concomitant CPAs) in February and October 1999, respectively. Likewise, they admit that they
received $4.25 million in loan proceeds, subject to the terms of the Notes and the CPAs, Thus,
as a matter of law, BCC has established the existence of a contract.

BCC contends foremost that the second clement of its contract claims against the Schers
is met by their failure to pay the amount owed by them upon BCC’s demand for the same, which
the express terms of the contracts required them to do.” Pursuant to the Lerms of the Notes, BCC
lent the Sehers a total of $4.25 million and was entitled to payment of the outstanding principal
balance of the loans, plus accrued interest, upon demand. The Sehers do not dispute that they
failed to pay BCC upon demand or that their actions violated the express terms of the contract.

Likewise, based on the record evidence, the Sehers cannot adequately dispute BCC’s
ability to prove the third element of its claims, The Schers undisputedly did not pay BCC the
amount owed under the contracts upon BCC’s demand for the same, which caused BCC to be
out-of-pocket approximately $4,391,157.28. Thus, as a matter of law, BCC has established that
the Sehers" material breach caused it injury.

In their opposition brief, the Schers do not directly address, let alone set forth a defense
to, BCC’s contract claims against them. Instead, they affirmatively argue only that disputed fact
issues preclude summary judgment in BCC’s and RWB’s favor on the Sehers’ two claims against
them (i¢., for breach of contract and for violation of the U.C.C.). Construing the Sehers’ brief in
a charitable manner, their arguments in support of their own contract claim against BCC and

RWB could be viewed as raising a defense to BCC’s breach of contract claims — namely, that

BCC also contends that the Sehers breached by failing to maintain adequate collateral and/or,
relatedly, to pledge additional collateral upon request. However, given the court’s finding that the Schers
breached by failing to pay the amount borrowed by them, it is not necessary to address this additional
contention,

19


understanding that the 600,000 shares from the FLP would be transferred if the Schers’ attomeys
coneluded there was no legal impediment to doing so.!!

The Sehers purport to contest BCC’s stated reason for not liquidating the stock, arguing
that BCC declined to liquidate the stock to avoid harming the eflorts of its affiliate, RWB, to
carry out its work for ABC-NACO (c¢., the sale of divisions of the company, sale of the
company as an ongoing concern, negotiation of Consent Solicitations, efe.). Based solely on Mr.
Seher’s general experience regarding the implications ofa fall in cquity share prices, they argue
that a “depressed market” for ABC-NACO shares would have rendered RWB’s work more
difficult. From that, they imply that BCC did not liquidate the collateral because doing so would
have depressed the market for ABC-NACO shares, thereby hindering RWB’s efforts on behalf of
ABC-NACO and, in turn, adversely impacting its future fees from ABC-NACO,

In support of this argument, the Sehers also point to evidence that Northwestern Mutual
Life Ins. Co, (allegedly “Baird’s” parent company) sold ils shares of ABC-NACO (which BCC
contests without citing to the record) and that BCC did not liquidate the shares of ABC-NACO
held as collateral in connection with another customer’s loan account, notwithstanding that the
loan was in default (which BCC admits). The Sehers do not make clear how these facts, if
accepted as truc, could support an inference that BCC did not liquidate the collateral stock in
order to protect RWB.

In response to the Sehers’ allegations in this lawsuit, BCC presented evidence that the
individuals involved in making the decision not to liquidate the stock were not motivated by

RWP’s investment banking or markct-making activities or fees or by issues of RWB’s own stuck

" Notwithstanding the relative importance of the issue, the Schers interposed only an
unsupported denial in response to this assertion.

13


regulation as a sccurities broker-dealer. The Federal Reserve is its primary regulator.

RWB is a registered broker-dealer under federal and state securities laws and is a member
of the New York Stock Exchange and other principal exchanges. It is under the jurisdiction of
the U.S. Securities and Exchange Commission (“SEC”), the National Association of Securities
Dealers, and other securitics industry regulators,

Neither parties’ submissions makes clear the precise nature and/or contours of the
relationship between BCC and RWB. What is clear is that they are related corporate entities:
they maintain their respective principal oltices at the same location, share some common staff
and executive level personnel, and operate a single, common risk management committec.

Joseph A, and Mary Beth Scher are husband and wife, Mr. Seher founded NACQ, Inc.,
which manufactured and sold products and component parts to users of rail cars and locomotives.
NACO also manufactured and sold flow products to users in the petrochemical, pulp and paper,
and waste water industries, Mr. Seher served as NACO’s President and Chairman of its Board of
Directors from 1985 until February 1999, He initially owned 95% of NACO’s issued and
outstanding shares and remained a principal shareholder of NACO when various NACO
executives purchased shares over time.

