Indiana Law Review


234 INDIANA LAW REVIEW [Vol. 8:228

tion.
32 A similar statute is needed in Indiana. The right should be

available to the landlocked property owner without regard for the
conditions under which his land was rendered inaccessible.

XII. Secured Transactions anil
Creditors9 Rights

R. Bruce Townsend*

The last year has seen some sensational developments in the
law of secured transactions and creditors' rights. The vendor under
a conditional sales contract is now recognized as holding a security
interest in land like that of a mortgagee. The exemptions of a wage
earner have been expanded by the Indiana Supreme Court but
narrowed by the highest Court of the land. The Indiana courts
have also dealt with many technical and policy questions which
should be of interest to the legal profession.

A. Real Estate Recording Statutes and Priorities

The Indiana recording statutes are incomplete, inconsistent,
and leave much to be desired, especially with respect to reserved
interests and transfers not literally or fully covered by recording
laws.

1 An example of one problem will illustrate this observation.
Suppose that V contracts to sell land to P on a conditional sales
contract. Later, a third party, P2, acquires an interest from V.

32An example of such legislation is 10 Tenn. Code Anno. § 54-1902
(1956) which provides:

Any person owning any lands, ingress or egress to and from which
is cut off or obstructed entirely from a public road or highway by the
intervening lands of another, or who has no adequate and convenient
outlet from said lands to a public road in the state, by reason of the
intervening lands of another, is given the right to have an easement

or right-of-way condemned and set aside for the benefit of such lands
over and across such intervening lands or property.

Professor of Law, Indiana University Indianapolis Law School. A.B.,
Coe College, 1938; J.D., University of Iowa, 1940.

'Indiana has two general statutes governing priorities. One relates to
reserved interests. Ind. Code §32-1-2-17 (Burns 1973). The other applies
to conveyances, mortgages and leases. Id. § 32-1-2-16. Other statutes provide

for recordation of certain types of instruments without including rules of

priorities. E.g., id. § 32-1-2-32. Cf. id. §§ 30-4-4-1, -2 (Burns 1972). None of the
statutes states a clear or satisfactory rule for determining priorities, but

Ind. R. Tr. P. 63.1(A), providing for the effect of lis pendens notice filing

or lack of it, is satisfactory in that area.



1974] SURVEY—SECURED TRANSACTIONS 235

Who prevails, and what law governs the rights of the parties?2

Prior to the enactment of the modern recording statutes, PI was
regarded as holding an equitable title. Such title could be cut

off by a bona fide purchaser of a legal title from V but, as between
competing equities, the rule was first in time, first in right.3 The
time is ripe for a definitive court decision establishing priority

rights among different classes of owners in real estate and, hope-
fully, the courts will read all the recording statutes as part of an
integrated whole and apply uniform rules to both equitable and
legal interests in land.

4 The court of appeals passed up this
opportunity in Rural Acceptance Corp. v. Pierce,5 in which a judg-

ment creditor of the vendor claimed that his judgment lien took
precedence over the interest of the vendor's prior purchaser, who
was in possession of the land. The judgment creditor argued that
his lien gave him a prior right to proceeds realized from insurance
carried by the purchaser for himself and the vendor covering the
loss of a building.

6 The purchaser was given priority upon the
theory that a judgment lienholder is not a purchaser for value
who will cut off prior "equities." Unfortunately, the court failed
to examine the valuable but sometimes ignored rule that a pur-
chaser's possession gives him a perfected title as against the claims
of subsequent parties.7

2The cases on this problem are almost indecipherable. Compare Bandy
v. Myers, 141 Ind. App. 220, 227 N.E.2d 183 (1967), with Denham v. Degymas,
237 Ind. 666, 147 N.E.2d 214 (1958). Neither case considered the recording
statutes which apply to land contracts. Case v. Bumstead, 24 Ind. 429 (1865)

;

Ind. Code §32-1-2-32 (Burns 1973).
^Compare Denham v. Degymas, 237 Ind. 666, 147 N.E.2d 214 (1958),

with Combs v. Nelson, 91 Ind. 123 (1883), and Wright v. Shepherd, 47 Ind.
176 (1874).

4Some past decisions dealing with the Indiana recording laws have gone
far toward achieving this result. Thus, defeasible equitable titles which

depend upon parol proof are subject to the recording laws which literally

apply only to separate written defeasances. Tuttle v. Churchman, 74 Ind.

811 (1881). A statute protecting purchasers for value has been judicially
rewritten to apply to purchasers giving value without notice. Wilson v.

Wilson, 86 Ind. 472 (1882). Plat books have been brought within the recording

laws without express statutory provision. Miller v. Indianapolis, 123 Ind.

196, 24 N.E. 228 (1890).
5298 N.E.2d 499 (Ind. Ct. App. 1973).
6The court upheld an order granting specific performance to the pur-

chaser and directing that the price first be applied to the vendor's mortgagee.

Any excess was to go to the alleged judgment lienholders in the order of what
the court assumed to be their judgment liens upon the land. Under the doctrine

of equitable conversion, recognized by the court, the vendor had no interest in

land but only in personal property. See discussion at text accompanying

notes 119-29 infra.
7A decision to this effect would eliminate for all time the "lazy banker"

rule of Mishawaka, St. Joseph Loan & Trust Co. v. Neu, 209 Ind. 433,



238 INDIANA LAW REVIEW [Vol. 8:234

B. Conditional Sales Contracts

For centuries, the English law and most state statutes have
prohibited forfeiture of the rights of a mortgagor. Indiana law
contemplates that the mortgagee by contract or otherwise cannot
defeat the mortgagor's right of redemption until sale, which sale

may not be held until six months after the filing of the foreclosure
complaint.

8 For centuries, crafty lawyers have sought ways to
defeat this redemption right, and one device for achieving this
end has been the conditional sales contract. It has been the tra-

ditional view in Indiana that a conditional vendor of real estate

could declare a forfeiture upon the vendee's default when the
contract allowed him to do so.9 The Indiana Supreme Court de-
clined to approve this practice in the case of Skendzel v. Marshall,™

in which the court required a vendor, who had received over one-
half of the purchase price, to foreclose his interest or lien by

following the same procedure applicable to mortgagees. The de-
cision was immediately followed by the Indiana Court of Appeals
in Tidd v. Stauffer." Although Skendzel indicated that forfeiture

would be permitted in situations in which it was equitable to do so,
the case is a landmark which brings a much needed humanity and
consistency to the law.

12
This need for humanity and consistency

was flaunted, but clearly demonstrated, in Goff v. Graham.™ The

196 N.E. 85, 105 A.L.R. 881 (1935). In that case, the interest of a vendee
with three days possession was defeated by a banker who took a mortgage
without actual knowledge. Case law overwhelmingly protects the purchaser
in possession, who arguably holds a legal title. Cf. Burt v. Bowles, 69
Ind. 1 (1879) (equitable title of possessor protected by legal remedy of
ejectment).

8The Indiana mortgage statute gives a right of redemption and pro-
hibits sales of real estate before the elapse of six months after the filing

of the foreclosure complaint. Ind. Code § 32-8-16-1 (Burns 1973) (mortgages

executed after July 1, 1957). This requirement was applied to all lien fore-
closures by Ind. R. Tr. P. 69(C). This right of the mortgagor may not
be contracted away. Federal Land Bank v. Schleeter, 208 Ind. 9, 194 N.E.
628 (1935).

9E.g., J.F. Cantwell Co. v. Harrison, 95 Ind. App. 293, 180 N.E. 482

(1932).
,0301 N.E.2d 641 (Ind. 1973).
"308 N.E.2d 415 (Ind. Ct. App. 1974) (when $16,000 had been paid on

the purchase price of $39,000, the court ordered foreclosure rather than

forfeiture).
12The old law made a distinction between the rights of a conditional

seller and a mortgagee of personal property. This inconsistency was one of

the emphatic reasons for Article 9 of the Uniform Commercial Code which

eliminated any artificial differences and treated the conditional sales con-

tract as an ordinary security interest. Uniform Commercial Code § 9-201

(37).
,3306 N.E.2d 758 (Ind. Ct. App. 1974).



1974] SURVEY—SECURED TRANSACTIONS 237

court of appeals upheld a lower court decision, after the lower

court had exercised apparently unprecedented continuing juris-
diction over the parties to a conditional sales contract in default,

and allowed the vendor to claim a forfeiture of moneys paid along
with damages which included overdue back payments. 14

One other problem related to the Skendzel case should be
noted. When the bankers succeeded in bringing about the adoption
of the new Trust Code, a means for evading redemption rights
may have seeped into the law through a provision which allows
an owner of land to convert the land into personal property by
a kind of legal "hocus pocus"—a form of dry trust. 15 Thus, an
owner may convey his land to a trustee but preserve the right of
management in himself as beneficiary, his interest thereby be-
coming personal property. The idea seems to have come from
Illinois, where several recent decisions hold that the beneficiary,
who is the real owner of the land for most practical purposes,
may give a security interest in his rights as personal property. 16

This security interest may be foreclosed under the Uniform Com-

14The history of the case in the court below indicated that the defendant
was reordered to comply with the contract. This action was followed by
appointment of a receiver, dismissal of the receiver, and finally a judgment of

cancellation with damages. The opinion in the court of appeals upheld
damages for waste and allowed the balance of the award to stand as an

award of restitution based upon moneys received by the purchaser as rent.

However, no deductions for expenses incurred by the purchaser were men-

tioned. See Grissom v. Moran, 292 N.E.2d 627 (1973), modifying 290 N.E.2d

119 (Ind. Ct. App. 1972), in which the court held that in a rescission action

the burden of proof falls upon the defendant to adjust the equities or damages

to achieve the status quo. Two other recent decisions, involving identical

fact situations, considered alleged abuses by a conditional seller of real

estate and his alleged conspirators in which a form of strict forfeiture

apparently was allowed. Ernst v. Schmal, 308 N.E.2d 732 (Ind. Ct. App.

1974) ; Lake Mortgage Co. v. Federal Nat'l Mortgage Ass'n, 308 N.E.2d

739 (Ind. Ct. App. 1974). The court in Ernst avoided careful examination of

the vendee's claims by upholding a lower court decision granting a new

trial to the conditional seller and finding insufficient evidence of wrong-

doing by a receiver and a prior mortgagee who allegedly participated in

the vendee's abuses.

15Ind. Code §30-4-2-14 (Burns 1972). This section permits a power of

sale in the trustee upon the direction of the beneficiary or other person,

thus allowing a lender-trustee to sell the beneficiary's interest on fore-

closure. Id. § 30-4-2-13 upholds the trust when the beneficiary has the power

to manage the real property and excludes the trust from the usual treatment

given to a dry trust.
16Wambach v. Randall, 484 F.2d 572 (7th Cir. 1973) (beneficiary's

interest under land trust is personal property and security interest therein

may be perfected by filing under the Uniform Commercial Code).



