Indiana Judgment Creditor Not Entitled To Post-Judgment Order Transferring Ownership Of Defendant’s Real Estate

Lesson. In the post-judgment collection phase of a case, the plaintiff creditor is not entitled to an order transferring title to the defendant debtor’s real estate for purposes of satisfying the judgment. For that to happen, the creditor must follow the process for an execution (sheriff’s) sale.

Case cite. Conroad Assocs., L.P. v. Castleton Corner Owners Ass'n, 187 N.E.3d 885 (Ind. Ct. App. 2022).

Legal issue. Whether a trial court, in post-money judgment collection proceedings, can transfer a judgment debtor’s interests in real estate to a judgment creditor.

Vital facts. The parties to the Conroad dispute were a building owner (Owner) and a party contracted to maintain the building (Association). The Association’s responsibilities included the maintenance of its own sewer lift station at the building. The lift station failed, resulting in a flood of sewage at a tenant’s location in Owner’s building. The flooding caused the tenant to terminate its lease with Owner.

Owner obtained a money judgment against Association for breach of contract (the Judgment). The procedural history that followed was complicated and involved proceedings supplemental, an appeal and a bankruptcy. Today’s post focuses on the motion for proceedings supplemental (post-judgment collection effort) filed thirteen days after the entry of the Judgment. Specifically, Owner requested that the Association’s lift station and related real estate rights be transferred to Owner to satisfy the Judgment. The trial court granted the motion (the Divest Order).

The trial court later reduced the amount of the Judgment, and the Association tendered money to the trial court to fully satisfy the amount owed. The Association then moved to vacate the Divest Order.

Procedural history. The trial court vacated the Divest Order, finding that it was erroneous in the first place. Owner appealed.

Key rules. Conroad has an in-depth analysis of Indiana Trial Rules 70(A) and 69(A), which deal with judgments and post-judgment remedies. (Please click on each for the full text of the rules.) The trial court relied upon Rule 70(A) when it entered the Divest Order.

Holding. The Indiana Court of Appeals affirmed the trial court and concluded that the court did not err when it vacated the Divest Order.

Policy/rationale. The Court reasoned that, under Rule 70(A), the only way a trial court can divest a defendant/judgment debtor of ownership in real estate is if the underlying judgment itself directs the judgment debtor to execute the conveyance. Because the Judgment in Conroad had no such direction (it was only a money judgment), the Divest Order was inappropriate under Indiana law. The Court pointed to Rule 69(A), which essentially provides that, in money judgment enforcement proceedings, the sale of real estate must be conducted in the same manner as a mortgage foreclosure (i.e. a sheriff’s sale). Indiana law does not permit a judgment creditor to simply file a motion to acquire title to a judgment debtor’s real estate.

Related posts.

• The Difference Between An Execution Sale And A Foreclosure Sale In Indiana
• Judgment Lien Principles Courtesy Of The Indiana Supreme Court
• Indiana Follows The Lien Theory Of Mortgages

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Part of my practice relates to post-judgment collection proceedings.  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.

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.

• Fraudulent Transfer Claims Within Post-Judgment Collection Proceedings 
• Plaintiff/Judgment Creditor Gets Cart Before Horse In Indiana Garnishment Effort 

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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.

Bank Loses 100k After Failing To Appear At Garnishment Hearing To Prove Right Of Set-Off

Lesson. A bank, as a garnishee-defendant, may claim a right to set-off funds on deposit against amounts its customer owes the bank. However, the bank should appear in court and prove its right. Merely asserting set-off in answers to interrogatories could waive the bank’s claim and result in a loss of the funds.

Case cite. Old Plank Trail Community Bank v. Mattcon General Contractors, 137 N.E.3d 308 (Ind. Ct. App. 2019)

Legal issue. Whether Bank preserved its right to a set-off of the amounts owed under a garnishment order.

Vital facts. In December 2018, a judgment in the amount of $162,178.95 was entered against defendant, Burrink, in favor of plaintiff, Mattcon. In January 2019, Mattcon initiated proceedings supplemental and sought the garnishment of Burrink’s deposit accounts at Bank. Bank, as garnishee-defendant, answered Mattcon’s interrogatories and identified two accounts with $97,944.07 on deposit. The answers went on to state “Bank has claimed set-off rights as past loans due to Bank.” However, Bank provided no documents to support the set-off, and Bank did not attend a hearing on the court’s order to appear. The trial court determined that Bank “waived any defenses as to garnished funds” and entered a final order in garnishment that required Bank to turn over the $97,944.07 to Mattcon.

