Skip to main content

Full text of "Indiana Law Review"

See other formats 


INDIANA 
LAW  REVIEW 


VOLUME  20 
1987 


The  Trustees  of  Indiana  University 
Copyright  ©  1987 


Indiana  Laiv  Review 


Volume  20 


1987 


Editor-in-Chief 
Gayle  Reindl 

Executive  Editors 


Articles  and  Production 
John  Joseph  Tanner 


Notes  and  Topics 
Richard  Allen  Kempf 


Don  Anderson 
Elaine  M.  Chaney 


Articles  Editors 

Ronald  d'Avis 
Mary  Dreyer 
Victoria  J.  Kincke 


Business  Editor 
Barbara  Arnold  Harcourt 

Note  and  Development  Editors 

Denise  Clare  Andresen  Laura  S.  Reed 

Joseph  Wayne  Foye  Carla  Cowles  van  Dongen 

James  C.  McKinley  James  E.  Utterback 


Associate 
Timothy  Shawn  Durham 
Mark  Eiler  Flexter 
Paul  D.  Fredrick 
John  R.  Gaskin 
Thomas  R.  Haley  III 
Alan  D.  Hutchinson 
James  D.  Johnson 
Lori  F.  Kaplan 
Cheryl  Knodle 
Kathleen  Pollock  Mills 


Editors 

Scott  S.  Morrisson 
Lannette  J.  Moutos 
Jeffrey  James  Neal 
Reed  S.  Oslan 
Scot  W.  Overdorf 
Nana  M.  Quay-Smith 
Marcia  Cox  Templeton 
Linda  Walker 
Judy  L.  Woods 
Christopher  B.  Young 


Editorial  Assistant 
Amy  Morrison  Grubbs 


Faculty  Advisor 
Paul  J.  Galanti 


MAY  2  21987       I 

uBmf 


Periodical 
Co/lection 


Volume  20  No.  1  1987 


Dedication 
Gerald  L.  Bepko 

1986  SURVEY  OF  RECENT  DEVELOPMENTS 

IN  INDIANA  LAW 

Contributors  to  This  Issue 


Susan  Burke 
Mary  Beth  Claus 
Debra  A.  Falender 
Kenneth  J.  Falk 
Donna  H.  Fisher 
Joseph  M.  Forte 
Paul  J.  Galanti 
Steven  K.  Huffer 
Andrew  W.  Hull 
Donald  L.  Jackson 
Lynn  Brundage  Jongleux 


Edward  A.  Keirn 
J.B.  King 
Walter  W.  Krieger 
Kathleen  Givens  Lucas 
Roger  L.  Pardieck 
Cathleen  J.  Perry 
David  M.  Powlen 
Edwin  J.  Simcox 
Susan  Stuart 
David  L.  Swider 
Lawrence  P.  Wilkins 


LW 
REVIHAS 


Search  thousands  of  law  review  and  bar  journal 
articles  effortlessly  on  WESTLAW!  It's  like  having 
a  staff  of  experts  always  at  your  command.  Tb 
answer  your  questions  on  taxation.  Business 
Regulation.  Bankruptcy.  Securities.  And  more! 


ON 
WESILW! 

Find  relevant  articles  instantly  Search  the  full  text 
of  articles  using  descriptive  words,  titles,  author's 
names  or  any  combination. 

DAVID  w.  LITTLE  When  you  want  to  know  what  the  experts  say 

3303  Browncliff  Lane  ,    .  ,  .  r^^rr^     .,  .  t 

ph°o°ne-"8i2/"33r-^  ^^  y^^^  subjcct,  tUHl  to  WESTLAW. 

Find  out  more  by  contacting  your  Wfest  Sales 
JOHN  M.^ALSH  Represcntative  or  by  calling  1-800-328-0109 

£SS-^  (or  612-228-2450) . 


WESTLAW* 

Superiority  That's  No  Illusion 

©1986  West  Publishing  Company     9204-8/4-86 


The  latest  in  the  law 
firomBNA 


Securities  Reg^ilation 
&  Law  Report 

When  you  need  to  keep  up  with  rapidly  chang- 
ing financial  market  regulations,  rely  on  BNA  s 
Securities  Regulation  &  Law  Report.  This 
weekly  information  service  offers  concise 
coverage  of  federal  and  state  securities  law 
and  regulation;  corporate  governance  and 
attorney  responsibility;  enforcement  activi- 
ties; commodity  futures  regulation;  and 
accounting  standards  and  practice. 


Corporate  Practice 
Series 

Designed  for  corporate  lawyers,  BNA's  Corpo- 
rate Practice  Series  is  a  time-saving  service 
offering  a  series  of  portfolios,  prepared  by 
practitioners,  treating  specific  areas  of  cor- 
poration law. 


The  Family 
Law  Reporter 

Keep  up  with  the  rapidly  expanding  field  of 
family  law  with  BNA's  Family  Law  Reporter 
Each  week,  you'll  get  nationwide  coverage  of 
precedent-setting  cases  in  divorce,  alimony, 
child  custody,  juvenile  court  cases,  and  tax 
aspects  of  family  law.  Reference  file  includes 
full  text  of  federal  laws,  selected  state  statutes, 
and  a  quick  scan  summary  of  state  divorce 
codes. 


Antitrust  &  Trade 
Reg^ilation  Report 


If  you  must  stay  abreast  of  significant  antitrust 
and  trade  regulation  developments,  rely  on 
BNA's  Antitrust  &  Trade  Regulation  Report. 
You'll  receive  weekly  notification  of  key  fed- 
eral, state,  and  local  news.  Coverage  includes 
the  Department  of  Justice,  the  Federal  Trade 
Commission,  state  and  federal  courts,  and 
private  enforcement. 


The  United  States 
Law  Week 

For  more  than  50  years.  The  United  States  Law 
Week  has  been  helping  lawyers  prepare 
briefs,  argue  points,  and  win  cases.  You  can 
turn  to  this  weekly  information  sen/ice  for 
news  and  analysis  of  legal  developments, 
precedent-setting  cases,  and  full  text  of 
selected  federal  statutes.  You'll  also  receive 
same-day  notification  of  all  Supreme  Court 
decisions,  in  full  text. 


Media  Law 
Reporter 


For  the  latest  decisions  affecting  the  full  range 
of  communications  law  issues — including  in- 
terpretations of  the  First  Amendment,  copy- 
rights, and  FOIA,  turn  to  BNA's  Media  Law 
Reporter  Weekly  coverage  includes  full  text 
and  digests  of  federal  and  state  media  law 
decisions  on  both  print  and  electronic  com- 
munications. 


Call  toll-free  800/372-1033 

(In  Maryland;  800/352-1400;  Washington,  D.C.;  258-9401 )  or  write  for  our  free  catalog. 


The  Bureau  of  National  Affairs,  Inc. 

Suite  S-5 14 

1231  25th  Street,  N.W. 

Wa.shington,  D.C.  20037 


Please  enter  my  subscription  to  the 
INDIANA  LAW  REVIEW 


NAME 


ADDRESS 


Enclosed  is  $ 
Bill  me  for  _ 
Mail  to: 


for 


subscriptions. 


subscriptions. 


INDIANA  LAW  REVIEW 

INDIANA  UNIVERSITY 

SCHOOL  OF  LAW -INDIANAPOLIS 

735  West  New  York  Street 

Indianapolis,  Indiana  46202 


Subscription  Rates  (one  year): 

Regular,  $18.00;  Foreign,  $21.50;  Survey,  $10.00; 
Single  Issue,  $5.00 


Indiana  Law  Revieiiv 


Philosophy,  Jurisprudence,  and  Jurisprudential 
Temperament  of  Federal  Judges 

Hon.  Ruggero  J.  Aldisert 

Legal  Issues  Involved  in  Private 

Sector  Medical  Testing  of  Job  Applicants 

and  Employees 

Leland  B.  Cross,  Jr. 
Douglas  Craig  Haney 

Indiana's  Living  Wills  and  Life-Prolonging 
Procedures  Act:  A  Reform  Proposal 

Carol  Ann  Mooney 

Coming  in  Volume  20,  No.  2,  to 
be  available  Summer  1987 

Price  $5.00 

Send  orders  to 

Indiana  Law  Review 

Indiana  University  School  of  Law — Indianapolis 

735  W.  New  York  Street,  Indianapolis,  Indiana  46202 


The  Board  of  Editors  of  the  Indiana 
Law  Review  expresses  its  appreciation  to 

Professor  Thomas  Allington 
for  his  invaluable  production  assistance. 


Indiana  Laifv  Revieiv 


Volume  20  1987  Number  1 

Copyright  ©  1987  by  the  Trustees  of  Indiana  University 


TABLE  OF  CONTENTS 

Dedication — Gerald  L.  Bepko x 

I.     Administrative  Law 

A.    Administrative  Adjudication — Revised  and  Recodified 

Kathleen  Givens  Lucas        1 

II.     Business  and  Commercial  Law 

A.  Developments  in  Business  Association  Law 
Paul  J.  Galanti      19 

B.  Article  9  of  the  Indiana  Uniform  Commercial  C(  e  in 
Transition Edward  A.  Kelrn      61 

C.  Indiana's  Uniform  Commercial  Code:  Recent 
Developments  David  M.  Powlen 

Edward  A.  Keirn      87 

D.  The  Indiana  Business  Corporation  Law:  Tool  For  Flex- 
ibility, Simplicity  and  Uniformity  ...Edwin  J.  Simcox    119 

III.  Civil  Procedure 

A.  Amendments  Curing  Defendant  Misnomers  Under  Trial 
Rule  15(C):  A  Bright  Line  Test  of  Prejudice  for  Relation 
Back? Steven  K.  Buffer    139 

B.  Attorney's  Fees  for  Frivolous,  Unreasonable  or 
Groundless  Litigation Andrew  W.  Hull    151 

IV.  Evidence 

A.  Indiana's  Statutory  Provisions  for  Alternative  Testimony 
in  Child  Sex  Abuse  Cases:  Is  It  Live  or  Is  It  Memorex? 
Susan    Burke    161 

B.  Evidentiary  Use  of  Other  Crime  Evidence:  A  Survey  of 
Recent  Trends  in  Criminal  Procedure Susan  Stuart    183 


Volume  20  Winter  1987  Number  1 

The  INDIANA  LAW  REVIEW  (ISSN  0090-4198)  is  the  property  of  Indiana  University  and  is  published  quarterly  by 
the  Indiana  University  School  of  Law — Indianapolis,  which  assumes  complete  editorial  responsibility  thereof.  Subscription 
rates:  one  year  $18.00;  foreign  $21.50.  Please  notify  us  one  month  in  advance  of  any  change  in  address  and  include 
both  old  and  new  addresses  with  zip  codes  to  ensure  delivery  of  all  issues.  Send  all  correspondence  to  Editorial  Assistant, 
Indiana  Law  Review,  Indiana  University  School  of  Law — Indianapolis,  735  West  New  York  Street,  Indianapolis,  Indiana 
46202.  Publication  office:  735  West  New  York  Street,  Indianapolis,  Indiana  46202.  Second  class  postage  paid  at  Indianapolis, 
Indiana  46201. 

POSTMASTER:  Send  address  changes  to  INDIANA  LAW  REVIEW,  735  West  New  York  Street,  Indianapolis, 
Indiana  46202. 


V.     Family  Law 

A.    Family  Law:  Equitable  Distribution  and  Proper  Valua- 
tion of  Marital  Property Mary  Beth  Claus 

Cathleen  J.  Perry    211 

VL     Insurance  Law 

A.    Developments  in  Insurance  Law:  Agents'  and  Brokers' 

Liability Donna  H.  Fisher    23 1 

VIL     Labor  Law 

A.  Developments  in  Employment  Discrimination  Law 
Lynn  Brundage  Jongleux    243 

B.  Recent  NLRB  Developments  ....... .David  L.  Swider    259 

VIIL     Professional  Responsibility  and  Liability 

A.    Developments  in  Professional  Liability  Law 

.Donald  L.    Jackson    281 

IX.     Property  and  Estates 

A.  Claims  By  and  Against  Decedents'  Estates 

Debra  A.  Falender    289 

B.  Developments  in  Property  Law  ....  Walter  W.  Krieger    305 

X.     Public  Welfare  and  Social  Security 

A.    Recent  Developments  Under  the  Social  Security  Act 

Kenneth  J.  Falk    345 

XL     Taxation 

A.    Some  Very  Significant  Developments  in  Indiana  Taxation 

J.B.  King    361 

XII.     Torts  and  Products  Liability 

A.  The  Disappearing  Rights  of  Plaintiffs  Under  a  Legal 
Disability Roger  L.  Pardieck    385 

B.  A  Multi-Perspective  Critique  of  Indiana's  Legislative 
Abrogation  of  the  Collateral  Source  Rule 
Lawrence  P.    Wilkins    399 

XIII.     Workmen's  Compensation 

A.    New  Developments  in  Workmen's  Compensation  Law: 
Accident  Defined  and  New  Thoughts  on  Crediting 
Joseph  M.  Forte    437 


Indiana  l^a^v  Revieiv 


Volume  20  1987 

Editor-in-Chief 
Gayle  Reindl 

Executive  Editors 

Articles  and  Production  Notes  and  Topics 

John  Joseph  Tanner  Richard  Allen  Kempf 

Articles  Editors 
Don  Anderson  Ronald  d'Avis 

Elaine  M.  Chaney  Mary  Dreyer 

Victoria  J.  Kincke 

Business  Editor 
Barbara  Arnold  Harcourt 

Note  and  Development  Editors 
Denise  Clare  Andresen  Laura  S.  Reed 

Joseph  Wayne  Foye  Carla  Cowles  van  Dongen 

James  C.  McKinley  James  E.  Utterback 


Associate  Editors 

Timothy  Shawn  Durham  Scott  S.  Morrisson 

Mark  Eiler  Flexter  Lannette  J.  Moutos 

Paul  D.  Fredrick  Jeffrey  James  Neal 

John  R.  Gaskin  Reed  S.  Oslan 

Thomas  R.  Haley  III  Scot  W.  Overdorf 

Alan  D.  Hutchinson  Nana  M.  Quay-Smith 

James  D.  Johnson  Marcia  Cox  Templeton 

Lori  F.  Kaplan  Linda  Walker 

Cheryl  Knodle  Judy  L.  Woods 

Kathleen  Pollock  Mills  Christopher  B.  Young 


Editorial  Assistant 
Amy  Morrison  Grubbs 

Faculty  Advisor 
Paul  J.  Galanti 


Indiana  University  School  of  Law— Indianapolis 

1986-87  ADMINISTRATIVE  OFFICERS  AND  FACULTY 

Administrative  Officers 

John  W.  Ryan,  Ph.D.,  President  of  the  University 

Gerald  L.  Bepko,  L.L.M.,   Vice-President 

Jeffrey  W.  Grove,  J.D.,  Acting  Dean 

James  F.  Bindley,  J.D.,  Assistant  Dean  for  Administration 

G.  Kent  Frandsen,  J.D.,  Associate  Dean  for  Student  Affairs 

James  W.  Torke,  J.D.,  Associate  Dean  for  Academic  Affairs 

Faculty 

Thomas  B.  Allington,  Professor.  B.S.,  University  of  Nebraska,  1964;  J.D.,  1966;  LL.M., 
New  York  University,  1971. 

Edward  P.  Archer,  Professor.  B.M.E.,  Rensselaer  Polytechnic  Institute,  1958;  J.D., 
Georgetown  University,  1962;  LL.M.,  1964. 

James  F.  Bailey,  III.,  Associate  Professor  and  Director  of  Law  Library.  A.B.,  University 
of  Michigan,  1961;  J.D.,  1964;  M.A.L.S.,  1970. 

James  F.  Bindley,  Assistant  Dean  for  Administration  and  Director  of  Placement  &  Develop- 
ment, B.A.,  Loyola  University,  1969;  J.D.,  University  of  Kentucky,  1972. 

Paul  N.  Cox,  Professor.  B.S.,  Utah  State  University,  1971;  J.D.,  University  of  Utah,  1974; 
LL.M.,  University  of  Virginia,  1980. 

Clyde  Harrison  Crockett,  Professor.  A.B.,  University  of  Texas,  1962;  J.D.,  1965;  LL.M., 
University  of  London  (The  London  School  of  Economics  and  Political  Science),  1972. 

Debra  a.  Falender,  Professor.  A.B.,  Mount  Holyoke  College,  1970;  J.D.,  Indiana  Univer- 
sity,  1975. 

G.  K.B^T:VRA^YysB^ ,  Associate  Dean  for  Student  Affairs  and  Associate  Professor.  B.S.,  Bradley 
University,  1950;  J.D.,  Indiana  University,  1965. 

David  A.  Funk,  Professor.  A.B.,  College  of  Wooster,  1949;  J.D.,  Case  Western  Reserve  Univer- 
sity, 1951;  M.A.,  The  Ohio  State  University  1968;  LL.M.,  Case  Western  Reserve  Univer- 
sity, 1972;  LL.M.,  Columbia  University,  1973. 

Paul  J.  Galanti,  Professor.  A.B.,  Bowdoin  College,  1960;  J.D.,  University  of  Chicago,  1963. 

Helen  P.  Garfield,  Professor.  B.S.J.,  Northwestern  University,  1945;  J.  D.,  University  of  Col- 
orado, 1967. 

Harold  Greenberg,  Associate  Professor.  A.B.,  Temple  University,  1959;  J.D.,  University  of 
Pennsylvania,  1962. 

Jeffrey  W.  Grove,  Acting  Dean.  A.B.,  Juniata  College,  1965;  J.D.,  George  Washington 
University,  1969. 

William  F.  Harvey,  CarlM.  Gray  Professor  of  Law.  A. B.,  University  of  Missouri,  1954;  J. D., 
Georgetown  University,  1959;  LL.M.,  1961. 

W.  William  Hodes,  Professor.  A.B.,  Harvard  College  1966;  J.D.,  Rutgers  Newark,  1969. 

Lawrence  A.  Jegen,  III.,  Thomas  F.  Sheehan  Professor  of  Tax  Law  and  Policy,  1982.  A.B., 
Beloit  College,  1956;  J.D.,  The  University  of  Michigan  1959;  M.B.A.,  1960,  LL.M., 
New  York  University,  1963. 

Henry  C.  Karlson,  Professor.  A.B.,  University  of  Illinois,  1965;  J.D.,  1968;  LL.M.,  1977. 

William  Andrew  Kerr,  Professor.  A.B.,  West  Virginia  University,  1955.  J.D.,  1957,  LL.M., 
Harvard  University,  1958;  B.D.,  Duke  University,  1968. 

Eleanor  D.  Kinney,  Assistant  Professor.  A.B.,  Duke  University,  1969;  M.A.,  University 
of  Chicago,   1970;  J.D.,  Duke  University,   1973. 

Walter  W.  Krieger,  Associate  Professor.  A.B.,  Bellarmine  College,  1959;  J.D.,  University 
of  Louisville,  1962;  LL.M.,  George  Washington  University,  1969. 

David  P.  Leonard,  Associate  Professor.  B.A.,  University  of  California  at  San  Diego,  1974; 
J.D.,  UCLA  School  of  Law,  1977. 

Robin  Paul  Malloy,  Assistant  Professor.  B.S.,  Purdue  University,  1971;  J.D.,  University 
of  Florida,   1980;  LL.M.,   University  of  Illinois,   1983. 

William  E.  Marsh,  Professor.  B.S.,   University  of  Nebraska,   1965;  J.D.,   1958. 


SusANAH  M.  Mead,  Associate  Professor.  B.A.,  Smith  College,  1969;  J.D.,  Indiana  University, 

1976. 

Mary  H.  Mitchell,  Associate  Professor.  A.B.,  Butler  University,  1975;  J.D.,  Cornell  Law 
School,  1978. 

David  R.  Papke,  Associate  Professor.  A.B.,  Harvard  College,  1969;  J.D.,  Yale  Law  School, 
1973;  M.A.  in  American  Studies,  Yale  University,  1973;  M.  Phil.,  in  American  Studies, 
The  University  of  Michigan,   1980;  Ph.D.,   1983. 

Ronald  W.  Polston,  Professor.  B.S.,  Eastern  Illinois  University,  1953;  LL.B.,  University  of 
Illinois,  1958. 

Kenneth  M.  Stroud,  Professor.  A.B.,  Indiana  University,  1958;  J.D.,  1961 . 

James  W.  Torke,  Acting  Associate  Dean.  B.S.,  University  of  Wisconsin,  1963;  J.D.,  1968. 

Joe  a.  Tucker,  Assistant  Professor,  B.A.,  Houston,  1977;  J.D.,  University  of  Texas,  1981. 

James  Patrick  White,  Professor  of  Law.  A.B.,  University  of  Iowa,  1953;  J.D.,  1956;  LL.M., 
George  Washington  University,  1959. 

Lawrence  P.  Wilkins,  Professor.  B.A.,  The  Ohio  State  University,  1968;  J.D.,  Capital  Univer- 
sity Law  School,  1973;  LL.M.,  University  of  Texas  School  of  Law,  1974. 

Mary  Wolf,  Visiting  Assistant  Professor  of  Law,  B.A.,  Saint  Xavier  College,  1969;  J. D.,  Univer- 
sity of  Iowa  College  of  Law,  1974. 

Harold  R.  Woodard,  Professorial  Lecturer.  B.S.,  Harvard  University,  1933;  J.D.,  1936. 


Emeriti 

Agnes  P.  Barrett,  Associate  Professor  Emeritus.  B.S.,  Indiana  University,  1942;  J.D.,  1964. 
Cleon  H.  Foust,  Professor  Emeritus.  A.B.,  Wabash  College,  1928;  J.D.,  University  of  Arizona, 

1933. 
John  S.  Grimes,  Professor  of  Jurisprudence  Emeritus.  A.B.,  Indiana  University.  1929;  J.D., 

1931. 
Melvin  C.  Poland,  Cleon  H.  Foust  Professor  of  Law  Emeritus,  B.S.  Kansas  State  University, 

1940;  LL.B.,  Washburn  University,  1949;  LL.M.,  The  University  of  Michigan,  1950. 
R.  Bruce  Townsend,  Cleon  H.  Foust  Professor  of  Law  Emeritus,  A.B.,  Coe  College,  1938; 

J.D.,  University  of  Iowa,  1940. 

Legal  Writing  Instructors 

Jeffrey  Been,  A.B.,    Wabash  College,   1981;  J.D.,  Indiana  University,  1984. 

Michael  Mullett,  Lecturer.  B.A.,  University  of  Michigan,  1966;  M.A.,  1973;  J.D.,  Indiana 

University,  1982. 
Vickie  Renfrow,  Lecturer.  B.A.,  University  of  Northern  Iowa,  1970;  M.A.,  1971;  Ph.D., 

Indiana  University,  Bloomington,  1976;  J.D.,  Indiana  University,  Bloomington,  1981. 
Joan  Ruhtenberg,  Lecturer.  B.A.,  Mississippi  University  for  Women,  1959;  J.D.,  Indiana 

University,  1980. 

Law  Library  Staff 

Terri  Lea  Hardin,  Affiliate  Librarian,  B.A.,  Indiana  University,  1982;  M.L.S.,  1983. 
Mary  P.  Hudson,  Assistant  Librarian,  B.A.,  Ball  State,  1969;  M.L.S.,  Indiana  Universtiy,  1973. 
Wendell  E.  Johnting,  Technical  Services  Librarian.  A.B.,  Taylor  University,  1974;  M.L.S., 

Indiana  University,  1975. 
Constance   Matts,  Associate  Librarian.   B.A.,    1973,   Case    Western  Reserve  University; 

M.S.L.S.,    1974,    Case    Western    Reserve    University;    M.A.I.R.,    1976,    Creighton 

University. 
KiyoshiOtsv,  Assistant  Librarian,  Parkland  College,  A. A.,  1976;  A.  B.,  University  of  Illinois, 

1980;  M.S.,  1982;  C.A.S.,  1983. 


.^V^'^  .    \^    ^^^~ 


^■•4^ 


'-4K 


%-%J 


*7^^■ 


V  tX^. 


*,  9  *i 


Gerald  L.  Bepko 


DEDICATION 

I  am  honored  to  have  been  asked  to  comment  on  the  significance 
of  Gerald  Bepko's  appointment  to  the  position  of  Vice  President  of  Indiana 
University-Purdue  University  at  Indianapolis.  His  selection  to  this  post 
is  a  source  of  great  enthusiasm  and  deep  satisfaction  for  all  who  sense 
the  importance  of  this  excellent  university. 

Two  days  after  being  asked  to  write  this  dedication,  I  came  across 
an  ancient  dispute  resolution  technique,  the  shadows  of  which  sometimes 
reappear  during  heated  moments  in  federal  court. 

The  information  came  to  me  while  I  was  helping  our  sixth-grader 
review  for  a  test  in  social  studies.  It  seems  that  the  early  Eskimos,  who 
were  indeed  wise  in  prizing  self-control  while  simultaneously  allowing  the 
world  to  ventilate,  developed  a  process  referred  to  as  "name-caUing." 
When  two  people  were  in  dispute,  the  tribe  set  up  a  contest  in  which 
the  two  faced  off  and  were  encouraged  to  be  as  foul-mouthed  to  one 
another  as  was  humanly  possible.  (Imagine  the  partisan  cheering  on  the 
sidelines!)  This  barrage  of  abuse  went  on  until  the  crucial,  telhng  mo- 
ment: when  one  of  the  participants  finally  grew  red-hot  and  lost  his  temper. 
The  price  of  such  loss  of  self-control  was  vanquishment:  the  one  who 
lost  control  lost  the  contest. 

This  dedication  assignment  and  that  piece  of  historical  information 
miraculously  coincided,  allowing  me  to  find  a  beginning  for  this  assess- 
ment of  Jerry's  unique  gifts,  which  hold  so  much  promise  for  the  Univer- 
sity. I'll  begin  by  observing  that  Jerry  would  have  been  a  good  Eskimo. 
In  all  my  experience,  I  have  never  known  him  to  lose  his  temper.  That 
capacity  will  probably  prove  to  be  more  significant  in  terms  of  his  ultimate 
success  as  a  university  administrator  than  anything  else. 

Jerry's  ability  to  undergo  great  provocation  without  losing  either 
perspective  or  control  is  related  to  a  number  of  other  aspects  in  his 
character.  There  is,  first  of  all,  a  twinkle  in  him,  a  droll,  self-effacing 
wit  that  is  wonderfully  easy  and  wonderfully  understated.  But  there  is 
also  in  that  wit  a  certain  quickness,  like  the  flash  of  gold  discreetly  hid- 
den, which  signifies  a  mind  ready  to  communicate  fully  and  efficiently 
without  trekking  through  endless  details.  Jerry  is  not  only  humorous,  he 
is  also  fully  alert,  and  it  is  that  alertness  which  informs  his  political  in- 
stincts so  adroitly  and  enables  him  to  foster  collegiality  among  the  faculty 
and  cooperation  in  the  community.  He  perceives  and  knows  how  to  merge 
and  mobilize  various  factions,  and  he  knows  instinctively  how  to  manuever 


XI 


this  already  great  institution,  whose  leadership  he  has  assumed,  toward 
even  more  noble  accomplishment. 

Jerry's  abilities  don't  end  with  his  adeptness  at  mobilizing  people  and 
at  tapping  into  their  potentialities  for  the  good  of  the  University.  He  re- 
mains, on  a  personal  basis,  both  sensitive  and  loyal.  While  he  is  very 
good  at  getting  people  to  help  the  University,  he  is  also  a  genuinely  nice 
person.  His  upbeat,  contagious  enthusiasm  makes  you  want  to  sign  on 
to  help.  People  wound  up  wanting  to  give  their  services  to  the  Indianapolis 
Law  School  because  they  wanted  to  do  right  by  Dean  Bepko.  I  know, 
because  I  have  many  times  myself  been  the  subject  of  his  appeals  to  speak, 
to  do  seminars  and  committee  work  and  so  forth.  But  even  when  you're 
being  enlisted  in  such  projects,  Jerry  has  a  masterful  touch:  first,  he  does 
not  exploit  those  who  would  help;  second,  he  does  not  push  willing  helpers 
into  areas  in  which  they  have  no  legitimate  background  or  business;  and 
third,  he  senses  when  he  might  be  coming  to  the  well  once  too  often; 
he  is  careful  not  to  cross  that  fine  line  beyoild  which  he  risks  asking  too 
much. 

At  a  time  when  the  fortunes  of  the  Indianapolis  campus  and  the  city 
of  Indianapolis  are  closely  intertwined,  and  when  the  University  can  pro- 
fit richly  by  drawing  upon  civic  expertise  and  leadership  throughout  In- 
dianapolis, this  level  of  prudent  regard  for  individuals  is  essential.  It  pro- 
mises to  the  University  that  inestimable  gift:  lasting  goodwill. 

In  canvassing  Jerry's  extraordinary  fitness  for  his  new  appointment, 
I  must  mention  another  trait  which  I  think  stands  at  the  center  of  his 
ability  to  mobilize  people:  his  personal  modesty.  Jerry  is  not  a  flashy 
man,  and  the  lights  of  his  ego  are  toned  down  enough  to  let  others  do 
most  of  the  shining.  And  just  as  human  beings  almost  instinctively  attack 
and  seek  to  bring  down  the  flashy  egotist,  so  they  are  moved  in  some 
inner  way  to  augment  and  assist  the  soul  who  is  modest.  Jerry's  modesty 
draws  people  to  him,  and  through  him,  to  the  University,  and  ail  this 
gives  him  great  potential  to  serve  the  cause  of  education. 

Many  of  the  characteristics  which  we  see  so  clearly  in  Jerry  —  his 
easy  self-control,  his  sensitivity  to  others,  his  prudence,  modesty,  and  self- 
effacing  wit  —  are  each  traits  which  point  in  a  certain  direction.  They 
add  up  to  a  superior  sense  of  human  balance  which  we  sometimes  call 
detachment,  and  which  leads  a  human  being  to  levels  of  objectivity  and 
clarity  that,  when  possessed  by  persons  in  public  life,  serve  everyone's 
interest. 

One  final  word:  Some  will  not  be  aware  that  in  his  past,  Jerry  Bepko 
was  for  a  time  an  FBI  agent.  I  suppose  there  are  a  few  who  would  find 
in  that  a  flaw,  undervaluing  the  high  sense  of  justice  that  motivates  most, 
though,  of  course,  not  all,  agents.  As  for  myself  having  been  a  United 
States  Attorney  and  an  assistant  United  States  Attorney  and  having  put 
together  many  cases  with  a  variety  of  agents,  I  have  come  to  know  that 


Xll 


the  best  agents  exemplily  that  same  persistence,  discretion,  loyalty,  and 
balance  that  are  Jerry's  mark  as  well.  I  have  always  thought  I  would 
Uke  to  have  had  the  opportunity  to  try  a  case  with  Jerry  on  my  side. 
In  the  larger  sense,  I  know  now  that  I  have  gotten  my  wish. 

The  Honorable  Sarah  Evans  Barker 
Judge,  United  States  District  Court 
Indianapohs 


Xlll 


Indiana  Lai¥  Review 


Volume  20  1987  Number  1 


Administrative  Adjudication — Revised  and  Recodified 

Kathleen  Givens  Lucas* 

I.     Introduction 

For  nearly  forty  years,  the  Administrative  Adjudication  Act^  (AAA) 
has  governed  the  procedures  of  most  Indiana  agencies,  boards  and 
commissions.  Unless  specifically  exempted,^  the  various  individuals  and 
bodies  acting  on  behalf  of  the  state  must  adhere  to  the  AAA.  Except 
for  relatively  few  minor  amendments,  the  AAA  had  remained  unchanged 
since  its  enactment  in  1947. 

With  the  passage  of  Pubhc  Law  361-1985,  the  1985  General  Assembly 
created  a  commission  to  study  state  administrative  procedures  and  rec- 
ommend any  necessary  changes.^  The  bipartisan  group,  composed  of 
four  senators,  four  representatives,  and  four  citizen  members,  convened 
and  operated  as  the  Administrative  Adjudication  Law  Recodification 
and  Revision  Commission  (Commission)."^  The  Commission  held  eleven 


*Director,  Office  of  Legal  Affairs,  Indiana  State  Board  of  Health.  B.S.,  Indiana 
University,   1972;  J.D.,  Indiana  University  School  of  Law — Indianapolis,   1978. 

'IND.  Code  §§  4-22-1-1  to  -30  (1982)  (repealed,  effective  July  1,   1987). 

^See  id.  §  4-22-1-2,  which  specifically  exempted  from  the  definition  of  "agency" 
the  courts,  the  Governor,  military  officers  or  boards,  state-funded  colleges  and  universities, 
benevolent,  reformatory,  or  penal  institutions,  the  Industrial  Board,  the  State  Board  of 
Tax  Commissioners,  and  the  Public  Service  Commission.  The  section  also  acempted  most 
functions  of  the  Department  of  State  Revenue,  but  indicated  that  the  provisions  of  the 
AAA  were  "supplementary"  to  those  of  the  revenue  acts.  The  definition  of  "administrative 
adjudication"  provided  further  exemptions  from  the  AAA  for  specific  functions  of  certain 
agencies.  Id. 

Tub.  L.  No.  361-1985,  §§  1-7  (noncode  sections). 

^The  Commission  members  were  Representatives  Richard  Regnier  (Chairman),  Mitch- 
ell V.  Harper,  Robert  F.  Hellmann,  and  W.  Laverne  Tincher;  Senators  John  B.  Augsburger, 
William  H.  Vobach,  Lindel  O.  Hume  and  James  Jontz;  and  lay  members  David  Allen, 
Susan  Davis  Smith,  Brian  G.  Tabler,  and  Tony  Zaleski.  Admin.  Adjudication  Law 
Recodification  and  Revision  Comm'n,  1985  Gen.  Assembly,  Final  Report  of  the  Ad- 
ministrative Law  Recodification  and  Revision  Commission  (1985)  [hereinafter  Final 
Report]  . 

1 


2  INDIANA  LAW  REVIEW  [Vol.  20:1 

official  sessions  and  periodically  convened  subcommittees  to  address 
specific  issues.  During  the  course  of  its  study,  the  Commission  received 
written  or  oral  testimony  from  at  least  thirty-nine  witnesses.^  The  final 
draft  approved  by  the  Commission  was  introduced  in  the  1986  Session 
of  the  General  Assembly  as  House  Bill  1339.  With  some  amendments, 
House  Bill  1339  became  Public  Law  18-1986,  which  revised  and  recodified 
the  AAA.^  This  survey  will  examine  some  of  the  more  noteworthy 
provisions  of  the  new  law. 

II.     Structure  and  General  Concepts  of  the  New  Law^ 

Public  Law  18-1986  created  within  title  4  a  new  article  21.5  (new 
article),  effective  July  1,  1987,  which  governs  administrative  orders  and 
procedures.^  Article  21.5  is  divided  into  six  chapters,^  beginning  with  a 
definitional  chapter. 

Most  of  chapter  1  is  unremarkable  in  that  it  sets  forth  definitions 
well-established  by  other  laws.  However,  "agency  action"  is  more  broadly 
defined  in  the  new  article  than  in  the  AAA.  In  addition  to  meaning  an 
order  or  part  of  an  order,  agency  action  now  also  refers  to  the  agency's 
performance  of,  or  failure  to  perform,  any  duty,  function,  or  other 
activity  under  article  21.5.^  Although  inclusion  of  an  agency's  failure  to 
perform  was  not  part  of  the  AAA  definition  of  administrative  adju- 
dication, it  is  contained  in  the  Uniform  Law  Commissioners'  Model 
State  Administrative  Procedure  Act  (Model  Act).'° 

The  term  "order"  is  also  comprehensively  defined.  It  now  means 
more  than  just  a  decision  following  adjudicative  proceedings,  and  spe- 
cifically includes  licenses.''  That  definition  becomes  important  in  deter- 
mining when  appeal  rights  accrue  under  the  new  article. 

Chapter  2  describes  the  application  of  the  new  law  by  stating  that 
article  21.5  "creates  minimum  procedural  rights  and  imposes  minimum 


'Id.  at  1. 

'See  IND.  Code  §§  4-21.5-1-1  to  -6-7  (Supp.   1986). 

Ud.  The  Act  also  established  a  committee  to  study  the  efficacy  of  creating  a  pool 
of  administrative  law  judges  and  to  study  the  effect  of  the  Act  on  such  issues  as  the 
adequacy  of  public  notice  of  proceedings,  and  to  propose  any  appropriate  legislation. 
Pub.  L.  No.   18-1986,  §§  5-6  (noncode  sections). 

''The  new  article  contains  a  chapter  each  on  definitions,  apphcation,  adjudicative 
proceedings,  special  proceedings  (emergency  and  temporary  orders),  judicial  review  and 
civil  enforcement. 

^IND.  Code  §  4-21.5-1-4  (Supp.   1986). 

'°The  definition  of  "agency  action"  in  new  Ind.  Code  §  4-21.5-1-4  is  the  same  as 
the  definition  in  the  Model  State  Admin.  Procedure  Act  §  1-102(2)  (1981).  However, 
the  Indiana  statute  replaces  "discretionary  or  otherwise"  in  subsection  (3)  with  "under 
this  article."  See  Ind.  Code  §  4-21.5-1-4(3)  (Supp.   1986). 

"Ind.  Code  §  4-21.5-1-9  (Supp.   1986). 


1987]  ADMINISTRATIVE  ADJUDICATION  3 

procedural  duties."'^  An  agency  may  afford  greater  procedural  rights 
as  long  as  they  are  not  inconsistent  with  the  new  article  or  do  not 
substantially  prejudice  rights  conferred  upon  other  persons  by  any  law.'^ 
Unless  precluded  by  another  law,  a  person  may  waive  any  right  conferred 
upon  him,  but  may  not  waive  any  procedural  duty.'^  For  example,  a 
person  can  waive  the  right  to  a  hearing,  but  he  cannot  agree  to  extend 
the  time  for  appeal. 

The  new  article  applies  to  agencies  and  agency  actions  unless  spe- 
cifically exempted  by  statute.  A  review  of  the  agencies  and  agency 
functions  exempted  from  the  new  article  reveals  that  the  Commission 
generally  followed  the  former  Indiana  Code  chapter  4-22-1  regarding 
application  of  the  procedural  law.'^  Notable  additional  exceptions  in  the 
new  article  include  internal  agency  policy  and  organizational  or  procedural 
actions  unrelated  to  an  agency's  licensing  or  enforcement  functions.'^ 
Examples  include  budget,  personnel,  or  contract  reviews  performed  by 
one  state  agency  for  another.  Certain  grant  and  incentive  programs  under 
the  auspices  of  the  Lieutenant  Governor's  office  are  also  exempted.'^ 

Chapter  3  of  the  new  article  contains  the  most  extensive  provisions, 
those  relating  to  adjudicative  proceedings  that  occur  under  the  agency's 
jurisdiction.'^  The  Commission  changed  some  requirements  that  had  been 
established  either  by  the  former  statute  or  by  case  law.  However,  the 
Commission  adopted  other  court  decisions  and  agency  rules  by  codifying 
these  into  the  new  article. 

The  new  article  provides  in  chapter  3,  section  1,  that  notice  and 
service  may  be  made  by  United  States  mail  or  personal  service.'^  Agencies 
no  longer  have  to  give  notice  and  service  by  registered  (or  certified) 
mail.^^  However,   because  the  new  law  also  provides  that  the  agency 


'^M   §  4-21.5-2-1. 

''Id.   §  4-21.5-3-35. 

''Id.   §  4-21.5-2-2. 

'^See  Minutes  of  the  Administrative  Adjudication  Law  Recodification  and  Revision 
Commission  1  (Sept.  3,  1985)  [hereinafter  Minutes,  Sept.  3,  1985].  The  draft  before  the 
Commission  on  that  date  "exempt [ed]  the  same  agencies  and  agency  actions  from  the 
application  of  IC  4-21.5  that  IC  4-22-1-2  currently  exempts."  Id. 

'"IND.  Code  §  4-21.5-2-5(5)  (Supp.   1986). 

''Id.  §  4-21.5-2-5(7).  See  Minutes  of  the  Administrative  Adjudication  Law  Recodi- 
fication and  Revision  Commission  1  (Nov.  7,  1985)  [hereinafter  Minutes,  Nov.  7,  1985]. 

'«lND.  Code  §§  4-21.5-3-1  to  -37  (Supp.   1986). 

'"^Id.  §  4-21.5-3-l(b).  Although  the  Commission  spoke  in  terms  of  first  class  mail, 
it  may  be  possible  to  utilize  post  cards  or  other  forms  of  United  States  mail  service. 

2°Ind.  Code  §  4-22-1-6  (1982)  (repealed,  effective  July  1,  1987)  required  agency 
notification  by  "registered  or  certified  mail"  of  the  matters  in  issue  and  the  hearing  time 
and  place,  when  the  agency  was  the  moving  party.  Ind.  Code  §  4-22-1-25  required  the 
use  of  "registered  letter,  return  receipt  requested"  for  notices  of  initial  determinations. 
But  see  Ind.  Code  §  1-1-7-1  (Supp.   1986),  which  provides  that  where  a  statute  or  duly 


4  INDIANA  LAW  REVIEW  [Vol.  20:1 

must  maintain  a  record  of  service^'  and  has  the  burden  of  persuasion 
that  it  has  identified  and  notified  persons  entitled  to  notice,^^  circum- 
stances may  dictate  the  use  of  certified  mail  to  establish  receipt  of 
service.  Service  may  also  be  made  by  publication  when  the  identity, 
address,  or  existence  of  a  person  is  not  ascertainable  or  when  allowed 
by  another  statute. ^^  The  former  AAA  made  no  provision  for  service 
by  pubhcation.^"* 

The  Commission  examined  and  rejected  the  holding  of  a  case  decided 
under  the  old  statute,  which  required  notice  to  be  "addressed  to  the 
person  or  persons  against  whom  an  order  or  determination  may  be  made 
at  their  last  known  place  of  residence,  or  place  of  business  .  .  .  ."^^ 
Citing  that  statutory  language,  the  Court  of  Appeals  of  Indiana,  in  Solar 
Sources,  Inc.  v.  Air  Pollution  Control  Board, ^^  held  that  notice  to  the 
person's  attorney  was  not  notice  to  the  client. ^^  In  rejecting  this  holding, 
the  Commission  reasoned  that  if  a  party  had  retained  counsel  or  had 
authorized  another  representative  to  receive  service,  the  agency  should 
be  allowed  to  serve  that  designated  entity.  Service  on  the  party's  attorney 
should  be  sufficient  and  may  even  be  more  beneficial  than  requiring 
service  on  the  party.  An  attorney  or  other  representative  familiar  with 
administrative  procedure  may  be  better  able  timely  to  comply  with 
procedural  requirements  for  appeal.  Also,  authorizing  service  on  the 
attorney  or  representative  may  promote  administrative  efficiency  where 
an  appearance  is  made  on  behalf  of  multiple  parties  or  a  class. ^^  There- 
fore, the  new  article  allows  service  upon  either  the  individual  or  an 
authorized  representative.^^ 

In  contrast  to  the  new  notice  provision,  the  Commission  accepted 
and  codified,  in  Indiana  Code  section  4-21.5-3-2,  a  case  that  interpreted 
Indiana  Trial  Rule  6  regarding  computation  of  time  in  administrative 
proceedings.^^  The  language  of  trial  rule  6{Ay^  is  reflected  almost  verbatim 
in  the  new  article,  which  provides  that  when  the  last  day  of  a  designated 


promulgated  rule  requires  notice  to  be  given  by  registered  mail,  the  use  of  certified  mail 
constitutes  compliance. 

^•IND.  Code  §  4-21.5-3-l(b)  (Supp.   1986). 

^'Id.   §  4-21.5-3-5(0- 

'Ud.  §  4-2 1.5-3- 1(d). 

2^lND.  Code  §  4-22-1-6  (1982)  (repealed,  effective  July  1,   1987). 

^'Id. 

M09  N.E.2d  1136  (Ind.  Ct.  App.   1980). 

^See  generally  Minutes  of  the  Administrative  Adjudication  Law  Recodification  and 
Revision  Commission  1  (July  23,  1985)  [hereinafter  Minutes,  July  23,   1985]. 

2^lND.  Code  §  4-21.5-3-l(c)  (Supp.   1986). 

'oRall  Stores,  Inc.  v.  State  Bd.  of  Tax  Comm'rs,  262  Ind.  386,  316  N.E.2d  674 
(1974). 

^'Ind.  R.  Tr.  p.  6(A). 


1987]  ADMINISTRATIVE  ADJUDICATION  5 

time  period  falls  on  a  weekend  or  holiday,  the  time  period  is  extended 
to  the  next  business  day.^^  Further,  if  the  time  period  allowed  is  less 
than  seven  days,  weekends  and  holidays  are  excluded  from  the  calculation. 
The  new  article  is  also  consistent  with  trial  rule  6(E)  in  that  it  provides 
that  three  days  are  added  to  any  required  period  when  notice  is  served 
by  mail." 

Another  significant  incorporation  of  the  trial  rules  in  the  new  article 
involves  motions  for  summary  judgment.""*  The  AAA  made  no  reference 
to  the  applicability  of  summary  decisions  where  only  a  question  of  law 
existed,  although  at  least  one  agency  provided  for  a  summary  decision 
procedure  by  rule.^^  In  a  recent  case,  the  Indiana  Court  of  Appeals 
discussed  the  requirement  for  exhaustion  of  administrative  remedies. ^^ 
The  court  stated  that  one  factor  to  be  considered  is  whether  the  question 
before  the  agency  is  one  of  fact  or  law,  suggesting  that  purely  legal 
questions  are  particularly  suited  for  the  judiciary. ^^  Its  review  of  other 
factors  in  the  case  led  the  court  to  conclude  that  exhaustion  of  admin- 
istrative remedies  was  required  before  parties  could  proceed  in  court. ^^ 

With  the  enactment  of  summary  judgment  provisions  of  the  new 
article,  the  issue  of  whether  purely  legal  questions  can  provide  an  escape 
clause  from  exhaustion  requirements  seems  to  be  resolved.  Because  an 
administrative  law  judge  (ALJ)  can  entertain  motions  for  summary  judg- 
ment, which  presuppose  the  absence  of  a  genuine  issue  as  to  any  material 
fact,^^  the  legislature  clearly  intended  that  agencies  may  decide  legal 
issues.  Efficiency  of  the  judicial  process  is  served  by  allowing  agencies 
the  opportunity  to  correct  their  own  errors,  to  reflect  on  policy  pref- 
erences, and  to  resolve  controversies  without  interruption."^  As  a  practical 
matter,  the  question  of  whether  the  issues  to  be  determined  are  purely 


3^lND.  Code  §  4-21.5-3-2(a)-(b)  (Supp.   1986). 

"Ind.  Code  §  4-21.5-3-2(e)  (Supp.  1986);  see  also  Ind.  R.  Tr.  P.  6(E). 

'■•Ind.  Code  §  4-21.5-3-23  (Supp.  1986)  is  patterned  after  the  trial  rule  on  summary 
judgment,  Ind.  R.  Tr.  P.  56. 

^^See  Department  of  Natural  Resources  Administrative  Procedures,  Ind.  Admin.  Code 
tit.  310,  r.  0.5-1-11  (Supp.   1986). 

^^Scott  County  Fed'n  of  Teachers  v.  Scott  County  School  Dist.  No.  2,  496  N.E.2d 
610  (Ind.  Ct.  App.   1986). 

"The  court  discussed  factors  affecting  the  analysis  of  whether  the  issue  was  one  of 
fact  or  of  law,  compiled  in  4  K.  Davis,  Administrative  Law  Treatise  §  26:1  (2d  ed. 
1983),  and  held  that  the  factors  in  favor  of  exhaustion  outweigh  the  factors  counseling 
a  departure  from  the  exhaustion  requirement.  Citing  also  Uniroyal,  Inc.  v.  Marshall,  579 
F.2d  1060  (7th  Cir.  1978),  where  the  federal  court  refused  to  create  a  per  se  exception 
for  purely  legal  issues,  the  Indiana  Court  of  Appeals  declined  to  accept  the  argument 
that  the  absence  of  factual  questions  warrants  a  retreat  from  the  exhaustion  requirement. 
Scott,  496  N.E.2d  at  614. 

'^Id. 

^^nd.  Code  §  4-21.5-3-23(b)  (Supp.   1986). 

^°K.  Davis,  supra  note  37. 


6  INDIANA  LA  IV  REVIEW  [Vol.  20:1 

legal  or  are  a  mixture  of  factual  and  legal  questions  remains  unresolved., 
until  a  hearing  on  summary  judgment.  Unless  arguments  are  initiated 
before  the   administrative  tribunal,   a  trial  court   may  be   required   to 
remand  the  case  upon  discovering  a  factual  issue. 

Possibly  the  most  extreme  illustration  of  a  legal  question  is  where 
a  party  raises  constitutional  issues  in  an  agency  proceeding.  In  Drake 
V.  Department  of  Natural  Resources,^^  the  appellant  argued  denial  of 
due  process.  The  court  of  appeals  stated  that  the  AAA  provided  an 
adequate  means  for  an  agency  to  review  constitutional  issues,  and  there- 
fore, equitable  rehef  in  court  was  not  available. '^^ 

A  comparison  of  two  recent  cases  may  assist  in  defining  the  pa- 
rameters of  an  agency's  ability  to  determine  the  constitutionality  of 
specific  laws.  In  Midwest  Steel  Erection  Company  v.  Commissioner  of 
Labor, "^^  the  court  of  appeals  apparently  looked  favorably  upon  a  hearing 
officer  reviewing  the  constitutionality  of  a  rule,  but  in  Sunshine  Pro- 
motions, Inc.  V.  Ridlen,'^  the  court  stated  that  an  administrative  officer 
has  no  authority  to  pass  on  the  constitutional  validity  of  a  statute.  Such 
determinations  are  within  the  exclusive  jurisdiction  of  the  courts  under 
the  Declaratory  Judgment  Act."*^ 

With  the  exception  of  challenges  to  the  constitutionality  of  a  leg- 
islative act,  it  appears  that  all  other  questions  of  law  arising  out  of 
agency  adjudications  are  to  be  decided  in  the  administrative  forum, 
subject  to  judicial  review.  The  codification  of  the  summary  judgment 
rule  in  the  new  article  provides  a  mechanism  for  agencies  to  decide 
those  purely  legal  questions  within  their  jurisdiction. "^^ 

By  using  the  language  of  the  trial  rules, "^^  the  new  article  narrows 
a  line  of  cases  holding  that  the  trial  rules  do  not  govern  the  operations 
of  administrative  agencies. ^^  The  only  trial  rules  that  formerly  applied 
specifically  to  administrative  actions  were  those  regarding  discovery. "^^ 


^•453  N.E.2d  288  (Ind.  Ct.  App.   1983). 

'^Id.  at  293. 

^H82  N.E.2d  1369  (Ind.  Ct.  App.   1985). 

M83  N.E.2d  761  (Ind.  Ct.  App.   1985). 

^'IND.  Code  §§  34-4-10-1  to  -16  (1982). 

'"See  Ind.  Code  §  4-21.5-3-23  (Supp.   1986). 

""^See,  e.g.,  id.  §  4-21.5-3-5(b)(6),  requiring  that  notice  to  parties  is  needed  for  just 
adjudication  pursuant  to  Ind.  R.  Tr.  P.  19;  Ind.  Code  §  4-21.5-3-21,  (Supp.  1986),  which 
reflects  Ind.  R.  Tr.  P.  24  regarding  intervention;  Ind.  Code  §  4-21.5-3-23  (Supp.  1986), 
which  adopts  the  summary  judgment  principles  of  Ind.  R.  Tr.  P.  56;  Ind.  Code  §  4- 
21.5-5-6(c)  (Supp.  1986)  stating  that  the  rules  regarding  change  of  venue  apply  to  judicial 
review. 

'^See,  e.g..  State  v.  Board  of  Trustees  of  South  Bend,  474  N.E.2d  520  (Ind.  Ct. 
App.  1985);  Margrat,  Inc.  v.  Indiana  State  Bd.  of  Tax  Comm'rs,  448  N.E.2d  684  (Ind. 
Ct.  App.  1982);  Solar  Sources,  Inc.  v.  Air  Pollution  Control  Bd.,  409  N.E.2d  1136  (Ind. 
Ct.  App.   1980). 

''See  Ind.  R.  Tr.  P.  28(F). 


1987]  ADMINISTRATIVE  ADJUDICATION  7 

The  Commission  heard  testimony  from  one  of  the  drafters  of  the 
Model  Act,^°  who  explained  that  more  than  one  category  of  administrative 
procedure  is  necessary  to  prevent  too  many  "trial-type"  proceedings. 
The  drafter  explained  that  the  Indiana  Act  differs  from  the  Model  Act 
in  that  the  Model  Act  avoids  the  burden  of  having  too  many  ''trial- 
type"  proceedings.  While  the  AAA  used  broad  definitions  to  cover  all 
agency  decisions  and  then  specifically  exempted  many  agencies,  the  Model 
Act  exempts  fewer  agencies  and  instead  provides  several  categories  of 
procedures  that  meet  due  process  requirements  but  are  less  compHcated 
than  trials. '''  The  Model  Act  also  provides  for  two  types  of  informal 
proceedings,  conference  and  summary,  to  handle  less  controversial  is- 
sues." While  the  Commission  declined  to  name  specific  procedural  cat- 
egories, the  effect  of  chapter  3  of  the  new  article  is  to  provide  for  and 
to  differentiate  among  various  types  of  agency  proceedings.''^ 

III.  Categories  of  Notice  Provisions 

A.  Permit  Provisions 

Four  basic  categories  of  proceedings  are  established  in  the  notice 
provisions  of  chapter  3.  Sections  4  and  5  affect  notification  regarding 
permits,  and  sections  6  and  8  apply  to  regulatory  enforcement.^'* 

Section  4  concerns  the  issuance  of  individual  licenses  by  agencies, 
including  drivers'  licenses,  noncommercial  hunting  and  fishing  licenses, 
and  certain  professional  Hcenses.^^  These  types  of  Ucenses  do  not  generally 
arouse  controversy  or  objections  by  other  people.  Personnel  decisions 
by  agencies  are  also  governed  by  section  4  because  they  are  not  of 
general  applicability.  Therefore,  notice  is  required  to  be  given  only  to 
the  person  to  whom  the  order  is  specifically  directed  and  any  others 
required  under  another  law.^^ 

Section  5  applies  to  permit  or  status  determinations  that  may  be  of 
broad  public  concern. ^^  Of  the  many  topics  addressed  by  the  Commission, 
the  most  controversial  was  probably  the  question  of  who  receives  notice 


^°Dr.  L.  Harold  Levinson,  Professor  of  Law  at  Vanderbilt  University,  participated 
in  development  of  the  1981  version  of  the  Model  States  Procedure  Act,  drafted  by  the 
National  Conference  of  Commissioners  on  Uniform  State  Law.  Minutes  of  the  Admin- 
istrative Adjudication  Law  Recodification  and  Revision  Commission  3  (July  30,  1985) 
[hereinafter  Minutes,  July  30,   1985]. 

''Id.  at  4. 

"IND.  Code  §§  4-21.5-3-1  to  -37  (Supp.   1986). 
''Id.  §§  4-21.5-3-4,  -5,  -6,  -8. 
''Id.  §  4-21.5-3-4(a). 
''Id.  §  4-21.5-3-4(b). 
"Id.  §  4-21.5-3-5. 


8  INDIANA  LAW  REVIEW  [Vol.  20:1 

of  the  "general  interest"  type  of  administrative  permit  proceedings.  The 
notice  issue  was  a  primary  focus  in  illustrating  the  need  for  revision  of 
the  AAA.58 

The  Commission  was  established  as  an  outgrowth  of  Senate  Enrolled 
Act  No.  341.^^  The  Natural  Resources  Advisory  Committee^°  had  initiated 
this  bill  in  the  1985  session  in  an  effort  to  amend,  not  rewrite,  the 
AAA.  Prominent  among  the  considerations  of  the  Natural  Resources 
Advisory  Committee  was  the  formidable  notice  problem  created  by  In- 
diana Environmental  Management  Board  v.   Town  of  Bremen.^^ 

The  Town  of  Bremen  case  involved  construction  and  operation 
permits  for  a  sanitary  landfill  granted  by  the  Indiana  Environmental 
Management  Board  (EMB).^^  The  town  and  several  private  citizens  sought 
to  obtain  judicial  review  of  the  permit  issuance  and  to  enjoin  its  ef- 
fectiveness pending  review.  The  trial  court  eventually  ordered  that  the 
EMB's  action  be  set  aside  and  vacated."  The  Indiana  Court  of  Appeals 
found  that  the  town  and  the  citizens  were  entitled  to  pursue  administrative 
remedies  under  the  AAA,  including  the  opportunity  for  settlement  and 
for  an  adjudicatory  hearing. ^"^  The  court  further  found  that  the  AAA 
required  the  agency  to  notify  all  "affected  persons"  by  registered  (or 
certified)  mail  or  in  person  of  its  initial  determination.^^  Failure  to  provide 
the  appellees  with  their  due  process  rights  under  the  AAA  rendered  the 
permits  void  ab  initio. ^^ 


^^Minutes  of  the  Administrative  Adjudication  Law  Recodification  and  Revision  Com- 
mission App.  E,  at  2  (July  2,   1985)  [hereinafter  Minutes,  July  2,  1985]. 

''The  original  bill,  as  introduced  by  Senator  Augsburger,  would  have  amended  several 
sections  of  the  AAA  to  clarify  problematic  areas.  It  was  eventually  determined  that  the 
entire  1947  Act  might  be  in  need  of  careful  review  by  a  study  committee,  so  the  bill  was 
amended  to  create  the  Commission, 

'^°Ind.  Code  §  2-5-5-1  (1982)  created  the  Natural  Resources  Advisory  Committee 
which  consists  of  eight  members  of  the  General  Assembly.  The  statute  was  amended  in 
1985  to  change  the  name  to  the  Natural  Resources  Study  Committee.  Ind.  Code  §  2-5- 
5-1  (Supp.   1986). 

'^■458  N.E.2d  672  (Ind.  Ct.  App.   1984). 

•^^The  Solid  Waste  Management  Board  now  issues  these  permits  pursuant  to  Pub. 
L.  No.   143-1985,  §  49  (codified  at  Ind.  Code  §  13-1-12-8  (Supp.   1985)). 

''Town  of  Bremen,  458  N.E.2d  at  673. 

^IND.  Code  §§  4-22-1-4,  -25  (1982)  (repealed,  effective  July  1,  1987)  specifically 
afforded  the  opportunity  for  settlement  and  adjustment  of  all  claims,  controversies,  and 
issues.  The  court  of  appeals  found  the  "public  hearing"  provided  for  under  the  EMB 
law,  Ind.  Code  §  13-7-17-1  to  -2  (1982),  was  preliminary  and  supplementary  to  the  AAA 
hearing  requirements.   Town  of  Bremen,  458  N.E.2d  at  675. 

^'Citing  as  authority  Grether  v.  Indiana  State  Bd.  of  Dental  Examiners,  239  Ind. 
619,  159  N.E.2d  131  (1959),  the  court  of  appeals  found  that  the  apparently  permissive 
notification  language  of  Ind.  Code  §  4-22-1-25  (1982)  (repealed,  effective  July  1,  1987) 
was  mandatory.  Town  of  Bremen,  458  N.E.2d  at  675  n.l. 

"^Town  of  Bremen,  458  N.E.2d  at  676. 


1987]  ADMINISTRATIVE  ADJUDICATION  9 

The  Town  of  Bremen  decision  created  the  potential  that  a  permit 
issued  by  an  agency  acting  under  the  AAA  might  be  voided  at  any 
subsequent  time  when  an  affected  person  complained  that  he  was  not 
given  proper  notice  of  the  issuance  of  the  permit.  Identification  of 
"affected  persons"  is  relatively  simple  in  some  types  of  agency  actions. 
However,  other  areas  regulated  by  AAA  agencies,  such  as  the  recently 
created  environmental  protection  programs,  almost  defy  definition  of 
who  may  be  affected.  The  Commission  heard  evidence  concerning  the 
need  for  clarification  as  to  whom  the  agencies  must  notify. ^^  Notification 
is  important  because  it  allows  for  administrative  appeal  if  objections  are 
timely  filed. ^^ 

The  Commission  minutes  reflect  that  the  first  draft  of  the  new  article 
incorporated  notice  provisions  from  the  introduced  version  of  Senate 
Bill  No.  341.^^  The  essence  of  the  original  bill  is  probably  most  apparent 
in  the  new  article's  notice  provisions  regarding  permits  of  public  concern. 
Much  of  the  Commission's  work  centered  on  defining  and  balancing  an 
individual's  right  to  receive  notice  against  a  permit  applicant's  right  to 
proceed  within  a  reasonable  time  frame. 

The  final  version  of  the  new  article  requires  notice  of  an  agency 
order  to  a  list  of  persons,  beginning  with  the  person  to  whom  the  order 
is  directed  and  any  others  required  by  law,  as  described  in  section  4.^° 
In  addition  to  the  requirements  of  section  4,  the  public  participation 
type  of  permits  under  section  5  also  require  notice  to  each  competitor 
in  cases  of  mutually  exclusive  licenses,  to  each  person  who  files  a  written 
request  for  notice,  to  each  person  with  a  substantial  and  direct  proprietary 
interest,  and  to  each  person  needed  for  just  adjudication  as  described 
in  the  language  of  Indiana  Trial  Rule  19.^'  The  Commission  decided 
that  if  the  agency  was  aware  that  a  person  had  the  type  of  interest 
described  in  the  trial  rule,  he  should  be  afforded  an  opportunity  for 
participation  early  in  the  decision-making  process.  The  agency  may  re- 
quest the  permit  applicant  to  assist  in  identifying  these  persons. ^^  Failure 


"•'See,  e.g..  Minutes,  July  30,  1985,  supra  note  50,  at  2,  regarding  statements  by  a 
representative  of  the  Indiana  Manufacturers'  Association;  Minutes  of  the  Administrative 
Adjudication  Law  Recodification  and  Revision  Commission  Subcommittee  2-3  (July  16, 
1985)  [hereinafter  Minutes,  July  16,  1985],  regarding  statements  by  representatives  of  the 
Indiana  State  Board  of  Health,  by  an  independent  hearing  officer  under  contract  to  the 
State  Board  of  Health,  and  by  a  representative  of  the  Department  of  Natural  Resources; 
Minutes,  July  2,  1985,  supra  note  58,  at  App.  E,  2,  regarding  the  results  of  a  survey  of 
state  agencies  by  the  Office  of  Attorney  General.  See  also  Minutes,  July  30,  1985,  supra 
note  50,  at  7,  for  the  contrary  views  of  the  Hoosier  Environmental  Council. 

^^See  supra  note  67. 

''''Minutes,  Sept.  3,   1985,  supra  note  15,  at  2. 

'°lND.  Code  §  4-2l.5-3-4(b)  (Supp.   1986). 

''Id.  §  4-21.5-3-5(b)(l)-(6). 

'^Id.   §  4-21.5-3-5(0. 


10  INDIANA  LAW  REVIEW  [Vol.  20:1 

to  notify  the  persons  defined  in  section  5(b)  can  result  in  the  invahdation 
of  the  order  granting  or  denying  the  permit  if  the  unnotified  person 
can  sustain  his  burden  of  persuasion  that  he  has  been  substantially 
prejudiced  by  the  agency  decision. ^^ 

B.  Enforcement  Provisions 

Indiana  Code  section  4-21.5-3-6  codifies  a  type  of  regulatory  en- 
forcement that  was  not  specifically  recognized  by  the  former  statute. 
The  AAA  provided  that  when  an  investigation  or  inspection  revealed  a 
violation,  no  final  order  could  be  issued  without  a  hearing  and  notice. ^"^ 

Certain  agency  practices  allow  for  the  issuance  of  an  order  which 
becomes  final  if  no  objections  are  filed. ^^  The  Commission  heard  tes- 
timony that  often  a  respondent  did  not  wish  to  invoke  the  hearing 
process  for  minor  violations  because  of  the  time  and  complicated  process; 
representatives  of  various  agencies  stressed  the  importance  of  expediting 
the  administrative  process  whenever  possible. ^^  The  new  article  thus 
recognizes  orders  that  impose  a  sanction  or  terminate  a  legal  interest, 
other  than  in  permit  situations,  which  become  effective  by  statute  without 
an  adjudicative  proceeding  unless  review  is  timely  requested. ^^ 

The  more  traditional  type  of  enforcement  action  is  described  in 
section  8  of  chapter  3.  The  section  describes  enforcement  actions  that 
can  be  pursued  only  through  filing  a  complaint  and  conducting  a  pro- 
ceeding under  chapter  3.^^  These  types  of  suits  might  arise  in  regulatory 
areas  for  which  the  agency  has  no  statutory  authority  to  proceed  under 
Indiana  Code  section  4-21.5-3-6  or  for  which  the  streamlining  of  the 
action  is  not  of  prime  importance. ^^ 

Both  types  of  enforcement  proceedings  require  the  agency  to  give 
notice  to  each  person  to  whom  an  order  may  be  directed  and  to  any 
other  person  required  by  law  to  be  notified. ^° 

IV.  Parties  and  Intervention 

Corollary  to  the  issue  of  notice  is  that  of  intervention.  A  person 
who  is  entitled  to  notice  is  not  necessarily  a  party  unless  he  is  designated 


^'•IhfD.  Code  §  4-22-1-5  (1982)  (repealed,  effective  July  1,   1987). 

''See,  e.g.,  procedures  under  Ind.  Code  §§  22-8-1.1-1  to  -50,  13-4.1-1-1  to  -15-15 
(1982). 

'^See  Minutes,  July  30,  1985  supra  note  50,  at  5,  9;  Minutes,  July  16,  1985,  supra 
note  67,  at  3. 

"Ind.  Code  §  4-21.5-3-6(a)  (Supp.   1986). 

''Id.   §  4-21.5-3-8. 

""Id.   §  4-21.5-3-6. 

'°Id.  §§  4-21.5-3-6(b),  -8(b). 


1987]  ADMINISTRATIVE  ADJUDICATION  11 

as  a  party  in  the  record  of  proceeding.*^'  The  only  exception  is  a  person 
against  whom  any  resulting  enforcement  order  under  chapter  3,  section 
8,  will  be  specifically  directed. ^^  That  person  will  automatically  be  a 
party,  as  will  any  other  persons  who  properly  file  a  petition  for  review 
of  an  agency  order  under  chapter  3,  section  7.  For  all  other  persons, 
the  new  article  creates  rights  of  intervention  in  the  agency  hearing  process 
which  are  consistent  with  state  and  federal  trial  rules. 

Prior  to  a  hearing,  mandatory  intervention  is  recognized  for  persons 
granted  an  unconditional  right  to  intervene  by  any  other  statute. ^^  Per- 
missive intervention  exists  for  those  who  demonstrate  that  they  may  be 
substantially  prejudiced  or  who  have  a  conditional  right  to  intervene 
under  another  statute.^"* 

During  a  hearing,  intervention  may  be  allowed  if  the  petitioner  has 
a  conditional  right  to  intervene  or  presents  a  common  question  of  law 
or  fact.^^  The  ALJ  must  also  determine  that  allovdng  intervention  after 
the  hearing  has  begun  will  not  impair  either  the  interests  of  justice  or 
the  prompt  conduct  of  the  proceedings.^^  Reflective  of  the  state  and 
federal  rules  on  this  subject,  the  new  article  requires  the  ALJ  to  consider 
whether  the  intervention  will  unduly  delay  or  prejudice  the  legal  interests 
of  the  parties. ^^ 

A  person  eligible  to  receive  notice  of  an  initial  agency  order,  who 
did  not  have  actual  notice  in  time  to  intervene  or  who  was  wrongfully 
denied  intervention,  may  have  standing  to  obtain  judicial  review  of  that 
agency  order  if  the  requisite  prejudice  is  shown. ^^  The  placement  of  this 
provision  in  chapter  5  suggests  that  the  proper  time  to  appeal  a  denial 
of  party  status  is  when  all  of  the  issues  are  considered  on  judicial  review. 
The  absence  of  an  interlocutory  appeal  for  denial  of  intervention  differs 
from  a  1981  amendment  to  Indiana  Trial  Rule  24.^^ 


«'M   §§  4-21.5-3-4(b),  -5(b),  -6(b). 

«2M   §  4-21.5-3-8(b). 

^^Id.  §  4-21.5-3-21(a)(l).  Certain  statutes  and  rules  guarantee  broad  rights  of  inter- 
vention. See,  e.g.,  Ind.  Code  §§  13-6-1-1  to  -6  (1982  &  Supp.  1986),  regarding  environmental 
lawsuits;  Ind.  Admin.  Code  tit.  310,  r.   12-1-3  (1984),  regarding  surface  mining. 

«^lND.  Code  §  4-2 1.5 -3 -2 1(a)(2)  (Supp.   1986). 

^'Id.  §  4-21.5-3-21(0). 

«Vaf.;  see  also  Fed.  R.  Civ.  P.  24;  Ind.  R.  Tr.  P.  24. 

««lND.  Code  §  4-21.5-5-3  (Supp.   1986). 

«^Ind.  R.  Tr.  p.  24(C)  was  amended  in  1981.  The  previous  rule  stated  that  "The 
court's  determination  upon  a  motion  to  intervene  may  be  challenged  only  by  appeal  from 
the  final  judgment  or  order  in  the  cause."  Ind.  R.  Tr.  P.  24(C)  (amended  1981).  But 
in  Indiana  Bankers  Ass'n  v.  First  Fed.  Sav.  &  Loan  Ass'n  of  East  Chicago,  180  Ind. 
App.  157,  387  N.E.2d  107  (1979),  the  court  of  appeals  found  that  there  may  be  facts 
and  circumstances  which  support  the  use  of  an  interlocutory  appeal  under  Ind.  R.  App. 
P.  4(B)(5)  when  a  motion  to  intervene  is  denied.  The  1981  amendment  changed  the  quoted 
language  of  the  trial  rule  to  read,  "The  court's  determination  upon  a  motion  to  intervene 


12  INDIANA  LAW  REVIEW  [Vol.  20:1 

The  new  article  does  contain  a  provision  for  judicial  review  of  a 
nonfinal  agency  action  if  a  person  establishes  both  that  an  immediate 
and  irreparable  harm  would  occur  and  that  no  adequate  remedy  exists 
at  law.  The  new  law  also  specifically  provides  that  the  failure  to  comply 
with  procedural  requirements  may  not  be  used  as  the  basis  for  finding 
an  inadequate  remedy  at  law.^°  This  precludes  a  person  from  missing 
his  statutory  deadline  for  filing  a  petition  for  review,  and  then  claiming 
that  he  has  no  adequate  remedy  at  law.  The  provision  allowing  limited 
review  of  nonfinal  agency  actions  may  potentially  allow  challenges  in 
court  of  decisions  on  petitions  for  stay  or  intervention  if  the  requisite 
standards  can  be  satisfied. 

V.  Effective  Date  of  Orders  and  Stay  Provisions 

Another  major  issue  addressed  by  the  new  article  is  when  an  order, 
particularly  one  concerning  a  license,  becomes  effective.  The  AAA  pro- 
vided that  "every  order  or  determination  so  made  shall  be  in  full  force 
and  effect  after  it  is  duly  entered  and  spread  of  record  in  the  permanent 
records  of  the  agency  .  .  .  ."^'  The  revocation  of  a  license  or  permit 
was  effective  as  of  the  date  of  revocation  "until  and  unless  set  aside 
by  a  court  on  review. "^^ 

This  AAA  language  sometimes  created  dual  effective  dates  for  agency 
orders.  If  an  order  both  revoked  a  permit  and  required  remedial  measures 
or  the  payment  of  a  fine,  the  revocation  was  effective  as  soon  as  the 
ultimate  authority  voted  to  revoke.  However,  the  portion  of  the  order 
requiring  corrective  action  or  a  civil  penalty  was  not  effective  until  the 
order  was  "spread  of  record,"  a  term  not  defined  in  the  AAA.  Because 
the  time  for  filing  a  petition  for  judicial  review  of  a  final  order  ran 
from  the  receipt  of  notice, ^^  most  agencies  used  the  date  of  service  of 
the  notice  as  the  effective  date  of  all  fully  adjudicated  orders. 

The  old  AAA  did  not  resolve  the  problem  of  determining  the  effective 
date  of  licenses  or  permits  approved  by  an  agency  without  full  adju- 
dication. Section  25  of  the  AAA  stated  that  if  no  objections  were  filed. 


shall  be  interlocutory  for  all  purposes  unless  made  final  under  Trial  Rule  54(B)."  Ind. 
R.  Tr.  p.  24(C).  Cf.  Developmental  Disabilities  Residential  Facilities  Council  v.  Metro- 
politan Dev.  Comm'n  of  Marion  County,  455  N.E.2d  960  (Ind.  Ct.  App.  1983),  which 
held  that  on  appeal,  a  denial  of  permissive  intervention  is  reviewable  only  for  an  abuse 
of  discretion. 

^IND.  Code  §  4-21.5-5-2(c)  (Supp.   1986). 

'■Ind.  Code  §  4-22-1-13  (1982)  (repealed,  effective  July  1,  1987). 

''Id. 

'^Id.  §  4-22-1-14  required  the  petition  to  be  filed  fifteen  days  after  the  receipt  of 
notice.  The  new  article  gives  parties  thirty  days  after  service  of  notice  to  file  a  petition 
for  review.  Ind.  Code  §  4-21.5-5-5  (Supp.   1986). 


1987]  ADMINISTRATIVE  ADJUDICATION  13 

a  permit  was  effective  fifteen  days  after  service.'^  If  objections  were 
filed  by  the  applicant  or  another  affected  person,  there  was  authority 
suggesting  that  the  effectiveness  of  a  permit  was  automatically  delayed 
until  all  procedural  requirements  were  met  and  a  final  order  was  entered. ^^ 

Some  agencies,  however,  have  differing  statutory  language  regarding 
permits.  For  example,  the  Environmental  Management  Act  provides  that 
the  decision  of  the  Commissioner  of  the  Indiana  Environmental  Man- 
agement Board  to  approve  or  deny  a  permit  is  effective  immediately 
unless  otherwise  stated. ^^ 

The  Commission  heard  divergent  views  on  many  issues,  including 
the  effectiveness  of  orders. '^^  Its  members  recognized  that  some  agency 
orders  require  a  meaningful  opportunity  for  appeal  before  they  take 
effect,  while  others  are  more  appropriately  effective  upon  issuance.  The 
requirements  for  the  effectiveness  of  orders  follow  a  rationale  similar 
to  that  of  the  notice  categories  in  terms  of  allowing  an  opportunity  for 
public  reaction. 

Individual  permits  or  licenses  of  minor  public  concern  are  effective 
when  served. ^^  Other  permits  become  effective  when  the  time  allowed 
for  seeking  administrative  review  expires. '^^ 

If  both  a  petition  for  review  and  a  petition  for  stay  of  effectiveness 
are  filed  before  an  order  becomes  effective,  any  part  of  the  order  within 
the  scope  of  the  petition  for  stay  may  be  delayed  for  an  additional 
fifteen  days  while  the  ALJ  conducts  a  preliminary  hearing. '°°  The  ALJ 
may  stay  the  order  in  whole  or  in  part.'°^ 

When  the  ALJ  orders  a  partial  stay,  an  applicant  may  elect  to 
proceed  with  the  unaffected  portions  of  the  permit. '°^  The  applicant 
assumes  the  risk  that  the  entire  permit  could  be  later  voided  following 
a  hearing,  but  that  risk  may  be  preferable  to  the  complete  standstill 
created  by  the  filing  of  an  objection  under  the  AAA.  The  partial  stay 
provisions  expedite  the  adjudicative  proceedings  and  protect  the  interests 
of  the  applicant  and  other  affected  persons  by  isolating  for  adjudication 
those  contested  portions  of  the  permit  which  are  severable. 


^"IND.  Code  §  4-22-1-25  (1982)  (repealed,  effective  July  1,   1987). 

"^^Id.;  see  also  Indiana  Envtl.  Management  Bd.  v.  Town  of  Bremen,  458  N.E.2d  672 
(Ind.  Ct.  App.   1984). 

^^Pub.  L.  No.  143-1985,  §  149  (codified  at  Ind.  Code  §  13-7-10-2.5(b)  (Supp.  1985)). 

'TiNAL  Report,  supra  note  4,  at  3. 

'«Ind.  Code  §  4-21.5-3-4(d)  (Supp.   1986). 

^^The  period  for  seeking  administrative  review  is  fifteen  days  unless  a  longer  time 
is  granted  by  another  statute.  Thus,  most  orders  are  effective  under  Ind.  Code  §  4-21.5- 
3-5(f)  (Supp.  1986)  within  fifteen  days  unless  petitions  for  review  and  for  stay  of  effectiveness 
have  been  filed. 

'°°lND.  Code  §  4-21.5-3-5(f)  (Supp.   1986). 

'°'M   §  4-21.5-3-5(h). 

'o^See  id. 


14  INDIANA  LAW  REVIEW  [Vol.  20:1 

The  express  ability  of  an  agency  to  stay  the  effectiveness  of  orders 
may  be  the  most  fundamental  change  in  administrative  law  created  by 
the  new  article.  Under  the  AAA,  only  the  courts  had  jurisdiction  to 
stay  agency  action  pending  judicial  review J°^  Caselaw  interpreting  the 
AAA  provided  that  the  stay  mechanism  could  be  used  as  an  equitable 
remedy  for  preserving  the  status  quo  to  avoid  undue  hardship. '^"^  The 
language  of  the  new  article  concerning  judicial  stay  is  practically  un- 
changed from  the  AAA.'°^  Thus,  presumably  the  same  principles  will 
apply  to  the  new  article  after  a  final  order  or  determination  is  made 
by  the  agency. 

Under  the  new  law,  the  ALJ  can  stay  agency  orders  in  both  categories 
of  licensing  during  the  course  of  administrative  adjudication. '°^  This 
change  is  consistent  with  the  1981  revision  of  the  Model  State  Admin- 
istrative Procedure  Act,  which  provides  that  the  presiding  officer  may 
take  action  on  a  petition  for  stay,  either  before  or  after  the  effective 
date  of  the  initial  or  final  order. '^^  The  new  article  also  gives  the  ultimate 
authority  discretion  to  grant  petitions  for  stay  during  efforts  to  modify 
a  final  order. '°^ 

VL  Emergency  and  Other  Temporary  Orders 

Acting  upon  requests  by  several  agencies, ^°^  the  Commission  expanded 
upon  the  brief  allusion  in  the  AAA  to  emergency  and  temporary  orders. ''° 
The  new  article  includes  chapter  4,  which  applies  if  an  emergency  exists 
or  if  a  statute  authorizes  immediate  agency  action."' 


'"'See  IND.  Code  §§  4-22-1-13,  -17  (1982)  (repealed,  effective  July  1,  1987),  which 
recognized  an  "automatic  stay  of  agency  action  where  expressly  provided  for  by  law." 

"^However,  the  court  could  not  extend  a  permit  beyond  its  effective  date,  thus 
constituting  a  judicially  created  renewal  permit.  Alcoholic  Beverage  Comm'n  v.  Lake  Super. 
Ct.  Room  4  Sitting  at  Gary,  259  Ind.   123,  284  N.E.2d  746  (1972). 

'"'Compare  Ind.  Code  §  4-22-1-17  (1982)  (repealed,  effective  July  1,  1987)  with  Ind. 
Code  §  4-21.5-5-9  (Supp.   1986). 

"^Ind.  Code  §§  4-21.5-3-4(e),  -5(f),  -5(h)  (Supp.   1986). 

•°^MoDEL  State  Admin.  Procedure  Act  §  4-217  (1981).  The  comment  following 
that  section  indicates  that  "[t]he  1961  Revised  Model  Act  mentioned  a  stay  granted  by 
the  agency  or  ordered  by  the  court  only  in  the  context  of  judicial  review,  Section  15(c),"  Id. 
§  4-217  comment. 

"o^Ind.  Code  §  4-21.5-3-31(b)  (Supp.   1986). 

'°^See,  e.g..  Minutes,  July  23,  1985,  supra  note  28,  at  4,  regarding  statements  by  a 
representative  of  the  Health  Professions  Bureau;  Minutes,  July  16,  1985,  supra  note  67, 
at  3,  regarding  statements  by  a  representative  of  the  Department  of  Natural  Resources; 
Minutes,  July  2,  1985,  supra  note  58,  at  App.  E,  at  3,  regarding  a  survey  of  state  agencies 
by  the  Office  of  Attorney  General. 

""Ind.  Code  §  4-22-1-5  (1982)  (repealed,  effective  July  1,  1987)  provided  only  that 
"in  a  case  of  emergency  a  temporary  order  may  be  made  by  such  agency  to  be  effective 
only  until  notice  may  be  given  and  hearing  had  as  herein  provided."  No  other  guidance 
was  provided  for  emergency  proceedings. 

'"Ind.  Code  §  4-21.5-4-1  (Supp.   1986). 


1987]  ADMINISTRATIVE  ADJUDICATION  15 

The  chapter  provide:,  for  an  order  with  or  without  notice  or  hearing, 
that  is  effective  when  issued. "^  The  agency  is,  however,  required  to  give 
*'such  notice  as  is  practicable"  to  persons  required  to  comply  with  the 
order.  "^ 

Upon  request,  the  agency  must  set  the  matter  for  evidentiary  hearing 
*'as  quickly  as  is  practicable.'""*  At  hearing  the  ALJ  may  void,  terminate, 
modify,  stay,  or  continue  the  order. "^  The  order  expires  on  the  date 
set  in  the  order,  the  date  set  by  statute,  or  the  elapse  of  ninety  days, 
whichever  is  earliest."^  As  long  as  the  adjudicative  process  is  being 
pursued  under  chapter  3,  the  order  may  be  renewed  for  successive  ninety 
day  periods  unless  precluded  by  law."^ 

The  emergency  provisions  are  available  as  an  adjunct  to  the  other 
categories  of  proceedings  described  in  chapter  4,"^  chapter  5,"^  chapter 
6,'^^  and  chapter  8,'^'  of  the  new  article. 

VII.  Judicial  Review^  and  Civil  Enforcement 

The  new  article  codifies  most  of  the  old  statutory  requirements  and 
court  interpretations  of  the  AAA  regarding  judicial  review.  Since  it  heard 
few  complaints  about  the  standards  for  court  review  of  agency  action, 
the  Commission  retained  the  core  provisions  of  the  AAA  in  this  area.'^^ 
Certain  scattered  caselaw  principles  were  legislatively  enacted  so  that  all 
the  requirements  for  administrative  adjudication  are  in  one  article. 

For  example,  countless  cases  have  held  that  a  party  must  exhaust 
his  administrative  remedies  before  seeking  judicial  review. '^^  The  ex- 
haustion requirement  is  specifically  stated  in  chapter  5  of  the  new 
article. ^^"^  As  was  true  under  the  AAA,'^^  the  new  article  provides  that 


"^Some  statutes  require  a  hearing  prior  to  the  issuance  of  a  temporary  order.  See, 
e.g.,  IND.  Code  §  13-4.1-11-8  (1982). 

"^IND.  Code  §§  4-21.5-4-2,  -3  (Supp.   1986). 

'''Id.  §  4-21.5-4-4. 

'''Id. 

'"'Id.  §  4-21.5-4-5. 

'"Id. 

'"Id.   §  4-21.5-3-4(d). 

"'Id.  §  4-21.5-3-5(g). 

''°Id.  §  4-21.5-3-6(d). 

'"Id.  §  4-21.5-3-8(a). 

'''See  id.  §§  4-21.5-5-1  to  -16. 

"^See,  e.g.,  Scott  County  Fed'n  of  Teachers  v.  Scott  County  School  Dist.  No.  2, 
496  N.E.2d  610  (Ind.  Ct.  App.  1986);  Drake  v.  Indiana  Dep't  of  Natural  Resources,  453 
N.E.2d  293  (Ind.  Ct.  App.  1983);  Thompson  v.  Medical  Licensing  Bd.,  180  Ind.  App. 
333,  389  N.E.2d  43  (1979),  cert,  denied,  449  U.S.  937  (1980). 

'^^IND.  Code  §  4-21.5-5-4  (Supp.   1986). 

'^'IND.  Code  §  4-22-1-18  (1982)  (repealed  effective  July  1,  1987);  see  also  Indiana 
Bd.  of  Chiropractic  Examiners  v.  Chamberlain,  495  N.E.2d  794  (Ind.  Ct.  App.  1986); 
Indiana  AlcohoHc  Beverage  Comm'n  v.  Johnson,  158  Ind.  App.  467,  303  N.E.2d  64 
(1973). 


16  INDIANA  LAW  REVIEW  [Vol.  20:1 

a  court  on  review  may  not  substitute  its  judgment  for  that  of  the  agency, 
nor  may  it  try  the  case  de  novo.^^^ 

The  new  article  also  retains  the  AAA's  standards  for  granting  relief 
on  judicial  review. '^^  If  substantial  prejudice  is  shown  under  these  stand- 
ards, the  reviewing  court  may  set  aside  an  agency  action.  Consistent 
with  the  AAA,  the  court  may  remand  the  case  for  further  proceedings 
and  compel  agency  action  when  it  is  unreasonably  delayed  or  unlawfully 
withheld. '28 

One  major  change  from  the  AAA  is  that  the  new  article  gives  a 
party  thirty  days  to  file  a  petition  for  judicial  review, '^9  instead  of  the 
previous  fifteen  day  period. '^°  Likewise  doubled  is  the  time  for  filing 
the  agency  record  with  the  court.'-' 

Cognizant  of  the  case  of  Shettle  v.  Meeks^^^  in  which  the  court  of 
appeals  held  that  an  agency  must  bear  the  cost  of  preparing  a  transcript 
for  judicial  review,  the  Commission  clarified  the  procedures  for  obtaining 
a  record  of  the  proceedings.  The  ALJ  must  have  the  hearing  recorded 
at  the  agency's  expense,  but  the  agency  is  not  required  to  prepare  a 
transcript.'"  Any  party  may,  at  his  own  expense,  cause  a  reporter  to 
prepare  a  transcript. '^"^  Despite  the  provisions  of  the  Access  to  Public 
Records  Law,'^^  the  agency  may  charge  a  petitioner  the  reasonable  costs 
of  preparing  necessary  copies  and  transcripts  for  the  court. '^^ 

Reasonable  costs  would  include  the  charge  by  a  reporting  service 
for  preparing,  upon  request,  a  hearing  transcript  that  would  not  otherwise 
have  been  transcribed.  The  party  making  the  request  would  pay  for  the 
transcript  unless  indigency  was  established.'^^ 

Chapter  6  of  the  new  article  concerns  civil  enforcement  of  agency 
orders.  A  verified  petition  for  civil  enforcement  is  the  proper  mechanism 
to  request  court-ordered  compliance. '^^  The  state'^^  or  any  party,  under 


'^^iND.  Code  §  4-21.5-5-11  (Supp.   1986). 

'^'Compare  Ind.  Code  §  4-22-1-18  (1982)  (repealed,  effective  July  1,  1987)  with  Ind. 
Code  §  4-2 1.5-5- 14(d)  (Supp.   1986). 

'^'Compare  Ind.  Code  §  4-22-1-18  (1982)  (repealed,  effective  July  1,  1987)  with  Ind. 
Code  §  4-21.5-5-15  (Supp.   1986). 

'^^IND.  Code  §  4-21.5-5-5  (Supp.   1986). 

'^°lND.  Code  §  4-22-1-14  (1982)  (repealed,  effective  July  1,   1987). 

'^'Compare  Ind.  Code  §  A-ll-XAA  (1982)  (repealed,  effective  July  1,  1987)  with  Ind. 
Code  §  4-21.5-5-13  (Supp.  1986). 

•^H65  N.E.2d  1136  (Ind.  Ct.  App.   1984). 

'"Ind.  Code  §  4-21.5-3-25(g)  (Supp.  1986). 

'''Id. 

'^'Ind.  Code  §§  5-14-3-1  to  -10  (Supp.   1986). 

'^^IND.  Code  §  4-21.5-5-13(d)  (Supp.   1986). 

"«M   §  4-21.5-6-1. 

'^'See  id.  §  4-21.5-6-1,  which  provides  that  the  petition  for  enforcement  may  be  filed 
by  an  agency  in  its  own  name,  by  an  agency  in  the  name  of  the  state,  by  the  Attorney 
General  in  his  own  name,  or  by  the  Attorney  General  in  the  name  of  the  state  at  the 
request  of  an  agency. 


1987]  ADMINISTRATIVE  ADJUDICATION  17 

specified  conditions, "*"  may  file  a  petition  to  enforce  an  agency's  order 
by  injunction,  restraining  order,  or  other  appropriate  relief."*'  The  re- 
sulting court  orders  are  appealable  through  the  rules  governing  civil 
appeals  from  the  courts."*^ 

Chapter  6  also  addresses  the  enforcement  of  subpoenas,  discovery 
orders,  and  protective  orders  issued  by  an  agency."*^  The  Commission 
considered  testimony  that  the  procedure  under  the  AAA,  in  which  only 
the  Attorney  General  could  seek  enforcement *'*''  of  subpoenas,  on  behalf 
of  the  agency  involved,  created  an  undue  burden  and  possible  conflicts 
of  interest  for  that  office. '^^  As  a  result,  the  new  article  provides  that 
any  party  to  an  agency  proceeding  can  seek  enforcement  of  the  agency's 
discovery  orders."*^ 

VIII.  Conclusion 

The  new  article  addresses  many  issues  that  have  arisen  since  the 
enactment  of  the  AAA  in  1947.  It  incorporates  the  principles  of  numerous 
court  decisions  and  trial  rules  in  recognition  of  the  increased  sophistication 
of  questions  presented  to  modern  agencies  as  they  attempt  to  effectuate 
state  and  federal  requirements.  Because  of  the  complexity  of  the  leg- 
islation, the  Commission  provided,  in  the  House  Enrolled  Act  1339,"*^ 
for  a  second  summer  study  committee  to  examine  certain  issues  and 
recommend  appropriate  legislation  to  the  Indiana  General  Assembly 
during  the  1987  session.  This  second  committee,  named  the  Administrative 
Adjudication  Commission,  met  during  the  summer  of  1986  to  propose 
minor  changes  in  the  new  article.  A  bill  that  makes  several  technical 
corrections  and  minor  revisions  received  the  consensus  of  the  summer 
group  and  will  be  introduced  to  the  General  Assembly  as  a  Commission 
bill  in  1987.148 


"*°5ee  id.  §  4-21.5-6-3(b),  which  precludes  commencement  of  an  enforcement  action 
by  a  party  if  sixty  days  have  not  elapsed  since  notice  of  intent  to  sue  was  given,  if  the 
agency  is  diligently  prosecuting  a  petition  for  civil  enforcement  of  the  same  order,  or  if 
a  petition  for  review  of  the  order  is  pending. 

'''Id.  §  4-21.5-6-6. 

''^Id.  §  4-21.5-6-7. 

'''Id.   §  4-21.5-6-2. 

•^"IND.  Code  §  4-22-1-21  (1982)  (repealed,  effective  July  1,  1987). 

''^See  Minutes,  July  2,  1985,  supra  note  58,  at  App.  E;  Final  Report,  supra  note  4. 

'^^Ind.  Code  §  4-21.5-6-2(b)  (Supp.   1986). 

'^Tub.  L.  No.   18-1986,  §§  5,  6  (non-code  section). 

'"^When  the  Administrative  Adjudication  Commission  met  in  1986,  it  considered 
making  changes  in  the  new  article  in  the  areas  of  the  pooling  of  administrative  law  judges, 
state  employee  arbitration,  civil  enforcement,  and  notice  provisions  concerning  landfills. 
The  Commission  declined  to  recommend  any  new  legislation  on  these  subjects  to  the 
General  Assembly  during  the  1987  session.  Admin.  Adjudication  Comm'n,  1986  Gen. 
Assembly,  Final  Report  of  the  Administrative  Adjudication  Commission,  November 
1,   1986  (1986). 


Developments  in  Business  Association  Law 

Paul  J.  Galanti* 

I.     Foreign  Limited  Partnerships 

The  Indiana  Uniform  Limited  Partnership  Act  (ULPA)'  is  the  original 
version  of  the  ULPA  promulgated  in  1916.  One  of  the  great  weaknesses 
of  the  ULPA  was  that  it  did  not  deal  with  limited  partnerships  with 
multistate  operations.  This  is  not  surprising  considering  that  the  drafters 
of  the  act  contemplated  that  limited  partnerships  would  be  small,  local 
enterprises.  Times  change,  and  limited  partnerships  with  multistate  op- 
erations have  become  common.  Consequently,  one  of  the  great  advances 
of  the  Revised  Uniform  Limited  Partnership  Act  (1976)  (RULPA)^  and 
its  successor,  the  Uniform  Limited  Partnership  Act  (1985)  (ULPA  1985),^ 
is  that  they  clarify  the  status  of  foreign  limited  partnerships.^  A  few 
states  had  enacted  procedures  for  recognizing  foreign  limited  partnerships 
before  RULPA,^  and  some  courts  recognized  such  enterprises  by  applying 
choice  of  law  rules. ^  This  practice,  however,  was  not  universal.  This 
presented  the  risk  of  a  court  holding  that  a  certificate  of  limited  part- 
nership filed  in  another  state  was  not  "substantial  compliance"  with  the 
formahties  of  forming  a  limited  partnership  under  ULPA.^  The  venture 
would  then  be  considered  a  general  partnership,  subjecting  the  limited 
partners  to  unlimited  Hability.^  Consequently,  a  cautious  attorney  rep- 
resenting a  limited  partnership  formed  under  the  laws  of  another  state 
that  wishes  to  transact  business  in  Indiana  would  qualify  it  as  an  Indiana 


*Professor  of  Law,  Indiana  University  School  of  Law — Indianapolis.  A.B.,  Bowdoin 
College,  1960;  J.D.,  University,  of  Chicago,  1963. 

'IND.  Code  §§  23-4-2-1  to  -31  (1982). 

^Revised  Uniform  Limited  PARXNERsmp  Act,  6  U.L.A.  215  (Supp.   1986). 

^Uniform  Limited  Partnersidp  Act,  6  U.L.A.  285  (Supp.  1986). 

*See  generally  Sell,  An  Examination  of  Articles  3,  4  and  9  of  the  Revised  Uniform 
Limited  Partnership  Act,  9  St.  Mary's  L.J.  459,  471-77  (1978). 

'See,  e.g.,  Cal.  Corp.  Code  §  15700  (Deering  Supp.  1974);  Tex.  Rev.  Civ.  Stat. 
Ann.,  art.  6132a,  §  32  (Vernon  Supp.   1986). 

"See,  e.g.,  Cheyenne  Oil  Corp.  v.  Oil  &  Gas  Ventures,  Inc.,  42  Del.  Ch.  100,  105, 
204  A.2d  743,  746  (1964);  Oilman  Paint  &  Varnish  Co.  v.  Legum,  197  Md.  665,  668, 
80  A. 2d  906,  907-08  (1951);  King  v.  Sarria,  69  N.Y.  24,  30-31  (1877);  see  also  Plaza 
Realty  Investors  v.  Bailey,  484  F.  Supp.  335  (S.D.N.Y.  1979)  (New  York  federal  court 
applied  Indiana  law  to  an  Indiana  limited  partnership  in  a  diversity  action);  Partnership 
Equities,  Inc.  v.  Marten,  15  Mass.  App.  42,  443  N.E.2d  134  (1982).  See  generally  J. 
Crane  &  A.  Bromberg,  Law^  of  PARTNERSfflP  §  26  n.30  (1968). 

'Ind.  Code  §  23-4-2-2(2)  (1982).  See  generally  J.  Crane  &  A.  Bromberg,  supra 
note  6,  §  26(b);  H.  Henn  &  J.  Alexander,  Lav^s  of  Corporations  §  29  (3d  ed.  1983). 

'See  Arrow  Petroleum  Co.  v.  Ames,   128  Ind.  App.   10,  142  N.E.2d  479  (1957). 

19 


20  INDIANA  LAW  REVIEW  [Vol.  2D:  19 

limited  partnership  under  the  ULPA— at  least,  that  is,  until  Indiana 
adopts  the  ULPA  1985. 

The  only  Indiana  decision  involving  the  limited  liability  of  a  foreign 
limited  partnership  is  the  recent  decision  in  Radio  Picture  Show  Part- 
nership V.  Exclusive  International  Pictures.'^  Perhaps  a  more  accurate 
statement  would  be  that  Radio  Picture  Show  might  have  involved  the 
limited  liability  status  of  a  foreign  limited  partnership.  A  purported 
Texas  limited  partnership,  3622  Limited,  was  one  of  the  entities  found 
liable  in  the  case.*°  In  turn,  3622  Limited  was  the  purported  limited 
partner  in  Radio  Picture  Show  Partnership,  which  was  a  purported 
Cahfornia  limited  partnership.  The  court  refused  to  limit  3622  Limited's 
Hability,  pointing  out  that  not  only  had  the  venture  not  filed  a  certificate 
of  limited  partnership  in  Indiana  but  also  that  defendants  had  not 
presented  evidence  they  were  properly  formed  limited  partnerships  in 
their  respective  states  of  organization.^'  The  only  evidence  presented  by 
defendants  was  the  bare  characterization  by  one  of  the  parties  that  3622 
Limited  was  a  limited  partnership.  This  assertion  was  not  sufficient  to 
meet  defendants'  burden  of  proof  on  the  issue. '^ 

It  might  be  possible  for  a  foreign  limited  partnership  planning  to 
transact  business  in  Indiana  simply  to  file  a  copy  of  the  certificate  of 
limited  partnership  prepared  and  filed  in  its  state  of  organization.  How- 
ever, because  ULPA  requires  the  certificate  to  specify  the  location  of 
the  principal  place  of  business  in  Indiana  in  order  to  determine  where 
the  certificate  should  be  filed, '^  the  only  safe  procedure  is  to  prepare 
and  file  a  certificate  specifically  drafted  to  comply  with  the  Indiana 
ULPA.  This  is  a  very  cumbersome  procedure  if  a  limited  partnership 
does  business  in  many  states  because  the  provisions  for  organizing  Hmited 
partnerships  in  ULPA  jurisdictions  are  not  completely  uniform.  The 
problem  is  compounded  by  the  frequent  need  to  amend  limited  part- 
nership certificates.'"^  The  multiple  fihng  requirements  for  multistate  lim- 
ited partnerships  were  simplified  significantly  in  the  RULPA  and  the 
ULPA  1985. '5 


M82  N.E.2d  1159  (Ind.  Ct.  App.   1985). 
'°Id.  at  1168. 

^^Id.  at  1168-69.  The  limitation  on  liability  of  limited  partners  is  a  matter  of  defense. 
See  Howard  v.  Gray's  Warehouses,  Inc.,  242  Ky.  501,  46  S.W.2d  787  (1932). 

The  Radio  Picture  Show  court  stated  that  "a  limited  partnership  [sic]  is  not  a  proper 
party  in  a  proceeding  against  the  partnership"  under  Ind.  Code  §  23-4-2-26.  482  N.E.2d 
at  1168.  The  reference  should  have  been  to  a  "limited  partner,"  but  the  error  is  under- 
standable because  the  purported  limited  partner,  3622  Limited,  was  itself  a  limited  part- 
nership. 

'^IND.  Code  §  23-4-2-2(1)  (1982). 

''Id.  §  23-4-2-24. 

'^Revised  Uniform  Limited  PARXNERsmp  Act  §  902,  6  U.L.A.  267  (Supp.   1986); 
Uniform  Limited  Partnership  Act  §  902,  6  U.L.A.  296-97  (Supp.  1986). 


1987]  BUSINESS  ASSOCIATIONS  21 

There  is  no  Indiana  authority  on  point, '^  but  it  is  clear  that  a  foreign 
corporation  that  is  the  general  partner  of  a  foreign  limited  partnership 
doing  business  in  Indiana  must  qualify  to  transact  business  as  a  foreign 
corporation  under  the  Indiana  General  Corporation  Act  (IGCA).'^  This 
is  not  necessary  if  a  foreign  corporation  is  a  limited  partner  of  a  foreign, 
or  even  an  Indiana,  limited  partnership.  The  requirement  that  limited 
partners  not  partake  in  control  of  the  business  to  maintain  limited  liability 
status'^  in  effect  precludes  a  corporation  that  is  a  limited  partner  from 
transacting  business  in  the  state.  Presumably  a  foreign  corporation  that 
is  a  limited  partner  partaking  in  control  of  the  business  of  a  limited 
partnership  would  be  subject  to  sanctions  for  failing  to  qualify  to  do 
business  in  Indiana  under  the  IGCA'^  and  would  be  liable  to  creditors 
of  the  limited  partnership  under  the  ULPA.^^ 

II.     Corporate  Management  and  Shareholder  Suits 

A  rather  unusual  case  decided  during  the  survey  period  is  Scott  v. 
Anderson  Newspapers,  Inc}^  In  Scott,  the  court  affirmed  in  part,  re- 
versed in  part,  and  remanded  with  instructions  certain  holdings  of  the 
Hancock  Superior  Court  in  a  declaratory  judgment  action. ^^  In  reaching 
this  result,  the  Scott  court  appeared  to  follow  traditional  corporate  law 
maxims  to  some  degree  while  doing  violence  to  other  maxims. 

The  dispute  was  between  two  factions  in  Anderson  Newspapers,  Inc. 
(ANI),  which  publishes  the  two  newspapers  in  Anderson,  Indiana,  the 
Bulletin  and  the  Herald.  The  plaintiffs  represented  the  Herald  group 
and  the  defendants  represented  the  Bulletin  group.  The  two  newspapers 
were  owned  and  operated  by  separate  corporations  before  1949,  but 
were  consolidated  in  that  year.  ANI  was  the  corporation  resulting  from 


"The  issue  was  not  discussed  in  Radio  Picture  Show,  although  the  general  partner 
in  the  partnership  was  a  California  corporation.  482  N.E.2d  at  1162.  The  structure  of 
the  Radio  Picture  Show  enterprise  was  rather  complex,  which  could  explain  why  the  court 
observed  that  "no  argument  .  .  .  [was]  made  concerning  knotty  problems  of  what  law 
would  govern."  Id.  at  1168. 

^^See  Ind.  Code  §  23-1-11-1  (1982).  See  generally  Note,  The  Corporation  as  Managing 
Partner  in  a  Limited  Partnership,  55  N.D.L.  Rev.  271  (1979).  This  also  will  be  true  under 
the  new  Indiana  Business  Corporation  Law,  Ind.  Code  §  23-1-49-1  (Supp.   1986). 

•«Ind.  Code  §  23-4-2-7  (1982).  See  Port  Arthur  Trust  Co.  v.  Muldrow,  155  Tex. 
612,  291  S.W.2d  312  (1956). 

'^Ind.  Code  §  23-1-11-14  (1982). 

^°Cf.  Mursor  Builders,  Inc.  v.  Crown  Mountain  Apartment  Ass'n,  467  F.  Supp. 
1316  (D.V.I.   1978). 

^'477  N.E.2d  553  (Ind.  Ct.  App.   1985). 

"M  at  556.  Perhaps  the  result  is  not  too  surprising  considering  the  somewhat 
convoluted  nature  of  the  parties.  Defendants  in  the  action  had  filed  a  counter  claim  and 
both  parties  appealed  from  the  lower  court  decision.  Thus  there  were  plaintiffs,  counter- 
defendants,  appellants,  and  cross-appellees  on  one  side  and  defendants,  counter-claimants, 
appellees,  and  cross-appellants  on  the  other.  Id. 


22  INDIANA  LAW  REVIEW  [Vol.  20:19 

the  consolidation. 23  The  former  Herald  interests  became  minority  share^ 
holders  and  directors  of  ANI  following  the  consolidation. ^-^  Each  group 
nominated  its  own  directors  although  they  were  elected  by  all  ANI 
shareholders.  In  turn,  the  president  and  secretary  were  elected  from  the 
Bulletin  group  and  the  vice  president  from  the  Herald  group.  Each  group 
appointed  the  editor  of  its  own  newspaper. ^^  Satisfactory  relations  between 
the  two  groups  apparently  ended  in  1981  when  the  founder  of  the 
Herald,  who  was  the  ANI  vice  president,  died.  His  son  voluntarily 
assumed  the  editorship  of  the  Herald  without  any  action  by  the  ANI 
board. 

At  this  point,  the  Bulletin  group,  armed  with  a  legal  opinion, 
attempted  to  gain  complete  control  of  ANI's  affairs  including  the  selection 
of  the  vice  president,  who  had  traditionally  come  from  the  Herald  group; 
the  right  to  nominate  and  elect  the  three  Herald  directors;  and  the  right 
to  name  the  Herald's  editor.  They  offered  amendments  to  ANI's  ** articles 
of  consolidation"  and  bylaws  to  provide  that  all  corporate  business  and 
affairs  could  be  transacted  by  a  simple  majority  vote  of  the  shareholders 
or  directors.  The  declaratory  judgment  suit  followed  because  these  amend- 
ments would  have  effectively  ended  the  rights  of  the  Herald  group  in 
ANI.26 

The  Scott  court,  in  discussing  the  issues  in  the  case,  consistently 
referred  to  the  "Herald  group's  preemptive  right  to  pubhsh  the  Herald. "^^ 
This  terminology  is  unfortunate.  It  is  not  clear  from  the  opinion  whether 
ANI  shareholders  had  "preemptive  rights"  as  authorized  by  the  IGCA.^^ 
The  term  preemptive  rights  refers  to  the  right  of  shareholders  to  subscribe 
to  or  purchase  additional  shares  of  a  corporation  under  certain  circum- 
stances.^^  It  would  not  be  surprising  if  ANI  shareholders  had  preemptive 
rights  because  they  are  quite  common  in  closely  held  corporations. ^^ 
Perhaps  the  parties  in  Scott  referred  to  the  right  of  each  group  to  publish 
its  own  newspaper  as  a  "preemptive  right,"  but  the  court  should  have 
refrained  from  using  a  term  of  art  of  corporation  law  in  such  an 
inaccurate  fashion. 


''Scott,  All  N.E.2d  at  557.  See  Ind.  Code  §§  23-1-5-1,  -3  (1982).  See  generally  H. 
Henn  &  J.  Alexander,  supra  note  7,  §  346. 

'^Scott,  All  N.E.2d  at  557.  Initially  there  were  five  ANI  directors,  three  from  the 
Bulletin  group  and  two  from  the  Herald  group.  The  number  of  directors  was  raised  to 
seven,  with  four  from  the  Bulletin  group  and  three  from  the  Herald  group.  Id. 

''Id. 

'"Id. 

''Id. 

2«lND.  Code  §  23-l-2-6(i)  (1982). 

'"^See  generally  H.  Henn  &  J.  Alexander,  supra  note  7,  §§  127,  175. 

^°Under  the  IGCA,  shareholders  do  not  have  preemptive  rights  except  to  the  extent 
that  such  rights  are  provided  for  in  the  articles  of  incorporation  or  a  resolution  of  the 
board  of  directors.  Ind.  Code  §  23-1-2-6(1)  (1982). 


1987]  BUSINESS  ASSOCIATIONS  23 

The  Scott  court  had  to  examine  the  original  consolidation  of  the 
two  newspapers  to  determine  the  rights  of  the  two  groups.  The  court 
started  with  the  truism  that  corporations  "can  be  created  and  exist  only 
by  virtue  of  statutory  authority,  and  by  that  authority  alone, "^'  and 
that  while  "there  may  be  a  contract  among  individuals  to  enter  into  a 
corporation;  .  .  .  when  the  contemplated  corporations  [sic]  comes  into 
existence,  the  charter,  not  the  contract,  determines  their  rights.  Its  pro- 
visions are  supreme. "^^ 

The  latter  observation  is  overbroad.  Certainly  corporations  are  crea- 
tures of  statutes,  but  many  courts  have  long  departed  from  the  strict 
corporate  norm.  They  now  clearly  recognize  and  enforce  contracts  among 
the  parties  to  closely  held  corporations  as  to  how  the  corporation  is  to 
be  governed  if  the  interests  of  third  parties  are  not  adversely  affected." 
This  contemporary  view  of  the  corporate  norm  clearly  has  been  accepted 
in  Indiana  by  decisions  recognizing  the  highly  fiduciary  nature  of  the 
so  called  incorporated  partnership.^"^  The  Scott  court  recognized  that  the 
relationship  between  a  corporation  and  its  shareholders  is  a  "contract 
in  which  the  articles  of  incorporation,  bylaws,  provisions  of  the  stock 
certificate,  and  the  pertinent  statutes  are  embodied,  "^^  but  it  failed  to 
acknowledge  that  the  contract  is  in  fact  more  inclusive.  This  narrow 
view  did  not  have  any  impact  on  the  result  in  Scott,  but  it  is  unfortunate 
that  the  court  intentionally  or  inadvertently  seems  to  be  retreating  from 
the  view  of  the  contemporary  cases. 

The  Scott  court  correctly  characterized  the  articles  of  consolidation 
as  ANI's  articles  of  incorporation.^^  Thus,  it  was  appropriate  to  look 
to  the  articles  of  consoUdation  to  determine  the  rights  of  the  two  disputing 
groups  with  respect  to  the  Herald.  The  court  was  satisfied  that  the 
provisions  of  the  articles  made  it  clear  that  the  two  newspapers  were 
to  be  controlled  by  their  respective  groups.  This  arrangement  included 


''Scott,  477  N.E.2d  at  558.  See  Ohio  Ins.  Co.  v.  Nunnemacher,  15  Ind.  294  (1860); 
Indiana  Bond  Co.  v.  Ogle,  22  Ind.  App.  593,  54  N.E.  407  (1899).  See  generally  H. 
Henn  &  J.  Alexander,  supra  note  7,  §  78. 

''Scott,  All  N.E. 2d  at  558. 

''See,  e.g.,  Galler  v.  Caller,  32  111.  2d  16,  203  N.E.2d  577  (1964);  McQuade  v. 
Stoneham,  263  N.Y.  323,  189  N.E.  234  (1934). 

"See  Dotlich  v.  Dotlich,  475  N.E.2d  331  (Ind.  Ct.  App.  1985),  discussed  in  Galanti, 
Business  Law,  1985  Survey  of  Recent  Developments  in  Indiana  Law,  19  Ind.  L.  Rev. 
67,  82-88  (1986);  Cressy  v.  Shannon  Continental  Corp.,  177  Ind.  App.  224,  378  N.E. 2d 
941  (1978),  discussed  in  Galanti,  Business  Associations,  1979  Survey  of  Recent  Developments 
in  Indiana  Law,  13  Ind.  L.  Rev.  133,  150-55  (1980);  Hartung  v.  Architects  Hartung/ 
Odle/Burke,  Inc.,  157  Ind.  App.  546,  301  N.E.2d  240  (1973),  discussed  in  Galanti,  Business 
Associations,  1974  Survey  of  Recent  Developments  in  Indiana  Law,  8  Ind.  L.  Rev.  24, 
42-46  (1974). 

"477  N.E.2d  at  558. 

"Id.  at  559.  See  Ind.  Code  §  23-l-5-5(f)  (1982). 


24  INDIANA  LAW  REVIEW  [Vol.  20:19 

not  only  the  right  to  maintain  separate  editorial  policies  but  also  that 
the  shareholders  and  directors  of  one  group  would  not  interfere  with 
the  operation  of  the  other  newspaper. ^^  No  fault  can  be  found  with  this 
conclusion,  although  the  choice  of  the  term  "preemptive  right"  was 
unfortunate. 

The  Scott  court's  treatment  of  ANI's  bylaws  was  somewhat  incon- 
sistent with  its  emphasis  on  the  primacy  of  the  articles  of  consolidation. 
The  bylaws,  adopted  shortly  after  ANI  was  organized,  provided  in  part 
that  provisions  relating  to  the  proportion  of  directors  from  each  group 
and  the  right  of  each  group  to  fill  board  vacancies  were  not  to  "be 
changed  except  by  the  affirmative  vote  of  six-eighths  of  all  outstanding 
stock  of  this  corporation."^^  The  court  gave  effect  to  this  bylaw,  as  it 
should  have,  although  under  the  IGCA,  any  provision  requiring  a  greater 
than  majority  vote  for  shareholder  action  must  be  included  in  the  articles 
of  incorporation.^^  The  IGCA  permits  the  bylaws  to  estabhsh  the  quorum 
of  outstanding  shares  for  a  meeting  of  shareholders. "^^  There  is  nothing 
wrong  with  giving  effect  to  the  bylaw,  particularly  because  both  groups 
substantially  complied  with  the  bylaw  until  the  present  litigation, ^^  al- 
though the  result  is  inconsistent  with  the  court's  expressed  understanding 
of  the  requirements  of  Indiana  corporation  law.''^ 

The  court  next  considered  the  contention  of  the  Bulletin  group  that 
a  simple  majority  vote  could  amend  the  articles  to  eliminate  these 
provisions.  The  Bulletin  group  argued  that  the  phrase  "without  limi- 


''Scott,  All  N.E.2d  at  559-60. 

''Id.  at  560. 

^'IND.  Code  §  23-l-2-9(m)  (Supp.   1986). 

""M  §  23-l-2-9(n).  Presumably  the  bylaws  were  adopted  by  the  shareholders  acting 
as  shareholders  rather  than  by  the  directors.  Under  the  IGCA,  the  power  to  make,  alter, 
amend,  or  repeal  bylaws  is  vested  in  the  board  of  directors  unless  otherwise  provided  in 
the  articles  of  incorporation.  Id.  §  23-1-2-8. 

Either  the  ANI  articles  of  consolidation  vested  authority  in  the  shareholders  with 
respect  to  the  bylaws,  or  at  least  provided  that  with  respect  to  the  composition  of  the 
board,  any  change  would  require  shareholder  approval  with  a  high  enough  vote  that  no 
change  could  occur  unless  both  factions  agreed.  This  would  be  permissible  under  Indiana 
Code  section  23-1-2-8  although  the  greater  than  majority  voting  requirement  should  have 
appeared  in  the  articles  of  incorporation. 

It  is  possible  the  articles  of  consolidation  did  require  a  greater  than  majority  vote 
for  shareholder  action  and  this  simply  was  not  mentioned  by  the  court.  This  does  seem 
unlikely,  however,  because  the  court  substantially  set  out  the  provision  in  the  articles  of 
consolidation  relating  to  the  make  up  of  the  board  of  directors.  Scott,  All  N.E.2d  at 
559-60. 

''Scott,  All  N.E.2d  at  560. 

"^There  is  an  old  Indiana  decision.  Green  v.  Felton,  42  Ind.  App.  675,  84  N.E.  166 
(1908),  holding  that  a  bylaw  providing  that  bylaws  could  be  amended  by  a  two-thirds 
vote  required  a  vote  of  two-thirds  shares  represented  at  a  meeting  rather  than  a  vote  of 
two-thirds  of  all  shares.  However,  Green  was  decided  before  the  IGCA  was  adopted. 


1987]  BUSINESS  ASSOCIATIONS  25 

tation"  contained  in  the  IGCA  provision''-  relating  to  amending  articles 
of  incorporation  meant  that  a  simple  majority  could  amend  the  articles 
regardless  of  any  other  provisions  in  the  corporate  documents.  This  is 
clearly  erroneous.  Certainly,  the  articles  of  consolidation  could  be  amended 
under  the  IGCA  to  give  the  Bulletin  group  total  control  of  both  papers. 
However,  the  problem  is  not  the  possible  absence  of  a  provision  in  the 
articles  requiring  a  greater  than  majority  vote  of  shareholders  to  amend 
the  articles,  but  that  the  operating  terms  of  the  articles  prohibited  either 
group  even  from  taking  steps  to  propose  an  amendment  to  the  articles. 
Thus,  the  Scott  court  was  right  in  concluding  that  the  provisions  in  the 
articles  relating  to  control  over  each  newspaper  could  be  amended  only 
if  the  directors  or  shareholders  of  the  group  concurred."^ 

The  court  characterized  the  Bulletin  group's  proposal  to  eliminate 
the  rights  of  the  Herald  group  as  "ultra  vires. '"'^  The  ultra  vires  doctrine 
is  severely  limited  by  the  IGCA,  but  in  some  cases  it  can  be  raised  by 
a  shareholder.^^  The  court  unfortunately  misused  the  term  "ultra  vires," 
which  should  be  limited  to  situations  where  a  corporation  has  attempted 
to  do  something  not  authorized  by  its  purposes  or  powers.  ANI  did 
not  lack  capacity  to  do  what  the  Bulletin  group  wanted.  Rather,  the 
Bulletin  group  was  trying  to  do  something  in  an  improper  manner. 
Furthermore,  characterizing  the  Bulletin  group's  efforts  as  ultra  vires  is 
totally  inconsistent  with  the  court's  determination  that  the  Scott  action 
was  a  derivative  rather  than  a  direct  action.  An  action  by  a  shareholder 
to  enjoin  an  ultra  vires  act  would  be  an  action  brought  to  enforce  a 
right  of  the  shareholder  rather  than  a  right  of  a  corporation.  The  latter 
is  the  essence  of  a  shareholder  derivative  action.''^ 

The  court  rejected  the  Bulletin  group's  contention  that  Indiana  law 
does  not  provide  for  separate  approval  of  amendments  by  shareholder 
"groups"  where  the  corporation  has  a  single  class  of  shares.''^  The 
court's  approach  to  this  issue  is  intriguing.  It  relied  on  the  "import" 


«lND.  Code  §  23-l-4-l(a)  (Supp.   1986). 

'^It  is  possible  that  the  opinion  of  the  Bulletin  group  that  they  could  amend  the 
articles  by  a  simple  majority  was  premised  on  the  lack  of  a  greater  than  majority  voting 
requirement  provision  in  the  articles  of  consolidation.  It  is  clear  that  a  better  drafting 
job  would  have  included  such  a  provision  in  the  articles.  The  argument  of  the  Bulletin 
group,  of  course,  was  not  specious  and  could  have  been  accepted  by  the  Scott  court  with 
its  somewhat  misbegotten  emphasis  on  the  controlling  nature  of  the  corporation  statute 
over  corporate  conduct. 

^H77  N.E.ld  at  561. 

^See  Ind.  Code  §  23-l-10-4(a)  (1982).  See  generally  W.  Cary  &  M.  Eisenberg, 
Cases  and  Materials  on  Corporations  40  (5th  ed.  unabr.  1980);  H.  Henn  &  J.  Alex- 
ander, supra  note  7,  §  184. 

"^See  generally  H.  Henn  &  J.  Alexander,  supra  note  7,  §  360. 

''Scott,  All  N.E.2d  at  561-62. 


26  INDIANA  LAW  REVIEW  [Vol.  20:19 

of  the  IGCA  section  authorizing  provisions  in  articles  "creating,  defining, 
limiting  or  restricting  the  powers  .  .  .,  of  the  shareholders  of  any  class 
...  of  shareholders.""^  The  court  apparently  rejected  the  idea  that 
there  was  more  than  one  class  of  shares  while  at  the  same  time  recognizing 
the  Herald  interests  and  the  Bulletin  interests  as  separate  "groups. "^° 
The  court  concluded  the  statement  that  there  was  "no  division"  of  the 
shares  in  the  printed  articles  of  consolidation  prescribed  by  the  Indiana 
Secretary  of  State  simply  meant  that  there  was  only  one  class  of  shares 
so  that  no  statement  of  voting  rights  was  required  because  there  was 
only  one  class.  The  court  in  effect  treated  the  two  groups  as  separate 
classes  while  denying  that  it  was  doing  this  because  the  arrangement 
was  not  sanctioned  in  the  articles  of  consoHdation. 

There  is  nothing  wrong  with  rejecting  the  Bulletin  group's  argument, 
and  the  court  reached  the  right  result.  However,  if  the  court  had  been 
willing  to  depart  from  its  preternatural  position  that  the  "contract"  to 
be  construed  was  within  the  four  corners  of  the  articles  of  consolidation 
and  simply  gave  effect  to  the  obvious  intent  of  the  parties,  as  was  done 
in  Cressy  v.  Shannon  Continental  Corp.,^^  the  same  result  could  have 
been  reached  in  a  less  circuitous  way. 

One  of  the  most  questionable  aspects  of  the  Scott  decision  was  the 
court's  determination  that  the  suit  was  a  derivative  action  warranting 
recovery  of  attorney's  fees  and  expenses  by  the  Herald  group. ^^  The 
Bulletin  group  argued  unsuccessfully  that  the  action  was  personal  to  the 
plaintiffs  because  it  sought  to  protect  and  defend  their  rights  as  share- 
holders and  did  not  seek  relief  benefiting  the  corporations.  The  court 
responded  that  "[i]t  is  only  in  exceptional  cases  that  stockholders  will 
be  permitted  to  sue  or  defend  a  suit  for  and  on  behalf  of  themselves 
as  stockholders  of  such  corporation."^^  This  statement  is  absolutely 
extraordinary  in  light  of  the  court's  own  characterization  of  the  Bulletin 
group  as  "illegally  and  oppressively  pursuing  a  course  of  action  in  the 
name  of  the  corporation  calculated  to  destroy  the  Herald  group's"^"* 
interests.  There  is  no  simple  and  foolproof  method  for  distinguishing  a 
derivative  action  from  a  shareholder's  direct  or  individual  action. ^^  Gen- 


^'Id.  at  562  (emphasis  in  original)  (quoting  Ind.  Code  §  23-1-3-2(12)  (1982)). 

^°/<i.  A  better  way  of  handling  this  issue  when  ANI  was  organized  would  have  been 
to  create  two  classes  of  shares:  a  Herald  class  and  a  Bulletin  class.  This  is  a  very  effective 
way  to  insure  that  each  constituent  group  in  a  corporation  will  have  its  interests  protected. 
See  Lehrman  v.  Cohen,  43  Del.  Ch.  222,  222  A. 2d  800  (1966). 

^'177  Ind.  App.  224,  378  N.E.2d  941  (1978),  discussed  in  Galanti,  Business  Asso- 
ciations, 1979  Survey  of  Recent  Developments  in  Indiana  Law,  13  Ind.  L.  Rev.  133,  150- 
55  (1980). 

"477  N.E.2d  at  562-64. 

"M  at  563. 

''Id. 

"H.  Henn  &  J.  Alexander,  supra  note  7,  §  360. 


1987]  BUSINESS  ASSOCIATIONS  27 

erally  speaking,  however,  "the  breach  of  the  shareholder's  membership 
contract  give[s]  rise  to  a  direct  or  individual  action  while  a  wrong  to 
the  incorporated  group  as  a  whole  (i.e.  breach  of  some  duty  to  the 
corporation)  is  the  basis  for  derivative  action. "^^  The  derivative  action 
is  appropriate  to  recover  damages  or  profits  where  a  controlling  interest 
is  harming  the  corporation,"  but  whatever  harm  the  Bulletin  group  was 
causing  was  to  the  Herald  group  and  not  to  ANI.  Furthermore,  derivative 
actions  are  constrained  by  the  provisions  of  trial  rule  23.1.^^  There  was 
no  evidence  that  plaintiffs  complied  with  these  requirements,  or  at  least 
none  was  mentioned  by  the  court. 

Furthermore,  the  court  in  discussing  the  ultra  vires  issue  recognized 
that  the  action  may  be  brought  in  a  proceeding  "against  the  corpora- 
tion."^^ The  derivative  action,  of  course,  is  an  action  on  behalf  of  the 
corporation.  The  court  in  fact  stated  that  suits  for  and  on  behalf  of 
shareholders  as  shareholders  are  permitted  "where  a  majority  of  the 
stockholders  are  illegally  and  oppressively  pursuing  a  course  in  the  name 
of  the  corporation,  which  is  in  violation  of  the  right  of  the  other 
stockholders,  and  can  only  be  restrained  by  a  court  of  equity. "^°  It  is 
clear  that  if  the  Scott  litigation  can  be  characterized  as  anything,  it  can 
be  characterized  as  an  attempt  by  the  Bulletin  group  to  oppress  the 
Herald  group.  Despite  reaching  this  conclusion,  the  court  determined 
that  the  action  was  derivative.  The  position  taken  in  Scott  is  supported 
by  neither  Indiana  nor  general  authority. 

It  is  possible  the  court  characterized  the  action  as  a  derivative  suit 
to  uphold  the  order  that  ANI  pay  the  Herald  group's  costs  and  attorneys' 
fees.^^  It  is  well  settled  that  attorneys'  fees  and  expenses  can  be  awarded 
to  a  successful  plaintiff  in  a  shareholder  derivative  suit  under  Indiana 
law. ^2  This  approach  is  the  converse  of  the  not  uncommon  situation  of 
a  court  straining  to  characterize  an  action  as  direct  rather  than  derivative 


^^Id.  (emphasis  added).  Henn  and  Alexander  have  noted  that  among  other  things, 
the  following  have  been  held  to  be  direct  actions  by  shareholders:  (1)  suits  to  protect 
preemptive  rights  (presumably  referring  to  the  traditional  preemptive  right  to  subscribe  to 
shares  of  the  corporation,  rather  than  as  the  term  is  used  in  Scott);  (2)  suits  to  enforce 
the  right  to  vote;  (3)  suits  to  enjoin  an  ultra  vires  act  or  other  threatened  wrong  before 
its  consummation;  (4)  suits  for  breach  of  a  shareholder  agreement.  Id. 

''Id. 

5«Ind.  R.  Tr.  p.  23.1. 

'''Scott,  All  N.E.2d  at  561  n.2. 

"^Id.  at  563  (citing  McFarland  v.  Pierce,  151  Ind.  546,  45  N.E.  706  (1897),  reh'g  over- 
ruled, 151  Ind.  549,  47  N.E.   1  (1897)). 

^'M  at  564.  The  fees  and  expenses  awarded  totaled  $122,818.82.  Id. 

''See  Neese  v.  Richer,  428  N.E.2d  36  (Ind.  Ct.  App.  1981),  discussed  in  Galanti, 
Business  Associations,  1982  Survey  of  Recent  Developments  in  Indiana  Law,  16  Ind.  L. 
Rev.  25,  25-29  (1983);  see  also  Cole  Real  Estate  Corp.  v.  Peoples  Bank  &  Trust  Co., 
160  Ind.  App.  88,  310  N.E. 2d  275  (1974). 


28  INDIANA  LAW  REVIEW  [Vol.  20:19 

where  an  unsuccessful  shareholder  in  a  derivative  action  can  be  liable 
for  the  expenses  of  the  corporation  under  a  security  for  expenses  statute. ^^ 
Still,  a  well  intentioned  motive  of  making  a  corporation  bear  the  expenses 
of  litigation  does  not  justify  characterizing  a  direct  shareholder  action 
as  a  derivative  action. 

The  court  next  rejected  the  Bulletin  group's  argument  that  ANI 
should  recover  the  salary  paid  plaintiff  Scott  for  his  services  as  interim 
editor  of  the  Herald  until  he  was  removed  from  that  position  by  court 
order. ^"^  The  court  concluded  that  the  trial  court  was  justified  in  rejecting 
the  argument  that  Scott  was  an  "officious  intermeddler"  and  in  con- 
cluding that  there  was  an  implied  contract  between  ANI  and  Scott  because 
someone  had  to  be  the  editor  of  the  Herald. ^^ 

The  final  issue  considered  in  Scott  was  whether  the  Herald  group's 
directors  had  the  right  to  name  the  ANI  vice  president. ^^  The  ANI  vice 
president  apparently  had  come  from  the  Herald  group  from  the  time 
ANI  was  organized  in  1949  to  the  death  of  Scott's  father  in  1981.  The 
Herald  group  argued  that  this  history  impliedly  amended  the  articles  of 
consolidation  and  the  bylaws  to  provide  in  effect  that  the  ANI  vice 
president  would  come  from  the  Herald  group.  The  court  rejected  this 
argument  and  noted  that  the  Herald  group  cited  "no  Indiana  cases 
supporting  that  contention,  only  cases  from  foreign  jurisidictions  so 
stating. "^^  This  too  is  an  extraordinary  statement.  It  is  well  established 
that  relationships,  even  if  reflected  in  corporate  documents,  can  be 
impliedly  amended  by  the  conduct  of  the  parties  if  the  interests  of  third 
parties  are  not  harmed. ^^  The  fact  that  no  Indiana  case  had  so  held 
simply  means  that  the  issue  had  not  previously  arisen  in  Indiana.  In- 
terestingly the  court  did  not  cite  any  Indiana  cases  holding  that  this 
cannot  be  done. 

The  court  noted  that  the  Herald  group  made  no  attempt  to  show 
the  corporation  laws  of  the  states  from  which  the  cases  arose  were 


^^See,  e.g.,  Reifsnyder  v.  Pittsburgh  Outdoor  Advertising  Co.,  405  Pa.  142,  173 
A. 2d  319  (1961).  See  generally  H,  Henn  &  J.  Alexander,  supra  note  7,  §  372. 

'''Scott,  All  N.E.2d  at  564-65. 

^^Id.  The  court  also  declined  to  order  Scott  to  reimburse  the  corporation  for  telephone 
calls  charged  to  and  paid  by  ANI.  The  argument  that  the  calls  were  personal  was  rejected 
because  the  calls  were  related  to  the  litigation.  Although  the  court's  determination  that 
the  cost  of  the  litigation  should  be  assessed  against  ANI  might  be  questionable,  it  certainly 
follows  that  these  expenses  were  properly  considered  costs  of  the  litigation.  If  Scott  had 
been  ordered  to  repay  the  corporation,  he  could  then  petition  the  court  to  order  the 
corporation  to  reimburse  him  in  the  same  amount.  Id.  at  565. 

''''Id,  at  565. 

'''Id. 

"'See,  e.g.,  Magnus  v.  Magnus  Organ  Corp.,  71  N.J.  Super.  363,  177  A.2d  55  (1962). 
Compare  Caller  v.  Caller,  32  111.  2d  16,  203  N.E.2d  577  (1964)  witfi  Soraers  v.  AAA 
Temporary  Serv.,  Inc.,  5  111.  App.  3d  931,  284  N.E.2d  462  (1972). 


1987]  BUSINESS  ASSOCIATIONS  29 

substantially  the  same  as  Indiana  corporation  law.^^  Although  the  plain- 
tiffs might  have  been  well  advised  to  have  checked  those  statutes,  citing 
such  authority  should  not  have  been  necessary  because  this  is  a  general 
principle  of  corporate  law,  which  exists  apart  from  statutes.  The  Scott 
court  also  ignored  the  fact  that  Indiana  courts  have  recognized  the 
estoppel  doctrine.  In  Bossert  v.  Geis,^^  the  court  held  that  a  corporation 
was  estopped  by  long  continued  conduct  of  its  president,  with  its  implied 
knowledge  and  consent,  from  denying  his  authority  to  execute  contracts 
and  borrow  money,  though  not  expressly  authorized  by  articles,  bylaws, 
or  the  directors.  This  rationale  should  have  applied  in  Scott,  or  at  least 
it  should  have  been  considered  by  the  court. 

As  it  is,  the  court  concluded  that  because  ANI's  charter,  meaning 
the  articles  of  consoHdation,  did  not  spell  out  "a  preemptive  right"  for 
the  Herald  group  to  name  the  vice  president,  "it  does  not  exist.  ANI 
officers  may  be  nominated  by  any  director,  come  from  any  group,  and 
be  elected  by  simple  majority  vote  of  the  ANI  directors."^'  In  other 
words,  the  Herald  group  could  name  the  newspaper's  editors  but  they 
were  forever  a  minority  block  on  the  board  with  very  little  influence 
on  the  day  to  day  operations  of  ANI  as  a  corporation.  This  result  is 
both  unfortunate  and  unnecessary.  It  is  fairly  certain  the  parties  who 
formed  ANI  contemplated  that  the  vice  president  would  come  from  the 
Herald  group,  and  it  is  also  clear  that  the  most  effective  way  of  insuring 
that  each  group  would  have  rights  with  respect  to  its  own  paper  was 
to  have  one  of  the  ANI  officer  positions  filled  by  the  Herald  group. 

All  in  all,  the  opinion  in  Scott  v.  Anderson  Newspapers,  Inc.  strikes 
this  author  as  unfortunate.  This  is  not  so  much  for  the  result,  because 
the  Bulletin  group  certainly  was  interfering  with  the  intended  structure 
of  ANI.  Rather,  it  is  because  of  the  court's  unnecessary  and  improper 
use  of  the  term  "preemptive  rights,"  and  its  insistence  on  staying  within 
the  four  corners  of  the  articles  of  consoHdation  notwithstanding  other 
decisions  of  the  Indiana  Court  of  Appeals  that  have  recognized  the 
highly  fiduciary  nature  of  the  relationships  among  owners  of  closely 
held  corporations.^^  Hopefully,  if  a  similar  dispute  occurs  before  another 
district,  the  analysis  of  Scott  will  not  be  followed,  and  the  fourth  district 
will  reconsider  the  views  expressed  in  Scott  if  another  opportunity  arises. ^^ 

III.     Corporate  Control 

The  attempt  by  Dynamics  Corporation  of  America  (DCA)  to  obtain 
control  of  CTS  Corporation  has  become  a  prolific  source  of  legal  issues 

"'Scott,  All  N.E.2d  at  565. 

'"51  Ind.  App.  384,   107  N.E.  95  (1914). 

''Scott,  All  N.E. 2d  at  565. 

'^See  cases  cited  supra  note  34. 

^The  battle  between  the  ANI  factions  continues.  Most  recently  there  appears  to  be 


30  INDIANA  LAW  REVIEW  [Vol.  20:19 

and  judicial  decisions.  The  battle  took  place  in  both  state  and  federal 
courts.  DC  A  failed  in  its  effort  to  oust  the  incumbent  CTS  management, 
but  the  biggest  loser  as  of  this  writing  is  the  new  Indiana  Business 
Corporation  Law  (IBCL)  or,  more  specifically,  the  control  share  ac- 
quisition chapter  of  the  IBCL.^"* 

All  told  there  have  been  five  opinions  in  the  control  battle:  one  in 
state  court, ^^  three  in  the  United  States  District  Court  for  the  Northern 
District  of  Illinois, ^^  and  one  in  the  Seventh  Circuit  Court  of  Appeals. ^^ 
There  will  be  at  least  one  more  because  the  United  States  Supreme  Court 
will  hear  an  appeal  from  the  Seventh  Circuit  decision. ^^  The  Indiana 
action  involved  the  issue  of  DCA's  right  as  a  substantial  shareholder 
to  obtain  corporate  information  from  CTS.  The  federal  litigation  involved 
DCA's  challenge  to  the  defensive  moves  by  CTS's  management. 

Anyone  who  opposes  attempts  to  acquire  or  obtain  control  of  Indiana 
corporations  will  be  pleased  by  the  result  in  DCA  I,  which  for  all  intents 
and  purposes  blocks  offerors  or  insurgents  from  access  to  corporate 
books  and  records  under  the  record  keeping  provisions  of  the  Indiana 
General  Corporation  Act  (IGCA).^^  Theoretically  they  can  still  gain  access 
to  the  records  as  shareholders  if  they  can  persuade  a  local  court  that 
they  have  a  "proper  purpose"  for  seeking  disclosure  of  corporate  in- 
formation, and  DCA  I  does  not  on  its  face  impose  on  the  shareholder 
the  burden  of  establishing  proper  purpose. ^°  However,  by  taking  an 
extraordinarily  narrow  view  of  what  is  a  proper  purpose,  the  result  of 
DCA  I  is  tantamount  to  putting  the  burden  on  the  shareholder. 

In  DCA  7,^^  the  Indiana  Court  of  Appeals  affirmed  an  order  of 
the  Elkhart  Circuit  Court  denying  relief  to  DCA  in  its  mandamus  action 
to  compel  CTS  to  disclose  corporate  information.^^  The  court  stated 
that  the  trial  court  could  infer  that  this  information  was  not  sought  for 


some  question  as  to  who  owns  ANI.  It  was  reported  that  the  two  newspapers  may  have 
been  sold  to  a  newspaper  chain,  but  this  was  denied  by  the  president  of  ANI.  Indianapolis 
Star,  Oct.  31,  1986,  at  35,  col.  2, 

'^IND.  Code  §§  23-1-42-1  to  -11  (Supp.   1986). 

^^Dynamics  Corp.  of  America  v.  CTS  Corp.,  479  N.E.2d  1352  (Ind.  Ct.  App.  1985) 
[DCA  I]. 

^^Dynamics  Corp.  of  America  v.  CTS  Corp.,  637  F.  Supp.  406  (N.D.  111.  1986) 
[DCA  II];  Dynamics  Corp.  of  America  v.  CTS  Corp.,  635  F.  Supp.  1174  (N.D.  111.  1986) 
[DCA  III];  Dynamics  Corp.  of  America  v.  CTS  Corp.,  Fed.  Sec.  L.  Rep.  (CCH)  1  92,765 
(N.D.  111.  May  3,  1986)  [DCA  IV]. 

"Dynamics  Corp.  of  America  v.  CTS  Corp.,  794  F.2d  250  (7th  Cir.),  prob.  juris, 
noted,  107  S.  Ct.  258  (1986)  [DCA   V]. 

'nOl  S.  Ct.  258  (Oct.  6,   1986)  (noting  probable  jurisdiction  for  appeal). 

^^IND.  Code  §  23-1-2-14  (1982). 

^°DCA  I,  479  N.E.2d  at  1353.  In  fact  it  seems  to  take  the  position  that  the  burden 
is  on  management  to  prove  a  lack  of  a  proper  purpose.  Id.  n.2. 

«'479  N.E.2d  1352  (Ind.  Ct.  App.   1985). 

«Vaf.  at  1353. 


1987]  BUSINESS  ASSOCIATIONS  31 

a  proper  purpose  but  rather  to  assist  DCA  in  its  non-derivative  battle 
against  incumbent  management  for  control  of  CTS.^^  This  does  not 
mean,  however,  that  steps  taken  to  oust  incumbent  management  were 
adverse  to  the  best  interests  of  the  corporation. 

The  particular  litigation  was  instituted  in  1981  after  DCA  had  de- 
manded to  inspect  numerous  CTS  records.  It  appears  that  some  of  the 
requested  information  had  been  furnished  to  DCA  as  a  result  of  discovery 
in  pending  litigation  or  had  been  furnished  to  all  CTS  shareholders. 
Apparently  DCA  filed  the  mandamus  action  before  CTS  had  formally 
responded  to  its  request,  but  it  is  certainly  disingenuous  to  think  that 
considering  the  hostility  between  DCA  and  CTS  management,  CTS  would 
have  produced  the  requested  records  without  a  court  order. ^"^ 

DCA  I  treated  the  burden  of  proof  issue  in  suits  to  enforce  a 
shareholder's  inspection  rights  in  a  summary  fashion.  Apparently  the 
trial  court  had  made  a  preUminary  ruling  that  the  IGCA  required  DCA 
to  state  its  purposes  in  seeking  to  inspect  CTS's  books  and  records 
before  it  could  sue,  and  that  it  had  the  burden  of  proving  that  those 
purposes  were  proper. ^^  The  court  of  appeals  indicated  that  it  was 
"inclined"  to  the  view  that  Indiana  authority  as  reflected  in  Charles 
Hegewald  Co.  v.  State^^  supported  the  position  of  the  trial  court,  but 
that  any  error  was  "harmless"  because  the  court's  findings  clearly 
imposed  the  burden  on  CTS.^^  It  certainly  is  possible  that  the  trial  court 
did  impose  the  burden  on  CTS  and  that  its  preliminary  rulings  were 
just  that,  but  it  does  appear  that  the  DCA  I  court  gave  Hegewald  an 
unduly  narrow  reading.  Hegewald  requires  the  purpose  of  the  exami- 
nation to  be  germane  to  the  shareholder's  interest  as  a  shareholder,  but 
the  Indiana  Supreme  Court  was  not  clearly  departing  from  the  position 
taken  by  other  courts  that  impose  the  burden  of  establishing  a  lack  of 
proper  purpose  on  the  corporation.^^  Furthermore,  nothing  in  Hegewald 
actually  requires  a  shareholder  to  state  his  purposes  in  seeking  inspection 
before  fihng  a  mandamus  action, ^^  and  the  IGCA  is  silent  on  this  point. ^^ 


«Vfi?.  at  1355. 

^'^See  id.  at  1354-55.  The  fact  that  the  shareholder  already  has  available  the  information 
being  sought  might  be  grounds  for  denying  inspection  under  common  law  for  lack  of 
good  faith.  See  People  ex  rel.  Giles  v.  Klauder-Weldon  Dyeing  Mach.  Co.,  180  A.D. 
149,  167  N.Y.S.  429  (1917).  See  generally  H.  Henn  &  J.  Alexander,  supra  note  7, 
§  199. 

''DCA  I,  479  N.E.2d  at  1353  n.2. 

8M96  Ind.  600,   149  N.E.   170  (1925). 

«M79  N.E. 2d  at  1353  n.2. 

''Hegewald,  196  Ind.  at  605-06,  149  N.E.  at  173.  See  generally  H.  Henn  &  J. 
Alexander,  supra  note  7,  §  199  n.2. 

*^Failure  to  state  the  purpose  might,  however,  go  against  the  good  faith  element  of 
the  shareholder's  right  to  examine  corporate  books  and  records. 

^IND.  Code  §  23-1-2-14  (1982). 


32  INDIANA  LAW  REVIEW  [Vol.  20:19 

The  inspection  provisions  of  the  IBCL^'  require  the  shareholder  to 
disclose  the  purpose  of  the  inspection  before  being  given  access  to  books 
and  records.  This  is  true  even  under  the  comparable  provisions  of  the 
Revised  Model  Business  Corporation  Act,^^  which  takes  a  more  liberal 
view  in  balancing  the  right  of  shareholders  to  inspect  corporate  records 
and  the  interest  of  management  in  freedom  from  harassment  by  share- 
holders. 

DCA  sought  to  inspect  records  and  minutes  of  the  1981  CTS  annual 
meeting  of  shareholders,  books  of  account  reflecting  expenditures  for 
research  and  development  since  1978,  books  of  account  reflecting  all 
legal  fees  paid  or  incurred  in  connection  with  the  litigation  between  CTS 
and  DCA,  all  fees  paid  or  owed  to  an  investment  banking  firm  since 
1980,  and  the  minutes  of  all  regular  and  special  meetings  of  the  board 
of  directors  of  CTS  since  August  1980.^3 

The  DCA  I  court  also  relied  on  S.F.  Bowser  &  Co.  v.  State.^"^  Bowser 
held  that  mandamus  would  not  lie  unless  and  until  the  corporation  knew 
or  was  given  reasonable  assurance  that  the  party  making  a  request  was 
really  a  shareholder.  It  is  difficult  to  see  how  Bowser  supported  CTS's 
position.  CTS  clearly  knew  DCA  was  a  shareholder  because  management 
and  DCA  had  been  battling  for  several  years.  The  court  also  cited  the 
Illinois  decision  in  People  ex  rel.  Miles  v.  Bowen  Industries,  Inc.^^  This 
too  seems  of  questionable  import  because  Miles  also  involved  the  issue 
of  whether  the  requesting  party  was  a  shareholder  and  entitled  to  inspect 
the  corporate  records  under  the  applicable  provisions  of  the  lUinois 
Business  Corporation  Act.^^ 

The  DCA  I  court  was  correct  in  noting  that  both  statutory  and 
common  law  require  a  shareholder  to  have  a  proper  purpose  to  be 
entitled  to  inspect  corporate  books  and  records. ^^  The  problem  with  the 
decision  is  that  the  court  seemingly  required  that  every  purpose  of  the 
shareholder  be  "proper."  Sounder  authority  recognizes  that  a  shareholder 
is  not  entitled  to  corporate  information  for  purely  personal  or  commercial 
reasons,  but  permits  inspection  where  there  is  a  proper  purpose  even 


^'iND.  Code  §  23-l-52-2(c)(2)  (Supp.   1986). 

^H  Model  Bus.  Corp.  Act  Ann.  §  16.02  (3d  ed.  1985).  The  balance  of  the  RMBCA 
is  aimed  at  protecting  management  from  harassment  by  shareholders  with  small  holdings, 
which  was  not  the  case  with  DCA,  the  largest  shareholder  of  CTS. 

^'DCA  I,  479  N.E.2d  at  1353.  The  court  of  appeals  cryptically  noted  that  "[w]e  do 
not  suggest  that  all  this  information  was  discoverable  under  the  Statute.  The  trial  court 
determined  that  some  was  not."  Id.  n.3.  It  appears  that  the  court  applied  some  of  the 
restrictions  imposed  by  discovery  rules  to  a  shareholder's  right  to  inspect  corporate  records, 
although  there  does  not  appear  to  be  a  basis  for  this. 

^^192  Ind.  462,   137  N.E.  57  (1922). 

^^327  111.  App.  362,  64  N.E.2d  213  (1945). 

^^III.  Rev.  Stat.,  ch.  32,  para.   157.45  (1945). 

''DCA  /,  479  N.E.2d  at  1354. 


1987]  BUSINESS  ASSOCIATIONS  33 

though  there  might  be  some  ulterior  motive. '^*^  Thus,  even  if  DCA's 
purpose  in  wanting  the  information  to  aid  "its  non-derivative  Htigation 
and  competitive  goals  against  CTS"  was  improper  (and  this  is  not  clearly 
the  case),  DCA  had  indicated  the  possibility  of  a  suit  against  CTS 
management  for  waste  of  corporate  assets  in  continuing  counterclaims 
against  DCA.^^  Utilizing  corporate  records  as  the  basis  of  possible  lit- 
igation against  management  has  long  been  held  to  be  a  proper  purpose. '°° 
Even  if  the  propriety  of  the  possible  litigation  was  a  "close  call,"  CTS 
should  have  lost  if  the  burden  of  proof  was  in  fact  on  it  rather  than 
on  DCA. 

Furthermore,  even  cases  that  narrowly  construe  the  right  of  share- 
holders to  inspect  corporate  records  such  as  State  ex  rel.  Pillsbury  v. 
Honeywell,  Inc.^^^  emphasize  that  the  shareholder's  purpose  must  be 
related  to  his  investment.  Clearly  DCA,  which  had  been  acquiring  CTS 
shares  since  1980,  was  concerned  with  its  "investment."  Consequently 
it  seems  that  DCA's  purpose  was  proper,  and  it  is  dubious  to  say  that 
the  trial  court's  finding  was  supported  by  the  evidence. 

The  DCA  I  court  also  upheld  the  determination  that  DCA  lacked 
a  proper  purpose  in  demanding  disclosure  of  research  and  development 
expenditures  of  CTS.'°^  The  decision  on  th-is  point  appears  to  hinge  upon 
a  statement  by  DCA's  president  following  the  1981  CTS  shareholder 
meeting  praising  "the  manner  in  which  CTS  had  answered  the  questions 
[about  the  reclassification  of  CTS's  research  and  development  expenses] 
at  the  meeting. "^^^  The  court  stated  that  DCA  had  given  no  explanation 
to  CTS  for  "withdrawing  its  expressed  approval  of  Mr.  Hostetler's 
response  at  the  annual  meeting. "'^"^  The  court  also  noted  that  information 
on  CTS's  research  and  development  was  contained  in  "work  papers" 
prepared  by  CTS  accountants  and  not  in  a  separate  account  and  that 


"^See,  e.g..  State  ex  rel.  Theile  v.  Cities  Serv.  Co.,  31  Del.  514,  115  A.  773  (1922) 
(purpose  to  sell  list  improper);  General  Time  Corp.  v.  Talley  Indus.,  Inc.,  43  Del.  Ch. 
531,  240  A. 2d  755  (1968)  (desire  to  solicit  proxies  in  opposition  to  management  directly 
related  to  shareholder  status  and  any  secondary  purpose  irrelevant);  Hannahan  v.  Puget 
Sound  P.  &  L.  Co.,  332  Mass.  586,  126  N.E.2d  499  (1955)  (possible  use  of  shareholder 
list  for  commercial  purposes  by  securities  dealer  no  bar  to  inspection).  See  generally  H. 
Henn  &  J.  Alexander,  supra  note  7,  §  199. 

DCA  clearly  was  attempting  to  oust  CTS  management  which  cannot,  objectively 
speaking,  be  deemed  improper  harassment  of  management  justifying  denial  of  inspection 
rights.  See  Sawers  v.  American  Phenolic  Corp.,  404  111.  440,  89  N.E.2d  374  (1949).  CTS 
management  obviously  would  disagree,  but  they  cannot  be  considered  "objective"  on  this 
issue. 

'^DCA  I,  479  N.E.2d  at  1354. 

'"^See,  e.g.,  Rochester  v.  Indiana  County  Gas  Co.,  246  Pa.  571,  92  A.  717  (1914). 

'0'291  Minn.  322,   191  N.W.2d  406  (1971). 

'°^DCA  I,  479  N.E.2d  at   1355. 

'"^Id. 


34  INDIANA  LAW  REVIEW  [Vol.  20:19 

the  information  was  considered  confidential  by  CTS.'^^  The  use  of  the 
term  "work  papers"  suggests  that  the  court  appUed  evidentiary  rules 
and  doctrines  to  shareholder  rights  to  information.  If  DC  A  in  fact 
misused  any  information  that  contained  trade  secrets,  trade  regulation 
law  would  amply  protect  the  interests  of  CTS.  The  main  point  seemed 
to  be  DCA's  "change  of  heart"  on  management's  responses.  It  is  an 
extraordinarily  thin  reed  to  support  a  conclusion  that  seeking  information 
on  expenditures  for  research  and  development  is  not  a  proper  purpose 
simply  because  the  shareholder  or,  in  this  case,  the  president  of  a  corporate 
shareholder,  praised  a  response  to  a  question  at  a  shareholder  meeting. 
Certainly  this  cannot  seriously  be  considered  an  appropriate  application 
of  the  estoppel  concept. 

It  is  within  the  purview  of  a  shareholder's  interest  to  determine  how 
the  funds  of  the  corporation  are  expended  and  whether  those  expenditures 
will  produce  the  most  appropriate  return  to  investors. *°^  CTS  management 
of  course  believed  that  its  decisions  as  to  the  appropriate  directions  for 
CTS  research  and  development  were  correct,  but  this  view  does  not 
preclude  a  shareholder  from  disagreeing  and  attempting  to  show  that 
the  management's  efforts  were  ill  advised. 

If  CTS  were  threatened  by  DC  A  hiring  away  its  employees,  it  could 
protect  itself  by  employment  contracts  containing  covenants  not  to  com- 
pete. Furthermore,  if  employment  contracts  were  not  terminable  at  will, 
CTS  could  have  an  action  for  inducing  a  breach  of  contract.  ^°^  Even 
in  the  absence  of  contractual  obligation,  the  fiduciary  duty  owed  by  an 
agent  to  a  principal  can  act  as  a  bar  against  improper  conduct  by  a 
former  employee. '°^ 

The  last  item  of  information  DCA  sought  related  to  the  retention 
of  an  investment  banker  and  the  minutes  of  board  meetings  where  legal 
advice  received  by  CTS  regarding  litigation  with  DCA  and  tentative  CTS 
business  plans  were  discussed.  The  court  merely  listed  these  items  and 
concluded  that  "there  was  a  reasonable  inference  available  to  the  trial 
court  that  DCA  was  not  seeking  the  requested  information  for  a  'proper 
purpose'  but  sought  it  instead  to  assist  DCA  in  its  non-derivative  litigation 
and  competitive  goals  against  CTS."^°^  Although  this  may  be  so,  there 
was  no  analysis  of  why  this  information  had  no  impact  on  the  investment 
interests  of  corporate  shareholders.  The  bald  conclusion  that  DCA  did 


"^H.  Henn  &  J.  Alexander,  supra  note  7,  §  199. 

107  < 


^See  generally  Harper,  Interference  with  Contractual  Relations,  41  Nw.  U.L.  Rev. 
873  (1953). 

'''See.  e.g.,  Duane  Jones  Co.  v.  Burke,  281  A.D.  662,  121  N.Y.S.2d  107  (1953), 
aff'd  as  modified,  306  N.Y.   172,   117  N.E.2d  237  (1954). 

'^DCA  I,  479  N.E.2d  at  1355. 


1987]  BUSINESS  ASSOCIATIONS  35 

not  have  a  proper  purpose  is  appropriate  only  if  the  burden  of  proving 
a  proper  purpose  is  on  the  shareholder.  The  lack  of  analysis  of  this 
issue  raises  the  possibility  that  both  the  trial  court  and  the  court  of 
appeals  were  putting  the  proper  purpose  burden  on  DCA. 

The  court  cited  numerous  cases  for  the  proposition  that  courts 
reviewing  inspection  statutes  have  adopted  the  general  rule  that  the 
primary  purpose  of  the  inspection  must  not  be  adverse  to  the  best  interest 
of  the  corporation. ^'°  This  is,  of  course,  a  truism,  but  interestingly  in 
one  case  cited  by  the  court,  inspection  was  granted.'" 

It  seems  that  under  a  decision  such  as  DCA  I,  a  "proper  purpose" 
to  entitle  a  shareholder  to  inspect  corporate  records  is  not  so  much  in 
the  eye  of  the  beholder  as  it  is  in  the  eye  of  management.  Certainly 
management  of  corporations  that  are  or  are  perceived  to  be  likely  takeover 
targets  will  find  much  comfort  in  DCA  /,  particularly  because  the 
inspection  rights  of  shareholders  under  the  IGCA  are  broader  than  under 
the  IBCL.  Under  the  new  law,  a  "proper  purpose"  is  statutorily  mandated 
and  a  shareholder  must  disclose  that  purpose  and  indicate  that  the  request 
is  directly  connected  with  that  purpose. "^  The  requirement  of  disclosing 
the  purpose  and  the  nexus  between  the  documents  and  the  purpose  could 
easily  be  satisfied  by  a  shareholder  in  the  position  of  DCA.  However, 
with  the  narrow  view  of  "proper  purpose"  in  DCA  I,  which  will  still 
be  good  authority  under  the  IBCL,  the  tender  offeror  or  insurgent  in 
a  proxy  contest  will  find  a  less  than  hospitable  atmosphere  in  Indiana 
courts. 

The  offeror  or  insurgent  might  find  the  atmosphere  in  federal  courts 
more  hospitable,  at  least  if  the  Supreme  Court  upholds  Judge  Posner's 
scholarly  opinion  in  DCA  F."^  in  DCA  V,  the  Seventh  Circuit  affirmed 
the  decision  of  the  United  States  District  Court  for  the  Northern  District 
of  lUinois  in  DCA  IP^^  enjoining  CTS's  management  from  enforcing  a 
"poison  pill"  plan  adopted  by  CTS  during  a  proxy  contest  between 
management  and  DCA.  DCA  sought  injunctive  relief  under  section  14(a) 
of  the  Securities  Exchange  Act  of  1934,''^  alleging  an  unlawful  proxy 
solicitation  by  CTS  management."^ 


'"C.  M.  &  M.  Group,  Inc.  v.  Carroll,  453  A. 2d  788  (Del.   1982). 

"^IND.  Code  §  23-l-52-2(c)(2)  (Supp.   1986). 

"'Dynamics  Corp.  of  America  v.  CTS  Corp.,  794  F.2d  250  (7th  Cir.),  prob.  juris, 
noted,  107  S.  Ct.  258  (1986). 

"^Dynamics  Corp.  of  America  v.  CTS  Corp.,  637  F.  Supp.  406  (N.D.  111.   1986). 

"45  U.S.C.  §  78n(a)  (1982). 

''''DCA  II,  637  F.  Supp.  at  407.  The  day  DCA  filed  suit,  it  announced  a  tender 
offer  for  up  to  one  million  CTS  shares  at  $43.00  per  share  and  that  it  intended  to  wage 
a  proxy  contest  to  elect  its  own  slate  of  directors  to  the  CTS  board.  The  offer  increased 
DCA's  holdings  in  CTS  to  27.7%  of  the  outstanding  shares.  Id. 


36  INDIANA  LAW  REVIEW  [Vol.  20:19 

DCA  II  involved  DCA's  motion  for  a  preliminary  injunction  against 
the  shareholder  rights  plan  adopted  by  the  CTS  board  shortly  after  DCA 
filed  suit.  The  plan  adopted  by  the  CTS  board  gave  CTS  shareholders 
a  distribution  of  one  "right*'  per  share.  The  rights  had  no  value  unless 
and  until  certain  triggering  events  occurred.  The  first,  known  as  a  "flip- 
in,"  occurred  when  a  person  or  group  acquired  fifteen  percent  or  more 
of  CTS's  common  shares.  At  such  time,  the  rights  became  nonredeemable 
and  entitled  all  CTS  shareholders  except  the  acquiror  to  purchase  a  unit 
of  CTS  securities  consisting  of  a  fractional  share  of  common  stock  and 
debentures  at  a  price  equal  to  twenty-five  percent  of  the  pretrigger  value 
of  the  securities.  The  purpose  of  the  "flip-in"  was  to  inflict  an  immediate 
economic  loss  on  any  hostile  bidders  who  did  not  negotiate  with  man- 
agement before  making  an  unsolicited  acquisition  attempt.*'^  Perhaps  it 
would  be  more  accurate  to  say  that  a  flip-in  plan  or  any  other  defensive 
poison  pill  is  intended  to  make  the  target  so  unpalatable  that  there 
simply  will  not  be  any  unsolicited  acquisitions. 

The  CTS  rights  plan  also  contained  a  "flip-over"  provision  which 
was  triggered  if  CTS  were  acquired  in  a  merger  or  upon  the  sale  of  all 
or  the  majority  of  its  assets.  When  the  flip-over  provision  was  triggered, 
CTS  shareholders  could  purchase  common  shares  of  the  acquiring  com- 
pany worth  $150  for  $75. 

The  flip-in  provision  was  in  controversy  in  DCA  II  because  DCA's 
tender  offer  would  have  raised  its  holdings  above  the  fifteen  percent 
trigger  threshold. •'^  DCA  raised  numerous  arguments  against  the  CTS 
poison  pill.  It  first  argued  that  the  plan  established  two  classes  of  shares 
and  discriminated  among  shareholders.  DCA  contended  this  was  pro- 
hibited by  Indiana  law.  It  also  argued  that  in  adopting  the  plan  in 
response  to  the  DCA  tender  offer,  CTS  management  breached  its  fi- 
duciary duty  to  CTS  and  other  shareholders."^ 

Judge  Getzendanner  rejected  these  arguments.  Under  both  the  IGCA 
and  the  IBCL,  a  corporation  can  issue  "rights"  that  trade  with  shares, '^° 
including  those  owned  by  an  acquiring  corporation,  even  if  the  acquiring 


"^The  rights  belonging  to  the  acquirer  under  the  plan  became  null  and  void  when 
the  fifteen  percent  threshold  was  reached.  Id. 

'"^The  court  noted  that  according  to  CTS's  calculations,  the  issuance  of  shares  and 
debentures  to  other  CTS  shareholders  would  have  imposed  an  economic  loss  of  approx- 
imately $24  million  on  DCA.  Id.  at  408. 

"^Id. 

'^°See  IND.  Code  §  23-1-2-7  (1982)  (IGCA);  Id.  §  23-1-26-5  (Supp.  1986)  (IBCL). 
The  court  stated  that  it  had  been  "advised"  that  Indiana  courts  look  to  Delaware  decisions 
in  matters  of  corporate  law.  637  F.  Supp.  at  408.  This  is  somewhat  of  an  overstatement. 

Not  surprisingly,  CTS  "opted  in"  to  the  IBCL  on  April  1,  1986,  the  earliest  date 
at  which  corporations  organized  under  the  IGCA  could  opt  in,  although  the  plan  was 
adopted  before  CTS  was  controlled  by  the  IBCL. 


1987]  BUSINESS  ASSOCIATIONS  37 

corporation  takes  subsequent  action  that  causes  it  to  forfeit  those  rights. 
Shareholder  approval  would  have  been  necessary  if  the  plan  had  created 
a  new  class  of  shares,  but  the  DCA  II  court  appears  correct  in  rejecting 
that  contention.  The  plan  was  not  a  pure  vote  altering  scheme'^'  since 
economic  consequences  attached  to  the  rights  when  they  were  triggered. 
This  is  not  to  say  that  the  law  is  "right."  Even  The  Wall  Street  Journal 
has  editorialized  that  "[t]here  is  only  one  way  to  be  sure  that  managers 
and  shareholders  are  on  the  same  side  of  a  takeover  question — share- 
holders should  have  to  vote  to  approve  defensive  tactics." '^^  Because 
DCA  had  not  established  a  probability  of  success  on  its  claim  that  the 
rights  plan  was  not  authorized  under  Indiana  law,  it  was  not  entitled 
to  a  prehminary  injunction. '^^ 

The  court  also  rejected  the  argument  that  the  rights  plan  discriminated 
against  DCA  and  any  other  CTS  shareholders  who  might  acquire  over 
fifteen  percent  of  CTS's  outstanding  shares. ^^"^  The  court  relied  on  Unocal 
Corp.  V.  Mesa  Petroleum  Co.  ,'^^  where  the  Delaware  Supreme  Court 
upheld  a  Unocal  exchange  offer  for  its  own  shares  that  intentionally 
excluded  shares  owned  by  Mesa  because  Unocal  was  responding  to  a 
perceived  threat  presented  by  Mesa.  Unocal  and  Moran  v.  Household 
International,  IncJ^^  apphed  the  business  judgment  rule  to  the  adoption 
of  defensive  moves  against  hostile  offerors  and  so  basically  supported 
the  position  of  DCA.  However,  even  assuming  that  Unocal  and  Moran 
did  not  tilt  the  playing  field  between  target  managers  and  raiders  unduly 
in  favor  of  the  former,  the  DCA  II  court  felt  that  the  Delaware  standards 
had  not  been  met  by  CTS's  management,  which  seemed  more  incHned 
to  entrench  itself  than  to  protect  the  interest  of  CTS  shareholders.'^^ 
Even  though  the  actions  of  a  board  are  entitled  to  a  presumption  of 
vaHdity  where  the  majority  of  a  board  of  directors  is  independent,'^^ 
the  court  felt  that  DCA's  independent  directors  had  not  displayed  "rea- 


'^'5ee  Unilever  Acquisition  Corp.  v.  Richardson- Vicks,  Inc.,  618  F.  Supp.  407  (S.D.N.Y. 
1985);  Asarco,  Inc.  v.  Court,  611  F.  Supp.  468  (D.N.J.   1985). 

'^^The  Wall  Street  Journal,  July  28,  1986,  at  12,  col.  1.  The  editorial  commented 
favorably  on  Judge  Posner's  decision  in  DCA  V.  Of  course,  the  editors  somewhat  smugly 
noted  that  the  shareholders  of  Dow  Jones  &  Company,  which  publishes  the  Journal,  had 
approved  a  defensive  scheme  to  protect  management  of  that  company.  One  might  well 
wonder  what  the  editorial  stance  would  have  been  if  someone  had  made  a  "play"  for 
Dow  Jones  before  any  defensive  moves  could  be  adopted. 

'^'DCA  II,  637  F.  Supp.  at  409. 

'^'Id. 

'"493  A. 2d  946  (Del.   1985). 

'2*500  A. 2d  1346  (Del.  1985).  Moran  upheld  a  flip-over  poison  pill  rights  plan  similar 
to  the  CTS  flip-over  plan.  See  also  Revlon,  Inc.  v.  MacAndrews  &  Forbes  Holdings, 
Inc.,  506  A.2d  173  (Del.   1986). 

'^'DCA  II,  637  F.  Supp.  at  411-18. 

'''See  Moran,  500  A.2d  at  1356. 


38  INDIANA  LAW  REVIEW  [Vol.  20:19 

sonable  grounds"  for  believing  that  DCA  in  fact  presented  a  danger  to 
CTS's  corporate  policies.  In  fact,  the  court  recognized  a  reasonable 
possibility  that  further  evidence  * 'might  reveal  some  of  the  board's  stated 
concerns  to  be  sham."'^^  Judge  Getzendanner  also  noted  that  the  tes- 
timony of  CTS  board  members  concerning  the  actual  threat  posed  by 
DCA  appeared  to  be  in  conflict. '^°  This  could  indicate  that  their  testimony 
was  unreliable  or  that  the  CTS  board  simply  had  not  discussed  the 
matter  thoroughly  and  that  individual  directors  had  different  impressions 
of  what  was  decided  and  resolved.'^'  Even  a  gross  negligence  standard 
would  not  guarantee  success  to  CTS  directors,  although  the  court  felt 
at  this  junction  that  gross  negligence  had  not  been  estabhshed  because 
CTS  did  not  adopt  the  poison  pill  until  it  had  obtained  legal  and 
investment  advice.  ^^^ 

CTS's  plan  failed  because,  as  is  likely  when  defensive  moves  follow 
a  hostile  tender  offer,  the  conclusion  that  the  plan  was  "appropriate" 
apparently  meant  that  it  was  appropriate  to  defeat  the  DCA  offer  or 
that  any  response  that  eliminated  the  DCA  threat  was  "reasonable" 
once  the  board  had  decided  the  DCA  offer  represented  a  threat.^"  The 
court  distinguished  the  Delaware  cases  ^^^  cited  by  CTS  because  they  were 
tailored  to  protect  the  interests  of  minority  shareholders  without  specific 
regard  to  entrenching  management.  CTS  also  was  hurt  by  evidence 
indicating  that  the  rights  plan  would  hamper  DCA's  proxy  contest  against 
incumbent  management. ^^^  It  would  seem  that  as  viewed  by  Judge  Getz- 
endanner, CTS  was  a  little  too  "greedy"  in  adopting  the  rights  plan 
which  would  deter  not  just  repressive  and  hostile  acquisitions,  but  all 
acquisitions,  and  thwart  a  bidding  contest  for  CTS. 

Judge  Getzendanner  made  it  clear  that  she  was  not  invalidating  all 
flip-in  plans  that  inflict  a  penalty  based  on  mere  ownership,  or  even 
ownership  levels  as  low  as  the  fifteen  percent  triggering  figure  in  the 
CTS  plan.  Rather,  she  was  ruling  that  for  purposes  of  a  preliminary 
injunction,  such  a  plan  adopted  in  the  heat  of  a  proxy  contest  with  no 
truly  identifiable  threat  was  unreasonable.'^^ 

CTS,  however,  did  not  give  up  its  battle  against  DCA  following 
DCA  II.  It  subsequently  adopted  a  shareholder  rights  plan  as  part  of 


'''DCA  II,  637  F.  Supp.  at  417. 

'''Id. 

'''Id.  at  417-18. 

'^^Revlon,  Inc.  v.  MacAndrews  &  Forbes  Holdings,  Inc.,  506  A.2d  173  (Del.  1986); 
Moran  v.  Household  Int'l,  Inc.,  500  A.2d  1346  (Del.   1985). 

"'DCA  II,  637  F.  Supp.  at  418. 

"^Id.  The  court  also  concluded  that  DCA  had  established  the  other  elements  for 
injunctive  rehef.  /<i.  at  418-19. 


1987]  BUSINESS  ASSOCIATIONS  39 

a  white  knight  strategy  for  selHng  CTS.  DCA  challenged  this  strategy 
and  the  second  rights  plan  as  a  breach  of  the  directors'  fiduciary  duties 
in  another  action  brought  under  section  14(a)  of  the  Securities  Exchange 
Act  of  1934.'^^  Judge  Getzendanner  denied  the  motion  to  enjoin  the 
second  rights  plan  in  DCA  III.^^^ 

In  ruling  for  CTS  in  this  proceeding,  Judge  Getzendanner  started 
from  the  premise  that  Indiana  law  treats  a  board  of  directors  adopting 
defensive  mechanisms  in  response  to  a  takeover  threat  as  having  a  conflict 
of  interest. '^^  This  conflict  mandates  close  judicial  scrutiny  of  directors' 
actions.  In  other  words,  the  directors  must  show  they  acted  in  good 
faith  and  made  a  reasonable  investigation  in  determining  that  a  danger 
to  corporate  policy  existed  and  that  the  chosen  defensive  mechanism 
was  reasonable  in  relation  to  the  threat.  If  the  directors  satisfy  this 
burden,  they  are  protected  by  the  business  judgment  rule,  and  a  share- 
holder challenging  their  actions  must  show  the  primary  purpose  of  the 
defense  was  entrenchment  rather  than  protection  of  the  shareholders' 
interest. 

Following  Judge  Getzendanner' s  order  in  DCA  11,  the  CTS  board 
realigned  its  defensive  measures  to  DCA's  actual  rather  than  perceived 
threat. ^"^^  In  essence,  the  second  CTS  rights  plan  put  CTS  up  for  sale, 
thus  maximizing  the  value  to  shareholders  other  than  DCA  through  an 
orderly  auction  of  the  company. 

The  new  shareholder  rights  plan  gave  CTS  shareholders  a  right  to 
exchange  CTS  shares  for  one  year  notes  with  a  principal  amount  of 
$50.00  and  a  10%  interest  rate.  These  notes  became  exercisable  and 
traded  separately  from  CTS  common  shares  only  if  someone  acquired 
a  beneficial  ownership  of  28%  or  more  of  CTS  common  shares. '"^^  The 
rights  were  to  be  postponed  if  the  plan  were  triggered  by  a  publicly 
announced  tender  offer  for  all  outstanding  CTS  shares  for  $50.00  or 
more. 

The  court  in  DCA  III  was  faced  with  two  issues:  (1)  were  the  press 
release  and  proxy  statement  announcing  the  proposed  sale  of  CTS  and 
the  rights  plan  materially  misleading;  and  (2)  should  the  rights  plan  itself 
be  enjoined. '"^^ 

DCA  was  unsuccessful  in  DCA  III  because  the  probability  of  suc- 


•"15  U.S.C.  §  78n(a)  (1982). 

'3«Dynamics  Corp.  of  America  v.  CTS  Corp.,  635  F.  Supp.   1174  (N.D.  111.   1986). 

'''Id.  at  1176. 

'"•oThe  CTS  board  formed  a  special  committee  of  outside  directors  which  explored 
the  possibihty  of  settling  with  DCA,  but  these  settlement  possibilities  were  not  productive. 
Id.  at  1176-77. 

""/c?.  at  1177.  This  figure  was  slightly  above  the  percentage  of  CTS  which  would  be 
owned  by  DCA  after  its  tender  offer. 

'^^Id.  The  court  in  DCA  III  addressed  only  the  second  issue. 


40  INDIANA  LAW  REVIEW  [Vol.  20:19 

cessfully  attacking  the  sale  of  CTS  and  the  second  rights  plan  as  a 
breach  of  a  fiduciary  duty  was  decidedly  lower  than  in  DCA  II.  Also, 
the  balance  of  hardships  did  not  weigh  sufficiently  in  DCA's  favor  to 
justify  injunctive  rehef.'"^^ 

Judge  Getzendanner  again  reiterated  her  conclusion  in  DCA  II  that 
although  CTS  management  had  not  made  a  reasonable  investigation  of 
DCA's  partial  tender  offer  in  adopting  the  flip-in  rights  plan,  such 
conduct  did  not  rise  to  the  level  of  gross  negligence. '"^"^  DCA  contended 
that  the  second  rights  plan  was  but  a  single-minded,  continued  effort 
at  stopping  DCA's  proxy  contest,  while  CTS  argued  that  the  plan  was 
an  honest  attempt  to  correct  the  inadequacies  of  the  first  plan.  Judge 
Getzendanner  was  persuaded  by  CTS's  argument  because  the  record  now 
reflected  a  greater  thoroughness  of  discussion  and  informed  decision 
making  prior  to  the  adoption  of  the  second  rights  plan.'^^ 

DCA  also  argued  that  the  decision  to  sell  CTS  was  a  breach  of 
fiduciary  duty  because  nothing  had  changed  since  CTS's  unequivocal 
earlier  view  that  it  was  an  inopportune  time  to  sell  the  company  so  as 
to  warrant  a  different  conclusion.  In  fact,  DCA  was  hoist  by  its  own 
petard  in  this  respect  because  Judge  Getzendanner  was  satisfied  that 
DCA,  which  now  owned  just  under  the  28%  trigger  of  the  second  rights 
plan,  had  changed  the  circumstances  facing  CTS,  and  that  the  directors 
had  not  changed  their  view  as  to  the  desirability  of  selling  CTS  but  rather 
had  concluded  that  a  sale  of  CTS  was  "the  lesser  of  two  evils. "''^^  She 
also  concluded  that  the  "generalized"  threat  presented  by  DCA  as  a  sizable 
minority  shareholder  to  the  sale  of  CTS  to  a  third  party  was  sufficient 
basis  to  keep  the  court  from  second  guessing  the  advice  given  to  CTS 
on  the  matter. '^^ 

The  court  was  satisfied  that  the  CTS  board  had  met  the  reasonable 
investigation  standard  of  Moran\}^^  although  Judge  Getzendanner  did 
not  accept  CTS's  argument  in  its  entirety.  She  recognized  that  there 
were  alternatives  to  the  plan  adopted  by  CTS  and  that  the  plan  actually 
adopted  was  not  the  most  reasonable  response. '"^^  However,  the  burden 
on  the  directors  was  not  to  show  that  the  plan  was  the  most  reasonable 
response  but  only  that  it  was  a  reasonable  response  to  the  threat  presented 
by  DCA. 


''Hd.  at  1177-78. 

'''Id.  at  1178. 

'''Id. 

"^Id.  DCA  had  not  fully  disclaimed  the  possibility  that  a  future  merger  might  be 
unfair  to  minority  shareholders.  Consequently  the  CTS  board  could  conclude  that  a  present 
sale  of  CTS  would  maximize  shareholder  values. 

'''Id.  at  1179. 

'^^Moran  v.  Household  Int'l,  Inc.,  500  A.2d  1346  (Del.   1985). 

"'DCA  III,  635  F.  Supp.  at  1180. 


1987]  BUSINESS  ASSOCIATIONS  41 

DCA's  argument  that  the  plan  was  unreasonable  in  giving  manage- 
ment a  potent  weapon  against  unfriendly  tender  offers  was  rejected 
because,  as  supported  by  dicta  in  Revlon,^^^  the  plan  could  have  started 
orderly  bidding  for  CTS.  Also,  the  plan  could  not  deter  all  hostile  offers 
because  the  rights  expired  on  a  tender  for  $50  per  share  or  more  in 
cash.  Whether  DCA  or  anyone  else  thought  that  CTS  was  worth  $50 
per  share  is  another  matter. 

Under  Revlon,  a  board  of  directors  has  a  duty  to  insure  that 
shareholders  receive  maximum  value  once  it  has  decided  to  sell  a  com- 
pany, even  as  the  lesser  evil.  The  DCA  III  court  felt  that  DCA  had 
raised  some  colorable  arguments  against  the  CTS  decision  to  sell,  but 
concluded  that  the  probability  of  success  was  insufficient  to  justify  an 
injunction.  •-' 

The  court  also  rejected  DCA's  argument  that  the  rights  plan  was 
adopted  primarily  for  entrenchment  purposes.  Certainly  the  plan  would 
aid  management  in  the  proxy  contest  insofar  as  a  white  knight  strategy 
could  garner  votes  from  shareholders  interested  in  cashing  out  of  CTS. 
However,  because  a  successful  auction  would,  or  could,  result  in  a  loss 
of  control  by  the  current  CTS  board,  the  plan  could  not  be  deemed  a 
mere  ploy  to  be  re-elected. ^^^  CTS  had  not  adopted  golden  parachutes 
or  other  items  that  clearly  promoted  entrenchment,  and  even  an  unrea- 
sonable determination  to  stop  DCA  did  not  equal  the  goal  of  entrench- 
ment. The  second  rights  plan  would  not  cause  irreparable  harm  to  DCA 
because  it  neither  hmited  DCA  to  an  equity  position  so  low  as  to  render 
successful  proxy  contests  impossible,  nor  did  it  interfere  with  the  ongoing 
tender  offer  as  did  the  first  rights  plan.'^^ 

DCA  evened  the  score  with  CTS  in  DCA  IV.''''  DCA  IV  related  to 
an  issue  not  considered  in  DCA  III:  DCA's  motion  for  preliminary  and 
permanent  injunctive  relief  with  respect  to  the  CTS  press  release  an- 
nouncing the  decision  to  sell  CTS  and' the  adoption  of  the  second  rights 
plan.  DCA  alleged  the  press  release  contained  material  misrepresentations 
and  omissions  in  violation  of  the  Securities  Exchange  Act  of  1934.'^^ 
CTS  contended  that  a  new  proxy  solicitation  to  shareholders  and  ac- 
companying letter  mooted  the  disclosure  issues  raised  by  DCA.^^^ 

Clearly  the  new  rights  plan  and  the  proposed  sale  of  CTS  were 
intended  to  affect  the  proxy  contest  and  to  attract  potential  white  knights. 


''"Revlon,  Inc.  v.  MacAndrews  &  Forbes  Holdings,  Inc.,  506  A.2d  173  (Del.   1985). 
'''DCA  III,  635  F.  Supp.  at  1180. 
'"W.  at  1181. 
•"M  at  1182. 

''^Dynamics  Corp.  of  America  v.  CTS  Corp.,  Fed.  Sec.   L.  Rep.  (CCH)  1  92,765 
(N.D.  111.  May  3,   1986). 

'"15  U.S.C.  §  78n(a)  (1982). 

'''DCA  IV,  Fed.  Sec.  L.  Rep.  at  93,747. 


42  INDIANA  LAW  REVIEW  [Vol.  20:19 

The  key  to  the  success  of  the  CTS  ploy  was  the  price  that  CTS  could 
attract.  If  management  could  sell  at  a  high  price,  it  would  secure  votes, 
but  if  the  price  were  low,  shareholders  would  probably  prefer  DCA. 

The  problem  with  the  press  release  was  obvious  on  its  face:  it 
''signaled"  that  CTS  could  be  sold  for  $50  a  share,  which  was  sub- 
stantially higher  than  DCA's  then  existing  tender  offer  price  with  no 
other  buyers  making  a  play  for  CTS.  The  court  clearly  was  correct  in 
considering  the  release  and  mandating  corrective  material.  The  letter 
accompanying  the  proxy  statement  did  clarify  the  issue  somewhat  by 
noting  that  the  $50  value,  which  was  the  principal  amount  of  the  notes 
to  be  issued  under  the  rights  plan,  was  the  asking  price  for  the  company 
and  not  a  prediction. 

There  was  some  testimony  that  $50  a  share  was  a  realizable  price 
for  CTS,  but  this  figure  was  substantially  discounted  by  Judge  Getz- 
endanner  because  it  was  based  on  management's  untested  expectations 
and  seemed  contrary  to  CTS's  actual  performance.'^^  Consequently,  even 
the  supposed  corrective  statement  in  the  letter  accompanying  the  proxy 
statement  was  misleading  because  it  did  not  disclose  the  basis  of  the 
opinion  by  CTS's  investment  banker  or  other  information  about  the 
projections  to  permit  shareholders  to  understand  the  hmitations  on  the 
projected  realizable  value  of  CTS.'^^  Also  the  letter  indicating  that  CTS 
was  for  sale  did  not  make  clear  management's  view  that  it  did  not 
believe  it  was  an  opportune  time  to  sell  CTS  and  that  the  plan  was 
based  both  upon  management's  fear  that  DCA  would  win  the  proxy 
contest  unless  a  white  knight  strategy  were  adopted  and  upon  a  general 
but  unspecified  mistrust  of  DCA.'^^ 

The  final  defect  in  CTS's  disclosure  related  to  its  ability  to  issue 
the  notes  called  for  in  the  second  rights  plan  if  there  were  a  triggering 
event.  The  court  concluded  that  the  letter  failed  to  explain  that  to  the 
extent  CTS  was  unable  to  issue  notes,  shareholders  would  remain  share- 
holders of  a  company  that  might  have  incurred  substantial  debt.'^°  Judge 
Getzendanner  felt  that  the  disclosure  could  have  been  more  specific  and, 
more  importantly,  that  management  had  not  adequately  disclosed  what 


'''Id.  Sit  93,748. 

'^^/c?.  There  was  no  disclosure  that  the  investment  advisor  estimated  the  long-term 
value  of  CTS  was  $75  per  share  realizable  in  two  and  a  half  years.  This  omission  was 
deemed  misleading  because  shareholders  were  in  effect  voting  to  sell  CTS  within  twelve 
months  at  a  maximum  price  of  $50  per  share,  and  probably  less,  without  being  told  that 
CTS  had  received  an  estimated  value  of  $75  per  share  if  the  company  waited  until  1988. 
Fed.  Sec.  L.  Rep.  at  93,749.  This  conclusion  is  somewhat  ironic:  management  which  did 
not  want  to  sell  erred  by  not  disclosing  information  that  would  tend  to  dissuade  shareholders 
from  selling. 

''^Id.  at  93,749. 

'^Id. 


1987]  BUSINESS  ASSOCIATIONS  43 

is  perhaps  the  most  important  factor — management's  belief  that  the  rights 
plan  would  be  so  successful  in  deterring  DCA  or  any  other  potential 
offeror  from  risking  a  triggering  event  that  it  was  highly  unlikely  the 
$50  notes  ever  would  be  issued.  At  the  same  time,  management  was 
signaling  that  a  $50  price  could  be  realized  within  a  year.  It  is  irrelevant 
whether  incumbent  management  or  DCA  could  do  the  most  for  CTS 
shareholders,  but  it  cannot  be  doubted  that  management  had  led  the 
shareholders  to,  if  not  down,  the  "garden  path"  with  a  misleading  proxy 
statement.  Because  of  the  substantial  impact  the  press  release  had  on 
the  market  for  CTS  shares,  the  only  possible  decision  Judge  Getzendanner 
could  make  was  to  enjoin  CTS  from  voting  proxies  it  had  received 
subsequent  to  the  issuance  of  the  press  release  and  to  prevent  contact 
with  shareholders  until  corrective  material  had  been  sent.'^' 

The  most  significant  decision  in  the  DCA-CTS  battle  to  date  is 
Judge  Posner's  opinion  in  DCA  V^^^  affirming  DCA  II  on  the  ground 
that  the  control  share  acquisition  provisions  of  the  Indiana  Business 
Corporation  Law'"  violate  the  supremacy  and  commerce  clauses  of  the 
United  State  Constitution.  Of  course,  even  though  Judge  Posner's  opinion 
can  be  characterized  as  a  scholarly  tour  de  force, '^"^  the  decision  by  the 
Supreme  Court  either  for  or  against  the  statute  will  be  far  more  significant 
because  of  its  impact  on  takeover  law  and  tactics  in  general. 

The  first  issue  considered  by  the  court  was  whether  a  preliminary 
injunction  was  appropriate.  Judge  Posner  concluded  that  the  irreparable 
harm  to  DCA  if  the  injunction  were  denied  and  the  irreparable  harm 
to  CTS  if  the  injunction  were  granted  basically  offset  each  other.  Thus 
the  propriety  of  the  injunction  depended  upon  which  side  was  Hkely  to 
prevail  at  the  trial. '^^  The  court  concluded  that  this  was  DCA. 

The  first  substantive  issue  considered  by  the  court  was  whether  the 
CTS  poison  pill  violated  management's  fiduciary  obligations  to  share- 
holders. This  question  was  governed  by  Indiana  law.'^^  The  function  of 


'"'Id.  at  93,749-50. 

'"Dynamics  Corp.  of  America  v.  CTS  Corp.,  794  F.2d  250  (7th  Cir.),  prob.  juris, 
noted,  107  S.  Ct.  258  (1986).  The  appeal  to  the  Seventh  Circuit  was  expedited.  Id.  at 
252. 

'"IND.  Code  §  23-1-42-1  to  -11  (Supp.  1986).  CTS  had  "opted  into"  the  IBCL  after 
April  1,   1986,  as  permitted  by  id.  §  23-l-17-3(b). 

'^The  opinion  received  favorable  comment  from  the  editors  of  The  Wall  Street 
Journal.  The  Wall  Street  Journal,  July  28,  1986,  at  12,  col.   1. 

''''DCA    V,  794  F.2d  at  252. 

'^Id.  at  253.  The  court  stated  that  "Indiana  takes  its  cues  in  matters  of  corporation 
law  from  the  Delaware  courts,  which  are  more  experienced  in  such  matters  since  such  a 
large  fraction  of  major  corporations  is  incorporated  in  Delaware  and  such  a  small  fraction 
in  Indiana."  Id.  This  statement  is  not  completely  accurate.  For  example,  in  Gabhart  v. 
Gabhart,  267  Ind.  370,  370  N.E.2d  345  (1977),  the  Indiana  Supreme  Court  specifically 
declined  to  follow  the  Delav/are  decision  in  Singer  v.  Magnavox  Co.,  380  A. 2d  969  (Del. 


44  INDIANA  LAW  REVIEW  [Vol.  20:19 

the  court  was  to  predict  how  Indiana  courts  would  evaluate  the  CTS  poison 
pill  in  the  context  of  the  perennial  debate  over  hostile  takeovers:  are  they 
detrimental  because  they  cause  managers  of  potential  targets  to  worry  too 
much  about  short  term  financial  results  and  promote  absentee  ownership 
or  control,  or  are  they  unequivocally  beneficial  to  shareholders  because 
someone  is  offering  a  premium  above  the  market  price  of  the  shares  which 
is  determined  by  all  available  public  information  about  a  company.  Under 
the  latter  view,  management  as  fiduciaries  should  embrace  rather  than 
oppose  a  takeover. '^^ 

Judge  Posner  felt  that  Indiana  courts  would  reject  these  polar  views 
and  would  permit  some  defensive  moves  by  target  company  management 
if  they  are  not  "insuperable  barriers  to  hostile  takeovers. "^^^  In  fact, 
as  the  court  pointed  out,  some  defensive  moves  are  required  by  federal 
law,  such  as  the  twenty  day  cooling  off  period  between  the  announcement 
and  the  consummation  of  a  tender  offer. '^^  Prohibiting  short  duration 
tender  offers  may  discourage  some  offers  because  the  offeror  may  have 
to  compete  with  other  offerors.  The  waiting  period  permits  careful 
analysis  of  the  offer  and  also  permits  other  offerors  to  start  an  auction 
for  the  target.  The  court  was  even  willing  to  recognize  that  "golden 
parachutes,"  where  generous  severance  payments  are  triggered  when 
managers  lose  their  jobs  because  of  a  takeover,  may  benefit  the  share- 
holders if  they  reduce  management's  resistence  to  takeovers  making  a 
takeover  more  costly.  Even  a  triggered  "poison  pill,"  if  not  lethal,  could 
benefit  shareholders.  However,  a  poison  pill  could  reduce  the  number 
of  tender  offers,  or  even  the  price,  by  making  a  tender  offer  less  certain 
of  success  and  more  costly,  thus  harming  all  shareholders. '^° 


1977),  on  the  issue  of  protecting  minority  shareholders  in  squeeze  out  mergers.  267  Ind. 
at  388,  370  N.E.2d  at  356.  Of  course,  with  the  demise  of  Singer  in  Weinberger  v.  UOP, 
Inc.,  457  A. 2d  701  (Del.  1983),  it  can  be  said  that  the  Indiana  Supreme  Court  guessed 
right.  However,  Gabhart  still  shows  that  Indiana  courts  will  not  slavishly  follow  Delaware 
law, 

^^'' Compare,  e.g.,  Scherer,  Takeovers:  Present  and  Future  Dangers,  Brookings  Rev., 
Winter-Spring  1986,  at  15  with,  e.g.,  Easterbrook  &  Fischel,  The  Proper  Role  of  a  Target's 
Management  in  Responding  to  a  Tender  Offer,  94  Harv.  L.  Rev.  1161  (1981).  Cf.  SEC 
Office  of  Chief  Economist,  A  Study  in  the  Economics  of  Poison  Pills,  [1985-1986  Transfer 
Binder]  Fed.  Sec.  L.  Rep.  (CCH)  1  83,971  (March  5,  1986). 

'^«Z)C4    V,  794  F.2d  at  253-54. 

'^^SEC  Rule  14e-l(a),   17  C.F.R.  §  240.14e-l(a)  (1986). 

'^""DCA  V,  794  F.2d  at  254-55.  Of  course,  the  ideal  solution  for  an  offeror  is  to 
trigger  a  poison  pill  that  bars  anyone  else  from  bidding  for  the  target  and  then  have  the 
pill  invalidated  in  court.  This  is  what  occurred  in  the  recent  takeover  of  N.L.  Industries, 
Inc.  See  Zukosky,  N.L.  's  Raider  Gets  His  Prize— Minus  a  Few  Marbles,  Business  Week, 
August  25,   1986,  at  37. 


1987]  BUSINESS  ASSOCIATIONS  45 

Considering  Judge  Posner's  well  known  inclination  for  economic 
analysis,  his  reference  to  empirical  studies  on  the  results  of  tender  offers 
is  not  surprising.  In  particular,  he  noted  a  finding  that  targets  that  resist 
offers  but  are  later  acquired  do  better  in  maximizing  shareholder  wealth, 
at  least  in  the  short  run,  than  targets  that  do  not  resist.'^'  Of  course 
if  defensive  tactics  reduce  the  number  of  tender  offers,  shareholders  may 
lose  in  the  long  run.  Shareholders  of  a  target  that  successfully  resists 
an  offer  are  unequivocally  worse  off.'^^  Thus,  some  resistance  by  man- 
agement might  be  optimal  and  consistent  with  its  duty  of  loyalty  to  the 
shareholders.'^^  Of  course  striking  the  optimal  level  will  be  difficult 
because  management  with  its  vested  self  interests  determines  whether  or 
not  to  resist  an  offer. 

Judge  Posner  acknowledged  skepticism  about  arguments  for  defensive 
measures  because  they  give  too  little  weight  to  the  effect  of  "defensive" 
measures  in  rendering  shareholders  defenseless  against  management. '^"^ 
He  was  particularly  skeptical  about  poison  pills  because  they  tend  to 
be  more  a  reflex  device  of  a  management  determined  to  hold  onto  power 
at  all  costs  than  a  considered  measure  for  rnaximizing  shareholder  wealth. 
He  contrasted  poison  pills  with  fair  price  amendments  which  require 
offerors  to  pay  the  same  price  to  nontendering  shareholders  in  subsequent 
mergers  or  cash  outs.  This  device  discourages  shareholders  from  stamped- 
ing to  tender  their  shares. 

Although  expressing  doubts  about  poison  pills,  the  court  acknowl- 
edged that  it  was  understandable  why  state  courts  would  hesitate  to 
condemn  all  defensive  measures  as  breaches  of  fiduciary  duties  on  the 
basis  of  the  present  incomplete  evidence  as  to  the  actual  effect  of  these 
measures. '^^  Consequently  Judge  Posner  assumed  that  Indiana  would 
follow  Delaware  law  and  would  recognize  defensive  measures,  including 
poison  pills,  as  within  the  power  of  the  target's  board  of  directors. '^^ 
However,  there  must  be  some  nexus  with  the  goal  of  maximizing  return 
to  the  shareholder,  and  the  directors  must  show  that  they  had  reasonable 
grounds  for  beUeving  that  the  offeror  presented  a  threat  to  corporate 


''"See  Jarrell,  The  Wealth  Effects  of  Litigation  by  Targets:  Do  Interests  Diverge  in 
a  Merge?,  28  J.  Law  &  Econ.   151  (1985). 
'''DCA    V,  794  F.2d  at  255. 

'''Id. 

'''^Id.  at  255-56.  Of  course,  it  is  possible  that  state  courts  would  be  less  inclined  to 
rely  on  economic  analysis  than  Judge  Posner,  who  always  has  advocated  such  an  analysis 
both  as  a  scholar  and  as  a  jurist. 

'^^See,  e.g.,  Revlon,  Inc.  v.  MacAndrews  &  Forbes  Holdings,  Inc.,  506  A. 2d  173, 
180  (Del.   1986). 


46  INDIANA  LAW  REVIEW  [Vol.  20:19 

policy  and  effectiveness  in  adopting  defensive  measures.  Admittedly,  this 
burden  is  easily  satisfied  by  a  showing  of  good  faith  and  reasonable 
investigation. •^^  CTS  had  argued  that  the  "business  judgment  rule" 
insulated  its  decision  to  adopt  the  poison  pill  from  judicial  scrutiny. 
Although  the  Delaware  court  has  done  some  backing  and  filling  with 
respect  to  the  boundaries  of  the  business  judgment  rule,  there  is  no 
question  that  it  has  departed  from  the  preternatural  deference  it  once 
gave  to  directors  reacting  to  any  perceived  threat  to  their  continued 
control  of  a  corporation.'^^ 

Judge  Posner,  not  surprisingly,  justified  the  business  judgment  rule 
in  "market"  terms,  recognizing  the  penalty  that  competition  in  the  market 
for  corporate  control  can  impose  on  a  management  that  makes  business 
mistakes,  as  well  as  recognizing  the  traditional  justification  that  people 
running  a  business  know  more  about  the  business  than  do  judges. '^^ 
However,  when  management  interferes  with  the  market  for  corporate 
control,  the  courts  are  less  deferential  because  of  the  conflict  between 
the  interests  of  a  management  seeking  to  secure  its  position  and  share- 
holders seeking  to  maximize  their  wealth. '^° 

After  making  these  "general  reflections"  on  the  role  of  the  courts 
in  reviewing  defensive  maneuvers.  Judge  Posner  analyzed  the  CTS  poison 
pill.  Not  surprisingly,  he  felt  that  CTS's  act  was  not  done  in  a  disinterested 
fashion  and  that  the  board  had  not  evaluated  in  a  cool,  dispassionate, 
and  thorough  manner  DCA's  tender  offer  for  shares  intended  as  part 
of  its  proxy  contest  strategy.  CTS's  failure,  in  the  court's  eyes,  was  the 
decision  by  CTS  inside  directors  to  block  the  DCA  tender  offer  before 
considering  its  ramifications  for  shareholder  welfare.'^'  For  example,  the 
presentation  of  the  poison  pill  plan  by  CTS's  investment  advisor  implied 
that  the  DCA  tender  offer  was  "unfair,"  although  the  board  had  not 
even  considered  the  fairness  of  the  DCA  offer  price.  Apparently  the 
"market"  did  analyze  the  DCA  offer  because  the  price  of  CTS  shares 
rose  from  below  $36  to  above  $40  when  the  offer  was  announced,  only 
to  drop  when  the  poison  pill  was  announced  and  rise  again  when  Judge 
Getzendanner  invalidated  the  poison  pill.'^^  Of  course  it  is  doubtful  that 
any  poison  pill  adopted  during  the  heat  of  battle,  rather  than  beforehand, 
could  ever  be  characterized  as  a  dispassionate  act. 

CTS  made  a  rather  ad  hominem  argument  that  it  did  not  need  to 


'"M;  see  also  Moran  v.  Household  Int'l,  Inc.,  500  A.2d  1346  (Del.   1985);  Unocal 
Corp.  V.  Mesa  Petroleum  Co.,  493  A. 2d  946  (Del.   1985). 

'''See,  e.g.,  Cheff  v.  Mathes,  41  Del.  Ch.  494,   199  A.2d  548  (1964). 
'"'DCA   V,  794  F.2d  at  256. 

''"Id.  at  257.   Judge  Posner  drolly  quoted  from  the  Queen  of  Hearts  in  Alice  in 
Wonderland:  "Judgment  first,  trial  later."  Id. 
''Ud. 


1987]  BUSINESS  ASSOCIATIONS  47 

investigate  the  DCA  offer  to  know  that  it  was  bad  because  of  the 
antagonism  between  DCA  and  CTS  management.  Apparently  CTS  man- 
agement thought  it  was  focusing  on  the  long  term  while  DCA  was  going 
for  the  quick  buck.  However,  this  attitude  could  be  discounted  considering 
the  souring  of  some  CTS  investments  that  had  been  opposed  by  DCA. 
Furthermore,  in  a  comment  that  should  be  noted  by  all  those  in  the 
position  of  CTS  management.  Judge  Posner  stated  that  "[t]he  friction 
between  the  companies  required,  if  anything,  more  than  the  usual  amount 
of  care  by  CTS's  board  of  directors  in  evaluating  the  proposal,  to  make 
sure  that  personal  feelings  would  not  be  allowed  to  interfere  with  the 
board's  fiduciary  obligations. "'^^ 

Judge  Posner  was  not  particularly  impressed  with  the  poison  pill  as 
a  plausible  measure  for  maximizing  shareholder  wealth.  He  conceded 
that  it  was  not  certain  that  CTS  shareholders,  other  than  DCA,  would 
be  worse  off  if  the  pill  were  triggered.  It  was,  however,  at  least  overkill 
and  too  high  a  price  to  pay  for  preventing  a  shift  in  control  from 
incumbent  CTS  management  to  DCA.  Even  if  the  tender  offer  succeeded, 
DCA  could  not  squeeze  out  remaining  shareholders  because  it  would 
not  own  a  majority  of  shares.  A  reasonable  defensive  move  would  be 
a  device  that  would  be  triggered  by  a  transaction  that  created  a  majority 
shareholder  or  by  an  attempt  to  squeeze  out  minority  shareholders  in 
an  unfair  transaction.'^"^ 

Judge  Posner  turned  one  CTS  argument  against  itself.  CTS  apparently 
argued  that  if  DCA  controlled  the  board  of  directors,  it  would  "gull" 
the  remaining  shareholders  into  selling  their  shares  for  too  low  a  price. '^^ 
As  Judge  Posner  again  drolly  observed,  this  argument  underscores  the 
importance  of  not  impeding  tender  offers  too  much  because  its  premise 
is  that  management  cannot  be  trusted  to  protect  the  interests  of  share- 
holders.'^^ Touche. 

After  disposing  of  the  validity  of  CTS's  poison  pill,  the  court 
considered  the  vaUdity  of  the  control  share  acquisition  provisions  of  the 
IBCL.  The  first  issue  was  the  procedural  question  whether  the  trial  court 
had  failed  adequately  to  notify  the  Indiana  Attorney  General  that  the 
constitutionality  of  the  statute  was  being  challenged. '^^  The  court  was 


'"/of.  at  258. 

'«Vflf.  at  259. 

'*'/g?.  It  is  ironic  that  recently  DCA  opposed  a  sale  of  CTS,  or  more  accurately, 
opposed  a  merger  of  CTS  with  AVX  Corporation.  Indianapolis  Star,  Dec.  18,  1986,  at 
73,  col.  2.  Of  course  the  merger  price  was  $35  per  share,  $8  less  than  what  DCA  offered 
in  its  tender  offer.  Then  again,  this  development  proves  the  court  was  right — the  $50  was 
illusory,  and  one  of  the  features  of  the  AVX  proposal  was  that  AVX  considered  "CTS 
management  .  .  .  [as]  one  of  the  positive  things  about  the  company."  Id. 

''"DCA    V,  794  F.2d  at  259. 

'*V(i.  Although  a  detailed  discussion  of  notification  would  unduly  lengthen  this  article, 
the  federal  statute  that  requires  notification  is  28  U.S.C.  §  2403(b)  (1982). 


