Indiana Law Review


XV. Secured Transactions & Creditors* Rights

R. Bruce Townsend*

Over fifty cases involving serious problems of secured transac-

tions and creditors' rights were decided by the Indiana appellate

courts last year. Most concern complex fact situations and difficult

questions of law. Fourteen dealt with substantially new and
previously unresolved interpretations of the mechanics' lien statute.'

Outstanding opinions dealt with the obligations of debtors transfer-

ring lien property;^ the risks of a secured party using self help after

declaring a premature default;* the duty of a mechanic asserting a

lien to give timely notice to the owner of homestead property;^ the
effect of recording notice of intent to claim a mechanics' lien on en-

tireties property by naming one spouse;^ and an assortment of prob-

lems illustrating the versatility of proceedings supplemental as a

remedy for reaching assets of the debtor." Two decisons resolved im-
portant matters of policy which, in the opinion of this writer,

deserve careful reconsideration. In one, the Indiana Supreme Court^
determined that an installment support order was not a "judgment,"
thereby requiring delinquencies to be liquidated by a new action
before enforcement and application of the fifteen year statute of

limitations to such proceedings. The effect will be to place an
unreasonable burden on divorcees with children and to allow delin-

quent orders to fester for an unreasonable length of time. The other
decision, from the court of appeals,* has the effect of discouraging

•Professor of Law, Indiana University School of Law-Indianapolis. A.B., Coe Col-
lege, 1938; J.D. University of Iowa. 1940.

'These cases are discussed in the text accompanying notes 85-141 infra.
'^Boswell V. Lyon, 401 N.E.2d 735 (Ind. Ct. App. 1980), discussed in text accompa-

nying notes 45-47 infra.

'Van Bibber v. Norris, 404 N.E.2d 1365 (Ind. Ct. App. 1980), discussed in text ac-
companying notes 67-74 infra.

'Mid-America Homes v. Horn, 396 N.E.2d 879 (Ind. 1979). This and another ex-
cellent decision on the problem are discussed in the text accompanying notes 117-125

infra.

'Beneficial Fin. Co. v. Wegmiller Bender Lumber Co., 402 N.E.2d 41 (Ind. Ct.
App.), rehearing denied, 403 N.E.2d 1150 (Ind. Ct. App. 1980). This case is discussed in

the text accompanying notes 104-07 infra.

"Ai least five excellent decisions in this category will be found at notes 153-68

and accompanying text.

'Kuhn V. Kuhn. 402 N.E.2d 989 (Ind. 1980), vacating and remanding 389 N.E.2d

319 (Ind. Ct. App. 1979). The case is discussed in text accompanying notes 173-82 infra.
"Beneficial Fin. Co. v. Wegmiller Bender Lumber Co., 402 N.E.2d 41 (Ind. Ct.

App.), rehearing denied, 403 N.E.2d 1150 (Ind. Ct. App. 1980). The case is discussed in

text accompanying notes 114-16 infra.

489



490 INDIANA LAW REVIEW [Vol. 14:489

lenders from making loans to assist an owner in financial difficulty
on a construction project. This questionable result 'was achieved by

subordinating a mortgage lender whose funds were applied to pay
off mechanics' liens to other mechanics on the project who were not
paid.

New legislation^ expanded the Indiana exemption law and
replaced an alternative exemption allowed under the Bankruptcy
Code of 1978.

A. Secured Transactions

1. Formalities in Creation—Mortgages and Conditional Sales
Contracts of Real E's^a^e. — Ordinarily a conveyance must be in
writing, signed by the grantor, describe the property and contain

words of grant. Parol evidence is admissible to show that the instru-
ment was not delivered or intended to be effective, that a signature
is a forgery or unauthorized, or that the transaction was procured
by misrepresentation, duress, or as a result of mistake.'" These for-

mal matters of creation which may be raised as between the parties
to the transaction are fully applicable to mortgages. An educational
decision illuminating several aspects of these problems,
Moehlenkamp v. Shatz,^^ dealt with the procedural framework in
which a co-mortgagor contended that her signature on a note and

mortgage was unauthorized or a forgery. The issue of non-execution
was properly raised under the Indiana trial rules by a sworn plea of
non est factum, which then placed the burden of going forward with

evidence of lack of authority on the mortgagor.'^ However, in this

case the court found that the defending mortgagor impliedly had

authorized her husband to sign the note and mortgage on entireties

property in light of his long practice to conduct her business with

her tacit approval.'^ The authenticity of her signature also was sup-
ported by the fact that the mortgage referring to the note was
acknowledged. Although consideration is not required to support a

mortgage"* or establish the validity of a negotiable note given for

'Ind. Code § 34-2-28-0.5 (Supp. 1980), discussed in text accompanying notes 142-52

infra.

'°E.g., Reinskopf v. Rogge, 37 Ind. 207 (1871) (execution ineffective where mort-

gagor drunk).

"396 N.E.2d 433 (Ind. Ct. App. 1979).

'^Ind. R. Tr. p. 9.2(B). In this case the plea of non est factum was not filed in the

responsive pleading as required by the rule. Id. 9(B). The plaintiff was barred from

asserting the defendant's delay in filing the plea because of his failure to raise the

issue at the trial.

"396 N.E.2d at 437.

"Goethe v. Gmelin, 256 Mich. 112, 239 N.W. 347 (1931) (mortgage effective as gift

although note secured by it was ineffective).



1981] SURVEY-SECURED TRANSACTIONS 491

the prior indebtedness of any person/^ the court found that the note

and mortgage were supported by consideration insofar as they were

given to replace a prior debt of the husband upon which the wife

was not liable.'^

Formation of a conditional sales contract, which has many at-
tributes of a mortgage in Indiana, is sometimes governed by the

rules of offer and acceptance or a meeting of the minds. Accordingly,

Wallace v. Rogier^'' recognized that parol evidence is admissible to

show that a fully signed conditional sales contract is a sham and in-

effective where it was prepared to enable the purchaser to obtain a

loan.'* Other recent decisions recognized that a conditional sales con-

tract may be rescinded when it has been procured by false material
misrepresentations of fact'^ and reformed when an error in the

description resulted from mutual mistake.^" The court in Bixwood,

Inc. V. Becker^^ recognized that an option to sell land created an in-

terest in land, and held that upon failure of performance by the pur-

chaser the vendor was entitled to bring an action to quiet title and

cancel the recorded contract.^^

2. Real Estate—Priorities. — k lien or interest in land may be
perfected as against subsequent purchasers by recordation,^'* by

reservation in the instrument of transfer through which title is

claimed,^'' or by possession.^^ In a dubious opinion, the court of ap-

'=lND. Code § 26-1-3-408 (1976).
'"396 N.E.2d at 438-39.

"395 N.E.2d 297 (Ind. Ct. App. 1979).

"Invalidity was proved by the testimony of the lawyer who prepared the condi-
tional sales contract for the parties. The vendors were allowed to eject the purchasers
in possession as tenants at sufference.

"Shuee v. Gedert, 395 N.E.2d 804 (Ind. Ct. App. 1979). The purchasers prevailed

on their counterclaim for rescission and restitution in the vendor's action for specific

performance. Evidence established that the vendors of a mobile home park had
misrepresented that utilities were properly installed, taxes were approximately $2500

less than they were in fact, and income was more than that generated by the business.
'"Liestikow v. Hoosier State Bank, 394 N.E.2d 225 (Ind. Ct. App. 1979).
''391 N.E.2d 646 (Ind. Ct. App. 1979). The case reinforces the turnaround of In-

diana law which at one time held that an option to purchase land created no interest in

the land until the option was exercised. Compare Raco Corp. v. Acme-Goodrich, Inc.,
235 Ind. 67, 131 N.E.2d 144 (1956) (The modern view finds that such an option creates a
covenant.) with Koehring v. Boman, 194 Ind. 433, 142 N.E. 117 (1924) (The former view

found that "a mere option to purchase land could not vest in the holders any title at

all, whether by entireties or otherwise, so long as the option had not been exercised.").
''^391 N.E.2d at 648-49.

^=^94 Ind. at 437, 142 N.E. at 118. E.g., Ind. Code §§ 32-1-2-16 to -18 (1976).

^*E.g., Warlord v. Hawkins, 150 Ind. 489, 50 N.E. 468 (1898).

'"E.g., McClellan v. Beatty, 115 Ind. App. 173, 53 N.E.2d 1013, 55 N.E.2d 327

(1944). See also Mishawaka St. Joseph Loan & Trust Co. v. Neu, 209 Ind. 433, 196 N.E.

85, (1935) (applying the questionable "lazy banker" rule holding that the banker was

not charged with notice of two days possession).



492 INDIANA LAW REVIEW [Vol. 14:489

peals may have added another method of perfection to this list. In
Berrey v. Jean,^^ the title of the adverse possessor which was not
perfected on the records or, arguably, by possession prevailed

against a later bona fide purchaser from the record owner whose
title had been cut off by the adverse possessor." In Fenley Farms, Inc.

V. Clark,"^^ the court held that a purchaser was charged with
knowledge of the possessory status of the land, including the claim
of the public to a visible roadbed. Another decision^^ discussed
elsewhere recognized the rule that when record title is taken by
husband and wife they become owners as tenants by the entireties,
and one cannot transfer his interest without the other. However, the
case held that if the record shows a conveyance or transfer by one
of the spouses, further inquiry by a purchaser may be required to
ascertain if the transfer is authorized before the purchaser will be a

bona fide purchaser.'"

3. Conditional Sales Contracts of Real Estate— Contracts and
Options. — Under the doctrine of Skendzel v. Marshall,^^ it has been
settled Indiana law that the rights of a purchaser under a condi-

tional sales contract are those of an equitable owner and essentially
those of a mortgagor where a substantial part of the price (more
than a minimal amount) has been paid. Consequently, upon default

by the purchaser, the vendee must proceed by judicial foreclosure

as in the case of mortgages. Strict foreclosure, as provided by the

contract, thus is not permitted, at least in the absence of abandon-

ment or circumstances establishing that the security is seriously im-
paired due to waste or non-payment of taxes. This rule was reaffirm-

'MOl N.E.2d 102 (Ind. Ct. App. 1980). In this case the land was acquired by

adverse possession for use as a cemetery. Perfection by possession could have been

found from the fact that some gravestones were on a part of the property which was

marked by a fence on three sides. Hence, a purchaser may have been put on notice
from these facts.

"Some older decisions held that an adverse title need not be recorded or
perfected since the prior owner had nothing to convey. E.g., Schall v. Williams Valley

R.R., 35 Pa. 191 (1860). However, since the adverse possessor may perfect his title by
possession, suit and lis pendens notice, or by affidavits which may be filed establishing
his title of record as against prior record owners, see Ind. Code §§ 17-3-47-1 to -3

(1976), he should not be allowed to set up his title against a later bona fide purchaser

from the prior owner unless he does so.
''404 N.E.2d 1164 (Ind. Ct. App. 1980). The roadway was claimed on the grounds

of public use for 20 years under Ind. Code § 8-20-1-15 (1976).

"Beneficial Fin. Co. v. Wegmiller Bender Lumber Co., 402 N.E.2d 41 (Ind. Ct.
App.), rehearing denied, 403 N.E.2d 1150 (Ind. Ct. App. 1980). This case is discussed in

the text accompanying notes 104-07 infra.

''See 402 N.E.2d at 45.

'261 Ind. 226, 301 N.E.2d 641 (1973), cert, denied, 415 U.S. 921 (1974), on mandate

to enforce order, 263 Ind. 337, 330 N.E.2d 747 (1975).



1981] SURVEY-SECURED TRANSACTIONS 493

ed and applied by the court of appeals in McLendon v. Safe Realty
Corp.^'^ in which the purchaser who was current on installments, but
delinquent on payment of taxes, had assigned his rights to another

purchaser. The court determined that although the property was va-

cant, it was not abandoned by the purchaser who did not abscond.'^
The court indicated that whether or not a vendee has paid a
substantial amount upon the contract must be determined by his
equity in the property, which in turn is dependent upon the amount
owing in relation to the value of the property at the time of

foreclosure/^ Because there was no proof of value, the court deter-

mined that payments of $7,276 on a principal amount of $10,000,
enhanced by unpaid taxes which brought the latter to $17,935,

established a payment of forty per cent of the contract price and
therefore more than a minimal amount. In another decision^'' the
court upheld a pretrial order of the lower court treating an action

by the vendor under a conditional sales contract for forfeiture as an

action to foreclose the lien in accordance with the rule of Skendzel

V. Marshall.^^ Boswell v. Lyon^'' demonstrates that the position of the

vendor under the Skendzel doctrine may be enhanced by allowing
him to recover a deficiency judgment against the purchaser when
the property is insufficient to satisfy the obligation. On the other
hand, Hawkins v. Marion County Board of Review^^ repudiates the
underpinnings of Skendzel by holding that a conditional purchaser of

real estate is neither indebted on a "mortgage" nor is he one who
"owns real property" within the meaning of a statute'^ allowing a

$1,000 mortgage exemption." By denying the tax exemption and
finding no denial of equal protection to conditional buyers of real

estate, the court of appeals ignored common knowledge that the con-
ditional sale is a poor man's security device. The effect of the court's
opinion is in fact a pervasive discrimination against the very poor.'"

