United States District Court, N.D. Illinois
January 20, 2004.
PPM FINANCE, INC., in its capacity as agent for JACKSON NATIONAL LIFE INSURANCE COMPANY, Plaintiff,
NORANDAL USA, INC., Defendant NORANDAL USA, INC., Counter-Plaintiff, PPM FINANCE, INC., in its capacity as agent for JACKSON NATIONAL LIFE INSURANCE COMPANY, PPM AMERICA SPECIAL INVESTMENTS CBO II, L.P. AND PPM SPECIAL INVESTMENTS FUND, L.P., Counter-Defendants
The opinion of the court was delivered by: AMY J. ST. EVE, District Judge
MEMORANDUM OPINION AND ORDER
Plaintiff PPM Finance, Inc., in its capacity as agent for Jackson
Mutual Life Insurance Company ("Jackson"), filed a two count complaint
against Defendant Norandal USA, Inc. ("Norandal") alleging breach of
contract and breach of fiduciary duty. (R. 36-1, Am. Compl.)
Specifically, Jackson alleged that Norandal failed to remit to Jackson
certain payments that their common debtor, Scottsboro Aluminum, L.L.C.
and Scottsboro Properties, L.L.C. (collectively,
"Scottsboro"), paid to Norandal in violation of a Subordination
Agreement between Norandal and Jackson.
Norandal filed a three count counterclaim against PPM America Special
Investment Fund, L.P. ("PPM Fund"), PPM America Special Investment CBO
II, L.P. ("PPM CBO II") (collectively, the "PPM Entities"), and PPM
Finance in its capacity as agent for Jackson.*fn1 (R. 35-1, Norandal's
First Am. Countercl.) In Count I, Norandal seeks a declaratory judgment
that Jackson and the PPM Entities have no right to recover the payments
at issue. In the alternative, in Count II, Norandal alleges that Jackson
and the PPM Entities are equitably estopped from recovering the payments.
In Count III, Norandal alleges that its right of recoupment defeats
Jackson's and the PPM Entities' claims to an affirmative recovery.
Jackson moved for summary judgment in its favor on its amended
complaint and against Norandal on Norandal's amended counterclaims.
Norandal moved for summary judgment in its favor on its amended
counterclaims. For the reasons stated herein, Jackson's motions for
summary judgment on its amended complaint and Norandal's amended
counterclaims are granted, and Norandal's motion for summary judgment on
its amended counterclaims is denied.
Summary judgment is proper when "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 material fact and that
the moving party is entitled to a judgment as a matter of law."
Fed.R.Civ.P. 56(c). A genuine issue of triable fact exists only if "the
is such that a reasonable jury could return a verdict for the
nonmoving party." Pugh v. City of Attica, 259 F.3d 619, 625 (7th
Cir. 2001) (quoting Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 248, 106 S.Ct. 2505, 2510 (1986)). The party seeking summary
judgment has the burden of establishing the lack of any genuine issue of
material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23,
106 S.Ct. 2548, 2552 (1986). A party will successfully oppose summary
judgment only if it presents "definite, competent evidence to rebut the
motion." Equal Employment Opportunity Comm'n v. Roebuck &
Co., 233 F.3d 432, 437 (7th Cir. 2000). The Court "considers the
evidentiary record in the light most favorable to the non-moving party,
and draws all reasonable inferences in his favor." Lesch v. Crown
Cork & Seal Co., 282 F.3d 467, 471 (7th Cir. 2002).
I. The Credit Agreement
On February 26, 1999, Norandal agreed to sell its Alabama aluminum
processing plant and related assets (the "Plant") to Scottsboro for a
total purchase price of approximately $92 million (the "Scottsboro
Acquisition"). (R. 49-2, Jackson's Local Rule 56.1(a) Statement of
Undisputed Facts Submitted in Supp. of Jackson's Mot. for Summ. J. on its
Am. Compl. and Norandal's Affirmative Defenses and Jackson and the PPM
Funds' Mot. for Summ. J. on Norandal's Am. Countercl. ("Jackson's
Rule 56.1(a)(3) Statement") ¶¶ 7, 13; R. 62-1, Def.'s Resp. to Pl. and
Counterdefs.' Local Rule 56.1 Statement of Uncontested Facts and
Statement of Genuine Issues and Statement of Add'l Facts That Require
Denial of Pl. and Counterdefs.' Mots. for Summ. J. ("Norandal's
Rule 56.1(b)(3)(A) Response") and ("Norandal's Rule 56.1(b)(3)(B) Statement of
Additional Facts") ¶¶ 7, 13.) Scottsboro entered into a Credit
Jackson and its agent PPM Finance to obtain funds to purchase the
Plant. (Id. ¶¶ 7, 11.) Under the Credit Agreement, Jackson
agreed to make certain loans and other extensions of credit to Scottsboro
of up to $125 million. (Id. ¶ 8.) Jackson loaned Scottsboro
approximately $69 million and PPM Fund loaned Scottsboro $7.5 million.
(Id. ¶ 14.)
Jackson, a lender under the Credit Agreement, is a life insurance
company organized under the laws of, and with its principal place of
business in, Michigan. (Id. ¶ 1.) Norandal, the seller of
the Plant, is a Delaware corporation with its principal place of business
in Tennessee. (Id. ¶ 4.) It operates aluminum rolling mills
in Tennessee, North Carolina, and Alabama. (Id.)
Counter-defendants PPM Fund and PPM CBO II are both Delaware limited
partnerships with their principal places of business in Illinois.
(Id. ¶¶ 2-3.)
II. The Subordinated Note
For the remainder of the purchase price, Scottsboro executed a
promissory note in Norandal's favor (the "Subordinated Note") for
approximately $7.8 million. (Id. ¶ 23.) The seller,
Norandal, thereby became a second creditor of the buyer, Scottsboro.
(Id.) Under the Subordinated Note, Scottsboro agreed to pay
Norandal equal, consecutive monthly installments of $215,925.64 on the
principal amount (plus accrued unpaid interest) beginning on March 31,
1999 and continuing through February 28, 2002. (Id. ¶ 64.)
Between November 1, 1999 and January 18, 2001, Norandal received fifteen
scheduled monthly payments from Scottsboro under the Subordinated Note,
totaling over $3.7 million. (Id. ¶ 65.) The Subordinated
Note is explicitly subject to the Subordination Agreement. (Id.
Through the Credit Agreement and the Subordinated Note, Norandal
received a total of $84,277,195.00 as a result of the funding and
closing of the Scottsboro Acquisition. (Id. ¶ 12.)
III. The Subordination Agreement
On February 26, 1999, the same day the parties executed the Credit
Agreement, Scottsboro, the PPM Entities, and PPM Finance in its capacity
as agent for Jackson executed a Subordination Agreement. (Id.
¶ 29.) Jackson and the PPM Entities are "Senior Creditors" under the
Subordination Agreement. (R. 52-1, Jackson's Index of Exs., Ex. 9,
Subordinated Note at 3.) The Subordination Agreement governs the relative
priority of the Senior Creditors' and Norandal's security interests in
Scottsboro's assets. (R. 49-2, Jackson's Rule 56.1(a)(3) Statement ¶
29; R. 62-1, Norandal's Rule 56.1(b)(3)(A) Response ¶ 29.) The
Subordination Agreement gives Jackson and the PPM Entities senior
security interests in Scottsboro's assets, and Norandal a junior security
interest in substantially the same assets.*fn2 (Id. ¶¶ 19,
29, 31.) The parties executed the Subordination Agreement "[a]s an
inducement to and as one of the conditions precedent to" Jackson's
extension of credit to Scottsboro under the Credit Agreement.
(Id. ¶ 59.) The Subordination Agreement is governed by
Illinois law. (Id. ¶ 30.)
Thompson, Hine & Flory ("Thompson") represented Norandal in the
Scottsboro Acquisition. (Id. ¶ 27.) Thomspon reviewed a
draft of the Subordination Agreement*fn3 and suggested changes to the
draft, including the addition of a provision that would require Jackson
to provide Norandal with notice of any default by Scottsboro under the
Credit Agreement. (Id. ¶¶ 35, 38.) Latham & Watkins,
counsel to Jackson and the PPM Entities, refused to include the
senior notice default provision. (Id. ¶¶ 38, 41.)
Norandal nevertheless executed the Subordination Agreement. (Id.
The Subordination Agreement contains a definition of "Senior Default
Notice."*fn4 (Id. ¶ 42.) The language in the definition of
"Senior Default Notice" specifically refers to Scottsboro. (Id.
¶ 44.) The term "Senior Default Notice" does not appear anywhere else
in the Subordination Agreement, and it is not employed in any substantive
paragraph. (R. 49-2, Jackson's Rule 56.1(a)(3) Statement ¶¶ 44, 45.)
