Klinker v. First Merchants Bank, N.A.

• Citation: 964 N.E.2d 190
• Decision Date: 20 March 2012
• Docket Number: No. 01S04–1107–PL–438.,01S04–1107–PL–438.
• Parties: Harold J. KLINKER, Appellant (Defendant below), v. FIRST MERCHANTS BANK, N.A., Appellee (Plaintiff below).
• Court: Indiana Supreme Court

964 N.E.2d 190

Harold J. KLINKER, Appellant (Defendant below),

v.FIRST MERCHANTS BANK, N.A., Appellee (Plaintiff below).

No. 01S04–1107–PL–438.

Supreme Court of Indiana.

March 20, 2012.

J. Brian Tracey, Fort Wayne, IN, Attorney for Appellant.

Scott B. Ainsworth, Decatur, IN, Attorney for Appellee.

On Petition to Transfer from the Indiana Court of Appeals, No. 01A04–1003–PL–247

SULLIVAN, Justice.

The trial court granted summary judgment to the plaintiff and awarded it treble damages and attorney's fees under the Indiana Crime Victims' Compensation Act, finding that the undisputed facts established that the defendant had committed criminal fraud. We reverse the judgment on the fraud claims because there are genuine issues of material fact as to whether the defendant acted with the requisite criminal intent.

Background

The defendant, Harold J. Klinker, managed and operated Trucks Unlimited, Inc. (“Trucks”), a used-car dealership in Decatur, Indiana. The plaintiff, First Merchants Bank, N.A. (“FMB”), financed Trucks' vehicle inventory through certain floor-plan agreements. The floor-plan loans were secured by various security interests in Trucks' assets, all of which were duly perfected. Additionally, Klinker and his wife personally guaranteed Trucks' debts, and this was secured by other perfected security agreements and business mortgages.

The relevant terms of the most recent floor-plan agreement were as follows: FMB would loan money to Trucks exclusively for the purchase of vehicles for resale. In return, Trucks would grant FMB a first-priority lien in the purchased vehicles. When a vehicle was sold, Trucks was required to pay FMB a sum equal to the loaned purchase-money amount for that vehicle. The financed vehicles were to be held for resale at designated locations provided for in the agreement. Although Trucks was permitted to retain control of the vehicles' titles, it was prohibited from transferring or negotiating any documents of title without FMB's consent.

On December 23, 2008, a floor-plan audit of Trucks' inventory was performed on FMB's behalf. It was discovered that 31 vehicles for which FMB had loaned purchase money were not in Trucks' possession. No proceeds from the sale or transfer of those vehicles had been paid to FMB. And it was discovered that some of them had been transferred to another dealer to be held and sold by him, but no proceeds from those transfers had been remitted to FMB. During the audit, Klinker was asked about a specific pickup truck that had been floor planned but was not on the lot. He informed the auditor that the vehicle was out on a test drive and had not been sold, but it was later discovered that it had been sold almost two weeks prior.

On March 17, 2009, FMB filed an eight-count complaint in Adams Circuit Court against Klinker, Trucks, and others (only Klinker appeals). Count I alleged fraud and Count II sought treble damages and attorney's fees under Indiana Code section 34–24–3–1. Counts III through VI sought enforcement of the floor-plan agreements, the guarantees, the business mortgages, and the security agreements, respectively. And Counts VII and VIII sought enforcement of non-business-related promissory notes and mortgages. Klinker did not file a responsive pleading.

Several months later, FMB moved for summary judgment on Counts I through VII. ¹ By then only 22 vehicles were “missing.” Klinker filed a memorandum in opposition to which was attached his two-page affidavit. The trial court refused to consider the affidavit, reasoning that it had not been properly designated, and concluded that there were no genuine issues of material fact and that Klinker had defaulted and acted with intent to commit fraud. Accordingly, it granted summary judgment to FMB on all seven counts and awarded treble damages and attorney's fees on the fraud claims. Klinker filed a Motion to Correct Error,² which was denied.

On appeal, the Court of Appeals held that the trial court had erred in refusing to consider Klinker's affidavit but that summary judgment was proper because the affidavit consisted of self-serving statements unsupported by real evidence and that the undisputed facts disclosed three “badges of fraud.” Klinker v. First Merchants Bank, N.A., 938 N.E.2d 846, 849–52 (Ind.Ct.App.2010). Klinker's Petition for Rehearing was denied.

Klinker sought, and we granted, transfer, Klinker v. First Merchants Bank, N.A., 962 N.E.2d 640 (Ind.2011) (table), thereby vacating the opinion of the Court of Appeals, Ind. Appellate Rule 58(A).

