There are three elements that must exist for marshalling to apply:

1. The senior creditor and junior creditor must be creditors of the same debtor
2. There must be two funds that belong to the debtor
3. Only one of the creditors can have the right to resort to both funds

This concept does not come out of the Uniform Commercial Code; it is an equitable principal that courts may apply.

Author: Lori Young (bio)
Phone: 812.452.3560
email: lyoung@bamberger.com

The Court held that a judgment creditor can only step in to the rights that the debtor had to the deposit account.  Since the debtor’s rights were subject to both the security interest in favor of the lender/depository bank and subject to the common law setoff rights, the judgment creditor could only receive those amounts in the account that were over and above the amount owed to the bank.  In this case, the debt to the bank far exceeded the amount in the account and the judgment creditor got nothing.

This case underscores the enhanced value of having a security interest in a bank account rather than simply relying on common law setoff rights.  Where lenders are dealing with high dollar deposits, it may be advisable to take the added step of obtaining a security interest in the accounts.  This gives the lender the flexibility to allow funds to be removed from the account even if other creditors are attempting to seize them without running the risk that the lender may have waived its rights.

On the other hand, banks that are relying solely on their setoff rights to protect their prior claim to funds in a deposit account should consider two things.  They may wish to consider putting a provision in their loan documents that makes the attempted seizure of funds an event of default.  This would allow the bank to accelerate the loan and exercise its right of setoff rather than paying it over to the other creditor.  Additionally, the bank should carefully analyze what its interests were prior to the receipt of attachment pleadings.  Under Indiana law (and the practice of most states), once the attachment pleadings are received, a hold must be put on the account.  This still should be done, but a quick analysis of the bank’s setoff rights would be in order to determine if the lender may hold on to the funds.

Author: Terry G. Farmer (bio)
Phone: 812.452.3543
Email: tfarmer@bamberger.com

It is astounding how easy it is to obtain the needed information without breaking into a building. Thieves may go “dumpster diving” by rummaging through trash looking for bills or other paper with personal information on it. Or they may use “Phishing” techniques, pretending to be financial institutions or companies while sending spam or pop-up messages, to obtain personal information from unsuspecting victims.

Many ID theft cases originate with “shoulder surfing,” watching from a nearby location while the victim punches in a telephone calling card or credit card number, or eavesdropping on a telephone conversation involving a credit card transaction.

The Internet is an inviting place for criminals to obtain identifying data, such as passwords or banking information. Many unsuspecting consumers fall prey to spam requests, which are unsolicited e-mail messages that promise benefits in exchange for identifying data.

The identifying data can be used for false applications for loans and credit cards, fraudulent withdrawals from bank accounts, or obtaining other goods or privileges.

To avoid becoming a victim, consumers should be guarded with personal information. The Office of the Indiana Attorney General recommends the following precautions:

• Minimize the amount of personal financial information you carry. Do not carry your Social Security card or a government-issued card with you, unless you need it. Only provide your Social Security number (SSN) when absolutely necessary.
• Memorize passwords and PIN numbers. Do not carry them.
• Keep financial information in a secure place in your home or bank safe deposit box.
• Shred documents before throwing them away. Purchase a cross-cut shredder to better protect your information.
• Do not give sensitive information to unsolicited callers. Legitimate businesses will not make unsolicited calls asking for your bank account numbers. Caller ID information can be spoofed, so do not rely on the name and number that is on your box. If in doubt, hang up and dial your vendors directly.
• Shield your hand when entering your PIN at a bank ATM, store checkout or when making long distance calls with a calling card. This habit prevents security cameras, cell phone cameras or people near you from acquiring your PIN. Shred ATM slips.
• Pick up new checks or credit cards at your bank, rather than having them delivered to your home. Do not have your driver’s license number printed on your checks.
• If your bank or credit card statement does not arrive on time, call to make sure it was sent to the proper address. Also contact the post office to see if a change of address has been filed in your name. A thief may steal or divert your statements to hide the theft and use the documents as “proof” of new identity.
• When traveling, keep all personal belongings locked in hotel safes/safe deposit boxes, or keep them with you. Personal belongings include prescription bottles, which display personal information.

The Indiana Banker’s Association further warns that, by taking the above precautions, you can save yourself sleepless nights trying to remedy the ID theft harm, not only to your credit report, but to your good name and reputation.

Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com

Although procedures differ somewhat among the states, collecting the judgment in Indiana begins with filing a complaint in proceedings supplemental.  In connection with the complaint, the court will order the debtor to appear to testify as to the location and extent of his assets from which he may be able to pay the judgment.  When the debtor appears, he is placed under oath, and the creditor’s counsel is entitled to ask a wide range of questions with regard to income, assets, debts, liabilities, and other subjects which may bear on his ability to pay.  If the debtor discloses bank accounts, the creditor may submit interrogatories and a court order compelling the financial institution to post a hold on the bank account, pending further order of the court.  Upon a subsequent hearing, the judge may order some or all of the account to be paid to the creditor to satisfy its judgment.

If the creditor learns that the debtor is employed, the creditor may take steps to garnish his wages.  Under current Indiana law, a creditor cannot garnish the first $217.50 per week of the debtor’s net income.  For any net income greater than $217.50 per week, the bank can garnish up to 25% of the income.

Additionally, in Indiana, once a creditor obtains a judgment, the judgment automatically becomes a lien upon any real estate property owned by the debtor in the county in which the judgment was obtained.  For example if the debtor owns real estate in Vanderburgh County, a Vanderburgh County judgment will automatically become a lien upon that property once the judgment is obtained.  If, however, the debtor owns property in another Indiana county, then the judgment will need to be docketed in that county so that it will become a lien upon the real property.  Some  other states require the recording of the lis pendens notice before a judgment becomes a lien upon real property.  Once the judgment becomes a lien, creditors can seek to have the property sold at sheriff’s sale or simply wait until the debtor sells the property on his own.  The creditor’s lien will appear on the title work performed in connection the transaction, and most buyers will insist that the lien be satisfied before the sale is closed.

Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com

In addition to the revised form, Federal Rule of Bankruptcy Procedure 3001 has been amended and a new Federal Rule of Bankruptcy Procedure 3002.1 has been added.  These changes significantly increased the burden upon creditors in consumer cases in relation to their Proof of Claim filings.  According to the Rules, not only must the creditor include an itemization of claim including interest,
fees, expenses and other charges incurred prior to the petition, if it is a secured claim, the creditor must also include a statement of the amount necessary to cure any default as of the date of the petition.

If the security interest is in the debtor’s principal residence, the creditor must also include the new Attachment A to the Proof of Claim form which provides further information and itemization of the amounts due and cure amounts.  If the secured creditor fails to provide the information, the court may preclude the creditor from ever recovering the amount that should have been disclosed and award attorneys’ fees to the debtor in relation to the failure to disclose.

In addition to the changes that come into effect at the time of filing the initial Proof of Claim, new Bankruptcy Rule 3002.1 adds new requirements for lenders whose collateral is the debtor’s principal residence in a Chapter 13 case where the debtor is making payments for the plan period.  The creditor is required to file and serve upon the debtor, the debtor’s counsel and the trustee a notice of any change in the payment amount, including any change that results from an interest rate or escrow amount no later than twenty-one (21) days before a payment in the new amount is due.  A new form, Form B-10 (Supplement 1) has been created that must be filed by the secured creditor as a supplement to its Proof of Claim in order to provide this notice.  Likewise, if the creditor is entitled to recover any post-petition fees, expenses or charges, the creditor is required to file a statement within one hundred eighty (180) days of accruing these amounts.  New Form B10 (Supplement 2) must be used and filed as a supplement to the Proof of Claim form.

Creditors should be on guard for the effective date and requirements of these new Rules and Forms.  If you would like any assistance in compliance with the new Rules, please contact a Bamberger attorney.

Author: Andrew C. Ozete (bio)
Phone: 812.452.3582
email: aozete@bamberger.com

Common in most contracts (including loan documents), an integration clause is a provision typically stating that the written contract supersedes all previous understandings, negotiations, or agreements, whether written or oral, between the parties with respect to the subject matter of the agreement.  The purpose of such a  provision is to limit evidence of contrary or conflicting agreements, inconsistent with the parties’ written contract. 

In the case, the guarantors had entered into separate guaranties with respect to two loans.  After default on both loans, the lender brought suit.  Evidently, through a sheriff’s sale, one of the two loans was paid in full.  However, the lender sought to obtain judgment against the guarantors for the indebtedness still due and owing on the smaller loan.  The guarantors’ primary defense was that they should be relieved from liability because of an integration clause contained in the guaranty of the loan that had been paid off.  They also argued that the lender failed to advise them as to the meaning of the guaranty.

