American Bank, FSB v. Cornerstone Community Bank

RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit I.O.P. 32.1(b)

File Name: 13a0235p.06

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

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AMERICAN BANK, FSB, dba American

Plaintiff-Appellee, --

Premium Finance,

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No. 12-6349

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v.

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Defendant-Appellant. N-

CORNERSTONE COMMUNITY BANK,

Appeal from the United States District Court

for the Eastern District of Tennessee at Chattanooga.

No. 1:11-cv-00324—Susan K. Lee, Magistrate Judge.

Argued: July 31, 2013

Decided and Filed: August 16, 2013

Before: GIBBONS, SUTTON and KETHLEDGE, Circuit Judges.

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COUNSEL

ARGUED: Scott N. Brown, Jr., SPEARS, MOORE, REBMAN & WILLIAMS, P.C.,

Chattanooga, Tennessee, for Appellant. Kenneth Oestreicher, WHITEFORD, TAYLOR

& PRESTON, LLP, Baltimore, Maryland, for Appellee. ON BRIEF: Scott N. Brown,

Jr., SPEARS, MOORE, REBMAN & WILLIAMS, P.C., Chattanooga, Tennessee, for

Appellant. Kenneth Oestreicher, Kristen B. Perry, WHITEFORD, TAYLOR &

PRESTON, LLP, Baltimore, Maryland, Harry R. Cash, GRANT, KONVALINKA &

HARRISON, P.C., Chattanooga, Tennessee, for Appellee.

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OPINION

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SUTTON, Circuit Judge. American Bank and Cornerstone Community Bank

each claimed a security interest in funds held in an account at Cornerstone. The

account’s owner, insurance broker U.S. Insurance Group (USIG), held the money, which

it had received from American, in trust as part of an insurance deal. After Cornerstone

1

No. 12-6349 Am. Bank v. Cornerstone Community Bank Page 2

took the contested money and applied it to a debt USIG separately owed it (and after

USIG went bankrupt), American sued Cornerstone for conversion. The magistrate judge

held that American’s interest trumped Cornerstone’s interest and that Cornerstone had

no right to the money. Because the Premium Finance Company Act, Tenn. Code Ann.

§§ 56-37-101 et seq. (2008), gave American a senior perfected security interest in the

contested funds good against any competing interest claimed by Cornerstone, we affirm.

I.

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,” R.21-6 at 5, that part of an insurance premium covering the term

of insurance that “has not yet occurred,” Black’s Law Dictionary 1300 (9th ed. 2009).

Insurers often require full payment in advance of coverage, here for twelve months, after

which the premium is “earned” as the term of the policy progresses. 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. Thus,

if Saberline defaulted after three months, the agreement entitled American to the

remaining three-quarters of Saberline’s premium.

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

through two payments in 2008.

Things did not go as planned. 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. As a result, on the two days when American deposited

Saberline’s insurance premiums, Cornerstone cleared the account of Saberline’s money

and reduced USIG’s debt in the process.

No. 12-6349 Am. Bank v. Cornerstone Community Bank Page 3

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.

The magistrate judge issued a declaratory judgment that American had a superior

security interest in the disputed funds and that Cornerstone was liable for conversion.

Cornerstone appeals.

II.

Resolution of this case starts, and largely ends, with the Premium Finance

Company Act, Tenn. Code Ann. §§ 56-37-101 et seq. The statute regulates insurance-

premium financing agreements like this one, and the 2008 version of the law establishes

that American properly perfected its security interest in the unearned insurance

premiums and that American’s security interest takes priority over Cornerstone’s

security interest in the funds in the USIG account.

American, to start, obtained a security interest in the disputed funds. The Act

gives banks and other entities “a perfected security interest in any premiums financed

. . . if the buyer or borrower signs a written agreement assigning a security interest to the

seller, seller’s assignee or lender.” § 56-37-112 (2008). American had just such a

written agreement. Saberline gave American “a security interest in . . . any and all

unearned premiums and dividends which may be payable under the insurance policies.”

R.21-6 at 5.

With this agreement in place, American did not need to file its security interest

or give any other notice to perfect its security interest. As the Act explains, “[n]o filing

of the premium finance agreement shall be necessary to perfect the validity of such

agreement as a secured transaction.” Tenn. Code Ann. § 56-37-112 (2008). The Act

instead recognizes perfection of the security interest upon execution of the written

No. 12-6349 Am. Bank v. Cornerstone Community Bank Page 4

premium financing agreement and payment of the insurance premium. Id.; see also In

re Barton Indus., Inc., 104 F.3d 1241, 1247 (10th Cir. 1997).