238 INDIANA LAW REVIEW [Vol. 8:234

mercial Code17 without judicial sale and without the right of

redemption under statutes applicable to mortgages on real estate.
18

It is unlikely that the court which decided Skendzel would allow

the land trust provision of the Trust Code to repeal the mortgage

redemption laws. 19

A vendor improperly evicting a purchaser under a conditional
sales contract undoubtedly commits a material breach of contract,
thus allowing the purchaser to treat the contract as terminated and
to rescind.

20
This remedy was clearly recognized by the supreme

court in Smeekens v. Bertrand,2 * wherein the breach occurred
when the vendor posted bond and improperly recovered possession
at the threshold of an ejectment action. Thereupon, the purchaser
elected to rescind and sought recovery upon the ejectment bond.
The court of appeals22 held that the bond did not cover this element
of damages, thus allowing a somewhat shocking abuse of the
summary procedures then available in ejectment. Some of the
sting of this decision has been removed by the new Indiana eject-
ment statute,23 enacted to meet the objections which the United
States Supreme Court pronounced in Fuentes v. Shevin.*4 The

17Ind. Code §§26-1-1-101 to -2-4-1 (Ind. Ann. Stat. §§19-1-101 to
-14-116, Burns 1964) [hereinafter cited as Uniform Commercial Code; here-
inafter referred to as the UCC or Code].

,aKortenhof v. Messick, 309 N.E.2d 368 (111. App. 1974) (holding that
mortgage foreclosure act did not apply to beneficiary of trust who assigned
his interest as security to a bank).

19
It is extremely doubtful that the land trust provision of the Indiana

statute will be held to transform the beneficiaries' interest into personal

property for purposes of foreclosure. First, Indiana courts have always
taken a dim view of sham transactions to defeat foreclosure laws. E.g.,
Kerfoot v. Kessner, 227 Ind. 58, 84 N.E.2d 190 (1949); Knapp v. Ellyson
Realty Co., 211 Ind. 180, 5 N.E.2d 973 (1937); Davis v. Landis, 114 Ind.

App. 665, 53 N.E.2d 544 (1944). Secondly, repeal of the statute by the
vague language of the Trust Code is almost unthinkable. Thirdly, the Trust

Code specifically provides that the "rules of law contained in this article do

not apply to . . . security instruments and creditor arrangements." Ind. Code

§ 30-4-1-1 (c) (Burns 1972).
^Compare Gwynne v. Ramsey, 92 Ind. 414 (1883), with Jennings v.

Bond, 14 Ind. App. 282, 42 N.E. 957 (1895). But cf. Haas v. Rathburn, 137 Ind.
App. 172, 205 N.E.2d 329 (1965) (holding that tenant in ejectment action

could not set up eviction in counterclaim).
2, 311 N.E.2d 431 (Ind. 1974).
22Bertrand v. Smeekens, 298 N.E.2d 25 (Ind. Ct. App. 1973).
23Ind. Code §§ 32-6-1.5-1 et seq. (Burns Supp. 1974). This statute requires

notice and hearing before possession is awarded to the plaintiff upon his

showing of a "reasonable probability" of recovery in the principal action.

Id. § 32-6-1.5-5. In case of emergency, possession may be granted without
hearing upon affidavits filed with the court. Id. § 32-6-1.5-3.

24407 U.S. 67 (1972). This case held unconstitutional statutes which al-

lowed replevin to a plaintiff posting bond but which had no provision



1974] SURVEY—SECURED TRANSACTIONS 239

statute provides for a preliminary hearing on the question of the
plaintiff's probability of recovery. In any event, the court of ap-
peals decision seems unsound, particularly insofar as the surety
bondsman is protected by his right of subrogation which includes
the right to the returned property.

C. Motor Vehicles

In Indiana, a security interest in a motor vehicle is created by
an ordinary security agreement which must be in writing, must be
signed by the debtor, and must describe the collateral. In addition,
value must be given and the debtor must have rights in the col-
lateral.

25 Suppose that there is no formal security agreement, but

that the lien is indicated upon the application for the certificate of
title and upon the certificate of title issued by the Bureau of Motor
Vehicles. Two formalities required for a security agreement may
be missing. One is the lack of the debtor's signature, since he is
not required to apply for the certificate,

26 and the other is the omis-
sion of words of grant or promise.27 In White v. Household Finance
Corp.,

76
the court held that, although the certificate named the

secured party as lienholder and included the debtor's surety as a
co-owner with the debtor, it did not fulfill the requirements of a

security agreement as specified by the Uniform Commercial Code
because the signature of the debtor was lacking.29 White poses an

for notice and hearing. Fuentes has since been modified by Mitchell v.
W.T. Grant Co., 94 S. Ct. 1895 (1974) (allowing ejectment when the judge
authorizes possession to a plaintiff who furnishes evidence and a bond).

"Uniform Commercial Code §§ 9-203(1) (b), 9-204(1). To be perfected
as against creditors, purchasers and other secured parties claiming through
the debtor, the security interest must be indicated upon the certificate of
title by a public official. Id. §9-302(3) & (4). However, perfection is not
required to create a security interest betwen the debtor and the secured party.

2b
Id. §§ 9-203(1) (b), 9-204(1). When a certificate of title or of origin

is transferred, the assignment upon the certificate is executed and signed
by the seller, and not by the transferee who is usually the debtor.

27
It is for this reason, i.e., that the financing statement does not contain

words of promise or grant, that an official financing statement signed by
the debtor does not meet the requirements of a security agreement. E.g.,
American Card Co. v. H.H.M.H. Co., 97 R.I. 59, 196 A.2d 150 (1963).

28302 N.E.2d 828 (Ind. Ct. App. 1973). This case held that, when the
secured party released insurance moneys to permit the debtor to acquire
the motor vehicle in question, a release of collateral was effectuated which
discharged the surety upon the debtor's obligation.

"Substantial authority was cited in support of this result. E.g., Shelton
v. Erwin, 472 F.2d 1118 (8th Cir. 1973). Other authority to the contrary

was also cited. Recently, it has been held that, if a number of documents
or instruments are prepared as part of a sale, loan and security transaction,
all the papers must be read together as one writing. In re Penn Housing
Corp., 367 F. Supp. 661 (W.D. Pa. 1973).



240 INDIANA LAW REVIEW [Vol. 8:234

extremely important problem which often arises as a result of
common business practice. Often the seller of a motor vehicle de-
livers possession to the buyer and, to assure payment, the seller

retains possession of the certificate of title in his name, without

the formality of a security agreement.
30 The White case indicates

the risk involved in this practice and suggests the need for use of
at least an informal security agreement when delivery is made be-
fore payment is received.

D. After-acquired Collateral and Proceeds

A security agreement may cover after-acquired collateral, 31
and it may also apply to proceeds or property taken in exchange

30
It is not uncommon for a seller of a motor vehicle who receives a

check for the price to withhold the certificate of title and his assignment
thereon by fastening it to the buyer's check. When the check is paid by
the drawee, the certificate with the assignment is made available to the
buyer when he receives his cancelled check. But, if the check is not paid,
the certificate will be returned to the seller. In this case, the pre-Uniform

Commercial Code cases usually held that an unpaid seller could repossess
the vehicle even against a bona fide purchaser from the buyer who was
not a dealer and who did not get the certificate of title. E.g., Nelson v.
Fisch, 241 Iowa 1, 39 N.W.2d 594 (1949). But cf. Fryer v. Downard, 134
Ind. App. 225, 187 N.E.2d 105 (1963) (buyer apparently forged seller's

signature to certificate entrusted to buyer; buyer also appeared to be a

dealer). Under the Uniform Commercial Code, the seller who receives
a bad check for the price of goods delivered to the buyer has a right to

reclaim the goods, but the buyer holds a voidable title with a power to

cut off the seller's title by sale to a bona fide purchaser. Uniform Commercial
Code § 2-403(1). The seller's right in such a case is a right of rescission and
restitution, and is not a security interest. Compare id. §§2-511(3) (payment
by check conditional), 2-702 (seller allowed to reclaim goods when buyer
received goods on credit while insolvent), 2-721 (preserving remedies for

fraud and extending relief available in case of rescission), with Guy Martin
Buick, Inc. v. Colorado Springs Nat'l Bank, 519 P.2d 354, 359, 14 UCC
Rep. Serv. 40, 47 (Colo. 1974) ("the right to reclaim goods sold in a cash

sale transaction ... is not and was not intended to be a security interest").
The better authority under the Code, however, will protect the seller who
has received a bad check from the buyer and who retains the certificate
of title as against the purchaser of the buyer, if the buyer is not a dealer,

upon the theory that the purchaser taking the vehicle without a certificate
of title does not purchase in good faith. Morris Plan Co. v. Moody, 266

Cal. App. 2d 28, 72 Cal. Rptr. 123, 5 UCC Rep. Serv. 1026 (1968) ; Mattek
v. Malofsky, 42 Wis. 2d 16, 165 N.W.2d 406, 6 UCC Rep. Serv. 277 (1969).
Cf. Lane v. Honeycutt, 14 N.C. App. 436, 188 S.E.2d 604, 10 UCC Rep. Serv.
1173 (1972) (purchaser from buyer who gave bad check did not receive
certificate of title to boat).

3 'Uniform Commercial Code §9-204(3) & (4). A financing statement
may be filed prior to the execution of a security agreement and before the
debtor acquires any rights in the collateral and, as a general rule, a secured



1974] SURVEY—SECURED TRANSACTIONS 241

for the original security.
32 Both of these rules were involved in

White v. Household Finance Corp.,
33

in which the original security
agreement on the debtor's motor vehicle included language covering
after-acquired household and consumer goods.34 When the motor
vehicle was destroyed in an accident, the court recognized the gen-
erally accepted rule that insurance covering the debtor against loss

of collateral is not proceeds. Such insurance may be claimed as
security only when the debtor agrees to insure or when the secured
party is named in the policy as an insured.35 The debtor voluntarily
had caused the secured party to be named with him as an insured,
so that the insurance continued as security after the loss. However,

the secured party and the debtor indorsed the insurance check to a
dealer for a new motor vehicle without executing a new security
agreement covering the second vehicle. The court held that the
new vehicle was not covered by the first security agreement, either
as proceeds of the insurance moneys36 or as after-acquired collat-

party's rights date from the time of perfection. Compare id. §9-402(1) with
id. §9-312(3) & (5).

32A security interest continues in identifiable proceeds which include
whatever is received when collateral or proceeds are sold, exchanged, col-
lected or otherwise disposed of. See id. §9-306(1) & (2). Perfection as to
proceeds is accomplished by indication in the financing statement covering

the original collateral; otherwise perfection is required as to the proceeds

with a ten day grace period if the original collateral was perfected. Id.

