Lincoln Towers Insurance Agency v. Boozell

Annotate this Case

Sixth Division

Filed: 8/22/97

No. 1-95-4139

LINCOLN TOWERS INSURANCE AGENCY, INC., ) Appeal from the Circuit
individually and as Representative ) Court of Cook County
of all persons similarly situated, )
)
Plaintiffs-Appellees, )
) No. 93 CH 11373
v. )
)
MARK BOOZELL, as Liquidator of STATE )
SECURITY INSURANCE COMPANY, ) Honorable
) Ellis E. Reid,
Defendant-Appellant. ) Judge Presiding.

JUSTICE ZWICK delivered the opinion of the court:
This action was brought by plaintiff, Lincoln Towers
Insurance Agency, Inc., on behalf of itself and other similarly
situated insurance producers for State Security Insurance
Company, an insurance company in liquidation. Plaintiffs sought
a declaration of their right to set off claims against the
insolvent insurer for commissions against premiums due the
insolvent company. In addition, plaintiffs challenged the
liquidator's administration of the insolvent insurance company's
estate and requested a declaration that section 206 of the
Illinois Insurance Code (215 ILCS 5/206 (West 1996)) is
unconstitutional. Upon cross-motions for summary judgment, the
trial court granted plaintiffs' motion in part, holding that they
were entitled to set off the amounts of their earned commissions
against premiums due the insolvent insurance company which were
being held in premium fund trust accounts. Defendant, the
liquidator for the insolvent insurance company, appealed the
order of the trial court, and plaintiffs filed a motion to
dismiss the appeal which was taken with the case.
The undisputed facts established that prior to its
liquidation on June 16, 1993, State Security Insurance Company
(State Security), issued property and casualty insurance
policies. The plaintiffs were producers of insurance who acted
as agents or brokers in soliciting insureds for State Security.
State Security paid the producers a commission based upon the
type of insurance sold. In the usual course of business, when
the producers received an application for insurance, they
collected the premiums directly from the insured and delivered
the policies of insurance from State Security to the insured.
Pursuant to section 508.1 of the Illinois Insurance Code (215
ILCS 5/508.1 (West 1996)), all money received by a producer for
selling or renewing insurance policies was held by the producer
in a fiduciary capacity for the benefit of the insurer. These
funds were held in a premium fund trust account.
State Security and the producers reconciled their
transactions on a monthly basis in accordance with a "written
account current" system. Each month, State Security issued a
statement of accounts to each producer which reflected the
premiums written, commissions earned, policy cancellations, and
the amount due and owing to State Security. The producers then
deducted commissions owed to them, credited State Security for
all unearned commissions due on canceled policies and remitted
the net amount due to State Security. Prior to the liquidation,
the producers paid premiums due to State Security within 45 days
of the close of the month for which the account current statement
was prepared, whether or not the premium had actually been
collected from the insured.
Approximately five months after the entry of the agreed
order of liquidation, the producers filed the instant declaratory
judgment action, seeking a declaration of their right to set off
earned commissions against previously collected premiums due
State Security. Upon consideration of cross-motions for summary
judgment, the trial court entered an order granting partial
summary judgment in favor of the producers, ruling as follows:
(1) the Contract Clause in the United States
Constitution governed the relationship of the parties,
and the contractual agreements between the producers
and State Security superseded the order of liquidation
and section 206 of the Insurance Code;
(2) the producers were entitled to deduct their
earned commissions from that portion of premiums held
in the trust fund account that they had collected on
behalf of State Security prior to the liquidation on
June 16, 1993;
In accordance with these rulings, the court ordered the producers
to provide a verified account statement to the liquidator within
45 days showing the status of all debits, credits and premiums
held.
We initially address plaintiffs' motion to dismiss the
appeal for lack of appellate jurisdiction.
Supreme Court Rule 304(b)(2) specifically provides for
review of a judgment or order entered in the administration of a
liquidation which finally determines a right or status of a
party. A final order is one which disposes of the merits of the
case, despite the fact that certain incidental matters may be
reserved for consideration. McCaffrey v. Nauman, 204 Ill. App.
3d 761, 764, 562 N.E.2d 628 (1990). An order is not
