MAC NAUGHTON v. HARMELECH et al
Filing
408
OPINION. Signed by Judge Kevin McNulty on 7/13/16. (cm )
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
W. JAMES MAC NAUGHTON,
Plaintiff pro
No. 09—cv-5450 (KM)(MAH)
Se,
OPINION
V.
SHAI HARMELECH pro Se, CABLE
AMERICA, INC., d/b/a SATELLITE
AMERICA and USA SATELLITE &
CABLE, INC.,
Defendants.
KEVIN MCNULTY, U.S.D.J.:
The plaintiff, W. James Mac Naughton, an attorney, was retained by the
defendants, Cable America, Inc., d/b/a Satellite America, USA Satellite &
Cable, Inc. (together “Cable America”), and Shai Harmelech. Mac Naughton
represented the defendants in a matter before the United States District Court
for the Northern District of Illinois. This New Jersey federal court action, now
pending for some seven years, concerns nonpayment of an outstanding balance
for legal services. The original debt, modest by the standards of federal court
litigation, has been overshadowed by litigation over the aggressive procedures
by which Mac Naughton sought to collect it.
Now before the Court are three motions: Defendants’ motion to dismiss
Mac Naughton’s Second Amended Complaint (ECF No. 382)1; Mac Naughton’s
motion for summary judgment under Federal Rule of Civil Procedure 56 (ECF
The motion to dismiss, filed by Harmelech, has been joined by Cable America.
(ECF No. 378)
I
1
No. 379); and Cable America’s motion for summary judgment under Rule 56.2
For the reasons stated below, I will deny the motion to dismiss, grant in part
and deny in part the summary judgment motions, and dismiss counts one,
two, and five without prejudice as moot.
I.
BACKGROUND
I here recite the essential chronology. Further facts are referred to in the
3
legal discussion.
Harmelech does not appear to have responded to Mac Naughton’s motion or
joined Cable America’s motion.
Defendants, in support of their factual contentions, cite some deposition
excerpts, but cite primarily to their own answer. The opponent of a properly supported
motion for summary judgment cannot rest on its pleadings. I have nevertheless
reviewed the record of the case in order to determine whether a genuine, material
is sue of fact is presented.
2
Citations to the record will be abbreviated as follows:
“2AC”
—
Second Amended Complaint (ECF No. 61).
“2AC Ex.”
Exhibits to the 2AC (ECF Nos. 61—1 to 61—6).
—
“Answer 2AC”
No. 71).
“Def MTD”
—
—
Answer, Affirmative Defenses and Counterclaims to 2AC (ECF
Defendants’ Motion to Dismiss the 2AC (ECF No. 382).
Defendants’ Reply Brief in Support of their Motion to
“Def MTD Reply”
Dismiss the 2AC and attached exhibits (ECF Nos. 391, 391—1).
Brief in Support of Plaintiffs Motion for Summary Judgment
“P1 MSJ Br.”
(ECF No. 379—2).
Defendants’ Brief in Opposition to Plaintiffs Motion for
“Def Opp. MSJ”
Summary Judgment (ECF No. 388).
—
—
—
“P1 Facts”
—
Plaintiffs Statement of Material Facts (ECF No. 379—3).
Plaintiffs MSJ Exhibits (ECF Nos. 379—6 to 379—38), attached
“P1 MSJ Ex.”
to the Certification of W. James Mac Naughton (“Mac Naughton Cert.”) (ECF No. 379—
4).
Brief in Support of Defendants’ Motion for Summary
“Def MSJ Br.”
Judgment (ECF No. 380-3).
—
—
Plaintiffs Brief in Opposition to Defendants’ Motion for
“P1 Opp. MSJ”
Summary Judgment (ECF No. 383).
—
2
A.
Parties
The plaintiff, W. James Mac Naughton, is a New Jersey resident, licensed
to practice law in this State. (Def Facts
¶
1; P1 Facts ¶2) He has over three
decades of experience with the satellite television industry. (Id.)
Defendant Shai Harmelech is an Illinois resident. (Def Facts
¶
2) Cable
America, Inc., and USA Satellite & Cable, Inc., are Illinois corporations with
their principal places of business in Illinois. (Def Facts
¶J
3—4) Defendants
distributed Russian language programming over satellite TV in the Chicago
metropolitan area. (P1 Facts
B.
¶
8)
The Representation
In 2009, defendants were parties to a case in the Northern District of
Illinois captioned Russian Media Group, LLC v. Cable America, Inc. et al, Civ.
No. 06—3578. (P1 Facts
9; Def Facts
¶
¶
6) (I will refer to this as the “Illinois
action.”) In May 2009, defendants retained Mac Naughton to represent them in
that case. The retainer agreement provided that Mac Naughton would charge
$300 per hour plus costs, expenses, and disbursements. (P1 Facts ¶j 14—15;
Def Facts ¶ 6; P1 MSJ Ex. A (ECF No. 379—6)) Expenses were defined to include
out of pocket costs, such as flights, hotels, and meals; interest for unpaid bills
was set at 1% per month; and New Jersey was designated as the forum for
“Def Facts”
Defendants’ Statement of Material Facts (ECF No. 380—1).
“Def MSJ Ex.”— Defendants’ MSJ Exhibits (ECF Nos. 380—5 to 380—i 1).
—
“P1 Response Facts”
“Harmelech Dep.”
(ECF No. 379—35)).
—
—
Plaintiff’s Response to Def Facts (ECF No. 384).
Transcript of the Deposition of Shai Harrnelech (P1 Ex. CC
“Mac Naughton Dep.”
Transcript of the Deposition of W James Mac
Naughton (DefEx. B (ECF No. 380-6)).
—
“Korniczky Dep.”
(ECF No. 379—34)).
—
Transcript of the Deposition of Paul J. Korniczky (P1 Ex. BB
“30(b)(6) Dep.”
Transcript of the Deposition of Shai Harrnelech on behalf of
Cable America (P1 Ex. AA (ECF No. 379-33)).
