                                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 Judg-
es.
   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. Gold-
man 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 negotia-
ble notes, face values aggregating about $16 million, to OFTI,
which would oﬀer the notes to the creditors as substitute se-
curity. 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 re-
leased their security in the tissue mill had the credit of both
Tak and OFTI behind the notes’ promises. The parties con-
templated 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 docu-
ments 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 diﬃ-
cult 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 in-
struments, 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 promisso-
ry 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 Invest-
ments, 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 is-
sue shares, even if that dilutes the interests of existing mem-
bers. 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 pro-
vides:
    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, de-
    mands, judgments, ﬁnes, fees, costs and expenses, including,
    without limitation, alorneys’ fees, of or against [Tak Invest-
    ments] 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 In-
    vestment Notes against [Tak Investments] relating to the Invest-
    ment Notes.

The district court concluded that this eﬀectively prevents
OFTI from enforcing the notes against Tak, because whatev-
er 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. Per-
haps, 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 with-
out 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 obliga-
tions 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 securi-
ty 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 in-
struments, 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 in-
   strument who is entitled to enforce the instrument under
   s. 403.309 or 403.418(4). A person may be a person entitled to en-
   force 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 re-
placed 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 en-
force 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 pos-
session. The lenders who hold the notes in pledge may have
a legal right to compel OFTI to endorse them to facilitate en-
forcement; that is some distance from giving OFTI a right to
leave the lenders in the lurch and take all of the notes’ bene-
ﬁts 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