automatically rendered nonfinal merely because the trial court
has retained jurisdiction over the cause for some purpose.
McCaffrey, 204 Ill. App. 3d at 764. The true test of the
finality of an order is met when it terminates the litigation on
the merits and finally determines the rights and obligations of
the parties, without leaving matters of substantial controversy
for subsequent resolution. McCaffrey, 204 Ill. App. 3d at 764.
In the case at bar, the trial court s order finally
determined the producers right to set off or retain earned
commissions from premiums held in the trust fund account which
had been collected on behalf of State Security prior to the
liquidation on June 16, 1993. The verified accounts which the
producers were required to file merely documented the status of
the parties and were incidental to the substantive claims
asserted. The fact that the court retained jurisdiction to
review such accounts did not affect the finality of the court s
ruling as to the rights and obligations of the parties.
Altschuler v. Altschuler, 399 Ill. 559, 569, 78 N.E.2d 225
(1948); Aetna Life Insurance Co. V. H.W. Stout & Associates,
Inc., 112 Ill. App. 3d 570, 574, 445 N.E.2d 1288 (1983).
Consequently, this court has jurisdiction to review the
substantive issues raised by defendant.
We next consider whether the trial court correctly
determined that the producers were entitled to set off the
amounts of their earned commissions against premiums collected or
held in premium fund trust accounts after the date of
liquidation.
In granting partial summary judgment in favor of the
plaintiffs, the trial court ruled that the Contract Clause of the
United States Constitution governed the relationship of the
parties, and the contractual agreements between the producers and
State Security superseded the order of liquidation as well as
section 206 of the Insurance Code.
Notwithstanding the declaration in the Contract Clause of
the United States Constitution (U.S. Const., art. 1, 10) that no
state may impair the obligation of contracts, it is firmly
established that contract rights are always subject to the
reasonable and legitimate exercise of the State's police power.
Meegan v. Village of Tinley Park, 52 Ill. 2d 354, 357-58, 288 N.E.2d 423 (1972); S & D Service, Inc. v. 915-925 W. Schubert
Condominium Ass'n., 132 Ill. App. 3d 1019, 1026, 478 N.E.2d 478
(1985). All contracts that are made are subject to the authority
of the State to safeguard the interests of its people. Sanelli
v. Glenview State Bank, 108 Ill. 2d 1, 23, 483 N.E.2d 226 (1985).
Moreover, the insurance industry is afforded with a public
interest and is subject to the control of the State in the
exercise of its police powers through the Insurance Code. City
of Evanston v. Create, Inc., 85 Ill. 2d 101, 114, 421 N.E.2d 196
(1981).
Statutes which are in existence at the time a contract is
executed are, in the absence of contrary language, deemed to be a
part of the contract as if they were expressly incorporated
therein. Selcke v. New England Insurance Co., 995 F.2d 688, 689
(7th Cir. 1993); McMahon v. Chicago Mercantile Exchange, 221 Ill.
App. 3d 935, 945, 582 N.E.2d 1313 (1991). Thus, statutes are a
source of implied contract terms which are read into all
contracts. Selcke, 995 F.2d at 689.
The set off provision currently embodied in section 206 of
the Illinois Insurance Code (215 ILCS 5/206 (West 1996)) has been
in existence since 1937 and, therefore, is deemed to be a part of
any contract executed by the insurer and the producers after that
date. Selcke, 995 F.2d at 689. As a result, the terms of
section 206 govern the producers' rights to set off earned
commissions against premiums held in the premium fund trust
accounts, and the trial court erred in finding that the Contract
Clause in the United States Constitution governed the
relationship of the parties and that section 206 of the Insurance
Code was superseded by the contractual agreements between the
producers and State Security.
We next examine whether the trial court correctly determined
that the producers were entitled to set off their commissions
against funds held in the premium fund trust accounts.
Article XIII of the Illinois Insurance Code (215 ILCS 5/187
et seq. (West 1996) was designed to provide a comprehensive,
orderly and efficient procedure for liquidating insurance
companies while protecting the rights of interested parties. See
In re Liquidation of Security Casualty Co., 127 Ill. 2d 434, 447,
537 N.E.2d 775 (1989). The rationale for creating statutory
procedures for liquidation of insurance companies is to provide a
means of marshaling the assets of an insolvent company and
distributing them under court supervision. Fabe v. Facer
Insurance Agency, Inc., 588 F. Supp. 1330, 1333 (C.D. Ill. 1984),
aff'd, 773 F.2d 142 (7th Cir. 1985). Avoiding preference of
creditors is an aim of liquidation just as it is in federal
