IN RE: BURNETT & ASSOCIATES, INC. CASE NO. 93-50431

UNITED STATES BANKRUPTCY COURT 

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

IN RE:

BURNETT & ASSOCIATES, INC. CASE NO. 93-50431

DEBTOR

CENTRAL BANK & TRUST COMPANY PLAINTIFF

v. ADV. NO. 93-5132

KENTUCKY CENTRAL INSURANCE COMPANY DEFENDANT

SYNOPSIS

"This adversary proceeding is pending on the motion of the defendant Kentucky Central Insurance Company (KCI) to dismiss the complaint for lack of jurisdiction or, in the alternative, to find that 28 U.S.C. 1334(c)(2) mandates that the court abstain from hearing this action, or for an extension of time in which to answer.

This is a controversy between two creditors of the chapter 11 debtor over entitlement to percentage commissions owed to the debtor on premiums payable by KCI policyholders on policies of insurance sold and serviced by the debtor insurance agency prior to bankruptcy.

. . . .

The plaintiff Central Bank & Trust Company, Liberty National Bank, and the defendant Kentucky Central Insurance Company, all hold consensual, nonpossessory security interests in the estate's interest in accounts receivable of the debtor, consisting primarily of permiums owed by policyholders of insurance policies written by the debtor as agent for various insurance companies. It seems to be agreed that the portion of any premium that the debtor agency is entitled to retain or receive as its commission for selling and servicing a policy is the actual receivable encumbered by the security interests of the banks and KCI, because the remainder of any such premium is received by the agency in trust for and must be forwarded to the insurance company issuing the policy. See KRS 304.9-400.

Whether or not KCI had a contractual right under its agency agreement with the debtor to commence direct billing of policyholders, it had such right under the Uniform Commercial Code. The UCC provides that on default a secured party is entitled to notify an account debtor to make payment directly to it whether or not the assignor was theretofore making collections on the collateral, and also to take control of any proceeds to which it is entitled under KRS 355.9-306. KRS 355.9-502.

However, even though notification and direct billing of account debtors by KCI may have been tantamount to taking possession of collateral, when bankruptcy intervened the debtor's interest in these accounts receivable became property of the estate, subject to the liens thereon. In re Empire For Him, Inc., 1 F.3d 1156 (11th Cir. 1993); United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983).

Continued direct billing of these accounts after bankruptcy by KCI without obtaining relief from stay may have been a violationof the automatic stay. 11 U.S.C. 362(a)(3). However, this problem seems to have been resolved by the agreed order of May 3, 1993, which authorized direct billing to continue without prejudice to the claims of Central Bank & Trust Company and Liberty National Bank on the commission portion of premium payments received by KCI.

The direct billing of these accounts by KCI did not supersede or defeat the rights of Central Bank & Trust Company or Liberty National Bank in the commission portion of the premium proceeds. An inferior lienholder cannot defeat the rights of prior lienholders by sequestering proceeds of collateral. KRS 355.9-306(2). KCI may be entitled under KRS 355.9-502(2) to its reasonable expenses of realization on collection of premiums, but such expenses may be less than the commission portion of the premiums on which the plaintiff has a prior lien.

If KCI is required by law to disgorge some portion of the premiums it has received under the direct biling arrangement, the amount of the secured claims of the banks and the amount of the unsecured claim of KCI dealt with under the confirmed plan are affected. Consequently, this litigation does affect the rights of the parties under the plan.

Clearly, this adversary proceeding is related to and does "arise in" the debtor's chapter 11 case and it is not a matter with respect to which this court must or should abstain under 28 U.S.C. 1334(c).

The motions of the defendant to dismiss or to abstain from hearing this adversary proceeding must be overruled. The defendant shall have 20 days to answer the complaint."

Dated: July 29, 1994.

 

By the court -

 

Joe Lee, Chief Judge

 

Copies to:

Randy Shaw

William T. Shier

W. Thomas Bunch