48  INDIANA  LAW  REVIEW  [Vol.  20:19 

satisfied  that  any  error  in  notification  did  not  prejudice  the  state. '^^  It 
is  possible  that  the  United  States  Supreme  Court  might  reverse  the  Seventh 
Circuit  on  the  ground  that  Indiana  has  not  had  its  day  in  court  J  ^^ 
Hopefully,  however,  the  high  court  will  reach  the  merits  of  the  con- 
stitutionality of  second  generation  antitakeover  statutes  such  as  the  In- 
diana statute  regardless  of  the  outcome  of  preliminary  issues. 

The  first  constitutional  issue  considered  in  DCA  V  was  the  supremacy 
clause  issue:  was  the  control  share  acquisition  statute'^^  preempted  by 
the  Williams  Act.'^'  The  Indiana  statute  defines  a  control  share  acquisition 
as  an  acquisition  that  with  any  previous  acquisitions  gives  the  acquiror 
at  least  twenty  percent  of  the  voting  shares  of  the  covered  firm.'^^  If 
the  acquiring  firm  files  a  statement  containing  specific  information*^^ 
and  requests  a  special  shareholders'  meeting  to  consider  whether  the 
shares  should  have  voting  rights,  management  has  fifty  days  within  which 
to  hold  a  shareholders'  meeting. *^^  The  statute  requires  that  a  majority 
of  all  shares  and  a  majority  of  disinterested  shares,  which  excludes  shares 
owned  by  the  acquiror  and  shares  owned  by  officers  and  inside  directors, 
must  favor  awarding  voting  rights. '^^ 

Judge  Posner  characterized  the  statute  as  being  "cleverly  drafted 
...  to  skirt  judicial  holdings  that  forbid  states  to  delay  tender  offers 
beyond  the  period  required  by  the  Williams  Act.'"^^  Of  course  the  effect 
of  the  statute  is  to  impose  a  fifty  day  delay  on  tender  offers  at  the 
option  of  the  target.  This  makes  it  more  difficult  for  any  tender  offer 
to  succeed,  because  an  offeror  could  not  accept  tendered  shares  until 
the  shareholder  meeting  where  it  will  be  determined  if  the  shares  will 


'''DCA   V,  194  F.2d  at  260. 

'^'C/.  Leroy  v.  Great  Western  United  Corp.,  443  U.S.  173  (1979).  The  court  also 
dismissed  two  other  threshold  challenges  to  Judge  Getzendanner's  consitutional  rulings. 
The  Attorney  General's  argument  that  venue  was  improper  in  the  Northern  District  of 
Illinois  was  deemed  to  have  been  waived  by  CTS.  An  argument  that  the  district  court 
should  have  abstained  in  favor  of  Indiana  courts  was  rejected  in  part  because  of  the  lack 
of  time,  but  more  particularly  because  the  court  agreed  that  the  statute  was  limited  to 
cases  where  the  target  was  an  Indiana  corporation.  DCA   V,  794  F.2d  at  260. 

'^IND.  Code  §  23-1-42-1  to  -11  (Supp.   1986). 

'"15  U.S.C.  §§  78m(d)-(e),  78n(d)-(f)  (1982). 

'^^IND.  Code  §  23-1-42-1  (Supp.   1986). 

•"/c?.  §  23-1-42-6. 

'''Id.  §  23-1-42-7. 

'^'Id.  §§  23-1-42-3,  23-1-42-9.  Without  a  majority  vote  of  all  shares,  and  of  all 
disinterested  shares,  the  acquired  shares  remain  non-voting  shares.  The  issue  of  the  voting 
rights  will  be  taken  up  at  the  next  regularly  scheduled  shareholder  meeting  if  the  acquirer 
does  not  request  a  special  meeting.  Id.  §  23-l-42-7(c).  If  the  statement  is  not  filed,  the 
corporation  can  redeem  the  shares  "at  the  fair  value  thereof  pursuant  to  the  procedures 
adopted  by  the  corporation."  Id.  §  23-1-42-10.  One  might  conjecture  how  close  the  "fair 
value"  would  be  to  what  the  acquirer  had  paid  for  the  shares. 

'"''DCA    V,  794  F.2d  at  261. 


1987]  BUSINESS  ASSOCIATIONS  49 

be  voting  or  nonvoting.  Thus  a  tender  offer  would  have  to  be  kept 
open  for  fifty  days  rather  than  the  twenty  business  days  required  by 
SEC  Rule  He-lCa),'*^^  and  even  then  the  offeror  cannot  be  certain  of  a 
victory  because  the  "disinterested"  shareholders  must  approve  the  vote.'^^ 

The  key  to  any  analysis  of  a  supremacy  clause  preemption  issue  is 
Edgar  v.  MITE  Corp.'''^  The  Seventh  Circuit  in  MITE  held  that  the 
Illinois  takeover  statute  violated  the  supremacy  clause,  but  this  view  was 
shared  by  only  three  Supreme  Court  justices. ^^  However,  even  though 
the  Supreme  Court  did  not  accept  the  preemption  argument,  it  has  held 
that  Congress  intended  to  strike  a  balance  between  target  management 
and  offerors  in  the  Williams  Act.^°'  From  this  premise,  courts  have 
reasoned  that  states  may  not  upset  the  balance  struck  by  Congress. ^^^ 
States  are  free  to  add  their  own  penalties  if  Congress  passes  a  statute 
punishing  some  practice  deemed  unfair  or  unjust  such  as  monopolization 
or  misrepresentation. ^°^  If  the  Williams  Act  is  actually  an  antitakeover 
statute,  as  some  argue, ^^"^  then  Indiana  should  be  able  to  enact  more 
stringent  antitakeover  laws.  However,  even  if  Judge  Posner  might  phil- 
osophically agree  with  those  who  oppose  any  interference  in  the  market 
for  control,  the  WiUiams  Act  does  exist  and  it  does  strike  a  balance. ^^^ 
Whether  or  not  the  balance  is  proper,  Congress  probably  did  not  want 
the  states  to  tip  this  so-called  "balanced  playing  field"  one  way  or  the 
other. 

Judge  Posner  characterized  the  application  of  the  standard  preemptive 
power  of  the  Williams  Act  to  the  Indiana  statute  as  "straight  forward. "^^^ 
He  did  not  attempt  to  determine  if  the  Indiana  statute  was  more  or 
less  hostile  to  takeovers  than  the  IlHnois  statute  involved  in  MITE.  In 
fact,  he  "guessed"  that  the  Indiana  statute  was  less  inimical  to  tender 
offers,  although  it  was  still  lethal.  In  particular.  Judge  Posner  considered 
the  fifty  day  period  of  the  Indiana  statute  to  be  "too  much"  when 


'''SEC  Rule  14e-l(a);   17  C.F.R.  §  240.14e-l(a)  (1986). 

'''^Officers  and  inside  directors  are  disenfranchised  as  well,  but  their  holdings  are 
likely  to  be  substantially  less  than  the  holdings  of  the  offeror.  Offerors  are  not  prone  to 
put  a  corporation  into  play  if  it  has  a  strongly  entrenched  management. 

"^^57  U.S.  624  (1982),  aff'g  MITE  Corp.  v.  Dixon,  633  F.2d  486  (7th  Cir.   1980). 

200457  u  g  ^^  636-39.  This  portion  of  the  opinion  by  White,  J.,  was  joined  by  Burger, 
C.  J.,  and  Blackmun,  J. 

^°'Piper  V.  Chris-Craft  Indus.,  Inc.,  430  U.S.   1  (1977). 

^°'See,  e.g.,  Martin-Marietta  Corp.  v.  Bendix  Corp.,  690  F.2d  558,  565-66  (6th  Cir. 
1982);  National  City  Lines,  Inc.  v.  LLC  Corp.,  687  F.2d  1122,  1128-33  (8th  Cir.  1982). 

'''DCA    V,  794  F.2d  at  262. 

^'^See,  e.g.,  Fischel,  Efficient  Capital  Market  Theory,  the  Market  for  Corporate 
Control,  and  the  Regulation  of  Cash  Tender  Offers,  57  Tex.  L.  Rev.   1  (1978). 

'°'DCA    V,  794  F.2d  at  262. 

^'^Id. 


50  INDIANA  LAW  REVIEW  [Vol.  20:19 

Congress  had  determined  that  approximately  a  month  is  enough  time 
to  keep  a  tender  offer  open.^^^ 

It  is  possible  that  the  preemption  issue  raised  by  Judge  Posner  could 
be  resolved  by  shortening  the  time  frame  of  the  control  share  acquisition 
statute.  However,  even  if  this  occurs,  Judge  Posner  made  it  clear  that 
in  the  opinion  of  the  panel,  the  statute  would  still  run  afoul  of  the 
commerce  clause. ^^^  It  has  been  a  long  estabhshed  tenet  of  constitutional 
law  that  the  commerce  clause  will  invalidate  any  state  regulation  of 
interstate  commerce  that  conflicts  with  the  presumed  purpose  of  the 
clause  to  make  the  nation  a  common  market,  at  least  in  areas  where 
Congress  has  not  spoken. ^°^  Judge  Posner  recognized,  however,  that  it 
was  possible  that  the  "dormant"  commerce  clause  would  no  longer  apply 
when  Congress  has  spoken  and  that  the  only  ground  for  invalidating 
state  legislation  would  be  the  supremacy  clause. ^'° 

However,  as  the  DC  A  V  court  pointed  out,  MITE  and  other  cases 
separate  the  supremacy  and  the  commerce  clauses  and  assume  that  the 
commerce  clause  retains  an  independent  force  notwithstanding  the  en- 
actment of  the  Williams  Act.^^^  Judge  Posner,  in  this  respect,  stated 
that  there  was  no  indication  the  Williams  Act  was  intended  to  insulate 
antitakeover  statutes  from  complaints  that  they  unduly  burden  interstate 
commerce. ^'^ 

The  commerce  clause  does  not  bar  all  state  action  that  might  impose 
some  burden  on  interstate  commerce;  burdens  will  be  upheld  if  the  local 
benefits  exceed  the  burden  imposed  upon  interstate  commerce. ^'^  Applying 
this  test,  the  court  concluded  that  the  burdens  the  statute  inflicted  on 
nonresidents  exceeded  the  benefits  to  Indiana  residents. ^'^  Although  the 
court  did  not  know  the  geographical  distribution  of  the  DCA  or  CTS 
shareholders,  Judge  Posner  was  willing  to  assume  that  the  vast  majority 
were  not  Indiana  residents.  Consequently  the  statute  gravely  impaired 
DCA's  ability  to  do  business  with  those  shareholders.  As  he  phrased 
it,  "Indiana  has  no  interest  in  protecting  residents  of  Connecticut  from 
being  stampeded  to  tender  their  shares  to  Dynamics  at  $43,"^^^  and 


^°'Id.  at  263. 

'°'Id. 

'°'Id.  See  Cooley  v.  Board  of  Wardens,  53  U.S.  (12  How.)  299  (1852). 

''°DCA   V,  794  F.2d  at  263. 

'''See  Pike  v.  Bruce  Church,  Inc.,  397  U.S.  137  (1970).  A  majority  of  the  Supreme 
Court  in  MITE  found  that  the  Illinois  statute  violated  the  commerce  clause  as  an  undue, 
indirect  burden  on  interstate  commerce.  Edgar  v.  MITE  Corp.,  457  U.S.  624,  640-46 
(1982). 

^''DCA   V,  794  F.2d  at  264. 

'''Id.  at  263. 


1987]  BUSINESS  ASSOCIATIONS  51 

"[fjor  the  sake  of  trivial  or  even  negative  benefits  to  its  residents  Indiana 
is  depriving  nonresidents  of  the  valued  opportunity  to  accept  tender 
offers  from  other  nonresidents."^'^  This  cannot  be  gainsaid  because  the 
purpose  of  the  control  share  acquisition  statute  like  that  of  any  other 
state  antitakeover  statute  is  to  impede  transactions  between  residents  of 
other  states.  This,  of  course,  is  the  opposite  of  the  purpose  of  state 
securities  laws,  which  affect  only  the  residents  of  the  particular  state. 

Judge  Posner  even  expressed  some  doubts  if  any  appreciable  number 
of  Indiana  shareholders  would  benefit  from  the  statute;  the  only  be- 
neficiaries might  be  the  officers  and  directors  of  CTS,  not  all  of  whom 
necessarily  were  Indiana  residents. ^'^  He  noted  that  no  evidence  had  been 
presented  that  DCA's  takeover  of  CTS  would  reduce  the  value  of  CTS 
or  result  in  a  shift  of  assets  or  employment  from  Indiana. ^'^  More 
importantly,  and  this  point  could  well  be  fatal  to  all  second  generation 
antitakeover  statutes,  any  shift  prevented  by  the  statute  would  be  further 
grounds  for  condemnation  because  the  commerce  clause  does  not  permit 
states  to  bar  corporations  from  moving  assets  and  employees  to  other 
states. ^'^  If  Indiana  presents  a  desirable  environment  for  business, ^^°  there 
is  no  reason  for  erecting  obstacles  to  shifts  in  corporate  control.  If  the 
environment  is  desirable,  the  business  will  remain  in  Indiana  regardless 
of  whether  management  are  "hometown  boys"  or  nonresidents.  For 
better  or  worse,  there  is  an  interstate  and  even  an  international  market 
for  corporate  control.  Indiana  has  attempted  to  opt  out  of  this  market, 
and  to  the  DC  A  V  court,  this  effort  is  barred  by  the  commerce  clause. 

Perhaps  anticipating  that  this  case  would  go  to  the  Supreme  Court, 
Judge  Posner  was  careful  to  distinguish  the  cases  relied  on  by  CTS. 
For  example,  L.P.  Acquisition  Co.  v.  Tyson^^^  was  different  because 
the  WilUams  Act  did  not  apply  to  the  tender  offer,  and  the  disclosures 
required  by  the  particular  statute  conferred  greater  benefits  on  state 
residents  than  the  disclosure  required  by  the  Indiana  statute. ^^^  In  other 
words,  the  court  perceived  Tyson  as  satisfying  the  balance  required  by 
Pike  V.  Bruce  Church,  Inc.,^^^  which  permits  an  indirect  "burden"  on 


^''Id.  at  264. 

'''Id. 

'''Id. 

''^Id. 

"°A  recent  study  commended  Indiana's  approach  to  attracting  new  businesses  to  the 
state.  Indianapolis  Star,  Oct.  1,  1986,  at  22,  col.  2.  It  would  be  interesting  to  know  how 
many  business  executives  who  favor  legislation  such  as  the  control  shares  acquisition  statute 
would  favor  legislation  barring  them  from  relocating  or  building  new  plants  and  facilities 
in  other  states.  Close  to  home,  how  many  Indiana  residents  would  have  approved  of 
legislation  that  would  have  kept  the  Colts  in  Baltimore? 

^^•772  F.2d  201  (6th  Cir.   1985). 

'''DCA   V,  794  F.2d  at  264. 

^"397  U.S.   137  (1970). 


52  INDIANA  LAW  REVIEW  [Vol.  20:19 

interstate  commerce  where  local  interests  are  paramount.  The  court  also 
distinguished  Cardiff  Acquisitions,  Inc.  v.  Hatch^^"^  on  the  grounds  that 
the  required  disclosure  was  designed  to  furnish  state  residents  information 
relevant  to  the  takeover's  impact  on  the  state  and  that  any  delay  imposed 
on  takeovers  was  so  slight  as  not  to  discourage  them.^^^  The  Indiana 
statute,  however,  was  perceived  by  the  court  as  erecting  a  "barrier  at 
once  formidable  and  arbitrary  to  tender  offers  whose  principal  effects 
if  they  succeed  will  be  felt  outside  Indiana. "^^^ 

The  court  also  rejected  CTS's  argument  that  Indiana  should  be 
permitted  to  control  and  regulate  the  internal  affairs  of  Indiana  cor- 
porations. The  court  correctly  recognized  that  Indiana  has  a  broad  latitude 
in  regulating  internal  affairs  of  Indiana  corporations,  including  provisions 
in  corporate  documents  that  would  discourage  takeovers. ^^^  However, 
there  are  limits  to  this  doctrine,  which  are  exceeded  when  the  state 
regulation  has  an  effect  "on  the  interstate  market  in  securities  and 
corporate  control  [that]  is  direct,  intended  and  substantial  ....  [and] 
not  merely  the  incidental  effect  of  a  general  regulation  of  internal 
corporate  governance. "^^^  As  Judge  Posner  accurately  if  not  elegantly 
phrased  it,  the  control  share  acquisition  statute  is  an  explicit  regulation 
of  tender  offers  and  is  not  immunized  from  the  commerce  clause  because 
"the  mode  of  regulation  involves  jiggering  with  voting  rights.  .  .  ."^^^ 


^^"751  F.2d  906  (8th  Cir.   1984). 

^^'DCA   V,  794  F.2d  at  264. 

'''Id. 

^^'The  court  referred  to  cumulative  voting,  which  can  make  it  difficult  to  oust  an 
entire  existing  board  of  directors.  A  staggered  board  of  directors  also  would  be  a  permitted 
defensive  move.  Id 

It  is  possible  that  the  Supreme  Court  may  place  more  emphasis  on  the  "internal 
affairs"  doctrine  or  at  least  distinguish  DCA  V  from  Edgar  v.  MITE  Corp.  because  in 
Edgar,  it  was  possible  for  the  lUinois  statute  to  apply  to  a  tender  offer  "which  would 
not  affect  a  single  Illinois  shareholder,"  465  U.S.  at  465,  whereas  the  Indiana  control 
share  acquisition  provisions  apply  only  to  publicly  owned  corporations  with  a  substantial 
number  of  Indiana  shareholders  or  with  a  substantial  number  of  shares  owned  by  Indiana 
residents.  Ind.  Code  §  23-l-42-4(a)(3)  (Supp.  1986).  This  position  or  a  complete  recon- 
sideration of  the  MITE  position  on  the  "internal  affairs"  doctrine  in  effect  would  totally 
insulate  state  antitakeover,  statutes  from  commerce  clause  scrutiny  as  long  as  they  are  limited 
to  domestic  corporations  with  a  "substantial"  number  of  resident  shareholders  even  if  they 
are  a  minority  of  all  shareholders. 

It  might  be  argued  that  rejection  of  the  "internal  affairs"  doctrine  would  invalidate 
any  statutory  provision  that  might  hinder  a  hostile  takeover.  That,  however,  is  basically 
an  in  terrorem  argument  because  a  statutory  provision  that  applies  to  all  corporations 
regardless  of  whether  they  are  the  target  of  a  hostile  takeover  attempt  is  not  the  same 
as  a  provision  that  applies  only  to  publicly  held  target  companies  and  that  has  as  a 
purpose  hindering  the  market  for  corporate  control. 

''^DCA    V,  194  F.2d  at  264. 

'''^Id.  The  court  also  rejected  the  argument  that  the  tender  offer  should  have  been 
enjoined  because  if  successful,  DCA  and  CTS  would  violate  section  8  of  the  Clayton  Act, 
15  U.S.C.  §  19  (1982),  which  prohibits  interlocking  boards  of  directors  that  might  eliminate 


1987]  BUSINESS  ASSOCIATIONS  53 

The  court  also  declined  to  reverse  on  the  ground  that  DCA's  tender 
offer  materials  did  not  disclose  its  intention  to  oust  the  CTS  management 
if  it  succeeded  in  the  proxy  contest.  Judge  Posner  agreed  that  this 
omission,  although  material,  had  been  cured  because  DCA's  proxy  ma- 
terial urged  shareholders  to  elect  the  DCA  slate  of  directors  and  because 
DCA's  desire  to  oust  the  present  CTS  board  was  broadcast  loudly  and 
widely. ^^°  Even  if  the  defect  could  not  be  cured  by  the  proxy  materials, 
an  issue  not  resolved  by  the  court,  it  was  not  clear  that  enjoining  the 
tender  offer  was  a  proper  remedy.  The  proper  remedy  was  within  the 
district  court's  discretion,  which  had  not  been  abused  in  this  case. 2^' 

It  is  of  course  impossible  to  know  if  the  Supreme  Court  will  uphold 
the  Seventh  Circuit's  decision  in  DCA  V}^^  There  is  no  question  that 
the  statute  was  intended  to  and  does  interfere  with  takeovers.  Judge 
Posner' s  treatment  of  the  commerce  clause  issue,  which  was  accepted 
by  the  majority  in  MITE,  should  be  persuasive.  Any  statute  that  presents 
an  offeror  with  the  distinct  possibility  of  owning  a  substantial  block  of 
non-voting  shares  in  an  Indiana  corporation  would  tend  to  dissuade  him 
from  making  a  tender  offer  for  that  corporation.  The  adverse  effect  on 
interstate  commerce  is  clear. 

It  would  be  unfortunate  if  tender  offers  and  takeovers  reduced  the 
number  of  publicly  held  Indiana  corporations.  However,  the  answer  to 
this  potential  problem  is  to  improve  the  business  climate  in  Indiana  to 
attract  and  retain  business  in  this  state  rather  than  to  create  artificial 
barriers  to  a  shift  in  corporate  control. 

Judge  Posner' s  supremacy  clause  argument  also  is  persuasive  because 
for  better  or  worse,  the  Williams  Act  does  establish  a  uniform  scheme 
for  the  regulation  of  tender  offers.  Tender  offers  and  takeovers  have 
national  impact  and  it  would  seem  that  even  in  a  time  of  deemphasis 
on  Washington,  having  one  set  of  rules  for  the  country  is  sound.  If 
there  is  a  problem  with  particular  tactics  by  offerors,  or  management 
for  that  matter,  the  proper  response  is  to  seek  change  from  Congress 
or  the  SEC. 

An  Ohio  control  share  acquisition  statute  which  was  similar  to  the 
Indiana  statute  in  that  it  required  shareholder  authorization  for  a  control 


competition  between  the  two  companies.  Judge  Posner,  an  eminent  antitrust  scholar,  noted 
there  was  no  persuasive  evidence  that  DCA  and  CTS  were  in  competition,  but  more 
importantly  the  argument  failed  for  the  very  simple  reason  that  DCA  would  just  find 
persons  to  serve  on  the  board  of  CTS  who  were  not  DCA  directors  if  there  was  a  question 
of  illegality  under  section  8.  DCA  V,  794  F.2d  at  264-65. 
^'"DCA    V,  794  F.2d  at  265. 

"^It  is  difficult  to  forecast  how  the  current  Court  will  line  up  on  the  issue.  Former 
Chief  Justice  Burger  was  in  the  plurality  that  deemed  the  Illinois  statute  involved  in  MITE 
preempted  by  the  Williams  Act,  457  U.S.  at  636-39,  while  current  Chief  Justice  Rehnquist 
dissented  in  MITE  on  the  grounds  of  mootness.  Id.  at  664. 


54  INDIANA  LAW  REVIEW  [Vol.  20:19 

share  acquisition  was  struck  down  in  Fleet  Aerospace  Corp.  v. 
Holderman^^^  because  it  conflicted  with  the  supremacy  clause  by  frus- 
trating the  objectives  of  the  Williams  Act  and  because  it  imposed  a 
substantial  direct  and  indirect  burden  on  interstate  commerce. ^^"^ 

It  is  hard  to  predict  the  reaction  of  the  state  if  DC  A  V  is  affirmed. 
Presumably  efforts  would  be  made  to  circumvent  the  decision,  perhaps 
by  a  statute  that  applies  only  to  corporations  not  subject  to  the  Williams 
Act,  where  the  predominant  number  of  shareholders  are  Indiana  residents 
and  that  are  truly  local  businesses.  This  type  of  statute  would  apply  to 
just  the  kind  of  small  corporations  that  always  seem  to  be  excluded 
from  antitakeover  legislation. 

IV.     Statutory  Developments 

A.     Indiana  Business  Corporation  Law 

The  most  significant  statutory  development  during  the  survey  period 
was  the  enactment  of  the  Indiana  Business  Corporation  Law.^^^  By  its 
terms,  the  IBCL  applies  to  all  existing  Indiana  corporations  as  of  August 
1,  1987.2^^  It  makes  sense  to  have  a  single  system  of  corporation  law 
rather  than  two  different  and  overlapping  systems,  and  normally  this 
approach  would  not  cause  any  problems.  Unfortunately  this  stratagem 
might  not  be  available  in  Indiana,  at  least  for  corporations  organized 
between  July  1,  1978,  and  February  21,  1986,  if  the  provisions  of  the 
IBCL  are  not  expressly  and  unanimously  adopted  by  the  shareholders. 

This  hiatus  is  the  time  in  which  there  was  no  "reserved  powers" 
clause  in  the  IGCA  reserving  to  the  General  Assembly  the  right  to  amend 
or  repeal  the  law  relating  to  corporations.  July  1,  1978,  was  the  effective 
date  of  repeal  of  the  clause  that  had  been  in  the  IGCA.^^^  It  is  distinctly 


^"796  F.2d  135  (6th  Cir.   1986). 

""The  Fleet  court  relied  on  DCA  V  in  deciding  against  the  Ohio  statute.  Id.  at  139. 

"^Act  of  March  26,  1986,  Pub.  L.  No.  149-1986,  §§  1-69  (codified  at  Ind.  Code 
§§  23-1-17-1  to  -54-2  (Supp.  1986)).  See  Simcox,  The  Indiana  Business  Corporation  Law: 
Tool  for  Flexibility,  Simplicity  and  Uniformity,  20  Ind.  L.  Rev.   119  (1987). 

"^IND.  Code  §  23-l-17-3(a)  (Supp.  1986). 

"'Ind,  Code  §  23-1-12-5  (1972)  (repealed  1978).  There  was  no  reserved  powers  clause 
in  the  IGCA  when  it  was  adopted  in  1929.  It  was  added  in  1949.  Frederick  Schortemeier, 
who  chaired  the  Indiana  Corporations  Survey  Commission  when  the  IGCA  was  adopted 
later  commented  that  it  was  felt  the  state  had  "inherent  power"  to  amend  the  IGCA  but 
that  it  was  advisable  to  make  the  power  express.  F.  Schortemeier,  Indiana  Corporation 
Law  206  n.ll  (1952). 

There  is  dictum  in  City  of  Indianapohs  v.  Navin,  151  Ind.  139,  143,  47  N.E.  525, 
526-27  (1897),  that  the  legislature  has  inherent  power  to  regulate  the  fares  of  a  common 
carrier  as  specified  in  the  organic  documents  of  the  corporation.  This  might  be  the  source 
of  Mr.  Schortemeier' s  comment.  However,  the  statement  was  dictum  because  the  General 
Assembly  had  reserved  the  power  to  regulate  fares.  Furthermore,  the  court  recognized 


1987]  BUSINESS  ASSOCIATIONS  55 

possible  that  a  court  can  rule  that  in  1978,  the  General  Assembly 
surrendered  Indiana's  authority  to  affect  subsequently  organized  cor- 
porations by  altering,  amending,  or  even  repealing  the  IGCA.  Of  course, 
it  is  also  possible  a  court  could  rule  that  the  repeal  was  a  careless, 
unintended  act.  The  drafters  of  the  Revised  Model  Business  Corporation 
Act  took  the  position  that  the  RMBCA  should  apply  to  existing  as  well 
as  new  corporations. ^^^  They  also  intended  the  act  to  supplant  existing 
general  incorporation  statutes  and  recommended  against  retaining  por- 
tions of  earlier  statutes. ^^^  The  Corporation  Law  Study  Commission, 
which  drafted  the  IBCL,  had  the  same  intent.  Unfortunately,  the  drafters 
of  the  RMBCA  also  operated  on  the  premise  that  there  had  been  a 
"universal  adoption  of  'reservation  of  power'  clauses  in  all  states  for 
more  than  a  century  .  .  .  ."^'^^  This  was  not  the  case  in  Indiana. 

The  General  Assembly  remedied  or  at  least  attempted  to  remedy 
this  problem  in  1986.  On  February  21,  1986,  Indiana  Code  section  23- 
1-12-5. 1(a)  was  added  to  the  IGCA,  retroactively  reserving  the  right  to 
"alter,  amend  or  repeal"  the  IGCA. 2"*^  This  corrective  legislation  also 
contained  section  23-1-12-5. 1(b),  which  stated  that 

the  purpose  of  the  General  Assembly  in  enacting  this  section  is 
to  correct  an  error  that  was  made  in  preparation  of  Acts  1978, 
P.L.  2,  SECTION  2325.  The  general  assembly  finds  and  declares 
that  the  inclusion  of  IC  23-1-12-5  in  the  list  of  provisions  to 
be  repealed  by  Acts  1978,  P.L.  2  was  a  clerical  error,  and  that 
the  general  assembly  did  not  intend  to  repeal  IC  23-1-12-5  when 
it  enacted  Acts  1978,  P.L.  2.2^2 


that  it  would  take  "clear  and  unmistakable  language"  inconsistent  with  the  exercise  of 
the  power  over  fares  to  surrender  such  power.  Id.  There  is  no  clearer  or  more  unmistakable 
statement  of  legislative  intent  to  surrender  the  reserved  power  than  expressly  repealing  the 
clause  unless,  of  course,  a  mistake  has  been  made. 

The  decision  in  State  ex  rel.  Starkey  v.  Alaska  AirHnes,  Inc.,  68  Wash.  2d  318,  413 
P. 2d  352  (1966),  contrasts  with  the  Navin  dictum.  In  Alaska  Airlines,  the  court  held  that 
provisions  in  the  Model  Business  Corporation  Act  which  had  been  adopted  in  Alaska 
could  not  be  applied  to  a  corporation  organized  under  the  previous  territorial  corporation 
act  which  had  not  contained  a  reserved  powers  clause.  Id. 

^'H  Model  Bus.  Corp.  Act  Ann.  §  17.01  (3d  ed.   1985). 

"^/<i.  §  17.05  (Official  Comment  at  1800).  The  practice  was  discouraged  because  it 
could  cause  unnecessary  confusion  in  determining  applicable  law  and  create  possible  internal 
statutory  conflicts.  Id. 

''°Id.  §  17.01  (Official  Comment  at  1797). 

^'"Act  of  February  21,  1986,  Pub.  L.  No.  19-1986,  §  39(a)  (codified  at  Ind.  Code 
§  23-1-12-5. 1(a)  (Supp.  1986)).  The  effective  date  of  Ind.  Code  §  23-1-12-5. 1(a)  was  July 
1,   1978. 

^^^Act  of  February  21,  1986,  Pub.  L.  No.  19-1986,  §  39(b)  (codified  at  Ind.  Code 
§  23-1-12-5. 1(b)  (Supp.   1986)). 

This  author  will  not  quarrel  with  the  General  Assembly's  statement  that  including 
Indiana  Code  section  23-1-12-5  in  the  list  of  provisions  to  be  repealed  was  a  "clerical 


56  INDIANA  LAW  REVIEW  [Vol.  20:19 

The  General  Assembly  also  added  a  reserved  powers  clause  applicable 
to  all  general  laws  to  the  Indiana  Code.^"^^  Thus  the  issue  of  reserved 
powers  was  clearly  resolved  for  corporations  organized  under  the  IGCA 
between  February  21,  1986,  and  the  August  1,  1987,  effective  date  of 
the  IBCL.  The  IBCL,  of  course,  contains  a  reserved  powers  clause. ^"^"^ 

The  problem  is  that  it  is  not  clear  that  the  General  Assembly  can 
retroactively  enact  a  reserved  powers  clause,  or  at  least  the  extent  to 
which  it  can.  It  has  long  been  recognized  in  Indiana  that  the  General 
Assembly  cannot  amend  or  otherwise  materially  modify  the  charter  of 
a  special  charter  corporation  unless  the  power  was  expressly  reserved. ^^^ 
It  also  has  been  recognized  by  Indiana  courts  that  a  statute  cannot  be 
appHed  retroactively  if  such  application  impairs  vested  rights. ^"^^  Even 
cases  such  as  Wencke  v.  City  of  Indianapolis, ^'^'^  which  posit  that  the 
"power  to  enact  statutes  and  ordinances  has  as  a  necessary  incident  the 
power  to  repeal [,]"  quahfy  that  power  by  subjecting  it  to  "constitutional 
restrictions  such  as  the  prohibition  against  impairment  of  contract. "^"^^ 

It  is  very  Hkely  that  the  IBCL  might  have  an  impact  on  the  interests 
of  shareholders  of  corporations  organized  during  the  hiatus.  There  is 
some  question  whether  the  IBCL  overruled  the  Indiana  Supreme  Court 
decision  in  Gabhart  v.  Gabhart?^^  Gabhart  protects  the  interest  of  mi- 


error."  However  Indiana  Code  section  23-1-12-6,  which  was  a  "savings  clause,"  also  was 
repealed  at  the  same  time.  This  would  seem  to  indicate  something  more  than  a  mere 
error  by  a  scrivener.  The  wisdom  of  repealing  a  savings  clause  is  not  readily  apparent, 
but   at   least  corporations   organized  under   pre-IGCA  law   had   Hmited   duration   unless 
reorganized  under  the  IGCA  and  in  1978  had  at  most  one  year  of  corporate  existence 
left.  There  was  no  effort  to  reinstate  Indiana  Code  section  23-1-12-6  in  1986. 
^''^Ind.  Code  §  1-1-5-2  (Supp.   1986).  This  provision  reads: 
Each  general  law  of  the  state  is  enacted  subject  to  the  right  of  the  general 
assembly  to  amend  or  repeal  that  law  at  any  time,  unless  the  general  assembly 
waives  this  right  in  that  law.  Except  in  the  case  of  a  law  containing  a  covenant 
that  the  general  assembly  will  not  amend  or  repeal  that  law,  the  general  assembly 
may  not  be  construed  to  have  waived  its  right  to  amend  or  repeal  any  general 
law  at  any  time. 
Id.   It  will  be  interesting  to  see  if  a  law  containing  a  "covenant"  that  it  will  not  be 
amended  or  repealed  in  fact  will  be  safe  from  amendment  or  repeal  without  more.  The 
courts  have  held  on  several  occasions  that  the  General  Assembly  cannot  limit  the  rights 
of  future  General  Assemblies.  See  State  ex  rel.  City  of  Terre  Haute  v.  Kolsem,  130  Ind. 
434,  29  N.E.  595  (1891);  Wencke  v.  City  of  IndianapoHs,  429  N.E.2d  295  (Ind.  Ct.  App. 
1981);  Martin  v.  Simplimatic  Eng'g  Corp.,  181  Ind.  App.   10,  390  N.E.2d  235  (1979). 
^^IND.  Code  §  23-1-17-2  (Supp.   1986). 

^''See  City  of  Terre  Haute  v.  Evansville  &  T.H.R.R.,   149  Ind.   174,   180,  46  N.E. 
77,  78  (1897). 

^^^Hinds  V.  McNair,  413  N.E.2d  586,  608-09  n.20  (Ind.  Ct.  App.   1980). 
^"^29  N.E. 2d  295  (Ind.  Ct.  App.   1981). 

^'^Id.  at  297.  See  Trustees  of  Dartmouth  College  v.  Woodward,  17  U.S.  (4  Wheat.) 
518  (1819). 

^^'267  Ind.  370,  370  N.E. 2d  345  (1977). 


1987]  BUSINESS  ASSOCIATIONS  57 

nority  shareholders  subject  to  a  squeeze  out  by  means  of  a  reverse  share 
spHt.  If  the  IBCL  does  overrule  Gabhart,  a  minority  shareholder  might 
have  a  cause  of  action  for  overreaching  conduct  by  controlling  share- 
holders occurring  before  July  31,  1987,  which  conduct  is  clearly  proper 
under  the  IBCL  if  it  occurs  on  or  after  August  1,  1987.  Thus,  a  right 
provided  by  Indiana  corporation  law  when  the  corporation  was  organized 
has  been  taken  away  by  the  IBCL.  It  certainly  can  be  argued  that 
shareholders  of  corporations  organized  when  there  was  no  reserved  powers 
clause  are  entitled  to  the  protections  accorded  to  minority  shareholders 
under  the  law  existing  as  of  the  date  of  incorporation.  This  would  be 
the  law  reflected  in  Gabhart. 

A  not  implausible  example  would  be  overreaching  conduct  directed 
against  one  minority  shareholder  on  July  31,  1987,  and  exactly  the  same 
conduct  directed  against  another  shareholder  on  August  1,  1987.  The 
first  shareholder  has  a  cause  of  action  which  would  be  preserved  under 
the  savings  clause  of  the  IBCL,^^°  but  the  second  shareholder  will  have 
no  remedy  because  of  a  change  in  the  organic  law  that  was  part  of  the 
"contract"  the  shareholder  had  with  other  shareholders  and  the  state. 
This  contract  created  certain  rights;  the  state  cannot  take  away  those 
rights  without  having  reserved  the  power  to  do  so  at  the  time  the 
corporation  was  organized.  At  least  this  is  how  the  argument  for  the 
second  minority  shareholder  would  be  framed.  It  is  far  from  certain 
that  this  argument  will  prevail.  However,  any  lawyer  worthy  of  the  title 
"professional"  would  argue  that  when  section  23-1-12-5  was  repealed, 
the  "contract"  between  the  state  and  a  corporation  and  its  shareholders 
specifically  excluded  the  right  of  the  state  to  change  the  terms  of  the 
contract,  and  that  the  corporation  and  the  shareholders  have  a  vested 
interest  in  not  having  Indiana  retroactively  impose  the  "right"  to  alter, 
amend,  or  repeal. 

It  is  possible  for  shareholders  to  waive  their  rights,  and  nothing 
would  prohibit  shareholders  from  unanimously  subjecting  themselves  and 
the  corporation  to  the  IBCL.  Such  an  act  would  bind  subsequent  share- 
holders because  that  will  be  part  of  the  contract  that  goes  with  their 
shares.  However,  unless  and  until  that  is  done,  there  is  at  least  the 
intriguing  possibility  that  the  General  Assembly's  attempt  to  establish 
retroactively  a  reserved  powers  clause  was  unsuccessful. 

It  does  not  make  any  difference  that  the  General  Assembly  adopted 
a  new  but  retroactive  reserved  powers  clause  rather  than  repealing  its 
repeal  of  section  23-1-12-5.  The  Indiana  Code  does  provide  that  the 
repeal  of  an  act  repealing  a  former  act  can,  if  expressly  provided,  revive 


"°The  savings  clause  is  not  part  of  the  IBCL  as  it  is  with  the  RMBCA,  4  Model 
Bus.  Corp.  Act  Ann.  §  17.03  (3d  ed.  1985),  but  was  provided  for  separately  in  Act  of 
March  26,  1986,  Pub.  L.  No.   149-1986,  §  66(a)(b). 


58  INDIANA  LAW  REVIEW  [Vol.  20:19 

the  former  act.^^'  Generally,  when  a  statute  is  repealed,  it  is  completely 
obliterated  unless  a  vested  right  is  impaired. ^^^  If  there  were  a  vested 
right  in  the  absence  of  a  reserved  powers  clause,  it  would  survive  the 
repeal. 

It  will  be  interesting  to  see  if  someone  challenges  the  apphcation  of 
the  IBCL  to  corporations  organized  between  July  1,  1978,  and  February 
21,  1986,  and  if  so,  whether  such  an  attack  is  successful. 

The  General  Assembly  continued  the  Corporation  Law  Study 
Commission^"  to  permit  it  to  publish  Official  Comments  on  the  new 
IBCL.  The  IBCL  specifically  authorizes  courts  to  consider  these  Official 
Comments  in  construing  the  act,  so  they  might  be  characterized  as  after 
the  fact  legislative  history. ^^'^ 

B.     Business  Combinations 

The  General  Assembly  also  added  a  new  chapter  to  the  Indiana 
General  Corporation  Act  relating  to  business  combinations. ^^^  This  chap- 
ter is  substantially  the  same  as  chapter  43  of  the  new  IBCL^^^  and  will 
be  superceded  when  the  IBCL  becomes  effective. 

C.     Liability  of  Directors  of  Not-for-Profit  Corporations 

In  1985,  the  General  Assembly  enacted  a  statute  limiting  the  civil 
liability  of  voluntary  directors  of  not-for-profit  corporations  that  have 
certain  specified  purposes. ^^^  The  statute  limits  civil  liability  for  the 
neghgent  performance  of  duties  by  individuals  who  serve  without  com- 
pensation as  directors  for  the  purpose  of  setting  poHcy,  controlling,  or 
otherwise  overseeing  the  activities  or  functional  responsibilities  of  such 
corporations. ^^^  The  liability  is  limited  to  the  coverage  provided  by  an 
insurance  poHcy  issued  to  the  particular  entity. ^^^ 

As  enacted,  the  provision  presented  the  possible  anomalous  result 
of  a  director  of  a  not-for-profit  corporation  having  limited  liability  if 
there  was  an  insurance  poHcy  but  unHmited  liability  if  there  was  not. 


"'Ind.  Code  §  1-1-5-1  (1982). 

^"Martin  v.  Simplimatic  Eng'g,  Inc.,  181  Ind.  App.  10,  11,  390  N.E.2d  235,  236 
(1979). 

Mnd.  Code  §  23-1-17-5  (Supp.   1986). 

2^^Law  of  January  23,  1986,  Pub.  L.  No.  151-1986,  §  1  (codified  at  Ind.  Code  §§ 
23-3-9-1  to  -22  (Supp.   1986)). 

"^IND.  Code  §§  23-1-43-1  to  -24  (Supp.   1986). 

"V^.  §  34-4-11.5-1.  The  purposes  are:  religion;  charity;  benevolence;  providing  goods 
or  services  at  no  charge  to  the  general  public;  education;  and  scientific  activities.  Id. 

'''Id.   §  34-4-11.5-2. 

''"Id. 


1987]  BUSINESS  ASSOCIATIONS  59 

This  possibility  was  eliminated  in  1986  when  the  General  Assembly 
amended  Indiana  Code  section  34-4-11.5-2  to  provide  that  if  no  insurance 
policy  issued  to  the  entity  provides  liability  coverage  for  the  allegedly 
negligent  act  or  omission  of  the  qualified  director,  the  qualified  director 
is  immune  from  civil  liability  for  that  act  or  omission. ^^"  This  amendment 
eliminates  the  possible  anomaly,  but  might  cause  not-for-profit  corpo- 
rations to  drop  insurance  coverage.  Hopefully,  however,  if  insurance  is 
available  at  reasonable  premiums,  admittedly  a  big  '*if,"  those  in  a 
position  of  responsibility  would  resist  the  temptation  to  drop  liability 
insurance  coverage  because  of  their  own  personal  immunity. 


^^'Act  of  March  3,   1986,  Pub.  L.  No.  197-1986,  §  2  (codified  at  Ind.  Code  §  34- 
4-11.5-2  (Supp.   1986)). 


Article  9  of  the  Indiana  Uniform 
Commercial  Code  in  Transition 

Edward  A.  Keirn* 


I.     Introduction 

From  July  1,  1964,  through  December  31,  1985,  Indiana's  law  of 
secured  transactions  regarding  personal  property  and  fixtures  was  es- 
sentially that  contained  in  Article  9  of  the  1962  Official  Text  of  the 
Uniform  Commercial  Code  (Old  Indiana  UCC).'  Effective  January  1, 
1986,  however,  Indiana  adopted  substantially  all  of  Article  9  of  the  1972 
Official  Text  of  the  Uniform  Commercial  Code  (New  Indiana  UCC),^ 
and  in  doing  so  conformed  its  law  of  secured  transactions  to  that  of 
the  vast  majority  of  other  jurisdictions.^  As  the  result  of  the  important 
changes  made  under  the  New  Indiana  UCC  regarding  transactional  scope, 
the  manner  by  which  security  interests  are  perfected,  and  the  resolution 
of  priority  disputes  among  multiple  claimants  to  the  same  collateral,'^  a 
logical  first  question  is:  what  impact  will  the  New  Indiana  UCC  have 
on  transactions  entered  into  before  its  effective  date?  The  correct  answer 
to  this  question,  it  seems,  may  be:  (a)  very  little,  if  any;  (b)  a  great 
deal;  or  (c)  it's  anybody's  guess,  depending  upon  the  particular  factual 
circumstances  and  legal  issues  involved. 

As  a  starting  point  in  the  analysis,  it  is  necessary  to  locate  a  series 
of  facially  innocuous  "transition  rules"  adopted  along  with  the  New 


♦Associate,  Barnes  &  Thornburg,  Indianapolis.  B.S.,  Marion  College,  1973;  M.P.A., 
Ball  State  University,  1979;  J.D.,  Indiana  University  School  of  Law — Indianapolis,  1983. 
The  author  gratefully  acknowledges  the  research  assistance  of  Ken  L.  Armstrong —  IL,  Uni- 
versity of  Chicago. 

'The  Old  Indiana  UCC  was  codified  at  Ind.  Code  §§  26-1-9-101  to  -507  (1982  & 
Supp.   1984). 

^The  New  Indiana  UCC  is  codified  at  Ind.  Code  §§  26-1-9-101  to  -507  (1982  & 
Supp.   1986). 

^See  Johnson,  Changes  in  the  Uniform  Commercial  Code,  J 985  Survey  of  Recent 
Developments  in  Indiana  Law,  19  Ind.  L.  Rev.  99  (1986)  [hereinafter  1985  Survey]. 

'^See  generally  J 985  Survey,  supra  note  3,  at  99-114;  Bepko,  Perfection  &  Priorities 
Under  Revised  UCC  in  Indiana,  Uniform  Commercial  Code  XI- 1  (ICLEF  1985);  Eslick 
&  Tyler,  A  Practical  Approach  to  the  1972  UCC  Official  Text  of  Article  9,  Perfection, 
Remedies,  Post-Insolvency  Filings,  Uniform  Commercial  Code  VIII-1  (ICLEF  1985); 
Falvey,  Fixtures  Under  the  1972  Version  of  the  Uniform  Commercial  Code,  Uniform 
Commercial  Code  XIV-1  (ICLEF  1985);  Meyer,  Indiana's  Adoption  of  1972  Amendments 
to  Article  9,  Uniform  CoMMERCL^.L  Code  X-1  (ICLEF  1985);  Thorne  &  Hostetler,  A 
Practical  Approach  to  the  1972  UCC  Official  Text  of  Article  9,  Competing  Liens  and 
Interests,  Multistate  Transactions  and  Transition,  Uniform  Commercial  Code  IX- 1  (ICLEF 
1985). 

61 


62  INDIANA  LA  W  REVIEW  [Vol.  20:61 

Indiana  UCC  (New  Transition  Rules).  Unlike  the  transition  rules  adopted 
in  connection  with  the  Old  Indiana  UCC,^  the  New  Transition  Rules 
are  not  codified  in  the  Indiana  Code.  Rather,  they  must  literally  be 
"discovered"  from  the  compiler's  notations  to  title  26  of  Burns  Indiana 
Statutes  Annotated  or  West's  Indiana  Annotated  Code  or  expressly 
"looked  up"  in  the  Indiana  Acts.^  The  New  Transition  Rules  are  com- 
prised of  six  sections  (some  with  multiple  parts)  numbered  sections  42 
through  47,  inclusive. 

The  next  step,  of  course,  after  locating  the  New  Transition  Rules 
is  to  read  them.  During  this  initial  reading,  the  language  of  the  New 
Transition  Rules  may  appear  to  be  quite  easy  to  understand.  There  is 
almost  no  legalese,  and  the  rules  themselves  are  not  exceptionally  long. 
After  all,  one  may  ask:  why  shouldn't  the  New  Transition  Rules  be 
relatively  easy  to  interpret  and  understand  since  they  are  nearly  identical 
to  the  model  transition  rules  prepared  by  the  Reporters  of  the  1972 
Official  Text  of  the  UCC,^  and  adopted  in  whole  or  in  part  by  most 
of  the  other  jurisdictions  enacting  the  1972  Official  Text?  Certainly,  it 
is  easy  to  overlook  the  fact  that,  unUke  the  1972  Official  Text  itself, 
the  model  transition  rules  (from  which  the  New  Transition  Rules  were 
taken)  have  not  been  approved  or  endorsed  by  the  National  Conference 
of  Commissioners  on  Uniform  State  Laws,  any  of  its  boards  or  com- 
mittees, or  the  American  Law  Institute.^ 

Having  now  put  the  reader  on  notice  that  there  may  be  more  to 
the  New  Transition  Rules  than  a  casual  reading  may  reveal,  let  us  now 
turn  to  the  substance  and  application  of  the  rules  themselves. 

11.     The  New  Transition  Rules 

A.     Section  42 

Section  42  contains  both  a  validity  provision  and  a  perfection  con- 
tinuation provision.  The  vahdity  provision  states  that  a  transaction  validly 
entered  into  before  January  1,  1986,  under  the  Old  Indiana  UCC  (and 
which  would  be  subject  to  the  New  Indiana  UCC  if  it  had  been  entered 
into  after  December  31,  1985)  and  the  rights,  duties,  and  interests  flowing 
from  such  a  transaction  remain  vaHd  after  December  31,  1985,  and 
"may  be  terminated,  completed,  consummated,  or  enforced  as  required 
or  permitted  by  [the  New  Indiana  UCC]."^  The  vaUdity  mentioned  in 


'See  IND.  Code  §§  26-1-10-101  to  -106  (1982). 

^985  Ind.  Acts  828-30,  Pub.  L.  No.  93-1984,  §§  42  to  47,  reprinted  in  Ind.  Code 
Ann.  in  note  to  §  26-1-1-105  (West  Supp.   1986). 

'Compare  id.  with  U.C.C.  §§  11-101  to  -108  (1972). 

^See  U.C.C,  Article  11,  3A  U.L.A.  431  (1981). 

M985  Ind.  Acts  828-30,  Pub.  L.  No.  93-1985,  §  42,  reprinted  in  Ind.  Code  Ann. 
in  note  to  §  26-1-1-105  (West  Supp.   1986). 


1987]  ARTICLE  9  IN  TRANSITION  63 

this  provision  obviously  has  reference  to  the  general  validity  of  security 
agreements  as  between  the  parties  (and  certain  third  persons)  described 
in  section  9-201  of  the  Old  Indiana  UCC.'« 

Neither  the  Old  Indiana  UCC  nor  the  New  Indiana  UCC  directly 
addresses  completion  or  consummation  of  transactions.  Both  do,  how- 
ever, contain  specific  provisions  on  enforcement  and  termination.  With 
respect  to  enforcement,  section  42  provides  that  the  New  Indiana  UCC's 
enforcement  provisions  may  be  used  in  connection  with  transactions 
entered  into  under  the  Old  Indiana  UCC.  Accordingly,  the  secured  party 
in  such  a  transaction  may  take  advantage  of  the  generally  less  burdensome 
provisions  of  the  New  Indiana  UCC  in  giving  notice  of  a  proposed 
pubhc  or  private  sale  or  in  proposing  to  retain  the  collateral  in  satisfaction 
of  the  underlying  obligation. '•  This  result  is  clear  and  relatively  straight- 
forward. 

Now,  let  us  turn  to  the  more  problematical  termination  analysis  of 
section  42.  This  section,  on  its  face,  states  that  transactions  entered  into 
under  the  Old  Code  "may  be  terminated  ...  as  required  or  permitted 
by  [the  New  Indiana  UCC].'"^  What  does  this  language  mean?  The 
logical  initial  response  is  that  a  secured  party  in  a  transaction  entered 
into  under  the  Old  Indiana  UCC  may  take  advantage  of  section  9-404 
of  the  New  Indiana  UCC,  pertaining  to  the  duties  of  the  secured  party 
in  terminating  financing  statements  when  the  financing  relationship  be- 
tween the  secured  party  and  the  debtor  comes  to  an  end.^^ 


'°Ind.  Code  §  26-1-9-201  (1982)  provides  in  pertinent  part:  "Except  as  otherwise 
provided  by  this  Act  a  security  agreement  is  effective  according  to  its  terms  between  the 
parties,  against  purchasers  of  the  collateral  and  against  creditors.  .  .  ." 

''Compare  Ind.  Code  §§  26-1-9-504(3)  and  26-1-9-505(2)  (1982)  (requiring  notices  to 
be  given  to  debtor  and  persons  who  have  filed  a  financing  statement  with  respect  to  the 
collateral  and  to  persons  known  by  the  secured  party  to  possess  a  security  interest  in  the 
collateral,  if  collateral  is  other  than  consumer  goods)  with  Ind.  Code  §§  26-1-9-504(3) 
and  26-1-9-505(2)  (1986)  (requiring  notices  to  be  given  to  debtor  and  to  other  secured 
parties  from  whom  secured  party  has  received  a  written  notice  of  claim  of  an  interest  in 
the  collateral,  if  the  collateral  is  other  than  consumer  goods).  Note  also  that  the  time 
period  for  the  debtor  or  other  persons  to  object  to  the  secured  party's  proposal  to  accept 
the  collateral  as  discharge  of  the  obligation  has  been  reduced  from  30  days  to  21  days 
under  the  New  Indiana  UCC.  Compare  Ind.  Code  §  26-1-9-505(2)  (1982)  with  Ind.  Code 
§  26-1-9-505(2)  (Supp.   1986). 

'M985  Ind.  Acts  828-30,  Pub.  L.  No.  93-1985,  §  42,  reprinted  in  Ind.  Code  Ann. 
in  note  to  §  26-1-1-105  (West  Supp.   1986). 

'^IND.  Code  §  26-1-9-404(1)  (Supp.   1986)  provides: 

(1)  If  a  financing  statement  covering  consumer  goods  is  filed  on  or  after  January 
1,  1986,  then  within  one  (1)  month  or  within  ten  (10)  days  following  written 
demand  by  the  debtor  after  there  is  no  outstanding  secured  obligation  and  no 
commitment  to  make  advances,  incur  obligations,  or  otherwise  give  value,  the 
secured  party  must  file,  with  each  filing  officer  with  whom  the  financing  statement 
was  filed,  a  termination  statement,  which  shall  be  identified  by  file  number.  In 
other  cases,  whenever  there  is  no  outstanding  secured  obligation  and  no  com- 
mitment to  make  advances,  incur  obligations,  or  otherwise  give  value,  the  secured 


64  INDIANA  LAW  REVIEW  [Vol.  20:61 

However,  upon  comparing  section  9-404  of  the  New  Indiana  UCC 
with  section  9-404  of  the  Old  Indiana  UCC,  the  correctness  of  this  initial 
response  becomes  suspect.  Unlike  the  situation  with  respect  to  en- 
forcement, the  New  Indiana  UCC  imposes  an  additional  burden  on  the 
secured  party.  From  the  perspective  of  the  secured  party,  the  only  real 
difference  between  the  two  versions  of  section  9-404  is  that  the  New 
Indiana  UCC  requires  the  secured  party  actually  to  file  appropriate 
termination  statements  with  respect  to  financing  statements  covering 
consumer  goods  "within  one  (1)  month  or  within  ten  (10)  days  following 
written  demand  by  the  debtor  after  there  is  no  outstanding  secured 
obligation  and  no  commitment  to  make  advances,  incur  obligations,  or 
otherwise  give  value  ...."•'*  By  contrast,  section  9-404  of  the  Old 
Indiana  UCC  made  no  distinction  between  financing  statements  covering 
consumer  goods  and  other  financing  statements;  in  both  cases,  the  secured 
party  merely  was  required  to  send  the  appropriate  termination  statement 
to  the  debtor  "within  ten  (10)  days  after  proper  [written]  demand  therefor 
.  .  .  .'"^  Simply  stated,  it  appears  to  make  little  sense  to  enact  a  transition 
rule  that  authorizes  (but  apparently  does  not  require)'^  the  secured  party 
to  utiHze  the  New  Indiana  UCC's  more  stringent  termination  procedures. '^ 

Well  then,  if  the  reference  to  termination  in  section  42  was  not 
intended  primarily  to  require  (or  perhaps,  even  to  authorize)  compliance 
with  section  9-404  of  the  New  Indiana  UCC  as  to  transactions  entered 


party  must  on  written  demand  by  the  debtor  send  the  debtor,  for  each  fihng 
officer  with  whom  the  financing  statement  was  filed,  a  termination  statement 
to  the  effect  that  he  no  longer  claims  a  security  interest  under  the  financing 
statement,  which  shall  be  identified  by  file  number.  A  termination  statement 
signed  by  a  person  other  than  the  secured  party  of  record  must  be  accompanied 
by  a  separate  written  statement  of  assignment  signed  by  the  secured  party  of 
record,  complying  with  IC  26-1-9-405(2),  including  payment  of  the  required  fee. 
If  the  affected  secured  party  fails  to  file  such  a  termination  statement  as  required 
by  this  subsection,  or  to  send  such  a  termination  statement  within  ten  (10)  days 
after  proper  demand  therefor,  he  shall  be  liable  to  the  debtor  for  one  hundred 
dollars  ($100),  and  in  addition  for  any  loss  caused  to  the  debtor  by  such  failure. 
'''-See  supra  note  13. 
''See  IND.  Code  §  26-1-9-404(1)  (1982). 

'^Section  42  provides  only  that  the  "transaction  .  .  .  may  be  terminated  ...  as 
required  or  permitted  by  [the  New  Indiana  UCC]."  The  "may,"  of  course,  suggests  that 
the  secured  party  has  the  option  of  complying  with  either  the  Old  Indiana  UCC  or  the 
New  Indiana  UCC. 

'^Notwithstanding  section  42,  however,  section  9-404(1)  of  the  New  Indiana  UCC 
expressly  applies  to  "a  financing  statement  covering  consumer  goods  .  .  .  filed  on  or  after 
January  1,  1986,  .  .  ."  See  Ind.  Code  §  26-1-9-202(1)  (Supp.  1986).  Hence,  presumably 
even  in  the  case  of  a  transaction  entered  into  prior  to  January  1,  1986,  if  a  financing 
statement  covering  consumer  goods  was  filed  in  connection  with  the  transaction  and  the 
filing  took  place  after  December  31,  1985,  the  secured  party  must  file  a  termination 
statement  within  the  time  constraints  described  in  section  9-404(1)  of  the  New  Indiana 
UCC. 


1987]  ARTICLE  9  IN  TRANSITION  65 

into  under  the  Old  Indiana  UCC,  what  other  function,  if  any,  does  the 
language  "may  be  terminated  ...  as  required  or  permitted  by  the  [New 
Indiana  UCC]"  perform?  If  nothing  else,  this  language  should  be  con- 
strued to  authorize  the  use  of  the  New  Indiana  UCC  termination  statement 
forms  in  connection  with  Old  Indiana  UCC  transactions.  In  other  words, 
the  secured  party  should  be  permitted  to  use  a  new  UCC-3  termination 
statement  to  terminate  an  old  UCC-1  financing  statement  and  to  use  a 
new  UCC-4  land  records  termination  statement  to  terminate  an  old  UCC- 
la  fixtures  financing  statement. '^  On  the  other  hand,  such  language 
should  not  be  construed  to  require  the  use  of  New  Indiana  UCC  ter- 
mination statement  forms  in  connection  with  Old  Indiana  UCC  trans- 
actions. The  operative  language  is  "may  be  terminated,"  not  "shall  be 
terminated."  Consequently,  the  secured  party  should  be  entitled  to  utilize 
the  termination  copy  of  the  originally  filed  old  UCC-1  financing  statement 
as  well  as  the  old  UCC-3  (in  the  case  of  a  UCC-1)  and  the  old  UCC- 
3a  (in  the  case  of  a  UCC- la)  in  terminating  financing  statements  filed 
pursuant  to  the  Old  Indiana  UCC.'^ 

The  perfection  continuation  provision  of  section  42  appHes  to  the 
same  transactions  as  the  validity  provision.  It  states  that  a  security 
interest  validly  entered  into  and  perfected  under  the  Old  Indiana  UCC 
remains  perfected  under  the  New  Indiana  UCC  until  it  lapses  (as  provided 
in  sections  44  and  45)  and  "may  be  continued  as  permitted  by  [the  New 
Indiana  UCC],"  unless  section  44  provides  for  a  different  rule.^°  The 
section  44  exception  refers  to  the  situation  in  which  the  New  Indiana 
UCC  requires  a  fiUng  in  an  office  where  the  Old  Indiana  UCC  did 
not.^^  In  that  instance,  section  44(3)  instructs  the  secured  party  to  file 
a  "special  financing  statement"  conforming  to  section  45(4)  (rather  than 
a  continuation  statement)  in  the  new  filing  office. ^^ 


'^Even  absent  section  42,  there  really  should  not  be  any  question  that  either  the 
new  forms  or  the  old  forms  may  be  used  to  terminate  financing  statements  filed  under 
the  Old  Indiana  UCC.  Pursuant  to  section  9-404  of  both  the  Old  Indiana  UCC  and  the 
New  Indiana  UCC,  to  be  effective,  a  termination  statement  need  only  be  in  writing,  be 
signed  by  the  secured  party  of  record  (or  the  secured  party's  assignee  of  record),  state 
that  the  secured  party  no  longer  claims  a  security  interest  under  the  financing  statement, 
and  identify  the  financing  statement  by  file  number.  See  Ind.  Code  §  26-1-9-404(1)  (1982) 
and  Ind.  Code  §  26-1-9-404(1)  (Supp.  1986).  The  only  question  should  be  whether  the 
termination  statement  is  on  a  "non-standard"  form  so  as  to  be  subject  to  an  additional 
filing  fee.  According  to  the  Interim  Rules  issued  by  the  Indiana  Secretary  of  State  on 
December  20,  1985,  old  forms  formerly  approved  by  the  Secretary  of  State  are  acceptable 
and  will  not  be  considered  to  be  "irregular  filings."  See  Secretary  of  State,  Interim  Rules 
for  the  Administration  of  the  Uniform  Commercial  Code,  at  6  (Dec.  20,  1985)  [hereinafter 
UCC  Interim  Rules]. 

^'^See  supra  note  18. 

^°1985  Ind.  Acts  828-30,  Pub.  L.  No.  93-1985,  §  42,  reprinted  in  Ind.  Code  Ann. 
in  note  to  26-1-1-105  (West  Supp.   1986). 

^'See  Reporters'  Discussion  of  1972  changes  to  U.C.C.  §  11-103  (1972). 

^^According  to  section  45(4),  this  "special  financing  statement"  "may  be  signed  by 


66  INDIANA  LAW  REVIEW  [Vol.  20:61 

The  various  perfection  lapse  rules  will  be  addressed  below  when 
sections  44  and  45  are  examined;  however,  the  real  "meat"  of  this 
provision  appears  to  be  its  authorization  to  employ  the  New  Indiana 
UCC  perfection  continuation  rules  in  connection  with  transactions  entered 
into  and  perfected  under  the  Old  Indiana  UCC.  The  changes,  real  or 
cosmetic,  effectuated  under  the  New  Indiana  UCC  with  regard  to  per- 
fection continuation  include:  (1)  a  different  (and  generally  later)  time 
to  file  a  continuation  statement  when,  for  whatever  reason,  the  financing 
statement  indicates  a  scheduled  maturity  date  of  the  obligation  secured 
of  five  years  or  less;^^  (2)  the  automatic  continuation  of  financing 
statements  that  otherwise  would  expire  during  the  pendency  of  the 
debtor's  bankruptcy  proceeding;^"*  (3)  a  requirement  that  a  continuation 
statement  signed  by  a  person  other  than  the  secured  party  of  record  be 
accompanied  by  an  appropriate  statement  of  assignment  signed  by  the 
secured  party  of  record  and  the  applicable  filing  fee  for  the  statement 
of  assignment;^^  (4)  a  "special  rule"  providing  for  indefinite  duration 
(without  need  of  a  continuation  statement)  where  a  debtor  is  identified 
as  a  "transmitting  utility;"^*  (5)  a  "special  rule"  providing  for  indefinite 


either  the  debtor  or  the  secured  party  .  .  .  [and]  must  identify  the  security  agreement, 
statement,  or  notice  (however  denominated  in  any  statute  or  other  law  repealed  or  modified 
by  this  act),  state  the  office  where  and  the  date  when  the  last  filing,  refiling  or  recording, 
if  any,  was  made  with  respect  thereto,  and  the  filing  number,  if  any,  or  book  and  page, 
if  any,  of  recording,  and  further  state  that  the  security  agreement,  statement  or  notice, 
however  denominated,  in  another  filing  office  under  [the  New  Indiana  UCC]  or  under 
any  statute  or  other  law  repealed  or  modified  by  [the  New  Indiana  UCC]  is  still  effective." 
Also,  according  to  section  45(4),  this  "special  financing  statement"  must  comply  with 
Ind.  Code  §  26-9-403(3)  (Supp.  1986)  pertaining  to  the  requirements  for  a  continuation 
statement,  except  to  the  extent  inconsistent  with  the  requirements  described  in  section 
45(4). 

"Compare  Ind.  Code  §  26-1-9-403(2),  (3)  (Supp.  1986)  with  Ind.  Code  §  26-1-9- 
403(2),  (3)  (1982).  Section  44(1),  which  deals  more  directly  with  this  change,  is  discussed 
infra  at  notes  41-46  and  accompanying  text. 

^^Ind.  Code  §  26-1-9-403(2)  (Supp.  1986)  provides  that  "[i]f  a  security  interest  perfected 
by  filing  exists  at  the  time  insolvency  proceedings  are  commenced  by  or  against  the  debtor, 
the  security  interest  remains  perfected  until  termination  of  the  insolvency  proceedings  and 
thereafter  for  a  period  of  sixty  (60)  days  or  until  expiration  of  the  five  (5)  year  period, 
whichever  occurs  later."  However,  the  courts  in  applying  section  9-403  of  the  Old  Indiana 
UCC  have  reached  essentially  this  same  result.  See  In  re  Chasely's  Foods,  Inc.,  726  F.2d 
303  (7th  Cir.  1983)  (applying  Indiana  law). 

^'This  provision  merely  makes  explicit  what  was  formerly  implicit  under  the  Old 
Indiana  UCC.  Compare  Ind.  Code  §  26-1-9-403(3)  (Supp.  1986)  with  Ind.  Code  §  26- 
1-9-403(3)  (1982). 

Hnd.  Code  §  26-1-403(5)  (Supp.  1986)  provides  that  "[i]f  a  debtor  is  a  transmitting 
utility  (IC  26-2-9-401(5))  and  a  filed  financing  statement  so  states,  it  is  effective  until  a 
termination  statement  is  filed."  Prior  to  the  effective  date  of  the  New  Indiana  UCC, 
however,  "transmitting  utihties"  (as  defined  in  section  9-105(l)(n)  of  the  New  Indiana 
UCC)  were  not  subject  to  the  perfection  provisions  of  the  Indiana  UCC.  See  Ind.  Code 
§§  8-1-2-1  and  8-1-5-1  (1982). 


1987]  ARTICLE  9  IN  TRANSITION  67 

duration  (without  need  of  a  continuation  statement)  of  a  real  estate 
mortgage  that  is  effective  as  a  fixture  fihng;^^  and  (6)  a  declaration  that 
the  lapse  of  a  financing  statement  resulting  from  the  failure  to  file  a 
timely  continuation  statement  will  be  "retroactive."^^ 

Notwithstanding  its  other  possible  functions,  however,  the  language 
in  this  provision  stating  that  the  perfection  of  a  transaction  entered  into 
and  perfected  under  the  Old  Indiana  UCC  "may  be  continued  as  per- 
mitted by  [the  New  Indiana  UCC]"^^  should  also  be  construed  to  au- 
thorize the  secured  party  to  use  the  New  Indiana  UCC  continuation 
statement  forms  in  connection  with  transactions  entered  into  and  perfected 
under  the  Old  Indiana  UCC.^°  In  other  words,  the  secured  party  in  such 


"Ind.  Code  §  26-1-9-403(5)  (Supp.  1986)  provides  that  "[a]  real  estate  mortgage 
which  is  effective  as  a  fixture  fiUng  under  IC  26-1-9-402(6)  remains  effective  as  a  fixture 
filing  until  the  mortgage  is  released  or  satisfied  of  record  or  its  effectiveness  otherwise 
terminates  as  to  the  real  estate."  The  possibility  of  using  a  real  estate  mortgage  as  a 
fixture  filing  under  the  New  Transition  Rules  is  the  subject  of  section  44(4),  discussed 
infra  at  notes  71-72  and  accompanying  text. 

^«Ind.  Code  §  26-1-9-403(2)  (Supp.  1986)  provides  that  "[i]f  the  security  interest 
becomes  unperfected  upon  lapse,  it  is  deemed  to  have  been  unperfected  against  a  person 
who  became  a  purchaser  or  lien  creditor  before  lapse." 

Under  the  Old  Indiana  UCC,  it  was  possible  to  argue  with  conviction  that  a  secured 
party  whose  perfection  in  the  collateral  lapsed  by  reason  of  his  failure  to  file  a  timely 
continuation  statement  enjoyed  perfection  as  against  any  purchaser  or  creditor  whose 
interest  in  the  collateral  arose  prior  to  the  lapse.  See  generally  B.  Clark,  The  Law^  of 
Secured  Transactions  Under  the  Uniform  Commercial  Code  2.14  (1980).  However, 
under  section  9-403(2)  of  the  New  Indiana  UCC,  a  judgment  lienor,  an  outright  purchaser, 
or  even  a  competing  secured  party  whose  interest  in  the  collateral  arose  prior  to  the  lapse 
in  perfection  will  have  a  superior  interest  in  the  collateral.  Id. 

Although  certainly  not  free  from  doubt,  it  would  appear  that  section  46,  not  section 
42,  will  determine  whether  the  new  rule  stated  under  section  9-403(2)  of  the  New  Indiana 
UCC  should  be  applied  to  a  secured  transaction  entered  into  and  perfected  under  the  Old 
Indiana  UCC.  Section  46  generally  provides  that  the  New  Indiana  UCC  applies  to  questions 
of  priority  unless  the  positions  of  the  parties  were  "fixed"  before  January  1,  1986.  1985 
Ind.  Acts  828-30,  Pub.  L.  No.  93-1985,  §  46,  reprinted  in  Ind.  Code  Ann.  in  note  to 
§  26-1-1-105  (West  Supp.  1986).  Hence,  if  the  lapse  in  perfection  occurs  on  or  after  January 
1,  1986,  section  46  apparently  would  require  that  the  harsh  retroactive  lapse  rule  dictated 
by  section  9-403(2)  of  the  New  Indiana  UCC  be  applied. 

"1985  Ind.  Acts  828-30,  Pub.  L.  No.  93-1985,  §  42,  reprinted  in  Ind.  Code  Ann. 
in  note  to  §  26-1-1-105  (West  Supp.   1986). 

'"Even  absent  section  42,  there  should  not  be  any  question  that  either  the  new 
forms  or  the  old  forms  may  be  used  to  continue  financing  statements  filed  under  the  Old 
Indiana  UCC.  Pursuant  to  section  9-403  of  both  the  Old  Indiana  UCC  and  the  New 
Indiana  UCC,  to  be  effective,  a  continuation  statement  need  only  be  in  writing,  be  signed 
by  the  secured  party  of  record  (or  the  secured  party's  assignee  of  record),  identify  the 
original  financing  statement  by  file  number,  and  provide  that  the  original  financing  statement 
is  still  effective.  See  Ind.  Code  §  26-1-9-403(3)  (1982);  Ind.  Code  §  26-1-9-403(3)  (Supp. 
1986).  The  only  question  should  be  whether  the  continuation  statement  is  on  a  "non- 
standard" form  so  as  to  be  subject  to  an  additional  filing  fee.  According  to  the  Interim 
Rules  promulgated  by  the  Indiana  Secretary  of  State  on  December  20,   1985,  old  forms 


68  INDIANA  LAW  REVIEW  [Vol.  20:61 

a  transaction  should  be  entitled  to  use  a  new  UCC-3  continuation 
statement  to  continue  an  old  UCC-1  financing  statement  (filed  in  the 
same  filing  office)  and  a  new  UCC-4  land  records  continuation  statement 
to  continue  an  old  UCC-1  a  fixtures  financing  statement.  On  the  other 
hand,  because  the  operative  language  is  "may  be  continued,"  not  "shall 
be  continued,"  the  secured  party  should  also  be  permitted  to  use  an 
old  UCC-3  continuation  statement  to  continue  an  old  UCC-1  financing 
statement  (filed  in  the  same  filing  office)  and  an  old  UCC-3a  fixtures 
continuation  statement  to  continue  an  old  UCC-1  a  fixtures  financing 
statement.^' 

B.     Section  43 

Section  43  provides  that  an  unperfected,  but  validly  created  security 
interest  under  the  Old  Indiana  UCC  will  be  deemed  to  be  properly 
perfected  under  the  New  Indiana  UCC  effective  January  1,  1986,  if  the 
New  Indiana  UCC  either  permits  perfection  without  filing  or  authorizes 
filing  in  the  office  where  a  prior  ineffective  filing  was  made.^^  In  other 
words,  this  section  can  have  the  effect  of  "curing,"  as  of  January  1, 
1986,  a  multitude  of  perfection  sins  committed  by  the  secured  party 
prior  to  that  date. 

Consider,  for  example,  the  secured  party  who  relied  upon  the  au- 
tomatic perfection  of  his  purchase  money  security  interest  in  consumer 
goods  under  the  Old  Indiana  UCC,  only  later  to  learn  that  the  consumer 
goods  that  he  sold  to  the  debtor  had  become  fixtures.  Under  the  Old 
Indiana  UCC,  a  secured  party's  entitlement  to  automatic  perfection  for 
purchase  money  security  interests  in  consumer  goods  was  lost  if  the 
goods  became  fixtures."  Under  the  New  Indiana  UCC,  however,  it  is 
clear  that  automatic  perfection  does  operate  under  these  facts,  at  least 
as  against  non-real  estate  parties. ^"^  Hence,  pursuant  to  section  43,  a 
secured  party  who  erroneously  relied  on  automatic  perfection  under  the 
Old  Indiana  UCC  will  enjoy  the  benefits  of  automatic  perfection  under 
the  New  Indiana  UCC  (with  respect  to  non-real  estate  parties)  as  of 


formerly  approved  by  the  Secretary  of  State  are  acceptable  and  will  not  be  considered  to 
be  "irregular  filings."  See  UCC  Interim  Rules,  supra  note  18,  at  6. 

^^See  supra  note  30.  However,  the  (final)  Rules  for  the  Administration  of  the  Uniform 
Commercial  Code  (effective  September  1,  1986)  issued  by  the  Indiana  Secretary  of  State 
[hereinafter,  the  UCC  Final  Rules]  suggest  that  in  the  case  of  a  fixture  filing  made  prior 
to  January  1,  1986,  it  may  be  necessary  to  use  a  new  UCC-4  land  records  continuation 
statement  so  as  to  continue  the  fixture  filing  in  the  real  estate  (mortgage)  records.  See 
infra  note  61. 

"1985  Ind.  Acts  828-30,  Pub.  L.  No.  93-1985  §  43,  reprinted  in  Ind.  Code  Ann. 
in  note  to  §  26-1-1-105  (West  Supp.   1986). 

"Ind.  Code  §  26-l-9-302(l)(d)  (1982). 

^''IND.  Code  §  26-l-9-302(l)(d)  (Supp.   1986). 


1987]  ARTICLE  9  IN  TRANSITION  69 

January  1,  1986,^^  without  having  Hfted  a  hand  and,  perhaps,  in  complete 
obHvion  of  the  original  perfection  blunder. 

A  similar  result  should  be  achieved  by  section  43  in  connection  with 
the  perfection  of  proceeds. ^^  Under  the  Old  Indiana  UCC,  if  a  secured 
party  was  granted  a  security  interest  in  proceeds  but  failed  to  check  the 
"proceeds  box"  on  the  UCC-1,  he  had  no  perfected  interest  in  proceeds 
after  ten  days  from  the  receipt  of  the  proceeds  by  the  debtor. ^^  The 
New  Indiana  UCC,  however,  changes  this  result  in  two  important  cir- 
cumstances. 

Under  the  New  Indiana  UCC,  the  secured  party  will  enjoy  an 
automatic  and  continuously  perfected  security  interest  in  proceeds,  even 
though  the  financing  statement  filed  in  connection  with  the  original 
collateral  is  "silent"  as  to  proceeds, ^^  if:  (1)  the  proceeds  are  identifiable 
cash  proceeds ;^^  or  (2)  the  financing  statement  is  filed  in  the  same  filing 
office(s)  where  an  original  security  interest  in  the  type  of  property 
constituting  the  proceeds  should  be  filed  (and  the  proceeds  are  not 
acquired  with  cash  proceeds)."*^  By  operation  of  section  43  in  these  two 
circumstances,  an  unperfected  security  interest  in  proceeds  under  the  Old 
Indiana  UCC  will  automatically  be  transformed  into  a  properly  perfected 
security  interest  in  proceeds  as  of  January  1,  1986. 

C.     Section  44 

Section  44(1)  contains  the  general  rule  that  a  financing  statement 
or  a  continuation  statement  filed  prior  to  January  1,  1986  (and  which 
has  not  lapsed  prior  to  that  date)  remains  effective  for  the  period  provided 
under  the  Old  Indiana  UCC,  but  not  less  than  five  years. "*'  Under  the 


''See  Reporters'  Discussion  on  1972  changes  to  U.C.C.  §  11-104  (1972). 

'"Cf.  In  re  S  8i  Z  Int'l  Management,  Inc.,  10  Bankr.  580  (Bankr.  S.D.  Fla.  1981) 
(omission  of  UCC  §  11-104  by  Florida  legislature  showed  intent  not  to  automatically 
perfect  previously  unperfected  pre-amendment  security  interest  in  proceeds). 

"IND.  Code  §  26-l-9-306(3)(a)  (1982). 

'^Pursuant  to  section  9-203(3)  of  the  New  Indiana  UCC,  the  secured  party  is  granted 
automatically  a  security  interest  in  proceeds,  unless  the  security  agreement  provides  to  the 
contrary.  Ind.  Code  §  26-1-9-203(3)  (Supp.  1986).  Under  the  Old  Indiana  UCC,  however, 
a  reference  to  proceeds  in  the  security  agreement  arguably  was  necessary  for  the  secured 
party  to  have  any  claim  to  proceeds.  Cf.  In  re  ^  &.  Z  Int'l  Management,  Inc.,  10  Bankr. 
at  584  (referring  to  an  inconsistency  between  section  9-203(1  )(b)  and  section  9-306(2)  of 
the  1962  Official  Text). 

^^ND.  Code  §  26-l-9-306(3)(b)  (Supp.   1986). 

^^Ind.  Code  §  26-l-9-306(3)(a)  (Supp.  1986).  If  the  proceeds  are  acquired  with  cash 
proceeds,  the  description  of  the  collateral  in  the  financing  must  indicate  the  types  of 
property  constituting  the  proceeds.  Id. 

""Notwithstanding  this  seemingly  clear  rule  contained  in  section  44(1),  the  recently 
effective  UCC  Final  Rules,  supra  note  31,  issued  by  the  Indiana  Secretary  of  State  provide 
in  pertinent  part:  "All  fixtures  filings  made  in  the  fixture  index  prior  to  January  1,  1986 


70  INDIANA  LAW  REVIEW  [Vol.  20:61 

Old  Indiana  UCC,  a  financing  statement  that  stated  a  maturity  date  of 
the  obligation  secured  of  five  years  or  less  was  effective  until  the  maturity 
date  disclosed  plus  sixty  days/^  All  other  financing  statements  were 
effective  for  five  years  from  the  date  of  filing /^  Section  44(1)  adopts 
the  rule  under  the  New  Indiana  UCC  (which  places  a  uniform  five  year 
duration  on  continuation  and  financing  statements)^^  and  applies  it  to 
fihngs  made  before  January  1,  1986. 

This  automatic  extension  of  certain  financing  statements  mandated 
by  section  44(1)  may,  of  course,  work  to  the  detriment  of  a  secured 
party  who  is  not  aware  of  the  extension.  For  example,  a  secured  party 
might  erroneously  file  a  continuation  statement  shortly  before  the  pre- 
extension  maturity  of  a  financing  statement  stating  an  (obligation)  ma- 
turity date  of  three  years  and,  therefore,  neglect  to  file  a  continuation 
statement  within  six  months  prior  to  the  newly-extended  maturity  date 
of  the  financing  statement  (which  under  section  44(1)  is  five  years  from 
the  date  of  filing).^'  In  that  case,  the  secured  party  would  be  holding 
an  unperfected  security  interest  after  five  years  from  the  date  of  filing 
of  the  financing  statement. ^^ 

Section  44(2)  provides  that  if  a  financing  statement  or  continuation 
statement  filed  before  January  1,  1986,  purports  to  cover  collateral 
acquired  by  the  debtor  after  December  31,  1985,  perfection  as  to  such 
after-acquired  collateral  will  be  effective  only  if  the  filing  or  filings  are 
in  the  office  or  offices  that  would  be  appropriate  to  perfect  the  security 
interests  in  the  new  collateral  under  the  New  Indiana  UCC."^^  The  rea- 


will  be  effective  until  they  expire  under  the  prior  law  or  until  December  31,  1988,  whichever 
*  comes  first.  .  .  ."  Id.  at  13  (emphasis  in  original).  Simply  stated,  even  though  section 
44(1)  unambiguously  provides  that  the  effectiveness  of  a  pre- 1986  continuation  statement 
or  financing  statement  will  last  for  a  full  five  years,  the  fixtures  financing  statement  itself 
will  be  purged  from  the  "public  record"  after  December  31,  1988,  whether  or  not  the 
five  years  have  elapsed.  If  the  secured  party  wants  to  prevent  this  pre-maturity  removal 
of  his  fixtures  financing  statement  after  December  31,  1988,  in  this  situation,  it  appears 
he  must  file  an  appropriate  continuation  statement  in  the  real  estate  (mortgage)  records 
during  the  six-month  period  preceding  December  31,  1988.  Id.  at  13,  27-28. 

As  legally  unjustified  as  the  above  administrative  rule  appears  to  be,  secured  parties 
and  attorneys  representing  secured  parties  can  at  least  take  some  solace  in  the  fact  that 
the  Secretary  of  State  apparently  has  abandoned  an  even  more  unjustified  interim  ad- 
ministrative rule  providing  that  all  "[f]ilings  made  under  the  1962  Act  up  until  December 
31,  1985,  will  remain  effective  until  they  expire  under  the  old  law  or  until  December  31, 
1988,  whichever  comes  first."  See  UCC  Interim  Rules,  supra  note  18,  at  4. 

^^IND.  Code  §  26-1-9-403(2)  (1982). 

''Id. 

''See  IND.  Code  §  26-1-9-403(2),  (3)  (Supp.   1986). 

''Id.   §  26-1-9-403(3). 

'^See,  e.g..  In  re  Callahan  Motors,   Inc.,  538  F.2d  76  (3d  Cir.),  cert,  denied  sub 
nom.  Sterns  v.  Princeton  Bank  &  Trust  Co.,  429  U.S.  987  (1976). 

^^985  Ind.  Acts  828-30,  Pub.  L.  No.  93-1985,  §  44(2),  reprinted  in  Ind.  Code  Ann. 
in  note  to  §  26-1-1-105  (West  Supp.   1986). 


1987]  ARTICLE  9  IN  TRANSITION  71 

sonable  inferences  from  section  44(2)  are  that:  (1)  all  existing  financing 
statements  and  continuation  statements  on  the  effective  date  of  the  New 
Indiana  UCC  will  remain  effective  for  the  remainder  of  the  five  years 
described  in  section  44(1)  as  to  existing  collateral,  even  though  the 
appropriate  place  for  filing  may  have  changed;"^^  and  (2)  the  existing 
fihngs  will  also  apply  to  collateral  acquired  after  the  effective  date  of 
the  New  Indiana  UCC,  unless  the  appropriate  filing  place  is  different 
under  the  New  Indiana  UCC/^  Perhaps  the  proper  application  of  section 
44(2)  can  be  best  illustrated  by  the  following  hypothetical: 

Facts:  On  January  1,  1984,  Debtor,  a  domestic  farming  cor- 
poration, grants  to  Creditor  A  a  non-purchase  money  security 
interest  in  *'all  its  equipment,  whether  now  owned  or  hereafter 
acquired."  Creditor  A  properly  perfects  its  security  interest  in 
such  collateral  on  January  2,  1984,  pursuant  to  the  Old  Indiana 
UCC,  by  filing  an  appropriate  financing  statement  with  the 
Indiana  Secretary  of  State. ^°  On  January  1,  1985,  Debtor  grants 
to  Creditor  B  a  non-purchase  money  security  interest  in  the  same 
collateral.  On  January  2,  1985,  Creditor  B  properly  perfects 
his  security  interest  in  such  collateral  by  fihng  an  appropriate 
financing  statement  with  the  Indiana  Secretary  of  State.  However, 
because  of  an  ambiguity  in  the  Old  Indiana  UCC's  perfection 
requirements,  Creditor  B  also  files  with  the  Recorder's  Office 
in  the  county  where  Debtor  resides  and  has  its  principal  place 
of  business. ^^  On  January  1,  1986,  Debtor  acquires  $1  million 
in  new  farm  equipment.  Assuming  that  neither  creditor  takes 
any  additional  steps  to  perfect,  which  creditor  has  priority  with 
respect  to  the  after-acquired  collateral? 

Pursuant  to  the  Old  Indiana  UCC's  priority  and  perfection  provi- 
sions. Creditor  A  would,  of  course,  enjoy  priority  over  Creditor  B  both 
as  to  the  existing  collateral  and  as  to  the  newly-acquired  collateral, 
because  Creditor  A  filed  first. ^^  By  contrast,  under  the  New  Indiana 
UCC,  Creditor  B  would  enjoy  priority  over  Creditor  A  both  as  to  the 
existing  collateral  and  as  to  the  newly-acquired  collateral  (unless  Creditor 
B  had  actual  knowledge  of  the  contents  of  Creditor  ^'s  financing 
statement),  because  only  Creditor  B  would  be  deemed  to  be  properly 


'^See  Reporter's  Discussion  on  1972  Changes  to  U.C.C.  §  11-105  (1972). 

""See  id. 

^°See  Second  National  Bank  of  Danville  v.  Massey-Ferguson  Credit  Corp.,  470  N.E.2d 
916  (Ind.  Ct.  App.   1985)  (interpreting  section  9-401  of  the  Old  Indiana  UCC). 

''See  Compiler's  Note  to  Ind.  Code  §  26-1-9-401  (Burns  1974)  (suggesting  that  the 
Indiana  Legislature  unintentionally  repealed  certain  language  in  section  9-401  that,  in  this 
case,  would  require  filing  both  locally  and  centrally). 

''See  Ind.  Code  §  26-1 -9-3 12(5)(a)  (1982). 


72  INDIANA  LAW  REVIEW  [Vol.  20:61 

perfected. ^^  The  New  Indiana  UCC  clearly  provides  that  in  order  for  a 
secured  party  to  be  perfected  as  to  farm  equipment  owned  by  a  domestic 
(farming)  corporation,  it  is  necessary  to  file  centrally  with  the  Secretary 
of  State  and  locally  with  the  Recorder's  Office  in  the  county  where  the 
debtor  has  its  residence. ^"^  Only  Creditor  B  has  satisfied  this  dual  filing 
requirement. 

By  operation  of  section  44(2),  however,  a  compromise  is  struck. 
Creditor  A  will  enjoy  priority  over  Creditor  B  as  to  the  collateral  in 
existence  on  December  31,  1985.^^  On  the  other  hand.  Creditor  B  will 
enjoy  priority  over  Creditor  A  as  to  the  collateral  acquired  on  January 
1,  1986.^^  If  Creditor  A  had  wanted  to  maintain  his  relative  priority 
with  respect  to  the  collateral  acquired  after  December  31,  1985,  he  should 
have  anticipated  the  change  in  filing  offices  under  the  New  Code  and 
filed  a  "special  financing  statement"  with  the  Recorder's  Office  in  the 
county  where  Debtor  had  its  residence  on  or  before  December  31,  1985." 

Section  44(3)  contains  the  general  rule  that  a  financing  statement 
or  continuation  statement  that  is  filed  prior  to  January  1,  1986,  "may 
be  continued  ...  as  permitted  by  [the  New  Indiana  UCC];"^^  how- 
ever, an  express  exception  is  made  to  this  general  rule  in  a  case  where 
the  place  for  filing  has  changed  under  the  New  Indiana  UCC.  According 
to  this  exception,  "[i]f  [the  New  Indiana  UCC]  requires  a  filing 
in  an  office  where  there  was  no  previous  financing  statement,  a  new 
financing  statement  conforming  to  Section  45  [of  the  New  Transition  Rules] 
shall  be  filed  in  that  office."^'  In  other  words,  a  "special  financing  state- 
ment" (rather  than  a  continuation  statement)  must  be  filed  in  the  new 
filing  office  to  continue  perfection. 

Section  44(3),  like  the  perfection  continuation  provision  in  section 
42,  appears  to  lend  support  to  the  general  proposition  that  a  secured 
party  may  use  New  Indiana  UCC  continuation  forms  to  continue  the 
perfection  of  transactions  entered  into  and  perfected  under  the  Old 
Indiana  UCC.  Nonetheless,  a  possible  legal  argument  exists  under  this 
section  that  neither  a  new  UCC-4  land  records  continuation  statement  nor 
an  old  UCC-3a  fixtures  continuation  statement  may  be  used  to  continue 
an  old  UCC- la  fixtures  financing  statement.  This  argument  is  based  on 
the  premise  that  the  New  Indiana  UCC  requires  a  financing  statement 
covering  a  security  interest  in  fixtures  to  be  filed  in  the  real  estate  records, 


''See  IND.  Code  §§  26-l-312(5)(a),  26-1 -9-40 l(l)(a),  (2)  (Supp.   1986). 
''See  id  §  26-1 -9-3 12(5)(a). 
''See  supra  note  48  and  accompanying  text. 
'^See  supra  note  49  and  accompanying  text. 

"See,  e.g.,  In  re  Painter,  39  Bankr.  544,  548  (Bankr.  D.S.D.   1984). 
'^1985  Ind.  Acts  828-30,  Pub.  L.  No.  93-1985,  §  44(3),  reprinted  in  Ind.  Code  Ann. 
in  note  to  §  26-1-1-105  (West  Supp.   1986). 
''Id. 


1987]  ARTICLE  9  IN  TRANSITION  73 

which  arguably  is  a  different  "office"  than  the  ''office"  where  the  original 
fixtures  fihng  was  made.  In  other  words,  it  might  be  asserted  that  a 
"special"  UCC-2  land  records  financing  statement  containing  a  legal 
description  of  the  real  estate  should  be  filed  in  the  real  estate  records 
to  continue  an  old  UCC-la  filed  in  the  old  fixtures  index/" 

It  is  submitted  that  such  an  argument  is  totally  without  merit  for 
the  simple  reason  that  both  the  real  estate  records  and  the  old  fixtures 
index  are,  in  fact,  located  in  the  same  "office" — the  County  Recorder's 
Office.  If  the  drafters  of  this  section  had  meant  to  say  "index"  or 
"file"  (rather  than  "office"),  they  would  have  said  so.^' 

A  much  more  troublesome  interpretive  problem  arises  under  this 
section  with  respect  to  the  continuation  of  perfection  in  watercraft. 
Under  the  Old  Indiana  UCC,  a  security  interest  in  watercraft  was  generally 
perfected  by  the  filing  of  an  appropriate  financing  statement. ^^  However, 
pursuant  to  the  New  Indiana  UCC,  a  security  interest  in  watercraft 
(other  than  watercraft  that  is  inventory  held  for  sale  by  a  person  in  the 
business  of  selling  goods  of  that  kind)  generally  must  be  perfected  by 
notation  of  the  secured  party's  lien  on  the  certificate  of  title  issued  by 
the  Department  of  Natural  Resources."  The  obvious  question,  of  course. 


'^See  section  45(4)  quoted  in  pertinent  part  supra  at  note  22  for  the  required  contents 
of  the  "special  financing  statement"  mandated  by  section  44(3). 

^'Notwithstanding  the  obvious  lack  of  merit  to  this  argument,  the  recently  effective 
UCC  Final  Rules  promulgated  by  the  Indiana  Secretary  of  State  provide  that:  "[i]n  no 
event  shall  a  fixture  filing  made  prior  to  January  I,  1986,  be  effective  after  December 
31,  1988  unless  re-filed  or  continued  in  the  real  estate  (mortgage)  records.''  See  UCC 
Final  Rules,  supra  note  31,  at  13  (emphasis  in  original).  The  emphasized  language,  of 
course,  suggests  that  a  "special  financing  statement"  may  be  necessary  to  effectuate  a 
transfer  from  fixtures  index  to  the  mortgage  records  index.  Based  upon  a  telephone 
conference  with  Beth  Adams,  the  Director  of  the  Uniform  Commercial  Code  Division  of 
the  Indiana  Secretary  of  State's  Office,  it  appears  that  the  appropriate  continuation 
statement  form  to  effectuate  this  transfer  from  the  fixtures  index  to  the  mortgage  records 
index  is  a  new  UCC-4  land  records  continuation  statement.  Telephone  interview  of  Sep- 
tember 17,  1986. 

"5ee  Ind.  Code  §  26-1-9-302(1)  (1982).  Automatic  perfection  was  available  as  well 
in  the  case  of  a  purchase  money  security  interest  in  watercraft,  if  the  debtor's  use  of  the 
collateral  was  primarily  for  a  personal,  family,  or  household  purpose,  see  id.  §§  26-1-9- 
109(1),  26-l-9-302(l)(d),  but  this  was  somewhat  risky,  because  a  buyer  without  actual 
knowledge  of  the  security  interest  who  gave  value  to  the  debtor  was  entitled  to  take  the 
watercraft  free  of  such  security  interest.  See  id.  §  26-1-9-307(2).  Finally,  it  was  possible 
(although  certainly  not  practical)  for  the  secured  party  to  perfect  a  security  interest  in 
watercraft  by  taking  actual  physical  possession  of  the  collateral.  See  id.  §  26-l-9-302(l)(a). 

"'See  Ind.  Code  §  26-l-9-302(3)(b)  (Supp.  1986);  see  also  United  Leaseshares  Inc. 
V.  Citizens  Bank  &  Trust,  470  N.E.2d  1383  (Ind.  Ct.  App.  1984)  (indicating  that  in  the 
case  of  vehicles  subject  to  titling,  the  lien  notation  must  be  by  an  official  or  employee 
of  the  Bureau  of  Motor  Vehicles).  One  reading  of  section  9-302  of  the  New  Indiana 
UCC,  however,  suggests  that  it  may  be  possible  to  make  use  of  automatic  perfection  in 


74  INDIANA  LAW  REVIEW  [Vol.  20:61 

is:  what  impact,  if  any,  will  this  change  in  perfection  procedure  have 
on  transactions  entered  into  and  perfected  by  the  filing  of  a  financing 
statement  pursuant  to  the  Old  Indiana  UCC?^"* 

First,  pursuant  to  section  42,  the  secured  party's  Hen  on  the  watercraft 
remains  perfected  until  it  lapses  under  either  section  44  or  section  45. 
With  respect  to  sections  44  and  45,  only  section  44(1)  contains  a  lapse 
rule  applicable  to  the  type  of  transaction  under  discussion.  It  provides 
that  a  financing  statement  or  a  continuation  statement  filed  before 
January  1,  1986,  which  has  not  lapsed  before  that  date,  remains  effective 
for  five  years  from  the  date  of  filing. ^^ 

If  perfection  will  lapse  five  years  after  filing,  what,  if  anything,  can 
be  done  to  continue  perfection  after  that  date?  According  to  section  42, 
the  security  interest  "may  be  continued  as  permitted  by  [the  New  Indiana 
UCC]  except  as  stated  in  Section  44  .  .  .  ."^^  Unfortunately,  the  New 
Indiana  UCC  does  not  permit  the  continuation  of  a  perfected  security 


the  case  of  a  purchase  money  security  interest  in  a  watercraft  if  the  collateral  is  acquired 
primarily  for  a  personal,  family,  or  household  purpose.  Compare  id.  §  26-l-9-302(l)(d), 
(3)(b)  (perfection  of  motor  vehicles)  with  id.  §  26-l-9-302(l)(d),  (3)(b)  (perfection  of 
watercraft).  Nevertheless,  Ind.  Code  §  14-1-4-21  (Supp.  1986)  appears  to  preclude  automatic 
perfection  by  stating  that  "[a]  security  agreement  covering  a  security  interest  in  a  watercraft 
that  is  not  inventory  held  for  sale  can  be  perfected  only  by  indication  of  the  security 
interest  on  the  certificate  of  title  ...  by  the  [Department  of  Natural  Resources]."  For 
the  same  reason,  it  appears  that  the  secured  party  may  not  perfect  a  security  interest  in 
non-inventory  watercraft  by  taking  actual  physical  possession  of  the  collateral. 

It  should  be  noted  that  the  meaning  of  Ind.  Code  §  14-1-4-21  (Supp.  1986)  is 
somewhat  "muddled"  by  another  section  of  chapter  4  of  title  14,  which  states  that  the 
chapter  on  "watercraft  certificates  of  title"  does  not  apply  to  "[wjatercraft  other  than 
motorboats  unless  the  owner  voluntarily  wishes  to  become  subject  to  this  chapter."  Ind. 
Code  §  14-1-4-2(4)  (Supp.  1986).  In  short,  it  is  unclear  how  a  secured  party  may  safely 
perfect  a  security  interest  in  a  watercraft  other  than  a  motorboat  if  the  owner  does  not 
elect  to  become  subject  to  this  chapter  (by  obtaining  a  certificate  of  title  for  the  watercraft). 
Because  the  owner  presumably  could  acquire  a  certificate  of  title  on  the  boat  at  any 
subsequent  time  and  thereby  elect  to  be  subject  to  the  chapter,  a  person  pondering  whether 
to  grant  credit  based  upon  a  security  interest  in  a  watercraft  other  than  a  motorboat 
should  insist  that  the  debtor  obtain  a  certificate  of  title  and  have  the  security  interest 
duly  noted  thereon. 

^For  the  purposes  of  the  analysis  contained  in  the  text,  it  will  be  assumed  that  the 
watercraft  at  issue  is  a  motorboat  and  that  the  security  interest  created  did  not  qualify 
for  automatic  perfection  pursuant  to  the  Old  Indiana  UCC.  See  supra  notes  62  &  63. 
However,  even  assuming  that  the  security  interest  did  qualify  for  automatic  perfection 
under  the  Old  Indiana  UCC,  it  appears  that  section  45(1)  of  the  New  Transition  Rules 
would  operate  to  terminate  the  automatic  perfection  as  of  December  31,  1988,  unless 
prior  to  that  date,  the  secured  party  had  his  lien  noted  on  the  certificate  of  title  by  the 
Department  of  Natural  Resources.  See  infra  notes  76-79  and  accompanying  text  for  further 
discussion  of  section  45(1). 

"1985  Ind.  Acts  828-30,  Pub.  L.  No.  93-1985,  §  44(1),  reprinted  in  Ind.  Code  Ann. 
in  note  to  §  26-1-1-105  (West  Supp.   1986). 

"•'Id.   §  42. 


1987]  ARTICLE  9  IN  TRANSITION  75 

interest  in  (non-inventory)  watercraft  to  be  accomplished  by  filing  a 
continuation  statement.  As  previously  noted,  the  secured  party  must  have 
his  hen  noted  on  the  watercraft's  certificate  of  title  by  the  Department 
of  Natural  Resources  for  perfection  to  be  continued  under  the  New 
Indiana  UCC. 

Section  42,  of  course,  contains  a  cross-reference  to  section  44.  Well 
then,  does  section  44  add  anything  to  the  perfection  continuation  analysis? 
Section  44(3),  the  only  subsection  of  section  44  to  which  the  "except 
as  stated  in  Section  44  .  .  ."  language  of  section  42  could  refer,  provides 
that  a  financing  statement  or  continuation  statement  filed  under  the  Old 
Indiana  UCC  "may  be  continued  by  a  continuation  statement  as  permitted 
by  [the  New  Indiana  UCC]  except  that  if  [the  New  Indiana  UCC]  requires 
a  fihng  in  an  office  where  there  was  no  previous  financing  statement, 
a  new  financing  statement  conforming  to  Section  45  .  .  .  shall  be  filed 
in  that  office."^^ 

Again,  the  New  Indiana  UCC  does  not  permit  the  continuation  of 
a  perfected  security  interest  in  (non-inventory)  watercraft  to  be  accom- 
pHshed  by  the  filing  of  a  continuation  statement.  Moreover,  the  exception 
contained  in  section  44(3)  also  does  not  appear  to  apply.  Arguably,  the 
notation  of  the  secured  party's  lien  on  the  certificate  of  title  is  not  a 
"filing"  within  the  meaning  of  section  44(3).^^  And,  in  any  event,  the 
filing  of  a  section  45  financing  statement  (i.e.,  a  "special  financing 
statement")  with  the  Department  of  Natural  Resources  would  in  all 
HkeHhood  be  an  exercise  in  futility.  That  agency  simply  is  not  equipped 
to  receive  or  maintain  an  index  for  UCC  financing  statements  or  con- 
tinuation statements. 

The  bottom-line  appears  to  be  that  sometime  prior  to  the  perfection 
lapse  under  section  44(1),  the  secured  party  must  present  a  properly 
completed  application  for  certificate  of  title,  together  with  the  prescribed 
fee,  to  the  Department  of  Natural  Resources  and  have  the  lien  noted 
on  the  face  of  the  title. ^^  Unfortunately,   the  title  application   forms 


'''Id.   §  44(3). 

'''Id. 

^^See  Ind.  Code  §  14-l-4-21(b)  (Supp.  1986).  Arguably,  the  debtor-owner  is  under 
a  statutory  duty  to  obtain  a  certificate  of  title  as  of  January  1,  1986,  if  the  watercraft 
is  subject  to  a  security  interest  on  that  date.  See  Ind.  Code  §  14-1-4-4  (Supp.  1986)  ("[A] 
watercraft  acquired  by  the  owner  before  January  1,  1986,  is  not  required  to  have  a 
certificate  of  title  until  it  is  mortgaged,  sold,  or  transferred,  or  a  lien  is  placed  on  the 
watercraft.").  However,  there  appears  to  be  no  corresponding  statutory  duty  for  the 
debtor-owner  to  have  the  secured  party's  lien  noted  on  the  certificate  of  title  once  it  is 
obtained.  Assuming  the  statutory  duty  exists,  the  debtor-owner  would  be  guilty  of  a  Class 
C  misdemeanor  if  he  should  fail  to  obtain  a  certificate  of  title.  See  Ind.  Code  §  14-1- 
4-22(a)  (Supp.  1986).  Moreover,  if  the  debtor-owner  should  obtain  the  requisite  certificate 
of  title  but  fail  tc  have  the  second  party's  lien  noted  thereon,  he  presumably  would  be 
subject  to  the  penalties  of  perjury.  See  UCC  Final  Rules,  supra  note  31,  at  33. 


76  INDIANA  LAW  REVIEW  [Vol.  20:61 

presently  being  used  contemplate  that  the  debtor,  not  the  secured  party, 
must  execute  the  application  for  certificate  of  title. ^°  Hence,  if  the  debtor 
should  refuse  to  execute  the  title  application  form,  the  secured  party 
may  well  be  "stuck"  with  an  unperfected  security  interest  and  be  at 
the  mercy  of  other  potential  claimants  to  the  watercraft,  including  judg- 
ment Hen  creditors  and  the  debtor's  trustee  in  bankruptcy. 

Section  44(4)  allows  a  real  estate  mortgage  recorded  prior  to  January 
1,  1986,  to  serve  as  a  fixtures  filing  of  goods  described  in  such  mortgage, 
if  the  mortgage  satisfies  the  provision  pertaining  to  such  matters  under 
the  New  Indiana  UCC.^'  For  some  unknown  reason,  however,  this 
provision  did  not  become  operative  until  July  1,  1986,^^  six  months  after 
the  effective  date  of  the  new  Indiana  UCC.  This  delay  in  the  effective 
date,  of  course,  renders  the  protection  afforded  by  section  44(4)  poten- 
tially meaningless.  Simply  stated,  a  fixtures  secured  party  relying  on  this 
provision  (without  a  back-up  regular  fixture  financing  statement)  may 
well  find  that  another  creditor  has  obtained  priority  during  the  six- 
month  "gap  period." 

D.     Section  45 

Section  45  attempts  to  address  questions  of  when  re-perfection  should 
be  undertaken  in  various  circumstances  and  what  kind  of  document 
should  be  used  for  the  re-perfection.  Section  45(1)  provides  that  a  security 
interest  perfected  or  having  priority  as  of  December  31,  1985,  without 
any  filing  or  recording,  must  be  re-perfected  under  the  New  Indiana 
UCC  if  the  New  Indiana  UCC  requires  the  filing  of  a  financing  statement 
for  perfection  or  priority.^^  In  this  situation,  however,  the  secured  party 


™This  result  appears  to  be  supported  by  statutory  requirements.  See  Ind.  Code  §§ 
14-l-4-8(b),  -9  (Supp.   1986). 

''Section  9-402(6)  of  the  New  Indiana  UCC  states  as  follows: 
(6)    A  mortgage  is  effective  as  a  financing  statement  filed  as  a  fixture  filing 
from  the  date  of  its  recording  if: 

(a)  The  goods  are  described  in  the  mortgage  by  item  or  type;  and 

(b)  The  goods  are  or  are  to  become  fixtures  related  to  the  real  estate  described 
in  the  mortgage;  and 

(c)  The  mortgage  complies  with  the  requirements  for  a  financing  statement  in 
this  section  other  than  a  recital  that  it  is  to  be  filed  in  the  real  estate  records; 
and 

(d)  The  mortgage  is  duly  recorded. 

No  fee  with  reference  to  the  financing  statement  is  required  other  than  the 
regular  recording  and  satisfaction  fees  with  respect  to  the  mortgage. 

Ind.  Code  §  26-1-9-402(6)  (Supp.   1986). 

''U.C.C.  §  11-105(4)  (1972)  provides  that  "the  mortgage  shall  be  deemed  effective 

as  a  fixture  filing  as  to  such  goods  under  subsection  (6)  of  Section  9-402  of  the  [new 

U.C.C.]  on  the  effective  date  of  [new  U.C.C.]." 

'M985  Ind.  Acts  828-30,  Pub.  L.  No.  93-1985,  §  45(1),  reprinted  in  Ind.  Code  Ann. 

in  note  to  §  26-1-1-105  (West  Supp.   1986). 


1987]  ARTICLE  9  IN  TRANSITION  77 

is  granted  until  December  31,  1988,  to  file  the  required  financing  state- 
ment or  to  perfect  the  security  by  another  method  (typically,  by  taking 
possession  of  the  collateral). ^"^  In  the  meantime,  the  secured  party's 
perfection  and/or  priority  under  the  Old  Indiana  UCC  is  continued.  If 
re-perfection  is  to  be  accomplished  by  filing  a  financing  statement,  section 
45(4)  indicates  that  the  filing  should  not  be  made  until  within  six  months 
before  the  security  interest  would  otherwise  lapse  (i.e.,  six  months  before 
December  31,  1988).^"^  Such  financing  statement  may  be  signed  by  either 
the  debtor  or  the  secured  party  and  must  identify  the  security  agreement 
and,  presumably,  must  also  state  that  the  security  agreement  is  still 
effective.^^ 

The  primary  secured  transactions  to  which  section  45(1)  is  directed 
are  those  involving  purchase  money  security  interests  in  farm  equipment 
having  a  purchase  price  of  $500.00  or  less.^^  Under  the  Old  Indiana 
UCC,  security  interests  in  such  collateral  were  perfected  automatically 
without  filing. ^^  The  New  Code,  however,  eliminates  this  particular  au- 
tomatic perfection  provision  and  requires  the  filing  of  an  appropriate 
financing  statement  for  perfection. ^^  Section  45(1)  allows  the  secured 
party  in  this  case  to  rely  on  automatic  perfection  for  three  full  years, 
during  which  time  the  secured  party  must  take  appropriate  action  to 
perfect  under  the  New  Indiana  UCC.^° 

Section  45(2)  provides  that  a  security  interest  perfected  prior  to 
January  1,  1986,  under  a  law,  other  than  the  Old  Indiana  UCC,  that 
required  no  filing,  refiling,  or  recording  to  continue  its  perfection  will 
continue  perfected  until  and  lapse  on  December  31,  1988,  unless:  (1)  a 
"special  financing  statement"  complying  with  section  45(4)  is  filed  within 
six  months  before  December  31,  1988;  (2)  the  security  interest  is  perfected 
otherwise  than  by  filing;  or  (3)  the  New  Indiana  UCC  expressly  defers 
to  the  other  law.^'  The  only  secured  transactions  that  appear  to  be 
covered  by  section  45(2)  are  those  transactions  subject  to  Indiana's  public 
utility  mortgage  statute. ^^  Prior  to  the  effective  date  of  the  New  Indiana 

''Id. 

''Id.   §  45(4). 

'^See  section  45(4)  quoted  in  pertinent  part  in  note  22,  supra,  for  the  required  contents 
of  the  special  financing  statement  mandated  by  section  45(1). 

''See  Reporters'  Discussion  on  1972  changes  to  U.C.C.  §  11-106(1)  (1972).  Section 
45(1)  may  also  cover  purchase  money  security  interests  in  watercraft  if  such  collateral  was 
acquired  primarily  for  a  personal,  family,  or  household  purpose.  See  supra  notes  62-64 
and  accompanying  text. 

^«lND.  Code  §  26-l-9-302(l)(c)  (1982). 

'^See  Reasons  for  1972  Change  accompanying  U.C.C.  §  9-302  (1972);  see  also  Ind. 
Code  §  26-1-9-302  (Supp.  1986). 

«°1985  Ind.  Acts  828-30,  Pub.  L.  No.  93-1985,  §  45(1),  reprinted  in  Ind.  Code  Ann. 
in  note  to  §  26-1-1-105  (West  Supp.   1986). 

''Id.   §  45(2). 

'^See  generally  Reporters'  Discussion  on  1972  changes  to  U.C.C.  §  11-106(2)  (1972). 


78  INDIANA  LAW  REVIEW  [Vol.  20:61 

UCC,  Indiana  Code  section  8-1-5-1  generally  provided  that  in  order  to 
have  a  valid  and  continuously  perfected  lien  on  the  real  and  personal 
property,  including  the  after-acquired  property,  of  a  public  utility,  the 
mortgagee  had  only  to  record  a  mortgage  describing  the  property  in  the 
real  estate  records  in  the  county  or  counties  where  the  property  covered 
by  the  mortgage  was  located. ^^  Effective  January  1,  1986,  Indiana  Code 
section  8-1-5-1  was  amended  to  provide  that,  in  addition  to  recording 
the  mortgage  in  the  appropriate  county,  it  is  necessary  to  comply  with 
the  filing  requirements  of  the  New  Indiana  UCC  in  order  to  perfect  a 
security  interest  in  the  collateral  of  a  public  utility  that  is  covered  by 
the  New  Indiana  UCC.^"^  Accordingly,  pursuant  to  section  45(2),  the 
public  utility  mortgagee  will  enjoy  continued  perfection  for  all  UCC- 
covered  collateral,  including  after-acquired  collateral, ^^  through  December 
31,  1988.  After  December  31,  1988,  perfection  will  lapse  as  to  the  UCC- 
covered  collateral  unless,  prior  to  that  date,  appropriate  and  timely 
perfection  of  such  collateral  is  accomplished  pursuant  to  section  45  and 
the  New  Indiana  UCC.  With  respect  to  UCC-covered  collateral  that 
properly  may  be  perfected  under  the  New  Indiana  UCC  by  filing  a 
financing  statement,  the  public  utility  mortgagee  should  file  within  six 
months  prior  to  December  31,  1988,  a  "special  financing  statement" 
complying  with  section  45(4)  in  the  appropriate  filing  office  or  offices.^^ 
However,  if  filing  a  financing  statement  is  not  a  proper  method  of 
perfection  under  the  New  Indiana  UCC,  the  mortgagee  must  comply 
with  the  appropriate  perfection  procedure  mandated  by  the  New  Indiana 
UCC  sometime  prior  to  December  31,  1988,  but  not  necessarily  within 
the  six-month  period  preceding  December  31,  1988.  For  example,  in  the 
case  of  money  or  instruments,  the  mortgagee  or  his  agent  must  take 


«^lND.  Code  §  8-1-5-1  (1982). 

^'^IND.  Code  §  8-l-5-l(b)  (Supp.   1986). 

'^^Section  44(2)  states  the  rule  that  "[w]ith  respect  to  any  collateral  acquired  by  the 
debtor  after  December  31,  1985,  any  effective  financing  statement  or  continuation  statement 
described  in  this  section  applies  only  if  the  filing  or  filings  are  in  the  office  or  offices 
that  would  be  appropriate  to  perfect  the  security  interests  in  the  new  collateral."  1985 
Ind.  Acts  828-30,  Pub.  L.  No.  93-1985,  §  44(2),  reprinted  in  Ind.  Code  Ann.  in  note 
to  §  26-1-1-105  (West  Supp.  1986)  (emphasis  suppHed).  Although  the  filing  required  under 
the  New  Indiana  UCC  with  respect  to  public  utility  mortgages  may  be  in  a  different  fihng 
office  (generally,  in  the  Secretary  of  State's  office),  the  only  effective  financing  statements 
and  continuation  statements  described  in  section  44  are  those  which  were  filed  pursuant 
to  the  Old  Indiana  UCC;  consequently,  public  utility  mortgages  recorded  under  Ind.  Code 
§  8-1-5-1  should  not  be  governed  by  section  44(2)  as  to  after-acquired  property. 

nf  the  debtor  is  a  "transmitting  utihty"  as  defined  in  Ind.  Code  §  26-l-9-105(l)(n) 
(Supp.  1986),  the  appropriate  filing  office  is  with  the  Office  of  the  Indiana  Secretary  of 
State.  See  Ind.  Code  §  26-1-9-402(5)  (Supp.  1986);  see  also  Official  Comments  to  U.C.C. 
§§  9-105(l)(n),  -401(5),  -403(6)  (1972).  Multiple  filings  may  be  necessary,  however,  in  the 
case  of  a  "public  utility"  as  defined  in  Ind.  Code  §  8-1-2-1  (Supp.  1986)  which  is  not 
a  "transmitting  utility."  See  generally  Ind.  Code  ^  26-1-9-401(1)  (Supp.  1986). 


1987]  ARTICLE  9  IN  TRANSITION  79 

actual  physical  possession  of  the  collateral, ^^  and  in  the  case  of  goods 
subject  to  a  certificate  of  title  law,  the  mortgagee  must  succeed  in  having 
his  lien  noted  on  the  title  by  the  appropriate  government  agency. *^*^ 

Section  45(3)  purports  to  govern  the  continuation  of  perfection  of 
security  interests  perfected  under  a  law  repealed  by  the  New  Indiana 
UCC  that  requires  further  filing,  refiling,  or  recording  to  continue 
perfection.  This  provision  appears  to  be  superfluous  because  the  New 
Indiana  UCC  contains  no  such  repealer. ^^ 

E.     Section  46 

Section  46  addresses  questions  of  priority.  The  "general  rule"  is 
that  the  New  Indiana  UCC  applies  to  questions  of  priority  unless  the 
rights  of  the  parties  were  fixed  under  the  Old  Indiana  UCC.  The  section 
contains  two  separate  sentences.  The  first  sentence  provides  that  "[e]xcept 
as  otherwise  provided  in  Sections  42,  43,  44,  and  45  [the  Old  Indiana 
UCC]  applies  to  questions  of  priority  if  the  positions  of  the  parties  were 
fixed  before  January  1,  1986."^°  The  second  sentence  of  section  46  states 
that  "[i]n  all  other  cases,  questions  of  priority  will  be  determined  by 
[the  New  Indiana  UCC]."^'  Unfortunately,  these  two  seemingly  very 
simple  sentences  virtually  defy  a  meaningful  and  consistent  interpretation. 

Perhaps  the  most  perplexing  interpretive  problem  regarding  section 
46  is  determining  the  meaning  of  the  "[e]xcept  as  otherwise  provided" 
language  in  the  first  sentence.  The  "plain  meaning"  of  this  sentence 
would  appear  to  be  that  the  Old  Indiana  UCC  governs  priority  disputes 
between  competing  claimants  whose  positions  in  the  collateral  are  fixed 
before  January  1,  1986,  unless,  under  the  other  transition  rules  (sections 
42,  43,  44,  and  45),  a  different  result  is  dictated.  The  question  then 
becomes:  what  must  these  other  transition  rules  provide  in  order  for 
the  Old  Indiana  UCC  not  to  govern  the  priority  dispute? 

For  example,  must  the  other  transition  rules  expressly  state  that  the 
Old  Indiana  UCC  will  not  govern,  or  that  the  New  Indiana  UCC  will 
govern,  a  particular  priority  dispute?  If  that  is  the  case,  there  simply 
are  no  other  transition  rules  that  would  satisfy  this  standard.  Conse- 
quently, the  "[e]xcept  as  otherwise  provided"  language  would  be  rendered 
totally  meaningless. 


''See  IND.  Code  §  26-1-9-305  (Supp.   1986). 

^^See  Reporters'  Discussion  on  1972  changes  to  U.C.C.  §  11-106(2)  (1972). 

^^This  subsection  in  the  model  transition  rules  was  intended  to  cover  "the  case  (if 
any)  where  a  prior  transmitting  utiUty  provision  outside  the  Code  had  a  filing  of  limited 
duration."  See  Reporters'  Discussion  to  U.C.C.  §  11-106(3)  (1972).  Indiana  had  no  such 
transmitting  utility  provision  outside  the  Old  Indiana  UCC. 

^1985  Ind.  Acts  828-30,  Pub.  L.  No.  93-1985,  §  46,  reprinted  in  Ind.  Code  Ann. 
in  note  to  §  26-1-1-105  (West  Supp.   1986). 


80  INDIANA  LAW  REVIEW  [Vol.  20:61 

What  about  a  somewhat  lower  standard?  What  if  the  requisite 
standard  is  that  the  other  transition  rules  must  express  a  particular 
priority  rule  (as  distinguished  from  a  particular  perfection  continuation 
rule),  which,  under  the  circumstances,  is  contrary  to  the  general  rule 
that  the  Old  Indiana  UCC  governs  priority  disputes  between  parties 
whose  positions  are  fixed  prior  to  January  1,  1986?  Under  this  standard, 
only  section  45(1)  expressly  refers  to  priority  (as  distinct  from  perfection 
continuation),  and  it  refers  to  the  continuation  of  the  priority  which 
existed  on  December  31,  1985.  Thus  once  again,  the  "[e]xcept  as  otherwise 
provided"  language  would  appear  to  have  no  meaning. 

Dropping  then  to  the  seemingly  lowest  possible  standard:  what  if 
the  requisite  standard  is  merely  that  the  other  transition  rules  must  refer 
to  the  continuation  of  perfection  under  the  New  Indiana  UCC?  In  other 
words,  the  first  sentence  of  section  46  should  be  interpreted  to  mean 
that  if  a  particular  transition  rule  operates  to  continue  the  perfection 
of  a  security  interest  under  the  New  Indiana  UCC,  the  rule  that  the 
Old  Indiana  UCC  governs  priority  disputes  between  parties  whose  po- 
sitions are  fixed  prior  to  January  1,  1986,  does  not  apply.  Or,  stated 
another  way,  continuation  of  perfection  by  operation  of  the  New  Tran- 
sition Rules  means  that  the  position  of  the  party  holding  such  a  security 
interest  will  be  deemed  to  be  fixed  on  or  after  January  1,  1986.  Under 
this  interpretation,  the  New  Indiana  UCC  would  govern  the  priority 
dispute  if  perfection  is  continued  under  the  New  Transition  Rules  (pur- 
suant to  the  second  sentence  of  section  46).  Although  this  interpretation 
would  give  real  meaning  to  the  "[ejxcept  as  otherwise  provided"  language, 
it  also  would  produce  the  "world's  worst"  transition  policy.  Consider 
the  following  hypothetical: 

Facts:  In  late  1984,  Debtor  executes  a  document  designated  as 
a  construction  mortgage  in  favor  of  Creditor  A  in  connection 
with  the  construction  of  a  large  office  building  on  Blackacre. 
Creditor  A  properly  records  his  mortgage  on  Blackacre  prior  to 
commencing  any  work.  On  January  1,  1985,  before  the  con- 
struction of  the  office  building  is  completed.  Creditor  B  agrees 
to  supply  on  credit  to  Debtor  certain  goods  which  are  to  become 
fixtures  on  Blackacre.  Creditor  B  wisely  asks  Debtor  to  execute 
a  security  agreement  covering  the  goods  and  immediately  perfects 
the  security  interest  so  created  by  filing  both  a  UCC-1  and  a 
UCC- la  before  the  goods  are  delivered  to  Debtor.  Subsequently, 
on  January  1,  1986,  the  New  Indiana  UCC  becomes  effective. 
Pursuant  to  sections  42  and  44(1)  of  the  New  Transition  Rules, 
the  perfection  of  Creditor  5's  security  interest  in  the  goods  is 
continued  beyond  the  January  1,  1986,  effective  date  of  the  New 
Indiana  UCC.  Which  of  Creditor  A  or  Creditor  B  has  priority 
with  respect  to  the  goods  sold  to  Debtor  by  Creditor  Bl 


1987]  ARTICLE  9  IN  TRANSITION  81 

Pursuant  to  section  9-313(2)  of  the  Old  Indiana  UCC,  Creditor  B  clearly 
was  entitled  to  priority  over  Creditor  A  as  to  the  fixtures, "^^  and  Creditor 
B  may  well  have  relied  on  this  priority  when  he  extended  credit  to 
Debtor.  Under  section  9-313(6)  of  the  New  Indiana  UCC,  however. 
Creditor  A  would  be  entitled  to  priority  over  Creditor  B,  because  of 
the  New  Indiana  UCC's  preference  of  construction  mortgagees  over 
parties  holding  purchase  money  security  interests  in  fixtures. ^^ 

If  the  first  sentence  of  section  46  were  to  be  interpreted  in  the 
manner  suggested  above,  the  New  Indiana  UCC  would  control  the  priority 
dispute  (under  the  second  sentence),  and  Creditor  B  would  "lose  out" 
to  Creditor  A,  even  though  Creditor  B  relied  to  his  detriment  on  the 
priority  rules  under  the  Old  Indiana  UCC,  and  even  though  the  at- 
tachment and  perfection  of  the  respective  interests  of  the  parties  in  the 
goods  were  accomplished  before  the  New  Indiana  UCC  was  enacted. 
Can  this  be  the  intended  result  under  section  46?  Certainly  not!^"^ 

It  appears  then,  that  the  only  interpretation  of  the  first  sentence  of 
section  46  that  gives  some  meaning  to  the  "[e]xcept  as  otherwise  pro- 
vided" language  but  that  does  not  destroy  the  reliance  interests  of  parties 
who  perfected  under  the  Old  Indiana  UCC  is  to  read  the  "except  as 
otherwise  provided"  language  as  modifying  the  clause  "if  the  positions 
of  the  parties  were  fixed  before  January  1,  1986."  In  other  words,  the 
first  sentence  of  section  46  should  be  construed  to  mean:  if  the  positions 
of  the  parties  are  fixed  before  January  1,  1986,  notwithstanding  any 
continuation  of  perfection  or  priority  under  sections  42,  43,  44,  and  45, 
the  Old  Indiana  UCC  governs  any  questions  of  priority.  Although  ad- 
mittedly, this  is  a  very  strained  interpretation  of  the  existing  language, 
it  at  least  will  not  work  an  injustice  on  innocent  parties.  Whether  or 
not  this  interpretation  is  the  "correct"  one  is,  of  course,  anybody's 
guess. 

Another  significant  ambiguity  in  section  46  is  what  is  meant  by  the 
parties  having  their  positions  "fixed."  Fortunately,  several  court  decisions 
from  other  jurisdictions  have  addressed  this  issue  under  a  similar  or 
identical  transition  rule.  Although,  to  date,  the  courts  have  refrained 
from  providing  a  general  formulation,  there  are  several  factual  contexts 


"^See  Ind.  Code  §  26-1-9-313(2),  (4)  (1982). 

"'See  Ind.  Code  §  26-1 -9-3 13(4)(a),  (6)  (Supp.   1986). 

^''In  addition  to  being  grossly  inequitable,  Ind.  Code  §  26-1-1-103  (Supp.  1986),  this 
result  appears  to  be  subject  to  constitutional  challenge  as  violating  the  due  process 
requirements  of  the  fifth  amendment.  Cf.  United  States  v.  Security  Indus.  Bank,  459  U.S. 
70  (1982)  (discussing  the  constitutionality  of  the  retroactive  application  of  section  522(0 
of  the  Bankruptcy  Code,  but  relying  on  non-constitutional  grounds  for  the  decision). 
Moreover,  this  result  runs  counter  to  section  42  which  purports  to  preserve  the  sanctity 
and  validity  of  security  agreements  as  against  third  parties.  See  Ind.  Code  §  26-1-9-201 
(1982). 


82  INDIANA  LAW  REVIEW  [Vol.  20:61 

in  which  the  meaning  of  this  language  has  been  addressed.  For  example, 
the  positions  of  the  parties  have  been  deemed  to  be  fixed  prior  to  the 
effective  date  of  the  New  UCC  if  the  security  interests  of  each  of  the 
claimants  were  both  acquired  and  perfected  before  that  date.^^  It  has 
also  been  held  that  if  one  of  the  claimants  to  the  collateral  is  the  debtor's 
trustee  in  bankruptcy,  and  the  petition  is  filed  after  the  effective  date 
of  the  New  UCC,  the  priority  dispute  will  be  resolved  under  the  New 
UCC.^^  Conversely,  it  has  been  held  that  if  the  bankruptcy  petition  is 
filed  by  or  against  the  debtor  before  the  effective  date  of  the  New  UCC, 
the  positions  of  a  (perfected  or  unperfected)  secured  party  claimant  to 
the  collateral  and  the  debtor's  trustee  in  bankruptcy  should  be  deemed 
to  be  fixed  as  of  the  bankruptcy  petition  date  and,  hence,  prior  to  the 
effective  date  of  the  New  UCC.^^  Finally,  in  the  case  of  competing 
secured  parties  to  after-acquired  inventory,  it  has  been  held  that  the 
position  of  the  parties  as  to  each  item  of  inventory  is  fixed  only  when 
the  debtor  received  possession,  because  prior  to  such  time  the  relative 
priorities  as  to  the  item  cannot  be  determined. ^^ 

Beyond  these  situations,  however,  the  determination  of  what  it  means 
for  the  positions  of  the  parties  to  be  fixed  becomes  increasingly  "fuzzy." 
This  is  especially  true  when  there  are  three,  rather  than  two,  claimants 
involved  in  the  priority  dispute.  Consider  the  hypothetical  priority  dispute 
between  the  construction  mortgagee  and  purchase  money  fixtures  secured 
party  described  above,  with  the  following  additional  facts: 

Additional  Facts:  On  January  2,  1986,  Creditor  C  extends  credit 
to  Debtor  for  services  rendered  and  takes  back  a  vaHd  security 
interest  in  "all  fixtures  of  Debtor  located  on  Blackacre."  On 
the  same  day.  Creditor  C  perfects  his  security  interest  in  the 
fixtures  by  filing  a  UCC-2  land  records  financing  statement  with 
the  Recorder's  Office  in  the  county  where  Blackacre  is  located. 
Now,  which  of  Creditor  A,  Creditor  5,  and  Creditor  C  takes 
priority  as  to  the  goods  sold  to  Debtor  by  Creditor  Bl 

As  between  Creditor  A  and  Creditor  B,  the  positions  of  the  parties 
should  be  deemed  to  be  fixed  before  January  1,  1986,  because  the 
interests  of  each  in  the  fixtures  attached  and  were  perfected  (or  recorded) 
before  January  1,   1986.^^  This  explanation  should  mean  that  the  Old 


^'See,  e.g..  In  re  Perrotto  Refrigeration,  Inc.,  38  Bankr.  284  (Bankr.  E.D.  Pa.  1984); 
Citizens  Sav.  Bank  v.  Sac  City  State  Bank,  315  N.W.2d  20  (Iowa  1982). 

'''See,  e.g..  In  re  Del  Norte  Depot,  Inc.,  716  F.2d  557  (9th  Cir.   1983). 

'''See,  e.g..  In  re  Sterling  Navigation  Co.,  Ltd.,  31  Bankr.  619  (S.D.N.Y.   1983). 

^^See  David  Bros.  v.  United  Bank  of  Littleton,  41  U.C.C.  Rep.  Serv.  261  (Colo. 
App.   1985). 

■^See  supra  note  95  and  accompanying  text. 


1987]  ARTICLE  9  IN  TRANSITION  83 

Indiana  UCC  controls  the  priority  dispute,  and  Creditor  B  would  have 
priority  over  Creditor  A. 

Then,  Creditor  C  enters  the  priority  dispute.  His  interest  attached 
and  was  perfected  after  December  31,  1985;  thus  his  interest  should  be 
deemed  to  be  fixed  after  the  effective  date  of  the  New  Indiana  UCC.'°" 
According  to  the  second  sentence  of  section  46,  any  priority  dispute 
with  him  should  be  determined  under  the  New  Indiana  UCC.  Nonetheless, 
whichever  version  of  the  Indiana  UCC  is  applied.  Creditor  C's  interest 
would  be  junior  to  that  of  both  Creditor  A  and  Creditor  5.'°' 

The  significant  question  is,  of  course,  whether  the  mere  entry  of 
Creditor  C  into  the  priority  dispute  means  that  the  New  Indiana  UCC's 
priority  rules  should  be  appHed  for  all  of  the  parties.  Certainly,  the 
relative  positions  among  the  three  claimants  did  not  become  fixed  until 
Creditor  C's  security  interest  was  perfected.  However,  should  the  mere 
happenstance  that  a  clearly  junior  secured  creditor  obtains  a  security 
interest  and  perfects  after  the  New  Indiana  UCC's  effective  date  be 
sufficient  legal  justification  for  causing  Creditor  B  to  "lose  out"  to 
Creditor  Al  Such  would  appear  to  be  the  fortuitous  result  of  a  literal 
interpretation  of  section  46.'°^ 

Unfortunately,  it  appears  that  the  Reporters  who  drafted  what  is 
now  section  46  of  the  New  Indiana  UCC  did  not  anticipate  the  three- 
party  priority  dispute  just  described. '°^  If  and  when  such  a  dispute  does 
occur,  how  it  will  be  resolved  is  really  anybody's  guess.  The  courts 
should,  however,  be  guided  by  public  policy  considerations,  and  not 
merely  by  a  literal  application  of  section  46  to  the  facts  of  the  case. 
Any  interpretation  of  section  46  that  would  cause  a  creditor  to  lose 
priority  through  events  totally  beyond  his  control  should  not  and  cannot 
be  countenanced. 

F.     Section  47 

Section  47  merely  recites  that  the  New  Indiana  UCC  takes  effect 
on  January  1,  1986.  This  is  the  only  one  of  the  New  Transition  Rules 
that  contains  no  "big  surprises"  and  no  ambiguities. 


^'^Cf.  In  re  Perrotto  Referigeration,  Inc.,  38  Bankr.  at  286-87  (indicating  that  perfection 
is  the  key  to  determining  when  the  positions  of  the  parties  are  fixed  under  Pennsylvania's 
version  of  section  46). 

'°>As  to  Creditor  A,  see  Ind.  Code  §  26-1-9-313(3)  (1982);  Ind.  Code  §  26-1-9-313(6) 
(Supp.  1986).  As  to  Creditor  B,  see  Ind.  Code  §  26-1-9-312(4)  (1982);  Ind.  Code  §  26- 
1-9-312(4)  (Supp.   1986). 

'°^See  supra  note  94. 

'°^5ee  Reporters'  Discussion  on  1972  changes  to  U.C.C.  §  11-107  (1972). 


84  INDIANA  LAW  REVIEW  [Vol.  20:61 

G.     The  "Missing"  Transition  Rule 

Although  section  47  is  the  last  of  the  New  Transition  Rules,  no 
discussion  of  the  New  Transition  Rules  would  be  complete  without  at 
least  a  reference  to  the  transition  rule  that  was  not  enacted  in  Indiana. 
Section  11-108  of  the  model  transition  rule  provides  that  "[u]nless  a 
change  in  law  has  clearly  been  made,  the  provisions  of  [new  U.C.C.] 
shall  be  deemed  declaratory  of  the  meaning  of  the  [old  U.C.C.]."'°^  In 
other  words,  provisions  of  the  New  UCC  may  be  used  to  interpret  the 
Old  UCC,  unless  a  clear  change  in  law  was  made  by  the  New  UCC. 

What  is  the  significance  of  Indiana's  omission  of  section  11-108 
from  its  New  Transition  Rules?  In  the  first  place,  the  omission  of  this 
section  means  that  a  creditor  may  not  simply  point  to  this  section  when 
he  wants  a  court  to  find  that  a  particular  provision  of  the  New  Indiana 
UCC  is  declarative  of  the  law  under  the  Old  Indiana  UCC.  Without 
the  benefit  of  this  section,  it  may  be  a  littl^  more  difficult,  for  example, 
to  convince  a  court  that  a  "lessor"  who  files  a  "protective  financing 
statement"  under  the  Old  Indiana  UCC  should  not  have  the  fiHng  used 
as  a  factor  in  determining  whether  or  not  the  "lease"  was  intended  as 
security.  ^°^ 

More  serious,  however,  is  the  possibility  that  a  court  will  consider 
the  omission  of  section  11-108  as  an  indication  by  the  Indiana  General 
Assembly  that  any  changes  made  in  the  language  of  the  Indiana  UCC 
by  the  New  Indiana  UCC  should  be  construed  as  a  change  in  law  from 
the  Old  Indiana  UCC.'°^  Or,  stated  another  way,  the  provisions  of  the 
New  Indiana  UCC  that  are  in  any  respect  different  from  the  provisions 
of  the  Old  Indiana  UCC  will  not  be  deemed  declaratory  of  the  meaning 
of  the  Old  Indiana  UCC  as  a  matter  of  law.  Such  a  result  could  prove 
devastating  to  those  creditors,  lessors,  and  consignors  of  all  kinds  and 
descriptions  who  entered  into  transactions  prior  to  January  1,  1986. 

III.     Summary  and  Conclusions 

If  nothing  else,  the  preceding  discussion  and  analysis  illustrates  that 
the  New  Transition  Rules  offer  a  plethora  of  potential  "traps"  and 
"windfalls"  to  secured  creditors.  Fortunately  for  some  and  unfortunately 
for  others,  these  "traps"  and  "windfalls"  are  buried  in  uncodified  law.'°^ 


""»U.C.C.  §   11-108  (1972). 

'»^5ee  IND.  Code  §  26-1-9-412  (Supp.   1986). 

'°*C/.  In  re  S  &  Z  Int'l  Management,  Inc.,  10  Bankr.  580  (Bankr.  S.D.  Fla.  1981) 
(omission  of  U.C.C.  §  11-104  by  Florida  legislature  showed  intent  not  to  automatically 
perfect  previously  unperfected  pre-amendment  security  interests);  In  re  Conger  Printing 
Co.,  Inc.,  18  U.C.C.  Rep.  Serv.  224  (D.  Ore.  1975)  (omission  of  U.C.C.  §  11-108  by 
Oregon  legislature  used  as  a  basis  for  determining  that  revised  U.C.C.  §  9-402(7)  was  not 
declaratory  of  prior  law). 

'°^Obscurity,  of  course,  may  be  the  most  redeeming  quality  of  the  New  Transition 


1987]  ARTICLE  9  IN  TRANSITION  85 

Because  the  New  Transition  Rules  are  based  in  major  part  on  the 
so-called  model  transition  rules'^*  (which,  in  turn,  have  formed  the  basis 
for  the  UCC  transition  rules  adopted  in  other  jurisdictions  enacting  the 
1972  Official  Text),  the  interpretive  and  other  problems  addressed  in 
the  Article  will  not  necessarily  be  unique  to  Indiana.  For  some  reason, 
however,  it  appears  that  the  other  1972  Official  Text  jurisdictions  have 
not  experienced  any  significant  amount  of  litigation  as  a  result  of  their 
adoption  of  the  model  transition  rules  (in  whole  or  in  part).  At  least, 
there  are  relatively  few  reported  decisions  dealing  with  these  rules. 

Perhaps,  Indiana  will  be  so  fortunate  as  to  share  a  similar  experience 
under  the  New  Transition  Rules.  Then  again,  Indiana  may  end  up  a 
"Htigation  hotbed"  for  resolving  perfection,  priority,  and  other  disputes 
when  at  least  one  of  the  parties  entered  into  a  transaction  or  took  steps 
to  perfect  a  security  interest  pursuant  to  and  in  accordance  with  either 
the  Old  Indiana  UCC  or  a  law  (other  than  the  Old  Indiana  UCC) 
modified,  amended,  or  repealed  by  the  New  Indiana  UCC. 

Of  course,  the  only  practical  and  certain  solution  to  the  many 
potential  problems  created  by  the  New  Transition  Rules  is  a  legislative 
one.  Simply  stated,  it  is  time  to  ask  the  Indiana  General  Assembly  to 
enact  a  new  set  of  transition  rules  to  the  New  Indiana  UCC  (perhaps, 
retroactively).  And,  unquestionably  such  a  new  set  of  rules  should  be 
made  a  part  of  the  Indiana  Code,  for  all  of  the  world  to  see  and 
appreciate. 


Rules,  and  for  that  reason,  the  author  had  to  engage  in  a  great  deal  of  "soul  searching" 
before  submitting  this  article  for  publication. 

'°^The  only  major  departures  from  the  model  transition  rules  include:  (1)  a  very 
curious  delayed  effective  date  applicable  to  section  44(4)  (pertaining  to  the  use  of  recorded 
mortgages  as  fixtures  filings),  see  supra  notes  71-72  and  accompanying  text;  and  (2)  the 
omission  of  section  11-108  of  the  model  transition  rules  (designed  to  create  a  presumption 
that  the  provisions  of  the  New  UCC  will  be  deemed  declaratory  of  the  meaning  of  the 
Old  UCC).  See  supra  notes  104-06  and  accompanying  text. 


Developments  in  Indiana  Commercial  Law 


David  M.  Powlen* 
Edward  A.  Keirn** 


I.     Introduction 


Within  the  survey  period,  there  have  been  significant  developments 
in  varied  areas  of  commercial  law.  This  Article  will  discuss  recent 
noteworthy  cases  and  statutes  in  the  areas  of  sales,  negotiable  instruments, 
secured  transactions,  dishonored  checks,  real  estate  foreclosure,  guar- 
anties, mechanic's  liens,  and  garnishment. 

II.    Sale  of  Goods 

There  have  been  several  noteworthy  decisions  involving  the  sale  of 
goods  during  the  survey  period.  In  Potts  v.  Offutt,^  the  Offutts,  as 
purchasers,  brought  suit  against  Potts,  a  mobile  home  dealer,  for  breach 
of  contract  for  the  sale  of  a  new  mobile  home.  The  parties  signed  an 
agreement  that  contained  a  provision  for  a  $12,000  trade-in  allowance 
on  the  Offutts'  old  mobile  home.  On  the  agreed  delivery  date,  however, 
the  new  mobile  home  was  not  delivered.  Potts  contended  that  he  could 
not  allow  the  $12,000  trade-in  value  on  the  Offutts'  mobile  home  because 
of  a  subsequent  appraisal  of  the  home.  Later,  the  Offutts  purchased 
the  very  same  mobile  home  from  another  dealer  for  $5,000  more  than 
the  price  specified  in  the  contract  with  Potts  and  sued  Potts  for  the 
additional  cost  of  the  mobile  home  and  for  the  consequential  damages 
incurred.  The  trial  court  awarded  judgment  to  the  Offutts  in  the  amount 
of  $5,200,  and  Potts  appealed. 

In  upholding  the  implicit  findings  of  the  trial  court,  the  court  of 
appeals  rejected  Potts'  claim  that  the  contract  language  allowed  him  to 
make  an  inspection  even  after  the  agreement  was  signed.^  Potts  also 
contended  on  appeal  the  he  was  actually  purchasing  the  plaintiffs'  old 
home  and  thus  was  entitled  to  a  buyer's  right  to  inspect  and  reject 
nonconforming  goods  as  provided  in  the  Indiana  Code  sections  26-1-2- 


*Partner,  Barnes  &  Thornburg,  Indianapolis.  A.B.,  Harvard  College,  1975;  J.D,, 
Harvard  Law  School,  1978. 

♦♦Associate,  Barnes  &  Thornburg,  Indianapolis.  B.S.,  Marion  College,  1973;  M.P.A., 

Ball  State  University,  1979;  J.D.,  Indiana  University  School  of  Law— Indianapolis,  1983. 

The  authors  gratefully  acknowledge  the  assistance  of  Alan  K.  Mills,  David  Thuma, 

Jeffrey  C.  Toole,  associates  with  the  firm  of  Barnes  &  Thornburg,   Indianapolis;  and 

Douglas  E.  Greer,  Ellen  Mufson,  Sherry  Weeks,  Ken  Armstrong,  and  Monica  L.  Miller. 

'481  N.E.2d  429  (Ind.  Ct.  App.   1985). 

^Id.  at  432. 

87 


88  INDIANA  LAW  REVIEW  [Vol.  20:87 

513^  and  26-1-2-601/  On  this  issue,  the  court  of  appeals  held  that  even 
if  Potts  had  acquired  the  rights  to  inspect  and  to  reject,  he  had  failed 
to  comply  with  Indiana  Code  section  26-1-2-602^  regarding  the  procedure 
for  properly  rejecting  goods. ^  In  this  case.  Potts  neither  timely  rejected 
nor  explained  to  the  Offutts  that  he  was  rejecting  the  trade-in  home. 

In  Data  Processing  Services,  Inc.  v.  L.H.  Smith  Oil  Corp.,^  Data 
brought  suit  against  Smith  after  Smith  refused  to  pay  the  last  of  several 
bills  which  Data  had  submitted  to  it  in  conjunction  with  Data's  devel- 
opment of  a  computer  software  program.  In  response  to  Data's  suit, 
Smith  sued  Data  in  another  court  for  damages  arising  out  of  Data's 
alleged  breach  of  contract  in  developing  the  software  program.  Even- 
tually, both  lawsuits  were  consolidated.  Finding  that  the  computer  pro- 
gram was  specifically  manufactured  goods  within  the  meaning  of  Indiana 
Code  section  26-1-2-501(1),^  the  trial  court  held  in  favor  of  Smith  with 
respect  to  both  lawsuits. 

On  appeal.  Data  argued  that  the  trial  court's  determination  that  the 
contract  was  governed  by  Article  2  of  the  Uniform  Commercial  Code 
(UCC)  was  in  error.  It  asserted  that  the  contract  was  for  the  sale  of 


^Ind.  Code  §  26-1-2-513(1)  (Supp.   1986)  provides,  in  pertinent  part: 

Unless  otherwise  agreed  .  .  .,  where  goods  are  tendered  or  delivered  or 
identified  to  the  contract  for  sale,  the  buyer  has  a  right  before  payment  or 
acceptance  to  inspect  them  at  any  reasonable  place  and  time  and  in  any  reasonable 
manner. 

"Ind.  Code  §  26-l-2-601(a)  (Supp.   1986)  provides,  in  pertinent  part: 
[I]f  the  goods  or  the  tender  of  delivery  fail  in  any  respect  to  conform  to  the 
contract,  the  buyer  may: 

(a)  reject  the  whole,  or 

(b)  accept  the  whole,  or 

(c)  accept  any  commercial  unit  or  units  and  reject  the  rest. 
'IND.  Code  §  26-1-2-602(1)  (Supp.   1986)  provides: 

Rejection  of  goods  must  be  within  a  reasonable  time  after  their  delivery 
or  tender.  It  is  ineffective  unless  a  buyer  seasonably  notifies  the  seller. 
'Potts,  481  N.E.2d  at  433. 

H92  N.E.2d  314  (Ind.  Ct.  App.),  reh'g  denied,  493  N.E.2d  1271   (Ind.  Ct.  App. 
1986). 

^Id.  at  317.  Ind.  Code  §  26-1-2-501(1)  (1982)  provides,  in  pertinent  part: 
(1)  The  buyer  obtains  a  special  property  and  an  insurable  interest  in  goods 
by  identification  of  existing  goods  as  goods  to  which  the  contract  refers  even 
though  the  goods  so  identified  are  nonconforming  and  he  has  an  option  to 
return  or  reject  them.  Such  identification  can  be  made  at  any  time  and  in  any 
manner  explicitly  agreed  to  by  the  parties.  In  the  absence  of  explicit  agreement 
identification  occurs 

(a)  when  the  contract  is  made  if  it  is  for  the  sale  of  goods  already 
existing  and  identified; 

(b)  if  the  contract  is  for  the  sale  of  future  goods  other  than  those 
described  in  paragraph  (c),  when  goods  are  shipped,  marked  or  otherwise 
designated  by  the  seller  as  goods  to  which  the  contract  refers;  .... 


1987]  COMMERCIAL  LAW  89 

services,  not  of  goods,  and  thus  Article  2  of  the  UCC  was  inappHcable. 
Although  it  is  not  clear  from  the  appellate  court's  opinion,  the  trial 
court  apparently  based  its  judgment  in  favor  of  Smith  upon  the  breach 
by  Data  of  the  Article  2  implied  warranties  of  merchantability  or  of 
fitness  for  a  particular  purpose  with  respect  to  Data's  development  of 
the  computer  software  program  at  issue. ^ 

The  court  of  appeals  agreed  with  Data  that  a  contract  to  provide 
computer  programming  was  a  sale  of  services  even  though  the  end  result 
may  be  preserved  on  a  magnetic  tape  or  computer  disk.'°  Nonetheless, 
it  ruled  that  no  reversal  was  necessary  because,  under  common  law 
principles.  Smith  was  entitled  to  the  same  relief  (i.e.,  damages)  as  was 
awarded  by  the  trial  court."  Specifically,  the  court  of  appeals  found 
that  Smith  was  entitled  to  damages  from  Data  on  the  ground  that  Data 
had  "breached  its  implied  promise  of  having  the  reasonable  skill  and 
ability  to  do  the  job  for  which  it  contracted."'^ 

Another  significant  case  involving  warranties  was  General  Foods 
Corp.  V.  Valley  Lea  Dairies,  Inc.^^  General  Foods  purchased  40,000 
pounds  of  roller  whole  dry  milk  from  Valley  Lea.  General  Foods' 
standards  required  Valley  Lea  to  test  the  milk  before  transferring  it. 
Valley  Lea  tested  the  milk  and  ascertained  that  it  was  manufactured 
under  appropriate  sanitary  conditions  in  conformance  with  federal  reg- 
ulations. When  the  shipment  of  milk  arrived,  General  Foods  checked  it 
and  found  that  one  of  the  nine  lots  in  the  shipment  proved  positive  for 
salmonella.  This  prompted  General  Foods  to  test  the  rest  of  the  lots 
for  contaminants  at  heightened  levels.  Upon  finding  no  contamination. 
General  Foods  opted  to  release  the  remaining  lots  into  its  milk  chocolate 
production  channels. 

After  the  milk  chocolate  was  produced.  General  Foods  took  test 
samples;  before  the  test  results  were  available,  however,  General  Foods 
shipped  the  milk  chocolate  to  two  of  its  customers.  Thereafter,  General 
Foods  discovered  salmonella  contamination  in  the  samples  of  the  milk 
chocolate  it  had  shipped.  As  the  result  of  this  contamination,  the  two 
customers  incurred  hundreds  of  thousands  of  dollars  worth  of  losses. 
Subsequently,  General  Foods  settled  with  the  customers  and  brought  suit 
in  the  United  States  District  Court  for  the  Northern  District  of  Indiana 
against  the  supplier  to  recover  its  damages. 

On  appeal  to  the  Seventh  Circuit  Court  of  Appeals  after  a  jury 
verdict  against  it,  General  Foods  urged  that  Valley  Lea  had  breached 


^Data  Processing,  492  N.E.2d  at  319-20. 

'°Id.  at  318-19. 

"M  at  319-20. 

'Vof.  at  320. 

'^771  F.2d  1093  (7th  Cir.   1985). 


90  INDIANA  LAW  REVIEW  [Vol.  20:87 

an  express  warranty  contained  in  the  purchase  order, '^  which  required 
the  product  to  conform  with  General  Foods'  written  pohcy  on  the  supply 
of  sensitive  food  ingredients,  as  well  as  the  implied  warranties  of  fitness 
for  a  particular  purpose'^  and  merchantability.'^  It  argued  that  the  trial 
court  had  tendered  improper  jury  instructions  with  regard  to  each  of 
these  three  theories  of  liability. 


''See  Ind.  Code  §  26-1-2-313  (1982)  which  provides: 

(1)  Express  warranties  by  the  seller  are  created  as  follows: 

(a)  any  affirmation  of  fact  or  promise  made  by  the  seller  to  the  buyer 
which  relates  to  the  goods  and  becomes  part  of  the  basis  of  the  bargain 
creates  an  express  warranty  that  the  goods  shall  conform  to  the 
affirmation  or  promise. 

(b)  any  description  of  the  goods  which  is  made  part  of  the  basis  of 
the  bargain  creates  an  express  warranty  that  the  goods  shall  conform 
to  the  description. 

(c)  any  sample  or  model  which  is  made  part  of  the  basis  of  the  bargain 
creates  an  express  warranty  that  the  whole  of  the  goods  shall  conform 
to  the  sample  or  model. 

(2)  It  is  not  necessary  to  the  creation  of  an  express  warranty  that  the  seller 
use  formal  words  such  as  'warrant'  or  'guarantee'  or  that  he  have  a  specific 
intention  to  make  a  warranty,  but  an  affirmation  merely  of  the  value  of  the 
goods  or  a  statement  purporting  to  be  merely  the  seller's  opinion  or  commendation 
of  the  goods  does  not  create  a  warranty. 

'^IND.  Code  §  26-1-2-315  (Supp.   1986)  provides: 

Where  the  seller  at  the  time  of  contracting  has  reason  to  know  any  particular 
purpose  for  which  the  goods  are  required  and  that  the  buyer  is  relying  on  the 
seller's  skill  or  judgment  to  select  or  furnish  suitable  goods,  there  is,  unless 
excluded  or  modified  under  IC  26-1-2-316,  an  implied  warranty  that  the  goods 
shall  be  fit  for  such  purpose. 

•^Ind.  Code  §  26-1-2-314  (Supp.   1986)  provides: 

(1)  Unless  excluded  or  modified  (IC  26-1-2-316),  a  warranty  that  the  goods 
shall  be  merchantable  is  implied  in  a  contract  for  their  sale  if  the  seller  is  a 
merchant  with  respect  to  goods  of  that  kind.  Under  this  section  the  serving  for 
value  of  food  or  drink  to  be  consumed  either  on  the  premises  or  elsewhere  is 
a  sale. 

(2)  Goods  to  be  merchantable  must  at  least  be  such  as: 

(a)  Pass  without  objection  in  the  trade  under  the  contract  description; 
and 

(b)  In  the  case  of  fungible  goods,  are  of  fair,  average  quality  within 
the  description;  and 

(c)  Are  fit  for  the  ordinary  purposes  for  which  such  goods  are  used; 
and 

(d)  Run,  within  the  variations  permitted  by  the  agreement,  of  even 
kind,  quality,  and  quantity  within  each  unit  and  among  all  units 
involved;  and 

(e)  Are  adequately  contained,  packaged,  and  labeled  as  the  agreement 
may  require;  and 

(0  Conform  to  the  promises  or  affirmations  of  fact  made  on  the 
container  or  label  if  any. 

(3)  Unless  excluded  or  modified  (IC  26-1-2-316),  other  implied  warranties 
may  arise  from  course  of  dealing  or  usage  of  trade. 


1987]  COMMERCIAL  LAW  91 

As  to  the  express  warranty  theory,  the  appellate  court  noted  that 
even  if  an  express  warranty  had  been  made,  such  was  waived  when 
General  Foods  tested  the  milk,  found  one  of  the  lots  defective,  and 
then  failed  to  return  the  remainder  of  the  shipment,  claiming  violation 
of  the  warranty.'^  The  appellate  court  also  upheld  the  trial  court's  jury 
instructions  regarding  the  implied  warranties  of  fitness  for  a  particular 
purpose  and  merchantability.  The  appellate  court  held  that  the  jury  was 
correctly  instructed  when  it  was  told  that  the  implied  warranty  of  fitness 
for  a  particular  purpose  was  inoperative  if  it  should  be  found  that 
General  Foods,  in  fact,  relied  on  its  own  testing  procedure  in  deciding 
whether  to  accept  or  reject  particular  lots  of  milk.'^  On  the  implied 
warranty  of  merchantability  issue,  the  appellate  court  determ.ned  that 
a  jury  instruction  providing  that  this  warranty  may  be  waived  or  excluded 
by  course  of  dealing  or  performance  between  the  parties  was  entirely 
proper. ^^  In  this  regard,  the  court  of  appeals  noted  that  General  Foods' 
written  policy  on  supply  of  sensitive  food  ingredients,  which  established 
its  in-house  testing  procedure  and  right  to  reject  nonconforming  products, 
could  have  supported  a  jury  finding  that  the  implied  warranty  of  mer- 
chantability was  excluded  or  modified  by  the  parties'  dealings  with  each 
other.20 

Finally,  the  appellate  court  upheld  the  jury's  determination  that 
Valley  Lea  was  entitled  to  the  defense  of  incurred  risk  against  General 
Foods'  claims  for  breach  of  warranties  and,  in  so  doing,  found  that 
the  trial  court's  instructions  regarding  the  doctrine  of  incurred  risk  either 
were  entirely  proper  or,  at  least,  were  not  prejudicial.^'  According  to 
the  doctrine  of  incurred  risk,  a  person  incurs  or  assumes  all  of  the 
ordinary  and  usual  risks  of  an  act  upon  which  he  voluntarily  enters,  if 
the  risks  are  subjectively  known  and  understood  by  him,  irrespective  of 
whether  or  not  the  acceptance  of  the  risk  was  reasonable  under  the 
circumstances.^^ 

III.     Negotiable  Instruments 

Several  recent  cases  have  been  decided  regarding  the  Hability  of 
various  parties  to  negotiable  instruments.  The  cases  involve  three  distinct 
factual  patterns,  including  one  case  in  which  an  endorsement  had  been 
forged,  an  action  wherein  the  person  executing  the  instrument  was  sued  in- 
dividually because  of  his  failure  to  indicate  his  representative  capacity, 


''Valley  Lea,  111  F.2d  at  1099. 

''Id. 

'^Id. 

^"Id. 

^'Id.  at  1096-98. 

^^Id.  at  1096-97. 


92  INDIANA  LAW  REVIEW  [Vol.  20:87 

and  a  case  in  which  the  drawer  dehvered  a  blank  check  that  was  completed 
without  authority. 

In  Clark  v.  Griff  in, ^^  Griffin  purchased  a  house  on  contract  from 
the  Dietrichs.  In  1981,  while  Griffin  was  still  making  payments,  a  fire 
caused  extensive  damage  to  the  house.  Clark  was  the  general  contractor 
who  was  to  perform  the  repair  work  on  the  house,  and  under  an  insurance 
settlement,  he  received  two  checks,  one  in  the  sum  of  $15,000  and 
another  for  $4,180.  Each  check  was  made  payable  to  Clark,  Griffin, 
and  the  Dietrichs.  The  $15,000  check  was  given  to  Clark  so  that  he 
could  buy  materials  and  commence  the  repairs.  The  other  check  was  to 
be  kept  by  Griffin  during  the  construction  and  then  released  to  Clark 
upon  satisfactory  completion  of  the  repair  work.  Griffin,  however,  en- 
dorsed his  name,  Clark's  name,  and  presumably,  the  Dietrichs'  names 
on  the  back  of  the  $4,180  check  and  cashed  it  with  Mutual  Trust  Bank 
(MTB).  Griffin  maintained  that  Clark  had  given  him  authority  to  sign 
Clark's  name  to  the  check.  Clark  alleged  otherwise  and  brought  an  ac- 
tion against  Griffin  and  MTB  for  conversion.  The  trial  court  held  that 
no  conversion  had  occurred  and  Clark  appealed. 

Clark  contended,  with  respect  to  his  claims  against  MTB,  that  Indiana 
Code  section  26-1 -3-4 19(l)(c)  authorized  him  to  sue  MTB.'"  The  court 
of  appeals  held,  however,  that  the  only  suit  contemplated  by  that  proviso 
was  one  against  the  drawee  bank.^^  Because  MTB  was  the  depositary 
bank,  the  applicable  provision  was  Indiana  Code  section  26-1-3-419(3), 
which  stated: 

(3)  Subject  to  the  provisions  of  this  Act  concerning  restrictive 
endorsements,  a  representative,  including  a  depositary  or  col- 
lecting bank,  who  has  in  good  faith  and  in  accordance  with  the 
reasonable  commercial  standards  applicable  to  the  business  of 
such  representative  dealt  with  an  instrument  or  its  proceeds  on 
behalf  of  one  who  was  not  the  true  owner  is  not  liable  in 
conversion  or  otherwise  to  the  true  owner  beyond  the  amount 
of  any  proceeds  remaining  in  his  hands. ^^ 

The  court  of  appeals  held  that  to  escape  liability  under  Indiana  Code 
section  26-1-3-419(3),  MTB  had  the  burden  of  estabhshing  that  it  had 
acted  in  a  commercially  reasonable  manner  in  cashing  the  check. ^^  On 
the  issue  of  commercial  reasonableness,  the  Clark  tribunal  determined 
that  the  evidence  at  trial  was  not  sufficient  to  carry  MTB's  burden  and. 


"481  N.E.2d  170  (Ind.  Ct.  App.   1985). 

^■'Ind.  Code  §  26-1 -3-41 9(l)(c)  (Supp.  1986)  provides  in  pertinent  part:  "An  instrument 
is  converted  when  ...  it  is  paid  over  a  forged  endorsement." 
''Clark,  481  N.E.2d  at  173. 
^"IND.  Code  §  26-1-3-419(3)  (Supp.   1986). 
''Clark,  481  N.E.2d  at  173. 


1987]  COMMERCIAL  LAW  93 

in  fact,  tended  to  show  quite  the  contrary. ^^  The  facts  that  MTB's 
employee  simply  took  Griffin's  word  that  he  was  authorized  to  sign  for 
Clark  and  that  Griffin  requested  most  of  the  check  proceeds  in  cash 
with  the  rest  to  be  placed  in  his  personal  account^*^  were  critical  to  the 
court's  decision. 

The  court  of  appeals  held  further,  however,  that  Clark,  whose 
endorsement  was  forged,  could  not  recover  from  MTB  if  and  to  the 
extent  Griffin  took  the  proceeds  of  the  check  and  paid  them  to  Clark. 
Simply  stated,  MTB  could  be  held  liable  to  Clark  only  to  the  extent 
he  had  suffered  a  loss,  and  not  necessarily  for  the  full  amount  of  the 
check. ^°  In  addition,  the  court  of  appeals  held  that  Griffin's  Hability  to 
Clark  for  forging  Clark's  signature  was  restricted  to  the  same  extent.^' 

In  Campion  v.  Wynn,^^  Campion  was  the  president  and  sole  stock- 
holder of  Chairs,  Inc.  In  January  1984,  Campion  approached  Wynn, 
an  employee  of  Chairs,  Inc.,  requesting  that  she  purchase  shares  of 
stock  in  the  corporation.  Wynn  declined.  Later,  Campion  approached 
Wynn  and  told  her  of  his  need  to  secure  money  to  buy  supplies.  Wynn 
lent  Campion  $8,000  in  return  for  a  note  executed  by  Campion,  which 
made  no  mention  of  Chairs,  Inc.,  as  the  maker.  In  the  entire  note,  the 
name  of  the  corporation  appeared  only  in  the  area  reserved  for  the 
address  of  the  maker.  Unfortunately  for  Wynn,  Chairs,  Inc.,  went  out 
of  business  in  May  1984,  before  any  payment  had  been  made  on  the 
note,  and  Wynn  brought  suit  on  the  note.  The  trial  court  found  Campion 
individually  liable  on  the  note,  and  Campion  appealed. 

On  appeal.  Campion  contended  that  although  the  note  did  not 
disclose  his  representative  capacity,  it  did  name  the  party  that  he  rep- 
resented. Consequently,  Campion  argued  that  he  was  entitled,  pursuant 
to  Indiana  Code  section  26-l-3-403(2)(b),"  to  introduce  parol  evidence 
to  establish  that  he  signed  in  a  representative  capacity.  On  this  issue, 
the  court  of  appeals  held  that  the  reference  to  Chairs,  Inc.,  in  the  note 
could  reasonably  be  construed  merely  as  giving  a  complete  address  for 
Campion  and  therefore  refused  to  reweigh  the  evidence. ^"^  Accordingly, 


^'Id.  at  173-74. 

^°Id.  at  174. 

"486  N.E.2d  543  (Ind.  Ct.  App.   1985). 
"IND.  Code  §  26-l-3-403(2)(b)  (1982)  provides: 

(2)  An  authorized  representative  who  signs  his  own  name  to  an  instrument 

(b)  except  as  otherwise  established  between  the  immediate  parties,  is 
personally  obligated  if  the  instrument  names  the  person  represented 
but  does  not  show  that  the  representative  signed  in  a  representative 
capacity,  or  if  the  instrument  does  not  name  the  person  represented 
but  does  show  the  representative  signed  in  a  representative  capacity. 
''Campion,  486  N.E.2d  at  545-46. 


94  INDIANA  LAW  REVIEW  [Vol.  20:87 

the  court  of  appeals  held  that  pursuant  to  Indiana  Code  section  26-1- 
3-403(2)(a),^^  Campion  was  personally  liable  on  the  note.^^  Alternatively, 
the  court  of  appeals  found  that  the  wording  of  the  note  was  sufficient 
to  make  Campion  personally  liable  even  if  the  corporation  was  deemed 
to  be  named  as  a  party  because  the  note  contained  a  joint  and  several 
promise  to  pay  by  Campion. ^^ 

In  E.  Bierhaus  &  Sons,  Inc.  v.  Bowling,^^  Bowling  was  a  small 
contractor  and  a  close  friend  of  Dabney,  who  owned  and  operated  four 
retail  grocery  stores.  In  September  1983,  Dabney  told  Bowling  that  he 
had  a  cash  flow  problem  and  needed  $40,000  for  sixty  days.  At  the 
same  time,  Dabney  began  to  discuss  with  BowHng  the  possibility  of 
Bowling  purchasing  a  half-interest  in  Dabney' s  grocery  business.  Bowling 
eventually  lent  to  Dabney  the  $40,000  as  well  as  another  $8,500  for  the 
payment  of  taxes  and  other  debts. 

Sometime  later,  Dabney  informed  Bowling  that  he  was  terminating 
Bierhaus  as  the  wholesale  grocery  supplier  for  his  stores  and  would 
purchase  elsewhere.  He  indicated  that  in  contemplation  of  a  partnership 
with  Bowling,  he  needed  Bowling's  financial  statement  for  a  potential 
new  supplier.  Bowling  furnished  the  requested  financial  statement  in 
mid-October.  Dabney  did  not  inform  Bowling  that  the  financial  statement 
was  for  Bierhaus,  and  nothing  on  the  financial  statement  indicated  that 
it  was  directed  to  Bierhaus. 

The  next  month,  Dabney  approached  Bowling  and  requested  a  check 
signed  in  blank  which  he  could  tender  to  the  purported  new  supplier 
as  security.  He  promised  that  the  check  would  not  be  cashed  without 
first  notifying  Bowling  and  promised  to  repay  Bowling  in  the  event  the 
check  was  cashed.  BowUng  informed  Dabney  that  he  had  only  $1,500 
in  the  bank,  but  Dabney  assured  him  it  would  not  matter.  Not  knowing 
that  Dabney  was  then  facing  financial  failure.  Bowling  signed  the  check 
in  blank  and  delivered  it  to  Dabney. 

Dabney  delivered  Bowling's  financial  statement  to  Bierhaus  in  late 
October  and  represented  to  Bierhaus'  treasurer  that  Bowling  would  be 
his  partner.  On  November  22,  1983,  Dabney,  without  Bowling's  authority, 
completed  the  previously  signed  blank  check  for  over  $10,000  and  de- 
livered it  to  Bierhaus  in  exchange  for  grocery  stock.  Bierhaus  made  no 
attempt  to  contact  Bowling  even  though  Bowling's  name,  address,  and 
telephone  number  were  on  the  check  and  even  though  it  had  received 
numerous  bad  checks  from  Dabney  and  from  other  people  on  behalf 
of  Dabney.  At  the  time  Bierhaus  accepted  Bowling's  check,  Bierhaus 
was  facing  a  $400,000  loss  on  Dabney' s  account.  The  BowHng  check 


''IND.  Code  §  26-l-3-403(2)(a)  (1982). 

'^Campion,  486  N.E.2d  at  545. 

''Id.  at  545-46. 

^H86  N.E.2d  598  (Ind.  Ct.  App.   1985). 


1987]  COMMERCIAL  LAW  95 

was  returned  for  insufficient  funds,  Dabney  went  into  bankruptcy,  and 
Bierhaus  sued  Bowling  on  the  dishonored  check.  The  trial  court  entered 
judgment  for  Bowling,  from  which  Bierhaus  appealed. 

Bierhaus  relied  upon  Indiana  Code  section  26-1-3-115,  which  pro- 
vided: 

(1)  When  a  paper  whose  contents  at  the  time  of  signing  show 
that  it  is  intended  to  become  an  instrument  is  signed  while  still 
incomplete  in  any  necessary  respect  it  cannot  be  enforced  until 
completed,  but  when  it  is  completed  in  accordance  with  the 
authority  given  it  is  effective  as  completed. 

(2)  If  the  completion  is  unauthorized,  the  rules  as  to  material 
alteration  apply  (section  3-407),  even  though  the  paper  was  not 
delivered  by  the  maker  or  drawer,  but  the  burden  of  establishing 
that  any  completion  is  unauthorized  is  on  the  party  so  asserting. ^^ 

First,  Bierhaus  argued  on  appeal  that  the  check  was  properly  completed 
with  the  authority  of  BowHng  and  that  as  a  result.  Bowling  was  liable 
on  the  check  pursuant  to  subsection  (1)  of  the  above-quoted  section. 
The  court  of  appeals,  however,  found  that  the  trial  court  was  justified 
in  concluding  that  the  check  was  completed  contrary  to  Bowling's  au- 
thority.^° 

Second,  Bierhaus  asserted  that  even  if  Dabney  completed  the  check 
contrary  to  Bowling's  authority.  Bowling  was  nonetheless  liable  to  Bier- 
haus on  the  check  because  of  Bowling's  negligence  and  because  of 
Bierhaus'  status  as  a  holder  in  due  course"^'  pursuant  to  Indiana  Code 
sections  26-1-3-406^^  and  26-1-3-407 ,^3  respectively.  With  respect  to  the 


"Ind.  Code  §  26-1-3-115  (Supp.   1986). 

'"> Bierhaus,  486  N.E.2d  at  602. 

''Id. 

^^IND.  Code  §  26-1-3-406  (1982)  provides: 

Any  person  who  by  his  negligence  substantially  contributes  to  a  material 
alteration  of  the  instrument  or  to  the  making  of  an  unauthorized  signature  is 
precluded  from  asserting  the  alteration  or  lack  of  authority  against  a  holder  in 
due  course  or  against  a  drawee  or  other  payor  who  pays  the  instrument  in  good 
faith  and  in  accordance  with  the  reasonable  commercial  standards  of  the  drawee's 
or  payor's  business. 

^'Ind.  Code  §  26-1-3-407  (1982)  provides: 

(1)  Any  alteration  of  an  instrument  is  material  which  changes  the  contract 
of  any  party  thereto  in  any  respect,  including  any  such  change  in 

(a)  the  number  or  relations  of  the  parties;  or 

(b)  an   incomplete  instrument,    by   completing   it   otherwise   than   as 
authorized;  or 

(c)  the  writing  as  signed,  by  adding  to  it  or  by  removing  any  part  of 
it. 

(2)  As  against  any  person  other  than  a  subsequent  holder  in  due  course 
(a)  alteration  by  the  holder  which  is  both   fraudulent  and  material 


96  INDIANA  LAW  REVIEW  [Vol.  20:87 

negligence  issue,  the  court  of  appeals  held  that  even  if  Bowling  had 
been  negligent  in  signing  and  delivering  the  blank  check  to  Dabney,  any 
contributory  negligence  (i.e.,  failure  to  observe  "reasonable  commercial 
standards")  on  the  part  of  Bierhaus  in  taking  the  check  would  bar 
recovery,  and  the  burden  was  on  Bierhaus  to  establish  that  it  had  followed 
"reasonable  commercial  standards"  according  to  an  objective  standard.'*'* 
On  the  issue  of  whether  Bierhaus  qualified  as  a  holder  in  due  course,"*^ 
the  court  of  appeals  noted  that  a  person  claiming  to  be  a  holder  in 
due  course  "has  the  double  hurdle  of  proving  good  faith,  a  subjective 
test,  plus  lack  of  notice,  an  objective  test.""*^  Given  the  facts  of  the 
instant  case,  the  court  of  appeals  concluded  that  it  could  not  say  either 
that  Bierhaus  carried  its  burden  of  proof  as  to  commercial  reasonableness, 
or  that  the  trial  court  erred  in  finding  that  Bierhaus  was  not  a  holder 
in  due  course."*^ 

IV.     Secured  Transactions 

Two  noteworthy  cases  during  the  survey  period  involved  the  per- 
fection of  security  interests.  In  Citizens  National  Bank  of  Evansville  v. 
Wedel,"^  a  bank  brought  a  replevin  action  against  an  unsecured  creditor 
who  had  taken  a  boat  from  the  debtor  in  satisfaction  of  a  pre-existing 
debt.  The  bank  claimed  that  it  had  a  security  interest  in  the  boat, 
resulting  from  a  financing  statement  filed  with  the  Secretary  of  State. 
In  the  financing  statement,  the  bank  had  described  its  collateral  as  "new 
boats — all  types  Of  trailers,  new  jet  boats — contract  and  lease  rights  for 
assigned  security  agreement  dated  May  31,  1979."  The  debtor  in  this 
case  was  "The  Post,  Inc.";  however,  according  to  the  bank's  financing 
statement,  the  debtor's  name  was  "Post,  Inc.  d/b/a  Osborne  Boats  & 


discharges  any  party  whose  contract  is  thereby  changed  unless  that 
party  assents  or  is  precluded  from  asserting  the  defense; 
(b)  no  other  alteration  discharges  any  party  and  the  instrument  may 
be  enforced  according  to  its  original  tenor,  or  as  to  incomplete  in- 
struments according  to  authority  given, 
(3)  A  subsequent  holder  in  due  course  may  in  all  cases  enforce  the  instrument 

according  to  its  original  tenor,  and  when  an  incomplete  instrument  has  been 

completed,  he  may  enforce  it  as  completed. 

''Bierhaus,  486  N.E.2d  at  603. 

^^Ind.  Code  §  26-1-3-302  (1982)  defines  a  "holder  in  due  course"  as  follows: 
(1)  a  holder  in  due  course  is  a  holder  who  takes  the  instrument 

(a)  for  value;  and 

(b)  in  good  faith;  and 

(c)  without  notice  that  it  is  overdue  or  has  been  dishonored  or  of 
any  defense  against  or  claim  to  it  on  the  part  of  any  person. 

'^Bierhaus,  486  N.E.2d  at  604. 

''Id.  at  605. 

'H%9  N.E.2d  1203  (Ind.  Ct.  App.   1986). 


1987]  COMMERCIAL  LAW  97 

Motors."  The  primary  issue  on  appeal  was  whether  the  bank  had  per- 
fected its  security  interest  in  the  boat. 

Before  taking  the  boat,  Wedel,  the  unsecured  creditor,  had  sought 
to  ascertain  whether  there  was  any  security  interest  in  the  boat  by 
requesting  the  Secretary  of  State's  office  to  search  for  any  financing 
statements  on  any  property  of  "The  Post,  Inc."  The  Secretary  of  State 
responded  that  it  could  not  find  any.  Wedel  argued  that  the  security 
interest  was  not  properly  perfected  because  the  debtor's  name  was  listed 
as  "Post,  Inc.  d/b/a/  Osborne  Boats  &  Motors"  instead  of  "The  Post, 
Inc."  In  reversing  the  trial  court,  the  court  of  appeals  held  the  omission 
of  the  article  "The"  from  the  financing  statement  was  a  minor  error 
and  was  not  seriously  misleading."*^ 

Wedel  also  contended  that  the  financing  statement  was  ineffective 
because  it  expressly  covered  only  "new  boats — all  types  of  trailers  and 
new  jet  boats."  Wedel  argued  that  this  description  was  insufficient  to 
perfect  a  security  interest  on  the  1979  model  boat  in  question,  which 
he  alleged  was  "used."  The  court  of  appeals  held  that  the  purpose  of 
the  collateral  description  in  a  financing  statement  was  merely  to  provide 
enough  notice  for  further  inquiry. ^°  Based  upon  this  standard,  the  court 
of  appeals  determined  that  the  financing  statement  filed  in  1979  sufficed 
to  require  further  investigation  by  Wedel,  especially  because  the  "used" 
boat  in  issue  was  a  1979  model. ^'  Ironically,  Wedel  was  precluded  from 
seeing  the  bank's  financing  statement  as  the  result  of  the  "not  seriously 
misleading  error"  in  the  debtor's  name  indicated  on  such  financing 
statement. 

The  decision  in  the  Citizens  National  Bank  case  is  extremely  sig- 
nificant to  those  persons  who  rely  on  Uniform  Commercial  Code  searches 
in  making  credit  granting  decisions.  Under  this  case,  the  critical  factor 
in  determining  whether  an  error  in  the  debtor's  name  is  "seriously 
misleading"  appears  to  be  the  similarity  in  appearance  between  the 
debtor's  correct  name  and  the  name  of  the  debtor  shown  on  the  financing 
statement  at  issue,  and  not  necessarily  the  practical  ability  of  the  search 
requester  to  be  made  aware  of  the  contents  of  the  financing  statement 
as  the  result  of  the  error. 

Presently,  it  is  the  poHcy  of  the  Indiana  Secretary  of  State's  office 
to  report  the  existence  of  only  those  financing  statements  that  bear  the 
exact  name  of  the  person  indicated  on  the  search  request  unless  the 
search  request  specifies  that  variations  of  the  indicated  name  should  also 
be  searched.  As  a  result  of  the  Citizens  National  Bank  case,  persons 
relying  on  Uniform  Commercial  Code  searches  should  always  specify 


'^Id.  at  1207 
'"'Id.  at  1208. 
''Id. 


98  INDIANA  LAW  REVIEW  [Vol.  20:87 

that  variations  of  the  indicated  name  should  be  searched,  even  though 
the  search  requester  is  absolutely  certain  that  the  indicated  name  is  the 
correct  name  of  the  debtor.  This  type  of  search  request  procedure,  of 
course,  does  not  guarantee  that  the  resulting  search  will  reveal  all  fi- 
nancing statements  of  which  the  searcher  may  be  deemed  to  be  "on 
notice."  Nevertheless,  it  at  least  will  enhance  the  chances  of  discovering 
additional,  legally  effective  financing  statements. 

In  Second  National  Bank  of  Danville  v.  Massey-Ferguson  Credit 
Corp.,^^  the  issue  was  whether  dual  filing  is  required  to  perfect  a  security 
interest  in  farming  equipment  when  the  debtor  is  an  Indiana  corporation. 
Foster  of  Indiana,  Inc.,  an  Indiana  corporation  located  in  Fountain 
County,  granted  to  Second  National  Bank  a  blanket  security  interest  in 
all  of  its  presently  owned  and  after-acquired  machinery  and  equipment. 
Second  National  Bank  perfected  its  security  interest  on  November  10, 
1978,  by  filing  financing  statements  with  both  the  recorder  of  Fountain 
County  and  the  Indiana  Secretary  of  State.  Massey-Ferguson,  on  the 
other  hand,  claimed  a  purchase  money  security  interest  in  a  combine 
and  grain  table  sold  by  Massey-Ferguson  and  acquired  by  Foster  in 
1981.  It  asserted  that  this  security  interest  was  vaHdly  and  timely  perfected 
on  December  8,  1981,  by  its  filing  of  a  financing  statement  with  only 
the  recorder  of  Fountain  County. 

Second  National  Bank  maintained  that  its  security  interest  in  the 
combine  and  grain  table  was  superior  to  that  of  Massey-Ferguson  because 
the  latter  had  failed  to  file  with  the  Indiana  Secretary  of  State.  Both 
parties'  arguments  centered  on  the  proper  construction  of  Indiana  Code 
section  26-1-9-401."  As  a  result  of  a  1971  amendment  to  this  section, 
certain  language  that  clearly  provided  for  dual  filing  was  deleted. ^"^  Second 


"478  N.E.2d  916  (Ind.  Ct.  App.   1985). 

"At   the  time   Second  National   Bank  and   Massey-Ferguson   filed   their   respective 
financing  statements,  section  26-1-9-401  provided,  in  pertinent  part: 

(1)  The  proper  place  to  file  in  order  to  perfect  a  security  interest  is  as 
follows: 

(a)  When  the  collateral  is  equipment  used  in  farming  operations,  or 
farm  products,  or  accounts,  contract  rights  or  general  intangibles  arising 
from  or  relating  to  the  sale  of  farm  products  by  a  farmer,  or  consumer 
goods,  then  in  the  office  of  the  county  recorder  in  the  county  of  the 
debtor's  residence  or  if  the  debtor  is  not  a  resident  of  this  state  then 
in  the  office  of  the  county  recorder  in  the  county  where  the  principal 
place  of  business  of  the  corporation  is  located,  and  in  the  office  of 
the  secretary  of  state  .... 
Ind.  Code  §  26-1 -9-401  (l)(a)  (1976). 

'"Prior  to  the  1971  simendment,  section  26-1-9-401  provided,  in  pertinent  part: 
(1)  The  proper  place  to  file  in  order  to  perfect  a  security  interest  is  as 

follows: 

(a)  When  the  collateral  is  equipment  used  in  farming  operations,  or 
farm  products,  or  accounts,  contract  rights  or  general  intangibles  arising 


1987]  COMMERCIAL  LA  W  99 

National  Bank  argued  that  the  deletion  was  purely  unintentional  and 
that  the  section  should  be  construed  to  conform  to  the  filing  requirements 
in  existence  prior  to  the  1971  amendment.  Massey-Ferguson,  on  the  other 
hand,  asserted  that  Indiana  Code  section  26-1-9-401  should  be  construed 
literally  to  require  only  a  local  filing  in  the  instant  case. 

In  finding  in  favor  of  Massey-Ferguson,  the  court  of  appeals  refused 
to  extend  the  plain  language  of  Indiana  Code  section  26-1-9-401  to 
require  dual  filing. ^^  The  court  apparently  failed  to  consider  (or,  at  least, 
be  persuaded  by)  the  explanation  of  the  section  in  Burns  Indiana  Statutes 
Annotated, ^^  the  dual  filing  requirement  recited  in  the  then  current  Rules 
and  Regulations  for  the  Administration  of  the  Uniform  Commercial 
Code  issued  by  the  Indiana  Secretary  of  State,"  or  a  1982  amendment 
to  the  section  (to  be  effective  after  December  31,  1983)  expressly  providing 
for  a  single  filing  with  the  Indiana  Secretary  of  State  when  the  collateral 
is  equipment  used  in  farming  operations. ^^ 


from  or  relating  to  the  sale  of  farm  products  by  a  farmer,  or  consumer 
goods,  then  in  the  office  of  the  county  recorder  in  the  county  of  the 
debtor's  residence  or  if  the  debtor  is  not  a  resident  of  this  state  then 
in  the  office  of  the  county  recorder  where  the  goods  are  kept,  or  if 
the  debtor  is  a  corporation  then  in  the  office  of  the  county  recorder 
in  the  county  where  the  principal  place  of  business  of  the  corporation 
is  located,  and  in  the  office  of  the  Secretary  of  State  .... 
Second  National  Bank,  478  N.E.2d  at  917. 
''Id.  at  917-18. 
'^Burns  printed  the  apparent  omission  in  brackets: 

(1)  The  proper  place  to  file  in  order  to  perfect  a  security  interest  is  as 
follows: 

(a)  When  the  collateral  is  equipment  used  in  farming  operations,  or 

farm  products,  or  accounts,  contract  rights  or  general  intangibles  arising 

from  or  relating  to  the  sale  of  farm  products  by  a  farmer,  or  consumer 

goods,  then  in  the  office  of  the  county  recorder  in  the  county  of  the 

debtor's  residence  or  if  the  debtor  is  not  a  resident  of  this  state  then 

in  the  office  of  the  county  recorder  in  the  county  where  the  [goods 

are  kept,  or  if  the  debtor  is  a  corporation  then  in  the  office  of  the 

county  recorder  in  the  county  where  the]  principal  place  of  business 

of  the  corporation  is  located,  and  in  the  office  of  the  secretary  of 

state  .... 

Ind.  Code  Ann.  §  26-1 -9-401  (l)(a)  (Burns  1974).  The  compiler's  note  to  this  section  states: 

"The  bracketed  words   in   subsection   (l)(a)   were  inserted  by   the   compiler,   since   they 

appeared  in  the  section  prior  to  the  amendment,  and  it  appears  they  were  unintentionally 

deleted  in  the  enrolled  bill."  Id. 

'^See  Secretary  of  State,  Indiana  Rules  and  Regulations  for  Administration  of  the 
Uniform  Commercial  Code  6  (1981). 

'^A  new  section  26-1-9-401.5  was  added  in  1982  to  provide  in  pertinent  part: 

(1)  Notwithstanding  section  401  of  this  chapter,  after  December  31,  1983, 

the  proper  place  to  file  in  order  to  perfect  a  security  interest  is  in  the  office 

of  the   secretary   of  state  when  the  collateral   is   equipment   used   in   farming 

operations,  or  farm  products,  or  accounts,  contract  rights  or  general  intangibles 


100  INDIANA  LAW  REVIEW  [Vol.  20:87 

Ironically,  effective  January  1,  1986,  Indiana  Code  section  26-1-9- 
401  was  once  again  amended — this  time  expressly  to  require  dual  filing 
when  the  debtor  is  a  corporation  and  the  collateral  is  equipment  used 
in  farming  operations. ^^ 

V.     Dishonored  Checks 

One  noteworthy  decision  was  handed  down  during  the  survey  period 
which  construed  Indiana's  two  statutes  allowing  an  injured  party  to  recover 
from  the  drawer  well  in  excess  of  the  face  amount  of  the  check  in  the 
event  the  check  is  dishonored/"  In  Stoutco,  Inc.  v.  Amma,  Inc.,^^  a 
payee-manufacturer  sued  the  drawer-distributor  on  a  dishonored  check. 
The  distributor  stopped  payment  on  a  check  drawn  to  pay  for  merchandise 
purchased  from  the  manufacturer  shortly  after  the  distributor  learned  that 
the  manufacturer  had  terminated  the  distribution  agreement  between  the 
two  parties.  At  all  relevant  times,  there  were  sufficient  funds  in  the  distrib- 
utor's account  to  pay  the  dishonored  check.  Subsequently,  the  manu- 
facturer brought  suit  in  the  United  States  District  Court  for  the  Northern 
District  of  Indiana  to  recover  the  penalties  then  provided  under  Indiana's 
two  (civil)  dishonored  checks  statutes. 

The  court  in  Stoutco  first  addressed  the  question  of  whether  the 
drawer-distributor  was  liable  under  Indiana  Code  section  28-2-8-1  for 
stopping  payment  on  the  check. ^^  The  distributor  argued  that  at  the  time 


arising  from  or  relating  to  the  sale  of  farm  products  by  a  farmer.  All  filings 
under  this  section  shall  be  maintained  by  the  secretary  of  state  in  an  agricultural 
file  separate  from  all  other  statements  filed  under  this  chapter. 
Ind.  Code  §  26-1-9-401.5(1)  (1982).  The  1982  amendment,  however,  was  repealed  in  1983 
prior  to  its  effective  date.  See  1983  Ind.  Acts,  Pub.  L.  No.  255-1983,  §  3. 

'^Section  26-1-9-401,  as  amended  by  Pub.  L.  No.  93-1985,  now  provides,  in  pertinent 
part: 

(1)  The  proper  place  to  file  in  order  to  perfect  a  security  interest  is  as 
follows: 

(a)  When  the  collateral  is  equipment  used  in  farming  operations,  or 
farm  products,  or  accounts  or  general  intangibles  arising  from  or 
relating  to  the  sale  of  farm  products  by  a  farmer,  or  consumer  goods, 
then  in  the  office  of  the  county  recorder  in  the  county  of  the  debtor's 
residence  or  if  the  debtor  is  not  a  resident  of  this  state  then  in  the 
office  of  the  county  recorder  in  the  county  where  the  goods  are  kept, 
or  if  the  debtor  is  a  corporation  then  in  the  office  of  the  county 
recorder  in  the  county  where  the  corporation  has  its  residence,  and 
in  the  office  of  the  secretary  of  state  .... 
Ind.  Code  §  26-1 -9-401  (l)(a)  (Supp.   1986). 

*^Ind.  Code  §  28-2-8-1  (Supp.  1986)  provides  for  a  civil  penalty  that  includes  recovery 
of  interest,  court  costs,  attorneys'  fees,  and  treble  the  face  amount  of  the  check  (maximum 
of  $500),  in  certain  cases,  for  wrongfully  stopping  payment  or  allowing  dishonor  of  a 
check.  Ind.  Code  §  34-4-30-1  (Supp.  1986)  allows  a  person  who  suffers  a  pecuniary  loss 
because  of  violation  of  Indiana's  crimes  against  property  laws,  sections  35-43-1-1  to  35- 


1987]  COMMERCIAL  LAW  101 

it  Stopped  payment,  it  thought  there  was  "valid  legal  cause"  to  do  so, 
and  therefore  that  it  should  not  be  held  liable  under  the  statute.  In 
essence,  the  distributor  contended  that  the  phrase  "valid  legal  cause"  as 
used  in  the  statute  should  be  given  a  subjective  meaning  and  should  be 
judged  as  of  the  time  the  stop  payment  order  was  given.  The  court, 
however,  adopted  an  objective,  strict  liability  approach  and  ruled  that 
a  drawer  can  make  use  of  this  defense  only  if  it  is  able  to  show  that 
it  actually  had  a  "legal  right  to  stop  payment  on  the  check."" 

The  second  question  addressed  in  Stoutco  was  whether  the  distrib- 
utor's president  could  be  held  individually  liable  for  the  dishonored  check 
under  Indiana  Code  section  28-2-8-1.  The  payee-manufacturer  argued 
that  the  president  was  liable  because  he  signed  the  check  on  behalf  of 
the  corporation  and  because  he  placed  the  stop  payment  order.  In  this 
regard,  the  manufacturer  asserted  that  the  situation  was  analogous  to 
cases  involving  violation  of  Indiana  Code  section  35-43-5-5,  the  criminal 
check  deception  statute,  and  that  therefore,  a  corporate  officer  should 
be  held  individually  Hable  on  a  dishonored  check  pursuant  to  Indiana 
Code  section  28-2-8-1.^^ 

The  court  disagreed  with  the  manufacturer's  analysis  for  two  reasons. 
First,  it  concluded  that  the  result  should  be  different  in  Indiana  Code 
section  28-2-8-1  cases  because  a  violation  of  that  statute  does  not  require 
fraudulent  intent,  unhke  a  violation  of  Indiana  Code  section  35-43-5-5.^^ 
Second,  the  court  held  that  the  language  of  the  statute  itself  precluded 
the  imposition  of  individual  liability. ^^  Reasoning  that  the  language  of 
Indiana  Code  section  28-2-8-1  permitted  liability  under  that  section  to  be 
imposed  on  a  corporate  officer  only  if  such  person  could  be  held  per- 
sonally liable  on  the  check  pursuant  to  Indiana  Code  section  26-1-3-403,^' 


43-5-8,  to  collect  up  to  three  times  his  actual  damages,  court  costs,  and  attorneys'  fees. 
Check  deception,  Ind.  Code  §  35-43-5-5  (Supp.  1986),  is  one  of  the  crimes  against  property 
laws. 

^•620  F.  Supp.  657  (N.D.  Ind.   1985). 

"The  statute  imposes  liability  upon  a  person  "who,  having  executed  and  delivered 
to  another  person  a  check  or  draft  drawn  on  or  payable  at  a  financial  institution,  either 
without  valid  legal  cause  shown  stops  payment  on  the  check  or  draft  or  allows  the  check 
or  draft  to  be  dishonored  .  .  .  ."  Ind.  Code  §  28-2-8-l(a)  (1986). 

"•'Stoutco,  620  F.  Supp.  at  661. 

^The  court  cited  Walker  v.  State,  467  N.E.2d  1248,  1250  (Ind.  Ct.  App.  1984)  and 
Cooper  V.  State,  181  Ind.  App.  275,  391  N.E.2d  841  (1979)  in  support  of  the  proposition 
that  the  "corporate  veil"  does  not  shield  an  officer  from  liability  under  the  criminal  check 
deception  statute.  Id. 

^'Stoutco,  620  F.  Supp.  at  661. 

""Id.  at  662. 

^^IND.  Code  §  26-1-3-403(2)  (1982)  provides: 

(2)  An  authorized  representative  who  signs  his  own  name  to  an  instrument 
(a)  is  personally  obligated  if  the  instrument  neither  names  the  person 


102  INDIANA  LAW  REVIEW  [Vol.  20:87 

the  court  concluded  that  no  recovery  could  be  had  against  the  president 
because  both  his  representative  capacity  and  the  name  of  the  corporation 
which  he  represented  were  shown  on  the  check/* 

Finally,  the  Stoutco  court  addressed  the  question  of  whether  the 
payee-manufacturer  could  collect  treble  damages,  costs,  and  reasonable 
attorneys'  fees  against  the  drawer-distributor  under  Indiana  Code  section 
34-4-30-1.69  Finding  that  the  criminal  check  deception  statute  (on  which 
hability  under  Indiana  Code  section  34-4-30-1  is  based)  clearly  required 
knowledge  or  intent  on  the  part  of  the  issuing  party  at  the  time  of 
issuance  that  the  check  would  not  be  paid  or  honored,  and  that  the 
evidence  indicated  that  the  drawer-distributor  intended  to  pay  the  check 
when  it  was  issued,  the  court  denied  recovery  to  the  payee-manufacturer 
under  this  section.^" 

VI.     Real  Estate  Foreclosure 

According  to  an  express  statutory  provision  that  pertains  to  the 
foreclosure  of  real  estate  mortgages,  the  court  ''shall"  include  a  deficiency 
judgment  in  the  order  of  sale  where  a  balance  remains  due  on  the 
mortgage  after  the  foreclosure  sale  if  the  mortgage  or  a  separate  in- 
strument contains  a  promise  to  pay  the  sum  of  money  secured  by  the 
mortgage. ''^  In  Arnold  v.  Melvin  R.  Hall,  Inc.,^^  however,  the  Indiana 
Court  of  Appeals  rejected  the  position  that  this  statute  requires  a  de- 
ficiency judgment  in  such  a  situation  and  instead  adopted  the  position 
that  it  allows  a  deficiency  judgment.''^  The  court  of  appeals'  ruling  in 

represented  nor  shows  that  the  representative  signed  in  a  representative 
capacity; 

(b)  except  as  otherwise  estabhshed  between  the  immediate  parties,  is 
personally  obligated  if  the  instrument  names  the  person  represented 
but  does  not  show  that  the  representative  signed  in  a  representative 
capacity,  or  if  the  instrument  does  not  name  the  person  represented 
but  does  show  that  the  representative  signed  in  a  representative  capacity. 
''''Stoutco,  620  F.  Supp.  at  662. 

^'Presently,  Indiana  Code  section  28-2-8-1  requires  the  plaintiff  to  elect  whether  to 
pursue  the  claim  under  section  34-4-30-1  or  under  section  28-2-8-1.  Ind.  Code  §  28-2-8-1 
(Supp.   1986).   However,  at  the  time  the  complaint  in  Stoutco  was  filed,  there  was  no 
such  election  of  remedies  provision. 
'"Stoutco,  620  F.  Supp.  at  662. 
^'The  pertinent  provision  states: 

When  there  is  an  express  written  agreement  for  the  payment  of  the  sum  of 
money  secured  contained  in  the  mortgage  or  any  separate  instrument,  the  court 
shall  direct  in  the  order  of  sale  that  the  balance  due  on  the  mortgage  and  costs 
which  may  remain  unsatisfied  after  the  sale  of  the  mortgaged  premises,  shall 
be  levied  of  [sic]  any  property  of  the  mortgage-debtor. 
Ind.  Code  §  34-1-53-5  (1982). 

'H78  N.E.2d  696  (Ind.  Ct.  App.),  reh'g  denied,  481   N.E.2d  409  (Ind.  Ct.  App. 
1985). 

'M81   N.E.2d  at  413  (rejecting  Melvin  R.   Hall,   Inc.'s  and  amici's  argument  that 


1987]  COMMERCIAL  LAW  103 

the  Arnold  case  purported  significantly  to  alter  proceedings  for  the 
foreclosure  of  Indiana  real  estate  mortgages  and  land  contracts. 

The  Arnolds  entered  into  a  contract  with  Melvin  R.  Hall,  Inc.,  for 
the  conditional  sale  of  real  estate  and  personal  property.  When  the 
Arnolds  defaulted  on  their  monthly  installments  after  paying  more  than 
half  of  the  $135,000  contract  price,  Hall  sought  and  obtained  a  foreclosure 
order  and  deficiency  judgment  against  the  Arnolds.  After  the  personal 
property  was  sold,  the  real  estate  was  sold  to  Hall,  the  sole  bidder  at 
the  foreclosure  sale.  Because  its  bid  was  substantially  less  than  the 
outstanding  balance,  Hall  sought  to  collect  the  deficiency.  The  Arnolds 
objected,  contending  that  it  would  be  inequitable  to  allow  Hall  to  recover 
a  deficiency  judgment  in  addition  to  retaining  the  land  and  the  installment 
payments.  The  court  of  appeals  agreed,  reversing  the  trial  court's  ruling.'''* 

The  court  of  appeals  relied  on  Skendzel  v.  MarshalV^  to  support  its 
view  that  equitable  principles  should  apply  to  situations  in  which  a 
vendor-mortgagee  purchases  the  property  at  the  foreclosure  sale  for  less 
than  the  amount  of  the  outstanding  debt.^^  Although  Skendzel  dealt  with 
enforcement  of  a  forfeiture  clause  in  a  land  sale  contract,  the  court  of 
appeals  availed  itself  of  the  Indiana  Supreme  Court's  reasoning  that  a 
conditional  land  sale  contract  should  be  viewed  as  an  equitable  mortgage, 
with  foreclosure  constituting  an  equitable  remedy. ^^  This  analysis  allowed 
the  court  of  appeals  to  inject  equitable  considerations  into  foreclosure 
proceedings  and  to  rule  that  "absent  evidence  that  the  property's  value 
is  less  than  the  total  remaining  deficiency,  a  mortgagee-vendor  who 
purchases  the  property  at  the  foreclosure  sale  is  not  entitled  to  a  deficiency 
judgment."''^ 

The  court  of  appeals  expanded  upon  its  initial  decision  in  a  sub- 
sequent opinion  denying  Hall's  petition  for  rehearing. ^^  The  court  again 
relied  heavily  on  Skendzel  and  the  equitable  principles  announced  therein 
and  analogized  the  two  factual  situations. ^^  It  also  distinguished  the  pre- 
Skendzel,  factually  similar  case  of  Markel  v.  Evans^^  and  its  progeny, 
and  attacked  the  presumption  that  a  foreclosure  sale  establishes  the  fair 


Indiana  code  section  34-1-53-5  requires  a  trial  court  to  grant  a  deficiency  judgment  for 
the  balance  due  after  the  foreclosure  sale,  plus  costs,  regardless  of  the  purchaser  and 
purchase  price). 

-"Arnold,  478  N.E.2d  at  699. 

^^261  Ind.  226,  301  N.E.2d  641  (1973). 

-"'Arnold,  478  N.E.2d  at  697-99. 

"M  at  697-98;  see  also  Skendzel,  261  Ind.  at  234-41,  301  N.E.2d  at  646-50  (analysis 
of  a  conditional  land  sale  contract  as  an  equitable  mortgage  and  corresponding  remedies 
for  breach). 

'^Arnold,  478  N.E.2d  at  699. 

^M81  N.E.2d  at  409  (Ind.  Ct.  App.   1985). 

«°A/.  at  410-11. 

«'47  Ind.  326  (1874). 


104  INDIANA  LAW  REVIEW  [Vol.  20:87 

market  value  of  the  property. ^^  Finally,  the  court  of  appeals  rejected 
Hall's  interpretation  of  the  Indiana  statute  pertaining  to  deficiency  judg- 
ments, concluding  once  again  that  "[f]oreclosure  means  essentially  an 
appeal  to  the  equitable  powers  of  the  court. "^^ 

On  a  petition  to  transfer  by  Hall,  the  Indiana  Supreme  Court  granted 
the  petition  and  affirmed  the  trial  court. ^"^  While  agreeing  with  the  court 
of  appeals  that  equity  would  demand  a  remedy  against  a  vendor-mort- 
gagee who  seeks  what,  in  effect,  is  a  double  recovery,  the  supreme  court 
was  unable  to  agree  with  the  court  of  appeals  "that  the  best  way  to 
assure  that  such  does  not  occur  is  to  require  every  mortgagee  to  provide 
the  court  with  evidence  that  the  fair  market  value  of  the  property  at 
the  time  of  the  foreclosure  sale  is  less  than  the  balance  of  the  debt  then 
due."^^  Rather,  according  to  the  supreme  court,  it  is  the  vendee  or. 
mortgagor  who  must  bring  the  inadequacy  of  the  price  received  at  the 
foreclosure  sale  before  the  court. ^^  The  supreme  court  was  quick  to  note, 
however,  that  in  order  for  the  sale  to  be  set  aside  or  for  the  deficiency 
judgment  to  be  denied  on  the  basis  of  inadequacy  of  price,  it  will  be 
necessary  for  the  vendee  or  mortgagor  to  show  that  "the  disparity  between 
the  value  of  the  property  sold,  and  the  price  paid,  [is]  so  great  as  to 
shock  the  sense  of  justice  and  right. "^"^ 

VII.     Guaranties 

In  three  recent  cases,  the  defendants  to  actions  brought  on  their 
respective  guaranty  contracts  failed  to  avoid  liability  when  the  courts 
strictly  construed  the  language  of  guaranty  instruments.  A  variety  of 
defenses,  including  lack  of  notice,  impairment  of  collateral,  ambiguity, 
estoppel,  and  unconscionability  were  unavaihng. 

