Indiana Law Review


1998 Survey of Indiana Contract
AND Business Law

Joseph R. Alberts*
John W. Hamilton**

Table of Contents

Introduction 688

L Survey of 1998 Indiana Contract Law 689
A. Contract Formation 689

1

.

Offer and Acceptance 689

2. Existence of Oral Contract 692

3. Implied in Fact Contract 695

B. Consideration 696

1

.

Unenforceable Promises 696

2. Independent Consideration for Unilateral Employment
Contracts 698

C Enforceability ofExculpatory Clauses 698
1

.

Advertising Agreement 698

2. Lease Agreement 700
3. Health Club Membership Agreement 701

D. Interpretation ofNon-Exculpatory Contractual Terms 703

1

.

Employment Agreements 703
2. Purchase Agreements 714

3. Settlement Agreements 717

4. Loan Agreement 720
5. Agreement Between Spouses 722
6. Construction Agreements 724

E. Repudiation/Mutual Mistake ofFact 726

F. Rescission 728

1

.

Rescission for Fraud 728

2. Rescission for Failure to Meet Conditions Precedent
and Subsequent 730

G. Breach/Damages 731
H. Choice ofLaw 735

II. Survey of 1998 Indiana Business Law 736
A. Interest 736

1

.

Construction Contracts 736

2. Tender of Payment 737
B. Banks and Banking 738

1. Fiduciary Relationship with Debtors 738

* Wooden & McLaughlin, Indianapolis. B.A., cum laude, departmental honors, 1991,
Hanover College; J.D., magna cum laude, 1994, Indiana University School of Law.

** Wooden & McLaughlin, Indianapolis. B.A., Davidson University, 1986; J.D., cum
laude, 1993, Washington 8l Lee University School of Law. The authors would also like to extend

their thanks to Jeffrey A. Adams for his research assistance.



688 INDIANA LAW REVIEW [Vol. 32:687

2. Wrongful Dishonor 740
3. Failure to Abide by Loan Commitment 742
4. Conversion ofNegotiable Instruments Fraudulently

Endorsed by Fiduciary 744
C Associations 746

1

.

Barring Claims by Members Against Associations 746
2. Court's Reluctance to Interfere with Internal Affairs

of Voluntary Associations 749
D. Limited Liability Companies: Allocationfor Tax Purposes

Requiring Cash Distributions 753
E. Corporations 755

1. Dissenter's Right Statute as Exclusive Remedy 755
2. Direct Action Against the Corporation 758
3. Foreign Corporations "Transacting Business" in Indiana .... 760
4. Corporation's Liability for Acts of Employee .761
5. Corporation's Rights and Responsibilities with Regard to

the Acts of Others 763

Introduction

This Article summarizes and comments upon selected appellate decisions
during the survey period (November 1, 1997, to November 1, 1998y in the areas
of Indiana contract and business law. This Article does not include in-depth

examination of decisions that, although they contain discussion about some
contract principles or doctrine, are more appropriately addressed in the context
of a survey of another area of substantive law, such as commercial law,^

insurance law,^ tort law,"* real property law,^ and business law.^ Similarly, this

1. This Article includes a few cases decided after November 1, 1998. In the interest of

maintaining some semblance of brevity, this Article focuses only on federal and state appellate court

decisions. There are, however, several published decisions from the United States District Courts

in Indiana during the survey period that address and resolve important business and contract

disputes. See, e.g., Bridgestone/Firestone, Inc. v. Lockhart, 5 F. Supp. 2d 667 (S.D. Ind. 1998);

Hayden v. Allstate Ins. Co., 5 F. Supp. 2d 649 (N.D. Ind. 1998); Seegers v. Pioneer Hi-Bred Int'l,

Inc., 997 F. Supp. 1124 (N.D. Ind. 1998); Natare Corp. v. Aquatic Renovation Sys., Inc., 987 F.

Supp. 695 (S.D. Ind. 1998); Deans v. Tutor Time Child Care Systems, Inc., 982 F. Supp. 1330

(S.D. Ind. 1998). In addition, the author's review of Indiana statutes found no significant revisions

addressing contract and business law.

2. See, e.g., Indiana-American Water Co. v. Town of Seelyville, 698 N.E.2d 1255 (Ind. Ct.

App. 1998) (containing a helpful distinction between an indefinite quantities contract and a

requirements contract).

3. See, e.g., American Family Life Assurance Co. v. Russell, 700 N.E.2d 1 174 (Ind. Ct.

App. 1998) (interpreting an exclusion); Jones v. Western Reserve Group, 699 N.E.2d 71 1 (Ind. Ct.

App. 1998) (interpreting policy language); Colonial Penn Ins. Co. v. Guzorek, 690 N.E.2d 664,

667-69 (Ind. 1997) (recognizing, inter alia, that contracts of insurance are governed by the same



1 999] CONTRACT AND BUSINESS LAW 689

Article does not include an in-depth analysis ofthose opinions issued during the

survey period that apply quasi-contract doctrine.^

I. Survey of 1998 Indiana Contract Law

A. Contract Formation

J. Offer andAcceptance.—Inl.C.C. Protective Coatings, Inc. v. A.E. Staley
Manufacturing Co.^ I.C.C. Protective Coatings, Inc. ("I.C.C.") specialized in the

application of paints, linings, and other types of protective coatings. A.E. Staley

Manufacturing Co. ("Staley") manufactured various types of com starches.

rules of construction as are other contracts, that interpretation of an insurance policy is generally

a question for the court, and that the power to interpret contracts does not extend to changing their

terms); Hartford Accident & Indem. Co. v. Dana Corp., 690 N.E.2d 285, 294-96 (Ind. Ct. App.
1997) (utilizing contract principles in determining whether term "suit" in policy was ambiguous);

Engelking v. Estate of Engelking II, 686 N.E.2d 932, 933 (Ind. Ct. App. 1997) (recognizing that

an insurance policy is a contract and is subject to the same rules of interpretation as are other

contracts) (citing lemma v. Adventure RV Rentals, Inc., 632 N.E.2d 1 178, 1 182 (Ind. Ct. App.
1994)).

4. See, e.g., Hagerman Const., Inc. v. Copeland, 697 N.E.2d 948, 962-63 (Ind. Ct. App.

1 998) (dicta concerning whether a clause in an agreement purporting to provide indemnity for one

of the parties' own negligence was ambiguous); CSX Transp., Inc. v. Kirby, 687 N.E.2d 611,615
(Ind. Ct. App. 1997) ('"A party may not contract against his own negligence.'") (quoting Freigy v.

Gargaro Co., 60 N.E.2d 288, 292 (1945)).

5. See. e.g., Rothe v. Revco D.S., Inc., 148 F.3d 672 (7th Cir. 1998) (finding that a 1958

lease agreement did not require lessee's continuous occupation and use of premises as drugstore

under doctrine of implied covenant); Dvorak v. Christ, 692 N.E.2d 920, 925 (Ind. Ct. App. 1998)

(holding that an agreement to purchase a condominium unit was unambiguous); Beiger Heritage

Corp. V. Montandon, 691 N.E.2d 1334, 1337 (Ind. Ct. App. 1998); (holding that a "due and

payable" phrase used in lease agreement setting forth payment of real estate taxes was unambiguous

and not intended to be used any differently from the way parties commonly have used the term in

Indiana for decades); Nelson v. Marchand, 691 N.E.2d 1264, 1269-70 (Ind. Ct. App. 1998)

(interpreting and applying a contract that included a warranty that construction of a home would

be done in "good and workmanlike manner"); R.N. Thompson & Assocs. v. Wickes Lumber Co.,
687 N.E.2d 617 (Ind. Ct. App. 1997) (discussing a purchaser's claim that the builder of a home

breached the implied warranty of habitability).

6. Part II of this Article includes a substantive treatment of Indiana decisions and

developments in the rather broad topic labeled "business law." One example of an Indiana decision

containing language that may be helpful in a contract case although it is treated in detail in Part II

of this Article under the rubric of "business law" is Five Star Concrete, LLC. v. Klink, Inc., 693
N.E.2d 583 (Ind. Ct. App. 1998) (involving a lawsuit brought by a former member of a limited

liability company against the company).

7. See, e.g., Galanis v. Lyons & Truitt, 698 N.E.2d 368 (Ind. Ct. App. 1998) (applying
quasi-contract quantum meruit principles in a case involving attorneys' fees).

8. 695 N.E.2d 1030 (Ind. Ct. App. 1998).



690 INDIANA LAW REVIEW [Vol. 32:687

Staley sought bids from various companies for the application of a protective
coating on the interior surfaces of three of its reactor tanks .^ I.C.C. submitted a
bid, which included a price, a list of specifications for the project, and a
provision that I.C.C. retained the right to cure any defective work. I.C.C. sent a
letter further detailing the bid, which stated the amount of time necessary to
complete the contract, as well as travel, manpower, and equipment rates. '^

Staley eventually awarded the contract to I.C.C. in a purchase order that
provided in part:

Provide labor & materials to line a total ofthree reactor tanks w/ceilcote
Flakeline 103 matl. per specification outlined in your quotation .... All

work to be performed using time and material rates outlined in your
letter .... Staley to supply tank watch for confined space entry
requirements. I.C.C. to supply monitoring and safety equipment for

personnel in tank . . .
."

The purchase order also stated that the goods and services were to be purchased
"in accordance with the terms of this purchase order, including those terms and

conditions printed on the reverse hereof."'^ The terms on the order's reverse side
provided that "any additional or different terms proposed by [I.C.C] in any

quotation, offer or otherwise are rejected unless expressly asserted in writing by

Staley."^'

I.C.C. signed and returned Staley's purchase order without objection, and

began working on the project. I.C.C. purchased 480 gallons of the protective

coating to cover all three tanks. After about a month, I.C.C. ceased work, having

used 435 gallons while fully lining one tank and having applied only one coat to

the second.*'* The day after I.C.C. ceased performance, Staley objected and
arranged for an inspection of the work. The inspection revealed visible areas of
materials embedded in the lining and that reactor surfaces were rough andjagged.
In the opinion of a former employee ofthe coating liner, "I.C.C. 's work was the
worst that he had ever seen and was far below industry standards."*^ At Staley's
request, the former coating company employee sent I.C.C. a letter describing how
to correct the defective work. I.C.C. sent Staley a letter indicating that I.C.C.

would make all necessary arrangements to repair the work according to the
manufacturer's specifications.*^ Despite I.C.C. 's letter, Staley canceled its

9. Staley mixed various substances in the reactor tanks. Staley wanted to use a coating

called "Flakeline 103" to avoid reactions between the steel in its reactors and caustic substances

used in the manufacturing process. See id. at 1032-33.

10. See id. atl033&n.l.

11. Id at 1033.

12. Id

13. Id

14. See id.

15. Id

16. SeeiddX\OZl>-U.



1999] CONTRACT AND BUSINESS LAW 691

purchase order the following day and contacted another company to correct the
defective work.

^^

I.C.C. sued Staley for breach of contract and to foreclose on a mechanic's

lien. Staley counterclaimed, asserting claims for, inter alia, breach of contract

and breach ofwarranty. Both parties moved for summary judgment.^^ The trial
court granted partial summary judgment to Staley, finding that the general terms
and conditions, including the right to cure, had not been incorporated into the

purchase order. '^ The case went to trial on the remaining counts, after which the
trial court found for Staley.^^ I.C.C. appealed. The court of appeals affirmed.^'

The court addressed two issues: (1) "[wjhether the trial court erred when it
determined that I.C.C. did not have the right to cure under the parties' contract;"

and (2) "[w]hether the trial court erred when it allowed testimony as to Staley 's
lost production and profits therefrom.

"^^

With respect to the first issue, I.C.C. argued that Staley breached the contract

when it refused I.C.C. 's offer to cure the defective work. "Specifically, I.C.C.
argue[d] that its contract bid, which provided for the right to cure, formed the

basis of the parties' agreement."^^ In the alternative, I.C.C. contended "that the

bid was incorporated by reference into the parties' contract by operation of
Staley's purchase order."^"* The court of appeals disagreed.^^

The court of appeals resolved the "right to cure" issue as a matter of contract
formation. The court did not need to decide whether I.C.C. 's bid was sufficiently
detailed to constitute a formal offer.^^ Even assuming that it did, Staley's
purchase order constituted a counteroffer because it varied the terms and

conditions of the proposed agreement. The court pointed out that the purchase
order reserved Staley's "right to reject, refuse or revoke any nonconforming

goods ordered under the bid or to cancel any nonconforming performance."^^

The court also recognized that "[t]he order further stated that the remedies
expressly provided by the purchase order were not exclusive of any other remedy

allowed by law."^^ The court reasoned:

Whether viewed as the original offer or as a counteroffer, the purchase

17. See id. sA 1034.

18. I.C.C.'s motion was for partial summary judgment; Staley's motion was for a summary

judgment on all counts. See id. at 1032.

19. See id.

20. See id

21. Id

22. Id. For an in-depth analysis of the damages issues addressed and resolved by the court,

see infra Part I.G.

23. Id at 1034.

24. Id

25. Id

26. Id at 1035.

27. Id

28. Id



692 INDIANA LAW REVIEW [Vol. 32:687

order was the offer which formed the basis ofthe parties' agreement. By
signing and returning the purchase order, I.C.C. accepted the offer and,

thus, entered into a binding agreement according to the terms and
conditions set forth in the order. Absent a showing by I.C.C. that the
parties did not intend the purchase order to be the sole memorial or
integration ofthe contract ... we must conclude that I.C.C. did not have
the right to cure.^^

Staley also argued that the purchase order contained an integration clause

"confirm[ing] that the order was intended to be the sole memorial of the parties'
agreement."^^ Indeed, the purchase order included a clause providing that "any

additional or different terms proposed by [I.C.C] in any quotation, offer or
otherwise [is to be incorporated into this contract] . . . unless expressly asserted

in writing by Staley."^ ^ The court agreed and, noting that the foregoing language
was clear and unambiguous, concluded: "By signing Staley's purchase order
without objection, I.C.C. obligated itself to the terms and conditions set forth in

the order. Thus, we hold that the parties' contract was fully integrated and that
we cannot consider parol evidence to determine whether I.C.C. had the right to
cure."^^

The court also disagreed with I.C.C. 's argument that its contract bid and
subsequent letter to Staley were incorporated by reference into the purchase

order. The court pointed out that the purchase order referred only to certain,
specified sections of I.C.C. 's bid and letter." The order specifically referred to
the application process outlined in the bid and to the rates and time specifications

outlined in the letter. Thus, according to the court, "the purchase order

incorporated only those sections into the parties' agreement. All other sections,

including the disputed right to cure, were not incorporated into the agreement.
"^"^

2. Existence ofOral Contract.—^In Creative Demos, Inc. v. Wal-Mart Stores,
Inc.^^ Wal-Mart acquired several food stores owned by Wholesale Club, Inc.
("Wholesale Club") and afterward operated them under the Sam's Club trade

name. Wholesale Club had hired Creative Demos to perform food

29. Id.

30. Id.

31. Id

32. Id at 1036.

33. Id

34. Id. The I.C.C. court also disagreed with I.C.C. 's public policy argument that it was

entitled to cure its performance deficiencies as a matter of the agreement. I.C.C. argued "that the

opportunity to cure [was] a condition precedent for an action for breach of the impHed warranty of

fitness for habitation" and "that a right to cure was provided under the statutes controlling the sale

of goods, automobiles, and health spas." Id. Citing Indiana's presumption that contracts represent

the freely bargained agreements of parties and the public's interest not to restrict unnecessarily

peoples' freedom of contract, the court determined that the right to cure, although recognized in

several settings, is not guaranteed in every contract, regardless of the parties' actual agreement. Id.

35. 142 F.3d 367 (7th Cir. 1998).



1 999] CONTRACT AND BUSINESS LAW 693

demonstrations in the stores. In January 1991, a month before Wal-Mart took
over, one of Wal-Mart's employees told Creative Demos that Wal-Mart would
use its services through September 1991, after which Wal-Mart would conduct
demonstrations in-house.^^ Wal-Mart replaced Creative Demos in March 1991,
and thereafter Creative Demos filed suit. A jury awarded Creative Demos more
than $7 million on their claim of early termination.^^

On appeal, the Seventh Circuit Court ofAppeals addressed the issues in four
distinct areas: contract, promissory estoppel, fraud, and unjust enrichment.^^

This Article addresses in detail only the contract issue. In that regard, the

Seventh Circuit agreed with the district court's decision to grant summary
judgment to Wal-Mart on Creative Demos' claim that the Wal-Mart employee's
statement created a contract for a definite term.^^ The court found crucial the fact

that Wal-Mart and Creative Demos never reached agreement on issues such as
whether Creative Demos' work could be terminated and for what cause."^^

In another case involving an allegedly oral contract. Lakes & Rivers Transfer
V. Rudolph Robinson Steel Co.,^^ the Rudolph Robinson Steel Company
("Robinson") entered into an agreement with Orion Maritime, Inc. ("Orion") "to

ship some imported steel to the United States for sale to Robinson's customers
in the Midwest.'"^^ A liner owned and operated by Orion was to ship the steel to
Detroit and Chicago. Per the agreement, Robinson was to provide and pay for
stevedores to unload cargo from the ship."^^ "The ship first docked at Detroit,

where only a part of the steel bound for Detroit was unloaded. Orion then, on its

own initiative, diverted the ship to Bums Harbor, Indiana, which was not one of
its scheduled ports."^"^ Stevedores unloaded the remainder of the cargo there.

Because Orion's diversion caused Robinson to incur additional expenses,

Orion agreed to order and pay for the stevedoring services associated with the

discharge of the cargo when the ship arrived at Bums Harbor.'*^ While Robinson
and Orion were negotiating that agreement, a Robinson employee called Lakes

and Rivers Transfer ("Lakes & Rivers") to determine their rates for unloading so

36. See id. at 368.

37. The district court reduced the award to $681,263. See id. at 369.

38. Mat 369-73.
39. Id at 369.

40. Id. With respect to the quasi-contract promissory estoppel issue, the jury concluded that

Creative Demos was entitled to $681,126 because the Wal-Mart employee's statement caused

Creative Demos to rely on an expectation of conducting demonstrations through September. See

id. The award was the jury's estimate of lost profits. As the court pointed out, however, promissory

estoppel does not support lost profits damages in Indiana. The court also took issue with whether

the reliance worked to Creative Demos' detriment. Id.

41. 691 N.E.2d 1294 (Ind. Ct. App. 1998).

42. Id at 1295.

43. See id.

44. Id.

45. See id



694 INDIANA LAW REVIEW [Vol. 32:687

that Robinson could decide whether Orion's offer would adequately defray its
additional transportation expenses. During the telephone conversation, no one
discussed who would pay for the services."*^

Before the ship arrived at Bums Harbor, a local agent for Orion called Lakes
& Rivers and indicated that the ship would be arriving shortly and needed to be
unloaded quickly. The agent did not say who he was representing, but the Lakes
& Rivers employee knew the agent and knew that he usually represented ship
owners."^^ The day before the ship arrived. Lakes & Rivers sent a fax to
Robinson, inquiring about who would be responsible for the stevedoring
charges."*^ A week after the ship was unloaded. Lakes & Rivers again asked
Robinson who would be responsible for the stevedoring costs. Robinson
responded that Orion would be responsible."*^ After repeated unsuccessful
attempts to collect from Orion, Lakes & Rivers demanded payment from
Robinson.

Lakes & Rivers eventually sued Robinson, and on cross motions for
summary judgment, the trial court granted summary judgment for Robinson.^^
Lakes & Rivers appealed, arguing that the parties entered into an oral contract
that bound Robinson to pay for the stevedore services that Lakes & Rivers
provided by virtue of Robinson's telephone inquiry about Lakes & Rivers'
rates.

^'

The court of appeals affirmed the trial court's decision, recognizing first that
a completed oral contract under Indiana law requires all parties to agree to all

terms ofthe contract.^^ According to the appellate court, the parties did not agree

on a crucial term ofthe alleged contract, namely "who was to pay for the services
[Lakes & Rivers] was to provide."^^ Robinson's employee never represented to
Lakes & Rivers, either orally or in writing, that Robinson was going to be
responsible for the stevedore services. Rather, according to the court, "the

evidence indicate[d] nothing more than that the [Lakes & Rivers] employee who
spoke to the Robinson employee 'assumed' Robinson would pay, and assumed

Orion was not responsible for the payment."^"* On those facts, the court was
unwilling to hold that a mere inquiry about the price of a product or service,

without more, creates a binding contract that obligates the inquiring party to

purchase the product or service.^^ Thus, the court affirmed the trial court's

46. See id.

47. See id.

48. See id

49. Orion repeatedly acknowledged its responsibility to pay the stevedoring charges, but for

reasons not discussed, Orion never paid. See id. at 1296.

50. See id

51. See id

52. Id

53. Id

54. Id

55. Id. In addition, the court disagreed with Lakes & Rivers that Robinson was estopped



1 999] CONTRACT AND BUSINESS LAW 695

decision that the parties never reached an agreement on the terms and conditions

alleged.

3. Implied in Fact Contract.—Matter ofJ. W. v. Hendricks County Office of
Family & Childrerf^ marks Indiana's most recent published appellate decision
with respect to implied in fact contracts. In Matter ofJ. W. , the Office of Family

and Children ("OFC") filed a petition alleging that J.W. was a child in need of
services due to his family's inability to adequately supervise him. The juvenile
court placed temporary wardship with the OFC.^^ Among other things, the court
ordered J.W.'s family to submit financial statements and insurance information

to the OFC and to establish a child support account with the county clerk.^^ The
family opened the account, filed a financial declaration, and provided the OFC
case manager with insurance information.

Although J.W. initially stayed in his parents' home, OFC ultimately placed
him with a private secure care facility. The juvenile court then entered a
dispositional decree, ordering J.W.'s family to reimburse the OFC for placement
costs.^^ After five months, J.W. returned home. The OFC petitioned the juvenile
court for an order directing J.W.'s family to reimburse the OFC for J.W.'s total
unpaid placement costs of $39,655.72. After a hearing, the juvenile court granted

the motion.^^

J.W.'s family appealed, raising two issues. The second ofthe two issues was
whether an implied contract existed between the family and the OFC that
obligated the OFC to place J.W. in a facility covered by the family's insurance.^'
According to J.W.'s family, the implied contract was created when they provided
the OFC with insurance information and informed the case manager that their
insurance policy required pre-approval for J.W.'s placement. They further
claimed that the OFC breached the implied contract by placing J.W. in a facility
not covered by their insurance.

^^

The court first set forth the requirements for an implied in fact contract in

to deny the existence of a contract. The court pointed out that the evidence did not disclose any

representation or concealment by Robinson that induced Lakes & Rivers to act to its detriment.
According to the court, "[Lakes & Rivers] unloaded Robinson's cargo at the request of Orion's
agent, without first determining who would be responsible for payment. When Robinson weis

finally asked by [Lakes & Rivers] who would pay for the stevedore services, Robinson responded
that Orion was responsible." Id. at 1297. The court simply found no support for the suggestion that

Lakes & Rivers would not have performed its services had it known Orion, and not Robinson, was
responsible for payment. Id.

56. 697 N.E.2d 480 (Ind. Ct. App. 1998).

57. SeeiddXAU.

58. See id.

59. See id.

60. See id.

6L See id. at 484. The first issue was whether the juvenile court erred in ordering J.W.'s
family to reimburse the OFC for the placement costs. See id. at 481-82.

62. See id. at 482.



696 INDIANA LAW REVIEW [Vol. 32:687

Indiana:

An implied in fact contract refers to the class of obligations which arises
from mutual agreement and intent to promise, when the agreement and
promise have simply not been expressed in words .... A contract
implied in fact arises out of acts and conduct of the parties, coupled with

a meeting of the minds and a clear intent of the parties in the
agreement.^^

Because there was no evidence of a mutual agreement between the parties and
because the OFC did not manifest a clear intent to place J.W. in a facility covered
by the family's insurance, the court of appeals refused to reverse the trial court
and to imply a contract.^

B. Consideration

1. Unenforceable Promises.—In In re Marriage ofArvin,^^ the Arvins
separated in 1996, at which time they reached a dissolution settlement. Craig

Arvin was not represented by counsel. Kim Arvin's attorney drafted the
settlement agreement. The trial court entered a decree of dissolution, which
merged and incorporated the settlement agreement.^^ The settlement agreement
provided for the settlement of all "issues attendant upon the dissolution of the
marriage" and was agreed upon "in consideration of the mutual covenants
contained herein."^^ The agreement also provided that the parties would have
joint legal custody ofthe couple's two children and that the settlement agreement

was made with the understanding that each party intended to remain in the
Kokomo area to maintain the stability of the children. Another provision stated
that no modification of the agreement would be valid unless in writing and
executed by both parties.

