Opinion
Civil Action No. 03-2283.
April 29, 2004
MEMORANDUM and ORDER
Citibank, N.A. brings this action against William A. Hicks for payment on a promissory note Hicks executed. Presently before the court is plaintiff's motion for summary judgment pursuant to Federal Rule of Civil Procedure 56. For the reasons stated below, plaintiff's motion will be granted.
BACKGROUND
The undisputed facts of this case are as follows. On or about December 1, 2000, William Hicks, defendant, signed a promissory note ("the Note") for a loan in the amount of $225,300 from Andersen Financial Corporation ("AFC"). Statement ¶ 2; Bovino Aff. Exh. C. Hicks took this loan in order to purchase an equity portion of Arthur Andersen Limited Partnership ("Andersen"). Def. Br. 2. Upon the signing of the note, the funds were transferred to Andersen, as Hicks directed. Pl. Br. Exh. 1. Hicks then received a partnership interest from Andersen. Id. AFC subsequently sold the Note to Charta Corporation ("Charta"), an affiliate of Citibank. Statement ¶ 1. Actually, AFC sold Charta promissory notes in lots, with numerous notes bundled together, and Hicks' note was contained in one of those bundles. Statement ¶¶ 2, 6; Bovino Aff. Exhs. 1, 2. On April 1, 2002, Charta assigned the Note, along with all the other notes by Andersen partners bought from AFC, to Citibank, the plaintiff. Statement ¶ 9; Bovino Aff. Exh. E.
Plaintiff submitted a statement of undisputed facts (hereinafter "Statement") with its motion for summary judgment (hereinafter "Pl. Br."). Defendant did not submit a separate statement of facts with his opposition to plaintiff's motion for summary judgment (hereinafter "Def. Br."), nor does he impliedly object to any of the facts contained in plaintiff's Statement within his opposition. Hence, even though citations for certain facts listed here are only to plaintiff's Statement, they are nonetheless undisputed.
The Note provides for acceleration upon the occurrence of the "Servicing Termination Date," Bovino Aff. Exh. C, which the Charta Purchase Agreement ("the Agreement") defines as "the date upon which [AFC's] appointment as Collection Agent shall have been terminated by the Agent pursuant to Section 6.01 [of the Agreement]." Statement ¶ 14; Exh. A. The Note incorporates by reference the Agreement. Bovino Aff. Exh C. Section 6.01 of the Agreement states that "[t]he Agent may at any time designate as Collection Agent any Person (including itself) to succeed the Seller or any successor Collection Agent, on the condition in each case that any such Person so designated shall agree to perform the duties and obligations of the Collection Agent pursuant to the terms hereof." Statement ¶ 15; Bovino Aff. Exh. A. On or about September 16, 2002, the appointment of AFC as Collection Agent, which was the "Seller" under the Purchase Agreements, was terminated. Accordingly, the Servicing Termination Date occurred on September 16, 2002. Statement ¶ 16.
Citibank notified Hicks on October 11, 2002 of the occurrence of the Service Termination Date, and advised him that it was exercising its right under the Agreement to accelerate the remaining balance. Statement ¶ 17; Bovno Aff. Exh. G. Citibank demanded that Hicks pay the remaining principal balance with interest by November 15, 2002. Statement ¶ 17; Bovino Aff. Exh. G. The amount due on that date was $187,750 for the remaining principal balance and $3,693.84 for combined interest and late fees, for a total balance of $191,443.84. Statement ¶ 18; Bovno Aff. Exh. H. Hicks has not made any payments on this balance, Statement ¶ 20, despite receiving a reminder letter from Citibank dated December 2, 2002. Statement ¶ 19. In addition to the $191,443.84 due on the Note, the Note provides for the collection of attorney's fees and expenses, collection costs and the costs and disbursements of any legal action undertaken to obtain payment on the Note. Bovino Aff. Exh. A. These are the damages plaintiff seeks in the instant case.
STANDARD OF REVIEW
Either party to a lawsuit may file a motion for summary judgment, and the court will grant it "if 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). "Facts that could alter the outcome are `material,' and disputes are `genuine' if evidence exists from which a rational person could conclude that the position of the person with the burden of proof on the disputed issue is correct." Ideal Dairy Farms, Inc. v. John Lebatt, LTD., 90 F.3d 737, 743 (3d Cir. 1996) (citation omitted). When a court evaluates a motion for summary judgment, "[t]he evidence of the non-movant is to be believed," Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986), and "all justifiable inferences are to be drawn in [the non-movant's] favor." Id. Additionally, "[s]ummary judgment may not be granted . . . if there is a disagreement over what inferences can be reasonably drawn from the facts even if the facts are undisputed." Ideal Dairy, 90 F.3d at 744 (citation omitted). However, "an inference based upon a speculation or conjecture does not create a material factual dispute sufficient to defeat entry of summary judgment." Robertson v. Allied Signal, Inc., 914 F.2d 360, 382 n. 12 (3d Cir. 1990).
