Indiana Law Review


XV. Secured Transactions and Creditors' Rigl^ts

R. Bruce Townsend*

Over sixty cases dealing with problems in secured transactions

and creditors' rights were handed down in this last year, and in the
process the court of appeals has credibly resolved many difficult and
complex problems but generously has left some matters for good
faith criticism and discussion. Commercial opinions by the supreme

court tend to be regarded as carved in stone. Forceful justification

for the tendency of that court to shy away from appeals in this
area is to be found in Van Bibber v. Norris.^ This decision gave effect
to non-waiver clauses in consumer credit transactions which this

writer and surely others will agree is an offensive "pig" type agree-

ment seldom approved elsewhere.
Special attention is reserved for decisions recognizing that an

entireties owner may be barred by laches from asserting that a con-
veyance or mortgage by the other, alone, is of no effect;^ involving

the rule of Skendzel v. Marshall,^ especially when the debtor's equity
was enhanced or diminished by improvements on one side and waste
or other misconduct on the other;* dealing with description of and

priorities between security interests in livestock when it becomes
commingled;^ categorizing leases with option to purchase as secured

transactions;® involving transfers by the debtor of property "subject

to" a lien on the property;^ concerning the right of a debtor to insist

that insurance proceeds be applied towards repair or rebuilding of

the collateral;^ procedure in the sale of goods by artisan lienholders;^

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

'419 N.E.2d 115 (Ind. 1981), discussed in text accompanying notes 81-82 &
105-120 infra.

'Wienke v. Lynch, 407 N.E.2d 280 (Ind. Ct. App. 1980), discussed in text accom-

panying note 14 infra.

^261 Ind. 226, 301 N.E.2d 641 (1973), cert denied, 415 U.S. 921 (1914), petition for

writ of mandate denied, 263 Ind. 337, 330 N.E.2d 747, affd, 264 Ind. 77, 339 N.E.2d 57
(1975).

*See text accompanying notes 27-38 infra.

'Cargill, Inc. v. Perlich, 418 N.E.2d 274 (Ind. Ct. App. 1981), discussed in text ac-
companying notes 55-59 infra. This case involves complex issues of after-acquired col-
lateral and description under the Uniform Commercial Code.

"Bolen V. Mid-Continent Refrigerator Co., 411 N.E.2d 1255 (Ind. Ct. App. 1980),
discussed in text accompanying notes 60-63 infra.

Tirst Federal Sav. and Loan Ass'n v. Arena, 406 N.E.2d 1279 (Ind. Ct. App.
1980), discussed in text accompanying notes 90-95 infra.

^Pearson v. First Nat'l Bank of Martinsville, 408 N.E.2d 166 (Ind. Ct. App. 1980),
discussed in text accompanying notes 121-29 infra.

'Robertson v. Mattingly, 413 N.E.2d 647 (Ind. Ct. App. 1980), discussed in text

367



368 INDIANA LA W REVIEW [Vol. 15:367

the resolution of many important issues under the mechanic's lien
statute;^" the res judicata effect of the allowance of a creditor's claim

in bankruptcy in a later suit against the bankrupt's creditor;^^ and

many more decisions of importance in enforcing security interests,
judgments, support orders, and rights in decedent's estates/^ The
1981 legislature was busy mainly catering to the special interests of
the lending industry.^^

A. Secured Transactions

1. Land Title and Priority Problems. — Several decisions
relating to title and priorities which may affect secured transactions
involving real estate were decided, some very important. A convey-
ance of entireties property by one spouse was effective to bind the
other non-joining party on a theory of laches after the grantee and
its successor paid taxes and made improvements for nearly five
years in Wienke v. Lynch.^^ Constructive knowledge of the entire-
ties ownership appearing from the records showing that one entire-
ties owner had failed to sign the deed did not defeat the right of a
purchaser to assert laches against him.^^ According to Baker v.

accompanying notes 136-38 infra. This case teaches that if a sale is bad, hold it over

again.

^"Eight current decisions are discussed in the text commencing at note 139. For a

complete review and summary of Indiana law on mechanics' liens, lawyers are advised
to consult the 1981 manual on the subject published by the Indiana Continuing Legal

Education Forum.

"Indiana Univ. v. Indiana Bonding & Surety Co., 416 N.E.2d 1275 (Ind. Ct. App.
1981), discussed in text accompanying notes 229-35 & 243-51 infra. The case involves
.important suretyship issues.

'^In particular, note Siskind v. Siskind, 415 N.E.2d 771 (Ind. Ct. App. 1981),

discussed in text accompanying notes 191-94 infra. This case considers exemption

limits on garnishment of wages for support.

^^Legislation dealing with title problems, conditional sales contracts, statutes of

limitations, exemptions, enforcement of support orders and usury and lending authori-

ty will be briefly considered in the material which follows.

'M07 N.E.2d 280 (Ind. Ct. App. 1980). The court recognized the rule that husband

and wife have no separate interests in entireties property which during their lives

may be conveyed by one without the other. A purchaser claiming through entireties
ownership shown in the records must take notice of a conveyance by one of the

spouses in the event the transfer has been authorized by the non-joining spouse.

Beneficial Fin. Co. v. Wegmiller Bender Lumber Co., 402 N.E.2d 41 (Ind. Ct. App.
1980) (holding valid a mechanic's lien recorded in name of one spouse), discussed in
Townsend, Secured Transactions and Creditors' Rights, 1980 Survey of Recent

Developments in Indiana Law, 14 Ind. L. Rev. 489, 503 (1981).
^^The wife conveyed the entireties property without his signature and with the

apparent knowledge of the husband. After a later divorce some five years after the

conveyance, the husband brought a quiet title action against a purchaser of the

grantee who acquired his interest ten months after the original deed. The court held
that the time span for measuring laches related to the time the plaintiff learned of his



1982] SECURED TRANSACTIONS 369

Chambers,^^ a conveyance to unmarried joint owners without further

definitive language presumptively creates equal ownership in com-

mon among the grantees upon which a good faith purchaser from
one may rely.^^ The case held that a conveyance to ''A and B, hus-
band and wife" does not create a survivorship title and that as be-

tween the parties, parol evidence is admissible to show unequal own-
ership and, in this case, that A who paid for the property did not in-
tend to make a gift of any interest to B. Whether the interest is
categorized as an easement or as an irrevocable license, the munici-

pal owner of a water main buried deep in the ground pursuant to an

unrecorded agreement with the owner was determined in Industrial
Disposal Corp. v. City of East Chicago^^ to hold an unperfected in-

terest in land which could be cut off by a bona fide purchaser.

Unless recorded or discoverable by reasonable observation, the

right to use the main constituted an unperfected interest in land.

The court of appeals in Kuchler v. Mark II Homeowners Associa-
tion,^^ determined that a "declaration of Covenants and Restrictions"

containing restrictive covenants on all property then owned by the
developmer-declarer and recorded in the miscellaneous records did

not bind land previously and later platted where neither the plats
nor the conveyances of lots thereunder referred to or incorporated

the "declaration." Although the precise basis of the decision is not

clear, the case seems to stand for the proposition that restrictions
not included by express provision or reference in plats requiring ap-

proval of zoning officials will not be binding upon prior or subse-

quent purchasers of lots without knowledge of the plan.^° An Indiana

claim and when he asserted it — not the time of reliance by the plaintiff. The court also
determined that neither the defendant's constructive or actual knowledge of the plain-

tiffs claim would defeat the defense of laches which depended upon a discretionary

balancing by the trial court of an assortment of equities. Finally, it should be noted

that the equitable defense of laches was permitted against an action to quiet title

which in Indiana is a legal cause of action.
^«398 N.E.2d 1350 (Ind. Ct. App. 1980).

^^The decision is supported by Brown v. Budd, 2 Ind. 442 (1850) which was not
cited by the court.

^«407 N.E.2d 1203 (Ind. Ct. App. 1980). The case holds in effect that an irrevocable
license is an interest in land and is subject to the recording statutes. Cf. Residents of

.Green Spring Valley Subdivision v. Town of Newburg, 168 Ind. App. 621, 344 N.E.2d
312 (1976) (contract to provide sewer services in exchange for landowner's waiver of

right to remonstrate against annexation subject to recording statute),

statute).

'M12 N.E.2d 298 (Ind. Ct. App. 1980). The restriction at issue in this case provid-
ed for a homeowners' association which could levy assessments and a lien upon the
various lots.

^"Id. Two approved plats from which sales were made by the developer contained
no reference to the involved restrictions which were recorded in the form of a
"declaration" in the miscellaneous records. Hence the restrictions were not a part of



370 INDIANA LAW REVIEW [Vol. 15:367

statute^^ barring unused mineral interests after twenty years unless

a claim extending the interest is recorded within two years after the
effective date of the act or before the expiration period was upheld
as constitutional and effective.^^ The decision is important to mort-
gagees and vendor's lienholders whose claims are similarly barred
by a non-claim statute.^^

Priorities between contract purchasers from the same vendor
became an oblique issue in North v. Newlin,^^ where the vendor con-
tracted to sell the same land to successive purchasers. In a suit for
specific performance by the first purchaser, the vendor argued that

the remedy was improper because he could not convey title already
committed by contract to another. The court denied the defense
because the second purchaser was not a party, and his superior title
was not affirmatively pleaded or proved. Thus an interesting prior-
ity question was avoided by a combination of poor pleading and an
evasive opinion on the priority issue.^^ The court granted specific

the plats approved by zoning officials. Indiana law seems to require plat restrictions to

be included in the plat which in turn must be approved by zoning officials. E.g., Ind.

Code § 18-7-5-52 (1976) (not cited in opinion). Since purchasers of lots under a plat ac-
quired title limited only by those restrictions incorporated in the approved plat, the

case seems to hold that they were not bound by the prior declaration which was not

the subject of official approval. However, the court held that lot purchasers under a

third plat which incorporated by reference the "declaration" were bound by the

restrictions included thereunder.

There also is some question under Indiana law whether a convenant restricting

use of an interest in land constitutes a recordable interest unless it relates to a con-

veyance, reservation, or known development plan. Compare Starz v. Kirsch, 78 Ind.
App. 431, 136 N.E. 36 (1922) (covenant by adjoining owner to limit use of land held per-

sonal and not recordable) with Elliot v. Keely, 121 Ind. App. 529, 98 N.E.2d 374 (1951)

(lot purchasers with knowledge bound by general unwritten and unrecorded develop-

ment plan). In Kuchler, the court did not determine whether a developer selling lots
with restrictions under a plat could increase the restrictions with respect to later sales

through the "declaration" recorded after eleven lots had been sold. The court deter-
mined that the later unapproved "declaration" was not enforceable. 412 N.E.2d at 300.

2^lND. Code §§ 32-5-11-1 to -8 (1976).
'=^Short V. Texaco, Inc., 406 N.E.2d 625 (Ind. 1980), prob. juris, noted, 101 S. Ct.

1693 (1981).

^'E.g., compare Ind. Code § 32-8-4-1 (1976) with Ind. R. Tr. P. 63.1(A) protecting
bona fide purchasers of property after statute of limitations has barred claim unless an

extension because of tolling has been recorded. New bar and limitation statutes
adopted in 1981 are discussed in the text accompanying notes 130-34 infra.

'%1Q N.E.2d 144 (Ind. Ct. App. 1981).

^^In this case, ajDparently neither purchaser took possession or recorded his con-

tract. The question then arose as to which purchaser should take priority. It is this

writer's opinion that the rule "first in time, first in right" should have been applied. If

the second purchaser had perfected by possession or recordation in good faith, he

should have prevailed and specific performance denied to the first purchaser. See

Townsend, Secured Transactions and Creditors' Rights, 1974 Survey of Recent

Developments in Indiana Law, 8 Ind. L. Rev. 234, 234-35 (1974) (discussing Indiana



1982] SECURED TRANSACTIONS 371

performance in favor of the first purchaser.^^

2. Conditional Sales Contracts —Real E's^a^e. — Conditional
sales contracts as a device for financing real estate transactions con-

tinue to spawn appellate litigation in Indiana. The rule of Skendzel
V. MarshaW to the effect that a conditional seller cannot forfeit the
conditional buyer who has paid a substantial part of the price (more
than a minimal amount) was involved in three cases, one allowing
forfeiture, the others requiring the seller to bring judicial foreclo-

sure proceedings as in the case of mortgage foreclosure. In Ebersold

V. Wise,^^ the purchaser had paid over $9,000 principal on a $21,000

contract with improvements of $3,000. Although the purchasers had

failed to pay taxes because of misconduct by the seller, the court re-

quired judicial foreclosure. Strict forfeiture also was denied in U. S.
Aircraft Financing, Inc. v. Jankovich^^ where the purchasers of a
leasehold and buildings had long been in default but had paid

$188,000 on a $300,000 obligation increased by $60,000 in waste and

$82,000 in back taxes (forty-two percent of the price thus having

been paid). The sale included buildings at an airport which were
determined by the court to be personal property. Inasmuch as the
seller had sought a remedy against both the buildings and leasehold,
the court held that judicial foreclosure of the whole as real estate

was permitted under the remedies provisions of Article 9 of the Uni-
form Commercial Code.^° This law allows a secured party holding

security in real and personal property to pursue remedies under the

Code with respect to the personal property, or proceed with rights
and remedies against both as if real estate. Strict forfeiture against

the owner of a shell home was permitted in Miles Homes of Indiana,
Inc. V. Harrah Plumbing and Heating Service Co.^^ There the seller
of a shell home had taken a mortgage securing the price and, after
later defaults, the mortgagor reconveyed to the mortgagee who
resold it to the mortgagor on conditional sales contract for $8,300.
The conditional buyer had paid approximately $1,200 in installments

authorities). In North, no evidence was offered establishing the second purchaser as a
bona fide purchaser. 416 N.E.2d at 150.

^^Since the decree of specific performance would have been worthless if in a later
suit the second purchaser established priority, the court in the exercise of sound ap-
pellate practice could have returned the case for a new trial.

'^261 Ind. 226, 301 N.E.2d 641 (1973), cert denied, 415 U.S. 921 (1974), petition for
writ of mandate denied, 263 Ind. 337, 330 N.E.2d 747, affd, 264 Ind. 77, 339 N.E.2d 57
(1975).

='«412 N.E.2d 802 (Ind. Ct. App. 1980).
^M07 N.E.2d 287 (Ind. Ct. App. 1980).

'"Ind. Code § 26-1-9-501(4) (1976).
''408 N.E.2d 597 (Ind. Ct. App. 1980). This case involved priorities between a

conditional seller and the mechanic's lienholder, discussed in text accompanying notes
165-73 infra.



372 INDIANA LAW REVIEW [Vol. 15:367

and made improvements of $3,600 for which a plumbing contract
claimed a mechanic's lien. A decision of the lower court allowing
foreclosure of the lien and denying forfeiture to the conditional

seller was reversed. The court held that the buyer had forfeited his
rights and that the lien of the mechanic rose no higher than the

buyer's title.^^ The court failed to weigh into the amount paid the
value of the improvements which would have given the debtor an
equity of about fifty percent.

