COA: Trial court is wrong to order shareholders to pay attorney fees

In a case that stems from a failed transaction in 2000 to purchase an event-decorating company, the Indiana Court of Appeals has reversed the order that shareholders of a corporation are liable for attorney fees on a wrongful stop-payment claim.

Gregory Rankin, Robert Cochrane and John Bales created CBR Event Decorators Inc. to purchase Todd Gates’ event-decorating company. A $100,000 check and signed asset purchase documents were mailed to Gates, who signed and returned them to the shareholders. But the shareholders stopped payment on the check that same day after believing Gates misrepresented the value of the assets after speaking with some of his employees. Gates sued CBR and the shareholders when attempts to renegotiate the purchase agreement failed.

Gates alleged against CBR breach of the asset purchase agreement, wrongful stop payment of a check, and breach of the promissory note; and alleged fraudulent conveyance and wrongful withdrawal of capital against the shareholders. He also sought to pierce the corporate veil. The trial court ruled in favor of Gates and ordered the veil pierced. As part of an agreement staying execution of the judgment pending appeal, the shareholders provided Gates with an irrevocable letter of credit issued by PNC bank for $1 million.

The piercing of the corporate veil was reversed on appeal in 2012, but the appeals court wrote in its opinion that the trial court should determine the portion of the attorney fees the shareholders are liable for to Gates as a result of the wrongful stop payment. The trial court ordered attorney fees of $290,093 plus 18 percent interest.

The trial court, without holding a hearing, ordered the funds from PNC Bank deposited with the trial court clerk after Gates requested the deposit before the letter of credit expired. That order, along with the attorney fee issue, were before the Court of Appeals in CBR Event Decorators, Inc., Gregory Rankin, Robert Cochrane and John Bales v. Todd M. Gates, 49A02-1302-CT-159.

The judges noted there was some confusion based on the language of the 2012 opinion in CBR I as to whether the shareholders should have to pay attorney fees. The wrongful stop payment claim was pled only against CBR, not the shareholders, Judge Margret Robb wrote. The shareholders could only be liable for these fees if the corporate veil was pierced, but that decision was reversed in CBR I.

The judges rejected Gates’ argument that regardless of any allegedly incorrect outcome, the legal doctrines of claim preclusion, issue preclusion and law of the case preclude the trial court and COA from addressing the issue of attorney fees. None of those doctrines are applicable here, so the appeals court does not have to uphold the award of attorney fees against the shareholders.

The order granting Gates’ request to deposit the letter of credit funds with the trial court clerk was not an improper ex parte order, the COA ruled. The trial court’s order wasn’t necessary to effectuate transfer of the funds to the clerk, as the terms of the letter allowed Gates to draw down the available balance of the letter of credit by providing a written demand to the bank, which he did.