Procedural history. The trial court ruled that Bank waived its right to set-off the garnished funds. Bank appealed.

Key rules. A garnishment proceeding “is a means by which a judgment creditor seeks to reach property of a judgment debtor in the hands of a third person, so that the property may be applied in satisfaction of the judgment.” A judgment creditor “has the initial burden of proving that funds are available for garnishment.” The burden then shifts to the garnishee-defendant to “demonstrate a countervailing interest in the property or assert a defense to the garnishment.”

A depositary bank generally “has the right of set-off after receipt of notice of garnishment.” However, that right of set-off can be waived. Waiver means “the voluntary relinquishment of a known right.” The “silence or failure to act will not constitute waiver unless the holder of the right fails to speak or act when there is a duty to speak or act.”

Holding. The Indiana Court of Appeals, guided by the lofty “abuse of discretion” standard, affirmed the trial court’s final order in garnishment.

Policy/rationale. Bank contended that, even though it did not attend the proceedings supplemental hearing, the interrogatory answers provided adequate notice of the set-off rights and, in turn, permitted Bank to set-off any amounts owed after Bank received notice of the garnishment proceedings. The Court refused to reverse the trial court’s decision related to Bank’s “potential” right to set-off:

[Bank] failed to include or reference any relevant loan documents, payment histories, statements of outstanding balances, or notices of default that would support its claimed set-off rights. Moreover, [Bank] had the duty, knowledge, and opportunity to present and prove the claimed defense to garnishment at the February 8 hearing. It failed to do so, despite the trial court's order that the claims or defenses were to be presented at the time and place of the hearing.

While the result seems a little harsh, the system is set up to be deferential to the trial court, which conducted the proceedings first-hand. Bank didn’t quite do enough to protect its interests here.

Related post.  Set-Off Versus Garnishment: Rights To And Priorities In Deposit Accounts
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My practice includes representing parties, including judgment creditors and lenders, in post-judgment collection proceedings. 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.

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.

• Indiana Supreme Court Rules On Scope Of Trial Court's Authority In Proceedings Supplemental
• Independent Contractor Earnings Are Subject To Garnishment In Indiana

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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 [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.

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.

Mortgage Lien Second In Line, Because Small Claims Court Judgment Never Fully Satisfied

Lesson. Look for a filed satisfaction of judgment to conclusively determine whether a judgment lien has been extinguished. A small claims court judgment, properly indexed and unreleased, will have senior priority over a subsequently-recorded mortgage.

Case cite. Herron v. First Financial Bank, 91 N.E.3d 994 (Ind. Ct. App. 2017)

Legal issue. The issue in Herron was whether a judgment lien was effective as of May 14, 2013, when a small claims court entered its judgment, or as of November 17, 2015, following an appeal of the small claims court’s ruling during proceedings supplemental. If the judgment lien was effective as of the earlier date, then it would have senior priority over the competing mortgage lien. If the judgment lien was not effective until the later date, then the mortgage lien would have first priority.

Vital facts. Herron, a contractor, repaired a church’s roof in March 2011. In 2013, the Lawrence Township small claims court (Marion County) entered judgment for Herron against the church. The Township recorded the judgment in its Judgment Book on May 14, 2013. There was no appeal. Proceedings supplemental ensued and resulted in payments that satisfied the principal amount of the judgment and filing fees. However, on November 14, 2014, the court awarded additional damages to Herron for attorney’s fees and collection costs. Several months later, the small claims court, apparently sua sponte (on its own), rescinded the November 2014 order. Herron appealed that ruling to the Marion Superior Court, and on November 17, 2015, the superior court (a) reversed the small claims court’s rescission of its 2014 damages ruling and (b) entered a $10,000 award for Herron. Meanwhile, in November 2014, First Financial Bank (FFB) entered into a mortgage loan with the church and recorded its mortgage on February 23, 2015 – after the May 2013 Herron small claims judgment but before the November 2015 superior court judgment.

