## In the



# U n ited S ta tes Co urt o f Ap p ea ls

F o rth eS e v e n th C ir cu it
N os. 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 J OHN W. C OSTE LLO, not i nd i vi du al l y, buta s Li ti g at i o n Tr us te e Underthe Com disc o Lit i gat i on Trust, P la intif f-A pp ellee, v. S T EV EN R. G RU ND ON, etal., D efend a nts-A pp ella nts.

Appeals from the United States District Court fo r the N o rthernDi stricto f Illino is, Eas tern Div isi on.

No s. 1: 05-cv -727, -736, -740, -746, -763, -764, -767

—Robert W . G ettleman, Judge .
A RG UE D A PRI L 6, 2010

— D ECI DE D J UNE 28, 2011

Befo re K ANN E , R OV NER, a nd T INDER, C ircu it Judges. T INDER, C ircu it Judge. Thi s co nsol i dated case co m es to us on ap p eals from th e d istri ct court’s gran ts of sum m ary j u d g me n ti n f a v o r o fth e p l a i n t i ff

- a p p e l l e e , J o h n W. Costel l o, Li ti gat i on Trust ee und erthe Com disc o Lit i gat i on2 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. Trust, and aga i nst defendants- appell ants i n an ac ti on t o enf or ce c er tain prom i sso rynot es. W e o ri gi nal l y i ssued an o pi ni o n o n Oc tobe r 1 8, 2 01 0, a ffi r m i ng in par t an d vacat i ng i n part
. Defendants- ap p ell ants fi l ed a pet i ti on for panelr ehear i ng, and w e r equeste d an answer, wh i ch was fi l ed

. By s epa r at e o r derwe g r an te d the pe ti ti o n a nd vacat ed the October18 , 20 10 opini on a nd fi nalj ud gm ent. F o r th e r e a s o n s th a tf o l l o w, w e v a c a t e th e g r a n t s o fs u mm ar y j ud gm ent i n favoro fthe Truste e a nd r em and fo r fur th erpr o ce eding s co ns i st en t wi ththi s o pi ni o n.

I . B AC KGR OUND T he de fend an ts-ap p ell an ts (the “B orrow ers”) are form erhi g h- l ev ele m pl o y ee s o fCo m di sc o Inc . , who par ti cipa te d i n Co m di sc o ’ s sh ar ed i nv es tmentpl an( S I P) p rogram ( “SIP Program ”) offered in early 1 998 by pu rch as i ngs hares ofCo m di sc o s to ck

. One hun dr ed per ce nt ofthe sto ck pu rchas e p ric e w as fund ed by perso nal l oans fro m pa rt i ci pati ng ba nks ( “Lend er s”) r epres ented b y F irs t N at ion al B an k of C h ica go (lat er B an k O n e) as th eir a gen t (the “B an k”). To sec ure the loans , the B orrow ers ex ec u te d p ro m iss or y n o t e s (“ SIP N ot es ” o r “N ot es ”) in thei r perso nalcapaci ti es. Com disc o chose to dealwith Ban kOne b ecau se o fthe b an k ’ s ex per i en ce i n de ve l o pi ng and i m ple m enti ng S I Ps f oro therco m panie s. Comdi sc o g ua r an te ed th e l o an s as pr o vi ded in a F ac i l i tya nd Gua r an ty Agr ee m en t be twe en Comdi sc o a nd the Bank ( the “ Faci l i ty A gr eem ent”)
. The Com d isco guar anty w as “a condi ti on t o the l oan ar ra ngem ent” w i th the Ba nk

. ( S A: 2 4 4
. ) Co mdi s c o r e c e i v e d the l o a n pr o c e e dsN os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. 3 d ire c tly from th e L en d e r s a n d h eld th e SIP sh ar es . I t se ems pr o babl e th atwi th o utthe g ua r an ty, mos t ofthe loans w ou ld n ot h ave be en m ad e. SI P p articipan ts w ere re quir ed to purchase a m i ni m um o f8, 000 shar es of C om d isc o s t o c k. A t $ 34 .50 p er sh ar e, th at res u lte d in a m i ni m um pur ch as e pr i ce an d l o ano f$ 27 6, 00 0. The loans’ pri nci pal am ounts ra nged fro m $2 76, 000 to $1, 725, 000. L oans w er e m ade i n exces s o f$1 , 000, 000 to o ne b o r r o wer( 05

- 73 7) who r epo rt ed no ne t wor tht o the Bank, to ano therbo rr ower ( 05- 745) for a l m ostte n ti m es hi s networth, and to two other bor ro w ers (0 5- 735 & 05- 726) f orm or e than fi ve ti m es thei r net worths. Com disc o i ntro du ced the SI P P ro gr am to pro specti ve parti ci pants duri ng a w ee ke n d m eet i ng i n Pal m S pri ngs, Cal i f o r ni a. Pr o spe ct i ve pa r ti ci pan ts ha d t o atte nd the m eeting or li sten to the p resen t a t io n. Th e B orrow ers re cei ved a bi nd ero fm ate ri al s e x p laining the t er m s o f the S I P Pro gr am ( the “ SI P M ate ri al s”) . T h e SI P pres entatio n and SI P M ate ri al s info rm ed the pros pecti ve parti cipan ts of va r i o us r es tr i ct i o ns o n the i r abi l i tyt o s el lthe SI P sh ares an d that t h e y w ou ld be obligated f or a speci fi ed ti m e per i od to shar e a ny g ain s on the sal e o f th e sha res w ith C om d isco. M ore sp ecifi cally, they w ere in for m ed of re st ric t i o n s in c lu d in g (a ) C om d isc o w ou ld hol d a bo rr ower’ s s hare s unti lthe bor ro w er ’ s l oan fro m B ank One was di schar ged; (b) the bor ro w erhad to del i verto Com disc o a st ockpow er, endor sed i n bl ank, c on c er n in g h is or h e r s h a r es (a b lan k s to c k p ow er is gener ally r equi re d w hen an insti tuti on hol ds secur i ti es as col l ate ra lf ora lo an so the i nsti tuti on m ay tr ansfer and sel lthe sto ck to sat i sfy the debt) ; ( c) the bor ro w er4 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. had to execute an i rr evo c ab le Lettero fDir ecti on with C o md i s c o a n d th e B a n kt o e n s u r e th a ta l lc a s h d i v i de nd s o n the s ha r es w en t i nt o the b o r r o wer ’ s ac co unta t Ban k One to pay th e pr i nc i pal an d ac cr ue d i nt er es t on the l oan; ( d) the pro ceeds fro m a perm i tte d sal e o fthe sto ck ha d t o “first be use d to re pay the Loan, ” inter estand fees atBa nkOne ; ( e) the b o r r o we r p aid a pr epa y m en t pen al tyt o Ba nkOne i fthe l o anw as pai d ea r l y ; a nd ( f ) the certifi cate r epres enti ng the bo rr ower’ s s hare s co ntai ned a le ge n d as to th e s to c k’s res tr ict ed st at u s. T h e SIP Pr o g r am was st r uctur ed so th at, wi th a few e xc ept i o ns , the S I P s ha r es c o ul d no t be s o l d dur i ngthe fi rs t y ea r o fthe prog ra m . A n “[ SI P Part i ci pant w as] enti tl ed to 10 0% o f the g ain, a fte r pa y m en t o fa l la m o unt s due o n the l o an, unle ss [ the Par ti ci p ant] vo l untari l y t er m i nate[ d] [ hi s] em p loym en t or [ s o ld ] t he share s w ithin th ree (3) years after pu rchas e. I n ei ther eve nt, the Com pan y [w as] en tit led to 5 0 % o f an y g ain u p on sa le.” (SA :20 7.) T h e SIP par ti ci pan ts wer e r equi r ed to no ti fy Co m di sc o o fa ny i nten tio n to se l lthei r SI P shar es because Com disc o had t h e righ t t o re p u rc h as e t h e SIP sh ar es . Th e SIP M at er ials in d ica te d th at th e p ro m iss or y n o t e s t o b e e x ec u te d in co nne cti on w i ththe l o an s ha d a fi xe d m atur i tyda te a nd a fi na lb al l o o n pa y m ent o fpr i nc i pala nd i nt er es t due at m atur i ty. The m ate ri al s al so i nd i cate d tha t C om disc o w oul d guara ntee the S I P N ote s. The SI P M ate ri al s s tat ed tha t “t he Loan i s no t s ecure d by the s toc k” ( SA:2 26) and the “SI P shar es d o not s er ve as co llat er al for th e l o a n . . . [;] th e loa n is n ota m ar gin l oan. ” ( SA:2 29. ) W hen pres en ting the S I P Pl an, Com disc o adv i sed pro specti ve parti ci pants thatthe “l oan i s no tN os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. 5 techni cal l y s ecure d by the se curi tie s . . . and thi s i s no t a m ar g i n a cc o unt
. ” ( S A: 35 5. ) Dur i ngthe S I P pr es en ta ti o n, how eve r, Com disc o w as ask ed, “[ C]an th[e ] shar es be used as secur i ty f oro thertr an sa c tio ns o r col l ate ra lf or oth erty pe[ s] o fl o an s? ” A Comd i sc o r epr es en ta ti ve a ns we r e d: N o, and the re aso n being i s the y are r est ri cted fro m th e s ta n d p oin t t h at th e c om p an y h as ce rt ain ri ghts w i th r es p ect to that sto ck, depend i ng upon y o ure m pl o y m en t. A nd a l so the r e’ s r es tr i ct i o ns und erthe ter m s o fthe bank l oan that you have that ther e a re cer tain thi ngs that wil lhappen w ith th e p ro c ee d s t o th e e x te n t t h a t y o u se ll it before the ban k l oan i s p aid off. S o whi l e i t i s no t te ch ni ca l l y a s ecur ed l o an, the com pany r et ains the st ockphysi cal l y a nd yo u cannot ple dge thatf oro therl oans. ( SA:3 65. ) In addition , the l anguage o fthe N ote s r efl ecte d that the s tock was “Res tr i cted S toc k” and the F aci l i ty A gr eem ent, wh i ch w as i ncor p or ate d i nto the t er m s o f the Notes, l i kewis e refe rr ed to the SI P shar es as “R es tr ict ed Sto c k.” Com d i sco pro vi ded pro specti ve SI P part i ci pants with i nf o r m at i o n r eg ar d i ngwhethe r ( a) the pr o po se d l o an s w er e m ar gi n l oans; (b) the p ro p osed l oans w er e s ecure d by the s toc k; ( c) the sto ck coul d be pl edged fo r anothe r l o an ; ( d ) th e pr o po se d l o an s woul d v i o l at e o r b e i nc o nsi st en t wi thRe g ul at i o n G o r Re g ul at i o n U; a nd ( e) Com disc o’ s per f or m ance ofi ts obl i ga tions under e ach Loan Docum ent ( i ncl ud i ng the Fa ci l i ty A gr ee m ent, ea ch6 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. N ote , and eac h Lette r ofD ire c tion), to wh i ch i t was a partywould vi ol ate any appli cabl e l ega lr equi re m ent. The SI P M ate ria l s incl ud ed Com disc o, Inc. ’ s 1 998 St ock O p t i o n P r o g r a m, wh i c h s t a t e d i n a s e c t i o n ti t l e d , “ No I l l ega lTra nsacti ons”: The Pr o g r am an d al l S to ckOpt i o ns g r an te d pur su an t t o i ta r e s u bj e c tt o a l ll a ws a n d r e g u l a t i o ns ofany gov er nm entalautho ri ty w hi ch m ay be appl i cabl e th er et o ; a nd no twi th st an di nga ny provi si on o fthe P ro gr am o r any S toc k Opti ons, Part i ci pa nts s hal lnotbe enti tl ed to exer ci se S to ckO p tio ns o r r ec ei ve the b en efi ts the r eo fa nd th e Com pany shal lnotbe obl i gat ed to del i ver an y C om m on Stoc k or pay an y b en efi ts to a Parti ci pan t i fs uche xe r ci se , de l i ve r y, o r pa y m en t o f b e n e fi t s wo u l d c o n s t i t u t e a v i o l a t i o n b y t he P ar ti ci pant orthe Com pany ofany provi si on o f an y s uchl aw o r r egul at i o n. (SA :23 7-3 8.) The S I P Mate r i al s des cr ibe d the F ac i l i tyAgr ee m en t as “the agr eem ent b etw ee n Com disc o and [Bank One] estab li sh ing the l oan p r o gram ” an d stated that “[b]y si gni ng the N ote , yo u . . . r epres ent that y ou have car efu lly re vie w ed th e F a c i l ity A gr ee m en t.” (SA :22 5.) In th e Facili ty A greem en t, C om d isco rep r esen ted and w arran te d tha t “[ t] he e xe cut i o n a nd de l i ve r y o f, a nd pe r f orm ance b y the Com pany ofi ts obl i gat i ons und er, ea ch L oa n D oc u m en t t o w h ich it is a p ar ty w ill no t re su lt in a br each orvi ol ati on o f[ or ] co n fl i ct with .

. . any Requir em ent o fLaw , ” ( SA:2 83) , wh i c h i ncl ud ed “the Se curi ti esN os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. 7 Acto f1 9 3 3 , the S e c ur i t i e s Exchange Ac to f1 9 3 4 , [ a nd ] Regul ati o ns G [ a nd ] U
. . . o f the Bo a r d o f Go v e r no rs o f the F edera lR es er ve Sy ste m . ” ( SA:2 76. ) Com disc o further r e pr e s e nt e d a nd wa r r a nt e d: N o part ofthe proce eds of any Loan w i l lbe used i n a manne r whi chwoul d vi o l at e, o r r es ul t i n a vi ol ati on o f, Regul ati on G [o r] .
. . Regul ati on U
. . . . N ei therthe m aking ofany Loan her eund er no r the u s e o fthe p r o c e e ds the r e o fwi l lv i o l ate or be i nconsi ste nt w i th the provi si ons ofR egulatio n G [or] . .
. R eg u lat ion U
. . . . (SA :28 3-8 4.) I n di s c us s i ngCo mdi s c o ’ s g ua r a nty, the F a c i l i ty A gr eem en t r epe at edl y refer r ed to the “ co l l at er als ec ur i ngthe Gu ar antee d D ebt. ” How eve r, the A gr ee m ent a l so prov i de d: N o Co ll ateral. N otw ithsta nd ing an y referen ce he r ein t o a ny c o l l at er als ec ur i nga ny o fthe Gu ar antee d D ebt, i t i s a cknowle dged that, o n th e dat e her eo f, ne i th erthe Co m pan y no r a ny Borr ower has gr anted, or has obl i gat i on to gr an t, any s ecuri ty i nter esto r ot h er l i en o n any ofi ts proper ty ( i ncl ud i ng, witho ut l i m itati on, the Rest r i ct ed S to ck) t o the Le nde r s as s ec ur i tyf o r the Gu ar antee d D ebt. ( SA:2 90. ) “Guarant eed Debt” i ncl ud ed the pri nci pal o f and intere st on the l oans to the b or ro w er s, pl us any othe r fee s t h e B or ro w er s o w ed p u rs u an t t o th e N ot es . (SA :28 8.) The Borr owers el ecte d to parti ci pat e in the SI P Pro

gr am , executi ng a SI P opti on exerci se f or m and a Lettero f8 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. Di r ec ti o n, a utho r i zingthe Ba nkto pay the pr o ce eds o fthe loa n to C om d isc o. E ac h B or ro w er als o ex ec u te d an SIP N ote
. The pro ceeds of t h e SI P Loans were re m i tte d to C om d isc o a s c on sid er at ion for th e p u rc h as e o f th e SIP shar es. Com disc o caused the appropr i ate num bero f shar es to be all oca ted and tr ansfer re d to i ts Regi str ar and TransferA gent, M el l on Invest orS er vi ces, LLC , f or the Bor ro w er s’ bene fi t. T h e Borr owers opened acco unts at the F i rs t Nati onalBank o fChica go i n or der t o rec ei ve dist ributi ons ofst ockdi vi dend s that we re used to off setpaym ents du e under the S I P N ote s. W i th i n s i x months, Co m di sc o ’ s st o cks pl i t, do ubl i ng the n umb e r o fs ha r e s e a c h S I P par ti ci pa nth a d ob t a i ne d. A nd i n j ust o vertwo ye ar s, th e stoc k was tr adingat$5 3 per shar e. S eve ra lS I P part i ci pants so l d th eir shar es at a pr i ce tha t noto nl y s at i sfi ed th ei r l o ano bl i g at i o ns but al so earned them a profi t, even a ftershar i ng with C om d isc o th e re q u ire d 50 % of t h e b a l a n c e o f th e g ain re aliz ed o n t h e s ale . H ow ev er , th e t id e t u rn ed an d in J uly20 01, Com disc o fi l ed f orbank ru ptcy. Thi s was an even t ofde f au l t unde r the Not es a nd c au se d Ba nkOne to a cc el er at e al la m o unt s o ut st an di ngon th e N o te s. The bankr u p tcy al so tr i gge re d an eve nt o fdef aul t under the F aci l i ty A gr eem ent. T he Lenders fi l ed a pr oo fo f c laim in C om d isc o’s b a n kr u p tc y for ap p ro x im at ely $133 m i l l i on. Com disc o set tl ed i ts guar antoro bl i gat i on to the Lend er s f or a paym ent of ove r $126 m i l l ion in exchange f orthe Len d er s’ assi gnm ent t o the Com disc o Lit i gat i on T rust ee ofal lr i ghts und erthe N ote s aga i nst the Bor ro w er s. The bank ruptcy cour t a pp ro ved th e se tt l ement, a nd the di st r i ctc o ur t he l d tha t th eN os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. 9 Tr us te e i s th e ho l dero fthe Not es wi tha l l rights o fe nf or cem ent. I n 200 5, the Tr ustee fi l ed separ ate act i ons aga i nst e ach B orrow er, seeking to en force the SIP N otes. T he Borrow ers as s e r t e d s e v e r a la ffi r ma t i v e d e fe n s e s , i n c l u d i n gfr au d an d dur es s. The Tr us te e m oved f o r s um m ar y j udg m en t a g a i n s ttwo o f th e d e fe n d a n t s , J a me s Du n c a n a n d L y s s a K. P a u l

