inc.’s 1998 Stock
Option Program, which stated in a section titled, “No
Illegal Transactions”:
The Program and all Stock Options granted pursu-
ant 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 Par-
ticipant 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:237-38.)
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 . . . represent that you have care-
fully reviewed the Facility Agreement.” (SA:225.) In
the Facility Agreement, Comdisco represented and war-
ranted that “[t]he execution and delivery of, and perfor-
mance 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 [or] conflict with . . . any Require-
ment of Law,” (SA:283), which included “the Securities
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 7
Act of 1933, the Securities Exchange Act of 1934, [and]
Regulations G [and] U . . . of the Board of Governors of
the Federal Reserve System.” (SA:276.) Comdisco further
represented and warranted:
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:283-84.)
In discussing Comdisco’s guaranty, the Facility Agree-
ment repeatedly referred to the “collateral securing the
Guaranteed Debt.” However, the Agreement also pro-
vided:
No Collateral. Notwithstanding any refer-
ence herein to any collateral securing any of the
Guaranteed Debt, it is acknowledged that, on
the date hereof, neither the Company nor any
Borrower has granted, or has obligation to grant,
any security interest or other lien on any of its
property (including, without limitation, the Re-
stricted Stock) to the Lenders as security for the
Guaranteed Debt.
(SA:290.) “Guaranteed Debt” included the principal of
and interest on the loans to the borrowers, plus any other
fees the Borrowers owed pursuant to the Notes. (SA:288.)
The Borrowers elected to participate in the SIP Pro-
gram, executing a SIP option exercise form and a Letter of
8 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
Direction, authorizing the Bank to pay the proceeds of the
loan to Comdisco. Each Borrower also executed an SIP
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 transferred to its Registrar
and Transfer Agent, Mellon Investor Services, LLC, for
the Borrowers’ benefit. 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, the stock was trading at $53
per share. Several SIP participants sold their shares at
a price that not only satisfied their 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. 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’ assignment to the Comdisco
Litigation Trustee of all rights under the Notes
against the Borrowers. The bankruptcy court approved
the settlement, and the district court held that the
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 9
Trustee is the holder of the Notes with all rights of en-
forcement.
In 2005, the Trustee filed separate actions against each
Borrower, seeking to enforce the SIP Notes. The Borrowers
asserted several 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 determined that the Trustee proved his prima facie
case on the SIP Notes and rejected the “primary defense
that the SIP Program was fraudulent” (SA:177), having
concluded that Comdisco’s alleged misrepresentations
were expressions of legal opinion that could not support
a fraud claim. (SA:178.) The court further found that
Duncan and Paul had not shown reliance on the alleged
misrepresentations. (Id.). The court also concluded that
the defendants could not assert the alleged illegality of
the loans as an affirmative defense and thus rejected
the argument that the loans were unenforceable. (SA:180.)
As for the negligent misrepresentation defense, the
court found based on the record that the defense was not
available against Comdisco or the banks. The 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 mo-
10 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
tions against Duncan and Paul. The defendants amended
their affirmative defenses, asserting that Comdisco com-
mitted securities fraud and violated securities laws
in breach of contract, thus excusing the Borrowers’ nonper-
formance. And the Trustee supplemented his memo-
randum 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
“zone of interests” protected by the regulations. Judg-
ments were entered, and the Borrowers appealed.
Within a year of the entry of the judgments, the Trustee
moved to correct or modify the judgments, seeking to
increase the amounts of the judgments. We granted the
district court leave to rule on the motion; amended judg-
ments were entered; and the Borrowers timely appealed.
The appeals were consolidated for disposition. Addi-
tional facts are discussed 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 an affirmative defense; (2) con-
cluding that Comdisco and Bank One did not violate
the Regulations; (3) placing the burden of proving a
violation of the Regulations on the Borrowers; (4) con-
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 11
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 illegality under Section 10(b) of the Securities Exchange
Act of 1934 and SEC Rule 10b-5, illegality under Section
17(a) of the Securities Act of 1933, and the excuse-of-
nonperformance defense; (6) extending its Duncan/Paul
summary judgment rulings to the Borrowers; and
(7) granting the Trustee’s Rule 60(a) motion. We will
address each argument as necessary.
A. Regulations G and U
The Borrowers contend that Comdisco violated Regula-
tion G by extending purpose credit to each Borrower
(in the form of Comdisco’s guaranty to the Bank) secured
by his margin stock in an amount exceeding 50% of the
purchase price of the stock.1 They claim that the Bank
violated Regulation U by arranging for Comdisco to
extend credit to them on better terms and conditions
1
Regulation G provided: “Limitation on extending purpose
credit. No lender . . . 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
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.
12 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
than it could legally extend credit under the regulation.
They also allege that the Bank violated Regulation U by
extending 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, they maintain that Comdisco and the Bank
committed “purpose statement” violations of Regulation
G or U by failing to obtain from each Borrower a
Federal Reserve Form FR G-3 or U-1.3
1. Whether the Borrowers May Assert Violations of
Regulations G and U as an Affirmative Defense
We begin by considering whether the district court
erred in concluding that the Borrowers lacked standing
to assert violations of Regulations G and U as an affirma-
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
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. 13
tive defense. The district court’s conclusion was based
on Bassler v. Central National Bank, 715 F.2d 308 (7th
Cir. 1983), which held that investment borrowers have
no private right of action against investment lenders
under Section 7(d), Section 29(b),4 or any other provision
of the Securities Exchange Act of 1934. Id. at 313. The
district court also relied on Blair v. Bank One, N.A., 307
B.R. 906 (N.D. Ill. 2004), appeal dismissed in light of settle-
4
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 exces-
sive use of credit for the purchasing or carrying of or trading
in securities in circumvention of the other provisions of this
section.” 15 U.S.C. § 78g(d).
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 viola-
tion of, or the continuance of any relationship or practice in
violation of, any provision of this chapter or any rule or regula-
tion thereunder, shall be void (1) as regards the rights of any
person who, in violation of any such provision, rule, or regula-
tion, shall have made or engaged in the performance of any
such contract, and (2) as regards the rights of any person
who, not being a party to such contract, shall have 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 regulation . . . .”
