Indiana Law Review


1979] SURVEY-SECURED TRANSACTIONS 289

XV. Secured Transactions and Creditors' Rights

R. Bruce Townsend*

During the year following the summer of 1977, the Indiana
Court of Appeals earned stature in the field of secured transactions

and creditors' rights. Its decisions reflect scholarship and hard work

in this area of private law. Thankfully, all of these cases are not

without controversy, and they, along with a group of bankruptcy

and federal decisions involving the state of Indiana, provide some
excellent material for this part of the Survey. Lawyers are invited

to give special attention to recent decisions that have imposed a

duty upon a disbursing mortgagee to procure releases; 1 allowed and

denied damages to a forfeiting conditional seller, and in particular,
the rule of waste established in the

4t

leaky spigot" case; 2 denied

subrogation to a title insurer against the vendor procuring in-

surance for his vendee;3 dealt with the "voidable" title of a bailee;4

recognized the debtor's efforts to subordinate a secured party in

favor of an unperfected interest;5 allowed a secured party to recover

a deficiency even though he had not notified a debtor of the sale;6

permitted an outright transferee of chattel paper to enforce it

against the account debtor;7 applied the mechanic's lien statute in

new situations;8 and recognized established principles of suretyship
in some old and some new situations.9 Accolades for the finest effort

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

The author wishes to extend his appreciation to Steve Smith for his assistance in
the preparation of this discussion.

'Prudential Ins. Co. v. Executive Estates, 369 N.E.2d 1117 (Ind. Ct. App. 1977).

See notes 24-27 infra and accompanying text.

Reynolds v. Milford, 375 N.E.2d 265 (Ind. Ct. App. 1978); Finley v. Chain, 374

N.E.2d 67 (Ind. Ct. App. 1978). See notes 51-58 infra and accompanying text.
3Lawyers Title Ins. Co. v. Capp, 369 N.E.2d 672 (Ind. Ct. App. 1977). See notes

29-31 infra and accompanying text.

'McDonald's Chevrolet, Inc. v. Johnson, 376 N.E.2d 106 (Ind. Ct. App. 1978). See

notes 65-70 infra and accompanying text.
5A-W-D, Inc. v. Salkeld, 372 N.E.2d 486 (Ind. Ct. App. 1978). See notes 78-81 infra

and accompanying text.
6
Hall v. Owen County State Bank, 370 N.E.2d 918 (Ind. Ct. App. 1977). See notes

83-100 infra and accompanying text.
7
First Nat'l Bank v. Schrader, 375 N.E.2d 1124 (Ind. Ct. App. 1978). See notes

102-04 infra and accompanying text.
8At least five recent decisions involve mechanic's liens on real estate. See notes

105-28 infra and accompanying text.
9See notes 184-204 infra and accompanying text. Probably the most ingenious

decision relating to suretyship is American States Ins. Co. v. Staub, Inc., 370 N.E.2d
989 (Ind. Ct. App. 1977), which held that a contractor's surety for the benefit of sub-



290 INDIANA LAW REVIEW [Vol. 12:289

must go to Hall v. Owen County State Bank, 10 which dealt with the
liability of a debtor for a deficiency when he received no notice of
the sale; however, many students of the law may have some reserva-
tions about the result. No praise should be given to four decisions,
including Savage v. Savage, 11 which correctly indicated that pension

rights, like wages, are not transferable or subject to usual creditor

process. In denying pension rights the status of "marital property,"

the court showed a lack of sensitivity to the potentially horrid social
and economic consequences of its decision. Mid America Homes v.
Horn12 placed too much emphasis upon record titles in allowing a
subcontractor to obtain a lien without the notification to the known
residential owner as required by statute. First Savings & Loan
Association v. Furnish™ countenanced notoriously sloppy tax sale

procedures. Rauch v. Circle Theatre 1 * allowed a dissolving corpora-
tion to distribute its assets to shareholders and ignore creditors

with contingent claims.

A. Consumer Legislation

Consumer legislation had its ups and downs in the courts during
the last year. On the down side, the Indiana Supreme Court denied
transfer to Holmes v. Rushville Production Credit Association™
which allowed a seemingly flagrant violation of consumer credit
disclosure requirements and refused attorney's fees to a debtor

asserting liability, in a counterclaim, for concededly improper

disclosures in a companion note. On the up side, a scholarly dissent-
ing opinion16 by Justice Hunter in Holmes pointed out the majority's
failure to note that the Uniform Consumer Credit Code17 (UCCC) and
the Federal Truth in Lending Act18 contemplated "strict," as

contractors is not released to a subcontractor who has taken a note extending the time

for payment.
10370 N.E.2d 918 (Ind. Ct. App. 1977). See notes 83-100 infra and accompanying

text.

"374 N.E.2d 536 (Ind. Ct. App. 1978). See notes 150-58 infra and accompanying

text. For another discussion of this case, see Garfield, Domestic Relations, 1978

Survey of Recent Developments in Indiana Law, 12 Ind. L. Rev. 157, 183-84 (1978).
12377 N.E.2d 657 (Ind. Ct. App. 1978). See notes 108-11 infra and accompanying

text.
13367 N.E.2d 596 (Ind. Ct. App. 1977). See notes 36-41 infra and accompanying

text.
14374 N.E.2d 546 (Ind. Ct. App. 1978). See notes 185-90 infra and accompanying

text.
15353 N.E.2d 509, remanded on rehearing, 355 N.E.2d 417 (Ind. Ct. App. 1976),

transfer denied, 371 N.E.2d 379 (Ind. 1978). For another discussion of this case, see

Greenberg, Contracts, Commercial Law and Consumer Law, 1978 Survey of Recent
Developments in Indiana Law, 12 Ind. L. Rev. 81, 92-93 (1978).

16371 N.E.2d 379, 379 (Ind. 1978) (Hunter, J., dissenting).
17Adopted in Indiana at Ind. Code §§ 24-4.5-1-101 to 6-203 (1976).
18
15 U.S.C. §§ 1601-1667 (1976).



1979] SURVEY-SECURED TRANSACTIONS 291

distinguished from "substantial," compliance with disclosure re-

quirements,19 and that attorney's fees to the debtor were mandated
by his "successful action to enforce liability" even though established

as a partial defense by counterclaim.20 Another consumer credit deci-

sion in the United States District Court for the Northern District of

Indiana determined that a debtor's claim for a truth-in-lending viola-

tion need not be asserted as a compulsory counterclaim in state pro-

ceedings on the original indebtedness and allowed a separate, later

action in federal court.
21 The Indiana Court of Appeals properly held

that the UCCC provisions regulating insurance charges apply only
to consumer credit, which was determined not to include loans made
to enable a debtor to procure equipment for his trucking business.22

The court also held that credit granted by a subcontractor to a
prime contractor for work performed on a residential owner's pro-
perty and for which a mechanic's lien was claimed is not consumer
credit within the meaning of the Federal Truth in Lending Act.23

19
Justice Hunter noted that the court of appeals found a disclosure which omitted

the "total finance charge" (Regulation Z, 12 C.F.R. § 226.8(d)(3)) to be in "substantial

compliance" with disclosure requirements based upon parol testimony of witnesses.

371 N.E.2d at 379. This writer was unable to find any decision allowing a required

disclosure to be satisfied by parol proof, under either the Truth in Lending Act or the

UCCC.
20No reason was given for denying attorney's fees in the decision of the court of

appeals. It could be explained by the fact that the debtor, while awarded damages on
his counterclaim for one violation of disclosure requirements, was adjudged liable to

the creditor for greater damages. In other words, the court may have been reluctant
to award attorney's fees to the losing party. See Rauch v. Circle Theatre, 374 N.E.2d

546 (Ind. Ct. App. 1978); cf. Bird v. Rector, 154 Ind. 138, 56 N.E.129 (1900) (attorney's

fees normally allowed mechanic under lien law would not be allowed where set-off ex-

ceeded claim for mechanic's lien).
21Daughterty v. First Bank & Trust Co., 435 F. Supp. 218 (N.D. Ind. 1977). Ac-

cord, Drew v. Flagship First Nat'l Bank, 448 F. Supp. 434 (M.D. Fla. 1977). Under the
Federal Truth in Lending Act, a debtor may not set off his claim to the penalty in an
action by the creditor on the principal debt until the claim is reduced to judgment. 15
U.S.C. § 1640(h) (1976) (effective Oct. 18, 1974). But cf. Chapman v. Rhode Island Hosp.
Trust Nat'l Bank, 444 F. Supp. 439 (D.R.I. 1978) (set-off against bankruptcy claim of
creditor allowed). If the debtor sues for a truth-in-lending penalty in federal court, it
has been held that the creditor may not counterclaim unless he establishes separate
grounds for federal jurisdiction. Meadows v. Charlie Wood, Inc., 448 F. Supp. 717 (M.D.
Ga. 1978) (based upon reasoning that claim of creditor is not a compulsory counterclaim
under Fed. R. Civ. P. 13); cf. Newton v. Beneficial Fin. Co., 558 F.2d 731 (5th Cir. 1977)
(debt discharged in bankruptcy could not be set off against claim of debtor for truth-in-
lending violation arising out of the same debt). But cf. Binnick v. Avco Fin. Servs. of
Neb., Inc., 435 F. Supp. 359 (D. Neb. 1977) (debtor whose obligation to creditor was
discharged brought suit for truth-in-lending violation — set-off by creditor allowed).

22
Hall v. Owen County State Bank, 370 N.E.2d 918, 933 (Ind. Ct. App. 1977).

23Mid America Homes, Inc. v. Horn, 377 N.E.2d 657 (Ind. Ct. App. 1978) (constru-
ing 15 U.S.C. §§ 1602(h), 1603(1), 1635 (1976)).



292 INDIANA LAW REVIEW [Vol. 12:289

B. Real Estate Transactions

1. Release of Liens; Duty of Disbursing Mortgagee to Obtain
Releases of Junior Liens anc Debts.— A lender-mortgagee who
undertakes disbursement of b' rrowed funds to prior lienholders and

creditors is under a duty to >btain recordable releases of the liens

and to obtain receipts showing that the debts have been paid.

Prudential Insurance Co. of America v. Executive Estates
24 found

such a duty grounded on an express agreement, the custom and

practice in the local real estate community, and the relationship be-

tween the borrower-mortgagor and the mortgagee who insisted on
making disbursements to prior lienholders and creditors.25 In this

case the mortgagee, who advanced funds for a housing development,
failed to procure not only the release of a completion bond to the ci-

ty but also the release of obligations and liens claimed by the con-

tractor who later filed notice of a mechanic's lien and commenced
litigation on the lien and an unpaid debt. Because of these omissions,

a title cloud was placed on the development. As a result, lots could
not be sold, expenses of litigation in defending against the claims of

the contractor were incurred, the mortgage went into default, and
the mortgagee brought suit to foreclose against the mortgagor who
counterclaimed for damages resulting from the former's breach of
duty. An award in excess of the mortgage debt plus a nearly equal
amount of punitive damages to the mortgagor was reversed on ap-
peal because the evidence neither showed oppressive or malicious
misconduct justifying punitive damages26 nor established the actual
loss reflected in the judgment.27 Although the final outcome of the

24369 N.E.2d 1117 (Ind. Ct. App. 1977).
25After finding an express agreement to procure releases and a duty arising from

custom and practice, the court determined that the duty of the mortgagee also was

based upon a principal-agent relationship. Cf. Lake County Title Co. v. Root Enter-

prises, 339 N.E.2d 103 (Ind. Ct. App. 1975) (duty of an escrow agent disbursing con-

struction funds), discussed in Townsend, Secured Transactions and Creditors' Rights,

1976 Survey of Recent Developments in Indiana Law, 10 Ind. L. Rev. 310, 325 (1976).
280n appeal, the court found that the record did not establish "oppression or

malice" by the mortgagee's failure to procure the proper releases. The court did not
consider whether the action of the mortgagee was accompanied by "oppression or

malice" in declaring default and foreclosing without allowance for the loss the action

had caused. In other words, suppose M gives a mortgage to E on his house which E
negligently destroys. Without giving M credit for the loss, E demands full payment
and forecloses. The decision conveys the incredible inference that E is acting with
motives which are benign and without "oppression or malice." But see State Farm
Mut. Auto Ins. Co. v. Shuman, 370 N.E.2d 941 (Ind. Ct. App. 1977).