. D u n c a n a n d P a u lfi l e d a c r o s s - mo t i o n f o r s u mm ar y j udg m en t, a r g ui ng tha t th e N o te s wer e une nf or ceabl e ba sed o n vi ol ati ons of federa lm ar gi n re gul atio n s. InD ec em b er 20 07, th e d ist ric t c ou rtd en ied th eir cr o s s - mo t i o n a n d g r a n t e d th e T r u s t e e ’ s mo t i o n . The c ou rtd et e r m i n ed th at th e T ru st ee p ro ve d h is p rim a fa c ie case o n the SI P N ote s a nd r ej ecte d the “pr i m ar y defense th atthe S I P P r o g r am was fr au dul en t” ( S A: 17 7) , ha ving co nc l ude d tha t Comdi sc o ’ s al l eg ed m i sr epr es en ta ti o ns w ere exp ressions of le g a l o p inion tha t cou ld n ot su p p ort a fra ud cl ai m . ( SA:1 78. ) The co urt furthe r fou nd that Du ncan and P aul had not shown r el i ance o n the al l ege d m isr ep re se n ta tio n s . ( Id. )
. The co urt al so concl ud ed that the defendants co uld notas ser t the al l ege d i l l ega l i ty o f the l oans as an affi rm ati ve d efense and thus r ej ecte d th e ar gu m en t th at t h e loa n s w er e u n en for c ea b le. (SA :18 0.) As f o r the ne g l i g en t m i sr epr es en ta ti o n de fen se , the cour t f ound ba sed on the re cor d that the defe ns e w as n ot available against C om d isco or th e ban ks. T he cou rt rej ecte d al lo theraffi rm ati ve defe nses. The Truste e s ubsequentl y m ove d f orsum m ar y j ud gm en t a g a i ns t the r e maining de fe nd a nt s , i nc o r po r a t i ngi ts m em or an d u m i n supp or t o fi ts sum m ar y j ud gm ent m o-10 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. ti ons aga i nst Duncan an d P aul

. The defendants am ended th e i r a ffi r ma t i v e d e fe n s e s , a s s e r t i n g th a t C o md i s c o c o mmi t t e d s e c u r i t i e s fr au d a n d v i o l a t e d s e c u r i t i e s l a ws in breach of con tract, thu s exc us ing the Borrow ers’ non p erf or m ance. A nd the Truste e s up ple m ented hi s m em oran d um to add ress th e n ew de fenses

. Th e d istri ct cou rt g r an te d s um m ar y j udg m en t to the Trustee , c o nc l udi ng th at th e S I P Pl an di d no t vi o l at e th e m ar gin reg ul at i o ns and, eve n i fi t had, the defe nd an ts had no ev i dence of sc ien te r an d th u s c ou ld n ot es ta b lish th e R u le 1 0b -5 c laim i n thei r fifth affi rm ati ve defe nse. The co urt al so deci ded that e v e n i fthe r e wa s a t e c hn i c a lv i o l a t i o n o fa nyr egul ati o n, s ucha v i o l at i o n di d no t r en derthe Not es une nf o r ce ab l e be ca us e th e defen dan ts wer e no t wi th i n the “zo ne o fi nter est s” prot ecte d by the r egul ati ons. J ud gmen t s we r e e nt e r e d, a nd the Bo r r o we r s a pp e a l e d. W i thi n a y earof the entr y ofthe j ud gm ents, the Truste e m ove d to cor re ct o r m odi fy the ju dgm ents, se eking to i nc r ea se the a m o unt s o fthe j udg m en ts
. W e g r an te d the dist ri ct c ourtl eave to r ule o n the m oti on; am ended j ud gmen t s we re e nt e r e d; a nd the Bo r r o we r s t i mel y a pp e a l e d. T h e a p p ea ls w er e c on so lid a t e d for d isp os itio n . A d d iti onalf acts ar e di scusse d as a pp ro pri ate
.
II. A N A L Y S IS T h e B or ro w er s a r g u e t h at th e d ist ric t c ou rterr ed in ( 1) co nc l ud i ng tha t they c oul d not a sse rtvi ol ati ons of Re g ul at i o ns G a nd U a s ana ffi r m at i ve de fen se ; ( 2) c o ncl ud i ng that Com disc o and Bank One did not vi ol ate the Regula tion s; (3) pl aci ng the burden o fpro vi ng a vi o l at i o n o fthe Re g ul at i o ns on th e Bo r r o wer s; ( 4) c o n-N os. 08

- 3961 , 08

- 3966, 08

- 3967, 08

- 3981 , etal

. 11

R eg u la tio n G p ro v id e d : “ L i m i tat i on on extend i n g pu rpose 1 cr ed it. N o le nd er . . . sh a ll ex tend any pu rpose c redit, s ecured di r e c t l y ori nd i r e c t l y by m a r gi n s t oc k i n a n a m ou nttha te x c e e ds the m axim u m loan v alu e of the c olla tera l secur ing the cre d it as s etf or th i n § 20 7. 7 o fthi s par t[ ’ The m axim u m loan va l ue ofany m argin sto ck

. . . i s fifty per c ent ofi ts curre nt m arket v alu e.’ ]. ” 12 C .F.R
. § 2 0 7 .3 (b ). U nless oth erw ise no ted , all c i t a t i on s i n thi s o pi ni ona r e t o the 1998 edi t i ono fthe Co de ofFe der al R egul at i ons , whi c h c ont ai ns the ve rs i ons ofthe regulat ions i n effectat the rel evant ti m e. clud ing tha t even i f th e B orrow ers p roved regulatory vio lat ion s, th ey c ou ld n ot av oid su m m ar y j u d gm en t in f av o r o fthe Tr us te e ba se d o n su ch vi o l at i o ns ; ( 5) g r an ting sum m ar y j ud gm ent o n the affi rm ati ve defe nses base d on i l l ega l i ty und erSecti on 10( b) of the Se curi ti es Ex change A ct o f1934 a nd S EC Rule 10 b- 5, i l l ega l i ty und erS ecti on 17(a) ofthe Sec urities A ct of 19 3 3 , and the ex cu se-ofnonperf or m ance defense; ( 6) extending i ts D unc an/Paul su m m ar y j udg m en t r ul i ng s to the Bo r r o wer s; a nd (7) g ra n tin g t h e T ru s t e e ’ s R u le 6 0(a ) m ot ion . W e w ill add re ss each ar gum ent a s nec ess ar y.
A. Re g ul a t i o ns G a nd U The Borr owers conte nd that Com disc o vi ol ate d Regul ati on G by extendi ng purpose cr edi t t o each Borr ower ( i n the f or m o fCom disc o’ s guaranty t o the Bank) se c u re d byhi s m ar g i n st o cki n a n a m o unte xc ee di ng5 0% o fthe pu r c h a s e p r i c e o f th e s t o c k

. T h e y c l a i m th a t the Ba nk 1 vi olated Regul ati on U by ar ra ngi ng f orCom disc o to ex te nd c r edi t to the m o n better te r m s an d c o ndi ti o ns12 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l.

R eg u la tio n U p ro v i d e d : “ A rra n g ing cre d it. N o bank m ay 2 a r r a ng e f orthe e x t e ns i on. . . of any pu r po s e c r e di t, e x c e pt upon the s am e t er m s an d co ndi t i ons unde r whic h the ban k i t s e l fma y e x t e n d

. . . p u r p o s e c re di tu n de r th i s p a r t
. ” 1 2 C
. F
. R. § 22 1 .3(a )(3). It al so p ro v i d ed : “ E x ten d ing cre d it. N o ba nk s ha l l e x t e nd a ny pu r po s e cr e di t, s e c ur e d di r e c t l y ori nd i r e c t l y by m argin s tock, i n an am ount thatex cee ds the m a xim um l oan value ofthe col lat eral s ecuri ng the c redit

. ” Id
. § 22 1 .3(a )(1). R eg u lation G requ ired tha t in the case o f exte n si o n o f cred it 3 se cured d ir ect ly or indire ct ly by m argin s tock, “the l ender s h a l l r e q u i r e i t s c u s t o me r t o e x e c u t e Form FR G- 3
. ” 1 2 C
. F
. R. § 207. 3 ( e )
. An d Re gu l a t i onU r e q ui r e d a ba nktha te x t e nd s such cre d it i n an am ount greate r than $100, 000 to “requir e it s cust om er t o exe cute Form FR U-1. ” Id. § 2 2 1 .3(b ). th ani t co ul d l eg al l y e xt en d c r edi t unde r the r egul at i o n. They al so al l ege thatthe Bank vi ol ate d Regul atio n U by ex ten d ing p urp os e c r ed it ( th e loan) to each B orrow er, i ndi r ec tly s ec ur ed byhi s m ar g i n s to cki n a n a m o unt ex c ee d in g 5 0% of th e p u rc h as e p ric e o f th at st oc k. In 2 addi ti o n, the y mai nt ain th at Comdi sc o a nd the Ba nk com m i tte d “ pu rpos e sta tem ent” vi ol ati ons of Regula ti on G or U by fai ling to obtain from ea c h B o rrow er a Feder alRese rv e F or m FR G- 3 o r U

- 1. 3

1. W hethert he Borr ow er s M ay A ssertV i ol at i ons of R egul at i ons G and U as an A f f i r m at i ve D ef ense W e begin by con side ring w he t he r the d istri ct cou rt er r ed i n c o nc l udi ngtha t th e Bo r r o wer s l ac k ed st an di ng to ass er t v i ol ati ons ofRegul ati ons G and U as an a ffi rm a-N os. 08

- 3961 , 08

- 3966, 08

- 3967, 08

- 3981 , etal

. 13

Se c t i on 7( d) pr ovide s i n pe rt i ne ntpar t : “I ts hal l be unl awful 4 for a n y p e r son no t sub ject to sub section ( c) of this section to ex t en d or m ai nt ai n c re dit o r to ar ra nge f or the e xt en s i on or m ai nt en anc e ofc re di tf or the pur p ose ofpur c has i ng o r c ar ry i ng a ny s ec ur i t y, i n c ont ra ven t i on ofs uc h r ul es an d reg u lation s as the B oa rd shall p rescrib e to p rev en t the exc ess i ve us e ofc re di tf or the p u rch as i ng o r c ar ry i ng o for t ra di ng in secu rities in circu m v en tion of th e o t h er p ro v ision s of this se ct io n .” 1 5 U .S.C . § 7 8 g (d ). Se c t i on 29 ( b) pr ovi des : “Eve ry c ont ra c tm ade i n vi ol at i on of any pr ovi s i on ofthi s c hapt eror ofan y r ule or r eg ul at i on ther eund er . . . the perf orm ance ofw hich involves the violation of, or th e con tinu an ce of an y rela t i o n sh ip or p rac tice in violat ion of, any prov is ion ofthi s chapter or any rule or re gulat i on the re under, s hal l be voi d ( 1) as re gar ds the ri ght s ofany person w ho, i n violat ion ofany such provisi on, rule , or r egulat i o n, s h a l l h a v e mad e o r e n g a g e d i n th e p e r f o r man c e o fan y s uc h con t r a c t, a n d ( 2 ) a s r e g a r ds th e r i g h t s o fa n y p e r s on w ho, not bei ng a party to su ch contract, s hall have acquire d a ny righ tthe r e un de r wi th a c t ua l k no wl e dg e o fthe f a c t s by reas o n o f w hich the m aking or perf orm ance ofs uch contrac t w a s in v io la tio n o f a n y su ch p ro v isi o n, ru le , or re g u la tio n . . . . ” 1 5 U .S.C . § 7 8 cc (b ). ti ve defe nse. The di str i ct c ou rt ’ s co ncl usi on was bas ed o n Bass l e rv. Ce nt r al Nat i onal Bank, 71 5 F
. 2d 308 ( 7th Cir
. 19 83) , wh i ch h eld thati nvest m ent b or ro w er s hav e no p rivate ri gh t of action against inve stm en t lend ers und er Se cti on 7( d), Se cti on 29(b) , or any othe r p ro vi si on 4 of th e Se c u rit ies E x c h a n g e A c t o f 19 34
. Id. a t 31 3. The di st r i ctc o ur t al so r el i ed o n Bl ai rv . Ba n k One, N. A. , 30 7 B .R . 906 (N .D . I ll. 20 04 ), a pp eal di s m i s s e d in ligh t of settle-14 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l.

m e ntwi t h i ns t r uc t i ons t o dis m i s s s ub no m . In reCom di sco, Inc. , N o. 04-2108 , 2005 W L 61363 23 (7th C ir. J an . 28, 2005 ), an d va c ate d b y Bl ai rv . Ba nk One, N. A. , 1 : 0 3

- c v - 3 0 9 5 ( N. D. I l l

. Mar
. 3 1 , 2 0 0 8 ) , wh i c h a pp l i e d B a ssler

. Th e B orrow ers conte nd thatthe dist ri ct c ourter re d in r el yi ng o n B a sslera nd B lair

. W e a gr ee. The B a ssler pla i ntiffente re d i nto a s er i es ofl oan tr ansac ti o ns t o fi na nc e th e pur ch as e o fs to cka nd pl ed ged th e st oc k a s s ec u rit y for th e n ot es . Th e b an k fa i l e d t o ob ta in a Regula ti on U stat em ent fr om hi m , wh i ch he c l ai m ed vi o l at ed S ec ti o n 7 ( d) o fthe S ec ur i ti es Excha ng e A cta nd Re g ul at i o n U. The pl aint i ffs o ug hta j udg m en t vo i di ng the l oans. The d i str i ct c ourtdi sm i sse d the co m pla i nt, h old in g t h at n o p riv at e a c tio n w as av aila b le. B a ssler, 71 5 F. 2d a t3 0 8

- 0 9
. T he p l a i nt i ffa s s e r t e d tha tS e c t i o n 7 ( d) and S ecti on 29(b) i m pli ed a pri vate ri ght of action for b or ro w in g in ve st or s a ga in st len d in g b an ks

. Id. at 309, 311. W e a ffi rm ed t he di str i ct c ourt, hol ding ther e was no r i ght o fact i on in i nvest m ent b or ro w er s a s a gainst in ve st m en t le n d er s. Id. at31 3. B lairtook B a sslera ste p further

. Bank One fi l ed a pr oo f o f cl ai m i n Comdi sc o ’ s ba nk r upt cy pr o ce eding f or the ou ts ta n d in g l oa n s to SIP p ar tic ip an ts
. B lair, 30 7 B. R. at90 8. C om d isco fil ed an objection seeking to void Ba nk On e’s c laim ba s e d on alleg ed m ar gin vio lat ion s. Se ve ra l SIP par ti ci pan ts ( i nc l udi ngmos t o fthe Bo r r o w ers i n o ur case ) i nter vened and so ught a decl ar ato ryj ud gm ent that Ban kOne c o uld n ot pur su e i ts c l ai m s ag ains t th em. The ba nk r upt cyc o ur t he l d tha t ne i th erCom d isc o no r the i nt er ve no r s ha d s ta tu to r y s ta ndi ngt o c ha l l en g e th eN os. 08

- 3961 , 08

- 3966, 08

- 3967, 08

- 3981 , etal

. 15 l e g a l i t y o fthe l o a ns und e r l y i ngBa nkOn e ’ s c l a i m. On ap p eal to the d istri ct court, C om d isco and the interv en ors ass er ted that the l oans vi ol ate d Regul ati on U and that Se cti on 7 ( d) a nd S ecti on 2 9( b) o f t h e Secur i ti es Ex change Ac tp r o v i de d th e m w i th a d e fe n s e t o B a n kO n e ’ s c l a i m. They ar gued that B a sslerwas not contr ol l i ng be cause they w i shed to as ser t a n affi rm ati ve defe nse, nota se par at e ca us e o fa ct i o n. The di st r i ctc o ur t r ej ec te d the ar gum ent a s “ one ofse m anti cs, ” Bl air, 3 07 B.R a t 9 09, noti ng tha t they were se eking a j ud gm en t i n thei r f avo r ra th er th an rais in g a n affir m a t ive d efe n se . Id. Th e cou rt concl u d ed that B a sslerwas c o nt r o l l i ngb ec au se the interven ors soug ht a d eclaration th at th e loans w ere vo id

. Id. at90 9-1 0. T h e a p p ella n ts arg u ed th at th ey co u ld ass er t Regula ti on U vi ol ati ons as an affi rm ati ve defe nse unde r S ecti on 7 ( d) , r ely i ngpr i m ar i l y o n Transam er ica M ortgage A dvisors, Inc. ( T A M A ) v. Lewis , 444 U
. S. 11 (1979). T A MA hel d that § 21 5( b) o fthe I nvest m ent Ad vi ser s Act of 1940 cr eat ed a priva te r ight ofact i on in cl i ents ofi nvest
men ta dv i s e r s t o v o i d a n i nv e s t men tc o nt r a c tb a s e d o n vio lat ion s o f th e A c t. Id. at18 -19 . The c ourtwas not persuaded. I t s ai d that B a ssler ha d a ddr e s s e d T A MA , concl ud i ng tha t T

