Jackson v. Farmers State Bank, No. 4-284

• Docket Nº: No. 4-284
• Citation: 481 N.E.2d 395
• Case Date: August 05, 1985
• Court: Court of Appeals of Indiana

Page 395

481 N.E.2d 395 Michael Desmond JACKSON, Tonya Lynn Jackson Woodling, Rickey
Dene Jackson, Mildred Jackson, and D & R Motors,
Inc., Appellants,
v.
FARMERS STATE BANK, Appellee. No. 4-284 A 55. ¹ Court of Appeals of Indiana,
First District. Aug. 5, 1985.
Rehearing Denied Sept. 18, 1985.

Page 397

Paul E. Becher, Barnes & Thornburg, Indianapolis, John Johnston, Johnston, Lehman & Guenin, Wabash, Ind., for appellants.

Richard K. Helm, Rockhill, Kennedy, Pinnick, Bent & Pequignot, Warsaw, for appellee.

RATLIFF, Presiding Judge.

STATEMENT OF THE CASE

This appeal is a consolidation of two separate cases. Desmond and Mildred Jackson, (the Jacksons) and D & M Motors, Inc., (D & M) suffered judgments of $85,592.28 and $39,968.09 respectively in favor of Farmers State Bank (FSB). ² In subsequent proceedings supplemental instituted by FSB to collect this judgment, the court set aside certain conveyances made by the Jacksons to Michael and Rickey Jackson and Tonya Jackson Woodling (garnishee-defendants). We affirm.

FACTS

The issues in this case all arise out of a dispute between the Jacksons and FSB. The Jacksons owned and operated a used car dealership incorporated as D & M Motors. In 1970, the Jacksons signed an agreement with FSB guaranteeing all of D & M's indebtedness to FSB. D & M's indebtedness was in the form of various financing plans such as an open note, a floor plan program, and the assignment of retail installment contracts.

In 1978 and 1979 disputes arose between FSB and D & M concerning the installment contract method of financing. Over the years the parties had agreed through a course of conduct as to the particulars of this method of financing. When a purchaser bought a car from D & M it would be financed by an installment loan contract which gave D & M a security interest in the car in exchange for monthly payments of the stated amount including principal and interest. The contract would then be

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assigned by D & M to FSB for value. It was FSB's policy, however, that it would not accept the contract unless D & M assigned it with recourse. This meant that in the event that a purchaser defaulted on his obligation, FSB could obtain payment from D & M Motors by presenting it with the contract. This course of conduct was observed by the parties and whenever a purchaser fell behind in payments, Mr. Jackson would pay-off the contract to FSB. By this arrangement it was D & M's obligation to pursue the purchaser for payment. The arrangement worked until 1979 when D & M began having financial trouble. FSB presented Mr. Jackson with several delinquent contracts which for a number of reasons he refused to pay. By the end of 1979, some short term notes given by D & M fell due and payment was not forthcoming.

In 1980 FSB brought an action against D & M and the Jacksons to collect the indebtedness. FSB filed a motion for summary judgment with an affidavit explaining each note and installment contract due including copies of each note and contract. The Jacksons and D & M responded by pointing to certain facts which they argued constituted genuine issues of material fact. Specifically, they argued payment of some overdue notes was tendered and refused raising an issue of fact as to the date from which interest should accrue. Regarding the installment contracts, D & M and the Jacksons stated that some contracts were actually without recourse and that FSB otherwise impaired the collateral securing some contracts. The trial judge agreed that the questions raised were issues of material fact to be litigated as to D & M's liability but found no issue remaining as to the Jacksons' liability on the indebtedness. The judge entered partial summary judgment against the Jacksons in July 1981 and amended this judgment on January 13, 1982. This judgment was again amended on December 7, 1982. The issues reserved were litigated at a trial held on June 7 and 8, 1983. On September 1, 1983, the court entered findings of fact and conclusions of law adverse to the Jacksons and D & M on all factual issues and corrected these findings on September 6. The Jacksons and D & M now appeal all adverse rulings concerning the merits of their liability to FSB.

