Indiana County Clerk Liable To Judgment Creditor For Bail Bond Proceeds Released To Judgment Debtor

Lesson. Following the entry of a money judgment, there may be innocent third parties who have money in their possession that they owe to the defendant (aka judgment debtor). If any such third party receives notice of the plaintiff’s (judgment creditor’s) post-judgment claim to such money, the third party should hold the money until the court determines the judgment creditor’s rights to the proceeds. If a third party (known as a garnishee-defendant) pays such money to the judgment debtor, the third party can be liable to the judgment creditor for the amount of money turned over. 

Case cite. Garner v. Kempf, 93 N.E3d 109 (Ind. 2018).

Legal issue. Whether Indiana law permits a judgment creditor to garnish a bail bond that the judgment debtor posted in an unrelated criminal case.

Vital facts. A judgment debtor tendered a cash bail bond in a criminal matter, which was unrelated to the civil matter where the judgment was entered. The judgment creditor tried to garnish the bond to satisfy the unpaid judgment. The clerk of the criminal court, who was named as a garnishee-defendant during proceedings supplemental in the civil case, released the funds to the judgment debtor’s criminal defense attorney. The judgment creditor pursued a claim against the clerk for the amount of the released proceeds.

Procedural history. The trial court ruled that the bond was not subject to garnishment. The judgment creditor appealed all the way to the Indiana Supreme Court, which issued the very comprehensive Garner opinion that is the subject of today’s post.

Key rules.

  1. Court clerks are subject to garnishment proceedings.
  2. The court that issues the underlying judgment retains jurisdiction over proceedings supplemental, even if there is a parallel action in another court.
  3. When a garnishee-defendant receives a summons, it becomes “accountable to the plaintiff in the action for the amount of money, property, or credits in the garnishee’s possession or due and owing from the garnishee to the defendant.”
  4. “In effect, upon serving the summons, the judgment-creditor secures a lien on the defendant-debtor’s property then held by the garnishee-defendant.”
  5. The garnishee-defendant is liable for paying out funds inconsistent with this lien.

Holding. The Indiana Supreme Court reversed the trial court and held that the clerk was an eligible garnishee-defendant and that the civil judgment was a lien on the criminal bond. The Court went on to find that the clerk was liable to the judgment creditor because the clerk distributed the proceeds before the civil court determined the parties’ rights to them.

Policy/rationale. In Garner, the clerk’s main contention was that she was protected by a separate criminal court order that released the bond to the defendant’s attorney. But the clerk had already received a summons from the civil court in connection with the judgment creditor’s proceedings supplemental. The clerk failed to inform the criminal court of the lien on the bond created by the summons. The Indiana Supreme Court reasoned that the clerk had a duty to hold the cash pending a determination of the judgment creditor’s right to the proceeds to satisfy the judgment. When the criminal judge approved of the defendant’s request to use the cash bond proceeds to pay his defense lawyer, “those proceeds were no longer encumbered to ensure [the defendant’s] appearance at his criminal trial,” at which point the proceeds became subject to the judgment creditor’s preexisting garnishment lien. Since the clerk released the money before the civil court determined the plaintiff/judgment-creditor’s right to the proceeds, the clerk became liable to the creditor for that amount. Please note that Justice David wrote a dissenting opinion that focused on the criminal law aspects of the matters at hand.

Related posts.

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I represent judgment creditors and lenders in commercial collection actions. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenlawyers.com. 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.


Post Script: When Can Post-Judgment Collection Efforts Begin In Indiana?

This follows-up last week's post.  Yesterday, I bumped into a lawyer who reads my blog and reminded me that we always must check the local rules of a particular county, including the local smalls claims court rules, for their potential application to a particular situation.  Local rules often supplement, or even trump, the state rules of procedure or case law.  As an example, the Marion County (Indianapolis) Small Claims Court Rules, specifically Rule LR49-SC00-602 provides:

B.  Thirty-Day Rule.  A Motion for Proceedings Supplemental shall not be set until thirty (30) calendar days after the date of judgment, except by order of the Court for good cause shown.

The point is that, in certain Indiana venues, post-collection efforts may not begin immediately.  Thanks to attorney Robert Burt for the feedback on last week's post.  

 


When Can Post-Judgment Collection Efforts Begin In Indiana?

How long must the holder of an Indiana judgment wait before executing on the judgment?  The answer depends on whether the case is in state or federal court.  Two opinions by Magistrate Judge Cherry address that issue and other proceedings supplemental basics Artmann v. Center Garage, 2012 U.S. Dist. LEXIS 153966 (N.D. Ind. 2012) (“Artmann I” - .pdf) and 2012 U.S. Dist. LEXIS 160908 (N.D. Ind. 2012) (“Artmann II” - .pdf). 

Procedural posture.  In Artmann I, the U. S. District Court for the Northern District of Indiana entered judgment in plaintiff’s favor, and one day later plaintiff filed its motion seeking to freeze, and collect upon, defendant’s bank accounts pursuant to Ind. Code §§ 28-9-3-4 and 28-9-4-2.  The opinion dealt with plaintiff’s motion and defendant’s corresponding motion to quash plaintiff’s motion. 

14 days.  The defendant contended that plaintiff’s efforts were premature.  Specifically, Federal Rule 62(a) provides for a 14-day stay of execution on a judgment.  The purpose of the rule is to “afford litigants an ample period of time to consider whether to appeal, to file a motion for new trial and/or to seek a stay of execution of judgment.”  Plaintiff argued that the rule did not bar its request for interrogatories and a hold because plaintiff sought only to “preserve” defendant’s property for eventual satisfaction.  Plaintiff stipulated that it would not actually collect any money until after the 14-day stay had expired. 

Yes and no.  The Court concluded that it could not permit garnishment proceedings before the expiration of the 14-day stay.  As such, plaintiff filed its motion too early.  Clearly the Court could not issue any order granting the motion until the stay ended.  Having said that, the ultimate result in Artmann I was a practical one in that the Court allowed plaintiff’s motion to remain pending until the expiration of the stay period.  (I learned that the Court granted plaintiff’s motion on day 15.) 

State law.  Indiana state court Rule 62(A) does not articulate a 14-day automatic stay of execution, or any stay whatsoever.  Historically, the Indiana state rule provided for a 60-day automatic stay, which later evolved into a 30-day stay and ultimately to no stay at all.  As such, the Artmann I holding only applies in federal court proceedings.  Plaintiffs in Indiana state courts may undertake post-judgment collection efforts immediately.  (Note:  In instances of enforcing a foreign judgment in Indiana, the domestication process cannot commence until 21 days after the entry of the judgment in the original [non-Indiana] court.)      

Pro supp basics.  Artmann II dealt with defendant’s contention that plaintiff’s Artmann I motions did not follow certain technical requirements for proceedings supplemental.  The Artmann II opinion provides a nice summary for judgment creditors and their counsel struggling with the nuts and bolts of proceedings supplemental in federal court.  Specifically, judgment creditors need to remain mindful that, under Indiana law, before courts can entertain a garnishment motion under I.C. §§ 28-9-3-4 and 28-9-4-2, creditors must first (or simultaneously) file a separate motion for proceedings supplemental.

