651 F.3d 614
7th Cir.2011Background
- Borrowers are former Comdisco executives who participated in the SIP program, taking loans secured by restricted stock funded by Bank One with Comdisco guarantying the loans.
- SIP shares were held as restricted stock with terms restricting sale and requiring Comdisco to share gains; the program included a 50% sharing with Comdisco after loan repayment.
- Comdisco filed for bankruptcy in 2001; a settlement with lenders led to the Comdisco Litigation Trustee obtaining rights under the Notes.
- Trustee sued the Borrowers on the SIP Notes to enforce repayment; Borrowers asserted defenses including fraud, duress, and illegality under federal margin laws.
- District court granted summary judgment for Trustee, holding no violation of margin regulations necessary for enforceability; judgments were appealed.
- On appeal, the Seventh Circuit vacates, remanding to address whether Regulations G/U violations can be raised as defenses and whether there were genuine issues of fact about violations.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Regulations G and U can be raised as affirmative defenses | Costello argues no private right required; defenses permitted. | Borrowers contend Bassler Blair foreclose, require private action to raise such defenses. | Borrowers may raise as defenses; district court erred in barring them. |
| Whether Regulations G and U were violated by Comdisco/Bank One | Trustee argues no clear evidence; however, issues exist as to indirect security and reliance. | Borrowers contend SIP indirectly secured loans/guaranty via stock with restrictions and bank reliance questions. | G/U violations potentially present; genuine issues of material fact exist; not decided here. |
| Burden of proving regulatory violations and good-faith reliance | Borrowers bear burden after illegality defense raised. | Trustee bears burden on good-faith non-reliance defense and whether indirect security existed. | Record shows genuine issues of fact; burden allocation requires remand for fact-finding. |
| Whether the Trustee's summary judgment on the §10(b) illegality defense was proper | Trustee sought judgment only on falsity; scienter not addressed upfront. | Borrowers contend district court relied on new arguments raised in reply; due process concerns. | Summary judgment on §10(b) illegality defense was error; cannot affirm on new grounds. |
| Whether §17(a) defense should have been sustained/vacated | District court relied on §10(b) analysis to grant; scienter issue unresolved. | Claims of deception under §17(a) require independent analysis; failure to address merits waives. | §17(a) grants should be vacated; need separate analysis on intent to deceive. |
Key Cases Cited
- Kaiser Steel Corp. v. Mullins, 455 U.S. 72 (1982) (illegality as a defense to contract can nullify enforcement)
- Rush-Presbyterian-St. Luke's Med. Ctr. v. Hellenic Republic, 980 F.2d 449 (7th Cir. 1992) (equitable balancing allowing contract enforcement where penalty is disproportionate)
- Mills v. Elec. Auto-Lite Co., 396 U.S. 375 (Supreme Court) (section 29(b) voids contracts; relief precludes enforcement)
- Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033 (7th Cir. 1977) (section 29(b) voids contracts under securities violations)
- Bassler v. Central Nat'l Bank, 715 F.2d 308 (7th Cir. 1983) (private right of action not required to raise illegality defense)
- Blair v. Bank One, N.A., 307 B.R. 906 (N.D. Ill. 2004) (extends Bassler on defensive use of margin violations; later vacated)
- TAMA v. Lewis, 444 U.S. 11 (1980) (private right of action potentially implied under securities regulations)
- NIPSCO v. Carbon Cty. Coal Co., 799 F.2d 265 (7th Cir. 1986) (contract voidability when statute violated; enforceability weighed)
- Shearson Lehman Bros., Inc. v. M & L Invs., 10 F.3d 1510 (10th Cir. 1993) (no affirmative defense for margin violations in contract actions (out-of-state authority))