In  Jackson  v.  Farmers  State  Bank,^^  the  plaintiff  sued  to  recover 
under  a  guaranty  agreement  in  which  the  defendants  guaranteed  the 
debts  of  their  closely-held  corporation.  Defendants  Desmond  and  Mildred 
Jackson  owned  a  car  dealership  doing  business  as  D  &  M  Motors.  D 


^^Arnold,  481  N.E.2d  at  411-12.  The  court  of  appeals  recognized  the  similarity  of 
factual  circumstances  between  Arnold  and  Market,  but  intimated  that  the  Skendzel  ruling 
fundamentally  changed  the  law,  thus  nullifying  the  importance  of  Markel.  Id.  Also,  the 
court  rejected  numerous  cases  supporting  the  Markel  proposition.  Id.  at  n.3.  Nor  did  the 
court  consider  the  posi-Skendzel  case  of  Ellsworth  v.  Homemakers  Finance  Service,  Inc., 
424  N.E.2d  166  (Ind.  Ct.  App.  1981),  in  which  the  court  declared  the  "[foreclosure  must 
follow  statutory  procedure."  Id.  at  169. 

''Arnold,  481  N.E.2d  at  412-13. 

«^Arnold  v.  Melvin  R.  Hall,  Inc.,  496  N.E.2d  63,  66  (1986). 

''Id.  at  65. 

'^Id. 

''Id.  (quoting  Branch  v.  Foust,   130  Ind.  538,  543,  30  N.E.  631,  633  (1891)). 

«M81  N.E.2d  395  (Ind.  Ct.  App.   1985). 


1987]  COMMERCIAL  LAW  105 

&  M  provided  financing  for  its  purchasers  by  installment  contracts,  which 
gave  D  &  M  a  security  interest  in  the  vehicle  purchased,  in  exchange 
for  monthly  payments  of  principal  and  interest.  In  due  course,  D  &  M 
would  assign  the  contracts  "with  recourse"  to  Farmers  State  Bank  (FSB) 
for  value.  Upon  the  default  of  a  vehicle  purchaser,  FSB  presented  the 
dehnquent  contract  to  D  &  M  and  obtained  payment  from  Mr.  Jackson. 
Starting  in  1970  and  continuing  until  1979,  each  delinquent  contract 
presented  to  D  &  M  by  FSB  was  paid  off  in  full  by  Mr.  Jackson. 

Beginning  in  1979,  however,  D  &  M  struggled  with  financial  problems. 
FSB  presented  Mr.  Jackson  with  several  delinquent  contracts,  which  he 
refused  to  pay.  D  &  M  also  defaulted  on  several  short  term  notes  owed 
to  FSB.  Subsequently,  FSB  sued  to  collect  D  &  M's  indebtedness  from 
the  Jacksons  pursuant  to  the  terms  of  a  separate  guaranty  instrument. 

After  an  adverse  decision  by  the  trial  court,  the  Jacksons  contended 
on  appeal  that  they  were  discharged  from  their  guaranty  liability  either 
because  they  had  not  been  provided  with  notice  of  D  &  M's  default  or 
because  the  collateral  securing  D  &  M's  obligation  had  been  impaired. 
The  court  of  appeals  held  with  respect  to  the  Jacksons'  "lack  of  notice" 
argument  that  the  plain  language  of  the  guaranty  contract  was  sufficient 
to  waive  any  otherwise  available  right  to  receive  notice  and  that  even 
if  the  waiver  language  were  determined  to  be  inadequate  or  ineffective, 
the  Jacksons,  as  D  &  M's  alter  ego,  were  on  constructive  notice  of  the 
liabilities  of  D  &  M  at  the  time  the  debts  came  due.^^ 

The  Jacksons  also  asserted  two  impairment  of  collateral  defenses. 
First,  they  argued  that  their  hability  under  the  guaranty  should  be 
discharged  because  FSB  released  titles  to  three  vehicles  to  the  purchasers. 
The  court  of  appeals  rejected  this  contention  because  in  each  instance 
the  Jacksons  had,  in  fact,  consented  to  the  release  of  the  titles. ^°  Second, 
the  Jacksons  asserted  that  because  the  titles  to  certain  of  the  repossessed 
vehicles  securing  D  &  M's  indebtedness  to  FSB  had  not  been  executed 
by  the  respective  owners,  the  collateral  was  impaired.  On  this  issue,  the 
court  of  appeals  questioned  whether  this  "necessarily  impaired  the  col- 
lateral" because  there  was  no  evidence  suggesting  that  Mr.  Jackson  had 
difficulty  in  seUing  repossessed  vehicles  in  the  past  and  because  an  Indiana 
statute  expressly  provided  for  obtaining  a  salvage  title  under  such  cir- 
cumstances.^^ 

Although  the  court  of  appeals'  holding  on  each  of  these  issues  was 
very  probably  correct  as  a  matter  of  common  law  principles  of  suretyship, 
it  is  submitted  that  the  court's  analysis  was  flawed.  Rather  than  relying 


^^Id.  at  400. 

^M  at  400-01  (citing  Ind.  Code  §  26-1-3-606(1)  (1982)). 

^'Id.  (citing  Ind.  Code  §  9-1-3.6-2(6)  (1982)). 


106  INDIANA  LAW  REVIEW  [Vol.  20:87 

on  the  common  law  principles  of  suretyship  in  its  analysis,  the  Jackson 
court  instead  relied  on  various  provisions  of  Article  3  of  the  UCC.  Each 
of  the  provisions  in  Article  3  referred  to  by  the  court,  however,  refers 
to  the  term  "instrument,"  which,  under  Indiana  Code  section  26-1-3- 
102(l)(e),  is  defined  to  mean  a  "negotiable  instrument. "^^  As  a  point  of 
fact,  the  guaranty  contract  which  the  Jacksons  executed  was  not  itself 
a  negotiable  instrument, ^^  and  it  is  exceedingly  unlikely  that  even  the 
retail  installment  sales  contracts  which  D  &  M  endorsed  "with  recourse" 
were  negotiable  instruments. ^"^ 

The  defendants  in  Hedrick  v.  First  National  Bank  &  Trust  Co.  of 
Plainfield^^  also  raised  the  defense  of  impairment  of  collateral.  In  Hed- 
ricky  the  defendants  executed  a  guaranty  instrument  in  favor  of  the  First 
National  Bank  and  Trust  Company  of  Plainfield,  in  which  Mr.  Hedrick 
and  Mr.  Murphy  guaranteed  the  debts  of  their  principals.  Brown  County 
Ski  Mountain  Resort,  Inc.,  and  Starlite  Recreation  Industries,  Inc. 

The  guaranty  contract  purported  to  secure  a  $990,000  loan  to  the 
corporations;  however,  pursuant  to  the  guaranty  contract,  the  Hability 
of  each  guarantor  was  limited  to  a  maximum  of  $138,600.  The  $990,000 
loan  to  the  corporations  was  also  secured  by  a  second  mortgage  on 
certain  real  estate  owned  by  the  corporations.  In  December  1981,  the 
corporations  defaulted  on  the  loan,  and  in  February  1982,  both  cor- 
porations filed  bankruptcy  petitions.  Subsequently,  First  National  sued 
the  guarantors. 

On  appeal  after  adverse  judgments  against  them  in  the  amount  of 
$138,600  each  (plus  interest  and  court  costs),  Hedrick  and  Murphy  argued 
that  they  were  discharged  from  their  liability  under  the  guaranty  contract 
because  of  First  National's  unjustifiable  impairment  of  the  collateral 
securing  the  loan  to  the  corporations.  Their  primary  collateral  impairment 
claims  concerned  the  fact  that  liens  totalling  $925,000  were  placed  ahead 
of  First  National's  lien  in  the  corporations'  bankruptcy  proceedings  and 
the  fact  that  First  National  had  rejected  an  offer  by  one  of  the  lienholders 
to  purchase  the  collateral  for  $350,000. 

The  court  of  appeals  rejected  the  guarantors'  impairment  of  collateral 
defenses  on  the  ground  that  Hedrick  and  Murphy  had  expressly  consented 
to  any  impairment  of  collateral  in  the  guaranty  contract. ^^  Nevertheless, 
the  court  went  on  to  discuss  the  merits  of  the  guarantors'  impairment 
of  collateral  defenses.   It  found   "no  evidence  to  indicate  that   [First 


'^iND.  Code  §  26-l-3-102(l)(e)  (Supp.   1986). 

^^See  Ind.  Code  §  26-1-3-104(1)  (Supp.  1986)  (definition  of  a  negotiable  instrument). 

'^Ind.  Code  §  24-4.5-2-403  (Supp.  1986)  precludes  a  seller  from  taking  a  negotiable 
instrument  other  than  a  check  as  the  evidence  of  the  obligation  of  the  buyer  in  a  consumer 
credit  sale. 

'^482  N.E.2d  1146  (Ind.  Ct.  App.   1985). 

^"Id.  at  1148-49. 


1987]  COMMERCIAL  LAW  107 

National]  was  responsible  for  any  circumstance  which  placed  [it]  behind 
lienholders."^^  Specifically,  the  court  of  appeals  noted  that  the  $925,000 
in  superior  liens  which  were  at  issue  either  were  granted  prior  to  the 
making  of  the  loan  to  the  corporations  by  First  National  or  were  approved 
by  the  bankruptcy  court  during  the  bankruptcy  proceedings.^^ 

Finally,  the  court  of  appeals  determined  that  First  National's  rejection 
of  the  $350,000  offer  to  purchase  the  collateral  did  not  harm  the 
guarantors  because  "there  was  evidence  that  sale  of  the  collateral  .  .  . 
would  not  have  satisfied  the  outstanding  debt  owed  the  Bank,  and  that 
at  least  $227,200  (the  total  sum  guaranteed)  would  remain  to  be  sat- 
isfied."^^ Accordingly,  even  if  the  waiver  language  contained  in  the 
guaranty  contract  had  been  deemed  to  be  ineffective,  the  impairment 
of  collateral  defenses  asserted  by  the  guarantors  v/ould  have  been  un- 
availing. 

In  Amoco  Oil  Co.  v.  Ashcraft,^^  the  United  States  Court  of  Appeals 
for  the  Seventh  Circuit  applied  Indiana  law  to  a  dispute  over  a  guaranty 
the  defendants  executed  when  they  purchased  a  franchise  to  sell  Amoco 
products.  The  franchisee,  Bowlby  Oil  Company,  was  indebted  to  Amoco 
for  more  than  $200,000  when  the  Ashcrafts  purchased  Bowlby  for  $150,000. 
After  the  purchase  was  completed,  the  Ashcrafts  signed  a  document 
entitled  "Unlimited  Guaranty."  The  language  of  the  document  stated 
that  the  Ashcrafts  "Unconditionally  Guarantee[d]  Payment  When  Due 
...  of  any  and  all  indebtedness,  including  interest  thereon,  of  [Bowlby] 
to  [Amoco],  howsoever  such  indebtedness  may  arise,  whether  as  principal, 
guarantor,  endorser  or  otherwise,  now  or  hereafter  existing  .  .  .  ."'°' 
Upon  default  by  Bowlby  in  the  payment  of  its  obligations  to  Amoco, 
Amoco  sued  the  Ashcrafts  under  the  guaranty  contract.  The  district 
court  granted  summary  judgment  for  Amoco  and  dismissed  the  Ashcrafts' 
counterclaims  for  fraud  and  breach  of  contract.  The  Seventh  Circuit 
affirmed.  ^'^^ 

The  Ashcrafts  alleged  three  grounds  for  avoidance  of  the  debt.  First, 
they  contended  that  the  guaranty  was  ambiguous.  The  Seventh  Circuit 
discussed  the  use  of  the  patent-latent  ambiguity  distinction  in  Indiana 
contract  law  and  stated  accordingly,  "[T]he  court  must  first  try,  without 
taking  any  oral  testimony,  to  figure  out  what  the  contract  means;  if  it 
succeeds  it  will  enforce  the  contract  in  accordance  with  that  meaning. "'°^ 
On  this  issue,  the  court  concluded  that  the  contract  was  clear  on  its 


''Id.  at  1149. 
''Id. 
''Id. 

'o«791  F.2d  519  (7th  Cir.   1986). 

'°'M  at  520. 

'°'Id.  at  524. 

'°'Id.  at  521. 


108  INDIANA  LAW  REVIEW  [Vol.  20:87 

face,  that  the  words  "now  or  hereafter  existing"  were  unambiguous, 
and  that  the  guaranty  clearly  referred  to  the  pre-existing  debts  of  Bowlby.'°^ 

The  Ashcrafts'  second  argument  was  that  Amoco  should  be  estopped 
from  enforcing  the  guaranty  because  certain  false  representations  were 
made  by  Amoco 's  agent.  They  contended  that  the  local  manager  of 
Amoco  had  assured  the  Ashcrafts  at  the  time  they  signed  the  guaranty 
that  the  guaranty  referred  only  to  debts  arising  subsequent  to  the  Ash- 
crafts' purchase  of  Bowlby.  The  Seventh  Circuit  held,  however,  that  the 
local  manager's  interpretation  of  the  document  was  not  actionable  as 
misrepresentation  because  Indiana  law  permits  an  action  for  misrepre- 
sentation of  fact  but  not  for  misrepresentation  about  the  meaning  of  a 
document. '°^ 

Third,  the  Ashcrafts  argued  that  the  guaranty  should  not  be  enforced 
on  the  basis  of  the  doctrine  of  unconscionability.  The  Seventh  Circuit 
observed,  though,  that  Indiana  law  is  "unfriendly  to  the  defense  of 
unconscionabiHty"^°^  as  demonstrated  by  the  fact  that  there  was  only 
one  reported  case  in  which  an  Indiana  appellate  court  accepted  a  defense 
of  unconscionability. '^^  It  noted  that  the  facts  of  that  case  were  clearly 
more  egregious  than  the  facts  of  the  instant  case.  Furthermore,  the 
Seventh  Circuit  concluded  that  the  Ashcrafts  had  taken  a  calculated  risk 
in  purchasing  Bowlby  and  had  not  attempted  to  negotiate  more  favorable 
terms.  As  a  result,  the  Seventh  Circuit  required  the  Ashcrafts  to  abide 
by  the  terms  of  the  guaranty  and  affirmed  Indiana's  resistance  to  em- 
bracing "a  more  paternalistic  conception  of  the  judicial  role  in  enforcing 
contracts.  "'°^ 

VIII.     Mechanic's  Liens 

During  this  survey  period,  the  Indiana  Court  of  Appeals  decided 
several  cases  concerning  mechanic's  liens.  Two  of  the  controversies  in- 
volved the  construction  of  Indiana  Code  section  32-8-3-3.'°^  In  both, 
the  Indiana  Court  of  Appeals  for  the  Third  District  took  issue  with  a 
case  previously  decided  by  the  First  District.  ^^° 


'°'Id.  at  521-22  (citing  Clem  v.  Newcastle  &  Danville  R.R.,  9  Ind.  488  (1857);  Skrypek 
V.  St.  Joseph  Valley  Bank,  469  N.E.2d  774,  779-80  (Ind.  Ct.  App.  1984);  Plymale  v. 
Upright,  419  N.E.2d  756,  763-65  (Ind.  Ct.  App.   1981)). 

'°^M  at  522. 

'«^5ee  Weaver  v.  American  Oil  Co.,  275  Ind.  458,  276  N.E.2d  144  (1971). 

''''Amoco,  791  F.2d  at  524. 

'°This  statute  provides  for  notice  of  intention  to  hold  a  mechanic's  lien  and  sets  out 
filing  requirements.  See  Ind.  Code  §  32-8-3-3  (Supp.   1986). 

•'o5ee  Cato  V.  David  Excavating  Co.,  435  N.E.2d  597  (Ind.  Ct.  App.   1982). 


1987]  COMMERCIAL  LAW  109 

In  O.J.  Shoemaker,  Inc.  v.  Board  of  Trustees,^^^  Shoemaker,  the 
mechanic's  lien  claimant,  filed  a  cross-claim  to  foreclose  its  lien  against 
real  estate  for  certain  improvements  made  to  the  property.  The  notice 
of  mechanic's  lien  contained  the  following  description: 

Lots  19  through  24  and  east  22"  Vac-Bridge  Street  and  West 
1/2  east  Mill  Race  and  Vac-alley  bet  Lots  21  and  22  of  Lowell."^ 

The  trial  court  found  this  description  insufficient  to  satisfy  the  require- 
ments for  estabhshing  a  lien,  relying  on  Cato  v.  David  Excavating  Co.,"^ 
an  opinion  by  the  First  District  Court  of  Appeals. 

The  mechanic's  lien  notice  in  Cato  set  forth  the  contractor's  intention 
to  hold  a  lien  on  certain  land  and  buildings  when,  in  fact,  the  contractor 
had  constructed  a  road  but  no  buildings.  The  Cato  court  held  that  such 
notice  was  insufficient  "not  only  for  its  failure  to  identify  the  improve- 
ment which  was  the  subject  of  the  hen  but  also  for  its  purported  inclusion 
of  the  buildings  within  the  scope  of  the  lien  when  only  the  land  was 
subject  to  the  lien."^'^ 

In  Shoemaker,  the  trial  court  dismissed  Shoemaker's  cross-claim 
specifically  because  the  lien  failed  to  refer  to  the  particular  improvement 
made  on  the  real  estate  by  Shoemaker.  The  Indiana  Court  of  Appeals 
for  the  Third  District  reversed,  finding  Shoemaker's  Hen  sufficient  to 
withstand  dismissal. '^^  The  Third  District,  disagreeing  with  the  First 
District's  interpretation  of  the  statute,  stated  that  Indiana  Code  section 
32-8-3-3 

is  designed  to  give  the  record  titleholder  of  the  property  and 
any  prospective  purchasers  or  money  lenders  notice  of  a  person's 
intent  to  hold  a  lien  on  the  property.  .  .  The  express  requirements 
of  the  statute  accomplish  that  purpose:  notice.  The  fact  that  'a 
lien  may  not  be  had  on  one  structure  for  work  done  on  or 
materials  furnished  for  a  different  structure,'  ...  is  important 
only  to  the  attempted  enforcement  of  the  lien,  not  to  the  notice 
of  it.1'6 

The  court  reasoned  that  any  party  with  an  interest  in  particular  property 
is  capable  of  inquiring  further  once  he  obtains  notice  of  a  lien."^ 


"•479  N.E.2d  1349  (Ind.  Ct.  App.   1985). 

"Vcf.  at  1350. 

"M35  N.E.2d  597  (Ind.  Ct.  App.   1982). 

'^'Shoemaker,  479  N.E.2d  at  1351  (citing  Cato,  435  N.E.2d  at  605). 

"^M  at  1352. 

"*'/a?.  at  1351  (citations  omitted)  (emphasis  in  original). 


110  INDIANA  LAW  REVIEW  [Vol.  20:87 

The  other  case  deaUng  with  a  similar  issue  was  Thomas  J.  Henderson, 
Inc.  V.  Leibowitz.^^^  In  Leibowitz,  Carl  and  Penny  Leibowitz  contracte'd 
with  Henderson  for  remodeling  work  on  a  house  that  Mrs.  Leibowitz 
was  purchasing  on  contract.  When  the  Leibowitzes  did  not  pay  in  full, 
Henderson  filed  a  notice  of  mechanic's  lien  on  the  house.  Henderson's 
notice  named  the  Leibowitzes  as  owners,  gave  the  street  number  and 
legal  description  of  the  property,  and  listed  the  amount  of  the  claim. 
Subsequently,  Henderson  brought  an  action  to  enforce  the  hen  against 
the  Leibowitzes  (equitable  owners),  the  Trytkos  (legal  owners),  and  the 
mortgage  company  that  held  the  first  mortgage  on  the  real  estate. 

The  trial  court  held  in  favor  of  all  defendants,  relying  on  Cato.  In 
Cato,  the  court  had  said,  ''The  statutory  requirement  of  a  statement 
of  intention  to  hold  a  lien  upon  property  impHes  that  some  reference 
to  the  improvement  be  made  which  will  distinguish  it  from  other  im- 
provements to  which  the  lien  does  not  attach. '"^^  The  trial  court  in 
Leibowitz  applied  this  language  from  Cato  to  hold  that  the  mechanic's 
lien  notice  was  invalid  for  failure  to  identify  the  improvement  that  was 
subject  to  the  lien.'^° 

The  Indiana  Court  of  Appeals  for  the  Third  District  reversed  the 
trial  court  on  the  mechanic's  lien  issue,  reiterating  in  Leibowitz  its  express 
rejection  of  the  First  District's  Cato  opinion.  ^^^  The  Leibowitz  court 
held  that  "compliance  with  the  statutory  requirement  of  legal  description, 
street  and  number  is  sufficient  to  satisfy  the  notice  purpose  of  the 
statute,'""  and  that  a  mechanic's  lien  notice  need  not  refer  to  the  nature 
of  the  improvements  in  order  to  satisfy  the  statutory  requirement. ^^^ 

The  court  of  appeals  also  rejected  the  defendants'  contention  that  the 
lien  notice  was  invalid  because  it  listed  only  the  Leibowitzes  as  owners, 
when  in  fact  the  Trytkos  were  the  legal  owners  at  the  time  the  notice 
was  filed.  Although  concluding  that  the  lien  could  not  attach  to  the 
Trytkos'  interest  in  the  real  estate  because  they  neither  authorized  the 
remodeling  nor  received  notice  of  Henderson's  intent  to  hold  a  lien,  the 
court  held  that  the  lien  was  valid  with  respect  to  the  Leibowitzes'  interest, 
stating  that  the  hen  "attached  to  whatever  interest  the  Leibowitzes  had 
when  the  labor  and  materials  were  furnished  and  also  to  the  interest 
subsequently  acquired  by  the  conveyance  from  the  Trytkos. "'^"^ 


"«490  N.E.2d  396  (Ind.  Ct.  App.   1986). 

'"Ca^o,  435  N.E.2d  at  606,  quoted  in  Thomas  J.  Henderson,  Inc.  v.  Leibowitz,  490 
N.E.2d  396,  397  (Ind.  Ct.  App.   1986). 

'^''Leibowitz,  490  N.E.2d  at  397. 

'2'M  at  398. 

'^^Id.  (citing  O.J.  Shoemaker,  Inc.  v.  Board  of  Trustees,  479  N.E.2d  1349,  1351  (Ind. 
Ct.  App.   1985)). 

'^Vc?.  The  court  of  appeals  cited  Mid  America  Homes,  Inc.  v,  Horn,  272  Ind.  171, 
396  N.E.2d  879  (1979).  In  Mid  America  Homes,  the  Supreme  Court  of  Indiana  held  that 


1987]  COMMERCIAL  LAW  111 

In  another  recent  case,  Indianapolis  Power  &  Light  Co.  v.  Todd,^^^ 
Indianapolis  Power  &  Light  Company  (IPALCO)  contracted  with  a 
general  contractor  for  work  on  certain  generating  stations.  The  general 
contractor  engaged  a  subcontractor  and  the  subcontractor  in  turn  hired 
laborers.  IPALCO  made  partial  payment  to  the  general  contractor,  which 
subsequently  paid  the  subcontractor  in  full;  the  subcontractor,  however, 
failed  to  pay  its  laborers.  The  laborers  sought  to  recover  from  IPALCO 
by  filing  notice  of  mechanic's  lien  under  Indiana  Code  section  32-8-3- 
1  and  by  filing  notice  of  intent  to  hold  IPALCO  personally  liable  under 
Indiana  Code  section  32-8-3-9  for  the  amount  of  labor  performed. 

The  trial  court  granted  partial  summary  judgment,  holding  for 
IPALCO  on  the  mechanic's  lien  issue  and  for  the  laborers  on  the  personal 
liability  issue.  On  appeal,  IPALCO  argued  that  the  laborers  of  a  sub- 
contractor were  not  a  protected  class  under  the  personal  liability  statute. 
While  conceding  that  the  language  of  the  personal  liability  statute  was 
ambiguous,  the  court  of  appeals  held  that  the  laborers  were  entitled  to 
recover  against  IPALCO. '^^  Relying  both  on  the  similarities  between  the 
mechanic's  lien  statute  and  the  personal  liability  statute  and  on  existing 
case  law  under  the  personal  hability  statute  and  its  predecessor,  the 
appellate  court  determined  that  laborers  employed  by  a  subcontractor 
were  entitled  to  participate  on  an  equal  basis  with  laborers  employed 
by  the  general  contractor.  ^^^  Of  course,  in  order  for  any  plaintiff  to  recover 
under  the  personal  liability  statute,  it  is  necessary  for  there  to  be  funds 
in  the  hands  of  the  owner  which  have  not  been  paid  to  the  general  con- 
tractor.'^^ Because  IPALCO  still  controlled  funds  under  the  construction 
contract,  the  appellate  court  held  that  IPALCO  was  personally  liable  to 
the  subcontractor's  laborers.'^' 

Another  recent  case  dealing  with  Indiana  Code  section  32-8-3-9,  the 
personal  liability  statute,  was  Lee  &  May  field.  Inc.  v.  Lykowski  House 
Moving  Engineers,  Inc.^^^  Lykowski  designed  new  wheel  dollies  for  use 
in  its  building-moving  business  and  contracted  with  Lee  &  Mayfield  (Lee) 
for  their  manufacture.  When  the  wheel  dollies  were  first  used  to  move 
a  building  owned  by  Levy,  they  proved  to  be  defective  and  Lykowski 
refused  to  complete  payment  for  them  to  Lee.  Lee  responded  by  filing 
notice  to  hold  Levy,  as  owner  of  the  building,  personally  responsible 
for  payment  pursuant  to  Indiana  Code  section  32-8-3-9.  The  trial  court 
ruled  on  summary  judgment  that  Lee's  claim  against  Levy  was  invaHd. 


"the  owner  entitled  to  notice  ...  is  the  owner  of  that  interest  which  may  be  subjected 
to  the  lien  anticipated  by  the  notice  .  ..."  272  Ind.  at  176-77,  396  N.E.2d  at  883. 

'^H85  N.E.2d  632  (Ind.  Ct.  App.   1985). 

'^^M  at  637. 

'^'Id.  at  636. 

'^Hd.  at  635-36. 

'2^M  at  636-37. 

'3°489  N.E.2d  603  (Ind.  Ct.  App.   1986). 


112  INDIANA  LAW  REVIEW  [Vol.  20:87 

On  appeal,  the  Indiana  Court  of  Appeals  noted  that  although  the 
personal  liability  provision  does  protect  subcontractors  and  materialmen, 
Lee  was  not  a  subcontractor  or  a  materialman  within  the  meaning  of 
Indiana  Code  section  32-8-3-9.'^'  It  held  that  the  scope  of  the  statute 
does  not  extend  to  one  in  Lee's  position  "who  merely  provides  parts 
for  equipment  belonging  to  and  used  by  the  contractor. "*^^  Because  the 
wheel  dollies  were  provided  to  Lykowski  not  just  to  move  Levy's  building, 
but  for  Lykowski's  building-moving  business  in  general,  the  court  of 
appeals  concluded  that  Lee  had  no  remedy  against  Levy  in  Lee's  pay- 
ment dispute  with  Lykowski. '^^ 

Finally,  in  Wilson  v.  Jenga  Corp.,^^"^  the  Wilsons  entered  into  a 
contract  with  Jenga  for  the  construction  of  a  house  on  certain  land 
owned  by  the  Wilsons.  Under  the  contract,  the  Wilsons  agreed  to  pay 
Jenga  even  if  they  failed  to  obtain  financing  for  the  house.  Relying  on 
this  provision,  Jenga  began  work,  only  subsequently  to  learn  that  the 
Wilsons  were  unable  to  obtain  financing.  Jenga  stopped  work  and  gave 
notice  of  intent  to  file  a  mechanic's  lien.  In  Jenga's  suit  to  foreclose 
on  the  Hen,  the  trial  court  held  that  the  hen  was  valid. ^^^ 

On  appeal,  the  Indiana  Court  of  Appeals  reversed  and  remanded. 
The  court  of  appeals  stated  that  as  a  general  proposition  in  a  suit  to 
foreclose  on  a  mechanic's  lien,  where  a  key  element  is  the  reasonable  value 
of  the  labor  and  materials  provided,  "[r]easonable  value  is  not  necessarily 
identical  to  cost."^^^  At  trial,  Jenga  had  attempted  to  estabhsh  the 
quantity  and  value  of  the  materials  it  provided  to  the  Wilsons  merely  by 
introducing  into  evidence  the  invoices  it  had  received  from  its  creditors; 
however,  the  witnesses  responsible  for  laying  the  foundation  for  this 
evidence  had  no  knowledge  of  how  the  invoices  were  prepared  and  of- 
fered no  testimony  that  Jenga  had  actually  paid  the  amounts  invoiced 
or  that  the  charges  represented  the  reasonable  value  of  services  and 
materials  used  on  the  project. 

The  Wilson  had  objected  at  trial  to  the  introduction  of  the  invoices 
on  hearsay  grounds  and  the  court  of  appeals  agreed. '^^  The  court  of  ap- 
peals concluded  that  in  Indiana,  "the  witness  through  which  a  business 
record  is  to  be  admitted  must  have  personal  knowledge  of  the  various 
elements  of  the  foundation.'"^*  Accordingly,  the  court  of  appeals  held 


'''Id.  at  608. 
''^Id. 
'''Id. 

'"490  N.E.2d  375  (Ind.  Ct.  App.   1986). 
"'Id.  at  376. 

''^Id.  (citing  Bangor  Roofing  &  Sheet  Metal  Co.  v.  Robbins  Plumbing  Co.,  151  Me. 
145,   116  A.2d  664  (1955)). 
"'Id.  at  377. 
"'Id.  (citing  Baker  v.  Wagers,  472  N.E.2d  218  (Ind.  Ct.  App.   1984)). 


1987]  COMMERCIAL  LAW  113 

that  the  trial  court's  rehance  on  the  invoices  in  determining  the  value  of 
the  materials  used  was  prejudicial  and  required  reversal.'^' 

IX.     Garnishment 

Two  decisions  within  the  survey  period  have  accorded  greater  protec- 
tions to  third  parties  in  garnishment  proceedings.  In  Browning  &  Herd- 
rich  Oil  Co.  V.  Hall,''''^  for  example,  the  Indiana  Court  of  Appeals  deter- 
mined that  a  judgment  creditor  could  not  garnish  certificates  of  deposit 
that  a  judgment  debtor  held  in  a  joint  account,  where  the  debtor  con- 
tributed none  of  the  funds."" 

The  facts  in  Browning  strongly  favored  the  nondebtor  account  holder. 
Plaintiff  Browning  obtained  a  default  judgment  against  Gerald  Hall.  In 
proceedings  supplemental,  Browning  discovered  that  certain  certificates 
of  deposit  had  been  issued  by  the  Decatur  County  Bank  to  "Opal  Hall 
and/or  Gerald  Hall"  in  an  amount  sufficiently  large  to  satisfy  the  judg- 
ment, and  attempted  to  levy  on  them.  Opal,  Gerald's  mother,  was  a 
seventy-two-year-old  widow  who  contributed  all  of  the  funds  for  the  CD's. 

The  mother's  contributions  to  the  CD's  were  from  her  lifetime  earned 
income,  savings,  the  sale  of  property  she  once  owned,  a  settlement  of 
her  husband's  personal  injury  claim,  the  sale  of  stock,  a  profit-sharing 
plan  from  her  former  employment,  and  miscellaneous  rent,  interest,  and 
other  income.  She  alone  received  the  interest  from  the  CD's,  which  she 
reported  on  her  annual  income  tax  returns.  She  kept  the  CD's  in  her 
lock  box,  retained  the  only  key,  entered  the  box  alone,  and  renewed 
the  CD's  when  they  came  due. 

By  contrast,  Gerald  Hall  never  exercised  any  physical  control  over 
the  CD's  or  the  lock  box.  Gerald  had  no  real  knowledge  as  to  the 
amount  of  the  CD's.  Moreover,  the  trial  court  found  that  by  placing 
the  CD's  in  joint  title,  the  mother  intended  to  save  administrative  expenses 
and  legal  fees  upon  her  death.  The  trial  court  ruled  that  at  no  time 
did  she  intend  to  make  an  inter  vivos  gift  of  any  portion  of  the  CD's 
to  Gerald. 

The  court  of  appeals  affirmed  the  trial  court's  denial  of  a  garnishment 
of  the  CD's.  The  appellate  tribunal  based  its  decision  primarily  on  an 
Indiana  statute  which  states  that  a  joint  account  "belongs,  during  the 
lifetime  of  all  parties,  to  the  parties  in  proportion  to  the  net  contributions 
by  each  to  the  sums  on  deposit,  unless  there  is  clear  and  convincing 
evidence  of  a  different  intent. ""^^  Because  the  mother  contributed  all  of 


''''Id. 

'^°489  N.E.2d  988  (Ind.  Ct.  App.   1986). 

'''Id.  at  992. 

•^^IND.  Code  §  32-4-1. 5-3(a)  (1982). 


114  INDIANA  LAW  REVIEW  [Vol.  20:87 

the  funds  for  the  purchase  of  the  CD's  and  because  no  clear  and 
convincing  evidence  existed  of  an  intent  to  make  an  inter  vivos  gift  to 
the  debtor,  the  court  of  appeals  concluded  that  she  alone  owned  the 
CD's,  and  therefore  the  CD's  were  not  subject  to  garnishment  by  Brown- 
ing in  its  attempts  to  satisfy  the  default  judgment  against  the  son."^^ 

In  a  concurring  opinion,  Judge  Ratliff  addressed  one  important  issue 
left  unresolved — which  party,  the  judgment  creditor  or  the  debtor,  ought 
to  bear  the  burden  of  establishing  the  extent  of  a  debtor's  interest  in 
a  joint  account.  Judge  Ratliff  contended  that  the  burden  properly  rests 
with  the  joint  depositors,  because  the  debtor  is  in  a  much  better  position 
than  a  judgment  creditor  to  know  or  ascertain  the  amount,  if  any,  that 
the  debtor  contributed  to  the  joint  account  and  which,  therefore,  would 
be  subject  to  garnishment.'^ 

Browning  illustrates  one  important  constraint  upon  judgment  cred- 
itors' attempts  to  garnish  funds  that  are  held  by  third  parties  and  in 
which  a  debtor  allegedly  has  an  interest.  Lakeshore  Bank  &  Trust  Co. 
V.  United  Farm  Bureau  Mutual  Insurance  Co.^"^^  established  yet  another 
Umitation  on  a  creditor's  ability  to  garnish  assets.  In  Lakeshore,  the 
court  of  appeals  held  that  the  doctrine  of  res  judicata  barred  a  judgment 
creditor  who  dismissed  a  garnishee-defendant  with  prejudice  from  pro- 
ceedings supplemental  from  later  suing  the  same  garnishee-defendant  for 
the  improper  disposition  of  funds  to  the  judgment  debtors. '^^ 

Lakeshore  Bank  and  Trust  Company  held  a  mortgage  on  the  debtors' 
home.  The  mortgage  required  the  debtors  to  maintain  insurance  on  the 
property,  with  the  loss  payable  clause  in  favor  of  Lakeshore.  The  debtors 
obtained  a  policy  from  United  Farm  Bureau  Mutual  Insurance  Company, 
Inc.  (Farm  Bureau),  but  the  poHcy  did  not  name  Lakeshore  as  the  loss 
payee.  During  foreclosure  proceedings,  which  Lakeshore  initiated  after 
the  debtors  defaulted  on  their  mortgage  payments,  fire  destroyed  the 
mortgaged  premises. 

Lakeshore  attached  the  insurance  proceeds  and  subsequently  obtained 
a  default  judgment  against  the  debtors.  Thereafter,  Lakeshore  commenced 
proceedings  supplemental  in  which  Farm  Bureau  was  named  as  garnishee- 
defendant.  Farm  Bureau,  in  its  answer,  alleged  that  it  had  paid  the 
insurance  proceeds  directly  to  the  debtors  prior  to  the  writ  of  attachment 
and  commencement  of  the  garnishment  proceedings.  Consequently,  Lake- 
shore  dismissed  Farm  Bureau  from  the  proceeding  with  prejudice.  One 
year  later,  however,  Lakeshore  filed  suit  against  Farm  Bureau,  alleging 
that  Farm  Bureau  had  actual  knowledge  of  Lakeshore's  interest  in  the 


'''Hall,  489  N.E.2d  at  992. 
'^M  at  992-93  (Ratliff,  J.,  concurring). 
'^H74  N.E.2d  1024  (Ind.  Ct.  App.   1985). 
''"Id.  at  1027-28. 


1987]  COMMERCIAL  LAW  115 

insurance  proceeds  and  therefore  wrongfully  transferred  the  proceeds  to 
the  debtors.  The  trial  court  granted  Farm  Bureau's  motion  to  dismiss  on 
the  ground  that  Lakeshore's  action  was  barred  by  the  principles  of  res 
judicata.  Lakeshore  appealed. 

As  a  preliminary  matter,  the  court  of  appeals  agreed  with  Lakeshore 
that  the  debtors'  covenant  in  this  mortgage  to  insure  the  mortgaged 
premises  for  Lakeshore's  benefit  was  sufficient  to  impress  an  "equitable 
lien"  in  favor  of  Lakeshore  on  the  insurance  proceeds  and  that  once 
Farm  Bureau  became  aware  of  Lakeshore's  interest  in  such  proceeds 
(whether  by  notification  prior  to  garnishment  or  by  service  of  summons 
in  garnishment),  Farm  Bureau  was  legally  obligated  to  account  to  Lake- 
shore  for  the  funds. '"^^  Nevertheless,  it  affirmed  the  judgment  of  the 
trial  court.  The  court  of  appeals  held  that  because  Farm  Bureau's  liability 
for  the  insurance  proceeds  was  an  issue  which  might  properly  have  been 
litigated  in  the  proceedings  supplemental  to  which  it  was  a  party,  its 
dismissal  with  prejudice  from  the  proceedings  operated  as  an  adjudication 
on  the  merits  of  that  issue. ^"^^  Accordingly,  the  court  observed,  "To 
allow  Lakeshore  to  sue  Farm  Bureau  in  a  later  cause  of  action  for  the 
wrongful  disposition  of  the  proceeds  would  be  a  retrial  of  the  issue  that 
was  or  should  have  been  litigated  in  the  earlier  proceedings"  and  therefore 
would  contravene  the  principles  of  res  judicata. '"^^ 

Clearly,  the  lesson  to  be  learned  from  Lakeshore  is  that  a  judgment 
creditor  should  not  automatically  dismiss  (with  prejudice)  a  garnishee- 
defendant  from  a  proceedings  supplemental  once  the  latter  reports  that 
he  no  longer  holds  property  belonging  to  the  judgment  debtor.  Instead, 
the  wise  judgment  creditor  should  first  determine  whether  the  garnishee- 
defendant  surrendered  the  property  to  be  garnished  to  the  judgment 
debtor  or  other  person  after  becoming  aware  of  the  judgment  creditor's 
interest,  such  that  the  garnishee  may  be  held  personally  liable  to  the 
judgment  creditor  for  the  improper  disposition  of  the  property. '^° 

Equally,  if  not  more,  important  to  the  law  of  garnishment  and 
attachment  than  either  Browning  or  Lakeshore  is  the  1985  enactment 
of  Indiana  Code  section  34-1-11-49,  which  provides: 

A  person,  whether  designated  as  a  garnishee  defendant,  an 
income  payor,  or  otherwise,  who  complies  with  what  purports 
to  be  a  garnishment  or  income  withholding  order  issued  under: 


'''Id.  at  1026-27. 

'''Id.  at  1027-28. 

'""Id.  at  1028. 

'^°Of  course,  a  judgment  creditor  who  dismisses  a  garnishee-defendant  from  proceedings 
supplemental,  only  to  determine  later  that  the  garnishee-defendant  is  or  may  be  liable  for 
the  amount  owed  by  the  judgment  debtor,  could  attempt  to  have  the  dismissal  set  aside. 
See  474  N.E.2d  at  1028;  see  also  Ind.  R.  Tr.  P.  41(F)  said  60(B). 


116  INDIANA  LAW  REVIEW  [Vol.  20:87 

(1)  the  Indiana  rules  of  trial  procedure; 

(2)  this  chapter;  or 

(3)  IC  31-2-10  or  a  similar  law  of  this  or  another  state 
pertaining  to  support  or  maintenance  of  any  person; 

is  not  personally  liable  for  the  amounts  withheld  if,  for  any 
reason,  the  order  is  determined  by  a  court  to  be  procedurally 
defective.'^' 

This  statute  was  enacted  to  address  the  dilemma  created  for  garnishee- 
defendants  by  a  combination  of  the  well-established  Indiana  case  law 
to  the  effect  that  a  garnishee-defendant's  disposition  of  the  judgment 
debtor's  property  pursuant  to  defective  legal  process  will  not  protect  the 
garnishee-defendant  from  personal  liability  to  other  claimants  to  the  same 
property^^^  and  the  more  recent  cases  such  as  Bowmar  Instrument  Corp. 
V.  Maag^^^  and  Owens-Classic,  Inc.  v.  Swager  Tower  Corp.,^^"^  which 
illustrate  that  distinguishing  between  valid  and  invalid  legal  process  can 
prove  quite  difficult. 

In  Bowmar,  the  court  of  appeals  held  that  the  child  support  obligor's 
employer,  which  allegedly  had  failed  to  comply  with  a  court-ordered 
wage  assignment,  could  not  be  held  in  contempt  of  court  for  such  failure, 
because  the  employer  was  not  served  with  a  summons  along  with  the 
wage  assignment  order. ^^^  As  it  turned  out,  however,  the  employer,  in 
fact,  made  payments  to  the  court  from  its  employee's  wages  under  what 
the  court  of  appeals  determined  to  be  an  invalid  court  order. ^^^  Although 
not  addressed  by  the  Bowmar  court,  the  facts  of  the  case  were  such 
that,  in  theory,  if  the  employer  had  been  served  with  a  "vahd"  order  in 
garnishment  against  the  same  employee,  the  employer  very  easily  could 
have  been  held  accountable  to  the  garnishment  creditor  for  the  payments 
"voluntarily"  made  under  the  defective  wage  assignment  order. 

After  Bowmar,  the  law  appeared  to  be  that  an  income  payor  or 
garnishee-defendant  could,  and  perhaps  should,  refuse  to  honor  a  wage 
assignment  order  or  garnishment  order  unless  such  order  was  served 
with  a  summons.  Then  came  the  Owens-Classic  decision. 


'^'iND.  Code  §  34-1-11-49  (Supp.   1986). 

'''See,  e.g.,  Emery  v.  Royal,  117  Ind.  299,  20  N.E.   150  (1889);  Debs  v.  Dalton, 
Ind.  App.  84,  34  N.E.  236  (1893);  see  also  14  I.L.E.,  Garnishment  §  13,  at  472-73: 

[I]n  the  absence  of  jurisdiction  in  garnishment   .  .  .  ,  a  judgment  against  the 

garnishee,  and  payment  thereof,  will  afford  [to  the  garnishee]  no  protection.  It 

is  the  duty  of  a  garnishee-defendant  before  paying  money  to  know  whether  a 

proper  judgment  has  been  rendered,  and,  if  through  his  negligence  he  bears  a 

loss,  he  must  bear  it. 
(footnotes  omitted). 

'"442  N.E. 2d  729  (Ind.  Ct.  App.   1982). 

'^M80  N.E. 2d  232  (Ind.  Ct.  App.   1985). 

'''Bowmar,  442  N.E.2d  at  731. 

'''Id.  at  730. 


1987]  COMMERCIAL  LAW  117 

In  Owens-Classic,  the  court  of  appeals  determined  that  two  garnishee- 
defendants,  each  of  whom  was  served  with  a  verified  motion  for  pro- 
ceedings supplemental  and  an  order  requiring  answers  to  certain  inter- 
rogatories, were  liable  to  the  garnishment  creditor  for  the  sums  held  as 
of  the  date  of  service  of  such  documents,  even  though  the  actual 
summonses  were  not  served  until  approximately  two  weeks  later. '^^  In 
reaching  its  decision,  the  Owens-Classic  court  reasoned  that  the  verified 
motion  and  the  order  on  the  interrogatories  contained  all  of  the  infor- 
mation required  to  be  in  a  summons. '^^  The  result  was  that  the  garnishee- 
defendants,  in  effect,  were  required  to  ''pay  twice" — once  to  the  judgment 
debtor  from  the  judgment  debtor's  funds  and  once  to  the  judgment 
creditor  from  the  garnishee-defendant's  own  funds — even  though  Bowmar 
clearly  suggested  that  absent  service  of  an  actual  summons,  a  garnishee- 
defendant  is  not  subject  to  the  court's  jurisdiction. 

The  1985  statute  offers  to  garnishee-defendants  under  garnishment 
orders  and  to  income  payors  under  income  withholding  orders  a  kind 
of  "safe  harbor."  Simply  stated,  the  statute  provides  that  garnishee- 
defendants  and  income  payors  who  comply  with  court  orders  that  are, 
or  later  prove  to  be,  procedurally  defective  cannot  be  held  personally 
liable  or  accountable  for  the  amounts  withheld  simply  because  of  the 
procedural  defect.  ^^^ 


''' Owens-Classic,  480  N.E.2d  at  234-35. 
''^See  IND.  Code  §  34-1-11-49  (Supp.   1986). 


The  Indiana  Business  Corporation  Law:  Tool  For 
Flexibility,  Simplicity  and  Uniformity 

Edwin  J.  Simcox* 

I.     Introduction 

The  Indiana  Business  Corporation  Law  (IBCL)'  is  designed  to  propel 
Indiana  into  the  forefront  of  states  with  modern  laws  governing  cor- 
porations. Enacted  by  the  1986  General  Assembly,  the  IBCL  is  a  com- 
prehensive revision  of  the  for-profit  corporation  law  with  * 'state-of-the- 
art"  provisions. 

Growing  concern  among  the  business  and  legal  communities  that 
the  Indiana  General  Corporation  Act  (IGCA),^  predecessor  to  the  IBCL, 
had  become  archaic  and  was  not  flexible  enough  to  serve  the  needs  of 
modern  business  organizations  effectively  led  to  enactment  of  the  IBCL. 
Not  only  had  the  IGCA  become  outmoded,  but  the  various  piecemeal 
attempts  to  update  it  over  the  years  instead  created  provisions  that 
became  ambiguous  and  lacked  continuity.  Thus,  when  the  Legislature 
established  a  study  commission^  to  draft  and  propose  a  new  corporation 


*A.B.,  Indiana  University,  1967;  J.D.,  1971.  President,  Indiana  Electric  Association. 
The  article  was  written  during  the  author's  second  term  as  Indiana  Secretary  of  State  and 
while  he  served  as  Chairman  of  the  Indiana  General  Corporation  Act  Study  Commission. 
The  author  gratefully  acknowledges  Susan  L.  Wampler,  Corporate  Counsel  in  the  office 
of  the  Secretary  of  State,  for  her  assistance  in  the  preparation  of  this  article. 

'Act  of  Mar.  5,  1986,  Pub.  L.  No.  149-1986,  1986  Ind.  Acts  1377  (codified  at  Ind. 
Code  §§  23-1-17  to  -54  (Supp.  1986)). 

^IND.  Code  §§  23-1-1  to  -12  (1982). 

'Act  of  Apr.  16,  1985,  Pub.  L.  No.  362-1985,  1985  Ind.  Acts  2490.  Public  Law 
362  established  the  General  Corporation  Law  Study  Commission,  chaired  by  the  Secretary 
of  State  and  composed  of  three  legal  practitioners,  three  members  of  the  business  com- 
munity, and  four  state  legislators  (two  from  each  house  and  party).  The  legislative  directive 
was  that  "[t]he  commission  shall  study  the  advisability  of  recommending  changes  in, 
including  a  complete  revision  of,  the  general  corporation  law  of  this  state.  Among  its  con- 
siderations, the  commission  shall  examine  model  or  uniform  corporation  laws."  Id.  §  5, 
at  2491. 

At  the  commission's  organizational  meeting  in  May,  1985,  it  was  determined  that 
the  revision  should  be  based  on  the  1983  version  of  the  Model  Business  Corporation  Act. 
The  commission's  goal,  also  established  at  that  initial  meeting,  was  the  creation  of  a 
completely  rewritten  corporation  act  which  would  be  modern  in  its  concepts,  flexible  in 
its  application,  and  simple  enough  to  be  used  by  small,  closely-held  corporations.  Flexibility 
was  singled  out  as  the  most  important  aspect  because  of  the  need  for  the  new  act  to 
accommodate  complex  transactions  and  yet  be  simple  and  streamlined  enough  to  make 
operation  under  the  act  feasible  for  small  corporations,  which  account  for  the  vast  majority 
of  all  corporations  formed  in  Indiana.  The  final  goal  of  the  commission  was  to  create 

119 


120  INDIANA  LAW  REVIEW  [Vol.  20:119 

Statute,  the  primary  goal  was  the  creation  of  a  law  that  would  provide 
flexibility,  simplicity,  and  uniformity. 

This  Article  will  not  attempt  to  analyze  every  important  new  provision 
of  the  IBCL  but  will  instead  focus  on  a  limited  number  of  the  statute's 
more  significant  aspects.  The  practitioner  is  cautioned  to  review  the  new 
act  in  its  entirety  in  order  to  represent  corporate  clients  most  effectively. 

II.     Applicability  of  the  Indiana  Business  Corporation  Lav\^ 

The  IBCL  will  apply  automatically  to  all  for-profit  corporations  that 
operate  in  Indiana  effective  August  1,  1987."^  This  includes  corporations 
formed  not  only  under  the  IBCL  but  also  those  corporations  formed 
under  the  IGCA^  or  any  other  prior,  for-profit  corporation  law  in 
Indiana.^  The  IBCL  repeals  all  prior  for-profit  corporation  laws,^  thus 
simpHfying  filing  procedures,  providing  uniformity  in  appHcation  of  the 
law,  and  eliminating  confusion  as  to  which  act  governs  a  particular 
corporation. 

The  IBCL  also  applies  to  all  corporations  transacting  business  within 
the  state  that  are  organized  under  the  laws  of  another  jurisdiction^  and 
to  certain  domestic  corporations  engaging  in  a  business  that  is  subject 
to  regulation  and  organized  under  another  statute  of  this  state  to  the 
extent  that  the  IBCL  does  not  conflict  with  the  other  statute.^  Not-for- 
profit  corporations  are  not  governed  by  the  IBCL.'° 

Existing  domestic  corporations  may  elect  to  be  governed  by  the 
provisions  of  the  IBCL  prior  to  its  August  1,  1987,  effective  date.*' 
Once  such  an  election  is  made,  all  of  the  provisions  of  the  IBCL  apply 


an  act  that,  as  much  as  possible,  would  conform  to  similar  acts  in  other  states.  This 
desire  for  uniformity  was  the  main  consideration  for  using  the  Model  Business  Corporation 
Act  as  the  starting  point. 

The  commission  met  weekly  throughout  the  summer  and  autumn  of  1985  and  also 
conducted  five  regional  hearings  across  the  state  in  order  to  obtain  recommendations  from 
Indiana  attorneys  and  corporations.  The  commission's  final  product  was  introduced  into 
the  Legislature  through  the  House  of  Representatives  in  the  form  of  House  Bill  1257. 

^IND.  Code  Ann.  §  23-l-17-3(a)  (West  Supp.   1986). 

^IND.  Code  §§  23-1-1  to  -12  (1982). 

*lND.  Code  Ann.  §  23-l-17-3(a)  (West  Supp.   1986). 

'Id. 

'Id.  §  23-1-17-4. 

^Id.  This  section  provides  that  "[a]  corporation  engaging  in  a  business  that  is  subject 
to  regulation  under  another  statute  of  this  state  may  incorporate  under  this  article  unless 
provisions  for  incorporation  of  corporations  engaging  in  that  business  exist  under  that 
statute."  For  example,  banks  and  insurance  companies  are  incorporated  under  Ind.  Code 
§§  28-1-4  and  27-1-6  (1982)  and  thus  may  not  incorporate  under  the  IBCL  although  they 
must  file  with  the  Secretary  of  State  to  form  a  corporation.  The  provisions  of  the  IBCL 
will  govern  these  corporations,  however,  as  long  as  there  is  no  contrary  provision  under 
title  28  or  title  27. 

'°See  iND.  Code  Ann.  §§  23-l-17-3(a),  23-1-20-5  (West  Supp.   1986). 

"/d/.   §  23-l-17-3(b).  To  so  elect,  a  corporation's  board  of  directors  must  adopt  a 


1987]  BUSINESS  CORPORATION  LAW  121 

to  the  corporation  with  the  exception  of  those  provisions  deaHng  with 
fihng  fees, '2  annual  reports,'^  and  incorporation. •"* 

A  foreign  corporation  does  not  have  the  option  of  electing  to  be 
governed  by  the  IBCL  prior  to  August  1,  1987. '^  However,  a  foreign 
corporation  that  transacts  with  a  domestic  corporation  that  has  elected 
early  must  comply  with  those  provisions  of  the  IBCL  that  relate  to  the 
specific  transaction.'^  The  intent  of  this  non-code  provision  is  to  alleviate 
possible  confusion  in  determining  which  law  would  govern  the  actions 
of  a  foreign  corporation  in  a  transaction  such  as  a  merger  with  an 
electing,  domestic  corporation. 

III.     Articles  of  Incorporation 

A.     Filing  Requirements 

Patterned  on  the  Model  Business  Corporation  Act,'^  the  IBCL  es- 
tablishes streamhned  fihng  requirements  which  will  also  promote  uni- 


resolution  electing  to  have  Ind.  Code  §§  23-1-18  through  -54  apply  to  the  corporation. 
The  resolution  must  be  filed  with  the  Secretary  of  State  and  must: 

a.  Recite  the  board's  resolution; 

b.  Set  forth  an  effective  date  after  the  date  of  filing  but  no  later  than  90  days 
after  the  date  of  filing; 

c.  Be  signed  by  any  officer  or  the  chairman  of  the  board; 

d.  Be  accompanied  by  the  $26  filing  fee;  and 

e.  Be  presented  along  with  one  conformed  copy. 

Ind.  Code  Ann.  §§  23-l-17-3(b),  23-1-18-1  (West  Supp.   1986). 

After  July  31,  1987,  the  provisions  of  the  IBCL  apply  to  all  for-profit  corporations; 
thus  the  election  to  be  governed  by  the  IBCL  will  no  longer  be  necessary. 

'^IND.  Code  Ann.  §  23-1-18-3  (West  Supp.  1986).  Prior  to  August  1,  1987,  the 
filing  fees  prescribed  by  Ind.  Code  §  23-3-2  apply  to  all  corporations,  regardless  of 
whether  a  corporation  has  "opted-in"  or  elected  to  be  governed  by  the  IBCL  prior  to 
its  August,   1987,  effective  date.  See  Ind.  Code  Ann.  §  23-l-17-3(c)  (West  Supp.   1986). 

'^IND.  Code  Ann.  §  23-1-53-3  (West  Supp.  1986).  Prior  to  August  1,  1987,  all 
corporations  must  continue  to  file  annual  reports  pursuant  to  Ind.  Code  §  23-1-8-1.  See 
Ind.  Code  Ann.  §  23-l-17-3(c)  (West  Supp.  1986).  The  first  annual  report  required  by 
the  IBCL  will  be  due  on  April  1,  1988,  since  the  IBCL  changes  the  filing  date  for  all 
annual  reports  from  a  July  30  filing  deadline  to  a  filing  period  ranging  from  January  1 
to  April  1.  The  old  annual  report  fihng  requirements  will  remain  effective  for  1987.  House 
Bill  1756,  pending  before  the  1987  Indiana  General  Assembly,  would  amend  the  IBCL  to 
create  a  quarterly  filing  system  based  upon  a  corporation's  date  of  incorporation/admis- 
sion. This  would  eliminate  the  strictly  fiscal/calendar  year  filing  system  in  which  all  for- 
profit  corporations  file  annual  reports  during  the  same  period. 

'■♦Ind.  Code  Ann.  §  23-1-21  (West  Supp.  1986).  No  incorporation  provisions  are 
effective  under  the  IBCL  until  August  1,  1987.  Until  that  date,  a  corporation  must  be 
formed  pursuant  to  Ind.  Code  §  23-1-3  (1982).  See  Ind.  Code  Ann.  §  23-l-17-3(c)  (West 
Supp.  1986).  However,  once  formed,  a  corporation  may  immediately  file  an  election 
pursuant  to  Ind.  Code  §  23-l-17-3(b)  to  come  under  the  provisions  of  the  IBCL. 

'^IND.  Code  Ann.  §  23-1-17-4  (West  Supp.   1986). 

'^Pub.  L.  No. 149-1986,  §  67,   1986  Ind.  Acts  1531. 

'^MoDEL  Business  Corp.  Act  (1983). 


122  INDIANA  LAW  REVIEW  [Vol.  20:119 

formity  as  other  states  adopt  the  Model  Act.  Under  the  IBCL,  there 
are  four  items  required  for  articles  of  incorporation.'^  Thus,  on  and 
after  August  1,  1987,  for-profit  corporations  will  be  required  to  set  forth 
only  the  following  information: 

1.  the  corporate  name; 

2.  the  number  of  shares  the  corporation  is  authorized  to  issue; 

3.  the  street  address  of  the  corporation's  registered  office  and 
name  of  the  registered  agent;  and 

4.  the  name  and  address  of  each  incorporator.'' 

Other  information  may  be  included  but  is  not  required. 

Unless  a  delayed  effective  date  is  specified,  pursuant  to  Indiana 
Code  section  23-l-18-4(b),  the  corporate  existence  begins  with  the  fihng 
of  articles  of  incorporation.^  The  brevity  of  the  new  filing  requirements 
should  facilitate  preparation  and  filing  of  incorporation  documents,  par- 
ticularly for  small  corporations. 

B.     Corporate  Name 

In  the  area  of  corporate  name,  the  IBCL  varies  from  the  prior  law 
in  two  significant  respects:  name  availability  and  permissible  words  of 
incorporation.  While  the  IBCL  retains  the  "distinguishable"  standard 
of  name  availability  adopted  two  years  ago,^'  it  departs  from  the  IGCA 
in  the  requirements  for  obtaining  consent  to  use  an  indistinguishable 
name.^^  Under  the  IBCL,  a  corporation  must  use  a  name  that  is  dis- 
tinguishable upon  the  records  of  the  Secretary  of  State  from  the  names 
of  all  other  corporations  whether  domestic,  foreign,  for-profit,  or  not- 


'^ND.  Code  Ann.  §  23-l-21-2(a)  (West  Supp.  1986).  Compare  the  abbreviated 
requirements  of  this  new  section  with  the  more  extensive  requirements  of  Ind.  Code  § 
23-1-3-2  (1982). 

'^IND.  Code  Ann.  §  23-l-21-2(a)  (West  Supp.   1986). 

^°Ici.  §  23 -1-21 -3(a).  No  delayed  effective  date  for  articles  of  incorporation  was 
permitted  under  the  IGCA. 

2'Act  of  Mar.  7,  1984,  Pub.  L.  No.  130-1984,  1984  Ind.  Acts  1125  (codified  at  Ind. 
Code  §§  23-1-2,  23-1-7,  23-1-11,  23-2-1,  23-3-4,  23-7-1.1).  The  "distinguishable"  standard 
is  met  if  a  proposed  name  is  in  any  way  different  from  an  existing  name,  as  long  as  the 
variation  is  not  a  minor  one  such  as  a  change  in  tense  or  punctuation.  This  standard, 
unlike  its  predecessor,  the  "confusingly  similar"  standard,  does  not  carry  with  it  the 
burden  of  determining  whether  a  proposed  name  might  be  confused  with  an  existing  name. 
That  determination  is  left  for  the  private  parties  and  courts  to  settle  if  one  feels  that  a 
corporation's  rights  to  a  specific  name  have  been  infringed. 

^^Ind.  Code  Ann.  §  23-l-23-l(c)  (West  Supp.   1986). 


1987]  BUSINESS  CORPORATION  LAW  123 

for-profit.^^  This  rule  also  applies  to  reserved  and  registered  names. ^^^ 
Under  the  IGCA,  it  was  permissible  to  incorporate  an  identical  or 
otherwise  indistinguishable  name  as  long  as  the  prior  existing  corporation 
provided  consent. ^^  Under  the  IBCL,  the  prior  existing  corporation  may 
continue  to  provide  consent,  but  must  also  agree  to  dissolve  or  change 
its  corporate  name.^^ 

The  second  and  more  significant  change  regarding  corporate  names 
is  the  expansion  of  the  permissible  words  of  incorporation.  Under  the 
IGCA,  only  the  words  "Corporation,"  "Incorporated,"  or  an  abbre- 
viation of  one  of  the  two  were  sufficient  as  words  of  incorporation.^^ 
The  IBCL  adds  the  words  "Company"  and  "Limited"  and  their  ab- 
breviations to  the  list  of  permissible  words  of  incorporation.^^  This 
provision  is  consistent  with  the  words  of  incorporation  adopted  by  most 
states.  ^^ 

Under  the  IBCL,  the  use  of  any  one  of  these  four  words  or  their 
abbreviations  may  indicate  corporate  status,  although  the  use  of  "Com- 
pany" and  "Limited"  is  not  restricted  to  corporations.  "Limited"  has 
traditionally  been  used  in  Indiana  to  denote  a  limited  partnership.  There- 
fore, the  presence  of  "Company"  or  "Limited"  in  a  name  does  not 
necessarily  indicate  that  the  owner  of  the  name  is  a  corporation.   A 


^'Id.  §  23- 1-23- 1(b). 

^"M  Registered  name  is  a  term  added  by  the  IBCL  which  permits  an  existing  foreign 
corporation  to  register  its  corporate  name,  if  the  name  is  distinguishable,  for  renewable 
one-year  periods  prior  to  the  transaction  of  business  in  Indiana.  Name  reservation,  on 
the  other  hand,  existed  for  both  domestic  and  foreign  corporations  under  the  IGCA  and 
continues  under  the  IBCL.  The  reservation  period  is  120  days.  Id.   §  23-l-23-2(a). 

2^lND.  Code  §  23-l-2-4(b)  (1982). 

^^IND.  Code  Ann.  §  23-l-23-l(c)  (West  Supp.   1986). 

2^lND.  Code  §  23-1-2-4  (1982). 

2«lND.  Code  Ann.  §  23-l-23-l(a)(l)  (West  Supp.   1986). 

^^As  of  the  introduction  of  the  IBCL  into  the  1986  General  Assembly,  only  three 
states  required  the  words  "Corporation"  and  "Incorporation"  as  the  exclusive  words  of 
incorporation.  Those  states  were:  Alabama,  Indiana,  and  New  Jersey.  Thirty-six  states 
allowed  "Corporation,"  "Incorporated,"  "Company,"  "Limited,"  or  a  more  permissive 
list  of  words  of  incorporation.  Those  state  were:  Alaska,  Arizona,  Cahfornia,  Colorado, 
Connecticut,  Delaware,  Georgia,  Idaho,  Illinois,  Iowa,  Kansas,  Kentucky,  Maine,  Maryland, 
Massachusetts,  Michigan,  Minnesota,  Mississippi,  Missouri,  Montana,  Nebraska,  Nevada, 
New  Mexico,  North  Carolina,  North  Dakota,  Oklahoma,  Oregon,  Pennsylvania,  Rhode 
Island,  South  Dakota,  Utah,  Vermont,  Virginia,  Washington,  West  Virginia,  and  Wyoming. 
Maine,  Utah  and  Wyoming  permit  any  name  to  be  incorporated.  Maryland  recognizes 
"Chartered"  and  Mississippi  permits  "Unlimited"  in  addition  to  the  standard  four  words. 
Hawaii,  Louisiana,  New  Hampshire,  New  York,  South  Carolina,  and  Wisconsin  allowed 
"Corporation,"  "Incorporated"  or  "Limited,"  but  not  "Company"  while  Arkansas, 
Florida,  Ohio,  Tennessee,  and  Texas  permitted  "Corporation,"  "Incorporated,"  or  "Com- 
pany" but  not  "Limited."  Telephone  survey  by  Susan  L.  Wampler,  Corporate  Counsel, 
Office  of  the  Indiana  Secretary  of  State,  August  14,   1985. 


124  INDIANA  LAW  REVIEW  [Vol.  20:119 

check  should  be  made  with  the  Corporations  Division  of  the  Secretary  of 
State's  Office  to  determine  whether  a  corporate  fihng  has  been  made. 

C.     Purposes  and  Powers 

The  articles  of  incorporation  are  no  longer  required  to  contain  a 
statement  regarding  the  purposes  of  the  corporation,  although  such  a 
clause  may  be  added. ^°  If  the  articles  of  incorporation  do  not  limit  the 
purposes,  powers,  or  duration  of  the  corporation,  the  corporation's 
purposes  and  powers  will  be  as  broad  as  allowable  under  the  Act^'  and 
its  duration  will  be  perpetual. ^^ 

Three  significant  expansions  of  a  corporation's  permissible  powers 
have  been  added  by  the  IBCL.  A  corporation  now  has  the  power  to 
lend  money  and  credit  to  its  officers,  directors,  employees,  and  agents^^ 
whereas  such  loans  were  prohibited  under  the  IGCA.^"^ 

Another  new  provision  defines  certain  einergency  powers  which  are 
available  to  all  corporations  under  the  IBCL.^^  This  section  allows  cor- 
porations to  continue  operations  during  an  emergency  by  modifying  lines 
of  succession  and  relocating  the  principal  office  without  adhering  to 
otherwise  required  procedures. ^^  An  emergency  is  defined  as  occurring 
"if  an  extraordinary  event  prevents  a  quorum  of  the  corporation's 
directors  from  assembling  in  time  to  deal  with  the  business  for  which 
the  meeting  has  been  or  is  to  be  called. "^^ 

A  third  new  section  contains  a  provision  that  gives  directors  the 
power  to  adopt  procedures  for  regulating  change  of  control  transactions 
and  provides  directors  with  the  authority  to  react  to  changing  hostile 
takeover  tactics. ^^ 

D.     Stock  Shares 

The  establishment  of  significantly  more  flexible  provisions  relating 
to  shares  of  stock  and  the  creation  of  a  capital  structure  are  key 
developments  initiated  by  enactment  of  the  IBCL.  The  statute  abandons 
the  traditional  concept  of  "common  stock"  in  favor  of  "authorized 
shares,"  thus  allowing  the  corporation  to  develop  a  capital  structure 
appropriate  for  its  specific  needs. ^'  The  IBCL  requires  only  that  at  all 


3°lND.  Code  Ann.  §  23-l-21-2(a),  -2(b)(2)(A)  (West  Supp.   1986). 
''Id.   §  23-1-22-1. 
'Ud.  §  23-1-22-2. 
''Id.  §  23-1-22-2(11). 
'^IND.  Code  §  23-1-2-18  (1982). 
3=lND.  Code  Ann.  §  23-1-22-3  (West  Supp.   1986). 
''Id.  §  23-l-22-3(a). 
"Id.   §  23-l-22-3(d). 

'^Id.  §  23-1-22-4.  See  also  infra  note  116  regarding  the  questioned  constitutionality 
of  the  IBCL's  provisions  regarding  takeovers. 

3^lND.  Code  Ann.  §  23-1-25  (West  Supp.   1986). 


1987]  BUSINESS  CORPORATION  LAW  125 

times  there  be  at  least  one  class  of  stock  with  full  voting  rights  and  one 
class,  which  may  be  the  same  class,  with  full  rights  upon  dissolution/" 
Any  number  of  other  special  classes  are  allowed,  including  traditional 
preferred  stock/' 

1.  Insolvency  and  Balance  Sheet  Tests  for  Distributions. — The  con- 
cepts of  "par  value,"  "stated  capital,"  "capital  surplus,"  and  "earned 
surplus"  are  ehminated  under  the  IBCL,  but  corporations  currently  using 
or  wishing  to  use  these  concepts  in  the  future  may  continue  to  do  so. 
The  IBCL  replaces  these  prior  terms  with  a  clear,  two-fold  standard  for 
determining  when  a  distribution  is  lawful:  an  equity  insolvency  test  and 
a  balance  sheet  test/^  The  equity  insolvency  test  considers  the  corpo- 
ration's ability  to  pay  its  current  obligations  as  they  become  due/^  In 
addition,  the  balance  sheet  test  requires  that  the  corporation's  assets 
exceed  the  sum  of  its  liabilities  and  preferential  amounts  due  upon 
liquidation/"*  Because  these  tests  are  routinely  used  by  businessmen  and 
accountants,  the  board  of  directors  through  its  collective  business  judg- 
ment will  be  permitted  under  the  IBCL  to  use  and  rely  on  these  more 
familiar  standards  in  determining  the  effect  to  the  corporation  of  a 
distribution  to  shareholders. 

2.  Treasury  Shares. — Following  the  modern  trend,  the  IBCL  elim- 
inates treasury  shares  unless  a  corporation  elects  to  have  them."*^  The 
IGCA  defined  treasury  shares  as  shares  that  have  been  issued  and 
subsequently  re-acquired  by  the  corporation  but  have  not  been  cancelled 
or  restored  to  the  status  of  authorized  but  unissued  shares. ^^  They  were 
by  statute  issued  but  not  outstanding.  The  IBCL  eliminates  the  concept 
of  treasury  shares  and  permits  a  corporation  to  acquire  its  own  shares 
and  either  hold  them  as  authorized  but  unissued  shares  or  cancel  them 
and  reduce  the  total  authorized  shares  of  the  corporation.'*^ 

3.  Consideration. — The  rules  governing  consideration  for  the  issuance 
of  shares  are  also  more  flexible  under  the  IBCL.  The  board  of  directors, 
unless  the  articles  of  incorporation  reserve  this  authority  to  the  share- 
holders, may  authorize  the  issuance  of  shares  for  any  tangible  or  in- 
tangible property  including  promissory  notes,  uncertified  checks,  and 
contracts  for  future  services, ^^  none  of  which  were  recognized  as  valid 


'"Id.  §  23-l-25-l(b). 
''Id.  §  23-l-25-l(c). 
«/af.  §  23-1-28. 
''Id.  §  23-1-28-3(1). 
''Id.  §  23-1-28-3(2). 
"Id.   §  23-1-27-2. 

^^Ind.  Code  §  23-l-l-l(h)  (1982);  see  also  Ind.  Code  Ann.  §  23-1-2-6  (West  Supp. 
1986). 

^^ND.  Code  Ann.  §  23-1-27-2  (West  Supp.   1986). 
^^Id.  §  23-1-26-2. 


1 26  INDIANA  LA  W  REVIEW  [ Vol .  20 : 1 1 9 

consideration  under  the  IGCA.  Additionally,  there  is  no  requirement 
that  there  be  an  initial  paid-in  capital  amount  of  one  thousand  dollars 
($1,000)  as  required  by  the  IGCA/^ 

4.  Dividends  and  Stock  Splits. — Because  the  concept  of  par  value 
has  been  eliminated,  the  IBCL  disposes  of  the  distinction  between  share 
dividends  and  splits  and  treats  all  pro  rata  issuances  to  the  corporation's 
shareholders  without  consideration  as  dividends. ^^ 

5.  Uncertified  and  Fractional  Shares. — The  IGCA  had  made  no 
provisions  for  uncertificated  securities  or  for  dealing  with  fractional 
shares  of  stock  which  often  result  from  mergers,  stock  splits,  and  div- 
idends. With  the  increase  in  frequency  of  these  complex  corporate  trans- 
actions and  the  modern  trend  toward  a  paperless  society,  explicit 
authorization  of  these  types  of  securities  has  become  essential. 

The  IBCL  allows  shares  of  stock  to  be  issued  without  certificates, 
acknowledging  the  increased  use  of  electronic  and  computerized  devices 
for  maintaining  share  records. ^^  To  protect  shareholders,  the  corporation 
has  the  burden  of  sending  shareholders  a  written  statement  of  the 
information  required  to  appear  on  certificates  if  the  corporation  does 
not  issue  certificates." 

In  another  significant  change,  the  IBCL  permits  the  issuance  of 
fractional  shares  of  stock  and  specifically  sets  out  guidelines  for  the 
control  of  fractional  shares,  including  the  substitution  of  scrip  for  frac- 
tional shares.  ^^ 

E.     Registered  Agent  and  Office 

Every  corporation  must  continuously  maintain  a  registered  office  in 
Indiana  and  a  registered  agent  at  that  office.^"*  The  new  terminology  is 
a  departure  from  the  prior  principal  office/resident  agent  requirement,^^ 
and  though  the  concept  is  basically  the  same,  there  are  a  number  of 
changes. 

A  registered  office  need  only  be  an  address  designated  by  the  cor- 
poration. No  other  connection  to  the  corporation  must  exist  as  arguably 
was  required  for  the  principal  office  under  prior  law.^^  However,  the 
IBCL  does  require  a  street  address;  a  post  office  box  will  no  longer 


^^ND.  Code  §  23-1-3-2(8)  (1982). 

50IND.  Code  Ann.  §  23-1-26-4  (West  Supp.   1986). 

''Id.   §  23-1-26-7. 

'Ud.  §  23-l-26-7(b). 

"M   §  23-1-25-4. 

''Id.   §  23-1-24-1. 

"IND.  Code  §  23-1-2-5  (1982). 


1987]  BUSINESS  CORPORATION  LAW  127 

suffice."  The  registered  agent  continues  to  serve  the  function  of  agent 
for  service  of  process  and  other  legal  notices. ^^ 

Unlike  the  IGCA,  the  IBCL  requires  the  business  address  of  the 
registered  agent  to  be  identical  to  the  address  listed  for  the  corporation's 
registered  office. ^^  A  registered  agent  must  be  either  an  individual,  a 
domestic  for-profit  or  not-for-profit  corporation,  or  a  foreign  for-profit 
or  not-for-profit  corporation  registered  in  Indiana.^°  Therefore,  if  a  law 
firm  is  to  be  the  registered  agent,  either  it  must  be  a  professional 
corporation  or  an  individual  within  the  firm  must  be  willing  to  serve 
as  the  registered  agent. 

Once  a  corporation  is  subject  to  the  provisions  of  the  IBCL,  its 
existing  resident  agent  and  resident  agent's  address  will  be  considered 
the  registered  agent  and  office  as  required  by  the  statute. ^^  This  provision 
relieves  the  corporation  of  the  burden  of  changing  the  agent  and  office 
to  conform  to  the  definitions  of  the  IBCL  until  the  filing  of  its  first 
annual  report.  Thus  the  records  of  the  Secretary  of  State  will  contain 
only  one  address  for  each  corporation  until  April  1,  1988,  when  the 
first  annual  report  is  filed  under  the  IBCL.  The  annual  report  must 
also  contain  a  Hsting  of  the  corporation's  principal  office,  whether  inside 
or  outside  of  Indiana,  which  the  statute  defines  as  the  place  where  the 
principal  executive  offices  are  located." 

The  procedures  for  changing  a  registered  agent  or  office  are  more 
comprehensive  than  under  the  prior  law.  Under  the  IBCL,  a  new  agent's 
written  consent  must  be  submitted  with  the  statement  of  change  of 
registered  agent."  A  registered  agent  may  resign  by  filing  two  copies  of 
a  signed  resignation  statement  with  the  Secretary  of  State. ^^  The  resigna- 
tion becomes  effective  on  the  thirty-first  day  after  the  day  on  which  it 
was  filed." 

A  corporation's  registered  agent  is  the  proper  party  for  service  of 
process  on  a  corporation.^^  If  the  registered  agent  is  unavailable,^^  service 


"IND.  Code  Ann.  §  23-l-24-2(a)(2)  (West  Supp.  1986). 

'^Id.  §  23-1-24-4. 

''Id.  §  23-l-24-l(2)(A). 

"^Id.  §  23-1-24-1(2). 

«'Pub.  L.  No.   149-1986,  §  66(c),   1986  Ind.  Acts  1531. 

"IND.  Code  Ann.  §  23-1-20-19  (West  Supp.   1986). 

"M   §  23-l-24-2(a)(5). 

^Id.  §  23-l-24-3(a). 

"•'Id.  §  23-l-24-3(c). 

"/cf.   §  23-l-24-4(a);  Ind.  R.  Tr.  P.  4.6(a)(1). 

^'Ind.  Code  Ann.  §  23-l-24-4(b)  (West  Supp.  1986).  The  registered  agent  is  not 
available  if  the  corporation  has  failed  to  appoint  a  new  one  or  if  with  reasonable  diligence 
the  agent  cannot  be  located.  Id. 


128  INDIANA  LAW  REVIEW  [Vol.  20:119 

may  be  made  on  the  secretary  or  other  executive  officer  at  the  cor- 
poration's principal  office. ^^ 

F.  Subsequent  Documents 

1.  General  Filing  Requirements  and  Certifications. — The  General 
Corporation  Law  Study  Commission  found  that  from  a  procedural  stand- 
point, there  was  a  need  to  simplify  the  execution  of  many  corporate 
transactions,  including  the  mechanics  of  filing  documents  with  the  Sec- 
retary of  State. ^^  Too  many  transactions  were  delayed  or  compHcated 
by  failure  to  comply  with  technical  requirements  of  the  IGCA.  Thus, 
the  IBCL  contains  a  uniform,  simplified  fihng  procedure  in  a  centralized 
location  in  the  Act  to  clarify  the  technical  requirements  of  document 
fihng.^o 

This  provision  of  the  IBCL  eliminates  the  verification  language^^ 
required  by  the  IGCA,^^  and  adds  a  section  permitting  a  delayed  effective 
date  of  up  to  ninety  days  after  the  date  of  filing  for  any  document. ^^ 
If  no  delayed  effective  date  is  specified,  the  document  is  effective  when 
filed  rather  than  when  approved. ^"^  The  IBCL  also  clarifies  and  expands 
the  list  of  persons  who  may  execute  corporate  documents. ^^ 

In  the  area  of  certifications,  the  IBCL  abandons  the  concept  of 
good  standing  in  favor  of  a  certificate  of  existence  or  authorization.^^ 


^^Id.  The  possibility  of  service  on  an  executive  officer  other  than  the  secretary  was 
added  so  that  this  provision  would  track  the  language  used  in  Indiana  Trial  Rule  4.6(a)(1). 

*'The  IGCA  required  documents  to  comply  with  various  out-dated,  technical  and 
often  complicated  procedures.  For  example,  the  IGCA  required  articles  of  incorporation 
to  be  presented  in  duplicate  with  both  copies  originally  signed  even  though  the  copy  is 
returned  to  the  filing  party  and  only  the  original  is  retained  by  the  Secretary  of  State. 
Ind.  Code  §  23-1-3-2  (1982).  The  IBCL  eliminates  this  technicality  by  requiring  a  filed  docu- 
ment to  be  accompanied  by  one  exact  or  conformed  copy  which  need  not  be  signed.  The 
new  requirement  eliminates  a  possible  filing  delay  when  the  signed  incorporator  or  officer 
is  not  available  to  sign  the  copy.  Ind.  Code  Ann.  §  23-1-18-2  (West  Supp.   1986). 

^°Ind.  Code  Ann.  §  23-1-18  (West  Supp.  1986).  In  addition,  this  section  also  eliminates 
the  requirement  of  individual  certificates  issued  in  connection  with  various  transactions 
in  favor  of  more  efficient  ways  to  evidence  the  completion  of  a  filing.  This  outmoded 
concept  of  issuing  an  individually  prepared  certificate  for  each  of  the  thousands  of 
transactions  completed  annually  is  replaced  by  a  fee  receipt  or  acknowledgement  of  receipt 
if  no  fee  is  required.  Id. 

'^Id.   §  23-l-18-l(g)(3). 

''See,  e.g.,  Ind.  Code  §§  23-1-3-2,  23-1-4-5,  23-l-5-2(f),  and  23-1-7-1  (1982). 

^Tnd.  Code  Ann.  §  23-l-18-4(b)  (West  Supp.   1986). 

''Id.   §  23-l-18-4(a). 

'^Id.  §  23-1-18-1(0-  This  section  retains  the  power  of  any  officer  to  sign  a  document 
and  adds  the  chairman  of  the  board  of  directors.  It  also  clarifies  that  an  incorporator 
may  sign  if  the  directors  have  not  been  selected  or  the  corporation  has  not  been  formed, 
and  permits  execution  by  the  fiduciary  if  the  corporation  is  in  the  hands  of  a  receiver, 
trustee,  or  other  court-appointed  fiduciary.  Id. 

''Id.   §  23-1-18-9. 


1987]  BUSINESS  CORPORATION  LAW  129 

2.  Articles  of  Correction. — Articles  of  correction  is  a  new  filing 
permitted  by  the  IBCL  which  allows  the  cure  of  deficiencies  or  incorrect 
statements  in  a  formerly  filed  document. ^^  A  corrective  filing  has  the 
effect  of  remedying  the  error  as  of  the  date  the  original  document  was 
filed  except  for  persons  who  relied  on  the  inaccurate  document  and  who 
are  adversely  affected  by  the  correction. ^^ 

This  new  corrective  filing  procedure  provides  a  much  needed  mech- 
anism to  correct  technical  errors.  Under  the  prior  act,  a  corporation 
was  required  to  file  articles  of  amendment,  even  though  that  procedure 
was  inappropriate,  because  there  was  no  better  means  of  correcting  errors 
in  a  previously  filed  document. 

5.  Articles  of  Amendment  and  Restated  Articles. — Certain  "house- 
keeping" amendments  to  the  articles  of  incorporation  may  now  be 
accomplished  under  the  IBCL  without  shareholder  approval. ^^  One  such 
permissible  amendment  is  changing  the  corporate  name  by  substituting 
the  word  "Corporation,"  "Incorporated,"  "Company,"  "Limited,"  or 
an  abbreviation  for  a  similar  word  or  abbreviation.^" 

Additionally,  the  IBCL  specifically  provides  for  restated  articles  of 
incorporation  when  a  corporation  has  made  amendments  to  its  articles 
and  wants  to  combine  all  currently  effective  provisions  into  one  doc- 
ument.^^  Additional  amendments  may  be  made  in  the  restated  articles 
with  or  without  shareholder  approval,  depending  upon  the  subject  matter 
being  amended. ^^  If  the  restatement  is  filed  without  amendments,  no 
shareholders'  vote  is  required. ^^  No  provision  for  restated  articles  existed 
under  the  IGCA. 

IV.     Directors  and  Officers 

A.     Indemnification,  Standard  of  Conduct,  and  Liability 

Liabihty  of  directors,  officers,  employees,  and  agents  has  become 
a  critical  issue  in  modern  corporation  law,  necessitating  a  detailed  and 
specific  chapter  on  indemnification.  Addressing  the  concern,  the  IBCL 
revitalizes  Indiana's  indemnification  statute  to  include  comprehensive 
definitions,  criteria  for  advancing  and/or  reimbursing  expenses,  including 
defense  fees,  and  provisions  for  the  maintenance  of  liability  insurance, 
as  well  as  sections  regarding  the  power  to  indemnify,  a  mechanism  for 


''Id.  §  23-1-18-5. 

'Hd.  §  23-1-1 8-5(c). 

"M  §  23-1-38. 

"^Id.  §  23-1-38-2(5). 

''Id.  §  23-1-38-7. 

'^Id.  §  23-l-38-7(d). 
''Id. 


130  INDIANA  LAW  REVIEW  [Vol.  20:119 

handling  claims  for  indemnification,  mandatory  indemnification,  and 
indemnification  by  judicial  order. ^"^  These  changes  are  directed  at  pro- 
viding maximum  protection  for  those  persons  who  serve  corporations 
while  preserving  the  rights  of  persons  to  enforce  legitimate  claims. 

The  IBCL  outlines  a  detailed  standard  of  conduct  for  directors  in 
the  execution  of  their  duties. ^^  This  standard  basically  is  three-fold  and 
requires  that  a  director  discharge  his  duties  in  good  faith,  with  the  care 
that  an  ordinarily  prudent  person  in  a  like  position  would  exercise  in 
similar  circumstances,  and  in  a  manner  the  director  reasonably  beheves 
to  be  in  the  best  interests  of  the  corporation.^^  The  IBCL  also  provides 
a  mechanism  for  handling  conflict  of  interest  transactions  in  which  a 
director  has  either  a  direct  or  indirect  interest  in  the  transaction.^^ 

The  most  notable  change  is  the  relaxation  of  the  legal  standard  of 
care  required  of  directors  from  simple  negligence  to  a  standard  of  "willful 
misconduct  or  recklessness."^^  This  change  was  made  to  alleviate  the 
critical  problem  of  obtaining  adequate  and  affordable  directors'  liability 
insurance  coverage. 

It  is  important  to  note  that  the  state  revenue  code  has  also  been 
amended  to  impose  liability  in  certain  cases  upon  corporate  officers  and 
directors  in  the  distribution  of  assets  upon  dissolution  of  a  corporation.^^ 
Officers  and  directors  are  personally  liable  for  "any  acts  or  omissions 
that  result  in  the  disposition  of  corporate  assets  in  violation  of  the 
interests  of  the  state. "^°  Additionally,  personal  liability  extends  to  all  taxes, 
penalties,  interest,  and  fees  associated  with  collection  of  the  corporation's 
liability  to  the  Department  of  Revenue' '  including  a  penalty  of  thirty  per- 
cent of  the  unpaid  tax.'^  These  provisions  become  effective  along  with 
the  IBCL  on  August  1,  1987." 

B.     Management  of  the  Corporation 

Wide  latitude  in  the  management  of  corporate  affairs  is  granted 
under  the  IBCL.  A  corporation  with  fifty  or  fewer  shareholders  may 
dispense  with  a  board  of  directors  by  specifying  in  the  articles  of 
incorporation   who   will   perform   the   board's   duties. ^"^  This   provision 


^'Id.  §  23-1-37. 

^'Id.  §  23-1-35. 

«*M  §  23-l-35-l(a). 

^'Id.  §  23-1-35-2. 

''Id.  §  23-l-35-l(e)(2). 

^^M  §  6-8.1-10-8.  See  infra  text  accompanying  notes  117-29. 

^Ind.  Code  Ann.  §  6-8.1-10-8(c)  (West  Supp.  1986). 

^'/of.  §  6-8.1-10-8(d). 

'^M.  §  6-8.1-10-8(e). 

'''Id.  §  6-8.1-10-8. 

^Id.  §  23-l-33-l(c). 


1987]  BUSINESS  CORPORATION  LAW  131 

reflects  the  practice  of  many  small  corporations  in  which  the  shareholders 
actually  conduct  the  operation  of  the  corporation. 

A  corporation  no  longer  must  have  a  president,  secretary,  and 
treasurer*^^  but  must  have  one  officer  responsible  for  preparing  minutes 
of  shareholders'  and  directors'  meetings  and  maintaining  and  authen- 
ticating the  records  of  the  corporation.^^ 

Under  the  IBCL,  the  board  of  directors  may  take  action  without 
a  meeting  if  the  action  is  taken  by  all  members  of  the  board  and  is 
evidenced  by  written  consent. ^^  Such  an  action  is  effective  when  the  last 
director  signs  or  on  the  date  specified  in  the  action  itself.  ^^ 

V.     Mergers  and  Share  Exchanges 

The  IBCL  updates,  clarifies,  and  streamlines  Indiana's  merger  and 
share  exchange  procedures  to  provide  an  expedited  means  of  accom- 
pHshing  these  transactions,  while  retaining  the  same  basic  procedural 
structure. 

A.     Consolidation 

The  most  notable  distinction  between  the  new  act  and  the  IGCA  is 
that  the  IBCL  no  longer  recognizes  statutory  '*consoHdation,"  which  is 
similar  to  a  merger  except  that  all  corporate  participants  disappear  into 
a  newly  formed  corporation  created  by  the  consolidation,  as  opposed  to 
an  existing  corporate  entity.^  A  similar  effect,  however,  may  be  obtained 
under  the  IBCL  by  creating  a  new  corporation  immediately  prior  to  the 
merger. 

B.     Merger 

A  significant  change  from  the  IGCA  is  the  elimination  of  the  thirty- 
day  reapproval  process, '°^  which  was  designed  to  give  directors  of  a 
merging  corporation  an  opportunity  to  re-evaluate  the  merits  of  the 
merger.  Under  this  section,  once  a  plan  of  merger  or  share  exchange 
was  approved  by  the  shareholders,  the  plan  had  to  be  reapproved  by 


''Pub.  L.  No.  149-1986,  §  65,  1986  Ind.  Acts  1530  (repealing  Ind.  Code  §  23-1-2- 
13).  The  IGCA  also  permitted  one  person  to  hold  all  positions  if  the  bylaws  so  provided, 
but  required  that  there  be  a  president,  secretary,  and  treasurer.  Ind.  Code  §  23- 1-2- 13(a) 
(1982). 

'*Ind.  Code  Ann.  §  23-1-36  (West  Supp.   1986). 

^'Id.   §  23-l-34-2(a). 

^Id.   §  23-l-34-2(b). 

'^Id.  §  23-1-5-3. 

'<»Pub.  L.  No.  149-1986,  §  65,  1986  Ind.  Acts  1530  (repealing  Ind.  Code  §  23-1-5- 
2(f)). 


132  INDIANA  LAW  REVIEW  [Vol.  20:119 

the  board  of  directors.'^'  The  provision  did  not  apply  if  the  shareholders' 
vote  was  unanimous. '°^  In  contrast,  the  IBCL  does  not  require  subsequent 
reapproval,'^^  thus  ehminating  a  burdensome  process  which  often  dis- 
couraged foreign  corporations  from  merging  with  Indiana  domestic  cor- 
porations because  of  the  uncertainty  of  the  transaction  even  after  initial 
approval. 

Another  departure  from  the  prior  law  is  the  requirement  that  each 
shareholder  of  the  surviving  and  merging  corporations,  whether  or  not 
entitled  to  vote,  receive  notice  from  the  corporation  of  the  proposed 
shareholders'  meeting. •^'^  The  notice  must  state  that  the  purpose,  or  one 
of  the  purposes,  of  the  meeting  is  to  consider  the  plan  of  merger  or 
share  exchange  and  must  contain  a  copy  or  summary  of  the  plan.^^^ 
The  IGCA  required  that  notice  of  the  meeting  be  sent  only  to  those 
shareholders  entitled  to  vote.'°^  Additionally,  the  IBCL  provides  that  in 
certain  cases,  shareholder  approval  by  the  surviving  corporation  is  not 
necessary.  ^°^ 

Subsidiary  or  short-form  mergers  are  available  to  more  corporations 
under  the  IBCL  than  under  the  prior  law.  The  IGCA  permitted  any 
corporation  owing  at  least  ninety-five  percent  (95%)  of  the  outstanding 
shares  of  each  class  of  stock  of  another  corporation  to  merge  such 
corporation  into  itself  without  shareholder  approval  from  either  cor- 
poration. ^°^  The  IBCL  broadens  this  provision  to  include  parent  cor- 
porations owning  at  least  ninety  percent  (90%)  of  the  outstanding  shares 
of  stock  of  a  subsidiary.  ^^^ 

Unlike  the  IGCA,  the  new  Act  specifically  provides  for  an  aban- 
donment of  either  a  plan  of  merger  or  share  exchange  at  the  discretion 
of  the  board  of  directors  without  shareholder  approval. ^'°  However,  the 
statute  specifically  requires  the  abandonment  to  occur  prior  to  the  filing 
of  the  articles  of  merger  or  share  exchange  with  the  Secretary  of  State.''' 

C     Share  Exchange 
The  IBCL  combines  mergers  and  share  exchanges  into  one  chapter''^ 


'°'lND.  Code  §  23-l-5-2(f)  (1982). 

'o^Ind.  Code  Ann.  §  23-1-40  (West  Supp.  1986). 
'^Id.   §  23-l-40-3(d). 

"^IND.  Code  §  23-l-5-2(a)  (1982). 

'°^Ind.  Code  Ann.  §  23-l-40-3(g)  (West  Supp.  1986). 

•°«lND.  Code  §  23-1-5-8  (1982). 

'o^Ind.  Code  Ann.  §  23-1-40-4  (West  Supp.  1986). 

"OM   §  23-l-40-3(i). 

'"M 

"Vc?.   §  23-1-40. 


1987]  BUSINESS  CORPORATION  LAW  133 

because  the  two  types  of  transactions  are  treated  similarly.  The  provisions 
specifically  applying  to  share  exchanges  closely  follow  the  procedures 
originally  enacted  by  the  legislature  in  1985  when  share  exchanges  were 
first  authorized.  ^'^  However,  many  of  the  IBCL's  streamhning  provisions 
relating  to  mergers  also  apply  to  share  exchanges  as  noted  above. 

D.     Takeover  Provisions 

It  is  outside  the  scope  of  this  Article  to  review  the  business 
combinations' •'^  and  control  share  acquisition''^  provisions  of  the  IBCL. 
Such  a  discussion  is  better  suited  for  later  treatment  after  resolution  of 
Dynamics  Corp.  of  America  v.  CTS  Corp.,^^^  in  which  the  control  share 
acquisition  provision  has  been  challenged  on  supremacy  and  commerce 
clause  grounds. 

VI.     Dissolutions 

A.     Voluntary  Dissolution 

The  provisions  for  voluntary  dissolution  of  an  Indiana  corporation 
are  greatly  simplified  under  the  IBCL.  Most  notably,  the  old  requirement 
of  clearances  from  the  Department  of  Revenue  and  Employment  Security 
Division,"^  which  frequently  delayed  the  dissolution  process  by  two  or 
more  months,  has  been  abolished."^  In  its  place,  the  IBCL  adopts  a  notice 
procedure  in  which  a  copy  of  treasury  form  966  or  a  similar  notice  must 
be  sent  within  thirty  days  following  adoption  of  a  plan  of  liquidation 
to  the  Department  of  Revenue  and  Employment  Security  Division."'  The 
requirement  that  the  Attorney  General's  Unclaimed  Property  Section  be 
notified  within  ten  days  of  the  resolution  to  dissolve  was  not  changed 
under  the  IBCL.'^« 

The  IBCL  establishes  a  procedure  whereby  a  corporation  can  settle 
claims   shortly   after  dissolution.'^'    Undisputed   known  claims   can   be 


"^Act  of  Apr.  14,  1985,  Pub.  L.  No.  231-1985,  1985  Ind.  Acts  1582  (codified  at 
IND.  Code  §§  23-1-5  and  23-3-2). 

'"•Ind.  Code  Ann.  §  23-1-43  (West  Supp.   1986). 

'''Id.  §  23-1-42. 

"^794  F.2d  250  (7th  Cir.  1986)  (Ind.  Code  §  23-1-42  void  as  violative  of  Williams 
Act  and  commerce  clause).  See  Galanti,  Developments  in  Business  Association  Law,  20 
Ind.  L.  Rev.   19,  29-54  (1987). 

"iND.  Code  §  23-1-7-1  (1982). 

"«Pub.  L.  No.   149-1986,  §  65,  Ind.  Acts  1530. 

"'Ind.  Code  Ann.  §  23-1-45  (West  Supp.  1986).  It  should  be  noted  that  Ind.  Code 
§  23-1-45-2(0  contains  a  typographical  error.  In  that  section,  Ind.  Code  §  6-8.1-10-8  is 
incorrectly  cited  as  Ind.  Code  §  6-1.1-10-8. 

'^°Ind.  Code  §  32-9-1-14  (1982). 

'^'Ind.  Code  Ann.  §  23-1-45-6,  -7  (West  Supp.   1986). 


134  INDIANA  LAW  REVIEW  [Vol.  20:119 

resolved  by  providing  notice  of  dissolution  to  claimants  and  by  paying 
the  acknowledged  amount  due.'^^  Disputed  known  claims  require  noti- 
fication of  the  dispute  from  the  claimant. '^^  Unknown  claims  may  be 
settled  by  pubHcation  which  initiates  the  running  of  a  two-year  statute 
of  limitations  after  which  claimants  are  barred  from  pursuing  claims. '^"^ 

Under  the  IGCA,  shareholders  could  initiate  voluntary  dissolution, ^^^ 
whereas  the  IBCL  does  not  permit  such  action. '^^  Another  departure 
from  prior  law  is  the  requirement  under  the  IBCL  that  all  shareholders, 
whether  or  not  entitled  to  vote,  receive  notice. '^^  The  IGCA  required 
that  notice  be  sent  only  to  those  entitled  to  vote.'^^ 

The  IBCL  also  creates  a  new  concept  whereby  a  dissolved  corporation 
has  a  limited  existence  following  the  filing  of  articles  of  dissolution 
under  which  it  may  continue  for  the  sole  purpose  of  winding  up  its 
corporate  affairs, '^^ 

Additionally,  the  IBCL  establishes  a  procedure  by  which  a  corpo- 
ration may  revoke  its  dissolution  by  filing  articles  of  revocation  of 
dissolution  with  the  Secretary  of  State  within  120  days  of  the  effective 
date  of  the  dissolution. '^°  The  IGCA  permitted  revocation  of  dissolution 

only  prior  to  the  issuance  of  a  certificate  of  dissolution  by  the  Secretary 
of  State.^31 

B.     Short  Form  Dissolution 

The  requirements  for  short  form  dissolution,  where  the  incorporators 
may  dissolve  a  corporation  without  shareholder  approval,  have  been 
modified  to  permit  more  corporations  to  follow  this  abbreviated  proc- 
ess.'^^  The  IGCA  imposed  a  one-year  filing  limit  relating  back  to  the 
date  the  articles  of  incorporation  were  filed,  and  permitted  filing  only 
if  the  corporation  had  not  begun  business  and  had  not  yet  issued  shares.^" 
The  IBCL  abolishes  the  time  constraint  and  permits  filing  if  the  business 
has  not  begun  or  if  shares  have  not  been  issued.'^"* 


'^M  §  23-l-45-6(b). 
'"M  §  23-l-45-6(c). 
•^M   §  23-1-45-7. 

'2^lND.  Code  §  23-l-7-l(b)(l)  (1982). 
'2^lND.  Code  Ann.  §  23-1-45  (West  Supp.   1986). 
''Ud.  §  23-l-45-2(d). 
■^^ND.  Code  §  23-l-7-l(b)(l)  (1982). 

''^Ind.  Code  Ann.  §  23-1-45-5  (West  Supp.  1986).  See  supra  text  accompanying  note 
89  regarding  officers'  and  directors'  liability  upon  dissolution. 
'3°lND.  Code  Ann.  §  23-1-45-4  (West  Supp.  1986). 
'"IND.  Code  §  23-1-7-2  (1982). 
'^^Ind.  Code  Ann.  §  23-1-45-1  (West  Supp.  1986). 
'"IND.  Code  §  23-l-7-l(a)  (1982). 
'^-•Ind.  Code  Ann.  §  23-1-45-1  (West  Supp.   1986). 


1 987]  BUSINESS  CORPORA TION  LAW  135 

C.     Administrative  Dissolution 

The  Secretary  of  State  has  the  power  under  the  IBCL  to  seek 
administrative  dissolution  if:  a  corporation  fails  to  pay  within  sixty  days 
after  the  due  date  any  penalties  imposed  by  the  IBCL  or  any  other  law; 
a  corporation  fails  to  file  its  annual  report  within  sixty  days  after  its 
due  date;  a  corporation  fails  to  appoint  or  notify  the  office  of  a  change 
in  the  registered  agent  or  registered  office  for  more  than  sixty  days;  or 
a  corporation's  limited  period  of  existence  has  expired. '^^  Under  the  prior 
law,  the  Secretary  of  State  could  initiate  administrative  dissolution  pro- 
ceedings only  if  the  corporation  failed  to  file  its  annual  report  for  two 
or  more  consecutive  years' ^^  or  if  two  years  had  elapsed  since  the  ter- 
mination of  the  corporation's  period  of  existence. '^^ 

Where  grounds  for  administrative  dissolution  exist,  the  Secretary  of 
State  must  give  the  offending  corporation  notice  of  the  grounds. '^^  If 
the  grounds  are  neither  corrected  nor  disproved  within  sixty  days  after 
receipt  of  the  notice,  the  Secretary  of  State  shall  administratively  dissolve 
the  corporation  by  issuing  a  certificate  of  dissolution  setting  forth  the 
grounds  for  dissolution  and  the  effective  date,  and  serve  a  copy  on  the 
corporation.  ^^^  A  corporation  that  has  been  administratively  dissolved 
continues  to  exist,  but  only  for  the  purposes  necessary  to  wind  up  and 
liquidate  its  operations^^^  like  the  Umited  purposes  of  a  voluntarily  dis- 
solved corporation.'"^' 

In  another  departure  from  the  prior  law,  a  corporation  has  only 
two  years  from  the  date  of  an  administrative  dissolution  to  seek  rein- 
statement.'^^  The  IGCA  imposed  no  time  constraint. '^^  When  the  rein- 
statement is  effective,  it  relates  back  to  the  effective  date  of  the 
administrative  dissolution,  and  business  is  resumed  as  if  the  dissolution 
had  never  occurred. '"^^ 

D.     Judicial  Dissolution 
The  IBCL  provides  for  judicial  dissolution  by  the  Attorney  General 


'''Id.   §  23-1-46-1. 

'^^IND.  Code  §  23-1-10-1  (1982). 

'''Id.   §  23-1-7-3. 

'^«lND.  Code  Ann.  §  23-l-46-2(a)  (West  Supp.   1986). 

''^Id.   §  23-l-46-2(b). 

'^°M   §  23-l-46-2(c). 

""M   §  23-1-45-5.  See  supra  text  accompanying  note  129. 

'"^Ind.  Code  Ann.  §  23-1-46-3  (West  Supp.  1986).  House  Bill  1756,  pending  before 
the  1987  Indiana  General  Assembly,  would  permit  administratively  dissolved  corporations 
meeting  all  other  requirements  to  reinstate  at  any  time,  thereby  eliminating  the  IBCL's 
two-year  limitation. 

'''Id.   §  23-3-4-1.6. 

""Id.   §  23-l-46-3(c). 


136  INDIANA  LAW  REVIEW  [Vol.  20:119 

in  the  event  of  fraud  or  abuse  of  authority;  by  a  shareholder  in  the 
event  of  a  deadlock;  by  a  creditor  in  the  event  the  creditor's  claim  has 
been  reduced  to  judgment  and  the  corporation  is  insolvent;  or  by  the 
corporation  under  circumstances  in  which  it  chooses  to  have  its  voluntary 
dissolution  continued  under  court  supervision.  ^"^^  When  the  board  of 
directors  is  deadlocked,  a  shareholder  action  for  judicial  dissolution  no 
longer  must  show  irreparable  injury  to  succeed. '"^^ 

VII.    Foreign  Corporations 

Relaxation  of  the  registration  requirements  for  a  foreign  corporation 
transacting  business  in  Indiana  is  another  major  advantage  of  the  new 
Act.  On  the  apphcation  for  admission,  the  "Indiana  shares"  formula''*^ 
has  been  eliminated^"^^  along  with  the  requirement  that  foreign  corpo- 
rations disclose  statements  of  business  transacted  and  tangible  property 
in  Indiana.''*' 

Another  significant  change  from  the  IGCA  is  the  IBCL's  creation 
of  specific  criteria  for  determining  what  does  not  constitute  "transacting 
business"  within  the  state  of  Indiana. '^^  A  non-exhaustive  laundry  list 
is  set  forth  to  provide  guidance  in  the  determination  of  whether  a 
corporation's  activities  require  registration.  The  list  includes  maintaining, 
defending,  or  settling  any  proceeding,  holding  meetings  that  concern 
internal  corporate  affairs,  maintaining  bank  accounts,  maintaining  offices 
dealing  with  the  corporation's  own  securities,  selling  through  independent 
contractors,  soliciting  or  obtaining  orders  that  must  be  accepted  outside 
of  Indiana  to  become  contracts,  as  well  as  any  transaction  in  interstate 
commerce  or  that  is  an  isolated  transaction  that  may  be  completed  in 
thirty  days.'^'  The  IGCA  left  the  determination  of  whether  an  act  was 
"transacting  business  in  Indiana"  to  the  judiciary. 

The  IBCL  penalty  provisions  for  corporations  transacting  business 
in  the  state  without  first  registering  are  nearly  identical  to  those  of  the 


'''Id.   §  23-1-47. 

'''Id.  §  23-l-47-l(2)(A). 

'''Id.  §  23-1-11-4;  IND.  Code  §  23-3-2-l(f)  (1982).  The  "Indiana  shares"  formula 
was  a  burdensome  mechanism  to  determine  the  percentage  of  business  a  foreign  corporation 
transacted  in  Indiana.  The  percentage  was  multiplied  by  the  corporation's  total  number 
of  outstanding  shares  to  determine  its  "Indiana  shares"  because  the  fee  was  based  on 
the  number  of  shares  attributable  to  Indiana  activity. 

'^«Pub.  L.  No.  149-1986,  §  65,  1986  Ind.  Acts  1530  (repealing  Ind.  Code  §  23-1- 
11-4). 

"'Id.  (codified  at  Ind.  Code  §  23-1-1  l-4(g),  (h)  (West  Supp.  1986)). 

'5°lND.  Code  Ann.  §  23-l-49-l(b)  (West  Supp.   1986). 

'''Id. 


1987]  BUSINESS  CORPORATION  LAW  137 

IGCA.'^^  A  civil  penalty  of  not  more  than  ten  thousand  dollars,  en- 
forceable by  the  Attorney  General,  is  retained  by  the  IBCL.'^^ 

Many  of  the  IBCL's  other  provisions  regarding  foreign  corporations 
closely  follow  those  pertaining  to  domestic  corporations,  including  name 
availability,'^"^  maintenance  of  a  registered  agent  and  office, '^^  and  re- 
vocation of  authority  to  transact  business. '^^ 

VIII.     Fees 

Until  passage  of  the  IBCL,  Indiana's  corporate  fee  structure  had 
not  been  significantly  adjusted  since  1973.'^^  Additionally,  Indiana's  fee 
structure  has  generally  been  based  upon  the  number  of  shares  authorized 
by  the  corporation, '^^  a  policy  that  tended  to  penalize  publicly  held 
corporations  and  deter  them  from  continuing  to  operate  in  Indiana.  The 
minimum  fee  for  incorporating  a  corporation  was  $36.00,  while  a  cor- 
poration with  two  million  authorized  shares  would  pay  $14,016  to  in- 
corporate.'^^ The  IBCL  erases  this  disparity  with  a  standard  $90  fee  for 
incorporation  or  admission  regardless  of  the  number  of  shares. '^°  This 
provision  eliminates  the  need  for  fee  calculation  by  the  corporation  and 
the  Secretary  of  State,  and  simultaneously  aboHshes  the  deterrent  to 
conducting  business  in  Indiana  while  estabhshing  a  standard  fee  that  is 
not  prohibitive  for  small  corporations. 

The  fee  to  amend,  dissolve,  withdraw,  or  reinstate  was  raised  from 
$26'^'  to  $30'62  ^hile  certifications  were  increased  from  %6^^^  to  $15'^^ 
with  a  fee  of  $1  per  page  for  copying. '^^  Mergers  or  share  exchanges 
will  cost  $90.'^^  There  will  no  longer  be  a  fee  for  change  of  registered 
agent, *^^  while  annual  report  fees  are  unchanged  at  $15.'^^ 


'"IND.  Code  §  23-1-11-14  (1982). 

'"IND.  Code  Ann.  §  23-l-49-2(d)  (West  Supp.   1986). 

'''Id.  §§  23-1-23,  23-1-49-6. 

'''Id.  §§  23-1-24,  23-1-49-7. 

''"Id.   §§  23-1-46,  -51. 

'"IND.  Code  §  23-3-2-2  (1973). 

'5«lND.  Code  Ann.  §  23-3-2-2  (West  Supp.   1986). 

"^Id.  at  (a). 

'"^Id.   §  23-1-1 8-3(a). 

"^'Ind.  Code  §§  23-3-2-2(h),  (k),  (m)  and  23-3-2-3  (1982). 

'"IND.  Code  Ann.  §  23-l-18-3(a)  (West  Supp.  1986). 

•"IND.  Code  §  23-3-2-3  (1982). 

'^Ind.  Code  Ann.  §  23-l-18-3(c)(2)  (West  Supp.   1986). 

''''Id.  at  (c)(1). 

'''"Id.  at  (a)(12). 

'^iND.  Code  Ann.  §  23-3-2-2G)  (West  Supp.   1986).  The  fee  was  $4. 

'"^Id.  at  (a)(23). 


138  INDIANA  LAW  REVIEW  [Vol.  20:119 


IX.  Conclusion 

In  keeping  with  the  goals  of  flexibility,  simpHcity,  and  uniformity, 
the  IBCL  provides  latitude  for  large  and  small  corporations  to  develop 
corporate  structures  to  accommodate  the  realities  of  their  businesses. 

Business  procedures  for  corporations  not  caring  to  change  their 
financial  structure  may  remain  substantially  the  same  as  under  the 
IGCA.  On  the  other  hand,  for  corporations  requiring  speciahzed  or 
creative  means  of  conducting  their  corporate  activities,  the  IBCL  provides 
a  mechanism  for  accomplishing  these  goals.  In  either  case,  adjustments 
may  need  to  be  made  in  the  corporation's  articles  of  incorporation  and 
by-laws  to  retain  provisions  from  the  IGCA  or  to  take  advantage  of  cer- 
tain new  provisions  of  the  IBCL.  For  example,  a  corporation  with  fifty 
or  fewer  shareholders  that  wants  to  eliminate  its  board  of  directors  must 
make  alternative  provisions  in  order  to  benefit  from  this  new  section  of 
the  IBCL.'^^  The  practitioner  is  cautioned  to  review  the  goals  of  each 
corporate  client  in  light  of  the  changes  in  the  law  in  order  to  determine 
which  adjustments  must  be  made. 

Finally  the  practitioner  is  cautioned  that  this  Article  did  not  endeavor 
to  review  thoroughly  each  of  the  many  new  provisions  of  the  145-page 
statute, '^^  but  instead  merely  highlighted  several  of  the  most  significant 
developments.  For  example,  new  provisions  relating  to  shareholders,'^' 
shareholder  meetings, '^^  voting, '"^^  dissenters'  rights, '"^^  amendment  of  by- 
laws,'^^  and  record-keeping'^^  are  not  even  touched  upon  here  although 
they  are  significant  aspects  of  the  IBCL.  Therefore,  the  practitioner  is 
urged  to  review  all  provisions  of  the  IBCL  thoroughly  to  better  assist 
corporate  clients  in  utilizing  the  new  Act's  dramatic  improvement  in 
corporate  flexibility. 


"'See  id.  §  23-1-33  (West  Supp.   1986). 

™Act  of  Mar.  5,   1986,  Pub.  L.  No.   149-1986,  1986  Ind.  Acts  1377. 

^'IND.  Code  Ann.  §  23-1-28  (West  Supp.   1986). 

'Ud.   §  23-1-29. 

''Id.  §  23-1-30. 

''Id.  §  23-1-44. 

''Id.  §  23-1-39. 

''Id.  §  23-1-52. 


Amendments  Curing  Defendant  Misnomers 

Under  Trial  Rule  15(C):  A  Bright  Line 

Test  of  Prejudice  for  Relation  Back? 

Steven  K.  Huffer* 


I.     Introduction 

Rule  15(C)  of  the  Indiana  Rules  of  Trial  Procedure  provides  that  an 
amended  complaint  will  relate  back  to  the  date  of  the  original  complaint 
if  the  claim  asserted  in  the  amendment  relates  to  the  same  conduct,  trans- 
action, or  occurrence  set  forth  in  the  original.'  Where  the  amendment 
changes  the  nominal  defendants,  trial  rule  15(C)  imposes  the  additional 
requirements  that  the  re-named  defendant  must  "within  the  period  pro- 
vided by  law  for  commencing  the  action  against  him"^  (1)  have  received 


*Associate  with  the  law  firm  of  Bose  McKinney  &  Evans,  Indianapolis,  Indiana.  B.A., 
Carleton  College,   1981;  J.D.,  Indiana  University  School  of  Law-Indianapolis,   1984. 

'Ind.  R.  Tr.  p.  15(C)  provides  in  full: 
(C)  Relation  Back  of  Amendments.  Whenever  the  claim  or  defense  asserted  in 
the  amended  pleading  arose  out  of  the  conduct,  transaction,  or  occurrence  set 
forth  or  attempted  to  be  set  forth  in  the  original  pleading,  the  amendment  relates 
back  to  the  date  of  the  original  pleading.  An  amendment  changing  the  party  against 
whom  a  claim  is  asserted  relates  back  if  the  foregoing  provision  is  satisfied  and, 
within  the  period  provided  by  law  for  commencing  the  action  against  him,  the 
party  to  be  brought  in  by  amendment: 

(1)  has  received  such  notice  of  the  institution  of  the  action  that  he  will  not 
be  prejudiced  in  maintaining  his  defense  on  the  merits;  and 

(2)  knew  or  should  have  known  that  but  for  a  mistake  concerning  the  identity 
of  the  proper  party,  the  action  would  have  been  brought  against  him. 

The  requirement  of  subsections  (1)  and  (2)  hereof  with  respect  to  a  governmental 
organization  to  be  brought  into  the  action  as  defendant  is  satisfied: 

(1)  in  the  case  of  a  state  or  governmental  organization  by  delivery  or  mail- 
ing of  process  to  the  Attorney  General  or  to  a  governmental  executive  [Rule 
4.6(A)(3)];  or 

(2)  in  the  case  of  a  local  governmental  organization,  by  delivery  or  mailing 
of  process  to  its  attorney  as  provided  by  statute,  to  a  governmental  executive 
thereof  [Rule  4.6(A)(4)],  or  to  the  officer  holding  the  office  if  suit  is  against  the 
officer  or  an  office. 

^Prior  to  its  amendment  in  1966,  Federal  Rule  of  Civil  Procedure  15(C)  consisted 
solely  of  what  is  now  its  first  sentence:  "Whenever  the  claim  or  defense  asserted  in  the 
amended  pleading  arose  out  of  the  conduct,  transaction,  or  occurrence  set  forth  or  attemp- 
ted to  be  set  forth  in  the  original  pleading,  the  amendment  relates  back  to  the  date  of 
the  original  pleading."  The  Advisory  Committee's  Note  to  the  amendment  states  that  the 
quoted  language  means  "within  the  applicable  hmitations  period."  39  F.R.D.  82,  83.  The 
Indiana  Supreme  Court  essentially  adopted  the  amended  federal  rule  with  the  adoption  of 
the  Indiana  Rules  of  Trial  Procedure  in  1970.  See  Czamecki  v.  Lear  Siegler,  Inc.,  471  N.E.2d 
299,  300  (Ind.   1984). 

139 


140  INDIANA  LAW  REVIEW  [Vol.  20:139 

notice  of  commencement  of  the  action  such  that  he  will  not  be  preju- 
diced in  defending  the  claim,  and  (2)  have  realized  that  but  for  a  mistake, 
the  original  pleading  would  have  named  him  as  a  defendant. 

In  a  number  of  cases  decided  during  the  survey  period,  Indiana  and 
federal  courts  have  elaborated  on  the  requirements  for  relation  back  of 
an  amended  complaint  to  avoid  the  intervening  maturity  of  an  applicable 
statute  of  limitations.  Two  conflicting  policy  considerations  have  influenced 
the  decisions  under  both  trial  rule  15(C)  and  the  nearly  identical  Federal 
Rule  of  Civil  Procedure  15(c).'  Statutes  of  limitations  generally  require 
commencement  of  an  action  within  a  specified  time  after  its  accrual.^ 
Federal  Rule  of  Civil  Procedure  15(c)  is  intended  to  provide  a  defendant 
with  notice  of  the  institution  of  an  action  against  him  so  that  he  will 
not  be  prejudiced  in  maintaining  his  defense.^  Absent  the  necessity  of 
changing  the  named  parties  in  the  original  complaint  by  amendment,  the 
statute  of  limitations  does  not  defeat  a  plaintiff's  claim  where  the  com- 
plaint is  filed  on  the  last  day  of  the  applicable  limitation  period  and  served, 
with  a  summons,  on  a  properly  named  defendant  at  some  time  after  the 
statute  has  run.^  Decisions  construing  the  federal  and  Indiana  rules  on 
relation  back  may  be  viewed  as  making  a  policy  choice  between  the  clear 


Ted.  R.  Civ.  P.  15(c)  provides: 
(c)  Relation  Back  of  Amendments.  Whenever  the  claim  or  defense  asserted  in 
the  amended  pleading  arose  out  of  the  conduct,  transaction,  or  occurrence  set 
forth  or  attempted  to  be  set  forth  in  the  original  pleading,  the  amendment  relates 
back  to  the  date  of  the  original  pleading.  An  amendment  changing  the  party  against 
whom  a  claim  is  asserted  relates  back  if  the  foregoing  provision  is  satisfied  and, 
within  the  period  provided  by  law  for  commencing  the  action  against  him,  the 
party  to  be  brought  in  by  amendment  (1)  has  received  such  notice  of  the  institu- 
tion of  the  action  that  he  will  not  be  prejudiced  in  maintaining  his  defense  on 
the  merits,  and  (2)  knew  or  should  have  known  that,  but  for  a  mistake  concern- 
ing the  identity  of  the  proper  party,  the  action  would  have  been  brought  against 
him. 

The  delivery  or  mailing  of  process  to  the  United  States  Attorney,  or  his 
designee,  or  the  Attorney  General  of  the  United  States,  or  an  agency  or  officer 
who  would  have  been  a  proper  defendant  if  named,  satisfies  the  requirement  of 
clauses  (1)  and  (2)  hereof  with  respect  to  the  United  States  or  any  agency  or 
officer  thereof  to  be  brought  into  the  action  as  a  defendant. 
Tor  example,  Ind.  Code  §  34-1-2-1  provides  that  certain  enumerated  actions  must 
be  commenced  within  six  years  after  they  accrue. 

'See  Kirk  v.  Cronvich,  629  F.2d  404,  408  (5th  Cir.  1980);  Simmons  v.  Fenton,  480 
F.2d  133,  137  (7th  Cir.  1973)  (citing  Martz  v.  Miller  Bros.  Co.,  244  F.  Supp.  246,  253-54 
(D.  Del.   1965)). 

'See  Ingram  v.  Kumar,  585  F.2d  566,  571  (2d  Cir.  1978),  cert,  denied,  440  U.S. 
940  (1979).  In  Cooper  v.  U.S.  Postal  Service,  740  F.2d  714,  717  (9th  Cir.  1984),  the  court 
characterized  its  strict  reading  of  Fed.  R.  Civ.  P.  15(c)  and  denial  of  relation  back  as  a 
"seemingly  harsh  result."  See  also  Kaplan,  Continuing  Work  of  the  Civil  Committee:  1966 
Amendments  of  the  Federal  Rules  of  Civil  Procedure,  81  Harv.  L.  Rev.  356,  410  (1967), 
quoted  in  Schiavone  v.  Fortune,   106  S.  Ct.  2379,  2388  (1986)  (Stevens  J.,  dissenting). 


1987]  TRIAL  RULE  15  (C)  141 

language  of  the  Indiana  and  federal  rules  and  a  more  equitable,  inherent- 
ly flexible,  standard  which  focuses  on  whether  the  defendant,  who  was 
first  correctly  named  in  an  amended  complaint  served  on  him  after  the 
hmitation  period  has  expired,  was  actually  prejudiced. 

II.     Schiavone  v.  Fortune 

In  Schiavone  v.  Fortune,^  the  United  States  Supreme  Court  adopted 
the  most  restrictive  possible  interpretation  of  federal  rule  15(c),  showing 
its  preference  for  following  the  rule's  clear  language.^  Schiavone  com- 
menced a  libel  action  against  Fortune  magazine  in  the  United  States  District 
Court  for  the  District  of  New  Jersey.  He  alleged  that  certain  statements 
pubhshed  in  the  May  31,  1982,  issue  of  Fortune  defamed  him.  Under 
New  Jersey  law,  a  libel  action  must  be  commenced  within  one  year  from 
the  date  of  its  accrual.^  The  Court  upheld  the  lower  courts'  finding  that 
the  cause  of  action  accrued  no  later  than  May  19,   1982.'° 

Schiavone  filed  his  complaint  on  May  9,  1983,  within  the  applicable 
statute  of  limitations.  He  named  "Fortune"  as  the  sole  defendant.  For- 
tune is  merely  a  trademark  and  an  internal  operating  division  of  Time, 
Incorporated,  a  New  York  corporation.  Fortune  is  not  a  separate  legal 
entity  with  the  capacity  to  be  sued." 

Time's  New  Jersey  registered  agent  received  the  complaint  and  sum- 
mons on  May  23,  1983,  outside  the  applicable  statute  of  Hmitations.  The 
registered  agent  refused  to  accept  service  of  process  because  Time  was 
not  named  as  a  defendant  in  the  complaint.  Schiavone  amended  his  com- 
plaint as  of  right, '^  changing  the  name  of  the  defendant  to  "Fortune, 
also  known  as  Time,  Incorporated.'"^  The  amended  complaint  was  served 
on  Time  by  certified  mail  on  July  21,   1983. '"^ 

The  district  court  granted  Time's  motion  to  dismiss  the  amended  com- 
plaint.'^ The  United  States  Court  of  Appeals  for  the  Third  Circuit  af- 
firmed.'^ The  United  States  Supreme  Court  affirmed  the  dismissal  of  the 
complaint.'^  The  Court  stated: 


'106  S.  Ct.  2379  (1986). 
'Id.  at  2385. 

'N.J.  Stat.  Ann.  §  2A:14-3  (West  1952)  provides:  "Every  action  at  law  for  libel 
or  slander  shall  be  commenced  within  1  year  next  after  the  publication  of  the  alleged  libel 
or  slander."  N.J.  Stat  Ann.  §  2A:14-3  (West  1952),  quoted  in  Schiavone,  106  S.  Ct.  at 
2381  n.3. 

''Schiavone,   106  S.  Ct.  at  2384. 

"M  at  2381  n.2. 

'^See  Fed.  R.  Civ.  P.  15(a),  which  permits  a  plaintiff  to  amend  his  complaint  before 
the  defendant  serves  an  answer. 

''Schiavone,   106  S.  Ct.  at  2381. 

'*Id. 

''Id. 

'"Schiavone  v.  Fortune,  750  F.2d  15  (3d  Cir.   1984). 

''Schiavone,  106  S.  Ct.  at  2386. 


142  INDIANA  LAW  REVIEW  [Vol.  20:139 

The  first  intimation  that  Time  had  of  the  institution  and 
maintenance  of  the  three  suits  took  place  after  May  19,  1983, 
the  date  the  Court  of  Appeals  said  the  statute  ran  "at  the  latest." 

Only  on  May  20  did  petititoner's  counsel  mail  the  complaints 
to  Time's  registered  agent  in  New  Jersey.  Only  on  May  23  were 
those  complaints  received  by  the  registered  agent,  and  then  refused. 
Only  on  July  19  did  each  petitioner  amend  his  complaint.  And 
only  on  July  21  were  the  amended  complaints  served  on  Time. 

It  seems  to  us  inevitably  to  follow  that  notice  to  Time  and 
the  necessary  knowledge  did  not  come  into  being  "within  the 
period  provided  by  law  for  commencing  the  action  against"  Time, 
as  is  so  clearly  required  by  Rule  15(c).  That  occurred  only  after 
the  expiration  of  the  applicable  1-year  period.  This  is  fatal,  then, 
to  petitioners'  litigation.  .  .  .  We  accept  the  Rule  as  meaning  what 
it  says.'^ 

In  Schiavone,  the  Court  overruled  a  line  of  federal  cases  construing 
the  language  of  federal  rule  15(c)  requiring  notice  to  the  target  defendant 
"within  the  period  provided  by  law  for  commencing  the  action"  to  mean 
within  the  statutory  period  plus  a  reasonable  time  for  service  of  process.'^ 
However,  substantial  uncertainty  still  exists  as  to  the  interpretation  of  the 
identical  clause  of  Indiana  Trial  Rule  15(C).  Indiana  courts  have  yet  to 
consider  a  case  under  rule  15(C)  in  which  the  complaint  was  filed  within 
the  limitations  period  and  first  served  on  the  target,  albeit  misnamed, 
defendant  a  short  time  after  the  statute  has  run.^°  Despite  the  clear  holding 
of  the  United  States  Supreme  Court  in  Schiavone,  differences  between 
other  federal  and  Indiana  rules, ^'  dicta  in  a  recent  Indiana  Supreme  Court 
decision, ^^  and  two  Indiana  Court  of  Appeals  decisions"  call  into  ques- 
tion the  adherence  to  Schiavone  by  Indiana  courts  under  trial  rule  15(C). 


''Id.  at  2384-85  (citations  omitted). 

''E.g.,  Ringrose  v.  Englebert  Huller  Co.,  692  F.2d  403,  410  (6th  Cir.  1982);  Kirk 
V.  Cronvich,  629  F.2d  404  (5th  Cir.  1980);  Ingram  v.  Kumar,  585  F.2d  566  (2d  Cir.  1978); 
Clark  V.  Southern  Ry.  Co.,  87  F.R.D.  356  (N.D.  III.  1980).  See  also  Schiavone,  106  S. 
Ct.  at  2388  n.4  (Stevens  J.,  dissenting). 

'°In  Honda  Motor  Co.  v.  Parks,  485  N.E.2d  644  (Ind.  Ct.  App.  1985),  the  Indiana 
Court  of  Appeals  considered  a  fact  pattern  substantially  similar  to  that  in  Schiavone.  The 
court  made  no  finding,  however,  as  to  the  date  of  first  service.  Id.  at  646.  Since  the  com- 
plaint was  filed  four  days  before  the  statute  ran,  first  service  could  have  been  before  or 
after  the  last  day  of  the  statutory  period.  Id.  at  645. 

^'Ind.  R.  Tr.  p.  21(A)  states  in  relevant  part:  "Incorrect  names  and  misnomers  may 
be  corrected  by  amendment  under  Rule  15  at  any  time."  Fed.  R.  Civ.  P.  21  contains  no 
such  provision. 

^'Czarnecki  v.  Lear  Siegler,  Inc.,  471  N.E.2d  299,  301   (Ind.   1984). 

^^Honda  Motor  Co.  v.  Parks,  485  N.E.2d  644  (Ind.  Ct.  App.  1985);  Creighton  v. 
Caylor-Nickel  Hospital,  Inc.,  484  N.E.2d  1303  (Ind.  Ct.  App.   1985). 


1987]  TRIAL  RULE  15(C)  143 

III.     Czarnecki  v.  Lear  Siegler,  Inc. 

In  Czarnecki  v.  Lear  Siegler,  Inc.,^"^  the  Indiana  Supreme  Court  readily 
concluded  that  the  amended  complaint  did  not  relate  back  under  the  facts 
presented.  The  plaintiff  truck  driver  was  blinded  by  fragments  from  the 
shattering  of  a  truck  cab's  rear  window.  The  incident  occurred  on 
September  1,  1975.  On  August  31,  1977,  the  last  day  of  the  limitations 
period, ^^  plaintiff  filed  suit  against  several  defendants,  including  "Hinson 
Cab  Company,"  which  plaintiff  believed  to  be  the  manufacturer  of  the 
cab,  but  which  was  in  fact  a  nonexistent  entity.  Plaintiff's  attorney  could 
find  no  address  for  ''Hinson  Cab  Company,"  but  attempted  service  by 
mailing  the  summons  to  C.T.  Corporation  System,  the  resident  agent  of 
another  totally  unrelated  defendant.  By  coincidence,  C.T.  Corporation 
System  was  also  the  resident  agent  for  Royal  Industries,  Inc.,  the  entity 
that  actually  manufactured  the  cab.  The  parties  stipulated  that  Royal  In- 
dustries, Inc.,  never  received  the  original  complaint  and  summons.  Hinson 
Manufacturing  Co.,  Inc.,  the  successor  in  interest  to  Royal  Industries, 
Inc.,  actually  received  service  of  the  summons  and  plaintiff's  amended 
complaint  first  naming  it  as  a  defendant  on  September  12,  1980,  more 
than  five  years  after  the  occurrence. ^^ 

The  trial  court  entered  summary  judgment  in  favor  of  the  cab 
manufacturer  based  on  the  statute  of  limitations.^'  The  Indiana  Court 
of  Appeals  reversed, ^^  relying  on  a  distinction  between  amendments  that 
cure  a  "misnomer"  and  amendments  that  actually  add  an  intended  defen- 
dant.^^ The  court  of  appeals  cited  Indiana  Trial  Rule  21(A),  a  rule  with 
no  counterpart  in  the  Federal  Rules  of  Civil  Procedure,  which  states: 
"Incorrect  names  and  misnomers  may  be  corrected  by  amendment  under 
Rule  15  at  any  time."^°  The  court  of  appeals  held  that  changing  a 
misnomer  to  reflect  the  actual  name  of  the  party  is  different  from  chang- 
ing the  party  against  whom  the  claim  is  asserted  and  therefore  distinguished 
Simmons  v.  Fenton,^^  in  which  the  United  States  Court  of  Appeals  for 
the  Seventh  Circuit  denied  relation  back." 


^M71  N.E.2d  299  (Ind.   1984). 

^'See  Ind.  Code  §  34-1-2-2(1)  (1982). 

''Czarnecki,  471   N.E.2d  at  300. 

'Ud.  at  299. 

'"Czarnecki  v.  Hinson  Cab  Co.,  461  N.E.2d  708  (Ind.  Ct.  App.   1984). 

^'Czarnecki,  471  N.E.2d  at  301. 

''Id. 

^'480  F.2d  133  (7th  Cir.   1973). 

^^In  Simmons,  plaintiff  brought  an  action  for  personal  injury  arising  out  of  an 
automobile  accident.  The  complaint  was  filed  on  the  last  day  of  the  limitations  period. 
480  F.2d  at  135.  The  original  pleading  named  as  defendant  "Teresa  D.  Fenton,"  a  thirteen 
year  old  girl  who  plaintiff  thought  was  the  driver  of  one  of  the  vehicles  involved.  The 
actual  driver  was  "Doris  J.  Fenton,"  her  mother.  Service  was  first  made  at  the  Fenton 


144  INDIANA  LAW  REVIEW  [Vol.  20:139 

The  Indiana  Supreme  Court  vacated  the  decision  of  the  court  of  ap- 
peals and  clarified  that  correction  of  a  misnomer  under  trial  rule  21(A) 
is  dependent  upon  compliance  with  the  requirements  of  trial  rule  15(C).^^ 
In  doing  so,  the  Indiana  Supreme  Court  expressly  noted  the  near  identity 
between  Indiana  Trial  Rule  15(C)  and  Federal  Rule  of  Civil  Procedure  15(c). 
The  court  specifically  relied  on  the  Seventh  Circuit's  decision  in  Simmons J"^ 
However,  in  dicta,  the  Indiana  Supreme  Court  hedged  on  its  adherence 
to  the  rationale  of  Simmons  that  the  first  notice  to  the  target  defendant 
of  commencement  of  the  action  must  be  within  the  statute  of  Hmitations. 
The  court  stated: 

Rule  15(C)  would  relate  back  here  if  the  summons  addressed 
to  Hinson  Cab  Company  had  actually  been  served  on  Royal  Indus- 
tries, Inc.,  Hinson  Division,  and  Royal  would  therefore  have  been 
given  notice  that  suit  was  being  brought  against  the  manufacturer 
of  the  cab,  which,  of  course,  was  Royal,  and  that  they  were  the 
intended  target  defendant  even  though  misnamed  by  the  summons 
served.  An  amended  complaint  served  after  the  running  of  the 
statute  of  limitations  which  properly  named  Royal  Industries,  Inc., 
Hinson  Division,  as  a  defendant,  would  have  related  back  under 
15(C)  because  clearly  they  would  have  had  notice  of  the  institu- 
tion of  the  action  and  would  have  known  that  but  for  a  mistake 
of  misnomer  they  were  the  intended  target  defendant. ^^ 

Thus,  in  Czarnecki,  the  Indiana  Supreme  Court  left  the  door  open 
to  acceptance  of  the  rationale  adopted  in  some  federal  circuits  that  "the 
period  provided  by  law  for  commencement  of  the  action"  includes  a 
reasonable  period  of  time  for  service. ^^  This  rule  was  intended  to  put  a 
plaintiff  who  misnames  his  target  defendant  in  the  complaint,  but  effects 
service  of  process  on  the  target  defendant  in  the  ordinary  course  of  events 
after  the  running  of  the  statute,  on  the  same  footing  as  the  plaintiff  who 
properly  names  his  target  defendant  to  begin  with.^^  However,  the  dicta 
in  Czarnecki  is  inconsistent  with  the  rationale  of  Simmons  that  the  "pre- 
judice" contemplated  by  federal  rule  15(c)  may  be  the  loss  of  a  statute 


family's  residence  after  the  running  of  the  statute.  Id.  The  court,  in  holding  that  the  at- 
tempted amendment  did  not  relate  back,  stated: 

Rule  15(c)  is  not  satisfied,  since  actual  service  on  whoever  was  served  was  not 
effected  until  ...  at  least  three  weeks  after  the  tolling  of  the  statute  of  limita- 
tions. [T]here  is  clearly  prejudice  to  her  [the  mother]  if  the  amendment  is  allow- 
ed. To  allow  the  amendment  will  be  to  deprive  her  of  the  defense  of  the  statute 
of  limitations.  Id.  at  136. 
''Czarnecki,  All  N.E.2d  at  301. 
''Id.  at  300. 
''Id.  at  301. 
'^See  supra  note  5. 
^'Ingram  v.  Kumar,  585  F.2d  566  (2d  Cir.  1978),  cert,  denied,  440  U.S.  940  (1979). 


1987]  TRIAL  RULE  15(C)  145 

of  limitations  defense  which  would  be  available  under  a  strict  interpreta- 
tion of  the  rule.^^ 

The  facts  of  Czarnecki  present  a  clear  case  for  denial  of  relation  back, 
because  the  first  notice  of  any  kind  to  the  target  defendant  did  not  occur 
until  some  three  years  after  the  running  of  the  statute  of  hmitations.  The 
cab  manufacturer  was  clearly  prejudiced  in  maintaining  its  defense  by  the 
passage  of  time  alone. ^^  Therefore,  Czarnecki  should  be  understood  as 
an  easy  application  of  rule  15(C)/°  Neither  the  dicta  nor  the  citation  to 
Simmons  was  necessary  to  reach  the  decision  not  to  permit  relation  back. 

IV.     Cr eight  on  v.  Caylor-Nickel  Hospital,  Inc. 

In  Creighton  v.  Caylor-Nickel  Hospital,  Inc.,^^  the  Indiana  Court  of 
Appeals  reversed  the  trial  court's  summary  judgment,  refusing  relation 
back  where  the  facts  presented  a  clear  conflict  between  equitable  treat- 
ment of  a  plaintiff  who  initially  misnamed  his  target  defendant  and  the 
express  language  of  trial  rule  ISCQ.'*^  In  Creighton,  the  plaintiff  brought 
an  action  for  medical  malpractice^^  which  he  alleged  resulted  in  his  injury 
from  a  slip  and  fall  in  a  shower/tub  unit  at  the  Caylor-Nickel  Hospital 
in  Bluffton,  Indiana.  There  are  three  units  within  the  hospital,  each  bear- 
ing the  name  "Caylor-Nickel":  the  Caylor-Nickel  Research  Institute,  the 
Caylor-Nickel  Clinic  (Clinic),  and  the  Caylor-Nickel  Hospital  (Hospital). "^^ 
All  three  are  in  close  proximity,  and  although  the  Clinic  and  Hospital 
actually  occupy  different  portions  of  the  same  building,  each  of  the  three 
is  a  separate  legal  entity."^  The  entities'  common  billing  statements  and 
other  documents  issued  to  the  public  also  added  to  the  confusion. ^^  The 
alleged  injury  occurred  on  February  24,  1978.  Creighton's  attorney  first 
filed  a  proposed  complaint  with  the  Indiana  Patient's  Compensation 
Authority  (Authority),  a  division  of  the  Indiana  Department  of  Insurance 
(Department),  on  February  19,  1980,  five  days  before  the  statute  of  Hmita- 
tions would  have  run,  naming  only  the  CHnic  as  a  defendant. ^^ 


''See  Simmons,  480  F.2d  at  136. 

''See  Swartz  v.  Gold  Dust  Casino,  Inc.,  91  F.R.D.  543,  548  (D.  Nev.  1981)  (citing 
Smith  V.  Guaranty  Service  Corp.,  51  F.R.D.  289  (N.D.  Cal.  1970));  cf.  Ridge  Co.  v.  NCR 
Corp.,  597  F.  Supp.  1239,  1244  (N.D.  Ind.  1984)  (minimum  two-year  delay  in  first  notice 
to  target  defendant;  summary  judgment  for  target  defendant). 

''See,  e.g..  Ridge  Co.  v.  NCR  Corp.,  597  F.  Supp.   1239  (N.D.  Ind.   1984). 

^'484  N.E.2d  1303  (Ind.  Ct.  App.   1985). 

'Ud.  at  1308. 

''Under  the  Indiana  Medical  Malpractice  Act,  Ind.  Code  §§  16-9.5-1-1  to  16-9.5-10-3, 
the  patient  plaintiff  must  initially  file  a  proposed  complaint  for  medical  malpractice  with 
the  Indiana  Insurance  Commissioner,  Ind.  Code  §   16-9.5-9-1  (1982). 

**Creighton,  484  N.E.2d  at  1304. 

''Id. 

''Id.  at  1307. 

"Id.  at  1304r05,   1307. 


146  INDIANA  LAW  REVIEW  [Vol.  20:139 

The  Authority  forwarded  the  proposed  complaint  naming  only  the 
Clinic  to  Cecil  Lockwood,  Jr.,  the  risk  manager  for  both  the  Hospital 
and  the  CHnic,  on  February  22,  1980,  two  days  before  the  running  of 
the  statute  of  Hmitations/^  Lockwood  did  not  receive  the  proposed  com- 
plaint until  February  28,  1980,  four  days  after  the  running  of  the  statute/^ 
On  the  same  day,  the  Hospital  and  Clinic  forwarded  the  proposed  com- 
plaint to  their  insurance  carrier,  pointing  out  the  plaintiff's  pleading 
mistake  in  Lockwood's  cover  letter/"  On  February  29,  1980,  the  Depart- 
ment reported  to  Creighton's  attorney  that  the  Authority  had  previously 
provided  erroneous  information  which  led  Creighton's  attorney  to  believe 
that  the  Hospital  and  Clinic  were  the  same  entity.^'  On  receiving  this  in- 
formation, Creighton's  attorney  amended  his  proposed  complaint  to  name 
the  Hospital  as  a  defendant  for  the  first  time.^^  The  amended  proposed 
complaint  was  received  by  the  Authority  on  March  3,  1980,  eight  days 
after  the  statutue  of  Hmitations  would  have  expired  on  the  claim. ^^  The 
Hospital  filed  a  motion  for  summary  judgment  as  to  the  amended  com- 
plaint based  on  the  statute  of  limitations.^^  The  trial  court  granted  sum- 
mary judgment  in  favor  of  the  Hospital. ^^ 

The  court  of  appeals  noted  that  the  Hospital  first  received  actual  for- 
mal notice  of  the  institution  of  the  action  four  days  after  the  running 
of  the  statute  of  limitations,  when  Lockwood  received  a  copy  of  the  pro- 
posed complaint  directed  against  the  Clinic. ^^  The  court  of  appeals  framed 
the  issue  as:  "whether  this  minor  delay  in  the  receipt  of  actual  notice 
precluded  relation  back  of  the  amended  complaint. "^^ 

The  court  of  appeals  discussed  three  factors  which  compelled  relation 
back  under  the  circumstances,  in  spite  of  the  fact  that  the  proper  target 
defendant  did  not  receive  actual  notice  of  institution  of  the  action  until 
after  the  running  of  the  statute.  First,  the  court  of  appeals  noted  that 
Creighton's  confusion  and  mistake  in  determining  the  correct  name  was 
induced  by  misleading  information  from  the  Clinic,  Hospital,  and 
Authority. ^^  Second,  the  Hospital  and  CHnic  had  the  closest  imaginable 


*Uci.  at  1305. 

''Id. 

'*'The  letter  stated:  "We  are  sure,  also,  that  it  is  not  necessary  to  call  your  attention 
to  the  fact  that  the  fall  which  resulted  in  the  suit  against  Caylor-Nickel  Clinic  occurred 
on  the  premises  owned  and  operated  by  Caylor-Nickel  Hospital,  Inc "  M  at  1305. 

''Id. 
''Id. 
''Id. 
"Id. 
"Id. 
''Id. 

'^Several  federal  and  Indiana  cases  have  relied  on  misleading  information  supplied 
by  the  defendant  as  an  equitable  basis  for  permitting  relation  back.  See  Ryser  v.  Gatchel 


1987]  TRIAL  RULE  15(C)  \A1 

identity  of  interests/'  Finally,  the  Hospital  received  constructive  notice 
of  institution  of  the  action,  since  service  of  the  proposed  complaint  was 
made  upon  the  Authority,  which  is  the  statutory  agent  for  service  of  pro- 
cess on  health  care  providers  under  the  Indiana  Medical  Malpractice  Act,^° 
within  the  statutory  period. 

The  court  of  appeals  distinguished  Czarnecki  by  pointing  out  that 
the  first  notice  of  the  claim  upon  the  cab  manufacturer  in  that  case  was 
more  than  three  years  after  the  filing  of  the  original  complaint/'  The 
court  of  appeals  stated,  in  justifying  relation  back  under  the  circumstances: 

[T]he  Hospital  received  actual,  formal,  seasonable  notice  and  must 
be  deemed  to  have  received  constructive  notice  of  the  claim  against 
it  on  the  day  the  action  was  commenced  by  filing  the  original 
proposed  complaint  with  the  Authority,  the  Hospital's  agent  for 
receipt  of  notice. 

We  think  a  defendant  to  be  brought  in  by  amendment  has 
received  "such  notice"  as  is  required  by  the  rule  when,  as  in  this 
case,  he  has  received  constructive  notice  of  the  claim  within  the 
period  provided  by  law  and  has,  thereafter,  received  actual,  for- 
mal, seasonable  notice  of  the  claim  and  knew  or  should  have 
known  that  "but  for  a  mistake  concerning  the  identity  of  the  pro- 
per party,  the  action  would  have  been  brought  against  him."" 

By  relying  on  constructive  notice,  the  court  appealed  to  "essential 
considerations  of  fairness.""  The  court  held: 

[T]he  claimant's  only  duty  (under  the  Medical  Malpractice 
Act)  is  to  file  a  proposed  complaint.  The  claimant  has  no  duty 
to  serve  the  named  defendant  with  notice  of  the  claim.  That 


151  Ind.  App.  62,  278  N.E.2d  320  (1972);  6  C.  Wright  &  A.  Miller,  Federal  Practice 
AND  Procedure  §  1500  n.28  (1971). 

^'The  "identity  of  interest"  exception  to  the  requirement  of  actual  notice  to  the  target 
defendant  within  the  limitations  period  is  widely  recognized.  See  C.  Wright  &  A.  Miller, 
supra  note  58,  at  516.  In  Schiavone,  the  Court  held  that  this  exception  would  still  require 
notice  to  someone  within  the  statutory  period.  Schiavone,  106  S.  Ct.  at  2384.  In  Honda, 
the  Indiana  Court  of  Appeals  implied  that  the  identity  of  interest  exception  may  be  satisfied 
even  if  service  on  the  wrong,  but  related,  party  is  first  made  outside  the  limitations  period. 
See  supra  note  20. 

'"Constructive  notice  to  the  target  defendant  or  service  on  the  target  defendant's  agent 
within  the  statutory  period  has  been  held  sufficient  notice  in  a  number  of  cases  to  permit 
relation  back.  See  C.  Wright  &  A.  Miller,  supra  note  58,  at  520  n.21.  Here,  too,  the 
Court  in  Schiavone  stated  that  service  on  the  agent  must  be  within  the  statutory  period. 
Schiavone,  106  S.  Ct.  at  2384.  ("there  was  no  proper  notice  to  Fortune  that  could  be  im- 
puted to  Time"  Id.  (emphasis  added)). 

''Creighton,  484  N.E.2d  at  1308. 


148  INDIANA  LAW  REVIEW  [Vol.  20:139 

responsibility,  a  ministerial  act,  rests  on  the  Authority,  the  health 
care  provider's  agent  for  receipt  of  notice/^ 

Creighton  is  probably  limited  to  its  factual  setting.  Its  holding  is 
arguably  that  medical  malpractice  complaints  in  Indiana  are  deemed  notice 
to  the  defendant  (and  other  related  parties)  on  the  date  of  filing  with 
the  Authority.  If  so,  medical  malpractice  actions  do  not  give  rise  to  the 
basic  problem  addressed  in  this  Article:  there  is  no  time  lag  between  com- 
mencing the  action  so  as  to  toll  the  statute  of  hmitations  and  the  notice 
to  the  defendant  necessary  to  invoke  the  relation  back  doctrine.  Therefore, 
Creighton  does  not  resolve  the  problem  of  ihQ  Schiavone  fact  pattern  under 
trial  rule  15(C). 

V.     Honda  Motor  Co.  v.  Parks 

Honda  Motor  Co.  v.  Parks^^  is  another  recent  Indiana  case  involving 
the  issue  of  relation  back  when  a  complaint  is  amended  under  rule  15(C) 
to  substitute  a  defendant  after  the  statute  of  limitations  has  run.  However, 
in  this  case,  the  Indiana  Court  of  Appeals  raised  more  questions  than 
it  answered  by  failing  to  make  a  finding  crucial  to  a  determination  under 
the  Schiavone  analysis.  The  court  engaged  in  an  extensive  discussion  of 
prior  Indiana  precedent,  notable  for  its  omission  of  Czarnecki.  In  revers- 
ing a  summary  judgment  for  the  products  liability  defendant,  the  court 
held  that  the  probable  existence  of  an  identity  of  interest  between  the 
original  and  substituted  defendants,  the  American  and  Japanese  branches 
of  Honda  respectively,  precluded  summary  judgment. ^^  While  it  was  clear 
that  the  complaint  was  filed  within  the  statutory  period,  the  court  made 
no  finding  as  to  the  date  of  original  service  on  American  Honda,  the 
erroneously-named  manufacturer.  It  is  possible  that  counsel  for  the  defen- 
dant did  not  raise  the  issue. 

VI.     Conclusion 

While  the  dicta  in  Czarnecki  and  the  holdings  in  Creighton  and  Honda 
would  seem  to  indicate  a  tendency  among  Indiana  appellate  courts  to  con- 
strue trial  rule  15(C)  liberally,  the  Schiavone  fact  pattern  has  yet  to  come 
before  them  for  resolution.  What  is  clearly  at  stake  is  the  availability  of 
summary  judgment  to  the  target  defendant  in  such  a  case.  Under  the 
Schiavone  analysis,  the  only  material  fact  is  the  date  of  first  notice  to 
the  defendant:  if  that  date  is  outside  the  statutory  period,  the  plaintiff 
is  out  of  court.  Under  the  more  liberal  approach  adopted  in  some  federal 


"'Id.  at  1307-08. 

*'485  N.E.2d  644  (Ind.  Ct.  App.   1985). 

''Id.  at  651. 


1987]  TRIAL  RULE  15(C)  149 

circuits,  but  now  overruled  by  Schiavone,  summary  judgment  might  be 
precluded  by  the  question  of  whether  the  defendant  was  actually  prejudiced 
by  first  receiving  notice  outside  the  statutory  period. 

Because  of  the  uncertainty  surrounding  the  Indiana  courts'  approach 
to  a  fact  situation  similar  to  Schiavone,  Indiana  plaintiffs'  counsel  should 
exercise  extra  care  in  correctly  naming  target  defendants  when  filing  an 
action  near  the  expiration  of  the  appHcable  statute  of  limitations.  If  Indiana 
courts  decide  to  follow  Schiavone  strictly,  a  mistake  in  the  designation 
of  a  defendant  may  be  fatal  to  their  client's  claim,  even  if  the  complaint 
is  filed  in  a  timely  manner. 


Attorney's  Fees  for  Frivolous, 
Unreasonable  or  Groundless  Litigation 

Andrew  W.  Hull* 

During  the  survey  period,  the  Indiana  legislature  enacted  a  statutory 
amendment  providing  for  an  award  of  attorney's  fees,  as  a  part  of  the 
costs  to  the  prevailing  party  in  a  civil  action.'  The  amendment  permits 
a  court  to  award  attorney's  fees  if  the  court  finds  that  either  party:  (1) 
brought  the  action  or  defense  or  a  claim  on  defense  that  is  frivolous, 
unreasonable,  or  groundless;  (2)  continued  to  litigate  the  action  or  defense 
after  the  party's  claim  or  defense  clearly  became  frivolous,  unreasonable, 
or  groundless;  or  (3)  litigated  the  action  in  bad  faith. ^  This  legislative 
mandate  for  the  award  of  attorney's  fees  is  a  departure  from  past  Indiana 
practice  and  raises  important  questions  for  practitioners. 

I.     The  American  Rule 

Indiana  courts  have  traditionally  adhered  to  the  American  rule  that 
attorney's  fees  cannot  be  awarded  to  a  prevailing  party  in  the  absence 
of  either  a  specific  statutory  provision  or  an  agreement  between  the  par- 
ties.^ This  rule  is  based  on  the  assumption  that  imposing  the  costs  of 
attorney's  fees  on  the  losing  party  will  greatly  discourage  use  of  the  courts.'' 
Critics  of  the  American  rule  have  argued  for  a  modification  of  the  rule 
for  at  least  three  reasons.  First,  the  American  rule  encourages  intolerably 
congested  courts.^  Second,  it  is  argued  that  an  injured  party  can  never 
be  made  whole  if  he  must  pay  his  attorney's  fees.^  Finally,  it  is  asserted 
that  the  rule  encourages  parties  with  unfounded  or  feeble  claims  to  bring 
suit  in  hope  of  recovering  at  least  the  nuisance  value  of  the  suit  because 


♦Associate,  Bose  McKinney  &  Evans,  Indianapolis.  B.G.S.,  The  University  of  Michigan, 
1981;  J.D.,  Indiana  University  School  of  Law — Bloomington,   1986. 

'IND.  Code  §  34-1-32-1  (Supp.  1986). 

^IND.  Code  §  34-l-32-l(b)  (Supp.   1986). 

'See,  e.g.,  Kikkert  v.  Krumm,  474  N.E.2d  503,  505  (Ind.  1985);  Trotcky  v.  Van  Sickle, 
227  Ind.  441,  443,  85  N.E.2d  638,  640  (1949).  Courts  have  construed  statutes  that  provide 
for  an  award  of  costs  to  the  prevailing  party  as  not  to  include  an  award  of  attorney's 
fees.  See  State  v.  Holder,  260  Ind.  336,  339,  295  N.E.2d  799,  800  (1973). 

"F.D.  Rich  Co.  v.  Industrial  Lumber  Co.,  417  U.S.  116,  129  (1974);  Fleischmann 
Distilling  Corp.  v.  Maier  Brewing  Co.,  386  U.S.  714,  718  (1967).  See  Mallor,  Punitive 
Attorney's  Fees  for  Abuses  of  the  Judicial  System,  61  N.C.L.  Rev.  613,  615-19  (1983), 
for  a  useful  discussion  of  the  policy  implications  of  the  American  rule. 

^See  Kuenzel,  The  Attorney's  Fee:  Why  Not  a  Cost  of  Litigation! ,  49  Iowa  L.  Rev. 
75,  79-80  (1963). 

^See  Ehrenzweig,  Reimbursement  of  Counsel  Fees  and  the  Great  Society,  54  Calif. 
L.  Rev.  792,  797  (1966). 

151 


152  INDIANA  LAW  REVIEW  [Vol.  20:151 

such  a  party  risks  nothing  but  the  costs  of  his  own  attorney's  fees.' 

It  is  widely  recognized  that  the  shifting  of  attorney's  fees  can  have 
an  important  impact  on  a  Htigant's  rights/  Both  Congress  and  the  Indiana 
legislature  have  provided  for  an  award  of  attorney's  fees  in  various  in- 
stances to  effectuate  important  legislative  pohcies.^ 

Through  the  exercise  of  their  equitable  powers,  Indiana  courts  have 
recognized  an  exception  to  the  American  rule  that  each  party  to  a  lawsuit 
must  bear  his  own  attorney's  fees  absent  expressed  statutory  or  contrac- 
tual authorization.  The  obdurate  behavior  exception  permits  a  court  to 
impose  an  award  of  attorney's  fees'"  on  a  party  that  has  litigated  in  bad 
faith."   The  Supreme  Court  of  Indiana  first  considered  the  obdurate 


'Id.  at  792;  Note,  Attorney's  Fees:  Where  Shall  the  Ultimate  Burden  Liel,  20  Vand. 
L.  Rev.   1216,   1223  (1967). 

^See  generally  Note,  Use  of  Taxable  Costs  to  Regulate  the  Conduct  of  Litigants, 
53  CoLUM.  L.  Rev.  78  (1953). 

'For  a  collection  of  federal  statutes  providing  for  an  award  of  attorney's  fees,  see 
Alyeska  Pipeline  Serv.  Co.  v.  Wilderness  Soc'y,  421  U.S.  240,  260-61  n.33  (1975).  Indiana 
statutes  that  provide  for  an  award  of  attorney's  fees  include:  Relocation  Assistance  Act, 
Ind.  Code  §  8-13-18.5-13  (1982);  Crime  Victim's  Civil  Actions  for  Damages,  Ind.  Code 
§  34-4-30-1  (1982);  Paternity  Proceedings,  Ind.  Code  §  31-6-6.1-18  (1982);  Dissolution  of 
Marriage,  Ind.  Code  §  31-1-11.5-16  (1982);  Evidence  of  Indebtedness;  Agreement  to  Pay, 
Ind.  Code  §  26-2-4-1  (1982);  Deceptive  Consumer  Sales,  Ind.  Code  §  24-5-0.5-4  (1982); 
Mechanics  Lien  Failure  to  Release,  Ind.  Code  §  32-8-1-2  (1982);  Tort  Claims  Against  Govern- 
mental Entities  and  Public  Employees,  Ind,  Code  §  34-4-16.5-19  (1982);  and  Civil  Rights 
Claims  Against  Public  Employees,  Ind.  Code  §  34-4-16.7-4  (1982). 

'"The  obdurate  behavior  exception  permits  only  an  award  of  attorney's  fees  and  does 
not  include  other  litigation  expenses  including  deposition  expenses.  Cox  v  Ubik,  424  N.E.2d 
127,   131  (Ind.  Ct.  App.   1981). 

"St.  Joseph  College  v.  Morrison  Inc.,  158  Ind.  App.  272,  279-80,  302  N.E.2d  865, 
870  (1973).  The  most  versatile  exception  to  the  American  rule  is  punitive  in  nature  and 
based  on  the  existence  of  bad  faith  on  the  part  of  one  of  the  litigants.  See  Hall  v.  Cole, 
412  U.S.   1,  5  (1973). 

Other  judicially  created  exceptions  to  the  American  rule  include  the  common  fund  ex- 
ception and  the  private  attorney  general  exception.  See  St.  Joseph  College,  158  Ind.  App. 
at  279-80,  302  N.E.2d  at  870  (quoting  La  Raza  Unida  v.  Volpe,  57  F.R.D.  94,  96  (N.D, 
Cal,  1972)),  The  common  fund  exception  permits  an  award  of  attorney's  fees  when  the 
plaintiff's  successful  litigation  confers  "a  substantial  benefit  on  the  members  of  an  ascer- 
tainable class,  and  where  the  court's  jurisdiction  over  the  subject  matter  of  the  suit  makes 
possible  an  award  that  will  operate  to  spread  the  costs  proportionately  among  them,"  Mills 
V.  Electric  Auto-Lite  Co,,  396  U,S,  375,  393-94  (1970)  (award  of  attorney's  fees  to  suc- 
cessful shareholder  plaintiffs  in  a  suit  to  set  aside  a  corporate  merger).  The  private  attorney 
general  exception  arises  where  a  court  awards  attorney's  fees  to  prevaihng  plaintiffs  when 
necessary  and  appropriate  to  insure  important  rights  or  social  policies,  St.  Joseph  College, 
158  Ind.  App.  at  279-80,  302  N.E.2d  at  870.  But  see  Alyeska  Pipeline  Serv.  Co.  v.  Wilderness 
Soc'y,  421  U.S.  240  (1975),  where  the  Supreme  Court  rejected  the  private  attorney  general 
exception  because  it  required  the  federal  courts  to  determine  a  number  of  issues  better  left 
to  legislative  resolution,  such  as  determining  which  statutes  were  of  sufficient  importance 
to  justify  fee  shifting.  Id.  at  269, 


1987]  FRIVOLOUS  LITIGATION  153 

behavior  exception  to  the  American  rule  in  Kikkert  v.  Krumm,^'^  where 
the  court  observed  that  the  rule  is  a 

protective  measure  which  operates  to  help  preserve  the  integrity 
of  the  judicial  process.  The  nature  of  an  attorney  fee  award  under 
the  obdurate  behavior  exception  is  punitive,  designed  to  reimburse 
a  prevailing  party  who  has  been  dragged  into  baseless  litigation 
and  thereby  subjected  to  great  expense. ^^ 

Although  several  cases  have  discussed  the  obdurate  behavior  excep- 
tion to  the  American  rule,'"  attorney's  fees  are  infrequently  awarded 
because  Indiana  appellate  courts  have  required  *'that  the  party's  conduct 
...  be  vexatious  and  oppressive  in  the  extreme  before  the  court  can 
impose  special  equitable  sanctions.'"^  For  this  reason,  the  obdurate 
behavior  exception  has  limited  usefulness  in  deterring  frivolous, 
unreasonable,  or  groundless  Htigation  practices. 

Cox  V.  Ubik^^  is  one  of  the  few  Indiana  appellate  cases  to  affirm 
an  award  of  attorney's  fees  by  a  trial  court  under  the  obdurate  behavior 
exception.  Plaintiff  (Cox)  brought  a  negligence  action  against  defendants 
(Ubik  and  Winters)  for  injuries  sustained  in  an  automobile  accident.'^  At 
trial.  Cox  claimed  that  Ubik's  automobile  struck  hers  from  the  rear, 
thereby  causing  her  colHsion  with  Winters'  automobile  and  a  retaining 
wall.'^  There  was  evidence  at  trial  that  Cox  acted  in  bad  faith  in  failing 
to  dismiss  Ubik  from  the  suit.  Cox  admitted  that  she  could  not  recall 
ever  telling  anyone  prior  to  trial  that  Ubik  had  hit  her.'^  Ubik  introduced 
testimony  by  the  police  officer  at  the  scene  of  the  accident  that  Cox  never 
mentioned  being  hit  by  Ubik  and  that  the  accident  was  caused  when  Cox 
hit  a  patch  of  ice  and  skidded  into  the  retaining  wall.^°  The  appellate 
court  concluded  that  it  was  within  the  trial  court's  discretion  to  assess 
Ubik's  attorney's  fees  against  Cox,  based  upon  the  above  evidence  that 
Cox  maintained  her  claim  against  Ubik  in  bad  faith. ^' 

The  federal  bad  faith  exception  to  the  American  rule^^  has  been 


'H74  N.E.2d  503  (Ind.   1985). 

^^Id.  at  505  (emphasis  in  original). 

''See,  e.g.,  id.;  Turnpaugh  v.  Wolf,  482  N.E.2d  506,  510  (Ind.  Ct.  App.  1985);  Dotlich 
V.  Dotlich,  475  N.E.2d  331,  348  (Ind.  Ct.  App.  1985);  Cox  v.  Ubik,  424  N.E.2d  127,  129 
(Ind.  Ct.  App.  1981);  Umbreit  v.  Chester  B.  Stem,  Inc.,  373  N.E.2d  1116,  1120  (Ind.  Ct. 
App.   1978). 

''St.  Joseph  College,   158  Ind.  App.  at  280,  302  N.E.2d  at  871. 

'^424  N.E.2d  127  (Ind.  Ct.  App.   1981). 

'Ud.  at  128. 

''Id. 

">Id.  at  130. 

''Id. 

''Id. 

''A  trial  court  has  inherent  authority  to  award  attorney's  fees  to  prevailing  parties 


154  INDIANA  LAW  REVIEW  [Vol.  20:151 

broadly  construed  to  apply  to  three  types  of  behavior:  prelitigation  miscon- 
duct, assertion  of  frivolous  claims,  counterclaims  and  defenses;  and  miscon- 
duct during  the  course  of  the  litigation."  The  application  of  the  bad  faith 
exception  to  prelitigation  conduct  is  based  upon  the  notion  that  the  costs 
of  litigation  ought  to  be  shifted  to  prevent  the  unfairness  of  imposing 
costs  on  a  party  who  should  have  been  entitled  to  enjoy  his  rights. ^^  In 
addition,  where  a  defendant  causes  litigation  by  unjustifiably  resisting  a 
meritorious  claim  of  right,  he  places  unnecessary  costs  on  the  courts  and 
the  public." 

The  Indiana  obdurate  behavior  exception  has  been  held  to  apply  only 
"at  the  time  a  party  files  a  knowingly  baseless  claim  or  at  the  time  a 
party  discovers  that  the  claim  is  baseless  and  fails  to  dismiss  it."^^  The 
exception  does  not  permit  an  award  of  attorney's  fees  for  obdurate 
behavior  that  precedes  or  gives  rise  to  a  cause  of  action.^'  This  is  an  im- 
portant distinction  from  the  bad  faith  exception  to  the  American  rule 
recognized  by  federal  courts. 

II.     Legislative  Response 

Indiana,  along  with  several  other  states,"  has  codified  the  judicially 
created  obdurate  behavior  exception  to  the  general  rule  that  each  party 


when  a  losing  litigant  has  "acted  in  bad  faith,  vexatiously,  wantonly,  or  for  oppressive  reasons." 
Alyeska  Pipeline  Serv.  Co.  v.  Wilderness  Soc'y.,  421  U.S.  240,  258-59  (1975)  (quoting  F. 
D.  Rich  Co.  V.  Industrial  Lumber  Co.,  417  U.S.  116,  129  (1974)).  See,  e.g.,  Hall  v.  Cole, 
412  U.S.  1,  5  (1973);  Annotation,  Award  of  Counsel  Fees  to  Prevailing  Party  Based  on 
Adversary's  Bad  Faith,  Obduracy,  or  Other  Misconduct,  31  A.L.R.  Fed.  833  (1977)  for 
a  useful  collection  of  cases  construing  the  federal  bad  faith  exception  to  the  American  rule. 

^'See  Mallor,  supra  note  4,  at  636-61  for  a  useful  summary  of  the  three  types  of 
misconduct  included  in  the  federal  bad  faith  exception.  Comment,  Court  Awarded  Attorney's 
Fees  and  Equal  Access  to  the  Courts,   111  U.  Pa.  L.  Rev.  636,  661  (1974). 

''See,  e.g.,  Rolax  v.  Atlantic  C.R.L.  Co.,  186  F.2d  473  (4th  Cir.  1951)  (as  one  justifica- 
tion for  the  award  of  attorney's  fees,  the  court  noted  the  pre-litigation  oppressive  and 
discriminatory  conduct  of  the  losing  Htigant);  Schlein  v.  Smith,  160  F.2d  22  (D.C.  Cir. 
1947)  (defendant  properly  ordered  to  pay  attorney's  fees  to  plaintiffs  due  to  grossly  fraudulent 
actions  of  defendant). 

^'Haycroft  v.  Hollenback,  606  F.2d  128,   133  (6th  Cir.   1979). 

''Kikkert,  474  N.E.2d  at  505. 

""Intentional  or  illegal  conduct  that  gives  rise  to  a  cause  of  action  is  not  obdurate 
behavior,  it  is  merely  conduct  that  may  form  the  basis  of  a  potential  lawsuit."  Id.  The 
obdurate  behavior  exception  has  been  applied  through  Appellate  Rule  15(G)  of  the  Indiana 
Rules  of  Appellate  Procedure  to  give  appellate  courts  the  discretion  to  award  attorney's 
fees  for  appeals  taken  in  bad  faith  or  merely  to  harass  or  delay.  See  Deetz  v.  McGowan, 
403  N.E.2d   1160,   1165  (Ind.   1980). 

'^See,  e.g.,  Ariz.  Rev.  Stat.  Ann.  §  12-341. 01(C)  (1982)  (upon  clear  and  convincing 
evidence  that  the  claim  or  defense  constitutes  harassment,  is  groundless  and  not  in  good 
faith);  Cal.  Civ.  Proc.  Code  §  128.5  (West  Supp.  1986)  (tactics  or  actions  not  based  on 
good  faith  which  are  frivolous  or  which  cause  unnecessary  delay;  frivolous  is  defined  as 
"totally  and  completely  without  merit  or  .  .  .  for  the  sole  purpose  of  harassing  an  opposing 


1987]  FRIVOLOUS  LITIGATION  155 

to  a  lawsuit  bear  his  own  attorney's  fees.  The  Indiana  legislature  amended 
section  34-1-32-1,  effective  September  1,   1986,  to  provide 

(a)  In  all  civil  actions,  the  party  recovering  judgment  shall  recover 
costs,  except  in  those  cases  in  which  a  different  provision  is 
made  by  law. 

(b)  In  a  civil  action,  the  court  may  award  attorney's  fees  as  part 
of  the  cost  to  the  prevailing  party,  if  it  finds  that  either  party: 

(1)  brought  the  action  or  defense  on  a  claim  or  defense  that 
is  frivolous,  unreasonable,  or  groundless; 

(2)  continued  to  litigate  the  action  or  defense  after  the  party's 
claim  or  defense  clearly  became  frivolous,  unreasonable, 
or  groundless;  or 

(3)  litigated  the  action  in  bad  faith. 

(c)  The  award  of  attorney's  fees  under  subsection  (b)  does  not 
prevent  the  prevailing  party  from  bringing  an  action  against 
another  party  for  abuse  of  process  arising  in  any  part  on  the 
same  facts,  but  the  prevailing  party  may  not  recover  the  same 
attorney's  fees  twice. ^^ 

This  statutory  scheme  is  patterned  after  section  34-4-16.5-19,^°  providing 
for  an  award  of  attorney's  fees  to  a  governmental  agency  prevailing  as 
a  defendant  to  a  tort  claim,  and  section  34-4-16.7-2,^'  providing  for  an 
award  of  attorney's  fees  to  a  governmental  agency  prevailing  as  a  defend- 
ant in  an  action  under  the  civil  rights  laws  of  the  United  States. 

Amended  subsection  34- 1-32- 1(b)(3)  will  probably  be  construed  by  the 


party.");  Colo.  Rev.  Stat.  §  13-17-101  (Supp.  1984)  (action  or  defense,  or  any  part  thereof, 
which  is  determined  to  have  been  substantially  frivolous,  substantially  groundless,  or  substan- 
tially vexatious);  Fla.  Stat.  Ann.  §  57.105  (West  Supp.  1985)  ("complete  absence  of  a 
justiciable  issue  of  either  law  or  fact");  Idaho  Code  §  12-121  (1979),  limited  by  Idaho 
R.  Civ.  P.  54(e)(1)  (case  brought,  pursued  or  defended  frivolously,  unreasonably  or  without 
foundation);  Mass.  Ann.  Laws  ch.  231,  §  6F  (Michie/Law  Co-op  1986)  (all  or  substantially 
all  the  claims,  defenses,  frivolous  and  not  in  good  faith);  Minn.  Stat.  Ann.  §  549.21  (West 
Supp.  1984)  (bad  faith  claim,  frivolous  claim  or  defense,  position  asserted  solely  to  harass 
or  delay,  or  fraud  upon  the  court);  N.D.  Cent.  Code  §  28-26-01  (Supp.  1985)  (claim  for 
relief  was  frivolous);  S.D.  Codified  Laws  Ann.  §  15-17-35  (1984)  (cause  of  action  was 
frivolous  or  brought  for  malicious  purposes);  Utah  Code  Ann.  §  78-27-56  (Supp.  1986) 
(action  or  defense  was  without  merit  and  not  brought  or  asserted  in  good  faith);  Wash. 
Rev.  Code  Ann.  §  4.84.185  (West  Supp.  1986)  (action,  counterclaim  .  .  .  was  frivolous 
and  advanced  without  reasonable  cause);  Wis.  Stat.  Ann.  §  814.025  (West  Supp.  1985) 
(action    .  .  .  which  is  found  to  be  frivolous,  including  both  bad  faith  and  meritless  claims). 

"Ind.  Code  §  34-1-32-1  (Supp.  1986).  Indiana  recognizes  an  action  for  abuse  of  pro- 
cess based  upon  a  showing  of  misuse  or  misapplication  of  the  judicial  process  for  an  end 
other  than  that  which  it  was  designed  to  accomplish.  Display  Fixtures  Co.  v.  R.L.  Hatcher, 
Inc.,  438  N.E.2d  26,  31  (Ind.  Ct.  App.  1982). 

^"Ind.  Code  §  34-4-16.5-19  (1983). 

^'Ind.  Code  §  34-4-16.7-2  (1983). 


156  INDIANA  LAW  REVIEW  [Vol.  20:151 

courts  as  a  codification  of  the  previously  recognized  obdurate  behavior 
exception. ^^  This  subsection  will  continue  to  be  narrower  in  scope  than 
the  federal  bad  faith  exception  because  its  application  is  expressly  Hmited 
to  circumstances  where  a  losing  party  litigated  the  action  in  bad  faith. 

The  language  of  amended  subsections  (b)(1)  and  (2),  however,  shifts 
the  court's  inquiry  from  a  search  for  the  improper  motives  of  the  losing 
party  to  a  review  of  the  legal  and  factual  basis  of  the  losing  party's  claim 
or  defense.  This  inquiry  into  whether  a  party  ''brought  the  action  or 
defense"  or  "continued  to  litigate  the  action  or  defense  after  the  party's 
claim  or  defense  clearly  became  frivolous,  unreasonable,  or  groundless," 
is  both  a  legal  and  factual  inquiry  that  goes  to  the  very  merits  of  a  claim 
or  defense.  These  subsections  place  an  obligation  on  litigants  to  investigate 
the  legal  and  factual  basis  of  the  claim  when  filing  and  to  continuously 
evaluate  the  merits  of  claims  and  defenses  asserted  throughout  litigation. 

The  obligation  to  review  the  merits  of  a  party's  legal  position  may 
be  imposed  on  both  the  client  and  attorney.  The  statute  provides  for  an 
award  of  attorney's  fees  to  the  prevailing  party  but  is  silent  as  to  who 
is  to  pay  the  award.  In  Owen  v.  Vaughn, ^^  the  Indiana  Court  of  Appeals 
for  the  Fourth  District  affirmed  an  award  of  attorney's  fees  against  a 
plaintiff's  attorneys  under  both  the  obdurate  behavior  exception  and  the 
Indiana  Tort  Claims  Act.^''  The  court  relied  on  an  early  Indiana  Supreme 
Court  case,  Brown  v.  Brown,^^  which  upheld  the  discretionary  power  of 
the  court  to  enter  costs  against  a  non-party  attorney  and  stated  that  such 
an  award  will  only  be  reversed  for  an  abuse  of  discretion." 

Another  issue  raised  by  this  statute  is  whether  a  court  can  award  par- 
tial attorney's  fees  on  a  finding  that  one  of  several  claims  or  defenses 
is  frivolous,  unreasonable,  or  groundless.  Section  34-1-32-1  provides  that 
the  court  "may"  award  attorney's  fees  if  the  elements  of  the  statute  are 
satisfied. ^^  As  a  matter  of  statutory  interpretation,  the  use  of  the  word 
"may"  grants  judicial  discretion  in  applying  a  provision.^*  This  suggests 


^^See  supra  notes  10-21,  26-27  and  accompanying  text. 

"479  N.E.2d  83  (Ind.  Ct.  App.   1985). 

''Id.  Sit  88.  Indiana  Tort  Claims  Act,  1974  Ind.  Acts,  P.L.  142,  §  1  (codified  as  amended 
at  Ind.  Code  §  34-4-16.5-1  et  seq.)  (1982)). 

"4  Ind.  627  (1853). 

'^Owen,  479  N.E.2d  at  88.  An  interesting  circumstance  could  arise  where  a  party  seeks 
to  avoid  responsibility  (or  have  responsibility  shifted  to  his  counsel)  for  an  award  of  at- 
torney's fees  by  asserting  that  the  claim  or  defense  at  issue  was  taken  on  the  advice  of 
counsel.  Although  advice  of  counsel  can  serve  as  a  defense  against  an  action  for  mahcious 
prosecution,  see,  e.g.,  Barrow  v.  Weddle,  161  Ind.  App.  601,  605-06,  316  N.E.2d  845,  849 
(1974),  it  is  unlikely  that  it  would  prevent  an  award  of  attorney's  fees  for  asserting  a  frivolous, 
unreasonable  or  groundless  claim  or  defense. 

"Ind.  Code  §  34-1-32-1  (Supp.   1986). 

''See  82  C.J.S.  Statutes  §  380  (1953). 


1987]  FRIVOLOUS  LITIGATION  157 

that  the  court's  range  of  options  is  broad  enough  to  allow  a  partial  award 
of  attorney's  fees.^^ 

The  statute  leaves  unclear  the  proper  manner  of  determining  the 
amount  of  the  attorney's  fee  award.  Although  there  are  instances  where 
a  court  has  taken  judicial  notice  of  what  a  reasonable  attorney's  fee  would 
be  because  of  familiarity  with  the  action/"  it  is  the  better  rule  that  at- 
torney's fees  be  proven  reasonable^'  with  the  opposing  party  having  an 
opportunity  to  object/^  Indiana  courts  have  held  that  a  contingent  fee 
arrangement  cannot  be  used  as  a  basis  for  determining  a  reasonable  fee 
to  be  paid  by  a  non-party  to  the  fee  agreement/^  Instead  courts  have 
considered  the  following  factors  as  evidence  of  a  reasonable  award  of 
attorney's  fees: 

(1)  The  time,  labor,  and  skill  required  to  perform  the  legal 
service  properly, 

(2)  The  difficulty  of  the  issues  involved, 

(3)  The  fee  customarily  charged  in  the  locality  for  similar  legal 
services, 

(4)  The  amount  involved,  and 

(5)  The  time  limitations  imposed  by  the  circumstances/"* 

Factors  such  as  these  should  continue  to  be  guidelines  to  determine  a 
reasonable  award  of  attorney's  fees  under  the  statute. 

Another  issue  raised  by  the  statute  is  the  relationship  between  section 
34-1-32-1  and  Rules  3.1  and  3.2  of  the  Indiana  Rules  of  Professional  Con- 
duct.''^  It  is  unclear  whether  an  award  of  attorney's  fees  under  this  statute 
will  provide  a  basis  for  discipHnary  action  under  Indiana's  Rules  of  Pro- 
fessional Conduct. ''^ 


''Where  a  party  prevails  as  to  only  one  issue  and  fails  on  other  issues,  the  party 
is  entitled  to  only  a  partial  award  of  costs.  Steele  v.  Epson,  142  Ind.  397,  404,  41  N.E.  822, 
825  (1895). 

'°Gerberin  v.  Gerberin,   172  Ind.  App.  255,  262,  360  N.E.2d  41,  47  (1977). 

''See  Lystarczyk  v.  Smits,  435  N.E.2d  1011,  1017  (Ind.  Ct.  App.  1982).  "A  lesser 
standard  would  undermine  the  confidence  of  the  public  in  the  bench  and  the  bar."  Id.  at  n.ll. 

'^See,  e.g..  In  Re  Marriage  of  Gray,  422  N.E.2d  696,  703  (Ind.  Ct.  App.  1981);  Belcher 
V.  Buesking,  371  N.E.2d  417,  420  (Ind.  Ct.  App.   1978). 

"'Contingent  fee  agreements  are  subject  "to  abuse  if  enforceable  against  non-agreeing 
promisors  on  notes  and  contracts  ..."  Leibowitz  v.  Moore,  477  N.E. 2d  946,  947,  modified, 
480  N.E. 2d  607  (Ind.  Ct.  App.  1985)  (discussing  Waxman  Industries,  Inc.  v.  Trustee  Dev. 
Co.,  455  N.E. 2d  376  (Ind.  Ct.  App.  1983)  and  Berkemeier  v.  Rushville  Nat'l  Bank,  459 
N.E.2d  1194  (Ind.  Ct.  App.   1984)). 

'^Lystarczyk,  435  N.E.2d  at  1017  (citing  Fox  v.  Galvin,  381  N.E. 2d  103,  108  (Ind. 
Ct.  App.   1978)). 

"'Ind.  Rules  of  Professional  Conduct  Rules  3.1  and  3.2.  On  November  25,  1986, 
the  Indiana  Supreme  Court  adopted  the  new  Rules  of  Professional  Conduct,  effective  January 
1,   1987. 

"^Certainly  one  difference  between  an  award  of  attorney's  fees  under  this  statute  and 
a  finding  of  probable  cause  for  maintaining  a  disciplinary  proceeding  is  the  requirement 


158  INDIANA  LAW  REVIEW  [Vol.  20:151 

Under  Rule  3.1,  an  attorney  is  subject  to  discipline  if  he  shall  "bring 
or  defend  a  proceeding,  or  assert  or  controvert  an  issue  therein,  unless 
there  is  a  basis  for  doing  so  that  is  not  frivolous,  which  includes  a  good 
faith  argument  for  an  extension,  modification  or  reversal  of  existing  law."'*' 
Thus,  an  attorney  who  asserts  a  claim  or  defense  for  which  there  is  a 
frivolous  basis,  could  be  subject  to  both  an  award  of  attorney's  fees  under 
section  34- 1-32- 1(b)(1)  or  (2)  and  a  disciplinary  proceeding  under  Rule 
3.1.  Where  an  attorney  maintains  a  good  faith  argument  for  a  change 
in  existing  law,  he  may  still  be  subject  to  an  award  of  attorney's  fees 
for  what  may  be  deemed  a  frivolous,  unreasonable,  or  groundless  claim 
or  defense. ^^ 

In  addition,  if  bad  faith  conduct  during  the  litigation  results  in  an 
award  of  attorney's  fees,  the  attorney  might,  under  some  circumstances, 
be  subject  to  discipHne  under  Rule  3.2,  which  requires  that  "[a]  lawyer 
make  reasonable  efforts  to  expedite  litigation  consistent  with  the  interests 
of  his  cHent.'"*^  Upon  an  award  of  attorney's  fees  for  asserting  a  frivolous, 
unreasonable,  or  groundless  claim  or  defense  or  litigating  an  action  in 
bad  faith,  it  may  be  difficult  to  show  that  such  actions  were  not  under- 
taken for  the  purpose  of  frustrating  an  opposing  party's  attempt  to  ob- 
tain rightful  redress. 

Finally,  it  is  unclear  whether  the  statute  is  applicable  in  federal  diver- 
sity cases  applying  Indiana  law  under  the  Erie  doctrine.^"  To  the  extent 
that  section  34-1-32-1  is  consistent  with  the  federal  bad  faith  exception, 
the  question  may  be  academic.  In  Alyeska  Pipeline  Service  Co.  v. 
Wilderness  Society, ^^  the  United  States  Supreme  Court,  in  dicta,  noted 
that  in  an  ordinary  diversity  case,  where  state  law  does  not  run  counter 
to  a  valid  federal  statute  or  rule  of  court,  a  state  law  denying  or  granting 
the  right  to  attorney's  fees  that  reflects  a  substantial  state  policy  should 
be  followed. ^^  Later  federal  diversity  cases  have  awarded  attorney's  fees 
under  applied  state  statutes  that  provided  for  an  award  of  attorney's  fees 
for  failure  to  disclose  a  product  flaw  in  a  products  Hability  action, ^^  and 


that  attorney  misconduct  be  shown  by  clear  and  convincing  evidence  before  sanctions  are 
appropriate.  See,  e.g..  In  Re  Allen,  470  N.E.2d  1312,  1315  (Ind.  1984);  In  Re  Sekerez, 
458  N.E.2d  229,  234  (Ind.),  cert,  denied,  105  S.  Ct.  182  (1984). 

■'^Ind.  Rules  of  Professional  Conduct  Rule  3.1.  This  rule  provides  an  exception 
in  criminal  proceedings  that  states:  "A  lawyer  for  the  defendant  in  a  criminal  proceeding, 
or  the  respondent  in  a  proceeding  that  could  result  in  incarceration,  may  nevertheless  so 
defend  the  proceeding  as  to  require  that  every  element  of  the  case  be  estabUshed."  Id. 

^«IND.  Code  §  34- 1-32- 1(b)(1)  and  (2)  (Supp.  1986). 

"'Ind.  Rules  of  Professional  Conduct  Rule  3.2  (1987). 

""'Except  in  matters  governed  by  the  Federal  Constitution  or  by  action  of  Congress, 
the  law  -to  be  applied  in  any  case  is  the  law  of  the  state."  Erie  R.R.  Co.  v.  Tompkins, 
304  U.S.  64,  78  (1938). 

''421  U.S.  240  (1975). 

'Ud.  at  259  n.31  (quoting  6  J.  Moore,  Federal  Practice  1  54.77[2]  (2d  ed.  1974)). 

"Woods  v.  International  Harvester  Co.,  697  F.2d  635,  640-41  (5th  Cir.  1983)  (apply- 
ing La.  Civ.  Code  Ann.  art.  2545  (West  1952)). 


1987]  FRIVOLOUS  LITIGATION  159 

an  award  to  an  insured  party  that  obtains  a  judgment  against  an  insurer.^'' 
Because  section  32-1-34-1  reflects  a  substantial  state  policy  and  does 
not  run  counter  to  federal  statutes  or  rules  of  court,  it  can  be  argued 
that  it  should  be  applied  when  a  federal  court  sits  in  diversity  jurisdiction 
and  applies  Indiana  law.  Alternatively,  it  is  arguable  that  the  statute  does 
not  grant  a  party  a  substantive  right  but  is  procedural  in  nature,  permit- 
ting Indiana  courts  to  exercise  their  discretion  to  supervise  the  litigation 
process.  Because  the  court  "may"  award  attorney's  fees,  it  is  difficult 
to  argue  that  a  party  has  a  substantive  right  to  an  award. 

In  Hanna  v.  Plumer,^^  the  United  States  Supreme  Court  noted  that 
Erie  questions  must  be  resolved  by  considering  the  dual  policies  of 
discouraging  forum  shopping  and  avoiding  inequitable  administration  of 
the  laws.^^  The  question  of  whether  the  appHcation  of  section  34-1-32-1 
will  achieve  these  policies  depends  in  part  on  how  Indiana  courts  choose 
to  implement  the  statute.  If  the  courts  apply  the  statute  in  such  a  manner 
that  it  fails  to  differ  substantially  from  the  federal  bad  faith  exception," 
then  the  justification  for  applying  the  statute  in  federal  diversity  actions 
may  be  unpersuasive.  Absent  significant  change  in  the  application  of  the 
statute,  it  may  not  be  viewed  as  creating  a  substantial  state  interest  suffi- 
cient to  justify  the  threat  to  consistency,  uniformity  and  equity  resulting 
from  federal  appHcation  of  state  law. 

III.     Conclusion 

Indiana  Code  Section  34-1-32-1  is  a  narrow  exception  to  the  American 
rule  that  attorney's  fees  cannot  be  awarded  to  a  prevailing  party  absent 


'"Fritz  V.  Standard  Security  Life  Ins.  Co.,  676  F.2d  1356,  1359  (11th  Cir.  1982)  (ap- 
plying Fla.  Stat.  §  627.428  (1984)). 

^'380  U.S.  460  (1965). 

''Id.  at  468. 

"In  addition,  Rule  1 1  of  the  Federal  Rules  of  Civil  Procedure  provides  for  an  award 
of  attorney's  fees  for  unmeritorious  or  dilatory  pleadings  practice.  The  rule  provides  in 
relevant  part: 

The  signature  of  an  attorney  or  party  constitutes  a  certificate  by  him  that  he 
has  read  the  pleading,  motion,  or  other  paper,  that  to  the  best  of  his  knowledge, 
information,  and  belief  formed  after  reasonable  inquiry  it  is  well  grounded  in 
fact  and  is  warranted  by  existing  law  or  a  good  faith  argument  for  the  extension, 
modification,  or  reversal  of  existing  law,  and  that  it  is  not  interposed  for  any 
improper  purpose,  such  as  to  harass  or  to  cause  unnecessary  delay  or  needless 
increase  in  the  cost  of  litigation.  If  a  pleading,  motion,  or  other  paper  is  not 
signed,  it  shall  be  stricken  unless  it  is  signed  promptly  after  the  omission  is  called 
to  the  attention  of  the  pleader  or  movant.  If  a  pleading,  motion,  or  other  paper 
is  signed  in  violation  of  this  rule,  the  court,  upon  motion  or  upon  its  own  in- 
itiative, shall  impose  upon  the  person  who  signed  it,  a  represented  party,  or  both, 
an  appropriate  sanction,  which  may  include  an  order  to  pay  to  the  other  party 
or  parties  the  amount  of  the  reasonable  expenses  incurred  because  of  the  filing 
of  the  pleading,  motion,  or  other  paper,  including  a  reasonable  attorney's  fee. 
Fed.  R.  Civ.  P.  11. 


160  INDIANA  LAW  REVIEW  [Vol.  20:151 

a  specific  statutory  provision  or  an  agreement  between  the  parties.  Under 
the  statute,  the  court  may  award  attorney's  fees  to  the  prevaiUng  party 
if  it  finds  that  the  opposing  party  has  asserted  or  maintained  a  frivolous, 
unreasonable,  or  groundless  claim  or  defense  or  otherwise  litigated  the 
action  in  bad  faith.  The  statute  permits  the  exercise  of  judicial  discretion 
and  is  flexibile  enough  to  provide  either  a  partial  or  complete  award  of 
attorney's  fees  against  opposing  counsel  as  well  as  the  opposing  party. 
Through  judicial  enforcement  of  this  statute,  attorneys  will  be  compelled 
to  carefully  scrutinize  the  merits  of  positions  adopted  in  all  stages  of  litiga- 
tion or  risk  an  award  of  attorney's  fees. 


Indiana's  Statutory  Provisions  for  Alternative  Testimony 
in  Child  Sexual  Abuse  Cases:  Is  It  Live  or  Is  It 

Memorex? 

Susan  D.  Burke* 


I.     Introduction 

At  least  one  legal  scholar  believes  that  sexual  abuse  of  children  has 
provided  the  subject  matter  for  the  witch  hunt  of  the  eighties.'  Whether 
this  is  true  or  not,  the  subject  of  sexual  crimes  against  children  has 
prompted  numerous  attempts  at  legislative  reform  within  the  last  five 
years. ^  Just  as  hurried  responses  to  perceived  crises  in  other  areas  have 
sometimes  caused  an  overreaction  or  backlash,  there  is  concern  that  the 
outpouring  of  publicity  about  sex  crimes  against  children  has  caused 
legislative  reforms  to  go  too  far  too  fast.^  Many  of  the  highly  publicized 
cases,  especially  those  involving  allegations  of  mass  abuse,  have  been 
shown  to  be  wholly  or  partially  unsubstantiated.^  Furthermore,  horror 
stories  of  defendants  who  have  been  falsely  accused  have  recently  sur- 
faced.^ While  no  one  wants  to  see  children  sexually  abused,  almost 
everyone  would  agree  that  there  have  been  problems  even  with  the 
warranted  prosecution  of  individuals  in  cases  involving  the  sexual  abuse 
of  children. 

Troublesome  questions  have  arisen.  In  our  zest  to  protect  children, 
is  it  possible  that  we  have  been  too  willing  to  sacrifice  the  rights  of 
those  accused  of  these  crimes?  Where  should  society  strike  the  balance 
between  protecting  children  and  protecting  those  accused?  Should  we 
narrowly  interpret  defendants'  constitutional  rights  to  insure  that  our 
children  are  rigorously  protected?  Is  a  narrow  interpretation  necessary, 


*B.S.,  Indiana  University,  1973;  M.S.,  Purdue  University,  1975;  J.D.,  Indiana 
University  School  of  Law— Indianapolis,  1985.  Trial  Attorney,  United  States  Equal 
Employment  Opportunity  Commission.  This  Article  was  written  in  the  author's  private 
capacity.  No  official  support  or  endorsement  by  the  United  States  Equal  Employment 
Opportunity  Commission  or  any  other  agency  of  the  United  States  government  is  intended 
or  should  be  inferred. 

'Graham,  Difficult  Times  for  the  Constitution:  Child  Testimony  Absent  Face-To- 
Face  Confrontation,  Champion,  Aug.   1985,  at  18. 

^Bulkley,  Evidentiary  and  Procedural  Trends  in  State  Legislation  and  Other  Emerging 
Legal  Issues  in  Child  Sexual  Abuse  Cases,  89  Dick.  L.  Rev.  645  (1985). 

^See,  e.g.,  Graham,  supra  note  1,  at  18-19. 

"See  Kinsley,  Civic  Virtuosity  and  Child  Abuse  Chic,  Champion,  Jan. /Feb.  1986, 
at  7;  see  also  Renshaw,  When  Sex  Abuse  Is  Falsely  Charged,  Champion,  Jan. /Feb.  1986, 
at  8-10. 

^See  Renshaw,  supra  note  4,  at  8-9. 

161 


162  INDIANA  LAW  REVIEW  [Vol.  20:161 

or  do  the  legal  reforms  enacted  already  fit  comfortably  within  our 
constitutional  framework?  Although  answering  all  of  these  questions  is 
beyond  the  scope  of  this  Article,  these  are  the  questions  that  the  legislature 
and  the  judiciary  have  been  faced  with  and  have  recently  attempted  to 
answer. 

Indiana  is  one  of  many  states  that  have  adopted  recent  legislation 
aimed  primarily  at  making  it  easier  to  bring  to  justice  those  who  commit 
sexual  crimes  against  children.^  In  1984,  the  legislature  enacted  Indiana 
Code  section  35-37-4-6.^  This  statute  creates  a  hearsay  exception  that 


''See  Bulkley,  supra  note  2,  at  666-68.  Although  Indiana's  new  statutory  provisions 
could  apply  to  some  non-sexual  offenses,  it  appears  that  they  were  enacted  largely  to 
remedy  problems  with  testimony  in  sex  crimes.  They  will  therefore  be  discussed  only  as 
they  concern  those  crimes. 

Tnd.  Code  §  35-37-4-6  (Supp.  1986).  This  statute  provides: 
Sec.  6.  (a)  This  section  applies  to  criminal  actions  for  the  following: 

(1)  Child  molesting  (IC  35-42-4-3). 

(2)  Battery  upon  a  child  (IC  35-42-2-1  (2)(B)). 

(3)  Kidnapping  (IC  35-42-3-2). 

(4)  Confinement  (IC  35-42-3-3). 

(5)  Rape  (IC  35-42-4-1). 

(6)  Criminal  deviate  conduct  (IC  35-42-4-2). 

(b)  A  statement  or  videotape  that: 

(1)  is  made  by  a  child  who  was  under  ten  (10)  years  of  age  at  the  time 
of  the  statement  or  videotape; 

(2)  concerns  an  act  that  is  a  material  element  of  an  offense  listed  in  subsec- 
tion (a)  that  was  allegedly  committed  against  the  child;  and 

(3)  is  not  otherwise  admissible  in  evidence  under  statute  or  court  rule; 

is  admissible  in  evidence  in  a  criminal  action  for  an  offense  hsted  in  subsection 
(a)  if  the  requirements  of  subsection  (c)  are  met. 

(c)  A  statement  or  videotape  described  in  subsection  (b)  is  admissible  in  evidence 
in  a  criminal  action  listed  in  subsection  (a)  if,  after  notice  to  the  defendant  of 
a  hearing  and  of  his  right  to  be  present: 

(1)  the  court  finds,  in  a  hearing: 

(A)  conducted  outside  the  presence  of  the  jury;  and 

(B)  attended  by  the  child; 

that  the  time,  content,  and  circumstances  of  the  statement  or  videotape 
provide  sufficient  indications  of  reliability;  and 

(2)  the  child: 

(A)  testifies  at  the  trial;  or 

(B)  is  found  by  the  court  to  be  unavailable  as  a  witness  because: 

(i)  a  psychiatrist  has  certified  that  the  child's  participation  in  the 
trial  would  be  a  traumatic  experience  for  the  child; 
(ii)  a  physician  has  certified  that  the  child  cannot  participate  in 
the  trial  for  medical  reasons;  or 

(iii)  the  court  has  determined  that  the  child  is  incapable  of  un- 
derstanding the  nature  and  obligation  of  an  oath. 

(d)  If  a  child  is  unavailable  to  testify  at  the  trial  for  a  reason  listed  in  subsection 
(c)(2)(B),  a  statement  or  videotape  may  be  admitted  in  evidence  under  this  section 
only  if  there  is  corroborative  evidence  of  the  act  that  was  allegedly  committed 
against  the  child. 


1987]  ALTERNATIVE  TESTIMONY  163 

allows  the  admission  at  trial  of  an  extrajudicial  statement  or  videotape 
of  a  child  victim  under  ten  years  of  age  if  certain  conditions  are  met. 
Although  the  Indiana  Court  of  Appeals  has  recently  ruled  that  there  is 
no  facial  constitutional  infirmity  in  section  35-37-4-6/  interesting  con- 
stitutional questions  remain. 

More  recently,  in  1986,  Indiana  Code  section  35-37-4-8  was  enacted.^ 
This  statute  establishes  alternative  forms  of  testimony  for  children  during 


(e)  A  statement  or  videotape  may  not  be  admitted  in  evidence  under  this  section 
unless  the  prosecuting  attorney  informs  the  defendant  and  the  defendant's  attorney 
of: 

(1)  his  intention  to  introduce  the  statement  or  videotape  in  evidence;  and 

(2)  the  content  of  the  statement  or  videotaj>e; 

within  a  time  that  will  give  the  defendant  a  fair  opportunity  to  prepare  a  response 
to  the  statement  or  videotape  before  the  trial. 

^Hopper  V.  State,  489  N.E.2d  1209  (Ind.  Ct.  App.  1986),  transfer  denied,  Aug.  16, 
1986. 

'Ind.  Code  §  35-37-4-8  (Supp.   1986).  This  statute  provides: 
Sec.  8.  (a)  This  section  applies  to  criminal  actions  for  felonies  under  IC  35-42 
and  for  neglect  of  a  dependent  (IC  35-36-1-4)  and  for  attempts  of  those  felonies 
(IC  35-41-5-1). 

(b)  On  the  motion  of  the  prosecuting  attorney,  the  court  may  order  that: 

(1)  the  testimony  of  a  child  be  taken  in  a  room  other  than  the  courtroom 
and  be  transmitted  to  the  courtroom  by  closed  circuit  television;  and 

(2)  the  questioning  of  the  child  by  the  prosecution  and  the  defense  be 
transmitted  to  the  child  by  closed  circuit  television. 

(c)  On  the  motion  of  the  prosecuting  attorney,  the  court  may  order  that  the 
testimony  of  a  child  be  videotaped  for  use  at  trial. 

(d)  The  court  may  not  make  an  order  under  subsection  (b)  or  (c)  unless: 

(1)  the  testimony  to  be  taken  is  the  testimony  of  a  child  who: 

(A)  is  less  than  ten  (10)  years  of  age; 

(B)  is  the  alleged  victim  of  an  offense  listed  in  subsection  (a)  for 
which  the  defendant  is  being  tried  or  is  a  witness  in  a  trial  for  an 
offense  listed  in  subsection  (a); 

(C)  is  found  by  the  court  to  be  a  child  who  should  be  permitted  to 
testify  outside  the  courtroom  because: 

(i)  a  psychiatrist  has  certified  that  the  child's  testifying  in  the 
courtroom  would  be  a  traumatic  experience  for  the  child; 
(ii)  a  physician  has  certified  that  the  child  cannot  be  present  in 
the  courtroom  for  medical  reasons;  or 

(iii)  evidence  has  been  introduced  concerning  the  effect  of  the 
child's  testifying  in  the  courtroom,  and  the  c<yurt  finds  that  it  is 
more  likely  than  not  that  the  child's  testifying  in  the  courtroom 
would  be  a  traumatic  experience  for  the  child; 

(2)  the  prosecuting  attorney  has  informed  the  defendant  and  the  defendant's 
attorney  of  the  intention  to  have  the  child  testify  outside  the  courtroom; 
and 

(3)  the  prosecuting  attorney  informed  the  defendant  and  the  defendant's 
attorney  under  subdivision  (2)  within  a  time  that  will  give  the  defendant 
a  fair  opportunity  to  prepare  a  response  before  the  trial  to  the  prosecuting 
.attorney's  motion  to  permit  the  child  to  testify  outside  the  courtroom. 


164  INDIANA  LAW  REVIEW  [Vol.  20:161 

the  trial  of  certain  criminal  actions  if  specific  conditions  are  met.  Because 
this  statute  was  so  recently  enacted,  it  has  yet  to  be  interpreted  by  an 
Indiana  appellate  court. '° 

This  Article  will  analyze  both  of  these  statutes  in  light  of  the 
constitutional  and  practical  questions  that  arise  when  they  are  utilized 
in  the  prosecution  of  sexual  crimes  against  children.  The  Article  will 
focus  on  possible  infringement  of  defendants'  rights,  while  hopefully 
not  losing  sight  of  the  rights  of  the  victims. 

II.     The  Problem 

The  difficulties  in  investigating  cases  involving  sexual  abuse  of  chil- 
dren, bringing  these  cases  to  trial,  and  gaining  convictions  are  well 
documented.' •  The  state  has  faced  numerous  problems  in  proving  every 
element  of  these  sexual  offenses.'^  Initially,  direct  evidence  or  other 
circumstantial  evidence  may  be  minimal.'^  Second,  the  child  allegedly 
involved  is  often  the  only  witness  available.'"*  Third,  the  child-victim 


(e)  If  the  court  makes  an  order  under  subsection  (b),  only  the  following  persons 
may  be  in  the  same  room  as  the  child  during  the  child's  testimony: 

(1)  Persons  necessary  to  operate  the  closed  circuit  television  equipment. 

(2)  Persons  whose  presence  the  court  finds  will  contribute  to  the  child's 
well-being. 

(3)  A  court  bailiff  or  court  representative. 

(0  If  the  court  makes  an  order  under  subsection  (c),  only  the  following  persons 
may  be  in  the  same  room  as  the  child  during  the  child's  videotaped  testimony: 

(1)  The  judge. 

(2)  The  prosecuting  attorney. 

(3)  The  defendant's  attorney  (or  the  defendant,  if  the  defendant  is  not 
represented  by  an  attorney). 

(4)  Persons  necessary  to  operate  the  electronic  equipment. 

(5)  The  court  reporter. 

(6)  Persons  whose  presence  the  court  finds  will  contribute  to  the  child's 
well-being. 

(7)  The  defendant,  who  can  observe  and  hear  the  testimony  of  the  child 
without  the  child  being  able  to  observe  or  hear  the  defendant.  However, 
if  the  defendant  is  not  represented  by  an  attorney,  the  defendant  may 
question  the  child. 

(g)  If  the  court  makes  an  order  under  subsection  (b)  or  (c),  only  the  following 
persons  may  question  the  child: 

(1)  The  prosecuting  attorney. 

(2)  The  defendant's  attorney  (or  the  defendant,  if  the  defendant  is  not 
represented  by  an  attorney). 

(3)  The  judge. 