A MA “d i d not re quir e a n i m pli ed ri ght o f acti on a ri si ng fro m § 7( d). ” B lair, 3 07B. R. a t 91 0 ( ci ting B a ssler, 715 F.2d at31 1-1 2). T h u s, B lairr e a d B a ssleras precl ud i ng a party f ro m r ai si ng m ar gi n vi ol ati ons defe nsi vel y. H ow ev er , B a sslerwas an a c tio n by a pl ai nti ffi nvest or ag ain st a len d in g ba n k to vo id a c on tr ac t. B a sslerdi d not hol d that S ecti on 7 ( d) a nd S ecti on 2 9( b) cannotbe16 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l.

ra i sed defensi vel y b y a bo rr ow erag ai nst a l ender i n an ac tion to enf or ce a co ntra ct, wh i ch i s the cas e pr ese nted h er e. T h u s, B la ir e xt e nd e d B a sslerb ey o nd i ts r ea ch

. N either B lairnor B a ssleroffe rs au th or ity f or th e p ro p os iti on t h at the Borr owers need a pr i vate r i ght o fact i on und erS ec tio n 7( d) o r Se cti on 2 9( b) in or der t o ass er t a n affi r m ative defen se tha t th e N o te s ar e vo i d a nd un en forceab l e be cause they vi ol ate S ecti on 7 ( d) a nd Regul at i o n s G a n d U. N o private right of action u nd er a s t a t u t e is ne cess ary to a s s e r ta v i o l a t i o n o ftha ts t a t ut e a s a n a ffi r mat i ve d efe n se . See, e . g. , Kais e rSt e e l Corp. v. M ul l i ns , 45 5 U.S
. 72 , 86 ( 1982 ) ( al l ow in g d efense und er§ 8( e) o fthe N ati onal LaborRel ation s A ct where defe nd ant had no pri vate r i g h t of ac tio n to en for c e t h e s ta tu te ); U ni t e d S t at es v. M i s s . Val l ey G enerati ng Co. , 36 4 U.S
. 52 0, 56 6 ( 1961 ) (hol di ngc o nfl i cto fi nt er es t o n the pa r t o fag o ve r nm en t offic ial w h o p ar tic ip at ed in c on tr ac t ne go tia tio n s in viol ation of fede ral law rend ered con tract u ne nforcea ble); E. Bement& So ns v. Nat ’ l Har r ow Co. , 186 U
. S. 70, 88 ( 1902 ) ( as su m i ngthat o nl y the Att o r ne y Ge ne r alc o ul d b r i ng ana ct i o n t o e nf o r ce the S he r m anAct, y eta ll ow i ngthe defe nse that the co ntra ct was i l l egal u nd erthe anti tr ust law s); Rush-P resb yter ian-St. Luke’s M ed. Ctr. v. Hel lenic Repu bli c, 9 80 F. 2d 449, 45 5 ( 7th Ci r. 19 92) ( noti ng tha t illeg al i ty m ay be a defense to contr act eve n though sta tutes thatm ake co nd uct i l l ega lo rdin ar i l y pr escr ibe p u b lic r em ed ies ); Johnston v. Bu m ba , 76 4 F
. S up p. 12 63, 1279 ( N
. D. I l l

. 19 91 ) ( al l owing defe nd ant t o ass er t a s a d efe n se to an ac tio n on a p ro m iss o r y n o t e t h at th e s ec u ri-N os. 08

- 3961 , 08

- 3966, 08

- 3967, 08

- 3981 , etal

. 17 tie s w er e s old in v iola tio n of se c u rit ies law s ), aff’d on o t h e rg r o u n ds , 98 3 F .2d 10 72 (7t h C ir. 19 92 ). Ka iser Steel expla i ns: Refusi ng to enf or ce a pro m i se that i s i l l ega l un de r the

. . . l a ws i s n o tp r o v i di nga n a ddi t i o nal r emedy c o nt r ar y t o the wi l lo fCo ng r es s. A defen dant proffer i ng the defense seeks o nl y t o be r el i eve d ofan i l leg alo bl i gat i on a nd does notas k any affi rm ati ve re m edy base d o n the

. . . l aw s. “[ A ] ny o ne sued upon a contr act m ay setup as a defence th ati t i s a vi o l at i o n o fthe a cto fCo ng r es s, a nd if found to b e so , tha t f ac t wi l lc o nst itu te a go od d efe n c e t o th e a c tio n .” 455 U
. S. at81 n. 7 ( quoti ng E. Bement& So ns , 1 86 U
. S. at 88). Re co g ni zing th at o nl y th e N at i o na l Lab o r Rel at i o ns B oa rd co u ld p ro vid e a ffirm at ive rem ed ies for u n fair lab or p ra c tic es , i d. at 8 6, th e C ou rt held that “a cou rt m ay not enf or ce a co ntra ct pr ovisi on wh i ch vi ol ate s [ federa ll aw ]
. ” Id. ; see also id. at 83 ( “[ A ] fe d er al cour t has a dut y to deter m i ne wh ethera contr act vi ol ate s federa l l aw be f o r e e n f o r c i n gi t
. ” )
. B y r e fu s i n gt o e n f o r c e a c o ntr ac t t h at vio lat es a st at u te , th e c ou rtse rv es th e p u b lic i nt eres t o fde te r r i ngc o nt r ac ts i n v i o l at i o n o fthe l aw a nd p ro m ot in g a d h er en c e to th e la w . Id. at77 ; s e eal s o N. Ind. Pub. S e r v. Co. (NIPSCO ) v. Car b on Cty. Coal Co. , 79 9 F
. 2d 265, 27 3 ( 7th Ci r. 19 86) ( re fusi ng to enf or ce a co ntra ct that violates a sta tute deter s be havi orf orbi dd en by tha t s t a t ut e )
. Acc o r di ng l y, the Co ur t he l d tha t the defendant w as enti tl ed to raise and have adj ud i cate d i ts defen se tha t th e ag r ee m en t su ed o n was v o i d a nd un en -18 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. for c ea b l e a s i n vio lat ion of fed er al la w . Ka iser Steel , 45 5 U
. S. at77

- 86. The Truste e atte m pts to di stingui sh the se author i ti es; he st ops s hor t, however, o fchal l engi ng wh ether they supp or t the pro posi ti on that no pri vate r i ght ofact i on i s n e e de d t o a s s e r ta n a ffi r mat i v e de fe ns e o fi l l e g a l i t y. H e fi rs t ar gues, ci ti ng Ka iser Steel a nd Rus h- Pre s b yt e r i an , th at som e of t h e cases relied on by the Borrow ers re q u ired the par ti es ass er ti ng the i l l ega l i ty defe nse t o show that the sta tute at i ssue w as des ign ed to p ro te c t t h eir int er es ts
. Ka iser Steel di d say that a defen se unde r § 8( e) o f th e N at i o na l Lab o r Rel at i o ns A ct c oul d be “ ra i sed bya partywh i ch § 8( e) was de s i g ne d t o p ro tect
. ” Id. a t 86
. Butthi s was i n the c o nt ex t ofa ddr e s s i ngwh e the r the di s t r i c tc o ur th a d a utho r i ty to adj ud i cate a defe nse b ase d on the i l l ega l i ty of a prom ise und erthe anti tr ust a nd l aborl aw s, o r w hetherthe N LR B had excl usi ve j uri sdic tion ove r th e m at te r. Se e, e . g. , i d. at 83 ( “W e al so do n ot ag re e that the questi on ofthe l ega l i ty ofthe

. . . [ prom i se] under

. . . the N LR A was w i thi n the excl usi ve j uri sdic ti on o f th e [ N L R B ].
. . . ”)
. In tha t co nt ex t, the Co ur ts t a t e d a gener alr ule w ith br oad appl i cabi l i ty: “a co urt m ay not en for c e a c on tr ac t p ro vis ion w h ich vio lat es [fed er al la w ].” Id. at86
. The Truste e a l so ove rr eads R ush -P resbyteria n. I n that ca s e , t wo Ch i c a g o h o s pi t a l s s ue d the g o v e r nme nto f G re e c e a n d tw o of it s a ge n c ies for p ay m en t o f bills f orm or e than $500 , 000 f orse rv i ces provi ded i n connect i on w i th kid n ey tr anspl ants. The defendants ar gued thatN os. 08

- 3961 , 08

- 3966, 08

- 3967, 08

- 3981 , etal

. 19

one of t h e h ospita l s co uld notco l l ect f ori ts ser vi ces because i t h ad noto btained a r equi re d stat e per m i t. Rus h- Pre s b yt e rian , 98 0 F
. 2d at 451, 45 5. The i l l ega l i ty defe ns e d id n ot f ai lo n the gr ound that the st atute di d no t pr o v i de a pr i v a t e r i g ht o f a c t i o n o r wa s notdes i g n e d t o pr o t e c tth e d e fe n d a n t s ’ i n t e r e s t s . In s t e a d , we f ol l owed the equi tabl e, bal anci ng ap proa ch thatappli es w h en a c on tr ac t it se lf is n o t i l l e ga l bu t is ca rrie d ou t in an i l l eg almanne r, a nd de te r m i ne d tha t th e ho spi tal ’s f ai l ure to com plywit h the perm i t r equi re m ent di d not b ar i t f ro m co llec tin g p ay m en t. Id. at45 5- 56; see a lso NIPS CO , 7 99 F
. 2d at2 72

- 74 ( apply i nge qui tabl e, b al an cing appr o ac h whe r e, a ss um i ng a v i o l at i o n “ l ur k i ng so m ew h er e in th e b ac kg ro u n d , th e c on tr ac t it se lf is not i l l ega l ”)
. I m port ant t o our deci si on was the f act th at barring r ecov ery w ou ld p rod uc e a san ction d isprop ortio n at e t o th e w ro n g. Rus h- Pre s b yt e r i an , 98 0 F
. 2d at 455- 56
. Thu s, the de fen dan ts wer e al low ed to a ss er t th e defe nse o fi l l ega l i ty; theyj ust l osto n the m er i ts. The Truste e next ar gues that othe r cases r el i ed on by the Borr owers su c h as M i s s i s s ippiVal l ey Ge ne r at i ng C o . a nd E. Bement& So ns i nvol ved chal l enges to contr acts o r conduct w hose very subj ect m att erwas i l l e g a lo r i n fe c t e d b y a n i l l e g a lc o n fl i c to fi nt e r e s t
. S o me ofthe case s f al lwith in t h i s ca teg or y; o ther s s uch as Rus h- Pre s b yt e r i an do not

. Fur ther m or e, “a co urt has the power to re fuse t o enf or ce a c on tr act w hen enf or cem ent w oul d vi ol ate cl ear l y a rt i cul ate d congr ess i onalgo al s a nd policie s. ” StuartPa rk Ass oc. v. A m er it ec h P ensio n Trust, 51 F. 3d 1319, 1326 (7th C ir. 1995).20 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. The Truste e a sse rt s that “ [i]t has l ong been hel d that a par ty i s no t e nti tl ed to rais e a vi ol ati on o fa sta tute as ana ffi r m at i ve de fen se unl es s i t ca n b e sh o wn th atthe partyas ser ti ng the defense po ss es ses a pri vate r i ght o f acti on under that s tatute. ” Ap pel l ee Br. 14 n. 2. H e ci tes Inland Co m m er cial P roper ty Sales, Inc. v. A tl antic A ss ocs. , Inc. , N o. 90 C 103 6, 199 1 W L 27831 1, at* 4 & n.3 ( N
. D. I l l

. Dec. 1 8 , 1 9 9 1 ) ( s t r i k i n ga ffi r ma t i v e de fe n s e s b a s e d o n n o n c o mpli a nc e wi th s t a t ut e b e c a us e de fe nd a nt“ do e s n o thave a pri vate cause o fac ti on pursuant to the Rea lEstat e Lice nse Act and ther ef or e ca nnot r ai se these affi rm at i v e de fe ns e s”) , a nd Fa rm C redit B a nkof St . Lou is v. D o rr, 62 0 N
. E. 2d 54 9, 55 1- 53 ( I l l

. App. Ct. 19 93) ( co nc l udi ng that a pri vate cause o fact i on i s nec ess ar y t o ass er t a cl ai m ba s e d o n no nc o mpl i a nc e wi th a s t a t ut e wh e the r th e cl ai m i s m ade i n a c om pla i nt o r as an affi rm ati ve d efe n se ) . Th es e a re th e o n ly a u th or itie s c ite d for th is propos i ti on a nd theyar e rele ga ted to a f oo tnot e. These deci si ons ar e no t per suasi ve; theyer re d i n re q u i ring a pri vate r i ght ofact i on a s a pre re quis i te to the a sse rt i on ofa sta tutory v i ol ati on a s a n affi rm ati ve defe nse. Furtherm or e, S ecti on 2 9( b) o fthe Se curi ti es Ex change A ct pr ovi des the Borr owers w i th the r i ght t o ra i se vi ol atio n s o f th e A c t a n d m ar gin reg u lat io n s d efe n siv ely to p re c lu d e e n for c em en t o f a c on tr ac t. A s s ta te d , T A MA hel d that Se c tion 215(b) o fthe I nvest m ent Ad vi ser s Act cr ea te d a pr i va te r i g hto fa ct i o n in c l i en ts o fi nv es tment adv i se r s to voi d a n inv es tmenta dvi se r s co nt r ac t. The lan gu a g e o f Sec tio n 21 5(b ), 15 U .S.C . § 80 b -1-1 5, c los ely p arall els the langu age o f Section 29(b). W hile the C ou rt note d that the statuto rysecti ons i nvol ved w er e “ i ntendedN os. 08

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. 21 to benefi t the cl i ents of i nvest m ent a dvis er s, ” T A MA , 444 U .S. at17, i t s tat ed that “w hetherCongr ess i ntended add i ti onal l y that these p rovi si ons w oul d be e nfo rce d thro ugh pri vate l i ti gat i on i s a di ffer ent qu esti on, ” i d. at 18
. To a ns wertha t que stion, the Co ur t l o o k ed to the l eg i sl ative hi st o r y, whi chwas s i l en t o n the i ss ue , a nd the st at u to ry lan gu ag e. Id. at15 -19 . Th e C ou rtco n c lu d ed : [ T]he sta tutory l anguage i tse l ff ai rl y i m p lies a ri ght t o speci fi c and l i m i ted r el i efi n a federa l co ur t
. Byde c l a r i ngc e r t a i n c o nt r a c t s v o i d, § 2 15 byi ts t er m s necessa r i l y c o nt empl at es tha t th e i ssue ofvo i dn ess under i ts cri ter i a m ay be l i ti gat ed som ew here

. A t the ver y l eas t Congr ess m ust hav e a ssum ed t h at § 215 coul d be r ai sed defen si vel y i n pr i va te l i ti g at i o n t o pr ec l ude the enf or cem ent o fan invest m ent a dvis er s co ntra ct. Id. at18
. The Courtt h en obser ved thati t has “r eco gni zed that a c om parabl e pr ovi si on, § 29(b) o fthe Se curi ti es Exch an g e Act o f1934, 1 5 U. S
. C. § 7 8c c(b) , c o nfer s a ‘ r i g ht to re sci nd ’ a contr act voi d und er [t h at statute]
. ” Id. at18

- 19 ( ci ti ng M i l l s v. Ele c. Aut o- Li t eCo. , 39 6 U.S
. 375, 38 8 ( 19 70 ) )
. And i n M il ls , a s t o c k ho l ders’ a c t i o n t o s e ta s i de a co rporat e m er geral l ege dlyi n vi ol ati on o fthe Se curi ti es Ex change A ct, the Court sta ted thatS ecti on 2 9(b) “ est abl i sh e s th a tth e g u i l t y p a r t y i s p r e c l u d e d fr o m e n f o r ci ng the c ontr act aga i nst a n unw i l l i ng i nnocent party
. ” M il ls , 396 U
. S. at38 7- 88 ( approvi ng o fthe i n te rp re tat i on o f S ec ti on 29(b) a s r en der i nga c o nt r ac t “v o i dab l e atthe op tio n of th e in n oc e n t p ar ty ”); Sun ds t r and Corp
. v. Su n Che m . Corp. , 5 53 F
. 2d 10 33 , 1 05 1 (7th Ci r . 1 99 7) ( affi r m i ng22 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. dism i ssa lo fco unterc l ai m f orspeci fi c per f or m ance o r da mag e s u nd e r a g r e e men ttha tv i o l a t e d the S e c ur i ti es Ex change A ct and Rule 10b- 5 as “voi d as r ega rds the r i ghts o f[ the v i o l a t o r ] u nd e r S e c t i o n 2 9 ( b ) o fthe Act ” )
. Ac c o r din gly , T A MA supports the concl usi on that a bo rr ower has th e r ight unde r S ec ti o n 2 9(b) t o a ss er t vi o l at i o ns o fthe Se curi ti es Ex change A ct a nd m ar gi n re gul ati ons as an affi r m at i ve de fen se t o a b r ea cho fc o nt r ac t ac ti o n. The Truste e a sse rt s that T A MA , M il ls , a nd Sun ds t r and ar e i n h ar m o ny wi th B a s s l erbe c au se th e s ta tu to ry p ro visio n s v iola te d in t h o s e c as es w er e in te n d ed to be n efit th e pa rt ies se ek in g red re ss th ro u gh Se c tio n 29 (b ). It is tr ue that T