—
3
disputes arising out of the representation. (P1 MSJ Ex. A) During the
representation, Mac Naughton was privy to what defendants regarded as
privileged and confidential information, including the fact that defendants were
in violation of an escrow order entered by the Illinois federal court. (P1 Facts
18; Def Facts
¶
¶
7) Paul Korniczky of the Chicago law firm Leydig, Voit & Mayer,
Ltd., served as cocounsel with Mac Naughton in that Illinois action, and
represented defendants in their negotiations with Mac Naughton over fees
owed. (P1 Facts
¶
17)
Mac Naughton represented the defendants between May 7, 2009, and
July 16, 2009. During that time, he billed defendants for 333.2 hours of work
at $300 per hour and $8,712.28 in out of pocket costs. The total bill was
$108,132.28. (P1 Facts
¶
20; Def Facts
¶
8; P1 Response Facts
¶
8) In June
2009, USA Satellite delivered to Mac Naughton three checks totaling $37,000,
but these were returned by their bank for insufficient funds. (P1 Facts
¶J
23—
24) On July 16, 2009, Mac Naughton suspended work for the defendants based
on an unpaid balance of $65,000.4 (P1 Facts
¶J
25—26)
On July 16, 2009, Mac Naughton sent defendants a letter demanding
payment plus an advance within a week, and threatening to apply to the court
to withdraw from the case. In the letter, he also advised defendants of their
right to fee arbitration pursuant to New Jersey Court Rule 1 :20A, and asserted
an attorney’s lien on the papers and electronic files in his possession. (P1 MSJ
Ex. E. 1 (ECF No. 379—10)) Harmelech refused to pay Mac Naughton,
5
contending that Mac Naughton overcharged defendants. (P1 Facts
¶
30) In his
deposition, Harmelech stated that he did not pursue fee arbitration “because it
Through various payments in 2009, defendants had paid down the balance
from $108,132.28 to $65,000. (Mac Naughton Cert. ¶ 15)
‘
Defendants continue to contend that they were overcharged in their statement
of facts. The deposition testimony to which they cite, however, consists only of Mac
Naughton’s testimony that he properly billed the defendants. (See Def Facts ¶J 25—26
(citing Mac Naughton Tr. 68:20—71:19, 122:22—123:25))
5
4
would take too long” and “looked complicated.” (Harmelech Dep. 142:24—
143:12) Harmelech also stated that he could have paid Mac Naughton from his
own funds or a bank loan but did not because he felt Mac Naughton “screwed”
him and it was “a scam.” (Harmelech Dep. 140:15—141:3, 195:11—196:13)
C.
The Agreements
The period from July 16, 2009, to August 12, 2009, culminated in the
execution of a security agreement and promissory note. The parties disagree,
however, as to how to characterize this process. Mac Naughton claims merely
that “the parties entered into negotiations,” while Defendants claim that
Harmelech executed the agreements only “[in] response to repeated threats.” (P1
Facts
¶
31; Def Facts
¶
10)6 Mac Naughton admits that he advised Korniczky,
Defendants cite only to deposition transcripts, but Mac Naughton includes
email exchanges between the parties dating from August 2009. (P1 MSJ Exs. F—K (ECF
Nos. 379—12 to 379—17))
6
On August 4, 2009, for example, Mac Naughton wrote:
I am going to file an application to withdraw as counsel by the end of this
week. That application will state that I have not been paid a substantial
amount of money. Both the Court and RMG will infer that you are at the
end of your rope and calibrate their decisions accordingly. Good luck,
you’re going to need it.
(P1 MSJ Ex. F) On August 5th, Mac Naughton sent an email attaching an itemized bill
and explaining that nearly half of the bill was from time spent repairing damage from
defendants’ ill-advised actions or pursuing strategies with which Mac Naughton did
not agree. (P1 MSJ Ex. K) On August 10, Mac Naughton attached a draft of a motion to
withdraw that notified the court of the bounced checks and unpaid bills. That email,
however, also included a settlement offer with a payment plan, and an offer to file an
uncontested motion to withdraw based on “mutual consent.” Mac Naughton added:
I am going to get paid, with or without Shais cooperation. I would prefer
to exit on a civilized and gentlemanly note with Shai’s cooperation. But if
that is not forthcoming, then I will still get paid because getting and
collecting on judgments is a subject I know a lot about.
If Shai is going to accept this proposal, then he should wire the first $5K
by Wednesday. No wire = no deal.
(P1 MSJ Ex. G) In further emails up until the promissory note and security agreement
were signed, Mac Naughton repeated that he would file the original motion to
withdraw if the agreements were not signed. (P1 MSJ Exs. I—J)
5
who still represented the defendants, that if he had to sue to collect the money,
he had “the right to use and reveal any of the secrets and confidences of
[djefendants necessary to collect.” (P1 Facts
¶
37) Mac Naughton added that
Korniczky understood those “confidences” could include the defendants’
delivery of bad checks and their failure to comply with an escrow order in the
Illinois action. (Id.) Harmelech, testifying on behalf of Cable America, said he
was afraid he was “going to look like shit in front of the judge.” (30(b)(6) Dep.
235:25—236:14) In his deposition, Mac Naughton explained that he believed the
judge in the Illinois case would be unsympathetic to a lawyer who attempted to
withdraw based on nonpayment alone. The bounced checks, however, would
(he believed) impress upon the court that there were “irreconcilable differences”
warranting withdrawal. (Mac Naughton Dep. 96:15—97:4)
Korniczky represented Harmelech and Cable America in the negotiations
with Mac Naughton. (P1 Facts
¶
31) Harmelech told Korniczky that he did not
have the money to pay Mac Naughton and wanted to set up a monthly payment
plan. (Korniczky Dep. 74:4—17, 75:18—22, 8 1:2—13) Eventually the parties
agreed to and executed a promissory note in the amount of $65,879 with 12%
annual interest, a security agreement, and a second retainer agreement. (P1
MSJ Ex. L (ECF No. 379-18))
The security agreement purported to give Mac Naughton “a security
interest in in all of the [defendants’] right, title and interest in any and all real
or personal property wherever located.” It provided that Mac Naughton was
authorized to sign on defendants’ behalf “any UCC- 1 or other documents
reasonably necessary to perfect the security interest.” (Id. at 3
¶
1) It also
contained a severability clause, and required defendants to pay reasonable
attorney’s fees and expenses. It selected New Jersey as the forum for disputes
arising out of the agreement. (Id. ¶j 4—5) Additionally, a schedule of payments
from August 2009 through March 2010 was attached. (Id. at 5)
Mac Naughton filed a UCC- 1 financing statement in the State of Illinois
immediately after the agreements were signed. (P1 MSJ Ex. M (ECF No. 379—
19)) He returned to defendants the property over which he had claimed an
6
attorney’s lien. (P1 Facts ¶56) On August 15, 2009, defendants paid Mac
Naughton an initial instalment of $5,000 pursuant to the payment schedule.
7
(P1 Facts
D.
¶
60)
Further Disputes
Defendants did not make their next scheduled payment in September
2009. (P1 Facts
¶
61) Mac Naughton notified defendants that all payments were
accelerated pursuant to the security agreement. About a week later, he filed a
motion to withdraw as counsel and for leave to intervene in the Illinois action
as a cross-claimant against the defendants. (P1 Facts
¶J
62—63)
On October 2, 2009, Mac Naughton sent out notices of disposition of
collateral and scheduled an auction to sell defendants’ assets on October 23,
2009, pursuant to Illinois UCC—1
No. 379—2 1); P1 Facts
¶J
§
9—6 10 (810 ILCS 5/9—6 10). (P1 Ex. 0 (ECF
65—66; Def Facts
¶
11) On October 16, 2009,
defendants’ attorney, Donald Spak, sent a cease and desist letter to Mac
Naughton, stating that the Security Agreement was not enforceable under
Illinois UCC
§
9—203 (810 ILCS 5/9—203) and 9—108(c) (810 ILCS 5/9—108)
because the description of collateral was supergeneric. (2AC Ex. E (ECF No.