In November 1998, NACO agreed to merge with ABC Rail, a supplier in the rail industry,
which was a public company. The merger transaction was complete in ebruary 1999, with
ABC-NACO, Inc. the surviving entity. ABC-NACO’s stock reached a closing high of $20/share
on August 10, 1999,

Mr. Scher served as Chief Executive Officer of ABC-NACO from the effective date of

the merger until approximately late March or carly April 2001, at which time he left the


BCC may not recover under the contracts for the Sehers’ alleged breach of contract because
BCC, itself. breached the contract and thereby surrendered its right to enforce the contract against
the Schers.

However, as set forth in section III(A), supra, the Sehers” breach of contract claim against
BCC fails as a matter of law. The Sehers have not raised any other barticr to BCC’s recovery.
BCC is therefore entitled to judgment as a matter of law on both its claims against the Sehers.

In light of the court’s ruling on these claims, the parties are directed to file a stipulation as
to the total amount owed by the Sehers under the contracts (including accrued interest) as of
January 2, 2004, on or before that date. If the parties are unable to reach an agreement
concerning the same, they are hereby ordered to file simultancous briefs on the issue on January
2, 2004

Cc, The Sehers' Counter-Claim for Violation of the Wisconsin Uniform
Commercial Code (Count LI)

In their initial pleading, the Sehers cited two provisions of the U.C.C. in support of their
counter-claim under the statute — sections 9-610 and 9-207. Ilowever, as noted in this court’s
March 28, 2003 order granting in part and denying in part BCC’s and RWB’s motion to dismiss,
section 9-610 does not obligate secured parties to dispose of collateral upon a borrower’s default,
but rather merely provides secured parties the option of doing so. In responding to the motion for
summary judgment, the Schers wholly abandoned their theories under both section 9-610 and
section 9-207,

The Sehers now allege only a violation of section 1-203 of the U.C.C., which imposes a
gencral obligation of good faith in the performance of contracts within the scope of the U.C.C

Setting aside the impropriety of alleging a theory for the first time in a brief opposing a motion

20


January 2, 2004, on or before that date. if the parties are unable to reach an agreement

concerning the same, they are hereby ordered to file simultancous briefs on the issue on January
2, 2004,

Enter:

Dia mt lbw

David H. Coar
United States District Judge

Dated: December 3, 2003



941 F.2d at 595,

Morcover, although the contracts granted to the Sehers a qualified right to effect the
liquidation of the collateral, and an unqualified right to request the same, the Schers never even
requested liquidation of the collateral (cither in the manner prescribed by the contracts or
otherwise). Had the Schers made such a request, BCC would have been contractually obligated
to liguidate the collateral so long as the liquidation and/or the Sehers’ provision of additional
sums would have satisfied the Schers’ obligations under the Notes, or the Sehers provided
satisfactory substitute collateral. BCC’s good faith duty under the contracts did not require it to
take an action that the Sehers opted not to pursuc, themselves. That is, BCC’s decision not to
liquidate the collateral, in light of the Schers” failure even to request liquidation, cannot be
viewed as the type of “opportunistic” behavior proscribed by the duty of good faith. See, e.g.,
Market Street, 941 F.2d at 595 (citation omitted).

Finally, even assuming arguendo that under the circumstances of this case, the law
implied a good faith duty restricting BCC’s exercise of its discretion in determining whether to
liquidate, the Schers’ claim nonetheless fails as a matter of law, Construing the evidence in the
light most favorable to them, they have not presented sufficient evidence to show that BCC
breached any such duty, The Sehers do not allege that they wanted BCC to liquidate the
collateral, and the undisputed record evidence establishes the contrary ~ the Sehers and their
attorneys were attempting to negotiate an absolute forbearance by BCC. Even absent that

evidence, it is undisputed that BCC understood or belicved that Mr. Seher did not want the

“waiver” argument (/¢., (hat BCC waived its right not to sell the collateral stock by representing that it
would) fails because it was raised for the first {ime in response to a motion for summary judgment and, in
any event, because il is not supported by compelling legal argument or authority,

\7


After ABC-NACO’s stock price dropped to $3.00/share, BCC demanded additional
collateral from the Sehers. It also took steps to ascertain whether the Schers could and would
pledge an additional 600,000 shares {rom the Seher Family Limited Partnership (*FLP”) as new
collateral for the outstanding debt (which shares were held in an account at RWB). ‘Thereafter,
the parties engaged in negotiations aimed at reaching such an agreement. As late as September
2001, BCC believed that the Sehers were still working with their attorneys towards that end,
Ultimately, the Schers never pledged any additional collateral, notwithstanding BCC’s requests
for the same.

Nonetheless, BCC did not exercise its right under the contracts to liquidate the collateral
itheld. fo the contrary, BCC retained the ABC-NACO stock as collateral and did not liquidate
it. Likewise, the Sehers never requested or instructed, either orally or in writing, the liquidation
of the collateral, as the contracts permitted them to do. Their attorneys did not do so either,

At some point in 2001, BCC demanded payment in full of the Sehers’ indebtedness.
BCC does not allege when this occurred, and ihe Sehers contend that it did not occur until
August 2001. In any event, the Sehers never complied with BCC’s demand, and BCC is
currently out-of-pocket $3,696,737.14 in outstanding principal, as well as $694,420.14 in unpaid
interest accrued as of May 31, 2003.