A unique aspect of the conditional seller's remedies was pre-
sented in Powers v. For<P^ where the conditional buyer of a news-
paper, including real estate and personal property, fell in default

after paying over $53,000 on a $60,000 contract. The purchaser sur-
rendered the property to the conditional seller who resold it at a
private sale. The vendor then brought suit against the vendee for
the difference between the unpaid purchase price and what was
realized on the sale — in effect, an action for damages. The court held
that since the contract allowed the vendor to retake the property

and keep the payments made as liquidated damages, the repossess-
ing vendor was barred from seeking damages or foreclosure because
of an election of remedies.^^ Since under the rule of Skendzel v. Mar-

shall an absconding vendee may be held to the forfeiture provision,
in this case the provision which otherwise would not have been en-

forceable became controlling.^^ However, the rule works a hardship
in that a defaulting vendee may abandon or turn possession over to
the seller and escape a deficiency judgment. The conditional seller
in such a case is put to a choice of taking possession and losing all

other rights or allowing the property to remain vacant and seeking

judicial foreclosure^^— a position not unlike that of a lessor who may
be bound by an election of remedies when he accepts surrender of
the premises from a defaulting tenant.^^ Conditional vendors will be

quick to avoid this problem by inserting a contractual provision

allowing them alternative remedies upon the buyer's default includ-
ing recovery on the debt by acceleration or as installments become
due, judicial foreclosure, specific performance, or the usual forfei-

ture provisions all without regard to whether or not possession has

been abandoned or surrendered to the vendor.^^ On the other hand,

^^408 N.E.2d at 600-01.

^H15 N.E.2d 734 (Ind. Ct. App. 1981).

''Id. at 736.

'^See id. at 737 (concurring opinion).

'*A similar choice had to be made by a conditional seller of personal property
under old common law. See Igleheart Bros., Inc. v. John Deere Plow Co., 114 Ind. App.
182, 51 N.E.2d 498 (1943); Crute v. LaPorte Discount Corp., 89 Ind. App. 573, 167 N.E.

542 (1929).

''See Grueninger Travel Serv. v. Lake County Trust Co., 413 N.E.2d 1034 (Ind.

Ct. App. 1980).

''Cf. id. (lease allowed repossessing landlord to relet and recover damages).



1982] SECURED TRANSACTIONS 373

the supreme court could avoid much worry by treating all condi-
tional sales as mortgages with the usual remedies available to mort-
gagees.

In other decisions, specific performance of an oral contract was
granted to a purchaser who went into possession.^^ Parol evidence
offered by a conditional seller showing that only a portion of the

"$1,000.00 cash in hand upon the execution of this agreement, the

receipt whereof by the Seller is hereby acknowledged," was exclud-
ed under the parol evidence rule in Ebersold v. Wise^^ despite a

strong dissent."^

Legislation enacted in 1981 requires conditional buyers of real

estate to record the contract or a memorandum thereof with the
recorder if a property tax deduction is claimed. A copy must be fur-
nished to the auditor who will assign a separate description and
identification number to the parcel being sold under the contract.'*^

3. Secured Transactions in Personal Property —Description;

After-Acquired Collateral. — The Uniform Commercial Code permits
a security agreement to cover after-acquired collateral if the agree-

ment so provides,''^ but after-acquired property so described need
not be included in the financing statement.** Unless excluded by its

terms, a security agreement automatically covers proceeds which

can be traced from the collateral,*^ but coverage of proceeds in order

to be perfected after ten days must be indicated in the financing
statement.*^ The security agreement must describe the collateral,*^
but the financing statement need only indicate the types of colla-

teral to be covered.** A financing statement may be filed before the

''Claise v. Bernardi, 413 N.E.2d 609 (Ind. Ct. App. 1980). A counterclaim by the
vendor claiming breach of contract was held drawn into the equitable action and was
not triable by jury. Id. at 613.

*M12 N.E.2d 802 (Ind. Ct. App. 1980). Cf. First Fed. Sav. & Loan Ass'n v. Arena.
406 N.E.2d 1279 (Ind. Ct. App. 1980) (similar misapplication of the parol evidence rule),
discussed in text accompanying notes 90-95 infra.

"412 N.E.2d at 807 (Garrard, P.J., dissenting).

*'IND. Code §§ 6-1.1-12-1 to -2 (Supp. 1981).
"Ind. Code § 26-1-9-204(3) (1976). The provision does not generally apply to crops

becoming growing after one year from the time the security agreement is executed
and to consumer goods acquired more than 10 days after value is given. Id. §
26-1-9-204(4).

"The leading case on the point is National Cash Register Co. v. Firestone & Co.,
346 Mass. 255, 191 N.E.2d 471 (1963). Accord, American Nat'l Bank & Trust Co. v.
National Cash Register Co., 473 P.2d 234 (Okla. 1970).

*^IND. Code § 26-1-9-306(3) (1976).
*'Id.

*Ud. §§ 26-l-9-203(l)(b), -110.

**A description in the financing statement is sufficient if it "contains a statement

indicating the types, or describing the terms, [sic] of collateral." Id. § 26-1-9-402(1)

("items" in engrossed bill).



374 INDIANA LAW REVIEW [Vol. 15:367

debtor executes a security agreement upon his collateral*^ and

priorities against subsequent or other secured parties (other than

purchase money security interests) who perfect by filing are deter-
mined in the order of filing.^" Thus, suppose that SPl files a financ-
ing statement covering D's ^'livestock" and proceeds. Later, D ac-
quires the livestock and gives a non-purchase money security agree-
ment covering the described livestock to SP2, who files a financing
statement covering proceeds and livestock. Still later, D executes a
security agreement covering the described livestock to SPl. SPl
will take priority .^^ Reason: SPl was the first to file.

However, when a secured party claims a security interest in col-
lateral acquired under but after execution of the security agree-

ment, priorities will depend upon whether the security agreement

covers after-acquired property or whether the collateral is proceeds

of assets covered by the security agreement. Thus, in the above ex-

ample, suppose that livestock covered by the original security agree-

ment of SPl was sold by D and then D acquired additional livestock
within the description of the security agreement. If SPl's security

agreement covers after-acquired collateral of the same description,
SPl will prevail over SP2 who does not claim a purchase money
security interest.^^ Likewise, SPl will take priority if he can trace
proceeds from the original livestock to the new livestock.^^ However,
if SPl's security agreement does not cover after-acquired livestock

and if he is unable to trace proceeds into the new, SP2 will take the
collateral free of any claim of SPl providing SP2*s security agree-

*^"A financing statement may be filed before a security agreement is made or a
security interest otherwise attaches." Id.

''Id. § 26-l-9-312(5)(a).

''E.g., Allis-Chalmers Credit Corp. v. Cheney Inv., Inc., 227 Kan. 4, 605 P.2d 525
(1980).

^^Since SPl's security agreement covers after-acquired livestock, SPl being first
to perfect by filing would take priority over SP2 who does not claim a purchase money
security interest therein. National Cash Register Co. v. Firestone & Co., 346 Mass.
255, 191 N.E.2d 471 (1963); North Platte State Bank v. Production Credit Ass'n, 189
Neb. 44, 200 N.W.2d 1 (1972); cf. First Nat'l Bank of Elkhart County v. Smoker, 153
Ind. App. 71, 286 N.E.2d 203 (1972) (security interest of bank on after-acquired inven-

tory upheld against seller). If SP2 had taken a purchase money security interest in the
after-acquired livestock and perfected within ten days after the debtor acquired

possession, SP2 would take priority. Ind. Code § 26-1-9-312(4) (1976). Livestock, if farm
products, is not inventory. Id. § 26-1-9-109(3).

"Even if the security agreement of SPl does not cover after-acquired property,
SPl will take priority if the later-acquired livestock was purchased with proceeds from
the livestock covered by the security agreement. Jordan v. Butler, 182 Neb. 626, 156

N.W.2d 778 (1968) (security interest in cattle traced to cash proceeds and then to cattle
purchased with cash and then to cash proceeds); Baker Production Credit Ass'n v.

Long Creek Meat Co., 266 Ore. 643, 513 P.2d 1129 (1973) (secured party traced checks
received by debtor in sale of cattle). Further compare Citizens Nat'l Bank v. Mid
States Dev. Co., 380 N.E.2d 1243 (Ind. Ct. App. 1978) (security interest in inventory

and accounts receivable traced to bank setoff).



1982] SECURED TRANSACTIONS 375

ment covers the after-acquired livestock.^" This very fact situation
was presented in Cargill, Inc. v. Perlich^^ with an added twist. The
court gave priority to SPl on the basis of the evidence which did
not clearly establish whether the livestock subsequently disposed of

by SP2 was made up of original (covered by SPl's security agree-
ment) or of subsequently acquired livestock — in this case, hogs. SP2
had replevined and resold the disputed hogs, but inasmuch as no

records were kept, the pigs could not be identified as being those
covered by SPl's security agreement or those later acquired. The
burden of going forward with the evidence shifted to SP2 who was
best able to identify the hogs seized under his temporary writ of

replevin.^^ The court buttressed its opinion by applying section 9-108
of the Uniform Commercial Code which creates a presumption that
after-acquired collateral is deemed to be taken for new value." This
provision, however, was not literally applicable because it applies
only in favor of a secured party for new value whose security agree-
ment covers after-acquired collateral.^® But the decision does imply

"Tri-County Livestock Auction Co. v. Bank of Madison, 228 Ga. 325, 185 S.E.2d

393 (1971); cf. White v. Household Fin. Corp., 158 Ind. App. 394, 302 N.E.2d 828 (1973)

(different rule for consumer goods).
^^418 N.E.2d 274 (Ind. Ct. App. 1981).

'^This rule requiring a converter to go forward with the evidence when proof
establishes that he was the last possessor and in the best position to identify the goods

or their quality was recognized and applied in Bottema v. Producers Livestock Ass'n,

366 N.E.2d 1189 (Ind. Ct. App. 1977). There the court applied a presumption that

livestock converted was of the best or highest condition and value. In the Cargill case,

SP2 had procured possession of 237 animals under a preliminary replevin proceeding
and sold the hogs before the replevin case ultimately decided that SPl had priority.
Since the collateral was disposed of by a secured party —SP2— the burden of proving
compliance with sales procedures under the Uniform Commercial Code was placed

upon SP2. Whether proof established compliance did not appear in the decision, but

damages were awarded on the basis of the price received by SP2 at the sale.
"Ind. Code § 26-1-9-108 (1976) which provides:

Where a secured party makes an advance, incurs an obligation, releases
a perfected security interest, or otherwise gives new value which is to be
secured in whole or in part by after-acquired property his security interest in

the after-acquired collateral shall be deemed to be taken for new value and
not as security for an antecedent debt if the debtor acquires his rights in

such collateral either in the ordinary course of his business or under a con-

tract of purchase made pursuant to the security agreement within a
reasonable time after new value is given.

This provision, aimed at protecting inventory and accounts receivable financers in

bankruptcy, has been superceded by a new Bankruptcy Rule allowing the trustee to
reach after-acquired collateral as a preference if the secured party's position is

enhanced within the ninety day or other preference period. 11 U.S.C. § 547(c)(5) (Supp.

Ill 1979) (applicable to inventory, receivable or proceeds thereof without definition).

^SPl's security agreements covered certain hogs as collateral including the

"young, products and produce of the collateral," and proceeds. 418 N.E.2d at 277. Its

prior financing statement covered "a purchase money interest in all livestock" on
SP2's farms and proceeds. Id. SP2's security agreements covered certain types of hogs



376 INDIANA LA W REVIEW [Vol. 15:367

that in the case of inventory and livestock financing, there is a
presumption that replacement inventory or livestock constitutes
proceeds when the original financing is for value. If so, the horrid
burden of tracing collateral under this kind of financing is assisted
by what amounts to a very sensible rule. The court held that SPVs
security agreement describing the collateral as a ''purchase money
security interest in all livestock" was reasonably construed as in-
cluding livestock securing non-purchase money loans, although it
was not broad enough to include after-acquired property .^^

a. Lease with option to purchase; goods left with seller. —

A

lease of refrigeration equipment was held to constitute a security
agreement upon parol proof that the lessee could buy the equipment
for $1.00 and sales taxes upon the completion of rental payments.
The court in Bolen v. Mid-Continent Refrigerator Co.^^ applied the
Uniform Commercial Code definition of a security agreement as in-
cluding a lease when the lessee has an option to become the owner
for "no additional consideration or for a nominal consideration."*^
Bolen is important because the option agreement was proved by
parol — in this case by testimony of the lessor's sales representative
and a shipping order.*^ As a security agreement, the transaction was
subject to Article 9 remedies, and the lessor was permitted to
recover a deficiency after repossession and resale under its provi-
sions.*^

and "all additions, substitutions, replacements, progeny and proceeds" under a prior

financing statement covering "all swine now owned or hereafter acquired including any
progeny, additions thereto or replacements thereof." Id. Thus, although SPVs security
agreement and financing statement included proceeds, it is not fair to say that after-

acquired hogs were covered either by the security agreement or financing statement.

SPTs security agreement and financing statement were sufficiently broad to include
both proceeds and after-acquired hogs. Cf. Whitworth v. Krueger, 98 Idaho 65, 558

P.2d 1026 (1976) (McFadden, C.J., concurring) (agreement giving security interest in

cattle and "replacements therefor" created security interest in after-acquired cattle).

SP^ in this case furnished feed for the cattle. Even if SP2 had retained a security in-
terest in the feed, the fattened cattle would not have been "proceeds." First Nat'l

Bank of Brush v. Bostron, 564 P.2d 964, 967 (Colo. Ct. App. 1977). The cattle may
arguably have been a "product." See Ind. Code § 26-1-1-9-315 (1976).

^«418 N.E.2d at 280.

^Mll N.E.2d 1255 (Ind. Ct. App. 1980).

"M at 1258. The court held that the lessor's inclusion of the lease within its
pleading eliminated the necessity of proof of execution absent denial under Indiana

Trial Rule 9.2. Id. at 1257-58.

^Ud. at 1258. While cases are divided on the allowance of parol proof of an agree-

ment allowing the lessee to purchase for a nominal or reduced consideration, parol
proof to show that a lease was intended as a security interest usually is considered.

Compare In re Walter W. Willis, Inc., 313 F.Supp. 1274 (N.D. Ohio 1970), affd, 440
F.2d 995 (6th Cir. 1971) with Woods-Tucker Leasing Corp. v. Hutcheson-Ingram Dev.

Co., 626 F.2d 401 (5th Cir. 1980) (oral option permitted absent integration clause in

lease).

*^411 N.E.2d at 1260.



1982] SECURED TRANSACTIONS 377

An interesting problem of the rights of a buyer of goods that
are being processed or manufactured by the seller in possession, and

what such a buyer must do to protect itself, was presented in
Masson Cheese Corp. v. Valley Lea Dairies, Inc.^^ where a manufac-
turer and seller of cheese had promised to sell its output to a buyer.

In this situation the buyer runs several risks, particularly if he has

paid for the goods or advanced funds before delivery. By allowing a
seller to remain in possession, the transaction is presumptively

fraudulent as against the seller's creditors and purchasers under the

statute on fraudulent conveyances.^^ By permitting the seller who is
a merchant who deals in goods of that kind to remain in possession,
he empowers the seller to dispose of the goods to a buyer in ordi-
nary course of business.^^ If the transaction is a sale or a contract to

sell, the buyer cannot replevin the goods unless he can show
grounds for specific performance or is unable to procure cover.^^

Should the transaction be construed as a security device, unless the

buyer takes a security agreement and perfects he will be deferred

to lien creditors, buyers, and secured parties under the rules of the

Uniform Commercial Code.^^ In the Masson Cheese Corp. decision,
the court of appeals found that the buyer had entrusted possession

to a merchant and was defeated when the cheese was sold in ordi-
nary course to a second buyer to pay a prior debt.^^ On this point,
the court erred for the reason that the Code specifies that a buyer
for an antecedent debt is not a buyer in ordinary course of busi-

ness.^° The concurring opinion chose to treat the transaction as a
secured transaction.^^ Since the buyer did not perfect, the subse-

«''411 N.E.2d 716 (Ind. Ct. App. 1980).

