Indiana’s Right Of Setoff And The Mutuality Requirement

Lesson. A defendant debtor can reduce the amount owed to a plaintiff creditor by the amount the creditor owes to the debtor, but the parties must be identical.

Case cite. Hendrix v. Campbell, 235 N.E.3d 221 (Ind. Ct. App. 2024)

Legal issue. Whether defendant could set off an adverse judgment held by husband and wife through a separate judgment the defendant held against wife, only.

Vital facts. This case involved the entry of a $115K judgment in favor of Mr. and Mrs. Campbell against Ms. Hendrix (the “Campbell Judgment”). In a separate case, Hendrix obtained a $61K judgment against Mrs. Campbell, only, who later passed away (the “Hendrix Judgment”). Both disputes were related to one house.

Procedural history. During proceedings supplemental, Hendrix moved to set off the Campbell Judgment by the Hendrix Judgment, which is to say that Hendrix sought to reduce the Campbell Judgment to $54K ($115K-$61K). The trial court denied the motion. Hendrix appealed.

Key rules. The Court’s opinion cited the following legal definitions of setoff:

• Black’s Law Dictionary defines setoff as: "[a] defendant's counterdemand against the plaintiff, arising out of a transaction independent of the plaintiff's claim" and "[a] debtor's right to reduce the amount of a debt by any sum the creditor owes the debtor."
• A secondary legal source puts the concept more succinctly: "[t]he right of setoff allows entities that owe each other money to apply their mutual debts against each other." 80 C.J.S. Set-off and Counterclaim § 59.

Indiana courts have equitable discretion to set off one judgment against another.

Importantly, the general rule is that “mutuality must exist between the judgments. In other words, the judgments must, at a minimum, be reciprocal between the same parties.”

An exception to the general rule of mutuality may be applied in Indiana “in order to prevent irremediable injustice.”

Holding. The Indiana Court of Appeals affirmed the trial court’s denial of setoff.

Policy/rationale. The Court found that, because mutuality did not exist between the judgment debtors, the Campbell Judgment could not be set off by the Hendrix Judgment. To illustrate, Hendrix owed Mr. Campbell money under the Campbell Judgment. On the other hand, Mrs. Campbell (actually, her estate), only, owed Hendrix money under the Hendrix Judgment. Further, despite seemingly common issues surrounding the subject house and likely Mr. Campbell’s interest in the estate, the Court determined that Hendrix did not establish the “irremediable injustice” exception to mutuality. The opinion does not address what Hendrix’s theory was, but instead simply concluded: “equity does not support reducing [Mr. Campbell’s] judgment by a debt that he does not owe.”

By the way, setoff is not dependent upon the entry of judgments. As suggested by the above definitions, competing claims/debts can give rise to setoff, as long as the parties are identical. For example, a borrower or guarantor may allege that certain damages caused by a lender should be set off against the unpaid loan amount.

Related posts.

• Set Off Versus Garnishment: Rights To And Priorities In Deposit Accounts
• UCC Security Interest Lesson: Nemo Dat Quot Non Habet

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Part of my practice involves representing parties in disputes about loans and the collection of same. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Indiana Has No Deadline To File Proceedings Supplemental

Lesson. There is no limitations period for the initiation of proceedings supplemental in Indiana, assuming the motion is filed within 20 years of the entry of the judgment.

Case cite. Converging Capital LLC v. Steglich, 234 N.E.3d 902 (Ind. Ct. App. 2024)

Legal issue. Whether Indiana law imposes a limitations period on the initiation of proceedings supplemental.

Vital facts. A money judgment was entered against debtor in 2006. In 2022, an assignee of the judgment initiated proceedings supplemental (a post-judgment collection motion) against debtor.

Procedural history. On the debtor’s motion, the trial court dismissed creditor’s proceedings supplemental as untimely. Creditor appealed.

Key rules.

• Proceedings supplemental are a continuation of the original action, not a new action that may trigger certain statutes of limitations.
• Also, a pro supp is not considered an “execution” on the judgment.
• Judgments themselves generally survive for 20 years in Indiana.

Holding. The Indiana Court of Appeals reversed and remanded the case back to the trial court.