8
6 1—5)) Spak also requested that Mac Naughton process a termination
statement for the filed financing statement pursuant to Illinois UCC
§
9—513
(810 ILCS 5/9—5 13), which defendants argued was filed without their
authorization. (Id.) Mac Naughton responded that he disagreed with
defendants’ legal conclusions and that defendants “gave me a security interest
Defendants paid Mac Naughton $10,000 on June 26, 2009, and $2,400 on
July 29, 2009 (or June 29 and July 30). This occurred after they had sent the bounced
checks but before they signed the security agreement. (Def Facts ¶ 27; P1 Response
Facts ¶ 27; see Mac Naughton Cert. ¶ 15)
Mac Naughton contends that this was the first time defendants advised him
that they regarded the collateral description as too broad. (P1 Facts ¶ 45) Korniczky
testified that Harmelech told him at the time they signed the agreement that “he knew
it was not a good security agreement” because “[ijt was too broad or too general.”
(Korniczky Dep. 100:5—15)
8
7
in everything they own.” (2AC Ex. F (ECF No. 6 1—6)) Mac Naughton cancelled
the auction, but never filed a termination statement. (P1 Facts ¶j 72—73)
Defendants claim that despite multiple written warnings, Mac Naughton
continued to harass their customers and clients. (Def Facts
¶
21) Mac
Naughton claims that, after receiving the Spak letter, he advised all third
parties with whom he communicated that the defendants disputed the
enforceability of the security interest. (P1 Facts
¶
71)9
Defendants paid Mac Naughton $8,500 on November 27, 2009, $5,000
on December 29, 2009, and $6,100 on November 18, 2010. (P1 Facts
¶
76)10
Mac Naughton states that as of November 14, 2014, defendants owed him
$61,942: $48,569 owed as of the last payment in November 2010, and $13,373
in interest. (P1. Facts
¶
77; P1 MSJ Ex. Z (ECF No. 379—32))” Defendants claim
that they paid Mac Naughton $37,000 to make up for the bad checks, but that
Mac Naughton did not credit them properly. (Def Facts
¶f
27_30)12 In his
On July 28, 2011, before this case was reassigned to me, Judge Salas
temporarily restrained Mac Naughton from contacting Harrnelech’s customers. (ECF
Nos. 119, 122) On March 30, 2012, Judge Salas dissolved those temporary restraints.
(ECF No. 167)
Defendants state that they paid only $5,000, not $8,500, on November 27,
2009. (Def Facts ¶ 27) I will use Mac Naughton’s numbers, which are more favorable
to defendants.
10
Mac Naughton’s per diem interest rate of $9.178, running from the last
payment, is equivalent to a per annum rate of less than 12%. Again, because Mac
Naughton’s calculation is more favorable to the defendants, I will follow his
accounting. (See P1 MSJ Ex. Z)
‘
This is one of many instances of defendants’ blurring the amount owed under
the promissory note with the $37,000 in bounced checks that they sent. (See, e.g., Def
MSJ Br. § lI.c) Defendants claim to have repaid Mac Naughton the $37,000 that they
originally tried to pay with bad checks. They point out that an indictment brought
against Harmelech charging him with three counts of bad checks was dismissed once
Mac Naughton had received $37,000 in payments. (Def Facts ¶J 31—36; P1 Response
Facts ¶ 35) That $37,000 figure is the sum of the payments sent from defendants to
Mac Naughton after they sent the bounced checks: $10,000 on (or about) June 26,
$2,400 on (or about) July 29, $5,000 on August 15, $8,500 on November 27, and
$5,000 on December 29, all in 2009, and $6,100 on November 18, 2010. (See Def
12
8
deposition, Mac Naughton admitted to applying money paid to him by
defendants in November and December of 2009 towards new attorney’s fees
that he incurred in pursuing defendants for breach of the promissory note.
(Mac Naughton Dep. 108:16—109:10) He maintained that he had the right to
decide how to apply the money based on the language of the promissory note
and the security agreement.’ (Id. at 109:11—25) However, this disagreement
3
does not seem to pose a genuine issue. The accounting records that Mac
Naughton himself submitted show that he applied the payments of November
27, 2009, December 29, 2009, and November 18, 2010, to reduce the principal
and interest on the promissory note. (P1 MSJ Ex. Z)
E.
Relevant Procedural History
Mac Naughton brought this suit on October 26, 2009. (ECF No. 1) On
February 16, 2010, defendants brought a motion to dismiss the original
complaint. (ECF No.8) In September 2010, Judge Sheridan granted the motion
to dismiss as to count four, pertaining to the validity of the August 12, 2009
security interest. He held that the description of defendants’ personal property
was “supergeneric,” and that the agreement therefore did not create a valid
Facts ¶ 27; Mac Naughton Cert. ¶ 15; P1 Facts ¶IJ 60, 76) But that does not imply that
the $37,000, because paid “twice” (once by bad check), may be double counted against
the legal fees owed. The promissory note is the focus here, and it was not signed until
August 12, 2009. Any payments made before that date are not relevant to whether the
promissory note has been repaid. In fact all payments made prior to the signing of the
promissory note were applied to reduce the amount owed to Mac Naughton from
$108,132.28 to $65,000. See note 4, supra. That is why the parties entered into a note
for only $65,000, rather than the amount originally owed.
Mac Naughton’s accounting records show that payments from the defendants
after the promissory note was signed were subtracted from the amount owed. As of the
filing of this motion, a balance of $61,942 was still outstanding. (P1 MSJ Ex. Z)
The promissory note states that “Maker shall be liable for all reasonable
attorney[9s fees and costs arising out of the collection or enforcement of this Note and
Security Agreement.” (P1 MSJ Ex. L at 6) The security agreement states that “Maker
agrees to pay Holder’s reasonable attorney[’]s fees and expenses for all matters arising
out [ofi enforcement of this Security Agreement.” (Id. at 3 ¶ 5)
9
security interest under the Illinois Commercial Code. Mac Naughton v.
Harmelech, No. CIV. 09—5450, 2010 WL 3810846, at *45 (D.N.J. Sept. 22,
2010) (ECF No. 35 at 8—10).
Mac Naughton filed an amended complaint the next day (ECF No. 37)
and filed the now-operative second amended complaint (“2AC”) in December
2010. Defendants filed an answer to the 2AC; that answer includes
counterclaims, which are also at issue in these motions.
After this case was reassigned to Judge Salas, Mac Naughton filed a
motion for leave to file a third amended complaint. (ECF No. 123) Judge Salas
denied that motion on grounds of undue delay and bad faith. (ECF No. 167 at
4—7) Specifically, Mac Naughton attempted to add a new count seeking a
declaratory judgment validating an “amended security agreement,” which
described certain specific certain items of defendants’ personal property. (Id. at
3_4)14
Mac Naughton claimed that the language of the security agreement gave
him the right to unilaterally amend the agreement, and that he had done so to
perfect his security interest. (Id. at 5) Judge Salas did not weigh in on whether
the contract gave Mac Naughton this authority, but held that he unduly
delayed in bringing this claim, and that it was a bad faith effort to circumvent
Judge Sheridan’s ruling. (Id. at 46)15
After the case was reassigned again to this Court (ECF No. 190), the
parties filed the current motions to dismiss and for summary judgment.
