United States District Court, N.D. Illinois, Eastern Division
THE PRUDENTIAL INSURANCE, CO. OF AMERICA Plaintiff,
PATICIA NEWMAN and JAMES HERST Defendants.
MEMORANDUM OPINION AND ORDER
JEFFREY CUMMINGS, UNITED STATES MAGISTRATE JUDGE
December 4, 2017, Plaintiff Prudential Insurance Company of
America (“Prudential”) brought this diversity
action against defendants Patricia Newman and James Herst
seeking interpleader pursuant to Federal Rule of Civil
Procedure 22. (Dckt. # 1). Mr. Herst died after this motion
was filed and the executor of Herst's estate has been
substituted as the party defendant in his place. (Dckt. ##
61, 63). Prudential's complaint alleges that
Prudential issued a $300, 000 individual life insurance
policy to Steve Newman (Patricia Newman's late husband)
on September 15, 2015. (Dckt. # 1, at 2). Steve Newman died
on June 10, 2017,  and Prudential received competing claims
for the insurance policy benefits from Ms. Newman and Herst.
Prudential then brought this interpleader action to determine
the proper allocation of the policy's benefits.
case was originally assigned to District Judge Jorge Alonso.
On April 20, 2018, the parties consented to proceed before
former Magistrate Judge Michael Mason on all matters,
including an entry of final judgment. (Dckt. # 31); 28 U.S.C.
§ 636(e); N.D.Ill. R. 73.1(c). Prudential sought leave
to deposit the interpleader funds with the Clerk of Court and
to be dismissed from the case. (Dckt. # 33). On May 30, 2018,
Judge Mason granted the motion, dismissed Prudential with
prejudice, and retained jurisdiction over the Estate's
and Ms. Newman's claims to the insurance
proceeds. (Dckt. #42). On June 4, 2018, the
insurance proceeds plus accumulated interest ($304, 338.67)
were deposited with the Clerk of the Court. The case was then
reassigned to this Court on February 1, 2019.
the Court now is the Estate's motion for partial summary
judgment, in which the Estate asserts that it is entitled to
at least $267, 541 of the interpleader funds. The Estate
seeks to recover for the debts that it claims that Newman and
a company known as Performance Source, Inc. owed to Herst at
the time Newman died. For the reasons discussed below, the
Estate's motion is granted in part and denied in part.
LEGAL STANDARD FOR CONSIDERATION OF SUMMARY JUDGMENT
judgment is appropriate when the pleadings, depositions,
answers to interrogatories, and admissions on file, together
with the affidavits, if any, show that “there is no
genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.” Fed.R.Civ.P.
56(a). Issues of fact are material if they are outcome
determinative. Hottenroth v. Village of Slinger, 388
F.3d 1015, 1027 (7th Cir. 2004). The moving party bears the
burden of showing that there is no genuine dispute as to any
material fact. Celotex Corp. v. Catrett, 477 U.S.
317, 323 (1986). When the moving party has met that burden,
the nonmoving party cannot rely on mere conclusions and
allegations to create factual issues. Balderston v.
Fairbanks Morse Engine Div. of Coltec Indus., 328 F.3d
309, 320 (7th Cir. 2003). Instead, it must “marshal and
present the court with the evidence [it] contends will prove
[its] case.” Goodman v. Nat. Sec. Agency,
Inc., 621 F.3d 651, 654 (7th Cir. 2010).
considered on a summary judgment motion “need not be
admissible in form, but must be admissible in content, such
that, for instance, affidavits may be considered if the
substitution of oral testimony for the affidavit statements
would make the evidence admissible at trial.”
Wheatley v. Factory Card & Party Outlet, 826
F.3d 412, 420 (7th Cir. 2016). Furthermore, courts do not
weigh the evidence or resolve conflicts in the record in a
summary judgment proceeding; instead, they review the
evidence presented in the light most favorable to the
non-moving party and draw all reasonable inferences in its
favor. NES Rental Holdings, Inc. v. Steine Cold Storage,
Inc., 714 F.3d 449, 452 (7th Cir. 2013). Summary
judgment is only granted “if no reasonable trier of
fact could find in favor of the non-moving party.”
