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

In one case in particular, a father was in possession of real estate that arguably had been conveyed to his son.  However, the father had disputed the title and had filed a quiet title action to determine actual ownership.  The father at all times remained in possession of the ground.  However, the failed to file in the public record a lis pendens notice.  This is a notice that alerts all other parties that there is a dispute relative to real estate title and cautions them that any action that they take with the real estate will be subject to that dispute.

The son borrowed money against the property.  The lender did a title search and did not see any evidence of the quiet title action.  However, the lender also did not inspect the property which the court indicates would have revealed that the father was in possession.

The son subsequently went bankrupt.  However, when the lender went to foreclose on the real estate, the father defended on the basis of its prior ownership claim.  The court ultimately found in favor of the father and that his ownership claim was superior to the son’s.  Then the court went on to invalidate the mortgage to the lender because the lender failed to make the inspection of the property.

Most lenders do not undertake an inspection of the property to ascertain whether they are parties in possession.  As this and other cases have illustrated this year, the failure to make this inspection and determine what parties might be in possession exposes the bank to risk and that its mortgage will be behind the prior rights of other parties.

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

In a recent case, subdivision improvements were constructed.  However, there were two important factors that impacted the analysis.  First, no houses whatsoever had been built in the subdivision.  Therefore, the court found that the exceptions for houses and improvements auxiliary to houses could not apply.  Second, the utilities that had been constructed had not yet been accepted by the relevant public utilities.  Since ownership of utilities does not transfer until the time of acceptance, the third exception did not apply.

Thus, in this case, the mechanic’s lienholders were junior to the debt of the construction lender.  Given the depressed real estate values, it is doubtful that the mechanic’s lienholders received any payment because of a lack of equity to support their lien position.

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

When the parties had a falling out, the employee attempted to defend the mortgage foreclosure based on the verbal promise to release.  The Court of Appeals held that a mortgage release is a document effecting title to real estate which must, as a matter of law, be done in writing and signed by the party against whom enforcement is sought.  In this case, since the employer did not reduce the release to writing and did not sign the document, the verbal release is not enforceable.

The processing of lien releases seems like a small matter but has a big impact on title issues.  Loans that are paid in full but not released wind up being a problem years down the road when there is no one left to know whether or not a release can be signed.  As the owner of property, it is advisable to make sure that lenders who agree to release (either because they had been paid in full or otherwise) actually do sign the appropriate paperwork and record it in a timely manner.  Failure to do so on a timely basis can cause serious problems for the owner down the road which may be very expensive and time consuming to correct.

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

One guarantor recently tried a rather ingenious argument to avoid having a guaranty enforced against her.  The guaranty form that had been prepared had a place for the guarantor to sign as well as the creditor.  For reasons that are not reported, the creditor apparently did not sign the guaranty form.  The guarantor argued that because the creditor did not sign the form, the guaranty was not enforceable.  The Indiana Court of Appeals held that only the guarantor’s signature was necessary to make the document enforceable.  The Court held that instruments such as guaranties only need to be signed by the party against whom the enforcement is sought, i.e. the guarantor.  The Court also noticed that notice of acceptance (a suretyship defense) had been waived in the guaranty.  So, even the creditor’s signature as evidence of acceptance of the guaranty was not necessary.

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

Indiana law provides that if a commercial mortgage grants the creditor the right to have a receiver appointed, the court must do so upon request of the lender.  However, there is not a tremendous amount of guidance as to what the receiver can do with the property other than collect rents and generally try to protect it during the pendency of the case. 

Receivership law applies not only to foreclosures but also to other situations where receivers may be appointed.  Under some of the language of the statute, it appears that the receiver has the right to sell property.  However, the Indiana Court of Appeals recently clarified that receivers in foreclosure actions do not have the authority to sell property absent the consent of the owner. 

As lenders struggle to find more effective ways to dispose of properties than traditional sheriff’s sales, many have tried to craft remedies where a receiver could market and sell property for (hopefully) a higher amount than could be received at a sheriff’s sale.  However, this recent ruling by the Court of Appeals makes it abundantly clear that this is not a right that receivers have absent concurrence from the owner.

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

One of the assets of the LLC was a commercial property.  They were tenants in the property who were delinquent in their rent.  One of the 50% owners wanted to evict them.  The other 50% owner wished to continue to work with them as tenants. 

The owner who was seeking eviction filed suit to evict the tenants.  The other owner intervened saying that there was no right to file the litigation because the members acting as a body had not taken this step to authorize it.