Many of the details surrounding the above undisputed facts are contested by the purties.

2. The parties’ efforts to reach an agreement concerning the pledging of
additional collateral and the Sehers’ proposed condition of
forbearance

In April 2001, BCC drafted a Guaranty of Account and Note Modification Agreement

pursuant to which the Sehers would pledge the additional 600,000 shares from the I‘LP and

9


$1.9 million in February 1999, The $1.9 million was extended at the time of the Sehers*
purchase ola new residence on Astor Street in Chicago, Illinois. To obtain the $2 million loan,
Mr. and Mrs. Seher cach executed a Demand Promissory Note (“Note”) in favor of BCC anda
Collateral Pledge Agreement (“CPA”), both dated February 8, 1999

In October 1999, the Schers borrowed another $2.25 million from BCC. ‘To obtain the
loan, the Schers cach executed another Note in favor of BCC and another CPA, both dated
October 12, 1999.7

2. The contracts executed in connection with the loans and their
collateralization

By their explicit and unambiguous terms, the Notes required the Sehers to pay the
outstanding principal balance of their loans, as well as accrued interest, upon demand. ‘The Notes
also required that the collateral securing the Schers’ debts to BCC be maintained at no less than a
200% collateral-to-debt ratio. Finally, the Notes made clear that they were secured by, and
subject to the terms and conditions of, the CPAs executed in connection therewith.

The CPAs granted BCC a security interest for collateral purposes in stock owned by the
Sehers, ‘The CPAs required BCC to exercise reasonable care in the custody and preservation of
the collateral in its possession, while also specifying that said duty did not include insuring or
taking any steps to collect or realize upon the collateral or any distribution of interest or

principal.

> The parties dispute whether the $1.9 million borrowed in February 1999 was used for the
purchase of that home, for home furnishings and improvements, and for other personal purposes.
Likewise, they dispute whether the $2.2 million borrowed in October 1999 was used for the purchase and
renovation of a new residence for the Schers on Dearborn Parkway in Chicago, [Ilinois, and/or for other
personal purchases, These disputes are immaterial.

6


company. During that time, Mr. Seher and his family were the largest beneficial stockholders of
ABC-NACO. The company filed a bankruptcy petition in October 2001.

B RWB’s relationship with the Sehers, NACO, and ABC-NACO

RWB provided assistance to NACO in connection with its merger with ABC Rail, RWB,
along with other entities, underwrote ABC Rail’s subordinated debt (which became an obligation
of ABC-NACO upon the merger).

‘The Sehers contend that RWB continued to provide financial advisory services to ABC-
NACO up to and beyond the time of Mr. Seher’s departure from ABC-NACO in March 2001.
For example, they contend that RWB served as the underwriter for the sale of ABC-NACO’s
investment securities. They also contend that, in 2001 and up until October 2001, RWB was
engaged to obtain Consent Solicitations, sell divisions of ABC-NACO, and raise capital through
sales of common shares of stock. Finally, the Schers allege that RWB’s fees for such services
were linked to its success in achieving ABC-NACO’s objectives. BCC and RWB deny these
contentions, generally, on the grounds that they are unsupported by the cited record evidence, but
admit that RWB undertook one Consent Solicitation, ft is undisputed that RWB was one of
ABC-NACO’s twenty largest unsecured creditors, as it held a claim of $817,663.89 as of ABC-
NACO’s October 2001 bankruptey filing.

The Sehers maintained a joint brokerage account at RWB,

Cc. BCC’s lending relationship with the Sehers

1. The loans
‘the Sehers entered into a lending relationship with BCC in December of 1998, BCC

loaned the Schers $100,000 in December 1998. BCC increased the loan amount to the Schers by


collateral to be liquidated. These facts, both independently and in their totality, demonstrate that
BCC’s declining to liquidate the collateral was not “arbitrary or unreasonable” and did not breach
the duty of good faith.

Finally, the Sehers’ bare spcculation concerning BCC’s motives (ie., that il was
motivated by a desire to protect RWB’s feces derived from its provision of services to ABC-
NACO) is insulficient to defeat summary judgment on their contract claim. See, ¢.g.. Borcky v.
Maytag Corp., 248 3d 691, 695 (7" Cir. 2001) (speculation is insufficient to defeat summary
judgment).

BCC is entitled to summary judgment in its favor on the Sehers’ counter-claims against it
for breach of contract. Therefore, RWB is also entitled to summary judgment in its favor on the
Schers’ counter-claim against it in the capacity of BCC’s alter ego (and this court.nced not
address whether the Sehers presented sufficient evidence to support a finding that RWB was
BCC’s alter ego).