^^

Immediately after the trial court entered the decree, Kim discharged her
attorney, retained new counsel, and filed a motion requesting relief from the
agreement. Kim argued that the agreement was entered into "without proper
advice and without proper disclosure."^^ Kim then moved the children and
herself over 100 miles from Kokomo to be with her new boyfriend and to obtain
more suitable employment. She also filed a notice of intention to leave the

63. Id. at 484 (citing McCart v. Chief Executive Officer in Charge, Indep. Fed. Credit

Union, 652 N.E.2d 80, 85 (Ind. Ct. App. 1995)).

64. Id. at 484. The court also supported its decision by noting that the state has a compelling

interest in protecting the welfare of children and advancing their best interests. In the case before

it, the court pointed out that the OFC determined that it was in J.W.'s best interests to be placed in
the facility they chose. Id.

65. 689 N.E.2d 1270 (Ind. Ct. App. 1998).

66. See id at 1270-71.

67. Id at 1272.

68. See id.

69. Id



1 999] CONTRACT AND BUSINESS LAW 697

jurisdiction.^^ At that point, Craig filed a motion asking that the court require

Kim to show cause why she should not be held in contempt for moving out ofthe
Kokomo area in violation of the settlement/decree.

The parties ultimately tried all issues to the bench, after which the trial court
denied Kim's motion to correct error but reftised to hold her in contempt of court,

finding that the move was "reasonable and further that she has provided to
[Craig] extensive visitation with the children since the move."^* Craig appealed,

and the court of appeals reversed^^

On appeal, Kim argued that the covenant providing that the parties intended
the children to remain in the Kokomo area was unenforceable because it was a
vague recital ofthe parties' intentions and understandings. Kim also argued that
the prohibition against modification was unenforceable because it violated public
policy.^^ With respect to the second argument, the court agreed that the

prohibition was most likely unenforceable, but the enforceability or the ability
to modify the provision was insignificant under the circumstances because it was
clear that Kim had no intention of honoring the covenant and instead
immediately repudiated it.^'* According to the court, "[r]egardless of whether the

covenant had been legally binding, it constituted sufficient consideration to

support the parties' agreement regarding child custody such that [Kim] could not

immediately repudiate the covenant without restoring [Craig's] rights to the

status quo."^^

With respect to the provision against moving the children, the court first
recognized that even an unenforceable promise may constitute sufficient
consideration to support a contract in Indiana.^^ The court then determined that
the parties' covenant that they intended the children to remain in the Kokomo
area to maintain their stability constituted sufficient consideration to support the

agreement regarding child custody disposition.^^ Kim's immediate repudiation

of her covenant constituted a failure of consideration with respect to the

independent covenant of the agreement regarding child custody.^^ Because Kim
made no attempt to return Craig to the status quo by relinquishing the benefit that
accrued to her under the independent covenant (i.e., that she be awarded primary

physical custody), the court reversed the trial court's decision with instructions

that the child custody disposition in the agreement be held voidable at Craig's

election and that the initial custody determination of the children be submitted

70. See id.

71. Id.

72. Id. at 1274.

73. See id. at 1272-73.

74. Id. at 1273.

75. Id

76. Id.

77. Id

78. See id. at 1273-74.



698 INDIANA LAW REVIEW [Vol. 32:687

fortrial.'"

2. Independent Consideration for Unilateral Employment Contracts.—
Although the focus of the case was on the employment-at-will doctrine in
Indiana, the Supreme Court of Indiana in Orr v. Westminster Village North,
Inc.^^ recognized in dicta that the court has yet to expressly address and resolve
whether unilateral contracts in the employment context always require adequate
independent consideration and whether an employee handbook can ever
constitute a unilateral contract serving to modify the otherwise at-will
employment relationship.^' The Orr court expressly declined to use the case as
a vehicle for resolving the issue.^^ Footnotes in the court's opinion reveal that

decisions from the Indiana Court of Appeals on the issue are not "entirely clear

and consistent,"^^ and that a number of decisions have held, "without discussing
the adequate independent consideration requirement, that the terms of an

employee handbook are irrelevant unless the employment contract is one for a
definite term."^^

C Enforceability ofExculpatory Clauses
1. Advertising Agreement.—^In Trimble v. Ameritech Publishing, Inc.^^ an

Ameritech advertising representative met with Trimble, a business owner who
wanted to advertise in the Yellow Pages, to execute a written advertising order.

The advertising contract Trimble signed provided "that any damages resulting
from Ameritech' s failure to publish the advertisement would be limited to the
amount paid for the advertising or the contract price, whichever is the lesser."^^
The contract also contained the following exculpatory clause:

Publisher's liability: . . . if publisher should be found liable for loss or

damage due to a failure on the part of the publisher or its directory, in
any respect, regardless ofwhether customer's claim is based on contract,

tort, strict liability or otherwise, the liability shall be limited to an

amount equal to the contract price for the disputed advertisements, or
that sum of money actually paid by the customer toward the disputed
advertisements, whichever sum shall be less, as liquidated damages and

79. Id at 1274.

80. 689 N.E.2d 712 (Ind. 1997).

81. Id. at7\9.

82. Id

83. Id at 719 n.l3 (comparing Tuthill Corp. v. Wolfe, 451 N.E.2d 72, 75, 78 (Ind. Ct. App.

1983) with Seco Chems., Inc. v. Stewart, 349 N.E.2d 733, 738 (Ind. App. 1976)).

84. Id. at 720 n.l4 (citing Tri-City Comprehensive Community Mental Health Ctr., Inc. v.

Franklin, 498 N.E.2d 1303, 1305-06 (Ind. Ct. App. 1986); Mead Johnson & Co. v. Oppenheimer,
458 N.E.2d 668, 671 (Ind. Ct. App. 1984); Campbell v. Eli Lilly & Co., 413 N.E.2d 1054, 1062
(Ind. Ct. App. 1980); Shaw v. S.S. Kresge Co., 328 N.E.2d 775, 778-79 (Ind. App. 1975)).

85. 700 N.E.2d 1 128 (Ind. 1998).

86. Id



1999] CONTRACT AND BUSINESS LAW 699

not as a penalty, and this liability shall be exclusive. In no event shall

publisher be liable for any loss ofcustomer's business, revenues, profits,

the cost to the customer of other advertisements or any other special,

incidental, consequential or punitive damages of any nature, or for any

claim against the customer by a third party. . .
}''

After Ameritech failed to publish Trimble's advertisement, Trimble filed suit

seeking damages for loss of business resulting from the omission of
advertisement. When Trimble filed suit, he had not been charged nor had he paid
any money for the advertisement. The trial court granted summary judgment for
Ameritech.^^ The court of appeals reversed.*^ The supreme court reversed the
court of appeals, affirming the trial court's original decision to grant summary
judgment and holding that exculpatory clauses such as Ameritech' s are

enforceable.^^

The Trimble court first recognized the existence of two similar court of
appeals cases, each of which involved Ameritech's previous failures to publish

one of its customer's advertisements in the Yellow Pages: Pigman v. Ameritech
Publishing, Inc.^^ and Pinnacle Computer Services, Inc. v. Ameritech Publishing,

Inc.^^ The court in Pigman held that "the exculpatory clause contained in
[Ameritech's] Yellow Pages advertising contract was unconscionable and void

as against public policy as a matter of law."^^ The court in Pinnacle rejected
Pigman, and held that "the exculpatory clause in Ameritech's Yellow Pages

order was valid and enforceable."^"*
The Trimble court cites several cases recognizing parties' contractual

freedom and the public's interest in not restricting that freedom unnecessarily.^^

The court also identifies five factors that courts and parties should consider when
determining whether a contract that is not otherwise prohibited by statute nor

tends to injure the public contravenes public policy:

(1) the nature of the subject matter of the contract; (2) the strength ofthe

public policy underlying any relevant statute; (3) the likelihood that

refusal to enforce the bargain or term will further any such policy; (4)
how serious or deserved would be the forfeiture suffered by the party
attempting to enforce the bargain; and (5) the parties' relative bargaining

87. /^. at 1128-29.

88. Seeidaxm^.
89. See id.

90. Id

91. 641 N.E.2d 1026 (Ind. Ct. App. 1994).

92. 642 N.E.2d 1011 (Ind. Ct. App. 1994).

93. Pigman, 641 N.E.2d at 1035.

94. Pinnacle, 642 N.E.2d at 1019.

95. Trimble, 700 N.E.2d at 1 129 (citing Continental Basketball Ass'n v. Ellenstein Enters.,

Inc., 669 N.E.2d 134, 139 (Ind. 1996); Fresh Cut, Inc. v. Fazli, 650 N.E.2d 1 126, 1 129 (Ind. 1995);

Weaver v. American Oil Co., 276 N.E.2d 144, 147 (Ind. 1971)).



700 INDIANA LAW REVIEW [Vol. 32:687

power and freedom to contract.^^

When applying the foregoing factors to the case at hand, the Trimble court
pointed out that the second and third factors did not apply.^^ With respect to the
other three factors, the court adopted the reasoning of the court of appeals in

Pinnacle because the reasoning in that case "correctly resolves these

considerations in favor of enforceability of the contract."^^ In so doing, the

supreme court expressly rejected the decision in Pigman?'^

2. Lease Agreement.—^In Vertucci v. NHP Management Co.^^ the Vertuccis
rented an apartment in the Bent Tree apartment complex in Indianapolis. Before

renting the apartment, Vertucci asked about security at the complex because his
two teenage daughters would be largely unsupervised during the day while he
and his wife were at work. Employees assured him that there was security at the
complex.*^' In addition, Bent Tree employees issued identification cards to every

member of his family. Vertucci understood that the cards were to ensure that
only tenants and their guests were using the common areas.

The lease agreement the Vertuccis signed contained the following provision:

Tenant agrees that landlord, its employees, or agents shall not be liable

for any damage or injury to Tenant, Tenant's family, agents, employees,
or guests, or to any person entering the premises or the building ofwhich

the leased premises are a part, for injury to person or property arising

from theft, vandalism, fire, or casualty occurring in the premises or the

building. LANDLORD IS NOT RESPONSIBLE FOR, AND DOES
NOT GUARANTEE, THE SAFETY OF TENANT, TENANT'S
GUESTS, FAMILY, EMPLOYEES, AGENTS, OR INVITEES.
TENANT AGREES TO LOOK SOLELY TO THE PUBLIC POLICE
AUTHORITIES FOR SECURITY AND PROTECTION. ANY
SECURITY THAT MAY BE PROVIDED IS SOLELY FOR THE
PROTECTION OF LANDLORD'S PROPERTY. . . .^'^

After a non-resident sexually assaulted one of his daughters at the complex's

swimming pool, Mr. Vertucci and his wife, as parents and natural guardians for
their daughter, sued the complex's management company and related entities.
The trial court granted the company's motion for summary judgment, which
argued that it did not owe any duty to protect the Vertuccis from a third party
criminal attack.

^^^

The Vertuccis appealed. The court of appeals ultimately reversed the trial

96. Mat 1130.
97. Id.

98. Id.

99. Id

100. 701 N.E.2d 604 (Ind. Ct. App. 1998)

101. See id. at 605.

102. Id. at 606 (emphasis in original).

103. See id. at 604.



1 999] CONTRACT AND BUSINESS LAW 70

1

court's decision with respect to whether the company owed such a duty.^^"* In
doing so, the Vertucci court first determined that the exculpatory clause in the

company's lease did not prevent the company from having or assuming a duty to
protect the Vertucci's daughter from the criminal actions of a third party.^°^

Although much of the court's opinion focuses on the negligence aspects of
the case, the court first addressed the company's initial argument that the lease

language quoted above effectively disclaimed its liability for injuries to

tenants. ^^ As the court wrote, the exculpatory clause in Bent Tree's lease form
applied specifically to ''theft, vandalism, fire or casualty.

""^^^ The parties
disagreed about whether the assault at issue was a "casualty" as interpreted by
the lease, and the lease itself did not define the term.^°^ To resolve the quandary,
the court turned to Black's Law Dictionary, which defines "casualty" as "'[a]
serious or fatal accident'" or a "'disastrous occurrence due to sudden, unexpected

or unusual cause'" or an "'[a]ccident; misfortune; or mishap; that which comes
by chance or without design[.]"'^^^

The court strictly construed the term "casualty" against Bent Tree, the lease's
drafter, concluding that an intentional act such as that perpetrated against the

Vertucci's daughter would not be considered a "casualty."' ^° Accordingly, the
court held that the exculpatory clause did not prevent Bent Tree from having or

assuming a duty as the Vertuccis alleged.*'

'

3. Health Club Membership Agreement.—In Powell v. American Health
Fitness Center of Fort Wayne, Inc.,^^^ Freda Powell signed a membership
agreement to become a member at American Health's fitness center in Fort
Wayne. The agreement contained the following exculpatory clause:

17. DAMAGES: By signing this agreement and using the Club's
premises, facilities and equipment. Member expressly agrees that the
Club will not be liable for any damages arising from personal injuries
sustained by member or his guest(s) in, on, or about the Club, or as a
result ofusing the Club's facilities and equipment. Member assumes full
responsibility for any injuries, damages or losses which may occur to
Member or their guest(s) in, on, or about the Club premises or as a result
of using the Club's facilities and equipment. Member agrees that the
Club shall not be liable for any loss or theft of personal property in or

about the Club premises and does hereby fully and forever release and

discharge the Club and all associated clubs, their owners, employees and

104. /^. at 608.

105. Mat 606.
106. Id.

107. Id.

108. See id

109. Id. (quoting BLACK'S LAW DICTIONARY 218 (6th ed. 1990)).
110. Id

111. Id

1 12. 694 N.E.2d 757 (Ind. Ct. App. 1998).



702 INDIANA LAW REVIEW [Vol. 32:687

agents from any and all claims, demands, damages, rights of action, or
causes of action present or future, whether the same be known or
unknown, anticipated or unanticipated, resulting from or arising out of
Member's or Member's guest(s) use or intended use of said Club
premises, facilities or equipment.''^

About a year later, Powell injured her foot while using a whirlpool at
American Health's facility. She sued American Health, alleging that her injury
was caused by its negligence. American Health filed a motion for summary
judgment based upon the foregoing exculpatory clause. The trial court granted
the motion, concluding that there was nothing ambiguous about the agreement,
that Powell knowingly signed the agreement, and that, as a matter of law, Powell

released American Health from liability for her claims.^ ^"^ Powell appealed, and

the court of appeals reversed.
^^^

The issue on appeal was whether the exculpatory clause in the contract
released American Health from any liability for Powell's injuries sustained while

on American Health's premises and caused by American Health's negligence.
'^^

Powell argued that the exculpatory clause was invalid because it was ambiguous.
Specifically, Powell contended that the clause did not explicitly state that a

member was releasing the health center from injuries resulting from the health
center's own negligence. According to the court, Powell's argument was one of
nonspecificity rather than ambiguity.* ^^ Citing Indiana State Highway
Commission v. Thomas,^^^ the Powell court recognized that the principle of
specificity exists with regard to indemnity contracts and requires "an express

stipulation as to the indemnitee's negligence" for the indemnity contract to be

valid. **^ Recognizing the court's prior opinion in Thomas, the court held that an

exculpatory clause intending to exculpate one party for liability because of its

negligence to the other party must both specifically and explicitly refer to the

negligence of the party seeking release from liability.
'^^

As the court explained, American Health's exculpatory clause did not do
so.'^* American Health's exculpatory clause provides that Powell released it

from liability for "any damages" and placed the responsibility on Powell for "any

injuries, damages or losses."*^^ The clause also provided that Powell "fully and
forever release[s] and discharge[s] [American Health] . . . from any and all

claims, demands, damages, rights of action, or causes of action present or future

113. Id. at 759.

114. See id.

115. Id at 758.

116. See id

117. Id at 760.

118. 346 N.E.2d 252, 263 (Ind. App. 1976)

119. Powell, 694 N.E.2d at 760.

120. Mat 761.
121. Id at 760-62.

122. /^. at 761.



1 999] CONTRACT AND BUSINESS LAW 703

. . . resulting from or arising out ofMember's . . . use . . . of said Club premises,

facilities or equipment."
^^^

According to the Powell court, such language never specifically or explicitly

referred to the negligence ofAmerican Health.^^'* Thus, the court held that, as a

matter of law, the exculpatory clause did not release American Health from

liability resulting from injuries sustained by Powell while on American Health's

premises and caused by American Health's negligence, and that the clause was
void to the extent that it purported to do so.^^^

D. Interpretation ofNon-Exculpatory Contractual Terms

I. EmploymentAgreements.—^The case ofT^m^v. Charter Behavioral Health
System of Northwest Indiana, Inc.,^^^ is interesting in that it involves both a

reformation theory and a dispute about contract terms. Ruff was a clinical
psychologist and clinical director at a Charter facility in Michigan City. His

employment contract provided that he receive a base salary plus 70%
commission on all revenues from psychological testing he performed in excess

of $15,000 per year.'^^ After the facility in Michigan City closed, the facility's

CEO, Michael Brown, offered Ruff the same position at a Charter facility in
Hobart.

Ruff began working in Hobart without knowing what the terms of his
employment would be. Brown eventually notified Ruff that Charter's central
office had prepared a contract that Ruff needed to sign. "Ruff signed the contract

without reading it."^^^ The agreement provided that Ruff would receive an
annual salary equal to what he received in Michigan City, but his 70%
commission was based on testing in excess of $108,000 per year.^^^

Ruffs contract provided in relevant part:

The term ofthis Agreement will be for one (1) year from August 5, 1996

and this Agreement will be self-renewing for additional one (1) year

terms unless the Hospital or Psychologist terminates this Agreement as
provided herein. Notwithstanding the preceding sentence, this

123. Id

124. Mat 760.
125. Id at 761-62. The court's opinion ftirther explains that the clause was void even though

other decisions from Indiana's appellate courts have upheld exculpatory clauses that have used

similar language, e.g., Shumate v. Lycan, 675 N.E.2d 749, 752 (Ind. Ct. App. 1997), Terry v.

Indiana State Univ., 666 N.E.2d 87 (Ind. Ct. App. 1996); Marshall v. Blue Springs Corp., 641

N.E.2d 92, 95 (Ind. Ct. App. 1994). The Powell court determined that such decisions were

distinguishable because the nonspecificity of the language used "was not put at issue nor

addressed." Powell, 694 N.E.2d at 762.

126. 699 N.E.2d 1171 (Ind. Ct. App. 1998).

127. Seeidat\\73.

128. Id

129. See id



704 INDIANA LAW REVIEW [Vol. 32:687

Agreement may be terminated by either party at any time, without cause,
upon no less than sixty (60) days notice to the other party. If the
Hospital terminates the Agreement, the Hospital may direct Psychologist
to immediately cease providing services, although the Hospital will

continue to be obligated to pay Psychologist those amounts due pursuant
to Section 7 during the notice period.

* * *

Psychologist shall receive and Hospital shall pay a base salary at the rate

of ninety thousand dollars ($90,000) per year (the 'Base Salary'),

payable in accordance with the Hospital's standard payroll policies.
* * *

Under the terms of this Agreement, Hospital will bill for, collect and
retain all fees for Psychologist's services rendered to all patients treated

by Psychologist, provided, however, that Hospital agrees to pay to
Psychologist as additional compensation hereunder seventy percent

(70%) of all net collections exceeding one hundred eight thousand
dollars ($108,000) for Psychological testing. Psychologist shall not

participate in any Hospital bonus plan. Upon the termination of this
Agreement for any reason whatsoever. Hospital will continue to bill and
collect on behalf of Psychologist, all of Psychologist's then outstanding

accounts receivable from Psychologist's clinical practice at the Hospital

for a period of one hundred eighty (180) days after such termination.

Upon expiration of the Agreement, all uncollected accounts will be the
property of the Hospital.

'^°

Charter terminated Ruff approximately five months later. Ruff brought suit

to reform the contract, claiming that Charter fraudulently induced him into
signing the contract without reading it by representing that it was identical to his
previous contract.

*^^
Ruff also sought a pro rata share of his commission based

on psychological testing he performed in the five months before his termination.

Both parties moved for summary judgment. The trial court denied Ruffs motion
and granted Charter's, finding, inter alia, that Ruff had an opportunity to read the

contract but chose not to and that Charter did not coerce or trick him into signing

it.*^^ The court of appeals reversed the trial court, holding that factual disputes
remained with respect to both the reformation for fraud claim and the amount of
commission claim.'^^

With respect to the reformation claim, the Ruffcourt pointed out that equity

has jurisdiction in Indiana

to reform written documents in only two well-defined situations: 1)
where there is a mutual mistake— . . . where both parties mistakenly

130. /^. at 1175-76.

131. Seeid.at\\13.

132. See id.

133. Mat 1176.



1 999] CONTRACT AND BUSINESS LAW 705

execute a document that does not express the true terms of their

agreement; or 2) where there has been a mistake by one party,

accompanied by fraud or inequitable conduct by the remaining party

with knowledge of the other's mistake.
^^"^

Apparently because the case involved the second of the two situations, the

court's opinion initially spells out the elements of fraud in Indiana and ultimately

concludes that whether Brown made a material misrepresentation of a past or
existing fact, whether Ruff relied on Brown's representation, and whether Ruff

was justified in doing so, were all questions of fact that precluded summary
judgment.

^^^

Next, the court addressed whether Ruff earned any commission pursuant to

the contract's terms. Charter argued that Ruff is entitled to no additional

compensation because "the commission due Ruff was figured and payable only
when net collections exceeded $108,000."^^^ Because Ruff did not work for
Charter in Hobart until he had generated billing in that amount, he had not earned

the commission. On the other hand. Ruff argued that the $108,000 figure was
based on annual revenues for psychological testing and could be pro-rated

monthly to figure the commissions he earned for the five months he was at
Hobart.

^^'

The Ruffcourt recited the familiar propositions that the intentions of parties
to a contract are to be determined from the four comers ofthe document and that

the test for determining the existence of an ambiguity is whether reasonably

intelligent persons could come to different conclusions about the contract's
meaning. ^^^ The court then pointed out that the contract Ruff signed did not
mention how he was to earn his commission, thus, the contract was ambiguous
on its face "as to how RufPs commission was earned and was to be paid."^^^ The
court concluded that the trier of fact would need to hear extrinsic evidence
concerning the intention of the parties to resolve the ambiguity.

'"^^

In Eck & Associates, Inc. v. Alusuisse Flexible Packaging, Inc.^^^ Eck and
Alusuisse entered in to a contract whereby Eck would sell Alusuisse' s product
to Reflectix, Inc. in return for a 5% commission. The contract provided that it
would continue indefinitely until terminated for just cause. Indeed, the relevant

134. Mat 1173.
135. Id. at 1 174-75. Charter also argued that the parole evidence rule barred any evidence

of oral representations about the contract. The court quickly pointed out, however, that an

exception to the parol evidence rule applies in the case of fraud in the inducement. Because Ruff

alleged fraud, the court reasoned that the parol evidence rule did not bar extrinsic evidence

concerning the circumstances surrounding the execution ofthe employment agreement. Id. at 1 175.

136. Mat 1176.
137. See id.

138. Id

139. Id

140. Id

141. 700 N.E.2d 1 163 (Ind. Ct. App. 1998).



706 INDIANA LAW REVIEW [Vol. 32:687

portions of the agreement provide as follows:

1

.

Nature and Term ofService. [Alusuisse] agrees to engage the
broker [Eck] as an independent contractor and [Eck] agrees to act as

Broker for [Alusuisse] in the business of selling products produced by
Alusuisse . . . This agreement shall commence on the 4th day ofAugust,
1989, and shall continue indefinitely, unless and until terminated by
either party as hereinafter provided.

2. Duties ofBroker. During the continuance ofthis agreement, the

Broker shall devote such time as is necessary to the sale of the products

of [Alusuisse], and shall use his best endeavors to promote its business

and welfare. [Alusuisse] recognizes, in accordance with the Broker's

regular business practice, he shall represent other firms and companies,

but it is specifically understood that the Broker is in no event selling the
products of, or representing companies which are in competition with,

the products sold and manufactured by [Alusuisse]. ...
* * *

8. Termination—How Made. This agreement may be terminated
by either partyforJust cause, upon sixty (60) days written notice.

9. Account. [Eck] shall operate at, and sell only to Reflectix which

is set forth on Exhibit "B".