§9-306(3).
33302 N.E.2d 828 (Ind. Ct. App. 1973).
34Although not discussed in the case, descriptions such as "consumer"

or "household" goods have been held sufficient. In re Turnage, 493 F.2d

505 (5th Cir. 1974); In re Trumble, 5 UCC Rep. Serv. 543 (W.D. Mich.
1968) ; United States v. Antenna Systems, Inc., 251 F. Supp. 1013 (D.N.H.

1966). Contra, In re Lehner, 303 F. Supp. 317, 6 UCC Rep. Serv. 1023 (D.
Colo. 1969) . A general description is almost a necessity in the case of after-
acquired collateral. Barnett Bank v. Fletcher, 290 So. 2d 533 (Fla. App.

1974). A motor vehicle would seem to be "consumer goods" within the general
Code definition of the term if used or bought primarily for personal, family,

or household purposes. Uniform Commercial Code §9-109(1).
35When insurance is carried by the lien-debtor only, the secured party

has no rights to loss payments unless the former agreed to insure the property.

Nordyke & Marmon Co. v. Gery, 112 Ind. 535, 13 N.E. 683 (1887). When the

debtor procures an insurance policy naming himself and the secured party

as insureds, the latter may enforce the policy as a creditor beneficiary and any
recovery inures to the benefit of a surety upon the obligation. Cf. Cook v.

American States Ins. Co., 275 N.E.2d 832 (Ind. Ct. App. 1971). If the policy

names both the debtor and secured parties as insureds, the latter receives

added protection when a "union" or "standard" clause is used, thereby treat-

ing each as separately insured. Federal Nat'l Mortgage Ass'n v. Great Am.

Ins. Co., 300 N.E.2d 117 (Ind. Ct. App. 1973) (allowing mortgagee to recover

loss after it had purchased the insured property on foreclosure of mortgage).
36The court correctly held that insurance moneys are not "proceeds"

of the original collateral—a position supported by the weight of Code and



242 INDIANA LAW REVIEW [Vol. 8:234

eral. Section 9-204(4) of the Uniform Commercial Code provides
that no security interest attaches under an after-acquired prop-
erty clause with respect to consumer goods given as additional
security unless the debtor acquires rights in them within ten days
after the secured party gives value. The court held that this
restriction was applicable to the facts in this case and overlooked
the fact that the secured party's indorsement and delivery of the
check constituted a contemporaneous exchange for the new automo-
bile and, therefore, was value given within the ten day period.37

Furthermore, it appeared that the second vehicle was claimed not
as "additional" but as replacement security.

38 Upon this point, it
seems that the court was in error, and the exchange of the check
for the contemporaneous acquisition of the new vehicle should

pre-Code law. E.g., Universal C.I.T. Credit Corp. v. Prudential Inv. Corp.,

101 R.I. 287, 222 A.2d 571, 3 UCC Rep. Serv. 696 (1966). This was the pre-
Code rule in Indiana. Hoverstock v. Darrow, 94 Ind. App. 83, 179 N.E. 790
(1932). The proposed revision to the UCC would provide that insurance
covering loss of collateral is proceeds. Uniform Commercial Code §9-306(1)
(1972 version). The main question in White was whether the second motor
vehicle purchased with the insurance funds was proceeds. Since the right
under the insurance policy was properly excluded from the ambit of the UCC,
id. § 9-104 (g), the question of whether the second vehicle took the place of

the secured party's rights to the insurance fund was governed by common law
principles or the UCC's requirement that a security agreement describing
the collateral be signed by the debtor. Id. §§ 9-203(1) (b), 9-204(1). The
court then held that, in the absence of a written security agreement signed

by the debtor, no security interest attached to the new vehicle. In other
words, substitution of collateral which is not proceeds must be effectuated by
a security agreement meeting UCC requirements. This matter is discussed at
text accompanying notes 73-76 infra.

37When the secured party indorsed the check payable to him and to the
debtor, and the check was used by the debtor to purchase the new vehicle,
surrender of the proceeds constituted value. Uniform Commercial Code

§ 9-108. This is a form of "new value" and constitutes a well recognized
concept of securities law. See Phelps v. National Acceptance Co. of Amer-
ica, 7 UCC Rep. Serv. 56 (M.D. Ala. 1969).

3aThe limitation upon after-acquired collateral in the case of consumer

goods is restricted to cases in which the security is taken as "additional"

security. Uniform Commercial Code § 9-204(4) (b). Seemingly, this does
not apply when collateral is substitutional. Security agreements commonly
extend to items taken in replacement of the collateral, and this appears to

be the reason for limiting the prohibition as to after-acquired collateral in

consumer goods to "additional" security. Section 9-204(4) (b) also excludes

accessions from the exception. The reason for requiring the debtor to acquire
rights in the goods within ten days after the secured party gives value is to

prevent the lender, who takes a security interest in after-acquired consumer
goods, from reaping the benefit of such a pot-luck provision without in any

way contributing to later acquisitions by the debtor. Cf. In re Johnson, 13
UCC Rep. Serv. 953 (D. Neb. 1973).



1974] SURVEY—SECURED TRANSACTIONS 243

properly have brought the new vehicle within the after-acquired
property clause contained in the first agreement.

The Code also restricts after-acquired property provisions in
the case of crops by requiring that a security agreement cannot
cover future crops unless they become growing within one year of
the execution of the security agreement.39 The Court of Appeals
for the Seventh Circuit, in United States v. Gleaners & Farmers
Cooperative Elevator Co.,

40 upheld a financing arrangement encom-
passing future crops when the successive security agreements ap-
plied to crops which became growing within the year of each secu-
rity agreement, even though those crops were not growing within
one year after the filing of a single financing statement. The court
held that the financing statement was still effective for the usual
five years.

41 Unfortunately, the court disapproved the one year

rule by reference to proposed Uniform Commercial Code amend-
ments which would allow farmers to encumber their crops in per-
petuity.

42 The need to finance the planting, care, and harvest of
current crops is a life and death matter, and thus there are sound
policy reasons for keeping current crops available as security for

current loans. The one year rule is a good one and elimination of
it should only be accomplished after careful thought.43

E. Inventory and Accounts Receivable Financing

Probably the most significant pioneering provisions of the
Code relate to inventory and accounts receivable financing.44 Sev-
eral recent decisions in this area are of importance to bankers and
others involved in this type of financing. The Code adopts the basic

"Uniform Commercial Code § 9-204(4) (a). This one year restriction
does not extend to security interests in crops given in conjunction with a

lease, land purchase or land improvement transaction evidenced by a contract,

mortgage or deed of trust.
40481 F.2d 104 (7th Cir. 1973).
41 A financing statement is effective as constructive notice for five years

from the date of filing unless it contains a maturity date within that period,
in which case it becomes ineffective sixty days after the maturity date.
Uniform Commercial Code §9-403(2). The Code fixes no expiration date
on the effectiveness of a security agreement except as applied to after-acquired

property clauses in the case of consumer goods and crops. See id. § 9-204(4).
42
Id. §9-204(3) (1972 amendment proposed by the National Conference

of Commissioners on Uniform State Laws and the American Law Institute).
43The Code gives a super-priority, to enable production during the growing

season, to a security interest taken for new value not more than three months
before crops become growing, but only as against prior security interests due

more than six months before the crops become growing. Id. §9-312(2).
44No longer is it a fraud on creditors for a secured party to take a

security interest in inventory and accounts receivable without requiring a

strict accounting as to the proceeds. Id. § 9-205.



244 INDIANA LAW REVIEW [Vol. 8:234

rule that if D gives a security interest upon his inventory to SP,
who perfects, a subsequent buyer in the ordinary course of business
will take free of the prior security interest even though he knows
of its existence.

45 The rule was applied in First National Bank v.
Crone,46 in which a dealer in logs had executed a security interest
in 147 logs to secure a $15,000 obligation to his bank, which then
"recorded"

47
a financing statement covering the transaction. There-

after, the logs were sold to or through a partnership engaged in
the business of buying and selling logs. The partnership, in turn,
arranged for a sale to an ultimate buyer who paid for the logs by
means of a draft deposited with the bank. The bank then withheld
the proceeds when the draft was collected. The court held that the
partnership was a buyer in the ordinary course of business and took
priority as to the draft proceeds less the net amount it owed to the
dealer on the price of the logs.

The Crone case resolved two interesting questions. First, the
court held that a sale of the dealer's entire stock of logs did not

constitute a bulk sale, excluded by definition, when the dealer had
been engaged in the business of buying and selling logs for over
twenty-five years. The burden of proving that the sale was in bulk
or out of the ordinary course of business evidently was placed on
the inventory financier.

48 A second question arose when it appeared

45
Id. § 9-307. This substantially restates prior law. Helms v. American

Security Co., 216 Ind. 1, 22 N.E.2d 822 (1939).
46301 N.E.2d 378 (Ind. Ct. App. 1973).
47A distinction of no importance is that financing statements are filed,

not recorded. The court assumed that the bank's security interest in the
inventory was duly perfected. Had it not been perfected, any buyer, includ-
ing a buyer in bulk, would have been protected under Uniform Commercial
Code § 9-301(1) (c) had he acquired delivery and given value without knowl-
edge of the prior security interest.

48The court held that the absence of evidence showing that the dealer,
who sold to the alleged buyer in the ordinary course of business, intended
to abscond or repurchase under a sham agreement showed that the sale was
in the ordinary course of business. Compare Everett Nat'l Bank v. Deschu-
iteneer, 109 N.H. 112, 244 A.2d 196, 5 UCC Rep. Serv. 561 (1968). However,
proof of an intent to defraud creditors is not required in the case of a bulk

sale and, in fact, most bulk sales, when there is compliance with Article 6
of the Uniform Commercial Code, are carried out without fraudulent purposes

on the part of either the buyer or seller. Probably the real effect of the

Crone case is that a sale in the ordinary course of business includes a sale to

a broker or wholesaler in the goods. E.g., Sherrock v. Commercial Credit

Corp., 290 A.2d 648, 10 UCC Rep. Serv. 523 (Del. 1972) (merchant-buyer
may be a buyer in the ordinary course of business and the Article 2 definition
of good faith as applied to merchants is inapplicable to an Article 9 transac-

tion) ; Associates Discount Corp. v. Rattan Chevrolet, Inc., 462 S.W.2d 546,

8 UCC Rep. Serv. 117 (Tex. 1970). At the least, the case stands for the
proposition that a seller regularly engaged in selling raw products, which



1974] SURVEY—SECURED TRANSACTIONS 245

that the alleged buyer in the ordinary course of business had ad-
vanced $6,300 on the price before delivery of the goods. The defi-
nition of a buyer in the ordinary course of business includes "re-
ceiving goods . . . under a pre-existing contract for sale, but does not
include a transfer in bulk or as security for or in total or partial
satisfaction of a money debt."49 Without discussion, it was deter-
mined that the receipt of goods in satisfaction of a prior down pay-
ment on their price is a receipt "under a pre-existing contract for
sale" and not a transfer in "total or partial satisfaction of a money
debt." This is a most sensible conclusion.50

The Court of Appeals for the Seventh Circuit, in Fitzpatrick v.
Philco Finance Corp.,5] dealt with one of the important problems

involved in inventory and accounts receivable financing, that is,
when cash proceeds are commingled or deposited in a general bank
account and the debtor is subjected to bankruptcy. Section 9-306

(4) (d) of the Uniform Commercial Code provides generally that
a perfected security interest in cash proceeds intermingled or depos-

ited in a bank account continues to be perfected into the whole of the
cash or bank account in the event insolvency proceedings are insti-
tuted against the debtor. However, the perfected security interest
in the bank account or commingled cash is limited to cash proceeds

require further processing by the buyer, sells in the ordinary course of busi-

ness when he sells large quantities of his inventory to other merchants or
processors.