Procedural history. Herron filed an action to foreclose his judgment lien and named FFB as a defendant. FFB contended that its mortgage was senior to Herron’s lien. Both FFB and Herron filed summary judgment motions claiming that their respective liens had senior priority. The trial court determined that FFB’s mortgage had priority and granted FFB’s motion for summary judgment. Herron appealed.

Key rules. Indiana Code 34-55-9-2 provides that a money judgment becomes a lien on the defendant’s real property when the judgment is entered and indexed in the judgment docket in the county where the property is located. Indiana Code 32-21-4-1 states that a mortgage takes priority according to the time that it was filed in the recorder’s office of the county where the property is located. Generally, in Indiana, “priority in time gives a lien priority in right.” 

Holding. The Indiana Court of Appeals reversed the trial court and held that Herron’s judgment lien was first in time and thus senior to FFB’s mortgage.

Policy/rationale. FFB based its argument on the fact that the file of the small claims court contained a November 7, 2014 receipt that showed the 2013 judgment balance to be zero, which suggested that there was no judgment lien as of that date. FFB further asserted that the November 14, 2014 award for fees during proceedings supplemental constituted a new judgment that was later rescinded. According to FFB, therefore, on November 17, 2015, when the superior court overturned the rescission and awarded damages, a second judgment lien was created, nine months after FFB perfected its mortgage lien.

The Indiana Court Appeals rejected each of FFB’s points. Although the record from the small claims court proceedings was not crystal clear, there was nothing “determinative” showing that the original judgment for Herron had been paid in full or was otherwise satisfied or released. Also, through proceedings supplemental, Herron had an ongoing claim for attorney fees and interest that related back to the original judgment. The Court also found that the small claims court’s rescission of its prior fee award did not go into effect because the superior court ultimately overturned the rescission on appeal. In the end, the Court concluded that Herron had a single judgment lien, created May 14, 2013, which had not been satisfied. As such, Herron’s judgment lien preceded FFB’s February 23, 2015 mortgage lien and had first priority.

Related posts.

• Indiana Supreme Court Discusses Proceedings Supplemental
• Indiana Judgment Lien (10 Years) and Judgment Enforcement (20 Years) Statutes Of Limitation
• Will A Mortgage Granted To Fund Renovation Costs Have Priority Over A Pre-Existing Judgment Against A Mortgagor/Purchaser?
• What Is A “Purchase-Money” Mortgage, And Does It Have Priority Over A Pre-Existing Judgment Against The Mortgagor?

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I represent judgment creditors and lenders, as well as their mortgage loan servicers, entangled in lien priority and title claim disputes. 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.

An “In Rem” Judgment Limits Collection To The Mortgaged Property

Lesson.  Borrowers are not personally liable for any deficiency resulting from the entry of an in rem judgment. 

Case cite.  Elliott v. Dyck O’Neal, Inc., 46 N.E.3d 448 (Ind. Ct. App. 2015).

Legal issue.  Were defendant borrowers entitled to a refund of monthly garnishment payments they made in connection with proceedings supplemental following an in rem judgment?

Vital facts.  The Elliotts defaulted under their mortgage loan with Fifth Third Bank, which obtained a judgment and decree of foreclosure.  The proposed order Fifth Third Bank tendered to the trial court spelled out an in rem (against the property) judgment, as opposed to an in personam (against the person) judgment.  The trial court signed off on the proposed order.  This meant that the judgment was against the Elliotts’ real estate but not the Elliotts individually.  After the sheriff’s sale, there was a deficiency remaining from the judgment amount.  Fifth Third Bank later assigned its interest in the judgment to O’Neal, which initiated proceedings supplemental against the Elliotts to collect the deficiency.  The Elliotts, who were without counsel initially, agreed to pay $50/month as part of a garnishment order.  Four years later, the Elliotts, with counsel, moved for a refund of the money they paid due to the fact that the judgment was in rem only.  O’Neal responded by claiming that the in rem limitation on the original judgment was a clerical error. 

Procedural history.  The trial court denied the Elliotts’ motion for refund, and the Elliotts appealed.  

Key rules.  Mortgage foreclosure cases are “essentially equitable” actions to enforce a lien against property to satisfy a debt.  Generally, trial courts have discretion to fashion equitable remedies that are “complete and fair to all parties involved.”   