The Subordination Agreement also defines "Subordinated Default
Notice." (R. 49-2, Jackson's Rule 56.1(a)(3) Statement ¶ 45; R. 62-1,
Norandal's Rule 56.1(b)(3)(A) Response ¶ 45.) In contrast to the term
"Senior Default Notice," the term "Subordinated Default Notice" appears
elsewhere in the Subordination Agreement, and requires Nordanal
to notify Jackson of any Scottsboro default under the Subordinated Note.
IV. Scottsboro's Defaults Under the Credit Agreement
John Krupinski, the former Chief Financial Officer ("CFO") of
Scottsboro from October 1999 through Scottsboro's bankruptcy proceedings,
served as Jackson's Rule 30(b)(6) witness on several topics, including
the Events of Default under the Credit Agreement. (Id. ¶
71.) Krupinski testified that beginning in October 1999 (the "Default
Date") and until at least August 1, 2001, Scottsboro defaulted on several
of its Senior Debt obligations to Jackson, with each breach resulting in
an Event of Default under Section 8. l (b) of the Credit Agreement. (R.
49-2, Jackson's Rule 56.1(a)(3) Statement ¶¶ 75-89.) Specifically,
Krupinski testified that these
defaults included defaults regarding financial covenants, affiliate
transactions, payments, a labor strike, audited financial statements, tax
distributions to equity holders, and net borrowing availability.
(Id. ¶¶ 71-88.)
Jackson first notified Scottsboro of a Senior Default on December 13,
2000 over one year after the first alleged default date. (R.
62-1, Norandal's Rule 56.1(b)(3)(B) Statement of Additional Facts ¶
31; R. 74-1, Jackson and the PPM Funds' Reply to Norandal's Local
Rule 56.1 Statement of Additional Facts That Require The Denial of Pl. and
Counterdefs.' Mots. for Summ. J. ("Jackson's Rule 56.1(a)(3) Reply")
¶ 31.) Jackson first notified Norandal of a Senior Default by letter
dated July 27, 2001. (Id. ¶ 9.)
V. The Limited Waiver Letter
Jeff Podwika, the PPM Finance loan officer responsible for the
Scottsboro loan from February 1999 through January 2001, sent Scottsboro
a letter dated December 31, 1999 (the "Limited Waiver Letter"). (R. 49-2,
Jackson's Rule 56.1(a)(3) Statement ¶ 90; R. 62-1, Norandal's
Rule 56. l(b)(3)(A) Response ¶ 90.) The Limited Waiver Letter provides in
During the period from the date hereof through May
31, 2000, Jackson and Agent hereby waive the
minimum Net Borrowing Availability restriction
. . . solely to the extent such restriction would
prohibit (1) the making of scheduled payments of
interest and principal on an unaccelerated basis
with respect to the [Subordinated Note]. . . .
This Limited Waiver shall be limited precisely as
written and shall not be deemed or otherwise
construed to waive or amend any provision of the
(Id. 91.) The Limited Waiver Letter was sent only to
Scottsboro, not to Norandal or any other party. (Id. 93.)
VI. The April 26, 2000 Amendment
On April 26, 2000, Jackson loaned Scottsboro an additional $5.25
million. (R. 62-1, Norandal's Rule 56.1(b)(3)(B) Statement of Additional
Facts ¶ 30; R. 74-1, Jackson's Rule 56.1(a)(3) Reply ¶ 30.) In
connection with the loan, Scottsboro, Jackson, and PPM Finance executed a
"Consent and Amendment to the Credit Agreement" (the "April 26, 2000
Amendment"). (R. 49-2, Jackson's Rule 56.1(a)(3) Statement ¶ 94; R.
62-1, Norandal's Rule 56.1(b)(3)(A) Response ¶ 94.) Section 6 of the
April 26, 2000 Amendment, entitled "Limited Waiver," pertains to a waiver
of certain financial covenants for the fiscal year ending December
31, 1999. (R. 49-2, Jackson's Rule 56.1(a)(3) Statement ¶ 95.)
Section 6 of the April 26, 2000 Amendment provides, in relevant part:
Agent and Lender hereby waive the existing Events
of Default under Section 8.1(b) of the Credit
Agreement arising solely due to Borrowers' failure
to comply with paragraphs (a), (b), (c), and (d)
of Annex G (Financial Covenants to the Credit
Agreement) for the testing periods ending on
December 31, 1999; provided, that such waiver
shall be conditional and shall be deemed void
ab initio and of no force and effect (and
Agent and Lenders shall be entitled to exercise
all rights and remedies under the Loan Documents
or otherwise as a result of such Events of
Default, all of which rights and remedies are
hereby expressly reserved in the event such waiver
is deemed void) if Agent shall determine that:
Capital Expenditures made by Borrowers and their
Subsidiaries on a combined basis from the Closing
Date through the last day of Fiscal Year 1999
exceeded $5,298,000 . . .
(R. 49-2, Jackson's Rule 56.1(a)(3) Statement ¶ 98; R. 62-1,
Norandal's Rule 56.1(b)(3)(A) Response ¶ 98.) To avoid nullfying
ab initio the conditional waiver, "Capital Expenditures made by
[the Scottsboro Entities] and their Subsidiaries on a combined basis from
[February 26, 1999] through [December 31, 1999] [could not] exceed
$5,298,000." (Id, ¶ 99.) Upon audit, Scottsboro's Capital
Expenditures for the 1999 fiscal year (i.e., the time frame
Section 6 of the April 26, 2000 Amendment) were above $6 million,
and therefore failed to meet one of the conditions for the effectiveness
of the conditional waiver. (Id. ¶ 100.)
VII. Scottsboro's Bankruptcy Proceedings
Jackson and the PPM Entities filed involuntary petitions for relief
under Chapter 11 of the Bankruptcy Code against Scottsboro on August 1,
2001 in the United States Bankruptcy Court for the Northern District of
Illinois. (Id. ¶ 103.) As of the bankruptcy filing date, the
outstanding aggregate amount that Scottsboro owed Jackson under the
Credit Agreement exceeded $55 million, and the amount that Scottsboro
owed the PPM Entities under the relevant loan agreements exceeded $14
million. (Id. ¶¶ 105, 106.) On August 14, 2001, the
Bankruptcy Court entered orders for relief. (Id. ¶ 107.) The
Bankruptcy Court found that Jackson held a first priority security
interest in substantially all of Scottsboro's assets. (Id. ¶
On November 5, 2002, Jackson filed this complaint against Norandal.
(Id. ¶ 124.) On January 15, 2003, Norandal filed in both the
Bankruptcy Court and this Court identical Motions to Enforce Settlement
Agreement and supporting papers, in which Norandal asserted that
Jackson's attorney Forrest B. Lammiman confirmed in writing on September
19, 2002 that Jackson agreed to the proposed terms of a global settlement
and that two of Norandal's attorneys confirmed certain terms of a
settlement agreement with Lammiman over the telephone on September 25,
2002. (Id. ¶ 126.) In his September 19, 2002 letter,
Lammiman states in pertinent part that "we are prepared to settle upon
the basis of the economic terms set forth therein, subject to
definitive documentation" (Id. ¶ 127 (emphasis added).)
In an email dated September 27, 2002, Lammiman notified Norandal's
attorney John S. Delnero that "I also need to talk to my client rep., who
is not in the office this week, as it turns out. In any event, pl. be
advised that I
doubt that Jackson will be able or willing to give the general
release you and Gerald requested in our telephone conversation."
(Id. ¶ 129.)
On February 27, 2003, Chief Bankruptcy Judge Wedoff orally denied
Norandal's Motion to Enforce Settlement. (Id. ¶ 134.) Judge
Wedoff stated: "I believe that there is not a binding settlement. The
parties had anticipated that there would be a written document that would
specify the terms of a release. No such written document ever came into
The primary issue in this case is whether the Subordination Agreement
requires Norandal to remit to Jackson payments that Scottsboro made to
Norandal while Scottsboro defaulted under the Credit Agreement, where
Jackson did not promptly notify Norandal of any default. This raises an
issue of contract interpretation and the parties' respective obligations
under the terms of their contracts.
Contract interpretation, including the preliminary question of whether
a contract is ambiguous, is a question of law. ECHO, Inc. v. Whitson
Co., Inc., 52 F.3d 702, 705 (7th Cir. 1995). "[C]ontract
interpretation is particularly suited for disposition on summary
judgment." United States v. 4500 Audek Model No. 5601 AM/FM Clock
Radios, 220 F.3d 539, 543 (7th Cir. 2000).
The primary objective in construing a contract is to give effect to the
parties' intent. Home Ins. Co. v. Chicago & Northwestern Transp.
Co., 56 F.3d 763, 767 (7th Cir. 1995). "[I]f a contract is clear on
its face and the text contains no clue that the contract might mean
something different from what it says, then the inquiry is over
no evidence outside of the contract may be considered." Id. at
767. Thus, the threshold inquiry is whether the contract is ambiguous on
face. Bourke v. Dun & Bradstreet Corp., 159 F.3d 1032,
1036 (7Ih Cir. 1998). A contract is intrinsically ambiguous if the
contract language is reasonably susceptible to more than one meaning.