49Uniform Commercial Code §1-201(9).
S0If the seller is indebted to the buyer on a prior debt which is applied

to reduce the purchase price of the goods, the buyer is not a buyer in the

ordinary course of business. Sherman v. Roger Kresge, Inc., 323 N.Y.S.2d

804, 9 UCC Rep. Serv. 858 (Broome County Ct. 1971) (seller delivered used
cars—inventory—in exchange for buyer's check which was returned to buyer
and applied on prior debt owing by seller to buyer) ; Chrysler Credit Corp. v.
Malone, 502 S.W.2d 910, 13 UCC Rep. Serv. 964 (Tex. Civ. App. 1973) (seller
sold automobile to buyer who purchased by returning a $5,000 check given
earlier on the same day by seller to buyer for a prior obligation owing for
insurance premiums). It is interesting to note that, in the Crone case, the

buyer gave value before receiving possession of the goods. Some decisions
have held that a buyer in the ordinary course of business, who makes payment
under a valid contract to purchase, qualifies even if he does not receive de-

livery of the goods. E.g., Sherrock v. Commercial Credit Corp., 290 A.2d

648, 10 UCC Rep. Serv. 523 (Del. 1972) ; Draper v. Minneapolis-Moline, Inc.,
100 111. App. 2d 324, 241 N.E.2d 342, 5 UCC Rep. Serv. 972 (1968) ; Chrysler
Credit Corp. v. Sharp, 288 N.Y.S.2d 525, 5 UCC Rep. Serv. 226 (Sup. Ct.
1968). Contra, Chrysler Credit Corp. v. Adamatic, Inc., 59 Wis. 2d 219, 208

N.W.2d 97, 12 UCC Rep. Serv. 849 (1973) (holding that when some goods
are returned to the debtor for repair, buyer qualifies as buyer in the ordinary

course of business).
51 491 F.2d 1288 (7th Cir. 1974). The case involved the Illinois version of

the Uniform Commercial Code which is the same as Indiana's version.



246 INDIANA LAW REVIEW [Vol. 8:234

received and commingled or deposited within ten days prior to the
institution of the proceedings less cash proceeds received by the

debtor and paid over to the secured party during the ten day

period.
52

In Fitzpatrick, an inventory financier with a perfected security

interest in inventory and proceeds was paid some $44,000 from the
debtor's general checking account during the ten day period prior

to bankruptcy. The court held that, since the security interest in
the bank account ceased to be perfected ten days prior to the insti-

tution of the bankruptcy proceeding, payments from the account

within that period to the secured party depleted the debtor's estate

by transferring his property to pay an antecedent debt which was
not fully secured. Therefore the transfer was vulnerable as a pre-
ference.

53 The court also held that the date of payment by check

from the account was the date the instrument was paid by the
drawee bank, not the date the check was received.54 The secured
party was allowed to retain $4,500 of the payment which represent-
ed cash proceeds from inventory received by the debtor within the
ten day period and deposited in the debtor's general account,
even though the court erroneously indicated that such allowance
was questionable as a priority provision in conflict with the Bank-
ruptcy Act.55

The decision emphasizes the need for the use of special bank
accounts for the deposit of cash proceeds and the danger of accept-

52This rule, providing a practical but limited right of tracing cash pro-
ceeds upon insolvency, was derived from section 10(b) of the Uniform Trust
Receipts Act, ch. 206, § 10(b), [1935] Ind. Acts 1003 (repealed 1964), which
was in effect in Indiana until the adoption of the Uniform Commercial Code.
It has been held that cash proceeds received and paid to the secured party,
which are required to be subtracted from those received and intermingled or
deposited, refers to cash proceeds paid from intermingled or deposited funds.
In re Security Aluminum Co., 9 UCC Rep. Serv. 47 (E.D. Mich. 1971).

53The amounts in the bank account apparently were proceeds or other
funds received and deposited in the account prior to bankruptcy. Literally,
Uniform Commercial Code § 9-306(4) (d) (ii) provides that the security
interest in the whole of the account is perfected "in the event of insolvency"

proceedings but is limited by cash proceeds received within the ten day period
and deposited in the account, less pay outs therefrom to the secured party
within the same period. It should be noted that, if the secured party claimed
unpaid proceeds in the bank account received by the bankrupt prior to the

ten day period, as an unperfected security interest, the claim would have

been awarded under id. § 9-301(1) (b) & (3) and Bankruptcy Act § 70c,
11 U.S.C. § 110(c) (1970).

5AAccord, Uniform Commercial Code § 3-409 (a draft or check is not
an assignment).

5511 U.S.C. §96 (1970). The history of this problem and its correct

solution is discussed in Henson, "Proceeds*' under the Uniform Commercial

Code, 65 Colum. L. Rev. 232 (1965) (reprinted in 2 UCC Rep. Serv. 566).



1974] SURVEY—SECURED TRANSACTIONS 247

ing payments from the general bank account of the debtor when-
ever bankruptcy is imminent.

56 The courts will face an even more
difficult problem when a case arises in which payments are received
from a general bank account or intermingled cash proceeds prior

to the ten day period.
57

Literally, section 9-306(4) (d) deals only

with transactions occurring within the ten day period. Therefore,

payments made to a secured party before that time should be pro-
tected as payments from cash proceeds subject to the accepted rules
for tracing proceeds commingled with other cash funds or in a bank
account.

58

"Identifiable cash proceeds which are not commingled continue to
be perfected. Uniform Commercial Code §9-306(4) (a) to (c). If moneys
constituting proceeds are deposited in a special account and are, thus, seg-
regated, perfection continues into the account. Salzer v. Victor Lynn Corp.,
315 A.2d 185, 14 UCC Rep. Serv. 208 (N.H. 1974).

57Payments from intermingled cash proceeds or a general bank account
made prior to the ten day period are not specifically dealt with by the Code.
It would seem, therefore, that a secured party may claim that such payments
are realized from perfected collateral and are nonpreferential to the extent
permitted under common law rules of tracing. Indiana follows the lowest
intermediate fund theory, i.e., if proceeds are traced to a bank account, the
debtor is presumed to make subsequent withdrawals from other funds first
so that the secured party may reach the balance not exceeding the lowest
amount of the fund after the deposit of his item. E.g., Rottger v. First
Merchants Natl Bank, 98 Ind. App. 139, 184 N.E. 267 (1933). When several
secured parties trace proceeds to an intermingled mass or deposit, they share
pro-rata subject to the lowest intermediate fund rule. See Gibbs v. Gerberick,

1 Ohio App. 2d 93, 96, 203 N.E.2d 851, 855-56 (1964), quoting Restatement
op Restitution § 213(c) (1937). If cash proceeds are transferred to bona

fide purchasers for value, the latter will take priority over perfected security

interests. Merchants Nat'l Bank & Trust Co. v. United States, 12 UCC
Rep. Serv. 902 (U.S. Ct. CI. 1973) (United States, receiving proceeds from

checking account in payment of taxes, took priority over secured party).

However, a banker's right of set-off to proceeds deposited in a bank account

is generally deferred to security interests in proceeds deposited in the account.

Universal C.I.T. Credit Corp. v. Farmers Bank, 358 F. Supp. 317, 13 UCC
Rep. Serv. 109 (E.D. Mo. 1973) ; Commercial Discount Corp. v. Milwaukee

Western Bank, 61 Wis. 2d 671, 214 N.W.2d 33, 12 UCC Rep. Serv. 1202
(1974). Cf. Peoples State Bank v. Caterpillar Tractor Co., 213 Ind. 235, 12
N.E.2d 123 (1938).

58If the secured party is able to trace his payment to proceeds in a bank

account, there is generally no preference simply because his perfected security

interest in the proceeds is used to pay the debtor's indebtedness. If the transfer

of the security interest in the original collateral was perfected more than

four months prior to bankruptcy, or obtained in exchange for a contem-

poraneous loan, there will be no preference. Likewise, when a fully secured
creditor is paid from any source, there is no preference because the trans-

action results merely in an exchange or release of the debtor's property and

there is no depletion of his estate to the injury of general creditors. In the



248 INDIANA LAW REVIEW [Vol. 8:234

The supreme court qualified the holding of the court of appeals

in Ertel v. Radio Corp. of America,
59 which recognized that an as-

signee of accounts takes free of independent defenses and claims

accruing to the account debtor after the account debtor has received

notification to pay the assignee.
60 On transfer, the supreme court

found that the rights under three contracts between the debtor and

the account debtor were assigned, but that the set-off or counter-

claim arose out of the debtor's defective performance under the

third contract. The court held that the claim or defense was one
arising out of that contract and, as required by section 9-318 (1) (a)

of the Uniform Commercial Code, the assignee took subject to the
claim without regard to the time of notification.

61 The court did
not indicate whether the right of set-off was limited to the amount
of the claim on the third contract or whether it would be allowed
on the other two contracts assigned.

In First National Bank v. Smoker,62 the court denied a farmer,
who sold cattle on credit to a meat processor, the right to reclaim
the cattle as against a prior security interest in the buyer's inven-

tory. The reason for denial of the farmer-seller's right to reclaim
was that he failed to comply with section 2-702 of the Uniform Com-
mercial Code, which requires a demand within ten days after deliv-
ery. This holding was reinforced by the United States Supreme
Court in Mahon v. Stowers,63 wherein the Court determined that the
farmer was not protected under provisions of the Federal Packers
and Stockyards Act. 64

F. Assignments by Lienholder or Lien Debtor

Several decisions dealt with assignments of rights by lien-
holders. In Ertel v. Radio Corp. of America,

65
the court recognized

the general rule that a surety who pays a creditor in full is subro-

Fitzpatrick case, the secured party's claim was not fully secured, so that
payment from unperfected funds was vulnerable as a preference.

59307 N.E.2d 471 (Ind. 1974).
60The case also affirmed the court of appeals opinion, holding that a

surety who paid the assignee secured party was subrogated to the assignee's
rights to the collateral, i.e., the claim against the account debtor, and that
proper notification to the account debtor was received as required by Uniform
Commercial Code §9-318(3).

61 "
. . . the rights of an assignee are subject to (a) all the terms of the

contract between the account debtor and assignor and any defense or claim
arising therefrom . . . ." Id. § 9-318(1) (a).

