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Rose v. Mercantile National Bank of Hammond
Citations: 844 N.E.2d 1035; 2006 Ind. App. LEXIS 594; 2006 WL 827394Docket: No. 56A03-0405-CV-235
Court: Indiana Court of Appeals; March 30, 2006; Indiana; State Appellate Court
James Rose and Robert Underwood appeal a trial court judgment favoring Mercantile National Bank of Hammond, which is the trustee under a trust agreement from June 25, 1975. The appeal raises six consolidated issues: 1) denial of their motion for a change of venue; 2) allowance of Mercantile to amend the complaint for treble damages; 3) denial of a jury trial on treble damages; 4) finding of violations under the Uniform Fraudulent Transfer Act; 5) awarding of treble damages and attorney's fees under Indiana Code; and 6) potential abuse of discretion regarding attorney's fees. The appellate court affirms in part, reverses in part, and remands with instructions. The case involves Jasper Newton Utility, Inc., a sub-chapter S corporation co-owned by Rose and Underwood. In 1978, Jasper agreed to provide sewage disposal for a development owned by Mercantile. In 1995, after plans changed for the development to be leased as a restaurant, Mercantile requested sewer connections, which Jasper denied due to capacity issues. Mercantile subsequently filed a complaint against Jasper for mandate, damages, and specific performance. Following a bench trial, the court ruled in favor of Mercantile, awarding $159,581. Jasper's appeal was affirmed in 2003. In 2000, while the complaint against Jasper was pending, discussions regarding the acquisition of Jasper by Utilities, Inc. began. Negotiations culminated in January 2001, when Rose executed an Asset Purchase Agreement for Jasper's utility assets, contingent upon regulatory approval. The Indiana Utility Regulatory Commission approved the sale on November 20, 2001, and an indemnity agreement was signed by Jasper and its owners on December 18, 2001. Jasper, Rose, and Underwood, under an indemnity agreement, agreed to protect WSCI from liabilities related to Mercantile's lawsuit. WSCI purchased Jasper's assets for approximately $470,000 on December 18, 2001, which Rose subsequently withdrew in two checks of $235,000 each, depositing them into personal accounts. In March 2002, Mercantile initiated supplemental proceedings, and in November, filed a complaint targeting Jasper and others, alleging the fraudulent transfer of Jasper's assets under the Uniform Fraudulent Transfer Act. Mercantile claimed Jasper's asset transfer to WSCI was fraudulent and sought to recover the funds transferred to Rose and Underwood. Rose and Underwood's request for a change of venue was denied, and they filed answers without demanding a jury trial. Both parties filed motions for summary judgment in early 2003, with Mercantile also seeking to amend its complaint to include a claim for treble damages due to alleged criminal fraud. The trial court held a hearing on the summary judgments, ultimately granting Mercantile's motion on July 24, 2003, concluding that the payments to Rose and Underwood constituted a fraudulent transfer under Indiana law, as they received funds without providing equivalent value in return. A fraudulent transfer is established due to Jasper receiving no reasonably equivalent value for the transfer while engaged in a business transaction with unreasonably small remaining assets. Jasper also intended or should have reasonably believed it would incur debts beyond its ability to pay. The evidence shows that Jasper, Rose, and Underwood were aware that the asset sale and proceeds distribution aimed to evade obligations to Plaintiffs and violated Indiana corporate law. Consequently, Plaintiffs are entitled to a judgment for their fraudulent transfer claims against all three defendants. The actual damages amount to $180,811.83, comprising the original judgment of $159,581.00 and $21,230.83 in post-judgment interest at 8% as of July 15, 2008. The court has discretion regarding damages when a crime victim seeks treble damages, with a hearing set for August 25, 2008. Plaintiffs can also recover costs, attorneys' fees, and related expenses due to defendants' violations, with mandatory attorney fees per Indiana law. All factual issues raised in Mercantile's complaints were resolved via summary judgment, except for the damage award. Rose and Underwood objected to Mercantile's motion to amend the complaint and requested a hearing. The trial court allowed the amendment and scheduled hearings for December 9, 2008, and set a bench trial for March 9, 2004, with a jury trial tentatively set for June 8, 2004. On March 24, 2004, the court ruled that Rose and Underwood were not entitled to a jury trial and vacated the scheduled jury trial set for June 8, 2004. The court then heard evidence regarding three counts of Mercantile's claims against Rose, Underwood, and Jasper. Following this, on April 20, 2004, the court issued findings of fact, conclusions of law, and a judgment against Rose and Underwood. The court reaffirmed its earlier findings from a July 24, 2003 summary judgment, confirming them through evidence presented during the March 24 trial, along with uncontroverted affidavits from the summary judgment phase. Additionally, the court established thirty-three new findings based on trial evidence, addressing issues