10. Nature ofRelationship. The relationship between the parties is
that of a sales agent and independent contractor. [Eck] is authorized to

accept an order on behalf of [Alusuisse]. To constitute a contract for
sale, all orders taken by [Eck] must be duly acknowledged and accepted

by [Alusuisse] at its respective authorized offices. Nothing contained in

this agreement shall be construed as creating an employer/employee

relationship between [Eck] and Alusuisse. [Alusuisse] will indemnify

and hold harmless [Eck] against any and all claims for damages which

may arise as a result of [Alusuisse' s] products, plant or personnel.
^"^^

Conflicts arose among Eck, Reflectix, and Alusuisse that ultimately led Alusuisse
to mail a notice to Eck terminating the contract.

Eck sued Alusuisse for breach of contract, alleging that Alusuisse lacked just
cause for terminating the contract. Eck also sued Reflectix for interference with
the contract. Reflectix filed a motion for summary judgment that Alusuisse
joined. The trial court initially denied the motion, after which Eck and Reflectix

settled their portion of Eck's claim. ^"^^ Alusuisse renewed its motion for

summary judgment, which the trial court granted, finding that the contract was

142. Mat 1167-68.
143. See id. at \\65.



1 999] CONTRACT AND BUSINESS LAW 707

terminable at-will.^'*'* The trial court never reached the question of whether

Alusuisse had just cause to terminate the contract. The court of appeals reversed

the trial court, holding that just cause of the broker's contract rebutted the

presumption of an at-will employment and that separate and independent
consideration was not a prerequisite to enforceability of the just cause
provision.

'''^

When addressing the substantive issues involved, the court of appeals began
by recognizing the employment-at-will doctrine is a rule of contract construction,

not a rule imposing substantive limitations on the parties' freedom to contract.
'"^^

"If the parties include a clear job security provision in an employment contract,
the presumption that the employment is at-will may be negated."^"*^ Additional
facts revealed that Alusuisse traditionally cultivated broker relationships that

were terminable at-will. However, Eck did not agree to a terminable at-will
contract.'"^* Instead, Eck submitted the modified contract for Alusuisse 's
approval. "Alusuisse opted to agree to the changes and signed the contract which

contained ajust cause termination provision, but lacked a unilateral-discretion-to-

reassign-accounts provision."^"*^ As the court explained:

Had Alusuisse intended the discretion which at-will termination affords,
Alusuisse could have refused to deal with Eck. No assertion of unequal
bargaining power was made. However, for reasons about which we may
only speculate, Alusuisse chose to forego the at-will flexibility. The
facts further reveal that once reminded of its unique contract with Eck,

Alusuisse abided by its terms and did not try to terminate the contract

until it arguably could demonstrate just cause.
^^°

The court went on to hold that a job security provision does not need
adequate independent consideration to rebut the at-will employment
presumption.'^' In doing so, the court quoted extensively from Streckfus v.

Gardenside Terrace Co-op, Inc}^^ In light of recent supreme court

pronouncements making it clear that parties may rebut the presumption of
employment at-will if they choose to include a clear job security provision in an
employment contract,'^^ and making it clear that parties' freedom to contract has

continued to be highly valued, the Eck court saw no reason to require
independent consideration for an explicit, freely bargained for and written just

144. 5eg/^. at 1165-66.

145. /c^. at 1169-70.

146. Mat 1167.
147. Id.

148. See id. at 1168.

149. Id

150. /c^. at 1168-69.

151. Mat 1169.
152. 504 N.E.2d 273, 275-76 (Ind. 1 987).

153. See On- v. Westminster Village N., Inc., 689 N.E.2d 712, 717 (Ind. 1997).



708 INDIANA LAW REVIEW [Vol. 32:687

cause provision.
^^"^

In Sample v. Kinser Insurance Agency, Inc.,^^^ the appellant-plaintiff, Cindy
Sample ("Sample") worked for James Kinser ("Kinser") at the Kinser Insurance
Agency ("Kinser Insurance"), an insurance agency based in Monroe County.
Kinser authorized Sample to write policies for, among others, Erie Insurance
Company. Kinser Insurance paid Sample on a commission basis, the terms and
conditions of which were set forth in a written agreement as follows:

1

.

There will be a $400.00 minium [sic] commission payable monthly
unless commissions are in excess of this, then the commission payment
will be made vice the minimum.

2. A 75% commission on new business and renewal will be paid to a
maximum period of one year and/or six months, depending on the
volumn [sic] ofbusiness created. At a satisfactory amount ofproduction
agreed upon between Cindy Sample and James C. Kinser, the
commission will then be reduced to Item #3 below. It is the intent ofthis

agreement to help the agent achieve a level of personal monetary goals

quickly and to help her maintain a productive salary until she gains time

in the position and establishes a satisfactory renewal base of business.

3

.

After the goals ofItem # 1 and Item #2 are achieved and agreed upon,

then Item #3 will take effect. This agreement changes the commission

schedule to a 50/50 basis on new and renewal business with assignment
to the Kinser Insurance Agency Inc. and all business will belong to the
Corporation. The Kinser Insurance Agency Inc. will supply and pay all
business cards, office expenses, and equipment as required to perform

her duties as an agent of this Agency. Film, gas, and all vehicles

expenses are to be supplied by the agent.
^^^

Initially, Sample had binding authority to write policies for Erie as a sub-
agent of Kinser Insurance. Subsequently, Kinser terminated that authority.

Sample, relying on Kinser' s representation, quit herjob with Kinser Insurance.
^^^

Shortly thereafter, Kinser Insurance gave Sample a check that it contended

154. Eck & Assocs., 700 N.E.2d at 1 169. In reaching such a decision, the court specifically
recognized the general principle that the at-will presumption applies to both oral and written

employment contracts. Despite that recognition, the court distinguished the cases dealing with

adequate independent consideration. Those cases, according to the court, were inapplicable, but

not due to their lack of explicit, freely bargained-for just cause provisions. Id. Rather, the

distinction was that they simply did not address the situation before the court. They involved

employees arguing that some other consideration transformed what normally would have been an

at-will employment situation into one that could only be terminated for just cause. See id.

155. 700 N.E.2d 802 (Ind. Ct. App. 1998).

156. Mat 803.
157. See id.



1 999] CONTRACT AND BUSINESS LAW 709

represented the commissions Sample earned through the date on which she quit.

Sample refused the check, contending that she also was entitled to receive
commissions she had generated before termination, but that had not accrued until

after her termination.'^^ After the parties were unable to reach an agreement

concerning the commissions. Sample sued Kinser and Kinser Insurance for

breach of contract and for fraud. Kinser Insurance responded by filing a motion

for summary judgment, which the trial court granted.'^^ The trial court agreed
that Sample was not entitled to receive commissions after her employment
terminated.'^° The court of appeals reversed the trial court on the breach of
contract claim and affirmed the trial court with respect to the fraud claim.

'^'

The court of appeals noted that the contract Sample signed provided for
commissions based on new and renewal business. '^^ However, as counsel for
Kinser Insurance correctly argued, the contract made no provision for
commissions following her termination. Kinser Insurance also submitted the

affidavit of Kinser, which stated "that the standard in the insurance industry is

that commissions are not paid after a person leaves the employ of an insurance
agency."'^^

Although the court conceded that industry standards may be important for
some purposes, they were not relevant in this case:

Although an employer and employee are free to agree that commissions

will not be paid after the employee's termination, the general rule is that

a person employed on a commission basis is entitled to those

commissions when the order is accepted by the employer. . . . Stated
differently a person employed on a commission basis is entitled to

commissions on business she has secured even though payment is not
received by the employer until a later date.'^"*

Just because the agreement at issue in Sample was silent about whether
Sample was entitled to commissions after her termination as an employee, did
not, according to the court, mean that she is not entitled to commissions.'^^
Rather, the court applied the foregoing rule. The court held that Sample was
entitled to be paid commissions for renewal business she had secured before her

termination.'^ According to the court, they were earned commissions; the sales

had been consummated and Sample's right to the commissions had ftilly accrued.

158. See id.

159. See id.

160. See id at 804

161. Id at 802.

162. Id at 804.

163. Id

164. Id

165. Id

166. Id



710 INDIANA LAW REVIEW [Vol. 32:687

subject only to actual receipt of the premium payments. ^^^

In Haxton v. McClnre Oil Corp.,^^^ Crystal Haxton ("Haxton"), was a cashier
for McClure Oil Corporation ("McClure"). Haxton signed an employment
agreement with McClure to work as a cashier. The agreement contained the
following relevant terms:

Term. The term ofthis agreement shall begin on October 19, 1995 and
shall be an "at will" agreement. The Employee may terminate this
agreement at any time by giving a required two weeks notice in writing.
This notice is to be given to the Employee's immediate supervisor.

* * *

Conditions of Wage Reduction. The Employee agrees that their [sic]
weekly paycheck can be reduced to the Federal Minimum wage rate if
the following conditions exist:

9ic :iC 9iC

Upon resignation, the Employee does not give the required written two
weeks notice to their [sic] immediate supervisor. ^^^

"On January 29, 1997, Haxton gave McClure a two-week written notice of
her resignation. She quit working on February 2, 1997, four days after she gave

notice."^^^ McClure's last paycheck to Haxton compensated her for the hours she

had worked and for one week's vacation. The amount McClure paid her,
however, was based on the Federal Minimum Wage of $4.75 per hour rather than
her hourly wage of $6.70 per hour.'^*

Haxton sued McClure in small claims court, seeking lost wages, statutory
penalties, and attorney fees. After a trial, the court entered judgment against
Haxton, determining that she had violated the terms of the employment
agreement when she terminated her employment without working the fiill two
weeks after she gave written notice.^^^ Haxton appealed, citing two errors. The
second of the two issues raised on appeal involved an interpretation of the
employment agreement.^^^ The court of appeals affirmed the trial court on that

167. Id

168. 697 N.E.2d 1277 (Ind. Ct. App. 1998).

169. Id. at 1279.

170. Id

171. The total amount McClure paid Haxton was $459. 1 1 . Haxton was earning $6.70 per

hour before she terminated her employment. See id.

172. See id

173. The first issue was whether Haxton was entitled to her full rate of pay for the hours

worked. See id. She contended on appeal that the employment agreement was an assignment of

wages in violation of section 22-2-6-1 of the Indiana Code. She also argued that McClure, by

reducing her pay assessed a fine against her in violation of section 22-2-81 of the Indiana Code.

The court of appeals disagreed on both points, holding that both statutes were inapplicable. Id. at

1280.



1 999] CONTRACT AND BUSINESS LAW 7 1

1

174
issue.

With respect to the allegedly ambiguous contract terminology, Haxton
contended that she complied with the terms by giving two weeks written notice,

even though she did not work the full two weeks. She claimed that she was
entitled to be paid at her regular rate ($6.70 per hour), rather than at the minimum
wage ($4.75 per hour) because the employment agreement was unclear as to
whether she was required to work the fiill two weeks after her notice. ^^^ The
court disagreed, concluding that the two-week notice provision in the

employment agreement should be construed as requiring an employee to work for
the period of his or her two-week notice.*^^ According to the court, "[t]o hold

otherwise would render the two-week notice element of the contract completely
meaningless."'^^

In Salin Bank & Trust Co. v. Review Board of Indiana Department of
Workforce Development,^^^ Frances Hatfield ("Hatfield") worked for Salin in
Columbus, Indiana in the bank's loan department when Salin decided to transfer
the loan operations to Indianapolis. Hatfield chose to stay in Columbus until her
position was eliminated. Hatfield understood that she was to receive
compensation at the rate of one or two weeks' pay for each year of service up to

a limit of twenty-six weeks of pay.'^^ Hatfield signed what was, for lack of a
better term, a termination agreement, which provided in part:

Salin Bank and Trust Company agrees to pay you the total lump sum of
$12,353.04, including all 1996 vacation, on the day following the

'Effective Date' of this Agreement, as that date is defined in paragraph

7.

It is understood that this lump sum does not represent any moneys
to which you are currently owed or have otherwise earned or accrued by
the Effective Date pursuant to any compensation plans, practices,

policies, programs or procedures. Payment of such earned or accrued
moneys shall be made upon your request or when applicable, pursuant
to the terms of any compensation plans, practices, policies, programs or

174. Id.

175. See id.

176. Id

177. Id. Although the court affirmed the trial court's disposition of the case with respect to

the terms ofthe employment agreement, the court agreed with Haxton that McCiure should not have

reduced her vacation pay to the minimum wage level. The court equated vacation pay with a vested

or accrued right where only the time of payment is deferred. Entitlement to vacation pay, according

to the Haxton court, is not a gratuity but rather "is in the form of compensation for services." Id.

at 1281 (citing Die & Mold, Inc. v. Western, 448 N.E.2d 44, 46 (Ind. Ct. App. 1983)). Absent an
agreement to the contrary, the court concluded that Haxton should be entitled to the accrued

vacation pay at the time of termination. Thus, the court remanded the issue to the trial court to

compute and award Haxton the amount of her claim as it related solely to vacation pay. Id.

178. 698 N.E.2d 1 (Ind. Ct. App. 1998).

179. SeeiddXl.



712 INDIANA LAW REVIEW [Vol. 32:687

procedures.

You agree to accept the above sum in full and final accord,
satisfaction, compromise and settlement of any and all claims and rights,
whether disputed or undisputed, accrued or unaccrued, liquidated or
unliquidated, vested or nonvested, arising in any way out of or under
your employment with Salin Bank and Trust Company . . . .^^°

Hatfield filed a claim with the Review Board of the Indiana Department of
Workforce Development (the "Board") seeking unemployment compensation
benefits, which were, of course, in addition to the lump sum payment Salin
outlined in the termination agreement.^^' The Board awarded unemployment
compensationlDcnefits to Hatfield. Salin appealed, contending, inter alia, that the

Board's decision contravened public policy because it failed to enforce a valid

and unambiguous contractual agreement. The court of appeals disagreed,
pointing out what it determined were ambiguities in the agreement.'^^ First, the

court recognized that although the agreement recites that the lump sum payment
to Hatfield does not constitute "any moneys to which you are currently owed or
have otherwise earned or accrued," the amount specifically includes payment of
"all 1996 vacation."'^^ Thus, the court agreed that "[a] clear ambiguity exists as

to whether a portion of the lump sum payment is attributable to salary or other
compensation owed to Hatfield."*^"* The court pointed out another ambiguity by
recognizing that the agreement specifically contemplated payment of other
compensation even though it stated that the agreement constituted the fiill and

final resolution of all matters arising out of the employment relationship.^*^ The
court concluded:

[WJhere the provisions of the agreement are ambiguous and Hatfield

testified that she did not understand that the agreement intended to

prevent her from filing a claim for unemployment compensation
benefits, Salin cannot rely upon a public policy argument to enforce its

intended purpose of the agreement.
^^^

In Schoemer v. Hanes & Associates, Inc.}^^ Hanes & Associates ("Hanes")
was the Indiana licensee of Dale Carnegie & Associates ("Carnegie"). Hanes
offered various Carnegie courses on leadership and management. Hanes hired

180. Seeid.?X2-2>.

181. One ofthe issues resolved before the Board was whether Hatfield was laid off or whether

she resigned her position. See id. at 4. The Administrative Law Judge found that she did not

resign, but was laid off due to a lack of work, which is not a disqualifying condition for the denial

of unemployment insurance in Indiana. See id. at 3-4.

182. Mats.
183. Id

184. Id

185. Id

186. Id

187. 693 N.E.2d 1333 (Ind. Ct. App. 1998).



1 999] CONTRACT AND BUSINESS LAW 7 1

3

Schoemer as a training consultant under a contract that provided, in relevant part:

The Training Consultant hereby acknowledges that he/she is an
independent contractor for Hanes & Associates, Inc. . .

.

As an independent contractor, the Training Consultant:
1

.

Is paid strictly on commission;

2. Is considered self-employed, and therefore;

a. Will have no County, State or Federal Income taxes
withheld and must fulfill this obligation himself/herself;

b. Will have no Social Security taxes withheld from his

commission and must fulfill this obligation himself/herself;

c. Will have no State Disability Insurance (SDI) premium
withheld from his commission;

d. Will have no unemployment insurance premium withheld;
[and]

e. Is not covered by the Workers Compensation Act.

3. As an independent contractor, the association with Hanes &
Associates, Inc. can be terminated at will by either party.***

Schoemer received commissions for "paid enrollments."'*^ Any refunds were to
be subtracted from Schoemer' s next pay period. The employment contract also
provided, in relevant part:

In the event of termination, [Schoemer's] final check will be

withheld until all outstanding leads, account files, office supplies,

equipment, training material and/or selling aids are returned to [Hanes].

In the event of termination, either voluntary or involuntary,

[Schoemer] will be paid for all completed enrollments he/she has sold up

to the date oftermination. After that [Schoemer] will be paid only once

more. The final pay will be made at the next regular end-of-the-month
payday which is at least [thirty] days away from [Schoemer's]
termination date. At the final payday, all completed enrollments will be

paid for, as well as the appropriate commission rate on all money
collected for pending enrollments, minus any 'buybacks,' cancellations,

etc. After this final pay, the company will absorb any buybacks,
cancellations, etc., normally charged to [Schoemer] and, likewise, will

get credit for any future monies collected on [Hanes'] pending

enrollments.
* * *

If legal action is necessary to enforce the terms and conditions of this

agreement, . . . [t]he prevailing party in any such action shall be entitled

to recover all costs of suit and reasonable attorney's fees as determined

188. Id. at 1336.

189. Id.



714 INDIANA LAW REVIEW [Vol. 32:687

by the court.
190

On November 18, 1993, Schoemer sold a customer relations training course
to Citizen's Gas. Schoemer subsequently received a commission for the sale. On
December 4, 1993, Hanes terminated its association with Schoemer, which
Schoemer acknowledged on December 7, 1993.^^' Schoemer received his
commission on December 21, 1993. However, in early January 1994, Citizen's
Gas canceled its order and demanded a refund. Hanes immediately gave
Citizen's Gas a refund and then demanded the commission from Schoemer. ^^^

After Schoemer refiised to return the commission, Hanes filed suit, seeking
the reimbursement of the commission from Schoemer. The trial court entered
judgment in favor of Hanes, including an award of attorney fees.^^^ Schoemer
filed a motion to reduce the judgment, which the trial court granted.^^"* Both
parties raised issues in the court of appeals.

Schoemer first argued that he was entitled to the statutory damages
contemplated by Indiana Code section 22-2-5-1 for the alleged nonpayment of
wages. The court disagreed, writing that relief available under section 22-2-5-1

of the Indiana Code is only available to employees and not independent
contractors.'^^ In this case, the court found that Schoemer was an independent
contractor based on the language in the contract that provided that Schoemer was
an independent contractor and would be paid strictly on commissions.'^^

Schoemer next argued that he was entitled to retain the commission paid with
respect to the sale of training courses to Citizen's Gas. Again the court of

appeals disagreed, holding that Schoemer was required to refund the
commission.'^^ The court reasoned that the terms of the contract stated that
"[t]he final pay date will be made at the next regular end-of-the-month payday
which is at least [thirty] days away from [Schoemer' s] termination date."'^*
Thus, because Citizen's Gas canceled its order and demanded a refund before
Schoemer' s final pay date, Schoemer was required under the contract to refund
the commission to Hanes.

'^^

2. Purchase Agreements.—Francis v. Yates^^ is a case in which the court of
appeals addressed whether the right of first refiisal contained in a contract for the

190. Id. at 1336-37.

191. Seeid.2Xmi.

192. See id.

193. See id.

194. See id

195. Id at 1338.

196. Id

197. Id at 1339.

198. Id

1 99. See id. The court addressed whether Schoemer was entitled to additional compensation

and Hanes' cross-appeal concerning their right to amend pleadings to conform to the evidence. Id.

at 1339-40.

200. 700 N.E.2d 504 (Ind. Ct. App. 1998).



1 999] CONTRACT AND BUSINESS LAW 7 1

5

purchase and sale of real property violated the rule against perpetuities, thus

rendering the contract void. Helen Yates ("Yates"), the owner of land in
Bloomington, entered into a written agreement for the sale and purchase of such

land with Donald Francis ("Francis"). The agreement described the three tracts

of land to be sold and the purchase price. The terms of the agreement also gave
Francis the option to purchase a fourth tract of land.^°^ The details of the option
were contained in a section ofthe agreement entitled "Option with Right of First

Refusal to Purchase Real Property Part of Offer and Option to Purchase Real

Property."^^^ The option was effective for shortly over one year from the date of

the execution ofthe agreement. The agreement contained a clause that provided:

This option and the contract resulting from the exercise thereof shall

bind and inure to the benefit of the heirs, administrators, executors,

successors, and assigns ofthe respective parties. All rights of Purchaser

hereunder may be assigned without restriction, but notice of each
assignment shall be given in writing to Seller.^^^

Francis purchased the first three tracts in a timely manner. However, after

over nine years had passed without Francis having exercised his option to

purchase the fourth tract,^°'* Yates sued Francis, seeking declaratory judgment

that the right of first refusal violated the rule against perpetuities. Yates moved
for summary judgment, which the trial court granted.^°^ Francis appealed. The
court of appeals reversed, concluding that fact issues concerning whether the

term "option" referred to only the option provision or to the right of first

refusal.'^'

On appeal, Francis conceded that the language extending the contract to the
heirs, administrators, executors, successors, and assigns violated the common law
Rule Against Perpetuities because his preemptive right to purchase the fourth

tract attempted a non-donative transfer of a non-vested property interest.^^^

Francis argued, however, that the extending language applied only to the option

portion of the contract and not the right of first refusal.

After reciting well-settled Indiana law with respect to construction of written

contracts,^^^ the court recognized that the situation before it was one in which the

201. See id. at 505.

202. Id. at 505.

203. Id

204. See id

205. See id.

206. Id at 507.

207. See id at 506.

208. Among the principles the court recognized were: (1) that the construction of written
contracts are questions of law for which summary judgment is particularly appropriate; (2) that if

ambiguity does not exist, then the court will not look beyond the four comers of the document to

determine the parties' intent; (3) that specific words and phrases cannot be read exclusive of other

contractual provisions; (4) that the parties intentions must be determined from the contract read in



716 INDIANA LAW REVIEW [Vol. 32:687

agreement did not unequivocally include "extending language" applicable to the

entire contract.^^^ Rather, the applicable provision reads: "This option and the
contract resulting from the exercise thereof shall bind an inure to the benefit of

the heirs, administrators, executors, successors, and assigns of the respective

parties.
"^'° From such language, it was not apparent to the court whether the

parties intended the word "option" to refer to the option section of the agreement
or if the parties intended the language to apply to both the option and right of

first refusal.

Because the designated materials did not allow the court to determine the
meaning of the term "option" as used in the agreement, the intent of the parties
was unclear.^^^ The court concluded that the contract was ambiguous and that the
ambiguity could only be resolved by facts extrinsic to its four comers.^^^ As
such, summary judgment was inappropriate.

In Salcedo v. Toepp}^^ Dr. Salcedo contracted with Dr. Toepp to purchase
his podiatry practice. The transaction was effected through four written
contracts, including a Purchase Agreement, an Employment Agreement for Dr.
Toepp, and a Lease Agreement. A fifth contract, a written Employment
Agreement, was executed by Dr. Salcedo and Dr„ Toepp's wife so that she could
continue receiving health insurance through the practice.^^"^ Ultimately, litigation

ensued on all of the contracts. A jury trial resulted in verdicts in favor of Dr.
Salcedo on the Purchase Agreement, on Dr. Toepp' s counterclaim on the

Purchase Agreement, and on Ms. Toepp' s claim under her Employment
Agreement, and for Dr. Toepp on the Employment Agreement and on the Lease
Agreement.^^^ The trial court set aside the two verdicts for Dr. Salcedo on the
Purchase Agreement and entered judgment on the remaining verdicts.^^^ Dr.

Salcedo appealed and the Toepps likewise raised several issues for cross-appeal.

The court of appeals reversed and remanded with instructions that the trial court
enter judgment on all of the jury's verdicts.^^^

Much of the appellate opinion concentrates on issues not germane to this
Article.^^^ However, the court's treatment of Ms. Toepp' s claim under the

its entirety; and (5) that courts strive to construe contractual provisions so as to harmonize the

agreement. Id. at 506.

209. Id. at 507.

210. Id

211. Id

in. Id

213. 696 N.E.2d 426 (Ind. Ct. App. 1998).

