IN RE ILLINOIS VALLEY ERECTORS, INC. (Bankr.C.D.Ill. 2005)

THOMAS PERKINS, Bankruptcy Judge

This matter is before the Court on the motion of the Defendant, Soy Capital Bank and Trust Company (DEFENDANT), for summary judgment on the amended complaint filed by Charles E. Covey, as Trustee (TRUSTEE), seeking to recover $3,153.16 paid by the Debtor, Illinois Valley Erectors, Inc. (DEBTOR), pursuant to the terms of premium financing agreements, as a preferential transfer under Section 547 of the Bankruptcy Code.

FACTUAL BACKGROUND

On May 15, 2002, prior to the filing of the bankruptcy, the DEBTOR entered into an insurance premium finance agreement. Under that agreement, J.L. Hubbard Insurance and Bonds agreed to finance $28,922 on three commercial insurance policies, taking a security interest in unearned insurance premiums. The agreement called for nine monthly payments of $3,310.96, beginning June 15, 2002. The final payment was due on February 15, 2003. The DEBTOR made that payment by check dated March 7, 2003, which was received by the DEFENDANT on March 11, 2003. The DEBTOR filed a Chapter 7 petition on May 20, 2003.

The TRUSTEE filed this adversary proceeding, seeking to recover the final payment as a preferential transfer under Section 547 of the Bankruptcy Code. The DEFENDANT filed a motion for summary judgment, alleging that the final payment it received is not avoidable by the TRUSTEE because it was a fully secured creditor when the transfer was received. In support of its motion, the DEFENDANT submits the affidavit of Randy S. Cannady, First Vice President for J.L. Hubbard Insurance and Bonds, attaching a calculation of the amount of the daily unearned premium. According to Mr. Cannady's affidavit, based on a per diem of $113.60, had cancellation of the policy become effective on or before April 2, 2003, it would have received at least the amount of the payment in refund of unearned premiums. The TRUSTEE, in addition to disputing the DEFENDANT'S calculations, contends that the DEFENDANT has failed to establish that cancellation of the policy would have occurred prior to April 1, 2003, a date on which the DEFENDANT would have become undersecured. It is the TRUSTEE'S position that the amount of the premium refund depends upon the effective date of cancellation and that this undetermined date raises a question of fact which requires trial.

ANALYSIS

Rule 56(c) of the Federal Rules of Civil Procedure, made applicable to this adversary proceeding by Federal Rule of Bankruptcy Procedure 7056(c), provides that summary judgment shall be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." The role of the court is not to weigh the evidence but only to determine whether there is a disputed, material fact for determination at trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The Supreme Court has noted that the "mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. at 247-48. A fact is "material" if, under the applicable law, it could have an effect on the outcome of the lawsuit. JPM, Inc. v. John Deere Indus. Equipment Co., 94 F.3d 270 (7th Cir. 1996).

In order to avoid a transfer under Section 547, a trustee must prove by a preponderance of the evidence that the transfer was:

(1) made to or for the benefit of a creditor;

(2) on account of a pre-existing debt;

(3) made while the debtor is insolvent;

(4) made on or within 90 days before the date of filing the petition; and

(5) enabled the creditor to receive more than it would have received had the transfer not been made and the case liquidated pursuant to the provisions of Chapter 7.

11 U.S.C. 547(b); Matter of Smith, 966 F.2d 1527 (7th Cir. 1992). Each of the elements must be established by the trustee in order for the transfer to be avoidable under this provision. As a general rule, transfers to fully secured creditors are not avoidable as preferences, because a secured claim would be fully satisfied in a Chapter 7 proceeding. In re Erin Food Services, Inc., 980 F.2d 792 (1st Cir. 1992); Matter of Prescott, 805 F.2d 719 (7th Cir. 1986).

The nature of premium finance agreements was explained by the court in In re Schwinn Bicycle Co., 200 B.R. 980 (Bankr.N.D.Ill. 1996):

Insurance premium financing agreements . . . are commonplace in the insurance industry. . . . Premium financing enables a commercial enterprise to prepay its insurance premiums in full at the inception of coverage without having to expend large amounts of cash immediately. In the standard arrangement, the insured pays down roughly 15% to 20% of total premiums due. The remaining balance is advanced by the premium finance company. That advance, coupled with the insured's down payment, fully prepays the insured's premiums. In exchange for the premium loan, the insured executes a finance agreement promising to repay the premium finance company the monies advanced, plus finance charges, in amortized monthly installments.

