Opinion ID: 852525
Heading Depth: 2
Heading Rank: 3

Heading: Involuntary Assignment of Perkins's Claim Against State Farm

Text: The majority holds that the trial court's order requiring Perkins's forced assignment of his chose in action against State Farm was error. The majority seems to base this holding on (1) the fact that the assignment was involuntary and (2) that the assignment violated the direct action rule. In my view, it is of no consequence that the assignment was over Perkins's objection. Also, I do not believe that this assignment implicates the direct action rule.
The majority states that it was error for the trial court to force Perkins to assign his claim against State Farm but that Perkins could voluntarily assign this claim. For the following reasons, I disagree. Trial Rule 69(E) allows the proceedings supplemental court to apply the debtor's nonexempt property to satisfaction of a judgment. Similarly, Indiana Code section 34-55-8-7 allows the proceedings supplemental court to order any property, income, or profits of the judgment debtor . . . to be applied to the satisfaction of the judgment. The proceedings supplemental court can enforce its orders by attachment or otherwise. Id. The court is also authorized by statute to forbid transfers of property and choses in action by the judgment debtor, thereby preventing the judgment debtor from engaging in fraudulent transfers and unfairly remaining judgment-proof. Id. Finally, section 34-55-8-7 grants the proceedings supplemental court continuing jurisdiction over a judgment debtor's future income, profits, and assets. Id. Any of these methods can produce an assignment that is done intentionally even if it is done in compliance with a court order and is not cheerfully or willingly done. Neither Trial Rule 69(E) nor the statute expressly authorizes a proceedings supplemental court to order a judgment debtor to execute an assignment of the debtor's potential causes of action against third parties. But the purpose of proceedings supplemental is to discover property and reach assets that the judgment debtor has failed or refused to apply in payment of a judgment and which cannot be reached by an ordinary execution. Union Bank & Trust Co. v. Vandervoort, 122 Ind.App. 258, 264, 101 N.E.2d 724, 727 (1951). Judgment debtors ordinarily appear in a proceedings supplemental court precisely because they have not voluntarily paid their creditors and will pay, if at all, only if compelled by the court. Accordingly, although the power to compel assignment is not spelled out in so many words in the relevant statutes, the powers that are explicit and the purpose of proceedings supplemental make clear that, just as other assets may be compelled to be transferred, a proceedings supplemental court has the power to compel a judgment debtor to assign the debtor's potential causes of action against third parties. Thus, in my view, the assignment ordered by the proceedings supplemental court was appropriate even though it was over Perkins's objection. An assignment of a bad faith claim ordinarily arises in the context of a judgment in excess of policy limits. Insureds not infrequently enter into voluntary assignments of potential bad faith claims against their insurers incident to settling the claims against them. The unusual feature of this case is that the insured professes satisfaction with his insurer's performance. If that is found to be correct, of course, the insurer will prevail in defending the bad faith claim. But I do not think that permitting an involuntary assignment is likely to be a source of frequent litigation as the majority believes. In order to be worth spending the effort to pursue such a claim, even on a contingent fee, a bad faith claim must have some merit. Therefore, I do not share the majority's concern that permitting involuntary assignment will be frequently invoked or costly. The issue presented by an involuntary assignment is whether Perkins or the Estate gets to evaluate the merits of the claim and decide whether to pursue it. For the reasons explained above, I see no basis in conventional legal doctrine to prohibit an involuntary assignment. But if involuntary assignments are prohibited, the effect is to give Perkins the ability to control the claim. I think it virtually certain that most insureds who are willing to deny any validity to a bad faith claim will be judgment-proof. The insured who has nothing to lose may not be the most objective evaluator of the potential claim. He may be disinclined to pursue the claim because any recovery will inure to the benefit of the injured party to satisfy the judgment. He may even be motivated by animosity towards the injured party and also may decide not to pursue it because continued litigation could be an annoyance to him with no potential net reward. For all these reasons, the insured should not be able to defeat such a claim by disavowing it any more than he can