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COA adopts rule allowing for partial subordination of 1st lienholder’s interest

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The Indiana Court of Appeals Wednesday decided the state should follow the majority rule on agreements to modify the priority of liens securing interests in a borrower’s assets.

Timothy, Lisa, Ross and Dane Clark and their farming operations pledged their 2010 crops as collateral to obtain loans from First Farmers Bank & Trust, Co-Alliance, LLP, and Monticello Farm Service, Inc. First Farmers was the first lienholder, Co-Alliance the second lienholder, and Monticello the third lienholder.  In June 2010, the bank and Monticello entered into an agreement in which Monticello would finance the Clarks’ 2010 crops, and in turn, the bank agreed to subordinate its interests in those crops to Monticello’s interests in the same.

Due to financial issues, Timothy and Lisa Clark entered into a settlement agreement which held the proceeds of their 2010 crop – $181,000, in an escrow account. Monticello sought to claim those proceeds based on the subordination agreement; Co-Alliance counterclaimed against Monticello, asserting it held the first priority lien. The trial court found Monticello was entitled to the disputed funds.

“The clear language of the subordination agreement shows that the parties’ intent was for the Bank to assign to Monticello a portion of any 2010 crop proceeds received by the Bank based on its status as the first lienholder. How else could the Bank have induced Monticello to make a loan but to guarantee it the right of first payment? Under these circumstances, treating a subordination of an interest differently from an assignment of that interest would add confusion to the law, not clarity, and would allow an intervening lienholder to obtain a windfall by becoming a senior lienholder through no action of his own,” Senior Judge Randall T. Shepard wrote. “Put another way, the agreement in this case is the functional and legal equivalent of a partial assignment. And in fact, such ‘partial subordination’ is the majority approach to subordination agreements.”

The appellate court rejected Co-Alliance’s claim that the court should adopt the approach that the bank’s lien drops to the end of the line based on the agreement. The COA instead adopted the majority rule, which allows for partial subordination of the first lienholder’s interest.

“The Bank could induce Monticello to finance the Clarks’ 2010 crops by giving Monticello its right to first payment. By virtue of the subordination agreement, Monticello would be paid first, but only up to the amount of the Bank’s senior claim, to which Co-Alliance was in any event junior. Co-Alliance would still receive what it expected to receive had there been no subordination agreement,” he wrote in Co-Alliance, LLP v. Monticello Farm Service, Inc., 91A05-1312-PL-607.
 

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  1. What a fine article, thank you! I can testify firsthand and by detailed legal reports (at end of this note) as to the dire consequences of rejecting this truth from the fine article above: "The inclusion and expansion of this right [to jury] in Indiana’s Constitution is a clear reflection of our state’s intention to emphasize the importance of every Hoosier’s right to make their case in front of a jury of their peers." Over $20? Every Hoosier? Well then how about when your very vocation is on the line? How about instead of a jury of peers, one faces a bevy of political appointees, mini-czars, who care less about due process of the law than the real czars did? Instead of trial by jury, trial by ideological ordeal run by Orwellian agents? Well that is built into more than a few administrative law committees of the Ind S.Ct., and it is now being weaponized, as is revealed in articles posted at this ezine, to root out post moderns heresies like refusal to stand and pledge allegiance to all things politically correct. My career was burned at the stake for not so saluting, but I think I was just one of the early logs. Due, at least in part, to the removal of the jury from bar admission and bar discipline cases, many more fires will soon be lit. Perhaps one awaits you, dear heretic? Oh, at that Ind. article 12 plank about a remedy at law for every damage done ... ah, well, the founders evidently meant only for those damages done not by the government itself, rabid statists that they were. (Yes, that was sarcasm.) My written reports available here: Denied petition for cert (this time around): http://tinyurl.com/zdmawmw Denied petition for cert (from the 2009 denial and five year banishment): http://tinyurl.com/zcypybh Related, not written by me: Amicus brief: http://tinyurl.com/hvh7qgp

  2. Justice has finally been served. So glad that Dr. Ley can finally sleep peacefully at night knowing the truth has finally come to the surface.

  3. While this right is guaranteed by our Constitution, it has in recent years been hampered by insurance companies, i.e.; the practice of the plaintiff's own insurance company intervening in an action and filing a lien against any proceeds paid to their insured. In essence, causing an additional financial hurdle for a plaintiff to overcome at trial in terms of overall award. In a very real sense an injured party in exercise of their right to trial by jury may be the only party in a cause that would end up with zero compensation.

  4. Why in the world would someone need a person to correct a transcript when a realtime court reporter could provide them with a transcript (rough draft) immediately?

  5. This article proved very enlightening. Right ahead of sitting the LSAT for the first time, I felt a sense of relief that a score of 141 was admitted to an Indiana Law School and did well under unique circumstances. While my GPA is currently 3.91 I fear standardized testing and hope that I too will get a good enough grade for acceptance here at home. Thanks so much for this informative post.

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