A MA a nd M il ls a ddr es se d whethe r the s t a t ut e a ti s s ue c r e a t e d a c a us e o fa c t i o n, a nd Sun ds t r and si m il ar l y c onsi dered wh ethera partyco uld as ser t a cl ai m t o e nf o r ce a c o nt r ac t. None th el es s, their r ea so ni ng su p p orts the as sertion th at th e B orrow ers m ay assert the a l l eged m ar gi n vi ol ati ons as affi rm ati ve defe nses. A nd ther e i s m or e a uthor i ty re in for c i ng the Bor ro w er s’ p os itio n . See B lue C hip Sta m p s v . M a no r D rugSto res , 42 1 U
. S. 72 3, 73 5 ( 1975 ) (d ict u m not i ng tha t S ecti on 2 9( b) provi des “that a contr act m ade i n vi ol ati on of any p ro vi si on o f t h e [S ecuri ti es Ex change] A ct i s v oi dabl e a t th e o p tio n of th e d ec eiv ed p ar ty ”); Nat ki n v . Ex c h. N at’l B ankof Chi. , 34 2 F
. 2d 675, 67 6 ( 7th Ci r. 19 65) ( “[ A ] vi ol ati on s uch as here all eg ed [ m aking l oans i n vi ol ati on o f Re g ul at i o n U] o per at es t o v o i d the c o nt r ac t righ ts o fthe partyin vi ol ati on”) ; StaffO pini on ofM ay 5, 19 82, Fe deral Re s e r v e R e g ul a t o r y S e r v i c e 5

- 9 0 0
. 1 1 ( “ Co nt r a c t s ma de i n vi ol ati on o fRegul ati on U are vo id ab l e under Se ction 29(b) ofthe [ E x c h a n ge A ct].”)
. A ll ow ing the Bor-N os. 08

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. 23

ro w er s t o ass er t the al l ege d vi ol atio ns o fRegul ati ons G an d U as a n a ffi r m at i ve de fen se i s co ns i st en t wi ththe R estatem ent (F irst ) o

f C o ntra cts § 5 98 ( 1932 ) , wh i ch se ts for th th e g en er al ru le th at a p ar t y t o a n illega l ba rg ain cannot re cove r dam age s f or bre ach of contr act. It is a l so consi st en t w i th the R estatem ent (S eco nd ) of C o ntra cts § 1 78 ( 1981 ) , wh i ch pro vi des: “A prom i se oro therte rm o fan agr eem ent i s un en f or ceabl e o n gr ounds ofpubli c pol i cy if legis lat ion p ro vid es th at it is u n en for c ea b le . .

. .” S e c t i o n 2 9 ( b ) e xp r e s s l y p ro vi de s tha ta ny“ c o nt r a c tma de i n violatio n o fa ny pr o vi si o n o fthi s ch apt ero r o fa ny rule orr egul ati on there und er. . . shal lbe voi d.

. . . ” 1 5 U
. S. C
. § 78cc(b). Sh earso n L ehm a n B ros., Inc. v. M & L Inv s. , 10 F. 3d 1510 (10th C ir
. 1 99 3) , i s ci te d a s addi ti o na la utho r i tyf o r the vi ew thatthe Borr owers cannot ass er t v i ol ati ons of m ar g i n r egul at i o ns a s ana ffirm ati ve de fen se . In She ars on , a st o ckbr o k erb r o ug hta b r ea cho fc o nt r ac t ac ti on and th e pur ch as er s as se r te d a n a ffi r m at i ve de fense f o r no npay m en t ba se d o n the b r oker’s vi o l at i o n o fRe g ul at i o n T, a m ar gi n regul ati on. The co urt f ound that the br oke r vi ol ate d the r egul at ion , id. at 1514 , bu t con clud ed there w as no a ffirm ati ve defe nse t o bre ach o fco ntra ct for su c h vio lat ion s. Id. a t 15 16
. The c o ur t th o ug htthi s co ncl us i o n w as “mos t co ns i st en t” wi ththe po l i cyb eh i nd Re g ul at i o n T an d o th err egul at i o ns w hich pr o te ctthe m ar ke t in ge n er al. Id. A notherco nsi derat i on was that the S ecuri ti es Ex ch an ge A ct a nd Regul ati on X r equi re d cli en ts to com p ly w ith m argin requ irem en ts . T h e cou rt re aso ned that since “the r egul ati ons pla ce the bur den24 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. ofm ar gi n re quir em ent com pli ance e qually upon br oke r an d cli e n t, it [w ou ld be] incon sisten t to place th e ent ire burden ofco m pli ance upon br oke rs in c on tract dispu tes
. ” Id. I n th is case, th ou gh, it rem ains to be d etermi n e d w h e the r th e B o r r o we r s w e r e r e s p o n s ib l e f o r c o mpl i an ce wi thmar g i n r equi rem en ts
. Re g ul at i o n X ex empts fr o m c o m pl i an ce “ [ a] ny bo r r o werwho o bt ains p urp ose cred it w ithin th e U nited States, un less the borr o wer w il lful l y c au se s th e cr edi t to b e ex te nde d i n c o ntraven tion of [the regu lations]. ” 12 C
. F.R. § 224.1(b)( 1). M or eov er, S ecti on 2 9( c) o fthe Se curi ti es Ex change A ct i m pli es a rightto as ser t avi ol ati on o fthe A ct o r Regul ati on G orU defensi vel y unde r Se cti on 2 9( b)

. S ecti on 2 9( c) pro vi des i n pert i nent par t: N othi ng i n thi s chapte r shal lbe c on st rued ( 1) to affectthe val i dity o fany l oan orexte nsi on o f cre dit

. . . unl ess atthe tim e o fthe m aking o fsuch l o an o r ex te ns i o n o f cr edi t
. . . th e person m aking such l oan orexte nsi on o fcr ed it
. . . shal lhave ac tu alkno wl edg e o ff ac ts b y re as o n o fwhi chthe m aking o fsu ch l oan orexte nsi on o fcr edi t .
. . i s a vi o l at i on o fthe pr o vi si o ns o fthi s ch apt ero r a ny r ul e o r re gul a t i o n the r e un de r, o r ( 2 ) t o a ff o r d a defe nse t o the col l ecti on o fany debt o r obl i gatio n . . . byany perso n w ho s hal lhave acqui re d su chde bt[ o r ] o bl i g at i o n . . . i n g o o d f ai thf o r v alue and w i thout actualkno w l edge o fthe vi ol ati on ofany provi si on o fthi s chapte r orany rul e o r re gul ati on there und eraffecting the l ega l i ty of su c hd eb t [o r] ob liga tio n . . . .N os. 08

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. 25 15 U
. S. C. § 7 8cc( c)
. By se tting f or th ci rcum sta nces u n d erwh i ch a l oan orexte nsi on o fcr edi t ca nnot be avo i ded , S ect ion 29( c) i m pli es that a l oan orexte nsi on of cre d it can b e av oid ed u n d er ot h e r circ u m st an c es . See C h ar les F. R ec h lin, Se cu r i t i e s Cr e di tRegul at i on § 11: 11 n .19 (2d e d . 200 7, d at ab as e u p d at ed Ju n e 2 01 0); cf. Int’l U ni on of

O pe r at i ng Eng’ rs , Lo ca l 15 0, AFL- CIO v. Wa rd, 563 F. 3d 276, 28 6- 87 ( 7th Ci r. 2009) ( concl ud i ng tha t th e Lab o r M an ag ement R el at i o ns Acti m pl i ed a r i g ht i n l aboro rg ani zati ons to sue o ffi cer s forbr each o f fid u c iar y d u tie s a n d st at in g t h at “[b ]y n u llifyin g a n y e x c u lpa t o r y p r o v i s i o ns , the s t a t ut e r e mov e s a p o s s ibl e d e fense to l i abi l i ty. I t fol l ows that the uni on m ust hav e a sta tutory rem ed y forl i abi l i ty f orbr each a gainst which th is sort of defen se m ight p oten tially be asserte d

. ”). T h e T ru st ee a ss er ts t h at “ th e illeg alit y d efe n se m ay on ly b e a ss er te d ag ain st co n tr ac ts th at are ‘int rin sic ally illega l’ ” an d no t i n c a s e s whe r e o ne pa r t y wo ul d ha v e t o vi ol ate a sta tute to perf or m i ts obl i gat i ons , c i ti ng NIPS CO
. But NIPS C O i tse l fr efutes thi s a rgum ent. N I PSCO and a c oal com pany ente re d i nto a co ntra ct forthe pu rchase ofco al f ortwenty y ear s. N I PSCO bec am e abl e t o buy el ectr i ci ty at pri ce s b e l o w the c o s t s o fg e ne r a t i nge l e c t r i c i t y fr o m coal and sto pp ed accepting coald el i ver i es. I t then sued the coa l com pany, se eking a decl ar ati on that itw as excused fro m i ts o bl i g at i o ns unde r the c o nt r ac t. NI PS CO a r g ue d tha t th e contr act vi ol ate d the M i nera lLands Leasin g A c t, wh i ch pr o hibi te d r a i l r o ads fr o m ho l di ngl ea se s o r pe r m i ts t o min e coa lexce pt f orits o w n u se f orr ai l ro ad purposes, bec ause th e c oa l co m p an y w as affiliat ed w i th a ra ilroa d

. NIPS CO ,26 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. 799 F.2d at 267-68. W e stated : “thi s i s n o t a case w he re the c ontr act i tse l fi s i l l ega l

. ” Id. a t 272. None th el es s, the an aly si s di d not sto p the r e. W e as su m ed th atthe co nt r ac t vi o l at ed th e Act an d c o ns i der ed whethe r the c on tr ac t w as n on et h ele s s e n for c ea b le. Id. a t2 7 3
. We com pared the pro s a nd co ns o fenf or cem en t o f th e co nt r ac t, a nd c o nc l ude d tha t the b al an ce f av o r ed en for c em en t. Id. a t 27 3- 74
. S i m i l ar ly, i n Rus h- Pre s b yt e r i an , we he l d tha t th e i l l eg al i tyde fen se di d no t b ar the hospi talfro m co l l ecting unpaid bi l l s. W e determ i ned that the for fei ture o f$2 00, 000 i n voi ding the c ontr act w as an ex c es siv e p u n ish m en t fo r an offe n se p u n ish ab le by a fi ne o f$1 0, 000. W e no ted thatthe perm i t v i ol ati on w as nei thera s eri ous a ffro nt to publi c pol i cy nor ha r m fult o the pub l i c wel f ar e as w ou l d j us ti fy no ne nfor c em en t. Rus h- Pre s b yt e r i an , 98 0 F
. 2d at 45 5-56. In effect, we wei g he d the pr o s an d c o ns, or th e equi ti es , o fe nf or cem ent. I n any eve nt, the Truste e ul tim ate l y a cknowle dges that “the w eigh t of author i ty
. . . hol ds that Se cti on 2 9( b) r en der s co nt r ac ts m ad e i n v i o l at i o n o fthe r egul at i o ns vo i dab l e atthe o pti o n o fa n inno ce nta nd un wi l l i ng p arty.” W hile he m ay d isp u t e w he th er the B orrow ers w er e innocent and unw i l l i ng p ar ti es, thatdeter m i nati on i s forthe dist ric t co urt. Giv en S ecti on 2 9( b) ’ s pro vi si on f orvo i ding contr acts m ad e in vi ol ati on o fthe A ct o r any rule o r re gul ati on there und er , t he f act that nei ther Regul ati on G norRegu lati on U has a sel f

- conta i ned p rovisi on for d o in g t h e sam e thin g i s no ba r to the affi rm ati ve defe nse.N os. 08

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. 27 T h e T ru st ee as se rt s t h a tw h en p re se n te d w ith th e ill eg al i tyde fen se , “ a co ur t m us t cr i ti ca l l y e xam i ne the cl ai m ed sta tutory v i ol ati ons and determ i ne wh ether it is b ein g a sk ed to en for c e t h e p r e c ise co n d u c t t h at is m ade unl awfulb y the s ta tu te , o r i fi t i s m er ely b eing as ked to gi ve legal effect to an agreem en t tha t w as oth erw i se l aw ful. ” I f the Borr owers ar e ri ght th at Com disc o and/orthe Bank vi ol ate d Regul ati on G o r U , then enfor c ing the par ti es’ co ntra cts w oul d app earto enf or ce the v er y c onduct prohibi ted bythe re gulati ons. That w oul d m ake thi s ca se unli ke Kel l y v . Kos uga , 3 58 U
. S. 51 6, 52 1 (1 95 9), inw h ich an u n law fu l ag re e m e n t t o fix the pr i ce of oni ons w as divi sibl e fro m a l aw ful agr eem ent t o pay f orpurchase d oni ons. The dis tr i ct c ourter re d in c on c l ud i ng tha t a pri vate ri ght of ac tion und erS ecti on 7 ( d) o r Se cti on 2 9( b) i s a prer equi si te to ass er ting m argin vi ol ati ons as an affi rm at i v e de fe ns e . T he c o ur tmi s r e a d Bass l er ; t hat ca se did not ad d ress w he th er a private r ig ht of action i s nec essary to ra i se a v i o l at i o n o fl aw de fen si ve l y . S i m i l ar l y, the cour t erre d in co ncl ud i ng tha t the i l l ega l i ty defe nse f ai l ed be ca us e th e defen dan ts w ere out si de th e “z o ne of int er es ts ” pr o te ct ed bythe mar g i n r egul at i o ns . The “z o ne o fint er es ts ” r equi r ementi s a l i m i ta ti o n o fpr ud en t i a l st an d in g t o m ain ta inan ac tio n . E lkG rov e U nified Sc h. D i s t
. v. Ne wdow , 542 U .S. 1, 11 -12 (20 04 ); Wi nkl e rv. G a tes , 481 F. 3d 977, 979-80 ( 7th C ir. 2007 ). T h e B orrow ers do n ot s ee k t o m ai ntai n an ac ti on under the S ecuri ti es Ex change A ct o r Regul ati on s G and U , but ra ther, to defen d ag ains t ana ct i o n b as ed o n a l l eg ed vi o l at i o ns o fthe sta tut e a nd r e g ul a t i o ns . T he y the r e f o r e n e e d n o te s t ab-28 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. l i sh thattheyfi t withi n the zone ofi nteres ts prot ecte d by thos e l aw s t o be e nti tl ed to as ser t thei r affi rm at ive d efe n se . A c c or d in gly , w e fin d th at th e d ist ri c t c ou rterr ed in deci ding that the Bor ro w er s co uld notas ser t a l l ege d vi ol ati ons ofRegul ati ons G and U as an a ffi rm ati ve de fen se . Th erefo r e we mustc o ns i derwhethe r the di st r ict c o ur t al so e r r ed i n g r an tings um m ar y j udg m en t on the gr ound that Com disc o and the Bank di d not v i o l a t e R e g u l a t i o n G o r U.