Hoppe v. Lewis Univ., 692 F.3d 833, 838 (7th Cir.
2012) (internal quotes and citation omitted). Finally, where
- - as here - - a court's jurisdiction is based on the
diversity statute, state law controls the substantive issues.
Harper v. Vigilant Ins. Co., 433 F.3d 521, 525 (7th
briefing summary judgment motions in this District must also
comply with Local Rule 56.1 and this Court is entitled to
require strict compliance with its terms. See Flint v.
City of Belvidere, 791 F.3d 764, 767 (7th Cir. 2015).
Local Rule 56.1 requires a party moving for summary judgment
to submit a statement of material facts with “specific
references to the affidavits, parts of the record, and other
supporting materials relied upon to support the facts.”
N.D.Ill. R. 56.1(a). Local Rule 56.1 statements must be
limited to material facts that are “supported by
specific references to the record” and “although
the evidence supporting a factual contention need not be
admissible itself, it must represent admissible
evidence.” Malec v. Sanford, 191 F.R.D. 581,
585 (N.D. Ill. 2000). Conversely, it is inappropriate to
include non-factual matters such as speculation, legal
arguments, and legal conclusions within Local Rule 56.1
statements. Cady v. Sheahan, 467 F.3d 1057, 1060
(7th Cir. 2006); Teerling v. Fleetwood Motor Homes of
Ind., Inc., No. 99 C 5926, 2001 WL 641337, at *1 (N.D.
Ill. June 4, 2011). (stating that a Rule 56.1 claim that a
party “executed a release” is a legal conclusion
that may not be included in a statement of
moving party has the responsibility of asserting all
facts relied upon in its opening statement of facts under
Local Rule 56.1(a).” Blackhawk Molding Co., Inc. v.
Portola Packaging, Inc., 422 F.Supp.2d 948, 952
(N.D.Ill. 2006) (emphasis added) (internal quotation marks
omitted). Consequently, “Local Rule 56.1 does not
contemplate a statement of additional facts from the
movant.” Id.; Carter v. Finley
Hospital, No. 01-C-50468, 2003 WL 22287392 at *1
(N.D.Ill. Sept. 30, 2003) (striking movant's statement of
additional material facts). For this reason, the Court will
strike the Estate's statement of additional material
facts (Dckt. # 66), and it will not consider the facts
asserted therein when determining whether the Estate is
entitled to summary judgment.
party opposing summary judgment is then obligated to file
“a concise response to the movant's statement that
shall contain . . . a response to each numbered paragraph in
the moving party's statement, including, in the case of
disagreement, specific references to the affidavits, parts of
the record, and other supporting materials relied
upon.” N.D.Ill. R. 56.1(b)(3)(B)). A moving party's
facts are deemed admitted for the purpose of a summary
judgment motion “unless controverted by the statement
of the opposing party.” N.D.Ill. R. 56.1(b)(3)(C). The
nonmoving party may also submit a statement of additional
facts that complies with the standards that apply to the
moving party's fact submission. Id; see also
De v. City of Chicago, 912 F.Supp.2d 709, 711-12
(N.D.Ill. 2012). If the moving party disputes the additional
facts of the non-movant, it must contest them in a reply
submission or the non-movant's additional facts will be
deemed admitted. N.D.Ill. R. 56.1(b)(3)(C). In this case, the
Estate has failed to respond to Ms. Newman's statement of
additional facts and the facts within her statement - - to
the extent that they are properly supported - - are deemed
admitted for purposes of this motion. See, e.g., Matter
of Kothe, No. 15-CV-8876, 2017 WL 4264901 at *2
(N.D.Ill. Sept. 26, 2017) (deeming non-movant's statement
of additional facts admitted where the movant failed to
respond to the non-movant's statement).