®^Ind. Code §§ 32-2-1-7 to -8 (1976). Possession by a merchant seller in good faith

and for a commercially reasonable time after sale or identification is not fraudulent. Id.

§ 26-1-2-402(2).

'Hd. § 26-1-2-403(2).

^^Under the Uniform Commercial Code, a buyer who does not get possession
usually cannot get possession of the goods unless they are unique or he is unable to

procure cover. See Ind. Code § 26-1-2-716 (1976). He has a limited right to repossess
upon the seller's insolvency. Id. §§ 26-1-2-502, -402(1).

^^See id. § 26-1-9-301. If the buyer takes a security interest in the goods to secure

delivery, the price, or both, he has all the rights and disabilities of a secured party

under Article 9. See id. §§ 26-1-2-402(1), (3) (1976). A buyer allowing the seller to re-
main in possession fits the pattern of the old chattel mortgage arrangement under

which the mortgagee allowed the mortgagor-seller to remain in possession. Seavey v.

Walker, 108 Ind. 78, 9 N.E. 347 (1886). Unless the mortgage was recorded, the trans-

action was a fraud on creditors. If the buyer holds a security interest, he can recover

possession from the seller on default. Ind. Code § 26-1-9-503 (1976).

«M11 N.E.2d at 719-20.

^"Ind. Code § 26-1-1-201(9) (1976) providing that a purchase in ordinary course

"does not include a transfer in bulk or as security for or in total or partial satisfaction

of a money debt."
"411 N.E.2d at 720.



378 INDIANA LAW REVIEW [Vol. 15:367

quent purchaser was entitled to priority because any purchaser tak-
ing possession and giving value (which includes a prior indebted-

ness) without knowledge will defeat an unperfected security inter-

est.''^ The court did not consider the alternative that the transaction
was presumptively a fraudulent conveyance. The case teaches one
important lesson. A buyer allowing the seller to remain in posses-
sion for repair, processing or other reasons is wise to take a secur-

ity agreement from the seller and perfect. As a secured party, he
can recover possession on default^^ and if he perfects, he will be pro-

tected against creditors, secured parties and purchasers who do not
qualify as buyers in ordinary course of business and will retain

rights to proceeds and after-acquired collateral under the rules of

Article 9:'

h. Remedies. — K repossessing secured party may resell the col-
lateral at a public or private sale, and if he complies with the re-

quirements of notice and conducts the sale in a commercially reason-

able manner, he may recover a deficiency .^^ A recent decision illus-
trates proper sale procedure by the secured party where a defi-
ciency was claimed. In Bolen v. Mid-Continent Refrigerator Co.i'^
evidence established a public sale justifying purchase by the lessor-

secured party. A valid public sale was shown by publication of the
sale in two local newspapers advertising public bidding with notice

of the sale to the debtor's attorney who had appeared in the action
prior to repossession.^^ Another decision recognized that a security

agreement covering both real and personal property may be fore-
closed against the whole as real estate.'^*

In the event that a secured party who has properly repossessed

^^IND. Code § 26-l-9-301(l)(c) (1976).
''See id. § 26-1-9-503.

^*0n this problem further compare In re Double H. Products Corp., 462 F.2d 52
{3d Cir. 1972) (United States allowed to recover goods being manufactured for it from

seller's trustee in bankruptcy and given priority over secured lender— held United
States not required to perfect under federal law applied to dispute).

'^Hall V. Owen County State Bank, 370 N.E.2d 918 (Ind. Ct. App. 1977).
^^411 N.E.2d 1255 (Ind. Ct. App. 1980), discussed in text accompanying notes 60-63

supra.

"In this case, it was determined that the lessor held a security interest. If this
had not been a secured transaction, the reselling lessor apparently would not be al-

lowed to recover a deficiency for future rent — at least in the absence of a lease provision
for resale. Cf. Loudermilk v. Feld Truck Leasing Co., 171 Ind. App. 498, 358 N.E.2d

160 (1976) (where lease of trucks provided for repossession without termination of

lease and lessor repossessed trucks, holding them available for use by lessee, lessor en-
titled to rent after repossession), discussed in Townsend, Secured Transactions and

Creditors' Rights, 1977 Survey of Recent Developments in Indiana Law, 11 Ind. L.
Rev. 252, 268-69 (1978).

'«U.S. Aircraft Financing Inc. v. Jankovich, 407 N.E.2d 287 (Ind. Ct. App. 1980),

discussed in text accompanying note 29 supra.



1982] SECURED TRANSACTIONS 379

collateral fails to dispose of it in compliance with Code provisions,
he may still be allowed to recover a deficiency if he can show that
the property was worth less than the amount of the indebtedness.^^
This rule, however, is qualified in the case of consumer goods. The
Code allows the debtor whose assets have been improperly sold to
recover not less than the amount of the finance charges plus ten
percent of the price or original loan.*" This rule was pointed out by
the supreme court in Van Bibber v. Norris^^ where the court deter-
mined that the assignor of a security agreement was a party to
what the court on appeal determined to be a proper repossession.
However, the court allowed a retriaP^ for what seemed to be two
reasons. One was that the house trailer which was the subject of the
sale was not sold within ninety days after repossession as required
by the Code where over sixty percent of the purchase price on con-
sumer goods has been paid.*^ For this violation and any other dis-
posal requirements of the Code the assignee-secured party was held
potentially responsible for the penalty.®* Apparently, too, liability

would be allowed for a second reason — that the secured party had
insolently converted personal, non-secured assets of the debtor in

the trailer which was repossessed.®^ The court did not decide

'^Hall V. Owen County State Bank, 370 N.E.2d at 928 (secured party in non-
consumer transaction failed to give one of debtors notice of sale).

«°IND. Code § 26-1-9-507(1) (1976).
«^419 N.E.2d 115 (Ind. 1981).

*^The lower court had awarded separate damages against the assignor and

assignee of the security agreement on the grounds of an improper repossession which

the appellate court found to be proper. This problem is discussed in the text comniienc-

ing at note 102. After repossession, the assignor-surety had paid off the assignee bank

and thereafter disposed of the collateral in a manner which did not appear in the

record. The court allowed a retrial of the damages against the assignor since it could

not determine the extent to which they were based upon what the court below incor-

rectly found to be an improper repossession as opposed to an improper disposal of the

collateral and other non-security assets of the debtor.

«^lND. Code § 26-1-9-505(1) (1976).
^''The supreme court seemed to recognize the failure to give notice of the sale to

the debtor would be a proper ground for damages. 419 N.E.2d at 127. The court

observed that "notice of the resale" had been sent to the debtor by the assignee. Id.

However, the statement of the facts in the case showed only that a notice of "reposses-

sion" had been sent by the assignee, and this to a known incorrect address. The notice
could have been found inadequate for the latter reason alone. See Day v. Schenectady
Discount Corp., 125 Ariz. 564, 611 P.2d 569 (Ariz. Ct. App. 1980). A general notice of
sale is inadequate. E.g., GEMC Fed. Credit Union v. Shoemake, 151 Ga. App. 705, 261
S.E.2d 443 (1979).

®^Some of the contents had been destroyed in a fire for which it appeared that the

assignor may or may not have been responsible. Cf. Ind. Code § 26-1-9-207 (1976)
(secured party obligated to exercise reasonable care toward collateral in his posses-

sion). But others had been given by the assignor to relatives, and the proof established

ill feelings of the assignor and the debtor.



380 INDIANA LAW REVIEW [Vol. 15:367

whether the debtor could recover punitive damages in addition to
the penalty provisions of the Code for improper resale procedures,®*
or for the independent conversion of debtor's personal assets which

were not subject to Code procedures.®^ Nor did the court determine
whether a deficiency judgment could be awarded to a secured party
who improperly disposes of consumer goods — an issue which was
not provoked by the facts. The court implicitly determined, how-
ever, that an assignee-secured party may escape responsibility to
the debtor by transferring the function of resale to a paying,

assignor-surety.®® Whether this responsibility can be delegated to a
non-paying surety or independent contractor remains unresolved,

but in any event it seems unlikely that the assignee can escape his

responsibilities in this way.

4. Transfers by Mortgagor or Lien Debtor. — A transferee of
property on which there is a mortgage or other lien may promise to
pay the indebtedness. In this case the lienholder may enforce his
lien, and, as a third-party creditor, the beneficiary may enforce a
deficiency against the transferee. The transferring debtor becomes a
surety of the transferee who is the primary party. In Indiana, if the

*®The Code specifically gives the debtor an "option" to recover in conversion or

the penalty where the collateral is not disposed of within ninety days of repossession.

IND. Code § 26-1-9-505(1) (1976).

*^Article 9 provisions of the Uniform Commercial Code come into play with

respect to disposal of collateral after default. Ind. Code § 26-1-9-501(1) (1976). When
non-security assets are involved, and probably when the secured party converts col-
lateral prior to default, the debtor may proceed with his common law and statutory
remedies which are not dealt with by the Code. See Townsend, Secured Transactions

and Creditors' Rights, 1976 Survey of Recent Developments in Indiana Law, 10 Ind.
L. Rev. 310, 319 n.50 (1976).

^^Accord, Community Management Ass'n v. Tousley, 32 Colo. App. 33, 505 P.2d
1314 (1973). But cf. Maas v. Allred, 577 P.2d 127 (Utah 1978) (bank responsible for acts
of junior lien or title holder to whom possession returned); Western Nat'l Bank v. Har-
rison, 577 P.2d 635 (Wyo. 1978) (outright transfer to surety held a conversion). It seems

that the assignee of the security interest would be responsible for wrongful acts of the

non-paying assignor-surety for wrongfully repossessing or reselling the collateral with

the assignee's assent. In re Webb, 17 U.C.C. Rep. 627 (Bankr. S.D. Ohio 1975); Farmers

State Bank v. Otten, 87 S.D. 161, 204 N.W.2d 178 (1973). Some decisions recognize that
pursuant to practice, a transfer to the surety-assignor may constitute a sale under the
Code, and if there is no compliance with notice and other Code requirements, the debtor
may hold both parties for wrongful acts with respect to that sale. Reeves v. Associates
Fin. Serv. Co., 197 Neb. 107, 247 N.W.2d 434 (1976). Cf. In re Ford Motor Co., 27
U.C.C. Rep. 1118 (F.T.C. 1979) (involving practice of reselling to assignor as purchaser

at a private sale). In Van Bibber, had a proper resale with notice to the debtor been
made by the assignee to the assignore-surety, the assignee's subsequent disposal of the
collateral would have been irrelevant. Shields v. Bobby Murray Chevrolet, Inc., 44
N.C. App. 427, 261 S.E.2d 238, aff'd, 300 N.C. 366, 266 S.E.2d 658 (1980). The Van Bib-
ber court held that the re-transfer to the assignor-surety was not a sale or disposal, ap-
plying Ind. Code § 26-1-9-504(5) (1976).



1982] SECURED TRANSACTIONS 381

transferee does not assume the indebtedness, he takes subject to
the mortgage or lien, meaning that he assumes no liability on the in-
debtedness, but the secured property becomes the primary source of
payment. In effect then the transferring debtor becomes a surety to
the extent of the value of the collateral, but as to any deficiency he

remains primarily liable. The transferee may lose the property to
the secured party, but he cannot be held for a deficiency absent

some breach of duty.*^ These principles were again recognized in
First Federal Savings and Loan Association v. Arena,^^ where the
mortgagor contracted to sell mortgaged land to a purchaser who in
the contract promised to assume the mortgage. However, when the
land was conveyed pursuant to the contract, the deed recited that
the conveyance was "subject to" the mortgage. The case decided
three important issues. First, it was held that the recital "subject
to" in the deed merged the prior contract of the parties and exclud-
ed parol evidence as shown by the written contract that the trans-
feree was to assume the mortgage.^^ Second, immediately after the
transfer, the mortgagee extended time of payment to the transferee
along with the transferee's agreement to pay increased interest.^^

This, the court held, released the original mortgagor as surety to

the extent of the value of the collateral at the time of the release

which was presumed to be the amount of the unpaid indebtedness.^^

*^These principles, along with the rule that the transferring lienholder does not

escape his liability by transferring the collateral to an assuming buyer without a nova-

tion, were carefully considered in Boswell v. Lyon, 401 N.E.2d 735 (Ind. Ct. App. 1980),

discussed in Townsend, 1980 Survey, supra note 14, at 494-95.

^"406 N.E.2d 1279 (Ind. Ct. App. 1980).

"M at 1281-82 & n.l. The decision followed Wayne Int'l Bldg. & Loan Ass'n v.
Beckner, 191 Ind. 664, 134 N.E. 273 (1922). The weight of authority is to the contrary

on this issue since the "subject to" language is a recital and not promissory in

character, and proof establishes the consideration for the deed which is usually not in-

tegrated in a deed poll. McDill v. Gunn, 43 Ind. 315 (1873); McRae v. Pope, 311 Mass.
500, 42 N.E.2d 261 (1942); G. Osborne, Handbook on the Law of Mortgages § 256 (2d
ed. 1970). On this point, the case probably is wrong.

^M06 N.E.2d at 1282. This follows the general rule that a binding agreement

altering performances between principal and creditor without the assent of the surety

will discharge the latter. For refinements of this rule, see American States Ins. Co. v.

Floyd I. Staub, Inc., 370 N.E.2d 989 (Ind. Ct. App. 1977), discussed in Townsend,

Secured Transactions and Creditors' Rights, 1978 Survey of Recent Developments in

Indiana Law, 12 Ind. L. Rev. 289, 318-19 (1979).
''The court followed Mutual Benefit Life Ins. Co. v. Lindley, 97 Ind. App. 575, 183

N.E. 127 (1932), which, in the case of a "subject to mortgage" transfer, held that the

transferring mortgagor was a surety to the extent of the value of the collateral, but

primarily liable as to any deficiency. If the value of the collateral at the time of the

modification of the contract between the mortgages and the transferee is not proved,

it is presumed to be the amount of the unpaid debt secured. Id. at 585, 183 N.E. at 130.

In Arenxi, the issue of the value of the collateral was not raised in the appeal, which af-

firmed the decision below completely discharging the surety-transferring mortgagor.



