Indiana Commercial Foreclosure Law

Indiana Supreme Court Rules On Scope Of Trial Court's Authority In Proceedings Supplemental

This is a continued report on the pair of Branham cases, which have moved their way from the Perry Circuit Court to the Indiana Court of Appeals and most recently to the Indiana Supreme Court.  The cases deal with proceedings supplemental and garnishment, and they were the subject of my July 14, 2011 post "Indiana Trial Court Oversteps Its Authority In Proceedings Supplemental." 

The Indiana Supreme Court handed down its decisions in the two matters on August 30, 2011:  .pdf1 and .pdf2.  This means that the two opinions cited in my July 14th post have been vacated.  The Supreme Court agreed with the Court of Appeals with regard to (1) the reversal of the trial's court's order requiring the judgment debtor to seek employment or to seek better employment and (2) the upholding of the trial court's order for the judgment debtor to return to court for status checks "some limited number of times." 

But the Supreme Court disagreed with the Court of Appeals and reversed the trial court's decision requiring the judgment debtor to pay $50 per month toward the judgment.  "For unrepresented parties in small claims court, resort to the generic exemption statute and the Social Security exemptions are not forfeited even if the litigants do no know enough to plead them." 

Again, the Branham opinions provide a good explanation of the purpose and scope of proceedings supplemental and garnishment, and they provide insight into the rights and remedies associated with a secured lender's effort to collect a deficiency judgment.  

Indiana Trial Court Oversteps Its Authority In Proceedings Supplemental

There are times when secured lenders need to utilize Indiana proceedings supplemental, for instance when they desire to recover a deficiency judgment from a borrower or, more likely, a guarantor.  A pair of Indiana Court of Appeals opinions, involving the same parties and decided on the same date, illustrate that trial courts have broad authority in proceedings supplemental but that such authority is not unlimited.  Branham v. Varble, 2010 Ind. App. LEXIS 1964 (.pdf) and 2010 Ind. App. LEXIS 1966 (.pdf) held that the trial court abused its discretion when it ordered the judgment debtors “to seek five jobs per week.” 

The appeal.  The Branham appeal arose out of the trial court’s order requiring the judgment debtors to pay $50 per month toward a judgment and the husband to conduct a job search by submitting five applications per week.  The judgment debtors appealed the ruling and based their appeal primarily upon Article 1, § 22 of the Indiana Constitution that states: 

The privilege of the debtor to enjoy the necessary comforts of life, shall be recognized by wholesome laws, exempting a reasonable amount of property from seizure or sale, for the payment of any debt or liability hereafter contracted: and there shall be no imprisonment for debt, except in case of fraud.

See also, Jail Time Is Not An Available Remedy In Collection Actions In Indiana.

Some controlling statutes.  The opinions suggest that the quoted portion of the Indiana Constitution formulated the basis for some of Indiana’s collection statutes, including Ind. Code § 24-4.5-5-105(2)(b) (exemptions from garnishment) and Ind. Code § 34-55-10-2 (property exempt from execution).

Affirmative action?  The interesting and perhaps novel issue in the two opinions surrounded the trial court’s order for the husband to “seek alternative employment by submitting five applications a week.”  The judgment creditor wanted the judgment debtors to increase their income so as to increase the amount available for garnishment.  The Court noted that proceedings supplemental’s origins are in equity and constitute a remedy “to the creditor for discovering assets, reaching equitable and other interest not subject to levy and sale at law and to set aside fraudulent conveyances.”  Ind. Trial Rule 69 and, in the Branham case, Indiana Small Claims Rule 11(C), governed.  Those rules give the trial court broad discretion in ordering payment terms. 

But Branham drew the line:

Keeping in mind T.R. 69 governing proceedings supplemental and S.C.R. 11, and based on the record before us, we cannot say that the garnishment order was a final judgment and that the trial court erred in requiring the Branhams to appear for a subsequent hearing for proceedings supplemental.

