National City Bank v. Columbian Mut. Life, 00-4249.

• Decision Date: 27 February 2002
• Docket Number: No. 00-4249.,00-4249.
• Citation: 282 F.3d 407
• Parties: NATIONAL CITY BANK, NORTHWEST, Plaintiff-Appellant, v. COLUMBIAN MUTUAL LIFE INSURANCE COMPANY, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 407

282 F.3d 407

NATIONAL CITY BANK, NORTHWEST, Plaintiff-Appellant, v. COLUMBIAN MUTUAL LIFE INSURANCE COMPANY, et al., Defendants-Appellees.

No. 00-4249.

United States Court of Appeals, Sixth Circuit.

Argued: January 24, 2002.

Decided and Filed: February 27, 2002.

Thomas S. Zaremba (argued and briefed), Roetzel & Andress, Toledo, OH, for Plaintiff-Appellant.

Cary Rodman Cooper (briefed), Thomas J. Tucker (argued and briefed), Cooper & Walinski, Toledo, OH, for Defendants-Appellees.

Before: MERRITT, BOGGS, and MOORE, Circuit Judges.

OPINION

MERRITT, Circuit Judge.

Here Columbian, the defendant insurance company, had a contractual right of recoupment or setoff for unearned premiums advanced to its agent. The agent also gave the plaintiff bank a perfected security interest in its accounts receivable in exchange for a loan. The question before us is whether the insurance company or the bank is first entitled to recoup its losses from new insurance commissions collected by the insurance company. Plaintiff, National City Bank, Northwest, brings this diversity action alleging that Defendants, Columbian Mutual Life Insurance Company and Columbian Life Insurance Company, engaged in a series of transactions by which they retained insurance commissions to which they were not entitled. We agree with the district court that Columbian's right is superior.

In 1993, Columbian began to sell life insurance with the issuance of credit cards. At that time, Columbian entered into an insurance agency contract with New Beginning Insurance to sell the insurance. Insurance agent Harold Aubry is the president and sole shareholder of New Beginning Insurance and its companion company New Beginning Financial Alliance. Under the agency contract, Columbian would advance a percentage of the first-year policy commissions (up to 11/12ths) to New Beginning Insurance upon receipt of a submitted policy application. The insured under the policy would then be billed monthly on a credit card over the course of the year. Under the terms of the contract, in situations where the policy was "not taken, not delivered, or otherwise lapsed," New Beginning Insurance was required to repay Columbian the advanced but subsequently unearned commissions. The agreement between Columbia and New Beginning Insurance provided a right of recoupment or setoff for Columbian to protect itself in the event that premiums went unpaid. The recoupment language of the agreement stated that Columbian "shall have a first lien on all commissions... and the Company [Columbian] may at any time deduct from any monies due to the General Agent [New Beginning Insurance]... any debt or debts due at any time from the General Agent to the Company" (emphasis added).

The result of the business practice between the parties was an accumulation of a large debt on the part of the New Beginning Insurance. From January 1994 to February 1995, Columbian advanced $900,000 to New Beginning Insurance, but by the end of 1994, New Beginning Insurance owed Columbian $638,136.17 in advanced commissions for policies with unpaid premiums.

During the summer of 1994, New Beginning Insurance and its companion company, New Beginning Financial, began to need money to sustain their operations. Aubry obtained a $200,000 line of credit from National City and borrowed $25,000. As collateral for the line of credit, Aubry unconditionally guaranteed the loans by granting National City a first security interest in all accounts receivable of both New Beginning Insurance and New Beginning Financial. In January and February 1995, Aubry borrowed an additional $175,000 from National City. National City perfected its security interest under Article 9 of the U.C.C. by filing the proper financing statements in October 1994. By contrast, Columbian did not perfect its "first lien" until it filed financing statements on August 7, 1995, perfecting its security interest in the assets of New Beginning Insurance.

Starting in March 1995, Columbian ceased advancing commissions to New Beginning for newly sold policies, ending its previous practice. In addition, Columbian used newly earned commissions to recoup the money owed to Columbian by New Beginning Insurance based on advanced commissions on the lapsed policies. Without those newly generated commissions, New Beginning Insurance defaulted on its operating credit line debt with National City. National City then attempted to collect on the balance of the commissions retained by Columbian. The Bank claimed that Columbian owed these to New Beginning Insurance.

This case was before us previously. Without discussion, the district court found that the contractual setoff right of Columbian took priority over the perfected security interests of National City. We remanded the case to determine whether the agency agreements provided Columbian with a separate contractual right of recoupment or setoff that is distinct from a lien, and whether that right is superior to National City's perfected security interest in...