A recent decision of the Seventh Circuit Court of Appeals has significant implications for lenders in commercial loan transactions and for law firms that give legal opinions about the enforceability of loan documents.

It has been well established by case law in the Seventh Circuit that no private right of action exists for a borrower to assert a margin regulation violation as a means to avoiding its obligations under loan documents.1 However, in Costello v. Grundon,2 a recent case decided by the Seventh Circuit, the Court held that a violation of margin regulations by the lender may be used as an affirmative defense by the borrower to avoid payment on a loan under Section 29(b) of the Securities Exchange Act. Section 29(b) of the Securities Exchange Act3 provides that “[e]very contract made in violation of any provision of this chapter or of any rule or regulation thereunder... the performance of which involves the violation of, or the continuance of any relationship or practice in violation of, any provision of this chapter or any rule or regulation thereunder, shall be void … as regards the rights of any person who, in violation of any such provision, rule, or regulation, shall have made or engaged in the performance of any such contract… .”4 Accordingly, lenders risk losing the ability to collect principal or interest on the offending loan, and law firms risk liability if they give enforceability opinions about loan documents that are not enforceable because of a margin violation.5