Source Inc. (“PSI”) is an Illinois-based
commercial debt management company that James Herst founded
in 1963. (Dckt. #19, at 1). Herst hired Newman as a PSI
employee in 2003. (Dckt. #19, at 2). On October 1,
2006, Herst and Newman agreed to transfer the ownership of
PSI to Newman by means of four interrelated agreements
namely: (1) the Stock Purchase Agreement; (2) Non-Negotiable
Secured Installment Note; (3) the Corporate Security
Agreement; and (4) the Purchaser's Security Agreement.
These documents (collectively referenced as the “2006
Contract”) were entered into effective October 1, 2006,
are governed by Illinois law, and constituted “the
entire Agreement between the parties.” (Dckt. # 23, at
Exs. 1, 2, 3; Dckt. #64-2, at 70, 84).
The 2006 Contract
The Stock Purchase Agreement
Stock Purchase Agreement (“SPA”) was executed
between by three parties: (1) Herst as seller, both
individually and as trustee of his living trust; (2) Newman
as the purchaser, and (3) PSI (through Herst as its corporate
president). (Dckt. #23, at 16). Herst agreed to sell Newman
one share of PSI's stock for $1, 000. (Dckt.
#23, at 1). Newman paid Herst $1, 000 for the remaining share
of PSI on the date the transaction closed (Dckt. #64-2, at
11). PSI agreed to redeem the remaining 99 shares of
Herst's stock in the corporation, upon which Herst was to
transfer the redeemed shares to PSI for a purchase price of
$335, 000. (Dckt. #23, at 4). Herst was also to be
paid $25, 000 for a covenant not to compete against PSI,
bringing the total purchase price to $360, 000.
(Id.). Under the terms of the SPA, PSI was solely
responsible for the payment of this $360, 000
"redemption price." (Id.; Dckt. #64-1, at
5). Herst executed the SPA individually and as sole trustee
of his living trust and as the President of PSI. (Dckt. #23,
at 16). Newman executed the SPA in his individual capacity.
to the SPA were five exhibits that were considered part of
the SPA itself. (Dckt. #23, at 17.) These exhibits included a
Non-Negotiable Secured Installment Note signed by PSI, a
Corporation's Security Agreement signed by PSI and Herst,
and a Purchaser's Security Agreement signed by Herst and
The Non-Negotiable Secured Installment Note
cover the payment of the purchase price of the 99 PSI shares
of stock and the covenant not to compete, PSI issued the
Non-Negotiable Secured Installment Note (“Note”)
of $360, 000 to Herst (the payee). (Dckt. #23, at 1, 18-21).
The Note obligated PSI to make 40 quarterly installment
payments to Herst in the amount of $9, 000 each quarter, or a
lesser amount if other criteria that are not relevant to this
proceeding were met, starting on May 1, 2007. (Dckt. #23, at
18-19). Each payment was to include interest on the
outstanding principal balance starting at a rate 4.93 percent
per annum. (Dckt. #23, at 18).
Note also defined Herst's rights in the event that PSI
defaulted on its payments. In particular, the Note provided
At the election of the Payee [Herst] or legal holder hereof,
it is expressly understood and agreed that if default be made
in the payment of any of the said installments of principal
above mentioned or interest thereon, when due, same shall, at
the option of the legal holder hereof, become immediately due
and payable, without further notice thereof, and shall be
collectible immediately or at any time after said such
default, anything herein before contained to the contrary
notwithstanding. Maker [PSI] shall not be in default unless
Maker [PSI] shall have failed to cure said default within
thirty (30) days from the date of receipt of written notice
from the Payee [Herst] or the legal holder hereof, advising
Maker that a principal payment due hereunder and/or interest
due hereunder has not been paid.
(Dckt. #23, at 20). Herst was required to provide written
notice by registered or certified mail to PSI at its business
address (to the attention of Newman) and to its attorney.
(Dckt. #23, at 19-20).
