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Indiana Courts Enforce the Intent of the Parties

 indiana courts enforce the intent of the parties

A bedrock principle of Indiana law is that the intent of the parties controls the contract. We are constantly advising our clients of this principle, and that is why it is so important that a contract clearly express the true intent of the parties, so that anyone who later reads that contract can understand without question what both parties meant when they agreed to the contract. The Indiana Court of Appeals has again reaffirmed this principle and repeated its long-standing policy of enforcing business contracts when the parties’ intent is clear.

In the case, which involved lien priorities, subordination agreements, crop financing and bankruptcy issues, there were 3 different lenders who had loaned money to a farmer.  At one point the lender who had the senior lien (“Lender #1), and therefore was entitled to be paid first from the proceeds of the farmer’s assets, entered into a partial subordination agreement with the lender which was “third in line” in terms of its lien position (“Lender #3).   It was clear from the subordination agreement that the reason for Lender #1 and Lender #3 to enter into the agreement was to induce Lender #3 to loan additional money to the farmer to plant crops.   Lender #3 then loaned additional money to the farmer, who ultimately filed bankruptcy.  The question then was which Lender was entitled to proceeds from those crops.

After analyzing case law concerning subordination agreements from other States, and parsing through a number of different arguments made by Lender #2 (who was trying to claim some portion of the crop proceeds even though it had not loaned any money towards those crops), the Indiana Court of Appeals noted that subordination agreements are merely contracts. They are contracts that often modify lien priorities. Because they are contracts, their interpretation is controlled by the intent of the parties as expressed by the clear language of the contract.

The Court ultimately determined that the intent of the parties was clear, that Lender #3 was entitled to be paid its debt from the proceeds of the crops for which it had loaned the additional money, and Lender #2, which was not even a party to the subordination agreement, was no worse off than it would have been had there been no subordination agreement.

The business lesson in all of this is, as always, to clearly document and say what you intend an agreement to be. Use clear language, simple words, examples and even illustrations where appropriate to express that intent.  By devoting a little more time and effort to clearly constructing the agreement, you will greatly increase the chance that the parties’ intent will be enforced and you will receive what you anticipated when you entered into the contract.

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Indiana’s Cognovit Note Prohibition

 

 

Warning Cognovit Note

A cognovit clause in a promissory note authorizes the lender to have entered a confession of judgment by the borrower upon the occurrence of an event of default under the promissory note without notice to the borrower.  An example of such a clause is as follows:

WARNING – BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL.  IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE.

The advantage of allowing and enforcing cognovit provisions is that it greatly expedites and streamlines the litigation process as the borrower does not have an opportunity to challenge the lender’s collection action.  Consequently, several States do allow cognovit notes, including Ohio and Pennsylvania.

However, such provisions raise legitimate concerns about due process, and accordingly a number of States prohibit the enforcement of cognovit provisions.  Indiana is one such State, as Indiana Code § 34-54-4-1 provides:

 A person who knowingly:
(1)        procures another to:
(A) execute as maker; or
(B) endorse or assign;
a cognovit note;
(2)        being the payee, endorsee, or assignee of the cognovit note, retains possession of the cognovit note; or
(3)        attempts to recover upon or enforce within Indiana a judgment obtained in any other jurisdiction based upon a cognovit note;
Commits a Class B misdemeanor.

In Jaehnen v. Booker, 806 N.E.2d 31 (Ind.App. 2004), the Indiana Court of Appeals reviewed all of the prior Indiana case law regarding cognovit notes and determined that “the evil to be avoided is the lack of due process.”  Consequently, a note containing a cognovit clause is enforceable in Indiana so long as the lender does not rely upon such clause.  Id., at 36.  In such an instance, the lender can effectively sever the cognovit clause while relying on the rest of the enforceable negotiable instrument.  Id., at 35.  This is true regardless of whether the note was executed in Indiana or another State.  Id., at 36.