Pro supp relief.  Finally, for those wondering what “proceedings supplemental” can accomplish, the Artmann II opinion noted the three fundamental types of relief available:  (1) requiring a judgment debtor (a defendant) to appear in court for an examination as to available property, (2) requiring a judgment debtor to apply particular property to satisfy the judgment and (3) joining a third-party (a garnishee) to the action and requiring that party to answer as to property held by that party for the judgment debtor.   For more posts on garnishment and proceedings supplemental, including freezing bank accounts, please click on the those Categories to your right.


Despite Judgment Debtor's Failure To Object, IRA Exempted From Garnishment

Lesson.  Indiana law generally protects retirement accounts from post-judgment collection.

Case cite.  Dumka v. Erickson, 70 N.E.3d 828 (Ind. Ct. App. 2017).

Legal issue.  Whether a judgment debtor’s failure to assert a statutory exemption from garnishment necessarily means that the exemption is waived.

Vital facts.  Judgment creditor filed a motion for proceedings supplemental against judgment debtor and named as a garnishee-defendant the institution that held funds in an “inherited traditional individual retirement account” (IRA). The judgment debtor inherited the IRA from her deceased husband. At the hearing on the motion, the debtor appeared pro se (without an attorney) and did not contest the creditor’s efforts to liquidate the IRA.

Procedural history.  Even though the judgment debtor failed to object to the garnishment or to otherwise assert an exemption, the trial court denied the judgment creditor’s motion. The creditor appealed.

Key rules.

Ind. Code 34-55-10-2(c)(6) provides that non-spousal inherited IRAs are not exempt from garnishment but that IRAs inherited by surviving spouses are exempt.

Generally, exemptions must be asserted by the debtor. However, the Indiana Supreme Court has held that, because exemptions “exist to give life to a constitutional right [sheltering certain property and income from attachment],” there should be exceptions to this general rule “consistent with fairness and practical realities.”

Trial courts may take “judicial notice” of statutes at any stage in a proceeding. Ind. Evid. Rule 201(b-d).

Holding.  The Indiana Court of Appeals affirmed the trial court.

Policy/rationale.

A key factor in the Court’s decision was that the judgment debtor was unrepresented by counsel. The undisputed facts established that “the IRA is lawfully exempt from attachment,” and the trial court properly took judicial notice of the exemption. Since the trial court’s order complied with the evidence and the law, the Court of Appeals affirmed the decision.

Related posts.

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I frequently represent creditors and debtors in business-related collection actions. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenlawyers.com. 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.

 


Plaintiff/Judgment Creditor Gets Cart Before Horse In Indiana Garnishment Effort

Lesson.  Wolberg offers a great summary of some of the hoops a judgment creditor must go through before garnishing bank accounts of a judgment debtor.  Most importantly, garnishment is not a stand-alone proceeding but must occur within the context of a motion for proceedings supplemental, which motion must be filed before, or at the time of, a garnishment motion.     

Case cite.  Wolberg v. Stamer, 2015 U.S. Dist. LEXIS 153516 (N.D. Ind. 2015) (.pdf).

Legal issue.  Whether successful plaintiffs can immediately garnish bank accounts post-judgment.  

Vital facts.  Plaintiff held a judgment in the amount of $262,383.50 and sought the garnishment of bank accounts possibly held by Defendant at nine banks.  Plaintiff did not first file a motion for proceedings supplemental. 

Procedural history.  The Wolberg opinion was a U.S. Magistrate Judge’s decision on Plaintiff’s “motion for writs of garnishment.” 

Key rules.  Federal Rule of Civil Procedure 69(a) governed Plaintiff’s motion and, in pertinent part, states: 

A money judgment is enforced by a writ of execution, unless the court directs otherwise. The procedure on execution—and in proceedings supplementary to and in aid of judgment or execution—must accord with the procedure of the state where the court is located, but a federal statute governs to the extent it applies.

Since this was an Indiana case, “proceedings supplemental are generally required before the Court issues a garnishment order.” 

Indiana Trial Rule 69(E) controlled the proceedings supplemental, including garnishment generally.  The rule, as applicable in Wolberg, requires, among other things, a verified motion alleging: 

that [the] garnishee has or will have specified or unspecified nonexempt property of, or an obligation owing to, the judgment debtor subject to execution or proceedings supplemental to execution, and that the garnishee be ordered to appear and answer concerning the same or answer interrogatories submitted with the motion.

Garnishment “is a means … to reach property … of a [defendant] which are in the hands of a third person so that they may be applied in favor of the judgment.” 

As to bank accounts, Ind. Code 28-9-3-4(d) outlines what a plaintiff needs to establish in order to garnish. 

Holding.  The Court in Wolberg denied Plaintiff’s motion for the following reasons:  (1) Plaintiff  did not file a motion for proceedings supplemental, (2) the motion for garnishment was not verified, (3) Plaintiff did not allege that he had no cause to believe that levy of execution would satisfy the judgment, (4) as to the nine garnishee banks, Plaintiff alleged they “may hold” bank accounts for Defendant instead of first alleging that Defendant “had or will have” nonexempt property subject to execution and (5) Plaintiff did not represent to the Court his compliance with Ind. Code 28-9-3-4(d).  

Policy/rationale.  Courts usually aren’t going to let plaintiff/judgment creditors circumvent the applicable trial rules and statutes.  T’s must be crossed, and I’s must be dotted.  The Court granted Plaintiff leave to re-file papers in order to achieve his objective.  So, Plaintiff got a do-over, but the judgment debtor will be given the appropriate notice and opportunity to be heard.

Related posts. 

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I frequently counsel both plaintiffs and defendants in connection with judgment collection matters.  My colleagues and I also pursue proceedings supplemental, including the garnishment of bank accounts, for judgment creditors.  If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenmclaughlin.com.  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.


Pre-Judgment Seizure of Property: Attachment Fundamentals

Can lenders seize property of a borrower or a guarantor to ensure its availability to satisfy a subsequent judgment?  Rarely.  I touched on this area of the law back on 3/6/07Woodward v. Algie, 2014 U.S. Dist. LEXIS 52997 (S.D. Ind. 2014) is an excellent opinion detailing the nuts and bolts of the remedy of attachment. 

The dispute.  The heart of the Woodward case was the plaintiff’s breach of contract claim against the defendant.  The contract involved the design and building of airplanes.  The plaintiff funded the project, and the defendant was on the production side.  The plaintiff alleged that the defendant failed to produce any planes, resulting in damages.  Following the filing of the complaint, the plaintiff filed a petition for a pre-judgment writ of attachment under Ind. Code § § 34-25-2-1(b)(4)-(6) seeking the seizure of the defendant’s property connected to the airplane project.