15 U.S.C. § 78cc(b).
14 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
ment with instructions to dismiss sub nom. In re Comdisco,
Inc., No. 04-2108, 2005 WL 6136323 (7th Cir. Jan. 28, 2005),
and vacated by Blair v. Bank One, N.A., 1:03-cv-3095 (N.D.
Ill. Mar. 31, 2008), which applied Bassler. The Borrowers
contend that the district court erred in relying on
Bassler and Blair. We agree.
The Bassler plaintiff entered into a series of loan trans-
actions to finance the purchase of stock and pledged the
stock as security for the notes. The bank failed to obtain
a Regulation U statement from him, which he claimed
violated Section 7(d) of the Securities Exchange Act and
Regulation U. The plaintiff sought a judgment voiding
the loans. The district court dismissed the complaint,
holding that no private action was available. Bassler, 715
F.2d at 308-09. The plaintiff asserted that Section 7(d)
and Section 29(b) implied a private right of action for
borrowing investors against lending banks. Id. at 309,
311. We affirmed the district court, holding there was
no right of action in investment borrowers as against
investment lenders. Id. at 313.
Blair took Bassler a step further. Bank One filed a proof
of claim in Comdisco’s bankruptcy proceeding for the
outstanding loans to SIP participants. Blair, 307 B.R. at 908.
Comdisco filed an objection seeking to void Bank One’s
claim based on alleged margin violations. Several SIP
participants (including most of the Borrowers in our
case) intervened and sought a declaratory judgment that
Bank One could not pursue its claims against them. The
bankruptcy court held that neither Comdisco nor the
intervenors had statutory standing to challenge the
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 15
legality of the loans underlying Bank One’s claim. On
appeal to the district court, Comdisco and the intervenors
asserted that the loans violated Regulation U and that
Section 7(d) and Section 29(b) of the Securities Exchange
Act provided them with a defense to Bank One’s claim.
They argued that Bassler was not controlling because
they wished to assert an affirmative defense, not a
separate cause of action. The district court rejected the
argument as “one of semantics,” Blair, 307 B.R at 909,
noting that they were seeking a judgment in their favor
rather than raising an affirmative defense. Id. The court
concluded that Bassler was controlling because the
intervenors sought a declaration that the loans were
void. Id. at 909-10. The appellants argued that they could
assert Regulation U violations as an affirmative defense
under Section 7(d), relying primarily on Transamerica
Mortgage Advisors, Inc. (TAMA) v. Lewis, 444 U.S. 11 (1979).
TAMA held that § 215(b) of the Investment Advisers Act of
1940 created a private right of action in clients of invest-
ment advisers to void an investment contract based on
violations of the Act. Id. at 18-19. The court was not
persuaded. It said that Bassler had addressed TAMA,
concluding that TAMA “did not require an implied right of
action arising from § 7(d).” Blair, 307 B.R. at 910 (citing
Bassler, 715 F.2d at 311-12). Thus, Blair read Bassler as
precluding a party from raising margin viola-
tions defensively.
However, Bassler was an action by a plaintiff investor
against a lending bank to void a contract. Bassler did not
hold that Section 7(d) and Section 29(b) cannot be
16 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
raised defensively by a borrower against a lender in an
action to enforce a contract, which is the case presented
here. Thus, Blair extended Bassler beyond its reach.
Neither Blair nor Bassler offers authority for the proposi-
tion that the Borrowers need a private right of action
under Section 7(d) or Section 29(b) in order to assert an
affirmative defense that the Notes are void and unen-
forceable because they violate Section 7(d) and Regula-
tions G and U.
No private right of action under a statute is necessary
to assert a violation of that statute as an affirmative
defense. See, e.g., Kaiser Steel Corp. v. Mullins, 455 U.S. 72,
86 (1982) (allowing defense under § 8(e) of the National
Labor Relations Act where defendant had no private
right of action to enforce the statute); United States
v. Miss. Valley Generating Co., 364 U.S. 520, 566 (1961)
(holding conflict of interest on the part of a government
official who participated in contract negotiations in
violation of federal law rendered contract unenforceable);
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, yet allowing the
defense that the contract was illegal under the antitrust
laws); Rush-Presbyterian-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 even though
statutes that make conduct illegal ordinarily prescribe
public remedies); Johnston v. Bumba, 764 F. Supp. 1263,
1279 (N.D. Ill. 1991) (allowing defendant to assert as a
defense to an action on a promissory note that the securi-
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 17
ties were sold in violation of securities laws), aff’d on
other grounds, 983 F.2d 1072 (7th Cir. 1992). Kaiser Steel
explains:
Refusing to enforce a promise that is illegal
under the . . . laws is not providing an additional
remedy contrary to the will of Congress. A defen-
dant proffering the defense seeks only to be re-
lieved of an illegal obligation and does not ask
any affirmative remedy based on the . . . laws.
“[A]ny one sued upon a contract may set up as
a defence that it is a violation of the act of Con-
gress, and if found to be so, that fact will con-
stitute a good defence to the action.”
455 U.S. at 81 n.7 (quoting E. Bement & Sons, 186 U.S. at 88).
Recognizing that only the National Labor Relations
Board could provide affirmative remedies for unfair
labor practices, id. at 86, the Court held that “a court
may not enforce a contract provision which violates
[federal law].” Id.; see also id. at 83 (“[A] federal court has
a duty to determine whether a contract violates federal
law before enforcing it.”). By refusing to enforce a con-
tract that violates a statute, the court serves the public
interest of deterring contracts in violation of the law and
promoting adherence to the law. Id. at 77; see also N. Ind.
Pub. Serv. Co. (NIPSCO) v. Carbon Cty. Coal Co., 799 F.2d
265, 273 (7th Cir. 1986) (refusing to enforce a contract
that violates a statute deters behavior forbidden by
that statute). Accordingly, the Court held that the de-
fendant was entitled to raise and have adjudicated its
defense that the agreement sued on was void and unen-
18 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
forceable as in violation of federal law. Kaiser Steel, 455
U.S. at 77-86.
The Trustee attempts to distinguish these authorities;
he stops short, however, of challenging whether they
support the proposition that no private right of action
is needed to assert an affirmative defense of illegality.