In ruling for the lender on both issues, the Court first noted that the two loan transactions were entirely separate contractual transactions and the integration clause contained in the subsequently executed guaranty pertained only to those agreements that were a part of the negotiations directly leading up to that specific loan.  The Court also held absent special circumstances, a lender does not owe fiduciary duties to a borrower requiring it to advise or recommend that the borrower seek legal counsel in connection with a commercial transaction.  In the instant case, the guarantors were physicians who had “embarked upon a sophisticated business venture”. 

While the result in this decision was good for the lender, the case does highlight the need to make certain loan transactions are documented properly.  Failing to do so might result in unintended consequences down the road. 

If you have any questions regarding this case, or any other lending or transactional issue, please contact one of the banking attorneys at Bamberger.

Author: Daniel R. Robinson (bio)
Phone: 812.452.3564
Email: drobinson@bamberger.com

For example, if the lender were financing the borrower based upon a portion of the borrower’s accounts receivable, a security agreement granting lender a security interest in borrower’s “designated accounts receivable” has the potential to be very dangerous for the lender. 

In the event that the borrower does not subsequently actually designate which accounts are pledged as collateral to the lender, the lender’s security interest may not attach to any of the borrower’s accounts receivable. 

Consequently, in situations where only a portion of the borrower’s assets are pledged, the bank should be sure not only to adequately describe the collateral, but also, if at all possible, be sure that the borrower is not required to take any further action, such as designation of accounts, for the bank’s security interest to attach.

Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com

Reuse

Indiana has many abandoned or underused properties due to an actual or perceived environmental condition, also known as Brownfields. Indiana communities know that despite a property’s great location, bottom-dollar price, existing infrastructure, and available work force, it takes closing the loop on the environmental unknowns to attract businesses to Brownfield properties.  In the 2011 grant round, EPA awarded Indiana communities over $5 million—more than any other state in the Region– for environmental assessments at Brownfield properties. Your community may have a real estate opportunity at a prime location where the environmental unknowns have already been identified or even addressed.  The Indiana Finance Authority also has funding available for below-market interest rate loans at cleanup sites.  Additional information on funding and financing Brownfield Redevelopment and success stories are available through the Indiana Finance Authority.

Recycle

Waste and left over raw material handling and disposal are costly to business and improper waste handling may lead to costly environmental cleanup.  Through Indiana’s Recycling Market Program, a total of $500,000 in grant funds has been made available for businesses interested in purchasing equipment for remanufacturing recyclable materials into products or feedstocks.   A 50% match is required and the deadline to apply is September 26, 2011. Additional information and the application may be found through the Recycling Market Development Program’s website.

Author: Jamie B. Dameron (bio)
Phone: 317.464.1591
Email: jdameron@bamberger.com

Generally, the bank’s mortgage has a higher priority than the later-recorded mechanic’s lien, in such an instance.  However, here the contractor argued that the bank had “unclean hands” because funds from the bank’s loan had been used to pay other contractors who performed work after this contractor.  In other words, the owner used its shrinking financial resources to pay other contractors first.  Because of the bank’s “unclean hands,” the contractor argued that its mechanic’s liens should be given first priority. 

The Indiana Court of Appeals disagreed.  The Court concluded that the bank did not have “unclean hands” because the bank did not control the disbursement of the loan proceeds.  The owner made the decision as to which contractor to pay first, and not the bank.

This case highlights the tension that frequently occurs on construction projects between contractors with mechanic’s lien rights and construction lenders when owners are unable or unwilling to pay what is owed.  If you’re wondering about the “unclean hands” doctrine, I’m pretty sure we have our British friends to thank for its name.  If you have any questions about this case, please contact a member of the Bamberger Construction Team or Banking Team.

The Indiana Court of Appeals found that providing notice to the Lender at the address stated in the mortgage was sufficient . When Lender disclaimed its interest in the foreclosure, MERS, as mere nominee did not have an enforceable right under the mortgage separate from the interest held by Lender. 

Lenders need to be aware that a nominee named in a mortgage does not have an interest in the mortgaged property separate and apart from the true lender. Foreclosure actions need to be prosecuted in the name of the true lender and any lienholder defendants need to be pursued in the name of the true lender. Any assignments taken need to be in the name of the true lender and not simply in the name of a nominee, such as MERS. An ounce of care can save Lenders some costly litigation later.

Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com