'°Ind.  Code  §  35-37-4-8  (Supp.   1986)  had  an  effective  date  of  Sept.   1,   1986. 
"5ee  Note,  The  Testimony  of  Child  Victims  in  Sex  Abuse  Prosecutions:  Two  Leg- 
islative Innovations,  98  Harv.  L.  Rev.  806  (1985). 
'^See  id.  at  806-07. 

^^See,  e.g.,  Bulkley,  supra  note  2,  at  646;  Note,  supra  note  11,  at  806-07. 
'"See,  e.g.,  Bulkley,  supra  note  2,  at  646;  Note,  supra  note  11,  at  806-07. 


1987]  ALTERNATIVE  TESTIMONY  165 

may  be  found  incompetent  to  testify.'^  Fourth,  even  if  the  child  is 
competent  to  testify,  there  are  several  obstacles  that  a  proponent  of  a 
child's  testimony  faces.  A  child  may  be  unable  to  recall  crucial  details 
of  what  occured.'^  And,  if  a  child  does  have  adequate  recall,  the  child 
may  have  difficulty  relating  what  occurred  to  the  jury.  Furthermore,  a 
child  may  be  easily  confused  by  cross-examination. '"^ 

Although  there  have  been  attempts  to  improve  the  investigatory 
process,  such  as  special  training  for  personnel  and  the  development  of 
anatomically  correct  dolls, '^  the  legislative  reforms  have  dealt  primarily 
with  the  testimonial  problems.  Underlying  these  attempts  at  reform  have 
been  certain  assumptions  about  the  psychological  development  and  func- 
tioning of  children.  It  is  important  briefly  to  examine  some  of  these 
assumptions,  for  if  some  of  them  are  erroneous,  the  proper  balance 
between  the  preservation  of  defendants'  rights  and  the  protection  of 
children  has  not  been  and  will  not  be  achieved.'^ 

Two  assumptions  appear  to  underlie  recent  statutory  changes  estab- 
Hshing  alternative  methods  for  a  child's  testimony.  The  first  is  that 
children  are  more  traumatized  when  testifying  in  court  about  sexual 
abuse  than  when  testifying  about  other  subjects. ^°  The  second  assumption 
is  that  this  trauma  is  greater  in  a  child  than  in  an  adult. ^'  Although 
these  assumptions  appear  plausible,  it  is  debatable  whether  there  has 
been  adequate  research  to  back  them  up.  Possibly  adults  are  transferring 
their  own  fears  and  anxieties  onto  the  children  faced  with  this  admittedly 
unpleasant  experience. 

According  to  a  leading  article  on  the  protection  of  child  victims  in 
the  criminal  justice  system: 

The  fact  is  that  psychiatrists  all  over  the  world  repeatedly  warn 
that  legal  proceedings  are  not  geared  to  protect  the  [child]  victim's 
emotions  and  may  be  exceptionally  traumatic^ ^  .  .  .  [However,]  the 


''See  Note,  supra  note  11,  at  807;  see  also  Ind.  Code  §  34-1-14-5  (1982),  which 
states,  in  relevant  part:  "The  following  persons  shall  not  be  competent  witnesses:  .  .  . 
Children  under  ten  (10)  years  of  age,  unless  it  appears  that  they  understand  the  nature 
and  obligation  of  an  oath." 

'^See  Note,  supra  note  11,  at  807  and  authorities  cited  therein. 

''Id. 

'"Although  a  discussion  of  changes  in  the  investigation  of  child  sex  abuse  and  attendant 
problems  is  not  within  the  scope  of  this  Article,  they  are  addressed  in  general  in  Frost, 
"Weird  Science"  and  Child  Sexual  Abuse  Cases,  Champion,  Jan. /Feb.  1986,  at  17-18; 
Libai,  The  Protection  of  the  Child  Victim  of  a  Sexual  Offense  in  the  Criminal  Justice 
System,  15  Wayne  L.  Rev.  977  (1969);  Mclver,  The  Case  for  a  Therapeutic  Interview 
in  Situations  of  Alleged  Sexual  Molestation,  Champion,  Jan. /Feb.   1986,  at  11-12. 

'''See  Libai,  supra  note  18,  at  1003-05. 

^°M  at  979-86. 

^Td. 

'Hd.  at  1015. 


166  INDIANA  LAW  REVIEW  [Vol.  20:161 

Studies  do  not  as  yet  demonstrate  a  clear  causal  link  between  the 
legal  proceedings  and  the  child  victim's  mental  disturbances;  but 
no  psychiatric  study  has  attempted  to  prove,  or  is  likely  to  attempt 
to  prove  in  the  future,  such  a  causal  link.  Psychiatrists  agree  that 
they  cannot  isolate  the  effects  of  the  '*crime  trauma"  from  the 
"prior  personality  damage"  or  either  of  the  foregoing  from  the 
"environment  reaction  trauma"  or  the  "legal  process  trauma."  But 
psychiatrists  do  agree  that  when  some  victims  encounter  the  law 
enforcement  system,  for  one  reason  or  another,  the  child  requires 
special  care  and  treatment. ^^ 

Although  this  article  was  pubhshed  in  1969,  it  is  still  often  cited  and 
was  used  to  substantiate  a  decision  of  the  New  Jersey  Superior  Court 
as  recently  as  1984.^"*  In  sum,  although  children  may  be  traumatized  by 
legal  proceedings,  the  causal  link  between  the  legal  proceedings  and  the 
trauma  suffered  by  a  crime  victim  has  not  been  established,  and  any 
adverse  effect  of  the  legal  proceedings  cannot  be  isolated. 

Studies  of  adults  who  were  sexually  abused  as  children  have  shown 
that  a  significant  portion  of  these  individuals  suffered  permanant  emo- 
tional harm  as  a  result  of  such  abuse. ^^  Although  this  result  does  not 
seem  surprising,  the  question  of  what  portion  of  the  emotional  harm 
was  due  to  the  victim's  involvement  in  the  legal  system,  especially  court 
procedures,  remains  unanswered.  One  study,  which  compared  victims 
who  had  been  involved  in  court  proceedings  with  a  random  sample  of 
victims,  found  that  a  larger  percentage  of  those  not  involved  in  the 
legal  system  were  able  to  recover  more  quickly  than  their  legally  involved 
counterparts.^^  The  differences,  however,  could  not  be  attributed  solely 
to  court  involvement.^^ 

Psychiatrists  often  testify  to  the  damage  that  will  be  done  to  children 
forced  to  testify  in  a  courtroom  proceeding. ^^  Until  empirical  studies  are 
performed,  however,  establishing  that  demonstrable  harm  to  children  is 
specifically  caused  by  the  court  experience  itself,  it  may  be  prudent  not 
to  abridge  defendants'  rights  under  the  guise  of  protecting  children  from 
emotional  trauma. 

Furthermore,  children  are  not  born  with  an  innate  knowledge  that 
sexual  matters  are  "bad,"  "nasty,"  or  embarrassing.^^  Information  about 


'-'Id. 

''See  State  v.  Sheppard,  197  N.J.  Super.  411,  484  A. 2d  1330  (1984). 

''See  Libai,  supra  note  18,  at  981-82. 

''Id.  at  982. 

''Id.  at  n.22. 

"See  State  v.  Sheppard,  197  N.J.  Super.  411,  416,  484  A.2d  1330,  1334  (1984); 
Libai,  supra  note  18,  at  1015. 

^'E.  Panting  &  G.  Reynolds,  Introduction  to  Contemporary  Psychology  363- 
66  (1975). 


1987]  ALTERNATIVE  TESTIMONY  167 

society's  sexual  taboos  must  instead  be  learned. ^°  It  is  possible,  therefore, 
that  adults  are  transferring  their  own  concerns  to  children  regarding 
sexually-oriented  testimony.  Moreover,  an  adult's  reaction  to  the  initial 
report  of  sexual  abuse  may  negatively  color  the  experience  for  the  child 
and  induce  part  of  the  trauma  the  child  experiences.^' 

Without  demonstrable  evidence  that  special  trauma  attributable  to 
the  courtroom  experience  itself  is  more  likely  to  occur  in  child-victims 
of  sexual  abuse  than  in  adult-victims  of  sexual  crimes,  the  reforms  in 
this  area  will  meet  with  strong  and  valid  opposition. ^^  Is  a  young  teenager 
or  adult-victim  of  a  sexual  crime  truly  better  prepared  to  withstand  the 
trauma  of  testifying  in  open  court  than  a  child-victim  of  such  a  crime? 
The  answer  may  be  yes,  but  until  there  is  supporting  empirical  evidence, 
caution  would  be  wise  when  enacting  reforms  that  may  place  defendants 
in  these  crimes  in  special  jeopardy  or  narrow  their  constitutional  pro- 
tections. 

III.     Indiana's  Legislative  Solutions 

A.  Indiana  Code  Section  35-37-4-6 

Indiana's  child-victim  hearsay  exception,  Indiana  Code  section  35- 
37-4-6,  allows  the  hearsay  statement  of  a  child-victim  to  be  admissible 
at  trial  if  the  court  determines  that  the  time,  content,  and  circumstances 
of  the  hearsay  statement  provide  sufficient  indications  of  reliability  and 
if  the  child  either  testifies  at  trial  or  is  found  to  be  "unavailable"  as 
a  witness."  The  statute  also  provides  that  if  the  child  is  unavailable  as 
a  witness,  there  must  be  corroborating  evidence  of  the  act  allegedly 
committed  against  the  child. ^"^  When  the  child  testifies  at  trial,  the 
provision  for  the  admission  of  the  hearsay  statement  appears  to  go  no 
farther  than  the  Patterson  rule,  a  well-established  principle  of  Indiana 
law.^^ 

When  the  hearsay  statement  is  admitted  at  trial  and  the  child-victim 
never  testifies  in  open  court,  however,  the  admission  represents  a  de- 
parture from  established  laws  of  evidence. ^^  The  obvious  question  this 


^°/g?.  at  118-20;  E,  Hetherington  &  R.  Porke,  Child  Psychology:  A  Contemporary 
Viewpoint  566-75  (2d  ed.   1979). 

^'See  Libai,  supra  note  18,  at  980-81. 

'^See,  e.g..  Long  v.  State,  694  S.W.2d  185,   191  (Tex.  Ct.  App.   1985). 

"Ind.  Code  §  35-37-4-6  (Supp.  1986).  For  full  text  of  this  statute,  see  supra  note  7. 

''Id.   §  35-37-4-6(d). 

'^The  Patterson  rule,  announced  in  Patterson  v.  State,  263  Ind.  55,  324  N.E.2d 
482  (1975),  basically  allows  the  admission  of  an  otherwise  excludable  prior  hearsay  statement 
as  substantive  evidence  if  the  declarant  testifies  at  trial  and  is  available  for  cross-examination. 

^*As  a  general  rule,  hearsay  testimony  is  inadmissible  at  trial  unless  it  falls  within 
certain  exceptions.  See  generally  McCormick  on  Evidence  §§  244-53  (E.  Cleary  2d  ed. 
1972). 


1 68  INDIANA  LA  W  RE  VIE  W  [Vol .  20: 1 6 1 

situation  raises  is  whether  such  admission  violates  the  defendant's  right 
of  confrontation  guaranteed  by  both  the  United  States^^  and  Indiana 
Constitutions.^^  In  Hopper  v.  State, ^"^  the  defendant  raised  just  such  an 
objection  to  the  admission  of  a  child-victim's  hearsay  statement,  and 
the  Indiana  Court  of  Appeals  found  that  the  admission  of  the  statement 
did  not  deny  the  defendant  his  right  of  confrontation /°  In  determining 
the  constitutionality  of  section  35-37-4-6,  the  court  rehed  on  the  United 
States  Supreme  Court's  decision  in  Ohio  v.  Roberts^^  In  Roberts,  the 
Court  held  that  an  extrajudicial  statement  may  be  admitted  when  the 
witness  has  been  shown  to  be  unavailable  if  the  statement  possesses 
"sufficient  indicia  of  reliability.'"*^  Furthermore,  no  additional  showing 
of  reliability  need  be  made  if  the  evidence  falls  within  a  firmly  rooted 
hearsay  exception."*^ 

In  Hopper,  the  Indiana  court  noted  section  35-37-4-6  required  "that 
the  time,  content,  and  circumstances  of  the  statement  provide  sufficient 
indications  of  reliability"  and  therefore  was  fully  in  compliance  with 
the  mandates  of  Roberts."^  The  court  found  that  the  witness  in  Hopper 
satisfied  the  requirement  of  unavailability  because  she  was  found  to  be 
incapable  of  understanding  the  nature  and  obhgation  of  an  oath."*^ 
Moreover,  the  witness's  statement  fell  within  the  excited  utterance  or 
spontaneous  exclamation  exception  to  the  traditional  hearsay  rule,  thus  satis- 
fying the  reliability  requirement.^^  In  addition,  the  statute  appears  to  go  even 
farther  than  the  requirements  of  Roberts,  because  it  requires  that  when 
a  statement  is  to  be  admitted  because  of  unavailability,  there  must  be 
corroborative  evidence  of  the  act  allegedly  committed."*^ 

Ohio  V.  Roberts,  however,  did  not  involve  the  extrajudicial  statement 
of  a  child  and,  therefore,  did  not  address  the  controversial  issue  of 
finding  a  child  witness  to  be  unavailable  because  of  psychiatric  testimony 


"U.S.  Const,  amend,  VI  provides:  "In  all  criminal  prosecutions,  the  accused  shall 
enjoy  the  right  ...  to  be  confronted  with  the  witnesses  against  him."  This  amendment 
is  often  referred  to  as  the  confrontation  clause.  See  Ohio  v.  Roberts,  448  U.S.  56,  62 
(1980). 

Hkd.  Const,  art.  1,  §  13  states:  "In  all  criminal  prosecutions,  the  accused  shall 
have  the  right  ...  to  meet  the  witnesses  face  to  face,  and  to  have  compulsory  process 
for  obtaining  witnesses  in  his  favor." 

^M89  N.E.2d  1209  (Ind.  Ct.  App.   1986). 

'°Id.  at  1212-13. 

^'448  U.S.  56  (1980). 

''Id.  at  66. 

''Id. 

M89  N.E.2d  at  1212. 

''Id. 

''Id. 

"iNH.  Code  §  35-37-4-6(d)  (Supp.  1986)  provides  that  "If  a  child  is  unavailable  to 
testify  at  the  trial  for  a  reason  listed  in  subsection  (c)(2)(B),  a  statement  or  videotape 
may  be  admitted  in  evidence  under  this  section  only  if  there  is  corroborative  evidence  of 
the  act  that  was  allegedly  committed  against  the  child." 


1 987]  A  L  TERN  A  TIVE  TESTIMONY  1 69 

that  testifying  would  be  traumatic,  or  because  the  child  is  incapable  of 
understanding  the  nature  and  obligation  of  an  oath/^  At  first  glance, 
incompetency  as  a  basis  for  unavailability  would  seem  to  be  a  logical 
anomaly — allowing  the  hearsay  statement  of  an  incompetent  witness  to 
be  admitted  for  the  very  reason  that  the  witness  is  incompetent.  When 
the  defendant  in  Hopper  raised  this  argument,  however,  the  court  noted 
that  the  incompetence  of  children  under  ten  who  are  unable  to  understand 
the  nature  and  obligation  of  an  oath  pertains  only  to  in-court  testimony, 
not  to  out-of-court  statements/^  In  addition,  however  logically  incon- 
sistent this  position  may  seem,  finding  child  witnesses  to  be  unavailable 
because  they  are  incompetent  to  testify,  in  order  to  admit  their  state- 
ments, appears  to  be  an  increasingly  accepted  position. ^^ 

The  opposite  position  is  not  without  its  adherents,  however.  In  State 
V.  Ryan,^^  the  Supreme  Court  of  Washington  found  that  statements 
admitted  under  a  child  hearsay  statute  very  similar  in  its  procedure  to 
Indiana's  were  inadmissible. ^^  Although  part  of  the  problem  in  Ryan 
was  a  stipulation  to  incompetence,  the  court  noted  that  if  the  judge 
had  examined  the  witnesses  and  found  them  incompetent  based  on  their 
inabihty  to  receive  a  just  impression  of  the  facts,  then  their  testimony 
would  be  too  unreliable  for  admission."  The  Ryan  court  held  that  the 
declarant's  competency  is  a  precondition  to  the  admission  of  his  hearsay 
statements,  with  the  exception  of  res  gestae  utterances.^'*  Under  this  strict 
standard  for  admissibility,  however,  Hopper  is  not  inconsistent  with 
Ryan,  because  the  child's  testimony  in  Hopper  fell  under  the  traditional 
hearsay  exception   of  excited  utterance  or  spontaneous  exclamation." 


^»Ind.  Code  §  35-37-4-6(c)(2)(B)  (Supp.  1986)  provides  for  a  finding  of  unavailability 
on  either  of  these  grounds. 

^^489  N.E.2d  at  1212  n.4  (citing  Jarrett  v.  State,  465  N.E.2d  1097  (Ind.   1984)). 

'°For  a  discussion  of  child-victim  hearsay  statutes  in  general,  see  Bulkley,  supra  note 
2,  at  649-52,  666-67. 

='103  Wash.  2d  165,  691  P.2d  197  (1984). 

"Washington's  statute,  Wash.  Rev.  Code  §  9A.44.120  (Supp.  1986),  provides  for 
the  admission  of  the  extrajudicial  statement  of  a  child  under  the  age  of  ten  which  concerns 
an  act  of  sexual  conduct  if: 

(1)  The  court  finds,  in  a  hearing  conducted  outside  the  presence  of  the 
jury  that  the  time,  content,  and  circumstances  of  the  statement  provide 
sufficient  indicia  of  reliability;  and 

(2)  The  child  either: 

(a)  Testifies  at  the  proceedings;  or 

(b)  Is  unavailable  as  a  witness:  Provided,  That  when  the  child  is 
unavailable  as  a  witness,  such  statement  may  be  admitted  only  if  there 
is  corroborative  evidence  of  the  act. 

Although  this  statute  does  not  specify  the  grounds  for  unavailability,  the  issue  in 
the  case  was  the  child's  incompetence. 

"103  Wash.  2d  at  177,  691  P. 2d  at  204. 
''Id.,  691  P.2d  at  203-04. 
"489  N.E.2d  at  1212. 


170  INDIANA  LAW  REVIEW  [Vol.  20:161 

Given  the  number  of  states  that  have  enacted  similar  statutes,  the  child 
hearsay  exception  as  enacted  in  Indiana  seems  here  to  stay.^^  The  United 
States  Supreme  Court,  however,  has  yet  to  rule  on  the  constitutionality 
of  any  of  these  statutes. 

A  second  basis  for  a  court  to  find  a  child  unavailable  as  a  witness, 
provided  in  section  35-37-4-6,  is  that  a  physician  has  certified  that  the 
child  cannot  participate  in  the  trial  for  medical  reasons. ^^  A  finding  of 
medical  unavailability  under  this  subpart  should  receive  little  opposition 
because  it  reflects  a  traditional  basis  for  the  unavailability  of  any  witness. ^^ 

The  third  basis  upon  which  a  court  may  find  a  child  unavailable 
as  a  witness,  provided  by  section  35-37-4-6,  is  that  a  psychiatrist  has 
certified  that  the  child's  participation  in  the  trial  would  be  a  traumatic 
experience  for  the  child. ^^  This  basis  of  unavailability  raises  the  issue 
of  whether  defendants'  rights  are  being  narrowed  based  on  unsupported 
assumptions  about  child- witnesses.  No  Indiana  appellate  court  has  ad- 
dressed the  constitutionality  of  this  specific  subpart  of  sec- 
tion 35-37-4-6. 

In  Long  V.  State, ^^  however,  the  Court  of  Appeals  of  Texas  delineated 
and  balanced  the  competing  interests  involved  when  it  scrutinized  a  state 
statute  allowing  a  videotaped  statement  of  a  child  to  be  admitted  at 
trial. ^^  The  court  recognized  the  state's  legitimate  and  substantial  interest 


^^See  Bulkley,  supra  note  2,  at  666-67. 

"IND.  Code  §  35-37-4-6(c)(2)(B)(ii)  (Supp.   1986). 

^^See  McCoRMiCK  on  Evidence  §  253  (E,  Cleary  2d  ed.   1972). 

^^IND.  Code  §  35-37-4-6(c)(2)(B)(i)  (Supp.   1986). 

«'694  S.W.2d  185  (Tex.  Ct.  App.   1985). 

*'The  Texas  statute  involved  was  TeX.  Code  Crim.  Proc.  Ann.  art.   38.071,   §  2 
(Vernon  Supp.   1985),  which  states: 

Sec. 2.  (a)  The  recording  of  an  oral  statement  of  the  child  made  before  the 
proceeding  begins  is  admissible  into  evidence  if: 

(1)  no  attorney  for  either  party  was  present  when  the  statement  was  made; 

(2)  the  recording  is  both  visual  and  aural  and  is  recorded  on  film  or 
videotape  or  by  other  electronic  means; 

(3)  the  recording  equipment  was  capable  of  making  an  accurate  recording, 
the  operator  of  the  equipment  was  competent,  and  the  recording  is  accurate 
and  has  not  been  altered; 

(4)  the  statement  was  not  made  in  response  to  questioning  calculated  to 
lead  the  child  to  make  a  particular  statement; 

(5)  every  voice  on  the  recording  is  identified; 

(6)  the  person  conducting  the  interview  of  the  child  in  the  recording  is 
present  at  the  proceeding  and  available  to  testify  or  be  cross-examined  by 
either  party; 

(7)  the  defendant  or  the  attorney  for  the  defendant  is  afforded  an  opportunity 
to  view  the  recording  before  it  is  offered  into  evidence;  and 

(8)  the  child  is  available  to  testify. 

(b)  If  the  electronic  recording  of  the  oral  statement  of  a  child  is  admitted  into 
evidence  under  this  section,  either  party  may  call  the  child  to  testify,  and  the 
opposing  party  may  cross-examine  the  child. 


1987]  ALTERNATIVE  TESTIMONY  171 

in  protecting  a  child  from  emotional  harm^^  and  even  acknowledged  that 
children  who  testify  may  be  more  damaged  by  their  traumatic  role  in 
the  court  proceedings  than  they  were  by  their  abuse."  Nevertheless,  when 
these  concerns  were  pitted  against  a  defendant's  constitutional  rights, 
the  balance  struck  was  in  favor  of  the  defendant  and  his  right  of  con- 
frontation/'* 

Notably,  the  statute  at  issue  in  Long  required  several  procedures 
not  required  by  Indiana  Code  section  35-37-4-6.  For  example,  the  Texas 
statute  required  that  the  declarant  be  available  to  testify  at  trial  and 
provided  that  either  party  could  call  the  declarant  for  examination  and 
cross-examination.^^  In  this  respect,  therefore,  the  statute  seemed  to 
present  no  more  than  a  videotaped  version  of  Indiana's  Patterson  rule.^^ 
Nevertheless,  the  court  found  that  the  tape  was  hearsay  with  no  indicia 
of  reliability;^^  the  interposition  of  a  camera  might  distort  the  evidence;^^ 
the  evidence  of  reduced  trauma  during  videotaping  was  insufficient;^^  a 
belated  opportunity  to  cross-examine  a  witness  was  not  sufficient  to 
protect  confrontation  rights;^°  and  the  statute  compelled  the  defendant 
to  forgo  either  his  right  to  confrontation  or  his  right  to  remain  silent.^' 
The  court  also  expressed  concern  over  the  lack  of  empirical  evidence 
that  in-court  testimony  traumatizes  children,  especially  in  light  of  possible 
abridgement  of  the  defendant's  rights. ^^ 

While  the  decisions  in  Long  and  Ryan  have  no  direct  precedential 
value  in  Indiana,  they  do  reflect  the  lack  of  uniformity  in  this  area  of 
the  law.  In  addition,  the  decisions  to  date  have  not  addressed  all  of 
the  grounds  for  unavailability  contained  within  section  35-37-4-6.  The 
Indiana  appellate  court  in  Hopper,  while  upholding  the  facial  consti- 
tutionality of  section  35-37-4-6,  did  not  address  all  of  the  issues  raised 
above,  nor  did  it  preclude  future  findings  of  unconstitutional  application 
of  the  statute.  It  therefore  remains  to  be  seen  just  how  far  Indiana 
courts  will  go  in  upholding  the  constitutionality  of  section  35-37-4-6. 

B.     Indiana  Code  Section  35-37-4-8 

Indiana's  alternative  testimony  for  children  provision,  code  section 
35-37-4-8,  provides  two  methods  by  which  a  child  may  testify  at  trial 

''^Long,  694  S.W.2d  at  190. 

"M  (citing  State  v.  Sheppard,  197  N.J.  Super.  411,  484  A.2d  1330  (1984)). 
^Id.  at  192-93. 

"Tex.  Code  Crim.  Proc.  Ann.  art.  38.071,  §  2(a)(8),  2(b)  (Vernon  Supp.   1985). 
See  the  full  text  of  these  subsections  supra  note  61. 
^^See  supra  note  35. 
''Long,  694  S.W.2d  at  189. 

'•''Id.  at  190-91. 

""Id.  at  191-92. 

''Id.  at  192. 

'^Id.  at  191-92. 


1 72  INDIANA  LA  W  REVIEW  [ Vol .  20 : 1 6 1 

while  the  child  is  separated  from  the  trial  by  either  time,  or  space,  or 
both.^^  The  first  allows  the  child  to  be  in  a  room  separated  from  the 
courtroom.^'*  Questions  by  the  defense  and  the  prosecution  are  transmitted 
to  the  child  via  closed  circuit  television. ^^  The  child's  testimony  is  trans- 
mitted to  the  courtroom  via  the  same  closed  circuit  connection. ^^  The 
second  method  entails  having  the  child's  testimony  videotaped  and  later 
presented  at  trial. ^^  The  defendant,  the  defendant's  attorney,  the  pros- 
ecuting attorney,  and  the  judge  are  all  in  the  same  room  as  the  child. ^^ 
The  defendant  is  allowed  to  see  and  hear  the  child  without  the  child 
being  able  to  observe  or  hear  the  defendant. ^^  As  with  the  previously 
discussed  hearsay  exception  statute, ^°  this  "alternative  testimony  for 
children"  statute  raises  constitutional  questions  regarding  the  confron- 
tation clauses  of  the  United  States  Constitution^ •  and  the  Indiana  Con- 
stitution.^^  Notably,  the  statute,  while  allowing  the  defendant's  attorney^^ 
to  question  the  child, ^"^  does  not  specifically  preserve  for  the  defendant's 
attorney  the  right  to  cross-examine  the  child. ^^  The  right  specifically  to 
cross-examine  the  child  will  most  likely  be  read  into  the  statute  to  avoid 
confrontation  clause  problems. 

Section  35-37-4-8  is  interesting  in  that  a  court  does  not  need  to  find 
that  a  child  is  "unavailable"  as  a  prerequisite  to  use  of  the  alternative 
procedures.  The  court  merely  must  find  that  the  child  "should  be 
permitted  to  testify  outside  the  courtroom"  because  of  certain  specific 
reasons. ^^  This  lack  of  a  requirement  of  unavailability  appears  to  place 


"Ind.  Code  §  35-37-4-8  (Supp.  1986).  For  the  entire  text  of  the  statute,  see  supra 
note  9. 

^^IND.  Code  §  35-37-4-8(b)(l)  (Supp.   1986). 
"M   §  35-37-4-8(b)(2). 
'''Id.   §  35-37-4-8(b)(l). 
''Id.   §  35-37-4-8(c). 
''Id.   §  35-37-4-8(0. 

'^Id.  §  35-37-4-8(0(7).  If  the  defendant  is  not  represented  by  an  attorney,  however, 
the  defendant  may  question  the  child.  Id. 
'°Id.  §  35-37-4-6. 
«'U.S.  Const,  amend.  VI. 
«^lND.  Const,  art.   1,  §  13. 

"If  the  defendant  is  not  represented  by  an  attorney,  the  defendant  may  question 
the  child.  Ind.  Code  §  35-37-4-8(0(7)  (Supp.  1986). 

*''The  child  may  be  the  victim  of  or  a  witness  to  one  of  the  applicable  offenses. 
^^Ind.  Code  §  35-37-4-8(g)  (Supp.  1986)  states  that  certain  persons  may  question  the 
child. 

»^Ind.  Code  §  35-37-4-8(d)(l)(C)  (Supp.   1986)  states  the  following  reasons: 

(i)  a  psychiatrist  has  certified  that  the  child's  testifying  in  the  courtroom 

would  be  a  traumatic  experience  for  the  child; 

(ii)  a  physician  has  certified  that  the  child  cannot  be  present  in  the  courtroom 

for  medical  reasons;  or 

(iii)   evidence   has  been   introduced   concerning   the   effect   of  the   child's 


1987]  ALTERNATIVE  TESTIMONY  173 

section  35-37-4-8  in  conflict  with  the  requirements  of  Ohio  v.  Roberts^' 
and,  therefore,  lay  the  groundwork  for  a  constitutional  challenge  unless 
the  lower  courts  consistently  read  this  requirement  into  the  statute. 

Although  Indiana  Code  section  35-37-4-8  has  received  no  judicial 
interpretation,  caselaw  from  other  jurisdictions  is  helpful  in  its  analysis. 
In  McGuire  v.  State,^^  the  Arkansas  Supreme  Court  found  that  the 
admission  of  a  previously  videotaped  deposition  of  a  child  victim  as  a 
substitute  for  the  child's  in-court  testimony  did  not  violate  the  defendant's 
constitutional  right  to  confrontation.^^  The  deposition  was  admitted  in 
a  rape  prosecution  solely  because  the  child's  grandparents  testified  that 
her  appearance  before  a  jury  might  cause  serious  harm.^°  The  defendant 
had  the  right  to  confront  and  cross-examine  the  witness  at  the  depo- 
sition.^^ The  court  distinguished  such  cases  as  United  States  v.  Benfield,'^^ 
a  case  that  involved  an  adult  witness  and  a  non-sexual  offense.  The 
court  in  Benfield  had  held  the  witness's  deposition  was  inadmissible 
because  the  defendant  had  not  been  allowed  to  participate  actively  in 
the  deposition. ^^  The  witness's  unavailability  was  due  to  a  psychiatric 
impairment  so  severe  that  it  required  hospitalization. ^"^  The  defendant's 
inabihty  to  participate  in  the  deposition  was  the  primary  impediment  to 
its  admissibility.^^ 

A  statute  very  similar  to  Indiana  Code  section  35-37-4-8(c)  was  under 
constitutional  attack  in  Powell  v.  State. ^^  The  Texas  statute^^  at  issue 


testifying  in  the  courtroom,  and  the  court  finds  that  it  is  more  Hkely  than 
not  that  the  child's  testifying  in  the  courtroom  would  be  a  traumatic 
experience  for  the  child;  .  .  . 

"448  U.S.  56  (1980). 

««288  Ark.  388,  706  S.W.2d  360  (1986). 

''Id.  at  393,  706  S.W.2d  at  362. 

''Id.  at  391,  706  S.W.2d  at  361. 

"M  at  393,  706  S.W.2d  at  362. 

^^593  F.2d  815  (8th  Cir.   1979). 

''Id.  at  821-22. 

''Id.  at  817. 

"Id.  at  821-22. 

%94  S.W.2d  416  (Tex.  Ct.  App.   1985). 

^^Tex.  Code  Crim.  Proc.  Ann.  art.  38.071,  §§  4,  5  (Vernon  Supp.   1985).  These 
sections  read  as  follows: 

Sec.  4.  The  court  may,  on  the  motion  of  the  attorney  for  any  party,  order  that 
the  testimony  of  the  child  be  taken  outside  the  courtroom  and  be  recorded  for 
showing  in  the  courtroom  before  the  court  and  the  finder  of  fact  in  the  proceeding. 
Only  those  persons  permitted  to  be  present  at  the  taking  of  testimony  under 
Section  3  of  this  article  may  be  present  during  the  taking  of  the  child's  testimony, 
and  the  persons  operating  the  equipment  shall  be  confined  from  the  child's  sight 
and  hearing  as  provided  by  Section  3.  The  court  shall  permit  the  defendant  to 
observe  and  hear  the  testimony  of  the  child  in  person,  but  shall  ensure  that 
the  child  cannot  hear  or  see  the  defendant.  The  court  shall  also  ensure  that: 


1 74  INDIANA  LA  W  RE  VIE  W  [Vol .  20: 1 6 1 

provided  that  upon  the  motion  of  the  attorney  for  either  party,  the 
court  could  order  that  the  child's  testimony  be  taken  outside  the  court- 
room and  recorded  for  admission  at  trial. ^^  The  statute  provided  that 
when  this  procedure  was  used,  the  child  could  not  be  required  to  testify 
in  open  court^^  and  that  while  the  defendant  was  entitled  to  see  and 
hear  the  child  giving  testimony,  the  child  must  not  see  or  hear  the 
defendant. '°°  In  these  respects,  the  Texas  statute  was  almost  identical  to 
section  35-37-4-8. '^i 

In  reaching  its  decision  that  the  statute  was  unconstitutional,  the 
Texas  court  cited  Davis  v.  Alaska^^^  for  the  proposition  that 
"[clonfrontation  means  more  than  being  allowed  to  confront  the  witness 
physically, "'°^  and  then  surmised  that  this  phrase  "surely  implied  that 
confrontation  means  at  least  being  allowed  to  confront  the  witness 
physically. "'^"^  The  Texas  statute,  in  denying  the  defendant  the  right  to 
be  seen  and  heard  by  his  accuser,  violated  this  right  to  physical  face- 
to-face  confrontation. •^^  Furthermore,  the  state's  interest  in  the  emotional 
well-being  of  its  children  did  not  outweigh  this  right  to  direct  confron- 
tation. •'^  The  court  cited  with  approval  a  passage  from  Vasquez  v. 
State, ^^'^  a  case  dealing  with  child  rape: 

The  little  girl  was  nervous  and  exited  [sic]  and  this  was  relied 
upon  as  a  reason  for  the  State  not  offering  her  as  a  witness, 
though  she  was  an  unusually  smart  child.  We  do  not  believe 
that  it  is  sufficient  under  the  facts  stated  to  defeat  the  right  of 
the  accused  to  be  confronted  by  the  witness  against  him.  The 


(1)  the  recording  is  both  visual  and  aural  and   is  recorded  on   film   or 
videotape  or  by  other  electronic  means; 

(2)  the  recording  equipment  was  capable  of  making  an  accurate  recording, 
the  operator  was  competent,  and  the  recording  is  accurate  and  is  not  altered; 

(3)  each  voice  on  the  recording  is  identified;  and 

(4)  each  party  is  afforded  an  opportunity  to  view  the  recording  before  it 
is  shown  in  the  courtroom. 

Sec.  5.  If  the  court  orders  the  testimony  of  a  child  to  be  taken  under  Section 
3  or  4  of  this  article,  the  child  may  not  be  required  to  testify  in  court  at  the 
proceeding  for  which  the  testimony  was  taken. 

•^Id. 

''^Id. 

'°'Ind.  Code  §  35-37-4-8  (Supp.  1986)  does  not  provide  for  the  additional  in-court 
testimony  of  the  child,  and  Ind.  Code  §  35-37-4-8(0(7)  (Supp.  1986)  contains  a  provision 
for  keeping  the  defendant  hidden  from  the  sight  and  sound  of  the  witness. 

'°M15  U.S.  308  (1974). 

'^'Powell,  694  S.W.2d  at  419  (quoting  Davis  v.  Alaska,  415  U.S.  308,  315  (1974)). 

"^Id. 

'°'Id.  at  420. 

'°n45  Tex.  Crim.  App.  376,   167  S.W.2d  1030  (1942). 


1 987]  A  L  TERN  A  TIVE  TESTIMONY  1 7  5 

writer  shares  all  of  the  sympathy  which  the  State  and  the  jury 
may  have  had  for  the  child  in  her  unfortunate  situation  and 
would  like  to  reheve  her  completely  of  the  embarrassment,  but 
it  would  set  a  precedent  too  dangerous  to  be  sanctioned.  It 
would  be  better  that  a  guilty  person  may  go  unpunished  than 
that  this  important  provision  of  our  Constitution  should  be 
ignored.  The  rights  of  the  accused  in  the  instant  case,  however 
important  to  him,  are  infinitesimal  when  compared  to  the  rights 
of  the  millions  which  are  protected  by  the  constitutional  provision 
involved. '°^ 

The  court  in  Powell  also  found  that  the  right  of  confrontation  and 
cross-examination  is  personal  to  the  accused  and  that  the  statute  im- 
permissibly required  him  to  delegate  to  his  attorney  entirely  this  cross- 
examination. '°^  While  the  same  type  of  delegation  appears  to  be  present 
in  Indiana  Code  section  35-37-4-8, ''°  it  is  unHkely  that  Indiana  courts 
would  reach  the  same  conclusion  as  the  Powell  court  on  this  issue. "• 
As  to  the  other  defects  in  the  Texas  statute  noted  by  the  court,  how 
Indiana  courts  will  rule  on  parallel  provisions  necessarily  remains  unclear. 

A  California  case  that  squarely  addressed  the  issue  of  physical  face- 
to-face  confrontation  in  a  sex  crime  prosecution  was  Herbert  v.  Superior 
Court .^^^  In  Herbert,  the  trial  court  concluded  that  the  child  witness  was 
disturbed  by  the  courtroom  and  especially  by  the  presence  of  the  defend- 
ant and  therefore  ordered  a  seating  arrangement  where  the  defendant, 
although  present  in  the  courtroom,  could  not  see  or  be  seen  by  the 
witness. '^^  The  defendant  was  further  instructed  to  raise  his  hand  if  he 
could  not  hear  or  if  he  wished  to  confer  with  his  counsel.''"*  Although 
the  prosecution  argued  that  the  essential  purpose  of  the  confrontation 
clause  was  to  provide  for  adequate  cross-examination,  the  court  found 
that  this  was  not  the  only  purpose.  The  court  took  note  of  a  long  line 
of  United  States  Supreme  Court  decisions  that  stressed  the  face-to-face 
nature  of  confrontation''^  and  stated  that  "[b]y  allowing  the  child  to 


'o«Pow^//,  694  S.W.2d  at  420  (quoting  Vasquez  v.  State,  145  Tex.  Crim.  App.  376, 
380,   167  S.W.2cl  1030,   1032  (1942)). 

'°Vc^.  at  420-21. 

"°Ind.  Code  §  35-37-4-8(g)(2)  (Supp.  1986)  provides  that  the  defendant  is  entitled 
to  question  the  child  only  if  he  is  not  represented  by  an  attorney. 

'''See,  e.g.,  Abner  v.  State,  479  N.E.2d  1254  (Ind.  1985);  Gallagher  v.  State,  466 
N.E.2d  1382  (Ind.  Ct.  App.  1984),  where  defense  counsel's  presence  and  participation  at 
a  deposition  of  prosecution  witnesses  were  held  to  constitute  a  waiver  of  objection  to 
admission  of  the  depositions  on  the  grounds  of  confrontation. 

"M17  Cal.  App.  3d  661,   172  Cal.  Rptr.  850  (1981). 

"'Id.  at  664,   172  Cal.  Rptr.  at  851. 

"'Id.  at  665,   172  Cal.  Rptr.  at  851. 

"^The  court  cited  Dowdell  v.  United  States,  221  U.S.  325  (1911);  Kirby  v.  United 


1 76  INDIANA  LA  W  RE  VIE  W  [Vol .  20: 1 6 1 

testify  against  defendant  without  having  to  look  at  him  or  be  looked 
at  by  him,  the  trial  court  not  only  denied  defendant  the  right  of 
confrontation  but  also  foreclosed  an  effective  method  for  determining 
veracity. "''^  Although  the  procedure  in  Herbert  was  court-initiated  rather 
than  statutory,  the  confrontation  issues  involved  remain  the  same  as 
those  raised  by  the  new  statutory  schemes. 

In  another  CaHfornia  decision,  Hochheiser  v.  Superior  Court, ^^^  the 
court  considered  similar  issues  in  relation  to  the  use  of  closed  circuit 
television  for  testimony.  Although  this  television  procedure  was  instituted 
by  a  court  rather  than  provided  for  by  statute,  the  procedure  involved 
was  very  similar  to  the  provisions  for  closed  circuit  testimony  in  Indiana 
Code  section  35-37-4-8.''^  The  court  in  Hochheiser  did  not  reach  the 
constitutional  issues  involved  with  closed  circuit  testimony  because  it 
held  that  the  trial  court  did  not  have  the  inherent  power  to  use  it  absent 
statutory  authorization. ^'^  However,  the  court  did  note  several  reservations 
about  the  procedure.  After  considering  several  possible  negative  con- 
sequences of  camera  presentation  of  evidence,  the  court  concluded  that 
closed  circuit  television  might  affect  a  juror's  impressions  of  the  witness's 
credibility  and  demeanor. '^°  The  court  also  considered  the  possible  adverse 
effect  of  the  closed  circuit  procedure  on  the  presumption  of  the  defend- 
ant's innocence.'^'  Finally,  the  court  considered  the  insufficiency  of  the 
evidence  that  such  a  procedure  was  necessary. '^^  The  court  noted  that 
the  United  States  Supreme  Court,  in  Globe  Newspapers  v.  Superior 
Court, ^^^  stated  that  when  considering  children's  testimony,  the  measure 
of  the  state's  interest  in  a  procedure  is  not  the  extent  to  which  minors 
are  injured  by  testifying,  but  the  increase  in  injury  caused  by  testifying 
in  front  of  the  jury  and  the  defendant.'^  The  Hochheiser  court  then 
stated: 

In  our  research  of  the  professional  literature  on  the  matter,  we 
have  not  discovered  any  study,  based  on  empirical  data,  which 


States,  174  U.S.  47  (1899);  and  Mattox  v.  United  States,  156  U.S.  237  (1895).  Herbert, 
117  Cal.  App.  3d  at  667,  172  Cal.  Rptr.  at  853. 

''''Herbert,   117  Cal.  App.  3d  at  668,   172  Cal.  Rptr.  at  853. 

"^61  Cal.  App.  3d  777,  208  Cal.  Rptr.  273  (1985). 

"^The  court  conducted  a  hearing  on  the  prosecutor's  motion  that  two  child  witnesses 
be  allowed  to  testify  by  closed  circuit  television  and  received  testimony  that  the  children 
would  be  psychologically  stressed  from  testifying  in  open  court.  The  proposed  procedure 
provided  for  the  witness  being  able  to  see  the  defendant  and  cross-examiner,  and  the 
defendant  being  able  to  see  the  witness.  Id.  at  781,  208  Cal.  Rptr.  at  275. 

'"/J.  at  787,  208  Cal.  Rptr.  at  279. 

'^°M  at  786,  208  Cal.  Rptr.  at  278-79. 

'^'M  at  787,  208  Cal.  Rptr.  at  279;  see  infra  notes  149-53  and  accompanying  text. 

''^Hochheiser.   161  Cal.  App.  3d  at  792-93,  208  Cal.  Rptr.  at  282-83. 

'"457  U.S.  596  (1982). 

'''Id.  at  607  n.l9. 


1987]  ALTERNATIVE  TESTIMONY  111 

deals  with  the  damaging  psychological  effect  of  giving  testimony 
in  the  presence  of  the  jury  and  the  accused,  on  the  sexually 
abused  child.  Rather,  we  found  that  such  literature  merely  con- 
tains generalized  statements  to  this  effect. '^^ 

The  viewpoints  expressed  by  the  California  courts  are  not  without 
their  opponents,  however.  In  State  v.  Sheppard,^^  the  New  Jersey  Su- 
perior Court  vigorously  upheld  the  use  of  a  closed  circuit  procedure. 
Because  Sheppard  is  a  leading  case  for  proponents  of  these  alternative 
methods  of  testimony,  it  will  be  examined  at  length.  Sheppard  involved 
a  sexual  offense  against  a  ten  year  old  child,  and  upon  a  motion  by 
the  state  to  allow  the  child  to  testify  via  closed  circuit  television,  a 
hearing  was  held  to  consider  the  propriety  of  the  procedure. '^^  The  chief 
testimony  at  the  hearing  was  presented  by  a  forensic  psychiatrist  who 
had  interviewed  the  child  witness.  He  testified  that  the  witness  had  the 
capacity  to  testify  truthfully,  but  that  the  use  of  the  video  equipment 
would  improve  the  accuracy  of  her  testimony.  ^^^  The  psychiatrist  further 
stated  that  while  the  courtroom  atmosphere  makes  an  adult  more  likely 
to  testify  truthfully,  the  opposite  was  true  of  a  child  witness,  especially 
when  the  alleged  abuse  was  perpetrated  by  a  relative. '^^  He  felt  that  the 
child's  ambivalent  feelings  accompanied  by  the  fear,  guilt,  and  anxiety 
produced  by  the  situation  would  mitigate  the  truth  and  result  in  inaccurate 
testimony. '^^  The  psychiatrist  believed  that  the  video  arrangement  would 
reUeve  these  feelings  and  improve  the  accuracy  of  the  testimony. '^^ 
Furthermore,  he  testified  that  while  the  witness  was  basically  psycho- 
logically-fit, probable  long-range  consequences  of  her  in  court  testimony 
would  include  behavioral  problems,  nightmares,  depression,  and  problems 
with  eating,  sleeping,  and  school. '^^  Nothing  in  the  published  opinion, 
however,  indicated  just  how  the  psychiatrist  reached  his  prognosis. 

There  was  also  testimony  in  Sheppard  from  two  attorneys  who  had 
prosecuted  child  abuse  cases.  They  both  testified  primarily  as  to  problems 
with  the  prosecution  of  such  cases  caused  by  difficulties  with  child- 
victim  testimony.'"  The  state's  final  witness  was  a  video  expert,  who 
testified  as  to  the  proposed  video  arrangement  and  conducted  a  dem- 
onstration.'^"^ 


'^'161  Cal.  App.  3d  at  793,  208  Cal.  Rptr.  at  283. 

'^^197  N.J.  Super.  411,  484  A.2d  1330  (1984). 

'^'Id.  at  415,  484  A.2d  at  1332-34. 

'2«M  at  416,  484  A.2d  at  1332. 

'^'Id. 

'"''Id. 

'''Id. 

'''Id.  at  416-17,  484  A.2d  at  1332-33. 

'"M  at  417,  484  A. 2d  at  1333. 

'''Id.  at  418,  484  A. 2d  at  1333-34. 


1 78  INDIANA  LA  W  RE  VIE  W  [Vol .  20: 1 6 1 

The  defendant  in  Sheppard  objected  that  his  constitutional  right  to 
confrontation  was  violated,  but  the  court  noted  that  the  right  of  con- 
frontation was  not  absolute.  ^^^  After  an  extensive  discussion  of  the 
meaning  of  confrontation,  the  court  appeared  to  conclude  that  the 
primary  constitutional  guarantee  was  that  of  cross-examination,  not  direct 
face-to-face  confrontation J^^  The  court  also  analogized  the  case  at  bar 
to  an  earlier  New  Jersey  case^^^  where  the  defendant  was  excluded  from 
the  judge's  private  interview  with  a  child  while  being  permitted  to  hear 
the  interview  in  another  room.  In  that  case,  there  was  found  no  abridge- 
ment of  the  defendant's  right  of  confrontation.  The  earlier  case,  however, 
involved  custody  and  was  not  a  criminal  trial. 

The  Sheppard  court  also  addressed  the  defendant's  due  process 
contentions  concerning  possible  technical  distortions  of  the  medium,  as 
well  as  its  failure  accurately  to  present  demeanor  and  dramatic  com- 
ponents of  testimony. '^^  The  court  noted  that  the  "filtering"  effect  of 
the  medium  would  equally  benefit  both  sides  and  found  that  videotaped 
testimony  was  sufficiently  similar  to  live  testimony  that  the  jury  could 
still  properly  perform  its  function. '^^  The  court  also  took  judicial  notice 
of  the  widespread  availability  of  television  in  American  households,  and 
the  resultant  familiarity  with  its  technical  characteristics  and  distortions. ^"^^ 
The  court  did  not  address,  however,  the  idea  that  a  large  portion  of 
what  we  view  on  television  is  fiction  as  opposed  to  real  life  presenta- 
tions. ^'^'  The  court  in  Sheppard  stated: 

Any  zeal  for  the  prosecution  of  these  cases,  however,  cannot 
be  permitted  to  override  the  constitutional  rights  of  the  defend- 
ants involved.  They  are  at  great  disadvantage  in  these  cases.  The 
testimony  of  a  small  child  can  be  very  winsome  (more  winsome, 
perhaps,  if  she  testifies  in  person  than  by  videotape.)  The  dif- 
ficulty of  cross-examining  a  young  child  may  prevent  the  exposure 


'''Id.  at  426,  484  A.2d  at  1339. 
''''Id. 

'"New  Jersey  Youth  &  Family  Servs.  v.  S.S.,  185  N.J.  Super.  3,  447  A.2d  183 
(1982). 

"«197  N.J.  Super,  at  430,  484  A.2d  at  1341. 

'^°M 

""This  point  is  crucial  to  the  issues  involved.  People  are  accustomed  to  viewing 
horrible  things  on  television  while  at  the  same  time  they  are  not  always  able  to  separate 
fictional  characters  from  real  life  people.  This  is  especially  a  concern  with  children.  One 
need  only  view  the  cartoons  on  television  to  learn  that  a  character  can  be  killed  in  one 
scene  and  happily  go  about  his  business  in  the  next.  This  indoctrination  may  make  what 
is  seen  on  the  video  screen  in  the  courtroom  less  real  to  the  viewer  and  thereby  diminish 
the  gravity  of  the  situation.  See,  e.g..  Note,  The  Criminal  Videotape  Trial:  Serious 
Constitutional' Questions,  55  Or.  L.  Rev.  567,  577-78  (1976). 


1987]  ALTERNATIVE  TESTIMONY  179 

of  inaccuracies.  The  charge  of  child  abuse  carries  its  own  sig- 
nificant stigma.  Defendants  in  these  cases  may  find  themselves 
ostracized,  whether  they  are  guilty  or  not.  Like  children,  they 
too  have  ambivalent  feelings  and  may  decide,  even  though  they 
believe  they  will  be  acquitted,  that  it  is  better  for  the  child,  the 
family  and  themselves  to  accept  a  plea  agreement  than  to  subject 
everyone  involved  to  a  trial.  These  problems  must  also  be  weighed 
in  deciding  the  dimensions  of  the  constitutional  right  of  con- 
frontation.'"^^ 

The  court  found,  however,  that  given  all  of  the  circumstances  of  the 
case  at  bar,  any  erosion  of  the  defendant's  rights  would  be  modest  and 
warranted  by  the  protection  of  the  child-victim.'^^  The  Sheppard  decision 
reflects  the  crucial  nature  of  the  balancing  of  rights  and  protections;  if 
the  assumptions  upon  which  the  balancing  is  predicated  are  erroneous, 
an  unwarranted  and  potentially  dangerous  modification  of  the  legal 
system  may  occur. 

Almost  all  of  the  cases  and  scholarly  writings  addressing  the  con- 
frontation issue  raised  by  statutory  or  judicial  testimonial  schemes  similar 
to  those  in  Indiana  Code  section  35-37-4-8  have  been  concerned  with 
whether  the  defendant  can  see  the  witness's  demeanor  so  that  he  can 
assist  in  his  defense.  Another  element  of  confrontation,  the  witness  being 
confronted  by  the  one  he  is  accusing,  is  an  equally  important  considera- 
tion.''*^ 

When  considered  in  light  of  social  psychological  theory,  this  second 
element  takes  on  even  greater  significance.  It  has  been  well  documented 
that  guilt  accompanying  aggression  toward  another  person  is  reduced  when 
the  target  of  that  aggression  is  "dehumanized."  In  other  words,  if  we 
conceive  of  another  as  not  being  human,  the  inhibitions  against  acting 
aggressively  are  reduced."*^  Also,  inhibitions  against  injuring  another  are 
reduced  when  feedback  from  that  other  person  is  reduced. ''^^  In  a  classic 
study  involving  electric  shocks,  subjects  in  a  position  to  observe  personally 
the  suffering  of  their  victims  were  less  likely  to  administer  severe  shocks.  "'^ 
Similar  phenomena  have  been  observed  in  modern  warfare:  because  the 
enemy  can  be  far  away  due  to  modern  technology,  there  are  diminished 
feelings  of  guilt  and  remorse  in  those  inflicting  the  harm.'"*^  While  this 
type  of  dehumanization  might  arguably  be  advantageous  in  time  of  war, 


''^Sheppard,  197  N.J.  Super,  at  432,  484  A.2d  at  1342. 

'*'Id.  at  431-32,  484  A.2d  at  1342-43. 

'''See,  e.g.,  Mattox  v.  United  States,   156  U.S.  237,  242-43  (1895). 

'"'P.    MiDDLEBROOK,    SOCIAL   PSYCHOLOGY   AND    MODERN    LiFE    299-300    (1974). 

''"Id.  at  299. 

'*'Id. 

'''Id. 


180  INDIANA  LAW  REVIEW  [Vol.  20:161 

its  possible  role  in  a  legal  system  founded  on  a  presumption  of  innocence 
is  questionable.  When  the  unreahty  of  a  large  portion  of  what  people, 
especially  children,  view  on  television  is  coupled  with  this  concept  of 
dehumanization,  the  consequences  could  be  severe  for  a  defendant  tried 
under  the  proposed  closed  circuit  procedures.  While  we  do  not  wish  to 
upset  unnecessarily  a  witness  already  facing  a  difficult  experience,  we 
also  do  not  want  to  so  distance  a  witness  from  the  defendant  that  the 
witness  fails  to  sense  the  seriousness  of  the  accusations  and  the  con- 
comitant stimulus  to  be  scrupulously  honest. 

An  additional  issue,  not  widely  addressed  by  courts  or  scholars,  is 
the  effect  of  videotaped  presentations  and  closed  circuit  television  on 
the  presumption  of  the  defendant's  innocence.  The  concept  that  a  defend- 
ant is  innocent  until  proven  guilty  is  basic  to  the  American  system  of 
jurisprudence.'"*^  If  the  proposed  procedures  impinge  upon  this  pre- 
sumption, the  defendant  will  be  denied  his  constitutional  right  to  a  fair 
and  impartial  trial. '^^  As  noted  by  the  court  in  Hochheiser  v.  Superior 
Court, ^^'  "[T]he  presentation  of  a  witness'  testimony  via  closed-circuit 
television  may  affect  the  presumption  of  innocence  by  creating  prejudice 
in  the  minds  of  the  jurors  towards  the  defendant  similar  to  that  created 
by  the  use  of  physical  restraints  on  a  defendant  in  the  jury's  presence. "'^^ 
Thus,  the  procedures  at  issue  might  violate  the  same  type  of  proscription 
against  bringing  a  defendant  to  trial  in  handcuffs  or  prison  clothing.'" 
Jurors  involved  in  a  trial  using  closed  circuit  testimony  might  conceivably 
wonder  why  the  child  has  to  be  protected  from  even  being  in  the 
defendant's  presence.  The  presumption  of  innocence  would  then  dis- 
appear. 

Another  consideration  regarding  videotape  and  closed-circuit  pro- 
cedures is  the  possibility  of  an  abridgement  of  the  defendant's  right  to 
a  fair  trial. '^"^  This  concern  is  based  on  the  possible  distortion  of  evidence 
of  the  witness'  demeanor  and  therefore  of  credibility.'^^  As  noted  in 
Hochheiser,  the  video  camera  in  essence  becomes  the  jurors'  eyes  by 
selecting  and  commenting  on  what  is  seen.'^^  In  addition,   the  video 


'^'"The  principle  that  there  is  a  presumption  of  innocence  in  favor  of  the  accused 
is  the  undoubted  law,  axiomatic  and  elementary,  and  its  enforcement  lies  at  the  foundation 
of  the  administration  of  our  criminal  law."  Coffin  v.  United  States,  156  U.S.  432,  453 
(1895). 

''°See  U.S.  Const,  amend.  XIV,  §  1. 

'^'161  Cal.  App.  3d  777,  208  Cal.  Rptr.  273  (1985). 

'"M  at  787,  208  Cal.  Rptr.  at  279. 

'''See,  e.g..  Flowers  v.  State,  481  N.E.2d  100,  105  (Ind.  1985);  see  also  Smith  v. 
State,  475  N.E.2d  27  (Ind.   1985). 

''"•See  Bulkley,  supra  note  2,  at  659. 

'''Id. 

'5^61  Cal.  App.  3d  at  786,  208  Cal.  Rptr.  at  278. 


1 987]  A  L  TERN  A  TI VE  TESTIMONY  1 8 1 

equipment  may  make  a  witness  look  small  and  weak  or  large  and  strong, 
and  off -camera  evidence  is  necessarily  excluded.'" 

This  last  criticism  is  especially  relevant  to  Indiana  Code  section 
35-37-4-8,  because  the  statute  provides  for  the  presence  in  the  videotaping 
room  of  "persons  whose  presence  the  court  finds  will  contribute  to  the 
child's  well-being. "'^^  However  well  intentioned  such  persons  may  be, 
their  body  language  or  non-verbal  cues  may  affect  the  child's  testimony, 
while  the  jury  cannot  see  this  influence. '^^  Additionally,  if  the  camera 
is  focused  primarily  on  the  child's  face  to  gain  information  about  his 
or  her  expression,  it  may  not  portray  the  witness'  overall  demeanor, 
and  vice  versa.  Also,  the  interposition  of  a  screen  between  the  viewer 
and  the  evidence  may  reduce  a  juror's  attention  span  and  lessen  his 
concentration. '^°  Finally,  by  legitimizing  the  status  of  the  individual  being 
televised,  the  medium  may  bestow  prestige  and  enhance  his  authority.'^' 
This  concept,  termed  "status-conferral,"'^^  might  be  especially  relevant 
where  a  child  is  involved,  because  under  ordinary  circumstances  a  child 
does  not  have  a  great  deal  of  status. 

Other  concerns  raised  by  alternative  testimony  procedures  include 
possible  infringement  of  a  defendant's  right  to  a  jury  trial'"  and  in- 
terference with  a  jury's  common-law  right  to  question  witnesses.'^'*  The 
defendant's  right  to  a  jury  trial  may  be  infringed  upon  because  the 
factors  discussed  above  may  interfere  with  the  jury's  decisionmaking 
function'^^  The  jury's  right  to  question  the  witness  is  obviously  curtailed 
if  the  witness  is  removed  from  the  courtroom. 

IV.     Conclusion 

It  is  unquestioned  that  there  have  been  problems  with  convicting 
persons  who  sexually  abuse  children.  However,  it  is  questionable  whether 
modification  of  trial  and  evidentary  procedures  is  the  proper  way  to 
deal  with  these  problems.  Furthermore,  once  it  is  decided  that  modi- 
fications of  trial  and  evidentiary  procedures  are  necessary,  the  extent  of 
such  modifications  must  be  determined.  If  a  legislative  modification  of 


'5«lND.  Code  §  35-37-4-8(e)(2)  (Supp.   1986). 


'^'For  example,  the  nod  of  a  head  or  a  smile  by  one  outside  the  range  of  the  camera 
is  necessarily  lost  to  the  jury,  and  in  fact  the  jury  will  probably  not  even  know  such  a 
person  is  there. 

'^Note,  supra  note  141,  at  577. 

'"'Hochheiser,  161  Cal.  App.  3d  at  787,  208  Cal.  Rptr.  at  279. 

'"See  Bulkley,  supra  note  2,  at  659. 

'"Although  apparently  not  frequently  exercised  today,  this  common-law  right  of  the 
jury  to  question  witnesses  is  apparently  still  good  law.  See  Note,  supra  note  141,  at  580. 
'"/of.  at  578-82. 


182  INDIANA  LAW  REVIEW  [Vol.  20:161 

trial  and  evidentiary  procedures  will  possibly  abridge  a  defendant's  con- 
stitutional rights,  the  legislature  should  alter  such  procedures  no  more 
than  is  absolutely  necessary. 

The  trial  testimony  of  a  child-victim  can  possibly  be  made  less 
traumatic  without  resorting  to  drastic  legislative  measures.  Reducing  the 
number  of  interviews  with  the  child,  reducing  the  number  of  continuances, 
and  preparing  the  child  for  the  courtroom  experience  are  examples  of 
measures  that  have  been  proposed  as  alternatives  to  the  extreme  interven- 
tion of  videotaped  testimony  or  closed-circuit  television. 

Just  how  often  the  provisions  of  sections  35-37-4-6  and  35-37-4-8 
will  be  invoked  remains  to  be  seen.  Whether  the  provisions  of  the  new 
Indiana  Code  section  35-37-4-8  will  pass  constitutional  muster  also  re- 
mains to  be  seen.  Given  the  constitutional  implications  of  these  procedures 
for  the  defendant,  however,  these  statutes  should  be  closely  examined 
and  any  underlying  assumptions  should  be  adequately  supported  by 
empirical  evidence. 


Evidentiary  Use  of  Other  Crime  Evidence:  A  Survey 
of  Recent  Trends  in  Criminal  Procedure 

Susan  Stuart* 


I.     Introduction 

When  writing  a  survey  article,  there  is  a  tendency  for  the  author 
to  search  for  some  defect  in  the  law  of  the  surveyed  cases,  in  order  to 
demonstrate  the  author's  acumen  in  theoretical  reasoning,  as  opposed 
to  that  of  the  courts'.  However,  this  survey  topic — the  admissibility  of 
evidence  of  other  bad  acts  and  crimes  in  a  criminal  trial — does  not  lend 
itself  to  such  a  self-serving  exercise.  The  law  in  Indiana  with  respect  to 
this  relatively  narrow  subject  area  is  instead  well-established  and  generally 
well-reasoned.  This  survey  period  did  include,  however,  several  cases  in 
which  the  practical  application  of  the  extant  law  rested  upon  a  ques- 
tionable foundation  or  was  altogether  improper.  In  most  instances,  the 
error  was  harmless,  but  the  precedential  use  of  such  improper  reasoning 
could  well  prove  damaging  in  later  cases.  The  purpose  of  this  Article, 
therefore,  is  not  to  remedy  any  flaw  in  the  law  but  to  suggest  a  more 
temperate  and  circumspect  approach  to  its  practical  apphcation.  Because 
of  the  frequency  with  which  one  specific  context  occurred  during  the 
survey  period,  the  Article  will  particularly  emphasize  the  principles  gov- 
erning the  admissibility  of  unrelated  crimes  and  other  bad  acts  as  they 
are  relevant  to  the  charges  at  trial. 

II.     Trial  Admission  of  Other  Crimes  and  Misconduct  Generally 

The  general  rule  in  Indiana  is  that  evidence  of  crimes  and  misconduct 
of  a  criminal  defendant,  other  than  of  the  charged  offenses,  is  not 
admissible  at  trial.'  However,  there  are  various  exceptions  to  this  rule 
of  exclusion.  Their  application  arises  either  when  the  defendant's  char- 
acter is  at  issue  or  when  the  proffered  evidence  is  relevant  to  an  element 
of  the  charged  offense.  The  four  exceptions  most  widely  recognized  in 
Indiana  relate  to  (1)  the  defendant's  bad  character,  (2)  proof  of  the 


♦Formerly  associated  with  Buschmann,  Carr  &  Meyer,  Indianapolis;  Former  Law  Clerk 
to  the  Honorable  Stanley  B.  Miller,  Indiana  Court  of  Appeals.  B.A.,  De  Pauw  University, 
1973;  M.Ed.,  Valparaiso  University,  1976;  J.D.,  Indiana  University  School  of  Law — 
Indianapolis,  1982.  The  author  expresses  appreciation  to  Don  Anderson  for  his  patience 
and  his  editing  skills. 

'E.g.,  Lee  v.  State,  271  Ind.  307,  312,  392  N.E.2d  470,  474  (1979);  Bruce  v.  State, 
268  Ind.  180,  245,  375  N.E.2d  1042,  1077,  cert,  denied,  489  U.S.  988  (1978);  Paulson 
V.  State,  181  Ind.  App.  559,  560,  393  N.E.2d  211,  212  (1979). 

183 


1 84  INDIANA  LA  W  RE  VIE  W  [Vol .  20 : 1 83 

crime  on  trial,  (3)  the  res  gestae  of  the  charged  offense,  and  (4)  cumulative 
and/or  explanatory  evidence  after  the  defendant  himself  has  broached 
the  subject. 

A.     Admissibility  to  Prove  Defendant's  Character 

There  are  two  reasons  why  a  court  may  admit  evidence  of  other 
crimes  to  show  a  defendant's  unsavory  character.  The  foremost  reason 
is  to  impeach  the  defendant's  credibility  as  a  witness.^  This  particular 
"bad  character"  exception  has  statutory  underpinnings,^  but  its  eviden- 
tiary use  is  limited  to  a  defendant's  "prior  convictions  for  crimes  which 
would  have  rendered  a  witness  incompetent.  These  crimes  are:  treason, 
murder,  rape,  arson,  burglary,  robbery[,]  kidnapping,  forgery  and  wilful 
and  corrupt  perjury.'"^  The  rationale  for  allowing  such  use  is  that  the 
nature  of  the  convictions  reflects  upon  a  witness's  propensity  for  truth 
and  veracity  while  testifying  at  trial. ^ 

The  second  use  of  "bad  character"  evidence,  on  the  other  hand, 
permits  introduction  of  a  wider  array  of  bad  conduct  but  can  only  be 
applied  on  a  more  limited  scope.  This  use  occurs  when  a  criminal 
defendant  places  his  character  directly  into  evidence  as  part  of  his  defense 
strategy.  Once  a  defendant's  reputation  for  good  character  is  at  issue, 
the  state  may  then  offer  specific  acts  of  prior  misconduct  into  evidence 
as  contradictory  proof  of  bad  character.^  However,  use  of  bad  character 
evidence  for  this  purpose  is  limited  by  rules  of  relevance  and  therefore 
must  go  directly  to  contradict  the  defense's  evidence.^  Such  a  limitation 
is  to  assure,  to  the  extent  possible,  that  the  bad  character  evidence  is 
circumscribed  for  use  only  as  rebuttal  evidence  rather  than  as  substantive 
proof  of  the  defendant's  guilt  of  the  charged  offense.^  Therefore,  in 


-See  Slough,  Impeachment  of  Witnesses:  Common  Law  Principles  and  Modern 
Trends,  34  Ind.  L.J.   1,  23  (1958). 

'Ind.  Code  §  34-1-14-14  (1982)  states,  "Any  fact  which  might  heretofore  be  shown 
to  render  a  witness  incompetent,  may  be  hereafter  shown  to  affect  his  credibility." 

^Ashton  V.  Anderson,  258  Ind.  51,  63,  279  N.E.2d  210,  217  (1972);  see  also  Daniels 
V.  State,  274  Ind.  29,  32,  408  N.E.2d  1244,   1246  (1980). 

'Ashton,  258  Ind.  at  62,  279  N.E.2d  at  217  ("only  those  convictions  for  crimes 
involving  dishonesty  or  false  statement  shall  be  admissible").  The  Indiana  Supreme  Court 
has  further  declared  that  a  witness'  credibility  may  be  impeached  only  by  convictions, 
not  generic  bad  acts.  Hensley  v.  State,  256  Ind.  258,  262,  268  N.E.2d  90,  92  (1971). 

'E.g.,  Hauger  v.  State,  273  Ind.  481,  483,  405  N.E.2d  526,  527  (1980);  Robertson 
v.  State,  262  Ind.  562,  565,  319  N.E.2d  833,  835  (1974). 

'See  Bond  v.  State,  273  Ind.  233,  240-41,  403  N.E.2d  812,  818  (1980);  Robertson, 
262  Ind.  at  566,  319  N.E.2d  at  836. 

^See,  e.g..  Fed.  R.  Evid.  404,  which  states:  "Evidence  of  a  person's  character  or 
a  trait  of  his  character  is  not  admissible  for  the  purpose  of  proving  that  he  acted  in 
conformity  therewith  on  a  particular  occasion  .  .  .  .";  22  C.  Wright  &  K.  Graham,  Jr., 
Federal  Practice  &  Procedure  §  5236,  at  397  (1978)  [hereinafter  Federal  Practice 
&  Procedure]. 


1987]  OTHER  CRIME  EVIDENCE  185 

either  of  these  two  situations,  a  prosecutor  may  not  generally  impute 
bad  character  through  evidence  of  other  crimes  unless  the  defendant 
first  places  his  character  at  issue,  either  directly  or  by  merely  taking  the 
witness  stand.  However,  there  are  other  situations  in  which  a  prosecutor 
may  offer  such  evidence  for  the  purpose  of  substantively  proving  guilt, 
aside  from  bad  character  generally. 

B.     Admissibility  to  Prove  Charged  Offense 

A  second  method  of  circumventing  the  general  prohibition  against 
use  of  other  crime  evidence  is  to  proffer  other  unrelated  crimes  and 
bad  acts  as  relevant  proof  that  the  defendant  committed  the  offense 
with  which  he  is  charged.^  The  Indiana  Supreme  Court  adopted  this 
exclusion  long  ago  when  it  stated: 

"It  is  only  on  rare  occasions  that  proof  of  the  commission  of 
another  crime  by  a  defendant  is  either  necessary  or  helpful 
towards  estabhshing  the  crime  with  which  he  is  charged.  Hence 
the  evidence  is  ordinarily  irrelevant,  while  at  the  same  time  its 
admission  would  necessarily  operate  to  so  prejudice  a  jury  against 
a  defendant  as  that  in  a  doubtful  case  it  might  control  the 
verdict.  *  *  *  But  it  has  never  been  held  by  any  court  of 
responsible  authority  that  the  people  cannot  prove  the  facts 
constituting  another  crime,  when  those  facts  also  tend  to  establish 
that  the  defendant  committed  the  crime  for  which  he  is  on  trial. 
Such  a  holding  would  accomplish  the  absurd  result  of  permitting 
a  rule  intended  to  prevent  a  defendant  from  being  prejudiced 
in  the  eyes  of  the  jury  because  of  his  life  of  crime  to  so  operate 
in  certain  cases  as  to  prevent  the  people  from  proving  the  facts 
necessary  to  convict  him  of  the  crime  charged. "'^ 

Further  refinement  of  this  principle  has  especially  focused  on  the  relevancy 
of  the  other  crime  evidence  to  specific  facts  in  dispute. 

Indiana  appellate  courts  look  chiefly  at  whether  the  evidence  of 
unrelated  crimes  proves  or  tends  to  prove  a  fact  in  issue  at  trial.  ••  This 
connection  has  been  variously  characterized  as  "a  fact  in  issue, "'^  "any 


"See,  e.g.,  Hergenrother  v.  State,  215  Ind.  89,   18  N.E.2d  784  (1939). 

'°M  at  94-95,  18  N.E.2d  at  787  (quoting  People  v.  Molineux,  168  N.Y.  264,  340, 
61  N.E.  286,  312  (1901)). 

''See,  e.g.,  Tippett  v.  State,  272  Ind.  624,  627,  400  N.E.2d  1115,  1117-18  (1980); 
Bruce  v.  State,  268  Ind.  180,  245,  375  N.E.2d  1042,  1077,  cert,  denied,  439  U.S.  988 
(1978);  Maldonado  v.  State,  265  Ind.  492,  495,  355  N.E. 2d  843,  846  (1976);  Kallas  v. 
State,  227  Ind.   103,   114,  83  N.E. 2d  769,  773  (1949). 

'^Tippett,  111  Ind.  at  627,  400  N.E.2d  at  1118;  Maldonado,  265  Ind.  at  495,  355 
N.E.2d  at  846;  Gaston  v.  State,  451  N.E. 2d  360,  363  (Ind.  Ct.  App.  1983). 


1 86  INDIA  NA  LA  W  RE  VIE  W  [Vol .  20: 1 83 

material  fact,"'^  "any  essential  element  of  the  crime  charged,""^  and 
"an  issue  in  serious  dispute  at  the  trial. "'^  As  succinctly  stated  by  the 
Indiana  Supreme  Court:  "[T]he  law  will  not  permit  the  State  to  depart 
from  the  issue,  and  introduce  evidence  of  other  extraneous  offenses  or 
misconduct  that  have  no  natural  connection  with  the  pending 
charge  .  .  .  ."'^  This  restriction  obviously  prevents  the  introduction  of 
other  crime  evidence  merely  to  present  the  defendant  to  the  jury  as  a 
person  with  a  "criminal  bent."'^  The  state  therefore  is  constrained  to 
present  other  crime  evidence  only  in  the  context  and  within  the  confines 
of  the  charged  offense.  This  principle  is  the  rule  of  logical  relevance.'^ 

Typically,  other  crime  evidence  can  be  fitted  into  specific  categories 
of  logical  relevance.  The  list  of  categories — intent,  motive,  purpose, 
identity,  common  scheme  or  plan,  and  guilty  knowledge — has  been  recited 
so  frequently  as  to  approach  the  form  of  a  litany.'^  And  the  admission 
of  evidence  within  these  categories  may  be  appropriate  not  only  for 
proving  the  commission  of  the  charged  offense  but  also  for  disproving 
a  defense. 2°  There  exists  a  further  well-recognized  category  in  Indiana 
law  in  which  evidence  of  a  more  general  pattern  (rather  than  of  discrete 
offenses)  is  admissible.  This  pattern  is  admitted  for  its  tendency  to  prove 
a  defendant's  guilt  at  a  sex  offense  trial  under  the  "depraved  sexual 
instinct"  exception. ^^  Under  the  current  state  of  the  law  then,  Indiana 
courts  have  established  fairly  well-defined  guidelines  for  admitting  evi- 
dence of  other  crimes  under  the  relevancy  exception. 

There  is,  however,  a  further  limit  on  this  exception,  regardless  of 
the  evidence's  logical  relevance  to  the  trial.  Even  if  the  logical  relevance 
of  other  crime  evidence  is  established  within  the  categories  Hsted  above. 


^'Kallas,  111  Ind.  at  114,  83  N.E.2d  at  773. 

''Hergenrother,  215  Ind.  at  96,  18  N.E.2d  at  787. 

"Thornton  v.  State,  268  Ind.  456,  458,  376  N.E.2d  492,  493  (1978). 

'^Dunn  V.  State,   162  Ind.   174,   182,  70  N.E.  521,  523  (1904). 

''Bruce,  268  Ind.  at  245,  375  N.E.2d  at  1077;  see  also  Lee  v.  State,  271  Ind.  307, 
312,  392  N.E.2d  470,  474  (1979). 

'^See,  e.g..  Fed.  R.  Evid.  401,  which  defines  relevant  evidence  as  "evidence  having 
any  tendency  to  make  the  existence  of  any  fact  that  is  of  consequence  to  the  determination 
of  the  action  more  probable  or  less  probable  than  it  would  be  without  the  evidence." 

'''See  Haynes  v.  State,  411  N.E. 2d  659,  664  (Ind.  Ct.  App.  1980);  see  also  Cobbs 
V.  State,  264  Ind.  60,  62,  338  N.E.2d  632,  633  (1975);  Paulson  v.  State,  181  Ind.  App. 
559,  560,  393  N.E. 2d  211,  212  (1979). 

^"E.g.,  Jackson  v.  State,  267  Ind.  62,  66,  366  N.E.2d  1186,  1189  (1977),  cert,  denied, 
435  U.S.  975  (1978);  Henderson  v.  State,  259  Ind.  248,  251,  286  N.E.2d  398,  400  (1972); 
Kallas,  111  Ind.  at  122,  83  N.E.2d  at  777. 

^'E.g.,  Bowen  v.  State,  263  Ind.  558,  563,  334  N.E.2d  691,  694  (1975);  Miller  v. 
State,  256  Ind.  296,  299,  268  N.E. 2d  299,  301  (1971);  Lamar  v.  State,  245  Ind.  104,  109, 
195  N.E. 2d  98,  101  (1964).  The  "depraved  sexual  iiistinct"  exception  is  utihzed  only  where 
the  offenses  exhibit  an  "unnatural"  sexual  proclivity,  such  as  for  sodomy  or  for  incest. 
Cohhs,  264  Ind.  at  62-63,  338  N.E.2d  at  633-34. 


1987]  OTHER  CRIME  EVIDENCE  187 

a  court  may  still  exclude  it  if  such  evidence  lacks  legal  relevance. ^^ 
Evidence  is  legally  irrelevant  if  it  will  mislead  the  jury  or  if  it  is  too 
remote  from  the  charged  offense. ^^  Evidence  of  other  crimes  is  inherently 
prejudicial  to  some  extent.  For  such  other  crime  evidence  to  be  admissible, 
therefore,  its  probative  value  must  substantially  outweigh  its  prejudicial 
effect  on  the  jury.^"^  Otherwise,  it  may  seriously  affect  the  defendant's 
right  to  a  fair  trial, ^^  and  trial  courts,  in  their  discretion,  may  exclude 
it.26 

In  sum,  the  chief  concern  with  respect  to  legal  relevance  is  whether 
the  jury  is  likely  to  find  a  defendant  guilty  due  to  his  mere  participation 
in  other  crimes  rather  than  upon  proof  of  the  elements  of  the  charged 
offense.  The  relevancy  exception  for  the  introduction  of  other  crime 
evidence  is  therefore  in  counterpoise  to  the  bad  character  exception 
because  the  trial  court's  primary  purpose  is  to  exclude  evidence  that  is 
relevant  only  to  showing  a  defendant's  bad  character.  In  contrast,  the 
res  gestae  and  cumulative  evidence  exceptions  evince  very  little  concern 
regarding  the  substantive  effect  of  evidence  of  bad  character. 

C     Admissibility  Under  Miscellaneous  Exceptions 

There  are  two  other  instances  in  Indiana  where  the  general  rule  of 
exclusion  can  be  overridden  by  the  circumstances  of  the  individual  case. 
The  first,  the  res  gestae  exception,  permits  the  admission  of  evidence 
of  other  crimes  where  they  are  part  of  the  same  transaction.  Such 
evidence  includes  "acts,  statements,  occurrences  and  circumstances  sub- 
stantially contemporaneous  with  the  crime  charged. "^^  This  exception, 
too,  is  not  without  bounds  and  is  committed  to  the  sound  discretion 
of  the  trial  court. ^^ 

The  final  exception  is  more  an  estoppel  of  the  defendant's  right  to 
object  to  the  admission  of  other  crime  evidence  than  a  true  exception. 
This  estoppel  occurs  when  the  defense  "opens  the  door"  by  eliciting 


^^See,  e.g..  Fed.  R.  Evid.  403,  stating  that  "[a]lthough  relevant,  evidence  may  be 
excluded  if  its  probative  value  is  substantially  outweighed  by  the  danger  of  unfair  prejudice, 
confusion  of  the  issues,  or  misleading  the  jury,  or  by  considerations  of  undue  delay, 
waste  of  time,  or  needless  presentation  of  cumulative  evidence." 

^'Hergenrother,  215  Ind.  at  94,  18  N.E.2d  at  786. 

^'See  supra  note  22;  see  also  Paulson,  181  Ind.  App.  at  561,  393  N.E.2d  at  212. 

^'Thornton,  268  Ind.  at  458,  376  N.E.2d  at  493. 

^^Malone  v.  State,  441  N.E.2d  1339  (Ind.  1982);  Wilson  v.  State,  432  N.E.2d  30 
(Ind.  1982);  Tippett,  272  Ind.  at  627,  400  N.E.2d  at  1117-18;  Thornton,  268  Ind.  at  458, 
376  N.E.2d  at  493;  Manuel  v.  State,  267  Ind.  436,  438,  370  N.E.2d  904,  905-06  (1977). 

"Lee  V.  State,  267  Ind.  315,  320,  270  N.E.2d  327,  329  (1977)  (citation  omitted); 
Gross  V.  State,  267  Ind.  405,  407,  370  N.E.2d  885,  887  (1977)  (quoting  Kiefer  v.  State, 
241  Ind.   176,   178,   169  N.E.2d  723,  724  (I960)). 

^«Blankenship  v.  State,  462  N.E.2d  1311,   1313  (Ind.   1984). 


188  INDIANA  LAW  REVIEW  [Vol.  20:183 

testimony  of  other  crimes  directly^^  or  by  introducing  testimony  of  only 
part  of  a  story,  the  completion  of  which  includes  evidence  of  other 
crimes. ^°  Clearly,  a  defendant  has  no  right  to  complain  of  the  state's 
use  of  such  evidence  when  he  was  the  party  who  broached  the  subject 
in  the  first  instance.  Beyond  these  two  miscellaneous  exceptions,  the 
main  inquiry  into  the  admissibility  of  other  crimes  evidence  is  still  whether 
the  defendant  has  placed  his  reputation  in  issue  or  whether  the  state 
can  convince  the  court  that  the  evidence  is  both  logically  and  legally 
relevant  to  a  material  fact  at  issue. 

III.     Recent  Cases 

Most  of  the  notable  recent  cases  concerned  the  relevancy  exception, 
although  a  few  cases  pertained  to  the  other  three  exceptions.  The  surveyed 
cases  range  from  the  well-reasoned  Burch  v.  State,^^  where  the  Indiana 
Court  of  Appeals  was  faced  with  an  alibi  defense  and  the  dilemma  of 
proving  identity  with  evidence  of  another  crime,  to  the  scantily  reasoned 
Stout  V.  State,^^  which  upheld  the  admissibility  of  an  accomplice's  tes- 
timony to  a  defendant's  participation  in  prior  crimes  by  relying  on  but 
a  single  precedent  which  had  no  rationale.  Between  these  two  extremes 
were  cases  addressing  the  use  of  an  evidentiary  "harpoon"  and  proper 
and  improper  admissions  of  police  investigations,  as  well  as  an  assortment 
of  cases  where  the  court  reached  the  right  result  despite  the  reasons 
given. 

Critiquing  these  cases  is  difficult  because  any  analysis  of  relevancy 
is  necessarily  subjective.  No  bright-line  objective  template  can  be  apphed 
by  appellate  courts  to  such  cases  because  the  standard  of  review  is 
whether  the  trial  court  abused  its  discretion."  It  is  clear  in  some  cases, 
however,  that  the  evidence  had  little,  if  any,  relevance  to  the  case  and 
its  admission  would  have  been  prejudicial  error  but  for  the  harmless 
error  doctrine.^"*  This  Article  attempts  to  demonstrate  flaws  in  the  ap- 
plications of  the  law  and  to  suggest  how  these  problems  may  be  resolved. 


^•"See,  e.g.,  Gilliam  v.  State,  270  Ind.  71,  76-77,  383  N.E.2d  297,  301  (1978). 

'°See,  e.g.,  Davis  v.  State,  481  N.E.2d  387,  389-90  (Ind.   1985). 

3'487  N.E.2d  176  (Ind.  Ct.  App.   1985). 

"479  N.E.2d  563  (Ind.   1985). 

''E.g.,  Wagner  v.  State,  474  N.E.2d  476,  493  (Ind.  1985);  Fisher  v.  State,  468  N.E.2d 
1365,  1368  (Ind.  1984);  Mayes  v.  State,  467  N.E.2d  1189,  1194-95  (Ind.  1984)  ("Trial 
courts  have  wide  discretion  in  determining  whether  proffered  evidence  is  relevant.  We  will 
not  disturb  the  court's  ruling  upon  such  a  matter,  absent  a  clear  abuse  of  that  discretion."). 

''See  Fed.  R.  Civ.  P.  61;  see  also  Fed.  R.  Crim.  P.  52(a),  which  states  that  "[a]ny 
error,  defect,  irregularity  or  variance  which  does  not  affect  substantial  rights  shall  be 
disregarded." 


1987]  OTHER  CRIME  EVIDENCE  189 

A.     Right  Result,  Right  Reason 

One  of  the  best  reasoned  cases  of  the  survey  period  also  included 
one  of  the  closest  judgment  calls.  In  Burch  v.  State,^^  a  jury  found  the 
defendant  guilty  of  attempted  robbery  and  battery,  both  while  the  defend- 
ant was  armed  with  a  deadly  weapon.^^  The  state's  case  relied  upon  the 
following  salient  facts:  On  Thursday,  November  3,  1983,  at  7:45  p.m., 
the  defendant  accosted  a  Ball  State  University  co-ed  on  the  second  level 
of  a  parking  garage  on  the  university  campus.  The  defendant  "goosed" 
the  victim  and  then  followed  her  to  her  car,  questioning  her  about  her 
plans  for  the  evening.  When  they  reached  the  victim's  car,  the  defendant 
drew  a  knife  and  ordered  her  into  her  car.  After  she  refused,  the 
defendant  pressed  the  knife  to  her  chest  and  demanded  her  backpack 
from  the  car.  A  struggle  ensued,  and  the  defendant  fled.  The  victim 
identified  Burch  as  her  assailant.  Burch  interposed  an  alibi  defense." 
To  impeach  the  aHbi,  the  state  presented  evidence  of  a  similar  uncharged 
attack. 

Another  Ball  State  co-ed  testified  to  an  incident  that  occurred  the 
following  Thursday  evening,  in  the  same  location  of  the  same  parking 
garage  and  with  similar  sexual  overtones.  The  victim  of  this  second 
incident,  however,  recognized  her  attacker  and  was  able  to  locate  his — 
the  defendant's — photograph  in  her  high  school  yearbook.  The  state 
argued  this  other  crime  testimony  was  essential  to  surmount  the  defend- 
ant's alibi. ^^  The  court  of  appeals  agreed. ^^ 

After  a  thorough  analysis  of  the  factual  similarities  and  the  differ- 
ences in  the  two  incidents,  the  court  determined  that  the  key  similarities 
in  the  two  occurrences — time,  location,  and  sexual  characteristics — pre- 
sented a  similar  and  distinctive  "modus  operandi,"  relevant  to  the 
question  of  the  assailant's  identity  raised  by  the  defendant's  alibi  de- 
fense. "^^  The  court  admitted  that  the  facts  presented  "a  very  close  question," 
but  because  "identity  was  the  primary  issue,"  the  other  crime  evidence 
was  crucial  to  the  state's  case  and  therefore  was  admissible.^'  However 
close  the  question,  under  the  abuse  of  discretion  standard,  the  court 
reached  the  correct  conclusion. 

The  "modus  operandi"  exception  to  the  general  rule  is  a  well- 
recognized  method  of  proving  identity.'*^  To   fit  within  this  category, 


«487  N.E.2d  176  (Ind.  Ct.  App.   1985). 

'^Id.  at  177. 

''Id.  at  179. 

''Id. 

''Id. 

"^Id. 

^^Id.  (footnote  omitted). 

^^See  Federal  Practice  &  Procedure,  supra  note  8,  §  5246,  at  512. 


190  INDIANA  LAW  REVIEW  [Vol.  20:183 

"[t]he  acts  or  methods  employed  must  be  so  similar,  unusual,  and 
distinctive  as  to  earmark  them  as  the  acts  of  the  accused."'*^  The  difficulty 
with  the  facts  in  Burch  is  that  sexual  attacks  upon  women  in  parking 
garages  are  not  uncommon.  However,  repeated  attacks  at  the  same  time 
on  the  same  day  of  the  week  at  the  same  location  do  create  a  distinctive 
pattern.  The  fact  that  both  victims  positively  identified  the  defendant 
as  their  assailant  greatly  lessened  the  opportunity  for  error  and  added 
yet  another  distinguishing  feature  to  the  "modus  operandi"  of  the  attacks. 
The  nature  of  the  other  crime  evidence  was  also  not  so  inflammatory 
as  to  make  it  legally  irrelevant.  Therefore,  this  evidence  was  properly 
admitted  because  the  exception's  requirements  were  scrupulously  applied. 
The  "modus  operandi"  exception  was  also  the  compelling  reason 
for  admitting  evidence  of  other  bad  acts  in  Eakins  v.  State^"^  In  Eakins, 
a  high  school  music  teacher  was  charged  with  battery  and  telephone 
harassment  arising  out  of  an  incident  with  one  of  his  female  students. "^^ 
During  her  freshman  year,  the  young  girl  had  complained  to  school 
authorities  about  the  defendant's  amorous  attentions  to  his  female  stu- 
dents as  well  as  his  physical  contacts  with  them.  During  the  following 
school  year,  the  defendant  hugged  and  kissed  the  complainant.  Not  long 
afterward,  the  girl's  family  began  to  receive  harassing  and  obscene 
telephone  calls  that  were  later  traced  to  the  defendant's  home.  The  girl 
identified  the  defendant  as  the  caller.  However,  the  defendant  evidently 
denied  the  allegation  because  the  identity  of  the  caller  became  the  focal 
issue  at  trial. "^^  In  response  to  the  defendant's  apparent  denial,  the  state 
introduced  testimony  of  a  former  student  who  described  her  sexual 
relationship  with  the  defendant  ."^^  This  former  student  testified  that  when 
she  terminated  her  involvement  with  the  defendant,  she  received  an 
abusive  telephone  call  from  him  as  well  as  repeated  hang-ups.  Although 
the  similarity  of  events  is  perhaps  not  as  distinctive  as  in  Burch,  the 
two  incidents  here  were  significantly  unique  because  both  girls  were 
familiar  with  the  defendant  and  the  sound  of  this  voice.  Because  telephone 
offenses  are  so  intrinsically  difficult  to  prove  inasmuch  as  the  victim 
does  not  see  the  perpetrator,  the  other  crime  evidence  in  this  case  was 
extremely  logically  relevant  to  the  issue  of  the  caller's  identity."*^  Thus, 


^Willis  V.  State,  268  Ind.  269,  272,  374  N.E.2d  520,  522  (1978)  (citation  omitted). 

M84  N.E.2d  607  (Ind.  Ct.  App.   1985). 

''Id.  at  608. 

'^Id.  The  facts  are  not  clear  with  respect  to  the  defendant's  case.  The  only  other 
issue  addressed  on  appeal  concerned  "newly  discovered"  evidence  that  the  defendant's 
son  had  made  similar  telephone  calls.  Id.  at  609.  One  can  therefore  assume  that  the 
defendant  denied  any  part  in  the  offense;  otherwise,  this  newly  discovered  evidence  would 
not  have  been  necessary. 

''Id.  at  608. 

"^The  appellate  court  could  have  easily  sidestepped  the  issue  entirely.  Eakins  was 
tried  to  the  court,  rather  than  before  a  jury,  and  there  exists  a  presumption  in  Indiana 


1 987]  O THER  CRIME  E  VIDENCE  1 9 1 

the  logical  relevance  exception  to  the  general  rule  of  exclusion  was 
properly  applied  under  the  circumstances,  and  the  evidence  was  properly 
admitted. ^^ 

One  other  notable  case  in  which  the  identity  of  the  perpetrator  was 
seriously  in  dispute  was  Henderson  v.  State. ^^  In  Henderson,  the  defend- 
ant was  on  trial  for  burglary  and  theft  arising  from  facts  relayed  to 
poHce  by  an  eyewitness. -•  The  witness  observed  a  man  leave  a  neighbor's 
home  with  a  television  set  and  place  the  set  in  a  gold  Ford  LTD  bearing 
Indiana  license  plate  number  99H8889.  The  police  later  discovered  that 
the  defendant  owned  a  Ford  with  Indiana  license  plate  number  99T8889, 
but  the  witness  had  some  difficulty  identifying  the  defendant." 

At  trial,  defendant  challenged  her  identification  evidence."  In  re- 
sponse, the  state  offered  and  the  trial  court  admitted  the  testimony  of 
one  Alonzo  Bellmar.^"^  Bellmar,  in  a  later  incident,  had  chased  a  man 
he  discovered  exiting  his  home  through  a  window.  This  man,  identified 
as  the  defendant,  ran  toward  a  tan  Ford  with  Indiana  license  plate 
number  99T8889  parked  nearby  before  Bellmar  lost  sight  of  him.  The 
Indiana  Supreme  Court  dismissed  the  state's  argument  that  Bellmar' s 
other  crime  testimony  fit  within  the  common  scheme  or  plan  exception^^ 
but  declared  the  evidence  highly  relevant  to  the  issue  of  identity  and 
therefore  admissible. ^^  The  only  significantly  identifiable  feature  here, 
besides  the  witnesses'  identification,  was  the  license  plate  number.  That 


law  that  a  trial  court  ignores  improperly  admitted  evidence,  absent  any  indication  it 
significantly  affected  the  court's  decision.  E.g.,  Pinkston  v.  State,  436  N.E.2d  306,  308 
(Ind.   1982);  Phelan  v.  State,  273  Ind.  542,  546,  406  N.E.2d  237,  239  (1980). 

^'^Eakins,  484  N.E.2d  at  609.  The  court  also  stated  that  the  evidence  fit  the  common 
plan  or  scheme  exception.  Id.  Indiana  courts  seem  frequently  to  confuse  the  "modus 
operandi"  exception  with  the  common  plan  or  scheme  exception.  This  latter  exception  is 
used  to  "prove  the  existence  of  a  larger  continuing  plan,  scheme,  or  conspiracy,  of  which 
the  present  crime  on  trial  is  a  part."  E.W.  Cleary,  McCormick's  Handbook  of  the 
Law  of  Evidence  §  190,  at  448  (2d  ed.  1972)  (footnote  omitted)  [hereinafter  Handbook 
OF  Evidence].  It  is  apparent  from  the  facts  in  Eakins  that  there  were  two  separate, 
distinguishable  incidents  that  were  not  smaller  parts  of  any  larger,  deliberate  scheme  to 
seduce  and  then  harass  the  female  student  population  of  the  high  school.  The  defendant 
could  not  have  had  a  deliberate  plan  in  mind  that  both  relationships  would  be  ended  by 
the  victim  and  he  would  subsequently  harass  them  by  telephone.  Rather,  the  cause  and 
effect  nature  of  both  offenses  would  make  the  "motive"  exception  to  the  rule  much  more 
applicable  than  the  common  scheme  or  plan  exception. 

5°489  N.E.2d  68  (Ind.   1986). 

''Id.  at  69. 

"/c^.  at  70.  She  was  acquainted  with  and  recognized  the  defendant  but  had  at  first 
confused  his  name  with  that  of  someone  else.  Id. 

''Id. 

''Id.  at  70-71. 

"Id. 

'^Id.  (presumably,  although  not  denominated  so,  under  the  "modus  operandi"  ex- 
ception). 


192  INDIANA  LAW  REVIEW  [Vol.  20:183 

evidence  was  so  specific  and  so  singular  as  to  be  the  hypothetical  "silver 
cross-bow"  regarded  as  ideal  signature  evidence  of  a  perpetrator.^^  Such 
a  perfect  example  of  the  "modus  operandi  "/identity  exception  is  ob- 
viously rare.  Where  identity  was  the  issue  and  the  jury  would  not  be 
misled,  there  could  be  no  argument  that  the  evidence  was  neither  logically 
nor  legally  relevant.  The  evidence  was  properly  admitted. 

The  unfortunate  Leroy  Williams  was  the  defendant  in  two  cases 
during  the  survey  period. ^^  In  the  first  Williams  v.  State, ^^  Williams  was 
apprehended  in  the  home  of  74-year-old  Mabel  Carpenter.  WiUiams 
advised  the  police  that  he  had  stolen  a  television  set  earlier  that  evening 
during  the  burglary  of  another  home.  On  appeal,  Williams  argued  that 
the  trial  court  had  improperly  admitted  this  statement  during  his  trial 
for  the  burglary  of  Carpenter's  home.^°  The  Indiana  Supreme  Court 
upheld  the  trial  court's  admission  on  the  grounds  that  it  was  relevant 
to  establish  Williams'  intent  and/or  motive  for  the  burglary.^'  The 
supreme  court  aptly  and  succinctly  declared:  "[T]here  is  no  substantial 
question  that  the  defendant  committed  the  acts  which  led  to  the  charge, 
but  rather  the  issue  is  the  defendant's  motive  or  criminal  intent"  in 
breaking  and  entering. ^^  WiUiams'  confession  of  the  television  theft  from 
another  home  was  the  only  evidence  of  his  motive  and  intent  to  commit 
the  felony  of  theft  in  Carpenter's  home  and  was  crucial  to  proving  all 
the  elements  of  the  charged  burglary.  This  evidence  would  not  have 
prejudiced  the  defendant  before  the  jury  and  was  therefore  not  legally 
irrelevant. 

A  similar  Indiana  Supreme  Court  decision  just  five  weeks  prior  to 
Williams  came  to  a  similar  conclusion  but  without  the  same  reasoned 
analysis.  In  Sizemore  v.  State, ^^  the  facts  were  not  nearly  as  clear  as 
in  Williams.  A  Mr.  Abel  chased  the  defendant  and  another  intruder  out 
of  the  ransacked  second  story  of  his  home  and  forced  them  to  surrender 
after  he  fired  a  shot  into  the  rear  of  their  car.  Upon  investigation,  the 


"5ee  Federal  Practice  &  Procedure,  supra  note  8,  §  5246,  at  513. 

5«Williams  v.  State,  489  N.E.2d  53  (Ind.  1986);  Williams  v.  State,  481  N.E.2d  1319 
(Ind.   1985). 

'M81  N.E.2d  1319  (Ind.   1985). 

'°Ici.  at  1321. 

^^Id.  The  then  extant  burglary  statute  defined  the  charged  offense  as  follows: 
A  person  who  breaks  and  enters  the  building  or  structure  of  another  person, 
with  intent  to  commit  a  felony  in  it,  commits  burglary,  a  Class  C  felony. 
However,  the  offense  is  a  Class  B  felony  if  it  is  committed  while  armed  with 
a  deadly  weapon  or  if  the  building  or  structure  is  a  dwelling,  and  a  Class  A 
felony  if  it  results  in  either  bodily  injury  or  serious  bodily  injury  to  any  person 
other  than  a  defendant. 
Ind.  Code  §  35-43-2-1  (1982). 

"'Williams,  481  N.E.2d  at  1321. 

"480  N.E.2d  215  (Ind.   1985). 


1987]  O THER  CRIME  E  VIDENCE  1 93 

police  and  Abel  discovered  on  Abel's  premises  several  items  that  had 
been  stolen  from  two  other  homes  that  same  day.  The  supreme  court, 
in  upholding  the  admission  of  these  items  into  evidence,  relied  upon  the 
intent  and  the  common  scheme  or  plan  exceptions. ^"^ 

The  court  did  not  precisely  explain  how  the  intent  exception  applied 
in  Sizemore.  However,  the  facts  of  this  case  fit  within  the  Williams 
analysis  described  above.  The  evidence  was  relevant  to  show  that  the 
defendant  intended  to  commit  theft  once  he  had  entered  the  premises. ^^ 
The  court  did  explain  that  the  items  taken  from  other  residences  estab- 
lished a  common  plan  or  scheme  of  the  defendant  and  his  accomplice 
to  burglarize  residences  that  particular  day.^  The  problem  with  the  court's 
reasoning  is  that  the  court  injected  the  "signature"  requirement  of  the 
"modus  operandi"  exception  into  its  explanation  of  the  common  scheme 
or  plan  exception,  thereby  confusing  evidence  of  identity  with  evidence 
of  intent. ^^  There  was  no  need  for  identity  evidence  because  identity  was 
never  in  question.  The  court's  common  scheme  or  plan  analysis  was 
also  weak  because  the  "distinctive"  feature  upon  which  the  court  focused 
was  the  manner  of  entry  into  the  burglarized  homes — kicking  in  the 
front  door.^^  Such  kicking  is  hardly  distinctive,  however,  when  even 
homeowners  have  been  known  to  do  the  same  thing  to  their  own  homes. 
Other  than  this  flawed  dictum,  the  court's  review  of  the  trial  court's 
admission  of  the  other  crime  evidence  of  theft,  which  circumstantially 
linked  the  defendant  to  all  three  locations,  was  sound. 

A  rather  perfunctory  result  arose  in  Brackens  v.  State. ^'^  In  that 
case,  the  defendant  was  accused  of  sexually  molesting  his  seven-year- 
old  niece  by  marriage. ^^  The  challenged  evidence  was  the  victim's  tes- 
timony that  the  defendant  had  engaged  in  prior  sexual  acts  with  her.^' 
The  issue  addressed  by  this  evidence  was  the  defendant's  denial  of  the 
prior  acts  and  his  further  denial  that  he  had  even  touched  the  victim 
that  day.  The  trial  court  allowed  the  testimony  under  the  "depraved 
sexual  instinct"  exception,  to  show  that  the  defendant  had  had  prior 
sexual  contact  with  the  victim,  despite  his  denial  of  the  charged  offense. ^^ 


«M  at  217. 

'''Id. 

^Id.  Such  a  conclusion  might  also  have  been  appropriate  to  show  the  intent  element, 
particularly  since  the  defendant  relied  upon  the  defense  of  intoxication  despite  his  testimony 
that  he  had  accompanied  the  accomplice  throughout  the  day.  See  also  Handbook  of 
Evidence,  supra  note  49,  §  190,  at  448-49. 

^^See  supra  notes  42  and  43  and  accompanying  text. 

''^Sizemore,  480  N.E.2d  at  217. 

«M80  N.E.2d  536  (Ind.   1985). 

™M  at  538. 

''Id.  at  539. 

'^Id. 


194  INDIANA  LAW  REVIEW  [Vol.  20:183 

The  supreme  court  supported  the  trial  court's  ruHng.  However,  the 
evidence  of  past  acts  in  this  case  may  not  have  been  relevant  to  any 
specific  factual  dispute  at  issue.  Such  a  blanket  application  of  the 
depraved  sexual  instinct  exception  regardless  of  the  facts  exemplifies  how 
courts  tend  to  use  this  exception  as  a  general  rule  when  certain  sex 
offenses  are  charged  and  there  is  evidence  that  the  defendant  has  com- 
mitted the  same  or  a  similar  offense  at  another  time.^^  Such  uncritical 
appHcation  of  the  exception  seems  to  undermine  the  general  rule  of 
exclusion.  However,  one  commentator  has  defended  this  type  of  general 
use  of  the  depraved  sexual  instinct  exception  by  arguing  that  it  creates 
an  ''issue"  akin  to  a  motive  for  committing  the  offense.^"^  This  "motive" 
is  that  the  defendant  has  "a  passion  or  propensity  for  illicit  sexual 
relations  with  the  particular  person  concerned  in  the  crime  on  trial. "^^ 
An  implication  that  the  defendant  has  a  character  flaw,  such  as  a  general 
propensity  for  this  kind  of  behavior,  is  mitigated  by  limiting  the  evidence 
to  a  relationship  with  only  the  victim. ^^  On  this  restricted  basis,  the 
admission  of  the  evidence  in  Brackens  was  entirely  appropriate  and  was 
no  more  prejudicial  than  the  charged  offense  itself. ^^ 


''^See  Handbook  of  Evidence,  supra  note  49,  §  190,  at  449  n.40. 

''Id.  at  449-50. 

"M  at  449  n.38  (emphasis  added). 

^^It  would  appear,  however,  that  some  Indiana  cases  have  used  the  "depraved  sexual 
instinct"  exception  without  regard  to  whether  the  victim  is  the  same  in  all  of  the  offenses. 
See,  e.g.,  Austin  v.  State,  262  Ind.  529,  319  N.E.2d  130  (1974),  cert,  denied.  All  U.S. 
1012  (1975);  Miller  v.  State,  256  Ind.  296,  268  N.E.2d  299  (1971).  The  rationale  for  this 
expansion  of  the  exception  may  be  that  the  unnaturalness  of  the  sex  act  is  distinctive  in 
and  of  itself.  See  Handbook  of  Evidence,  supra  note  49,  §  190,  at  449.  This  is  especially 
important  now  that  the  Indiana  Supreme  Court  no  longer  categorizes  rape  among  the 
exceptions  for  depraved  sexual  instinct  (at  least  where  consent  is  the  only  issue).  See, 
e.g.,  Jenkins  v.  State,  474  N.E.2d  84  (Ind.  1985);  Malone  v.  State,  441  N.E.2d  1339 
(Ind.  1982);  Meeks  v.  State,  249  Ind.  659,  234  N.E.2d  629  (1968).  But  any  extension  of 
admissibility  on  the  basis  of  the  unusual  nature  of  sex  crimes  lends  itself  to  the  dangers 
of  admitting  offenses  that  may  only  show  a  repeated  commission  of  the  same  sort  of 
crime  rather  than  evidence  of  crimes  with  unusual  features.  Such  a  result  has  been  decried 
by  Indiana  courts.  See,  e.g.,  Duvose  v.  State,  257  Ind.  450,  452,  275  N.E.2d  536,  537 
(1971)  (rape);  see  also  Raines  v.  State,  251  Ind.  248,  240  N.E.2d  819  (1968)  (evidence  of 
homosexual  acts  has  no  relevance  at  murder  trial). 

"The  supreme  court  also  noted  that  most  of  the  victim's  challenged  testimony  came 
forth  during  her  cross-examination  by  the  defense,  as  if  to  imply  that  any  error  in 
admission  was  harmless  because  the  defendant  "opened  the  door."  Brackens,  480  N.E.2d 
at  539.  See  also  Haynes  v.  State,  411  N.E.2d  659,  664  (Ind.  Ct.  App.  1980);  Gilliam  v. 
State,  270  Ind.  71,  76-77,  383  N.E.2d  297,  301  (1978).  Such  implication  though  misses 
the  point  when  it  was  the  state  that  first  raised  the  topic  on  direct  examination,  although 
defendant's  cross-examination  on  the  subject  could  arguably  be  a  waiver  of  any  objection 
to  the  original  direct  testimony. 

The  irony  is  that  the  court  misapplied  the  "opened  door"  exception  later  in  the 
case.  Brackens  took  the  stand  in  his  own  defense  to  deny  the  charges.  Brackens,  480 


1987]  OTHER  CRIME  EVIDENCE  195 

An  interesting  set  of  facts  arose  in  Gibbs  v.  State,'^^  where  the 
defendant  was  convicted  of  attempted  murder  for  a  vehicular  attack  on 
a  woman  he  later  married. ^^  On  appeal,  the  defendant  argued  that  the 
trial  court  erred  in  allowing  the  state  to  question  him  and  the  victim 
about  their  prostitution-related  activities.^"  The  defendant  had  a  business 
as  well  as  a  romantic  relationship  with  the  victim,  involving  the  victim's 
employment  as  a  prostitute.  At  the  time  of  the  attack,  the  victim  was 
preparing  to  leave  the  defendant's  employ.  The  Indiana  Supreme  Court 
held  that  such  evidence  could  well  provide  information  about  the  defend- 
ant's motive  for  the  attack.^'   Such  evidence  was  deemed  particularly 


N.E.2d  at  539.  In  doing  so,  he  put  his  credibility  as  a  witness  at  issue.  The  state  was 
thus  justified  in  introducing  evidence  of  his  prior  convictions  for  theft  and  robbery — 
infamous  crimes— to  impeach  him.  The  court  declared  the  defendant  had  "opened  the 
door"  for  impeachment  purposes.  Id.  at  540.  While  this  evidence  fits  the  classic  Ashton 
V.  Anderson,  258  Ind.  51,  279  N.E.2d  210  (1972),  formula  for  impeachment  of  Brackens' 
credibility,  it  has  nothing  to  do  with  the  "opened  door"  exception.  See  supra  notes  4 
and  5  and  accompanying  text.  Although  theft  was  not  originally  considered  in  the  Ashton 
V.  Anderson  genre,  the  Indiana  Supreme  Court  considered  it  a  crime  involving  dishonesty 
and  added  it  to  the  Ashton  list  in  Fletcher  v.  State,  264  Ind.  132,  136-37,  340  N.E.2d 
771,  774-75  (1976).  However,  admission  of  theft  convictions  can  be  prohibited  if  they 
"arise  from  factual  situations  which  do  not  indicate  a  lack  of  veracity  on  the  part  of 
the  witness."  Id.  at  137,  340  N.E.2d  at  775.  This  limitation  can  only  be  triggered  by 
defense  counsel,  preferably  by  motion  in  limine.  Id.  In  the  absence  of  a  proper  foundation 
by  defense  counsel,  one  must  assume  that  Brackens'  theft  conviction  was  properly  admitted 
for  impeachment  purposes. 

A  classic  "opened  door"  testimony  did  arise  in  the  murder/battery  case  of  Davis 
v.  State,  481  N.E.2d  387  (Ind.  1985).  The  defendant  called  one  Coomes  as  a  witness  to 
buttress  his  claim  of  self-defense.  Coomes  testified  about  a  conversation  the  defendant 
had  had  with  his  two  victims  during  which  the  victims  discussed  their  prison  experiences. 
This  evidence  was  adduced  to  substantiate  the  defendant's  fear  that  these  two  men  would 
seriously  injure  or  kill  him  and  to  explain  why  he  stabbed  them  during  a  fight.  Id.  at 
389.  What  the  defendant  tried  to  "close  the  door"  on  was  the  fact  that  during  that  same 
conversation,  he  revealed  to  the  victims  that  he  too  had  been  in  prison.  The  trial  court 
had  allowed  this  fact  to  be  brought  out  on  Coomes's  cross-examination.  Id.  The  Indiana 
Supreme  Court  ruled  that  not  only  was  this  testimony  highly  relevant  to  rebut  defendant's 
factual  defense,  but  that  he  had  also  opened  the  door  on  direct  examination.  Id.  As  the 
court  remarked: 

[0]ur  courts  frequently  have  held  in  other  contexts  that  a  party  may  not  submit 
evidence  of  part  of  a  conversation,  transaction,  deposition  or  the  evidentiary 
material  without  giving  the  other  party  an  opportunity  to  introduce  the  remaining 
material  if  it  is  necessary  to  explain  or  illustrate  the  context  from  which  the 
excerpted  evidence  was  taken,  or  to  mitigate  the  prejudice  caused  by  introduction 
of  only  part  of  the  evidence  in  question. 
Id.  This  correct  statement  of  the  exception  contrasts  starkly  with  the  court's  statements 
in  Brackens. 

M83  N.E.2d  1365  (Ind.   1985). 

'^Id.  at  1366. 

«°M  at  1368. 

^'M  A  similar  set  of  facts  was  present  in  Harms  v.  State,  156  Ind.  App.  123,  295 


196  INDIANA  LAW  REVIEW  [Vol.  20:183 

relevant  where  motive  was  tied  to  the  specific  intent  element  of  the 
attempted  murder  charge  and  where  the  victim  denied  that  the  defendant 
struck  her  intentionally.^^  Because  the  unrelated  prostitution  activities 
could  hardly  prejudice  a  jury  trying  an  attempted  murder  case,  the 
probative  value  of  the  evidence  substantially  outweighed  any  dangers  of 
legal  irrelevance,  and  the  supreme  court  properly  upheld  the  trial  court. 

The  last  example  of  a  correctly-decided  case  dealt  with  a  problem 
all  too  frequently  encountered  in  trial  courts.  In  Riley  v.  State, ^^  the 
Indiana  Supreme  Court  reversed  a  drug  dealing  conviction  because  the 
state  had  injected  an  "evidentiary  harpoon"  into  the  trial,  under  the 
guise  of  the  common  scheme  or  plan  exception. ^"^  The  trial  court  had 
granted  the  defendant's  motion  in  limine  to  protect  him  from  any  mention 
of  prior  drug  use  or  sales. ^^  In  spite  of  the  court's  order  and  the 
defendant's  repeated  objections,  the  prosecutor  persisted  in  questioning 
the  state's  sole  witness  about  prior  buys  from  the  defendant. ^^  The  trial 
court  eventually  relented  and  allowed  the  evidence  upon  a  showing  that 
there  were  similarities  among  all  of  the  defendant's  sales  to  the  witness. ^^ 

In  reversing,  the  supreme  court  declared  there  were  no  distinctive 
characteristics  of  the  transactions  to  fit  within  the  common  scheme 
exception. ^^  Thus,  the  evidence  had  been  improperly  admitted,  particularly 
with  respect  to  drug  use.^"^  The  court  then  astutely  observed  that  because 
the  state's  sole  evidence  was  from  a  single  witness,  the  "evidentiary 
harpoon"^°  of  improper  evidence  injected  by  the  state  could  only  have 
bolstered  its  case  unfairly  before  the  jury.^^  The  defendant  was  therefore 
granted  a  new  trial. ^^ 


N.E.2d  156  (1973),  where  the  deceased  victim  threatened  to  withdraw  from  a  burglary 
ring  and  go  to  the  police. 

''Gibbs,  483  N.E.2d  at  1366. 

«^489  N.E.2d  58  (Ind.   1986). 

''Id.  at  61. 

''Id.  at  59. 

'"•Id.  at  59-61. 

''Id.  at  61. 

"Id.  The  court  would  probably  have  been  more  correct  if  it  had  addressed  the 
"modus  operandi"  exception. 

'•"Id. 

'^"Evidentiary  harpoon"  is  defined  in  Indiana  as  that  circumstance  "where  the 
prosecution  through  its  witnesses  successfully  places  evidence  before  the  jury  which  is 
improper  ...  in  situations  where  such  evidence  would  not  be  admissible."  Grimes  v. 
State,  258  Ind.  257,  262,  280  N.E.2d  575,  578  (1972)  (citation  omitted). 

"/?//ey,  489  N.E.2d  at  61.  The  evidence  of  prior  sales  was  also  not  crucial  to  show 
that  the  witness  could  identify  the  defendant  because  they  were  also  friends.  See,  e.g., 
United  States  v.  Juarez,  561  F.2d  65  (7th  Cir.   1977). 

''Riley,  489  N.E.2d  at  61. 


1987]  OTHER  CRIME  EVIDENCE  197 

B.     Right  Result,    Wrong  Reason 

In  this  next  group  of  cases,  the  appellate  courts  reached  the  proper 
conclusion  that  evidence  of  other  crimes  fell  within  one  of  the  permitted 
exceptions  to  the  general  rule  of  exclusion.  However,  the  specific  ex- 
ceptions invoked  by  the  courts  were  not  necessarily  correct. 

In  Jones  v.  State,^^  the  supreme  court  clearly  demonstrated  the  respect 
given  to  trial  court  discretion  in  ruling  on  the  admissibility  of  evidence. 
The  defendant  was  convicted  of  robbery  and  criminal  deviate  conduct 
for  robbing  a  savings  and  loan  association  and  forcing  one  of  the  female 
employees  to  disrobe  and  commit  oral  sodomy.^"*  At  trial,  the  victim  of 
a  similar  crime  testified  to  events  occurring  several  weeks  earlier  at  a 
gas  station  one-half  block  from  the  savings  and  loan.  This  witness  had 
been  unable  to  identify  her  attacker  until  the  police  showed  her  a  picture 
of  the  savings  and  loan  perpetrator.  The  defendant  argued  that  evidence 
of  the  gas  station  incident  was  inadmissible  at  trial. ^^ 

The  supreme  court  ruled  the  evidence  admissible  to  prove  the  per- 
petrator's identity  and  to  prove  a  common  plan  or  scheme,  because  of 
the  distinctive  characteristics  present  in  both  crimes. ^^  However,  the 
common  plan  or  scheme  exception  is  used  to  "prove  the  existence  of 
a  larger  continuing  plan,  scheme,  or  conspiracy,  of  which  the  present 
crime  on  trial  is  a  part."^^  Such  a  larger  plan  did  not  exist  here  nor 
did  the  court  so  hold.  What  the  court  was  actually  using,  without  properly 
identifying  it,  was  the  "modus  operandi"  exception  wherein  other  crime 
evidence  is  admissible  on  the  grounds  of  relevance  because  of  the  same 
distinct,  unusual,  or  unique  method  employed  in  committing  the  charged 
offense.  ^^ 

By  repeated,  improper  use  of  the  term  "common  scheme  or  plan," 
Indiana  courts  have  bastardized  the  "modus  operandi"  exception  by 
requiring  something  less  than  an  unusual  or  unique  device.  Perhaps  by 
connoting  "common,"  "scheme,"  and  "plan"  instead  of  "modus  op- 
erandi," the  courts  have  felt  compelled  to  admit  evidence  as  meager  as 
some  vague  pattern  of  behavior.  As  a  consequence,  many  decisions  have 
upheld  the  admission  of  evidence  evincing  no  characteristics  distinct  from 
other  crimes  committed  by  other  defendants  under  the  rubric  of  "common 


"479  N.E.2d  44  (Ind.   1985). 

''Id.  at  44. 

''Id.  at  46. 

'^Id. 

'^Handbook  of  Evidence,  supra  note  49,  §  190,  at  448-49  (footnote  omitted). 

'^See  supra  notes  42  and  43  and  accompanying  text.  One  could  argue  that  this  is 
a  hypertechnical  distinction  when  in  fact  the  unique  features  of  both  offenses,  and  not 
the  name  of  the  exception,  were  the  actual  test  of  admissibility  in  the  case  and  the  correct 
result  was  reached.  The  distinction  is  valid. 


198  INDIANA  LAW  REVIEW  [Vol.  20:183 

scheme  or  plan."^^  In  other  words,  "similarities"  has  become  the  op- 
erative term,  rather  than  "uniqueness."  This  lapse  creates  problems  in 
a  case  such  as  Jones  v.  State  where  the  only  truly  distinctive  element 
of  each  offense  was  the  combination  of  armed  robbery  at  a  business 
establishment  with  the  commission  of  an  act  of  oral  sodomy  upon  a 
female  employee. 

But  for  the  nature  of  the  premises  and  the  specific  nature  of  the 
deviate  sex  act  involved,  Jones  would  be  no  different  from  any  other 
offense  combining  violent  larceny  with  a  violent  sex  act.  It  is  not  unusual 
for  rape  and  robbery  to  be  combined  during  a  residential  burglary, '°° 
but  it  is  arguable  that  forcing  a  victim  to  commit  fellatio  where  the 
perpetrator  risks  detection  during  business  hours  of  the  targeted  estab- 
lishment is  unique.  Thus,  in  Jones  there  was  minimal  logical  relevance 
of  the  other  crime  evidence  to  the  issue  of  Jones'  identity. '^^  As  for 


•^^In  Wiles  v.  State,  437  N.E.2d  35  (Ind.  1982),  the  state  put  on  the  testimony  of 
a  prior  rape  victim  during  the  burglary /attempted  rape  trial  of  the  defendant.  The 
"identification"  exception  (presumably  common  scheme  or  plan)  was  invoked  to  show 
the  following  similarities  between  the  two  events: 

(1)  the  perpetrator  threatened  the  victim  with  a  knife; 

(2)  money  and  jewelry  were  stolen; 

(3)  the  perpetrator  wore  a  long-sleeved  shirt  in  mid-summer; 

(4)  the  attacks  occurred  in  the  same  area  of  Indianapolis; 

(5)  the  attacks  were  seventeen  days  apart;  and 

(6)  the  attacker  cut  the  cords  to  the  victims'  extension  phones. 

Id.  at  39.  Unfortunately,  this  scenario  is  common  in  other  run-of-the-mill  rape/burglary 
offenses.  See,  e.g.,  Williams  v.  State,  275  Ind.  434,  417  N.E.2d  328  (1981);  Willis  v. 
State,  268  Ind.  269,  374  N.E.2d  520  (1978).  In  fact,  the  common  scheme  or  plan  exception 
was  also  used  in  Williams  v.  State  to  admit  factual  similarities  in  two  separate  incidents 
of  rape.  The  admitted  facts  were: 

(1)  two  perpetrators; 

(2)  one  wore  a  ski  mask,  the  other  a  red  hooded  sweatshirt; 

(3)  obscene  phone  calls  preceded  the  attacks; 

(4)  the  victims'  husbands  worked  nights,  which  was  when  the  attacks  occurred; 

(5)  the  attackers  pried  open  the  back  door  and  left  it  open  afterwards; 

(6)  a  butcher  knife  was  used  to  threaten  the  victims; 

(7)  the  victims'  hands  were  tied; 

(8)  the  perpetrators  cut  the  phone  wires; 

(9)  the  attacks  were  about  a  week  apart;  and 

(10)  the  attackers  stole  personal  property. 

Williams,  275  Ind.  at  440,  417  N.E.2d  at  332.  The  red  hooded  sweatshirt  was  perhaps 
a  distinctive  enough  feature  in  Williams  to  justify  admission  of  the  evidence.  However, 
there  does  not  appear  to  have  been  any  question  of  identity  involved  in  the  case. 

'°^See,  e.g.,  Jenkins  v.  State,  474  N.E.2d  84  (Ind.  1985);  Wiles  v.  State,  437  N.E.2d 
35  (Ind.  1982);  Williams  v.  State,  275  Ind.  434,  417  N.E.2d  328  (1981). 

'°'The  facts  of  Jones  are  not  the  least  bit  illuminating  with  regard  to  the  defense  of 
the  case  and  whether  identity  was  in  serious  dispute.  Due  to  the  seriousness  of  the  crime, 
one  can  presume  that  the  defendant  denied  any  involvement,  thereby  putting  his  identity 
at  issue. 


1987]  OTHER  CRIME  EVIDENCE  199 

legal  relevance,  prejudice  to  the  defendant  was  diminished  by  the  fact 
that  both  crimes  were  of  the  same  inflammatory  nature.  Because  the 
charged  crime  was  highly  offensive,  a  jury  was  unlikely  to  have  been 
prejudiced  by  evidence  of  a  second  evil  act.  It  would  appear  then  that 
the  Indiana  Supreme  Court's  affirmance  of  Jones'  conviction  upon 
evidence  having  such  a  tenuous  relevancy  connection  was  a  deferral  to 
the  trial  court's  discretion  to  admit  such  evidence. '^^ 

The  next  case  in  the  "right  result,  wrong  reason"  genre  is  Schoff stall 
V.  State. ^^^  Schoffstall  was  convicted  of  reckless  homicide  for  the  death 
of  his  infant  son,  which  occurred  while  the  baby  was  in  Schoffstall's 
custody."^"*  During  trial,  Schoffstall  objected  to  the  admission  of  autopsy 
photographs  and  to  the  testimony  of  a  forensic  pathologist  that  prior 
to  the  date  of  death,  the  baby  had  sustained  numerous  injuries  to  his 
spleen,  left  lung,  lip,  eye  and  cheek,  and  brain. '^^  The  pathologist 
concluded  the  baby  was  a  victim  of  child  abuse  syndrome. '°^  Schoffstall's 
wife  also  testified  to  circumstantial  evidence  of  his  abuse  of  the  baby, 
and  Schoffstall  himself  admitted  during  statements  to  police  that  he  had 
hit  the  child.  Schoffstall  objected  to  the  admission  of  this  c  idence  on 
grounds  of  irrelevancy  and  immateriality.'^^  The  court  of  appeals  con- 
cluded that  the  evidence  was  admissible  under  the  relevancy  exceptions 
of  motive,  intent,  or  common  scheme  or  plan.'°^ 

The  evidence  was  indeed  admissible  but  not  under  any  of  these 
named  exceptions.  Although  the  facts  are  not  clear  with  respect  to  what 
offense  Schoffstall  was  charged  with,  it  is  clear  he  was  convicted  of 
reckless  homicide. '^^  The  statutory  elements  of  this  crime  are:  "A  person 
who  recklessly  kills  another  human  being  commits  reckless  homicide,  a 
Class  C  felony. "''°  Reckless  homicide  is  not  an  "intentional"  crime  for 


'°^An  argument  can  also  be  made  for  reversal.  It  appears  that  there  was  sufficient 
independent  evidence  of  identity  by  the  employees  of  the  savings  and  loan  to  obviate  the 
need  for  the  other  victim's  testimony.  One  could  also  contend,  obversely  to  the  author's 
conclusion,  that  because  the  very  nature  of  the  crimes  was  so  inflammatory,  evidence  of 
a  second  such  crime  by  th"  defendant  would  have  prejudiced  the  jury.  Precedential  authority 
would  have  permitted  reversal  under  such  circumstances.  See,  e.g..  Riddle  v.  State,  264 
Ind.  587,  348  N.E.2d  635  (1976);  Brooks  v.  State,  156  Ind.  App.  414,  296  N.E.2d  894 
(1973).  Because  of  the  abuse  of  discretion  standard,  however,  the  issue  of  reversal  in 
Jones  becomes  an  academic  question  the  answer  to  which  is  dependent  upon  evidence 
which  may  be  in  the  record  but  is  not  clearly  set  forth  in  the  opinion. 

'°H88  N.E.2d  349  (Ind.  Ct.  App.   1986). 

"^Id.  at  351. 

'°^/flf.  at  351-54. 

'°Vd/.  at  351. 

'°'/c?.  at  354. 

•°«/d  at  355. 

'°'M  at  350. 

"°lND.  Code  §  35-42-1-5  (1982). 


200  INDIANA  LAW  REVIEW  [Vol.  20:183 

which  prior  child  abuse  evidence  would  be  relevant  to  show  motive  or 
intent,  as  it  would  for  murder.'"  Use  of  the  common  scheme  or  plan 
exception  is  not  justified  either  because  typically  child  abuse  is  not  a 
continuing  deliberate  plan  or  scheme  but  rather  is  the  result  of  uncon- 
trollable and/or  irrational  behavior  continuing  in  an  unplanned  and 
erratic  fashion  throughout  a  parent  (adult)/child  relationship. 

The  valid  relevance  exception  better  suited  for  child  abuse  cases, 
although  not  yet  adopted  by  Indiana  courts,  is  the  "corpus  delicti" 
exception.  The  "corpus  delicti"  exception  allows  the  admission  of  evi- 
dence of  other  crimes  as  proof  that  a  criminal  act  took  place. "^  This 
exception  is  particularly  useful  where  the  defendant  acknowledges  that 
harm  occurred  but  denies  that  the  harm  was  caused  by  any  criminal 
instrumentality."''  Refuting  the  defense  of  absence  of  "corpus  delicti" 
requires  a  showing  that  the  defendant  has,  in  the  past,  engaged  in  similar 
criminal  conduct."'*  The  risk  inherent  in  the  "corpus  delicti"  exception 
is  that  it  may  be  easily  abused  to  show  oilly  propensity,  a  result  scru- 
pulously rejected  by  the  case  law."^  However,  in  Schoff stall,  evidence 
that  the  defendant's  relationship  with  his  son  was  characterized  by 
instances  of  other  criminally  violent  acts  of  physical  abuse  tended  directly 
to  rebut  defendant's  allegation  that  the  child  was  injured  by  accident."^ 

Application  of  this  "corpus  delicti"  exception  should  be  Hmited  to 
admission  of  evidence  of  a  pattern  of  child  abuse  between  the  defendant 
and  the  victim.  If  so  applied,  the  exception  would  be  consistent  with 
an  ideal  application  of  the  depraved  sexual  instinct  exception  where 
evidence  of  criminal  acts  with  other  victims  is  excluded.  Such  a  limitation 
would  avoid  the  problems  arising  in  cases  such  as  United  States  v. 
Woods,^^^  where  the  defendant's  propensity  for  abusing  children  in  general 


'"See  Worthington  v.  State,  273  Ind.  499,  405  N.E.2d  913  (1980),  cert,  denied,  451 
U.S.  915  (1981)  (defendant  charged  and  convicted  of  second  degree  murder  for  death  of 
seven-year-old  adopted  daughter);  O'Conner  v.  State,  272  Ind.  460,  399  N.E.2d  364  (1980) 
(defendant  charged  with  second  degree  murder  of  three-year-old  child);  Corbin  v.  State, 
250  Ind.  147,  234  N.E.2d  261  (1968)  (defendant  indicted  first  degree,  convicted  second 
degree  murder  of  21-month-old  daughter).  In  each  of  these  cases,  prior  evidence  of  child 
abuse  was  admitted  for  the  purpose  of  showing  malice,  premeditation,  intent,  or  motive. 
These  exceptions  were  appropriately  applied  because  of  the  intentional  nature  of  the 
charged  and/or  convicted  offenses.  See  Ind.  Ann.  Stat.  §  10-3404  (Burns  1956)  (second 
degree  murder).  For  current  version,  see  Ind.  Code  §  35-42-1-3  (1986). 

"^See  Federal  Practice  &  Procedure,  supra  note  8,  §  5239,  at  460  (footnotes 
omitted). 

'''Id. 

'''Id. 

'"Id.  at  460-61. 

""Schoff stall,  488  N.E.2d  at  354-55. 

"M84  F.2d  127  (4th  Cir.  1973).  In  Woods,  the  defendant  was  convicted  for  the 
smothering  death  of  her  eight-month-old  foster  son,  who  died  of  cyanosis.  Id.  at  128-29. 


1987]  OTHER  CRIME  EVIDENCE  201 

became  the  chief  characteristic  of  the  evidence.''^  In  Schoffstall,  the 
evidence  of  previous  abuse  to  the  same  infant  was  highly  relevant  to 
establish  that  a  "corpus  delicti"  existed  despite  Schoffstall's  represen- 
tations of  an  accident.  The  logical  relevance  by  sheer  necessity  sub- 
stantially outweighed  any  potential  prejudice.  The  court  of  appeals' 
reasoning  notwithstanding,  the  evidence  was  properly  admitted. 

Hossman  v.  State^^^  is  not  analyzed  for  its  result  as  much  as  for 
the  improper  logic  of  its  dicta.  Hossman  was  convicted  of  burglary, 
conspiracy,  and  receiving  stolen  property. '^^  The  burglary  and  conspiracy 
convictions  rested  upon  evidence  that  the  defendant  directed  two  other 
men  to  break  into  a  home  to  steal  some  drinking  glasses. '^^  The  defendant 
challenged  testimony,  allowed  by  the  trial  court,  alleging  that  one  of 
these  same  men  had  sold  other  goods  to  the  defendant  on  prior  oc- 
casions.'^^ Pointing  out  that  there  was  no  criminality  attached  to  these 
sales,  the  court  of  appeals  noted  that  the  sole  purpose  for  their  admission 
was  to  show  an  earlier  connection  between  the  defendant  and  this  other 
man  by  reason  of  a  business  relationship.'^^  However,  the  court  went 
further  and  declared  that  even  if  the  state's  evidence  had  evinced  crim- 
inality, it  would  have  fit  within  the  common  scheme  or  plan  exception 
to  show  identification,  intent,  or  state  of  mind.'^  This  declaration  in- 
correctly invoked  the  common  scheme  or  plan  exception  because  there 
was  no  evidence  that  such  a  plan  even  existed  or  that  the  burglary  was 
a  part  thereof.  The  common  plan  or  scheme  exception  was  therefore 
irrelevant. 

What  the  court  did  point  out,  perhaps  unwittingly,  was  that  the 
evidence  was  relevant  to  show  intent  or  motive.  A  close  analysis  of  the 
facts  and  the  targeted  offenses  reveals  that  the  court  made  an  excellent 
connection  between  the  charged  crime  and  the  intent  and  motive  ex- 


The  prosecution  was  allowed  to  submit  evidence  that  the  defendant  had  been  involved  in 
twenty  earlier  cyanotic  episodes  with  nine  different  children,  seven  of  whom  died.  Id.  at 
130.  The  controversy,  of  course,  was  balancing  the  difficulty  of  proving  that  the  death 
of  the  infant  was  caused  by  a  criminal  instrumentahty  and  thus  "corpus  delicti"  with 
the  prejudice  inherent  in  admitting  the  evidence  purely  to  show  the  defendant's  character 
flaw.  The  controversy  will  continue  to  rage  but  is  really  of  no  moment  in  the  classic 
parent/battered  child  relationship,  such  as  in  Schoff stall,  where  the  abuse  is  part  of  a 
continuing  relationship. 

"«M  at  130-32. 

"M82  N.E.2d  1150  (Ind.  Ct.  App.   1985). 

^^°Id.  at  1152-53.  His  conviction  for  receiving  stolen  property  was  reversed  on  a 
separate  appeal.  Id.  at  1153.  The  burglary  and  conspiracy  convictions  resulted  from  a 
new  trial  after  the  first  was  declared  a  mistrial.  Id.  at  1152-53. 

'2'M  at  1152. 

'^^Id.  at  1157. 

'"/of. 

'^'Id. 


202  INDIANA  LAW  REVIEW  [Vol.  20:183 

ceptions  for  relevancy.  Evidence  of  Hossman's  prior  receipt  of  stolen 
goods  would  supply  a  motive'^^  for  his  vicarious  involvement  in  the 
burglaries  committed  by  other  parties,  as  well  as  show  the  specific  intent 
of  theft,  the  predicate  for  burglary.  Although  Hossman's  conviction  for 
receiving  stolen  property  was  overturned,  the  relevancy  link  is  clear  and 
is  sufficient  to  justify  the  admission  of  this  evidence  going  to  issues  that 
could  not  help  but  be  in  dispute  because  of  Hossman's  limited  role  in 
the  commission  of  the  crime. 

C.     No  Harm,  No  Foul 

Several  cases  in  the  survey  period  improperly  upheld  the  admission 
of  other  crime  evidence;  however,  a  thorough  examination  reveals  that 
in  each  case  the  admission  was  harmless.  One  example  is  Foster  v. 
State,^^^  which  otherwise  would  be  an  excellent  example  of  the  common 
scheme  or  plan  exception.  In  Foster,  a  jury  found  the  defendant  guilty 
of  forgery  for  signing  his  employer's  name  on  a  stolen  blank  payroll 
check  and  then  cashing  it.'^^  Among  the  evidence  presented  were  three 
other  payroll  checks  cashed  the  same  day  that  were  within  the  numerical 
sequence  of  the  subject  check.  The  conclusion  was  that  the  defendant 
had  embarked  upon  a  calculated  plan  to  obtain  money  through  fraud. '^^ 

This  is  a  classic  example  of  a  common  scheme  or  plan,  where 
evidence  is  excepted  from  the  general  rule  of  exclusion  because  it  tends 
to  prove  a  fact  at  issue,  such  as  the  identity  of  the  perpetrator  or  the 
defendant's  intent.  The  problem  in  Foster  is  that,  contrary  to  the  court's 
rationale,  there  appears  to  have  been  no  question  of  the  defendant's 
identity  at  trial. '^^  Nor  would  these  checks  necessarily  have  presented 
any  more  definite  evidence  of  intent  to  defraud  than  the  single  check 
upon  which  the  information  had  been  filed.  There  appears  to  have  been 
no  serious  dispute  over  any  issue  requiring  this  evidence  to  make  the 
state's  case.  If  not,  the  three  "unrelated"  checks  should  have  been  ruled 
inadmissible.  However,  any  error  was  rendered  harmless  when  the  defend- 
ant's brother  testified,  evidently  without  objection,  ta^the  defendant's 
illegal  transactions  with  these  other  checks,  thereby  making  the  erro- 
neously admitted  evidence  cumulative  only.'^°  The  improperly  admitted 


'"For  good  examples  of  the  use  of  the  motive  exception,  see  Jenkins  v.  State,  263 
Ind.  589,  590-92,  335  N.E.2d  215,  216-17  (1975);  Thomas  v.  State,  263  Ind.  198,  199- 
201,  328  N.E.2d  212,  212-13  (1975). 

'M84  N.E.2d  965  (Ind.   1985). 

'"M  at  966. 

'^^Id.  at  967. 

'^^Bank  employees,  called  as  witnesses,  identified  the  defendant.  Id.  The  court  ruled 
that  the  other  checks  "reinforced  identification  testimony."  Id. 

''°Id.;  see  Wallace  v.  State,  486  N.E.2d  445,  461  (Ind.   1985)  (improperly  admitted 


1987]  OTHER  CRIME  EVIDENCE  203 

Other  crime  evidence  in  Foster  was  therefore  rendered  nonprejudicial  as 
a  matter  of  law. 

Clarkson  v.  State^^^  presented  another  classic  example  of  a  common 
scheme  or  plan.  The  defendant  was  convicted  of  theft  and  violation  of 
state  securities  laws  for  defrauding  an  elderly  couple  under  the  guise  of 
an  investment  plan.'^^  The  questionable  evidence  here  was  the  testimony 
of  three  other  elderly  women,  who  told  of  their  own  experiences  with 
the  defendant's  confidence  scheme.'"  As  in  Foster,  the  evidence  was 
presumably  admitted  to  show  intent  to  defraud. '^"^  And  as  in  Foster, 
such  testimony  had  no  greater  tendency  to  show  intent  than  the  evidence 
of  the  charged  offense  itself.  The  other  three  incidents  were  unnecessary 
to  the  prosecution's  case.  The  error  here  is  particularly  acut^  because 
intent  is  not  required  to  violate  the  securities  laws,'"  and  the  court  never 
addressed  the  requirement  of  "intent  to  deprive"  of  use  under  the  theft 
statute. '^^  Therefore,  the  evidence  was  irrelevant  to  any  question  of  intent 
to  defraud  under  the  securities  laws  because  this  was  not  an  issue  at 
trial.  And  clearly  the  theft  intent  was  also  not  the  issue.  Because  the 
other  women's  testimony  had  no  logical  relevance  to  any  issue  of  intent, 
the  evidence  was  inadmissible  on  this  basis. 

The  court  though  did  state  that  the  women's  testimony  was  crucial 
to  show  a  scheme  to  defraud, '^^  which  is  an  element  of  a  securities  law 
violation.  Again  however,  the  testimony  had  no  greater  probity  than  the 
evidence  of  the  subject  offense  and  was  therefore  an  unnecessary  presenta- 
tion of  cumulative  evidence  on  an  issue  already  adequately  supported 
by  other  evidence.  But,  as  in  Foster,  any  error  was  rendered  harmless 
by  the  defendant's  failure  to  object  to  the  testimony  of  two  of  the 
witnesses. '^^ 

A  third  common  scheme  or  plan  was  present  in  Alvers  v.  State.^^^ 
Alvers  was  a  jeweler  who  had  a  habit  of  receiving  stolen  property  and 
of  substituting  cubic  zirconias  for  diamonds  in  jewelry  left  in  his  care 
for  repair.  The  grand  jury  indicted  him  for  corrupt  business  influence 
upon  seven  predicate  offenses  of  this  nature."*"  At  trial,  the  objectionable 


evidence  does  not  require  reversal  if  cumulative  of  other  evidence);  Johnson  v.  State,  251 
Ind.  369,  374,  241  N.E.2d  270,  272  (1968). 

'^'486  N.E.2d  501   (Ind.   1985). 

'"/cf.  at  503. 

•"M  at  506. 

'''Id. 

'"Briefly,  Indiana  state  securities  laws  presume  criminal  intent  from  a  defendant's 
acts.  Id.  at  507.  See  Ind.  Code  §  23-2-1-1  (1982). 

'''See  Ind.  Code  §  35-43-4-2(a)  (1986). 

'''Clarkson,  486  N.E.2d  at  506. 

"'Id. 

'"489  N.E.2d  83  (Ind.  Ct.  App.   1986). 

'"^Id.  at  85;  see  Ind.  Code  §  35-45-6-2  (1982). 


204  INDIANA  LA  W  RE  VIE  W  [Vol .  20: 1 83 

evidence  was  the  testimony  of  two  other  victims  of  Alvers'  operation."^' 
The  testimony  was  allowed  as  proof  of  a  common  scheme  or  plan.''^^ 
But  of  what  practical  necessity  was  this  testimony  when  the  seven  pred- 
icate offenses  raised  the  inference  of  such  scheme  anyway?  The  evidence 
was  improperly  admitted.  Its  admission  was  harmless,  though,  because 
the  testimony  of  the  other  victims  could  have  had  little,  if  any,  prejudicial 
effect  on  the  jury's  deliberations.'"^^  The  trial's  outcome  would  not  have 
been  different  even  had  this  testimony  been  excluded  because  the  great 
weight  of  the  evidence  of  a  common  scheme  or  plan  presented  by  the 
seven  separate  charges  would  have  convicted  Alvers  anyway. 

In  Graham  v.  State, ^'^'^  the  defendants  were  charged  with  and  convicted 
of  involuntary  manslaughter,  reckless  homicide,  and  the  unlawful  practice 
of  medicine  in  the  death  of  one  Sybil  Bennett. '"^^  The  Grahams  had 
established  Hoosier  Health  House  in  order  to  treat  individuals  with 
medical  problems  by  naturopathic  means,  in  accordance  with  the  teachings 
of  a  prophet  of  the  Seventh  Day  Adventist  Church.  Bennett  went  to 
the  Grahams  for  treatment  of  a  lump  on  her  breast.  Without  the  benefit 
of  conventional  medical  treatment,  Bennett  eventually  died  under  the 
Grahams'  care  from  complications  of  breast  cancer.  At  trial,  the  state 
introduced  evidence  that  the  Grahams  were  administering  and  charging 
for  similar  services  provided  to  other  people. '^^  The  court  of  appeals 
upheld  the  admission  of  this  evidence  for  purposes  of  showing  "intent, 
motive,  purpose,  identification,  or  a  common  scheme  or  plan."'^^  This 
bare  recital  of  the  general  exception,  with  no  further  explanation,  was 
the  only  rationale  given.  At  most,  the  evidence  showed  a  common  scheme 
to  engage  in  the  unlawful  practice  of  medicine,  but  there  was  no  issue 
in  dispute  requiring  the  evidence  as  proof  of  identity  or  intent.  The 
evidence  pertinent  to  Bennett's  death  was  sufficient  to  show  the  defend- 
ants' unlawful  practice  of  medicine.  More  evidence  of  the  same  character, 
presented  even  as  part  of  a  scheme,  would  not  have  had  any  tendency 
to  make  the  existence  of  the  unlawful  practice  of  medicine  any  more 
probable  than  without  it.  Nor  was  the  evidence  relevant  to  any  material 
issue  of  fact  as  to  the  manslaughter  and  reckless  homicide  charges.  The 
evidence  was  irrelevant  and  therefore  improperly  admitted.  However,  as 
in  Alvers,  because  of  the  sheer  weight  of  the  state's  case,  there  was  no 
danger  that  the  improper  admission  misled  or  unfairly  prejudiced  the 
jury;  it  was  harmless  error. 


'''Alvers,  489  N.E.2d  at  89. 
''^Id.  at  90. 

'''See,  e.g..  Gill  v.  State,  467  N.E.2d  724,  725  (Ind.   1984);  Brewster  v.  State,  450 
N.E.2d  507,  510  (Ind.   1983). 

'^M80  N.E.2d  981  (Ind.  Ct.  App.   1985). 
'''Id.  at  983-84  (footnotes  omitted). 
"''Id.  at  992. 
"'Id. 


1987]  OTHER  CRIME  EVIDENCE  205 

The  second  Williams  v.  State^^^  case  involved  Williams'  conviction 
for  the  other  burglary  he  confessed  to  committing  after  his  apprehension 
in  Mrs.  Carpenter's  home."^*^  To  review  briefly,  Williams  was  convicted 
for  burglary  of  the  Carpenter  home.  His  confession  to  an  earlier  burglary 
and  theft  was  used  to  establish  his  intent  to  commit  theft  in  the  Carpenter 
home.*^^  The  state's  case  here,  the  prosecution  of  that  other  burglary, 
was  based  upon  Williams'  confession,  the  presence  of  a  stolen  television 
nearby,  and  fresh  blood  matching  Williams'  blood  type  found  on  the 
burglarized  premises.'^'  During  trial,  the  state  was  granted  leave  to 
describe  Williams'  arrest  in  Carpenter's  home,  especially  the  fact  that 
he  was  bleeding  at  the  time.^"  There  is  no  problem  with  the  admission 
of  evidence  that  Williams  was  bleeding  at  the  time  of  his  arrest;  what 
was  error  was  the  admission  of  evidence  of  the  situs  of  the  arrest.  The 
state's  evidence  of  Williams'  presence  at  the  first  house  (blood)  and  of 
the  theft  of  the  television  therefrom  was  sufficient  for  conviction.  The 
fact  that  Williams  was  in  Carpenter's  house  at  the  time  of  his  arrest 
and  had  committed  another  burglary  there  had  no  probative  value  to 
the  state's  case  and  was  erroneously  admitted.  It  was  harmless  error, 
however,  for  the  same  reason  as  in  Graham  and  Alvers\  the  evidence 
of  the  charged  offense  and  of  the  defendant's  guilt  was  not  so  equivocal 
as  to  have  unfairly  affected  the  jury. 

The  error  in  the  next  "no  harm-no  foul"  case  was  also  harmless 
by  reason  of  the  very  limited  effect  the  improper  evidence  could  have 
had  on  the  jury.  Forehand  v.  State^^^  involved  the  defendant's  conviction 
for  dealing  in  phencyclidine  (PCP),  a  Schedule  II  controlled  substance. ^^"^ 
During  the  state's  examination  of  the  arresting  officers,  an  earlier  sale 
of  marijuana,  made  at  the  defendant's  direction,  was  revealed. *^^  The 
Indiana  Supreme  Court  upheld  the  admission  of  the  testimony  on  the 
basis  of  res  gestae. ^^^  The  marijuana  sale  was  held  to  be  part  and  parcel 
of  the  negotiation  and  sale  of  the  PCP  even  though  the  marijuana  sale 
was  three  days  before  the  commission  of  the  charged  offense.'" 

The  application  of  the  res  gestae  exception  was  stretched  beyond  its 
limits.  As  the  court  itself  stated,  "Under  the  res  gestae  exception  evidence 
may  be  introduced  which  completes  the  story  of  the  crime  by  proving 
its  immediate  context  .  .  .  ."'^^  There  was  no  "immediacy"  to  the  context 


'M89  N.E.2d  53  (Ind.   1986). 
^'^^See  supra  notes  58-60  and  accompanying  text. 
'^°Se^  supra  note  61  and  accompanying  text. 
'''Williams,  489  N.E.2d  at  55. 

'"479  N.E.2d  552  (Ind.   1985). 

'''Id.  at  554. 

'''Id. 

'"Id. 

'"Id.  at  554-55. 

"^Id.  at  554  (emphasis  added). 


206  INDIANA  LAW  REVIEW  [Vol.  20:183 

here  of  three  days'  passage  of  time.'^^  Even  the  civil  appHcation  of  the 
res  gestae  doctrine  could  not  be  extended  to  justify  such  a  broad  ap- 
plication.'^°  The  res  gestae  exception  simply  did  not  apply,  and  it  was 
error  to  admit  the  evidence  of  the  marijuana  sale. 

One  could  perhaps  argue  that  the  common  plan  or  scheme  exception 
would  be  appropriate,  but  the  relevancy  of  a  marijuana  sale  would  be 
difficult  to  establish  at  a  trial  for  dealing  in  PCP.  However,  there  is 
the  possibility  that  the  marijuana  sale  exhibited  a  common  plan  to  sell 
controlled  substances  of  all  kinds.  The  problem  though  is  that  there  was 
no  issue  in  dispute  requiring  proof  of  such  a  plan.  When  the  strength 
of  the  state's  direct  evidence  from  the  testimony  of  the  undercover 
officers  is  considered,  there  was  no  element  left  to  be  proven  that  was 
not  brought  out  by  their  statements.  However,  because  of  this  strength 
of  the  state's  case  and  the  discretion  given  to  the  trial  court,  the  error 
in  admission  of  this  other  crime  evidence  can  only  be  deemed  harmless. 

The  last  of  the  "harmless  error"  cases  is    Wooden  v.   State, ^^^  in 


''^See,  e.g.,  Moster  v.  Bower,  153  Ind.  App.  158,  170,  286  N.E.2d  418,  425  (1972); 
Tenta  v.  Guraly,  140  Ind.  App.  160,  170-71,  221  N.E.2d  577,  582-83  (1967)  {res  gestae 
statements  must  relate  to  main  event). 

'^The  court  cites  to  a  case  expanding  the  res  gestae  exception  outside  the  immediate 
time  frame  to  justify  the  evidence  here.  Id.  at  555.  (citing  Altman  v.  State,  466  N.E.2d 
716  (Ind.  1984)).  But  that  still  does  not  prevent  the  conclusion  that  use  of  the  res  gestae 
exception  in  criminal  trials  in  Indiana  has  been  stretched  far  beyond  the  definition  of  the 
term  given  in  Lee  v.  State,  267  Ind.  315,  320,  370  N.E.2d  327,  329  (1977)  (citation 
omitted)  as  "acts,  statements,  occurrences  and  circumstances  substantially  contemporaneous 
v^ith  the  crime  charged."  In  the  civil  context,  res  gestae  refers  to  a  "spontaneous  and 
instinctive  reaction  to  a  startling  or  unusual  occurrence  during  which  interval  certain 
statements  are  made  under  such  circumstances  as  to  show  lack  of  forethought  or  deliberate 
design  in  the  formulation  of  their  content"  and  is  used  as  an  exception  to  the  hearsay 
rule.  Moster,  153  Ind.  App.  at  170,  286  N.E.2d  at  425  (emphasis  deleted).  See  also  Tenta, 
140  Ind.  App.  at  170-71,  221  N.E.2d  at  582-83.  Its  application  in  criminal  law  should 
ideally  have  the  same  immediacy  limitations  but  not  necessarily  as  an  exception  to  anything, 
much  less  as  a  rule  of  exclusion  of  other  crime  evidence. 

What  reflection  can  other  crimes  committed  as  part  of  or  immediately  with  reference 
to  the  charged  offense  have  upon  the  defendant's  character?  How  can  it  prejudice  a 
defendant's  case  as  being  unfairly  entered  into  evidence?  There  seems  to  be  no  valid 
reason  for  applying  the  rule  of  exclusion  to  "necessary  parts  of  the  proof  of  an  entire 
deed,"  "inseparable  elements  of  the  deed,"  or  "concomitant  parts  of  the  criminal  act." 
lA  J.H.  WiGMORE,  Evidence  in  Trials  at  Common  Law^  §  218  (3d  ed.  1983).  So  why 
even  have  a  res  gestae  exception  in  criminal  law?  See  Wilson  v.  State,  491  N.E.2d  537 
(Ind.  1986)  (application  of  res  gestae  exception  conforms  to  Wigmore's  non-exception). 
If  there  is  evidence  of  other  crimes  that  are  part  and  parcel  of  a  common  plan  or  scheme, 
but  which  are  inadmissible  under  res  gestae  because  of  a  lack  of  immediate  context,  other 
exceptions  already  exist  to  allow  admissibility.  It  therefore  might  be  wise  to  consider  the 
abolition  of  the  rule  altogether  in  the  criminal  context  and  either  admit  the  other  crime 
evidence  as  an  inseparable  portion  of  the  charged  crime  or  under  the  common  scheme 
or  plan  exception. 

'^'486  N.E.2d  441  (Ind.   1985). 


1987]  OTHER  CRIME  EVIDENCE  207 

which  the  defendant  was  on  trial  for  robbery. '^^  The  trial  court  granted 
his  motion  in  hmine  to  prohibit  the  state  from  ehciting  testimony  that 
he  may  have  been  involved  in  any  other  offense  while  armed  with  a 
gun.'"  The  testimony  of  the  officer  who  investigated  the  instant  offense 
revealed  that  the  defendant's  mug  shot  was  shown  to  the  victim  for 
identification.  The  trial  court  overruled  a  defense  motion  for  mistrial, 
and  the  Indiana  Supreme  Court  affirmed.'^'*  The  court  declared  that  the 
testimony  did  not  exceed  the  boundaries  of  the  motion  in  limine  and 
only  explained  the  officer's  investigation.'^^ 

Besides  the  fact  that  the  officer's  investigation  appeared  to  be  of 
little  relevance  to  the  charged  offense,  there  was  absolutely  no  need  for 
his  testimony  that  the  police  had  a  photograph  of  the  defendant  in  their 
files.  Mug  shots  and  any  references  thereto  are,  with  rare  exceptions, 
inadmissible  because  of  their  tendency  to  show  that  a  defendant  has 
committed  or  was  a  suspect  in  other  crimes. '^^  The  gratuitous  injection 
of  this  information  may  well  have  been  inadvertent,  but  it  was  nonetheless 
improper.  The  defendant's  motion  for  mistrial  was  properly  denied, 
though,  because  he  could  not  possibly  have  been  prejudiced  by  the 
improper  evidence.  The  victim  positively  and  unequivocally  identified 
the  defendant  as  the  robber.  In  fact,  shortly  after  the  crime,  the  victim 
recognized  him  on  the  street  and  followed  him  before  calling  the  police. 
Any  error  in  the  reference  to  the  defendant's  police  photograph  was 
therefore  harmless. 

D.     Wrong  Result 

The  only  case  during  the  survey  period  in  which  an  error  in  admission 
of  other  crime  evidence  may  well  have  been  prejudicial  was  Stout  v. 
State.^^^  This  conclusion  is  based  upon  the  facts  revealed  in  the  opinion. 
A  review  of  the  actual  trial  transcript  might  lead  to  a  different  conclusion, 
but  this  analysis  is  confined  to  the  recitation  of  facts  in  the  reported 
case. 

In  Stout,  the  offending  evidence  was  initially  entered  via  testimony 
of  the  defendant's  accomplice  in  burglary  and  theft. '^^  The  accomplice 


'"M  at  442. 

'^M  at  443. 

'"'Id. 

'^^Police  investigation  evidence  was  properly  restricted  in  Williams  v.  State,  491  N.E.2d 
540,  541  (Ind.  1986)  (police  officer  not  allowed  to  testify  to  defendant's  initial  arrest  on 
unrelated  charge),  but  was  not  in  O'Grady  v.  State,  481  N.E.2d  115,  119-20  n.l  (Ind. 
Ct.  App.  1985)  (conviction  reversed  where  police  officer's  testimony  of  informant's  story 
went  beyond  established  bounds  of  non-objectionable  hearsay). 

'^^479  N.E.2d  563  (Ind.   1985). 

''^Id.  at  567. 


208  INDIANA  LAW  REVIEW  [Vol.  20:183 

implicated  the  defendant  as  a  participant  in  multiple  burglaries  committed 
prior  to  the  charged  offense.  The  Indiana  Supreme  Court  upheld  the 
admission  of  this  evidence  "to  show  common  scheme  or  plan,  intent, 
purpose  or  identity. "'^^  It  furnished  no  further  illumination  than  a  citation 
to  another  case,  Foresta  v.  State. ^^^  Unfortunately,  Foresta  is  as  scantily 
reasoned  as  Stout  and  refers  only  to  other  crime  evidence  pertinent  to 
proof  of  identity.'^'  Identity  was  not  at  issue  in  Stout.  The  common 
plan  or  scheme  exception  might  be  relevant  if  the  facts  of  the  case  were 
clearer  because  the  defendant  and  his  accomplice  apparently  committed 
several  burglaries  within  a  short  time  period.  However,  there  is  no 
evidence  in  the  opinion  to  justify  a  conclusion  that  the  defendant  engaged 
in  a  common  plan  or  scheme  for  a  singular  purpose.  The  defendant's 
activities  were  simply  a  series  of  multiple  unrelated  offenses  of  which 
the  charged  offense  was  only  one.'^^  The  only  other  value  the  evidence 
had  was  to  show  criminal  propensity,  which  is  an  impermissible  use. 
The  admission  of  the  accomplice's  testimony  cannot  be  deemed  legally 
harmless  because  other  improper  evidence  was  later  admitted  upon  the 
ground  that  the  accomplice's  testimony  was  properly  admitted. 

During  the  further  course  of  the  state's  case,  a  pohce  officer  testified 
to  the  course  of  his  investigation  leading  to  the  arrest  of  the  defendant. ^^^ 
During  this  testimony,  the  officer  discussed  the  whereabouts  of  the 
defendant  and  his  accomplice  on  the  days  prior  to  the  charged  crime. '^'^ 
Although  the  opinion  does  not  recite  the  actual  testimony,  it  is  evident 
that  it  concerned  the  other  break-ins  and  the  defendant's  role  in  them. 
The  supreme  court  upheld  the  admission  of  the  officer's  testimony  based 
in  part  upon  the  admissibility  of  the  accomplice's  testimony. *^^  But,  as 
already  pointed  out,  that  testimony  was  improperly  admitted.  Therefore, 
the  officer's  testimony  was  also  improperly  admitted.  The  sum  effect 
of  these  two  errors  added  to  the  posture  of  the  case  as  otherwise  set 
forth  in  the  opinion  indicates  that  reversal  was  required. 

The  other  crime  evidence  elicited  from  these  two  witnesses  had  no 
logical  relevance  to  any  material  fact  at  issue  in  the  trial.  The  majority 
of  the  state's  case  appears  to  have  rested  on  the  credibility  of  the 
accomplice's  testimony  as  to  the  facts. '^^  His  credibility  could  only  have 
been  bolstered  by  the  corroborating  testimony  of  a  police  officer.  Ad- 


'^'Id. 

'^°274  Ind.  658,  413  N.E.2d  889  (1980). 

'''Id.  at  660,  413  N.E.2d  at  890-91. 

'^^In  fact,  the  supreme  court  itself  treated  the  charged  offense  as  being  motivated  by 
a  need  for  money,  which  is  presumably  in  contradistinction  to  whatever  undisclosed  reason 
motivated  the  other  offenses.  Stout,  479  N.E.2d  at  565. 

'''Id.^dX  567. 

'''Id.  at  568. 

'''Id. 

'^^Also  diminishing  the  persuasiveness  of  the  state's  case  is  the  fact  that  the  home 


1987]  OTHER  CRIME  EVIDENCE  209 

mission  of  the  other  crime  evidence  obviously  enhanced  the  prosecutor's 
case  in  the  eyes  of  the  jury.  However,  the  evidence  was  used  only  to 
show  the  defendant's  propensity  for  crime  rather  than  substantively  to 
prove  his  guilt  of  the  charged  offense.  Therefore,  this  evidence,  both 
legally  and  logically  irrelevant,  caused  prejudicial  error  and  the  case 
should  have  been  reversed  for  a  new  trial. '^^ 

IV.  Conclusion 

After  this  cursory  glance  at  the  notable  cases  in  this  survey  period, 
it  is  apparent  that  the  appellate  courts  of  Indiana  have  properly  applied 
the  other  crime  exceptions  less  than  fifty  percent  of  the  time,  at  least 
in  published  opinions.  It  is  difficult  to  determine  why  there  is  a  problem 
in  this  area.  It  is  not  difficult  to  imagine  that  in  the  heat  of  trial,  minor 
errors  will  be  made  by  both  the  bench  and  the  trial  attorneys.  Some 
of  these  exceptions  are  based  on  subtle  nuances  in  the  facts,  and  the 
speed  at  which  a  trial  is  conducted  is  not  always  conducive  to  sorting 
through  these  nuances  to  reach  a  proper  decision.  Under  the  circum- 
stances, it  is  remarkable  that  even  though  the  published  opinions  im- 
properly applied  the  law  so  often,  the  trial  courts  actually  erred  only 
once. 

There  is  a  remedy  which  will  prevent  the  occurrence  of  the  errors 
made  in  the  survey  opinions  which  are  more  often  errors  of  analysis 
than  of  substance.  That  solution  is  to  know  the  facts  of  each  case. 
Only  a  thorough  knowledge  of  the  facts  present  in  both  the  state's  and 
the  defense's  cases  can  give  one  a  proper  perspective  of  the  context  in 
which  other  crime  evidence  can  be  examined.  This  knowledge  must  be 
supplied  by  the  trial  attorneys  in  both  their  presentation  at  trial  and  on 
appeal.  When  the  attorneys  have  supplied  the  cogent  facts,  the  trial 
courts  can  apply  the  law.  In  doing  so,  the  courts  must  assume  the 
exclusion  applies  unless  and  until  the  facts  and  their  unique  juxtaposition 
warrant  the  application  of  a  specifically  tailored  exception  for  a  spe- 
cifically accepted  purpose.  The  law  in  Indiana  allowing  admission  of 
other  crime  evidence  despite  the  general  prohibition  is  not  without  logic 
and  reason,  but  by  its  very  principles,  it  can  be  applied  only  sparingly. 
Such  a  thoughtful  approach  to  the  law  will  clarify  the  exceptions  for 
the  trial  bench  and  will  establish  proper  guidelines  for  the  trial  bar. 


where  the  stolen  items  were  found  was  not  within  the  defendant's  exclusive  control  and 
was  accessible  to  other  parties,  including  the  accomplice.  See  id.  at  565. 

'''See,  e.g..  Brooks  v.  State,  156  Ind.  App.  414,  296  N.E.2d  894  (1973)  (prejudicial 
error  to  admit  evidence  of  other  thefts  not  reduced  to  conviction  of  defendant  to  show 
behavioral  pattern). 


Family  Law:  Equitable  Distribution  and  Proper  Valuation 

of  Marital  Property 

Mary  Beth  Claus* 
Cathleen  J.  Perry** 

I.     Introduction 

Three  developments  during  this  survey  period  had  an  important 
impact  on  the  division  and  valuation  of  marital  property  when  a  couple 
undergoes  a  divorce.  The  Indiana  Court  of  Appeals  rejected  the  approach 
that  the  starting  point  for  determining  an  equitable  distribution  of  marital 
property  is  to  split  the  property  equally  between  the  spouses.  In  two 
other  important  cases,  Indiana  courts  faced  the  issue  of  the  proper 
valuation  of  marital  property  in  the  contexts  of  jointly  held  stock  and 
professional  partnership  interests.  This  Article  will  discuss  the  theory  and 
development  of  equitable  distribution  in  Indiana  and  will  show  that 
Indiana  courts  have  taken  unique  approaches  in  valuating  certain  types 
of  marital  property  for  purposes  of  dividing  it  between  divorced  spouses. 

II.     Equitable  Distribution  After  Luedke 

During  this  survey  period,  the  Indiana  Supreme  Court  decided  that 
it  would  not  join  other  states  that  have  adopted  the  theory  that  the 
starting  point  for  an  equitable  distribution  of  property  upon  marriage 
dissolution  should  be  an  equal  split  between  the  spouses.'  In  Luedke  v. 
Luedke,^  the  Fourth  District  Court  of  Appeals  of  Indiana  had  held  that 
when  considering  the  contribution  of  each  spouse  to  the  acquisition  of 
property  pursuant  to  Indiana  Code  section  31-l-11.5-ll(b)(l),  a  poten- 
tially equal  division  of  the  marital  property  should  be  the  starting  point 
for  the  trial  court's  analysis  of  the  evidence  relevant  to  property  dis- 
tribution upon  marriage  dissolution.^  The  Indiana  Supreme  Court  rejected 
this  approach  and  stated  that  while  perhaps  one's  mind  ought  to  lean 
toward  an  equal  division,  to  require  such  would  impose  an  artificial 
structure  on  the  fact-finding  process  that  may  hinder  a  trial  judge's 
ability  to  weigh  openly  all  the  facts  in  the  case."* 


♦Associate,  Bingham,  Summers,  Welsh  &  Spilman,  Indianapohs.  B.A.,  University 
of  Cincinnati,   1982;  J.D.,  Indiana  University  School  of  Law — Indianapolis,   1986. 

**Associate,  Bingham,  Summers,  Welsh  &  Spilman,  Indianapolis.  B.A.,  Miami  Uni- 
versity, 1980;  J.D.,  Indiana  University  School  of  Law— Indianapolis,  1986.  The  authors 
gratefully  acknowledge  the  assistance  of  Carolyn  Coukos,  J.D.,  in  the  preparation  of  this 
article. 

'See  Luedke  v.  Luedke,  487  N.E.2d  133  (Ind.   1985). 

H76  N.E.2d  853  (Ind.  Ct.  App.),  vacated,  487  N.E.2d  133  (Ind.   1985). 

^Id.  at  865. 

^Luedke,  487  N.E.2d  at  134  (emphasis  in  original).  A  bill.  House  Bill  1452,  was  in- 

211 


/^ 


212  INDIANA  LAW  REVIEW  [Vol.  20:211 

The  following  discussion  will  review  the  theory  and  history  of  the 
concept  of  equitable  distribution,  consider  the  process  of  the  law  in 
Indiana  concerning  equitable  distribution  up  to  the  time  of  Luedke, 
analyze  the  circuit  and  supreme  court  decisions  in  Luedke,  and  conclude 
with  its  effect  on  subsequent  cases. 

A.     The  Theory  of  Equitable  Distribution 

Equitable  distribution  is  a  method  of  dividing  property  upon  divorce 
premised  upon  the  theory  that  marriage  is  a  voluntary  partnership  where 
both  spouses  contribute,  whether  such  contribution  is  in  the  form  of 
monetary  contributions  or  nonfinancial  contributions  such  as  homemaker 
services.^  This  view  is  not  new  in  that  it  has  its  "doctrinal  roots"  in 
community  property  law.^  The  theory  behind  community  property  law 
is  that  marriage  is  an  economic  unit  where  each  spouse  makes  his  or 
her  unique  contributions.^  The  contribution  of  the  homemaker  is  con- 
sidered to  have  equal  significance  with  that  of  the  wage  earner,  regardless 
of  which  spouse  performs  which  service.^  It  has  been  noted  that  the 
primary  difference  between  equitable  distribution  and  community  prop- 
erty states  is  that  the  latter  states  restrict  the  manner  in  which  the  parties 
can  deal  with  marital  property  during  the  marriage  and  prior  to  divorce.^ 

The  application  of  community  property  concepts  to  equitable  dis- 
tribution theory  can  be  contrasted  with  the  common  law  theory  of 
property  distribution  upon  marriage  dissolution.  At  common  law,  upon 
marriage  dissolution,  all  rights  to  property  were  based  upon  which  spouse 
had  title. '°  Thus,  a  spouse  who  had  no  assets  in  his  or  her  own  name 
was  forced  to  rely  upon  alimony  to  obtain  financial  support.''  Thus  a 
major  difference  arose  between  the  common  law  and  equitable  distri- 
bution theories.  Under  the  latter,  one  could  consider  noneconomic  factors 
when  disposing  of  marital  property,  such  as  homemaking  contributions, 
a  spouse's  lost  opportunities  for  employment  when  staying  home,  and 


troduced  in  the  1987  session  of  The  Indiana  Legislature  which,  if  passed,  would  significantly 
influence  property  distribution  in  Indiana.  Therefore,  practitioners  faced  with  this  issue  should 
investigate  the  impact  of  recent  legislature  developments,  if  any. 

'L.  Golden,  Equitable  Distribution  of  Property  1-2  (1983). 

^Id.  at  2.  Community  property  law  is  practiced  in  eight  southern  and  western  states: 
Arizona,  California,  Idaho,  Louisiana,  Nevada,  New  Mexico,  Texas,  and  Washington.  Id. 
at  5  &  n.22. 

'Id.  at  2. 

'Id. 

^Annotation,  Divorce:  Equitable  Distribution  Doctrine,  41  A.L.R.4th  484,  484-85 
(1985). 

'°L.  Golden,  supra  note  5,  at  4-5. 

"Id.  at  5.  The  concept  of  alimony  is  tied  to  a  fault-based  system  of  divorce,  whereas 
equitable  distribution  principles  are  generally  founded  upon  a  no-fault  theory  of  divorce. 
Id.  at  4-5;  see  also  Lacayo,  Second  Thoughts  About  No-Fault,  Time,  Jan.  13,  1986,  at 
55,  col.  1. 


1987]  MARITAL  PROPERTY  213 

a  Spouse's  performance  of  various  social  obligations  on  behalf  of  his 
or  her  spouse.'^  Many  jurisdictions  rejected  the  inequities  of  common 
law  distribution  theory  by  adopting  equitable  distribution  status.  Cur- 
rently at  least  thirty-eight  states  have  adopted  some  form  of  equitable 
distribution  by  statute.'^  These  statutes  typically  mandate  either  a  "just," 
"equitable,"  or  "just  and  reasonable"  disposition."^  Indiana's  equitable 
distribution  statute  similarly  calls  for  a  division  of  property  which  is 
"just  and  reasonable."'^  In  defining  a  just  or  equitable  distribution, 
most  courts  consider  that  this  does  not  require  a  property  division  to 
be  equal, '^  while  a  few  states  consider  that  such  a  property  division 
should  be  as  equal  as  possible.'^  In  those  states  that  do  not  require  an 
equal  division  of  property  in  order  to  effect  a  just  or  reasonable  dis- 
tribution, the  trial  judge  is  typically  vested  with  much  discretion  to 
apportion  property.'^  This  approach  has  been  criticized  in  that  such 
discretion  results  in  prejudice  and  increased  costs  and  delay  at  trial 


19 


B.     The  Roots  of  Equitable  Distribution  in  Indiana 

Prior  to  the  time  of  the  decision  of  the  Indiana  Court  of  Appeals 
in  Luedke  v.  Luedke,^^  Indiana  recognized  that  trial  judges  have  wide 
authority  to  allocate  property  upon  divorce  and  should  be  reversed  on 
appeal  only  for  an  abuse  of  discretion. ^^  In  dividing  property  upon 
divorce,  Indiana  courts  are  guided  by  Indiana  Code  section  31-1-11.5- 
1 1 ,  which  mandates  that  property  be  distributed  in  a  just  and  reasonable 
manner  whether  the  property  is  owned  by  either  spouse  prior  to  marriage 
or  acquired  individually  during  marriage,  or  acquired  jointly  during 
marriage. ^^  The  court  is  mandated  to  consider  the  following  five  factors 
in  determining  what  is  a  just  and  reasonable  disposition: 

(1)  The  contribution  of  each  spouse  to  the  acquisition  of  the 
property,  including  the  contribution  of  a  spouse  as  homemaker. 


'-Annotation,  supra  note  9,  at  487. 

'^[Reference  File]  Fam.  L.  Rep.  (BNA)  400:  i-ii  (1986). 

'"L.  Golden,  supra  note  5,  at  240-41. 

'^IND.  Code  §  31-1-1 1.5-1 1(b)  (Supp.   1986). 

'^Annotation,  supra  note  9,  at  502-04.  See  infra  text  accompanying  notes  70-71. 

'Yd/,  at  505-07.  See  infra  text  accompanying  notes  67-69,  74-78. 

'*L.  Golden,  supra  note  5,  at  3-4. 

'Vc?.  The  National  Conference  of  Commissioners  on  Uniform  State  Laws  responded 
to  these  criticisms  by  proposing  The  Uniform  Marital  Property  Act.  The  Prefatory  Note 
to  the  Act  indicates  that  it  is  a  property  law,  the  aim  of  which  is  to  recognize  shared 
property  rights  of  spouses  during  marriage.  Unif.  Marital  Property  Act,  Prefatory 
Note,  9A  U.L.A.  21  (Supp.   1986). 

^°476  N.E.2d  853  (Ind.  Ct.  App.),  vacated,  487  N.E.2d  133  (Ind.   1985). 

^'Swinney  v.  Swinney,  419  N.E.2d  996,  997-98  (Ind.  Ct.  App.),  transfer  denied,  426 
N.E.2d  658  (Ind.   1981). 

^^Ind.  Code  §  31-1-1 1.5-ll(b)  (Supp.   1986). 


214  INDIANA  LAW  REVIEW  [Vol.  20:211 

(2)  The  extent  to  which  the  property  was  acquired  by  each  spouse 
prior  to  the  marriage  or  through  inheritance  or  gift. 

(3)  The  economic  circumstances  of  each  spouse  at  the  time  the 
disposition  of  the  property  is  to  become  effective,  including  the 
desirabihty  of  awarding  the  family  residence  or  the  right  to  dwell 
in  that  residence  for  such  periods  as  the  court  may  deem  just 
to  the  spouse  having  custody  of  any  children. 

(4)  The  conduct  of  the  parties  during  the  marriage  as  related 
to  the  disposition  or  dissipation  of  their  property. 

(5)  The  earnings  or  earning  ability  of  the  parties  as  related  to 
a  final  division  of  property  and  final  determination  of  the  prop- 
erty rights  of  the  parties. ^^ 

The  court  of  appeals  in  Luedke  observed  that  while  factors  two  and 
four  could  be  readily  identified  and  traced  and  factors  three  and  five 
are  economic  factors  susceptible  of  proof,  factor  one,  involving  the 
contribution  of  each  spouse,  is  nebulous  and  therefore  not  subject  to 
any  precise  measurement.^'* 

The  standard  of  review  when  determining  whether  the  trial  court 
abused  its  discretion  is  to  determine  whether  the  result  reached  is  clearly 
against  the  logic  and  effect  of  all  facts  and  circumstances  before  the 
court. 2^  In  Swinney  v.  Swinney,^^  the  court  of  appeals  stated  that  a 
"just  and  reasonable"  distribution  under  Indiana  Code  section  31-1- 
1L5-11  requires  fairness;  however,  it  does  not  require  equality  in  dis- 
tribution between  the  spouses. ^^  In  reviewing  whether  it  was  an  abuse 
of  discretion  to  award  the  wife  ninety-seven  percent  of  the  marital  assets 
including  a  house  that  had  been  given  to  both  parties  by  the  wife's 
father,  the  court  reviewed  each  statutory  factor  enumerated  in  section 
31-1-11. 5-11  (c).  In  examining  the  second  statutory  factor,  the  extent  to 
which  property  was  acquired  by  each  spouse  prior  to  marriage  through 
inheritance  or  gift,  the  court  determined  that  where  both  parties  had 
received  a  gift  from  the  wife's  father,  such  gift  should  be  included  in 
the  marital  pot.^^  Thus  by  considering  the  "total  circumstances,"  the 
court  could  determine  whether  a  substantial  contribution  by  one  spouse 
under  one  subparagraph  offset  the  contribution  of  the  other  spouse  under 
a  different  subparagraph. ^^  After  engaging  in  this  analysis  and  weighing 


''Id.  §  31-1-1 1.5-1 1(c). 

^416  N.E.2d  at  863-64  n.ll. 

''Swinney,  419  N.E.2d  at  997-98. 

M19  N.E.2d  996  (Ind.  Ct.  App.   1981). 

''Id.  at  998. 

''Id. 

'"Id.  at  999. 


1987]  MARITAL  PROPERTY  215 

the  evidence  in  favor  of  the  appellee,  the  court  concluded  that  the  trial 
court  had  abused  its  discretion  in  awarding  the  wife  ninety-seven  percent 
of  the  assets. ^°  Thus,  it  appears  that  the  standard  of  review  for  the  trial 
court's  abuse  of  discretion  is  not  totally  toothless. 

Subsequent  cases  in  Indiana  similarly  held  that  the  just  and  reasonable 
division  of  property  does  not  require  that  the  division  be  equal. ^'  In 
acknowledging  the  presumption  that  the  trial  court's  division  of  property 
is  correct,  the  appellate  court  looks  at  the  evidence  most  favorable  to 
the  judgment  and  often  surmises  circumstances  that  the  trial  court  could 
have  considered  to  support  its  decision. ^^ 

In  considering  the  first  statutory  factor  under  section  31-1-11.5- 
11(c)(1),  the  contribution  of  each  spouse  to  the  acquisition  of  property, 
including  the  contribution  of  a  spouse  as  a  homemaker,  Indiana  rec- 
ognizes that  this  provision  mandates  the  consideration  of  the  homemaking 
endeavors  of  both  husband  and  wife  in  a  marriage."  Thus,  it  is  evident 
that  noneconomic  factors  should  be  considered  in  achieving  equitable 
distribution.^"^  In  Temple  v.  Temple, ^^  the  wife  on  appeal  challenged  the 
award  of  sixty-nine  percent  of  the  marital  property  to  her,  contending 
among  other  matters  that  the  trial  court  had  not  considered  her  con- 
tribution financially  as  the  primary  homemaker  to  the  acquisition  of 
marital  assets.  The  court  reiterated  the  standard  that  it  does  not  weigh 
the  evidence  or  substitute  its  discretion  for  that  of  the  trial  judge. ^^ 
^s,  the  court  concluded  that  inevitably  the  trial  court  considered  the 
veiy  factors  that  the  appellant  contended  had  been  omitted. ^^ 

Indiana  also  recognizes  that  forgone  career  opportunities  by  a  spouse 
should  be  recognized  in  achieving  equitable  distribution.^^  In  Taylor  v. 
Taylor,^^  the  husband  on  appeal  contended  that  the  lower  court  decision 


''See,  e.g.,  Kaply  v.  Kaply,  453  N.E.2d  331,  332,  335  (Ind.  Ct.  App.  1983)  (court 
upheld  a  lower  court  decision  awarding  husband  approximately  twenty  percent  of  the 
marital  property  and  awarding  wife  eighty  percent);  In  re  Marriage  of  Salas,  447  N.E.2d 
1176,  1180  (Ind.  Ct.  App.  1983)  (court  reversed  lower  court  because  it  failed  to  consider 
parties'  debts  when  it  is  :ed  its  award);  Dean  v.  Dean,  439  N.E.2d  1378,  1381,  1383 
(Ind.  Ct.  App.  1982)  (court  upheld  award  to  husband  of  two  and  one-half  times  more 
property  than  to  his  wife);  Cunningham  v.  Cunningham,  430  N.E.2d  809,  814  (Ind.  Ct. 
App.  1982)  (court  upheld  trial  court's  order  for  wife  to  reconvey  real  estate  to  husband 
where  parties  had  been  in  a  short  term  marriage  and  both  were  financially  independent). 

'^Cunningham,  430  N.E.2d  at  814. 

"Temple  v.  Temple,  435  N.E.2d  259,  262  (Ind.  Ct.  App.   1982). 

^''Annotation,  supra  note  9,  at  510-15. 

'H35  N.E.2d  259  (Ind.  Ct.  App.   1982). 

'''Id.  at  262. 

''Id. 

^^Taylor  v.  Taylor,  420  N.E.2d  1319,  1323  (Ind.  Ct.  App.  1981);  see  also  Annotation, 
supra  note  9,  at  509-15. 

"420  N.E.2d  1319  (Ind.  Ct.  App.   1981). 


2 1 6  INDIANA  LA  W  REVIEW  [Vol .  20:2 1 1 

was  erroneous  since  his  share  of  the  assets  upon  dissolution  amounted 
to  less  than  those  he  had  brought  into  the  marriage.  The  court  ac- 
knowledged that  all  factors  in  section  3 1-1-11. 5-ll(c)  must  be  balanced 
against  one  another  when  awarding  marital  property. "^^  The  court  observed 
that  while  the  husband  was  a  skilled  businessman,  the  wife  was  unskilled, 
having  forgone  a  career  outside  the  home."^^  Thus,  the  court  concluded 
that  the  trial  court's  distribution  of  property  was  not  clearly  against  the 
logic  and  effect  of  the  facts  and  circumstances  before  it."^^ 

The  standard  of  review  for  determining  whether  a  trial  court  has 
abused  its  discretion  has  not  gone  uncriticized  although  the  trial  court's 
job  has  been  described  as  a  "Herculean  task."'^^  While  the  court  applied 
this  standard  again  in  Lord  v.  Lord,'^'^  it  acknowledged  that  such  a 
standard  is  imprecise  and  gives  a  trial  judge  a  Hmitless  range  of  choice. 
Therefore,  such  a  review  is  meaningless. "^^  The  court  contrasted  this  with 
the  more  measurable  objective  of  obtaining  a  "just  and  proper"  ahmony 
distribution.  Specifically,  this  term  required  that  the  alimony  award  leave 
an  injured  wife  in  as  good  a  condition  as  she  would  have  been  had  her 
husband  died."*^ 

C  Luedke  v.  Luedke:  Rejection  of  the  Equal 
Split  Starting  Point 

In  Luedke  v.  Luedke,"^^  the  Indiana  Court  of  Appeals  approved  of 
the  "just"  criticism  of  the  abuse  of  discretion  standard  as  previously 
made  in  Lord  v.  Lord"^^  and  determined  that  this  situation  was  in  need 
of  repair. "^^  In  Luedke,  the  court  addressed  the  issue  of  whether  the  trial 
court  abused  its  discretion  in  awarding  fifty-seven  percent  of  the  property 
to  the  husband  and  forty-three  percent  to  the  wife.^^  In  an  unprecedented 
opinion,  the  court,  while  recognizing  perhaps  that  this  was  a  change  in 
the  law,  held  that  the  language  of  section  31-1-1 1.5-1 1(c)(1)  regarding 
the  marital  contribution  of  the  parties  means  that  a  potentially  equal 
division  of  the  marital  property  should  be  the  starting  point  for  a  trial 


'^Id.  at  1323. 

''Id. 

''Id.  at  1324. 

^Temple  v.  Temple,  435  N.E.2d  259,  262  (Ind.  Ct.  App.   1982). 

^M43  N.E.2d  847  (Ind.  Ct.  App.   1982). 

''Id.  at  850-51  n.4. 

'^Id.  The  appellate  court  in  Luedke  similarly  acknowledged  that  the  standard  applicable 
to  an  alimony  distribution  under  the  prior  Indiana  divorce  statute  provided  the  judge  with 
a  range  of  choice  within  which  to  act,  contrary  to  the  current  dissolution  act.  Luedke  v. 
Luedke,  476  N.E.2d  853,  859  (Ind.  Ct.  App.),  vacated,  487  N.E.2d  133  (Ind.   1985). 

^^76  N.E.2d  853  (Ind.  Ct.  App.),  vacated,  487  N.E.2d  133  (Ind.   1985). 

M43  N.E.2d  847  (Ind.  Ct.  App.   1982). 

''Luedke,  476  N.E.2d  at  859-60,  865. 

'°Id.  at  855. 


1987]  MARITAL  PROPERTY  111 

court's  analysis  of  the  other  statutory  factors.^'  If,  however,  one  spouse 
has  neglected  his  or  her  role,  this  fifty-fifty  split  under  section  31-1- 
11.5-1 1(c)(1)  is  not  required." 

The  parties  in  Luedke  had  been  married  for  nineteen  years  and  had 
three  children.  At  the  time  of  the  divorce,  Robert  was  an  executive  with 
Eli  Lilly  and  Company  while  his  wife,  Shari,  had  returned  to  school  to 
prepare  for  a  job  as  a  respiratory  therapist  after  having  been  out  of 
the  work  force  for  their  nineteen  years  of  marriage.  During  those  years, 
Shari  was  a  full-time  homemaker  and  mother.  The  trial  court  awarded 
fifty-seven  percent  of  the  marital  property  to  Robert  and  forty-three 
percent  to  Shari."  On  appeal,  Shari  contended  that  the  trial  court  abused 
its  discretion  in  this  division  of  the  marital  property. 

The  court  proceeded  to  an  analysis  of  the  relevant  statutory  factors, 
sections  31-l-11.5-ll(c)(l),  (3),  and  (5).  In  reviewing  the  economic  cir- 
cumstances of  each  spouse  at  the  time  of  property  disposition,  it  was 
evident  that  Robert  had  the  advantaged  position  due  to  his  secure  position 
with  a  stable  company. ^"^  In  reviewing  the  earnings  abilities  of  the  parties, 
it  was  also  evident  that  Robert  had  the  superior  position. ^^  The  court 
then  turned  to  an  analysis  of  section  3 1-1-11.5-11  (c)(1)  to  determine  if 
this  would  offset  the  favorable  position  of  Robert  under  sections  31-1- 
11.5-1 1(c)(3)  and  (5),  thereby  justifying  an  award  in  his  favor  of  fifty- 
seven  percent  of  the  property.  The  court  recognized,  as  previously  held 
in  Temple  v.  Temple, ^^  that  this  section  recognized  the  contribution  of 
homemaking  endeavors  to  the  acquisition  of  marital  property. ^^  Fur- 
thermore, a  necessary  corollary  is  the  rebuttable  presumption  that  the 
contribution  of  the  homemaker  is  equal  to  that  of  the  wage  earner. ^^ 
Thus,  the  court  held  that  the  starting  point  for  the  division  of  property 
is  a  potentially  equal  one  under  section  31-1-1 1.5-1 1(c)(1),  which  can  be 
rebutted  by  either  party's  proof  that  an  equal  division  would  not  be 
just  and  reasonable. ^^  Therefore,  a  burden  is  placed  on  each  party  to 
prove  that  an  equal  division  of  property  would  not  be  just  or  reasonable. ^° 
Thus  the  court  emphasized  that  its  holding  is  not  in  contravention  of 
prior  cases  which  held  that  the  division  of  property  need  not  be  equal 
in  order  to  effect  a  just  and  reasonable  division  of  property.^' 


^'/of.  at  865  (emphasis  original). 

"M  at  859-60. 

"M  at  855. 

''Id.  at  861. 

''Id.  at  862. 

5^435  N.E.2d  259  (Ind.  Ct.  App.   1982). 

''Luedke,  476  N.E.2d  at  863.  See  supra  text  accompanying  notes  33-34. 

''Luedke,  476  N.E.2d  at  864-65. 

'"Id.  at  865. 

"^Id. 

^'Id.  See  supra  note  31. 


218  INDIANA  LAW  REVIEW  [Vol.  20:211 

In  supporting  its  decision  to  begin  with  an  equal  division  of  property 
in  a  marital  dissolution,  the  court  offered  several  reasons.  First,  a  definite 
starting  point  for  property  distribution  provides  the  "necessary  structure" 
in  which  the  trial  court  can  weigh  evidence  in  rebuttal  to  an  equal 
division."  Second,  it  provides  a  more  meaningful  appellate  court  review 
because  there  is  an  articulated  starting  point,  contrary  to  the  prior  limitless 
range  of  choice  exercised  by  the  trial  court."  Third,  litigants  would  be 
aided  in  negotiating  property  settlements  because  they  would  have  a 
starting  point  from  which  to  begin  negotiations.^"^  Fourth,  the  court 
reasoned  that  the  legislature  meant  to  recognize  the  marriage  relationship 
as  "a  common  enterprise,  a  voluntary  union  of  co-equals  in  which  the 
parties  define  and  agree  upon  their  roles. "^^ 

Thus,  in  effect  the  court  appHed  a  formula  approach  in  reviewing 
the  trial  court.  Because  factors  two  and  four  in  section  31-1-11. 5-ll(c) 
were  irrelevant,  factor  one  estabhshed  a  rebuttable  presumption  of  an 
equal  division  of  property.  However,  factors  three  and  five  were  in 
Robert's  favor.  "[B]ecause  of  Robert's  superior  economic  circumstances 
and  earning  ability[,]"^^  the  presumption  of  equal  distribution  was  re- 
butted, in  favor  of  Shari.  It  therefore  followed  that  the  award  of  fifty- 
seven  percent  of  the  property  to  Robert  was  an  abuse  of  discretion. 

The  appellate  court  in  Luedke  supported  its  position  that  a  potentially 
equal  division  of  property  should  be  the  starting  point  for  a  trial  judge 
in  a  dissolution  action  by  reference  to  other  jurisdictions  adopting  this 
same  approach."  The  court  also  noted  that  two  states,  Arkansas  and 
North  Carolina,  maintain  a  rebuttable  presumption  of  an  equal  distri- 
bution of  property  by  statute. ^^  In  analyzing  the  interpretation  of  the 
North  Carolina  statute,  the  North  Carohna  Court  of  Appeals,  in  White 


"•^Luedke,  476  N.E.2d  at  865. 

"Id. 

"'Id. 

"•'Id.  at  866. 

''''Id.  at  867. 

'"Id.  at  865-66.  See,  e.g..  Cherry  v.  Cherry,  66  Ohio  St.  2d  348,  348,  353-56,  421 
N.E.2d  1293,  1294,  1298-99  (1981),  where  the  Supreme  Court  of  Ohio  rejected  the  contention 
that  an  irrebuttable  or  rebuttable  presumption  existed  that  mandated  an  equal  division  of 
property  under  the  Ohio  dissolution  statute,  but  accepted  the  proposition  that  a  potentially 
equal  division  should  be  the  starting  point  from  which  a  trial  judge  should  proceed. 
Accord,  Paul  W.  v.  Margaret  W.,  8  Fam.  L.  Rep.  (BNA)  3013,  3015-16  (C.P.  Allegheny 
County  (Pa.)  Dec.  1,   1981). 

''^Luedke,  476  N.E.2d  at  866;  see  also  Ark.  Stat.  Ann.  §  34-1214(A)(l)  (Supp. 
1985)  ("All  marital  property  shall  be  distributed  one-half  [1/2]  to  each  party  unless  the 
court  finds  such  a  division  to  be  inequitable,  in  which  event  the  court  shall  make  some 
other  division  that  the  court  deems  equitable  .  .  .  .");  N.C.  Gen.  Stat.  §  50-20(c)  (Supp. 
1983)  ("There  shall  be  an  equal  division  .  ,  .  unless  the  court  determines  that  an  equal 
division  is  not  equitable.  If  the  court  determines  that  an  equal  division  is  not  equitable, 
the  court  shall  divide  the  marital  property  equitably.  .  .  .").  In  Glover  v.  Glover,  4  Ark. 


1987]  MARITAL  PROPERTY  219 

V.  White, ^'^  compared  the  statute  to  other  equitable  distribution  statutes. 
The  court  noted  that  the  vast  majority  of  states  vest  the  decision  regarding 
the  distribution  of  property  in  the  individual  judge's  discretion,  given 
the  particular  circumstances  at  hand.^^  In  such  states  no  presumption 
of  equality  in  distribution  exists.^'  The  court  contrasted  these  states  with 
North  Carolina's  statute  which  was  deemed  indistinguishable  from  the 
Arkansas  statute,  which  also  establishes  a  rebuttable  presumption  of  an 
equal  division  of  property. ^^  Thus  the  court  rejected  the  wife's  contention 
that  the  trial  court's  equal  distribution  of  property  was  erroneous  where 
she  had  contributed  services  that  exceeded  the  value  of  her  interest  in 
jointly  and  separately  held  property. ^^ 

In  addition  to  Arkansas  and  North  Carolina,  Wisconsin  has  a  statute 
that  presumes  an  equal  division  of  property  as  to  property  not  acquired 
prior  to  or  during  marriage  through  gift,  bequest,  or  inheritance. ^"^  This 
distribution  can  be  offset,  however,  by  considering  various  statutory 
factors. ^^  In  Jasper  v.  Jasper,''^  the  Wisconsin  Supreme  Court  considered 
the  rationale  behind  Wisconsin's  statute  to  be  that  marriage  should  be 
viewed  as  a  partnership  where  the  contribution  of  a  full-time  homemaker 
has  value  at  least  as  great  as  that  of  the  contribution  of  the  breadwinner. 
Specifically,  the  homemaking  partner  has  forgone  career  opportunities 


App.  27,  29,  627  S.W.2d  30,  31,  reh'g  denied,  628  S.W.2d  882  (Ark.  App.  1982),  the 
court  interpreted  the  above  Arkansas  statute  and  stated  that  when  a  trial  court  distributes 
property  in  an  unequal  manner,  it  must  give  its  reasons  for  such  disposition. 

^•^64  N.C.  App.  432,  308  S.E.2d  68  (1983),  affd  as  modified,  312  N.C.  770,  324 
S.E.2d  829  (1985). 

^°308  S.E.2d  at  71. 

''Id. 

'Hd. 

'Hd.  at  72. 

'■•Wis.  Stat.  Ann.  §  Idl .255  (West  1981).  Wisconsin  also  adopted  the  Uniform 
Marital  Property  Act  (UMPA),  which  became  effective  in  that  state  on  January  1,  1986. 
Wis.  Stat.  Ann.  §  766.001  to  -.97  (West  Supp.  1986).  The  Prefatory  Note  to  the  UMPA 
states  that  the  Act  is  a  property  law  merely  governing  the  rights  of  spouses  to  property 
during  marriage.  Unif.  Marital  Property  Act,  Prefatory  Note,  9A  U.L.A.  21  (Supp. 
1986).  The  theory  behind  the  act  is  that  the  contributions  of  both  spouses  during  a 
marriage  are  equal  such  that  they  share  equal  undivided  ownership  of  marital  property. 
Two  propositions  behind  the  Act  are  that:  (1)  marriage  involves  a  mode  of  sharing,  and 
(2)  that  this  sharing  mode  is  an  ownership  right  upon  divorce.  Id.  at  22.  Thus,  the  UMPA 
merely  takes  the  parties  "to  the  door  of  the  divorce  court."  Id.  at  23.  The  comments 
emphasize  that  the  appropriate  procedures  for  dividing  property  should  be  determined 
from  individual  states'  dissolution  statutes.  Id.  The  Indiana  General  Assembly  has  twice 
rejected  Senate  Bill  No.  6,  which  would  adopt  the  UMPA  in  Indiana.  It  will  be  before 
the  General  Assembly  again  in  1987  with  some  amendments.  See  S.  6,  1986  Gen.  Assembly 
§§  1-25  (1986);  Middleton,  Confusion,  Uncertainty  Surround  Equitable  Distribution,  Nat'l 
L.  J.,  May  26,  1986,  at  31,  col.  1. 

"Wis.  Stat.  Ann.  §  767.255  (West  1981). 

^^07  Wis.  2d  59,  318  N.W.2d  792  (1982). 


220  INDIANA  LAW  REVIEW  [Vol.  20:211 

to  further  those  of  that  partner's  spouse. ^^  In  spite  of  the  above  reasoning, 
the  court  upheld  an  unequal  division  of  property  where  the  evidence 
supported  the  finding  that  the  husband  had  contributed  more  to  the 
marriage  financially  and  in  caring  for  minors  than  the  wife  had."^^ 

The  Jasper  court's  explanation  of  the  rationale  behind  the  Wisconsin 
statute  is  strikingly  similar  to  the  propositions  of  Indiana  courts  as 
previously  set  forth  in  Temple  and  Taylor  v.  Taylor,^^  where  the  con- 
tributions of  a  homemaker  to  the  marriage  as  well  as  that  individual's 
forgone  career  opportunities  were  recognized  as  factors  to  be  considered 
in  achieving  equitable  distribution.  Thus,  the  recognition  of  marriage  as 
a  partnership  permeates  all  equitable  distribution  statutes  regardless  of 
whether  or  not  those  statutes  are  accompanied  by  a  mandate  for  the 
trial  judge  to  begin  his  analysis  with  a  rebuttable  presumption  of  equality 
in  distribution.  One  commentator  has  said  that  the  doctrine  of  a  fifty- 
fifty  split  as  the  starting  point  for  equitable  distribution  is  merely  a 
means  to  "structure  the  court's  deliberative  process"  in  reviewing  the 
statutory  factors. ^°  In  other  words,  this  commentator  surmised  that 
perhaps  the  true  reasoning  behind  this  "starting  point  analysis"  is  that 
one  cannot  expect  judges  to  adhere  to  the  policies  recognizing  a  home- 
maker's  contributions  and  forgone  career  opportunities  to  the  marriage 
partnership  when  attempting  to  achieve  an  equitable  distribution.^* 

The  Indiana  Supreme  Court  rejected  this  distrust  of  the  ability  of 
trial  court  judges  properly  to  apply  the  policies  of  equitable  distribution 
when  the  supreme  court  reviewed  the  lower  court's  decision  in  Luedke. 
In  a  cursory  opinion,  the  Indiana  Supreme  Court  rejected  the  appellate 
court's  interpretation  of  section  31-1-1 1.5-1 1(c)(1)  and  stated  that  while 
perhaps  one's  mind  ''ought  to  lean  toward  an  equal  division"  of  property, 
"to  require  [such]  as  a  matter  of  law  .  .  .  impinge[s]  [upon]  the  trial 
judge's  ability  to  openly  weigh  all  the  facts  and  circumstances  .  .  .  ."^^ 
The  court  reasoned  that  the  daily  actions  of  people  are  not  readily 
susceptible  to  mathematical  apphcation  when  it  comes  to  marital  dis- 
solution actions. ^^  Thus  the  court  rejected  the  appellate  court's  formula- 
hke  application  of  section  31-1-1 1.5-1 1(c).  The  court  also  reasoned  that 
due  to  the  sensitive  and  difficult  task  at  hand  in  a  property  dissolution 
action,  a  trial  judge  should  be  vested  with  broad  discretion.  The  court 
also  cited  many  prior  cases  holding  that  the  statutory  term  mandating 


''Id.  at  68,  318  N.W.2d  at  797. 
''Id. 

'HIQ  N.E.2d  1319  (Ind.  Ct.  App.   1981). 
^°L.  Golden,  supra  note  5,  at  244. 

**'M  at  245  n.64;  see  also  Foster,  Commentary  on  Equitable  Distribution,  26  N.Y.L. 
ScH.  L.  Rev.   1,  31-32  (1981). 

'^Luedke,  487  N.E.2d  at  134. 
"/of. 


1987]  MARITAL  PROPERTY  221 

a  "just  and  reasonable"  distribution  does  not  require  an  equal  or 
relatively  equal  division  of  property. '^'^  Thus,  it  appears  that  the  part- 
nership theory  of  marriage  behind  equitable  distribution  should  be  a 
sufficient  guide  for  trial  judges  dividing  property  upon  marriage  dis- 
solution without  imposing  upon  them  an  analytical  framework  for  their 
"Herculean  task."^^ 

Cases  decided  subsequent  to  Luedke  during  this  survey  period  have 
followed  Luedke,  although  not  without  criticism.  In  Baker  v.  Baker, '^^ 
the  Fourth  District  Court  of  Appeals  that  had  decided  Luedke  was  again 
faced  with  the  issue  of  whether  the  trial  court's  division  of  marital 
property  was  just  and  reasonable  where  the  wife  was  awarded  sixty 
percent  of  the  marital  assets.  The  husband  contended  that  this  distribution 
was  not  just  and  reasonable  in  light  of  Luedke. ^^  Relying  on  the  supreme 
court's  decision  in  Luedke,  the  court  of  appeals  in  Baker  rejected  the 
husband's  contention,  finding  that  the  great  earnings  disparity  in  favor 
of  the  husband  supported  the  lower  court's  decision. ^^  The  court  re- 
affirmed the  prior  principles  established  in  Temple  and  Swinney  v. 
Swinney^^  that  in  a  property  dissolution  action  a  trial  court's  action  will 
be  presumed  to  be  correct,  and  a  trial  court  will  be  reversed  only  for 
an  abuse  of  discretion. ^° 

Judge  Young,  in  a  concurring  opinion,  criticized  this  result  in  several 
respects.  In  a  somewhat  cynical  view,  he  first  concurred  on  the  basis 
that  the  supreme  court's  decision  in  Luedke  virtually  precluded  an  appel- 
late court's  review  of  a  trial  court's  discretion.  He  stated,  "[0]ur  supreme 
court  has  reinstated  the  pre-Luedke  situation  in  which  a  trial  court's 
range  of  choice  is  virtually  limitless  and  our  review  little  more  than 
pretense."^'  He  argued  that  the  distribution  of  assets  will  vary  from 
court  to  court  based  on  the  particular  "disposition  or  whim"  of  a  certain 
judge  who  may  be  tempted  to  resort  to  who  was  "good"  or  "bad," 
thereby  reinstating  fault-based  concepts  of  divorce. ^^  He  further  argued 
that  the  fifty-fifty  starting  point  of  Luedke  would  have  provided  a  real 
basis  for  appellate  review  and  precluded  the  possibility  that  the  "financial 


''Id.  Sit  135.  See,  e.g.,  Van  Riper  v.  Keim,  437  N.E.2d  130  (Ind.  Ct.  App.  1982); 
Irwin  V.  Irwin,  406  N.E.2d  317  (Ind.  Ct.  App.  1980);  In  re  Marriage  of  Julien,  397 
N.E.2d  651  (Ind.  Ct.  App.  1979);  Dahlin  v.  Dahlin,  397  N.E.2d  606  (Ind.  Ct.  App.  1979); 
In  re  Marriage  of  Davis,   182  Ind.  App.  342,  395  N.E.2d  1254  (1979). 

^Temple  v.  Temple,  435  N.E.2d  259,  262  (Ind.  Ct.  App.   1982). 

M88  N.E.2d  361  (Ind.  Ct.  App.   1986). 

''Id.  at  364. 

''Id.  at  365. 

'H\9  N.E.2d  996  (Ind.  Ct.  App.),  transfer  denied,  426  N.E.2d  658  (Ind.   1981). 

•^Baker,  488  N.E.2d  at  364. 

''Id.  at  366. 

'Hd.  at  366-67. 