He first argues, citing Kaiser Steel and Rush-Presbyterian,
that some of the cases relied on by the Borrowers
required the parties asserting the illegality defense to
show that the statute at issue was designed to
protect their interests. Kaiser Steel did say that a
defense under § 8(e) of the National Labor Relations
Act could be “raised by a party which § 8(e) was
designed to protect.” Id. at 86. But this was in the context
of addressing whether the district court had authority
to adjudicate a defense based on the illegality of
a promise under the antitrust and labor laws, or
whether the NLRB had exclusive jurisdiction over
the matter. See, e.g., id. at 83 (“We also do not agree
that the question of the legality of the . . . [promise] under
. . . the NLRA was within the exclusive jurisdiction of
the [NLRB]. . . .”). In that context, the Court stated a
general rule with broad applicability: “a court may not
enforce a contract provision which violates [federal law].”
Id. at 86.
The Trustee also overreads Rush-Presbyterian. In that
case, two Chicago hospitals sued the government of
Greece and two of its agencies for payment of bills
for more than $500,000 for services provided in connection
with kidney transplants. The defendants argued that
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 19
one of the hospitals could not collect for its services be-
cause it had not obtained a required state permit.
Rush-Presbyterian, 980 F.2d at 451, 455. The illegality
defense did not fail on the ground that the statute
did not provide a private right of action or was not de-
signed to protect the defendants’ interests. Instead, we
followed the equitable, balancing approach that applies
when a contract itself is not illegal but is carried out in
an illegal manner, and determined that the hospital’s
failure to comply with the permit requirement did not
bar it from collecting payment. Id. at 455-56; see also
NIPSCO, 799 F.2d at 272-74 (applying equitable, balancing
approach where, assuming a violation “lurking
somewhere in the background, the contract itself is
not illegal”). Important to our decision was the fact
that barring recovery would produce a sanction dispropor-
tionate to the wrong. Rush-Presbyterian, 980 F.2d at 455-
56. Thus, the defendants were allowed to assert the
defense of illegality; they just lost on the merits.
The Trustee next argues that other cases relied on
by the Borrowers such as Mississippi Valley Generating
Co. and E. Bement & Sons involved challenges to
contracts or conduct whose very subject matter was
illegal or infected by an illegal conflict of interest. Some
of the cases fall within this category; others such
as Rush-Presbyterian do not. Furthermore, “a court has
the power to refuse to enforce a contract when
enforcement would violate clearly articulated congressio-
nal goals and policies.” Stuart Park Assoc. v. Ameritech
Pension Trust, 51 F.3d 1319, 1326 (7th Cir. 1995).
20 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
The Trustee asserts that “[i]t has long been held that
a party is not entitled to raise a violation of a statute as
an affirmative defense unless it can be shown that the
party asserting the defense possesses a private right of
action under that statute.” Appellee Br. 14 n.2. He cites
Inland Commercial Property Sales, Inc. v. Atlantic Assocs., Inc.,
No. 90 C 1036, 1991 WL 278311, at *4 & n.3 (N.D. Ill. Dec.
18, 1991) (striking affirmative defenses based on noncom-
pliance with statute because defendant “does not have
a private cause of action pursuant to the Real Estate
License Act and therefore cannot raise these affirma-
tive defenses”), and Farm Credit Bank of St. Louis v. Dorr,
620 N.E.2d 549, 551-53 (Ill. App. Ct. 1993) (concluding
that a private cause of action is necessary to assert a
claim based on noncompliance with a statute whether
the claim is made in a complaint or as an affirmative
defense). These are the only authorities cited for this
proposition and they are relegated to a footnote. These
decisions are not persuasive; they erred in requiring a
private right of action as a prerequisite to the assertion
of a statutory violation as an affirmative defense.
Furthermore, Section 29(b) of the Securities Exchange
Act provides the Borrowers with the right to raise viola-
tions of the Act and margin regulations defensively
to preclude enforcement of a contract. As stated, TAMA
held that Section 215(b) of the Investment Advisers Act
created a private right of action in clients of investment
advisers to void an investment advisers contract. The
language of Section 215(b), 15 U.S.C. § 80b-1-15, closely
parallels the language of Section 29(b). While the Court
noted that the statutory sections involved were “intended
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 21
to benefit the clients of investment advisers,” TAMA,
444 U.S. at 17, it stated that “whether Congress intended
additionally that these provisions would be enforced
through private litigation is a different question,” id. at
18. To answer that question, the Court looked to the
legislative history, which was silent on the issue, and the
statutory language. Id. at 15-19. The Court concluded:
[T]he 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 somewhere. 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.
Id. at 18. The Court then observed that it has “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 v. Elec. Auto-Lite Co., 396 U.S. 375, 388
(1970)). And in Mills, a stockholders’ action to set aside
a corporate merger allegedly in violation of the Securities
Exchange Act, the Court stated that Section 29(b) “estab-
lishes that the guilty party is precluded from enforcing
the contract against an unwilling innocent party.” Mills,
396 U.S. at 387-88 (approving of the interpretation of
Section 29(b) as rendering a contract “voidable at the
option of the innocent party”); Sundstrand Corp. v. Sun
Chem. Corp., 553 F.2d 1033, 1051 (7th Cir. 1997) (affirming
22 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
dismissal of counterclaim for specific performance or
damages under agreement that violated the Securities
Exchange Act and Rule 10b-5 as “void as regards the rights
of [the violator] under Section 29(b) of the Act”). Accord-
ingly, TAMA supports the conclusion that a borrower has
the right under Section 29(b) to assert violations of the
Securities Exchange Act and margin regulations as an
affirmative defense to a breach of contract action.
The Trustee asserts that TAMA, Mills, and Sundstrand
are in harmony with Bassler because the statutory provi-
sions violated in those cases were intended to benefit
the parties seeking redress through Section 29(b). It is
true that TAMA and Mills addressed whether the
statute at issue created a cause of action, and Sundstrand
similarly considered whether a party could assert a
claim to enforce a contract. Nonetheless, their reasoning
supports the assertion that the Borrowers may assert
the alleged margin violations as affirmative defenses.
