Pine Top Ins. Co. v. Century Indem. Co.
| Decision Date | 27 November 1990 |
| Docket Number | 88 C 4330. |
| Citation | 123 BR 287 |
| Parties | PINE TOP INSURANCE COMPANY, Plaintiff, v. CENTURY INDEMNITY COMPANY and Bank of America National Trust and Savings Association, Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
James R. Stinson, Holly A. Harrison, Susan A. Stone and Todd C. Jacobs, Chicago, Ill., for plaintiff.
Phil C. Neal, Ralph T. Russell, Jr. and Lawrence M. Benjamin, Chicago, Ill., for Bank of America Nat. Trust & Sav. Ass'n.
David M. Spector, Thomas S. Kiriakos and Nancy Linnerooth, Chicago, Ill., for Century Indem. Co.
Pine Top Insurance Company ("Pine Top"), an Illinois insurance company currently in liquidation under Illinois Insurance Code Art. XIII (Ill. Rev. Stat. ch. 73, ¶¶ 799-833.131), has sued Century Indemnity Company ("Century") and Bank of America ("Bank") under Insurance § 816(2) to recover two allegedly voidable preferential transfers. Bank and Century now move separately under Fed.R.Civ.P. ("Rule") 562 for summary judgment (Century's motion being limited to First Amended Complaint Count I). For the reasons stated in this memorandum opinion and order, Bank's motion for summary judgment is granted and Century's motion is denied.3
Pine Top provided reinsurance coverage for Century in accordance with reinsurance treaties between them. Those treaties required Pine Top to reimburse Century for certain losses covered by the reinsured policies that Century had initially issued. From time to time Century would require Pine Top to establish standby letters of credit ("LOCs") to secure its obligations under the treaties. By February 19865 Pine Top had a debt of approximately $2,875,961 owing to Century under the reinsurance treaties, and that is the amount in dispute in this case.
To enable Pine Top to give security for its reinsurance treaties, its parent company Greyhound Corporation ("Greyhound")6 asked Bank to grant Pine Top a line of credit of $10 million on which LOCs could be drawn. Greyhound told Bank that Pine Top required some of the LOCs to replace other LOCs that had expired on December 31, 1985 and that it urgently needed to have the $10 million line of credit in place to facilitate their replacement. Bank had no previous dealings with Pine Top, but it was willing to extend a line of credit to Pine Top only because of Bank's relationship with its long-time customer Greyhound. In fact, all the negotiations surrounding the establishment of the line of credit were between Greyhound and Bank.
Bank's officer-in-charge of the Greyhound account was Robert Troutman ("Troutman"), who had no experience in issuing LOCs for insurance companies. When Greyhound approached Troutman seeking the line of credit, it asked that the credit be provided on an unsecured basis. Troutman refused to do so and insisted that the credit be fully collateralized from its inception.7 At the time of Bank's commitment and at all times thereafter it was understood by Bank, Greyhound and Pine Top that the line of credit was to be fully secured. Bank's February 10 commitment letter to Pine Top set forth the terms under which Bank would provide Pine Top with a $10 million line of credit conditioned upon the provision of specified collateral. That collateral was to comprise (1) Pine Top's current and future reinsurance recoverable receivables, (2) $6.8 million in its short-term notes and (3) a $3.2 million standby LOC to be issued by Bank to Pine Top on the account of Greyhound Corporation.8
On about February 20 Greyhound transmitted to Bank ten applications for letters of credit on Pine Top's behalf, to be issued against the $10 million line of credit. One of those called for an LOC to be issued to Century in the amount of $2,875,961. On February 26 Bank issued and transmitted that LOC to Century, which received it by March 4.
Before the issuance of the LOC, the collateral that was contemplated in the original agreement was identified by the agreement itself and by other correspondence between Pine Top and the Illinois Department of Insurance ("DOI"). Pine Top informed DOI as early as February 19 of the loan agreement with Bank and of the fact that Pine Top was pledging approximately $10 million of its assets to Bank to secure the issuance of LOCs to companies reinsured by Pine Top.
