Enforcement – Negotiable Notes

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7^th Circuit Court of Appeals

Case Name: Tissue Technology, LLC, et al. Tak Investments, LLC

Case No.: 18-1835

Officials: FLAUM, EASTERBROOK, and SCUDDER, Circuit Judges.

Focus: Enforcement – Negotiable Notes

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 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).)

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

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Attorney Derek A. Hawkins is the managing partner at Hawkins Law Offices LLC, where he heads up the firm’s startup law practice. He specializes in business formation, corporate governance, intellectual property protection, private equity and venture capital funding and mergers & acquisitions. Check out the website at www.hawkins-lawoffices.com or contact them at 262-737-8825.