Id. A contract is not ambiguous simply because the parties do
not agree on the meaning of its terms. Id.
"The parties to a subordination agreement normally consist of a `common
debtor' who owes a debt to two creditors or two groups of creditors, a
creditor known as the `junior creditor' that agrees to subordinate its
debt to the debt of another creditor, and a `senior creditor' that
benefits from the subordination agreement and acquires priority over the
junior creditor. Such agreements are routinely entered into by one
creditor to induce another to extend additional credit to the debtor."
In re Chicago, South Shore and South Bend R.R., 146 B.R. 421,
426 (Bankr. N.D. Ill. 1992) (citation omitted). "A subordination
agreement' . . . is nothing more than a contractual modification of lien
priorities and must be construed according to the expressed intention of
the parties and its terms.'" Id. (citation omitted).
The parties dispute the meaning of Sections 2.3 and 2.5 of the
Subordination Agreement. Section 2.3 of the Subordination Agreement
Notwithstanding any provision of any Subordinated
Debt Document to the contrary, no Obligor
[Scottsboro] may make, and no Subordinated
Creditor [Norandal] may receive, accept or retain
any payment of principal, interest or any
other amount with respect to the Subordinated Debt
[the Subordinated Note] until the Senior Debt
is paid in full in cash and all commitments
to make loans and issue letters of credit under
the Senior Debt Documents [the Credit Agreement]
are terminated, except that, (i) subject
to Section 2.2 above, [Scottsboro] may make,
and Subordinated Creditors may receive scheduled
payments of principal and interest (at the
applicable rate in the absence of a Subordinated
Default) under the Subordinated Note on an
unaccelerated basis so long as no Senior
Default shall have occurred and be continuing or
would result therefrom and (ii) Subordinated
Creditors may receive proceeds of any sale of
Spare Parts in a Proceeding as provided in Section
(R. 49-2, Jackson's Rule 56.1(a)(3) Statement ¶ 39; R. 62-1,
Norandal's Rule 56.1(b)(3)(A) Response ¶ 39 (emphases added).)
Section 2.5 of the Subordination Agreement provides:
If any payment or distribution on account
of the [Subordinated Note] not permitted to be
made by any Obligor [Scottsboro] or received by
any Subordinated Creditor [Norandal] under this
Agreement is received by any Subordinated
Creditor before all Senior Debt is paid in full in
cash, such payment or distribution shall not
be commingled with any assets of Subordinated
Creditor, shall be held in trust by such
Subordinated Creditor for the benefit of the
Senior Creditors [Jackson, PPM Fund and PPM CBO
II] and shall be promptly paid over to the
Senior Creditors, or their representatives,
for application on a pro rata basis (subject to
the terms of any intercreditor agreement among the
Senior Creditors) to the payment of the Senior
Debt then remaining unpaid, until all of the
Senior Debt is paid in full in cash.
(Id. ¶ 54 (emphases added).)
I. The Subordinated Agreement Unambiguously Requires Norandal To
Remit To Jackson Payments That Scottsboro Made To Norandal While
Scottsboro Was In Default On Its Senior Debt Obligations
A. Payments Are "Permitted To Be Made . . . Or Received" If They
Are Permitted "Under The Agreement"
The parties agree that Section 2.5 of the Subordination Agreement
applies only to payments that were "not permitted to be made." The
parties disagree, however, as to who or what may serve as the source of
that permission. Norandal argues that a payment may be "permitted" by
Jackson's words or actions. Jackson argues that a payment may be
"permitted" only if it complies with the terms of the Subordination
Agreement. At issue is the language of Section 2.5 regarding "payment[s]
. . . not permitted to be made by any Obligor or received by any
Subordinated Creditor under this Agreement," and whether the phrase
"under this Agreement" modifies "any Subordinated Creditor" or "payment
. . . not permitted to be made."
Norandal argues that "under this Agreement" modifies "any Subordinated
make clear that "the party receiving an `incorrect' payment need
not be Norandal, but can be `any Subordinated Creditor under this
Agreement.'" (R. 63-1, Norandal's Mem. of Law in Opp. to Mots, for Summ.
J. ("Norandal's Opp. Mem.") at 10 n.5.) Norandal urges that the last
antecedent rule of contract interpretation requires this interpretation,
because "any Subordinated Creditor" immediately precedes "under this
Agreement." Thus, under Norandal's interpretation, the source of
permission for a "payment . . . permitted to be made" is Jackson. It is
undisputed that Jackson continued to loan Scottsboro funds after the
Default Date and that Scottsboro used those funds to make the payments at
issue to Norandal. Norandal contends that Jackson thereby "specifically
authorized" those payments, rendering them "permitted" under Section 2.5
and thus rightfully belonging to Norandal.
Jackson argues that "under this Agreement" modifies "payment . . .
permitted to be made." Jackson contends that the plain language of
Section 2.5 makes clear that payments are "permitted to be made" only if
they do violate the "Agreement," specifically, Section 2.3 of the
Subordination Agreement. Section 2.3 governs the circumstances under
which Norandal may "accept, receive, or retain" payments. Thus, Jackson
argues, the source of permission for payments that are "permitted to be
made" is the Subordination Agreement itself, not Jackson. The Court
Norandal attempts to create an ambiguity in Section 2.5 where none
exists. First, it is unclear why Norandal thinks it would be necessary to
distinguish Subordinated Creditors "under this Agreement" from some other
subordinated creditors not mentioned in the Agreement. The term
"Subordinated Creditor" is specifically defined elsewhere in the
Subordination Agreement as including not only Norandal but also "all
subsequent holders of the Subordinated Debt." (R.
52-1, Jackson's Index of Exs., Ex. 9, Subordinated Note at 3.)
Thus, the phrase "under this Agreement" is redundant and rendered
meaningless by applying it to modify a term that is already specifically
defined. See Carroll v. Acme-Cleveland Corp., 955 F.2d 1107,
1112 (7th Cir. 1992). Moreover, the Subordination Agreement uses the term
"Subordinated Creditor" more than sixty times throughout the document
without specifying that such reference is being made to Subordinated
Creditors "under this Agreement." Finally, Norandal's reliance on the
"last antecedent rule" is not persuasive. The last antecedent rule is
merely a general canon of contract interpretation. The Court need not
apply the rule mechanically, as urged by Norandal, where "there is
something in the instrument requiring a different conclusion."
Forty-Eight Insulations, Inc. v. Acevedo, 140 Ill. App.3d 107,
115, 487 N.E.2d 1206, 211 (Ill.App. Ct. 1986) (citation omitted).
Sections 2.3 and 2.5 are susceptible to only one meaning. Section 2.5
applies when Norandal has received a payment on the Subordinated Note
"not permitted to be made by [Scottsboro] or received by [Norandal] under
this Agreement. . . ." Payments not permitted to be made "under this
Agreement" are payments that are made or received in violation of Section
2.3. Under Section 2.3, Norandal cannot "receive, accept, or retain" any
payment made by Scottsboro under the Subordinated Note when a Senior
Default has occurred and is continuing. Thus, under the unambiguous
language of Sections 2.3 and 2.5, a "payment . . . not permitted to be
made . . . or received" is a payment that Scottsboro made to Norandal
while Scottsboro was in default on its obligations to Jackson under the
Credit Agreement and while the Senior Debt remained unpaid.
B. The Subordination Agreement Does Not Require Jackson Or The
PPM Entities To Notify Norandal Of Any Senior Default
Norandal argues that the Subordination Agreement requires Jackson to
notify it in the event that Norandal received a payment from Scottsboro
that was not "permitted to be made . . . or received," and that Jackson
is not entitled to recover the payments because it failed to notify
Norandal of any Senior Defaults until July 27, 2001.*fn5
Jackson contends that the unambiguous language of the Subordination
Agreement places no restrictions or limitations on Jackson's ability to
recover payments from Norandal that Scottsboro made while it was in
default under the Credit Agreement and the Senior Debt remained unpaid.
Essentially, Jackson argues that the existence of a default,
rather than Norandal's actual notice of a default, triggers
Norandal's obligation to remit the payments to Jackson. The Court agrees.
1. The Unambiguous Language Of The Subordination Agreement Does
Not Require Jackson To Notify Norandal Of A Senior Default
Norandal argues that it could not have had any obligation to hold
particular payments in trust before it had notice to do so. Norandal
relies on the language of Section 2.5 and the definition of "Senior
Section 2.5 provides that in the event that Norandal receives a
"payment . . . not permitted to be made . . . or received," that "such
payment or distribution shall not be commingled with any assets
of Subordinated Creditor, shall be held in trust by such
Subordinated Creditor for the
benefit of the Senior Creditors [Jackson and PPM Entities] and
shall be promptly paid over to the Senior Creditors . . ."
Norandal argues that Section 2.5 presumes that Norandal would receive
notice of a Senior Default because the requirement that such payments
"shall not be commingled" and "shall be held in trust" is "predicated
upon Norandal having notice that the payments at issue were `incorrect'
. . . [and that] Norandal had received notice that a particular payment
was `incorrect.'" (R. 63-1, Norandal's Opp. Mem. at 11.)
