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Judgment Deemed Satisfied After Defendant Guarantor Utilizes Strawman To Purchase It

In commercial foreclosure actions, creative parties and counsel often reach unique settlements that satisfy the needs of both the lender and the borrower or guarantor(s). The case of TacCo v. Atlantic Limited Partnership, 937 N.E.2d 1212 (Ind. Ct. App. 2010) shows such creativity in action. TacCo is a lesson in satisfaction of judgments and the strawman defense, but the more interesting facet of the case is the maneuvering between co-guarantors over their shared exposure to a $3.2MM judgment.

Players. I’ll label the key players in TacCo as follows: Lender, Borrower, Strong Guarantor, Strawman and Weak Guarantor. “Strong” and “weak” signify that one of the co-guarantors seemingly had the financial capacity or willingness to pay the debt, while the other did not. Lender initiated a commercial mortgage foreclosure action against Borrower, Strong Guarantor and Weak Guarantor. The suit resulted in a judgment for $3.2MM.

Post-judgment settlement. Before the sheriff’s sale, Lender and Strong Guarantor entered into a settlement agreement that centered on Lender’s sale of the judgment for $1.5MM in cash, a $1.5MM promissory note and a $250,000 letter of credit. On paper, the settlement was conditioned upon Strong Guarantor’s ability to locate a purchaser of the judgment, which purchaser ended up being Strawman. Lender obtained the cash and promissory note, and Strawman obtained an assignment of the judgment. Strawman then submitted a credit bid at the sheriff’s sale for $1.5MM and acquired the subject property.

Purpose. Lender got paid off, but Weak Guarantor was not a part of the deal. Although Weak Guarantor and Strawman submitted conflicting evidence and theories, it appears that the settlement was structured to deliver Strong Guarantor the real estate and to expose Weak Guarantor to judgment enforcement (collection) efforts by Strawman.

Post-settlement motion. After the settlement occurred, Weak Guarantor filed a motion for entry of satisfaction of judgment. See, Ind. Trial Rule 67(B) . Weak Guarantor asserted that the judgment had been paid in full. Strawman contended that the judgment still existed and that, as the assignee of the judgment, it could collect the entire $1.7MM+ deficiency from Weak Guarantor.

Judgment satisfaction rules. The legal issue was whether the intent of the post-judgment settlement transaction was to extinguish the judgment against Strong Guarantor. The Court in TacCo outlined the applicable Indiana legal principles:

1. Payment of a judgment by one of the judgment debtors (defendants) is a satisfaction of the judgment, notwithstanding the fact that an assignment of the judgment is made to such debtor or to someone else.
2. Where a strawman is used by a co-debtor to purchase an assignment of a judgment, the judgment is deemed to have been purchased by one of the joint judgment debtors.
3. The controlling fact in such a case is the payment by one legally bound to pay, and the fact that an assignment is made to him or to someone else is not of controlling importance.
4. If one whose duty is to pay the debt makes the payment, then an assignment will not keep the debt alive.

Judgment satisfied. Without regurgitating all of the detail here, the Court in TacCo followed the money, evaluated the actors’ involvement and concluded that Strawman and Strong Guarantor essentially were the same entity. Here is how the Court of Appeals in TacCo applied the rules to reach its conclusion:

We conclude that the evidence presented to the trial court showed that [Strong Guarantor] made payment to [Lender] to purchase the Consent Judgment and assigned the judgment to [Strawman]. . . . Here, [Strong Guarantor] was a party legally bound to pay the judgment, and the evidence showed that it was the party who made payment to [Lender] for purchase of the judgment. The fact that an assignment of the judgment was made to [Strawman] does not change the fact that such payment resulted in a satisfaction of the judgment. The trial court did not abuse its discretion when it found that [Strong Guarantor] used [Strawman] as its strawman to purchase the Consent Judgment and deemed that the judgment had been satisfied.

Result. The upshot was that the judgment no longer existed, and Weak Guarantor’s exposure to the full $1.7MM+ deficiency disappeared. Strawman thus could not enforce the judgment against Weak Guarantor.

Arguably, Strong Guarantor still might have a contribution claim against Weak Guarantor for a pro rata portion of the deficiency ($850,000+), but the Court did not address that issue. In the end, the settlement structure in TacCo was a creative design for Strong Guarantor that didn’t quite work.