Note further provides that:
the obligations under this Note are secured by that certain
Corporation's Security Agreement and Purchaser's
Security Agreement (as such terms are defined in the
Agreement, collectively referred to herein as the
‘Security Agreements') copies of which are attached
hereto and marked for identification as Exhibit
B and Exhibit C,
respectively; it being specifically agreed that
Pay[ee] shall look only to the pledged Collateral
(such as term is defined in the Security Agreements) for any
payment and/or performance due under this Note.
(Dckt #23, at 20) (emphasis in original). Newman signed the
Note in the capacity of President of PSI. (Dckt. #23, at 21).
The Corporation's Security Agreement
and PSI entered in the Corporation's Security Agreement
(“CSA”), under which the obligations of PSI (the
“debtor”) under the SPA and the Note were secured
by “collateral” (namely, the 99 shares of PSI
stock that PSI redeemed from Herst). (Dckt. #23, at 22; Dckt.
#64-2, at 79). In particular, the CSA provided that:
Debtor's [PSI's] failure to pay any quarterly
installment of the Note within thirty (30) days after
Debtor's receipt of written notice from Secured Party
[Herst] that such installment is past due and provided Debtor
does not reasonably dispute such notice within thirty (30)
days after Debtor's receipt of written notice from
Secured Party of such failure shall constitute a Default
under this Corporation's Security Agreement. In the event
any such Default is not cured within thirty (30) days of
Debtor's receipt of such written notice, then interest
shall accrue on such unpaid quarterly installment at an
annual rate of interest of eight percent (8%) per annum,
until such quarterly installment has been satisfied. Further,
if at any time Debtor is in Default for failing to make three
(3) quarterly installments and so long as those three (3)
quarterly installments remain due and unpaid then, and only
in such event, Secured Party has the right to declare the
then balance of the Note immediately due and payable . . . .
(Dckt. #23, at 23). The CSA further provided that Herst was
required to deliver written notice of past due quarterly
installment payments to PSI at its business address (to the
attention of Newman) and to its attorney by one of the
following means: (1) in person to someone entitled to receive
notice; (2) by certified or registered mail; (3) by an
overnight courier service; or (4) by fax. (Dckt. #23, at 24).
the CSA imposed certain obligations on PSI with respect to
securing a life insurance policy on Newman. (Dckt. #64-2, at
80). In particular, the PSI provided:
Newman's Policy. Un[til] the Note has been satisfied,
Debtor (PSI) will use commercially reasonable efforts to
maintain a life insurance policy on the life of Newman in an
amount at least equal to the outstanding principal amount of
the Note (“Newman Policy”). The Newman Policy
will provide that in the event of Newman's death,
proceeds of the Newman Policy shall first be paid to Secured
Party (Herst) to the extent of the then outstanding principal
amount of the Note. The parties acknowledge that the Newman
Policy may be in an amount in excess of the amount due to
Secured Party. Secured Party shall have no right, title
and/or interest in and to any proceeds payable under the
Newman Policy in excess of the then principal amount due to
Secured Party under the Note. To the extent the Newman Policy
is in existence while the Note remains unpaid, once annually,
Debtor shall provide notice to Secured Party that the Newman
Policy is in effect and that the premiums due thereon have
been satisfied as of such date.
(Dckt. #64-2, at 80).
did not recall at his deposition whether PSI had obtained a
life insurance policy for Newman as of the time the parties
executed the SPA. (Dckt. #64-2, at 18). Herst did become
aware that a life insurance policy had been taken out on
Newman's life shortly after the 2006 Contract was
executed. (Dckt. 64-2, at 30). Herst further testified that
two additional successive life insurance policies were taken
out on Newman's life after the execution of the 2006
Contract and that the third policy lapsed in 2014 prior to
the parties' execution of the 2014 Agreement due to a
failure to make the premium payments. (Dckt. 64-2, at 30-31).
The Purchaser's Security Agreement
(the “secured party”) and Newman (the
“debtor”) entered in the Purchaser's Security
Agreement (“PSA”), under which the obligations of
PSI (the “corporation”) under the SPA and the
Note were secured by “collateral” consisting of
the “purchaser's stock” (namely, the 1 share
of PSI stock that Newman purchased from Herst). (Dckt. #64-2,
at 84). The PSA further provides that Newman would become
“the only owner of Stock (namely, the 100 shares of PSI
stock) that is then issued” as of the closing date.