such as the sale of the company, refusal to pay the judgment, bad faith, and economic motivations behind their actions. The court confirmed that its conclusions from the summary judgment were also validated by the trial evidence, and subsequently awarded Mercantile treble damages of $542,485.49 due to violations of Indiana Code and attorney fees totaling $162,730. Rose and Underwood contended that the trial court erred in denying their motion for a change of venue. According to Indiana Trial Rule 76(B), a change of judge is granted upon an unverified motion unless a prior change has been made in the case. The court noted that previous proceedings were not independent actions but rather continuations of the original proceedings, which restricts the ability to request a change of judge or venue. The court referenced case law confirming that supplemental proceedings serve to enforce the existing judgment without necessitating further proof of execution. Furthermore, fraudulent conveyances fall under Indiana Code chapter 32-18-2, which defines such conveyances as fraudulent if made with actual intent to defraud or without receiving equivalent value. Fraudulent conveyance actions aim to eliminate barriers to enforcing judgments, functioning as equitable executions similar to supplemental proceedings. These actions do not invalidate the original transaction but allow the creditor to pursue the transferred property as if it remained under the original owner's name. Mercantile initiated supplemental proceedings against Jasper in March 2002 and subsequently filed a complaint in November 2002 to aid in executing a judgment against Jasper and several other defendants, alleging that Jasper fraudulently transferred assets to Utilities, Inc. with the intent to hinder Mercantile. Mercantile also claimed that Jasper moved proceeds from this transfer to Rose and Underwood, again with fraudulent intent. The court was asked to void these transfers and allow Mercantile to execute against the proceeds, treating the complaint as an action to set aside a fraudulent conveyance. This action does not question the validity of Mercantile’s claim but focuses on the means of satisfying it. Fraudulent conveyance actions are extensions of the plaintiff's judgment, not separate claims. Furthermore, even though Rose and Underwood were not named in the original action, the courts must consider the actual parties involved in the proceedings rather than just the named parties. The legal definition of 'party' encompasses those who can control the proceedings and those against whom a duty is sought to be imposed. Determining whether a person is a party in a legal action relies solely on the record. Rose and Underwood, as owners of Jasper, had the rights to control proceedings and were effectively parties in the original case brought by Mercantile against Jasper. Mercantile's fraudulent conveyance action is considered an extension of that original case. The trial court did not err in denying Rose and Underwood's second request for a change of judge, as they had already received one change in the same proceeding. On February 14, 2003, Mercantile sought to amend its complaint to include a third count for treble damages and attorney fees under Indiana Code 34-24-3-1. In its response to Rose and Underwood's summary judgment opposition, Mercantile argued it was entitled to treble damages due to their violation of Indiana Code 35-48-5-4. During the July 8, 2003 hearing, Mercantile requested summary judgment for the defendants' violations, asking the court to determine liability and schedule a hearing for damages if necessary. Rose and Underwood did not object to this request. On July 24, 2003, the trial court granted summary judgment to Mercantile, noting the court's discretion in determining damages under treble damages statutes and scheduling a further hearing for damages on August 25, 2003. The court confirmed that plaintiffs could recover costs, attorney fees, and other expenses due to the defendants' violations, with attorney fees mandated under the applicable statute. On August 11, 2003, Rose and Underwood objected to the motion to amend the complaint, which Mercantile moved to strike. Subsequently, Rose and Underwood answered the amended complaint on November 7, 2003. The trial court granted Mercantile's motion to amend the complaint on November 26, 2003, ruling that Rose and Underwood failed to timely object as required by procedural rules. The court has broad discretion in allowing amendments, and its decision can only be reversed for an abuse of discretion, which was not found in this case. Mercantile filed a motion to amend its complaint under Ind. Trial Rule 15(A), which allows a party to amend pleadings without court permission under specific conditions. Since more than thirty days had elapsed after Mercantile's original complaint was filed and Rose and Underwood had already answered it, Mercantile needed either their consent or the court's permission to amend. While trial courts typically grant such amendments liberally, they consider factors such as undue delay, bad faith, and potential prejudice to the opposing party. Rose and Underwood did not raise any of these concerns on appeal, nor did they object to the motion to amend until several months later, effectively waiving their right to challenge it. Consequently, the