2. W hethert he R egul at i ons W er e Viol at ed T he Borrow ers a s s e r t tha t in m oving for sum m ary j ud gm ent, the Truste e di d not chal l enge w hether Com disc o vi ol ate d Regul ati on G. I t s eem s they a re co rr ect. ( Se e S A : 442

— Co n sol

. S upp l

. M em . S up p. Pl

. ’ s M ots
. S umm. J
. 1 0 ( “ the S I P De fe nd a nt s h a v e n o ta nd c a nn ot prove th at the L end ers vi o l at ed th e m ar g i n r es tr i ct i o ns se t f or th in R eg u lat ion G or R eg u lat ion U .” (em p h as is ad d ed )) ; see also Con sol. M em Sup p . Pl’s M o t s. Sum m . J
. Ag ains t Dunc an& Pa ul2 0- S A: 18 0 ( as se r tingtha t th e defen dan ts ha d no s ta ndi ngt o r ai se a Regulati o n U viol ation as an affi rm ative d efense ))
. A s su ch, th e B orro w er s w er e u n d er n o ob liga tio n to p re se n t a ll of th eir evi dence ofRegul ati on G vi olat ion s in or der t o defe at th e T ru st ee ’s s u m m ar y jud gm en t m ot ion
. Se e, e . g. , Su ble tt v. John Wil ey & Sons, Inc. , 463 F.3d 731 , 736 (7th C ir. 2006) ( “[ I ] fthe movingpa r tydo es no t r ai se a n i ss ue i n s u p p o r t o f i t s mo t i o n f o r s u mma r y j u d g me n t, t he nonm oving par ty i s no t r equi re d to prese nt evid en ceN os. 08

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. 29 on that point, and the dist ri ct c ou rt s h oul d not r el y o n th at grou n d i n its d ecision.”); Po urghorais hi v. Flyi ng J, Inc. , 4 4 9 F
. 3 d 7 51, 765 ( 7 th Ci r . 2 0 0 6 ) ( “ Th e p a r t y o pposi ng sum m ar y j ud gm ent has no obl i gat i on t o add re ss grou nd s n ot raised i n a m otion for su m m ary j ud gm en t.”)
. ( Ofc o ur s e , the Bo r r o we r s wo ul d h a v e h a d t o p r ove Re g ul ati on G v i o l at i o ns t o o bt ain s um m ar y j udg m en t i n thei r f avo r. ) I t would be unfa i r to up hol d a grant o f s u mma r y j u d g me n ti n f a v o r o fth e T r u s t e e b a s e d o n the l ack ofev i dence thatRegul ati on G w as v i ol ate d because the Bor ro w er s di d not ha ve an adequate opportunity to re spond to such an a rgum ent. As f o r th e B a n k ’ s a l l e g e d v i o l a t i o n s o fR e g u l a t i o n U, the Tr ustee argued thatthe Bank had not re l i ed on the S I P shar es as col l ate ra l, thus a ssert i ng the go od- f ai th n on -re lian c e e x c ep tio n to th e m ea n in g o f“in d ire c tly secur ed. ” See 12 C. F. R. § 221. 2( g) ( 2) ( i v) ( sta ti ng tha t “i nd i re ctl y s ecure d” “[ d]o es not i ncl ud e . . . an a rr angem en t [ unde r § 22 1. 3( g ) ( 1) ] i f : . . . [ t] he ba nk, i n g ood f ai th, h as n otrelie d u p on th e m ar gin st oc k a s c olla te ra l in extendi ng . . . the parti cul arcr edi t”) ; 12 C. F. R. § 221. 117 ( disc ussi ng wh en a bank i n “go od f aith” has no t r el i ed o n s to cka s co l l at er al )
. Thi s go o d- f ai thno n- r el i an ce e xcepti on o nl y a pp l i es to exte n sio n orm ai ntenance vi ol atio n s; it d oe s n otap p ly to arr an gin g v iola tio n s. See 12 C .F.R . §§ 2 21 .2(g )(2) (iv), 22 1.1 17 (a). (N or w ou ld it ap p ly to C om d isc o a n d its alleg ed vio lat ion of R eg u lat ion G .) F ur th er m o r e, wher ea s th e bu r deno fe st ab l i sh i ng th e affi r m at i ve de fen se o fi l l eg ali ty woul d b e o n the Bo rrower s, the Tr us te e bo r e th e bur deno fpr o vingthe30 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. go od -fait h n on -re lian c e e x c ep tio n . C f. Knox v. C o ok Cnty. Sheriff ’s Po li ceD ep’t, 86 6 F
. 2d 905, 90 7 ( 7th Ci r. 19 88) ( sta ti ng tha t the st atute o fl i m i tat i ons i s a n affi rm ati ve defe nse b ut the burden ofpro vi ng an ex cepti on there to i s o n the pla i nti ff )
. “[ T]he questi on o fwh etheror n ot a b an k h as relie d u p on p ar ti c u l a r st oc k a s c olla te ra l is n ec es sa rily a qu es tio n of fac t t o b e d et er m in ed

. . . in th e l i g hto fall rel ev an t ci r cumst an ce s. ” 12 C. F
. R. § 2 21. 117(b)

. The r eco rd es tabl i shes g en uine i ssues o f m at er i al f ac t as to whethe r th e Ban k sa ti sfied the tw o c rit er i a that pr ovi de “so m e ind i cati on” that i t has no tr e l i e d o n the s t o c ka s col l a t e r a ls uc h tha tthe e xc e ptio n ap p lies : ( 1) th e ba nkha d o bt aine d a r ea so nabl y c ur r en t fi nanci alstate m ent ofthe bor ro w erand thi s s tat em en t co ul d r ea so nabl y s uppo r t th e l o an, a nd ( 2) the l oan w as not payable o n d em and or bec au se o ffl uctua ti o ns i n mar k etv alue o fthe stock, bu t instead w a s pa yable on on e or m ore fi xed m atur i ties wh i ch w er e typi calo fm atur i ti es ap p lied by th e b an k t o loa n s o th er w ise sim ilar

. . . . Id. Som e of th e B orrow ers’ finan cial state m en ts su p p ort a re aso nabl e infe re nce that the st ate m ents coul d not re aso nabl y s up portthe l oan . F orexam ple , a l oan w as m ade i n excess of $1, 000, 000 to one bor ro w er (05

- 737) who re po r t e d n o n e two r th t o the Ba nk, a l o a n wa s ma de to an ot h er bo rro w er (05 -74 5) fo r al m o s t t en tim es h is ne t w o rth, and l oan s w ere m ad e to tw o other borrow ers ( 0 5

- 7 3 5 & 0 5

- 7 2 6 ) f o r mor e tha n fi v e t i mes the i r net wo r ths

. T he t r a ns c r i pt ofthe S I P pr e s e nt a t i o n l e nd sN os. 08

- 3961 , 08

- 3966, 08

- 3967, 08

- 3981 , etal

. 31 supp or t t o the infe re nce t h at t h e B ank di d not r el y o n the fi nanci alst ate m ents; Com disc o’ s r epres entatives es se n tia lly s a i d a s m u c h to th e p ro sp ec tiv e SIP p ar tic ipants. ( Se e S A : 367 ( “Obvi ousl y, m osto f u s d on’ t hav e a c re d it th at ca n su p p or t a qu a r te r m illion or h alf m i l lion , w hatev erthe num beri s, o fl oans, but ther e i s a C om d isc o gu ar an ty th er e. H ow ev er , i f so m eo n e is in ba nk r upt cy, [ th e Ban k ] pr o babl y w oul d no t l et[ th e l o an ] g o thr o ug h. ”)
. ) In a ddi ti on, in a r g ui ngtha t th e Ban ks at i sfi ed th e g o o d- f ai thno n- r el i an ce e xc ept i o n, th e T ru st ee d id n ota ss er t th at t h e SIP N ot es w er e “ p ay ab le on o ne o r m ore fix ed m atur i ti es which we r etypi ca l of m a turities a pp lied by the ba nkto lo a ns o t h e r w i s e sim ila r . . . .” 12 C. F
. R. § 2 21. 11 7(b) ( emphas i s adde d)

. Thu s, the Tr us te e di d not carry hi s bur deni n pr o vingtha t th e B an k in goo d fait h d id n otrely on th e s to c k a s c olla te ra l. I n d eterm in in g w he th er Regu lations G and U w ere vio lat ed , th e d ist ric t c ou rtco n sid er ed w h et h er th e SIP sh ar es di r ec tly o r i ndi r ectly se cur ed th e l o an s o r the gu ar a n ty . I t w ro te : “T h e re st ric tio n s p lac ed on th e SIP sh ar es do s ug g es t th atthe s ha r es i nd irectlys ec ur ed th e l oans, and i fthe cour t were w ri ti ng o n a t ot ally cl ean sl ate , i t m i g hta g r ee wi thde fen dan ts ’ a r g um en t. But the s l ate i s no t e nti re l y c l ean. . . . ” C o s t e l l o v . H a ller, 20 08 W L 46463 35, at * 5 (N
. D
. I ll

. Sept
. 24, 2008 ). T h e cou rt th en co n sid er ed th at be for e im p lem en tin g t h e SIP P ro gr am , C om d isc o, th ro u gh its ou ts id e lega l co u n se l, L ola H al e, s o ug ht a n o pi ni o n fr o m the F ede r alRe se r ve Ba nk th at th e SIP loan s w o u l d n o t be d ire c tly or in d ire c tly se c u re d b y th e sec u rit ies p u rc h as ed th ro u gh th e SIP Progr am . H ale received a respon se in the f orm of a32 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. l et te r fr o m J ames B. M cCauley, S en i o r Att o r ne y f o r the Feder alRese rv e Bank ofChica go. The M cCaule y l ett er o pi ne d tha t th e “pr o p osed tr an sa ct i o n d[ i d] no t co nstitut e a l oan secu red ‘directly or ind irectly’ by the pu rc h as ed st o c k as co n te m p lat ed by R eg u lat ion s G an d U .” ( SA:5 12. ) The le tt erst ate d that “ [ t] hi s o pini on r el i es h ea vily u p on you r as se rt ion th at ‘th er e is n o re fer en c e . . . ei theri n the note o r i n the Facil i ty A gr eem ent t o any r est ri cti on o n t h e tra nsfero fthe secur i ti es to be pu rchas ed .

. . nordo those se curi ti es f or m co ll ate ra lf or the Note. ’ ” ( Id. ) M cCaule y a l so w ro te th at “[ t] he l ega l staff ofthe Bo ar d o fGo ve r no r s [ pr es um ab l y o fthe Feder alRese rv e S yst em ] has been consulte d .

. . [ and] has co nc ur r ed i n thi s o pinio n, ” bute m pha si ze d tha t th e o p i n ion w as a st aff o p in ion on ly

— no t th ato fthe Board an d tha t “di ffer en t f ac ts c o ul d c o m pela di ffer en t co nc lu sio n .” (SA :51 3.) The Borr owers cor re ctl y poin te d o ut to the dist ri ct c ou rtthatH al e’ s l ett err equeste d concurr ence onl y that Bank One’s l oan w oul d not be deem ed to be, d ire c tly or in d ire c tly , sec u re d b y t h e s ec u rit ies p u rc h as ed . I t d id n otas k w h et h er C om d isc o’s g u a r a n ty w ou ld be d ire c tly or i ndi r ec tly s ec ur ed bythe s to ck, whethe r Co m di sc o ’s g ua r an tywoul d v i o l at e Re gu lati o n G, o r whethe r Ba nk One wo ul d c o mm i ta n “ a r r a ng i ng ” v i o l a t i o n o fR e g ul ati on U. The Borr owers al so sta ted that H al e’ s l ett erf ai l ed to ment i o n s ev er alr es tr ic ti o ns o n the s to ck, i nc l udi ng that Com disc o had a r i ght o ffi rs t r efusalon a sal e o f th e s h ar es ; C om d isc o’s C om p en sa tio n C om m itt ee co u ld i m pose re str i cti ons on the ti m i ng, am ou n t, and fo rm o f the s al e o fthe shar es; and the sto ck coul d not beN os. 08

- 3961 , 08

- 3966, 08

- 3967, 08

- 3981 , etal

. 33 pl edg ed as c o l l at er alf o r a ny othe r l o an . The Not es a nd Faci l i ty A gr eem ent r efer re d to the s toc k a s “ Rest ri cted St ock, ” a nd the A greem ent r efer re d to the “ col l ate ra l secu ring the G ua ran teed De bt.” T h e d istri ct cou rt agr eed thatH al e’ s l ett erdi d not pro vi de a c om p lete l i st of th e re st ric t i o n s o n th e s to c k, bu t c on c lu d ed th at it se t o utthe “ k eyr es tr i ct i o n” tha t “ any o ut st an di ng a mou nt s o n th e l o a n wo ul d b e p a i d fr o m t he p r o c e e ds ofany s ale o fthe sto ck at any t i m e. ” C oste ll o , 2 0 0 8 WL 46 46 33 5, a t * 6. The c o ur t f o und thi s r es tr i ct i o n t o b e th e m ost su ggestive “that th e loans ( or gu aran t e e ) w ere i nd i re ctl y s ecure d by the st ockbec ause i t i s thi s r est ri cti o n th at woul d m o st l i k ely en su r e r epa y m en t of th e l oan. ” Id. Because “ the Board” was i nfo rm ed ofthi s r est ri cti on, the cour t s aw “no r eas on t o rej ect H al e’ s r el i an ce on that o pini on in advi si ng Com disc o as to the l ega l i ty ofthe Pl an. ” Id. T h e d ist ric t c o u rtga ve th e o p in ionin the M cCaule y l ett ersubst anti alweight a n d concl ud ed th atthe S I P P l andid no t vi o l at e ei th erRe g ul at i o n G or U
. Id. The Borr owe rs co ntend that the di str i ct c ourter re d i n defe rr i ng to the M cCaule y l ett er . The Trust ee re spond s that i t i s uncl earwh etherthe cour t g ave a he i g ht en ed l ev elo fde fer en ce t o the l et te r a nd, i n a ny eve nt, the cour t was ent i tl ed to deferto i ts re aso ning. Altho ug h the cou rts ta te d tha t i t was g i vingthe sta ff’ s o pini on s ubstanti alweight, o therl anguage i n i ts d ec isio n im p l i es th at it m ay h av e d efe rre d to w h atit belie ve d ( m i st ak en l y ) was a n o ffi ci alo pi ni o n o fthe Fed eral Reserv e B oard

. Th e cou rt said th at “th e B oard an d i ts staff ha[ve] prim ary resp ons ibi li ty for inter-34 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. pr et i ngthe Exc ha ng e Act an d [ i ts ] r egul at i o ns , ” ci ting Ford M otor Cre dit C o. v. M il hollin , 44 4 U.S
. 55 5, 56 5- 68 ( 1980 ) ( hol ding that de fer ence w as appropri ate to o ffi ci al st affo pi ni o ns o fF ede r alRe se r ve Bo ar d i nt er pr et i ng th e Tr uth in Len di ng Act an d Re g ul at i o n Z, unl es s demons t r ab l y i r r a t i o na l ) , a nd R evlon, Inc. v. Pa ntry P ri de, Inc. , 62 1 F . Su p p . 804 , 815 (D .C . D e l. 19 85 ) (“t h is C ou rtw ill acco rd subst an ti alweight to the [ Feder alRese rv e Bo ar d] s taf f’ s o pi ni o ns ”)
. The r el i an ce o n M il hollin a nd Rev l on s ug g es ts tha t the di st r i ctc o ur t th o ug htthe op in ion w as from “t h e F ed er al R es er ve B oa rd .” Bu t the M cCaule y l ett eri s no t a n offi ci alst affo pini on o fthe F ede r alRese r ve Bo ar d. M cCa ul eywor k s f o r the Fed er al Reser ve Bank ofChica go, notthe Feder al Reser ve Board. The Boar d and the Fed er alRese rv e Banks ar e “tw o express l y ind ependent sta tutory e nti ti es .” Re s e a r c h Tr i a n g l e In s t
. v . Bd
. o f Go v e r n o rs o

f t h e F e d. Re s e r ve Sy s. , 1 32 F.3d 98 5, 98 9 (4 th C ir. 19 97 ). Th e B oa rd is cre ate d and em pow er ed by su b c h apterI Io fTi tl e 1 2 o f th e Uni te d S ta te s Code , 1 2 U. S
. C. § § 24 1- 25 0; the Feder alRese rv e ba nks are creat ed and em pow er ed by subchapterI X, 12 U
. S. C. §§ 341- 361. The a u th ori ty to apply and enf or ce Se c ti on 7 ( d) o fthe Se curi ti es Ex change A ct i s del ega ted to the Se curit i es Ex change Com m i ssi on, 15 U
. S. C. §§ 78u( d), 78 u-3 ( a)

— no t th e Feder alRese rv e Bank ofCh i cago . A nd the author i ty to und er tak e “ adm i ni str ati ve l aw m aking” i s del ega ted to th e B oard of G overn o r s . 1 2 U
. S. C
. § 248(k). Th e B oard m ay del ega te cer ta in ofi ts functi ons to Feder alRese rv e banks, but i t m ay not del ega te an y ofi ts functi ons “r el atin g to rul em aking o r perta i ni ng princi pal l y t o m one-N os. 08

- 3961 , 08

- 3966, 08

- 3967, 08

- 3981 , etal

. 35 tar y a nd cr edi t pol i ci es. ” 1 2 U
. S. C. § 2 48( k)

. A l though M cCaule y c onsul ted with the s taffo fthe Board of Gover n o r s a n d th e s t a ffa g r e e d wi th h i s o p i n i o n, the M cCaule y o pini on was notpubli sh ed in the Fe de r al R es erve Regulatory Service, the l oo sel eafse rv i ce published by the Boa rd w h ich i ncl ud es offi ci alst affo pini ons, see 12 C.F
. R. § 261. 10( d)( 4) , o r any o thero ffi ci also urce. The Tr us te e as se r ts tha t “the b es t r eading” o fthe di s t r i c tc o ur t ’ s o pini oni s tha ti tf o l l o we d Krza l i c v. Rep ub l i c Tit l eCo. , 3 1 4 F
. 3 d 8 7 5 , 8 7 9 ( 7 th C i r . 2 0 0 2 ) ( ex pla i ni ng tha t a n age n c y’s l ess f or m alpro nouncem ents m ayb e en ti tl ed to s o m e defer en ce ), a nd g av e th e M cCa ul eyl et te r s o m ethingl es s th an Che vron -style deference, se e C hev ron U SA , Inc. v. N a t u r a l R es. D efense Counc i l, Inc . , 4 67 U
. S. 8 37 (1984). T his ap p ears to be d eferen ce u nd er Ski dm orev. Swi f t& Co. , 32 3 U
. S. 13 4, 14 0 ( 1944 ) ( a n a g e n c y ’ s i nt e r pr e t a t i o n ma y b e e n t i t l e d t o s o me d e fer en c e a c c or d in g t o its “p ow er to p er su ad e” ). See U ni t e d S t at e s v. M e ad Corp. , 533 U
. S. 218, 2 3 5 -38 ( 2001 ). Ye t i t i s unc l ea r ho w the Tr us te e r ea ch es thi s co nc l us i o n. N either K rzalic, Che vron , nor Sk idm o re w as m e n tio n ed in the di st rict co urt’ s o pini on. N onethel ess , the M cCaule y l ett eri s s om e ind i cati on t h at the r egul ati ons w er e no t vio lat ed , an d th e c ou rtco u ld h av e c on sid er ed it. C f. Sk idm o re, 32 3 U .S. at14 0 ( sta ti ng tha t info rm alag ency “opi ni ons . . . wh i l e no t co ntro l lin g u p on the co urts by re as o n o f th eir au th or ity , d o c on st itu te a b od y of e x p er ie nc e a nd i nfo r med j ud g men t t o whi c h c o ur t s . . . m ay proper l y r eso rtf orgui dance”); s e e also Se hi ev. Ci ty of A uro ra , 4 32 F
. 3d 7 49, 7 53 ( 7th Ci r . 2 00 5) ( co ns i der i ng but ul ti m ate l y fi nd i ng unpersuas i ve opi ni on l ett er s o f36 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. th e Depa r tmento fLabo r i nt er pr et i ngthe me an in g o fa r egul at i o n pr o m ul g at ed unde r the F ai r Labo r S ta nd ard s A ct). H o wev er, g i ve n the o m i ss i o ns i n Hal e’s lette r a nd the quali fi cati ons to the M cCaule y o pini on, i t ca nnot be sa i d tha t th e r ec ord co nc l us i ve l y e st ab l i sh es tha t th e SIP P lan d id n otv iola te R eg u lat ion G or U . In M e ad, the Cour t r ei ter ate d tha t “a n age ncy’ s inter preta ti on m ay m er i t s om e defer ence w hatev eri ts f or m , gi ven th e ‘ s p e c i a l i z e d e x p e r i e n c e a n d b r o a d e r i n v e s t i g a ti o ns and i nfo rm ati on’ ava i l abl e t o the a gency. . . . ” 5 33 U
. S. a t 23 4 ( quoti ng Sk idm o re, 323 U
. S. at 139). Th e d eterm ination w he t h e r de ferenc e is ow ed turn s on th e “ ‘thoro ug hnes s ev i den t i n [ th e ag en cy ’ s] c o ns i der at i o n, the val i dity o fi ts re as on i ng, i ts consi ste ncy with ear l i er and l ate r pronouncem ents, and al ltho se f acto rs wh ich gi ve i t pow er to persuade