214. SeeiddXMZ.

215. See id.

216. See id.

1\1. Id

218. The first issue the court addressed involves the propriety of setting aside the verdicts for

Dr. Salcedo under the Purchase Agreement. The issues addressed by the court on that issue are best

left to substantive treatment as a labor/employment matter. Id. at 433-34. Similarly beyond the



1 999] CONTRACT AND BUSINESS LAW 7 1

7

Employment Agreement is interesting and worthy of a brief comment. Ms.
Toepp's Employment Agreement read, in pertinent part:

For all services rendered to [Dr. Salcedo] by [Ms. Toepp], [Dr. Salcedo]

agrees to pay a gross monthly salary of Seven Hundred Dollars, less
withholding and social security taxes. [Dr. Salcedo] will carry health

and life insurance coverage on [Mrs. Salcedo] with the same coverage,
terms and deductibles as is currently being carried by [Dr. Toepp]. . . }^^

Ms. Toepp contended that because Dr. Salcedo owed her $7350 worth of
wages under the Employment Agreement,^^^ the jury's verdict in favor of Dr.
Salcedo was contrary to law. In rejecting the argument, the court pointed out that
the purpose of Ms. Toepp's Employment Agreement was to enable her to
continue her health insurance through the practice. Thus, despite the plain

language of the agreement, the parties never intended or expected that she

perform any services for Dr. Salcedo. "Thus, the jury could reasonably have

concluded that, just as Dr. Salcedo had waived his right to receive services from

[Ms.] Toepp under the contract, [Ms.] Toepp had waived her right to
compensation over and above the health insurance coverage that Dr. Salcedo

provided through the practice."^^^

3. Settlement Agreements.—^In Silkey v. Investors Diversified Services,
Inc.^^^ the court of appeals affirmed the trial court's determination that an

agreement between parties mediating a dispute was enforceable. The Silkeys
sued Investors Diversified Services, Inc. and a broker named Mark Powers
(collectively, "Brokers") for misrepresentation, violations of state securities law,

breach of fiduciary duty, and constructive fraud, all stemming from investments

that did not meet the Silkeys' expectations. The trial court ordered mediation,
which resulted in an oral settlement agreement.^^^ At the mediation, the mediator

recorded a recitation of the terms of the agreement that his office later

transcribed and forwarded to the parties. Counsel for the Brokers prepared a

scope of this Article is the court's resolution of the adequacy of the damage award with respect to

the Employment Agreement. Id. at 434.

219. Mat 430.
220. The amount represented the agreed upon wage rate of $700 per month less amounts

deducted for taxes and health insurance. See id. at 434.

221 . Id. at 435. The court also resolved a dispute about entitlement to attorney fees. Indeed,

both parties asserted that they were entitled to fees; Dr. Salcedo as a prevailing party under the

Purchase Agreement and Dr. Toepp as the prevailing party under the Employment Agreement and

the Lease Agreement for successfully defending against Dr. Salcedo's claim. See id. To resolve

the matter, the court examined all three agreements, ultimately concluding that Dr. Salcedo was

entitled to fees as the prevailing party under the Purchase Agreement and that Dr. Toepp was

entitled to fees under the Lease Agreement. Id. at 436. Dr. Toepp, however, was not entitled to

fees under the Employment Agreement. See id.

111. 690 N.E.2d 329 (Ind. Ct. App. 1997).

223. Seeid.'!s!il'}>\.



718 INDIANA LAW REVIEW [Vol. 32:687

"Settlement Agreement and Mutual General Release" and sent it to the Silkeys
for signature. The Silkeys refused to sign the written agreement and, thereafter,
Brokers filed a "Motion to Enforce Mediation Agreement and Request for
Sanctions."^^*

The trial court found as a matter of fact that the document accurately
reflected the mediation agreement and that the Silkeys simply were attempting

to repudiate the agreement.^^^ The trial court also found that the audio tape
recording was a legally binding form of the agreement that set forth with
reasonable certainty the terms and conditions of the parties' agreement.^^^ The
trial court then directed that the terms of the audio tape recording be reduced to

writing for signature of all parties.^^^

The investors appealed, and the court of appeals affirmed.^^^ The central
issue before the court of appeals was whether the oral agreement reached by the
parties at the conclusion of the mediation was enforceable.^^^ The Silkeys
acknowledged that the parties reached an agreement at the mediation and that it

was reduced to writing. However, they argued that they rescinded their verbal
assent to the terms of the agreement and that the agreement was unenforceable
because they neither signed it, nor filed it with the court.^^^

After an initial examination ofthe purposes ofIndiana's Rules ofAlternative

Dispute Resolution ("ADR rules"), the court concluded that although the ADR
rules control the process of mediation, "the enforcement of any valid agreement

is within the authority of the trial court under the existing law in Indiana."^^^ In

response to the Silkeys' argument that they should not be held to an agreement

about which they changed their minds, the court quickly recognized that such a

rule "would clearly create a disincentive for settlement" and that it would "allow

mediation to serve not as an aid to litigation, but as a separate and additional

impetus for litigation."^^^ The court concluded: "Having found that a settlement
agreement had been reached, the trial court acted within its authority under the

A.D.R. rules and the case law in Indiana in directing the parties to reduce their

agreement to writing and sign and file it with the court."^^^

224. See id.

225. See id.

226. See id.

227. See id.

228. Id

229. /c/. at 331-32.

230. See id. at 332.

231. Id

232. Mat 333.
233. Id. at 334. The court also rejected the Silkeys' argument that the agreement was not

final or binding because it was oral and that it violated the Statute of Frauds. The court initially

recognized that a settlement agreement in Indiana is not required to be in writing. Id. With respect

to the Statute of Frauds issue, the court disagreed with the Silkeys' argument that the agreement

could not be performed within one year of its making: r



1 999] CONTRACT AND BUSINESS LAW 7 1

9

In Indiana State Highway Commission v. Curtis^^* the Suttons owned real
estate adjoining State Road 10 in Jasper County. In 1985, they granted the State

of Indiana an easement for highway drainage work to be performed. In 1988, the

Suttons sued the State and a contractor, alleging that the work had damaged their

property and had resulted in an involuntary taking of their property.^^^ Four days

before trial, counsel for the State contacted counsel for the Suttons to discuss

settlement and advised that a monetary settlement required the governor's

approval, and that any easement over state property required Indiana Department

of Transportation ("INDOT") approval. Ultimately, counsel arrived at an agreed

amount for a monetary settlement from the State and the State's grant of an
easement onto the State's property for the Suttons to install a new septic system.
Counsel for the Suttons faxed a written agreement to counsel for the State, which

he signed and retumed.^^^ Part ofthe agreement granted the Suttons access over

State property, specifically: "[A]ccess through State Road lO's existing guardrail

and any driveway therefrom as described in paragraph five (5) of this agreement

is subject to approval by INDOT."^^^

After the State failed to deliver the money within the agreed forty-five days
or to authorize installation of a septic system, the Suttons filed a motion to

enforce the settlement agreement. The trial court found that the parties entered

into a binding settlement agreement and granted the Suttons' motion to enforce

the settlement. The trail court ordered the State to pay the settlement, permit the

easement for the septic system, and pay attorney's fees to the Suttons.^^^ The
State appealed, and the court of appeals: (1) affirmed the trial court's

enforcement of the agreement; (2) found sufficient evidence to demonstrate an

agreement was reached; and (3) reversed the award of attorney's fees.^^^
The supreme court granted the State's petition to transfer and issued an

opinion reversing the trial court's decision with respect to the enforcement ofthe

agreement.^'*^ The supreme court first concluded that the agreement could not be

held enforceable because the terms of the agreement required INDOT's approval
of the easement provisions and there was no evidence in the record and no

It is possible that the agreement could be fully performed within one year of its making

if the underlying investment were to pay a distribution equal to or greater than the

guarantee amount within the first year. There is no express stipulation between the

parties that the agreement would not be performed within one year.

Id.

234. 704 N.E.2d 1015 (Ind. 1998).

235. Seeid.dX\Q\l.

236. See id.

231. See id.

238. See id

239. Indiana State Highway Comm'n v. Curtis, 695 N.E.2d 143 (Ind. Ct. App. 1998).
240. The supreme court's opinion summarily affirms the court of appeals' decision with

respect to attorney's fees. Curtis, 704 N.E.2d at 1020.



720 INDIANA LAW REVIEW [Vol. 32:687

finding by the trial court to indicate that approval was given or waived.^''^ The
trial court had found that "'it is not equitable for the State to settle a case upon
certain agreements . . . and then some eight months later repudiate the
agreement. '"^^^ The supreme court disagreed, writing:

Failure to gain a required approval is not repudiation of the agreement.

Rather it is insistence on compliance with the terms of the agreement.
"The mere fact that a promise or condition is somewhat harsh or unfair
in its operation is not enough to furnish such an excuse." . . . Because the
condition—approval by the Governor and INDOT—is an essential part
ofthe exchange and there is no evidence of extreme forfeiture or penalty

the condition in this case is not excused. There are obvious public safety

concerns involved in the granting of an easement that affects a safety rail

on a public highway. It is quite reasonable that the contract required that

INDOT approve such an arrangement, and that it be quite specific as to
where and when and how rights under the easement are to be
exercised.^*^

The supfeme court recognized that even in non-public contracts, it is not
uncommon for a settlement agreement to require approval by some agency or
organization for one reason or another. Thus, the court concluded:

[U]pholding the right of a party to insist on such a condition ultimately

facilitates settlement by permitting an agreement to be made with an
enforceable condition, even if the condition is likely to be fulfilled.

Accordingly, as a matter of contract law, because INDOT approval was
required by the settlement, and that approval was not obtained, the
agreement, as to the easement provisions, is not enforceable.^'*'*

With respect to the second issue addressed, the Curtis court agreed with the

State that the governor's approval is required for any compromise of a claim

against the State:

[I]n the area of tort claims we do have a separate body of law—the Tort
Claims Act—^that is applicable only to claims against governmental
entities. . . . [0]nly the Governor has ultimate authority to compromise

a claim. . . . Whatever its objective, the legislature is free to change that

requirement, but unless and until this occurs, the Governor's approval is

required before the State can compromise a tort claim.^'*^

4. Loan Agreement.—^In Bastin v. First Indiana Bank^^^ Janet Bastin

241. Mat 1018.
242. Id.

243. Id. at 1019.

244. Id at 1019-20.

245. Id at 1020.

246. 694 N.E.2d 740 (Ind.Ct.App. 1998).



1 999] CONTRACT AND BUSINESS LAW 72

1

("Bastin") obtained an adjustable rate mortgage loan from First Indiana in the

amount of $23,750. The loan was evidenced by a note and had been serviced by
First Indiana from its inception?*^ The note allowed First Indiana to adjust
Bastin's interest rate on September 1 and March 1 of each year. Attached to the
note was an Adjustable Rate Rider that provided, in relevant part:

The interest rate that I will pay may change on the first day of March,
1985 and on that day every 6th month thereafter. Each date on which my
interest rate could change is called an "Interest Change Date."

* * *

Beginning with the first Interest Change Date, my interest rate will be
based on an Index. The "Index" is the weekly auction average rate for
United States Treasury bills with a maturity of 6 months, as made
available by the Federal Reserve Board. The most recent Index figure
available as of the date 45 days before each Interest Change Date is
called the "Current Index."

* *

Before each Interest Change Date, the Note Holder will calculate my
new interest rate by adding two and 25/lOOths percentage points (2.25%)
to the Current Index. The Note Holder will then round the result of this

addition to the nearest one-eighth of one percentage point (.0125%).

This rounded amount will be my new interest rate and will be effective
on each Interest Change Date and will remain in effect until the next
Interest Change Date.^^*

The sources of the rates are found in the Federal Reserve Board's issuance
of the Statistical Release H.15, which is released each Monday. Other sources
are The Wall Street Journal 2ind an electronic service known as Telerate, which
provides updated information daily .^"^^ When interest rates are rising, the
borrower benefits from a bank's use of either the Telerate or The Wall Street

Journal. When interest rates are falling, the buyer benefits from the H.15.^^°
"From the date of inception of Bastin's [n]ote until sometime in 1987, First

Indiana relied on the index figure as published in The Wall Street Journal
.''^^^

Subsequently, First Indiana began to obtain the index figure from the H.15

publication. First Indiana continued to provide Bastin with interest rate changes.

"However, First Indiana never informed Bastin that it had switched from The

Wall Street Journal to the H.15 publication as the source for the index figure."^^^

Bastin filed suit against First Indiana on behalf of herself and other similarly

situated buyers, alleging that First Indiana charged excessive interest on its

247. See id. at 742.

248. Id.

249. See id.

250. See id at 742-43

251. Id at 743.

252. Id



722 INDIANA LAW REVIEW [Vol. 32:687

loans.^^^ Bastin claimed that First Indiana breached the note because it was using
the H.15 figure, which was not the most recent figure available. Bastin argued
that the bank should have used The Wall Street Journal index. In the alternative,

Bastin argued that even if use ofthe H.15 was proper. First Indiana still breached
the note by previously using The Wall Street Journal as its source for the index
figure.^^"*

The trial court granted First Indiana's cross-motion for summary judgment
and Bastin appealed.^^^ The court of appeals held that the note was not
ambiguous.^^^ The fact that First Indiana interpreted the note differently by
utilizing both the H.15 figure as well as The Wall Street Journal figure did not

mean that the language in the note itselfwas ambiguous. The court reasoned that
it is not bound by an erroneous interpretation placed on the contract by a party.^^^

The fact that the note previously had been interpreted differently did not change
Its meaning.^

The court further wrote that the note's interest rate provision was subject to
only one interpretation.^^^ The word "index" as used in one part of the note was
determined to be the same one as the "Current Index" used in the latter portion
ofthe note.^^° The court reasoned that the note's language did not require First
Indiana to use the index figure as published in The Wall Street Journal or as

published by the Telerate method.^^* Rather, the "Current Index" or "Index" to

be implemented by First Indiana was to be the "most recent index figure" that
was "made available by the Federal Reserve Board."^^^ Despite the availability
of the weekly auction average through various secondary sources, the court

agreed that the note clearly permitted First Indiana to use the index figure that

was made available by the Federal Reserve Board.^^^
5. Agreement Between Spouses,—^In Pond v. Pond^^ the Supreme Court of

Indiana addressed an interesting situation in which a husband and wife executed

an agreement after the husband filed a petition for legal separation, but before the

wife filed a petition for dissolution. The focus ofthe agreement was the division
of marital property. The document recites that the parties were married at the
time ofthe signing, that the husband had filed a petition for legal separation, and

253. See id.

254. See id.

255. See id.

256. Id at 747.

257. Id at 745.

258. See id.

259. Id at 746.

260. See id

261. Id

262. Id

263. Id

264. 700 N.E.2d 1130 (Ind. 1998)



1 999] CONTRACT AND BUSINESS LAW 723

that the husband would attend counseling sessions.^^^ According to the

agreement's terms, the husband's failure to attend counseling would void the

agreement. Also part of the agreement was that the parties relinquished claims
for temporary or permanent spousal support and all statutory inheritance rights.

Finally, "the agreement include[d] a clause purporting to allocate certain attorney

fees and contain[ed] a severability clause that declare[d] the remainder of the

agreement to be enforceable if any portion [was] adjudged to be invalid,

unlav^l, or void."^^^

The attorney's fees clause provided: "In the event an attack by one party as

to the validity ofthis agreement is unsuccessful, the party initiating such action

shall be responsible for all attorney's fees and costs incurred by both parties in

the prosecution or defense of such action."^^^

The trial court approved the parties' agreement except for the attorney's fees
paragraph, which it held to be unconscionable.^^^ Instead, the trial court ordered

the husband to pay a substantial portion of the wife's attorney fees.^^^ The court
of appeals affirmed that decision without addressing whether the agreement was
a reconciliation agreement, but reversed and remanded on other grounds.

^^°

The Supreme Court of Indiana granted transfer and affirmed the trial court's
decision to treat the agreement as a settlement agreement, but reversed the trial

court's decision not to enforce the attorney's fees provision.^^' Before the

supreme court, the husband contended that the agreement was a reconciliation
agreement, which, he argued, the court should strictly enforce in the same
manner as an antenuptial agreement. The wife countered that the agreement
should be construed as a dissolution settlement agreement, which would allow
the trial court to partially enforce or to modify it under Indiana Code section 31-
1-11. 5- 10, part of the Indiana Dissolution of Marriage Act (the "Act").^^^

The supreme court found that the parties' agreement was not a reconciliation
agreement and should not be treated as an antenuptial agreement.^^^ Instead, the

court pronounced that the agreement "clearly" fell within the ambit of the Act:

This agreement was formed between the parties to a marriage, and its
substance was directed at the amicable settlement of 'disputes that have
arisen or may arise . . . attendant upon the dissolution of their marriage.'
. . . The agreement was signed after the husband had commenced
proceedings pursuant to the Act. The trial court did not err in construing

265. See id. at 1134.

266. Id.

267. Mat 1135-36.
268. See id at 1134.

269. See id. at 1136.

270. Marriage of Pond, 676 N.E.2d 401, 408-09, 412-13 (Ind. Ct. App. 1997).

271. PoAiflf, 700N.E.2datll37.

272. See id. at 1132.

273. /c^. at 1135.



724 INDIANA LAW REVIEW [Vol. 32:687

the parties' agreement in accordance with the Act
274

With respect to the attorney's fees paragraph, the husband argued that the
general principles of contract law require enforcement of the paragraph unless

the contract is contrary to law or public policy. Although the court wrote that a
contract for attorney fees is, as a general rule, enforceable according to its terms

unless contrary to law or public policy, the court also pointed out that Indiana

courts are not bound to accept every proffered settlement.^^^ "In reviewing a
settlement agreement, a court should concern itself only with fraud, duress, and

other imperfections of consent, or with manifest inequities, particularly those

deriving from great disparities in bargaining power."^^^

The trial cOurt had refused to enforce the attorney's fees clause because it
would have caused an economic impossibility to anyone but the husband to
challenge the agreement, and because the court was concerned about the disparity
of income between the parties.^^^ According to the Pond court, such reasons "are
insufficient to establish fraud, duress, other imperfections of consent, or manifest

inequities."^^^ Thus, the court reversed the trial court to the extent that the

judgment of dissolution rejected and refused to enforce the attorney's fees
clause.

^^^

6. Construction Agreements.—^In Indiana Erectors, Inc. v. Trustees of
Indiana University,^^^ the facts of the case were not disputed. In December of
1990, Indiana University (the "University") contracted with a general contractor,

which general contractor contracted with a subcontractor ("SCI"), which
subcontractor in turn entered into a subcontract with Indiana Erectors, Inc.

("Erectors") for the renovation of the Student Building on the Bloomington,

Indiana campus. On December 17, 1990, employees of Erectors caused a fire
that damaged the Student Building.^*^ The University's general insurance carrier,
the Allendale Mutual Insurance Company ("Allendale") paid the University
approximately $1.9 million for the loss. No additional insurance policy had been
obtained to cover the renovation of the Student Building and none of the

contractors or subcontractors were specifically named as insureds in the
Allendale policy.^^^ Allendale brought an insurance subrogation action in the

name of the University against Erectors, seeking damages under alternative

274. Id.

275. /^. at 1136.

276. Id. (citing Voigt v. Voigt, 670 N.E.2d 1271, 1278 (Ind. 1996)). Citing Voigt, the court

was quick to add that "the power to disapprove a settlement agreement must be exercised with great

restraint. A trial judge should not reject such agreements just because she believes she could draft
a better one." Id.

111. Seeidaiim.
278. Id

279. Id

280. 686 N.E.2d 878 (Ind. Ct. App. 1997).

281. SeeidatS19.

282. See id.



1999] CONTRACT AND BUSINESS LAW 725

theories of negligence and breach of the SCI/Erectors contract, of which the

University was a third party beneficiary.^^^ At trial, the jury returned a verdict
in favor of the University in the amount of $1.9 million?^"* "The amount of the
verdict/judgment reveals that the judgment was based on a breach of contract
theory."^^^

The first issue addressed by the court was whether Erectors was an intended
insured of the Allendale policy. Citing LeMaster Steel Erectors, Inc. v. Reliance

Insurance Co.^^^ the court noted that when a party agrees to purchase insurance
for the benefit of both parties to the contract, the first party in effect agrees to

waive the intended insured's liabiHty.^^^ Thus, the first party would be precluded

from bringing an action against the intended insured for any matter that was to
be insured from, regardless of the fault of the intended insured.^^^ Erectors

asserted that it was entitled to judgment as a matter of law because it had been
an intended insured under the interdependent, contractual relations between the

University, its general contractor and the subcontractors. The trial court
determined that Erectors was not an intended insured under the Allendale
policy.^^^ Accordingly, the trial court denied Erector's Motion for Summary
Judgment.^'"

The trial court determined whether Erectors was an intended insured of the
Allendale policy by reviewing the Construction Contract (the "Contracf

)

between the University and its general contractor. Article 1 1 of the Contract

governed insurance and stated that: "'Owner shall maintain during the course of
construction, Builder's Risk Insurance . . . The insured shall be the Owner and
the Contractor(s) as their interests may appear . . . .'"^^^ Erectors argued that it
was an intended insured as one of the "Contractors" involved in the project.

The court disagreed. In reviewing Article 4. 1 . 1 .2 of the Contract, the court
noted that the term "Contractor" was defined as "all of the Prime Contractors,
unless reference is made to the intended specific Prime Contractor."^^^ Article
4.1.1.1. of the Contact identified the "Prime Contractors" as the "General

283. 5'ee /flf. at 879-80.

284. See id. at 880.

285. Id. This proposition is based on the Indiana Erectors court's observation that the jury,

in its verdict forms, "had reduced [the University's] recovery under its negligence theory by 25%
(representing fauh allocated to [the University]) producing a verdict in the amount of $1,425

million." Id

286. 546N.E.2d 313, 316-17 (Ind. Ct. App. 1989)

287. Indiana Erectors, 686 N.E.2d at 880.

288. See LeMaster Steel Erectors, 546 N.E.2d at 3 1 7.

289. See Indiana Erectors, 686 N.E.2d at 882.

290. See id. at 880.

291. Id. at 881 (quoting contract between the parties) (emphasis added by court). The

Contract was a standard form construction contact. Article 1 1 of this form had been deleted and

replaced with typewritten terms. Id.

292. Id.



726 INDIANA LAW REVIEW [Vol. 32:687

Contractor," the "Mechanical Contractor" and the "Electrical Contractor."^^^

This was significant, given that the University had hired a general, a mechanical,
and an electrical contractor.^^"* In addition, the court noted that the term
"Subcontractor" was defined under Article 5.1.1. as "a person or entity who has
a direct contract with the Contractor to perform any of the Work at the site."^^^
Additionally, Article 5.2.4 provided that "nothing in this Contract shall create

any contractual relation between any subcontractor and the Owner."^^^

Based on the above articles, the court concluded that the term
"Contractor(s)" unambiguously referred only to the Prime Contractor, but did not

include subcontractors.^^^ The court then compared the case to LeMaster^^^ in
that under the unambiguous language of Article 1 1 of the Contract, the general
contractor was an intended insured but the subcontractor was not. Thus, the
insurance subrogation could properly proceed against the subcontractor.^^ Thus,

the court affirmed the trial court's denial of Erector's motion for summary
judgment.^^° Under the reasoning of the LeMaster case, the court refuted
Erector's argument that its contract with SCI and SCI's subcontract with the
general contractor gave rise to legitimate expectation on Erector's behalf that it
was an intended insured under the University's construction contract. As in
LeMaster, "[njeither [the] owner nor the owner's insurer can be bound by any
subcontract to which neither was party."^^^

E. Repudiation/Mutual Mistake ofFact

In Jay County Rural Electric Membership Corp. v. Wabash Valley Power
Ass 'n,^^^ Jay County Rural Electric Membership Corp. ("Jay County"), a rural
electric membership corporation that purchased wholesale electricity for

s.

293. Id

294. Paragraph 4. 1 . 1 . 1 . provides "the work of this Project has l?^en divided into the following

parts, for which there will be separate, prime contractors as indicated below: 1) General

Construction work, by the General Contractor, 2) Mechanical Construction work, by the

Mechanical Contractor, 3) Electrical Construction work by the Electrical Contractor and 4) Other."

Id

295. Id

296. Id

297. Id

298. LeMaster Steel Erectors, Inc. v. Reliance Ins. Co., 546 N.E.2d 313, 317-20 (Ind. Ct.

App. 1989).