222  INDIANA  LAW  REVIEW  [Vol.  20:211 

well-being  of  [dissolution  litigants]  [would  be]  left  to  the  good  graces 
of  a  particular  trial  judge  .  .  .  ."^^  Indeed,  one  commentator  has  men- 
tioned that  with  the  advent  of  no-fault  divorce,  society  has  merely  changed 
its  focus  of  unpleasantness  from  the  reasons  for  a  marriage  break-up 
to  disputes  over  factors  affecting  property  distribution.^"^ 

In  Planert  v.  Planert,"^^  another  case  subsequent  to  Luedke,  the  court 
of  appeals  seemed  to  come  to  a  merely  tahsmanic  conclusion  that  the 
property  distribution  was  just  and  reasonable  after  determining  that  the 
lower  court  based  its  decision  upon  the  conduct  of  the  parties  during 
the  marriage  as  it  related  to  the  disposition  of  their  property.  Thus,  the 
court  affirmed  the  piQ-Luedke  abuse  of  discretion  standard  as  a  means 
to  review  a  trial  court's  decision. ^^  Another  case  decided  during  the 
survey  period,  however,  indicated  that  the  appellate  court's  standard  of 
review  is  not  totally  toothless.  In  Schnarr  v.  Schnarr,^^  the  court  of 
appeals  overturned  the  trial  court's  decision  that  had  awarded  the  wife 
ninety-six  percent  of  the  marital  assets  in  spite  of  the  fact  that  both 
spouses  had  identical  training  in  the  operation  of  a  business  and  the 
same  work  experience.  The  court  rejected  the  lower  court's  reasoning 
that  the  future  earnings  ability  of  the  husband  supported  an  award  in 
the  wife's  favor  in  accordance  with  Indiana  Code  section  31-1-11.5- 
ll(c)(5).^« 

Luedke  essentially  did  not  change  the  state  of  the  law  in  Indiana 
regarding  property  distribution  upon  marriage  dissolution.  While  the 
contributions  of  a  homemaking  spouse  like  Shari  Luedke  will  not  be 
unrecognized  in  a  property  distribution,  such  a  spouse  also  cannot  assume 
an  automatic  right  to  one-half  of  the  marital  property.  Due  to  the  fact- 
sensitive  nature  of  each  dissolution  action,  Indiana  trial  judges  have 
been  vested  with  broad  discretion  in  determining  such  issues.  As  long 
as  the  bench  and  bar  remain  cognizant  of  the  policies  behind  equitable 
distribution  and  seek  to  implement  them  in  their  decisions,  it  should 
not  be  too  detrimental  that  a  trial  judge  is  not  required  to  begin  with 
a  fifty-fifty  division  of  the  property  when  determining  a  property  dis- 
tribution case. 


''Id.  at  367. 

'^"LaCayo,  supra  note  11,  at  55,  col.  1;  see  also  Middleton,  supra  note  74,  at  31, 
col.  1  (the  author  also  raised  concerns  regarding  how  equitable  distribution  laws  are  being 
applied,  quoting  Judge  Young's  opinion  in  Baker). 

M78  N.E.2d  1251  (Ind.  Ct.  App.   1985). 

^^In  another  case  decided  during  the  survey  period,  Neffle  v.  Neffle,  483  N.E.2d 
767  (Ind.  Ct.  App.  1985),  the  court  found  the  lower  court  did  not  abuse  its  discretion 
in  awarding  the  husband  most  of  the  assets  but  requiring  him  to  pay  a  cash  award.  The 
court  recognized  that  Indiana  code  section  31-1-1 1.5-1 1(b)(2)  permits  marital  assets  to  be 
distributed  in  kind  as  well  as  in  money.  Id.  at  768-69. 

M91  N.E.2d  561  (Ind.  Ct.  App.   1986). 

'^^Id.  at  564-65. 


1987]  MARITAL  PROPERTY  223 

III.     VA1.UAT10N  OF  Marital  Property: 
Jointly  Held  Stock  and  Partnership  Interests 

Two  other  important  cases  were  decided  in  this  survey  period.  Both 
Eyler  v,  Eyler^^  and  Peddycord  v.  Peddycord^^^  dealt  with  the  proper 
valuation  of  marital  property.  However,  each  case  addressed  the  concept 
of  valuation  in  the  context  of  two  distinct  types  of  marital  property, 
jointly  held  stock  and  professional  partnership  interests. 

A.     Eyler  v.  Eyler:  Jointly  Held  Stock 

The  case  of  Eyler  v.  Eyler^^^  presents  an  interesting  approach  to  the 
valuation  of  jointly  held  shares  of  stock.  In  this  case,  the  husband  and 
wife  were  joint  owners  of  90.2%  of  the  outstanding  stock  in  the  husband's 
business,  Superior  Training  Services,  Inc.^°^  The  couple  subsequently 
divorced  and  the  trial  court  was  required  to  decide  how  this  jointly  held 
property  should  be  divided  in  order  to  achieve  a  just  and  equitable 
result. 

The  trial  court  had  determined  that  the  husband  would  retain  all 
of  the  couple's  stock  in  the  business  and  the  wife  would  receive  a  money 
judgment  equal  to  the  value  of  one-half  of  the  jointly  owned  stock. '°^ 
In  theory  the  trial  court  spHt  the  stock  in  half  and  awarded  the  wife 
a  sum  of  money  equal  to  the  value  of  45.1%  of  the  stock.  However, 
the  trial  court  also  decided  that  the  wife's  45.1%  of  the  stock  represented 
a  minority  share  of  the  total  outstanding  stock  in  the  business. '^^  When 
valuing  minority  shares,  discounts  are  normally  applied  to  the  total  value 
of  the  minority  shares  in  order  to  compensate  for  the  difference  in  real 
value  between  majority  and  minority  shares  of  stock. '^^  In  this  case,  the 
value  of  the  wife's  shares  of  stock  was  discounted  by  25%  in  order  to 
arrive  at  its  "true  value." '°^  The  trial  court  decided  that  the  45.1% 
shares  of  stock  which  the  wife  was  theoretically  "selling"  to  her  husband 
were  worth  25%  less  than  their  "book  value"  because  her  stock  rep- 
resented only  a  minority  interest  in  the  business.  Her  corresponding 
money  judgment  was  reduced  by  the  equal  percentage. '^^ 


^'492  N.E.2d  1071  (Ind.  1986). 

'«'479  N.E.2d  615  (Ind.  Ct.  App.  1985). 

'°'492  N.E.2d  1071  (Ind.  1986). 

'"^Eyler,   492  N.E. 2d  at  1073. 

'"Eyler  v.  Eyler,  485  N.E.2d  657,  661  (Ind.  Ct.  App.),  vacated,  492  N.E. 2d  1071 
(Ind.  1986). 

"^/of.  at  661. 

'°^5ee  Perlman  v.  Permonite  Mfg.  Co.,  568  F.  Supp.  222,  230  (N.D.  Ind.  1983), 
aff'd,  134  F.2d  1283  (7th  Cir.   1984). 

'^Eyler,  485  N.E.2d  at  661. 

'°'Id. 


224  INDIANA  LAW  REVIEW  [Vol.  20:211 

The  wife  appealed  this  decision  on  the  basis  that  the  trial  court 
erred  in  applying  a  minority  discount  to  the  value  of  her  portion  of 
the  stock. '°^  She  argued  that  because  she  had  always  been  a  joint  owner 
of  90.2%  of  the  outstanding  shares,  her  stock  had  never  been  treated 
as  a  minority  interest.  The  Indiana  Court  of  Appeals  upheld  the  trial 
court's  determination  with  little  discussion.'"*^  The  court  of  appeals  simply 
recognized  that  the  wife  owned  45.1%  of  the  stock  after  the  property 
was  divided.  This  percentage  was  less  than  50%  and  was,  therefore,  a 
minority  share  of  stock  subject  to  a  minority  discount. ''° 

On  appeal,  the  Indiana  Supreme  Court  reversed  the  court  of  ap- 
peals.'" Instead  of  analyzing  the  issue  in  terms  of  the  percentage  of 
stock  owned  by  each  spouse  after  the  property  division,  the  supreme 
court  concentrated  on  the  nature  of  the  joint  ownership  of  stock  before 
the  property  division."^  "[T]he  shares  constituting  the  90.2%  share  of 
the  business  were  at  all  ...  times  held  in  joint  ownership  and  not 
burdened  by  the  factors  which  may  warrant  consideration  of  the  'minority 
interest'  discount.""^  Although  the  wife's  share  of  stock  was  technically 
a  minority  share,  her  stock  had  always  been  exercised  as  part  of  a 
majority  block  and,  therefore,  was  not  worth  less  than  any  of  the  other 
stock  in  the  business.  Thus,  the  wife  was  awarded  a  money  judgment 
equal  to  the  full  value  of  her  shares  of  stock. 

The  decision  of  the  supreme  court  rests  upon  a  recognition  of 
common  law  principles  on  the  nature  of  joint  ownership.'"'  Joint  tenants 
own  a  single,  unified  interest  in  personal  or  real  property."^  Each  joint 
tenant  owns  an  undivided  share  of  the  whole  property."^  If  the  husband 
and  wife  jointly  owned  90.2%  of  the  outstanding  shares,  both  owned 
a  majority  interest  in  the  corporation.  The  court  reasoned  that  minority 
discounting  was  not  necessary  because  neither  spouse  had  ever  been 
relegated  to  the  position  of  minority  shareholder."^ 


'"■^"Candace  was  to  receive  a  money  judgment  corresponding  to  the  value  of  45.1% 
of  the  outstanding  stock  in  Superior  Training  Services,  which  percentage  represented  a 
minority  interest.  Application  of  a  minority  discount  was  supported  by  law."  Id. 

''"Id. 

'"Eyler  v.  Eyler,  492  N.E.2d  1071,   1074  (Ind.   1986). 

'''Id. 

"''The  supreme  court's  decision  is  similar  to  the  court  of  appeals  decision  in  that 
neither  court  engaged  in  a  lengthy  discussion  of  the  nature  of  joint  ownership. 

'"See  Duncan  v.  Suhy,  378  111.  104,  37  N.E.2d  826  (1941);  Richardson  v.  Richardson, 
121  Ind.  App.  523,  98  N.E.2d  190  (1951);  Clausen  v.  Warner,  118  Ind.  App.  340,  78 
N.E.2d  551  (1948);  In  re  Lorch's  Estate,  33  N.Y.S.2d  157  (Sur.  Ct.  1941). 

"^Welsh  V.  James,  408  111.  18,  95  N.E.2d  872  (1950),  rev'd,  7  111.  2d  106,  129  N.E.2d 
699  (1955);  Rogers  v.  Rogers,  437  N.E.2d  92  (Ind.  Ct.  App.  1982);  Clovis  v.  Clovis,  460 
P.2d  878  (Okla.   1969);  Turner  v.  Turner,   185  Va.  505,  39  S.E.2d  299  (1946). 

'"Eyler,  492  N.E.2d  at   1074. 


1987]  MARITAL  PROPERTY  225 

At  first  glance,  it  would  appear  that  the  supreme  court  was  ignoring 
a  fundamental  fact  of  the  couple's  divorce.  At  some  point  the  corporate 
stock  had  to  be  divided  and  would  no  longer  be  held  in  joint  ownership."*^ 
After  division,  the  wife  would  have  owned  45.1^o  of  the  stock,  nu- 
merically a  minority  interest.  If  the  wife  was  entitled  to  a  money  judgment 
equal  to  her  share  and  numerically  her  share  was  a  minority  one,  her 
money  judgment  should  have  been  discounted  to  reflect  its  minority 
status. 

However,  the  decision  of  the  supreme  court  correctly  recognized  the 
practical  reality  surrounding  the  wife's  "minority"  interest.  First,  inherent 
in  a  trial  court's  power  to  grant  a  divorce  is  the  power  to  determine 
how  the  marital  property  should  be  divided. ^'^  A  value  must  be  placed 
on  the  marital  property  in  order  for  the  court  to  determine  how  an 
equitable  and  just  division  can  be  achieved.  The  trial  court  has  the 
discretion  to  designate  a  particular  date  at  which  valuation  of  property 
will  officially  occur. ^^°  Logically,  however,  valuation  would  have  to  occur 
prior  to  the  actual  division  of  the  property. '^^  Without  knowing  the 
value  of  a  particular  piece  of  marital  property,  the  trial  court  would 
be  unable  to  make  a  decision  that  is  just  and  equitable  to  all  parties. 

In  Eyler,  the  couple's  marital  property  was  valued  as  of  the  date 
of  separation. ^^^  At  the  date  of  separation,  the  marital  property  had  not 
been  divided.  Although  they  no  longer  lived  together,  the  husband  and 
wife  still  owned  90.2%  of  the  stock  as  joint  owners.  Both  were  still 
majority  owners.  Thus,  the  value  of  the  wife's  shares  could  not  be 
discounted  in  value  as  minority  shares  because  at  the  time  of  valuation, 
she  was  owner  of  the  whole  majority  interest. 

In  addition,  the  Indiana  Supreme  Court  correctly  rejected  the  mi- 
nority discount  theory  because  of  the  true  nature  of  the  wife's  stock. 
Minority  shares  are  normally  discounted  because  the  owner  lacks  the 
power  to  control  corporate  decision  making. '^^  For  this  reason,  minority 


"^ Joint  tenancies  may  be  severed  in  a  number  of  ways.  Severance  will  normally  result 
in  the  creation  of  a  tenancy  in  common.  See  Mann  v.  Bradley,  188  Colo.  392,  535  P. 2d 
213  (1975),  where  the  wife  "conveyed"  her  share  of  property  to  her  husband,  the  other 
joint  holder,  thus  destroying  the  joint  tenancy.  See  also  Jackson  v.  O'Connell,  23  111.  2d 
52,   177  N.E.2d  194  (1961). 

"'Taylor  v.  Taylor,  436  N.E.2d  56,  58  (Ind.   1982). 

^^°Id.  at  58  &  n.l.  In  Taylor,  an  issue  arose  as  to  whether  the  marital  home  should 
be  valued  at  the  time  of  separation  or  at  the  time  the  dissolution  action  commenced.  The 
Indiana  Supreme  Court  decided  that  a  trial  court  is  not  "hmited  to  a  specific  date  of 
valuation."  Id.  at  59.  If  the  property  division  is  just  and  reasonable,  the  trial  court's 
decision  will  not  be  overturned.  Id. 

'"See  Annotation,  Proper  Date  for  Valuation  of  Property  Being  Distributed  Pursuant 
to  Divorce,  34  A.L.R.  4th  63,  63-85  (1984),  for  a  discussion  of  how  different  jurisdictions 
determine  the  proper  date  for  valuation  of  marital  property. 

'^'Eyler,  492  N.E.2d  at  1074. 

'^^Perlman  v.  Permonite  Mfg.  Co.,  568  F.  Supp.  222,  230-31  (N.D.  Ind.  1983),  aff'd, 
734  F.2d  1283  (7th  Cir.   1984),  stated 


226  INDIANA  LAW  REVIEW  [Vol.  20:211 

shares  are  not  worth  as  much  as  majority  shares,  even  though  they  both 

have  the  same  "book  value, "'^'*  Prior  to  the  divorce,  the  wife  exercised 

her  shareholder  rights  as  a  majority  owner.   The  45.1%   of  the  total 

shares  designated  as  belonging  to  the  wife  were  never  "minority"  shares 

in  the  sense  that  the  owner  lacked  the  power  to  direct  corporate  affairs. 

As  the  supreme  court  properly  stated,  the  shares  were  "not  burdened 

by  the  factors  which  may  warrant  consideration  of  the  'minority  interest' 
discount. '"25 

For  these  reasons,  the  supreme  court  reached  the  correct  decision 
in  the  Eyler  case.  Although  in  the  pure  numeric  sense,  the  wife  owned 
only  a  minority  interest  once  the  shares  of  stock  were  divided,  these 
shares  were  never  burdened  by  the  deficiencies  normally  attributed  to 
true  minority  shares,  such  as  a  stock  owner's  inability  to  control  corporate 
decision  making.  Because  the  wife's  shares  were  always  part  of  a  majority 
block  of  shares,  subjecting  her  interest  to  a  minority  discount  was 
unwarranted. 

B.  Peddycord  v.  Peddycord:  Professional  Partnership 

Interests 

Property  valuation  was  the  subject  of  another  recent  Indiana  decision, 
Peddycord  v.  Peddycord J^^  At  the  time  of  the  husband  and  wife's 
divorce  in  Peddycord,  the  husband  was  a  partner  in  a  law  firm.'^^  The 
parties  agreed  that  his  interest  in  the  professional  partnership  was  a 
marital  asset  subject  to  division  in  the  dissolution  action. '^^  In  order  to 
divide  this  asset,  the  trial  court  had  to  place  a  value  on  the  partnership 
interest  and  award  the  wife  a  money  judgment  equal  to  her  equitable 
share  of  the  husband's  interest. '^^ 

Placing  a  value  on  a  spouse's  partnership  interest  was  not  a  simple 
task.  The  trial  court  decided  to  use  a  formula  found  in  the  partnership 


"A  minority  shareholder  could  not  have  expected  to  receive  a  proportionate 
share  of  the  going  concern  value  of  the  assets  if  he  had  remained  a  stockholder 
of  Amnest  as  a  going  concern,  unless  the  assets  as  a  whole,  or  the  company 
as  a  whole,  were  to  be  sold.  As  a  minority  stockholder,  he  would  have  had 
no  voice  in  a  corporate  policy,  and  no  power  to  influence  decisions  as  to  whether 
to  sell  and,  if  so,  when  and  how.  The  control  of  these  decisions  is  an  element 
of  value  .  ..." 

Id.  at  231  (citing  Moore  v.  New  Ammest,  Inc.,  6  Kan.  App.  2d  461,  474-75,  630  P. 2d 

167,   177  (1981)). 

'^'Perlman,  568  F.  Supp.  at  231. 

'^' Eyler,  492  N.E.2d  at  1074. 

'M79  N.E.2d  615  (Ind.  Ct.  App.   1985). 

'^'Id.  at  616. 


1987]  MARITAL  PROPERTY  227 

agreement,  which  was  used  to  calculate  a  partner's  interest  at  the  time 
of  his  death. '^^  Most  partnership  agreements  contain  formulas  for  cal- 
culating the  amount  of  money  the  partnership  will  give  a  partner  in 
order  to  "buy  out"  his  share  upon  his  death  or  withdrawal  from  the 
partnership.'^'  According  to  the  partnership  agreement  in  Peddycord,  at 
the  time  of  his  death  the  husband  would  be  entitled  to  $20,673.73,  the 
amount  of  his  capital  account,  plus  a  death  benefit  payment  of 
$53,630.89.'^^  From  the  total  of  these  two  figures,  the  trial  court  sub- 
tracted $16,908.02  for  the  habilities  owed  by  the  husband  to  the  part- 
nership.'" The  trial  court  arrived  at  a  net  valuation  of  the  husband's 
interest  totalling  $57,396.60. '^^ 

On  appeal,  the  husband  argued  that  the  trial  court  erred  in  using 
the  partnership  death  benefit  formula  for  calculating  the  value  of  his 
present  interest  in  the  partnership.'^^  The  husband  argued  that  the  value 
of  his  interest  should  be  calculated  according  to  the  partnership's  formula 
for  reimbursing  partners  who  withdraw  from  the  firm.  The  Indiana 
Court  of  Appeals  found  that  the  wrong  formula  had  indeed  been  used 
to  calculate  the  husband's  interest  and  reversed  the  trial  court's  decision. '^^ 

The  court  of  appeals  began  its  analysis  by  recognizing  that  partnership 
agreements  normally  contain  several  formulas  for  determining  the  amount 
of  money  a  former  partner  is  entitled  to  receive  upon  his  withdrawal 
from  the  firm.'^^  This  amount  is  different  depending  on  whether  the 
partner  withdraws  from  the  firm,  becomes  disabled,  dies,  or  retires. '^^ 
While  recognizing  that  at  least  one  other  jurisdiction  has  used  the  death 
benefit  formula  for  calculating  a  husband's  present  interest,  the  court 
of  appeals  decided  that  the  formula  used  for  reimbursing  partners  who 
withdraw  from  the  firm  represented  the  correct  formula  for  calculating 
a  husband's  present  interest  in  a  dissolution  action. '^^ 


''"Id. 

'"Walzer,  Developing  the  Financial  Circumstances  of  a  Marital  Community,   1978 
Economics  of  Divorce  111,  127-33. 
''^Peddycord,  479  N.E.2d  at  616. 

'''Id. 

'''Id. 

"''Id.  at  616-17. 

'"Id.  at  616. 

"^Id.  See  Annotation,  Evaluation  of  Interest  in  Law  Firm  or  Medical  Partnership 
for  Purposes  of  Division  of  Property  in  Divorce  Proceedings,  14  A.L.R.3d  621,  621-29 
(1976),  for  a  further  discussion  of  formulas  available  for  valuing  a  partner's  interest  in 
a  partnership. 

""^Peddycord,  479  N.E.2d  at  617;  see  also  Fonstein  v.  Fonstein,  53  Cal.  App.  3d 
846,  126  Cal.  Rptr.  264  (1975),  vacated,  17  Cal.  3d  738,  131  Cal.  Rptr.  873,  552  P. 2d 
1169  (1976);  Johnson  v.  Johnson,  277  N.W.2d  208  (Minn.  1979);  Weaver  v.  Weaver,  72 
N.C.  App.  409,  324  S.E.2d  915  (1985);  Holbrook  v.  Holbrook,  103  Wis.  2d  327,  309 
N.W.2d  343  (Wis.  Ct.  App.   1981). 


228  INDIANA  LAW  REVIEW  [Vol.  20:211 

In  deciding  this  issue,  the  court  drew  an  analogy  between  partnership 
agreements  and  hfe  insurance  pohcies.'^^  An  insurance  company  will  pay 
a  different  amount  to  a  life  insurance  policyholder  depending  on  whether 
the  holder  dies  or  voluntarily  cashes  in  his  pohcy.'^'  The  distinction 
between  these  two  amounts  rests  on  the  element  of  volition.'"*^  Presum- 
ably, a  policyholder  never  voluntarily  dies,  while  cashing  in  the  insurance 
policy  is  a  discretionary  decision  which  rests  solely  within  the  pohcy- 
holder's  control.  Likewise,  withdrawing  from  a  partnership  is  a  decision 
a  partner  freely  undertakes,  but  dying,  retiring,  or  becoming  disabled 
are  decisions  "involuntarily"  imposed  upon  him.^"^^ 

Thus,  just  as  "[a]n  insurance  policy's  value,  for  the  purposes  of  a 
marriage  dissolution,  is  its  cash  value  .  .  .,"  the  Peddycord  court  decided 
that  the  value  of  a  partner's  interest  in  a  marriage  dissolution  is  de- 
termined as  if  the  partner  ''cashed  in"  or  withdrew  from  the  firmJ^"* 

The  Peddycord  decision  illustrates  the  difficulty  a  court  faces  when 
valuing  an  interest  in  a  professional  or  small  partnership  business  ar- 
rangement. The  value  of  most  business  interests  is  measured  by  the  fair 
market  value. '"^^  However,  an  interest  in  a  professional  partnership  usually 
has  no  hypothetical  outside  marketplace  in  which  its  value  can  be  de- 
termined.'^^ Instead,  it  is  generally  more  rehable  to  ascertain  the  value 
according  to  an  internal  marketplace  which  determines  what  the  business 
or  practice  is  worth  to  the  spouse  who  will  continue  to  operate  in  that 
business. '^^  As  one  author  has  noted,  there  is  a  distinct  difference  between 
these  two  marketplace  scenarios: 

What  an  "outsider"  is  willing  to  pay  is  generally  considerably 
less  than  what  the  practice  or  business  will  yield  to  its  present 
proprietor.  Many  businesses  and  virtually  all  practices  have  a 
personal  element  that  is  non-transferrable.  Yet,  too  great  a  dis- 


''°Peddycord,  479  N.E.2d  at  617. 

""M  Upon  death  the  holder's  beneficiaries  receive  the  full  proceeds  owed  under  the 
insurance  contract.  If  the  holder  decides  to  "cash  in"  his  policy  before  death,  he  is 
entitled  only  to  the  present  value  of  his  policy  determined  by  the  premiums  previously 
paid.  Id. 

'''Id. 

'"^Retiring  may  be  seen  as  a  voluntary  decision,  although  it  is  usually  tied  to  a  factor 
over  which  an  individual  has  no  control  —  his  age. 

'''Peddycord,  479  N.E.2d  at  617. 

'^'Walzer,  supra  note  131,  at  128. 

'"^In  the  case  of  a  law  partnership,  the  partners  must  be  attorneys  who  practice  law 
in  the  partnership.  Attorneys  cannot  form  law  partnerships  with  non-attorneys  who  do 
not  practice  law  in  the  partnership.  See  Model  Code  of  Professional  Responsibility  DR 
3-103  (codified  at  Ind.  Code  Ann.  §  DR  3-103  (Burns  1984)).  For  this  reason,  the  partnership 
in  Peddycord  was  the  only  entity  that  could  theoretically  buy  out  the  husband's  partnership 
interest. 

'""Walzer,  supra  note  131,  at  128. 


1987]  MARITAL  PROPERTY  229 

count  does  not  do  [sic]  justice  to  the  non-proprietor  spouse, 
generally  the  wife.  For  a  divorce  is  not  the  same  as  a  sale.  The 
day  after  the  divorce  the  husband  will  continue  to  earn  what 
he  previously  earned.  Some  incremental  value  should  be  allowed 
for  this  continuity  of  earning  power  when  determining  the  value 
of  a  business  or  professional  practice."*^ 

The  court  of  appeals  correctly  determined  that  the  partnership  agree- 
ment was  the  best  source  for  establishing  a  marketplace  for  the  husband's 
interest.  Deciding  which  formula  to  use  from  the  agreement  is  a  matter 
of  choosing  which  scenario  most  accurately  represents  the  husband's 
interest  at  the  time  of  dissolution.  Death  benefit  formulas  are  normally 
funded  by  insurance  policies. ^"^^  For  this  reason,  the  value  placed  on  the 
departing  partner's  interest  is  normally  higher  under  the  death  benefit 
formula.  This  money,  however,  would  not  be  available  at  the  time  of 
a  couple's  divorce. '^° 

Because  the  withdrawal  formula  is  usually  not  funded  by  insurance, 
it  is  probably  '*close  to  pure  book  value — the  lowest  price"  of  all  the 
categories. '^^  The  withdrawal  formula  does  not  include  any  additional 
benefit  that  would  normally  be  awarded  a  partner  who  has  lost  his  status 
with  the  partnership  under  "involuntary"  circumstances.  Instead,  the 
withdrawal  formula  represents  the  present  value  of  his  interest — the 
amount  of  his  capital  account  minus  liabilities  owed  to  the  partnership. 
Under  this  formula,  the  other  spouse  could  not  take  advantage  of  benefits 
that  arise  from  factual  scenarios  that  may  never  occur — namely  that  the 
partner  dies,  retires,  or  becomes  disabled  while  he  is  still  a  partner  in 
the  firm.  For  these  reasons,  the  withdrawal  formula  represents  the  most 
logical  formula  for  calculating  a  partner's  present  interest  in  a  partnership 
at  the  time  of  dissolution. 

IV.     Conclusion 

Indiana  courts  were  not  willing  to  assume  that  a  fifty-fifty  division 
of  marital  property  was  the  proper  starting  point  for  purposes  of  equitable 
distribution.  Although  other  states  have  adopted  this  presumption  either 
by  caselaw  or  by  statute,  Indiana  preferred  to  give  trial  judges  wide 
discretion  to  determine  what  a  fair  and  reasonable  division  should  be. 

In  the  area  of  valuation  of  marital  property,  Indiana  took  an  in- 
teresting approach  to  how  to  value  jointly  held  stock  and  partnership 
interests.  In  refusing  to  allow  a  wife's  shares  of  stock  to  be  subject  to 


'"'Id.  at  128-29. 
''°Id.  at  129. 
'''Id. 


230  INDIA NA  LA  W  REVIEW  [ Vol .  20 : 2 1 1 

a  minority  discount,  the  Indiana  Supreme  Court  noted  that  although 
numerically  the  wife's  share  was  a  minority  one,  the  wife  and  her  husband 
at  the  date  of  separation  still  owned  all  the  stock  in  joint  tenancy.  In 
valuating  a  husband's  professional  partnership  interest,  the  Indiana  Court 
of  Appeals  rejected  the  death  benefit  formula  and  decided  that  the 
withdrawal  formula  was  the  fairest  and  most  logical  way  to  evaluate 
the  present  interest  at  the  time  of  divorce. 

Indiana  courts  in  some  ways  are  maintaining  the  status  quo  regarding 
the  best  way  to  divide  marital  property,  and  are  developing  some  trends 
in  the  area  of  valuation  of  special  kinds  of  marital  property.  Practitioners 
and  divorcing  couples  should  be  aware  of  the  trends  in  marital  property, 
considering  the  wide  discretion  given  to  trial  judges  to  divide  property 
as  well  as  the  different  types  of  marital  property  that  can  be  divided. 


Developments  in  Insurance  Law: 
Agents'  and  Brokers'  Liability 

Donna  H.  Fisher* 

During  this  survey  period,  Indiana  courts  again  had  the  opportunity 
to  address  a  myriad  of  insurance-related  issues.'  One  issue,  in  particular, 
received  the  repeated  attention  of  our  courts.  That  issue  concerned  the 
duties  and  related  liabilities  of  insurance  agents  and  brokers  to  their 
principals,  including  both  insureds  and  insurers. 

Traditionally,  insurers  use  the  terms  "agents"  and  "brokers"  to 
describe  "field"  personnel  responsible  for  selling  policies.  The  two  terms 
are  distinguished  by  the  activity  undertaken.  Generally,  an  "agent"  is 
a  representative  of  the  insurer  and  a  "broker"  represents  the  insured 
for  most  purposes.^  A  "broker"  is  essentially  an  independent  contractor 
"who  acts  as  a  middleman  between  the  insured  and  the  insurer,  and 
who  solicits  insurance  from  the  public  under  no  employment  from  any 
special  company,  and  who,  upon  securing  an  order,  places  it  with  a 
company  selected  by  himself."^  Most  often,  the  insured  bears  the  risk 
of  a  broker's  error  while  the  insurer  bears  the  risk  of  its  agent's  neg- 
ligence."^ 

Until  1977,  Indiana  distinguished  between  agents'  and  brokers'  li- 
ability by  statute.  Indiana  Code  section  27-i-15-l(d)  provided: 


*Associate,  Jennings,  Maas  &  Stickney,  Indianapolis.  B.A.,  Susquehanna  University, 
1969;  J.D.,  Indiana  University  School  of  Law — Indianapolis,  1983. 

'This  article  deals  only  with  insurance  law  cases  during  the  survey  period  in  the 
area  of  agents'  and  brokers'  liabihty.  Other  cases  of  note,  however,  should  not  go 
unmentioned.  See,  e.g.,  B  &  R  Farm  Servs.  v.  Farm  Bureau  Mut.  Ins.,  483  N.E.2d  1076 
(Ind.  1985)  (products  hazard  exclusion  does  not  exclude  coverage  for  product  accidentally 
released  into  property  of  others);  Eli  Lilly  &  Co.  v.  Home  Ins.  Co.,  482  N.E.2d  467 
(Ind.  1985)  (Indiana  adopts  multiple-trigger  interpretation  of  comprehensive  general  liability 
injury/occurence  policy  language);  Allstate  Ins.  Co.  v.  Boles,  481  N.E.2d  1096  (Ind.  1985) 
("household  exclusion"  clause  of  automobile  liability  pohcy  does  not  contravene  public 
policy);  Loving  v.  Ponderosa  Sys.,  Inc.,  479  N.E.2d  531  (Ind.  1985)  (distribution  of 
insurance  proceeds  among  lessor,  lessee,  and  mortgagee);  Erie  Haven,  Inc.  v.  Lippman 
Refrigeration  Construction,  486  N.E.2d  646  (Ind.  Ct.  App.  1985)  (scope  of  insurable 
interest  on  unexpired  lease  and  leasehold  improvements);  Hartford  Ins.  Co.  v.  Vernon 
Fire  &  Casualty  Co.,  485  N.E.2d  902  (Ind.  Ct.  App.  1985)  (scope  of  omnibus  clause 
permitted  use  provision);  Milwaukee  Guardian  Ins.,  Inc.  v.  Reichhart,  479  N.E.2d  1340 
(Ind.  Ct.  App.  1985)  (duty  to  defend  absent  prior  notice);  State  Farm  Mut.  Auto.  Ins. 
Co.  V.  Glasgow,  478  N.E.2d  918  (Ind.  Ct.  App.  1985)  (insurer  not  collaterally  estopped 
from  litigating  the  issue  of  insured's  negligence  in  proceedings  supplemental). 

^B.  Harnett,  Responsibility  of  Insurance  Agents  and  Brokers  §§  2.02-2.07 
(Supp.   1984). 

^3  M.  Rhodes,  Couch  on  Insurance  2d  §  25:93  (Rev.  ed.   1984). 

'Id. 

231 


232  INDIANA  LAW  REVIEW  [Vol.  20:231 

The  word  "broker"  .  .  .  shall  mean  an  individual,  co-partnership, 
or  a  corporation  authorized  by  its  charter  or  by  law  to  do  an 
insurance  agency  business,  resident  in  any  state,  and  not  an 
officer  or  agent  of  the  company  interested,  who  or  which  for 
compensation  acts  or  aids  in  any  manner  in  obtaining  insurance 
for  a  person  other  than  himself  ....  An  insurance  broker  is 
hereby  declared  to  be  the  agent  of  the  insured  for  all  purposes 
in  connection  with  such  insurance.^ 

In  1977,  Indiana  Code  sections  27-1-15-1  through  27-1-15-9  were  repealed^ 
and  replaced  by  Indiana  Code  sections  27-1-15.5-1  through  27-1-15.5-18, 
which  address  the  hcensing  of  "insurance  agents,  surplus  line  agents, 
insurance  consultants,  and  limited  insurance  representatives."^  The  term 
"broker"  is  not  separately  defined  by  the  new  chapter;  rather,  the  earlier 
definition  of  "broker"  has  been  partially  incorporated  into  the  definition 
of  "insurance  agent."  "Insurance  agent"  is  defined  by  the  Code  as 

[a]ny  individual  or  corporation  who,  for  compensation,  acts  or 
aids  in  any  manner  in  soliciting  applications  for  a  policy  of 
insurance  or  in  negotiating  policies  of  insurance  on  behalf  of 
an  insurer.  An  individual  or  corporation  not  licensed  as  an 
insurance  agent,  surplus  lines  insurance  agent,  or  limited  insur- 
ance representative  who  solicits  a  policy  of  insurance  on  behalf 
of  others  or  transmits  for  others  an  application  for  a  pohcy  of 
insurance  to  or  from  an  insurance  company,  or  offers  or  assumes 
to  act  in  the  negotiations  of  such  insurance,  shall  be  an  insurance 
agent  within  the  intent  of  this  chapter,  and  shall  thereby  become 
hable  for  all  the  duties,  requirements,  liabilities,  and  penalties 
to  which  such  licensed  agents  are  subject.^ 

Despite  this  change,  post- 1977  Indiana  case  law  has  continued  to 
distinguish  between  "brokers"  and  "agents"  and  to  apportion  liability 
based  upon  a  distinction  between  the  terms. ^  Such  case  law  has  confirmed 


^iND.  Code  §  27-l-15-l(d)  (1971). 

'^IND.  Code  §§  27-1-15-1  to  27-1-15-9  were  repealed  by  1977  Ind.  Acts,  Pub.  L. 
280,  §  3. 

^ND.  Code  §  27-1-15.5-1  (1982). 

'Id. 

^See,  e.g..  Monarch  Ins.  Co.  v.  Siegel,  625  F.  Supp.  693  (N.D.  Ind.  1986);  Augustine 
V.  First  Fed.  Sav.  &  Loan  of  Gary,  270  Ind.  238,  384  N.E.2d  1018  (1979);  Town  & 
Country  Mut.  Ins.  Co.  v.  Savage,  421  N.E.2d  704  (Ind.  Ct.  App.  1981);  Stockberger  v. 
Meridian  Mut.  Ins.  Co.,  182  Ind.  App.  566,  395  N.E.2d  1272  (1979);  Bulla  v.  Donahue, 
174  Ind.  App.  173,  366  N.E.2d  233  (1977).  The  Bulla  and  Stockberger  decisions  do  not 
rely  upon  Indiana  statute  as  authority  for  their  finding  that  "[a]n  insurance  agent  or 
broker  who  undertakes  to  procure  insurance  for  another  is  an  agent  of  the  proposed 
insured  .  .  .  ."  Bulla,  174  Ind.  App.  at  126,  366  N.E.2d  at  236.  The  decisions  cite  instead 
J.  Appleman,  Insurance  Law  &  Practice,  as  well  as  C.J.S.,  Am.  Jur.  2d  and  A.L.R.3d. 


1987]  INSURANCE  LAW  233 

that  although  the  definitions  of  the  terms  agent  and  broker  appear  clear, 
the  lines  distinguishing  the  two  roles  are  often  hazy  and  are  highly 
dependent  upon  the  facts  of  each  case.  The  determination  of  legal 
responsibility  for  agents'  and  brokers'  acts  rests  more  with  the  extent 
of  and  authority  behind  such  acts  than  with  the  pure  application  of 
either  term.  This  year's  survey  cases  concerning  agents'  and  brokers' 
liability  are  instructive  in  continuing  to  define  the  respective  duties  of 
agents  and  brokers  and  the  extent  to  which  insurance  companies  will 
be  bound  by  breach  of  such  duties. 

A.  Breach  of  Duty  to  Procure  Insurance  Coverage 

Several  cases  during  this  survey  period  examine  the  insurance  agent's 
duties  in  regard  to  procuring  insurance  on  behalf  of  a  future  insured. 
In  Monarch  Insurance  Co.  v.  Siegel,^^  the  United  States  District  Court 
for  the  Northern  District  of  Indiana  found  that  the  insurance  company 
was  not  liable  for  the  acts  of  an  independent  insurance  broker  through 
whom  its  insured  had  placed  a  policy  of  aircraft  insurance. •' 

Defendant  Siegel,  the  co-owner  of  a  Piper  Turbo  Seminole  aircraft, 
had  originally  purchased  a  Global  Insurance  policy  on  his  airplane 
through  Dickens  &  Company,  insurance  brokers,  and  Dickens'  agent, 
Terry  Campton.  In  September  1982,  Siegel  conferred  with  Campton  as 
to  whether  his  pilot,  Ackerman,  would  meet  the  Global  policy's  coverage 
requirements.  Siegel  advised  Campton  that  Ackerman  had  250  hours  of 
multi-engine  flight  time,  although,  in  fact,  Ackerman  had  not.  Based 
upon  Siegel's  representation,  Campton  informed  Siegel  that  Ackerman 
would  qualify  with  five  additional  flight  hours. 

In  1983,  Siegel  cancelled  the  Global  policy  and  arranged  with  Camp- 
ton to  purchase  a  Monarch  policy  providing  similar  coverage.  In  his 
application,  Siegel  represented  that  the  plane  was  for  "[p]rivate  business 
and  pleasure" '^  and  not  rental  use.  The  Monarch  policy  required,  among 
other  things,  that  the  aircraft  pilot  have  250  hours  of  flying  time  in 
multi-engine  aircraft. 

In  February  1983,  four  couples,  including  pilot  Ackerman  and  his 
wife,  rented  the  Seminole  from  Siegel  for  a  flight  to  Tennessee.  Ackerman 
piloted  the  aircraft  and,  upon  return,  crash-landed  at  Indianapolis,  in- 
juring his  passengers. 


Stockberger,  182  Ind.  App.  at  576,  395  N.E.2d  at  1279;  Bulla,  174  Ind.  App.  at  126, 
366  N.E.2d  at  236.  In  each  of  these  cases,  except  Monarch,  the  facts  concerned  insurance 
policies  issued  prior  to  the  1977  statutory  change.  Monarch,  which  concerned  a  policy 
issued  in  1983,  cited  Stockberger  and  Augustine  in  continuing  to  recognize  the  "broker"/ 
"agent"  distinction.  625  F.  Supp.  at  697. 
'°625  F.  Supp.  693  (N.D.  Ind.   1986). 

'Ud.  at  696. 


234  INDIANA  LAW  REVIEW  [Vol.  20:231 

Monarch  filed  a  declaratory  judgment  action  seeking  a  determination 
that  it  had  no  coverage  for  the  occurrence.'^  In  his  defense,  Siegel  raised 
the  issue  of  whether  Campton  and  Dickens  &  Company  had  adequately 
discharged  their  duty  to  him  in  procuring  the  Monarch  policy  and  whether 
Monarch  was  responsible  for  the  negligent  acts  of  Dickens  &  Company 
and  Campton,  Monarch's  "agent."''*  After  a  brief  analysis,  the  district 
court  held  that  Monarch  was  not  liable.'^  It  found  that  because  Campton 
placed  insurance  with  several  companies,  he  was  an  "insurance  broker" 
and  was  thus  an  "independent  contractor"  working  for  the  insurer.'^ 
The  court  also  held  that  any  negligence  on  the  part  of  Campton,  as  an 
independent  contractor,  or  any  statement  made  by  Campton  in  regard 
to  the  Monarch  policy  would  not  bind  the  insurance  company.'^ 

The  court  next  examined  the  issue  of  whether  Campton  breached 
a  duty  to  Siegel  in  faiUng  to  warn  him  that  Ackerman  was  not  covered 
by  the  Monarch  policy.  The  court  noted  that  in  Indiana,  an  agent  who 
undertakes  to  procure  insurance  and  "through  fault  and  neglect  fails  to 
do  so,  .  .  .  may  be  liable  for  breach  of  contract  or  for  negligent  default 
in  the  performance  of  a  duty  imposed  by  contract."'^  The  court  also 
noted  the  corresponding  duty  "on  the  part  of  the  insured  to  provide 
the  agent  or  broker  with  the  information  necessary  to  implement  the 
policy[.]"'^  The  court,  therefore,  found  that  the  issue  of  Campton's  and 
Dickens  &  Company's  negligence  was  a  factual  issue  which  would  turn 
upon  the  jury's  finding  as  "to  what  Campton  knew  and  what  Siegel 
told  him  prior  to  the  procurement  of  the  Monarch  policy.  "^°  Because 
of  this  fact  question,  a  trial  was  necessary,  and  summary  judgment  was 
denied. 

In  Nahmias  Realty,  Inc.  v.  Cohen, ^^  the  Indiana  Court  of  Appeals 
had  occasion  to  address  a  similar  procurement  issue.  In  Nahmias,  the 
plaintiff,  Nahmias,  owner  of  a  commercial  building,  relied  upon  defend- 
ants, Alvin  Cohen  and  Affiliated  Agencies,  Inc.,  to  procure  adequate 
fire  insurance  for  his  building.  Affiliated  placed  Nahmias'  coverage 
through  American  Insurance  Company,  but  through  error,  failed  to 
procure  replacement  cost  coverage.  Affiliated  also  failed  to  inform  Nah- 


''Id. 

''Id.  at  697,  699,  702. 

''Id.  at  697. 

'^Id.  The  court  cited  as  authority  Stockberger  v.  Meridian  Mut.  Ins.  Co.,  182  Ind. 
App.  566,  395  N.E.2d  1272  (1979)  and  other  cases  decided  prior  to  the  1977  changes  in 
the  Indiana  Code. 

''Monarch,  625  F.  Supp.  at  697. 

'^Id.  at  702  (citing  Stockberger  v.  Meridian  Mut.  Ins.  Co.,  182  Ind.  App.  566,  576, 
395  N.E.2d  1272,   1279  (1979)). 

''Id. 

'""Id.  at  703. 

^'484  N.E.2d  617  (Ind.  Ct.  App.   1985). 


1987]  INSURANCE  LAW  235 

mias  that  Nahmias  could  obtain  building  and  fire  code  update  coverage 
under  its  American  policy. 

Nahmias'  building  burned  in  1977  and  Nahmias  decided  to  repair. 
American  denied  replacement  coverage  and  eventually  Nahmias  bought 
another  building,  sold  his  condemned,  damaged  building  to  the  city  of 
Indianapolis  for  $250,000,  and  sued  American  and  Affiliated. ^^  The 
insurer,  American,  entered  into  a  covenant  not  to  sue,  paying  Nahmias 
$357,000.  At  trial.  Affiliated  admitted  liability;  however,  the  trial  court 
determined  that  Nahmias  had  been  fully  compensated  by  American  and 
awarded  no  damages. ^^  Nahmias  appealed,  seeking  the  full  cost  of  repair 
to  its  building. ^'^ 

The  court  of  appeals  found  that  an  insurance  agent's  negligent  failure 
to  procure  insurance  renders  the  agent  liable  for  ''any  damage  resulting 
from  his  failure. "^^  The  court  held  that  the  measure  of  damages  should, 
therefore,  be  "(a)  the  amount  which  would  have  been  due  under  the 
policy  which  Affiliated  should  have  obtained  .  .  .  ,  plus  (b)  any  con- 
sequential damage  resulting  from  Affihated's  breach  of  duty,  less  (c) 
the  cost  of  unpaid  premiums  .  .  .  ."^^  The  court  noted  that  it  was 
uncontested  that  Nahmias  had  wanted  to  restore  its  building  and  that 
"[b]ut  for  Affihated's  neglect,  Nahmias  would  have  so  recovered. "^^ 

Noting  that  replacement  cost  coverage  was  not  a  pure  indemnity 
contract,  the  court  held  that  Nahmias  was  entitled  to  the  full  cost  of 
repairs. 2^  This  was  true  despite  the  fact  that  Nahmias  had  failed  to  repair 
his  building,  a  condition  precedent  to  recovering  replacement  costs  under 
his  American  policy.  The  court  found  that  poHcy  defenses  were  not 
available  to  Affihated,  "a  non-party  to  the  insurance  contract. "^^ 

The  court  further  found  that  Nahmias  was  also  entitled  to  the  cost 
to  bring  "both  the  damaged  and  undamaged  parts  of  Nahmias'  recon- 
structed  building   into   comphance   with   all   applicable   building   codes 

"30 

The  Nahmias  decision  does  not  address  the  nature  of  the  relationship 
between  Affihated  and  American  and,  therefore,  leaves  unanswered  the 
question  of  whether  Affihated's  negligence  would  have  been  imputed  to 
American  had  American  not  entered  into  a  covenant  with  Nahmias. 
Further,  the  opinion  contains  little  factual  background  for  its  finding 

^^Id.  at  619. 
"M  . 

''Id.  at  620  (citing  Bulla  v.  Donahue,  174  Ind.  App.  123,  126,  366  N.E.2d  233,  236 
(1977))  (emphasis  added). 

2*M.  at  620-21  (citations  omitted). 
''Id.  at  621. 
''Id.  at  624. 
''Id.  at  623. 
3°/£/.  at  624. 


236  INDIANA  LAW  REVIEW  [Vol.  20:231 

that  Affiliated  breached  its  duty  and  was  negligent  in  failing  to  advise 
Nahmias  that  Nahmias  could  obtain  code  update  coverage  by  purchasing 
a  waiver  of  American's  exclusion  concerning  such  coverage.^'  Although 
prior  Indiana  case  law  has  recognized  an  affirmative  duty  on  the  part 
of  an  agent  to  make  inquiries  into  all  necessary  information  concerning 
desired  coverage,  such  cases  have  based  this  duty  upon  either  a  "long- 
established  relationship  of  entrustment  .  .  .  between  the  insured  and  the 
agent"^^  or  upon  facts  known  to  the  agent  which  would  put  the  agent 
on  notice  that  certain  coverages  would  be  necessary."  On  its  face, 
Nahmias  holds  that  an  agent  has  an  affirmative  duty  to  advise  a  proposed 
insured  who  relies  on  its  services  of  all  coverages  available  or  to  face 
the  risk  that  the  insured  will  claim  the  benefit  of  such  coverage  after 
a  loss.  Under  the  facts  of  Nahmias,  it  appears  that  the  insured  will  not 
have  to  claim  or  establish  that  it  would  have  agreed  to  purchase  the 
coverage  if  offered. 

In  State  Farm  Life  Insurance  Co.  v.  Fort  Wayne  National  Bank,^"^ 
the  Indiana  Court  of  Appeals  found  an  insurer  and  its  agent  Uable  to 
a  decedent's  estate  for  failure  to  place  ownership  of  a  life  insurance 
policy  in  the  proper  party. ^^  In  1975,  James  Zimmerman  purchased  Hfe 
insurance  from  Robert  Houser,  State  Farm's  local  agent,  and  State 
Farm's  agency  manager,  Vernon  Deutsch.  James  Zimmerman  was  ninety- 
five  percent  owner  of  Zimmerman's  Excavating  Service  with  his  son, 
Steven.  The  acknowledged  purpose  of  the  life  insurance  policy  was  to 
fund  Steven's  purchase  of  outstanding  stock  in  the  event  of  his  father's 
death.  The  policy  named  James  Zimmerman  as  owner.  When  he  died, 
the  policy  proceeds  passed  through  James'  estate  with  a  tax  consequence 
of  approximately  $34,000  and  resulted  in  an  insufficient  balance  to  cover 
the  stock  purchase.  This  deficit  would  not  have  occured  if  the  policy 
had  been  credited  to  the  ownership  of  Steven,  who  paid  all  premiums. 

The  personal  representatives  of  the  estate  sued  State  Farm  and  its 
agents,  contending  that  they  were  negligent  in  faiUng  to  accomplish  the 
undisputed  purpose  of  the  policy. ^^  Neither  Houser  nor  Deutsch  was 
permitted  to  testify  against  the  estate  pursuant  to  Indiana's  dead  man 


''Id.  at  621,  623. 

"United  Farm  Bureau  Mut.  Ins.  Co.  v.  Cook,  463  N.E.2d  522,  528  (Ind.  Ct.  App. 
1984)  (agent  had  duty  to  inquire  into  information  necessary  for  coverage  and  to  inform 
the  insured  that  he  could  not  procure  the  requested  coverage). 

''See,  e.g..  Automobile  Underwriters,  Inc.  v.  Hitch,  169  Ind.  App.  453,  349  N.E.2d 
271  (1976)  (agent  who  had  knowledge  that  proposed  insured,  a  service  station  operator, 
offered  shotgun  shells  for  sale  at  station,  was  negligent  in  failing  to  procure  liability 
insurance  covering  incident  in  which  customer  was  injured  by  defective  shell). 

'M74  N.E.2d  524  (Ind.  Ct.  App.   1985). 

''Id. 

''Id.  at  526. 


1987]  INSURANCE  LA  W  237 

Statutes. ^^ 

Plaintiffs  offered  evidence,  "including  a  retail  credit  report  and  the 
testimony  of  Steven's  wife,"  which  the  court  found  established  that 
State  Farm  knew  the  poHcy  was  meant  to  fund  the  stock  purchase. ^^ 
Further,  the  plaintiff  provided  expert  testimony  which  established  that 
State  Farm's  act  in  failing  to  properly  identify  the  policy  owner  was 
"inconsistent  with  the  skill,  knowledge,  diligence  and  care  ordinarily 
exercised  in  the  insurance  industry. "^^ 

State  Farm  raised  the  defense  of  contributory  negligence  on  the  part 
of  James  Zimmerman."^"  The  appellate  court  found,  however,  that  Zim- 
merman "was  not  famihar  with  the  legal  means"  to  accomplish  the 
intended  purpose  of  his  insurance  "but  relied  on  State  Farm  to  properly 
execute  his  intentions,"  and  therefore  was  not  negligent."^' 

In  State  Farm,  the  court  identified  Houser  and  Deutsch  as  State 
Farm's  local  agents  and,  therefore,  incompetent  witnesses  based  upon 
the  fact  that  they  "actively  negotiated"  a  contract  with  the  deceased 
on  their  principal's  (State  Farm's)  behalf."^^  Were  Houser  and  Deutsch 
held  to  be  independent  brokers,  thus  Zimmerman's  agents,  the  results 
may  have  been  different  in  that  their  testimony  would  not  automatically 
be  incompetent  under  Indiana  Code  section  34-1-14-8,  nor  would  it 
automatically  be  classified  as  "adverse"  and  improper  under  Indiana 
Code  section  34-1-14-6. "^^ 

In  Pekin  Insurance  Co.   v.    Wheeler,"^"^  the  court  of  appeals  found 


"Indiana  statutes  provide  that  a  witness  is  incompetent  to  testify  against  an  estate 
if 

a.  The  action  is  one  in  which  an  administrator  or  executor  is  a  party  or  one  of  the 
parties  is  acting  in  the  capacity  of  an  administrator  or  executor; 

b.  The  action  involves  matters  which  occurred  within  and  during  the  Hfetime  of  the 
decedent; 

c.  The  action  is  a  case  in  which  a  judgment  or  allowance  may  be  made  or  rendered 
for  or  against  the  estate  represented  by  such  executor  or  administrator; 

d.  The  witness  is  a  necessary  party  to  the  issue  and  not  merely  a  party  to  the  record; 

e.  The  witness  is  adverse  to  the  estate  and  must  testify  against  the  estate. 
Ind.  Code  §  34-1-14-6  (1982).  The  section  that  involves  contracts  is  as  follows: 

No  person  who  shall  have  acted  as  an  agent  in  the  making  or  continuing  of  a 
contract  with  any  person  who  may  have  died,  shall  be  a  competent  witness,  in 
any  suit,  upon,  or  involving,  such  contract,  as  to  matters  occurring  prior  to 
the  death  of  such  decedent,  on  behalf  of  the  principal  to  such  contract,  against 
the  legal  representatives,  or  heirs  of  the  decedent,  unless  he  shall  be  called  by 
such  heirs  or  legal  representatives. 
Ind.  Code  §  34-1-14-8  (1982). 

''State  Farm,  474  N.E.2d  at  528. 

''Id. 

^Id. 

''Id. 

''Id.  at  527. 

''See  supra  note  37. 

^493  N.E.2d  172  (Ind.  Ct.  App.   1986). 


238  INDIANA  LAW  REVIEW  [Vol.  20:231 

that  an  insurance  policy  "never  came  into  existence"  after  an  agent 
signed  the  insured's  name  to  an  appHcation  absent  the  insured's  knowl- 
edge/^ In  Pekin,  the  plaintiff,  Pekin  Insurance  Company,  brought  suit, 
claiming  that  its  insureds,  the  Wheelers,  were  covered  under  another 
valid  policy  issued  by  Celina  Insurance  Company/^  The  Wheelers  had 
originally  purchased  a  Republic  Mutual  Insurance  pohcy  (a  Celina  Group 
member),  which  had  an  expiration  date  of  March  1,  1978,  through 
McClain,  an  independent  insurance  agency.  In  February  1978,  McClain 
contacted  Celina  about  issuing  a  second  policy  to  be  effective  on  the 
expiration  of  the  first.  Celina  suggested  that  McClain  forward  an  ap- 
plication, but  cautioned  that  acceptance  would  be  dependent  upon  a 
driving  record  check.  Thereafter,  someone  at  McClain  signed  the  Wheel- 
ers' name  to  an  application  and  forwarded  it  to  Celina. 

In  the  interim,  the  Wheelers  contacted  another  agency  and  purchased 
automobile  coverage  through  Pekin  Insurance  to  replace  their  Republic 
policy. 

Celina  issued  a  policy  to  the  Wheelers  on  the  basis  of  the  application 
signed  by  McClain,  completed  its  investigation  into  Jimmie  Wheeler's 
questionable  driving  record,  and  notified  McClain  that  it  was  cancelling 
the  policy  effective  April  20,  1978.  In  1982,  Pekin  named  Cehna  as  a 
defendant  in  a  lawsuit  concerning  an  accident  on  April  11,  1978,  involving 
Jimmie  Wheeler.  Pekin  claimed  Celina  had  coverage.  Through  discovery, 
Celina  learned  that  the  Wheelers  had  not  signed  the  Celina  appHcation 
nor  were  they  aware  the  appHcation  had  been  made.  Celina  counter- 
claimed  against  Pekin  and  sought  a  declaratory  judgment  that  CeHna's 
policy  was  void  from  its  inception. "^^ 

The  sole  issue  addressed  by  the  court  of  appeals  was  whether  McClain 
had  the  authority  to  bind  Celina  and  the  Wheelers  to  an  insurance 
contract.  The  court  held  it  did  not."*^  The  court  found  that  Celina  had 
no  duty  to  ascertain  the  extent  of  McClain' s  authority  from  Wheeler 
in  that  Jimmie  Wheeler's  forged  signature  was  on  the  application  and 
Celina  was  entitled  to  "believe  it  was  dealing  with  a  bona  fide  appli- 
cant.'"^^ Further,  the  court  found  that  because  there  was  no  "meeting 
of  the  minds"  between  Celina  and  the  Wheelers,  no  contract  had  ever 
been  formed. ^° 

The  case  presents  an  interesting  reversal  of  a  fact  situation.  Here, 
the  issue  was  an  unauthorized  attempt  to  procure  rather  than  a  failure 
to  procure  coverage.  The  case  invites  speculation  as  to  whether  McClain 
would   have  been  liable   for   failure  to   procure   automobile   insurance 


''Id.  at  174. 

'^Id.  at  173-74. 

''Id.  at  173. 

'^Id.  at  174. 

'""Id.  at  173. 

'"Id.  at  174. 


1987]  INSURANCE  LAW  239 

coverage  had  it  not  contacted  Celina  and  had  the  Wheelers'  Repubhc 
poHcy  expired  without  replacement.  Although  it  has  been  held  that  an 
agent  has  no  obligation  to  renew  term  insurance,^'  that  finding  would 
be  dependent  upon  facts  concerning  the  Wheelers'  reliance  on  McClain. 

B.  Insurer's  Liability  for  Punitive  Damages  Assessed 
Against  Its  Agents,  Brokers,  and  Claims  Representatives 

In  Liberty  Mutual  Insurance  Co.  v.  Parkinson, ^^  plaintiff  Mary  Ann 
Parkinson  sued  Liberty  Mutual  Insurance  Company  for  punitive  damages 
for  its  failure  to  settle  an  uninsured  motorist  claim."  Plaintiff  Parkinson 
was  involved  in  a  hit-and-run  collision  and  reported  the  incident  to 
Liberty  Mutual,  her  insurer.  She  asked  Liberty  Mutual's  claim  repre- 
sentative about  her  coverage  for  the  accident  and  the  effect  of  her  claim 
upon  her  insurance  rates.  Liberty's  claim  representative  informed  Par- 
kinson "that  her  rates  would  go  'sky  high'."^"^  She  was  also  told  that 
her  policy  coverage  did  not  include  the  cost  of  a  rental  car. 

Parkinson  relied  on  this  information,  hired  an  attorney,  and  at- 
tempted to  sue  the  hit-and-run  driver,  who  could  not  be  located.  Par- 
kinson then  saw  a  second  attorney,  who  told  her  that  she  was  covered 
under  the  uninsured  motorist  provisions  of  her  Liberty  Mutual  policy. 
Parkinson's  attorney  eventually  settled  her  uninsured  motorist  and  prop- 
erty damage  claims  with  Liberty  Mutual  for  approximately  $6,000.  In 
settling,  however,  Parkinson  reserved  her  right  to  sue  Liberty  Mutual 
for  bad  faith  and  eventually  did  so."  At  trial,  the  court  awarded 
Parkinson  compensatory  damages  of  $2,000  and  punitive  damages  of 
$40,000.^^  Liberty  Mutual  appealed,  alleging,  among  other  errors,  that 
the  award  of  compensatory  damages  was  contrary  to  law  in  that  Par- 
kinson had  been  fully  compensated  for  her  loss  pursuant  to  the  settlement 
agreement.  Liberty  Mutual  also  claimed  that  the  trial  court's  award  of 
punitive  damages  was  contrary  to  law." 


''See  16A  J.  Appleman,  Insurance  Law  &  Practice  §  8832  (1981  &  Supp.  1986). 

"487  N.E.2d  162  (Ind.  Ct.  App.   1985). 

''Id.  at  163. 

''Id. 

"Id. 

''Id. 

'''Id.  Liberty  Mutual  also  contended  that  Indiana  did  not  recognize  the  independent 
tort  of  bad  faith,  upon  which  Parkinson's  suit  was  premised.  The  court  found  that  while 
the  tort  had  been  adopted  by  many  jurisdictions,  it  had  not  been  specifically  adopted  in 
Indiana.  Id.  at  164-65.  The  court,  however,  held  that  Indiana's  "special  contractual 
remedy"  providing  punitive  damages  when  an  insurer's  breach  of  contract  "is  accompanied 
by  an  independent  tort  or  where  a  serious  wrong  of  a  tortious  nature  was  committed  and 
the  public  interest  would  be  served  by  the  deterrent  effect  of  punitive  damages"  was 
sufficient  to  support  plaintiff's  cause  of  action.  Id.  (citing  Travelers  Indem.  Co.  v. 
Armstrong,  442  N.E.2d  349  (Ind.  Ct.  App.  1982)). 


240  INDIANA  LAW  REVIEW  [Vol.  20:231 

The  court  of  appeals  found  that  although  Parkinson  may  have  settled 
for  "all  benefits  due  under  the  policy,  [she]  did  not  receive  all  she  was 
due  under  the  contract. "^^  The  court  noted  that  the  contract  "contained 
a  promise,  implied  in  law,  that  Liberty  Mutual  would  deal  fairly  with 
[Parkinson]  in  settlement  of  any  claim, "^^  and  that  Liberty  Mutual 
breached  this  promise  "by  discouraging  Parkinson  from  filing  a  claim 
that  could  not  in  good  faith  be  disputed. "^°  Parkinson  was  therefore 
entitled  to  compensation  for  the  breached  implied  promise,  including 
damages  incurred  by  the  delay  in  settlement.^' 

The  appellate  court  also  reaffirmed  the  trial  court's  award  of  punitive 
damages  against  Liberty  Mutual  based  upon  the  claim  representative's 
acts  of  dissuading  Parkinson  from  filing  her  claim  and  misrepresenting 
the  terms  of  the  policy. "^  As  an  additional  basis  for  the  punitive  damage 
award,  the  court  of  appeals  cited  Liberty  Mutual's  practices  of  instructing 
its  representatives  "never  to  admit  coverage  or  volunteer  information 
about  a  policy  to  the  policyholder,"  and  of  providing  no  training  for 
its  representatives  in  policy  interpretation.^^ 

The  court  found  that  although  it  may  be  sound  business  practice 
for  representatives  not  to  volunteer  coverage  information,  ''at  a  mini- 
mum, ...  a  claims  representative  should  assist  a  policyholder  in  fihng 
a  claim. "^"^  The  court  held  that  Liberty  Mutual's  failure  to  assist  Par- 
kinson, coupled  with  the  "use  of  'scare  tactics'  "  was  "convincing 
evidence  of  oppression  [which  justified]  the  imposition  of  punitive  dam- 
ages. "^^ 

Liberty  Mutual  petitioned  for  rehearing,  contending  that  the  appellate 
court  failed  to  address  the  issue  of  the  company's  liability  for  the  acts 
of  its  claims  representative.^^  The  court  denied  Liberty's  petition  for 
rehearing,  noting  that  Liberty's  corporate  policy  of  "intentionally  keep[ing] 
claims  representatives  ignorant  of  uninsured  motorist  coverage,"  together 
with  other  evidence,  supported  the  award. ^^ 

In  Bymaster  v.  Bankers  National  Life  Insurance  Co.,^^  applicants 
for  a  life  insurance  policy  sued  both  the  insurance  company  and  the 
agent  for  failure  to  refund  their  complete  advance  premium. ^^  On  Feb- 


'^Id.  at  165. 

'"Id. 

'"Id. 

''Id. 

'Ud.  at  166. 

''Id. 

'^Id.  (emphasis  added). 

''Id. 

^"Liberty  Mut.  Ins.  Co.  v.  Parkinson,  491  N.E.2d  229,  230  (Ind.  Ct.  App.   1986). 

"Id. 

'^HSO  N.E.2d  273  (Ind.  Ct.  App.   1985). 

"'Id.  Sit  276. 


1987]  INSURANCE  LAW  241 

ruary  6,  1979,  plaintiffs  Glenn  and  Rosemary  Bymaster  applied  for  two 
$100,000  Bankers  National  Life  (Bankers)  policies  and  prepaid  the  first 
year  premiums.  They  made  application  for  their  policies  through  defend- 
ant Pat  Mattmann.  Mattmann  was  an  officer  of  Continental  National 
Corporation  (CNC). 

In  1977,  CNC  had  entered  into  a  general  agent's  agreement  with 
Bankers  to  sell  its  policies  as  an  independent  contractor.  Later,  Bankers 
entered  into  a  licensing  agreement  identifying  CNC  as  "general  agent." 
Mattmann  was  appointed  as  CNC's  agent  to  solicit  sales  of  Bankers 
policies  and  was  paid  by  CNC. 

The  agreement  between  Bankers  and  CNC  required  that  all  premiums 
collected  by  CNC  be  kept  in  a  trust  account  due  and  payable  immediately 
to  Bankers,  although  only  ten  percent  was  required  to  be  forwarded 
immediately  to  Bankers.  No  commission  was  earned  by  CNC  until  it 
delivered  the  policy  to  the  insured. 

When  Mattmann  made  his  sales  presentation  to  the  Bymasters,  he 
represented  that  he  was  Bankers'  agent.  He  had  them  fill  out  an  ap- 
plication, which  revealed  that  Mrs.  Bymaster  had  a  history  of  cancer 
and  that  Mr.  Bymaster  had  had  heart  problems.  Nonetheless,  Mattmann 
accepted  their  first  year  premium  payment  and  gave  them  a  conditional 
receipt  signed  by  himself  and  Bankers'  secretary.  Mattmann  also  gave 
the  Bymasters  CNC's  written  guarantee  that  their  premiums  would  be 
returned  if  the  policies  were  not  issued.  CNC  then  forwarded  ten  percent 
of  the  Bymasters'  premium  to  Bankers. 

The  Bymasters'  application  was  denied  by  Bankers  in  May  1979, 
and  ten  percent  of  their  premium  was  returned  from  Bankers  in  June. 
They  were  instructed  by  Bankers  to  contact  CNC  regarding  the  balance. 

At  the  time  it  returned  the  Bymasters'  ten  percent  premium.  Bankers 
had  already  terminated  its  agency  agreement  with  CNC  and  had  lodged 
a  formal  complaint  against  CNC  with  the  Illinois  Insurance  Commis- 
sioner, alleging  that  "CNC  had  repeatedly  misrepresented  the  terms  of 
certain  poHcies  and  had  repeatedly  violated  regulations  concerning  the 
return  of  monies  held  in  their  premium  trust  accounts. "^° 

When  the  Bymasters  demanded  their  premium  from  CNC,  Mattmann 
told  them  he  was  also  an  agent  for  Equitable  Life  Insurance  Company 
and  could  transfer  their  premiums  to  that  account.  The  Bymasters  again 
signed  applications,  but  demanded  that  their  premium  be  returned  when 
they  learned  they  would  have  to  have  additional  medical  examinations. 

Bankers  did  not  learn  that  the  Bymasters  had  not  received  the  full 
return  of  their  premium  until  eight  months  after  it  had  sent  the  Bymasters 
the  ten  percent  check.  Bankers  knew  of  the  intervening  transaction  with 
Equitable  and  assumed  the  refund  problem  had  been  resolved. 


°Id.  at  275. 


242  INDIANA  LAW  REVIEW  [Vol.  20:231 

CNC  subsequently  filed  bankruptcy  and  the  Bymasters  sued  CNC, 
Mattmann,  Bankers,  and  Equitable  for  actual  and  punitive  damages.^' 
At  trial,  the  jury  awarded  verdicts  against  CNC  and  Mattmann  for 
actual  and  punitive  damages,  and  against  Bankers  for  actual  damages 
in  the  amount  of  $28,353.^^  Bankers  obtained  a  judgment  on  the  evidence 
in  its  favor  on  the  punitive  damage  issue. ^^  The  Bymasters  appealed  the 
grant  of  judgment  on  the  evidence  for  Bankers,  and  Bankers  cross- 
appealed  the  award  of  compensatory  damages.^"* 

The  Bymasters  claimed  that  the  trial  court  erred  in  failing  to  award 
punitive  damages  against  Bankers.  They  argued  that  "CNC  and  Matt- 
mann were  Bankers'  agents  and  were  permitted  to  solicit  the  sale  of 
policies,  collect  premiums,  .  .  .  issue  conditional  receipts,  .  .  .  and 
maintain  a  premium  trust  account"  on  behalf  of  Bankers. ^^  The  court 
of  appeals  found  that  no  "fraud  or  other  substandard  conduct"  occurred 
by  CNC,  Mattmann,  or  Bankers  in  soliciting  the  poHcies  or  processing 
applications.^^  In  other  words,  no  substandard  conduct  occurred  while 
CNC  and  Mattmann  were  acting  as  Bankers'  agents.  The  court  noted 
that  the  fraud  allegation  pertained  only  to  the  retention  of  the  ninety 
percent  premium  balance,  an  act  that  occurred  after  Bankers'  agency 
contract  with  CNC  had  terminated. ^^  The  court  further  indicated  that 
even  if  the  agency  relationship  were  not  terminated.  Bankers  would  not 
automatically  be  subject  to  a  punitive  damage  award  if  CNC  and  Matt- 
mann had  engaged  in  fraud. ^^  Citing  Husted  v.  McCloud,^^  the  court 
reiterated  that  "where  an  agent  commits  independent  fraud  for  his  own 
benefit,  he  ceases  to  act  as  an  agent  for  his  principal. "^^  The  court  held 
that  because  Bankers  never  condoned  CNC's  failure  to  return  the  By- 
masters'  premium.  Bankers  was  not  liable  for  punitive  damages.^' 


''Id.  at  276. 

''Id. 

''Id. 

'^Id.  The  Bymasters  also  argued  that  Bankers  had  been  reckless  in  employing  CNC 
and  Mattmann  and  was,  therefore,  liable  for  punitive  damages  under  the  authority  of 
Orkin  Exterminating  Co.  v.  Traina,  461  N.E.2d  693  (Ind.  Ct.  App.  1984)  (later  reversed 
on  appeal  by  the  Indiana  Supreme  Court,  486  N.E.2d  1019  (Ind.   1986)). 

'^Bymaster,  480  N.E.2d  at  278. 

"Id. 

''Id.  at  279. 

'^450  N.E.2d  491  (Ind.  1983).  In  Husted,  one  law  firm  partner  defrauded  a  client 
and  the  law  partnership  by  converting  the  client's  funds.  The  Indiana  Supreme  Court 
found  that  the  innocent  partner,  although  liable  for  actual  damages,  could  not  be  assessed 
punitive  damages.  Id. 

'''By master,  480  N.E.2d  at  279. 

''Id. 


Developments  in  Employment  Discrimination  Law 

Lynn  Brundage  Jongleux* 

During  the  survey  period,  the  United  States  Supreme  Court  and  the 
United  States  Court  of  Appeals  for  the  Seventh  Circuit  decided  a  number 
of  significant  employment  discrimination  cases.  This  Article  will  survey 
those  cases  that  are  most  interesting  and  significant  to  Indiana  attorneys 
practicing  in  that  area.  Developments  under  Title  VII  of  the  Civil  Rights 
Act  of  1964,'  particularly  the  subject  of  sexual  harassment,  will  be  the 
primary  focus. 

I.     Sexual  Harassment 

Meritor  Savings  Bank  v.  Vinson^  marks  the  Supreme  Court's  first  opin- 
ion on  the  subject  of  sexual  harassment  in  the  workplace.  The  Equal 
Employment  Opportunity  Commission  (EEOC)  and  most  courts  that  have 
considered  the  issue  have  found  sexual  harassment  to  be  a  violation  of 
Title  VII. ^  There  nevertheless  have  been  many  unresolved  issues,  such  as 
the  extent  of  an  employer's  liability  for  actions  of  its  supervisors. "*  The 
Court  in  Vinson  resolved  some  issues,  but  left  others  for  a  later  day. 

Mechelle  Vinson  was  hired  in  1974  by  Sidney  Taylor,  a  vice-president 
of  what  later  became  Meritor  Savings  Bank,  to  be  a  teller  trainee  in  the 
branch  of  which  Taylor  was  the  manager.  Vinson  worked  in  the  same 
branch  for  four  years,  moving  through  the  ranks  as  teller,  head  teller 
and  assistant  manager.  In  September  1978,  Vinson  left  work  to  take  an 
indefinite  sick  leave.  She  was  terminated  by  the  bank  in  November  1978 
for  abuse  of  that  leave. ^ 

Vinson  filed  suit  against  the  bank  and  Taylor  under  Title  VII,  claim- 
ing that  she  had  been  sexually  harassed  by  Taylor  throughout  the  four 
years  of  her  employment.^  She  sought  injunctive  relief,  compensatory  and 
punitive  damages,  and  attorney's  fees.^ 


*Partner,  Sommer  &  Barnard,  Indianapolis.  A.B.,  Indiana  University,  1972;  J.D., 
Indiana  University  School  of  Law — Indianapolis,   1977. 

'42  U.S.C.  §§  2000e-2000e-17  (1982)  [hereinafter  Title  VII]. 

M06  S.  Ct.  2399  (1986). 

'See,  e.g.,  the  EEOC's  guidelines  on  sexual  harassment,  29  C.F.R.  §  1604.11  (1986); 
Phillips  V.  Smalley  Maintenance  Serv.,  Inc.,  711  F.2d  1524  (11th  Cir.  1983);  Katz  v.  Dole, 
709  F.2d  251  (4th  Cir.   1983);  Bundy  v.  Jackson,  641  F.2d  934  (D.C.  Cir.   1981). 

"Jongleux,  Developments  in  Employment  Discrimination  Law,  19  Ind.  L.  Rev.  215, 
225-26  (1986). 

'Vinson,   106  S.  Ct.  at  2402. 

"•Id. 

Ud.  Vinson  initially  did  not  seek  reinstatement  nor  allege  that  her  discharge  violated 
Title  VII.  Shortly  before  trial,  her  attempt  to  amend  her  complaint  to  add  those  elements 

243 


244  INDIANA  LAW  REVIEW  [Vol.  20:243 

At  trial,  the  district  court  heard  eleven  days  of  testimony/  Vinson 
testified  that  shortly  after  she  had  completed  the  teller  trainee  program, 
Taylor  had  invited  her  to  dinner  and  suggested  that  they  have  a  sexual 
relationship.^  She  testified  that  she  had  declined  at  first,  but  then 
acquiesced  for  fear  of  losing  her  job.'°  She  testified  that  over  the  next 
several  years,  Taylor  demanded  sexual  favors  on  numerous  occasions, 
fondled  her  in  front  of  other  employees,  and  forcibly  raped  her  on  several 
occasions.  •' 

Taylor  flatly  denied  that  he  had  sexually  harassed  or  engaged  in  a 
sexual  relationship  with  Vinson.'^  He  claimed  that  Vinson's  accusations 
were  motivated  by  a  business  dispute.'^  The  bank's  evidence  was  that  it 
had  no  knowledge  of  Vinson's  being  sexually  harassed,  and  that  if  harass- 
ment had  occurred,  it  was  without  the  bank's  consent  or  approval. •'* 

The  district  court  ruled  against  Vinson,  finding  that  she  "was  not 
the  victim  of  sexual  harassment  or  sexual  discrimination"  when  she  was 
employed  by  the  bank.'^  The  court  did  not  resolve  the  credibility  dispute 
between  Vinson  and  Taylor.  Rather,  its  decision  was  based  on  a  finding 
that  if  there  had  been  a  sexual  relationship,  it  was  voluntary  and  had 
"nothing  to  do  with  [Vinson's]  continued  employment  at  [the  bank]  or 
her  advancement  or  promotions  at  that  institution.'"^  The  district  court 
apparently  believed  that  sexual  harassment,  in  order  to  be  actionable,  must 
be  accompanied  by  tangible  job  detriment. '^ 

Even  though  the  trial  court  found  no  sexual  harassment,  it  never- 
theless went  on  to  discuss  the  bank's  potential  hability  for  Taylor's  acts. 
The  court  noted  that  the  bank  had  an  express  policy  against  discrimina- 
tion and  an  internal  process  by  which  complaints  could  be  remedied.'* 
It  found  that  since  Vinson  had  not  notified  the  bank  of  the  alleged  sex- 
ual harassment  through  the  procedure  or  otherwise,  the  bank  was  without 
notice  and  not  liable  for  Taylor's  actions.'^ 

Vinson  appealed  to  the  United  States  Court  of  Appeals  for  the  District 
of  Columbia  Circuit.^"  The  circuit  court,  drawing  from  its  earlier  deci- 


and  non-federal  claims  was  denied  by  the  district  court.  Vinson  v.  Taylor,  753  F.2d  141, 
143  n.l2  (D.C.  Cir.   1985). 

'Vinson,   106  S.  Ct.  at  2402. 

'Id. 

''Id. 

''Id. 

"Id.  Sit  2403. 

''Id. 

"Id. 

' 'Vinson  v.  Taylor,  23  Fair  Empl.  Prac.  Cas.  (BNA)  37,  43  (D.D.C.   1980). 

"Id.  at  42  (footnote  omitted). 

"Id.;  106  S.  Ct.  at  2403. 

"Vinson,   106  S.  Ct.  at  2403. 

'^ Vinson,  23  Fair  Empl.  Prac.  Cas.  at  41. 

^"Vinson  v.  Taylor,  753  F.2d  141  (D.C.  Cir.  1985). 


1987]  EMPLOYMENT  DISCRIMINATION  245 

sion  in  Bundy  v.  Jackson, ^^  described  two  types  of  sexual  harassment. 
The  first  is  the  so-called  quid  pro  quo  type- of  harassment,  involving  con- 
ditioning of  concrete  employment  benefits  on  sexual  favors.  The  second 
is  the  hostile  environment  type  of  sexual  harassment,  involving  no 
economic  detriment  but  rather  affecting  the  work  environment  to  such 
an  extent  that  it  becomes  hostile  or  offensive. ^^  The  circuit  court  con- 
cluded that  Vinson  had  stated  a  claim  for  the  hostile  environment  kind 
of  sexual  harassment  and  remanded  because  the  district  court  had  not 
considered  whether  the  testimony  described  that  kind  of  violation." 

The  circuit  court  also  held  that  Vinson's  voluntariness  was  not  rele- 
vant to  a  finding  that  sexual  harassment  had  occurred. ^''  The  appropriate 
inquiry  was  whether  Taylor  had  made  toleration  of  his  sexual  advances 
a  condition  of  Vinson's  employment."  The  court,  uncertain  what  the 
district  court  meant  by  its  voluntariness  conclusion,  speculated  that  cer- 
tain evidence  that  had  been  admitted  by  the  district  court  about  Vinson's 
"dress  and  personal  fantasies"  had  led  that  court  to  conclude  that  her 
participation  in  the  sexual  relationship  had  been  voluntary. ^^  The  circuit 
court  concluded  that  that  evidence  "had  no  place  in  this  litigation."" 

The  D.C.  Circuit  rejected  the  district  court's  conclusion  that  the  bank 
could  not  be  liable  for  Taylor's  actions  because  it  had  no  notice  of  them." 
Instead,  the  court  concluded  that  general  Title  VII  principles  should  be 
applied  to  impose  vicarious  liability  on  employers  for  sexual  harassment, 
just  as  it  is  imposed  for  other  types  of  discrimination."  The  court  relied 
in  part  on  Title  VII's  definition  of  employer  as  including  "agents,"  and 
held  that  Taylor  was  an  agent  of  the  bank  with  respect  to  the  other 
employees  in  the  branch  of  which  he  was  manager.^"  Ironically  in  light 
of  the  EEOC's  arguments  before  the  Supreme  Court,  the  court  attached 
"considerable  weight"  to  the  EEOC's  guidelines,  which  provide  for  liability 
"regardless  of  whether  the  specific  acts  complained  of  were  authorized 
or  even  forbidden  by  the  employer  and  regardless  of  whether  the  employer 
knew  or  should  have  known  of  their  occurrence."^' 

The  Supreme  Court  thus  had  before  it  several  issues.  First,  the 
divergence  between  the  district  court  and  the  circuit  court  decisions  raised 


^'641  F.2d  934  (D.C.  Cir.   1981). 

''Vinson,  753  F.2d  at  144-45  (citing  Bundy,  641  F.2d  934;  Barnes  v.  Costle,  561  F.2d 
983  (D.C.  Cir.   1977));  see  also  Jongleux,  supra  note  4,  at  225  n.94. 

'^Vinson,  753  F.2d  at  145  (footnotes  omitted). 

''Id.  at  146. 

'^Id.  ("[A]  victim's  capitulation  to  on-the-job  sexual  advances  cannot  work  a  forfeiture 
of  her  opportunity  for  redress."). 

''Id.  at  n.36. 

"Id. 

"Id.  at  147. 

"Id.  at  149. 

">Id.  at   147-48. 

''Id.  at  149  (quoting  29  C.F.R.   §   1604.11(c)  (1984)). 


246  INDIANA  LA  W  REVIEW  [Vol.  20:243 

the  issue  of  whether  a  hostile  environment  created  by  sexual  harassment 
without  tangible  economic  loss  was  a  violation  of  Title  VII.  The  second 
issue  presented  to  the  Court  was  whether  the  fact  that  Vinson  voluntarily 
entered  into  the  sexual  relationship  with  Taylor  precluded  her  succeeding 
in  her  Title  VII  case.  Finally,  and  most  significantly,  the  Court  was 
presented  with  the  issue  of  whether  an  employer  can  be  liable  for  actions 
of  a  supervisor  that  create  a  hostile  working  environment  if  the  super- 
visor's behavior  has  not  been  brought  to  the  employer's  attention. ^^ 

The  Court  first  ruled  unequivocally  that  no  tangible  economic  loss 
was  necessary  for  sexual  harassment  to  constitute  a  violation  of  Title  VII. ^^ 
The  Court  first  looked  to  the  statute  itself  and  found  no  indication  that 
Congress  intended  to  limit  Title  VII's  scope  as  urged  by  the  bank.^''  The 
Court  then  approved  the  definition  of  sexual  harassment  in  the  EEOC's 
guidehnes.^^  Reviewing  the  "substantial  body  of  judicial  decisions  and 
EEOC  precedent"  upon  which  the  EEOC's  guidelines  were  based,  the 
Court  concluded  that  the  EEOC's  guidehnes  "were  fully  consistent  with 
.  .  .  existing  law"  in  providing  that  "hostile  environment"  sexual  harass- 
ment is  sex  discrimination.^^  Thus,  "a  plaintiff  may  estabUsh  a  violation 
of  Title  VII  by  proving  that  discrimination  based  on  sex  has  created  a 
hostile  or  abusive  work  environment."^'  But  the  Court  went  on  to  cau- 
tion that  sexual  harassment  must  be  "sufficiently  severe  or  pervasive  'to 
alter  the  conditions  of  [the  victim's]  employment  and  create  an  abusive 
work  environment'  "  in  order  to  constitute  actionable  sexual  harassment. ^^ 

The  Court  then  examined  two  alternative  bases  for  the  district  court's 
conclusion  that  Vinson  had  not  been  the  victim  of  sex  discrimination, 
to  determine  whether  that  conclusion  had  disposed  of  Vinson's  claims. 
It  held  that  both  bases  were  erroneous  as  a  matter  of  law  and  upheld 
the  appellate  court's  order  to  remand. ^^  First,  the  trial  court  had  failed 
to  consider  a  hostile  environment  theory  of  sexual  harassment  because 
of  an  erroneous  view  that  some  economic  effect  on  Vinson's  employment 
was  necessary. ""^  A  second  possible  basis  for  the  district  court's  decision 

^^Some  courts,  while  imposing  strict  liability  in  quid  pro  quo  cases,  have  applied  a 
"knew  or  should  have  known"  standard  in  hostile  environment  cases.  See,  e.g.,  Katz  v. 
Dole,  709  F.2d  251  (4th  Cir.   1983). 

''Vinson,  106  S.  Ct.  at  2404. 

''Id.  at  2404-05. 

''Id.  at  2405. 

'^Id.  The  EEOC's  guidelines  provide  that  "unwelcome  sexual  advances,  requests  for 
sexual  favors,  and  other  verbal  or  physical  conduct  of  a  sexual  nature"  are  actionable  sex- 
ual harassment  where  "such  conduct  has  the  purpose  or  effect  of  unreasonably  interfering 
with  an  individual's  work  performance  or  creating  an  intimidating,  hostile,  or  offensive 
working  environment."  29  C.F.R.  §  1604.11(a)(3)  (1986). 

"Vinson,  106  S.  Ct.  at  2405-06. 

"Id.  at  2406  (citing  Henson  v.  Dundee,  682  F.2d  897,  902  (11th  Cir.   1982)). 

"Id. 

'''Id. 


1 987]  EMPLO  YMENT  DISCRIMINA  TION  241 

may  have  been  its  conclusion  that  Vinson  engaged  in  the  relationship  with 
Taylor  voluntarily;  the  Court  rejected  that  basis  as  well/'  Instead  of  focus- 
ing on  the  fact  that  Vinson  was  not  forced  against  her  will  to  participate 
in  the  sexual  relationship,  the  district  court  should  have  determined  whether 
Vinson  "by  her  conduct  indicated  that  the  alleged  sexual  advances  were 
unwelcome  .  .  .  .'"^^ 

Having  determined  that  a  remand  was  necessary,  the  Court  disagreed 
with  the  D.C.  Circuit's  flat  prohibition  of  any  evidence  of  Vinson's  pro- 
vocative dress  or  speech,  and  concluded  that  *'such  evidence  is  obviously 
relevant"  to  the  issue  of  whether  Vinson  found  Taylor's  sexual  advances 
in  fact  to  be  unwelcome/^  In  response  to  Vinson's  contention  that  the 
relevance  of  such  evidence  is  outweighed  by  its  prejudicial  effect,  the  Court 
held  that  that  determination  was  best  made  by  the  district  court /"* 

Finally,  the  Court  addressed  the  question  of  whether  an  employer  may 
be  held  strictly  liable  for  the  acts  of  its  supervisors  in  creating  a  hostile 
environment,  even  if  the  employer  neither  knew  nor  should  have  known 
of  the  misconduct,  and  whether  the  existence  of  an  internal  grievance  pro- 
cedure and  antidiscrimination  policy  has  an  effect  on  that  issue.  The 
Court's  majority  ultimately  decUned  to  answer  this  question,  noting  that 
the  issue  had  a  "rather  abstract  quality"  given  the  record  before  the 
Court /^  The  Court's  discussion  leading  to  that  conclusion  provides  helpful 
guidelines  for  employers  seeking  to  prevent  liability  for  sexual  harassment. 

The  Court  first  addressed  the  EEOC's  arguments.  In  an  apparent 
departure  from  its  own  guidelines,'*^  the  EEOC,  appearing  as  amicus  curiae, 
argued  that  strict  liability  to  employers  for  sexual  harassment  by  super- 
visors was  appropriate  in  quid  pro  quo  incidents,  but  not  in  hostile  en- 
vironment situations.''^  The  agency  reasoned  that  Congress  had  intended 
that  agency  principles  apply  to  analyses  under  Title  VII. ''^  Application 
of  those  principles  in  hostile  environment  cases  might  not  lead  to  a  con- 
clusion of  Hability  on  an  agency  theory.  Rather,  the  EEOC  advocated 
that  in  cases  where  an  employer  has  available  a  complaint  procedure 
"  'reasonably  responsive  to  the  employee's  complaint,'  "  the  employer 
should  be  shielded  from  liability  for  hostile  environment  sexual  harass- 
ment if  the  employee  fails  to  avail  herself  of  the  procedure.'*'  Thus,  the 


*^Id.  The  Court  recognized  that  the  determination  of  whether  advances  were  unwelcome 
'presents  difficult  problems  of  proof  ....'"  Id. 
'Ud.  at  2407. 
''Id. 

''Id.  at  2408. 
'^See  supra  note  36. 
''Vinson,   106  S.  Ct.  at  2407-08. 
"Id.  at  2408. 
'Ud.  (quoting  the  EEOC's  amicus  curiae  brief,  at  26). 


248  INDIANA  LAW  REVIEW  [Vol.  20:243 

EEOC  advocated  strict  liability  for  quid  pro  quo  sexual  harassment  but 
liability  for  hostile  environment  sexual  harassment  only  if  the  employer 
has  notice  or  has  no  internal  complaint  procedure  designed  to  resolve  sex- 
ual harassment  claims. 

While  refusing  to  "issue  a  definitive  rule"  on  the  subject,  the  Supreme 
Court  did  eliminate  two  possibilities.  First,  it  rejected  the  circuit  court's 
conclusion  that  employers  are  absolutely  liable  for  the  actions  of  their 
supervisors,  "regardless  of  the  circumstances  of  a  particular  case."^°  Sec- 
ond, it  concluded  that  an  employer's  lack  of  notice  of  sexual  harassment 
does  not  protect  the  employer  from  liability.^' 

The  Court  approved  the  application  of  agency  principles  in  determin- 
ing liability  under  Title  VII,  concluding  that  Congress  intended  to  "place 
some  limits  on  the  acts  of  employees  for  which  employers  under  Title 
VII  are  to  be  held  responsible.""  There  is  thus  the  possibility  that  the 
Court  would  approve  an  employer's  assertion  of  the  common  law  defense 
that  the  supervisor  was  acting  outside  the  scope  of  his  authority  when 
he  committed  acts  of  sexual  harassment.  The  bank  argued  that  it  was 
protected  from  liability  because  it  had  in  place  an  internal  grievance  pro- 
cedure and  anti-discrimination  policy  that  Vinson  failed  to  use.^^  The  Court 
noted  that  those  facts  were  relevant  but  not  dispositive.^^  The  bank's  pro- 
cedure did  not  address  sexual  harassment  in  particular,  and  it  required 
complaints  to  be  made  to  the  employee's  supervisor. ^^  The  Court  left  open 
the  possibility  that  an  employer  could  insulate  itself  from  liability  "if  its 
procedures  were  better  calculated  to  encourage  victims  of  harassment  to 
come  forward. "^^ 

Four  members  of  the  Court  joined  in  a  concurring  opinion  authored 
by  Justice  Marshall  that  did  address  the  issue  of  employer  liability  and 
rejected  the  EEOC's  position. ^^  The  opinion  took  issue  with  the  EEOC's 
position  that  supervisors'  responsibilities  begin  and  end  with  hiring,  firing, 
and  disciplinary  decisions,  and  concluded  that  "a  supervisor  is  charged 
with  the  day-to-day  supervision  of  the  work  environment  and  with  ensur- 
ing a  safe,  productive,  workplace. "^^  The  concurring  justices  thus  rejected 
the  concept  that  an  employer  is  not  liable  for  a  hostile  environment  created 
by  sexual  harassment  unless  he  has  notice.  Rather,  they  advocated  the 
application  of  the  same  rule  applied  in  all  other  Title  VII  cases:  "sexual 


''Id.  at  2409. 

''Id.  at  2408. 

'Ud. 

''Id.  at  2408-09. 

'*Id.  at  2409. 

"Id.  Vinson  thus  would  have  had  to  file  her  complaint  with  Taylor,  the  alleged  harasser. 

"Id. 

'Ud.  (Marshall,  J.,  concurring). 

'Ud.  at  2410  (Marshall,  J.,  concurring). 


1 987]  EMPLO  YMENT  DISCRIMINA  TION  249 

harassment  by  a  supervisor  of  an  employee  under  his  supervision,  leading 
to  a  discriminatory  work  environment,  should  be  imputed  to  the  employer 
for  Title  VII  purposes  regardless  of  whether  the  employee  gave  'notice' 
of  the  offense."^' 

The  Supreme  Court's  opinion  and  the  EEOC's  position  in  this  case 
make  it  clear  that  in  order  to  avoid  liability  for  sexual  harassment, 
employers  should  institute  internal  policies  that  prohibit  discrimination  in 
general  and  sexual  harassment  in  particular.  Internal  complaint  or  grievance 
procedures  should  be  established  and  communicated  to  employees.  The 
identity  of  the  person  to  whom  complaints  should  be  directed  should  be 
carefully  considered,  to  avoid  the  possibility  that  an  employee  would  have 
to  complain  to  the  alleged  harasser.  Complaints  under  these  procedures 
should  be  investigated  and  dealt  with  quickly  and  appropriately,  including 
taking  disciphnary  action  against  violators.  Given  the  EEOC's  position 
in  Vinson,  it  is  likely  that  the  existence  of  such  pohcies  and  procedures 
can  be  a  significant  factor  in  that  agency's  handling  of  a  charge  of  sexual 
harassment.  In  addition,  the  Court's  opinion  provides  a  basis  for  a  court 
in  future  Title  VII  litigation  to  consider  the  existence  of  such  a  procedure 
and  the  victim's  failure  to  use  it  as  relevant  in  a  hostile  environment  case. 

In  Zabkowicz  v.  West  Bend  Co.,^^  the  Seventh  Circuit  decided  several 
interesting  issues  that  may  arise  in  sexual  harassment  cases  in  federal  court. 
Zabkowicz  sued  West  Bend,  her  employer,  and  three  supervisors  for  fail- 
ing to  protect  her  from  sexual  harassment  by  her  co-employees  after  she 
had  notified  them  that  it  was  taking  place. ^'  As  a  result  of  the  harass- 
ment, she  had  developed  physical  and  emotional  symptoms  that  required 
her  to  be  off  work  for  approximately  three  months.  West  Bend  eventually 
put  a  stop  to  the  harassment  after  she  filed  a  charge  with  the  EEOC. 
Zabkowicz  then  also  sued  four  of  her  co-workers.  West  Bend,  the  three 
supervisors,  and  the  union  representing  her,  alleging  intentional  infliction 
of  emotional  distress."  The  parties  agreed  that  the  tort  claims  against 
the  individual  co-workers  would  be  severed  for  trial."  Before  trial,  the 
trial  court  dismissed  the  intentional  infliction  of  emotional  distress  claims 
against  West  Bend  and  the  supervisors  on  the  ground  that  they  were  barred 
by  the  exclusive  remedy  provision  of  Wisconsin's  Worker's  Compensa- 
tion Act.^'* 


^'^Id.  at  2411  (Marshall,  J.,  concurring).  The  concurring  justices  acknowledged  that 
there  may  be  circumstances  in  which  some  limitation  on  liability  is  appropriate,  giving  the 
example  of  a  supervisor  who  commits  harassment  in  an  area  to  which  he  is  not  assigned.  Id. 

*''789  F.2d  540  (7th  Cir.  1986).  Zabkowicz  was  decided  on  April  24,  1986,  some  two 
months  before  the  Supreme  Court's  decision  in  Vinson.  The  Court's  decision  in  Vinson 
did  not  affect  the  outcome  of  any  issues  in  this  case. 

^'Zabkowicz  v.  West  Bend  Co.,  589  F.  Supp.  780,  781-82  (E.D.  Wis.   1984). 

''Zabkowicz,  789  F.2d  at  542. 

''Id. 

"'Id.  at  543;  Wis.  Stat.  Ann.  §   102.03(1)  (West  1973). 


250  INDIANA  LA  W  REVIEW  [Vol.  20:243 

The  sexual  harassment  issues  under  Title  VII  and  the  Wisconsin  Fair 
Employment  Act  were  tried  to  the  court,  which  found  that  West  Bend 
was  liable  under  both  statutes  for  failing  to  take  corrective  measures  when 
it  became  aware  of  Zabkowicz'  co-workers'  offenses/^  The  court  awarded 
Zabkowicz  back  pay  of  $2,763.20,  which  represented  pay  lost  during 
medical  leaves/^  Having  decided  all  of  the  federal  claims  in  the  case,  the 
court  then  dismissed  the  state  tort  law  claims  against  the  co-workers  on 
the  ground  that  it  had  no  independent  basis  of  federal  jurisdiction  over 
them  and  should  not  assert  "pendent  party"  jurisdiction/'  The  court  also 
denied  Zabkowicz'  petition  for  attorney's  fees,  asserting  that  the  fee  re- 
quest of  some  $127,000  was  exaggerated  and  did  not  distinguish  between 
hours  spent  on  her  Title  VII  claim  and  those  spent  on  her  other  claims/^ 
Zabkowicz  appealed  the  dismissal  of  her  tort  claims  and  the  denial  of 
attorney's  fees/^ 

The  Seventh  Circuit  first  examined  the  question  of  whether  worker's 
compensation  was  Zabkowicz'  exclusive  state  remedy  for  emotional  distress 
occasioned  by  sexual  harassment.  DecHning  to  certify  the  question  to  the 
Wisconsin  Supreme  Court,  the  Seventh  Circuit  consulted  cases  decided 
under  Wisconsin's  statute  and  determined  that  under  Wisconsin  law,  emo- 
tional distress  is  compensable  as  an  "injury."'"  Definitions  and  cases  under 
Wisconsin's  statute  provided  that  emotional  stress  or  strain  without  ac- 
companying physical  trauma  could  be  deemed  covered  injuries.''  Further, 
noting  that  the  focus  is  on  the  injury  itself  and  not  the  acts  causing  the 
injury  when  determining  whether  an  injury  was  accidental,  the  court  con- 
cluded that  Zabkowciz'  injuries  were  accidental,  even  if  the  sexual  harass- 
ment was  intentional.'^  Thus,  the  court  upheld  the  district  court's  dismissal 
of  those  claims  as  being  barred  under  Wisconsin  law.'^ 

The  court  then  turned  to  the  pendent  parties  doctrine.  Issues  of  pen- 
dent jurisdiction  are  difficult  enough  in  sexual  harassment  cases  when  the 
same  parties  are  involved  in  both  federal  and  state  claims.  The  courts 
must  in  each  case  determine,  pursuant  to  the  test  set  out  in  United  Mine 


''Zabkowicz,  589  F.  Supp.  at  785. 

''Id. 

"Zabkowicz,  789  F.2d  at  543. 

''Id. 

"Id. 

''Id.  at  543-44. 

''Id.  Wis.  Stat.  Ann.  §  102.01(2)(c)  (West  Supp.  1986)  defined  a  covered  injury  as 
"mental  or  physical  harm  to  an  employee  caused  by  accident  or  disease  .  .  .  [including] 
mental  harm  or  emotional  stress  or  strain  without  physical  trauma,  if  it  arises  from  ex- 
posure to  conditions  or  circumstances  beyond  those  common  to  occupational  or  nonoc- 
cupational life." 

''Zabkowicz,  789  F.2d  at  545. 

"Id. 


1 987]  EMPLO  YMENT  DISCRIMINA  TION  25 1 

Workers  v.  Gibbs,^^  whether  the  proof,  scope  of  issues,  remedies  sought, 
and  other  aspects  of  the  state  law  claims  predominate  over  the  federal 
Title  VII  claims.  An  affirmative  answer  dictates  the  denial  of  pendent 
jurisdiction.'^  The  addition  to  that  equation  of  parties  as  to  whom  only 
state  law  claims  are  asserted — pendent  parties — makes  the  courts'  deci- 
sion in  each  case  even  more  difficult. 

The  Seventh  Circuit  analyzed  the  pendent  parties  issue  in  Zabkowicz' 
case  by  applying  a  two-part  test  it  drew  from  the  Supreme  Court's  deci- 
sion in  Aldinger  v.  Howard. ^^  The  first  part  of  the  test  is  constitutionally 
based.''  There  must  be  a  federal  claim  of  sufficient  substance  to  confer 
federal  jurisdiction,  and  the  federal  and  state  claims  must  arise  from  a 
"common  nucleus  of  operative  fact"  such  that  the  claims  would  be  ex- 
pected to  be  tried  in  one  forum — the  United  Mine  Workers  v.  Gibbs  test.'* 
The  second  prong  of  the  pendent  parties  test  requires  the  court  to  look 
to  the  basis  for  federal  jurisdiction  and  deny  jurisdiction  if  it  appears 
that  Congress  did  not  intend  for  a  particular  pendent  claim  to  be  brought 
in  federal  court. '^  As  with  all  pendent  jurisdiction  decisions,  the  ultimate 
exercise  of  jurisdiction  is  in  the  discretion  of  the  trial  court,  which  looks 
to  "  'considerations  of  judicial  economy,  convenience  and  fairness  to 
litigants.'  "^'^ 

Zabowicz'  Title  VII  claims  satisfied  the  first  prong  of  the  test,  but 
the  court  had  some  difficulty  concluding  that  Congress  intended  for  co- 
employees  to  be  brought  into  the  case  by  way  of  pendent  state  claims 
when  they  could  not  have  been  sued  under  Title  VII.*'  The  court  noted, 
however,  that  the  Supreme  Court  under  Aldinger  would  permit  combina- 
tion of  such  claims  despite  an  apparent  lack  of  congressional  intent  if 
the  grant  of  federal  jurisdiction  were  exclusive.*^  Assuming  but  explicitly 
not  holding  that  Title  VII  jurisdiction  is  exclusively  federal,*^  the  court 


'"383  U.S.  715  (1966). 

''See,  e.g.,  Bouchet  v.  National  Urban  League,  730  F.2d  799  (D.C.  Cir.  1984),  wherein 
the  court  somewhat  colorfully  concluded  that  "[the  state  claims]  would  be  pendent  to  this 
Title  VII  litigation  much  as  a  dog  is  pendent  to  its  tail."  Id.  at  805-06. 

'H21  U.S.   1  (1976). 

''Zabkowicz,  789  F.2d  at  546  (citing  U.S.  Const,  art.  III). 

''Id.  (citing  Gibbs,  383  U.S.  715). 

"Id.  (citing  Owen  Equip.  &  Erection  Co.  v.  Kroger,  437  U.S.  365,  373  (1978)  (quoting 
Aldinger,  All  U.S.  at  18)). 

'"Id.  (quoting  Gibbs,  383  U.S.  at  726). 

"The  court  affirmed  the  district  court's  conclusion  that  "Title  VII  does  not  provide 
a  means  for  an  employee  to  sue  non-supervisory  co-workers  for  discriminatory  acts."  Id. 
(citation  omitted).  See  42  U.S.C.  §  2000e-5(f)(l)  (1982). 

''Zabkowicz,  789  F.2d  at  547. 

*^The  court  has  in  at  least  one  other  case  suggested  that  federal  jurisdiction  over  Title 
VII  claims  may  not  be  exclusive.  Patzer  v.  Board  of  Regents,  763  F.2d  851,  855  n.4  (7th 
Cir.   1985). 


252  INDIANA  LAW  REVIEW  [Vol.  20:243 

nevertheless  found  the  district  court's  dismissal  of  the  claims  to  be  proper 
because  the  tort  claims  had  been  severed  for  trial. ^^  The  interests  of  judicial 
economy,  which  might  have  been  present  if  the  state  law  claims  had  been 
tried  along  with  the  Title  VII  claims,  would  not  have  been  served  by  a 
separate  trial  of  the  state  claims  in  federal  court /^  It  appears  that  both 
the  district  court^^  and  the  Seventh  Circuit*^  would  have  approved  the 
assertion  of  pendent  parties  jurisdiction  had  it  not  been  for  the  severance 
of  the  state  claims.  That  fact  should  be  a  tactical  consideration  for  parties 
in  sexual  harassment  cases  involving  pendent  claims  or  parties. 

The  Seventh  Circuit  then  held  that  the  district  court's  total  denial 
of  attorney's  fees  had  been  an  abuse  of  discretion.*^  Conceding  that 
Zabkowicz'  fee  request  was  probably  "excessive  and  unreasonable,"  the 
court  nevertheless  held  that  it  was  not  so  egregious  as  to  justify  a  com- 
plete denial  of  fees.*^  The  court  then  addressed  two  issues  raised  by  the 
parties  that  should  be  considered  by  the  district  court  on  remand  in 
deciding  the  fee  to  be  awarded.  First,  the  circuit  court  concluded  that 
fees  could  be  awarded  for  time  spent  on  the  non-Title  VII  claims  so  long 
as  the  other  claims  arose  "out  of  a  common  factual  core  or  [were]  based 
on  related  legal  theories. "^°  According  to  the  court,  to  attempt  to  separate 
the  time  spent  on  different  legal  theories  would  be  an  "  'exercise  in  futil- 
ity.' "^^  The  tort  claims  against  West  Bend,  the  supervisors,  and  the  co- 
workers were  considered  by  the  court  clearly  to  involve  a  "common  core 
of  facts. "^^  State  tort  law  claims  by  Zabkowicz'  husband,  on  the  other 
hand,  were  held  to  be  noncompensable."  Finally,  because  Zabkowciz  had 
stipulated  to  the  dismissal  of  labor  law  and  tort  claims  against  West  Bend 
and  the  union,  apparently  without  receiving  any  payment,  she  should  not 
be  entitled  to  attorney's  fees  for  those  claims  because  they  had  done 
nothing  to  "advance  the  vindication  of  .  .  .  her  civil  rights."^'*  The  Seventh 


''Zabkowicz,  789  F.2d  at  548. 

''Id. 

"589  F.  Supp.  780. 

''The  Seventh  Circuit's  attitude  toward  pendent  parties  jurisdiction  has  softened  con- 
siderably over  the  past  several  years.  Compare  Hixon  v.  Sherwin-WiUiams  Co.,  671  F.2d 
1005  (7th  Cir.  1982)  and  Johnson  v.  Miller,  680  F.2d  39  (7th  Cir.  1982)  with  Thomas  v. 
Shelton,  740  F.2d  478,  487  (7th  Cir.  1984)  ("Although  pendent  party  jurisdiction  is  not 
dead,  neither  is  it  in  the  best  of  health")  and  Moore  v.  Marketplace  Restaurant,  Inc.,  754 
F.2d  1336,  1359  (7th  Cir.  1985)  ("The  'pendent  parties'  concept  has,  it  is  true,  wobbly 
constitutional  foundations."). 

''Zabkowicz,  789  F.2d  at  549. 

"Id.  at  550. 

'"Id.  at  551. 

''Id.  (quoting  Garrity  v.,Sununu,  752  F.2d  727,  734-35  (1st  Cir.   1984)). 

'Ud. 

''Id.  at  551-52. 

''Id.  at  552  (citing  Christiansburg  Garment  Co.  v.  EEOC,  434  U.S.  412  (1978)). 


1987]  EMPLOYMENT  DISCRIMINATION  253 

Circuit  ordered  the  district  court  to  reexamine  the  attorney's  fee  request 
in  Hght  of  its  decision  and  to  determine  which  fees  were  reasonably  ex- 
pended in  pursuing  her  claims. ^^  In  the  court's  view,  the  small  amount 
of  back  pay  recovered  by  Zabkowicz  should  not  preclude  her  recovering 
a  substantial  fee;  but  because  she  sought  only  pecuniary  and  no  injunc- 
tive or  declaratory  relief,  neither  should  she  or  her  attorney  be  permitted 
a  windfall.'^  The  ultimate  amount  of  the  fee  award  was  left  to  the  discre- 
tion of  the  district  court.'' 

The  court's  holdings  in  this  case  are  instructive  to  Indiana  practitioners 
in  the  employment  discrimination  area.  Defendant  employers  have,  in  some 
lower  federal  court  cases,  asserted  with  mixed  success  that  worker's  com- 
pensation was  a  sexual  harassment  victim's  exclusive  remedy  for  emotional 
injury.  Indiana's  worker's  compensation  law'^  is  not  as  clear  as  Wiscon- 
sin's apparently  was  to  the  Seventh  Circuit.  While  *' injury  by  accident" 
is  defined  in  terms  similar  to  those  in  Wisconsin's  statute, '^  it  is  unclear 
whether  emotional  stress  can  constitute  a  covered  injury  without  some 
actual  physical  trauma  associated  with  it,  although  one  district  of  The 
Indiana  Court  of  Appeals  has  held  that  no  physical  injury  is  necessary. '°° 
Ultimately,  this  question  may  have  to  be  certified  to  the  Indiana  Supreme 
Court  for  a  ruling. 

II.     Affirmative  Action 

The  subject  of  affirmative  action  continues  to  be  confusing  to  analysts 
and  alarming  to  employers  attempting  to  identify  standards  to  avoid  liabil- 
ity to  both  minorities  and  nonminorities.  The  United  States  Supreme  Court 
decided  one  affirmative  action  case  during  the  survey  period  that  did  lit- 
tle to  alleviate  the  confusion. '°' 


''Id.  at  553. 

''Id.  at  552-53. 

'Ud.  at  553. 

'«lND.  Code  Ann.  §§  22-3-1-1  to  -10-3  (West  1981  &  Supp.   1986). 

'"'  'Injury'  and  'personal  injury'  mean  only  injury  by  accident  arising  out  of  and 
in  the  course  of  the  employment  and  do  not  include  a  disease  in  any  form  except  as  it 
results  from  the  injury."  Ind.  Code  Ann.   §  22-3-6-l(e)  (West  Supp.  1986). 

"""Compare  Campbell  v.  Kiser  Corp.  &  Diecast,  137  Ind.  App.  366,  208  N.E.2d  727 
(1965)  and  Sollitt  Constr.  Co.  v.  Walker,  127  Ind.  App.  213,  135  N.E.2d  623  (1956)  with 
Hansen  v.  Von  Duprin,  Inc.,  496  N.E.2d  1348  (Ind.  Ct.  App.   1986). 

""The  Court  decided  two  more  affirmative  action  cases  on  July  2,  1986,  each  featur- 
ing multiple  opinions  and  alignments  of  justices.  Local  28,  Sheet  Metal  Workers  v.  EEOC, 
106  S.  Ct.  3019  (1986);  Firefighters  Local  93  v.  Cleveland,  106  S.  Ct.  3063  (1986).  Both 
cases  involved  interpretation  under  section  706(g)  of  Title  VII,  which  protects  bona  fide 
seniority  systems.  In  Sheet  Metal  Workers,  106  S.  Ct.  at  3034,  the  Court  upheld  court- 
ordered  hiring  quotas  based  on  evidence  of  pervasive  past  discrimination.  In  Cleveland, 
106  S.  Ct.  at  3072,  the  Court  approved  a  voluntary  consent  decree  setting  up  an  affirmative 
action  plan  that  gave  blacks  preference  over  whites  for  promotion  even  though  those  benefited 


254  INDIANA  LAW  REVIEW  [Vol.  20:243 

In  Wygant  v.  Jackson  Board  of  Education, ^^^  nonminority  teachers 
who  had  been  laid  off  in  favor  of  less-senior  minority  teachers  challenged 
on  equal  protection  grounds  a  collectively-bargained  layoff  provision  that 
was  enacted  for  affirmative  action  purposes.'"^  The  parties  had  agreed 
upon  hiring  goals  geared  to  the  percentage  of  minority  students  in  the 
school  system.  The  layoff  provision  at  issue  was  intended  to  preserve  the 
minority  percentage  achieved  by  the  hiring  goals  by  providing  that  the 
percentage  of  minority  teachers  laid  off  could  not  exceed  the  percentage 
that  minority  teachers  represented  in  the  entire  workforce. '""^ 

Both  the  district  court '°^  and  the  United  States  Court  of  Appeals  for 
the  Sixth  Circuit' °^  upheld  the  provision  despite  the  lack  of  any 
demonstrated  prior  discrimination.  Rather,  the  lower  courts  held  that  the 
school  board's  articulated  goal  of  remedying  societal  discrimination  by 
providing  role  models  for  school  children  was  an  adequate  justification 
under  the  equal  protection  clause  for  race-conscious  layoffs.'"'  The 
Supreme  Court  reversed. '°^  The  plurality  opinion'"^  first  held  that  the  "role 
model"  theory  did  not  constitute  a  compelling  state  purpose  and  was  not 
an  adequate  basis  for  the  race-conscious  layoff  provision. ''°  To  the  ex- 
tent that  the  purpose  of  the  provision  was  to  remedy  past  actual  discrimina- 
tion, as  opposed  to  societal  discrimination,  the  Court  held  that  a  finding 
by  the  district  court  of  prior  discrimination  was  constitutionally  necessary 
to  justify  the  layoff  provision.'" 


were  not  actual  victims  of  discrimination.  Two  more  affirmative  action  cases  under  Title 
VII  are  set  to  be  argued  in  the  Court's  current  term.  One,  U.S.  v.  Paradise,  cert,  granted, 
106  S.  Ct.  3331  (1986),  involves  a  challenge  to  promotion  goals  in  an  affirmative  action 
plan  adopted  by  the  state  of  Alabama  for  its  state  police  force.  The  other,  Johnson  v. 
Transportation  Agency,  cert,  granted,  106  S.  Ct.  3331  (1986),  involves  a  challenge  to  an 
affirmative  action  plan  intended  to  remedy  sex  discrimination. 

'"106  S.  Ct.  1842  (1986). 

'"^M  at  1845-46.  Because  no  Title  VII  claim  was  asserted,  the  discussion  of  this  case 
will  be  somewhat  limited,  as  the  Court's  discussion  was  primarily  on  constitutional  grounds. 

'''Id.  at  1845. 

'o^Wygant  v.  Jackson  Bd.  of  Educ,  546  F.  Supp.   1195  (E.D.  Mich.   1982). 

'"'Wygant  v.  Jackson  Bd.  of  Educ,  746  F.2d  1152  (6th  Cir.   1984). 

'"Vc?.  at  1156-57. 

'°' Wygant,  106  S.  Ct.  at  1852. 

'"'There  were  five  separate  opinions.  The  majority  was  fashioned  through  a  plurality 
opinion,  most  of  which  was  joined  by  Justice  O'Connor,  and  two  opinions  by  Justices  White 
and  O'Connor  concurring  in  the  judgment.  Justice  Marshall  filed  one  dissenting  opinion, 
joined  by  Justices  Brennan  and  Blackmun,  and  Justice  Stevens  authored  a  second  dissenting 
opinion. 

''"Wygant,  106  S.  Ct.  at  1847-48.  The  dissent  authored  by  Justice  Marshall  concluded 
that  the  school  board's  purpose  was  more  than  adequate  to  justify  the  race-conscious  provi- 
sion. Id.  at  1862-63.  The  dissent  noted  that  the  provision  was  voluntarily  adopted  pursuant 
to  collective  bargaining  negotiations,  distinguishing  Firefighters  v.  Stotts,  467  U.S.  561  (1984), 
and  should  be  given  effect.  Id.  at  1860  (Marshall,  J.,  dissenting). 

'"Id.  at  1848. 


1 987]  EMPLOYMENT  DISCRIMINA  TION  255 

Even  if  the  existence  of  past  discrimination  had  been  demonstrated, 
however,  the  Court  held  that  the  layoff  provision  was  not  ''sufficiently 
narrowly  tailored"  to  accomplish  otherwise  legitimate  purposes."^  Hiring 
goals  were  given  as  an  example  of  a  less  intrusive  means  of  accomplishing 
the  same  objectives."'  The  Court  left  little  doubt  that  preferential  layoff 
provisions  such  as  the  one  at  issue  here  impermissibly  burden  nonminor- 
ity  employees  and  will  not  be  approved,  while  hiring  goals  "do  not  im- 
pose the  same  kind  of  injury  that  layoffs  impose.'""* 

III.     Time  Limits  for  Filing  Title  VII  Charges 

Title  VII  requires  that  a  charge  of  discrimination  must  be  filed  with 
the  EEOC  within  180  days  of  the  alleged  discriminatory  act,  except  that 
in  states  with  so-called  deferral  agencies,  a  complainant  who  institutes 
a  proceeding  before  the  state  agency  has  300  days  within  which  to  file 
with  the  EEOC."^  A  timely  EEOC  charge  is  a  prerequisite  to  a  Title  VII 
plaintiff's  right  to  file  s.uit  in  federal  district  court.  "^  The  Indiana  Civil 
Rights  Commission  (ICRC)  is  a  deferral  agency  under  Title  VII.  Pursuant 
to  Indiana  law,  charges  of  discrimination  must  be  filed  with  the  ICRC 
or  a  local  human  rights  commission  within  90  days  of  the  alleged 
discrimination."^  At  least  since  the  Supreme  Court's  decision  in  Mohasco 
Corp.  V.  Silver, ^^^  commentators  and  courts  have  debated  whether  a  Title 
VII  complainant  must  file  a  timely  state  charge  in  order  to  be  entitled 
to  the  extended  300-day  filing  period,  or  whether  any  filing,  timely  or 
not,  satisfies  the  deferral  requirement.  The  debate  was  spurred  by  a  foot- 
note in  Mohasco: 

Under  the  Moore  decision,  which  we  adopt  today,  a  complainant 
in  a  deferral  State  having  a  fair  employment  practices  agency  over 
one  year  old  need  only  file  his  charge  within  240  days  of  the 
alleged  discriminatory  employment  practice  in  order  to  insure  that 
his  federal  rights  will  be  preserved.  If  a  complainant  files  later 
than  that  (but  not  more  than  300  days  after  the  practice  com- 
plained oO,  his  right  to  seek  relief  under  Title  VII  will  nonetheless 
be  preserved  if  the  State  happens  to  complete  its  consideration 
of  the  charge  prior  to  the  end  of  the  300-day  period."^ 


''Ud.  at  1852  (footnote  omitted). 

"Vcf.  at  1850-51. 

""M  at  1851.  While  recognizing  the  burden  that  layoffs  represent  to  nonminorities, 
the  dissent  concluded  that  the  layoff  provision  at  issue  was  sufficiently  narrow  so  as  not 
to  be  an  unconstitutional  burden.  Id.  at  1865.  (Marshall,  J.,  dissenting). 

'"42  U.S.C.  §  2000e-5(e)  (1982). 

"^Mohasco  Corp.  v.  Silver,  447  U.S.  807  (1980). 

"iND.  Code  Ann.  §  22-9-1-3  (West  1981). 

"»447  U.S.  807  (1980). 

'"A/,  at  814  n.l6  (citing  Moore  v.  Sunbeam  Corp.,  459  F.2d  811  (7th  Cir.   1972)). 


256  INDIANA  LAW  REVIEW  [Vol.  20:243 

In  Martinez  v.  UAW Local  7575,'^°  the  Seventh  Circuit  addressed  the 
issue  for  the  first  time.  The  state  involved  happened  to  be  Indiana. 
Martinez  was  a  union  member  who  brought  suit  under  Title  VII  and  other 
statutes  against  her  union  for  alleged  race  discrimination. '^'  On  the  251st 
day  after  the  alleged  discrimination,  she  filed  a  charge  with  the  Fort  Wayne 
Human  Relations  Commission.  That  agency,  declining  to  process  it  because 
it  was  untimely,  transferred  the  case  to  the  EEOC  on  the  258th  day.  The 
district  court  granted  summary  judgment  for  the  union  on  the  ground 
that  Martinez's  claim  was  barred  by  the  applicable  statute  of  limitations.  •^^ 

The  issue  presented  to  the  Seventh  Circuit  was  whether  Martinez  was 
entitled  to  the  extended  filing  period  despite  the  fact  that  the  deferral 
agency  had  no  opportunity  to  act.  The  court  acknowledged  that  the  "pur- 
pose of  the  longer  statute  of  limitations  ...  is  to  give  states  an  oppor- 
tunity to  remedy  problems  of  discrimination  before  the  federal  govern- 
ment gets  involved. '"^^  Under  the  deferral  formulation  set  out  in  Title 
VII,  a  complainant  may  not  file  an  EEOC  charge  until  the  state  agency 
has  had  the  charge  for  sixty  days,  unless  the  state  completes  its  process 
earlier. '^"^  Thus,  Mohasco  and  other  cases  have  held  that  the  complainant 
must  file  with  the  state  agency  on  or  before  the  240th  day  to  ensure  a 
valid  EEOC  filing  by  the  300th  day.''' 

In  Martinez's  case,  the  purpose  of  state  filing  was  obviated  by  her 
untimeUness.  The  Fort  Wayne  Commission  did  not  have  the  60  days  in- 
tended by  Congress  within  which  to  attempt  to  remedy  the  alleged 
discrimination.  While  it  was  obviously  disturbed  by  the  prospect  of  com- 
plainants being  able  deliberately  to  bypass  the  deferral  portion  of  the  Ti- 
tle VII  formulation, '^^  the  Seventh  Circuit  nevertheless  refused  to  con- 
clude that  Martinez  had  forfeited  her  right  to  the  extended  fiUng  period.''^ 

The  court  noted  cases  under  the  Age  Discrimination  in  Employment 
Act  (ADEA)''^  that  have  permitted  untimely  state  filings  to  satisfy  the 
deferral  requirement, '^^  but  distinguished  them  because  of  the  absence  of 
a  deferral  period  in  the  ADEA.'^°  Referring  to  other  circuits  that  have 
decided  the  issue  similarly  under  Title  VII,  the  Seventh  Circuit  dechned 


'^"772  F.2d  348  (7th  Cir.   1985). 

'''Id.  at  349. 

''Ud. 

'''Id.  at  350. 

"HI  U.S.C.  §  2000e-5(c)  (1982). 

'''Supra  note  119. 

"'Martinez,  111  F.2cl  at  351. 

"'Id.  at  353. 

'^«29  U.S.C.  §§  621-634  (1982). 

"'^Martinez,  772  F.2d  at  351  (including  the  Seventh  Circuit  decision  in  Anderson  v. 
Illinois  Tool  Works,  Inc.,  753  F.2d  622  (7th  Cir.   1985)). 

''"Indiana's  age  discrimination  statute  does  not  cover  any  entity  subject  to  the  ADEA. 
Ind.  Code  Ann.  §  22-9-2-1  (West  1981).  Accordingly,  Indiana  is  not  a  deferral  state  under 


1987]  EMPLOYMENT  DISCRIMINATION  257 

to  make  a  comprehensive  ruling  on  the  subject.'^'  Rather,  it  hmited  its 
ruHng  to  the  facts  of  the  case  and  the  90-day  fihng  period  in  Indiana.''^ 
The  court  concluded  that  it  was  inconsistent  with  congressional  intent  to 
allow  complainants  less  than  180  days  to  file  with  deferral  agencies  and 
at  the  same  time  to  make  that  filing  a  condition  to  a  federal  right  of 
action.'"  Because  Indiana's  statute  of  limitations  was  only  half  the  180 
days  intended  by  Congress  to  be  permitted,  failure  to  file  a  timely  charge 
could  not  be  held  to  preclude  the  filing  of  an  EEOC  charge  within  the 
300-day  filing  period. '^'*  While  the  court  did  not  address  longer  state  fil- 
ing periods,  the  court's  holding  strongly  indicates  that  it  might  rule  other- 
wise in  a  case  involving  a  state  filing  period  of  180  days  or  longer. 

If,  as  the  Supreme  Court  held  in  Mohasco,  the  purpose  of  the  ex- 
tended filing  period  was  to  permit  states  an  opportunity  to  redress 
discrimination,  it  makes  little  sense  to  say  a  discrimination  plaintiff  should 
have  300  days  within  which  to  file  if  the  state  agency  is  powerless  to  act 
because  of  a  late  filing.  Despite  authority  to  the  contrary  in  other  cir- 
cuits,'" it  is  hoped  that  the  Seventh  Circuit  will  apply  the  logic  of  this 
decision  to  bar  a  plaintiff  who  fails  to  file  a  timely  state  charge  where 
the  state  has  a  180-day  or  longer  filing  period. 


the  ADEA,  and  age  discrimination  claimants  must  uniformly  file  charges  with  the  EEOC 
within  180  days, 

'''Martinez,  111  F.2d  at  351-52. 

'^Vaf.  at  352. 

•"M  at  352-53. 

'''Id. 

''^See  cases  cited  id.  at  351. 


Recent  NLRB  Developments 

David  L.  S wider* 

I.     Introduction 

Decisions  of  the  National  Labor  Relations  Board  ("Board"  or 
"NLRB")  during  this  survey  period'  may  be  the  first  indication  that 
the  conservative  swing  in  Board  policy  brought  about  by  Reagan  ap- 
pointees to  the  Board  is  slowing.  During  the  last  survey  period,^  Chairman 
Donald  Dotson,  appointed  by  President  Reagan  in  1984,  led  the  way 
in  continuing  expressly  to  overrule  numerous  prior  Board  decisions  and 
in  significantly  departing  from  the  policies  underlying  those  earlier  de- 
cisions.^ To  be  sure,  the  Board  decisions  of  the  current  survey  period 
continue  to  reflect  the  views  of  a  very  conservative  Board.  Nonetheless, 
for  the  most  part,  these  cases  do  not  expressly  depart  from  previous 
Board  holdings.  A  flurry  of  decisions  in  which  Chairman  Dotson  dissented 
were  handed  down  in  late  May  of  1986,  in  anticipation  of  Member 
Dennis'  imminent  departure  from  the  Board,  and  strongly  suggest  that 
the  labor  law  pendulum  may  finally  have  reached  its  right-most  point."* 

Because  this  survey  period  was  not  filled  with  far-reaching  changes 
in  Board  policy,  the  cases  in  this  discussion  were  more  difficult  to  select 
than  those  included  in  last  year's  survey.  Subjective  considerations  nec- 
essarily played  a  greater  role  in  the  selection  process.  Nonetheless,  an 
effort  has  been  made  to  select  cases  which  will  be  of  most  interest  and 
benefit  to  all  attorneys  representing  clients  in  labor  matters,  regardless 
of  whether  those  cHents  are  employees,  unions,  or  employers.  In  addition 
to  Board  cases,  this  Article  will  discuss  pertinent  United  States  Supreme 


*Partner,  Sommer  &  Barnard,  Indianapolis.  B.S.,  Indiana  University,  1975;  J.D., 
Indiana  University  School  of  Law — Indianapolis,  1978.  The  author  wishes  to  extend  his 
appreciation  to  Elizabeth  G.  Filipow  for  her  assistance  in  the  preparation  of  this  Article. 

'The  survey  period  extends  from  June,  1985  through  May,   1986. 

Uune,   1984  through  May,   1985. 

'See  Swider,  Recent  NLRB  Developments,  19  Ind.  L.  Rev.  241,  244-56  (1986). 

'See  Trover  Clinic,  280  N.L.R.B.  No.  2  (May  30,  1986),  122  L.R.R.M.  (BNA)  1172 
(1986);  Dorothy  Shamrock  Coal  Company,  279  N.L.R.B.  No.  174  (May  30,  1986),  123 
L.R.R.M.  (BNA)  1048  (1986);  Armon  Company,  279  N.L.R.B.  No.  158  (May  30,  1986), 
122  L.R.R.M.  (BNA)  1166  (1986);  Lucky  Stores,  Inc.,  d/b/a/  Gemco,  279  N.L.R.B.  No. 
153  (May  29,  1986),  122  L.R.R.M.  (BNA)  1180  (1986);  Woodcliff  Lake  Hilton  Inn,  Inc., 
279  N.L.R.B.  No.  146  (May  22,  1986),  123  L.R.R.M.  (BNA)  1061  (1986);  Armco,  Inc., 
Eastern  Steel  Division,  Ashland  Works,  279  N.L.R.B.  No.  143  (May  30,  1986);  Metropolitan 
Teletronics  Corp.,  279  N.L.R.B.  No.  134  (May  10,  1986),  122  L.R.R.M.  (BNA)  1107 
(1986);  Getty  Refining  and  Marketing  Co.,  279  N.L.R.B.  No.  126  (May  14,  1986),  122 
L.R.R.M.  (BNA)  1150  (1986).  Of  course,  depending  on  who  is  selected  to  replace  Member 
Dennis  on  the  Board,  future  decisions  may  resume  the  conservative  slide. 

259 


260  INDIANA  LA  W  REVIEW  [Vol.  20:259 

Court  and  Seventh  Circuit  Court  of  Appeals  decisions  which  involve 
recent  and  important  developments  under  the  National  Labor  Relations 
Act  ("Act"  or  "NLRA"). 

II.     An  Employer's  Duty  to  Supply  Financial  Information 

During  Bargaining 

At  least  twice  during  the  past  year,  the  Board  had  the  opportunity 
to  clarify  its  position  regarding  an  employer's  obligation  to  release 
financial  information  to  a  requesting  union.  In  Buffalo  Concrete^  and 
Cowin  &  Co.,^  the  Board  demonstrated  that  it  will  look  behind  an 
employer's  asserted  reasons  for  requesting  concessions  at  the  bargaining 
table  to  determine  whether  the  company's  position  is  grounded  upon 
the  inability  to  continue  paying  present  wages  and  benefits  or  whether 
the  company  is  simply  basing  its  request  upon  an  unwillingness  to  do 
so.^  It  is  clear  from  the  Board's  decision  in  Buffalo  Concrete  that  a 
management  request  for  concessions  will  not  in  itself  trigger  an  obligation 
to  release  financial  information  upon  a  union's  request.^  It  is  equally 
plain,  however,  from  Cowin  &  Co.  that  simply  paying  lip  service  to  an 
unwiUingness  to  continue  paying  at  the  current  levels  will  not  necessarily 
protect  an  employer  from  a  union's  request  for  financial  data.^ 

In  Buffalo  Concrete,  six  employer-members  of  a  construction  industry 
bargaining  association  sought  concessions  at  the  bargaining  table  upon 
the  premise  of  competition.  The  employers  attempted  to  convince  the 
union  that  because  nonunion  contractors  had  made  such  substantial 
inroads  into  the  concrete  industry  in  their  location,  unionized  contractors 
had  lost  the  ability  to  compete  effectively.  To  regain  competitiveness  in 
the  industry,  the  employers  expressed  the  need  to  ''narrow  the  cost  gap 
between  the  union  and  nonunion  companies.'"" 

In  response  to  the  employers'  requests  for  concessions,  the  union 
asked  to  see  the  employers'  financial  records  to  determine  whether  the 
requests  were  justified.  After  repeated  requests  for  the  information  by 
the  union  and  after  repeated  denials  by  the  employers,  the  union  filed 
refusal-to-bargain  charges  against  the  employers.  After  a  hearing  on  these 
charges,  an  Administrative  Law  Judge  (ALJ)  held  for  the  union  on  this 
issue.  The  ALJ  concluded  that  an  assertion  of  an  "inability  to  compete" 
is  tantamount  to  an  "inability  to  pay"  bargaining  stance,  thus  triggering 


^276  N.L.R.B.  No.  40  (Sept.  30,   1985),   120  L.R.R.M.  (BNA)  1139  (1985). 
-^277  N.L.R.B.  No.  82  (Nov.  26,   1985),  121  L.R.R.M.  (BNA)  1029  (1985). 
^See  infra  notes  10-20  and  accompanying  text. 
«276  N.L.R.B.  No.  40,  slip  op.  at  7,   120  L.R.R.M.  at  1141. 
^See  infra  notes  18-20  and  accompanying  text. 
'°276  N.L.R.B.  No.  40,  slip  op.  at  3,   120  L.R.R.M.  at  1140. 


1987]  NLRB  261 

the  duty  to  turn  over  financial  information  to  the  union  upon  request." 
Upon  appeal,  the  Board  disagreed. 

Before  overturning  the  ALJ's  decision  on  this  question,  the  Board 
expressly  agreed  with  his  statement  of  applicable  law:  '*[W]hen  an  em- 
ployer objects  to  a  union's  bargaining  demands  on  the  basis  that  it  is 
unable  to  afford  the  cost  of  the  proposal,  it  is  under  a  duty  to  let  the 
union  see  its  books  and  records  so  that  the  union  can  verify  the  truth- 
fulness of  the  employer's  contentions."'^  The  Board  also  concurred  with 
the  ALJ's  view  of  the  permissible  implications  of  concession  bargaining: 
"[W]hen  concession  bargaining  does  take  place,  an  implied  major  premise 
of  the  employer's  position  necessarily  is  that  it  has  been  paying  wages 
and  benefits  which  it  could  afford  at  one  time  but  which  it  no  longer 
wishes  to  pay.'"^  The  Board  parted  with  the  ALJ,  however,  in  his 
effectively  equating  concession  bargaining  demands  with  "inability  to 
pay"  assertions.  The  Board  explained,  "[W]e  will  not  assume  that  an 
employer  who  no  longer  wishes  to  pay  wages  and  benefits  it  once  agreed 
to  is  unable  to  make  such  payments."'"^  Applying  this  rationale  to  the 
facts  before  it,  the  Board  concluded  that  even  though  the  employers 
had  maintained  that  concessions  were  needed  to  increase  their  competitiveness 
in  their  industry  and  had  referred  to  a  general  loss  of  jobs  in  the  unionized 
sector  of  that  industry,  the  employers  had  stopped  short  of  claiming  that 
they  were  unable  to  afford  the  union's  proposals.'^  Accordingly,  the 
Board  held  that  the  employers  had  not  violated  sections  8(a)(1)  and  (5) 
of  the  NLRA'^  by  refusing  the  union's  request  for  financial  information.'^ 

In  Co  win  &  Co.,  the  Board  demonstrated  that  it  does  not  consider 
an  employer's  obligation  to  turn  over  financial  information  to  a  requesting 
union  as  simply  a  matter  of  semantics.  The  Board  upheld  an  ALJ's  de- 
termination that  the  employer  violated  sections  8(a)(1)  and  (5)  of  the 
Act  by  refusing  to  provide  the  union  with  requested  financial  information. 


"276  N.L.R.B.  No.  40,  JD  slip  op.  at  17-18  (quoting  United  Steel  Workers  of  Am. 
V.  NLRB  (Stanley  Artex  Windows),  401  F.2d  434  (1968)). 

'^276  N.L.R.B.  No.  40,  slip  op.  at  6,   120  L.R.R.M.  at  1141. 

''Id. 

'■*Id.  slip  op.  at  7,   120  L.R.R.M.  at  1141  (emphasis  in  original). 

''Id. 

'*§   158  Unfair  labor  practices, 
(a)  It  shall  be  an  unfair  labor  practice  for  an  employer 

(1)  to  interefere  with,  restrain,  or  coerce  employees  in  the  exercise  of  the 
rights  guaranteed  in  section  157  of  this  title; 

(5)  to  refuse  to  bargain  collectively  with  the  representatives  of  his  employees, 
subject  to  the  provisions  of  section  159(a)  of  this  title. 
29  U.S.C.  §§  158(a)(1),  (a)(5)  (1982). 

'^276  N.L.R.B.  No.  40,  slip  op.  at  7,   120  L.R.R.M.  at  1141. 


262  INDIANA  LA  W  REVIEW  [Vol.  20:259 

despite  the  employer's  repeated  assertion  that  its  request  for  concessions 
was  based  only  on  an  unwillingness  to  provide  the  wages  and  benefits 
of  the  pastJ^  In  reaching  this  conclusion,  the  Board  rehed  primarily  on 
other  statements  made  by  the  employer  during  the  course  of  bargaining 
which  indicated  an  inability  to  pay  higher  wages. '^  The  employer  also 
raised  as  a  justification  for  its  bargaining  position  that  it  had  suffered 
financial  losses  during  each  of  the  previous  three  years.  Hence,  the  Board 
concluded:  ''Under  these  circumstances  we  find  that  the  [employer], 
despite  its  assertions  to  the  contrary,  was  in  fact  expressing  financial 
inability  to  pay."^^ 

III.     A  Union's  Right  to  Fine  Financial  Core  Members 

During  the  last  survey  period,  the  United  States  Supreme  Court  held 
that  a  union  cannot  impose  fines  against  members  whose  tendered  res- 
ignations are  invalid  under  the  union's  constitution.^'  The  Court,  in 
Pattern  Makers'  League  v.  NLRB,^^  ruled  that  a  union's  attempt  to  so 
limit  a  member's  right  to  resign  violates  section  8(b)(l)(AP  of  the  Act.^'^ 
During  the  present  survey  period,  the  Board  extended  the  Pattern  Makers 
rationale  to  include  a  union's  attempt  to  impose  discipHne  upon  "financial 
core"  members. ^^  Previous  Supreme  Court,  Court  of  Appeals  and  Board 


'«277  N.L.R.B.  No.  82,  slip  op.  at  1  n.l,  121  L.R.R.M.  at  1029. 
"/(C/.  For  example,  at  the  onset  of  the  bargaining,  the  employer  related  to  the  union 
that  there  was  "a  real  question  of  whether  we  shall  be  in  business  at  the  termination  of 
this  contract  unless  prior  contractual  concepts  are  radically  changed."  Id. 
^°Id. 

^'Pattern  Makers'  League  v.  NLRB,  105  S.  Ct.  3064  (1985).  See  Swider,  supra  note 
3  at  250. 

2^105  S.  Ct.  3064  (1985). 
"§  158  Unfair  labor  practices. 

(b)  It  shall  be  an  unfair  labor  practice  for  a  labor  organization  or  its  agents — 
(1)  to  restrain  or  coerce  (A)  employees  in  the  exercise  of  the  rights  guaranteed 
in  section  157  of  this  title:  Provided,  That  this  paragraph  shall  not  impair  the 
right  of  a  labor  organization  to  prescribe  its  own  rules  with  respect  to  the 
acquisition  or  retention  of  membership  therein. 
29  U.S.C.  §  158(b)(1)(A)  (1982)  (emphasis  in  original). 
2^105  S.  Ct.  at  3071. 

^^A  "financial  core"  union  member  is  one  whose  only  obligation  to  the  union  is 
to  pay  all  initiation  fees  and  dues  uniformly  required  by  the  union  to  maintain  membership. 
This  enables  an  employee  who  does  not  wish  to  maintain  full  union  membership  status 
to  avoid  a  threat  of  discharge  under  section  8(a)(3)  of  the  Act  {see  infra  note  23)  while 
covered  by  a  collective  bargaining  agreement  containing  a  union-security  provision.  The 
following  is  an  example  of  a  typical  union-security  clause: 

All  present  Employees  in  the  bargaining  unit  shall  maintain  membership 
in  good  standing  in  the  Union  as  a  condition  of  employment.  All  new  Employees 
shall  as  a  condition  of  employment,  become  members  of  the  Union  within  sixty 
(60)  calendar  days,  to  the  extent  of  paying  initiation  fees  and  membership  dues 
as  required  of  all  Union  Members. 


1987]  NLRB  263 

decisions  have  held  that  a  union  cannot  demand,  under  section  8(a)(3), ^^ 
that  a  financial  core  member  take  an  oath  or  attend  union  meetings, ^^ 
fill  out  application  forms, ^^  accept  memberships^  or  do  anything  other 
than  tender  dues  and  fees.'"  However,  until  this  survey  period,  the  precise 
question  of  whether  a  union  can  impose  discipUne  on  financial  core 
members  had  not  been  squarely  faced. 

In  Tacoma  Boatbuilding,^^  two  unions  were  engaged  in  an  economic 
strike  against  the  same  employer.  During  the  course  of  the  strike,  several 
union  members  submitted  (or  tried  to  submit)  a  letter  to  their  respective 


The  failure  of  any  Employee  to  maintain  his  Union  membership  in  good 
standing  as  required  herein,  upon  written  notice  to  the  Company  by  the  union 
to  such  effect  and  to  further  effect  that  Union  membership  was  available  to 
such  person  on  the  same  terms  and  conditions  generally  available  to  other 
members,  shall  obligate  the  Company  to  discharge  such  Employee  within  ten 
(10)  calendar  days  of  such  notice. 
"§  158  Unfair  labor  practices, 
(a)  It  shall  be  an  unfair  labor  practice  for  an  employer — 

(3)  by  discrimination  in  regard  to  hire  or  tenure  of  employment  or  any 
term  or  condition  of  employment  to  encourage  or  discourage  membership  in 
any  labor  organization:  Provided,  That  nothing  in  this  subchapter,  or  in  any 
other  statute  of  the  United  States,  shall  preclude  an  employer  from  making  an 
agreement  with  a  labor  organization  (not  established,  maintained,  or  assisted  by 
any  action  defined  in  this  subsection  as  an  unfair  labor  practice)  to  require  as 
a  condition  of  employment  membership  therein  on  or  after  the  thirtieth  day 
following  the  beginning  of  such  employment  or  the  effective  date  of  such 
agreement,  whichever  is  the  later,  (i)  if  such  labor  organization  is  the  representative 
of  the  employees  as  provided  in  section  159(a)  of  this  title,  in  the  appropriate 
collective-bargaining  unit  covered  by  such  agreement  when  made,  and  (ii)  unless 
following  an  election  held  as  provided  in  section  159(e)  of  this  title  within  one 
year  preceding  the  effective  date  of  such  agreement,  the  Board  shall  have  certified 
that  at  least  a  majority  of  the  employees  eligible  to  vote  in  such  election  have 
voted  to  rescind  the  authority  of  such  labor  organization  to  make  such  an 
agreement:  Provided  further.  That  no  employer  shall  justify  any  discrimination 
against  an  employee  for  nonmembership  in  a  labor  organization  (A)  if  he  has 
reasonable  grounds  for  believing  that  such  membership  was  not  available  to  the 
employee  on  the  same  terms  and  conditions  generally  applicable  to  other  members, 
or  (B)  if  he  has  reasonable  grounds  for  believing  that  membership  was  denied 
or  terminated  for  reasons  other  than  the  failure  of  the  employee  to  tender  the 
periodic  dues  and  the  initiation  fees  uniformly  required  as  a  condition  of  acquiring 
or  retaining  membership. 
29  U.S.C.  §  158(a)(3)  (1982)  (emphasis  in  original). 

"Union  Starch  &  Refining  Co.,  87  N.L.R.B.  779  (1949). 

^^United  Stanford  Employees,  Local  680,  232  N.L.R.B.   326  (1977),  enforced,  601 
F.2d  980  (9th  Cir.   1979). 

"Hershey  Foods  Corp.,  207  N.L.R.B.  897  (1973),  enforced,  513  F.2d  1083  (9th  Cir. 
1975). 

^°NLRB  V.  General  Motors  Corp.,  373  U.S.  734,  742-43  (1963). 

^'277  N.L.R.B.  No.  20  (Nov.   19,   1985),  120  L.R.R.M.  (BNA)  1329  (1985). 


264  INDIANA  LAW  REVIEW  [Vol.  20:259 

unions  giving  notice  of  their  intent  to  alter  their  membership  status  from 
"full"  membership  to  "financial  core"  status. ^^  The  employees  who 
submitted  this  letter  then  crossed  the  picket  line  and  returned  to  work. 
In  response,  the  unions  initiated  internal  charges  against  the  employees 
and  imposed  fines  against  most  of  them  for  crossing  a  sanctioned  picket 
line.  The  employees  responded  by  filing  section  8(b)(1)(A)  charges  against 
their  unions." 

After  a  hearing,  an  ALJ  dismissed  the  employees'  unfair  labor 
practice  charges,  finding  that  the  charging  parties  had  never  "clearly  and 
unequivocally"  resigned  from  their  unions.^"*  The  ALJ  reasoned  that  the 
submitted  letters  did  not  provide  the  unions  with  reasonable  notice  of 
resignation  and,  therefore,  that  the  employees'  membership  status  had 
not  changed.  Having  made  this  determination,  the  ALJ  avoided  the  need 
to  address  the  issue  of  whether  financial  core  members  can  legally  be 
subject  to  union  discipHne. 

The  Board  reversed  the  ALJ's  decision  and  concluded  that  the  unions 
had  violated  the  Act  by  initiating  charges  and  imposing  fines  against  the 
employees  after  they  had  changed  their  membership  status. ^^  The  Board 
characterized  its  holding  as  a  simple  extension  of  previous  limitations  im- 
posed on  unions  with  respect  to  financial  core  members."  The  Board  also 
premised  its  holding  on  Pattern  Makers*  and  other  Board  decisions  that 
permitted  a  union  member  to  resign  from  full  membership  and,  thereby, 
avoid  subsequent  union  discipHnary  attempts.^'  Relying  on  this  latter  line 
of  cases,  the  Board  summarily  rejected  the  unions'  argument  that  provi- 
sions in  the  unions'  constitutions  purporting  to  limit  members'  resignation 
rights  precluded  giving  any  effect  to  the  employees'  resignation  letters. ^^ 
In  supporting  its  holding,  the  Board  also  responded  to  the  unions'  argu- 
ment that  had  the  employees  wished  to  avoid  subsequent  union  discipline 


"M  slip  op.  at  2-3,  120  L.R.R.M.  at  1330.  The  letter  provided  in  pertinent  part: 
This  letter  will  serve  as  notification  that  I  am  changing  my  membership  status 
.  .  .  from  that  of  a  "full"  member  to  that  of  a  "financial  core"  member.  As 
a  "financial  core"  member,  I  will  continue  to  pay  to  the  union  all  initiation 
fees  and  dues  uniformly  required  of  all  members  for  maintaining  membership. 
I  am  not  resigning  from  the  union,  I  am  only  changing  my  membership  status. 
I  will  not,  henceforth,  be  subject  to  any  obligations  of  membership  other  than 
that  of  paying  uniformly  required  dues  and  initiation  fees  required  of  all  .  .  . 
members. 


Id. 


''Id.  slip  op.  at  3,   120  L.R.R.M.  at  1330. 

''Id. 

''Id. 

"'Id.  slip  op.  at  6,  120  L.R.R.M.  at  1331. 

"Id.  slip  op.  at  7  n.7,  120  L.R.R.M.  at  1331  n.7. 

"Id.  slip  op.  at  6,   120  L.R.R.M.  at  1331. 


1987]  NLRB  265 

for  crossing  the  picket  line  they  could  have  resigned  completely  from  their 
unions.  The  Board  explained: 

[Wjhile  there  is  a  voluntary  aspect  to  the  assumption  of  financial 
core  status,  when  there  is  a  union-security  clause  in  effect  an 
employee  must  retain  financial  core  status  as  a  condition  for 
employment.  To  then  say,  however,  that  a  financial  core  member 
is  subject  to  the  same  discipHne  as  a  full  member  is  to  render 
meaningless  the  third  part  of  the  Scofield  test,  namely,  that  a 
member  is  free  to  leave  the  union  and  escape  the  rule.^^ 

In  effect,  the  Board's  holding  in  Tacoma  Boatbuilding  is  an  acknowl- 
edgment that  to  permit  a  union  to  discipline  a  financial  core  member 
is  to  countenance  an  unlawful  restraint  on  an  employee's  section  7"*° 
right  to  refrain  from  union  activity.^' 

IV.     Hiring  Temporary  Replacements  During  an  Offensive 

Lockout 

If  there  was  one  decision  during  the  survey  period  which  struck 
organized  labor  harder  than  any  other,  that  decision  must  be  Harter 
Equipment,  Inc^^  In  Harter,  the  Board  concluded  that  an  employer's 
use  of  temporary  workers  during  a  lockout  initiated  to  bring  economic 
pressure  to  bear  upon  legitimate  bargaining  demands  is  not  unlawful. '^^ 


'^Id.  In  Scofield  v.  NLRB,  394  U.S.  423,  430  (1969),  the  Court  explained  that 
"Section  8(b)(1)  leaves  a  union  free  to  enforce  a  properly  adopted  rule  which  reflects  a 
legitimate  union  interest,  impairs  no  policy  Congress  has  embedded  in  the  labor  laws, 
and  is  reasonably  enforced  against  union  members  who  are  free  to  leave  the  union  and 
escape  the  rule." 

""Employees  shall  have  the  right  to  self-organization,  to  form,  join,  or  assist 
labor  organizations,  to  bargain  collectively  through  representatives  of  their  own 
choosing,  and  to  engage  in  other  concerted  activities  for  the  purpose  of  collective 
bargaining  or  other  mutual  aid  or  protection,  and  all  of  such  activities  except 
to  the  extent  that  such  right  may  be  affected  by  an  agreement  requiring  mem- 
bership in  a  labor  organization  as  a  condition  of  employment  as  authorized  in 
section  158(a)(3)  of  this  title. 
29  U.S.C.  §  157  (1982). 

"'5ee,  e.g..  Carpenters  District  Council  (Gordon  Construction,  Inc.)  277  N.L.R.B. 
No.   19  (Nov.  19,   1985),   120  L.R.R.M.  (BNA)  1327,   1329  (1985)  stating: 

Accordingly,  we  find  that  because  Viskovich  notified  the  Respondent  of  this 
change  in  membership  status  prior  to  crossing  the  picket  line  and  returning  to 
work,  the  Respondent's  bringing  charges  and  imposing  a  fine  against  him  con- 
stituted an  unlawful  restraint  on  his  Section  7  right  to  refrain  from  union  activity 
in  violation  of  Section  8(b)(1)(A)  of  the  Act. 

«280  N.L.R.B.  No.  71  (June  24,  1986),  122  L.R.R.M.  (BNA)  1219  (1986). 
*Ud.  slip  op.  at  2,  122  L.R.R.M.  at  1220.  The  majority  opinion,  joined  by  Chairman 
Dotson  and  Members  Johansen  and  Babson,  met  with  a  lengthy  dissent  by  Member  Dennis. 


266  INDIANA  LA  W  REVIEW  [Vol.  20:259 

This  decision  has  given  management  a  powerful  new  weapon  to  use  in 
achieving  its  collective  bargaining  objectives. 

The  salient  facts  of  Harter  are  not  complicated  and  are  capable  of 
frequent  recurrence.  The  employer  and  the  union,  parties  to  a  series  of 
collective  bargaining  agreements,  began  negotiating  a  new  agreement  in 
October  of  1981.  Their  existing  contract  was  scheduled  to  expire  on 
December  1,  1981.  When  little  bargaining  progress  was  made  in  the  face 
of  the  employer's  demands  for  concessions  and  changes  in  the  contract's 
union  security  clause,  the  union  offered  to  extend  the  existing  contract 
for  another  six  months  so  that  bargaining  could  continue.  The  employer 
replied  that  it  would  not  let  its  employees  work  without  a  contract  and 
would  agree  to  no  extension  of  the  December  1  expiration  date.  When 
no  agreement  was  reached  by  December  3rd,  the  employer  locked  out 
its  employees  to  pressure  the  union  into  accepting  the  employer's  "final" 
offer.  In  mid- January  1982,  with  no  agreement  yetachieved,  the  employer 
began  hiring  temporary  employees  so  that  operations  could  continue 
during  the  lockout.  The  union  responded  to  the  employer's  hiring  of 
temporary  replacements  with  section  8(a)(1)  and  (3)  charges.  After  a 
hearing,  an  ALJ  concluded  that  the  employer's  lockout  and  temporary 
replacement  of  the  union  workers  did  not  constitute  a  violation  of  the 
NLRA.44 

In  reviewing  the  ALJ's  decision,  the  Board  first  noted  that  there 
was  no  evidence  in  the  record  suggesting  that  the  employer's  action  was 
motivated  by  unlawful  union  animus.  Indeed,  the  record  reflected  that 
the  parties  had  had  an  amicable  bargaining  history."^  The  Board  also 
recognized  that  the  record  contained  no  evidence  that  the  employer  had 
engaged  in  bad-faith  bargaining  either  before  or  after  the  lockout.'*^ 
Because  the  union  had  adduced  no  proof  of  anti-union  motivation  on 
the  employer's  part,  the  Board's  analysis  was  necessarily  governed  by  prin- 
ciples established  by  the  Supreme  Court  in  NLRB  v.  Great  Dane  Trailers, 
Inc.*^  There,  the  Court  elaborated  guidelines  for  determining  the  cir- 
cumstances in  which  a  8(a)(3)  violation  may  be  found  even  in  the  absence 
of  anti-union  animus. "** 


''Id. 

''Id. 

'"•Id. 

^'388  U.S.  26  (1967). 

''Id.  at  34. 

First,  if  it  can  reasonably  be  concluded  that  the  employer's  discriminatory  conduct 
was  "inherently  destructive"  of  important  employee  rights,  no  proof  of  an 
antiunion  motivation  is  needed  and  the  Board  can  find  an  unfair  labor  practice 
even  if  the  employer  introduces  evidence  that  the  conduct  was  motivated  by 
business  considerations.  Second,  if  the  adverse  effect  of  the  discriminatory  conduct 
on  employee  rights  is  "comparatively  slight,"  an  antiunion  motivation  must  be 
proved  to  sustain  the  charge  //  the  employer  has  come  forward  with  evidence 
of  legitimate  and  substantial  business  justifications  for  the  conduct.  Thus,  in 


1987]  NLRB  267 

In  determining  the  effect  on  employee  rights  of  Harter's  lockout 
and  subsequent  hiring  of  temporary  replacements,  the  Board  looked  to 
two  other  Supreme  Court  decisions,  American  Ship  Building  Co.  v. 
NLRB^^  and  NLRB  v.  Brown.'''  In  each  of  these  cases  the  Court  ''found 
sufficient  business  justification  for  both  employer  weapons  in  the  course 
of  economic  conflicts"^'  and  "found  that  the  impact  of  the  employer  con- 
duct on  employee  rights  was  comparatively  slight,  rather  than  inherently 
destructive."^^ 

Accordingly,  in  holding  that  an  employer  does  not  violate  the  Act 
by  temporarily  replacing  employees  in  conjunction  with  a  lawful  lockout 
in  support  of  legitimate  bargaining  demands,  the  Board  in  Harter  found 
that  the  use  of  temporary  employees  reasonably  serves  the  same  legitimate 
business  purpose  served  by  the  lockout  itself,  i.e.,  bringing  economic 
pressure  to  bear  in  support  of  a  valid  bargaining  position."  The  Board 
also  found  that  utilizing  temporary  replacements  in  conjunction  with  a 
lawful  lockout  is  no  more  destructive  of  employee  rights  than  locking  out 
employees  in  the  first  place.*'*  Because  of  the  "temporary"  status  of  the 
replacements,  "[t]he  Union  or  its  individual  members  have  the  ability  to 
relieve  their  adversity  [in  either  situation]  by  accepting  the  employer's  less 
favorable  bargaining  terms  and  returning  to  work."**  On  these  bases,  the 
Board  affirmed  the  ALJ's  decision  to  dismiss  the  union's  complaint.*^ 

In  dissent.  Member  Dennis  disagreed  with  the  Board's  refusal  to 
distinguish  between  "offensive"  and  "defensive"  lockouts  in  assessing 


either  situation,  once  it  has  been  proved  that  the  employer  engaged  in  discrim- 
inatory conduct  which  could  have  adversely  affected  employee  rights  to  some 
extent,  the  burden  is  on  the  employer  to  establish  that  he  was  motivated  by 
legitimate  objectives  since  proof  of  motivation  is  most  accessible  to  him. 
Id.  (emphasis  in  original). 

"^380  U.S.  300  (1965).  In  American  Ship  Building,  the  Court  held  that  an  employer 
may  temporarily  lock  out  its  employees  during  a  bargaining  impasse  for  the  sole  purpose 
of  bringing  economic  pressure  to  bear  in  support  of  a  legitimate  bargaining  position 
without  violating  either  section  8(a)(1)  or  (3).  Id.  at  318. 

5°380  U.S.  278  (1965).  In  Brown,  the  Court  held  that  members  of  a  multi-employer 
bargaining  association  may  lock  out  and  temporarily  replace  employees  after  their  union 
has  commenced  a  "whipsaw"  strike  against  another  association  member.  Id.  at  288-90. 
A  "whipsaw"  strike  is  one  aimed  at  a  single  employer  who  is  part  of  a  group  of  employers 
from  whom  the  union  is  seeking  benefits.  The  objective  is  to  gain  favorable  terms  from 
the  targeted  employer,  which  can  then  be  used  as  a  pattern  or  a  base  to  obtain  the  same 
or  better  terms  from  the  other  employers  under  the  same  threat  of  pressure  exerted  against 
the  first  employer. 

='280  N.L.R.B.  No.  71,  slip  op.  at  3,   122  L.R.R.M.  at  1220. 

"M  slip  op.  at  4,   122  L.R.R.M.  at  1220. 

'Ud.  slip  op.  at  10,   122  L.R.R.M.  at  1222. 

''Id.  slip  op.  at  9-10,   122  L.R.R.M.  at  1222. 

''Id.  slip  op.  at  10,   122  L.R.R.M.  at  1222. 

'^Id.  slip  op.  at  11-12,   122  L.R.R.M.  at  1223. 


268  INDIANA  LA  W  REVIEW  [Vol.  20:259 

the  relative  effect  of  hiring  temporary  replacements  on  employee  rights. 
In  Brown,  the  Court  permitted  the  hiring  of  temporary  replacements  in 
the  narrow  context  of  a  "defensive"  lockout/^  whereas  in  Barter,  the 
majority  was  now  condoning  the  same  action  in  the  context  of  an 
"offensive"  lockout. ^^  Dennis  reasoned  that  this  offensive  use  was  "in- 
herently destructive"  of  employee  rights  and,  therefore,  violative  of  the 
Act,  notwithstanding  the  absence  of  improper  motivation  and  the  presence 
of  a  legitimate  and  substantial  employer  business  objective. ^^ 

V.     Hiring  "Permanent"  Replacements  During  an  Economic 

Strike 

In  NLRB  V.  Mackay  Radio  &  Telegraph  Co.,^^  the  Supreme  Court 
held  that  economic  strikers  are  entitled  to  immediate  reinstatement  upon 
their  unconditional  offer  to  return  to  work,  unless  their  positions  have 
been  filled  by  "permanent"  replacements.^'  If  permanent  replacements 
have  been  hired,  then  the  striking  employees  are  placed  on  a  preferential 
recall  list  and  are  called  back  to  work  as  new  job  openings  occur  or 
as  their  replacements  are  separated  from  employment. ^^  The  question 
whether  replacements  are  temporary  or  permanent  was  addressed  and 
resolved  by  the  Board  during  this  survey  period  in  a  manner  that  may 
give  organized  labor  some  hope  that  Chairman  Dotson*s  conservative  hold 
on  the  Board  is  weakening. ^^ 

In  Hansen  Brother's  Enterprises,^'^  the  employer  maintained  that  the 
strike  replacements  it  had  hired  during  the  course  of  an  economic  strike 
had  "permanent"  status  for  three  reasons.  First,  the  employer  relied  on 
a  letter  it  sent  to  the  strikers  which  provided  in  pertinent  part:  "You 


^U.e.,  one  commenced  by  members  of  a  multi-employer  bargaining  association  who 
were  defending  themselves  against  a  whipsaw  strike  against  another  of  their  members. 

''/.e.,  the  lockout  was  commenced  for  the  sole  purpose  of  placing  economic  pressure 
on  the  union  to  accept  the  employer's  lawful  bargaining  demands. 

'''Id.  shp  op.  at  22,  122  L.R.R.M.  at  1226  (Dennis,  Member,  dissenting). 
[A]  Ho  wing  an  employer  to  take  the  offensive  and  temporarily  replace  locked- 
out  employees  renders  nugatory  the  employees'  right  to  strike,  and  places  an 
unacceptable  burden  on  employees'  rights  to  engage  in  collective-bargaining  and 
union  activities.  I  therefore  find  the  Respondent's  temporary  replacement  of  its 
employees  in  these  conditions  unlawful  under  Section  8(a)(1)  and  8(a)(3)  of  the 
Act  as  inherently  destructive  of  rights  guaranteed  in  Sections  7  and  13  of  the 
Act. 
Id. 

^°304  U.S.  333  (1938). 
''Id.  at  345-46. 

^^Laidlaw  Corporation,  171  N.L.R.B.  1366  (1968),  enforced,  414  F.2d  99  (7th  Cir. 
1969). 

'^See  also  note  4  supra. 

^279  N.L.R.B.  No.  98  (April  30,   1986),   122  L.R.R.M.  (BNA)  1057  (1986). 


1987]  NLRB  269 

should  further  be  aware  that  if  a  replacement  is  hired  for  your  position, 
you  may  lose  your  right  to  reemployment  if  you  later  change  your  mind 
and  wish  to  come  back  to  work."^^  Second,  the  employer  supported  its 
position  by  relating  statements  made  to  the  replacements  to  the  effect  that 
the  employer  ''wanted"  to  consider  them  as  permanent  employees  and 
''wanted"  the  replacements  to  consider  themselves  as  such/^  Third,  the 
employer  cited  its  repeated  refusal  of  the  union's  demand  during  negotia- 
tions to  terminate  the  employment  of  the  strike  replacements/^ 

The  Board  rejected  all  these  arguments,  and  disagreed  with  the  ALJ's 
conclusion  that  the  striking  employees'  offer  to  return  to  work  was  con- 
ditional because  it  was,  at  all  times,  coupled  with  a  demand  of  reinstate- 
ment to  former  positions  and  a  demand  for  the  discharge  of  the 
replacements/^  The  Board  relied  upon  the  employer's  use  of  the  word 
"may"  in  its  letter  to  the  strikers  apprising  them  that  they  "may"  lose 
reemployment  rights  if  replacements  are  hired/'  The  Board  also  found 
that  the  employer's  statements  to  the  replacements  were  non-committal 
in  that  the  replacements  were  never  actually  told  that  they  were  perma- 
nent/°  Rather,  the  employer  had  merely  told  them  that  it  "wanted"  to 
consider  them  as  permanent /'  The  Board  was  also  unconvinced  of  the 
permanent  nature  of  the  replacements  by  the  employer's  alleged  bargain- 
ing statements.  At  most,  these  statements  showed  the  employer's  intent 
to  replace  the  strikers  permanently,  but  the  Board  explained:  "Such  a 
showing  fails  to  satisfy  the  employer's  burden;  rather,  the  employer  must 
show  a  mutual  understanding  between  itself  and  the  replacements  that 
they  are  permanent. "^^  Accordingly,  the  Board  concluded  that,  because 
the  replacements  were  not  "permanent,"  the  strikers'  offer  to  return  to 
work  was  "perfectly  appropriate"  in  its  concurrent  demand  that  the 
replacements  be  discharged. ^^  The  Board  ordered  the  employer,  inter  alia, 
to  offer  the  strikers  immediate  and  full  reinstatement  to  their  former  jobs 
and  to  make  them  whole  for  any  loss  of  earnings  suffered  as  a  result 
of  the  refusal  to  honor  their  "unconditional"  offer  to  return  to  work.^^ 

Chairman  Dotson  wrote  a  stinging  dissent.   He  began:    "My  col- 


''Id.  slip  op.  at  3  n.5,  122  L.R.R.M.  at  1057  n.5. 

^Id.  slip  op.  at  3,   122  L.R.R.M.  at  1057  (footnote  omitted). 

"•'Id.  slip  op.  at  2,  122  L.R.R.M.  at  1057. 

"•'Id. 

''"Id.  slip  op.  at  3,  122  L.R.R.M.  at  1057. 

''Id. 

'^Id.  (emphasis  in  original)  (citing  Associated  Grocers,  253  N.L.R.B.  31  (1980)). 

''Id.  slip  op.  at  2,  122  L.R.R.M.  at  1057. 

'^Id.  slip  op.  at  5. 


270  INDIANA  LAW  REVIEW  [Vol.  20:259 

leagues'  handling  of  the  evidence  in  this  case  gives  rise  to  a  disquieting 
concern.  Briefly  stated,  the  majority's  analytic  approach  to  the  evidence 
reflects  an  undue  taste  for  verbal  analysis  rather  than  a  recognition  of 
the  real  world  facts. "^^  In  addition  to  its  "overconcern  for  verbal 
precision,"  the  majority,  in  Dotson's  view,  also  ignored  the  effect  of 
the  Supreme  Court's  recent  decision  in  Belknap,  Inc.  v.  Hale^^  on  the 
employer's  statements  to  the  replacements. ^"^  In  Belknap,  the  Court  held 
that  strike  replacements  who  were  told  by  their  employer  that  they  would 
be  "permanent"  were  not  pre-empted  by  federal  law  from  bringing  a 
state  court  action  for  misrepresentation  and  breach  of  contract  when 
they  were  subsequently  laid  off  pursuant  to  a  strike  settlement  agreement 
reached  in  the  context  of  an  unfair  labor  practice  case.^^  Dotson  argued 
that  it  was  the  legitimate  concern  raised  by  Belknap  that  caused  the 
employer  in  Hansen  to  tell  the  replacements  that  it  '* wanted"  to  consider 
them  permanent  and  that  it  "wanted"  the  replacements  also  to  consider 
themselves  permanent.^'  Dotson  concluded: 

The  preponderance  of  the  evidence  in  this  case  demonstrates  that 
the  Respondent  sought  to  hire  permanent  replacements  while 
protecting  itself  against  the  adverse  possibilities  posed  by  the 
Belknap  case,  which  had  issued  only  a  few  weeks  prior  to  the 
strike.  Two-and-a-half  years  later,  this  Board  sits  in  judgment 
on  the  verbal  constraints  employed  to  that  end  and  finds  them 
inadequate.  Looking  only  to  these  verbaUsims,  the  majority  im- 
poses a  2-1/2-year  backpay  remedy  essentially  because  it  would 
have  phrased  two  items  in  a  different  way.  By  so  doing,  the 
majority  has,  in  my  view,  adopted  a  wholly  unrealistic  approach 
to  labor  matter s.^° 

VI.     Misrepresentations  and  Altered  Board  Materials  in  Union 

Election  Campaigns 

During  the  survey  period,  the  Board  continued  along  its  "anything 
goes"  course  in  dealing  with  campaign  misrepresentations.  Also  in  the 


^^Id.  slip  op.  at  8,   122  L.R.R.M.  at  1058  (Dotson,  Chairman,  dissenting), 

M63  U.S.  491  (1983). 

"279  N.L.R.B.  No.  98,  slip  op.  at  8-9,  122  L.R.R.M.  at  1058  (Dotson,  Chairman, 
dissenting). 

^^Belknap,  463  U.S.  at  512.  The  Court  suggested  that  an  employer  could  protect 
itself  from  such  liability  by  promising  permanent  employment  subject  to  the  possible 
contingencies  of  a  Board  order  or  an  unfair  labor  practice  settlement  agreement.  Id.  at 
502. 

^'279  N.L.R.B.  No.  98,  slip  op.  at  8-9,  122  L.R.R.M.  at  1058  (Dotson,  Chairman, 
dissenting). 

«°M  sHp  op.  at  11,  122  L.R.R.M.  at  1059  (Dotson,  Chairman,  dissenting). 


1987]  NLRB  271 

past  year,  the  Seventh  Circuit  placed  its  imprimatur  upon  the  Board's 
liberal  approach,  by  enforcing  one  of  the  seminal  cases  in  the  Board's 
recent  permissive  trend,  Riveredge  Hospital}^  In  NLRB  v.  Affiliated 
Midwest  Hospital, ^^  the  Seventh  Circuit  agreed  with  the  Board's  Riveredge 
Hospital  decision  that  misrepresentations  of  Board  processes  or  actions 
by  a  party  no  longer  constitutes  per  se  grounds  for  vacating  an  election. ^^ 

In  Riveredge  Hospital,  the  employer  sought  to  have  an  election  set 
aside  on  the  basis  of  several  alleged  misrepresentations  made  by  the 
union  in  the  time  period  between  the  fihng  of  two  election  petitions 
and  the  resulting  election.  The  most  controversial  piece  of  union  campaign 
propaganda  during  this  period  was  a  leaflet  entitled  "U.S.  Government 
Issued  Complaint  Against  Riveredge."  In  fact  no  action  had  been  taken 
by  the  Board  against  the  employer;  rather,  a  charge  that  had  been  filed 
against  the  employer  had  resulted  in  a  settlement  agreement  containing 
a  non-admission  provision.  The  Regional  Director,  following  Formco, 
Inc.,^'^  overturned  the  election  results  on  the  ground  that  the  union's 
misrepresentations  had  "injected  the  Board  into  the  campaign  and  caused 
its  neutrality  to  be  impaired."*^  The  Board,  however,  reversed. ^^  Relying 
on  its  new  Midland  National  Life  Insurance  Co}^  position  that  "we 
will  no  longer  probe  into  the  truth  or  falsity  of  the  parties'  campaign 
statements,  and  ...  we  will  not  set  elections  aside  on  the  basis  of 
misleading  campaign  statements"**  the  Board  reasoned  that  there  was  "no 
sound  reason  why  misrepresentations  of  Board  actions  should  be  on  their 
face  objectionable  or  be  treated  differently  than  other  misrepresenta- 
tions."*' 

In  challenging  the  Board's  change  of  policy  announced  in  Riveredge 
Hospital  before  the  Seventh  Circuit,  the  employer  was  faced  with  a 
difficult  onus:  "In  order  to  challenge  the  Board's  poHcies  directly,  as 
opposed  to  its  application  of  those  policies,  the  movant  must  establish 
that  the  NLRB's  interpretation  of  the  law  is  unreasonable. "^°  Attempting 
to  sustain  that  burden,  the  employer  cited  the  Board's  "on  again  off 


«'264  N.L.R.B.   1094  (1982). 

«^789  F.2d  524  (7th  Cir.   1986). 

^'Id.  at  529. 

^"233  N.L.R.B.  61  (1977).  The  Board  set  aside  an  election  based  on  the  union's 
false  statement  that  the  employer  had  been  "found  guilty  of  engaging  in  unfair  labor 
practices  and  was  ordered  to  post  a  60-Day  Notice."  Id.  at  61.  The  Board  explained: 
"[A]ny  substantial  mischaracterization  or  misuse  of  a  Board  document  for  partisan  election 
purposes  is  a  serious  misrepresentation  warranting  setting  an  election  aside."  Id. 

«'264  N.L.R.B.  at  1094. 

»'263  N.L.R.B.   127  (1982). 
««M  at  133. 
«'264  N.L.R.B.  at  1095. 

^NLRB  V.  Affiliated  Midwest  Hospital,  Inc.,  789  F.2d  at  528  (citing  NLRB  v. 
Action  Automotive,  Inc.,  105  S.  Ct.  984,  988  (1985)). 


272  INDIANA  LAW  REVIEW  [Vol.  20:259 

again"  treatment  of  general  campaign  misrepresentations  as  compared 
to  the  Board's  uniform  and  consistent  approach  to  misrepresentations 
concerning  Board  actions  or  processes.  The  Seventh  Circuit,  unmoved 
by  this  argument,  stated:  "The  fact  that  a  poHcy  has  existed  for  a  long 
period  of  time  does  not  alone  establish  that  all  alternatives  are  incorrect 
or  untenable. "^^ 

The  Seventh  Circuit  also  addressed  the  propriety  of  the  Board's  aban- 
donment of  its  rationale  for  distinguishing  misrepresentation  of  Board 
actions  from  other  types  of  misrepresentations,  namely,  that  the  former 
situation  impugns  the  neutrality  of  the  NLRB.  After  reviewing  the  Board's 
justifications  for  departing  from  its  rationale,  the  court  concluded:  "Given 
the  judicial  acceptance  of  Midland,  the  Board's  extension  of  that  policy 
to  the  type  of  conduct  involved  here  cannot  be  deemed  to  be  unreasonable 
as  a  matter  of  law."^^  Accordingly,  the  court  enforced  Riveredge  Hospital 
on  the  issue  of  mischaracterizations  of  Board  actions  by  a  party  in  an 
election  campaign. 

One  of  the  reasons  given  by  the  Board  in  justifying  its  change  of 
policy  in  Riveredge  Hospital  and  which  the  Seventh  Circuit  found  not  to  be 
unreasonable  in  Midwest  Hospital ,  was  that  "misrepresentation  was 
viewed  as  different  from  the  alteration  of  a  Board  document,  an  action 
that  Midland  considered  to  be  per  se  objectionable  ...  on  the  grounds 
that  when  the  speaker  is  a  party  rather  than  the  agency  itself  the  voters 
are  less  likely  to  consider  the  statement  truthful. "^^  The  distinction 
between  the  Board's  treatment  of  misrepresentations  and  alterations  of 
Board  documents  has  narrowed  significantly  since  Midland.  This  is  evi- 
denced by  three  Board  decisions  on  the  issue  of  altered  Board  documents 
during  the  survey  period.  All  three  of  the  cases  interpreted  and  applied 
the  new  standards  recently  established  in  SDC  Investments,  Inc.^^ 

In  SDC,  the  Board  held  that  it  would  no  longer  find  that  reproduction 
of  Board  documents  for  partisan  purposes  is  per  se  objectionable  conduct. ^^ 
Rather,  the  Board  explained: 

[W]e  believe  that  the  crucial  question  should  be  whether  the 
altered  ballot  in  issue  is  likely  to  have  given  voters  the  misleading 
impression  that  the  Board  favored  one  of  the  parties  to  the 
election.  When  it  is  evident  that  the  altered  ballot  is  the  work 
of  a  party,  rather  than  the  Board,  employees  are  perfectly  capable 
of  judging  its  persuasive  value. ^ 


^'M  at  528 

''Id.  at  529  (referring  to  NLRB  v.  Best  Products,  Inc.,  765  F.2d  903,  911-13  (9th 
Cir.   1985)  (detailing  the  acceptance  of  the  Midland  rule)). 
'Vd/.  (emphasis  in  original). 

'^274  N.L.R.B.  No.  78  (Feb.  28,   1985),  118  L.R.R.M.  (BNA)  1410  (1985). 
''Id.  slip  op.  at  ,   118  L.R.R.M.  at  1412. 
""Id. 


1987]  NLRB  273 

Accordingly,  the  Board  adopted  as  its  new  position  that  when  the  altered 
material  on  its  face  clearly  identifies  the  party  who  prepared  it  the 
alteration  is  not  objectionable  and  will  not  serve  as  the  basis  for  setting 
aside  an  election. ^^  The  Board  also  expressly  embraced  a  case-by-case 
analysis  for  instances  in  which  the  source  of  the  alteration  is  not  clearly 
identified  on  the  document  at  issue. ^*  The  case-by-case  approach  requires 
an  examination  of  the  nature  and  content  of  the  material  in  order  to 
determine  whether  the  document  has  the  tendency  to  mislead  employees 
into  believing  that  the  Board  favors  one  party  over  the  other. ^^  The 
Board  applied  the  SDC  standards  liberally  and  in  favor  of  the  party 
altering  Board  documents  during  the  survey  period. 

In  Professional  Care  Centers  of  North  America,  Inc.,^^^  for  example, 
the  Board  found  unobjectionable  a  copy  of  its  sample  ballot  that  had 
been  altered  in  the  following  manner:  (1)  the  Board's  name  and  seal  had 
been  deleted  and  replaced  by  the  union's  name,   address,   and   seal; 

(2)  the  "Yes"  box  on  the  ballot  had  been  marked  with  an  "X";  and 

(3)  the  phrase  *The  National  Labor  Relations  Board  protects  your  right 
to  a  free  choice"  had  been  lifted  from  another  portion  of  the  notice  and 
inserted  below  the  ballot. ^°'  The  Board  also  found  permissible  the  follow- 
ing modifications  to  a  copy  of  its  '^Rights  of  Employees"  publication: 
(1)  The  Board's  seal  and  heading  had  been  removed  from  the  top  of  the 
page;  and  (2)  the  Board's  seal  and  heading  had  been  exised  from  the  lower 
portion  of  the  page  and  replaced  with,  '*you  have  the  right  to  vote  by 
secret  ballot — the  boss  will  not  know  how  you  vote.  Vote  union — vote 
to  improve  your  conditions  [ — ]  stand  up  for  your  rights"  and  "Distributed 
by— Local  Union  410— AFSME,  AFL-CIO,  St.  Louis,  MO."'°^ 

The  Board  majority  comprising  Chairman  Dotson  and  Member  Dennis, 
concluded  that  the  alterations  were  not  objectionable  because  the  name, 
address,  telephone  number  and  seal  of  the  union  appeared  on  the  face 
of  the  election  notice  and  because  the  reverse  side  of  the  notice  identified 
the  union  as  the  party  responsible  for  its  distribution.'^^  The  Board 
found  that  voters  were  not  likely  to  be  misled  into  believing  that  the 
Board  favored  the  union  in  the  election. '^"^  Member  Johansen,  dissenting 
from  the  majority's  conclusion,  stated:  "The  document  in  dispute  fails 
to  note  that  alterations  were  made,  what  the  alterations  were,  and  who 


^^Id.  (footnote  omitted). 
^Id. 

'°°279  N.L.R.B.  No.   106  (April  30,   1986),   122  L.R.R.M.  (BNA)  1076  (1986). 
'°'M  slip  op.  at  3,  122  Il.R.R.M.  at  1077  (Johansen,  Member,  dissenting). 
'°V<i.  slip  op.  at  3-4,  122  L.R.R.M.  at  1077. 
'°'Id.  slip  op.  at  1  n.l,   122  L.R.R.M.  at  1076-77. 


274  INDIANA  LAW  REVIEW  [Vol.  20:259 

made  them.  This  can  mislead  voters  who  may  perceive  the  document 
as  emanating  from  the  Board  in  that  form."^^^ 

Even  when  the  name  of  the  party  making  the  alterations  is  un- 
questionably omitted  from  the  altered  Board  documents,  the  Board  has 
still  shown  reluctance  to  find  the  document  objectionable.  In  C.J.  Kreh- 
biel  Company, ^^^  with  Member  Johansen  again  dissenting,  the  Board 
concluded  that  an  altered  portion  of  an  ALJ's  decision  distributed  by 
a  union  in  a  representation  election  was  not  likely  to  mislead  employees 
into  beheving  that  the  Board  supported  the  union. ^^'^  Because  the  name 
of  the  union  was  not  on  the  flyer,  although  the  flyer  had  been  mailed 
to  employees  in  envelopes  bearing  the  union's  name,'^^  the  Board  had 
to  examine  the  nature  and  content  of  the  altered  material  to  determine 
whether  it  had  the  tendency  to  mislead  the  employees  as  to  the  Board's 
neutrality  in  the  election. '^^ 

The  remedy  section  of  the  ALJ's  decision,  which  was  reproduced 
in  the  flyer,  involved  another  company  in  the  same  industry  as  the 
employer.  On  the  same  page  as  the  ALJ's  decision  was  a  5-inch  "crowing 
rooster,"  the  words  "Vote  Yes,"  a  box  with  an  "X"  in  it,  and  other 
prounion  cartoons.  The  union  had  also  undescored  certain  portions  of 
the  opinion.  Two  days  after  distributing  the  first  flyer,  the  union 
distributed  a  second  flyer  that  referred  to  the  first  flyer  as  being  an  "actual 
copy"  of  a  portion  of  an  ALJ's  decision. 

Contrary  to  Member  Johansen's  view  that  the  "two  documents, 
taken  together,  were  likely  to  mislead  the  employees  into  beheving  that 
an  administrative  law  judge,  and  by  extension  the  Board,  was  encouraging 
the  employees  to  'Vote  Yes'  in  the  election, "^'^  Chairman  Dotson  and 
Member  Dennis  credited  the  employees  with  greater  power  of  discern- 
ment: 

We  cannot  find  that  the  17  June  flyer  had  a  tendency  to  mislead 
employees  into  believing  that  the  Board  endorsed  the  Union.  No 
reasonable  employee  would  believe  that  an  administrative  law 
judge  would  embelhsh  his  decision  with  cartoons,  slogans,  and 
crowing  roosters  ....  Further,  the  sheer  physical  size  and  place- 
ment of  the  cartoons  and  slogans  on  the  leaflet  support  the 
conclusion  that  these  items  were  additions  made  by  the  preparer 
of  the  flyer."  11 


'"'M  slip  op  at  3,   122  L.R.R.M.  at  1077  (Johansen,  Member,  dissenting). 

>'*279  N.L.R.B.  No.  114  (May  7,   1986),  122  L.R.R.M.  (BNA)  1105  (1986). 

'°VGf.  slip  op.  at  3,  122  L.R.R.M.  at  1105. 

'°«/c?.  slip  op.  at  2  n.2,  122  L.R.R.M.  at  1055  n.2. 

"^M  slip  op.  at  2,  122  L.R.R.M.  at  1105.  See  SDC,  21 A  N.L.R.B.  No.  78,  slip  op. 
at  ,  118  L.R.R.M.  at  1412. 

"°279  N.L.R.B.  No.  114,  slip  op.  at  5,  122  L.R.R.M.  at  1106  (Johansen,  Member) 
dissenting). 

"76/.  slip  op.  at  3,  122  L.R.R.M.  at  1105. 


1987]  NLRB  275 

Accordingly,  the  Board  certified  the  results  of  the  election. "^ 

Based  on  Member  Johansen's  dissenting  opinions  in  Professional 
Care  and  C.J.  Krehbiel,  it  is  difficult  to  understand  why  he  joined  with 
Chairman  Dotson  in  deciding  Rosewood  Manufacturing  Co.*'^  in  favor 
of  an  employer  who  had  altered  an  official  NLRB  sample  ballot. 
Johansen's  position  in  Rosewood  is  especially  perplexing  in  the  face  of 
Member  Dennis'  dissent.  Rosewood  is  factually  very  close  to  SDC,  in 
which  the  Board  found  objectionable  a  hand-written  facsimile  of  an 
official  sample  ballot  altered  by  the  addition  of  the  phrase  ''remember 
to  vote  yes.""" 

In  Rosewood,  the  employer  altered  and  then  posted  official  NLRB 
election  documents  from  an  election  between  the  same  parties  some  nine 
months  earlier.  The  modification  consisted  of  a  handwritten  caption, 
"Vote  No,"  on  the  top  half  of  the  election  notice  with  an  arrow  drawn 
to  the  "No"  portion  of  the  sample  ballot.  The  union  contended  that 
the  employer  had  also  placed  an  "X"  in  the  "No"  box  on  the  actual 
materials  posted.  Nowhere  on  the  altered  documents  did  the  employer 
identify  itself.  ^'^ 

Nonetheless,  the  Board  found  that  the  campaign  material  was  per- 
missible reasoning  that  "the  handwritten  message  ...  as  well  as  the 
drawn  arrow  was  clearly  discernible  as  [an]  addition  made  by  the  Em- 
ployer and  sufficiently  distinct  from  the  printed  notice  and  sample  ballot 
so  as  to  preclude  the  suggestion  that  the  Board  was  endorsing  the 
Employer.""^  The  Board  also  based  its  conclusion  on  the  fact  that  the 
altered  documents  stemmed  from  the  first  election  between  the  parties, 
and  explained  that  this  fact  somehow  "would  have  alerted  voters  that 
the  alteration  was  not  endorsed  by  the  Board. "^'"^ 

Relying  on  SDC  and  Silco,  Inc. , "  *  the  latter  of  which  is  almost  fac- 
tually indistinct  from  Rosewood,  Member  Dennis  strongly  disagreed  with 
the  Board's  position: 

In  Silco,  Inc.,  cited  with  approval  footnote  5  of  SDC,  above, 
the  Board  found  objectionable  the  Employer's  posting  of  hand- 
printed facsimile  sample  ballots  with  the  words  "Vote  'No'  ON 
JULY  2!"  written  just  beneath  the  facsimile  and  an  arrow  drawn 
to  the  "No"  box.  The  Board  observed  the  document  did  not 
show  the  Employer  was  responsible,  and  reasoned  that,  although 


''^Id.  slip  op.  at  1,   122  L.R.R.M.  at  1105. 

'"278  N.L.R.B.  No.   103  (Feb.  26,   1986),  121  L.R.R.M.  (BNA)  1225  (1986). 

""274  N.L.R.B.  No.  78  (Feb.  28,  1985),   118  L.R.R.M.  (BNA)  1410  (1985). 

'"278  N.L.R.B.  No.   103,  slip  op.  at  1,  121  L.R.R.M.  at  1225. 

"*278  N.L.R.B.  No.   103,  slip  op.  at  3,   121  L.R.R.M.  at  1225  (footnote  omitted). 

'''Id.  slip  op.  at  4,   121  L.R.R.M.  at  1225-26. 

"»231  N.L.R.B.   110  (1977). 


276  INDIANA  LA  W  REVIEW  [Vol.  20:259 

not  an  exact  NLRB  ballot  replica,  ''this  facsimile  necessarily 
tends  to  suggest  that  the  material  appearing  thereon  bears  the 
board's  approval." 

As  no  meaningful  distinction  exists  between  the  instant  facts 
and  those  in  Silco,  a  case  remaining  viable  after  SDC,  I  would 
set  aside  the  election.''^ 

Because  Rosewood  was  a  three-member  decision,  had  Johansen  agreed 
with  Dennis,  as  his  positions  in  Professional  Care  and  C.J.  Krehbiel 
suggested,  Rosewood  would  have  been  decided  in  favor  of  setting  aside 
the  election. '2° 

VII.     Threats  of  Reprisal  Implied  Through  an  Employer's  Use  of 
Copies  of  Board  Cases  in  Election  Campaigns 

In  National  Micronetics,  Inc.,^^^  the  Board  changed  its  view  regarding 
the  distribution  and  highhghting  of  certain  sections  of  previous  Board 
decisions  by  an  employer  during  a  representation  campaign.  In  an  earlier 
case,  Glassmaster  Plastics  Co.,^^^  the  Board  had  upheld  an  ALJ's  de- 
termination that  altering  and  disseminating  the  Board's  opinion  in  Oxford 
Pickles^^^  was  objectionable  conduct. '^"^  The  employer  had  summarized 
Oxford  Pickles  and  marked  it  up  in  such  a  way  as  to  emphasize  only 
certain  portions  of  the  decision.  The  manner  in  which  the  employer 
presented  these  materials  during  the  election  campaign  was  viewed  by 
the  ALJ  as  "clearly  designed  and  .  .  .  clearly  hav[ing]  the  effect  of  a 
not  so  subtle  threat  of  reprisal  .  .  .  ."'^^ 


■"278  N.L.R.B.  No.  103,  slip  op.  at  5-6,  121  L.R.R.M.  at  1226  (Dennis,  Member, 
dissenting)  (citations  omitted).  In  response  to  Dennis'  dissent,  the  majority  pointed  out 
that  "[i]n  Silco,  the  message,  'Vote  "No"  on  July  2!'  was  hand-printed  in  the  same  style 
as  the  hand-printed  sample  ballot  posted  by  the  employer.  The  partisan  message  was  not 
sufficiently  distinct  from  the  facsimile  ballot  and  tended  to  suggest  that  the  alteration 
bore  the  Board's  approval."  Id.  slip  op.  at  3  n.8,  121  L.R.R.M.  at  1225. 

'2°One  must  hope  that  Johansen's  apparent  inconsistent  positions  in  these  three  cases 
were  not  caused  by  the  fact  that  Professional  Care  and  C.  /.  Krehbiel  involved  union- 
altered  Board  materials  and  union-won  elections,  whereas  it  was  the  employer  who  had 
made  the  modifications  and  won  the  election  in  Rosewood. 

'^'277  N.L.R.B.  No.  95  (Dec.  9,   1985),  121  L.R.R.M.  (BNA)  1035  (1985). 

'^^203  N.L.R.B.  944  (1973). 

'^M90  N.L.R.B.  109  (1971).  Oxford  Pickles  is  frequently  used  by  employers  during 
election  campaigns  because  of  some  of  the  statements  made  by  the  Board  in  the  case  in 
upholding  an  employer's  campaign  representations.  For  instance,  in  one  paragraph  of  the 
decision,  the  Board  said:  "ITlhere  is  no  requirement  in  the  Act  that  an  employer  accede 
to  all  union  demands  or,  after  bargaining,  retain  all  current  benefits.  Nor  does  the  presence 
of  a  union  prohibit  an  employer  irom  moving  its  plant  should  ecenomic  conditions  so 
dictate.  Similarly,  an  employer  may  permanently  replace  economic  strikers."  Id.  at  109. 

'^^203  N.L.R.B.  at  944. 

'^'Id.  at  951. 


1987]  NLRB  2V 

Similarly,  the  employer  in  National  Micronetics  distributed  copies 
of  Oxford  Pickles,  as  reported  in  LRRM,  but  added  a  handwritten 
statement  at  the  top  saying:  "HERE'S  THE  FACTS  from  the  NA- 
TIONAL LABOR  RELATIONS  BOARD— THEY  ARE  NEUTRAL. 
THIS  IS  THE  LAW— READ  IT."  The  LRRM  headnotes  had  been 
underlined  and  characterized  as  follows: 

FACT  #1  —  LMRA  does  not  require  that  employer  accede  to 
all  union  demands  or,  after  bargaining,  retain  all 
current  benefits', 

FACT  #2  —  ...  in  fact  employer  may  permanently  replace 
economic  strikers  and  presence  of  union  does  not 
prohibit  an  employer  from  moving  its  plant  should 

FACT  #3  —  economic  conditions  dictate; 

FACT  #4  —  ...  that  all  union  promises  of  improved  benefits 
are  not  attainable  without  prior  employer  assent\ 

126 

The  text   of  the   decision   had   also   been   bracketed,   underlined,   and 
characterized  as  "TRUE"  in  certain  places. 

Applying  Glassmaster,  the  ALJ  in  National  Micronetics  found  the 
employer's  alteration  and  distribution  of  Oxford  Pickles  objectionable 
because  it  constituted  an  unlawful  threat  of  reprisals  against  employees 
if  they  selected  the  union  as  their  bargaining  representative. ^^^  The  Board 
reversed  the  ALJ  on  this  issue  and  expressly  overruled  Glassmaster 
Plastics  to  the  extent  that  it  was  inconsistent  with  the  Board's  new 
view.'"  The  Board  concluded: 

The  highlighted  portions  of  the  LRRM  report  are  accurate  state- 
ments of  the  law,  and  the  Respondent  had  a  right  to  disseminate 
such  information,  especially  when  the  Union  had  misstated  the 
law  on  these  points  during  the  election  campaign.  .  .  .  We  find 
that  distributing  accurate  copies  of  a  Board  decision  with  portions 
highlighted  and  characterized  as  "true"  can  in  no  way  be  con- 
strued as  an  illegal  threat  or  as  objectionable  conduct. '^^ 


'^^277  N.L.R.B.  No.  95,  slip  op.  at  4,  121  L.R.R.M.  at  1037. 
'^«/c?.  slip  op.  at  5,   121  L.R.R.M.  at  1037. 


278  INDIANA  LAW  REVIEW  [Vol.  20:259 

VIII.     Employer's  Right  to  Refuse  to  Bargain  After  Union 
Affiliation  Election  in  which  Nonunion  Employees  were  not 

Permitted  to  Vote 

In  Amoco  Production  CoJ^^  the  Board  held  that  all  employees  in 
a  bargaining  unit,  not  just  union  members,  must  be  given  the  opportunity 
to  participate  in  a  union  affiliation  election. ^3'  Otherwise,  the  Board 
explained,  it  will  not  amend  the  union's  certification  or  require  the 
employer  to  bargain  with  the  reorganized  union. '^^  The  Fifth  Circuit 
upheld  the  Board's  decision  in  Amoco,^^^  and  the  Seventh  Circuit  later 
followed  suit  by  upholding  the  Board's  new  rule  in  United  Retail  Workers 
Union  Local  811  v.  NLRB.^^'^  During  the  survey  period,  the  Supreme 
Court,  in  "one  of  those  rare  departures  from  [the]  Court's  long  history 
of  special  deference  to  the  Board's  decisions  concerning  the  selection  of 
an  exclusive  bargaining  unit  representative  by  employees, "^^^  struck  down 
the  Board's  new  policy. 

In  NLRB  V.  Financial  Institution  Employees  of  America ^^^^  an  em- 
ployer-bank refused  to  bargain  with  a  reorganized  union  purporting  to 
represent  the  bank's  employees  because  nonunion  employees  in  the  bar- 
gaining unit  had  been  excluded  from  participating  in  the  union  affiliation 
election.  In  dismissing  the  new  union's  sections  8(a)(1)  and  (5)  charges 
against  the  bank,  the  Board  held  that  because  nonunion  employees  were 
not  allowed  to  vote  in  the  affiliation  election,  the  election  did  not  meet 
minimal  "due  process"  standards  and  the  affiliation  was  therefore  in- 
valid.'^^  Upon  the  union's  petition  for  review,  the  Ninth  Circuit  reversed 
and  remanded  the  case,  and  thus  created  a  conflict  between  itself  and 
the  Fifth  and  Seventh  Circuits.'^*  The  appellate  court  concluded  that  the 
Board's  requirement  that  nonunion  employees  be  permitted  to  vote  on 
affiliation  questions  "[was]  irrational  and  inconsistent  with  the  National 
Labor  Relations  Act."^^^  The  Supreme  Court  agreed  with  the  Ninth 
Circuit. '^0 

The  Court  acknowledged  that  there  are  instances  in  which  employee 


'^°262  N.L.R.B.   1240  (1982). 
'''Id.  at  1241. 

'"Local  Union  No.  4-14,  Oil,  Chem.  &  Atomic  Workers  Int'l  Union  v.  NLRB,  721 
F.2d  150  (5th  Cir.   1983). 

'^^774  F.2d  752  (7th  Cir.   1985). 

'"NLRB  V.  Financial  Inst.  Employees  of  Am.,  Local  1182,  106  S.  Ct.  1007,  1017 
(1986)  (Burger,  C.J.,  concurring). 

•3^06  S.  Ct.   1007  (1986). 

'"Seattle-First  National  Bank,  265  N.L.R.B.  426  (1982). 

''«752  F.2d  356  (9th  Cir.   1984). 

'^'M  at  362. 

'^°106  S.  Ct.  at  1017. 


1987]  NLRB  279 

support  for  a  certified  union  may  be  eroded  by  changed  circumstances.'"*' 
The  Court  also  recognized  an  employer's  right  to  allege  these  changed 
circumstances  and  effect  an  election  to  determine  whether  a  union  rep- 
resenting its  employees  continues  to  enjoy  majority  support.'"*^  But  to 
accomplish  this  result  the  Court  added  that  the  employer  "must  'dem- 
onstrate by  objective  considerations  that  it  has  some  reasonable  grounds 
for  believing  that  the  union  has  lost  its  majority  status.'  ""^^  The  Court 
noted  that  one  such  objective  consideration  might  be  an  independent 
union's  affiliation  with  a  national  or  international  organization."^  How- 
ever, the  Court  explained  that  affiliation  has  long  been  considered  an 
internal  matter  that  does  not  affect  the  union's  status  as  bargaining 
representative  and  emphasized  that  the  employer  remains  obligated  to 
recognize  the  reorganized  union  if  the  affiliation  election  is  conducted 
with  adequate  "due  process"  safeguards  and  there  is  substantial  con- 
tinuity between  the  pre-  and  post-affiliation  union.  "*^ 

Finding  that  the  Board's  new  rule  "dramatically  changes  this 
scheme,""*^  because  it  permits  an  employer  to  challenge  a  union's  con- 
tinuing majority  support  even  if  the  organizational  changes  resulting 
from  the  affiliation  are  not  substantial  enough  in  themselves  to  raise  a 
question  of  representation, '"'^  the  Court  held  that  the  rule  exceeds  the  Board's 
statutory  authority.  Rejecting  the  Board's  arguments  that  the  new  rule 
minimized  industrial  strife  and  was  a  reasonable  means  of  protecting 
employees'  rights  to  select  a  bargaining  representative,  the  Court  reasoned 
that  the  new  rule  "violated  the  policy  Congress  incorporated  into  the 
Act  against  outside  interference  in  union  decision-making.""*^  Accord- 
ingly, the  Court  concluded  that  the  Board  must  determine  under  traditional 
standards  whether  union  affiliation  raises  a  question  of  representation.'*' 
If  the  question  is  raised,  then  an  election  must  be  held  to  decide  whether 
the  new  union  is  still  the  choice  of  the  majority  of  employees  in  the  unit. 
Neither  the  Board  nor  the  employer  will  any  longer  be  permitted  to  circum- 
vent this  procedure  simply  by  relying  on  the  fact  that  nonunion  employees 
were  denied  participation  in  the  affiliation  election.  Conversely,  the  Board 
may  no  longer  interfere  in  internal  union  affairs  by  requiring  that  non- 
union employees  be  allowed  to  vote  in  affiliation  elections  for  such  elec- 
tions to  be  valid. 


'''Id.  at  1011. 

''^Id.  (citing  29  U.S.C.  §  159(c)(l)(A)(ii);  29  C.F.R.  §§  101.17,  102.60(a)(1985). 
'^n06  S.  Ct.  at  1011   (quoting  United  States  Gypsum  Co.,   157  N.L.R.B.  652,  656 
(1966)). 

"^Id.  (footnote  omitted). 

•«M  at  1012. 

"•^M  (footnote  omitted). 

'''Id.  at  1017. 

''''Id.  at  1014. 

"^Id.  at  1014-15  (footnote  omitted). 


Developments  in  Professional  Liability 

Donald  L.  Jackson* 

Judicial  developments  in  the  Indiana  courts  during  the  survey  period 
have  yielded  a  number  of  interesting  decisions  dealing  with  professional 
liability  and  responsibility.'  However,  there  was  a  paucity  of  unique 
judicial  determinations  that  resolved  conflicts  between  the  appellate  dis- 
tricts or  that  established  new  law.  This  summary  discussion  is,  therefore, 
intended  as  a  forum  to  briefly  inform  legal  practitioners  and  scholars 
of  two  cases  involving  the  liability  of  attorneys. 

I.     Statute  of  Limitations 

One  important  development  during  the  survey  period  concerned  the 
tolling  of  the  statute  of  limitations  in  legal  malpractice  suits  involving 
fraudulent  concealment  by  an  attorney.  The  First  District  Court  of 
Appeals  of  Indiana  confronted  this  issue  in  Lambert  v.  Stark,^  a  case 
which  dealt  with  the  tolling  effect  of  a  continuing  attorney-client  fiduciary 
relationship  on  the  statute  of  Hmitations. 

The  Indiana  Supreme  Court's  1985  decision  in  Whitehouse  v.  Quinri^ 
had  settled  the  uncertainty  as  to  which  statute  of  hmitations  applied  to 
a  legal  malpractice  action.  Prior  to  Whitehouse,  there  was  a  conflict 
among  different  districts  of  the  Court  of  Appeals  of  Indiana  as  to  which 
statute  of  limitations  applied.'^  Whitehouse  affirmed  with  apparent  finality 
that  a  legal  malpractice  cause  of  action  is  limited  by  Indiana  Code 
section  34-1-2-2.^  Because  an  attorney's  act  of  malpractice  results  in  an 
injury  to  or  a  loss  of  a  personal  right  or  interest  in  property,  a  claim 


*Partner,  Bingham,  Summers,  Welsh  &  Spilman,  IndianapoHs.  B.S.,  1960;  J.D., 
1966,  Indiana  University.  The  author  wishes  to  express  his  appreciation  to  Bryan  J.  Collins 
for  his  assistance  in  the  preparation  of  this  article. 

'See,  e.g..  In  re  Stanton,  492  N.E.2d  1056  (Ind.  1986);  In  re  Long,  486  N.E.2d 
1031  (Ind.  1986);  In  re  Duffy,  482  N.E.2d  1137  (Ind.  1985);  Baily  v.  Martz,  488  N.E.2d 
716  (Ind.  Ct.  App.   1986). 

M84  N.E.2d  630  (Ind.  Ct.  App.   1985). 
H77  N.E.2d  270  (Ind.   1985). 

'^See  Jackson,  Indiana's  Development  of  a  Definitive  Legal  Malpractice  Statute  of 
Limitations,  19  Ind.  L.  Rev.  275  (1986). 

'Ind.  Code  §  24-1-2-2  (1982)  provides  in  part: 
The  following  actions  shall  be  commenced  within  the  periods  herein  prescribed 
after  the  cause  of  action  has  accrued,  and  not  afterward:  (1)  For  injuries  to 
person  or  character,  for  injuries  to  personal  property,  and  for  a  forfeiture  of 
penalty  given  by  statute,  within  two  (2)  years  .... 