F.
The Current Seven Claims and Four Counterclaims
Mac Naughton’s 2AC contains seven claims for relief:
In the 2AC, Mac Naughton alleges two causes of action that similarly attempt
to remedy the original security agreement. Mac Naughton asks this Court to reform
the security agreement or grant him an equitable lien. (2AC Counts 6, 7)
‘5 Judge Salas noted that “[p]laintiff has failed to direct this Court to any case
law in support of his contention that he is entitled to unilaterally amend the central
agreement to a litigation after that litigation has commenced, much less after that
agreement has been deemed invalid.” (Id. at 6)
14
10
Count 1: violation of the 720 ILCS 5/17—i prohibition against issuing
bad checks (2AC
Count 2: fraud (2AC
¶J 30—34);
¶ 35—4 1);
Count 3: breach of the promissory note’ (2AC
6
¶J 42—46);
Count 4: declaratory judgment on the sufficiency of the security interest
language in the security agreement (2AC
¶J 47—56);’7
Count 5: breach of the May 2009 retainer agreement (2AC ¶J 57—63);
Count 6: reformation of the promissory note and security agreement
(2AC
¶J 64—73);
Count 7: equitable lien (2AC
¶J 74—79).
Defendants’ answer to the 2AC contains four counterclaims:
Count A: damages under Illinois UCC
§ 9—625(b) (810 ILCS 5/9—625) for
acting without a commercially reasonable disposition under
Illinois UCC 9—610 (810 ILCS 5/9-610);
Count B: damages under Illinois UCC
UCC
§ 9—625(e)(3) for violating Illinois
§ 9—509 (810 ILCS 5/9—509) by filing a financing
statement without authority;
Count C: damages under Illinois UCC
§ 9—625(e)(4) for failing to file a
termination statement as required by Illinois UCC
§ 9—5 13(c)(4)
(810 ILCS 5/9—513);
Count D: damages under Illinois UCC
§ 9—625(c)(2) for failing to comply
with secured party’s UCC obligations in regards to consumer
goods.
Count 3 is not entirely clear, but this is my interpretation of the claim
intended to be asserted.
16
This is the count that was dismissed by Judge Sheridan. Mac Naughton
continues to allege it to “preserve appellate review.” (2AC at 8 n. 1)
17
11
II.
MOTIONS DIRECTED TO THE SEVEN CLAIMS IN THE 2AC
Mac Naughton, as plaintiff, moves for summary judgment on counts
three, six and seven of the 2AC. (See P1 MSJ Br.) He acknowledges that, should
summary judgment be granted as to count three, then counts one, two and five
of the 2AC can be dismissed without prejudice as moot. (P1 MSJ Br. 39 & n.15;
P1 Opp. MSJ 9 n.7) Defendants make mirror-image motions for summary
judgment dismissing all counts of the 2AC. They also move to dismiss the 2AC
for lack of standing, claiming that Mac Naughton has assigned all of his claims
to another entity.
A.
Motion to Dismiss for Lack of Standing
Defendants bring a motion to dismiss the second amended complaint,
contending that Mac Naughton lacks standing because he assigned his claims.
I will treat it as a Rule 12(b)(1) motion.
In their opening brief, defendants cite to exhibits that they do not attach.
(Def MTD at 1—2) To their reply brief defendants attach a complaint from a
different matter (Def MTD Reply Ex. 1). Defendants claim that this complaint
demonstrates that Mac Naughton has assigned all of his claims to another
entity. They do not attach or cite to the assignment itself, and the exhibit is
submitted improperly as a mere attachment to a brief. What is more,
defendants have slipped this material into their reply, giving plaintiff no
opportunity to respond to it. Defendants have not attempted to support their
contentions factually, nor have they incorporated them into their summary
8
judgment motions or opposition.’
If I were to consider that complaint, I could not give it the significance that
defendants assign to it. Count 1 of that complaint alleges that “Plaintiff Mac Naughton
has assigned to Plaintiff Casco Bay his claims for breach of the Non-Assignment
Clause and First Amended Security Agreement by Defendant USA Satellite arising out
of the Leydig Assignment as stated in this Count.” (ECF no. 391 at 14 ¶ 49) The claim
“stated in this Count” is that “USA Satellite breached the Non-Assignment Clause and
First Amended Security Agreement by directing and authorizing the Leydig
18
12
In short, there is no clear showing that would permit dismissal of the
2AC on standing grounds.
B.
Summary Judgment Standard
Federal Rule of Civil Procedure 56(a) provides that summary judgment
should be granted “if the movant shows 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); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
248, 106 S. Ct. 2505 (1986); Kreschollek v. S. Stevedoring Co., 223 F.3d 202,
204 (3d Cir. 2000).
In deciding a motion for summary judgment, a court must construe all
facts and inferences in the light most favorable to the nonmoving party. See
Boyle v. County of Allegheny Pennsylvania, 139 F.3d 386, 393 (3d Cir. 1998).
The moving party bears the burden of establishing that no genuine issue of
material fact remains. See Celotex Corp. v. Catrett, 477 U.S. 317, 322—23, 106
S. Ct. 2548 (1986). “[W]ith respect to an issue on which the nonmoving party
bears the burden of proof
the burden on the moving party may be
...
discharged by ‘showing’—that is, pointing out to the district court—that there
is an absence of evidence to support the nonmoving party’s case.” Celotex, 477
U.S. at 325.
Once the moving party has met that threshold burden, the non-moving
party “must do more than simply show that there is some metaphysical doubt
as to material facts.” Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475
U.S. 574, 586, 106 5. Ct. 1348 (1986). The opposing party must present actual
Assignment.” (Id. ¶ 47) That appears to involve a judgment owed to USA Satellite, in
which Mac Naughton believes he possesses a security interest. If Mac Naughton had a
security interest, it must be by virtue of the security agreement (which Judge Sheridan
found to be unenforceable as supergeneric) or the second security agreement that Mac
Naughton purported to sign on defendants’ behalf (which Judge Salas declined to
consider as the basis for claims in this action). At any rate, whatever all this may
mean, it stops far short of a total assignment of claims that would deprive Mac
Naughton of standing to pursue the debt here.
13
evidence that creates a genuine issue as to a material fact for trial. Anderson,
477 U.S. at 248; see also Fed. R. Civ. p. 56(c) (setting forth types of evidence on
which nonmoving party must rely to support its assertion that genuine issues
of material fact exist). “[U}nsupported allegations
...
and pleadings are
insufficient to repel summary judgment.” Schoch v. First Fid. Bancorporation,
912 F.2d 654, 657 (3d Cir. 1990); see also Gleason v. Norwest Mortg., Inc., 243
F.3d 130, 138 (3d Cir. 2001) (“A nonmoving party has created a genuine issue
of material fact if it has provided sufficient evidence to allow a jury to find in its
favor at trial.”). If the nonmoving party has failed “to make a showing sufficient
to establish the existence of an element essential to that party’s case, and on
which that party will bear the burden of proof at trial,
...
there can be ‘no
genuine issue of material fact,’ since a complete failure of proof concerning an
essential element of the nonmoving party’s case necessarily renders all other
facts immaterial.” Katz v. Aetna Cas. & Sur. Co., 972 F.2d 53, 55 (3d Cir. 1992)
(quoting Celotex, 477 U.S. at 322—23).