62286 N.E.2d 203 (Ind. Ct. App. 1972).
6394 S. Ct. 1626 (1974).
647 U.S.C. §§181 et seq. (1970).
65307 N.E.2d 471 (Ind. 1974). The creditor brought this action against

the debtor and guarantors for the amount owing under a loan and security
agreement covering accounts receivable and revolving inventory.



1974] SURVEY—SECURED TRANSACTIONS 249

gated to all the rights the creditor has in the collateral, including

rights against an account debtor upon an account held as security.64

The general rule that a lien debtor may not escape liability by
assigning his rights and duties to another without the consent of

the creditor was recognized in Chrysler Corp. v. M. Present Co.,67

which involved an assignment of a leasehold interest.60

Two recent decisions, Ernst v. Schmal69 and Lake Mortgage Co.
v. Federal National Mortgage Association, 70 dealt with the diffi-
culties encountered by a purchaser of land under a conditional sales
contract when the land was sold subject to a prior mortgage. Those
cases failed to clarify the issues arising when a purchaser is in
default upon the contract and the vendor's subsequent grantee is
in default upon the mortgage. Litigation involved an attempt to
hold the vendor and others liable for interfering with the pur-
chaser's relationship with the mortgagee.71

G. Release and Discharge of Surety

The rule that a surety is discharged to the extent of the credi-
tor's release or impairment of collateral is a common law proposi-
tion and is also codified in section 3-606 of the Uniform Commer-
cial Code. This principle was recognized and applied in White v.
Household Finance Corp.,77 wherein the court acknowledged the

66The surety's right of subrogation to any collateral held by the creditor
was recognized in White v. Household Finance Corp., 302 N.E.2d 828 (Ind.
Ct. App. 1973), in which an uncle was the surety upon a promissory note of
his nephew. The note was secured by a security interest in a motor vehicle.
The court held that the surety's right of subrogation extended to other
collateral acquired by the creditor, even when the surety released the
lien on the motor vehicle after it had been wrecked.

67491 F.2d 320 (7th Cir. 1974). This case was a consolidated action brought
by the plaintiff to recover damages for loss of property in a warehouse fire.

6aThe court cited Navin v. New Colonial Hotel, 228 Ind. 128, 90 N.E.2d
128 (1950), for this well established proposition.

69308 N.E.2d 732 (Ind. Ct. App. 1974) (upholding the trial court's right
to grant a new trial because the jury was confused as to the complex issues).

7O308 N.E.2d 739 (Ind. Ct. App. 1974) (purchaser's action, for conspiracy
to evict purchaser, brought against vendor's grantee-mortgagee and receiver
in foreclosure proceeding; action dismissed as to mortgagee).

71 The problem in both cases seemingly involved a tort claim against the
vendor's grantee for bringing about foreclosure of a prior mortgage. The
judges at both the appellate and trial levels seemed as confused about the
theory of the case as the jury. The purchaser's assertions may have some
merit. See Monarch Buick Co. v. Kennedy, 138 Ind. App. 1, 209 N.E.2d 922
(1965), in which the assignor of a security agreement was held liable in
conversion when he induced the assignee to repossess the collateral.

72302 N.E.2d 828 (Ind. Ct. App. 1973). The case is discussed in connec-
tion with the creation and perfection of security interests in motor vehicles
at note 66 supra. See also text accompanying notes 28-37 supra.



250 INDIANA LAW REVIEW [Vol. 8:234

rule that a contemporaneous substitution of collateral of equal value

does not release a surety.
73 However, the court found that the

creditor had failed to procure a security interest in property which

it had permitted the debtor to acquire with insurance moneys held

as security for the loan on which the surety was held discharged.
74

Prior Indiana law had established that a creditor is under no duty

to record or perfect a security interest in collateral received from

the principal,
75 but the court in White indicated that the duty im-

posed by the Uniform Commercial Code—to use reasonable care
with respect to collateral in the creditor's possession—would in-
clude a duty to perfect.

76 Outright surrender, to the debtor-princi-

pal, of collateral perfected by possession was held to constitute an
impairment of collateral which discharged the surety on the obli-

gation.

A lien debtor in default may defeat foreclosure by redeeming,
that is, by tendering the full amount owing under the security
transaction. The court in Lake Mortgage Co. v. Federal National
Mortgage Association77 recognized and applied the generally ac-
cepted rule that a valid tender must include the full amount due.

H. Remedies and Other Rights

of Parties to Secured Transactions

Secured parties generally insist on insurance protection, and
four recent decisions emphasized the importance of such protection.
In Federal National Mortgage Association v. Great American In-
surance Co.™ a casualty policy covering the debtor, with a pro-

73Hunter v. Community Loan & Inv. Corp., 127 Ga. App. 142, 193 S.E.2d
55 (1972).

74In this case, the moneys released by the secured party apparently
equaled the unpaid balance of the loan.

75Philbrooks v. McEwen, 29 Ind. 347 (1868).
76"A secured party must use reasonable care in the custody and pres-

ervation of collateral in his possession. . . ." Uniform Commercial Code
§ 9-207 ( 1 ) . The court cited two recent decisions holding that a surety is dis-
charged when the creditor fails to perfect the security interest and the surety
is defeated by other claimants as a consequence. First Bank & Trust Co. v.
Post, 10 111. App. 3d 127, 293 N.E.2d 907, 12 UCC Rep. Serv. 512 (1973)

;

Shaffer v. Davidson, 445 P.2d 13, 5 UCC Rep. Serv. 772 (Wyo. 1968). In
the White case, the creditor failed to obtain a security interest in the new
collateral, but no third party rights were involved.

77308 N.E.2d 739 (Ind. Ct. App. 1974). In this case, the conditional pur-
chaser, who was three months in arrears, tendered the installment due for one
month and tender was refused. Foreclosure upon debtor's default was there-
fore held proper.

78300 N.E.2d 117, 118 (Ind. Ct. App. 1973). The clause in question stated
that insurance "shall not be invalidated by any act or neglect of the mortgagor



1974] SURVEY—SECURED TRANSACTIONS 251

vision including the mortgagee under the "union" or "standard"

clause was held to cover the mortgagee even after he had pur-

chased the insured property at a mortgage foreclosure sale. The
"union" or "standard" clause is especially desirable because it, in

effect, is two separate policies, one for the debtor and one for the

lienholder, so that the non-performance of conditions, or the breach,

or the termination of the relationship by one party will not defeat

a recovery of insurance proceeds by the other. In another case,

White v. Household Finance Co.,
79 the court held that naming a

secured party in an insurance policy voluntarily acquired by the

debtor protects the secured party. This is true even though the pro-

ceeds of insurance would not otherwise be covered by a security

agreement which did not require the debtor to insure. However,

a secured party cannot be forced to pay insurance premiums on
policies procured by the debtor, which name the secured party as
an insured, in the absence of express, implied or apparent authority.

In Kody Engineering Co. v. Fox & Fox Insurance Agency,* the
court of appeals affirmed this rule and held that no recovery
could be had on a theory of unjust enrichment, at least in the
absence of reimbursement under the policy for a loss. Finally, in

Goff v. Graham," the failure of a debtor to procure insurance,
as required by his agreement, was held to be a material breach
which justified the conditional vendor's declaration of a default.

Although a secured party may normally recover a deficiency
when repossessed collateral is sold pursuant to the requirements of
the Uniform Commercial Code,62 the right may be waived. In Yel-
low Manufacturing Acceptance Corp. v. Voss,63 the court held that

or owner of the within described property, nor by any foreclosure." For
a further discussion of the virtue of the "union" or "standard" clause, see

Comment, The Effect of the Standard Mortgage Clause in Insurance Policies,
12 Ind. L.J. 50 (1936). Accord, Aetna Ins. Co. v. Robinson, 213 Ind. 44, 10
N.E.2d 601 (1937) (vendor repossessed under conditional sales contract).

79302 N.E.2d 828 (Ind. Ct. App. 1973). See discussion at note 66 and
text accompanying notes 28-37 supra.

8o303 N.E.2d 307 (Ind. Ct. App. 1973) (holding that no ratification by
the secured party could be found from statements made by the secured party
while he was uninformed that he was covered by the insurance policy).

81 306 N.E.2d 758 (Ind. Ct. App. 1974). For a further discussion of this
case, see text accompanying notes 14-15 supra.

82Uniform Commercial Code § 9-504. However, the Uniform Consumer
Credit Code limits a secured party, in the case of a consumer credit sale of
goods or services, to repossession of the collateral or recovery upon the debt,
but only when the cash price of the sale is $1,200 or less. See Ind. Code
§24-4.5-5-103 (Burns 1974).

83303 N.E.2d 281, 283 (Ind. Ct. App. 1973). The decision of the lower
court was affirmed upon the debtor's testimony that an agent had told him
he "would have no more trouble" after he surrendered the truck.



252 INDIANA LAW REVIEW [Vol. 8:234

the secured party's office manager, who had authority to repossess
collateral, had apparent authority to accept a return of the property

in exchange for the surrender of rights to a deficiency. It is inter-

esting to note that the oral release of deficiency rights was given
without consideration. In Traylor v. Lafayette National Bank,*4

the court allowed an action on a note to be joined with foreclosure
of stock certificates pledged as security. The court reluctantly
admitted parol evidence to show the holder's breach of a joint ven-
ture agreement to supply additional capital to the borrower.

The Indiana statute on foreclosure of tax liens contains no pro-
vision for giving notice of the sale to mortgagees. The court of
appeals, in Shigley v. Whitlock,

65
refused to determine the constitu-

tionality of that statute because the record failed to show that the
mortgagee, who challenged the statute, was without actual notice
of the sale and therefore prejudiced by the alleged defect in the
law.

86

/. Mechanics' Liens

A subcontractor, laborer or materialman furnishing materials
or services to the prime contractor may assert a mechanics' lien
either upon the property or upon unpaid funds. Such a lien is

measured by the reasonable market value of the materials or serv-
ices and is not to exceed the full contract price. The lien must be
recorded within sixty days and foreclosed within a year of recorda-
tion or within thirty days after notice to the lienholder to bring

suit.
87

Is there any other theory upon which the owner may be held?
In Renn v. Davidson's Southport Lumber Co.,™ the lower court

64303 N.E,2d 672 (Ind. Ct. App. 1973). In discussing the parol evidence

rule, the court did not mention Uniform Commercial Code § 3-119, which
clearly allows a contemporaneous written agreement to vary the terms of

a negotiable instrument as between the immediate parties.
85310 N.E.2d 93 (Ind. Ct. App. 1974). The statute in question was Ind.

Code §6-1-56-3 (Burns 1972). The court held that, although the burden of

proof was upon the purchaser at a tax sale to establish that notice was

given to the mortgagee, since the record on appeal did not show that the

mortgagee was without actual notice, the decision of the lower court against

the mortgagee should be affirmed. It seems that the court placed the burden

of proving lack of actual notice upon the mortgagee.
86Prior case law holds that notice to the mortgagee is unnecessary. Cf.

