BlogNews and practical information from our attorneys.
What if you are asked to act as a Receiver for an Indiana commercial property in foreclosure? Frequently in Receiverships, the secured creditor does not want the Receiver to engage counsel because of the added expense. When you agree to the Receivership appointment, the secured creditor will send you a lengthy draft order to submit to the Court appointing you as Receiver. You may find yourself wondering what provisions are necessary in your position. Below is a list of important items a prospective Indiana Receiver should look for in most Receivership orders:
- Reporting requirements: The order should provide how frequently the Receiver must file updates with the Court regarding the status and finances of the Receivership, including the income and expenses.
- Extent of Receivership: The order should define whether the Receiver will control the borrower itself or just the property pledged as collateral in favor of the secured creditor. Commonly the Receiver will only be appointed to control the collateral, whether that collateral is real estate or personal property. Actually taking control of the borrower itself can add complications and expenses for the Receiver, such as filing tax returns. Also, if real estate constitutes the only collateral, it is helpful if the order provides that books and records related to the real estate must be turned over by the borrower and its officers to the Receiver.
- Selling Property: The order should provide whether the collateral that constitutes the Receivership estate can be sold by the Receiver. The order should also provide the procedure for selling the collateral (i.e. notice required to other parties and court for a proposed sale, period of time for objections to a sale motion). Rarely would a Receiver’s ability to sell personal property be challenged. However, as discussed in another of my blog posts, a Receiver cannot sell Indiana real estate unless the borrower has entered into a post-default waiver of its equity of redemption. If the Receiver’s primary motivation for accepting the Receiver engagement is the possible commission from a sale of property, the Receiver needs to understand whether it will be able to sell that property.
- Compensation of Receiver: The order should specifically define the amount, the frequency, and the procedure for the Receiver to obtain compensation for its services. Typically, the Receiver receives payment of compensation upon submission of invoices to the court and an absence of objection by any party for a specified period of time without a hearing. Also, the order should include any commission from the sale of property in addition to any flat monthly fee or hourly rate for the Receiver’s services.
- Retention of Professionals: Even if the bank insists that the Receiver does not hire counsel at the beginning of a Receivership, it may later become necessary. Unforeseen complications, challenges to actions by the Receiver, and/or a sale of property could necessitate legal advice. Also, situations could arise that require retention of an accountant or other similar professionals.
- Ability to Commence Actions: The order should authorize the Receiver to file actions to protect the Receivership property. The most common such actions involve lease terminations and contract disputes with vendors.
- Expenses of Receivership: The order should authorize the Receiver to incur expenses to protect the Receivership estate including paying vendors and utilities, obtaining insurance, repairs to the property, etc. The order may cap the amount of such pre-approved expenditures or provide that expenses are subject to approval by the secured creditor.
- Loans from the Bank: Ideally the Receivership property will generate sufficient income (typically from rents) to pay the expenses of the Receivership, including the Receiver’s compensation. Frequently this is not the case, especially if the property is in a state of disrepair and requires any improvements before marketing the property is feasible. Consequently, loans from the secured creditor are often necessary to fund the Receivership, and the order should pre-approve such loans.
- Bank Accounts: A separate deposit account should be set up by the Receiver for the Receivership. The order may dictate where such an account must be established, as banks often require that the Receiver’s account be maintained at that bank so that the bank can monitor the account during the Receivership.
- Bond: The Indiana Receiver Statute does require the posting of a bond to protect the secured creditor, borrower, and other parties in the action. However, some courts may allow the Receiver to serve without such a bond, but if there is a concern that the borrower may appeal the appointment of the Receiver, it is advisable to have the bond posted.
- Interference with Performance: The Order should preclude the borrower or any other parties from interfering with the Receiver’s performance of its court appointed duties.
These considerations will be relevant in virtually every Indiana Receivership. With that being said, every Receivership will have its own unique facts and circumstances to consider when a potential Receiver reviews a proposed Receivership order. It is necessary for the proposed Receiver to have a firm understanding of the facts related to the Receivership and the secured creditor’s expectations for the Receivership before accepting a Receiver engagement.
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Successor Liability and Piercing the Corporate Veil:
Protect Your Assets
We have had several meetings recently with new clients who are either purchasing the assets of an existing business, or are beginning a new company. When we are in these meetings, we will often stress the importance of separation between the business assets and those assets that belong to the individual owners of the business. In addition, when a business is purchasing the assets of a former business, it is important to structure the transaction such that the business buying the assets can limit or eliminate any obligations for debts owed by the selling business.
These meetings have brought to mind a previous post concerning the same issues, including the factors that a court will examine when determining whether or not to hold an individual liable for a corporation’s debts period.
While the Ziese case discussed in that previous post was more focused on “successor liability”, another important decision from the Indiana Court of Appeals around that same time held that in addition to the elements discussed in the Ziese case concerning whether or not a court should consider “piercing the corporate veil,” (and thereby hold the individual shareholders liable for the debts of the corporation), a plaintiff seeking to do so must also show a causal connection between the fraud or injustice alleged by the party seeking to pierce the corporate veil and the harm that that party complains of. In other words, it is not enough to prove that the defendant corporation did not follow corporate formalities or otherwise misused the corporate form. Rather, the plaintiff must be able to demonstrate that misuse actually caused the damages that the plaintiff is complaining about. The Indiana Court of Appeals also confirmed what has been discussed in numerous other instances in this blog that these types of cases, as well as many others, are highly fact sensitive, and it is difficult to draw perfect analogies from one case to the next.