With that said, we nevertheless conclude that the court overstepped its authority and abused its discretion when it required Quincy to seek alternative employment by submitting five applications a week.  As set forth above, the purpose of proceedings supplemental is to afford the judgment-creditor relief to which it is entitled under the terms of the judgment.  . . .  Here, the judgment-creditors are entitled to the payment of the money judgment rendered in their favor.  Although the court is afforded discretion in proceedings supplemental, we have found no authority that supports the trial court’s order requiring Quincy to seek alternate employment by submitting five applications a week. 

One interpretation of these two opinions is that, while trial courts have broad authority to enter orders impacting a judgment debtor’s income and assets, they cannot compel a judgment debtor to increase his or her wealth.  For example, courts can’t order defendants to get a job.  The Branham opinions are an interesting study in the purpose and scope of proceedings supplemental, and they provide secured lenders with a little flavor of their rights and remedies associated with enforcing a deficiency judgment.

Note:  The Indiana Supreme Court granted transfer on March 10th and issued opinions on August 30th.  Please see my September 23, 2011 post for more on this law.  

Set-Off Versus Garnishment: Rights To And Priorities In Deposit Accounts

Fifth Third Bank v. Peoples National Bank, 210 Ind. App. LEXIS 952 (Ind. Ct. App. 2010) (.pdf) outlines a plethora of legal principles related to judgment enforcement generally and garnishment proceedings specifically.  The opinion analyzes a priority dispute between one lender, which had a judgment lien in a checking account, and a second lender, which had a security interest in the same account.

The parties and the account.  An accounting firm, OMS, opened a checking account with Fifth Third.  Fifth Third also loaned OMS approximately $1.5MM, secured in part by the same account.  Years later, Peoples obtained a judgment against OMS in the amount of $64,000.  About the same time, OMS defaulted on the Fifth Third loan.  Fifth Third did not initially freeze the OMS checking account.  Meanwhile, Peoples initiated proceedings supplemental against OMS and named Fifth Third as a garnishee defendant.  Although Fifth Third did not at first disclose to Peoples that OMS had the account, it subsequently identified the account and froze it.  In a separate suit, Fifth Third soon thereafter got its own judgment against OMS.

Competing interests.  The Court in Fifth Third noted that, under Indiana law, a judgment creditor (here, Peoples) acquires an equitable lien “on funds owed by a third party [here, Fifth Third] to the judgment debtor [here, OMS] from the time the third party receives service of process in proceedings supplemental.”  The third party (here, Fifth Third) may be “liable for paying out funds in a manner inconsistent with the judgment creditor’s lien.”  On the other hand, Indiana recognizes a right of depositary bank (here, Fifth Third) to set-off any amounts owed to it with funds from its “indebted depositors’ [here, OMS’s] account after receipt of notice of garnishment proceedings.”  The pivotal rule proved to be:  a garnishing creditor (here, Peoples) “has no greater rights in the judgment debtor’s [here, OMS’s] assets than the judgment debtor does.” 

General rule of priority.  In Fifth Third, the “first in time is first in right” rule applied.  Fifth Third, a secured creditor with a perfected prior security interest in the deposit account, had rights that were superior to Peoples, a subsequent judgment (unsecured) creditor.  At the time of the loan default, OMS owed Fifth Third in excess of $470,000, which was the account balance at the time in question.  Once OMS defaulted, Indiana law entitled Fifth Third to exercise the remedy of self-help in order to apply the balance of the deposit account to the indebtedness owed under the security agreement.

Compelled to set-off?  Peoples asserted various equitable arguments against Fifth Third’s position.  Peoples contended that, by not immediately exercising the right to set-off, Fifth Third lost its superior priority status and should have been foreclosed from attempting to belatedly enforce its right to the account.  Under the UCC, a secured party holding a perfected security interest in a deposit account “may set-off or apply the balance of the deposit account to the loan obligation secured by the deposit account.”  Again, Peoples, the garnishing creditor, had no greater rights in OMS’s assets than did OMS.  OMS owed Fifth Third in excess of $1MM.  The OMS deposit account contained only $470,000.  As such, OMS’s rights in the deposit account “were extremely subject to” Fifth Third’s security interest.  According to Fifth Third, a failure to exercise set-off will not result in a subordination of those rights to the rights of a garnishing creditor.