^MOl N.E.2d 80 (Ind. Ct. App. 1980).

^7d. at 83.

'*Id.

''Leistikow v. Hoosier State Bank, 394 N.E.2d 225 (Ind. Ct. App. 1979) (action for

strict foreclosure filed prior to Skendzel but decided after Skendzel).
^«26 Ind. 226, 301 N.E.2d 641 (1973).
''401 N.E.2d 735 (Ind. Ct. App. 1980).
''394 N.E.2d 957 (Ind. Ct. App. 1979) (at the time the exemption was claimed the

purchaser had paid $5,325 on a price of $6,750).

'7d. at 959.

'"Ind. Code § 6-1.1-12-1 (Supp. 1980).
^'394 N.E.2d at 959-60. The homestead credit allowed to owners of residential

property for 1980 and thereafter may be claimed by contract purchasers. Ind. Code §
6-1.1-20.9-2 (Supp. 1980). In 1975 the statute allowing the $1000 exemption was amended
to include contract purchasers who have agreed to pay the taxes. Act of April 24,



494 INDIANA LAW REVIEW [Vol. 14:489

4. Effect of Transfers by Parties to a Security Transaction. — A
transfer of the collateral by a mortgagor, conditional purchaser, or

lien debtor may have an important impact on the obligations of the
parties. In Indiana if the property is sold "subject" to the lien or

without a provision for the assumption of the indebtedness secured,

the property becomes primarily liable for the obligation secured and
the transferor remains liable as a surety." If the transferee assumes

the obligation, he, along with the property, is primarily charged and

the seller becomes a surety ."'* In no case is the transferor relieved of
his liability upon the obligation unless the lien creditor accepts the
new owner in lieu of the original debtor under an articulated agree-
ment amounting to a novation — an arrangement that is rare."" This
problem was reviewed by Judge Buchanan in a classic casebook type
opinion, Boswell v. Lyon,*^ which should be studied by students of

the law. There V sold land to PI on a conditional sales contract pro-
viding that transfers by the purchaser would be allowed only with

the written consent of the vendor. Later PI assigned his interest to

P2 who assumed the contract, and V in writing "hereby consent[ed]"
to the assignment. Still later, P2 similarly assigned to P3, and V
similarly assented in writing to this transfer. When P3 failed to
make payments, V foreclosed on the property naming PI, P2 and P3
as parties. After judgment was entered against PI, P2 and P3 on
the debt, a sale of the property was ordered. On appeal, PI claimed
that when V consented to the transfers, PI was released from the

1975, Pub. L. No. 39, § 1, 1975 Ind. Acts 182 (curently codified at Ind. Code §
6-1.1-12-1 (Supp. 1980)).

"Mutual Benefit Life Ins. Co. v. Lindley, 97 Ind. App. 575. 183 N.E. 127 (1932).

Compare Company Gross Income Tax Div. v. Crown Dev. Co., 231 Ind. 449, 109 N.E.2d 426
(1952) (A purchaser of real estate who assumes a mortgage indebtedness becomes the
principal debtor and the grantor acts as a surety.) with Rauch v. Circle Theatre, 374

N.E.2d 546 (Ind. Ct. App. 1978) (lessee's assignment of a lease did not discharge its du-

ty under the lease to the lessor).

"The rule was recognized by two recent decisions: Shuee v. Gedert, 395 N.E.2d

804 (Ind. Ct. App. 1979) (where the court recognized in a footnote that the land was

primarily liable for the debt, id. at 806 n.4); Foremost Life Ins. Co. v. Department of

Ins., 395 N.E.2d 418 (Ind. Ct. App. 1979) (paying surety entitled to subrogation). The

transferee assuming a lien or debt may be held on his promise by the lienholder as a
third party creditor beneficiary. Helms v. Kearns, 40 Ind. 124 (1872). If the deed or

conveyance shows that a grantee assumes a lien or debt, parol evidence usually will

not be admitted to show another prior or contemporaneous arrangement. See general-

ly Annot., 94 A.L.R. 1319 (1935). Parol evidence is admissible to show that a grantee

did not assent to the provision. Metzger v. Huntington, 139 Ind. 501, 37 N.E. 1084,

rehearing denied 39 N.E. 235 (1894). Parol evidence is admitted even if the conveyance

is made with warranty. Whicker v. Hushaw, 159 Ind. 1, 64 N.E. 460 (1902).
"Navin v. New Colonial Hotel, 228 Ind. 128, 90 N.E.2d 128 (1950) (vendor could

not be required to accept purchaser's assignee in lieu of purchaser where vendor did

not agree).

'MOl N.E.2d 735 (Ind. Ct. App. 1980).



1981] SURVEY-SECURED TRANSACTIONS 495

obligation. The court properly held that absent an agreement by the
vendor meeting the requirements of a novation, PI remained liable

as a surety on the obligation.'"' Further, the vendor's consent to the

second assignment without Pi's approval did not affect the obliga-

tion of PI or release PI from his suretyship obligation to pay."^

The court in Brendonwood Common v. Franklin*^ held that the
restrictive covenants imposing a duty to pay assessments for the

upkeep of roads and making the obligation a lien upon the various

lots in the Brendonwood subdivision ran with the land and bound
successive lot owners.*^ A provision for attorneys' fees also ran with
the land and was secured by the lien.^° Other recent cases determined

that a mortgagee in the mortgage banking business who assigns
mortgages to banks, then collects the mortgage payments as an
agent for the banks, and turns over the payments to an escrow ac-

count is not liable for intangible taxes,^' or for gross income taxes on

interest received and then transmitted to the assignee banks.^^

5. Remedies of a Secured Party Under the Uniform Commer-
cial Code—Repossession by Self Help; Event of Default. — Upon an
event of default, a secured party, under the express provisions of

the Uniform Commercial Code, may repossess the collateral and
toward this end may exercise self help if this can be done without
breach of peace unless there is an agreement to the contrary .^^ The
court applied this provision in Census Federal Credit Union v.

Wann^* and held that the secured party committed no breach of the

peace by repossessing a motor vehicle at 12:30 a.m. from the park-
ing lot of the debtor's apartment building without contacting the

debtor or others.^^ A prior demand for a return of the collateral had
been made and refused. While the court indicated that the secured
party may not break into homes, other buildings or enclosed spaces
or commit a crime to repossess, no wrong is committed by taking

Vd. at 743-45.

*'The first purchaser argued that he was released as surety when the vendor con-
sented to the second assignment on the theory that the obligation was altered. This
contention was rejected on the obvious ground that the vendee's risk was diminished
by a new obligor who assumed the obligation.

"403 N.E.2d 1136 (Ind. Ct. App. 1980).

"Id. at 1141.

^"Id. at 1143. The case without citation thereto seems to overrule Levin v. Munk,
97 Ind. App. 118, 169 N.E. 82 (1929), which held that a covenant in a lease to pay at-
torney's fees does not run with the land.

'Meridian Mortgage Co. v. State, 395 N.E.2d 433 (Ind. Ct. App. 1979).
"Indiana Dep't of Revenue v. Waterfiled [sic] Mortgage Co., 400 N.E.2d 212 (Ind.

Ct. App. 1980).

''Ind. Code § 26-1-9-503 (1976).
'M03 N.E.2d 348 (Ind. Ct. App. 1980).

''Id. at 351.



496 INDIANA LAW REVIEW [Vol. 14:489

the property off a street, parking lot or unenclosed space without
contest from the debtor or another person.^® In other words, a
sneaky repossession made without breaking into an enclosure is not
a breach of the peace, particularly if it is preceded by demand for
return of the collateral."

On the other hand, a secured party who repossesses collateral in
breach of the peace or before an event of default is a converter; if

his actions are made knowingly or maliciously, he may be held for
punitive damages as well.^* This principle was applied in Van Bibber
V. Norris^^ in which the secured party and its assignee had

repossessed a mobile home before installments were overdue, and
the secured party had disposed of the contents of the home which
apparently were not covered by the security agreement/" The court
upheld substantial punitive damages in different amounts against
each party .^^

The time at which a default occurs thus becomes important for
determining when the secured party may repossess and proceed
with this remedy. This time is fixed by the terms of the security

agreement.®^ Most agreements allow the secured party at his option
to accelerate the indebtedness and assert default if and when the
debtor fails to pay an installment on time. However, if the secured
party accepts late installments, a long line of Indiana security deci-

sions hold that he cannot accelerate the indebtedness and claim an

event of default until he notifies the debtor of his intent to do so

""Id.

"For an excellent review of authories on self help, see Knauer, Acceleration and

Default, Rights and Remedies of an Indiana Creditor VI-16 to VI-22 (1980).

^'The converting secure party may mitigate damages by deducting the unpaid in-
debtedness. See Townsend, Secured Transactions and Creditors' Rights, 1976 Survey

of Recent Developments in Indiana Law. 10 IND. L. Rev. 310, 319 n.50 (1976).
^'404 N.E.2d 1365 (Ind. Ct. App. 1980) (an excellent opinion of over twenty pages

by Judge Young).

*°In this case the secured party, who was the seller of the mobile home, had
assigned the contract to a bank under an agreement to repurchase. The seller

repossessed at the request of the bank before any installment was overdue, and

ultimately the debtor sued both parties for conversion of the home and its contents. Id.

at 1369-71.

*'The court below, without a jury, awarded damages of $5,000 for the home,

$10,000 for the contents against both parties, and punitive damages of $30,000 against

the seller and of $10,000 against the assignee. Id. at 1369.

^^Article 9 of the Uniform Commercial Code does not fix the time of default, so

that the event of default must be fixed by the security agreement. The Uniform Con-

sumer Credit Code for purposes of delinquency charges, allows the debtor a ten day

grace period before an overdue installment under a precomputed consumer credit sale

or loan is in default. Ind. Code §§ 24-4.5-2-203, -3-203 (1976). However, those sections do

not add a ten day grace period to the time of payment for purposes of default under

Article 9 of the Code.



1981] SURVEY-SECURED TRANSACTIONS 497

and gives the latter a reasonable time in which to bring the obliga-

tion current.*' This rule was applied in Van Bibber v. Norris^* where

the repossessing secured party had accepted fifty-seven past due

payments, thirty-seven of which were delinquencies, as determined

by the bank's internal policies.**

Many security agreements contain provisions attempting to
avoid the foregoing rule of waiver.** Van Bibber held that an anti-

waiver provision in a security agreement was invalid for the basic

reason that the secured party's acceptance of late payment spoke
louder than the words in the contract.*^ The court recognized that
anti-waiver provisions are unconscionable and implied that a secured

party who invokes the clause is guilty of bad faith.
Another common acceleration provision used in security

agreements is the so-called insecurity clause which allows accelera-

tion when the secured party deems himself insecure. The Uniform
Commercial Code invalidates the secured party's exercise of rights

under these clauses unless done in good faith, but the Code puts the

burden of proving bad faith upon the debtor.** Case law has eased

this unreasonable burden by allowing the debtor to prove facts or

lack of facts known to the creditor from which a reasonable person
acting in good faith could find indebtedness or payment insecure.*'
In Van Bibber the secured party claimed the right to repossess a
mobile home under this kind of insecurity clause when it learned
that the debtor was in jail on a drug charge. On appeal the court of
appeals held that the lower court could reasonably find that an ac-

celeration was in bad faith when it was based upon the secured

"^Cases applying or recognizing this rule of waiver have been considered in the

following survey articles of the Indiana Law Review: Townsend, Secured Transac-
tions and Creditors' Rights, 1977 Survey of Recent Developments in Indiana Law, 11

Ind. L. Rev. 252. 261 (1978) [hereinafter cited as Townsend. 1977 Survey]; Townsend,
Secured Transactions and Creditors' Rights, 1976 Survey of Recent Developments in
Indiana Law, 10 Ind. L. Rev. 310, 315 (1976) [hereinafter cited as Townsend, 1976
Survey]; Townsend, Secured Transactions and Creditors' Rights, 1973 Survey of Re-
cent Developments in Indiana Law, 7 Ind. L. Rev. 226, 231 (1973) [hereinafter cited as
Townsend, 1973 Survey].

