« June 2011 | Main | August 2011 »

USA Today Addresses Short Sales

USA Today has a telling piece regarding short sales on line:  Short sales, long waits:  Buyers and sellers find process frustrating.  The article focuses on the residential side, but does provide some insight into the process as it might apply to commercial transactions.  The main difference I see is the role that mortgage insurance evidently plays in a consumer short sale. 

I'll be speaking briefly about short sales at an Indianapolis continuing legal education seminar on October 10, 2011.  Here's a link to the program.  I touched upon short sales, in the UCC context, on December 7, 2010.

Indiana Trial Court Oversteps Its Authority In Proceedings Supplemental

There are times when secured lenders need to utilize Indiana proceedings supplemental, for instance when they desire to recover a deficiency judgment from a borrower or, more likely, a guarantor.  A pair of Indiana Court of Appeals opinions, involving the same parties and decided on the same date, illustrate that trial courts have broad authority in proceedings supplemental but that such authority is not unlimited.  Branham v. Varble, 2010 Ind. App. LEXIS 1964 (.pdf) and 2010 Ind. App. LEXIS 1966 (.pdf) held that the trial court abused its discretion when it ordered the judgment debtors “to seek five jobs per week.” 

The appeal.  The Branham appeal arose out of the trial court’s order requiring the judgment debtors to pay $50 per month toward a judgment and the husband to conduct a job search by submitting five applications per week.  The judgment debtors appealed the ruling and based their appeal primarily upon Article 1, § 22 of the Indiana Constitution that states: 

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.

See also, Jail Time Is Not An Available Remedy In Collection Actions In Indiana.

Some controlling statutes.  The opinions suggest that the quoted portion of the Indiana Constitution formulated the basis for some of Indiana’s collection statutes, including Ind. Code § 24-4.5-5-105(2)(b) (exemptions from garnishment) and Ind. Code § 34-55-10-2 (property exempt from execution).

Affirmative action?  The interesting and perhaps novel issue in the two opinions surrounded the trial court’s order for the husband to “seek alternative employment by submitting five applications a week.”  The judgment creditor wanted the judgment debtors to increase their income so as to increase the amount available for garnishment.  The Court noted that proceedings supplemental’s origins are in equity and constitute a remedy “to the creditor for discovering assets, reaching equitable and other interest not subject to levy and sale at law and to set aside fraudulent conveyances.”  Ind. Trial Rule 69 and, in the Branham case, Indiana Small Claims Rule 11(C), governed.  Those rules give the trial court broad discretion in ordering payment terms. 

But Branham drew the line:

Keeping in mind T.R. 69 governing proceedings supplemental and S.C.R. 11, and based on the record before us, we cannot say that the garnishment order was a final judgment and that the trial court erred in requiring the Branhams to appear for a subsequent hearing for proceedings supplemental.

With that said, we nevertheless conclude that the court overstepped its authority and abused its discretion when it required Quincy to seek alternative employment by submitting five applications a week.  As set forth above, the purpose of proceedings supplemental is to afford the judgment-creditor relief to which it is entitled under the terms of the judgment.  . . .  Here, the judgment-creditors are entitled to the payment of the money judgment rendered in their favor.  Although the court is afforded discretion in proceedings supplemental, we have found no authority that supports the trial court’s order requiring Quincy to seek alternate employment by submitting five applications a week. 

One interpretation of these two opinions is that, while trial courts have broad authority to enter orders impacting a judgment debtor’s income and assets, they cannot compel a judgment debtor to increase his or her wealth.  For example, courts can’t order defendants to get a job.  The Branham opinions are an interesting study in the purpose and scope of proceedings supplemental, and they provide secured lenders with a little flavor of their rights and remedies associated with enforcing a deficiency judgment.

Note:  The Indiana Supreme Court granted transfer on March 10th and issued opinions on August 30th.  Please see my September 23, 2011 post for more on this law.  

Indiana Toll Road-Related Foreclosure?

A July 7th article from Bloomberg Businessweek concluded that the Indiana Toll Road, which had been "held up as an example of public-private partnerships, shows no signs of breaking even for its conglomerate."  LINK.  Given the political backrop, it's hard to imagine  that it would ever come to this - but the article suggests the possibility of a foreclosure  action involving the project:

The private investors haven’t made out so well. Had the road been profitable, they stood to make millions per year over the life of the 75-year project. As it is, they have not been able to get past the debt they incurred winning the bid. They have met their annual debt payments only by borrowing money and may default before loans mature in 2015, according to disclosure documents from Macquarie Atlas Roads, one of the investors. The project’s 2010 prospectus said that revenue from the highway is “expected to remain insufficient to cover debt service obligations over the medium term.” The document cautions that “any default under the loan documents may lead to lender actions which may include foreclosure of the project assets or bankruptcy.”