Compelled to freeze?  Peoples also claimed that Fifth Third lost its superior priority status when Fifth Third continued to honor checks drawn on the deposit account after the OMS loan default.  Fifth Third’s security interest was automatically perfected by its “control” over the account.  Ind. Code § 26-1-9.1-104 provides that the requisite “control” over the account exists even if the debtor retains the right to direct the disposition of the funds in the account.  Fifth Third’s decision to allow OMS to reach the funds was not inconsistent with the required “control” for purposes of automatic perfection.  Banks have “the latitude to allow their indebted depositors to have reasonable access to funds, which may enable them to continue to operate and generate revenue that may be applied to their existing indebtedness.”  Under circumstances like those in Fifth Third, the failure to freeze an account that is subject to set-off will not permit a garnishing creditor to assume senior status.

 

Assets Cannot Be Frozen By An Injunction

As mentioned in my May 4, 2007 post “Nuclear Weapon of the Law" Unavailable to Creditor in Recent Case, getting a judgment is one thing; collecting it is another.  Secured lenders embroiled in commercial foreclosure litigation always focus upon their ability to collect any deficiency judgment, and defendant borrowers or guarantors may attempt to dispose of assets during the course of litigation.  The March 16, 2009 opinion by Judge Simon in Yessenow v. Hudson, 2009 U.S. Dist. LEXIS 21393 (N.D. Ind. 2009) reminds us that the law prohibits courts from freezing a defendant’s assets to protect the recovery of damages.  Indiana law offers a handful of remedies to deal with this concern, but an injunction is not one of them.

The situation.  The Yessenow case arose out of a business deal in which two doctors and a banker invested in a hospital.  Later, a venture capital company offered to purchase five of the hospital’s ancillary medical facilities through a sale/leaseback transaction, but the company required an initial security deposit of about $1,500,000 in case the hospital defaulted on any of the sale payments.  One of the doctors, Yessenow, who became the plaintiff in the litigation, posted the security deposit.  To do so, he obtained a letter of credit backed by a promissory note and secured by a mortgage on his condo in Chicago.  Yessenow and the two other investors (the defendants) entered into an indemnification agreement that they and the hospital would indemnify (reimburse) Yessenow for any losses incurred as a result of the loan.  A couple years later, the bank demanded a draw on the full amount of the letter of credit, and Yessenow filed suit for indemnification, which his partners/co-investors had refused to do.  In the action, Yessenow filed a motion for preliminary injunction to freeze those defendants’ assets.

No injunction.  One of the reasons Judge Simon denied Yessenow’s request for injunction, which sought a preliminary asset freeze, was the precedent set by the United States Supreme Court in Grupo Mexicano de Desarrolla v. Alliance Bond Fund, 527 U.S. 308 (1999):

[Trial courts have] no authority to issue a preliminary injunction preventing defendants from disposing of their assets pending adjudication of a plaintiff’s contract claim for money damages. 

The rationale behind this rule is that “until a creditor has established title, he has no right to interfere with the debtor’s property, and it would lead to an unnecessary, and perhaps, a fruitless and oppressive interruption of the debtor’s rights.”  Judge Simon concluded that the Grupo decision directly applied to this case.  Plaintiff Yessenow had sued the defendants for damages and had feared that they would secrete their assets or reinvest their money into other ventures to evade paying such damages.  “But fear that a debtor will avoid paying their debts is nothing new or exceptional.”  Hence the development and purpose of the law of fraudulent conveyances and bankruptcy. 

Other avenues for relief.  In Indiana, secured lenders cannot invoke a trial court’s equitable power to restrict a defendant’s use of his unencumbered property before judgment.  While a foreclosing lender could pursue the remedies of pre-judgment attachment and/or pre-judgment garnishment discussed in my 12-14-06 and 3-6-07 posts, pre-judgment remedies can be difficult and expensive to prosecute.  (Remember that, after the fact, Indiana’s Uniform Fraudulent Transfer Act at I.C. 32-18-2 may apply.)  Lenders may be better served to litigate their underlying actions as quickly as possible, and then utilize the post-judgment collection tools,  prescribed by Indiana statutes, that are readily enforced by Indiana’s courts.  The fact is - as frustrating as these situations may be, temporary restraining orders and injunctions are not the way to go.