. . . .’ ” Id. at2 28 ( quo ting Sk idm o re, 323 U
. S. at 140); s ee also Am
. Fe d’n of G ov’t E m ps. v. Rum sf

el d, 262 F.3d 649 , 656 (7th C ir. 2001) (“i nform al[ age nc y] inter preta ti ons ar e e nti tl ed to r espectto the e xtent that they ha ve the power to persuade” ( quotati ons om i tte d))

. The Borr owers ar gued that the M cCaule y l ett er w as n ot enti tl ed to defer ence base d i n parto n the o mi s s i o ns i n Ha l e ’ s l e t ter
. The di s t r i c tc o ur ta pparently thought that i t o w ed the M c C au ley opi ni on so m e d efe re n c e. O n rem an d , th e d i st ric t c ou rtsh ou ld ass ess how m uch defe re nce, i fany, i s due to the M cCaule y o pi ni o n, a nd fur the r de t e r mi ne whe the r the r e c o r d r ai ses a re as on ab le in fer en c e t h at th e SIP sh a r e s ind ire c tly secur ed the l oans and/orse cured the guar anty.N os. 08

- 3961 , 08

- 3966, 08

- 3967, 08

- 3981 , etal

. 37 W e e m phasi ze that the i ss u e i s no t whether the s toc k di r ec tly s ec ur ed th e Ban k ’ s l o an s, b utwhethe r the st o cki ndi r ec tly s ec ur ed th e l o an s an d/ o r s ec ur ed th e gu ar an ty . In arg u in g t h at th e s to c k d i d n otind ire c tly secu re th e loans, th e T rus tee con ten d s th at th e B o r r ow ers f ai l ed to i denti fy a ny r es tr i ct i o n o r l i m i ta ti o n o n the s toc k i ts e l fr e qu i r i ngtha tthe s t o c ko r i t s p r o c e e ds be u sed to p a y t he Ba nk

. In resp ons e, th e B orrow ers i denti fy s eve ra lr est ri cti ons on the S I P shar es, wh i ch th e y c l a i m i mpl i c a t e 1 2 C. F
. R. § 2 2 1
. 2 ( g ) ( 1 ) ( i ) , wh i ch sta tes that“ Ind irectlysecu red( 1) Incl ud es any a rr angem en t w ith th e cu stom er un d er w hich : (i ) T h e c u s tom er’s ri ght or abi l i ty to sel l, ple dge, or othe rwis e dispos e of m ar gi n sto ck own ed by the c ustom eri s in any w ay re st r i cted w hile the c r edi t r emai ns o ut st an di ng. . . . ” The Truste e r epl i es that the i denti fi ed re st ric ti ons al lo perat e i n f avo r ofCom disc o, n ot the Bank, and, as a re sul t, the s hare s ca nnot a m ount t o an indir ect secur i ty

— at l eas t no t in f avo r ofthe Bank. The Trust ee c laim s that ther e w as no re str i cti on i n the SI P N ote s or any other tr ansact i on d ocum ent pr ovi ding that the S I P shar es could not b e pl edg ed as s ec ur i tyf o r o th erl o an s. Buthe c an n o t d isp u te th at th er e w er e re st ric tio n s o n th e SIP shar es, and the SI P part i ci p an ts w er e t ol d that they coul d not pl edge the shar es as col l ate ra lf oro therl oans. The Truste e fu rt h er st ate s that e ven i fthe sto ck w as re str i cted, the defini ti on o f “ind i re ctl y s ecure d” i s no t sat i sfi ed beca use the Bank in go od f ai th d id n ot re l y o n th e s to c k a s c olla te ra l for th e loa n s. See 1 2 C
. F
. R. § 2 21. 2( g) ( 2) ( i v)
. H e s ubm i ts that the fol l owing f acts sh ow th at th e B an k d id n otrely on th e s to c k a s c ol-38 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. l at er al : ( 1) the Bo r r o w ers

— no t Comdi sc o o r the Ba nk

— contr ol l ed the sto ck, ( 2) the Bank structured the tran sacti on s o i t co u ld c oll ect the pr i nci pal and i nter est w i thout havi ng to l i quidate the sto ck in t he ev ent o f defa ulto n the l oans ; and ( 3) the Bank coul d rely o n Comdi sco ’ s g ua r an tyi n the e ve nto fde f au l ts o n the loans. H ow ever, the evid en ce sh ow s tha t the share s w ere he l d b y M el l o n Ba nk, Co m di sc o ’ s tr an sferagen t, i n a sp ecial accou nt that only certain C om d isco officers co ul d s i g n t o release the s ha r es t o e ns ur e th atthe sh ar es woul d no t be sold o r t r an sfer r ed wi th o utpa y i ng offthe N ote
. ( SA:4 96. ) The acc ounts w ere described as “i nacces sibl e” ( i d. ), pres um ably m ean in g that they w ere i na cces sibl e t o the S I P part i ci pants. W e a re unsure how th e s tr u c tu re of th e t r a n s a c tio n sh ow s t h at th e B an k in good f ai thdi d no t r ely o n the s to cka s co l l at er al

. Ra th er, the s tr ucture ofthe tr ansact i on s eem s t o sugge st that th e l oans wer e no t di r ec tly s ec ur ed bythe s ha r es . The Truste e points t o the l ack ofany ri ght o fCom disc o to sel lo r tr ansferthe SI P shar es w i thout author i zati on fro m the SI P part i ci pants. Y et each o fthe parti ci pants had to execute a s toc k power endo rs ed in bl ank that w as hel d by Com disc o orM el l on Bank a nd would al l ow the ho l der t o sel lthe shar es i n the op en m arketo r tr ans fe r the s ha r e s t o i t s e l f

. T hu s , e a c h pa r t i c i pa nte ff ecti vel y a uthor i zed Com disc o to sel lhi s o r her SI P shar es. The Truste e cl ai m s “ the Bank coul d not ha ve re l i ed on th e stock as collateral becau se it had Co m d is co’s guar anty, and .

. . Com disc o had suffi ci ent a sse ts to sa ti sfy i ts o bl i g at i o ns u nde r the g ua r an tywi th o ut resorting to th e stock.” Th is uns up p orted conc lu s oryN os. 08

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. 39

ass er ti on does n ot est abl i sh as a f act that the Bank did not rel y o n the sto ck as col l ate ra l

. In additi on, the Truste e o ffe r s n o e xp l a na t i o n whythe Ba nkc o ul d n o th a ve reli ed on both the stoc k and the gu aran t y , and w e are un aw are of a n y . Th e B an k rel ied on Com d isco’s guar anty, wh i ch one coul d rea sonab l y fi nd was sec ured b y t h e s to c k. T h u s, th er e is atlea st a re as on ab le i nfe re nce that the Bank ind i re ctl y re lied o n the sto ck as col l ate ra lf orthe l oans. A s no ted ea rl i er , the Truste e di d not co ntestwh ether C o md i s c o v i o l a t e d R e g u l a t i o n G
. I fC o mdi s c o c o mm i tte d “extendin g” vi ol ati ons ofRegul ati on G, then i t se ems th at th e Ban k l i k ewi se co m m i tt ed “e xt en di ng ” an d

“ a rra n gin g” vio lat ion s o f R eg u lat ion U
. See 12 C.F
. R. § 221. 3( a) ( 3) ( “N o bank m ay ar ra nge forthe extensi on . . . o f an y pur po se c r edit, e xc eptupo n the s ame t er m s an d c o n d i tio n s u n d er w h ich th e b an k its elf m ay ex te n d

. . . pu rp os e credi t under thi s par t. ”) ; 12 C. F. R. § 221. 118 ( re fer encing 12 C. F.R. § 2 07. 103)
. In additi on, the Truste e d oes not c ont est th at ne ither Fed eral R eserve Form FR G -3 nor F or m FR U-1 w as provi ded to the Borr owers. Thus, ifthe guar anty and l oans w er e s ecure d dir ectly o r in d ir ec tly b y the s to ck, the n Co m di sc o a nd the Ba nk woul d ha ve c o m m i tt ed “P ur po se S ta tem en t” v i o l at i o ns of R eg u lat ion s G an d U as w ell. See 12 C. F. R. § 20 7.3 ( e) (inth e c as e o f ex te n sio n o f cr ed it s ec u re d d ire c tly or in dir ectly b y m ar gi n sto ck, the “the l ender shall r equi r e i ts c us to m ert o e xe cut e F o r m F R G- 3) ; 12 C. F
. R. § 2 21 .3(b ) (req u irin g a ba n k w h en ex te n d in g c r e d it secur ed dir ectly o r i n d ire c tl y b y m ar gi n sto ck i n an40 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l.

Se c t i on 10 ( b) m akes i t“un l awful f or an y pe rs on, di re c t l y or 5 i ndi re c t l y, . . . [t]o us e or e m pl oy, i n c onn ec t i on with the purc has e or s al e ofan y s ec ur i t y . . . an y m ani pul at i ve or deceptive device o r contri vance in c ontraventi on of such r u l e s a n d r e g u l a t i o n s a s th e [ S e c u r i t i e s an d E x c h a n g e ] C o mm i s s i on m ay pre s c ribe as ne cessary or appr opr i at e i n the pu bl i c i nt e r e s to r f orthe pr ot e c t i ono fi nv e s t or s . ” 1 5 U. S
. C. § 78 j(b ). SE C R u l e 1 0 b -5 m a k es it “ u n la w fu l fo r a n y p er so n. . . ( a ) To e m pl oy a ny de vi c e , s c he m e , o r a r t i fi c e t o de f r a ud, ( b) To m ak e an y un tru e stat e m e nt o f a m ater ial fact or to om it to st ate a m ater ial f actnece ss ary i n ord er t o m ake the st atem ents m ade, in the l ight ofthe ci rcum sta n ces und er w hich they w ere m a d e , n o t m islead ing , or ( c) To eng ag e in any ac t, pr ac t i c e, or c our s e ofbus i ne s s whi c h o per at es or w ould op erat e as a fraud or decei t upon any pers on, i n connect i o n wi th th e p u r c h a s e o r s a l e ofany s e c u r i t y . ” 1 7C
. F
. R. § 240. 10b-5. am ou nt exc eed ing $100 , 0 0 0 to obtain an exec ut ed Form FRU -1 from i ts cu stom er). W e do not deci de w hetherCom disc o ort h e Bank vi olated Regu lation G or U , h ow ever. I t is en ou gh that there ar e g enui ne i ss ue s o fmate r i alf ac t as t o whethe r the r egul at i o ns wer e vi o l at ed an d, i fs o , whethe r the Ba nk sa ti sfi ed th e g o o d- f ai thno n- r el i an ce e xc ept i o n.
B. Secti on 10( b) of t he Securi t i es Ex change A ctof 1934 an d SE C R u le 10b -5 5 The B orro w er s a rgue thatthe gr ants ofsum m ar y j ud gm ent in f avo r ofthe Truste e on the S ecti on 1 0( b) i l l ega l i tyN os. 08

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. 41 defe nse s houl d be va cate d as wel l

. The Trust ee soughtsum m ar y j u d gm ent o n thi s defense sol el y o n th e ba si s th at the Bo r r o wer s co ul d no t pr o ve a ny f al se sta tem ent ( “f al si ty” )
. H e di d not chal l enge w hether th ey coul d establ i sh the i ntent to decei ve orr eckl ess di sr eg ar d f o r th e truth ( “s ci en te r ”)
. The n in r eply, he ar gue d tha t be ca us e he s o ug hts um m ar y j udg m en t base d on f al si ty, the Borr owers had the bur den to est abl i sh al lel em ents ofthe Se cti on 1 0( b) defense. A s the m ov ing par ty, the Truste e had the i ni ti al bu rd en of iden tifying th e basis for see k in g sum m ary j u d gm en t. Se eLogan v. Com m e r ci al U ni o n Ins. Co. , 96 F. 3d 971, 979 ( 7th Cir
. 1996 ) ( “Only after the m ov an t h as ar ti cul ate d w i th r efer ences to t h e r eco rd and to the l aw spe ci fi c r ea so ns why i t be l i ev es the r e i s no g enui ne i ssue ofm ate ri alf act m ust the nonm ova n t pr ese nt ev i dence suffi ci ent to dem onst ra te an i ssue f ortr i al

. ”) ( ci ti ng C elo tex C orp. v. Ca tret t, 4 77U. S
. 3 17, 3 23 ( 19 86)). The no nm o va nt i s no t re quir ed to pre sent evi dence on an i ssue not ra ise d by th e m ov an t. Se e, e . g. , Suble tt, 4 63 F.3d at 73 6 (“[I ]f the m oving par ty d oe s n ot r ai se an i ssue i n supp or t o f i ts m oti on f orsum m ar y j ud gm ent, the nonm oving par ty i s not r equi r ed to pr es en t ev i den ce o n tha t po i nt, a nd the di str i ct c ourtsho uld notr el y on t h at gr ound in i ts d ec isio n .”); Pourghorai s hi, 44 9 F
. 3d at 765 ( “The party opposi ng sum m ar y j ud gm ent has no obl i ga tion to ad d ress grou nd s not raised in a m otion for s u m m a ry j u d gm ent. ”)
. The f act that the Bor ro w er s fi l ed an e xp a ns i v e r e s po ns e b r i e f, a R ul e 5 6
. 1 r e s po ns e , a nd a sta tem ent of add i ti onal f acts did not al ter th is ru l e. T he res po ns i ve fi l i ng s di d no t cr ea te a r i g hti n the42 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. T ru st ee to as se rtfor th e fir s t t i m e in rep ly n ew ch all eng e s t o the Bo r r o we r s ’ e v i de nc e a s t o o the r a s pe c ts of th e Section 1 0 (b ) il legali ty d efense

. Th e Tru stee offers no a uthor i ty to supp or t hi s no ve l v i ew thatthe “r ather unu sualco urse o fthe m oti on f orsum m ar y j ud gm ent” m ad e itn e c e s sa ry an d p ro p er for h im to at ta c k t h e a d d iti onalel em ents on wh i ch he ini tially had take n a pass . Gr an tings um m ar y j udg m en t o n the b as is ofthe ne w ly raised scien ter argu m en t raises im p ortan t fai rness concerns, es peci al l y where the Bor ro w er s a l er ted the di stri ct c ourti n thei r m oti on t o str i ke that they had add i ti onalev i dence supporting the sci enterel em ent. T h e T r u s t e e a s s e r t s th a tth e B o r r o we r s d e p r i v e d th e mse l ve s o fthe o ppo r tu ni tyt o pr es en t ev i den ce o n the sc ien te r ele m en t: T h ey offe re d so m e, b u t no t all, of t h e ir evi dence on sci enter
. W e a re unaw ar e o fany auth or ity that re quir ed them to m ar sh al a l lthe evi dence thatthey had on an i ssue that w as not as se rt ed bythe Truste e i n s e e k i ngs ummar y j ud g men t
. Ha d s c i e nt e r b e en proper l y pl aced i n i ssue, the Borr ow er s m ay have presente d otherev i dence, o r soughtan e xtensi on a nd di scove ry un d er Ru le 56(f ). Th e Tru stee criticizes th e Borr o we r s f o r n o t s e e k i n g l e a v e t o fi l e a s u r - r e p l y . But “ther e i s no r equi re m ent that a party fi le a sur- re plyto a ddr e s s a n a r g ume nt b e l i e v e d t o b e i mpr o pe r l y a dd re sse d,” Har dr i ckv. Ci ty of Bol i ngb r ook, 5 2 2 F
. 3 d 7 5 8 , 76 3 n. 1 ( 7th Ci r. 20 08) , and a p ar ty need not “se ek l eave to fi l e a sur - re plyi n or der t o prese rv e a n ar gum ent for pu rpos es ofappeal