C.
Count 3: Breach of the Promissory Note
The parties do not dispute that they both signed the promissory note.
Defendants argue, however, that they signed the agreement under duress and
that they have paid their debt to Mac Naughton.
1.
Duress
19
Under New Jersey law, a contract is voidable based on duress if a
contracting party is deprived of the exercise of free will because of wrongful
pressure or threats. Rubenstein v. Rubenstein, 120 A.2d 11, 13—15 (N.J. 1956).
“The act or conduct complained of need not be ‘unlawful’ in the technical sense
The promissory note and the security agreement both require consent to
jurisdiction in New Jersey courts for all matters arising out of their enforcement. (P1
MSJ Ex. L); see Ins. Corp. of frelancl v. Compagriie des Bauxites de Guinee, 456 U.S.
694, 703—04, 102 S. Ct. 2099, 2105 (1982). Additionally, the parties appear to agree
that New Jersey law governs, and cite New Jersey law as to all matters regarding the
contract.
19
14
of the term; it suffices if it is wrongful in the sense that it is so oppressive
under given circum[s]tances as to constrain one to do what his free will would
refuse.” Id. at 15 (internal quotation marks and citations omitted). In defining
“economic duress,” the Supreme Court of New Jersey has stated “that the
‘decisive factor’ is the wrongfulness of the pressure exerted.” Cont’l Bank of Pa.
v. Barclay Riding Acad., Inc., 459 A.2d 1163, 1175 (1983).20 “Economic duress”
is a difficult term to define, but the wrongfulness of the threat is an appropriate
place to start the analysis.
There is no “simple formula” to determine if a threat is wrongful, but the
New Jersey Supreme Court has looked to hornbook law for guidance:
One point has tended to become more certain: Where there is
adequacy of consideration, there is generally no duress....
Whenever a party to a contract seeks the best possible terms, there
can be no rescission merely upon the grounds of “driving a hard
bargain.” Merely taking advantage of another’s financial difficulty
is not duress. Rather, the person alleging financial difficulty must
allege that it was contributed to or caused by the one accused of
coercion.... Under this rule, the party exerting pressure is scored
only for that for which he alone is responsible.
Cont’l Bank, 459 A.2d at 1175—76 (quoting 13 Williston, Contracts
§ 1617 at
708 (3d ed. 1970)). See also Rubenstein, 120 A.2d at 14—15 (citing the
Restatement of Contracts and Williston in a case about threats of gangster
violence and arsenic poisoning); Miller v. Eisele, 168 A. 426, 429—30 (1933)
The Supreme Court of New Jersey quoted 13 Williston, Contracts § 1617 at
704 (3d ed. 1970)) to define economic duress: “1. [t)he party alleging economic duress
must show that he has been the victim of a wrongful or unlawful act or threat, and 2.
[s]uch act or threat must be one which deprives the victim of his unfettered will.” Id.
20
Whether the person had an adequate alternative remedy in the courts is a
relevant factor, but has been given reduced weight in recent case law. The Supreme
Court of New Jersey prominently featured the “adequate remedy” element in Ross Sys.
v. Linden Dari-.Delite, Inc., 173 A.2d 258, 261 (N.J. 1961) (“Payments are made under
duress when they are induced by the wrongful pressure of the payee and the payor
has no immediate and adequate remedy in the courts to resist them.”). In Cont’l Bank,
the Court did not overrule Ross Sys. or invalidate the “adequate remedy” factor, but
marginalized it to some degree.
15
(citing the Restatement of Contracts in a case about duress resulting from the
stock market crash of 1929).
The Restatement (Second) of Contracts lists two types of threats that are
potentially relevant here:
(1) A threat is improper if
(c) what is threatened is the use of civil process and the threat is
’
2
made in bad faith
(2) A threat is improper if the resulting exchange is not on fair
terms, and
(a) the threatened act would harm the recipient and would not
significantly benefit the party making the threat....
Restatement (Second) of Contracts
§ 176 (1981).
Comment d of the Restatement defines the section (1) (c) requirement of
“bad faith”:
The policy in favor of free access to the judicial system militates
against the characterization as improper of threats to commence
civil process, even if the claim on which the process is based
eventually proves to be without foundation. Nevertheless, if the
threat is shown to have been made in bad faith, it is improper. Bad
faith may be shown by proving that the person making the threat
did not believe there was a reasonable basis for the threatened
process, that he knew the threat would involve a misuse of the
process or that he realized the demand he made was exorbitant.
Restatement (Second) of Contracts
§ 176 cmt. d (1981).
A threat to sue a debtor for collection is the classic form of this type of threat.
See Warner-Lambert Pharm. Co. v. Sylk, 471 F.2d 1137, 1144 (3d Cir. 1972) (“New
Jersey cases have held that threats of legal proceedings to be instituted unless a party
executes a certain paper do not of themselves amount to legal duress.”). But threats
while litigation is ongoing, like those here, also require bad faith in order to be
considered improper. See Shine v. TD Bank Fin. Grp., No. CIV. 09—4377, 2011 WL
3328490, at *6 (D.N.J. Aug. 2, 2011) (no impropriety where there is “a legal right to
pursue attorneys’ fees, costs, and sanctions.”).
2I
16
Comment f gives some insight into the kind of quasi-blackmail that may
fall under section (2)(a). “A typical example is a threat to make public
embarrassing information concerning the recipient unless he makes a
proposed contract.” Restatement (Second) of Contracts § 176 cmt. f (1981).
Defendants claim that Mac Naughton overcharged them and then
threatened them with embarrassing revelations in his motion to withdraw from
representation in the Illinois action if they did not pay. Mac Naughton admits
that he conveyed to Korniczky, defendants’ attorney, that he might reveal to the
Illinois federal court the bounced checks and the violation of the escrow order.
(P1 Facts
¶
37; Def Facts
¶
9; Def Opp. MSJ at 5) Harmelech, testifying on
behalf of Cable America, claimed he was scared because he was “going to look
like shit in front of the judge.” (30(b)(6) Dep. 235:25—236:14)
I pause to note that this is not a case of an attorney’s taking advantage of
his client’s lack of legal acumen. Cocounsel, Korniczky, represented Harmelech
and Cable America in their negotiations with Mac Naughton over the unpaid
fees, and the “threat” seems to have been addressed to him. (P1 Facts
¶
31) The
parties’ dealings must be considered in that context.