Baldwin v. Maroney, 173 Ind. 574, 91 N.E. 3 (1910). However, this was

prior to the now famous case of Mullane v. Central Hanover Bank & Trust
Co., 339 U.S. 306 (1950).

67The Indiana mechanics' lien laws are codified at Ind. Code §§ 32-8-3-1

et seq. (Burns 1973).
88300 N.E.2d 682 (Ind. Ct. App. 1973). The case is one that every lawyer

involved with summary judgments should carefully study. It teaches that



1974] SURVEY—SECURED TRANSACTIONS 253

granted summary judgment to a subcontractor upon the theory that
the prime contractor had been authorized to procure materials from

the subcontractor, thereby making the owner liable as a direct con-
tracting party with the subcontractor. The decision was reversed
because the contract upon which agency was based was not in the
record and because affidavits did not establish that the agency
relationship was unrevoked. However, the case raises a red flag
to owners who should carefully examine their contracts with prime
contractors to make certain that such contractors are not granted
agency authority.

In Saiyit Joseph's College v. Morrison, Inc.,
69

a subcontractor

claimed two mechanics' liens, one based upon his contract with the
prime contractor and the other based upon a separate contract with
the owner for "extras." The court held that recordation of one lien
met the notice requirements of the mechanics' lien law as to both
liens since both liens arose out of one construction project.

90 How-
ever, the two liens could not be tacked for purposes of computing
the sixty day period in which the liens must be recorded, that is,
the single notice was effective only as to those contracts upon which
work or labor was performed within the sixty day period.9 ' The
court also explained that it is only when the contractor or subcon-
tractor recovers judgment enforcing a mechanics' lien that he is
allowed reasonable attorneys' fees. If he recovers only upon the
contract with the owner, attorneys' fees cannot generally be recov-

ered.
92

In another opinion, Oxford Development Corp. v. Rausauer

documents should be carefully put before the court and their foundations
established by affidavits. Affidavits must set forth facts based upon the
personal knowledge of an affiant, who has been affirmatively shown to be
competent to testify, and they must be otherwise admissible as evidence.

89302 N.E.2d 865 (Ind. Ct. App. 1973).
90Judge Buchanan's opinion on this point was solidly based on the idea

that the mechanics' lien, in Indiana, is a consensual lien, that is, it must arise
out of contract with the owner or with his assent. Hence, there is no real
reason why one lien notice on two separate contracts should not be sufficient
so long as the parties are named and the land is identified.

91 On the other hand, the time for recording mechanics' liens may be ex-
tended when the owner requests repairs to be made. In this case, the time
starts running from the time of the last work. E.g., Conlee v. Clark, 14 Ind.
App. 205, 42 N.E. 762 (1896) (the time commenced from the time the hot
water line was removed by the subcontractor at the request of the new
owner). A contractor or subcontractor cannot extend the time by volun-
tarily making repairs. Ellis v. Auch, 124 Ind. App. 454, 118 N.E.2d 809

(1954).
92Although reasonable attorneys' fees are allowed to the plaintiff recover-

ing judgment in the enforcement of a mechanics' lien, an owner cannot be

held for attorneys' fees when the "contract consideration for such labor,
material or machinery has been paid" by him or the party for whom the
improvement has been constructed. Ind. Code §32-8-3-14 (Burns 1973). This



254 INDIANA LAW REVIEW [Vol. 8:234

Builders, Inc.,
93
the court recognized that extra work comes within

the terms of a written contract expressly providing for "extras"94

and upheld an award of $5,400 attorneys' fees in favor of the prime
and subcontractors. The award was upheld even though the con-
tractors had asked for only $1,500 in their complaint. The court
reasoned that, for purposes of appeal, the complaint was deemed
to be amended to fit the proof adduced at the trial.

Interpretation of the types of contracts and relationships
covered by the Indiana mechanics' lien law will probably never end

because the statute applies both to enumerated types of work and
to "other structures," thus inviting application of the ejusdem gen-

eris rule of statutory construction. The court in Hough v. Zehrner95

rejected the rule, however, and applied the lien law in favor of a

materialman who furnished crushed stone for a driveway to be used
in conjunction with a commercial garage being constructed.

J. Wage Garnishment Exemptions

Prior to the adoption of the Uniform Consumer Credit Code96

in Indiana, it was quite clear that 90% of a debtor's wages were
exempt from garnishment in proceedings supplemental.97 In the
case of a resident householder, $15 per week plus 90% of his weekly
wages above that amount were exempt when the judgment was
founded upon contract.98 Although there was some question about
the constitutionality of these statutes, which granted a much lower
initial exemption than in the case of real or personal property,99

the figures were widely accepted as governing law. Then, on

seems to mean that, if the owner pays the prime contractor for work completed
by the subcontractor, the subcontractor cannot recover attorneys' fees when
he forecloses against the property.

93304 N.E.2d 211 (Ind. Ct. App. 1973).
94Failure to pay for the extras was held to be a material breach which

justified the contractor in his refusal to go forward with performance. For
purposes of recording and tacking, a duty to pay under a written contract
and for "extras" would therefore seem to be one contract. Compare Saint
Joseph's College v. Morrison, Inc., 302 N.E.2d 865 (Ind. Ct. App. 1973),
considered at text accompanying notes 88-91 supra.

95302 N.E.2d 881 (Ind. Ct. App. 1973).
96Ind. Code §§ 24-4.5-1-101 to -6-203 ( (Burns 1974) [hereinafter referred

to as UCCC].
97Id. §34-1-44-7 (Burns 1973).
98
Id. § 34-2-28-1 (d). This provision is included in the general exemption

statute.

"In Martin v. Loula, 208 Ind. 346, 194 N.E. 178 (1935), the court held
that a statute allowing 90% of intangibles to be exempt while other property,
up to $1,000, could be claimed as fully exempt denied equal protection to

debtors owning intangibles. If this result is followed to its logical conclusion,

the present exemption laws are all unconstitutional.



1974] SURVEY—SECURED TRANSACTIONS 255

October 1, 1971, the Uniform Consumer Credit Code, which gave
additional benefits to judgment debtors by a prohibition against

discharge for garnishment of wages,
100

provided that 25% of a
judgment debtor's weekly disposable earnings above 30 times mini-

mum hourly wages "shall be subject to garnishment . . . notwith-
standing any exemption or other law."

101 The Indiana Supreme
Court, in Mims v. Commercial Credit Corp., }0* applied "Alice in
Wonderland" reasoning to hold that the law did not mean what it
said. The court allowed the judgment debtor to take the highest
exemption allowed under either the UCCC or the prior law. Based
upon present minimum wage laws of $2 per hour for employees
covered by the Fair Labor Standards Act

103
prior to February 1,

1967, the opinion directs that the exemption available to a resident

householder with respect to judgments founded upon contract will

be $15 plus 90% of weekly disposable earnings above $15,
if weekly disposable earnings are greater than $90. However, if

weekly disposable earnings are less than $90, the exemption is com-

puted at 30 times minimum hourly wages, now 30 times $2, plus
75% of weekly disposable earnings above that amount ($60)
as provided by the UCCC.104 If the debtor is not entitled to the
$15 weekly exemption, his exemption will be computed at 90%
of total weekly disposable earnings if the weekly disposable

earnings are greater than $100 ; but, if weekly disposable earnings

are less than $100, the exemption is 30 times hourly minimum
wages, now 30 times $2, plus 75% of weekly disposable earn-
ings above that amount ($60) as provided by the UCCC. 105

100Ind. Code §24-4.5-5-106 (Burns 1974).
101

Jd. §24-4.5-5-105. The law excludes and thus makes exempt amounts
required by law to be withheld from earnings.

1O2307 N.E.2d 867 (Ind. 1974).
10329 U.S.C. §§201-09 (1970).
104The point at which the old formula with the $15 householder exemp-

tion grants a larger exemption than that permitted by the UCCC is determined
by the following equation (X being the point at which each formula produces
the same exemption and the minimum hourly wage being $2) : .10 (X - $15) =
.25 (X - $60) ; X = $90. Thus, if weekly disposable earnings are $90, then
either formula will produce the maximum exemption. If weekly disposable
earnings are less than $90, then the old formula will produce the maximum
exemption. If weekly disposable earnings are greater than $90, then the UCCC
formula will produce the maximum exemption.

10SThe point at which the old formula without the $15 householder
exemption grants a larger exemption than that permitted by the UCCC is
determined by the following equation (X being the point at which each
formula produces the same exemption and the minimum hourly wage being
$2) : .10X = .25 (X - $60) ; X = $100. Thus, if weekly disposable earnings
are $100, then either formula will produce the maximum exemption. If
weekly disposable earnings are less than $100, then the old formula will



256 INDIANA LAW REVIEW [Vol. 8:234

Three unfortunate results flow from the Mims decision. The
first concerns the many hundreds of outstanding garnishment
orders based upon the UCCC computation. What happens to those
judgments or decrees? They may be reopened under Trial Rule
60(B) ' 06 but, until this is done, the finality of such judgments can-
not be challenged. The second unfortunate result flows from the
unusual affirmative burden placed upon the court to determine the
debtor's exemption when he is not represented by counsel, a burden
which seemingly will be applied to all exemptions in the case of
proceedings supplemental. However, since the Federal Truth in
Lending Act107 fixes a somewhat similar but smaller exemption,
language in that law seems to deny jurisdictional power to any
court to award less than the exemption allowed by the federal law. 108

produce the maximum exemption. If weekly disposable earnings are greater
than $100, then the UCCC formula will produce the maximum exemption.

106It sometimes is believed that a continuing decree or injunction cannot

be later modified except as provided by statute, on appeal or by other
recognized post-judgment remedies. This, however, is untrue as applied
to courts of equity who have continuing jurisdiction to modify a continuing
decree or order which becomes oppressive due to changed conditions. E.g.,
United States v. Swift & Co., 286 U.S. 106 (1932) ; cf. Union Trust Co. v.
Curtis, 182 Ind. 61, 105 N.E. 562 (1914); Crumpacker v. Howes, 140 Ind.
App. 37, 222 N.E.2d 296 (1966). Recent Indiana decisions make it clear
that the open-end provisions of Ind. R. Tr. P. 60(B)(7) & (8) will be
liberally construed to permit modification of a continuing order or decree

when enforcement becomes inequitable. E.g., Soft Water Util., Inc. v. LeFevre,
301 N.E.2d 745 (Ind. 1973) (the court amended the date of a ruling to
conform to the misinformation supplied by the court's clerk) ; School City

v. Continental Elec. Co., 301 N.E.2d 803 (Ind. Ct. App. 1973) (a decree

of specific performance was set aside in favor of the party obtaining it
when performance became impossible). But cf. Public Serv. Comm'n v.
Schaller, 299 N.E.2d 625 (Ind. Ct. App. 1973) (the court unnecessarily

equated relief under Ind. R. Tr. P. 60(B)(8) with the inherent power of

the court to modify an equitable decree and limited the corrective action to

changed conditions which were not foreseeable).
10715 U.S.C. §§1672, 1673 (1970). The Truth in Lending Act provides

that the maximum amount of the aggregate disposable earnings subject
to garnishment may not exceed the lesser of 25% of the judgment debtor's
disposable earnings for that week, or the amount by which the judgment
debtor's disposable earnings exceed 30 times minimum hourly wages. In
short, this means that the judgment debtor is allowed an exemption of $60
(at the present minimum hourly wage of $2) with respect to weekly wages
up to $90. When his wages exceed $90 a week, he is entitled to an exemption
measured by 25% of weekly wages. In computing weekly wages, withholdings
required to be made by law are excluded and thus made exempt.

