The Indiana Court of Appeals issued two opinions in DBL v. LaSalle Bank, 2010 Ind. App. LEXIS 2056 (Ind. Ct. App. 2010) and 2011 Ind. App. LEXIS 167 (Ind. Ct. App. 2011). DBL, one of those factually-dense, unique cases, shows what an important tool a receivership can be for a foreclosing lender/mortgagee.
Layers of claims, settlements. DBL involved a mortgage loan secured by a plaza located in a city in Southern Indiana. The borrower’s property was the subject of a condemnation and nuisance lawsuit with the city. The borrower and the city reached a settlement, apparently without the lender’s knowledge, with regard to the nuisance claim in which the city agreed to pay the borrower $1,725,600 in three installments. There was a separate agreed judgment entered regarding the condemnation claim in which the city was to pay the borrower and the lender $224,600, but those funds all went directly to the borrower in error. At some point along the way, the lender filed a foreclosure action and requested the appointment of a receiver. The lender then discovered that the city made sizeable payments to the borrower pursuant to the settlement of the nuisance claim.
Turnover. The lender sought a court order directing the borrower to turn over, to the receiver, the funds the borrower received from the city. The lender alleged that the borrower was in violation of the trial court’s order appointing receiver. The trial court granted the motion and directed the borrower, within a week, to pay $1,365,600 to the receiver.
Scope. One issue in the case surrounded whether the payments made by the city were within the scope of the receivership order. The Court noted generally that in Indiana (a) a receiver ordinarily takes all the property of the debtor that constitutes the subject of the action but (b) does not take property not involved in the action or not included in an order designating the particular property of which the receiver is to have charge. Because the settlement related specifically to the subject real estate, the Court concluded that “the checks paid by [the city to borrower] concerned [the mortgaged real estate] and were within the scope of and subject to the Receivership Order, and [borrower’s] failure to include the monies paid or otherwise notify the Receiver of the [settlement agreement] was a violation of that order.” The Court therefore initially affirmed the trial court’s turnover order.
DBL II. The borrower petitioned the Court of Appeals for a rehearing, which is the method to have the Court reconsider a prior opinion. The problem was that the borrower had immediately disbursed the settlement funds received from the city. The money the trial court ordered the borrower to turn over was gone. As such, upon further review, the Court reversed its initial decision and remanded the case to the trial court for further proceedings.
Non-party technicality. The Court of Appeals, on rehearing, held that there should have been a determination by the trial court whether the borrower was in possession of the funds at the time it issued its turnover order. In Indiana, where a debtor distributes funds to third persons before the establishment of the receivership, “a court or receiver cannot compel the third persons, without due process of law, to turn over such funds to the receiver.” In DBL, if the $1,506,000 paid to the borrower had been distributed to third persons, the receiver, in an attempt to acquire such funds, would first need to amend the complaint to make such outsiders a party to the proceedings or otherwise file a separate action against such outsiders. So, in that respect, the power of a receiver is not unlimited.
But wait. The borrower was not off the hook. The Court stated:
we point out that it appears from the record that [borrower] has concealed the whereabouts of not only the $1,506,000 by not including it in any record which was ordered to be turned over to the Receiver, but also the $360,000 paid to [borrower] after the date of the Receivership Order. Indeed, neither this installment nor the existence of the Settlement Agreement was disclosed to the Receiver. Nevertheless, we believe that these questions are best left to the trial court to resolve by way of a fact-finding hearing and any other procedures which may be necessary.
Although the borrower successfully distributed the settlement money outside of the immediate reach of the receiver, the borrower may still pay a price for its alleged violation of the prior receivership order.
As explained on this blog before, a receivership can be a potent device for foreclosing lenders in Indiana. It can, and generally does, put a choke hold on income generated by the subject property, and DBL illustrates just how broad the scope of a receivership order can be.