Indiana Court decisions – Nov. 20-Dec. 4, 2019

7th Circuit Court of Appeals

Nov. 26

Civil Plenary – Slip-and-fall/Show Cause

Linda Waldon and Steve Waldon v. Wal-Mart Stores, Inc.

19-1529

An order to show cause has been entered against a Crawfordsville attorney whom the 7th Circuit Court of Appeals says intentionally altered photographs entered into the record in a slip-and-fall case. The appellate court also raised the possibility of sending the matter to the Indiana Supreme Court Disciplinary Commission.

In Linda Waldon and Steve Waldon v. Wal-Mart Stores, Inc., 19-1529, Linda Waldon alleged she slipped and fell after stepping on fallen plastic hangers while browsing in a Crawfordsville Walmart, injuring her back, neck and head. Waldon sued Wal-Mart Stores Inc., alleging the company failed to provide a safe environment for its shoppers and was therefore liable for her injuries.

Waldon and her husband, Steve Waldon, asserted before the Indiana Southern District Court that she had no knowledge of how long the hanger was on the floor or whether Walmart knew the hanger was there, nor did she know that an employee had visually inspected the same area just minutes before without seeing any hazards on the ground. The district court instead determined Walmart had presented evidence that it had no actual knowledge of the purportedly dangerous conditions, but the Waldons claimed the employees lied, submitting two photographs allegedly depicting “substantial debris” where Linda fell.

Disregarding the photos for their failure to show that the conditions depicted were the same or similar to those on the day of the accident, the district court concluded the Waldons’ premises-liability claim failed as a matter of law and entered summary judgment for the retailer.

The 7th Circuit affirmed, finding, among other things, that “(n)one of Waldons’ arrows hit their mark” regarding the issue of the employee’s testimony and concluding Linda’s challenge was insufficient to overturn the district court’s decision because she offered “no evidentiary support for their assertion that the Wal-Mart employees’ affidavits were incredible, self-serving statements that cannot support summary judgment.”

The 7th Circuit then raised the “troubling point” that the Waldons’ counsel appeared to have altered the photographs from the district court record. The appellate court asked who had altered the images and why, noting discrepancies in the date stamps on the photos.

“Waldons’ counsel admits the date stamps were deleted when the photos were reproduced in their separate appendix for this court. Counsel places the responsibility for ‘the differing markings’ on a legal assistant who created the appendix and claims that when the photos were scanned in their office the date stamp disappeared. But legal ethical rules impose broad supervisory responsibilities on attorneys over their staff, and prohibit lawyers from disavowing responsibility for an assistant’s conduct,” Judge Michael Brennan wrote.

Persuasive evidence was presented by Walmart that the photos were intentionally altered, the 7th Circuit continued, noting the pages accompanying the altered photos were the only handwritten pages from a 248-page appellate appendix. Those pages also lacked the district court’s filing information across the top.

“Even more distressing is Waldons’ counsel’s representations to this court about these photographs. The Waldons contend the photos are their ‘best evidence’ of actual and constructive notice. In the Waldons’ appellate brief their counsel repeatedly says the photos are from the date of her injuries. And at least twice at oral argument Waldons’ counsel misrepresented that the photographs were taken the day of the incident,” Brennan wrote. “His untruthful statements to this court in writing and at oral argument about when the photographs were taken and that they depict the fall location on January 1, 2017 trouble us considerably, including because the Waldons rely so heavily on the photos in this appeal.”

The 7th Circuit thus concluded Waldon’s counsel, James Ayers of Wernle, Ristine & Ayers in Crawfordsville, “intentionally altered the photographs previously submitted in the district court record” and misrepresented to the court what day they were taken on. It ordered Ayers to show cause within 14 days why he should not be sanctioned under Rule 46 of the Federal Rules of Appellate Procedure for altering the photographs and misrepresenting the record to the court.

“Additionally, after considering Waldons’ counsel’s response, we will decide whether to forward a copy of this opinion to the Indiana Supreme Court Disciplinary Commission for it to consider whether to institute disciplinary proceedings against him,” the 7th Circuit concluded.

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Dec. 3

Civil Plenary – First Amendment/Public Employees

Amy Harnishfeger v. United States of America, et al.

