## Facts

- Several affiliated manufacturing companies obtained commercial insurance and financed the premiums through a premium-finance company under a premium-finance agreement.
- The financier advanced about $271,803.65 in premiums (plus financing charges) to be repaid in monthly installments.
- As collateral, the insureds granted the financier a security interest in any unearned premiums refundable upon cancellation and authorized the financier to cancel the policies on default to recover the unearned premiums.
- The financier did not file a UCC financing statement to perfect any security interest in the unearned premiums.
- After the debtors filed Chapter 7, the trustee held $114,112.72 in unearned premiums in escrow.
- The financier sought relief from the automatic stay to obtain the escrowed unearned premiums; the trustee opposed, asserting priority as a hypothetical lien creditor and avoidance rights under 11 U.S.C. § 544(a).

## Issues

1. Whether a security interest in unearned insurance premiums securing a premium-finance agreement falls within UCC Article 9 or is excluded as a “transfer of an interest in or claim under any policy of insurance.”
2. If Article 9 applies, whether the financier’s failure to file a financing statement left its interest unperfected and subordinate to the Chapter 7 trustee under 11 U.S.C. § 544(a).
3. Whether the financier was entitled to relief from the automatic stay to recover the escrowed unearned premiums.

## Decision

- The court held that UCC Article 9 applies to a security interest in unearned insurance premiums; the insurance exclusion did not apply.
- Because Article 9 governed and the financier did not file a financing statement, its security interest was unperfected.
- The Chapter 7 trustee, as a hypothetical lien creditor under § 544(a), had priority over the unperfected security interest and could avoid it.
- The court denied the financier’s motion for relief from the automatic stay to obtain the $114,112.72 in escrowed unearned premiums.

## Legal Principles

- The UCC Article 9 insurance exclusion for transfers of an “interest in or claim under” an insurance policy is construed to cover the policy itself or claims to coverage proceeds, not a lender’s collateral interest in refundable unearned premiums arising from a separate financing transaction.
- A security interest in unearned premiums is within Article 9’s scope and is ordinarily perfected by filing a financing statement.
- An unperfected Article 9 security interest is subordinate to the rights of a bankruptcy trustee exercising strong-arm powers as a hypothetical judicial lien creditor under 11 U.S.C. § 544(a).
- Relief from the automatic stay to obtain alleged collateral is properly denied where the movant’s asserted property interest is avoidable and junior to the estate’s interest.

## Conclusion

The court treated unearned premium collateral in a premium-finance arrangement as Article 9 collateral requiring filing to perfect; because the financier did not file, the trustee’s § 544(a) status defeated the financier’s claim to the escrowed unearned premiums and warranted denial of stay relief.


In re JII Liquidating, Inc., 344 B.R. 875 (Bankr. N.D. Ill. 2006)