800 F.2d 1153 (D.C. Cir. 1986), 85-5708, Drabkin v. A.I. Credit Corp.

Docket Nº:85-5708, 85-5710.
Citation:800 F.2d 1153
Party Name:Murray DRABKIN, Trustee, v. A.I. CREDIT CORPORATION, Appellant (Two Cases).
Case Date:August 29, 1986
Court:United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit
 
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Page 1153

800 F.2d 1153 (D.C. Cir. 1986)

Murray DRABKIN, Trustee,

v.

A.I. CREDIT CORPORATION, Appellant (Two Cases).

Nos. 85-5708, 85-5710.

United States Court of Appeals, District of Columbia Circuit

August 29, 1986

Argued March 6, 1986.

Page 1154

Appeal from the United States District Court for the District of Columbia (Civil Action No. 84-00296).

Bryan T. Veis, with whom Calvin H. Cobb, Jr., Washington, D.C., was on brief, for appellant.

Barry J. Dichter, with whom William J. Natbony was on the brief, New York City, for appellee. Abel J. Mattos, Washington, D.C., entered an appearance for appellee.

Before MIKVA and SILBERMAN, Circuit Judges, and McGOWAN, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge SILBERMAN.

SILBERMAN, Circuit Judge:

Appellant A.I. Credit Corporation (AICCO) appeals the district court's entry of summary judgment affirming the decision of the bankruptcy court. 49 B.R. 605. Appellee Murray Drabkin, the trustee of the now bankrupt Auto-Train Corporation, had brought an action in the bankruptcy court to recover certain payments that Auto-Train made to AICCO in the ninety-day period before Auto-Train filed its bankruptcy petition. The district court agreed with the trustee that those disbursements were preferential payments under Section 547(b) of the Bankruptcy Code, 11 U.S.C. Sec. 547(b) (1982). We affirm.

I.

AICCO is a premium financing company. Its business is to lend money, usually to commercial enterprises, to enable the borrower to purchase insurance. Premium financing is a common commercial arrangement.

Page 1155

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 term 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.

In this case, AICCO loaned to Auto-Train $1,357,347.99 so that Auto-Train could purchase property and casualty insurance policies. In light of the risk of nonpayment, AICCO designed a repayment schedule to ensure that the available fund of unearned premiums always exceeded the unrepaid amount of the loan; the schedule required Auto-Train to repay the loan covering a year's premiums in nine months instead of twelve and to make a substantial downpayment. Accordingly, in June 1980 Auto-Train delivered to AICCO a check for $522,941.12, which included a downpayment of $271,469 plus two monthly installment payments. This would ensure that AICCO was never undersecured and would be, in fact, oversecured by $338,407.16. 1

Since the fund of unearned premiums was constantly diminishing, however, AICCO could only be certain of full repayment if it could count on the unearned premiums it could claim if it cancelled the insurance policy plus the amount of the downpayment. AICCO's plan, which would have provided ample security for the outstanding loan, faltered when Auto-Train's check was dishonored. AICCO learned of the dishonoring on June 25, 1980, by which time the unearned premium fund had decreased to approximately one million dollars--substantially below the $1.36 million that AICCO had loaned. Had AICCO declared Auto-Train in default at that time, it could have taken the $1 million in unearned premiums, but that action would still have left it over $300,000 short of recouping the amount originally loaned.

On July 15, 1980, Richard Keating, the president of AICCO, and Robert Keesecker, Auto-Train's vice-president for finance, agreed that Auto-Train would make weekly payments of $25,000 to AICCO instead of the previously agreed-to monthly payments of approximately $125,000. According to their new agreement, the amount of the dishonored check would be made up when Auto-Train obtained additional outside financing. The intent of the parties in entering into this agreement, which AICCO contends is material to the outcome of this case, is controverted. AICCO maintains that the parties wanted the payments to be applied only to the secured portion of the debt, offsetting the declining security interest; the trustee, on the other hand, argues that the parties intended merely to forestall AICCO from foreclosing on the unearned premiums (which would have terminated insurance coverage necessary to Auto-Train's business), and that they did not clearly manifest an intent to apply the rescheduled payments to the secured portion of the debt.

Auto-Train did not comply with the new $25,000-per-week repayment schedule, but it did make sporadic payments totalling $155,000 during the ninety days preceding Auto-Train's petition for bankruptcy, filed on September 8, 1980. Drabkin, as trustee for Auto-Train, sued to recover that amount plus interest for the benefit of Auto-Train's other creditors. The bankruptcy court agreed that the payments constituted preferences voidable by the trustee.

Page 1156

The district court affirmed the bankruptcy court's decision. In re Auto-Train, 49 B.R. 605 (D.D.C.1985).

II.

Section 547(b) of the Bankruptcy Code, 11 U.S.C. Sec. 547(b) (1982), authorizes a bankruptcy trustee to avoid certain transfers of the debtor's property to creditors if those transfers meet each of that section's five conditions. 2 AICCO disputes only the applicability of the fifth condition. AICCO contends that because the...

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