American Bank, FSB v. Cornerstone Community Bank
733 F.3d 609
6th Cir.2013Background
- American Bank financed a $429,991 insurance premium for Saberline and obtained a written security interest in all "unearned premiums."
- Payment was routed through broker U.S. Insurance Group (USIG), which asked American to deposit funds into USIG’s Cornerstone bank operating account instead of a trust account.
- Cornerstone had a preexisting loan relationship with USIG and had authority to sweep account balances above $50,000 to repay USIG’s debt; it swept the premium deposits and applied them to USIG’s debt.
- Saberline defaulted; American canceled the policy and sought recovery of the unearned premium. USIG later repaid American from another account but then filed bankruptcy; American settled with the trustee while reserving conversion claims against Cornerstone.
- The magistrate judge held American’s interest prevailed and Cornerstone converted the funds; Cornerstone appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether American perfected a security interest in unearned premiums under Tennessee’s Premium Finance Company Act | The Act automatically perfects the lender’s security interest upon a written premium finance agreement and payment | Cornerstone contends bank deposit-account rules under Article 9 govern perfection/priority | Held for American: the Act perfects security interests without filing and gave American a perfected interest |
| Which statute governs priority: the Premium Finance Act or UCC Article 9 bank-deposit priority rule | American: the specific Premium Finance Act controls and trumps the general UCC rule | Cornerstone: UCC §47-9-327 gives the bank priority as deposit-account holder | Held for American: specific statute (Premium Finance Act) governs; it supersedes conflicting general UCC rule |
| Whether Cornerstone’s good-faith sweeps negate conversion liability | American: sweeps breached its superior security interest and constituted conversion regardless of Cornerstone’s good faith | Cornerstone: good-faith collection of USIG debt is not conversion | Held for American: good faith is irrelevant to conversion; sweeps were exercise of dominion inconsistent with American’s rights |
| Availability of equitable defenses (waiver, laches, estoppel) | American: reserved rights in settlement with trustee; no waiver or estoppel | Cornerstone: settlement, delay, and lack of notice bar recovery | Held for American: defenses forfeited or meritless—settlement expressly preserved rights; no showing of prejudice or intentional waiver |
Key Cases Cited
- RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct. 2065 (2012) (specific statute governs over general rule)
- Digital Equip. Corp. v. Desktop Direct, Inc., 511 U.S. 863 (1994) (interpretive canon: specific governs general to harmonize statutes)
- In re Barton Indus., Inc., 104 F.3d 1241 (10th Cir. 1997) (premium-finance agreement perfection recognized without filing)
- In re Hurtado, 342 F.3d 528 (6th Cir. 2003) (exercise of dominion over funds can constitute conversion)
- Bonded Fin. Servs., Inc. v. European Am. Bank, 838 F.2d 890 (7th Cir. 1988) (bank application of customer funds vis-à-vis third-party claims relevant to conversion analysis)
- United States v. Huntington Nat’l Bank, 574 F.3d 329 (6th Cir. 2009) (forfeiture of issues not raised below)
- Ralston v. Hobbs, 306 S.W.3d 213 (Tenn. Ct. App. 2009) (elements of conversion under Tennessee law)