And there is more authority reinforcing the Borrowers’
position. See Blue Chip Stamps v. Manor Drug Stores, 421
U.S. 723, 735 (1975) (dictum noting that Section 29(b)
provides “that a contract made in violation of any pro-
vision of the [Securities Exchange] Act is voidable at
the option of the deceived party”); Natkin v. Exch. Nat’l
Bank of Chi., 342 F.2d 675, 676 (7th Cir. 1965) (“[A] viola-
tion such as here alleged [making loans in violation of
Regulation U] operates to void the contract rights of the
party in violation”); Staff Opinion of May 5, 1982, Federal
Reserve Regulatory Service 5-900.11 (“Contracts made
in violation of Regulation U are voidable under Sec-
tion 29(b) of the [Exchange Act].”). Allowing the Bor-
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 23
rowers to assert the alleged violations of Regulations G
and U as an affirmative defense is consistent with the
Restatement (First) of Contracts § 598 (1932), which sets
forth the general rule that a party to an illegal bargain
cannot recover damages for breach of contract. It is also
consistent with the Restatement (Second) of Contracts § 178
(1981), which provides: “A promise or other term of an
agreement is unenforceable on grounds of public policy
if legislation provides that it is unenforceable . . . .”
Section 29(b) expressly provides that any “contract made
in violation of any provision of this chapter or of any
rule or regulation thereunder . . . shall be void. . . .” 15
U.S.C. § 78cc(b).
Shearson Lehman Bros., Inc. v. M & L Invs., 10 F.3d 1510
(10th Cir. 1993), is cited as additional authority for the
view 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 non-
payment based on the broker’s violation of Regulation T,
a margin regulation. The court found that the broker
violated the regulation, id. at 1514, but concluded there
was no affirmative defense to breach of contract for
such violations. Id. at 1516. The court thought this con-
clusion was “most consistent” with the policy behind
Regulation T and other regulations which protect the
market in general. Id. Another consideration was that
the Securities Exchange Act and Regulation X required
clients to comply with margin requirements. The court
reasoned that since “the regulations place the burden
24 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
of margin requirement compliance equally upon broker
and client, it [would be] inconsistent to place the entire
burden of compliance upon brokers in contract dis-
putes.” Id. In this case, though, it remains to be deter-
mined whether the Borrowers were responsible for com-
pliance with margin requirements. Regulation X ex-
empts from compliance “[a]ny borrower who obtains
purpose credit within the United States, unless the bor-
rower willfully causes the credit to be extended in con-
travention of [the regulations].” 12 C.F.R. § 224.1(b)(1).
Moreover, Section 29(c) of the Securities Exchange
Act implies a right to assert a violation of the Act or
Regulation G or U defensively under Section 29(b). Sec-
tion 29(c) provides in pertinent 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 extension 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, or (2) to afford a
defense to the collection of any debt or obliga-
tion . . . by any person who shall have acquired
such debt [or] obligation . . . in good faith for value
and without actual knowledge of the violation
of any provision of this chapter or any rule or
regulation thereunder affecting the legality of
such debt [or] obligation . . . .
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 25
15 U.S.C. § 78cc(c). By setting forth circumstances
under which a loan or extension of credit cannot be
avoided, Section 29(c) implies that a loan or extension
of credit can be avoided under other circumstances. See
Charles F. Rechlin, Securities Credit Regulation § 11:11
n.19 (2d ed. 2007, database updated June 2010); cf. Int’l
Union of Operating Eng’rs, Local 150, AFL-CIO v. Ward,
563 F.3d 276, 286-87 (7th Cir. 2009) (concluding that
the Labor Management Relations Act implied a right
in labor organizations to sue officers for breach of
fiduciary duties and stating that “[b]y nullifying any excul-
patory provisions, the statute removes a possible defense
to liability. It follows that the union must have a
statutory remedy for liability for breach against which
this sort of defense might potentially be asserted.”).
The Trustee asserts that “the illegality defense may only
be asserted against contracts that are ‘intrinsically illegal’”
and not in cases where one party would have to violate a
statute to perform its obligations, citing NIPSCO. But
NIPSCO itself refutes this argument. NIPSCO and a coal
company entered into a contract for the purchase of coal
for twenty years. NIPSCO became able to buy electricity at
prices below the costs of generating electricity from coal
and stopped accepting coal deliveries. It then sued the coal
company, seeking a declaration that it was excused from its
obligations under the contract. NIPSCO argued that the
contract violated the Mineral Lands Leasing Act, which
prohibited railroads from holding leases or permits to mine
coal except for its own use for railroad purposes, because
the coal company was affiliated with a railroad. NIPSCO,
26 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
799 F.2d at 267-68. We stated: “this is not a case where
the contract itself is illegal.” Id. at 272. Nonetheless, the
analysis did not stop there. We assumed that the
contract violated the Act and considered whether the
contract was nonetheless enforceable. Id. at 273. We
compared the pros and cons of enforcement of
the contract, and concluded that the balance favored en-
forcement. Id. at 273-74. Similarly, in Rush-Presbyterian,
we held that the illegality defense did not bar the
hospital from collecting unpaid bills. We determined
that the forfeiture of $200,000 in voiding the contract
was an excessive punishment for an offense punishable
by a fine of $10,000. We noted that the permit violation
was neither a serious affront to public policy nor
harmful to the public welfare as would justify nonen-
forcement. Rush-Presbyterian, 980 F.2d at 455-56. In effect,
we weighed the pros and cons, or the equities, of en-
forcement.
In any event, the Trustee ultimately acknowledges that
“the weight of authority . . . holds that Section 29(b)
renders contracts made in violation of the regulations
voidable at the option of an innocent and unwilling
party.” While he may dispute whether the Borrowers
were innocent and unwilling parties, that determination
is for the district court. Given Section 29(b)’s provision
for voiding contracts made in violation of the Act or
any rule or regulation thereunder, the fact that neither
Regulation G nor Regulation U has a self-contained
provision for doing the same thing is no bar to the af-
firmative defense.
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 27
The Trustee asserts that when presented with the il-
legality defense, “a court must critically examine the
claimed statutory violations and determine whether
it is being asked to enforce the precise conduct that is
made unlawful by the statute, or if it is merely being
asked to give legal effect to an agreement that was other-
wise lawful.” If the Borrowers are right that Comdisco
and/or the Bank violated Regulation G or U, then
enforcing the parties’ contracts would appear to enforce
the very conduct prohibited by the regulations. That
would make this case unlike Kelly v. Kosuga, 358 U.S.
516, 521 (1959), in which an unlawful agreement to fix
the price of onions was divisible from a lawful agree-
ment to pay for purchased onions.
