Gray v. A.I. Credit Corp. (In Re Paris Industries Corp.)Gray v. A.I. Credit Corp. (In Re Paris Industries Corp.)
DECISION AND ORDER
Bеfore the Court is the Complaint of Stephen S. Gray, the Chapter 11 Trustee of Paris Industries Corporation (Paris), who seeks to recover two payments, totalling $21,125, as preferential transfers made by Paris to the Defendant A.I. Credit Corporation (AIC). The matter has been submitted on briefs. 1
In
Drabkin v. A.I. Credit Corp.,
AIC is a premium financing company. Its business is to lend money usually to commercial enterprises, to enable theborrower to purchase insurance. Premium financing is a common commercial arrangement. See, e.g., In re Duke Roofing, 47 B.R. 990 , 994 (E.D.Mich.1985). As collateral for the loan, the finance company takes a security interest in the unearned premiums. It retains the right to cancel the policy in the event of nonpayment and to claim the remaining unearned premiums under the terms of the policy. This kind of security interest is predicated on the fact that although an insurance policy covering a long period into the future may be paid for in advance, the insurer earns the premiums only as each “daily unit” of insurance is extended to the insured. Thus, on any given day during the tеrm of an insurance policy, there is a fund of unearned premiums which must be refunded upon cancellation of the coverage. Obviously, the fund diminishes with time as the insurer earns the premiums.
Id. at 1154. The foregoing summary of AIC’s operating procedures is sufficiently similar to AIC’s operation in the instant proceeding fоr use herein as our own.
BACKGROUND
The parties have stipulated as follows:
On July 18, 1986, Paris borrowed $133,-779 from AIC to pay the annual premiums for five of its business related insurance policies. In return, Paris agreed to make an initial payment of $52,684, followed by eight monthly installments of $10,560 each, with the last payment due on February 12, 1987, giving AIC a $3,385 profit for the use of its money for eight months.
From its inсeption, and throughout the eight month term of the loan, Paris consistently made its payments late, ranging between 22 to 26 days after the due date. As a result of Paris’ tardiness, each and every month AIC mailed Paris a “Notice of Intent to Cancel.” On February 3, 1987, 66 days before Paris filed its bankruptcy petition, AIC received a $10,565 payment, 22 days late. On March 9,1987, 25 days after the due date and 30 days prior to the petition, Paris made its last payment, which was received by AIC within hours after AIC had actually mailed a “Notice of Cancellation” to Paris’ five insurance carriers. Immediately upon receipt of that payment, however, AIC reversed itself and sent a “Request for Reinstatement” form to each carrier.
On April 10, 1987, Paris filed the instant petition, and shortly thereafter Stephen S. Gray was appointed Chapter 11 Trustee. Gray seeks to recover the last two installment payments, made on February 3, 1987 and March 10, 1987, respectively, both within 90 days of Paris’ Chapter 11 filing.
THE PREFERENCE ACTION
The Trustee must prove each of the five elements in § 547(b) to establish a payment as preferential.
See Barash v. Public Finance Corp.,
the trustee may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before suсh transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the filing of the petition;
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(5) that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made;
AIC asserts, inter alia, that in this preference action the Debtor has failed to satisfy all the elements of § 547(b), because, it alleges, the last two payments were made for current, as opposed to antecedent, debt. Whether a debt is current or antecedent depends, of course, on when it was incurred, and we conclude as a matter of law that Paris incurred the debt in question on July 18, 1986 when the premium finance agreement was signed, and not, as AIC argues, when each installment pay
It is clear that the first, third, and fourth elements have also been satisfied,
i.e.:
the relevant payments were made by Paris to AIC for the benefit of a creditor (the first element), while Paris was presumed insolvent (the third element), and within 90 days of the bankruptcy filing (the fourth element). AIC's final § 547(b) argument is whether the two payments in question аllowed AIC to obtain more than it would have received in a Chapter 7 distribution (the fifth element). If the value of the collateral (here, the unearned premium fund) fully covered the debt, then AIC did not receive more than it would have received under Chapter 7, because a creditor with a fully secured сlaim, by definition, receives 100% of the debt owed.