destroy any other asset to preclude the injured party from levying on it to satisfy the judgment. And I see nothing in existing rules of law that should prevent the injured party (in this case the Estate) from attempting to prove its case if it believes the claim is worth pursuing. It seems an uphill battle in the face of Perkins's avowed satisfaction with his insurer's performance, but I see no reason to deny the Estate the ability to form its own judgment on that issue. Because I believe the trial court ruled correctly in ordering assignment of Perkins's claims against State Farm, I must address an additional argument against the assignment raised by State Farm but not addressed by the majority. State Farm argues that Perkins's potential bad faith claim is not property within the meaning of Trial Rule 69(E) and Indiana Code section 34-55-8-7 because it is a contingent and unliquidated claim for damages in tort. I agree that Perkins's potential claim is contingent and unliquidated. There has been no judicial finding of bad faith, fraud, or breach of contract, and Perkins may be correct in his view that there is no merit to these claims. I disagree, however, that because Perkins's potential claim is unliquidated and contingent, it is not property within the meaning of Indiana's statutory provisions governing proceedings supplemental to execution. Several forms of choses in action have been found to be property subject to proceedings supplemental. Most have been less speculative than an unliquidated tort claim. See, e.g., Burkett v. Bowen, 118 Ind. 379, 380-81, 21 N.E. 38, 38-39 (1889) (holding that promissory notes and mortgage owing to a judgment debtor and in the hands of a third party can be reached in proceedings supplemental); Fowler v. Griffin, 83 Ind. 297, 299 (1882) (holding that funds and choses in action of the judgment debtor, in the hands of third parties, can be reached in proceedings supplemental); Butler v. Jaffray, 12 Ind. 504 (1859) (holding that promissory notes payable to judgment debtors and fraudulently transferred to a third-party trustee can be reached in proceedings supplemental). A judgment creditor can seek to attach whatever property a judgment debtor has. This principle is subject only to the exemption laws and is not limited to liquidated claims. A chose in action is the right to receive or recover a debt, demand, or damages on a cause of action ex contractu or for tort or omission of a duty. Picadilly, 582 N.E.2d at 339 n. 1 (quoting Black's Law Dictionary 219 (5th ed.1979)). As such, it is an asset that may have value, however speculative. Moreover, there is specific authority for the proposition that a debtor's contingent and unliquidated cause of action against a third party is property that can be reached in a proceeding supplemental under Indiana law. In In re Great Lakes Steel & Fabricating Industries, Inc., 83 B.R. 1015 (Bankr.N.D.Ind. 1988), a judgment debtor had a pending counterclaim against a third party. In a state court proceeding supplemental, the judgment creditor had been allowed to attach the unliquidated and contingent counterclaim. Id. at 1017. The judgment debtor subsequently filed for bankruptcy, and the bankruptcy court upheld the validity of the proceeding supplemental attachment order, thereby giving the judgment creditor the benefit of the contingent claim at the expense of other creditors of the judgment debtor. Id. at 1021. Notwithstanding the fact that the judgment debtor's counterclaim against the third party was contingent and unliquidated, the claim was the proper subject of a proceeding supplemental attachment order. Id. The bankruptcy court found that to hold otherwise would permit a judgment debtor to keep its choses in action judgment-proof until the claim was settled or tried and would render nugatory the continuing jurisdictional control given the proceeding supplemental court by Indiana Code section 34-55-8-7. Id. at 1022. The bankruptcy court also agreed that future interests incapable of reasonable evaluation have not been subject to prejudgment attachment. This is consistent with the general view that claims for unliquidated damages cannot be reached by attachment or garnishment process before the party seeking attachment or garnishment has obtained a judgment against the obligee. 6 Am.Jur.2d Attachment & Garnishment § 127 (2004). But the greater protection provided a defendant in prejudgment proceedings is not necessary in proceedings supplemental where the judgment creditor's claim has already been adjudicated. Id. [14] I find the reasoning of the bankruptcy court in Great Lakes persuasive. I also note that decisions from other jurisdictions are consistent with my reading of the Indiana statute permitting judgment creditors to attach property. [15] Accordingly, I believe that property in Trial Rule 69(E) and Indiana Code chapter 34-55-8 includes a judgment debtor's contingent and unliquidated tort actions.