«M04 N.E.2d at 1373.

'^In this case the installment claimed as a basis for acceleration and default was
due on October 30. The assignee bank directed the seller-assignor to repossess on
November 9 (within the 10 day grace period granted by the bank). The seller repossessed
on November 20 without a demand for payment from the debtor. Id. at 1371.

'^E.g., Pierce v. Yochum, 330 N.E.2d 102 (Ind. Ct. App. 1975) (construing anti-
waiver clause as applicable to future, but not past payments); Nelson v. Butcher, 352

N.E.2d 106 (Ind. Ct. App. 1976) (anti-waiver clause ignored by court).
"404 N.E.2d at 1374.

'"'Ind. Code § 26-1-1-203 (1976).
"'Universal C.I.T. Credit Corp. v. Sheplar, 164 Ind. App. 516, 329 N.E.2d 620

(1975), discussed in Townsend, 1976 Survey, supra note 63 at 310.



498 INDIANA LAW FEVIEW [Vol. 14:489

party's bare knowledge of the criminal charge without further in-
quiry as to guilt or the effect of the criminal charge upon payment
of the obligation;^" the creditor knew that seventy per cent of the
purchase price had been paid; and the value of the collateral exceed-

ed the indebtedness which was secured by the suretyship obligation
of the assignor of the contract." The secured party was not allowed
to buttress his case by proof of facts of which he had no knowledge

at the time of his decision to accelerate. Van Bibber stands for the
proposition that a secured party taking advantage of an insecurity

clause because the debtor is in jail runs the risk of an expensive

lawsuit when he repossesses the collateral, unless his decision is
also based on other facts making it reasonable to suppose that he
will not be paid or his security is impaired.

Lenders should take note of one other point made by Van Bib-
ber. The court indicated that in any case of acceleration, the secured
party is bound by the general requirement of good faith which cuts

across all transactions under the Code.^^ One ground for acceleration
and default under the security agreement in that caise was the crea-
tion of an "encumbrance" by the debtor. It was proved that a third
party had obtained a restraining order preventing the debtor from

removing the collateral from a mobile home park — apparently to
protect the park's right to an artisan's lien for back rent. Although

the court determined that the record did not establish the restrain-

ing order to be an encumbrance, the court nonetheless held that the

injunction could not be claimed as a basis for a default unless the

secured party relied upon the encumbrance.^^ Absent reliance, the

secured party did not meet the requirement of good faith as imposed

by section 1-203 of the Uniform Commercial Code.^'*

6. Mortgage Foreclosure. — A foreclosure action by a mort-
gagee or lienholder is an equitable proceeding. If suit is brought

upon the note or indebtedness in the same action, the whole case is
drawn into equity under the court's clean up power and decided
without a jury.^^ If the debtor counterclaims for damages on a legal

™404 N.E.2d at 1377.

"The court recognized that an installment was overdue for less than 10 days at

the time of acceleration. However, as noted above, this ground for default had been

waived. See also Holmes v. Rushville Prod. Credit Ass'n, 170 Ind. App. 509, 353 N.E.2d

509 (1976), amended on other grounds on rehearing, 170 Ind. App. at 518-19, 357
N.E.2d at 734, transfer denied, 267 Ind. 454, 371 N.E.2d 379 (1978) (where acceleration

was upheld although the obligation was secured by a surety but other facts indicated

that security was impaired).
"404 N.E.2d at 1373. "Every contract or duty within this Act imposes an obliga-

tion of good faith in its performance or enforcement." Ind. Code § 26-1-1-203 (1976).
''404 N.E.2d at 1374-75.

'Vd. at 1372-73.

"Carmichael v. Adams, 91 Ind. 526 (1883). It has been held that if a third party is



1981] SURVEY-SECURED TRANSACTIONS 499

cause of action, that claim too will be decided by the equity court

without a jury.'* These principles were recognized in Farmers Bank
& Trust Co. V. Ross^'' in which the mortgagor in a mortgage
foreclosure action filed a counterclaim for breach of a contract to

loan money. The court submitted all the issues to an advisory jury
and entered judgment on the decision of the jury. The appellate
court held that all the issues were triable in equity, and while an ad-

visory jury was proper, a judgment for the mortgagee on the deb-
tor's counterclaim was reversed because it appeared from the record

that the trial judge felt that he was bound to follow the jury ver-
dict.^*

Once foreclosure proceedings have commenced under a properly
recorded mortgage or lien, persons acquiring an interest in the prop-

erty from the mortgagor pending the suit (lis pendens) need not be

made parties and are bound by the judgment or decree.^' One recent
decision recognized the rule,*" and another held that the court must
allow the transferee to intervene in the proceedings.*'

Warner v. Webber Apartments, Inc.^^ held that a mortgagee
may forego his right to foreclose on the mortgage and may instead
recover upon the written promise contained in the mortgage instru-

ment to pay the secured indebtedness.*^ Although foreclosure was
not sought,*^ the case also allowed recovery of attorneys' fees which

were provided for within the promise to pay the indebtedness.

a surety on the mortgage note, the surety, claiming a defense that he was not bound
on the note by a plea of non est factum, is entitled to a jury trial upon proper request.
Hartlep v. Murphy, 197 Ind. 222, 150 N.E. 312 (1926).

'"Henning v. Rieth-Riley Constr. Co., 141 Ind. App. 99, 226 N.E.2d 350 (1967)
(foreclosure of mechanic's lien).

"401 N.E.2d 74 (Ind. Ct. App. 1980).

'7d. at 76.

''Zilky V. Carter, 226 Ind. 396, 81 N.E.2d 597 (1948). However, foreclosure or
litigation involving an unperfected lien or interest in real estate does not constitute lis
pendens notice as against bona fide purchasers unless lis pendens notice is filed as pro-
vided by statute. Ind. Code §§ 34-1-4-1, -2 to -3, -8 (1976).

'"Braun v. Loshe, 390 N.E.2d 189 (Ind. Ct. App. 1979) (assignee of vendee bound
by judgment against vendee seeking specific performance).

*'Maisel and Assocs. v. Canden Corp., 398 N.E.2d 1366 (Ind. Ct. App. 1980) (pur-
chaser from mortgagee allowed to intervene in action to set aside sale under
foreclosure action).

"MOO N.E.2d 1180 (Ind. Ct. App. 1980).

^^Id. at 1181. Foreclosure of the lien without a prayer for a deficiency or recovery
upon the debt will bar a later suit for a deficiency. Mutual Benefit Life Ins. Co. v.
Bachtenkircher, 209 Ind. 106, 198 N.E. 81 (1935). Older cases allowing the mortgagee to
recover judgment upon the debt and later foreclose upon the mortgage securing the
debt when the judgment is not paid are questionable. Compare Kozanjieff v. Petroff,
215 Ind. 286, 19 N.E.2d 563 (1939) with Muncie Nafl Bank v. Brown, 112 Ind. 474, 14
N.E. 358 (1887).

"400 N.E.2d at 1182.



500 INDIANA LAW REVIEW [Vol. 14:489

B. Creditors' Rights

1. Mechanics' Liens—In General. — The Indiana mechanics' lien
statute*^ protects a class of persons described as subcontractors,

materialmen and laborers and equipment lessors of the prime con-

tractor and his subcontractors/® An established common law rule,
that the statute does not extend to materialmen furnishing

materials and goods to other materialmen, was recently recognized

and applied in City of Evansville v. Verplank Concrete & Supply,
Inc.^^ In that case, Verplank furnished the beams and cement to a
materialman who had agreed to supply the beams to the contractor;
the materialman did not agree to perform any work at the site.**
While a mechanic's lien generally cannot be procured against

governmental property,*^ Verplank held that the mechanics' lien

statute protected materialmen performing under the contract of a

trustee financing a parking garage on lands leased by a municipality

with pledged income bonds.'" The court explained the exception on
the basis that the statute authorizing the project did not require a

surety protecting suppliers of work and materials as in the case of
"public" contracts.*'

A materialman must prove that materials furnished to a project
were used in the construction. One qualification to this rule is that a
presumption of use arises from proof that the materials were

delivered at the construction site. This qualification was recently ap-

plied in Temple ton v. Sam Klain & Sons, Inc.^^

»=IND. Code § 32-8-3-1 (Supp. 1980).
''Compare Wood v. Isgrigg Lumber Co., 71 Ind. App. 64, 123 N.E. 702 (1919) with

Nash Eng'r Co. v. Marcy Realty Corp., 222 Ind. 396, 54 N.E.2d 263 (1944) and Stephens
V. Duffy, 41 Ind. App. 385, 83 N.E. 268 (1908), affg, 41 Ind. App. 385, 81 N.E. 1154

(1907) (applying an earlier version of Ind. Code § 32-8-3-1 (1980)).
«M00 N.E.2d 812 (Ind. Ct. App. 1980).

''Id. at 820, If a security interest is retained by the seller furnishing goods to a

materialman, it seems that the lien could not be asserted against the owner who is a
buyer in the ordinary course of business. See Ind. Code § 26-1-9-307(1) (1976); cf.
Puritan Eng. Corp. v. Robinson, 207 Ind. 58, 191 N.E. 141 (1934) (a materialman claim-

ing a lien must show that his materials were furnished for the specific purpose of use
in the building on which he claims a lien).

*»Repp & Mundt, Inc. v. Hitzelberger Supply Co., 353 N.E.2d 547 (Ind. Ct. App.
1976).

»"400 N.E.2d at 818.

"The project was authorized by a statute providing for the financing of city

economic and pollution development facilities. Ind. Code § 18-6-4.5-1 (1976 & Supp.
1980). This was determined not to be "public" construction for which surety bonds are

reC|uired to protect suppliers, because the construction was not paid for with "funds

derived from taxation or from special assessments." Id. § 5-16-5-2.

"'400 N.E.2d 1198 (Ind. Ct. App. 1980). Another exception to the rule estops the

owner to deny that materials were used in the construction when ordered by him. Van
Wells V. Stanray Corp., 341 N.E.2d 198 (Ind. Ct. App. 1976).



1981] SURVEY-SECURED TRANSACTIONS 501

In enforcing a mechanic's lien, the mechanic is entitled to at-

torneys' fees, but not if the owner has paid in full."^ This principle

was recognized in Templeton in which the court found that payment

had not been made in full but held that attorneys' fees incurred in
successfully defending the lien on appeal could not be recovered.*''

2. Notice by Subs to Owners. — The statutory provision requir-
ing subs claiming liens against "owner-occupied" real estate to give

written notice to the owner within thirty days of commencement of
the performance (sixty days in the case of new construction)**^ was
held applicable to a conditional buyer temporarily driven from his

home when it was partially destroyed by fire and when the
materialman furnishing supplies for the repair failed to give the re-

quired notice to the absent buyer.** In another decision, Mid-

America Homes v. Horn,^^ the Indiana Supreme Court sensibly defin-
ed the term "owner" entitled to notice under this provision to mean
the owner contracting with the prime contractor — not a record
owner who is not a party to the construction under which the lien is
claimed.®* In doing so, the court reversed the court of appeals which

had held that notice to the vendor who had contracted to sell the
land to a purchaser was sufficient because he was the record owner
and that notice to the vendee who had contracted with the prime
contractor was not required.** The supreme court properly pointed
out that the purpose of this notice requirement is to alert the

original contracting party that subs under the prime contractor plan

to claim a lien if they are not paid. This permits the contracting par-

ty to take steps to assure proper application of his payments under
the contract. Notice to a record owner who is not a contracting par-
ty will not achieve that purpose. The case also reinforces an old
principle in mechanic's lien law to the effect that subs who have no
contractual relation or rights with the owner must link their claims
by connecting intervening contracts to the owner. Hence, notice

"IND. Code § 32-8-3-14 (1976).
'MOO N.E.2d at 1202-04.

'=IND. Code § 32-8-3-1 (Supp. 1980).
»«Barker v. Brownsburg Lumber Co., 399 N.E.2d 426 (Ind. Ct. App. 1980). This

case involved the old statute requiring notice within five days (fourteen if new con-
struction) of commencement. The time limits have been extended by a 1977 amend-
ment. Act of Apr. 12, Pub. L. No. 310, § 1, 1977 Ind. Acts 1424 (currently codified at

Ind. Code § 32-8-3-1 (Supp. 1980)).
»'396 N.E.2d 879 (Ind. 1979).