Under 1(c), for the threat to be wrongful, Mac Naughton had to believe
that there was no reasonable basis for the threatened action. See Restatement
(Second) of Contracts
§
176 cmt. d (1981). Under 2(a), the threatened action
must have been calculated to harm defendants without significantly benefiting
Mac Naughton. See id. at cmt. f. Mac Naughton had a good faith reason for his
threat of revealing the bounced checks in his motion to withdraw. A lawyer
cannot withdraw from a pending case without leave of the court. The lawyer
must establish good cause, and even then may be ordered to remain. In his
22
The local rules in the United States District Court for the Northern District of
Illinois require an attorney of record to obtain leave from the court before withdrawing.
N.D. Ill. R. 83.17. Further, Illinois Rule of Professional Conduct 1.16 governs
declination or termination of representation of a client. In relevant part, it states:
22
17
deposition, Mac Naughton explained that the particular judge involved was
unsympathetic to the bare argument that the lawyer was not being paid. The
bounced checks were part and parcel of the fact that he had not been paid.
Mac Naughton felt that the bounced checks would impress upon the court that
there were “irreconcilable differences” that made withdrawal appropriate. (Mac
Naughton Dep. 96: 15—97:4) In short, this was more than mere failure to pay;
this could be construed as a client’s fraudulent behavior toward the lawyer. To
(b) Except as stated in paragraph (c), a lawyer may withdraw from
representing a client if:
(1) withdrawal can be accomplished without material adverse
effect on the interests of the client;
(2) the client persists in a course of action involving the
lawyer’s services that the lawyer reasonably believes is criminal or
fraudulent;
(3) the client has used the lawyer’s services to perpetrate a
crime or fraud;
(4) the client insists upon taking action that the lawyer
considers repugnant or with which the lawyer has a fundamental
disagreement;
(5) the client fails substantially to fulfill an obligation to the
lawyer regarding the lawyer’s services and has been given reasonable
warning that the lawyer will withdraw unless the obligation is
fulfilled;
(6) the representation will result in an unreasonable financial
burden on the lawyer or has been rendered unreasonably difficult by
the client; or
(7) other good cause for withdrawal exists.
(c) A lawyer must comply with applicable law requiring notice to or
permission of a tribunal when terminating a representation. When
ordered to do so by a tribunal, a lawyer shall continue representation
notwithstanding good cause for terminating the representation.
(d) Upon termination of representation, a lawyer shall take steps
to the extent reasonably practicable to protect a client’s interests, such
as giving reasonable notice to the client, allowing time for employment of
other counsel, surrendering papers and property to which the client is
entitled and refunding any advance payment of fee or expense that has
not been earned or incurred. The lawyer may retain papers relating to
the client to the extent permitted by other law.
18
cite it in connection with a motion to withdraw (or to state that one will do so)
meets the 1(c) test of good faith. It also meets the 2(a) test of being not
gratuitously harmful, but beneficial to Mac Naughton. Mac Naughton obviously
would suffer financially if he were forced to continue to work without being
paid. Defendants do not put forward any affidavit or evidence to the contrary.
Mac Naughton further argues that he was within his rights under the
Illinois and New Jersey Rules of Professional Conduct (“RPC”) to threaten to
reveal defendants’ confidences in order to collect a bill. (P1 MSJ Br. 14—15) The
Illinois RPC permits lawyers to reveal information, inter alia, “in a controversy
between the lawyer and the client” and “to comply with other law or a court
order.” Ill. RPC R. 1.6(b)(5—6); see also N.J. RPC R. l.6(d)(2, 4). “A threat to do
that which one has the legal right to do does not constitute duress unless the
right is abused or the threat made in bad faith.” 28 Williston on Contracts
§ 71:26 (4th ed.); see also Shine, 2011 WL 3328490, at *6 (threats within a
litigation are not improper where there is “a legal right to pursue” the
threatened activity). True, “conduct may be legal but still oppressive.” Cont’l
Bank, 459 A.2d at 1175. I find however, that Mac Naughton’s informing the
court that defendants gave him bad checks does not approach that standard of
oppressiveness. Nor is it wrongful to threaten to reveal that the defendants had
not complied with the court’s escrow order. Indeed, Mac Naughton as an officer
of the court may have had a duty to report his client’s disobedience of the
court’s order. At any rate, if Mac Naughton had been exceeding his legal rights,
it would have been natural for Korniczky as counsel to say so, and to resist.
Defendants’ claim that Mac Naughton’s fee was too high, or that they
had no choice but to sign the agreement, rings especially hollow given the
availability of fee arbitration. Mac Naughton advised defendants of their right to
fee arbitration pursuant to New Jersey Court Rule 1:20A. (P1 MSJ Ex. E. 1) At
his deposition, Harmelech stated that he did not pursue fee arbitration
“because it would take too long” and “looked complicated.” (Harmelech Dep.
142:24—143:12) Defendants refused to arbitrate Mac Naughton’s fees and
19
instead chose an alternative solution: to put Mac Naughton off by signing the
promissory note and agreeing to pay him over time. Defendants are in litigation
because they very quickly abandoned the bargain they had made.
2.
Payments
Defendants do not factually support their claim that they have paid their
debt under the promissory note. Defendants claim to have paid $10,000 on
June 26, $2,400 on July 29, $5,000 on August 15, $8,500 on November 27,
and $5,000 on December 29, all in 2009. They claim to have paid $6,100 on
November 18, 2010. (See Def Facts
¶
27; Mac Naughton Cert.
¶
15; P1 Facts
¶J
60, 76) For purposes of this motion, I take those representations as true.
The promissory note was signed on August 12, 2009. The first two
payments, which predated the promissory notes, were not applied toward it.
The remaining payments, which came after, were applied to the balance of the
note. Thus the payment of $5,000 on August 15th was credited to the note
balance, reducing it from $65,879 to $60,879. (See P1 Facts
¶
40; P1 MSJ Ex. Z)
Likewise, the remaining payments ($19,600 in all) were credited against the
balance due on the promissory note. (See P1 MSJ Ex. Z)
Defendants’ claims that they were overcharged for legal services do not
raise a genuine, material issue. Count 3 is a suit on the promissory note, not a
claim of breach of the retainer agreement. If defendants contested the
underlying charges for services, they (on their own or through their counsel,
Korniczky) could have declined to sign the note, or they could have instituted
fee arbitration. They did not; instead, they entered into a binding agreement to
pay, which they breached. The promissory note is valid and not voidable.
Defendants have breached it by failing to pay plaintiffs according to its
schedule. I grant summary judgment to Mac Naughton and deny summary
judgment to defendants on count three.
Counts one, two, and five are alternative theories for collection of the
same amounts sought under count three. Mac Naughton has stated that, if
summary judgment is awarded on count three, then counts one, two, and five
20
are rendered redundant, and he will consent to their dismissal. (P1 MSJ Br. 39
& n. 15; P1
Opp.
MSJ 9 n.7) I will therefore dismiss counts one, two, and five
without prejudice.
D.
Count 6: Reformation of the Security Agreement
Mac Naughton asks the Court to reform the security agreement to correct
the portion that Judge Sheridan previously found invalid. See Mac Naughton,
2010 WL 3810846, at *45 (ECF No. 35 at 8—10). Judge Salas has all but
rejected this attempt to unilaterally reform the security agreement. (ECF No.