Indiana Banks, As Garnishee Defendants, Need Not Restrict Withdrawal Of Subsequently-Deposited Funds

From time to time, the enforcement of secured loans will evolve into the collection of  deficiency judgments.  One of the available collection tools is a garnishment order.  The Indiana Court of Appeals in JPMorgan Chase v. Brown, 2008 Ind. App. LEXIS 1029 (Ind. Ct. App. 2008) (Chase.pdf) recently interpreted Ind. Code § 28-9-4-2 and addressed the question of whether a depository financial institution, which has received notice of garnishment proceedings, is required to restrict withdrawal of funds that are subsequently deposited into the account.  Surprisingly, the answer is no.

What happened.  Collection agency filed a motion for proceedings supplemental naming Chase as a garnishee defendant and asserting that Chase possessed deposit accounts in which the defendant/judgment debtor had an interest.  (A “garnishee” essentially is an entity, like a bank, that has money in its possession belonging to a defendant.)  In answers to interrogatories, Chase confirmed that the judgment debtor maintained an account with the bank that had a balance, as of March 5, 2007, of $20.61.  Furthermore, the bank confirmed that it immediately restricted the withdrawal of those funds.  Later, the judgment debtor made four deposits totaling over $1,000 to the account.  Because the collection agency sought about $2,200, the court signed an order requiring Chase to pay over to the clerk approximately $2,200 from the account.  Chase did not do so, however, and only restricted the account balance of $20.61.  The trial court thereafter found Chase in contempt and entered a judgment against Chase for $1,045.99, the balance of the account that included the subsequent deposits.  

Chase’s position.  On appeal, Chase argued that it only was required to restrict withdrawal of funds “in an amount equal to the balance of  [judgment debtor’s] account at the time [Chase] received notice of the garnishment proceedings.”  Chase based its contention on a 1998 amendment to the operative statute.

The statute.  I.C. § 28-9-4-2 provides in part that a depository financial institution shall restrict deposit account withdrawals in an amount equal to “the balance in the account at the time of receipt of the documents in process . . ..”  I.C. § 28-9-4-2(a)(2)(B).  The pre-1998 version of the statute specifically provided for restriction of additional funds “subsequently deposited into” the account.  When the legislature amended the statute, it deleted those words. 

When courts interpret statutes, their goal is to determine and give effect to the intent of the legislature.  In this case, the Court would “not simply re-read language into a statute that the legislature has deleted.”  The Court therefore held:

In light of the legislature’s amendment to I.C. § 28-9-4-2, we agree with [Chase] that the statute only required it to restrict withdrawal of the balance in [judgment debtor’s] account at the time it received the documents and process required by I.C. § 28-9-3-4(d).  The legislature’s decision to omit the words “or subsequently deposited into” from I.C. § 28-9-4-2 is irrefutable and, as required by the rules of statutory construction, we will not reinsert the omitted language into the statute when construing the statute.  Thus, we agree with [Chase] that the trial court erred by finding it in contempt for failing to restrict withdrawal of funds that were subsequently deposited into [judgment debtor’s] account. 

Odd result.  The Indiana Court of Appeals clearly did the right thing in this case.  The question for me is whether Indiana’s General Assembly did the right thing when, in 1998, it deleted from the operative statutory section the words “or subsequently deposited into” from the law.  The statutory amendment means that lenders attempting to collect deficiency judgments through the garnishment of judgment debtors’ bank accounts may need to issue multiple garnishment requests to the same bank.  Otherwise, the bank only is compelled to restrict the withdrawal of funds in the account at the time of a particular request.  While there may have been good reasons for the 1998 statutory amendment, the consequences for debt collectors – whether intended or not – appear to be unfavorable and impractical. 