Holding.  The Indiana Court of Appeals reversed the trial court and held that the Elliotts were entitled to the equitable relief of a refund, plus interest, of the payments they made due to the lack of an in personam judgment in the original foreclosure order. 

Policy/rationale.  There was no dispute that the foreclosure order did not entitle O’Neal to collect a personal judgment from the Elliotts.  The Court was not persuaded by O’Neal’s position that the language in the judgment was a mistake.  The Court granted the Elliotts a refund “given the unique and specific facts of this case and because equity so demands.”  The money they paid was pursuant to an improper garnishment order based on an in rem judgment.  The case involved “significant equitable considerations” that included the fact that the Elliotts were unrepresented at the time.  (For more on the Court’s rationale, review the opinion, which also addressed O’Neal’s unsuccessful effort to amend the judgment.) 

Related posts. 

• Contents of Indiana Foreclosure Judgment/Decree
• Indiana Deficiency Judgments: Separate Action Not Applicable

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Part of my practice is to defend lenders and their servicers in contested foreclosures and consumer finance litigation.  If you need assistance with such matters in Indiana, please call me at 317-639-6151 or email me at [email protected]  Also, you can receive my blog posts 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. 

• Garnishment Of Joint Bank Accounts In Indiana
• Indiana Supreme Court Rules On Scope Of Trial Court's Authority In Proceedings Supplemental
• Indiana Supreme Court Discusses Proceedings Supplemental

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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 [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.

Charging Orders: Rights Of A Judgment Creditor Against A Membership Interest Of An Indiana Limited Liability Company

Lesson.  A charging order is the only remedy for a judgment creditor against a judgment debtor's member’s interest in an Indiana limited liability company (LLC), and the remedy is quite limited.

Case cite.  In Re: Boone County Utilities, 2014 Bankr. LEXIS 3943 (S.D. Ind. 2014) (.pdf).

Legal issue.  What are the rights of a judgment creditor against a judgment debtor's membership interest in an Indiana LLC?  More specifically, can a judgment creditor garnish a judgment debtor's interest in an LLC? 

Vital facts.  Judgment creditor (Branham) held a judgment against an LLC (Newland), which was the sole member of BCU, another LLC.  Branham sought to garnish Newland's interest in BCU in order to collect on the judgment.  

Procedural history.  The purpose of the Boone opinion was to rule on a discovery dispute between Branham and BCU, which was named as a garnishee defendant.  The case dealt with whether a deposition of a representative of BCU could occur and, if so, what topics could be covered in the deposition. 

Key rules.  The discovery battle in Boone gave rise to a great discussion by the Court of Indiana LLC law, including judgment enforcement and charging orders.  Here are some of rules:

• Ind. Code 23-18-6-7 says that a judgment creditor can seek a charging order against an LLC.
• A charging order grants to the judgment creditor “only the rights of an assignee of the member’s economic interest (the right to payment and distribution) in the LLC.”
• A charging order does not result in the judgment creditor becoming a member of the LLC.
• Indiana’s Business Flexibility Act (Ind. Code 23-18), which controls LLCs, provides that, while a membership interest in an LLC is the member’s personal property subject to execution, members have no direct interest in the LLC’s assets.
• Thus a member’s interest in an LLC is limited by Ind. Code 23-18-1-10 “to the economic rights [to payments/distributions from the LLC] and nothing more.” 

Holding.  The Court concluded that a charging order was the only remedy for Branham against Newland's member interest in BCU - “a very limited and possibly unsatisfactory remedy.”  Branham was not entitled to membership in Newland and was not entitled to participate in corporate actions.  Branham was not permitted to force a monetary distribution or to insist upon inspecting Newland's books and records.  Moreover, the Branham did not acquire rights to the Newland's membership in BCU or to participate in the corporate actions, management, governance or direction of BCU.  At best, Branham could obtain BCU's distributions to Newland, if any.  As to the discovery dispute, the Court generally concluded that Branham could inquire into facts reasonably calculated to lead to admissible evidence about any such distributions, but little else.    