281 


282  INDIANA  LAW  REVIEW  [Vol.  20:281 

to  compensate  for  such  an  injury  must  be  commenced  within  two  years 
after  the  occurrence  of  the  injury.^ 

With  the  Hmitation  period  thus  estabhshed,  conditions  for  toUing 
the  statute  of  Hmitations  received  judicial  attention  in  Lambert.  The 
Lamberts  had  sought  the  advice  of  counsel,  Kesler  &  Stark,  regarding 
financial  problems.  Kesler  &  Stark  allegedly  advised  the  Lamberts  to 
dispose  of  certain  property,  which  the  Lamberts  did.  Kesler  &  Stark 
then  filed  a  petition  for  bankruptcy  on  behalf  of  the  Lamberts.  A  few 
months  later,  a  creditor  of  the  Lamberts  objected  to  the  discharge  in 
bankruptcy,  alleging  fraud  in  the  transfer  of  such  property.  Kesler  & 
Stark  informed  the  Lamberts  that  a  complaint  opposing  their  discharge 
had  been  filed.  The  attorneys  continued  to  represent  the  Lamberts  and 
responded  to  the  creditor's  complaint  opposing  the  discharge.  On  March 
19,  1982,  the  bankruptcy  judge  denied  the  Lamberts  a  discharge  in 
bankruptcy,  finding  that  they  intentionally  defrauded  creditors  by  trans- 
ferring property  for  less  than  adequate  consideration  within  one  year 
of  filing  the  bankruptcy  petition.^ 

Within  two  years  after  the  denial  of  the  discharge,  the  Lamberts 
filed  suit  against  Kesler  &  Stark. ^  In  response  to  the  attorneys'  motion 
for  summary  judgment  asserting  that  the  suit  was  barred  by  the  statute 
of  limitations,  the  Lamberts  argued  that  the  existence  of  a  continuing 
fiduciary  relationship  with  their  attorneys  tolled  the  commencement  of 
the  statute  of  limitations  until  they  discovered  that  their  attorneys'  advice 
had  been  incorrect.^ 

There  is  no  question  that  the  statute  of  limitations  period  applicable 
to  a  legal  malpractice  cause  of  action  may  be  tolled  by  reason  of 
fraudulent  concealment.  The  limitations  period  will  not  shield  a  person 
who  conceals  the  fact  that  he  is  liable  for  an  action.*^  Indiana's  statutory 
basis  for  tolling  the  commencement  of  a  limitations  period  based  upon 
concealment''  requires  that  the  party  actively  and  intentionally  conceal 
the  cause  of  action. '^ 

A  corollary  to  this  concept  of  fraudulent  concealment  applies  where 
a  fiduciary  relationship  exists  and  where  the  fiduciary  fails  to  disclose 


'Whitehouse,  All  N.E;2d  at  274;  Shideler  v.  Dwyer,  275  Ind.  270,  281,  417  N.E.2d 
281,  288  (1981). 

'Lambert,  484  N.E.2d  at  631. 

Hd.  at  632. 

'°lND.  Code  §  34-1-2-9  (1982)  provides: 

If  any  person  liable  to  an  action  shall  conceal  the  fact  from  the  knowledge  of 
the  person  entitled  thereto,  the  action  may  be  commenced  at  any  time  within 
the  period  of  limitation  after  the  discovery  of  the  cause  of  action. 

'^See,  e.g.,  Dorsey  Mach.  Co.  v.  McCaffrey,  139  Ind.  545,  38  N.E.  208  (1894); 
Keilman  v.  Hammond,  124  Ind.  App.  392,  116  N.E. 2d  515  (1953);  Van  Spanje  v.  Hostettler, 
68  Ind.  App.  518,   119  N.E.  725  (1918). 


1987]  PROFESSIONAL  LIABILITY  283 

to  the  person  to  whom  the  fiduciary  owes  a  duty  of  good  faith  and 
loyalty  the  possible  existence  of  a  cause  of  action  against  the  fiduciary.'^ 
The  Indiana  appellate  courts  have  had  few  occasions  to  determine  whether 
an  attorney's  failure  to  disclose  to  a  client  the  existence  of  a  possible 
cause  of  action  for  malpractice  tolls  the  commencement  of  the  statute 
of  limitations. •"*  In  Lambert,  the  First  District  Court  of  Appeals  of 
Indiana  made  clear  that  in  order  "to  avoid  the  bar  of  limitations  by 
claiming  fraudulent  concealment,  [clients  must]  show  that  they  used  due 
diligence  to  detect  the  fraud. "'^  A  naked  assertion  that  the  misconduct 
was  not  in  fact  discovered  does  not  satisfy  a  client's  burden  of  proving 
that  even  if  he  used  reasonable  care  and  dihgence,  he  would  not  have 
discovered  the  possibility  of  actionable  malpractice.  Therefore,  the  Lam- 
berts had  the  burden  of  showing  they  used  reasonable  care  and  diligence 
to  detect  their  attorneys'  fraudulent  concealment.  Because  the  Lamberts 
failed  to  meet  this  burden,  they  could  not  toll  the  commencement  of 
the  statute  of  limitations.  Therefore,  their  claim  for  legal  malpractice 
was  barred,  and  summary  judgment  in  favor  of  Kesler  &  Stark  was 
proper.  ^^ 

Judge  Ratliff's  dissent  in  Lamberf^  brings  into  focus  the  full  ram- 
ification of  this  holding.  Judge  RatHff  wrote  that  "[a]lthough  Kesler 
and  Stark  claim  to  have  advised  Lamberts  of  the  petition  to  deny 
discharge,  an  inference  could  be  drawn  from  the  fact  of  their  continued 
representation  opposing  the  petition  to  deny  discharge,  that  they  were 
concealing  their  origixial  malpractice."'^  Thus,  in  Judge  Ratliff's  view, 
where  a  third  party  alleges  that  an  attorney's  client  acted  improperly 
and  the  attorney  continues  to  defend  the  propriety  of  his  client's  conduct 
that  was  based  on  the  erroneous  advice  of  the  attorney,  there  is  a 
sufficient  factual  basis  to  infer  fraudulent  concealment,  if  the  client  has 
no  actual  knowledge  of  the  legal  malpractice.'^  This  is  true  at  least  for 
purposes  of  ruHng  on  a  motion  for  summary  judgment. ^^ 

In  contrast  to  the  dissent,  the  majority  in  Lambert  appears  to  require 
a  cUent  to  at  least  question,  if  not  investigate,  possible  acts  of  legal 
malpractice  when  the  client  is  given  information  that  may  indicate  that 
the  attorney's  legal  advice  was  possibly  in  error.  Thus,  at  least  in  the 
context  of  a  summary  judgment,  Lambert  holds  that  a  client  has  the 


'^Such  a  duty  has  long  been  recognized  in  the  context  of  a  physician-patient  rela- 
tionship. See  Guy  v.  Schuldt,  236  Ind.   101,   138  N.E.2d  891  (1956). 

''See  Keystone  Distribution  Park  v.  Kennerk,  461  N.E.2d  749  (Ind.  Ct.  App.  1984); 
Whitehouse  v.  Quinn,  443  N.E.2d  332  (Ind.  Ct.  App.  1982),  vacated  and  rev'd  on  other 
grounds,  477  N.E.2d  270  (Ind.   1985). 

'^484  N.E.2d  at  632. 

'''Id. 

''Id. 

''Id.  at  634. 

"Id.  at  634-35. 

'°Id.  at  635. 


284  INDIANA  LAW  REVIEW  [Vol.  20:281 

burden  of  showing  that  he  used  reasonable  care  and  dihgence  to  detect 
the  fraud. 2'  A  mere  showing  that  the  legal  advice  was  discovered  to  be 
in  error  after  the  attorney-chent  relationship  ended  is  not  sufficient. ^^ 
Formerly,  in  one  line  of  Indiana  cases,  the  statute  of  limitations 
was  tolled  if  one  who  had  a  duty  to  disclose  (as  in  a  fiduciary  relationship) 
failed  to  do  so.^^  However,  the  Lambert  court  engrafted  onto  this  rule 
the  additional  requirement  of  due  diligence  mentioned  in  another  line 
of  Indiana  cases. ^^  It  now  appears  that  a  victim  of  legal  malpractice 
who  seeks  to  toll  the  statute  of  Hmitations  must  present  evidence  that 
he  used  reasonable  care  and  diligence,  and  that  even  by  the  use  of  such 
diligence,  the  victim  was  not  able  to  discover  that  the  advice  was  incorrect 
in  order  for  an  attorney  to  be  found  guilty  of  fraudulent  concealment. 
A  showing  of  continued  representation  by  the  attorney  will  not  be 
sufficient  to  prove  fraudulent  concealment  and  therefore  to  toll  the 
statute  of  limitations.  This  result,  while  possibly  harsh,  appears  to  be 
consistent  with  the  strong  policy  underlying  the  statute  of  limitations.^^ 

II.     Additional  Client  and  Attorney  Exposure 

A  second  noteworthy  development  during  the  survey  period  was  the 
expansion  of  vicarious  liability  in  the  context  of  the  attorney-client 
relationship.  In  addition  to  expanding  the  potential  for  damages  to  be 
assessed  against  a  cHent  by  a  third  party  for  the  acts  or  omissions  of 
an  attorney,  an  attorney's  total  exposure  to  a  client  for  such  wrongful 
acts  could  be  greater.  In  United  Farm  Bureau  Mut.  Ins.  Co.  v.  Groen,^^ 
a  case  of  first  impression  in  Indiana,  the  Indiana  Court  of  Appeals  held 
an  insurance  company  liable  for  the  alleged  negligence  and  abuse  of  pro- 
cess by  its  attorney  in  a  subrogated  claim  brought  on  behalf  of  the  in- 
surer. ^^ 

The  facts  of  Groen  clearly  illustrate  the  cause  for  concern.  In  Groen, 
the  insurance  company  retained  an  attorney  to  bring  suit  to  recover  on 
a  subrogated  claim  arising  from  an  automobile  accident.  A  default 
judgment  was  granted  against  Thomas  Groen.  When  a  copy  of  the 
default  judgment  was  forwarded  to  the  Bureau  of  Motor  Vehicles  by 
the  insurer's  attorney,  Groen' s  license  was  suspended.  Groen  was  later 
arrested  for  driving  with  a  suspended  license.  Groen  succeeded  in  setting 
the  default  judgment  aside  on  the  grounds  that  he  was  never  served 


^'Id.  at  632. 
"/or. 

"Dotlich  V.  Dotlich,  475  N.E.2d  331  (Ind.  Ct.  App.  1985).  But  see  Forth  v.  Forth, 
409  N.E.2d  641  (Ind.  Ct.  App.   1980)  (court  held  that  there  was  no  tolling). 

^'See  Keystone  Distribution  Park,  461  N.E.2d  749;  Whitehouse,  443  N.E.2d  at  332. 
''See  Shideler  v.  Dwyer,  275  Ind.  270,  273,  417  N.E.2d  281,  283  (1981). 
M86  N.E.2d  571  (Ind.  Ct.  App.   1985). 
''Id. 


1987]  PROFESSIONAL  LIABILITY  285 

with  process  and  therefore  the  court  never  obtained  jurisdiction  over 
him.  Groen  filed  suit  against  the  insurance  company  and  the  attorney 
for  neghgence  and  abuse  of  process. ^^  The  insurance  company  was  held 
to  be  accountable  for  damages  caused  by  the  negligence  and  abuse  of 
process  occasioned  by  the  acts  of  its  attorney. ^^ 

While  in  a  representative  capacity,  an  attorney  has  long  been  con- 
sidered an  agent  of  a  client;^^  but  no  Indiana  authority  had  fully  con- 
sidered the  capacity  in  which  an  attorney  serves  a  client  in  relation  to 
notions  of  vicarious  liability  for  tortious  conduct.  Traditional  notions 
of  vicarious  liability  are  based  upon  the  doctrine  of  respondeat  superior 
and  require  determination  of  such  issues  as  the  power  or  right  to  control 
and  the  existence  of  a  master-servant  relationship.^' 

In  Groen,  the  insurance  company  asserted  that  the  doctrine  of 
respondeat  superior  appHed  in  order  to  determine  a  client's  liability  for 
the  acts  of  its  attorney. ^^  Within  this  framework,  the  company  argued 
that  an  attorney  is  an  independent  contractor  whose  acts  are  not  under 
the  immediate  control  of  a  client,  and  thus,  a  client  should  not  be  held 
liable  for  an  attorney's  tortious  conduct."  The  court,  however,  rejected 
the  premise  that  a  master-servant  relationship  was  necessary  to  hold  a 
client  Hable  for  the  acts  of  its  attorney. ^"^ 

Without  a  great  deal  of  analysis  of  the  numerous  poUcy  considerations 
in  this  area,  the  court  held: 

Because  of  the  close  identity  of  an  attorney  with  the  client  he 
represents,  we  hold  that  neither  the  absence  of  a  master-servant 
relationship  nor  the  characterization  of  the  attorney  as  an  in- 
dependent contractor  is  a  bar  to  the  liability  of  the  client  for 
the  torts  of  the  attorney  acting  within  the  scope  of  his  authority. ^^ 

While  such  a  result  is  not  inconsistent  with  decisions  in  other  states, ^^ 
it  represents  a  significant  expansion  of  traditional  notions  of  vicarious 
hability  for  tortious  acts  if  it  is  applied  to  other  than  the  attorney-client 


^'Id.  at  572. 

^'Id.  at  574. 

'"'See  State  ex  rel.  Peoples  Nat'l  Bank  &  Trust  Co.  v.  Dubois  Cir.  Ct.,  250  Ind. 
38,  233  N.E.2d  177  (1968),  reh'g  denied,  250  Ind.  38,  234  N.E.2d  859  (1968);  Kreite  v. 
Kreite,  93  Ind.  583  (1883). 

^'See,  e.g..  Railway  Express  Agency,  Inc.  v.  Bonnell,  218  Ind.  607,  33  N.E.2d  980 
(1941);  Trinity  Lutheran  Church  v.  Miller,  451  N.E.2d  1099  (Ind.  Ct.  App.  1983);  Gibbs 
V.  Miller,  152  Ind.  App.  326,  283  N.E.2d  592  (1972);  Restatement  (Second)  of  Agency 
§§  212-67  (1957);  W.  Seavey,  Handbook  of  the  Law  of  Agency  (1964). 

"486  N.E.2d  at  573. 

"M  at  573-74. 

''Id.  at  574. 

'^Id.  Cited  in  Groen  in  support  of  its  holding: 

Hewes  v.    Wolfe,   14  N.C.   App.   610,   330  S.E.2d   16  (1985)  (where  attorney 
tortiously  institutes  or  continues  civil  proceedings  or  is  guilty  of  oppressive  or 


286  INDIANA  LAW  REVIEW  [Vol.  20:281 

relationship.  It  should  not  be.  The  attorney-client  relationship  is  unique 
in  that  the  attorney  has  almost  unbridled  authority  to  act  on  behalf  of 
his  client.  No  other  principal-agent  relationship  exists  in  which  the  agent 
occupies  a  position  as  special  as  that  of  the  attorney  to  his  client. 

While  earlier  cases  clearly  have  held  that  an  attorney's  acts  as  an 
agent  are  binding  upon  his  client, ^^  these  cases  involved  the  effect  of 
an  attorney's  actions  upon  the  actual  case  being  litigated  by  the  attorney. 
Because  an  attorney  is  specifically  engaged  to  act  on  behalf  of  a  client 
in  a  legal  proceeding,  it  is  not  surprising  that  his  actions  bind  a  client 
for  purposes  of  those  proceedings.  The  Groen  decision  can  be  said  to 
be  a  logical  extension  of  these  decisions.  By  holding  the  insurance 
company  liable  to  Groen  for  the  negligence  of  its  attorney,  Groen  appears 
to  conclude  that  the  attorney  acted  as  the  agent  of  the  company,  and 
therefore,  the  negligence  of  the  attorney  was  the  negligence  of  the  in- 
surance company.  ^^ 

Authority  also  exists  for  assessing  monetary  sanctions  against  a  client 
for  costs  incurred  by  an  opposing  party  as  a  result  of  an  attorney's 
conduct. ^^  Such  liability  is  predicated  upon  procedural  rules"^^  and  is 
intended  to  facilitate  the  efficient  operation  of  the  courts. 

Not  only  is  the  concept  of  vicarious  liability  set  forth  in  Groen  of 
substantial  concern  to  a  client,  an  attorney's  potential  liability  for  dam- 
ages for  wrongful  or  negligent  acts  is  expanded.     As  the  insurance  company 


wrongful  conduct  during  course  of  proceeding  in  order  to  enforce  claim  of 

client,  client  is  liable  for  attorney's  wrongful  acts);  Racoosin  v.  LeSchack  & 

Grodensky,  103  Misc.  2d  629,  426  N.Y.S.2d  707  (1980)  (utility  liable  for  damages 

for  willful  interference  with  property  where  judgment  against  customer  for  unpaid 

utility  bills  was  later  declared  void  for  lack  of  jurisdiction  over  customer);  Flight 

Kitchen,  Inc.  v.  Chicago  Seven-Up  Bottling  Co.,  22  111.  App.  3d  558,  317  N.E.2d 

663   (1974)  (corporate  defendant   liable   for   acts   of  attorney  who   wrongfully 

ordered  levy  against  plaintiff's  property  to  enforce  judgment  rendered  on  behalf 

of  defendant). 

Accord,  Peterson  v.  Farmers  Casualty  Co.,  226  N.W.2d  226  (Iowa  1975).  But  see  Lynn 

V.  Superior  Court,  225  Cal.  Rptr.  427,  180  Cal.  App.  3d  346  (1986)  (client  is  not  liable 

for  the  negligent  or  intentional  infliction  of  emotional  distress  caused  by  its  attorney 

because  an  attorney  is  an  independent  contractor);  Plant  v.  Trust  Co.  of  Columbus,  168 

Ga.  App.  909,  310  N.E.2d  745  (1983);  Evans  v.  Steinberg,  40  Wash.  App.  585,  699  P.2d 

797  (1985)  (insurer  not  liable  for  malpractice  claims  against  an  attorney  because  an  attorney 

is  an  independent  contractor). 

"5ee,  e.g..  International  Vacuum,  Inc.  v.  Owens,  439  N.E.2d  188  (Ind.  Ct.  App. 
1982)  (citing  Kuhn  v.  Indiana  Ice  &  Fuel  Co.,  104  Ind.  App.  387,  390,  11  N.E.2d  508, 
509  (1937));  see  also  supra  note  30. 
^«486  N.E.2d  at  573-74. 

"In  Brutus  v.  Wright,  163  Ind.  App.  366,  324  N.E.2d  165  (1975),  costs  were  assessed 

against  a  client  for  expenses  associated  with  a  continuance  caused  by  an  attorney's  delay. 

'*°Ind.  R.  Tr.  p.  53.5  provides  in  part  "the  court  may  award  such  costs  as  will 

reimburse  the  other  parties  for  their  actual  expenses  incurred  from  the  delay."  See  also 

Ind.  R.  Tr.  P.  11;  Fed.  R.  Civ.  P.   11,  37(b). 


1987]  PROFESSIONAL  LIABILITY  2S1 

did  in  Groen,  a  client  will  most  likely  contest  such  claims  of  vicarious 
liability  for  the  acts  of  the  attorney.  Generally,  any  attorney's  fees 
reasonably  incurred  in  such  defense  to  reduce  or  avoid  damages  caused 
by  an  attorney's  negligent  or  wrongful  actions  are  recoverable  as  con- 
sequential damages  in  a  subsequent  malpractice  action  against  an  at- 
torney/' Thus,  in  addition  to  being  liable  in  damages  for  tortious  conduct, 
an  attorney  may  also  be  liable  to  a  client  for  expenses  incurred  by  the 
cHent  to  mitigate  or  defend  against  the  damages  claimed  by  a  third 
party  and  caused  by  the  acts  constituting  malpractice. 


"'See,  e.g..  United  Fidelity  Life  Ins.  Co.  v.  Law  Firm  of  Best,  Sharp,  Thomas  & 
Glass,  624  F.2d  145  (10th  Cir.  1980);  Spering  v.  Sullivan,  361  F.  Supp.  282  (D.  Del. 
1973);  McGregor  v.  Wright,  117  Gal.  App.  186,  3  P.2d  624  (1931);  Ninth  Ave.  &  Forty- 
Second  St.  Corp.  V.  Zimmerman,  217  A.D.  498,  217  N.Y.S.  123  (1926);  Hiss  v.  Friedberg, 
201  Va.  572,  112  S.E.2d  871  (1960);  R.  Mallen  &  V.  Levit,  Legal  Malpractice  §  309 
(2d  ed.   1981). 


Claims  By  and  Against  Decedents'  Estates 

Debra  a.  Falender* 

I.     Introduction 

Several  cases  decided  during  the  survey  period  resolved  issues  con- 
cerning claims  made  by  and  against  decedents'  estates  and  decedents' 
successors.'  The  discussion  of  these  cases  will  be  divided  into  three  parts: 
claims  and  actions  by  decedents'  estates;  claims  against  decedents'  estates; 
and  actions  to  impose  constructive  trusts  on  decedents'  successors. 

II.     Claims  by  Decedents'  Estates 
The  most  interesting  of  the  recent  cases^  involving  claims  made  by 


♦Professor,  Indiana  University  School  of  Law — Indianapolis.  A.B.,  Mount  Holyoke 
College,  1970;  J.D.,  Indiana  University,  1975. 

'An  important  development  related  to  claims  and  actions  by  decedent's  successors 
was  the  amendment  of  the  will  contest  statute,  Ind.  Code  §  29-1-7-17  (Supp.  1986), 
changing  the  contest  filing  period  to  "five  months  after  the  [will]  has  been  spread  of 
record  or  the  date  of  the  first  published  notice  to  creditors,  whichever  occurs  later."  The 
legislature  removed  the  former  unfortunate  reference  to  the  time  the  will  was  offered  for 
probate.  The  amendment  is  certainly  applicable  to  estates  of  decedents  who  die  after  its 
effective  date,  which  is  September  1,  1986.  See  Ind.  Code  §  1-1-3-3  (1982).  Perhaps  it 
is  also  applicable  to  estates  opened  after  its  effective  date  or  to  contests  filed  after  its 
effective  date,  because  the  amendment  extends  and  clarifies  the  time  for  contest. 

Two  will  contest  cases  were  decided  during  the  survey  period:  Farner  v,  Farner,  480 
N.E.2d  251  (Ind.  Ct.  App.  1985)  (affirming  the  trial  court's  judgment  in  favor  of  the 
will  over  allegations  of  undue  execution,  undue  influence,  and  unsoundness  of  mind),  and 
In  re  Estate  of  Parlock,  486  N.E.2d  567  (Ind.  Ct.  App.  1985)  (holding  that  inconsistency 
between  the  attestation  clause  and  the  will  was  not  fatal  to  the  will's  validity  when  the 
inconsistency  concerned  something  not  required  for  the  will's  validity,  namely,  the  testator's 
signature  on  every  page).  The  Farner  case  extensively  reviews  the  law  of  undue  influence 
and  evidence  in  will  contest  actions. 

^One  recent,  interesting  case  held  that  the  personal  representative  could  sue  to  recover 
a  lump-sum  child  support  arrearage  owed  the  deceased  custodial  parent.  In  that  case, 
Lizak  V.  Schultz,  480  N.E.2d  962  (Ind.  Ct.  App.  1985),  the  court  decided  that  the  divorce 
court  does  not  lose  "subject-matter  jurisdiction  to  reduce  support  arrearage  to  a  lump 
sum  upon  the  death  of  the  custodial  parent."  480  N.E.2d  at  963.  The  court  applied  an 
exception  to  the  general  rule,  see  State  ex  rel.  Paxton  v.  Porter  Superior  Court,  467 
N.E.2d  1205  (Ind.  1984),  that  divorce  proceedings  terminate  entirely  upon  the  death  of 
one  of  the  parties.  Furthermore,  the  court  held  that  the  support  arrearage  is  "money 
owed"  the  deceased  custodial  parent  at  the  time  of  his  death,  if  he  had  expended  his 
own  funds  to  satisfy  the  support  needs  of  the  children;  thus,  pursuant  to  Ind.  Code  § 
29-1-13-3  (1982),  the  custodial  parent's  personal  representative  may  sue  the  noncustodial 
parent  to  recover  this  "money  owed."  Lizak,  480  N.E.2d  at  964. 

Two  other  cases  concerned  actions  to  recover  damages  for  wrongful  death.  The  courts' 
decisions  in  these  cases  were  based  on  well-settled  Indiana  precedent.  In  Andis  v.  Hawkins, 

289 


290  INDIANA  LA  W  REVIEW  [Vol.  20:289 

decedents'  estates  and  decedents'  successors  was  Bailey  v.  Martz,^  which 
arose  out  of  an  action  to  recover  damages  for  malpractice  against 
attorneys  who  allegedly  let  the  statute  of  limitations  run  on  actions  to 
recover  for  personal  injury  suffered  by  a  deceased  minor/  In  resolving 
the  malpractice  issue,  the  Bailey  court  considered  the  relationship  among 
three  sections  of  the  statutes  of  limitations,^  namely,  Indiana  Code  section 


489  N.E.2d  78  (Ind.  Ct.  App.  1986),  the  court  held  that  punitive  damages  are  not  recoverable 
in  an  action  by  parents  under  Ind.  Code  §  34-1-1-8  (1982)  to  recover  for  the  wrongful 
death  of  their  child,  because  Indiana  judicial  decisions  have  restricted  the  recovery  to 
pecuniary  loss.  See,  e.g.,  Boland  v.  Greer,  409  N.E.2d  1116  (Ind.  Ct.  App.  1980)  (transfer 
denied).  In  dicta,  the  Andis  court  stated  that  punitive  damages  also  are  not  recoverable 
in  an  action  for  the  wrongful  death  of  an  adult,  because  Ind.  Code  §  34-1-1-2  (1982) 
specifies  the  elements  of  recoverable  damages,  and  punitive  damages  are  not  specified. 
489  N.E.2d  at  82. 

In  another  wrongful  death  case.  Community  Hospital  of  Anderson  v.  McKnight,  482 
N.E.2d  280  (Ind.  Ct.  App.  1985),  the  court  held  that  pursuant  to  the  wrongful  death 
statute,  Ind.  Code  §  34-1-1-2  (1982),  the  only  person  who  can  bring  an  action  for  wrongful 
death  based  on  medical  malpractice  is  the  decedent's  personal  representative,  who  must 
be  appointed  within  two  years  of  the  decedent's  death.  The  decedent's  widow  and  child 
unsuccessfully  argued  that  an  order  of  no  administration  within  two  years  of  death  was 
a  substitute  for  appointment  of  a  personal  representative. 
'488  N.E.2d  716  (Ind.  Ct.  App.   1986). 

■•The  child's  father  first  asked  one  lawyer  to  pursue  each  of  at  least  three  actions: 
one  to  recover  for  the  personal  injuries  suffered  when  the  child  was  rendered  quadriplegic 
as  a  result  of  a  motorcycle  collision  with  a  train;  another  to  recover  for  injuries  suffered 
when  the  child  was  burned  by  a  malfunctioning  heart  monitor;  and  another  to  recover 
for  the  child's  wrongful  death,  allegedly  caused  by  a  malfunction  in  lung  stimulation 
equipment  and  by  delay  in  sending  an  ambulance  when  the  child  had  stopped  breathing. 
The  child's  father  discharged  the  first  lawyer,  who  had  not  pursued  any  of  the  claims, 
and  hired  two  other  lawyers  to  pursue  all  claims,  including  a  possible  malpractice  action 
against  the  first  lawyer. 

Twenty  months  after  the  child's  death,  the  two  lawyers  withdrew  their  representation 
because  they  saw  a  potential  conflict  of  interest  between  themselves  and  their  client.  They 
concluded  that  the  eighteen-month  survival-of-action  statute,  Ind.  Code  §  34-1-2-7  (1982), 
possibly  had  run  while  they  were  representing  the  father;  and  if  it  had  run,  the  father 
had  a  cause  of  action  for  malpractice  against  them.  When  they  withdrew,  the  two  lawyers 
had  not  filed  an  action  against  anyone. 

Exactly  two  years  after  his  child's  death,  the  father  retained  other  counsel.  Six  months 
later,  an  estate  was  opened  for  the  child,  and  two  months  after  that,  the  instant  malpractice 
action  was  filed  by  the  father  against  the  two  lawyers.  The  alleged  malpractice  consisted 
of  failure  to  file  any  of  the  actions  described  above  and  wrongful  withdrawal  from 
representation.  One  of  the  lawyers'  defenses  was  that  neither  their  withdrawal  nor  their 
failure  to  file  the  actions  caused  harm  to  the  father  or  to  his  son's  estate.  They  contended, 
inter  alia,  that  no  statute  of  limitations  had  run  against  the  claims  while  they  were 
representing  the  father,  and  that  the  father  had  four  months  left  on  the  appHcable  statute 
of  Umitations  after  their  withdrawal  to  seek  other  counsel  to  pursue  the  claims.  The  trial 
court  entered  summary  judgment  in  favor  of  the  lawyers.  The  two-year  statute  of  limitations 
on  the  wrongful  death  actions  clearly  had  not  run  by  the  time  of  the  lawyers'  withdrawal. 
Ind.  Code  §  34-1-1-2  (1982).  Arguments  in  the  case  centered  around  the  personal  injury 
statutes  of  limitations. 

H88  N.E.2d  at  723-24. 


1987]  ESTATES  291 

34-1-2-2(1),  which  is  the  two-year  statute  of  Hmitations  for  personal 
injuries;^  Indiana  Code  section  34-1-2-5,  which  provides  that  '*[a]ny  person 
.  .  .  under  legal  disabilities  when  the  cause  of  action  accrues  may  bring 
his  action  within  two  .  .  .  years  after  the  disability  is  removed;"^  and 
Indiana  Code  section  34-1-2-7,  which  provides  an  eighteen-month  ex- 
tension of  the  limitations  period  for  persons  who  die  before  bringing 
an  action  or  being  sued.^ 

The  court  in  Bailey  reasoned  that  the  applicable  personal  injury 
statute  of  Hmitations  of  two  years,  Indiana  Code  section  34-1-2-2(1), 
was  not  running  when  the  minor  died  because  it  was  tolled  by  Indiana 
Code  section  34-1-2-5  until  the  minor's  eighteenth  birthday.^  When  the 
minor  died  prior  to  attaining  majority,  the  two-year  personal  injury 
limitations  period  of  section  34-1-2-2(1)  then  began  to  run.'°  Thus,  the 
court  held,  the  eighteen-month  death  time  survival  period  of  Indiana 
Code  section  34-1-2-7  would  not  apply  for  two  reasons:  first,  because 
the  applicable  two-year  personal  injury  statute  had  not  begun  to  run 
and  consequently  could  not  be  "extended"  when  the  minor  died,  and 
secondly,  because  apphcation  of  the  eighteen-month  period  would  have 
shortened  the  two-year  personal  injury  statute  of  limitations  J  • 


*Ind.  Code  §  34-1-2-2(1)  (1982)  [hereinafter  personal  injury  statute  of  limitations] 
provides:  "The  following  actions  shall  be  commenced  within  the  periods  herein  prescribed 
after  the  cause  of  action  has  accrued,  and  not  afterwards:  (1)  For  injuries  to  person  or 
character,  for  injuries  to  personal  property,  and  for  a  forfeiture  of  penalty  given  by 
statute,  within  two  (2)  years." 

'Ind.  Code  §  34-1-2-5  (1982)  [hereinafter  disability  statute  of  limitations]. 
^Ind.  Code  §  34-1-2-7  (1982)  [hereinafter  death-time  survival  statute  of  hmitations] 
provides: 

If  any  person  entitled  to  bring,  or  liable  to,  any  action,  shall  die  before  the 
expiration  of  the  time  limited  for  the  action,  the  cause  of  action  shall  survive 
to  or  against  his  representatives,  and  may  be  brought  at  any  time  after  the 
expiration  of  the  time  limited  within  eighteen  (18)  months  after  the  death  of 
such  person. 
^The  court  said,  "Thus,  had  Mark  hved,  running  of  the  applicable  statute  of 
limitations  would  have  been  tolled  until  ...  his  18th  birthday."  488  N.E.2d  at  722. 

'"Using  the  court's  analysis,  if  the  minor  had  survived  to  majority,  then  the  two- 
year  personal  injury  statute,  Ind.  Code  §  34-1-2-2(1)  (1982),  would  have  begun  to  run 
on  his  eighteenth  birthday. 
"The  court  stated: 

Contrary  to  Bailey's  claim,  I.C.  34-1-2-7  does  not  apply  here.  Our  [sjupreme 
[c]ourt  has  determined  this  code  section  applies  only  to  cases  where  the  party 
dies  after  the  applicable  statute  of  limitations  has  begun  to  run  and  before  the 
time  limit  has  expired.  Here,  however,  the  applicable  limitations  statute  was  not 
running  at  the  time  Mark  died.  Further,  the  [s]upreme  [c]ourt  determined  the 
effect  of  this  section  is  to  extend  the  time  of  limitations  only,  never  to  diminish 
it.  .  .  .  The  application  for  which  Bailey  contends  would  have  shortened  the  2 
year  period  for  the  filing  of  this  action  by  6  months.  I.C.  34-1-2-7  is  not  the 
statute  of  limitations  which  applies  here. 
488  N.E.2d  at  722  (citations  omitted,  emphasis  in  original). 


292  INDIANA  LAW  REVIEW  [Vol.  20:289 

The  error  in  the  court's  analysis  is  its  view  that  when  a  disabihty 
exists  on  the  day  a  cause  of  action  accrues,  the  general  statute  of 
limitations  is  tolled  at  the  outset  and  does  not  begin  to  run.  This  approach 
is  not  supported  by  the  language  or  the  logic  of  the  statutes.  An  approach 
consistent  with  the  language  of  the  statutes  would  identify  two  separate 
statutes  of  limitations  under  the  special  circumstances  of  disability  or 
death.  In  all  cases,  by  its  terms,  the  appHcable  general  statute  of  hm- 
itations  begins  to  run  when  the  cause  of  action  accrues. '^  If  at  that  time 
the  plaintiff  is  under  a  disability,  the  general  statute  continues  to  run, 
but  in  addition,  a  special  statute  will  begin  to  run  when  the  disability 
is  removed.  ^^  Then,  if  the  plaintiff  (or  defendant)  dies  while  either  statute 
is  running,  another  special  death-time  survival  statute  begins  to  run  at 
the  time  of  death. '^  In  any  event,  under  firmly  entrenched  Indiana 
Supreme  Court  precedent,  the  disability  statute  of  limitations  will  never 
operate  to  shorten  the  general  statute  of  hmitations;  likewise,  the  eighteen- 
month  death-time  survival  statute  will  never  operate  to  shorten  either 
the  general  statute  or  the  disability  statute  of  limitations.^^ 

The  Bailey  court  correctly  stated  this  well-entrenched  precedent,  but 
incorrectly  applied  it  when  the  court  determined  that  the  death-time 
survival  statute  would  shorten  the  general  two-year  statute,  which  ac- 
cording to  the  court  began  to  run  when  the  deceased  minor  died.  Actually, 
when  the  minor  died  more  than  two  years  after  the  injuries,  the  only 
potentially  applicable  statutes  of  limitations  were  the  two-year  disability 
statute  and  the  death-time  survival  statute.  One  could  argue  that  the 
two-year  disability  statute  was  operable  because  when  the  minor  died, 
his  disability  was  removed  for  the  first  time.^^  Alternatively,  one  could 
argue  that  the  only  relevant  statute  of  limitations  at  the  time  of  the 
child's  death  was  the  death-time  survival  statute.*^  The  Bailey  court 
should  have  wrestled  with  the  choice  between  the  disability  statute  and 
the  death-time  survival  statute,  not  the  choice  between  the  general  statute 
and  the  death-time  survival  statute.  The  court  should  have  decided  whether 
the  disability  of  minority  is  removed  by  a  minor's  death,  kicking  in  the 
two-year  disability  statute,  or  whether  the  disability  statute  never  kicks 
in,  leaving  the  death-time  statute  as  the  only  applicable  statute.  ^^  If  the 


'^5ee  IND.  Code  §  34-1-2-2(1)  (1982),  supra  note  6. 

''See  Ind.  Code  §  34-1-2-5  (1982),  supra  text  accompanying  note  7. 

''See  Ind.  Code  §  34-1-2-7  (1982),  supra  note  8. 

•^Harris  v.  Rice,  66  Ind.  267  (1879);  McNear  v.  Roberson,  12  Ind.  App.  87,  39 
N.E.  896  (1894). 

'^The  Bailey  court  said,  "Mark's  death  removed  his  legal  age  disability."  488  N.E.2d 
at  722. 

"Obviously,  to  the  extent  that  the  estate's  claim  was  for  wrongful  death,  the  statute 
of  limitations  on  that  claim  would  not  begin  to  run  until  the  date  of  death.  Ind.  Code 
§  34-1-1-2  (1982). 

'^The  following  hypothetical  illustrates  more  clearly  the  difference  between  the  Bailey 
court's  approach  and  the  suggested  approach.  Assume  that  a  minor  inherited  real  estate 


1987]  ESTATES  293 

decision  was  in  favor  of  the  former  approach,  summary  judgment  for 
the  lawyers  could  have  been  affirmed. 

III.     Claims  Against  Decedents'  Estates 

A.     Claims  in  General 

In  three  claims  cases,  straightfoward  fact  situations  resulted  in  non- 
controversial  holdings.  A  personal  representative  was  not  unqualified  to 
serve  merely  because  he  was  a  claimant.'^  A  bank  in  which  the  decedent 
had  made  a  general  deposit  of  funds,  and  to  whom  the  decedent  owed 
money,  was  permitted  to  set  off  the  deposit  against  the  debt,^^  thereby, 
to  the  extent  of  the  set-off,  avoiding  the  claim-fiUng  rules  and  claim-payment 


in  1970.  In  1972,  an  adverse  possessor  began  using  the  real  estate  actually,  openly, 
notoriously,  adversely,  and  exclusively,  and  continued  his  use  through  1986.  Assume  that 
the  minor  died  in  1983,  at  the  age  of  16.  The  statute  of  limitations  for  the  recovery  of 
possession  of  real  estate  is  ten  years.  Ind.  Code  §  34-1-2-2  (1982).  Ordinarily,  that  statute 
would  have  barred  the  owner's  cause  of  action  against  the  adverse  possessor  in  1982,  but 
because  of  the  owner's  disability,  the  cause  of  action  was  not  barred  at  the  owner's  death. 
Under  the  suggested  approach,  the  minor's  estate  would  have  either  eighteen  months  or 
two  years  after  his  death  to  bring  an  action  to  recover  possession  depending  on  whether 
the  death-time  survival  statute  or  the  disability  statute  was  held  to  apply;  using  the  Bailey 
court's  approach,  the  minor's  estate  would  have  ten  years  after  his  death  to  recover 
possession. 

'^Estate  of  Jaworski  v.  Jaworski,  417  N.E.2d  89,  92  (Ind.  Ct.  App.  1985)  (the 
personal  representative  properly  was  removed  on  the  ground  of  unsuitability  where  the 
"animosity  and  ill-feeling"  between  the  personal  representative  and  other  heirs  "would 
interfere  with  and  affect  the  orderly  administration  of  the  estate").  See  In  re  Estate  of 
Baird,  408  N.E.2d  1323  (Ind.  Ct.  App.  1980)  (the  personal  representative  was  not  unsuitable 
merely  because  he  was  a  claimant  and  a  legatee,  but  he  was  unsuitable  because  the 
animosity  between  him  and  other  heirs  would  have  interfered  with  orderly  estate  admin- 
istration). 

^°First  Nat'l  Bank  of  Martinsville  v.  American  Fletcher  Nat'l  Bank  &  Trust  Co., 
480  N.E.2d  964  (Ind.  Ct.  App.  1985).  First  National  was  a  case  of  first  impression  in 
Indiana,  but  the  result  is  supported  by  what  the  court  identified  as  the  "weight  of 
authority."  Id.  at  966.  In  First  National,  the  debt  was  unmatured,  but  the  loan  documents 
gave  the  bank  the  right  to  accelerate  whenever  it  deemed  itself  insecure.  The  documents 
also  referred  to  a  possible  right  of  set-off  "  'under  applicable  law.'  "  Id.  at  965  (quoting 
the  note).  The  bank  did  not  deem  itself  insecure  until  after  the  debtor-depositor's  death, 
at  which  time  it  appeared  that  the  debtor-depositor's  estate  was  insolvent.  The  First 
National  court  believed  that  its  holding  was  more  in  line  with  the  "true  relationship 
between  the  bank  and  its  depositor"  —  namely,  the  bank  owns  the  deposited  funds;  the 
depositor  is  a  creditor  of  the  bank,  entitled  to  be  paid  what  the  debtor-bank  owes  him. 
Id.  at  968.  In  First  National,  after  the  permitted  set-off,  the  bank  owed  the  decedent 
nothing. 

Courts  that  have  refused  to  permit  an  after-death  set-off  have  been  concerned  with 
according  the  bank  a  priority.  E.g.,  In  re  Schenck's  Estate,  63  Misc.  2d  721,  313  N.Y.S.2d 
277  (1970),  cited  in  First  National,  480  N.E.2d  at  966-67.  If  the  bank  has  reserved  the 
rights  to  accelerate  and  set-off  when  it  deems  itself  insecure,  recognizing  those  rights  after 
death  would  not  be  according  the  bank  more  than  it  had  bargained  for. 


294  INDIANA  LAW  REVIEW  [Vol:  20:289 

priorities  of  the  Probate  Code.^'  A  widow's  claim  was  allowed  against  her 
husband's  estate  for  the  amount  she  had  spent  on  her  husband's  funeral. ^^ 
An  heir  or  other  person  interested  in  the  estate  who  pays  claims  against 
the  estate  is  subrogated  to  the  rights  of  the  payee  against  the  estate. ^^ 
The  payor,  of  course,  is  subject  to  the  same  claim-filing  time  constraints 
to  which  the  payee  was  subject.^"* 

The  widow  in  Kroslack  v.  Estate  of  Kroslack^^  asserted  her  right  to 
a  survivor's  allowance,^^  but  the  decedent's  estate  was  insolvent.  There 
were,  however,  funds  held  by  the  decedent  and  his  son  in  multi-party 
accounts;  these  funds  by  statute  are  liable  to  pay  the  survivor's  allowance 
if  the  estate  is  insufficient,  a  demand  has  been  made  of  the  personal 
representative,  and  proceedings  to  assert  the  liability  are  begun  within 
a  year  after  the  decedent's  death. ^^  The  son  was  prepared  to  argue  that 
he  had  no  liability  to  pay  the  allowance  from  the  accounts  because  the 
widow  did  not  commence  a  proceeding  to  assert  that  liability  within  one 
year  after  the  decedent's  death. ^^  In  the  face  of  this  argument,  the  special 
administrator  of  the  husband's  estate,  with  proper  court  approval,  com- 
promised the  son's  liability  at  less  than  the  full  amount  of  the  survivor's 
allowance. ^^  A  majority  of  the  court  of  appeals  affirmed  the  compromise, 
while  the  dissenting  judge  would  have  disapproved  it  and  ordered  full 
payment  of  the  allowance  out  of  the  accounts,  because  of  the  son's 
' 'contemptible  self-dealing. "^° 


^'Ind.  Code  §  29-1-14-1  (Supp.  1986)  (five-month  claim-filing  requirement);  Ind. 
Code  §  29-1-14-9  (Supp.  1986)  (claim-payment  priorities,  which  would  put  unsecured 
creditors  seventh  in  line  after  expenses  of  administration,  reasonable  funeral  expenses,  the 
survivor's  allowance,  debts  and  taxes  preferred  under  the  law  of  the  United  States, 
reasonable  medical  expenses,  and  debts  and  taxes  preferred  under  Indiana  law), 

^^^Estate  of  Stack  v.  Venzke,  485  N.E.2d  907  (Ind.  Ct.  App.  1985).  The  Stack  court 
also  affirmed  the  trial  court's  decision  that  the  widow's  alleged  post-nuptial  waiver  was 
unenforceable  because  the  husband  had  failed  to  disclose  more  than  $44,000  out  of  more 
than  $149,000  worth  of  assets. 

"M  at  911  (citing  Owen  Creek  Presbyterian  Church  v.  Taggart,  44  Ind.  App.  393, 
89  N.E.  406  (1909);  Chamness  v.  Chamness'  Estate,  53  Ind.  App.  225,  101  N.E.  323 
(1913)). 

2H89  N.E.2d  650  (Ind.  Ct.  App.   1986). 

^'See  iND.  Code  §  29-1-4-1  (Supp.  1986). 

^^IND.  Code  §  32-4-1.5-7  (1982). 

^'Kroslack,  489  N.E.2d  at  653. 

''Id.  at  652. 

^°The  son  refused  to  turn  over  funds  in  the  accounts,  in  defiance  of  a  court  order 
and  two  contempt  citations.  Eventually,  a  special  administrator  had  to  be  appointed  to 
attempt  to  collect.  The  dissent  concluded: 

I  cannot  agree  with  a  result  which  allows  an  executor  to  wrongfully  withhold 
funds  clearly  due  an  estate,  in  effect  blackmailing  the  special  administrator  into 
a  compromise  so  that  the  widow  can  get  at  least  some  portion  of  her  statutory 
allowance.  Such  a  result  is  not  consistent  with  the  law,  principles  of  equity,  or 


1987]  ESTATES  295 

In  Estate  of  Nay, ^^  the  court  held  that  the  county  welfare  department 
is  an  arm  of  the  state  and  is  therefore  exempt  from  the  five-month 
claim-filing  requirement. ^^  This  decision  serves  as  a  reminder  that  state 
and  county  reimbursement  claims  may  be  asserted  against  the  personal 
representative  at  any  time  before  the  estate  is  closed."  Presumably,  even 
after  the  estate  is  closed,  reimbursement  claims  may  be  asserted  against 
the  decedent's  successors. ^"^  This  and  every  other  exception^^  to  the  five- 
month  claim-filing  requirement  diminishes  the  certainty  that  ordinarily 
follows  the  expiration  of  the  claim-filing  period  and  the  closing  of  an 
estate.  This  decreased  certainty,  however,  clearly  was  contemplated  and 
intended  by  the  legislature.^^ 

B.  Joint  and  Several  Obligations 
Upon  the  death  of  one  who  is  jointly  and  severally  liable  on  an 


good  policy.  The  trial  court's  approval  of  the  "compromise"  was  an  abuse  of 

discretion.  I  would  reverse. 
Id.  at  655-56  (footnote  omitted)  (Staton,  J.,  dissenting). 

^'489  N.E.2d  632  (Ind.  Ct.  App.  1986).  The  county's  claim  was  for  reimbursement 
for  old  age  assistance  provided  to  the  decedent.  Id.  at  633. 

"Ind.  Code  §  29-l-14-l(a)  (Supp.  1986)  provides  in  part:  "All  claims  against  a 
decedent's  estate,  other  than  .  .  .  claims  ...  of  the  state  and  any  subdivision  thereof.  .  . 
shai]  be  forever  barred  against  the  estate"  unless  they  are  filed  within  "five  months  after 
the  ^ate  of  the  first  published  notice  to  creditors."  Before  1954,  the  claim  filing  provision 
did  not  contain  any  exceptions  for  a  state  or  its  subdivisions.  489  N.E.2d  at  634, 

"In  Nay,  the  claim  was  filed  more  than  a  year  after  the  expiration  of  the  five- 
month  period,  but  the  estate  was  still  open.  489  N.E.2d  at  634. 

State  and  county  reimbursement  claims  also  may  be  asserted  against  guardians.  See 
In  re  Estate  of  Keeler,  476  N.E.2d  917  (Ind.  Ct.  App.  1985),  upholding  a  judgment 
ordering  payment  of  the  county's  claim  for  reimbursement  out  of  funds  received  by  the 
minor's  guardian  in  settlement  of  a  wrongful  death  action  following  the  death  of  the 
minor's  parents.  The  county's  claim  was  for  reimbursement  for  expenditures  made  on 
behalf  of  the  minor  while  the  minor  was  a  ward  of  the  welfare  department.  The  court 
held  that  the  wrongful  death  proceeds  were  assets  of  the  minor  and  were  "available  for 
the  care  and  support  furnished  .  .  .  dependents  during  their  minority,  whether  furnished 
by  the  Welfare  Department  or  by  anyone  else."  Id.  at  921. 

^■♦Of  course,  the  claims  must  be  asserted  within  the  applicable  statute  of  limitations. 
See,  e.g.,  Lee  v.  Cain,  476  N.E.2d  922,  on  rehearing,  479  N.E.2d  105  (Ind.  Ct.  App. 
1985)  (fifteen-year  statute  of  limitations  of  Ind.  Code  §  34-1-2-3  (1982)  apphed  and  barred 
a  substantial  portion  of  a  former  spouse's  claim  against  her  deceased  former  husband  for 
back  child  support).  The  claims  should  not  be  enforceable  beyond  the  amount  received 
by  the  decedent's  successors  from  the  decedent. 

^^Other  exceptions  to  the  claim-filing  bar  include  claims  of  subdivisions  of  the  United 
States,  claims  for  expenses  of  administration,  and  claims  of  liens  and  other  property 
interests.  Ind.  Code  §§  20-l-14-l(a),  (d);  -14-21  (1982).  The  exception  for  tort  claims 
contained  in  Ind.  Code  §  29-1-14-1(0  will  not  affect  estate  assets.  There  is  also  uncertainty 
caused  by  the  availability  of  constructive  trust  actions.  See  infra  notes  50-78  and  accom- 
panying text. 

'*The  Nay  court  held  that  the  exceptions  contained  in  Ind.  Code  §  29- 1-14- 1(a)  are 
unambiguous.  489  N.E.2d  at  634. 


296  INDIANA  LAW  REVIEW  [Vol.  20:289 

obligation,"  the  creditor  may  choose  to  file  a  claim  for  all  or  part  of 
the  debt  against  the  estate  of  the  deceased  joint  obligor,^^  or  the  creditor 
may  forgo  the  filing  of  a  claim  and  collect  the  entire  debt  from  the 
surviving  joint  obligor. ^^  When  the  joint  obligation  is  secured  by  a 
mortgage,  the  creditor's  choices  increase.  The  secured  creditor  may  rely 
solely  on  the  security  for  repayment,  or  rely  solely  on  the  personal 
obligation  of  one  or  both  of  the  joint  obligors,  or  if  the  security  is 
inadequate,  rely  on  the  security  to  the  extent  of  its  value  and  the  personal 
obligation  of  one  or  both  of  the  joint  obligors  to  the  extent  the  security 
is  deficient. "^^  If  the  creditor  intends  to  rely  in  whole  or  in  part  on  the 
personal  obhgation  of  the  deceased  joint  obligor,  the  creditor  must  file 
a  claim  against  the  deceased  obligor's  estate  within  the  five-month  claim- 


3^lND.  Code  §  29-1-14-5  (1982)  provides: 

Every  contract  executed  jointly  by  the  decedent  with  any  other  person  or  persons, 
and  every  joint  judgment  founded  on  such  contract,  shall  be  deemed  to  be  joint 
and  several  for  the  purpose  contemplated  in  section  4  of  this  chapter  [requiring 
the  filing  of  a  claim  to  enforce  such  joint  obligation];  and  the  amount  due 
thereon  shall  be  allowed  against  the  estate  of  the  decedent  as  if  the  contract 
were  joint  and  several. 

'*The  only  way  the  creditor  may  collect  from  the  decedent's  estate  is  by  filing  a 
claim.  Ind.  Code  §  29-1-14-4  (Supp.   1986)  so  provides: 

No  action  shall  be  brought  by  way  of  complaint  and  summons  against  any 
personal  representative  and  any  other  person  or  persons,  or  his  or  their  legal 
representatives,  upon  any  contract  executed  jointly,  or  jointly  and  severally,  by 
the  deceased  and  such  other  person  or  persons,  or  upon  any  joint  judgment 
founded  thereon;  but  the  holder  of  said  contract  or  judgment  shall  enforce  the 
collection  thereof  against  the  estate  of  the  decedent  only  by  filing  his  claim  as 
provided  in  section  2  [Ind.  Code  §  29-1-14-2]  of  this  chapter. 

''E.g.,  McLochlin  v.  Miller,  139  Ind.  App.  443,  217  N.E.2d  50  (1966). 

''"The  secured  creditor  need  not  file  a  claim  to  protect  his  right  to  foreclose  against 
the  security,  because  the  five-month  claim-filing  period  does  not  apply  to  an  action  to 
enforce  a  lien  or  mortgage.  Ind.  Code  §  29-l-14-l(e)  (Supp.  1986).  Unless  authorized  by 
the  court,  foreclosure  proceedings  may  not  be  commenced  until  five  months  after  the 
decedent's  death;  and  if  a  foreclosure  action  is  initiated  while  the  estate  is  open,  the 
personal  representative  must  be  joined.  Ind.  Code  §  29-1-14-16  (Supp.  1986).  Of  course, 
foreclosure  is  not  available  until  an  event  of  default  has  been  properly  noticed  by  the 
creditor. 

Unless  otherwise  provided  in  the  note  or  mortgage,  the  creditor  may  forgo  the 
security,  sue  on  the  note,  obtain  a  personal  judgment  against  the  obligor,  and  collect  the 
judgment  out  of  other  assets  of  the  debtor.  See,  e.g.,  Mitchell  v.  Ringle,  151  Ind.  16, 
50  N.E.  30  (1898). 

The  creditor's  right  to  elect  to  file  a  claim  against  the  estate  of  the  deceased  obligor, 
or  to  forgo  filing  and  collect  the  debt  from  the  survivor  seems  to  give  the  creditor  some 
control  over  distribution  of  the  deceased  obligor's  estate.  The  court  of  appeals  observed, 
however,  that  the  apparent  "control"  accorded  the  creditor  is  accorded  "because  that  is 
what  the  parties  themselves  agreed  to."  Estate  of  Leinbach  v.  Leinbach,  486  N.E. 2d  2, 
3  (Ind.  Ct.  App.   1985). 


1987]  ESTATES  297 

filing  period/'  The  creditor  may  file  a  claim  whether  the  obligation  is 
due  or  not,  contingent  or  absolute,  or  current  or  in  default/^ 

If  the  surviving  joint  obligor  intends  to  pursue  a  right  to  contribution 
from  the  deceased  joint  obligor,  the  survivor  should  file  a  claim  against 
the  decedent's  estate  within  the  five-month  claim-filing  period/^  Estate 
of  Leinbach  v.  Leinbach^^  contains  holding  and  dicta  that  are  instructive 
regarding  the  proper  procedure  to  follow  in  asserting  rights  to  payment 
and  contribution  when  one  of  two  joint  obhgors  dies.  In  Leinbach,  2i 
husband  and  wife  both  had  signed  a  note  and  mortgage  securing  real 
estate  which  they  owned  as  tenants  by  the  entireties.  When  the  husband 
died,  the  mortgagee  filed  a  claim  against  his  estate  for  the  full  outstanding 
balance  of  the  mortgage  debt."^^  The  widow  also  filed  a  claim  against 
the  husband's  estate  for  contribution  for  one-half  the  amount  due  on 


^■iND.  Code  §  29-1-14-1  (Supp.   1986). 

"^The  secured  creditor  need  not  file  a  claim  to  protect  his  right  to  foreclose  against 
the  security,  because  the  five-month  claim-filing  period  does  not  apply  to  an  action  to 
enforce  a  Hen  or  mortgage.  Ind.  Code  §  29-l-14-l(e)  (Supp.   1986). 

"^The  right  to  contribution  is  an  equitable  right  between  the  debtors,  permitting  "one 
who  has  paid  the  debt  to  recover  from  the  other  the  portion  he  should  have  borne." 
Estate  of  Leinbach  v.  Leinbach,  486  N.E.2d  2,  3  (Ind.  Ct.  App.  1985)  (citing  Judd  v. 
Small,  107  Ind.  398,  8  N.E.  284  (1886)).  If  the  estate  paid  the  entire  debt,  it  would  be 
entitled  to  contribution  from  the  surviving  joint  obligor.  Magenheimer  v.  Councilman,  76 
Ind.  App.  583,  125  N.E.  77  (1919). 

The  survivor  may  file  a  claim  for  contribution  whether  the  joint  obligation  is  due 
or  not,  and  whether  the  liability  of  the  decedent  is  contingent  or  absolute.  Ind.  Code  § 
29-1-14-1  (Supp.  1986).  If  the  survivor  does  not  file  a  claim,  and  if  the  survivor  eventually 
is  forced  to  pay  more  than  his  share  (normally  one-half)  of  the  joint  obligation,  the 
survivor  could  claim  an  equitable  lien  on  property  relieved  of  the  security  interest  by  the 
survivor's  payment.  Enforcement  of  this  lien  would  not  be  barred  by  failure  to  file  a 
claim.  Ind.  Code  §  29-1 -14-1  (e)  (Supp.  1986).  Enforcement  of  the  lien  could  be  an  effective 
substitute  for  assertion  of  the  right  of  contribution  via  the  claims  procedure  only  if  an 
ownership  interest  in  the  mortgaged  property  was  distributed  to  the  deceased  obligor's 
heirs  or  devisees.  If  the  mortgaged  property  was  owned  by  the  joint  obligors  with  right 
of  survivorship,  then  the  surviving  joint  obligor  would  have  no  lien  to  enforce  as  a 
substitute  for  the  barred  right  of  contribution.  The  survivor,  however,  would  have  succeeded 
to  ownership  of  the  entire  property. 

M86  N.E.2d  2  (Ind.  Ct.  App.   1985). 

"^This  claim  was  properly  filed  whether  the  mortgage  debt  was  due  or  not.  In 
Leinbach,  the  mortgagee  asserted  in  its  claim  that  the  balance  was  due  and  payable  at 
the  decedent's  death.  Id.  at  2.  Perhaps  the  mortgage  contained  an  acceleration  clause  that 
operated  in  the  event  of  death  of  one  of  the  obligors. 

Even  if  the  mortgage  balance  was  not  due  and  payable  at  the  deceased  co-owner's 
death,  the  mortgagee  could  have  filed  a  claim  for  all  or  part  of  the  mortgage  debt.  In 
fact,  if  the  mortgagee  failed  to  file  a  claim,  the  mortgagee  would  have  been  barred  from 
pursuing  the  deceased  obligor's  personal  liability  against  his  successors.  If  the  mortgage 
balance  was  not  due  at  the  time  of  decedent's  death,  the  court  would  allow  it  at  its 
present  value  and  order  it  paid  "as  in  the  case  of  an  absolute  claim."  Ind.  Code  §  29- 
1-14-3  (Supp.   1986). 


298  INDIANA  LAW  REVIEW  [Vol.  20:289 

the  mortgage  note.  The  court  of  appeals  held  that  the  widow  was  entitled 
to  contribution  only  if  and  when  she  paid  more  than  her  share  (pre- 
sumably one-half)  of  the  mortgage  debt."^^ 

In  dicta,  the  court  commented  upon  a  portion  of  the  trial  court's 
ruling  that  was  not  appealed.  The  trial  court  had  ordered  the  estate  to 
pay  only  one-half  the  debt  to  the  mortgagee  and  had  held  that  the 
estate  was  liable  for  the  other  half  only  if  the  widow  did  not  pay  and 
only  if  the  security  was  insufficient.^^  The  court  of  appeals  indicated 
that  if  the  mortgagee  had  appealed,  it  would  have  found  error:  "As  to 
the  trial  court's  judgment  in  favor  of  the  bank,  we  think  the  court  erred 
in  anticipating  a  right  to  contribution  and  granting  judgment  outright 
for  only  half  the  debt  and  finding  the  [e] state  secondarily  liable  for  the 
other  half.'"^^  One  could  add  that  the  trial  court  was  creative  but  incorrect 
when  it  conditioned  the  estate's  secondary  liability  on  the  adequacy  of 
the  security. 

Leinbach  serves  as  a  reminder  to  estate  planners  that  they  must 
understand  joint  and  several  liability  to  understand  the  potential  ultimate 
distribution  of  a  chent's  estate  when  that  client  is  a  joint  obligor  and 
particularly  when  the  joint  obligation  is  secured  by  survivorship  property. 
The  entire  ownership  interest  in  survivorship  property  may  end  up  in 
the  surviving  joint  owner,  but  the  deceased  joint  owner's  estate  may  be 
obligated  to  pay  half  of  the  joint  obligation. "^^  This  result  occurs  because 
the  parties  agreed  to  it;  the  planner  must  be  aware  of  and  take  into 
account  such  agreements. 

IV.     Actions  to  Impose  Constructive  Trusts 

If  a  claimant  seeks  to  recover  specific  property  from  the  decedent 
or  his  successors,  the  claimant  could  bring  an  action  to  impose  a 
constructive  trust  on  that  property.  A  constructive  trust  will  be  imposed 
when  the  decedent  or  his  successors  would  be  unjustly  enriched  by 
retention  of  the  property. ^^  If  the  constructive  trust  action  is  begun  within 
the  five-month  claim-filing  period,  and  if  the  subject  property  is  in  the 


M86  N.E.2d  at  5  (following  McLochlin  v.  Miller,  139  Ind.  App.  443,  217  N.E.2d 
50  (1966)). 

•*^M  The  trial  court  then  concluded  that  the  widow's  claim  for  contribution  was 
moot.  Id. 

'Hd. 

"^The  assumption  is  made  that  if  the  estate  is  asked  to  pay  the  creditor  the  full 
amount  of  the  debt,  the  estate  will  pursue  its  right  of  contribution  against  the  surviving 
obligor. 

'"E.g.,  Melloh  V.  Gladis,  261  Ind.  647,  309  N.E.2d  433  (1974).  Unjust  enrichment 
may  occur  because  the  property  was  obtained  by  the  decedent  or  his  successors  "through 
fraud,  duress,  undue  influence  or  mistake,  or  through  a  breach  of  a  fiduciary  duty,  or 
through  the  wrongful  disposition  of  another's  property."  Id.  at  656,  309  N.E.2d  at  438, 
quoted  in  Given  v.  Cappas,  486  N.E.2d  583,  589  (Ind.  Ct.  App.   1985). 


1987]  ESTATES  299 

possession  of  the  decedent's  personal  representative,  the  action  may  be 
asserted  against  the  personal  representative.^'  If  the  action  is  begun  after 
the  five-month  claim-fiUng  period,"  or  if  the  subject  property  is  not  in 
the  possession  of  the  personal  representative,"  the  action  can  be  asserted 
against  only  the  decedent's  successors. 

A.     Given  v.  Cappas 

In  two  recent  constructive  trust  cases,  the  trusts  were  asserted  against 
the  decedent's  successors.  In  Given  v.  Cappas, ^"^  the  trial  court  found 
that  certain  shares  of  stock  were  assets  of  a  law  partnership,  acquired 
in  part  by  purchase  and  in  part  as  compensation  for  services  rendered 
to  a  chent.  At  the  time  of  the  lawsuit,  the  shares  were  held  by  a  spouse 
of  a  deceased  partner  as  trustee  of  an  express  trust  for  his  children. ^^ 
In  order  to  prevent  unjust  enrichment  of  the  spouse  and  children  at  the 
expense  of  the  surviving  partners,  the  trial  court  imposed  a  constructive 
trust  and  directed  the  spouse  to  transfer  the  other  partners'  shares  to 
them,  and  the  court  of  appeals  affirmed. ^^  The  court  of  appeals  stated 


5'lND.  Code  §  29-1-14-21  (Supp.  1986).  See  Williams  v.  Williams,  427  N.E.2d  727 
(Ind.  Ct.  App.  1981)  (even  though  enforcement  of  a  property  interest  was  barred  against 
the  personal  representative  because  of  failure  to  assert  the  interest  within  the  five-month 
period,  enforcement  outside  the  estate  proceeding  against  the  decedent's  successors  was 
not  barred);  In  re  Estate  of  Williams,  398  N.E.2d  1368,  1371  (Ind.  Ct.  App.  1980)  (a 
petition  claiming  an  interest  in  property  in  the  possession  of  the  personal  representative, 
here  the  enforcement  of  a  corporate  stock  buy-sell  agreement,  must  be  filed  within  the 
five-month  period  if  the  claimant  "desires  the  issue  to  be  adjudicated  as  a  part  of  the 
estate  proceeding'')  (emphasis  in  original). 

"Williams  v.  Williams,  427  N.E.2d  727  (Ind.  Ct.  App.  1981)  (even  though  a  claim 
of  property  interest  was  barred  against  the  personal  representative  because  of  failure  to 
assert  it  within  the  five-month  period,  enforcement  outside  the  estate  proceeding  against 
the  decedent's  successors  was  not  barred). 

"For  example,  if  the  property  interest  is  claimed  in  survivorship  property  or  property 
placed  or  held  by  the  decedent  in  an  inter  vivos  trust,  the  personal  representative  would 
not  be  involved  in  the  action. 

'M86  N.E.2d  583  (Ind.  Ct.  App.   1985). 

"M  at  585.  The  Given  court  discussed  the  dead  man's  statute,  Ind.  Code  §  34-1- 
14-6  (1982),  and  held  that  if  assets  of  the  decedent's  estate  will  not  be  affected  by  the 
judgment,  the  dead  man's  statute  will  not  render  witnesses  incompetent  to  testify.  486 
N.E.2d  at  588.  The  fact  that  the  personal  representative  of  the  decedent's  estate  has  been 
made  a  party  does  not  necessarily  mean  that  assets  of  the  decedent's  estate  will  be  affected 
by  a  judgment  in  the  action.  Id.  Furthermore,  the  dead  man's  statute  does  not  apply 
unless  the  witness  is  a  party  to  the  issue  to  be  tried;  to  be  a  party  to  the  issue,  the 
witness  must  have  a  present,  certain,  vested  interest  that  will  be  won  or  lost  by  the  direct 
operation  of  the  judgment.  Id.  at  583;  see  also  Satterthwaite  v.  Satterthwaite,  420  N.E.2d 
287  (Ind.  Ct.  App.  1981).  In  Given,  the  stock  at  issue  was  not  an  asset  of  the  decedent's 
estate,  and  therefore  the  dead  man's  statute  was  inapphcable.  486  N.E.2d  at  588.  Fur- 
thermore, the  witnesses  were  not  parties  to  the  issue.  Id. 

''Given,  486  N.E.2d  at  585. 


300  INDIANA  LAW  REVIEW  [Vol.  20:289 

that  the  relationship  among  partners  is  a  fiduciary  relationship. ^"^  Thus, 
fraud  is  presumed  or  inferred  without  proof  of  actual  dishonesty  when 
one  partner  benefits  from  the  use  of  partnership  property. ^^ 

A  constructive  trust  will  not  be  imposed  if  the  transferee  is  a  bona 
fide  purchaser  for  value.  In  Given,  although  the  transferee  was  innocent 
of  wrongdoing,  and  did  not  have  notice  of  wrongdoing,  she  was  a  donee 
and  not  a  purchaser  for  value;  thus,  the  transferee's  bona  fide  purchaser 
defense  did  not  succeed. ^^ 

Because  a  constructive  trust  is  an  equitable  remedy,  imposition  of 
the  trust  may  be  barred  by  the  equitable  doctrine  of  laches.  In  Given, 
however,  because  there  was  no  inexcusable  delay  in  the  trust  claimant's 
assertion  of  rights,  and  no  prejudice  to  the  transferee-defendant,  the 
defense  of  laches  was  properly  rejected  by  the  trial  court. ^  The  right 


"M  at  589-90.  The  court  cited  McKinley  v.  Long,  222  Ind.  639,  88  N.E.2d  382 
(1949),  and  Ind.  Code  §  23-4-1-21  (1982),  a  section  of  the  Indiana  Partnership  Act. 

''Given,  486  N.E.2d  at  590  (citing  Hunter  v.  Hunter,  152  Ind.  App.  365,  283  N,E.2d 
775  .(1972)). 

^The  court  suggested  in  passing  the  possibility  that  love  and  affection  between  a 
parent  and  child  may  constitute  sufficient  consideration  to  render  the  transferee  a  purchaser 
and  not  a  donee.  Id.  at  591  (citing  76  Am.  Jur.  2d  Trusts  §  275  (1975)  and  reciting  the 
proposition  that  "the  parent  child  relationship  may  constitute  sufficient  consideration  to 
support  the  transfer  of  property").  The  court  ultimately  avoided  application  of  this 
proposition  by  finding  that  while  the  parent-partner  was  "instrumental  in  effecting  the 
transfer  [to  the  spouse  as  trustee  for  his  children,  that  fact]  does  not  make  him  the 
grantor  of  the  property  so  that  we  may  impute  a  meritorious  consideration  such  as  love 
and  affection  for  his  children."  Id. 

The  court's  discussion  of  the  consideration  issue  is  somewhat  unfortunate.  The  court 
stated  a  parent-child  consideration  rule  that  is  not  necessarily  applicable  to  a  bona  fide 
purchaser  case.  Even  the  cited  source  of  the  rule,  76  Am  Jur.  2d  Trusts  §  275,  at  496 
(1975),  fudges  a  bit  when  it  cites  a  consideration-of-marriage  case  and  states:  "It  has 
been  held  that  marriage  does  constitute  value  for  an  antenuptial  settlement  on  a  wife  of 
trust  property  or  funds  so  as  to  cut  off  equities  of  the  beneficiaries,  where  the  wife  takes 
in  good  faith  and  without  notice."  (citing  Johnson  v.  Peterson,  101  Neb.  504,  163  N.W. 
869  (1917)). 

Whether  the  consideration  of  love  and  affection  between  a  parent  and  child  is  sufficient 
to  overcome  the  equities  of  the  constructive  trust  claimant  is  a  question  that  should  be 
addressed  directly.  An  underlying  policy  of  the  bona  fide  purchaser  doctrine  is  protection 
of  the  reliance  interest  of  a  person  who  gave  value  in  exchange  for  a  transfer  of  property. 
See  generally  J.  Cribbet,  Principles  of  the  Law^  of  Property  286  (2d  ed.  1975).  The 
kind  of  value  that  gives  rise  to  protectable  reliance  is  usually  money  or  money's  worth, 
as  opposed  to  love  and  affection.  Id.  See,  e.g..  Strong  v.  Whybark,  214  Mo.  341,  102 
S.W.  968  (1907);  Ten  Eyck  v.  Witbeck,  135  N.Y.  40,  31  N.E.  994  (1892).  Even  if  love 
and  affection  are  considered  to  be  value  under  the  bona  fide  purchaser  doctrine,  they 
should  not  be  sufficient  to  overcome  automatically  the  equities  of  the  constructive  trust 
claimant,  who  has  been  deprived  of  property  due  to  fraud  or  constructive  fraud. 

Furthermore,  it  is  misleading  for  the  court  to  state  that  "the  parent-child  relationship 
may  constitute  sufficient  consideration  to  support  the  transfer  of  property."  Given,  486 
N.E. 2d  at  591.  No  consideration  is  necessary  to  support  a  transfer  of  property. 

«'486  N.E.2d  at  592;  see  also  Duran  v.  Komyatte,  490  N.E.2d  388  (Ind.  Ct.  App. 
1986),  discussed  infra  notes  67-78  and  accompanying  text,  wherein  the  court  stated  that 


1987]  ESTATES  301 

to  assert  a  trust  may  also  be  waived,  but  an  effective  waiver  entails  an 
intentional  relinquishment  of  rights,  which  did  not  exist  in  Given.^^ 

Expiration  of  the  appropriate  statute  of  limitations  will  bar  a  con- 
structive trust  action. ^^  In  Given,  the  transferee  asserted  expiration  of 
the  six-year  statute  of  limitations  for  fraud,"  because  the  transfer  to 
her  had  occurred  more  than  six  years  prior  to  commencement  of  the 
constructive  trust  action.  Ordinarily,  the  limitations  period  begins  to  run 
when  the  fraud  is  accomplished;  concealment  of  material  facts,  however, 
will  toll  the  statute.^"*  In  Given,  the  court  found  concealment  and  tolling 
of  the  statute  until  the  concealing  partner  died;  before  then,  the  con- 
structive trust  claimants  did  not  actually  know  of  that  partner's  claim 
of  ownership  of  the  partnership  property,  and  the  partner's  fiduciary 
duty  to  disclose  such  material  information  excused  his  co-partners'  duties 
to  exercise  due  diligence  to  discover  it.^^ 

B.     Duran  v.  Komyatte 

As  with  any  trust,  a  constructive  trust  requires  a  trust  res — separate, 
identifiable,  existing  property  that  can  be  held  in  the  trust. ^^  In  Duran 
V.  Komyatte,^'^  the  lack  of  a  trust  res  sounded  the  death  knell  for  a 


the  trust  claimant's  "failure  to  act  .  .  .  until  now  is  another  consideration  we  employed 
to  determine  that  the  equitable  remedy  of  a  constructive  trust  is  not  appropriate  in  this 
instance."  490  N.E.2d  at  393. 

In  Duran,  the  plaintiff  claimed  a  constructive  trust  as  a  remedy  for  breach  of  her 
former  husband's  breach  of  an  agreement  to  make  a  will.  Id.  at  390.  The  will  was  to 
have  been  executed  within  ten  days  of  the  parties'  final  divorce  decree  and  a  copy  was 
to  have  been  sent  to  the  plaintiff  within  another  ten  days.  The  plaintiff  did  not  assert 
the  breach  of  agreement  until  ten  years  later,  after  her  former  husband  died.  Id.  Actually, 
the  plaintiff's  assertion  of  a  remedy  for  her  former  spouse's  breach  of  contract  to  make 
a  will  was  timely.  Such  a  contract  is  not  breached  until  the  death  of  the  promisor,  because 
the  promisor  could  at  any  time  before  his  death  perform  the  agreement  by  executing  the 
will.  See  B.  Sparks,  Contracts  To  Make  Wills  179  (1956).  The  Duran  court's  language 
must  relate  to  the  plaintiff's  failure  to  complain  about  her  spouse's  failure  to  make  a 
will  and  send  her  a  copy  within  ten  days  of  the  divorce  decree. 

^"486  N.E.2d  at  592. 

^^See  generally  Forth  v.  Forth,  409  N.E.2d  641  (Ind.  Ct.  App.   1980). 

"See  Ind.  Code  §  34-1-2-1  (1982). 

"^Forth,  409  N.E.2d  at  644. 

^^'486  N.E.2d  at  592-93;  see  also  Dotlich  v.  Dotlich,  475  N.E.2d  331  (Ind.  Ct.  App. 
1985)  (fiduciary  relationship  among  corporate  directors  excused  duty  to  exercise  due  diligence 
to  discover  a  director's  fraud). 

^In  a  constructive  trust,  usually  the  property  is  "held"  in  trust  only  fictionally 
because  the  trust  arises  and  is  executed  by  the  judgment  of  the  court  imposing  it.  There 
have  been  long-lived  constructive  trusts,  however.  E.g.,  David  v.  Russo,  415  N.E.2d  531 
(111.  Ct.  App.  1980),  remanded  and  appealed,  456  N.E.2d  342  (111.  Ct.  App.  1983)  (imposing 
a  constructive  trust  on  the  holders  of  legal  title,  finding  that  they  held  such  title  only  as 
security  for  a  loan  to  the  trust  beneficiaries,  and  ordering  an  accounting  by  the  trustees 
to  the  beneficiaries). 

*^490  N.E.2d  388  (Ind.  Ct.  App.   1986). 


302  INDIANA  LAW  REVIEW  [Vol.  20:289 

constructive  trust  claim.  The  asserted  trust  was  to  be  in  favor  of  the 
plaintiff's  children  and  was  to  consist  of  all  property  owned  by  the 
plaintiff's  former  husband  at  the  time  of  their  divorce.^^  The  basis  for 
the  trust  was  the  former  husband's  breach  of  an  agreement,  made  as 
part  of  the  divorce  settlement,  to  make  a  will  leaving  all  his  property 
to  his  and  plaintiff's  three  children.  The  husband  died  ten  years  after 
the  divorce  without  having  made  such  a  will.  The  court  agreed  that  the 
husband  had  breached  "his  fiduciary  duty  to  execute  a  will,"^*^  but  the 
court  held  that  a  constructive  trust  was  not  an  available  remedy. ^°  The 
expenses  of  the  husband's  last  illness  had  rendered  his  estate  insolvent, 
so  that  even  if  he  had  made  a  will,  there  would  have  been  no  property 
left  to  pass  under  it  to  the  three  children.^'  Furthermore,  the  agreement 
to  make  a  will  did  not  refer  to  or  require  that  any  specific  property 
be  left  to  the  children.  Thus,  the  alleged  constructive  trust  lacked  a 
trust  res.^^ 

Because  the  decedent's  estate  was  insolvent,  a  claim  for  damages 
for  breach  of  the  decedent's  agreement  to  make  a  will  would  have  gone 
unsatisfied.  Furthermore,  borrowing  the  court's  analysis  of  the  construc- 
tive trust  issue,  perhaps  no  damage  would  have  been  suffered.  Under 
the  court's  interpretation  of  the  property  settlement  agreement,  the  de- 
cedent's breach  was  merely  a  technical  one  of  not  signing  a  document 
called  a  will.  According  to  the  court,  there  was  no  other  substance  to 
that  agreement: 

John  was  ordered  to  do  no  more  than  execute  a  will.  No 
mention  of  any  specific  property  to  be  left  to  the  children  is 
present.  Nor  is  there  any  mandate  that  John  have  property  at 
the  time  of  his  demise  to  leave  to  his  children. ^^ 

The  troubling  feature  of  this  interpretation  of  the  agreement  is  its 
failure  to  consider  the  fundamental  duty  of  good  faith  and  fair  dealing 
between  parties  to  a  contract.  In  an  analogous  case  interpreting  an 
antenuptial  contract,  Russell  v.   Walz,^"^  the  court  of  appeals  stated  that 


''Id.  at  390. 

^'^Id.  at  393.  A  property  settlement  incorporated  into  the  final  decree  of  divorce  is 
a  binding  contract.  Id.  at  392  (citing  Anderson  v.  Anderson,  399  N.E.2d  391  (Ind.  Ct. 
App.   1979)). 

'°Id. 

''Id.  at  392. 

''Id. 

'^Id.  The  agreement  itself  provided,  in  pertinent  part:  "Husband  agrees  to  have 
drawn  and  execute  a  last  Will  and  Testament  leaving  all  of  his  assets,  real  and  personal 
to  his  living  3  children  surviving  at  the  time  of  his  death  and  said  will  shall  not  be 
changed  until  his  youngest  present  living  child  shall  become  emancipated.  .  .  ."  Id. 

M58  N.E.2d  1172  (Ind.  Ct.  App.   1984). 


1987]  ESTATES  303 

a  transferor  breaches  an  implied  obligation  of  good  faith  if  he  makes 
a  transfer  with  "  'an  actual  intent  thereby  to  subvert  the  antenuptial 
agreement,'  "  or  if  the  transfer  is  '*  'of  a  disproportionate  and  unrea- 
sonable amount  of  assets  in  relationship  to  the  balance  of  the  promisor's 
property.'  "^^  An  investigation  into  whether  the  husband's  depletion  of 
his  estate  was  in  good  faith  would  seem  similarly  appropriate  in  the 
property  settlement  context  of  Duran.^^ 

In  any  event,  the  Duran  case  and  its  dicta  certainly  serve  as  a 
warning  that  very  careful  drafting  of  will  contracts  is  called  for.  It  is 
not  enough  that  the  promisor  agrees  merely  to  make  a  will.  A  meaningful, 
enforceable  agreement  should  include  express  provisions  regarding  the 
kinds  or  values  of  property  that  the  parties  agree  will  be  devised  by  the 
will.^^  It  is  not  in  the  promisor's  best  interest  to  guarantee  that  a  certain 
property  or  value  will  be  owned  and  be  unencumbered  at  the  promisor's 
death;  yet,  it  is  not  in  the  promisee's  best  interest  to  leave  the  description 
of  certain  property  or  its  value  out  of  the  will  contract.  Both  parties' 


''Id.  at  1185  (dicta)  (quoting  Dubin  v.  Wise,  354  N.E.2d  403,  408-09  (111.  Ct.  App. 
1976),  and  citing  for  its  dicta  Crawfordsville  Trust  Co.  v.  Ramsey,  55  Ind.  App.  40,  100 
N.E.  1049  (1913)).  According  to  Dubin,  the  disproportionate  transfer  test  establishes  "fraud 
implied  in  law."  354  N.E.2d  at  409.  See  also  Lawrence  v.  Ashba,  115  Ind.  App.  485, 
59  N.E. 2d  568  (Ind.  Ct.  App.  1944),  stating  that  a  promisor  under  a  contract  not  to 
revoke  a  will  should  "have  the  right  to  dispose  of  any  or  all  of  the  corpus  of  the  estate 
for  his  reasonable  needs  in  the  event  the  income  should  be  inadequate  for  that  purpose, 
but  he  could  not  dispose  of  it  to  defraud  or  defeat  his  obligation."  Id.  at  494,  59  N.E. 2d 
at  572. 

Mn  Duran,  the  court  of  appeals  affirmed  a  summary  judgment  against  the  constructive 
trust  claimant  and  in  favor  of  the  decedent's  second  wife.  490  N.E. 2d  at  393.  One  issue 
raised  by  the  constructive  trust  claimant  was  that  there  was  a  genuine  issue  of  material 
fact  concerning  the  deceased  husband's  state  of  mind  when  he  failed  to  execute  the  will 
and  when  he  and  his  second  wife  purchased  entireties  property.  Id.  at  392.  The  former 
spouse  alleged  that  the  entireties  purchase  was  "tainted  by  fraud."  Id.  Both  of  plaintiff's 
arguments  indicated  that  she  was  concerned  generally  with  the  deceased  husband's  good 
faith. 

The  catch-22  in  the  Duran  case  is  that  there  was  no  property  in  the  husband's  estate 
to  remedy  the  breach  of  his  obligation  of  good  faith.  There  was,  however,  the  entireties 
property.  If  it  was  purchased  with  funds  of  the  deceased  promisor,  and  if  the  second 
spouse  was  not  a  bona  fide  purchaser  for  value  without  notice  of  the  contractual  claims, 
then  the  entireties  property  could  have  been  subjected  to  a  constructive  trust  as  a  method 
of  enforcing  the  contractual  claims  of  the  ex-spouse  and  children.  The  burden  would  be 
on  the  ex-spouse  and  children  to  prove  the  decedent's  lack  of  good  faith  in  divesting 
himself  of  property  to  avoid  compliance  with  the  will  contract,  and  that  might  not  be 
an  easy  burden  to  meet,  considering  the  fact  that  the  decedent's  divestitures  were  in  favor 
of  his  second  spouse  (by  the  purchase  of  the  entireties  property)  and  in  favor  of  creditors, 
primarily  those  who  rendered  him  medical  service. 

^'One  approach  might  be  to  use  a  kind  of  best  efforts  clause  —  for  example,  the 
promisor  agrees  to  use  his  best  efforts  to  retain  x  property  or  y  amount  of  property  in 
his  estate. 


304  INDIANA  LAW  REVIEW  [Vol.  20:289 

perspectives  might  be  best  satisfied  with  the  inclusion  of  a  flexible  and 
open-ended,  express  good  faith  clause. ^^ 


'^Different  considerations  apply  to  a  contract  to  devise  specific  property  and  to  a 
contract  to  make  a  will  devising  all  or  part  of  the  promisor's  net  estate,  whatever  it  may 
be  at  the  time  of  the  promisor's  death.  When  the  contract  is  of  the  latter  variety,  the 
parties  need  to  include  a  more  detailed  definition  of  acceptable  future  conduct.  For 
example,  both  parties  should  demand  an  express  provision  regarding  the  kinds  of  gifts 
that  the  promisor  is  entitled  to  make.  See  generally  B.  Sparks,  Contracts  to  Make 
Wills  50-69  (1956). 


Developments  in  Property  Law 

Walter  W.  Krieger* 

I.     Adverse  Possession:  The  Element  of  Notoriety 

In  Indiana,  the  time  period  required  to  acquire  title  by  adverse 
possession  is  ten  years. '  The  possession  during  this  period,  in  order  to 
meet  the  requirements  of  adverse  possession,  must  be:  (1)  hostile  and 
under  a  claim  of  right,  (2)  actual,  (3)  open  and  notorious,  (4)  exclusive, 
and  (5)  continuous. ^  In  addition,  Indiana  Code  section  32-1-20-1  requires 
the  adverse  possessor  to  pay  all  taxes  and  special  assessments  on  the 
land  during  the  period  he  claims  to  have  had  adverse  possession. ^ 


♦Associate  Professor  of  Law,  Indiana  University  School  of  Law — Indianapolis.  A.B., 
Bellarmine  College,  1959;  J.D.,  University  of  Louisville,  1962;  L.L.M.,  George  Washington 
University,  1969.  The  author  wishes  to  extend  his  appreciation  to  Lori  F.  Kaplan  and 
Timothy  S.  Durham  for  their  assistance  in  the  preparation  of  this  Article. 

'Indiana  Code  section  34-1-2-2(6)  is  a  statute  of  limitations  which  runs  against  the 
title  holder.  Actions  for  the  recovery  of  the  possession  of  real  estate  must  be  brought 
within  ten  years  in  Indiana,  Ind.  Code  §  34-1-2-2(6)  (1983);  property  will  vest  in  the 
adverse  possessor  if  other  elements  of  adverse  possession  are  present.  Greene  v.  Jones, 
490  N.E.2d  776,  777  (Ind.  Ct.  App.   1986). 

^Worthley  v.  Burbanks,  146  Ind.  534,  539,  45  N.E.  779,  781  (1897).  The  Appellate 
Court  of  Indiana  expressed  the  elements  of  adverse  possession  in  shghtly  different  terms: 
"such  possession  must  be  actual,  visible,  open,  notorious,  exclusive,  hostile,  under  claim 
of  ownership,  and  continuous  for  the  statutory  period  .  .  .  ."  Smith  v.  Brown,  126  Ind. 
App.  545,  552,  134  N.E.2d  823,  826  (1956).  However,  the  Indiana  appellate  court  has 
also  determined  that  the  terms  "under  a  claim  of  right"  and  "under  claim  of  ownership" 
mean  nothing  more  than  "hostile"  and  the  use  of  these  terms  does  not  create  an  additional 
element  of  adverse  possession.  Poole  v.  Corwin,  447  N.E. 2d  1150,  1152  n.l  (Ind.  Ct. 
App.   1983);  Kline  v.  Kramer,  179  Ind.  App.  592,  599,  386  N.E.2d  982,  988  (1979). 

^Ind.  Code  Ann.  §  32-1-20-1  (West  Supp.  1986).  The  requirement  that  the  adverse 
possessor  pay  taxes  on  the  land  was  added  by  the  Indiana  legislature  to  put  an  end  to 
the  situation  in  the  northern  portion  of  the  state  where  squatters  were  obtaining  title  to 
large  tracts  of  land  while  absentee  owners  were  paying  taxes.  Echterling  v.  Kalvaitis,  235 
Ind.  141,  145,  126  N.E.2d  573,  575  (1955).  The  tax  requirement  was  intended  to  provide 
notice  to  the  record  owner  that  an  intruder  was  making  a  claim  to  his  land.  Id.\  Kline, 
179  Ind.  App.  at  600,  386  N.E. 2d  at  989. 

In  boundary  Une  disputes,  however,  the  supplementary  element  of  payment  of  taxes 
has  been  held  inapplicable  by  the  Indiana  courts.  The  tax  duplicates  are  generally  too 
sketchy  to  provide  notice  to  the  true  owner  that  a  claim  is  being  made  to  a  small  portion 
of  his  land,  and  as  a  result  both  parties  believe  they  are  paying  taxes  on  the  disputed 
land.  See,  e.g.,  Echterling,  235  Ind.  at  146,  126  N.E.2d  at  675;  Ford  v.  Eckert,  406 
N.E.2d  1209  (Ind.  Ct.  App.  1980);  Berrey  v.  Jean,  401  N.E. 2d  102  (Ind.  Ct.  App.  1980); 
Kline,  179  Ind.  App.  at  592,  386  N.E.2d  at  982;  Penn  Cent.  Transp.  Co.  v.  Martin,  170 
Ind.  App.  519,  353  N.E. 2d  474  (1976).  In  addition,  if  any  structures  have  been  placed 
in  the  disputed  area,  the  taxes  on  such  improvements  have  undoubtedly  been  assessed 
against  the  adverse  possessor. 

305 


306  INDIANA  LAW  REVIEW  [Vol.  20:305 

In  Greene  v.  Jones,^  the  Indiana  Court  of  Appeals  examined  the 
element  of  notorious  possession.  In  1970,  Robert  and  Janet  Jones  (Joneses) 
purchased  Lot  No.  2  in  a  residential  subdivision  in  Jefferson  County, 
Indiana.  The  lot  had  not  been  landscaped  and  four  flags  were  placed 
at  what  the  Joneses  believed  were  the  corners  of  their  lot.  In  fact,  the 
two  flags  on  the  west  side  of  their  lot  were  set  approximately  seven 
feet  to  the  west  of  the  true  property  line.  In  1974,  the  Joneses  purchased 
a  portion  of  Lot  No.  10  located  behind  Lot  No.  2.  Once  again,  the 
Joneses  believed  the  western  property  Hne  of  Lot  No.  10  extended  seven 
feet  beyond  the  true  property  line.  In  1981,  Richard  and  Linda  Greene 
(Greenes)  purchased  Lot  No.  1  and  the  remaining  portion  of  Lot  No. 
10  immediately  to  the  west  of  the  Jones  property.  A  survey  conducted 
by  the  Greenes  in  1983  revealed  that  the  Greenes'  true  eastern  property 
line  extended  seven  feet  into  what  the  Joneses  considered  to  be  their 
property.  They  informed  the  Joneses  of  this  fact,  and  the  Joneses 
subsequently  brought  suit  to  quiet  title  to  the  seven  foot  strip  adjacent 
to  their  western  property  line.^  The  trial  court  quieted  title  in  the  Joneses 
seven  foot  strip  adjacent  to  Lot  No.  2  and  their  portion  of  Lot  No. 
10.6 

On  appeal,  the  Greenes  raised  two  issues.  The  first  issue  involved 
the  Joneses'  claim  to  title  by  adverse  possession  of  the  seven  foot  strip 
adjacent  to  the  western  boundary  of  their  portion  of  Lot  No.  10.  The 
Joneses  had  not  purchased  their  portion  of  Lot  No.  10  until  1974.  Since 
the  suit  to  quiet  title  was  filed  in  1983,  the  Greenes  argued  that  the 
Joneses  had  not  possessed  the  property  for  the  ten  year  period  necessary 
to  acquire  title  by  adverse  possession  and  that  the  trial  court's  judgment 
was  contrary  to  law.  The  appellate  court  agreed  with  the  Joneses' 
contention  and  reversed  the  trial  court's  judgment  pertaining  to  Lot  No. 
10.^ 

The  second  issue  raised  by  the  Greenes  was  whether  the  acts  of 
possession  by  the  Joneses  were  sufficient  to  meet  the  requirements  for 
adverse  possession  as  to  Lot  No.  1.^  The  court  noted  that  the  elements 
of  adverse  possession  which  the  Joneses  were  required  to  show  were 
that  "the  possession  was  actual,  visible,  notorious,  exclusive,  under  a 
claim  of  ownership,  hostile  to  the  owner  of  record  title,  and  continuous 


M90  N.E.2d  776  (Ind.  Ct.  App.   1986). 

'Id.  at  777. 

''Id. 

Ud.  In  a  footnote,  the  court  noted  that  prior  to  1974,  both  portions  of  Lot  No. 
10  were  owned  by  one  person  and  thus  no  adverse  possession  as  to  a  portion  of  Lot 
No.  10  could  exist  before  1974.  Had  the  Joneses'  grantor  been  in  adverse  possession  of 
the  seven  foot  strip,  the  Joneses  could  have  tacked  on  his  period  of  adverse  possession 
to  meet  the  required  statutory  period.  Id.  at  777  n.l. 

Hd.  at  777. 


1987]  PROPERTY  LAW  307 

for  the  full  period  of  the  statute.'"  The  court  primarily  focused  on  the 
element  of  notorious  possession.  In  explaining  this  element,  the  court 
relied  heavily  upon  the  discussion  of  notorious  possession  by  the  Indiana 
Supreme  Court  in  McCarty  v.  Sheets}^ 

Adverse  possession  was  at  issue  in  McCarty  due  to  the  fact  that 
defendants'  garage  encroached  upon  plaintiff's  land.  The  defendants 
mowed  the  grass,  cut  thistles,  and  removed  weeds  in  the  area  around 
the  garage.  The  trial  court  quieted  title  in  defendants  to  a  strip  of  land 
four  feet  and  two  inches  wide  along  the  entire  east  side  of  plaintiff's 
property,  a  distance  of  one  hundred  and  fifty  feet."  In  reversing  the 
trial  court's  judgment,  the  supreme  court  held  that  "while  maintenance 
activities  in  a  residential  area  are  a  factor  in  a  property  dispute,  standing 
alone,  they  are  not  sufficient  to  support  a  divesture  of  property  based 
upon  adverse  possession. "'^  The  McCarty  court  did  not  find  such  acts 
to  be  open  and  notorious'^  and  cited  Philbin  v.  Carr^"^  for  its  explanation 
of  notorious  possession: 

[P]ossession  must  be  notorious.  It  must  be  so  conspicuous  that 
it  is  generally  known  and  talked  of  by  the  public — at  least  by 
the  people  in  the  vicinity  of  the  premises.  It  must  be  manifest 
to  the  community.  In  the  course  of  twenty  years  a  visible  oc- 
cupancy naturally  ought  to  become  notorious.  It  ought  to  be 
so  well  known  and  commonly  understood  that  the  people  residing 
in  the  neighborhood  could  testify  with  substantial  unanimity 
concerning  its  existence.  Where  the  persons  who  have  passed 
frequently  over  and  along  the  premises  have  been  unable  to  see 
any  evidence  of  occupancy,  evidently  the  possession  has  not  been 
of  the  character  required  by  the  rule.'^ 

The  Greene  court,  after  quoting  the  same  passage  from  the  Philbin 
opinion,  noted  that  "[i]n  McCarty,  the  supreme  court  ruled  that  yard 
maintenance  activities  in  a  residential  area  such  as  mowing  grass  and 
weeding  are  sporadic  and  periodic  acts  of  ownership  and  insufficient  to 
constitute  adverse  possession. "^^  On  the  other  hand,  the  court  held  that 
erecting  improvements  on  a  disputed  portion  of  the  property  is  sufficiently 
conspicuous  for  purposes  of  adverse  possession.'^ 


•"Id.  at  778. 

'M23  N.E.2d  297  (Ind.   1981). 
''Id.  at  300. 
''Id.  at  300-01. 
''Id.  at  300. 

'^75  Ind.  App.  560,   129  N.E.   19  (1920). 

"McCarty,  Al^  N.E.2d  at  301  (quoting  Philbin  v.  Carr,  75  Ind.  App.  560,  584,  129 
N.E.   19,  27-28  (1920)). 

'^Greene,  490  N.E.2d  at  778. 

'''Id.  The  court  cites  as  examples  of  such  activities  Penn  Cent.  Transp.  Co.  v.  Martin, 


308  INDIANA  LAW  REVIEW  [Vol.  20:305 

Having  thus  determined  the  standard  for  notorious  possession  in  a 
residential  area,'^  the  court  next  examined  the  activities  of  the  Joneses 
in  the  disputed  area.  They  had  plowed,  graded,  and  planted  grass  up 
to  the  mistaken  property  line  and  had  periodically  mowed  and  fertilized 
the  area.  The  Joneses  had  also  planted  a  fruit  tree  in  the  disputed  area 
approximately  four  years  before  trial. '^  There  were  two  additional  ac- 
tivities in  the  disputed  area  which  the  court  found  irrelevant.  A  wood 
fence  had  been  erected  along  the  mistaken  property  line  by  a  prior 
owner,  but  the  fence  had  stood  for  only  seven  years  (1972  to  1979)  at 
the  most.^^  The  utility  company  also  had  placed  the  Joneses'  water  meter 
in  the  disputed  area.  The  court  could  find  no  authority,  and  none  was 
cited,  for  the  proposition  that  the  placement  of  equipment  by  a  utility 
company  in  a  disputed  area,  whether  within  or  without  their  easement, 
could  be  used  as  evidence  to  establish  the  boundary  line  of  the  adverse 
possessor. ^'  The  court  noted  that  the  meter  was  placed  in  the  area  by 
the  utility  company,  not  the  Joneses,  and  therefore  could  not  be  inter- 
preted as  a  manifestation  of  the  Joneses'  control  over  the  property. ^^ 

The  court  concluded  that  "applying  these  facts  to  the  standard 
enunciated  for  notorious  possession,  we  must  conclude  no  activity  or 
conduct  by  the  Joneses  was  sufficiently  conspicuous  to  give  persons  who 
frequently  pass  the  premises  the  ability  to  see  occupancy  other  than  the 
periodic  and  sporadic  yard  maintenance  which  was  held  insufficient  by 
our  supreme  court  in  McCarty  .  .  .  ."^^  Thus  the  court  reversed  the  trial 
court's  judgment  as  to  the  disputed  area  adjacent  to  Lot  No.  2  and 
held  the  Greenes'  title  had  not  been  defeated.^"^ 

In  a  dissenting  opinion,  Judge  Young  argued  that  grading  and 
planting  grass  and  trees  in  a  disputed  area  are  sufficient  acts  of  ownership 
to  establish  title  by  adverse  possession  "when  the  owner  of  record  has 


170  Ind.  App.  519,  353  N.E.2d  474  (1976)  (erecting  a  garage  and  adding  a  house  in 
addition  to  mowing  the  grass);  Smith  v.  Brown,  126  Ind.  App.  545,  134  N.E.2d  823 
(1956)  (erecting  concrete  curbing,  driveway,  and  hedge  fence  along  with  yard  maintenance). 

'Throughout  the  opinion,  the  court  is  careful  to  limit  its  holding  to  adverse  possession 
of  property  in  a  "residential  area."  In  the  McCarty  decision,  which  the  court  indicates 
is  controlling,  the  Indiana  Supreme  Court's  determination  of  what  constituted  open  and 
notorious  possession  of  land  in  a  residential  area  was  greatly  influenced  by  the  nature 
and  use  of  the  property  being  adversely  possessed:  "Cases  of  adverse  possession  must, 
of  necessity,  be  decided  on  a  case  by  case  basis,  for  what  constitutes  possession  of  a 
'wild'  land  may  not  constitute  possession  of  a  residential  lot,  just  as  possession  of  the 
latter  may  not  constitute  possession  of  a  commercial  lot."  McCarty,  423  N.E.2d  at  300. 

'"Greene,  490  N.E.2d  at  778. 

20/G?.  at  778-79,  779  n.3. 

^'Id.  at  779  n.4. 

^^Id. 

'Ud.  at  779. 

''Id. 


1987]  PROPERTY  LAW  309 

actual  notice  of  the  possessor's  claim. "^^  In  such  a  situation,  the  re- 
quirement that  the  possession  be  notorious  would  serve  no  useful  purpose, 
since  the  sole  purpose  of  this  requirement  is  to  put  the  record  owner 
on  notice  of  the  claim. ^^  Judge  Young  cited  several  Indiana  decisions 
which  indicate  that  the  purpose  of  notorious  possession  "is  to  put  the 
record  owner  on  notice  of  the  adverse  claim. "^^  By  implication,  the 
cases  cited  by  Judge  Young  appear  to  suggest  that  where  the  owner  has 
actual  notice  of  the  claim,  open  and  notorious  possession  is  not  required. ^^ 
Judge  Young  noted  that  there  are  no  Indiana  decisions  that  have  explicitly 
held  that  possession  must  be  notorious  where  the  owner  has  actual  notice 
of  the  adverse  claim. ^^ 

Judge  Young  inferred  that  there  was  evidence  that  the  Greenes  were 
aware  of  the  existence  of  the  fence  or  at  least  that  they  were  aware  the 
Joneses  were  making  an  adverse  claim  to  the  mistaken  boundary  Une 
where  the  fence  once  stood:  "Here,  it  was  undisputed  that  the  Greenes 
and  their  predecessors  in  title  knew  the  Joneses  claimed  the  property  to 
the  Hne  where  the  fence  had  once  been  located. "^°  If  the  majority  of 
the  court  was  of  the  view  that  the  Greenes  had  actual  notice  of  the 
Joneses'  claim,  it  was  not  expressed  in  the  written  opinion. ^^  The  only 
reference  to  actual  notice  in  the  majority  opinion  was  the  statement  that 
"[t]he  discrepancy  in  the  boundary  Une  between  Lots  Nos.  1  and  2  was 
discovered  by  the  Greenes  in  1983  when  they  had  the  land  surveyed  in 
order  to  construct  a  fence  on  the  west  side  and  a  drainage  ditch  on 
the  east  side  of  their  property. "^^ 

A  second  issue  raised  in  the  dissenting  opinion  relates  to  the  suf- 


^^Id.  at  779  (Young  J.,  dissenting). 

''Id. 

''Id.  (citing  Houston  v.  United  States  Gypsum  Co.,  652  F.2d  467,  475  (5th  Cir. 
1981);  Marengo  Cave  Co.  v.  Ross,  212  Ind.  624,  627,  10  N.E.2d  917,  921  (1937);  Poole 
V.  Corwin,  447  N.E.2d  1150,  1152  (Ind.  Ct.  App.  1983);  Philbin  v.  Carr,  75  Ind.  App. 
560,  585,  129  N.E.   19,  28  (1920)). 

^^In  illustration  of  this  observation.  Judge  Young  quoted  from  Philbin:  "[W]here 
there  has  been  no  actual  notice,  the  possession  must  have  been  so  notorious  as  to  warrant 
the  inference  that  the  owner  ought  to  have  known  that  a  stranger  was  asserting  dominion 
over  this  land."  490  N.E. 2d  at  780  (Young,  J.,  dissenting)  (quoting  Philbin,  75  Ind.  App. 
at  585,  129  N.E.  at  28). 

''Greene,  490  N.E. 2d  at  779  (Young,  J.,  dissenting). 

'°Id.  at  780. 

^'Since  the  fence  was  removed  in  1979,  there  was  no  direct  evidence  that  the  Greenes 
were  aware  that  it  ever  existed  when  they  purchased  Lot  No.  1  and  the  remaining  portion 
of  Lot.  No.  10  in  1981.  Id.  at  779  n.3.  This  would  leave  only  the  maintenance  activities 
to  establish  notice  of  the  adverse  claim. 

"/(C/.  at  777.  Perhaps  Judge  Young  was  inferring  such  notice  from  the  activities  in 
the  disputed  area,  i.e.  how  could  the  owner  of  a  residential  area  fail  to  see  the  grading 
and  planting  of  grass  and  trees  or  the  existence  of  a  water  meter  in  the  disputed  area. 
However,  such  implied  notice  would  seem  to  require  the  activities  to  be  notorious. 


310  INDIANA  LAW  REVIEW  [Vol.  20:305 

ficiency  of  the  activities  by  the  Joneses.  Judge  Young  clearly  believed 
that  the  activities  by  the  Joneses  were  sufficient  to  acquire  title  by 
adverse  possession."  In  McCarty,  however,  the  supreme  court  found 
maintenance  activities  in  residential  areas  insufficient  to  establish  title 
by  adverse  possession,  not  only  because  they  failed  to  meet  the  standard 
for  open  and  notorious  possession,  but  because  they  were  not  contin- 
uous.^^ The  supreme  court  found  such  maintenance  activities  to  be 
periodic  or  sporadic  acts  of  ownership  insufficient  to  constitute  adverse 
possession. ^^  Thus,  even  if  the  fence  or  other  activities  such  as  the 
planting  of  grass  and  trees  gave  the  owner  notice  of  a  claim,  the  activities 
must  have  been  continuous  for  the  statutory  period. ^^ 

One  final  observation  regarding  the  decision  in  Greene  can  be  made. 
It  can  be  inferred  from  the  majority  opinion  that  some  evidence  of  a 
visible  marker  must  exist  establishing  the  boundaries  of  the  area  being 
adversely  claimed.  Judge  Young  read  the  majority  opinion  as  requiring 
such  evidence  when  he  observed  that  *'[t]he  majority's  view  that  the 
entire  neighborhood  must  be  able  to  recognize  the  property  line  between 
the  two  neighbors'  residences  would  limit  adverse  possession  to  situations 
where  the  act  of  possession  is  evidenced  by  a  visible  marker  such  as  a 
fence,  garage,  or  driveway. "^^  The  McCarty  decision,  rehed  upon  ex- 
tensively in  the  majority  opinion,  appears  to  suggest  even  more  strongly 
that  some  visible  evidence  of  the  location  of  the  disputed  boundary  line 
is  required  before  the  possession  can  be  adverse. ^^  Clearly  the  requirement 
that  there  be  visible  evidence  of  the  disputed  boundary  line  is  an  element 
of  notorious  possession.  It  is  also  suggested  that  this  requirement  can 
be  viewed  as  part  of  other  elements  of  adverse  possession  such  as 
'^exclusive"  or  '*under  claim  of  ownership."  Without  some  evidence  of 
the  exact  area  of  the  encroachment,  it  is  hard  to  impute  actual  or 
constructive  notice  to  the  owner  that  a  claim  of  ownership  has  been 
made.  This  point  was  made  by  Judge  Hoffman,  in  a  separate  dissenting 
opinion  in  the  court  of  appeals  decision  in  McCarty, ^^  when  he  remarked: 
"No  fence  or  markings  of  any  kind  showed  where  the  boundary  line 


"/</.  at  779  (Young,  J.,  dissenting).  "Improving  the  disputed  area  by  grading  and 
planting  grass  and  trees  constitutes  sufficient  acts  of  ownership  to  establish  adverse  possession 
of  a  residential  property  when  the  owner  of  record  title  has  actual  notice  of  the  possessor's 
claim."  Id. 

''McCarty,  423  N.E.2d  at  300. 

''Id.  at  301. 

'"•Id.  at  297;  Echterling  v.  Kalvaitis,  235  Ind.  141,  126  N.E.2d  573  (1955);  Greene, 
490  N.E.2d  at  776;  Philbin  v.  Carr,  75  Ind.  App.  560,  129  N.E.   19  (1920). 

'^Greene,  490  N.E. 2d  at  779  (Young,  J.,  dissenting). 

'^For  a  discussion  of  the  supreme  court's  decision  in  McCarty,  see  Krieger,  Survey 
of  Recent  Developments,  16  Ind.  L.  Rev.  283,  287-88  (1983). 

^^391  N.E.2d  834  (1979),  rev'd,  423  N.E.2d  297  (Ind.   1981). 


1987]  PROPERTY  LAW  311 

existed.  It  is  a  sad  day  in  Indiana  when  the  courts  take  a  man's  land 
from  him  on  evidence  of  mowing  grass  on  the  side  and  behind  a  garage. '"^° 

II.     Easements:  Scope 

In  Brock  v.  B  &  M  Master  Farms,  Inc.,'^^  the  Indiana  Court  of 
Appeals  discussed  several  issues  relating  to  the  scope  of  an  express 
easement.  In  1911,  John  Roemer  conveyed  a  forty  acre  tract  of  land 
in  Franklin  County,  Indiana,  to  Clarence  Schreiber.  At  that  time  of  the 
conveyance,  the  only  access  from  the  forty  acre  tract  to  a  public  road 
was  over  the  land  retained  by  the  grantor.'*^  The  Roemer/Schreiber  deed 
contained  the  following  express  easement:  "Also,  a  right-of-way  for 
wagon,  horses  and  footpassers,  and  no  hauling  can  be  done  over  said 
right-of-way  when  the  ground  is  soft  from  heavy  rains  or  when  thawing 
out  in  the  spring  of  the  year.""*^ 

The  court  noted  that  had  the  deed  not  contained  an  express  easement, 
the  law  would  have  impHed  a  way  of  necessity  to  afford  Schreiber  access 
to  a  public  road."^^  In  the  case  of  an  implied  way  of  necessity,  the 
easement  would  have  come  to  an  end  in  1971,  when  Roemer  Road  was 
extended  to  provide  direct  access  to  the  property  thereby  eliminati'ig  the 
necessity  of  the  easement. "^^  However,  because  this  was  an  express  case- 
ment, neither  the  fact  that  direct  access  to  a  public  road  was  subsequently 
made  available  nor  the  fact  that  the  easement  had  been  used  only 
occasionally  caused  the  easement  to  terminate.'*^ 

The  defendants,  John  and  Jean  Brock,  acquired  title  to  the  land 
previously  owned  by  Schreiber  from  AHce  Blair.  The  deed  indicated  that 
there  was  "a  right  of  way  for  ingress  and  egress  for  horses,  wagons, 
vehicles  and  persons  on  foot   .  .  .   [as]   set  forth  in  deed  from  John 


^"M  at  838  (Hoffman,  J.,  dissenting). 

^'481  N.E.2d  1106  (Ind.  Ct.  App.   1985). 

'Ud.  at  1107. 

''Id. 

''Id.  at  1108.  Where  land  is  conveyed  in  such  a  manner  that  the  grantee  is  completely 
landlocked,  the  law  will  imply  an  easement  for  a  way  of  necessity  over  the  lands  of  the 
grantor  not  conveyed.  Ritchey  v.  Welsh,  149  Ind.  214,  48  N.E.  1031  (1898).  Such  an 
easement  is  favored  by  the  public  policy  that  land  should  not  be  rendered  unfit  for  use 
or  occupancy  by  a  grant  which  provides  no  means  of  ingress  or  egress.  Moore  v.  Indiana 
&  Mich.  Elec.  Co.,  229  Ind.  309,  95  N.E.2d  210  (1950). 

'^^Brock,  481  N.E. 2d  at  1107.  A  way  of  necessity  ends  when  the  necessity  no  longer 
exists.  Wilson  v.  Glascock,  74  Ind.  App.  255,   126  N.E.  231  (1920). 

'^Brock,  481  N.E. 2d  at  1108-09.  The  rule  that  an  implied  easement  by  necessity 
terminates  with  the  necessity  does  not  apply  to  right-of-ways  acquired  by  express  grant 
or  by  prescription.  See.  e.g.,  Reder  v.  Radtke,  132  Ind.  App.  412,  177  N.E. 2d  669  (1961). 
The  fact  that  the  easement  is  used  intermittently  does  not  terminate  an  easement  created 
by  express  grant.  Brock,  481  N.E. 2d  at  1108-09.  An  express  easement  by  grant  is  generally 
not  lost  by  mere  nonuse.  Jeffers  v.  Toschlog,  178  Ind.  App.  603,  383  N.E.2d  457  (1978). 


312  INDIANA  LAW  REVIEW  [Vol.  20:305 

Roemer  to  Clarence  W.  Schreiber.  .  .  ."'^"  Even  without  the  express 
reference  to  the  easement  in  the  deed,  the  easement  appurtenant  would 
have  passed  with  the  sale  of  the  dominant  estate  "like  a  dog's  tail  goes 
along  with  a  sale  of  the  dog."'^^  The  easement  in  this  case  was  clearly 
appurtenant  because  it  benefited  the  forty  acre  tract  (dominant  estate)/^ 
Had  the  intent  of  the  parties  been  that  the  easement  was  to  benefit 
Schreiber  personally  rather  than  as  owner  of  the  forty  acre  tract  (an 
easement  in  gross),  there  would  have  been  a  serious  problem  raised 
regarding  the  assignability  of  the  easement. ^° 

In  1978,  the  portion  of  the  land  formerly  owned  by  Roemer,  on 
which  the  disputed  right  of  way  was  located  (servient  estate),  was  con- 
veyed to  B  &  M  Moster  Farms,  Inc.  (Moster).  A  clause  in  an  addendum 
to  the  contract  to  purchase  stated  that  the  conveyance  was  "subject  to 
a  right-of-way  for  wagons,  horses  and  foot  passers  on  and  over  [land] 
.  .  .  described  in  a  warranty  deed  to  Clarence  W.  Schreiber."^'  Even 
without  this  express  statement  in  the  contract,  however,  it  seems  unHkely 
Moster  could  have  successfully  claimed  that  it  took  the  land  without 
notice  of  the  easement.  Moster  would  be  charged  with  constructive  notice 
of  the  easement  because  the  Roemer/Schreiber  deed  was  in  its  chain  of 
title. ^^  In  addition,  Moster  would  be  charged  with  inquiry  notice  if  there 
were  any  evidence  of  the  existence  of  the  easement  visible  by  a  physical 
inspection  of  the  premises.^'' 

Moster  filed  suit  in  1983  to  prevent  the  Brocks  from  constructing 
a  private  drive  over  its  land  and  the  Brocks  counterclaimed  seeking  an 
injunction  prohibiting  Moster  from  interfering  with  their  use  of  the  right 
of  way.  The  trial  court  held  that  use  of  the  right  of  way  granted  in 
the  deed  was  exclusively  limited  to  agricultural  purposes  and  enjoined 
the  Brocks  from  entering  upon  Moster' s  land  for  any  other  purpose  and 


''Brock,  481  N.E.2d  at  1107. 

'^^R.  Cunningham,  W.  Stoebuck  &  D.  Whitman,  The  Law  of  Property  §  8.10 
(1984)  [hereinafter  Cunningham]. 

"'The  court  refers  to  the  Brocks'  land  as  the  "dominant  estate:"  "Nor  may  Brocks 
subdivide  the  dominant  estate  such  that  there  would  be  increased  traffic  ..."  Brock,  481 
N.E.2d  at  1109. 

'°At  common  law,  easements  in  gross  were  not  transferable  but  created  a  personal 
right  only  in  the  grantee.  Cunningham,  supra  note  48,  §  8.10,  at  461.  Under  Indiana 
statute,  easements  in  gross  created  after  July  6,  1961,  may  be  alienated,  inherited,  and 
assigned  if  the  instrument  that  created  the  easement  so  states.  Ind.  Code  Ann.  §  32-5- 
2-1  (West  Supp.   1986). 

''Brock,  481  N.E.2d  at  1107. 

"A  purchaser  is  charged  with  constructive  notice  of  all  interests  recorded  within  the 
chain  of  title.  Willard  v.  Bringolf,  103  Ind.  App.   16,  30,  5  N.E.2d  315,  321  (1936). 

"A  purchaser  is  charged  with  notice  of  anything  he  could  have  discovered  from  a 
physical  inspection  of  the  premises.  Mishawaka  St.  Joseph  Loan  &  Trust  Co.  v.  Neu, 
209  Ind.  433,  196  N.E.  85  (1935). 


1987]  PROPERTY  LAW  313 

from  constructing  a  private  drive  over  the  right  of  way.  The  Brocks 
appealed  the  order. ^'^ 

The  court  of  appeals  began  its  analysis  by  noting  that  in  interpreting 
the  meaning  of  an  instrument  creating  an  easement,  the  intent  of  the 
parties  must  be  ascertained  and  given  effect.  The  intent  of  the  parties 

is  determined  by  a  proper  construction  of  the  language  in  the 
instrument  from  an  examination  of  all  the  material  parts  thereof. 
Where  the  provision  is  ambiguous,  the  court  may  consider  the 
situation  of  the  property  and  the  parties,  and  the  surrounding 
circumstances  at  the  time  the  instrument  was  executed  to  de- 
termine intent  ....  In  the  case  of  doubt  or  uncertainty,  the 
grant  of  an  easement  will  ordinarily  be  construed  in  favor  of 
the  grantee. ^^ 

The  Roemer/Schreiber  deed  was  construed  to  contain  an  ambiguity. 
The  1911  language  authorizing  the  use  of  the  right  of  way  by  "wagons, 
horses  and  footpassers"  became  ambiguous  by  "the  mere  passage  of 
time  and  development  of  society. "^^  The  court  observed  that  the  function 
of  an  easement  "should  be  gleaned  by  contemplating  not  the  character 
of  the  traffic  intended  to  travel  the  way,  but  rather  the  purpose  to  be 
served  by  the  traffic. "^^  The  court  noted  that  the  term  "right-of-way"  tradi- 
tionally refers  to  an  easement  of  access  arising  out  of  necessity  upon 
the  severance  of  a  tract  of  land.^^  The  use  of  the  term  "wagons,  horses 
and  footpassers"  was  only  a  statement  of  the  types  of  transportation 
existing  in  1911.^^  The  court  concluded  that  Roemer  intended  the  easement 
granted  to  Schreiber  to  be  a  general  right  of  ingress  and  egress  "with 
no  Hmitation  to  traffic  used  for  agricultural  purposes. "^^ 

Having  established  that  the  easement  created  a  general  right  of  ingress 
and  egress  to  the  Brocks'  property,  the  court  addressed  the  issue  of 
expanded  use  of  or  construction  on  the  right  of  way  by  the  Brocks. 
The  meaning  of  the  term  "expanded  use"  is  not  fully  explained  in  the 
decision.  The  court's  discussion  indicates,  however,  that  the  proposed 


''Brock,  481  N.E.2d  at  1107-08. 

''Id.  at  1108  (citations  omitted). 

'"•Id. 

''Id. 

"Id. 

'-"Id.  (citing  Jeffers  v.  Toschlog,  178  Ind.  App.  603,  383  N.E.2d  457  (1978)).  In 
Jeffers,  the  court  construed  a  1907  instrument  containing  a  provision  authorizing  "teams 
and  wagons"  as  intending  to  permit  present  day  vehicles  to  travel  the  way.  Jeffers,  178 
Ind.  App.  at  605-07,  383  N.E.2d  at  458-59.  For  further  cases  discussing  this  point,  see 
Annotation,  Type  of  Vehicle  or  Mode  of  Travel  Permissible  on  Express  Easement  of  Way 
Created  in  Limited  Terms,  156  A.L.R.  1050  (1945);  Annotation,  Automobile  Traffic  as 
Additional  Burden  on  Right  of  Way,  53  A.L.R.  553  (1928)). 

^Brock,  481  N.E.2d  at  1108. 


314  INDIANA  LAW  REVIEW  [Vol.  20:305 

construction  of  the  private  drive  was  part  of  a  plan  to  subdivide  the 
dominant  estate  and  provide  each  owner  with  access  to  the  easement. ^' 
The  general  rule  is  that  the  use  of  an  easement  cannot  be  changed  to 
subject  the  servient  estate  to  a  greater  burden  than  was  agreed  upon.^^ 
In  light  of  this  general  rule,  the  court  concluded  that  the  Brocks  could 
not  "subdivide  the  dominant  estate  such  that  there  would  be  increased 
traffic  over  Moster's  land,  creating  an  extra  burden  on  the  servient 
estate.""  The  court  found  that  when  the  easement  was  created,  the  parties 
clearly  had  not  intended  for  the  servient  estate  to  be  burdened  to  the  extent 
which  would  result  from  the  proposed  subdivision. ^"^  This  finding  was 
somewhat  unexpected  in  light  of  the  court's  earlier  conclusion  that  the 
grant  of  the  easement  created  a  general  right  of  ingress  and  egress  not 
limited  to  traffic  for  agricultural  purposes. ^^  When  a  right  of  way  is 
created  by  grant  in  general  terms,  the  right  to  use  the  way  is  not  limited 
to  activities  conducted  on  the  dominant  estate  at  the  time  of  the  grant. 
A  degree  of  change  or  growth  of  the  dominant  estate  is  permitted. ^^ 
This  natural  development  of  the  dominant  estate  is  presumed  to  have 
been  contemplated  by  the  parties. ^^  Where  the  dominant  estate  is  sub- 
divided, the  general  rule  is  that  those  who  succeed  to  the  possession  of 
each  of  the  parts  into  which  the  dominant  estate  has  been  subdivided 
are  entitled  to  use  the  easement  appurtenant.^^  Some  increased  burden 
to  the  servient  estate  will  result  from  the  increased  number  of  users, 
unless  forbidden  by  the  terms  of  the  grant  or  unless  the  increased  burden 
is  material.  Nevertheless,  the  right  to  use  the  easement  attaches  to  each 
of  the  parts  of  the  dominant  estate. ^^  Thus,  the  court's  conclusion  that 
use  of  the  easement  by  each  owner  of  a  subdivided  dominant  estate 
would  be  an  ''expanded  use"  of  the  easement  which  would  create  an 
"extra  burden"  on  the  servient  estate  seems  unwarranted  on  the  facts 
presented. 

Selvia  v.  Reitmeyer,^^  cited  by  the  Brock  court  as  authority  for  this 
position,   does  not  in  fact  support  such  a  broad  generalization.   The 


^'The  only  expanded  use  actually  discussed  by  the  court  relates  to  the  subdivision 
of  the  dominant  estates.  Id.  at  1109. 

^Id. 

''Id.  at  1108. 

^^CuNNiNGHAM,  supra  note  48,  §  8.9,  at  459-60. 

^^Restatement  of  Property  §  484  (1944). 

'^Id.  §  488  (1944);  see  also  Annotation,  Right  of  Owners  of  Parcels  into  Which 
Dominant  Tenement  Is  or  Will  Be  Divided  to  Use  Right  of  Way,  10  A.L.R.3d  960  (1966). 

^^CuNNiNGHAM,  supra  notc  48,  §  8.9,  at  460;  Restatement  of  Property  §  488 
comment  b  (1944). 

^°156  Ind.  App.  203,  295  N.E.2d  869  (1973). 


1987]  PROPERTY  LAW  315 

Selvia  defendants  were  using  the  easement  not  only  to  reach  the  portion 
of  their  property  that  was  part  of  the  dominant  estate,  but  also  were 
using  the  easement  for  ingress  and  egress  to  lands  that  were  never  part 
of  the  dominant  estate.  The  court  prohibited  the  use  of  the  easement 
to  reach  lands  that  were  not  part  of  the  dominant  estate,  holding  that 
this  use  amounted  to  an  unreasonable  burden  on  the  servient  estate."^' 
The  Selvia  opinion  recognized  the  general  rule  that  the  owners  of  each 
portion  of  the  subdivided  dominant  estate  may  use  the  appurtenant 
easement  unless  the  increased  or  additional  use  "materially  burdens" 
the  servient  estate. ^^  The  Brock  court  appears  to  have  assumed  that  any 
increase  in  traffic  constituted  an  "expanded  use"  and  a  material  burden 
beyond  the  scope  of  the  easement. ^^  However,  this  conclusion  is  not 
unreasonable  considering  that  the  Brock  court  determined  that  appor- 
tionability  of  the  appurtenant  easement  was  not  intended  when  the 
easement  was  created. "^"^ 

The  final  issue  raised  by  the  Brock  court  involved  the  right  of  the 
Brocks  to  improve  the  easement.  The  court  acknowledged  the  general 
rule  that  the  owners  of  an  easement  have  a  right  to  make  improvements 
and  repairs  that  are  reasonably  necessary  to  effectuate  the  grant  of  an 
easement. ^^  However,  the  court  did  not  believe  improvements  were  nec- 
essary to  the  Brocks  easement,  as  the  right  of  way  was  passable  and 
"mere  inconvenience  provides  no  basis  for  changing  its  construction."^^ 
Once  the  court  determined  that  there  could  be  no  increased  traffic  over 
the  easement,  the  issue  of  the  right  of  the  Brocks  to  make  improvements 
most  Hkely  became  moot.  Had  the  court  found  the  increased  traffic 
resulted  from  the  natural  development  of  the  dominant  estate  and  did 
not  create  an  undue  burden  on  the  servient  estate,  the  court  might  have 
determined  the  paving  of  the  right  of  way  across  Moster's  pasture  was 
reasonably  necessary  to  the  effectual  use  of  the  easement. ^^ 

III.  Landlord  and  Tenant:  Assignments 
A  leasehold  interest  is  freely  transferable  by  a  tenant  unless  there 


''Id.  at  210,  295  N.E.2d  at  874. 

'^Id.  at  209-10,  295  N.E.2d  at  873-74  (citing  Annotation,  Right  of  Owners  of  Parcels 
into  Which  Dominant  Tenement  Is  or  Will  Be  Divided  to  Use  Right  of  Way,  10  A.L.R.3d 
960  (1966). 

'^Brock,  481  N.E.2d  at  1109.  If  an  increase  in  traffic  is  viewed  as  a  change  in 
degree  of  use  rather  than  as  a  change  in  the  character  of  the  use,  such  change  should 
not  be  viewed  as  an  increased  burden  on  the  servient  estate.  See,  e.g..  Burgess  v.  Sweet, 
662  S.W.2d  916,  919  (Mo.  Ct.  App.   1983). 

''Brock,  481  N.E.2d  at  1109. 

''Id. 

''Id. 

^Tor  cases  discussing  the  right  of  an  owner  of  a  right  of  way  easement  to  make 


316  INDIANA  LAW  REVIEW  [Vol.  20:305 

is  a  covenant  against  such  transfer  in  the  lease. ''^  Where  the  tenant 
transfers  possession  of  the  leasehold  to  the  transferree  for  the  entire 
remaining  term  of  the  lease,  the  transfer  creates  an  assignment. ^^  Where 
the  tenant  transfers  his  interest  in  the  lease  for  less  than  the  entire  term, 
i.e.  where  the  tenant  retains  a  reversion  in  the  leasehold,  the  transfer 
creates  a  sublease  and  not  an  assignment. ^°  The  difference  between  an 
assignment  and  a  sublease  is  very  technical  and  the  intent  of  the  parties 
is  often  ignored  by  the  courts.^'  The  two  transfers,  however,  create 
entirely  distinct  legal  relations  between  the  parties.  In  the  case  of  an 
assignment,  the  original  tenant  ceases  to  have  a  possessory  interest  in 
the  leasehold,  and  the  privity  of  estate  between  the  original  tenant  and 
the  landlord  comes  to  an  end.  The  assignee-transferree,  on  the  other 
hand,  is  now  in  privity  of  estate  with  the  landlord  and  is  liable  to  the 
landlord  for  the  performance  of  all  covenants  that  run  with  the  land, 
including  the  covenant  to  pay  rent.^^  Unless  the  assignee  agrees  to  assume 
the  obligations  under  the  lease  for  the  remainder  of  the  term,  however, 
the  assignee  remains  liable  for  the  performance  of  the  covenants  only 
while  the  privity  of  estate  continues.  If  the  assignee  reassigns  the  leasehold 
estate,  his  liability  comes  to  an  end.^^  Because  the  original  tenant  was 
a  party  to  the  lease  agreement,  he  remains  secondarily  liable  for  the 
performance  of  obligations  in  the  lease  even  after  an  assignment  because 
of  this  privity  of  contract  unless  the  landlord  releases  him  from  this 
Hability.^^ 

In  the  case  of  a  sublease,  the  original  tenant  retains  a  reversion  in 
the  leasehold  estate,  and  therefore  the  privity  of  estate  between  the 
original  tenant  and  the  original  landlord  continues.  The  law  does  not 
recognize  any  privity  of  contract  or  privity  of  estate  between  the  sublessee 
and  the  original  landlord.  Instead,  the  sublease  (new  lease)  creates  a 
new  landlord  and  tenant  relationship  between  the  original  tenant  (new 


repairs  or  improvement,  see  Annotation,  Right  of  Owner  of  Easement  of  Way  to  Make 
Improvements  or  Repairs  Thereon,  112  A.L.R.   1303  (1938). 

^^W.  BuRBY,  Handbook  of  the  Law  of  Real  Property  144  (3d  ed.  1965);  J. 
Cribbet,  Principles  of  the  Law  of  Property  219  (2d  ed.  1975).  Covenants  prohibiting 
the  tenant  from  transferring  his  leasehold  estate  without  the  consent  of  the  landlord, 
however,  are  standard  "boilerplate"  in  most  leases.  Cunningham,  supra  note  48,  §  6.69, 
at  386. 

^'J.  Cribbet,  supra  note  78,  at  219;  Cunningham,  supra  note  48,  §  6.66,  at  381. 

^°See  sources  cited  supra  note  79. 

^^See  sources  cited  supra  note  79. 

^^J.  Cribbet,  supra  note  78,  at  221;  Cunningham,  supra  note  48,  §  6.67,  at  382. 

«^W.  BuRBY,  supra  note  78,  at  141-42;  J.  Cribbet,  supra  note  78,  at  221-22.  If  the 
assignee  agrees  to  assume  the  obligations  under  the  lease,  he  would  then  remain  liable 
for  the  performance  of  the  obligations  under  privity  of  contract.  Cunningham,  supra  note 
48,  §  6.67,  at  382. 

^"J.  Cribbet,  supra  note  78,  at  221;  Cunningham,  supra  note  48,  §  6.67,  at  382. 


1987]  PROPERTY  LAW  317 

landlord)  and  the  sublessee  (new  tenant),  and  the  original  landlord  must 
continue  to  look  to  the  original  tenant  for  the  performance  of  the 
obligations  under  the  original  lease. ^^ 

In  Shadeland  Development  Corp.  v.  Meeks,^^  the  Indiana  Court  of 
Appeals  examined  some  of  the  common  and  not  so  common  problems 
involved  in  the  transfer  of  leasehold  estates.  In  Shadeland,  the  owner 
lessors,  Mary  R.  Meek  and  J.  Perry  Meek  Realty  Co.,  Inc.  (the  Meeks), 
brought  suit  against  Shadeland  Development  Corp.  (Shadeland),  the 
tenant  assignor,  and  its  parent  corporation,  HoHday  Inns,  Inc.  (Holiday 
Inns),  for  breach  of  a  sixty  year  commercial  lease.  Shadeland  had 
transferred  the  lease  to  San  Antonio  Inns,  Inc.  (San  Antonio),  who 
subsequently  defaulted  on  the  rental  payments. ^^  The  trial  court  denied 
the  motion  of  Shadeland  and  Holiday  Inns  for  summary  judgment  and 
granted  the  Meeks'  motion  for  summary  judgment  on  the  issue  of 
hability.^^ 

Three  major  issues  were  addressed  by  the  court  on  the  appeal  by 
Shadeland  and  Holiday  Inns.^^  The  first  issue  discussed  was  the  right 
of  Shadeland  to  assign  its  interest  under  the  lease.  The  lease  was  signed 
by  Fred  C.  Tucker,  Jr.,  as  agent  for  a  nominee,  an  Indiana  corporation 
to  be  formed  by  Tucker  and  others.  The  lease  specifically  provided  that 
the  lease  could  be  assigned  by  Tucker  at  any  time  to  the  nominee 
corporation  and  that  upon  the  assumption  of  the  lease  by  such  cor- 
poration, "it  shall  be  the  Lessee  hereunder  as  if  it  were  the  original 
party  and  solely  Hable  and  Fred  C.  Tucker,  Jr.  shall  have  no  further 
Hability  hereunder. "^°  Tucker  subsequently  assigned  the  lease  to  1920 
North  Meridian  Corp.  (North  Meridian),  which  later  merged  with  Shade- 


*'J.  Cribbet,  supra  note  78,  at  221;  Cunningham,  supra  note  48,  §  6.68,  at  384. 

M89  N.E.2d  1192  (Ind.  Ct.  App.   1986). 

^''Id.  at  1193.  There  was  actually  an  earlier  assignment  from  Shadeland  to  Key  Host 
Inn  of  Indianapolis,  Inc.  (Key  Host)  on  July  22,  1977.  Holiday  Inns  loaned  Key  Host 
the  funds  to  pay  the  consideration  for  the  transfer  from  Shadeland.  Subsequently,  financial 
difficulties  arose  and  a  "resettlement  statement"  was  issued  by  Shadeland  and  Robert 
Weber,  President  of  Key  Host,  whereby  Shadeland  assigned  the  lease  to  San  Antonio 
with  Weber  as  guarantor  for  San  Antonio.  Again,  Holiday  Inns  loaned  San  Antonio  the 
money  to  pay  the  consideration  for  the  assignment  from  Shadeland.  Id.  at  1194.  After 
briefly  mentioning  these  facts,  the  opinion  never  again  refers  to  this  assignment  or  to 
Key  Host.  However,  clause  (8)  of  the  assignment  from  Shadeland  to  San  Antonio  provided 
that  "[t]he  parties  hereto  previously  entered  into  an  Assignment  of  Lease  on  the  premises 
dated  July  22,  1977.  Upon  execution  hereof  by  both  Assignor  and  Assignee  this  previous 
Assignment  of  Lease  shall  be  deemed  null  and  void."  Id.  at  1198. 

««/af.  at  1193. 

"/(C/.  A  fourth  issue,  whether  Holiday  Inns  was  liable  to  the  Meeks  as  Shadeland' s  parent 
corporation  became  moot  when  the  court  found  that  Shadeland  had  not  breached  any 
contractual  duty  under  the  lease.  Id.  at  1202. 

"^Id.  at  1195. 


318  INDIANA  LAW  REVIEW  [Vol.  20:305 

land,  which  emerged  as  the  surviving  corporation.^'  The  lease  further 
provided  that  after  the  completion  of  certain  improvements  on  the  leased 
premises  called  for  by  the  lease,  "Lessee  shall  have  the  free  right  to 
assign  this  Lease  without  the  consent  of  the  Lessor;  and,  upon  such 
assignment  becoming  effective  and  the  assumption  by  the  assignee  of 
all  obhgations  of  this  Lease,  Lessee  shall  have  no  further  liability  here- 
under."^^ The  court  noted  that  the  construction  of  a  motel  building,  an 
improvement  on  the  leased  premises  called  for  by  the  lease,  was  completed 
"sometime  in  the  early  1960's."^^  Because  the  assignment  by  Shadeland 
to  San  Antonio  did  not  occur  until  October  13,  1977,  it  would  appear 
that  the  consent  of  the  lessor  was  not  required.  The  Meeks,  however, 
while  conceding  that  the  term  "lessee"  as  used  in  the  lease  was  meant 
to  include  both  Tucker  and  the  nominee  corporation,  argued  that  North 
Meridian  and  not  Shadeland,  its  successor  by  merger,  was  the  nominee. ^"^ 
Thus,  arguably  Shadeland  did  not  have  a  right  of  assignment. ^^  The 
court  rejected  this  argument  for  two  reasons.  First,  the  lease  contained 
a  specific  provision  which  stated  "[t]he  covenants  and  agreements  herein 
contained  shall  inure  to  the  benefit  of  and  be  binding  upon  the  parties 
hereto  and  their  respective  successors  and  assigns. "^^  Thus  as  a  successor 
corporation,  Shadeland  would  have  the  right  to  assign.  Second,  the  court 
pointed  out  that  under  Indiana  Code  section  23-1-5-5,  dealing  with  the 
effect  of  corporate  merger  or  consolidation,  a  surviving  corporation  after 
merger  possesses  all  the  rights  of  each  corporation  merged. ^^  Thus, 
Shadeland  possessed  all  the  rights  of  North  Meridian  including  the  right 
to  assign. ^^ 

The  second  issue  discussed  by  the  court  was  the  liability  of  Shadeland 
to  Meeks  after  the  transfer  to  San  Antonio.  The  trial  court  had  found 
Shadeland  liable  based  on  the  general  rule  that  the  original  tenant  remains 
liable  for  the  performance  of  the  covenants  in  the  lease  under  privity 
of  contract  even  after  a  valid  assignment.  The  court  agreed  with  Shade- 
land  that  the  trial  court's  rehance  on  the  general  rule  was  misplaced 
due  to  the  express  release  contained  in  the  lease. ^^  Meeks,  however, 
made  several  additional  arguments  concerning  the  validity  of  the  as- 
signment to  San  Antonio.  The  assignment  agreement  stated  that  San 
Antonio  took  subject  to  the  payment  of  rent  and  subject  to  the  observance 


'^Id.  at  1193-94. 
'''Id.  at  1195. 
''Id.  at  1193. 
'''Id.  at  1195. 
''Id. 
'"Id. 

''Id.  at  1196  (citing  Ind.  Code  §  23-1-5-5  (1979)  (repealed  effective  August  1,  1987. 
Ind.  Code  Ann.  §  23-1-5-5  (Burns  Supp.   1986)). 
''Shadeland,  489  N.E.2d  at  1196. 
"Id.  at  1196-97. 


1987]  PROPERTY  LAW  319 

and  performance  of  each  and  every  covenant  and  condition  in  the  lease J'^^ 
Meeks  argued  that  this  made  the  assignment  conditional  on  the  per- 
formance of  the  obligation  in  the  lease  and  that  when  the  assignee  failed 
to  pay  the  rent,  the  lease  reverted  to  Shadeland.'^'  The  court  found  this 
argument  unpersuasive  and  held  the  "subject  to"  language  was  merely 
a  statement  of  explanation  of  the  rights  being  assigned. '°^  Meeks'  ar- 
gument regarding  the  "subject  to"  language  appears  to  have  been  limited 
to  the  question  of  whether  or  not  the  assignment  was  conditional  and 
does  not  appear  to  raise  the  issue  of  whether  the  assignee  "assumed" 
the  obligations  under  the  lease.  Before  the  tenant  was  to  be  released 
from  Hability  under  the  lease  in  question,  the  lease  required  that  there 
be  an  "assumption  by  the  assignee  of  all  obligations  under  this  Lease. "'°^ 
Although  this  point  does  not  appear  to  have  been  raised,  the  language 
of  the  assignment  agreement  clearly  indicates  that  the  assignee  is  assuming 
the  performance  of  the  covenants  and  conditions  of  the  lease  for  the 
remainder  of  the  term: 

And  the  Assignee  .  .  .  does  hereby  promise,  covenant,  and  agree 
to  and  with  the  said  Assignor  and  to  and  with  the  Lessor  above 
named,  that  Assignee  will,  effective  as  of  and  from  the  date  of 
the  execution  of  this  instrument  and  during  the  remainder  of 
the  term  of  the  Lease,  pay  the  rents  thereby  reserved  .  .  .  and 
will  also  faithfully  observe  and  perform  all  of  the  covenants  and 
conditions  contained  in  the  Lease. '^"^ 

The  second  argument  made  by  Meeks  regarding  the  validity  of  the 
assignment  involved  the  effect  of  a  right  of  reentry  (power  of  termination) 
clause  contained  in  the  assignment  agreement.  Meeks  argued  that  this 
clause  was  a  retention  by  the  tenant  of  a  reversion  in  the  leasehold 
making  the  transfer  a  sublease  and  not  an  assignment. '°^  The  court  noted 
that  there  is  a  split  of  authority  as  to  whether  a  right  of  reentry  is  a 
sufficient  reversionary  interest  to  make  an  otherwise  valid  assignment  a 
sublease. '°^  In  Indian  Refining  Co.  v.  Roberts, ^^^  the  court  held  that  a 


'°^Id.  at  1197. 

'°'M  at  1198-99. 

'"'^Id.  at  1199. 

•"Vof.  at  1195. 

"^Id.  at  1197. 

'°^/c/.  at  1199. 

'"^Id.  at  1200  (citing  Indian  Refining  Co.  v.  Roberts,  97  Ind.  App.  615,  181  N.E. 
283  (1932)).  The  majority  of  jurisdictions  do  not  consider  a  right  of  reentry  to  be  a 
sufficient  interest  to  make  an  otherwise  valid  assignment  a  sublease.  The  minority  view, 
the  Massachusetts  rule,  followed  in  some  states,  does  consider  a  right  of  reentry  the 
retention  of  a  reversionary  interest  by  the  tenant  turning  the  transfer  into  a  sublease. 
Cunningham,  supra  note  48,  §  6.66,  at  381. 

'°^97  Ind.  App.  615,  181  N.E.  283  (1932). 


320  INDIANA  LA  W  REVIEW  [Vol.  20:305 

right  of  reentry  for  the  nonpayment  of  rent  was  not  a  reservation  of 
a  reversion  but  was  instead  merely  a  chose  in  action. '^^  While  in  Roberts 
the  right  of  reentry  was  only  for  the  nonpayment  of  rent,  the  Shadeland 
court  held  that  the  rationale  was  still  applicable  even  though  in  the 
present  case,  the  conditions  giving  rise  to  the  right  of  reentry  included 
unauthorized  structural  modification,  an  unauthorized  sublease,  and  the 
lack  of  premises  insurance. ^°^  The  Shadeland  court  also  noted  that  in 
any  event,  the  right  of  reentry  was  intended  only  to  insure  the  repayment 
of  the  loan  from  Holiday  Inns,  and  thus,  it  ended  when  the  debt  was 
paid  and  the  assignment  was  recorded  on  September  6,  1978. ^'^  The 
breach  by  San  Antonio  did  not  occur  until  much  later  when  rent  was 
not  paid  after  March  1980.''^ 

The  last  issue  addressed  by  the  court  is  perhaps  the  most  interesting. 
The  trial  court  concluded  that  Shadeland  and  Holiday  Inns  owed  a  duty 
to  the  Meeks  to  use  reasonable  care  in  selecting  and  securing  an  assignee 
capable  of  performing  its  obhgations  for  the  remainder  of  the  lease 
term,  roughly  forty-five  years. ^'^  In  reversing  the  trial  court,  the  court 
of  appeals  found  no  duty  as  a  matter  of  law  to  use  reasonable  care  in 
selecting  an  assignee: 

[S]uch  duty  would  be  a  restriction  on  ahenation  of  land  and 
such  restrictions  are  not  favored  in  law.  How  and  to  whom  a 
leasehold  may  be  assigned  is  a  matter  for  contract  law  to  be 
decided  by  the  landlord  and  tenant  each  bargaining  in  his  own 
interest.  The  existence  of  a  duty  to  find  a  solvent  assignee  would 
unduly  inhibit  the  parties  from  fashioning  an  agreement  in  their 
own  best  interests.''^ 

The  court  could  find  nothing  in  the  language  of  the  lease  implying  a 
duty  in  the  selection  of  an  assignee.  The  lessee  was  given  the  "  'free 
right  to  assign  this  lease  without  the  consent  of  the  lessor.'  "''"^ 

Finally,  the  court  noted  that  the  nature  of  the  transaction  made  it 
hesitant  to  infer  any  duty  in  the  selection  of  the  assignee.''^  The  lease 


'°«M  at  631,  181  N.E.  at  289. 

'''^Shadeland,  489  N.E.2d  at  1200. 

"°/£/.  The  court  apparently  agreed  with  Shadeland's  assertion  that  the  right  of  reentry 
was  merely  security  for  the  repayment  of  the  loan  made  to  San  Antonio  to  finance  its 
venture.  Id.  at  1199. 

'"/£/.  at  1200. 

"Vt/.  at  1200-01  (citations  omitted).  There  is  also  authority  for  the  position  that  an 
assignee  does  not  have  any  duty  to  use  care  to  select  a  solvent  assignee  in  the  case  of 
a  reassignment.  A.D.  Julliard  &  Co.  v,  American  Woolen  Co.,  69  R.I.  215,  32  A. 2d  800 
(1943). 

'''Shadeland,  489  N.E. 2d  at  1201. 

'''Id. 


1987]  PROPERTY  LAW  321 

required  Shadeland  to  construct,  at  its  own  expense,  a  building  sufficient 
to  operate  a  motel  with  all  allied  services  and  facilities.  Only  after  this 
was  accomplished  could  the  tenant  assign  without  the  consent  of  the 
lessor. ^'^  This  suggests  the  lessor  was  looking  to  the  improvement  erected 
on  the  leased  premises  as  security  for  the  tenant's  future  performance 
of  the  lease. ''^  The  court  quoted  from  several  treatises  indicating  that 
it  is  not  uncommon  where  the  lease  requires  the  tenant  to  erect  a  building 
on  the  leased  premises  to  provide  that  upon  completion  of  the  structure, 
the  tenant  may  freely  assign  the  lease  with  no  further  personal  liability 
under  the  lease. '^^  The  court  also  quoted  from  decisions  in  other  juris- 
dictions reaching  the  same  conclusion  based  on  similar  factual  situa- 
tions.*'^ Thus,  because  no  duty  to  use  particular  care  in  the  selection 
of  an  assignee  was  expressed  in  the  lease  and  because  none  could  be 
inferred  from  the  nature  of  the  transaction,  the  decision  of  the  trial 
court  was  reversed  and  remanded  for  entry  of  summary  judgment  in 
favor  of  Shadeland  and  Holiday  Inns.'^° 

IV.  Recording  Statutes,  Notice,  and  Bona  Fide  Purchaser 

Without  a  recording  system,  the  priority  among  deeds,  mortgages, 
and  other  interests  in  property  is  determined  by  the  effective  date  of 
the  conveyance.'^'  The  owner,  having  once  conveyed  his  interest,  has 
nothing  left  to  convey  a  second  time.  Thus  the  second  purchaser  of  the 
same  interest,  even  if  he  has  paid  value  and  is  without  notice  of  the 
prior  conveyance,  takes  nothing. '^^  A  recording  system  changes  this  "first 
in  time,  first  in  priority"  rule  by  requiring  the  first  purchaser  to  record 
his  conveyance  or  run  the  risk  of  losing  it  to  a  subsequent  purchaser. '^^ 
The  vast  majority  of  recording  systems,  however,  give  priority  to  a 
subsequent  purchaser  only  if  he  qualifies  as  a  bona  fide  purchaser,  i.e. 
one  who  pays  value  and  who  acquires  the  interest  without  notice  of  the 
prior  conveyance. '2^*  In  addition,  about  half  the  states,  including  Indi- 


"^"Because  of  this  security  it  is  not  unreasonable  for  the  parties  to  place  no  duty 
on  Shadeland  to  choose  a  particular  assignee."  Id. 

"*The  court  quoted  from  1  M.  Friedman,  Friedman  on  Leases  §  7.1  (1983);  2  R. 
Powell,  The  Law  of  Real  Property  242  (1983). 

"'Alexander  v.  Theatre  Realty  Corp.,  253  Ky.  674,  70  S.W.2d  380  (1934);  Jenkins 
V.  John  Taylor  Dry  Goods,  352  Mo.  660,   179  S.W.2d  54  (1944). 

'^''Shadeland,  489  N.E.2d  at  1203. 

'^'J.  Cribbet,  supra  note  78,  at  279. 

^'Ud. 

'"Cunningham,  supra  note  48,  §  11.9,  at  775. 

'^V<i.  §  11.10,  at  783.  Only  under  a  pure  race  statute  could  a  subsequent  purchaser 
with  actual  or  constructive  notice  take  over  a  prior  unrecorded  interest.  Id.  §  11.9,  at 
776. 


322  INDIANA  LAW  REVIEW  [Vol.  20:305 

ana,'^^  also  require  that  the  subsequent  bona  fide  purchaser  record  his 
conveyance  first,  before  the  prior  conveyance  is  recorded. '^^ 

Notice  is  an  essential  element  of  the  recording  system.  When  a 
conveyance  is  properly  recorded,  it  is  said  to  give  "constructive  notice" 
to  the  world  of  the  conveyance. '^^  Thus,  a  person  will  be  charged  with 
notice  of  the  conveyance  because  had  he  checked  the  public  records,  he 
would  have  discovered  it.  Thus  if  the  prior  conveyance  has  been  properly 
recorded,  the  subsequent  purchaser  cannot  qualify  as  a  bona  fide  pur- 
chaser. The  converse,  however,  is  not  true.  The  mere  fact  that  a  prior 
conveyance  has  not  been  properly  recorded  does  not  necessarily  mean 
the  subsequent  purchaser  is  without  notice.  If  the  subsequent  purchaser 
has  actual  notice  of  the  prior  unrecorded  conveyance,  he  will  not  be 
protected  by  the  recording  system  in  most  states. ^^^  Actual  notice  can 
come  from  a  variety  of  sources. '^^  An  interesting  situation  in  which  an 
arguably  improper  recording  of  a  memorandum  of  an  installment  land 
contract  gave  actual  rather  than  constructive  notice  to  the  subsequent 
purchaser  of  the  prior  interest  was  presented  in  Altman  v.  Circle  City 
Glass  Corp.'''' 

In  Altman,  Bert  and  Elsie  Brown  executed  a  conditional  sales  contract 
in  1968,  conveying  the  property  in  question  to  the  Circle  City  Glass 
Corp.  (Circle  City).  Circle  City  subsequently  paid  the  full  consideration 
pursuant  to  the  contract,  but  a  deed  was  never  received  from  the 
Browns. '^^  Elsie  Brown  died  in  1972  and  her  son,  Bert,  acquired  title 
to  the  property. ^^^  Bert  died  in   1973,   and  his  widow  and  sole  heir, 


'^^Indiana  has  a  typical  "race-notice"  statute: 

Every  conveyance  or  mortgage  of  lands  or  of  any  interest  therein,  and  every 
lease  for  more  than  three  (3)  years  shall  be  recorded  in  the  recorder's  office 
of  the  county  where  such  lands  shall  be  situated;  and  every  conveyance,  mortgage 
or  lease  shall  take  priority  according  to  the  time  of  the  filing  thereof,  and  such 
conveyance  mortgage  or  lease  shall  be  fraudulent  and  void  as  against  any 
subsequent  purchaser,  lessee  or  mortgagee  in  good  faith  and  for  a  valuable 
consideration,  having  his  deed,  mortgage  or  lease  first  recorded. 

IND.  Code  §  32-1-2-16  (1982). 

'^^CuNNiNGHAM,  supra  uotc  48,   §   11.9,  at  775-76.  For  a  discussion  of  the  various 

types  of  recording  statutes,  see  Johnson,  Purpose  and  Scope  of  Recording  Acts,  47  Iowa 

L.  Rev.  231  (1962). 

'^^J.  Cribbet,  supra  note  78,  at  282. 

'^^See  supra  note  124. 

'^^For  a  discussion  of  the  sources  of  actual  notice,  see  Cunningham,  supra  note  48, 

§  11.10,  at  787. 

'30484  N.E.2d  1296  (Ind.  Ct.  App.   1985). 

'^'/c^.  at  1297.  It  appears  from  the  wording  the  consideration  was  paid  over  a  period 

of  time,  but  the  date  on  which  the  full  consideration  was  eventually  paid  is  not  stated, 
'"/c?.   The  facts   indicate  that   Bert  and   his   mother  executed  the  conditional   sales 

contract  as  sellers,  but  the  exact  nature  of  Bert's  interest  in  the  property  at  the  time  the 

contract  was  executed  is  not  made  clear.   Because  the  opinion  later  indicates  that  Bert 


1987]  PROPERTY  LAW  323 

Gertrude,  inherited  the  property. '^^  On  June  21,  1976,  Circle  City  recorded 
a  memorandum  of  the  conditional  sales  contract.'^'*  On  January  26,  1983, 
Gertrude  Brown  conveyed  the  property  to  Daniel  B.  Altman  by  a  warranty 
deed.  Several  months  prior  to  the  conveyance,  Altman  had  received  a 
commitment  for  title  insurance  from  Lawyers  Title  Insurance  Corp. 
(Lawyers  Title).  The  written  commitment  informed  Altman  that  before 
title  insurance  could  be  obtained,  "Altman  would  first  have  to  obtain 
a  quitclaim  deed  from  Circle  City  'to  terminate  its  interest  in  a  Con- 
ditional Sales  contract,  a  Memorandum  thereof  having  been  recorded 
on  June  21,  1976.'  "'^^  After  purchasing  the  property,  Altman  brought 
suit  to  quiet  title  against  Circle  City,  which  counterclaimed  to  quiet  title 
in  its  name.'^^  The  trial  court  granted  summary  judgment  in  favor  of 
Circle  City,  holding  that  Altman  had  constructive  notice  of  Circle  City's 
interest  by  reason  of  the  recorded  memorandum  of  the  conditional  sales 
contract  and  actual  notice  of  its  interest  from  the  written  commitment 
for  title  insurance. '^^ 

Altman  raised  two  issues  on  appeal.  The  first  issue  was  whether  the 
recording  of  the  memorandum  of  the  conditional  sales  contract  gave 
Altman  constructive  notice  of  Circle  City's  interest  in  the  property. '^^ 
The  court  of  appeals'  conclusion  that  Altman  had  actual  notice  of  Circle 
City's  interest  from  the  commitment  for  title  insurance  made  it  unnec- 
essary for  the  court  of  appeals  to  address  this  issue. '^^  Nevertheless 
several  observations  should  be  made.  Altman  did  not  appear  to  be 
arguing  that  a  conditional  sales  contract  could  not  be  recorded. '^^  Instead, 


"acquired  title"  to  the  property  at  his  mother's  death,  it  seems  hkely  that  he  and  his 
mother  held  title  as  joint  tenants  with  right  of  survivorship, 

'"M  It  is  not  clear  if  Circle  City  had  completed  the  payments  under  the  contract 
before  Elsie  and  Bert's  death.  It  is  irrelevant,  however,  since  the  heirs  of  a  record  owner 
have  the  power  to  transfer  title  to  a  bona  fide  purchaser  whether  or  not  the  record  owner 
had  any  vahd  interest  in  the  land  at  the  date  of  his  death.  See  Earle  v.  Fisk,  103  Mass, 
491  (1870), 

''^Altman,  484  N,E.2d  at  1297.  It  is  not  clear  from  the  facts  why  Circle  City  did 
not  record  the  conditional  sales  contract  itself  rather  than  a  memorandum.  One  can  only 
speculate,  but  one  possibility  is  that  the  instrument  might  not  have  been  entitled  to 
recordation  because  it  lacked  one  of  the  formalities.  It  is  a  common  practice  when  executing 
long  term  conditional  sales  contracts  to  leave  out  one  or  more  of  the  requirements  necessary 
to  record  the  document.  Thus,  in  the  event  of  default  by  the  purchaser,  the  seller  will 
have  clear  record  title  and  will  not  have  a  recorded  contract  clouding  the  title,  Cunningham, 
supra  note  48,  §  11,9,  at  782.  The  requirements  for  an  instrument  to  be  entitled  to  be 
received  and  recorded  are  contained  in  Ind.  Code  §  36-2-11-16  (1982), 

'''Altman,  484  N.E.2d  at  1297, 

'''Id. 

'''Id. 

"'Id. 

"'Id  at  1300, 

"'°lt  would  appear  that  a  conditional  contract  can  be  recorded  under  the  Indiana 


324  INDIANA  LAW  REVIEW  [Vol.  20:305 

he  appeared  to  be  arguing  that  there  is  no  statute  authorizing  the  recording 
of  a  "memorandum"  of  the  conditional  sales  contract.'^'  The  fact  that 
the  legislature  passed  a  statute  authorizing  the  recording  of  a  memo- 
randum of  a  lease'"^^  would  appear  to  support  Altman's  position.  Until 
this  question  is  resolved  by  case  law  or  until  the  legislature  enacts  specific 
legislation,  it  would  be  unwise  to  record  a  memorandum  of  a  conveyance 
(other  than  a  lease)  instead  of  the  instrument  itself.  Additionally,  Altman 
may  have  been  arguing  that  even  if  a  memorandum  could  be  recorded, 
this  memorandum  did  not  comply  with  the  statutory  requirements  for 
the  recording  because  the  memorandum  was  signed  only  by  Circle  City's 
representative.'"*^ 

The  second  issue  raised  by  Altman  related  to  the  trial  court's  finding 
that  he  had  actual  notice  of  Circle  City's  interest. ''^'*  Altman  argued  that 
because  the  memorandum  is  not  entitled  to  be  recorded,  it  does  not 
impart  either  actual  or  constructive  notice  of  the  interest. '"^^  Further, 
Altman  argued  that  because  he  did  not  actually  see  the  memorandum 
or  the  conditional  sales  contract  himself,  he  did  not  have  actual  notice. '"^^ 

The  court  of  appeals  began  with  the  observation  that  while  an 
instrument  that  is  not  entitled  to  be  recorded,  or  is  improperly  recorded, 
or  is  recorded  outside  the  chain  of  title  does  not  operate  as  constructive 
notice,  it  may  nevertheless  bind  persons  having  actual  notice  of  its 
existence. '"^^  While  it  was  true  that  Altman  did  not  actually  see  the 
memorandum  in  the  public  records,  the  information  he  received  from 
Lawyers  Title  placed  a  duty  on  him  to  make  a  reasonable  inquiry.  Had 
he  inquired  with  reasonable  diligence,  he  would  have  discovered  the 
nature  of  Circle  City's  interest  in  the  property.'"*^  The  court  of  appeals 
noted  the  general  principle  of  law  that  where  a  person  becomes  aware 
of  facts  that  are  sufficient  to  place  a  reasonable  and  prudent  person 
under  a  duty  to  inquire,  the  person  will  be  charged  with  the  knowledge 


recording  system.  Case  v.  Bumstead,  24  Ind.  429  (1865);  Ind.  Code  Ann.  §  32-1-2-32 
(West  Supp.   1986). 

'''Altman,  484  N.E.2d  at  1297. 

'"^Indiana  Code  section  36-2-11-20  provides  for  the  recording  of  a  memorandum  of 
lease. 

"•The  court  noted  that  the  memorandum  was  signed  only  by  Circle  City's  repre- 
sentative. Altman,  484  N.E.2d  at  1297.  Assuming  arguendo  that  a  memorandum  of  the 
contract  could  be  recorded,  it  does  not  appear  that  the  memorandum  meets  the  other 
requirements  for  recordation.  However,  because  it  was  accepted  for  recordation  by  the 
recorder's  office  and  was  in  fact  recorded,  there  may  be  a  conclusive  presumption  that 
it  complied  with  the  requirements.  See  Ind.  Code  Ann.  §  36-2-1  l-16(e)  (West  Supp.  1986). 

'''Altman,  484  N.E.2d  at  1297. 

"'Id. 

"'Id.  at  1299. 

"'Id.  Sit  1298.  The  court  of  appeals  cited  Rogers  v.  City  of  Evansville,  437  N.E.2d 
1019  (Ind.  Ct.  App.   1982). 

"'Altman,  484  N.E.2d  at  1299. 


1987]  PROPERTY  LAW  325 

that  such  inquiry  would  impart  if  reasonably  prosecuted."*^  Some  courts 
refer  to  inquiry  notice  as  constructive  notice; '^°  however,  the  Indiana 
Supreme  Court  defined  inquiry  as  implied  actual  notice  in  Mishawaka, 
St.  Joseph  Loan  &  Trust  Co.  v.  New. 

[A]ctual  notice  has  been  divided  into  two  classes,  (1)  express 
and  (2)  implied,  which  is  inferred  from  the  fact  that  the  person 
charged  had  means  of  knowledge  which  he  did  not  use.  "What- 
ever fairly  puts  a  person  on  inquiry  is  sufficient  notice,  where 
the  means  of  knowledge  are  at  hand;  and  if  he  omits  to  inquire, 
he  is  then  chargeable  with  all  the  facts  which,  by  a  proper 
inquiry,  he  might  have  ascertained."'^' 

The  A  It  man  court  observed  that  *'[t]he  Mishawaka  decision  stands 
for  the  equitable  principle  that  the  means  of  knowledge  combined  with 
the  duty  to  utilize  that  means  equate  with  knowledge  itself. '"^^  The  court 
concluded  that  the  information  which  Altman  had  received  imparted  a 
duty  to  inquire,  which  if  pursued  with  reasonable  diligence  would  have 
led  to  the  discovery  of  Circle  City's  interest  in  the  property.  Thus  Altman 
had  implied  actual  knowledge  of  the  prior  conveyance  and  could  not 
be  considered  a  subsequent  bona  fide  purchaser.'" 

It  may  at  first  appear  strange  that  the  discovery  of  an  instrument 
not  entitled  to  be  recorded  in  the  public  records  can  give  actual  or 
inquiry  notice  to  the  person  making  the  discovery,  while  it  would  not 
give  constructive  notice  to  a  person  who  failed  to  search  the  public 
records.  In  theory,  such  a  rule  appears  to  punish  the  party  who  conducts 
a  dihgent  search  of  the  public  records  and  discovers  an  instrument  not 
entitled  to  be  recorded.  At  the  same  time,  this  rule  appears  to  reward 
the  lazy  individual  who  did  not  bother  to  search  the  records  and  therefore 
is  not  charged  with  actual  or  inquiry  notice  of  the  interest.  In  practice, 
however,  it  would  be  extremely  foolish  not  to  search  the  public  records 
because  of  the  extremely  remote  possibility  of  discovering  an  instrument 
not  entitled  to  be  recorded  and  thereby  run  the  risk  of  not  discovering 
numerous  recorded  interests. 

V.  The  Rule  Against  Perpetuities:  A  Potpourri 

The  rule  against  perpetuities  is  without  doubt  one  of  the  most  complex 
and  misunderstood  concepts  in  the  whole  of  law.'^^  In  Indiana,  the 
common  law  rule  has  been  codified  in  Indiana  Code  section  32-1-4-1: 


'''Id.  at  1298-99. 

'^"Cunningham,  supra  note  48,  §   11.10,  at  787. 

■^'209  Ind.  433,  442-43,   196  N.E.  85,  89  (1935). 

'''Altman,  484  N.E. 2d  at  1298. 

'"Id.  at  1300. 

"''The  rule  against  perpetuities  has  been  described  by  the  late  Professor  W.  Barton 


326  INDIANA  LAW  REVIEW  [Vol.  20:305 

An  interest  in  property  shall  not  be  valid  unless  it  must  vest,, 
if  at  all,  not  later  then  twenty-one  (21)  years  after  a  life  or  lives 
in  being  at  the  creation  of  the  interest.  It  is  the  intention  by 
the  adoption  of  this  chapter  to  make  effective  in  Indiana  what 
is  generally  known  as  the  common  law  rule  against  perpetuities 

155 

In  dealing  with  the  rule  against  perpetuities  it  is  important  to  keep 
in  mind  that  it  is  a  rule  against  the  remoteness  of  vesting  of  interests — 
it  invaHdates  interests  that  vest  too  remotely.  ^^^  The  rule  has  nothing  to 
do  with  how  long  an  interest  may  last  or  when  an  interest  becomes 
possessory. '^^  An  interest  may  become  vested  long  before  it  becomes 
possessory, '^^  Likewise,  the  rule  has  nothing  to  do  with  the  duration  of 
trusts. '^9 

The  term  'Vested  interest"  refers  to  an  interest  that  does  not  contain 
a  condition  precedent  to  its  becoming  possessory  at  the  natural  termi- 
nation of  all  preceding  estates. '^°  A  condition  precedent  is  a  condition 
that  must  occur  or  happen  before  a  future  interest  can  become  vested. ^^^ 
Where  there  is  a  condition  precedent,  the  future  interest  is  contingent 


Leach  as  "a  technicality-ridden  legal  nightmare  ....  a  dangerous  instrumentahty  in  the 
hands  of  most  members  of  the  bar,"  Leach,  Perpetuities  Legislation,  Massachusetts  Style, 
67  Harv.  L.  Rev.  1349  (1954).  The  Supreme  Court  of  California  went  so  far  as  to  hold 
that  an  attorney  who  drafted  an  instrument  that  violated  the  rule  was  not  guilty  of 
malpractice  because  he  had  not  "failed  to  use  such  skill,  prudence  and  diligence  as  lawyers 
of  ordinary  skill  and  capacity  commonly  exercise."  Lucas  v.  Hamm,  56  Cal.  2d  583,  592, 
15  Cal.  Rptr.  821,  826,  364  P.2d  685,  690  (1961),  cert,  denied,  368  U.S.  987  (1962).  It 
is  unclear  whether  these  and  similar  remarks  are  intended  as  an  indictment  of  the  bar  or 
the  rule. 

'•^John  Chipman  Gray's  classic  definition  of  the  common  law  rule  against  perpetuities, 
adopted  by  the  courts  in  both  the  United  States  and  England,  states:  "No  interest  is 
good  unless  it  must  vest,  if  at  all,  not  later  than  twenty-one  years  after  some  life  in  being 
at  the  creation  of  the  interest."  J.  Gray,  The  Rule  Against  Perpetuities  §  201  (4th 
ed.   1942). 

'^^Leach,  Perpetuities  in  a  Nutshell,  51  Harv.  L.  Rev.  638,  639-40  (1938). 

'"/fi?.;  T.  Bergin  &  P.  Haskell,  Preface  to  Estates  in  Land  and  Future  Interests, 
180  (2nd  ed.   1984). 

"«L.  SiMES  &  A.  Smith,  The  Law  of  Future  Interest  §  1233,  at  137  (2d  ed.  1956). 
Professor  Leach  gives  as  an  example  a  device  "[T]o  A  for  life,  remainder  to  A's  children 
for  their  lives,  remainder  to  B."  B's  interest  is  valid  because  it  is  vested.  Yet  it  may  not 
become  possessory  until  after  the  death  of  a  child  of  A  yet  unborn  who  might  live  more 
than  twenty-one  years  after  the  death  of  the  measuring  lives  in  being  at  the  creation  of 
B's  interest.  Leach,  supra  note  156,  at  647. 

'^^As  long  as  the  equitable  interests  are  vested  in  the  beneficiaries,  the  duration  of 
the  trust  can  exceed  the  period  in  the  rule  against  perpetuities.  T.  Bergin  &  P.  Haskell, 
supra  note  157,  at  184,  224-25. 

'^L.  SiMEs,  Handbook  of  the  Law  of  Future  Interests  §  90,  at  186  (2d  ed.  1966). 

'^'T.  Bergin  &  P.  Haskell,  supra  note  157,  at  72-73. 


1987]  PROPERTY  LAW  327 

and  is  subject  to  the  rule  against  perpetuities.'^^  One  of  the  more  common 
types  of  conditions  precedent  is  the  age  contingency.  Often  a  donative 
transfer  will  state  that  the  beneficiary  is  not  to  receive  the  property  until 
he  or  she  attains  a  named  age.  Traditionally  the  courts  have  treated  the 
age  contingency  as  a  condition  of  survivorship,  i.e.  that  the  beneficiary 
must  survive  to  the  designated  age  to  take  the  property.'"  For  example, 
if  a  testator  devised  property  "to  A  if  A  should  attain  the  age  of  twenty- 
five  (25),"  a  court  would  most  likely  view  the  age  contingency  as  a 
condition  precedent  requiring  A  to  reach  the  age  twenty-five  to  take  the 
property.  If  A  should  die  before  reaching  twenty-five,  the  devise  to  A 
would  fail.'^"*  In  this  example,  the  age  contingency  would  not  cause  a 
violation  of  the  rule  against  perpetuities  because  ^  is  a  life  in  being. 
A  will  either  reach  the  designated  age  or  fail  to  do  so  within  his  own 
Hfetime.'^^  However,  where  the  gift  is  to  a  class  of  beneficiaries  and 
there  is  a  possibility  of  additional  members  being  added  to  the  class 
after  the  creation  of  the  interest,  an  age  contingency  in  excess  of  twenty- 
one  years  can  create  serious  problems. '^^ 

The  concept  of  "Hves  in  being"  can  also  create  major  problems  for 
the  drafters  of  future  interests  and  those  attempting  to  ascertain  their 
vaUdity.  The  term  refers  to  a  person  or  persons  alive  at  the  creation 
of  the  interest,  which  the  court  can  use  as  measuring  lives  to  determine 
whether  the  interest  vested  within  the  rule.'^^  The  measuring  lives  are 
usually  named  in  the  instrument  creating  the  interest  and  these  persons 
are  often  donees  under  the  instrument,  but  neither  of  these  conditions 
is  required. '^^  For  example,  a  devise  by  the  testator  "to  my  grandchildren 


'"L.  SiMES  &  A.  Smith,  supra  note  158,  §  1235,  at  139. 

'"L.  SiMES,  supra  note  160,  §  93,  at  193.  Words  such  as  "if"  or  "provided"  the 
beneficiary  reaches  a  certain  age  are  generally  held  to  create  a  condition  precedent.  Id. 
However,  words  such  as  "to  be  paid  at"  a  certain  age  or  "to  be  paid  when"  the  beneficiary 
reaches  a  certain  age  are  viewed  by  the  courts  as  merely  postponing  the  time  of  enjoyment 
and  not  as  creating  a  condition  precedent  to  vesting.  Id.;  T.  Bergin  &  P.  Haskell,  supra 
note  157,  at  132-34.  If  the  wording  does  not  create  a  condition  precedent  but  only  delays 
the  time  of  enjoyment  (possession),  and  the  beneficiary  dies  before  the  time  for  distribution, 
the  property  passes  to  his  estate.  Id.  at  127;  L.  Simes  &  A.  Smith,  supra  note  158,  § 
586,  at  32. 

'*^T.  Bergin  &  P.  Haskell,  supra  note  157,  at  133;  L.  Simes  &  A.  Smith,  supra 
note  158,  §  575,  at  8. 

'*^L.  Simes,  supra  note  160,  §  127,  at  268;  L.  Waggoner,  Future  Interests  in  a 
Nutshell  §  12.7,  at  181  (1981). 

'^5ee  infra  notes  176-81  and  accompanying  text. 

'*'L.  Simes,  supra  note  160,  §  127,  at  265-67.  The  lives  must  be  human  lives  and 
not  lower  animals  or  a  corporation.  Id.  §  127,  at  265.  These  measuring  lives  must  not 
be  so  numerous  as  to  make  it  unreasonably  difficult  for  the  court  to  determine  the  last 
survivor  of  the  group.  T.  Bergin  &  P.  Haskell,  supra  note  157,  at  183-84. 

'^^T.  Bergin  &  P.  Haskell,  supra  note  157,  at  182-83. 


328  INDIANA  LAW  REVIEW  [Vol.  20:305 

who  reach  twenty-one  (21)"  is  vahd  because  the  testator's  children  are 
implied  as  lives  in  being,  even  though  they  were  not  named  in  the 
instrument  nor  given  any  interest  under  it.'^^ 

A  gift  to  a  class '^^  such  as  children  or  grandchildren  can  create 
special  problems  both  with  regard  to  the  time  of  vesting  and  the  de- 
termination of  the  lives  in  being.  Unlike  a  gift  to  an  individual,  the 
membership  in  a  class  can  increase  or  decrease  after  the  interest  has 
been  created  because  of  new  births  or  deaths.'^'  Where  the  class  is  closed, 
i.e.  where  no  additional  members  can  be  added  at  the  time  the  interest 
is  created,  the  members  of  the  class  can  be  used  as  the  measuring  lives. '"^^ 
For  example,  if  the  testator  devised  property  "to  my  children  who  shall 
attain  the  age  of  twenty-five  (25),"  there  would  be  no  violation  of  the 
rule  against  perpetuities.  The  age  contingency  would  create  a  condition 
precedent  to  vesting,  but  the  interest  of  the  testator's  children  will  vest, 
if  at  all,  within  the  lives  of  the  children, '^^  who  were  all  alive  at  the 
testator's  death'^^ — the  time  when  the  interest  was  created. '^^  Where  the 
class  is  not  closed  at  the  time  the  interest  is  created,  special  problems 
are  created.  For  example,  if  the  testator  devised  property  "to  my  children 
for  life,  remainder  to  my  grandchildren  who  attain  the  age  of  twenty- 
five  (25)"  and  the  testator  left  children  surviving  him,  the  gift  to  the 
grandchildren  violates  the  rule  against  perpetuities.  It  would  be  possible 
for  a  surviving  child  of  the  testator  to  have  a  child  (testator's  grandchild) 
after  the  testator's  death  and  for  this  grandchild's  interest  to  vest  more 
than  twenty-one  years  after  the  death  of  all  the  measuring  lives  in  being 
at  the  time  the  interest  was  created.  The  testator's  children  and  all  the 
grandchildren  alive  at  the  testator's  death  could  all  die  before  the  af- 
terborn  grandchild  reached  the  age  of  four,  and  because  the  interest 
must  vest  within  twenty-one  years  of  the  last  death  of  a  measuring  life 


'*'L.  SiMES,  supra  note  160,  §  127,  at  265-66;  L.  Waggoner,  supra  note  165,  §  12.7, 
at  180. 

'™A  class  gift  is  a  gift  to  a  group  of  persons  having  some  common  characteristic. 
The  share  of  each  person  in  the  class  will  be  determined  by  the  number  of  members.  L. 
SiMES,  supra  note  160,  §  101,  at  204-05. 

'''Id. 

"^L.  SiMES  &  A.  Smith,  supra  note  158,  §  1226,  at  115;  L.  Waggoner,  supra  note 
165,  §  12.7,  at  179-80. 

'^^T.  Bergin  &  P.  Haskell,  supra  note  157,  at  191,  L.  Waggoner,  supra  note  165, 
§  12.7,  at  181. 

'^"It  is  possible  that  if  the  testator's  last  surviving  child  is  a  male,  a  grandchild  en 
ventre  sa  mere  could  be  born  after  the  last  child's  death  and  thus  reach  twenty-one  more 
than  twenty-one  years  after  the  death  of  lives  in  being.  However,  the  rule  against  perpetuities 
includes  periods  of  gestation  within  the  period  of  the  rule.  T.  Bergin  &  P.  Haskell, 
supra  note  157,  at  187;  L.  Simes,  supra  note  160,  §  12.7,  at  266;  L.  Waggoner,  supra 
note  165,  §   12.7,  at  178-79. 

'"An  interest  created  by  will  becomes  effective  at  the  testator's  death.  L.  Simes,  supra 
note  160,  §  12.7,  at  267;  L.  Waggoner,  supra  note  165,  §  12.5,  at  174. 


1987]  PROPERTY  LA  W  329 

in  being,  the  twenty-five  year  limitation  on  the  vesting  of  the  afterborn 
grandchild's  interest  could  be  outside  the  twenty-one  year  limit.  For 
example,  under  the  above  provision,  suppose  the  testator  had  two  chil- 
dren, A  and  B,  and  grandchild  C,  who  were  ahve  upon  the  testator's 
death.  Suppose  further  that  A  had  a  child,  £),  after  the  testator  had 
died.  Then  upon  Z)'s  first  birthday.  A,  B,  and  C  all  die  suddenly.  Thus, 
D's  interest  must  vest  within  twenty-one  years  of  ^'s,  B's,  and  Cs 
deaths  or  be  void  under  the  rule  against  perpetuities.  However,  according 
to  the  devising  language,  Z)'s  interest  may  not  vest  until  he  attains  the 
age  of  twenty-five,  which  is  twenty-four  years  from  the  date  of  the 
measuring  lives  in  being's  {A,  B,  8l  C)  deaths.  Therefore,  this  provision 
is  void  under  the  rule.'^^  The  fact  that  this  is  unlikely  to  occur  does 
not  prevent  the  rule  from  operating.  The  rule  against  perpetuities  is 
based  on  possibilities  and  not  probabilities.'^^ 

In  addition,  class  gifts  under  the  rule  against  perpetuities  are  treated 
as  a  unit,  and  under  the  "all  or  nothing"  rule,  unless  the  interest  of 
each  and  every  member  of  the  class  vests  within  the  rule,  the  gift  to 
the  entire  class  fails. '^^  Thus  the  gift  to  all  the  grandchildren  will  fail 
even  though  the  interests  of  the  grandchildren  alive  at  the  testator's 
death  will  vest,  if  at  all,  within  their  own  hfetimes,  and  even  though 
some  of  the  grandchildren  are  already  twenty-five  years  old  at  the 
testator's  death. '^^  It  should  be  noted  that  if  there  had  been  no  age 
contingency  in  the  example  but  simply  a  remainder  to  the  testator's 
grandchildren,'^^  or  if  the  age  contingency  had  been  twenty-one  instead 
of  twenty-five,'^'  the  interests  of  the  grandchildren  would  not  have 
violated  the  rule  against  perpetuities. 

In  Merrill  v.  Wimmer,^^^  the  Supreme  Court  of  Indiana  found  the 
provisions  for  the  distribution  of  the  corpus  of  a  testamentary  trust 
violated  the  rule  against  perpetuities,  and  as  a  result,  the  testator  died 
intestate.  The  Merrill  decision  raises  a  number  of  interesting  issues:  (1) 
why  did  the  interests  in  the  testamentary  trust  violate  the  rule  against 


"^L.  Waggoner,  supra  note  165,  §  12.7,  at  186  example  12-8;  Waggoner,  Perpetuity 
Reform,  81  Mich.  L.  Rev.  1718,   1746  (1983)  [hereinafter  Perpetuity  Reform]. 

'"L.  SiMES,  supra  note  160,  §  133,  at  285-89. 

''^Id.  §  134,  at  289-92. 

"^L.  SiMES  &  A.  Smith,  supra  note  158,  §  1265,  at  197-98;  L.  Waggoner,  supra 
note  165,  §  12.7,  at  186  example  12-8. 

'*°With  no  age  contingency,  the  interest  will  vest  in  the  class  of  grandchildren  when 
all  of  them  are  born,  which  will  occur  within  the  hfetime  of  the  testator's  children,  who 
are  the  lives  in  being.  Leach,  supra  note  156,  at  641. 

'*'L.  SiMES,  supra  note  160,  §  127,  at  265.  Because  the  children  of  the  testator  are 
the  measuring  lives,  all  the  grandchildren  will  reach  twenty-one  no  later  than  twenty-one 
years  after  the  death  of  the  testator's  last  surviving  child.  L.  Waggoner,  supra  note  165, 
§  12.7,  at  180. 

'«H81  N.E.2d  1294  (Ind.   1985). 


330  INDIANA  LAW  REVIEW  [Vol.  20:305 

perpetuities;  (2)  what  could  the  drafter  have  done  to  avoid  a  rule  violation; 
and  (3)  is  there  a  need  for  legislative  reform  to  mitigate  the  harshness 
and  inequities  resulting  from  a  violation  of  the  rule. 

In  Merrill,  the  will  of  Newell  M.  Merrill  left  a  life  estate  to  his 
wife  and  the  residue  of  the  estate  in  trust.  The  Hfe  estate  to  Merrill's 
wife  became  irrelevant  when  his  wife  predeceased  him.'^^  The  income 
from  the  trust  was  left  to  the  Merrill's  three  children,  Judith,  Dennis, 
and  Walter,  and  to  the  wife  of  any  son  who  might  die  before  the 
termination  of  the  trust. '^"^  The  distribution  of  the  corpus  of  the  trust 
was  provided  for  in  Item  3(E)  of  the  will: 

That  when  my  youngest  grandchild  reaches  the  age  of  twenty-five 
(25)  years,  said  Trust  shall  terminate  as  to  two-thirds  (2/3)  of 
the  corpus  of  said  Trust,  and  that  said  two-thirds  (2/3),  to- 
gether with  the  accumulated  income  to  be  credited  to  said 
two-thirds  (2/3)  interest,  shall  be  divided  as  follows,  to  wit: 
One-Third  (1/3)  shall  be  divided  one-half  (1/2)  to  my  daughter, 
Judith  I.  Yarling,  and  one-half  (1/2)  to  her  children,  share  and 
share  ahke;  One-Third  (1/3)  shall  be  divided  one-half  (1/2)  to 
my  son,  Dennis  A.  Merrill,  and  one-half  (1/2)  to  his  children, 
share  and  share  ahke;  One-Third  (1/3)  of  the  corpus  of  said 
Trust,  together  with  any  accumulated  income,  to  be  credited  to 
said  one-third  (1/3)  interest,  shall  be  continued  in  Trust  for  my 
son,  Walter  O.  Merrill,  and  he  shall  have  the  income  from  this 
Trust  for  and  during  his  natural  life  and  upon  his  death,  if  he 
has  bodily  issue,  then  one-half  (1/2)  of  his  one-third  (1/3),  in 
Trust,  shall  go  to  his  bodily  issue  and  the  other  one-half  (1/2) 
of  the  one-third  (1/3),  in  Trust,  or  all  of  said  one-third  (1/3), 
in  Trust,  in  the  event  he  has  no  bodily  issue,  shall  go  to  my 
grandchildren,  living  at  the  time  of  the  termination  of  said  Trust, 
share  and  share  aUke.'^^ 

The  trial  court,  adopting  the  findings  of  the  probate  commissioner, 
held  that  the  trust  provisions  distributing  two-thirds  of  the  corpus  to 
Judith,  Dennis,  and  their  children  violated  the  rule  against  perpetuities 
and  awarded  Judith  and  Dennis  each  one-third  of  the  corpus  outright. '^^ 
The  trial  court  also  upheld  the  entire  provision  regarding  the  one-third 


'"/fi?.  at  1297.  The  entire  will  is  reproduced  in  the  opinion.  Id.  at  1296-97. 

'^■'/g?.  at  1296.  The  court  does  not  appear  to  question  the  validity  of  the  income 
provisions  of  the  trust.  However,  the  court  finds  the  entire  trust  void,  apparently  under 
the  doctrine  of  "infectious  invalidity."  Id.  at  1300.  See  infra  note  190.  The  income 
provisions  may  create  an  accumulations  problem,  but  the  issue  was  not  addressed  by  the 
court  and  will  not  be  discussed  in  this  survey. 

'''Merrill,  481  N.E.2d  at  1297. 


1987]  PROPERTY  LAW  331 

share  of  the  corpus  relating  to  Walter.'^''  The  court  of  appeals  agreed 
with  the  trial  court  that  the  provisions  for  the  distribution  of  the  two- 
thirds  corpus  violated  the  rule  against  perpetuities,  but  the  court  of 
appeals  was  critical  of  the  trial  court's  decision  to  distribute  the  two- 
thirds  interest  directly  to  Judith  and  Dennis,  thereby  extinguishing  the 
interests  of  their  children  in  the  trust. '^^  The  court  of  appeals  also  found 
the  trial  court  had  erred  in  upholding  the  provisions  of  the  trust  regarding 
Walter. '^^  While  the  court  of  appeals  agreed  that  the  provision  regarding 
Walter  did  not  violate  the  rule  against  perpetuities,  the  court  of  appeals 
concluded  that  the  provision  could  not  stand  alone  because  it  was  an 
integral  part  of  an  interrelated  testamentary  distributional  scheme. '^° 
Instead  of  declaring  the  entire  trust  void,  however,  the  court  of  appeals 
saved  the  trust  by  applying  "the  equitable  doctrine  of  approximation. "•'*' 
In  order  to  avoid  the  harshness  of  the  rule  against  perpetuities  and  to 
give  effect  to  the  testator's  intent,  the  court  of  appeals  held  the  word 
"grandchild"  appearing  in  the  first  line  of  Item  3(E)  of  Newell's  will 
should  be  construed  to  mean  grandchild  ahve  at  the  testator's  death. ^^^ 
Under  this  construction,  the  provisions  in  Item  3(E)  of  the  will  would 
not  violate  the  rule  against  perpetuities.  ^^^  On  transfer,  the  Indiana 
Supreme  Court  was  highly  critical  of  the  court  of  appeals'  attempt  to 
rewrite  the  will  under  the  guise  of  merely  construing  the  will.  Resort 
to  rules  of  construction  to  ascertain  the  testator's  intent  can  be  made 
only  in  cases  where  there  is  an  actual  or  latent  ambiguity,  and  here  the 
supreme  court  found  "there  is  no  ambiguity  whatsoever  in  the  will,  with 
regard  to  either  the  identity  of  the  beneficiaries  or  the  time  of  termination 
of  the  trust. "'^^  While  the  court  expressed  remorse  over  the  fact  that 

'''Id. 

^''Merrill,  453  N.E.2d  356,  360  (Ind.  Ct.  App.  1983),  vacated,  481  N.E.2d  1294  (Ind. 
1985). 

''^Merrill,  453  N.E.2d  at  360.  The  rule  against  perpetuities  destroys  only  those  interests 
in  the  instrument  that  violate  the  rule.  The  other  interests  in  the  instrument  take  effect 
as  if  the  void  interest  had  never  been  created.  T.  Bergin  &  P.  Haskell,  supra  note  157, 
at  208-10.  On  occasion,  however,  the  courts  will  strike  the  other  portions  of  a  will  or 
trust  if  the  court  finds  they  are  not  severable.  Id.  at  210;  G.G.  Bogert  &  G.T.  Bogert, 
Law^  of  Trusts  185-86  (5th  ed.  1973).  This  is  known  as  the  doctrine  of  "infectious 
invahdity."  L.  Simes,  supra  note  160,  §  133,  at  284. 

'^'Merrill,  453  N.E.2d  at  361.  For  a  detailed  discussion  of  the  court  of  appeals 
application  of  the  doctrine  of  equitable  approximation,  see  Falender  &  Fruehwald,  Trusts 
&  Decedents'  Estates,  1984  Survey  of  Recent  Developments  in  Indiana  Law,  18  Ind.  L. 
Rev.  435,  450-57  (1985). 

''^Merrill,  453  N.E.2d  at  362. 

'"If  the  interest  vests  (trust  terminates)  when  the  youngest  grandchild  alive  at  the 
testator's  death  reaches  twenty-five,  the  rule  against  perpetuities  is  not  violated  because 
the  grandchild  would  be  a  life  in  being  at  the  creation  of  the  interest.  See  T.  Bergin  & 
P.  Haskell,  supra  note  157,  at  211. 

'^'Merrill,  481  N.E.2d  at  1298. 


332  INDIANA  LAW  REVIEW  [Vol.  20:305 

the  testator's  intent  had  been  frustrated,  it  noted  that  it  was  the  rule 
against  perpetuities  and  not  the  court  that  had  subverted  his  intent. '^^ 
The  supreme  court  appeared  unwilUng  to  use  the  doctrine  of  equitable 
approximation  to  save  the  trust.  While  noting  that  "li]n  some  jurisdic- 
tions, where  the  rule  exists  only  by  virtue  of  the  common  law,  courts 
have  taken  certain  liberties  [with  the  rule],"  the  supreme  court  felt 
restrained  from  making  any  attempt  to  prevent  its  mischief  because  the 
rule  exists  by  statute  in  Indiana. '^^  Having  found  that  the  provisions 
for  the  distribution  of  the  corpus  of  the  trust,  including  the  provision 
regarding  Walter, '^^  violated  the  rule  against  perpetuities,  the  court  con- 
cluded that  Newell  Merrill  died  intestate. '^^ 

A  logical  place  to  begin  any  discussion  of  the  Merrill  decision  is 
with  the  finding  by  the  court  that  the  trust  provisions  in  Item  3(E)  of 
the  will  violated  the  rule  against  perpetuities.  The  probate  commissioner, 
the  trial  court,  and  the  court  of  appeals  were  all  in  agreement  that  the 
proposed  distribution  of  two-thirds  of  the  corpus  to  Judith,  Dennis,  and 
their  children  violated  the  rule.  In  fact,  the  appellants  conceded  that 
the  proposed  distribution  violated  the  rule.'^^ 

Before  discussing  the  supreme  court  decision,  however,  it  might  be 
useful  first  to  examine  the  court  of  appeals  opinion  to  ascertain  the 
rationale  for  that  court's  determination  that  the  proposed  distribution 
of  two-thirds  of  the  corpus  to  Judith,  Dennis,  and  their  children  violated 
the  rule  against  perpetuities.  The  most  explicit  passage  in  the  opinion 
discussing  this  issue  states: 

Here,  it  is  possible  the  youngest  grandchild  may  reach  the  age 
of  25  years  more  than  21  years  after  the  death  of  the  lives  in 
being,  Newell's  children,  at  the  creation  of  the  interests.  .  .  . 

Such  class  must  close  within  the  period  of  the  rule.  .  .  . 
Here  it  may  not  close  until  after  the  period  prescribed  in  the 
rule.  .  .  .  Therefore,  the  possibility  exists  that  grandchild's  interest 
would  not  vest  within  the  time  required  by  the  rule.  For  that 
reason,  the  entire  gift  fails. ^^^ 


'^'Id.  at  1299. 

'''Id.  at  1298-99  n.2. 

'''Id.  at  1299-1300. 

''^Id.  at  1300.  From  a  literal  reading  of  the  decision,  the  supreme  court  has  declared 
the  entire  trust,  including  the  income  provisions,  void.  The  supreme  court  apparently 
applied  the  doctrine  of  infectious  invalidity  to  destroy  the  income  provision  of  the  trust. 

'''Merrill,  453  N.E.2d  at  359.  The  authors  of  Trusts  and  Decedents'  Estates,  1984 
Survey  of  Recent  Developments  in  Indiana  Law,  berate  the  attorneys  in  Merrill  for  conceding 
a  rule  violation  that  arguably  did  not  exist.  Falender  &  Fruehwald,  supra  note  191,  at 
457. 

^°^Merrill,  453  N.E.2d  at  359  (citations  omitted). 


1987]  PROPERTY  LAW  333 

There  can  be  little  doubt  from  the  wording  of  this  passage  that  the 
court  of  appeals  viewed  the  gift  to  the  children  of  Judith  and  Dennis 
as  a  class  gift.^^'  Because  the  class  members  were  all  grandchildren  of 
the  testator,  the  court  viewed  the  age  contingency  "when  my  youngest 
grandchild  reaches  the  age  of  twenty-five  (25)  years"  as  applying  to  the 
members  of  the  class.  It  is  also  clear  from  the  wording  that  the  court 
of  appeals  viewed  the  contingency  as  a  condition  of  survivorship,  creating 
a  condition  precedent  to  the  vesting  of  the  class  gift.^^^  Here  the  youngest 
grandchild,  or  for  that  matter  any  afterborn  grandchild,  might  reach 
the  age  of  twenty-five  more  than  twenty-one  years  after  the  death  of 
the  lives  in  being  (testator's  children)  at  the  creation  of  the  interest. 
Because  a  class  gift,  under  the  all  or  nothing  rule,  must  vest  in  each 
and  every  member  of  the  class  within  the  period  of  the  rule  against 
perpetuities,  the  entire  gift  f ailed. ^°^ 

Returning  to  the  supreme  court  decision,  it  is  equally  clear  that  the 
supreme  court  viewed  the  trust  instrument  as  creating  class  gifts:  "The 
beneficiaries  were  the  Testator's  children  and  grandchildren,  all  of  them, 
and  the  trust  was  to  terminate,  as  to  two-thirds  (2/3),  when  the  youngest 
grandchild  attained  the  age  of  twenty-five  (25)  years. "^^'^  While  the 
supreme  court  likewise  viewed  the  age  contingency  as  creating  a  condition 
of  survivorship,  the  decision  reads  as  if  the  court  considered  the  age 
contingency  as  a  condition  precedent  to  the  vesting  of  all  the  interests 
in  the  corpus  of  the  trust,  not  just  the  interests  of  the  children  of  Judith 
and  Dennis.  In  discussing  the  interests  of  Judith  and  Dennis,  the  court 
remarked  that  "[s]ince  the  identity  of  the  youngest  grandchild  cannot 
be  determined  until  all  of  the  Testator's  children  have  died,  the  intended 
gift  to  these  two  children  fails.  .  .  ."^^^  Further,  in  discussing  the  one- 


^°'It  is  not  clear  whether  the  court  of  appeals  also  viewed  Judith  and  Dennis  as 
members  of  the  class.  It  is  suggested  that  they  should  not  be  viewed  as  class  members 
because  their  shares  are  fixed.  Each  is  to  receive  one-half  (1/2)  of  a  one-third  (1/3)  share 
of  the  corpus.  Only  their  children's  shares  are  dependent  on  the  number  of  class  members. 
If,  however,  Judith  and  Dennis  are  not  viewed  as  members  of  the  class,  then  technically 
their  interests  do  not  violate  the  rule  against  perpetuities.  Nevertheless,  had  the  court  of 
appeals  not  saved  the  trust  by  applying  the  doctrine  of  equitable  approximation,  it  seems 
certain  the  court  would  not  have  allowed  the  interests  of  Judith  and  Dennis  to  survive 
the  destruction  of  their  children's  interests  for  the  same  reason  the  court  would  not  have 
allowed  the  one-third  share  regarding  Walter  to  stand  alone.  The  distribution  provisions 
of  the  trust  were  all  part  of  an  interrelated  testamentary  scheme.  Merrill,  453  N.E.2d  at 
360. 

^°Ht  is  not  clear  from  the  opinion  whether,  in  addition  to  each  grandchild  reaching 
the  age  of  twenty-five,  each  grandchild  must  also  survive  to  the  time  of  distribution  when 
the  youngest  grandchild  reaches  twenty-five  to  take  a  share  of  the  corpus.  See  L.  Simes 
&  A.  Smith,  supra  note  158,  §  656,  at  120. 

^"'See  supra  notes  178-81. 

''^Merrill,  481  N.E.2d  at  1298. 

^°'Id.  at  1298  n.l. 


334  INDIANA  LAW  REVIEW  [Vol.  20:305 

third  share  to  be  distributed  at  the  death  of  Walter,  the  supreme  court 
concluded  that  since  this  one-third  share  of  the  corpus  was  to  "continue" 
to  be  held  in  trust  after  the  youngest  grandchild  reached  the  age  of 
twenty- five,  "if  the  corpus  of  two-thirds  cannot  vest  within  the  time 
allowed,  .  .  .  the  gift  of  the  one-third  interest  fails  for  the  same  reason 
as  does  the  gift  of  the  two-thirds  interest. "^°^ 

It  should  be  noted  that  if  the  language  "that  when  my  youngest 
grandchild  reaches  the  age  of  twenty-five  (25)  years"  is  viewed  as  creating 
a  condition  of  survivorship  requiring  the  beneficiaries  to  survive  to  the 
time  of  distribution,  the  supreme  court  correctly  concluded  that  the 
provisions  for  distribution  of  the  corpus  of  the  trust  violate  the  rule.^^^ 
It  is  suggested,  however,  the  supreme  court  could  have  reached  the 
conclusion  that  the  language  did  not  create  a  condition  precedent  of 
survivorship.  In  such  case,  the  trust,  except  for  one  provision, ^^^  would 
not  have  violated  the  rule  against  perpetuities. ^°^  Traditionally,  when  an 
interest  is  given  to  a  beneficiary  "if,"  "at,"  "when,"  or  "provided" 
the  beneficiary  attains  a  stated  age,  the  courts  have  viewed  the  language 
as  creating  a  condition  of  survivorship  requiring  the  beneficiary  to  reach 
the  stated  age  in  order  to  take  the  interest. ^'^  Nevertheless  there  are 
numerous  age-postponement  cases  finding  no  condition  of  survivorship 


'°^Id.  at  1300. 

^"^Even  though  all  the  grandchildren  will  be  born  within  the  rule  against  perpetuities, 
i.e.  no  additional  grandchildren  can  be  born  after  all  the  testator's  children  have  died, 
if  the  grandchildren  must  survive  until  the  youngest  grandchild  reaches  twenty-five  to  take 
a  share  of  the  corpus,  then  the  size  of  the  class  cannot  be  determined  within  the  period 
of  the  rule.  In  the  case  of  a  class  gift  the  entire  gift  will  fail  where  the  class  can  increase 
or  decrease  beyond  the  period  of  the  rule.  L.  Simes  &  A.  Smith,  supra  note  158,  §  1265, 
at  196;  L.  Waggoner,  supra  note  165,  §  13.2,  at  238. 

^°^The  provision  for  the  distribution  of  one-half  (1/2)  of  one-third  (1/3)  of  the  corpus 
"to  my  grandchildren  living  at  the  time  of  termination  of  the  trust"  does  violate  the  rule 
against  perpetuities  because  the  trust  cannot  be  terminated  until  the  youngest  grandchild 
reaches  twenty-five,  beyond  the  period  of  the  rule.  Even  if  the  court  had  not  found  an 
implied  condition  of  survivorship  requiring  all  the  beneficiaries  to  survive  until  the  time 
of  distribution,  the  court  might  have  declared  the  entire  trust  void  under  the  doctrine  of 
infectious  invalidity.  See  supra  note  190. 

^°^If  the  phrase  "that  when  my  youngest  grandchild  reaches  the  age  of  twenty-five 
(25)  years"  is  viewed  as  referring  solely  to  the  time  of  distribution  of  the  corpus  and 
not  as  a  condition  of  survivorship,  the  interests  of  the  grandchildren  would  have  vested 
at  the  time  of  their  births.  T.  Bergin  &  P.  Haskell,  supra  note  157,  at  193-94. 

^'°M  at  132-34;  L.  Simes  &  A.  Smith,  supra  note  158,  §  586,  at  31-37.  It  has  been 
suggested  that  words  such  as  "if"  or  "provided"  the  beneficiary  attains  the  stated  age 
clearly  indicate  a  condition  of  survivorship,  whereas  words  such  as  "at"  or  "when"  are 
often  used  in  situations  where  the  drafter  intended  an  absolute  gift  to  the  beneficiary 
with  only  the  time  of  enjoyment  postponed  until  the  stated  age.  Colt  v.  Hubbard,  33 
Conn.  281  (1866);  Fuller  v.  Fuller,  58  N.C.  223  (1859),  both  cited  in  L.  Simes  &  A. 
Smith,  supra  note  158,  §  586,  at  33-36;  see  also  Halbach,  Future  Interests:  Express  and 
Implied  Condition  of  Survival,  49  Cal.  L.  Rev.  297,  301-04  (1961). 


1987]  PROPERTY  LAW  335 

and  holding  that  the  interest  of  the  beneficiary  vests  before  reaching 
the  named  age.^"  A  close  reading  of  these  age  contingency  cases  suggests 
that  the  courts  will  look  to  see  if  there  are  other  factors  suggesting  the 
transferor  intended  to  create  an  immediate  interest  in  the  beneficiary 
with  only  the  time  of  enjoyment  postponed. ^'^  It  is  suggested  that  there 
are  other  factors  in  the  Merrill  case  from  which  the  court  could  have 
concluded  that  the  interests  in  the  children  of  Dennis  and  Judith  were 
vested  and  not  contingent. ^'^ 

One  factor  which  suggests  that  the  interests  of  Judith,  Dennis,  and 
their  children  were  vested  and  not  contingent  is  that  the  words  postponing 
the  distribution  of  the  corpus  of  the  trust  to  the  time  that  the  youngest 
grandchild  reaches  the  age  of  twenty-five  are  separated  from  the  words 
creating  the  interests  and  appear  to  relate  solely  to  the  time  of  distri- 
bution. ^^"^  Item  3(E)  of  the  will  states  that  when  the  youngest  grandchild 


^"See,  e.g.,  In  re  Welch's  Estate,  83  Cal.  App.  2d  391,  188  P.2d  797  (1948)  (despite 
language  that  beneficiary  "shall  have  no  vested  right"  until  age  twenty-five,  court  found 
beneficiary  did  not  have  to  survive  to  age  twenty-five  to  have  a  transferrable  interest); 
Stinson  v.  Palmer,  146  Conn.  335,  150  A. 2d  600  (1959)  (trust  estate  to  pass  to  children 
of  testator's  son  alive  at  widow's  death  when  "each  one  shall  reach  the  age  of  thirty 
(30)  years"  vested  at  widow's  death);  Carter  v.  Berry,  243  Miss.  321,  140  So.  2d  843 
(1962)  (where  trust  for  benefit  of  testator's  grandchildren  was  to  terminate  "when  the 
youngest  should  become  twenty-five  years  of  age,"  interests  of  grandchildren  vested  at 
testator's  death);  Wachovia  Bank  &  Trust  Co.  v.  Taylor,  255  N.C.  122,  120  S.E.2d  588 
(1961)  (held  will  provision  providing  that  legacy  was  to  be  divided  among  children  of 
testator's  daughters  "when  they  reached  age  of  twenty-five  (25)  years"  created  a  vested 
interest  and  did  not  violate  the  rule  against  perpetuities);  Wurst  v.  Savings  Deposit  Bank 
&  Trust  Co.,  47  N.E.2d  676  (Ohio  Ct.  App.  1940)  (trust  for  children  of  testator's  son 
to  be  distributed  when  the  youngest  child  attained  the  age  of  thirty  (30)  valid  because 
children's  interest  vested  at  birth);  South  Carolina  Nat'l  Bank  of  Charleston  v.  Johnson, 
260  S.C.  585,  197  S.E.2d  668  (1973)  (trust  proceeds  to  be  distributed  among  grandchildren 
"when  my  youngest  grandchild  shall  reach  the  age  of  twenty-one  (21)"  vested  at  the  death 
of  the  testator  subject  to  opening  to  let  in  after-born  grandchildren). 
^'^L.  SiMES  &  A.  Smith,  supra  note  158,  §  586,  at  33-35. 