The Act also gave American’s security interest priority over Cornerstone’s. A

security interest covered by the Act is perfected “as against creditors, subsequent

purchasers, pledgees, encumbrancers, trustees in bankruptcy or any other insolvency

proceeding under any law or anyone having the status or power of the aforementioned

or their successors or assigns.” Tenn. Code Ann. § 56-37-112 (2008). Cornerstone falls

into at least two lower-priority categories. Tennessee law generally defines “creditor”

to include “a general creditor, a secured creditor, a lien creditor, and any representative

of creditors,” id. § 47-1-201(13) (2008), a definition that covers Cornerstone, see App.

Br. at 7 (“[Cornerstone] was also a lender to USIG, having granted USIG a line of credit

loan, and also an unrelated term loan.”). In addition, Cornerstone was a “subsequent

purchaser” under the Act. Cornerstone conceded as much during oral argument. And

with good reason: Article 9 of the Uniform Commercial Code, as enacted in Tennessee,

says that “subsequent purchasers” include not just “buyer[s]” but also “secured

lender[s].” See Tenn. Code Ann. § 47-9-401, cmt. 7. The Act’s perfection and priority

provisions thus give American a senior security interest in the funds deposited in USIG’s

operating account.

Cornerstone offers several responses. It first invokes a provision of Tennessee’s

version of the U.C.C., which favorably treats a bank’s security interest in its customers’

deposit accounts. “[A] security interest held by the bank with which the deposit account

is maintained,” it says, “has priority over a conflicting security interest held by another

secured party.” Id. § 47-9-327(3). But the most Cornerstone can say about this

provision of the U.C.C. is that it suggests a different priority rule from the one set forth

in the Act. When that happens, courts customarily seek to honor as much of the

competing laws as they can by giving priority to the more specific piece of legislation.

“[I]t is a commonplace of statutory construction that the specific governs the general.”

RadLAX Gateway Hotel, LLC v. Amalgamated Bank, __ U.S. __, 132 S. Ct. 2065, 2071

(2012) (internal quotation marks omitted); see also Rent-N-Roll v. Highway 64 Car &

No. 12-6349 Am. Bank v. Cornerstone Community Bank Page 5

Truck Sales, 359 S.W.3d 183, 188 (Tenn. Ct. App. 2010). The detailed Premium

Finance Company Act, not the Uniform Commercial Code, amounts to the more specific

of the two laws. The U.C.C. itself embraces this canon, noting that, “[i]n case of conflict

between [Article 9] and a rule of law, statute, or regulation . . . , the rule of law, statute,

or regulation controls.” Tenn. Code Ann. § 47-9-201(c). Here, we have a specific

statute describing the perfection and priority of security interests related to premium

financing agreements that conflicts with a general statute that applies to commercial

transactions. If, as Cornerstone claims, just one set of these rules may apply to this

priority contest, it must be the Premium Finance Company Act.

This analysis helps to explain why Cornerstone cannot clear another hurdle it

faces in overturning the magistrate judge’s decision—or at least why this additional

obstacle, even if Cornerstone could sidestep it, does not alter the outcome of this dispute.

Article 9 separately provides that “[t]his chapter does not apply to . . . a transfer of an

interest in or an assignment of a claim under a policy of insurance.” Id. § 47-9-

109(d)(8). The provision is susceptible of two reasonable readings. It could be read to

exclude (1) a transfer of an interest in a policy of insurance and (2) an assignment of a

claim under a policy of insurance. That would help American because its security

interest amounts to “an interest in . . . a policy of insurance.” Or it could be read to

exclude (1) a transfer of an interest in a claim under a policy of insurance and (2) an

assignment of a claim under a policy of insurance. That would help Cornerstone because

American’s security interest does not seem to be a “claim under a policy of insurance.”

Every court to address the issue, including the magistrate judge in this case, has

embraced the “interest in” interpretation, the one that favors American, and thus has

exempted these types of transactions from Article 9. See, e.g., In re Barton Indus., 104

F.3d at 1246; In re QA3 Fin. Corp. No. Bk11-80297-TJM, 2011 WL 1297840, at *2

(Bankr. D. Neb. Apr. 5, 2011); In re JII Liquidating, Inc., 344 B.R. 875, 882–84 (Bankr.

N.D. Ill. 2006). We agree that this is the better interpretation largely for the reasons

given above: It “harmon[izes]” two statutes that would otherwise conflict and respects

the interpretive norm that the specific usually trumps the general. Digital Equip. Corp.

No. 12-6349 Am. Bank v. Cornerstone Community Bank Page 6

v. Desktop Direct, Inc., 511 U.S. 863, 879 (1994); Frazier v. E. Tenn. Baptist Hosp.,

Inc., 55 S.W.3d 925, 928 (Tenn. 2001).