The location of execution of a cognovit note is relevant for determining whether Indiana will give a foreign judgment full faith and credit.  If a cognovit note was executed in Indiana and a judgment is entered in Ohio based on the cognovit provision, Indiana will not recognize the foreign judgment.  On the other hand, if the cognovit note was executed in Ohio and a judgment is entered in Ohio, then Indiana will give full faith and credit to the Ohio judgment.  See, Cox v. First National Bank of Woodlawn, 426 N.E.2d 426, 430 (Ind.App. 1981).

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Attorney Fee Liens Under Indiana Law

 

attorney lien

 

Indiana law recognizes two types of liens that can be asserted by an attorney to recover amounts owed for unpaid services.  The first type of lien is provided by Indiana Code § 33-43-4-1, which provides:

An attorney practicing law in a court of record in Indiana may hold a lien for the attorney’s fees on a judgment rendered in favor of a person employing the attorney to obtain the judgment.

This statutory lien only applies in situations where a judgment has been rendered in favor of the client.  Therefore, it will rarely be available to counsel that is representing a defendant in litigation.  In order to assert such a lien, the attorney must file a notice of the lien including the amount owed with the trial court within sixty (60) days of the date the judgment has been rendered.  See, Indiana Code § 33-43-4-2.

In addition to the attorneys’ lien provided by statute, Indiana courts also recognize that attorneys’ have an equitable right to retain possession of a client’s documents, money, or other property which comes into the hands of the attorney professionally until the attorney’s fees are paid.  This lien exists as long as the attorney retains possession of the client’s property.  The situation in which this equitable lien will be most effective is when the attorney receives funds for his client, such as proceeds from a settlement.  When the attorney only has his client’s file, the effectiveness of such a lien depends on the value to the client of the retained file.

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What Triggers the Beginning of a Non-Compete?

hagenow2In a recent case decided by the Indiana Court of Appeals, the judges unanimously agreed that a 10 day break in employment with a prior employer started the running of the non-compete agreement between that employer and its employee, despite the fact that same employee was rehired by that same employer 10 days later.

     At the time of the employee’s original hire, he was asked to sign a non-compete agreement, which he did.  He was subsequently fired.  Ten days later his employer offered to revoke the termination and allow him to return to his prior position.  The employee returned to his position but the employer did not ask the employee to sign a new non-compete agreement.  Approximately 2 ½ years later, the employee left that employment and immediately began working for his former’s employer’s competitor.

     The employer filed a lawsuit seeking to enforce the non-compete agreement that the employee signed at the time of his original hire.  The employer argued that because the termination was “revoked”, and the employee rehired, the non-compete agreement signed when the employee was originally hired should still remain in full force and effect.

     The Indiana Court of Appeals rejected the employer’s argument and ruled in favor of the employee.  The Court noted certain principles related to non-compete provisions, which we have previously discussed here.  Included among these are the fact that covenants not to compete are in restraint of trade and are not favored by the law; they are strictly construed against employers and are enforced only if reasonable; and those covenants must be reasonable with respect to legitimate protectable interest of the employer.

     The Court of Appeals held:

Mindful that non-compete agreements are disfavored by law and strictly construed against the employer, we conclude there is no issue of material fact [Employee] was indeed separated from [Employer] on October 16, 2009, which marked the starting point of the two year restrictive period of the non-compete agreement.  Absent the execution of a new non-compete agreement on October 26, 2009 or a written extension of the prior non-compete agreement, the employee’s restrictive period ended on or about October 16, 2011.  Therefore, at the time of entering into an employment relationship with [Competitor] in May of 2012, [Employee] was no longer bound by the provisions of the non-compete agreement.

     The obvious lesson here for employers is that a re-hired employee needs to sign a new non-compete agreement, or at least some sort of document acknowledging that the previous non-compete agreement has been extended to fill any gap in employment.  Indiana courts will enforce contracts according to their plain, ordinary, and clear terms.  Therefore, it is a worthwhile exercise to put together written contracts, signed by all necessary parties, to accurately document what the parties’ intent is with respect to their agreements, including non-compete and other types of agreements.

