First Bank of Whiting v. Sisters of Mercy Health Corp.

• Decision Date: 09 November 1989
• Docket Number: No. 45A04-8805-CV-152,45A04-8805-CV-152
• Citation: 545 N.E.2d 1134
• Court: Indiana Appellate Court
• Parties: The FIRST BANK OF WHITING, as Trustee, Appellant, v. SISTERS OF MERCY HEALTH CORPORATION, Appellee.

Page 1134

545 N.E.2d 1134

The FIRST BANK OF WHITING, as Trustee, Appellant, v. SISTERS OF MERCY HEALTH CORPORATION, Appellee.

No. 45A04-8805-CV-152.

Court of Appeals of Indiana,

Fourth District.

Nov. 9, 1989.

John M. O'Drobinak, P.C. by David M. Austgen, Crown Point, for appellant.

Joseph O'Conner, O'Conner & Weigle, Hammond, for appellee.

MILLER, Judge.

This appeal involves the attempt of plaintiff-appellee Sisters of Mercy Health Corporation (Hospital) to collect, by proceedings supplemental, a $33,948.03 Lake Superior Court judgment against Clarice A. Christenson (Clarice). Clarice is the beneficiary of a spendthrift trust and defendant-appellant, the First Bank of Whiting is the trustee (Trustee). ¹ After obtaining the judgment against Clarice, the Hospital filed proceedings supplemental against Clarice and the Trustee as a garnishee-defendant, attempting to reach assets of the trust to satisfy its judgment. Meanwhile, Clarice filed a voluntary petition in bankruptcy seeking relief from her creditors. At the time Clarice filed her bankruptcy petition, the Hospital's judgment remained unsatisfied. Although Clarice listed the Hospital as an unsecured creditor in her petition, the Hospital chose not to participate in the bankruptcy proceedings. Instead, the Hospital continued its proceedings supplemental action against the Trustee. After Clarice's debt to the Hospital had been discharged in bankruptcy, the trial court entered judgment against the Trustee requiring the Trustee to pay the Hospital $10,920.00 from income of the trust. The Trustee appeals this judgment raising two issues for review. However, one issue is dispositive because we find the trial court committed reversible error when it entered judgment against the Trustee, as a garnishee defendant in proceedings supplemental, after Clarice's debt to the Hospital had been discharged in bankruptcy.

FACTS

a.) State Proceedings Before Bankruptcy

After obtaining a judgment against Clarice on August 7, 1985, for medical expenses, the Hospital filed proceedings supplemental against Clarice and the Trustee, as a garnishee-defendant. After a hearing on July 14, 1986, the trial court found the Trustee paid Clarice monthly disbursements from the trust in the sum of $780.00 and ordered the Trustee "to pay all disbursements of principal and income from the aforesaid trusts to which defendant is entitled and becomes entitled" to the clerk of the Lake Superior Court to satisfy the Hospital's judgment. ² After entry of this order, the Trustee, in its discretion under the terms of the trust, terminated the monthly income payments to Clarice and did not pay any money to the clerk of the trial court. On April 9, 1987, the Hospital filed a petition "To Invade Trust Assets and Income for Payment of Judgment" against Clarice and the Trustee, as garnishee-defendant. In this motion the Hospital alleged the Trustee's actions--in terminating the monthly payments to Clarice and refusing to make payments to the court--constituted bad faith and an abuse of discretion. The Hospital requested that the court order the Trustee to satisfy the Hospital's judgment from the assets of the trust. ³

b.) State Proceedings During Bankruptcy

On June 8, 1987, Clarice filed a voluntary petition in the United States Bankruptcy Court in the Southern District of Florida, seeking relief from her creditors. Although Clarice listed the Hospital as an unsecured creditor, the Hospital chose not to participate in the bankruptcy proceedings and continued its proceeding supplemental action against the Trustee. In response, the Trustee filed a Motion to Dismiss the Hospital's petition "To Invade Trust Assets" on July 22, 1987. This motion was premised upon (1) the spendthrift provisions of the trust, (2) the Trustee's discretionary power under the trust to withhold income, and (3) the automatic stay provisions of the United States Code (11 U.S.C. Sec. 362). After a hearing on July 24, 1987, the Trustee's Motion to Dismiss was taken under advisement. ⁴ On September 11, 1987, the Bankruptcy trustee for the bankruptcy court, filed a "Motion to Lift Automatic Stay and Authorize Employment of Special Counsel" in the bankruptcy court requesting that the automatic stay be lifted to allow this proceeding to continue in the state court of Indiana. After a hearing, the bankruptcy court denied this motion on October 8, 1987 finding "this matter should be heard in Bankruptcy Court". The bankruptcy court noted the denial of this motion "is without prejudice to either party filing appropriate pleadings to have this matter determined in Bankruptcy Court". (R. 907). However, rather than pursue its remedies in the bankruptcy forum, the Hospital continued its action in Indiana and on October 20, 1987, filed a Motion for Summary Judgment. Clarice and the Trustee filed separate memorandums in opposition to this motion, noting the automatic stay provisions of the Bankruptcy Code (11 U.S.C. Sec. 362(a)) preclude the summary judgment motion and any other action in these proceedings to collect the Hospital's judgment against Clarice.