In summary, the Indiana courts will be very reluctant to pierce a corporate veil, and are more reluctant to do so than to impose successor liability as the Court of Appeals did in Ziese. A detailed review of the facts of each case will be necessary in order to attempt to determine how a court may view a particular situation, understanding that the hurdle will be quite high to clear in order to create personal liability for the shareholder of a corporation in Indiana.
Indiana Tax Deed Notice Requirement
A recent Indiana decision, 219 Kenwood Holdings v. Properties 2006, 2014 Ind.App. LEXIS 512 (Ind.App. 2014), examined the requirements for the notice that must be provided by a tax sale purchaser to the property owner.
Unexpected Holdings, LLC purchased a property in Lake County, Indiana at a tax sale on April 25, 2013, and the rights related to that purchase were assigned to Properties 2006, LLC. On June 21, 2013, Properties 2006, LLC sent notice of its purchase and its intent to petition for a tax deed to the owner, 219 Kenwood Holdings, LLC, as required by Indiana Code § 6-1.1-25-4.5. The notice provided “A petition for a tax deed will be filed on or after August 24, 2013.” On August 30, 2013, Properties 2006, LLC sent notice to the owner that it had petitioned for a tax deed, as required by Indiana Code § 6-1.1-25-4.6.
Attempting to set aside the sale, 219 Kenwood Holdings, LLC argued that the first notice provided by the tax sale purchaser did not satisfy the statutory requirements. Indiana Code § 6-1.1-25-4.5(e) provides fifteen (15) requirements for that notice, although only the following two (2) requirements were in dispute in the case:
The notice that this section requires shall contain at least the following:
- A statement that a petition for a tax deed will be filed on or after a specified date.
- The date on or after which the petitioner intends to petition for a tax deed to be issued.
The owner argued that (a) Section 4.5(e) required two (2) separate statements to satisfy requirements (1) and (2), and (b) Section 4.5(e)(2) requires a prediction as to the date on which the tax deed would be issued. The Court found both arguments unavailing. The Court acknowledged the partial redundancy of (1) and (2) and determined that a single statement that a petition for tax deed would be filed on or after a specific date, as had been provided to the owner in this case, satisfied both (1) and (2). Furthermore, predicting the date the deed would be issued would only be required under Section 4.5(e)(2) if the phrase “to petition” were omitted from the provision. Consequently, the provided notice satisfied the statutory requirements, and the Indiana Court of Appeals affirmed that the purchaser was entitled to the issuance of a tax deed.
How Much Effort is Required to Find the Person You are Suing?
In what should have been an otherwise uneventful mortgage foreclosure, the Indiana Court of Appeals recently made clear to parties in lawsuits that they must take some reasonable efforts to notify all necessary parties of a lawsuit before they will be entitled to a judgment. In Hair v. Deutsche Bank National Trust Company, a bank filed a foreclosure action, and needed to name another lien holder in order to complete the foreclosure, clear title to the real estate, and obtain a judgment. There was no question that the bank’s mortgage lien was the first lien on the property, but Hair held a “junior” lien on the property. After the bank was unable to serve a summons on Hair, it attempted to serve him through “publication”, which is a technique allowed under Indiana law. However, a party may only rely upon service by publication after providing evidence that a diligent search was made and that the party cannot be found, has concealed his whereabouts, or has left the State.
The Court found that the bank had not made a diligent effort to ascertain Hair’s whereabouts, and held that “mere gestures are not enough” and the “means employed must be such as one desirous of actually informing the party might reasonably adopt to accomplish it.”
Because the Court found that the bank had not exercised that due diligence, and that had the bank performed even a bit of Internet research Hair could have easily been located, the Court granted Hair’s motion to set aside the judgment. The Court of Appeals then sent the case back to the trial court for further handling.
Where this case will end up remains to be seen because the real estate has already been sold to a third party. However, by operation of law, Hair’s lien was not foreclosed and therefore is still attached to the real estate. At the same time, there is no dispute that Hair’s lien was inferior to the bank’s lien, and the property sold at the sheriff’s sale for less than what was owed to the bank. Therefore, even if Hair had been properly served with a summons, the bank would have foreclosed the lien and Hair would not have received any of the proceeds of the sale. The Court of Appeals did not address that issue, and sent the case back to the trial court for further proceedings.
The practical lesson here is that it is not sufficient to simply serve a party by publication without being able to demonstrate that you have exercised reasonable efforts in your due diligence to locate that party so that the party can be personally served. The failure to do this can result in the setting aside of a foreclosure judgment and the unwinding of subsequent transactions based upon that judgment. Furthermore, with modern technologies, particularly the Internet and Internet based applications, what constitutes due diligence is likely more extensive now than what would have been required in the past.