trial court's approval of Mercantile's amendment was not deemed an abuse of discretion. Additionally, Mercantile's claim for treble damages was presented during the summary judgment hearing, where Rose and Underwood did not object to it. This implied consent allowed the trial court to consider the treble damages issue as part of the proceedings. The court’s conclusions indicated it recognized the claim, and under Trial Rule 15(B), amendments can be made to align pleadings with trial evidence. Therefore, the court's decision to grant the amendment was upheld. Lastly, Rose and Underwood contended that the trial court wrongly denied their request for a jury trial on the treble damages issue, which was discussed in a hearing on December 9, 2003. On December 19, 2003, the trial court ordered that the defendants' jury demand regarding Count III of the Amended Complaint be preserved and tentatively set a two-day jury trial for June 8, 2004. The court extended the discovery deadline to February 15, 2004. During the trial on March 24, 2004, the court expressed uncertainty about the jury trial issue, noting that it had not been guaranteed. Rose and Underwood contended that Mercantile's claim for treble damages was not scheduled for that day and would be addressed later with a jury. The court refuted this, indicating that evidence presentation was expected that day and denied the right to a jury trial on Count III. Rose and Underwood proceeded with the trial without requesting a continuance, thus waiving their opportunity for a jury trial on that issue. The court had previously determined Mercantile's entitlement to treble damages in a summary judgment order on July 24, 2003, leaving only the amount to be decided. Additionally, Rose and Underwood claimed the trial court erred in finding them in violation of the Uniform Fraudulent Transfer Act. The court's findings were affirmed based on Indiana Trial Rule 52(A), allowing for judgment affirmation on any supported legal theory. The appellate review focused on whether evidence supported the findings and whether those findings justified the judgment. The trial court concluded that Rose and Underwood's receipt of sales proceeds without equivalent value constituted a fraudulent transfer under Indiana Code 32-18-2-14(2), which does not require proof of fraudulent intent. The statute relevant to the trial court's ruling states that a transfer or obligation by a debtor is fraudulent if the debtor does not receive reasonably equivalent value in exchange, and if the debtor is engaged in or about to engage in a business with unreasonably small assets or intends to incur debts beyond their ability to pay. The trial court concluded that if a plaintiff proves the statute's elements, no further evidence of the defendant's intent is necessary. The findings indicate that Rose and Underwood violated this statute, as Jasper was aware of a $159,581 judgment against it when it closed a sale on December 18, 2001, and subsequently distributed its remaining assets to Rose and Underwood without receiving value in return. Rose and Underwood's assertion that Jasper was not incurring debts at the time of the distribution is rejected, as the distribution occurred despite the known judgment, leaving Jasper unable to pay its debts. The court found no error in its conclusion that Jasper, Rose, and Underwood violated Indiana's Uniform Fraudulent Transfer Act. Additionally, the court awarded treble damages and attorney's fees to Mercantile, which Rose and Underwood contested, claiming insufficient evidence of fraudulent intent. Ind.Code 34-24-3-1 allows a person suffering a pecuniary loss due to a violation of Ind.Code 35-48 to file a civil action for damages not exceeding three times the actual loss, plus costs and attorney's fees. To recover, Mercantile needed to prove it incurred such a loss from a violation of the law. Additionally, Ind.Code 35-43-5-4(8) defines fraud, a class D felony, as the concealment or transfer of property with intent to defraud creditors, requiring Mercantile to establish all elements of fraud, including intent, by a preponderance of the evidence. The trial court found that Rose and Underwood intentionally transferred Jasper's assets to themselves to defraud creditors, supported by these findings: They sold the business to WSCI on December 18, 2001, knowing of an existing judgment, and made no provision to satisfy it at closing. They intended to evade the judgment, as evidenced by their actions to liquidate the company and deplete its assets. Their attorney was consulted to devise a plan to protect WSCI while avoiding the judgment, which included a hold harmless agreement. At closing, Jasper received approximately $470,000, which Rose deposited and quickly withdrew to pay themselves, effectively transferring funds from Jasper to their personal accounts without informing Mercantile. The evidence indicated they had the opportunity to pay the judgment but chose not to. Rose and Underwood informed prospective buyers of a judgment against them for $159,000, agreeing to a hold harmless indemnification with WSCI to facilitate the sale. They later discovered a higher judgment of $159,581 had been entered against them just before the sale. Despite being aware of the judgment and subsequent appeal, they did not pay it for several months, citing uncertainty about the timing