Indiana Commercial Foreclosure Law

Judgment Deemed Satisfied After Defendant Guarantor Utilizes Strawman To Purchase It

In commercial foreclosure actions, creative parties and counsel often reach unique settlements that satisfy the needs of both the lender and the borrower or guarantor(s). The case of TacCo v. Atlantic Limited Partnership, 937 N.E.2d 1212 (Ind. Ct. App. 2010) shows such creativity in action. TacCo is a lesson in satisfaction of judgments and the strawman defense, but the more interesting facet of the case is the maneuvering between co-guarantors over their shared exposure to a $3.2MM judgment.

Players. I’ll label the key players in TacCo as follows: Lender, Borrower, Strong Guarantor, Strawman and Weak Guarantor. “Strong” and “weak” signify that one of the co-guarantors seemingly had the financial capacity or willingness to pay the debt, while the other did not. Lender initiated a commercial mortgage foreclosure action against Borrower, Strong Guarantor and Weak Guarantor. The suit resulted in a judgment for $3.2MM.

Post-judgment settlement. Before the sheriff’s sale, Lender and Strong Guarantor entered into a settlement agreement that centered on Lender’s sale of the judgment for $1.5MM in cash, a $1.5MM promissory note and a $250,000 letter of credit. On paper, the settlement was conditioned upon Strong Guarantor’s ability to locate a purchaser of the judgment, which purchaser ended up being Strawman. Lender obtained the cash and promissory note, and Strawman obtained an assignment of the judgment. Strawman then submitted a credit bid at the sheriff’s sale for $1.5MM and acquired the subject property.

Purpose. Lender got paid off, but Weak Guarantor was not a part of the deal. Although Weak Guarantor and Strawman submitted conflicting evidence and theories, it appears that the settlement was structured to deliver Strong Guarantor the real estate and to expose Weak Guarantor to judgment enforcement (collection) efforts by Strawman.

Post-settlement motion. After the settlement occurred, Weak Guarantor filed a motion for entry of satisfaction of judgment. See, Ind. Trial Rule 67(B) . Weak Guarantor asserted that the judgment had been paid in full. Strawman contended that the judgment still existed and that, as the assignee of the judgment, it could collect the entire $1.7MM+ deficiency from Weak Guarantor.

Judgment satisfaction rules. The legal issue was whether the intent of the post-judgment settlement transaction was to extinguish the judgment against Strong Guarantor. The Court in TacCo outlined the applicable Indiana legal principles:

1. Payment of a judgment by one of the judgment debtors (defendants) is a satisfaction of the judgment, notwithstanding the fact that an assignment of the judgment is made to such debtor or to someone else.
2. Where a strawman is used by a co-debtor to purchase an assignment of a judgment, the judgment is deemed to have been purchased by one of the joint judgment debtors.
3. The controlling fact in such a case is the payment by one legally bound to pay, and the fact that an assignment is made to him or to someone else is not of controlling importance.
4. If one whose duty is to pay the debt makes the payment, then an assignment will not keep the debt alive.

Judgment satisfied. Without regurgitating all of the detail here, the Court in TacCo followed the money, evaluated the actors’ involvement and concluded that Strawman and Strong Guarantor essentially were the same entity. Here is how the Court of Appeals in TacCo applied the rules to reach its conclusion:

We conclude that the evidence presented to the trial court showed that [Strong Guarantor] made payment to [Lender] to purchase the Consent Judgment and assigned the judgment to [Strawman]. . . . Here, [Strong Guarantor] was a party legally bound to pay the judgment, and the evidence showed that it was the party who made payment to [Lender] for purchase of the judgment. The fact that an assignment of the judgment was made to [Strawman] does not change the fact that such payment resulted in a satisfaction of the judgment. The trial court did not abuse its discretion when it found that [Strong Guarantor] used [Strawman] as its strawman to purchase the Consent Judgment and deemed that the judgment had been satisfied.

Result. The upshot was that the judgment no longer existed, and Weak Guarantor’s exposure to the full $1.7MM+ deficiency disappeared. Strawman thus could not enforce the judgment against Weak Guarantor.