The district court erred in concluding that a private
right of action under Section 7(d) or Section 29(b) is a
prerequisite to asserting margin violations as an affirma-
tive defense. The court misread Bassler; that case did not
address whether a private right of action is necessary
to raise a violation of law defensively. Similarly, the
court erred in concluding that the illegality defense
failed because the defendants were outside the “zone
of interests” protected by the margin regulations. The
“zone of interests” requirement is a limitation of pru-
dential standing to maintain an action. Elk Grove Unified
Sch. Dist. v. Newdow, 542 U.S. 1, 11-12 (2004); Winkler v.
Gates, 481 F.3d 977, 979-80 (7th Cir. 2007). The Borrowers
do not seek to maintain an action under the Securities
Exchange Act or Regulations G and U, but rather, to
defend against an action based on alleged violations of the
statute and regulations. They therefore need not estab-
28 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
lish that they fit within the zone of interests protected
by those laws to be entitled to assert their affirmative
defense.
Accordingly, we find that the district court erred in
deciding that the Borrowers could not assert alleged
violations of Regulations G and U as an affirma-
tive defense. Therefore we must consider whether the
district court also erred in granting summary judgment
on the ground that Comdisco and the Bank did not
violate Regulation G or U.
2. Whether the Regulations Were Violated
The Borrowers assert that in moving for summary
judgment, the Trustee did not challenge whether
Comdisco violated Regulation G. It seems they are correct.
(See SA:442—Consol. Suppl. Mem. Supp. Pl.’s Mots.
Summ. J. 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)); see also Consol. Mem Supp. Pl’s Mots. Summ. J.
Against Duncan & Paul 20-SA:180 (asserting that the
defendants had no standing to raise a Regulation U
violation as an affirmative defense)). As such, the Bor-
rowers were under no obligation to present all of their
evidence of Regulation G violations in order to defeat
the Trustee’s summary judgment motion. 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 judgment, the
nonmoving party is not required to present evidence
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 29
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 op-
posing summary judgment has no obligation to address
grounds not raised in a motion for summary judgment.”).
(Of course, the Borrowers 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 of the Trustee based on the
lack of evidence that Regulation G was violated because
the Borrowers did not have an adequate 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 it apply
to Comdisco and its alleged violation of Regulation G.)
Furthermore, whereas the burden of establishing
the affirmative defense of illegality would be on the
Borrowers, the Trustee bore the burden of proving the
30 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
good-faith non-reliance exception. Cf. Knox v. Cook Cnty.
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). “[T]he question of whether or not a
bank has relied upon particular stock as collateral is
necessarily a question of fact to be determined . . . in
the light of all relevant circumstances.” 12 C.F.R.
§ 221.117(b). The record establishes genuine issues of
material fact as to whether the Bank satisfied the
two criteria that provide “some indication” that it has
not relied on the stock as collateral such that the excep-
tion applies:
(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 . . . .
Id. Some of the Borrowers’ financial statements support
a reasonable inference that the statements could not
reasonably support the loan. For example, a loan was
made in excess of $1,000,000 to one borrower (05-737)
who reported no net worth to the Bank, a loan was made
to another borrower (05-745) for almost ten times his
net worth, and loans were made to two other borrowers
(05-735 & 05-726) for more than five times their net
worths. The transcript of the SIP presentation lends
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 31
support to the inference that the Bank did not rely on
the financial statements; Comdisco’s representatives
essentially said as much to the prospective SIP partici-
pants. (See SA:367 (“Obviously, most of us don’t have
a credit that can support a quarter million or half
million, whatever 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.”).) In addition, in arguing that the
Bank satisfied the good-faith non-reliance exception,
the Trustee did not assert 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, the
Trustee did not carry his burden in proving that the
Bank in good faith did not rely on the stock as collateral.
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. It wrote: “The 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’ argument. But
the slate is not entirely clean. . . .” Costello v. Haller, 2008
WL 4646335, at *5 (N.D. Ill. Sept. 24, 2008). The court
then considered that before implementing the SIP
Program, Comdisco, through its outside legal counsel, Lola
Hale, 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
32 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
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 con-
stitute a loan secured ‘directly or indirectly’ by the pur-
chased 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 reference . . .
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
staff of the Board of Governors [presumably of the
Federal Reserve System] 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 con-
clusion.” (SA:513.)
The Borrowers correctly pointed out to the district
court that Hale’s letter requested concurrence only that
Bank One’s loan would not be deemed to be, directly or
indirectly, secured by the securities purchased. It 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 Regula-
tion U. The Borrowers also stated that Hale’s letter failed
to mention 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
impose restrictions on the timing, amount, and form of
the sale of the shares; and the stock could not be
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 33
pledged as collateral for any other loan. The Notes and
Facility Agreement referred to the stock as “Restricted
Stock,” and the Agreement referred to the “collateral
securing the Guaranteed Debt.” 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 “key restriction” that “any outstanding
amounts on the loan would be paid from the proceeds
of any sale of the stock at any time.” Costello, 2008 WL
4646335, at *6. The court found this restriction to be the
most suggestive “that the loans (or guarantee) were
indirectly secured by the stock because it is this restric-
tion that would most likely ensure repayment of the
loan.” Id. Because “the Board” was informed of this restric-
tion, the court saw “no reason to reject Hale’s reliance
on that opinion in advising Comdisco as to the legality
of the Plan.” Id. The district court gave the opinion in
the McCauley letter substantial weight and concluded
that the SIP Plan did not violate either Regulation G
or U. Id.
The Borrowers contend that the district court erred
in deferring to the McCauley letter. The Trustee
responds that it is unclear whether the court gave a
heightened level of deference to the letter and, in any
event, the court was entitled to defer to its reasoning.
Although the court stated that it was giving the
staff’s opinion substantial weight, other language in its
decision implies that it may have deferred to what it
believed (mistakenly) was an official opinion of the
Federal Reserve Board. The court said that “the Board
and its staff ha[ve] primary responsibility for inter-
34 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
preting the Exchange Act and [its] regulations,” citing
Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 565-68
(1980) (holding that deference was appropriate to official
staff opinions of Federal Reserve Board interpreting
the Truth in Lending Act and Regulation Z, unless demon-
strably irrational), 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 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 Federal Reserve
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 Section 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). The Board
may delegate certain of its functions to Federal Reserve
banks, but it may not delegate any of its functions “re-
lating to rulemaking or pertaining principally to mone-
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 35
tary and credit policies.” 12 U.S.C. § 248(k). Although
McCauley consulted with the staff of the Board of Gov-
ernors and the staff agreed with his opinion, the
McCauley opinion was not published in 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
district court’s opinion is that it followed Krzalic v.