B. BCC’s breach of contract claims against the Sehers (Counts J and II)

BCC"s contract claims are premised upon the Sehers* non-payment of the principal and
interest owed by them under the Notes, as well as their failure to keep the loans sufficiently
collateralized. Under Wisconsin law, to prevail in its twin breach of contract claims against each
of the Schers, BCC must establish that: (1) a contract exists; (2) the Sehers’ actions violate the
express terms of the contract; and (3) the breach is material and resulted in injury, Walgreen Co.
v. Sara Creek Property Co., 775 F. Supp. 1192, 1195 (L.D. Wis. 1991),

BCC’s ability to mect the first clement of its claims against the Schers is undisputed. The

Sehers admit that they each executed the two Notes in favor of BCC (as well as the two

18


market value of the ABC-NACO stock fluctuated.’

Prior to 2001, the Sehers responded to such requests by providing additional collateral to
BCC. As of June 2000, the Sehers’ collateral pledge totaled 1,906,857 shares of ABC-NACQO
stock. That amount did not thereafier change. Moreover, the Schers did not make any payment
on either Note after June 2000. At the time, the ou(standing principal loan balance was
$3,696,737.

The parties dispute the precise date on which the loans became under-collatcralized (as
measured by the contractually agreed upon 200% collateralization level), More specifically, they
disagrce as to the proper method for valuation of the stock. The Schers contend that because the
stock was “thinly traded,” the stock could not have been disposed of on a single day and, instead,
would have had to be sold over a period of time. Further, they contend that accrued interest,
rather than simply the outstanding principal balance, should be factored into the analysis of when
the loans became under-collateralized. Within that framework, the Schers contend the loans
were under-collateralized as of January 2001, BCC, on the other hand, contends that the loans
became under-collateralized on March 30. 2001, when ABC-NACO’s share price dropped to
$3.00." The parties agree that the loans remained under-collateralized from that time forward.

E. Events following the under-collateralization of the loans

lL. Undisputed facts regarding the parties’ conduct

> Although the Sehers purport to dispute the identity of the entity requesting additional collateral,
they provide no record support for their denial, instead offering only the bare contention that
representatives of RWB made the requests. ‘This bare denial does not suffice (o create a triable fact issue,
and, in any event, this fact is not material.

® Although the precise date of (he under-collateralization of the loans is immaterial, the record
supports BCC’s interpretation, as the contracts defined “fair market value” as the last sale price of the
stock on the day of valuation.

8


_ Mitnats Catdar Fovemn (G67)

United States District Court, Northern District of IMlinois

Nanne of Assigned Judge David H. Coar Sitting Judge if Other
or Magistrate Judge
CASE NUMBER 02 C3789 12/3/2003
CASE :
TITLE Baird Credit Corp. v. Joscph A. Seher and Mary Beth Seher y, Baird Credit Corp. and

Robert W. Baird, Inc,

[ln the tallowwing, box (2) indicate the party liting the motion, ¢.g.. plaintiff, defendant, 3rd purly plaintitt, and (b) slate briefly the nature
ol the motion being presented.)

MOTION:

Plaintiff/Counterdefendant’s and Third-Party Defendant’s joint motion for summary judgment

DOCKET ENTRY:

() a Filed motion of [ use listing in “Motion” box above. |

(2) ao Brief in support of motion duc

(3) u Answer briet lo motion due . Reply to answer brief due

(ap) o Ruling/Hearing on set for a

(3) u Status hearing|held/continucd to] [set far/re-set for]on set for | at

(6) o Pretrial confcrence[held/continued to] [set for/re-set for] on _, Set for at

(7) o Trialfset for/re-set for] on ab :

(8) a [Bench/Jury trialJ [Hearing] held/continued to at

(9) u ‘This case is dismissed | with/without] prejudice and without costs|/by/agreement/pursuant to]

CFRCP4(m) OLocal Ruledt.t = OFRCP4 (a1) OO FRCP4i(a)(2).

co) «oi (Other docket entry] — For the reasons stated in the attached memorandum, the joint motion for
summary judgment is granted in its entirety. BCC is granted judgment as a matter of law as to its breach
of contract claims against the Sehers, and BCC and RWB are granted judgment as a matter of law as to
the Sehers’ claims against them. As set forth in the memorandum, the parties are directed to file a
stipulation on or before January 2, 2004, or file simultaneous bricfs on that date, concerning the total
amount owed by the Sehers, This matter is set for status off Januayy 20, 2004, at 9:00 a.m.

adh [For further detail see order attached to the original minute order.] | Guull) ’ N

v No notices required, advised in open court. Document

Number

No natives required. suber of ws

Notices mailed by judge's stall!

