Order Granting Receiver’s Motion For Turnover Of Funds Upheld

Lesson. Upon the entry of an order appointing a receiver, all assets of the entity over which the receiver is appointed become assets of the receivership estate.

Case cite. Steingart v. Musgrave, 221 N.E.3d 725 (Ind. Ct. App. 2023)

Legal issue. Whether the trial court’s order for the turnover of funds allegedly owed to the receiver was erroneous.

Vital facts. An Indiana limited liability company executed five promissory notes in favor of a lender totaling about $10.5 million. The lender later filed suit against the LLC and the owner-members due to the notes being in default. In connection with the suit, the court appointed a receiver over the LLC.

The receiver discovered that, eleven days pre-appointment, one of the member-owners opened a bank account in Minnesota and allegedly deposited nearly $400K of the LLC’s assets into the account. The receiver claimed that the funds were then disbursed without notice to or authorization from the receiver, contrary to the court’s order appointing the receiver. The receiver filed a motion for turnover requesting the court to order the member-owner to return certain of the funds to the LLC.

Procedural history. The trial court ordered the member-owner to turn over about $300K to the receiver within seven days. The member-owner appealed the trial court’s turnover order.

Key rules. In Indiana, a receivership “is an equitable remedy, the purpose of which is to secure and preserve property or assets for the benefit of all interested parties, pending litigation.”

Indiana trial courts control and supervise the property in a receivership, as well as direct and advise the receiver. In the trial court’s discretion, the court can grant the receiver the necessary powers to carry out the duties. Indiana Code 32-30-5-7 “provides a nonexclusive list” of those powers.

Immediately upon appointment and qualification, the entity's assets become receivership assets until final distribution by the court. “To that end, property in receivership remains under the court's control and continuous supervision, and it is the duty of the receivership court to protect the property from interference.” It follows that the receivership court “has the power to control all controversies that affect such property.”

The parties, in turn, “have a duty to deliver to the receiver all property in their possession that is included in the court's order.” Should the parties fail to fulfill such duty, the receiver “has the authority to request the court to act to prevent interference with, or the denial of, his or her possession of the property.”

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

Policy/rationale. The member-owner asserted that the trial court abused its discretion by issuing the turnover order. The member-owner felt the receiver’s concerns of misappropriation were unfounded. The Court of Appeals noted that any money in the Minnesota bank account on the day the receiver was appointed was subject to the receivership order. The LLC was obligated to remit to the receiver all deposit accounts, money and other property listed in the order. The member-owner’s failure to turn over to the receiver the funds in the account as of the day of appointment, or thereafter deposited, was a violation of the receivership order. The Court further found that, as practical matter, the subject turnover order merely was an extension of the original receivership order. Since Indiana gives trial courts “inherent power” to enforce compliance with their receivership orders, the Court of Appeals found no error with the issuance of the turnover order to obtain the assets of the LLC.
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Part of my practice involves representing parties in receivership proceedings. 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.


In A Matter Of First Impression In Indiana, Court Of Appeals Upholds Award Of Punitive Damages In Fraudulent Transfer Action

Lesson. Parties to fraudulent transfer actions could face punitive damages.

Case cite. Clary-Ghosh v. Ghosh, 223 N.E.3d 216 (Ind. Ct. App. 2023)

Legal issue. Whether the trial court abused its discretion when it awarded punitive damages against Defendants in a fraudulent transfer action.

Vital facts. Plaintiff brought an action against Defendants under the Indiana Uniform Fraudulent Transfer Act (UFTA). As is the case with many of these UFTA actions, the facts are very dense.  Here, the dispute primarily surrounded transfers of vehicles to avoid post-judgment collection. For all the details, please review the Court’s opinion. One noteworthy finding of the trial court was:

98. Here, [Defendant 1] provided no documentation which demonstrated that it followed any of the corporate formalities of filing tax returns, conducting meetings, maintaining minutes or notes, etc. In addition, in [Defendant 1’s] response to [Plaintiff's] discovery, it concealed the transfers of the [v]ehicles by stating that they were to [Defendant 2], when in fact they were to a trust established prior to the dissolution of [Defendant 1]. It was only after obtaining discovery from a non-party, the BMV, that the true nature of the transfers was revealed.

