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Pursuant to Ind.Appellate Rule 65(D), this Memorandum Decision shall not be regarded as precedent or cited before any court except for the purpose of establishing the defense of res judicata, collateral estoppel, or the law of the case. ATTORNEY FOR APPELLANT: LATRIEALLE WHEAT Angola, Indiana ATTORNEY FOR APPELLEES R.L.S. DEVELOPMENTS, L.L.C., ROGER DIEHM and SHELLY DIEHM: JAMES O. WAANDERS Indianapolis, Indiana

IN THE COURT OF APPEALS OF INDIANA
H & J LEGACY FAMILY LIMITED PARTNERSHIP, Appellant-Plaintiff, vs. R.L.S. DEVELOPMENTS, L.L.C., ROGER DIEHM, Individually and as a Partner of R.L.S. Developments, L.L.C., and SHELLY DIEHM, Individually and as a Partner of R.L.S. Developments, L.L.C., and COMMUNITY STATE BANK, Appellees-Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

FILED
Dec 27 2011, 9:28 am
of the supreme court, court of appeals and tax court

CLERK

No. 57A03-1105-PL-185

APPEAL FROM THE NOBEL CIRCUIT COURT The Honorable Michael J. Kramer, Judge Cause No. 57C01-0606-PL-12

December 27, 2011 MEMORANDUM DECISION - NOT FOR PUBLICATION BAILEY, Judge

Case Summary In 2005, H & J Legacy Family Limited Partnership ("H & J") won a judgment against R.L.S. Developments, L.L.C. ("RLS"). After failing to collect on the judgment, H & J brought suit against RLS; RLS's members, Roger Diehm and Shelly Diehm ("Roger" and "Shelly" individually, "the Diehms" collectively), individually; and Community State Bank, contending that certain transactions by RLS with the Diehms and Community State Bank were fraudulent and seeking to pierce the RLS corporate veil to reach the Diehms' personal assets to satisfy the prior judgment. Community State Bank was dismissed upon a grant of summary judgment, and the case proceeded to a bench trial on H & J's claims against RLS and the Diehms. The trial court found in favor of RLS and the Diehms and against H & J, and denied H & J's subsequent motion to correct error. H & J now appeals. We affirm. Issues H & J raises numerous issues for our review, which we restate as: I. Whether the trial court committed reversible error when it: A. Concluded that H & J's fraudulent transfer claim did not encompass RLS's distributions of cash and property to the Diehms during the pendency of the 2001 action because H & J did not conform with the pleading requirements of Indiana Trial Rule 9(B); B. Entered its findings as to the year-end balances of RLS's general ledger accounts and RLS's assets before and during the 2001 action;

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C. Concluded that the mortgage RLS granted on certain real estate to Community State Bank in exchange for $50,000 was not a fraudulent transfer; and II. Whether the Indiana Business Flexibility Act provides H & J with an alternate basis for recovery. Facts and Procedural History In 2001, H & J first filed suit against RLS ("the 2001 action"). During the pendency of the 2001 action, RLS owned two pieces of real estate: a house at 620 Westgate in Kendallville ("620 Westgate") and a building called the Northeastern Center. In 2002, RLS sold the Northeastern Center for $700,000 (Ex. E), but retained 620 Westgate throughout the pendency of the 2001 action and beyond. At the beginning of the 2001 tax year for RLS, the company's tax returns reflected total assets of $1,041,462, which included the value of the Northeastern Center, 620 Westgate, and cash and other property; liabilities of $792,569; and owner's capital of $248,893. From 2001 to 2003, RLS made distributions of property and capital totaling $352,305 to the Diehms as members of the company; no distributions were made during 2004. At the end of the 2004 tax year for RLS, the company's tax returns reflected general ledger account balances of $161,259 in assets, of which $8,429 was held as cash and $152,830 was held as "Construction in Process"; $49,876 in liabilities; and $111,383 in owner's capital. (Ex. D.) By 2004, RLS had incurred around $30,000 in attorney's fees defending the 2001 action, and would incur nearly $10,000 more by the conclusion of an appeal. On November 12, 2004, the Diehms, acting for RLS, granted a mortgage on 620 Westgate with Community 3