. . . . ” Id. T h e B or row er s were not w ro ng i n thei r und er sta nd i ng o fthei r sum m ar y j ud gm en t ob li gat i ons. W hi l e thei r choi ce m ay have beenN os. 08

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. 43 st ra te gic

— th ey c ou ld h av e s ou gh t le av e t o file a su r-re p ly an d /or filed a R u le 5 6(f) affid av it

— w e wil lnoti nsi st that they have done so wh en the r ule s and cas e l aw g i ve the m o pti o ns o n ho w t o pr o ce ed. And bya ddr es sing th e ne wl y r ai se d a r g um en ts i n the i r mot i o n t o st ri k e, the Borr owers did notbec om e obl i gat ed to pre sent al lo f thei r evi dence on th e iss u e. A rgum ent i s no t a subst i tute f orf acts supporte d by e vi dence a s n ecessi tat ed by R u l e 5 6
. T h e d i s t r i c tc o u r ts h o u l d n o th a v e g r a n t e d s u mm ar y j ud gm ent o n the basi s o fthe n ew l y r ai sed sci enter ar gu m en t. Se e, e . g. , Suble tt, 46 3 F
. 3d at 736. On a r el at ed po i nt , th e Bo r r o wer s i ndi ca te tha t th e dist ri ct c ou rt h el d them to a hei ghtene d standard o f proo fof s c ienter. Ci ti ng Tella bs, Inc. v. M a k o r Issues & R igh ts , Lt d. , 551 U
. S. 308, 323 (2007 ), the d istri ct cou rt l oo ked f orev i dence thatwould r ai se a “ st ro ng i nfe re nce” of s c i e n te r. Tel labs de al t wi ththe he i g ht en ed pl ea di ng st an dar d f o r pr i va te se cur i ti es fr au d su i ts under the Private S e cu riti es L iti gation R eform A ct (“PSL R A ”), S ec ti o n 2 1D(b) ( 2) o fwhi chpr o vi des th at a co m pl aint shal lal l ege “f acts gi vin g ri se to a s tr ong i nfe re nce that th e d efe nd ant a cted with the r equi re d stat e o fm i nd

. ” 1 5 U
. S. C
. § 78u-4(b )( 2 ). N either th e PSL R A nor Tel labs ch an g ed th e wel l

- es tabl i sh ed su m m ar y j udg m en t st an d ar d

. SeeM izzaro v. H o m e D epot, Inc. , 54 4 F
. 3d 1230 , 12 39 (11th Cir. 2008 ) (noting th at th e PSL R A plead ing stan d ard is not the sam e as the sum m ary j ud gm en t stan d a r d ). I nde e d, the Co ur to b s e r v e d tha t“ the t e s ta te a c h s t a ge [ ple ading, sum m ar y j ud gm e nt, and j ud gm ent a s a m att er of l aw ] i s m eas ured aga i nst a differ ent b ackdrop. ” Tel labs , 55 1 U.S
. at32 4 n. 5. O n sum m ar y j ud g-44 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l.

men t, a c o ur tma y n o twe i g h th e e v i de nc e o r de c i de w hi ch i nfe re nces shoul d be dra w n fro m the f acts
. A nders on v. Libe rty Lob by, Inc
. , 477 U
. S. 242, 255 (1986 ); Kodish v. O akbrookTerrace Fire P rot. D is t. , 604 F. 3d 490, 50 7 ( 7th Ci r . 2 01 0)
. Ra th er, the c o ur t’ s ta ski s to de te r m i ne ba se d o n the r ec o r d whethe r the r e i s a g enui ne i ss ue of m at er ial fa c t re q u i r i n g t ria l. Cel ot ex Corp. , 47 7 U.S
. at 3 3 0 ; Ande rs on , 47 7 U.S
. at24 9; Ko dish , 6 0 4 F
. 3 d at 507. The dis tr i ct c ourter red in h ol ding the Bor ro w er s t o proo fo ff acts thatwould r aise a str ong i nfe re nce o f scien ter. The di st r i ctc o ur t ha d the di sc r et i o n t o r ul e o n the su m m ar y j udg m en t m o ti o ns wi th o utr ely i ngo n the new l y r aise d argum ents i n the Truste e’ s r epl y. On re

view in g the Trust ee’ s r epl y b ri efand l earni ng tha t th e ne wl y r ai se d a r gu m en ts m i g htha ve mer i t, the cour t co uld have o ffer ed th e B or ro w er s a n opportunity to fi l e a sur - re plyand additi onalev i dence. I t di d not. I ns te ad, i t den i ed th ei r m o ti o n to st r i k e as m o o t. Butthe B or ro w er s’ o bj ec tio n to co n sid er at ion o fth e n ew ly ra i sed ar gu m en ts d i d not be com e m oo t bythe f act that th e di st r i ctc o ur t ( 1) de ci ded to c o nside r the m a nd ( 2) de ci ded th em f av o r ab lyt o war d the Tr us te e. The anal ogyo ffer ed by the Bor row er s i s a pt: “I t would be as i f t h e pl ai nti ffm ove d fo r a j ury tr i aland the j ud ge, w ith ou t ru lin g o n th e m ot ion, con d u c te d a b en c h tria l, re nd er ed j ud gm ent forthe d efe n d an t, an d then dism i sse d the pl ai nti ff’ s m oti on a s m oo t
. ” Aurora L oan Servs. , Inc. v . Cradd ie th , 442 F.3d 101 8, 1027( 7th Cir. 2006 )
. A nd bec ause the di stri ct c ourt ’ s deci si on does not expla i n w hy i t thought the m oti on to s tr i ke w as m oo t,N os. 08

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. 45

w e a re unsure how m uch c on sid er ati on i t g ave to that m o ti o n. T h e T rust ee subm i ts that w e ca n affi rm the gr ants ofs um m ar y j ud gm ent o n the Se cti on 1 0( b) i l l ega l i ty de fe ns e o n s e v e r a la l t e r na t i v e g r o un ds

— th e r e i s no evid en ce of any fraud ulen t m isrepres en tation, the B orro w er s s eekan unw ar ra nted exte ns i on o fthe pri vate rig h t o f rec ov er y u n d er Sec tio n 10 (b ) , th ey h av e n o e videnc e o fa ma ni pu l a t i v e o r de c e pt i v e de v i c e , the a l l ege d m isrepres en tati o n s rega rd ing Re gu lations G and U w ere no t m ade “in co nne ct i o n wi th th e pur ch as e o r sa l e” of a secur i ty, the B or row er s ca nnot pro ve re l i ance, and they cannot show that a ny al l eged m i sr epres entat i on was m ate ria l. The Trust ee ci tes Rut h v
. Tr i um ph Part ne rs hips , 577 F. 3d 790 ( 7th Ci r. 20 09) , f orthe propos i ti on that

“ ‘[w ]e m ay af firm su m m ar y jud gm en t o n an y b as is su pp or ted in the re cor d.’ ” Id. at79 6 ( quoti ng Kle b anows ki v. Sh e ahan , 54 0 F.3 d 633, 63 9 ( 7th Ci r. 20 08) )
. Thi s s tat em en t was made i n the c o nt ex t o fa ddr es singthe appell ant’ s cl ai m thatthe appell ee c ou l d not m ake a parti cul arar gu m ent b ecause i t had notcr oss - appeal ed

— a p r o c e d u r a ls i t u a t i o n qu i t e d i ffe r en t f r o m wh a twe h av e h er e. R uth and the case s i t ci tes do notaddress whethe r we m aya ffi r m a gra nto fs um m ar y j udg m en t on an al ternati ve gr ound newly ra i sed i n sum m ary j ud gm en t rep ly brief. A l though “ w e m ay affi rm a gr ant o f su m m ar y jud gm en t o n an y a lte rn at ive ba sis fo u n d in th e r ec o r d a s l o nga s th atb asi s w as a dequa te l y c o nsi dered bythe dist ri ct c ourtand the nonm oving par ty had an opportunity t o conte st i t, ” Bes tv. Ci ty of Por t l and, 55 4 F.3 d 69 8, 70 2 ( 7th Ci r. 20 09) , we m ay not affi rm o n46 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. a ba si s that was notr ai sed in su p p ort o fsum m ar y j ud gm en t, i d. a t 7 0 2

- 0 3 ( r e v e r s i ng g r a nt o f s ummar y j ud gm ent a nd r em anding w here “there [w as] noteno ugh of a record

. . . to affirm on an alternative bas is”). H er e, the al ternati ve base s a rgued by the Trust ee w e r e n o tr a i s e d in the di s t r i c tc o ur tu nt i lthe fi l i ngo f th e repl y, and the Borr owers did nothave an a dequ ate opportunity to co ntestthem

. Fur ther, i t i s uncl ear w hetherthe dist ric t co urt gave any consi derat i on t o th ese oth er groun d s. T hu s, it w o uld be un fai r to affi rm s u mma r y j u d g me n to n th e s e a l t e r n a t i v e b a se s, a n d we decl i ne the Trust ee’ s invi tat i on t o do so

. The gr an ts o f sum m ar y j ud gm en t t o the Tr ustee o n the Se cti on 1 0( b) il legali ty d efense w ere in error.

C. Sect i on 17( a) ofSecuri t i es Act of19 33 A s a n affirm ativ e defense, the Borr owers cl ai m ed that th e N o te s ar e une nf o r ce ab l e be ca us e Ban k One a nd Com disc o vi ol ate d Sect i on 1 7( a) o fthe Se curi ti es A ct o f 19 33 , 15 U .S.C . § 7 7q (a). T h ey alleg ed th at “[t ]h e m at er ially f al se and m i sl eadi ng st ate m ents, o m i ssi ons, and cour se o fc o nd uc to fBa nkOne an d C o mdi s c o we r e ma de and e mpl o y e d a s p a r to fa s c he me i n o r de r t o de cei ve th e SI P P articipan t, to obtain th e SI P P articipan t’s p ro p er ty , an d to op er at e a s a frau d u p o n th e SIP P ar tic ipan t
. . . . ” The v er si o n o fS ec ti o n 1 7( a) i n e ffec t atthe t i me o fthe t r a ns a c t i o ns a ti s s ue r e a d: I t s hal lbe u n law ful f orany perso n i n the offer or sa l e o fa ny s ec ur i ti es b y the us e o fa ny mean sN os. 08

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. 47

orinst rum ents oftr anspor tat i on o r com m unica

t i o n i n i n t e r s t a t e c o mme r c e o r b y u s e o ft he m ails , d ire c tly or in d ire c tly

— ( 1) to em ploy an y devi ce, sche m e, o r artifi ce to d efraud , or ( 2) to o btain m oneyo r proper ty by m eans ofany untrue s tat em ent of a m ate
ri alf act oran y om i ssi on t o sta te a m ate ri al f act necess ar y in or der t o m ake th e statem en ts m ad e, in l ight of the circu m stan ces u nd er w hich th e y w ere m ade, notm i sl eadi ng, o r ( 3) to engag e in any tr ansact i on, prac ti ce, orco urse o fbusi ness w hi ch o p er ate s o r w ou l d opera te as a fra ud o r decei t upon th e p u rc h as er . 15 U .S.C . § 77 q (a). T he Borrow ers con ten d that the gran ts o f su m m ary j ud gm ent on t hei r Se cti on 1 7( a) defense shoul d be va ca te d b ec au se the di st r i ctc o ur t di d no t ar ti cul at e an y basi s for g ranti ng sum m ar y j ud gm ent ind ependent of i t s h o l di ngtha tRegul a t i o ns G a nd U we r e n o tv i o l a t e d. Th e T ru stee r esponds thatthe cour t r el i ed on o ther ba s e s a nd i m p li es th at it conclu d ed that the B orrow ers f ai l ed to es tabl i sh thatCom disc o had the r equi si te sci enterto es tabl i sh a Se cti on 1 7( a) vio l ati on. H e a l so ar gue s th atthe Bo r r o we rs hav e wai ve d a ny o th era r g um ents they m ay have regardingthe Se cti on 1 7( a) defense b y fa ilin g t o a ss er t t h em on ap p ea l , w h ich is co rre c t. See,48 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l.

Pr oofofs c i en t eri s ane l em en tofa vi ol at i on of§ 17 ( a) ( 1) , but 6 n o t § 17 (a )(2) o r (a )(3). Aaro n v . S EC , 44 6 U .S. 6 8 0 , 69 5 -9 7(19 8 0 ); se e al so M uel l erv. Sul l i van , 14 1 F .3 d 12 3 2 , 12 3 5 (7t h C ir . 19 9 8 ). The Bor ro wers ’ al l eg at i ons thatthe “m at er i ally f al s e and m i s l e a di n g s t a t e me n t s , o mi s s i o n s , a n d c o u r s e o fc o n du c tof B a n k O n e a n d C o m d isc o w er e m a d e a n d em p lo y ed as p a rt o f a sche m e to d eceiv e the SIP Pa rticip an t” (SA :136) seem to fall w ithin § 17 (a )( 1). T he B or ro w ers’ rep ly b rief im p lies that th is defe nse f all s und er § 17( a) ( 2) or ( a) ( 3)
. W e l eav e this m att er f or the di s t ri c tc our t ’ s det er m i nat i on, i fne c es s ar y. e . g. , M e ndez v. Pe r l a Dent al , N o. 08- 2029 , ___ F. 3d ___, ___, 2011 W L 19905 27, at * 3 (7th C ir. M ay 24, 2011). T he district cou rt’s reasonin g f or granting sum m ary j udg m en t o n the S ec ti o n 1 7(a ) de fen se i s cr y pti c. As the appell ee, the Truste e m ay defe nd t h e j ud gm ent b ase d on an y a rg u m en t ra ise d be low

. Tru hl ar v. U
. S. P o s t al Se r v. , 60 0 F.3d 88 8, 89 2 (7 th C ir.), cert. denied , 13 1 S
. Ct. 44 3 ( 2010 )
. H owever, he ha s cho se n to defend on o nl y o ne: the Bor ro w er s’ f ai l ure to est abl ish that “ Com disc o had an i ntent to decei ve, m ani pu l ate o r d efr au d.” ( A pp el l ee B r. 59 .) A s d isc u ss ed , th e d ist ric t c ou rterr on eo u sly gran ted sum m ary j ud gm en t on th e groun d tha t t he Borro w er s f ai l ed to o fferev i dence ofsci enter
. There f or e, 6 the g ra nts o fsum m ar y j u d gm en t on the Se cti on 1 7( a) i l l e g a l i t y de fe ns e s ho ul d b e v a c a t e d.

D . Ex t ensio n oft he D unc an/PaulRu l i ngs T h e B or ro w er s c on te n d th at th e d ist ric t c ou rterr ed in extend i ng i ts D uncan/Pa ul sum m ar y j ud gm ent rulings.N os. 08

- 3961 , 08

- 3966, 08

- 3967, 08

- 3981 , etal

. 49 The cour t’ s o pini on s tat es that “[ t] he i nsta n t d efendants r ai se the s ame c ou nt er cl ai m s an d de fen se s an d the c o u r t ’ s r u l i n g i n [ D unc an/Paul ] w ill no t b e re vis ite d .” C oste ll o , 2 00 8 W L 4 64 63 35 , a t * 3. The Bo r r ow ers a r g ue th at su c h lan gu ag e s h ow s t h a t t h e d ist ric t c ou rtd id n ot r each the subst ance ofthei r defe nses but m er ely g av e i ts e ar l i err ul i ng s pr ecl us i ve e ffec t. Al th o ug h o ne m i ght dr aw such a concl usi on i fthe quoted l anguage i s t a k e n o uto fc o nt e xt, we do n o tr e a d thi s l a ngua ge in a vacu um . Th e record reveals that th e d is trict court ga ve th e B or ro w er s a n o p p o rt u n ity to p re se n t t h eir o w n argum en ts a nd e vi den ce a nd g av e th em so m e co nsi der at i o n. W e unde r st an d the di st r i ctc o ur t as s ay i ng tha ti twa s a do pt i ngb o th i t s p r i o r ruling s a nd i t s s up p ortive reasonin g. (W he th er the g r a n ts of sum m ary j ud gm ent were p ro per base d on the sam e g ro und s o n w h ich it w as gra n te d ag ain st D u n c an an d P au l is an ot h er qu es tio n ad d re ss ed be low .) The B orro w er s chal l enge the g ra nts o fsum m ar y j ud gm en t on th e fraud set-offde fens e , w hich they assert w as base d on a l ack ofev i dence ofr el i ance b y Duncan or Paul. In the D unc an/Paul de cision , the district cou rt note d that the defendants had not att em pted to show re lian c e on t h e alle ge d m isr ep re se n ta tio n s. B u t t h e p rin c ipal gr ound fo r the c ourt ’ s r uling was thatthe al l ege d m i sr epr es en ta ti o ns w er e ex pr es si o ns o fl eg alo pi ni o n, w hi ch cannotsupport a fra ud claim . (S A : 178 ( ci ti ng C ity o f A uro ra v . Green , 467 N
. E.2 d 610, 61 3 ( I l l

. A pp . Ct. 19 84) ( “A s a ge nera lr ule , o ne i s no t e nti tled t o re l y upon a r epres entat i on o fl aw since bo th p arti es ar e pr esum ed50 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l.