299. See Indiana Erectors, 686 N.E.2d at 88 1 . The court noted that because Article 1 1 of the

standard construction contract had been revised, the court's holding in South Tippecanoe School

Building Corp. v. Shambaugh & Son, Inc., 395 N.E.2d 320 (1979), where the court held that the
subcontractor was an intended beneficiary under the construction contract, was inapplicable.

Indiana Erectors, 686 N.E.2d at 88 1 -82.

300. Indiana Erectors, 686 N.E.2d at 882.

301. Id

302. 692N.E.2d905(Ind.Ct. App. 1998). e



1 999] CONTRACT AND BUSINESS LAW 727

distribution, sued the Wabash Valley Power Association ("WVPA"), an electric
generation and transmission cooperative, as well as the Kosciusko County
REMC. In 1977, Jay County became a member of the WVPA by signing an all-
requirements wholesale power supply contract. The contract required Jay
County to purchase all of its power and energy requirements for its system from
WVPA.'"'

In December of 1996, Jay County sent notices purporting to withdraw its
membership in the WVPA and to terminate the all-requirements contract with
WVPA. Jay County then filed suit against the WVPA, seeking that the trial court
declare its withdrawal and termination valid-^^"* "It also negotiated a contract

with Cinergy that would guarantee better prices for electricity."^^^ WVPA moved
for a temporary restraining order and preliminary injunction to require Jay

County to purchase its electricity exclusively from WVPA during the pendency
of the litigation. The trial court issued the injunction, and Jay County timely
initiated an interlocutory appeal.^^^

When determining whether the trial court erred in issuing the injunction, one
of the factors the Jay County court examined was the likelihood of success at
trial.

^°^ In that context, Jay County offered three arguments in support of its

contention that it likely would have succeeded at trial, the first two ofwhich were

anticipatory repudiation and mutual mistake.^^^ Jay County first argued that

WVPA repudiated its contract when it notified Jay County of its desire to merge
with another cooperative, Hoosier Energy. On that issue, the trial court found
that WVPA began having conversations with Hoosier Energy in late 1996 about
the possibility of merger.^^^ In February 1997, Jay County was informed that
WVPA and Hoosier Energy would consider merger at their February board
meetings. Before the board meetings, Jay County decided to formally terminate

its corporate and contractual relationship with WVPA.
The trial court, therefore, concluded that at the time Jay County treated the

all-requirements contract as terminated, WVPA had not communicated a
positive, absolute, and unconditional repudiation of the contract, and ultimately

concluded that there was a likelihood that WVPA would prevail at trial on this
issue.^^° According to the court of appeals:

The trial court was well within its discretion in so concluding, as
questions remain as to whether (1) Jay County prematurely reacted to
WVPA's preliminary statements of intent to merge; (2) whether a merger

303. See id. dX 90%.

304. See id.

305. Id

306. See id at 907.

307. Id at 909.

308. See id. at 910. Jay County also argued that the WVPA failed to comply with statutory
preconditions for conducting business. Id. The third factor is beyond the scope of this Article.

309. Seeid2X9\\.

310. See id.



728 INDIANA LAW REVIEW [Vol. 32:687

would actually constitute a repudiation of the all-requirements contract;
and (3) whether Jay County read 'repudiation' into WVPA's intentions
because it wanted out of the contract in order to preserve its more
favorable contract with Cinergy.^"

The Jay County court next turned its attention to Jay County's mistake of fact
argument. "Jay County argue[d] that a material feature of the all-requirements
contract was both parties' understanding that WVPA's involvement in [the
Marble Hill nuclear power facility] would result in more reliable and economical
power, an understanding that constituted a mutual mistake."^ *^ On that issue, the
trial court found that, at the time it entered into the contract, the Jay County
Board understood that the contract was a long-term commitment that obligated
Jay County to purchase its total requirements from WVPA regardless of whether
WVPA ever received power from Marble Hill.^^^ The trial court also found that
the investment in Marble Hill, like many investments, was risky and that the
doctrine of mutual mistake did not apply.^^"^ Thus, the trial court concluded that

there was a likelihood that WVPA would prevail at trial.^^^ In affirming that
decision, the court of appeals simply held that "the [trial] court's conclusions

were well within its discretion."^
'^

F. Rescission

1. Rescissionfor Fraud.—^In Drudge v. Brandt^^^ Louise Drudge ("Drudge")
sued her daughter, Jean Brandt ("Brandt") for alleged breach of contract and

constructive fraud. The dispute arouse out oftwo separate events. First, Drudge
advanced to Brandt approximately $50,000 so that Brandt could buy a new home
in Indiana. Drudge contended that she advanced the funds with the

understanding that Brandt would pay her back when Brandt's home in Florida
sold.^^^ A few months later. Drudge agreed to transfer money into an annuity that
was placed in Brandt's name. In exchange, Brandt agreed to pay the interest
income on the annuity to Dredge. According to Drudge, Brandt did not repay the

advancement even after she sold her Florida home and Brandt failed to pay her
the interest income from the annuity as promised. As a result, "Drudge claimed
that Brandt's actions constituted a breach of contract as well as constructive

311. Id. The court also addressed Jay County's argument that the trial court erred in

determining that WVPA provided the "adequate assurance of performance" required by section 26-
1-2-609 of the Indiana Code. Id. Because that issue is more appropriately addressed in the

commercial law survey, it is beyond the scope of full treatment here.

312. Mat 912.
313. See id.

314. See id

315. Seeiddi!i9\\.

316. Id at 912.

3 1 7. 698 N.E.2d 1 245 (Ind. Ct. App. 1 998).

318. See id at 1246.



1 999] CONTRACT AND BUSINESS LAW 729

fraud."'^'

Brandt denied that she took advantage of Drudge. She admitted that Drudge

had given her money to buy her home in Indiana and that she originally agreed
to repay Drudge when she sold her house in Florida, but claimed that the parties
later modified the agreement.^^° Brandt also "denied that there was any
agreement to pay the interest income from the annuity to Drudge."^^^

The trial court entered judgment for Drudge, declaring that all interest
payments on the annuity were for Drudge's benefit and could be paid directly to

her, but refusing to allow Drudge to rescind the agreement and recover the
principal amount of the annuity.^^^ The first of the two issues Drudge appealed

was whether the trial court erred in failing to order that the agreement pertaining
to the annuity be rescinded and the annuity transferred to her.^^^ Drudge relied

on three cases in support of her position, Dowell v. Jolly^^^ Tibbetts v. Krall^^^

and Cree v. Sherfy?^^ All three "cases involv[ed] aged or infirm persons who
transferred land to others in exchange for an agreement to provide care and

maintenance during the transferor's lifetime."^^^

The Drudge court was not persuaded by the foregoing cases, concluding that

they did not compel rescission of the agreement.^^* The court reasoned and
concluded:

First, the property transferred in this case was not land. Rather, it was
money used to purchase an annuity in Brandt's name. Second, the
transfers of land in the earlier cases were in exchange for agreements to

provide personal services to the transferor, and not merely the repayment

of accrued interest on an annuity. Because of the unique character of

both land and the provision of personal care and maintenance to an aged

and infirm person as consideration for the transfer of such property,

rescission as the only practical remedy to be afforded in the event of a

breach. . . . Here, neither the property conveyed, i.e., money with which
to purchase an annuity, nor the property promised in exchange, i.e., the

accrued interest on the annuity during Drudge's lifetime, were unique.

319. Id.

320. See id. at 1247.

321. Id

322. See id. at 1249. The trial court also refused to impose a constructive trust. See id. at

1250.

323. See id. at 1248-49. The second issue the court of appeals addressed was whether the

trial court erred in not finding that Brandt had committed constructive fraud and in not ordering that

the annuity be placed in a constructive trust. The court of appeals affirmed on both issues. Id. at

1249-50, 1250.

324. 159 N.E.2d 590 (Ind. App. 1959).

325. 145 N.E.2d 577 (Ind. App. 1957).

326. 37N.E. 787 (Ind. 1894).

327. Drudge, 698 N.E.2d at 1249.

328. Id



730 INDIANA LAW REVIEW [Vol. 32:687

Under the circumstances presented in this case, we cannot say that the
judgment entered by the trial court is contrary to law or that the trial
court erred in failing to grant a rescission of the contract.^^^

2. Rescissionfor Failure to Meet Conditions Precedent andSubsequent.—^In
Harrington Management Co. v. Paul E. Draper Family, Ltd. Partnership^^^ the
parties entered into a written Purchase Agreement under which Draper agreed to
sell a parcel of commercial real estate to Barrington. The Purchase Agreement
provided that "[t]ime is of the essence of this Contract" and an Addendum also
noted that "[t]ime is important."^^^ The closing was to take place after all
conditions had been satisfied or waived. The Addendum also provided that a
condition of the offer was that utilities, city water, electric, gas, and storm
drainage were available to the property line and were in adequate supply and
capacity to serve the development. The agreement gave the purchaser 1 80 days
from the date of the agreement to satisfy or waive the condition.^^^

Barrington experienced delays in satisfying the condition because it had

problems obtaining the land use and drainage approvals necessary to develop the

property. The parties agreed to extend the period in which Barrington could
satisfy or waive the condition. Barrington requested a second extension, but

Draper refused.^" Barrington then demanded that Draper close the transaction
and forward the closing documents. Draper refused to close and filed suit,

requesting that the Purchase Agreement be rescinded to enable it to sell the real

estate to another purchaser. Barrington counterclaimed, requesting specific

performance.""* The parties agreed to disposition by "summary proceedings,"
after which the trial court entered judgment in Draper's favor, thereby granting

rescission of the Purchase Agreement and that Draper could retain the earnest

money deposit."^ Barrington appealed.
On appeal, Barrington argued that Draper breached the Purchase Agreement

by refusing to close the transaction and that the trial court erred by considering

parol evidence on the issue ofwhether the land use and drainage approvals were

a condition constituting a material part of the consideration benefitting Draper

that could not be waived."^ The court of appeals disagreed, pointing out that it
could affirm the trial court's judgment notwithstanding consideration of parol

evidence because the trial court also found that Draper was entitled to rescind the
Purchase Agreement upon the failure of a condition subsequent (the expiration
of the time allotted for Barrington to satisfy or waive the condition regarding the

329. Id. at 1250.

330. 695 N.E.2d 135 (Ind. Ct. App. 1998),

331. Id. at 138.

332. See id. at 142.

333. See id. at 139.

334. See id.

335. See id.

336. See id. at 141.



1 999] CONTRACT AND BUSINESS LAW 73

1

procurement of land use and drainage approvals).^^^ Citing favorably both the

"time of the essence" provisions in the Purchase Agreement and Dvorak v.
Christ,^^^ the court held that the Purchase Agreement became legally defunct

once the time period of the parties' first extension expired.^^^ Thus, the trial

court did not abuse its equitable discretion when it granted Draper's request for
rescission.^"**^

Because Indiana law requires that the party seeking rescission of a contract

must return the defaulting party to the status quo, the court of appeals determined

that Draper had to return the earnest money paid under the contract.^"* ^

Accordingly, the court reversed that portion of the trial court's decision allowing

Draper to retain the earnest money.
^*^

G. Breach/Damages

Judge Staton's opinion in Bee Window, Inc. v. Stough Enterprises, Inc}^^

addresses a single issue under Indiana law: Whether a party breached a written

services contract. Bee Window entered into an agreement with Stough
Enterprises, the management corporation for Indianapolis Blood Plasma, Inc.
(collectively, "Stough"), whereby Bee Window would ftimish and install twenty-
three windows and perform incidental work at the Blood Plasma building located
on North Capitol Avenue in Indianapolis.

^'*'*

Bee Window fabricated the windows on site using raw materials including
lumber, glass, and vinyl framing material received from a supplier. The vinyl
material proved unsuitable. "[T]he windows rattled, leaked, and deflected
inward and outward up to seven inches during windstorms."^"*^ Stough

complained to Bee Window and withheld final payment. Bee Window failed to
cure the problem and Stough sued Bee Window for breach of contract.^"*^ After
a bench trial, the trial judge awarded Stough damages and denied Bee Window's
motion to correct error. Bee Window appealed.^'*^ The court of appeals
affirmed.'^'

The first of the two issues Bee Window raised was whether the trial court's

337. Id.

338. 692 N.E.2d 920, 924 (Ind. Ct. App. 1998). See supra note 6 and accompanying text.

339. Barrington Management, 695 N.E.2d at 141.

340. See id. at 142.

341. Id

342. Id. The court next addressed the issue of attorneys fees, id. at 142-43, this Article does

not address this issue in detail.

343. 698 N.E.2d 328 (Ind. Ct. App. 1998).

344. See id. at 329.

345. Id

346. See id.

347. See id

348. Id.



732 INDIANA LAW REVIEW [Vol. 32:687

determination that Bee Window breached its contract was clearly erroneous.^'^^

With respect to that issue, Bee Window relied on the case of Millner v.
Mumbry,^^^ a case in which the plaintiff, who claimed to be an engineer,
developed his own plans and specifications for a "berm house."^^^ Those
specifications were written into the agreement and the defendant, a concrete

contractor, poured concrete walls in accordance with the plaintiffs plans. After

completion ofthe house, the walls began to develop cracks and the plaintiff sued.

The Millner trial court found for the contractor and the court of appeals affirmed
because it would not require the contractor to pay for doing exactly what the
plaintiff required.^^^

The Bee Window court distinguished Millner on its facts because Stough did
not supply the specifications for constructing the windows.^^^ "Stough specified

only that [they] retain an aesthetic vertical and horizontal pattem."^^"* The court
concluded:

In this case, the parties agreed that Bee Window would provide
windows for twenty-three openings. Inherent in that agreement was an
understanding that the windows would function as windows. Yet the
record indicates they leaked rain, deflected inward and outward with

changes in air pressure, failed to meet building code regulations and,

more compelling, created a serious threat to life because they could
explode or implode into razor-sharp pieces of glass. The trial court's
ruling that Bee Window breached its contract with Stough is not clearly
erroneous.

^^^

349. The second ofthe two issues on appeal concerned whether the $45,615 damage award

was within the scope of the evidence. See id. On that issue, the Bee Window court could not agree

that the conclusion was erroneous. Id. at 330-3 1 . The trial court arrived at the damage award by

subtracting the amount Stough initially refused to pay Bee Window for the original work from the

lowest bid to remove and replace the window system. The trial court concluded that the existing

windows Bee Window installed had no value and, in fact, subjected Stough to "'the threat of

tremendous tort liability [.]'" Id. at 330-3 1 (quoting the trial court).

350. 599 N.E.2d 627 (Ind. Ct. App. 1992).

351. According to the Bee Window court's description, a "berm house" is a structure built

into embanked earth. Bee Window, 698 N.E.2d at 330.

352. See id.

353. Id

354. Id. Bee Window recommended a vinyl window frame that would perform better than

aluminum. Bee Window also contended that it installed the windows in conformance with specific

design specifications provided by a third party supplier/manufacturer and agreed to by Stough. See

id. The court of appeals wrote that the trial court was free to accept or reject Bee Window's

testimony regarding the existence and compliance with a specific design. In either event, the court

of appeals concluded, "Stough did not develop technical expertise." Id.

355. Id



1999] CONTRACT AND BUSINESS LAW 733

In Holloway v. Bob Evans Farms, Inc.^^^ Dorothy Holloway ("Holloway")
sued Bob Evans Farms, Inc. ("Bob Evans") and Norpac Foods, Inc. ("Norpac")
in negligence and breach of contract after finding a worm in her meal while
eating at a Bob Evans restaurant. Norpac supplied the frozen vegetables in which
the worm was allegedly found. The trial court granted both Bob Evans's and
Norpac's motions for summary judgment.^^^ The court of appeals reversed in
part and affirmed in part.^^^

The first issue the court ofappeals addressed was a procedural one: Whether

Holloway' s complaint sufficiently asserted a breach of contract claim under

Indiana's notice pleading practice.^^^ Count I of Holloway's complaint provided

in relevant part:

9. Bob Evans knowingly invited [Holloway] into its restaurant and
expressly offered by its menu and staff to prepare and deliver to
[Holloway] wholesome food in return for a price set by which [she]

agreed to pay.

1 0. Norpac knowingly delivered frozen food products to Bob Evans with
the intention that the same be prepared and sold to the public who
were invitees to Bob Evans.

1 1

.

Bob Evans recklessly and negligently failed to exercise reasonable
care in the preparation of the food ordered by [Holloway], and

Norpac negligently packaged the food products sold to [her].

12. As a direct and proximate result of [bob Evans's and Norpac's]
negligence and failure to exercise reasonable care, [Holloway]

suffered injury to her person of a continuing nature and out-of-

pocket losses as hereinabove set forth.^^^

According to the Holloway court, the above-cited passage sounded in both

tort and contract. The court determined that Paragraph 9 sufficiently alleged, per
Rule 8 of the Indiana Rules of Trial Procedure, an offer, acceptance, and

consideration.^^' Further, the court agreed that Paragraph 10 sufficiently alleged

that Norpac breached its obligation to deliver unadulterated frozen food to Bob
Evans.^^2

The court next examined, in turn, both Bob Evans's and Norpac's substantive
claims that Holloway failed to set forth sufficient evidence to justify damages for

356. 695 N.E.2d 991 (Ind. Ct. App. 1998)

357. See id. at 993.

358. Id. at 997.

359. Id at 994.

360. Id

361. Id

362. Id



734 INDIANA LAW REVIEW [Vol. 32:687

breach of contract. Bob Evans argued "that the only damages placed at issue by
Holloway were her emotional distress damages and that such damages are not
recoverable for breach of contract."^^^ The court agreed that emotional distress
damages are not recoverable under a pure breach of contract theory, but that
Holloway sought, in addition to recovery for emotional distress, recovery for her
physical illness, multiple doctor visits, medications, and her absence from

work.^^'* Accordingly, the court reversed the trial court's grant of summary
judgment, concluding that a genuine issue of material fact existed on whether
Bob Evans's breach was a substantial factor that contributed to HoUoway's
aforementioned damages.^^^

Norpac made a similar argument, maintaining that Holloway failed to present
sufficient evidence to support her breach of contract claim with respect to it. The
court agreed, recognizing first that HoUoway's breach of contract claim against
Norpac was based on a third party beneficiary theory.^^ HoUoway's claim failed
because she did not designate any evidence regarding the terms of the contract

between Norpac and Bob Evans, nor did she demonstrate that Norpac or Bob
Evans intended that she receive a benefit by performance of the contract.^^^
Thus, the court determined that the trial court did not err when it granted
summary judgment to Norpac on the breach of contract issue.^^^

Finally, in I.C.C. Protective Coatings, Inc. v. A.E. Staley Manufacturing

Co.,^^^ the facts of which are discussed in detail earlier in this Article,^^^ the

appellate court affirmed a trial court's decision to allow Staley's "principal

process engineer" to offer an opinion that the company "lost 2.6 million pounds
of starch, at a cost of approximately $130,000, due to I.C.C. 's defective

performance."^^^ I.C.C. claimed that evidence of Staley's lost profits was
irrelevant and speculative, and that the employee was incompetent to testify
about lost profits.

According to the court, the Staley employee was familiar with the
manufacturing process and that part of his job required him to estimate the

363. Mat 995.
364. Id. (citing Plummer v. Hollis, 1 1 N.E.2d 140 (Ind. 1937)).

365. Id.

366. Id. The court acknowledged that a third party beneficiary contract in Indiana

exists when: (1) the parties intend to benefit the third party, (2) the contract imposes a

duty on one of the parties in favor of the third party, and (3) the performance of the

terms of the contract renders a direct benefit to the third party intended by the parties

to the contract.

Id. at 995 (citing National Bd. of Examiners for Osteopathic Physicians and Surgeons, Inc.

American Osteopathic Ass'n, 645 N.E.2d 608, 618 (Ind. Ct. App. 1994)).

367. See Holloway, 695 N.E.2d at 996.

368. Id

369. 695 N.E.2d 1030 (Ind. Ct. App. 1998).

370. See supra ?d^\.K.\.

371. I.C.C. Protective Coatings, 695 N.E.2d at 1037.



1 999] CONTRACT AND BUSINESS LAW 73 5

revenue that would be created by a new project to determine whether the project
was cost-effective.^^^ The employee was also familiar with Staley's marketing
and sales procedures. As such, the court was satisfied that he was competent to
testify about lost profits and that his testimony provided a sufficient basis for the

trial court's damage award.^^^ The court also agreed that lost profit evidence was
relevant because I.C.C.'s failure to comply with the specifications set forth in the

agreement forced Staley to delay reactor operations until the work was
corrected.^^"^

H. Choice ofLaw

Indiana appellate courts resolved three cases during the survey period in

which the parties raised choice of law issues in contract disputes, Schaffert v.

Jackson National Life Insurance Co.^^ Cox v. Nichols^^^ and HartfordAccident
& Indemnity Co. v. Dana Corp?^^ All three cases involved construction of
insurance policies and, as such, this limited Article will not treat the underlying

facts or their substantive resolution in detail. They are, however, notable in the
contract context because they each confirm Indiana's "most intimate contacts"^^^

test for choice of law in contract cases involving interpretation of insurance

policies. The "most intimate contacts" test focuses on five factors: (1) place of
contracting; (2) place of negotiation; (3) place of performance; (4) location of

subject matter of contract; (5) domicil, residence, nationality, place of

incorporation and place of business of parties.^^^

372. Id.

373 . Id. In estimating lost profits, the engineer multiplied the number ofpounds of starch that

would have been produced during the delay by the net profit Staley earned per pound of starch. The

court agreed that the evidence supported the damage award. Id.

374. Id

375. 687 N.E.2d 230 (Ind. Ct. App. 1997).

376. 690 N.E.2d 750 (Ind. Ct. App. 1998).

377. 690 N.E.2d 285 (Ind. Ct. App. 1997).

378. The "most intimate contacts" test has been succinctly stated as follows: "The court will

consider all acts of the parties touching the transaction in relation to the several states involved and

will apply the law of that state with which the facts are in most intimate contact.'" Schaffert, 687

N.E.2d at 233 (quoting Eby v. York-Div., Borg-Warner, 455 N.E.2d 623, 626 (Ind. Ct. App. 1983)

(citation omitted)).

379. See Hartford, 690 N.E.2d at 291-94 (utilizing test to resolve whether to apply Ohio or

Indiana law, ultimately determining that application of Indiana law was appropriate); Schaffert, 687

N.E.2d at 232-33 (applying factors to conclude that Illinois law applied rather than Indiana law);

see also RESTATEMENT (Second) of Conflict of Laws § 1 88 ( 1 97 1 ). Although it recognizes the

"most intimate contacts" choice of law test when construing an insurance contract, the court's

opinion in Cox v. Nichols, 690 N.E.2d 750 (Ind. Ct. App. 1998), never sets forth each of the test's

factors in detail. Regardless, because the Cox court ultimately determined that it could not resolve

the choice of law issue solely by looking to the contract itself, the Cox opinion also includes



736 INDIANA LAW REVIEW [Vol. 32:687

II. Survey OF 1998 Indiana Business Law

A. Interest

I. Construction Contracts.—^In Indiana Erectors, Inc. v. Trustees ofIndiana
University,^^^ the facts ofwhich are discussed in detail earlier in this Article,^^^
Erectors appealed the trial court's award of prejudgment interest because the
University had failed to comply with section 34-4-37-1 of the Indiana Code.^^^
Citing the decision of/« re Johnson^^^ the court noted that this statute provided

for new substantive right to tort claimants, enabling such plaintiffs to recover
prejudgment interest as a component of compensatory damages.^^'* The court
also noted that prejudgment interest had been permitted as a component of
contract damages prior to the enactment of section 34-4-37-1 of the Indiana
Code.^*^ Given that the trial court awarded damages based on a breach of
contract theory, the court held that the provisions of section 34-4-37-1 were

inapplicable and affirmed the trial court's award of prejudgment interest.^^^

In Hooker Builders, Inc. v. Smalley^^^ Hooker Builders, Inc. ("Hooker")
entered into an agreement with the Smalleys to construct their residence. After

construction, a dispute arose regarding the amount owed by the Smalleys under
the agreement.^*^ The matter was submitted to an arbitrator, who determined that
the Smalleys owed Hooker the cost of construction plus eight percent, resulting
in an award of $82,571.92 for Hooker. Hooker filed a motion to reconsider,

asking the arbitrator to include interest on the award.^^^ The arbitrator denied
Hooker's request and reaffirmed the arbitrator's award. Hooker then filed a
motion to correct the arbitrator's award in Bartholomew County Superior Court

No. 2. The trial court denied the motion and confirmed the award.^^ Thereafter,

a subcontractor of Hooker's filed a mechanic's lien on the property. The
Smalleys petitioned the court to order Hooker to accept the award of $82,571 .92.