Arguably, Strong Guarantor still might have a contribution claim against Weak Guarantor for a pro rata portion of the deficiency ($850,000+), but the Court did not address that issue. In the end, the settlement structure in TacCo was a creative design for Strong Guarantor that didn’t quite work.

How Long Is Too Long To Wait Before Enforcing A Money Judgment In Indiana?

The question posed in the title of this post is exactly the question stated by the Indiana Court of Appeals in Wilson v. Steward, 937 N.E.2d 826 (Ind. Ct. App. 2010).

Oldie, but a goodie. On July 25, 1989, the Henry Circuit Court held that Father was in contempt for non-payment of child support and ordered that Father pay a lump sum for the arrearage, plus Mother’s attorney fees. Father died in 2009, and an estate was opened in Rush Superior Court. On September 10, 2009, Mother filed a claim against the estate based on the unpaid order from 1989. The estate filed a motion to dismiss and asserted that the claim was barred by statutes of limitations. The trial court denied the motion and awarded Mother the money to which she was entitled over twenty years earlier.

Not child support. The Court of Appeals rejected the idea that the 1989 order was an enforcement of child support obligations, which triggers its own statute of limitations (Ind. Code § 34-11-2-10). If you are a domestic relations lawyer who has stumbled on to my blog, please read the opinion for more on that subject.

Money judgment. The Court held that the Indiana code sections dealing with the enforcement of money judgments applied. “Mother’s claim against the estate is an attempt to enforce the 1989 judgment . . ..” The issue was whether I.C. § 34-11-2-12 barred Mother’s claim. I touched upon this matter in my 2008 post “Time Limitations Upon The Enforcement Of Non-Indiana Judgments In Indiana.” The statute reads: “Every judgment and decree of any court of record of the United States, of Indiana, or of any other state shall be considered satisfied after the expiration of twenty (20) years.”

Unique statute. The Wilson opinion noted that I.C. § 34-11-2-12 contains “unique phraseology” that “sets it apart from all other statutes of limitation listed in Indiana Code Chapter 34-11-2.” In reality, the twenty-year statute is not a statute of limitations but “a rule of evidence that creates a rebuttable presumption.” This means:

A judgment that is less than twenty years old constitutes prima facie proof of a valid and subsisting claim, whereas a judgment that is over twenty years old stands discredited, with the lapse of time constituting prima facie proof of payment. Thus, the party seeking to avail itself of the presumption of satisfaction of a judgment after twenty years have passed must plead payment.

(Prima facie is defined as “a fact presumed to be true unless disproved by some evidence to the contrary.”)

Applying the statute. In Wilson, Mother filed her claim to enforce the 1989 money judgment six weeks after the twenty-year period expired. At the trial court’s hearing in 2010, Mother provided testimony that the 1989 judgment had not been paid. Moreover, the record was devoid of any evidence from the estate asserting payment. The Court of Appeals concluded that “the evidence was sufficient to overcome the presumption of satisfaction of the judgment.” Accordingly, I.C. § 34-11-2-12 did not bar Mother’s claim against the estate.

No absolute bar. Wilson illustrates that Section 12 does not set an outer limit of twenty years on the validity and enforceability of a money judgment. In other words, Section 12 does not constitute an absolute bar to recovery. Rather, it is a rule of evidence creating a rebuttable presumption of satisfaction (payment) by the lapse of time (twenty years). If there is proof of non-payment, particularly in the absence of any proof of payment, then judgments can be enforced outside of the twenty-year period. How long is too long to wait before enforcing a money judgment in Indiana? According to Wilson, it may never be too late, even if the judgment debtor is dead!

Contempt Powers Unavailable To Enforce Payment Of A Civil Judgment In Indiana

In 2007, I wrote that “Jail Time Is Not An Available Remedy In Collection Actions In Indiana.” That principle is alive and well in Indiana as explained by the Indiana Court of Appeals in Carter v. Grace Whitney Properties, 2010 Ind. App. LEXIS 2172. Perhaps to the chagrin of lenders who want paid, when it comes to judgment enforcement, Indiana places certain limits on how far courts can go.