(Dckt. #64-2, at 84). The PSA had a default provision that is
materially identical to the default provision within the CSA
with the exception that the PSA required Herst to provide
Newman and his attorney with written notice that one or more
of PSI's quarterly installment payments were past due.
(Dckt. #64-2, at 85). The means by which Herst was to deliver
written notice to Newman and his attorney are the same as are
stated in the CSA. (Dckt. #64-2, at 86).
PSI's payments to Herst prior to October 2014
on May 1, 2007, and on a quarterly basis thereafter, the Note
provided that PSI would pay Herst a base of $9, 000, until
the $360, 000 - - with contractually mandated additions -
-was paid in full. (Dckt. #23, at 18). The record contains no
detailed evidence of the payments that PSI made between 2006
and late 2013. A payment ledger sent to Herst by Newman in or
around August 2014 does show that PSI owed Herst $276, 750 as
of January 1, 2011 and that PSI owed Herst $249, 377.49 as of
December 31, 2013 (Dckt. #23, at 2, 27). The August 2014
payment ledger further establishes that PSI made eight
payments of various amounts to Herst between January and
August 2014 that totaled $5, 600 (Dckt. #23, at 27). As such,
PSI fell far short in making the $9, 000 in payments that was
due for each quarter in 2014. (Id.). Despite this,
Herst did not deliver written notice to PSI and its attorney
of PSI's default in the making of any of the installment
payments required by the Note. (Dckt. #64-1, at 6). Herst
further admitted in his deposition that he did not formally
enforce any defaults of the 2006 Contract between 2006 and
2014. (Dckt. #64-2, at 27). As of August 18, 2014, PSI owed
Herst a balance of $243, 777.49. (Dckt. #23, at 27).
The 2014 Agreement
October 3, 2014, Herst and Newman signed a new agreement that
was titled “2014 Agreement for Variation of purchase
price of 9/30/2006 AGREEMENT re sale of Performance Source
Inc. (PSI) from James Herst (JH) to Steve Newman (SN)”
(hereafter, the “2014 Agreement”). (Dckt. #23, at
2, 28). The purpose of the 2014 Agreement was to enable
Newman to better operate PSI by reducing the monthly payments
to Herst and extending the term during which payments would
be made. (Dckt. #64-2, at 28-29). Herst agreed to accommodate
Newman because he wanted the continuation of income and he
believed that more consistent payments would serve to meet
his financial needs. (Dckt. #64-2, at 29). Herst and Newman
signed the 2014 Agreement in their individual capacities.
(Dckt. #23, at 28).
2014 Agreement altered the purchase price and payment terms
that were part of the Note. Instead of PSI owing $9, 000 each
quarter to Herst under the Note, the 2014 Agreement provided
[Newman] is to remit to [Herst] monthly the sum of $1500
(Fifteen Hundred Dollars) starting on or before November 1,
2014, and then deposit $1500.00 within each successive month
from December, 2014 through seven and one-half (7-1/2) year
term or until a total of net $135, 000.00 has been fully
paid. Excess payment to [Herst] of the $1500.00 base monthly
payment is encouraged and as an incentive, if in any one
calendar month when any amount over the $1500.00 due is paid
. . . such excess will be allowed as an additional 50% credit
to the 2014 purchase price. Example $2000.00 ($500.00 in
excess of the required $1500.00), if paid in any one calendar
month indicates $2, 250 would be the credit that month to the
obligation of this 2014 Agreement.
(Dckt. #23, at 28). In essence, in an attempt to assist PSI,
Herst agreed to forego the collection of the remaining $243,
777 due to him from PSI under the 2006 Contract in exchange
for Newman's promise to pay him $135, 000 under the terms
of the 2014 Agreement. (Dckt. #23, at 2).
2014 Agreement also provided Herst with the added security of
being named as a beneficiary under ...