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.
No. 12-6349 Am. Bank v. Cornerstone Community Bank Page 8
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.