Cash proceeds paid to Debtor under a commercial property insurance policy are excluded from the scope of the UCC for perfection purposes, and any perfection of such must occur under common law. Wheeling & Lake Erie Ry. Co. v. Keach (In re Montreal, Me. & Atl. Ry., Ltd. 521 B.R. 703 (Bankr. D. Me., 2014).
In June 2009, Montreal, Maine & Atlantic Railway, Ltd. (the “Debtor”), with its affiliate, and Wheeling & Lake Erie Railway Company (the “Creditor”) executed a Line of Credit Note with a ceiling amount of $6 million (the “Note”). The Debtor and Creditor executed a security agreement, granting the Creditor a security interest in “[a]ll Accounts and other rights to payment (including Payment Intangibles)” and “all additions, accessions, substitutions . . . and all cash or non-cash proceeds of any of the foregoing, including insurance proceeds.” The Creditor filed a UCC-1 financing statement with the Delaware Secretary of State.
In April 2013, the Debtor and its affiliate obtained a commercial property insurance policy from Travelers Property Casualty Company of America (“Travelers”) (the “Policy”). Shortly thereafter, one of Debtor’s trains derailed in Quebec, causing multiple deaths and substantial property and environmental damage. Per a settlement agreement, Travelers agreed to pay the Debtor $3.8 million under the Policy. The Creditor, however, claimed a valid, perfected security interest in all of Debtor’s rights to payment under the Policy and challenged the settlement as impairing its security interest.
Noting that Maine has enacted the UCC (the “Maine UCC”), the court began its analysis under Article 9 of the same, which enables a creditor to obtain security interests in payment intangibles and/or accounts. The court found it “undisputed that [Creditor] has a valid, perfected security interest in all of the Debtor’s ‘accounts’ and ‘payment intangibles.'” Per Article 9’s definitions, the Creditor thus had a valid, perfect security interest in Debtor’s “right to payment for a monetary obligation, whether or not earned by performance: . . . [f]or a policy of insurance issued or to be issued” and a “general intangible under which the account debtor’s principal obligation is a monetary obligation.”
The Creditor argued that the settlement payment fit squarely within the definition of “account” or “payment intangible” and that it perfected its security interest by filing a UCC-1. The court disagreed. Upon citing Section 9-1109 of the Maine UCC, which explicitly exempts from Article 9 transactions “[a] transfer of an interest in or an assignment of a claim under a policy of insurance,” the court identified numerous cases that applied the exception in the context of unearned insurance premiums. The court found no meaningful distinction between the right to unearned premiums and the right to payments for coverage under an insurance policy, and that “both are excluded from the scope of Article 9.” Thus, the court held, “[R]egardless of whether [Creditor] has a security interest in an ‘account’ or a ‘payment intangible’ as defined by the UCC, it is expressly excluded from the scope of Article 9 if — as here — it arose from an insurance policy.”
The court further stated, “Although the definition of ‘account’ includes some ‘insurance related rights’ . . . [a]n insured’s right to receive payment for a covered loss is not a ‘right to payment’ . . . [f]or a policy of insurance issued or to be issued.” In the court’s view, these insurance related rights in the definition of “Account” refer to an insurer’s right to receive premiums from insureds or to an agent’s right to commission upon issuance of a policy. The inclusion of insurance related rights is “designed to facilitate financing by insurers or insurance agents, which has nothing to do with an insured’s right to receive payment under a policy.”
Finding that Article 9 excluded the settlement payment from the scope of the UCC for perfection purposes, the court addressed whether the Creditor validly perfected its security interest under Maine common law. The court conceded that Maine’s requirements for perfection were unclear but held that Creditor failed to perfect its asserted security interest because it took no steps other than filing a UCC-1. The court concluded, “[I]t is clear that Maine law requires something more than the filing of a UCC-1 . . . [t]here is no evidence in the record that [Creditor] notified Travelers of its claimed interest . . .that [Creditor] ever became a loss payee under the Policy or . . . had possession of the policy.” Absent any such evidence, the Creditor’s claim of a perfected security interest held no merit.