Policy/rationale. Debtor argued that a ten-year statute of limitations applied and that creditor had failed to renew the judgment within that ten-year period. But the Court clarified that the ten-year rule related only to the enforcement of a judgment lien on real estate, not to proceedings supplemental generally. Thus, the creditor was permitted to initiate the process to collect.

Related posts.

• Indiana Judgment Lien (10 Years) and Judgment Enforcement (20 Years) Statutes Of Limitation
• How Long Is Too Long To Wait Before Enforcing A Money Judgment In Indiana?
• Expired Judgment Lien Must Be Renewed Before Foreclosure Can Occur

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Part of my practice involves representing banks and lenders in post-judgment collection matters. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Indiana Judgment Liens On Real Estate In Revocable Trusts

Lesson. A judgment lien can attach to real estate in a revocable trust if, among other things, the judgment debtor holds an ownership interest in the trust’s assets.

Case cite. Sumrall v. LeSEA Inc. 234 N.E.3d 230, (Ind. Ct. App. 2024)

Legal issue. Whether a judgment creditor may secure a judgment lien on real estate within a revocable trust, even though the judgment was against only one of the co-trustees, co-settlors and co-beneficiaries of the trust.

Vital facts. In March 2016, Lester Sumrall (Lester) recorded something he called a bond debt notice (Notice) against LeSEA’s real estate that asserted $173K was due and owing. Meanwhile, in November 2018, a third party conveyed certain real estate (Property) to Lester. A few weeks later, Lester recorded a quitclaim deed that conveyed title to the Property, for no consideration, to the Sumrall Trust (Trust), in which both he and his wife were co-trustees and co-beneficiaries. The Trust was revocable during the couple’s lifetime, although upon death the Trust became irrevocable, with their children being the residual beneficiaries.

In 2019, LeSEA sued Lester for slander of title to LeSEA’s property by virtue of the recording of the Notice, which LeSEA claimed was invalid. In 2020, LeSEA was awarded a money judgment for $236K arising out of the invalid Notice. A few years later, in the same action following some messy proceedings, the trial court granted LeSEA’s motion to place a judgment lien on the Property.

Procedural history. Lester appealed the trial court order placing a judgment lien on the Property.

Key rules. The Court noted that "the fundamental requirement of due process is the opportunity to be heard at a meaningful time and in a meaningful manner."

The Court relied in part on Kesling v. Kesling, 967 N.E.2d 66 (Ind. Ct. App. 2012) for the idea that Lester had an interest in the Property placed into the Trust. Please read the opinion for more.

The Court took a deep dive into Indiana trust law, and cited to the Restatement (Third) of Trusts (2007), Ch. 21:

Technically, the trust is still not generally recognized as a legal "entity," but it is generally for federal tax purposes, and in practice trustees act on behalf of their trusts and are sued as trust representatives. Indeed, in this Chapter and elsewhere in this country, the trust is treated as an entity to such an extent that it is no longer inappropriate to refer to claims against or liabilities of a "trust" (as in the title and content of this Chapter) and to the liability or debt of a beneficiary to a "trust" (as in Chapter 20), or to refer to and treat trusts, in law and in practice, as if they were entities in numerous other contexts.

Holding. The Indiana Court of Appeals affirmed the trial court.

Policy/rationale. Lester argued that the entry of the lien violated due process. The court proceedings were muddled, but basically Lester asserted he didn’t get his day in court. Lester also claimed that the Property was shielded from collection by virtue of it being held in the Trust with his wife. (Lester’s wife was not connected to the Notice, and she was not a party to the slander of title suit.) Candidly, most judgment creditors default view is that a debtor’s assets held in trust are difficult if not impossible to touch. Sumrall opens a window to collection, however, if a trust is revocable and other boxes are checked, meaning the trust document will be important.

Both the trial court and the Court of Appeals found it compelling that the Trust was revocable and “freely allow[ed] the Property to be removed from the Trust at any time,” which is “much different” than placing the Property in an irrevocable trust. Thus, LeSEA could seek to enforce its judgment against Lester via a lien on the Property without violating notions of due process.

Related posts.