To defeat summary judgment, the non-moving party cannot rest on the pleadings, but rather that party must go beyond the pleadings and present "specific facts showing that there is a genuine issue for trial." FED. R. CIV. P. 56(e). Similarly, the non-moving party cannot rely on unsupported assertions, conclusory allegations, or mere suspicions in attempting to survive a summary judgment motion. Williams v. Borough of W. Chester, 891 F.2d 458, 460 (3d Cir. 1989) (citing Celotex v. Catrett, 477 U.S. 317, 325 (1986)). Further, the non-moving party has the burden of producing evidence to establish prima facie each element of his claim. Celotex, 477 U.S. at 322-23. The non-movant must show more than "[t]he mere existence of a scintilla of evidence" for elements on which he bears the burden of production. Anderson, 477 U.S. at 252. Thus, "[w]here the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no `genuine issue for trial.'" Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citations omitted).
DISCUSSION
As previously explained, defendant does not contend that there is a genuine issue of material fact regarding the existence of the Note or the possession of the Note by Citibank. But see infra note 5. Rather, defendant's opposition to plaintiff's motion for summary judgment is entirely dependent on defenses affecting the ability of plaintiff to collect on the Note. More specifically, Hicks asserts that there was fraud in the inducement, fraudulent misrepresentation, failure of consideration, entitlement to a setoff, and unclean hands. The first four of these defenses are based primarily on alleged actions by Andersen and are therefore ultimately dependent on a showing that Andersen and AFC are alter egos. Since defendant has not provided sufficient evidence to allow a reasonable fact finder to conclude that Andersen and AFC were alter egos, these defenses must fail. Defendant has also failed to provide sufficient evidence in support of his unclean hands defense based on actions of Citibank, and accordingly, this defense must fail, as well.
Plaintiff concedes that any defenses that can be asserted against AFC regarding the enforceability of the Note can be asserted against Citibank as the current, rightful holder of the Note. Plaintiff instead concentrates on the alleged relationship and connection, or lack thereof, between AFC and Andersen.
I. The Alter Ego Theory and Dependent Defenses
The parties agree that the terms of the Note are governed by Illinois law. Illinois courts have made it clear that "a court may disregard a corporate entity and pierce the veil of limited liability where the corporation is merely the alter ego or business conduit of another person or entity." Peetoom v. Swanson, 778 N.E.2d 291, 294-295 (Ill.App.Ct. 2002) (citing In re Rehabilitation of Centaur Insurance Co., 606 N.E.2d 291 (Ill. 1992), aff'd, 632 N.E.2d 1015 (Ill. 1994)). A court should consider the following factors when determining whether to disregard a corporate entity: "(1) inadequate capitalization; (2) failure to issue stock; (3) failure to observe corporate formalities; (4) nonpayment of dividends; (5) insolvency of the debtor corporation at the time; (6) nonfunctioning of other officers or directors; (7) absence of corporate records; and (8) whether the corporation is a mere facade for the operation of dominant stockholders." Ted Harrison Oil Co., Inc. v. Dokka, 617 N.E.2d 898, 902 (Ill.App.Ct. 1993) (citing Webb v. Webb, 536 N.E.2d 206, 208 (Ill. 1989)). Defendant does not mention this standard nor does he directly present evidence on any one of these factors. Instead, defendant relies exclusively on two memoranda from Andersen regarding the process of becoming a partner at Andersen and how to fund the capital contribution necessary for this transition. Def. Exhs. 1, 2.
In the first memorandum Andersen explains recent changes made to the process of becoming a partner at Andersen or one of its affiliates. More specifically, it provides that Andersen has increased the amount of the paid-in capital contribution necessary to become a partner at Andersen. The memorandum states, "In order to minimize financial concerns, we are taking a number of steps: 1. We will provide loans through Andersen Financial Corporation ("AFC") consistent with the method used for initial capital contributions for new [Andersen] Partners. AFC was established to provide capital loans to [Andersen] and AAIP Partners." Def. Exh. 1. Defendant argues that this statement is evidence of a relationship between Andersen and AFC that is more involved than merely two separate corporations transacting independently. In other words, Andersen's statement " We will provide loans through AFC" (emphasis added) implies that the two companies are actually alter egos and, hence, any statements attributable to Andersen are attributable to AFC and likewise, any defenses that can be asserted against Andersen can be asserted against AFC.