Norandal misses the point. The terms of the Subordination Agreement
itself put Norandal on notice of its obligation to hold certain payments
in trust that violate the Subordination Agreement. The fact that Norandal
did not have actual notice that particular payments were not "permitted"
under the Agreement is irrelevant because Norandal had the duty to
determine for itself (by asking Scottsboro or Jackson) whether Scottsboro
defaulted and thus whether particular payments were "permitted."
Norandal further argues that the Subordination Agreement would not have
included a definition of "Senior Default Notice" if such notice were not
required. Norandal attacks Jackson's explanation that the definition is a
mere "dangling definition" leftover from a form agreement given that it
specifically refers to "Scottsboro."
It is undisputed, however, that the definition of "Senior Default
Notice" itself does not confer any substantive right. It is also
undisputed that the term "Senior Default Notice" does not appear in any
substantive paragraph of the Subordination Agreement. Moreover, the
Subordination Agreement defines the term "Subordinated Default
Notice," which, in contrast to the term "Senior Default Notice," appears
elsewhere in the Subordination Agreement, and explicitly requires
Nordanal to notify Jackson of any Scottsboro default under the
Note. (R. 52-1, Jackson's Index of Exs., Ex. 9, Subordinated Note
§ 6.) If the parties intended to include a senior default notice
provision in the Subordination Agreement, they would have explicitly done
In sum, nothing in the Subordinated Agreement requires Jackson to
notify Norandal in the event of a Senior Default, and nothing that
Jackson said or did relieves Norandal of its obligations to Jackson.
Pursuant to Section 2.5, Norandal is not allowed to "receive, accept or
retain" particular payments unless they were made when "no Senior Default
shall have occurred and be continuing or would result therefrom . . .,"
that is, when no Senior Default existed. Norandal had the burden of
determining whether any Senior Defaults existed when it accepted those
payments. Norandal never made any inquiry to Jackson or Scottsboro
regarding the existence of any defaults under the Credit Agreement.
Instead, Norandal remained ignorant of the existence of any default.*fn6
2. Jackson Rejected Norandal's Counsel's Request For A Senior
Default Notice Provision
Counsel represented Norandal in connection with the negotiation of the
Subordination Agreement. Norandal's counsel reviewed a draft of the
Subordination Agreement and specifically requested that Jackson include a
senior default notice provision. Jackson refused that request. Norandal
nonetheless executed the Subordination Agreement. Thus, Norandal clearly
knew that the Subordination Agreement did not contain a senior default
notice provision when it executed the contract. It cannot now rewrite the
Agreement to include a provision for which it
specifically but unsuccessfully negotiated.
Accordingly, Norandal's affirmative defense that Jackson's claims are
barred by the non-occurrence of a condition precedent has no merit.
C. Scottsboro Defaulted On Its Obligations To Jackson Under The
John Krupinski, Scottsboro's former CFO, testified that beginning in
October 1999 and until at least August 1, 2001, Scottsboro defaulted on
several of its Senior Debt obligations to Jackson. (R. 49-2, Jackson's
Rule 56.1(a)(3) Statement ¶¶ 75-89.) Each breach resulted in an Event
of Default under Section 8. l(b) of the Credit Agreement. Specifically,
Krupinski testified that these defaults included defaults regarding
financial covenants, affiliate transactions, payments, a labor strike,
audited financial statements, tax distributions to equity holders, and
net borrowing availability.
Norandal argues that there is a genuine issue as to whether Scottsboro
defaulted under the Credit Agreement because Krupinski's testimony
allegedly lacks foundation. Norandal further argues that the December 31,
1999 Limited Waiver Letter, the April 26, 2000 Amendment, and the
testimony of Jeff Podwika (the PPM Finance loan officer who sent the
Limited Waiver Letter to Scottsboro), establish that no default occurred.
Norandal does not directly address the substance of Krupinski's
testimony and the underlying facts establishing Scottsboro's defaults.
Norandal does not dispute, for example, that Scottsboro failed to meet
the minimum debt service coverage ratio for each month beginning in
October 1999 through the filing date of the bankruptcy (R. 49-2,
Jackson's Rule 56.1(a)(3) Statement ¶ 75), that Scottsboro failed to
meet the minimum interest coverage ratio for each
month (Id. ¶ 76), that Scottsboro made capital
expenditures in excess of $5,000,000 during the 1999 Fiscal Year
(Id. ¶ 78), or that Scottsboro made undisclosed sales of
inventory to an affiliate and failed to disclose such sales in advance to
PPM and Jackson. (Id. ¶ 79). Norandal does not dispute that
"Events of Default" are set forth in Section 8.1(b) of the Agreement.
Because Norandal fails to directly refute the underlying facts
establishing Scottsboro's defaults, Norandal fails to establish a genuine
issue of fact as to whether those defaults occurred.
Norandal appears to argue that Krupinski's testimony cannot form the
basis of summary judgment because Krupinski lacked personal knowledge as
to the facts to which he testified.*fn7 A Rule 30(b)(6) witness,
however, need not have personal knowledge of the facts to which he
testifies, because he testifies as to the corporation's position on the
matters set forth in the Rule 30(b)(6), not his personal opinion.
Calzaturficio v. Fabiano Shoe Co., Inc., 201 F.R.D. 33, 37 (D.
In accordance with Rule 30(b)(6), Jackson and the PPM Entities prepared
Krupinski to give complete, knowledgeable, and binding answers for the
topics for which he was the corporate designee. As part of that
preparation, Krupinski reviewed a spreadsheet detailing Scottsboro's
financial condition throughout the relevant time period. Norandal
complains that Krupinski did not personally prepare the spreadsheet and
did not have personal knowledge of its contents. Krupinski's personal
knowledge, however, is not necessary. Ierardi v. Lorillard, No.
Civ. A. 90-7049,
1991 WL 158911, at *1 (E.D. Pa. Aug. 13, 1991) ("[A]n individual
employee's lack of personal knowledge is irrelevant."). By providing
Krupinski with the data in the spreadsheet, Jackson and the PPM Entities
fulfilled their duty to present and prepare a Rule 30(b)(6) designee to
provide testimony beyond matters of his personal knowledge. United
States v. Taylor, 166 F.R.D. 356, 360 (M.D.N.C. 1996) ("If the
persons designated by the corporation do not possess personal knowledge
of the matters set out in the deposition notice, the corporation is
obliged to prepare the designees so that they may give knowledgeable and
binding answers for the corporation."); see also Buycks-Roberson v.
Citibank Fed. Sav. Bank, 162 F.R.D. 338, 343 (N.D. Ill. 1995)
(noting that the duty to present and prepare a corporate designee goes
beyond matters personally known to that designee).
Norandal contends that the testimony of Jeff Podwika refutes
Krupinski's testimony and establishes that no defaults occurred. Podwika
is the PPM Finance loan officer who sent Scottsboro the Limited Waiver
Letter dated December 31, 1999. Podwika testified that "we send out
waivers because we are comfortable with the situation or what occurred we
have an understanding of it and we are willing to waive and move forward
based on whatever terms are in that waiver." (R. 62-1, Norandal's
Rule 56.1(b)(3)(B) Statement of Additional Facts ¶ 28.) Norandal argues
that the Limited Waiver Letter establishes that PPM Finance was
"comfortable with the situation" and that no default occurred.
Podwika further testified that if a default occurred, "[t]here would
always be some communication. No matter what it was called, there would
always be some communication with the borrower." (R. 62-1, Norandal's
Rule 56.1(b)(3)(B) Statement of Additional Facts ¶ 32.) PPM Finance
first notified Scottsboro of a default under the Credit Agreement on
2000. (Id. ¶ 31.) Norandal contends that no default
occurred before December 13, 2000 because if there had been a default,
Norandal argues, PPM Finance would have notified Scottsboro.
Podwika never stated, however, that "Scottsboro was not in default."
Podwika simply does not refute the underlying facts of Krupinski's
testimony establishing that defaults occurred.
Similarly, Norandal argues that PPM Finance would not have lent
Scottsboro an additional $5.25 million if Scottsboro had been in default.
The Subordination Agreement explicitly provides, however, that the
"Senior Creditors may at any time . . . without impairing or releasing
the obligations of the Subordinated Creditors under this Agreement,
increase the amount of Senior Debt." (R. 52-1, Jackson's Index of Exs.,
Ex. 9, Subordinated Note § 3.) Norandal cites no evidence to support
its arguments. Again, the fact that PPM Finance loaned Scottsboro
additional funds does not refute Krupinski's testimony that Scottsboro
Finally, Norandal's argument that a default must be "material" in order
to trigger Norandal's obligation to hold the payments in trust is
nonsensical. Norandal argues that a party seeking to be excused from its
own contractual obligations due to another party's breach must
demonstrate that the breach was material, and that accordingly Jackson
may not renege on its "contractual obligations to fund Scottsboro's
payments to Norandal" without demonstrating that Scottsboro's alleged
defaults were material. First, the Subordination Agreement does not
require Events of Default to be "material." Second, Jackson does not owe
an affirmative duty to "fund Scottsboro's payments to Norandal" under the
Subordination Agreement. There is no such duty flowing to Norandal under
the Subordination Agreement. Jackson is not asking the Court to excuse it
from its own contractual obligations to Scottsboro under the Credit
Agreement. Rather, it is seeking to enforce its rights against Norandal
under the Subordination Agreement. Jackson
need not demonstrate that Scottsboro's defaults were "material."