The history. The plaintiff obtained a money judgment against the defendant and filed proceedings supplemental. The court ordered the defendant to make periodic payments to satisfy the judgment. Presumably because the defendant failed to make payments, the plaintiff filed, on at least twelve occasions over a five-year period, “informations for contempt” against the defendant. At one point, the plaintiff convinced the court to sentence the defendant to thirty days in jail, although the court later expunged the sentence. After some procedural maneuvering by the parties and the court, the court entered a modified order – coined a “personal order of garnishment” – to compel the defendant to make payments. The defendant appealed that order.

“Personal order of garnishment.” The phrase “personal order of garnishment” is not a term of art in Indiana, but the Court of Appeals concluded that Ind. Code § 34-55-8-7 covers the concept. (Typically, “garnishment” relates to third parties, not the defendant/judgment debtor.) Trial courts may order income, not exempt from execution, to be applied to satisfy a judgment. As such, a “personal order of garnishment” (against a defendant) is an applicable and proper mechanism of collection under the right circumstances. In Carter, the order issued by the trial court was not proper because the defendant had no ability to pay. “The judgment creditor has the burden of showing that the debtor has property or income that is subject to execution.” No such evidence existed in Carter. Translation: courts can’t order defendants to pay money that they don’t have and then punish such defendants for not paying.

No contempt powers. Ind. Trial Rule 69(E) and a handful of statutes, including Ind. Code § 34-55-8, govern Indiana proceedings supplemental. Article 1, Section 22 of the Indiana Constitution provides the foundation upon which all Indiana collection laws are based:

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.

One issue in Carter was whether the use of contempt powers to force payment for a debt violates the Indiana Constitution. (Black’s defines “contempt power” as a court’s “inherent power to punish one for contempt of its judgments or decrees . . ..” One such form of punishment is jail time.) Money judgments generally are enforced by execution and various auxiliary remedies. As the Court noted in Carter, however, “contempt of court is not one of these.” The mere threat of imprisonment is improper too. Carter held that, to the extent Vanderburgh County’s local rules provided a basis for contempt proceedings for a defendant’s failure to pay a judgment, such rules are contrary to Indiana law.

Future proceedings? Another question in Carter was whether the trial court should limit future proceedings supplemental in the absence of a good faith belief that the defendant had property or income subject to court process. In Indiana, the general rule is that “a creditor cannot require a debtor to attend ongoing proceedings supplemental hearings and be reexamined continuously as to whether the debtor has acquired any new assets or income.” In other words, “future ‘fishing expeditions’ are improper.” The exception to that rule is if the plaintiff makes a showing that new facts justify a new order for examination. The Court held in Carter that any future proceedings supplemental against the defendant “must be supported by new facts justifying a new order or examination.”

The Carter decision, together with the recent Branham case addressed in my July 14 and September 23, 2011 posts, illustrates some of the boundaries to proceedings supplemental specifically and the collection of debts generally.

Domesticating An Out-Of-State Judgment In Indiana

Recently, the Indiana State Bar Association's listserve for the Bankruptcy and Creditor's Rights section had an inquiry regarding other lawyer's experiences with domesticating foreign judgments under the relatively new statute Ind. Code Section 34-54-11.  I've written about the statute and procedure here, most recently in my post dated 2/4/11 "6 Steps to Enforce a Foreign Judgment in Indiana."

Evidently, the reviews of the statute are mixed, due in large part to clerk's offices and court's staffs either not being familiar with the new statute or not fully understanding its meaning and purpose.  Admittedly, the procedure called for under the statute is quite unique.  I've seen where some lawyers have abandoned the new procedure in favor of the "old school" method of filing a new action (complaint). 

For what it's worth, we've encountered some questions from clerks and courts, but we've been able to work through those questions without too much trouble.  We've found that I.C. 34-54-11 has been an expeditious and cost-effective way to get the job done.  The statute has some quirks and kinks that hopefully will be resolved over time, but overall we recommend that out of state judgment creditors utilize this "new school" mechanism to enforce their judgments.  As always, I welcome emails or comments on the matter. 

