On February 23, 2009, the Supreme Court of Pennsylvania issued a decision finding that payments made by a failed Pennsylvania insurance company in the ordinary course of business are not recoverable by the statutory liquidator of the insolvent insurer because the payments were not on account of an "antecedent debt" as that term is used in the voidable preference provision of Pennsylvania's Insurance Act. In so ruling, Pennsylvania's highest court followed the lead of an Ohio appellate court in reading an "ordinary course of business exception" into Ohio's insurer insolvency preference statute, when such an exclusion was not expressly included in the statute by the legislature.
The case of Joel S. Ario, Ins. Commissioner, et al. v. Ingram Micro, Inc., et al., Nos. 19-22 MAP 2006, entailed efforts by Pennsylvania's insurance commissioner, acting as liquidator of Reliance Insurance Company ("Reliance"), to recover as voidable preferences certain claim payments made by Reliance to policyholders prior to entry of the order placing Reliance into statutory liquidation. Pennsylvania's Insurance Act authorizes a liquidator to avoid certain prior payments made by an insolvent insurance company, including those which constitute preferences. The purpose of preference provisions is to achieve equitable apportionment of unavoidable losses and to discourage creditors from engaging in unusual collection practices which help dismember the debtor.
Pennsylvania's Insurance Act defines a "preference" in pertinent part as "a transfer of any of the property of an insurer to or for the benefit of a creditor, for or on account of an antecedent debt, made or suffered by the insurer within one year before the filing of a successful petition for liquidation." 40 Pa. Cons. Stat. § 221.30(a). Thus, § 221.30 limits a liquidator's power to void transfers to transfers made for or on account of antecedent debt. The term antecedent debt, however, is not defined in Pennsylvania's Insurance Act, and the parties in the Ario case disputed whether the claims payments at issue were for antecedent debt. The question on appeal then was whether payments made in the ordinary course of business constitute transfers for or on account of an antecedent debt. In answering the question, the Supreme Court, among other things, looked to the two judicial decisions from other states that have addressed the issue.
In Covington v. HKM Direct Market Communications, Inc., 2003 Ohio 6306, 2003 Ohio App. Lexis 5645, 2003 WL 22784378 (Ohio App. November 25, 2003) (unpublished opinion), the Court of Appeals of Ohio addressed whether an insolvent insurer's payments to a company for printing and direct mail services were made for or on account of antecedent debt and were therefore voidable preferences under Ohio's liquidation statute. As with Pennsylvania's statute, the term "antecedent debt" was not defined in Ohio's statute, Ohio Rev. Code § 3903.28. The Ohio Court concluded that the term "antecedent debt" did not include transactions conducted in the ordinary course of business. To hold otherwise, the court reasoned, would render the term "antecedent debt" superfluous and result in the Liquidator having the power to void all transfers made for or on account of any debt. Subsequent to the appellate court's decision, Ohio's legislature amended § 3903.28 to expressly include an "ordinary course" exception.
The Supreme Court of Nebraska, in Wagner v. Gilbane Building Co., 276 Neb. 686, 757 N.W.2d 194 (Neb. 2008), reached a contrary conclusion as to whether an insolvent insurer's ordinary course of business payments constituted voidable preferences. Like Ohio's and Pennsylvania's statues, Nebraska's preference statute, Neb. Rev. Stat. § 44-4828, limits voidable preferences to transfers made for or on account of "antecedent debt," which term is not defined. Nebraska's highest court determined that because Nebraska's preference statute did not contain an express ordinary course of business exception, the legislature did not intend that there be such an exception. The court opined that when the Legislature does not expressly enact an exception to a statutory rule, it must be assumed that the Legislature intended to not have the exception.In the end, the Pennsylvania Supreme Court sided with the Ohio Court of Appeals, and concluded that Pennsylvania's General Assembly intended the term "antecedent debt" to not include transfers made in the ordinary course of business, even though the statute does not expressly so state. The court found this construction of § 221.30 to best uphold the interests of insureds, creditors, and the public, as well as the interests of insurers. It also felt that a contrary interpretation would be harmful to both the insurance industry in Pennsylvania as well as insureds. Recognizing that arguments for a contrary interpretation certainly could be made, the court challenged the Pennsylvania General Assembly to amend the Insurance Act accordingly if it did not intend the conclusion reached by the court.
The question addressed by the Pennsylvania Supreme Court in Ario is not an isolated issue. In addition to Ohio, Nebraska, and Pennsylvania, thirty two other states (Alaska, California, Colorado, Connecticut, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Montana, New Hampshire, New Mexico, North Carolina, North Dakota, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, West Virginia, and Wisconsin) have preference statutes that limit voidable preferences to transfers made for or on account of "antecedent debt." Of these additional states, only three, Illinois, Texas, and Utah, addresses the "ordinary course" issue in their preference statutes. All three, like Ohio now does, expressly make an exception for payments made in the ordinary course of business. Thus, the question of whether the undefined phrase "antecedent debt" includes or excludes transfers in the ordinary course of business has yet to be definitively answered in the majority of states across the country. Whether these states ultimately will determine that transfers in the ordinary course of business do or do not constitute voidable preferences under their insurer insolvency statutes cannot be predicted. How the states answer that question, however, will profoundly impact the scope of permissible preference collection efforts in insurance company liquidations in those states.