Policy/rationale.  The Court in Boone did not address much policy in its opinion.  I think the point here is that the law generally is set up to shield investors and owners of a corporate entity against personal liability, unless there is proof that the corporate veil should be pierced.  As a practical matter, charging orders against an Indiana LLC generally have little value.  In seemingly rare instances, if an LLC has money, and if it decides to distribute that money to its members, a charging order requires the LLC to redirect such payment from the judgment debtor to the judgment creditor.  When and how this would happen, if ever, could be the subject of its own post.  If you’ve seen or heard of a charging order netting money to a judgment creditor, please share your story in the comment section below.  I’d love to hear about it as I’ve yet to see the tool work myself.     

Related posts.    

• Indiana Supreme Court Discusses Proceedings Supplemental
• Indiana Collection Theories Of Piercing The Corporate Veil, Alter Ego, Successor Liability And Mere Continuation: Part 
• Effort To Pierce The “Corporate Veil” Denied

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.

Execution Upon Indiana Real Estate Owned As “Tenancy By The Entireties”

Is real estate that spouses own jointly subject to execution to satisfy a judgment entered against only one of the spouses?  Not in Indiana.

Definition.  Black’s Law Dictionary’s definition of “tenancy by the entireties” is:

A tenancy which is created between a husband and wife and by which together they hold title to the whole with right of survivorship . . ..  It is essentially a “joint tenancy,” modified by the common-law theory that husband and wife are one person, and survivorship is the predominant and distinguishing feature of each.

Indiana’s rules.  As a matter of law, real estate owned by a husband and wife is held under a form of ownership known as “tenancy by the entireties.”  There are only two requirements for a tenancy by the entireties to exist:  (1) that spouses be legally married at the time of the conveyance; and (2) that the deed include both spouse’s names.  No “magic language” is required on the deed.  If, for example, the deed states that the grantor conveys the real estate “to Eddie Doe and Betty Doe, husband and wife,” then under Indiana law the couple owns the real estate as tenants by the entireties.

Exempt.  In Indiana, a creditor of one spouse cannot execute upon real estate owned as tenants by entireties.  See Ind. Code § 34-55-10-2(C)(5); see also Diss v. Agri Bus. Int’l, 670 N.E.2d 97, 99 (Ind. Ct. App. 1996) (“A tenancy by the entirety is immune from seizure in satisfaction of the individual debts of either of the co-tenant spouses.”).  Thus, any real estate owned jointly as spouses is exempt from collection by any creditor that obtains a judgment against one spouse individually. 

Sale proceeds/rents.  As a general rule, proceeds arising from the sale of entireties property also are exempt from collection by the creditors of one spouse.  Thus, where entireties property is sold, the sale proceeds do not lose their exemption protection so long as no action is taken contrary to treatment as entireties property (i.e., the proceeds are not split, divided or otherwise designated to either spouse’s individual creditors) and/or there is a particular statement by the couple that they intend the proceeds to be, and are, held as entireties property.  Whitlock v. Public Service Company of Indiana, Inc., 159 N.E.2d 280 (Ind. 1959).  On the other hand, rents are not immune. 

Co-borrowers/guarantors.  These laws protect an innocent spouse or, in other words, a spouse that was not a defendant in the lawsuit or a party to the underlying transaction.  The entireties exemption explains why, on the front-end of a deal, a lender might insist upon spouses co-signing a note or require guaranties from both spouses, even though only one of the spouses is in the business.  If both spouses are judgment debtors, co-borrowers or co-guarantors, then their real estate held as tenancy by the entireties is not shielded from post-judgment collection. 

Thanks to my colleague Matt Millis for his input into this post.  He took the lead with the legal research this week and, as always, is an effective post-draft editor for me. 

Out-Of-State Defendants Must Appear In Indiana For Post-Judgment Asset Examinations

In Gagan v. SBC Cablevision, 2012 U.S. Dist. LEXIS 167815 (N.D. Ind. 2012) (.pdf), an Indiana federal court held that an Arizona resident must appear in person to answer questions regarding assets available to satisfy a fifteen-year-old, $1.71MM judgment against him.  (Incidentally, the collection efforts were not time barred because judgments can be pursued in Indiana for twenty years.)