INDEPENDENT CONTRACTOR EARNINGS ARE SUBJECT TO GARNISHMENT IN INDIANA

If as a secured lender you choose to pursue a deficiency judgment, one of the common options to consider is a garnishment proceeding.  Typically, we think of this in terms of garnishing “wages,” but the May 31, 2007 opinion by the Indiana Court of Appeals in Indiana Surgical Specialists v. Griffin, 2007 Ind. App. LEXIS 1151 explained that garnishment can include more than just wages. (ISSvGriffinOpinion.pdf). 

General rule.  Garnishment refers to “any legal or equitable proceedings through which the earnings of an individual are required to be withheld by a garnishee, by the individual debtor, or by any other person for the payment of a judgment.” Ind. Code 24-4.5-5-105(1)(b); Indiana Surgical at 3.  Earnings are “compensation paid or payable for personal services, whether denominated as wages, salary, commission, bonus, or otherwise, and includes periodic payments under a pension or retirement program.”  I.C. 24-4.5-1-301(9); Indiana Surgical at 4.  Addressing a federal counterpart to the Indiana statute, the United States Supreme Court in a 1974 case stated that garnishment should include “periodic payments of compensation.”  Indiana Surgical at 4.  Interestingly, the Indiana Court of Appeals adopted the “periodic payments of compensation” language even though it is not found in the Indiana statute. 

(The Court of Appeals dealt only with I.C. 24-4.5-5, the Uniform Consumer Credit Code, and the garnishment provisions therein.  The remedy of garnishment also is addressed generally in I.C 34-25-3 and Indiana Trial Rule 69(E).  I see no reason why the holding of Indiana Surgical would not apply to all garnishment actions in Indiana.)   

Application to independent contractors.  Indiana Surgical involved a judgment debtor that was an independent contractor of the garnishee defendant.  In other words, the debtor was not an employee and did not earn wages.  She was a courier who received a commission based on the deliveries made.  The Indiana Court of Appeals determined that the commissions were “periodic payments of compensation,” which constituted “earnings” subject to garnishment.  Id. at 4.

I suppose the common label “garnishing wages” really should be “garnishing earnings.”  The more important point here for commercial lending institutions pursuing deficiency judgments in Indiana is that you can institute proceedings supplemental against the principal of an independent contractor (agent) in order to seek satisfaction of the contractor’s debt.  The relief is not limited to an employer/employee scenario.

“NUCLEAR WEAPON OF THE LAW” UNAVAILABLE TO CREDITOR IN RECENT CASE

Getting a judgment is one thing; collecting it is another.  Creditors often are concerned about the ability to recover money from debtors that may have sufficient assets at the outset of a dispute but may squander those assets over the course of litigation.  As previously mentioned in this blog, there are a few remedies under Indiana law that address this very legitimate concern.  In a decision by Judge David F. Hamilton on March 20, 2007, another remedy, albeit one with virtually zero applicability to most commercial collection cases, is discussed - prejudgment injunctive relief.  The lesson J&J Wehner, Inc. v. H&L Plating & Grinding, Inc., 2007 U.S. Dist. LEXIS 24366 (S.D. Ind.) [WehnerOpinion.pdf] teaches us is that, unlike prejudgment attachment and garnishment, injunctive relief usually is not the answer.

Case background.  The dispute surrounded the sale of a chrome plating and grinding business.  As a part of the sale, the purchasers gave the sellers an installment promissory note in the sum of $866,000.  Not long after taking over the business, the purchasers learned that the site might have been contaminated with high levels of chromium and hexavalent chromium and that the sellers likely had actual knowledge of the contamination at the time of the sale.  Several employees told the purchasers that the sellers had disposed of chromium waste on the premises.  Remediation estimates were between $1.5 million and $2.25 million.  Due to the hefty environmental liability exposure, the purchasers stopped making payments on the note, which they claimed they were fraudulently induced to sign.  The note contained a warranty that the sellers were not in violation of any environmental laws affecting the properties or the business.  One issue in the case was whether the purchasers’ default could be excused due to the sellers’ fraud. 