The "project assets" upon which the lenders would foreclose are not detailed in the article.  From what little I know about the deal, the lenders would not be able to repossess (own, via a sheriff's sale) the interstate itself because the State of Indiana maintains ownership of the roadway.  The investors' (borrowers') rights to the Toll Road arise out of a long-term lease arrangement. 

If and when additional details unfold about the project's problems and/or the lenders' remedies upon default, I'll post the information here.  It could be a very interesting and unique case, particularly from a secured lender's perspective, if the matter were ever litigated.   




Indiana Supreme Court Clarifies Indiana Law In Distinguishing A True Lease From A Sale Subject To A Security Interest

Today’s post supplements my February 11, 2011 post regarding Gibraltar Financial v. Prestige Equipment punch press case.  On June 21, 2011 (.pdf), the Indiana Supreme Court reversed the Court of Appeals’ decision that was the topic of my prior article.  At issue is the sometimes difficult question of whether a transaction constituted a lease or a sale subject to a security interest. 

UCC, generally.  Although the case involved Colorado law, the operative statutes are similar, if not identical, to those in Indiana.  The first is the UCC’s definition of a lease at Ind. Code § 26-1-2.1-103(j).  The “key thing to note” with regard to the definition is that lease and security interest-based transactions “are mutually exclusive.”  The second and more central statute is I.C. § 26-1-201(37), which sets forth rules for distinguishing the two transactions.  The provision is complex.  The Gibraltar opinion helps parties and their lawyers navigate through that statute.  (Colorado’s version is Colo.Rev.Stat. § 4-1-203.)

Security interest per se.  The Court first concluded that one component of Section 201(37) is to create a two-pronged “bright-line test” to decide the issue of whether the transaction has created a security interest.  If the facts meet the test, “no further inquiry is required.” 

    Prong 1.  The first prong is satisfied “if the consideration that the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease and is not subject to termination by the lessee.”  The Court in Gibraltar concluded that the lease was not subject to termination.  Thus the first prong of the bright-line test was met.

    Prong 2.  The second prong is satisfied if one or more of four “Residual Value Factors” identified in the statute are found to exist.  In Gibraltar, only one of the four factors were potentially at issue:  whether the lease provided the lessee with an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease.  The Court (and the Court of Appeals) wrote at length about two different tests applicable to this prong:  the “Fair Market Value Test or Standard” and the “Option Price/Performance Cost Test.”  (Review the opinion for details.)  The Court held that prong 2 was not satisfied under either test, essentially because “compliance with the Lease required [lessee] to pay more than nominal consideration to become the owner of the press.” 

Because prong 2 of the bright-line test was not met, there was no security interest per se created by the lease.

Fall back.  If the transaction does not pass the two-pronged bright-line test, Indiana courts must turn to a consideration of “the economic reality of the transaction in order to determine . . . whether the transaction is more fairly recognized as a lease or as a secured financing agreement.”  The Court discussed the pertinent statutory provisions and described their complexity, as well as courts’ struggles with interpreting them.  The Court’s solution was to articulate the following rule:  the question is whether the economic realities of the transaction dictate that it is a lease, and the focus in answering the question should be on the operative “economic factors” that drove the transaction.  The Court’s opinion identified some of the factors to be considered, none of which alone controls.  Indeed there were factors supporting both sides in Gibraltar.  The bottom line is that a resolution of this issue is highly dependent upon the facts. 

No summary judgment.  The Gibraltar decision involved an appeal of the trial court’s summary judgment ruling, which was affirmed by the Court of Appeals.  Here’s how the Indiana Supreme Court left the case: 

the defendants had the burden of establishing the absence of any genuine issue of material fact as to the economic realities of the transaction dictating that it was a lease as a matter of law.  To do so required evidence of the expectations of [lessee] and [lessor] at the time the transaction was entered into as to such factors as the value of the punch press on the EBO and lease expiration dates, the discount rate, and whether the “only economically sensible course” for [lessee] would have been to exercise the EBO. 

The Court saw “no way of resolving this case without this evidence” and thus reversed the case.   

Gibraltar serves as a reminder that not all “lease” agreements will be treated as leases.  Lenders should be attentive to these rules and to structure their transactions accordingly, depending upon whether they desire the transactions to be true leases versus a secured loans.  This dense body of law plays an important role when asset-based lenders and their collection counsel are confronted with defaults on these transactions.  The nature of the underlying transaction will control the remedies available to the lender/lessor, as well as who owns the asset.