Bank and Pine Top had intended the $10 million line of credit to be 100% collateralized up front. Nonetheless, although the nature of the collateralization was set forth in the February 10 commitment letter and although Greyhound assured Bank that the collateral would be transferred as soon as possible, the collateral itself was not turned over immediately. About two weeks after the acceptance of the LOC by Century, Greyhound caused Pine Top to execute the Security and Investment Agreements and the security agreements giving Bank its security interest in Pine Top's reinsurance recoverables (those documents bear an execution date of March 18 but were not actually delivered to Bank until about April 18).9 On approximately the same March 18 date Pine Top executed an assignment of the to-be-issued Greyhound LOC of $3.2 million, which Bank then issued and took possession of on April 17. Then on April 22 Greyhound transferred cash in the amount of approximately $6.8 million from its accounts at the Continental Bank in Chicago to Bank. Bank invested those funds in short-term securities, which were thereafter held by Bank as collateral pursuant to its agreement with Pine Top.
Pine Top had in fact been insolvent since at least February 26 (the date of the Century LOC). In the later substantive discussion this opinion will address the question whether Bank did or did not have any reason to believe that Pine Top was in danger of insolvency at that time or at any time before the transfer of the collateral. What the record reflects is that Bank had then received Pine Top's 1984 and 1985 Annual Statements and its Quarterly Statement for the Third Quarter of 1985. On about May 21, only after Bank had already received the security transferred to it by Pine Top, it received the Quarterly Statement for the First Quarter of 1986, which showed that Pine Top's surplus had shrunk substantially and was extremely slender. Importantly, all of the financial information known by Bank throughout the relevant period before it received its collateral security indicated that Pine Top's assets exceeded its liabilities. In any event, Bank did not conduct any further analysis of Pine Top's financial condition before Bank's extension of credit or its receipt of security, looking instead to the fact that it would be fully secured. Additionally, Bank believed that Greyhound would stand behind Pine Top.10
As for Century, there is substantial evidence that Century had reasonable cause to believe that Pine Top was insolvent — and there is none to the contrary.11 At the time of the LOC Pine Top was already in arrears to Century in payments totalling approximately $732,000 on a total indebtedness of approximately $2,875,961. Century knew that Pine Top was unable to pay its debts. It also knew that Pine Top was "potentially insolvent" (Group Ex. K). Additionally, on June 23 the Illinois Director of Insurance filed a verified petition for the rehabilitation of Pine Top, which then entered into voluntary rehabilitation pursuant to the Illinois Insurance Code. With knowledge of those facts and just three weeks short of Pine Top's entry into liquidation, on December 29 Century reimbursed itself from the LOC for 100% of Pine Top's indebtedness to Century — $2,875,961. Pursuant to its obligation under the LOC, Bank honored the draft and then reimbursed itself by liquidating collateral held under the security agreements with Pine Top. On January 16, 1987 Pine Top was determined by the Director of Insurance to be insolvent and was ordered into liquidation.
On May 17, 1988 DOI filed this action against Century to recover the alleged preference in the amount of $2,875,961 received by Century as a result of the LOC issued by Bank. DOI amended its complaint on October 5, 1988 by adding Bank as a defendant, seeking to recover the alleged preference of the security transferred to Bank. As already stated in n. 4, Century has earlier filed a motion for summary judgment, which this Court denied on June 8, 1989 in the Opinion.
Insurance § 816(2) provides:
Any transfer of, or lien upon, any property of any company made or created within four months prior to the filing of a complaint under this article, which gives to any creditor or policyholder or enables him to obtain a greater percentage of his debt than any other creditor or policyholder in the same class, which is accepted by a creditor or policyholder having reasonable cause to believe that such a preference will occur, shall be voidable.
In purely surface terms it might appear that Bank received a preference under Insurance § 816(2). It took actual possession of the security about two months after it issued the LOC to Century (and thus within the four-month statutory period preceding the complaint by the Director of Insurance seeking Pine Top's rehabilitation). Hence it is entirely proper for Pine Top, through the liquidator, to attempt recovery from Bank of an alleged preference of nearly $2.9 million. In the absence of any other facts, there would therefore be a clear preference if (and only if) Bank had "reasonable cause to believe" that a preference would occur.
But there are three potential exceptions to liability under Insurance § 816(2) that Bank says are called into play here:
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