Prejudgment relief requested.  Given the potential delays associated with litigating the claims, the sellers sought a preliminary injunction under Ind. Code § 34-26-1-5, ordering the purchasers, at the outset of the case, to pay all amounts due and owing under the note either directly to the sellers or into an escrow account with the court.  Wehner at 9.  The sellers’ objective was to secure satisfaction of the judgment they ultimately hoped to receive.  (Wishful thinking, perhaps, given the evidence of the environmental misconduct . . ..) 

Relief denied.  One of the elements to be established for preliminary injunctive relief is that the remedy at law must be inadequate - the injury cannot be rectified by the recovery of money.  As a general rule, a party that suffers “mere economic injury” is not entitled to injunctive relief because an award of damages is sufficient to make the party whole.  Id. at 10.  There are, however, “unusual” cases in which the collection of damages may be “impossible, uncertain or unusually difficult” so that a preliminary injunction should be available.  Id.  In this particular case, at issue was the demand for a pre-trial payment to a creditor on a disputed debt or, in the alternative, an impoundment of money to the court.  Such extraordinary relief can arise out of a procedural tool that the United States Supreme Court in Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308, 329 (1999) described as “the nuclear weapon of the law.”  Id. at 11.  The problem in Wehner was that, if the sellers prevailed on their underlying claim, the damages from the purchasers’ default would be entirely monetary and easy to quantify.  Although there was a legitimate concern that the purchasers might not be ready to pay the full damages when due, “that is often the case in civil litigation.”  Id. at 12.  Judge Hamilton held that the sellers “have not shown that their case is so compelling as to justify use of ‘the nuclear weapon of the law,’ a pre-judgment injunction ordering payment of a general creditor or freezing assets to protect a general creditor.”  Id. 

Fraudulent inducement.  Judge Hamilton also addressed, in part, whether the alleged fraud by the sellers could excuse nonperformance under the note.  The note was, in fact, an unconditional promise to pay according to its terms.  I.C. § 26-1-3.1-106(a).  But, in this case, the note was not in the hands of a holder in due course.  If it were, the purchasers’ fraudulent inducement defense would have no merit.  I.C. § 26-1-3.1-305(a)(1)(C) .  Because the purchasers were not holders in due course (defined in Indiana’s UCC at 26-1-3.1-302), common law defenses such as fraud in the inducement were available to them.  I.C. § 26-1-3.1-306.  Judge Hamilton denied the sellers’ motion for summary judgment on the defense and concluded that the fraudulent inducement issue must be tried.

In sum.  For commercial lending institutions concerned about the dissipation of the assets of their borrowers during a foreclosure proceeding, remedies such as pre-judgment attachment and/or garnishment may be viable.  Barring highly unique circumstances, however, an injunction is not.  A motion for a prejudgment order to pay money almost always will fail.  Lenders will be better served by prosecuting the underlying action as quickly as possible.  Once a judgment is obtained, courts are much more accommodating in terms of collection efforts. 

MORE ON PREJUDGMENT ATTACHMENT AND GARNISHMENT

Lenders wanting to freeze, before judgment, the assets of a fraudulent borrower, or a borrower trying to avoid collection efforts, will be interested in some of the rules outlined by the Indiana Court of Appeals in Squibb v. State of Indiana, 860 N.E.2d 904 (Ind. Ct. App. 2007), decided January 31, 2007. 

Hide and go seek.  The case arose out of an alleged investment scam in which the Securities Division of the State of Indiana targeted Marietta and Thomas Squibb, husband and wife.  About thirty-five investors had purchased promissory notes from the Squibbs either for the development of KOA camp grounds in Michigan or a condo project in Florida.  The investors were being paid late or not at all.  The matter dealt with alleged unregistered securities in violation of the Indiana Securities Act, so the State got involved.  Some of the facts that warranted prejudgment relief in the State’s favor included evidence that Mr. and Mrs. Squibb (1) had recently sold their home and were in the process of closing various bank accounts, (2) were living in an apartment and (3) had a bank account that had been open for six weeks and then closed.  Generally speaking, “it was becoming difficult for the State to track the Squibbs’ assets.”  Squibb at 15-16. 