"Evidence supporting a loss of net profits was held inadequate and too

speculative where the proof showed the average price received by showing offers for

four lots multiplied by the total number of lots, less the estimated promotional and

sales expenses. Failure to show that all the lots were similar or that the price was



1979] SURVEY-SECURED TRANSACTIONS 293

case will depend upon a new trial with respect to damages, the case
serves as an excellent warning to lenders undertaking to disburse

funds to the mortgagor's creditors and junior lienholders.

2. Rights and Remedies of Lienholder and Debtor;
Insurance. — Often an insurer paying a loss is subrogated to the
rights of the insured against a third party who is liable to the in-
sured.

28
In Lawyers Title Insurance Corp. v. Capp, 29 insurers were

advised that the rule does not permit subrogation against a party

with whom they contract for the benefit of a third party. In this
case, the vendor conveying land to a purchaser had procured title in-

surance for the purchaser from the insurer. When a title defect was
paid off by the insurer, the insurer sought subrogation against the

vendor on his covenants of title. The court denied subrogation as
being inequitable.30 The rule of the case is also important to such
persons as lienholders and mortgagors who procure insurance for
the protection of others to whom they might be liable.31

Another decision, Augustine v. First Federal Savings & Loan
Association?2 recognized that a lienholder that procured insurance

for the protection of a debtor might be under a duty to renew the
policy or to notify the debtor of its expiration.33 Summary judgment

typical made this proof so weak as to suggest only "gross profits." The court failed to
indicate whether or not interest expenses on the mortgage and liabilities incurred in
connection with charges which should have been released by the mortgagee were
allowable.

2
*E.g., Hagerman v. Mutual Hosp. Ins., Inc., 371 N.E.2d 394 (Ind. Ct. App. 1978)

(health and accident insurer subrogated to settlement obtained by insured against tort-

feasor).

29369 N.E.2d 672 (Ind. Ct. App. 1977).
30
Id. at 674.

31
C/. Insurance Co. of N. America v. Martin, 151 Ind. 209, 51 N.E. 361 (1898) (in-

surer paying loss to mortgagee subrogated to rights of mortgagee against mortgagor

who breached terms of policy).
32373 N.E.2d 181 (Ind. Ct. App. 1978). In this case the insurance covered the ven-

dor's mortgagee, the vendor, and the buyer who later purchased the property on a
conditional sales contract. The property was destroyed by fire a few days after the
policy expired. Conflicting claims of all the parties including an insurance agent were

raised on a motion for summary judgment which, according to the appellate court, had
been improvidently granted because sealed depositions had not been considered by the

court below.
33373 N.E.2d at 183 n.l. The duty of the lienholder promising to procure insurance

for the debtor is clear. Sims Motor Transp. Lines, Inc. v. Davis, 126 Ind. App. 344, 130

N.E.2d 82 (1956) (life insurance). It is less certain whether the lienholder procuring in-

surance or holding possession of the policy is under a duty to renew it or to notify the

debtor before its termination. Cf. U.C.C. § 9-207(1) (secured party in possession under

duty to use reasonable care in the custody and preservation of collateral). UCCC §
4.304 (notice of cancellation required to be given by creditor requesting termination of

property or liability insurance). Case law in other jurisdictions is divided on the ques-

tion. See Chrysler Credit Corp. v. Friendly Ford, Inc., 535 S.W.2d 110, 19 UCC Rep.
849 (Mo. Ct. App. 1976), and cases cited therein.



294 INDIANA LAW REVIEW [Vol. 12:289

against the debtor was reversed, leaving the scope of this duty for
future resolution.

3. Foreclosure of Liens; Right of Mortgagee to Notice of Tax
Sale. — In most mortgage and lien foreclosures, junior lienholders of
record, who have possession or who are known by the foreclosing
lienholders, must be made parties or the purchaser at the sale will
acquire only the interest of those parties named, leaving the junior
interest intact with a right to foreclose.34 Early Indiana law did not

apply this rule to tax foreclosures,35 presumably either because the

"King" should be given one of his prerogatives in such cases or

because notice to the owner-mortgagor served as a fictional form of
constructive notice to other lienholders. The Indiana Court of Ap-
peals chose to follow precedent in First Savings & Loan Association
v. Furnish, 36 and held that a tax foreclosure sale upon notice to the

mortgagor-"owner" bound a mortgagee who was given notice of the
sale only through a general notice published in a newspaper.37 The
decision thus attempts to resolve the unsettled question of whether

the United States Supreme Court decision in Mullane v. Hanover
Bank & Trust Co. 38 applies to tax lien sales. Under that decision,
constructive notice by publication is inadequate when actual notice
can be given to a party in judicial-type proceedings affecting his prop-

erty.
39 Unfortunately, the court of appeals failed to consider the ob-

vious fact that tax sales are generally known to be conducted in a
careless, haphazard manner which do not produce a fair price for the
property.

40 Lack of notice to interested parties more than likely is
one of the reasons for low prices at tax sales. Hopefully, this deci-

sion will not end the search for due process of law.41

-4. Remedies of Conditional Sellers of Real Estate; Forfeiture:
The Leaky Spigot Case. —Skendzel v. Marshall42 has become a

u
E.g., Catterlin v. Armstrong, 101 Ind. 258 (1885).

35Baldwin v. Moroney, 173 Ind. 574, 91 N.E. 3 (1910).
36367 N.E.2d 596 (Ind. Ct. App. 1977). In this case the mortgagee received actual

notice of the sale in time to redeem from the purchaser, but at the added expense of

redemption. The court nevertheless decided that it retained standing to challenge the

constitutionality of the procedure.
31
Id. at 600-01. The Indiana tax sale statute provides for 21 days' notice to

"owners" by certified mail. Ind. Code § 6-1.1-24-4 (1976).
38339 U.S. 306 (1950).
39
/d. at 320.

40The court did take judicial notice of the fact that mortgagees are generally

astute in keeping abreast of tax payments and records, thus justifying a rule that

omits notice of tax sales to them. 367 N.E.2d at 601.

"Lack of notice of a tax assessment to an owner may constitute a denial of due
process. F.W. Woolworth Co. v. State Bd. of Tax Comm'rs, 369 N.E.2d 958 (Ind. Ct.

App. 1977).
42
261 Ind. 226, 301 N.E.2d 641 (1973), cert, denied, 415 U.S. 921 (1974).



1979] SURVEY-SECURED TRANSACTIONS 295

household name to Indiana lawyers. It held that typical conditional
sales contracts of real estate, which grant the vendor a right to

declare a forfeiture upon default of payments or other breaches of

contract by the purchaser, are penal in nature if the buyer has paid

a substantial amount on the contract.43 The vendor in such a case
must foreclose his interest as a mortgagee, thus giving the mort-

gagor a right to remain in possession and to redeem until the land is
sold under judicial foreclosure procedures applicable to mortgages.

Decisions of the Indiana Court of Appeals since Skendzel, however,

have seized upon, and probably enlarged, certain equitable excep-

tions to the rule that such defaults are penal in nature and have

allowed forfeiture if the vendee has not paid a substantial amount
towards the purchase price, if he has committed waste or damage
seriously affecting the value of the property, if he has abandoned

possession, or if a combination of these factors is found to justify

allowing the vendor to repossess and keep the payments made.44

During the last year, the court of appeals upheld forfeiture in three

cases where the vendee paid (1) $32,000 of a purchase price of $57,000;
45

(2) $2,242 of a price of $7,454;
46 and (3) $1,000 and unstated payments

on an obligation to pay $9,815.47 In addition, in the first case, the

court found "abandonment" only because payments were not made.48

In the second case, taxes were not paid.49 In the third instance, the
property was abandoned (vacated), waste of a trifling nature was
committed, and casualty insurance had lapsed.50

43/d

"Donaldson v. Sellmer, 333 N.E.2d 862 (Ind. Ct. App. 1975); Goff v. Graham, 159

Ind. App. 324, 306 N.E.2d 758 (1974). Other decisions have followed Skendzel and

denied forfeiture. Ogle v. Wright, 360 N.E.2d 240 (Ind. Ct. App. 1977); Bartlett v. Wise,

348 N.E.2d 652 (Ind. Ct. App. 1976); Tidd v. Stauffer, 308 N.E.2d 415 (Ind. Ct. App.

1974).

45Morris v. Weigle, 375 N.E.2d 677 (Ind. Ct. App. 1978).
46Reynolds v. Milford, 375 N.E.2d 265 (Ind. Ct. App. 1978).
47
Finley v. Chain, 374 N.E.2d 67 (Ind. Ct. App. 1978). Actually, the court assumed

that $6,893 had been paid on the price of $22,815 for land priced under the contract.
48375 N.E.2d 677. It appeared that the property was continuously occupied by a

tenant of the purchaser, a Purdue professor. Evidence in this case also established that

a vacant house without a bathroom deteriorated in value by $6,000, but there was no

proof of waste or that the value of the land had deteriorated below the amount of the

obligation.
49375 N.E.2d 265. In this case the vendor presented testimony of damage to the

property, but the trial court over the vendor's steadfast objections refused to allow

the purchaser to testify on this issue. The court of appeals held that the vendor could
not support an award of damages for waste when the purchaser was not permitted to
rebut the vendor's proof.

50374 N.E.2d 67. In this case, as part of the same transaction, the vendor sold
stock in the tavern to the purchaser under a separate obligation to pay and according
to a distinct payment schedule along with an undertaking to pay some of the corporate
debts. These payments were secured by the conditional sales contract, as was the



296 INDIANA LAW REVIEW [Vol. 12:289

Of these three recent decisions allowing forfeiture, it is most in-
teresting to note that in Reynolds v. Milford51 the lower court

awarded the vendor possession, damages measured by the unpaid in-
stallments to the time the vendor regained possession, and overdue

escrow payments for taxes and insurance. On appeal, the court held
that the damage award was inequitable, and, in any event, would be
limited to the reasonable rental value of the property for the

wrongful occupation from the time forfeiture was declared to the
time possession was recovered.52 On the other hand, in Finley v.
Chain,

53 which should forever be known as the "leaky spigot case,"
the vendor of a tavern, who regained possession of the property
after it was vacated, was allowed to recover overdue payments prom-
ised by the vendee in connection with the sale of stock in a corpora-

tion operating the tavern, such promise being secured by both the

stock and the conditional sales contract.54 The court also allowed
damages for permissive waste described as resulting from
"negligence or omission to do that which would prevent injury." 55 It

then held that failure to repair several leaky water spigots was per-
missive waste, but that failure to fix a broken front door and a

burned-out water cooler did not constitute such waste, apparently

obligation thereunder to pay a prior mortgage upon the land. Hence, the vendee's

obligations were secured by a security interest in the stock and by the conditional

sales contract with respect to the land. See also Kruse, Kruse & Miklosko, Inc. v.
Beedy, 353 N.E.2d 514 (Ind. Ct. App. 1976). In Beedy the seller apparently had
declared a forfeiture of the stock. Such a forfeiture, if declared, is permitted under

U.C.C. § 9-501(4) which gives a secured party the same remedy with respect to both

personal and real property as with realty only.
51375 N.E.2d 265 (Ind. Ct. App. 1978).
52Where the vendor declares an forfeiture of a lease with an option to purchase,

the purchaser is liable for rental payments accruing to the time of eviction. Schlemmer

v. Saine, 106 Ind. App. 403, 20 N.E.2d 198 (1939); Bernstein v. Rhoades, 92 Ind. App.

553, 157 N.E. 463 (1927). Unlike the conditional sales contract, the payments due under

a true lease with an option to purchase are considered to be rent. In the case of a con-

ditional sale the payments usually are described in the contract as "rent" or

"liquidated damages" upon forfeiture. Hence, the question always is not whether the

payments are rent, but whether they are reasonable as liquidated damages. The court

in Reynolds seems to have found that the unpaid payments along with the forfeited

amount were unreasonable as liquidated damages.
53374 N.E.2d 67 (Ind. Ct. App. 1978).
54The purchaser under the conditional sales contract had promised to pay the bills

of the corporation which included two liquor bills, a sewage bill, and a sales tax which

were overdue and unpaid obligations at the time of forfeiture. As a type of third-party

beneficiary contract, these obligations were secured by the conditional sales contract.

The court held that the vendor was entitled to damages measured by these unpaid

bills. Apparently, no claim was made for overdue and unpaid installments on the pur-
chase price of the stock or on a mortgage assumed by the conditional buyer.