Nolilied counsel by whephone DEC. 47003

Docketing to mail notices,
Mail AQ 430 farm, Hinds fils a’sin LX

Copy to judge/magisteate judge

B14 Kd £- a3g 60

sfaye majled note

courtney

acdc deputy’s OT G3. ag ald

initials

Date‘time received in
central Clork’s OMice ing dept



that their lawyers had concluded the 600,000 shares could not be pledged, which the Sehers also
deny,

Although the Schers contend that BCC rejected their written proposal on May 8, 2001,
the Schers admit that general discussions concerning the pledging of additional collateral
extended beyond May 8". Specifically, they maintain that Mr. Seber made “clear” to BCC from
mid-May 200) forward that he would consider the transfer of additional shares for coflateral only
if BCC agreed to a forbearance as set forth in the Sehers’ May 2001 written proposal.

It is undisputed that, as late as September 2001, a BCC/RWB executive wrote a letter to
Mr. Scher regarding his understanding that Mr. Seher would be mecting shortly with his lawyers
to discuss the possible pledge of the additional 600,000 shares,

3. BCC's alleged representations that it was required to and intended to
liquidate the collateral

As noted above, the Sehers admit that they never requested or instructed BCC to liquidate
the collateral, either orally or in writing. Moreover, they do not allege that they wanted BCC. to
liquidate the collateral, However, they now contend that BCC made representations to the effect
that it was going to liquidate the collateral.

Specifically, the Sehers contend that various BCC and RWB exceutives informed them
on multiple occasions that BCC had legal obligations, as well as intemal policies, requiring
maintenance of collateral at levels different from that Specified in the contracts. Moreover, the
Sehers contend that, following Mr. Seher’s departure from ABC-NACO, BCC informed their
attorney that federal securities laws obligated BCC to increase the colluteral-to-loan ratio because
Mr. Seher was no longer an “insider” of ABC-NACO, ‘They further allege that between mid-

March and carly May 2001, a BCC/RWB executive stated that “Baird” was legally obligated to

i


forwarded the same to Mr. Scher for his review and consideration. The parties subsequently
engaged in some discussions concerning the pledging of additional collateral.

The Sehers instructed their attorneys to make a written proposal to BCC for the transfer
of the 600,000 shares. Their forthcoming May 7, 2001 written proposal provided for the transfor
of 600,000 shares from the FI.P to BCC, and also provided for a forbearance, pursuant to which
BCC would agree not to liquidate any of the shares held as collateral, whether old or new, until
the earlier of: (1) the date on which a bankruptcy petition was filed by or against ABC-NACO;
or (2) April 30, 2002.7

Ultimately, the parties never reached an agrcement concerning the pledging of the
additional shares, but the parties disagree as to why. ‘The Schers contend that BCC rejected its
written proposal during a telephone conversation on May 8, 2001, for the expressed reason that
applicable legal rules or requirements required BCC to liquidate the transferred shares upon 15
days’ notice. BCC denies that contention.'

BCC maintains that the partics discussed a possible agreement during their phone call on
May 8, 2001, and that, thereafier, it understood that Mr. Seher was working with his lawyers
towards the end of achieving such an agreement. BCC contends that Mr. Seher consistently said
that he had engaged lawyers who were working to ascertain whether such a transfer would be

permissible, which the Sehers deny. Further, BCC contends that the Sehers never informed it

7 Although the Sehers’ Local Rule 56.1 statement implics that the forbearance they sought would
pertain only to the “new” shares, their contention is directly contradicted by the express terms of the
written proposal, as well as by the Schers’ other record admissions.

* Notably. a letter authored by Mr, Seher in November 2001 (following ABC-NACO’s
bankruptcy filing) posits the 15-day requirement as one imposed by the SEC and applying to the
collateral already held in the event that no additional shares were pledged,

10


Additionally, the CPAs granted BCC the right to take various actions upon the Schers’
default of their obligations under the Notes and/or the CPAs and to do so without notice or
demand of any kind.? In pertinent part, they authorized BUC to liquidate the collateral upon the
Schers’ default of such obligations. [lowever, by their terms. neither the CPAs nor the Notes
required BCC to liquidate the collateral stock for any reason or under any circumstances. Rather,
they provided BCC the option of doing so, as one of an assortment of remedies.

Likewise, the CPAs provided that the Schers could demand liquidation of the collateral
stock, so long as they placed their demand in writing. Under the CPAs, BCC could nonetheless
refuse to liquidate the collateral based on its sole opinion that so doing would adversely affect the
value of the collateral, “wales the proposed sale plus other sums tendered by [the Schers|, if any,
will pay in full all Obligations, or substitute Collateral satisfactory to [BCC] is delivered to
{BCC}.” (Emphasis added). The CPAs also expressly provided that any refusal by BCC to
dispose of the collateral, or any loss or damage to the collateral, would not affect the Sehers’
liability for their indebtedness.