Defendant’s objection.  The defendant/judgment debtor objected to the plaintiff/judgment creditor’s motion for proceedings supplemental on the basis that he did not reside in Indiana.  His objection appeared to be valid based upon Ind. Code § 34-55-8-2(a)(1), which governs proceedings supplemental and suggests that the judgment debtor must be “residing in the territorial jurisdiction of the court . . . to appear.” 

Trial rule trumps statute.  The judgment creditor pointed to Ind. Trial Rule 69(E)(3) that, like I.C. § 34-55-8-2, deals with proceedings supplemental.  Unlike the statute, however, the trial rule contains no “territorial jurisdiction” qualification to a judgment debtor exam.  The Court in Gagan ultimately relied upon the trial rule, which was adopted after the statute. 

Explanation.  The Court’s conclusion made sense.  Proceedings supplemental may only be filed in the trial court that issued the underlying judgment.  Indiana regards the process as a continuation of the trial court’s jurisdiction.  Also, the Indiana Civil Code Study Commission’s comments stated that Rule 69(E) “retains the basic statutes upon [proceedings supplemental] but introduces simpler pleadings and procedure” intended to ease the burden on judgment creditors.  Gagan provided:  “the commentary explained that Rule 69(E) intended to broaden the proper venue beyond that of the judgment debtor’s county of residence and to permit proceedings supplemental to be filed in the court where the judgment was entered.”  Because the Court in Gagan already had jurisdiction, and because proceedings supplemental are an outgrowth of the original proceedings, the Court did not need to re-establish jurisdiction over the judgment debtor. 

Teeth?  The Court overruled the judgment debtor’s objections to the motion for proceedings supplemental and the request for a debtor examination.  The Court retained jurisdiction under Rule 69(E) “to carry out the proceedings to determine what non-exempt assets [defendant] has available that may partially satisfy the judgment.”  While the Gagan holding is creditor friendly, the victory may have been a hollow one.  (I’m speculating.)  If the Arizona judgment debtor refused to hop on a plane and come to court in Indiana, what recourse would the judgment creditor have?  While the defendant may be subject to contempt-related sanctions for refusing to appear, I’m not sure that would matter much to someone already saddled with a $1.71MM judgment.  Having said that, at least one practical benefit to the Court’s decision was to enable the judgment creditor to compel the judgment debtor to be deposed in Arizona, without the need for domesticating the judgment and initiating proceedings supplemental there.

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.)  

Contempt Powers Unavailable To Enforce Payment Of A Civil Judgment In Indiana

In 2007, I wrote that “Jail Time Is Not An Available Remedy In Collection Actions In Indiana.” That principle is alive and well in Indiana as explained by the Indiana Court of Appeals in Carter v. Grace Whitney Properties, 2010 Ind. App. LEXIS 2172. Perhaps to the chagrin of lenders who want paid, when it comes to judgment enforcement, Indiana places certain limits on how far courts can go.

The history. The plaintiff obtained a money judgment against the defendant and filed proceedings supplemental. The court ordered the defendant to make periodic payments to satisfy the judgment. Presumably because the defendant failed to make payments, the plaintiff filed, on at least twelve occasions over a five-year period, “informations for contempt” against the defendant. At one point, the plaintiff convinced the court to sentence the defendant to thirty days in jail, although the court later expunged the sentence. After some procedural maneuvering by the parties and the court, the court entered a modified order – coined a “personal order of garnishment” – to compel the defendant to make payments. The defendant appealed that order.

“Personal order of garnishment.” The phrase “personal order of garnishment” is not a term of art in Indiana, but the Court of Appeals concluded that Ind. Code § 34-55-8-7 covers the concept. (Typically, “garnishment” relates to third parties, not the defendant/judgment debtor.) Trial courts may order income, not exempt from execution, to be applied to satisfy a judgment. As such, a “personal order of garnishment” (against a defendant) is an applicable and proper mechanism of collection under the right circumstances. In Carter, the order issued by the trial court was not proper because the defendant had no ability to pay. “The judgment creditor has the burden of showing that the debtor has property or income that is subject to execution.” No such evidence existed in Carter. Translation: courts can’t order defendants to pay money that they don’t have and then punish such defendants for not paying.

No contempt powers. Ind. Trial Rule 69(E) and a handful of statutes, including Ind. Code § 34-55-8, govern Indiana proceedings supplemental. Article 1, Section 22 of the Indiana Constitution provides the foundation upon which all Indiana collection laws are based:

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.