The Court of Appeals directed the trial court to hold a hearing on whether or not the party initiating the case had the right under the operating agreement of the LLC to move forward with the litigation.  The Court surmised that it did not, which is probably the case. 

This case illustrates a couple of things.  First of all, before initiating litigation, it is a wise step to take appropriate corporate action to make sure that the suit is authorized or to have previously granted that authority to an officer or a manager under your documents.  While in this case it was the other owner that intervened to stop the lawsuit, it is possible that the defendant may have been able to raise the issue as well.  This is a question that has not yet been answered by the courts.

If your business routinely initiates litigation, it would be advisable to make sure that the organizational documents expressly allow the initiation of litigation by the parties who are making this decision.  Otherwise, an appropriate corporate action may be necessary to initiate the suit.

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

A recently reported case illustrates this point.  Here is a condensed version of the facts.  Mr. and Mrs. Jones were the sole shareholders of Company A.  Fred and Joe were the sole shareholders of Company B.  Both companies were incorporated on the same day.  The articles of incorporation for Company A only contained bare bones information and no special governance provisions.  Eventually, Company A adopted by-laws that provided that at least one director of Company A had to be one of the Jones and two of the directors had to be owners of Company B.  There were only to be three directors.  The by-laws also provided that any election that violated the requirements were that two of the directors had to be Company B shareholders would be “null and void” and “of no force and effect”. 

Eventually, the Joneses got tired of having Frank and Joe as directors of the Jones’ company.  They attempted to remove them which should have been fairly straightforward since they were the only owners of Company A.  However, Frank and Joe were not willing to go.  On appeal, the court noted that there were only two people on the planet that qualified as the directors from Company B.  You guessed it, Frank and Joe.  Further, since there were no provisions in the articles of incorporation that allowed the shareholder to amend the by-laws, the by-laws could only be amended by the directors.  And since two of the three directors were going to be Frank and Joe, good luck with that.  No amendment of the by-laws was likely. 

Further, since there were no special provisions to the contrary, the statute required that the articles of incorporation could only be amended if the amendment was first proposed by the board of directors.  Again, you could see what the outcome would be.

The Joneses undoubtedly had a disappointing day in court.  As the sole owners of the corporation, you would have thought they would be able to run their business pretty much the way they wanted.  However, because of the corporate structure that they put into place, it was impossible for them to constitute a board that would run the company in keeping with their desires.  Further, it is not clear if the Joneses could dissolve the company because of deadlock as Frank and Joe had the majority vote and control of the board – and could in fact operate the company.

Was this the intended consequence?  It is hard to say, but is doubtful that the Joneses are happy with the way this has turned out.

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

In a recent reported case, a guaranty document was described in a mortgage.  The description was not particularly specific but did provide evidence that the guaranty existed.  Unfortunately, for reasons that were not reported, the guaranty itself was never signed by the guarantor.  The lender recognizing that the unsigned guaranty would not ordinarily be enforceable attempted to argue that since the mortgage was signed and the guaranty was incorporated by reference in the mortgage, the signature on the mortgage was sufficient to make the guaranty enforceable.

The Indiana Court of Appeals considered the argument – and rejected it.  First, it viewed the description of the guaranty in the mortgage to be too vague.  Second, it found no clear intent to incorporate the mortgage by reference despite the fact it was referred to in the mortgage.   Therefore, even though the lender had gone to some expense to collateralize the guaranty, it received no recovery because the guaranty itself was not signed.

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

In a recent case reported from the Indiana Court of Appeals, a subcontractor wished to pursue a claim for additional compensation due to a change in the plans for the project.  Under the terms of the contract, the subcontractor was to give notice of a possible claim within 21 days of it becoming aware of the basis for the additional compensation claim.  The Court found that between 10 and 11 months had elapsed after revised plans came into possession of the subcontractor.  The Court seemed to have felt that it was not completely clear that it was immediately obvious that the claim for extras would be necessary simply from reviewing the plans.  However, the Court did note that a representative of the subcontractor had a conversation about the claim with the prime contractor 36 days prior to actually filing a written notice of a possible claim for additional compensation.  Because this was outside the 21 day window, the Court held that the denial of the claim was appropriate. 

Deadline management and claim notification management in the construction process is critical.  Clients should be very careful to chart out and track these deadlines throughout the life of a construction project.  They are easily overlooked when things get busy.  But as this case illustrates, failure to meet the requirements can be fatal to what might have otherwise been a valid claim for additional compensation.

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