Even if the Premium Finance Company Act gave American a senior perfected

security interest in the funds, Cornerstone claims that its good faith sweeps of the funds

do not amount to conversion under Tennessee law. But good faith has nothing to do

with it. “Conversion is the appropriation of another’s property to one’s own use and

benefit, by the exercise of dominion over the property, in defiance of the owner’s right

to the property.” Ralston v. Hobbs, 306 S.W.3d 213, 221 (Tenn. Ct. App. 2009).

“[W]rongful intent . . . is not an element of conversion and, therefore, need not be

proved.” White v. Empire Express, Inc., 395 S.W.3d 696, 720 (Tenn. Ct. App. 2012)

(emphasis added and internal quotation marks omitted). American met each requirement

for a conversion claim under Tennessee law. Cornerstone benefitted from the sweeps

by paying down USIG’s debt, reducing “the attendant risk of having a substantial loan

owed by a company in trouble.” R.54 at 16–17. By applying the funds to USIG’s

existing debt, Cornerstone exercised dominion and control over the funds. See In re

Hurtado, 342 F.3d 528, 533 (6th Cir. 2003); Bonded Fin. Servs., Inc. v. European Am.

Bank, 838 F.2d 890, 894 (7th Cir. 1988). And the sweeps did not respect, indeed defied,

American’s senior security interest in the contested funds.

For the first time on appeal, Cornerstone adds several new theories—some about

conversion, some about more general principles (waiver, laches, estoppel)—for avoiding

the conclusion that it converted the funds. But this is too late and too little. It is too late

because Cornerstone did not raise these arguments below. R.54 at 16 (magistrate judge

noting that Cornerstone “made no other argument opposing [American’s] contentions

as to the conversion”). Cornerstone thus forfeited the arguments. See United States v.

Huntington Nat’l Bank, 574 F.3d 329, 332 (6th Cir. 2009).

It is too little because there is no support for the arguments anyway. Cornerstone

claims that its actions were not the proximate cause of American’s loss, precluding

liability for conversion. But proximate cause is not an element of the claim. See Car

Transp. v. Garden Spot Dists., 805 S.W.2d 632, 635 (Ark. 1991) (“[P]roximate causation

No. 12-6349 Am. Bank v. Cornerstone Community Bank Page 7

is not an element for the jury to find prior to awarding damages for conversion.”);

90 C.J.S. Trover and Conversion § 4 (“[P]roximate causation” is not “an element of

conversion.”). Cornerstone adds that American had no right to immediate possession

of the property. But the Tennessee cases laying out the elements of a conversion claim

impose no such requirement. See, e.g., Ralston, 306 S.W.3d at 221. At all events,

American’s agreement with Saberline made the unearned premiums “immediately due

and payable to” American in the event of default, which occurred here because

Saberline—and USIG as its agent—did not “comply with [the] term[s] or condition[s]

of th[e] Agreement.” R.21-6 at 5.

Cornerstone contends that American waived its conversion claim by settling its

preference claim with the bankruptcy trustee (and paying the estate $310,304.25) after

USIG filed its bankruptcy petition. Waiver is the intentional, voluntary relinquishment

of a known right, and “there must be clear, unequivocal and decisive acts of the party”

to demonstrate it. Collins v. Summers Hardware & Supply Co., 88 S.W.3d 192, 201

(Tenn. Ct. App. 2002) (internal quotation marks omitted). American did no such thing.

The settlement agreement with the trustee included this disclaimer: “Nothing contained

herein shall constitute a waiver or release, nor is it intended to affect [American’s] right

to recover . . . from parties other than the Trustee.” R.21-13 at 5. That is not the

“intentional,” “voluntary,” “clear,” “unequivocal” or “decisive” surrender of a right.

Just the opposite.

Laches does not save Cornerstone. It requires a showing of inexcusable delay

that causes prejudice to the defendant. See Baptist Physician Hosp. Org., Inc. v.

Humana Military Healthcare Servs. Inc., 481 F.3d 337, 353 (6th Cir. 2007). Even if

there had been an inexcusably long delay between Cornerstone’s sweeps and American’s

conversion action, not shown on this record, Cornerstone has not shown prejudice. Its

one statement that the “passage of time made it impossible for [Cornerstone] . . . to assist

[American] in mitigating its loss,” App. Br. at 52, is a conclusion, not an explanation,

and at any rate it is a conclusion that seems to speak to American’s prejudice, not

Cornerstone’s.

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Cornerstone’s equitable estoppel arguments re-plow grounds already covered.

It says that American voluntarily surrendered its rights to the money to the bankruptcy

trustee, but see R.21-13 at 5 (the disclaimer in the settlement agreement), that American

did not give notice to Cornerstone about its security interest, but see the Premium

Finance Company Act, Tenn. Code Ann. § 56-37-112, and that American waited too

long to bring its conversion claim, but see Baptist Physician Hosp., 481 F.3d at 353.

III.

For these reasons, we affirm.