Luxury Townhomes, LLC/LP XXIV, LLC v. McKinley Properties, Inc. and Kenneth Polsinelli

FOR PUBLICATION
ATTORNEY FOR APPELLANT: ATTORNEYS FOR APPELLEE:
MATTHEW E. DUMAS JOHN B. DRUMMY
Hostetter & O’Hara JAMES R. COHEE
Brownsburg, Indiana Kightlinger & Gray, LLP
Indianapolis, Indiana
Aug 01 2013, 8:49 am
IN THE
COURT OF APPEALS OF INDIANA
LUXURY TOWNHOMES, )
LLC/LP XXIV, LLC, et al., )
)
Appellants-Defendants, )
)
vs. ) No. 49A05-1210-MF-514
)
McKINLEY PROPERTIES, INC. )
AND KENNETH POLSINELLI, )
)
Appellees-Non-Parties. )
APPEAL FROM THE MARION SUPERIOR COURT
The Honorable Michael D. Keele, Judge
Cause No. 49D07-1004-MF-15176
August 1, 2013
OPINION - FOR PUBLICATION
BRADFORD, Judge
This case arises from a foreclosure action and concerns about the court-appointed
receiver’s maintenance of the collateral during the proceedings. Plaintiff PNC Bank1
(“PNC”) filed foreclosure proceedings against Appellants-Defendants Luxury Townhomes,
LLC and LP XXIV, LLC (collectively, “Luxury”) after Luxury failed to make scheduled
payments as set forth in the relevant mortgage documents. PNC requested that a receiver be
appointed to oversee the collateral during the pendency of the foreclosure proceedings. The
trial court subsequently appointed Appellee-Non-party Kenneth Polsinelli of McKinley
Properties, Inc. (“McKinley”) as receiver.
Luxury and PNC eventually settled and jointly moved to dismiss the foreclosure
proceedings. Shortly thereafter, Polsinelli, acting in his capacity as receiver, filed his final
report concerning the receivership estate. Luxury objected to the report and requested
permission to assert claims against Polsinelli and McKinley. The parties requested an
evidentiary hearing. Following the conclusion of the evidentiary hearing, the trial court
accepted Polsinelli’s final report, discharged Polsinelli, and closed the receivership estate.
Luxury’s subsequently filed motion to correct error was denied by the trial court. On appeal,
the parties raise numerous issues, one of which we find dispositive. Concluding that the
subsequent claims which Luxury seeks to bring against Polsinelli or McKinley are barred by
the doctrine of res judicata, we affirm the trial court’s order denying Luxury’s motion to
correct error.
FACTS AND PROCEDURAL HISTORY
Luxury is the owner of two apartment complexes, the Las Palmas Apartments n/k/a
1
PNC does not participate in the instant appeal.
2
Carmel Creek and Private Reserve, (collectively, “the collateral”) located in Indianapolis. In
order to secure funding to purchase the collateral, Luxury executed a promissory note and
mortgage agreement with PNC. Luxury, however, failed to make payments pursuant to the
terms of the mortgage documents.
On April 5, 2010, mortgagee PNC filed a foreclosure action against mortgagor
Luxury. That same day, PNC filed a motion seeking the immediate appointment of a receiver
to maintain the collateral during the pendency of the foreclosure proceedings. Over Luxury’s
objection, on July 21, 2010, the trial court appointed Polsinelli as receiver.
Pursuant to the trial court’s order appointing Polsinelli as receiver, Polsinelli was
granted numerous powers, including the power to take possession of, manage, operate, and
maintain the collateral; collect rents and other receivables; negotiate with others concerning
use of the collateral; make payments that Polsinelli judged to be necessary; and to “do any
other acts it deems proper to protect and operate the [c]ollateral.” Appellants’ App. p. 33.
Polsinelli was granted the power to enter into an agreement with a management company for
the day-to-day management and operation of the collateral. Polsinelli was ordered to obtain
insurance or maintain the existing policy for the collateral. Polsinelli was also authorized to
seek protective funding advances from PNC that he deemed necessary to preserve the
collateral. The order required Polsinelli to swear to perform his duties faithfully and to
secure his oath by issuing a bond in the amount of $150,000.