Republic Title Co., 314 F.3d 875, 879 (7th Cir. 2002) (ex-
plaining that an agency’s less formal pronouncements
may be entitled to some deference), and gave the
McCauley letter something less than Chevron-style defer-
ence, see Chevron USA, Inc. v. Natural Res. Defense
Council, Inc., 467 U.S. 837 (1984). This appears to be defer-
ence 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 have considered it. Cf.
Skidmore, 323 U.S. at 140 (stating that informal agency
“opinions . . . while not controlling upon the courts by
reason of their authority, do constitute a body of experi-
ence 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
36 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
the Department of Labor interpreting the meaning
of a regulation promulgated under the Fair Labor Stan-
dards Act).
However, given the omissions in Hale’s letter and the
qualifications to the McCauley opinion, it cannot be
said that the record conclusively establishes that the
SIP Plan did not violate Regulation G or U. In Mead,
the Court reiterated 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 deter-
mination whether deference is owed turns on the “ ‘thor-
oughness evident in [the agency’s] consideration, 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) (“infor-
mal [agency] interpretations are entitled to respect to
the extent that they have the power to persuade” (quota-
tions omitted)). The Borrowers argued that the McCauley
letter was not entitled to deference based in part on
the omissions in Hale’s letter. The district court ap-
parently thought that it owed the McCauley opinion
some deference. On remand, the district court should
assess how much deference, if any, is due to the McCauley
opinion, and further determine whether the record raises
a reasonable inference that the SIP shares indirectly
secured the loans and/or secured the guaranty.
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 37
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 secured the
guaranty. In arguing that the stock did not indirectly
secure the loans, the Trustee contends that the Borrowers
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 re-
stricted 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 he
cannot dispute that there were restrictions on the SIP
shares, and the SIP participants were told that they
could not pledge the shares as collateral for other loans.
The Trustee further states 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 the loans. See 12 C.F.R.
§ 221.2(g)(2)(iv). He submits that the following facts
show that the Bank did not rely on the stock as col-
38 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
lateral: (1) the Borrowers—not Comdisco or the Bank—
controlled the stock, (2) the Bank structured the trans-
action 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. However, the evidence shows 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.) The accounts were described as
“inaccessible” (id.), presumably meaning that they were
inaccessible to the SIP participants. We are unsure how
the structure of the transaction shows that the Bank in
good faith did not rely on the stock as collateral. Rather,
the structure of the transaction seems to suggest that
the loans were not directly secured by the shares. The
Trustee points to the lack of any right of Comdisco to
sell or transfer the SIP shares without authorization
from the SIP participants. Yet each of the participants
had to execute a stock power endorsed 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. Thus, each participant effec-
tively authorized Comdisco to sell his or her SIP shares.
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
resorting to the stock.” This unsupported conclusory
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 39
assertion does not establish as a fact that the Bank did not
rely on the stock as collateral. In addition, 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. Thus, there is at least a reasonable
inference that the Bank indirectly relied on the stock as
collateral for the loans.
As noted earlier, the Trustee did not contest whether
Comdisco violated Regulation G. If Comdisco com-
mitted “extending” violations of Regulation G, then
it seems that the Bank likewise committed “extending” and
“arranging” violations of Regulation U. 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.”); 12 C.F.R. § 221.118
(referencing 12 C.F.R. § 207.103). In addition, the Trustee
does not contest that neither Federal Reserve Form FR G-3
nor Form FR U-1 was provided to the Borrowers. Thus,
if the guaranty and loans were secured directly or indi-
rectly by the stock, then Comdisco and the Bank
would have committed “Purpose Statement” violations
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 “the lender shall
require its customer to execute Form FR G-3); 12 C.F.R.
§ 221.3(b) (requiring a bank when extending credit
secured directly or indirectly by margin stock in an
40 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
amount exceeding $100,000 to obtain an executed Form
FR U-1 from its customer).
We do not decide whether Comdisco or the Bank vio-
lated Regulation G or U, however. It is enough that there
are genuine issues of material fact as to whether the
regulations were violated and, if so, whether the Bank
satisfied the good-faith non-reliance exception.
B. Section 10(b) of the Securities Exchange Act of
1934 and SEC Rule 10b-5 5
The Borrowers argue that the grants of summary judg-
ment in favor of the Trustee on the Section 10(b) illegality
5
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] Com-
mission may prescribe as necessary or appropriate in the
public interest 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 connec-
tion with the purchase or sale of any security.” 17 C.F.R.
§ 240.10b-5.
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 41
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 challenge whether
they could establish the intent to deceive or reckless
disregard for the truth (“scienter”). Then in reply, he
argued that because he sought summary judgment
based on falsity, the Borrowers had the burden to
establish all elements of the Section 10(b) defense.
As the moving party, the Trustee had the initial
burden of identifying the basis for seeking summary
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 nonmovant
is not required to present evidence on an issue not
raised by the movant. See, 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
decision.”); Pourghoraishi, 449 F.3d at 765 (“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
expansive response brief, a Rule 56.1 response, and a
statement of additional facts did not alter this rule.
The responsive filings did not create a right in the
42 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
Trustee to assert for the first time in reply new chal-
lenges to the Borrowers’ evidence as to other aspects of
the Section 10(b) illegality defense. The Trustee offers
no authority to support his novel view that the “rather
unusual course of the motion for summary judgment”
made it necessary and proper for him to attack the addi-
tional elements on which he initially had taken a pass.
Granting summary judgment on the basis of the
newly raised scienter argument raises important fair-
ness concerns, especially where the Borrowers 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 on scienter. We are unaware of any authority
that required them to marshal all the evidence that they
had on an issue that was not asserted by the Trustee
in seeking summary judgment. Had scienter been
properly placed in issue, the Borrowers may have pre-
sented other evidence, or sought an extension and dis-
covery under Rule 56(f). The Trustee criticizes the Bor-
rowers 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 improperly ad-
dressed,” 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 judg-
ment obligations. While their choice may have been
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 43
strategic—they could have sought leave to file a sur-reply
and/or filed a Rule 56(f) affidavit—we will not insist
that they have done so when the rules and case law
give them options on how to proceed. And by addressing
the newly raised arguments in their motion to strike, the
Borrowers did not become obligated to present all of
their evidence on the issue. Argument is not a substitute
for facts supported by evidence as necessitated by
Rule 56. The district court should not have granted sum-
mary judgment on the basis of the newly raised scienter
argument. See, e.g., Sublett, 463 F.3d at 736.