In c onnecti on w ith the § 10(b) i ll egali ty def ense , the Truste e 7 di d as s er tthatthe Bor ro wers c oul d nots how rel i anc e. Buthe has notde fended the app li cat ion ofthe D u n c a n /P a u l ru l i ngs t o the appe l l ant s bas ed o n n on- re l i ance, and we wil l no tm ake a p a rt y ’s ar g u m en t fo r h im
. Va u g h n v. Ki ng , 167 F. 3d 347, 354 (7th C i r . 1 9 9 9) ( “It is no t the resp on sibility of this cou rt to m a k e a rg u m en ts fo r t h e p a rt ie s.” ). to b e equa l l y c apabl e of kn ow i nga nd i nt er pr et i ngthe l aw . ”) ) . T h u s, i t i s no t s urpri si ng tha t the co urt did not v i e w the Bo r r o we r s ’ decl ar a t i o ns , wh i c h s e e m t o s up porta re aso nabl e infe re nce o fr eliance, as r equi ring a re su l t di ffer en t fr o m tha t r ea ch ed i n D unc an/Paul

. ( The Truste e doe s no t a rgue thatthe Bo rrow er s’ affi davi ts c o ul d not su p p or t a rea so n ab le in fer e n c e o f j u st ifiab le re l i ance; he m er el y c ri ti ci zes them as se l f

- ser vi ng. ( Se e Appel l e e ’ s B r . 6 0

- 6 1
. ) As a r e s u l t, h e h a s wa i v e d a ny su c h a rg u m en t fo r p u rp os es of th is a p p ea l. Se e, e . g. , 7 O ’N e al v. Ci ty of

Chi cago , 5 8 8 F
. 3 d 4 0 6 , 4 0 9 ( 7 th Ci r . 2 009) (dec linin g to cons ider argu m en t not m ad e on ap p eal))

. N o ne th el es s, the di st r i ctc o ur t’ s an aly sis f al te r s. The Bo r r o wer s ar g ue tha t th eyi den ti fied an ex ce pti o n t o the g en er alr ul e th atl eg al opi ni o ns c anno t su ppo r t a fr au d c laim an d th e d ist r i c t c o u rtn ev er co n sid er ed it. See West v. W
. Cas . & Su r . Co. , 846 F.2d 38 7 (7 th C ir. 19 88 ). In West, we r ec o g ni ze d tha t unde r I l l i no i s l aw, “ [ a] s ta te m en t that, st anding alo n e, appears to be a s tat em ent o f opi ni on, never thel ess m ay be a sta tem ent of f act wh en consi dered in c onte xt. ” Id. at39 3. W e q u ot ed an Il lin ois Su p re m e C ou rtop in ion :N os. 08

- 3961 , 08

- 3966, 08

- 3967, 08

- 3981 , etal

. 51 W he r ev er a pa r tys ta te s a m at te r whi chmight otherw i se be o nl y a n opi ni on, but does not sta te i t a s th e e x p r e s s i o n o f th e o p i n i o n o f h i s o wn, b ut as a n a ffi r m at i ve f act m at er i alt o the t r an sa ct i o n, so that the oth er p ar ty m ay re aso nabl y t re at i t a s a f act and rely upon i t a s s uch, then th e s tat em ent c l earl y b eco m es an affi rm ati on o fthe f act wi th i n the mean i ngo fthe r ule a g ains t fr au dul en t m i sr epr es en ta ti o n. Id. ( quoti ng B utti tt a v. Law re nce, 178 N .E . 390 , 3 93 (Ill

. 1931 ) )
. Thus, wh ethera sta tem ent i s o ne o f fa ct o r op in ion d ep en d s o n th e fa c tu al c ir c u m st an c es . Id. Fact ors to be c onsi de re d in d ete rm i ni ng wh ethera pla i nti ffr eason ab l y r e l i e d o n a n o pi ni o n a s tho ugh i t we r e a sta tem ent o ff act in c lu d e “ the a cces s o fthe parti es to outsi de i nfo rm ati on, ” the par ti es’ r el ati ve sophi sti cati on, and w hether“the speak erhas he ld h im sel fo ut as havi ng speci al know l edge. ” Id. at 39 3-9 4. T h er efo re , “it is no t ‘ th e f o rm of the s ta te m en t whi chi s i m po r ta nt or co n tr ollin g, bu t t h e s en se in w h ich it is re as on ab ly und er sto od. ’ ” Id. at39 4 ( quoti ng Pros s er a nd K e e t on on To rts § 1 0 9 , a t7 5 5 ( W. Ke e t o n 5 th e d

. 1 9 8 4 ) )
. The dist ri ct c ou rt ’ s o pini on does notr efl ect consi derat i on ofwh etherthe al l ege d m i sr epres entat i ons shoul d be tr eat ed as sta tem ents off act und erthi s a uthor i ty. T h e T ru st ee fu rt h er arg u es th at th e d ist ric t c ou rtd id not have to add re ss the fra ud se t-o ff d efense i n or der to r ul e i n h i s f av o r becau se i t co nc l ude d tha t th e B or ro w e r s fa iled to p re se n t e vid en c e o f sc ien te r, w h ich is ne c e s s a r y t o p r o v e a fr a ud s e t- of fcl a i m. As di s c us s e d, th e co ur t er r ed i n g r an tings um m ary j udg m en t o n the52 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. basi s o fa l ack ofpro ofo fsci enter. E .g. , Subl et t, 46 3 F
. 3d at 73 6 ( “[ I ] f th e m o ving par ty do es no t r ai se an i ss ue i n s uppo r t o fi ts mot i o n fo r s um m ar y j ud gm en t, the nonm ovin g partyi s no t r equi re d to prese nt ev i dence on that poi nt, and the dist ri ct cour t shoul d no t rely on that gr ound in i ts deci si on. ”)
. S o, to o, i t would be er ro r to extend the D unc an/Paul r ulin gs o n the basi s o fa l ack of ev idence o fsci enter, part i cul ar l y where the Tr ustee did notev en ar gue b el ow that a f ai l ure of pr oo fo f sci enterwarra nted sum m ar y j ud gm ent o n the fra ud se toff d efe n se . C

f. B est, 554 F.3d at 702 -03. Th e d is t r ic t cou rt er re d i n gr anti ng sum m ar y j ud gm ent t o the Tr ustee o n the fra ud se t- offdefenses . T he B o rrow ers also challenge th e d istri ct cou rt’s failu re to address the m er i ts ofthei r negl i gent m i sr epresen tati on s et- offdefense. In the D unc an/Paul sum m ary j ud gm en t rulin g , t he cou rt held that the record di d no t su ppo r t th e cl ai m tha t ei th erCo m di sc o orthe Bank w as “i n the busi ness ofsupplying i nfo rm ati on f or the gui dance of othe rs i n thei r busi n es s tra nsacti o ns ” ( S A: 18 2) , whi chi s ne ce ss ary f o r tha t defen se . The Bo r r o wer s su bmi t th atthe y ha d s uch evi den ce b utthe cour t di d not co nsi der i t. The T rustee has no t chal l enged th is ass er tio n on ap p ea l, an d ou r re vie w of th e m a t e ria ls ci ted bythe Borr owers sugge sts th at theym ay have en ou gh eviden ce to r a is e a n i ssu e of fact on th is m atter. W hethertheyhave pre sente d e n ough e vi dence to sati sfy the “ i n the b us i ne ss o fs uppl y i ngi nf o r m at i o n” el eme nta nd wh e the r the y u l t i mat e l y c a n pr e v a i lo n th eir ne gli gen t m isrepres e n t a tion d efense are f or det erm i nati on in the dist ri ct c ourt
.N os. 08

- 3961 , 08

- 3966, 08

- 3967, 08

- 3981 , etal

. 53 E. Ex cuse- of- N onperf orm ance D ef ense T h e B o r r o we r s ’ fi n a lc h a l l e n g e i s t o th e g r a nt s o fs u mm ar y j ud gm ent o n thei r excu se-o f

- nonperf or m ance defen se . U n d er Il lin ois la w , th ey arg u e, th e B an k’s co m p lian ce wi thS ec ti o n 1 7( a) , S ec ti o n 1 0(b) , and Re g ul at i o n U w er e i m pli ed ter m s o fthe parti es’ co ntra c ts a n d, by f ai l i ng to co m p ly w ith these l aw s, the Bank br eached the c ontract s, excusi ng the i r perf or m ance. The Trust ee d o e s n o t d i s p u t e th a t u n d e r I l l i n o i s l a w, l a ws i n e xi s t e nc e a tthe t i me a c o nt r a c ti s e xe c ut e d, “ a r e de e med , i n the abse nce o fco ntra ctuall anguage to the contr ar y, ‘part of th e c o n t r act as thou gh they w ere exp ressly i nc orp or at ed ther ei n. ’ ” Se l ckev. Ne w Engl and Ins . Co. , 9 9 5 F
. 2d 688, 689 ( 7th Ci r. 19 93) ( quoti ng M cM aho n v. Ch i. M er cantil e Exch. , 582 N .E .2d 13 1 3 , 13 19 (Ill . A p p . C t. 19 91 )); see also Ill. B a nke rs ’Li

f eAs s ’ n v . Col l i ns , 3 41 I l l

. 5 48 , 5 52 ( 19 30)
. T hu s, S e c t ion 17(a), Section 10(b) and Regu lation U are i m pl i ed te r m s of th e N o te s. The Bo r r o wer s as se r t th atthe B an k’s n on c om p lian c e w ith th es e la w s e x c u se s t h eir perf or m an ce. A “par ty cannot sue forbr each o fco ntra ct w i thout al leg ing a nd pro vi ng tha t he has hi m sel fsubst an ti al l y c o m pl i ed wi tha l lthe mate ria lt er m s o fthe agr eem en t.
. . . ” GeorgeF. M ue l l e r& So ns, Inc . v. N
. Il l
. Gas Co. , 3 3 6 N. E. 2 d 1 8 5 , 1 8 9 ( I l l

. App
. Ct
. 1 9 7 5 )
. And a m ate ri albr each o fa c on tr act w i l lexcuse the othe r p ar ty ’s p er for m an c e. Elda Arn hol d & B yzan t i o, L. L. C. v. O ce an Atl
. Woodl and Corp
. , 2 84 F.3d 693, 70 0 (7th C ir. 2002). The Truste e fi rs t r esponds th at the l oans w er e no t i l l eg al

. Al th o ug h h e f o cus es on com pl i an ce wi ththe m ar gi n re gul ati ons, the defe nse is based noto nl y o n al l ege d m ar gi n rul e v i ol ati ons but al so on vi ol ati ons of54 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l.

I n the di strict c our t, the Tr us t ee al s o r el i ed o n A D M Inves t or 8 S ervs. , Inc . v. Col l i ns , 51 5 F
. 3d 7 53 ( 7th Ci r. 20 08 ) ; he doe s no t d o so h er e. A D M Investor S er v ic es held thata t rader’ s “f ail ure t o pos t r equ ired m ar gi n f or a fut ur es c ont ra c tdoe s no t exc use him fro m p a ying. ” Id. at75 7. Her e, i n c ont ra s t, the Borr ower s as s er tthatthe Bank ’ s no nc om pl i anc e with the law excuse s thei r perf orm ance. Section 17(a) an d Section 1 0(b). Th e grant s of su m m ary j udg men to n the S e c t i o n 1 7 ( a ) a nd S e c t i o n 1 0 ( b ) de fenses w er e e rr or, and i t r em ai ns to be deter m i ned w hether the Bank vi ol ated a m ar gi n re gul ati on. The Trust ee al so m ai ntai ns that th e e xc us e - of

- nonperf or m ance defen se f ai l s be ca us e th e Bo r r o wer s ar e no t i n the z o ne o fi nt er es ts pr o te ct ed by th e m ar g i n r egul at i o ns , c i ting Tho m son M cK inn o n Securities, Inc
. v. C l a rk, 90 1 F
. 2d 1568 ( 11th Cir
. 19 90) , f orsup port
. T he ca se i s inapp osi te. There , a br oke r sued a form ercl i ent t o re cove r paym ent o n hi s a ccount. The cl i ent r ai sed as an a ffirm ati ve defe nse th e br o k er ’ s brea cho fe xc ha ng e r ul es , whi chwer e i nc o r p or at ed int o th e p ar tie s’ a gr ee m en ts
. Id. a t1 5 7 0
. T he cour t rej ecte d the defense because the cl i ent r equeste d the b r o k e r t o i g no r e a co ntra c tt e r m byp l a c i nga t r a de on hi s be hal f, thus w aiving the te rm as a condi ti on pre ced en t t o h is ob liga tio n . Id. at15 71. 8 Secon d , the T rus tee argu es th at t he Borrow ers i m pli edl y wai ved any bre ach b y acceptingthe l oan proceeds, p ar tici pati ng i n the SI P Pro gr am , and f ai l i ng to obj ect to the SIP P ro gram o r N ote s unti ltheyhad l ost th e op portunity t o profi t fro m the prog ra m . A s the par ty cl ai m in g w ai ver, the Truste e had the burden t o proveN os. 08

- 3961 , 08

- 3966, 08

- 3967, 08

- 3981 , etal

. 55 th atthe Bo r r o wer s ( 1) kne w ofthe ir r i g htt o a ss er t th e Bank’s bre aches, and ( 2) i ntended t o w ai ve the a ll ege d b re ac h es . R yder v. B ankof H ick o ry H il ls , 58 5 N
. E.2 d 46, 49 ( I l l

. 1 99 1)
. Ye t he di d no t do s o in th is c o ur t o r i n the di st r i ctc o ur t. F ur th er m o r e, the Tr us te e’ s r el i ance onthe B or ro w er s’ f ai l ure to ra i se any obj ecti on to th e SIP Pr o g r am o r N o te s r ev ea l s th e wea k ne ss o f hi s p ositi o n. “An i m pl i ed wai ve r may ar i se whenc onduc t o fthe per so n a g ains t whom w ai ve r i s as serted i s i nc o ns i st en t w i th any othe r i ntenti on than to waive i t. ” Wol f r am P’s hip, Lt d. v. La Sal l eNat ’ l Bank, 765 N .E .2d 10 12 , 102 6 (Ill. A pp . Ct. 20 01)
. I m pli ed w ai verar i ses “where ( 1) an unexp re sse d in tenti on t o w ai ve can be cl ear l y infe rr ed fr o m the c i r cumst an ce s o r ( 2) the c o nduc t o fthe w ai vi ng par ty h as m i sl ed the othe r partyi nto a r easonab l e be l i efthata w ai verh as occur re d.” Id. The Truste e h as n otid en tifie d th e fa c ts i n t h e re c or d th at w ou ld supp or t a fi nd i ng o fi m pli ed w ai ver . Thus, he ha s no t ade qua te l y develope d hi s wai ve r a r g um en t, a nd the r e s u lt is a w aiv er of th e w aiv er arg u m en t o n ap p ea l. See, e . g. , A rgyrop oul os v. Ci ty of Al t on , 53 9 F
. 3d 724, 73 8 ( 7th C ir. 2008). Thi r d, i t i s ar g ue d tha t i fthe Ba nkb r ea ch ed th e c on tr ac ts by len d in g m on ey in v i ola tio n of th e m ar gin r egul at ions, the n the Bo r r o wer s al so b r ea ch ed th e co nt r ac ts b y b o r r ow in gmone y i n v i o l at i o n o fthe m argin regu lations. T he Tru stee ass erts th at th e Borr o wer s ca nno t pr o fi t fr o m the i r o wn br ea cho fthe m ar gi n re gul ati ons , ci ti ng G oldst ei n v. Lust ig, 50 7 N
. E.2 d 16 4, 16 8 (Ill. A p p . C t. 19 87 ) (“A p ar ty w h o m at er i a l ly b r e a c h e s a c o n t r a c t ca n n o tt a k e a d v a n t a g e o fth e t e r ms56 N os . 08-3 96 1, 08 -39 66 , 08-3 96 7, 08 -39 81 , et a l. ofth e c o nt r a c t whi c h b e ne fi t hi m. ” )
. I t i s no t c l e a r that the Borr owers vi ol ate d the m ar gi n re gul ati ons. Regul ati o n X ex empts a b orrowerfr o m the mar g i n r egul at i o ns “unle ss the b or ro w erwil l fully c auses the cre ditto b e extended in contr avent i on of Regul ati on G, T, or U .” 12 C.F
. R. § 224. 1( b) ( 1). T h e re cor d bef or e us does not est abl i sh thatthe B or ro w er s wil l fully c aused the Bank to extend cr edi t in vi ol ati on o fo ne o fthes e r egul ati ons. The dis tr i ct c ourterred i n gr anti ng the Trust ee su m m ary j ud gm en t on th e B orrow ers’ exc u se-of- non p erf or m ance defe nse.

I I I . C ONC L US I ON Forthe f or eg oi ng r eas ons, the dist ri ct c ourt ’ s g ra nts of sum m ary j ud gm en t in f avor of the T rus tee are V ACATED and the se ap peal s a re R EMA NDE D f orfurther pr o ce eding s co ns i st en t wi ththi s o pi ni o n. Gi ven o ur d isposition of the ap p eals from th e grant s of su m m ary j ud gm ent, the appeal s fro m the A m ended Judgm ents ar e D ISMISSED A S M OO T . W e a pp r e c i a t e the s ub s t a nt i a le ff o r t s tha tthe di s t r i ct cour t a nd co unselhave expended i n thes e m att er s t o thi s point. H owever, f orr eas ons disc u sse d above , m ore ne eds t o b e do ne b efo r e th i s l i ti g at i o n c anb e put to re st.

6- 28- 11