''Id. at 883.

»'377 N.E.2d 657, 659-60 (Ind. Ct. App. 1978), criticized in, Townsend, Secured

Transactions and Creditor's Rights, 1978 Survey of Recent Developments in Indiana
Law, 12 Ind. L. Rev. 289, 305-06 (1979).



502 INDIANA LAW REVIEW [Vol. 14:489

must go to the owner in this chain of privity of which subs must be
aware.

Henderlong Lumber Co. v. Zinn^"" also dealt with the same
notice provision. A late notice was given to the owner by a sub who
claimed that the lien nonetheless should be effective with respect to

performances rendered after the notice was received. The court re-
jected this argument on the obvious ground that the statute, as a
condition precedent to the lien, required the notice to be given

within the specified time after the "first delivery of labor per-
formed."^" The sub who furnished materials also sought to uphold
the notice as partially effective by claiming that deliveries were
made under separate contracts, thus qualifying those deliveries
timely made under separate contracts. The evidence did not support
this contention and the court in effect found that all deliveries were
made under one contract.'"^

3. Recording Notice of Mechanic's Lien.
—

'Notice of the

mechanic's lien against real estate describing the property and nam-
ing the owner must be filed in duplicate with the recorder within
sixty days of the last performance by the mechanic.'"^ This statute

seems designed to accomplish at least three separate objectives.

One is to fix a time period during which a lien may be claimed.
Another is to provide the means for getting to the owner belated
notice of the lien which is claimed. This second objective is ac-
complished by a provision that the county recorder mail a required

duplicate copy to the named owner. Still a further purpose is to pro-
vide a form of record notice of the lien to purchasers from the

'"MOe N.E.2d 310 (Ind. Ct. App. 1980). This case dealt with the statute when it re-

quired the five day notice in the case of an old contract and the fourteen day notice in

the case of a new contract. Ind. Code § 32-8-3-1 (1976) Icurrent version at Ind. Code §
32-8-3-1 (Supp. 1980)).

""406 N.E.2d at 312 (based upon Ind. Code § 32-8-3-1 (1976) (current version at

Ind. Code § 32-8-3-1 (Supp. 1980)) (emphasis in original).
'"^406 N.E.2d at 313. In granting summary judgment for the owner, the court held

that the supplier carried the burden of proving that performances were made under

different contracts, a burden which was not supported by invoices showing deliveries

upon different dates. Id. Case law supports the proposition that recording provisions of

the mechanics' lien law must be separately satisfied with respect to work and

materials furnished under separate contracts. Saint Joseph's College v. Morrison, Inc.,

158 Ind. App. 272, 302 N.E.2d 865 (1973) (holding that one recorded notice for separate

contracts was sufficient if notice was recorded within the statutory time for each con-

tract but that tacking to enlarge the time would not be permitted). On this basis, the

argument in the Zinn case that a materialman under separate contracts must give

notice to the owner under time limits with respect to each separate contract is logical,

if not practical.

""Ind. Code § 32-8-3-3 (1976). This means that transferees must take notice of con-

struction in progress and for 60 days after completion.



1981] SURVEY-SECURED TRANSACTIONS 503

owner and to protect purchasers and creditors who deal with the

owner when the notice is not properly and timely filed. An in-

teresting problem arose in Beneficial Finance Co. v. Wegmiller

Bender Lumber Co.,^°^ where the prime contractor contracted with

owners who owned the land as tenants by the entireties. The court

held that a notice by an unpaid sub naming only the husband as

owner was sufficient to meet the notice requirements of the

statute.'"^ The notice was certainly sufficient to notify the owners of

the lien since the husband had contracted with the prime as agent

for the wife.'"^ In holding that the notice was sufficient to put pur-

chasers and creditors upon notice of the lien, the third objective of

the statute, the decision clarified an important problem in title and

recordation law arising where one of two tenants by the entireties

executes a deed, mortgage, or other instrument transferring en-

tireties property without the other party being named. '"^ The case,

although involving a mechanic's lien notice, suggests that the con-

veyance by one spouse is sufficient to put purchasers and creditors

on constructive notice that the transfer may have been authorized

by the non-named entireties party. Title lawyers should carefully

""402 N.E.2d 41 (Inc. Ct. App.), rehearing denied, 403 N.E.2d 1150 (Ind. Ct. App.

1980). On rehearing the case, the court held that the recorded notice of a lien need not
describe or identify the type of ownership of the named owner.

'"^402 N.E.2d at 46. In resolving the problem, the court embarked upon an un-

necessary, unclear line of reasoning whether or not the court should be prejudiced

against the mechanics' lien statute by giving it a strict or liberal construction. This

action raises the unsavory possibility that perhaps the decision was based upon the

judge's hatred or love for this law.

'°°/d. Another recent decision recognizes that the husband may, as established by

rules of implied or apparent authority, be authorized to bind the wife in conveyances

of entireties property. Moehlenkamp v. Shatz, 396 N.E.2d 433 (Ind. Ct. App. 1979),
discussed in text accompanying note 11.

""402 N.E.2d at 46. Normally a recorded transfer by an owner outside the record

chain of title is not constructive notice of the rights of the transferee. Thus, if M,

holding under an unrecorded contract with V, gives a mortgage to E which is recorded
and five years later M acquires record title, a later bona fide purchaser from M is not
put on constructive notice of the mortgage. Sinclair v. Guzenhauser, 179 Ind. 78, 98

N.E. 37 (1912), aff'd on rehearing, 179 Ind. 67, 100 N.E. 376 (1913); Bingham v.

Kirkland, 34 N.J. Eq. 229 (1881). See also, Tefft v. Munson, 57 N.Y. 97 (1874). The ques-
tion thus arises, where a deed is made to H and W as tenants by entireties, whether a
transfer by one of the spouses alone is outside the chain of title since neither may con-
vey without the other until the relation is terminated. Because the relation may be ter-
minated by parol circumstances, such as death, divorce, or agreement, it seems that

purchasers must take note of recorded transfers by one of the parties. Compare Sim-

mons V. Parker, 61 Ind. App. 403, 112 N.E. 31 (1916) (mortgage by husband alone is

constructive notice of purchase-money vendor's lien and put purchaser on duty of in-

quiry) with Brower v. Witmeyer, 121 Ind. 83, 22 N.E. 975 (1889) (purchaser of first

recorded mortgage was required to determine whether holder took with notice of a

purchase-money mortgage acquired prior in time but recorded subsequently).



504 INDIANA LAW REVIEW [Vol. 14:489

take note of this. The general rule that both husband and wife must
join in transfers of entireties property does not mean that a record
conveyance by one party is facially ineffective. A transfer by one
may be effective, and purchasers must make further inquiry into
this possibility when a conveyance or transfer by one is of record or,
as in this case, when notice of a mechanic's lien names only one of
the spouses.

•4. Priorities of Mechanics' Liens. — A properly recorded
mechanic's lien on real estate relates back to the time the work first
commenced,^"* and from that point the lien will take priority over

subsequent or intervening mortgages and conveyances."" However,

by the terms of the same statute the mechanic will share pro rata
with prior and subsequent mechanic's liens."" This of course lays the

groundwork for a possible circuity of lien problem when the lien of
one mechanic takes priority over a later mortgage, and the lien of

another mechanic commences after the same mortgage. In all pro-
bability, the mortgage will and should be defeated by both liens if

they are properly recorded.'" If the mortgage is promptly recorded,

however, and if the loan made under the intervening mortgage is in
fact applied to payment of mechanics with perfectable liens, the
mortgagee should to that extent be subrogated to the equal priority

status of those mechanics actually paid. The reasons for such action
include avoiding unjust enrichment, avoiding an hideous circuity

problem, and resolving fairly an important problem of construction

financing when the owner needs new funds during progress of the
work."^ Unfortunately, this result, announced by two well entrenched

Indiana cases, "^ was rejected by Beneficial Finance Co. v. Wegmiller

""IND. Code § 32-8-3-5 (1976).

'°7d. See, e.g.. Northwestern Loan & Inv. Ass'n v. McPherson, 23 Ind. App. 250,
54 N.E. 130 (1899). A prior mortgage or lien as a general rule will take priority over
subsequent mechanics' liens absent waiver or estoppel. See, e.g., Robert Hixon

Lumber Co. v. Rowe, 83 Ind. App. 508, 149 N.E. 92 (1925). However, subsequent
mechanics with a lien upon buildings erected by them may remove the structures. Ind.
Code § 32-8-3-2 (1976).

'°IND. Code § 32-8-3-5 (1976).

'"For a circuity of lien problem between successive mortgages and an intervening

mechanic's lien, see Thorpe Block Sav. & Loan Ass'n v. James, 13 Ind. App. 522, 41
N.E. 978 (1895), where there was no equality of priority problem.

"^If a mortgagee advances funds to pay off prior mechanic's liens, equity will

subrogate the mortgagee to those liens to prevent unjust enrichment. Mishawaka, St.

Joseph Loan & Trust Co. v. Neu, 209 Ind. 433, 196 N.E. 85 (1935); Warford v. Hankins,
150 Ind. 489, 50 N.E. 468 (1898). Prior liens will be deferred to purchase money secur-
ity interests to avoid unjust enrichment. But see, Houston v. Houston, 67 Ind. 276

(1879) (purchase money lien took priority over judgment lien).
'"Ward V. Yarnelle, 173 Ind. 535, 91 N.E. 7 (1910); McLaughlin Mill Supply Co. v.

Laundry Serv., 95 Ind. App. 693, 184 N.E. 429 (1933) (where only some of competing

mechanic's lienholders had notice of mortgage).



1981] SURVEY-SECURED TRANSACTIONS 505

Bender Lumber Co.,^^* in which the court deferred the recorded
mortgage to a materialman although the mortgage loan was used to

pay other mechanics."* Prior case law to the contrary was

distinguished on the apparent ground that the mortgagee should

share in priority only if the circumstances showed notice to or

waiver by the competing mechanics."® This decision will not have a

favorable impact on the financing of construction and should be

overruled.

Purchasers generally must take notice of pending or recent con-

struction because a mechanic's lien relates back to the time of com-

mencement of the work; the lienholder has sixty days from the com-
pletion of work within which to record his mechanic's lien; and the

mechanic's lien will take priority from time of commencement if
notice of the lien is properly recorded."' The rule of relation back
operates to the further advantage of the mechanic's lienholder

against the owner or purchaser from the owner when the lienholder
is called back and directed by the owner to correct defective work

or complete the project. The mechanic then has sixty days after that
completion in which to file notice of his lien."* The Indiana statute,
however, contains a special provision protecting a purchaser of a

single or double family dwelling for his own occupancy if he pur-
chases innocently, without notice, and for value before notice of the

lien is recorded."' This provision was applied in Riggins v.
Sadowsky^^" in which an unpaid subcontractor had furnished work
and materials for the owner's single family dwelling but had not

recorded notice of his lien. The property was then sold to a pur-
chaser who took possession; thereafter, the sub made some repairs
at the purchaser's request. The sub then filed notice of his lien for
his prior services within sixty days of the corrective work. The
court, in reversing the decision below which had upheld the lien,

held that the lienholder carried the burden of proving that he had

filed notice of his lien prior to the purchase or that the purchaser

was not a bona fide purchaser.^^' Established decisions allowing
notice of the lien to be recorded within sixty days after corrective

work demanded by the owner'^^ were properly held inapplicable to

"M02 N.E.2d 41 (Ind. Ct. App.), rehearing denied, 403 N.E.2d 1150 (1980).
"^402 N.E.2d at 48.

"Yd.

'"Id. at 46-47. See Ind. Code § 32-8-3-5 (1976).

"'See note 103 supra.

'"Ind. Code § 32-8-3-1 (1976 & Supp. 1980). The statute protects the good faith
purchaser if he records his deed before the notice of lien is recorded.

''"403 N.E.2d 1152 (Ind. Ct. App. 1980).

'''Id. at 1155-56.