Defendant relies further on a memorandum apparently circulated by Andersen management entitled, "Frequently Asked Questions." Def. Exh. 2. Defendant highlights a number of statements contained in this memorandum that also imply that Andersen and AFC are alter egos. First, in response to the question, "How will I fund Paid-In Capital (Subordinated Loan)?" Andersen officials wrote, "Obtain a loan from Andersen Financial Corporation (AFC). All loans must be obtained from AFC. In other words, loans cannot be obtained from a [prospective partner]'s individual lending institution." Def. Exh. 2. In that same memo, Andersen answered the question, "What happens if I move from MFP/D to AW Partner?" by writing, "MFP capital . . . in your account with the firm will first be applied to pay off any AFC loan balance outstanding." Id. Further, to answer "What if I leave the firm?" Andersen wrote, "If you leave the Firm, the full amount of your capital contribution (or subordinated loan) will be repaid to you — less any AFC outstanding loan balance, interest, or other amounts due the Firm." Id. Andersen also answers specific questions about AFC loans, including the terms of the loan, the interest rate on the loan, and how one makes payments on the loan ("[i]nterest and principal will be deducted from [an individual's] semi-monthly compensation").
The precise origination of this memorandum is not clear. Defendant does not explicitly claim that he received this memorandum from Andersen officials and relied on it to his detriment. Rather, defendant initially explains that this particular memorandum was "produced by Citibank in litigation with another former Andersen Partner." Def. Br. 2 (mislabeling this memorandum as "Exhibit 1," when it is in fact attached and labeled as "Exhibit 2"). Later, defendant writes that this memorandum was "circulated by Andersen Management." Def. Br. 14. Regardless of the exact source, defendant never claims that this memorandum is from AFC or its officials.
The reason that Andersen required its partners to allow Andersen to make deductions from an Andersen partner's salary and have it attributed to the AFC loan is unstated. In addition, Andersen's referring to the loans made to partners from AFC as "amounts due the Firm" leads one to suspect that the two entities have a close relationship. Defendant is correct that "Andersen clearly blurred any alleged distinction between itself and AFC." Def. Br. 14. However, the mere suspicion that Andersen and AFC are alter egos, although perhaps rational, is not sufficient to meet the standard for piercing the corporate veil under Illinois law, particularly considering the absence of evidence on any of the eight factors listed by the Illinois courts. A blurred line of distinction between two companies does not mean that the two companies are actually (legally) alter egos, and the Andersen statements cited by defendant, though suggestive, are not more than a "scintilla of evidence" and are not sufficient to allow a reasonable jury to conclude that Andersen and AFC are alter egos. Therefore, any defense dependent on the alter ego theory, i.e. any defense defendant asserts solely against Andersen, must fail.
1. Failure of Consideration
Defendant argues that he took out the loan from AFC "for the express purpose of buying a valuable partnership in Andersen," Def. Br. 15, and that since he "did not receive the valuable partnership interest he bargained for," Id., there was failure of consideration for the loan from AFC. In addition to other apparent legal deficiencies with this argument, see Pl. Br. 16-17, Pl. Rep. Br. 6-7, defendant agreed at oral argument that this defense is dependent on the deficient alter ego theory. Hence, defendant's failure of consideration argument must fail.
2. Setoff
Defendant correctly states that in Illinois "the right to enforce the obligation of a party to pay an instrument is subject to . . . (3) a claim in recoupment of the obligor against the original payee," 810 ILL. COMP. STAT. 5/3-305(a) (2004), with certain qualifications that are inconsequential in the instant case. Id. Defendant again cites statements from the "Frequently Asked Questions" memorandum, Def. Exh. 2, which defendant admits was from Andersen Management and not AFC. Def. Br. 14. More specifically, Hicks quotes, "If you leave the Firm, the full amount of your capital contribution (or subordinated loan) will be repaid to you — less any AFC outstanding loan balance, interest, or other amounts due the Firm." Def. Exh. 2. Although this would appear to entitle Hicks to a recoupment, or setoff, in an amount equal to his capital contribution to Andersen, Andersen is not the original payee in the instant case. In fact, Andersen is not even a party to the instant case. Rather, AFC is the original payee. Defendant has not provided any evidence that would support a finding that he is entitled to a recoupment of his capital contribution to Andersen from AFC. Accordingly, this defense must fail.