55
Id. at 79.



1979] SURVEY-SECURED TRANSACTIONS 297

on the unarticulated basis that the evidence did not show that the
conditional buyer made a practice of making these repairs but did
repair the leaky faucets.56 It was made clear, however, that, to be ac-
tionable, waste by a mortgagor or vendee must render the debt un-
safe. In holding the conditional buyer liable for damages due to
waste, the court indicated that it was adopting the same rule ap-
plicable to a mortgagor on the theory that the conditional sale was,

in effect, a mortgage. This is a correct but surprising result con-

sidering that forfeiture had been declared and allowed.57 The difficulty
of measuring damages was resolved by limiting recovery to the
reduced value of the property, not to exceed the difference between

the unpaid obligation and the value of the land,58 A new trial was
ordered to enable the appellee-vendor to correct his deficiency in

proof on the issue of damages.

56
Id. This may be the first Indiana case to attempt to define permissive waste. It

seems that a tenant may make reasonable use of the property which is measured by
the expected use to which it will be put. He is not responsible for ordinary wear and
tear. Jennings v. Bond, 14 Ind. App. 282, 42 N.E. 957 (1895). Arguably, leaky faucets,

the deterioration of the cooler, and a broken front door could be classified as ordinary

wear and tear in the use of a tavern. See also Restatement (Second) of Property §
12.2, Comment d, Illustrations 1-3 (1977). However, the tenant is responsible for non-
ordinary wear and tear caused by his customers. Id., Comment g. While the rule of
permissive waste imposes no duty upon a tenant to repair conditions resulting from or-

dinary wear and tear or forces for which he is not responsible, he may be under a duty
to make sufficient repairs to avoid further permanent or consequential damages which
forseeably result from the condition. Id., Comment d, Illustration 5 (1977). See also
Ferguson v. Stafford, 33 Ind. 162 (1870). In Finley, if the door had been kicked in or

damaged in an abnormal way while in the conditional purchaser's possession, it seems
that the burden of going forward with evidence showing that the damage was caused
by a stranger should have been placed upon the purchaser. Cf. Bottema v. Producers

Livestock Ass'n, 369 N.E.2d 1189 (Ind. Ct. App. 1977) (rule applicable to bailment situa-

tion). But see Merritt v. Richey, 127 Ind. 400, 27 N.E. 131 (1891).
5

'

'Accord, Jowdy v. Guerin, 10 Ariz. App. 205, 457 P.2d 745 (1969) (supporting pro-

position that conditional buyers and mortgagors are liable in damages for permissive

waste; here, vacant house allowed to become "demolished").
58Accord, id. It seems that damages to a structure are estimated by the usual

rules allowing cost of repair. Ingmire v. Butts, 334 N.E.2d 701 (Ind. Ct. App. 1975). If

they are permanent, damages may be measured by the reduced value of the land.
Knisely v. Hire, 2 Ind. App. 86, 28 N.E. 195 (1891). Equity will enjoin waste by a mort-

gagor or conditional buyer only when proof is offered that the debt secured is im-

paired. In other words, the lienholder must show that the land is inadequate to satisfy

the obligation and that the mortgagor or purchaser either is insolvent or is not respon-

sible on the debt. Cf. State ex rel. McCaslin v. Evans, 44 Ind. 151 (1873) (insolvent

vendee enjoined from cutting timber); Gray v. Baldwin, 8 Blackf. 164 (Ind. 1846) (en-

joined mortgagor who was cutting timber and without other property); Gleason v.

Gleason, 43 Ind. App. 426, 87 N.E. 869 (1909) (injunction denied against life tenant com-

mitting permissive waste).



298 INDIANA LAW REVIEW [Vol. 12:289

C. Security Interests in Personal Property

1. Creation of Security Interest; Parol Evidence to Show That
Title Taken in Name of Secured Party Held as Security. —Parol
evidence is admissible to show that an outright conveyance of land
to another person from or for a debtor was intended as a
mortgage.59 Does this rule apply to personal property, and is parol
evidence prohibited by article 9 of the Uniform Commercial Code?
In Johnson v. Johnson,™ titles to a mobile home and automobile
were taken in the name of two parents who financed the transaction
for a husband and wife. It was held that, upon divorce, the court
should have disposed of the property as marital property belonging

to the husband and wife on the unarticulated assumption that parol

evidence had established their ownership rights.61 This matter is not

directly covered by article 9, but the result is in accord with the

spirit of section 1-103 of the Code which adopts supplementary rules
of equity

62 permitting parol evidence to show that an outright con-
veyance is held as security.

2. Lease of Goods (Bailment) as a Security Interest; Voidable

Title. —As a general rule, a lessor or bailor of goods is protected
from the dishonesty of his bailee who, without authority, sells to a

third party. He may recover in trover or replevin from the third
person who takes his title subject to the doctrine of caveat emptor.63

The lessor is not a secured party who must perfect by filing or by
other means as provided in article 9 of the Uniform Commercial
Code.64 The bailee usually does not hold a "voidable" title empower-
ing him to convey title to a bona fide purchaser. These principles
were recognized in McDonald's Chevrolet, Inc. v. Johnson65 where,
after misrepresenting both his name and, obviously, his intent to
return a house trailer at the expiration of a thirteen-day leasehold

term, the lessee ultimately caused the vehicle to be sold to an In-

59See also Moore v. Linville, 352 N.E.2d 846 (Ind. Ct. App. 1976), discussed in
Townsend, Secured Transactions and Creditors' Rights, 1977 Survey of Recent

Developments in Indiana Law, 11 Ind. L. Rev. 253, 258-59 (1977).
60367 N.E.2d 1147 (Ind. Ct. App. 1977).
n
I<L at 1149.

62
Prior to the Code, it was clear that title to personal property transferred to or

taken in the name of a creditor could be proved to be held as security, so that the debt-
or could regain full rights upon repaying the loan. Maple v. Seaboard Sur. Co., 117 Ind.

App. 627, 73 N.E.2d 80 (1947). A creditor without possession claiming a security in-
terest based upon an unwritten outright transfer from the debtor may have difficulty
establishing his title under article 9 which requires a writing signed by the debtor

describing the collateral and containing words of grant. White v. Household Fin. Corp.,

158 Ind. App. 394, 407-08, 302 N.E.2d 828, 836-37 (1973).
63
Schinler v. Westover, 99 Ind. 395 (1884); Ingersoll v. Emmerson, 1 Ind. 76 (1848).

64DeVita Fruit Co. v. FCA Leasing Corp., 473 F.2d 585 (6th Cir. 1973).
65376 N.E.2d 106 (Ind. Ct. App. 1978).



1979] SURVEY-SECURED TRANSACTIONS 299

diana good faith purchaser by means of several spurious certificates

of title.
66 Ordinarily, when possession of goods is obtained by the

fraud of an outright buyer, the seller has an equitable right to re-

scind.
67 The buyer, however, has a "voidable" title with a power to

transfer title to a bona fide purchaser on the ancient theory that the

equitable title of the seller may be cut off by a bona fide purchaser.68

Johnson properly stands for the proposition that it is not the pro-

curement of possession by fraud which creates the power in the

fraudulent transferee. It is the giving of possession with intent to

transfer a specific rescindable title induced by the fraud or wrongdo-

ing which places the risk of loss upon the seller when the buyer con-
veys that interest to a third party.69 Johnson, thus, reflects the rule

that a transferee obtaining a partial title by fraud obtains only a

voidable partial title. Hence, when the lessee obtained a thirteen-day
lease by fraud, he had no more than the power to convey his
thirteen-day leasehold interest to a bona fide purchaser.70

It should be pointed out that a lessee or bailee without authority

to dispose of the goods may hold a "voidable" title or a power to
convey a good title to a bona fide purchaser in circumstances which

were not present in Johnson.11 A lessee or bailee may have a
voidable title if he is a seller of goods who is allowed to remain in

66
In this case the trailer was taken by the lessee from Texas to Alabama where it

was registered. A certificate of title was obtained by the lessee in Nebraska. Finally,
after procuring an Indiana title, it was traded to an Indiana dealer. The titles were ob-

tained by theft of a serial number stolen from another motor home in Texas. The case
actually involved litigation between the Indiana dealer and his buyer who successfully
brought suit for breach of warranty of title when the vehicle was seized by the Indiana
State Police.

"E.g., Woods v. Shearer, 56 Ind. App. 650, 105 N.E. 917 (1914) (by replevin action
seller recovered property traded to buyer on fraudulent misrepresentations with

respect to stock exchanged in the transaction; seller excused from returning worthless

stock as a condition to rescission).
68
U.C.C. § 2-403(1); Stoner v. Brown, 18 Ind. 464 (1862).

69The court probably exaggerated in stating that a "bailment involves no transfer
of ownership; the bailee acquires only a possessory interest." For many purposes he
acquires ownership rights. E.g., The Winkfield, [Eng.] [1904] P. 410. A lessee having
exclusive use of a motor vehicle for more than 30 days is an "owner." Ind. Code

§ 9-l-l-2(o) (1976).
70Arguably, since a sub-bailment ordinarily is impermissible, the bailee ac-

quired no transferable, voidable interest. Compare Aetna Cas. & Sur. Co. v. Higbee, 80
Ohio App. 437, 76 N.E.2d 404 (1947) (sub-bailment by fur storage company held to be a
conversion), with Restatement of Security § 23, Comment b (1941). If a seller is in-
duced to transfer a one-half interest in goods by fraud, however, it seems that the
buyer is empowered only to sell the one-half interest to a bona fide purchaser. His
power is limited to the interest transferred. See U.C.C. § 2-403(1) (purchaser of limited
interest acquires only the limited interest).

71376 N.E.2d 106 (Ind. Ct. App. 1978).



300 INDIANA LAW REVIEW [Vol. 12:289

possession.
72

If the lessor entrusts the bailee of a motor vehicle with
a properly indorsed certificate of title (which was not the case in
Johnson), a bona fide purchaser taking a clear title should be pro-
tected.

73 A lessor entrusting possession to a bailee merchant who
deals in goods of that kind may be estopped from claiming his title
against a buyer in the ordinary course of business.74 In addition, a
lease may become, in effect, a security transaction if the lease calls
for payments which allow the lessee to become the owner upon com-
pletion of the payments or for an additional nominal consideration.
The lessor must perfect under article 9 if he is to be protected
against later secured parties, purchasers, and creditors.75

3. Discharge and Release of Secured Claim; Parol Evidence to
Prove that Collateral Accepted in Discharge of Debt and to Prove
Subordination.—Lamb v. Thieme™ held that a debtor may prove a
parol agreement with the secured party in which the latter accepted
part of the collateral in full satisfaction of the debt. A debtor,
however, may object to oral proof of an alleged agreement in which
he surrendered his right of redemption after default when the
evidence is offered by a creditor with a security interest in the col-

lateral.
77

A-W-D, Inc. v. Salkeld18 recognized that a prior secured party
may orally subordinate his security agreement to a second

72
Ind. Code § 32-2-1-7 (1976) (seller's possession presumed fraudulent against

seller's creditors and purchasers in good faith), as modified by U.C.C. § 2-402(2). This,

in effect, is a codification of the rule in Twyne's Case, 3 Co. Rep. 806, 76 Eng. Rep. 809

(1601). See also Seavey v. Walker, 108 Ind. 78, 9 N.E. 347 (1886).
73See also Fryer v. Downard, 134 Ind. App. 226, 187 N.E.2d 105 (1963); Dresher v.

Roy Wilmeth Co., 118 Ind. App. 542, 82 N.E.2d 260 (1948). A bona fide purchaser is not
protected by reliance upon a forged certificate of title or a spurious title obtained by

forgery. Central Fin. Co. v. Garber, 121 Ind. App. 27, 97 N.E.2d 503 (1951); Buckeye

Union Cas. Co. v. Nichols, 4 Ohio Misc. 131, 212 N.E.2d 685 (1965) (no title passed

through certificate of title procured by use of stolen serial number). Hence, the court

in Johnson, see note 61 supra, properly did not regard as significant the alleged bona

fide purchaser's acquisition of a certificate of title based upon a forgery and a spurious

serial number.
74
U.C.C. § 2-403(2).