Dp. The collateralization and eventual under-collateralization of the loans

‘The Sehers initially pledged shares of NACO and, subsequently, of ABC-NACO, as
collateral for their debt obligations.’ Al various times, BCC made additional requests for
collateral in order to maintain the 200% collateral-to-debt ratio, Specifically, BCC made such

requests when the loan amount increased, when the mortgage was released, and/or when the

> The CPAs also provided that BCC could waive any given default by the Sehers without waiving
any other subsequent or prior default by them

* At some point, the Sehers* debt obligation was partially secured with a home mortgage:
However, as of June 2000, BCC had released the mortgage, and, from that point forward, the only
collateral securing the Sehers’ loans was common stock in ABC-NACO,

7


for summary judgment, the Schers’ claim, in its current incarnation, nonctheless fails as a matter
of law.

The Schers contend that there is no meaningful difference between the “good [aith”
obligation read into contracts under Wisconsin law and that prescribed by the U.C.C., and the
Schers do not address the issuc. However, one critical dilference is that section |-203 of the

ULC

C. does not support an independent cause of action for failure to act in good faith under a
contract. See, e.g, Hauer v. Union State Bank of Wautoma, 532 N.W.2d 436, 464 & n.7 (Wis.
Ct. App. 1995) (quoting official comment to § 401.203, STATS.) (section 1-203 does not support
an independent cause of action for failure to act in good faith under a contract, but instead merely

dircets courts to “interpret[] contracts within the commercial context in which they are ercated,

performed, and enforced”). The Sehers’ counter-claim under the U.C.C. against BCC and RWB
fails for this independent reason.

Even assuming, arguendo, that the Sehers could theoretically state a claim for relief under
this section of the U.C.C., such a claim would fail as a matter of law for the reasons set forth in
section IIMA), sara.

IV. Conclusion

Far the foregoing reasons, BCC’s and RWB’s motion for summary judgment is granted in
its entirety, BCC is pranted judgment as a matter of law as to its breach of contract claims
against the Schers, and BCC and RWB are granted judgment as a matter of law as to the Schers’
claims against them.

In light of the court’s ruling on these claims, the parties are directed to file a stipulation as

to the total amount owed by the Schers under the contracts (including accrued interest) as of



The movant bears the initial burden of establishing that there is no genuine issue of
material fact, Celotex Corp, vy. Catrett, 477 U.S. 317, 923, 91 L. Ed. 2d 265, 1068, Ct. 2548
(1986), “Because the purpose of summary judgment is to isolate and dispose of factually
unsupported claims,” the non-movant must then present specific facts showing that there is an
issue (or trial, Michael v. St. Joseph County, et al., 259 F.3d 842, 845 (7" Cir. 2001) (quoting
Ved, R. Civ. P. 56(c)). To successfully oppose the motion, the non-movant cannot rest on the
pleadings alone, but must designate specific facts in affidavits, depositions, answers to
interrogatories, or admissions that establish that there is a genuine triable issue. Celotex, 477
U.S. at 324. A scintilla of evidence in support of the non-movant’s position is insufficient to
defeat a summary judgment motion; “there must be evidence on which the jury could reasonably
find for the [non-movant].” Anderson y, Liberty Lobby, Inc., 477 U.S, 242, 248, 106 8, Ct. 2505,
2510, 91 L. Ed, 2d 202 (1986),

IT. Factual Background!

A. The parties

BCC’s principal line of business is the provision of financing to individuals with a high
net worth and/or individuals who own “control” shares or restricted shares of stock and who are
secking credit for personal purposes to be secured by, among other assets, such securities. BCC

is not a securities broker-dealer under state or federal securities laws and is not subject to

' The parties complicated the court’s task by [ailing to comply with Local Rule 56.1 —
specifically, by failing to provide proper record support for asserted facts and by responding to asserted
facts with unsupported or otherwise improper denials, Of course, the court may, within its discretion,
respond to these failures by disregarding the former and deeming admitted the latter, However, the court
has instead “scoured” the record. and its disposition of the instant motion rests upon the undisputed facts
(except to the extent otherwise noted).


ownership, !?
TL. Analysis

Based on the parties’ contractual agrcement, Wisconsin law governs this court’s
disposition of their respective contract claims, As set forth below. BCC prevails as a matter of
law and the Schers fail as a matter of law an their respective contract claims because the Sehers
have tailed to adduce sufficient evidence to establish that BCC violated its good faith duty under
the contracts. Moreover, the Schers fail as a matter of law on their claim under the UCC. -
foremost, because the provision under which the Sehers purport to bring their action does not
Support an independent claim for breach of the duty of good faith, and, in any event, for the same
reasons that their contract claim fails,

A. The Sehers’ counter-claim for breach of contract against BCC and RWB
(Count 1)

The Sehers’ counter-claim for breach of contract is premised on BCC’s failure to
liquidate the shares held by it as collateral in connection with the Sehers* loans. More
specifically, the Sehers allege that BCC had a good faith obligation to liquidate the collateral
after the loans became under-collateralized and after BCC allegedly stated that it would do so.
‘The Sehers allege that, by failing to liquidate the collateral, BCC breached the covenant of good
faith that is read into contracts in Wisconsin. See, e.g, Market Street Assocy. Ltd. Partnership v.
rey. 941 F.2d 588. $93-96 (7" Cir. 1991). Additionally, the Sehers allege that RWB should be
held liable for BCC’s breach as its alter ego.

