American Bank, FSB v. Cornerston Community Bank (In re American Bank, FSB)

In re: American Bank FSB, 6th Cir Court of Appeals, No. 12-6349, (August 16, 2013)
In an opinion recommended for full text publication, the 6th Circuit Court of Appeals affirmed the ruling by the district court, that, in regards to the competing secured claims by American Bank and Cornerstone Community Bank, in the funds of the insolvent debtor U.S. Insurance Group (USIG), held in an account at Cornerstone; American Bank’s interest was superior to Cornerstone’s interest and that Cornerstone had no right to the money. The court's decision was based on the Premium Finance Company Act, Tenn. Code Ann. §§ 56-37-101 et seq. (2008), which gave American a senior perfected security interest in the contested funds good against any competing interest claimed by Cornerstone.
Procedural context:
Cornerstone Community Bank appealed the district courts' declaratory judgment that American Bank had a superior security interest in the disputed funds and that Cornerstone was liable for conversion.
American Bank loaned $429,991 to Saberline Transportation to pay for an insurance premium. As part of the deal, American took a security interest in “all unearned premiums,” that part of an insurance premium covering the term of insurance that “has not yet occurred.” Saberline agreed that, if it defaulted on the loan, American could cancel the policy and instruct the insurer, Praetorian Insurance Company, to return any unearned premiums to American. USIG brokered the deal. American would deliver the funds to USIG’s account at Cornerstone, after which USIG would forward the money to Praetorian. Consistent with this arrangement, American transferred $429,991 to USIG’s account at Cornerstone. Instead of placing the money in a trust account for Saberline, USIG told American to deposit the funds in USIG’s general operating account at Cornerstone. USIG, as it happens, was already indebted to Cornerstone and had authorized the bank to conduct daily sweeps of the operating account and apply anything over $50,000 to the debt. Saberline defaulted on its first payment to American. American canceled the insurance policy and set out to recover the insurance premium. It was not that easy. USIG repaid American with funds drawn from a separate account at a different bank. But not long after USIG returned the money, USIG filed for bankruptcy turning this last transfer into a preference payment. American settled with the bankruptcy trustee, reserving its right to pursue a conversion claim against Cornerstone.
Circuit Court Judges: GIBBONS, SUTTON and KETHLEDGE

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