6 Steps To Domesticate A Foreign Judgment In Indiana

If you hold a judgment entered in a state other than Indiana, and if you believe the judgment debtor has assets in Indiana that could satisfy the judgment, then keep reading.  The hoops through which you must jump to reach those assets are outlined in Indiana Code § 34-54-11 “Enforcement of Foreign Judgments.” 

I.C. § 34-54-11.  Enacted in 2003, and amended in 2010, this Indiana statute tells you just about everything you need to know.  Here are the six major steps:

1. Wait at least twenty-one days after the entry of the judgment in the original (non-Indiana) court.

2. File a copy of the foreign judgment, authenticated in accordance with 28 U.S.C. 1963 or any applicable Indiana statutes, in the clerk’s office of any Indiana county. 

3. File an affidavit, signed by the judgment creditor, with the clerk that states:
 a. the name/address of the judgment debtor; and
 b. the name/address of the judgment creditor.

4. Send a notice of the filing of the foreign judgment to the judgment debtor.   Ensure the clerk also has sent the same notice to the judgment debtor.  See, I.C. § 34-54-11-2(b) and (c).  The clerk’s notice specifically must contain:
 a. the name and address of the judgment creditor; and
 b. the name and address of the judgment creditor’s attorney, if any.

5. File proof of your mailing from #4 with the clerk.  (Please note: the lack of mailing by the clerk does not affect the viability of the proceedings so long as the judgment creditor files proof of its mailing to the judgment debtor.)

6. Pay a filing fee, which is $133.00 currently.

Once the filing and notice requirements have been met, the judgment creditor is free to proceed as if it holds an Indiana judgment.  In other words, you may begin to enforce the judgment by execution or other process.

Statutory changes – mailing and timing.  The 2010 amendments deleted the requirement for more traditional constitutional service of process (i.e., certified mail or proof of hand delivery).  Instead, it would appear that an overnight-type mailing, which establishes delivery to the address, should suffice.  Finally, there is no longer a statutory twenty-one day waiting period to begin execution proceedings from the date of delivery of the notice.  Execution can commence as soon as steps 1-6 have been met. 

Defenses.  My understanding always has been that, in cases of domesticating foreign judgments in Indiana, the judgment debtor’s (the defendant’s) only defense relates to jurisdiction.  In other words, the judgment debtor only can attack the validity of the judgment (halt enforcement) by establishing that the original court did not have the power to enter the judgment in the first place – an unlikely scenario.  Otherwise, the judgment essentially is presumed to be valid, and the underlying case will not be re-litigated in Indiana.  The other potential barrier is if the defendant files an appeal in the original case.  An appeal generally will stay the enforcement of the foreign judgment in Indiana until the underlying case concludes. 

Old school.  I.C. § 34-54-11-5 states that the statute “does not impair” the right to bring an action to enforce a foreign judgment by other means.  Before the enactment of the statute, it was common to file a complaint to domesticate (certify) the non-Indiana judgment and to follow all the normal rules and procedures applicable to new lawsuits.  I no longer see a benefit to this course of action.  The new statute now allows the judgment creditor, initially, to bypass the judge because a separate Indiana court order domesticating or certifying the foreign judgment is not required, unless the debtor files a notice under Sections 2 or 4.  The statutory formula should result in the enforcement of a foreign judgment more quickly and, therefore, more inexpensively.

If as an out-of-state judgment creditor you need to pursue the assets of a judgment debtor that are located in Indiana, please contact me or another Indiana lawyer to assist with the process.  I.C. § 34-54-11, the relatively new “Enforcement of Foreign Judgments” statute, is your ticket to an expeditious and cost-effective enforcement of your lien.

(Thanks to my colleague Blaire Henley for helping to updating this post, which I original published on November 20, 2007.)

Indiana Judgment Liens Are Subordinate to Prior Liens

What is the priority of judgment lien versus other liens on real estate?  The March 4, 2009 opinion by the Indiana Court of Appeals in Johnson v. Johnson, 2009 Ind. App. LEXIS 355 (Johnson.pdf) provides some guidance on the matter.  Johnson dealt with the subordination of a lien arising out of an agreed judgment reached in a divorce case.  Yes, even dissolution of marriage litigation can teach lenders something about Indiana commercial foreclosure law. 