One issue in Carter was whether the use of contempt powers to force payment for a debt violates the Indiana Constitution. (Black’s defines “contempt power” as a court’s “inherent power to punish one for contempt of its judgments or decrees . . ..” One such form of punishment is jail time.) Money judgments generally are enforced by execution and various auxiliary remedies. As the Court noted in Carter, however, “contempt of court is not one of these.” The mere threat of imprisonment is improper too. Carter held that, to the extent Vanderburgh County’s local rules provided a basis for contempt proceedings for a defendant’s failure to pay a judgment, such rules are contrary to Indiana law.

Future proceedings? Another question in Carter was whether the trial court should limit future proceedings supplemental in the absence of a good faith belief that the defendant had property or income subject to court process. In Indiana, the general rule is that “a creditor cannot require a debtor to attend ongoing proceedings supplemental hearings and be reexamined continuously as to whether the debtor has acquired any new assets or income.” In other words, “future ‘fishing expeditions’ are improper.” The exception to that rule is if the plaintiff makes a showing that new facts justify a new order for examination. The Court held in Carter that any future proceedings supplemental against the defendant “must be supported by new facts justifying a new order or examination.”

The Carter decision, together with the recent Branham case addressed in my July 14 and September 23, 2011 posts, illustrates some of the boundaries to proceedings supplemental specifically and the collection of debts generally.

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.

 

Veil-Piercing Claim Better Left For Proceedings Supplemental

A recent decision by Magistrate Judge Jane Magnus-Stinson in the Southern District of Indiana, G4S Justice Services, Inc. v. Correctional Program Services, Inc., 2009 U.S. Dist. LEXIS 88689 (S.D. Ind. 2009) (.pdf), explains, albeit indirectly, why efforts to collect judgments by piercing the corporate veil are more appropriate in the context of proceedings supplemental.   

Strategic decision.  In G4S, the plaintiff pursued a strategy I have seen but have never myself utilized.  The plaintiff filed a lawsuit against a defendant corporation seeking, among other things, damages for breach of contract.  The contract/debt was not personally guaranteed by the owners of the corporation.  Nevertheless, the plaintiff included a cause of action seeking to pierce the defendant’s corporate veil and named the corporation’s shareholders, personally.  I’ve posted about veil piercing before, most recently on January 19, 2009. 

Dismissal, on technicality.  The Court’s opinion arose out of the defendant shareholders’ pre-trial motion for judgment on the pleadings seeking a dismissal of the count asserted against them.  The Court held that the plaintiff’s veil-piercing allegations in the complaint were conclusory and did not contain any details “that would plausibly justify concluding that [defendant corporation] did in fact [fraudulently] pay the [shareholders’] personal obligations.”  The Court seemed to feel that the allegations were not based upon anything other than speculation.  The Court therefore dismissed the count related to the defendant shareholders:  there was a “complete absence of any allegations that would justify piercing [defendant corporation’s] corporate veil.”

Better strategy.  In dicta (legalese for “opinions of a judge which do not embody the resolution or determination of the court,” Black’s Law Dictionary), Judge Magnus-Stinson suggested that veil-piercing claims are better left for post-judgment proceedings.  In the event the plaintiff in G4S subsequently obtained a money judgment that the assets of the defendant corporation could not satisfy, the plaintiff would have the ability to conduct proceedings supplemental, a post-judgment proceeding I touched upon on June 29, 2007.  Proceedings supplemental, commonly referred to by lawyers as “pro supp,” are equitable in nature and “permit the judgment-creditor to discover and obtain property held by third-parties that ought to be used to satisfy the judgment.”  For example, in that process:

The judgment-creditor can obtain access to the judgment-debtor’s books and records.  See Fed. R. Civ. Pro. 69(a)(2); Ind. T.R. 69(E)(4).  Using information obtained from those sources, judgment-creditors can—and do—argue that a court should pierce the judgment-debtors’ corporate veil and make their shareholders’ assets available to satisfy the judgment.

Later, perhaps.  The Court made it clear that the dismissal of the defendant shareholders was without prejudice (not final or permanent) and that the plaintiff could revisit veil-piercing during proceedings supplemental “in the event it obtains a judgment against [defendant corporation], and assuming that it can obtain evidence to support the imposition of such a remedy.” 