382 INDIANA LAW REVIEW [Vol. 15:367

Third, the original mortgage included a provision anticipating trans-

fers by the mortgagor to the effect that the mortgagee "may,

without notice to the Mortgagor, deal with . . . successors ... in the

same manner as with the Mortgagor, and may . . . extend time for
payment . . . without discharging . . . the debt . . . ."^^ This waiver of
suretyship defenses was interpreted as applicable only to extensions
of time. Inasmuch as the mortgagee and the transferee had increased

the interest rate on unpaid principal, the waiver was ineffective.^^
The binding agreement modifying the transferee's duty to pay inter-
est discharged the obligation of the mortgagor to the extent that he

was a surety.
Suppose that a mortgagor contracts to sell the mortgaged land

to a purchaser on conditional sales contract. The purchaser agrees
to make the installment payments under the mortgage, but fails to
do so. Does the mortgagor-seller have a remedy against the purchas-
er? In Claise v. Bernardi,^^ the court held that the mortgagor-seller's

remedy was limited to his contract damages. He could not recover in
tort on a theory that the purchaser interfered with his contractual

relation with the mortgagee, thereby injuring his credit.^^

5. Acceleration Provisions. — Accelersition provisions in lien and
loan agreements giving creditors the option of accelerating the re-

maining payments when a default occurs are tempered by principles
of equity barring acceleration when the creditor accepts late pay-
ments or performances under the contract after a default. The
creditor is estopped or deemed to have waived his right to enforce
acceleration for the original and like defaults until he notifies the

debtor of his intent to reinstate his option and gives the debtor a

reasonable time in which to bring himself current.^® The rule was

^''406 N.E.2d at 1283.

^^Id. For other decisions construing advance waiver of surety defenses, see

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

on other grounds, 170 Ind. App. 518, 357 N.E.2d 734 (1976), transfer denied, 267 Ind.

454, 371 N.E.2d 379 (1978) (advance consent to "any partial release of collateral" ap-

plied to proceeds of collateral); White v. Household Fin. Corp., 158 Ind. App. 394, 302

N.E.2d 828 (1973) (consent to release of collateral did not apply to release of insurance

proceeds).

^"413 N.E.2d 609 (Ind. Ct. App. 1980).

'The case raises interesting questions of the surety-transferor's remedies against
an assuming transferee who fails to pay lien installments. If the transferor pays in-
stallments, he may recover reimbursement. If he pays in full, he may claim subroga-
tion and accelerate the payments. He may not request the mortgagee to accelerate and
foreclose under Ind. Code §§ 34-1-55-1, -2 (1976) (so-called rule of Paine v. Packard).

Fensler v. Prather, 43 Ind. 119 (1873) (holding surety must have been such at inception

of the contract). However, he may be wise to retain a separate lien or sell on condi-
tional sale so that he may fully protect himself on default as in this case.

'*In general, see cases discussed in Townsend, 1980 Survey, supra note 14, at 497;

Townsend, 1977 Survey, supra note 77, at 261; Townsend, 1976 Survey, supra note 87

at 315; Townsend, Secured Transactions and Creditors' Rights, 1973 Survey of Recent

Developments in Indiana Law, 7 Ind. L. Rev. 226, 231 (1973).



1982] SECURED TRANSACTIONS 383

again recognized in U.S. Aircraft Financing, Inc. v. Jankovich^^ in-

volving a defaulting buyer under a conditional sales contract.

Acceptance of late payments, however, was held not to deny the
conditional seller the right of acceleration for other and different de-

faults.^°°

Many "pig" type contracts and security agreements contain pro-
visions to the effect that acceptance of late payments shall not estop
the creditor from accelerating the indebtedness. Generally, the Indi-

ana cases have recognized in effect that these types of contractual

provisions negate the right of the parties to be governed by rules of
fair play in the future and therefore are ineffective.^"^ However, the
Indiana Supreme Court in Van Bibber v. Norris^^^ in overruling a
careful decision by the court of appeals^"^ and the court below held

that contractual provisions of this sort may be rammed down the
consumer's throat — even in a case where late payments were ac-
cepted fifty-seven times by a creditor from a debtor who had paid
seventy percent of the purchase price. The court also held in effect
that even supposing that late payments were waived by the credi-
tor's conduct, other grounds for default were not.^°^ One of these
was the right reserved in the security agreement to declare a de-
fault under an insecurity clause.^"^ In applying this provision, the
court reweighed the evidence on appeaP"® and found that the accel-
eration was exercised in good faith despite evidence to the contrary.
Another ground for default was a provision allowing optional accel-
eration in the case of transfer or an encumbrance — found in this

«M07 N.E.2d 287 (Ind. Ct. App. 1980).

^""/d. The court determined that while a waiver of late payments may have sur-
vived a letter addressed to the wrong debtor, acceleration for failure to pay taxes and

insure the property provided alternative grounds for acceleration. The case did not in-

dicate whether or not these breaches occurred before or after the acceptance of late

payments. Id. at 292.

^'^^See authorities cited at note 117 infra.

''m9 N.E.2d 115 (Ind. 1981).
'"^04 N.E.2d 1365 (Ind. Ct. App.), on rehearing, 408 N.E.2d 1302 (Ind. Ct. App.

1980), rev'd in part, 419 N.E.2d 115 (Ind. 1981). This case was discussed in Townsend,

1980 Survey, supra note 14, at 496-98.

^^Mig N.E.2d at 125. Cf. U.S. Aircraft Financing, Inc. v. Jankovich, 407 N.E.2d 287

(Ind. Ct. App. 1980) holding in effect that waiver of acceleration by acceptance of late

payments did not constitute waiver of other grounds for acceleration.

^"^Under this provision, the secured party had the option to accelerate "for any

reason deeming itself insecure." This provision must be exercised in good faith, and

the burden of proving bad faith is upon the debtor. Ind. Code § 26-1-1-208 (1976).

'"*The court reweighed the evidence upon appeal and refused to consider all the

circumstances against which the assignee bank's faith was to be determined, including

the fact that no effort was made to contact the debtor in jail before the repossession.
The court indulged in the presumption that if a debtor is in jail, the debt is impaired,
leading to the untenable position that the bank had no duty to make further inquiry as
to the whole circumstances. In this respect, the court erred. See Mineika v. Union

Nat'l Bank, 30 111. App. 3d 277, 332 N.E.2d 504 (1975).



384 INDIANA LAW REVIEW [Vol. 15:367

case from the fact that a mobile home park held a lien on the trailer
for failure of the debtor to pay overdue rent/°^ The court failed to
examine the many problems raised by "due on sale" clauses which
have an abusive effect on debtors who need to sell or further encum-
ber the property. ^°^

Van Bibber v. Norris, in upholding the anti-waiver clause, is
most unfortunate for several important reasons. First, the judge in
effect overruled his own opinion in an earlier case without citing or
considering it.^*^^ Second, the court failed fully to consider the op-

pressive character of anti-waiver or anti-estoppel clauses in con-

tracts. These are seldom, if ever, fairly bargained, and are included

as boiler plate in agreements prepared or drafted by the lending in-

dustry. ^^° Third, the decision affects a whole line of cases which have
ignored or invalidated such provisions in other contractual

contexts. ^^^ Thinking men everywhere know that if A and B contract
with each other they cannot agree not to bargain in the future — nor
should they be able to fix a new statute of frauds or parol evidence
rule for later, non-contemporaneous agreements and dealings. Fourth,

^"^"Sale or encumbrance" of the collateral was made a ground for declaring ac-
celeration. The court failed to consider whether or not this provision, drafted by the

lender, applied only when the sale or encumbrance is made with fraudulent purpose or
intent to deprive the lender of its property.

'°*The Uniform Commercial Code permits voluntary or involuntary transfers of

the debtor's interest notwithstanding a provision prohibiting transfer or making the

transfer a default. Some scant authority has held that optional acceleration on transfer
is permitted. Production Credit Ass'n v. Nowatzski, 90 Wis. 2d 344, 280 N.W.2d 118

(1979). Other decisions require the so-called "due on sale" clauses to be exercised in

good faith and not for purposes of obtaining a greater rate of interest. Brown v. Avem-
co Inv. Corp., 603 F.2d 1367 (9th Cir. 1979); Wellenkamp v. Bank of America, 21 Cal. 3d

943, 582 P.2d 970, 148 Cal. Rptr. 379 (1978); Continental Fed. Sav. & Loan Ass'n v. Fet-
ter, 564 P.2d 1013 (Okla. 1977). See generally 47 Miss. L. J. 331 (1976).

^"'Lafayette Car Wash, Inc. v. Boes, 258 Ind. 498, 502, 282 N.E.2d 837, 840 (1972)
(under lease with anti-waiver clause, court stated that the acceptance of a late pay-

ment of rent would have waived the right to terminate the lease, and "if lessors' past

acceptance of late rent payments had induced the vendees to neglect to pay the rent . .

.

when otherwise they would not have neglected to do so, lessors would be estopped
from terminating the lease without notice on the grounds of late payment").

""This is a point of which the court should take judicial notice. See, e.g., ICLEF &
Ind. State B. Ass'n, Uniform Commercial Code Forms, Forms 1-1 & 1-2 (1974).

'''E.g., Oxford Dev. Corp. v. Rausauer Builders, Inc., 158 Ind. App. 622, 304

N.E.2d 211 (1973) (contract prohibiting charge for "extras" unless agreed to in writing

held waived by subsequent conduct); Foltz v. Evans, 113 Ind. App. 596, 49 N.E.2d 358

(1943) (contract stipulating that any modification must be in writing held to be

modified verbally). Anti-waiver clauses have been held ineffective in conditional sales

contracts of real estate. E.g., Nelson v. Butcher, 170 Ind. App. 101, 352 N.E.2d 106

(1976); Pierce v. Yochum, 164 Ind. App. 443, 330 N.E.2d 102 (1975). Likewise, such

clauses have been held ineffective in the case of leases. Rembold Motors, Inc. v. Bon-
field, 155 Ind. App. 422, 293 N.E.2d 210 (1973).



1982] SECURED TRANSACTIONS 385

such clauses are brutal to the home owner who has given a se-
curity interest in a trailer or mobile home — which was the fact in
this case. Since under the Commercial Code this type of home owner
can be dispossessed and foreclosed in a matter of a few days, the

result is almost unthinkable in a humanitarian society."^ Fifth, there

is some question whether or not the repossession of a trailer-home,
planned and executed while the owner is known to be in jail, is car-
ried out without a "breach of the peace."^^^ Had the owner been
handcuffed by a third party while the home was repossessed by the
lender, it stretches technicality to say that the repossession was
peaceable — certainly not in good faith. Sixth, anti-waiver clauses
will enable unscrupulous lenders to trick and coerce unsuspecting

consumers to refinance at higher rates of interest — especially given
the current situation in which interest rates are out of control. This

has been the effect of "due on sale" clauses where the buyer is
forced to refinance at higher rates. ^^^ Seventh, it stretches the imagi-

nation to suggest that a legitimate financial institution after contin-

ually accepting late payments fifty-seven times after seventy per-
cent of the price had been paid, would in good faith accelerate and

in a sneaky manner repossess the jailed debtor's home without giv-
ing him notice and an opportunity to bring himself current as under

the precise circumstances of the case. All transactions under the

Code are governed by a standard of good faith.^^^ The bad faith in

^^Toreclosure sale under a mortgage on real estate is prohibited until three

months after the complaint is filed. Ind. Code § 32-8-16-1 (1976). No time limitations
upon resale of goods or fixtures is fixed by the Uniform Commercial Code, except that

the time must be commercially reasonable. Ind. Code § 26-1-9-504(3) (1976). However,

the 1980 legislature accorded trailer homes the same exemption from execution as
home owners. Id. § 34-2-28-l(a) (Supp. 1981).

'"Repossession by self-help is permitted if completed "without a breach of the

peace." Id. § 26-1-9-503 (1976). The fact that the debtor is in jail has been held insuffi-

cient to show a breach of the peace. Helfinstine v. Martin, 561 P.2d 951 (Okla. 1977).

The duty of the secured party when the debtor is known to be incarcerated may,
however, be increased. Cf. Ind. Code § 26-1-9-504(3) (1976) ("every aspect of the disposi-

tion . . . must be commercially reasonable").

"*See note 108 supra.

"'Ind. Code § 26-1-1-102(3) (1976) (obligation of good faith may not be disclaimed
by agreement); id. § 26-1-1-203 ("Every contract or duty within this Act imposes an

obligation of good faith in its performance or enforcement.") The requirement of good
faith applies to all accelerations. See Brown v. Avemco Inv. Corp., 603 F.2d 1367 (9th
Cir. 1979). The court in Van Bibber determined that an assignee-banker is not a "mer-
chant" within the meaning of Article 2 of the Code, which it held inapplicable to an

assignee of the seller. Under Article 2, a merchant's standard of good faith includes

the "observance of reasonable commercial standards of fair dealing in the trade" in ad-

dition to honesty in fact. See Ind. Code § 26-l-2-103(b) (1976). Why a banker should be
held to a lesser standard than a merchant on financial matters growing out of a sale

was left a mystery by the court.



386 INDIANA LAW REVIEW [Vol. 15:367

this case was sufficiently shown to support the lower court award of
actual and probably punitive damages."^ Eighth, the decision will en-

courage lenders and other contracting parties to view the decision

as opening the door to anti-waiver clauses and other provisions eli-

minating defenses arising out of subsequent conduct. This will put

the ethical lawyer in a serious dilemma — to protect his client on one
side and to draft a fair bargain on the other. Ninth, although the

decision recognized a split of authority under the Commercial

Code,"^ it failed to deal with the import of the Uniform Consumer
Credit Code which recognizes a special rule of unconscionability to
be applied in consumer transactions."* In fact. Van Bibber is sup-
ported by only one decision under the Commercial Code applying
the anti-waiver clause against consumers, and that decision has been

severely criticized by dissenting and disagreeing judges there."®

Finally, if the court had outlawed the anti-waiver clause, no serious

injury would flow to lenders. Balanced against the relative hurt to
borrowers who find that they suddenly lose their property and
credit standing because of an unsuspected repossession, the case

makes no sense. Creditors may easily protect themselves by accept-
ing late payments with a warning or by giving the debtor notice and
a reasonable opportunity to bring himself current.^^°

"^Sec Nicholson's Mobile Home Sales, Inc. v. Schramm, 164 Ind. App. 598, 330
N.E.2d 785 (1975), discussed in Townsend, 1976 Survey, supra note 87, at 321; Nevada

Nat'l Bank v. Huff, 582 P.2d 364 (Nev. 1978). However, punitive damages were prop-

erly denied where the fact-finder had found that the creditor was guilty of only a

mistake in the law. Cobb v. Midwest Recovery Bureau Co., 295 N.W.2d 232 (Minn.

1980).

'^^Several decisions have denied effect to anti-waiver clauses in consumer trans-

actions. Ford Motor Credit Co. v. Waters, 273 So.2d 96 (Fla. 1973) (creditor estopped

from asserting default); Vines v. Citizens Trust Bank, 146 Ga. App. 845, 247 S.E.2d 528

(1978) (separate notification to bring debtor current waived); Fontaine v. Industrial

Nat'l Bank, 111 R.I. 6, 298 A.2d 521 (1973) (unconscionable). Only one decision was

found upholding the anti-waiver provision in a consumer transaction. This was

McAllister v. Langford Investigators, Inc., 380 So.2d 299, 300 (Ala. Civ. App. 1980)

(disapproving Hale v. Ford Motor Credit Co., 374 So.2d 849 (Ala. 1979) (three judges

dissenting)). Anti-waiver clauses have been upheld in the case of commercial loans in

Illinois and Kentucky, neither of which involved self-help repossession. General Grocer

Co. V. Bachar, 51 111. App. 3d 907, 365 N.E.2d 1106 (1977); Universal C.I.T. Credit Corp.

V. Middlesboro Motor Sales, Inc., 424 S.W.2d 409 (Ky. 1968).

"*Ind. Code § 24-4.5-5-108 (1976). Under this provision, official comments make it
clear that the standard of conscionability is to be determined by conduct acceptable

between a businessman and a consumer — not between merchants. Uniform Consumer
Credit Code § 5.108, Comment 1.