"'E.g., Potter v. Cline. 161 Ind. App. 349, 353, 316 N.E.2d 422, 425 (1974) (recogniz-



506 INDIANA LAW REVIEW [Vol. 14:489

an innocent purchaser for value of a single or double dwelling for his

own occupancy who was not aware of the unpaid bill owing to the
prime mechanic when he requested the corrective work.'^^ The
burden of proving lack of good faith was correctly placed upon the
lien-claimant because the purchaser apparently had paid a commer-
cially reasonable value. '^^ It is likely that the mechanic should have

lost for another reason not discussed by the case. It did not appear

from the facts that he had given the requisite written notice of in-

tent to hold a lien within the thirty or sixty day period from the

time of the corrective work to the purchaser who was an owner-
occupant of a single or family dwelling. This requirement would

seem reasonably applicable under these circumstances.'^^
5. Mechanic's Lien on Retainage. — A sub may assert a

mechanic's lien upon funds owing by the owner to the prime by noti-
fying the owner in writing of his claim without filing record notice
of the lien.'^* A recent decision'" held that the bringing of suit by
the sub does not fulfill this notice requirement and indicated that if

a lien upon the fund is to be obtained, it will not exist until the for-

mal notice is given. '^* Another case, Blade Corp. v. American

ing rule that completion of work under a separate contract did not extend time for fil-

ing notice of lien under another contract). Prior to the statutory provision protecting

the bona fide purchaser, it was held that a purchaser who requested completion or cor-
rective work under a construction contract of the vendor took subject to the relation

back lien if the lien was recorded within 60 days after the completion of the corrective

work. Conlee v. Clark, 14 Ind. App. 205, 42 N.E. 762 (1896). See generally, Townsend,

Secured Transactions and Creditors' Rights, 1975 Survey of Recent Developments in

Indiana Law, 9 Ind. L. Rev. 305, 330-31 (1975).

''M03 N.E.2d at 1155-56.

'^^See Ind. R. Tr. P. 9.1(D) which was not cited in the decision.

'^^See statute and discussion at note 95 supra and accompanying text. Because the

purchaser is a new and different kind of owner-occupant, it seems that a mechanic

should be required to give him written notice of his intent to claim a lien arising out of

corrective work.

'"Ind. Code § 32-8-3-9 (1976).

'"Zeigler Bldg. Materials, Inc. v. Parkison, 398 N.E.2d 1330 (Ind. Ct. App. 1980)

(materialman, by intervention in a suit by owner against the counterclaiming prime

who had been discharged in bankruptcy, claimed a right to funds owing by owner to
prime — court failed to recognize that the only right of a materialman-creditor of the
bankrupt to do this would have been on the basis of a lien upon the fund owing by the

owner to the prime).

'^*/d. at 1332. In this case a materialman claimed a right to funds owing by the

owner to the prime contractor under whom the materials were furnished. The
materialman intervened in a suit against the counterclaiming prime who had been

discharged in bankruptcy. The court was unable to find a theory upon which the

materialman could make a claim to the fund after the bankruptcy discharge of the

prime contractor. It is submitted that this could have been sustained if the

materialman had a valid, perfected lien upon the fund by virtue of the mechanic's lien

statute. See, Avco Fin. Co. v. Erickson, 132 111. App. 2d 868, 270 N.E.2d 111 (1971).



1981] SURVEY-SECURED TRANSACTIONS 507

Drywally Inc.,^^^ held that a proper notice of lien upon an obligation

of the owner to the prime is ineffective if the owner's right of setoff

against the prime contractor equals or exceeds the amount owing by

the owner.''" The owner's setoff consisted of payments and damages

incurred as a result of the prime's default and abandonment of the

work prior to the owner's receipt of notice.'^' Although the sub may
claim a lien upon amounts owing to the contractor, an owner con-

tracting with a prime for construction is not personally bound to a

sub (subcontractors, laborers and materialmen contracting with the

prime) supplying work or materials.''^ A provision in the contract
between the owner and the prime that the prime will pay the subs

does not contractually bind the owner to such parties, although, ac-

cording to another recent case,''' it will obligate the prime to subs

who are not in privity with him as third party beneficiaries.
Another current decision''* recognized that a tenant may hold the
landlord upon his promise to reimburse the tenant for improvements

even though the tenant's notice of mechanic's lien was filed too late.

The point is thus made that a mechanic with a promise of payment
from the owner may have a remedy to enforce his lien and the pro-
mise as well, so that if one fails the other may prevail.

6. Application of Payment from Construction Fund. — A con-
tractor often deals with a materialman or subcontractor who fur-

However, the case properly seems to hold that unless notice is given the owner before
bankruptcy, the lien may not be claimed after the petition is filed, apparently because
it does not relate back to the commencement of performance. Accord, Lockridge v.
Brockman, 137 F. Supp. 383 (N.D. Ind. 1956); 11 U.S.C. § 545(2) (1978) (unperfected

statutory lien voidable if ineffective against bona fide purchaser); Id. § 547(c)(6). But cf.,
id. § 546(b) (protecting lien which relates back).

'''Blade Corp. v. American Drywall. Inc., 400 N.E.2d 1183 (Ind. Ct. App. 1980).
Another decision found that the setoff was not proved. Templeton v. Sam Klain & Son,
Inc., 400 N.E.2d 1198 (Ind. Ct. App. 1980).

'™400 N.E.2d at 1186-87.

"'It was determined that retainages by the owner were exceeded by expenses of
completion incurred after the default and notice. The court indicated that as against
lien notices against the fund, contractually provided retainages of the owner could be

withheld until completion. Id. at 1186.

'^'Because privity is lacking between the owner or subs, the latter may not
recover absent a binding direct or third party beneficiary promise of the owner. E.g.,

Indianapolis Raceway Park, Inc. v. Curtiss, 386 N.E.2d 724, 727 (Ind. Ct. App. 1979),
discussed in Townsend, Secured Transactions and Creditors' Rights, 1979 Survey of
Recent Developments in Indiana Law, 13 Ind. L. Rev. 369, 381-82 (1980) [hereinafter
referred to as Townsend, 1979 Survey].

'^'Zeigler Bldg. Materials, Inc. v. Parkison, 398 N.E.2d 1330 (Ind. Ct. App. 1980).

'^'Malbin & Bullock, Inc. v. Hilton, 401 N.E.2d 719 (Ind. Ct. App. 1980) (where
landlord transferred funds realized from sale of leased property to escrow account for

payment in case tenant won mechanic's lien suit, held that tenant recovering personal
judgment against landlord could reach account by proceedings supplemental).



508 INDIANA LAW REVIEW [Vol. 14:489

nishes supplies or work on several projects with different owners.
Suppose that the owner on one project pays a contractor who uses
the funds to make a partial payment to a materialman or subcon-
tractor to whom the contractor is obligated on that project as well
as on other projects. Must the money be applied to the project from
whence the funds were generated? In Templeton v. Sam Klain &
Son, Inc.,^^^ the court of appeals recognized the basic rule that a deb-

tor making a partial payment on two or more debts may direct ap-
plication to one or the other; if he does not, the creditor may apply
it as he sees fit; and if the creditor does not do so, the law will apply

it to the least secured, or to the creditor's advantage, and in other

cases to the oldest debt."" In this case, a materialman applied the

funds deposited in a general account toward the oldest obligation

owing by the contractor — another project. The court held that the
creditor was under no obligation to apply the payments to the con-
struction on the property of the owner who made payment since the
materialman was unaware of the source of the funds."' The creditor
was not bound by the deception of the contractor who indorsed
check payments certifying payment of all materialmen and deposited

them in his general account. The court indicated that the result might
have been different had proof, which was lacking, established that
the funds represented by the owner's restrictively indorsed check

were in fact the ones used to make the payment, and that the
creditor had knowledge of that fact."* Because mechanic's
lienholders have the inchoate right to a lien upon those funds"^ and

because criminal laws require disclosure of unpaid liens upon receipt

of payment,'" good faith should require the payee with knowledge of

the source to apply the payment toward the contract generating the
funds.'"'

'^'400 N.E.2d 1198 (Ind. Ct. App. 1980).

''"E.g., McCauley v. Holtz, 62 Ind. 205, 207 (1878).
'^'400 N.E.2d at 1202. A similar result was reached in Western & Southern Indem.

Co. V. Cramer, 104 Ind. App. 219, 10 N.E.2d 440 (1937), where a surety upon public con-

struction contended that a materialman was required to apply payments from the sure-

ty's project towards obligations incurred on that project. Contra, Clow Corp. v. Ross

Township School Corp., 384 N.E.2d 1077 (Ind. Ct. App. 1979), discussed in Townsend,

1979 Survey, supra note 132, at 395.

'^400 N.E.2d at 1202.

""Upon notice to the owner, a mechanic may obtain a lien upon retainages. Ind.
Code § 32-8-3-9 (1976). See generally discussion at note 126 supra and accompanying

text.

""Ind. Code § 32-8-3-15 (Supp. 1980).

'"See Townsend, 1979 Survey, supra note 132, at 396 n.l96. Statutes in some

states make payments received by a contractor, trust funds to be applied towards the

construction obligations. E.g. Romero v. Romero, 535 F.2d 618 (10th Cir. 1976); In re

Morris Ketchum, Jr. & Assocs., 409 F. Supp. 743 (S.D.N.Y. 1975). These cases denied



1981] SURVEY-SECURED TRANSACTIONS 509

7. Exemptions. — TYie 1980 legislature modified the general ex-
emption statute in four principal respects.'"^ First, the total amount
of exemption was increased to a new limit of $10,000; the increase is
to include real estate or personal property constituting the debtor's

personal or family residence to a value of $7,500; other real estate or

tangible personal property to a value of $4,000; intangible personal

property to $100 with an exclusion of debts and income owing; and

unlimited amounts for professionally prescribed health aids.'" Sec-

cond, joint debtors' individual entireties interests in real estate or

personal property constituting the debtor's personal or family res-

idence may be claimed to a value of $7,500 (with the $10,000 total
limit on this and other exempt property)/*^ This changes prior deci-
sional law disallowing joint debtors the right to claim entireties

property exempt as against joint creditors."^ Third, the option to
claim the exemptions specified by the Bankruptcy Code was re-
jected, so that only Indiana exemptions may be claimed in
bankruptcy.'" A fourth provision'" seems to make entireties real
property exempt without limitation in bankruptcy proceedings, ex-
cept in the case of joint or consolidated cases involving both

spouses. To the extent that this final provision makes a special ex-
emption rule for bankruptcy, it is clearly at war with the federal

discharge to a bankrupt misapplying proceeds. Contra, In re Dloogoff, 600 F.2d 166
(8th Cir. 1979).

Payment received by a contractor under the Miller Act must be applied toward
contract obligations. St. Paul Fire & Marine Ins. Co. v. United States, 309 F.2d 22 (8th
Cir. 1962) (opinion by Judge Blackmun), cert, denied, 372 U.S. 936 (1963).

Indiana case law holds that the owners of equitable trust funds may reclaim them
from an innocent creditor who applies them towards an antecedent debt. Peoples State
Bank v. Caterpillar Tractor Co.. 213 Ind. 235, 12 N.E.2d 123 (1938) (pre-existing debt is
not value sufficient to constitute payee of money a bona fide purchaser). However, if a
negotiable instrument is used to pay a prior debt, the payee may be a holder in due
course, and if so, will take free of claims to the instrument. Ind. Code §§ 26-l-3-303(b),
-305(1) (1976).

'"Act of Mar. 3, 1980, Pub. L. No. 196, § 1, 1980 Ind. Acts 1625 (currently codified

at Ind. Code § 34-2-28-0.5 (Supp. 1980) (effective April 1, 1980)).
'"Ind. Code § 34-2-28-0.5-2(a)-(d) (Supp. 1980).
'"/d § 34-2-28-l(a).

"'Sharpe v. Baker, 51 Ind. App. 547, 96 N.E. 627 (1911), petition for rehearing
overruled, 99 N.E. 44 (1912).

"Ind. Code § 34-2-28-0.5, -1 (Supp. 1980). The act was carelessly drafted to allow
only exemptions permitted by Indiana law and by inference to exclude non-Code

federal exemptions, which of course the Indiana legislature cannot do. To this extent
the provision is invalid.

'"/d. § 34-2-28-l(e). This subsection makes exempt:
Any interest the debtor has in real estate held as a tenant by the entireties
on the date of the filing of the petition for relief under the bankruptcy code,

unless a joint petition for relief filed by the debtor and spouse, or individual

petitions of the debtor and spouse are subsequently consolidated.