Prejudgment attachment.  I discussed this remedy in my December 14, 2006 post Attachment:  The 8 Badges of Fraud.  Squibb is another opinion that comments upon Ind. Code § 34-25-2-1 and reminds us that attachment may be ordered only when the underlying action is for the recovery of money, which invariably will be the case in commercial foreclosure or lien enforcement suits.  In addition, at least one of six other statutory requirements must be met: 

1.  the defendant is a foreign corporation or a non-resident of Indiana;
2.  the defendant is secretly leaving or has left Indiana with the intent to defraud the defendant’s creditors;
3.  the defendant is concealed so that a summons cannot be served upon it;
4.  the defendant is removing or is about to remove the defendant’s property subject to execution, outside Indiana, not leaving enough behind to satisfy the plaintiff’s claim;
5  the defendant has sold, conveyed or otherwise disposed of the defendant’s property subject to execution with the fraudulent intent to cheat, hinder or delay the defendant’s creditors; or
6.  the defendant is about to sell, convey or otherwise dispose of the defendant’s property subject to execution with the fraudulent intent to cheat, hinder or delay the defendant’s creditors. 

(My December 14, 2006 post focused upon number 5.)  Again, only one of these needs to be established in order to obtain relief.  See also, T.R. 64(B).

Witness testimony versus affidavit.  An “affidavit” is a written statement of facts that is confirmed by the oath of the party making it.  It’s written testimony, as opposed to oral testimony in a courtroom or before a court reporter.  Affidavits are appropriate for many kinds of pre-trial proceedings, including motions for prejudgment attachment, even though they generally are inadmissible at trial.  “At this preliminary hearing, which is far from determinative of the eventual outcome of the suit, traditional rules of evidence do not apply, and affidavits, hearsay, and other evidence that may be later deemed inadmissible at trial may be received and considered as evidence.”  Squibb at 15, n. 8.  This rule is significant because a representative of the lender arguing for prejudgment attachment need not appear in court to testify in support of the motion.  Filing affidavits in lieu of live testimony saves time and expense.  (A lender or its lawyer may conclude it’s in the lender’s best interests to produce a live witness, however.)   

Prejudgment garnishment.  I.C. § 34-25-3, cousin to the attachment statute, governs prejudgment garnishment, which generally applies to property (usually money) held by third parties, like a bank.  (Attachment, on the other hand, generally relates to property held by the defendant/debtor.)  The defendants in Squibb correctly noted that the statute limits prejudgment garnishment to “personal actions arising upon contract” and that the underlying action was not such a case.  However, Indiana Trial Rule 64(B)(3), which also applied, authorizes the relief when the plaintiff is “suing upon a claim for money, whether founded on contract, tort, equity or any other theory . . ..”  The Indiana Court of Appeals held that the trial rule, which is broader in scope, carried the day.  (Memo to lawyers:  don’t forget the trial rules when searching for legal remedies.) 

Marital home not exempt.  Here is another tidbit from Squibb.  Mrs. Squibb argued that the marital home, which was held with her husband in tenancy by the entireties, was not subject to execution and therefore could not be attached.  The Indiana Court of Appeals, citing to I.C. § 34-55-10-2(c)(5), rejected the argument and concluded that, because both spouses were involved in the legal wrong, their home was subject to execution.  So when there is evidence that spouses are jointly liable in a case, the marital home is available to satisfy the judgment.  Squibb at 16, n. 9. 

Although the Squibb opinion dealt with securities violations, the remedies and procedures apply with equal vigor to commercial lenders who suspect a non-paying borrower is in the process of liquidating or hiding assets.  A motion for prejudgment attachment, for prejudgment garnishment, or both, may facilitate or increase a lender’s monetary recovery.

ATTACHMENT: THE 8 BADGES OF FRAUD

Few things are more frustrating to creditors than debtors transferring assets to affiliated entities in order to avoid collection efforts.  Such conduct was the subject of a November 14, 2006 decision by United States Magistrate Judge Christopher A. Nuechterlein of Indiana’s Northern District.  See, Lock Realty Corp. v. U. S. Health LP, 2006 U.S. Dist. LEXIS 84420 (N.D. Ind. 2006)-lock_opinion.pdf.    