'''See Hale v. Ford Motor Credit Co., 374 So.2d 849 (Ala. 1979).
'''See Wade v. Ford Motor Credit Co., 455 F. Supp. 147, 24 U.C.C. Rep. 1040 (E.D.

Mo. 1978) where the creditor gave continual reminders to the debtor to pay up. The
anti-waiver clause was not needed to support a finding of no waiver or estoppel.



1982] SECURED TRANSACTIONS 387

As noted below, the court of appeals has indicated that destruc-
tion of the collateral may have the effect of accelerating the indebt-
edness when insurance proceeds covering the loss and payable to
them as their interests appear are received. Pearson v. First Na-
tional Bank^^^ held that the mortgagee could keep and apply the pro-

ceeds to the indebtedness as it became due unless the debtor could
show bad faith by the lienholder or some equitable basis entitling
the debtor to rebuild or refurbish the property with the proceeds.^^^

6. Right of Lien Debtor to Apply Insurance Funds Towards
Repair of the CollateraL — Suppose that a lien debtor under a mort-
gage or security agreement procures property insurance covering
both the debtor and the lienholder when neither the policy nor the
lien contract specify how the proceeds are to be applied. Upon
damage or destruction of the collateral, may the debtor insist that
the proceeds be used to repair or replace the collateral? May the
lienholder insist upon a refinancing at a higher rate of interest? In
Pearson v. First National Bank^^^ the court construed a mortgage
provision requiring insurance payable in favor of the mortgagees "as
their interest may appear" as allowing the bank to apply the in-
surance proceeds to the indebtedness as it becomes due.^^* After a
careful review of the few decisions on the point in other states, the
court denied relief to the mortgagor because of failure to prove lack
of good faith^^^ on the part of the mortgagee or other grounds re-
quiring application of the funds towards rehabilitation of the prop-
erty. The case indicated that relevant proof would have included
evidence of whether the debtor was current upon the indebtedness;^^^
facts showing estoppel by the bank when reconstruction was com-

»=^408 N.E.2d 166 (Ind. Ct. App. 1980).

'^Ud. at 170-71.

''Ud. at 166.

^^*Id. at 170. Prior Indiana law was to the effect that if the indebtedness is over-

due or accelerated, the lienholder may insist that insurance proceeds be applied first
towards the indebtedness. Commercial Union Fire Ins. Co. v. Wade, 103 Ind. App. 461,
8 N.E.2d 1009 (1937).

^'^408 N.E.2d at 171. The court cited Schoolcraft v. Ross, 81 Cal. App. 3d 75, 146
Cal. Rptr. 57 (1978) holding that an express provision giving the lienholder the option

of applying the proceeds to the balance of the debt or for reconstruction carried an im-

plied condition that the option be exercised in good faith. This seemed to be construed

to mean that if the lienholder's security remained unimpaired either before or after
the reconstruction, refusal to allow the proceeds to be used for this purpose would be

in bad faith. In the Pearson case no evidence was introduced on the value of the col-
lateral either before or after the projected construction. 408 N.E.2d at 171.

^=^'408 N.E.2d at 170. Accord, Cottman Co. v. Continental Trust Co., 169 Md. 595,
182 A. 551 (1936).



388 INDIANA LAW REVIEW [Vol. 15:367

menced after the fire; and the amount of insurance proceeds paid or
credited to the debtor, and how or if the mortgage was retired/" If
the debtor was in effect seeking specific performance of an implied
obligation to allow application of the proceeds toward rehabilitation
of the collateral, the court was correct in requiring proof of damages
or that damages would not have afforded an adequate remedy/^* The
case thus does not subscribe to the unreasonable view that a mor-

tgage or security agreement silent upon the subject will allow the
lienholder to accelerate and apply insurance proceeds payable to
both parties toward the debt. It indicates that the lien debtor may
obtain relief if he is not in default and can show damages or a need
for specific equitable relief. Most policy provisions give the insured
the option to repair or pay damages, and terms of mortgages or
security agreements carefully drafted by lienholders give the latter

the option of accelerating and application towards the total debt.^^^

7. Mortgage Foreclosure—Statute of Limitations. —New stat-
utes of limitations and bars or non-claim provisions with respect to

real estate mortgages were enacted in 1981. Title lawyers are ad-
vised that mortgages and vendors' liens created on September 1,
1982 and thereafter shall expire ten years after the maturity date of the

last installment as shown of record (prior thereto, twenty years).^^°
The statute of limitations on mortgages continues to be ten years,

•"408 N.E.2d at 170-71.

•^*M at 170. The court seemed to assume that if the debtor could have refinanced

reconstruction at a lower rate of interest elsewhere, the debtor suffered no damages
from the mortgagee's refusal to make the funds available for repair. But if he was forced
to pay an increased rate of interest, it seems that he would be entitled to damages.

See Doddridge v. American Trust Sav. Bank, 98 Ind. App. 334, 189 N.E. 165 (1934).

While equity will not generally grant specific performance of promises to lend money,

it will do so where the plaintiff can show that money is not available or that he would

suffer undue hardship. See Standard Land Corp. v. Bogardus, 154 Ind. App. 283, 289

N.E.2d 803 (1972). The court thus seems to leave the door open to damages or

equitable relief depending upon the circumstances. It would be unfair to require the

lienholder to suffer repairs if his security will be or continue to be impaired by the im-

provement. Thus if repairs would leave his indebtedness in a less secured state than

before the loss, allowing the repairs would be in the nature of waste. Cf. Finley v.

Chain, 374 N.E.2d 67 (Ind. Ct. App. 1978) (waste measured by extent of impairment of

security below amount of debt). On the other hand, if the debtor finds it difficult to ob-
tain financing for needed repairs so that he will be unable to have a home or to con-
tinue a business, equities predominate in his favor.

^^^Cf. Savings Soc'y Commercial Bank v. Michigan Mut. Liab. Co., 118 Ohio App.

297, 194 N.E.2d 435 (1963) (election by insurer- notice to debtor sufficient).

•'"Ind. Code § 32-8-4-1 (Supp. 1981). This statute is a bar to recovery and will pro-

tect good faith purchasers relying upon the record after the time period has expired

despite any tolling which is not shown of record. See Citizens Bank v. Mergenthaler

Linotype Co., 216 Ind. 573, 586, 25 N.E.2d 444, 450 (1940).



1982] SECURED TRANSACTIONS 389

presumably from the time each installment becomes due/^^ but the
limitation for suing upon the written money debt is changed from
ten to six years after August 31, 1982.^^^ The effect will be to restore
the old Indiana rule recognizing two causes of action for limitations
purposes: one on the debt and another on the security/^^ The catch-
all limitation period has also been reduced by the same legislation
from fifteen to ten years commencing on September 1, 1982/^*

B. Creditors' Rights

1. Artisans' Liens. — An artisan with a possessory lien for
labor, materials, and a storage lien upon a motor vehicle may sell
the property under statutory provisions allowing the sale at public

auction after thirty days, the insertion of two weekly advertise-
ments in a newspaper, and the sending of a registered mail notice to

the owner at his last known address indicating that the property
will be sold at public sale within fifteen days of mailing/^^ In Robert-

son V. Mattingly^^^ an artisan who had furnished repairs and storage
for over two years sold the vehicle to a purchaser without compli-
ance with the statute. So that a certificate of title could be

obtained,^^^ the artisan later resold it to the original buyer, this time

after compliance with statutory procedures. The buyer then pro-
cured a new certificate of title and the car was ultimately sold to a
successive seventh purchaser from whom the original owner sought
recovery. The sale was upheld upon proof of compliance with the
statute and that notice to the owner was timely sent (though not
necessarily received).^^® The case mainly teaches that strict compli-

^^^IND. Code § 34-1-2-2(6) (Supp. 1981).
^^Ud. § 34-1-3-2(5). A special rule applies to written contracts to pay money be-

tween September 19, 1981 and September 1, 1982 where the limitation is fixed at ten
years, and contracts executed before September 19, 1981 are enforceable only under
the limitations period in effect at the time "of execution.

^^^Yarlott V. Brown, 192 Ind. 648, 138 N.E. 17 (1923).
^^^Ind. Code § 34-1-2-3 (Supp. 1981). No provision applies to security interests in

personal property, but "chattel mortgages" are excluded from real estate mortgage
provisions of the new law. Id. § 34-l-2-2(b). This exclusion indicates that the statute
does not apply to liens on fixtures and personal property.

"®Ind. Code § 9-9-5-6 (1976). Another statute also recognizes the artisans' liens and
provides for judicial foreclosure one year from the time of recordation of notice of the

lien. Id. § 32-8-31-5.

''"413 N.E.2d 647 (Ind. Ct. App. 1980).

"^Ind. Code § 9-9-5-6 (1976) (providing for the issuance of a new certificate of title
on the artisan's "certificate" showing compliance with the sales provision of the
statute).

^^he court also emphasized that an agent of the owner was notified of the sale,
and showed concern for his long delay in asserting his rights. The court did not decide
an issue of the statute of limitations.



390 INDIANA LAW REVIEW [Vol. 15:367

ance with sales procedures will pay off to the artisan who forecloses,
and that if a bad sale is made, it can be corrected by a complying

resale.

2. Mechanics* Liens — General Duties of Parties; Punitive
Damages. — Parties to a construction contract are expected to per-
form their obligations. If they do not, an intentional breach of con-

tract or duty may result in punitive damages, as reflected in recent
decisions. An owner, however, has no duty to pay a subcontractor
without a mechanic's lien. In this connection. Harper v. Goodin^^^
held that a sub filing a mechanic's lien after the sixty day required

period for asserting the lien and then refusing to release it could be

held liable in a common law action for disparagement of title.^*°
Damages included the cost of attorney's fees in clearing title and
punitive damages as well.^^^ An owner or contractor who wrongfully
withholds retainages intentionally causing injuries to the obligee's

credit may be held liable for punitive damages under a ruling in
Southern, School Buildings, Inc. v. Loew Electric, Inc.^^^ This kind of
liability was also extended to a contractor intentionally breaching
his contract.

^'*^

a. Notice to occupying owner by subcontractors. — Current
provisions of the mechanic's lien statute require subcontractors

claiming a lien against an occupying owner of a single or double
dwelling to give him written notice of intent to claim the lien within

thirty days after performance commences (sixty days in the case of
new construction).^^^ In Henderlong Lumber Co. v. Zinn,^^^ a supplier
gave the notice a few months after the time had expired. The sup-
plier claimed a lien for only those materials furnished after the

'^'409 N.E.2d 1129 (Ind. Ct. App. 1980).

""The court recognized that the mechanic wrongfully refusing to release the lien

could be held liable for a statutory penalty as provided by statute. Ind. Code

§§ 32-8-1-1 to -2 (1976). The statutory remedy was not exclusive.

"The mechanic defended on the ground that his refusal to release the lien was
based on advice of counsel, but the defense was held not to be established by proof

that the disparagement was made with knowledge that the lien was ineffective. 409

N.E.2d at 1132, 1134-35.

""407 N.E.2d 240 (Ind. Ct. App. 1980) (refusal to submit instruction on punitive

damages prejudicial error justifying new trial).

"T.D. Borkholder Co., Inc. v. Sandock, 413 N.E.2d 567 (Ind. 1980) (building con-

structed in latent deviation from plans); see Harper v. Goodin, 409 N.E.2d 1129 (Ind.

Ct. App. 1980); cf. Orto v. Jackson, 413 N.E.2d 273 (Ind. Ct. App. 1980) (owner allowed

damages for aggravation and inconvenience in counterclaim to foreclosure action and

this was not barred by owner's settlement with subcontractor for the same defect).

"*Ind. Code § 32-8-3-1 (Supp. 1981). Prior to its amendment, the statute required

the notice to be sent within five and fourteen days, respectively. See Act of March 16,

1963, ch. 376, § 1, 1963 Ind. Acts 963.

"«406 N.E.2d 310 (Ind. Ct. App. 1980).



1982] SECURED TRANSACTIONS 391

notice had been given. The court held that since the notice had not
been given within the statutory time from commencement, the sup-
plier could not meet the condition of the lien statute/^^ An attempt
to argue that deliveries were made under separate contracts occur-
ing after the notice had been given was rejected as being raised for
the first time on appeal. Had the argument been supported by proof
and timely made, it would have found support in a dubious line of

cases refusing to tack successive performances under separate con-

tracts on the same construction project.^^^
b. Recordation of notice. —A mechanic claiming a lien upon real

estate must record notice of his intent to claim the lien within sixty

days after the last performance.^*® The lien then relates back to the
time the work first commenced.^^^ If the notice is not recorded with-
in the prescribed time, the lien and the accompanying right to

recover attorney's fees^^° are lost.^^^ Two decisions rejected liens for
failure of the recorded notice to meet statutory requirements. In
Froberg v. Northern Indiana Construction, Inc,,^^^ the court denied
attorney's fees to a prime contractor whose notice described a tract
of land other than that on which the work was performed.^^^ Subur-
ban Electric Co. v. Lake County Trust Co.^^^ held that designation of
a general partner by name as owner-contractor in the notice recorded
by a materialman was inadequate to bind real estate held of record
in the name of the partnership.^^^ This technical result was justified
on the theory that the notice provision was designed to inform the
owner and subsequent purchasers.^^® A notice which would not in
fact give accurate notice to subsequent purchasers did not meet the
requirements of the statute — even though the record in the case did

""/d at 312.

'*^Thus, if a prime contractor or subcontractor renders performances under

separate contracts upon a single construction project, it has been held that the notice

of the lien must be recorded within sixty days of the last performance for each con-

tract. Tacking is not permitted. See Saint Joseph's College v. Morrison, Inc., 158 Ind.

App. 272, 302 N.E.2d 865 (1973), discussed in Townsend, 1974 Survey, supra note 25, at

253 (1974). Logically, this highly questionable interpretation of the law would require

notices by subcontractors to the owner within the thirty or sixty day period from the

commencement of performances under each separate contract.

"«lND. Code § 32-8-3-3 (1976).
""M § 32-8-3-5.
'""See id. § 32-8-3-14.

'''See id. § 32-8-3-3.

'^HIQ N.E.2d 451 (Ind. Ct. App. 1980). The prime contractor, however, recovered

upon his contract with the owner.

*"M at 454.
^"412 N.E.2d 295 (Ind. Ct. App. 1980).

'^'Id. at 297.



392 INDIANA LAW REVIEW [Vol. 15:367

not show prejudice to a third party who acquired title a short time
after the defective notice was recorded/^^

c. Priorities. — A lien or property interest properly perfected
will, as a general rule, take priority over a mechanic who later com-
mences construction work on the property. ^^® An exception to this
rule is recognized when proof establishes that the prior lienholder
has actively consented to the construction improvement/^^ Active

consent has been found on the part of a joint owner making part
payment to the contractor,^®" an unenforceable promise by an owner
to convey land to a person furnishing materials and work on the
property,^®^ and where the prior owner or lienholder participates in
the construction project/®^ A landlord's agreeing to improvements
was also deemed evidence of active consent.^^^ If a mortgage or lien
is taken on property with a view that the proceeds of the loan will

be used for an improvement on the property, the law is not clear
whether giving the construction loan constitutes active consent.^^^

Leaning in the direction that it does not is Miles Homes of Indiana,
Inc. V. Harrah Plumbing and Heating Service Co.^^^ where a seller
furnished a shell house to the owner of land who gave a mortgage
on the land to secure the price. To make the property livable as ex-
pected by the lender, the owner-debtor contracted with a mechanic

^"The lien in this case was claimed by a subcontractor who dealt with a prime
contractor represented by a general partner of the owning partnership. The
partnership-owner conveyed the property to a trust while the work was in progress,
but the deed was not recorded until one hour and forty minutes after notice of the lien
was recorded. The court made an assumption which in view of the record was com-
pletely unjustified: i.e., that the trust changed its position because the record failed to
show the lien. In this case, the notice of the lien was accompanied by a document
(deed) showing the partnership as owner, but the court held that the attachment did
not cure the defect in name.