The majority concludes that an involuntary assignment of claims against carriers whose insureds do not believe they have been wronged by their insurance companies was inconsistent with the direct action rule. For the following reasons, I disagree. Indiana Law recognizes that an insured may assert a claim against an insurer for breach of the duty of good faith. USA Life One Ins. Co. v. Nuckolls, 682 N.E.2d 534, 541 (Ind.1997); Erie Ins. Co. v. Hickman by Smith, 622 N.E.2d 515, 519 (Ind. 1993). Indiana courts have also acknowledged causes of action brought by insureds for their insurers' failure to defend them from liability in the third-party context. See, e.g., Gooch v. State Farm Mut. Auto. Ins. Co., 712 N.E.2d 38 (Ind.Ct.App.1999), trans. denied; Dimitroff v. State Farm Mut. Auto. Ins. Co., 647 N.E.2d 339, 341 (Ind.Ct.App.1995). The Court of Appeals has explicitly refused, however, to recognize any bad faith action brought by a third-party claimant directly against the tortfeasor's insurer. Menefee v. Schurr, 751 N.E.2d 757, 761 (Ind.Ct.App.2001), trans. denied; Dimitroff, 647 N.E.2d at 342; Eichler v. Scott Pools, Inc., 513 N.E.2d 665, 667-68 (Ind.Ct.App.1987). Courts applying this so-called direct action rule have reasoned that insurance companies do not have a special relationship giving rise to a duty of good faith to an injured third party/judgment creditor. See Menefee, 751 N.E.2d at 760; Bennett v. Slater, 154 Ind.App. 67, 73-74, 289 N.E.2d 144, 148 (1972). Similarly, courts do not view an injured party as a third-party beneficiary of the tortfeasor's contract with the insurer. See, e.g., Hartman v. United Heritage Prop. & Cas. Co., 141 Idaho 193, 108 P.3d 340, 346 (Idaho 2005) (noting that the basis of the prohibition on direct actions is that the person allegedly injured by the insured is not a party to the insurance contract and has no rights under it); State Farm Mut. Auto. Ins. Co. v. Allen, 744 S.W.2d 782, 785-86 (Mo.1988); Schmalfeldt v. N. Pointe Ins. Co., 252 Mich.App. 556, 652 N.W.2d 683, 687 (Mich. Ct.App.2002) (stating that the insured contract benefits the insured and the injured plaintiff was merely an incidental beneficiary of the contract who was not entitled to enforce the contract against the insurer). The majority holds that the forced assignment violates the direct action rule by permitting the Estate, as a third party, to sue Perkins's insurer. I do not agree that the assignment implicates the direct action rule. The direct action rule is nothing more than an application of standard third-party beneficiary doctrines under contract law and a rejection of any special relationship between the insurer and a victim of the insured. To the extent policy considerations underlie the direct action rule, the concern is that permitting the insurer to be made (or to make itself) a party to the dispute between the insured alleged tortfeasor and an injured party may unfairly expose to the jury the deep pocket of the insurer in an action where the conduct of the insured is the issue. Allstate Ins. Co. v. Keltner, 842 N.E.2d 879, 884 (Ind.Ct. App.2006); Rausch v. Reinhold, 716 N.E.2d 993, 1002 (Ind.Ct.App.1999). This concern is not presented by a claim of bad faith refusal to pay claims because in that case the conduct of the insurer itself is in issue and the insurer is properly before the court. The assignee of an insured's bad faith claim against the insurer does not bring an independent claim or seek recognition of a duty of good faith running from the insurer to the assignee. Nor does the assignee claim to be a third-party beneficiary of the contract. Rather, the assignee merely stands in the insured's shoes and enforces the insured's claims against the insurer. See Pettit v. Pettit, 626 N.E.2d 444, 447 (Ind.1993). Accordingly, I do not agree that the assignment in this case authorized the Estate to bring an independent action asserting the right of a third party against State Farm. The Estate merely seeks to enforce whatever rights or claims State Farm's first-party insured could have brought. I do not express any view as to the merit of such claims but believe that to the extent Perkins had a claim, it was validly assigned to the Estate. Finally, I believe the majority is mistaken in its concern that permitting involuntary assignments will result in widespread use of that technique. Most insureds cheerfully assign bad faith claims to settle with a plaintiff who obtains a judgment in excess of policy limits. In the rare case where that does not occur, the plaintiff/judgment creditor must evaluate the risks and potential rewards of pursuing a bad faith claim on behalf of an insured when the insured professes satisfaction with the insurer's performance. The practical barriers to such a claim will deter many if not most such claims. I would permit the Estate to take its chances. DICKSON, J., joins.