Attachment law, generally.  In Indiana, Trial Rule 64 and I.C. § 32-25-2-1 authorize pre-judgment attachment.  The Woodward opinion dealt only with statutory attachment, however.  Indiana’s statute requires plaintiffs to file an affidavit in support of any petition showing, (1) the nature of the claim, (2) that the claim is just, (3) the amount sought to be recovered and (4) one or more of the grounds for attachment in I.C. § 34-25-2-1(b).  Indiana law also requires plaintiffs to post a bond “with sufficient surety payable to the defendant, that the plaintiff will duly prosecute the attachment proceeding and pay all damages suffered by the defendant if the attachment proceedings are both wrongful and oppressive.”  See, I.C. § 34-25-2-5. 

Grounds - § (b)(4) – asset movement.  This statutory provision mandates that the plaintiff show the defendant was removing, or was about to remove, property outside of Indiana and was not leaving enough in Indiana to satisfy the plaintiff’s claim.  Plaintiff’s supporting affidavit in Woodward did not meet this requirement.  There was no basis for the Court to find that the defendant had or would have insufficient assets to satisfy the judgment sought by the plaintiff. 

Grounds - § (b)(5)-(6) – fraudulent intent.  These rules require the plaintiff to show that the defendant had sold, conveyed or otherwise disposed of, or was about to sell, convey or otherwise dispose of, executable property with the fraudulent intent to cheat, hinder, or delay the plaintiff.  Again, the Court in Woodward concluded that there was insufficient evidence of the alleged fraudulent intent.  “This Court cannot simply assume fraud on the part of the [defendant].”  I discussed establishing fraudulent intent, through Indiana’s “8 badges of fraud,” in my post dated 12/14/06

Property subject to attachment, and why.  The plaintiff in Woodward sought a writ of attachment against essentially all of the defendant’s property.  The Court viewed this as seeking an order for replevin, not attachment.  The attachment remedy "is available in an action for the recovery of money.”  Replevin actions, on the other hand, seek to recover property.  “The plaintiff must aver the amount of damages that he ought to recover, and the sheriff seizes only the amount of property, by value, to satisfy the plaintiff’s averred claim, beginning with personal property.”  One seeking a writ of attachment should not identify specific goods to be seized “because the purpose of attachment is only to ensure that property, any property, will be available to satisfy a money judgment; it is not to preserve the availability of specific items of property for recovery by the plaintiff.”  Because the plaintiff made no claim for replevin, but only money damages, the proposed remedy of seizing specific property of the defendant’s was inappropriate. 

Denied.  The Court denied the petition for prejudgment writ of attachment.  The plaintiff in Woodward failed to prove he was entitled to the relief.  The plaintiff also lost because he proposed an inadequate bond of only $2,500 and submitted no explanation of the calculation, despite seeking a judgment for $475,000.  A pre-judgment writ of attachment is very difficult to obtain in Indiana.  Allegations will not be enough, and concrete proof will be needed.  In my view, an evidentiary hearing, in contested cases, will be required before an Indiana judge will grant this extraordinary relief. 


Judgments Cannot Be Collected Directly From Separate, Albeit Related, Corporate Entities

Lenders and other parties often are frustrated trying to collect business debts owed by assetless corporate entities.  This is especially true when it’s known that there are related, healthy entities owned by the same person.  Indiana Regional Council of Carpenters v. First American Steel, 2013 U.S. Dist. Lexis 79562 (N.D. Ind. 2013) (.pdf) helps explain the fundamentals of corporate entity judgment collection and why separate and distinct entities are not liable for the debts of another. 

Pertinent parties.  Plaintiff obtained a judgment against defendants First American Steel, LLC (“Steel LLC”) and its owner Castellanos, who also owned a company named First American Construction, Inc. (“Construction, Inc.”).  Power and Sons Construction, named as a garnishee defendant in Plaintiff’s proceedings supplemental, owed money to Construction, Inc. but not to Steel, LLC or to Castellanos.

Collection theory.  The First American Steel opinion dealt with Plaintiff’s efforts to compel Power and Sons to turnover money it owed to Construction, Inc.  In other words, Plaintiff asked the trial court for an order directing Power and Sons to pay to Plaintiff the money Power and Sons owed to Construction, Inc.  Castellanos contested the motion on grounds that Power and Sons could not be ordered to turnover money due to a non-party to the underlying action.

Execution basics.  In Indiana, a judgment-creditor (plaintiff) carries the burden of demonstrating that the judgment-debtor (defendant) has property or income subject to execution (collection).  Rules of property govern whether the judgment-debtor holds an interest in the targeted property.  The core issue in First American Steel was whether the judgment-debtor, Castellanos, held an interest in the debt owed by Power and Sons.  If so, then Plaintiff could step into the shoes of Castellanos and collect the debt.  Thus the question was whether the money owed by Power and Sons to Construction, Inc. was the personal property of Castellanos. 

Separate and distinct.  The Court noted that a corporation is a legal entity created by the state that has its own legal identity.  People who own stock in a corporation do not own the capital of the corporation.  Instead, the capital belongs to the corporation as a legal person.  “Because a corporation is a separate legal entity, although Castellanos owns the corporation in its entirety, his ownership interest is distinct from the corporate assets.”  In other words, Castellanos’ personal property consisted “of his shares of the corporation, not the corporate assets themselves.”  (See also:  Does A Guarantor’s Bankruptcy Stop A Foreclosure Case Against the Borrower?)

Motion denied.  Because the money Plaintiff sought was an asset of Construction, Inc. (a separate and distinct legal entity) and not Castellanos, ordering Construction, Inc. to turn over the funds “essentially would hold it liable for the debts of another.”  No can do.  Plaintiff therefore failed to meet its burden to demonstrate that the property was subject to turnover.

Alternatives.  The Court noted that Plaintiff could have, if supported by the facts, extinguished the fictional separation between Castellanos and Construction, Inc. (his corporation) by piercing the corporate veil or by showing the company was being used as an alter ego.  The Court also stated that, if Construction, Inc. was dissolved or in the process of dissolving, then the assets of the corporation “would become the personal property of the owner (Castellanos), provided there were no creditors of that corporation to absorb the assets.”  Instead of pursuing Construction, Inc. directly, Plaintiff could have explored those theories to effectively terminate the separation between Castellanos, the owner, and his corporation.  The Court in First American Steel said that Plaintiff made no attempts to establish grounds for those remedies.


When Can Post-Judgment Collection Efforts Begin In Indiana?

How long must the holder of an Indiana judgment wait before executing on the judgment?  The answer depends on whether the case is in state or federal court.  Two opinions by Magistrate Judge Cherry address that issue and other proceedings supplemental basics Artmann v. Center Garage, 2012 U.S. Dist. LEXIS 153966 (N.D. Ind. 2012) (“Artmann I” - .pdf) and 2012 U.S. Dist. LEXIS 160908 (N.D. Ind. 2012) (“Artmann II” - .pdf). 

Procedural posture.  In Artmann I, the U. S. District Court for the Northern District of Indiana entered judgment in plaintiff’s favor, and one day later plaintiff filed its motion seeking to freeze, and collect upon, defendant’s bank accounts pursuant to Ind. Code §§ 28-9-3-4 and 28-9-4-2.  The opinion dealt with plaintiff’s motion and defendant’s corresponding motion to quash plaintiff’s motion. 