of payment. In July 2008, facing potential summary judgment on a fraudulent transfer case, they arranged to pay the judgment and interest, using personal funds. In February 2003, after learning their appeal was denied, Underwood authorized a settlement offer of $80,000, despite knowing Jasper owed approximately $180,000. With a combined income exceeding $5 million and assets around $30 million, their offer was significantly less than the judgment. They had strategically depleted Jasper's assets, limiting Mercantile's ability to collect the judgment. Rose and Underwood expressed their belief that the judgment was unfair, opting to resist payment until it was economically untenable to do so. Underwood acknowledged they should not have paid unless the fraudulent transfer claim was resolved, indicating a willingness to leverage Jasper's insolvency to negotiate a settlement, which only became possible because they had drained Jasper's assets. On March 24, 2004, Underwood testified that after receiving proceeds from the sale, Jasper depleted its assets and closed the business to file a final tax return, acknowledging knowledge of the impending closure. Underwood confirmed that after a judgment was entered against Jasper-Newton Utilities in November 2001, he and Mr. Rose planned to appeal the judgment and liquidate the company, intending to distribute funds to partners and stockholders. They consulted an attorney and an accountant about the sale proceeds, but Underwood clarified that the auditor was merely aware of the business closure and did not advise them on asset depletion. When questioned about the obligation to pay the judgment, Underwood asserted they would not pay it while an appeal was pending and expressed uncertainty about why they delayed payment even after the appeal ended on February 12, 2008. The court highlighted that despite having a $180,000 judgment affirmed, they offered only $30,000 to settle, leading to Underwood's admission that they had financial means to pay the judgment, with Rose's net worth reported at over $9 million as of March 31, 2008. Rose and Underwood argue that there is insufficient evidence to demonstrate intent to defraud under the relevant criminal statutes. However, the court finds that the evidence, including a low settlement offer and various indicators of fraud, supports the trial court's conclusion that Rose and Underwood intended to transfer assets from Jasper to themselves to defraud Jasper’s creditors, in violation of Indiana law. Additionally, Rose and Underwood contest the trial court's award of attorney's fees to Mercantile. The court notes that under Indiana law, attorney's fees are mandatory when a plaintiff prevails, and the trial court has broad discretion in determining the amount. The trial court awarded 30% of the recovery, amounting to $162,730. The court explains that while a contingent fee agreement is generally considered reasonable between an attorney and client, this reasonableness may not apply when the fee is added to a judgment against a debtor, as the debtor has a direct interest in the fee's determination. The court cites case law indicating that contingent fees must be based on prior agreements and cannot be enforced against third parties without objective evidence of reasonableness. Ultimately, the trial court found the one-third contingent fee customary in collection practices, which the court upheld. The trial court's award of a 30% contingent fee to Mercantile's counsel was deemed an abuse of discretion, as it significantly exceeded the attorney fees billed by Mercantile, which amounted to $60,346.52. The court's award of $162,730.00 resulted in Rose and Underwood paying nearly three times that amount, raising concerns of unreasonableness in light of typical attorney fee awards in similar tort cases, which range from 30% to 40%. While the trial court was justified in its denial of Rose and Underwood's motions regarding venue change, complaint amendment, and jury trial, it was determined that the attorney fee award constituted a windfall for Mercantile's counsel. Therefore, the award was reversed, and the case was remanded for recalculation of reasonable attorney fees. Additionally, the trial court's findings supported the determination that Rose and Underwood violated Indiana's Uniform Fraudulent Transfer Act, with relevant statutes cited emphasizing the conditions under which transfers by debtors can be considered fraudulent. A creditor may seek relief against a transfer or obligation under this chapter, subject to limitations outlined in section 18. The creditor can pursue the following remedies: 1) Avoidance of the transfer or obligation to satisfy their claim. 2) Attachment or provisional remedies against the transferred asset. 