'""E.g., Woods V. Deckelbaum. 244 Ind. 260, 191 N.E.2d 101 (1963).
'''E.g., Rader v. A.J. Barrett Co., 59 Ind. App. 27, 108 N.E. 883 (1915).
""O'Hara v. Architects Hartung & Assocs., 163 Ind. App. 661, 326 N.E.2d 283

(1975).

^"^Martin v. Martin, 122 Ind. App. 241, 103 N.E.2d 905 (1952) (wife orally agreed to
convey land to entireties ownership in exchange for improvements by husband who
claimed a lien upon property).

"'^Better Homes Co. v. Hildebrand Hardware Co., 202 Ind. 6, 171 N.E. 321 (1930).
^"^Dallas Co. v. William Tobias Studio, Inc., 162 Ind. App. 213, 318 N.E.2d 568

(1974) (reversing summary judgment for landlord).
'"^It has been held that a construction lien may be deferred to later mechanics'

liens. See Farmers Loan & Trust Co. v. Canada & St. L. Ry., 127 Ind. 250, 26 N.E. 784
(1890); Building & Loan Ass'n v. Coburn, 150 Ind. 684, 50 N.E. 885 (1898). A construc-
tion loan made after mechanics have commenced work will be deferred to mechanics
liens. Beneficial Fin. Co. v. Wegmiller Bender Lumber Co., 402 N.E.2d 41, 403 N.E.2d
1150 (Ind. Ct. App. 1980), discussed in Townsend, 1980 Survey, supra note 14, at 504-06
(1981).

^"^408 N.E.2d 597 (Ind. Ct. App. 1980).



1982] SECURED TRANSACTIONS 393

for installation of plumbiiig, and this mechanic duly asserted a lien

against the property. In reversing the lower court which allowed

the lienholder to foreclose with priority, the court held that the in-

terest of the seller of the shell home should prevail/^^ Why active
consent to make a shell home livable could not be inferred is un-
fathomable.

Another exception to the rule giving prior liens and interests

superiority over subsequent mechanics' liens is a statutory provision

allowing removal of "buildings erected by the lienholder" as against

lessors and mortgagees.^^^ Miles Homes found that this statutory ex-
ception was inapplicable for two reasons. One was that the building
was not erected by the mechanic claiming the lien/^^ a dubious inter-
pretation which will not work when several persons contribute to
the construction of a building. The other reason was that the seller
of the shell building had become a conditional seller of the land, and,
since conditional sellers were not excepted by the statute, the ex-
ception did not apply. ^^^ Evidence showed that originally the owner-
debtor had given the seller of the house a mortgage on the land for

the price, and upon later defaults, the property was conveyed to the
seller who then resold it to the owner on conditional sales contract.
Although the decision below could clearly be sustained on the

theory of a fake sale amounting to a mortgage,^^" the court deter-

mined that the seller had the rights of a conditional seller of the
land. The court stretched the law a little further by allowing the so-
called conditional seller strict foreclosure because nothing had been

paid on principal. ^^^ The court failed to consider the value of im-
provements made by the owner and the mechanic amounting to
nearly one-half of the original purchase price. ^^^ As a consequence
the mechanic was foreclosed without an opportunity to assert even a

'''Id. at 600-01.

i"lND. Code § 32-8-3-2 (1976).
*««408 N.E.2d at 601.

'"Ud. at 600. This accords with Davis v. Elliott, 7 Ind. App. 246, 34 N.E. 591 (1893),

holding that the exception did not include vendors.

"'See Kerfoot v. Kessener, 227 Ind. 58, 84 N.E.2d 190 (1949) (applying well

established rule that outright deed may be proved as an equitable mortgage, especially

when the property is resold on security to the debtor). See generally Townsend, 1974

Survey, supra note 25, at 311-12 (1974).

'''408 N.E.2d at 600. The court held that the case fell within an exception to

Skendzel v. Marshall, 261 Ind. 226, 301 N.E.2d 641 (1973), which requires judicial

foreclosure of conditional sales contracts of real estate when a substantial equity exists

in the debtor. Id.

'"Counting payments which had been made and the value of improvements

established in the record, the debtor and the mechanic had added over one-half of the

value of the indebtedness in payments and value added to the land. Id. at 598-99. See

generally text accompanying notes 31 & 32 supra.



394 INDIANA LAW REVIEW [Vol. 15:367

secondary lien on the property since he stood in the shoes of the

owner-debtor. The case is a complex manipulation of difficult secur-
ity concepts aided by a reweighing of the evidence on appeal/^^

d. Waiver of lien. — That a contractor may waive its rights to a
mechanic's lien was established in King Pin Motor Lodge, Inc. v. D.
J. Construction Co.'^'^^ There the agreement to waive the lien was ex-
ecuted in favor of the bank which apparently furnished financing on

the strength of the waiver. The court held that the waiver bound
the contractor with respect to the owner as well, so that when
recovery for extras was allowed, the contractor was denied attor-
ney's fees.^^^

e. Foreclosure of mechanic's lien; notice to bring suit. — By
statute, time limits for foreclosure of mechanics' liens are severely

prescribed. Suit must be brought within one year^^^ and the owner
may expedite this time period by giving the lienholder written
notice to commence suit.^^^ If the lienholder fails to bring suit within
thirty days after receiving this notice, the lien (not liability on con-

tract) is "null and void."^^® In Lafayette Tennis Club, Inc. v. C.W.

Ellison Builders, Inc.,^''^ a subcontractor who properly recorded
notice of its lien was served with an unregistered and uncertified
letter from the owner complaining that an itemized account had not
been furnished with the following directions: "Please file suit on

your Mechanic's Lien which you filed in order that the matter may
brought to a head."^®° No response was made to the letter and suit
to foreclose the lien was commenced more than thirty days after
receipt of the notice. In an unusually harsh holding, the court focused

upon the second paragraph of the statute stating that an owner who
has given such notice by "registered or certified mail to the holder

of the lien at the address given in the notice of lien recorded may
file an affidavit" to this effect and that the thirty day period had

elapsed.^^* Ignoring that this provision was added by legislative
amendment obviously to expedite and secure the clearance of titles
when mechanics' lienholders have undetermined claims, the court

"^This conclusion is supported by the dissent of Judge Young. 408 N.E.2d 597 at

601 (Young, J., dissenting).

'^"416 N.E.2d 1317 (Ind. Ct. App. 1981).

''"Id. at 1319.

^^^Suit must be brought within one year of the time the notice of lien is recorded

or within one year of the time that credit is given and written terms thereof are ex-

ecuted by the lienholder and all owners of record. Ind. Code § 32-8-3-6 (1976).
^"IND. Code § 32-8-3-10 (1976).

^^M06 N.E.2d 1211 (Ind. Ct. App. 1980).

'''Id. at 1212.

'^'Id. at 1213-14, quoting Ind. Code § 32-8-3-10 (1976) (emphasis added). This second

paragraph was added in 1963. Act of March 16, 1963, ch. 376, § 4, 1963 Ind. Acts 963.



1982] SECURED TRANSACTIONS 395

seemed to hold that the notice must be sent by certified or
registered letter, that an affidavit of service must be recorded, and that

the written notice must prominently explain to the sendee that his

foreclosure action will be barred if suit is not commenced within
thirty days/®^ The notice and the manner of its service were held in-
sufficient to require foreclosure within thirty days of its receipt.

The case has a virtue — it is accompanied by a dissent/®^
3. Exemptions. — By statute, it is now clear that the exemption

provision of the Uniform Consumer Credit Code allowing creditors
to reach twenty-five percent of disposable weekly earnings above

thirty times minimum hourly wages with an exemption of the
balance is valid. ^^^ Doubt arising from the fact that the proceedings

supplemental statute allowed a continuing lien upon only ten per-

cent of earnings and income^*^ was eliminated by an amendment to
that statute permitting non-exempt property to be applied to the

judgment debt with a lien upon income and profits to the extent

permitted by the Code.^*^ This new statute also provides that the
judgment debtor must be "notified" of a hearing before the court

can order property, income or profits applied towards the judgment

in proceedings supplemental,^®^ overruling Citizens National Bank v.
Harvey^^^ on this point. The exemption of life insurance was extend-
ed to protect a beneficiary or an assignee spouse against a creditor

of the spouse as well as the insured, and loan values as well as cash

surrender values were made exempt.^^^

-4. Enforcement of Property Division and Support Orders.—
The statute limiting garnishment of weekly wages to twenty-five
percent of disposable earnings allows more to be reached in the case
of "alimony" or "support" if the decree specifies a higher percent-

^gg 190
rpj^^g

provision of the law seemingly was repealed by Siskind

^«M06 N.E.2d at 1214-15.

^^Ud. at 1215. Similar to the statute involved in this case is a rule of suretyship to

be found in Ind. Code §§ 34-1-55-1 to -2 (1976) which allows a surety to demand in
writing that a creditor bring suit against the principal. If suit is not prosecuted promptly

and with diligence, the surety is discharged. See text accompanying notes 247-48 infra.

For a case in which a notice by the surety similar to that used in Lafayette Tennis

Club was upheld, compare Reiman v. Terre Haute Sav. Bank, 96 Ind. App. 652, 180
N.E. 490 (1932).

^«^IND. Code § 34-1-44-7 (Supp. 1981) (validating id. § 24-4-4.5-5-105 (1976))
'^^Doubt became serious when an opinion of the Attorney General resurrected

Mims V. Commercial Credit Corp., 261 Ind. 591, 307 N.E.2d 867 (1974) holding that a
debtor was entitled to the most liberal exemption provided by different statutes.

^^•'IND. Code § 34-1-44-7 (Supp. 1981).
'''Id.

'^nei Ind. App. 582, 339 N.E.2d 604 (1976), criticized in Townsend, 1976 Survey,

supra note 87, at 330-33.

^««lND. Code § 27-l-12-14(c) to (d) (Supp. 1981).
^'"IND. Code § 24-4.5-5-105 (Supp. 1981).



396 INDIANA LAW REVIEW [Vol. 15:367

V. Siskind,^^^ which held that the twenty-five percent limitation upon
disposable earnings does not apply to an alimony or support decree

even if the decree fails to specify that more may be garnished.
Under this interpretation, the effect seems to be that one hundred
percent of a defaulting spouse's wages could be garnished to satisfy
a back property division or for support payments when the decree is
silent as to the amount of disposable earnings to be reached/®^ For-
tunately, this hideous result is tempered by federal law which limits
garnishment of wages for ''support" to 50, 55, 60 and 65% of dispos-
able earnings, depending upon the support and delinquency status of
the debtor/®^ To the extent that the decree involved property divi-
sion, it may have been in violation of federal law permitting garnish-
ment of not more than twenty-five percent of weekly disposable
earnings towards payment of non-support judgments/^^ In Budnick
V. Budnick,^^^ it was made clear that a divorce award of attorney's
fees to the attorneys could be enforced by them in proceedings sup-
plemental to execution/^^ Rohn v. Thuma^^'^ decided that a husband
could not be punished in contempt for failure to pay uncertain

undefined college expenses awarded by a support decree — at least
until the court determined whether the decree should be construed

to include college expenses at institutions more costly than a state
university.

^^®

^^^415 N.E.2d 771 (Ind. Ct. App. 1981).

^®^In this case the court allowed garnishment of 55% of the husband's wages
(disposable earnings) to satisfy a variable rate alimony decree in arrears. Id. at 772.

^^^5 U.S.C. § 1673(b)(2) (Supp. Ill 1979).

^'^The federal law exempts the lesser of 25% of weekly disposable earnings or the
amount by which weekly disposable earnings exceed 30 times minimum wages with
the further provision allowing only 50, 55, 60 or 65 per cent of weekly disposable earn-

ings to be reached for "support." 15 U.S.C. § 1673 (1976). Hence, under federal law it

appears that not more than 25% may be reached for property division which is deter-
mined not to be "support" under Indiana law. See generally Townsend, Creditor Prob-

lems Growing out of Alimony, Support, and Property Settlement Decrees, in [ICLEF]
Rights and Remedies of an Indiana Creditor in 1980, V-3, V-19 to V-23 (1980).
Therefore, the award in Siskind of 55% was illegal under federal law if the order was
for property division and if it is so regarded under the federal law. The court called it
"alimony." 415 N.E.2d at 772. Actually, the decree involved a property settlement pro-

viding for both support and property division in lump sum payments every month.
Hence the decree may have been in compliance with federal law — at least to the ex-
tent that the payment was for "support" if that portion of the amount owing was in-

cluded in the 55% ordered to be paid. This opinion lays the groundwork for future
trouble.

^'^413 N.E.2d 1023 (Ind. Ct. App. 1980).

'^Tees may be awarded directly to attorneys in divorce proceedings. See Ind.
Code § 31-1-11.5-16 (1976). In this case, the court determined that the appeal from pro-
ceedings supplemental was in bad faith, justifying a penalty of ten percent.

1^^408 N.E.2d 578 (Ind. Ct. App. 1980).

'^^Contempt for failure to pay uncontested dental bills was allowed. Another re-
cent decision holds that contempt for failure to pay support is proper even though



1982] SECURED TRANSACTIONS 397

The power of the court to include pension rights as marital prop-
erty in divorce awards appeared again in several decisions. Wilson

V. Wilson^^^ concerned a pension payable absolutely but only when
the husband reached a certain age. After reviewing the array of con-

flicting Indiana decisions on the problem, the court determined that

the pension was not vested and therefore not distributable as a
marital asset.^°° Another decision recognized that gift transfers by a
spouse with intent to defeat marital assets may be considered in
reducing the donor's share of the assets on property division.^"^

New law was made, or at least an old problem of enforcement
was clarified, in Clark v. Clark,^^^ holding that a spouse allegedly in
contempt of a court order could be arrested on a body attachment
without prior notice and hearing on the contempt charge.^"^ Legisla-

tion in 1981 provides that the court may, on application, order inter-

est to be paid at one percent per month on delinquent child support
payments.^*'"

5. Proceedings Supplemental to Execution. — Two recent deci-
sions, both involving issues of res judicata, illustrate that a judg-

ment creditor may enforce his judgment against a liability insurer
by means of garnishment of the insurer in proceedings supplemen-

some but not all the children for which support has been ordered are emancipated.

Reffeitt v. Reffeitt, 419 N.E.2d 999 (Ind. Ct. App. 1981) (holding also that agreement

between husband and wife reducing payments ineffective until approved by court for

prospective operation).

1^^409 N.E.2d 1169 (Ind. Ct. App. 1980).