14 days.  The defendant contended that plaintiff’s efforts were premature.  Specifically, Federal Rule 62(a) provides for a 14-day stay of execution on a judgment.  The purpose of the rule is to “afford litigants an ample period of time to consider whether to appeal, to file a motion for new trial and/or to seek a stay of execution of judgment.”  Plaintiff argued that the rule did not bar its request for interrogatories and a hold because plaintiff sought only to “preserve” defendant’s property for eventual satisfaction.  Plaintiff stipulated that it would not actually collect any money until after the 14-day stay had expired. 

Yes and no.  The Court concluded that it could not permit garnishment proceedings before the expiration of the 14-day stay.  As such, plaintiff filed its motion too early.  Clearly the Court could not issue any order granting the motion until the stay ended.  Having said that, the ultimate result in Artmann I was a practical one in that the Court allowed plaintiff’s motion to remain pending until the expiration of the stay period.  (I learned that the Court granted plaintiff’s motion on day 15.) 

State law.  Indiana state court Rule 62(A) does not articulate a 14-day automatic stay of execution, or any stay whatsoever.  Historically, the Indiana state rule provided for a 60-day automatic stay, which later evolved into a 30-day stay and ultimately to no stay at all.  As such, the Artmann I holding only applies in federal court proceedings.  Plaintiffs in Indiana state courts may undertake post-judgment collection efforts immediately.  (Note:  In instances of enforcing a foreign judgment in Indiana, the domestication process cannot commence until 21 days after the entry of the judgment in the original [non-Indiana] court.)      

Pro supp basics.  Artmann II dealt with defendant’s contention that plaintiff’s Artmann I motions did not follow certain technical requirements for proceedings supplemental.  The Artmann II opinion provides a nice summary for judgment creditors and their counsel struggling with the nuts and bolts of proceedings supplemental in federal court.  Specifically, judgment creditors need to remain mindful that, under Indiana law, before courts can entertain a garnishment motion under I.C. §§ 28-9-3-4 and 28-9-4-2, creditors must first (or simultaneously) file a separate motion for proceedings supplemental.

Pro supp relief.  Finally, for those wondering what “proceedings supplemental” can accomplish, the Artmann II opinion noted the three fundamental types of relief available:  (1) requiring a judgment debtor (a defendant) to appear in court for an examination as to available property, (2) requiring a judgment debtor to apply particular property to satisfy the judgment and (3) joining a third-party (a garnishee) to the action and requiring that party to answer as to property held by that party for the judgment debtor.   For more posts on garnishment and proceedings supplemental, including freezing bank accounts, please click on the those Categories to your right.


Garnishment Of Joint Bank Accounts In Indiana

If, following an Indiana mortgage foreclosure and sheriff’s sale, a deficiency judgment exists, plaintiffs/secured lenders have the option, in proceedings supplemental, to garnish certain property of the defendants/judgment debtors (such as a guarantor).  Trustees of the Teamsters v. Brown, 2012 U.S. Dist. LEXIS 15426 (N.D. Ind. 2012) (.pdf) involved the attempted garnishment of a bank account held jointly by a judgment-debtor and an innocent spouse. 

The targeted funds.  The plaintiff in Brown owned a judgment against Mr. Brown.  In proceedings supplemental, the plaintiff served interrogatories on two garnishee-defendant banks.  Bank A responded that Mr. Brown and his wife had a joint account and that all contributions to the account were for income from the wife’s employer.  Bank B responded that Mr. Brown and his wife had a joint account there as well.  A portion of the balance in Bank B related to Mr. Brown’s Social Security benefits, income from his wife’s employer and a tax refund owed to Mr. Brown.  The plaintiff filed a motion with the court requesting a turnover order of all funds in each bank.  Mr. Brown asserted that Indiana law protected the funds received from Social Security, as well as the funds contributed to the joint account by his wife.

Basics.  The Court in Brown noted that, under Indiana law, the plaintiff/judgment-creditor bore the burden of demonstrating that Mr. Brown, as the judgment-debtor, had property or income subject to execution.  An interest in property subject to execution may include property that the judgment-debtor owns that is in the hands of a third-party, such as a bank account.  But there are Indiana and federal statutes that exempt certain property a judgment-debtor owns from garnishment.  Ind. Code § 28-9-3-4(d)(3)(B) provides that certain sources of income deposited into an account are exempt and that those sources of income include “Social Security, Supplemental Security Income, veterans benefits, and certain disability pension benefits, and that there may be other exemptions from garnishment under federal or state law.”  See also 42 U.S.C. § 407(a).  Mr. Brown’s Social Security benefits were exempt.   

Joint account.  The evidence established that the bank accounts were joint accounts with survivorship, not tenants in common.  Ind. Code § 32-17-11-4 defines a joint account as “an account payable on request of one (1) or more of two (2) or more parties whether or not mention is made of any right of survivorship.”  In Indiana, the ownership of funds in a joint account is a question of fact during the lifetime of the parties. 

Tenants in common.  The plaintiff in Brown asserted that the agreement with each bank indicated an intent to hold the funds jointly, not by their respective contributions, because the documents stated “Joint Account – With Survivorship (And Not As Tenants In Common).”  In Indiana, tenants in common are presumed to own property in equal shares, although evidence may be submitted to prove the parties’ intent to the contrary for the purpose of determining how much property is owned by each tenant in common.  On the other hand, individuals who deposit money into a joint account are entitled to the opposite presumption.  The Court in Brown interpreted Ind. Code § 32-17-11-23 to mean “that the individual who made the contribution to the joint account retains ownership of the respective funds unless there is clear and convincing evidence of a contrary intent.” 

Presumption.  Since the agreements with the banks specifically stated that Mr. Brown and his wife did not hold the account as tenants in common, the Court could not assume that they held the money in equal shares.  Rather, they held the money as joint tenants, and the plaintiff had the burden to show that Mr. Brown and his wife intended for mutual use of all funds contributed to the account.  “The law is clear that the parties own the amount equal to their contributions absent clear and convincing evidence to the contrary.”  The Court concluded that there was nothing in the agreements with the banks that manifested an intent contrary to the presumption described in Ind. Code § 32-17-11-23. 

Withdrawal rights not dispositive.  To overcome the presumption, the plaintiff pointed to the couple’s use of the funds, which use indicated their intent to share.  Mr. Brown made withdrawals and signed checks from the accounts for his personal and business use.  In Indiana, “the right to withdraw and the right of ownership, however, are separate and distinct rights.”  While deposit agreements may give a joint tenant the right to withdraw funds, such agreement does not alter ownership.  A joint account holder does not own the funds deposited by another account holder unless there is proof that it was given by gift, contract or irrevocable trust.  As such, Mr. Brown’s use of the funds alone was not clear and convincing evidence that his spouse intended to relinquish ownership of the funds in their entirety. 

In the end, the Court limited the plaintiff’s garnishment to a tax refund check that Mr. Brown deposited.  No other funds in either bank were subject to garnishment.  A key point is that, under Indiana law, the contributions of an innocent spouse into a deposit account held jointly with a judgment debtor should be shielded from collection.


