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COA: Bank that sold property to itself entitled to summary judgment

October 11, 2017

A northern Indiana bank that took deed of a property in lieu of foreclosure and sold the property to itself was entitled to summary judgment on the owner’s claims of fraud and breach of agreement, the Indiana Court of Appeals ruled Wednesday after finding those claims were “wholly without merit.”

In Bobick’s Pro Shop, Inc. v. 1st Source Bank, 71A04-1703-CT-655, Bobick’s Pro Shop Inc. was in debt to 1st Source Bank and Donna J. Bobick on two separate mortgages, with the overall debt totaling roughly $300,000. In a 2009 Agreement for Deed in Lieu of Foreclosure, 1st Source and Bobick each agreed to a settlement that conveyed all of BPS’ rights, title and interest to its St. Joseph County property to 1st Source.

The agreement also gave 1st Source “sole and absolute” discretion to “dispose of the property” in a manner it saw fit, as long as the proceeds from the sale or disposal of the property were used to satisfy the amount payable to the bank. Once that amount was paid in full, the agreement called for 90 percent of any remaining proceeds to be applied to obligations of Donna Bobick, and 80 percent of any remaining funds after that to be distributed BPS. All other funds would be distributed to 1st Source.

After failing to receive an acceptable offer to purchase the property, 1st Source sold the property to itself for $2.9 million, but the proceeds of that sale were “insufficient to result in a distribution to BPS.” Regardless, BPS filed suited against 1st Source, alleging the sale of the property to itself was a breach of the agreement and was an act of criminal fraud.

Both parties filed cross-motions for summary judgment, which the St. Joseph Superior Court awarded to 1st Source. The Indiana Court of Appeals affirmed that decision in a Wednesday opinion, with Judge Edward Najam writing BPS’ claims were “wholly without merit and contrary to the plain language of the agreement.”

“(T)he Agreement expressly authorized 1st Source to ‘dispose of the Property in such manner…and at such time as (1st Source) determines in its sole and absolute discretion,’” Najam wrote. “Those terms are unambiguous and in no way ‘limited’ 1st Source’s discretion in how to dispose of the property.”

The appellate judge then rejected BPS’ claim that the “fundamental purpose” of the agreement was to provide a mechanism to share “excess value” in the property. Rather, “the fundamental purpose of the Agreement was to settle a legal dispute between the parties by giving 1st Source exclusive control over disposition of the real estate and releasing BPS from its mortgage obligations. BPS received the benefit of its bargain.”

“1st Source made a business decision that it was authorized to make under the Agreement, and in so doing 1st Source also suffered a loss, at least in the foreseeable future,” Najam wrote.

In a footnote, the appellate court also rejected the notion that the use of the phrase “dispose of” required a transaction with a third party. Thus, the appellate court found 1st Source was entitled to summary judgment on both the breach of agreement and criminal fraud claims.

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