Upon taking possession of the collateral, Polsinelli noted that the collateral was
largely in a state of disrepair. Specifically, Polsinelli found numerous broken windows and
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doors, graffiti and vandalism throughout the apartment complexes, decay, weathering over
damaged areas, gutters that had not been maintained, damage to a roof, collapsed ceilings,
mold and mildew in some of the apartments, landscaping overgrown and in disrepair, non-
functional lighting, flea infestations in some of the apartments, evidence of rodent
infestation, outstanding notices of violations from the Marion County Health Department,
and pools that had not been properly maintained and were not operating correctly. Polsinelli
also found that the asphalt was in a state of disrepair, a waterline had ruptured, and some
apartments were missing appliances. In addition, hail damage, for which Luxury had
received an insurance check, had not been fixed. Polsinelli was able to recover
approximately $68,000 in outstanding rent, approximately $32,000 of which the receiver
found in desk drawers or leasing files in the rental offices. In the leasing offices, Polsinelli
also found that multiple files were missing and there were no office supplies, computers, or
maintenance equipment.
Polsinelli contracted with McKinley to operate and manage the collateral on a day-to-
day basis. Polsinelli established relationships with vendors to make repairs and set up a 24-
hour emergency hotline for residents. Polsinelli secured the open buildings, increased
lighting, and hired a professional security company to add a layer of security and to reduce
potential liability to the collateral. Polsinelli began running both credit and criminal
background checks on prospective tenants and for residents seeking to renew their leases.
Over the course of the receivership, Polsinelli answered hundreds of maintenance calls and
“turned” numerous apartments, meaning that apartments that were previously uninhabitable
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were once again available for leasing. Polsinelli collected what rent he could and from
January of 2011 until June of 2011, was able to increase revenue and collections at both
properties.
Despite Polsinelli’s efforts to make improvements to the collateral, the distressed state
of the collateral demanded additional funds to sustain the turnaround and make additional
needed improvements. To obtain the funds needed for the additional projects, Polsinelli
invoked his power to request financial advances from PNC. PNC partially granted some of
Polsinelli’s requests but often forwarded the partial funds months after Polsinelli first made
the request. Because of the lack of funds, Polsinelli was not able to make all necessary
repairs, and, as a result, some apartments became uninhabitable and the receiver was forced
to stop leasing activity for these apartments. Polsinelli returned the collateral to Luxury on
August 8, 2011.
With respect to the foreclosure proceedings, PNC and Luxury eventually reached a
settlement, and, on August 4, 2011, filed a joint motion requesting dismissal of PNC’s
foreclosure action against Luxury. In making this request, PNC and Luxury agreed that the
trial court should have continuing jurisdiction for the purpose of settling the receivership
estate. Also on August 4, 2011, a motion was filed to discharge Polsinelli and to settle the
receivership estate. Luxury also filed a request for leave to join and assert claims against
Polsinelli and McKinley. On August 16, 2011, the trial court conducted a teleconference on
Luxury and PNC’s joint motion to dismiss. During this teleconference, Luxury, PNC, and
Polsinelli agreed to submit a combined proposed scheduling order.
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On September 30, 2011, Polsinelli filed his final report on the receivership estate. On
October 25, 2011, Polsinelli filed an “Unopposed Proposed Scheduling Order” in which
Luxury, PNC, and Polsinelli requested that an evidentiary hearing be set to review
Polsinelli’s final report and Luxury’s objections to Polsinelli’s final report, as well as to
“address and determine [Luxury’s] Motion for Leave.” Appellees’ App. pp. 368-69. On
October 27, 2011, the trial court approved the motion and scheduled an evidentiary hearing.
The next day, Luxury filed its objections to Polsinelli’s final report.
Prior to the start of the evidentiary hearing, Luxury requested that the trial court enter
“Findings of Fact and Conclusions of Law” pursuant to Trial Rule 52. The trial court
conducted an evidentiary hearing over the course of three days, March 7, 2012, March 8,
2012, and April 19, 2012. During the hearing, the trial court received evidence and heard
testimony relating to Polsinelli’s final report, Luxury’s objections to that report, and Luxury’s
request for permission to assert claims against Polsinelli and McKinley.
On July 6, 2012, the trial court issued “Findings of Fact, Conclusions of Law and
Judgment Entry” in which it accepted Polsinelli’s final report, “fully and finally” discharged
Polsinelli and the surety on his bond, and denied Luxury’s motion for leave to join and assert
claims against Polsinelli and McKinley. Appellants’ App. pp. 26-31. On July 31, 2012,
Luxury filed a motion to correct error.2 The trial court denied Luxury’s motion to correct
error on August 21, 2012. This appeal follows.
DISCUSSION AND DECISION
2
This motion was signed by Luxury’s counsel who was admitted pro hac vice, and not by Luxury’s
local counsel.