• Judgment Lien Principles Courtesy Of The Indiana Supreme Court
• Sampling Of Indiana Deed Law, And Judgment Lien Attachment Issues

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Part of my practice involves representing parties in lien-related disputes. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Purchaser Secures Surplus Funds Following HOA Lien Foreclosure Sale

Lesson. Depending on the nature of the lien foreclosure action, former property owners may not always get the surplus sheriff’s sale proceeds – equity can play a role.

Case cite. Brent St. John v. Carnoustie Circle Owners Ass'n Inc., 235 N.E.3d 204 (Ind. Ct. App. 2024)

Legal issue. Whether the distribution of excess sheriff’s sale proceeds following an HOA lien foreclosure was contrary to law.

Vital facts. Purchaser acquired title to a condo at a sheriff’s sale resulting from a homeowners association’s (HOA) lien foreclosure. The plaintiff HOA conceded that the sale was subject to Mortgagee’s senior lien on the subject property, but the judgment did not provide for payment of any sale proceeds to Mortgagee. Instead, the judgment stated that residual net proceeds were to be paid into court “subject to further order.” Following the sale and satisfaction of the HOA’s judgment and other minor liens, about $100K in surplus proceeds remained.

Procedural history. Former Owner filed a petition claiming entitlement to the surplus. Mortgagee, which had been defaulted prior to the judgment entry, in turn, filed a notice asserting its senior lien, but did not make a claim for any proceeds. Purchaser, in turn, objected to any funds being distributed to Former Owner and argued that the proceeds should instead be redirected to Purchaser to pay down the mortgage. The trial court sided with Purchaser, and Former Owner appealed.

Key rules. Former Owner relied upon Indiana Code Section 32-30-10-14 (“Section 14”) and the 2016 Edler opinion, which deal with the distribution of surplus funds after a mortgage foreclosure sale. I discussed Section 14 and Edler in the first “related post” below.

The Indiana Court of Appeals found it significant that HOA liens are governed by statutes outside of mortgage-related statutes. See, Indiana Code Section 32-25-6. Further, the Court noted that, in Indiana, “a lien for unpaid [HOA] assessment may be foreclosed by a lawsuit ‘under laws of Indiana governing mechanics’ and materialmen’s liens.’”

Holding. The Indiana Court of Appeals, in an unpublished opinion, affirmed the trial court.

Policy/rationale. The Court distinguished this case from the Edler case, which involved Section 14 and the disposition of sheriff’s sale proceeds in mortgage foreclosure matters. Since Brent St. John was an HOA lien foreclosure, Indiana Code Section 32-25-6-3 and corresponding mechanic’s lien laws and procedure controlled. Those laws/procedures aren’t particularly relevant, because the case frankly involved a unique set of facts. The bottom line is the Court found a way to bypass Section 14’s rule that any surplus funds should be paid back to the mortgage debtor (here, Former Owner). The trial court’s ruling did not specify the statute upon which it relied but merely decided to allocate funds “to the sole party having the incentive to clear title to the property [Purchaser].” The Court of Appeals embraced that concept when it concluded that “[Purchaser] was equitably entitled to the [net sale proceeds].” Thus, as a practical matter, Purchaser got most of its money back after satisfying other liens on the property. Because the outcome of Brent St. John was based on equitable principles, the result conceivably could be different under a separate set of circumstances.

Related posts.

• If A Sheriff’s Sale Is "Subject To" A Senior Mortgage, The Senior Lender Gets None Of The Sale Proceeds, Even If There Is A Surplus
• Statutory Disposition of Foreclosure Sale Proceeds
• Mortgagee Prevails In Claim For Indiana Tax Sale Surplus
• Priority Of HOA Liens In Indiana

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Part of my practice involves representing parties in sheriff's sale matters. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Indiana’s Equitable Clean-Up Doctrine Blocks Jury Trial

Lesson. Counterclaims for money damages arising out of alleged wrongful foreclosure actions likely will not be tried to a jury but rather the court.

Case cite. Colvin v. Taylor, 233 N.E.3d 497 (Ind. Ct. App. 2024)

Legal issue. Whether counterclaims filed in a foreclosure action were “sufficiently related to the foreclosure” such that the foreclosure subsumed the legal claims.