''Compare U.C.C. § 1-201(37) with Nickell v. Lambrecht, 29 Mich. App. 191, 185

N.W.2d 155 (1970) and James Talcott, Inc. v. Franklin Nat'l Bank, 292 Minn. 277, 194

N.W.2d 775 (1972).
76367 N.E.2d 602 (Ind. Ct. App. 1977) (agreement established by admission of the

secured party to whom stock was transferred by the debtor).
"U.C.C. § 9-506. It has been held, however, that the debtor's surety may orally

consent to a release of collateral. Indianapolis Morris Plan Corp. v. Karlen, 28 N.Y.2d

30, 268 N.E.2d 632, 319 N.Y.S.2d 831 (1971). The Code permits the secured party to

keep collateral in satisfaction of the obligation upon written notice to the debtor who
does not' object in writing. U.C.C. § 9-505(2).

78372 N.E.2d 486 (Ind. Ct. App. 1978).



1979] SURVEY-SECURED TRANSACTIONS 301

lienholder who changes position in reliance thereon. Subordination,
however, was denied in an interesting situation in which the debtor

had given an unperfected security interest in inventory to SP1.

When seeking credit from SP2 who sought security in the same col-
lateral, the debtor informed SP2 of SPTs security interest and that
his "first obligation" was to SP1. The debtor then executed a security
agreement with SP2 which covered the collateral after advising SP2
that he would be put in "second place." However, SP2 first
perfected his security interest and claimed priority over SP1 under
the Code rule giving priority to the secured party who first
perfects.

79 A lower court finding of subordination was reversed upon
the ground that there was no subordination agreement as a matter
of law, but simply that there was a mistake of law as to priorities.80

A dissenting judge ingeniously found a subordination agreement in
what was determined to be a third-party beneficiary contract be-
tween the debtor and SP2 for the benefit of SP1.S1 The case is a
good candidate for transfer.

-4. Remedies of Secured Party; Right to Deficiency upon Im-
proper Sale. — Subject to a few specified exceptions, a secured party
may recover a deficiency upon disposition of collateral when the
debtor is sent reasonable notification of the time and place for the

sale, and the sale is conducted in a commercially reasonable

manner.82 Hall v. Owen County State Bank83 dealt with the re-
quirements for reasonable notification and for a commercially

reasonable sale, as well as with the secured creditor's rights to a

deficiency, when these standards have not been met. With respect
to notification of the time and place for the sale, the court held that

the debtor's right to notice cannot be waived by him before or after

default;
84
that in the case of joint debtors, notice to one will not bind

the other;85 and that an unwritten notice of an offer to buy the col-

79
tf.C.C. § 9-312(5).

80
372 N.E.2d at 488.

S1
ld. at 486, 489 (Garrard, J., dissenting).

82
U.C.C. § 9-504(1). Notification to the debtor is not required when the collateral

is perishable, threatens to decline speedily in value, or is of a type customarily sold on

a recognized market. Notice is not required to be given to junior secured parties in the

case of consumer goods. Id.
83370 N.E.2d 918 (Ind. Ct. App. 1977).
8i
Id. at 924. The Code expressly provides that the rights of the debtor and the

duties of the secured party with respect to sale or disposition cannot be waived or

varied. U.C.C. § 9-501(3). Contra, Holmes v. Rushville Prod. Credit Ass'n, 353 N.E.2d

509, remanded on rehearing, 355 N.E.2d 417 (Ind. Ct. App. 1976) (surety waived

defense where secured party consented to disposal of collateral without notice).
85370 N.E.2d at 925-26. The case, in effect, held that a partner (although the part-

nership was not clearly established) was not bound individually upon a note secured by
partnership property and was entitled to notification. Accord, Atlas Thrift Co. v.



302 INDIANA LA W REVIEW [Vol. 12:289

lateral a few hours before the sale followed by the debtor's assent is

insufficient.
86 The court held that a casual sale to an inquiring buyer

after repossession was reasonable and embarked upon an in-depth
lecture as to what constituted a commercially reasonable sale.87

Price was fixed as the most important item for determining commer-
cial reasonableness, although it was held to be no basis, standing
alone, for challenging a sale which otherwise is proper.88 Other fac-

tors, listed as important by the court, include the price received for

the goods when resold by the buyer; whether the collateral is sold in
a retail or wholesale market; the number of bids solicited or received;
and the whole range of circumstances accompanying a sale.89 In

this case, independent evidence90 showing that the value of the col-

lateral was equal to the sale price justified a finding that the private
sale was commercially reasonable despite the failure of the secured
party to have an appraisal, the unfamiliarity of the persons conduc-

ting the sale with the subject of the sale, and the sale to the first

bidder without solicitations or notice to other possible buyers. While

the case furnishes few concrete rules defining when a sale is com-
mercially reasonable or unreasonable, the decision makes clear to all
repossessing creditors that a sale, well-advertised in advance, which

draws the attention of a broad audience, which brings a good price,

and which is conducted by a knowledgeable person, aided by a

careful appraisal of the collateral, stands a good chance of meeting

Code requirements. Something less may suffice, but the price received
then becomes a key factor.

Most importantly, Hall determined that a sale without
reasonable notice to a debtor, which is probably commercially

unreasonable as well, will not bar a creditor from recovering a defi-

ciency,
91

subject to one qualification. The secured party may recover

Horan, 27 Cal. App. 3d 999, 104 Cal. Rptr. 315 (1972). See also Clayton v. Fletcher Sav.

& Trust Co., 89 Ind. App. 451, 155 N.E. 539 (1927) (notice of rescission must be given
to all joint partners). A corporate officer individually bound as debtor upon a corporate
obligation secured by corporate property is entitled to notification. Hepworth v. Orlan-

do Bank & Trust Co., 323 So. 2d 41 (Fla. Dist. Ct. App. 1975); Third Nat'l Bank & Trust
Co. v. Stagnaro, 25 Mass. App. Dec. 58 (1962); DeLay First Nat'l Bank & Trust Co. v.
Jacobson Appliance Co., 196 Neb. 398, 243 N.W.2d 745 (1976); T & W Ice Cream, Inc.
v. Carriage Barn, Inc., 107 N.J. Super. 328, 258 A.2d 162 (1969).

86370 N.E.2d at 926.
81
Id. at 928-30.

88"The fact that a better price could have been obtained by a sale at a different

time or in a different method ... is not of itself sufficient to establish that the sale

was not made in a commercially reasonable manner." U.C.C. § 9-507(2).
89370 N.E.2d at 929-30.
90Testimony of the buyer at the sale was held sufficient to establish the

collateral's value at the time of sale as being equal to the price he paid for it. Id. at

931.
91 The court adopted what appears to be the majority rule on this point. A minority

of decisions construing the Uniform Commercial Code (which does not expressly deal



1979] SURVEY-SECURED TRANSACTIONS 303

only the difference between the reasonable market value of the col-

lateral at the time of the sale and the amount of the obligation. It is
presumed that the market value of the collateral equals the in-
debtedness, and the burden of proof is upon the secured party to

show that the indebtedness was higher than the market value of the
collateral. He cannot prove value by the price realized at the sale,
by his own testimony, or by the testimony of his agents alone.92 In
the case of an improper sale, the debtor may enjoin the sale, and
recover damages if he can show that the value of the collateral im-
properly sold exceeded the obligation.93 Several important questions

flow from this new rule. In determining the value of collateral im-
properly sold, will the court consider retail value or wholesale value

in fixing the market value of the goods? In the case of motor

vehicles, a difference in these market values is generally recognized.

It seems that the court here should bind the secured party to the

retail market value of the goods when the sale is determined to be
improper, at least in the case of non-inventory items. This is the

rule generally followed in computing damages for injuries to goods
held by an owner who is not a retailer, wholesaler, or manufacturer.94

Athough the court approved private sales which are otherwise prop-
erly conducted by a secured party in a wholesale market,95 a valua-

tion of non-inventory collateral fixed in that market should follow

only from a sale which is preceded by proper notification and con-

ducted in a commercially reasonable manner. The court in Hall
denied punitive damages because the sale was determined to have

with the problem) denies a deficiency to a secured party who fails to give reasonable
notification of the sale or who sells in a manner which is not commercially reasonable.
In support of the minority position, the court cited decisions from six states. Other re-

cent decisions indicate that the minority view is virulent. E.g., Nixdorf Computer, Inc.

v. Jet Forwarding, Inc., 579 F.2d 1175 (9th Cir. 1978); Herman Ford-Mercury, Inc. v.
Betts, 251 N.W.2d 492 (Iowa 1977); Jackson State Bank v. Beck, 577 P.2d 168 (Wyo.

1978).
92A similar presumption may arise when a surety is released to the extent of the

value of collateral held by the principal. Cf. Mutual Benefit Life Ins. Co. v. Lindley, 97

Ind. App. 575, 187 N.E. 680 (1933) (court presumed value of collateral to be equal to the

amount of indebtedness when extension released surety who was secondarily liable
thereon only to the extent of the collateral).

93U.C.C. § 9-507(1). In the case of consumer goods, the debtor is entitled to a

penalty measured by the finance charge plus 10% of the loan or the cash price of the
goods. E.g., Western Nat'l Bank v. Harrison, 577 P.2d 635 (Wyo. 1978).

94Cassel v. Newark Ins. Co., 274 Wis. 25, 79 N.W.2d 101 (1956); Restatement of
Torts § 911, Comment d (1939). When inventory is damaged or lost, the measure of
damages is based on the wholesale price. Chicago Title & Trust Co. v. W.T. Grant Co.,
2 111. App. 3d 483, 275 N.E.2d 670 (1971).

^Accord, Mount Vernon Dodge, Inc. v. Seattle-First Nat'l Bank, 18 Wash. App.

569, 570 P.2d 702 (1977) (emphasizing that bank was not licensed to sell motor vehicles

as retail dealer under licensing statute).



304 INDIANA LAW REVIEW [Vol. 12:289

been conducted by the banker-secured party in good faith and after

approval by the debtor, and dismissed the claim of the debtor for at-

torney's fees.
96 This is a correct result since the bank did not charge

the debtor for its expenses in the sale or for attorney's fees and

claimed no more than the deficiency it was awarded. However, Hall
seems to recognize that punitive damages will be allowed when an
improper sale is accompanied by bad faith or followed by an ex-

cessive demand for a deficiency.97 Conceivably, since good faith is a
standard governing all provisions of the Code,98 the possibility re-

mains that no deficiency will be allowed when the errant secured
party is guilty of bad faith.99 In no event should he be allowed at-

torney's fees or expenses of a bad sale, a point apparently recognized

by the secured party who made no such claim in Hall. In fact, no
decisions were found where these charges were added to a deficiency
claim after a non-complying sale. 100

5. Remedies of Secured Party; Right of Transferee to Collect
Chattel Paper. — A transferee of chattel paper may collect from the
account debtor when the assignor (debtor of the transferee) is in
default or when it is otherwise agreed. 101 First National Bank v.

""Attorney's fees were claimed under the UCCC which was held to be inap-
plicable. See note 23 supra. Accord, Liberty Nat'l Bank & Trust Co. v. Acme Tool
Div., Rucker Co., 540 F.2d 1375 (10th Cir. 1976). Usually, attorney's fees are denied in

the absence of a contract or other equitable grounds. City of Indianapolis v. Central

R.R., 369 N.E.2d 1109 (Ind. Ct. App. 1977). Whoever heard of a security agreement giv-
ing a debtor the right to attorney's fees from a secured party when the latter violates
his duties towards the former? Attorney's fees should be considered as an element of

punitive damages. See Indianapolis Journal Newspaper Co. v. Pugh, 6 Ind. App. 510,
528, 33 N.E. 991, 996 (1892) (attorney's fees allowed as an element of punitive

damages).
97370 N.E.2d at 927 n.10. Accord, Davidson v. First Bank & Trust Co., 559 P.2d

1228, 1232-33 (Okla. 1976); cf. Nicholson's Mobile Home Sales, Inc. v. Schramm, 330
N.E.2d 785, 790-91 (Ind. Ct. App. 1975) (secured party wrongfully repossessing mobile

home).
98
U.C.C. § 1-203.

"Because the error committed by the secured party in Hall was determined to

have been made in good faith, the question remains whether a secured party flagrantly
violating Code resale provisions should be allowed a deficiency. If good faith is a factor

here, and possibly it should be, the conflicting authority in the various states may
possibly be reconciled upon this basis. Cf. Associates Financial Servs. Co. v. DiMarco,

383 A.2d 296 (Del. Super. 1978) (deficiency given to secured party who "errs in good
faith").

100
In Cornett v. White Motor Corp., 190 Neb. 496, 209 N.W.2d 341 (1973), the court

awarded the secured party the expenses of preparing the collateral for resale, but in

that case the expenses were incurred after an improper sale to the secured party who
resold the goods at a much higher price which the court determined to be the proper
value in allowing a deficiency.