^ "These  factors  negating  a  requirement  of  survival  are  set  forth  in  Falender  &  Fruehwald, 
supra  note  191,  in  the  discussion  of  the  court  of  appeals  opinion  in  Merrill: 

Under  the  Merrill  facts,  several  factors  existed  negating  the  implication  of  a 
survivorship  condition:  the  absence  of  an  alternative  or  a  supplanting  limitation, 
the  gift  of  income  to  the  future  interest  owners  during  the  time  preceding 
termination  of  the  trust,  and  the  lack  of  a  word  or  phrase  describing  the 
beneficiaries  as  ones  who  must  survive  to  a  later  date,  such  as  "if  living."  The 
existence  of  these  negative  factors,  coupled  with  the  commitment  of  Indiana 
courts  to  the  earliest  possible  vesting  of  interests,  makes  it  unlikely  that  a 
condition  precedent  of  survivorship  should  have  been  implied  in  the  Merrill  trust 
provision. 
Id.  at  459. 

^'"Where  the  condition  is  attached  to  the  interest  itself,  the  vesting  is  postponed  to 
the  time  stated,  but  where  the  condition  is  annexed  to  the  time  of  payment,  only  the 
gift  vests  immediately.  2A  R.  Powell,  The  Law^  of  Real  Property  1  331,  at  786  (P. 
Rohan  rev.  ed.  1986);  L.  Simes  &  A.  Smith,  supra  note  158,  §  576,  at  11. 


336  INDIANA  LAW  REVIEW  [Vol.  20:305 

shall  reach  twenty-five,  the  "Trust  shall  terminate  as  to  two-thirds  (2/ 
3)  of  the  corpus  of  said  Trust,  and  .  .  .  shall  be  divided  as  follows.  . 
.  ."^'^  Item  3(E)  then  provides  that  one-third  (1/3)  of  the  corpus  shall 
be  divided  one-half  (1/2)  to  Judith  and  one-half  (1/2)  to  her  children 
and  that  one-third  (1/3)  of  the  corpus  shall  be  divided  one-half  (1/2) 
to  Dennis  and  one-half  (1/2)  to  his  children. ^'^  There  are  no  express 
words  of  survivorship  contained  in  the  language  creating  these  interests. 
In  addition,  a  gift  to  the  children  of  Judith  and  Dennis  is  not  the  same 
as  a  class  gift  to  the  testator's  grandchildren.  The  share  that  each  child 
of  Judith  shall  receive  will  be  determined  by  the  number  of  children 
born  to  Judith,  not  by  the  number  of  children  born  to  Dennis  or  the 
total  number  of  testator's  grandchildren.  Likewise,  the  share  received 
by  each  child  of  Dennis  will  be  determined  solely  by  the  number  of 
children  born  to  Dennis.  In  fact,  the  youngest  grandchild  might  turn 
out  to  be  a  child  of  Walter,  and  there  is  no  gift  to  the  children  of 
Walter,  although  the  children  of  Walter  who  survive  him  would  be 
included  in  the  class  gift  to  his  "bodily  issue. "^^^  Thus  it  is  hard  to 
see  how  the  youngest  grandchild  reaching  the  age  of  twenty-five  is  directly 
related  to  the  vesting  of  the  interests  of  Judith,  Dennis,  and  their  children. 
Two  additional  factors  strengthen  the  argument  that  the  interests 
were  vested.  First,  the  trust  provides  that  the  income  from  the  trust  is 
to  be  paid  to  the  testator's  children,  Judith,  Dennis,  and  Walter  for 
and  during  the  duration  of  the  trust. ^^^  When  an  intermediate  gift  of 
income  is  given  to  a  beneficiary  who  is  to  receive  a  share  of  the  corpus 
at  a  stated  age,  the  presumption  is  raised  that  the  beneficiary's  interest 
is  vested  and  not  contingent. ^^^  Thus  the  interests  of  Judith  and  Dennis 
would  be  presumed  to  be  vested.  Second,  the  provision  for  the  distribution 
of  the  one-third  of  the  corpus  regarding  Walter  contains  an  express 
condition  of  survivorship.  One-half  (1/2)  of  the  one-third  (1/3)  share, 
or  all  of  the  one-third  (1/3)  share  if  Walter  should  have  no  bodily  issue, 
is  to  be  distributed  "to  my  grandchildren,  living  at  the  time  of  the 
termination  of  the  trust. "^^°  The  use  of  this  express  condition  of  sur- 


'^'Merrill,  481  N.E.2cl  at  1297. 

^'"•Id. 

^"A  child  of  Walter  would  not  be  considered  a  "bodily  issue"  unless  he  survived 
Walter.  The  term  "bodily  issue"  creates  a  condition  of  survivorship.  R.  Powell,  supra 
note  214,  t  327,  at  761-62.  In  addition  the  word  "issue"  would  include  more  remote 
descendants  than  children.  L.  Simes  &  A.  Smith  supra  note  158,  §  738,  at  215. 

'''Merrill,  481  N.E.2d  at  1296. 

^"R.  Powell,  supra  note  214,  t  332,  at  786-91,  L.  Simes  &  A.  Smith,  supra  note 
158,  §  588,  at  37-38.  While  the  children  of  Judith  and  Dennis  were  not  given  an  intermediate 
gift  of  the  income,  the  fact  that  their  parents'  share  would  be  presumed  to  be  vested 
would  appear  to  lend  some  support  to  the  argument  that  their  interests  should  likewise 
be  considered  vested. 

^'"Merrill,  481  N.E.2d  at  1297.  This  provision  clearly  violates  the  rule  against  per- 
petuities since  it  requires  the  grandchildren  to  survive  to  the  time  of  distribution — when 


1 


1987]  PROPERTY  LAW  337 

vivorship  with  regard  to  the  distribution  of  the  one-third  share  of  the 
corpus  suggests  the  testator  had  no  intent  to  create  such  a  condition 
with  regard  to  the  distribution  of  the  two-thirds  share  to  Judith,  Dennis, 
and  their  children.  Had  there  been  an  impHed  condition  of  survivorship 
requiring  the  beneficiaries  to  survive  to  the  time  of  distribution,  there 
would  have  been  no  need  for  the  testator  to  have  expressly  created  one 
with  regard  to  distribution  of  the  one-third  share.  The  fact  that  the 
testator  created  an  express  condition  of  survivorship  with  regard  to  the 
distribution  of  the  one-third  share  strongly  suggests  he  did  not  intend 
to  create  one  with  regard  to  the  distribution  of  the  two-thirds  share. 2^' 
If  any  doubt  then  remained  as  to  whether  the  interests  were  vested  or 
contingent,  the  court  could  have  applied  the  general  rule  favoring  vesting 
of  interests  at  the  earliest  possible  time.^^^ 

Within  the  opinion  there  is  some  language  which  suggests  the  supreme 
court  may  have  found  a  violation  of  the  rule  against  perpetuities  because 
the  duration  of  the  trust  exceeded  the  period  of  the  rule: 

Here,  there  is  no  ambiguity  whatsoever  in  the  will,  with  regard 
to  either  the  identity  of  the  beneficiaries  or  the  time  of  ter- 
mination of  the  trust.  The  beneficiaries  were  the  Testator's  chil- 
dren and  grandchildren,  all  of  them,  and  the  trust  was  to  terminate, 
as  to  two-thirds  (2/3),  when  the  youngest  grandchild  attained 
the  age  of  twenty-five  (25)  years.  What  could  be  more  clear? 
The  problem  is  not  one  of  ascertaining  the  Testator's  intentions, 
as  to  time  for  vesting,  but  simply  that  our  statute  will  not  permit 
such  intention  to  be  carried  out.^^^ 

It  is  not  clear  from  this  passage  whether  the  court  believed  the 
phrase  "when  my  youngest  grandchild  reaches  the  age  of  twenty-five 
(25)  years"  created  a  condition  of  survivorship  requiring  the  beneficiaries 
of  the  trust  to  survive  until  such  time  or  whether  the  court  found  a 
rule  violation  to  exist  because  the  time  of  termination  was  when  the 
youngest  grandchild  reached  the  age  of  twenty-five — a  time  beyond  the 
period  of  the  rule.   The  latter  viewpoint  is   suggested  by  the  court's 


the  youngest  grandchild  reaches  the  age  of  twenty-five— a  time  beyond  the  period  of  the 
rule.  It  is  somewhat  shocking  therefore  that  both  the  trial  court  and  the  court  of  appeals 
reached  the  conclusion  that  the  provisions  of  the  trust  regarding  Walter  did  not  violate 
the  rule  against  perpetuities.  Merrill,  453  N.E.2d  at  360. 

^^'See,  e.g.,  Pyne  v.  Pyne,  154  F.2d  297,  300  (D.C.  Cir.  1946);  In  re  Stanford's 
Estate,  49  Cal.  2d  120,  133-35,  315  P.2d  681,  689  (1957);  Pechin  v.  Medd,  476  N.E.2d 
526,  530  (Ind.  Ct.  App.  1985);  see  also  Falender  &  Fruewald,  supra  note  191,  at  459 
n.l60. 

^^^See,  e.g.,  Alsman  v.  Walters,  184  Ind.  565,  111  N.E.  921  (1916);  Aldred  v.  Sylvester, 
184  Ind.  542,  111  N.E.  914  (1916);  Moorman  v.  Moorman,  156  Ind.  App.  606,  297 
N.E.2d  836  (1973). 

^^' Merrill,  481  N.E. 2d  at  1298  (emphasis  added). 


338  INDIANA  LAW  REVIEW  [Vol.  20:305 

discussion  of  the  validity  of  the  provision  for  the  distribution  of  the 
one-third  share  of  the  corpus  regarding  Waher.  The  supreme  court  noted 
that  two-thirds  of  the  trust  was  to  terminate  when  the  youngest  grandchild 
reached  the  age  of  twenty-five,  but  that  the  remaining  one-third  of  the 
corpus  was  to  be  "continued"  in  trust  until  Walter's  death.^^"*  From  this 
fact  the  court  reasoned: 

The  use  of  the  word  "continued"  as  to  the  one-third  share 
following  the  provisions  for  termination  as  to  the  two-thirds 
share  permits  no  conclusion  other  than  that  the  one-third  share 
will  not  vest  until  some  time  subsequent  to  the  vesting  of  the 
two-thirds  share.  Obviously,  if  the  corpus  of  two-thirds  cannot 
vest  within  the  time  allowed,  and  the  vesting  of  the  remaining 
one-third  may  be  deferred  until  an  even  later  date,  the  gift  of 
the  one-third  interest  fails  for  the  same  reason  as  does  the  gift 
of  the  two-thirds  interest. ^^^ 

Because  it  was  the  time  of  termination  that  was  being  deferred,  it 
would  appear  that  the  court  viewed  the  time  of  termination  as  the  time 
of  vesting.  If,  as  one  suspects,  the  court  was  concerned  with  allowing 
the  duration  of  a  private  irrevocable  trust  to  exceed  the  period  of  the 
rule  because  of  its  effect  upon  the  free  alienability  of  property,  the 
court  could  have  approached  the  problem  differently.  While  the  rule 
against  perpetuities  does  not  prevent  the  duration  of  a  trust  from  ex- 
ceeding the  period  of  the  rule,^^^  there  is  a  small  body  of  caselaw^^^  as 
well  as  the  comments  of  numerous  legal  scholars  suggesting  that  a  private 
trust  cannot  remain  indestructible  beyond  the  rule  against  perpetuities. ^^^ 
The  trust,  according  to  these  authorities,  should  not  be  declared  void, 
but  merely  terminable  by  the  beneficiaries.  There  seems  to  be  some 
disagreement  between  these  authorities  as  to  whether  the  trust  is  ter- 
minable by  the  beneficiaries  from  its  inception  or  only  after  the  end  of 
lives  in  being  plus  twenty-one  years. ^^^  Under  this  approach,  the  trust 

^^^This  remark  by  the  court  is  most  interesting  because  the  court  had  earlier  concluded 
that  the  indentity  of  the  youngest  grandchild  could  not  be  determined  until  all  the  testator's 
children  had  died.  Id.  at  1298  n.l. 

^^'Id.  at  1300  (emphasis  added). 

2^*The  equitable  interests  in  a  trust  can  vest  long  before  the  trust  terminates,  and  if 
the  interests  are  certain  to  vest,  if  at  all,  within  the  rule  against  perpetuities  the  rule  is 
satisfied.  T.  Bergin  &  P.  Haskell,  supra  note  157,  184,  224-25;  L.  Simes,  supra  note 
160,  §  144,  at  314-15. 

^^^See  cases  cited  in  L.  Simes,  supra  note  160,  §  145. 

^^^See,  e.g.,  id.;  T.  Bergin  &  P.  Haskell,  supra  note  157,  at  225-26;  Restatement 
(Second)  of  Trusts  §  62  comment  o  (1959);  Restatement  (Second)  of  Property  (Do- 
native Transfer)  §  2.1  (1983);  A.  Scott,  The  Law  of  Trusts  §  62.10(2)  (3d  ed.  1967); 
L.  Simes  &  A.  Smith,  supra  note  158,  §  1393,  at  245-46. 

"'Simes  and  Smith  argue  for  the  position  that  it  would  be  more  in  accord  with  the 
analogy  to  the  period  of  the  rule  to  strike  down  the  provision  for  indestructibility  as  of 


1987]  PROPERTY  LAW  339 

would  not  be  destroyed,  but  its  indestructibility  would  be  limited  to  the 
period  of  the  rule,  or  if  the  court  preferred,  from  the  inception  of  the 
trust,  thus  allowing  the  beneficiaries  to  terminate  the  trust. 

The  testamentary  trust  in  Merrill  is  less  than  a  paragon  of  legal 
draftsmanship.  There  were  a  number  of  mistakes  made  by  the  drafter 
leading  to  the  apparent  rule  violation.  The  first  was  the  use  of  an  age 
contingency  in  excess  of  twenty-one  years. ^^°  Where  an  interest  is  given 
to  an  individual  or  to  a  class  that  is  closed  at  the  time  the  interest  is 
created,  a  requirement  that  the  individual  or  members  of  the  class  attain 
a  certain  age  in  excess  of  twenty-one  in  order  to  take  the  interest  presents 
no  problem  because  they  are  measuring  lives  in  being  at  the  creation 
of  the  interest  and  they  will  attain  the  stated  age,  if  at  all,  within  their 
own  hfetimes."^  However,  where  an  interest  is  given  to  a  class  (testator's 
grandchildren)  that  is  not  closed  at  the  time  the  interest  is  created,  an 
age  contingency  in  excess  of  twenty-one  years  may  cause  the  gift  to  fail 
because  the  interest  might  vest  more  than  twenty-one  years  after  the 
death  of  the  last  measuring  life  in  being  at  the  creation  of  the  interests. ^^^ 
For  example,  a  gift  to  the  testator's  grandchildren  or  to  the  testator's 
grandchildren  who  reach  the  age  of  twenty-one  is  valid,  since  the  testator's 
children  can  be  used  as  the  measuring  lives  in  being  and  the  grandchildren 
will  all  be  born  and  reach  the  age  of  twenty-one  no  later  than  twenty- 
one  years  after  the  death  of  the  testator's  last  child.  If,  however,  the 
age  contingency  for  vesting  is  in  excess  of  twenty-one,  the  gift  to  the 
grandchildren  may  fail.  In  Merrill,  the  interests  would  not  have  failed 
had  the  drafter  reduced  the  time  of  distribution  to  "when  the  youngest 
grandchild  reaches  the  age  of  twenty-one  (21)."  It  is  very  possible, 
however,  as  the  court  of  appeals  suggested,  that  the  testator  did  not 
want  the  corpus  of  the  trust  distributed  until  the  grandchildren  were 
mature  enough  to  handle  their  inheritance  wisely — apparently  at  the  age 
of  twenty-five.^"  Faced  with  this  dilemma,  the  drafter  should  have  done 
two  things.  First,  he  should  have  attempted  to  word  the  trust  in  such 
a  manner  as  to  be  absolutely  clear  that  the  interests  of  the  grandchildren 


the  time  of  creation.  L.  Simes,  supra  note  160,  §  145,  at  317;  L.  Simes  &  A.  Smith  supra 
note  158,  §  1393,  at  246.  The  other  authorities  cited  supra,  note  228,  suggest  the  trust 
is  terminable  by  the  beneficiaries  only  at  the  end  of  the  period  of  the  rule. 

"""Regard  with  particular  suspicion  any  gift  which  is  contingent  upon  the  taker 
attaining  an  age  in  excess  of  21.  Such  gifts  constitute  the  largest  single  group  of  invalid 
limitations."  Leach,  supra  note  156,  at  670. 

"'5ee  supra  notes  172-75  and  accompanying  text. 

^^^See  supra  note  176  and  accompanying  text. 

^"Merrill,  453  N.E.2d  at  360.  To  prevent  a  rule  violation,  the  court  of  appeals 
excluded  grandchildren  born  after  the  testator's  death  from  the  term  "grandchild"  in  3(E) 
of  the  will,  thus  closing  the  class  at  the  testator's  death.  Id.  at  362.  The  supreme  court 
found  no  indication  of  an  intent  to  exclude  after-born  grandchildren  from  the  wording 
of  the  trust  and  as  a  result  it  violated  the  rule.  Merrill,  481  N.E.2d  at  1298. 


340  INDIANA  LAW  REVIEW  [Vol.  20:305 

were  to  vest  at  their  birth  and  not  when  they  reached  the  age  of  twenty- 
five,  and  that  the  distribution  of  the  corpus  to  the  grandchildren  when 
they  reached  the  age  of  twenty-five  was  related  solely  to  the  time  of 
the  enjoyment  and  not  to  the  time  of  vesting.  One  proposed  solution 
is  to  give  the  income  from  one-third  of  the  corpus  to  each  of  the 
testator's  children  for  so  long  as  they  shall  live.  This  would  not  change 
the  time  of  distribution  of  the  trust  as  written  in  Merrill  because,  as 
the  supreme  court  pointed  out,  the  youngest  grandchild  cannot  be  de- 
termined until  all  the  testator's  children  are  dead.^^"^  Thus  the  testator's 
children  in  Merrill  would  never  have  been  able  to  enjoy  any  of  the 
corpus.  Following  the  income  provisions  for  Dennis  and  Judith,  another 
provision  would  provide  for  the  distribution  of  the  corpus  to  their 
children.  For  example,  following  the  income  provision  to  Judith,  the 
clause  might  read: 

Upon  the  death  of  my  daughter,  Judith,  the  trustee  shall  divide 
the  one-third  (1/3)  of  the  corpus  from  which  Judith  was  receiving 
the  income  into  as  many  shares  as  there  are  children  of  Judith 
then  living,  and  the  trustee  shall  set  aside  and  designate  one 
such  share  as  a  separate  trust  fund  for  the  benefit  of  each  living 
child  of  Judith.  The  trustee  shall  thereafter  pay  the  income  from 
each  share  to  the  child  for  whose  benefit  the  share  was  set  off 
until  the  termination  of  the  trust  with  respect  to  such  share. 
When  such  child  shall  attain  the  age  of  twenty- five  (25)  years, 
or  shall  have  attained  the  age  of  twenty-five  (25)  years  at  the 
death  of  Judith,  or  when  such  child,  having  survived  Judith, 
shall  die  under  the  age  of  twenty-five  (25),  the  trust  shall  ter- 
minate as  to  such  share  and  the  trustee  shall  distribute  such 
share,  together  with  any  accrued  income,  to  such  child  or,  if 
he  be  dead,  to  his  executor  or  administrator. ^^^ 

This  provision  would  not  require  the  grandchildren  to  survive  to  the 
time  of  distribution,  and  the  income  provision  to  each  of  the  grand- 
children, as  well  as  the  payment  of  the  share  of  the  corpus  to  the  estate 
of  any  grandchild  who  should  die  before  reaching  the  age  of  twenty- 
five,  clearly  indicate  the  interests  are  'Vested"  at  the  death  of  Judith 
and  Dennis.  Because  Walter  did  not  have  any  children  at  the  time  the 
instrument  was  drafted,  it  might  be  prudent  to  include  a  gift  over  in 
the  event  Walter  should  die  without  children. 


"*Id.  Sit  n.l.  By  providing  that  one-half  (1/2)  of  the  two-thirds  (2/3)  of  the  corpus 
was  to  go  to  Judith  and  Dennis  and  that  the  trust  of  the  other  one-third  (1/3)  of  the 
corpus  might  "continue"  after  the  time  of  distribution  until  Walter's  death,  the  drafter 
did  not  appear  to  have  been  aware  of  the  legal  effect  of  the  words  employed. 

"'This  provision  is  a  modified  version  of  the  clause  contained  in  L.  Simes  &  A. 
Smith,  supra  note  158,  §  1294,  at  236. 


1987]  PROPERTY  LAW  341 

Second,  to  avoid  any  question  of  a  rule  violation,  the  drafter  should 
include  a  saving  clause. ^^<^  A  blanket  saving  clause  in  the  Merrill  trust 
would  have  prevented  a  rule  violation. ^^^  Such  a  clause  might  have  read: 

This  trust  shall  terminate  in  any  event  not  later  than  twenty- 
one  years  after  the  death  of  the  last  survivor  of  all  beneficiaries 
of  this  trust  who  are  in  being  at  the  time  of  my  death,  and, 
unless  sooner  terminated  by  the  terms  of  this  trust,  the  trustee 
shall,  at  the  termination  of  such  period  make  distribution  to  my 
then  living  descendants  per  stirpes. ^^^ 

The  harshness  that  can  result  from  a  rule  violation  is  clearly  reflected 
in  the  Merrill  decision.  The  testator  wanted  a  substantial  portion  of  his 
estate  to  pass  to  his  grandchildren,  and  one  of  his  children,  Walter,  to 
receive  only  the  income  for  life  from  one-third  of  the  corpus  of  the 
trust.  Instead,  because  of  the  rule  violation,  the  entire  trust  was  destroyed 
and  the  testator's  estate  passed  intestate  to  his  second,  childless  wife 
and  his  three  children."^  The  testator's  grandchildren  received  nothing 
and  his  children,  including  Walter,  received  their  shares  of  the  estate 
outright.  The  testator's  intent  was  totally  frustrated.  One  might  argue 
that  the  frustration  was  caused  by  the  ineptness  of  the  testator's  attorney. 
To  some  degree  this  is  true,  but  the  rule  is  so  technical  and  full  of 
pitfalls  for  even  the  most  experienced  drafters  that  Professor  Gray  was 
led  to  remark:  "[T]here  are  few  lawyers  of  any  practice  in  drawing  wills 
and  settlements  who  have  not  at  some  time  either  fallen  into  the  net 
which  the  Rule  spreads  for  the  unwary,  or  at  least  shuddered  to  think 
how  narrowly  they  have  escaped  it."^'^^ 

The  ease  with  which  a  technical  violation  of  the  rule  can  occur  and 
the  harshness  of  the  consequences  of  a  violation  have  led  most  legal 
scholars  and  experts  in  the  field  to  conclude  that  some  type  of  perpetuities 
reform  is  needed.^"*'  The  court  of  appeals  in  Merrill  attempted  to  reform 
the  instrument  to  make  it  comply  with  the  rule  by  applying  the  doctrine 


"*M  §  1295,  at  236;  T.  Schaffer,  The  Planning  and  Drafting  of  Wills  and  Trusts 
143  (2d  ed.  1979);  L.  Waggoner,  supra  note  165,  §  12.7(c),  at  188;  Leach  &  Logan, 
Perpetuities:  A  Standard  Saving  Clause  to  Avoid  Violations  of  the  Rule,  74  Harv.  L. 
Rev.  1141  (1961). 

^''Merrill,  481  N.E.2d  at  1298-99  n.2. 

"*This  provision  is  a  modified  version  of  the  saving  clause  contained  in  L.  Simes  & 
A.  Smith,  supra  note  158,  §  1295,  at  236. 

^^'The  facts  indicate  that  the  testator  is  survived  by  a  second,  childless  wife  and  three 
children  by  a  prior  marriage.  Merrill,  481  N.E.2d  at  1297.  Under  Ind.  Code  §  29-1-2-1 
(1982),  the  decedent's  estate  would  be  distributed  to  his  wife  and  his  three  children  from 
the  first  marriage. 

^""J.  Gray,  The  Rule  Against  Perpetuities  xi  (4th  ed.   1942). 

^"'Unfortunately  there  is  no  general  agreement  as  to  the  method  of  reform  to  be 
used.  Perpetuity  Reform,  supra  note  176,  at  1718. 


342  INDIANA  LA  W  REVIEW  [Vol.  20:305 

of  equitable  approximation. ^"^^  The  supreme  court  rejected  the  court  of 
appeals'  attempt  to  save  the  instrument,  finding  the  court  had  no  au- 
thority to  rewrite  the  will.^"*^  Courts  in  only  four  states,  Hawaii,  Mis- 
sissippi, New  Hampshire,  and  West  Virginia,  have  presumed  to  reform  an 
instrument  without  legislative  authority  in  order  to  avoid  a  violation  of 
the  common  law  rule.^"^  In  light  of  the  Merrill  decision,  it  appears  that 
modification  of  the  rule  in  Indiana  must  come,  if  at  all,  from  the 
legislature. 

At  the  present  time,  legislation  that  to  some  degree  or  another 
modifies  the  common  law  rule  against  perpetuities  exists  in  twenty-three 
states.  In  a  few  states,  this  legislation  is  directed  towards  the  correction 
of  specific  drafting  errors  resulting  in  rule  violations  of  a  technical  nature 
such  as  age  contingencies  in  excess  of  twenty-one  years,  the  presumption 
of  lifetime  fertility,  and  the  unborn  widow  problem. ^^^^  In  most  states, 
however,  the  reform  has  been  more  extensive  and  has  attempted  to 
address  all  potential  rule  violations.  Sixteen  states  have  adopted  variations 
of  the  wait-and-see  rule.^"*^  In  these  jurisdictions,  the  courts  wait  to  see 
if  in  fact  the  interest  vests  or  fails  to  do  so  within  the  rule.  Only  if 
the  interest  remains  contingent  after  the  period  of  the  rule  does  a  violation 
occur. ^'*''  The  wait-and-see  doctrine  will  eliminate  those  violations  based 
on  remote  possibilities  which  in  fact  never  occur  and  in  many  cases  will 
permit  the  instrument  to  operate  as  written  without  any  modification.^"^^ 
The  main  objection  to  the  doctrine  is  that  title  to  property  could  be 
tied  up  for  the  period  of  the  rule.^"*^  It  should  be  observed  that  the 
drafter  can  easily  create  his  own  wait-and-see  provision  in  an  instrument 
by  use  of  the  blanket  saving  clause. ^^° 


^"^^See  supra  notes  191-92  and  accompanying  text. 

^*^See  supra  notes  194-96  and  accompanying  text. 

^'^Perpetuity  Reform,  supra  note  176,  at  1757;  see  cases  cited  in  Merrill,  481  N.E.2d 
at  1298-99  n.2. 

^'^^ Perpetuity  Reform,  supra  note  176,  at  1726-50.  Professor  Leach  in  his  quest  for 
reform  of  the  rule  went  so  far  as  to  give  names  to  certain  categories  of  rule  violations, 
such  as  "the  fertile  octogenarian,"  "the  unborn  widow,"  "the  precocious  toddler"  and 
"the  magic  gravel  pit."  Leach,  Perpetuities  in  Perspective:  Ending  the  Rule's  Reign  of  Terror, 
65  Harv.  L.  Rev.  721  (1952);  Leach,  Perpetuities,  Staying  the  Slaughter  of  the  Innocents, 
68  L.Q.  Rev.  35  (1952). 

^"Tor  specific  statutes,  see  T.  Bergin  &  P.  Haskell,  supra  note  157,  at  213-14  n.6 
and  7. 

^"Tor  specific  statutes,  see  T.  Bergin  &  P.  Haskell,  supra  note  157,  at  213-14  nn.6-7. 
supra  note  176,  at  1759-84. 

2^«L.  Waggoner,  supra  note  165,  §  15.3,  at  298-99. 

^^Id.  at  300.  T.  Bergin  &  P.  Haskell,  supra  note  157,  at  218.  Another  problem 
created  by  the  wait-and-see  doctrine  is  that  of  deciding  who  are  to  be  used  as  the  measuring 
lives  in  determining  the  waiting  period.  This  problem  is  discussed  in  some  detail  in  Perpetuity 
Reform,  supra  note  176,  at  1762-82. 

^'""Perpetuity  Reform,  supra  note  176,  at  1776,  1778  n.l55. 


1987]  PROPERTY  LAW  343 

Fifteen  states  have  enacted  reformation  type  statutes  which  employ 
the  doctrine  of  cy  pres  or  equitable  approximation  to  reform  instruments 
that  violate  the  rule.^^'  In  some  of  these  states,  the  statutes  allow  the 
court  to  reform  the  instrument  immediately  where  there  is  a  rule  violation, 
but  in  other  states,  the  reformation  statutes  are  combined  with  wait- 
and-see  statutes  so  that  the  court  must  wait  to  see  if  a  violation  in  fact 
occurs;  only  if  the  interest  remains  contingent  at  the  end  of  the  waiting 
period  is  the  court  permitted  to  modify  the  instrument  in  order  to  comply 
with  the  rule.^" 

It  is  beyond  the  scope  of  this  survey  to  discuss  in  any  detail  the 
pros  and  cons  of  legislative  reform  of  the  rule,  nor  is  this  limited 
discussion  intended  as  an  endorsement  of  such  reform.  Instead  this 
discussion  is  intended  merely  to  alert  the  reader  that  there  is  some 
momentum  for  perpetuities  reform.  The  American  Law  Institute  (ALI) 
recently  adopted  both  a  wait-and-see  provision^"  and  a  reformation  (cy 
pres)  provision^^^  in  the  Restatement  (Second)  of  Property,  Donative 
Transfers.  Similarly  at  the  August  1986  meeting  of  the  National  Con- 
ference of  Commissioners  on  Uniform  State  Laws,  a  massive  eighty  page 
"Draft  for  Approval"  Statutory  Rule  Against  Perpetuities  was  introduced 
by  the  Drafting  Committee  on  Rule  Against  Perpetuities  Act,  Professor 
Lawrence  Waggoner  of  the  University  of  Michigan  Law  School,  Reporter. 
It  is  unclear  at  this  time  if  these  recent  legislative  activities  or  the  Merrill 
decision  will  spark  any  interest  in  perpetuity  reform  in  the  Indiana 
legislature. 

The  Merrill  decision  should  stand  as  a  warning  to  those  members 
of  the  bar  who  draft  wills,  trusts,  and  other  documents  involving  future 
interests.  The  drafter  must  be  ever  mindful  of  the  rule  against  perpetuities 
and  each  provision  should  be  tested  to  insure  no  violation  exists.  Where 
possible,  beneficiaries  should  be  described  by  name  rather  than  class. 


"'T.  Bergin  &  P.  Haskell,  supra  note  157,  at  218  n.l4. 

"^L.  Waggoner,  supra  note  165,  §  15.2,  at  291-92;  Perpetuity  Reform,  supra  note 

176,  at  1755  n.97. 

"The  wait-and-see  provision  provides  the  vesting  requirement  with  respect  to  donative 

transfers:  "[E]xcept  as  provided  in  §  1.6  [which  apphes  to  charitable  gifts],  a  donative 

transfer  of  an  interest  in  property  fails,  if  the  interest  does  not  vest  within  the  period  of 

the  rule  against  perpetuities."  Restatement  (Second)  of  Property  (Donative  Transfers) 

§  1.4  (1983). 

"The  reformation  provision  states  the  consequences  of  the  failure  of  an  interest 

under  the  rule  against  perpetuities  in  a  donative  transfer: 

If  under  a  donative  transfer  an  interest  in  property  fails  because  it  does  not 
vest  or  cannot  vest  within  the  period  of  the  rule  against  perpetuities,  the 
transferred  property  shall  be  disposed  of  in  the  manner  which  most  closely 
effectuates  the  transferor's  manifested  plan  of  distribution  and  which  is  within 
the  limits  of  the  rule  against  perpetuities. 

Id.  §  1.5. 


344  INDIANA  LAW  REVIEW  [Vol.  20:305 

and  age  contingencies  in  excess  of  twenty-one  years  should  be  avoided. 
Where  any  doubt  exists,  a  saving  clause  should  be  included  in  the 
instrument. 


Recent  Developments  Under  the  Social  Security  Act 

Kenneth  J.  Falk* 

I.     Introduction 

The  Social  Security  Act'  has  been  described  by  the  United  States 
Supreme  Court  as  "among  the  most  intricate  ever  drafted  by  Congress,"^ 
and  the  Court  has  stated  that  the  Act  is  "almost  unintelligible  to  the 
uninitiated."^  To  most  persons,  Social  Security  means  only  a  government 
benefit  program  for  retired  or  disabled  persons.  But  the  Social  Security 
Act  provides  the  legislative  basis  for  such  diverse  programs  as  Aid  to 
Families  with  Dependent  Children  (AFDC),  Medicaid,  and  child  welfare 
programs,  as  well  as  child  support  collection  programs.  The  Code  sections 
are  further  explained  and  detailed  in  numerous  volumes  of  the  Code  of 
Federal  Regulations.  And  each  state  has  added  further  glosses  to  the 
Act  with  state  administrative  rules  and  regulations. 

A  survey  of  recent  developments  under  the  Social  Security  Act 
therefore  necessarily  encompasses  a  wide  area.  However,  certain  patterns 
quickly  emerge  in  reviewing  decisions  under  the  Act.  Litigation  under 
the  Act  can  take  two  directions.  The  first  is  to  challenge  the  consti- 
tutionality of  a  portion  of  the  Act  itself,  or  of  omissions  in  the  Act."^ 
The  second  approach  is  to  assume  that  Congress  acted  properly  in 
enacting  a  portion  of  the  Act,  but  to  argue  that  the  federal  or  state 
agency  erred  in  enacting  regulations  to  implement  the  Act.^ 

The  above  approaches  are  highlighted  in  recent  federal  court  cases 
in  and  around  Indiana  under  the  Social  Security  Act.  A  review  of  these 
decisions  also  establishes  patterns  that  provide  insight  into  potential  future 
litigation  in  this  area. 

II.     AFDC 

A.     Sibling  Deeming 

Prior  to  October  1,  1984,  AFDC  applicants  had  the  option  of 
excluding  from  the  filing  unit  any  child  in  the  family.^  Thus,  if  the 

♦Assistant  Director  of  Litigation,  Legal  Services  Organization  of  Indiana,  Inc.  B.A., 
J.D.,  Columbia  University,  1977. 

'42  U.S.C.  §  301  (1982). 

^Schweiker  v.  Gray  Panthers,  453  U.S.  34,  43  (1981). 

'Id.  (quoting  Friedman  v.  Berger,  547  F.2d  724,  727  n.7  (2d  Cir.  1976),  cert,  denied, 
430  U.S.  984  (1977)). 

'See.  e.g.,  Mathews  v.  Lucas,  427  U.S.  495  (1976). 

'See.  e.g.,  Malloy  v.  Eichler,  628  F.  Supp.  582  (D.  Del.   1986). 

'See  Shonkwiler  v.  Heckler,  628  F.  Supp.   1013,   1014  (S.D.  Ind.   1985). 

345 


346  INDIANA  LAW  REVIEW  [Vol.  20:345 

family  unit  was  made  up  of  a  mother  and  half-siblings,  if  one  of  the 
half-siblings  received  a  substantial  amount  of  child  support  from  the 
absent  father  or  Social  Security  benefits  from  a  deceased  father,  that 
half-sibling  could  be  excluded  from  the  family  unit  for  purposes  of 
AFDC  eligibility.  The  family  could  therefore  maximize  its  benefits  by 
excluding  from  the  family  unit  persons  who  had  income,  but  who  were 
under  no  legal  obligation  to  share  that  income  with  other  members  of 
the  family.  Given  the  paltry  sums  received  under  AFDC,^  even  with  this 
maximization,  these  families  continued  to  be  poor. 

In  1984,  in  the  Deficit  Reduction  Act,  Congress  enacted  a  change 
designed  to  reduce  or  eliminate  AFDC  benefits  to  those  perceived  by 
Congress  to  be  less  needy  than  persons  with  no  resources  whatsoever.^ 
Specifically,  Congress  amended  the  Social  Security  Act  to  provide  that 
all  brothers  and  sisters  living  in  the  same  home,  including  half-brothers 
and  sisters,  shall  have  their  available  income  counted  towards  AFDC 
eligibility.^  That  is,  the  available  income  of  all  siblings  is  deemed  to  be 
shared  by  all  other  siblings  and  is  therefore  counted  towards  the  family's 
income.  The  Secretary  of  Health  and  Human  Services  quickly  promul- 
gated regulations  stating  that  all  income  of  brothers  and  sisters,  including 
half-sibhngs,  was  available  to  the  family. '° 

This  sibling  deeming  rule  has  spawned  a  great  deal  of  litigation  by 
low  income  persons.''  The  litigation  has  attacked  both  the  constitution- 


^In  Indiana,  for  example,  the  maximum  combined  amount  of  AFDC  that  one 
dependent  child  and  one  needy  relative  can  receive  is  $196  per  month.  Not  more  than 
$60  per  month  may  be  awarded  for  each  additional  child.  Indiana  Dep't.  of  Pub.  Welfare, 
Indiana's  Assistance  to  FAMn-iES  with  Dependent  Children  Program  (June,  1985)  (available 
in  the  office  of  the  Indiana  Department  of  Public  Welfare).  See  also  Ind.  Admin.  Code 
tit.  470,  r.   10.1-3-3  (Supp.   1986);  infra  notes  31-33  and  accompanying  text. 

'Shonkwiler,  628  F.  Supp.  at  1017. 

'See  Deficit  Reduction  Act  of  1984,  §  2640(a),  42  U.S.C.  §  602(a)(38)(B)  (Supp. 
Ill  1985),  which  states  in  pertinent  part: 

[I]n  making  the  determination  under  paragraph  (7)  with  respect  to  a  de- 
pendent child  and  applying  paragraph  (8),  the  State  agency  shall  .  .  .  include — 

any  brother  or  sister  of  such  child  .  .  .  and  any  income  of  or  available 
for  such  parent,  brother  or  sister  shall  be  included  in  making  such  determination 
and  applying  such  paragraph  with  respect  to  the  family  .... 
■°45  C.F.R.  §  206.10(a)(l)(vii)(B)  (1985).  It  states:  "For  AFDC  only,  in  order  for 
the  family  to  be  eligible,   an  application  with  respect  to  a  dependent  child  must  also 
include,  if  living  in  the  same  household  and  otherwise  ehgible  for  assistance  .  .  .   [a]ny 
blood-related  or  adoptive  brother  or  sister." 

''See,  e.g.,  Ardister  v.  Mansour,  627  F.  Supp.  641  (W.D.  Mich.  1986)  (ruHng  on 
preliminary  injunction);  Whitehorse  v.  Heckler,  627  F.  Supp.  848  (D.S.D.  1985);  Gorrie 
V.  Heckler,  624  F.  Supp.  85  (D.  Minn.  1985);  Frazier  v.  Pingree,  612  F.  Supp.  345  (M.D. 
Fla.  1985)  (ruhng  on  preliminary  injuction);  Shonkwiler  v.  Heckler,  628  F.  Supp.  1013 
(S.D.  Ind.  1985)  (ruling  on  preliminary  injunction);  see  also  Shonkwiler  v.  Bowen,  No. 
IP84-1612-C  (S.D.  Ind.  Aug.  11,  1986);  Gilliard  v.  Kirk,  633  F.  Supp.  1529  (W.D.N.C. 


1987]  SOCIAL  SECURITY  347 

ality  of  the  statute  on  its  face  as  well  as  the  propriety  of  the  implementing 
regulations.'^  The  constitutional  arguments  have  been  that  the  statute 
and/or  regulations  violate  a  right  of  privacy  and  family  integrity  because 
the  statute  forces  families  that  are  not  one  unit  to  merge  into  one;'^ 
that  the  statute  effects  an  unconstitutional  taking;'"*  and  that  the  statute 
creates  an  unconstitutional  irrebuttable  presumption.'^  These  arguments 
have  met  with  varying  success.  A  number  of  courts  have  found  the 
statute  and/or  regulations  unconstitutional  on  their  face.'^  However, 
other  courts  have  found  them  constitutional.'^ 

In  Indiana,  the  issue  was  presented  in  the  case  of  Shonkwiler  v. 
Heckler .^^  The  United  States  District  Court  for  the  Southern  District  of 
Indiana  held  that  the  statute  and  implementing  regulations  were  proper. ^^ 

Brenda  Shonkwiler  was  the  head  of  the  AFDC  household  in  this 
case.  Ms.  Shonkwiler  had  three  children  living  with  her.  One  was  the 
child  of  Mikel  Shonkwiler  and  the  other  two  were  children  from  a  former 
marriage.  Mr.  Shonkwiler  paid  $360  a  month  in  court-ordered  child 
support  for  his  child's  benefit.  Prior  to  sibling  deeming,  the  Shonkwiler 
child  was  not  included  in  the  family  unit.  Thus,  he  received  $360  a 
month  in  support  and  the  rest  of  the  family,  Brenda  and  the  two  half- 
sibUngs,  received  $256  a  month  in  AFDC.  However,  the  sibling  deeming 
rule,  as  interpreted  by  the  Department  of  Health  and  Human  Services 
and  the  Indiana  Department  of  Public  Welfare,  mandated  that  the 
Shonkwiler  child  and  his  support  income  be  included  in  the  family  unit; 
as  a  consequence  the  family  became  ineligible  for  AFDC.^°  Thus,  Mikel 
Shonkwiler' s  support  for  his  son  was  deemed  as  being  used  to  support 
his  son's  half-sibHngs  and  his  ex- wife.  Other  plaintiffs  in  the  litigation 
experienced  similar  harsh  results  because  of  sibling  deeming.^' 

In  finding  against  the  plaintiffs,  the  district  court  relied  on  a  theme 
often  voiced  by  both  courts  and  defendants  in  current  litigation  under 


1986);  Oliver  v.  Ledbetter,  624  F.  Supp.  325  (N.D.  Ga.  1985);  Creaton  v.  Heckler,  625 
F.  Supp.  26  (CD.  Cal.   1985). 

^^See  cases  cited  supra  note  11. 

^^See,  e.g.,  Shonkwiler,  slip.  op.  at  10-11. 

''See,  e.g.,  Gorrie,  624  F.  Supp.  at  90-91. 

'^See,  e.g.,  Shonkwiler,  slip.  op.  at  11. 

'''See,  e.g.,  Gilliard  v.  Kirk,  633  F.  Supp.  1529  (W.D.N.C.  1986);  Whitehorse  v. 
Heckler,  627  F.  Supp.  848  (D.S.D.  1985);  Gorrie  v.  Heckler,  624  F.  Supp.  85  (D.  Minn. 
1985);  Frazier  v.  Pingree,  612  F.  Supp.  345  (M.D.  Fla.   1985). 

''See,  e.g.,  Shonkwiler  v.  Bowen,  No.  IP84-1612-C  (S.D.  Ind.  Aug.  11,  1986); 
Ardister  v.  Mansour,  627  F.  Supp.  641  (W.D.  Mich.  1986);  Oliver  v.  Ledbetter,  624  F. 
Supp.  325  (N.D.  Ga.   1985);  Creaton  v.  Heckler,  625  F.  Supp.  26  (CD.  Cal.   1985). 

'«628  F.  Supp.   1013  (S.D.  Ind.   1985). 

"'Id. 

'°Id.  at  1016, 

''See  id.  at  1016-17. 


348  INDIANA  LAW  REVIEW  [Vol.  20:345 

the  Social  Security  Act:  the  need  to  reduce  the  costs  of  welfare  programs. ^^ 
The  court  stated: 

The  primary  purpose  of  Section  2640,  the  Secretary's  regulation, 
and  the  State's  AFDC  Manual  provision  is  to  reduce  or  eUminate 
welfare  benefits  for  those  considered  by  Congress  to  be  less 
needy  than  those  completely  without  resources  such  as  households 
that  have  available  other  income  or  resources  with  which  to 
support  themselves.  .  .  .  Given  Congress'  legitimate  purpose  of 
redistributing  limited  resources,  the  standard  fihng  unit  provision 
is  rationally  related  to  achieving  that  purpose.  It  is  appropriate 
to  assume  the  following  proposition:  that  individuals  who  live 
in  the  same  household  share  expenses.  If  the  contributions  of 
the  siblings  added  to  the  AFDC  unit  are  not  direct  payments 
to  assist  with  household  expenses,  there  will  at  least  be  indirect 
payments  through  the  sharing  of  fixed  expenses. ^^ 

Given  the  split  in  district  court  decisions  around  the  country,^"^  it  is 
not  unreasonable  to  expect  that  the  United  States  Supreme  Court  will 
ultimately  review  this  issue.  The  Supreme  Court  recently  gave  an  in- 
dication of  how  it  might  rule  on  some  of  the  issues  presented  in  Shonk- 
wiler.  In  Lyng  v.  Castillo, ^^  the  Court  was  faced  with  a  challenge  to 
sibling  deeming  under  the  Food  Stamp  Act,^^  a  program  not  under  the 
Social  Security  Act.  There,  Congress  had  amended  the  statute  to  provide 
that  a  food  stamp  household  must  include  all  sibhngs  living  together.^'' 
The  Court  upheld  the  law  and  found  no  impingement  on  a  fundamental 
right  and  no  equal  protection  violation. ^^  According  to  the  Court,  the 
law  was  rationally  based. ^^  This  decision  continued  a  trend,  recognizable 
in  Shonkwiler,  of  extending  great  deference  to  Congress'  determination 
of  what  eligibility  guidelines  are  appropriate  under  the  Social  Security 
Act.30 


^m.  at  1018. 

^'Shonkwiler,  slip.  op.  at  12  (citing  Brown  v.  Heckler,  589  F.  Supp.  985,  992-94 
(E.D.  Pa.   1984)). 

^'^See  supra  notes  16-17. 

"106  S.  Ct.  2727  (1986). 

26U.S.C.  §§  2011-29  (1982). 

^'Lyng,  106  S.  Ct.  at  2728  n.l. 

'Ud.  at  2727-28. 

"Id.  at  2730-32. 

'""Moreover,  the  Legislature's  recognition  of  the  potential  for  mistake  and  fraud 
and  the  cost-ineffectiveness  of  case-by-case  verification  of  claims  that  individuals  ate  as 
separate  households  unquestionably  warrants  the  use  of  general  definitions  in  this  area." 
Id.  (footnotes  omitted). 

In  discussing  the  power  of  Congress  to  require  a  disabled  dependent  child's  Social 
Security  benefits  to  terminate  upon  marriage  to  a  disabled  spouse,  the  Supreme  Court 


1987]  SOCIAL  SECURITY  349 

The  Lyng  decision  did  not  address  the  AFDC  program.  Nor  did  it 
address  all  the  constitutional  arguments  raised  by  opponents  of  sibling 
deeming  in  the  AFDC  programs.  However,  in  upholding  sibling  deeming 
in  the  Food  Stamp  program,  the  Court  did  emphasize  points  presented 
in  Shonkwiler:  courts  are  reluctant  to  find  legislation  under  the  Social 
Security  Act  unconstitutional  and,  concomitantly,  decisions  by  Congress 
in  changing  the  Social  Security  Act  are  accorded  great  deference.  Lyng 
will  therefore  undoubtedly  have  an  impact  on  sibling  deeming  in  the 
AFDC  context. 

B.     Lump  Sum  Budgeting 

The  sibling  deeming  cases  in  the  AFDC  context  exemplify  one  method 
of  attack  on  programs  under  the  Social  Security  Act,  a  constitutional 
attack  on  the  legislation  itself.  A  recent  Indiana  case  regarding  lump 
sum  budgeting  illustrates  the  other  method,  attacking  agency  interpre- 
tation of  the  legislation. 

In  order  to  be  eligible  for  AFDC,  an  applicant  must  satisfy  both 
an  income  and  a  resource  test.^'  Eligibility  will  be  found  only  if  an 
applicant's  income  is  below  a  needs  standard  established  by  each  state, ^^ 
and  if  his  resources  are  not  in  excess  of  $1,000." 

The  issue  presented  in  the  lump  sum  context  is  how  to  treat  the 
receipt  of  a  large  sum  of  unearned  income,  whether  through  inheritance. 
Social  Security  award,  or  some  other  means.  If  it  is  treated  as  a  resource, 
then  once  the  individual  has  spent  it  down  to  less  than  $1,000,  he  would 
again  be  eligible  for  AFDC.  If,  however,  the  lump  sum  is  treated  as 
income,  it  must  somehow  be  budgeted  in  the  monthly  AFDC  budget. 

Prior  to  1981,  lump  sums  were  treated  as  resources,  but  in  that 
year.  Congress  amended  the  Social  Security  Act  to 

provide  that  if  a  child  or  relative  applying  for  or  receiving  aid 
to  families  with  dependent  children,  or  any  other  person  whose 

stated  that  *'[g]eneral  rules  are  essential  if  a  fund  of  this  magnitude  is  to  be  administered 
with  a  modicum  of  efficiency,  even  though  such  rules  inevitably  produce  seemingly  arbitrary 
consequences  in  some  individual  cases."  Califano  v.  Jobst,  434  U.S.  47,  53  (1977)  (citing 
Weinberger  v.  Salfi,  422  U.S.  749,  776  (1975)). 

^'42  U.S.C.  §  602  (1982). 

^^In  Indiana,  needs  are  computed  according  to  a  set  formula,  regardless  of  actual 
needs.  Ind.  Admin.  Code  tit.  470,  r.  10.1-3-3(a)(2)  (Supp.  1986).  For  example,  an  applicant 
is  allotted  no  more  than  $100  a  month  for  basic  shelter  costs,  regardless  of  his  actual 
shelter  costs.  A  person's  basic  needs,  comprising  food,  clothing,  personal,  household 
supplies,  and  utilities  are  budgeted  at  no  more  than  $85.25  a  month  for  the  first  person 
in  the  household  and  $73.50  for  the  second,  regardless  of  actual  costs.  Then  when  a  total 
needs  figure  is  reached,  it  is  automatically  reduced  ten  percent  to  create  an  adjusted  total 
needs  figure.  The  maximum  AFDC  benefit  that  can  be  received  is  this  adjusted  total 
needs  figure.  Ind.  Code  §  12-1-7-3.1.(1982). 
"43  U.S.C.  §  602(a)(7)(B)  (1982). 


350  INDIANA  LAW  REVIEW  [Vol.  20:345 

need  the  State  considers  when  determining  the  income  of  a  family, 
receives  in  any  month  an  amount  of  earned  or  unearned  income 
which,  together  with  all  other  income  for  that  month  not  excluded 
under  paragraph  (8),  exceeds  the  State's  standard  of  need  ap- 
plicable to  the  family  of  which  he  is  a  member — 

(A)  such  amount  of  income  shall  be  considered  income  to  such 
individual  in  the  month  received,  and  the  family  of  which  such 
person  is  a  member  shall  be  ineligible  for  aid  under  the  plan 
for  the  whole  number  of  months  that  equals  (i)  the  sum  of  such 
amount  and  all  other  income  received  in  such  month,  not  ex- 
cluded under  paragraph  (8),  divided  by  (ii)  the  standard  of  need 
applicable  to  such  family,  and 

(B)  any  income  remaining  (which  amount  is  less  than  the 
applicable  monthly  standard)  shall  be  treated  as  income  received 
in  the  first  month  following  the  period  of  ineligibility  specified 
in  subparagraph  (A)  .  .  .  .^"^ 

In  Watkins  v.  Blinzinger,^^  the  Court  of  Appeals  for  the  Seventh 
Circuit  explained  this  provision  by  stating  that  under  it, 

the  state's  welfare  officials  divide  the  lump  sum  by  the  monthly 
"standard  of  need"  ....  The  quotient  gives  the  number  of 
months  the  person  will  be  ineligible  for  aid.  For  example,  if  a 
person  receives  $20,000  and  the  monthly  standard  of  need  is 
$500,  the  state  will  divide  $20,000  by  $500,  producing  a  quotient 
of  40.  The  recipient  will  be  ineligible  for  AFDC  for  40  months. 
This  method  treats  the  lump  sum  as  if  the  amount  of  the 
"standard  of  need"  had  been  received  as  monthly  income  during 
the  months  following  receipt  of  the  lump  sum.  A  recipient  who 
spends  a  lump  sum  classified  as  "income"  and  becomes  destitute 
remains  ineligible  for  the  program  nevertheless,  while  if  the  lump 
sum  had  been  called  a  "resource"  eligibility  would  have  been 
restored. ^^ 

Neither  the  statute  nor  the  federal  regulations  promulgated  under 
it  define  the  word  "income."  While  it  might  be  concluded  that  income 
is  something  easily  determined,  a  specific  problem  arises  in  considering 
personal  injury  awards.  In  Indiana,  as  elsewhere,  compensation  for 
personal  injury  has  always  been  treated  as  restoring  the  wronged  indi- 
vidual to  his  preinjured  state. ^^  The  individual  is  made  whole  but  nothing 
more. 


''Id.  §  602(a)(17). 
^=789  F.2cl  474  (7th  Cir.   1986). 
'"•Id.  at  475  (footnote  omitted). 

''See,  e.g.,  State  Farm  Mut.  Auto.  Ins.  Co.  v.  Mid-Century  Ins.  Co.,  259  N.E.2d 
424  (Ind.  Ct.  App.   1970). 


1987]  SOCIAL  SECURITY  351 

Nevertheless,  the  Secretary  of  Health  and  Human  Services  and  the 
Indiana  Department  of  Public  Welfare  have  both  taken  the  position  that 
a  personal  injury  award  is  income.  As  a  result,  aggrieved  AFDC 
recipients  in  Watkins  brought  suit  in  the  United  State  District  Court  for 
the  Southern  District  of  Indiana.  The  district  court  rendered  judgment 
in  favor  of  the  Secretary  and  the  State. ^^  The  Seventh  Circuit  affirmed 
the  district  court's  decision. ^^ 

The  Seventh  Circuit  attempted  to  define  income  and  to  show  why 
an  award  designed  to  compensate  for  injuries  is  income. "^  However,  the 
key  to  the  court's  decision  is  the  fact  that  Congress  did  not,  in  the 
Social  Security  Act,  define  the  term  income.  Therefore,  the  Secretary 
was  free  to  define  income  or  else  allow  the  states  to  define  the  term. 
The  Seventh  Circuit  reasoned: 

Because  AFDC  is  a  program  of  cooperative  federalism,  and 
because  states  control  most  of  the  important  variables,  the  Sec- 
retary's position  ...  is  entitled  to  considerable  respect.  If  the 
Secretary  (or  a  court)  forced  a  state  to  exclude  an  item  from 
income,  it  might  respond  by  reducing  the  payments  to  all  re- 
cipients of  AFDC.  A  court  should  require  such  a  revamping  of 
the  program  only  if  the  legislation  at  hand  leaves  no  alternative.^' 

The  Seventh  Circuit  acknowledged  that  the  Secretary's  position  "may 
produce  harsh  results. '"^^  Nevertheless,  it  upheld  that  position. 

Not  all  courts  facing  the  lump  sum  budgeting  question  have  sustained 
the  Secretary's  discretion  in  this  manner,  however.  In  Reed  v.  Health 
and  Human  Services,^^  the  Court  of  Appeals  for  the  Fourth  Circuit 
determined  that  in  the  absence  of  a  specific  legislative  definition  of 
income,  it  should  be  given  its  plain  and  ordinary  meaning,  which  had 
been  consistently  followed  by  Congress  in  such  things  as  the  Internal 
Revenue  Code."^  This  plain  and  ordinary  meaning  dictated  a  conclusion 
that  a  lump  sum  personal  injury  award  was  not  income."*^ 

The  Supreme  Court  has  agreed  to  review  the  Reed  case."^^  It  is 
uncertain  whether  the  Court  will  defer  to  agency  discretion  as  in  Watkins, 


3«Watkins  v.  Blinzinger,  610  F.  Supp.  1443  (S.D.  Ind.  1985),  aff'd,  789  F.2d  474 
(7th  Cir.   1986). 

^'Watkins,  789  F.2d  474. 

"^Id. 

''Id.  at  478. 

'^Id.  at  482. 

^^774  F.2d  1270  (4th  Cir.  1985),  cert,  granted,  106  S.  Ct.  3271  (1986);  see  also  Payne 
V.  Toan,  626  F.  Supp.  553  (W.D.  Mo.  1985);  LaMadrid  v.  Hegstrom,  599  F.  Supp.  1450 
(D.  Or.  1984).  But  see  Jackson  v.  Guissinger,  589  F.  Supp.   1288  (W.D.  La.   1984). 

"^Reed,  11 A  F.2d  at  1274-75. 

''Id. 

"^Lukhard  v.  Reed,  106  S.  Ct.  3271  (1986). 


352  INDIANA  LAW  REVIEW  [Vol.  20:345 

or  to  common  sense  as  in  Reed.  Nevertheless,  Watkins  stands  as  a 
reminder  of  the  great  deal  of  latitude  that  courts  grant  to  agencies 
interpreting  the  statutes  they  are  charged  with  administering/^ 

III.     Medicaid 

Watkins  can  be  explained  as  the  Seventh  Circuit's  way  of  bowing 
to  agency  discretion.  However,  another  recent  Indiana  case  shows  that 
courts  can  be  less  deferential  to  an  agency's  interpretation  of  law. 

Medicaid  is  a  program  designed  to  furnish  "medical  assistance  on 
behalf  of  families  with  dependent  children  and  of  aged,  blind,  or  disabled 
individuals,  whose  income  and  resources  are  insufficient  to  meet  the 
costs  of  necessary  medical  services. '"^^  It  is  funded  and  administered 
through  the  cooperation  of  the  federal  and  state  governments  pursuant 
to  Title  XIX  of  the  Social  Security  Act.^^  A  state  participating  in  Medicaid 
must  develop  a  state  plan,  which  must  comply  with  various  income  and 
eligibility  requirements  contained  in  the  Social  Security  Act.^° 

Persons  who  receive  AFDC  also  receive  Medicaid. ^^  However,  in 
certain  situations  the  income  and  resources  eligibility  requirements  of 
AFDC  and  Medicaid  differ.  The  Secretary  has  addressed  this  situation 
in  regulations  by  stating  that  "[t]he  [state]  agency  must  provide  Medicaid 
to  individuals  who  would  be  eligible  for  AFDC  except  for  an  eligibility 
requirement  used  in  that  program  that  is  specifically  prohibited  under 
Title  XIX. "^^  Thus,  not  only  must  states  provide  Medicaid  to  persons 
who  receive  AFDC  assistance,  but  states  must  also  provide  Medicaid  to 
persons  who  would  receive  AFDC  but  for  an  AFDC  eligibility  requirement 
that  is  specifically  prohibited  in  the  Medicaid  statute. 

In  amending  the  AFDC  statute  to  provide  for  sibling  deeming. 
Congress  did  not  make  any  comparable  amendment  to  the  Medicaid 
Act.  Instead,  for  quite  some  time,  the  Medicaid  Act  has  contained  a 
strict  prohibition  against  counting  the  income  of  a  child  as  available  to 
meet  the  needs  of  the  child's  siblings  or  parents. 


''See,   e.g..  Young  v.   Community  Nutrition  Inst.,    106  S.   Ct.  2360,   2364  (1986), 
where  the  Supreme  Court  noted: 

[I]f  the  statute  is  silent  or  ambiguous  with  respect  to  the  specific  issue,  the 
question  for  the  [reviewing]  court  is  whether  the  agency's  answer  is  based  on 
a  permissible  construction  of  the  statute  ....  [A]  court  may  not  substitute  its 
own  construction  of  a  statutory  provision  for  a  reasonable  interpretation  made 
by  the  administrator  of  an  agency, 
(quoting  Chevron,  U.S.A.,  Inc.  v.  Natural  Resources  Defense  Council,  467  U.S.  837 
(1984)). 

M2  U.S.C.  §  1396  (1982). 

''Id. 

''Id. 

''Id.  §  1396a(a)(10)(A)(i). 

"42  C.F.R.  §  435.113  (1985). 


1987]  SOCIAL  SECURITY  353 

A  State  plan  for  medical  assistance  [Medicaid]  must.  .  .  . 

.  .  .  include  reasonable  standards  ...  for  determining  eli- 
gibility for  and  the  extent  of  medical  assistance  under  the  plan 
which  ...  do  not  take  into  account  the  financial  responsibility 
of  any  individual  for  any  applicant  or  recipient  of  assistance 
under  the  plan  unless  such  applicant  or  recipient  is  such  indi- 
vidual's spouse  or  such  individual's  child  who  is  under  age  21 

53 

The  effect  of  this  statute  is  of  great  importance.  If  deeming  of 
sibling  income  is  prohibited  by  Medicaid,  then  even  if  a  family  loses 
AFDC  benefits  because  one  sibling's  income  is  deemed  to  be  available 
to  the  whole  family,  the  family  should  still  be  ehgible  to  receive  Medicaid. 
Thus,  the  Social  Security  Act  would  at  least  assure  that  the  family  is 
able  to  receive  necessary  medical  care. 

Despite  the  clear  text  of  the  statute  and  regulation,  the  Secretary 
of  Health  and  Human  Services  and  the  Indiana  State  Department  of 
Public  Welfare  applied  the  sibling  deeming  rule  to  Medicaid  recipients, 
thereby  discontinuing  the  Medicaid  benefits  of  thousands  of  indigent 
persons.  In  Reed  v.  Blinzinger,^'^  low  income  persons  challenged  this 
extension  of  the  sibling  deeming  rule,  claiming  that  a  conflict  existed 
between  the  Secretary's  AFDC  regulations  and  the  clear  language  of  the 
Medicaid  prohibition.  The  United  States  District  Court  for  the  Southern 
District  of  Indiana  held  for  the  plaintiffs,  stating  it  could  not  see  a 
distinction  between  merely  requiring  a  sibling  to  be  included  in  the  filing 
unit  and  deeming  the  sibling's  income  available  to  the  Medicaid  ap- 
plicant.^^ The  court  enjoined  the  Secretary  and  the  State  Welfare  De- 
partment from  utilizing  sibling  deeming  in  determining  Medicaid 
eligibility.^^ 

In  its  decision,  the  court  simply  found  that  the  Secretary  had  gone 
too  far  in  interpreting  the  statute  and  then  claiming  his  interpretation 
was  entitled  to  deference. 

An  administrative  interpretation  is  given  controlling  weight  only 
if  it  is  reasonable  and  reflects  the  policies  underlying  the  leg- 


"42  U.S.C.   §   1396a(a)(17)(D)  (1982).  The  implementing  regulations,  42  C.F.R. 
435.602  (1985),  state: 

(a)  Except  for  a  spouse  of  an  individual  or  a  parent  for  a  child  who  is  under 
age  21  or  blind  or  disabled,  the  agency  must  not — 

(1)  Consider  income  and  resources  of  any  relative  available  to  an  individual; 
nor 

(2)  Collect  reimbursement  from  any  relative  for  amounts  paid  by  the  agency 
for  services  provided  to  an  individual. 

'^639  F.  Supp.   130  (S.D.  Ind.   1986),  appeal  pending. 

''Id.  at  134. 

''Id. 


354  INDIANA  LAW  REVIEW  [Vol.  20:345 

islation.  Moreover,  an  agency  is  bound  by  its  own  regulations. 
The  interpretation  cannot  be  inconsistent  with  the  plain  meaning 
of  a  regulation  or  nullify  the  intent  or  wording  of  a  regulation. 
The  Secretary's  interpretation  of  §  602(a)(38)  does  not  com- 
port with  the  plain  language  of  the  Medicaid  statute  or  with 
the  Secretary's  own  regulations.  The  language  of  the  statute  and 
regulations  is  unambiguous.  A  court  "must  give  effect  to  the 
unambiguously  expressed  intent  of  Congress."  When  the  statute 
is  analyzed  as  a  whole,  as  defendants  argue  it  should  be,  the 
statute  provides  that  the  Secretary  may  set  standards  for  deter- 
mining the  availability  of  income  actually  received  by  an  indi- 
vidual and  of  income  assumed  to  be  available.  The  latter  is 
limited  to  income  from  a  spouse  or  parent." 

The  court's  decision  was  in  accord  with  holdings  of  other  circuits  and 
districts. ^^  Agency  discretion  in  statutory  interpretation  is  therefore  not 
limitless,  but  must  be  a  rational  and  consistent  interpretation  of  the 
statute. 

IV.     Social  Security 

Another  area  in  which  arguments  about  agency  discretion  in  statutory 
interpretation  have  raged  in  the  recent  past  is  the  area  of  disability 
determinations  under  the  Social  Security  Act.  Although  there  has  been 
no  seminal  Indiana  case  on  this  issue,  it  has  been  addressed  by  the 
Court  of  Appeals  for  the  Seventh  Circuit,  and  because  it  will  be  addressed 
by  the  United  States  Supreme  Court  this  term,  the  issue  must  be 
mentioned. 

Depending  on  insured  status,  one  is  entitled  to  either  Social  Security 
or  Supplemental  Security  Income  if  one  is  "under  a  disability. "^^  The 
Act  defines  "disability"  as  the  "inability  to  engage  in  any  substantial 
gainful  activity  by  reason  of  any  medically  determinable  physical  or 
mental  impairment  which  .  .  .  can  be  expected  to  last  for  a  continuous 
period  of  not  less  than  12  months."^"  Disability  exists  only  if  the 
claimant's  impairments  "are  of  such  severity  that  he  is  not  only  unable 
to  do  his  previous  work  but  cannot,  considering  his  age,  education,  and 


"M  at  132-33  (citations  omitted).  The  Secretary  and  the  state  had  argued  that  the 
Secretary's  extension  of  the  sibling  deeming  rule  to  Medicaid  eligibility  clearly  reflected 
the  intent  of  Congress  and  that  this  interpretation  was  entitled  to  great  deference.  Id.  at  131-32. 

''See,  e.g.,  Vance  v.  Hegstrom,  793  F.2d  1018  (9th  Cir.  1986);  Malloy  v.  Eichler, 
628  F.  Supp.  582  (D.  Del.  1986);  Sundberg  v.  Mansour,  627  F.  Supp.  616  (W.D.  Mich. 
1986);  Gibson  v.  Puett,  630  F.  Supp.  542  (M.D.  Tenn.   1985). 

^'42  U.S.C.  §  423(a)(l)(D)(1982);  see  also  id.  §  1381a. 

"^Id.  §  423(d)(1)(A);  see  also  id.  §  1382c(a)(3)(A). 


1987]  SOCIAL  SECURITY  355 

work  experience,  engage  in  any  other  kind  of  substantial  gainful  work 
which  exists  in  the  national  economy.  .  .  ."^'  Thus,  disability  is  a  factor 
both  of  medical  status  and  of  various  vocational  considerations. 

The  Secretary  of  Health  and  Human  Services  promulgated  a  five- 
step  sequential  evaluation  procedure  for  determining  disability. ^^  As  noted 
in  Yuckert  v.  Heckler, ^^  in  framing  the  issue  relevant  here, 

The  first  step  requires  the  ALJ  to  determine  whether  the  claimant 
is  currently  working.   20  C.F.R.    §   404.1520(b)  (1985).   If  the 


''Id.  §  423(d)(2)(A);  see  also  id.  §  1382c(a)(3)(B). 
"^See  20  C.F.R.  §  404.1520  (1986),  which  provides: 

(a)  Steps  in  evaluating  disability.  We  consider  all  material  facts  to  determine 
whether  you  are  disabled.  If  you  are  doing  substantial  gainful  activity,  we  will 
determine  that  you  are  not  disabled.  If  you  are  not  doing  substantial  gainful 
activity,  we  will  first  consider  your  physical  or  mental  impairment(s).  Your 
impairment(s)  must  be  severe  and  meet  the  duration  requirement  before  we  can 
find  you  to  be  disabled.  We  follow  a  set  order  to  determine  whether  you  are 
disabled.  We  review  any  current  work  activity,  the  severity  of  your  impairment(s), 
your  residual  functional  capacity  and  your  age,  education,  and  work  experience. 
If  we  can  find  that  you  are  disabled  or  not  disabled  at  any  point  in  the  review, 
we  do  not  review  further. 

(b)  If  you  are  working.  If  you  are  working  and  the  work  you  are  doing  is 
substantial  gainful  activity,  we  will  find  that  you  are  not  disabled  regardless  of 
your  medical  condition  or  your  age,  education,  and  work  experience. 

(c)  You  MUST  HAVE  A  SEVERE  IMPAIRMENT.  If  you  do  uot  have  any  impairment 
or  combination  of  impairments  which  significantly  Hmits  your  physical  or  mental 
abihty  to  do  basic  work  activities,  we  will  find  that  you  do  not  have  a  severe 
impairment  and  are,  therefore,  not  disabled.  We  will  not  consider  your  age, 
education,  and  work  experience.  However,  it  is  possible  for  you  to  have  a  period 
of  disability  for  a  time  in  the  past  even  though  you  do  not  now  have  a  severe 
impairment. 

(d)  When  your  impairment(s)  meets  or  equals  a  limited  impairment  in  Ap- 
pendix 1.  If  you  have  an  impairment(s)  which  meets  the  duration  requirement 
and  is  listed  in  Appendix  1  or  is  equal  to  a  listed  impairment(s),  we  will  find 
you  disabled  without  considering  your  age,  education,  and  work  experience. 

(e)  Your  impairment(s)  must  prevent  you  from  doing  past  relevant  work. 
If  we  cannot  make  a  decision  based  on  your  current  work  activity  or  on  medical 
facts  alone,  and  you  have  a  severe  impairment(s),  we  then  review  your  residual 
functional  capacity  and  the  physical  and  mental  demands  of  the  work  you  have 
done  in  the  past.  If  you  can  still  do  this  kind  of  work,  we  will  find  that  you 
are  not  disabled. 

(f)  Your  impairment(s)  must  prevent  you  from  doing  any  other  work.  (1) 
If  you  cannot  do  any  work  you  have  done  in  the  past  because  you  have  a 
severe  impairment(s),  we  will  consider  your  residual  functional  capacity  and  your 
age,  education,  and  past  work  experience  to  see  if  you  can  do  other  work.  If 
you  cannot,  we  will  find  you  disabled.  (2)  If  you  have  only  a  marginal  education, 
and  long  work  experience  (i.e.,  35  years  or  more)  where  you  only  did  arduous 
unskilled  physical  labor,  and  you  can  no  longer  do  this  kind  of  work,  we  use 
a  different  rule  (see  §  404.1562). 

"774  F.2d  1365  (9th  Cir.  1985),  cert,  granted,  106  S.Ct.   1967  (1986). 


356  INDIANA  LA  W  REVIEW  [Vol.  20:345 

claimant  is  working,  the  ALJ  must  find  her  not  disabled.  Id. 
If  the  claimant  is  not  working,  however,  the  second  step  requires 
the  ALJ  to  determine  whether  the  claimant  suffers  a  severe 
impairment.  20  C.F.R.  §  404.1520(c)  (1985).  The  regulations 
define  a  severe  impairment  as  one  that  significantly  limits  the 
claimant's  "ability  to  do  basic  work  activities."  20  C.F.R.  § 
404.1521(a)  (1985).  Basic  work  activities  mean  "the  abilities  and 
aptitudes  necessary  to  do  most  jobs."  20  C.F.R.  §  404.1521(b) 
(1985).  The  ALJ  must  evaluate  the  severity  of  an  impairment 
without  reference  to  vocational  factors.  20  C.F.R.  §  404.1520(c) 
(1985).  Only  if  the  ALJ  finds  the  claimant's  impairment(s)  severe 
does  he  proceed  to  the  next  three  steps  of  the  sequential  analysis, 
under  which  he  is  required  to  consider  the  claimant's  age,  ed- 
ucation, work  experience,  and  ability  to  perform  past  work.  See 
20  C.F.R.  §  404.1420(d)-(0  (1985). ^^ 

Step  two  of  the  regulation,  therefore,  allows  an  individual  to  be 
denied  disability  status  without  considering  vocational  factors.  Moreover, 
step  two  requires  an  applicant  who  has  shown  inability  to  do  past  work 
nevertheless  to  carry  a  further  burden.  Thus,  despite  the  fact  that 

[t]he  courts  of  all  twelve  circuits  have  unanimously  held  that, 
while  the  ultimate  burden  of  proving  disability  Ues  with  the 
claimant,  the  plaintiff  makes  a  prima  facie  showing  when  he 
demonstrates  an  impairment  which  prevents  him  from  performing 
his  previous  work.  The  burden  then  shifts  to  the  Secretary  to 
show  that  the  claimant  remains  capable  of  performing  other 
work  in  view  of  the  vocational  factors  of  age,  education,  and 
work  experience.  ...  All  the  circuits  agree  that  it  is  the  language 
of  the  Act  itself  which  requires  "that  disability  determinations 
be  made  according  to  a  two  step  process,"  with  the  first  step 
placing  the  burden  on  the  claimant  to  demonstrate  an  inability 
to  perform  past  work.^^ 

Step  two  appears  to  be  an  example  of  an  administrative  agency  inter- 
preting the  Act  in  ways  contrary  to  the  statute.  Therefore  the  Seventh 
Circuit,  in  Johnson  v.  Heckler,^^  along  with  a  number  of  other  courts,^'' 
has  declared  step  two  to  be  unlawful.  The  discretion  of  the  Secretary 
does  not  stretch  that  far. 


"^Id.  at  1368  (footnotes  omitted). 

"Johnson  v.  Heckler,  769  F.2d  1202,   1210  (7th  Cir.   1985),  appeal  pending  (citing 
Valercia  v.  Heckler,  751  F.2d  1082,  1086  (9th  Cir.   1985)). 
^769  F.2d  1202  (7th  Cir.   1985),  appeal  pending. 
""See  Baeder  v.  Heckler,  768  F.2d  547  (3rd  Cir.  1985);  Yuckert,  774  F.2d  at  1365. 


1987]  SOCIAL  SECURITY  357 

The  Secretary's  argument  that  step  two  is  a  reasonable  exercise 
of  her  broad  rule-making  authority  necessary  to  the  proper  and 
efficient  functioning  of  "an  already  overburdened  agency"  .  .  . 
is  a  fall-back  argument  merely,  and  a  thoroughly  unpersuasive 
one.  The  district  court  rejected  the  Secretary's  reliance  on  her 
broad  rule-making  authority,  reasoning  that,  to  merit  deference, 
the  Secretary's  regulations  and  rules  must  be  consistent  with  the 
Act  ....  Because  we  have  held  the  Secretary's  regulations  to 
be  inconsistent  with  the  statute,  no  deference  to  her  rule-making 
authority  is  required. ^^ 

This  has  not  been  the  holding  of  all  courts  facing  this  issue;  a 
number  have  found  that  the  severity  regulations,  as  interpreted  by  the 
courts,  can  be  utilized. ^^  Illustrative  of  these  is  Farris  v.  Secretary  of 
Health  and  Human  Services, ^°  where  the  Court  of  Appeals  for  the  Sixth 
Circuit  attempted  to  resolve  agency  discretion  with  an  apparent  violation 
of  the  Social  Security  Act.  The  court  interpreted  the  step  two  inquiry 
as  allowing  rejection  of  a  claim  for  a  non-severe  impairment  only  if  the 
impairment  is  a  ''slight  abnormality  which  has  such  a  minimal  effect 
on  the  individual  that  it  would  not  be  expected  to  interfere  with  the 
individual's  ability  to  work,  irrespective  of  age,  education  and  work 
experience."^'  Thus,  these  courts  interpret  step  two  as  merely  a  ''de 
minimis''  requirement.  This  interpretation  is  problematic  because  there 
is  no  assurance  that  the  agency  interprets  the  severity  regulation  as  a 
de  minimis  step. 

This  debate,  Hke  the  debate  over  lump  sum  budgeting,  should  be 
resolved  within  the  next  year.  The  Supreme  Court  has  agreed  to  review 
Yuckert,  and  the  Court  should  resolve  this  debate  between  agency  dis- 
cretion and  legislative  pronouncements. 

V.     Paternity/Support  Establishment 

Title  IV-D  of  the  Social  Security  Act^^  appropriates  money  to  the 
states  to  estabhsh  paternity  and  support  for  children  born  out  of  wedlock. 
To  receive  funding,  each  state  must  submit  a  state  plan  whose  require- 
ments are  enumerated  in  the  Act.^^  Among  other  things,  the  state  plan 
must  provide  that  each  state  will  "undertake  ...  in  the  case  of  a  child 


''^Johnson,  769  F.2d  at  1212. 

'''See  Estran  v.  Heckler,  745  F.2d  340  (5th  Cir.   1984);  Evans  v.  Heckler,  734  F.2d 
1012  (4th  Cir.   1984);  Brady  v.  Heckler,  724  F.2d  914  (11th  Cir.   1984). 
^°773  F.2d  85  (6th  Cir.   1985). 

''Id.  at  90  (quoting  Brady  v.  Heckler,  724  F.2d  914,  920  (11th  Cir.   1984)). 
'HI  U.S.C.  §  651  (1982). 
'Ud.  §  654. 


358  INDIANA  LAW  REVIEW  [Vol.  20:345 

born  out  of  wedlock  ...  to  establish  paternity.  "^^  The  only  prerequisite 
for  receiving  such  services  is  that  the  applicant  must  either  be  on  AFDC 
or  have  applied  for  paternity  determination  services  as  prescribed  in  the 
state  plan.^^  These  services  are  open  to  everyone. 

In  Indiana,  the  State  Department  of  Public  Welfare  administers  the 
Title  IV-D  plan.  However,  through  cooperative  agreements  allowed  by 
the  Act,^^  the  state  has  delegated  the  responsibility  for  prosecuting  pa- 
ternity cases  to  the  various  county  prosecutors. 

The  Marion  County  Prosecutor  enacted  a  poHcy,  which  became 
effective  in  September  1982,  of  refusing  to  file  paternity  cases  whenever 
there  was  a  possibility  of  there  being  more  than  one  father. ^^  Specifically, 
if  the  woman  had  sexual  relations  with  more  than  one  man  before, 
during,  or  after  the  probable  month  of  conception,  no  paternity  case 
would  be  filed. ^^  This  policy  was  modified  orally  in  1983  to  allow  for 
a  number  of  exceptions. ^^ 

In  1984,  a  mother  of  an  infant  born  out  of  wedlock  apphed  for 
paternity  services  from  the  Marion  County  Prosecutor's  Office. ^^  The 
office  refused  to  assist  because  of  the  above  policy,  despite  the  fact  that 
she  had  menstruated  between  the  probable  time  of  conception  and  the 
time  she  had  relations  with  another  man.^' 

The  woman,  labeled  Ms.  Doe,  brought  suit  in  Doe  v.  Blinzinger.^^ 
She  claimed  that  the  policy  violated  the  Social  Security  Act  in  that  the 
state  and  its  designate,  the  prosecutor,  were  not  undertaking  to  establish 
paternity. ^^  The  United  States  District  Court  for  the  Southern  District 
of  Indiana  agreed  and  enjoined  the  use  of  the  poHcy.^"* 

Unhke  the  cases  discussed  previously.  Doe  did  not  involve  a  dispute 
between  plaintiffs  and  the  federal  government.  Moreover,  Doe  is  the 
only  known  case  of  its  kind  in  the  country,  in  contrast  with  the  above 
cases,  which  involve  issues  litigated  in  other  districts  and  circuits.  How- 
ever, Doe  does  involve  an  agency,  the  State  Department  of  Public 
Welfare,  and  the  Marion  County  Prosecutor's  Office,  both  of  which 
attempted  to  interpret  the  Act  broadly  to  deny  assistance  to  low-income 


''Id.   §  654(4)(A). 

''Id.   §  654(4)(A)(6). 

'"•Id.   §  654(7). 

"Doe  V.  Blinzinger,  No.  IP84-1044-C,  at  4  (S.D.  Ind.  July  9,  1986). 

''Id.  at  4. 

'^Id. 

'"'Id.  at  2-3. 

''Id. 

8^No.  IP84-1044-C  (S.D.  Ind.  July  9,   1986). 

''Id.  at  7-10. 

''Id.  at  2-3  Judgment. 


1987]  SOCIAL  SECURITY  359 

women  in  paternity  cases. ^^  In  this  case,  the  district  court  found  that 
interpretation  was  too  far-reaching.^^ 

VI.     Conclusion 

The  five  cases  and  areas  presented  above  are  diverse.  Indeed,  they 
illustrate  the  expansiveness  of  the  Social  Security  Act.  Although  it  is 
difficult  to  draw  conclusions  from  them,  some  general  themes  emerge. 

First,  poor  persons  and  their  advocates  face  an  uphill  battle  in 
attacking  the  constitutionality  of  parts  of  the  Social  Security  Act.  Strong 
presumptions  of  validity  attach  to  congressional  pronouncements.  There- 
fore, the  focus  must  be  on  whether  the  agencies  administering  the  Act 
have  interpreted  the  Act  in  a  manner  contrary  to  the  legislative  language, 
intent,  or  purpose.  While  deference  is  given  to  the  agencies'  interpretation, 
their  discretion  is  not  boundless. 

The  third  theme  is  not  really  a  theme,  but  a  hypothesis.  Four  of 
the  five  cases  discussed  above  involved  plaintiffs  arguing  that  agencies 
had  gone  too  far  in  interpreting  Congress'  intent  as  expressed  in  the 
Social  Security  Act.  Of  course,  this  is  nothing  new.  Plaintiffs  have  always 
claimed  that  agencies  have  gone  too  far.  What  is  disquieting  is  the 
reliance  agencies  have  put  on  fiscal  considerations  in  advancing  narrow 
interpretations  of  the  Act.  In  Reed  v.  Blinzinger,^^  for  example,  the 
Department  of  Health  and  Human  Services,  by  extending  the  sibling 
deeming  rule  for  determining  eligibility  for  AFDC  to  determining  eli- 
gibility for  Medicaid,  advanced  an  interpretation  of  the  Act  that  has 
been  rejected  by  every  court  considering  the  issue.  Yet  the  Department 
continues  to  advocate  a  narrow  interpretation  of  the  Act,  arguing  that 
such  an  interpretation  is  fiscally  sound  and  advances  the  intent  of 
Congress.  As  a  result,  hundred  of  thousands  of  needy  persons  are  denied 
Medicaid.  Yet,  given  the  current  conservative  sentiment  generally,  the 
argument  that  a  specific  interpretation  will  save  money  carries  weight. 

The  1960's  saw  the  War  on  Poverty.  In  the  1980's,  through  restrictive 
amendments  to  the  Social  Security  Act  and  through  restrictive  interpre- 
tations of  the  Act,  we  are  seeing  a  war  on  the  poor.  As  can  be  seen, 
much  of  the  battle  is  being  waged  in  Indiana.  Undoubtedly,  it  will 
continue  to  be. 


''Id.  at  3-6. 

'"Id.  at  10-11. 

«^639  F.  Supp.   130  (S.D.  Ind.   1986),  appeal  pending. 


Some  Very  Significant  Developments  in  Indiana  Taxation 

J.B.  King* 

I.     Introduction 

Certain  recent  legislative  enactments  and  judicial  decisions  promise 
to  have  a  material  impact  upon  the  structure  of  Indiana  tax  law.  This 
Article  will  discuss  three  areas  that  promise  to  have  the  most  extensive 
effects.  The  first  topic  is  those  changes  in  procedure  created  along  with 
Indiana's  new  tax  court.  The  next  area  of  discussion  will  be  Indiana's 
response  to  world-wide  taxation  of  multinational  corporations.  Finally, 
two  recent  decisions  on  the  issue  of  uniformity  of  property  tax  valuation 
will  be  analyzed. 

II.     The  New  Indiana  Tax  Court— How  Will  It  Work? 

A.     Some  Basic  Observations  Regarding  the  Court 

After  years  of  debate,  the  Indiana  Legislature  finally  created  a  special 
tax  court  which  commenced  business  on  July  1,  1986.'  Over  the  years, 
proponents  for  the  establishment  of  a  special  tax  court  had  vigorously 
argued  that  state  tax  litigation  requires  adjudications  by  a  tribunal  that 
has  a  first-hand  working  knowledge  of  the  intricacies  of  Indiana's  tax 
laws.  Conversely,  opponents  had  critically  viewed  the  prospect  of  a  tax 
court  as  removing  locally  elected  judges  from  a  grass  roots  determination 
as  to  the  propriety  or  impropriety  of  assessments  by  the  State  of  tax 
UabiUties  against  the  citizenry. 

The  debate  is  over.  The  right  decision  was  reached  by  the  Legislature 
but,  as  shall  be  discussed  in  this  Article,  the  1985  act  creating  the  court 
provides  a  number  of  unanswered  questions  that  may  plague  the  court 
in  its  infancy. 

The  two  critical  questions  concerning  the  new  tax  court  are  (a)  what 
is  the  real  scope  of  the  court's  so-called  "exclusive  jurisdiction"^  and 
(b)  what  will  be  the  kind  or  character  of  judicial  review  to  be  followed 
by  the  court  in  adjudicating  tax  appeals.  Each  of  these  key  questions 
is  separately  discussed  later  in  the  Article.  However,  some  preliminary 


♦Partner,  Baker  &  Daniels,  Indianapolis.  A.B,,  Indiana  University,  1951;  LL.B. 
University  of  Michigan  Law  School,  1954, 

'1985  Ind.  Acts  2278,  Pub.  L.  No.  291-1985  (codified  at  Ind.  Code  §§  33-3-5-1 
to  33-3-5-19  (Supp.   1986)). 

^"The  tax  court  has  exclusive  jurisdiction  over  any  case  that  arises  under  the  tax 
laws  of  this  state  .  .  .  ."  Ind.  Code  §  33-3-5-2(a)  (Supp.  1986). 

361 


362  INDIANA  LAW  REVIEW  [Vol.  20:361 

observations  regarding  the  structure  of  the  court  and  its  statutory  powers 
are  initially  appropriate. 

First,  the  tax  court,  while  denominated  an  appellate  court  in  the 
tax  court  act,^  will  essentially  serve  as  the  exclusive  trial  court  to  hear 
statutory  tax  appeals  from  final  determinations  of  the  revenue  department 
and  the  state  tax  board,  i.e.  tax  appeals  that  prior  to  the  creation  of 
the  tax  court  were  filed  in  the  state's  trial  courts  of  general  jurisdiction."* 
Thus,  the  basic  thrust  of  the  tax  court  act  is  simply  to  substitute  the 
tax  court  for  the  state's  trial  courts  as  the  tribunal  to  hear  tax  appeals 
filed  pursuant  to  existing  tax  appeal  statutory  procedures.  Cases  falling 
within  the  court's  exclusive  jurisdiction  are  denominated  "original  tax 
appeals."^ 

As  estabUshed  in  the  1985  statute,  the  tax  court  consists  of  one 
judge. ^  The  original  tax  court  bill,  as  introduced  in  the  legislature,  had 
provided  for  three  judges,^  and  it  may  prove  necessary  to  enlarge  the 
court  if  the  case  load  of  the  court  develops  to  the  magnitude  many 
anticipate.  The  principal  office  of  the  court  is  in  Indianapolis,  but  the 
act  requires  taxpayers  to  elect  any  one  of  seven  designated  counties  as 
the  place  where  evidentiary  hearings  will  be  held  by  the  court. ^  The 
clerk  of  the  supreme  court  and  court  of  appeals  serves  as  the  clerk  of 
the  tax  court  and  the  tax  court  is  vested  with  authority  to  employ 
necessary  court  personnel.^ 

The  supreme  court  has  adopted  modified  trial  rules  of  practice, 
known  as  the  Rules  for  the  Indiana  Tax  Court,  which  are  essentially 
those  provisions  of  the  Indiana  Rules  of  Trial  Procedure  that  would  be 
applicable  to  the  tax  court's  judicial  review  function. '°  Tracking  the 
statute,  Rule  TC-2  and  Rule  TC-3  provide  the  fundamentals  for  the 
form  and  commencement  of  an  action  in  the  tax  court  as  follows: 

Rule  TC-2 
One  Form  of  Action 

(A)  In  the  Indiana  Tax  Court,  there  shall  be  one  form  of 


^"An  appellate  court  to  be  known  as  the  'Indiana  Tax  Court'  is  established."  Id. 
§  33-3-5-1. 

'Compare  Ind.  Code  §  6-8. 1-9- 1(c)  (1982)  with  Ind.  Code  6-8. 1-9- 1(c)  (Supp.  1986). 

'IND.  Code  §  33-3-5-2(b)  (Supp.  1986). 

^Id.  §  33-3-5-3.  The  Honorable  Thomas  G.  Fisher  has  been  appointed  by  the  governor 
to  serve  as  judge  of  the  new  court. 

^H.  1861  (1985)  (as  introduced). 

^Those  counties  are  Allen,  Jefferson,  Lake,  Marion,  St.  Joseph,  Vanderburgh,  and 
Vigo.  Ind.  Code  §  33-3-5-l(c)  (Supp.   1986). 

'Id.  §  33-3-5-10. 

'°The  rules  for  the  Indiana  Tax  Court  were  formally  adopted  on  July  18,  1986. 
They  are  reprinted  in  Ind.  Code  Ann,  Interim  Ann.  Serv.  No.  1,  66  (West,  October 
1986). 


1987]  TAXATION  363 

action  in  the  nature  of  a  civil  action  to  be  known  as  an  ''original 
tax  appeal." 

(B)  An  original  tax  appeal  is  an  action  that  arises  under  the 
tax  laws  of  the  State  of  Indiana  by  which  an  initial  judicial 
appeal  of  a  final  determination  of  the  Department  of  State 
Revenue  or  the  State  Board  of  Tax  Commissioners  is  sought.'' 

Rule  TC-3 
Commencement  of  an  Action 

(A)  An  original  tax  appeal  is  commenced  by  filing  a  petition 
in  the  Tax  Court. '^ 

Rule  TC-4  ehminates  the  necessity  to  serve  a  summons  on  the  attorney 
general,  the  revenue  department,  or  the  state  tax  board  in  an  original 
tax  appeal  in  the  tax  court  and  instead  provides  that  the  clerk  of  the 
court  shall  promptly  transmit  copies  of  the  taxpayer's  petition  to  the 
attorney  general  and  to  the  agency  named  as  defendant  in  the  petition.'^ 

The  Indiana  Tax  Court  Rules  also  address  the  exclusive  venue  of 
the  tax  court  as  follows: 

Rule  TC-13 

Venue 

The  Tax  Court  has  exclusive  statewide  jurisdiction  over  all 
original  tax  appeals,  and  venue  of  all  original  tax  appeals  shall 
He  only  in  the  Tax  Court. '"^ 

All  tax  court  trials  are  to  be  tried  without  the  intervention  of  a 
jury,'^  and  the  tax  court  is  required  to  render  its  decisions  in  writing.'^ 
As  shall  be  discussed,  the  court  is  granted  Hmited  authority  to  enjoin 
tax  collections,'^  and  the  tax  court  is  directed  to  establish  a  simplified 
procedure  for  the  handling  of  small  tax  claims.'^ 

But,  as  noted,  the  real  question  regarding  the  new  tax  court  concerns 
the  actual  scope  of  its  jurisdiction  and  the  nature  of  its  judicial  review. 

B.     The  Tax  Court's  Exclusive  Jurisdiction — 
Is  It  Really  Exclusive? 

Effective  July  1,  1986,  the  tax  court  has  been  vested  with  "exclusive 

''Id.  at  66. 

''Id.  at  66-67. 

"Id.  at  69. 

'^IND.  Code  §  33-3-5-13(a)  (Supp.  1986). 

'^Id.   §  33-3-5-15. 

'''See  infra  notes  82-90  and  accompanying  text. 

'^See  infra  notes  91-95  and  accompanying  text. 


364  INDIANA  LAW  REVIEW  [Vol.  20:361 

jurisdiction"  over  any  case  that  arises  under  the  tax  laws  of  the  state 
and  that  is  an  initial  appeal  of  a  final  determination  made  by  (1)  the 
Indiana  Department  of  Revenue  or  (2)  the  Indiana  State  Board  of  Tax 
Commissioners.'^  Under  section  20  of  the  act  creating  the  court, ^°  the 
court  does  not  have  jurisdiction  over  any  case  before  July  1,  1986,  but 
a  case  that  is  pending  in  another  court  on  or  after  June  30,  1986,  and 
that  is  otherwise  within  the  exclusive  jurisdiction  of  the  court  may  be 
transferred  to  the  tax  court  if  all  parties  agree  to  the  transfer.^' 

The  tax  court's  exclusive  jurisdiction  clearly  applies  to  all  appeals 
of  final  assessment  determinations  made  by  the  state  tax  board  pursuant 
to  Indiana  Code  sections  6-1.1-15-42^  and  6-1. 1-1 5-5, ^^  and  indeed  the 
act  creating  the  tax  court  explicitly  amended  the  latter  to  specify  that 
appeals  from  a  final  assessment  determination  by  the  state  tax  board 
shall  be  lodged  with  the  new  tax  court. ^^^ 

Likewise,  the  tax  court's  exclusive  jurisdiction  clearly  applies  to  all 
appeals  of  a  denial  of  a  tax  refund  claim  by  the  revenue  department. 
The  provision  that  empowers  the  revenue  department  to  receive  and 
grant  or  deny  claims  for  the  refund  of  income  taxes,  sales  and  use 
taxes,  intangibles  taxes,  and  several  listed  excise  taxes  was  similarly 
amended  in  the  1985  tax  court  act  to  specify  that  appeals  from  the 
department's  denial  of  any  such  claims  for  refund  shall  be  filed  with 
the  tax  court. 2^ 

Although  the  tax  court's  exclusive  jurisdiction  to  hear  statutory 
appeals  from  the  revenue  department  and  the  state  tax  board  is  plain 
on  the  face  of  the  act  creating  the  court,^^  jurisdiction  is  nonetheless 
still  contingent  upon  the  taxpayer  having  first  complied  with  all  of  the 
statutory  preconditions  for  initiation  of  the  action. ^"^ 

Contrary  to  popular  belief,  however,  the  tax  court's  exclusive  ju- 
risdiction may  not  be  exclusive  as  to  all  tax  litigation.  As  noted,  the 
court's  jurisdiction  is  statutorily  restricted  to  initial  appeals  of  final 


'^Ind.  Code  §  33-3-5-2(a)  (Supp.   1986). 

^"1985  Ind.  Act.  2278,  2290,  Pub.  L.  No.  291-1985,  §  20. 

^This  section  provides  for  an  appeal  when  the  state  tax  board  does  not  act  on  a 
taxpayers  request  for  review.  Ind.  Code  §  6-1.1-15-4  (1982). 

^This  section  provides  for  judicial  review  of  the  state  tax  board's  final  determination. 
Ind.  Code  §  6-1.1-15-4  (Supp.  1986). 

^1985  Ind.  Acts  2278,  2283,  Pub.  L.  No.  291-1985,  §  5. 

''Id.  at  2286-87,  Pub.  L.  No.  291-1985,  §  12  (amending  Ind.  Code  §  6-8.1-9-1  (1982)). 

''Id.  at  2279,  Pub.  L.  No.  291-1985,  §  1  (codified  at  Ind.  Code  §  33-3-5-2(a)  (Supp. 
1986)). 

^^"If  a  taxpayer  fails  to  comply  with  any  statutory  requirement  for  the  initiation  of 
an  original  tax  appeal,  the  tax  court  does  not  have  jurisdiction  to  hear  the  appeal."  Ind. 
Code  §  33-3-5-ll(a)  (Supp.  1986). 


1987]  TAXATION  365 

determinations  by  either  the  state  tax  board  or  the  revenue  department. ^^ 
However,  not  all  tax  cases  will  involve  a  "final  determination"  by  one 
or  the  other  of  these  state  agencies. 

The  first  jurisdictional  question  that  will  require  resolution  is  whether 
the  tax  court  has  jurisdiction  over  property  tax  refund  claims.  An  Indiana 
statute  allows  a  taxpayer  to  file  a  claim  for  a  refund  of  all  or  a  portion 
of  property  tax  paid.^^  The  property  tax  refund  claim  must  be  filed 
within  three  years  after  the  tax  was  paid  and  must  be  filed  with  the 
auditor  of  the  county  in  which  the  taxes  were  originally  paid.  This 
statutory  property  tax  refund  procedure  establishes  three  grounds  upon 
which  a  refund  claim  may  be  based: 

(1)  Taxes  on  the  same  property  have  been  assessed  and  paid 
more  than  once  for  the  same  year; 

(2)  The  taxes,  as  a  matter  of  law,  were  illegal;  or 

(3)  There  was  a  mathematical  error  either  in  the  computation 
of  the  assessment  upon  which  the  taxes  were  based  or  in  the 
computation  of  the  taxes. ^^ 

The  statutory  procedure  further  provides  that  a  property  tax  refund 
claim  may  or  in  some  instances  shall  be  forwarded  to  the  state  tax 
board  for  its  review  and  its  approval  or  disapproval.^^  The  county  board 
of  commissioners  is,  however,  vested  with  the  authority  to  take  the  final 
administrative  step  in  the  allowance  or  disallowance  of  a  property  tax 
refund  claim,  and  an  Indiana  statute  explicitly  states  that  "when  the 
county  board  disallows  a  claim,  the  claimant  may  appeal  that  decision 
to  the  county  circuit  court. "^^  Unlike  the  expHcit  amendments  to  both 
Indiana  Code  sections  6-1.1-15-5  and  6-8.1-9-1,  which  expressly  substi- 
tuted the  tax  court  as  the  court  to  which  appeals  under  those  sections 
were  to  be  taken,  section  6-1.1-26-4  was  left  unamended.  It  therefore 
appears  that  a  sound  argument  can  be  made  that  the  new  tax  court  has 
no  jurisdiction  over  property  tax  refund  claims  since  (1)  the  state  tax 
board  does  not  make  the  final  determination  of  the  refund  claim,  and 
(2)  the  judicial  review  provision  specifying  appeals  to  the  circuit  court 
was  left  intact. 

A  similar  cloudy  situation  exists  as  to  the  tax  court's  jurisdiction 
relative  to  the  correction  by  a  county  auditor  of  errors  found  in  tax 
duplicates  respecting  either  the  proper  assessment  of  property  or  the 


^'Id.   §  33-3-5-2(a). 

2'lND.  Code  §  6-1.1-26-1  (1982). 

'^Id.  §  6-1.1-26-1(4). 

''Id.  §  6-1.1-26-2. 

'Ud.  §  6-l.l-26-4(c). 


366  INDIANA  LAW  REVIEW  [Vol.  20:361 

correct  imposition  of  property  tax.  An  Indiana  statute  requires  a  county 
auditor,  subject  to  certain  limitations,  to  correct  errors  that  are  discovered 
in  the  tax  dupHcate  for  any  one  or  more  of  the  following  reasons: 

(1)  The  description  of  the  real  property  was  in  error. 

(2)  The  assessment  was  against  the  wrong  person. 

(3)  Taxes  on  the  same  property  were  charged  more  than  one  (1) 
time  in  the  same  year. 

(4)  There  was  a  mathematical  error  in  computing  the  taxes  or 
penalties  on  the  taxes. 

(5)  There  was  an  error  in  carrying  delinquent  taxes  forward  from 
one  (1)  tax  duplicate  to  another. 

(6)  The  taxes,  as  a  matter  of  law,  were  illegal. 

(7)  There  was  a  mathematical  error  in  computing  an  assessment. 

(8)  Through  an  error  of  omission  by  any  state  or  county  officer 
the  taxpayer  was  not  given  credit  for  an  exemption  or  deduction 
permitted  by  law." 

This  correction  of  errors  procedure  does  not  provide  a  specific  statutory 
judicial  review  remedy.  However,  as  to  the  sixth,  seventh  and  eighth 
grounds  for  correction,  as  noted  above,  the  auditor  is  prohibited  from 
correcting  an  error  without  first  obtaining  the  approval  of  the  state  tax 
board  if  either  (1)  the  challenged  tax  is  "based  on  an  assessment  made 
or  determined  by  the  state  board  of  tax  commissioners,"^"^  or  (2)  if  the 
requested  correction  has  failed  to  receive  the  approval  of  any  two  of 
the  following  officials:  the  township  assessor,  the  county  auditor,  the 
county  treasurer,  and  the  county  assessor. ^^  As  to  corrections  requiring 
state  tax  board  approval,  it  is  possible  that  the  tax  court  has  jurisdiction 
over  any  state  tax  board  disapproval  of  a  requested  correction  of  error. 
Such  disapproval  should  constitute  a  "final  determination"  by  the  board 
so  as  to  come  within  the  tax  court's  "exclusive  jurisdiction."  But  as  to 
the  other  grounds  for  corrections  of  error  and  possibly  even  as  to 
corrections  requiring  state  tax  board  approval,  it  would  appear  that 
taxpayers  should  have  a  mandamus  remedy  entitling  the  taxpayer  to  seek 
relief  in  his  local  circuit  or  superior  court  by  way  of  a  mandate  to 
compel  the  auditor  to  discharge  his  statutory  duty  to  make  the  required 
correction. ^^  Consequently,  there  is  substantial  doubt  whether  the  tax 


"IND.  Code  §  6-1. 1-15- 12(a)  (Supp.   1986). 

''Id.  §  6-l.l-15-12(d). 

''Id. 

^*"The  action  for  mandate  may  be  prosecuted  against  any  .  .  .  public  or  corporate 
officer  ...  to  compel  the  performance  of  .  .  .  any  duty  resulting  from  any  office  .  .  .  ." 
IND.  Code  §  34-1-58-2  (1982).  See  State  ex.  rel.  Land  v.  Board  of  Trustees  of  Springs 
Valley  School  Corp.,  430  N.E.2d  791,  794  (Ind.  Ct.  App.  1982). 


1987]  TAXATION  367 

court  possesses  jurisdiction  as  to  either  the  property  tax  refund  procedure^'' 
or  to  the  property  tax  correction  of  errors  procedure. ^^ 

Compounding  this  uncertainty  as  to  the  real  scope  of  the  tax  court's 
so-called  "exclusive  jurisdiction"  is  a  body  of  well-established  Indiana 
law  that  has  long  recognized  that  apart  from  the  statutory  assessment 
appeals  procedures  and  apart  from  the  statutory  property  tax  refund 
procedures,  a  property  taxpayer  may  be  entitled  to  enjoin  the  collection 
of  property  taxes,  at  least  if  the  property  was  not  lawfully  assessable 
in  the  first  instance. ^^ 

In  the  seminal  case  of  Croop  v.  Walton, '^^  the  Indiana  Supreme 
Court  rejected  a  contention  that  the  property  tax  refund  procedure  was 
the  exclusive  remedy  for  challenging  an  unlawful  property  tax  levy: 
"[WJhere  the  property  is  not  subject  to  taxation,  the  assessment  is  void, 
and  its  collection  can  be  restrained  by  injunction,  regardless  of  the 
[statutory]  right  to  appeal. '"^^  This  right  to  injunctive  relief  would  appear 
still  to  be  available  to  enjoin  an  attempted  imposition  of  property  taxes 
on  (1)  property  not  subject  to  assessment  (such  as  property  not  in  the 
state  on  the  assessment  date),  (2)  property  that  has  been  misclassified 
as  being  taxable  and  therefore  erroneously  assessed,  and  possibly  (but 
importantly)  (3)  property  that  is  exclusively  used  in  interstate  commerce 
and  that  has  been  assessed  at  100%  of  its  value.  It  is,  of  course, 
problematic  whether  the  Indiana  appellate  courts,  with  the  advent  of 
the  tax  court,  will  continue  to  adhere  to  this  principle,  but  if  it  remains 
a  recognized  exception  to  the  basic  statutory  procedures  for  challenging 
assessments  and  seeking  property  tax  refunds,  jurisdiction  for  equitable 
injunctive  relief  will  not  lie  with  the  tax  court  but  rather  with  the  general 
trial  courts  of  the  state. 

In  the  case  of  appeals  from  revenue  department  tax  determinations, 
the  tax  court's  jurisdiction  will  be  virtually  exclusive,  but  there  may  be 
perplexing  exceptions.  The  first  such  question  is  whether  taxpayers  will 
have  recourse  to  the  trial  courts  of  general  jurisdiction  for  injunctive 
rehef.  Shortly  after  the  1933  enactment  of  the  Indiana  gross  income 
tax,"^^  the  Indiana  Supreme  Court,  in  Department  of  Treasury  of  Indiana 


^^IND.  Code  §§  6-1.1-26-1  to  6-1.1-26-6  (1982). 

^«lND.  Code  §  6-1.1-15-12  (Supp.   1986). 

'^See  Croop  v.  Walton,  199  Ind.  262,  157  N.E.  275  (1927);  Board  of  Comm'rs  of 
County  of  Sullivan  v.  Heap,  155  Ind.  App.  633,  294  N.E. 2d  182  (1973);  Scott  v.  Abke, 
130  Ind.  App.  199,  163  N.E.2d  257  (1960);  Sluder  v.  Mahan,  124  Ind.  App.  661,  121 
N.E. 2d  137  (1954).  Cf.  Board  of  Comm'rs  of  Madison  County  v.  Midwest  Assocs.,  Inc., 
253  Ind.  551,  255  N.E. 2d  807  (1970)  (no  right  to  enjoin  collection  of  real  estate  taxes 
when  taxing  unit  is  a  third  party  beneficiary  of  a  contract  provision  that  requires  purchaser 
of  land  to  pay  real  estate  taxes). 

^°199  Ind.  262,   157  N.E.  275  (1927). 

^'Id.  at  265,  157  N.E.  at  276. 

«1933  Ind.  Acts,  ch.  50. 


368  INDIANA  LAW  REVIEW  [Vol.  20:361 

V.  Ridgely,^^  faced  the  question  of  whether  a  taxpayer  could  seek  to 
enjoin  an  attempted  imposition  of  the  gross  income  tax  by  the  revenue 
department,  even  though  the  gross  income  tax  act  contained  a  specific 
procedure  for  court  review  of  denied  refund  claims.  In  Ridgely,  the 
state  argued  that  the  statutory  procedure  for  appealing  denials  by  the 
revenue  department  of  gross  income  tax  refund  claims  was  the  exclusive 
procedure  for  challenging  an  imposition  of  gross  income  tax.  Rejecting 
the  state's  position,  the  Indiana  Supreme  Court  held: 

The  fact  that  the  statute  provides  a  method  of  obtaining  a  refund 
if  the  taxpayer  sees  fit  to  pay  the  tax  does  not  necessarily  make 
this  remedy  exclusive,  nor  does  it  rob  a  court  of  equity  of 
jurisdiction  to  afford  equitable  relief  by  way  of  injunction. 

...  So  we  conclude  the  remedy  afforded  a  taxpayer  who 
has  paid  tax  for  which  he  is  not  liable  either  voluntarily  or 
involuntarily,  to  recover  the  unauthorized  tax,  is  additional  and 
cumulative  and  not  exclusive. '^'^ 

The  1937  General  Assembly  quickly  responded  to  the  Ridgely  decision 
and  enacted  the  following  anti-injunction  provision: 

No  injunction  to  restrain  or  delay  the  collection  of  any  tax 
claimed  to  be  due  under  the  provisions  of  this  act  [the  gross 
income  tax  act]  shall  be  issued  by  any  court,  but  in  all  cases 
in  which,  for  any  reason,  it  be  claimed  that  any  such  tax  about 
to  be  collected  is  wrongful  or  illegal  in  whole  or  in  part,  the 
remedy,  except  as  otherwise  expressly  provided  in  this  act,  shall 
be  by  payment  and  action  to  recover  such  tax  as  provided  in 
this  section."*^ 

In  1963,  this  same  anti-injunction  provision  was  incorporated  into 
the  then  newly  enacted  Indiana  sales  and  use  tax^^  and  the  Indiana 
adjusted  gross  income  tax."*^ 

Citing  the  1937  anti-injunction  provision,  the  Supreme  Court  in  1971 
emphatically  confirmed  that  the  statutory  tax  refund  appeal  procedure 
was  to  be  considered  the  sole  and  exclusive  remedy  for  challenging  a 
gross  income  tax  imposition. "^^  The  court  accordingly  said: 

It  is  clear  that  the  remedy  thus  provided  by  the  Legislature 
is  and  is  intended  to  be  the  sole  and  exclusive  remedy  available 


"^211  Ind.  9,  4  N.E.2d  557  (1936). 
""Id.  at  15,  4  N.E.2d  at  560. 
^4937  Ind.  Acts,  ch.   117,  §  14(d). 
*M963  Ind.  Acts  (Spec.  Sess.),  ch.  30,  §  16. 
^n963  Ind.  Acts.  (Spec.  Sess.),  ch.  32,  §  604. 

"^State  ex  rel.   Indiana  Dep't  of  Revenue  v.  Marion  Circuit  Court,  255  Ind.  501, 
265  N.E.2d  241  (1971). 


1987]  TAXATION  369 

to  question  the  legality  of  the  imposition  of  a  tax  under  the 
Indiana  Gross  Income  Tax  Law. 

We  hold,  therefore,  that  the  respondent  court  is  without 
subject  matter  jurisdiction  to  enjoin  or  restrain  the  petitioner 
from  attempting  to  collect  the  taxes  in  question  from  the  plaintiff/^ 

This  holding,  of  course,  also  directly  confirmed  the  exclusivity  of  the 
sales  and  use  tax  and  the  adjusted  gross  income  tax  statutory  refund 
appeal  procedures. 

Consequently,  it  would  seem  that  the  tax  court's  exclusive  jurisdiction 
is  indeed  exclusive,  at  least  to  the  judicial  disposition  of  taxpayers* 
challenges  to  the  imposition  of  the  major  state  taxes  administered  by 
the  revenue  department,  namely,  the  gross  income  tax,  the  sales  and 
use  tax,  and  the  adjusted  gross  income  tax,  along  with  its  companion, 
the  supplemental  net  income  tax.  Such  is  not  the  case,  however. 

First,  a  cloud  has  been  cast  on  the  exclusivity  of  these  statutory 
refund  appeal  procedures  as  the  result  of  the  enactment  of  the  1980 
Tax  Administration  Code^^  that  established  uniform  provisions  for  the 
administration  by  the  revenue  department  of  most  of  the  taxes  admin- 
istered by  that  agency,  including  particularly  the  income  taxes  and  the 
sales  and  use  taxes.  The  1980  Tax  Administration  Code  repealed  the 
anti-injunction  provision  as  enacted  in  1937^'  and  substituted  therefor 
the  following  provision: 

(d)  The  court  [referring  to  the  court  to  which  the  appeal  is 
taken]  shall  hear  the  appeal  de  novo  [referring  to  the  refund 
claim  appeal]  and  without  a  jury,  and  after  the  hearing  may 
order  or  deny  any  part  of  the  appealed  refund.  .  .  .  The  court 
may  not  enjoin,  restrain  or  delay  collection  of  any  of  the  listed 
taxes,  regardless  of  the  facts  or  legal  theory  on  which  the  suit 
requesting  that  relief  is  brought.  The  only  relief  that  a  court 
may  grant  is  to  allow  a  refund  of  taxes,  interest  and  penalties 
that  have  been  paid  to  and  collected  by  the  department." 

At  first  blush,  this  substituted  provision  would  seem  to  be  sub- 
stantively a  virtual  replication  of  the  forerunner  1937  anti-injunction 
provision.  But,  on  scrutiny,  the  provision  does  not  prohibit  the  issuance 
of  an  injunction  "by  any  court; "^^  instead,  it  literally  prohibits  the 
issuance  of  an  injunction  only  by  the  court  to  which  the  refund  claim 


''Id.  at  504,  265  N.E.2d  at  243. 
501980  Ind.  Acts  660,  Pub.  L.  No.  61. 
"1937  Ind.  Acts,  ch.   117,  §  14(d). 

"1980  Ind.  Acts  660,  679,  Pub.  L.  No.  61   (codified  at  Ind.  Code  §  6-8.1-9-l(d) 
(Supp.  1980))  (emphasis  added). 

"1937  Ind.  Acts,  ch.  117,  §  14(d). 


370  INDIANA  LAW  REVIEW  [Vol.  20:361 

is   appealed,   in   stark  contrast  to  the  original  language   of  the    1937 
provision,  which  stated: 

No  injunction  to  restrain  or  delay  the  collection  of  any  tax 
claimed  to  be  due  under  the  provisions  of  this  act  shall  be  issued 
by  any  court,  but  in  all  cases  in  which,  for  any  reason,  it  be 
claimed  that  any  such  tax  about  to  be  collected  is  wrongful  or 
illegal  in  whole  or  in  part,  the  remedy,  except  as  otherwise 
expressly  provided  in  this  act,  shall  be  by  payment  and  action 
to  recover  such  tax  as  provided  in  this  section. ^"^ 

While  the  last  sentence  of  the  Tax  Administration  Code's  reworded 
anti-injunction  provision  might  have  saved  the  dichotomy  between  the 
old  and  the  new  anti-injunction  provisions, ^^  the  1980  Tax  Administration 
Code's  anti-injunction  provision  was  in  fact  expressly  deleted  in  the  1985 
enactment  of  the  tax  court  act.  The  provision,  as  amended  in  1985, 
now  reads  as  follows: 

The  tax  court  shall  hear  the  appeal  de  novo  and  without  a 
jury,  and  after  the  hearing  may  order  or  deny  any  part  of  the 
appealed  refund.  The  court  may  assess  the  court  costs  in  any 
manner  that  it  feels  is  equitable.  The  court  may  enjoin  the 
collection  of  any  of  the  listed  taxes  under  IC  33-3-5-11.  The 
court  may  also  allow  a  refund  of  taxes,  interest,  and  penalties 
that  have  been  paid  to  and  collected  by  the  department. ^^ 

The  1985  deletion  of  any  express  prohibition  on  the  issuance  of 
injunctions  by  any  court  could  resurrect  the  Ridgely  holding."  The  judicial 
and  legislative  history  concerning  the  absence,  then  the  presence,  and 
now  once  again,  the  absence  of  an  express  anti-injunction  provision  may 
allow  taxpayers  to  contend  that  in  the  absence  of  an  express  anti- 
injunction  provision,  the  refund  appeal  procedure  is  no  longer  the  ex- 
clusive procedure  and,  consequently,  injunctive  reUef  under  Ridgely  is 
available  from  the  general  trial  courts. 

It  would  seem  that  if  the  Indiana  appellate  courts  are  disposed  to 
focus  state  tax  litigation  in  the  new  tax  court,  there  is  a  strong  Hkelihood 
that  the  ultimate  outcome  of  this  question  will  be  a  recognition  that 
the  deletion  of  an  express  anti-injunction  provision  does  not  alter  the 


^'*Id.  (emphasis  added). 

"The  last  sentence  of  the  1980  Tax  Administration  Code's  anti-injunction  provisions 
provides  as  follows:  "The  only  relief  that  a  court  may  grant  is  to  allow  a  refund  of 
taxes,  interest  and  penalties  that  have  been  paid  to  and  collected  by  the  department." 
Id.  This  sentence,  unhke  the  prior  language  in  the  provision,  can  be  read  to  apply  to  all 
courts,  thus  impliedly  restricting  any  court  from  issuing  injuctive  relief. 

'*lND.  Code  §  6-8.1-9-l(d)  (Supp.  1986). 

"See  supra  notes  43-44  and  accompanying  text. 


1987]  TAXATION  371 

exclusivity  of  the  statutory  refund  procedures  and  that  the  Hmited  au- 
thority granted  to  the  new  tax  court  to  enjoin  collection  of  a  contested 
tax  is  to  be  construed  as  the  sole  and  exclusive  means  for  a  taxpayer 
to  obtain  injunctive  relief  in  any  court. 

The  tax  court's  "exclusive  jurisdiction"  may  also  be  diluted  by  two 
relatively  recent  judicially  recognized  exceptions  to  the  exclusivity  of  the 
statutory  refund  procedures.  In  Mat  his  v.  Cooperative  Vendors,  Inc.,^^ 
the  Indiana  Court  of  Appeals  held  that  a  retail  merchant  could  properly 
initiate  a  declaratory  judgment  action  to  challenge  the  revenue  depart- 
ment's attempt  to  hold  the  retailer  liable  for  uncollected  sales  tax.  The 
court  reasoned  that  a  retailer  who  is  statutorily  identified  as  an  agent 
of  the  state  to  collect  sales  tax^^  is  not  the  taxpayer  and,  therefore,  the 
retailer  in  the  Mathis  case  was  not  obliged  to  follow  the  refund  appeal 
procedure  established  for  "taxpayers. "^^  The  Mathis  court  concluded 
that  the  retailer  could  properly  challenge  the  revenue  department's  at- 
tempted assessment  by  way  of  a  declaratory  judgment  action  without 
having  first  to  pay  the  assessed  tax  as  would  be  otherwise  required 
pursuant  to  the  conventional  statutory  refund  appeal  procedure.^'  Under 
the  reasoning  of  Mathis,  the  tax  court  would  not  have  jurisdiction  of 
such  declaratory  judgment  actions,  particularly  since  Indiana  Code  section 
33-3-5-11  expressly  provides  that  "the  tax  court  does  not  have  jurisdiction 
to  hear  the  appeal"  unless  the  taxpayer  has  complied  with  all  statutory 
pre-appeal  conditions'^  and,  of  course,  the  key  statutory  condition  to  a 
revenue  department  appeal  is  the  payment  of  the  contested  tax,  a  con- 
dition avoided  by  the  employment  of  a  declaratory  judgment  action. 

The  Mathis  precedent  could  conceivably  be  answered  by  a  broad 
brush  response  that  the  overriding  intention  of  the  legislature  was  to 
vest  exclusive  jurisdiction  in  the  tax  court  "over  any  case  that  arises 
under  the  tax  laws  of  this  state  and  that  is  an  initial  appeal  of  a  final 
determination  made  by  .  .  .  the  department  of  state  revenue.""  However, 
the  context  of  the  entire  law,  including  the  requirement  that  all  statutory 
preconditions  to  an  appeal  must  be  first  satisfied,  strongly  suggests  that 
the  focal  point  of  the  court's  jurisdiction  was  indeed  limited,  in  the  case 
of  revenue  department  determinations,  to  "taxpayers"  who  are  seeking 
redress  of  tax  refund  denials.^'* 


^470  Ind.  App.  659,  354  N.E.2d  269  (1976). 

'^he  statutory  identification  of  the  retail  merchant  as  an  agent  of  the  state  is 
contained  in  Ind.  Code  §  6-2.5-2-l(b)  (Supp.   1986). 

"^Mathis,  170  Ind.  App.  at  666,  354  N.E.2d  at  274. 

"•'Id. 

^^IND.  Code  §  33-3-5-11  (Supp.  1986). 

''Id.  §  33-3-5-2. 

"It  should  be  noted  that  the  holding  in  Mathis  was  distinguished  by  the  court  of 
appeals  in  Ind.  Dep't  of  State  Revenue  v.  Indiana  Gamma  Gamma,  181  Ind.  App.  664, 
394  N.E.2d  187  (1979),  where  the  court  held  that  an  association  charged  with  failure  to 


372  INDIANA  LAW  REVIEW  [Vol.  20:361 

State  V.  Indianapolis  Airport  Authority^^  portends  a  second  exception 
to  the  tax  court's  jurisdiction.  In  this  case,  the  court  of  appeals  first 
concluded  that  the  Airport  Authority  was  not  a  person  or  taxpayer 
within  the  purview  of  the  statutory  tax  refund  appeal  procedure; 
the  court  accordingly  held  that  because  the  refund  appeal  procedure 
did  not  apply  to  the  Airport  Authority,  it  could  properly  seek  and  obtain 
an  injunction  permanently  enjoining  the  revenue  department  from  at- 
tempting to  impose  the  gross  income  tax  on  the  Authority's  gross  receipts 
from  its  operations. ^^  The  Indianapolis  Airport  Authority  decision,  by 
reason  of  its  narrow  application  to  just  those  entities  that  can  claim 
they  are  neither  a  "taxpayer"  nor  a  "person"  should  not  have  significant 
impact  on  the  tax  court's  jurisdiction.  And,  as  in  the  case  of  Mathis, 
this  ruling  may  eventually  be  overridden  by  an  ultimate  appellate  holding 
that  notwithstanding  these  possible  technical  deficiencies,  the  pervasive 
intention  of  the  legislature  was  to  empower  the  tax  court  to  hear  all 
appeals  from  final  determinations  by  the  revenue  department,  whether 
affecting  taxpayers  or  others  against  whom  the  department  has  sought 
to  assess  tax  liability. 

One  final  observation  about  the  new  tax  court's  jurisdiction  regards 
the  availability  of  mandamus  actions  by  taxpayers  to  compel  the  per- 
formance of  ministerial  functions  of  the  taxing  agencies  and  to  assure 
that  the  taxpayer  has  been  accorded  full  due  process  of  law  in  the 
administrative  process. ^^  To  the  extent  appropriate,  trial  courts  of  general 
jurisdiction  should  continue  to  have  jurisdiction  over  taxpayer  mandamus 
actions  that  seek  equitable  relief  against  a  taxing  agency  before  the 
agency  has  issued  a  final  determination.^^  Clearly,  the  tax  court  will  not 
have  such  jurisdiction  because  its  authority  is  expressly  limited  to  appeals 
from  final  determinations.  While  resort  to  mandamus  should  indeed  be  rare, 
that  remedy  is  available  in  Indiana. ^^  For  example,  in  State  ex  rel. 
Montgomery  Ward  &  Co.  v.  Indiana  Department  of  State  Revenue,^^ 
the  Marion  Superior  Court  entered  a  judgment  mandating  the  revenue 
department  to  hold  a  hearing  and  to  make  a  final  determination  of  the 
taxpayer's  duly  filed  claim  for  refund  as  required  by  the  statutory 
procedures. ^^ 


collect  sales  tax  could  not  seek  declaratory  judgment  relief  because  the  association  had 
voluntarily  paid  the  tax  and  filed  a  claim  for  refund,  thereby  bringing  itself  within  the 
exclusive  judicial  remedy  afforded  by  the  statute. 

«173  Ind.  App.  55,  362  N.E.2d  200  (1977). 

^Id.  at  59,  362  N.E.2d  at  202. 

*^Ind.  Code  §  34-1-58-2  (1982)  provides  the  statutory  authority  for  mandamus  action. 
See  supra  note  36. 

^^See  supra  notes  33-36  and  accompanying  text. 

^^ND.  Code  §  34-1-58-1  (1982). 

^°No.  S482-1606  (Marion  Superior  Court  1983). 

^'The  applicable  procedure  is  codified  at  Ind.  Code  §  6-8.1-9-l(b)  (1982)  (amended 
1985).  See  State  Tax  Bd.  v.  Oliverius,   156  Ind.  App.  46,  294  N.E.2d  646  (1973). 


1987]  TAXATION  373 

C.     The  Kind  of  Judicial  Review 
to  Be  Conducted  by  the  Tax  Court 

The  new  Indiana  statute  provides  that  the  character  or  kind  of 
judicial  review  to  be  conducted  by  the  tax  court  shall  be  determined  by 
the  statutory  law  governing  the  particular  original  tax  appeal. ^^  This 
provision  is  especially  significant  because  of  the  existing  disparity  in  the 
character  of  the  procedure  statutorily  established  for  appeals  from  the 
revenue  department  as  compared  to  the  character  of  the  procedure 
statutorily  established  for  appeals  from  the  state  tax  board. ^^ 

Revenue  department  tax  appeals  are  statutorily  denominated  de  novo 
appeals. ^"^  No  administrative  record  is  made  (and  none  is  required)  by 
the  revenue  department  in  its  disposition  of  tax  refund  claims.  Indeed, 
the  statutory  procedure  governing  the  department's  disposition  of  tax 
refund  claims  does  not  even  require  a  hearing, ^^  and  the  department 
frequently,  if  not  customarily,  determines  a  refund  claim  without  a 
hearing.  Commenting  on  this  revenue  department  tax  appeal  procedure, 
the  Indiana  Court  of  Appeals,  in  United  Artists  Theatre  Circuit,  Inc. 
V.  Indiana  Department  of  State  Revenue,^^  has  recently  said: 

[T]he  right  to  administrative  hearing  is  discretionary  with  the 
Department.  Furthermore,  there  is  nothing  within  the  language 
of  the  Gross  Income  Tax  Act  to  indicate  that  the  refund  pro- 
cedure is  a  review  of  an  administrative  determination.  Moreover, 
we  have  previously  reviewed  the  trial  court's  findings  as  findings 
from  a  trial  de  novo.  In  Wayne  Pump  Co.  v.  Department  of 
Treasury,  (1953)  232  Ind.  147,  110  N.E.2d  284,  the  supreme 
court  held  it  was  the  trial  court's  duty  to  determine  the  issues 
in  tax  refund  suits  upon  the  merits.  .  .  .^^ 

Taxpayers,  the  department,  and  the  courts  have  accordingly  approached 
judicial  reviews  of  revenue  department  final  determinations  as  a  de  novo 
fact-finding  process. 

Conversely,  court  appeals  from  the  state  tax  board  have  been  sub- 
jected to  a  much  narrower  scope  of  judicial  review.  The  principal  reason 
for  this  more  limited  scope  of  review  is  that  the  statutory  procedure 


'^Sec.  14.  With  respect  to  determinations  as  to  whether  any  issues  or  evidence 
may  be  heard  in  an  original  tax  appeal  that  was  not  heard  in  the  administrative 
hearing  or  proceeding,  the  tax  court  is  governed  by  the  law  that  applied  before 
the  creation  of  the  tax  court  to  appeals  to  trial  courts  of  final  determinations 
made  by  the  department  of  state  revenue  and  the  state  board  of  tax  commissioners. 
Ind.  Code  §  33-3-5-14  (Supp.   1986). 

''Compare  Ind.  Code  §  6-8.1-9-1  (Supp.  1986)  with  Ind.  Code  §  6-1.1-15-4  (1982). 

^^IND.  Code  §  6-8.1-9-l(d)  (Supp.   1986). 

''Id.   §  6-8.1-9-1. 

M59  N.E.2d  754  (Ind.  Ct.  App.   1984). 

''Id.  at  759  (citations  omitted). 


374  INDIANA  LAW  REVIEW  [Vol.  20:361 

for  the  administrative  determination  of  assessment  challenges  requires 
the  state  tax  board  to  hold  a  hearing,  with  at  least  ten  days  notice  to 
the  taxpayer,  and  then  to  render  its  decision  after  the  hearing. ^^  Stressing 
the  existence  of  this  administrative  hearing  requirement,  the  Indiana 
Court  of  Appeals  has  emphasized  that  in  appeals  from  the  state  tax 
board,  the  taxpayer  is  confined  to  the  matters  presented  to  the  state 
tax  board. ^^  This  more  limited  scope  of  judicial  review  was  described 
as  follows: 

We  conclude  that  .  .  .  only  those  witnesses  who  testified  at  the 
board's  hearing  may  testify  at  the  judicial  review  hearing,  and 
they  may  testify  only  to  those  facts  to  which  they  testified  at 
the  board's  hearing.  Similarly,  only  those  exhibits  introduced  at 
the  board's  hearing  may  be  introduced  on  judicial  review. ^^ 

The  preservation  of  these  two  distinct  judicial  review  procedures  is 
desirable.  But  taxpayers  and  taxpayers'  counsel  must  remain  especially 
alert  to  the  necessity  to  make  a  complete  factual  record  in  proceedings 
before  the  state  tax  board  because  that  record  will  govern  the  scope  of 
the  tax  court's  judicial  review  of  the  tax  board's  final  determination. 

D.     The  Tax  Court's  Authority  to  Enjoin  the  Collection  of  Tax 

Indiana  Code  section  33-3-5-11  now  provides  that  a  taxpayer  who 
wishes  to  enjoin  the  collection  of  tax  pending  the  original  tax  appeal 
may  petition  the  tax  court  for  such  relief.^'  The  petition  must  set  forth 
a  summary  of  the  issues  and  a  statement  of  the  equitable  considerations 
for  which  the  tax  court  should  enjoin  collection  of  the  tax.^^  However, 
the  tax  court  may  enjoin  collection  only  if  the  court  finds: 

(1)  The  issues  raised  by  the  original  tax  appeal  are  substantial; 

(2)  The  petitioner  has  a  reasonable  opportunity  to  prevail 
in  the  original  tax  appeal;  and 

(3)  The  equitable  considerations  favoring  the  enjoining  of 
the  collection  of  the  tax  outweigh  the  state's  interests  in  collecting 
the  tax  pending  the  original  tax  appeal. ^"^ 

This  provision  was  a  last  minute  insertion  by  the  Legislature  in  the 


^«lND.  Code  §  6-1.1-5-4  (1982).  See  Whirlpool  Corp.  v.  State  Bd.  of  Tax  Comm'rs., 
167  Ind.  App.  216,  338  N.E.2d  501  (1975). 

^^State  Bd.  of  Tax  Comm'rs.  v.  Catling  Gun  Club,  Inc.,  420  N.E.2d  1324  (Ind.  Ct. 
App.   1981). 

«°M  at  1328. 

«'lND.  Code  §  33-3-5-ll(b)  (Supp.  1986). 

'Ud.  §  33-3-5-1 1(c). 
'^Id.  §  33-3-5-1 1(a). 


1987]  TAXATION  375 

tax  court  bill;  consequently,  it  is  fundamentally  flawed.  First,  it  simply 
disregards  the  fact  that  the  tax  court  does  not  have  jurisdiction  to  hear 
an  appeal  unless  the  taxpayer  has  complied  with  all  of  the  statutory 
requirements  for  the  initiation  of  the  tax  appeal.  In  the  case  of  appeals 
from  the  revenue  department,  the  taxpayer  is  statutorily  required  first 
to  pay  the  challenged  tax,  then  to  file  a  claim  for  refund;  the  statutory 
appeal  lies  from  the  department's  denial  of  the  refund  claim. ^^  If  the 
taxpayer  cannot  initiate  his  appeal  without  first  paying  the  contested 
tax,  the  stark  question  is:  what  purpose  is  served  by  the  injunction 
procedure? 

Obviously,  this  is  a  technical  snafu,  and  it  is  understood  that  with 
the  department's  cooperation,  the  tax  court  is  going  to  receive  and 
consider  petitions  to  enjoin  the  collection  of  taxes  assessed  by  the  revenue 
department,  notwithstanding  this  jurisdictional  cloud.  However,  the  fur- 
ther question  remains  that  if  the  court  actually  preliminarily  enjoins  the 
collection  of  tax,  does  it  have  jurisdiction  to  proceed  to  hear  the  case 
since  the  statute  explicitly  states  that  "if  a  taxpayer  fails  to  comply  with 
any  statutory  requirement  for  the  initiation  of  the  tax  appeal,  the  tax 
court  does  not  have  jurisdiction  to  hear  the  appeal. "^^  Presumably  this 
paradox  will  be  corrected  by  the  1987  General  Assembly. 

Another  fundamental  inconsistency  with  the  new  tax  collection  in- 
junction provision  is  that  it  is  unnecessary  in  the  case  of  a  taxpayer 
appeal  challenging  property  tax  assessment  increases  by  the  state  tax 
board.  Under  Indiana  Code  section  6-1.1-15-10,  property  tax  taxpayers 
are  basically  relieved  from  paying  tax  on  contested  assessment  increases 
during  the  pendency  of  a  court  appeal  challenging  such  increases. ^^ 
Arguably,  the  new  law  could  be  construed  as  an  implied  repeal  of  the 
existing  law,  but  in  view  of  the  general  judicial  admonition  that  implied 
repeals  are  not  favored,*^  it  seems  unlikely  the  courts  would  apply  this 
principle  to  defeat  the  long-established  statutory  provision  that  exonerates 
taxpayers  from  paying  property  taxes  on  an  assessment  or  assessment 
increase  that  is  being  challenged  either  at  the  administrative  level  or  in 
the  courts. ^^ 

Nonetheless,  for  taxpayers  appealing  revenue  department  final  de- 
terminations, the  new  procedure  for  the  granting  of  injunctive  relief  by 
the  tax  court,  assuming  the  technical  gUtches  are  quickly  solved,  should 


''Id,  §  6-8. 1-9- 1(c). 

''Id.  §  33-3-5-l(a). 

''Id.  §  6-1.1-15-10. 

**"Repeals  of  statutes  by  implication  are  not  favored,  and  in  construing  statutes  the 
courts  will  avoid  a  construction  effecting  a  repeal  by  implication,  if  possible."  26  Ind. 
L.  Ency.  Statutes  §  83  (1953). 

«'IND.  Code  §  6-1.1-15-10  (Supp.  1986). 


376  INDIANA  LA  W  REVIEW  [Vol.  20:361 

be  helpful  relief  if  the  statutory  conditions  permitting  the  issuance  of 
an  injunction  can  indeed  be  met. 

E.     Small  Tax  Claims 

The  tax  court  has  been  empowered,  indeed  directed,  to  establish  a 
small  claims  docket  for  processing  (a)  refund  claims  from  the  revenue 
department  that  do  not  exceed  $5,000  for  any  year,  and  (b)  appeals 
from  the  state  tax  board  of  assessments  of  property  that  do  not  exceed 
$15,000  for  any  year.^^  While  commendable  in  its  objective,  the  efficacy 
of  this  new  small  claims  procedure  remains  to  be  seen.  Presumably,  the 
goal  of  the  tax  court  will  be  to  establish  simpHfied  procedures  for  the 
fihng  and  administration  of  small  tax  claims  but,  with  the  simplification 
of  procedures,  the  court  may  find  itself  faced  with  a  ponderous  burden. 
If  such  occurs,  the  Legislature  will  have  to  provide  the  court  with  the 
necessary  resources  to  carry  out  the  program. 

The  Supreme  Court  has  adopted  special  rules  for  the  filing  of  small 
tax  claims.^'  These  rules  are  denominated  "Small  Tax  Case  Rules"  and 
they  incorporate  to  the  extent  not  inconsistent  with  the  tax  court's 
jurisdiction  the  "Indiana  Rules  for  Small  Claims."  Rule  STC-2  provides 
a  simplified  form  of  notice  for  the  filing  of  a  small  tax  claim  as  follows: 

Rule  STC-2 
Notice  of  Claim 

The  notice  of  claim  to  be  used  under  Small  Claims  Rule  2  shall 
contain: 

(1)  the  name  of  the  Tax  Court; 

(2)  the  name,  address  and  telephone  number  of  claimant; 

(3)  a  designation  of  the  type  of  tax  the  claim  involves; 

(4)  a  statement  of  the  taxable  period  involved  or,  in  the 
case  of  a  claim  relating  to  property  taxes,  the  effective  date  of 
any  assessment  at  issue; 

(5)  a  brief  statement  of  the  nature  of  the  claim; 

(6)  a  statement  of  the  amount  of  tax  at  issue  or,  in  the 
case  of  a  claim  relating  to  property  taxes,  the  assessed  value  of 
the  property  at  issue;  and 

(7)  any  additional  information  which  may  facilitate  proper 
service  or  processing  of  the  claim. ^^ 

The  filing  of  the  notice  of  claim  is  considered  to  be  a  summons  as  to 


^Id.  §  33-3-5-12. 

''These  rules  were  formally  adopted  on  July  18,   1986.  They  are  reprinted  in  Ind. 
Code  Ann.,  Interim  Ann.  Serv.  No.  1,  71  (West,  October  1986). 
'^IND.  Small  Tax  Case  R.  2. 


1987]  TAXATION  377 

the  state  agency,^^  but  rule  STC-3  requires  that  the  notice  of  claim  shall 
be  served  upon  the  attorney  general  by  registered  or  certified  mail,  return 
receipt  requested.^'* 

II.     Indiana's  Response  to  the  Issue  of 
World-Wide  Taxation  of  Multinational  Corporations 

Following  a  series  of  decisions  by  the  United  States  Supreme  Court 
in  the  early  1980's  that  addressed  the  issue  of  state  taxation  of  the 
world-wide  or  foreign  source  income  of  multicorporate  unitary  busi- 
nesses,^^ Indiana  has  grappled  with  the  economically  sensitive  question 
of  how  far  Indiana  should  expand  its  now  recognized  constitutional 
jurisdiction  to  impose  the  Indiana  adjusted  gross  and  supplemental  income 
taxes  on  the  taxable  income  of  unitary  businesses.  Coupled  with  this 
question  is  the  companion  question  of  how  far  Indiana  should  go  in 
taxing  the  foreign  source  income  of  United  States  domestic  companies. 

In  1984,  Governor  Orr,  in  order  to  allay  expressions  of  grave  concern 
by  many  taxpayers  as  to  what  Indiana's  policy  would  be  in  view  of  the 
1983  United  States  Supreme  Court  decision  in  Container  Corp.  of  Amer- 
ica V.  Franchise  Tax  Board^^  issued  the  following  statement: 

The  attached  Indiana  Department  of  Revenue  directive  is  in 
response  to  the  many  reports  that  have  greatly  misrepresented 
Indiana's  unitary  tax  policy.  I  wish  to  make  Indiana's  position 
absolutely  clear.  Except  when  requested  by  the  taxpayer  or  in 
cases  where  there  is  evidence  of  a  blatant  attempt  to  avoid 
Indiana  taxes,  Indiana  has  not,  does  not,  and  will  not  require 
combined  reporting  of  taxpayers  conducting  unitary  businesses. 
This  has  been  our  policy.  The  United  States  Supreme  Court 
decision  in  the  Container  Corporation  of  America  case  has  not 
altered  that  poHcy.^^ 

The  revenue  department  directive  identified  in  Governor  Orr's  state- 
ment further  explained  the  department's  policy  as  to  its  application  of 
the  unitary  business  taxation  method  as  follows: 

The  Department  has  no  intention  of  using  combined  income  of 
unitary  businesses  as  a  means  of  gaining  additional  tax  revenues. 


"Ind.  Small  Tax  Case  R.  3. 

^Id. 

'^Container  Corp.  of  America  v.  Franchise  Tax  Bd.,  463  U.S.  159  (1983);  F.W. 
Woolworth  Co.  v.  Taxation  &  Revenue  Dep't,  458  U.S.  354  (1982);  ASARCO,  Inc.  v. 
Idaho  State  Tax  Comm'n,  458  U.S.  307  (1982);  Exxon  Corp.  v.  Department  of  Revenue, 
447  U.S.  207  (1980);  Mobil  Oil  Corp.  v.  Commissioner  of  Taxes,  445  U.S.  425  (1980). 

M63  U.S.   159  (1983). 

'Public  announcement  by  Governor  Robert  D.  Orr  of  Indiana  (February  23,  1984). 


378  INDIANA  LAW  REVIEW  [Vol.  20:361 

but  will  only  use  the  method  for  the  fair  reporting  and  reflection 
of  income  attributed  to  Indiana  when  the  standard  three-factor 
formula  clearly  does  not  fairly  reflect  income.  To  categorize 
Indiana  as  a  "unitary  state"  is  not  an  accurate  description  of 
the  policy  Indiana  has  followed  for  years. ^^ 

In  1985,  the  Indiana  Legislature  further  addressed  the  issue  of  unitary 
business  taxation  and  enacted  an  amendment  to  the  adjusted  gross  income 
tax  act  (popularly  called  the  "Sony  amendment")^^  that  essentially  pro- 
vides that  Indiana  will  not  impose  the  unitary  business  tax  concept  on 
a  world-wide  basis,  but  restricts  the  revenue  department's  application 
of  that  concept  to  a  "water's  edge"  jurisdiction. '^^  Broadly  speaking, 
"water's  edge  unitary  taxation"  essentially  means  that  the  revenue  de- 
partment may  apply  the  unitary  business  method  to  combine  the  income 
of  a  multicorporate  business  only  to  the  extent  such  business  is  conducted 
within  the  United  States.  Conversely  stated,  the  department  may  not  tax 
a  unitary  business  on  the  basis  of  world-wide  income.  Because  numerous 
articles, ^^^  as  well  as  numerous  court  decisions, ^°^  have  dealt  with  this 
unitary  business  concept,  the  objective  of  this  comment  is  to  focus  on 
where  Indiana  stands  today  on  the  issue  of  unitary  taxation. 

The  1985  enactment  of  a  "water's  edge"  unitary  business  taxation 
limitation  has  produced  two  unresolved  serious  concerns.  First,  Indiana 
has  not  dealt  with  the  question  of  the  taxability  of  foreign  source  income 
(generally  dividends  and  royalties)  of  United  States  based  multinational 
businesses.  American  multinationals  may  well  argue  that  "water's  edge" 
taxation  will  place  them  at  a  great  tax  disadvantage  with  foreign-based 
multinationals  if  Indiana  taxes  the  domestic  companies'  foreign  source 
income  while  exempting  from  taxation  the  overseas  income  of  the  foreign 
multinationals.  It  is  significant  at  this  point  to  note  that  all  of  the  states 
bordering  Indiana  have  provided  tax  relief  for  the  foreign  source  income 
of  American  companies. ^^^  This  issue  has  been  presented  to  our  legislature 
but  no  action  has  yet  been  taken  by  the  General  Assembly  to  rectify 
the  asserted  disparity  in  the  taxation  of  U.S.  incomes  vs.  foreign  com- 
panies. 


'^Commissioner's  Directive  No.  10  (Ind.  Revenue  Dep't,  Feb.   1984). 
'^985    Ind.   Acts   658,   663,   Pub.    L.   No.   75-1985,    §   4   (codified   at   Ind.    Code 
§  6-3-2-2(0)  (Supp.   1986). 

""See,  e.g.,  Buresh  &  Weinstein,  Combined  Reporting:  The  Approach  and  Its  Prob- 
lems, J.  State  Tax'n,  Spring  1981,  at  5;  Corrigan,  Interstate  Corporate  Income- 
Recent  Revolutions  and  a  Modern  Response,  29  Vand.  L.  Rev.  423  (1976);  Frankel,  Basic 
Principles  and  Significant  Issues  in  State  Taxation  of  Unitary  Corporate  Income,  37  Tax 
Exec.   1  (1984). 

^°^See  supra  note  95. 

'°'See,  e.g.,  III.  Ann.  Stat  ch.  120,  para.  15-1501(a)(28)  (Smith-Hurd  Supp.  1986). 


1987]  TAXATION  379 

The  second  unresolved  problem  emanating  from  the  1985  enactment 
of  the  "water's  edge"  unitary  business  Hmitation  concerns  a  companion 
limitation  that  restricts  the  department's  application  of  the  unitary  concept 
even  as  to  domestic  multicorporate  businesses. 

[T]he  department  may  not  require  that  income,  deductions,  and 
credits  attributable  to  a  taxpayer  and  another  entity  ...  be 
reported  in  a  combined  income  tax  return  for  any  taxable  year, 
unless  the  department  is  unable  to  fairly  reflect  the  taxpayer's 
adjusted  gross  income  for  the  taxable  year  through  use  of  other 
powers  granted  to  the  department  .  .  .  .^^"^ 

This  provision  has  received  little  attention  to  date,  but  it  may  bear 
considerable  significance  as  to  the  department's  real  authority  to  apply 
the  unitary  business  concept. 

The  legislative  history  behind  the  enactment  of  this  provision  reflects 
that  it  was  adopted  to  ensure  that  the  state's  apphcation  of  the  unitary 
business  concept  was  to  be  a  last  resort  tool  to  determine  the  Indiana 
taxable  income  of  a  multistate,  multicorporate  business.  The  provision 
requires  the  department  first  to  seek  to  establish  whether  Indiana  taxable 
income  can  be  fairly  determined  without  resort  to  the  unitary  method. '^^ 
For  example,  the  department  may  now  be  required  to  determine  whether 
Indiana  taxable  income  is  ascertainable  on  a  separate  accounting  basis 
(such  as  making  adjustments  for  intercompany  transactions)  before  the 
department  may  fall  back  on  the  unitary  method. 

It  can  be  argued  that  this  statute  is  nothing  more  than  a  recitation 
of  the  existing  law  and  that  it  imposes  no  new  limitations  on  the 
department.  The  answer  to  such  a  contention  should  be  that  under  long- 
established  principles  of  statutory  construction,  the  legislature  is  presumed 
not  to  have  enacted  a  useless,  redundant,  or  meaningless  law  and  that 
it  is  incumbent  on  agencies  and  the  courts  to  attribute  a  meaningful 
purpose  to  an  enactment  of  the  legislature.'^^ 

Assuming  that  the  new  provision  is  to  be  given  a  meaningful  inter- 
pretation, the  legislature  has  imposed  a  more  restrictive  standard  upon 
the  revenue  department  as  to  its  employment  of  the  unitary  tax  method; 
therefore,  Indiana  taxpayers  facing  unitary  taxation  by  the  department 
may  be  well  advised  to  seek  factually  to  demonstrate  that  such  taxation 
is  unwarranted.  If  so  construed,  this  law  is  certainly  consistent  with  and 
responsive  to  Governor  Orr's  statement  that  "except  when  requested  by 


'°^lND.  Code  §  6-3-2-2-(p)  (Supp.   1986). 


'°*"It  is  a  rule  of  statutory  interpretation  that  courts  will  not  presume  the  legislature 
intended  to  do  a  useless  thing  or  to  enact  a  statute  that  is  a  nullity."  Northern  Ind. 
Bank  v.  State  Bd.  of  Finance,  457  N.E.2d  527,  532  (Ind.   1983). 


380  INDIANA  LAW  REVIEW  [Vol.  20:361 

the  taxpayer  or  in  cases  where  there  is  evidence  of  a  blatant  attempt 
to  avoid  Indiana  taxes,  Indiana  has  not,  does  not,  and  will  not  require 
combined  reporting  of  taxpayers  conducting  unitary  businesses. "'^^ 

III.     Uniformity  in  Valuation — 
A  Mounting  Property  Tax  Assessment  Problem 

The  Indiana  Court  of  Appeals  in  two  recent  decisions  has  relied 
upon  article  10,  section  1  of  the  Indiana  Constitution^^^  to  set  aside  the 
state  tax  board's  assessment  of  business  inventory  for  lack  of  uniformity 
in  the  valuation  of  property  of  like  kind.  In  State  Board  of  Tax  Com- 
missioners V.  Pioneer  Hi-Bred  International,  Inc.,^^^  the  court  examined 
regulation  16's^'°  mandatory  trade  leveling  adjustment  to  inventory  for 
manufacturers  who  have  assumed  the  role  of  retailers.  State  Board  of 
Tax  Commissioners  v.  PolyGram  Records,  Inc.,^^^  involved  regulation 
16's  mandatory  adjustment  for  royalty  fees  in  determining  the  valuation 
of  inventory.  In  both  of  these  cases,  the  court  found  that  the  application 
of  regulation  16  resulted  in  identical  or  similar  property  being  assessed 
at  different  assessed  values.  Absent  evidence  that  this  was  necessary  to 
achieve  equality  among  different  taxpayers,  the  court  concluded  that  this 
result  violated  the  Indiana  Constitution's  mandate  that  there  be  '*a 
uniform  and  equal  rate  of  assessment  and  taxation  and  ...  a  just 
valuation  for  all  property,  both  real  and  personal."''^ 

In  Pioneer  Hi-Bred  International, ^^^  Pioneer  (the  taxpayer)  produced 
and  sold  various  types  of  seed  grain.  On  the  assessment  date.  Pioneer 
owned  seed  grain  that  was  stored  at  its  Indiana  production  facilities  and 
also  owned  seed  grain  in  the  hands  of  its  Indiana  sales  representatives 
for  retail  sale.  Pioneer  reported  the  assessed  value  of  all  of  its  seed  in 
Indiana  on  the  assessment  date  (whether  held  at  its  facilities  or  held  by 
its  salesmen)  at  the  same  value.  The  state  tax  board  rejected  Pioneer's 
valuation  on  the  basis  of  rule  3,  section  2(A)  of  regulation  16,  which 
requires  a  manufacturer  or  processor  who  assumes  the  role  of  a  retailer 
to  value  its  inventory  located  at  the  retail  level  of  trade  differently  than 


'"Tublic  Announcement  by  Governor  Robert  D.  Orr  of  Indiana  (February  23,  1984). 

'°^"The  General  Assembly  shall  provide,  by  law,  for  a  uniform  and  equal  rate  of 
property  assessment  .  .  .  ."  Ind.  Const,  art.  10,  §  1. 

'°^477  N.E.2d  939  (Ind.  Ct.  App.   1985). 

""Regulation  16  was  enacted  by  the  state  board  of  tax  commissioners  pursuant  to 
the  authority  granted  by  Ind.  Code  §  6-1.1-31-1  (1982).  It  requires  that  manufacturers 
or  processors  who  also  act  as  retailers  must  value  inventory  at  the  retail  level  as  though 
purchased  from  the  manufacturing  plant.  It  is  codified  at  Ind.  Admin.  Code  tit. 50,  § 
4.1-3-2  (1984). 

"•487  N.E.2d  444  (Ind.  Ct.  App.   1985). 

"^Ind.  Const,  art.   10,  §  1. 

"H77  N.E.2d  939  (Ind.  Ct.  App.   1985). 


1987]  TAXATION  381 

inventory  not  ready  for  retail.'"*  The  state  tax  board  then  valued  Pioneer's 
seed  at  the  production  level  on  a  cost  per  books  method,  but  in  valuing 
the  seed  in  the  hands  of  Pioneer's  sales  representatives  (at  the  retail 
level),  the  tax  board  included  the  cost  of  materials,  labor,  manufacturing 
and  operating  expenses,  and  intracompany  profit  (essentially  the  costs 
of  distribution  to  the  retail  level). ''^ 

The  state  tax  board  argued  that  this  trade  leveling  adjustment  was 
justified  because  it  assured  that  all  seed  at  the  retail  level  of  trade  would 
be  valued  equally  whether  it  was  owned  by  a  retailer  who  purchased  it 
from  a  producer  or  by  a  producer  assuming  the  role  of  retailer.  The 
board  asserted  that  "[t]he  inequality  of  tax  Hability  assessed  against  the 
same  property  of  a  single  taxpayer  is  justified  because  equality  of  as- 
sessment occurs  among  different  taxpayers."''^  The  state  tax  board, 
however,  never  presented  any  evidence  to  the  court  that  substantiated 
its  argument.  No  evidence  was  introduced  comparing  the  valuation  of 
similar  inventory  owned  by  a  retailer  with  Pioneer's  assessed  values,  nor 
did  the  state  provide  any  evidence  showing  that  uniformity  and  equality 
between  Pioneer  and  other  retailers  was  achieved  by  regulation  16's 
trade-levehng  adjustment. ^'^  Therefore,  the  court  rejected  the  state  tax 
board's  contention  that  regulation  16's  trade  leveling  adjustment  leads 
to  uniformity  and  equality  among  taxpayers.*'^ 

The  court  then  addressed  the  issue  of  whether  the  disproportionate 
tax  liability  assessed  against  Pioneer's  seed  is  legally  permissible.  Relying 
upon  the  1977  decision  in  State  Board  of  Tax  Commissioners  v.  Lyon 
&  Greenleaf  Co.,^^^  the  court  ruled  that  the  state  tax  board's  classification 
and  different  valuations  of  Pioneer's  seed  based  upon  its  level  of  trade 
violated  article  10,  section  1  of  the  Indiana  Constitution. '^°  Observing 
that  the  state  tax  board  had  failed  to  show  that  such  classification  was 
required  to  achieve  a  just  valuation  of  all  property,  the  court  concluded: 

Inventory  stored  at  Pioneer's  facilities  is  distinguished  from 
the  same  inventory  in  the  hands  of  Pioneer's  sales  representatives. 
Such  a  distinction  is  probably  more  artificial  than  in  Lyon  & 
Greenleaf.  In  this  case,  not  only  is  identical  property  valued 
differently  but  the  same  owner  of  identical  property  is  taxed 


"^IND.  Admin.  Code  tit.  50,  §  4.1-3-2(A)(5)  (1984). 

'^'Pioneer  Hi-Bred  Int'l,  All  N.E.2d  at  941. 

''"Id.  at  942. 

"Vc?. 

"»/c?.  at  943. 

"^72  Ind.  App.  272,  359  N.E.2d  931  (1977).  In  this  case,  the  Indiana  Court  of 
Appeals  ruled  that  the  assessing  of  fungible,  commingled  grain  stored  in  the  same  warehouse 
at  different  values  depending  upon  whether  the  grain  was  owned  by  the  warehouse  itself 
or  by  farmers  was  violative  of  the  Indiana  Constitution.  Id. 

'^"Pioneer  Hi-Bred  Int'l,  All  N.E.2d  at  943. 


382  INDIANA  LAW  REVIEW  [Vol.  20:361 

differently.  We  therefore  conclude  that  the  Board's  higher  val- 
uation of  Pioneer's  seed  grain  at  the  retail  level  of  trade  was 
impermissible  and  the  trial  court  properly  set  it  aside. '^^ 

In  PolyGram  Records, ^^^  the  court  of  appeals  again  held  that  the 
state  tax  board's  assessment  of  tangible  personal  property  violated  article 
10,  section  1  of  the  Indiana  Constitution.  PolyGram  is  a  company  that 
produces,  promotes,  and  distributes  records  and  tapes.  It  operates  a 
distribution  center  for  its  products  in  Beech  Grove,  Indiana.  In  the 
record  and  tape  industry,  the  artist  first  contracts  with  a  record  label 
company  to  make  a  master  copy  of  the  recording.  The  record  label 
company  than  contracts  with  companies  Uke  PolyGram  to  produce, 
promote,  and  distribute  the  recording.  According  to  the  court,  PolyGram 
generally  subcontracted  out  the  actual  manufacturing  of  the  record  to 
record-pressing  companies. ^^^  PolyGram  was  compensated  by  retaining 
a  percentage  of  the  wholesale  price  with  the  remainder  going  to  the 
record  label  company,  which  in  turn  used  the  funds  for  expenses,  in- 
cluding the  payment  of  royalties  to  the  artist.  The  court  found  that  the 
record  label  company  was  solely  responsible  for  any  royalty  payments 
to  the  recording  artist  and  that  PolyGram  was  in  no  way  involved  with 
royalty  agreements  between  the  record  label  company  and  the  artist. '^"^ 

The  state  tax  board  increased  PolyGram's  business  inventory  as- 
sessment by  127^^0  to  cover  the  value  of  royalties  on  the  records  that 
PolyGram  held  on  the  assessment  date  in  Indiana. '^^  This  adjustment 
was  made  in  accordance  with  rule  3,  section  2(A)(6)  of  regulation  16,'^^ 
which  provides  that  if  the  taxpayer's  cost  per  books  of  inventory  excludes 
any  royalty  fees,  an  adjustment  increasing  such  cost  to  reflect  those  fees 
must  be  made.'^^ 

The  taxpayer  prevailed  in  this  case  by  establishing  (1)  that  it  was 
not  responsible  for  any  royalties  on  its  records,  (2)  that  if  a  record  was 
in  its  inventory,  no  royalty  had  accrued  because  there  had  been  no  sale 
(the  event  that  triggered  the  obligation  to  pay  royalty),  and  (3)  most 
importantly,  that  PolyGram  was  in  no  different  position  than  an  Indiana 
record-presser,  i.e.  the  manufacturer  of  recordings,  and  that  the  state 
tax  board  did  not  include  royalty  values  in  assessing  records  owned  by 
record-pressers .  '^^ 


'^'Id. 

'"487  N.E.2d  444  (Ind.  Ct.  App.   1985). 

'^'Id.  at  445. 

'^'Id. 

'^Hd. 

'^^IND.  Admin.  Code  tit. 50,  §  4.1-3-2(A)(6)  (1984). 

'^'PolyGram  Records,  487  N.E.2d  at  445. 

'^^PolyGram  is  in  no  different  position,  according  to  the  record,  than  an  Indiana 

located  record-presser,  i.e.,  the  manufacturer,  of  recordings,  where  royalty  values 


1987]  TAXATION  383 

The  sum  of  these  recent  valuation  decisions  casts  a  mounting  threat 
to  the  valuation  standards  employed  by  the  state  tax  board.  If  the  courts 
mean  that  all  property  of  like  kind  must  be  valued  at  the  same  amount, 
then  the  board's  "cost"  approach  to  valuation  is  certainly  jeopardized. 
But  if  the  decisions  stand  only  for  the  proposition  that  property  similarly 
situated  in  the  same  marketplace  is  to  be  assessed  pursuant  to  uniform 
valuation  standards,  then  the  board's  general  procedures  may  withstand 
further  judicial  scrutiny.  In  the  board's  defense,  its  use  of  "cost"  as 
a  starting  point  for  valuation  has  considerable  merit,  not  only  as  to  the 
uniformity  of  the  standard,  but  also,  and  importantly,  this  starting  point 
permits  a  sound  and  defensible  audit  procedure. 


are  not  assessed.  We  believe  the  situation  is  sufficiently  similar  to  the  seed  corn  '■* 

in  State  Bd.  of  Tax  Com'rs.  v.  Pioneer  Hi-Bred,  (1985)  Ind.  App.,  477  N.E.2d  „ 

939,  and  the  stored  wheat  in  Ind.  St.  Bd.  of  Tax  Com'rs.  v.  Lyon  &  Greenleaf  a 

Co.,  (1977)   172  Ind.  App.  272,  359  N.E.2d  931,  that  these  cases  control  the  1 
PolyGram  inventory  because  the  Board  has  created  an  artificial  distinction  which 
results  in  an  assessment  which  is  not  uniform  or  results  in  a  just  valuation.  As 
a  result,  the  PolyGram  assessment  contravenes  Ind.  Const.  Art.  10,  §  1. 

Id.  (footnote  omitted).  '' 

Its 


The  Disappearing  Rights  of  Plaintiffs 
Under  a  Legal  Disability 


Roger  L.  Pardieck* 


I.     Introduction 

Historically,  limitations  on  actions  were  generally  held  to  be  in 
derogation  of  the  common  law  and  were  looked  upon  with  disfavor. • 
As  we  moved  into  the  twentieth  century,  the  courts  began  to  look 
favorably  upon  statutes  of  limitation  as  a  method  to  prevent  claims 
against  governmental  entities  and  to  encourage  diligence  among  plain- 
tiffs.^ In  the  1970's,  special  interest  legislation  produced  Hmitations  on 
the  rights  of  children;  these  statutes  have  been  liberally  construed  by 
the  courts  in  Indiana.^  In  Indiana,  as  well  as  other  states,  the  trend 
appears  to  limit  actions  through  arbitrary  time  constraints.  One  exception 
to  this  trend  was  the  adoption  of  a  modified  discovery  rule  in  Barnes 
V.  A.H.  Robins  Co.,  Inc.,"^  where  the  Indiana  Supreme  Court  recognized 
that  the  strict  application  of  a  statute  of  limitations  may  create,  in  some 
instances,  a  great  and  intolerable  injustice.^ 

As  limitations  on  actions  crept  into  the  early  English  common  law, 
savings  statutes  were  passed  which  protected  children  and  others  under 


♦Managing  attorney,  Law  Offices  of  Roger  L.  Pardieck,  Seymour,  Indiana.  A.B. 
Indiana  University,  1959;  LL.B.,  Indiana  University  School  of  Law— Bloomington,  1963. 

'Shideler  v.  Dwyer,  417  N.E.2d  281,  283  (Ind.  1981).  Statutes  of  limitations,  as  we 
know  them,  originated  in  England.  Originally,  there  was  no  Hmitation  on  when  a  person 
could  bring  an  action  against  another  for  a  particular  wrong.  Eventually,  statutes  of 
limitation  were  utiHzed.  At  the  same  time,  rules  developed  which  prevented  the  statute 
from  running  during  a  period  when  a  person  was  under  some  legal  disability.  The  rules 
were  thought  necessary  to  protect  the  individual's  right  to  seek  redress  for  the  wrong 
done  against  him  after  his  disability  was  removed.  Infants  were  among  the  individuals 
protected  under  these  rules.  W.  Ferguson,  Statutes  of  Limitation  Saving  Statutes  7-59 
(1978). 

^Shideler,  417  N.E.2d  at  283;  Spoljaric  v.  Pangan,  466  N.E.2d  37,  43  (Ind.  Ct. 
App.   1984). 

'See  Shideler,  417  N.E.2d  at  283. 

M76  N.E.2d  84  (Ind.  1985). 

Tor  example,  many  courts  now  apply  discovery  rules  in  various  types  of  actions. 
The  Indiana  Supreme  Court  recently  adopted  such  a  rule  for  cases  in  which  the  plaintiff 
suffered  an  injury  as  the  result  of  protracted  exposure  to  a  foreign  substance.  Id.  In 
these  types  of  cases,  the  statute  of  limitations  begins  "to  run  from  the  date  the  plaintiff 
knew  or  should  have  discovered  that  she  suffered  an  injury  or  impingement,  and  that  it 
was  caused  by  the  product  or  act  of  another."  Id.  at  87-88.  The  court  declined  to  extend 
the  rule  to  all  types  of  tort  cases  but  did  not  preclude  that  possibility  from  happening 
in  the  future.  Id.  at  87. 

385 


386  INDIANA  LA  W  REVIEW  [Vol.  20:385 

a  legal  disability  from  the  harsh  result  of  having  their  rights  extinguished 
before  they  were  legally  competent  to  exercise  them.^  Similarly,  many 
states  in  this  country  enacted  savings  statutes  to  preserve  the  actions  of 
those  under  a  legal  disability."^  While  this  was  once  true  in  Indiana,  the 
legislation  of  the  seventies,  coupled  with  judicial  interpretations  of  this 
legislation,  has  whittled  away  at  the  protection  provided  children  and 
those  under  a  legal  disability.  A  recent  illustrative  case  is  Orr  v.  Turco 
Manufacturing  Co.,  Inc.,^  in  which  the  Indiana  Court  of  Appeals  found 
that  the  products  liability  statute^  requiring  minors  to  bring  a  products 
liability  claim  within  two  years  from  the  date  of  the  injury,  regardless 
of  the  minor's  age,  barred  the  claim  of  an  injured  child.  As  shall  be 
seen  from  the  legislative  history  discussed  later  in  this  Article,  the 
legislation  was  squarely  aimed  at  limiting  liability  without  regard  to 
whether  the  case  was  good  or  bad  and  without  consideration  for  its 
impact  on  children. '°  Without  more  distance  between  ourselves  and  the 
issue,  it  may  be  impossible  definitively  to  determine  the  present  effect 
of  the  trend  to  eliminate  rights  of  the  legally  disabled,  but  it  is  pertinent 
to  question  the  direction  in  which  we  are  headed. 

II.     The  Granting  of  an  Extension  of  Time 

In  Indiana,  an  infant  is  permitted  to  bring  an  action  "(1)  in  his 
own  name;  (2)  in  his  own  name  by  a  guardian  ad  litem  or  a  next  friend; 
[or]  (3)  in  the  name  of  his  representative,"  if  the  representative  has 
been  appointed  by  the  court. ^'  By  statute,  "[a]ny  person  being  under 
legal  disabilities  when  the  cause  of  action  accrues  may  bring  his  action 
within  two  (2)  years  after  the  disability  is  removed. "'^  This  provision 
does  not,  in  the  literal  sense,  stop  the  statute  of  limitations  from  running; 
rather,  the  statue  of  limitations  begins  to  run  when  the  cause  of  action 
accrues. '^  However,  because  of  his  minority  status,  the  child  is  given 
two  years  after  attainment  of  majority  to  bring  his  cause  of  action  if 
the  full  statute  of  limitations  runs  while  he  is  still  a  minor.  ^"^  Yet,  in 
the  last  decade,  this  extension  of  time  has  been  narrowed  by  legislative 
and  court  action. 


^See  W.  Ferguson,  supra  note  1,  at  13-14. 
'See  id.  at  7-59. 

«484  N.E.2d  1300  (Ind.  Ct.  App.   1985). 
^IND.  Code  §  33-1-1.5-5  (1982). 
^°See  infra  text  accompanying  notes  45-48. 
"Ind.  R.  Tr.  P.  17(c)  (1986). 

'^Ind.  Code  §  34-1-2-5  (1982).  This  does  not  prohibit  children  from  pursuing  an 
action  while  they  are  still  minors.  Rather,  it  merely  preserves  their  right  to  bring  an  action 
within  two  years  of  their  attaining  majority  status.  Norris  v.  Mingle,  217  Ind.  516,  29 
N.E.2d  400  (1940). 

'^King  V.  Carmichael,  136  Ind.  20,  35  N.E.  509  (1893). 
''Id. 


1987]  LEGAL  DISABILITY  387 

III.     Taking  Away  the  Child's  Safety  Net 

A.     The  Products  Liability  Act 

In  1978,  the  Indiana  legislature  passed  the  Indiana  Products  Liability 
Act,  which  included  the  following: 

This  section  applies  to  all  persons  regardless  of  minority  or  legal 
disability.  Notwithstanding  I.C.  34-1-2-5,  any  product  liability 
action  must  be  commenced  within  two  years  after  the  cause  of 
action  accrues  or  within  ten  (10)  years  after  the  delivery  of  the 
product  to  the  initial  user  or  consumer;  except  that,  if  the  cause 
of  action  accrues  more  than  eight  (8)  years  but  not  more  than 
ten  (10)  years  after  that  initial  delivery,  the  action  may  be 
commenced  at  any  time  within  two  (2)  years  after  the  cause  of 
action  accrues.'^ 

This  statute  became  the  focus  of  the  Indiana  Court  of  Appeals'  decision 
in  Orr  v.   Turco  Manufacturing  Co.,  Inc.^^ 

B.     The  Orr  Decision 

In  Orr,  Nicolette  Orr  was  injured  on  a  swing  set  in  1979  when  she 
was  ten  years  old.  Paul  Orr  was  appointed  guardian  of  Nicolette 's  estate 
on  June  23,  1983.  On  June  30,  1983,  an  action  was  filed  against  Turco, 
the  manufacturer  of  the  swing  set.  In  response,  Turco  filed  a  motion 
to  dismiss,  asserting  that  the  action  had  been  filed  more  than  two  years 
after  the  injury  occurred  and  was,  therefore,  barred  by  the  products 
hability  statute  of  limitations. 

Orr  attempted  to  argue  that  Indiana  Code  section  33-1-1.5-5  did  not 
apply  to  persons  with  a  legal  disability  or  minority  status.  In  addition, 
Orr  argued  that  courts  had  the  authority  and  responsibility  to  determine 
when  a  cause  of  action  accrued. ^^  In  rejecting  both  of  these  arguments. 


'^ND.  Code  §  33-1-1.5-5  (1982)  (emphasis  added).  Prior  to  the  enactment  of  this 
statute,  minors  had  two  years  after  attaining  majority  to  file  product  liability  actions.  See 
D'Andrea  v.  Montgomery  Ward  &  Co.,  Inc.,  571  F.2d  403  (7th  Cir.  1978)  (applying 
Indiana  law). 

'^484  N.E.2d  1300  (Ind.  Ct.  App.   1985). 

"Id.  at  1302  (relying  on  the  Indiana  Supreme  Court's  decision  in  Barnes  v.  A.H. 
Robins,  Inc.,  476  N.E.2d  84  (Ind.  1985)).  In  Barnes,  the  plaintiffs  had  utilized  a  con- 
traceptive device  known  as  the  Dalkon  Shield.  Each  plaintiff  had  suffered  injuries  in  1972- 
1979  due  to  the  use  of  the  device  but  did  not  discover  the  connection  between  their  use 
of  the  shield  and  their  illnesses  until  they  saw  a  60  Minutes  program  in  1981.  The  plaintiffs, 
upon  learning  of  the  association  between  the  Dalkon  Shield  and  the  problems  they  suffered, 
filed  actions  in  1981.  The  supreme  court  was  asked  to  determine  when  the  statute  of 
limitations  would  begin  to  run  in  such  actions,  and  in  response  to  this  inquiry  adopted 
the  discovery  rule.  Barnes,  476  N.E.2d  at  87. 


388  INDIANA  LAW  REVIEW  [Vol.  20:385 

the  court  of  appeals  noted  that  the  statute  in  question  was  clear  and 
unambiguous  and  provided  no  exceptions  for  either  minority  or  legal 
disability.'^  Therefore,  the  court  was  bound  to  follow  the  mandate  of 
the  legislature  and  bar  Orr's  claim  which  was  brought  more  than  two 
years  after  the  injury  was  suffered.'^ 

Perhaps  more  importantly,  the  court  also  rejected  Orr's  argument 
that  the  statute  violated  article  1,  section  12  of  the  Indiana  Constitution. ^^ 
In  doing  so,  the  court  rehed  on  two  prior  Indiana  decisions,  Dague  v. 
Piper  Aircraft  Corp}^  and  Rohrabaugh  v.    Wagoner.^^ 

C.     The  Dague  Decision 

In  Dague,  the  Indiana  Supreme  Court  was  asked  to  determine  whether 
the  products  liability  statute  of  limitations  violated  article  1,  section  12 
of  the  Indiana  Constitution.^^  This  section  provides  in  part  that:  "All 


'^Orr,  484  N.E.2d  at  1302. 

'^M  The  court  of  appeals  subsequently  determined  in  a  companion  case  that  the 
intent  of  the  legislature  was  so  clearly  expressed  that  an  award  of  attorney  fees  was 
proper.  Orr  v.  Turco  Mfg.  Co.,  Inc.,  496  N.E.2d  115  (Ind.  Ct.  App.  1986).  The  court 
determined  that  in  Hght  of  the  statutory  language,  Orr  could  not  in  good  faith  argue  that 
minors  were  not  covered  by  the  two  year  provision  in  the  products  liabiUty  statute.  The 
arguments  made  by  Orr  were  deemed  meritless.  The  appeal  was  found  "to  be  frivolous 
because  wholly  without  merit,  and  thus  presumptively  taken  in  bad  faith."  Orr,  496 
N.E.2d  at  118. 

The  award  of  attorney  fees  in  this  action  creates  an  untenable  problem  for  plaintiffs' 
attorneys.  Although  Orr's  argument  based  on  the  wording  of  the  statute  may  have  been 
tenuated,  Orr  also  asserted  that  the  statute  violated  the  Indiana  Constitution.  The  products 
liability  statute  of  hmitations  had  previously  withstood  a  constitutional  attack  but  had 
not  been  questioned  with  regard  to  minors'  claims.  Orr,  484  N.E.2d  at  1302;  see  also 
Dague  V.  Piper  Aircraft  Corp.,  275  Ind.  520,  530,  418  N.E.2d  207,  313  (1981).  Even  if 
Orr  inartfully  presented  her  case,  and  that  is  not  to  say  that  she  did,  would  this  fact 
make  the  case  so  meritless  as  to  justify  an  award  of  attorney  fees  especially  when  similar 
statutes  had  been  successfully  attacked  in  other  states?  The  court  of  appeals  relied  on 
the  fact  that  Indiana's  medical  malpractice  statute  had  been  upheld  with  respect  to  minors 
and  that  the  decision  in  that  case  was  dispositive  of  the  issue  raised  by  Orr.  Orr,  484 
N.E.2d  at  1303  (citing  Rohrabaugh  v.  Wagoner,  274  Ind.  661,  413  N.E.2d  891  (1980)). 
Because  the  court  believed  the  decision  was  dispositive,  it  determined  that  Orr's  appeal 
was  meritless.  This  decision  leaves  attorneys  in  the  position  of  having  to  decide  whether 
to  launch  a  constitutional  attack  on  a  statute  where  another,  but  not  identical,  statute 
has  been  upheld  and  risk  being  assessed  for  attorney  fees  or  forgo  the  attack. 

Presumably,  the  assessment  of  attorney  fees  is  intended  to  discourage  "frivolous" 
lawsuits.  The  extent  to  which  it  will  accomplish  that  objective  may  never  be  known; 
however,  it  is  certain  to  have  a  chilling  effect  on  lawyers  when  they  consider  taking  on 
controversial  litigation. 

^°Or/-,  484  N.E.2d  at  1302. 

^'275  Ind.  520,  418  N.E.2d  207  (1981). 

^^274  Ind.  661,  413  N.E.2d  891  (1980). 

^^In  Dague,  the  plaintiff  filed  a  four  count  complaint  against  Piper  Aircraft  seeking 
to  recover  damages  for  the  wrongful  death  of  her  husband.  Her  husband  had  died  as  a 


1987]  LEGAL  DISABILITY  389 

courts  shall  be  open;  and  every  person,  for  injury  done  to  him  in  his 
person,  property,  or  reputation,  shall  have  remedy  by  due  course  of 
law."^'*  The  plaintiff  argued  that  the  ten-year  limitation  contained  in 
Indiana's  product  liability  statute  cut  off  her  actions  based  on  the  theories 
of  strict  liability  and  negligence  without  providing  an  alternative  remedy. ^^ 
This  effectively  deprived  her  of  access  to  the  courts  and  therefore,  the 
provision  violated  article  1,  section  12  of  the  Indiana  Constitution. ^^ 

The  supreme  court  disagreed.  The  court  reasoned  that  the  legislature 
is  entitled  to  change  the  common  law^^  and  that  the  legislature  was 
within  its  authority  in  enacting  legislation  that  narrowed  the  time  frame 
in  which  an  action  could  be  brought.  The  court  concluded  that  there 
is  no  vested  right  in  a  rule  of  common  law  and  that  the  right  to  bring 
a  common  law  action  is  not  a  fundamental  right. ^^  The  court  ultimately 
decided  that  the  Products  Liability  Act  did  not  contravene  article  1, 
section  12  of  the  Indiana  Constitution. ^^  Significantly,  the  court  never 
discussed  the  portions  of  the  statute  dealing  with  minors  and  persons 
under  a  disability.  This  issue  was  never  presented  to  the  court.  The 
Dague  case  merely  held  that  in  general,  the  statute  of  repose  was 
constitutional.  Because  the  Dague  court  did  not  consider  the  constitu- 
tionality of  the  clause  making  the  limitation  applicable  to  children,  the 
Dague  decision  should  not  have  been  considered  dispositive  of  the  Orr 
case. 

D.     The  Child  and  the  Medical  Malpractice  Action 
Rohrabaugh  v.    Wagoner,^^  although  instructive,  did  not  deal  with 


result  of  injuries  sustained  when  the  Piper  Pawnee  aircraft  he  was  piloting  crashed  on 
July  7,  1978.  The  decedent  passed  away  on  September  5,  1978,  and  his  wife  filed  her 
complaint  on  October  1,  1979,  alleging  that  the  decedent's  injuries  and  death  were  caused 
by  a  defective  condition  in  the  aircraft.  It  was  undisputed  that  the  aircraft  had  been 
manufactured  in  1965  and  placed  into  the  stream  of  commerce  on  March  26,  1965.  A 
federal  district  court  granted  Piper  Aircraft's  motion  for  summary  judgment  on  the  basis 
of  Indiana's  ten-year  statute  of  repose.  On  appeal,  the  Seventh  Circuit  certified  several 
issues  to  the  Indiana  Supreme  Court,  including  the  issue  of  whether  the  ten-year  statute 
of  repose  violated  the  Indiana  Constitution.  Dague,  275  Ind.  at  522-23,  418  N.E.2d  at 
209. 

^^IND.  Const,  art.  I,  §  12  (1851,  amended  1984). 

^^Dague,  275  Ind.  at  529,  418  N.E.2d  at  212.  The  statutory  provision  provides  in 
pertinent  part:  "[A]ny  product  liability  action  .  .  .  must  be  commenced  within  two  [2] 
years  after  the  cause  of  action  accrues  or  within  ten  [10]  years  after  the  delivery  of  the 
product  to  the  initial  user  or  consumer  .  .  .  ."  Ind.  Code  Ann.  §  34-4-20A-5  (Burns 
Supp.   1986)  (emphasis  added). 

''Dague,  275  Ind.  at  529,  418  N.E.2d  at  212. 

''Id.,  418  N.E.2d  at  213. 

''Id. 

''Id.  at  530,  418  N.E.2d  at  213. 

^°274  Ind.  661,  413  N.E.2d  891  (1980). 


390  INDIANA  LAW  REVIEW  [Vol.  20:385 

the  products  liability  statute  questioned  in  Orr.  Rather,  Rohrabaugh 
dealt  solely  with  the  medical  malpractice  statute  of  limitations.^'  The 
plaintiff  in  Rohrabaugh  was  a  minor  between  age  six  and  eighteen,  both 
when  her  action  was  brought  and  when  the  alleged  acts  of  malpractice 
occurred. ^2  The  medical  malpractice  statute  of  limitations  provided  that 
minors  under  the  age  of  six  had  until  their  eighth  birthday  to  pursue 
an  action  while  all  other  minors  had  only  two  years  "from  the  date  of 
the  alleged  act,  omission  or  neglect"  to  pursue  their  action."  The  plaintiff 
brought  her  malpractice  action  in  1979,  more  than  two  years  after  the 
enactment  of  the  medical  malpractice  statute  and  more  than  two  years 
after  the  effective  date  of  the  Act.^^  The  trial  court  dismissed  the 
plaintiff's  action  as  being  untimely  filed  and  the  supreme  court  affirmed 
that  decision. 

The  plaintiff  asserted  that  the  medical  malpractice  statute  violated 
the  rights  guaranteed  by  both  the  fourteenth  amendment  of  the  United 
States  Constitution  and  article  1,  sections  12  and  23  of  the  Indiana 
Constitution.^^  The  court  first  noted  that  the  legislature  was  not  required 
to  exempt  children  from  the  operation  of  statutes  of  limitation. ^^  The 


^^Id.  Rohrabaugh  was  not  the  first  Indiana  case  to  address  the  medical  malpractice 
statute's  limitation  of  minors'  claims.  In  Chaffin  v.  Nicosia,  261  Ind.  698,  310  N.E.2d 
867  (1974),  the  Indiana  Supreme  Court  determined  that  the  statute  of  limitations  in  the 
old  medical  malpractice  statute  did  not  override  the  special  statute  of  limitations  for 
persons  under  a  legal  disability.  Id.  at  703,  310  N.E.2d  at  870.  The  court  noted  that 
requiring  a  minor  to  file  his  action  within  the  two-year  period  provided  by  the  medical 
malpractice  statute  would  be  "extraordinarily  harsh"  and  inconsistent  with  the  legislature's 
intention  of  creating  a  legal  disability  to  protect  minors.  Id.  at  704,  310  N.E.2d  at  871, 
However,  after  this  ruling,  the  medical  malpractice  statute  was  amended  to  set  up  the 
current  system.  See  infra  note  33  and  accompanying  text.  Nevertheless,  the  court's  focus 
on  the  impact  on  children  and  their  right  to  access  to  the  courts  is  instructive  in  reviewing 
the  present  situation, 

3^274  Ind,  at  662,  413  N,E,2d  at  892. 

"M  at  663,  413  N,E.2d  at  892  (quoting  Ind.  Code  §  16-9.5-3-1  (1976)).  The  Act 
also  provided  that  any  action  which  accrued  before  the  enactment  of  the  statute  had  to 
be  brought  within:  "(a)  Two  years  of  the  effective  date  of  this  article;  or  (b)  The  period 
described  in  section  1  of  this  chapter."  Ind.  Code  §  16-9,5-3-2  (1976),  The  plaintiff  had 
missed  both  of  these  deadlines,  Rohrabaugh,  274  Ind,  at  663,  413  N,E,2d  at  892, 

''Rohrabaugh,  21 A  Ind.  at  663,  413  N.E.2d  at  892. 

'Ud.,  413  N,E,2d  at  893,  Article  1,  section  23  of  the  Indiana  Constitution  states: 
"The  General  Assembly  shall  not  grant  to  any  citizen,  or  class  of  citizens,  privileges  or 
immunities,  which  upon  the  same  terms,  shall  not  equally  belong  to  all  citizens,"  Ind, 
Const,  art.  I,  §  23. 

^^274  Ind.  at  664,  413  N.E.2d  at  893  (citing  Sherfey  v.  City  of  Brazil,  213  Ind, 
493,  13  N.E.2d  568  (1938),  in  which  the  court  stated  that  neither  infancy  nor  incapacity 
suspended  the  requirement  to  give  notice  of  injury  to  a  municipality  as  required  by  statute. 
Again,  this  decision  made  no  examination  of  the  historical  use  of  savings  statutes  with 
regard  to  minors.  It  merely  stated  that  children,  like  adults,  had  to  meet  the  statutorily 
imposed  notice  provision.) 


1987]  LEGAL  DISABILITY  391 

court  then  decided  that  children  were  not  a  suspect  class  and  did  not 
require  strict  judicial  scrutiny.^''  Therefore,  the  constitutional  analysis 
utilized  by  the  court  only  required  the  classification  in  the  statute  to 
"be  reasonable,  not  arbitrary,"  and  that  it  ''rest  upon  some  ground  of 
difference  having  a  fair  and  substantial  relation  to  the  object  of  the 
legislation,  so  that  all  persons  similarly  circumstanced  shall  be  treated 
ahke."^^  Unfortunately,  the  court  did  not  appear  then  to  consider  the 
peculiar  situation  in  which  all  children  are  placed  in  seeking  redress  for 
an  injury. 

Rather  than  examining  children's  need  for  access  to  the  legal  system, 
the  court  focused  entirely  on  the  purpose  of  the  legislation,  i.e.  to  reduce 
physicians'  exposure  to  medical  malpractice  suits  by  limiting  the  time 
period  in  which  suits  could  be  brought  and  thereby  to  assure  the  avail- 
ability of  malpractice  insurance  at  a  reasonable  cost.^^  The  legislature 
apparently  feared  that  health  care  services  would  be  withdrawn  from 
the  public  if  such  measures  were  not  taken. "^^  In  weighing  the  benefit 
of  such  a  limitation  to  the  medical  profession  and  insurance  industry 
against  the  burden  placed  on  children,  the  court  stated: 

[T]he  Legislature:  'may  well  have  given  consideration  to  the  fact 
that  most  children  by  the  time  they  reach  the  age  of  six  years 
are  in  a  position  to  verbally  communicate  their  physical  com- 
plaints to  parents  or  other  adults  having  a  natural  sympathy 
with  them.  Such  communications  and  the  persons  whom  they 
reach  may  to  some  appreciable  degree  stand  surrogate  for  the 
lack  of  maturity  and  judgment  of  infants  in  this  matter.  The 
Legislature  may  well  have  considered  the  fact  of  some  importance 
that  many  health  care  providers  are  specially  trained  professional 
persons  meeting  state  standards  for  licensing,  and  are,  therefore, 
entitled  to  a  special  degree  of  trust. '"^^ 

The  court  concluded  that  the  classification  utilized  in  the  medical  mal- 
practice statute  was  reasonably  related  to  the  purpose  of  the  legislation 
and  that  "children  of  this  class  and  adults  are  similarly  circumstanced 


''Rohrabaugh,  274  Ind.  at  666,  413  N.E.2d  at  893-94. 

^«/(c/.  (quoting  Johnson  v.  St.  Vincent  Hospital,  Inc.,  273  Ind.  374,  392,  404  N.E.2d 
585,  597  (1980)). 

^'274  Ind.  at  666,  413  N.E.2d  at  894. 

*°Id.  This  again  raises  the  interesting  question  of  whether  the  recurring  insurance 
crises  are  caused  by  1)  the  tort  system,  2)  the  unrestrained  investment  practices  of  the 
insurance  industry,  3)  the  competitive  forces  of  the  marketplace  in  which  the  insurance 
industry  operates,  4)  the  insurance  industry  itself  for  its  own  benefit,  or  5)  all  of  the 
above. 

''Id.  at  667,  413  N.E.2d  at  895  (quoting  Johnson  v.  St.  Vincent  Hospital,  Inc.,  273 
Ind.  374,  404,  404  N.E.2d  585,  604  (1980)). 


392  INDIANA  LA  W  REVIEW  [Vol.  20:385 

with  regard  to  their  abihty  to  bring  malpractice  actions.'"*^  Therefore, 
the  statute  was  held  to  be  constitutional  and  ''consistent  with  the  pro- 
tection offered  by  our  State  and  Federal  Constitutions  to  equal  protection 
of  the  laws."'^^ 

Notably,  the  Rohrabaugh  decision  dealt  solely  with  the  statute  of 
limitations  in  the  medical  malpractice  statute.  When  evaluating  the  statute, 
the  court  had  to  determine  whether  the  provisions  of  the  statute  were 
a  reasonable  method  of  dealing  with  the  perceived  health  care  and 
insurance  crisis.  This  evaluation  involved  an  examination  of  the  provision 
with  that  particular  goal  in  mind.  The  decision  does  not  stand  for  the 
proposition  that  any  statute  of  limitations  is  per  se  constitutional.  The 
Orr  decision,  however,  treated  the  Rohrabaugh  case  as  controlling  prec- 
edent even  though  the  goals  of  the  two  statutes  were  not  the  same. 

The  products  liability  statute  was  passed  because  of  an  alleged 
insurance  crisis.  No  public  service  such  as  health  care  was  involved. 
Thus,  the  determination  in  Rohrabaugh  that  limiting  minors'  rights  was 
reasonable  for  the  medical  malpractice  statute  should  not  mean  the  same 
was  true  for  the  products  liability  statute.  The  court  in  Orr  simply  relied 
on  the  Rohrabaugh  decision  without  conducting  a  separate  analysis  of 
the  different  factors  involved  in  the  products  Uability  legislation.  In  fact, 
the  court  refused  to  consider  the  Minutes  of  the  Select  Joint  Committee 
on  Products  Liability  on  the  basis  that  the  language  in  the  statute  was 
unambiguous. "^"^  This  raises  a  question  regarding  the  role  of  the  Minutes 
and  whether  legislative  history  is  relevant  in  determining  whether  the 
limitation  on  the  child's  right  to  bring  an  action  was  a  reasonable  method 
of  dealing  with  the  problem  confronting  the  legislature. 

A  review  of  the  Minutes  would  have  revealed  that  the  major  concern 
was  the  ten-year  limitation  and  that  the  enactment  of  the  limitation  was 
not  expected  to  decrease  insurance  rates  paid  by  Indiana  manufacturers, 
although  that  was  the  stated  goal  of  the  legislation."^^  The  insurance 
industry  nevertheless  urged  the  passage  of  the  limitations  so  that  Indiana 
"could  serve  as  an  example  to  the  other  states  in  drafting  their  laws.'"^^ 
It  was  acknowledged  that  it  is  "fitting  and  appropriate  for  counsel  or 
injured  parties  to  seek  to  make  recoveries  under  the  tort  system  and  it 
is  proper  for  them  to  have  the  tools  with  which  to  bring  their  cases. '"^^ 


^^274  Ind.  at  667,  413  N.E.2d  at  895. 

''^274  Ind.  at  668,  413  N.E.2d  at  895.  Considering  the  specific  reasons  for  the  passage 
of  the  medical  malpractice  statute,  Rohrabaugh  should  not  have  been  treated  as  being 
dispositive  of  the  Orr  case  without  an  independent  analysis  of  the  purpose  of  the  products 
statutes. 

^Orr,  484  N.E.2d  at  1302. 

"^Minutes  of  the  Select  Joint  Committee  on  Products  Liability  (Sept.   19,  1977). 

'''Id. 

'"Minutes  of  the  Select  Joint  Committee  on  Products  Liability  (Sept.  1977)  (statement 
presented  by  William  F.  Burfeind,  Asst.  Counsel,  American  Insurance  Assoc.) 


1987]  LEGAL  DISABILITY  393 

Yet,  the  statute  takes  the  tools  needed  for  seeking  redress  away  from 
minors.  Although  the  committee  acknowledged  that  it  might  be  appro- 
priate to  give  children  additional  time  to  file  an  action,  no  such  provision 
was  included  in  the  final  draft /^  A  review  of  the  evidence  presented  to 
the  committee  fails  to  reveal  the  basis  for  excluding  such  a  provision. 
No  testimony  appears  to  have  been  given  concerning  the  impact  such 
a  provision  would  have  had  on  the  "perceived  crisis"  or  the  impact  on 
children  of  faiUng  to  protect  their  access  to  the  courts.  An  examination 
of  the  legislative  history  provides  substantial  evidence  for  the  contention 
that  the  purpose  of  the  legislation  could  have  been  accomplished  without 
encroaching  on  the  rights  of  children.  Other  courts  have  examined  similar 
legislative  histories  to  determine  the  impact  of  such  legislation  on  children 
and  have  concluded  that  the  elimination  of  the  historic  savings  provision 
was  unreasonable. 

E.     An  Alternative  Analysis 

Illustrative  of  cases  in  which  courts  have  examined  legislative  histories 
in  construing  statutes  of  Hmitations  similar  to  that  in  Indiana's  Products 
Liability  Act  is  Sax  v.  Votteler,^^  in  which  the  Texas  Supreme  Court 
determined  that  the  statute  of  limitations  applied  to  minors'  claims  in 
medical  malpractice  actions  was  unconstitutional.^^  The  Texas  statute, 
which  is  similar  to  that  of  Indiana,  provided  that  minors  under  the  age 


"^Minutes  of  the  Select  Joint  Committee  on  Products  Liability  (Oct.  14,  1977).  The 
products  liability  statute  is  a  political  response  to  the  alleged  insurance  crisis.  One  cannot 
doubt  the  reality  of  the  crisis  today  as  well  as  at  the  time  this  statute  was  passed.  Yet 
its  cause  is  another  matter.  Some  point  to  a  litigation  explosion  and  frivolous  lawsuits 
as  the  cause,  but  the  allegation  is  yet  to  be  proven.  The  Justice  Department  set  up  the 
Willard  Commission  to  study  tort  reform.  It  reported  a  758<?7o  increase  in  federal  products 
liability  litigation  in  the  past  ten  years.  Extent  and  Policy  Implications  of  the  Current 
Crisis  in  Insurance  Availability,  I  Tort  Policy  Working  Group  42  (1986).  However,  it 
ignored  data  which  shows  that  a  substantial  portion  of  the  increase  relates  to  one  product, 
asbestos.  Even  considering  the  impact  of  mass  tort  litigation  involving  asbestos,  Bendectin, 
Agent  Orange  and  the  Dalkon  Shield,  such  suits  have  outpaced  population  growth  by 
only  two  percentage  points.  Farrell  «fe  Glaberson,  The  Explosion  in  Liability  Lawsuits  is 
Nothing  But  a  Myth,  Business  Week,  April  21,  1986  at  24.  Generally,  civil  cases  have 
declined  10*%  since  1981  in  state  court  systems  according  to  the  National  Center  for  State 
Courts  and  the  Rand  Institute  for  Civil  Justice.  That  there  is  and  was  an  insurance  crisis 
is  beyond  dispute,  but  surely  there  must  be  some  relationship  between  the  remedy  and 
the  alleged  wrong  to  justify  radical  legislation  that  overturns  well  established  common 
law.  The  legislative  history  of  the  products  liability  statute  merely  identifies  the  problem. 
There  is  no  evidence  to  establish  that  the  restriction  on  children's  rights  is  related  to  the 
availability  or  cost  of  insurance.  If  victims  have  less  access  to  the  courts,  we  will  have 
less  litigation — not  because  we  have  fewer  wrongs  but  because  it  is  harder  to  pry  open 
the  court  house  door. 

^'648  S.W.2d  661  (Tex.   1983). 


394  INDIANA  LA  W  REVIEW  [Vol.  20:385 

of  six  years  had  until  their  eighth  birthday  to  file  their  claims.^'  All 
other  children  had  two  years  from  the  date  of  medical  treatment  or 
from  the  date  the  tort  was  committed  to  file  their  action." 

The  plaintiff  in  Sax  had  undergone  an  operation  for  the  removal 
of  her  appendix  on  May  10,  1976,  when  she  was  eleven  years  old.  The 
physician  continued  his  treatment  of  the  plaintiff  until  August  5,  1976. 
On  February  20,  1979,  the  plaintiff  filed  her  action  against  the  physician, 
alleging  that  the  doctor  had  mistakenly  removed  one  of  her  fallopian 
tubes  rather  than  her  appendix.  The  physician  filed  a  motion  for  summary 
judgment,  arguing  that  the  claim  was  barred  by  the  two-year  statute  of 
limitations.  The  trial  court  granted  the  motion  and  the  court  of  appeals 
affirmed  the  judgment.  The  supreme  court,  however,  reversed  the  decision 
in  part  and  remanded  the  case  for  trial  on  the  merits. ^^ 

In  reversing,  the  court  noted  that  Texas  had  historically  tolled  the 
statute  of  limitations  for  minors'  claims. ^"^  At  the  time  of  the  medical 
malpractice  statute's  passage,  minors  had  until  two  years  after  they 
attained  majority  to  bring  a  tort  action. ^^  The  Saxes  attacked  the  Texas 
statute,  arguing  that  the  minor  was  being  deprived  of  her  rights  to  due 
process  and  equal  protection  of  the  law  as  guaranteed  by  the  fourteenth 
amendment  of  the  United  States  Constitution  and  the  Texas  Constitu- 


^'M  at  663.  The  Texas  statute  at  issue  in  the  Sax  case  provided: 
Notwithstanding  any  other  law,  no  claim  against  a  person  or  hospital  covered 
by  a  policy  of  professional  liability  insurance  covering  a  person  licensed  to 
practice  medicine  or  podiatry  or  certified  to  administer  anesthesia  in  this  state 
or  a  hospital  licensed  under  the  Texas  Hospital  Licensing  Law,  as  amended 
(Art.  4437f,  Vernon's  Texas  Civil  Statutes),  whether  for  breach  of  express  or 
implied  contract  or  tort,  for  compensation  for  a  medical  treatment  or  hospi- 
talization may  be  commenced  unless  the  action  is  filed  within  two  years  of  the 
breach  or  the  tort  complained  of  or  from  the  date  the  medical  treatment  that 
is  the  subject  of  the  claim  or  the  hospitalization  for  which  the  claim  is  made 
is  completed,  except  that  minors  under  the  age  of  six  years  shall  have  until  the 
eighth  birthday  in  which  to  file,  or  have  filed  on  their  behalf  such  claim.  Except 
as  herein  provided,  this  section  applies  to  all  persons  regardless  of  minority  or 
other  legal  disability. 
Professional  LiabiUty  Insurance  for  Physicians,  Podiatrists,  and  Hospitals  Act,  ch.  330, 
1975  Tex.  Gen.  Laws  864  (emphasis  added)  (expired  1977)  (substantially  similar  provision 
regarding  statute  of  limitations  present  at  Tex.  Rev.  Civ.  Stat.  Ann.  art.  459011  (Vernon 
1977),  except  the  amended  law  substitutes  age  12,  thus  providing  minors  would  have  until 
age  14  to  file). 

'^Sax,  648  S.W.2d  at  663. 

"A/.  The  court  reversed  the  decision  with  respect  to  the  minor's  cause  of  action, 
but  affirmed  the  holdings  of  the  lower  court  that  the  parents'  claim  for  medical  expenses 
and  loss  of  earnings  during  the  minority  of  the  plaintiff-child  was  barred  by  the  statute 
of  limitations.  Id.  at  667. 
''Id. 

''Id.  This  was  also  the  situation  in  Indiana  prior  to  the  passage  of  the  medical 
malpractice  and  products  liability  statutes  of  limitations  legislation.  See  supra  text  accom- 
panying notes  13  and  35. 


1987]  LEGAL  DISABILITY  395 

tion.^^  The  Texas  court  held  that  "the  right  to  bring  a  well-estabUshed 
common  law  cause  of  action  cannot  be  effectively  abrogated  by  the 
legislature  absent  a  showing  that  the  legislative  basis  for  the  statute 
outweighs  the  denial  of  the  constitutionally-guaranteed  right  of  redress."" 
Like  the  Indiana  statute,  the  Texas  statute  had  been  passed  in  an  effort 

to  provide  an  insurance  rate  structure  that  would  enable  health 
care  providers  to  secure  Hability  insurance  and  thereby  provide 
compensation  for  their  patients  who  might  have  legitimate  mal- 
practice claims.  The  specific  purpose  of  the  provision  in  question 
was  to  limit  the  length  of  time  that  the  insureds  would  be 
exposed  to  potential  liability. ^^ 

The  court  noted  that  in  order  to  meet  her  burden  of  proof,  the 
plaintiff  had  to  show  that  she  had  a  "cognizable  common  law  cause 
of  action  that  [was]  being  restricted"  and  that  "the  restriction  was 
unreasonable  or  arbitrary  when  balanced  against  the  purpose  of  the 
statutes. "^^  There  was  no  question  that  a  child  had  a  common  law  cause 
of  action  that  was  being  restricted.^^  The  problem  was,  therefore,  to 
determine  whether  the  restriction  was  unreasonable. 

In  Texas,  children  have  no  right  to  bring  a  cause  of  action  on  their 
own  until  the  disability  of  minority  is  removed.^'  This  does  not  distinguish 
Texas  minors  from  Indiana  minors.  Although  Indiana  minors  are  tech- 
nically permitted  access  to  the  courts, ^^  they  are  effectively  prohibited 
from  gaining  access  unless  a  third  party  assists  them  in  retaining  counsel 
and  managing  the  case."  This  effectively  places  Indiana  children  in  the 
same  situation  as  Texas  children  because  any  action  they  bring  as  minors 
is  dependent  on  the  actions  of  third  parties. 

In  Texas,  as  in  Indiana,  the  parents,  guardians,  or  next  friends  of 


^^Sax,  648  S.W.2d  at  667.  The  traditional  due  process  guarantee  is  provided  in  the 
Texas  Constitution  art.  I,  §  19,  which  states:  "No  citizen  of  this  state  shall  be  deprived 
of  life,  liberty,  property,  privileges  or  immunities,  or  in  any  manner  disfranchised,  except 
by  the  due  course  of  the  law  of  the  land."  In  addition,  the  Texas  Constitution  art.  I, 
§  13,  which  is  similar  to  the  Indiana  Constitution  art.  I,  §  12,  provides:  "Excessive  bail 
shall  not  be  required,  nor  excessive  fines  imposed,  nor  cruel  or  unusual  punishment 
inflicted.  All  courts  shall  be  open,  and  every  person  for  an  injury  done  him,  in  his  lands, 
goods,  person  or  reputation,  shall  have  remedy  by  due  course  of  law."  This  second 
provision  is  sometimes  referred  to  as  the  "Open  Courts  Provision,"  but  is  considered  a 
due  process  guarantee.  Id.  at  664.  Compare  Tex.  Const,  art.  I,  §  13  with  Ind.  Const. 
art.  I,  §  12. 

''Sax,  648  S.W.2d  at  665-66. 

'^Id.  at  666. 

'^Id. 

"^Id. 

""Id. 

"See  Ind.  R.  Tr.  P.   17(c). 

"See  generally  State  ex  rel  Keating  v.  Bingham,  233  Ind.  504,  121  N.E.2d  727  (1954). 