In sum, the unambiguous terms of the Subordination Agreement require
Norandal to remit to Jackson the payments Scottsboro made to Norandal
while Scottsboro was in default under the Credit Agreement. Because
Scottsboro defaulted on its debt obligations to Jackson, and because
Norandal failed to remit those payments to Jackson, Norandal breached the
Accordingly, summary judgment is granted in favor of Jackson on both
counts of its amended complaint.
II. Norandal's Affirmative Defenses Have No Merit
A. Jackson Did Not Waive Its Right To Recover The Payments Under
The Subordination Agreement
Norandal argues that Jackson waived its right to recover the payments
because it "specifically authorized" Scottsboro to make those payments to
Norandal, thereby intentionally relinquishing a known right. This is
Norandal's Second Affirmative Defense.
Under Illinois law, "waiver" is the voluntary and intentional
relinquishment of a known right. See United States v. Sumner,
265 F.3d 532, 537 (7th Cir. 2001). "The party claiming an implied waiver
has the burden of proving a clear, unequivocal, and decisive act of its
opponent manifesting an intention to waive its rights." In re
Nitz, 317 Ill. App.3d 119, 130, 739 N.E.2d 93, 103 (Ill.App. Ct.
2000). Where the evidence regarding a party's conduct during the relevant
period is undisputed, the Court may determine waiver as a matter of law.
WaId v. Chicago Shippers Assoc., 175 Ill. App.3d 607, 621,
529 N.E.2d 1138, 1148 (Ill.App. Ct. 1988).
1. The Subordination Agreement Has An Enforceable Non-Waiver
Non-waiver clauses are enforceable under Illinois law. Monarch
Coaches, Inc. v. ITT Indus. Credit, 818 F.2d 11, 13 (7th Cir. 1987);
McDonald's Corp. v. C.B. Management Co., 13 F. Supp.2d 705, 712
(N.D. Ill. 1998). Non-waiver clauses "may be strictly construed even when
full compliance with the contract has not been required for a lengthy
period of time." Roboserve, Inc. v. Kato Kagaku Co.,
78 F.3d 266, 277 (7th Cir. 1996). Such clauses are strictly enforceable under
Illinois law, though they may be "waived by [the] words and deeds of the
parties, so long as the waiver is proved by clear and convincing
evidence." Id. (citation omitted),
The Subordination Agreement provides:
Any failure or delay on the part of any party
in exercising any such right, remedy, or
power, or abandonment or discontinuance of steps
to enforce the same, shall not operate as a
waiver thereof or affect the rights of the
affected party thereafter to exercise the same.
(R. 52-1, Jackson's Index of Exs., Ex. 9, Subordinated Note § 7)
(emphases added).) Section 8 further provides that any waiver must be
made in writing:
Any modification or waiver of any provision of
this Agreement, or any consent to any
departure by any party therefrom, shall not be
effective in any event unless the same is in
writing and signed by Agent or Collateral
Agent (or their respective successors and
assigns), Purchasers (or their respective
successors and assigns) and Holder, and then such
modification, waiver, or consent shall be
effective only in the specific instance and for
the specific purpose given.
(Id. § 8 (emphases added).) In addition, the Subordination
Agreement provides that its terms shall not be "affected, modified or
impaired in any manner" by any amendment or modification of the Credit
Agreement or other Senior Debt Document or by "any exercise or
non-exercise of any right, power or remedy under or in respect of the
Senior Debt or the Subordinated Debt . . ."
(Id. § 8.)
2. Jackson's Actions Do Not Constitute A Waiver
Norandal argues that Jackson waived its rights by "permitting"
Scottsboro to make the payments to Norandal, providing the funding to
Scottsboro to make those payments, and making no effort to compel
Norandal to hold such payments in trust.
There is no waiver. Jackson did not "specifically authorize" or
"permit" Scottsboro to make the payments. As discussed above, payments
are "permitted" under the Subordination Agreement only if they do not
violate Section 2.3. Neither the Limited Waiver Letter nor the April 26,
2000 Amendment constitutes the requisite "permission."
Moreover, the Subordination Agreement makes clear that Jackson's
failure to enforce any rights under the Agreement "shall not operate as a
waiver thereof," and that any purported waiver is effective only if it is
in writing and signed by PPM Finance and Norandal. It is undisputed that
there is no writing signed by the parties expressly waiving Jackson's
right to recover those payments. Neither the Limited Waiver Letter nor
the April 26, 2000 Amendment expressly waived or even referred to the
non-waiver provisions of the Surbordination Agreement.
Norandal argues that Jackson waived its right to the payments by
loaning Scottsboro an additional $5.25 million after the Default Date and
executing the April 26, 2000 Amendment. But Section 3 of the
Subordination Agreement explicitly allowed Jackson to loan additional
funds to Scottsboro and increase the amount of Senior Debt without
affecting Norandal's obligations under the Subordination Agreement. (R.
52-1, Jackson's Index of Exs., Ex. 9, Subordinated Note § 3.)
Jackson's exercise of its explicit rights under the Subordination
Agreement does not constitute a wavier.
Norandal mischaracterizes the terms of the April 26, 2000 Amendment by
arguing that Jackson explicitly waived all Senior Defaults that had
already occurred. For support, Norandal cites section 4.2 of the April
26, 2000 Amendment, which provides:
After giving effect to the issue and sale of the
Senior Floating Rate Term Notes, no Default or
Event of Default shall have occurred and be
continuing. No event or condition shall exist
which has had or could reasonably be expected to
have a Material Adverse Effect.
(R. 52-1, Jackson's Index of Exs., Ex. 13, April 26, 2000 Amendment
§ 4.2.) Section 4.2 does not, as Norandal argues, excuse Scottboro's
then-existing defaults. Rather, Section 4.2 sets forth a
condition that must be met in order for the April 26, 2000
Amendment to be effective. Section 4 explicitly provides that "The
effectiveness of this Agreement is subject to the fulfillment to Agent's
and Lender's satisfaction, on or prior to the date hereof, of the
following conditions." (R. 52-1, Jackson's Index of Exs., Ex. 13, April
26, 2000 Amendment § 4.) Section 4.2 is one of those conditions. The
April 26, 2000 Amendment's plain language makes clear that it does not
operate as a waiver of all Scottsboro defaults.*fn8
Norandal's affirmative defense of waiver has no merit.
B. The Subordination Agreement Is Not An Unenforceable Contract
Norandal argues that the Subordination Agreement is an unenforceable
adhesion because it was presented to Norandal on a "take it or
leave it" basis with no opportunity for actual negotiation. This is
Norandal's Tenth Affirmative Defense.
A contract of adhesion is a form agreement submitted to a party for
acceptance without any opportunity to negotiate its terms.
Northwestern Nat. Ins. Co, v. Donovan, 916 F.2d 372, 377 (7th
Cir. 1990). A contract is not a contract of adhesion simply because one
party may have had little relative bargaining power regarding the terms
of the contract. Id.; Bastian v. Wausau Homes, Inc.,
635 F. Supp. 201, 203-04 (N.D. Ill. 1986). "Similarly situated parties seeking
to void a term as adhesive have been rebuffed by Illinois courts."
Rothwell Cotton Co. v. Rosenthal & Co., 827 F.2d 246, 251
(7th Cir. 1987).
The Subordination Agreement is not a contract of adhesion. Norandal, as
part of a multinational corporation, is a sophisticated party. It had
competent counsel representing it during contract negotiations. Norandal
entered into the Subordination Agreement to "induce" the Senior Lenders
to fund the bulk of the $92 million transaction and to allow the sale to
proceed. Norandal's counsel requested specific changes that Jackson's
counsel refused to make, and the parties nonetheless executed the
contract. Negotiation occurred, but Norandal's counsel was simply
unsuccessful. Norandal's affirmative defense that the Subordination
Agreement is an unenforceable contract of adhesion has no merit.
C. Norandal Is Not A Holder In Due Course Because It Had Notice
Of Its Obligations
Norandal argues that it is a holder in due course with respect to the
payments at issue.*fn9 A "holder in due course" is one who takes a
negotiable instrument for value, in good faith, and
without notice of any claims or defenses to the instrument.
See 810 Ill. Comp. Stat. 5/3-302 (West 2003); Mut. Serv.