Vital facts. Land contract Seller filed a foreclosure action against land contract Purchaser, who filed counterclaims for abuse of process and conversion of property. The counterclaims stemmed from alleged wrongdoing by agents of Seller following a court order for Purchaser to vacate the property. Purchaser claimed money damages from Seller’s improper removal of Purchaser’s property from the premises.

Procedural history. Purchaser demanded a jury trial. The trial court denied the request.

Key rules.

The Colvin opinion noted that the: “Indiana Constitution guarantees that ‘[i]n all civil cases, the right of trial by jury shall remain inviolate.’ Ind. Const. art. 1, § 20. However, this provision preserves the right to a jury trial only as it existed at common law, and a party is not entitled to such a trial on equitable claims.”

"[W]hen both equitable and legal causes of action or defenses are joined in a single case, the equitable causes of action or defenses are to be tried by the court while the legal causes of action or defenses are to be tried by a jury…. [W]here a case includes ‘plainly equitable causes of action and sufficiently distinct, severable, and purely legal causes of action, then the legal claims require a trial by jury."

However, equity “subsumes an entire case where the ‘essential features of a suit’ demonstrate that the lawsuit as a whole is equitable and the legal causes of action are not 'distinct or severable[.]'"

Foreclosure actions are equitable, and “being essentially equitable, the whole of the claim is drawn into equity, including related legal claims and counterclaims.”

Holding. The Indiana Court of Appeals affirmed the trial court and, in doing so, relied on the Indiana Supreme Court’s opinion in Lucas v. U.S. Bank, 953 N.E.2d 457 (Ind. 2011), about which I discussed in my post: Are Borrowers Entitled To Jury Trials On Their Counterclaims?

Policy/rationale. Colvin concluded that the dispute, “as a whole, [was] equitable in nature….” The counterclaims were related to the foreclosure claim “such that the foreclosure action pull[ed] the legal claims into equity.” But for Seller’s alleged unlawful actions in seeking possession of the property, Purchaser would not have suffered money damages. Thus, the “core legal issues” overlapped “to a considerable degree.” Because the essential features of the suit were equitable, the “equitable clean-up doctrine” applied.

Note: Apparently the land contract did not have a jury trial waiver provision, as the Court’s opinion did not mention one or otherwise factor any contract language into its holding.

Related post.  Contractual Waiver Of Right To Jury Trial

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Part of my practice involves representing parties in contested mortgage foreclosure cases. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Indiana Does Not Have Commercial Usury Laws

Apologies for the lack of content the past 30 days.  Significant personal and business commitments have gotten in the way.  I'm alive and well, however.

Sometimes I'm asked whether Indiana has commercial interest rate caps or, in other words, whether there are usury laws applicable to business loans.  Black's Law Dictionary defines "usury" as "the laws of a jurisdiction regulating the charging of interest rates" or "an unconscionable and exorbitant rate or amount of interest." 

Based on my experience and understanding of Indiana law, there are no statutory caps on interest rates for commercial loans.  This is not to suggest that, for instance, a default interest rate of some massive amount (say, 90% per annum) would ultimately be enforceable, if challenged in court.  I'm only passing along that Indiana's legislature is "hands off" when it comes to regulating interest charged on business loans.    

(There are, however, so-called usury laws applicable to consumer loans, which are not the subject of today's post.)

To my knowledge the only statute that could possibly fall into the category of a commercial rate cap is Indiana Code 24-4.6-1-101, sometimes called the "Post-Judgment Interest Statute," which generally provides for a post-judgment interest rate of eight percent (8%) per annum.  The rate runs from the date of the Court finding (judgment) until the date the defendant (borrower/guarantor) satisfies the judgment.  Why could this be labeled a cap?  Because 8% could be less than the rate called for in the underlying promissory note, especially if the note provided for default interest.  

Prior Posts.

• What Is Indiana's Post-Judgment Interest Rate?
• Indiana Supreme Court’s COVID Order Interpreted: Post-Judgment Interest
• Indiana’s Post-Judgment Interest Statute Applies to Awards of Attorney’s Fees

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Part of my practice involves representing parties in disputes arising out of loans in default. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on X @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.