The trial court granted the Smalleys request, ordering the Smalleys to pay the

Indiana's three factor test utilized to determine choice of law in tort cases. Cox, 690 N.E.2d at 752

(citing Hubbard Mfg. Co., Inc. v. Greeson, 515 N.E.2d 1071, 1073 (Ind. 1987)).

380. 686 N.E.2d 878 (Ind. Ct. App. 1997)).

381. Seesupra??ai\.T>.6.

382. Indiana Erectors, 686 N.E.2d at 882.

383. 120 B.R. 461 (Bankr. N.D. Ind. 1990).

384. Indiana Erectors, e^e'^E.l&^iUl.

385. Id (citing Indianapolis Mach., Co. v. Cohen, 378 N.E.2d 93 1, 935 (1978)).

386. Id

387. 691 N.E.2d 1256 (Ind. Ct. App. 1998).

388. See id. at 1257. The Smalleys contended the Hooker was due only the balance of the

estimated contract price while Hooker contended the actual cost of construction controlled. See id.

389. See id.

390. See id.



1999] CONTRACT AND BUSINESS LAW 737

award into the court, which award was eventually delivered to Hooker.^^'
Hooker appealed the trial court's denial of Hooker's motion to correct the

arbitrator's award to include interest.^^ The court noted that an award of interest

is available only if damages are readily ascertainable?^^ Because, Hooker failed

to provide the court with a record of the trial court's proceedings, the court held

that Hooker was not entitled to interest prior to the date ofthe arbitrator's award.
However, because both parties agreed that the arbitrator's award was binding, the
court awarded Hooker interest from the date of the award to the date of the trial

court's judgment.^^"^

2. Tender ofPayment.—^In 4'D Buildings., Inc. v. Palmore^^^ 4-D Buildings,
Inc. ("Builder") brought an action against The Golden Post, Inc. ("Kennel")
requesting foreclosure of a mechanics lien for the construction of a building.

Kennel counterclaimed against Builder claiming defective construction.^^^

"Kennel admitted that it owed the amount secured by the mechanic's lien."^^^
Builder agreed to accept a sum of $4,933.56 from Kennel in exchange for
releasing Kennel from any further accumulation of prejudgment interest.^^^

However, Kennel paid said amount, over Builder's objection, to the trial court.

The trial court ruled that it would hold the payment pending resolution of the
trial.

^^^ The trial court subsequently held that such payment to the court
constituted proper tender by the Kennel to discontinue accumulation of

prejudgment interest.'*^^ Builder appealed.

The 4-D Buildings court noted that the award of prejudgment interest is
based upon the idea that the plaintiff, during the course of litigation, is deprived

of funds and is not made whole unless interest is included in the award.'*^'

391. See id.

392. As a threshold issue, the court rejected the Smalleys' claim that Hooker, by accepting

the award and simultaneously executing a waiver for its receipt, waived the right to bring further

claims. Id. The court's ruling was based on the facts that Hooker accepted the award at the

Smalleys' request to remove the lien and was merely a credit against the ultimate judgment. Id.

393. Id. at 1258 (citing City of Indianapolis v. Twin Lakes Enters., Inc., 568 N.E.2d 1073,

1087 (Ind. Ct. App. 1991) (finding that damages are readily ascertainable where the trier of fact

need not exercise its judgment to determine the amount of damages)).

394. Id. The court awarded further interest from the date of judgment to the date the

Smalleys' paid the amount of the award to the trial court based on section 24-4.6-1-101 of the

Indiana Code. Id.

395. 688 N.E.2d 918 (Ind. Ct. App. 1997).

396. See id. at 920.

397. Id

398. See id.

399. See id

400. See id.

401. Id. (citing Wayne Township v. Lutheran Hosp. of Ft. Wayne, Inc., 590 N.E.2d 1 130,

1 134 (Ind. Ct. App. 1992)).



738 INDIANA LAW REVIEW [Vol. 32:687

However, a proper tender ends any further obligation to pay additional interest.'*^^
The court noted that a proper tender "generally requires full payment of the debt
due, and ifrefused, the tender must be kept open by paying the full amount into
court.'"^^^ Because Kennel did not pay the tendered sum to Builder, Builder did
not receive compensation for deprivation of sums due to Builder. Therefore, the
court held that the tender was improper and did not serve to stem the
accumulation of prejudgment interest."*^

B. Banks and Banking

1. Fiduciary Relationship with Debtors.—^In The Huntington Mortgage Co.
V. DeBrota,^^^ debtors on home mortgage loans originated by The Huntington
Mortgage Company (the "Bank"/^^ brought suit against the Bank for its
collection private mortgage insurance ("PMI").'*^^ The Bank moved for summary
judgment, which was denied by the trial court,'*^^ and then brought an
interlocutory appeal. In its appeal, the Bank requested that the court grant its
summary judgment motion against the debtors' claims for breach of contract,
suppression of material facts, conversion, unjust enrichment, civil conspiracy,

bailment and breach of fiduciary duty.'*^^

In addressing the debtors' breach of contract claim, the court noted that the

mortgage executed by the debtors contained sections requiring the payment of
PMI premiums if payment of such conditions were a requirement for making the
loan.'*^^ In determining whether PMI was a requirement for making the loan, the

402. See id. (citing IND. CODE §§ 26-1 -3.1 -603(c), 34-2-24-1 (1998)).

403. Id. (emphasis in original) (citing iND. CODE § 34-2-24-1 (1998); Maddox v. Wright, 489

N.E.2d 133, 138 (Ind. Ct. App. 1996)).

404. Id. at 921. The court also addressed Builder's appeal of certain damages awarded

Kennel on its counterclaims. Builder claimed that the trial court awarded Kennel damages for

corrective actions that were for items beyond those contained in the agreement for construction

between Builder and Kennel. See id. Thus, Builder argued, the trial court put Kennel into a better

position than it would have been under the contract. While the court agreed with Builder's

argument that an award for contractual damages is limited to the loss actually suffered, it noted that

the additional items were necessitated to cure Builder's breach and therefore were permissible. Id.

at 921-22.

405. 703 N.E.2d 160 (Ind. Ct. App. 1998).

406. The loans subsequently were sold by the Bank to Fannie Mae. See id. at 163.

407. Id. As the court notes, the secondary market requires debtors to pay PMI premiums

when the loan to value ratio for the home mortgage loan is greater than eighty percent. Id. PMI

protects the lender in the event that unpaid balance of a loan is greater than the value of the

mortgaged property at foreclose. See id. at 163 n.3.

408. Id at 163.

409. Id

410. Id. at 164. The court cited the following provision:

Funds for Taxes and Insurance. Subject to applicable law or to a written waiver



1999] CONTRACT AND BUSINESS LAW 739

court reviewed the Bank's commitment letter, which specifically required such
payments."*^* Moreover, the court pointed to the debtors' own testimony, wherein
they admitted that they were aware that PMI would be required for their loan/^^
The court rejected the debtors' argument that the Bank was obligated
contractually to enter into an agreement to discontinue PMI payments based on
the plain meaning of the language in the mortgage permitting cessation of PMI
payments when such requirement ends upon written agreement between a debtor
and the Bank/^^ In addition to disagreeing regarding the "plain meaning" of the

said language, the court further noted that the mortgage stated that PMI
premiums are to be paid "until the Note is paid in full."^^"* The debtor next
argued that the Bank had the right to cancel PMI premiums given that the Fannie
Mae servicing guidelines permit the Bank to cancel such premiums when the loan
to value ratio ofthe loan reaches eighty percent."*'^ The court, however, held that

Fannie Mae's policy places discretion with the lender and confers no rights upon

debtor."*^^ Moreover, the court stated that the debtors' argument ignores the fact

that lenders may desire PMI when the loan to value ratio is less than eighty
percent for high risk borrowers, and that the Bank's policies included criteria for

discontinuance of PMI insurance, such as reappraisal of the mortgaged
property/*^ Therefore, the court held that the Bank had a contractual right to
continue collection of PMI premiums from debtors/^^

by Lender, Borrower shall pay to Lender on the day monthly payments are due under

the Note, until the Note is paid in full, a sum of ("Funds") for : . . . (e) yearly mortgage

insurance premiums, if any; and (f) any sums payable by Borrower to Lender, in

accordance with the provisions of paragraph 8, in lieu of the payments of mortgage

insurance premiums.

* 4t *

Mortgage Insurance. If Lender required mortgage insurance as a condition of

making the loan secured by this Security Instrument, Borrower shall pay the premiums

required to maintain mortgage insurance in effect . . . until the requirement for mortgage

insurance ends in accordance with any written agreement between Borrower and Lender

or applicable law.

Id. at 164.

411. The commitment letter stated: "THIS COMMITMENT IS CONTINGENT UPON THE
CONDITIONS AS NUMBERED BELOW: ... (4) Receipt of mortgage insurance approval by
coverage at 22%, AT TIME OF CLOSING." Id.

412. Id at 165.

413. Id at 164.

414. See supra note 409 and accompanying text.

415. Huntington Mortgage, 703 N.E.2d at 1 65

.

416. Id. at 166 (citing Hinton v. Federal Nat'l Mortgage Ass'n, 945 F. Supp. 1052, 1056,

1059 (S.D.Tex. 1996)).

417. Id

4 1 8. Id. In holding that the Bank had a right to collect the PMI premiums, the court found

it unnecessary to address the debtors' claims for conversion and unjust enrichment. Id.



740 INDIANA LAW REVIEW [Vol. 32:687

The court next considered whether the Bank had a fiduciary duty to debtors,
such that the Bank was obligated to make certain disclosures to debtors."*^^ The
court first noted that, in Indiana, the general rule is that "'the mere existence of
a relationship between parties of bank and customer or depositor does not create

a special relationship of trust and confidence. ""^^° The court noted that, for a
fiduciary relationship between bank and customer to be implied, special
circumstances must exist wherein a weaker, less knowledgeable and/or
dependant party puts confidence in the other, and that party wrongfully abuses

the confidence.^^' The debtors asserted that the Bank's superior knowledge
regarding PMI, control over the premiums and the purchase PMI, and its duties
to provide an accounting for and properly escrow said funds gave rise to a

fiduciary relationship. The court noted, however, that such circumstances exist
in almost every relationship between a lender and a borrower."^^^ The court cited
the Eastern District of Louisiana's holding that although a lender, as an escrow

agent for insurance premiums and taxes, does have certain fiduciary duties to
safeguard and properly disburse funds, such duties do not encompass a duty
secure the lowest premium rate, the best terms, or the best company any more
than the escrow oftax payments imposes a duty to secure lower assessments.

"^^^

Thus, the court held that the debtors had failed to establish special circumstances

that would give rise to a fiduciary relationship."*^"*

2. Wrongful Dishonor.—^In Wells v. Stone City Bank^^^ Wells obtained a
loan from the Stone City Bank (the "Bank") in the amount of $15,000 and
opened a checking account with the Bank, into which the loan proceeds were

419. M at 166-69. Specifically, the debtors alleged
that [the Bank] had a duty to disclose the following: 1) that there was no written

agreement or applicable law which required [the debtors] to pay PMI; 2) the true nature

ofthe purpose and requirements for PMI; 3) the fact that [the debtors] could obtain PMI

from the insurer of their choice; 4) the point at which [the debtors] were no longer

required to pay PMI, if at all; 5) the criteria for discontinuing payment of PMI insurance

premiums; . . . [and that] the premiums for PMI did not decrease as [the debtors] paid

down the principal of the loan.

See id. at 166-67.

420. Id. at 167 (quoting Peoples Trust Bank v. Braun, 443 N.E.2d 875, 879 (Ind. Ct. App.

1983)).

421. Id

422. Id

423. Id. at 167-68 (citing Blair v. Source One Mortgage Servs. Corp., No. CIV.A. 96-2497,

1997 WL 250040, at * 1 1 (E.D. La. May 9, 1997)).
424. See id. at 168. The court dispensed with the civil conspiracy claim because the debtors

failed to raise any action of the Bank with regard to collection of PMI that was unlawful. Id. The

bailment claim was dismissed by the court because it had held the Bank had a right to collect such

PMI premiums and was not required to return said premiums to the debtors. Id. at 169. Therefore,

no bailment had been created.

425. 691 N.E.2d 1246 (Ind. Ct. App. 1998).



1 999] CONTRACT AND BUSINESS LAW 74

1

deposited. Afterwards, Wells wrote three checks totaling $9,534.20, which the

Bank did not honor."^^^ Approximately three years later. Wells sued the Bank for
wrongful dishonor, breach of contract, breach of the duty of good faith, and
fraud, asking for $17.5 million in lost income, punitive damages, costs, and

attorney fees.'*^^ The Bank moved for summary judgment, arguing that Wells'
claims were barred by the two-year statute of limitations for personal injury

claims.'*^^ Wells appealed, contending that his claims sounded in breach of

contract, and therefore were subject to the six-year statute of limitations for

contract claims."*^^

In determining which limitations period applied to Wells' claim, the court

noted that if either oftwo statutes of limitation apply to a claim, any doubt as to

which one to apply should be resolved in favor of applying the longer period.'^^^

Citing Black's Law Dictionary, the court noted that "a tort is a legal wrong to
person or property, independent of contract.

''^^^ However, the relationship

between bank and depositor, particularly with regard to a checking account, is

contractual in nature."*^^ The court noted that Wells did not allege the breach of
any duty in his claim against the Bank outside of the Bank's failure to comply
with the terms of his contract for services."*" The court rejected the Bank's
argument that because some of Wells' claims, such as the claim for damage to
reputation, are generally only available for libel, slander, abuse of process,

malicious prosecution and interference with third party contract, that his claim

was a tort action. The court noted that the reason damage to reputation was
permitted in such claims is because such damages are a foreseeable results of

such torts.'*^'* The court reasoned that a trial court, looking at the facts of this
case, might determine that damage to reputation was a foreseeable result of the
Bank's breach of its contract with Wells."*^^ The court concluded that the
possibility that a particular injury is not a foreseeable result of a particular breach

of contract should not preclude a contract claim just because the consequential

damage sought sounds more appropriately in tort."*^^

426. See id. at 1248.

427. See id.

428. See id; see also IND. CODE § ZAA-l-l (1998).

429. See Wells, 691 N.E.2d at 1248; see also iND. CODE § 34-1-2-1 (1998).

430. Wells, 691 N.E.2d at 1249.

431. Id. (emphasis added by the court) (citing BLACK'S Law DICTIONARY 1489 (6th ed.
1990)).

432. Id

433. Id

434. Id

435. Id

436. Id. at 1250. The court cited Lawyers Title Insurance Corp. v. Pokraka, 595 N.E.2d 244,

247 (Ind. 1992), for the proposition that recovery theories of fraud or breach of oral contract always

involve injury to person or property and that applying the two-year statute of limitations to such

claims would be tantamount to repealing the six-year statute of limitations for fraud and breach of



742 INDIANA LAW REVIEW [Vol. 32:687

The court rejected Wells' claim of fraud in the Bank's misrepresentation that
it would honor Wells' checks by opening an account and accepting his deposit.'*^^
The court observed that fraud requires a misrepresentation of a past or present
fact/^^ However, the court noted that Wells' claims stated a cause of action for
constructive fraud, which does not require a false statement of a past or present
fact/^^ The elements of constructive fraud are: 1) a duty existing by virtue ofthe
relationship between the parties; 2) representations or omissions made in
violation of that duty; 3) reliance thereon by the complaining party; 4) injury to
the complaining party as a proximate result thereof; and 5) the gaining of an

advantage to the duty-bound party to this disadvantage of the complaining

party ."^^ The court held that the Bank's superior position with regard to its
depositors, who depend on the bank to safeguard their ftinds and honor their
checks, imposes a duty on a Bank sufficient for the first element of constructive
fraud.^* The court further held that Wells' allegations satisfied the remaining
elements of constructive fraud."^^ Therefore, the court reversed the trial court's

grant of summary judgment on the allegation of fraud."^^
3. Failure to Abide by Loan Commitment.—In Ohio Valley Plastics v.

National City Bank,"^ a loan officer for National City Bank (the "Bank")
continued to assure the principal of Ohio Valley Plastics, Inc. (the "Borrower")

that the Bank had approved Borrower's request for a line of credit, when, in fact,
the loan request had never been submitted to the Bank's loan committee and had

not been approved. Borrower then brought an action against the Bank for fraud
and promissory estoppel alleging reliance damages including lost business

opportunities, costs in delaying business plans, damage to reputation, stationary
and other costs and increased interest costs due to a higher rate on the loan

Borrower obtained with another lender.'^^ The trial court granted the Bank's

oral contract. Wells, 691 N.E.2d at 1249-50.

437. Id. at 1251.

438. Id. at 1250.

439. Id

440. Id at 1250-51 (citing Mullen v. Cogdell, 643 N.E.2d 390, 401 (Ind. Ct. App. 1994)).

441. Id at 1251. The court declined to determine that the Bank's duty was a fiduciary one,

but the court held that a fiduciary duty is not required for constructive fraud. Id.

.

442. Id. The second criteria is satisfied by the allegation that the Bank breached its duty to

honor Wells' checks, the third by the allegation that Wells relied on the Bank to honor his checks,

the fourth by Wells allegation that he was injured, and the fifth by the allegation that the Bank

gained interest income from the sham transaction. See id.

443. Id. In his dissent. Judge Rucker disagreed with the majority's holding that the cause of

action sounded in contract Id. (Rucker, J., dissenting). Focusing on the substance of the cause of

action, rather than the manner in which it was pleaded. Judge Rucker noted that the claims for

damage to reputation and credibility are for personal injuries, which are properly recoverable in a

tort action. Id. at 1252.

444. 687 N.E.2d 260, 262 (Ind. Ct. App. 1997).

445. See id.



1 999] CONTRACT AND BUSINESS LAW 743

motion for summary judgement based on the Statute of Frauds."*^^
The Borrower appealed, arguing in the alternative that: (i) its claim did not

rise out of a credit agreement but from the Bank's misrepresentations and

therefore the Statute of Frauds does not apply or (ii) even if the Statute of Frauds

does apply, equitable theories of constructive fraud and promissory estoppel

remove the case from the Statute .'^'^^ In addressing the Borrow^er's first

contention, the court noted that "[t]he substance ofan action, rather than its form,

controls whether a particular statute" applies/"*^ The court further noted the
Indiana Supreme Court's admonition in Ball v. Cox^^^ that courts closely adhere

to the Statute of Frauds, less it be rendered impotent/^^ The court held that
Indiana Code section 32-2-1.5-5, which applies to "an action upon an agreement
with a creditor to enter into a new credit agreement,''^^^ applies to all actions
arising out of an agreement of a bank to loan money, whether they be

characterized as breach of contract, fraud, deceit or promissory estoppel/^^

In addressing the Borrower's second contention, the court noted that, based

on Whiteco Industries, Inc. v. Kopani*^^ a claim of fraud or estoppel will not

remove a case from the Statute of Frauds.'*^'* To so rule, the court continued,
would render the statute meaningless as every plaintiff would assert an oral
promise estopped the statute's requirement of a writing."^^^ In order for

promissory estoppel to remove a case from the Statute of Frauds, the plaintiff

must demonstrate the '"infliction of an unjust and unconscionable injury. '"^^^ In

the case at bar, the court held that Borrower's reliance damages did not rise to

that level."*^^ The court went on dismiss the Borrower's claim for constructive
fraud because the Borrower's allegations did not satisfy the requirement that the

Bank gain from its alleged fraud."*^* Lastly, the court distinguished the case of

446. See id. Indiana's Statute of Frauds, IND. Code § 32-2-1.5-5 (1998), provides in part:

"A debtor may bring an action upon an agreement with a creditor to enter into a new credit

agreement . . . only if the agreement: (1) is in writing; (2) sets forth all the material terms and

conditions of the agreement; and (3) is signed by the creditor and debtor."

447. Ohio Valley Plastics, 687 N.E.2d at 263.

448. Id (citing Shideler v. Dwyer, 417 N.E.2d 281, 285-86 (Ind. 1981); INB Nat'l Bank v.

Moran Elec. Serv., Inc., 608 N.E.2d 702, 706 (Ind. Ct. App. 1993)).

449. 7 Ind. 453 (1856).

450. Ohio Valley Plastics, 687 N.E.2d at 263.

451. Ind. Code § 32-2-1-1.5-5 (1998) (emphasis added).

452. Ohio Valley Plastics, 687 N.E.2d at 263-64.

453. 514 N.E.2d 840 (Ind. Ct. App. 1987).

454. Ohio Valley Plastics, 687 N.E.2d at 264.

455. Id (citing Whiteco Indus., 514 N.E.2d at 844).

456. Id. (quoting Whiteco Indus., 514 N.E.2d at 845).

457. Id

458. Id. See supra note 4 1 8 and accompanying text (discussing the elements of constructive

fraud).



744 INDIANA LAW REVIEW [Vol. 32:687

First National Bank v. Logan Manufacturing Co.^^^ wherein the Indiana
Supreme Court did permit a borrower to collect reliance damages for breach of
an oral agreement to loan money, because that case was decided prior to the
effective date of the statute in question.'^^^

4. Conversion of Negotiable Instruments Fraudulently Endorsed by
Fiduciary.—^In UNR-Rohn, Inc. v. Summit Bank ofClinton County,^^^ the court
of appeals addressed whether a bank could be held liable when it cashed
hundreds of checks for an authorized signor on a corporate account, which fiinds

later were determined to be embezzled."^^^ An employee of UNR-Rohn, Inc.
("Depositor") had authorized a certain employee to endorse checks payable to

Depositor. In 1984, the employee began to cash third-party checks at NBD Bank
(the "Bank") payable to Depositor and continued this practice until 1991, by
which time the employee had embezzled approximately $182,000."*^^ Depositor

brought an action against the Bank under Indiana Code section 26-1-3-419*^ for
breach of an alleged duty to deposit said checks to Depositor's account rather

than cash them. The Bank moved for summary judgment based on the Uniform
Fiduciary Act ("UFA")'*^^ and the statute of limitations. The trial court granted
the Bank's motion with regard to the UFA but denied its motion with regard to
the statute of limitations defense."*^^ Both parties appealed.

The court first reviewed Indiana Code sections 30-2-4-4 and 30-2-4-9 and
determined that, if a fiduciary is empowered to endorse checks, the UFA protects
a bank cashing a check endorsed by such fiduciary unless the bank has (i) actual

knowledge that the fiduciary is breaching its duty or (ii) knowledge of sufficient

facts that the bank's action in dealing with such fiduciary is in bad faith."*^^

Although the UFA does not define "bad faith," the court noted that other courts
addressing whether a bank acted with bad faith under the UFA have examined
"'whether it was "commercially" unjustifiable for the payee to disregard and
refuse to learn facts readily available.

'"^^^ Because the Bank was the moving
party, the Bank had the burden of establishing that no genuine issue of material
fact existed with regard to whether it acted in bad faith. The court noted that the

Bank permitted the employee ofDepositor to deposit several hundred corporate
checks into his personal account, yet "merely relied upon general assertions in

459. 577 N.E.2d 949 (Ind. 1991).

460. Ohio Valley Plastics, 687 N.E.2d at 265.

461. 687 N.E.2d 235 (Ind. Ct. App. 1997).

462. Id. at 236-37.

463. See id.

464. Ind. Code § 26-1-3-419 (repealed by P.L. 222-1993, § 58, effective July 1, 1994)

(recodified as amended at Ind. Code § 26-1-3.1-420 (1998)).

465. Ind. Code §§30-2-4-1 to -14 (1998).

466. UNR-Rohn, 687 N.E.2d at 237.

467. Id at 238-39 (citing Ind. Code §§ 30-2-4-4, -9 (1998)).

468. Id at 239 (quoting Appley v. West, 832 F.2d 1021, 1031 (7th Cir. 1987) (stating that

"[a]t some point, obvious circumstances become so cogent that it is 'bad faith' to remain passive").



