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.