bankruptcy (Fabe, 588 F. Supp. at 1333-34), and liquidation
statutes are intended to protect individual policyholders and
other claimants without permitting certain classes of creditors
to place themselves in a superior position.
Upon the entry of an order of liquidation, section 193(7) of
the Illinois Insurance Code requires producers to immediately
turn over to the liquidator all unearned premiums that have been
collected by or on behalf of the company and all earned premiums
owing the company. 215 ILCS 5/193(7) (West 1996).
Section 206 of the Illinois Insurance Code provides as
follows:
"in all cases of mutual debts or mutual credits
between the [insurance] company and another person,
such credits and debts shall be set off or
counterclaimed and the balance only shall be allowed or
paid,
* * *
No set-off shall be allowed in favor of an
insurance agent or broker against his account with the
company, for the unearned portion of the premium on any
cancelled policy, unless that policy was cancelled
prior to the entry of the Order of Liquidation, and
unless the unearned portion of the premium on that
cancelled policy was refunded or credited to the
assured prior to the entry of the Order of
Liquidation." 215 ILCS 5/206 (West 1996).
On appeal, the liquidator challenges the trial court's grant
of partial summary judgment in favor of the producers, contending
that the language of this section precludes a set off of the
earned premiums which had not been credited prior to the date of
liquidation because, after the declaration of insolvency, there
is no mutuality between the parties. In support of this
contention, the liquidator asserts that a fiduciary is prohibited
from exercising the right of set off against funds entrusted to
him on the ground that these funds belong to the debtor, and that
it would be unfair for the fiduciary to abuse his position of
trust to gain an advantage over other creditors.
Thus, resolution of this dispute centers upon the
determination of whether there is "mutuality" in the debts and
credits which result from the insurance transactions executed by
the insurer and the producers. The term "mutuality" has been
defined to mean contemporaneous and in the same capacity. Stamp
v. Insurance Co. of North America, 908 F.2d 1375, 1379 (7th Cir.
1990); Boston & Maine Corp. v. Chicago Pacific Corp., 785 F.2d 562, 566 (7th Cir. 1986). Courts strictly construe mutuality to
ensure that a debtor's claim in one capacity is not set off
against a claim asserted by the party in a different capacity.
In re Lakeside Community Hospital, 151 B.R. 887, 891 (N.D. Ill.
1993). Where the liability of the party claiming the right to
set off arises from a fiduciary duty or is in the nature of a
trust, the requisite mutuality of debts or credits does not
exist. Ross-Viking Merchandise Corp. v. American Cyanamid Co.,
Lederle Div., 151 B.R. 71, 73 (Bankr. S.D.N.Y. 1993).
In the case at bar, all money received by a producer for
selling or renewing insurance policies was held by the producer
in a fiduciary capacity for the benefit of the insurer in a
premium fund trust account. 215 ILCS 5/508.1 (West 1996); 50
Ill. Adm. Code 3133.30(c) (1994). All premiums deposited in the
premium fund trust account are considered to be the property of
the insurance company unless lawfully withdrawn. 50 Ill. Adm.
Code 3133.40(g) (1994). Thus, the producers acted as
fiduciaries in holding the collected premiums in trust for the
benefit of the insolvent insurer. Therefore, there could be no
mutuality between those funds and the producers' contractual
rights to collect earned commissions. Accordingly, the absence
of mutuality prohibits the producers from setting off the amount
of their contractual right to commissions against the funds held
by them, in a fiduciary capacity, in trust for the benefit of
State Security. To hold otherwise would allow the producers to
invade the premium fund trust accounts as a means of ensuring
that they receive the full amount of their commissions from the
insolvent insurer to the detriment of all other creditors. Such
a result would clearly be contrary to the legislative mandate of
avoiding preferences.
For the forgoing reasons, the judgment of the circuit court
of Cook County is reversed, and the cause is remanded for further
proceedings consistent with the views expressed herein.
Reversed and remanded.
QUINN, J., concurs.
GREIMAN, P.J., dissents.
PRESIDING JUSTICE GREIMAN, specially concurring in part and
dissenting in part:
I agree with the majority's observations with respect to the
contract clause in the United States Constitution, but believe
that the Illinois statutes vary the meaning of "mutuality" as a
condition for the right of setoff.
The elements of mutuality are often repeated in the
decisions of the bankruptcy and state courts. See Turner v.
Small Business Administration, 59 F.3d 1041 (10th Cir. 1995);
