Justices: Agreement was impermissibly modified

A LaPorte Superior judge made an impermissible modification to a divorced couple's settlement agreement by giving the bank's lien on the family farm priority over the ex-wife's lien, the Indiana Supreme Court ruled today.

In their dissolution agreement, Robert Johnson agreed to pay Gina Johnson her interest in a family farm through a series of lump sums and installment payments until 2013. To operate the farm, Robert would take out a loan at the bank every April 15 to finance seasonal expenses, which is repaid after fall harvest. The line of credit is secured by an all-assets security agreement that is cross-collateralized with all other collateral with the bank as well as personal guarantees from the farm's owners. The bank requires first position on all assets securing the farm's debt.

The bank required Robert to get an agreement from Gina ensuring her interests in the farm wouldn't subordinate its own. Gina refused so Robert sought a declaratory order subordinating her lien, which the trial court granted.

The Supreme Court reversed in Gina Johnson v. Robert Johnson, No. 46S04-0907-CV-346. At issue is whether Gina agreed to waive her priority on lines of credit entered into after the settlement only up to the amount taken out for the farm's operations in the past or whether she waived her priority without limit. Robert attempted to take out money to cover the farm expenses as well as covering the payments he needed to make to Gina.

The agreement is silent on this issue, but the Supreme Court found the agreement undeniably assumes for the farm's continued operation in the manner Gina had grown accustomed, which requires renewing the lines of credit at issue in the case.

But the funds for Robert to pay Gina aren't implied as necessary to the agreement. Gina may have impliedly agreed to a subordinate position when it comes to the continuing operating expenses of the farm, but she wouldn't have assented to Robert taking on a large amount of debt to finance his payments to her. That would offer her little protection if he defaulted, wrote Chief Justice Randall T. Shepard.

"An order declaring Gina's judgment lien subordinate to the lien securing the annual line of credit would not constitute a modification but an enforcement because it implies the continued financing of the farm's operations," he wrote. "Conversely, an order subordinating her lien to the bank's for amounts over and above such an amount would constitute an impermissible modification."

The justices also noted that if Robert's declarations about the state of his finances are accurate, he may have trouble repaying Gina without financing higher debt on the farm. The justices suggested they negotiate an agreement allowing Robert to meet his obligations and encouraged them to avoid further litigation on the issue.