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Full text of "Indiana Law Review"

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 



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

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

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Indiana Law Review 

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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. 





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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 determ