As collateral for the loan, the insured typically assigns to the premium finance company all "return" or "unearned" premiums. Although insurance premiums are typically prepaid at the inception of coverage, the insurer "earns" its premiums on a pro rated basis, earning a small portion of its premium for each day it extends coverage to the insured. Thus, on any given day during the term of an insurance policy, there is an unearned premium balance which would have to be refunded or "returned" to the insured upon cancellation of its coverage. On the inception date of coverage, 100% of prepaid premiums are unearned. That balance diminishes with time as the insurer gradually earns its premiums. It is these unearned premiums that the insured assigns to the premium finance company as collateral for its loan.

In addition to granting a security interest in its unearned premiums, the insured also typically gives the premium finance company limited power of attorney to cancel the policy in event of default, after notice, and take possession of its collateral. Notices regarding cancellation are generated and mailed in accordance with applicable state law. In Illinois, premium finance companies must first send written notice of their intent to cancel insurance coverage subject to a finance agreement to the insured. The insured then has ten days after receipt of notice to cure its default. If default is not cured within that ten-day grace period, the finance company may effect cancellation by sending notice of cancellation to the insurer. Coverage is then canceled as if the request for cancellation had been submitted by the insured. See 215 ILCS 5/513a11 (1992). (Footnotes omitted).

200 B.R. at 982-83.

As the court noted in Schwinn, premium finance agreements are unlike other financing arrangements and payments made under them are particularly immune from preferential challenges. Relying on the Seventh Circuit's analysis in Prescott, the court in Schwinn held that a payment received by a premium finance company is not avoidable if immediately preceding the contested transfer, the creditor was fully secured. In Prescott, the court held that the trustee satisfies the burden of showing that the preferred party's debt was not fully secured by establishing that the value of its collateral on the date before the transfer took place was less than the amount owed by the debtor on that date. See also, In re Telesphere Communications, Inc., 229 B.R. 173 (Bankr.N.D.Ill. 1999) (the time for determining a creditor's secured status for the purpose of § 547(b)(5) is the time of payment, not the time of bankruptcy filing). In the present case, it is clear that the DEFENDANT was fully secured at the time of the disputed transfer. On March 11, 2003, when the final payment due of $3,153.16 was received, the value of the DEFENDANT'S collateral was $5,035.70.

The TRUSTEE would require more. The TRUSTEE suggests that the DEFENDANT must establish that cancellation of the policies would have been effected prior to the time that the value of the unearned premiums dropped below the amount of the payment made by the DEBTOR. This Court disagrees. Once it is established that the status of the creditor is fully secured at the time of the payment, the analysis is at an end. The Chapter 7 liquidation test, applicable to creditors holding unsecured and undersecured claims, does not come into play. The "hypothetical" date upon which the DEFENDANT would have effected a cancellation of the DEBTOR'S insurance policies is irrelevant.

The TRUSTEE contends that the earliest date the policy could have been cancelled would have been April 1, 2003, on which date the DEFENDANT would have been undersecured. As of that date, the value of the unearned premiums would have been $3,072.81 and the loan balance would have been $3,163.42. The DEFENDANT disputes that contention, contending that had the payment not been made, the ten day notice of cancellation would have been sent on March 14, or the following Monday, March 17, resulting in cancellation being effectuated on March 28, 2003. Though it does not accept the TRUSTEE'S calculations of the per diem rate of $99.13 rather than $102.77, it employs that figure for the sake of argument. Given the result reached by the Court, no determination need be made regarding this disagreement.

Moreover, the date on which the policies would have been cancelled had the final payment not been made is conjectural. The reality is that the payment was made and the policies were not cancelled. Any attempt to determine who might have done what, and when they might have done it, under a hypothetical set of circumstances would necessarily be based on speculation. This Court is of the view that simply using the time of the transfer as the collateral valuation date is preferable as a rule of law that is easy to apply, leads to predictable results and gives premium finance companies fair warning and guidance so that they may conduct their affairs accordingly. See, Aetna Cas. Sur. Co. v. Dow Chemical Co., 883 F.Supp. 1101 (E.D.Mich. 1995) (interest of certainty, predictability of results and ease of application are proper considerations for courts).

The Court holds that a premium finance company's secured status for purposes of Section 547(b)(5) is properly determined by comparing the amount of the indebtedness as of the date of the challenged transfer to the premium refund value as of that same date. As long as the refund value equals or exceeds the debt amount, the company is fully secured and the transfer is not avoidable as a preference. The DEFENDANT was fully secured on the date of the challenged transfer and is entitled to judgment as a matter of law.

Accordingly, the motion for summary judgment filed by the DEFENDANT should be granted. This Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Order will be entered.

ORDER

For the reasons stated in an Opinion filed this day, IT IS HEREBY ORDERED that the Motion for Summary Judgment filed by the Defendant, Soy Capital Bank and Trust Company, is GRANTED, and Judgment is entered in favor of the Defendant and against the Plaintiff.