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Law Does Not Always Keep Pace with the Rest of the World

law

Lawyers rely upon previous court decisions when determining what advice to give to clients. By reading previous decisions based upon facts similar to a particular situation, a lawyer can best advise the client what is likely to happen and how to approach the problem.  For this reason, lawyers rely on the law generally being the same year after year.

The law can and does change, however.  In fact, sometimes a court will actually reverse one of its prior rulings.  The 7th Circuit Federal Court of Appeals recently did just that, and noted it is “not attractive” to “move from one side of a conflict to another,” but because the Court has a duty to apply the relevant law in a way to avoid “unnecessary litigation,” then the Court must do so.

Furthermore, as we all know the world changes, and sometimes changes very quickly.  It is amazing to think that the iPhone was not introduced until October 2007. Think about how much the world has changed as a result of the introduction into our lives of the iPhone/ Smartphone.  Looking back a few years further, the Internet used to be a novelty, and yet now is a practical necessity to everyday life, school and business.

However the process for changing the law is often quite slow, and so situations arise where technology and the world change so fast that the law is unable to keep pace and so there is no legal precedent to deal with new situations.  As a result matters  must be resolved using laws that were not really designed to deal with issues in the modern world, and there is no case law to guide the attorneys or the parties.

So what to do when the old meets the new, or stated another way, a situation arises as a result of the new (e.g. the Internet) which is governed by laws that have been in existence for years before anyone even considered something like the Internet or a Smartphone.

In a recent case decided by the Indiana Court of Appeals, one of the judges, in her dissent (disagreement) to the court’s ruling, looked at this phenomenon.  In the case, the LaPorte County Convention and Visitor Bureau announced at a public meeting that the Bureau was intending to begin using the phrase “Visit Michigan City LaPorte.”  A person who attended that meeting was then instructed by her employer (Serenity) to immediately register the domain name “visitmichigancitylaporte.com.”

Later on the same day as the announcement, when the Bureau went to register the website address, it discovered that it had already been purchased by Serenity.  The Bureau filed a lawsuit against Serenity.

The Bureau was successful on two separate occasions at the trial court, and the trial court issued an injunction that prohibited Serenity from using the website address. However, the Indiana Court of Appeals reversed the trial court, and ruled that the phrase “Visit Michigan City LaPorte” was not protectable, and that Serenity’s use of the phrase did not create any confusion concerning who was using the phrase.  The Court of Appeals noted that the existing law requires that someone who is seeking to protect a phrase, trade name, etc., must demonstrate that the phrase or name was previously identified with a particular company or product.  Because the Bureau had not established that it was already using the disputed phrase, it could not meet the requirements of the law.

In her dissent, Judge Riley noted among other things that the law concerning “unfair competition” has not kept pace with the times. She wrote:

[the law at issue] was enunciated in a time when men drove a cart and horse and life proceeded more slowly, but they are difficult to apply to an era where messages can be sent at the speed of light and goods can be purchased by the push of a button.  Although it is frequently feasible to pour new wine into old bottles, here, the old rule – albeit still valid – simply cannot keep up with the modern advances in technology.

After noting that many other courts are moving away from the strict requirements that were in place when Indiana’s law was enacted, she opined that it was an opportune time for the Indiana legislature to change the law to more accurately fit the realities of the modern day world:

In light of Indiana’s sparse and outdated case law, I would urge our legislature and Supreme Court, if the opportunity arises, to look beyond the man and cart method . . . and instead usher Indiana into the technological realities of the 21st century by formulating tools appropriate to handle the complexities of the internet’s realm. 

It remains to be seen how the legislature will respond to this case.  There are numerous other laws still on the books that do not match the realities of the modern day world.  We will simply have to wait to see how quickly those laws are amended or replaced.

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