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I. Overview of Relevant Authority Relating to Receiverships
A trial court may appoint a receiver in actions where, as here, a mortgagee seeks to
foreclose the mortgage. Ind. Code § 32-30-5-1(4). Upon motion by the mortgagee, the court
shall appoint a receiver if, at the time the motion is filed, the property is not occupied by the
owner as the owner’s principal residence and:
(A) it appears that the property is in danger of being lost, removed, or
materially injured;
(B) it appears that the property may not be sufficient to discharge the
mortgaged debt;
(C) either the mortgagor or the owner of the property has agreed in the
mortgage or in some other writing to the appointment of a receiver;
(D) a person not personally liable for the debt secured by the mortgage has, or
is entitled to, possession of all or a portion of the property;
(E) the owner of the property is not personally liable for the debt secured by
the mortgage; or
(F) all or any portion of the property is being, or is intended to be, leased for
any purpose.
Id.Before beginning his duties as a receiver, a receiver must swear to perform the duties
of a receiver faithfully and execute a written undertaking, i.e., a bond, with one or more
sureties, to ensure that he faithfully discharges his duties and obeys the court’s orders. Ind.
Code § 32-30-5-3. “A receiver may, under control of the court or judge: (1) bring and defend
actions; (2) take and keep possession of the property; (3) receive rents; (4) collect debts; and
(5) sell property; in the receiver’s own name, and generally do other acts respecting the
property as the court or judge may authorize.” Ind. Code § 32-30-5-7.
Before a receiver can be discharged from his duties, he must file a report in final
settlement of the receivership proceedings. Ind. Code § 32-30-5-14. The report must set
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forth all receipts and disbursements to the date of the accounting, as well as other appropriate
information relative to the administration of the receivership, liquidation of the receivership,
and declaration and payment of dividends. Ind. Code § 32-30-5-15. Interested parties may
file objections to the receiver’s report within thirty days of its filing. Ind. Code § 32-30-5-
18(a). If objections are not filed within thirty days, they are forever barred. Ind. Code § 32-
30-5-18(b). After the expiration of the thirty day period to object, the trial court shall,
without delay, proceed with a hearing and determination of the objections or exceptions, pass
upon the account or report, order the payment of a partial or final dividend, and make other
appropriate orders. Ind. Code § 32-30-5-19.
The trial court’s approval of a receiver’s report releases and discharges the receiver
and the surety on the receiver’s bond “for all matters and things related to or contained in”
the report. Ind. Code § 32-30-5-20. Upon the trial court’s approval of the receiver’s final
report and the receiver’s performance and compliance with the trial court’s order made on the
final report, “the receiver and the surety on the receiver’s bond shall be fully and finally
discharged and the court shall declare the receivership estate finally settled and closed subject
to the right of appeal of the receiver or any creditor, shareholder, or other interested party
who has filed objections or exceptions” to the report. Ind. Code § 32-30-5-21.
II. Standard of Review
Luxury appeals from the denial of its motion to correct error.
A trial court is vested with broad discretion to determine whether it will grant
or deny a motion to correct error. Volunteers of America v. Premier Auto
Acceptance Corp., 755 N.E.2d 656, 658 (Ind. Ct. App. 2001). A trial court has
abused its discretion only if its decision is clearly against the logic and effect
8
of the facts and circumstances before the court or the reasonable inferences
therefrom. Id. The trial court’s decision comes to us cloaked in a presumption
of correctness, and the appellant has the burden of proving that the trial court
abused its discretion. Id. In making our determination, we may neither
reweigh the evidence nor judge the credibility of witnesses. Id.Jones v. Jones, 866 N.E.2d 812, 814 (Ind. Ct. App. 2007).
Upon reviewing a motion to correct error, this court also considers the standard of
review for the underlying ruling. Life v. F.C. Tucker Co., Inc., 948 N.E.2d 346, 349 (Ind. Ct.
App. 2011) (citing Shane v. Home Depot USA, Inc., 869 N.E.2d 1232, 1234 (Ind. Ct. App.
2007)). Here, pursuant to Luxury’s request, the trial court entered findings of fact and
conclusions thereon pursuant to Indiana Trial Rule 52. Where a trial court has entered
findings of fact and conclusions thereon pursuant to a party’s request, we engage in the
following two-tiered standard of review:
We must first determine whether the evidence supports the findings of
fact and then whether the findings support the judgment. We will not reverse
the trial court’s findings and judgment unless they are clearly erroneous.
Findings of fact are clearly erroneous when the record lacks any facts or
reasonable inferences from the evidence to support them. The judgment is
clearly erroneous when it is unsupported by the findings of fact and
conclusions entered on the findings. In making these determinations, we will
neither reweigh the evidence nor judge witness credibility, considering only
the evidence favorable to the judgment and all reasonable inferences
therefrom.