The notion is that there is a time and place for piercing the corporate veil - during post-judgment proceedings, not during the litigation of the underlying claims.  Perhaps other judges or lawyers may feel differently, but I share the Court’s view in G4S.  Please e-mail or post a comment with your thoughts.

INDIANA SUPREME COURT DISCUSSES PROCEEDINGS SUPPLEMENTAL

Do you know what “proceedings supplemental” are?  If you are in the business of collecting judgments in Indiana, and from time to time virtually all secured lenders are, then the June 20, 2007 opinion by the Indiana Supreme Court in Rose v. Mercantile National Bank, 2007 Ind. LEXIS 471 provides a great primer on the subject.  (RoseOpinion.pdf).   

Facts of Rose.  Plaintiffs sued an S-Corp, and the trial court entered judgment against S-Corp for $159,581.  During the litigation, the owners of S-Corp sold the company in an asset sale to Corporation I for $475,000.  Corporation I then transferred its rights and obligations under the asset-purchase agreement to Corporation II, a wholly-owned subsidiary of Corporation I.  After the sale, the owners of S-Corp deposited the sale proceeds into S-Corp’s bank account and, within three days, issued checks to themselves for the entire sale price.  The closing occurred approximately one month after the trial court entered judgment for Plaintiffs.   

About a year later, presumably because the judgment had not been paid, Plaintiffs moved for proceedings supplemental and brought fraudulent transfer claims against S-Corp, Corporation I, Corporation II, and S-Corp’s owners.  Plaintiffs asserted that assets had been transferred out of S-Corp to avoid paying the judgment.  During the proceedings supplemental, Plaintiffs sought to amend the complaint to add additional claims and to recover new damages.  The result was a new judgment for Plaintiffs for $542,435.49 plus attorney’s fees of $162,730.  The Indiana Supreme Court affirmed the trial court’s finding that the two owners of S-Corp fraudulently transferred assets, but the Court set aside the new claims for new damages. 

Proceedings supplemental generally.  Proceedings supplemental are designed to help judgment creditors enforce judgments – for discovering assets and to set aside fraudulent conveyances.  Proceedings supplemental are merely the continuation of an original action.  Ind. Trial Rule 69(E) generally governs proceedings supplemental, and the motion is made in the court where judgment was rendered.  Discovery is permitted, and a hearing must be conducted, after which certain property is to be applied toward the judgment.  Id. at 4-5. 

Fraudulent transfer.  Judgment creditors often use proceedings supplemental to bring fraudulent transfer actions, the purpose of which is to remove “obstacles which prevent the enforcement of the judgment . . . through the levy of execution.”  The essence of a fraudulent transfer action is not to attack the transfer or to recover damages.  Instead, the action “is to subject property to execution as though it were still in the name of the grantor.”  Id at 6-7.

New claims.  Unlike Plaintiffs’ fraudulent transfer claims, Plaintiffs also sought new damages from the S-Corp owners by adding a new cause of action under Indiana’s Crime Victims’ Compensation Act, which allows for treble damages and attorney’s fees.  The Court said this was a no-no: 

  Allowing a new claim to be tacked on at this stage would be just as
  unfitting as opening up any other litigation to add new claims after
  judgment.  Such an approach to collections would lay the
  groundwork for perpetual motion-a far cry from the timely and
  efficient system of conflict resolution the nation’s judiciary strives
  to provide.  Proceedings supplemental are appropriate only for
  actions to enforce and collect existing judgments, not to establish
  new ones. 

Id. at 7.  So, a new claim for new damages, and thus the imposition of a new judgment, should be filed in a new lawsuit.  On the other hand, “any action to assist in collection of an original judgment [like a proceeding supplement] must be filed under the same cause number as the original action.”  Id. 

In addition to addressing the generalities of proceedings supplemental, the Indiana Supreme Court provides clarity for lenders concerning fraudulent transfer actions, which can be appropriately prosecuted in proceedings supplemental or, in other words, in a continuation of the same case and in the same trial court that rendered the judgment.  Any new claims or, in other words, actions for separate and distinct damages, however, must be the subject of another lawsuit.