Lopes v. United States Department of Housing & Urban Development,
197 B.R. 15 (D.R.I. 1996); The Federal National Mortgage Ass'n v.
County of Orange, 183 B.R. 609 (C.D. Cal. 1995); Stamp v.
Insurance Co. of North America, 908 F.2d 1375 (7th Cir. 1990); In
re Knedlik, 192 B.R. 559 (D. Kan. 1995); Westamerica Bank v.
United States of America, 178 B.R. 493 (N.D. Cal. 1995); In re
Medina, 177 B.R. 335 (D. Or. 1994); United States v. Maxwell, 170 B.R. 974 (N.D. Ill. 1994); Ross-Viking Merchandise Corp. v.
American Cyanamid Co., 151 B.R. 71 (S.D.N.Y. 1993); State of
Illinois v. Lakeside Community Hospital, 151 B.R. 887 (N.D. Ill.
1993); Fabe v. Facer Insurance Agency, Inc., 773 Fd.2d 142 (7th
Cir. 1985); Ducker v. Lohrey, 33 B.R. 973 (S.D. Ohio 1983).
However, the right of setoff was also founded in equitable
principles. See Turner, 59 F.3d 1041; Ducker, 33 B.R. 973.
I would consider the Illinois statutory scheme with both of
12
these observations in mind. Moreover, I would give effect to all
of the provisions of the Insurance Code and assume, as I am so
obliged, that our General Assembly did not intend that certain
sections of the Code be ignored.
Section 206 of the Insurance Code provides for the setoff of
mutual debts and further states that unearned premiums shall not
be the subject of such setoffs. 215 ILCS 5/206 (West 1996).
Section 508.1 of the Code requires that all premiums collected be
placed in a trust account, safe from the creditors of the
insurance producer. 215 ILCS 5/508.1 (West 1996). In the
instant appeal, the insurance producer only seeks to set off
"earned" premiums.
Why would the legislature make a distinction between earned
and unearned premiums in section 206? Surely, it is aware that
all premiums collected are required to be placed in a trust
account. Accordingly, there would be no need to distinguish the
two classifications since set off of both would be prohibited by
reason of the fiduciary capacity in which the insurance producer
served by reason of section 508.1, thus creating the lack of
mutuality that the majority recognizes. Why the need to address
"unearned premiums" in a separate paragraph in section 206?
Since we are required to give effect to all of the language
of any statute, we can assume that the legislature meant to make
a real distinction and that, without that language, the
13
legislature thought that both earned and unearned premiums might
be set off. But section 508.1 creating the trust accounts would
make both types of premiums beyond the right of setoff because of
the lack of mutuality. We must construe both of these sections
in pari materia to provide the meaningful statutory scheme
envisioned by our legislature to protect the consumer public and
allow fairness between the insurance carriers and the insurance
providers.
Courts have been willing to waive the issue of mutuality.
In Ducker, the debtor rather than the creditor was a fiduciary as
a matter of law and had sold property belonging to the creditor
for which the creditor received no credit, although one of the
parties was clearly a fiduciary. The court concluded that there
might be exceptions to the general rule that setoff is
unavailable where the parties lack the necessary element of
mutuality.
The Ducker court stated:
"Although formal logic may dictate that setoff
be denied either party, where inconsistent relations
are found to exist, We have no difficulty in finding
that, in the instant case, such a denial of setoff
would plainly exalt form over substance". (Emphasis
omitted.) Ducker, 33 B.R. at 976-77.
Moreover, the case upon which the majority relies, Fabe v.
14
Facer Insurance Agency, Inc., 588 F. Supp. 1330, 1333 (C.D. Ill.
1984), is inapposite since its focus was upon the lack of
mutuality with respect to unearned commissions.
Plaintiff in the instant appeal does not seek unearned
commissions or earned and unearned collected premiums but rather
limits its requests to earned commissions to which the cases
cited to not appear to respond.
The majority also relies upon the language of a regulation
adopted by the Department of Insurance and cites section
3113.40(g) of the Illinois Administrative Code for the
proposition that: "[a]ll monies deposited into a PFTA (Premium
Fund Trust Account) are considered to be fiduciary funds until
lawfully withdrawn." 50 Ill. Adm. Code 3113.40(g) (1994).
Reading on, however, section 3113.40(h)(3) provides that
commissions due the producer may be lawfully withdrawn from the
PFTA. Again, I must ask why the legislature, being aware of the
issue of mutuality, and the Director of Insurance, who
understands that portions of the regulation may be in conflict,
would be so obscure when it would be so easy to state that
obligations may not be set off from the PFTA after an order of
liquidation?
15
1-95-4139
Accordingly, I would allow a setoff for such earned
commissions.

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