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Bank Records Of Non-Party (Third Party) Discoverable In Post-Judgment Collection Action

Lesson. A bank’s records of a non-party to litigation can be subpoenaed in post-judgment collection proceedings if the document request is reasonably calculated to lead to the discovery of concealed or fraudulently transferred assets.

Case cite. Allstate Ins. Co. v. Orthopedic P.C. 2022 U.S. Dist. LEXIS 42485 (S.D. Ind. 2022)

Legal issue. Whether a judgment creditor could obtain the bank records of a non-party in post-judgment collection proceedings.

Vital facts. The Allstate opinion followed the entry of a 460k judgment that Defendant health care providers failed to pay. Plaintiff claimed that Defendants improperly transferred patients to Non-Party provider and that those patients “were then to be billed using the name of a separate entity apparently to avoid detection by [Plaintiff].” Thus, there was a perceived financial relationship between Defendants and Non-Party in which Defendants were transferring assets to avoid collection. In order to investigate the theory further, Plaintiff subpoenaed the bank records of Non-Party.

Procedural history. Non-party moved to quash the subpoena.

Key rules. Allstate was a federal court action, so the federal rules of procedure applied. The Court noted that Rule 69(a)(2) expressly provides that a judgment creditor "may obtain discovery from any person" to aid in execution of a judgment. This applies to discovery to non-parties too. See also, Indiana Trial Rule 69(E).

Indiana federal case law interprets Rule 69 to allow “a judgment creditor to obtain discovery on ‘information relating to past financial transactions which could reasonably lead to the discovery of concealed or fraudulently transferred assets.’”

Discovery to non-parties “may be permitted where [the] relationship between judgment debtor and nonparty is sufficient to raise a reasonable doubt about bona fides or transfer of assets.”

The Court cited the following test for subjecting third parties (aka non-parties) to discovery: “. . . so long as the judgment creditor provides 'some showing of the relationship that exists between the judgment debtor and the third party from which the court . . . can determine whether the examination has a basis.'”

However, a judgment creditor must keep its inquiry “pertinent to the goal of discovering concealed assets of the judgment debtor and not be allowed to become a means of harassment of the debtor or third persons.”

Holding. The trial court denied the motion to quash and ordered Non-Party’s bank to provide the responsive materials.

Policy/rationale. Non-Party contended that the records were irrelevant and beyond the reach of discovery. Non-Party’s main theory was that it had not been sued by Plaintiff and that Plaintiff had not claimed Non-Party was a part of any conspiracy. The Court disagreed and concluded that the subpoena was “an entirely reasonable and appropriate attempt to obtain discovery in support of [Plaintiff’s] efforts to collect on its judgment . . . .” The Court’s rationale was that Plaintiff met the “reasonable doubt” standard by presenting evidence in the form of emails that indicated Defendants may have fraudulently transferred its patients to Non-Party to evade Plaintiff’s collection efforts.

Related posts.

Part of my practice involves representing parties in post-judgment collection actions. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Lender Entitled To Full Amount Of Insurance Proceeds From Fire Loss: Borrower Responsible For Own Attorney Fees

Lesson. If a borrower engages an attorney to help with an insurance claim arising out of a loss to mortgaged property, generally the attorney will not be paid from the insurance proceeds, which belong to the lender as a loss payee.

Case cite. Flannagan v. Lakeview Loan Servicing LLC 184 N.E.3d 691 (Ind. Ct. App. 2022)

Legal issue. Whether Borrower’s attorney was entitled to a cut of the insurance proceeds following a fire that damaged Borrower’s house.

Vital facts. Borrower and Lender entered into a mortgage loan. A fire destroyed the house on the mortgaged real estate.

As is typical, the mortgage required insurance against certain losses, including fire. The customary language in the mortgage also stated that, in the event of a loss, the insurance proceeds may be applied by Lender either (a) to the reduction of the indebtedness owed under the promissory note or (b) to the restoration or repair of the damaged property. Borrower’s insurance policy had a standard provision that any loss payments would be paid to Borrower unless “some other person is named in the policy or is legally entitled to receive payment” (a so-called “loss payee”). With respect to lenders/mortgagees named in the policy, the mortgage went on to express that losses shall be paid “to the mortgagee and you, as interests appear.” Lender was a loss payee on Borrower’s hazard insurance policy.

Borrower engaged a law firm to represent her in connection with the fire loss. The insurer issued settlement checks in the amount of $74,373.23 that were jointly payable to Borrower, Lender and Borrower’s law firm. The proceeds were less than the total amount of Borrower’s debt.

Procedural history. A lawsuit arose in which Lender and Borrower sought a determination by the trial court of Borrower’s law firm’s rights to the insurance proceeds. The trial court granted summary judgment in favor of Lender, and Borrower appealed.

Key rules. Indiana law generally provides that, because a mortgage is a contract, the parties “are free to enter into an agreement concerning the disposition or application of insurance proceeds in the event of a loss.”

"Where a mortgage or insurance policy provides for insurance proceeds to be paid to the mortgagee 'as its interest appears', the mortgagee is entitled to the insurance proceeds to the extent of the mortgage debt."

Holding. The Indiana Court of Appeals affirmed the trial court’s summary judgment.

Policy/rationale. Borrower essentially contended Lender was only entitled to the insurance proceeds remaining after the cost of her attorneys, which were instrumental in negotiating a settlement of the fire loss. The Court rejected Borrower’s theory because “the plain language of the Mortgage does not support [Borrower’s] interpretation of the phrase “insurance proceeds.” The Court noted that the mortgage:

did not expressly refer to a partial distribution of insurance proceeds or, at least where the proceeds do not exceed the amount of the [Borrower’s] indebtedness, to a distribution of a portion of the insurance proceeds to the Lender and a portion of the proceeds to the [Borrower]. Also, the Mortgage does not suggest the amount of insurance proceeds to which the Lender is entitled must be reduced by an amount equal to the costs or attorney fees incurred by the [Borrower] to secure the proceeds.

The Court also examined equitable claims asserted by Borrower. Please review the opinion for details of those theories. In the end, neither the language of the mortgage nor the law of equity required Lender to share the insurance proceeds with Borrower’s attorneys. Remember, the purpose of the insurance was to cover damage to Lender’s loan collateral (Borrower’s house). Assuming Borrower did not use the funds to rebuild the destroyed property, the money went to reduce Borrower’s debt. Make no mistake – this was a windfall to Lender. Borrower benefitted from the insurance proceeds. It’s just that Borrower had to pay for her lawyers.

Related posts.

I represent parties involved in disputes arising out of loans that are in default. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.