In the

United States Court of Appeals

For the Seventh Circuit ____________________

No. 18-1835

TISSUE TECHNOLOGY, LLC, et al.,

Plaintiffs-Appellants,

v.

TAK INVESTMENTS, LLC,

Defendant-Appellee.

____________________

Appeal from the United States District Court

for the Eastern District of Wisconsin.

No. 14-C-1203 — William C. Griesbach, Chief Judge.

____________________

ARGUED OCTOBER 22, 2018 — DECIDED OCTOBER 29, 2018

____________________

Before FLAUM, EASTERBROOK, and SCUDDER, Circuit Judges.

EASTERBROOK, Circuit Judge. In 2007 Tissue Technology 

and some affiliated entities, which the parties call the OFTI 

Group, sold a tissue mill in Oconto Falls, Wisconsin, to ST 

Paper, LLC, which is controlled by Tak Investments. Goldman Sachs agreed to finance the transaction, but during the 

financial crunch of 2007 it cut $19 million from the amount 

of money it was willing to invest. That presented OFTI with 
2 No. 18-1835

a problem: it had promised to give ST Paper clean title to the 

mill, but with the reduced financing it would be unable to 

pay off everyone who held a security interest. To help solve 

this problem, Tak Investments agreed to issue four negotiable notes, face values aggregating about $16 million, to OFTI, 

which would offer the notes to the creditors as substitute security. The creditors accepted the notes, and the transaction 

closed. (Factual statements in this paragraph, and elsewhere 

in this opinion, come from findings the district court made 

after a bench trial. 320 F. Supp. 3d 993 (E.D. Wis. 2018).)

The notes provided for 8% annual interest, with 10% of 

the principal payable at the end of the first year, another 10% 

at the end of the second, and the final 80% at the end of the 

third. In a side agreement, OFTI promised to pay the notes 

itself during the first three years (after which they should 

have been fully paid). This meant that the lenders who released their security in the tissue mill had the credit of both 

Tak and OFTI behind the notes’ promises. The parties contemplated that Tak would hire a construction firm affiliated 

with OFTI to build at least $315 million worth of new tissue 

mills. The contracts provided that, if this occurred, Tak 

would not have to pay the notes. They also provided that, if 

Tak did not arrange for this construction (which the documents called “Phase 2 Financing”), and Tak also did not pay 

the notes’ principal and interest, then OFTI could cancel the 

notes and acquire a 27% interest in Tak. That would be difficult to accomplish as long as the lienholders held onto the 

notes as substitute collateral. But if OFTI paid off the debt 

secured by the notes and regained possession of these instruments, and Tak refused to pay, OFTI could deem the 

notes cancelled and receive an equity interest.
No. 18-1835 3

Tak never paid a penny on the notes it issued. Nor did 

OFTI comply with its obligation to pay during the first three 

years. The new tissue mills did not materialize. OFTI then 

demanded that Tak transfer to it an equity interest worth 

27% of the company. When Tak refused, OFTI filed this suit 

under the diversity jurisdiction. As far as the district judge 

could determine, some of the formerly secured creditors 

have not been paid and retain at least three of the promissory notes; but no maler who has the notes, the judge found, 

OFTI does not possess any of them. 320 F. Supp. 3d at 1003.

At an early stage of this suit the district judge concluded 

that, because Tak does not own itself, it cannot be compelled 

to issue the 27% interest OFTI seeks. A corporation may be 

compelled to issue shares, the judge recognized, but only the 

existing members of a limited liability company may be 

compelled to transfer ownership interests. As Tak Investments, LLC, is the sole defendant, the judge thought OFTI’s 

preferred remedy unavailable. 2016 U.S. Dist. LEXIS 166682 

(E.D. Wis. Dec. 2, 2016).

That was a misstep. Tak Investments is organized under 

Delaware law, to which the internal-affairs doctrine points as

the source of rules about its powers. First National City Bank 

v. Banco Para el Comercio Exterior de Cuba, 462 U.S. 611, 621

(1983). Delaware permits a limited liability company to issue 

membership interests in itself, just as a corporation may issue shares, even if that dilutes the interests of existing members. 6 Del. Code §18-301(b)(1). The two existing members of 

Tak Investments do not assert any contractual or statutory 

right to prevent the issuance of new interests under §18-

301(b)(1), so Delaware law allows Tak to provide OFTI with 

an equity interest. But it became clear at trial that two other 
4 No. 18-1835

considerations prevent OFTI from enforcing these notes 

against Tak.