Cas. Ins. Co. v. Elizabeth State Bank, 265 F.3d 601, 619-20 (71h
Cir. 2001). In Illinois, a party has "notice" of a fact when: "(a) he has
actual knowledge of it; or (b) he has received a notice or notification
of it; or (c) from all the facts and circumstances known to him at the
time in question he has reason to know it exists." 810 Ill. Comp. Stat.
5/1-201(25) (West 2003).
Norandal is not a holder in due course. Norandal had reason to know,
through the unambiguous terms of the Subordination Agreement, that, until
Scottsboro paid the Senior Debt in full, Jackson had a claim to
Scottsboro's payments to Norandal if Scottsboro made such payments in
default under the Credit Agreement. Norandal is not an innocent third
party with no notice of any other claim. It expressly contracted with
Jackson to remit to Jackson any Subordinated Note payments made to
Norandal while Scottsboro was in default under the Credit Agreement. The
Subordination Agreement itself put Norandal on notice of its obligation
to hold payments in trust that were not "permitted" under the Agreement,
because, as discussed above, the Subordination Agreement placed the
burden on Norandal to determine whether any payments were not
"permitted." Norandal's affirmative defense has no merit.
D. The Parties Did Not Enter Into a Global Settlement
Norandal asserts as its Ninth Affirmative Defense that Jackson and PPM
Finance have no claims against Norandal because the parties entered into
a global settlement in which Jackson and PPM Finance released Norandal
from all claims related to the payments at issue. Jackson argues that
Norandal presented the identical argument to Chief Bankruptcy Judge
Wedoff in the adversarial bankruptcy proceedings, who ruled that there
was no global settlement. In any event,
Jackson argues, there was no global settlement on the merits
because the parties never formalized their discussions with definitive
documentation. The Court agrees with Jackson,
1. Norandal Is Collaterally Estopped From Arguing That There
Was a Global Settlement
Collateral estoppel precludes litigation of an issue "if the following
conditions are met: (1) the issue sought to be precluded is the same as
that involved in the prior action, (2) the issue was actually litigated,
(3) the determination of the issue was essential to the final judgment,
and (4) the party against whom estoppel is invoked was represented in the
prior action." Adair v. Sherman, 230 F.3d 890, 893 (7th Cir.
Norandal argues that the parties reached a global settlement through
the September 19, 2002 exchange of letters between Norandal's counsel and
Jackson's counsel. Norandal presented this same argument in the adversary
proceeding then pending before Judge Wedoff. Norandal filed identical
Motions to Enforce Settlement in this case and in the bankruptcy
proceeding, and elected to have its motion proceed before Judge Wedoff
instead of before this Court. (R. 49-2, Jackson's Rule 56.1(a)(3)
Statement ¶¶ 126, 131; R. 62-1, Norandal's Rule 56.1(b)(3)(A) Response
¶¶ 126, 131.) The parties fully briefed Norandal's Motion to Enforce
Settlement. Judge Wedoff orally ruled that "I believe that there is not a
binding settlement. The parties had anticipated that there would be a
written document that would specify the terms of a release. No such
written document ever came into existence." (Id. ¶ 134.)
The only question is whether Judge Wedoff's oral ruling constituted a
final judgment because it is undisputed that Norandal was represented in
the earlier proceeding, that the issue was decided on the merits, and
that the issue was identical. The adversary cases in Scottsboro's
bankruptcy were eventually settled by a separate and undisputed
settlement agreement between the parties and were dismissed without
prejudice. Norandal argues that the voluntary settlement rendered the
bankruptcy proceedings a nullity and that Judge Wedoff's ruling has no
effect on this case because there was no "final judgement" resolving the
Norandal confuses the standards for appealability with the standards
for collateral estoppel. "To be `final' for purposes of collateral
estoppel the decision need only be immune, as a practical matter, to
reversal or amendment. `Finality' in the sense of 28 U.S.C. § 1291 is
not required." Miller Brewing Co. v. Jos. Schlitz Brewing Co.,
605 F.2d 990, 996 (7th Cir. 1979). Judge Wedoff's ruling may have been
interlocutory and not immediately appealable, but it still has preclusive
effect. Gilldorn Savs. Ass'n v. Commerce Savs. Ass'n,
804 F.2d 390, 393-94 (7th Cir. 1986); Illinois Bell Tel. Co. v. Haines &
Co., Inc., 713 F. Supp. 1122, 1124-25 (N.D. Ill. 1989). Collateral
estoppel bars Norandal from relitigating the issue of a global settlement
in this case.
2. On The Merits, No Binding Settlement Contract Between
Norandal And Jackson Existed
In any event, the undisputed facts establish that the parties did not
enter into a global settlement. The September 19, 2002 exchange of
letters between John Delnero, representing Norandal, and Forrest
Lammiman, representing Jackson, do not reflect a meeting of the minds
regarding settlement. Lammiman's September 19, 2002 reply letter to
Delnero is expressly conditioned on documenting the parties' purported
agreement: "[W]e are prepared to settle upon the basis of the economic
terms set forth [in Delnero's September 19, 2002 letter], subject to
definitive documentation."*fn10 (R. 49-2, Jackson's
Rule 56.1(a)(3) Statement ¶ 127.) An exchange of letters about contract
terms does not create a contract where the negotiations are "subject to"
the execution of a written agreement: "When parties make a pact `subject
to' the execution of a later agreement, they manifest an intent not to be
bound by the original pact." Cohen Dev. Co. v. JMJ Properties,
Inc., 317 F.3d 729, 735 (7th Cir. 2003). The parties failed to
successfully negotiate a written agreement as required by Lammiman's
letter. Accordingly, no binding settlement agreement exists.
Norandal argues for the first time in its opposition to Jackson's
Motion for Summary Judgment that definitive documentation did in fact
exist, in the form of a draft settlement agreement dated September 23,
2002. It is undisputed that the draft settlement agreement clearly
contained a header noting that the document was a draft and that the
transmittal email included language that the September 23, 2002 draft
agreement would "have no effect on the parties until and unless it is
fully executed by all the parties." It is also undisputed that the
parties never executed the draft agreement. "[A] condition precedent
requiring the execution of a definitive documentation is a condition
precedent to formation, and thus, when unsatisfied, no contract exists in
the first place." In re Midway Airlines, Inc., 180 B.R. 851, 917
(Bankr. N.D. Ill. 1995); Ceres Ill., Inc. v. Illinois Scrap
Processing, Inc., 114 Ill.2d 133, 143-44, 500 N.E.2d 1, 5 (1986).
Norandal's affirmative defense that Jackson's claims are barred under
the Subordination Agreement pursuant to a Settlement Agreement is without
E. Equitable Estoppel Does Not Bar Jackson's Claims
Norandal argues that Jackson is equitably estopped from recovering any
payments that Norandal received from Scottsboro under the Subordinated
Note prior to July 27, 2001 because Jackson did not notify Norandal of
any Senior Default until that date.
To prevail on its equitable estoppel counterclaim,*fn11 Norandal must
establish six elements: (1) voluntary words or conduct by the estopped
party amounting to a misrepresentation or concealment of material facts;
(2) actual or implied knowledge of the estopped party that the
representations were not true; (3) lack of knowledge of the true facts by
the innocent party both at the time made or at the time acted upon; (4)
intent, or a reasonable expectation, on the part of the estopped party
that the innocent party would act on the misrepresentations; (5) a
reasonable, good-faith, detrimental change of position by the innocent
party based on the misrepresentations; and (6) prejudice to the innocent
party. Vaughn v. Speaker, 126 Ill.2d 150, 162-63,
533 N.E.2d 885, 890-91 (Ill. 1988).
Norandal argues that Jackson and the PPM Entities "concealed from
Norandal the fact that any Senior Default existed prior to July 27,
2001." (R. 63-1, Norandal's Opp. Mem. at 26.) It is well-settled under
Illinois law that there can be no concealment supporting an equitable
estoppel claim unless there is an affirmative duty to speak. Inland
Metals Ref. Co. v. Ceres Marine Terminals, Inc., 557 F. Supp. 344,
349 (N.D. Ill. 1983). The Court has already determined that Jackson had
no affirmative duty to notify Norandal of Senior Defaults. See
Section I.B. Because Norandal cannot establish the first element of
equitable estoppel, *fn12 Count II of its counterclaim and its Fifth
Affirmative Defense fail.
F. The Doctrine of Voluntary Payment Does Not Bar Jackson's
"The voluntary payment doctrine is a corollary to the mistake of law
doctrine and, in its general formulation, holds that a person who
voluntarily pays another with full knowledge of the facts will not be
entitled to restitution." Randazzo v. Harris Bank Palatine,
N.A., 262 F.3d 663, 667 (7th Cir. 2001). Under the voluntary payment
doctrine, "[a]bsent fraud, coercion or mistake of fact, monies paid under
a claim or right to payment but under a mistake of law are not
recoverable." Smith v. Prime Cable of Chicago,
276 Ill. App.3d 843, 847, 658 N.E.2d 1325, 1330 (Ill.App. Ct. 1995).
Norandal argues that the voluntary payment doctrine precludes Jackson
from recovering the payments at issue even though Jackson did not
actually make those payments. Norandal contends that Jackson and PPM
Finance "chose to permit and provide funding for Scottsboro Properties'
making of Promissory Note payments to Norandal" (R. 44-2, Norandal's Mem.
of Law in Supp. of its Mot. for Summ. J. at 12), and that this "conduct
was the functional equivalent of making the payments on behalf of
Scottsboro Properties." (R. 63-1, Norandal's Opp. Mem. at 18.) Norandal
further contends that the voluntary payment doctrine extends beyond the
realm of a contractual payor-payee relationship. The Court disagrees.