396  INDIANA  LAW  REVIEW  [Vol.  20:385 

the  child  may  institute  an  action  on  behalf  of  the  child  while  the  child 
is  a  minor. ^^  Under  the  Texas  medical  malpractice  statute,  the  failure 
of  the  parent  or  guardian  to  institute  the  action  in  a  timely  fashion 
precluded  the  child  from  asserting  her  cause  of  action.  The  child  also 
had  no  recourse  against  the  parents  for  their  failure  to  pursue  an  action 
because  of  the  doctrine  of  parent-child  immunity. ^^  As  a  result,  the  court 
stated: 

The  child,  therefore,  is  effectively  barred  from  any  remedy  if 
his  parents  fail  to  timely  file  suit.  Respondents  argue  that  parents 
will  adequately  protect  the  rights  of  their  children.  This  Court, 
however,  cannot  assume  that  parents  will  act  in  such  a  manner. 
It  is  neither  reasonable  nor  realistic  to  rely  upon  parents,  who 
may  themselves  be  minors,  or  who  may  be  ignorant,  lethargic, 
or  lack  concern,  to  bring  a  malpractice  lawsuit  action  within 
the  time  provided  by  [the  medical  malpractice  statute]. ^^ 

Although  the  court  acknowledged  that  the  length  of  time  an  insured  is 
exposed  to  liability  will  affect  insurance  rates,  it  concluded  that  the 
statute  in  question  was  an  unreasonable  method  of  dealing  with  the 
problem  because  it  abrogated  the  child's  right  of  redress  without  providing 
a  reasonable  alternative.^^  This  approach  assures  that  minors  will  continue 
to  have  a  right  to  seek  redress  for  injuries,  while  the  Indiana  approach 
severely  curtails .  this  right.  Unhke  the  Indiana  courts,  the  Texas  court 
also  squarely  faced  the  problems  confronted  in  seeking  redress  in  the 
legal  system. 

IV.     Conclusion 

The  analysis  utilized  by  the  Texas  Supreme  Court  attempts  to  balance 
the  loss  of  the  right  of  redress  against  the  need  to  limit  the  time  frame 
in  which  actions  may  be  brought.  In  contrast,  Indiana  decisions  have 
ignored  the  realities  of  the  child's  inability  to  pursue  an  action  on  his 
own.  It  is  time  for  both  the  courts  and  the  legislature  to  recognize  that 
the  child's  right  to  bring  an  action  in  Indiana  is  gradually  being  eroded. 
Children  are  totally  dependent  on  third  parties  to  pursue  their  actions 
and  now,  in  both  the  areas  of  products  liability  and  medical  malpractice, 
children  may  lose  their  right  of  redress  if  their  parents,  guardians  or 
next  friends,  either  from  ignorance  or  lack  of  concern,  do  not  pursue 


"Tex.  Civ.  Code  Ann.  §  1994  (Vernon  1964). 

"Sax,  648  S.W.2d  at  667.  Indiana  also  recognizes  the  continued  vitality  of  the 
doctrine  of  parent-child  immunity.  See  Buffalo  v.  Buffalo,  441  N.E.2d  711  (Ind.  Ct.  App. 
1982). 

^^648  S.W.2d  at  667. 

''Id. 


1987]  LEGAL  DISABILITY  397 

the  child's  legal  remedies.  A  child  of  eight  may  be  able  to  say  "I  am 
hurt,"  but  this  does  not  translate  into  the  ability  to  recognize  that  he 
has  a  right  to  seek  legal  redress  or  to  seek  out  a  third  party  who  is 
willing  to  pursue  that  right  for  him.  The  historical  protection  afforded 
minors  still  has  validity  in  the  area  of  statutes  of  limitations.  The  right 
to  seek  legal  redress  for  wrongs  committed  against  a  person  is  one  of 
the  corner  stones  of  our  society  and  legal  system.  The  current  trend  of 
legislation  and  case  law  in  Indiana  threatens  this  right.  Unless  these 
statutes  are  reevaluated  by  the  courts  and  legislature  and  their  impact 
on  the  child's  right  to  seek  redress  is  considered,  the  minor's  right  to 
seek  legal  redress  for  wrongs  committed  against  him  may  be  further 
reduced  in  situations  where  the  child  has  no  one  willing  to  pursue  his  W 

action  for  him.  If! 

An  exceedingly  logical  friend  recently  related  that  when  he  was  ten  '* 

years  old,  he  was  playing  with  his  brothers  when  his  father  suddenly  g 

picked  him  up  and  spanked  him.  He  turned  in  hurt  and  bewilderment 
and  asked,  "What  did  I  do  to  deserve  that?"  "Nothing,"  his  father 
replied.  "Then  why  was  I  spanked?"  "To  teach  you  that  this  is  not  a 
rational  world,"  was  the  answer.  Lawyers  and  judges  learn  sooner  than  ..j 

most  that  this  is  not  a  rational  world.   It  should  be  part  of  our  re-  'ei 

sponsibility,  however,  to  make  it  more  so.  The  limitations  on  the  rights 
of  the  legally  disabled,  as  modified  recently  by  the  legislature,  do  not 
do  that.  R! 


«ii 


'%IC 


"'■a 


A  Multi-Perspective  Critique  of  Indiana's  Legislative 
Abrogation  of  the  Collateral  Source  Rule 

Lawrence  P.  Wilkins* 

I.     Introduction 

From  an  early  date  in  Indiana  jurisprudence,  courts  have  denied 
defendant  tortfeasors  the  abihty  to  present  evidence  that  the  plaintiff 
has  obtained  compensation  for  the  injuries  from  other  sources  and  avoid 
liability  by  arguing  that  the  plaintiff  has  no  need  for  compensation 
through  the  torts  system.  So,  for  example,^  where  the  plaintiff's  loss 
has  been  covered  by  a  contract  of  insurance  purchased  by  the  plaintiff 
or  the  plaintiff's  employer,  Indiana  courts,  in  accordance  with  a  rule 
adopted  in  virtually  every  American  jurisdiction,  have  steadfastly  refused 
to  permit  the  defendant,  '*by  way  of  set-off,  recoupment,  or  in  mitigation 
of  damages,"^  to  avoid  compensating  the  plaintiff  in  an  amount  equal 
to  the  assessed  value  of  the  injuries. 

Effective  September  1,  1986,  the  "collateral  source  rule,"  as  this 
judicial  position  has  come  to  be  known,  no  longer  governs  the  trial  of 
personal  injury  actions.  By  declaring  a  new  collateral  source  rule  which 
requires  the  admission  of  evidence  of  certain  types  of  compensation 
payments  to  plaintiff  from  outside  sources,  and  permits  consideration 
of  those  payments  in  the  assessment  and  review  of  damages,  the  Indiana 


♦Professor  of  Law,  Indiana  University  School  of  Law  -  Indianapolis.  B.A.,  The 
Ohio  State  University,  1968;  J.D.  Capital  University  Law  School,  1973;  LL.M.,  The 
University  of  Texas  School  of  Law,  1974. 

'Other  sources  of  benefits  may  be  involved.  The  rule  of  exclusion  discussed  here 
applies  to  direct  provision  of  benefits,  such  as  disability  payments  from  plaintiff's  own 
carrier  or  plaintiff's  employer's  insurance,  pension  plans,  free  medical  services,  welfare 
benefits,  social  security  benefits,  and  gifts.  It  also  applies  to  benefits  that  are  more  indirect, 
such  as  tax  savings  from  the  nontaxability  of  judgments  for  damages  or  income  and 
services  of  a  second  spouse.  The  justifications  for  excluding  evidence  of  benefits  may  vary 
according  to  the  type  of  benefit.  See  generally  Averbach,  The  Collateral  Source  Rule,  21 
Ohio  St.  L.J.  231  (1960);  Esdaile,  The  Collateral  Source  Rule:  A  Proposal  to  Regulate 
Admission  of  Evidence  to  Avoid  Prejudice,  68  Mass.  L.  Rev.  102  (1983);  Fleming,  The 
Collateral  Source  Rule  and  Loss  Allocation  in  Tort  Law,  54  Cal.  L.  Rev.  1478  (1966); 
Hogan,  The  Collateral  Source  Rule:  Its  Justification  and  Its  Defense,  Trial,  Feb.  1983, 
at  58;  Lambert,  The  Case  for  the  Collateral  Source  Rule,  1966  Ins.  L.J.  531;  Maxwell, 
The  Collateral  Source  Rule  in  the  American  Law  of  Damages,  46  Minn.  L.  Rev.  669 
(1962);  Peckinpaugh,  An  Analysis  of  the  Collateral  Source  Rule,  1966  Ins.  L.J.  545;  Note, 
Unreason  in  the  Law  of  Damages:  The  Collateral  Source  Rule,  77  Harv.  L.  Rev.  741 
(1966)  [hereinafter  Unreason].  Where  significant,  the  differences  will  be  treated  below, 
but  in  most  parts  the  discussion  will  proceed  without  distinguishing  the  various  sources. 

^Sherlock  v.  Ailing,  44  Ind.   184,   199  (1873). 

399 


400  INDIANA  LA  W  REVIEW  [Vol.  20:399 

General  Assembly  has  reversed  the  judicial  rule  of  exclusion.^  In  this 
enactment,  one  of  a  series  of  important  legislative  modifications  and 
abrogations  of  the  common  law  in  this  state  in  recent  years,  the  General 
Assembly  has  terminated  an  unbroken  Hne  of  precedent  extending  back 
nearly  to  the  middle  of  the  19th  century.  Any  legislative  rewriting  of 
common  law  is  significant,  but  when  such  a  solidly  established  doctrine 
as  the  collateral  source  rule  is  overturned,  the  event  is  especially  note- 
worthy. The  rule  has  been  under  steady  attack  since  it  was  first  pro- 
nounced in  the  courts  and  has  garnered  severe  criticism  from  commentators 
over  the  years.  This  Article  will  examine  the  enactment^  in  detail  and 
comment  upon  its  operation  and  apparent  effect  in  the  common  law  of 
torts  from  several  perspectives.  It  will  also  briefly  review  the  criticisms 
leveled  at  the  rule  and  evaluate  the  statutory  abrogation  in  light  of  those 
criticisms. 

II.     Common  Law  Background  of  the  Collateral  Source  Rule 

The  main  justification  offered  in  the  early  decisions  for  refusing  to 
entertain  defenses  of  this  nature  has  been  that  the  defendant  has  no 
interest  in  the  transactions  of  the  injured  party.  The  view  of  the  courts 
was  clear:  the  mere  fortuity  that  the  defendant  had  injured  someone 
who  had  obtained  protection  of  personal  fiscal  resources  from  expenses 
occasioned  by  physical  injury  bore  no  relationship  to  the  defendant's 
liability.  As  will  be  demonstrated  below,  the  courts  have  been  so  resolutely 
opposed  to  defendants'  arguments  based  on  the  premise  that  no  net  loss 
has  occurred  because  of  the  collateral  payments,  that  judicial  analyses 
of  this  rule  of  exclusion  have  been  truncated  or  nonexistent.^  A  logical 
framework  for  the  judicial  collateral  source  rule  can  be  inferred,  however, 
and  an  overall  review  of  the  common  law  history  of  its  application 
reveals  a  shift  in  emphasis  upon  justifications  for  the  rule,  if  not  a  shift 
in  the  essence  of  the  rule  itself.  This  section  of  the  Article  will  examine 
the  case  law  background  of  the  rule  and  attempt  to  develop  the  inferred 
logical  framework  of  the  courts  in  applying  the  rule.  This  background 
will  then  serve  as  a  basis  for  analysis  of  the  effects  of  the  statute. 

Early  in  the  rule's  development  in  Indiana,  the  approach  of  the 
courts  applying  the  rule  began  with  an  assumption  that  the  defendant's 


^Act  of  March  11,  1986,  Pub.  L.  No.  201-1986,  1986  Ind.  Acts  1959  (codified  at 
IND.  Code  §§  34-4-33-14;  34-4-35-1;  34-4-36-1  to  -3  (Supp.   1986)). 

"The  act  is  entitled  "Reductions  of  Subrogation  or  Lien  for  Collateral  Benefits — 
Jury  Instructions  in  Personal  Injury  Cases — Collateral  Source  Evidence."  Senate  Enrolled 
Act  394  (1986).  It  does  not  have  a  short  title,  but  needs  one  badly.  Some  plaintiffs' 
attorneys  have  suggested  "The  Liability  Insurance  Relief  Act,"  others  think  it  might  better 
be  called  the  "Reduced  Compensation  Act,"  while  some  defense  counsel  have  been  calling 
it  the  "One  Bite  at  the  Apple  Act." 

'See  infra  note  8  and  text  accompanying  notes  20-27. 


1987]  COLLATERAL  SOURCE  RULE  401 

attempt  to  mitigate  was  an  attempt  to  address  the  issue  of  the  defendant's 
culpabihty.  Given  that  approach,  the  fact  that  the  injured  party  had 
received  some  financial  balm  from  another  was  viewed  as  non  sequitur. 
The  attempt  to  prove  that  a  plaintiff,  once  injured,  had  been  requited 
from  another  source  would  not  serve  as  a  premise  for  the  offered 
conclusion  that  the  defendant  was  not  at  fault  in  invading  the  plaintiff's 
interest. 

The  courts  were  concerned  with  the  effect  of  recognizing  a  rule  that 
would  allow  an  interloper  to  profit  from  the  contractual  security  arranged 
by  others,  as  evidenced  in  the  statement  by  the  court  in  Cunningham 
V.  Evansville  and  Terre  Haute  R.  Co.:^ 

The  payment  of  such  moneys  not  being  procured  by  the 
defendant,  and  they  not  having  been  either  paid  or  received  to 
satisfy  in  whole  or  in  part  his  liability,  he  can  derive  no  advantage 
therefrom  in  mitigation  of  damages  for  which  he  is  liable.  As 
has  been  said  by  another,  to  permit  a  reduction  of  damages  on 
such  a  ground  would  be  to  allow  the  wrong-doer  to  pay  nothing, 
and  take  all  the  benefit  of  a  policy  of  insurance  without  paying 
the  premium.^ 

Reduced  to  essential  terms,  the  truth  of  this  proposition  is  not  self- 
evident.  Nor  does  the  court  offer  any  further  explanation,  preferring 
instead  merely  to  recite  other  holdings.^  No  reason  in  logic  is  suggested 
on  the  face  of  the  statement  why  C  cannot  benefit  from  a  transaction 
between  A  and  B.  Even  beyond  the  explicit  recognition  of  third-party 
beneficiary  contracts,  common  experience  teaches  that  members  of  a 
market  society  benefit  daily  from  others'  transactions.  If  considerations 
of  fairness  are  adopted  as  the  perspective,  so  long  as  A  and  B  get  what 
they  bargained  for,  no  reason  is  suggested  for  disallowing  C  to  enjoy 
the  fruits  of  the  bargain  as  well.  However,  the  quotation  from  the 
Cunningham  court  does  demonstrate  that  the  person  seeking  the  miti- 
gation was  not  simply  a  third-party  interloper;  he  was  not  the  neutral 
"C"  in  the  abstract  statement.  The  would-be  interloper  in  the  case  was 
a  ^'wrongdoer."  So  stated,  the  recitations  take  on  a  certain  tone  of 
moral  indignation  at  the  suggestion  that  someone  clothed  in  fault  could 
avail  himself  of  the  preparedness  of  another.^ 

The  combination  of  a  simply  stated  rule  backed  by  an  attitude  of 
moral  indignation  proved  to   be  a  formidable  obstacle  to   the   rule's 


"102  Ind.  478  (1885). 

^Id.  at  484  (quoting  1  Sutherland,  Damages  242  (1916)). 

«The  court  quoted  Sherlock  v.  Ailing,  44  Ind.  184  (1873),  and  cited  The  Ohio  and 
Mississippi  R.W.  Co.  v.  Dickerson,  59  Ind.  317  (1877),  thereby  establishing  a  pattern  of 
substituting  recitation  for  analysis  by  subsequent  courts. 

'One  is  reminded  of  Aesop's  fable  of  the  grasshopper  and  the  ant. 


402  INDIANA  LAW  REVIEW  [Vol.  20:399 

Opponents.  The  courts  remained  steadfastly  unwilling  to  permit  the  tort- 
feasor to  avoid  paying  reparation  to  the  plaintiff  on  the  ground  that 
plaintiff  had  already  recovered  for  the  injuries. 

Not  long  after  the  rule  was  first  articulated,  the  courts  applied  it 
to  bar  evidence  of  gratuitous  services  rendered  to  the  plaintiff. '°  This 
development  is  noteworthy  because  in  such  cases  the  justification  that 
plaintiff's  foresight  and  preparedness  in  dealing  with  contingencies  that 
might  place  a  burden  on  the  plaintiff's  fiscal  fortunes  was  unavailable. 
That  the  rule  was  nevertheless  applied  to  such  situations  demonstrates 
just  how  focused  upon  assuring  that  the  defendant  paid  for  the  wrongful 
injury  the  courts  were.  Having  emphasized  the  accountability  of  the 
tortfeasor  as  the  justification  for  the  rule,  and  having  refused  to  inquire 
whether  a  debit  upon  the  financial  status  of  the  plaintiff  actually  existed, 
the  courts'  application  of  the  rule  of  exclusion  to  gratuitous  benefits 
conferred  upon  the  plaintiff  was  a  simple  application  of  the  basic  logical 
construct  of  the  rule,  not  an  extension  or  modification  of  it.  In  the 
view  adopted  by  the  judiciary,  the  nature  of  the  source  of  compensation 
that  the  plaintiff  had  received  was  simply  inconsequential  to  the  issue 
of  defendant's  accountability  for  the  injury. 

This  basis  for  the  rule  clearly  has  roots  in  a  philosophy  of  corrective 
justice.  An  important  element  of  a  system  pursuing  the  corrective  model 
is  retribution  for  wrongs. ^^  If  the  view  is  adopted  that  a  primary  aim 


'"City  of  Indianapolis  v.  Gaston,  58  Ind.  224,  227  (1877). 

"In  an  attempt  to  lay  out  the  "raison  d'etre  of  the  law  of  tort,"  Professor  Glanville 
Williams  posited  "four  possible  bases  of  the  actions  for  damages  in  tort,"  which  are: 

1.  Appeasement  "By  this  means  the  victim  is  induced  to  'let  off  steam'  within 
the  law  rather  than  outside  it." 

2.  Justice  "Two  variants  of  this  theory  may  be  perceived:  (1)  The  first  places 
emphasis  upon  the  fact  that  the  payment  of  compensation  is  an  evil  for  the 
offender,  and  declares  that  justice  requires  that  he  should  suffer  this  evil.  This 
is  the  principle  of  ethical  retribution,  ...  (2)  The  second  variant  looks  at  the 
same  situation  from  the  point  of  view  of  the  victim;  it  emphasizes  the  fact  that 
the  payment  of  compensation  is  a  benefit  to  the  victim  of  the  wrong,  and 
declares  that  justice  requires  that  he  should  receive  this  compensation.  We  may 
call  this  ethical  compensation." 

3.  Deterrence  "Ranged  against  the  theory  of  tort  as  part  of  the  moral  order 
are  those  who  believe  that  it  is  merely  a  regime  of  prevention.  The  action  in 
tort  is  a  'judicial  parable,'  designed  to  control  the  future  conduct  of  the 
community  in  general." 

4.  Compensation  "...  according  to  which  one  who  has  caused  injury  to  another 
must  make  good  the  damage  whether  he  was  at  fault  or  not.  This  is  the  same 
as  the  theory  of  ethical  compensation  except  that  it  does  not  require  culpability 
on  the  part  of  the  defendant." 

Williams,  The  Aims  of  the  Law  of  Tort,  4  Current  Legal  Probs.   137,  140-53  (1951). 

These  concepts  are  elements  of  a  corrective  theory  of  justice  and  form  part  of  the 

backdrop  for  discussion  of  the  enactment  in  the  context  of  its  satisfaction  of  the  objectives 


1987]  COLLATERAL  SOURCE  RULE  403 

of  the  torts  system  in  holding  actors  Hable  for  the  consequences  of  their 
actions  is  retribution,  to  permit  a  "wrongdoer"  to  elude  accountability 
where  the  injured  party  turns  out  to  have  provided  coverage  for  disability 
(or  is  the  recipient  of  largess)  would  be  dysfunctional.  The  system  would 
be  deprived  of  the  opportunity  to  deal  with  a  wrong,  to  correct  the 
wrongdoer,  and  in  so  correcting  deter  that  wrongdoer  from  further 
injurious  conduct.  It  would  also  deny  the  system's  objective  of  presenting 
the  assessment  of  accountability  as  an  example  to  others  who  would 
engage  in  like  behavior,  thereby  impairing  the  wider  deterrence  goal  of 
the  system.  For  some  courts,  this  view  was  so  fundamental  that  to  them 
the  conclusion,  embodied  in  the  statement  of  the  rule,'^  was  obvious 
and  required  reference  to  no  other  principle. ^^ 

The  early  establishment  of  such  a  view  did  not  quell  the  efforts  of 
defendants  subject  to  its  effect  to  try  to  breach  the  logic  of  its  foundation, 
however.  Examples  of  bids  to  proffer  evidence  of  compensation  from 
collateral  sources  to  reduce  defendants'  ultimate  judgment  debt  are  prev- 
alent in  the  case  law.  For  example,  in  a  1915  case,  pointing  to  an 
Indiana  statute  pertaining  to  railroads,  which  conferred  an  insurable 
interest  in  lands  along  rail  routes,  one  defendant  railroad  claimed  that 
when  it  destroyed  the  owner's  property,  insurance  proceeds  collected  by 
the  owner  inured  to  the  defendant's  benefit  and  reduced  its  liability  to 
the  owner's  subrogated  insurer  by  the  amount  paid.'"^  The  Indiana  Su- 


of  a  system  having  components  derived  from  such  a  theory.  This  is  not  to  suggest  that 
Professor  Wilhams  captures  all  of  corrective  theory;  indeed,  scholars  have  developed 
sophisticated  variations  and  even  (mildly?)  disagree  on  some  fundamental  ideas.  See 
generally  Posner,  The  Concept  of  Corrective  Justice  in  Recent  Theories  of  Tort  Law,  10 
J.  Legal  Studies  187  (1981),  and  authorities  cited  therein.  However,  complete  explication 
of  those  variations  and  points  of  departure  is  beyond  the  scope  of  this  article. 

'^The  judicial  treatment  accordingly  given  to  such  cases  became  tautological  in  form: 
The  defendant  should  not  be  permitted  to  reduce  liability  because  it  would  be  improper 
for  wrongdoers  to  reduce  liability.  See,  e.g.,  infra  note  13  (quoted  language  of  the  court 
in  Cincinnati  R.  Co.  v.  McCullom,   183  Ind.  556  (1915)). 

The  irreducibility  of  the  principle  prevented  the  courts  adhering  to  it  from  expressing 
it  any  other  way.  Professor  Williams  explains:  "Those  who  adopt  the  doctrine  of  ethical 
retribution  do  not,  and  cannot,  refer  it  to  any  other  principle.  It  is  a  postulate — an 
ultimate  value-judgment  which  can  only  be  accepted  or  rejected."  Williams,  supra  note 
11,  at  141. 

''E.g.,  Cincinnati  R.  Co.  v.  McCullom,  183  Ind.  556,  571  (1915),  where  the  court 
said:  "Under  such  an  instruction  [where  the  defendant  had  requested  that  the  jury  determine 
damages  by  crediting  defendant  with  the  amounts  plaintiff  had  received  from  insurance 
proceeds]  pecuniary  benefit  received  by  an  injured  party  to  which  a  defendant  had  not 
contributed  could  be  used  as  a  defense  in  mitigation  of  damages  resulting  from  the 
wrongful  act  of  such  defendant.  The  impropriety  of  such  an  instruction  can  readily  be 
seen."  The  court  cited  no  authority. 

'Pittsburgh,  C,  C.  &  St.  L.  Ry.  Co.  v.  Home  Ins.  Co.,  183  Ind.  355,  362,  108 
N.E.  525,  528  (1915). 


404  INDIANA  LAW  REVIEW  [Vol.  20:399 

preme  Court,  acknowledging  the  statutory  creation  of  an  insurable  in- 
terest, nevertheless  rejected  the  argument  on  the  ground  that  the  statute 
gave  no  rights  to  the  defendant  in  the  insurance  contract  procured  by 
the  land  owner  and  did  not  affect  the  "ordinary  rule"  of  exclusion  of 
evidence  of  collateral  sources  of  compensation.^^  Trying  a  reverse-twist 
variation  on  the  theme  of  interests,  a  trucker  defendant  in  a  case  brought 
nearly  forty  years  later  argued  that  because  the  plaintiff  had  received 
insurance  benefits  for  the  injury  to  his  property  caused  by  the  defendant, 
and  because  the  plaintiff  had  subrogated  its  rights  to  the  carrier,  the 
plaintiff  was  no  longer  the  sole  party  in  interest  in  the  action.'^  The 
strategy  was  designed  to  compel  the  naming  of  the  insurance  carrier  as 
a  party,  enabling  the  defendant  to  compel  plaintiff  to  answer  interro- 
gatories pertinent  to  insurance  proceeds  received.  The  strategy  failed 
with  the  theory,  however,  when  the  Indiana  Supreme  Court,  reciting  the 
''general  rule,"  held  that  the  defendant  had  no  concern  with  the  trans- 
action between  the  plaintiff  and  the  insurer,  could  not  be  subrogated 
to  the  rights  of  the  insured,  and  was  concerned  only  with  having  to 
pay  double  for  the  injury.  Having  obtained  an  adverse  judgment,  which 
when  satisfied  would  "fully  release  the  appellant  from  further  Uability 
to  anyone,"  the  defendant's  rightful  concerns  had  come  to  an  end,  and 
he  would  not  be  permitted  to  unseat  the  plaintiff  as  a  party,  interrogate 
the  plaintiff,  or  join  the  carrier.  ^^  Eight  years  earlier,  a  defendant  who 
had  collided  with  a  fire  truck  and  injured  the  plaintiff  argued  that 
because  the  plaintiff  was  covered  by  a  hospitalization  plan  of  the  city, 
which  was  mandated  by  statute,  the  city  was  thereby  rendered  primarily 
liable  and  defendant  could  not  be  liable  for  plaintiff's  medical  expenses. ^^ 
Relying  generally  on  the  rule,  the  Indiana  Court  of  Appeals  refused  to 
adopt  the  defendant's  theory,  stating  "[w]here  the  wrongdoer  is  liable 
for  damages,  he  is  liable  for  all  damages  and  it  is  no  concern  of  such 
wrongdoer  who  ultimately  gets  the  money. '"^ 

The  language  of  the  courts  in  resisting  such  persistent  and  creative 
attempts  to  overcome  the  rule  is  consistently  couched  in  fundamental, 
unqualified  terms,  which  probably  explains  in  large  measure  the  resiliency 
of  the  rule  to  attacks.  In  Sherlock  v.  Alling,^^  the  first  Indiana  case  to 
decide  that  a  defendant  could  not  offer  evidence  of  the  proceeds  of 
insurance^*  to  mitigate  damages,  the  Indiana  Supreme  Court  stated: 


''Id.  at  362,   108  N.E.  at  528. 

'^Powers  V.  Ellis,  231  Ind.  273,   108  N.E.2d  132  (1952). 
^Ud.  at  281,  108  N.E. 2d  at  136. 

'«Mullins  V.  Bollinger,  115  Ind.  App.   167,  55  N.E.2d  381  (1944). 
"M  at  171,  55  N.E.2d  at  382. 
^°44  Ind.   184  (1873). 

^'The  insurance  proceeds  were  from  a  life  insurance  policy  on  plaintiff's  decedent. 
Id.  at  199. 


1987]  COLLATERAL  SOURCE  RULE  405 

To  allow  such  a  defence  would  defeat  actions  under  the  law, 
when  the  party  killed  had  by  his  prudence  and  foresight,  made 
provision  or  left  means  for  the  support  of  his  wife  and  children, 
and  the  wrong-doer  would  thus  be  enabled  to  protect  himself 
against  the  consequences  of  his  own  wrongful  act. 
.  .  .  No  case  has  been  found  recognizing  the  doctrine  claimed, 
and  we  are  not  willing  to  be  the  first  to  sanction  it.^^ 

By  1893,  the  courts  considered  the  rule  to  be  "well  settled"  that 
the  plaintiff  could  "recover  his  entire  loss  from  [defendant]  without 
regard  to  the  amount  of  insurance  he  may  have  been  paid  thereon. "^^ 
The  rule  remained  "settled"  everywhere  but  in  the  minds  of  defense 
counsel  until  the  General  Assembly  reversed  the  rule  in  the  1986  session. 

Modern  courts  have  taken  to  simply  quoting  the  encyclopedic  state- 
ment of  the  rule,  as  was  done  in  Evans  v.  Breeden:^"^ 

'Compensation  for  the  loss  received  by  plaintiff  from  a  col- 
lateral source,  independent  of  the  wrongdoer,  as  from  insurance, 
cannot  be  set  up  by  the  wrongdoer  in  mitigation  of  damages. '^^ 

On  these  terms,  to  reach  the  opposite  conclusion  and  permit  reduction 
of  defendant's  judgment  debt  to  plaintiff  on  the  premise  that  plaintiff's 
loss  has  been  covered,  would  require  defendants  to  demonstrate  some 
reason  why  they  should  be  permitted  to  ride  the  beneficial  coat-tails  of 
the  injured  party's  transactions.  Having  had  no  input  into  the  trans- 
actions, and  being  cast  as  a  "wrongdoer,"  the  typical  defendant  is  unable 
to  make  such  a  showing  and  is  thereby  counted  out  with  two  strikes. 
A  case  frequently  relied  upon  is  Ohio  and  Mississippi  Ry.  Co.  v. 
Dickerson,^^  where  the  Indiana  Supreme  Court  declared,  in  response  to 
defendant's  argument  that  the  damages  were  excessive  because  of  plain- 
tiff's receipt  of  full  salary  after  the  injury: 

This  forms  no  ground  for  the  reduction  of  the  damages.  In 
such  cases,  damages  are  assessed  according  to  uniform  principles, 
and  are  not  to  be  affected  by  the  mere  accidental  business 
relations  of  the  party  injured.  The  liberality  of  his  employer 
forms  no  reason  why  the  appellee  should  not  be  compensated 
for  the  injury  he  sustained. ^^ 


^^Id.  at  200. 

"Lake  Erie  &  W.R.  Co.  v.  Griffin,  8  Ind.  App.  47,  50  (1893)  (citing  Cunningham 
Evansville  &  Terre  Haute  R.  Co.,   102  Ind.  478  (1885)). 
^M64  Ind.  App.  558,  330  N.E.2d  116  (1975). 

''Id.  at  561,  330  N.E.2d  at  118  (quoting  9  I.L.E.,  Damages  §  86  at  253). 
2^59  Ind.  317  (1877). 
'Ud.  at  324. 


406  INDIANA  LAW  REVIEW  [Vol.  20:399 

Try  as  they  might,  defendants  in  this  state  and  most  others^^  have  simply 
been  unable  to  overcome  this  view  of  the  rule. 

Yet  attempts  to  overcome  it  have  recurred,  and  in  some  instances 
have  succeeded  in  knocking  some  chinks  loose  by  way  of  exceptions. ^^ 
If  the  proposition  is  so  fundamental,  that  is,  if  it  is  based  upon  an 
irreducible  principle  viewed  as  part  of  the  fabric  of  our  system  of  justice, 
one  would  expect  opposition  to  it  to  wane,  exceptions  to  be  nonexistent, 
and  efforts  to  overturn  it  eventually  to  stop.  The  fact  that  these  ex- 
pectations have  not  been  fulfilled  in  the  115  years  since  the  rule  was 
first  judicially  pronounced  in  this  country^^  suggests  that  perhaps  the 
rule  is  not  so  fundamental  after  all;  that  even  though  the  rule  has  been 
taken  to  be  fundamental  in  nature,  it  may  actually  be  further  reducible 
to  more  fundamental  parts;  and  that  its  resiliency  is  more  attributable 


^^See  generally  C.  McCormick,  Handbook  on  the  Law  of  Damages  323  (1935); 
Averbach,  supra  note  1;  Annotation,  Third  Party  Tortfeasor's  Rights  to  Have  Damages 
Recovered  by  Employee  Reduced  by  Amount  of  Employee's  Workers'  Compensation 
Benefits,  43  A.L.R.4th  849  (1986);  Annotation,  Validity  and  Construction  of  No-fault 
Insurance  Plans  Providing  for  Reduction  of  Benefits  Otherwise  Payable  by  Amounts 
Receivable  From  Independent  Collateral  Source,  10  A.L.R.4th  996  (1981);  Annotation, 
Collateral  Source  Rule:  Injured  Person 's  Hospitalization  or  Medical  Insurance  as  Affecting 
Damages  Recoverable,  11  A.L.R.3d  415  (1977);  Annotation,  Admissibility  of  Evidence 
That  Injured  Plaintiff  Received  Benefits  from  Collateral  Source,  on  Issue  of  Malingering 
or  Motivation  to  Extend  Period  of  Disability,  47  A.L.RJd  234  (1973);  Annotation,  Right 
of  Tortfeasor  or  Liability  Insurer  to  Credit  for  Amounts  Already  Disbursed  to  Injured 
Party  Under  Medical  Payments  or  Funeral  Expense  Clause  in  Liability  Policy,  1 1  A.L.R.3d 
1115  (1967);  Annotation,  Collateral  Source  Rule:  Right  of  Tortfeasor  to  Mitigate  Opponent's 
Damages  for  Loss  of  Earning  Capacity  by  Showing  That  His  Compensation,  Notwith- 
standing Disability,  Has  Been  Paid  By  His  Employer,  1  A.L.R.3d  516  (1966);  Annotation, 
Collateral  Source  Rule:  Injured  Person's  Receipt  of  Statutory  Disability  Unemployment 
Benefits  as  Affecting  Recovery  Against  Tortfeasor,  4  A.L.R.3d  535  (1965);  Annotation, 
Application  of  the  Collateral  Source  Rule  in  Actions  Under  the  Federal  Tort  Claims  Act, 
12  A.L.R.3d  1245  (1962). 

^'E.g.,  Jackson  v.  Beard,  146  Ind.  App.  382,  398,  255  N.E.2d  837,  847  (1970) 
(admitted  evidence  of  receipt  of  social  security  benefits  on  the  grounds  that  plaintiff 
waived  the  collateral  source  rule  by  opening  up  testimony  with  respect  to  reduced  income); 
accord  Cox  v.  Winklepleck,  149  Ind.  App.  319,  271  N.E.2d  737  (1971)  (evidence  through 
plaintiff's  testimony  of  sick  leave  and  vacation,  failure  to  object  to  instructions,  if  given, 
relating  to  such  compensation,  failure  to  argue  application  of  the  rule  in  brief  on  appeal, 
constituted  waiver).  Some  states  have  permitted  an  exception  to  the  rule  for  the  purpose 
of  establishing  that  the  plaintiff  is  a  mahngerer.  See  Hogan,  supra  note  1,  at  58-59. 
Contra  Eichel  v.  New  York  Central  R.  Co.,  375  U.S.  253,  254-55  (1963).  No  case  in 
Indiana  has  directly  ruled  on  the  matter,  but  in  dictum  the  court  in  Cox,  149  Ind.  App. 
319,  271  N.E.2d  731,  stated  that  the  jury  could  properly  consider  whether  the  period  of 
time  that  the  plaintiff  was  off  work  was  the  "proximate  result"  of  the  defendant's  tortious 
conduct.  Id.  at  322,  271  N.E.2d  at  739. 

3«Harding  v.  Townshend,  43  Vt.  536,  538  (1871)  has  been  said  to  be  the  first  case 
where  the  rule  was  using  the  term  "collateral."  Averbach,  supra  note  1,  at  233;  see  also 
Esdaile,  supra  note  1.  The  Propeller  Monticello  v.  Mollison,  58  U.S.  (17  How.)  152  (1854) 
is  claimed  to  be  the  first  case  where  the  doctrine  was  applied.  Maxwell,  supra  note  1, 
at  671. 


1987]  COLLATERAL  SOURCE  RULE  407 

to  the  courts'  attitudes  about  it  as  well  as  a  general  resistance  of  a 
system  based  upon  stare  decisis  to  examine  its  commitment  to  pronounced 
rules.  This  further  suggests  that  other  principles  of  at  least  equal  value 
have  continued  to  underlie  attempts  to  strike  the  rule  from  the  system, 
and  that  while  the  assertions  of  these  competing  principles  have  fallen 
on  judicial  ears  deafened  by  stare  decisis,  the  legislature  has  listened  to 
proponents  of  the  competing  principles. 

Correcting  the  defendant  is  not  the  only  aim  of  the  common  law 
torts  system,  however.  The  system  also  purports  to  correct  the  wrong 
by  making  the  injured  plaintiff  whole,  at  least  so  far  as  monetary 
compensation  will  allow.  This  aspect  has  been,  to  date,  the  focus  of 
defense-oriented  attempts  to  overturn  the  rule.  Reduced  to  their  essence, 
the  arguments  have  been  that  because  the  plaintiff  has  already  received 
some  compensation  for  the  injury,  the  need  to  make  the  injury  whole 
through  torts  compensation  no  longer  exists,  and  defendant  ought  to 
be  excused  from  accountability  through  that  system.  By  placing  the 
arguments  on  this  foundation,  the  opponents  of  the  rule  have  anchored 
themselves  to  an  equally  fundamental  principle  from  which  lo  gather 
the  strength  of  conviction  to  reiterate  their  pleas  for  reform. 

So  cast,  the  competing  arguments  have  placed  the  corrective  system 
of  justice  in  a  position  of  internal  conflict.  To  emphasize  the  retributive 
aim  of  the  system  and  deny  the  mitigation  is  to  ignore  the  possibility 
that  the  compensatory  function  will  be  duplicated.  To  recognize  the 
duplication  and  allow  the  "wrongdoer"  to  escape  Hability  through  mit- 
igation is  to  ignore  the  retributive  and  deterrent  functions.  The  tensions 
created  by  this  conflict  have  produced  some  stultification  of  policy  in 
some  instances,  and  judicial  ground-shifting  in  others,  as  courts  attempt 
to  answer  the  repeated  challenges.  The  next  section  of  this  Article  will 
examine  the  criticisms  of  the  rule  and  responses  to  those  criticisms,  with 
a  view  toward  identifying  the  alternative  justifications  developed  in  sup- 
port of  the  rule. 

III.     Criticisms  of  the  Rule 

The  earliest  attempts  to  allow  collateral  sources  to  be  considered  in 
mitigation  were  grounded  in  good  measure  upon  considerations  of  fair- 
ness. Defendants  argued  that  to  permit  the  plaintiff  to  benefit  from  a 
judgment  that  did  not  take  into  account  the  fact  that  the  injury  had 
already  been  compensated  would  permit  a  double  recovery.  Some  judicial 
responses  to  that  argument  were  as  much  bottomed  upon  the  retributive 
function  of  the  torts  system  and  the  moral  position  which  refused  to 
aid  a  tortfeasor  as  were  the  seminal  statements  of  the  rule  itself:  If  a 
windfall  is  to  result,  better  that  the  windfall  be  enjoyed  by  the  innocent 
injured  party  than  by  a  wrongdoer. ^^ 

^'No  reported  Indiana  case  has  addressed  this  argument.  For  an  example  of  a  judicial 


408  INDIANA  LAW  REVIEW  [Vol.  20:399 

Critics  of  the  rule  have  questioned  the  core  idea  of  this  proposition 
by  suggesting  that  it  may  not  be  true  in  all  cases  that  the  plaintiff  is 
the  better  recipient  of  the  windfall.  An  inquiry  into  the  bases  of  liability 
is  central  to  this  position,  because  in  one  form  it  is  a  direct  attack  upon 
the  assumption  that  the  tortfeasor  is  a  "wrongdoer."  Where  the  tortfeasor 
is  subject  to  liability  on  a  theory  of  strict  liability,  the  status  of  the 
parties  relative  to  the  issue  of  fault  is  roughly  equal.  Thus  in  this 
application  of  the  rule,  the  justification  that  it  advances  the  retributive 
function  of  tort  law  is  unavailable.^^  Making  this  observation,  the  critics 
have  maintained  that  there  is  no  indication  that  refusals  to  mitigate 
have  been  "sensitive  to  varying  degrees  of  moral  fault.""  However,  strict 
Hability  as  a  regime  of  accountability  has  seen  the  development  of 
alternative  justifications  for  imposing  the  burden  on  the  tortfeasor  at 
the  outset  that  more  directly  address  the  question  of  who  should  bear 
the  loss.  Risk  allocation,  cost  spreading,  accident  prevention,  cost-benefit 
analysis,  market  forces,  and  related  concepts  are  elements  of  the  economic 
theories  dominating  discussions  of  accountability  for  injuries  arising  out 
of  modern  trade  and  transportation.^"^  To  the  extent  that  imposition  of 
the  collateral  source  rule  permits  the  allocation  of  costs  in  a  manner 
consistent  with  the  objectives  and  criteria  of  the  regime  within  which 
the  rule  is  applied,  the  rule  is  justified  independent  of  the  traditional 
notion  that  an  injured  party  is  to  be  favored  over  a  "wrongdoer."  To 
be  certain,  the  courts  no  longer  have  the  ability  to  declare  the  ruUng 
upon  a  stark  comparison  between  a  blameworthy  defendant  and  an 
innocent  injured  party,  but  the  foundation  for  the  objection  to  the  moral 
justification  will  have  disappeared  as  well.  If  the  analysis  of  cheapest 
risk-avoider  or  most  efficient  cost-bearer  has  taken  place  independent 
of  the  question  of  who  is  to  "blame,"  and  has  identified  the  tortfeasor 
as  a  proper  person  to  subject  to  hability  under  the  requirements  of  strict 
hability,  then  to  suggest  that  the  plaintiff's  insurer  ought  to  bear  the 
cost  because  defendant  is  not  a  "wrongdoer"  begs  the  question.  The 
real  issue  becomes  whether  allowing  the  plaintiff  to  be  compensated 


statement  from  another  jurisdiction,  see  Grayson  v.  Williams,  256  F.2d  61,  65  (10th  Cir. 
1958);  Annotation,  Admissibility  of  Evidence  That  Injured  Plaintiff  Received  Benefits 
from  Collateral  Source,  on  Issue  of  Malingering  or  Motivation  to  Extend  Period  of 
Disability,  47  A.L.R.3d  234  (1973). 

^^See  Unreason,  supra  note  1,  at  749. 

^''Complete  exploration  of  the  economic  justifications  for  and  criticisms  of  the  strict 
liability  system  of  compensation  is  beyond  the  scope  of  this  article.  See  generally  P. 
Keeton,  D.  Dobbs,  R.  Keeton  &  D.  Owen,  Prosser  and  Keeton  on  Torts  §§  75,  97, 
98  (5th  ed.  1984);  M.  Polinsky,  An  Introduction  to  Law  and  Economics  ch.  13  (1983); 
R.  PosNER,  Economic  Analysis  of  Law  §§  6.5,  6.6  (3d  ed.  1986).  For  a  discussion  of 
cost  allocation  in  the  context  of  theories  of  corrective  justice  and  a  proposal  for  a  non- 
fault  based  system,  see  G.  Calabresi,  The  Cost  of  Accidents  (1970). 


1987]  COLLATERAL  SOURCE  RULE  409 

from  two  sources  is  an  efficient  allocation  of  resources.  Nothing  in  the 
critical  literature  has  explored  that  issue. ^^  The  legislative  abrogation 
applies  to  ''personal  injury"  actions  and  contains  no  exclusion  for  actions 
based  upon  strict  liability.  By  permitting  strictly  liable  defendants  to 
shift  the  ultimate  allocation  of  costs  to  the  injured  party's  insurer,  the 
Act  may  well  have  thrown  the  strict  liability  system  into  imbalance. 

Even  in  the  context  of  a  fault-based  theory  of  liability,  the  rule's 
critics  have  contested  the  moral  basis  for  applying  the  rule.  Arguments 
cast  in  this  mold  attack  the  rule  using  several  premises, ^^  but  those 
having  the  greatest  bearing  upon  Indiana's  legislative  abrogation  are  the 
related  notions  that  no  even-handed  method  of  determination  of  damages 
exists  in  the  law  of  torts,  and  that  the  method  employed  is  subject  to 
evaluations  that  are  primarily  affected  by  factors  other  than  the  tort- 
feasor's degree  of  culpability.  As  expressed  in  an  ambitious  student 
comment  in  the  Harvard  Law  Review,  the  criticism  is  that  no  "norm 
of  damages"  for  assessing  the  extent  of  liability  exists,  and  the  variables 
upon  which  the  size  of  the  judgment  debt  depends  are  "the  extent  of 
injury,  the  physical  idiosyncracies  and  earning  capacity  of  the  injured 
person,  and  .  .  .  the  latter's  own  degree  of  culpability."^^  So  long  as 
the  purpose  of  dispensing  justice  on  an  individualized  basis  remains  a 
vital  part  of  the  torts  compensation  system,  it  is  difficult  to  envision  a 
mechanism  that  would  not  determine  compensation  according  to  factors 


^^Cf.    R.    KeETON  &   J.   O'CONNELL,   BASIC   PROTECTION   FOR  THE   TRAFFIC   ViCTIM  278, 

400-03  (1965).  The  authors'  proposed  no-fault  plan  provides  "reimbursement  limited  to 
net  loss"  to  avoid  "wasteful  overlapping  of  basic  protection  and  benefits  from  other 
sources."  The  authors  acknowledge  that  the  plan  "is  based  on  a  principle  contrary  to 
that  underlying  the  collateral  source  rule  of  fort  law."  Compare  the  detailed  approach 
of  Professors  Keeton  and  O'Connell  in  Umiting  reimbursement  to  net  loss  with  the  General 
Assembly's  broad  approach. 

^^See  Unreason,  supra  note  1,  at  749.  One  premise  of  such  arguments  is  that 
"wrongdoers"  are  treated  uniformly  under  the  rule  and  are  not  so  treated  in  the  larger 
scheme  of  tort  liability,  pointing  out  that  "[e]ven  the  most  flagrant  wrongdoer  ordinarily 
is  not  liable  for  damages  unless  harm  in  fact  results  from  his  conduct."  Id.  Even  assuming 
the  validity  of  the  statement,  it  is  difficult  to  grasp  its  logic  in  the  context  of  the  argument 
that  the  rule  should  not  be  applied.  The  assertion  seems  to  be  that  because  the  torts 
system  operates  so  that  those  whose  conduct  has  caused  no  harm,  even  though  the  conduct 
is  "wrongful,"  are  not  subject  to  liability,  those  who  have  wrongfully  caused  harm  should 
not  be  subject  to  hability  for  compensation  to  an  already  compensated  plaintiff.  So  stated, 
it  is  susceptible  to  the  interpretation  that  it  means  because  some  "wrongdoers"  escape 
liability,  others  should  too  (an  argument  often  heard  by  state  troopers  who  have  stopped 
speeding  motorists).  It  makes  sense  only  if  the  elements  of  "no  harm"  and  "harm  already 
compensated"  are  equated.  Reduced  to  these  terms,  the  argument  becomes  one  that  asks 
the  courts  to  ignore  the  retribution  function  and  concentrate  on  the  need  for  applying 
the  compensation  function,  something  that  the  courts  are  bound  not  to  do  at  common 
law.  This  suggests  the  prime  issue  of  the  legislative  abrogation,  about  which  see  infra 
text  accompanying  notes  57-61. 

^''Unreason,  supra  note  1,  at  749. 


410  INDIANA  LAW  REVIEW  [Vol.  20:399 

that  vary  with  the  peculiar  make-up  of  the  injured  party.  If  "norms  of 
damages"  is  translatable  to  a  schedule  of  amounts  recoverable  arranged 
by  category  of  injuries,  the  criticism  seems  more  a  disenchantment  with 
the  torts  compensation  system  in  general  than  a  revelation  of  a  fallacy 
of  the  collateral  source  rule. 

Concern  for  an  assurance  of  appropriate  relationship  between  com- 
pensation and  levels  of  culpability  is  legitimate.  That  concern  has  reshaped 
the  face  of  the  torts  compensation  system  in  the  more  than  twenty  years 
since  the  quoted  criticism  was  written.  Lawyers,  judges,  and  juries  work- 
ing in  tort  cases  in  nearly  every  state  now  do  so  within  the  controlling 
principle  of  liability  apportioned  according  to  fault.  With  the  adoption 
bf  a  comparative  fault  system,  the  business  of  finding  fault  with  the  con- 
duct that  has  led  to  the  injury  is  not  aimed  exclusively  in  the  direction 
of  the  named  tortfeasor.  This  is  not  to  say  that  cases  will  not  still  occur 
where  the  defendant  is  the  only  wrongdoer,  but  many  cases  are  decided 
where  fault  is  assessed  to  both  the  plaintiff  and  the  defendant,  and  among 
those  are  some  where  the  terms  "plaintiff"  and  "defendant"  are  mean- 
ingful only  to  the  extent  of  designating  who  was  first  to  bring  a  lawsuit. 
In  a  system  of  comparative  fault,  the  concept  of  culpability  has  changed 
significantly  from  the  traditional  notions  of  moral  blameworthiness. 
However,  the  degree  of  culpability  is  certainly  a  focal  point  of  the 
inquiry  into  who  should  bear  responsibility,  and  juries  are  instructed  to 
reach  their  verdicts  by  referring  directly  to  the  relative  culpability  of 
the  parties.  That  fact  alone,  of  course,  does  not  provide  a  "norm  of 
damages, "3^  but  sensitivity  to  degrees  of  fault  has  been  built  into  the 
system,  and  the  assessor  of  fault  and  damages  is  charged  with  the 
responsibility  for  apportioning  responsibility  accordingly.  This  funda- 
mental change  in  the  system  means  that  at  least  in  some  cases,  the 
courts  are  no  longer  dealing  with  a  blameless  plaintiff,  and  the  under- 
pinnings for  the  moral  assertion  that  windfalls  should  not  be  enjoyed 
by  the  wrongdoer  have  eroded  away. 

IV.    A  Critique  of  the  Legislative  Abrogation 

Against  this  background,  an  assessment  of  the  legislative  abrogation 
should  take  into  account  the  effect  that  proof  of  collateral  benefits 
would  have  on  the  ultimate  assignment  of  responsibility.  To  the  extent 


^^It  is  not  precisely  clear  just  what  is  meant  by  "norm  of  damages"  in  this  context, 
but  if  it  means  something  Hke  a  schedule  of  damages  such  as  applied  in  the  workers' 
compensation  field,  the  reference  for  the  norm  would  at  any  rate  be  the  type  of  injury 
and  not  degrees  of  culpability.  If  it  means  a  schedule  of  damages  related  to  the  type  of 
conduct,  it  would  resemble  the  system  of  fines  and  penalties  employed  in  the  criminal 
law.  With  the  difficulty  of  categorizing  the  myriad  of  ways  that  negligent  conduct  manifests 
itself,  such  a  schedule  would  seem  to  be  infeasible  beyond  a  general  sweeping  "fine"  for 
conduct  failing  to  satisfy  the  standard  of  the  ordinary  and  prudent  person. 


1987]  COLLATERAL  SOURCE  RULE  411 

that  proof  of  collateral  benefits  will  allow  an  admittedly  culpable  tort- 
feasor to  escape  liability  altogether,  it  would  appear  to  suffer  from  the 
same  criticism  leveled  at  the  rule:  it  is  susceptible  to  the  charge  that  it 
remains  insensitive  to  degrees  of  fault  (it  would  actually  run  counter  to 
the  cardinal  principle  of  the  system).  To  the  extent  that  it  becomes 
operable  only  with  respect  to  plaintiffs  who  had  received  outside  payments 
and  permits  defendants  to  offset  liability  in  direct  one-to-one  proportions, 
it  remains  vulnerable  to  the  argument  that  such  proof  allows  gross,  one- 
sided results  which  would  vary  solely  upon  the  idiosyncratic  circumstances 
of  the  person  injured. 

However,  the  enactment  does  not  permit  the  inclusion  of  evidence 
of  collateral  benefits  on  a  wholesale  basis.  The  legislature  has  been 
careful  to  limit  its  rule  of  inclusion  by  setting  out  an  express  list  of 
exceptions.  The  court  must  permit  offers  of: 

(1)  proof  of  collateral  source  payments,  other  than: 

(A)  payments  of  life  insurance  or  other  death  benefits; 

(B)  insurance  benefits  for  which  the  plaintiff  or  members  of 
the  plaintiff's  family  have  paid  for  directly;  or 

(C)  payments  made  by  the  state  of  Indiana  or  the  United  States, 
or  any  agency,  instrumentality,  or  subdivision  thereof,  that  have 
been  made  before  trial  to  a  plaintiff  as  compensation  for  the 
loss  or  injury  for  which  the  action  is  brought[.]^^ 

To  these  exceptions  must  be  added  the  separate  section  of  the  Act 
which  requires  the  court,  if  requested,  to  "instruct  the  jury  that  the 
jury  may  not  consider  the  tax  consequences,  if  any,  of  its  verdict.'"*^ 
The  exceptions  draw  a  rather  tight  boundary  around  the  new  rule's 
appHcation,  and  the  required  jury  instruction"*'  even  allows  some  assurance 
that  the  jury  will  not,  through  surmise,  debit  the  verdict  amount  by 
assumed  tax  savings. 

With  respect  to  these  exceptions,  the  common  law  rule  remains  in 
effect,  presumably  accompanied  by  all  of  the  problems  assigned  to  it 
by  the  critics.  Reflective  examination  of  the  statute  reveals  that  the  new 
rule  is  not  conceptually  revolutionary,  and  may  not  even  fully  discharge 
the  ambitious  assertion  of  purpose  that  the  General  Assembly  included 
in  the  Act."*^  The  enactment  by  its  own  terms  purports  to  open  the  door 


3'lND.  Code  §  34-4-36-2(1)  (Supp.   1986)  (emphasis  added). 

'"Id.  §  34-4-35-1  (emphasis  added). 

"The  provision  appears  to  be  merely  directory,  but  it  states  that  "the  court  shall, 
if  requested"  give  the  instruction  and  the  content  is  set  out  specifically.  The  instruction 
will  be  requested  in  every  case,  and  the  court  does  not  have  the  usual  discretion  to  refuse 
it.  For  further  discussion,  see  infra  notes  91-93  and  accompanying  text. 

"The  Act  declares  in  the  first  section  of  the  new  chapter  that: 
The  purpose  of  this  chapter  is: 


412  INDIANA  LAW  REVIEW  [Vol.  20:399 

to  evidence  of  collateral  source  benefits,  then  promptly  closes  it  to  all 
but  third-party  purchased  accident  and  hospitalization  insurance  proceeds, 
wage  maintenance  plans  (excluding  workers'  compensation  and  govern- 
mental entitlements),  gratuitous  services,  and  gratuitous  benefit  payments. 
It  seems  not  to  have  taken  full  leave  of  the  important  notion  in  Sherlock 
V.  Alling^^  that  the  defendants  ought  not  to  avail  themselves  of  plaintiffs' 
"prudence  and  foresight"  in  providing  for  future  contingencies  through 
insurance.  Minimal  departure  in  concept  does  not  mean  minimal  dif- 
ference in  effect,  however.  Certainly,  given  the  heavy  incidence  of  third- 
party  purchased  accident  and  hospitalization  insurance  coverage  and  sick 
pay,  most  cases  will  be  affected  by  the  rule. 

Given  this  adherence  to  the  idea  which  supplied  part  of  the  foundation 
for  the  exclusionary  common  law  rule,  the  statutory  rule  contains  some 
flaws  in  language  and  logic  which  may  present  difficulties  in  application 
that  will  require  judicial  interpretation.  The  facial  resemblance  to  the 
underlying  concept  of  the  common  law  rule  of  exclusion  may  lead  to 
problems  in  application  in  doubtful  cases.  For  example,  the  Act  excepts 
from  its  coverage  "insurance  benefits  for  which  the  plaintiff  or  members 
of  the  plaintiff's  family  have  paid  for  directly,"^"*  while  it  excepts  "pay- 
ments of  life  insurance  or  other  death  benefits'"^^  without  reference  to 
whether  the  Hfe  insurance  benefits  were  paid  for  "directly"  by  the 
plaintiff  or  were  received  gratuitously.  Opposition  in  the  critical  literature 
to  excluding  evidence  of  Hfe  insurance  proceeds  has  been  mild  at  best,'*^ 
on  the  basis  that  in  forms  other  than  term-type  policies,  it  is  not  a 
contract  of  indemnity  transacted  for  the  purpose  of  covering  expenses 
in  connection  with  a  loss;  rather,  it  represents  an  effort  to  save  and 
invest  part  of  the  family  finances;  and  that  the  wrongful  conduct  of 
the  defendant  only  hastened  the  day  on  which  the  contract  obligations 
of  the  carrier  became  due.^^  Without  an  official  legislative  history,  it 


(1)  to  enable  the  trier  of  fact  in  a  personal  injury  or  wrongful  death  action  to 
determine  the  actual  amount  of  the  prevaihng  party's  pecuniary  loss;  and 

(2)  to  provide  that  a  prevailing  party  not  recover  more  than  once  from  all 
applicable  sources  for  each  item  of  loss  sustained. 

Act  of  March  11,  1986,  Pub.  L.  No.  201-1986,  1986  Ind.  Acts  1959. 

Considered  against  the  exceptions  clauses  quoted  above,  it  seems  doubtful  that  the 
General  Assembly  has  enabled  the  trier  of  fact  to  do  much  at  all  in  some  cases  "to 
determine  the  actual  amount  of  the  prevailing  party's  pecuniary  loss"  or  to  prevent  a 
plaintiff  from  recovering  "more  than  once  from  all  applicable  sources  for  each  item  of 
loss  sustained." 

"^4  Ind.   184  (1873).  See  supra  text  and  quotation  accompanying  note  22. 

^IND.  Code  §  34-4-36-2(1  )(B)  (Supp.   1986). 

''Id.  §  34-4-36-2(1  )(A). 

'^^See  Fleming,  supra  note  1,  at  1500;  Unreason,  supra  note  1,  at  750-51. 

"^See  Fleming,  supra  note  1,  at  1500;  Unreason,  supra  note  1,  at  750-51.  See  generally 
1  Rhodes,  Couch  on  Insurance  2d  §§  1:18,  1:30,  1:51,  1:60,  1:62,  1:72,  1:73,  1:74, 
1:75  (1984). 


1987]  COLLATERAL  SOURCE  RULE  413 

cannot  be  known  what  persuaded  the  General  Assembly  to  maintain  the 
exclusionary  rule  with  respect  to  such  policies,  but  clearly  the  type  of 
insurance  is  important  in  the  legislative  scheme.  However,  given  the 
thrust  of  the  Act,  it  seems  incongruous  generally  to  exclude  life  insurance 
of  all  types,  stemming  from  all  sources.  Because  the  legislature  has 
chosen  to  categorize  insurance  benefits  by  type  and  then,  with  respect 
to  the  general  category  of  "insurance,"  further  categorize  on  the  basis 
of  who  paid  for  it,  the  sweeping  treatment  of  life  insurance  is  inconsistent 
and  puzzling.  Avoidance  of  complexity  seems  a  weak  explanation  in 
light  of  the  General  Assembly's  willingness  to  create  the  complexity  of 
categories  in  the  first  instance. 

Complexity  cannot  be  avoided  in  any  case  where  the  gratuitously 
conferred  poHcy  has  come  from  a  family  member.  Section  2(3)  of  the 
Act  permits  ''proof  of  the  cost  to  the  plaintiff  or  to  members  of  the 
plaintiff's  family  of  collateral  benefits  received  by  the  plaintiff  or  the 
plaintiff's  family. "^^  The  Act  does  not  say  that  hfe  insurance  benefits 
are  not  collateral  benefits.  It  acknowledges  that  they  are  collateral  benefits 
but  renders  them  exceptional  by  the  use  of  the  words  "other  than"  in 
the  operative  clause."^^  Exclusion  of  the  benefits  with  inclusion  of  the 
costs  where  a  family  member  has  purchased  the  policy  is  bound  to  lead 
to  confusion. 

The  unfortunate  choice  of  language  in  the  two  subsections  has 
provided  fertile  ground  for  contention  in  the  context  of  gratuitously 
conferred  policies.  A  party  might  argue  that  even  though  Hfe  insurance 
is  involved,  the  evidence  of  benefits  received  from  the  policy  should 
nevertheless  be  admitted  on  the  grounds  that  plaintiff  has  not  paid  for 
the  benefits  "directly"  and  subsection  1(B)  thereby  controls.  Giving 
credence  to  the  purpose  clause,  which  emphasizes  the  actual  pecuniary 
losses  of  the  plaintiff  and  states  the  objective  of  a  single  recovery,  no 
apparent  reason  exists  for  excluding  evidence  of  life  insurance  benefits 
generally.  Plaintiffs  who  have  "indirectly"  purchased  Hfe  insurance  ben- 
efits through  employment  plans  or  other  means  that  satisfy  the  unstated 
"indirect"  concept  will  have  recovered  for  the  pecuniary  losses  that 
concerned  the  legislature.  Likewise,  it  is  not  clear,  upon  analysis,  why 
those  who  have  purchased  term  Hfe  policies  should  not  be  required  to 
try  to  convince  the  trier  of  fact  that  the  proceeds  were  not  purchased 
as  a  hedge  against  accidental  losses  rather  than  as  an  investment  strategy 
utilizing  family  finances.  Perhaps  the  exclusion  represents  a  sympathetic 
recognition  that  since  Hfe  insurance  proceeds  are  the  bone  of  contention, 
loss  of  life  win  have  occurred,  and  the  survivors  should  be  spared  the 
humility  of  arguing  over  who  should  be  credited  with  the  assigned  monetary 
value  of  the  Hfe  of  the  decreased.  Only  the  legislators  know. 

^«lND.  Code  §  34-4-36-2(3)  (Supp.   1986). 
'^Id.  §  34-4-36-2(1). 


414  INDIANA  LAW  REVIEW  [Vol.  20:399 

The  argument  might  be  resolved  by  observing  that  the  first  subsection, 
1(A),  does  not  contain  the  word  "or"  following  the  semicolon  ending 
the  clause.  If  the  legislature  intended  the  omission,  it  might  mean  that 
the  two  clauses  are  not  alternatives  but  are  disjunctive  and  the  first 
clause  stands  alone  without  modification  or  supersession  by  the  other. 
However,  drafting  conventions  indicate  that  when  the  disjunctive  is 
intended,  use  of  the  word  "or"  is  recommended. ^°  Grammatical  and 
typographical  omissions  and  errors  are  not  so  rare  in  legislative  codes, 
however,  that  a  court  can  be  sanguine  about  an  interpretation  that 
assumes  an  intentional  omission,  especially  one  that  runs  counter  to 
drafting  conventions.  Interpretation  of  the  effect  of  a  statute  on  the 
basis  of  what  is  not  present  in  the  legislative  language  is  tricky  business, 
and  opens  the  door  to  some  rather  sweeping  arguments. 

A  court  would  have  similar  difficulty  trying  to  interpret  the  statute 
adhering  to  the  principle  that  a  more  specific  statutory  statement  governs 
a  general  statement.  If  the  type  of  insurance  mentioned  in  the  two  clauses 
is  the  basis  for  comparison,  the  first  clause  is  more  specific  by  virtue 
of  the  inclusion  of  the  modifier  "Hfe"  to  operate  on  "insurance."  On 
the  other  hand,  if  the  manner  of  purchase  is  the  comparison,  the  phrase 
"for  which  the  plaintiff  or  members  of  the  plaintiff's  family  have  paid 
for  directly,"  makes  the  second  clause  more  specific.  Additionally,  the 
third  subsection,  1(C),  seems  even  more  specific  than  the  previous  two, 
because  it  appears  that  if  the  state  or  federal  government  is  the  source 
of  the  funds,  it  does  not  matter  whether  the  funds  could  be  characterized 
as  from  Hfe  insurance  or  otherwise,  or  whether  the  plaintiff  purchased 
the  benefits  directly  or  otherwise.  It  might  be  argued  on  the  strength 
of  this  observation  that  the  three  clauses  are  set  out  in  ascending  order 
of  specificity.  Again,  without  an  official  history,  the  courts  are  left  to 
conjecture  and  surmise.  The  legislature  could  have  been  more  cognizant 
of  drafting  conventions  and  stated  clearly  and  affirmatively  what  evidence 
should  be  included.  Interpreters  should  not  be  left  to  an  analysis  of  a 


^°See  R.  DiCKERSON,  The  Fundamentals  of  Legal  Drafting  76-78  (1965).  E.g., 
Council  of  the  District  of  Columbia,  Legislative  Drafting  Manual  63  (Rev.  ed. 
1982). 

''E.g.,  Commonwealth  v.  Kelly,  177  Mass.  221,  58  N.E.  691  (19(X)).  The  court  held 
that  innkeepers  could  not  sell  intoxicating  liquor  to  guests  after  11  P.M.  on  the  strength 
of  a  comma,  which  was  included  in  the  first  publication  of  the  statute  in  question,  but 
was  dropped  in  favor  of  a  semicolon  in  later  printings,  and  potential  fortunes  were  lost. 
See  also  Ex  parte  John  Hill,  172  Eng  Rep.  397  (1827).  The  absence  of  the  word  "bull" 
in  an  enumeration  which  made  it  a  crime  to  mistreat  "any  horse,  mare,  gelding,  mule, 
ass,  ox,  cow,  heifer,  steer,  sheep,  or  other  cattle"  rendered  the  enactment  inapplicable  to 
bull-baiting  against  the  interpretive  device  employed  by  the  judges,  which  excludes  from 
the  general  words  items  of  higher  rank  than  the  words  enumerated.  Thus  the  "sport"  of 
bull-baiting  was  legally  the  attribution  of  many  made  and  lost  fortunes  in  merrye  olde 
England. 


1987]  COLLATERAL  SOURCE  RULE  415 

series  of  exceptions  to  determine  what  limited  types  of  benefits  remain 
affected  by  the  rule  of  inclusion.  Legal  lore  and  folklore  contains  stories 
about  how  fortunes  were  made  and  lost  on  the  basis  of  the  presence 
or  absence  of  a  word  or  a  punctuation  mark.^'  The  point  of  the  stories 
is  always  that  precision  of  language  is  important  in  the  law,  but  they 
also  provoke  negative  reactions  from  those  who  think  that  the  substance 
of  the  law,  not  its  form,  should  control  decisions.  Indiana  courts  should 
not  have  been  placed  in  the  difficult  position  of  determining  accountability 
upon  such  a  technical  point  by  such  an  easily  curable  grammatical 
structure. 

More  generally,  the  exception  for  "directly"  purchased  benefits  is 
curious  and  fraught  with  problems.  In  a  hospitalization  plan  to  which 
employer  and  employee  both  contribute,  an  issue  is  bound  to  arise  in 
litigation  whether  evidence  of  benefits  is  to  be  included  or  excluded. 
Counsel  handling  such  cases  should  be  prepared  to  present  arguments 
pro  and  con  on  the  question  of  whether  the  trier  of  fact  should  divide 
the  proceeds  in  proportion  to  the  relative  amounts  paid  by  the  parties 
to  the  employment  contract  and  credit  the  defendant  with  only  the 
amount   "paid  for"  by  employer  contributions. 

If  the  legislature  intended  to  inject  such  complications  into  the  trial 
of  damages,  it  is  a  fair  question  whether  it  carefully  considered  the 
added  administrative  costs.  The  potential  for  confusion  will  be  so  great 
in  some  cases  that  the  inquiry  to  determine  the  "actual  amount  of  the 
party's  pecuniary  losses" ^^  will  come  at  greater  administrative  costs  than 
the  legislature  may  have  contemplated.  In  light  of  the  inconsistency  with 
which  the  legislature  has  treated  the  criterion  of  actual  pecuniary  loss 
as  a  truly  primary  consideration  in  the  two  subsections,  it  is  doubtful 
that  it  intended  trials  to  delve  so  deeply  into  such  a  determination.  Evidence 
that  the  legislature  was  motivated  to  avoid  complications  in  the  evaluation 
of  damages  is  contained  in  another  part  of  the  enactment  itself.  In  section 
2  of  the  Act,  the  General  Assembly  declared:  "In  a  tort  action  for 
personal  injuries  tried  by  a  jury,  the  court  shall,  if  requested,  instruct 
the  jury  that  the  jury  may  not  consider  the  tax  consequences,  if  any, 
of  its  verdict. "^^ 

The  Internal  Revenue  Code  of  1954,  section  104(a)(2)  excludes  from 
gross  income  "the  amount  of  any  damages  received  ...  on  account  of 
personal  injuries  or  sickness."^"*  In  effect,  the  section  produces  the 
possibility  that  a  person  recovering  for  lost  or  impaired  earnings  will 
"receive  a  net  amount  greater  than  if  no  injury  had  occurred,  because 
plaintiff  is  entitled  to  receive  the  full  amount  of  the  damages  without 


"IND.  Code  §  34-4-36-1(1)  (Supp.   1986). 

"/d.   §  34-4-35-1. 

^*26  U.S.C.A.  104  (a)(2)  (1984). 


416  INDIANA  LAW  REVIEW  [Vol.  20:399 

the  tax  reduction  that  would  occur  if  the  same  amount  had  been  received 
as  ordinary  taxable  income.  If  a  jury  were  to  take  section  104(a)(2)  into 
account  and  try  to  adjust  the  verdict  to  reflect  the  tax  savings,  it  would 
be  required  to  perform  computations  using  estimates  or  evidence  of  the 
plaintiff's  tax  rate,  which  could  get  quite  complicated.  Furthermore, 
even  though  the  amount  of  the  verdict  is  not  taxable,  the  interest 
generated  by  investments  of  the  monies  generated  by  the  damages  award 
is  taxable,  adding  another  layer  of  compHcation.  Courts  have,  in  general, 
refused  to  permit  the  jury  to  consider  such  evidence,  some  on  the  basis 
of  the  collateral  source  rule,  and  others  simply  because  they  were  skeptical 
about  juries'  ability  to  make  the  adjustments.^^  If  the  jury  instruction 
section  of  the  Act  is  viewed  as  contrary  to  the  general  thrust  of  the 
Act's  rule  of  inclusion,  it  represents  strong  evidence  that  the  General 
Assembly  preferred  that  the  common  law  rule  of  exclusion  remain  intact 
where  the  inclusion  of  collateral  benefit  evidence  would  compel  a  com- 
plicated set  of  computations  in  order  to  adjust  the  verdict  to  reflect 
those  benefits. 

Furthermore,  the  significance  of  "direct"  in  the  analysis  of  the 
transaction  giving  rise  to  the  entitlement  to  benefits  presents  a  potentially 
troublesome  issue.  An  employee  who  has  settled  for  a  lower  wage  or 
salary  in  return  for  employer-paid  accident  and  hospitalization  insurance 
or  wage  maintenance  is  likely  to  assert  with  legitimate  conviction  that 
contributions  have  been  directly  made  to  the  provision  of  the  protection 
plans.  The  statute  has  made  such  arguments  by  plaintiff's  counsel  possible 
by  virtue  of  the  subsection  permitting  evidence  of  "proof  of  the  cost 
to  the  plaintiff  or  to  members  of  the  plaintiff's  family  of  collateral 
benefits  received  by  the  plaintiff  or  the  plaintiff's  family. "^^ 

No  limitation  on  "direct"  versus  "indirect"  cost  is  mentioned  in 
the  subsection.  It  is  apparent  from  the  inclusion  of  evidence  of  cost 
that  the  jury  is  to  consider  that  evidence  in  some  way  in  rendering  its 
verdict  for  damages.  Nothing  in  the  statute  explicitly  says  what  effect 
that  evidence  is  to  have.  It  makes  sense  to  assume  that  the  section  authorizes 
the  jury  to  deduct  the  plaintiff's  costs  from  the  collateral  benefits  before 
deducting  those  benefits  from  the  defendant's  Hability.  That  is  not  the 
only  plausible  interpretation  of  the  clause,  however.  It  may  also  be 
interpreted  to  mean  that  the  jury  should  consider  the  existence  of  costs 
("direct"  or  "indirect")  to  the  plaintiff  as  determinative  of  whether  the 
benefits  should  be  deducted  from  the  damages  award  at  all.  By  pointing 
out  the  exclusion  of  evidence  accomplished  by  the  statute's  first  two 
exceptions,  a  bona  fide  argument  could  be  offered  that  the  legislature's 


''See  Unreason,  supra  note  1,  at  747  (citing  Highshew  v.  Kushto,  235  Ind.  505, 
134  N.E.2d  555  (1956),  and  other  cases).  Contra  Norfolk  &  Western  Ry.  Co.  v.  Liepelt, 
444  U.S.  490  (1980). 

'^IND.  Code  §  34-4-36-2(3)  (Supp.   1986). 


1987]  COLLATERAL  SOURCE  RULE  417 

choice  of  peculiar  language  has  left  it  open  to  jury  discretion  whether 
to  permit  defendants  to  enjoy  the  beneficial  effect  of  plaintiff's  financial 
arrangements.  The  rule,  after  all,  is  only  a  rule  of  evidentiary  inclusion. 
It  does  not  dictate  what  conclusions  the  trier  of  fact  must  draw  from 
that  evidence.  In  a  proper  case,  the  jury,  having  found  that  the  plaintiff 
has  incurred  costs  for  the  benefits,  might  well  decide  to  refuse  to  offset 
the  damages  by  the  amount  of  the  benefits. 

It  might  be  counter-argued  with  some  force  that  such  an  interpretation 
would  place  subsection  2(3)  in  conflict  with  subsection  2(1)(B),  on  the 
grounds  that  2(1  )(B)  would  be  nullified  if  2(3)  were  given  such  effect. 
However,  the  arguments  cannot  be  settled  on  the  face  of  the  statute, 
and  courts  presented  with  such  issues  will  have  to  decipher  the  language. 
Without  a  single  definitive  interpretation,  the  potential  for  inconsistency 
among  courts  is  real,  and  a  controlling  pronouncement  from  the  supreme 
court  could  be  several  years  in  coming. 

Courts  charged  with  the  task  of  making  some  sense  of  the  language 
might  well  be  disposed  to  avoiding  an  interpretation  that  draws  two 
parts  into  conflict,  but  if  the  legislature's  basic  design  is  the  source  of 
the  conflict,  the  courts  are  limited  in  what  they  can  do.  The  courts 
might  be  able  to  save  a  statute  from  minor  errors  of  construction,  but 
they  should  not  be  expected  to  repair  major  design  flaws.  When  it  is 
recalled  that  in  addition  to  the  difficulty  between  these  two  clauses, 
subsections  2(1)(A)  and  2(1  )(B)  also  contain  conflicting  terms  and  that 
interpretation  is  needed  to  apply  them  consistently,  the  statute's  design 
becomes  suspect. 

Determining  the  principles  of  design  that  govern  the  statute  is  difficult 
because,  as  demonstrated,  so  much  of  the  enactment  is  internally  in- 
consistent. One  thing  is  certain:  in  permitting  a  defendant  to  escape 
accountability  completely,  solely  on  the  basis  that  the  plaintiff's  collateral 
benefits  are  large  enough  to  have  covered  the  "pecuniary  losses,"  the 
legislature  has  eradicated  the  retributive  and  deterrent  functions  of  the 
torts  system,  important  justifications  for  the  common  law  rule.  Degrees 
of  culpability  are  of  no  consequence;  the  effect  can  be  the  same  whether 
the  defendant  is  a  mere  humbler  or  an  intentional  wrongdoer.  Emphasis 
has  now  been  shifted  to  the  compensatory  function,  but  only  in  a  limited 
sense.  The  legislature  has  concentrated  on  the  need  for  compensation, 
and  has  attempted  to  swing  the  balance  of  concern  in  the  torts  system 
in  that  direction.  New  emphasis  does  not  necessarily  mean  expansive 
refinement,  however.  In  concentrating  the  pursuits  of  the  system  upon 
recovery  of  "pecuniary  losses,"  the  General  Assembly  has  allowed  a 
much  narrower  concept  of  compensation  to  become  operable  than  has 
previously  characterized  the  common  law.  It  goes  beyond  the  mere 
mechanical  difference  between  the  common  law  rule  of  exclusion  and 
the  legislative  rule  of  inclusion.  The  triers  of  fact  and  law  are  now  to 
evaluate  cases  by  concentrating  upon  and  giving  primacy  to  the  "actual 


418  INDIANA  LAW  REVIEW  [Vol.  20:399 

amount  of  .  .  .  pecuniary  losses"^''  proven  by  the  complaining  party, 
and  to  assure  that  no  more  than  one  compensation  is  made,  "from  all 
appHcable  sources. "^^  In  so  doing,  if  it  turns  out  that  a  proven  wrongdoer 
escapes  an  obligation  to  pay  for  the  wrong,  then  so  be  it;  that  effect 
is  among  the  costs  of  seeing  to  it  that  the  injured  party  gets  no  more 
than  is  due.  This  shift  in  emphasis  clearly  reflects  the  legislative  preference 
for  a  torts  system  in  which  distributive  theories  of  justice  dominate 
corrective  theories.  This  is  not  to  say  that  corrective  justice  has  been 
discarded,  since  "correction"  includes  compensation  for  the  injury  as 
well  as  retribution,  and  the  enactment  certainly  allows  for  both  in  a 
proper  case.^^  The  compensatory  correction  is  based  upon  an  assessment 
of  the  injured  party's  need,  and  establishing  need  becomes  a  threshold 
for  determining  whether  the  system  will  seek  payment  of  retribution  as 
a  source  of  the  compensation.  In  a  general  sense,  this  has  always  been 
true  in  the  common  law.^°  But  now,  the  determination  of  need  is  confined 
by  a  pecuniary  concept  of  loss  or  detriment,  in  contrast  to  the  more 
abstract  notion  of  loss  or  detriment  in  the  common  law,  which  would 
include  not  only  those  injuries  evidenced  by  pecuniary  harm,  but  also 
harms  not  directly  translatable  into  pecuniary  terms. ^^ 

This  distinction  between  a  requirement  of  concrete,  limited-means 
establishment  of  need  on  the  one  hand,  and  a  broader,  more  abstract 
and  flexible  means  of  assessing  the  appropriateness  of  compensation  is 
important  in  understanding  the  thrust  of  the  statute  and  evaluating  its 
possible  repercussions  in  the  torts  system.  By  focusing  upon  the  com- 
pensatory side  of  the  corrective  justice  equation  using  a  pecuniary  loss 
concept  as  the  lens  by  which  to  ascertain  "need,"  the  legislature  may 
have  given  short  shrift  to  both  distributive  and  corrective  functions  even 
though  it  has  expressed  objectives  grounded  in  distributive  theory. 


"M   §  34-4-36-1(1). 

'Ud.  §  34-4-36-1(2). 

''A  "proper  case"  in  this  sense  would  be  one  where  no  collateral  source  benefits 
were  received  by  the  plaintiff  or  one  in  which  collateral  sources  that  were  received  fell 
within  one  of  the  statutorily  excepted  categories. 

^It  has  been  true  at  least  in  negligence  law,  which  requires  the  plaintiff  to  establish 
a  prima  facie  case  by  proving  actual  damages. 

^'This  idea  can  be  illustrated  by  the  concept  of  "general"  versus  "special"  damages 
in  tort  law.  "General"  damages  are  those  damages  recoverable  for  injuries  expected  or 
assumed  to  have  resulted  from  the  invasion  of  the  defendant,  and  which  are  viewed  as 
so  usually  accompanying  the  invasion  that  some  courts  do  not  require  that  they  be 
specifically  pleaded  and  proved.  Pain  and  suffering,  humiliation,  fear,  fright,  and  anxiety 
are  usually  counted  among  the  harms  for  which  "general"  damages  are  recoverable. 
"Special"  damages,  on  the  other  hand,  are  assessed  for  "natural"  consequences  of  the 
conduct,  but  are  not  expected  or  assumed  in  the  same  sense  of  inevitability  as  those  in 
the  category  of  "general"  damages,  and  hence  must  be  specially  pleaded  and  proved.  See 
generally  C.  McCormick,  supra  note  28,  at  32-39,  315-19. 


1 987]  COLL  A  TERAL  SOURCE  R  ULE  4 1 9 

A  full  description  of  the  distributive  theories  of  justice  is  beyond 
the  scope  of  this  Article.  For  this  analysis  it  should  be  sufficient  only 
to  point  out  some  elements  in  simplified  form  and  their  bearing  upon 
this  enactment.  First,  concerns  of  justice  from  a  perspective  of  distributive 
principles  are  usually  addressed  on  the  "higher"  order  of  things  and 
people.  The  orientation  is  to  matters  social  in  scale:  the  rights,  entitle- 
ments, powers,  duties,  and  obligations  of  groups  of  society  qua  segments 
of  that  society  in  interaction.  First  principles,  designed  to  order  the 
interaction  between  groups  and  ensure  that  each  operates  at  a  level  of 
benefits  and  burdens  that  is  fair  to  all,  guide  the  choice  among  alternative 
courses  of  action  and  establishment  of  relationships.^^  Those  principles 
also  establish  the  basic  framework  of  institutions  designed  to  maintain 
and  adjust  the  apportionment  and  dispersal  of  social  resources  and 
provide  the  criteria  for  evaluating  their  work."  The  "share"  appropriate 
to  each  group  is  determined  by  reference  to  the  particular  content  of 
the  first  principles,  and  so  it  follows  that  the  "justness"  of  allocation 
can  be  ascertained  by  how  closely  it  adheres  to  the  principle  of  enti- 
tlement, not  necessarily  to  the  relative  sizes  of  the  shares.  Because  the 
content  of  the  first  principles  varies  across  models,  the  "justness"  of 
entitlement  may  be  determined  by  whether  (to  present  some  examples): 
it  tends  to  maximize  the  net  of  gains  over  losses  in  a  utilitarian  system; 
it  is  equal  to  the  entitlements  of  others  in  an  egalitarian  system;  it 
represents  what  society  has  chosen  through  some  rational  process  of 
collective  decisionmaking  in,  for  example,  a  majoritarian  democratic 
system;  or  it  represents  an  accumulation  brought  about  by  conscientious 
effort  in  a  system  based  upon  moral  desert. ^^  Beyond  this,  distributive 
principles  and  the  various  theories  for  distributive  justice  are  not  generally 
concerned,  so  that  what  is  actually  produced  as  a  result  in  a  particular 
case  is  not  generally  addressed. ^^  Further  refinement  of  assessment  within 
the  respective  systems  is  possible  by  examining  what  "losses"  are  to  be 
measured  against  what  "gains;"  what  counts  as  "equal"  and  how  is  it 
measured;  who  is  entitled  to  vote  or  otherwise  participate  in  the  mech- 
anism for  collective  choice;  and  what  intermixture  of  effort  and  accu- 
mulated resources  is  "natural"  or  "moral. "^^  But  confined  to  the  level 


^^See  generally  J.  Rawls,  A  Theory  of  Justice  4,  7,  84-85  (1971);  Hoffman  & 
Spitzer,  Entitlements,  Rights  and  Fairness:  An  Experimental  Examination  of  Subjects' 
Concepts  of  Distributive  Justice,  14  J.  Legal  Stud,  259,  262-67  (1985);  Sadurski,  Social 
Justice  and  Legal  Justice,  3  Law  &  Phil.  329,  330-31,  334  (1984). 

*U.  Rawls,  supra  note  62,  at  274-80. 

^Id.  at  22-33,  221-34,  312-15;  Hoffman  &  Spitzer,  supra  note  62,  at  262-66. 

^^See  Franaszek,  Justice  and  the  Reduction  of  Litigation  Cost:  A  Different  Perspective, 
37  Rutgers  L.  Rev.  337,  350-60  (1985). 

^J.  Rawls,  supra  note  62,  at  22-33,  221-34,  312-15;  Hoffman  &  Spitzer,  supra  note 
62,  at  262-66. 


420  INDIANA  LA  W  REVIEW  [Vol.  20:399 

of  distributive  principles,  any  debate  between  competing  theories  can 
proceed  no  further  than  these  issues  and  cannot  address  the  matter  of 
what  is  a  just  resolution  of  a  controversy  between  individuals.^^  Thus, 
in  a  distributive  system  governed  solely  by  the  principle  of  "first-come- 
first-served,"  for  example,  the  competing  theories  for  distributive  justice 
could  come  to  different  conclusions  on  the  question  of  whether  the 
system  was  "good"  or  "just,"  as  measured  by  the  doctrine  of  each 
theory,  and  so  judge  the  result  at  that  level. ^^  But  within  a  system  that 
ratifies  the  "first-come-first-served"  principle,  the  controversy  between 
the  late-comer  who  was  shut  out  by  the  first-comer  who  takes  all  of 
the  offered  resources  cannot  be  resolved  in  the  context  of  the  dominant 
distributive  theory.  That  debate  must  take  place  in  the  context  of  cor- 
rective principles,  which  provide  the  justification  for  nonconsensual  trans- 
fers to  adjust  maldistribution.  The  corrective  principles  may  limit  the 
distributive  principle  within  certain  circumstances  that  prevail  between 
individuals.  So,  for  example,  the  "first-come-first-served"  principle  could 
still  operate  in  a  system  that  included  a  corrective  principle  of  allowing 
a  late-comer  to  compel  the  transfer  of  the  proceeds  of  the  race  upon 
a  showing  that  the  putative  first-comer  was  not  "really"  first,  or  was 
"first"  only  because  of  some  culpable  behavior  during  the  race.  Pressed 
against  this  elementary,  and  perhaps  oversimplified,  framework  of  anal- 
ysis, the  Indiana  statute  contains  features  that  are  difficult  to  integrate 
into  the  common  law  of  torts. 


^Trofessor  Glanville  Williams  illustrated  the  problem  in  the  context  of  his  discussion 
of  the  deterrence  function: 

Lundstedt  denies  that  there  is  necessarily  a  moral  basis  for  the  law  of  tort, 
even  where  liability  is  confined  to  cases  of  culpa.  He  seeks  to  prove  this  denial 
by  an  example.  'Through  the  negligence  of  a  poor  man  a  millionaire  has  suffered 
damage  estimated  at  £500.  Surely  it  would  not  be  in  accordance  with  the 
sentiment  of  justice  that  the  poor  man  should  eventually  be  forced  to  beg  for 
his  living  in  order  that  the  millionaire  might  obtain  his  "satisfaction"?'  In 
Lundstedt's  opinion,  not  only  is  such  a  transfer  unjust;  it  is,  if  regarded  in 
isolation,  socially  undesirable.  Only  by  taking  a  broad  view  can  we  discover  it 
to  be  for  the  public  good  to  maintain,  without  exception,  a  rule  whereby  damage 
ought  regularly  to  be  so  transferred. 
Williams,  supra  note  11,  at  145. 

^^That  is,  a  utilitarian  would  say  that  the  principle  and  hence  the  system  is  just  to 
the  extent  that  it  maximizes  social  utility,  and  the  resulting  distribution  to  a  single  individual 
would  be  irrelevant.  An  egahtarian  would  maintain  that  the  principle  (thereby  the  system) 
is  unjust  because  it  permits  an  unequal  distribution,  and  the  resulting  distribution  to  a 
single  individual  demonstrates  the  injustice.  A  social  choice  theorist  would  say  that  so 
long  as  society  rationally  has  chosen  the  principle  to  govern  (perhaps  on  the  basis  that 
it  "knew"  such  results  were  possible),  the  result  is  what  society  wanted  and  is  therefore 
just,  and  so  on. 


1987]  COLLATERAL  SOURCE  RULE  421 

The  Statute  purports  to  establish  the  distributive  principle  of  enti- 
tlement to  compensation  upon  demonstration  of  need  to  repair  a  pe- 
cuniary loss.  It  purports  to  correct  maldistribution  (the  burdens  of 
personal  injury)  by  requiring  compensation,  but  from  only  one  source 
among  all  "applicable  sources."  The  definite  shift  in  emphasis  from 
corrective  retributive  and  deterrent  functions  to  distributive  and  corrective 
compensation  functions  will  be  difficult  to  harmonize  with  the  established 
common  law  of  torts. ^^  For  example,  as  demonstrated  above, ^°  the 
statement  of  the  distributive  principle  does  not  help  the  triers  of  law 
and  fact  to  ascertain  ''appHcable  sources"  in  doubtful  cases,  because 
the  corpus  of  the  Act  in  large  part  contradicts  the  principle. 

From  the  perspective  of  distributive  theories  of  justice  on  the  * 'higher" 
order  of  coordination  of  lives  and  fortunes,  the  Act  is  not  likely  to 
bring  about  drastic  change,  because  decisions  about  whether  to  insure 
oneself  from  accident  or  liability  or  both  are  affected  more  directly  by 
other  social  and  psychological  forces.  Likewise,  persons  will  be  no  more 
able  to  predict  whether  they  will  hurt  or  be  hurt  by  someone  with 
insurance  after  the  Act  than  they  were  before  its  enactment.  But  once 
the  law  of  ''personal  injury  actions"  contained  in  the  statute  is  invoked 
by  those  who  appeal  to  the  justice  system  to  reorder  their  lives,  the 
culmination  of  the  corrective  process  as  modified  by  the  Act  is  bound 
to  affect  the  view  of  those  subject  to  it.  As  cognizance  of  the  statute's 
inconsistent  treatment  of  "direct"  and  "indirect"  benefits  grows,  for 


^^For  the  remainder  of  the  article,  the  discussion  will  evaluate  the  statute  using  John 
Rawls'  "fundamental  social  problems"  of  "coordination,  efficiency,  and  stability"  as  the 
criteria.  Rawls  expressed  his  ideas  in  this  way: 

Some  measure  of  agreement  in  conceptions  of  justice  is,  however,  not  the  only 
prerequisite  for  a  viable  human  community.  There  are  other  fundamental  social 
problems,  in  particular  those  of  coordination,  efficiency,  and  stability.  Thus  the 
plans  of  individuals  need  to  be  fitted  together  so  that  their  activities  are  compatible 
with  one  another  and  they  can  all  be  carried  through  without  anyone's  legitimate 
expectations  being  severely  disappointed.  Moreover,  the  execution  of  these  plans 
should  lead  to  the  achievement  of  social  ends  in  ways  that  are  efficient  and 
consistent  with  justice.  And  finally,  the  scheme  of  social  cooperation  must  be 
stable;  it  must  be  more  or  less  regularly  complied  with  and  its  basic  rules  willingly 
acted  upon;  and  when  infractions  occur,  stabilizing  forces  should  exist  that  prevent 
further  violations  and  tend  to  restore  the  arrangement. 
J.  Raw^ls,  supra  note  62,  at  6. 

In  some  respects  the  critique  will  directly  apply  Rawls'  criteria  and  in  the  same 
context  as  he  expressed  them.  In  others,  the  critique  will  be  more  general;  for  example, 
with  respect  to  coordination,  Rawls  speaks  of  the  problem  of  individual  plans  fitting 
together.  Here  the  problem  of  coordination  will  also  be  addressed  as  one  of  fitting  the 
legislative  declaration  of  "personal  injury  law"  into  the  established  common  law  of  torts, 
which  also  involves  the  matter  of  coordinating  the  sometimes  conflicting  institutional 
powers  of  the  legislature  and  the  courts. 

™5ee  supra  notes  44-61  and  accompanying  text. 


422  INDIANA  LAW  REVIEW  [Vol.  20:399 

example,  and  members  of  society  assess  the  justice  they  and  others  have 
received  against  the  distributive  principle  declared  in  the  Act,  some 
disappointment  and  disenchantment  with  the  system  will  likely  result. 
To  the  extent  that  the  retributive  and  deterrent  functions  of  the  common 
law  corrective  theory  of  justice  are  ingrained  in  social  attitudes  about 
the  litigation  system  for  redressing  tortious  conduct,  the  statute  will 
significantly  change  that  system.  Persons  who  seek  corrective  justice 
through  the  torts  system  must  establish  their  claims  by  reference  to 
concepts  of  fault.  Many  who  successfully  meet  the  requirements  of  a 
prima  facie  case  will  nevertheless  see  tortfeasors  at  every  level  of  blame- 
worthiness escape  liability.  When  it  is  explained  that  the  law  dictated 
such  a  result  because  of  the  insurance  planning  of  the  injured  party, 
some  are  apt  to  wonder  if  the  principle  of  liability  apportioned  by 
"fault"  is  meaningful  at  all.^' 

The  distributive  principle  declared  by  the  Act  is  that  one  should  be 
compensated  based  on  need,  which  is  determined  by  whether  the  person 
seeking  compensation  has  received  payment  from  one  of  the  sources  not 
excepted  by  the  Act.  The  necessary  corollary  to  that  principle  is  a  mirror 
image  of  another  distributive  principle,  which  maintains  that  one  is 
entitled  to  benefits  on  the  justification  of  conscientious  effort  and  ex- 
penditure of  one's  resources.  That  is,  under  the  Act,  the  defendant 
becomes  entitled  to  benefit  from  someone  else's  planning  and  expenditure 
when  he  produces  injury  through  conduct  that  society  has  otherwise 
deemed  culpable.  The  potential  for  a  system  employing  such  a  principle 
to  satisfy  those  who  believe  the  torts  system  is  also  for  the  purpose  of 
correcting  faulty  conduct  is  minimal.  It  is  hkely  to  produce  pressures 
for  redistribution  to  permit  injured  parties  to  participate  in  the  insurance 
planning  of  defendants  on  the  grounds  of  an  amalgam  of  principles  of 
equalization  and  moral  desert.  The  argument  is  likely  to  take  this  form: 
If  defendant  is  able  to  participate  in  plaintiff's  transactions  on  the  basis 
of  an  assessment  of  need  for  corrective  compensation,  so  too  should 
the  plaintiff  be  entitled  to  participate  in  defendant's  insurance  planning 
on  the  basis  of  an  assessment  of  a  need  for  corrective  retribution  and 
deterrence,  and  the  balance  should  be  struck  by  equalizing  the  competing 
claims.  That  could  be  done  by  allowing  partial  participation  by  both. 
Plaintiff  would  not  receive  full  compensation  because  he  would  not 
deserve  double  recovery.  Defendant  would  not  be  able  fully  to  escape 


"To  the  extent  that  the  enactment  succeeds  in  transferring  the  burden  of  the  cost 
of  accidents  to  accident  and  health  insurers,  the  effect  will  have  been  to  move  the  torts 
compensatory  system  into  a  "no-fault"  regime  without  modifying  the  substantive  law 
requiring  a  showing  of  fault  or  other  refinements.  See  generally  G.  Calabresi,  supra  note 
34;  R.  Keeton  &  J.  O'Connell,  supra  note  35. 


1987]  COLLATERAL  SOURCE  RULE  A17> 

liability  because  he  would  deserve  to  pay  some  retribution  and  feel  some 
effects  of  a  deterrent  sanction. ^^ 

Objection  to  the  views  just  articulated  is  bound  to  arise  on  grounds 
of  efficiency — yet  another  criterion  for  evaluating  the  system  of  justice. 
That  objection,  stemming  from  the  distributive  principle  of  the  Act, 
would  maintain  that  if  a  plaintiff  were  able  to  obtain  more  than  the 
pecuniary  value  of  the  injury,  the  system  would  be  requiring  a  corrective 
transfer  of  wealth  from  the  defendant  to  the  plaintiff  where  no  correction 
was  necessary.  To  the  extent  that  the  plaintiff  would  be  getting  more 
than  the  cost  of  the  transaction  contemplated,  the  argument  proceeds, 
the  system  would  be  inefficient. 

These  efficiency  arguments  would  bear  a  close  relationship  to  the 
objections  raised  in  the  critical  literature  against  the  common  law  rule 
of  exclusion  and  the  responses  to  those  objections.  In  that  debate,  the 
assertion  has  been  that  double  recovery  amounts  to  a  windfall,  and  that 
plaintiffs  are  no  more  entitled  to  windfalls  than  defendants.  The  criticism 
was  offered  in  the  form  of  an  argument  grounded  in  concepts  of  moral 
desert,  not  so  much  as  a  challenge  to  the  common  law's  moral  assertion 
that  blameworthy  defendants  deserve  to  pay,  but  that  plaintiffs  may  not 
always  deserve  to  get  a  windfall.^^  In  a  clash  of  moral  claims,  some 
tension  is  created  that  produces  an  impetus  to  identify  a  neutral  principle 
with  which  to  resolve  the  conflict.  Here  the  assertion  would  be  that 
who  deserves  the  windfall  can  be  decided  by  reference  to  the  distributive 
principle  that  reflects  society's  desire  to  be  efficient  in  allocations  and 
transfers  of  pecuniary  resources.  The  argument  would  continue  that  if 
the  aim  of  the  compensation  function  is  to  redress  injury  by  putting 
the  injured  party  back  in  the  position  enjoyed  prior  to  the  injury,  and 
the  best  way  to  do  that  is  to  compel  a  transfer  of  defendant's  assets 
to  cover  the  plaintiff's  pecuniary  loss,  a  transfer  greater  in  amount  than 
the  loss  would  be  dysfunctional  and  inefficient. 

The  responses  to  the  critics'  challenge  to  the  moral  justification  for 
applying  the  rule  may  be  apt,  even  in  the  absence  of  a  moral  contrast 
between  "wrongdoer"  and  injured  party.  In  response  to  the  assertion 
that  the  plaintiff  may   not  be  more  entitled  to   a  windfall   than  the 


^^The  justification  for  this  result  is  grounded  on  both  the  distributive  principle  that 
one  should  receive  no  more  than  a  fair  share,  and  the  corrective  principle  that  involuntary 
transfers  of  wealth  are  necessary  when  one  has  injured  another  through  culpable  conduct. 
Neither  principle  is  fully  satisfied,  but  to  the  extent  that  full  satisfaction  of  one  means 
no  satisfaction  of  the  other,  the  two  are  in  conflict  and  cannot  coexist.  The  three  possible 
alternatives  in  such  situations  are:  (1)  one  principle  is  discarded  in  favor  of  the  other; 
(2)  the  two  alternate  in  applicability;  or  (3)  a  new  principle  synthesizing  the  two  originals 
is  developed.  The  result  of  this  solution  is  an  example  of  the  exercise  of  the  third  option 
and  maintains  essential  relationship  to  both  competing  principles. 

"5ee  Peckinpaugh,  supra  note  1,  at  550-51;  Unreason,  supra  note  1,  at  748-49. 


424  INDIANA  LAW  REVIEW  [Vol.  20:399 

defendant,  the  proponents  of  the  basic  rule  have  challenged  the  assumed 
truth  of  the  assertion  that  plaintiff  would  receive  a  double  recovery. 
Such  responses  take  two  forms:  (a)  a  general  recognition  that  contracts 
of  insurance  sometimes  permit  the  insurer  to  be  subrogated  to  the  rights 
of  the  insured  and  entitle  the  insurer  to  reimbursement  from  the  proceeds 
of  the  judgment;  (b)  a  counter-assertion  that  the  compensation  received 
is  frequently  not  "full."'^'*  This  latter  approach,  in  turn,  branches  to 
mean:  (1)  that  accident  insurance  is  not  perfect,  and  some  items  of 
injury  are  usually  not  covered  by  the  insurance  policy,  such  as  expenses 
governed  by  deductibles  clauses,  or  pain  and  suffering;  and  (2)  that 
other  detriments  to  the  plaintiff  arose  by  virtue  of  having  to  resort  to 
litigation  to  obtain  recompense  from  the  tortfeasor,  such  as  time,  trouble 
and  aggravation,  or  attorney's  fees,  which  traditionally  are  not  compen- 
sable items  in  tort  damages. ^^ 

With  respect  to  the  justification  for  the  common  law  rule  that 
plaintiffs  are  often  required  to  repay  insurance  carriers  from  the  proceeds 
of  judgments,  the  General  Assembly  has  responded  to  concern  about 
the  effect  of  the  new  rule  of  inclusion.  The  Act  specifically  makes 
admissible  "proof  of  the  amount  of  money  that  the  plaintiff  is  required 
to  repay,  including  workmen's  compensation  benefits,  as  a  result  of  the 
collateral  benefits  received;  .  .  ."^^ 

Because  the  Act's  purpose  clauses  establish  pecuniary  loss  and  a 
single  recovery  as  the  primary  considerations  for  evaluating  personal 
injury  claims,  admission  of  evidence  of  subrogation  rights  is  clearly 
consistent  with  the  distributive  and  corrective  principles  of  the  legislative 
declaration.^^  The  jury  may  thereby  take  into  account  the  fact  that  the 


^'^See  Unreason,  supra  note  1,  at  750,  where  the  author  discusses  the  argument  posed 
here.  The  argument  is  treated  as  a  general  justification  for  the  rule  rather  than  as  a 
counter-assertion  to  opponents  of  the  rule.  See  also  McWeeney  v.  New  York,  N.H,  & 
H.R.R.,  282  F.2d  34,  37-39  (2d  Cir.  1960),  cert,  denied,  364  U.S.  870  (1960);  Hudson  v. 
Lazarus,  217  F.2d  344,  346  (D.C.  Cir.  1954),  cert,  denied,  350  U.S.  856  (1954);  2  V. 
Harper  &  F.  James,  The  Law  of  Torts  §  25.22  (1956). 

"See  Fleming,  supra  note  1,  at  1499;  Lambert,  supra  note  1,  at  542. 
'^IND.  Code  §  34-4-36-2(2)  (Supp.   1986). 

"The  Act  also  appears  to  adjust  subrogation  rights  to  more  nearly  reflect  the  jury's 
assessment  of  the  pecuniary  losses  in  the  case.  The  first  section  of  the  Act  provides: 
In  any  action  tried  under  this  chapter,  any  subrogation  or  Hen  for  collateral 
benefits  received  by  the  prevailing  party  shall  be  reduced  by  the  ratio  of  the 
lower  of  the  prevailing  party's  judgment  or  collected  judgment  to  the  amount 
of  damages  the  trier  of  fact  found  the  prevailing  party  to  have  sustained. 
Act  of  March  11,   1986,  Pub.  L.  No.  201-1986,   1986  Ind.  Acts  1959  (codified  at  Ind. 
Code  §  34-4-33-14  (Supp.  1986)). 

It  might  appear  that  the  General  Assembly  has  enacted  a  duphcation  of  an  existing 
section  which  already  affects  subrogation  claims,  in  light  of  the  section  of  the  Comparative 
Fault  Act,  Ind.  Code  §  34-4-33-12  (Supp.  1986),  that  reduces  subrogation  claims  and  liens 
in  the  same  proportion  as  the  claimant's  recovery  is  diminished,  and  in  some  instances  the 
two  sections  do  operate  identically. 


1987]  COLLATERAL  SOURCE  RULE  425 

subrogation  rights  of  the  insurer  will  offset  any  potential  for  double 
recovery  by  the  plaintiff.  This  places  a  responsibility  upon  plaintiff's 
counsel  to  present  clearly  the  obligation  to  repay  and  request  instructions 
designed  to  assure  that  the  jury  understands  the  effect  of  that  obligation 
in  producing  the  net  amount  of  pecuniary  loss.  Other  problems  with 


Important  differences  exist,  however,  as  demonstrated  beiow.  The  differences  seem 
to  indicate  an  intention  to  assure  that  injured  parties  not  at  "fault"  will  not  be  under- 
compensated as  a  result  of  the  operation  of  the  rule  of  inclusion  in  conjunction  with 
subrogation  rights. 

The  section  is  inartfully  drafted,  but  seems  to  mean  that  when  a  plaintiff  recovers 
less  than  the  damages  assessed  in  an  action  covered  by  the  Comparative  Fault  Act,  the 
subrogee  or  lien  holder  can  recover  only  that  amount  that  is  in  the  same  proportion  to 
the  original  claim  as  the  plaintiff's  recovery  bears  to  the  assessed  damages.  That  amount 
is  determined  mathematically  by  first  finding  the  quotient  of  the  recovery  divided  by  the 
damages  amount  and  then  multiplying  the  amount  of  the  original  subrogation  or  lien  by  that 
quotient. 

To  demonstrate  the  effect  of  the  provision,  several  illustrations  are  necessary,  each 
with  an  increasing  amount  of  complexity.  The  simplest  will  deal  with  the  case  where 
injuries  are  fully  covered  by  insurance:  Assume  that  Plaintiff  incurred  medical  expenses 
in  the  amount  of  $10,000,  which  were  paid  by  Insurer.  Insurer  now  has  a  potential 
subrogation  claim  in  the  amount  of  $10,000.  If  Plaintiff's  damages  are  assessed  at  $10,000 
and  the  jury  also  finds  Plaintiff  to  be  at  fault  by  SO'^o,  the  verdict  will  be  for  $5,000. 
If  Plaintiff  recovers  the  full  $5,000,  Insurer's  claim  will  be  reduced  by  50%  ($5,000  - 
$10,000  =  .50)  to  $5,000.  In  this  way,  the  enactment  assures  Plaintiff  (and  the  triers  of 
law  and  fact)  that  Insurer  will  not  be  able  to  recover  more  on  the  subrogation  claim 
than  Plaintiff  has  recovered.  This  arrangement  prevents  the  possibility  that  Plaintiff  will 
bear  more  responsibility  for  the  injury  than  the  jury's  apportionment  of  "fault"  would 
allow. 

The  more  complicated  version  operates  the  same  way:  Again,  assume  that  Plaintiff 
proved  medical  expenses  of  $10,000,  which  were  covered  by  Insurer's  policy,  but  this  time 
only  to  the  extent  of  80%.  At  that  point,  Insurer's  subrogation  rights  would  total  $8,000. 
Suppose  further  that  the  jury,  after  finding  Plaintiff's  damages  to  be  $10,000,  also  found 
Plaintiff  to  be  50%  at  fault,  and  rendered  a  verdict  for  $5,000.  If  Plaintiff  recovers  the 
full  $5,000,  Insurer's  claim  is  reduced  by  50%  ($5,000  ^  $10,000  =  .50)  to  $4,000.  In 
this  illustration  Plaintiff  must  bear  responsibility  for  $1,000  of  the  $2,000  that  the  injury 
has  cost. 

The  two  previous  illustrations  have  ignored  the  effect  of  the  legislative  rule  of  inclusion. 
Here  is  what  happens  when  Defendant  attempts  to  introduce  evidence  of  Plaintiff's  receipt 
of  insurance  benefits  in  the  second  illustration:  Assume  that  the  insurance  cost  Plaintiff 
$1,000.  If  Plaintiff  has  "directly  purchased"  the  insurance,  the  receipt  of  collateral  benefits 
is  inadmissible  and  the  jury  may  not  consider  them.  (Also,  Defendant's  counsel,  being 
fair,  did  not  first  ask  Plaintiff  if  any  benefits  were  received  from  insurance  and  then  ask 
how  those  benefits  were  purchased.) 

If  the  transaction  somehow  falls  outside  the  Act's  exceptions  and  amounts  to  an 
"indirect"  purchase,  the  importance  of  the  effect  of  the  new  rule  of  inclusion  becomes 
apparent:  "damages"  are  no  longer  measured  by  simply  using  the  concepts  of  "special"  and 
"general"  damages,  but  are  a  function  of  the  determination  of  the  "pecuniary  losses"  Plaintiff 
has  suffered.  The  jury  determines  damages  by  offsetting  the  amount  of  the  expenses  by  the 
amount  of  the  benefits,  less  the  cost  to  Plaintiff  for  those  benefits.  In  determining  Plaintiff's 
"pecuniary  loss,"  the  jury,  doing  the  computation  correctly,  would  start  with  the  $10,000 
medical  expenses.  From  that  amount  it  would  deduct  the  $8,000  in  collateral  benefits.  To 


426  INDIANA  LAW  REVIEW  [Vol.  20:399 

respect  to  this  aspect  of  the  statute  will  be  discussed  below,^^  but  so 
long  as  the  focus  is  upon  avoiding  the  potential  for  recovering  more 
than  the  economic  cost  of  the  injury,  the  Act  squarely  meets  the  common 
law  rule's  defenders'  arguments  for  retaining  the  exclusionary  effect; 
any  allowance  of  damages  greater  than  the  actual  pecuniary  loss  would 
represent  an  economically  dysfunctional  transfer  of  resources.  Proponents 
of  the  equalized  partial  compensation/retribution  approach  would  be 
required  to  justify  the  transfer  on  other  grounds^^  which  overcome  this 


the  $2,000  remainder  it  would  then  add  back  the  $1,000  it  cost  Plaintiff  to  get  those 
benefits.  Plaintiff's  "pecuniary  losses"  would  then  total  $3,000.  The  jury  would  then 
determine  "damages"  to  be  $3,000.  If  it  finds  Plaintiff's  "fault"  to  be  50%,  the  verdict 
would  be  in  the  amount  of  $1,500.  Insurer's  lien  would  then  be  reduced  by  50%  ($1,500 
^  $3,000  =  .50)  to  $4,000.  Plaintiff  would  be  required  to  repay  the  subrogation  claim, 
if  at  all,  only  to  the  extent  of  the  judgment.  A  strong  argument  could  be  maintained 
that  the  subrogee  cannot  recover  anything  on  the  grounds  that  Plaintiff's  recovery  has 
not  exceeded  his  actual  losses,  and  he  would  therefore  not  be  "unjustly  enriched"  by 
retaining  the  full  amount  of  the  proceeds  of  judgment.  On  the  adjustment  of  subrogation 
rights  which  exceed  the  amount  of  judgment,  see  generally  Wilkins,  The  Indiana  Com- 
parative Fault  Act  at  First  (Lingering)  Glance,  17  Ind.  L.  Rev.  687,  740-46  (1984). 

When  Plaintiff  is  found  to  be  free  of  "fault,"  the  "ratio  of  the  lower  of  the  prevailing 
party's  judgment  or  collected  judgment  to  the  amount  of  damages  the  trier  of  fact  found 
the  prevailing  party  to  have  sustained"  is,  of  course,  1:1,  or  100%.  The  operation  of 
the  enactment  means  that  the  subrogation  rights  or  hen  are  reduced  by  100%,  and  the 
faultless  Plaintiff  is  not  required  to  bear  any  of  the  cost  of  the  injury.  Thus,  in  this 
situation,  the  difference  between  the  new  subrogation  reduction  section  and  the  original 
one  can  be  seen:  Under  the  original  section,  because  "diminution"  of  Plaintiff's  recovery 
is  the  triggering  device,  no  reduction  occurs  unless  such  diminution  occurs.  Under  the 
new  section,  reduction  occurs  "by  the  ratio"  of  (collected)  judgment  to  damages,  and  if 
Plaintiff  recovers  full  damages,  that  ratio  is  100%. 
^^See  infra  notes  86-89  and  accompanying  text. 

^''Such  an  approach  would  have  to  maintain  that  what  might  appear  to  be  a  breach 
of  the  compensatory  function  is  actually  a  cost  imposed  against  the  defendant  and  in 
favor  of  the  plaintiff  to  reflect  the  corrective  aims  of  the  system.  See  supra  note  34  and 
accompanying  text  for  discussion  of  other  aspects  of  this  approach. 

Professors  Keeton  and  O'Connell  have  articulated  the  idea  this  way: 
It  is  often  stated  that  the  principal  objective  of  tort  law,  and  of  any  automobile 
claims  system,  is  to  compensate  for  loss.  More  precisely,  however,  the  objective 
is  to  determine  whether  to  compensate,  and  if  so,  how.  Tort  law  prescribes  the 
negative  of  compensation — the  circumstances  under  which  compensation  will 
not  be  awarded — as  well  as  the  affirmative.  Underlying  the  whole  body  of  tort 
law  is  an  awareness  that  the  need  for  compensation,  alone,  is  not  a  sufficient 
basis  for  an  award.  When  a  plaintiff  receives  a  defendant's  payment  in  satisfaction 
of  a  judgment  obtained  in  court,  loss  is  not  compensated  in  the  sense  that  it 
is  somehow  made  to  disappear.  It  is  only  shifted:  To  the  extent  that  the  plaintiff 
gains,  the  defendant  loses.  Moreover,  the  machinery  for  adjudicating  whether 
and  how  loss  is  to  be  shifted  is  provided  at  considerable  economic  cost  to  the 
community  and  to  the  parties.  To  the  costs  of  courts  to  society  and  the  costs 
of  lawyers  to  the  parties  must  be  added  other  less  tangible  and  direct  costs; 
for  example,  the  costs  of  missing  work  to  testify  in  court,  the  discomfiture  and 
even  agony  of  recreating  the  accident  at  the  trial,  and  the  anger  and  frustration 


1987]  COLLATERAL  SOURCE  RULE  All 

economic  efficiency  argument  or  expand  the  scope  of  the  economic 
efficiency  inquiry  to  include  consideration  of  other  costs  and  benefits 
and  directly  refute  the  claim  of  efficiency. ^° 

Considerations  of  efficiency  in  the  system  of  justice  include  not  only 
the  efficiency  of  allocations  and  transfers  of  monetary  resources,  but 
also  the  efficiency  of  the  legal  processes  by  which  those  allocations  and 
transfers  are  accomplished.  On  this  plane  of  analysis,  the  enactment  has 
reversed  the  emphasis  of  the  common  law  rule  of  exclusion.  Under  the 
common  law,  the  potential  for  loss  of  efficiency  in  the  occasional  case 
involving  a  plaintiff  who  was  not  obligated  to  repay  was  offset  by  the 
gain  of  efficiency  in  not  requiring  presentation  to  the  jury  of  evidence 
and  instructions  concerning  the  existence  of  such  an  obligation.  In  order 
to  assure  that  the  occasional  case  will  be  captured  by  the  distributive 
and  corrective  principles  operative  in  the  Act,  the  General  Assembly  has 
required  that  every  other  case  include  the  evidence  of  repayment  obli- 
gation. The  marginal  gains  made  possible  under  the  new  rule  therefore 
are  achieved  at  significant  administrative  costs, ^'   and  those  costs  are 


of  a  courtroom  fight.  When  loss  is  shifted  by  way  of  an  award,  these  costs  ^  ' 
adjudication,  tangible  and  intangible,  produce  a  net  loss  from  an  over-all  point 
of  view  unless  advantages  outweighing  them  are  realized. 

From  a  recognition  of  this  truth  emerges  a  basic  principle  underlying  both 
tort  law  generally  and  that  segment  of  tort  law  concerned  with  automobile  cases: 
An  award  is  not  made  unless  there  exists  some  reason  other  than  the  mere  need 
of  the  victim  for  compensation.  Otherwise,  the  award  will  be  an  arbitrary  shifting 
of  loss  from  one  person  to  another  at  a  net  loss  to  society  due  to  the  economic 
and  sociological  costs  of  adjudications. 

R.  Keeton  &  J.  O'CoNNELL,  supra  note  35,  at  242. 

^°Judge  Richard  Posner  provides  an  analysis  that  would  challenge  the  fundamental 

validity  of  the  argument  on  the  larger  scale  of  economics,  and  one  that  is  clearly  grounded 

in  corrective  theory.  In  his  text,  he  sets  out  the  following  analysis  of  the  collateral  source 

rule: 

If  an  accident  insurance  policy  entitles  me  to  receive  $10,000  for  a  certain  kind 
of  accidental  injury  and  I  sustain  that  injury  in  an  accident  in  which  the  injurer 
is  negligent,  I  can  both  claim  the  $10,000  from  the  insurance  company  and 
obtain  full  damages  (w'  ich  let  us  assume,  are  $10,000)  from  the  injurer,  provided 
I  did  not  agree  to  assign  my  tort  rights  to  the  insurer  (subrogation).  To  permit 
the  defendant  to  set  up  my  insurance  policy  as  a  bar  to  the  action  would  result 
in  underdeterrence.  The  economic  cost  of  the  accident,  however  defrayed,  is 
$10,000,  and  if  the  judgment  against  him  is  zero,  his  incentive  to  spend  up  to 
$10,000  (discounted  by  the  probabihty  of  occurrence)  to  prevent  a  similar  accident 
in  the  future  will  be  reduced.  Less  obviously,  the  double  recovery  is  not  a 
windfall  to  me.  I  bought  the  insurance  policy  at  a  price  presumably  equal  to 
the  expected  cost  of  my  injury  plus  the  cost  of  writing  the  policy.  The  company 
could  if  it  wished  have  excepted  from  the  coverage  of  the  policy  accidents  in 
which  the  injurer  was  liable  to  me  for  the  cost  of  the  injury,  or  it  could  have 
required  me  to  assign  to  it  any  legal  rights  that  I  might  have  arising  from  an 
accident.  In  either  case  my  premium  would  have  been  less. 

Some  courts  have  had  trouble  when  the  collateral  source  benefit  was  not 


428  INDIANA  LAW  REVIEW  [Vol.  20:399 

imposed  against  the  cases  that  would  have  come  out  the  same  under 
the  common  law  rule  as  they  will  under  the  new  rule  anyway. 

On  this  scale  of  efficiency,  the  new  statute  presents  some  serious 
problems  that  the  General  Assembly  should  address  at  its  earliest  op- 
portunity. In  addition  to  the  problems  discussed  above,  the  statute 
contains  other  flaws  which  not  only  bring  it  into  conflict  with  existing 
sections  of  the  Comparative  Fault  Act,  but  which  also  turn  the  enactment 
on  itself  and  present  opportunities  for  results  not  in  keeping  with  its 
objective. 

First,  with  respect  to  the  existing  subrogation  claims  and  liens  re- 
duction section  of  the  Comparative  Fault  Act,  the  new  enactment  does 
not  contain  exceptions  that  are  prominent  in  the  former  provision.  Section 
12  of  the  Comparative  Fault  Act  reduces  all  such  claims  and  Hens  ''other 
than  a  Hen  under  IC  22-3-2-13  [workers'  compensation]  or  IC  22-3-7- 
36  [occupational  disease]. "^^  The  new  enactment  applies  to  ''any  sub- 
rogation or  lien  for  collateral  benefits. "^^  Whether  this  difference  rep- 
resents a  shift  in  policy  by  the  legislature  to  permit  the  imposition  of 
some  responsibility  upon  some  employers  who  were  at  fault  in  producing 
a  worker's  injury,  or  is  simply  an  oversight  is  not  clear. ^"^  It  is  clear 
that  courts  will  be  faced  with  a  dilemma  concerning  which  section  to 
apply. ^^ 

When  juries  begin  to  apply  the  new  enactment  against  the  background 
of  the  evidence  that  can  now  be  admitted,  some  problems  of  coherency 
will  result  from  its  poor  construction  by  the  legislature.  The  source  of 
this  difficulty  is  subsection  2(3),  which  permits  the  fact-finder  to  hear 


rendered  pursuant  to  a  contract  but  was  "gratuitous."  However,  most  gratuitous 
benefits  turn  out  to  be  ones  for  which  the  beneficiary  has  paid  indirectly.  If 
an  employer  gives  his  injured  employees  medical  treatment  free  of  charge,  this 
means  only  that  the  employer  pays  for  their  labor  partly  in  money  and  partly 
in  kind,  so  that  the  money  wage  would  be  higher  if  the  "gratuitous"  benefits 
were  lower.  (What  about  social  security  benefits?) 

R.  PosNER,  supra  note  34,  at  186. 

*"Those  costs  may  be  reflected  in  the  complexity  of  the  activity  needed  to  evaluate 

the  point  in  contention,  and  in  the  consequent  potential  for  confusion  and  error,  as  well 

as  in  the  more  direct  costs  of  time  and  expense.  The  Act  may  well  involve  such  costs, 

as  illustrated  supra  note  77  in  the  discussion  of  how  the  subrogation  reduction  section 

of  the  Act  works. 

^^ND.  Code  §  34-4-33-12  (Supp.   1986)  (emphasis  added). 

^Ud.   §  34-4-33-14  (emphasis  added). 

**''See  generally  Wilkins,  supra  note  77,   at  751-56  for  discussion  of  the  workers' 

compensation  lien  exception  in  section  34-4-33-12. 

•^^Conventional    techniques   of   statutory   interpretation   would    suggest   an    "implied 

repeal"  of  the  earlier  statute,  if  it  is  unavoidably  in  conflict  with  the  later  one.  See  Payne 

V.   Buchanan,   238   Ind.   231,   238,    148   N.E.2d  537,   540  (1957);  see  also  Schrenker  v. 

Chfford,  270  Ind.  525,  387  N.E.2d  59  (1979);  Lloyd  v.  State,  270  Ind.  227,  383  N.E.2d 

1048  (1979). 


1987]  COLLATERAL  SOURCE  RULE  429 

evidence  of  "proof  of  the  amount  of  money  that  the  plaintiff  is  required 
to  repay,  including  workmen's  compensation  benefits,  as  a  result  of  the 
collateral  benefits  received;  .  .  ."^^ 

Because  the  statute  provides  no  statement  other  than  the  general 
statements  of  purpose  about  how  the  newly  admitted  evidence  is  to 
affect  the  findings  of  fact,  the  jury  might  rationally  conclude  that  an 
obligation  to  repay  offsets  the  effect  of  reduction  for  receipt  of  the 
benefits.  That  is,  a  jury  trying  to  compute  its  verdict  might  well  decide 
that  because  the  plaintiff  is  obligated  to  repay  the  benefits  received,  the 
amount  of  those  benefits  should  be  reflected  in  the  recovery  so  that  the 
plaintiff  will  not  be  required  to  incur  further  out  of  pocket  expenses. ^^ 
The  problem  is  that  the  plaintiff's  obligation  to  repay  cannot  be  definitely 
ascertained  until  after  the  verdict  has  been  rendered,  and  if  a  jury 
misapprehends  the  purpose  of  the  evidence  of  the  plaintiff's  obligation 
to  repay,  in  the  manner  suggested  above,  it  may  well  inadvertently 
change  the  plaintiff's  obligation. ^^  Considering  the  statute  as  a  whole, 
such  a  result  would  run  directly  counter  to  the  apparent  intent.  The 
language  of  the  enactment  permits  such  a  result,  however,  and  unless 
the  jury  is  carefully  and  completely  instructed  on  the  effect  it  is  to  give 
to  such  evidence,  the  statute  will  be  permitted  to  cannibalize  itself.^^ 
Even  if  no  error  occurs,  the  adjustment  will  have  come  at  the  expense 
of  greater  administrative  costs. 

Another  form  of  the  arguments  critical  of  the  common  law  rule  in 
this  context  posits  that  the  courts  have  been  so  concerned  that  juries 
would  be  "prejudiced"  by  the  inclusion  of  evidence  of  collateral  com- 


«^lND.  Code  §  34-4-36-2(3)  (Supp.   1986). 

^^To  illustrate: 

The  jury  considers  Plaintiff's  $10,000  expenses  as  the  starting  point.  Hearing  evidence  that 
the  Plaintiff  received  $8,000  in  benefits  and  charged  that  it  is  to  determine  Plaintiff's  "actual 
pecuniary  loss,"  it  would  then  deduct  that  $8,000  from  the  expense,  leaving  $2,000.  Having 
hard  that  Plaintiff  is  obligated  to  repay  that  $8,000,  however,  the  jury  might  well  decide  to 
adjust  its  findings  to  assure  that  Plaintiff  does  not  have  to  repay  those  benefits  out  of  pocket. 
If  it  adds  back  the  $8,000  and  the  verdict  is  $10,000,  the  intended  effect  of  having  it  consider 
evidence  of  collateral  source  benefits  is  frustrated. 

**That  would  happen  in  this  way: 

In  the  example  given  supra  note  87,  the  verdict  was  for  full  damages.  When  damages 
and  the  verdict  are  equal,  the  "ratio"  is  1:1  or  100*^0,  and  the  subrogation  rights  are 
extinguished.  In  its  effort  to  give  Plaintiff  a  source  of  funds  out  of  which  to  satisfy  the 
subrogation  claim,  the  jury  will  have  actually  erased  the  obligation  and  would  permit  a 
double  recovery,  even  though  it  believed,  correctly  at  the  time  it  began  its  adjustment, 
that  Plaintiff  was  required  to  pay  the  benefits  back. 

^'Given  the  indirectness  of  such  evidence,  the  complexity  of  comparative  fault  in 
general,  the  complexity  of  subrogation  claims  and  liens  and  the  reduction  factor,  and  the 
number  of  mathematical  computations  that  the  jury  has  to  perform,  it  is  doubtful  that 
even  the  most  careful  instruction  will  be  able  to  prevent  errors. 


430  INDIANA  LAW  REVIEW  [Vol.  20:399 

pensation  sources  that  the  exclusionary  effect  of  the  rule  must  reflect 
a  belief  that  juries  applying  common  morality  would  find  it  unconscion- 
able for  the  plaintiff  to  obtain  double  recovery. ^°  This  argument  finds 
support  in  empirical  studies  conducted  thirty  years  ago  at  the  University 
of  Chicago.^'  Proponents  of  the  rule  have  not  come  forward  with 
countering  empirical  evidence  and  (consequently?)  have  not  directly  re- 
sponded to  the  argument.  Of  course  the  common  law  rule  was  well  in 
place  long  before  any  empirical  data  on  jury  behavior  were  available. 
The  judicial  attitude  may  well  reflect  a  concern  for  prejudice  to  defend- 
ants' interests  as  well  as  plaintiffs'.  The  justification  that  the  rule  was 
prejudicial  to  the  plaintiff  was  a  relatively  recent  development  in  Indiana, 
and  supports  the  view  that  courts  are  concerned  about  the  jury  deciding 
issues  of  liability  and  damages  in  favor  of  defendant  when  it  is  presented 
evidence  of  collateral  source  benefits.^  It  is  interesting  to  note,  however, 
that  the  court  in  Brindle  v.  Harter,^^  which  articulated  this  view,  relied 
upon  decisions  that  the  admissibility  of  evidence  of  insurance  was  prej- 
udicial to  defendants,  and  applied  this  reasoning  to  collateral  source 
evidence  "by  analogy."^"*  The  Brindle  court's  reasoning  thereby  reflects 
a  judicial  approach  that  is  rooted  as  much  in  a  concern  about  the 
prejudicial  effect  of  evidence  of  insurance  toward  the  defendant  as  the 
plaintiff.  The  legislative  attitude  reflected  in  the  Act  rejects  that  approach. 
It  may  be  true  that  in  this  modern  day  of  personal  injury  litigation,  with 
financial  responsibility  laws  inducing  the  purchase  of  automobile  insur- 
ance and  the  widespread  utilization  of  health  and  accident  coverage 
plans,  juries  will  assume  that  insurance  protection  is  available. ^^  If  that 
is  true,  then  the  concern  should  be  with  what  effect  that  assumption 
has  on  the  dispensation  of  justice  at  the  hand  of  the  jury.  No  clear 
answer  is  available;  the  same  empirical  study  that  supports  the  rule  of 
inclusion  also  suggests  that  where  uncertainty  about  coverage  exists, 
jurors  operate  somewhat  erratically  in  the  atmosphere  of  doubt  about 
the  appropriateness  of  taking  it  into  account.  Some  people  might  see 
the   "absence"   of  insurance  as  defendant's  fault,   while  others  might 


'"Esdaile,  supra  note  1,  at  105;  Peckinpaugh,  supra  note  1,  at  550-51;  Unreason, 
supra  note  1,  at  749. 

^'5ee  Esdaile,  supra  note  1,  and  authorities  cited  therein.  In  his  article,  Mr.  Esdaile 
cites  an  empirical  study  by  Professor  Harry  Kalven,  in  which  Professor  Kalven  provides 
a  brief  overview  of  the  study  conducted  by  The  Jury  Project  of  the  University  of  Chicago 
Law  School.  In  his  article,  Professor  Kalven  observes  that  the  persons  who  participated 
in  the  study  expressed  a  sensitivity  to  situations  where  the  plaintiff  has  obtained  com- 
pensation from  other  sources  and  tended  to  reduce  damages  in  such  cases.  Kalven,  The 
Jury,   The  Law  and  the  Personal  Injury  Award,  19  Ohio  St.  L.  J.   158,  169  (1958). 

'^Brindle  v.  Harter,   138  Ind.  App.  692,  311  N.E.2d  513  (1965). 

'Ud. 

''Id.  at  699-700,  211  N.E.2d  at  517-18. 

^^See  Kalven,  supra  note  91,  at  171. 


1 987]  COLL  A  TERA  L  SOURCE  R  ULE  43 1 

favor  the  plaintiff  and  attempt  some  rough  "equity"  at  the  risk  of 
putting  the  burden  on  the  carrier.^*'  The  modern  torts  system  wrought 
by  the  "reform"  of  common  law  by  the  General  Assembly  places 
importance  upon  the  efficiency  of  allocation  and  transfer  of  resources, 
while  it  also  confers  an  increased  responsibility  upon  the  jury  to  evaluate 
the  cases  brought  before  it,  on  issues  of  liability  as  well  as  damages. 
In  such  a  system,  opening  up  matters  of  insurance  coverage  purchased 
by  the  plaintiff  to  jury  consideration  while  keeping  the  matter  of  insurance 
coverage  purchased  by  the  defendant  for  protection  in  the  event  of 
Hability  seems  to  be  giving  the  jury  only  half  the  facts  it  needs  to  decide 
the  ultimate  issue.  That  issue  includes  matters  of  correction  in  the 
retributive  and  deterrence  sense  as  well  as  in  the  sense  of  needed  com- 
pensation. The  jury's  input  into  the  evaluation  of  the  case  ought  to 
include  its  decision  about  which  side  of  the  controversy  should  bear  the 
costs  of  the  accident,  and  whose  insurance  fund  should  reflect  them. 
An  objection  that  such  a  system  would  be  allowing  the  jury  to  get 
involved  with  "questions  of  law,"  when  its  proper  function  is  to  deal 
with  "questions  of  fact,"  begs  the  question.  The  present  system  already 
lets  jurors  do  that,  and  sends  them  off  to  deliberate  in  secret  with  only 
part  of  the  facts  and  law  involved  in  the  case  and  the  hope  that  they 
will  properly  do  justice  equipped  with  that  partial  knowledge.  If  the 
response  is  that  this  type  of  system  is  an  adjustment  too  far  the  other 
way,  then  perhaps  a  middle-ground  approach  could  be  identified.  A 
system  that  permitted  instructions  of  law  based  upon  the  partial  equalized 
compensation/retribution  approach  might  help  keep  the  jury  in  line  and 
address  both  sides  of  the  debate. ^^ 


''Id. 

'Professors  Keeton  and  O'Connell  recognized  the  advisability  that  the  system  address 

both  sides  of  the  controversy: 

This  principle  is  not  a  denial  of  the  central  importance  in  tort  law  of  the  need 
to  compensate  for  loss.  Rather  it  is  a  recognition  that  good  rules  of  law  for 
determining  when  and  how  losses  are  to  be  compensated  must  reflect  concern 
for  the  interests  of  those  who  pay  awards  as  well  as  those  who  receive  them. 
Also,  recognition  of  this  basic  principle  of  preserving  the  status  quo  when  lacking 
good  reason  for  change  does  not  imply  that  the  principle  is  ordinarily  decisive. 
Doing  justice,  after  all,  is  the  main  objective.  Surely  the  costs  of  adjudication, 
calculated  in  even  the  most  inclusive  terms,  are  a  modest  price  to  pay  if  the 
system  achieves  this  end.  It  has  long  been  assumed  that  doing  justice  ordinarily 
requires  a  wrongdoer  to  compensate  his  innocent  victim;  and  since  it  is  so  often 
concluded  that  there  is  good  reason  for  regarding  one  party  as  a  wrongdoer 
and  the  other  as  his  innocent  victim,  the  principle  of  preserving  the  status  quo 
in  order  to  save  the  costs  of  adjudication  will  rarely  be  controlhng.  The  principle 
remains  valid,  however,  for  occasionally  it  will  be  decisive,  and  it  serves  also 
as  a  reminder  that  the  search  for  defensible  bases  for  shifting  loss  must  be 
pressed  beyond  the  simple  need  for  compensation. 

R.  Keeton  &  J.  O'Connell,  supra  note  35,  at  243. 


432  INDIANA  LAW  REVIEW  [Vol.  20:399 

The  third  criterion  for  evaluating  a  system  of  justice,  the  social  need 
for  stability  in  that  system,  is  also  impHcated  in  the  interjection  of  the 
new  rule  of  inclusion  into  the  common  law  of  torts.  In  shifting  the 
business  of  courts  and  juries  away  from  the  traditional  corrective  ap- 
proaches to  resolving  personal  injury  disputes  and  more  narrowly  focusing 
that  business  upon  a  distributive  principle,  the  Act  is  likely  to  generate 
repercussions  in  the  process  of  accommodating  the  system  to  the  change. 

Much  of  what  has  already  been  discussed  is  relevant  in  this  con- 
sideration of  stability.  For  example,  to  the  extent  that  the  new  rule's 
potential  for  defeating  the  expectations  of  those  who  seek  judicial  dispute 
resolution  is  realized,  satisfaction  with  the  manner  in  which  the  system 
adjusts  competing  claims  will  wane.  A  realization  of  the  possibility  that 
the  complexities  in  applying  the  new  rule  will  produce  higher  economic 
and  administrative  costs  or  greater  potential  for  error  will  also  lower 
estimations  of  the  quality  of  justice  the  system  has  to  offer.  Impetus 
for  change  or  a  search  for  alternatives  might  result  from  the  decline  in 
gratification  or  unwillingness  to  incur  greater  costs.  Loss  of  the  op- 
portunity to  obtain  retribution  against  the  background  of  requirements 
focused  upon  proof  of  "fault"  might  induce  some  pressure  to  modify 
those  requirements.  It  is  certainly  too  early  to  leap  to  any  conclusions 
on  these  issues,  but  just  as  when  a  stone  is  thrown  into  a  pond,  the 
level  of  the  pond  is  raised,  and  the  ripples  Unger  long  after  the  stone 
has  come  to  rest,  the  new  rule  will  have  a  similar  effect  on  the  common 
law.  The  pond  and  the  common  law  are  flexible  enough  to  find  new 
points  of  equilibrium,  thereby  adjusting  to  accommodate  the  new  part 
into  the  entire  system.  But  the  nature  of  the  pond  and  the  common 
law  are  nevertheless  forever  changed. 

Recognition  that  the  legislative  rule  emphasizes  the  compensatory 
function  and  that  it  does  so  by  exclusive  reference  to  pecuniary  losses 
will  possibly  refuel  efforts  to  induce  the  common  law  to  recognize  costs 
of  personal  injury  litigation  as  compensable  pecuniary  losses.  Arguments 
for  the  recovery  of  attorney's  fees  are  to  be  expected  on  the  grounds 
that  such  fees  represent  a  pecuniary  loss  to  the  plaintiff,  occasioned  by 
the  defendant's  culpable  conduct,  effectively  reducing  the  recovery  amount, 
which  the  Act  blithely  treats  as  a  refined  method  of  identifying  what 
the  plaintiff  has  been  required  to  give  up  as  a  result  of  the  injury  caused 
by  the  defendant. ^^ 


^^The  General  Assembly  has  already  declared  a  policy  in  favor  of  recovery  of  attorney's 
fees,  and  has  thereby  established  a  position  directly  opposed  to  the  common  law  rule.  An 
enactment  passed  in  the  same  session  as  the  one  here  discussed  provides: 

In  any  civil  action,  the  court  may  award  attorney's  fees  as  part  of  the  cost  to 
the  prevailing  party  if  it  finds  that  either  party: 

(1)  brought  the  action  or  defense  on  a  claim  or  defense  that  is  frivolous, 
unreasonable,  or  groundless; 


1987]  COLLATERAL  SOURCE  RULE  433 

Less  likely,  perhaps,  but  still  plausible,  are  arguments  that  the  com- 
mon law  should  recognize  what  the  legislature  has  not,  concerning  other 
costs  of  litigation  not  reimbursed  by  collateral  benefactors.  Such  ar- 
guments will  ask  the  courts  to  permit  awards  reflecting  the  inconvenience, 
aggravation,  or  humiliation  experienced  by  those  forced  to  resort  to 
litigation  in  order  to  obtain  redress.  To  be  certain,  these  items  of  damage 
were  not  arguable  in  the  common  law  prior  to  the  Act,  but  they  were 
barred  by  other  rules  of  exclusion  which  may  come  under  new  scrutiny 
in  the  atmosphere  of  change  brought  about  by  the  adoption  of  the  new 
rule  of  inclusion.  The  common  law  rules  of  exclusion  were  not  pro- 
nounced and  intended  to  be  applied  in  a  vacuum;  they  were  developed 
within  a  coherent  system.  In  such  a  system,  modification  of  one  rule 
is  likely  to  produce  secondary  effects,  placing  pressure  on  other  rules. 
The  legislature's  piecemeal  change  in  the  rules  of  the  process  will  produce 
efforts  to  reassess  the  continued  vitahty  of  the  other  rules  of  exclusion. 

The  new  roles  and  responsibilities  imposed  on  juries  by  this  enactment 
and  the  Comparative  Fault  Act  perhaps  signal  a  public  view  that  juries 
ought  to  have  more  to  hear  and  say  in  the  adjustment  of  disputes 
between  their  peers.  The  legislature's  readiness  to  open  juries'  eyes  and 
minds  to  complex  issues  of  percentages  of  ''fault"  and  pecuniary  losses 
reflects  a  greater  faith  in  jurors'  abilities  than  the  common  law's  rules 
of  exclusion  have  shown.  The  light  of  comparison  casts  an  unflattering 
shadow  of  paternalism  across  the  face  of  the  common  law.  If  the  General 
Assembly's  faith  is  fulfilled,  perhaps  it  should  not  lie  in  the  mouths  of 
common  law  judges  to  refuse  to  consider  whether  they  ought  to  give 
the  jury  all  of  the  information  it  needs  to  decide  how  the  disputants' 
resources  and  losses  should  be  distributed. 

Finally,  inasmuch  as  the  Act  is  another  in  a  series  of  legislative 
incursions  into  the  common  law  of  torts, ^^  stability  is  implicated  on  the 
scale  of  institutional  coordination.  On  this  scale,  the  perspective  is  that 
of  concern  with  the  relationship  between  the  courts  and  the  legislature 
as  institutions  of  government  in  fashioning  the  law  to  be  applied  and 


(2)  continued  to  litigate  the  action  or  defense  after  the  party's  claim  or 
defense  clearly  became  frivolous,  unreasonable  or  groundless;  or 

(3)  litigated  the  action  in  bad  faith. 

Act  of  March  11,  1986,  Pub.  L.  193-1986,  1986  Ind.  Acts  1944  (codified  at  Ind.  Code 
§  34- 1-32- 1(b)  (Supp.   1986)). 

"Groundless"  may  be  a  relatively  concrete  standard  by  which  to  judge  the  appro- 
priateness of  actions  and  defenses.  "Frivolousness"  and  "unreasonableness"  are  far  more 
abstract  and  flexible  standards,  providing  considerable  leeway  for  assertion  of  the  right 
to  recover. 

'^The  Comparative  Fault  Act,  Ind.  Code  §§  34-4-33-1  to  -14  (Supp.  1986);  the 
Medical  Malpractice  Act,  Ind.  Code  §§  16-9.5-1-1  to  -10-5  (1984  &  Supp.  1986);  the 
Products  Liability  Act,  Ind.  Code  §§  33-1-1.5-1  to  -8  (1984  &  Supp.  1986);  and  the 
seatbelt  statute,  Ind.  Code  §§  9-8-14-1  to  -6  (Supp.   1986). 


434  INDIANA  LA  W  REVIEW  [Vol.  20:399 

the  manner  of  application  in  the  trial  of  disputes  involving  personal 
injuries.  The  issue  becomes  whether  a  conflict  exists  between  the  leg- 
islature's exercise  of  power  and  that  of  the  courts.  To  be  certain,  the 
legislature  does  have  some  power  to  affect  the  judiciary  by  adopting 
rules  of  procedure,  jurisdictional  requirements,  limits  on  and  bases  of 
recovery,  and  the  like.  Mixed  judicial  and  legislative  functions  are  nec- 
essary complexities  in  ordering  the  system  of  justice  in  a  complex  society. 
But  a  dual  role  is  not  inescapable,  and  the  courts  have  maintained  an 
area  of  exclusivity  with  respect  to  procedural  rules.  As  students  of  the 
law  soon  discover  and  are  frequently  reminded  thereafter,  deciding  which 
rules  are  substantive  and  which  are  procedural  is  not  always  clear  cut, 
however.  The  Indiana  Supreme  Court  has  attempted  to  state  some 
guidelines  in  establishing  the  dividing  line: 

In  general  terms  substantive  law  can  be  defined  as  including 
that  body  of  rules  which  regulates  the  conduct  and  relationship 
of  members  of  society  and  the  state  itself  as  among  themselves 
apart  from  the  field  of  litigation  and  jurisdiction.  In  general 
form  procedural  law  can  be  defined  as  that  body  of  law  regulating 
the  conduct  and  relationship  of  individuals,  courts,  and  officers 
in  the  course  of  judicial  litigation.  ^^^ 

Challenges  to  the  constitutionality  of  this  Act  may  not  be  inevitable, 
but  to  the  extent  that  it  is  perceived  to  be  a  legislative  declaration  that 
goes  beyond  the  bounds  of  that  necessary  area  of  mixed  functions,  it 
may  induce  a  reaction  on  constitutional  grounds.  In  the  new  chapter 
created  by  the  Act  entitled  "Jury  Instructions  in  Personal  Injury  Actions" '^^ 
and  in  the  first  purpose  clause, ^°^  the  General  Assembly  has  created  the 
issue  of  whether  the  statute  amounts  to  an  impermissible  legislative  rule 
of  procedure  or  merely  a  new  statement  of  substantive  law.^°^ 


"^State  V.  Gibson  Circuit  Court,  239  Ind.  394,  399,  157  N.E.2d  475,  478  (1959) 
(quoting  1  Gavit,  Ind.  Pleading  and  Practice  §  5  at  11  (1950)).  The  court  expanded 
upon  the  treatise  definitions  by  stating: 

As  a  general  rule  laws  which  fix  duties,   establish  rights  and  responsibilities 

among  and  for  persons,  natural  or  otherwise,  are  substantive  in  character,  while 

those  which  merely  prescribe  the  manner  in  which  such  rights  and  responsibilities 

may  be  exercised  and  enforced  in  a  court  are  procedural. 

The  time,  place  and  method  of  doing  an  act  in  court  properly  fall  within 

the  category  of  procedural  rules  and  are  appropriate  subjects  for  such  regulation. 
Id.   (citation  omitted).   The  court  held  that  the  rule  of  court  pertaining  to  change  of 
venue  superseded  a  statute  on  the  same  subject,  upon  finding  that  the  statute  was  a  rule 
of  procedure. 

""Ind.  Code  §  34-4-35-1  (Supp.   1986). 

'°Vg?.   §  34-4-36-1. 

'°^According  to  case  law,  if  the  supreme  court  has  not  issued  a  rule  on  the  matter, 
the  legislature  is  within  the  proper  exercise  of  its  power  to  declare  procedural  rules,  and 


1987]  COLLATERAL  SOURCE  RULE  435 

V.     Conclusion 

The  common  law  collateral  source  rule,  being  a  rule  of  exclusion, 
has  created  tension  in  the  trial  of  torts  cases  since  its  inception.  Its 
definite,  one-sided  effect  on  the  outcome  of  cases  has  provoked  strong 
and  polarized  positions  on  both  sides  of  the  bar.*^"^  The  approach  of 
the  courts  to  the  rule  was  couched  in  fundamental  terms  giving  the 
appearance  that  the  rule  itself  was  considered  fundamental.  So  viewed, 
the  need  for  further  analysis  seemed  unnecessary  to  the  courts,  and  the 
force  of  stare  decisis  perpetuated  the  rule's  application  for  over  a  century 


may  even  declare  such  rules  in  an  area  where  the  supreme  court  has  spoken,  so  long  as 
the  two  rules  are  not  in  conflict.  State  v.  Bridenhager,  257  Ind.  699,  279  N.E.2d  794 
(1972).  The  supreme  court  has  promulgated  rule  51  of  the  Indiana  Rules  of  Trial  Procedure 
pertaining  to  jury  instructions.  That  rule  does  not  contain  any  language  relating  to  the 
effect  of  tax  consequences,  of  course,  and  the  rule  is  stated  generally  in  any  event,  so 
direct  conflict  between  the  Act's  instruction  and  the  trial  rule  does  not  exist.  The  striking 
feature  of  the  trial  rule  is  the  discretion  that  it  confers  upon  the  judge  in  deciding  whether 
and  what  to  instruct  the  jury.  The  rule's  mandatory  effects  are  directed  toward  "the 
parties,"  and  no  part  of  the  rule  permits  the  parties  to  compel  the  reading  of  any 
instruction.  Cf.  Hobby  Shops,  Inc.  v.  Drudy,  161  Ind.  App.  699,  317  N.E.2d  473  (1974). 
The  new  chapter  of  the  Code  created  by  the  Act  requires  that  the  court  ''shall  if  requested, 
instruct  the  jury  that  the  jury  may  not  consider  the  tax  consequences,  if  any,  of  its 
verdict."  Ind.  Code  §  34-4-35-1  (Supp.  1986)  (emphasis  added).  In  contrast  to  trial  rule 
51,  the  statute  removes  the  trial  court's  discretion,  and  the  legislature  has  spelled  out 
the  content  of  the  instruction.  Clearly  the  General  Assembly  has  taken  a  different  approach 
and  has  gone  further  than  the  supreme  court  itself  has  to  direct  the  conduct  of 
the  participants  in  litigation.  Whether  this  direction  will  amount  to  an  impermissible 
incursion  into  the  exclusive  realm  of  the  courts  will  have  to  await  review  by  the  courts. 

The  first  purpose  clause  of  the  Act  purports:  "to  enable  the  trier  of  fact  in  a  personal 
injury  or  wrongful  death  action  to  determine  the  actual  amount  of  the  prevailing  party's 
pecuniary  loss."  Ind.  Code  §  34-4-36-1  (Supp.  1986).  The  provision  is  not  clearly  purely 
substantive  or  procedural,  which  gives  rise  to  the  issue.  One  might  argue  that  "to  enable" 
has  a  procedural  connotation,  but  the  remainder  of  the  clause  surely  deals  with  the 
substantive  content  of  the  legislature's  notion  of  the  proper  measure  of  damages  {quaere, 
indeed,  whether  the  measure  of  damages  is  substantive  or  procedural).  How  the  jury 
determines  "pecuniary  losses,"  however,  is  surely  a  matter  of  procedure,  and  it  is  arguable 
that  the  limited  rule  of  inclusion  determines  how  the  jury  goes  about  determining  what 
is  counted  as  "pecuniary  loss."  The  General  Assembly  has  been  careful  in  its  language 
selection,  however,  steering  clear  of  imposing  mechanical  requirements  upon  the  jury. 
Furthermore,  the  rule  is  one  of  inclusion  of  evidence  that  the  courts  have  not  previously 
recognized.  In  Johnson  v.  St.  Vincent  Hosp.  Inc.,  273  Ind.  374,  404  N.E.2d  585  (1980), 
the  supreme  court  observed  that  the  challenged  statute  (the  Medical  Malpractice  Act)  made 
evidence  admissible  rather  than  inadmissible,  and  that  the  evidence  that  had  been  made 
admissible  had  been  "expressly  sanctioned  by  rules  of  evidence  as  declared  by  the  courts." 
Id.  at  393,  404  N.E.2d  at  598.  From  those  observations,  the  court  concluded  that  the 
statute  did  not  "take  away  from  the  courts  their  judicial  authority."  Id.  The  factual 
distinctions  in  the  case  of  the  enactment  under  discussion  may  prove  to  be  crucial. 

^^E.g.,  the  juxtaposed  articles,  Lambert,  The  Case  for  the  Collateral  Source  Rule, 
1966  Ins.  L.J.  531,  and  Peckinpaugh,  An  Analysis  of  the  Collateral  Source  Rule,  1966 
Ins.  L.J.  545. 


436  INDIANA  LAW  REVIEW  [Vol.  20:399 

in  this  state.  Upon  close  examination,  the  rule  can  be  seen  to  have  been 
a  means  of  addressing  several,  even  competing,  principles;  and  the 
common  law  position  had  given  primacy  to  the  retributive  and  deterrent 
functions  of  the  torts  system,  giving  double  effect  to  the  compensatory 
function  in  some  cases.  The  legislature,  in  declaring  a  new  rule  of 
inclusion,  has  answered  the  pleas  of  those  who  opposed  the  rule  on  the 
strength  of  arguments  stemming  from  principles  driving  the  compensatory 
function,  and  in  doing  so  has  shifted  the  balance  to  the  other  side. 
Such  a  dramatic  shift  would,  in  any  case,  be  difficult  to  accommodate 
in  our  system  of  litigation,  because  of  ingrained  habits  of  conduct,  and 
familiar  patterns  of  thought  and  speech,  to  say  nothing  of  the  existence 
of  113  years  of  unbroken  precedent.  But  the  legislative  rule  as  declared 
contains  conceptual  and  mechanical  difficulties  which  will  magnify  the 
expected  problems.  Some  were  perhaps  avoidable.  Given  the  legislative 
preference  for  distributive  and  corrective  principles  apparent  on  the  face 
of  the  statute,  some  of  these  difficulties  were  unavoidable.  So  the  old 
tension  has  not  been  relieved;  rather,  the  beneficiaries  of  institutional 
resolution  of  the  controversies  producing  it  have  merely  been  reversed. 
Moreover,  the  enactment  is  merely  the  latest  in  a  series  of  efforts  by 
the  General  Assembly  to  transport  tort  law  out  of  the  common  law  and 
into  a  legislative  conceptualization,  thereby  raising  issues  of  institutional 
coordination  within  the  system.  Mobilization  of  opposition  to  the  rule 
is  to  be  expected,  not  only  in  the  form  of  direct  challenges  to  the  rule 
itself,  but  also  in  the  form  of  increasing  demands  for  further  modification 
of  the  common  law  to  accommodate  the  interests  given  primacy  by  the 
abrogated  rule.  The  resulting  debates  should  prove  to  be  interesting. 


New  Developments  in  Workmen's  Compensation  Law: 
Accident  Defined  and  New  Thoughts  on  Crediting 

Joseph  M.  Forte* 

I.     Introduction 

Three  areas  of  workmen's  compensation  law  were  significantly  affected 
by  Indiana  decisions  during  the  current  survey  period.'  Two  of  these  major 
developments  occurred  in  Evans  v.  Yankeetown  Dock  Corp.,^  a  wrongful 
death  action  brought  against  an  employer  by  the  decedent-employee's  per- 
sonal representative.  In  Evans,  the  Indiana  Court  of  Appeals  and  subse- 
quently the  Indiana  Supreme  Court,  in  vacating  the  appellate  court's 
opinion,  greatly  impacted  traditional  views  of  both  jurisdictional  exclusivity 
and  compensability^  by  redefining  a  workmen's  compensation  term  of  art, 
"injury  by  accident."  The  third  major  development  in  Indiana  workmen's 
compensation  law  related  to  the  crediting  of  non-workmen's  compensa- 
tion payments  made  to  the  employee  by  the  employer  against  the 
employee's  compensation  award.'* 

This  Article  focuses  on  the  historical  backdrop  against  which  each 
development  occurred,  the  substantive  changes  resulting  from  each  develop- 
ment and,  lastly,  what  each  development  means  for  the  Indiana 
practitioner. 

II.     Accident  —  Revisited  and  Redefined 

A.     The  History 

The  Indiana  Court  of  Appeals'  revisiting  and  subsequent  redefining 
of  accident  in  Evans  changed  the  classical  definition  of  accident  which 


♦Member,  Edward  N.  Kalamaros  &  Associates,  P.C,  South  Bend,  Indiana.  B.S., 
Purdue  University,  1976;  J.D.,  Indiana  University  School  of  Law— IndianapoUs,  1979.  The 
author  wishes  to  express  his  appreciation  to  Victoria  Kincke  for  her  assistance  in  the  prepara- 
tion of  this  Article 

'The  survey  period  runs  from  June  1,  1985,  to  May  31,  1986.  During  this  twelve- 
month period,  seven  decisions  were  rendered  in  the  area  of  workmen's  compensation  law. 
A  bill,  Senate  Bill  426,  was  introduced  in  The  1987  Indiana  Legislature  which,  if  passed 
would  significantly  influence  the  definition  of  "accident"  for  workmen's  compensation  pur- 
poses. Therefore,  practitioners  faced  with  this  issue  should  investigate  recent  legislature 
developments,  if  any. 

M81  N.E.2d  121  (Ind.  Ct.  App.   1985),  rev'd,  491  N.E.2d  969  (Ind.   1986). 

^Liability  of  the  employer  under  the  Compensation  Act  to  any  employee  or  employee's 
dependent  for  personal  injury  or  death  by  accident  arising  out  of  or  in  the  course  of  employ- 
ment is  established  under  Indiana  Code  §  22-3-2-6  (1982).  The  Act  requires  as  prerequisites 
compensation:  (1)  an  injury;  (2)  that  the  injury  be  by  accident;  (3)  that  the  injury  by  acci- 
dent arise  out  of  the  employment;  and  (4)  that  the  injury  occur  while  in  the  course  of 
the  employment.  Ind.  Code  §  22-3-2-5  (1982). 

'Indiana  State  Highway  Dep't  v.  Robertson,  482  N.E.2d  495  (Ind.  Ct.  App.  1985); 
Jones  &  Laughhn  Steel  Corp.  v.  Kilburne,  477  N.E.2d  345  (Ind.  Ct.  App.   1985). 

437 


438  INDIANA  LA  W  REVIEW  [Vol.  20:437 

had  been  in  existence  for  nearly  seventy  years/  Historically,  the  outcome 
of  numerous  actions  brought  under  Indiana's  Workmen's  Compensation 
Act  turned  upon  the  applicability  of  the  definition  of  accident,  which 
required  a  sudden,  untoward  event/  Such  results  were  consistent  with 
judicial  decisions  of  other  jurisdictions  having  statutory  language  similar 
to  that  of  Indiana's  Workmen's  Compensation  Act/ 

Yet,  a  definition  of  accident  that  focused  on  an  ''event"  often  created 
confusion  as  to  which  event  was  the  event  at  issue.  Was  an  unexpected 
injury  or  an  unexpected  source  of  injury  required  for  the  Workmen's  Com- 
pensation Act  to  apply?  In  response,  the  Indiana  Court  of  Appeals 
appeared  to  sidestep  this  dilemma  in  Ellis  v.  Hubbell  Metals,  Inc.^  by 
ruling  that  the  happening  necessary  to  fulfill  the  accident  requirement  was 
an  unexpected  result  as  opposed  to  an  unexpected  event.  However, 
Calhoun  v.  Hillenbrand  Industries'^  and  several  subsequent  cases '°  did  essen- 
tially dispose  of  the  unexpected  result  theory,  leaving  intact  the  traditional 
unexpected  event  definitional  requirement  of  accident  as  Indiana  law." 

B.     The  Winds  of  Change 

While  the  Indiana  Supreme  Court  reinstated  the  unexpected  event  re- 
quirement of  accident  in  Calhoun, ^^  Judge  DeBruler's  dissent  critically 


'See  Haskell  &  Baker  Car  Co.  v.  Brown,  67  Ind.  App.  178,  187,  112  N.E.  555, 
557  (1917). 

'See  Calhoun  v.  Hillenbrand  Indus.,  269  Ind.  507,  381  N.E. 2d  1242  (1978);  Young 
V.  Smalley's  Chicken  Villa,  458  N.E. 2d  686  (Ind.  Ct.  App.  1984);  Houchins  v.  J.  Pier- 
pont's,  469  N.E.2d  786  (Ind.  Ct.  App.  1984);  Estey  Piano  Corp.  v.  Steffen,  164  Ind.  App. 
239,  328  N.E. 2d  240  (1975);  City  of  Anderson  v.  Borton,  132  Ind.  App.  684,  178  N.E.2d 
904  (1962);  American  Maize  Produce  Co.  v.  Nichiporchick,  108  Ind.  App.  502,  24  N.E. 2d 
801  (1940);  Indian  Creek  Coal  &  Mining  Co.  v.  Calvert,  68  Ind.  App.  474,  119  N.E.  519 
(1918). 

^See  generally  81  Am.  Jur.  2D   Workmen's  Compensation  §  227  (1976). 

M74  Ind.  App.  86,  366  N.E. 2d  207  (1977). 

'269  Ind.  507,  381   N.E. 2d  1242  (1978). 

'"Young  V.  Smalley's  Chicken  Villa,  458  N.E.2d  686  (Ind.  Ct.  App.  1984);  Houchins 
V.  J.  Pierpont's,  469  N.E.2d  785  (Ind.  Ct.  App.   1984). 

"The  two  conflicting  views  as  to  satisfying  the  "accident"  requirement  through  either 
the  untoward  event  or  unexpected  result  theory  came  before  the  court  of  appeals  in  Calhoun 
V.  Hillenbrand  Industries,  374  N.E. 2d  54  (Ind.  Ct.  App.  1978).  The  Industrial  Board  had 
denied  compensation.  The  court  of  appeals  concluded  an  injury  was  "by  accident"  if  the 
result  was  unexpected,  even  though  no  unexpected  event  had  occurred.  In  Calhoun,  the 
unexpected  result  was  a  backache  suffered  by  the  claimant.  Accordingly,  the  court  of  ap- 
peals reversed  the  Industrial  Board's  denial  of  compensation.  However,  the  supreme  court, 
on  transfer,  disagreed  and  vacated  the  opinion  of  the  court  of  appeals,  stating  in  its  now 
famous  language,  "It  is  well  settled  under  our  law  that  in  order  to  show  an  accident  there 
must  be  some  untoward  or  unexpected  event  ....  It  is  not  sufficient  to  merely  show  that 
a  claimant  worked  for  the  employer  during  the  period  of  his  life  in  which  his  disability 
arose."  Calhoun,  269  Ind.  at  510-11,  381  N.E. 2d  at  1244  (citations  omitted). 

'^269  Ind.  507,  381  N.E.2d  1242  (1978). 


1987]  WORKMEN'S  COMPENSATION  439 

concluded  that  the  Industrial  Board  had  inappropriately  isolated  a  causa- 
tion question,  that  is — whether  the  personal  injury  had  been  caused  by 
an  accidental  means  or  method,  within  its  analysis  of  the  accident  issue. '^ 
Judge  DeBruler  was  not  alone  in  his  criticism  of  this  definition  of 
accident."* 

Judge  Ratliff,  in  a  concurring  opinion  in  Kerchner  v.  Kingsley  Fur- 
niture Co.,^^  previewed  the  court  of  appeals  decision  in  Evans  by  recall- 
ing his  concurring  opinion  in  Lovely  v.  Cooper  Industrial  Products, ^^  in 
which  he  expressed  his  displeasure  with  the  "unexpected  cause"  theory 
of  accident.  Judge  Ratliff  adamantly  contended  that  the  unexpected  cause 
theory,  which  is  predicated  on  a  sudden,  untoward  event  traceable  to  a 
precise  date,  place,  and  time,  departs  from  the  underlying  philosophy  and 
legislative  intent  of  Indiana's  Workmen's  Compensation  Act.'^  Under 
Judge  RatUff's  analysis,  the  proper  focus  of  an  "accident"  analysis  is 
on  an  unexpected  or  untoward  result  "arising  out  of  and  in  the  course 
of  employment"  rather  than  on  an  unexpected  or  untoward  event. "^  While 
ultimately  yielding  to  the  precedential  case  law  in  effect.  Judge  Ratliff 
concluded  by  expressing  a  hope  that  the  courts'  current  use  of  the  unex- 
pected cause  definitional  requirement  of  accident  would  be  overturned  and 
replaced  by  an  unexpected  result  theory  of  accident.'^  Two  months  after 
Kerchner,  Judge  Ratliff's  hopes  were  realized  by  the  Indiana  Court  of 
Appeals  decision  in  Evans  v.  Yankeetown  Dock  Corp.^^  Yet  this  fulfill- 
ment of  Judge  Ratliff's  hopes  was  to  be  short-lived — in  less  than  a  year, 
the  Indiana  Supreme  Court  would  vacate  the  appellate  court's  decision^' 
and  in  doing  so,  would  clarify  or,  depending  on  your  point  of  view,  totally 
change  the  judicial  interpretation  of  the  term  "injury  by  accident"  as  used 
in  Indiana's  Workmen's  Compensation  Act. 

C.     Evans  v.  Yankeetown  Dock  Corp.:  The  Decision 

1.     The  Court  of  Appeals 

a)  The  facts. — The  Evans  case  was  a  wrongful  death  action  brought 
against  the  decedent's  employer  by  the  decedent's  personal  representative- 
spouse.^^  Mrs.  Evans  contended  that  the  employer  was  negligent  in  that 


''Id.  at  512,  381  N.E.2d  at  1245  (DeBruler,  J.,  dissenting). 

'*See  Forte,  //  Was  No  Accident  That  .  .  .  ,  19  Ind.  L.  Rev.  207,  210  (1986). 

"478  N.E.2d  74  (Ind.  Ct.  App.   1985). 

'M29  N.E.2d  274,  279-81  (Ind.  Ct.  App.  1981)  (Ratliff,  J.,  concurring),  transfer  denied. 

'Ud.  at  279. 

''Kerchner,  478  N.E.2d  at  78  (Ratliff,  J.,  concurring). 

''Id. 

"481  N.E.2d  121. 

''Evans,  491  N.E.2d  969. 

^M81  N.E.2d  at  123. 


440  INDIANA  LA  W  REVIEW  [Vol.  20:437 

it  had  knowingly  employed  a  mentally  ill  individual  who  posed  a  physical 
threat  to  fellow  employees  and  who  unquestionably  was  a  proximate  cause 
of  her  husband's  death. ^^  Shortly  before  the  start  of  the  workday,  a  co- 
employee,  Harlan  Miller,  shot  the  decedent  five  times  while  suffering  a 
hallucinatory  delusion  that  his  wife  and  the  decedent  were  conspiring  to 
kill  him  by  poisoning;  these  delusions  resulted  from  an  alcohol-induced 
paranoia.^'*  Evidence  further  indicated  that  the  employer's  superintendent 
knew  that  Harlan  Miller  had  threatened  Oscar  Evans  with  bodily  harm 
and  shortly  after  the  shooting  stated,  *'[M]aybe  I  should  have  done 
something  to  prevent  it  [the  shooting]."" 

In  response,  the  defendant-employer,  Yankeetown,  generally  denied 
Mrs.  Evans'  allegations  and  moved  for  summary  judgment  by  essentially 
challenging  the  trial  court's  jurisdiction  over  the  complaint."  From 
Yankeetown's  point  of  view,  this  was  a  workmen's  compensation  com- 
plaint, which  was  governed  by  Indiana's  Workmen's  Compensation  Act 
and  rightfully  within  the  jurisdiction  of  the  Industrial  Board. ^^  The  trial 
court  granted  summary  judgment  in  favor  of  the  defendant  by  holding 
that  an  action  for  workmen's  compensation  was  the  sole  and  exclusive 
remedy  available  for  the  death  of  Oscar  Evans. ^^  To  support  its  decision, 
the  trial  court  found  that  (1)  Oscar  Evans  and  Harlan  Miller  were  indeed 
co-employees  of  the  defendant,  (2)  on  the  date  in  question,  Evans  was 
shot  and  killed  by  Miller,  and  (3)  Evans'  death  was  the  result  of  an  * 'ac- 
cident which  arose  out  of  and  in  the  course  of"  his  employment  with 
Yankeetown  Dock  Corporation.^' 

b)  Accident  defined. —Simply  put,  the  issue  before  the  court  of 
appeals  in  Evans  was  whether  Indiana's  Workmen's  Compensation  Act 
granted  the  Industrial  Board  exclusive  jurisdiction  over  negligence  claims 
brought  against  an  employer  for  the  wrongful  death  of  an  employee. ^° 
From  the  vantage  point  of  this  issue,  the  court  of  appeals  quickly  grasped 
the  opportunity  to  attack  and  clarify  the  definition  of  accident,  a  term 
of  art  which  had  given  rise  to  judicial  confusion  on  more  than  one  occa- 
sion.^' The  Evans  court  launched  its  attack  by  noting  the  absence  of  the 
qualifying  language,  "arising  out  of  and  in  the  course  of"  in  the 
workmen's  compensation  jurisdictional  statute,  Indiana  Code  section 
22-3-2-6.^^  This  absence,  when  compared  with  the  quaHfying  language's 


'*id. 

''Id. 

''Id. 

''Id. 

''Id. 

"Id.  at  123-24. 

'"Id.  at  123. 

"M  at  125. 

"Id. 


1987]  WORKMEN'S  COMPENSATION  441 

presence  in  the  actual  compensation  statute,  Indiana  Code  section  22-3-2-2, 
was  of  great  significance  to  the  court  of  appeals  in  that  it  created  a  distinc- 
tion between  requirements  necessary  for  jurisdiction  and  requirements 
necessary  for  actual  compensation;  it  was  this  distinction  that,  in  the  words 
of  the  Evans  court,  meant  "this  court  for  more  than  a  half  century  has 
on  occasion  misconstrued  workers'  compensation  law  by  contorting 
pristinely  simple  legislative  language  into  a  virtually  unworkable  defini- 
tion of  'accident'."" 

The  court  then  focused  on  the  actual  language  of  the  jurisdictional 
statute,  which  states  that  the  Industrial  Board  is  to  have  exclusive  jurisdic- 
tion in  a  claim  based  on  "personal  injury  or  death  by  accident. "^"^  After 
noting  that  "personal  injury  or  death"  is  "self-explanatory,"  the  Evans 
court  emphasized  that  the  precise  language  used  by  Indiana  legislators 
is  "by  accident,"  rather  than  "by  an  accident,"  as  Indiana  courts  have 
frequently  construed  the  jurisdictional  statute."  Thus,  the  court  of  appeals 
used  the  omission  of  the  article  "an"  as  the  basis  for  ruling  that  the 
jurisdictional  requirements  of  Indiana  Code  section  22-3-2-6  are  met  by 
any  accidental  injury,  where  accidental  injury  is  defined  as  one  that  was 
not  expected  to  occur  or  one  that  did  not  occur  by  design  of  the  employer 
or  injured  employee. ^^ 

Philosophically,  the  Evans  court  found  that  a  definition  of  accident 
that  focused  on  a  sudden,  untoward  event  presumed  that  Indiana's 
Workmen's  Compensation  Act  was  "meant  to  remedy  an  'accident'  and 
thereby  be  regulated  by  an  'event'.""  Such  a  presumption  was  clearly 
erroneous  under  the  court  of  appeals'  interpretation  of  Indiana' a  Work- 
men's Compensation  Act.  According  to  the  Evans  court,  "[W]orkmen's 
compensation  laws  were  enacted  to  cover  liability  without  fault  for  in- 
juries or  death  in  the  workplace,  as  social  legislation  whereby  employers 
(and  ultimately  consumers)  would  bear  the  burden  of  risk  of  insecurity 
and  poverty  of  injured  employees.""  Therefore,  under  the  Evans  ap- 
proach, a  court,  in  determining  whether  the  threshold  requirement  of  "ac- 
cident" had  been  met,  should  focus  on  the  resultant  injury  to  the  employee 
rather  than  either  the  injury's  unexpected  source  or  the  unexpected  event 
that  had  caused  it." 

c)  A  causal  connection  required. — However,  the  court  of  appeals 
circumscribed  the  parameters  of  the  change  wrought  in  Evans  by  indicating 
that  considerations  relating  to  the  time,  manner,  and  causation  of  the 
employee's  injury  would  be  shifted  from  judicial  determinations  of  jurisdic- 


'*Id.  at  126. 

''Id. 

''Id. 

''Id. 

'^Id.  (citing  B.  Small,  Workmen's  Compensation  Law  of  Indl\na  §   1.1   (1950)). 

'"Id.  at  126-27. 


442  INDIANA  LAW  REVIEW  [Vol.  20:437 

tion  to  determinations  of  compensability;  that  is,  these  factors  would  be 
critical  in  determining  whether  the  employee's  injury  '*arose  out  of  and 
in  the  course  of  employment"  and  was  therefore  compensable/" 

To  illustrate  the  proper  approach  towards  issues  of  jurisdiction  and 
compensability,  the  Evans  court  utilized  an  example  of  an  employee  suf- 
fering a  heart  attack  while  engaged  in  routine  labor/'  Because  the 
employee's  injury  was  clearly  unintended  by  both  employee  and  employer, 
the  injury  was  accidental  and  clearly  within  the  jurisdictional  ambit  of 
the  Industrial  Board/^  Yet  the  injury's  cause  is  determinative  of  the  issue 
of  compensability.  If  the  employee's  heart  attack  is  shown  to  have  resulted 
from  a  pre-existing  heart  condition,  the  injury  did  not  arise  from  his 
employment  and  is  not  compensable/^  However,  if  the  heart  attack  resulted 
from  unusual  exertion  demanded  by  the  employee's  work,  his  injury  is 
deemed  to  have  arisen  out  of  and  in  the  course  of  employment /"* 

The  Evans  court  went  on  to  note  that  a  critical  reading  of  cases  such 
as  the  classic  heart  attack  case  of  United  States  Steel  Corp.  v.  Dykes*^ 
reveals  that  the  claims  in  these  cases  were  not  decided  upon  an  inter- 
pretation of  "accident,"  but  rather  were  decided  upon  the  fact  that  the 
injuries  either  did  not  arise  out  of  employment  or  did  not  occur  in  the 
course  of  employment/^  The  court  then  concluded  that  its  approach  to 
redefining  accident  would  not  change  the  law  as  it  has  been  applied  — 
that  is,  the  causal  connection  required  for  compensability  would  remain 
unscathed/^  However,  from  this  point  forward,  the  causal  requirement 
would  be  a  critical  element  of  an  analysis  of  whether  the  accident  "arose 
out  of  and  was  suffered  in  the  course  of"  the  employment. 

d)  Jurisdictional  questions. — In  attempting  to  clarify  the  interaction 
between  the  compensation  statute,  Indiana  Code  section  22-3-2-2,  and  the 
jurisdictional  statute,  Indiana  Code  section  22-3-2-6,  the  Evans  court  held 
that  the  qualifying  language  "arising  out  of  or  in  the  course  of"  was 
not  to  be  considered  in  analysis  of  the  jurisdictional  question.''^  However, 
later  in  the  main  opinion,  the  court  noted: 


""M  at  129-30.  Acts  of  willful  or  wanton  misconduct  by  the  employer  against  the. 
employee  were  "most  likely"  not  included  within  the  definition  of  accident.  Id.  Additional- 
ly, the  court  did  not  change  or  criticize  the  prohibition  of  compensation  for  the  employee's 
injury  that  is  knowingly  self-inflicted,  a  result  of  intoxication,  a  commission  of  an  offense, 
a  failure  to  use  safety  appliances,  or  a  failure  to  obey  a  reasonable  written  or  printed  rule 
of  the  employer  conspicuously  posted  under  Indiana  Code  §  22-3-2-8.  Id.  at  128  n.7. 

''Id.  at  129. 

'Ud. 

'Ud. 

*'Id. 

^'238  Ind.  599,   154  N.E.2d   111   (1958). 

''Evans,  481   N.E.2d  at  129. 

''Id. 

''Id.  at  125. 


1987]  WORKMEN'S  COMPENSATION  443 

[T]hus,  the  language  "arising  out  of  and  in  the  course  of  employ- 
ment" qualifies,  not  just  ''accident,"  but  the  entire  jurisdictional 
threshold,  "personal  injury  or  death  by  accident."  To  do  other- 
wise, of  course,  would  cause  a  conflict  in  identical  phraseology 
merely  because  it  was  located  in  separate  statutes:  "accident"  as 
"event"  in  Indiana  Code  22-3-2-2  and  "accident"  as  "condition" 
in  Indiana  Code  22-3-2-6.  We  can  hardly  credit  our  legislature 
with  such  an  absurd  intention.  Thus,  our  definition  of  "by  acci- 
dent" from  the  jurisdictional  statute  necessarily  alters  the  mean- 
ing of  the  claim  statute. ""^ 

While  this  apparent  inconsistency  was  not  addressed  by  the  Evans  ma- 
jority. Judge  Conover,  in  his  concurring  opinion,  urged  that  the  jurisdic- 
tional rule  must  retain  the  qualifying  language  "arise  out  of  and  in  the 
course  of  employment."^"  Judge  Conover  stated  that  if  this  v/ere  not  the 
case,  the  Industrial  Board  would  be  given  exclusive  jurisdiction  over  cases 
that  involved  off-the-job  injury  or  death. ^'  To  illustrate  the  absurdity  of 
this  result.  Judge  Conover  posed  the  hypothetical  of  an  emplovee  injured 
when  struck  by  his  employer's  truck  in  the  middle  of  town;  under  the 
majority's  approach,  the  Industrial  Board  would  be  given  exclusive  jurisdic- 
tion in  this  hypothetical.^^  Because  such  jurisdiction  was  never  intended 
by  the  legislature.  Judge  Conover  opined  that  "the  qualifier  'arising  out 
of  and  in  the  course  of  employment'  is  an  integral  part  of  the  rule."" 
In  Segal ly  v.  Ancerys,^"^  the  Third  District  Court  of  Appeals  apparently 
agreed  with  Judge  Conover  because  it  failed  to  follow  the  Evans  jurisdic- 
tional decision  as  to  the  judicial  removal  of  the  qualifying  phraseology 
"arise  out  of  and  in  the  course  of  employment."  While  Segally  did  not 
formally  address  Evans  in  its  decision,  its  analysis  clearly  relied  on  a  pre- 
Evans  jurisdictional  test."  Similarly,  in  Ski  World,  Inc.  v.  Fife,^^  the  First 
District  Court  of  Appeals  explicitly  refused  to  apply  the  Evans  test  and 
chose  for  its  jurisdictional  analysis  the  x>^Q-Evans  test  set  forth  in  Skinner 
V.  Martin  J^  Thus,  with  Segally  and  Ski  World  standing  in  direct  conflict 
with  Evans,  a  situation  ripe  for  supreme  court  clarification  arose. 

2.     The  Indiana  Supreme  Court 

a)  Setting  the  stage. — Resolution  of  this  conflict  between  the  districts 

'Ud.  at  129. 

'°/<i.  at  130  (Conover,  J.,  concurring). 

''Id. 

'Ud. 

'Ud.  at  131. 

'M86  N.E.2d  578  (Ind.  Ct.  App.   1986). 

''Id.  at  580-83. 

'*489  N.E.2d  72  (Ind.  Ct.  App.   1986). 

^M55  N.E.2d  1168  (Ind.  Ct.  App.   1983). 


444  INDIANA  LAW  REVIEW  [Vol.  20:437 

came  with  the  Indiana  Supreme  Court's  acceptance  of  transfer  and  vaca- 
tion of  the  court  of  appeals'  decision  in  Evans  v.  Yankeetown  Dock 
CorpJ^  On  transfer,  the  supreme  court  addressed  three  issues:  (1)  whether 
the  quahfying  language  "arising  out  of  and  in  the  course  of  employment" 
was  necessary  to  jurisdictional  analysis;  (2)  what  was  the  appropriate  defini- 
tion of  the  term  "by  accident;"  and  (3)  whether  summary  judgment  was 
proper  under  the  facts  of  the  case.^^ 

The  analysis  of  these  issues  was  prefaced  by  the  court's  focus  on  broad 
public  policy  considerations  of  workmen's  compensation  in  general,  which 
serves  the  interest  of  the  injured  worker  by  providing  a  perhaps  more 
limited  compensation  in  return  for  a  guarantee  of  compensation  by 
avoiding  common  law  defenses /°  The  court  found  that  the  employer  and 
his  insurance  carrier  also  benefitted  by  relief  from  the  prospect  of  large 
damage  verdicts  and  a  guarantee  of  some  degree  of  certainty  in  planning 
for  anticipated  costs  of  employee  injuries /•  Finally,  the  court  postured 
itself  by  noting  that  the  duty  and  the  responsibility  to  determine  such 
public  policy  and  to  adopt  legislation  reflecting  these  public  policy  con- 
siderations are  those  of  the  legislature  and  that  the  courts  are  limited  to 
the  interpretation  of  ambiguous  statutes/^ 

b)  Clarifying  questions  of  jurisdiction.— With  fundamental  public 
policy  in  place,  the  Evans  court  quickly  decided  that  Indiana  Code  sec- 
tion 22-3-2-6  was  clear  and  unambiguous;  as  a  result,  the  court  was  pro- 
hibited from  construing  it."  Specifically,  the  court  focused  on  the  interplay 
of  Indiana  Code  section  22-3-2-6  with  other  portions  of  the  Workmen's 
Compensation  Act,  including  the  express  definition  of  injury  and  personal 
injury, ^^  and  found  this  interplay  to  be  clear,  unambiguous,  and  without 
need  of  judicial  construction/^ 

In  considering  the  court  of  appeals'  decision  in  Evans,  the  supreme 
court  noted  that  the  appellate  court  had  rejected  the  statutory  definition/^ 
Such  rejection  was  inappropriate,  given  the  unambiguous  nature  of  the 
statutes  relating  to  the  definition  of  accident  and  their  use  in  the  jurisdic- 
tion and  compensation  sections  of  the  Indiana  Workmen's  Compensation 
Act/^ 

To  clarify  Indiana  law,  the  supreme  court  reinstated  the  x>^Q-Evans 


'M91  N.E.2d  969  (Ind.   1986). 

''Id.  at  971. 

''Id. 

''Id. 

"Id. 

''Id.  at  972. 

*nND.  Code  §  22-3-6-l(c)  (1982). 

"Evans,  491  N.E.2d  at  973. 

"Id. 

'Ud. 


1987]  WORKMEN'S  COMPENSATION  445 

jurisdictional  test  originally  formulated  in  Skinner  v.  Martin .^^  Under  this 
test,  Indiana  Code  section  22-3-2-6  "excludes  all  rights  and  remedies  of 
an  employee  against  his  employer  for  personal  injury  or  death  if  the  follow- 
ing three  statutory  jurisdictional  prerequisites  are  met: 

A.  personal  injury  or  death  by  accident; 

B.  personal  injury  or  death  arising  out  of  employment; 

C.  personal  injury  or  death  arising  in  the  course  of  employ- 
ment."^' 

Any  action  for  employee  injury  or  death  that  does  not  meet  all  three 
prerequisites  is  not  within  the  jurisdiction  of  the  Industrial  Board  and 
therefore  may  be  brought  in  court/" 

c)  Looking  at  the  definition  of  accident.— Tmmng  to  the  definition 
of  accident,  the  Evans  court  consistently  reinforced  its  finding  that  Indiana 
Code  section  22-3-2-6  is  unambiguous.  To  the  court,  appHcation  of  the 
statutory  language  '*by  accident"  was  to  be  done  on  a  literal  basis  rather 
than  by  a  re-interpretation  of  the  language  which  necessitated  the  inser- 
tion of  the  article  "an"  before  the  word  "accident. "''  In  effect,  the 
supreme  court,  in  focusing  on  the  statutory  language,  redefined  accident 
without  the  finding  of  ambiguity  made  by  the  court  of  appeals.  As  a 
result,  the  statutory  terminology  "injury  or  death  by  accident,"  as  used 
under  Indiana's  Workmen's  Compensation  Act,  was  held  to  be  any  unex- 
pected injury  or  death,  and  previous  case  holdings  were  expressly  over- 
ruled to  the  extent  that  they  were  inconsistent  with  this  definition. ^^ 

Yet  the  supreme  court  carefully  circumscribed  the  boundaries  of  its 
decision  by  distinguishing  the  jurisdictional  issue  of  Evans  from  the  causa- 
tion issue  of  Calhoun  v.  Hillenbrand  Industries. ^^  To  clarify  this  distinc- 
tion, the  court  simply  noted  that  analysis  of  causation  issues  is  most  prop- 
erly addressed  under  the  portion  of  the  statute  dealing  with  the  term, 
"arising  out  of"  the  employment.^''  Accordingly,  the  Calhoun  decision 
remains  correct  as  it  relates  to  a  required  showing  of  the  causal  connec- 
tion between  injury  and  employment — that  is,  a  claimant  must  make 
more  than  a  mere  showing  that  he  was  working  for  the  employer  during 
the  period  in  which  the  disability  arose  in  order  to  establish  causation.'^ 
Implicitly,  by  such  reference  to  Calhoun,  the  supreme  court  steadfastly 
preserved  the  causation  requirement  for  compensabihty. 


''Id. 

''Id, 

''Id. 

''Id.  at  974. 

'Ud.  at  975. 

''269  Ind.  507,  381  N.E.2d  1242  (1978). 

'*Evans,A9\  N.E.2d  at  975. 

''Id. 


446  INDIANA  LAW  REVIEW  [Vol.  20:437 

Finally,  the  court  applied  its  interpretation  of  Indiana's  Workmen's 
Compensation  Act  to  the  case  at  bar.  Because  the  trial  court  had  cor- 
rectly found  that  Oscar  Evans  was  an  employee  and  that  he  suffered  death 
by  accident  that  arose  out  of  and  in  the  course  of  his  employment,'^  the 
exclusive  remedy  provisions  of  Indiana's  Workmen's  Compensation  Act 
barred  an  action  at  law  against  Evans'  employer. ''  Therefore  the  lower 
court's  grant  of  summary  judgment  in  favor  of  the  employer  was 
appropriate.'^ 

D.     Evans'  Effect  on  the  Practitioner 

Although  the  court  of  appeals  did  attempt  to  establish  a  new  jurisdic- 
tional test,  the  Evans  case  ultimately  served  to  affirm  a  jurisdictional  test 
already  in  place  and  in  use.  However,  in  this  reaffirmation,  the  supreme 
court  appeared  to  alter  radically  the  definition  of  accident.  But  on  closer 
analysis,  this  alteration  has  less  impact  on  practice  under  Indiana's 
Workmen's  Compensation  Act  than  would  appear  upon  an  initial  reading 
of  the  case. 

While  it  is  true  that  a  small  number  of  cases  will  be  affected  by  Evans' 
definitional  change,  a  practitioner,  in  all  likelihood,  would  have  resolved 
most  of  these  clear  accident  cases,  or  at  least  the  issue  of  accident,  prior 
to  a  hearing  before  the  Industrial  Board.  In  the  remaining  cases,  the  chang- 
ing of  the  definition  of  accident  will  place  more  importance  on  medical- 
legal  analysis.  Evans  requires  that  the  practitioner  pay  closer  attention 
to  the  claimant's  prior  medical  history  as  it  relates  to  the  issue  of  whether 
the  accident  was  unexpected  or  the  result  of  a  pre-existing  condition  and 
therefore  more  probably  expected.  A  gray  area  may  emerge  from  those 
cases  defended  on  the  basis  of  '*no  accident"  with  regard  to  the  expecta- 
tion of  injury.  Consequently,  further  clarification  will  undoubtedly  be 
forthcoming  as  this  approach  is  taken  and  collides  with  the  granting  of 
compensation  for  the  aggravation  of  pre-existing  injuries. 

Nevertheless,  the  Evans'  decision  greatly  clarifies  the  accident  issue; 
such  clarification  will  unquestionably  result  in  less  litigation  on  the  issue 
of  accident.  In  the  future,  the  practitioner's  emphasis  will  shift  to  the 
causal  connection  under  the  "arising  out  of  the  employment"  portion  of 
the  statute.  In  the  area  of  causation,  negligible  event  cases  such  as  City 
of  Anderson  v.  Borton,^^  Young  v.  Smalley's  Chicken  Villa, ^^  and 
Houchins  v.   /.   Pierpont's,^^   will  remain  good  law,   either  under  the 


''Id. 

''Id.  at  976. 

'Ud. 

"132  Ind.  App.  684,   178  N.E.2d  904  (1962). 

'"458  N.E.2d  686  (Ind.  Ct.  App.   1984). 

"469  N.E.2d  786  (Ind.  Ct.  App.   1984). 


1987]  WORKMEN'S  COMPENSATION  AAl 

approach  that  the  accident  was  expected  or,  alternatively,  that  the  situa- 
tion is  not  compensable  because  the  injury  did  not  "arise  out  of"  the 
employment  and  accordingly  fails  to  satisfy  the  proximate  causation  re- 
quirement of  the  Act.  Thus  the  practitioner  will,  for  the  most  part,  make 
the  same  analysis  under  a  different  section  of  the  Act  in  the  future. 

III.     Credits 
A.     The  Historical  Trilogy 

While  Indiana  Code  section  22-3-3- 10(a)  clearly  limits  disability 
payments  for  injuries  occurring  after  July  1,  1979,  to  fifty-two  weeks  of 
temporary  total  disability  benefits,^^  uncertainty  arose  in  terms  of  credits 
for  payments  under  Indiana  Code  section  22-3-3-23.*^  Historically,  the 
provision  appears  to  have  been  an  attempt  to  bar  an  employee  from 
benefits  to  which  he  was  entitled  under  Indiana's  Workmen's  Compensa- 
tion Act  if  the  injured  employee  received  benefits  under  a  group  disability 
policy.®'^ 

However,  in  United  Toolcraft  v.  Sousley,^^  the  Indiana  Court  of 
Appeals  held  that  acceptance  of  group  benefits,  which  were  paid  to  the 
employee  under  the  mistaken  belief  that  his  condition  had  resulted  from 
illness  and  not  injury  "arising  out  of  and  in  the  course"  of  his  employ- 
ment, did  not  bar  recovery  of  workmen's  compensation  benefits.  Rather 
the  Sousley  court,  by  noting  the  employee's  concession  that  the  employer 
was  properly  allowed  a  credit  against  the  workmen's  compensation  award 
for  payments  made  under  the  disability  poHcy,  implicitly  agreed  with  the 
crediting.*^ 

Following  Sousley,  the  law  of  payment  crediting  was  somewhat  con- 
fused due  to  conflicting  approaches  and  narrowly  drawn  exceptions.  In 
Inland  Steel  Co.  v.  Almodovar,^''  the  parties'  factual  stipulation  to  the 
single  hearing  member  clearly  indicated  that  both  a  credit  for  overpay- 
ment of  temporary  total  disability  benefits  and  a  credit  for  receipt  of  non- 
occupational group  insurance  benefits  would  be  allowed  to  the  employer. 


«^lND.  Code  §  22-3-3-10  (1982). 

«^IND.  Code  §  22-3-3-23(a)  (1982)  reads: 

Any  payments  made  by  the  employer  to  the  injured  employee  during  the  period 
of  his  disability,  or  to  his  dependents,  which  by  the  terms  of  Chapters  2  through 
6  were  not  due  and  payable  when  made,  may,  subject  to  the  approval  of  the 
industrial  board,  be  deducted  from  the  amount  to  be  paid  as  compensation. 
However,  the  deduction  shall  be  made  from  the  distal  end  of  the  period  during 
which  compensation  must  be  paid,  except  in  cases  of  temporary  disability. 

'*See  United  Toolcraft  v.  Sousley,   128  Ind.  App.   181,   147  N.E.2d  558  (1958). 

''Id. 

''Id.  at  188,   147  N.E.2d  at  562. 

'^72  Ind.  App.  556,  361  N.E.2d  181  (1977). 


448  INDIANA  LA  W  REVIEW  [Vol.  20:437 

On  review,  the  court  seemed  to  agree  that  the  claimant  should  not  be 
allowed  a  double  recovery  by  retaining  both  the  non-occupational  disability 
benefits  and  the  workmen's  compensation  benefits/*  Yet  the  Almodovar 
court  subsequently  ruled  that  the  Industrial  Board  did  not  have  jurisdic- 
tion to  make  such  a  crediting  determination  because  insufficient  facts  to 
estabhsh  jurisdiction  were  presented  in  the  record/' 

Of  apparent  concern  to  the  Almodovar  court  was  the  need  for  some 
type  of  plaintiff  indemnification  in  the  event  that  a  non-occupational  car- 
rier was  involved  and  sought  recovery  from  the  plaintiff  for  funds  paid 
erroneously  under  the  belief  that  the  incident  was  non- work-related/"  Con- 
sequently, the  court  of  appeals  established  an  implied  rule  that  if  the 
employer,  and  not  some  insurance  company,  paid  the  "non-occupational" 
benefit  to  the  plaintiff  pursuant  to  a  contract  that  gave  the  employer  a 
right  to  deduct  such  payments  from  its  liability  to  the  plaintiff  for  the 
compensation  award  of  the  Industrial  Board,  then  the  Industrial  Board 
would  have  jurisdiction  to  make  an  appropriate  award  for  such  credits/' 
However,  if  the  benefits  were  paid  by  an  insurance  company,  which  was 
not  the  employer's  compensation  carrier,  the  Industrial  Board  had  no 
jurisdiction  to  attempt  to  adjudicate  the  plaintiff's  Hability  or  non-liability 
to  such  insurer/^ 

Although  the  Indiana  Supreme  Court  denied  transfer  in  Almodovar, 
Justice  Pivarnik  dissented  from  this  denial  and  Justice  Prentiss  concurred 
with  the  dissent."  The  dissent  noted  that  the  majority,  in  failing  to  grant 
transfer,  supported  the  lower  court's  failure  to  state  the  grounds  for  its 
denial  of  credits  for  the  money  expended  for  hospital  and  medical  costs/'* 
In  addition,  the  dissent  found  the  stipulations  entered  into  by  the  parties 
at  the  beginning  of  the  hearing  to  be  anything  but  ambiguous/^  In  this 
regard.  Justice  Pivarnik  noted  that  both  parties  stipulated  to  the  amounts 
paid  and  further  stipulated  that  Inland  was  to  receive  full  credit  for  the 
amounts  paid  in  the  event  that  there  was  a  workmen's  compensation  award 
in  favor  of  the  petitioner/^ 

The  decision  in  Freel  v.  Foster  Forbes  Glass  Co,^^  completes  this 
historical  trilogy.  In  Freel,  the  surviving  dependents  of  the  disabled 
employee  appealed  an  Industrial  Board  award  of  temporary  total  disability 


''Id.  at  566-67,  361  N.E.2d  at  188. 
''Id.  at  567,  361  N.E.2d  at  188. 
''Id. 
''Id. 
'Ud. 

"Inland  Steel  Co.  v.  Almodovar,  266  Ind.  638,  366  N.E.2d  169  (1977)  (Pivarnik, 
J.  dissenting). 

''Id.  at  639,  366  N.E.2d  at  170. 

''Id. 

''Id. 

"449  N.E.2d  1148  (Ind.  Ct.  App.   1983). 


1987]  WORKMEN'S  COMPENSATION  449 

benefits  made  subject  to  a  credit  equaling  amounts  paid  by  the  employer 
under  a  wage  continuation  plan.'^  The  wage  continuation  plan  in  Freel 
was  not  a  part  of  a  union  contract  and  was  silent  as  to  the  interplay 
with  benefits  available  to  injured  employees  under  workmen's  compensa- 
tion.''  The  employer  was  self-insured  for  Workmen's  Compensation  Act 
benefits  as  well  as  for  sickness  and  accident  benefits. '°°  The  Freel  court, 
in  its  analysis,  noted  the  absence  of  authority  for  the  proposition  that 
a  contract  that  provides  benefits  to  an  employee  on  some  basis  other  than 
workmen's  compensation  should  specifically  provide  for  credits  to  the 
workmen's  compensation  carrier  before  the  same  may  be  applied.'"' 

In  addition,  the  court  of  appeals  focused  on  the  purposes  of  Indiana's 
Workmen's  Compensation  Act,  which  it  saw  as  the  avoidance  of  litiga- 
tion and  the  placement  of  the  burden  of  caring  for  the  injured  employee 
upon  the  industry  employing  the  employee  and  the  consumers  of  that  in- 
dustry's products.'"^  The  court  reasoned  that  if  a  credit  was  not  available, 
the  employee  would  recover  twice  for  the  same  injury;  in  addition,  the 
injured  employee  would  receive  more  money  for  the  period  of  disability 
than  he  would  have  been  able  to  earn  had  there  been  no  injury.'"  To 
the  Freel  court,  such  a  potential  situation  was  totally  inconsistent  with 
the  purposes  of  Indiana's  Workmen's  Compensation  Act.'"''  Moreover, 
the  court  of  appeals  opined  that  any  employer  who  voluntarily  paid  an 
employee  in  his  time  of  need  should  not  be  penalized  by  the  denial  of 
a  full  credit  against  any  workmen's  compensation  award  for  such  payments 
—  any  ruling  to  the  contrary  would  inevitably  cause  employers  to  be  less 
generous.'"^ 

B.  Changes  in  Crediting 

It  was  against  this  historical  backdrop  that  two  Indiana  cases  dealing 
with  credits  occurred.  In  Jones  &  Laughlin  Steel  Corp.  v.  Kilburne,^^^ 
the  court  of  appeals  addressed  the  issue  of  whether  amounts  paid  pur- 
suant to  a  union-established  permanent  disability  pension  plan  should  be 
set-off  against  workmen's  compensation  awards.  While  the  pension  plan 
in  Kilburne  was  funded  entirely  by  the  employer,  the  court  found  that 
it  was  a  separately  bargained  employment  benefit  which  was  designed  to 
supplement  workmen's  compensation  and  that  pension  benefits  paid  in 


'Ud.  at  1149. 
"/cf.  at  1149-50. 
'°°/J.  at  1150. 
'"'M  at  1151. 
'''Id. 
'''Id. 
'''Id. 
"'Id. 
"'All  N.E.2d  345  (Ind.  Ct.  App.   1985). 


450  INDIANA  LAW  REVIEW  [Vol.  20:437 

fulfillment  of  this  plan  were  separate  and  apart  from  workmen's  com- 
pensation awards.'"^  As  a  result,  the  Kilburne  court  approved  of  the 
Industrial  Board's  refusal  to  deduct  the  pension  plan  benefits  from  its 
award. '°^ 

Of  particular  import  to  the  Kilburne  decision  was  the  pension  plan's 
contractual  language  addressing  deductions  for  the  payment  of  workmen's 
compensation.'"^  Also  contained  within  this  portion  of  the  pension  plan 
was  an  exemption  for  payments  received  by  participants  for  a  permanent 
incapacity  retirement  occurring  prior  to  age  65;  the  exemption  prohibited 
the  crediting  of  payments  against  a  compensation  award.' '°  Finally,  the 
Kilburne  court  dispelled  the  notion  of  ''double  recovery"  involved  in  this 
particular  factual  situation  by  indicating  that  the  claimant  would  not  receive 
payments  greater  than  his  regular  salary  if  he  received  both  workmen's 
compensation  and  pension  benefits.''' 

In  the  second  crediting  case  in  the  survey  period,  Indiana  State 
Highway  Department  v.  Robertson, ^^^  the  claimant  demonstrated  a  novel 
approach  to  Indiana  Code  section  22-3-3-23.  In  Robertson,  the  employee 
sought  to  avoid  the  Workmen's  Compensation  Act's  exclusive  remedy  pro- 
vision in  an  action  against  her  employer,  the  State  Highway  Department; 
the  action  was  premised  on  allegations  of  negligent  design,  construction, 
and  maintenance  of  an  intersection  where  the  employee  was  injured."^ 
Although  the  trial  court  denied  the  defendant-employer's  motion  for  sum- 
mary judgment  based  upon  workmen's  compensation's  exclusive  remedy 
provisions,  the  Indiana  Court  of  Appeals  found  the  plaintiff's  injury  to 
be  a  compensable  work-related  accident  and,  therefore,  any  action  at  law 
was  barred  by  the  exclusive  remedy  provisions.'"* 

In  attempting  to  persuade  the  appellate  court,  the  plaintiff  argued 
that  the  State  Highway  Department  should  be  subject  to  suit  based  upon 
a  dual  capacity  theory."^  Alternatively,  the  plaintiff  contended  that  the 
exclusivity  provision  of  Indiana's  Workmen's  Compensation  Act  was  in- 
applicable because  the  employee  received  wage  compensation  as  a  merit 
employee  for  disabilities  from  injuries  occurring  while  on  the  job  under 
a  provision  of  the  Indiana  Administrative  Code,  rather  than  under  the 
provisions  of  the  Workmen's  Compensation  Act."^ 


°Ud.  at  349. 

"Id.  at  348. 

"'Id. 

''Id. 

''Id. 

'H82  N.E.2d  495  (Ind.  Ct.  App.   1985). 

"Id.  at  496. 

''Id.  at  498. 

"Id.  at  497. 

''Id. 


1987]  WORKMEN'S  COMPENSATION  451 

In  overturning  the  lower  court's  denial  of  summary  judgment,  the 
Robertson  court  noted  that  under  31  Indiana  Administrative  Code  2-11-5, 
the  state  provided  the  employee  full  pay  for  lost  time  as  opposed  to  tem- 
porary total  disability  benefits  of  66V3^q  of  statutory  wages  as  provided 
under  Indiana's  Workmen's  Compensation  Act."^  In  addition,  the  court 
found  that  payments  under  the  administrative  code  provision  were  '*not 
due  and  payable  when  made"  and  would  therefore  not  operate  to  remove 
the  matter  from  the  Act  or  its  exclusive  remedy  provisions  because  removal 
would  render  Indiana  Code  section  22-3-3-23(a)  a  nullity."*  Finally,  the 
Robertson  court  found  support  for  crediting  payments  made  against 
workmen's  compensation  awards  under  the  terms  of  31  Indiana  Adminis- 
trative Code  2-11-5  itself,  which  provides  for  a  credit  offset  of  funds  paid 
under  it  when  an  employee  also  seeks  temporary  total  disabihty  compen- 
sation during  the  single  year  of  applicability."^ 

C.     Meaning  for  the  Practitioner 

While  the  area  of  crediting  remains  somewhat  unclear,  several  general 
rules  for  the  application  of  Indiana  Code  section  22-3-3-23  can  be  gleaned 
from  the  above  cases.  These  rules  are: 

(1)  while  it  appears  that  a  contractual  agreement  giving  rise  to 
such  credit  is  most  helpful  to  the  employer  seeking  to  enforce 
a  credit,  such  agreement  is  really  not  necessary; 

(2)  if  payments  for  workmen's  compensation  are  made  directly 
from  the  employer  or  from  the  employer's  insurer,  it  appears 
that  the  credit  will  be  granted; 

(3)  a  troublesome  area  arises  where  there  may  be  a  subrogation 
or  lien  claim  against  the  employee  for  repayment  of  funds  by 
the  insurance  carrier  or  entity  making  medical  or  disability 
payments; 

(4)  where  a  pension  plan  or  other  benefits  are  bargained  for  as 
a  part  of  negotiations  in  a  union  contract,  payments  made 
under  such  plans  will  not  be  allowed  as  a  credit  against  a 
workmen's  compensation  award  in  the  absence  of  specific  con- 
tractual provisions  granting  credits;  and 

(5)  excess  payments  amounting  to  more  than  the  employee's  nor- 
mal wages  apparently  provide  strong  grounds  for  allowing  a 
credit,  although  a  failure  to  exceed  wages  does  not  necessarily 
result  in  a  denial  of  credits. 

"Vflf.  at  498. 


452  INDIANA  LAW  REVIEW  [Vol.  20:437 

These  guidelines  appear  to  arise  from  public  concern  over  the  possibility 
of  an  employee  being  subject  to  subrogation  actions  by  non- workmen's 
compensation  insurance  carriers  or  other  entities  providing  such  funds  and 
competing  public  poHcy  against  double  recovery  by  the  claimant.  Crediting 
is  also  an  area  where  further  judicial  interpretation  is  expected.