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Commissions Received by a Wholesale Insurance Broker are Preferences Under Sec. 547(b)

Kartzman v. Peachtree Special Risk Brokers (In re John A. Rocco Co.), Nos. 12-01269 (JKS), 10-18799 (JKS), 2016 Bankr. LEXIS 2079 (U.S. Bankr. D.N.J. May 18, 2016)

Debtor John A. Rocco Co., Inc. was an insurance producer. Defendant Peachtree was a wholesale insurance broker. Debtor and Peachtree entered into an agreement pursuant to which the Debtor placed two insurance policies for its clients through Peachtree. The clients defaulted and the policies were cancelled. A few months later, the Debtor sought to reinstate the policies and wired a total of $138,114.50 from its trust account into Peachtree’s trust account. Peachtree further remitted the funds to the insurers, less its commission of $15,870.60 and the two policies were then reinstated retroactively.

The Debtor filed a voluntary Chapter 11 petition and the Trustee commenced the adversary proceeding against Peachtree to recover the alleged payments as preferential. The Bankruptcy Court granted partial summary judgment in favor of the Trustee on his claim to recover $138,114.50 as preference payments. The District Court remanded the case to determine whether Peachtree was the initial transferee from whom the preference payment can be recovered. In the meantime, the Trustee settled its claims directly with the Debtor’s clients towards their two insurance policies and filed a notice of settlement in the Court. Pursuant to the settlement, the Trustee was entitled to pursue its claims against Peachtree but such claims were limited to the recovery of the commissions retained by Peachtree. So, the only remaining issue was whether the commissions of $15,870.60 received by Peachtree were preferences under section 547(b) of the Bankruptcy Code.

Upon remand, the Court concluded that Peachtree was the initial transferee as it received payment directly from the Debtor and retained the commissions for its own benefit. The Court reasoned that Peachtree was a creditor of the Debtor because the Debtor guaranteed Peachtree full payment of premiums and commissions on each policy written pursuant to the parties’ agreement. Peachtree issued invoices to the Debtor demanding payment of the two premiums and the commission payments were made on account of this antecedent debt because they relieved the Debtor of this liability. Peachtree did not challenge the presumption of insolvency set forth in section 547(f) and the transfer occurred during the 90-day preference period. Finally, the transfers enabled Peachtree to receive more than it would receive in Chapter 7 because over $19,000,000 in claims were filed in the bankruptcy case and the Debtor’s petition reflected only $119,320.50 in assets. Since all of the elements of section 547(b) were present, the Court held that the commission payments of $15,870.60 were preferences.