AGO 2001-02.

• Case Date: May 31, 2001
• Court: Indiana

Indiana Attorney General Opinions 2001. AGO 2001-02. May 31, 2001Advisory Opinion 2001-2Official Opinion 2001-2 Treasurer Tim Berry State Treasury of Indiana Indiana State House Indianapolis, Indiana 46204 RE: North Miami School Corporation & Indiana Intercept StatuteDear Treasurer Berry: In a letter dated February 8, 2001, you requested that the Attorney General provide you with an opinion in regard to the application of the states intercept statute. Specifically, you posed the questions listed below. I. Questions Presented: (1) Does the intercept mechanism in IC 20-5-4-10 apply to the instant case involving North Miami School Corporation, when it made lease payments to Center School Buildings, Inc. but Center Schools failed to make payments to Harris Bank, the assignee of the lease proceeds? (2) What event must occur to trigger the treasurer to apply the intercept statute and does the statute provide for the payment of interest in the event of a default? II. Brief Answers No, the intercept statute does not apply because the school did not default in any debt service obligation. Harris Bank failed to provide notice to North Miami School Corporation that it had been assigned the proceeds of the lease and that payment was to be made to the bank. Harris Bank is estopped from collecting from North Miami because of the legal relationship of the parties, their course of dealings, and the fact that every lease payment was made to Center Schools. The events that trigger the application of the intercept statute are (1) receipt of notice by the Treasurer of the State that a school corporation has defaulted in its payment of a debt service obligation and (2) the finding by the Treasurer that the school corporation actually defaulted on a debt service obligation. The intercept statute applies to the actual amount in default, plus any interest that accrues from the time that the amount should have been paid, in accordance with the terms of the specific agreement in question. III. Statement of Facts On November 26, 1979, Ray Dunn, President of Center Schools, Inc. (hereinafter "Center Schools") entered into a Lease Agreement with North Miami School Corporation (hereinafter "North Miami") to construct a school building addition. The Agreement outlined Center Schools duties as landlord and North Miamis duties as tenant. The Agreement provided for semi-annual installment payments of $163,882.00 with an option to purchase the structure and the land at the end of the tenth year, provided that North Miami had not defaulted under the lease. North Miami also would receive a special warranty deed at the end of the lease term in February 2000, had it not exercised the option to purchase after the tenth year. Dunn and Fred Warner, President of North Miami at the time, signed the document. Harris Bank was not a party to the Agreement. The Lease Agreement allowed Center Schools to assign the lease without approval from North Miami after the building was constructed. It provided that a default left uncured for 30 days would result in written notice from the landlord to correct the default. As per the terms of the lease, notice of any kind was to be delivered to the tenant, North Miami, at its Denver, Indiana office. The lease was recorded on August 13, 1980 and again on June 15, 1981 when it was amended to state that the building had been completed. Ray Dunn and Maurice Musselman, President of North Miami at the time, signed the addendum. The addendum stated that the new lease term began March 1, 1981 and ended on February 28, 2000. On March 1, 1981, Dunn, representing Center Schools, then entered into an agreement for a loan with Harris Bank to mortgage the North Miami project. Only Dunn and Harris Bank signed the Loan Agreement. North Miami was not a party to the Loan Agreement. The Loan Agreement outlines the relationship between Center Schools as the borrower and Harris Bank as the lender. It also states that North Miami is a lessee of the property and that to simplify collection of lease payments, Harris Bank should act as a collecting agent for Borrower with respect to unassigned portions of the lease rental payments. The document also refers to the Assignment of the Lease. North Miami, however, was not a party to the Loan Agreement. The document further provides that if North Miami and the borrower made all payments that a warranty deed would be transferred from Harris Bank to North Miami. Counsel for the bank provided this office with one letter from Center Schools dated September 1, 1981, which directs North Miami to "make all payments to our favor at Harris Bank, 111 West Monroe Street, Chicago, Illinois 60603." Counsel argues that this letter constituted notice to North Miami of the assignment of the lease proceeds. Center Schools continued to send semi-annual letters to North Miami to remind the school corporation to remit payments to Center Schools at the Gary address. The Assignment, dated February 17, 1982 and recorded on the same date, states that in cases of default of which the lender has knowledge, the banker/lender shall endeavor to notify the borrower within 30 days. One instance of default is defined as failure of the borrower or lessee to make payments. In addition to the Loan Agreement, the mortgage note, signed by Dunn for Center Schools, and Harris Bank, provides that on or before September 2000, Center Schools promises to pay to Harris Bank $3,330,035.96 plus interest. Payments of $163,882.00 were due twice per year beginning March 1, 1981. The lease between North Miami and Center Schools secured the note. From the beginning of the lease, North Miami made every semi-annual payment to Center Schools at the address for Center Schools in Gary, Indiana. North Miami never made a payment to Harris Bank. North Miami provides supporting documentation to this effect, with records beginning in 1981. Harris Bank did not notify North Miami that it had been assigned the rights as holder of the lease. Harris Bank also did not request that North Miami make payments to the bank. Instead, North Miami made payments to Center Schools, and Center Schools continued to make semi-annual payments amount to the bank. Dunn allegedly took the last two payments made by North Miami. Harris Bank states that it never received the payments. North Miami, however, made the last two payments, as documented by North Miami, in the manner in which it had made all of the other payments from 1981 until the last payment. North Miami made the semi-annual payments to Center Schools at the Gary office. When it did not receive the first of the last two payments in March and September of 2000, Harris Bank notified Center Schools and Dunn that it had not received...