510 INDIANA LAW REVIEW [Vol. 14:489

law and ineffective. Hence, if any sensible interpretation is to be
made of the statute, it seems that it was intended to make entireties
property exempt for the purpose of eliminating the doubt existing
under section 541 of the Code whether the bankrupt's interest in en-
tireties property, whatever it is, will pass to the estate.'^* If made
exempt by state law, then the substantial effect is to give entireties
property the same status it had under prior Indiana and bankruptcy
law — providing that the exemption is claimed. The reference in the
exemption statute to joint bankruptcies was probably included to in-
dicate that as under prior law,'''^ joint creditors of husband and wife

should be allowed to reach entireties property (subject, however, to

the homestead exemption). If so construed, this means that the
rights of joint and individual creditors with respect to entireties

property will effectively remain as they were before the new code,
except for the $7,500 homestead exemption allowed each spouse

against joint creditors. Thus if H takes bankruptcy, owning by the
entireties a home worth $40,000 and has joint creditors with claims
of $20,000, then the bankrupt and his wife may claim as exempt
$15,000. The joint creditors may reach what is left of the home
whether administered in or out of bankruptcy or as a joint bank-

ruptcy. The balance ($5,000) may be claimed as exempt as against
the individual creditors whether or not H's interest passes to the

estate. Individual creditors may not reach the wife's interest in the
property which may be claimed as either exempt or as not subject
to creditor process. This can be litigated in H's bankruptcy or in a

joint bankruptcy.'^" This solution, of course, is highly speculative.

It should be noted that when a state exemption is allowed or
claimed in bankruptcy, its parameters are still controlled by the

federal law. Thus, although the general Indiana exemption law is

'"Under the Bankruptcy Code it is not clear whether the interest of a debtor,

whatever it may be, will pass to the estate in bankruptcy under § 542 of the Code.

Under the proposed interpretation of the Indiana exemption law, the entireties owner

will be placed in the same position that he was in before its adoption by allowing hus-

band and wife either to claim the exemption allowed by Indiana law or to claim that

his interest in the assets does not pass to the trustee. For an excellent discussion of

this problem under the Code see Note, The Bankruptcy Code of 1978 and Its Effect

upon Tenancies by the Entireties, 13 Ind. L. Rev. 761 (1980).

'"Under prior law entireties property did not pass as estate property since it was

owned by the marital unit. But joint creditors could reach it. First Nat'l Bank of

Goodland v. Pothuisje, 217 Ind. 1, 25 N.E.2d 436 (1940). In the case of husband and wife

consolidated bankruptcies, some referees allowed entireties to be administered so that

joint creditors would be paid. The same will be true under the Code. See generally. In

re Jeffers, No. 79 30724 (N.D. Ind. Feb. 19. 1979) (unpublished opinion of Judge

Rodebaugh).
'^11 U.S.C. § 725 (Supp. II 1978).



1981] SURVEY-SECURED TRANSACTIONS 511

limited to contract actions and is made inapplicable to judgments ac-
quired before October 1, 1977, the Code prescribes that the exempt
property is "not liable during or after the case for any debt of the

debtor" that is provable in bankruptcy.'^' Most tort claims are now
provable in bankruptcy. '^^

8. Proceeding Supplemental to Execution. — In the enforcement
of a judgment by proceedings supplemental, the court may order the
debtor's property of all types applied toward the indebtedness, pro-

viding that the property is transferable and subject to creditor pro-

cess. The order may extend to persons with respect to obligations
and funds of the debtor, and it may direct payments of unspecified
amounts and payments made dependent upon conditions. Authority
for this extraordinary and necessary power is derived from statute
and from inherent equity power to afford remedies where execution
is not adequate.'*^ The workability of this broad power of the court
is beautifully illustrated by a group of recent decisions. In Deetz v.
McGowan,^^* a creditor with a judgment for over $100,000 procured

an order against the judgment debtor directing proceeds from the

sale of the latter's land to be deposited in an escrow savings ac-

count. Pending appeal from the order, the judgment debtor died,

and her personal representative claimed the funds to satisfy priority

creditors of the estate. The court held that the escrow order in pro-
ceedings supplemental created a lien thereon which took priority

over estate creditors.'*^ Hudson v. Tyson^^^ allowed a tort creditor
with a judgment of $10,000 against a bail bonding company to gar-
nish a deposit of $75,000 which was required by law'^^ to be given to
the insurance commissioner to assure payment of bond forfeitures.'^*
Although the deposit was held to secure payment of bond for-
feitures which had a first priority, the court allowed the fund to be

"attached," subject to payment when it was established that con-
tingent charges against the fund and the company which had ceased
business were less than the deposit. '^^ In Malbin & Bullock, Inc. v.

'''Id. § 522(c; (Supp. Ill 1979).

'*Vd. § 502. Although the Indiana exemption law excepts judgments entered
before October 1, 1977, such claims also will be discharged under the Code for the
same reason.

'=^IND. Code §§ 34-1-44-1 to -8 (1976); Ind. R. Tr. P. 69(E).
''"403 N.E.2d 1160 (Ind. Ct. App. 1980).

''Yd. at 1165. A lienholder's interest in the collateral will survive administration.
Paidle v. Hestad, 169 Ind. App. 370, 348 N.E.2d 678 (1976).

"M04 N.E.2d 636 (Ind. Ct. App. 1980). In this case a bail bondsman shot a bonded
client while attempting to bring him in on a bench warrant. The client recovered a
judgment against the bondsman and his principal insurance company.

'"Ind. Code § 35-4-5-35 (1976).
"M04 N.E.2d at 642.
'''Id. at 641.



512 INDIANA LAW REVIEW [Vol. 14:489

Hilton,^^ a tenant who sought to establish a mechanic's lien and in-
stead recovered a personal judgment against a corporate owner of
real estate was allowed to garnish an escrow account established
with the owner's funds to protect a subsequent purchaser of the
property. Garnishment was permitted, although the escrow was
created by the successor shareholders to whom all the assets of the
corporate owner had been transferred.^^' American Underwriters,
Inc. V. Curtis^^^ allowed a tort creditor who obtained a default judg-
ment to garnish the debtor's liability insurer.'*^ In this case the in-
surer, after a hearing in proceedings supplemental, raised the

defenses that the policy was conditioned by statute on a judgment
rendered against the insured "after actual trial"'" and that liability

could not be sustained where judgment was procured by the claim-
ant without notifying the liability insurer of the suit. The court
disallowed the "actual trial" defense because it was raised too late"*
and determined that nothing in the statute required the tort claim-
ant to notify the insurer of the suit.'®* Finally, Arnold v. Dirrim^^'^
recognized that proceedings supplemental may be used as a vehicle to
reach assets which have been fraudulently conveyed by the debtor.'**

Until a judgment is final, it may not be enforced by execution or
proceedings supplemental.'*' A questionable application of this rule

'«°401 N.E.2d 719 (Ind. Ct. App. 1980). Although the court denied a lien to the

creditor, a judgment based upon the contract between the owner and tenant was

upheld on pleadings which requested foreclosure of a mechanic's lien.

'*'The court had no trouble in allowing garnishment of assets which passed to the

successor shareholders of the corporation, although the basis for the holding was not

made clear.
'^^392 N.E.2d 516 (Ind. Ct. App. 1979).

"^Id. at 517-18; accord, Allstate Ins. Co. v. Morrision, 146 Ind. App. 497, 256

N.E.2d 918 (1970).

'"Ind. Code § 9-2-l-5(c) (1976 & Supp. 1980).
'*^The Indiana Supreme Court has indicated that defenses of a garnishee in pro-

ceedings supplemental must be pleaded. State ex reL Travelers Ins. Co. v. Madison

Superior Court, 265 Ind. 287, 354 N.E.2d. 188 (1970).
'°°392 N.E.2d at 519. Another recent decision recognizes that the liability insurer

has no direct fiduciary duty or obligation to settle with a third party injured by the in-

sured at least before judgment against the insured. Winchell v. Aetna Life & Cas. Ins.
Co., 394 N.E.2d 1114 (Ind. Ct. App. 1979) (insurer also insured plaintiff). Accord, Ben-

nett V. Slater, 154 Ind. App. 67, 289 N.E.2d 144 (1972) (where insurer failed to settle

within policy limits, beneficiary with excess judgment against insured could not bring

direct suit against insurer), discussed in Townsend, Secured Transactions and

Creditors' Rights, 1973 Survey of Recent Developments in Indiana Law, 7 Ind. L.

Rev. 226, 243 (1973).

'"398 N.E.2d 442 (Ind. Ct. App. 1979), discussed at text accompanying notes 198-200

infra.

'^'398 N.E.2d at 447.

"'De Later v. Hudak, 399 N.E.2d 832 (Ind. Ct. App. 1980) (order to pay marital

debt had not become final).



1981] SURVEY-SECURED TRANSACTIONS 513

was applied in Kuhn v. Kuhn."° The court held that decrees award-
ing future support payments of definite amounts could not, when
later in default, be enforced by execution or proceedings supplemen-

tal until the amount was liquidated by a court judgment or decree.'"
In making installment decrees unenforceable until further litigation
establishes the amount in default, the Indiana Supreme Court has
imposed an expensive and harsh burden of relitigation upon the

many thousands of mothers who must contend with delinquent sup-
port payments."^ Whether the Kuhn rule will apply to property divi-
sion and other awards payable in fixed installments was not made
clear by the case.

9. Enforcement of Property Division and Support
Orders. — The supreme court in Kuhn v. Kuhn"^ held that an order
for periodic support payments of definite amounts is not a final

order, so that before it may be enforced by execution or contempt, a
new decree or judgment determining the amount of default must be
procured."^ In a sense the court was correct in recognizing that for

some purposes, at least, a support order is not final. It may prospec-
tively be modified by later court order;'^^ it terminates on emancipa-

tion or when the child reaches twenty-one^'" and possibly upon the
death of the spouse procuring the award or the death of the child."'

However, the award is final for purposes of appeal and enforcement
by contempt proceedings."* The court justified its new rule on the
ground that a contrary result would make support orders for future

"°402 N.E.2d 989 (Ind. 1980), considered at text accompanying notes 173-85 infra.
'"402 N.E.2d at 991. For a discussion of the decision of the court of appeals per-

mitting enforcement of delinquent installments under a support order without a fur-

ther order liquidating the amount due, see Townsend, 1979 Survey, supra note 132, at

390.

"^One reason for the decision was the possibility, apparently instilled by amicus

curiae, that installment support orders would constitute judgment liens on real estate

if such orders were considered judgments, a possibility which has been rejected by

prior case law and current legislation. See discussion at text accompanying notes

179-81 infra.

'"402 N.E.2d 989 (Ind. 1980). For a similar result see De Later v. Hudak, 399
N.E.2d 832 (Ind. Ct. App. 1980) (where proceedings supplemental were denied because

the amount owing under a decree to pay a marital debt had not been fixed).
'"402 N.E.2d at 991.

'"Ind. Code § 31-1-11.5-17 (1976).
"7d §§ 31-1-11.5-12, -17.
'"See Collins v. Gilbreath, 403 N.E.2d 921 (Ind. Ct. App. 1980) (arrearages could

not be recovered by stepfather after mother committed suicide — court indicated that
right passed to mother's estate).

"'Before contempt orders are entered, the court, after notice and hearing, must

find evidence of a violation of the order. Denny v. State, 203 Ind. 682, 182 N.E. 313
(1932). Contempt is proper for failure to pay support. Rager v. Rager, 222 Ind. 443, 54

N.E.2d 261 (1944).



514 INDIANA LAW REVIEW [Vol. 14:489

support payments, liens on property/" The 1980 legislature met this
concern by prohibiting a court from creating a lien on real estate un-

til the amount delinquent has been fixed by judgment or a copy of
the order finding the amount delinquent has been entered upon the
lis pendens docket.'*" Also, prior case law holds that property divi-

sion and support orders directing installment payments do not serve

as basis for a judgment lien — at least before the amount owing is
fixed.'*' Finally, the court relied upon a statutory provision per-

missively allowing a court to enter a judgment for unpaid support.
This, however, overlooks the fact that this law is simply a restate-

ment of well-recognized equitable power'*^ and in the teeth of
another statute allowing a decree to be enforced "by all remedies

available for enforcement of a judgment including but not limited to
contempt. . . ."'*^ The court also held that since enforcement of a
delinquent support order is not an action upon a judgment (for
which the limitation is ten years) the general catch-all statute of

limitations of fifteen years applied to bar the remedy.'*^ The court
failed to consider whether the remedy is equitable and governed by
laches and other equitable rules of discretion.'*^ The decision thus
will not only make enforcement of delinquent payments expensive
and difficult, but also will allow family feuds and litigation to sim-

mer for unnecessarily long periods of time.
Other decisions held that the right to collect overdue support

payments awarded to a wife pass to her estate when she dies;'*^ that
unvested pension rights can be considered in a property division

award,'*' a result seemingly repudiated by 1980 legislation defining

'™402 N.E.2d at 990-91.