First, Jackson did not "permit" the payments to be made. Second, it is
Scottsboro, not Jackson, made the payments. Norandal provides no
authority to support its contention that a payer's lender
becomes the payer when loan proceeds are used to make the payments at
Third, Jackson was not contractually obligated to make the payments to
Norandal because Jackson was not a party to the Subordinated Note.
Norandal cites Inland Real Estate Corp. v. Oak Park Trust and Sav.
Bank, 127 Ill. App.3d 535, 469 N.E.2d 204 (Ill.App. Ct. 1983), to
support its contention that Illinois courts have expanded the voluntary
payment doctrine beyond the realm of a contractual relationship.
Inland is inapposite for several reasons. First, Inland
involved the voluntary-tax-payment doctrine, a distinct derivative of the
voluntary payment doctrine. Second, the payor in Inland was
contractually bound to make the payments. The payor in Inland
was the assignee of a mortgage note who stood in the shoes of the
assignor-mortgagor with regard to the rights and interests under the note
and mortgage. The payor was therefore contractually obligated to make the
tax payments at issue. Id. at 542, 469 N.E.2d at 209. Unlike the
payor in Inland, Jackson was not contractually obligated to make
the payments to Norandal.*fn13 The voluntary payment doctrine does not
apply. Norandal's Fifth Affirmative Defense accordingly has no merit.
G. Laches Does Not Bar Jackson's Claims
Norandal alleges that Jackson's claims are barred by the doctrine of
laches because Jackson "slept on its rights" and delayed suing Norandal
until three years after the alleged Default Date. This is Norandal's
Fourth Affirmative Defense.
Laches means a culpable delay in suing. Teamsters & Employers
Welfare Trust of Illinois v. Gorman Bros. Ready Mix, 283 F.3d 877,
880 (7th Cir. 2002). A party asserting a laches defense must demonstrate:
(1) an unreasonable lack of diligence by the party against whom the
defense is asserted; and (2) prejudice arising therefrom. Smith v.
Caterpillar, Inc., 338 F.3d 730, 733 (7th Cir. 2003). The Seventh
Circuit has noted that "laches is a question of degree" and that "if only
a short period of time has elapsed since the accrual of the claim, the
magnitude of prejudice required before the suit should be barred is
great." Chattanoga Mfg., Inc. v. Nike, Inc., 301 F.3d 789, 795
(7th Cir. 2002).
Courts generally determine the reasonableness of the alleged delay by
reference to the statute of limitations. Hot Wax, Inc. v. Turtle Wax,
Inc., 191 F.3d 813, 821 (7th Cir. 1999). In Illinois, the statute of
limitations for actions involving written contracts is ten years after
the date on which the cause of action accrued. 735 Ill. Comp. Stat. §
5/13-206 (West 2003).
Jackson has not unreasonably delayed in suing Norandal. Jackson's cause
of action arguably accrued on November 1, 1999, when Norandal first
received a Subordinated Note payment in violation of Section 2.3 of the
Subordination Agreement. Jackson filed this complaint against Norandal
three years later on November 5, 2002.*fn14 This is less than one-third
of the statute of limitations period.
Moreover, during that three year period, Jackson did not sit idly by
and exhibit an "unreasonable lack of diligence." Before resorting to
litigation, Jackson first tried to collect the
balance due on the Credit Agreement from Scottsboro. When
Scottsboro could not be sold as a going concern, Jackson credit bid for
substantially all of Scottsboro's assets at an auction and then proceeded
to sell off most of those assets. (R. 49-2, Jackson's Rule 56.1(a)(3)
Statement ¶ 114; R. 62-1, Norandal's Rule 56.1(b)(3)(A) Response
¶ 114.) Jackson also assisted the Bankruptcy Trustee in his pursuit
of Scottsboro's accounts receivables, which led to the bankruptcy cases
against Norandal. (Id. ¶¶ 120-121.) Those cases in turn led
to this action.
The undisputed facts demonstrate that there was no unreasonable delay.
Norandal's laches affirmative defense fails.
H. The Doctrine of Unclean Hands Does Not Bar Jackson's
Norandal argues that Jackson violated its duty of good faith and fair
dealing by failing to timely notify Norandal of Senior Defaults, and that
Jackson is therefore barred from recovering the payments by the unclean
hands doctrine. Norandal's unclean hands affirmative defense is "based on
the grounds that [Jackson] acted wrongfully in failing to provide
Norandal with notice of a Senior Default prior to July 27, 2001." (R.
63-1, Norandal's Opp. Mem. at 24-25.)
1. The Implied Covenant Of Good Faith And Fair Dealing
Under Illinois law a covenant of good faith and fair dealing is implied
in every contract unless expressly disavowed. Dayan v. McDonald's
Corp., 125 Ill. App.3d 972 990, 466 N.E.2d 958, 971 (Ill.App. Ct.
1984). Good faith "requires that the party vested with contractual
discretion exercise that discretion reasonably, not arbitrarily,
capriciously, or in a manner inconsistent with the reasonable expectation
of the parties." Northern Trust Co. v. VIII South Michigan
Assocs., 276 Ill. App.3d 355, 368, 657 N.E.2d 1095, 1104 (Ill.App.
Ct. 1995). However, "[p]arties are entitled to enforce the terms of
negotiated contracts to the letter without
being mulcted for lack of good faith." Perez v. Citicorp
Mortgage, Inc., 301 Ill. App.3d 413, 423-24, 703 N.E.2d 518, 525
(Ill.App. Ct. 1998).
Norandal argues that the implied covenant of good faith and fair
dealing exists in the Subordination Agreement "by virtue of [Jackson's]
discretion created by the inclusion of the `senior Default Notice'
definition." (R. 63-1, Norandal's Opp. Mem. at 29.) Norandal argues that
the definition of "Senior Default Notice" vests Jackson with discretion
"as to when and how [Jackson] would notify Norandal that a Senior Default
had taken place." (Id. at 28.) Norandal contends that by failing
to timely notify it that a Senior Default had occurred, Jackson acted
unreasonably and violated the implied covenant of good faith and fair
This argument is misguided because the implied covenant of good faith
and fair dealing does not create an independent source of duties for the
parties to a contract. Beraha v. Baxter Health Care Corp.,
956 F.2d 1436, 1443 (7th Cir. 1992). Rather, it simply guides the
construction of explicit terms in the agreement. Id. Norandal
does not argue that the covenant of good faith and fair dealing
informs the interpretation of a particular contract term.
In any event, as discussed in Section I.B.I, Jackson had no duty to
notify Norandal of the Scottsboro defaults and therefore did not violate
the implied covenant of good faith and fair dealing. The definition of
"Senior Default Notice" has no bearing on the parties' obligations under
the Subordination Agreement and confers no substantive rights. "Parties
to a contract . . . are entitled to enforce the terms of the contract to
the letter and an implied covenant of good faith cannot overrule or
modify the express terms of a contract." VIII South Michigan
Assocs., 276 Ill. App.3d at 367, 657 N.E.2d at 1104. Jackson acted
in accordance with the negotiated terms of the Subordination Agreement,
and did not breach the implied covenant of good faith and fair
2. The Doctrine Of Unclean Hands
Unclean hands is an "exceptional" defense that "rarely prevents the
grant of the relief that would otherwise be appropriate." Polk Bros.,
Inc. v. Forest City Enters., Inc., 776 F.2d 185, 193 (7th Cir.
1985). Unclean hands will bar a plaintiff's recovery in a court of equity
if the plaintiff's misconduct, fraud, or bad faith (1) was in connection
with the very transaction being considered or complained of; and (2) was
directed toward the defendant. Cunningham v. Equicredit Corp. of
Illinois, 256 F. Supp.2d 785, 797-98 (N.D. Ill. 2003).
Norandal argues that "[b]ecause [Jackson and the PPM Entities] violated
their duty of good faith and fair dealing, the PPM Entities have unclean
hands." (R. 63-1, Norandal's Opp. Mem. at 29.) Specifically, Norandal
argues that "[b]y concealing Scottsboro's true financial status from
Norandal, the PPM Entities prevented Norandal from adequately protecting
itself." (Id. at 30.) First, Jackson did not violate the implied
covenant of good faith and fair dealing, as discussed above. Second,
Jackson's failure to notify Norandal of Scottsboro's default cannot give
rise to a claim of unclean hands because Jackson had no duty to do so.