The judgment lien and the loan.  The divorce settlement, in part, involved the ownership and operation of a farming business, which maintained certain financing secured by the business’s assets, including its real estate.  The financing, which entailed a line of credit that came up for renewal annually, had been in place before the divorce.  Post-settlement, the business needed to restructure its debt, in part for the husband to sustain payments to the wife.  The divorce settlement constituted a judgment lien to the extent that the trial court had ordered the husband to pay the wife money in installments. 

The subordination problem.  The husband sought a court order forcing the wife to subordinate her judgment lien.  A representative of the bank testified that the bank would renew the line of credit only if it continued to hold a first priority lien on the business, including presumably a senior mortgage lien on the farm’s real estate.  However, the wife refused to sign a subordination agreement.  The trial court sided with the husband and ordered the wife to complete the necessary paperwork to permit the refinancing.  The wife appealed.

The priority rules.  The Court of Appeals first noted, generally, that judgment liens in Indiana are purely statutory.  Ind. Code § 34-55-9-2 states:

. . . [A]ll final judgments for the recovery of money or costs . . . constitute a lien upon real estate and chattels real liable to execution in the county where the judgment has been duly entered and indexed . . .

The Court held that “as the line of credit existed at the time parties filed the Settlement Agreement, Wife’s judgment lien was subordinate to the Bank’s prior, existing lien.”  This is because, in Indiana, “liens for judgments are subordinate to all prior legal or equitable liens.” 

The loan renewal matter.  The Court went on to articulate the following additional legal principles that guided its decision:

Indiana law on priorities of liens is clear that the taking of a new note and mortgage for the same debt upon the same land will not discharge the lien of the first mortgage unless the parties so intended.  A court considers the circumstances of the transaction and will not permit the release of the old mortgage and the execution and recording of the new mortgage to destroy the lien of the original mortgage when not so intended, or rights of the third parties have not intervened, or positions changed.  Where notes are renewals of prior indebtedness, an intervening lienor will not have a superior lien, and the original lien retains superiority. 

The Borrower defeated the judgment lien holder.  In Johnson, the bank provided testimony that the line of credit came up for renewal every year.  The Court thus concluded that, if the business’s “indebtedness was merely being renewed every April 15, then the Bank’s lien would have retained its superiority over Wife’s judgment lien.”  The Court therefore upheld the trial court’s order that the wife must subordinate her judgment lien in order to enable the husband to renew the business’s line of credit.

Although not 100% clear in the opinion, it appears to me that the Court thought the bank’s lien would have priority regardless of whether the wife signed a subordination agreement.  Yet, the Court took the matter a step further by compelling the wife to sign off, probably to give the bank additional comfort.  The Johnson case reminds us that a prior loan, secured by a mortgage, even if subject to a renewal, should maintain senior status in the event of the entry of a subsequent judgment lien.  But, a signed subordination agreement would leave no doubt, which is what the bank and the husband (the borrower) sought in Johnson.   

Time Limitations Upon The Enforcement Of Non-Indiana Judgments In Indiana

A lawyer from New York recently contacted me after reading my November 20, 2007 post 6 Steps To Enforce A Non-Indiana Judgment In Indiana.  Her client holds a 1994 judgment entered in the State of New York.  She was curious whether her fourteen-year-old New York judgment could still be enforced in Indiana.   

20 years-execution.  Yes, the New York party can domesticate its foreign judgment here in Indiana and proceed with execution, without fear of being time barred.  Ind. Code § 34-11-2-12, entitled “Satisfaction of Judgment or Decree by Expiration of Twenty Years,” states:

Every judgment and decree of any court of record of the United States, of Indiana, or of any other state shall be considered satisfied after the expiration of twenty (20) years. 

This is not a twenty-year statute of limitations but rather a rule of evidence creating a rebuttable presumption of satisfaction (payment) by the lapse of time (twenty years).  Odell v. Green, 121 N.E.2d 304 (Ind. Ct. App. 1918).  In a suit in Indiana on a foreign judgment, instituted after the expiration of twenty years after entry of the judgment, the plaintiff/judgment creditor cannot recover unless it proves the judgment remains unpaid.  Hendricks v. Comstock, 1859 Ind. LEXIS 111 (Ind. 1859).  Since the New York judgment falls within the twenty-year period, the plaintiff/judgment creditor, after domestication of the judgment under I.C. § 34-54-11, can immediately execute. 