The parties stated at oral argument that Andersen is still an operating entity. Hence, it is unclear why Hicks has not attempted to retrieve the approximately $250,000 in his capital account from Andersen. Since Andersen is not a party to this case, however, it is unnecessary to evaluate whether or not Hicks is, in fact, entitled to that money from Andersen. The important point is that he is clearly not entitled to a setoff from AFC nor, therefore, from Citibank.
3. Fraud in the Inducement and Fraudulent Misrepresentation
Again, defendant correctly summarizes the law he cites in support of these defenses. As defendant explains,
[F]or a misrepresentation to constitute fraud which invalidates a contract, it must be a representation in the form of a statement of a material fact, made for the purpose of inducing a party to act; it must be false and known by the party making it to be false, or not actually believed by him, on reasonable grounds, to be true; and the party to whom it is made must be ignorant of its falsity, must reasonably believe it to be true, must act thereon to his damage, and in so acting must rely on the truth of the statement.Wilkinson v. Appleton, 190 N.E.2d 727, 729-30 (Ill. 1963) (cited by defendant at Def. Br. 10-11). Again, however, defendant has failed to produce sufficient evidence to allow a reasonable fact finder to conclude that this defense applies in the instant case. First, Hicks focuses on statements made by Andersen officials "as to Andersen's value as a company, as to its integrity, its financial health, and as to it being a model of professional conduct and efficiency," Def. Br. 12, as these facts would affect the value of Hicks' potential investment. As previously discussed, any statements made by Andersen officials are not attributable to AFC under the claimed alter ego theory and therefore do not afford Hicks any defense to the enforceability of the Note by Citibank.
Hicks also alleges that an AFC official, John Cole, echoed the misrepresentations of the Andersen officials, which would appear to solve the above-stated legal deficiency. There is no evidence, however, that Cole had authority, or even apparent authority, to speak on behalf of AFC. In fact, there is no mention at all of Cole's position with AFC. Hicks also does not make specific allegations regarding the misrepresentations made by Cole. Finally, and fatally, the defendant admitted at oral argument that there is nothing in the record to substantiate the necessary element that Cole knew these mystery statements to be false or acted with reckless disregard as to their falsity. Hence, defendant has not produced sufficient evidence to allow a reasonable fact finder to conclude that Hicks is entitled to the defense of either fraud in the inducement or fraudulent misrepresentation against AFC and therefore Citibank. Accordingly, these defenses must fail.
II. Unclean Hands
As explained by the Illinois courts, "The equitable doctrine of unclean hands provides that a party seeking equitable relief cannot take advantage of his own wrong." Eichmann v. National Hosp. and Health Care Services, Inc., 719 N.E.2d 1141, 1145 (Ill.App.Ct. 1999) (citation omitted). Hicks goes into a considerable amount of detail on Citibank's relationship to Andersen generally and its alleged involvement in the infamous Enron debacle, relying almost exclusively on hearings in the United States Senate concerning the role of financial institutions in the collapse of Enron. Def. Br. 4-8. Hicks ultimately arrives at the conclusion that Citibank facilitated the fraud against him perpetrated by Andersen. No reports or transcripts of proceedings to which Hicks vaguely refers are included in the record. Defendant explained at oral argument, though, that the Senate proceedings to which he refers in his brief were actually the findings of a Senate committee, presumably the Senate Committee on Governmental Affairs, Permanent Subcommittee on Investigations, which he twice quotes. Although the findings of a governmental investigation may well be admissible for purposes of defeating a motion for summary judgment, there is no evidence that defendant's factual statements are, in fact, supported by findings of a Senate committee. Defendant has not even given a citation to any report from the subcommittee which would then identify the source of these statements and provide the specific quotes that would be necessary to consider it as evidence.
Further, even if the evidence illusorily cited by defendant did support what he claims, defendant fails to connect Citibank and Andersen. Rather, he focuses on the relationship between Citibank and Enron, whose misfortunes have no bearing on the instant case. There is absolutely no evidence, not even alleged evidence, that Citibank had any role in the transaction that gave rise to the promissory note Citibank now seeks to enforce against Hicks. Accordingly, defendant's unclean hands defense must fail.
At oral argument, defendant argued that there is no evidence in the record of the assignment of the note from AFC to Charta. Since this is a new argument that was not in defendant's brief, I will not consider it here. However, I will note that plaintiff has included a copy of the schedule of notes sold by AFC to Charta on December 1, 2000, and Hicks' note, including the principal amount and payment due dates, is listed in that document. This evidence is not contradicted and clearly defeats defendant's new, inappropriately raised defense.