101The secured party (assignee) is authorized to collect from the account debtor or

obligor on an instrument "[w]hen so agreed and in any event on default." U.C.C. §

9-502(1). This probably means the default of the assignor-debtor.



1979] SURVEY-SECURED TRANSACTIONS 305

Schrader102 held, in effect, that an outright purchaser of chattel

paper is authorized, by implied agreement, to collect from the ac-

count debtor and to bring suit as the real party in interest. 103

Although not decided by the court, such a transferee in possession

of chattel paper seems not only to be able to collect from and to sue

an account debtor in default, but also, in some circumstances, to be
under a duty to do so when the assignor is secondarily liable. 104

D. Creditors
9

Rights

1. Mechanic's Liens. — A person furnishing work, labor, or
materials to a construction project may claim a lien upon the property
under the Indiana mechanic's lien statute, 105 subject to rules which

have been carefully worked out by decisions and frequent amend-
ments. In 1977 the period of time in which a subcontractor must
give advance notice to the owner of residential property that he in-
tends to assert a lien was extended from fourteen to sixty days
after commencement of the work in the case of new construction,
and from five to thirty days after commencement of the work when
alteration or repair is involved.106 Both the old and amended ver-
sions of this law make notice to the residential owner a condition
precedent to the acquisition of a lien. 107 Mid America Homes v.
Horn108 held that timely notice by a materialman to the record

102375 N.E.2d 1124 (Ind. Ct. App. 1978).
103The court mistakenly determined that an outright assignment of chattel paper

was controlled by article 2 of the Code or by common law principles. In fact, however,
article 9 governs most of the rights of the parties when chattel paper is taken either
as security or by outright transfer. See, e.g., U.C.C. § 9102(b). The right of the

assignee (secured party by definition) to collect from the account debtor (original

obligor) is governed by § 9-502 of the Uniform Commercial Code. See note 93, supra.

The case correctly held that an outright transferee of chattel paper by agreement is
authorized to collect and is the real party in interest regarding suit against the ac-

count debtor. Compare the last sentence of § 9-502(2).
104

C/. U.C.C. § 9-207(1) (secured party in possession under a duty to take necessary

steps to preserve rights against prior parties). Whether an assignee in possession of

chattel paper or a secured party in possession of an instrument is under a duty

towards his debtor-surety to bring an action against the account debtor or obligor is

not clearly settled. Compare In re Johnson, 552 F.2d 1072 (4th Cir. 1977) (bank in

possession of notes required to file claim against account debtor's estate in bankruptcy),

with In re United East Coast Corp., 6 UCC Serv. 449 (E.D.N.Y. 1969) (pledgee of note
under duty only to give pledgor opportunity to bring suit upon notes in default). For

the Indiana pre-Code law, see H. Pratter & R. Townsend, Indiana Uniform Commer-
cial Code with Comments §§ 9-207(1), 9-502 (1963).

105
Ind. Code § 32-8-3-1(1) (Supp. 1978).

106Act of Apr. 12, 1977, Pub. L. No. 310, § 1, 1977 Ind. Acts 1424 (codified at Ind.

Code § 32-8-3-1 (Supp. 1978)).
107
Ind. Code § 32-8-3-1 (1976 & Supp. 1978).

108377 N.E.2d 657 (Ind. Ct. App. 1978).



306 INDIANA LAW REVIEW [Vol. 12:289

owner of the land was sufficient, although the prime contract was
made by a purchaser who had contracted to purchase the land from
the record owner and who apparently had taken possession of the
land.

109
In any event, the materials were invoiced to the purchaser,

and the materialman was informed of the deed to the purchaser one
day before the time for giving notice had expired.110 Without impos-

ing an obligation of good faith or a duty to inquire as to the

possessory status of the property, the court held that the notice re-

quirement in the case of residential property was satisfied when the
record owner received notice. The decision is a bad one and leaves
the residential ''owner" who leases or who holds less than a record
title at the mercy of careless or unscrupulous subcontractors who ig-
nore the contract between the prime contractor and the person with

whom the prime contractor is dealing.111 The owner's ignorance of
this technical law will cause him great dismay when he discovers
that a subcontractor holds a lien even though the owner has paid
the prime contractor.

As a general rule, while an owner's interest in land may be sub-
jected to a mechanic's lien for work performed in privity with a
prime contractor, the owner is not liable on the contract to the sub-
contractor.

112 Privity between the subcontractor and the owner is

m
Id. at 660. The case did not clarify whether the purchaser had taken possession,

but he certainly had done so through the contractor who had caused delivery to be
made to the premises. For discussion concerning the proposition that possession is suf-
ficient to put third parties on notice, see, Townsend, Secured Transactions and
Creditors' Rights, 1974 Survey of Recent Developments in Indiana Law, 8 Ind. L. Rev.
234, 235 & n.7 (1974); Townsend, Secured Transactions and Creditors' Rights, 1975
Survey of Recent Developments in Indiana Law, 9 Ind. L. Rev. 305, 306 & n.6 (1975);
Townsend, Secured Transactions and Creditors' Rights, 1977 Survey of Recent
Developments in Indiana Law, 11 Ind. L. Rev. 252, 254-55, 255 n.15 (1977).

no
In William F. Steck Co. v. Springfield, 151 Ind. App. 671, 281 N.E.2d 530 (1972),

failure to give notice to an equitable mortgagee who was the record owner was fatal to
the lien. The case did not decide that notice to a record owner was adequate, nor did it
hold that the subcontractor could ignore the party whose contract with the prime con-
tractor served as the basis for the subcontractor's lien. If the contract with the prime
contractor had been made by the record owner in Horn, notification by the subcontrac-
tor to the record owner should have been sufficient to bind the purchaser as long as
the subcontractor complied with the requirements of good faith and his duty to deter-
mine the possessory status of the property. See Townsend, Secured Transactions and
Creditors' Rights, 1973 Survey of Recent Developments in Indiana Law, 7 Ind. L. Rev.
226, 240, n.79 (1973).

m
It is settled that the term "owner" as used by the mechanic's lien law is not

limited to record owners. Potter v. Cline, 161 Ind. App. 349, 316 N.E.2d 422 (1974),
discussed in Townsend, Secured Transactions and Creditors' Rights, 1975 Survey of
Recent Developments in Indiana Law 9 Ind. L. Rev. 305, 330 (1975).

112
Glick v. Seufert Constr. & Supply Co., 342 N.E.2d 874 (Ind. Ct. App. 1976) (prom-

ise not inferred when owned said he would "try to help sub get his money"). Where
the prime contractor is the agent of the owner, a subcontractor dealing with the



1979] SURVEY-SECURED TRANSACTIONS 307

lacking. Lawshe v. Glen Park Lumber Co. 113 held, however, that an
owner promising to pay a subcontractor, who had performed but had
not been paid by the prime contractor, was liable upon his promise
when the subcontractor refrained from recording notice of his lien in
reliance upon the promise. The court was not required to consider
the possible defense that the owner's promise to answer for the

debt of another was within the Statute of Frauds114 since it was
neither pleaded nor litigated. The court indicated, however, that
under principles of constructive fraud or estoppel, the owner would
be barred from interposing the statute as a defense where the
evidence clearly established that the subcontractor had refrained

from filing notice of his lien due to the owner's assurances.115

When a contractor fails to complete his promised performance,
he may be denied enforcement of his express contract with the
owner, but Indiana law allows him recovery in general assumpsit or

on the basis of unjust enrichment.116 In enforcing his right on the im-

plied contract, Johnson v. Taylor Building Corp. 111 granted the con-

tractor a mechanic's lien on the property less a deduction for

damages resulting from the breach. 118 A contractor supplying
materials and labor for an eighty unit housing project was allowed
to claim a lien upon an unimproved lot in the project, in Inter-City
Contractors v. Consumer Building Industries. 119 In another case, the
lien covered both attorney's fees and prejudgment interest from the
time of an account stated.120

former may recover from the owner-principal. Urbanational Developers, Inc. v.
Shamrock Eng'r, Inc., 372 N.E.2d 742 (Ind. Ct. App. 1978). See text accompanying note

122 infra.
113375 N.E.2d 275 (Ind. Ct. App. 1978).
u4
Ind. Code § 32-2-1-1 (1976).

115This result is consistent with prior case law which indicates that a promise to

pay a third person's obligation upon which the promisee holds a lien on the promisor's

land constitutes a promise to pay the promisor's own debt. Cf. Parker v. Dillingham,
129 Ind. 542, 29 N.E. 23 (1891) (promise made to sub who had no lien on property). An
owner promising to pay a subcontractor for previous and future work has been denied
the benefit of the Statute of Frauds on the basis that the main purpose of the promise

is to benefit the owner. Board of Comm'rs v. Cincinnati Steam Heating Co., 128 Ind.
240, 27 N.E. 612 (1891); Davis Constr. Co. v. Petty, 91 Ind. App. 147, 168 N.E. 769

(1929).

u6Western Wheeled Scraper Co. v. Scott Constr. Co., 217 Ind. 408, 27 N.E.2d 879

(1940); Cato Enterprises, Inc. v. Fine, 149 Ind. App. 163, 271 N.E.2d 146 (1971).
m
371 N.E.2d 404 (Ind. Ct. App. 1978). In this case the contractor had completed

construction without installing a septic system because a required permit could not be

obtained.
n8

Id. at 407. An owner may claim the right to a no-lien contract even though he
later breaches the contract. Hammond Hotel & Improvement Co. v. Williams, 95 Ind.
App. 506, 176 N.E. 154 (1931).

119373 N.E.2d 903 (Ind. Ct. App. 1978).
120The right of a mechanic to recover interest and attorney's fees was recognized

in Drost v. Professional Bldg. Serv. Corp., 375 N.E.2d 241 (Ind. Ct. App. 1978) (award



308 INDIANA LAW REVIEW [Vol. 12:289

Indiana law permits the prime contractor and the owner to
enter into a no-lien contract if it is written, acknowledged, describes

the property, and is recorded within five days after execution.121 Ur-

banational Developers, Inc. v. Shamrock Engineering, Inc. 122 held
that a no-lien contract in a separate writing may be ineffective
against subcontractors if parol evidence establishes that the writing

was executed after the original contract and was not supported by
new consideration. 123 In addition, the decision indicates that a no-lien
contract between an owner and a prime contractor will not bar later
liens claimed by subcontractors when proof establishes that the
prime is a wholly-owned subsidiary and, thus, the owner's agent or

alter-ego.
124 Thus, it seems that a no-lien contract will bar subs only

when it is made with an independent prime contractor — not with
one who is a mere agent of the owner. Hence, a no-lien contract with
a construction manager would be ineffective.125 In Imperial House of
Indiana, Inc. v. Eagle Savings Association, 126 the original contract

between the owner and the prime contractor was amended by a no-
lien provision drafted approximately one year later and duly recorded

within five days after execution of the amendment. Several subcon-
tractors, who had commenced work long before the new no-lien pro-

of interest and attorney's fees upheld despite an effort to avoid judgment under Trial

Rule 60).
121
Ind. Code § 32-8-3-1 (Supp. 1978).

122372 N.E.2d 742 (Ind. Ct. App. 1978).
123The original contract between the prime contractor and the owner contained a

no-lien provision which was construed under the federal housing law as binding only

the prime contractor and not subcontractors. VNB Mortgage Corp. v. Lone Star
Indus., Inc., 215 Va. 366, 209 S.E.2d 909 (1974). The separate no-lien agreement be-

tween the prime contractor and the owner was recorded and met the statutory re-

quirements. In holding that there was no presumption of consideration for the no-lien

agreement, the court of appeals overlooked Indiana Trial Rule 9.1(C) which makes lack

of consideration an affirmative defense.
124372 N.E.2d at 752. The complex facts showed that the owner was a partnership,

and the sole general partner thereof was the president of the prime contractor and its

parent corporation. The prime contractor was a paper corporation which was a sub-
sidiary of its parent corporation, both having the same officers. The partnership agree-

ment provided that the prime contractor or its parent corporation would be its agent

and all contracts by the agent would bind the partnership. The court held that the case

was a proper one for piercing the corporate veil, and that a subcontractor who was not
paid could hold all the parties on its contract made only with the prime. Id. The court
remanded the case for retrial of the issue of the validity of the no-lien contract since

the trial court had not heard the relevant evidence. The court did not openly decide

that a no-lien contract between an owner and its prime contractor who, in fact, is the

owner's agent will be unenforceable against subcontractors. It should have done so.
125For a current decision dealing with the status of the contract manager, see

University Casework Sys., Inc. v. Bahre, 362 N.E.2d 155 (Ind. Ct. App. 1977) (general

contractor had standing to seek arbitration with a sub).
126376 N.E.2d 537 (Ind. Ct. App. 1978).