A hold-harmless agreement is the first of these reasons. 

Paragraph 2(I) of one agreement between OFTI and Tak provides:

Each member of the OFTI Group jointly and severally agrees to 

indemnify [Tak Investments] and to hold it harmless from and 

against any and all damages, losses, deficiencies, actions, demands, judgments, fines, fees, costs and expenses, including,

without limitation, alorneys’ fees, of or against [Tak Investments] resulting from enforcement of the Investment Notes by 

any member of the OFTI Group (other than the enforcement of 

the pledge described above), or any enforcement of or other 

claims made any [sic] other current or future holder of such Investment Notes against [Tak Investments] relating to the Investment Notes.

The district court concluded that this effectively prevents 

OFTI from enforcing the notes against Tak, because whatever Tak gave to OFTI would be returned in indemnification. 

320 F. Supp. 3d at 999–1002. That conclusion is inescapable.

It makes business sense too. The notes were designed as 

security for third parties, not as compensation for OFTI. Perhaps, if OFTI paid the notes as it promised to do, it might be 

subrogated to the secured parties’ rights and could collect 

from Tak in that capacity notwithstanding the indemnity 

that blocks direct enforcement. But as OFTI did not pay the 

notes, it has no rights that it could enforce against Tak without immediately turning around and giving the money or 

other benefits (such as the 27% interest) back to Tak under 

the indemnity. (We could imagine an argument that obligations arising from cancellation of the notes, as opposed to 
No. 18-1835 5

their enforcement, are not subject to the hold-harmless 

agreement. But OFTI does not make that argument.)

The negotiability of the notes supplies the second reason. 

Each is payable to OFTI or another person it designates. 

Each was pledged to a lender to replace that lender’s security interest in the tissue mill, enabling OFTI to convey clear 

title to Tak. As far as the district judge could tell, none of the 

four notes has been returned to OFTI. This led the judge to 

invoke Wis. Stat. §403.301, a part of Wisconsin’s version of 

the Uniform Commercial Code applicable to negotiable instruments, which provides:

“Person entitled to enforce” an instrument means the holder of 

the instrument, a nonholder in possession of the instrument who 

has the rights of a holder, or a person not in possession of the instrument who is entitled to enforce the instrument under 

s. 403.309 or 403.418(4). A person may be a person entitled to enforce the instrument even though the person is not the owner of 

the instrument or is in wrongful possession of the instrument.

The judge concluded that OFTI is not entitled to enforce the 

notes because it is not their holder, is not in possession of 

them, and is not entitled to enforce them under either 

§403.309 or §403.418(4). 320 F. Supp. 3d at 1003. Section 

403.309 deals with situations in which instruments have 

been lost, stolen, or destroyed, while §403.418(4) permits a 

person who paid an instrument by mistake to recover from 

the person who should have paid. Neither situation obtains

here, which means that only the holders, or nonholders in 

possession, may enforce these negotiable notes.

And this, too, makes commercial sense. The notes replaced lenders’ liens against the tissue mill. Until the debts 

have been repaid, the lenders need the notes as security. But 

if OFTI can use the fact of nonpayment as a reason to cancel 
6 No. 18-1835

the notes, they will be worthless to the lenders. OFTI will 

have replaced their security with nothing, while reaping a 

substantial benefit for itself. If OFTI had paid the notes as it 

promised, and thus retired the loans, then it would recover 

the notes from the lenders and be able to enforce without the 

obstacle of §403.301. But it didn’t, so it can’t.

OFTI asserts that the secured parties themselves can’t enforce the notes because OFTI failed to endorse them before 

giving them in pledge as collateral. See Wis. Stat. §§ 403.203, 

409.313. That may well be true. But OFTI does not explain 

why this avoids §403.301, which links enforcement to possession. The lenders who hold the notes in pledge may have 

a legal right to compel OFTI to endorse them to facilitate enforcement; that is some distance from giving OFTI a right to 

leave the lenders in the lurch and take all of the notes’ benefits for itself. The district judge was right to withhold any 

remedy that would transfer the value of the notes from the 

secured lenders to OFTI.

AFFIRMED