106The Act provides that "[n]o court of the United States or any State

may make, execute, or enforce any order or process in violation of this
section." Id. § 1673(c). A similar provision will be found in section 5-105(3)
of the UCCC. Ind. Code §24-4.5-5-105(3) (Burns 1974). These provisions
were not mentioned in the Mints case.



1974] SURVEY—SECURED TRANSACTIONS 257

A third consequence of the holding in the Mims case is that it not
only complicates the computation of exemptions, but fixes them
at such low rates that the effect may be to dry up credit to the very
poor, a result at war with the underpinnings of the UCCC. The
case demonstrates the need for an overhaul of Indiana's many ex-
emption laws109 and forthrightly mandates a humane approach
to the whole problem.

In a recent decision, the United States Supreme Court dealt
with the interesting question of whether a debtor's right to a refund

of income taxes withheld from wages is subject to creditor process.
In Kokoszka v. Belford," the bankrupt defended a turnover order
directing him to deliver his refund check to the trustee. The bank-
rupt claimed that the refund was exempt under the Federal Truth
in Lending Act, which exempts from garnishment the lesser of 25%
of a debtor's disposable weekly earnings or 30 times minimum
wage. Chief Justice Burger limited the exemption to "garnish-
ment" of periodic payments and did not extend the exemption to

include the trustee's rights to reach proceeds of weekly payments

109The general exemption statute, Ind. Code § 34-2-28-1 (Burns 1973), is
limited to debtors who are resident householders and to judgments founded
upon contract. Many other statutes exempt such items as specified pensions
and insurance but are not restricted to resident householders and to judg-

ments founded upon contract. The garnishment statute, id. § 34-1-44-7, allows
only 10% of the debtor's income or profits to be subjected to garnishment in
proceedings supplemental. The 90% exemption thus allowed is not limited
to resident householders or to judgments founded upon contract. Under the

garnishment statute, it has been held that enforcement of an alimony or

support decree by garnishment is limited to 10% of the judgment debtor's
income. Clay v. Hamilton, 116 Ind. App. 214, 63 N.E.2d 207 (1945) (the

court disallowed the $15 exemption since the judgment was not founded
upon contract). Hence, although the UCCC allows garnishment of wages
and income in excess of the exemption provided therein, the more liberal

provisions allowing 90% of earnings and income to be exempt under the
garnishment law would seem to prevail under the ruling of the Mims de-
cision. Compare Ind. Code §24-4.4-5-106(2) (Burns 1974) with id. §34-1-44-7
(Burns 1973). It appears, however, that the court may award alimony or
support payments in excess of that prescribed by exemption laws. Cf. Dorman
v. Dorman, 251 Ind. 272, 241 N.E.2d 50 (1968) (court ordered payment of
$40 a week support to be made from the husband's pay of $75 a week). But,
in view of Wellington v. Wellington, 304 N.E.2d 347 (Ind. Ct. App. 1973),
holding that alimony decrees for the payment of money are no longer en-
forceable by contempt, collection of such decrees from income and wages must
occur under garnishment laws in proceedings supplemental, resulting in the

right of the judgment defendant to assert that 90% of his income or wages
is exempt.

11094 S. Ct. 2431 (1974). The decision did not flatter the many judges
in the lower federal courts who had written extensive opinions on the same
subject. None of their opinions were cited.



258 INDIANA LAW REVIEW [Vol. 8:234

once they have been made.'" In view of the more humane attitude
of the Indiana Supreme Court toward exemptions, 112 and because
the Indiana definition of "garnishment" is much broader than the
federal law's definition and includes proceedings requiring the
debtor to withhold earnings,

113
it is not unlikely that tax refunds

from wage withholdings will be held exempt under the Indiana
Uniform Consumer Credit Code. Therefore, such tax refunds
should also be held exempt in Indiana bankruptcy proceedings. 114

K. Property Subject to Creditor Process

Not all the debtor's interests in property are subject to creditor
process. Indiana law recognizes that a creditor cannot reach a fu-

ture interest in property "incapable of being appraised or sold with

fairness to both the debtor and the creditor." 115 A substantial exten-
sion of this doctrine occurred in Loeb v. Loeb,Ub wherein the

supreme court held that, in an award of alimony, the court could
not consider the husband's interest in a trust established by his
mother which was to be paid to him upon his mother's death, sub-
ject to the condition that he survive her. The decision is to be
applauded in the expectation that it will help remove all speculative
future interests from court sponsored market places. In a some-
what similar vein, the court of appeals, in Irwin Union Bank &
Trust Co. v. Long," 7 held that a wife with a judgment for alimony

1 '

' The Court first determined that the tax refund for the tax year 1971
was "property" of the debtor at the time he filed his petition on January 5,
1972. The Court did not determine what the answer would have been had the
petition been filed in 1971. Chief Justice Burger accepted the idea that a
"tax refund is not the weekly or other periodic income required by a wage
earner for his basic support." Id. at 2435. He did not take judicial notice of
inflation nor of the well known fact that millions of families depend upon
their tax refunds for support.

" 2See Mims v. Commercial Credit Corp., 307 N.E.2d 867 (Ind. 1974).
See text accompanying notes 102-109 supra.

n3The Federal Truth in Lending Act defines "garnishment" as "any
legal or equitable procedure through which the earnings of any individual
are required to be withheld for payment of any debt." 15 U.S.C. § 1672(c)
(1970). The Indiana law defines "garnishment" as

any legal or equitable proceedings through which the earnings of
an individual are required to be withheld by a garnishee, by the
individual debtor, or by any other person for the payment of a
judgment.

Ind. Code § 24-4.5-5-105(1) (b) (Burns 1974).
n4Not only are exemptions provided by federal law allowed to a bank-

rupt, but the bankrupt can also take advanage of the exemptions allowed
under state law. Bankruptcy Act §6, 11 U.S.C. §24 (1970).

n5Gushwa v. Gushwa, 93 Ind. App. 68, 75, 177 N.E. 366, 368 (1931).
n6301 N.E.2d 349 (Ind. 1973).
n7312 N.E.2d 908 (Ind. Ct. App. 1974).



1974] SURVEY—SECURED TRANSACTIONS 259

could not force the judgment debtor to exercise his right to with-
draw up to four per cent of the principal of a trust of which he was
beneficiary, when the trust instrument provided that none of his
creditors could reach the trust corpus.'

ia

L. Judgment Liens and Lien Creditors

A creditor with a judgment may obtain a lien upon the judg-
ment debtor's real estate by causing the judgment to be entered
and indexed in the judgment docket in the county where the land
is located.

1 ' 9 Although this lien will protect the judgment lien-
holder against persons who subsequently acquire an interest in the
property from the judgment debtor, 120 the judgment lienholder is
not a purchaser for value who may claim the rights of a bona fide
purchaser as against prior unperfected interests in the land. This

rule was applied in Rural Acceptance Corp. v. Pierce. 12 * On the
other hand, a creditor who obtains a lien on personal property by
means of judicial proceedings will take priority over prior unper-
fected security interests, if the lien creditor becomes such without

knowledge.'
22 The Pierce court ignored an interesting problem gen-

erated by its unusual facts. V gave a mortgage to El upon which a
balance was owing. V then contracted to sell the land to P2 who
went into possession owing a balance to V in excess of the mort-
gage. C3 then obtained a judgment against V and he apparently
claimed a judgment lien upon the land. CU thereafter obtained a

naIn reaching this result, the court emphasized that it would attempt
to give effect to the intention of the settlor and, in so doing, considered the

federal estate tax law and the obvious efforts of the settlor to provide for his
grandchildren. Prior case law indicated that a beneficiary's interest in a
spendthrift trust could be reached for purposes of paying alimony or sup-

port to the beneficiary's wife or children. Cf. Clay v. Hamilton, 116 Ind. App.

214, 63 N.E.2d 207 (1945) (allowing a wife holding an alimony judgment to
reach the husband's interest in the trust for support). The judgment debtor
in Long was not the settlor. Had he been the settlor, Ind. Code § 30-1-9-14
(Burns 1972) would have had some relevancy. It provides that a "grantor of
lands reserving an absolute power of revocation, shall be deemed an absolute
owner, as regards creditors and purchasers."

M9Ind. Code §§34-1-43-1, -45-2 (Burns 1973).
' 20E.g., Armstrong v. McLaughlin, 49 Ind. 370 (1875).
,2, 298 N.E.2d 499 (Ind. Ct. App. 1973). A judgment creditor who

purchases at his own sale is a purchaser for value and qualifies as a bona
fide purchaser who will cut off prior unperfected interests. Pugh v. Highley,
152 Ind. 252, 53 N.E. 171 (1899). Likewise, an assignee of the judgment
lienholder qualifies as a purchaser for value with similar rights. Tuttle

v. Churchman, 74 Ind. 311 (1881).
1T22Uniform Commercial Code § 9-301(1) (b) & (3). A subsequent judg-

ment lienholder on realty who is without knowledge will take priority over
a prior unperfected security interest in fixtures. Id. § 9-313(3) (c).



260 INDIANA LAW REVIEW [Vol. 8:234

judgment against V, also apparently claiming a judgment lien upon
the land, but he obtained a proceedings supplemental order against

V, and P2 as garnishee, directing that amounts owing by P2 in
excess of those owing El who was to be paid first, be paid to C4. 123

In a subsequent suit by P2 for specific performance, the lower court
ordered payment of the unpaid purchase price to first be applied to
El's mortgage, then to C3's judgment, and finally, if any amounts
remained, to C4's judgment. If the payment was insufficient to
satisfy either of the judgment creditors, determined by the court
to be judgment lienholders, they were to have no further claim.
This order was affirmed on the theory that P2's equity was superior
to the interest of a subsequent "judgment lienholder."

The astonishing fact is that the judgment debtor, V, had no
interest in the land. Under the doctrine of equitable conversion,
which was recognized by the court, he merely owned P2's obliga-
tion to pay him. This obligation was secured by an interest in the
land, but was, at most, possibly a contract right or a general intan-

gible.
124

Since a judgment lien is recognized only in land, it can be
argued that neither C3 nor CU obtained a judgment lien upon Vs
property.