18-1865

According to the 7th Circuit’s Dec. 3 opinion in Amy Harnishfeger v. United States of America, et al., 18-1865, Harnishfeger became a phone sex operator during a stint of unemployment.

“She decided to try phone-sex work, but quickly discovered it was not the ‘flirty fun’ the phone-sex industry held it out to be,” Judge David Hamilton wrote for the court. “Harnishfeger was horrified to hear what some of the callers would fantasize about, including sexual abuse of children.”

Harnishfeger shared her experiences via “Conversations with a Monster,” a book she wrote that detailed five of her most “horrifying” calls. The book also opined on the social role of phone sex operators and their part in facilitating or preventing sexual assault.

Harnishfeger published the book under a pseudonym, though she announced on her private Facebook page that she had written it.

Shortly after the book was released, Harnishfeger was selected for the Volunteers in Service to America, or VISTA, program, an AmeriCorps program run by the Corporation for National and Community Service. Harnishfeger was placed with the Indiana Army National Guard, where she maintained a database for the Family Program Office.

But when Harnishfeger’s supervisor, Noelle Butler, became her Facebook friend, Butler discovered the post about “Conversations with Monsters.” Butler and another guard employer bought the book and brought it to the attention of Lt. Col. Lisa Kopczynski, the director of the Family Program Office.

Upon learning of the book, Kopczynski contacted a CNCS representative asking for Harnishfeger’s removal or termination, saying the book did not reflect well on the Family Program. Kopczynski then explained Harnishfeger’s removal by telling her the book was “really horrible,” though the volunteer later agreed to deactivate her Facebook in favor of completing her VISTA service with another organization.

Ultimately, none of the alternative organizations were a good fit for Harnishfeger, so her VISTA membership was terminated. She sued the government and other National Guard officials, including Kopczynski, under the First Amendment and the Administrative Procedure Act, but the Indiana Southern District Court granted summary judgment to the defendants.

In overturning summary judgment for Kopczynski, the 7th Circuit first upheld the validity of Harnishfeger’s First Amendment claim, relying on United States v. National Treasury Employees Union, 513 U.S. 454 (1995) and Pickering v. Board of Education, 391 U.S. 563 (1968).

“Harnishfeger’s book was written and published a month before she began her VISTA service. Its content is entirely unrelated to CNCS, VISTA, and the Guard,” Hamilton wrote. “It was written for a general audience on the personal experiences of sex workers and their social role, matters for which there is undoubtedly a public. Harnishfeger never deliberately linked the book to her VISTA service, which had not even begun at the time of publication.

“…Conversations was speech on a matter of public concern within the meaning of NTEU, and Harnishfeger is therefore entitled to Pickering balance,” he continued. “The district court erred in reaching the contrary conclusion.”

The district court had ruled in the alternative that even if “Conversations” met the threshold issue of constitutional protection, the Pickering balance would weigh in favor of the defendants because of the way the book would affect perceptions of the National Guard and the Family Program Office. But the 7th Circuit also disagreed with that finding.

“The connection between the stated grounds for Harnishfeger’s termination and the evidence before us is so tenuous as to support a reasonable inference that the former were mere pretexts for the feelings of embarrassment and disgust that Conversations undoubtedly – and intentionally, Harnishfeger points out – arouses in its readers,” Hamilton said. “But a public employer may not ‘use authority over employees to silence discourse, not because it hampers public functions but simply because superiors disagreed with the content of employees’ speech.’”

The 7th Circuit further determined that Kopczynski was acting under color of state law when she demanded Harnishfeger’s removal, creating a remedy under 42 U.S.C. § 1983. And, the court said, Kopczynski was not covered by qualified immunity because “Conversations” is protected speech, and there was no evidence that such speech caused an actual disruption.

However, as to Harnishfeger’s claims against the United States and two employees of the Corporation for National and Community Service, the 7th Circuit found no “triable issue on any federal defendant’s personal participation in a constitutional violation and otherwise failed to show a triable issue on her APA claim.” Specifically, Harnishfeger failed to prove the CNCS employees played a role in her removal, Hamilton wrote, and she also failed to prove that she faced a “uniquely onerous” burden in attempting to find a new VISTA assignment.