See In re Auto-Train Corp.,
In the present case, some arithmetic is in order since the value of the collateral was decreasing at a fixed rate over a given period of time. For example, on February 3, 1987, when Paris made its next to last payment in the amount of $10,565, there was $35,133 in the unearned premium fund to secure AIC’s claim in the amount of $21,125. On March 9, 1987, the date оf the last $10,560 payment, there was $22,597 in the unearned premium fund, and AIC was owed $10,560. On April 10, 1987, however, when Paris filed the instant petition, the unearned premium fund contained only $11,118.15, so that as of the date of filing, AIC would have been undersecured if the two payments in question had not been made. The dispositive question therefore is: at what point in time should the collateral be valued, to determine whether the creditor is fully secured, for § 547(b)(5) avoidance purposes?
We have considered this issue previously, and restate herein that the date of the petition is controlling.
In re Buyer’s Club Markets,
In this case, where unsecured creditors will receive less than 100% of their claims,
2
at least one of the payments in question enabled AIC to receive more than it would have under a Chapter 7 distribution. Without the payments in question, as of the date of bаnkruptcy, AIC would have held a $10,006.85 unsecured claim, and a secured claim in the amount of $11,118.15. In fact, AIC received a total of $21,125 during the preference period. Accordingly,
AIC’S AFFIRMATIVE DEFENSES
Transfers otherwise preferential are not recoverable if a creditor establishes that the questioned transfer falls within one of seven exceptions delineated in § 547(c).
Barash v. Public Finance,
The three § 547(c) exceptions AIC relies upon provide as follows:
(c) The trustee may not avoid under this section a transfer—
(1) to the extent that such transfer was
(A) intended by the debtor and the creditor ... to be a contemporaneous exchange for new value given to the debtor; and
(B) in fact a substantially contemporaneous exchange;
(2) to the extent that such transfer was—
(A) in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee;
(B) made in the ordinary course of business or financial affairs of the debtor and the transferee; and
(C)made according to ordinary business terms;
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(4) to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor—
(A) not secured by an otherwise unavoidable security interest; and
(B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor;
NEW VALUE
The stipulated facts, together with the unambiguous language of the premium finance agreement, preclude any argument that Paris’ insuranсe coverage had been cancelled. Although a “Notice of Cancellation” dated January 6, 1987 had been prepared, it was not mailed or otherwise transmitted, because AIC received Paris’ payment.
See
stipulations nos. 9 and 12. Sim
Finally, it is also misleading to assert that AIC relinquished its security interest in the collateral, and that said relinquishment constituted new value. This argument erroneously assumes that AIC had acquired the right to colleсt the unearned premiums. Under the premium finance agreement, that right arises only after cancellation of the policies. Clearly, none of the five insurance policies was ever can-celled.
ORDINARY COURSE OF BUSINESS
AIC’s reliance on the ordinary course of business exception is also misplaced, for the reason that loan payments do not fall within the protection of
The rationale for the ordinary course of business exceрtion is well explained by the Acme-Dunham court:
Trade credit transactions are exactly that — a two way exchange. They further the policies of the Code because they allow the debtor to continue on in business and in the narrow context of ongoing trade exchange, they do not diminish the estate for it is replenished by the goods and services paid for. A long-term loan is an antecedent debt in the traditional sense_ [N]othing is exchanged at the time of the payments ... which helps the debtor to continue in business. There is merely an outflow of money from the estate.
Id. at 741-42.
The eight month loan term in this case does not distinguish it from the longer loans involved in Acme-Dunham and the cases cited above, and the rationale in those cases applies here. 4
The Court in
McClanahan v. Lakeside National Bank of Lake Charles (In re RDC Corp.),
Based upon all of the foregoing, it is ORDERED that $10,006.85 of the $21,125 paid during the preference period is preferential, and that $11,118.15 may be retained by AIC, since that was a payment on a fully secured claim.
Enter Judgment consistent with this opinion.
Notes
Of the District of Rhode Island, sitting by designation.
. But they were not particularly helpful to the Court in addressing the issues that we feel are dispositive.
. It is our understanding that this is a no asset case.
. In
Drabkin v. A.I. Credit Corp.,
. Although a different result was reached in
Fidelity Sav. & Inv. Co. v. New Hope Baptist,
. Limiting the scope of