1979] SURVEY-SECURED TRANSACTIONS 309

vision and its recordation, continued to perform. Ultimately, they

were not paid and they filed proper notice of mechanic's liens. Suc-

cessors of the owner challenged the liens on the ground that the
work for which the lien was claimed had been performed after the
no-lien contract had been recorded. The court ruled that subcontrac-
tors, who commence performance under a contract without a no-lien
provision being recorded within five days after its initial execution,

are not charged with a subsequently recorded no-lien amendment to
the original contract until they have actual knowledge of it. 127 In

other words, subcontractors are not required to search the record

each day before work or materials are furnished to determine
whether or not a no-lien contract has been recorded. I hope the deci-

sion means that no subcontractor will be bound by a no-lien contract
or subsequent no-lien amendment unless there is recordation within
five days after the original contract is executed or unless the sub-

contractor receives actual knowledge of the no-lien provision before

he supplies the work and materials for which his lien is claimed.
This interpretation will enable the subcontractor to rely upon the

original contract and lack of recordation within the five-day period

following its execution, thus limiting his need to search the records

for a later no-lien provision which should bind him only after he

receives actual notice. 128

2. Artisan and Possessory Liens. — The Uniform Commercial
Code provision granting a lien to warehousemen and allowing
foreclosure by them under power of sale 129 was held by the United
States Supreme Court to be immune from challenge in a civil rights
action brought in federal court upon the obfuscatory ground that no

"state action" was involved. 130 The Court apparently did not decide
whether the statute was otherwise constitutional. Three justices

™Id. at 542.
128Suppose that the owner and prime contractor sign a no-lien contract, and it is

not recorded until sixty days after execution. By the same token, suppose that the
owner and the prime contractor sign a no-lien amendatory provision sixty days after

execution of the original contract, and it is recorded within five days. In either case,

suppose further that a subcontractor commences work more than five days after the
original contract, either before or after recordation of the no-lien contract or provision.

Should the subcontractor be protected? Ind. Code § 32-8-3-1 (Supp. 1978) provides that
a no-lien provision or stipulation "in the contract" is effective against subcontractors

performing prior to the time of recordation. It is suggested that the term "in the con-

tract" refers to the original contract. As a result, unless the no-lien provision in the
contract or one amending it is filed within five days of the original contract, the
notoriety of the contract in the contracting community and the lack of recordation
within five days is enough to protect all subcontractors as long as they do not have ac-
tual notice of the no-lien terms.

129
U.C.C. § 7-210.

130Flagg Bros., Inc. v. Brooks, 98 S. Ct. 1729 (1978).



310 INDIANA LAW REVIEW [Vol. 12:289

found that "state action" was present and that the statute in ques-
tion, which delegated to a warehouseman state power to determine
title in the form of a self-help remedy, constituted a denial of due
process.

131

3. Federal Liens; Priority over Inchoate Liens. — The doctrine
that the King can rape his subjects at will has lost some of its literal
effect, but it continues to shame the law in many areas. For exam-
ple, if E obtains a lien first in time, a later property interest or lien
claimed by the federal government will take priority if the prior lien
is "inchoate." This is true even though E's lien might prevail over

subsequent similar claims recognized under state law.132 Priority is

determined by federal law which has nurtured the doctrine in order

to satisfy its fiscal appetite. Two recent federal decisions from In-
diana have applied this rule to mechanic's lienholders involved in a

construction project insured by the Department of Housing and Ur-
ban Development.133 In each instance, the liens arose and were

perfected under state law and, thus, would take priority under state

law over the mortgagee from whom the federal government ac-
quired title. 134 Since the liens were determined to be inchoate, ap-
parently because no judgment had established the amount of the
lien, however, they were deferred to the mortgage insured by, and
subsequently assigned to, the government.135 Another decision in-

volving a tax lien failed to consider whether or not a prior,

revocable assignment of future wages was so inchoate that an ensu-
ing tax lien would take priority.136 The assignment of wages, which
were collected by the assignee through an escrow arrangement after
the tax lien attached, was given priority. The time at which a lien
becomes choate is uncertain, but is said to occur when the iien-

131
Id. at 1745 (Stevens, White, Marshall, JJ., dissenting).

1320n this point, the Indiana Court of Appeals has boldly overruled the United

States Supreme Court in holding that a judgment lien is choate. Muniz v. United

States, 129 Ind. App. 433, 155 N.E.2d 140 (1958) (overruling Thelusson v. Smith, 15

U.S. (2 Wheat.) 396 (1817)).
133Willow Creek Lumber Co. v. Porter County Plumbing & Heating, Inc., 572 F.2d

588 (7th Cir. 1978) (applying the weight of precedent, but recognizing the rule that

state law is "not without some merit"); McCollough Constr. Co. v. Agricultural Prods.

Corp., 437 F. Supp. 404 (N.D. Ind. 1977) (recognizing that the rule "may at times be in-

equitable and disruptive of the local commercial scheme"; the court followed what it

determined to be the weight of federal decisions).
134Under Indiana law, the mechanic's lien would take priority or at least rank in

equal priority with a later construction mortgage. McLaughlin Mill Supply Co. v. Laun-

dry Serv. Inc., 95 Ind. App. 693, 184 N.E. 429 (1933); Ind. Code § 32-8-3-2 (1976).
135572 F.2d at 590-91; 437 F. Supp. at 407.
136Wagner v. United States, 573 F.2d 447 (7th Cir. 1978). The 1966 Tax Lien Act

eliminated many problems of choateness and, in particular, deferred tax claims and

liens to mechanic's liens. 26 U.S.C. § 6323(a) (1976).



1979] SURVEY-SECURED TRANSACTIONS 311

holder, the property, and the amount of the lien are established. 137

Since the rule often conflicts with state law and commercial prac-

tice, it remains an archaic reminder that the King is entitled to his

perquisites, no matter how unfair they may be.
k. Execution; Proceedings Supplemental — The problem of com-

pulsory process as a means for reaching a debtor's assets through
execution and proceedings supplemental was tangentially touched
upon by three cases heard by the United States Supreme Court.
One permitted a search by firefighters without a warrant. 138 Another
permitted the use of a search warrant in order to obtain evidence.139

A third required a search warrant based upon something less than
probable cause in order to investigate possible violations of the Oc-

cupational Safety and Health Act.140 All, by analogy, infer that a

sheriff armed with an ordinary writ of execution cannot break doors
in his search for assets or evidence of property subject to creditor

process, but he may do so when he is armed with a court order
issued upon evidence of probable cause. 141 Something less than such
an order may justify an unauthorized search of a debtor's premises
as indicated in the first and third cases, which afford little aid in

marking the parameters of this unusual power.

Protective Insurance Co. v. Steuber142 recognized the purpose of

Trial Rule 69(E), expediting proceedings supplemental, and permit-

ted an appeal by a garnishee from a proceedings supplemental order

without the need for filing a motion to correct errors.143

5. Enforcement of Equitable Decrees. — A spouse who fails to
abide by a decree awarding a property settlement in the form of a
lump sum or in a specified amount payable in installments cannot be
held in contempt.144 This rule, which was recognized by the Indiana
Supreme Court in order to avoid imprisonment for a debt, was

137Thus, the lien obtained by an attaching creditor is inchoate. United States v.

Security Trust & Sav. Bank, 340 U.S. 47 (1950). A lien which is unperfected as against
purchasers and lien creditors probably is inchoate. E.g., Sams v. Redevelopment Auth.,
436 Pa. 524, 528, 261 A.2d 566, 570 (1970).

138Michigan v. Tyler, 98 S. Ct. 1942 (1978).
139Zurcher v. Stanford Daily, 98 S. Ct. 1970 (1978) (search of a newspaper office).
140Marshall v. Barlow's, Inc., 98 S. Ct. 1816 (1978).
141A search is forbidden without a warrant. See G.M. Leasing Corp. v. United

States, 429 U.S. 338 (1977), discussed in Townsend, Secured Transactions and
Creditors' Rights, 1977 Survey of Recent Developments in Indiana Law, 11 Ind. L.
Rev. 252, 277 (1977). A search warrant issued upon false testimony or evidence does
not justify a search thereunder. See Franks v. Delaware, 98 S. Ct. 2674 (1978).

142370 N.E.2d 406 (Ind. Ct. App. 1977). A judgment in a proceedings supplemental
against a garnishee insurer was reversed when an appeal in the principal action
established that a default was improperly entered without notice.

143M at 411-12.
144
State ex rel Shaunki v. Endsley, 362 N.E.2d 153 (Ind. 1977).



312 INDIANA LAW REVIEW [Vol. 12:289

qualified by the court of appeals in Marburger v. Marburger145 which
indicated that contempt would lie against a husband who had been
ordered to pay marital creditors. 146 After the husband failed to pay
the debts for which the wife was also liable, she obtained a
discharge in bankruptcy.147 She then brought civil contempt pro-
ceedings against the errant husband, claiming as damages the fees
paid to her attorney in the bankruptcy action. After the court noted

that the husband could be held in contempt, it reasoned,
nonetheless, that the wife could not enforce the decree because she

had not proved damages.148 The wife suffered no loss because the
bankruptcy discharge had released her from the debts. The fees in-
curred in procuring the discharge were held to be improper as a
measure of damages for civil contempt, although it was conceded
that attorney's fees may be awarded to a party successfully pros-
ecuting civil contempt proceedings.149

6. Assets Subject to Creditor Process; Pensions. — A recent
decision of the Indiana Court of Appeals held that a husband's pen-

sion is not considered marital property upon divorce. 150 Without tak-

ing into account the adverse social and economic consequences of

the decision as it relates to the division of "marital property,"
151 the

case seems to presuppose, for traditional purposes of transferability

and claims of creditors, that rights to be received under a pension

plan are not a present vested property interest to be liquidated and

appraised at present value. 152 Therefore, creditors must treat the

145372 N.E.2d 1250 (Ind. Ct. App. 1978).
146The basis for this holding probably comes from a combination of precedents. In

State ex rel. Schutz v. Marion Sup. Ct., 261 Ind. 535, 307 N.E.2d 53 (1974), the dissent

had difficulty in distinguishing between decrees directing the payment in money to the

other spouse, which were not subject to contempt, and decrees directing payment to a

third party which were subject to contempt. Id. at 535, 539, 307 N.E.2d at 53, 56

(Arterburn, C.J., dissenting). Another decision held that a divorce decree directing

payment of creditors may not be enforced by creditors. Seiner v. Fromm, 145 Ind.

App. 378, 251 N.E.2d 127 (1969). In Marburger the creditors were not parties to the

proceeding.
,47The husband had previously taken bankruptcy but had not scheduled the wife.

As a result, the court held that his obligation to her was not discharged. See notes

165-67 infra and accompanying text.
148372 N.E.2d at 1253.
m

Id. See Chadwick v. Alleshouse, 250 Ind. 348, 233 N.E.2d 162 (1968) (payment

ordered to be made to attorney).
150Savage v. Savage, 374 N.E.2d 536 (Ind. Ct. App. 1978).
mBut see Bodenhorn v. Bodenhorn, 567 F.2d 629 (5th Cir. 1978) (holding that

unvested army pension was community property to be taken into account in dividing

marital estate).
152The court analogized the income from a pension with income from wages for the

purpose of excluding it from marital property and supported its opinion with Wilcox v.

Wilcox, 365 N.E.2d 792 (Ind. Ct. App. 1977) (holding that the future income of a college

professor could not be evaluated for purposes of dividing such property).