“Undoubtedly, CNC’s course of proceeding put Harnishfeger in a less than ideal position to continue her VISTA service,” the judge wrote. “But non-ideal is not irrational.”

The case was remanded for further proceedings.

Indiana Supreme Court

Dec. 3

Civil Plenary – Nonsolicitation/Reformation Clause

Heraeus Medical, LLC, et al. v. Zimmer, Inc., et al.

19S-PL-471

The Indiana Supreme Court has vacated a preliminary injunction prohibiting a medical sales representative from recruiting employees away from his former employer, finding a nonsolicitation agreement he had previously signed with the company cannot be reformed.

In Heraeus Medical, LLC, et al. v. Zimmer, Inc., et al., 19S-PL-471, a dispute between medical components company Zimmer Inc. and its former employee Robert Kolbe began after Kolbe recruited other Zimmer employees to work with him at his new job with Heraeus Medical.

When he began working for Zimmer, Kolbe signed a noncompetition agreement prohibiting him from recruiting Zimmer employees to work for a competitor. After several Zimmer employees began filling position with Heraeus, litigation ensued.

Zimmer alleged Kolbe violated the nonsolicitation covenant by recruiting former Zimmer employees to work for Heraeus. The company sought a preliminary injunction to enforce the Kolbe agreement, which the Kosciusko Superior Court granted, thereby prohibiting Kolbe from recruiting Zimmer employees.

The Indiana Court of Appeals found the nonsoliciation agreement to be overbroad and thus unenforceable, but revised the nonsolicitation covenant to make it reasonable after finding that a reformation clause in the Kolbe agreement authorized the court to modify unenforceable provisions.

Indiana Supreme Court justices granted transfer to the case in September and ultimately rejected Zimmer’s argument that reforming the overbroad covenant wouldn’t upend Indiana’s blue pencil doctrine but would rather “give effect to the parties’ stated intent.

“We disagree with Zimmer,” Chief Justice Loretta Rush wrote for the unanimous court. “Consistent with the history and purpose of Indiana’s blue pencil doctrine, courts cannot add terms to an unenforceable restrictive covenant in a noncompetition agreement — even when that agreement contains language purporting to give a court the power to do so. And because Zimmer’s nonsolicitation covenant is overbroad and cannot be blue-penciled in a way that would render it reasonable under Indiana law, the covenant is void and unenforceable.”

Likewise, parties to noncompetition agreements cannot then use a reformation clause to contract around the principle, the high court found. It therefore concluded that the blue pencil doctrine applies in the case at hand, despite the Kolbe agreement’s reformation clause, to bar an interpreting court from adding language to limit the scope of its restrictive covenants.

“Because the Kolbe Agreement’s unenforceable covenant not to solicit Zimmer employees cannot be reformed, we vacate section 1(e) of the trial court’s preliminary injunction order — which purports to enforce that covenant — and remand,” the high court concluded.

All justices concurred, affirming the appellate court’s decision in all other respects.

Indiana Court of Appeals

Nov. 20

Guardianship – Special Immigrant Juvenile/Power of Attorney

In the Matter of the Guardianship of Shirla Gonzalez Xitumul: Miguel Hernandez Jeronimo

19A-GU-948

An Indiana trial court judge who doubted whether he had the authority to grant a guardianship in a case before him involving two undocumented immigrants will get the case back from the Indiana Court of Appeals, which told him in a Nov. 20 opinion that his ruling was erroneous.

The case involves Shirla Gonzalez Xitumul, who at age 14 escaped her “violent” father in Guatemala in October 2017, eventually settling in Decatur County with her uncle, Miguel Hernandez Jeronimo.

Hernandez has a foreign power of attorney signed by Shirla’s parents allowing him to act in his niece’s interests.

Shirla’s parents also signed a document renouncing parental authority after she settled with Hernandez, “so that he can provide the essentials for her subsistence,” according to the record. In January, Hernandez filed an unopposed petition with the Decatur Circuit Court to be named Shirla’s guardian. Judge Timothy Day noted he “reluctantly” made special immigrant juvenile status findings, including that returning Shirla to her native country would not be in her best interests, but he found that appointment of a guardian was not necessary because of Hernandez’s power of attorney.