1 999] CONTRACT AND BUSINESS LAW 745

its pleadings that it acted in good faith and that it lacked any knowledge of any
breach of [the employee's] fiduciary duty."*^^ The court then held that the Bank
did not meet its burden of establishing that no genuine issue of material fact
existed by merely asserting good faith, and reversed the trial court's grant of
summary judgement on this issue/^°

In addressing the Bank's cross appeal for denial of summary judgment, the
court focused on determining the point in time at which the Depositor's cause of

action accrued under Indiana Code section 34-1-2-2*^' for the purpose of
determining whether the statute of limitations had lapsed/^^ The court first noted
that Indiana courts, in determining when a cause of action accrues under Indiana
Code section 34-1-2-2, consistently have applied the discovery rule whereby a
cause action begins accruing at the time the plaintiff knew, or with the exercise

of ordinary diligence, could have discovered that a cause of action against

another has arisen.'*^^ The court concluded that in Indiana, the discovery rule
applies to the accrual ofany tort action."*^"^ The Bank argued that no Indiana court
had applied the discovery rule to a cause of action involving the conversion of

negotiable instruments and cited a litany of cases from other jurisdictions that

declined to apply the discovery rule to Indiana Code section 26-1-3-419.*^^ The
court, however, reasoned that it would be inconsistent with Indiana's system of
jurisprudence to carve out an exception to the discovery rule for tort actions

involving conversion ofnegotiable instruments.'*^^ Therefore, the court remanded

the case to the trial court to apply the discovery rule to the Depositor's cause of

action under Indiana Code section 26-1-3-419 and to determine whether the
Depositor's claims were time barred."*^^

469. Id. at 239.

470. Id.

471. IND. CODE §34-1-2-2 (1998).

472. UNR-Rohn, 687 N.E.2d at 239. The court also noted that both parties agreed that the

two year statute of limitations set forth in Indiana Code section 34-1-2-2(1) (1998) applied to the

Depositor's claims. Id. at 240.

473. Id. at 240 (noting that the discovery rule '"is based on the reasoning that it is

inconsistent with our system ofjurisprudence to require a claimant to bring [a] cause of action'"

before the plaintiff could know, with due diligence, that such cause of action existed).

474. Id (citing Wehling v. Citizens Nat'l Bank, 586 N.E.2d 840, 842-43 (Ind. 1992); Habig

V. Bruning, 613 N.E.2d 61, 64 (Ind. Ct. App. 1993)).

475. The court may have actually meant to refer to U.C.C. 3-419 based upon the court's

reference to this statute in footnote 5. M at 241 & n. 5.
476. Id. at 241 . The court did recognize in a footnote that other jurisdictions had declined

to apply the discovery rule to causes of action under U.C.C. 3-419 in the absence of fraudulent

concealment based on "U.C.C. policies of finality, negotiability and uniformity." Id. at 241 n.5.

477. Id Sit 241.



746 INDIANA LAW REVIEW [Vol. 32:687

C Associations
I. Barring Claims by Members Against Associations.—In Biereichel v.

Smith,'^^^ the court of appeals held that a member of an unincorporated
association could not sue the association for the tortious acts of another member.
In Biereichel, the plaintiff, a member of a union, went to the union's "office to
obtain information regarding work opportunities."*^^ After a discussion with a
union member employed by the union as its business manager/representative, the
plaintiffwas attacked by the union business manager and was severely injured."*^^
The plaintiff filed an action against the union and the union was granted partial
summary judgment by the trial court based "on the general rule in Indiana that
members of an unincorporated association cannot sue the association for the
tortious acts of one or more of its members."**^

On appeal, the plaintiff contended that the court of appeal's recent ruling in
Hanson v. St. Luke 's United Methodisf^^ required the court to reverse the
summary judgment ruling."^^^ In Hanson, the court of appeals carved out an
exception to the general rule and refused to dismiss a lawsuit brought by a
member against her church for injuries she sustained during a fall in the church's
parking lot.'*^ However, because the Indiana Supreme Court had granted transfer
in Hanson, that decision did not constitute binding precedent."*^^ The Biereichel
court then reviewed the supreme court's decision in Calvary Baptist Church v.
Joseph,^^^ which articulated the general rule that "members of an unincorporated
association cannot sue the association for the tortious acts of one or more of its
members."*^^ In Calvary, the supreme court noted that other jurisdictions had

created an exception to this general rule for highly organized and centralized

associations and cited the California Supreme Court's decision in Marshall v.

478. 693 N.E.2d 634, 638 (Ind. Ct. App. 1998).

479. /J. at 635.

480. See id.

481. /^. at 636

482. 682 N.E.2d 1314 (Ind. Ct. App. 1997).

483. Biereichel, 693 N.E.2d at 636.

484. Id.

485. See id.

486. 522 N.E.2d 371 (Ind. 1988).

487. Biereichel, 693 N.E.2d at 636. The court quoted from Calvary the theory behind the

general rule:

[T]he members of an unincorporated association are engaged in a joint enterprise. The

negligence of each member in the prosecution of that enterprise is imputable to each and

every other member so that the member who has suffered damages through the tortious

conduct of another member of the association may not recover from the association for

such damage. It would be akin to the person suing himself as each member becomes

both a principal and an agent as to all other members for the actions of the group itself

Id. (quoting Calvary Baptist Church, 522 N.E.2d at 374-75).



1 999] CONTRACT AND BUSINESS LAW 747

International Longshoremans ' and Warehousemans ' Union^^^ The Biereichel
court noted that, although the Supreme Court in Calvary did recognize the

wisdom of this exception, the Calvary court declined to adopt it."*^^ The
Biereichel court likewise declined to adopt the exception, as it believed that any

abrogation of a general rule of law would be best left to the Indiana Supreme

Court.'''

The plaintiff then argued that the general rule in Indiana should not be
applied when the member committing the tortious conduct was not engaged in
an association activity or joint enterprise/'^ The Biereichel court rejected this

argument finding that the Calvary court did not set out any such requirement for

application of the general rule.'*'^ Finally, the plaintiff argued that summary
judgement was inappropriate because the association manager's acts arguably
were intentional and therefore the general rule set forth in Calvary does not

apply.'^'^ The Biereichel court declined to address this argument because the
plaintiff failed to support this contention with an argument or relevant

authority.'*''* Therefore, the Biereichel court affirmed the trial court's grant of

summary judgment in favor of the defendant union."*'^
In Menard Inc. v. Dage-MTI, Inc.,^^ the court of appeals addressed whether

the president of a corporation could bind the corporation when he did not have
express authority to sell the corporation's property. Dage-MTI, Inc. ("Dage") is

a closely held Indiana corporation whose president was Arthur Sterling
("Sterling")."*'^ Menard, Inc. ("Menard") forwarded a formal offer to Sterling for

the purchase of certain real estate owned by Dage. Sterling circulated the offer
to the Dage directors who had a disfavorable opinion of the sale."*'^ Thus,
Sterling let the offer lapse. Later, Sterling informed Menard's agent that the

Dage board of directors had objected to various provisions contained in the
offer.'"

Subsequently, Menard indicated that it would make a second offer for a

488. 371 P.2d 987 (1962) (recognizing an exception for large international labor unions

satisfying the following "two-part test: (i) whether the association possesses a separate legal

existence from its members, and (ii) whether the members retain direct control over the operations

of the association").

489. Biereichel, 693 N.E.2d at 637.

490. Id.

491. See id.

492. Id. at 637.

493. /^. at 637-38.

494. Id. at 638.

495. Id.

496. 698 N.E.2d 1227, 1229 (Ind. Ct. App. 1998).

497. See id.

498. See id.

499. See id



748 INDIANA LAW REVIEW [Vol. 32:687

larger portion of the real estate.^^° Sterling drafted a resolution that authorized

Sterling to "offer and sell" the real estate. Sterling was told by the board of
directors to revise the resolution to read "offer for sale."^°^ Sterling was ftzrther
informed by the board that he could only offer the real estate to Menard at a
particular price and could not negotiate the terms of a sale without board

acceptance.^^^ When Menard forwarded a second proposal to purchase the real
estate, the agreement contained the same objectionable provisions found in the
first proposal. Nevertheless, Sterling negotiated several minor changes to the

agreement and then signed the revised offer on behalf of Dage without approval
of the board of directors.^^^ The offer included a provision stating that Sterling
was duly authorized to sign the agreement and to bind Dage.^^"* Once the board
of directors became aware ofthe Menard agreement, the board ordered Sterling
to "extricate Dade from the agreement" and retained counsel to put Menard on
notice that the board questioned and intended to contest the agreement's

enforceability.^^^ Menard ultimately filed suit for specific performance against
Dage. The trial court ruled in favor of Dage and Menard appealed.

On appeal, Menard first argued that the trial court erred concluding that
Sterling lacked express authority to sign the agreement.^^ The Menard court
stated a fundamental tenet of agency law that "'an agent has no authority to act

contrary to the known wishes and instructions of his principal. '"^°^ Moreover,
"'an agent is authorized to do [only] what is reasonable for him to infer that the
principal desires him to do in light of the principal's manifestations and the facts

as he knows . . . them or should know them at the time.'"^°^ The Menard court
noted that the resolution drafted by Sterling was specifically altered to change the
language to "offer for sale." Further, the Dage board of directors "informed
Sterling that any offer made by Menard would require board review and
acceptance."^^^ Thus, the Menard court concurred with the trial court's ruling
that Sterling lacked express authority to bind Dage to the terms of Menard's
agreement.^ ^° Menard cited Blairex Laboratories, Inc. v. Globes,^^^ wherein the
court of appeals held that an agent had express authority from its principal

despite the fact that one member ofthe board of directors indicated that he would

500. Id.

501. M at 1229-30.
502. See id. at 1230.

503. See id.

504. See id.

505. Id

506. See id.

507. Id. (quoting Old Security Life Ins. Co. v. Continental III. Nat'l Bank & Trust Co., 740
F.2d 1384, 1391 (7th Cir. 1984)).

508. Id. at 1230-3 1 (quoting RESTATEMENT (SECOND) OF AGENCY § 33 & cmt. a (1957)).
509. /^. at 1231.

510. Id

511. 599N.E.2d233(Ind. CtApp. 1992).



1999] CONTRACT AND BUSINESS LAW 749

like to see the agent enter into a contract with certain provisions which the

contract ultimately did not contain.^*^ The Menard court distinguished Blairex
because the Dage board of directors' expressions were not merely a desire to see
certain terms in the agreement, but rather specific directives that Sterling's

authority was limited only to solicitation of offers.^^^
Menard also argued that the trial court erred in finding that Sterling did not

have apparent authority to enter into a binding agreement.^'"* "Apparent authority

refers to a third party's reasonable beliefthat the principal has authorized the acts

of its agent."^'^ Apparent authority "arises from the principal's indirect or direct

manifestations to a third party, and it cannot arise from the representations or acts

ofthe agent."^^^ Menard relied on Pollas v. Hardware Wholesalers, Inc.^^^ and
related cases for the proposition that the use of Sterling as a sole negotiator was
an indirect manifestation of Sterling's apparent authority. Although a

communication of authority made solely by an agent normally will not result in
apparent authority, the Pollas court held that when a principal "'places an agent
in the position of sole negotiator on [its] behalf, it may be reasonable for a third
person to believe that the agent possesses authority to act for the principal.

'"^'^

However, in Menard, "the trial court concluded that, because Sterling had

informed Menard of his need for board approval before entering into the
agreement . . . , Menard could not have reasonably believed that Sterling
possessed authority to bind Dage to the agreement."^ *^ Menard further argued
that Pollas and related cases require a finding that an agent has apparent

authority when the principal appoints that agent as a sole negotiator.^^° The
Menard court dismissed this argument, stating that Pollas and its progeny permit
a finding of apparent authority but do not require such a finding.^^^

2. Court's Reluctance to Interfere with Internal Affairs of Voluntary

Associations.—In Indiana High School Athletic Ass 'n v. Reyes^^^ the Indiana
Supreme Court declined to interpret and enforce the rules of the Indiana High
School Athletic Association ("IHSAA") leaving the interpretation of IHSAA
rules to its members. In Reyes, a student baseball player was prohibited from
playing high school baseball by the IHSAA because that student, who had been

512. Menard, 698 N.E.2d at 1231.

513. Id.

514. See id.

515. Id. (citing Pepkowski v. Life of Ind. Ins. Co., 535 N.E.2d 1 164, 1 166-67 (Ind. Ct. App.

1989)).

516. Id (citing Drake v. Maid-Rite Co., 681 N.E.2d 734, 737-38 (Ind. Ct. App. 1997), reh 'g

denied; Pepkowski, 535 N.E.2d at 1 166-67).

5 1 7. 663 N.E.2d 1 1 88 (Ind. Ct. App. 1 996), reh 'g denied.

518. Menard, 698 N.E.2d at 1232 (quoting Pollas, 663 N.E.2d at 67).

519. Id.

520. See id.

521. Id

522. 694 N.E.2d 249, 257 (Ind. 1997).



750 INDIANA LAW REVIEW [Vol. 32:687

held back one year in school in Puerto Rico before moving to Indiana, would play
more seasons of high school sports than permitted by IHSAA eligibility rules.^^^
The IHSAA's Eight Semester Rule places a maximum on the number of
semesters that a student athlete may play high school sports.^^"* The student
petitioned the IHSAA for an additional year of eligibility under the IHSAA
Hardship Rule and was denied.^^^ The student filed suit for injunctive relief,
arguing that the IHSAA Executive Committee's decision in his case was arbitrary
and capricious and violated his right to equal privileges and immunities under
Article 1, Section 23, of the Indiana Constitution.^^^ The trial court issued a
temporary restraining order preventing the IHSAA and the high school from
enforcing the Eight Semester Rule against the student.^^^ The trial court
subsequently rejected the findings of the IHSAA's decision with regard to the
student's eligibility and issued a permanent injunction against the IHSAA and the
high school from enforcing the Eight Semester Rule against the student.^^^ The
trial court also prohibited the IHSAA from sanctioning the high school under its
Restitution Rule for the school's compliance with the court order.^^^ The IHSAA
initiated an appeal and filed a petition to stay the judgment pending appeal with

the trial court.^^^ The trial court denied the petition to stay.^^^ The court of
appeals reversed the trial court's ruling

and held that (i) the IHSAA's determination to deny [the student's]
application for an exception under the hardship rule was not arbitrary
and capricious; (ii) the IHSAA's decision to deny [the student's] request
for another year of eligibility was state action subject to review under
Article 1, Section 23 of the Indiana Constitution; (iii) the Eight Semester

Rule and the hardship rule did not violate the [student's] right to equal

523. M at 252-53.
524. Id. at 253.

525. Id. The IHSAA. hardship rule provides:

The Commissioner or his designee or the Committee shall have the authority to set aside

the effect any Rule when, in the opinion of the Commissioner or his designee or the

Committee:

a. Strict enforcement ofthe Rule in the particular case will not serve to accomplish

the purpose of the Rule;

b. The spirit of the Rule has not been violated; and

c. There exists in the particular case circumstances showing undue hardship which

would result from enforcement of the Rule.

Id. at 253 n.2.

526. /^. at 253.

527. See id.

528. See id.

529. Id.

530. Id.

531. Id.



1 999] CONTRACT AND BUSINESS LAW 75

1

privileges and immunities under Article I, Section 23 of the Indiana

Constitution; and (iv) the IHSAA Restitution Rule is valid.^^^

The high school then appealed the IHSAA's application of the Restitution Rule
to it, which required the school to forfeit victories, return trophies and awards

and return certain funding in the event that an ineligible student athlete

participated in violation of the IHSAA eligibility rules, even if such participation
was in accordance with an injunction or restraining order that is later vacated.^"

On appeal, the high school did not challenge the first three parts of the court
of appeal's decision, but did challenge the validity of the Restitution Rule.^^"*

The high school apparently relied upon the court of appeals case, Indiana High
School Athletic Ass 'n v. Avant,^^^ for the proposition that the IHSAA Restitution
Rule violates the public policy of Indiana by penalizing schools and students for

complying with court orders.^^^ The Avant court analogized the application of
the Restitution Rule to a situation where a court finds a statute to be

unconstitutional, noting that because of "'the de facto existence and reliance

upon [the statute's] validity, [the statute] has practical consequences which
cannot be justly ignored.'"^^^ The Reyes court found fault in the Avant court's
analogy, which was based on the reasoning in Martin v. Ben Davis Conservancy

532. Id.

533. Id. at 254. The Restitution Rule provides:

If a student is ineligible according to [IHSAA] Rules but is permitted to participate

in interschool competition contrary to [IHSAA] Rules but in accordance with the terms

of a court restraining order or injunction against the student's school and/or the

[IHSAA] and injunction is subsequently voluntarily vacated, stayed, reversed or it is

finally determined by the courts that injunctive relief is not or was not justified, any one

or more ofthe following action(s) against such school in the interest of restitution and

fairness to competing schools shall be taken:

a. Require individual or team records and performances achieved during

participation by such ineligible student to be vacated or stricken;

b. Require team victories to be forfeited to opponents;

c. Require team or individual awards earned be returned to the association;

and/or

d. If the school has received or would receive any funds from an [IHSAA]

toumament series in which the ineligible individual has participated, require

the school to forfeit its share of net receipts from such competition, and if said

receipts have not been distributed, authorize the withholding of such receipts

by the [IHSAA].

Id. at 254 n.3.

534. Id. at 253-54. The high school contended that a split in authority existed between

decisions by two courts of appeal and asked that the supreme court resolve the dispute. See id.

535. 650 N.E.2d 1 164 (Ind. Ct. App. 1995).

536. See Reyes, 694 N.E.2d at 254-55.

537. Id. at 255 (quoting Avant, 650 N.E.2d at 1 1 71 (quoting United REMC v. Indiana Mich.
Power Co., 648 N.E.2d 1 194 (Ind. Ct. App. 1995))).



752 INDIANA LAW REVIEW [Vol. 32:687

DistrictP^ In Martin, the Indiana Supreme Court held that although an action
generally is not sustainable if based upon an unconstitutional statute, a final
judgment that is based upon the unconstitutional statute but rendered prior to the
declaration of unconstitutionality is sustainable.^^^ The Avant court concluded
that the rationale ofMartin renders the Restitution Rule unreasonable in that it
penalizes persons relying on a trial court's ruling.^'*^ The Reyes court disagreed
with the Avant court's reasoning, stating that the Martin exception does not apply
because the trial court's injunction in Reyes was not a final judgment.^"*^

The high school next argued that, despite the general Indiana rule that courts
exercise limited interference with the internal affairs and rules of a voluntary

membership associations, courts historically have applied heightened scrutiny to
IHSAA decisions.^"^^ The Reyes court noted that there are some exceptions to this
general rule.^"*^ For example, in State ex Rel Givens,^^ the supreme court carved

out an exception where the decision of the voluntary membership association
infringed upon a member's liberty or property rights.^'*^ Another exception noted

by the Reyes court is where the association's decision constitutes fraud or other
illegality

.^"^^ The Reyes court noted that certain courts of appeal decisions
suggested a further exception where the association applies its rules in an
arbitrary, discriminatory or malicious manner or the association rules require due
process.

^"^^ The Reyes court rejected any additional exceptions to the general rule
stating that "[ajbsent fraud, other illegality, or abuse of civil or property rights

having their origin elsewhere in law, Indiana courts will not interfere in the

internal affairs of voluntary membership associations."^"^* The Reyes court
distinguished cases applying an arbitrary and capricious standard to the actions

of the IHSAA based on the fact that those cases involved a student athlete's
challenge to an IHSAA decision rather than a school's challenge to an IHSAA
rule.^"*^ Although the Reyes court held that Indiana courts will continue to apply

an arbitrary and capricious standard to IHSAA decisions affecting students, it
will not apply such standard to the IHSAA's decisions regarding member
schools.^^^

538. 153 N.E.2d 125 (1958).

539. Reyes, 694 N.E.2d at 255.

540. Id. (quoting Avant, 650 N.E.2d at 1 1 7 1 ).

541. Id

542. See id.

543. Id. &t 256.

544. 117N.E.2d553(1954).

545. Reyes, 694 N.E.2d at 256.

546. Id (citing Randolph v. Leeman, 146 N.E.2d 267, 272 (Ind. App. 1957)).

547. Id. (citing United States Auto Club v. Woodward, 460 N.E.2d 1255, 1261 (Ind. Ct. App.

1984); Terrell v. Palomino Horse Breeders of Am., 414 N.E.2d 332, 335 (Ind. Ct. App. 1980)).

548. Id

549. Id. at 257.

550. Id.



1999] CONTRACT AND BUSINESS LAW 753

Finally, the high school argued that the Restitution Rule was inherently
contemptuous of the judiciary^^' by punishing schools for following a court's

orders. However, the Reyes court likened voluntary membership and

membership association rules to contracts. First, the court noted a variety of
circumstances where contracts will allocate risks of unfavorable litigation results

between parties.^^^ For example, the Reyes court noted that "[c]ouples may sign
prenuptial agreements dictating what is to occur should a trial judge determine

that the prenuptial agreement is unenforceable."^^^ The court concluded that such

agreements show no disrespect for the courts, and neither did the Restitution
Rule that constitutes an agreement between the IHSAA members allocating the
risks of litigating IHSAA rules and balancing competing member interests.^^"^

D. Limited Liability Companies: Allocationfor Tax Purposes

Requiring Cash Distributions

In Five Star Concrete, L.L.C v. Klink, Inc.^^^ the court of appeals addressed

whether a dissociated member of a limited liability company had a right to
receive a cash distribution equal to the net income allocated to such member for
tax purposes. A company ("Klink") formed a limited liability company called
Five Star Concrete, L.L.C. (the "Five Star") with four other corporations, all

engaged in supplying ready mix concrete, "in order to furnish concrete to large
construction projects."^^^ After a period of time, Klink disassociated from Five

Star and, pursuant to the operating agreement for Five Star, received a payment
from it for the market value of the limited liability company's units .^^^ At Five
Star's fiscal year end, it allocated $3 1,889 in profits to Klink for tax purposes.^^^

Klink subsequently sued Five Star for a distribution of cash equal to the profits

allocated to Klink for tax purposes.^^^ The trial court granted Klink' s motion for
summary judgment and denied Five Star's cross motion for summary
judgment.^^^ Five Star appealed the trial court's grant of summary judgment on
the issue ofwhether Klink, as a dissociated member ofFive Star, had a legal right
to receive a cash distribution equal to the net income allocated to Klink for tax
purposes.^^^ In appealing the denial of its cross motion for summary judgment.
Five Star raised two additional issues: (i) whether Klink affirmatively divested
itself of all economic interests in Five Star when it sold its membership units to

551. Id.

552. Id.

553. Id.

554. Id. at 257-58.

555. 693 N.E.2d 583, 584 (Ind. Ct. App. 1998)

556. Id. at 585.

557. ^-ee /V/. at 585, 587.

558. See id. at 585.

559. See id.

560. See id.

561. See id. at 586.



754 INDIANA LAW REVIEW [Vol. 32:687

Five Star and (ii) whether the method of valuing Klink's economic interest
demonstrates that Klink was paid the current fair market value of its entire
interest in Five Star^^^

First, the Five Star court addressed whether Klink had a legal right to receive

a cash distribution based on the facts stated above.^^^ The Five Star court noted
that no provision in the Indiana Business Flexibility Act (the "Act"/^* "creates

an automatic legal right to receive a distribution in the amount of [allocated]
income, even when a member is withdrawing from the [limited liability
company]."^^^ The court further noted that such distributions, in some instances,
would be unlawful.^^^ In particular, the court noted that a distribution may be
unlawful when it would cause a limited liability company to become insolvent.^^^
The court further noted that Five Star's operating agreement was silent regarding
the timing and amount of distributions and that, under the Act, such decisions are
made by a majority of the members.^^^ Finally, the Five Star court noted that
limited liability companies, like partnerships, are pass-through entities receiving

conduit treatment under income tax law, meaning "that allocations occur
regardless of the magnitude or timing of distributions."^^^ Therefore, the Five

Star court held that Klink was not entitled, as a disassociated member of a
limited liability company, to a cash distribution equal to its allocations of profits

for the year.^^°

The Five Star court next addressed Five Star's argument that, because Klink
sold its membership units, it divested itself of any economic interest in any

562. See id. at 587.

563. Id. at 586.

564. IND. Code §§ 23-18-1-1 to -13-1 (1998).

565. Five Star Concrete, 693 N.E.2d at 586.

566. Id. (citing iND. CODE § 23-18-5-6 (1998); United States v. Basye, 410 U.S. 441, 453

(1973)).

567. Id. at 586 n.4. The court specifically identifies Indiana Code section 23-185-6 (1998),

which states that

A distribution may not be made if after giving effect to the distribution:
(1) [t]he limited liability company would not be able to pay its debts as the debts

become due in the usual course of business; or (2) the limited liability company's total

assets would be less than the sum of its total liabilities plus, unless the operating

agreement permits otherwise, the amount that would be needed if the affairs of the

limited liability company were to be wound up at the time of the distribution to satisfy

any preferential rights that are superior to the rights of members receiving the

distribution.

iND. Code § 23-185-6 (1998).
568. Five Star Concrete, 693 N.E.2d at 586. The court noted that Five Star had made an

earlier distribution to its members in which Klink received $12,500. Id.