""Act of Feb. 27, 1980, Pub. L. No. 181, § 1, 1980 Ind. Acts 1574 (currently codified

at Ind. Code § 31-l-11.5-13(f) (Supp. 1980)).

'^'Uhrich v. Uhrich, 362 N.E.2d 1163 (Ind. Ct. App. 1977) (property division

payable in installments); Myler v. Myler, 137 Ind. App. 605, 210 N.E.2d 446 (1965) (sup-

port installments).

'*^Suit may be brought upon an equitable decree to enforce it as in the case of a
judgment. Hansford v. Van Auken, 79 Ind. 302 (1881); Princeton Coal & Mining Co. v.
Gilchrist. 51 Ind. App. 216, 99 N.E. 426 (1912). Courts have inherent power to issue

orders assisting in the enforcement of judgments and decrees. Wilson v. Wilson, 169

Ind. App. 530, 349 N.E.2d 277 (1976).

"'Ind. Code § 31-l-11.5-17(a) (Supp. 1980).

"*The Indiana statute of limitations applicable to "judgments" is ten years. Ind.

Code § 34-1-2-2(6) (1976). The statute is not limited to judgments for the payment of

money, nor is the statute limited to legal judgments. Hence, the court's failure to apply

the limitations statute applicable to "judgments" is a newly created and erroneous

holding that a support order is not a judgment.

"'^The doctrine of laches may be applicable. See Matthews v. Wilson, 31 Ind. App.

90, 67 N.E. 280 (1903) (laches applied to enforcement of lien decreed in favor of wife).

"'Collins v. Gilbreath, 403 N.E.2d 921 (Ind. Ct. App. 1980).

'"Irwin V. Irwin, 406 N.E.2d 317 (Ind. Ct. App. 1980) (holding that the unvested

pension could be considered in arriving at the proportion of division but not as a part



1981] SURVEY-SECURED TRANSACTIONS 515

marital property as including "a present right to withdraw pension

or retirement benefits";'** and that a property division decree giving

the husband a lien upon property going to the wife to be paid when
the wife decides to sell the property is invalid as improperly del-

egating authority to the wife.'*®

10. Attachment and Garnishment. — While non-residence of the
defendant is grounds for attachment and attachment and garnish-

ment in Indiana,'*" due process, under the rule of Shaffer v.
Heitner,^^^ limits jurisdiction in such cases to situations in which the

defendant appears, is personally served within Indiana, is subject to

Indiana jurisdiction because of sufficient contacts as required by In-

ternational Shoe Co. V. Washington, ^^^ or where the plaintiff is suing

on a judgment meeting the foregoing requirements.'®^ Prior to Shaf-

fer it was assumed that in rem jurisdiction could be obtained over a
tort creditor by attachment and garnishment of his liability insurer

in any state where the insurer could be served pursuant to the well
known case of Seider v. Roth.^^* However, the rule of Seider v. Roth
was overruled by the United States Supreme Court in Rush v. Sav-
chuk.^^^ There, a resident of Minnesota brought suit against a resi-

dent of Indiana for injuries received in an accident in Indiana by

serving and naming the liability insurer of the defendant as gar-
nishee. Because the plaintiff had no direct cause of action against

the insurer and other grounds of jurisdiction required by Shaffer
were not met, an in rem judgment for the plaintiff was reversed."*

of the property awarded). Accord, Libuano v. Libuano, 388 N.E.2d 574 (Ind. Ct. App.
1979). Irwin also held that a workmen's compensation award received {but apparently
owing before separation) after final separation should not be included in the property
awarded. The 1980 legislature redefined "final separation," the date for determining
marital property as the date of the filing of the petition. Act of Feb. 28, 1980, Pub. L.
No. 180, § 2, 1980 Ind. Acts 1573 (currently codified at Ind. Code § 31-1-11.5-11 (Supp.
1980)).

'**Act of Feb. 28, 1980, Pub. L. No. 180, § 1, 1980 Ind. Acts 1573 (currently codified

at Ind. Code § 31-l-11.5-2(d) (Supp. 1980)).
"'Henderson v. Henderson, 401 N.E.2d 73 (Ind. Ct. App. 1980). Other cases,

however, upheld a support decree to be adjusted annually by the consumer price in-
dex, Branstad v. Branstad, 400 N.E.2d 167 (Ind. Ct. App. 1980), and until the child com-

pletes his undergraduate college education diligently pursued, Brokaw v. Brokaw, 398
N.E.2d 1385 (Ind. Ct. App. 1980). But a property division award conditioned on non-
remarriage of the wife was held unlawful. Wilhelm v. Wilhelm, 397 N.E.2d 1079 (Ind.
Ct. App. 1979).

""Ind. R. Tr. P. 64(B).

'"433 U.S. 186 (1977).

"^326 U.S. 310 (1945).

"'The subject is a lively one. See, e.g., Townsend, 1979 Survey, supra note 132, at
391.

''n7 N.Y.2d 111, 216 N.E.2d 312 (1966).

"nOO S. Ct. 571 (1980).
'^M at 573-74.



516 INDIANA LAW REVIEW [Vol. 14:489

11. Fraudulent Conveyances. — A creditor may avoid transfers
of property subject to creditor process if the transfer was not for
fair consideration and was made with intent to defraud creditors by
a debtor who is or thereby becomes insolvent.'" In Arnold v. Dir-
rim,^^^ the remedy was allowed in favor of successful members of a
class action in which judgment was recovered against a corporate
director for violation of the Indiana Securities Act/'® During the

course of the litigation and shortly after commencement of the trial,
the director sought to avoid collection of the judgment by a series of
transactions in which he conveyed all of his property for inadequate

consideration to a family corporation, to his wife, and to a spend-

thrift trust in which he reserved a joint right to income for life. A
finding of intent to defraud creditors was supported by numerous
badges of fraud including the contemporaneous, hurried character of

the transfers, the inadequacy of consideration, and the fact that the

transfers, all made during the pendency of the lawsuit against him,
were to close family members with some benefits retained by the
debtor. The court further recognized that a transfer for a fair con-
sideration may be avoided as fraudulent if it is taken by the
transferee with knowledge of the fraud.^"" The donor's intent also
was deemed established by a sanction imposed for failure to submit
to a deposition. Insolvency was inferred from the debtor's testimony
at the trial that he had no assets.

12. Bulk Sales.—Malbin & Bullock, Inc. v. Hilton'°^ seems to
recognize that proceeds from a bulk sale of inventory may be reached
by a creditor of the seller through proceedings supplemental.

13. Receiverships—Statutory Liquidators. — hiquidsition of
banks, insurance companies, and the like have been regulated by

statutes in most states, leaving control of assets and administrative

matters to statutory liquidators whose domiciliary title must be
given full faith and credit by other states.^"^ Hudson v. Tyson,'^"^

'"IND. Code § 32-2-1-14 (1976).
"«398 N.E.2d 442 (Ind. Ct. App. 1979).

'"/d. at 450. In a companion case the Indiana Court of Appeals affirmed the class

action judgment in a decision which should be carefully studied by corporate directors.

Arnold v. Dirrim, 398 N.E.2d 426 (Ind. Ct. App. 1979).
'°<'398 N.E.2d at 447. See, Ind. Code § 32-2-1-17 (1976).
'"'401 N.E.2d 719 (Ind. Ct. App. 1980) (holding that proceeds of inventory held by

shareholders to whom assets were transferred could be reached — ground not clear).
''"'The fountainhead case is Relfe v. Rundle, 103 U.S. 222 (1880). However, the title

of a foreign liquidator is subject to local policy of other states allowing creditors to

reach local assets. Clark v. Williard, 294 U.S. 211 (1935). Cf., O'Malley v. Hankins. 207

Ind. 589, 194 N.E. 168 (1935) (Indiana refused local ancillary receiver for local assets

and creditors).
'~'404 N.E.2d 636 (Ind. Ct. App. 1980).



1981] SURVEY-SECURED TRANSACTIONS 517

however, allowed an Indiana creditor to reach the assets^"" of a

foreign insurance corporation allegedly in control of a California li-

quidator when the debtor corporation failed to prove the judgment
vesting the foreign representative with title.^"^ An important deci-
sion of the Indiana Supreme Court^"* held that a statute requiring

the filing of insurance company liquidations with the Marion County

Circuit Court is a venue law under Indiana Trial Rule 75, so that

commencement in the wrong court was not jurisdictional nor subject

to challenge by mandate.^"^ A well thought out interpretation of the
priority provisions of the insurance liquidation statute is to be found

in Foremost Life Insurance Co. v. Department of Insurance^°^ in

which an insurer, who was secondarily liable upon policies reinsured
with an insolvent Indiana insurance company ,^''^ sought to share a

class three priority given to insureds and policyholders.^'" The court

held that the insurer under the reinsurance agreement was not an

"insured" or "policyholder" entitled to a third priority, but to the

extent that the insurer paid its policyholders covered by the rein-

surance agreement, it was entitled to that status by way of subroga-

tion to the priority class.^'* However, upon equitable principles,

subrogation against other policyholders of the third priority was

deferred until all policyholders entitled to that priority had been

paid in full.^*'

^"^In this case a creditor was allowed to reach a deposit required by an insurer for

the benefit of a particular class of creditors of which the creditor was not a member. Id.
at 642. Indiana may properly protect local creditors by requiring foreign insurers to
deposit funds for their benefit. Fischer v. American United Life Ins. Co., 314 U.S. 549
(1942).

206404 N.E.2d at 641. A person suing upon or relying upon a foreign judgment
must prove it by introducing a certified copy or by admissions. Shane v. Koehler, 168
Ind. App. 552, 343 N.E.2d 818 (1976).

^°*State ex rel Indiana Life & Health Ins. Guar. Ass'n v. Superior Court, 399
N.E.2d 356 (Ind. 1980).

""'M at 358-59. The court held, also, that the Marion County Superior Court was
given concurrent jurisdiction with the circuit court. Id. at 359 (citing Ind. Code §
33-5-35.1-4 (Supp. 1980)).

'"'395 N.E.2d 418 (Ind. Ct. App. 1979) (opinion by Judge Robertson).

^°'The creditor-insurer in this case had entered into a contractual arrangement

whereby its credit life and disability policies would be sold in states where the re-
insurer (now in insolvency proceedings) was not authorized to do business. The rein-
surer then reaped the profits, if any, paid the insurer a straight commission, and took

the risk on the policies. The creditor insurer, however, remained secondarily liable as
between the parties recognized in the case as a "quasi-suretyship" arrangement. Id. at
422-23.

^'"See Ind. Code § 27-1-4-15 (1976). The liquidation and priorities law has been
changed and is now codified at Ind. Code § 27-9-3-40(3) (Supp. 1980). However, law of
this case remains important under the new statute.

'"395 N.E.2d at 425.

'""The court also held that the creditor-insurer or surety in this case was not a
guaranty association entitled to third priority under the express terms of the law.



518 INDIANA LAW REVIEW [Vol. 14:489

H. Creditors' Rights in Decedents' Estates. — As a general rule
a creditor may not share in the assets of a decedent unless an estate
is opened within one year and his claim is filed within five months of
the first published notice to creditors.^'^ In Anson v. Estate of An-
son,^^* a creditor who also was a disinherited heir was barred by
failure to file his claim within the statutory limits from the time of

the first newspaper publication to heirs. By statute, newspaper
notice to creditors is authorized, but notice to heirs and devisees

must be sent by mail.^"^ The creditor argued that because his claim
was filed within five months of the mailed notice to him as an heir
his claim should have been allowed. The mailing had been delayed
because of the representative's omission and amendment. The court
held that the purpose of the notice provision of the probate code ap-

plicable to creditors was validly different from the notice provision
required to be given heirs and devisees and that newspaper notice
to a creditor who was an heir was all that was required to fix time
limits for filing his claim as a creditor.^" Had the court been com-
pletely honest it would have pointed out that the statute is illogical

in that there is in fact a greater need to give known creditors mail
notice of administration than heirs and devisees.^" Another decision,

Rising Sun State Bank v. Fessler,^^^ denied relief to a physician who
sued the personal representative instead of filing a claim with the

probate court within the time limits. In the interests of justice, the

court should have ordered the case transferred to the proper court^*'

or bound the personal representative on principles of estoppel
(which the court held inapplicable under the non-claim statute).