State Bank in exchange for $50,000. Approximately $40,000 of this money was used to pay attorney's fees at trial and on appeal; the remainder of the loan money was used to pay a portion of the principal balance. Roger made further payments on the loan individually.1 On January 10, 2005, judgment was entered for H & J against RLS in the amount of $98,927.93 plus costs of $104.00. H & J attempted to collect upon the judgment in the 2001 action by initiating proceedings supplemental, but was unsuccessful because the only asset available for execution was the 620 Westgate property, upon which Community State Bank still held a mortgage lien. On June 27, 2006, H & J filed its complaint in the instant case. In Count One, H & J alleged that that RLS's grant of a mortgage to Community State Bank prior to the judgment in the 2001 action was a fraudulent transfer. In Count Two, H & J alleged that the Diehms individually possessed adequate assets to satisfy the judgment against RLS, and that "in anticipation of" a lawsuit by H & J the Diehms "secreted away assets or improperly encumbered assets that could be used to satisfy the debt owed herein." (App. 14.) RLS and the Diehms answered the complaint on August 23, 2006, and denied the substance of the allegations. On January 15, 2007, Community State Bank filed a motion for summary judgment, and on July 9, 2007, its motion was granted, removing it as a party from the case. On January 19, 2011, RLS submitted a written motion requesting the trial court to

1

At trial in the instant case, Roger testified that he did not know whether these payments were properly characterized as loans from him individually to RLS, as contributions of capital to RLS, or were subject to some other treatment for accounting and tax purposes.

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enter specific findings and conclusions setting forth the basis of its judgment at trial. On January 20, 2011, a bench trial was conducted. During the trial, H & J sought to introduce into evidence exhibits and testimony related to the financial condition of RLS and its distribution of assets to the Diehms from 2001 to 2004; this consisted of partnership tax returns2; testimony from Roger; and expert testimony from Carla Butler ("Butler"), a Certified Public Accountant who had reviewed RLS's tax returns. The trial court admitted much of this evidence and excluded other evidence, sometimes limiting the admission of the evidence for foundational purposes, and based its rulings in part on the specificity or lack thereof of Count Two of the complaint's allegations of fraud by RLS. In response to a ruling sustaining an objection to evidence relating to RLS's distribution of assets to the Diehms, H & J moved to amend the complaint to conform to the evidence already admitted; the trial court denied this motion. Also during the trial, RLS and the Diehms moved for involuntary dismissal of Count Two of the complaint, which the trial court also denied. Thus, at the conclusion of the trial, evidence related to the second count of the complaint had been admitted, neither of the two counts in H & J's complaint had been dismissed, and neither count had been amended. The trial court indicated, however, that to the extent Count Two might constitute an allegation of fraud or fraudulent transfer, it construed that allegation to pertain to disposition of the proceeds of RLS's sale of the Northeastern Center. At the conclusion of the trial, the court took the case under advisement. On March 2,

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RLS was treated as a partnership for tax purposes.

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2011 the trial court entered findings and conclusions: 6. When the complaint in [the 2001 action] was filed, R.L.S. had assets consisting of a house at 620 Westgate and what is known as the Northeastern Center building. The house at 620 Westgate was unencumbered [by any liens]. *** 8. 11. On November 12, 2004, R.L.S. encumbered the property at 620 Westgate and received a mortgage loan for $50,000.00. In tax year 2001 R.L.S. had income of $16,316.00 and made distribution to partner [sic] in the amount of $85,228.00. It began the tax year with assets of $1,041,462.00 and liabilities of $1,041,462.00, and ended the tax year with assets of $623,807.00 and liabilities of $623,807.00. The capital account for each of the two (2) partners went from $124,448.00 to $89,600.00. In tax year 2002 R.L.S. had income of $239,154.00 and made distributions to partner [sic] in the amount of $182,596.00. It began the tax year with assets of $623,807.00 and liabilities of $623,807.00, and ended the tax year with assets of $235,755.00 and liabilities of $235,755.00. The capital account for each of the two (2) partners went from $89,600.00 to $117,879.00 during the tax year. In tax year 2003 R.L.S. had a loss of $7,394.00 and made distributions to partner [sic] in the amount of $84,481.00. It began the tax year with assets of $235,755.00 and liabilities of $235,755.00, and ended the tax year with assets of $122,280.00 and liabilities of $122,280.00. The capital account for each of the two (2) partners went from $117,879.00 to $42,241.00 during the tax year. In tax year 2004 R.L.S. had a loss of $12,897.00 and made no distributions to partners. It began the tax year with assets of $122,280.00 and liabilities of $122,280.00, and ended the tax year with assets of $161,259.00 and liabilities of $161,259.00. R.L.S. incurred legal fees of $9,229.00.

12.

13.

14.

*** 20. Count 1 of the complaint in the present cause specifically alleges that the defendant's [sic] defrauded the plaintiff in encumbering the 620 6

Westgate property. Count 2 of the complaint generally alleges that the Diehms secreted or improperly encumbered assets that could be used to satisfy the judgment against [RLS]. *** A. B. [Reproduces I.C.

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