10 years-lien.  When New York counsel contacted me, she feared that too much time had passed.  Based upon her quick review of Indiana law, it was her understanding that Indiana may have a statute of limitations of ten years.  I.C. § 34-55-9-2 “Lien Upon Real Estate – Time Limitation” states, in pertinent part:

All final judgments for the recovery of money . . . in Indiana . . . constitute a lien upon real estate . . . in the county where the judgment has been duly entered and indexed in the judgment docket as provided by law:  . . . (2) until the expiration of ten (10) years after the rendition of the judgment . . ..

This ten-year statute of limitations specifically relates to a judgment lien on real estate and not the judgment itself.  In Indiana, a money judgment automatically becomes a lien on real estate owned by the defendant/judgment debtor in the county where the judgment was rendered.  This lien, which can be foreclosed, exists on the real estate for ten years.  Although the lien expires, the judgment itself may be enforced up to twenty years after its entry.  Needham v. Suess, 577 N.E.2d 965 (Ind. Ct. App. 1991). 

Which state’s law applies?  What if New York law held that judgments were presumed paid after ten years?  Would Indiana’s twenty-year statute still apply, or would the Indiana action be subject to New York’s ten-year rule?  In 1859, the Indiana Supreme Court addressed that very issue in Hendricks.  The plaintiff/judgment creditor filed suit in Indiana to collect on a seventeen-year-old Michigan judgment.  Michigan at the time had a statute identical to I.C. § 34-11-2-12 except that the time period was ten years, not twenty.  The defendant/judgment debtor in Hendricks argued that the case should have been dismissed based upon the presumption of payment under the Michigan statute.  The Indiana Supreme Court rejected the argument and held that, because the defense related to the remedy, not the merits, the law of the state where the action was pending (Indiana) applied.  According to Hendricks, the rules of the foreign state do not govern judgment enforcement actions.  Indiana’s do.

Jail Time Is Not An Available Remedy In Collection Actions In Indiana

Do you ever get so frustrated with your attempts to collect a guaranteed commercial debt that you wish you could have your guarantor thrown in jail for a failure to pay?  While I understand the frustration, this drastic remedy typically is not available in Indiana.  The Indiana Court of Appeals’ August 8, 2007 opinion in Mitchell v. Mitchell, 2007 Ind. App. LEXIS 1805 (Mitchell.pdf)  reminds us of the applicable legal principles. 

The Court decided Mitchell in the context of a divorce proceeding, specifically a husband’s failure to comply with a dissolution decree requiring him to pay certain marital debts.  The wife sought to hold the husband in contempt for his failure to do so.  Although the opinion does not specifically apply to commercial lenders, some of the rules outlined by the Court are good to know:

1.  The Indiana Constitution, Article 1, Section 22, forbids imprisonment for debt, so contempt may not be used to enforce an order requiring one party to pay another a fixed sum of money.  Id. at 9.

2.  As to a final money judgment requiring a person to pay a fixed sum of money to another party, Indiana Trial Rule 69 contains the correct remedies for non-compliance with the judgment (selling the judgment creditor’s property, proceedings supplemental/garnishment, etc.).

So, a money judgment, such as a judgment on a guaranty, may only be enforced by execution (not the death kind; the seizing and selling of property kind).  As much as commercial lenders may at times want to have evasive guarantors sent to jail until they deal with their debts, this simply is not an option in Indiana.

As an aside, the situation in Mitchell did not involve a money judgment requiring the husband to pay a fixed sum of money to his wife.  Rather, the court order required him to pay, and hold his wife harmless from the payment of, mortgage and credit card debts.  As such, the trial court was not barred from using its contempt powers to enforce compliance with the order.  Thus there may be rare situations in which a lender can utilize the contempt powers of the court, but those powers are not available when the basic problem is a failure to pay money owed.