569. Id. (citing BLACK'S Law DICTIONARY 75 (6th ed. 1990)).
570. Id.



1999] CONTRACT AND BUSINESS LAW 755

distributions of the limited liability company.^^' In examining the operating
agreement for Five Star, the Five Star court observed that a "unit" is defined as

"'an interest in the Company representing a contribution to capital. '"^^^ The Five
Star court observed that this definition of the term "unit" supported Klink's

argument that it sold less than all of its economic rights in Five Star when it sold
its membership units.^^^ However, the Five Star court observed that under the

same operating agreement, "each unit generally entitled the members to one vote
and to a proportionate share of the [limited liability company's] net income,

gains, losses, deductions and credits."^^"* The Five Star court concluded that
parties could reasonably differ as to the meaning of the word "unit" under the
operating agreement and whether the sale of a unit constituted a transfer of all

rights to future distributions of Klink.^^^ Thus, the Five Star court held that the

trial court properly denied Five Star's motion for summary judgment.^^^
Finally, the court addressed whether the trial court properly denied Five

Star's motion for summaryjudgment based on its argument that, based on the fair
market value of Klink's interest in Five Star, Five Star's purchase price for

Klink's units included all potential distributions from Five Star.^^^ The Five Star

court noted that the "[v]aluing of an interest of a member is a 'complex task,'
more of a business matter than a legal one."^^^ Thus, the Five Star court
concluded that a determination of market value is an issue of fact and not

appropriate for summary judgment.^^^

E. Corporations

1. Dissenter 's Right Statute as Exclusive Remedy.—In Settles v. Leslie,^^^
The Indiana Court of Appeals discussed "whether the Indiana Dissenters Right
statute^^^*^ [("IDR")] provides the exclusive remedy for minority shareholders of

a closely held corporation claiming breach of fiduciary duty by the corporation's

majority shareholders."^^^ In Settles, the majority shareholders (the "Majority

Shareholders") of Mi-Tech Metals, Incorporated ("Mi-Tech") decided to sell the

571. Mat 587.
572. Id. (quoting Five Star Concrete, Inc. Operating Agreement).

573. Id

574. Id.

575. Id

576. Id.

577. Id

578. Id. (citing Paul J. Galanti, 17 Indiana Practice, Business Organizations § 6.7

(1991)).

579. Id.

580. 701 N.E.2d 849 (Ind. Ct. App. 1998).

581. Ind. Code §§ 23-1-44-1 to -20 (1998).
582. Settles, 701 N.E.2d at 850.



756 INDIANA LAW REVIEW [Vol. 32:687

company after the death of a key employee .^^^ Mi-Tech successfully negotiated
the merger of Mi-Tech with another company, which merger was objected to by
minority shareholders (the "Minority Shareholders").^^"* A special meeting ofthe
shareholders ofMi-Tech was scheduled for September 12, 1994 to consider the
proposed merger.^^^ Just three days prior to the special meeting on September 9,
1994, the Minority Shareholders filed a complaint for a temporary restraining

order to enjoin Mi-Tech's directors from voting on the proposed merger.^^^ In
their complaint, the Minority Shareholders alleged that the Majority Shareholders

misappropriated Mi-Tech's funds by "(1) overcompensating themselves, (2)
failing to pay dividends, and (3) receiving excessive compensation for
employment contracts and non-competition agreements in connection with a
corporate merger." The court denied the Minority Shareholders' request for the
temporary restraining order.^^^ At the special shareholders meeting, the Minority
Shareholders, represented by counsel, delivered a Notice ofDissent regarding the

merger stating that:

Notice is hereby given that [the Minority Shareholders] . . . express and

state their dissent with the proposed Plan ofMerger of Mi-Tech Metals,
Inc. with Birco, Inc.:

1

.

That [the Minority Shareholders] are shareholders entitled to vote on

the proposed merger.

2. That it is the intent of [the Minority Shareholders] to demand
payment for their shareholder's shares if the proposed action is
effectuated.

3

.

That [the Minority Shareholders] further intend to retain all other

rights of a shareholder, and further they are willing to deposit the

shareholder's shared certificate [s] as the corporation may require.
4. The dissenters further hereby notify the corporation that the

dissenter's own estimate of the fair value of the dissenter's share is
the sum of $ 1 9,0 1 8.40 per share.^^^

The merger proposal was adopted at the special meeting despite the Minority

Shareholder's efforts. Subsequently, Mi-Tech delivered to each dissenting

shareholder a Notice of Dissenter's Rights, which stated that any dissenting

shareholder electing to demand payment pursuant to the IDR should provide
notice of such to the company by means of the attached form on or before sixty
days after the date ofthe Notice ofDissenter's Rights. Also, the Notice informed

the dissenting shareholders that they must deposit their shares with the company

583. /^. at 850-51.

584. See id. at 85 1 . The Minority Shareholders were tenants in common of the shares held

by the employee who had died. See id. at 850.

585. Mat 851.
586. Id

587. Mat 850, 851.
588. Mat 851.



1999] CONTRACT AND BUSINESS LAW 757

on or before the expiration of the sixty day period.^^^ In addition, Mi-Tech
offered to exchange the Minority Shareholder's shares for $14,000 per share.^^^

The Minority Shareholders did not demand payment or deposit their shares
within the prescribed time period^^' and instead filed suit against the Majority

Shareholders.^^^ The Majority Shareholders filed their answer, claiming that the
Minority Shareholder's exclusive remedy was the IDR statute .^^^ The trial court
granted the Majority Shareholder's motion for summary judgment without
explanation or elaboration.^^"*

On appeal, the Minority Shareholders contended their claims of breach of
fiduciary duty and fraud were outside the scope ofthe IDR statute.^^^ The Settles
court noted that the Indiana Supreme Court's recent decision in Fleming v.
International Pizza Corp}^^ held that the IDR statute "provides the exclusive
remedy for minority shareholders challenging a proposed merger.'*^^ The
Minority Shareholders contended that they declined to invoke their dissenter's

rights and instead were pursuing individual fraud and breach of fiduciary duty

claims against the Majority Shareholders .^^^ However, the Settles court, in

reviewing the complaint of the Minority Shareholders, came to the conclusion
that the claims regarding fraud and breach of fiduciary duty were essentially

claims regarding the fair value of the Minority Shareholder's share price in

conjunction with the merger.^^^ The Settles court held that the Minority
Shareholders could not circumvent the remedy established by the legislature for

valuing stock held by dissenting shareholders to a mergei^^^ simply by refusing

to pursue their statutory remedies and filing common law claims for fraud and
breach of fiduciary duty against the individuals controlling the corporation.

^^^

589. See id.

590. Id.

591. Id

592. See id.

593. See id.

594. See id.

595. Mat 852.
596. 676 N.E.2d 1051 (Ind. 1997).

597. Settles, 701 N.E.2d at 853 (citing Fleming, 676 N.E.2d at 1056). The IDR Statute

provides in part:

(a) A shareholder is entitled to dissent from, and obtain payment of the fair value of the
shareholder's shares in the event of . . . [c]onsumation of a plan of merger to which the

corporation is a party .... (b) A shareholder: (1) who is entitled to dissent and obtain
payment for the shareholder's shares . . . may not challenge the corporate action creating

... the shareholder's entitlement.

iND. Code §§ 23-l-44-8(a), (c) (1998).
598. Settles, 701 N.E.2d at 853.

599. Id. at 853-54.

600. Id at 852.

601. /^. at 854.



758 INDIANA LAW REVIEW [Vol. 32:687

However, the Settles court went on to hold that, under the IDR statute, the
dissenting shareholders were permitted to ajudicial appraisal ofthe value oftheir

shares.^^^ The Settles court noted that a judicial appraisal was sufficiently
comprehensive to incorporate any claims for wrongdoing brought by either the
corporation or its shareholders in valuing just compensation to the dissenting

shareholders.^^^

In reaching its decision, the Settles court relied heavily on the supreme

court's decision in Fleming.^^ In Fleming, the plaintiff claimed dissenter's

rights in connection with the sale by the sole majority shareholder of
substantially all of the assets of the corporation.^^^ In addition to claiming fair

value for its shares, the Fleming plaintiff alleged that the majority shareholder

had breached its fiduciary obligations to the plaintiffwith regard to the asset sale.

The Fleming court held that the IDR statute "'did not foreclose the ability of
dissenting shareholders to litigate their breach of fiduciary duty or fraud claims

within the appraisalproceeding. '''^^^ The Settles court concluded that the trial
court is authorized to create a comprehensive scope of valuation of claims for

appraisers under the IDR statute in order to protect the rights of dissenting
shareholders,^^ such as the Minority Shareholders. Thus, the court held that the

IDR statute was the sole avenue of recourse for the Minority Shareholder's fraud
and breach of fiduciary duty claims in conjunction with the merger and affirmed

the trial court's grant of summary judgment.^^^

2. Direct Action Against the Corporation.—In Barth v. Barth,^^^ (''Barth
Iir) the court of appeals determined whether a minority shareholder in a

corporation having a total of three shareholders could bring an action in its own
name against the majority shareholder as opposed to a derivative action on behalf
ofthe corporation. A minority shareholder of an electric company, Robert Barth
("Robert"), brought an action against the majority and controlling shareholder,

Michael Barth ("Michael"), alleging that Michael had taken certain actions that

had the effect of substantially reducing the value of Robert's shares of stock.

The alleged actions included: (i) payment of excessive salaries to Michael and
members of his immediate family; (ii) use of corporate employees to perform
services on Michael's and his son's homes without proper compensation to the
corporation; (iii) lowering dramatically dividend payments; and, (iv)

appropriation of corporate funds for Michael's personal investments.^*^ Michael

602. Id.

603

.

Id. (citing Fleming v. International Pizza Supply Corp., 676 N.E.2d 1 05 1 , 1 057 n.9 (Ind.

1997)).

604. Fleming, 676 N.E.2d at 1 05 1

.

605. See Settles, 701 N.E.2d at 855.

606. Id. (quoting Fleming, 676 N.E.2d at 1057 (emphasis supplied)).

607. Id. at 856.

608. Id.

609. 693 N.E.2d 954, 955 (Ind. Ct. App. 1998) [hereinafter Barth III].

610. Id.



1999] CONTRACT AND BUSINESS LAW 759

and the corporation moved to dismiss for failure to state a claim "arguing that a
derivative action suit was required to redress claims of this nature." ^'' The trial

court granted Michael's motion to dismiss and such ruling was reversed by the

court of appeals.^^^

Upon transfer, the Indiana Supreme Court cited the general rule in Indiana
that "shareholders of a corporation may not maintain actions at law in their own
names to redress an injury to the corporation, even if the injury has the effect of
impairing the value of their stock."^'^ The supreme court explained that the
general rule was established to prevent disregard for the corporate entity that
would result if an individual lawsuit were permitted by disgruntled
shareholders.^^'* In addition, the general rule promotes the protection of all

shareholders rather than allowing one shareholder to prejudice the interests ofthe

other shareholders by receiving funds justly due the corporation.^*^ Finally, the

supreme court noted that the general rule protects corporate creditors by putting

the proceeds of recovery back into the corporation.^*^ The supreme court,

however, indicated two reasons why the general rule will not always apply in the
case of closely held corporation.

"First, the shareholders in a close corporation stand in a fiduciary

relationship to each other, and as such, must deal fairly, honestly, and

openly with the corporation and with their fellow shareholders. Second,

shareholder litigation in the closely-held corporation context will often

not implicate the policies that mandate requiring derivative litigation

when more widely-held corporations are involved."^*^

Thus, the supreme court held that a court has exempted a shareholder claim from

the restrictions applicable to derivative actions if it determines that the lawsuit

will not "(i) unfairly expose the corporation or the defendants to a multiplicity

of actions, (ii) materially prejudice the interests of the creditors of the

corporation, or (iii) interfere with a fair distribution of the recovery among all
interested persons."^*^ The supreme court then remanded the case back to the
trial court.

On remand, the trial court held that, because the corporation had three

611. Id.

612. See Barth v. Barth, 651 N.E.2d 291, 292 (Ind. Ct. App. 1995) [hereinafter Barth /].

613. See Barth III, 693 N.E.2d at 957 (citing Barth v. Barth, 659 N.E.2d 559, 560 (Ind. 1995)

[hereinafter Barth //]).

6 1 4. See id. (quoting Barth II, 659 N.E.2d at 65 1 ).

615. See id. (citing Barth II, 659 N.E.2d at 561 (noting that the plaintiff shareholder receives

adequate compensation by increasing its shares value when recovery is put back into the

corporation)).

616. Id. (citing Barth II, 659 N.E.2d at 561).

617. Id. (quoting Barth II, 659 N.E.2d at 56
1
).

618. Id. at 958 (quoting American Law Institute, Principals of Corporate
Governance: Analysis and Recommendations § 7.01(d) (1994)).



760 INDIANA LAW REVIEW [Vol. 32:687

shareholders, one of which was not a party to Robert's action and would not be
bound by any judgment in that case, by allowing Robert to proceed in a direct,
rather than a derivative, action could expose Michael and the corporation to a
multiplicity of lawsuits.^*^ Reviewing the trial court's decision under an abuse
ofdiscretion standard, the Barth III court agreed that because there the remaining

shareholder of The company had not joined in Robert's action, that third
shareholder could bring a separate action against the corporation and Michael for

its own damages to the price of its shares.^^°

Next, the Barth ///court addressed whether Robert's lawsuit, if treated as a

direct action, would prejudice creditors.^^' The Barth ///court noted that Robert
had petitioned the court for the corporation to pay damages to him, not its
creditors; such a result, the Barth III court concluded, would be inherently
prejudicial to creditors.^^^ Finally, the court addressed whether Robert's action

would result in a fair distribution of the corporation's assets.^^^ The Barth III
court agreed with the trial court that, because all damages would go to Robert,
"the result . . . would constitute an unfair distribution of the assets of the
corporation to only one of its shareholders."^^"* Thus, the Barth III court

concluded that the trial court did not abuse its discretion when it determined that
Robert did not satisfy the supreme court's requirements set forth in Barth //for

a direct action and affirmed the trial court's ruling.^^^

3. Foreign Corporations "Transacting Business" in Indiana.—In Lackmond
Products, Inc. v. Construction Supply, Inc. ^^^ the court of appeals addressed

whether a Georgia corporation was "transacting business" in Indiana by selling
goods to Indiana customers through the mail and by taking orders through an

independent contractor located in Ohio. Lackmond sold products to Construction
Supply, Inc. ("CSI"), an Indiana corporation, by taking orders in Georgia and

shipping the goods to CSI at various locations in Indiana. When Lackmond filed
suit against CSI for its alleged failure to pay for such goods, CSI moved to
dismiss, arguing that Lackmond lacked the capacity to bring an action because
it was a foreign corporation "transacting business" in Indiana without a
certificate of authority."^ The trial court dismissed the action and Lackmond
appealed.

Under Indiana Code section 23-1-49- 1(a),

619. 5ge /flf. at 958.

620. Id. (contrasting W& WEquipment Co. v. Mink, 568 N.E.2d 564, 570 (Ind. Ct. App.
1991), wherein the corporation only contained two shareholders and thus there was no potential for

multiple shareholder suits).

621. Id.

622. Id

623. /^. at 959.

624. Id

625. Id.

626. 691 N.E.2d 494, 495 (Ind. Ct. App. 1998).

627. See id. r



1 999] CONTRACT AND BUSINESS LAW 76

1

[a] foreign corporation may not "transact business" in Indiana until it
obtains a certificate of authority from the secretary of state. Indiana

Code [section] 23-l-49-2(a) further states that a foreign corporation
transacting business in Indiana without a certificate of authority may not
maintain a proceeding in any court in Indiana until it obtains a certificate

of authority.^^*

However, the Lackmond court noted that, under Indiana Code section 23-1-49-
1 (b), certain activities do not constitute transacting business, including but not

limited to "'(5) [s]elling through independent contractors [,] (6) [s]oliciting or

obtaining orders, whether by mail or through employees or agent or otherwise,

if the orders require acceptance outside Indiana before they become contracts .
. . [, and] (11) [t]ransacting business in interstate commerce.

'"^^^
Finally, the

Lackmond court noted that the allegation that a foreign corporation does not have
the capacity to sue is an affirmative defense and the burden was upon CSI to
support its contentions.

^^°

The Lackmond court observed that CSI did not argue that Lackmond, by
taking orders in Georgia and using an Ohio corporation to take orders, did not

fall within the exceptions set forth in Indiana Code sections 23- 1-49- 1(b)(5), (6)
and (11). Instead, CSI argued that Lackmond' s contacts with Indiana were
"'more regular, systematic or extensive than interstate sales activities described

in' Indiana Code [section] 23-l-49-l(b)."^^^ The Lackmond conri, however,
stated that Lackmond's sales contracts with CSI were formed in Georgia because
"Lackmond accepts [an] order by shipping the requested inventory to Indiana
from its Georgia warehouse."^^^ With these facts, the Lackmond court held that
Lackmond's activities of filing customer-placed purchase orders sent to
Lackmond' s Georgia office by phone or facsimile specifically excluded from the
definition of "transacting business" under Indiana Code section 23-l-49-l(b).^"
Thus, the court of appeals reversed the trial court's dismissal of Lackmond'

s

action.

4. Corporation 's Liability for Acts of Employee.—^In Coble v. Joseph
Motors, Inc.,^^^ the court of appeals addressed whether a corporation would be
deemed to have committed an intentional tort against an employee due to a

628. Id (citing IND. CODE §§ 23-1-49-1(1), -2(a) (1998)).

629. Id. at 495-96 (quoting iND. CODE §§ 23- 1-49- 1(b)(5), (6), (1 1) (1998)).

630. Id at 496.

631. Id

632. Id. The court also found CSI's offer of Lackmond sales invoices, which accompanied

each shipment to CSI, to evidence that the purchase orders did not require acceptance outside

Indiana before they became contracts unpersuasive, because the invoices were issued after

Lackmond's acceptance of CSI's offer to purchase and therefore, after contraction formation. Id.

at496n.3.

633. Mat 496.
634. 695 N.E.2d 129, 133 (Ind. Ct. App. 1998).



762 INDIANA LAW REVIEW [Vol. 32:687

supervisor's tortious acts. The plaintiff in Cohle was injured in an accident at
work that sliced off the tip of her finger."^ The tip of the finger found its way
to the human resources manager of the corporation, who used the severed
fingertip as a prop in presentations to the employees regarding company safety.
Coble brought a claim for emotional injuries against the corporation.^^^ The trial
court dismissed Coble's claim for want ofjurisdiction based upon the exclusivity
provision of the Worker's Compensation Act.^^^

On appeal, the employee argued that the corporation had committed an
intentional tort against her, which was not covered by the Worker's
Compensation Act.^^^ The Coble court observed that, pursuant to the Supreme
Court's decision in Perry v. Stitzer Buick GMC, Inc.,^^^ "'tortious intent will be
imputed to an employer that is a legal entity or artificial person where either (1)
the corporation is the tortfeasor's alter ego or (2) the corporation has substituted

its will for that of the individual who committed the tortious acts.'"^"^^ Thus, the
Coble court concluded that in order for the corporation to be responsible for the

human resource manager's intentional acts, the human resource manager must
be the alter ego of the corporation or the corporation "must have intended the

injury or actually known that the injury was certain to occur."^^ In reviewing the
facts, the Coble court noted that the human resource manager was not an owner
or controller of the corporation nor was there any evidence that the corporation
intended to commit the torts against the employee or know that the injury was
certain to occur. The human resource manager's actions were not undertaken
pursuant to any policy of the corporation nor did management instruct the
manager to display the employee's severed fingertip.^"^^ The employee argued
that the corporation ratified the human resources manager's offensive acts by
raising his salary subsequent to the incident.^^ However, the Coble court was
not persuaded for two reasons: (i) the employee presented no evidence that the

raise and the offensive conduct were linked, and (ii) the corporation subsequently

fired the human resource manager in part because of this incident.^'^ Thus, the
Coble court affirmed the trial court's ruling.

635. /^. at 131.

636. Mat 131-32.
637. See id. at 132. This Article does not address the Coble court's discussion of issues

regarding the Worker's Compensation Act.

638. Seeid.dXm.

639. 637 N.E.2d 1282 (Ind. 1994).

640. Coble, 695 N.E.2d at 134 (quoting Perry, 637 N.E.2d at 1287 (citations omitted in

original)).

641. Mat 134.
642. Seeid.2iXUA-l5.

643. See id. at 135.

644. Id



1 999] CONTRACT AND BUSINESS LAW 763

5. Corporations Rights and Responsibilities with Regard to the Acts of
Others.—In SummitAccount & Computer Service, Inc. v. RJHofFlorida, Inc.,^^
the court of appeals determined whether a corporate successor in interest may be
awarded punitive damages and attorney's fees for damages incurred by its

predecessor pursuant to the Indiana Criminal Conversion Statute.^^ In Summit,

a leasing company brought an action against a collection agency for conversion
of property under Indiana Code section 35-43-4-3, a proven violation of which
permits a recovery of treble damages, costs of the action and reasonable

attorney's fees.^^ The trial court awarded the leasing company treble damages,
costs and attorney's fees and defendants appealed.^^

On appeal, the collection agency argued that the leasing company's successor
in interest (the "successor corporation"), could not recover for damages incurred

by the leasing company because, under the ruling of Hart Conversions, Inc. v.
Pyramid Seating Co.,^^ such tort claims are not assignable.^^^ In Summit, the
leasing company had sold all of its assets, including its claims against the
collection agency, to a third party that in turn sold the assets to the successor

corporation.^^ ^ One individual was the sole shareholder, director and officer of
all three corporations, and the corporations conducted business of the same
nature from the same place.^^^ Citing the court ofappeals' decision in Mishawaka
Brass Manufacturing v. Milwaukee Value Co.,^^^ the trial court held that the

successor corporation was a direct continuation ofthe ownership and operations
of the leasing company with only a change of name.^^"* Under the ruling in
Mishawaka Brass, "'a direct continuation of the ownership and operations ofthe
first corporation,' with only a change of name 'will not cut off liability to a
creditor of the first corporation. '"^^^ Applying this rule, the Summit court

645. 690 N.E.2d 723, 724 (Ind. Ct. App. 1998).

646. Ind. Code §35-43-4-3 (1998).

647. Summit Account & Computer Serv., 690 N.E.2d at 725-26. See also iND. CODE § 34-1
(1998) (providing for civil actions against persons who violate Indiana Code section 35-43-4-3, and

providing what damages are available in such suits). This Article focuses on the issue of damages

available under this statute to a corporate successor in interest.

648. See Summit Account & Computer Serv. , 690 N.E.2d at 726.
649. 658 N.E.2d 129 (Ind. Ct. App. 1955).

650. See Summit Account & Computer Serv. , 690 N.E.2d at 728.
65 1

.

See id.

652. See id.

653. 444 N.E.2d 855 (Ind. Ct. App. 1983).

654. See Summit Account & Computer Serv., 690 N.E.2d at 728.
655. Id. (quoting Mishawaka Brass, 444 N.E.2d at 858).



764 INDIANA LAW REVIEW [Vol. 32:687

affirmed the trial court's determination that the successor corporation was a
direct continuation of its predecessors and should have the same rights and
liabilities thereof.^^^

A

656. Id. A third case addressing this topic but not discussed in this survey is Wabash Grain,
Inc. V. Smith, 700 N.E.2d 234, 235 (Ind. Ct. App. 1998). In Wabash Grain, the court of appeals

addressed whether an action filed against a related corporation in federal court would toll the statute

of limitations with regard to a subsequent action against a related corporation in state court. The

Wabash Grain court noted that although both corporations were controlled by the same individual,

each corporation is a distinct legal entity under the law; therefore, an action against one corporation

will not toll the statute of limitations against an affiliated corporation. Id. at 240. The plaintiff also

argued that equitable tolling should apply given that the corporation it sued first in federal court was

controlled by or controlled the affiliated corporation it sued second in state court. See id. However,

the Wabash Grain court noted that the plaintiff presented no evidence to establish that either

corporation '"so ignored, controlled or manipulated'" the other, or "'that the misuse of the

corporate form would constitute a fraud or promote injustice.'" Id. (quoting Winkler v. V.G. Reed

& Sons, Inc., 638 N.E.2d 1228, 1231 (Ind. 1994)).