In my "Notable News" category, you'll find posts from November 17, December 1 and December 6 that follow the Conseco v. Steve Hilbert $84 million judgment enforcement proceedings. My 11-17-06 post "Not Your Typical Sheriff's Sale" mentioned that Hilbert's $20 million mansion had been slotted for a sale by the Hamilton County Civil Sheriff next Thursday, December 28. Today, The Indianapolis Star reports that Conseco canceled the sale pursuant to the settlement reached December 6th. Evidently, in lieu of the judicial sale, Hilbert simply deeded the property to Conseco. Conseco, in turn, was able to avoid the time and expense of a sheriff's sale and now can move forward with disposing of the property itself, likely with a better financial result.
When a lender makes the decision to foreclose on its borrower’s real estate collateral in Indiana, the lender must determine who, besides the borrower, claims an interest in the property. That’s why a title policy (foreclosure) commitment is ordered before the filing of the case. Clear title cannot be obtained upon a sheriff’s sale unless all lien holders are named as defendants in the suit (so that their interests can be foreclosed). Recently, the Indiana Court of Appeals reminded us of why and when pre-suit title work must be updated.
The rule. In the December 8, 2006 opinion House v. First American Title Company, 2006 Ind. App. LEXIS 2472, the Court of Appeals addressed a dispute between the purchaser of residential real estate (after a sheriff’s sale) and his title insurance company. Although the issues in the opinion have no real bearing on commercial foreclosure law, a rule cited by the Court in its decision does: a foreclosure action’s filing date is the “only relevant date used to determine the proper parties to a mortgage foreclosure.” Third-parties who secure an interest in the mortgaged property after the filing of the foreclosure complaint need not be named in the suit. Note these comments from House:
Because the judgment of the Dearborn County Health Department
did not attach until after the foreclosure action was commenced by
the Bank of New York, any lien which arose as a result of the
default judgment obtained by the health department was foreclosed
by the foreclosure sale and therefore does not affect fee simple title
to the real estate.
So, lenders need not continuously search title during the course of litigation and worry about adding new parties to their foreclosure complaint. “The only relevant date” is the foreclosure action’s commencement date – the day the lender filed the complaint.
Date down. Invariably, there will be a gap between the completion of the preliminary title search and the initiation of the suit. Conceivably, liens, etc. could arise during that time. To cover the gap, lenders must “date down” (update) their title policy commitment to the day of the filing of the complaint. House confirms that this is the only title update required, and I recommend that it be done shortly after the filing of the complaint. If any interests arise during that period, the new lien holders must be added to the case. Should the updated commitment uncover no new interests, the lender can be comfortable proceeding with the original cast of characters.
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.
An unidentified lender has sued to foreclose on a 1.2 million square foot industrial complex on the east side of Indy. Here's a link to the IBJ story. A local industrial park property manager, Larry Harshman, has been named receiver. Interestingly, he's quoted as not having been contacted before being appointed. It's been my experience that lenders essentially will line up a receiver in advance, get the borrower's blessing and then ask the court to appoint the lender's specific choice. The statute doesn't require this, however.
Also of note is that the lender and borrower tried to avoid formal foreclosure proceedings by putting the property up for auction, which evidently failed to generate a sizable enough offer to satisfy the lender, the borrower, or both. This attempted pre-foreclosure transaction sometimes is labeled a "short sale" and is designed, in part, to save time and expense. Needless to say, a short sale avoids a judicial (sheriff's) sale of the collateral.
Several local media sources are reporting that Carmel, Indiana-based Conseco and its founder and former CEO Steve Hilbert reached a confidential settlement early this morning. Indianapolis Star story link. This appears to resolve the proceedings supplemental phase of the litigation about which I wrote in my December 1 post "Not Your Typical Order To Appear." I doubt that this will impact the December 28 sheriff's sale of Hilbert's former mansion, however. (See my November 17 post "Not Your Typical Sheriff's Sale"). I suspect Hilbert essentially has surrendered that asset to Conseco as part of the collection efforts.
Naturally, judgment debtors don't enjoy being grilled in Court about the nature and extent of their assets. Hilbert avoided such uncomfortable and public questioning by settling this morning just before he and his wife were set to appear. Because the settlement is confidential, we'll never know who got the better deal. Did Hilbert string along Conseco and wait to settle until virtually the last possible minute? Or, did Conseco push Hilbert to the brink of an awkward hearing to squeeze more money out of him? My guess is, it was a combination of the two. Regardless, this is an example of how Court intervention, or more specifically the threat of it, ultimately causes parties to settle.
Here is The Indianapolis Star's full story in Thursday's paper: 'It's all over now'
In the November issue of Hoosier Banker, author Jean Wojtowicz provides nice insight into the utilization of alternative loan products in her article "Yellow Flags on Commercial Real Estate." (hoosier_banker_article.pdf). Of particular significance to this blog is Ms. Wojtowicz's mention of Susan Schmidt Bies' recent testimony before a Congressional Subcommittee. Ms. Bies, of the Federal Reserve, stated that between 1992 and 2005 commercial real estate concentrations of the nation's largest banks almost doubled. According to Bies, commercial real estate is a volatile sector of the economy, and a downturn could trigger financial stress like that seen in the late '80's/early '90's (which, in turn, would trigger more commercial foreclosure cases).
By way of follow-up to my November 17 post "Not Your Typical Sheriff's Sale," J.K. Wall of The Indianapolis Star is reporting that former Conseco CEO Steve Hilbert will be in Hamilton Circuit Court (Noblesville, IN) this morning in connection with Conseco's continued efforts to enforce its $84 million judgment against Hilbert. (Link to story.) Although I have not reviewed the pleadings, presumably Hilbert's appearance before Judge Proffitt is pursuant to an Indiana Trial Rule 69(E)(3) order to appear. As some of you may know, this phase of Conseco's litigation against Hilbert is called "proceedings supplemental to execution."
Here's a link to The Star's update to the story: Hilbert, Conseco agree on $1.1M account.
Here's a link to the full story from Saturday's Star: Hilberts, Conseco back at it.