Recent Court of Appeals’ Decision Highlights Potentially Sweeping
Ramifications of Reports and Accounts Filed by Receivers
By John Rogers
A recent decision by the Indiana Court of Appeals may create unexpected pitfalls for unwary receivers, creditors and companies involved in receivership proceedings who are unfamiliar with the decision’s implications. Although it remains to be seen to what extent the holding may be limited by its somewhat unusual facts, a straightforward reading of the opinion in Memory Gardens Mgmt. Corp., Inc. v. Liberty Equity Partners, LLC et al., 2015 Ind. App. LEXIS 614 (Ind. Ct. App., Sept. 3, 2015), trans. denied, 2015 Ind. LEXIS 1053, 42 N.E.3d 520 (Ind., Dec. 17, 2015) is that any claims that would be assets of an entity in receivership are expunged if they are not addressed in reports and accountings filed by court-appointed receivers.
While the holding Memory Gardens appears unambiguous, the facts are somewhat complicated. The claim at issue involved a lawsuit filed by Robert Nelms on a $450,000 Demand Note given by Old Bridge Funeral Home (“Old Bridge”) to Memory Gardens Management Corporation (“MGMC”). Nelms was the sole shareholder of MGMC, the managing member and CEO of Old Bridge, and also the sole shareholder of Ansure Mortuaries of Indiana, LLC (“Ansure”), parent company of MGMC. Before Nelms filed the lawsuit on the Demand Note, Ansure was in a receivership, along with its subsidiaries, including MGMC, which performed management services for Ansure and other related companies. In the course of the receivership, most of Ansure’s assets – but not its equity interest in MGMC – were sold to a purchaser, after which the receiver filed a motion seeking authority to file a final report, to return certain remaining assets to Nelms, and to retain control over MGMC for the purpose of closing out is accounts and winding down its business affairs as management company. The receiver’s motion was approved without objection, as was the receiver’s final report, and a subsequent supplemental final report. The receiver also filed articles of dissolution for MGMC, after which the court entered an order discharging the receiver.
Two years later, Nelms filed suit against Old Bridge, purportedly as president of MGMC. Old Bridge moved for summary judgment on two theories, including the obvious one that MGMC had been dissolved, from which Old Bridge concluded there was no “standing” to assert the claim. In response to this argument, Nelms and MGMC countered that the company was in the process of being reinstated, and that MGMC had been “returned” to Nelms along with other assets. The trial court granted summary judgment for Old Bridge, but relied on the second argument made by Old Bridge – namely, that because the $450,000 note was not mentioned in the inventory, final report or accounting filed by the receiver, the receiver “effectively abandoned this claim,” and pursuant to Ind. Code 32-30-5-18(b), any suit on the note was “forever barred” because Ansure, MGMC and Nelms did not object to the inventory, final report or accounting filed by the receiver, which made no mention of the Demand Note. That statute, referred to as the “Non-Claim Statute,” generally provides that “any objections or exceptions to the matters and things contained in an account or report and to the receiver’s acts reported in the report or account” are “forever barred for all purposes” if no objection or exception is filed within thirty days.
In affirming, the Court of Appeals agreed with the trial court’s interpretation of Ind. Code 32-30-5-18(b), concluding that “because neither Nelms, Ansure, nor MGMC objected to the absence of the Demand Note in the Receiver’s Final Report or the Receiver’s failure to collect upon the Demand Note within the thirty day period provided by the Non-Claim Statute, we conclude that MGMC’s claims under the Demand Note are forever barred for all purposes.” Although both the trial court and the Court of Appeals refer to the note as having been “abandoned” by the receiver, both courts also use the language of the Non-Claim Statute to reach a res judicata-like conclusion that no future action could be based on the Demand Note. Ordinarily, “abandonment” of a claim by, for example, a trustee in bankruptcy, simply leads to the conclusion that the abandoned claim is not being administered by the trustee and accordingly reverts to the debtor. Morlan v. Universal Guar. Life Ins. Co., 298 F.3d 609, 617 (7th Cir. 2002) (the effect of a trustee's abandoning a claim is to re-vest the ownership of it in the debtor); Robson v. Texas Eastern Corp., 833 N.E.2d 461 (Ind. App. 2005).