On a related point, the Borrowers indicate that the
district court held them to a heightened standard of
proof of scienter. Citing Tellabs, Inc. v. Makor Issues &
Rights, Ltd., 551 U.S. 308, 323 (2007), the district court
looked for evidence that would raise a “strong inference”
of scienter. Tellabs dealt with the heightened pleading
standard for private securities fraud suits under the
Private Securities Litigation Reform Act (“PSLRA”),
Section 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 stan-
dard. 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 observed that “the test at each stage
[pleading, summary judgment, and judgment as
a matter of law] is measured against a different back-
drop.” Tellabs, 551 U.S. at 324 n.5. On summary judg-
44 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
ment, a court may not weigh the evidence or decide
which inferences 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 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. On re-
viewing 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’ objection to consideration of the newly
raised arguments did not become moot by the 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 the district court’s decision does not
explain why it thought the motion to strike was moot,
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 45
we are unsure how much consideration it gave to that
motion.
The Trustee submits that we can affirm the grants
of summary judgment on the Section 10(b) illegality
defense on several alternative grounds—there is no
evidence of any fraudulent misrepresentation, the Bor-
rowers seek an unwarranted extension of the private
right of recovery under Section 10(b), they have no evi-
dence of a manipulative or deceptive device, the alleged
misrepresentations regarding Regulations G and U were
not made “in connection 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 Partnerships,
577 F.3d 790 (7th Cir. 2009), for the proposition that
“ ‘[w]e may affirm summary judgment on any basis
supported in the record.’ ” Id. at 796 (quoting Klebanowski
v. Sheahan, 540 F.3d 633, 639 (7th Cir. 2008)). This state-
ment 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 do not address
whether we may affirm a grant of summary judgment
on an alternative ground newly raised in summary judg-
ment reply brief. Although “we may affirm a grant of
summary judgment on any alternative basis found in
the record as long as that basis was adequately con-
sidered by the district court and the nonmoving party
had an opportunity to contest it,” Best v. City of Portland,
554 F.3d 698, 702 (7th Cir. 2009), we may not affirm on
46 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
a basis that was not raised in support of summary judg-
ment, id. at 702-03 (reversing grant of summary judg-
ment 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
opportunity 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. The grants of
summary judgment to the Trustee on the Section 10(b)
illegality defense were in error.
C. 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 Section 17(a) of the Securities Act of
1933, 15 U.S.C. § 77q(a). 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 Section 17(a) in effect at the
time of the transactions at issue read:
It shall be unlawful for any person in the offer
or sale of any securities by the use of any means
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 47
or instruments of transportation or communica-
tion 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 mate-
rial fact or any omission to state a
material fact necessary in order to make
the statements made, in light of the cir-
cumstances under which they were
made, not misleading, or
(3) to engage in any transaction, practice,
or course of business which operates or
would operate as a fraud or deceit upon
the purchaser.
15 U.S.C. § 77q(a).
The Borrowers contend that the grants of summary
judgment on their Section 17(a) defense should be
vacated because the district court did not articulate any
basis for granting summary judgment independent of
its holding that Regulations G and U were not violated.
The Trustee responds that the court relied on other
bases and implies that it concluded that the Borrowers
failed to establish that Comdisco had the requisite
scienter to establish a Section 17(a) violation. He also
argues that the Borrowers have waived any other argu-
ments they may have regarding the Section 17(a) defense
by failing to assert them on appeal, which is correct. See,
48 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
e.g., Mendez v. Perla Dental, No. 08-2029, ___ F.3d ___, ___,
2011 WL 1990527, at *3 (7th Cir. May 24, 2011).
The district court’s reasoning for granting summary
judgment on the Section 17(a) defense is cryptic. As the
appellee, the Trustee may defend the judgment based
on any argument raised below. Truhlar v. U.S. Postal
Serv., 600 F.3d 888, 892 (7th Cir.), cert. denied, 131 S. Ct. 443
(2010). However, he has chosen to defend on only one:
the Borrowers’ failure to establish that “Comdisco had
an intent to deceive, manipulate or defraud.” (Appellee
Br. 59.) As discussed, the district court erroneously
granted summary judgment on the ground that the Bor-
rowers failed to offer evidence of scienter.6 Therefore,
the grants of summary judgment on the Section 17(a)
illegality defense should be vacated.
D. Extension of the Duncan/Paul Rulings
The Borrowers contend that the district court erred in
extending its Duncan/Paul summary judgment rulings.
6
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” (SA:136) seem to fall
within § 17(a)(1). The Borrowers’ reply brief implies that this
defense falls under § 17(a)(2) or (a)(3). We leave this matter
for the district court’s determination, if necessary.
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 49
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.”
Costello, 2008 WL 4646335, at *3. 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 preclusive effect. Although one
might draw such a conclusion 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 con-
sideration. We understand the district court as saying
that it was adopting both its prior rulings and its sup-
portive reasoning. (Whether the grants of summary
judgment were proper based on the same grounds on
which it was granted against Duncan and Paul is
another question addressed below.)
The Borrowers challenge the grants of summary judg-
ment on the fraud set-off defense, which they assert
was based on a lack of evidence of reliance by Duncan or
Paul. In the Duncan/Paul decision, the district court
noted that the defendants had not attempted to show
reliance on the alleged misrepresentations. But the princi-
pal ground for the court’s ruling was that the alleged
misrepresentations were expressions of legal opinion,
which cannot support a fraud claim. (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
50 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
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 sup-
port 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.) As a result, he has waived any
such argument for purposes of this appeal.7 See, e.g.,
O’Neal v. City of Chicago, 588 F.3d 406, 409 (7th Cir. 2009)
(declining to consider argument not made on appeal)).