The facts.  In a prior case, Plaintiff Lock Realty Corp. obtained a judgment in excess of $485,000 against defendant U.S. Health LP for breach of a lease.  Lock later added defendant Americare III LLC to the judgment because U.S. Health unlawfully assigned the lease to Americare, which was part of a single business enterprise with U.S. Health.  In fact, U.S. Health utilized roughly eighty-three entities to shelter itself from liability.  Lock then filed the current lawsuit against U.S. Health for additional damages (over $10 million) associated with lease breaches that occurred after the entry of the prior judgment.  About six weeks after Lock filed the second suit, U.S. Health sold four nursing home units to a third-party for approximately $3 million.  U.S. Heath transferred the sale proceeds to Heritage Medical Group, Inc., the managing partner of U.S. Health and one of the eighty-three entities that made up the U.S. Health enterprise. 

Attachment.  In an effort to prevent U.S. Health from concealing assets that may be available to satisfy a judgment in the second suit, as well as the judgment from the first case, Lock filed a motion to attach the proceeds of the $3 million sale.  Ind. Code § 34-25-2-1(b)(5) is the statute upon which Lock’s motion was based: 

   (b)  The plaintiff may attach property when the action is for the
  recovery of money and the defendant:

   (5)  has sold, conveyed, or otherwise disposed of the
   defendant’s property subject to execution, or permitted
   the property to be sold with the fraudulent intent to cheat,
   hinder, or delay the defendant’s creditors . . ..

Attachment generally means “the act or process of taking . . . property, by virtue of a . . . judicial order, and bringing the same into the custody of the court for the purpose of securing satisfaction of the judgment ultimately to be entered in the action.”  Blacks Law Dictionary.

Fraudulent intent.  The issue was whether U.S. Health acted with fraudulent intent to cheat, hinder or delay.  In Indiana, there are eight common law “badges of fraud” from which fraudulent intent in a given transaction may be inferred:

1. Transfer of property by the debtor during the pendency of a suit.
2. Transfer of property that greatly reduces the debtor’s estate.
3. A series of contemporaneous transactions that strip a debtor of all property available for execution.
4. Secret or hurried transactions not in the normal course of business.
5. Any transaction not conducted in the normal course of business.
6. A transaction conducted in a manner differing from customary methods.
7. Little or no consideration for the transfer.
8. A transfer of property between family members.

No single factor constitutes fraudulent intent.  Rather, the facts must be viewed together to determine how many badges of fraud exist and if together they amount to fraudulent intent.  (Keep in mind that attachment cannot occur in every case.  For instance, Microsoft may have multiple transactions ongoing during litigation, but those transactions aren’t necessarily fraudulent, in part because few if any transfers would render Microsoft judgment proof.)   

Magistrate Nuechterlien granted the motion for attachment because Lock established that several badges of fraud existed, including: 

• U.S. Health transferred property while the second suit was pending and while it had failed to satisfy the judgment from the first suit.
• The U.S. Health enterprise had been reduced by $3,000,000 after it sold four of its facilities.
• U.S. Health and Americare essentially were one entity, so property Americare transferred was subject to execution by Lock.
• The proximity of the final sale appeared “suspect and uncustomary.”
• U.S. Health had retained benefits of the transferred property because the proceeds were given to Heritage, simply another entity in the U.S. Health enterprise.  “This is no different than taking money out of one’s left pocket and putting in one’s right pocket.”

The lessons of Lock.  The Lock ruling reminds us that attachment can be a valuable tool in cases where a defendant is utilizing affiliate entities to hide money.  If you suspect that a borrower, during litigation, is burying assets in associated companies merely to avoid your collection efforts, look for the eight badges of fraud.  You might be able to freeze the assets pending the outcome of the suit. 

_______________

Update:  On September 14, 2009, Judge Miller issued a thirty-three page opinion in the Lock Realty v. U.S. Health case.  Click here for a .pdf of the order.  The decision outlines the procedural history, facts and substantive issues (both liability and damages) in the litigation.  The opinion isn't necessarily pertinent to my blog, but it does tell more of the story behind the case for those interested.