3) Appointment of a receiver for the transferred asset or the transferee's property, and if a judgment has been obtained, the creditor may levy execution on the transferred asset or its proceeds. According to Ind.Code. 32-18-2-18, if a transfer is voidable, the creditor may recover the value of the transferred asset or the amount necessary to satisfy their claim, limited to the lesser of the two. Judgment may be entered against the first transferee or the beneficiary of the transfer. Ind.Code. 34-24-3-1 allows individuals suffering pecuniary loss due to specific violations to file a civil action seeking damages up to three times the actual damages, along with costs, reasonable attorney fees, unreimbursed travel expenses, and compensation for time related to legal proceedings. On August 11, 2003, Rose and Underwood objected to Mercantile's motion to amend its complaint. The trial court later denied Mercantile's request for summary judgment against Utilities, Inc. and WSCI, finding genuine issues of material fact regarding whether these entities knowingly aided Jasper in fraudulent property transfer, violating Ind.Code. 35-43-5-4(8). Ultimately, Mercantile's claims against Utilities, Inc. and WSCI were dismissed after they failed to object to the motion to amend before the court’s selected date for further filings. Summary: The trial court granted summary judgment on certain issues on June 24, 2003, leading to confusion about why the case was scheduled for trial. The court addressed Rose and Underwood's motion for a change of judge under Trial Rule 76(B) but did not assess its timeliness under Trial Rule 76(C), indicating that the lack of determination should not be interpreted as a confirmation of the motion's timeliness. According to Indiana Trial Rule 15(B), issues not raised in pleadings, if tried by consent, are treated as if they were included in the pleadings, allowing for amendments even post-judgment without affecting trial outcomes. The court may freely amend pleadings if it serves the case's merits, unless it prejudices the objecting party, who may be granted a continuance to address new evidence. The dissent argued against allowing claims under Ind. Code 34-24-3-1 in supplemental proceedings, suggesting it would enable new civil actions improperly. However, this argument was not raised by Rose and Underwood on appeal or in their trial objections, leading to a waiver of the issue. Even with this waiver, if Mercantile is barred from asserting its claim in these proceedings, it could be permanently barred by res judicata, preventing re-litigation of claims arising from the same transactions. The court emphasized judicial economy, suggesting Mercantile should be allowed to pursue its claim under the Uniform Fraudulent Transfer Act (UFTA), which permits creditors to avoid transfers necessary to satisfy claims and allows for additional equitable relief. The Seventh Circuit supported this view, indicating that the UFTA's provisions may allow for discretionary monetary relief, including punitive damages. The Seventh Circuit certified questions regarding the permissibility of certain damages under the Uniform Act to the Indiana Supreme Court, which accepted the questions on October 14, 2004; however, the case was settled, leading to its dismissal without a ruling from the Indiana Supreme Court (DFS Secured Healthcare Receivables Trust v. Caregivers Great Lakes, Inc., No. 94S00-0410-CQ-447). The dissent argued that a claim under Ind.Code 34-24-3-1 was inappropriate in a supplemental proceeding as it sought a "new judgment." The document clarifies that actions under the Uniform Fraudulent Transfer Act (IUFTA) are separate causes of action and can be brought in supplemental proceedings, with no distinction made for the crime victim's compensation statute. Despite Trial Rule 15(B) typically applying to amendments at trial, the court allowed its application during summary judgment since no objections were raised regarding treble damages. Rose and Underwood acknowledged potential harmless error related to previous court proceedings. Determining fraudulent intent is a factual question, which may be inferred from "badges of fraud," and multiple badges together can indicate a pattern of fraudulent intent. The trial court identified several badges of fraud in this case: 1) the sale of Jasper and its assets during ongoing litigation, 2) the sale that left Jasper insolvent, 3) contemporaneous transactions stripping Jasper of executable property, 4) a hurried transaction not following usual business practices, and 5) a transaction differing from customary methods. Rose and Underwood did not dispute the first two badges but contended that evidence was insufficient for the last three. The case involved a series of transactions following a lawsuit where judgment was entered against Jasper, and subsequent asset sales occurred shortly thereafter. Rose issued two checks from Jasper's account, each for $235,000, to himself and Underwood shortly after Jasper received proceeds from a sale. These transactions, which occurred within days of each other and involved the immediate deposit of funds into personal accounts rather than escrowing them, raised concerns about their legitimacy. The trial court found that these hurried transactions deviated from standard business practices and effectively deprived Jasper of assets that could have satisfied Mercantile's claims. Under Indiana law (Ind. Code 23-1-28-3), such distributions are prohibited if they jeopardize a corporation's ability to meet its debts. Rose, aware of Jasper's judgment liability to Mercantile, depleted Jasper's assets and effectively closed the business. The court identified five indicators of fraud in Rose and Underwood's actions, suggesting fraudulent intent and supporting allegations of violations under the Uniform Fraudulent Transfer Act. The proceeds intended for the judgment could have been placed in escrow for appropriate disbursement.