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Orthodontic Centers of Illinois, Inc. v. Michaels

November 13, 2006

ORTHODONTIC CENTERS OF ILLINOIS, INC., PLAINTIFF/COUNTERDEFENDANT,
v.
CHRISTINE MICHAELS, D.D.S., P.C., AND CHRISTINE MICHAELS, D.D.S., DEFENDANTS/COUNTERPLAINTIFFS.



The opinion of the court was delivered by: Milton I. Shadur Senior United States District Judge

MEMORANDUM OPINION AND ORDER

Orthodontic Centers of Illinois, Inc. ("Centers") originally brought this diversity action against Christine Michaels, D.D.S., P.C., and Christine Michaels, D.D.S. (for convenience collectively "Michaels," treated as a singular feminine proper noun) to seek damages stemming from the parties' business agreement and from the asserted nonpayment of five promissory notes ("Notes") that had been signed by Michaels in Centers' favor. Because this Court found the business agreement unenforceable as a matter of Illinois law, it rejected all claims and counterclaims premised on the agreement's validity in two 2005 opinions reported at 403 F.Supp.2d 690 ("Opinion I") and 407 F.Supp.2d 934 ("Opinion II"). Both opinions, however, held that the Notes were enforceable against Michaels, so that the only issue remaining in the case is the amount--if any--of that liability.

Both parties have now brought and briefed their motions for summary judgment under Fed. R. Civ. P. ("Rule") 56 on that damages issue.*fn1 At heart their dispute revolves around whether anyone can show what if any payments have been made to reduce Michaels' liability on the Notes. Michaels claims that Centers has the burden of proving damages but cannot meet that burden because of accounting problems, so that it is entitled to no more than nominal damages. On the other side of the coin, Centers contends that it is Michaels who bears the burden of proving the affirmative defense of payment but cannot meet that burden due to her admissions in her motion, so that Centers is entitled to damages for the bulk of the face value of the Notes plus interest and attorney's fees. For the reasons stated in this memorandum opinion and order, both parties' motions are denied.

Standard of Review

Under familiar Rule 56 principles a movant for summary judgment bears the burden of establishing the absence of any genuine issue of material fact (Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986)). For that purpose courts consider the evidentiary record in the light most favorable to nonmovants and draw all reasonable inferences in their favor (Lesch v. Crown Cork & Seal Co., 282 F.3d 467, 471 (7th Cir. 2002)). But to avoid summary judgment a non-movant "must produce more than a scintilla of evidence to support his position" that a genuine issue of material fact exists (Pugh v. City of Attica, 259 F.3d 619, 625 (7th Cir. 2001)). Ultimately summary judgment is appropriate only if a reasonable jury could not return a verdict for the non-movant (Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). And to add one more complexity where (as here) cross-motions for summary judgment are involved, those principles require the adoption of a Janus-like perspective: As to each motion, the non-movant's version of any disputed facts must be credited.

Finally, as a federal court sitting in diversity, this Court is charged with applying state law--in this instance Illinois law, as the parties agree--to resolve all substantive questions (M. T. Bonk Co. v. Milton Bradley Co., 945 F.2d 1404, 1407 (7th Cir. 1991)). What follows, then, is (1) a summary of the facts undisputed by either party, followed by (2) an application of Illinois substantive law to those facts as augmented by additional and disputed facts that must be viewed in the light most favorable to the party against whom a particular argument has been asserted.*fn2

Background*fn3

Centers is a holder, with rights of enforcement, of five Notes signed by Michaels in the aggregate principal amount of $193,224 (M. St. ¶1; C. St. ¶¶1-4). By their terms the Notes (C. St. ¶6): shall be payable from [Michaels'] net operating margin with interest at a rate of one and one half (1.5%) percent over the prime rate of interest over a period of 60 months. Payment will begin after payment of non-interest bearing cash advances and upon the attainment of a net operating margin sufficient to repay [the] advances.

Each Note contains an acceleration clause and provides for post-maturity interest in the event of default (C. St. ¶¶7-8).

Over the course of the parties' relationship from January 1, 1998 through December 31, 2003, Michaels made debt payments to Centers far in excess of the $300,481.80 of principal and interest that would have been due on the Notes had they been paid according to schedule (M. St. ¶¶16-17). But the Notes were not the only debt that Michaels owed to Centers under the parties' business arrangement, so there is a question of how Michaels' payments were or should have been allocated.

Two witnesses as well as Michaels herself have reviewed Centers' accounting records to ascertain what portion if any of Michaels' debt payments was allocated to reducing her liability on the Notes (C. St. ¶¶10-13). In the end the parties have diametrically opposed positions as to what the evidence can prove about (1) what payments were in fact made on the Notes and relatedly (2) who has to prove that fact (C. St. and M. R. St. ¶¶11-12, 15-17; M. St. and C. R. St. ¶¶6-14, 18)

Burden of Proving Payment or Nonpayment Simply put, Michaels' three-step argument that she should be entitled to summary judgment is that (1) Centers bears the burden of proving its damages as part of its claim, (2) to prove those damages Centers bears the burden of proving what portion of the face value of the Notes is still remaining after Michaels' payments and (3) because Centers cannot "definitively" prove what has or has not been paid, Centers cannot make its case for damages as a matter of law (M. Mem. 1-2, 10). That position fails at step (1), because under the Illinois Commercial Code (810 ILCS 5/3-308(b))*fn4 Centers bears no such burden of proof to makes its case (see Tuttle v. Rose, 102 Ill.App.3d 865, 866-67, 430 N.E.2d 356, 358 (1st Dist. 1981)).*fn5

Here is Section 3-308(b):

If the validity of signatures is admitted or proved and there is compliance with subsection (a), a plaintiff producing the instrument is entitled to payment if the plaintiff proves entitlement to enforce the instrument under Section 3-301, unless the defendant proves a defense or claim in recoupment. If a defense or claim in recoupment is proved, the right to payment of the plaintiff is subject to the defense or claim, except to the extent the plaintiff proves that the plaintiff has rights of a holder in due course which are not subject to the defense or claim.*fn6 In other words, in an action to enforce a note in which the stated conditions have been met--as is true here--the plaintiff is entitled to payment on the ...


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