Day also said in a hearing, “[W]e have a noncitizen of our country asking me to grant him relief under the laws of our country. … To grant guardianship over again, a noncitizen. … So I don’t know where I stand as a state court, in my ability to grant this.”

Appellate Judge Margret Robb pointed with added emphasis to Indiana Code § 29-3-5-1(a): “[a]ny person may file a petition for the appointment of a person to serve as guardian for an incapacitated person or minor[.]

“… Therefore, under the relevant statutes and definitions, neither the citizenship of the proposed guardian nor the citizenship of the minor impacts whether a petition for guardianship can be filed or granted,” Robb wrote for the panel in In the Matter of the Guardianship of Shirla Gonzalez Xitumul: Miguel Hernandez Jeronimo, 19A-GU-948.

“With respect to Shirla’s dependency or custody, the trial court found that a guardianship was not necessary because Hernandez already had a power of attorney entitling him to act on Shirla’s behalf. However, a guardian appointed by a court to have the care and custody of the person or property of a minor … and an attorney in fact designated to act for a principal under a power of attorney … are not interchangeable and the existence of one does not preclude the other. … And in a case seeking an SIJ predicate order, the ‘appointment of a guardian constitutes the necessary declaration of dependency on the juvenile court,’” the panel held, citing In re Estate of Nina L. ex rel. Howerton, 41 N.E.3d 930 (Ill. App. Ct. 2015).

“Whether or not Hernandez must have the status of guardian to enroll Shirla in school or seek medical treatment for her, it is necessary that he be named her guardian so that she can apply for SIJ status. Thus, it appears the trial court considered the question of the ‘necessity’ of this guardianship through the wrong lens and erred in declaring the guardianship unnecessary,” the panel held.

The case was remanded for further proceedings on the guardianship petition.

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Nov. 21

Miscellaneous – Medical Malpractice/Summary Judgment

Alfred Strickholm, et al. v. Anonymous Nurse Practitioner

19A-MI-696

A ruling that favored a Bloomington nurse practitioner was reversed Nov. 21 after the Indiana Court of Appeals found a question remained about whether she had provided health care to a patient just days before he suffered from cardiac arrest.

On Dec. 1, 2015, Peter Strickholm was prescribed a blood pressure medicine for his high levels by a nurse practitioner who had recently been established as his primary care provider. One week later, Strickholm returned to have his blood pressure checked. Another nurse took the blood pressure test, rather than his NP, and sent the results to another physician in the office who noted improvement as well as unchanged levels. The physician suggested Strickholm be seen again in a few weeks and said he should increase his dosage if his blood pressure levels were still elevated.

When his NP reviewed and approved the physician’s report Dec. 11, she made no further testing or treatment recommendations. Strickholm suffered cardiac arrest days later, leaving him with cognitive impairment. His parents subsequently filed a medical malpractice claim against the NP, alleging she had breached the relevant standard of care in her treatment of Strickholm up to and through at least Dec. 8, causing him harm.

A trial court later granted the NP’s motion for summary judgment, finding she did not provide any medical care to Strickholm after Dec. 1, thus rendering the complaint late by three days. It concluded that the continuous-wrongdoing doctrine didn’t apply to the NP’s single act of prescribing Strickholm medication, and that she didn’t provide health care to him the day she signed his report because she did not physically see him in person.

An appellate panel reversed in Alfred Strickholm, et al. v. Anonymous Nurse Practitioner, 19A-MI-696, finding as dispositive the issue of whether the NP’s act of reviewing and approving the record of Strickholm’s prior visit constituted the provision of health care.

“Anonymous NP characterizes her approval as merely ‘an administrative function to close the open note in Peter Strickholm’s medical record[,]’ and contends that the only response to Peter’s December 8, 2015, visit was made by the physician in the office that day and/or the LPN as a matter of law. We have little hesitation in concluding otherwise,” Judge Cale Bradford wrote for the appellate panel.

“Even if we assume that Anonymous NP did not see Peter after December 1, 2015, there is designated evidence that December 11, 2015, was the last opportunity she had to evaluate Peter’s latest test results and order further testing or further treatment,” the panel wrote.