The duty of good faith requires parties to a contract to exercise their discretion under the

contract in a manner consistent with the parties’ reasonable expectations. ““Good faith’ is a

ee

2 Ih response, the Sehers offered ouly another unsupported denial,
14


make clear that such a finding is appropriate only where there is some evidence that the party,
while in technical compliance, acted intentionally to defeat or evade the essence of the contract.
See also Original Great Am, Chocolate Chip Cookie Co, y, River Valley Cookies, Ltd, 970 P.2d
273, 281 (7" Cir. 1992) (“[t]he law...provide[s] a remedy in the name of good faith against
opportunistic behavior, in the sense of behavior designed to change the bargain struck by the
parties in favor of the opportunist’).

On the undisputed facts, this is not such a case, and the law does not read into the
contracts an obligation on BCC’s part to liquidate the collateral. Here, the contracts specilically
authorized BCC to decide whether to liquidate the collateral, as merely one of an assortment of
remedies available 1o BCC in the event of the Sehers” default. The contingencies giving rise to
this lawsuit - chief among them, the declining value of the collateral stock — were obviously
contemplated by the partics. They drafted the contracts to grant to BCC absolute discretion to
liquidate the collateral as onc of an assortment of remedies and to grant to the Sehers the absolute
right to liquidation under certain circumstances and the absolute right to request the same under
any circumstances, Thus, the contract expressly provided both parlics the right to “hedge” their
bets with respect to changes in the market value of the collateral stock. In this case, both parties
clearly hedged in favor of the possibility that the market value of the ABC-NACO stock would
once again rise. After the stock instead became worthless. BCC exercised another of its
contractual rights by seeking to recover through litigation. In light of these undisputed facts, the
duty of good faith cannot be read to prohibit BCC from exercising its clear contractual rights as it

did.'" See Super Valu, 431 N.W.2d al 726; Smith, 848 F.Supp. at 1417; see also Market Street,

—

'4 This is so regardless of whether BCC made the representations alleged by the Sehers regarding,
its “legal” obligation and intention to liquidate the collateral. Kelatedly, the Sehers’ half-hearted
16



of the Demand Promissory Notes and concomitant Collateral Pledge Agreements executed by
them. Pursuant to the terms of the Notes, the loans were payable on demand, ‘Ihe Sehers
provided stock to BCC as collateral to secure the loans. In carly 2001, the loans became under-
collateralized, and BCC demanded additional collateral, BCC and the Schers sought to reach an
agreement providing for the Schers to pledge additional collateral to BCC. but they did not reach
an agreement. In approximately August 2001, BCC demanded payment of the Sehers”
indebtedness. The Schers did not then or anytime therealicr pay the outstanding balance on the
loans. The collateral stock became worthless in October 2001.

BCC’s and RWB’s joint motion for summary judgment in their favor on both BCC’s
claims against the Schers and the Sehers’ claims against BCC and RWB is now before this court.
For the reasons set forth below, the motion is granted in its entirety.

L Summary Judgment Standard

At summary judgment, the court must view the facts in the light most favorable to the
nonmoving party and draw all reasonable inferences in its favor, See, e.g., Krchnavy y,
Limagrain Genetics Corp., 294 ¥.3d 871, 875 (7" Cir. 2002), Summary judgment is appropriate
if “the pleadings, depositions, answers to interrogatories, and admissions on file, together with
the affidavits, if any, show that there is no genuine issue as to any matcrial fact and that the
moving party is entitled to a judgment as a matter of law.” Fed. R. Civ. P, 56(c); Schuster v.
Lucent Technologies, Inc. 327 F.3d 569, $73 (7" Cir. 2003) (quoting Fed. R. Civ, P. 56(¢)). A
triable fact issue exists “only if there is sufficient evidence lavoring the nonmoving party for a
jury to return a verdict for that party.” Schuster, 327 F.3d 569, $73 (7" Cir, 2003) (quoting Wade

v. Lerner New York, Inc., 243 F.3d 319, 321 (7" Cir, 2001) (quotation omitted).


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

BAIRD CREDIT CORP.,
No, 02 € 3789
Plaintiff,
HONORABLE DAVID H. COAR
v.

JOSEPH A. SEHER and MARY BETH
SEHER,
Defendants, Counter-
Plaintiffs, and Third-Party
Plaintiffs,

Y

BAIRD CREDIT CORP. and ROBERT W.
BAIRD, INC.,

Counterdefendants and
Third-Party Defendant.

wwe SS ee eS

MEMORANDUM OPINION AND ORDER

The plaintiff, Baird Credit Corp. (“BCC”), filed a complaint against defendants Joseph A.
and Mary Beth Seher (“the Sehers”), alleging a breach of contract claim against each of them.
The Schers subsequently filed counter-claims against BCC and third-party defendant Robert W.
Baird, Inc. (“RWB”), alleging breach of contract, breach of fiduciary duty, and violation of the
Wisconsin Uniform Commercial Code, Wisconsin Statutes 209.101, ef seg. (“UCC”), On BCC’s
and RWB’s motion to dismiss the counter-claim and third-party complaint, respectively, this
court dismissed the breach of fiduciary duty claim for failure to state a claim and allowed the two
remaining counter-claims to proceed.