Fraudulent Transfer Claims Within Post-Judgment Collection Proceedings

Lender (judgment-creditor) obtained a $1+MM judgment against guarantor (judgment-debtor).  Guarantor allegedly transferred millions of dollars to guarantor’s spouse.  Lender, in proceedings supplemental, filed a motion seeking to avoid the transfer and targeted the spouse (garnishee-defendant).  Was a separate cause of action (lawsuit) required?  Did the spouse have a right to a jury trial?  Did the spouse have to file a response to the lender’s motion?  In PNC Bank, 2011 U.S. Dist. LEXIS 99917 (S.D. Ind. 2011) (rt click/save target as for pdf), Magistrate Judge Baker addressed those questions in his report and recommendations, which District Court Judge Pratt subsequently adopted.

General parameters.  In response to the lender’s motion to set aside the alleged fraudulent transfers, the guarantor objected on three grounds.  PNC relied on the Indiana Supreme Court’s decision in Rose v. Mercantile National Bank, about which I wrote on June 29, 2007.  The PNC case noted several basic rules that applied:

 1. A motion to avoid a fraudulent conveyance can be invoked in proceedings supplemental because the claim’s “sole purpose [is] the removal of obstacles which prevent enforcement of a judgment.” 

 2. A garnishee-defendant (third party) can be named for the first time during proceedings supplemental. 

 3. To proceed, the garnishee-defendant must have “property of the judgment-debtor, regardless of whether the judgment-debtor himself could have pursued the garnishee-defendant or whether the garnishee-defendant was a party to the underlying lawsuit.” 

 4. A court need not make a preliminary determination that a garnishee-defendant violated the Fraudulent Transfer Act before requiring the garnishee-defendant to appear.

Objection 1 – new claim?  The first issue in PNC was whether the lender’s fraudulent transfer theory was a “new claim” that warranted the filing of a separate lawsuit. 

 1. Generally, when a judgment-creditor proceeds against a garnishee-defendant, the proceedings merely are a “continuation of the original cause of action, not a new and independent civil action.” 

 2. On the other hand, if a judgment-creditor introduces new claims “unrelated to the enforcement of a judgment,” or if the judgment-creditor “seeks damages greater than the original judgment,” then the judgment-creditor has moved the case outside of proceedings supplemental, and a new cause of action is required. 

3. Although proceedings supplemental can include a fraudulent conveyance claim, the recovery is not for the alleged wrong or for damages.  Rather, “proceedings supplemental seek to continue the original cause of action by enforcing a previously granted judgment.”  If the judgment-creditor is successful, the conveyance remains valid, and the only effect of the judgment is to subject the property to execution “as though it were still in the name of the grantor [judgment-debtor].”  I interpret this to mean that the result is an order subjecting the transferred funds to further judgment execution proceedings (collection).

In PNC, unlike Rose, the lender’s original judgment amount and the amount targeted in its motion were precisely the same.  Accordingly, Indiana law did not require a new cause of action (separate lawsuit). 

Objection 2 – jury trial?  The guarantor also asserted that the law required a new cause of action because the spouse had a right to a jury trial.  Since proceedings supplement derive from equity, they usually should be conducted by the judge.  Nevertheless, jury trials are not completely precluded.  If questions of fact arise as to the claim involving the garnishee-defendant, then the parties may demand a jury trial.  The Court in PNC recognized and preserved the spouse’s right to a jury trial.

Objection 3 – garnishee response required?  In PNC, the lender wanted the Court to compel the spouse to file a written response (an answer) to the lender’s motion.  Once a verified motion triggers proceedings supplemental, pursuant to Trial Rule 69(E) courts shall order garnishees to appear for a hearing or to answer interrogatories, but “no further pleadings shall be required.”  Responsive pleadings are not required unless a new claim arises.  Since there were no new issues of liability as to the spouse in PNC (see Objection 1), the Court did not require the spouse to file a response.   

The upshot of the ruling in PNC was that the Court temporarily denied the lender’s motion pending discovery into whether a factual basis existed for setting aside the disputed transfers.  The proceedings supplemental therefore continued, albeit without a new action against the spouse and without the spouse needing to respond to the motion.  The Court contemplated that the lender would file a renewed motion following limited discovery.  (The case has since been settled.)  


Indiana Supreme Court Rules On Scope Of Trial Court's Authority In Proceedings Supplemental

This is a continued report on the pair of Branham cases, which have moved their way from the Perry Circuit Court to the Indiana Court of Appeals and most recently to the Indiana Supreme Court.  The cases deal with proceedings supplemental and garnishment, and they were the subject of my July 14, 2011 post "Indiana Trial Court Oversteps Its Authority In Proceedings Supplemental." 

The Indiana Supreme Court handed down its decisions in the two matters on August 30, 2011:  .pdf1 and .pdf2.  This means that the two opinions cited in my July 14th post have been vacated.  The Supreme Court agreed with the Court of Appeals with regard to (1) the reversal of the trial's court's order requiring the judgment debtor to seek employment or to seek better employment and (2) the upholding of the trial court's order for the judgment debtor to return to court for status checks "some limited number of times." 

But the Supreme Court disagreed with the Court of Appeals and reversed the trial court's decision requiring the judgment debtor to pay $50 per month toward the judgment.  "For unrepresented parties in small claims court, resort to the generic exemption statute and the Social Security exemptions are not forfeited even if the litigants do no know enough to plead them." 

Again, the Branham opinions provide a good explanation of the purpose and scope of proceedings supplemental and garnishment, and they provide insight into the rights and remedies associated with a secured lender's effort to collect a deficiency judgment.  


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.  


Set-Off Versus Garnishment: Rights To And Priorities In Deposit Accounts

Fifth Third Bank v. Peoples National Bank, 210 Ind. App. LEXIS 952 (Ind. Ct. App. 2010) (.pdf) outlines a plethora of legal principles related to judgment enforcement generally and garnishment proceedings specifically.  The opinion analyzes a priority dispute between one lender, which had a judgment lien in a checking account, and a second lender, which had a security interest in the same account.

The parties and the account.  An accounting firm, OMS, opened a checking account with Fifth Third.  Fifth Third also loaned OMS approximately $1.5MM, secured in part by the same account.  Years later, Peoples obtained a judgment against OMS in the amount of $64,000.  About the same time, OMS defaulted on the Fifth Third loan.  Fifth Third did not initially freeze the OMS checking account.  Meanwhile, Peoples initiated proceedings supplemental against OMS and named Fifth Third as a garnishee defendant.  Although Fifth Third did not at first disclose to Peoples that OMS had the account, it subsequently identified the account and froze it.  In a separate suit, Fifth Third soon thereafter got its own judgment against OMS.

