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In re Rose

August 26, 2008


The opinion of the court was delivered by: Michael P. McCUSKEY Chief U.S. District Judge


This is an appeal from an Opinion entered by the United States Bankruptcy Court for the Central District of Illinois (Bankruptcy Case No. 05-94897) brought pursuant to 28 U.S.C. § 158(a). In Adversary Case No. 06-9024, the Bankruptcy Court found in favor of Defendant, James E. Rose, and against Plaintiffs Mercantile National Bank of Indiana, J.R. Construction Co., and Joseph Ramacci. Plaintiffs had brought an Amended Adversary Complaint in the Bankruptcy Court following a state court action in Indiana. Defendant filed a Motion to Dismiss the complaint, which was granted by the Bankruptcy Court.


This case arises from a business transaction and subsequent legal action in Indiana. From the Bankruptcy Court Opinion and the briefs of the parties the following facts are established:

In 1994, Plaintiff Mercantile entered into a transaction with Jasper-Newton Utility (J-N), in which Defendant and Robert Underwood were shareholders. J-N Utility was an Indiana sub-S corporation carrying out business as a public utility company. J-N denied Mercantile's application on the grounds that Mercantile fraudulently misrepresented the required water usage on their application.

Plaintiffs sued J-N in 1995 based on the agreement to provide water and sewer services, seeking damages against J-N for their refusal to provide services. The case was assigned to Judge Daniel J. Molter, but J-N moved successfully for a change of judge and Judge Small was substituted. Judge Small heard the trial but died before he could rule on the case. Judge Molter took the case back over and denied J-N's motion for change of venue. On May 21, 1999, Judge Molter heard the bench trial and on November 15, 2001, entered a judgment in Plaintiffs' favor for $159,581.

J-N was sold to Water Services Company of Indiana, Inc. (WSCI) for $475,000 in December 2001. At the sale, Defendant and Underwood individually executed an indemnity agreement in favor of WSCI. Under the agreement, Defendant and Underwood jointly and severally agreed to indemnify and hold harmless WSCI from any and all liabilities, claims, damages, penalties, causes of action, and other costs and expenses imposed or incurred by reason of Plaintiffs' lawsuit. J-N then transferred $237,500 each to Defendant and Underwood.

On November 16, 2002, Plaintiffs filed a proceedings supplemental to collect on the judgment containing fraudulent transfer claims against J-N, WSCI, Defendant, and Underwood and sought attorneys' fees. Plaintiffs claimed the transfer of the $475,000 from J-N to Defendant and Underwood was fraudulent under Indiana's Uniform Fraudulent Transfer Act. Ind. Code 32-18-2-17. Plaintiffs asserted that cash and assets had been transferred out of J-N to avoid paying the judgment. Defendant and Underwood again moved for a change of judge, which was denied. On January 17, 2003, WSCI moved for summary judgment. Defendant and Underwood filed their answer to Plaintiffs' complaint on February 11, 2003. On February 13, 2003, Plaintiffs moved for summary judgment and simultaneously moved for leave to amend its complaint to add a third claim for treble damages and attorneys' fees under the Crime Victim's Compensation Act (CVCA). On July 23, 2003, Defendant and Underwood tendered to the court $181,300. The next day, the court calculated damages of $180,811.83, representing the original judgment amount plus statutory interest.

On August 11, 2003, Defendant and Underwood filed an objection to Plaintiffs motion to amend the complaint, but the motion was granted by the court on November 26, 2003, dating the order March 28, 2003. The court ordered a bench trial for the fraudulent transfer claims and set the CVCA claim for a later jury trial. On March 24, 2004, as the bench trial on the fraudulent transfer claims was set to take place, the court ruled that Defendant and Underwood were not entitled to a jury trial and heard evidence on all of Plaintiffs' claims, including the CVCA claim. The court entered judgment for Plaintiffs and awarded them treble damages of $542,435.49 and attorneys' fees of $162,730. The appellate court later affirmed Judge Molter's ruling.

The Supreme Court of Indiana, in a decision dated June 20, 2007, reversed the part of Judge Molter's ruling concerning the CVCA claim. The court found that Plaintiffs attempt to seek new damages from Defendant and Rose did not fit the purpose of proceedings supplemental. Rose v. Mercantile National Bank of Hammond, 868 N.E.2d 772, 777 (Ind. 2007). The court found that:

"Allowing a new claim to be tacked on at this stage would be just as unfitting as opening up any other litigation to add new claims of judgment. Such an approach to collections would lay the groundwork for perpetual motion-a far cry from the timely and efficient system of conflict resolution the nation's judiciary strives to provide. Proceedings supplemental are appropriate only for actions to enforce and collect existing judgments, not to establish new ones."

Rose, 868 N.E.2d at 777.

The court concluded that any action to assist in collection of an original judgment, such as a proceeding supplemental, must be filed under the same cause number as the original action and that conversely, any action that may result in imposition of a new judgment should be filed under a new cause number. Rose, 868 N.E.2d at 777.

Defendant had filed this Chapter 11 proceeding on October 14, 2005, at which time the judgment for $542,435.49 in treble damages and $162,730 in attorneys' fees under the CVCA had been rendered in Plaintiffs' favor with an appeal pending in the Indiana Court of Appeals. On March 7, 2006, Plaintiffs filed an adversary proceeding to challenge the dischargeability of the judgment awarding CVCA and attorneys' fees. After the Indiana Supreme Court's reversal of ...

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