It is a general rule that a person claiming an interest in property

^'^Ind. Code § 29-1-14-1 (Supp. 1980). Unless administration is commenced within

five months of death, real estate may not be sold to pay claims. Id. § 29-1-7-15.1 (1976).
'''399 N.E.2d 432 (Ind. Ct. App. 1980). See also, Falender, Decedents' Estates and

Trusts, 1980 Survey of Recent Developments in Indiana Law, 14 Ind. L. Rev. 291

(1981).

'"'Ind. Code § 29-1-7-7 (1976). Fairly interpreted, the statute could be construed as

requiring mailed notice to creditors as well as heirs and devisees, but because the re-

quirement of mailing follows a sentence prescribing notice to the latter, it was con-

strued as not requiring notice to creditors. 399 N.E.2d at 434-35.

"'399 N.E.2d at 435.

"'Because heirs and devisees are closer to the decedent, they are more likely to

know of his death than are creditors. It can be argued that notice by publication to
known creditors denies them due process of law. Mullane v. Central Hanover Bank &
Trust Co., 339 U.S. 306 (1950). The court, however, relied upon cases indicating that

the legislature could make the non-claim statute commence from a time other than

upon notice.
"»400 N.E.2d 1164 (Ind. Ct. App. 1980).

"'C/., iND. R. Tr. p. 75(B) applied in State ex rel Indiana Life & Health Ins. Guar.
Ass'n V. Superior Court of Marion Co., 399 N.E.2d 356 (Ind. 1980) to receivership ad-

ministration.



1981] SURVEY-SECURED TRANSACTIONS 519

held by the decedent is not required to file a "claim" with the estate

and the interest therein will continue against distributees and suc-

cessors from the estate.^^" The rule was recognized in Deetz v.
McGowan^^^ where a lien upon the debtor's interest in an escrowed

fund was obtained by a creditor in proceedings supplemental before

the debtor's death. The court held that the proceedings could be
continued without the necessity of filing a claim with the estate. ^^^

The lien thus took precedence over priority claims of other
unsecured creditors. Another interesting question of the rights of

property claimants to assets of the debtor was posed in Estate of
Williams.^'^ There, the decedent owned stock in what appeared to be
a closely held corporation under an agreement not to sell to others

and to sell to the petitioner upon his death. The petitioner filed an ac-
tion in the estate to enforce this agreement more than five months
after the first published notice to creditors. The court determined
that the suit did not involve a "claim" within the non-claim

statute.^^^ However, the court applied another provision of the In-
diana Code allowing persons with "any interest in any property in

the possession of the personal representative adverse to the estate . .

.

[to] file, prior to the expiration of five (5) months after the date of
the first published notice to creditors, a petition" with the probate

court to establish his title.^^^ By construing "may" as "must" the
court denied relief on the basis that the statute fixed a cut-off date

for establishing property rights in probate proceedings. The court
was careful to point out that the statute was a bar to proceedings in
probate, leaving the inference that rights to the property after the

five month period may be pursued in other courts against distrib-

''"Beach v. Bell, 139 Ind. 167, 38 N.E. 819 (1894). Heirs and devisees are not re-

quired to file claims with the estate. Rush v. Kelley, 34 Ind. App. 449, 73 N.E. 130
(1905) (claim of widow for statutory allowance). The probate code expressly provides
that proceedings to enforce liens are not subject to the non-claim statute. Ind. Code §
29-l-14-l(e) (Supp. 1980); see Paidle v. Hestad, 348 N.E.2d 678 (Ind. Ct. App. 1976).

'^'403 N.E.2d 1160 (Ind. Ct. App. 1980), see also text accompanying notes 154-55
supra,

'"403 N.E.2d at 1165.
'"398 N.E.2d 1368 (Ind. Ct. App. 1980).
'"/d. at 1369-70. The petitioner in this case apparently was seeking specific perfor-

mance of the contract to sell the stock. For some unexplained reason, the court in-
dicated that the doctrine of equitable conversion would not apply to such property. On
this point, it is clear that specific performance of an agreement to sell or not to sell
close corporate stock is generally granted and the doctrine of equitable conversion ap-

plies. E.g., Legro v. Kelley, 311 Mass. 674, 42 N.E.2d 836 (1942). When a purchaser
sought specific performance in such a case, the court properly held that his action was
not a "claim" within the non-claim statute. See, New England Trust Co. v. Spaulding,
310 Mass. 424, 38 N.E.2d 672 (1941).

''^398 N.E.2d at 1370-71 (applying Ind. Code § 29-1-14-21 (1976)).



520 INDIANA LAWREVIEW [Vol. 14:489

utees and successors in administration. In short, the statute frees
the probate court from late suits involving title, such as ejectment,
replevin, specific performance, rescission and restitution and the
like, but without necessarily barring later property remedies
against successors and possibly the representative in other courts.^^*
Any other interpretation of the case would create chaos with
respect to property titles.

In another significant opinion,^^^ the supreme court held that a
sale of estate property to a personal representative is void unless
approved by all interested parties or specifically authorized by
^jjj 228

rpj^jg
decision has an important bearing upon all types of

judicial, foreclosure and fiduciary sales, and teaches that purchase of
trust property by a fiduciary is improper.

15. Bankruptcy.— Worthless assets of a bankrupt may be aban-
doned by court order after a hearing.^^' Under the Bankruptcy Code
of 1978^*" and prior Bankruptcy Rules,^^' assets which are scheduled
but not administered are deemed abandoned when the estate is closed.
This latter principle was overlooked by Zeigler Building Materials,
Inc. V. Parkinson^^^ in which the title of the bankrupt was denied
because no order of abandonment had been made.^^^ In De Later v.
Hudak,^^* the court of appeals apparently was in contempt of the

bankruptcy court by enforcing a property division decree based

upon a prior, discharged obligation of the wife.^^^ Both under the

"°A person claiming an interest in property coming into the possession of the per-

sonal representative may recover the property by filing a reclamation petition — at
least if it is filed within the five month period. Isbell v. Heiny, 218 Ind. 579, 33 N.E.2d

106 (1941). The probate code expressly forbids foreclosure of liens on real estate until

after five months from the death of the decedent unless the representative is diligently

prosecuting proceedings to sell the property. Ind. Code § 29-1-14-16 (1976).

''Un re Garwood, 400 N.E.2d 758 (Ind. 1980).

"'M at 767.
^^11 U.S.C. § 554(a) (Supp. Ill 1979).

^'"11 U.S.C. § 554(c) (Supp. II 1978).

'^'Bankruptcy Rule 608 (1973).
'^'398 N.E.2d 1330 (Ind. Ct. App. 1980) (relying on Am. Jur).

^^^Id. at 1332-33. In this case a bankrupt contractor asserted a cause of action by

counterclaim against an owner for whom a home was built. A materialman to whom
the contractor owed money intervened and claimed any excess fund owing to the con-
tract under Ind. Code § 32-8-3-9 (1976). Before judgment, the contractor took bankruptcy

and was discharged. Among its reasons for disallowing the intervening materialman a
right to any surplus retainage owing by the owner was the fact that this surplus, if

any, belonged to the trustee in bankruptcy unless there was an order from the

bankruptcy court abandoning the property. For further discussion of the case see text

accompanying note 127 supra.
"'399 N.E.2d 832 (Ind. Ct. App. 1980).
"Trior to the divorce, the wife received a discharge in bankruptcy on a claim

which she was later ordered to pay in a divorce decree; no appeal was taken. The



1981] SURVEY-SECURED TRANSACTIONS 521

Code^^* and pre-Code^" law, enforcement of discharged claims is

stayed, and the new bankruptcy law makes it clear that a judgment
procured by a creditor on a discharged claim is void.

16. Suretyship. — SeweTdi\ established suretyship principles
were applied in Gemmer v. Anthony Wayne Bank.^^^ Gemmer held
that a surety bound upon a negotiable instrument as an indorser

under words guaranteeing payment is not entitled to demand or pre-
sentment and notice as a condition to liability;^^' the creditor is not

required first to bring suit against the principal, absent a condition

to this effect in the suretyship contract;^^" consideration is not re-

quired in the case of a surety on a negotiable promissory note secur-

ing a prior obligation of a third party;^*' and proof that a surety was

not to be bound on the instrument must be raised by an affirmative

defense.^^^ Whipple v. Dickey^*^ recognized that a paying surety may
recover reimbursement from his principal.^" As previously noted,
other recent cases recognized the rule that a debtor selling lien

property usually remains liable as a surety ,^*^ and that action of the

lienholder in consenting to the arrangement with the assignee is not

such a modification of the contract as to release the surety,^"® Consis-

tent with the general rule that a surety's promise is limited to the

terms of his bargain, the guarantor of a tenant's obligations to a

landlord under a lease was held not liable on a subsequent note and
mortgage on the leased premises given to pay for the construction

of a building on the mortgaged property .^^^ The construction of the
building was permitted but not required by the lease. Erosion of the

old rule making keepers of public funds and their sureties insurers

court held that in proceedings supplemental by the husband to enforce the order, she

could not raise the issue of discharge which had been adjudicated by the divorce

decree.

"ni U.S.C. § 524(a)(1) and (2) (Supp. II 1978).
"'Bankruptcy Rule 401 (1973).
"'391 N.E.2d 1185 (Ind. Ct. App. 1979).

"'M at 1187 (citing Ind. Code § 26-1-3-416(5) (1976) (rule of the Uniform Commer-
cial Code)).

^"This is the usual suretyship principle. Barnes v. Mowry, 129 Ind. 568, 28 N.E.
535 (1891).

2*'lND. Code § 26-1-3-408 (1976) (rule of the Commercial Code).
"^As between the immediate parties, parol evidence may be admitted to prove

that the surety was not to be bound. E.g., Hunter v. First Nat'l Bank, 172 Ind. 62, 87

N.E. 734 (1909); Ind. Code § 26-l-3-306(c) (1976).
^^"401 N.E.2d 787 (Ind. Ct. App. 1980).

"^The court also held that the creditor was not required to have raised a com-

pulsory counterclaim in a prior proceeding where the obligation did not mature until

after the action had commenced.

"^See text accompanying note 42 supra.

"'Boswell V. Lyon, 401 N.E.2d 735 (Ind. Ct. App. 1980).

"'Orange Co. v. Brown, 393 N.E.2d 192 (Ind. Ct. App. 1979).



522 INDIANA LAW REVIEW [Vol. 14:489

when the funds are lost or misapplied^" was indicated in a recent
case holding a financial officer liable only for bad faith in paying out
unauthorized funds.^^^

17. Miscellaneous. — Lobbying activity of financial institutions
was reflected in 1980 legislation authorizing variable rate (VRM) and
rollover (ROM) mortgages or loans by banks, industrial loan and in-
vestment companies, savings banks and credit unions.^^" Building and
loan associations who were granted VRM authority in 1979 were au-
thorized to make rollover mortgages and loans.^*' The United States
Supreme Court in Ford Motor Credit Co. v. Milhollin'^^^ construed
the federal truth-in-lending act as not requiring acceleration provi-

sions to be disclosed on the face of a consumer credit sale agree-
ment as a "default, delinquency, or similar charg[e]."^^^ In another
case,^^^ the Indiana Court of Appeals found that a "subject to financ-
ing" clause in a real estate contract "impose[s] upon the buyers an
implied obligation to make a reasonable and good faith effort to
satisfy the condition,"^^^

^*The root Indiana decision to this effect is Halbert v. State ex rel Bd. of
Comm'rs, 22 Ind. 125 (1864). The case has not been overturned except by statute in
some instances.

"'State V. Newbern, 398 N.E.2d 683 (Ind. Ct. App. 1979).
""Act of Mar. 3, 1980, Pub. L. No. 176, § 1980 Ind. Acts 1544, reflected in Ind. Code

§§ 28-1-13.5-1 to -5 (Supp. 1980) (banks); id. §§ 28-1-21.5-1. -2. -5 to -7 (building and loan
associations); id. § 28-6-1-19 (savings banks); id. § 28-7-1-17 (credit unions). The law
regulates the number and amount of loan changes and requires disclosures to be made
to the debtor.

^^'See note 1 supra.

'"100 S. Ct. 790 (1980) (settling split of authority recognized in Townsend, 1979
Survey, supra note 132, at 371 and relying upon administrative interpretations by the
Federal Reserve Board).

"nOO S. Ct. at 794.
'^'Billman v. Hensel, 391 N.E.2d 671 (Ind. Ct. App. 1979) (purchasers denied

recovery of $1000 deposit where a contract was conditioned on procurement of a con-
ventional mortgage of $35,000 on a purchase price of $54,000 — purchaser failed to pro-
cure the loan mainly because he did not have a sufficient down payment to make up
the difference).

"Yd. at 673.