Competing interests.  The Court in Fifth Third noted that, under Indiana law, a judgment creditor (here, Peoples) acquires an equitable lien “on funds owed by a third party [here, Fifth Third] to the judgment debtor [here, OMS] from the time the third party receives service of process in proceedings supplemental.”  The third party (here, Fifth Third) may be “liable for paying out funds in a manner inconsistent with the judgment creditor’s lien.”  On the other hand, Indiana recognizes a right of depositary bank (here, Fifth Third) to set-off any amounts owed to it with funds from its “indebted depositors’ [here, OMS’s] account after receipt of notice of garnishment proceedings.”  The pivotal rule proved to be:  a garnishing creditor (here, Peoples) “has no greater rights in the judgment debtor’s [here, OMS’s] assets than the judgment debtor does.” 

General rule of priority.  In Fifth Third, the “first in time is first in right” rule applied.  Fifth Third, a secured creditor with a perfected prior security interest in the deposit account, had rights that were superior to Peoples, a subsequent judgment (unsecured) creditor.  At the time of the loan default, OMS owed Fifth Third in excess of $470,000, which was the account balance at the time in question.  Once OMS defaulted, Indiana law entitled Fifth Third to exercise the remedy of self-help in order to apply the balance of the deposit account to the indebtedness owed under the security agreement.

Compelled to set-off?  Peoples asserted various equitable arguments against Fifth Third’s position.  Peoples contended that, by not immediately exercising the right to set-off, Fifth Third lost its superior priority status and should have been foreclosed from attempting to belatedly enforce its right to the account.  Under the UCC, a secured party holding a perfected security interest in a deposit account “may set-off or apply the balance of the deposit account to the loan obligation secured by the deposit account.”  Again, Peoples, the garnishing creditor, had no greater rights in OMS’s assets than did OMS.  OMS owed Fifth Third in excess of $1MM.  The OMS deposit account contained only $470,000.  As such, OMS’s rights in the deposit account “were extremely subject to” Fifth Third’s security interest.  According to Fifth Third, a failure to exercise set-off will not result in a subordination of those rights to the rights of a garnishing creditor.

Compelled to freeze?  Peoples also claimed that Fifth Third lost its superior priority status when Fifth Third continued to honor checks drawn on the deposit account after the OMS loan default.  Fifth Third’s security interest was automatically perfected by its “control” over the account.  Ind. Code § 26-1-9.1-104 provides that the requisite “control” over the account exists even if the debtor retains the right to direct the disposition of the funds in the account.  Fifth Third’s decision to allow OMS to reach the funds was not inconsistent with the required “control” for purposes of automatic perfection.  Banks have “the latitude to allow their indebted depositors to have reasonable access to funds, which may enable them to continue to operate and generate revenue that may be applied to their existing indebtedness.”  Under circumstances like those in Fifth Third, the failure to freeze an account that is subject to set-off will not permit a garnishing creditor to assume senior status.

 


Assets Cannot Be Frozen By An Injunction

As mentioned in my May 4, 2007 post “Nuclear Weapon of the Law" Unavailable to Creditor in Recent Case, getting a judgment is one thing; collecting it is another.  Secured lenders embroiled in commercial foreclosure litigation always focus upon their ability to collect any deficiency judgment, and defendant borrowers or guarantors may attempt to dispose of assets during the course of litigation.  The March 16, 2009 opinion by Judge Simon in Yessenow v. Hudson, 2009 U.S. Dist. LEXIS 21393 (N.D. Ind. 2009) reminds us that the law prohibits courts from freezing a defendant’s assets to protect the recovery of damages.  Indiana law offers a handful of remedies to deal with this concern, but an injunction is not one of them.

The situation.  The Yessenow case arose out of a business deal in which two doctors and a banker invested in a hospital.  Later, a venture capital company offered to purchase five of the hospital’s ancillary medical facilities through a sale/leaseback transaction, but the company required an initial security deposit of about $1,500,000 in case the hospital defaulted on any of the sale payments.  One of the doctors, Yessenow, who became the plaintiff in the litigation, posted the security deposit.  To do so, he obtained a letter of credit backed by a promissory note and secured by a mortgage on his condo in Chicago.  Yessenow and the two other investors (the defendants) entered into an indemnification agreement that they and the hospital would indemnify (reimburse) Yessenow for any losses incurred as a result of the loan.  A couple years later, the bank demanded a draw on the full amount of the letter of credit, and Yessenow filed suit for indemnification, which his partners/co-investors had refused to do.  In the action, Yessenow filed a motion for preliminary injunction to freeze those defendants’ assets.

No injunction.  One of the reasons Judge Simon denied Yessenow’s request for injunction, which sought a preliminary asset freeze, was the precedent set by the United States Supreme Court in Grupo Mexicano de Desarrolla v. Alliance Bond Fund, 527 U.S. 308 (1999):

[Trial courts have] no authority to issue a preliminary injunction preventing defendants from disposing of their assets pending adjudication of a plaintiff’s contract claim for money damages. 

The rationale behind this rule is that “until a creditor has established title, he has no right to interfere with the debtor’s property, and it would lead to an unnecessary, and perhaps, a fruitless and oppressive interruption of the debtor’s rights.”  Judge Simon concluded that the Grupo decision directly applied to this case.  Plaintiff Yessenow had sued the defendants for damages and had feared that they would secrete their assets or reinvest their money into other ventures to evade paying such damages.  “But fear that a debtor will avoid paying their debts is nothing new or exceptional.”  Hence the development and purpose of the law of fraudulent conveyances and bankruptcy. 

Other avenues for relief.  In Indiana, secured lenders cannot invoke a trial court’s equitable power to restrict a defendant’s use of his unencumbered property before judgment.  While a foreclosing lender could pursue the remedies of pre-judgment attachment and/or pre-judgment garnishment discussed in my 12-14-06 and 3-6-07 posts, pre-judgment remedies can be difficult and expensive to prosecute.  (Remember that, after the fact, Indiana’s Uniform Fraudulent Transfer Act at I.C. 32-18-2 may apply.)  Lenders may be better served to litigate their underlying actions as quickly as possible, and then utilize the post-judgment collection tools,  prescribed by Indiana statutes, that are readily enforced by Indiana’s courts.  The fact is - as frustrating as these situations may be, temporary restraining orders and injunctions are not the way to go.


Indiana Banks, As Garnishee Defendants, Need Not Restrict Withdrawal Of Subsequently-Deposited Funds

From time to time, the enforcement of secured loans will evolve into the collection of  deficiency judgments.  One of the available collection tools is a garnishment order.  The Indiana Court of Appeals in JPMorgan Chase v. Brown, 2008 Ind. App. LEXIS 1029 (Ind. Ct. App. 2008) (Chase.pdf) recently interpreted Ind. Code § 28-9-4-2 and addressed the question of whether a depository financial institution, which has received notice of garnishment proceedings, is required to restrict withdrawal of funds that are subsequently deposited into the account.  Surprisingly, the answer is no.