c.) State Proceedings After Discharge

On November 12, 1987, the Bankruptcy Court entered an "Order of Discharge" releasing Clarice from all dischargeable debts, including the debt to the Hospital. After her discharge, Clarice filed a motion in the bankruptcy court for sanctions and injunctive relief claiming the Hospital's continued collection activities in Indiana violated federal bankruptcy law. After a hearing, the bankruptcy court denied Clarice's motion noting this denial was based upon the representations of the Hospital's counsel that "the pending action in Indiana State Court is against First Bank of Whiting, not the debtor, and does not seek a judgment, recovery or garnishment against the debtor, debtor's assets, assets of the bankruptcy estate or any trust which debtor is a beneficiary of." (R. at 911). The trial court was advised of the bankruptcy court's ruling. On November 23, 1987, a summary judgment hearing was held in the Lake Superior Court. At this hearing, the trial court denied the Trustee's "Motion to Dismiss" previously taken under advisement. On January 6, 1988, the trial court, having taken the summary judgment motion under advisement, granted summary judgment for the Hospital and against the Trustee as follows:

ORDER OF JANUARY 6, 1988

This cause was filed by the Sisters of Mercy Hospital (hereinafter referred to as 'Hospital'), against Clarice A. Christenson, defendant, (hereinafter referred to as 'Clarice') for services rendered. Judgment was taken against Clarice on August 8, 1985, in the amount of $33,948.03 for medical services rendered plus interest and attorney fees. Thereafter, the Hospital began proceedings supplemental and joined the Bank of Whiting (hereinafter referred to as 'Trustee'), as Trustee, and served the Trustee with a request to answer Interrogatories on April 10, 1986. The Trustee answered said Interrogatories on May 8, 1986, indicating that they were the trustees of Spendthrift Trust Nos. 3004-A and 3004-B, of which Clarice was the beneficiary. It is significant to note that the Trustee became aware of this judgment for medical expenses incurred by Clarice upon receiving notice of the judgment on or about August 15, 1985.

The two trusts administered by the Trustee were established by Clarice's husband, who died in 1970, leaving Clarice as the primary beneficiary and naming other residuary beneficiaries. The Trust Article III, Section 2B provides that the Trustee is to pay the sums 'required for her health, maintenance and support.' From time to time in the administration of the trusts, the Trustee has paid medical expenses incurred by Clarice up to and through 1980, upon either the request of the health provider or at the direction and authorization of Clarice. The Trustee, in addition to paying medical expenses in 1980 and prior thereto, was disbursing to Clarice the sum of $780.00 a month until April, 1986, upon being served with notice of proceedings supplemental; and Clarice has received nothing from the trusts since that time.

On June 7, 1987, Clarice, now living in Florida, filed a Chapter 7 Bankruptcy action in the State of Florida under Cause No. 887-52552-BKC-TCB. Clarice was discharged in bankruptcy on November 12, 1987, and the Hospital's debt listed in Clarice's bankruptcy petition at $41,000.00 was discharged. The Bankruptcy Court, on December 7, 1987, entered an order denying Clarice's motion for sanctions and to enjoin stay violation to permit this Court to determine whether the bankruptcy discharge is being circumvented.

On April 9, 1987, the Hospital filed in this Court a petition styled 'To Invade Trust Assets and Income for Payment of Judgment,' alleging that the Trustee had violated its fiduciary responsibility by failing to comply with the terms of the two trusts and paying the medical expenses of Clarice due to the Hospital and, in fact, determined to refuse to pay said medical expenses.

This petition was superseded when, thereafter, on July 23, 1987, the plaintiff Hospital filed a separate cause of action against the Bank of Whiting as defendant seeking to invade trust assets and income rather than proceeding against the Trustee as a garnishee defendant in this cause. This cause number, 587-638, has been removed out of this county, still remains pending, and this Court will not determine in this ruling what liability and what responsibilities if any of the Trustee regarding the payment of Clarice's medical bills when it first came to the Trustee's attention.

The Court here finds that the Trustee became aware of the judgment against Clarice and in favor of the Hospital in August of 1985, yet continued to pay Clarice the amount of $780.00 each month from the income of the trust and did not stop paying said sum until April of 1986, upon being served with the proceedings supplemental.

The Court further...