In re JII Liquidating, Inc.

JII Liquidating, Inc. (Jernberg), JSI Liquidating, Inc., and IM Liquidating, LLC (collectively, the Jernberg companies) (debtors) produced automotive parts. Jernberg purchased insurance policies for the Jernberg companies from an insurance agent. Premium Assignment Corporation (PAC) (creditor) financed the purchase and entered into a premium-finance agreement (the finance agreement) with Jernberg and the insurance agent. Pursuant to the finance agreement, PAC financed $271,803.65 of the insurance premiums for the insurance policies. Jernberg agreed to repay the funds plus a $6,520.05 finance charge in equal monthly installments of $27,832.37. As security, Jernberg gave PAC a security interest in any unearned-insurance premiums that could become payable under the insurance policies, as well as the authority to cancel the insurance policies if Jernberg defaulted on its payment obligations under the finance agreement. PAC never filed a financing statement regarding its security interest in the unearned-insurance premiums. Thereafter, the Jernberg companies filed for bankruptcy. During bankruptcy proceedings, the bankruptcy trustee held $114,112.72 in unearned-insurance premiums in escrow. PAC moved for a termination of the automatic stay so the funds could be refunded to PAC. The trustee sought to avoid PAC’s claim as a hypothetical-lien creditor pursuant to 11 U.S.C. § 544(a). The trustee argued that the trustee had priority over PAC’s claim because PAC had never filed a financing statement to perfect its interest under Uniform Commercial Code (UCC) Article 9. PAC argued that Article 9 did not apply to a security interest in unearned-insurance premiums. The trustee responded by arguing that the Article 9 exclusion applied only to a transfer of an interest in an insurance policy or an assignment of an insurance-policy claim and that, unlike some other states, Illinois had not enacted a statute providing that a secured party need not file the financing agreement to perfect the validity of the agreement.