1979] SURVEY-SECURED TRANSACTIONS 313

pension as income or as earnings which may not be assigned, 153 but
which, in Indiana, may be garnished by proceedings supplemental. 154

While Indiana has no general exemption law with respect to pen-

sions or income therefrom, 155 the Federal Truth in Lending Law pro-
vides an exemption out of earnings which includes periodic pension

payments and which is either twenty-five percent of the weekly earn-

ings or the amount of weekly earnings in excess of thirty times the
minimum wage, whichever is smaller. 156 Orders for the "support of
any person" are excluded from this exemption by the federal law, 157

but the exclusion would probably not apply to a decree dividing

marital property since the Indiana law generally does not measure
property division by a duty of support. 158

7. Bulk Sales. — A return of inventory to the original seller may
be a bulk sale. 159 An analogous problem was presented, but not
recognized, in the rather vague claims which were made in Mooney-
Mueller-Ward, Inc. v. Woods.160 Here, the lessee of a drugstore
agreed to maintain the inventory and its contents. After the lessor
had repossessed the store, as well as the drugs, and the tenant had
taken bankruptcy, a creditor of the tenant, who had supplied some
of the inventory, claimed a bulk sale. The court denied relief on the
ground that the tenant was not the agent of the landlord who had
leased the store and the inventory to a second tenant in the mean-

I53Wages may not generally be assigned. Ind. Code §§ 24-4.5-2-410, 24-4.5-2-403
(1976). But see Wagner v. United States, 573 F.2d 447, 451 (7th Cir. 1978) which
overlooked the statutes cited above and applied Ind. Code § 22-2-6-2 (1976). Wagner
properly held that an assignment of wages was revocable and that future wages were

not subject to a federal tax lien.
154
Ind. Code § 31-1-44-7 (1976). See Mitchell v. Godsey, 222 Ind. 527, 53 N.E.2d 150

(1944) (lien upon income or profits not exceeding 10% allowed in proceedings sup-
plemental).

155The Indiana law exempts "wages, commissions, income, rents or profits." Ind.

Code § 24-4.5-5-105 (1976). In re Power, 115 F.2d 73 (7th Cir. 1940) held that income

from a fully paid annuity contract was not exempt under a statute then exempting

only "income or profits." Some statutes exempt particular pensions of government
employees. E.g., Ind. Code §§ 10-1-2-9, 18-1-12-11, 19-1-18-21, 19-1-24-4 (1976).

15615 U.S.C. § 1673 (1976). "Periodic payments pursuant to a pension or retirement

program" are included within the definition of "earnings" to which the exemption ap-

plies. Id. § 1672(a).
151

Id. § 1673(b).
158Maintenance may be granted to a spouse only in the case of mental or physical

incapacity. Wilcox v. Wilcox, 365 N.E.2d 792 (Ind. Ct. App. 1977) (construing Ind. Code

§§ 31-l-11.5-9(c), -11 (1976)).
159The bulk sales statute is article 6 of the Uniform Commercial Code.

Presumably, a return of inventory will qualify as a bulk sale under that law, although

no decisions on that point were found.
160371 N.E.2d 400 (Ind. Ct. App. 1978). See generally Annot., 59 A.L.R.2d 1115

(1958).



314 INDIANA LAW REVIEW [Vol. 12:289

time.
161 The decision did not consider whether the landlord would be

accountable to the first tenant's creditors as a bulk purchaser as

would the second tenant if he acquired the inventory with notice of

the bulk sale. 162 If the provision in the lease had been construed to

be a contract to sell the replenished inventory in the tenant's

possession, the transaction would have been presumptively
fraudulent with respect to the seller's (tenant's) creditors under the

Indiana fraudulent conveyance statute.163 In any event, the right to

avoid the conveyance of the inventory passed exclusively to the

lessee's trustee in bankruptcy, so that the creditor's only remedy
was to proceed in the bankruptcy court. 164

8. Receiverships. — A receiver may not be appointed without
providing either notice or affidavits based upon belief. 165 Although

not considered by a recent decision applying this rule, it should be

noted that a proper order appointing a receiver without notice

should be followed by a prompt hearing.166 Another decision refused

to appoint a receiver upon request of a creditor with a contingent

claim against a liquidating corporation despite the fact that the cor-

porate assets were being distributed to shareholders without

making provision for the creditor.167

9. Bankruptcy; Dischargeability of Particular Claims.—
Dischargeability of particular claims under section 17 of the
Bankruptcy Act has received considerable attention in the last year.
As a general rule, governmental claims for taxes are not dis-
charged. 168 This rule was applied by the United States Supreme

161371 N.E.2d at 401. It is conceivable that the landlord retained a security in-

terest in the inventory and after-acquired inventory. If this were the case, it was not a

bulk sale. U.C.C. § 6-103. The transfer to the tenant may have qualified as a sale or
return. U.C.C. § 2-326. In either instance, the security interest would not have been

valid against the bankrupt's trustee in bankruptcy, unless the landlord had perfected

by possession before bankruptcy in which case it could have been classified as a

preference. Compare Bankrupty Act § 70a with § 60, 11 U.S.C. §§ 96, 110(a) (1976). The

language of the lease creating the landlord's right to the inventory was not set forth in
the opinion.

162U.C.C. §§ 6-104(1), 6-109.
163
Ind. Code § 32-2-1-7 (1976). See note 68, supra.

1MSee generally W. Collier, 4A Collier on Bankruptcy § 70.92 (14th ed. J.
Moore, R. Oglebay, F. Kennedy & L. King 1978).

165Meek v. Steele, 368 N.E.2d 257 (Ind. Ct. App. 1977). This case was brought to
the court of appeals on appeal. A writ of prohibition, it seems, would also have been
proper. State ex rel. Mammonth Dev. & Constr. Consultants, Inc. v. Superior Ct., 357
N.E.2d 732 (Ind. 1976).

166
Indianapolis Mach. Co. v. Curd, 247 Ind. 657, 221 N.E.2d 340 (1966). See also Ind.

R. Tr. P. 65(B)(2).
167Rauch v. Circle Theatre, 374 N.E.2d 546 (Ind. Ct. App. 1978). See notes 185-90

infra and accompanying text.

""Bankruptcy Act § 17a(l), 11 U.S.C. § 35a(l) (1976).



1979] SURVEY-SECURED TRANSACTIONS 315

Court to include the "penalty" imposed upon a bankrupt who fails to
collect and pay over withholding taxes. 169 Claims for money or prop-
erty obtained by "false representations" also are not discharged

when contested under section 17. 170 In re Blessing 111 held that a
creditor must prove intent to defraud as one of the elements of non-
dischargeability under this provision. The presumption of fraudulent
intent under the old Indiana bad check law, 172 which arose when a
check was not paid within ten days after notice that it had been
returned for insufficient funds, was inadequate to prove the
necessary mens rea for denying discharge of the claim in bankruptcy.
In Blessing the creditor had recovered a state judgment awarding him

treble damages on a check which had been dishonored for insuffi-

cient funds before bankruptcy. 173 In a proceeding to establish non-

dischargeability of the judgment, the bankruptcy judge found the

state judgment to be res judicata on the issue of fraudulent intent.

On appeal, error was found in giving a res judicata effect to the
judgment which had found fraudulent intent based on state

statutory presumption. In bankruptcy proceedings, fraudulent intent

is a matter of federal law. 174 Claims for "alimony" or for support of a

wife or child are excluded from discharge by section 17. 175 The
Seventh Circuit Court of Appeals has held that an award of money
to the wife as part of an order approving a property settlement or

dividing marital property is "alimony" insofar as it provides for the

support or maintenance of the wife.176 Towards this end, if the order

169United States v. Sotelo, 98 S. Ct. 1795 (1978). The court did not consider alter-
native grounds for reaching the same result. If this were a "penalty," the claim of the
government was not provable and, therefore, was not discharged except to the extent
of pecuniary loss. Compare Sotelo with Bankruptcy Act § 17a, 11 U.S.C. § 35(a) (1976),
and 11 U.S.C. § 93(j) (1976). Failure to pay taxes withheld may have constituted
"willful and malicious conversion" or misappropriation by a "fiduciary" under the pro-

visions of § 17a(2) or (4) of the Bankruptcy Act, 11 U.S.C. § 35(a)(2), (4) (1976), which ex-

empt the claim from dischargeability if contested within a proper period.
170
11 U.S.C. § 35(a)(2) (1976).

171
442 F. Supp. 68 (S.D. Ind. 1977). Accord, Sanitation Recycling, Inc. v. Jay Peak

Lodging Ass'n, 428 F. Supp. 1022 (D. Vt. 1977) (proof of fraudulent intent a require-

ment for non-dischargeability).
172
Ind. Code § 35-17-5-10 (1976) (defining crime as a deceptive pratice). The new

provision is id. § 35-43-5-5 (Supp. 1978).
173For the statute allowing treble damages, see id. § 35-7-5-12 (1976). The new pro-

vision is id. § 34-4-30-1 (Supp. 1978).
174The court held that the issue of fraudulent intent should be re-litigated in the

bankruptcy court, rather than requiring the bankruptcy judge to determine the basis

of the state court judgment. In other words, this case may, but does not necessarily,

stand for the proposition that issues relating to dischargeability cannot be determined

by res judicata principles with respect to ante-bankruptcy judgments.

'"Bankruptcy Act § 17a(7), 11 U.S.C. § 35a(l) (1976).
176
Nichols v. Hensler, 528 F.2d 304 (7th Cir. 1976) cert, denied, 434 U.S. 1086 (1978)

(applying Indiana law prior to no-fault divorce statute).



316 INDIANA LAW REVIEW [Vol. 12:289

reflects a balancing of a projected differential in the income of the

parties, it is "alimony" only to that extent, which is a question of

fact for the bankruptcy judge. In re Woods, 111 also decided in the

Seventh Circuit, found that an order approving a division of property

in which the husband agreed to pay marital debts without any other

obligation to pay money was a division of property but was not based
upon a differential in earning power, although the record showed
a differential of thirty-eight dollars per week. Hence, the obligation

of the husband to pay the marital debts was not "alimony" and was
discharged in bankruptcy. 178 A similar holding was indicated in a
footnote by the Indiana Court of Appeals in Marburger v. Mar-
burger,119 which, unlike the Woods case, involved an order under the
new Indiana no-fault divorce statute.180 Marburger also applied
another provision of section 17 which states that debts which have

not been duly scheduled in time for proof and allowance will not be

discharged.
181 The court noted in dictum that the husband's failure to

schedule the wife as a creditor also failed to discharge him from

paying marital debts as ordered under a property settlement. 182 The
court, however, overlooked two possible qualifications to this provi-
sion of section 17. One is that the provision does not apply to a
creditor with notice of the bankruptcy, while the other provides that

the creditor must be scheduled in time for proof and allowance of
his claim. If the husband's bankruptcy was a no-asset case, both
listed and unlisted creditors, including the wife, were not denied
proof and allowance of claims because they were not required to file

claims until assets were discovered. 183

10. Suretyship; Miscellaneous. — A tenant assigning his rights
under a lease remains liable to the lessor as a surety with respect to

177561 F.2d 27 (7th Cir. 1977) (applying Indiana law prior to no-fault divorce

statute).

™Accord, Nitz v. Nitz, 568 F.2d 148 (10th Cir. 1977) (husband's annual income ex-

ceeded that of wife by approximately $1,000).
m372 N.E.2d 1250, 1252 n.2 (Ind. Ct. App. 1978).
180The new Indiana no-fault divorce statute permits an award of maintenance to

the wife only when she is mentally or physically disabled. Ind. Code § 31-1-11.59(c)
(1976). However, in distributing marital property, the court is required to consider

"the earnings or earning ability of the parties." Id. § 31-1-11.5-11.

""Bankruptcy Act § 17a(3), 11 U.S.C. § 35a(3) (1976).
182372 N.E.2d at 1252.
183Under the new bankruptcy rules, if no assets are available for distribution, the

first notice to creditors may advise them that it is unnecessary to file claims unless
later notice of assets is given. Bankruptcy R. 203(b). If a dividend later becomes

available, creditors are given additional time of not less than 60 days or the usual six-

month period, whichever is later, in which to file their claims. Bankruptcy R. 302(e)(4).

Hence, in a no-asset case a failure to schedule a creditor will not make his claim
dischargeable, except possibly in a situation where he must bring a proceeding to

determine dischargeability under § 17(3) of the Bankruptcy Act, 11 U.S.C. § 35(a)

(1976).



