Indiana Supreme Court Nixes Summary Judgment on Alleged Fraudulent Nature of "Out of Trust" Sales
In Klinker v. First Merchants Bank, N.A., 964 N.E.2d 190 (Ind. 2012), the Indiana Supreme Court, by unanimous decision, reversed the trial court's grant of summary judgment in favor of a floor-plan lender respecting the defendant's alleged sale of certain vehicles "out of trust" under both criminal and bank fraud statutes.
The facts of Klinker are relatively straight forward and in times of economic down turn, more frequent. Merchants Bank, N.A. (the "Bank") provided purchase money inventory financing to Trucks Unlimited, Inc., a used car dealership. The Bank took a security interest in the vehicle inventory although allowing the dealership to retain control of the vehicle titles. The terms of the underlying loan agreement required the dealership to repay the amount of the purchase money advanced by the Bank upon the sale of the financed vehicle. After discovering that the dealership had sold certain of the Bank's vehicle collateral without remitting the proceeds to the Bank (i.e. out of trust), the Bank bought suit against the dealership (and Klinker as a guarantor) under a variety of actions including criminal fraud and bank fraud. The Bank also sought recovery of treble damages and its attorney's fees under Indiana's Crime Victims Compensation Act (I.C. § 34-24-3-1). The trial court granted the Bank's Motion for Summary Judgment including an award of treble damages and attorney's fees based on a showing of three out of eight generally recognized badges of fraud. The decision was affirmed on appeal.
The Indiana Supreme Court reversed the decisions of both the trial and appeals courts noting that there was no finding by the trial court that the defendant "acted with the requisite mens rae--the specific intent to defraud...Thus, summary judgment is proper only if the undisputed facts show that, when the [debtor] made the challenged transfers, his objective was to cause injury or loss to [the second creditor] by deceit ." Id. at 194 (emphasis supplied). The Supreme Court determined that three badges of fraud were in and of themselves insufficient to satisfy a circumstantial burden of proof in absence of an admission by the defendant.
Dealing an almost death knell for seeking a favorable disposition of fraud based claims on summary judgment, the Supreme Court stated that "summary judgment is almost never appropriate where the claim requires a showing that the defendant acted with criminal intent or fraudulent intent." For similar reasons, the Court also found that the Bank failed to show facts necessary for a determination that the dealership committed fraud on a financial institution which requires, among other elements, proof of the defendant's knowing execution (or attempted execution) of a scheme to attain money or other property by fraudulent pretenses. While noting the differences between an act of knowing under the bank fraud statute compared to the specific intent necessary under the general criminal fraud statute, the Supreme Court found that the Bank had not proven the requisitemens rae to defraud under the provision of this statute as well. To underscore the futility of prosecuting an action under the bank fraud statute based on out of trust sales, the Court further notes that this statute requires that the alleged fraudulent activity be committed at the time the loan documents were executed , not on conduct occurring after the loans were made.
From this point forward and irrespective of the number of badges of fraud the plaintiff may be able to establish, the determination of whether or not a defendant committed fraud such as to entitle the plaintiff to relief under the Crime Victims Compensation Act or otherwise on the alleged fraudulent activity will necessarily require a trial before a judge or jury absent an admission or confession of guilt.