While we defer substantially to findings of fact, we do not do so for
conclusions of law. We apply a de novo standard of review to conclusions of
law and owe no deference to the trial court’s determination of such questions.
Gates v. Houston, 897 N.E.2d 532, 534-35 (Ind. Ct. App. 2008) (quoting Mueller v. Karns,
873 N.E.2d 652, 657 (Ind. Ct. App. 2007)).
III. Analysis
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Generally, when one seeks to sue a receiver in an independent action, “there is a
condition precedent that leave to sue the receiver must be obtained from the receivership
court.” Hazifotis v. Citizens Fed. Sav. & Loan Ass’n, 537 N.E.2d 35, 38 (Ind. Ct. App.
1989). “The condition precedent has its basis in common law.” Id. The question of whether
to grant a motion for leave to sue a receiver in an independent suit is a matter for the court’s
discretion. Martin v. Forrey, 100 Ind. App. 371, 376, 193 N.E. 679, 681 (1935).
In the instant matter, the trial court conducted a three-day evidentiary hearing during
which it heard evidence relating to Polsinelli’s final report, Luxury’s objections to the report,
and Luxury’s motion for leave to sue Polsinelli and McKinley. Luxury asserted that
Polsinelli had negligently performed his duties and wanted permission to recover both
Polsinelli’s bond and additional funds through a separate negligence action. Upon
considering the evidence and arguments presented by the parties, the court determined that
Polsinelli did not act negligently in performing his duties, accepted Polsinelli’s final report,
denied Luxury’s motion for leave to file a separate action against Polsinelli, “fully and finally
discharged” Polsinelli and his bond, and closed the receivership estate. Appellants’ App. p.
31. Luxury does not challenge the trial court’s approval of Polsinelli’s final report,
Polsinelli’s discharge, or the settling of the receivership estate on appeal.
Again, the trial court’s approval of the final report releases and discharges the receiver
and surety on the receiver’s bond for all matters and things related to or contained in the
report. Ind. Code § 32-30-5-20. This rule is consistent with this court’s prior opinion in
Ratcliff v. Citizens Bank of Western Indiana, 768 N.E.2d 964, 970 (Ind. Ct. App. 2002), in
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which we concluded:
Even before the non-claim statute, Indiana Code Section 34-48-4-5, it was the
common law in Indiana that once the court approves a receiver’s Final Report,
it is conclusive as to the rights of the parties thereunder. Put another way:
“[A] party to an action, in which a receiver has been appointed,
must take notice of everything done in that action, including the
final report filed by the receiver and his discharge as such.... A
party properly brought into court is chargeable with notice of all
subsequent steps taken in the cause down to and including the
judgment.”
Flanders v. Ostrom, 206 Ind. 87, 187 N.E. 673, 676 (1933) (holding court did
not err when it denied motion to vacate judgment approving receiver’s Final
Report).
As such, Polsinelli and McKinley argue that the trial court acted within its discretion in
denying Luxury’s motion for leave and motion to correct error because Luxury is barred from
raising any subsequent claims against either Polsinelli or his agent, McKinley. We agree.
In Hazifotis, this court considered whether a party was barred from bringing a separate
suit against a receiver after the receivership court determined that the receiver had faithfully
carried out his duties as receiver, accepted the receiver’s final report, and discharged the
receiver. 537 N.E.2d at 38. In finding that a subsequent suit by the party against the receiver
would be barred by the issue preclusion branch of the doctrine of res judicata, the court
stated:
The doctrine of res judicata is described as consisting of two branches,
claim preclusion and issue preclusion. Claim preclusion applies when there
has been a final judgment on the merits which acts as a complete bar to a
subsequent action on the same claim between the same parties or those in
privity with them. Town of Flora v. Indiana Service Corp. (1944), 222 Ind.
253, 256, 53 N.E.2d 161, 163. Issue preclusion arises when the claims are not
the same, but some fact or question has been determined in the former suit and
is again put in issue in a subsequent suit between the same parties or their
privies. Id. at 257, 53 N.E.2d at 163. The question presented to this Court is
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whether issue preclusion bars relitigation of the adequacy of [one’s]
performance as receiver.
To invoke the issue preclusion branch of res judicata, four elements
must be satisfied: 1) the former judgment must have been rendered by a court
of competent jurisdiction; 2) the matter now in issue was determined in the
former suit; 3) the particular controversy adjudicated in the former action must
have been between parties to the present suit or their privies; and 4) the
judgment in the former suit must have been rendered on the merits. Peterson
v. Culver Educational Foundation (1980), Ind. App., 402 N.E.2d 448, 460-
461.