Procedural history. Before the appeal, the trial court awarded a judgment against Defendants in a UFTA action. Defendants appealed on several grounds. This post relates only to the punitive damages matter.

Key rules. In Indiana, "[t]he purpose of punitive damages is not to make the plaintiff whole or to attempt to value the injuries of the plaintiff. Rather, punitive damages have historically been viewed as designed to deter and punish wrongful activity. As such, they are quasi-criminal in nature."

Punitive damages in Indiana “are a creature of common law,” and the UFTA at I.C. § 32-18-2-20 states that “unless superseded by this chapter, the principles of law and equity . . . supplement this chapter.”

Further, the remedies provision in the UFTA at I.C. § 32-18-2-17(1)-(3) “provides that a creditor bringing successful claims may obtain a host of types of relief, including avoidance of the fraudulent transfer or obligation, attachment against the transferred asset, an injunction against further disposition of the debtor's assets, and the appointment of a receiver.” I.C. § 32-18-2-17(3)(C) also states that "[s]ubject to applicable principles of equity and in accordance with applicable rules of civil procedure" a creditor may obtain "[a]ny other relief the circumstances require." The court deemed Section 17(3)(C) to be “catch-all” provision, and nowhere in the UFTA is a recovery of punitives prohibited.

Indiana has a punitive damages statute declaring that damages must not be greater than three times the compensatory damages awarded or $50,000. I.C. § 34-51-3-4.

Holding. The Indiana Court of Appeals, in what appears to be a matter of first impression, affirmed the trial court’s award of punitive damages.

Policy/rationale. Defendants argued that the trial court erred in awarding punitive damages because such damages are inconsistent with the UFTA’s limited purpose of removing obstacles to the collection of a judgment. After conceding that no Indiana state or federal court had determined whether punitives are permitted under the UFTA, the Court concluded “that it was our legislature's intent to allow for the imposition of punitive damages upon successful UFTA claims in order to punish those who have violated the statute and to act as a deterrent to future fraudulent conduct.”

Related posts.

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Part of my practice involves post-judgment collection 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.


Notices of Sheriff’s Sales: Some Reminders

I received an email last week from the Marion County (Indianapolis) Sheriff’s Office advising that the real estate division “is making advancements in technology” that have led to a new notice of sheriff’s sale. Click here for the form in Word that will be required beginning with the June 21, 2024 sale.

For more background on Indiana law surrounding the sale notice requirement, please review these posts:

While I’m at it, remember that the Marion County Sheriff has a great website to help parties navigate through the sale process. The staff provides virtually all the forms and information one needs, and my experience has been that the staff is always been helpful in answering questions attorneys and bidders might have. Click here for that website.

Although not all of Indiana’s 92 counties have a website as extensive as Marion County’s, many of our sheriff’s offices do in fact have a sale web page. Make sure to investigate in advance of your sale. Just as importantly, in my experience every county has a sheriff’s sale contact person willing and able to assist in preparing for a foreclosure sale. Finally, don’t forget that local rules, customs and practices control the nitty gritty of the sale process.
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Part of my practice involves representing parties at sheriff’s sales. 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 Claims To Pierce The Corporate Veil Should Be Post-Judgment

Lesson. A veil-piercing claim is a post-judgment collection tool, not a separate cause of action in a lawsuit.

Case cite. Conroad Associates v. Castleton Corner Owners Association et. al. 2023 U.S. Dist. LEXIS 135677 (S.D. Ind. 2023)

Legal issue. Whether a plaintiff in a breach of contract action against a company could simultaneously sue the individual owners of the company for the alleged breach.

Vital facts. This federal court action relates to a state court case about which I wrote in August of 2022. Here is a link to that post, which provides some background about the dispute. In this matter, a plaintiff sued a number of parties for money damages based on several causes of action, one of which was against individuals for their corporate entity’s breach of contract.

Procedural history. The individual defendants filed a motion for judgment on the pleadings seeking dismissal of the case.

Key rules.