125
Therefore, when Ch obtained a garnishment order

123The garnishment order directed the purchaser to make payments
directly to El until El's mortgage was satisfied and then to make the balance
of his payments to CU. The res judicata effect of this order was not discussed
or considered. But cf. Bostwick v. Bryant, 113 Ind. 448, 16 N.E. 378 (1888).
Of course, the order was not binding upon C3 who apparently was not a
party to that proceeding.

)7ACompare Uniform Commercial Code § 9-105 (g) with id. §9-106.
Although the Uniform Commercial Code does not apply to liens upon real
estate, id. § 9-104 ( j ) , its provisions do govern obligations secured by interests
in land. In re Bristol Associates, Inc., 13 UCC Rep. Serv. 1150 (E.D. Pa.
1973) (the security taken in a leasehold and rents thereunder was required
to be perfected under the provisions of the Uniform Commercial Code)

;

Uniform Commercial Code § 9-102.
1 "Several very old decisions indicate that a judgment lien may be ob-

tained upon the vendor's interest. Garr v. Lockridge, 9 Ind. 92 (1857). On
the other hand, the interest of the vendee was not subject to a judgment lien
and could be reached only by proceedings supplemental. . Figg v. Snook, 9
Ind. 202 (1857); Jeffries v. Sherburn, 21 Ind. 112 (1863). But cf. Hamilton
v. Byram, 122 Ind. 283, 23 N.E. 795 (1890) (equitable interest of mortgagor
under absolute deed subject to execution as interest in land). With the de-
velopment of the doctrine of equitable conversion, these cases seem unsound.

Jackson v. Snell, 34 Ind. 241 (1870) (holding that the assignee of promissory

notes held by the vendor prevailed over the judgment creditor who claimed
a lien upon vendor's interest) ; Davis v. Landis, 114 Ind. App. 665, 53 N.E.2d

544 (1944) (holding the transfer of purchaser's interest in a land contract

as security to be a mortgage) ; Butcher v. Kagey Lumber Co., 164 Ohio 85, 128
N.E.2d 54 (1955) (holding that assignee for value of vendor in an un-

recorded executory land contract took priority over a subsequent judgment

creditor of the vendor)

.



1974] SURVEY—SECURED TRANSACTIONS 261

against V, and P2 as garnishee, he obtained an equitable lien' 26

prior in time to that of C3, who may never have obtained an inter-
est in the property until the lower court issued the order from
which Ck appealed.

127 In summary, the vendor's interest ought to
be treated the same as that of a mortgagee,

128 and if creditors are

to reach it, they must do so by proceedings supplemental. 129 This,
at least, is a logical result which naturally flows from the decision
of the Indiana Supreme Court in Skendzel v. Marshall.™

The Federal Tax Lien Act of 1966 subordinates the federal lien
for taxes to "security interests" existing before recordation of the

federal lien.
131 By definition, a "security interest" is a security in

property which would be given protection against "judgment liens"
under state law. 132 In interpreting this provision, the United States

District Court for the Northern District of Indiana, in Fred Fraus
& Sons, Inc. v. United States,™3 gave priority to a properly recorded
federal tax lien over a prior unperfected security interest in per-

sonal property of the taxpayer, even though the government had
been notified of the security interest before its lien arose or was
recorded. Under state law, an unperfected security interest is valid
against a subsequent lien creditor with knowledge,134 but the court

held that the federal statute referred to perfection as against all

judgment creditors, meaning lien creditors, including those with
or without notice. 135

,26C/. Graydon v. Barlow, 15 Ind. 197 (1860); Union Bank & Trust
Co. v. Vandervoort, 122 Ind. App. 258, 101 N.E.2d 724 (1951).

,2rC4 argued, in effect, that he held a perfected security interest in the
vendor's real estate because of a filed financing statement. The court dis-
missed the argument upon the theory that perfection of security interests
applies only to personal property other than fixtures. It may have been that
CU claimed lis pendens notice of his lien against V's rights in the contract
with P, perfection of which is permitted by the filing of a financing statement
under Ind. R. Tr. P. 63.1(A) (2) & (C). The decision does not make this clear.

'^Compare, e.g., Walner v. Capron, 224 Ind. 267, 66 N.E.2d 64 (1946),
with Knapp v. Ellyson Realty Co., 211 Ind. 180, 5 N.E.2d 973 (1937).

129Choses in action owned by an obligee, as a general rule, cannot be
sold on execution against him unless the chose is surrendered by the
obligee, i.e., the judgment debtor. Beckman Supply Co. v. Newell, 68 Ind.
App. 679, 118 N.E. 962 (1918); Ind. Code §34-1-36-2 (Burns 1973).

,3o301 N.E.2d 641 (Ind. 1973), discussed at text accompanying notes 11-

19 supra.
13, 26 U.S.C § 6323(a) (1970).
,32

/<*. § 6323(h).
,33369 F. Supp. 1089, 14 UCC Rep. Serv. 828 (N.D. Ind. 1974).
1 "Uniform Commercial Code § 9-301(1) (b) (3).
135The court assumed that the term "judgment lien" is co-extensive

with the term "lien creditor" as used in the Uniform Commercial Code. Similar
problems will emerge when a state lien for taxes arises and is perfected
after the creation of a security interest but before the security interest is



262 INDIANA LAW REVIEW [Vol. 8:234

M. Proceedings Supplemental to Execution

In Indiana, "actions" upon judgments for the payment of
money are barred after ten years, 136 judgment liens expire within
the same period, 137 execution may issue after ten years from entry
of judgment only after notice and hearing,

138 and judgments of

courts of record are "deemed satisfied" after twenty years.
139 The

question presented to the court of appeals in Myers v. Hoover*
40

was whether proceedings supplemental could be initiated to reach
or garnish the debtor's property after ten years had expired from

entry of the judgment. The court held that, inasmuch as proceed-
ings supplemental to execution are continued by motion in the
original action, the remedy now allowed by Trial Rule 69(E) is
not an "action" upon a judgment and therefore is not barred by
the ten year statute of limitations. The result finds doubtful sup-
port in case law141 and is an unfortunate restriction on statutes of
limitations which are usually sufficiently generous to judgment
creditors who sleep on their rights. Moreover, the case may mean
that orders in proceedings supplemental will not extend the statutes

of limitations in favor of judgment creditors. 142 Basically, proceed-

perfected. In this connection, see Gevyn Constr. Corp. v. Affiliated Eng'rs,
Inc., 375 F. Supp 207 (W.D. Pa. 1974) (the state lien took priority under the
terms of a statute creating a lien for unemployment taxes).

' 36Ind. Code § 34-1-2-2 (b) (Burns 1973).
™7Id. §34-1-45-2.
138

/d. §34-1-34-2.
,39

/d. §34-1-2-14. This provision has been held to create only a re-
buttable presumption of payment. Pensinger v. Jarecki Mfg. Co., 78 Ind. App.
569, 136 N.E. 641 (1922).

,4O300 N.E.2d 110 (Ind. Ct. App. 1973).
141 White v. White, 98 Ind. App. 587, 186 N.E. 349 (1933), held to the

contrary at a time when the statute of limitations barring actions upon
judgments was twenty years. It is now ten years. See note 136 supra. While
that case did not involve proceedings supplemental, it did deal with a motion

for execution as provided by Ind. Code §34-1-34-2 (Burns 1973). In support

of its decision, the court in Myers cited Hinds v. McNair, 235 Ind. 34, 129
N.E.2d 553 (1955), in which proceedings supplemental were commenced
prior to the end of the ten year period barring a judgment lien and in which

the court allowed the proceedings to continue after the ten year period had

expired. In quoting from Hinds, the court misquoted the effect of that

decision which more accurately is stated in the Hinds opinion as follows:

We hold, therefore, that the expiration of the judgment lien or the
lien of the execution pending the proceedings supplemental does not

terminate such proceedings and make them ineffectual.
Id. at 40, 129 N.E.2d at 558.

"*But cf. Hinds v. McNair, 235 Ind. 34, 129 N.E.2d 553 (1955). A recent
decision has indicated that proceedings supplemental are civil actions subject

to the change of venue laws. McCarthy v. McCarthy, 297 N.E.2d 441 (Ind.



1974] SURVEY—SECURED TRANSACTIONS 263

ings supplemental as provided by statute are equitable in nature.
143

Hence, judgment creditors pursuing such remedies should be sub-

ject to the doctrine of laches, especially since equity usually adopts

the outermost limits of the statute of limitations applicable to the

underlying legal remedy.
144

N. Bulk Sales—Sale of Business
Suppose that S operates a business under the trade name "Rose

City Sheet Metal Works" and from time to time purchases supplies
from C. Later, S sells his business, along with the trade name, to B
who operates thereunder and continues to purchase supplies from
C. If B defaults on his obligations to C, may C hold S upon a
theory of estoppel? In Meggs v. Central Supply Co., Inc.,* 45 the
court held that S was liable for sales made by C to B when C relied
upon &'s continued ownership. Sellers of a business must take
warning from this unique, but sound, decision and either notify
former suppliers or limit the use of the seller's business name in
the continuation of the business. The Bulk Sales Article of the
Uniform Commercial Code affords a complementary type of pro-
tection by allowing creditors of the seller to reach the property
passing to the buyer.

146

Ct. App. 1973), discussed in Townsend, Secured Transactions and Creditors'
Rights, 1973 Survey of Indiana Law, 7 Ind. L. REV. 226, 241-42 (1973).

,43C/. Figg v. Snook, 9 Ind. 202 (1857) (holding that proceedings sup-
plemental were a substitute for an equity suit denominated as a creditor's
bill).

144As a general rule, equity will follow the law and, if a claim is barred
by the statute of limitations at law, it will be barred in equity. Cf. McKinney
v. Springer, 3 Ind. 59 (1851) (equity followed the law as to the statute of
limitations, including provisions extending time). Laches may bar a claim
within a time shorter than the statute of limitations. Compare Hegarty
v. Curtis, 121 Ind. App. 74, 95 N.E.2d 706 (1950), with Ryason v. Dunten,

164 Ind. 85, 73 N.E. 74 (1905).
145307 N.E.2d 288 (Ind. Ct. App. 1974).
146A bulk sale is defined as the sale of a "major part" of the seller's

inventory or a "substantial part" of his equipment if sold in connection with

a bulk transfer of inventory. Uniform Commercial Code § 6-102. The sale
may be avoided by the seller's creditors who become such prior to the sale
or prior to receiving notice as required by the Code. The sale will not be
avoided if a schedule of assets and creditors is furnished by the seller and
notice of the sale is given to the creditors. Id. §§ 6-104 to 6-108. See First

Nat'l Bank v. Crone, 301 N.E.2d 378 (Ind. Ct. App. 1973). This case is dis-
cussed at text accompanying notes 46-50 supra.