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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. Hail to our Constitutional Law Expert in the Executive Office! “What you’re not paying attention to is the fact that I just took an action to change the law,” Obama said.

  2. What is this, the Ind Supreme Court thinking that there is a separation of powers and limited enumerated powers as delegated by a dusty old document? Such eighteen century thinking, so rare and unwanted by the elites in this modern age. Dictate to us, dictate over us, the massess are chanting! George Soros agrees. Time to change with times Ind Supreme Court, says all President Snows. Rule by executive decree is the new black.

  3. I made the same argument before a commission of the Indiana Supreme Court and then to the fedeal district and federal appellate courts. Fell flat. So very glad to read that some judges still beleive that evidentiary foundations matter.

  4. KUDOS to the Indiana Supreme Court for realizing that some bureacracies need to go to the stake. Recall what RWR said: "No government ever voluntarily reduces itself in size. Government programs, once launched, never disappear. Actually, a government bureau is the nearest thing to eternal life we'll ever see on this earth!" NOW ... what next to this rare and inspiring chopping block? Well, the Commission on Gender and Race (but not religion!?!) is way overdue. And some other Board's could be cut with a positive for State and the reputation of the Indiana judiciary.

  5. During a visit where an informant with police wears audio and video, does the video necessary have to show hand to hand transaction of money and narcotics?

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