^"'Compare Morgan v. Cooper, 415 N.E.2d 729 (Ind. Ct. App. 1981) (excluding pen-

sion rights from marital assets as "future income" and not vested) with Irwin v. Irwin,

406 N.E.2d 317 (Ind. Ct. App. 1980) (unvested pension could be considered but not

divided). The present divorce law defines property as "including a present right to

withdraw pension for retirement benefits." Ind. Code § 31-l-11.5-2(d) (Supp. 1981). Pen-

sion rights payable in the future and contingent upon survival are not a part of the

estate in bankruptcy. In re Harter, 10 Bankr. 272 (Bankr. N.D. Ind. 1981), discussed at

note 236 infra.

^"^Melnik v. Melnik, 413 N.E.2d 969, 973 (Ind. Ct. App. 1980).
^''^404 N.E.2d 23 (Ind. Ct. App. 1980).

^°Ud. at 37-38. It seems that old case law held that before the defendant charged

with civil contempt could be subjected to a body attachment, he must have been served

with notice and given an opportunity to appear at the hearing and found in con-

tempt. Denny v. State, 203 Ind. 682, 695-96, 182 N.E. 313, 317-18 (1932). Legislation

adopted in 1947 seems to make it clear that the court in contempt proceedings may
direct body attachment either before or after the hearing on contempt. See Ind. Code

§§ 34-4-9-1 to -3 (1976) (applying to both civil and criminal contempt proceedings). A
body attachment to procure witnesses who refuse to honor a properly served subpoena
is proper. See Ind. R. Tr. P. 45(F) & (G). However, before a body attachment may
issue, it seems that it must be based upon affidavit or proof establishing probable

cause for the charge. See Ind. Code § 34-1-10-10 (1976); Thomas v. Woollen, 255 Ind.

612, 266 N.E.2d 20 (1971); Carey v. Carey, 132 Ind. App. 30, 171 N.E.2d 487 (1961).

Whether or not this was the case in Clark v. Clark is unclear.

^""IND. Code § 31-6-6.1-15.5 (Supp. 1981).



398 INDIANA LAW REVIEW [Vol. 15:367

tal. In Snodgrass v. Baize,^^^ a judgment based on negligence against
the insured from which the defending insurer withdrew because of a
conflict of interest was held not binding upon the insurer who
defended on the ground that the policy did not cover the judgment
creditor's claim.^"^ The garnishee insurer was allowed to prove as a
defense that the claim was based on an intentional tort which was
not covered by the policy. The insurer successfully argued that if it
had defended the position, it would be taking positions both for and

against the client. The effect is that in any case where the liability
insurer denies liability on the policy, it can not properly represent

the insured as to issues at war with its undertaking. The insurer's
defense thus must be litigated separately, and this may be done in
proceedings supplemental if the defense is preserved. In this case

the insurer paid for the insured's defense by another lawyer who
represented the insured. In United Farm Bureau Mutual Insurance
Co. V. Wampler^^'^ the court found that a declaratory judgment in

favor of the insurer determining that it was not liable on the policy
before judgment was not binding upon the judgment creditor who
was not a party to the proceeding.^"* Both cases indicate that the
liability insurer who denies liability on its policy to the insured may
and possibly should make its defense in proceedings in which the in-
sured beneficiary is named as a party .^°^ If proper steps are taken to
avoid waiver or estoppel as in these cases, the insurer is entitled to

raise the defense in proceedings supplemental.^^"

As noted above, an attorney awarded fees in divorce or support

'"^405 N.E.2d 48 (Ind. Ct. App. 1980).

«»M at 55.
='"406 N.E.2d 1195 (Ind. Ct. App. 1980).

^*/d at 1197. The insured had filed a third party complaint against the insurer to
determine that the insurer was liable, and the insurer was granted a severance of the
trial on that issue. Thereafter the insured was defaulted on the negligence action and
the declaratory judgment action was dismissed. Id. at 1196-97.

^°^See 406 N.E.2d at 1197; 405 N.E.2d at 55. Defenses may not be raised after the
hearing in proceedings supplemental. American Underwriters, Inc. v. Curtis, 392

N.E.2d 516 (Ind. Ct. App. 1979). Defenses of a garnishee probably should be pleaded.

Travelers Ins. Co. v. Madison Superior Court, 265 Ind. 287, 354 N.E.2d 188 (1976). The
insurer must affirmatively raise defenses on the policy in proceedings supplemental,

and in an appropriate case is entitled to jury trial. 406 N.E.2d at 1197-98. In the

rehearing of Snodgrass v. Baize, 409 N.E.2d 645 (Ind. Ct. App. 1980), the court held

that the insurance beneficiary carried the burden of proving liability on the policy, but

once the policy was offered in evidence, the insurer carried the burden of going for-
ward with the evidence showing non-coverage. The court apparently applied Indiana
Trial Rule 9(C). For another decision where liability of the insurer was determinejd in a
declaratory judgment suit, see Indiana Lumbermens Mut. Ins. Co. v. Brandum, 419
N.E.2d 246 (Ind. Ct. App. 1981) (insured intended to injure A and injured 5— act not
"intentional" as to B).

""In both cases the prompt action of the insurer denying liability appeared to

negate waiver or estoppel.



1982] SECURED TRANSACTIONS 399

proceedings may enforce the judgment by proceedings supplemental
to execution.^"

6. Receiverships —Life Insurance Liquidation. — The Indiana in-
surance law giving priority in insurance company liquidations to
policyholders was interpreted as excluding ''reinsurers" by Fore-
most Life Insurance Co. v. Department of Insurance .^^^ The Indiana
Supreme Court denied subrogation to the rights of policyholders
paid by it to an insurer under whose name the insolvent issued
policies so that it could do business in other states, although under

the agreement between them the entire risk was born by the insol-
vent company. The decision construed the arrangement between the
insurance companies as one of "reinsurance" and overruled in part a

careful decision by the court of appeals^^^ which attempted to

remove some of the mystique surrounding the concept of "reinsur-
ance." The mystique remains.

7. Creditors' Rights in Decedents' Estates. — The dead man's
statute^^* does not apply to make a vendee, seeking specific perform-
ance of a contract to purchase entireties property, incompetent to

testify as to transactions with the deceased spouse.^^^ The survivor
against whom the action was brought was determined not to be an
"heir" in Summerlot v. Summerlot.^^^ A claim filed against a dece-
dent in his name before the running of the statute of limitations but
amended by naming a special representative of the decedent there-
after was upheld in Eberbach v. McNabney^^'^ as a procedural matter
governed by Trial Rule 15(C).^^^ This rule relates the amendment
back to when the correct party was informed of the action within
the limitation period. On the other hand, the same judges in General
Motors Corp. v. Arnett,^^^ where the wife filed a wrongful death ac-
tion within the two year period allowed for wrongful death actions,
held that her appointment as special representative after the time

had expired did not relate back under the Rule. The latter holding
represents the absurd struggle in which form sometimes prevails

over substance, and pays no compliment to the law or its profession.^^"

^"See notes 195-96 supra and accompanying text.
"''409 N.E.2d 1092 (Ind. 1980).
"^395 N.E.2d 418 (Ind. Ct. App. 1979), discussed in Townsend, 1980 Survey, supra

note 14, at 517 (1981).

"*IND. Code § 34-1-14-6 (1976).

""408 N.E.2d 820 (Ind. Ct. App. 1980).
"'413 N.E.2d 958 (Ind. Ct. App. 1980). Suit was apparently filed against the

representative as permitted under Ind. Code § 29-l-14-l(f) (1976).
"«413 N.E.2d at 962.

"M18 N.E.2d 546 (Ind. Ct. App. 1981).
^"The court failed to apply Trial Rule 17(A) to this case through the rule was clear-

ly applicable. The case also overlooked Holmes v. Pennsylvania N.Y. Cent. Transp. Co.,
48 F.R.D. 449 (N.D. Ind. 1969) (reaching a contrary result). The court also failed to



400 INDIANA LAW REVIEW [Vol. 15:367

Two recent decisions, Key v. Sneed^^^ and In re Kingseed,^^^ hold
that income from specifically devised assets of a decedent passes to

the personal representative as a general asset of the estate to be used

in paying administration expenses or even swelling the rights of

other beneficiaries at the expense of the specific devisees. Kingseed
also holds that a devisee in possession of specifically devised property

is accountable for the rental value of the property until distribution,

but wisely allows the personal representative to make early distri-
bution of this and other property without a court order.^^^ These
decisions taking away income from specifically devised property
before distribution raise an unanswered problem when the specific-
ally devised asset is subject to a mortgage or lien. Must income
from such property be applied towards the payment of liens upon
the property? The problem is complicated by the fact that speci-
fically devised property upon which there is a lien passes subject to
the encumbrance unless the testator indicates otherwise.^^* While
the probate code allows the representative to pay all or part of the

lien upon estate property with prior court approval,^^^ case law indi-

cates that the lienholder may insist on application of income from
the encumberd property toward his lien if the lien instrument so
provides.^^® The position of the representative is further complicated
by the fact that Kingseed indicates that he is under a duty to keep
installment payments current in order to avoid acceleration or
default of lien property,^^^ but makes it clear that he may avoid
ongoing responsibility for current payments by making prompt dis-
tribution of the lien property to the specific devisee— preferably

recognize that the widow and beneficiaries are the real party in interest in a wrongful

death action despite the technical requirement that suit be brought by the decedent's

representative. See Pettibone v. Moore, 223 Ind. 232, 59 N.E.2d 114 (1945). The deci-

sion was based in part on the outmoded notion that actions for wrongful death are not

a part of the common law. But cf. Carlson v. Green, 100 S. Ct. 1468 (1980) (federal com-
mon law allows survival of constitutional civil rights actions in Indiana).

^^408 N.E.2d 1305 (Ind. Ct. App. 1980).
^413 N.E.2d 917 (Ind. Ct. App. 1980).

^mS N.E.2d at 924 (upholding retroactive approval of early distribution). The
court held that for occupancy or possession prior to the time the distribution is made,

the devisee is responsible and may be held to pay rent for the use of the property. Id
at 926-27.

'"'^IND. Code § 29-1-17-9 (1976).
""'Id. § 29-1-14-20.

^In receivership proceedings, the lienholder is entitled to income from mortgaged

property when the mortgage so provides. Hemstock v. Wood, 113 Ind. App. 112, 44
N.E.2d 1016 (1943).

'^Kingseed held the representative accountable for failure to lease assets and col-

lect rent. It seems to follow that if he defaults on a mortgage, allowing the mortgagee

to insist on higher interest, he may incur liability for the loss. Cf. Ind. Code § 29-1-14-3

(1976) (claims due at future date payable at present value or to be secured by funds or

bond of distributee); M § 29-1-14-16 (foreclosure of lien on land stayed for five months
after death).



1982] SECURED TRANSACTIONS 401

228
after obtaining a court orderJ

8. Bankruptcy. — A surety who directed its creditor to file a
claim in the principal's bankruptcy was not bound on principles of
res judicata or issue preclusion for contesting the amount of the
claim allowed in bankruptcy in a later suit by the creditor in state

court. The surety in Indiana University v. Indiana Bonding & Surety
Co.^^^ was permitted to prove that the creditor sustained loss of only
$19,000 although the creditor's claim for the same loss was allowed
for nearly $30,000 in the principal's bankruptcy .^^" Since the claim

was uncontested in bankruptcy, the allowance of the claim there was
not even treated as evidence of the amount owing by the principal
to the creditor, although the court recognized that a contested judg-

ment by the creditor against the principal ordinarily would be ad-
mitted as prima facie evidence against the surety who was not a
party .^^^ The court also determined that the surety's act of directing
enforcement of the creditor's claim in the principal's bankruptcy did

not estop the surety from challenging the amount allowed, mainly
because the surety had no opportunity to defend or participate in

the bankruptcy proceedings.^^^ Under the Bankruptcy Code^^^ it is

^^*The representative may and probably should make timely payments of current
installments on lien property. He is protected if he first obtains a court order or if he
later obtains court approval. Baker v. Happ, 114 Ind. App. 591, 54 N.E.2d 123 (1944).

After a court order, he may abandon encumbered property. Ind. Code § 29-1-13-8
(1976).

2^416 N.E.2d 1275 (Ind. Ct. App. 1981).

^^"The creditor in the case was Indiana University which was protected by a bond
governing the faithful performance of the principal which supplied food to the In-

dianapolis campus through vending machines. The case demonstrated that the Univer-
sity had no satisfactory means of ensuring accurate accounting of sales by the vendor.

^^^416 N.E.2d at 1285. The judgment for the creditor is allowed as rebuttable
evidence in a later suit against the surety unless it was obtained by default or by con-
fession. Restatement of Security § 139 (1941). However, the surety on judicial bonds
usually is concluded by a judgment rendered against the principal in the judicial pro-

ceeding. See Ross v. Felter, 71 Ind. App. 58, 123 N.E. 20 (1919). Liability of the surety

on judicial bonds may be enforced on motion. See Ind. R. Tr. P. 65.1. It seems that a
judgment in favor of the creditor against the surety will not bind the principal who is
not a party unless he is given an opportunity to defend. Cf. Ind. Code § 34-1-55-7 (1976)
(default judgment by surety forbidden if he knows of defense and principal defends
after furnishing indemnity); Michener v. Springfield Engine & Thresher Co., 142 Ind.
130, 40 N.E. 679 (1895) (judgment by a creditor against a surety was reopened after
the principal successfully defended the claim against the same creditor).

^^^The decision involved a 1971 bankruptcy which is not covered by the Bank-

ruptcy Code effective October 1, 1979. The court cited authority under pre-Code law
which narrowly restricted the persons who could object to claims. One argument for
denying res judicata effect in bankruptcy proceedings to the allowance or denial of a

claim by the principal is that this will deny the creditor or surety a right to trial by
jury on the issue resolved. For a holding to the contrary, see Parklane Hosiery Co. v.

Shore, 439 U.S. 322 (1979) (determination for SEC in equity suit binding party in later
civil suit did not deny right to trial by jury); Katchen v. Landy, 382 U.S. 323 (1966).

^'^As to jurisdiction of the bankruptcy court over civil proceedings arising in "or



402 INDIANA LAW REVIEW [Vol. 15:367

now clear that the bankruptcy court has jurisdiction to litigate colla-
teral issues relating to the bankruptcy, and determination of a surety's

rights with respect to the creditor filing a claim are drawn into the
authority of the bankruptcy court.^^^ Hence, under the Code it seems
logical that a surety who urges the creditor to file the obligation
secured in bankruptcy should be bound by the allowed claim on prin-

ciples of agency or estopped from claiming that the award is too
large when the surety has an opportunity to challenge the claim,
and to be made a third party by intervention or as a defendant.^^^
Hence, a creditor whose claim is secured by a surety should join the
surety as a third party defendant if he wishes to avoid double litiga-

tion and run the risk of inconsistent judicial determinations. Under
the Code, the courts probably will no longer protect a surety who
advises his creditor to sue or file a claim and then seeks to mitigate

the damage award. In all events, the creditor may avoid the problem
by making the surety a party.

In other decisions, the bankruptcy court in the northern Indiana

district has determined that pension rights payable in the future

and contingent upon survivorship do not pass as "property" to the

bankrupt's estate, but like future wages and earnings remain with
the bankrupt.^^® Another important case in the southern Indiana dis-
trict dealt with the right of a bankrupt to avoid non-possessory, non-

purchase money liens on household goods, jewelry, tools of the trade
and health aids.^^^ A lender consolidating or refinancing loans was
disallowed the right to claim that all or some of the debts were pur-
chase money loans unless his security agreement provided that pay-
ments on consumer credit sales would be applied in the order pre-
scribed by the Uniform Consumer Credit Code.^^* Decisions coming

related to cases under" the Code, see 28 U.S.C. § 1471 (Supp. Ill 1979). Further com-
pare In re Lucasa Int'l Ltd., 6 Bankr. 717 (S.D.N.Y. 1980) (third party suit against
guarantor proper).