What happened.  Collection agency filed a motion for proceedings supplemental naming Chase as a garnishee defendant and asserting that Chase possessed deposit accounts in which the defendant/judgment debtor had an interest.  (A “garnishee” essentially is an entity, like a bank, that has money in its possession belonging to a defendant.)  In answers to interrogatories, Chase confirmed that the judgment debtor maintained an account with the bank that had a balance, as of March 5, 2007, of $20.61.  Furthermore, the bank confirmed that it immediately restricted the withdrawal of those funds.  Later, the judgment debtor made four deposits totaling over $1,000 to the account.  Because the collection agency sought about $2,200, the court signed an order requiring Chase to pay over to the clerk approximately $2,200 from the account.  Chase did not do so, however, and only restricted the account balance of $20.61.  The trial court thereafter found Chase in contempt and entered a judgment against Chase for $1,045.99, the balance of the account that included the subsequent deposits.  

Chase’s position.  On appeal, Chase argued that it only was required to restrict withdrawal of funds “in an amount equal to the balance of  [judgment debtor’s] account at the time [Chase] received notice of the garnishment proceedings.”  Chase based its contention on a 1998 amendment to the operative statute.

The statuteI.C. § 28-9-4-2 provides in part that a depository financial institution shall restrict deposit account withdrawals in an amount equal to “the balance in the account at the time of receipt of the documents in process . . ..”  I.C. § 28-9-4-2(a)(2)(B).  The pre-1998 version of the statute specifically provided for restriction of additional funds “subsequently deposited into” the account.  When the legislature amended the statute, it deleted those words. 

When courts interpret statutes, their goal is to determine and give effect to the intent of the legislature.  In this case, the Court would “not simply re-read language into a statute that the legislature has deleted.”  The Court therefore held:

In light of the legislature’s amendment to I.C. § 28-9-4-2, we agree with [Chase] that the statute only required it to restrict withdrawal of the balance in [judgment debtor’s] account at the time it received the documents and process required by I.C. § 28-9-3-4(d).  The legislature’s decision to omit the words “or subsequently deposited into” from I.C. § 28-9-4-2 is irrefutable and, as required by the rules of statutory construction, we will not reinsert the omitted language into the statute when construing the statute.  Thus, we agree with [Chase] that the trial court erred by finding it in contempt for failing to restrict withdrawal of funds that were subsequently deposited into [judgment debtor’s] account. 

Odd result.  The Indiana Court of Appeals clearly did the right thing in this case.  The question for me is whether Indiana’s General Assembly did the right thing when, in 1998, it deleted from the operative statutory section the words “or subsequently deposited into” from the law.  The statutory amendment means that lenders attempting to collect deficiency judgments through the garnishment of judgment debtors’ bank accounts may need to issue multiple garnishment requests to the same bank.  Otherwise, the bank only is compelled to restrict the withdrawal of funds in the account at the time of a particular request.  While there may have been good reasons for the 1998 statutory amendment, the consequences for debt collectors – whether intended or not – appear to be unfavorable and impractical. 


INDEPENDENT CONTRACTOR EARNINGS ARE SUBJECT TO GARNISHMENT IN INDIANA

If as a secured lender you choose to pursue a deficiency judgment, one of the common options to consider is a garnishment proceeding.  Typically, we think of this in terms of garnishing “wages,” but the May 31, 2007 opinion by the Indiana Court of Appeals in Indiana Surgical Specialists v. Griffin, 2007 Ind. App. LEXIS 1151 explained that garnishment can include more than just wages. (ISSvGriffinOpinion.pdf). 

General rule.  Garnishment refers to “any legal or equitable proceedings through which the earnings of an individual are required to be withheld by a garnishee, by the individual debtor, or by any other person for the payment of a judgment.” Ind. Code 24-4.5-5-105(1)(b); Indiana Surgical at 3.  Earnings are “compensation paid or payable for personal services, whether denominated as wages, salary, commission, bonus, or otherwise, and includes periodic payments under a pension or retirement program.”  I.C. 24-4.5-1-301(9); Indiana Surgical at 4.  Addressing a federal counterpart to the Indiana statute, the United States Supreme Court in a 1974 case stated that garnishment should include “periodic payments of compensation.”  Indiana Surgical at 4.  Interestingly, the Indiana Court of Appeals adopted the “periodic payments of compensation” language even though it is not found in the Indiana statute. 

(The Court of Appeals dealt only with I.C. 24-4.5-5, the Uniform Consumer Credit Code, and the garnishment provisions therein.  The remedy of garnishment also is addressed generally in I.C 34-25-3 and Indiana Trial Rule 69(E).  I see no reason why the holding of Indiana Surgical would not apply to all garnishment actions in Indiana.)   

Application to independent contractors.  Indiana Surgical involved a judgment debtor that was an independent contractor of the garnishee defendant.  In other words, the debtor was not an employee and did not earn wages.  She was a courier who received a commission based on the deliveries made.  The Indiana Court of Appeals determined that the commissions were “periodic payments of compensation,” which constituted “earnings” subject to garnishment.  Id. at 4.

I suppose the common label “garnishing wages” really should be “garnishing earnings.”  The more important point here for commercial lending institutions pursuing deficiency judgments in Indiana is that you can institute proceedings supplemental against the principal of an independent contractor (agent) in order to seek satisfaction of the contractor’s debt.  The relief is not limited to an employer/employee scenario.


“NUCLEAR WEAPON OF THE LAW” UNAVAILABLE TO CREDITOR IN RECENT CASE

Getting a judgment is one thing; collecting it is another.  Creditors often are concerned about the ability to recover money from debtors that may have sufficient assets at the outset of a dispute but may squander those assets over the course of litigation.  As previously mentioned in this blog, there are a few remedies under Indiana law that address this very legitimate concern.  In a decision by Judge David F. Hamilton on March 20, 2007, another remedy, albeit one with virtually zero applicability to most commercial collection cases, is discussed - prejudgment injunctive relief.  The lesson J&J Wehner, Inc. v. H&L Plating & Grinding, Inc., 2007 U.S. Dist. LEXIS 24366 (S.D. Ind.) [WehnerOpinion.pdf] teaches us is that, unlike prejudgment attachment and garnishment, injunctive relief usually is not the answer.

Case background.  The dispute surrounded the sale of a chrome plating and grinding business.  As a part of the sale, the purchasers gave the sellers an installment promissory note in the sum of $866,000.  Not long after taking over the business, the purchasers learned that the site might have been contaminated with high levels of chromium and hexavalent chromium and that the sellers likely had actual knowledge of the contamination at the time of the sale.  Several employees told the purchasers that the sellers had disposed of chromium waste on the premises.  Remediation estimates were between $1.5 million and $2.25 million.  Due to the hefty environmental liability exposure, the purchasers stopped making payments on the note, which they claimed they were fraudulently induced to sign.  The note contained a warranty that the sellers were not in violation of any environmental laws affecting the properties or the business.  One issue in the case was whether the purchasers’ default could be excused due to the sellers’ fraud. 

Prejudgment relief requested.  Given the potential delays associated with litigating the claims, the sellers sought a preliminary injunction under Ind. Code § 34-26-1-5, ordering the purchasers, at the outset of the case, to pay all amounts due and owing under the note either directly to the sellers or into an escrow account with the court.  Wehner at 9.  The sellers’ objective was to secure satisfaction of the judgment they ultimately hoped to receive.  (Wishful thinking, perhaps, given the evidence of the environmental misconduct . . ..) 