It thus concluded that a genuine issue of material fact existed regarding whether the NP provided health care to Strickholm when she approved his report on Dec. 11. The appellate court further rejected the NP’s reliance on both Havens v. Ritchey, 582 N.E.2d 792 (Ind. 1991) and Szamocki v. Anonymous Dr. & Anonymous Grp., 70 N.E.3d 419, 424 (Ind. Ct. App. 2017), trans. denied, noting that each case was factually distinguishable from Strickholm’s case.

As a result, the appellate court ultimately reversed the trial court’s entry of summary judgement and remanded for trial on the question of timeliness.

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Nov. 25

Civil Collection – Default Judgment/Jurisdiction

Innovative Therapy Solutions Incorporated, D/B/A Innovative Pharmacy Solutions v. Greenhill Manor Management, LLC, et al.

19A-CC-1717

The Indiana Court of Appeals has reinstated default judgement against three nursing facilities after concluding the defendants couldn’t explain why their response was so late and that the underlying complaint was not “insufficient.”

Innovative Therapy Solutions Inc. filed a complaint in January 2019 alleging skilled nursing facilities Greenhill Manor Management, Hanover Nursing Management and Wintersong Village Management had failed to provide compensation for $52,400.61 worth of goods and services provided by ITS. The complaint requested the full amount owed, plus prejudgment interest at an 8% rate.

Summonses were sent to each of the defendants, but ITS later filed for default judgment, alleging all three failed to timely file a responsive pleading. Default judgment was ultimately ordered against the three defendants, but defense counsel responded by filing a motion to set aside the default judgment pursuant to Trial Rule 60(B).

Specifically, the defendants alleged that because ITS originally failed to attach the Affidavit of Debt to the complaint it served on defendants, the service of process was “inadequate.” They also claimed the Hamilton Superior Court lacked personal jurisdiction over defendants and the default judgment was void pursuant to Rule 60(B)(6), and that the default judgment should be set aside pursuant to Rule 60(B)(8) because of “equitable considerations.”

The trial court ordered that the default judgment be set aside, but the Indiana Court of Appeals reversed in Innovative Therapy Solutions Incorporated, D/B/A Innovative Pharmacy Solutions v. Greenhill Manor Management, LLC, et al., 19A-CC-1717.

In its defense, the defendants contended that inadequate service produced by ITS’ initial failure to attach the Affidavit of Debt to the complaint rendered the latter insufficient and that the trial court was therefore without personal jurisdiction over them. They further argued the default judgment was therefore void and should be vacated.

“However, ‘it is well established that non-compliance with Rule 9.2(A) is not a per se bar to the action.’ … Rather, Trial Rule 9.2(F) — which Management Defendants only selectively quote — plainly states that a trial court faced with non-compliance with 9.2(A), ‘in its sound discretion, may order compliance, the reasons for non-compliance to be added to the pleadings, or allow the action to continue without further pleading,’” Judge L. Mark Bailey wrote for the appellate court.

The COA found that because the trial court issued a notice to the parties in which it decided to allow ITS to submit an Affidavit of Debt without amending the complaint, the court acted within its discretion. Thus, it concluded, Trial Rule 60(B)(6) did not afford Greenhill, Hanover and Wintersong relief from the default judgment.

Additionally, the appellate court found the defendants failed to allege facts that would indicate a reasonable basis for why they waited more than seven weeks from the date of the default judgment to file a motion to set aside that judgment.

“Management Defendants failed to allege facts showing the default judgment was void or any other reason justifying relief from judgment,” Bailey wrote. “Therefore, the trial court order setting aside the default judgment was clearly against the logic and effect of the facts and circumstances … .

“A default judgment is an ‘extreme remedy,’ and we prefer to decide cases on the merits where possible,” the panel concluded. “…However where, as here, there is no explanation at all for an untimely response, ‘[t]he judicial system simply cannot allow its processes to be stymied by simple inattention.’”

The case was remanded for proceedings consistent with the opinion.

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Dec. 2

Civil Plenary – Legal Malpractice/Judgment on the Evidence

Drendall Law Office, P.C. v. Lucy Mundia

19A-PL-582

Judgment will be entered for a northern Indiana law firm facing a legal malpractice claim after the Indiana Court of Appeals reversed the denial of the firm’s motion for judgment on the evidence.