Id. at 38-39.
The court concluded that the elements of issue preclusion were satisfied and the party
was barred from bringing the independent suit because the pivotal issue in Hazifotis’s
collateral suit was the adequacy of the receiver’s performance as receiver, and that the issue
had been brought before the receivership court by an objection to the receiver’s discharge.
Id. at 39. The judgment of the receivership court was rendered on the merits and all relevant
parties were parties in both the receivership proceedings and the collateral suit. Id. The
court concluded that “[t]he doctrine of res judicata precluded relitigation of the issue whether
[the receiver] faithfully carried out his duties as receiver. Because that issue was the basis
for Hazifotis’[s] collateral suit, [the receiver and the mortgagee bank] were entitled to
judgment as a matter of law.” Id.This conclusion is consistent with the findings of other jurisdictions as well. In Hogg
v. Siebrecht, 464 N.W.2d 209, 210-11 (S.D. 1990), the Supreme Court of South Dakota held
that the doctrine of res judicata barred a party’s subsequent suit against a receiver because the
matters sought to be litigated in the subsequent suit could have been or should have been
litigated at the time the receiver’s final report and account were approved. In Aviation Brake
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Systems, Ltd. v. Voorhis, 133 Cal. App. 3d 230, 234-35 (Ca. 1982), the California Court of
Appeal concluded that a subsequent suit against a receiver was barred by the doctrine of res
judicata because the receiver’s final report had been submitted and accepted and the issues
which the party sought to bring in the subsequent suit were not issues that could not have
been raised at the time the trial court considered the receiver’s final report and the objections
thereto.
Likewise, in Yaw v. Beeghly, 109 Ill. App. 3d 627 (1982), the Appellate Court of
Illinois considered whether the discharge of the receiver and acceptance of the receiver’s
final report barred a subsequent negligence action against the receiver. The court concluded
that it did, finding that “[a]lthough a new suit in negligence was brought against the receiver,
it was clearly based on his conduct in executing his duties as receiver.” 109 Ill. App. 3d at
632. In making this conclusion, the court stated that “[t]o allow appellants to avoid the
doctrine of res judicata simply by bringing a new suit would undermine its very purpose,”
and, accordingly, the doctrine of res judicata bars appellants from bringing a negligence suit
against the receiver. Id. at 632-33.
Here, like in Hazifotis, the pivotal issue in Luxury’s collateral suit was the adequacy
of Polsinelli’s performance as receiver. This issue was considered by the trial court during
the three-day evidentiary hearing by Luxury’s objection to Polsinelli’s final report. After the
three-day evidentiary hearing, the trial court rendered judgment on the merits. The trial court
accepted the report, discharged Polsinelli, and closed the receivership estate. In doing so, the
trial court determined that Polsinelli and his agent, McKinley, had acted in an appropriate
13
fashion and that Polsinelli had adequately performed his duties as receiver. This factual
determination would preclude a subsequent determination that Polsinelli had acted
negligently in his administration of the receivership estate. Also, nothing in the record
indicates that Luxury sought to bring any claims against Polsinelli’s agent separate from
those it desired to bring against Polsinelli or that Polsinelli’s agent had any duty to Luxury.
At most, McKinley had a duty to Polsinelli to act appropriately as his agent, and, the trial
court effectively found that McKinley had met this duty by determining that Polsinelli,
through McKinley’s acts, had faithfully carried out his duty as receiver.
Moreover, Luxury’s reliance upon the recent opinion of the Ohio Court of Appeals in
PNC Bank, National Association v. Kidz Real Estate Group, LLC, et al., 2013 WL 1385638(Oh. Ct. App. April 5, 2013), can easily be distinguished from the instant matter because,
unlike in the instant matter, in Kidz, the trial court did not hold an evidentiary hearing before
denying Kidz’s motion for leave or accepting the receiver’s final report. The Ohio Court of
Appeals reversed the trial court’s denial of Kidz’s motion to leave and order discharging the
receiver finding that it was an abuse of discretion for the trial court to do so without first
conducting an evidentiary hearing. Id. at *10.
Because the trial court has already made a factual determination on Polsinelli’s
performance as receiver after a three-day evidentiary hearing and has discharged Polsinelli
and closed the receivership estate, we conclude that any subsequent suit by Luxury regarding
issue of whether Polsinelli faithfully carried out his duties as receiver is barred by the issue
preclusion branch of the doctrine of res judicata. Accordingly, we affirm the judgment of the
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trial court.
The judgment of the trial court is affirmed.
BAILEY, J., and MAY, J., concur
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