Opinion ID: 801993
Heading Depth: 3
Heading Rank: 2

Heading: Investors’ Conversion Claim

Text: Indiana’s criminal conversion statute states that “[a] person who knowingly or intentionally exerts unauthorized control over property of another person commits criminal conversion . . . .” IND. C ODE § 35-43-4-3(a). Indiana law permits a plaintiff to bring a civil conversion claim under its criminal conversion statute. See IND. C ODE § 34-24-3-1 (“If a person . . . suffers a pecuniary loss as a result of a violation of IC 35-43 . . . , the person may bring a civil action against the person who caused the loss . . . .”). To prevail on their civil conversion claim, the Investors must prove the elements of the criminal conversion claim by a preponderance of the evidence. See SJS Refractory Co., LLC v. Empire Refractory Sales, Inc., 952 N.E.2d 758, 766 (Ind. Ct. App. 2011). In particular, they must prove that Morgan Stanley knowingly or intentionally exerted unauthorized control over their property, and that they suffered pecuniary loss as a result of this unauthorized control. The Investors claim when Morgan Stanley allowed Okun to apply the balance of the escrow accounts against the purchase price of the loan, it committed conversion. They contend that Morgan Stanley knew, by virtue of its participation in drafting and executing the loan documents, that the Investors retained an interest in those 20 No. 11-2891 accounts. Morgan Stanley, they maintain, held the funds in those accounts as a fiduciary for them. In their view, it had no right to offset the loan’s purchase price with those funds, and it knowingly exercised unauthorized control when it did so. Morgan Stanley counters, first, that the Investors are raising their breach of fiduciary duty argument for the first time on appeal and, thus, have waived it. Second, it argues that the fiduciary duty analysis on which the Investors rely does not apply in the context of the mortgage transaction. Finally, it challenges that the Investors have failed to prove that it knowingly lacked authorization to offset the purchase price with the escrow funds.
During the proceedings below, the Investors based their conversion claim on the fact that Lara Coleman, not Okun, signed the Borrowers’ Escrow Instructions when she lacked authorization to do so. They argued that Morgan Stanley required Borrowers’ Escrow Instructions to allow Okun to use the escrow funds to pay for the loan, and, accordingly, that Morgan Stanley knowingly prompted unauthorized control over the fund and caused their pecuniary loss. The argument below does not frame Morgan Stanley’s conduct as a breach of fiduciary duty, so we find the argument waived. See Puffer v. Allstate Ins. Co., 675 F.3d 709, 718 (7th Cir. 2012) (“It is a well-established rule that arguments not raised to the district court are waived on appeal.”). No. 11-2891 21
Assuming arguendo that the Investors preserved their breach of fiduciary duty claim, however, their argument fails. The Investors suggest that Morgan Stanley was not authorized to “net” the escrow funds against the loan’s purchase price and that it knew it was not authorized to do so. They predicate their argument on Morgan Stanley’s purported fiduciary duty to them, suggesting that Morgan Stanley could disburse the funds only in their interest and with their explicit permission. First, IPA Lender, if anyone, exercised unauthorized control over the funds in the escrow accounts. Yet, were this not the case, the Investors cannot establish a fiduciary relationship between themselves and Morgan Stanley. Under Indiana law, a “mortgagor/mortgagee relationship[] . . . do[es] not transform a traditional debtor-creditor relationship into a fiduciary relationship absent an intent by the parties to do so.” Paul v. Home Bank SB, 953 N.E.2d 497, 504 (Ind. Ct. App. 2011) (quoting Wilson v. Lincoln Fed. Sav. Bank, 790 N.E.2d 1042, 1046-47 (Ind. Ct. App. 2003)). Section 6.1 of the Mortgage expressly disavows such a relationship, stating, The relationship between [the Investors] and [Morgan Stanley] is solely that of debtor and creditor, and [Morgan Stanley] has no fiduciary or other special relationship with [the Investors], and no term or condition of any of the Note, this Security Instrument, and the Other Security Documents shall be construed so as to deem the relationship between [the Investors] and [Morgan Stanley] to be other than that of debtor and creditor. 22 No. 11-2891 Per the express terms of their agreement, the Investors cannot demonstrate that Morgan Stanley owed them any fiduciary duty. See id. (“Absent special circumstances, a lender does not owe a fiduciary duty to a borrower.”). Morgan Stanley enjoyed an independent security interest in the escrow accounts and did not hold the funds as a fiduciary for them. Consequently, they cannot prove that Morgan Stanley exercised unauthorized control of the accounts on this basis. Notably, Section 3.4 of the RSA further undermines the Investors’ unauthorized control argument. In that section, the Investors represented that “[they] underst[ood] and agree[d] that, in connection with any sale of the Loan pursuant to Section 18.1 of the Security Instrument, all of [Morgan Stanley’s] interest in the Reserves and the Reserve Escrow Accounts will be assigned to the transferee of the Loan.” Simply put, the Investors gave Morgan Stanley express permission to assign its interest in the escrow accounts to whoever purchased the loan, and they imposed no restrictions on the means by which it structured that assignment—applying the total in the funds against the purchase price of the loan is not prohibited under the RSA, particularly given that commingling funds was permitted under its terms. At best, the Investors may argue that Morgan Stanley was not authorized to assign the funds to Okun or his entities because he was the manager of IPA Fund Manager, which was forbidden from holding an ownership interest in the twenty limited liability companies for whom it acted. See supra Part I.A.1. Yet, regardless of No. 11-2891 23 whether the Investors’ Consent and LLC Amendments precluded Okun, in his individual capacity or through different entities, from taking a putative ownership interest in the Investors’ companies by holding their loan, Morgan Stanley was not a party to either of those contracts. Therefore, Morgan Stanley did not commit any unauthorized control by assigning its interest in the funds to the Okun-controlled entity, IPA Lender. Because the Investors cannot prove unauthorized use, we need not examine the scienter and causation elements of their conversion claim. They cannot prevail. Morgan Stanley was not barred by the Note, the Mortgage, or the RSA from assigning its interest in the escrow accounts to Okun or structuring a sale of the loan as it wished. We conclude that Morgan Stanley committed neither breach of contract nor conversion and was entitled to judgment as a matter of law. The district court correctly granted its motion for summary judgment. B. The District Court Properly Denied the Investors’ Motion for Summary Judgment Because the district court properly granted summary judgment for Morgan Stanley, it appropriately denied the Investors’ motion for summary judgment.