In 2013, Lucy Mundia’s husband Edward Mwuara had been arrested on suspicion of violating a protective order against Mundia’s 6-year-old daughter, Shirley. Authorities misspelled his name upon his arrest, and when a deputy prosecutor checked the protective order registry under the misspelled name, she found no active order. Mwuara was released, but days later he attacked Mundia and Shirley, killing the girl.

Mundia hired the Drendall Law Office to represent her in a potential negligence suit against the city of South Bend and St. Joseph County, but the firm failed to file the requisite tort claim notice, thus “barring” Mundia’s claims. Mundia responded with a legal malpractice action, but the St. Joseph Circuit Court ruled in the law firm’s favor.

The Indiana Court of Appeals, however, reversed summary judgment for Drendall and remanded Mundia’s case, finding Drendall did not meet its initial burden of negating the elements of proximate cause and damages of Mundia’s legal malpractice claim.

Following a jury trial that issued a verdict in Mundia’s favor, Drendall renewed an earlier motion for judgment on the evidence but was denied. However, the law firm found more success on its second appeal to the COA in Drendall Law Office, P.C. v. Lucy Mundia, 19A-PL-582.

Members of the appellate panel on Dec. 2 found the jury’s verdict in Mundia’s favor was clearly erroneous and that her evidence was insufficient to prove that Drendall’s failure to file a tort claim notice caused her to lose the opportunity to settle with the public entities. An essential element of her legal malpractice claim was thus not supported by substantial evidence, it concluded.

“Although Mundia’s evidence suggests the possibility of a settlement was not completely foreclosed, there was no substantial evidence or reasonable inference from the evidence that it was probable she would have obtained a settlement under these circumstances,” the COA wrote in its reversal. “In other words, Mundia’s evidence may have proved that she could have gotten a settlement, but it did not prove that she would have.

“… Although the facts of this case are undeniably tragic and Mundia has unquestionably suffered harm, the law and the evidence in this case do not support her claim for relief. Mundia has failed to present sufficient, probative evidence on a necessary element of her legal malpractice claim, and therefore the jury’s verdict in her favor ‘is wholly unwarranted,’” it concluded.

The COA thus concluded the trial court abused its discretion in denying Drendall’s Trial Rule 50(A) motion for judgment on the evidence and remanded for a vacation of the jury’s verdict, as well as entry of judgment for the law firm.

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Dec. 3

Criminal – Trespass/Sufficiency of the Evidence

David Kifer v. State of Indiana

19A-CR-1188

A trespassing conviction has been vacated for a man who was banned from the Evansville government complex, with the Indiana Court of Appeals addressing first-impression issues of whether outright bans from public buildings are permissible.

In David Kifer v. State of Indiana, 19A-CR-1188, David Kifer was informed via letter in March 2005 that he was no longer allowed in the county’s Civic Center Complex. The building included the police department, so when Kifer was sentenced on an unrelated charge in 2019, he was advised to contact the sheriff’s office in advance if he needed to enter the building.

One month later, Kifer arrived at the complex wanting to file a police report about his wife threatening him with knives. Two officers working at the building’s entrance knew of Kifer’s ban from the building, but they did not ask him to leave. Instead, after Kifer reported the alleged crime, he was arrested.

Kifer was then charged with and convicted of Level 6 felony criminal trespass and was sentenced to two years in the Indiana Department of Correction. But in overturning his conviction, Judge Patricia Riley wrote Dec. 3 that the state did not prove the existence of an agency relationship.

Specifically, Riley pointed to the testimony of David Rector, the general manager for the Evansville Vanderburgh County Building Authority who sent Kifer the letter banning him from the civic complex. The court likened this to the case of Glispie v. State, 955 N.E.2d 819, 821 (Ind. Ct. App. 20110), reh’g denied.

“(Rector) banned Kifer after being ‘notified by judicial officers, law enforcement officials, elected department heads,’” Riley wrote. “However, as Rector is the general manager employed by the Building Authority, he is not the agent of judicial officers, law enforcement officials, or elected department heads and therefore cannot derive his authority from them. … Accordingly, the State did not carry its burden of proof.”

The COA also addressed an issue of first impression raised by Kifer – whether an agent can ban a person “forever and permanently from a public building.” It looked to out-of-state precedent from Louisiana and Alaska in the cases of State v. Johnson, 381 So.2d 498 (La. 1980) and Turney v. State, 922 P.2d 283 (Ak. Ct. App. 1996), for guidance.