‘The parties’ claims and counter-claims arise out of BCC’s 1998 and 1999 loans to the

Sehers, which totaled $4.25 million. ‘The Sehers received the loan procceds subject lo the terms

oe



sell the ABC-NACO stock held as collateral and that those statements were never retracted.”

‘The Schers allege that, in August 2001, Mr. Scher complained to a BCC/RWB executive
about “the failure to have sold his shares of ABC-NACO” and that he repeated the complaint
during a subsequent telephone conversation BCC denies those allegations.

4, The reason(s) for BCC’s decision not to liquidate the collateral

BCC presented evidence that Mr. Scher expressed a desire that the collateral not be
liquidated and that, accordingly, it understood him to desire that the collateral not be liquidated.
The Schers’ attorneys testified (hat they shared that understanding — in particular, that Mr, Seher
wanted to hold onto the stock because he believed it would recover (i¢., increase in price).'? OF
course, the Sehers’ written proposal for the transfer of the shares from the FLP contained the
express condition that BCC not liquidate any of the collateral it then held or any of the additional
collateral it would come to hold pursuant to the potential agreement, The November 2001 letter
authored hy Mr, Scher also expressly stated that he had sought an agreement from BCC
“permitt[ing] a standstill for a period of time to allow for a recovery” in ABC-NACO’s price and,
in that vein, “even offered to attempt to use some of these [F LP] shares” as additional collateral.
BCC thus presented evidence lo support its contention that it declined to liquidate the stock

because it chose to accommodate the Schers’ expressed desire not to sell the stock, with the

—_—

” It is worth noting that, in June 2001, Mr, Seher directed in writing how the ABC-NACO shares
held by BCC should be voted. ‘The Sehers admit that this fact directly contradicts any allegations that
they thought the collateral had been liquidated between March 24 and May 15, 2001, The Sehers appear
to have abandoned any such allegations.

10 “he Sehers’ efforts to dispute this evidence by characterizing it alternatively as “inadmissible,”
“hearsay,” and “irrelevant” are unavailing. Evidence concerning what the Sehers communicated and
what BCC understood concerning how they wished BCC to exercise its rights under the contracts is
admissible and is relevant to the Sehers’ claim that BCC acted in bad faith under the contract.

12



compact reference to an implicd undertaking not to take opportunistic advantage in a way that
could not have becn contemplated at the time of drafting, and which therefore was not resolved
explicitly by the parties.” Marker Street, 941 F.2d at 595 (citation omitted). See also Wis. Stat.
§ 401.203. The duty is designed to protect parties to a contract from “arbitrary or unreasonable
conduct.” Foseid v, State Bank of Cross Plains, 541 N,W.2d 203, 213 (Wis. App, 1995)
(internal quotations and citation omitted). Based on the undisputed facts, the Sehers cannot, as a
matter of law, establish that BCC breached the duty of good faith by failing to liquidate the
collateral."

BCC and RWB correctly note that, as a general proposition, the good faith duty implied
by Wisconsin law cannot substantively alter the existing terms of a contract or prohibit conduct
that is authorized by the contract. Super Valu Stores, Inc. v, D-Mart Food Stores, Inc., 431
N.W.2d 721, 726 (Wis. Ct. App. 1988), See also Smith v. Rainsofi Water Conditioning Ca,, 848
F.Supp. 1413, 1417 (2.D. Wis. 1994) (“[ujnder Wisconsin law, there can be no breach of the
implied covenant of good faith and fair dealing based on acts which are specifically authorized in
the agreement’),

There is a line of cases, beginning with Estate of Chayka, 176 N.W.2d 561 (Wis. 1970),
that supports the proposition that even where a party technically fulfills its obligations under a
contract, it may be found to be in breach of the covenant of good faith. See alse Interim Health
Care of N. Ill. Inc. v. Interim Health Care, Inc., 225 F.3d 876 (7" Cir, 2000); Wisconsin Natural

Gas Co. y, Gabe's Construction Co., 582 N.W.2d 118 (Wis. App. 1988). However, these cases

3 Contrary to the Schers’ contention, courts may resolve at summary judgment the issue of
whether a party violated the covenant of good faith, assuming that the undisputed facts permit such a
finding. See, ¢.g.. Smith v. Rainsoft Water Conditioning Co., 848 F.Supp. 1413, 1417 (E.D. Wis. 1994)
(dismissing claim based on implied covenant of good faith and fair dealing at summary judgment).

15