To "prevent fraud or unfairness to third parties,” Indiana may allow the corporate veil to be pierced so as to impose liability for a corporation's acts and omissions beyond the corporation itself.

However, "piercing the corporate veil is not a separate cause of action but rather a means of imposing liability for an underlying cause of action, such as breach of contract."

The Piercing Corporate Veil category on this blog has a couple dozen posts identifying the various rules and tests applicable to Indiana’s veil piercing doctrine.

Holding. The Court dismissed the veil piercing count in the complaint.

Policy/rationale. In its complaint, plaintiff argued that it stated "a coherent case for piercing of the corporate veil — including by serious undercapitalization, the failure to keep corporate records and follow other formalities, fraudulent representation by unelected controlling persons, the commingling of assets, and other manipulations of the corporate form to achieve personal ends." While those allegations may have been valid, the Court concluded that the cause of action was premature. If the plaintiff later obtained a judgment, the plaintiff could then seek to pierce the corporate veil, assuming “it has a good faith basis to assert that theory in proceedings supplemental.” In short, the plaintiff in Conroad had the cart before the horse.

Related post. Veil-Piercing Claim Better Left For Proceedings Supplemental

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Part of my practice involves representing parties 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.


Forbearance Agreements: The Benefits Of A Timeout

The Indiana Bankers Association publishes the Hoosier Banker magazine, which features my article about forbearance agreements in the current issue.  Click here for the online version of the piece.  The full article follows.  I'd like to thank the folks at the IBA for allowing me to contribute to the March/April publication.  

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When facing a loan default, the fundamental question for lenders is whether to exercise their remedies against the borrower and/or guarantors (collectively, “obligors”) or to pursue a settlement (workout). A forbearance agreement is a workout tool—a temporary settlement agreement.

What is a forbearance? Black’s Law Dictionary defines “forbearance” as the “act of abstaining from proceeding against a delinquent debtor; delay in exacting the enforcement of a right; indulgence granted to a debtor.” The idea is that the foreclosing lender agrees to a timeout.

Why would obligors want time? They:

• face a judgment or a foreclosure (loss of their property) and need to restructure their affairs
• desire to sell the loan collateral (such as commercial real estate) to pay off/pay down the loan
• intend to work with another lender to refinance
• want to settle internal partner disputes affecting the loan’s performance
• need to resolve a temporary hardship (i.e. COVID or other impact on revenue)
• seek to cure covenant defaults such as mechanic’s liens or code enforcement violations

Why would lenders consent to a timeout?

• Foreclosure litigation is a last resort
• The loan’s performance stems from a temporary problem that can be solved with time
• There is a positive relationship with the borrower group (trust)
• The obligors are preserving and protecting the loan collateral (i.e. the assets are not in jeopardy of being lost or impaired)
• The collateral position is weak (i.e. there is relatively little value in the property)
• The collateral is defective (i.e. environmental contamination)
• The guarantors are judgment proof
• The loan documents have defects that can be fixed in the forbearance agreement
• Forbearance saves attorney’s fees and litigation expenses
• Temporary settlements avoid the commitment of bank personnel necessary to litigate

Contract.

Under Indiana law, forbearance agreements are contracts. The agreement reduces the situation into a single document that is relatively easy for judges to understand. (An added bonus is that judges tend to look favorably on lenders who resort to court after first affording obligors the opportunity to avoid suit in the first place.) Make sure to clarify in writing all of the essential terms of the deal.

Signatories.

All obligors to the loan should sign the forbearance agreement, or lenders risk releasing the omitted obligors from liability. This is because a forbearance agreement arguably constitutes a “material alteration” of the original obligation. Under Indiana law, a guarantor can be released from liability if the underlying obligation is “material altered” without the guarantor’s knowledge and consent. The simple solution is to have all the obligors sign the agreement. If a guarantor is unwilling to execute, then the lender should proceed to litigation or explore a different workout approach.

Settlement

As with any compromise, everything is negotiable. Also bear in mind that the parties can enter into forbearance agreements virtually at any point—before or during a lawsuit, even after the entry of judgment.