167 at 4—7) I nevertheless consider Mac Naughton’s argument.
Mac Naughton contends that a unilateral mistake can be a basis for
reformation of a contract when the non-mistaken party knew about the
mistake and kept silent. (P1 MSJ Br.
§ III.D) Mac Naughton’s view is not in
accord with New Jersey law.
Mutual mistake is of course a recognized basis for reformation of a
contract:
Reformation predicated upon mutual mistake requires that both
parties are in agreement at the time they attempt to reduce their
understanding to writing, and that the writing fails to express that
understanding correctly.... A general understanding that A will
purchase and B will sell some land-the identity, location and
extent to be subsequently determined-cannot be the basis for
reformation. The reason is because no understanding has been
reached with respect to the essential terms of the contract. Implicit
in the general understanding is the recognition that when the
parties arrive at the point of preparing an enforceable contract they
will specify the precise property to be conveyed.
St. Pius X House of Retreats, Salvatorian Fathers v. Diocese of Camden, 443
A.2d 1052, 1056 (N.J. 1982). But no claim of mutual mistake is made here.
Unilateral mistake is a far narrower basis for reforming a contract. It
requires “unilateral mistake by one party and fraud or unconscionable conduct
by the other.” Id. at 1055. See also Brodzinski v. Pulek, 182 A.2d 149, 153 (N.J.
Super. Ct. App. Div. 1962) (“[W]hen the written instrument fails to express the
real agreement or transaction
...
through the mistake of one party accompanied
21
by the fraudulent knowledge and procurement of the other, there may be
reformation.” (internal quotation marks and citations omitted)) Mac Naughton
gets off on the wrong foot in asserting that mere knowledge of the mistake and
silence is sufficient. Silence is not sufficient; the unilateral mistake doctrine
requires “fraud or unconscionable conduct.” Mac Naughton has failed to
establish such unconscionable conduct.
23
Indeed, even unconscionable conduct, standing alone, will not suffice.
“[Tjhere must be clear and convincing proof that the contract in its reformed,
and not original, form is the one that the contracting parties understood and
meant it to be; and as, in fact, it was but for the alleged mistake in its
drafting.” Brodzinski, 182 A.2d at 153 (internal quotation marks and citations
omitted)); see also St. Pius, 443 A.2d at 1056. Mac Naughton does not
demonstrate that the parties had any intent whatever as to the status of the
miscellaneous collateral that he now wishes to bring within the scope of the
amended security agreement.
Finally, even in established cases of unilateral mistake, reformation is
discretionary, not mandatory. Raiczyk v. Ocean Cnty. Veterinary Hosp., 377
F.3d 266, 270 (3d Cir. 2004).
It is well established that in order to rescind or reform an
agreement on the basis of a unilateral mistake, the following
essential elements must each be present: (1) the mistake must be
of so great a consequence that to enforce the contract as actually
made would be unconscionable; (2) the matter as to which the
mistake was made must relate to the material feature of the
contract; (3) the mistake must have occurred notwithstanding the
exercise of reasonable care by the party making the mistake, and
(4) the relief afforded must not seriously prejudice the other party,
except for loss of his bargain.
Mac Naughton cites In re Allegheny Int’l, Inc., 954 F.2d 167, 180 (3d Cir.
1992). That case, however, interprets Pennsylvania law. Mac Naughton also cites to
the Chancery Division opinion in Brodzinski v. Pulek, 174 A.2d 907, 911 (N.J. Super.
Ct. Ch. Div. 1961) The Appellate Division opinion, however, states New Jersey law just
as it is laid out in St. Pius, supra. Brodzinski, 182 A.2d at 153.
23
22
Fleming Companies, Inc. v. Thrifiway Medford Lakes, Inc., 913 F. Supp. 837,
843 (D.N.J. 1995); accord Raiczyk, 377 F.3d at 270 (“The power of reformation
should be used only when the mistake is material, when there would not be
prejudice to the other party (besides the loss of the bargain), and upon a
showing that the plaintiff exercised reasonable care.”) Mac Naughton has not
demonstrated any of those discretionary factors. He drafted this security
agreement and pressed it upon defendants; the responsibility for its defects is
his, and he cannot show that the equities tip in his favor.
For all of these reasons, I deny Mac Naughton’s motion for summary
judgment on count six, and grant defendants’ mirror-image motion for
summary judgment dismissing count six.
E.
Count 7: Equitable Lien
Mac Naughton makes a final attempt to salvage a security interest by
requesting that the Court impose an equitable lien on all of defendants’
personal property. (P1 MSJ Br.
§ III.E)
In New Jersey, an equitable lien “may be created by express executory
24
contracts relating to specific property
equity and conscience
...
...
[and] according to the dictates of
in certain cases where contribution or reimbursement
is enforceable in equity, including those involving fraud and innocent mistake.”
Temple v. Clinton Trust Co., 62 A.2d 690, 693 (N.J. 1948). “The whole doctrine
of equitable liens or mortgages is founded upon that cardinal maxim of equity
which regards as done that which has been agreed to be, and ought to have
been, done.” VRG Corp. v. GKN Realty Corp., 641 A.2d 519, 522 (N.J. 1994)
Mac Naughton cites some Illinois law to support his argument. (P1 MSJ Br.
21—24) Illinois law, like New Jersey law, provides that an equitable lien may arise
either from an express agreement regarding specific property or as a result of more
general equitable considerations. Shchekina u. Washington Mut. Bank, No. 08 C 6094,
2012 WL 3245957, at *6 (N.D. Iii. Aug. 7, 2012) (quoting Paine/ Wetzel Associates, Inc.
v. Gitles, 528 N.E.2d 358, 360 (Iii. App. Ct. 1988)).
24
23
(quoting Rutherford Nat. Bank v. H.R. Bogle & Co., 169 A. 180, 182 (N.J. Ch.
1933)).
The security agreement never specified the property in which Mac
Naughton desired a security interest. Mac Naughton, the drafter, merely
provided that he wanted a security interest in any and all property.
Furthermore, the equities do not favor Mac Naughton’s position. He
wrote the agreement and pressured defendants to sign it. (Mac Naughton Cert.
¶
24; see note 6, supra). In connection with getting them to sign, he boasted of
his expertise: “getting and collecting on judgments is a subject I know a lot
about.” (P1 MSJ Ex. G) It would not be equitable to repair a mistake foisted on
the other side by the mistaken party, Mac Naughton, for his own benefit. Thus,
I deny Mac Naughton’s request for summary judgment on count seven and I
grant defendants’ corresponding summary judgment motion to dismiss count
seven.
III.
MOTIONS DIRECTED TO THE FOUR COUNTERCLAIMS
The defendants’ four counterclaims, brought under the Illinois version of
the UCC, all relate to Mac Naughton’s efforts to obtain a security interest in aid
of collection of his fee. Defendants move for summary judgment on the first
three counterclaims; Mac Naughton, as counterclaim defendant, moves for
summary judgment dismissing all four.
A.
