The Prudential Insurance Co. of America v. Newman

          MEMORANDUM OPINION AND ORDER

          HON. JEFFREY CUMMINGS, UNITED STATES MAGISTRATE JUDGE

         On 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).^[1] 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, ^[2] 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.

         This 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.^[3] (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.

         Before 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.

         I. LEGAL STANDARD FOR CONSIDERATION OF SUMMARY JUDGMENT

         Summary 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).

         Evidence 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 Cir. 2005).

         Parties 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 fact).^[4]

         “The 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.

         The 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).

         II. FACTUAL RECORD

         Performance Source Inc. (“PSI”) is an Illinois-based commercial debt management company that James Herst founded in 1963. (Dckt. #19, at 1).^[5] 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).

         A. The 2006 Contract

         i. The Stock Purchase Agreement

         The 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.^[6] (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. (Id.).

         Attached 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 Newman. (Id.).

         ii. The Non-Negotiable Secured Installment Note

         To 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).

         The Note also defined Herst's rights in the event that PSI defaulted on its payments. In particular, the Note provided that:

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).

         The 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]^[7] 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).

         iii. The Corporation's Security Agreement

         Herst 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).

         Finally, 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).

         Herst 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).

         iv. The Purchaser's Security Agreement

         Herst (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).

         B. PSI's payments to Herst prior to October 2014

         Starting 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^[8] 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).^[9] 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).

         C. The 2014 Agreement

         On 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).

         The 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 that:

[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).

         The 2014 Agreement also provided Herst with the added security of being named as a beneficiary under ...