Answering that question in a footnote, Riley wrote that the court “does not decide that an individual cannot be banned from a public building; rather, we conclude that this decision has to be communicated by the proper authorized person and cannot be in place permanently without anything more. We decline to address whether a permanent ban can be in place with the specification that access to the building is possible upon advance notice or by request for an escort at the entrance.”

Indiana Tax Court

Nov. 25

Tax – Valuation/Build-to-suit Lease

Southlake Indiana LLC v. Lake County Assessor

18T-TA-16

Valuations of a Merrillville Kohl’s store have been reversed after the Indiana Tax Court found error in a state board’s analysis.

The case of Southlake Indiana LLC v. Lake County Assessor, 18A-TA-16, traces back to 1992, when Southlake Indiana first executed a build-to-suit lease with a Kohl’s store on a retail building in Merrillville. From 2007 to 2012, the Lake County assessor valued the property at roughly $16.8 million, then lowered the valuation to $13.7 million in 2013 and 2014.

Southlake appealed all of those valuations as too high, and the Lake County Property Tax Assessment Board of Appeals reduced the assessments for 2007 through 2012. Southlake appealed again, this time to the Indiana Board of Tax Review.

Southlake’s appraiser, Sara Coers, used three methods, including calculating rent as a percentage of gross sales, to estimate the property’s rent and determined its net operating income was $4.88 to $6.09 per square foot. But the assessor’s appraiser, Mark Kenney, used a market-rent analysis to estimate an NOI of $8.19 to $9.58 per square foot. The appraisers each used differing capitalization rates.

In evaluating the appraisals, the Indiana board created its own evaluation method that compared 16 leases to Coers’ and Kenney’s estimate market rents, and determined Kenney’s were better suited. The board also found that if Coers’ gross-sales-percentage analysis was “corrected,” it supported Kenney’s. Thus, the board adopted Kenney’s income approach values.

But the Indiana Tax Court reversed the board on Nov. 25, with Judge Martha Blood Wentworth finding the board’s reliance on Kenney’s market rent estimates to be contrary to law.

Specifically, Wentworth pointed to testimony from Kendall Lees, a Kohl’s real estate expense manager, which the judge said showed that “Kohl’s build-to-suit rents are often above market because they actually reflect non-property interests.” That meant that, under Grant Cty. Assessor v. Kerasotes Showplace Theatres, LLC, 995 N.E.2d 876 (Ind. Tax Ct. 2011), Kenney and the board should have adjusted the build-to-suit leases they relied upon, but they did not do so.

“…(W)hile Coers included unadjusted build-to-suit leases in her market extraction analysis, she explained that she ultimately did not consider them because they were old leases and she did not have a ‘great way’ to adjust them to market levels,” Wentworth said. “…Coers further explained that she would not consider build-to-suit rental data in her analysis unless she could confirm that the leases were motivated by market terms, that the potential above-market rent could be isolated, or how the increment of tenant quality could affect the sales price.

“…This evidence shows that Coers exercised caution – as required by Kerasotes – whenever build-to-suit rental data was included in her analyses, and the record is devoid of relevant evidence that shows otherwise,” Wentworth continued. “… Accordingly, the Indiana Board’s finding that Coers relied on build-to-suit leases that did not reflect market rent is unsupported by the record evidence.”

The Tax Court also agreed with Southlake that the board’s adjustment of Coers’ percentage-of-gross-sales market rent estimates was unsupported by substantial and reliable evidence, saying the board provided “little basis” to prove the alleged errors in Coers’ analysis. “Moreover,” Wentworth said, “the Indiana Board cited no evidence or authority to support its methodology or show that it actually corrected the alleged error in Coers’s analysis.”

Thus, the case was remanded to the board “with instructions to assign the subject property a market value-in-use under the income approach that: 1) calculates the property’s NOI each year at issue by replacing Kenney’s market rents with market rents derived by Coers through her reconciliation of her market extraction and gross percentage of sales estimates; and 2) applies Coers’s capitalization rates for 2010, 2011, and 2012, but Kenney’s capitalization rates for 2007, 2008, 2009, 2013, and 2014.”•

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