Nonetheless, the district court’s analysis falters. The
Borrowers argue that they identified an exception to the
general rule that legal opinions cannot support a fraud
claim and the district court never considered it. See West
v. W. Cas. & Sur. Co., 846 F.2d 387 (7th Cir. 1988). In
West, we recognized that under Illinois law, “[a] statement
that, standing alone, appears to be a statement of
opinion, nevertheless may be a statement of fact when
considered in context.” Id. at 393. We quoted an Illinois
Supreme Court opinion:
7
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.”).
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 51
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 transaction,
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 depends on the factual circumstances. Id. Factors
to be considered in determining whether a plaintiff rea-
sonably relied on an opinion as though it were a
statement of fact include “the access of the parties to
outside information,” the parties’ relative sophistica-
tion, and whether “the speaker has held himself out as
having special knowledge.” Id. at 393-94. Therefore, “it is
not ‘the form of the statement which is important
or controlling, but the 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
treated as statements of fact 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 it concluded that the
Borrowers failed to present evidence of scienter, which is
necessary to prove a fraud set-off claim. As discussed,
the court erred in granting summary judgment on the
52 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
basis of a lack of proof of scienter. 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 decision.”). 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 702-03. 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 misrepre-
sentation set-off defense. In the Duncan/Paul summary
judgment 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 guidance of others in their business transac-
tions” (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 assertion on appeal, and our review of the materials
cited by the Borrowers suggests that they may have
enough evidence to raise an issue of fact on this matter.
Whether they have presented enough evidence to
satisfy the “in the business of supplying information”
element and whether they ultimately can prevail on
their negligent misrepresentation defense are for deter-
mination in the district court.
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 53
E. Excuse-of-Nonperformance Defense
The Borrowers’ final challenge is to the grants of sum-
mary judgment on their excuse-of-nonperformance de-
fense. Under Illinois law, they argue, the Bank’s compli-
ance with Section 17(a), Section 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. The Trustee
does not dispute that under Illinois law, laws in ex-
istence at the time a contract is executed, “are deemed,
in the absence of contractual language to the contrary,
‘part of the contract as though they were expressly incor-
porated therein.’ ” Selcke v. New England Ins. Co., 995 F.2d
688, 689 (7th Cir. 1993) (quoting McMahon v. Chi. Mercantile
Exch., 582 N.E.2d 1313, 1319 (Ill. App. Ct. 1991)); see also
Ill. Bankers’ Life Ass’n v. Collins, 341 Ill. 548, 552 (1930).
Thus, Section 17(a), Section 10(b) and Regulation U are
implied terms of the Notes. The Borrowers assert that the
Bank’s noncompliance with these laws excuses their
performance. A “party cannot sue for breach of contract
without alleging and proving that he has himself sub-
stantially 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. App. Ct. 1975). And a
material breach of a contract will excuse the other
party’s performance. Elda Arnhold & Byzantio, L.L.C. v.
Ocean Atl. Woodland Corp., 284 F.3d 693, 700 (7th Cir. 2002).
The Trustee first responds that the loans were not
illegal. Although he focuses on compliance with the
margin regulations, the defense is based not only on
alleged margin rule violations but also on violations of
54 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
Section 17(a) and Section 10(b). The grants of summary
judgment on the Section 17(a) and Section 10(b) defenses
were error, and it remains to be determined whether
the Bank violated a margin regulation. The Trustee
also maintains that the excuse-of-nonperformance
defense fails because the Borrowers are not in the zone
of interests protected by the margin regulations, citing
Thomson McKinnon Securities, Inc. v. Clark, 901 F.2d 1568
(11th Cir. 1990), for support. The case is inapposite. There,
a broker sued a former client to recover payment on
his account. The client raised as an affirmative defense
the broker’s breach of exchange rules, which were in-
corporated into the parties’ agreements. Id. at 1570. The
court rejected the defense because the client requested
the broker to ignore a contract term by placing a trade
on his behalf, thus waiving the term as a condition prece-
dent to his obligation. Id. at 1571.8
Second, the Trustee argues that the Borrowers
impliedly waived any breach by accepting the loan pro-
ceeds, participating in the SIP Program, and failing to
object to the SIP Program or Notes until they had lost
the opportunity to profit from the program. As the party
claiming waiver, the Trustee had the burden to prove
8
In the district court, the Trustee also relied on ADM Investor
Servs., Inc. v. Collins, 515 F.3d 753 (7th Cir. 2008); he does not
do so here. ADM Investor Services held that a trader’s “failure
to post required margin for a futures contract does not
excuse him from paying.” Id. at 757. Here, in contrast, the
Borrowers assert that the Bank’s noncompliance with the
law excuses their performance.
Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al. 55
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 in the
district court. 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 inconsistent
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
from the circumstances or (2) the conduct of the
waiving party has misled the other party into a rea-
sonable 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 his waiver argument, and the
result is a waiver of the waiver argument on appeal. See,
e.g., Argyropoulos v. City of Alton, 539 F.3d 724, 738 (7th
Cir. 2008).
Third, it is argued that if the Bank breached the
contracts by lending money in violation of the margin
regulations, then the Borrowers also breached the
contracts by borrowing money in violation of the
margin regulations. The Trustee asserts that the Bor-
rowers cannot profit from their own breach of the
margin regulations, citing Goldstein v. Lustig, 507 N.E.2d
164, 168 (Ill. App. Ct. 1987) (“A party who materially
breaches a contract cannot take advantage of the terms
56 Nos. 08-3961, 08-3966, 08-3967, 08-3981, et al.
of the contract which benefit him.”). It is not clear that
the Borrowers violated the margin regulations. Regula-
tion X exempts a borrower from the margin regulations
“unless the borrower willfully causes the credit to
be extended in contravention of Regulation G, T, or U.”
12 C.F.R. § 224.1(b)(1). The record before us does not
establish that the Borrowers willfully caused the Bank to
extend credit in violation of one of these regulations.
The district court erred in granting the Trustee
summary judgment on the Borrowers’ excuse-of-nonper-
formance defense.
III. CONCLUSION
For the foregoing reasons, the district court’s grants
of summary judgment in favor of the Trustee are
V ACATED and these appeals are R EMANDED for further
proceedings consistent with this opinion. Given our
disposition of the appeals from the grants of summary
judgment, the appeals from the Amended Judgments
are D ISMISSED AS 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,
more needs to be done before this litigation can be put
to rest.
6-28-11