    Release. All forbearance agreements should require the obligors to waive any and all rights, claims and defenses. This will help lenders and their counsel to streamline any future litigation necessary to enforce the loan if the forbearance agreement is breached. Indiana law is settled that forbearance releases are effective to protect against future lender liability claims. If an obligor is not willing to grant a release, then the lender might as well get on with the fight.

    Deal terms. Here is a list of some key contract terms to be considered:

        • Obligors’ admission of:
            o existing loan documents and the ratification of same
            o lien perfection
            o default(s)
            o debt amounts

        • Payment terms:
            o payment of principal and/or interest during the forbearance period versus deferral
            o rate of interest
            o payment of escrow items versus deferral
            o treatment of any past due interest
            o treatment of any past due principal payments
            o payment of attorney’s fees
            o payment of a forbearance fee
            o payment of other out-of-pocket expenses such as appraisal fees

        • Extension of maturity date
        • Stipulated payoff amount upon maturity (end of the forbearance period)
        • Agreed judgment, either filed or escrowed (aka “pocket” judgment)
        • Addition of collateral
        • Addition of guarantors
        • Cure of prior loan document defects
        • Requirement to resolve other liens or junior lien foreclosure suits
        • Waiver of jury trial and covenant not to sue
        • Consent to jurisdiction and venue
        • Release of claims and defenses (see above)

Depending on your particular situation, the benefits of granting obligors more time through a thoughtful and well-written forbearance agreement can exceed the costs of deferring the enforcement of the loan.

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My practice includes representing parties involved 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 Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.


Metes And Bounds Legal Descriptions, As Opposed To Street Addresses, Control The Effectiveness Of Mortgages In Indiana

Lesson. So long as the legal description in a mortgage provides notice of the boundaries and location of the subject real estate, discrepancies regarding the street address are of no moment.

Case cite. United States Bank Nat'l Ass'n v. Spencer, 214 N.E.3d 1017 (Ind. Ct. App. 2023)

Legal issue. Whether the trial court should have granted Lender’s motion for summary judgment in its mortgage foreclosure action.

Vital facts. Spencer was a residential mortgage foreclosure case involving a few twists and turns. This is my fourth and final post about the opinion. For background, please click on my three prior posts: 1/23/24, 2/2/24 and 2/15/24.

Procedural history. The trial court denied Lender’s motion for summary judgment and later entered judgment for the Borrowers that essentially nullified the mortgage.

Key rules.

The Court in Spencer reminds us of some fundamentals surrounding Indiana mortgage foreclosure claims. First, a “mortgage is an interest in real property that secures a creditor's right to repayment.” This means that “an action to foreclose a mortgage is an in rem (i.e., against the property) proceeding."

Yet, upon a borrower’s default, "in addition to the remedy of an in rem action of foreclosure, a creditor may sue to establish the debtor's in personam (i.e., personal) liability for any deficiency on the debt and may enforce a judgment against the debtor's personal assets."

Among other things, “for a mortgage to be effective, it must contain a description of the land intended to be covered sufficient to identify it.” The test for determining the sufficiency of a legal description “is whether the tract intended to be mortgaged can be located with certainty by referring to the description.”

Holding. The Indiana Court of Appeals reversed the trial court’s summary judgment ruling.

Policy/rationale. To prevail on the summary judgment motion, Lender had to show Borrowers were in default under the terms of the promissory note and mortgage. Borrowers did not really contest that they were in default and in violation of the terms of the mortgage. No payments had been made for several years.

Despite Borrowers’ arguments to the contrary, the Court declined to hold that there was a “material” issue of fact (which would have prevented summary judgment) related to some confusion about the correct street address for the subject real estate. This is because the metes and bounds legal description in the relevant deeds and mortgage was consistent and put “potentially interested parties on notice as to the boundaries and location of the property.” In Indiana, legal descriptions, not street addresses (aka common addresses), generally control the enforceability of a mortgage. As such, the Court found that summary judgment as to liability must be entered, although it remanded the case back to the trial court to determine the amount of Lender’s damages, including reasonable attorney’s fees.

Related posts.

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Part of my practice involves mortgage-related litigation and title 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.