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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. 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.

  2. 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?

  3. I will agree with that as soon as law schools stop lying to prospective students about salaries and employment opportunities in the legal profession. There is no defense to the fraudulent numbers first year salaries they post to mislead people into going to law school.

  4. The sad thing is that no fish were thrown overboard The "greenhorn" who had never fished before those 5 days was interrogated for over 4 hours by 5 officers until his statement was illicited, "I don't want to go to prison....." The truth is that these fish were measured frozen off shore and thawed on shore. The FWC (state) officer did not know fish shrink, so the only reason that these fish could be bigger was a swap. There is no difference between a 19 1/2 fish or 19 3/4 fish, short fish is short fish, the ticket was written. In addition the FWC officer testified at trial, he does not measure fish in accordance with federal law. There was a document prepared by the FWC expert that said yes, fish shrink and if these had been measured correctly they averaged over 20 inches (offshore frozen). This was a smoke and mirror prosecution.

  5. I love this, Dave! Many congrats to you! We've come a long way from studying for the bar together! :)

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