The Court’s application of Ind. Code 32-30-5-18(b) is somewhat surprising to those of us who viewed the primary purpose of the statute to be limitation of potential claims against a receiver. See Luxury Townhomes, LLC v. McKinley Properties, Inc., 992 N.E.2d 810 (Ind. App. 2013). In reaching its broader conclusion in Memory Gardens, the Court of Appeals relied upon – and arguably expanded – the holdings of a few previous decisions, and in particular the holdings in Ratcliff v. Citizens Bank of W. Ind., 768 N.E.2d 964 (Ind. App. 2002) and Eryk-Midamco Co. v. Bank One, 841 N.E.2d 1190 (Ind. App. 2006). Both of these cases involved receivers appointed in foreclosure proceedings where the mortgagor or mortgagee attempted to assert claims against each other after the receiver had liquidated assets and made distributions to the relevant parties, as summarized in a final report to which no objection was made. In Ratliff, it was the mortgagor’s lender liability claim that would have been a compulsory counterclaim to the bank’s foreclosure complaint. Eryk-Midamco involved the opposite situation – a bank’s claim against mortgagors for alleged conversion of rent collateral which was asserted after the receiver had implicitly determined all rights of the bank to rent proceeds in his final report. The Court of Appeals determined in Ratliff and Eryk-Midamco that such claims could not be asserted by the mortgagee or mortgagor once foreclosure case in which the receiver was appointed was concluded.
The situation in Memory Gardens is seemingly different from that in Ratliff and Eryk-Midamco because the receiver was not appointed to resolve claims between MGMC and Old Bridge, and did not purport to. There is no indication from the opinion in Memory Gardens that Old Bridge was directly involved in the receivership. Nonetheless, the Court of Appeals reasons that because the Demand Note was an asset of MGMC, all claims under the Demand Note “should have been administered in the receivership,” and the receiver’s failure to even mention the note would prohibit any future action on the Demand Note.
It is unclear whether the receiver’s knowledge or lack of knowledge regarding the existence of the note in Memory Gardens is relevant to the Court of Appeals’ holding. The recitation of facts in the opinion indicates the loan was mentioned in an affidavit provided to the receiver by Old Bridge but was not included in MGMC’s statement of assets submitted to the receiver under Trial Rule 66(B). The opinion does not focus on the state of the receiver’s actual knowledge, however, but seems to suggest that if an asset should have been brought to the receiver’s attention, it will be deemed to have been “abandoned” (and barred) if no mention is made in the receiver’s report. The Court states “it was incumbent upon MGMC to provide the Receiver with knowledge of the Demand Note’s existence, and accordingly to the extent the Demand Note existed, the Receiver should have had knowledge of the Demand Note or a copy of it in her possession.” The Court then concludes that “[b]y omitting any mention of the Demand Note in her final report, we conclude that the Receiver effectively abandoned MGMC’s claims under the Demand Note.” This result is unlike the settled conclusion that a trustee in bankruptcy is not deemed to have abandoned an asset if it should have been included in the debtor’s bankruptcy schedules but was omitted.
Several questions are left unanswered by Memory Gardens. Is its holding restricted to matters contained or omitted from a receiver’s “final” report, or does it encompass all accountings and reports? While the opinion talks about all these reports, it most frequently speaks of the final report. On the other hand, the Non-Claim Statute simply refers to objections to an “account or report.” The opinion also does not address exactly who is “forever barred” from bringing actions. Is the opinion limited to parties such as MGMC, who the court notes had an obligation to bring facts to the receiver’s attention, or is it intended to encompass everyone, including perhaps the receiver? Again, some guidance may be gleaned from the Non-Claim Statute, which imposes the duty to timely object on “any creditor, shareholder, or other interested party.” Even the deadline for making timely objection to a report is somewhat ambiguous, and probably not limited to 30 days. The Non-Claim Statute simply alludes to the “thirty day period referred to” in Ind. Code 32-30-5-17, which strictly speaking is not a thirty-day deadline. That statute states that upon the filing of an account or report, the clerk of the court in which the receivership is pending shall give notice of the date on which the account or report is to be heard and determined by the court, which may not be less than thirty days.
Future cases will presumably reveal whether the holding of Memory Gardens will be limited or further explained. But for now at least it seems clear it is essential for all parties involved in a receivership to take note of the decision and to carefully consider the impact of including or not including any potential claims in any account or report filed by a receiver.