The other case involves FSB's institution of proceedings supplemental to execution and complaint to set aside certain conveyances against the Jacksons. FSB claimed the Jacksons made transfers, beginning September 28, 1979, to frustrate the bank in its attempt to collect from the Jacksons. On this date, the Jacksons conveyed 60% of their entirety interest in four pieces of real estate to the garnishee-defendants. The conveyances of three of these properties were set aside; namely, the Jacksons' residence, the car lot, and the Atwood Duplex. The court found the Jacksons' transfers represented a course of conduct to intentionally defraud, hinder, and delay FSB in collecting the debts. Included in this course of conduct was the transfer of numerous other assets. The court found the transfer of the three properties on September 28, 1979 rendered the Jacksons insolvent and that this state of insolvency continued up to the time of FSB's attempt to execute on its judgment. Therefore, the transfers of the residence, car lot, and Atwood duplex to the garnishee-defendants were found to be fraudulent conveyances and void as to FSB. The garnishee-defendants now appeal this judgment.

ISSUES

Restated the issues as to the merits of this action are as follows:

1. Are the Jacksons liable to FSB on delinquent installment contracts assigned to FSB?

(A) Does lack of notice to the Jacksons' of the principal's default discharge their liability?

(B) Did FSB impair the collateral resulting in the Jacksons' discharge as a surety?

(C) Did FSB alter some of the contracts thereby discharging the Jacksons liability as a surety?

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2. Did the trial court err by denying the Jacksons motion for change of venue from judge?

3. Did the trial court err by finding Mr. Jackson in contempt for failure to comply with a court order?

4. Did the trial court err by entering partial summary judgment against the Jacksons?

The issues raised on the fraudulent conveyance claim are restated as follows:

5. Did the trial court err by setting aside the conveyance of the Jacksons' residence, car lot, and Atwood Duplex as in fraud of creditors?

6. Did the trial court err in exercising equitable jurisdiction before requiring FSB to first resort to available legal remedies?

7. Did the garnishee-defendants have notice that their interests in the Atwood Duplex and the car lot were subject to being set aside by the trial court?

8. Are the court's findings so vague as to render them void?

DISCUSSION AND DECISION

Issue One

The Jacksons first challenge the trial court's findings regarding their liability on the installment contracts. They argue that as guarantors, before being liable to pay-off an installment contract they were entitled to proof (1) that notice of the purchasers' default was sent to them; (2) that the purchasers were insolvent; (3) that FSB had made a demand for payment from the purchasers. This argument reveals a misunderstanding of the various relationships present in this case.

The facts as found by the trial court and supported by sufficient evidence reveal that D & M sold used cars to purchasers on installment loan contracts. FSB agreed to accept the assignment of these contracts for value. This assignment from D & M to FSB was always to be with recourse. FSB and D & M agreed by a course of conduct that whenever a purchaser defaulted on a payment, D & M would pay-off the entire contract. This agreement was not only established by the course of conduct but was also the definition of the term "with recourse" appearing on each installment contract assigned. Furthermore, all of D & M's indebtedness to the bank was unconditionally guaranteed by Desmond and Mildred Jackson after 1970.

It is important to note that the Jacksons were not liable on the installment contracts based on the guaranty agreement. By this agreement, the Jacksons promised to pay D & M's debts to FSB. We must, therefore, first consider the basis for D & M's liability to FSB.

FSB, as a holder, could require D & M to pay for a contract on which the purchaser defaulted because D & M was a recourse endorser of the instrument. Indiana Code section 26-1-3-414(1). Furthermore, any notice of dishonor due D & M pursuant to Indiana Code section 26-1-3-501(1)(a) was explicitly waived by D & M on each installment contract. Such a waiver is entirely proper under Indiana Code section 26-1-3-511(2)(a). D & M also expressly waived the right to require that FSB avail itself of any other remedy before exercising its right of recourse against D & M. ³ Therefore, D & M was immediately liable to FSB on the assigned installment contracts whenever a purchaser defaulted. In light of the waiver provision the only conceivable question of fact was whether the purchasers were actually in default. The Jacksons do not challenge whether the contracts were overdue, but even if they did, the evidence clearly shows that as of the time of the trial in 1983, all pertinent contracts were overdue.

With D & M's liability established, we now consider the effect of the Jacksons' guaranty agreement with FSB. The Jacksons' argument is that their liability under

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the guaranty agreement is discharged because no notice of their principal's default was given. Under certain circumstances notice of a principal's default must be given to bind a surety. The Furst & Bradley Manufacturing Co. v. Black (1887), 111 Ind. 308, 313-14, 12 N.E. 504, 507-08; Bowyer v. Clark Equipment Co. (1976), 171 Ind.App. 431, 436, 357 N.E.2d 290, 293, trans. denied. Assuming, arguendo, the guaranty agreement was the type which required notice, the Jacksons are still not entitled to discharge.

The Jacksons improperly label the purchasers of the cars as their principals....