Relief denied.  One of the elements to be established for preliminary injunctive relief is that the remedy at law must be inadequate - the injury cannot be rectified by the recovery of money.  As a general rule, a party that suffers “mere economic injury” is not entitled to injunctive relief because an award of damages is sufficient to make the party whole.  Id. at 10.  There are, however, “unusual” cases in which the collection of damages may be “impossible, uncertain or unusually difficult” so that a preliminary injunction should be available.  Id.  In this particular case, at issue was the demand for a pre-trial payment to a creditor on a disputed debt or, in the alternative, an impoundment of money to the court.  Such extraordinary relief can arise out of a procedural tool that the United States Supreme Court in Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308, 329 (1999) described as “the nuclear weapon of the law.”  Id. at 11.  The problem in Wehner was that, if the sellers prevailed on their underlying claim, the damages from the purchasers’ default would be entirely monetary and easy to quantify.  Although there was a legitimate concern that the purchasers might not be ready to pay the full damages when due, “that is often the case in civil litigation.”  Id. at 12.  Judge Hamilton held that the sellers “have not shown that their case is so compelling as to justify use of ‘the nuclear weapon of the law,’ a pre-judgment injunction ordering payment of a general creditor or freezing assets to protect a general creditor.”  Id

Fraudulent inducement.  Judge Hamilton also addressed, in part, whether the alleged fraud by the sellers could excuse nonperformance under the note.  The note was, in fact, an unconditional promise to pay according to its terms.  I.C. § 26-1-3.1-106(a).  But, in this case, the note was not in the hands of a holder in due course.  If it were, the purchasers’ fraudulent inducement defense would have no merit.  I.C. § 26-1-3.1-305(a)(1)(C) .  Because the purchasers were not holders in due course (defined in Indiana’s UCC at 26-1-3.1-302), common law defenses such as fraud in the inducement were available to them.  I.C. § 26-1-3.1-306.  Judge Hamilton denied the sellers’ motion for summary judgment on the defense and concluded that the fraudulent inducement issue must be tried.

In sum.  For commercial lending institutions concerned about the dissipation of the assets of their borrowers during a foreclosure proceeding, remedies such as pre-judgment attachment and/or garnishment may be viable.  Barring highly unique circumstances, however, an injunction is not.  A motion for a prejudgment order to pay money almost always will fail.  Lenders will be better served by prosecuting the underlying action as quickly as possible.  Once a judgment is obtained, courts are much more accommodating in terms of collection efforts. 


MORE ON PREJUDGMENT ATTACHMENT AND GARNISHMENT

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.


ATTACHMENT: THE 8 BADGES OF FRAUD

Few things are more frustrating to creditors than debtors transferring assets to affiliated entities in order to avoid collection efforts.  Such conduct was the subject of a November 14, 2006 decision by United States Magistrate Judge Christopher A. Nuechterlein of Indiana’s Northern District.  See, Lock Realty Corp. v. U. S. Health LP, 2006 U.S. Dist. LEXIS 84420 (N.D. Ind. 2006)-lock_opinion.pdf.    

The facts.  In a prior case, Plaintiff Lock Realty Corp. obtained a judgment in excess of $485,000 against defendant U.S. Health LP for breach of a lease.  Lock later added defendant Americare III LLC to the judgment because U.S. Health unlawfully assigned the lease to Americare, which was part of a single business enterprise with U.S. Health.  In fact, U.S. Health utilized roughly eighty-three entities to shelter itself from liability.  Lock then filed the current lawsuit against U.S. Health for additional damages (over $10 million) associated with lease breaches that occurred after the entry of the prior judgment.  About six weeks after Lock filed the second suit, U.S. Health sold four nursing home units to a third-party for approximately $3 million.  U.S. Heath transferred the sale proceeds to Heritage Medical Group, Inc., the managing partner of U.S. Health and one of the eighty-three entities that made up the U.S. Health enterprise. 

Attachment.  In an effort to prevent U.S. Health from concealing assets that may be available to satisfy a judgment in the second suit, as well as the judgment from the first case, Lock filed a motion to attach the proceeds of the $3 million sale.  Ind. Code § 34-25-2-1(b)(5) is the statute upon which Lock’s motion was based: 

   (b)  The plaintiff may attach property when the action is for the
  recovery of money and the defendant:

   (5)  has sold, conveyed, or otherwise disposed of the
   defendant’s property subject to execution, or permitted
   the property to be sold with the fraudulent intent to cheat,
   hinder, or delay the defendant’s creditors
. . ..

Attachment generally means “the act or process of taking . . . property, by virtue of a . . . judicial order, and bringing the same into the custody of the court for the purpose of securing satisfaction of the judgment ultimately to be entered in the action.”  Blacks Law Dictionary.

Fraudulent intent.  The issue was whether U.S. Health acted with fraudulent intent to cheat, hinder or delay.  In Indiana, there are eight common law “badges of fraud” from which fraudulent intent in a given transaction may be inferred:

1. Transfer of property by the debtor during the pendency of a suit.
2. Transfer of property that greatly reduces the debtor’s estate.
3. A series of contemporaneous transactions that strip a debtor of all property available for execution.
4. Secret or hurried transactions not in the normal course of business.
5. Any transaction not conducted in the normal course of business.
6. A transaction conducted in a manner differing from customary methods.
7. Little or no consideration for the transfer.
8. A transfer of property between family members.

No single factor constitutes fraudulent intent.  Rather, the facts must be viewed together to determine how many badges of fraud exist and if together they amount to fraudulent intent.  (Keep in mind that attachment cannot occur in every case.  For instance, Microsoft may have multiple transactions ongoing during litigation, but those transactions aren’t necessarily fraudulent, in part because few if any transfers would render Microsoft judgment proof.)   

Magistrate Nuechterlien granted the motion for attachment because Lock established that several badges of fraud existed, including: 

• U.S. Health transferred property while the second suit was pending and while it had failed to satisfy the judgment from the first suit.
• The U.S. Health enterprise had been reduced by $3,000,000 after it sold four of its facilities.
• U.S. Health and Americare essentially were one entity, so property Americare transferred was subject to execution by Lock.
• The proximity of the final sale appeared “suspect and uncustomary.”
• U.S. Health had retained benefits of the transferred property because the proceeds were given to Heritage, simply another entity in the U.S. Health enterprise.  “This is no different than taking money out of one’s left pocket and putting in one’s right pocket.”

The lessons of Lock.  The Lock ruling reminds us that attachment can be a valuable tool in cases where a defendant is utilizing affiliate entities to hide money.  If you suspect that a borrower, during litigation, is burying assets in associated companies merely to avoid your collection efforts, look for the eight badges of fraud.  You might be able to freeze the assets pending the outcome of the suit. 

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Update:  On September 14, 2009, Judge Miller issued a thirty-three page opinion in the Lock Realty v. U.S. Health case.  Click here for a .pdf of the order.  The decision outlines the procedural history, facts and substantive issues (both liability and damages) in the litigation.  The opinion isn't necessarily pertinent to my blog, but it does tell more of the story behind the case for those interested.