Norandal cannot establish that Jackson engaged in misconduct, fraud, or
bad faith because Jackson acted in accordance with the unambiguous terms
of the Subordination Agreement.
Norandal's affirmative defense that Jackson has unclean hands has no
I. The Doctrine of "Equity Abhors A Forfeiture" Does Not Bar
Norandal asserts that Jackson's claims are barred by the doctrine that
"equity abhors a forfeiture." Forfeiture is the failure to timely assert
a right. United States v. Wood, 301 F.3d 556,
560 (7th Cir. 2002). Forfeiture occurs by accident, neglect, or the
inadvertent failure to timely assert a right. Id. "A court of
equity abhors forfeitures, and will not lend its aid to enforce them. Nor
will it give its aid in the assertion of a mere legal right contrary to
the clear equity and justice of the case." Beverage Realty, Inc. v.
Chatham Club, LLC, No. 01 C 1396, 2003 WL 444572, at *4 (N.D. Ill.
Feb. 21, 2003). However, a court will give effect to a forfeiture that
has been declared in the manner prescribed in a contract between the
parties. Tadros v. Kuzmak, 277 Ill. App.3d 301, 306,
660 N.E.2d 162, 166 (Ill.App. Ct. 1995).
It is unclear what right Norandal seeks to protect from forfeiture.
Norandal states without support or explanation that "[i]n their First
Amended Complaint, PPM Finance is seeking the forfeiture of Norandal's
proceeds from the sale of its collateral because of Scottsboro's alleged
breaches," and then cryptically asserts that "[t]he doctrine of `equity
abhors a forfeiture' applies in a situation, such as this, where a
contract may give a party a right to take a certain action, but the facts
surrounding the event indicate that it would be inequitable to allow that
party to take that action." (R. 63-1, Norandal's Opp. Mem. at 33.)
Norandal has a senior security interest in Scottsboro's spare parts
inventory, but Norandal fails to establish how giving effect to the
negotiated terms of the Subordination Agreement would cause Norandal to
forfeit "proceeds from the sale of its collateral."
Norandal further states that "in the absence of a material breach by
Scottsboro, PPM Finance has no right to its own nonperformance under the
Credit Agreement or to require Norandal's forfeiture of its rights under
the Subordination Agreement." (R. 63-1, Norandal's Opp. Mem. at 34.) As
Jackson points out, this argument is "unintelligible." It is unclear what
alleged duty Jackson is seeking to shirk through "nonperformance."
Jackson does not owe an
affirmative duty to Norandal under the Subordination Agreement.
Norandal will not forfeit any right by remitting the payments to
Jackson according to the negotiated terms of the Subordination Agreement.
J. PPM Fund and PPM CBO II Are Not Necessary Parties
Norandal argues that the PPM Entities (PPM Fund and PPM CBO II) are
"necessary parties" under Federal Rule of Civil Procedure 19(a) because
they signed the Subordination Agreement as "Purchasers."
Rule 19 requires that the PPM Entities be joined if (1) "complete
relief cannot be accorded" Jackson and Norandal without the PPM Entities;
or (2) the PPM Entities "claim an interest relating to the subject of the
action and is so situated that the disposition of the action in [the PPM
Entities'] absence may (i) as a practical matter impair or impede [the
PPM Entities'] ability to protect that interest or (ii) leave [Jackson or
Norandal] subject to a substantial risk of incurring double, multiple, or
otherwise inconsistent obligations. . . ." Fed.R.Civ.P. 19(a).
The PPM Entities are not necessary parties because complete relief will
be accorded Jackson and Norandal in the absence of the PPM Entities.
Although the PPM Entities are Senior Creditors under the Subordination
Agreement, Jackson must be paid in full before the PPM Entities receive
any payment on their debt. (R. 52-1, Jackson's Index of Exs., Ex. 6,
Intercreditor Agreement § 2.1.) Since Jackson is owed approximately
$11.5 million, payment by Norandal of the entire amount demanded by
Jackson in this litigation still leaves Jackson significantly unpaid. (R.
49-2, Jackson's Rule 56.1(a)(3) Statement ¶ 101; R. 62-1, Norandal's
Rule 56.1(b)(3)(A) Response ¶ 101.) Similarly, there is no risk that
the PPM Entities' absence would impair or impeded their ability to
protect their own interests because their interests are subordinated to
Jackson's according to the Intercreditor Agreement. The PPM
Entities are therefore not necessary parties.
K. Norandal's Rule 12(b)(6) Motion Is Not Properly Before The
Norandal asserts as its First Affirmative Defense that Jackson failed
to state a claim upon which relief could be granted. This is tantamount
to a Rule 12(b)(6) motion, which must be made before the party answers
the complaint. See Fed.R.Civ.P. 12(b)(6). This affirmative
defense is not properly before the Court, and the Court need not consider
II. Norandal's Counterclaims Fail As A Matter Of Law
A. Count I: Norandal Is Not Entitled To A Declaratory
In Count I of its Counterclaim, Norandal seeks a declaratory judgment.
The Court has already considered and rejected the basis for each
statement that Norandal asks the Court to declare.
Specifically, Norandal seeks an Order declaring: (1) that the PPM
Entities permitted Scottsboro to make payments to Norandal pursuant to
the Promissory Note until July 27, 2001*fn15; (2) that PPM Finance did
not provide Norandal with Notice of any Senior Default until July 27,
2001*fn16; (3) that Norandal is a holder in due course for all payments
it received from Scottsboro Properties pursuant to the Promissory Note
prior to July 27, 2001*fn17; (4) that the PPM Entities are precluded
from recovering from Norandal payments that Scottsboro Properties made to
pursuant to the Promissory Note under the Voluntary Payment
doctrine*fn18; (5) that there was no Senior Default in existence and
continuing at the time that Scottsboro Properties made payments to
Norandal under the Promissory Note*fn19; (6) that all of the payments
that Scottsboro Properties made to Norandal pursuant to the Promissory
Note were payments properly made to Norandal under Section 2.3 of the
Subordination Agreement*fn20; (7) that none of the payments that
Scottsboro Properties made to Norandal pursuant to the Promissory Note
were "incorrect Payments" under Section 2.5 of the Subordination
Agreement*fn21; and (8) that Norandal is not liable to any of the PPM
Entities for any payments it received from Scottsboro Properties pursuant
to the Promissory Note prior to July 27, 2001.*fn22 (R. 35-1, Norandal's
First Am. Countercl. at 12-13.) Accordingly, summary judgment is granted
against Norandal as to Count I.
B. Count II: Equitable Estoppel Does Not Bar Jackson's
The Court addressed and rejected this argument in Section II.E.
Accordingly, summary judgment is granted against Norandal as to Count II.
C. Count III: Norandal Has No Claim Of Recoupment
Recoupment is a mitigation of damages. In re A and C Else.
Co., 211 B.R. 268, 273 (Bankr. N.D. Ill. 1997). It is an equitable
right based on the premise that "where the creditor's claim against the
debtor arises from the same transaction as the debtor's claim, it is
defense to the debtor's claim against the creditor rather than a
mutual obligation. . . ." Lee v. Schweiker, 739 F.2d 870, 875
(3d Cir. 1984). Under the doctrine of recoupment, no affirmative recovery
may be permitted. In re Rooster, Inc., 127 B.R. 560, 569
Norandal's recoupment counterclaim, like its affirmative defenses of
unclean hands and estoppel, is "based on the grounds that [Jackson] acted
wrongfully in failing to provide Norandal with notice of a Senior Default
prior to July 27, 2001." (R. 63-1, Norandal's Opp. Mem. at 24-25.) But,
as discussed above, Jackson had no duty to notify Norandal of any Senior
Norandal asserts, without articulating the basis of its recoupment
claim, that "Norandal's recoupment claim . . . is applicable in light of
the PPM Entities' breach of the implied covenant of good faith and fair
dealing." (R. 63-1, Norandal's Opp. Mem. at 31.) As discussed in Section
II.H, however, Jackson did not breach the implied covenant of good faith
and fair dealing.
Accordingly, summary judgment is granted against Norandal as to Count
Norandal breached the terms of the Subordination Agreement by failing
to hold in trust payments it received from Scottsboro that were not
permitted under the Subordination Agreement. None of the affirmative
defenses that Norandal raises has merit. Accordingly, Jackson's motion
for summary judgment on its amended complaint is granted as to both
counts, and its motion for summary judgment against Norandal on
Norandal's affirmative defenses is granted.
Norandal is not entitled to the declaratory relief that it seeks,
equitable estoppel does not bar Jackson's claims, and Norandal's claim
for recoupment fails. Accordingly, Jackson's motion for summary judgment
against Norandal as to all counts of Norandal's counterclaim is granted,
and Norandal's motion for summary judgment as to all counts of its
counterclaim is denied.
Judgment is entered for Jackson in the amount of the sum total of the
fifteen payments at issue. In addition, Jackson is entitled to
prejudgment interest on that amount under the Illinois Interest Act, 815
Ill. Comp. Stat. 205/2, at the rate of five (5) percent per annum.*fn23