'^"11 U.S.C. § 502 (Supp. II 1978) (allowing party in interest, including creditor of a
partner, to object to allowance of claims).

^^^Compare Restatement of Judgments § 85 & 93, comment e (1942) with
Bankr. R. 306(c) (allowing objection to allowance of a claim) and Bankr. R. 714 (allowing
third party practice) and Bankr. R. 724 (allowing intervention).

^^®In two decisions, the court held that army and naval retirement benefits

payable in the future and contingent upon survival are not "property." See In re

Harter, 10 Bankr. 272 (Bankr. N.D. Ind. 1981); In re Haynes, 9 Bankr. 418 (Bankr. N.D.

Ind. 1981). In the first cited case, the court pointed out that while Congress exempted

benefits of the Veteran's Administration, Medal of Honor winners, railroad retirement

benefits, social security payments, military pay annuities and others, no exemption is

given army retirement pensions. The second case noted that since pensions are not
marital property, pensions are not "property" in the bankruptcy sense.

'^^Mulcahy v. Indianapolis Morris Plan Corp., 3 Bankr. 454 (Bankr. S.D. Ind. 1980).

''^^IND. Code § 24-4.5-2-409 (1976).



1982] SECURED TRANSACTIONS 403

down hard on the very poor were followed by Judge Rodibaugh in
denying approval of a Chapter 13 plan to a plasterer with a monthly

salary of $600 and a gross income of $3,300 who proposed to pay
nothing under the plan.^^^ The court determined, in effect, that a
poor person cannot propose a plan in good faith.

9. Suretyship. The promise of a surety as general rule must be
supported by consideration, and when signed with the principal, the
consideration moving to the principal or from the creditor will sup-
port his promise. Davis v. B.C.L. Enterprises, Inc.^'^^ held that a sure-

ty's promise made after the contract between the principal and cred-
itor (in this case a tenant and his landlord) will not be binding ab-

sent other consideration. The case recognized that such a promise
would be enforceable if the original agreement was signed on the
understanding that the guaranty would be forthcoming, but the deci-

sion did not take the forward step of recognizing that the require-

ment of consideration in such cases is a formality which should be
eliminated.^''' The case also failed to note that lack of consideration
is an affirmative defense under the Indiana trial rules,^"^ and was in
error if its decision upholding the lower court was based simply on
the fact that the suretyship agreement was dated after the original

contract was signed.
Indiana University v. Indiana Bonding & Surety Co.^*^ and First

Federal Savings and Loan Association v. Arena^^^ recognized and ap-
plied the rule that a binding agreement between principal and cred-
itor altering the principal's duty of performance under the contract

will discharge a non-assenting surety.

Both of these cases involved provisions waiving suretyship

defenses. In Indiana University , the surety bond provided that no
modifications of the guaranteed contract shall affect the obligation

of the surety .^*^ An extension and modification of the contract be-
tween the principal vending company and the creditor-university did
not release the surety. In First Federal Savings & Loan, a provision

^^^In re Kurd, 6 Bankr. 329 (Bankr. N.D. Ind. 1980).

^^"406 N.E.2d 1204 (Ind. Ct. App. 1980).

^"A negotiable instrument given for the prior debt of any person is enforceable

under the Uniform Commerical Code which also defines such a debt as value. Compare

Ind. Code § 26-1-3-408 (1976) with id. § 26-1-1-201(44).

^"Ind. R. Tr. p. 9.1(C) provides: "When an action or defense is founded upon a

written contract or release, lack of consideration for the promise or release is an affir-

mative defense, and the party asserting lack of it carries the burden of proof."

^"416 N.E.2d 1275 (Ind. Ct. App. 1981).

'"406 N.E.2d 1279 (Ind. Ct. App. 1980), discussed in text accompanying notes 90-95

supra.

'"'416 N.E.2d at 1282. A companion bond covering the vending company's opera-
tion in Bloomington did not contain the waiver provision.



404 INDIANA LAW REVIEW [Vol. 15:367

authorizing the mortgagee to extend time to successors of the mort-

gagor was construed as inapplicable to alterations of the rate of in-
terest.^'^

Indiana University also dealt with the rights of a creditor who
complies with the written request of a surety to bring suit against

the principal under the statutory rule of Pain v. Packard}^'' Under
this rule as adopted in Indiana, the surety is discharged unless the

creditor, having received notice to sue the principal, sues the prin-

cipal and prosecutes the case through execution with dispatch. The
rule is a beneficial device to rid the surety of a contingent liability

against a defaulting debtor and a dilatory creditor.^*® As noted
previously ,^^^ the court held that the surety was not bound by the
amount of the claim allowed the creditor against the principal in
bankruptcy proceedings, mainly because the amount was not liti-
gated in bankruptcy and because the court determined that the

surety could not become a party to defend its interest in bank-
ruptcy. However, in most cases involving attempts to comply with

Pain V. Packard, the surety may be and usually is named as a party
defendant.^^*^ If he is not made a party, he should not be allowed to
relitigate the issues which he has invoked by pressing for judicial

proceedings in which he is represented and may intervene.^^^
While the promise of a surety ordinarily falls within the Statute

of Frauds,^^^ Shane Quadri v. Goodyear Service Stores^^^ recognized

that a third party beneficiary promise in which the promisor pur-

ports to pay his own obligation for the beneficiary is not within the
statute. There an insurer orally directed a car-leasing company to
furnish an automobile to an insured and also to pay for repairs on

the rented car. The undertaking was found not to be a promise to
pay the debts of another within the Statute of Frauds.

'*%06 N.E.2d at 1283.

2*'The Indiana statute codifying the rule is Ind. Code §§ 34-1-55-1 to -2 (1976).
Unlike the original case of Pain v. Packard, 13 Johns. 174 (N.Y. 1816) which discharged

the surety only to the extent of damage resulting from the failure to prosecute the
principal, the Indiana statute absolutely discharges the surety if the creditor fails to

sue and prosecute through collection with diligence.

^**It avoids the technical problems of exoneration, the only remedy by which the

surety can resolve his troubled position without paying the creditor. See Hunter v.

First Nafl Bank, 172 Ind. 62, 87 N.E. 734 (1909); Barnes v. Sammons, 128 Ind. 596, 27
N.E. 247 (1891).

"'/See text accompanying notes 229-35 supra.

^^"L. Simpson, Handbook on the Law of Suretyship 179 (1950).
^"Restatement of Judgments § 85 (1942) (person represented in litigation bound

by rules of res judicata). The surety by requesting suit parallels the position of one
vouched into litigation. See Uniroyal, Inc. v. Chambers Gasket & Mfg. Co., 380 N.E.2d
571 (Ind. Ct. App. 1978).

2"lND. Code § 32-2-1-1 (1976).
=^^^412 N.E.2d 315 (Ind. Ct. App. 1980).



1982] SECURED TRANSACTIONS 405

C. Miscellaneous Cases and Legislation

Inability of the landlord to obtain financing did not excuse him
from a convenant requiring him to rebuild a leased building com-

pletely destroyed by fire,^^* a result at war with inflation and prob-
ably reason.^^^ The responsibility under a sour mortgage participa-
tion agreement was construed and resolved in favor of a supervising
mortgagee releasing a mortgage during the course of construction.^^^

Release of the lien for inheritance taxes by the five year limitations

period after death was construed not to bar the personal liability of
the personal representative and distributees under a former stat-

ute,^^^ and the rule of the case has been codified in the succeeding

law.^^® Two cases involved violations of and the disclosure require-
ments of the Truth in Lending Act and the Uniform Commercial

Code. In one, a consumer loan taken on all the debtor's after-

acquired household goods without qualification was determined to
be in violation of applicable law^^® because under the Uniform Com-
mercial Code, a security interest on after-acquired consumer goods
is forbidden unless value is given within ten days after acquisition.^^"

The consumer was allowed damages only to the extent of setoff as
permitted under the Indiana law since her claim for affirmative

relief was barred under the one year statute of limitations.^" In the
other case, an improper disclosure was incorrectly found from the
failure of a consumer credit sale to disclose the amount of credit life
and disability coverage,^^^ and damages were allowed as a setoff

''-•Marcovich Land Corp. v. J.J. Newberry Co., 413 N.E.2d 935 (Ind. Ct. App.
1980).

^^'C/. Aluminum Co. of America v. Essex Group, Inc., 499 F. Supp. 53 (W.D. Pa.
1980) (aluminum seller faced with inflation given relief under long term sales contract).

^^'American Fletcher Mortgage Co. v. Cousins Mortgage & Equity Investments,
623 F.2d 1228 (7th Cir. 1980).

'^"State, Ind. Dep't of State Revenue v. Lees, 418 N.E.2d 226 (Ind. Ct. App. 1980).

The former statute was Act of March 6, 1931, ch. 175, § 30, 1931 Ind. Acts 192 (amend-

ed 1937, 1951) as amended by Act of March 12, 1957, ch. 204, § 1, 1957 Ind. Acts 424
(repealed 1976).

^^*Ind. Code § 6-4.1-8-1 (1976) (no limitation on personal liability).
258Corbin v. Town Fin., Inc., 417 N.E.2d 1172 (Ind. Ct. App. 1981). Both the federal

truth-in-lending law and the Uniform Consumer Credit Code require a description of
the security interest and a "clear identification of the property to which the security

interest relates." 15 U.S.C. § 1639(a)(8) (1976); Ind. Code § 24-4.5-3-306(2)(k) (1976).
Federal Reserve Regulation Z, 12 C.F.R. § 226.8(b)(5) (1981), specifically requires after-

acquired property to be "clearly" set forth in conjunction with a description of the

type of security interest.

*~IND. Code § 26-l-9-204(4)(b) (1976).
^'See Streets v. M.G.I.C. Mortgage Corp., 378 N.E.2d 915 (Ind. Ct. App. 1978),

discussed in Townsend, Secured Transactions and Creditors' Rights, 1979 Survey of
Recent Developments in Indiana Law, 13 Ind. L. Rev. 369, 371-72 (1980).

""Means v. Indiana Financial Corp., 416 N.E.2d 896 (Ind. Ct. App. 1981). The case
applied Ind. Code § 24-4.5-2-306(2)(g) (1976). However, the case was in error. While the



406 INDIANA LAW REVIEW [Vol. 15:367

against an assigneee who did not show that it was a good faith pur-
chaser who had given notice of the assignment as required by the
Uniform Consumer Credit Code.^^^ Crestwood Park, Inc. v. ApostaP^^
indicated that officers of a corporation transferring its assets to a

trust for the purpose of avoiding corporate debts could be held

liable to its creditors.

Several decisions involved the award of attorney's fees where
provided for by agreement or statute.^^^ While several cases upheld

awards of attorney's fees without proof on the theory that the judge

below is an expert who may judicially note what is a reasonable
fee,^^^ the court of appeals has sounded a warning against the prac-

tice and held that fees should be carefully established by time

records in accordance with the Code of Professional Responsibil-

ity—at least where the case is unusual or involved.^^^

Bankers and lenders had a field day in the 1981 legislature. Obli-

gations secured by first mortgages and liens on land were taken out

of most of the regulatory provisions of the Uniform Consumer
Credit Code except for disclosures, remedies, and powers of the ad-

ministrator.^^^ Thus, there seems to be no limit on interest rates

chargeable upon consumer credit sales and loans on real estate

cited Indiana Uniform Consumer Credit Code provision requires the amount of in-

surance to be stated, the Federal Truth in Lending Act does not. Indiana law,

however, specifies that if disclosures meet the requirements of the federal law, re-

quirements of Indiana law are met. Ind. Code § 24-4.5-2-301(2) (1976). Hence, both In-

diana and federal law disclosure requirements did not require the amount to be stated.

In another decision the court of appeals initially refused to review a truth in lend-

ing violation because the security agreement was not included in the record on appeal;

however, the court granted a rehearing after finding that the promissory note, which

was in the record, contained violations. Noel v. General Fin. Corp., 419 N.E.2d 200
(Ind. Ct. App.), rehearing granted, 421 N.E.2d 25 (Ind. Ct. App. 1981).

'^"'Ind. Code § 24-4.5-2-404 (1976). The court held that the assignee had notice as
shown by the face of the sales agreement.

2^*413 N.E.2d 654 (Ind. Ct. App. 1980). The issue was not decided since the case
was reversed on other grounds.

^'^^E.g., Donahue v. Watson, 413 N.E.2d 974 (Ind. Ct. App. 1980) (attorney's fee to
trustee from trust estate allowed at an hourly rate of $50 to a lawyer with one and one

half years of experience and at $60 to one with 25 years of experience — note how ex-
perience pays off).

2««State V. Kuespert, 411 N.E.2d 435 (Ind. Ct. App. 1980) (attorney's fees of

$1,381.34 which were awarded as sanction for failure to respond to discovery fixed by

judge's judicial knowledge).

^'V.S. Aircraft Financing, Inc. v. Jankovich, 407 N.E.2d 287 (Ind. Ct. App. 1980)

(fees of $30,000 for foreclosing conditional sales contract rejected and sent back for

retrial on basis of court's knowledge derived from pleadings, documents, and time

lawyer spent in court).

^^^"Mortgage transactions" defined as consumer first mortgages on or consumer

credit sales of real estate were taken out of the Code provisions with the exceptions

noted above. Ind. Code §§ 24-4.5-l-301(15)(a), -2-104(2)(b), -3-105 (Supp. 1981).



1982] SECURED TRANSACTIONS 407

(unless they qualify as consumer related sales or loans). Incredibly,
this is the first time in 100 years that the lid on interest rates on

home and other mortgages in Indiana has been completely lifted.^^^
Other legislation extended interest rates to twenty-one percent on

overall consumer credit sales and supervised loans; and to twenty-

one percent on consumer related sales and loans.^^° The permissible
scope of VRM and ROM loans for banks was expanded to accord
with federal tolerances,^^^ and banks were permitted to make second
mortgages subject to valuation requirements.^^^ Interest rates on

judgments were raised from eight to twelve percent.^^^ This provi-
sion becomes effective after December 31, 1982. Budget service
agencies were allowed to charge an initial fee, but were required to
post a higher bond and forbidden to take accounts unless a budget

analysis shows that the debtor can reasonably meet required pay-
ments.^^^

^*'This is justified by some bankers from the fact that on March 31, 1980, Congress
took the lid off interest rates on first mortgage home loans with respect to loans by
lenders under the National Housing Act and under laws insuring deposits of banking

institutions. States may reinstate maximum limits by vote before April 1, 1983.
Depository Institutions Deregulation and Monetary Control Act of 1980, Pub. L. No.
96-221, 94 Stat. 132, 161-63 (to be codified in 12 U.S.C. § 1735f-7).

''^"IND. Code §§ 24-4.5-2-201(2)(b), -602(2), -3-508(2)(b), -602(2.5) (Supp. 1981).
''7d §§ 28-1-13.5-2 to -3.

""'Id § 28-l-13-7(b).

='"M § 24-4.6-1-101.

"Vd §§ 28-1-29-6, -8, -12.