Counterclaim A: Damages Under 810 ILCS 5/9-625(b)
Defendants seek damages under 810 ILCS 5/9—625(b) for acting without
a commercially reasonable disposition under 810 ILCS 5/9-6 10.
Section 9—610(b) requires that “[ejvery aspect of a disposition of
collateral, including the method, manner, time, place, and other terms, must
be commercially reasonable.” 810 ILCS 5/9-610(b). Further, section 9-625 is
titled “Remedies for secured party’s failure to comply with Article.” Subsection
(b) states that “a person is liable for damages in the amount of any loss caused
by a failure to comply with this Article.” 810 ILCS 5/9-625(b). Defendants
24
claim that Mac Naughton’s assertion of an unenforceable security interest was
commercially unreasonable. (Def MSJ Br. 18) The parties cite no case law on
point and the Court is aware of none.
It is true that Mac Naughton sought to assert his security interest on the
terms mutually agreed to by the parties. He abandoned his attempt to dispose
of the property through auction, however, four days after defendants sent him
a letter contending that the security interest was invalid. (P1 Facts
¶f
69, 72)
There is no contention that, before receiving the letter, Mac Naughton took any
action inconsistent with a belief that he had a valid security interest. At any
25
rate, there has been no “disposition of collateral,” reasonable or otherwise, to
which this statute would apply. Thus I will grant Mac Naughton’s motion for
26
summary judgment as to defendants’ first counterclaim and deny defendants’
corresponding motion.
B.
Counterclaim B: Damages Under 810 ILCS 5/9-625(e)(3)
Defendants seek damages under 810 ILCS 5/9—625(e)(3) for violating 810
ILCS 5/9—509 by filing a UCC—1 financing statement without authority. Section
9-625(e)(3) grants statutory damages for each instance that a person files a
financing statement without authority. 810 ILCS 5/9—62 5(e)(3).
Section 9-509 permits the filing of an initial financing statement if, inter
alia, “the debtor authorizes the filing in an authenticated record or pursuant to
subsection (b)” 810 ILCS 5/9-509(a). Subsection (b) states, in relevant part,
“Commercial reasonableness is generally a question of fact and thus is not
appropriate for determination on a motion for summary judgment. However, where
facts are undisputed, the question of reasonableness becomes one of law.” In re Estate
of Nardoni, 2014 IL App (1st) 131075-U, 2015 WL 1514908 at *8 (Iii. App. Ct. March
31, 2015) (internal citation omitted).
25
The record for these motions contains only the original security agreement.
Defendants also complain that Mac Naughton, even after terminating the auction,
acted unreasonably in contacting their customers. The subject matter of this statute,
however, is confmed to dispositions of property, and no such disposition is alleged.
26
25
“[bjy authenticating or becoming bound as debtor by a security agreement, a
debtor or new debtor authorizes the filing of an initial financing statement.”
Here, there was of course a security agreement. (P1 MSJ Ex. L at 3
¶
1)
The court was provided no relevant case law, and found none, regarding a
financing statement based on a security agreement later held invalid because
of a supergeneric description of property. Mac Naughton filed the financing
statement on August 12, 2009, immediately after the security agreement was
finalized. (P1. Facts
¶
46; P1 MSJ Ex. M) At that point, the security agreement
had just been mutually agreed to, and had not been challenged or found
invalid. Judge Sheridan did not rule that the language was supergeneric until
September 22, 2010. (Def Facts
¶
22) Because Mac Naughton was currently
authorized to file the financing statement when he filed it on August 12, 2009,
he did not violate section 9—625(e)(3). I grant Mac Naughton’s motion for
summary judgment dismissing defendants’ second counterclaim and deny
defendants’ corresponding motion.
C.
Counterclaim C: Damages Under 810 ILCS 5/9-625(e)(4)
Defendants seek damages under 810 ILCS 5/9—625(e)(4) for failing to file
a termination statement as required by 810 ILCS 5/9—513(c)(4).
Section 9—513(c) states:
(c) Other collateral. In cases not governed by subsection (a), within
20 days after a secured party receives an authenticated demand
from a debtor, the secured party shall cause the secured party of
record for a financing statement to send to the debtor a
termination statement for the financing statement or file the
termination statement in the filing office if:
(4) the debtor did not authorize the filing of the initial financing
statement.
810 ILCS 5/9-513. Section 9-625(e)(4) grants statutory damages for each
instance that a person fails to file a termination statement as required by
section 9-513. 810 ILCS 5/9—625(e)(4).
26
Defendants demanded a termination statement from Mac Naughton in
their October 16, 2009 letter (2AC Ex. E at 3), and again on October 15, 2010,
after Judge Sheridan’s ruling (Def Facts
¶
24; P1 Response Facts
¶
24). Mac
Naughton has not filed a termination statement as to the financing statement
filed on August 12, 2009. (P1 Facts
¶
73)
Defendants, rightly or wrongly, “authorize[d] the filing of the initial
financing statement.” 810 ILCS 5/9—51 3(c)(4). Judge Sheridan’s subsequent
ruling does not change the fact that they signed the security agreement on
which the initial filing was based. Defendants do not have a claim under
section 9—513(c)(4). I grant Mac Naughton’s motion for summary judgment
dismissing defendants’ third counterclaim and deny defendants’ corresponding
motion.
D.
Counterclaim D: Damages Under 810 ILCS 5/9-625(c)(2)
Defendant seeks damages under 810 ILCS 5/9—625(c)(2) for failure to
comply with a secured party’s UCC obligations in regard to consumer goods.
27
“Consumer goods’ means goods that are used or bought for use primarily for
personal, family, or household purposes.” 810 ILCS 5/9-102. Harmelech,
testifying on behalf of Cable America, stated that he and Cable America owned
no consumer goods in Illinois. (30(b)(6) Dep. 169:14—170:11) Defendants
provide no facts to contradict this, and they do not support their fourth
counterclaim in any way. Thus, I grant Mac Naughton’s motion for summary
judgment on the fourth counterclaim.
Defendants do not mention this fourth counterclaim in any of their briefing
on either summary judgment motion. (See, e.g., DefMSJ Br.; DefOpp. MSJ)
27
27
IV.
CONCLUSION
Defendants’ motion to dismiss the 2AC for lack of standing is DENIED.
As to count three of the 2AC, Mac Naughton’s motion for summary
judgment is GRANTED, and Defendants’ corresponding motion for summary
judgment is DENIED. Counts one, two and five of the 2AC are DISMISSED
without prejudice as moot. Count four is DISMISSED for the reasons given by
Judge Sheridan. (See ECF No. 35.) As to counts six and seven of the 2AC,
Defendants’ motion for summary judgment is GRANTED and Mac Naughton’s
corresponding summary judgment motion is DENIED.
Mac Naughton’s motion for summary judgment is GRANTED as to all
four of defendants’ counterclaims. Defendants’ corresponding motion for
summary judgment as to their first three counterclaims is DENIED.
An appropriate order accompanies this Opinion.
Dated: July 13, 2016
‘LI
Hon. Kevin McNulty
United States District Judge
28
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