Discussion

We consider only whether summary judgment on the fraud and treble-damages claims was proper. In reviewing a grant of summary judgment we face the same issues as the trial court and follow the same process. Owens Corning Fiberglass Corp. v. Cobb, 754 N.E.2d 905, 908 (Ind.2001). Under Trial Rule 56(C), the moving party bears the burden of making a prima facie showing that there are no genuine issues of material fact and that it is entitled to judgment as a matter of law. Dreaded, Inc. v. St. Paul Guardian Ins. Co., 904 N.E.2d 1267, 1269–70 (Ind.2009). If it is successful, the burden shifts to the nonmoving party to designate evidence establishing the existence of a genuine issue of material fact. Id. at 1270; Jarboe v. Landmark Cmty. Newspapers of Ind., Inc., 644 N.E.2d 118, 123 (Ind.1994).

In addition to contract damages, which are not disputed, FMB seeks exemplary damages under the Indiana Crime Victims' Compensation Act (“CVCA”). Under the CVCA, a person who suffers a pecuniary loss as a result of certain property crimes may bring a civil action against the person who caused the loss and recover up to three times the actual damages and a reasonable attorney's fee, along with other expenses. Ind.Code § 34–24–3–1 (2008). A criminal conviction is not a condition precedent to recovery under this statute. White v. Ind. Realty Assocs. II, 555 N.E.2d 454, 456 (Ind.1990) (interpreting statutory predecessor). Rather, the claimant merely must prove each element of the underlying crime by a preponderance of the evidence. Id.

I

FMB contends that Klinker violated Indiana Code section 35–43–5–4(8), which provides that “[a] person who ... with intent to defraud the person's creditor or purchaser, conceals, encumbers, or transfers property ... commits fraud, a Class D felony.” Effectively, this statute makes it a crime to execute a fraudulent conveyance with the specific intent to “defraud” the person's creditors. Summary judgment for FMB on this claim is proper only if the undisputed facts show that (1) Klinker (2) concealed, encumbered, or transferred property (3) with the specific intent to defraud FMB, his creditor.

It is undisputed that Klinker transferred financed vehicles without FMB's knowledge, thereby concealing them from his creditor. It is also undisputed that doing so constituted a breach of contract, but this does not lead inescapably to a finding of criminal fraud. See Sachs v. Blewett, 206 Ind. 151, 156, 185 N.E. 856, 858 (1933) (“This court has repeatedly said that actionable fraud cannot be predicated upon a promise to do a thing in the future, although there may be no intention of fulfilling the promise.” (citations omitted)); Milburn v. Phillips, 136 Ind. 680, 687, 34 N.E. 983, 984 (1893) (noting that fraud is never presumed and must be proved by the party charging it, “the presumption always being against bad faith” (citations omitted)); Jackson v. Myers, 120 Ind. 504, 509, 22 N.E. 90, 91 (1889) ( “Conceding that he was morally bound to execute a conveyance without a demand therefor[e], his failure so to do would not constitute a fraud. To so hold would be to abolish all distinction between fraud and breach of contract.”); cf. Manzon v. Stant Corp., 138 F.Supp.2d 1110, 1116 (S.D.Ind.2001) (“ ‘It is precisely this mens rea that differentiates criminal conversion from the more innocent breach of contract ... that the criminal conversion statute was not intended to cover.’ ” (ellipsis in original) (citation omitted)); Jet Credit Union v. Loudermilk, 879 N.E.2d 594, 597 (Ind.Ct.App.2008) (similar), trans. denied.

To obtain summary judgment, FMB must also demonstrate that the undisputed facts show that Klinker acted with the requisite mens rea—the specific intent to defraud. “A person engages in conduct ‘intentionally’ if, when he engages in the conduct, it is his conscious objective to do so.” I.C. § 35–41–2–2(a). Although “defraud” is not defined by statute, it is a familiar legal term dating to the fourteenth century meaning “[t]o cause injury or loss to (a person) by deceit.” Black's Law Dictionary 488 (9th ed. 2009). Thus, summary judgment is proper only if the undisputed facts show that, when Klinker made the challenged transfers, his conscious objective was to cause injury or loss to FMB by deceit.

The Court of Appeals and the trial court both employed the analysis used in cases where a judgment creditor brings proceedings supplemental to set aside as a fraudulent conveyance a transfer of property made by a judgment debtor. See Klinker, 938 N.E.2d at 850–51. In those cases, fraudulent intent may be inferred from various “badges of fraud,” such as:

1. a transfer of property by a debtor while a lawsuit is pending;

2. a transfer of property that renders the debtor insolvent or greatly reduces the debtor's estate;

3. a series of contemporaneous transactions that strip the debtor of assets available for execution;

4. a secret or hurried transaction not occurring in the usual mode of business;

5. a transaction conducted in a manner that differs from customary methods;

6. a transaction in which the debtor retains benefits over the transferred property;

7. a transfer made for inadequate consideration; and

8. a transfer of property between family members.

Milburn, 136 Ind. at 688–91, 34 N.E. at 984–85; Hoesman v. Sheffler, 886 N.E.2d 622, 629–30 (Ind.Ct.App.2008); Greenfield v. Arden Seven Penn Partners, L.P., 757 N.E.2d...