June 29, 2007
INDIANA SUPREME COURT DISCUSSES PROCEEDINGS SUPPLEMENTAL

Do you know what “proceedings supplemental” are?  If you are in the business of collecting judgments in Indiana, and from time to time virtually all secured lenders are, then the June 20, 2007 opinion by the Indiana Supreme Court in Rose v. Mercantile National Bank, 2007 Ind. LEXIS 471 provides a great primer on the subject.  (RoseOpinion.pdf).   

Facts of Rose.  Plaintiffs sued an S-Corp, and the trial court entered judgment against S-Corp for $159,581.  During the litigation, the owners of S-Corp sold the company in an asset sale to Corporation I for $475,000.  Corporation I then transferred its rights and obligations under the asset-purchase agreement to Corporation II, a wholly-owned subsidiary of Corporation I.  After the sale, the owners of S-Corp deposited the sale proceeds into S-Corp’s bank account and, within three days, issued checks to themselves for the entire sale price.  The closing occurred approximately one month after the trial court entered judgment for Plaintiffs.   

About a year later, presumably because the judgment had not been paid, Plaintiffs moved for proceedings supplemental and brought fraudulent transfer claims against S-Corp, Corporation I, Corporation II, and S-Corp’s owners.  Plaintiffs asserted that assets had been transferred out of S-Corp to avoid paying the judgment.  During the proceedings supplemental, Plaintiffs sought to amend the complaint to add additional claims and to recover new damages.  The result was a new judgment for Plaintiffs for $542,435.49 plus attorney’s fees of $162,730.  The Indiana Supreme Court affirmed the trial court’s finding that the two owners of S-Corp fraudulently transferred assets, but the Court set aside the new claims for new damages. 

Proceedings supplemental generally.  Proceedings supplemental are designed to help judgment creditors enforce judgments – for discovering assets and to set aside fraudulent conveyances.  Proceedings supplemental are merely the continuation of an original action.  Ind. Trial Rule 69(E) generally governs proceedings supplemental, and the motion is made in the court where judgment was rendered.  Discovery is permitted, and a hearing must be conducted, after which certain property is to be applied toward the judgment.  Id. at 4-5. 

Fraudulent transfer.  Judgment creditors often use proceedings supplemental to bring fraudulent transfer actions, the purpose of which is to remove “obstacles which prevent the enforcement of the judgment . . . through the levy of execution.”  The essence of a fraudulent transfer action is not to attack the transfer or to recover damages.  Instead, the action “is to subject property to execution as though it were still in the name of the grantor.”  Id at 6-7.

New claims.  Unlike Plaintiffs’ fraudulent transfer claims, Plaintiffs also sought new damages from the S-Corp owners by adding a new cause of action under Indiana’s Crime Victims’ Compensation Act, which allows for treble damages and attorney’s fees.  The Court said this was a no-no: 

  Allowing a new claim to be tacked on at this stage would be just as
  unfitting as opening up any other litigation to add new claims after
  judgment.  Such an approach to collections would lay the
  groundwork for perpetual motion-a far cry from the timely and
  efficient system of conflict resolution the nation’s judiciary strives
  to provide.  Proceedings supplemental are appropriate only for
  actions to enforce and collect existing judgments, not to establish
  new ones. 

Id. at 7.  So, a new claim for new damages, and thus the imposition of a new judgment, should be filed in a new lawsuit.  On the other hand, “any action to assist in collection of an original judgment [like a proceeding supplement] must be filed under the same cause number as the original action.”  Id. 

In addition to addressing the generalities of proceedings supplemental, the Indiana Supreme Court provides clarity for lenders concerning fraudulent transfer actions, which can be appropriately prosecuted in proceedings supplemental or, in other words, in a continuation of the same case and in the same trial court that rendered the judgment.  Any new claims or, in other words, actions for separate and distinct damages, however, must be the subject of another lawsuit.

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Posted at 05:25 PM in Proceedings Supplemental  |  Permalink