1979] SURVEY-SECURED TRANSACTIONS 317

covenants running with the land or those expressly assumed by the

assignee.
184 This general principle was recognized in Ranch v. Circle

Theatre.
185 There the lessor brought suit after the assignment

against the assignor-tenant, a corporation in the process of dissolv-

ing and distributing its assets to shareholders. The court held that

dissolution by the lessee, under the circumstances, constituted an

anticipatory breach of the covenants in the lease upon which the

lessee was a surety. 186 Since the assignee was solvent and perform-

ing the covenants of the lease, however, no damages were proved.

No relief was granted to the landlord, who was left with the new
tenant's obligation for covenants running with the land.

187 The court,
through a receivership, 188 or other equitable machinery, should have

required the dissolving surety to provide protection against the

possibility of future loss.
189 By denying a receivership for this pur-

pose, the court sanctioned a means by which a corporate surety may
escape its contingent liabilities — dissolution. Since a form of
fraudulent conveyance is involved, equity retains the power to pro-

tect the innocent creditor with a contingent claim in such a case.
190

lM
Cf. Powell v. Jones, 50 Ind. App. 493, 98 N.E. 646 (1912) (tenant-assignor liable

on the express covenant to pay rent unless landlord releases tenant from the obliga-

tion).

185374 N.E.2d 546 (Ind. Ct. App. 1978).
186See Bushnell v. Kraft, 133 Ind. App. 474, 183 N.E.2d 340 (1962) (liquidation of

corporate obligor constitutes breach of an executory contract).
187The case did not make clear whether the assignee of the tenant assumed the

covenants of the lease by contract. If not, the assignee would not have been liable for

covenants which did not run with the land. See also Geyer v. Lietzan, 230 Ind. 404, 103
N.E.2d 199 (1952).

188The landlord petitioned for a receiver which was denied, but the court on appeal
in upholding the decision below stated that a receiver would have been proper. "The

other remedies available to Lessors — the right to file an action for damages and peti-
tion for the appointment of a receiver under IC 1971, 34-1-2-1 (Burns Code Ed.) to
preserve and collect the corporate assets — were sufficient to protect Lessor's
interest." 374 N.E.2d at 553.

l89
E.g., Specialty Furniture Co. v. Rusche, 212 Ind. 184, 6 N.E.2d 959 (1937) (ap-

pointment of receiver for voluntarily dissolving corporation held proper). The Probate
Code protects a creditor holding a contingent obligation of the decedent. Ind. Code §§
29-1-14-7, 29-1-14-8 (1976) (imposing liability upon devisees and heirs to the extent of
the value of the property received on distribution). It seems that this procedure also

applies to receivership proceedings for a dissolving corporation. Ind. Tr. R. 66(D)

(probate procedures adopted in receivership proceedings with respect to claims).

Remedies against a dissolving corporation, its officers, and shareholders are preserved

for two years in case of voluntary dissolution. Ind. Code § 23-1-7-1 (1976).
190
Traditionally, a fraudulent conveyance by a surety will not be set aside when

the principal is solvent. Boyd v. Vickrey, 138 Ind. 276, 37 N.E. 972 (1894). However,
equity may enjoin a transfer when a debtor is threatening to dispose of his assets at a
time when the creditor's action is not due. McCormick v. Hartley, 107 Ind. 248, 6 N.E.
357 (1886). See also McKain v. Rigsby, 250 Ind. 438, 237 N.E.2d 99 (1968). A lessor
whose claim is one for future rent not yet due may set aside a fraudulent conveyance.
Wright v. Haley, 208 Ind. 46, 194 N.E. 637 (1935) (bulk sale by tenant).



318 INDIANA LAW REVIEW [Vol. 12:289

As a general rule, a creditor who releases or impairs collateral
furnished by the principal debtor will discharge a surety to the ex-
tent of the value of the security.191 In addition, a binding agreement
between the creditor and debtor extending the time of performance
will discharge a surety who has not assented to the arrangement.192

These principles have evolved in order to protect the surety against
risks of subsequent dealings between the debtor and creditor in
which the surety did not take part and which tend to prejudice per-
formance by the debtor. A surety upon a public construction con-
tract for the benefit of subcontractors claimed that he was discharged
by an application of both these rules in American States Insurance
Co. v. Staub., Inc.

193 There the municipality had retained funds which
were owed to the prime contractor. Under an Indiana statute, 194 a
lien could be placed upon this fund by persons to whom the prime
contractor was indebted on the contract as long as a claim was made
within sixty days after the last work or material was furnished by
the claimant. When the unpaid subcontractor failed to file his claim
to this fund within the time limit, the surety asserted that it was
released to the extent that the fund would have satisfied the unpaid

bill. The court rejected this argument on the basis that the subcon-
tractor had not impaired the collateral by failing to file. 195 The court
applied the general rule that a surety is not discharged by mere
passiveness of the creditor who owes no duty to take affirmative ac-
tion to sue.

196 The same holds true when the creditor fails to

191This rule often is applied to situations where an owner-creditor is required by

his contract with the principal-contractor to keep a retainage from work progress

payments. A surety is discharged to the extent that the retainage is paid to the prin-
cipal. Weik v. Pugh, 92 Ind. 382 (1884); State ex rel Hartford Accident & Indem. Co. v.
Martin, 94 Ind. App. 531, 159 N.E. 21 (1927). If the surety's promise is conditioned

upon the retainage, he will be totally discharged if it is paid to the principal. State ex

rel. National Sur. Co. v. Board of Comm'rs, 93 Ind. App. 435, 153 N.E. 421 (1926); Hub-

bard v. Reilly, 51 Ind. App. 19, 98 N.E. 886 (1912).
192The rule here is based on the idea that the surety did not bargain for the exten-

sion and, therefore, should not be bound. Post v. Losey, 111 Ind. 74, 12 N.E. 121 (1887)

(extension to principal granted by creditor after principal discharged in bankrupt-

cy—surety discharged). Under the Uniform Commercial Code, an extension of time to

the principal will discharge the surety only if he has a right of recourse against the

principal. U.C.C. § 3-606(l)(a).
193370 N.E.2d 989 (Ind. 1977).
194
Ind. Code § 5-16-5-1 (1976). If a materialman or subcontractor fails to file his

claim within 60 days after his last performance, he loses his right to the fund. Mac-

Donald v. Calumet Supply Co., 210 Ind. 536, 19 N.E.2d 567, modified, 21 N.E.2d 400

(1939) (contractor completing performance for surety took fund to the exclusion of sub-

contractors who did not file within the statutory time).
i95See also Board of Educ. v. Pacific Nat'l Fire Ins. Co., 19 111. App. 2d 290, 153

N.E.2d 498 (1958).
,96370 N.E.2d at 992.



1979] SURVEY-SECURED TRANSACTIONS 319

preserve other rights against the debtor.
197 A release of the re-

tainage after the time for filing a claim to it had lapsed was held not

to prejudice the rights of the subcontractor or the surety.
198 The

surety also claimed that it was discharged by the subcontractor-

creditor's acceptance of a promissory note from the prime contractor

which, apparently, extended the time for payment. Under the
Uniform Commercial Code, this action presumptively operated as an

extension of time.199 Although the court needlessly emphasized that

the note was not accepted in payment of the underlying debt, the
decision clarified some old case law200 by holding that since the time

of payment to a subcontractor or materialman on a construction con-

tract is uncertain and continuing in nature, the extension of time

was authorized by the undertaking of the prime contractor and the

contract of the surety.
201 Therefore, the extension did not discharge

the surety.

Other recent decisions have recognized the rule that a creditor

who releases several co-sureties will discharge the others to the ex-

197Under this principle, a creditor is not required to take affirmative action to sue
the principal to foreclose collateral, to pay taxes, etc. Barnes v. Mowry, 129 Ind. 568,
28 N.E. 535 (1891); Wasson v. Hodshire, 108 Ind. 26, 8 N.E. 621 (1886); Hogshead v.
Williams, 55 Ind. 145 (1876). Old law held that he was not under a duty to perfect a
mortgage or security furnished by the debtor. Philbrooks v. McEwen, 29 Ind. 347
(1868). However, a creditor in possession of collateral or one who possesses the means
for perfecting the mortgage or security interest may have a duty to do so. White v.
Household Fin. Corp., 158 Ind. App. 394, 302 N.E.2d 828 (1973) (criticizing Philbrooks).

,98
370 N.E.2d at 994.

199"Unless otherwise agreed where an instrument is taken for an underlying

obligation . . . the obligation is suspended pro tanto until the instrument is due . . . ."

U.C.C. § 3-802(l)(b) (applicable to a note where a bank is not the maker).
200Under U.C.C. § 3-802 (see note 181 supra) the taking of a note for a prior debt

which advances the time of payment is presumed to be conditional payment, not pay-
ment. But notwithstanding that there is no presumption of payment, the taking of the

note is presumed to bind the creditor to the extension. Pre-Code cases in Indiana

sometimes created the inference that, if the note was not taken in "payment," the note
did not operate as an agreement to extend the time of payment. Hughes v. Adams, 187
Ind. 165, 118 N.E. 680 (1918) (note taken by beneficiary of surety bond). Parol evidence

is admissible under the Code and under prior law to rebut the presumption that the

extension note was accepted. See Beck v. O'Dell, 193 Ind. 386, 140 N.E. 527 (1923). The
presumption of extension may be rebutted by proof that the new note was taken as
security upon the understanding that all rights under the original obligation should re-

main intact. See also Kelley v. York, 183 Ind. 628, 109 N.E. 772 (1915). Unlikely as it

may be, parol proof will be allowed to show that the note is taken in payment as a full
accord and satisfaction, in which event the surety on the prior obligation will be

discharged.
201A creditor extending time to a principal upon a continuing contract of guaranty

does not discharge a surety who undertakes to pay the successive obligations of the
principal. Morgan v. Smith Am. Organ Co., 73 Ind. 179 (1880); National Exch. Bank v.
Gay, 57 Conn. 224, 17 A. 555 (1889).



320 INDIANA LAW REVIEW [Vol. 12:320

tent of their right of contribution from the sureties released.202 Parol

evidence was admitted to establish that two of four co-makers on a
promissory note were sureties or accommodation makers who were
not discharged by a tender of the principal sum and interest when
the debtors failed to include in the tender attorney's fees required

by the note. Tender was made after suit had been filed by the
holder of the note.203 A promisee entitled to attorney's fees by agree-
ment is not entitled to enforce the provision in litigation when he
fails to win an affirmative judgment.204

XVI. Taxation

John W. Boyd*

A. Case Law Developments

During this year's survey period, the Indiana courts reported
nine noteworthy decisions in the area of state taxation. Two of those
nine cases were decided by the Indiana Supreme Court.

1. Property and Excise Taxes. — a. Ad Valorem Taxes, Com-
merce Clause Exemption. — The Indiana Supreme Court considered
the exemption to the personal property tax for property in in-
terstate commerce 1 in State Board of Tax Commissioners v. Carrier

202Carvey v. Indiana Nat'l Bank, 374 N.E.2d 1173 (Ind. Ct. App. 1978).
203
Stockwell v. Bloomfield State Bank, 367 N.E.2d 42 (Ind. Ct. App. 1977).

204Rauch v. Circle Theatre, 374 N.E.2d 546 (Ind. Ct. App. 1978).

*Member of the Indiana Bar. B.A., Northwestern University, 1973; J.D. Indiana
University School of Law — Indianapolis, 1976.

'Act of Mar. 18, 1975, Pub. L. No. 47, §§ 29-30, 1975 Ind. Acts 317 (current ver-

sion at Ind. Code 6-1.1-10-30 (1976)), provided that personal property of nonresidents of

the state who are able to show by adequate records that such personal property has
been shipped into this state and placed in the original package in a public warehouse

for the purpose of transshipment to an out-of-state destination, shall not, while so in

the original package in such warehouse, be subject to the tax imposed by Ind. Code §§
6-1-20 to 39 (1971) and that portion of a premises owned or leased by a consignor or

consignee, shall be deemed to be a public warehouse.

Personal property of nonresidents of the state shipped into this state and placed

in the original package in a public or private warehouse for the purpose of transship-

ment to an out-of-state or within-the-state destination and so designated on the original

bill of lading, or personal property of residents or nonresidents of the state placed in

the original package in a public or private warehouse for the purpose of transshipment

to an out-of-state destination and so designated on the original bill of lading, shall not,

while so in the original package in such warehouse, be subject to tax imposed by this

act. In construing this section, goods, wares and merchandise shall be exempt only to

the extent that they are exempt from ad valorem taxes under the commerce clause of

the Constitution of the United States. Id.