Case Name: In the Matter of the Receivership of SUPERIOR MUTUAL INSURANCE CO. KORLANN, Respondent, v. E-Z PAY PLAN, INC. et al, Appellants
Court: Oregon Supreme Court
Jurisdiction: Oregon
Decision Date: 1967-05-24
Citations: 247 Or. 170
Docket Number: 
Parties: In the Matter of the Receivership of SUPERIOR MUTUAL INSURANCE CO. KORLANN, Respondent, v. E-Z PAY PLAN, INC. et al, Appellants.
Judges: Before Perry, Chief Justice, and McAllister, Sloan, O’Connell, Goodwin, Denecke and Lusk, Justices.
Reporter: Oregon Reports
Volume: 247
Pages: 170–189

Head Matter:
Argued March 6,
reversed May 24, 1967
In the Matter of the Receivership of SUPERIOR MUTUAL INSURANCE CO. KORLANN, Respondent, v. E-Z PAY PLAN, INC. et al, Appellants.
428 P. 2d 172
Norma J. Paulus and Edward L. Ciarle, Jr., Salem, argned the canse for appellants. With them on the briefs were Clark & Marsh, Salem.
Paul D. Hanlon, Special Assistant Attorney General, Portland, argued the cause for respondent. With him on the brief were Hart, Veazie, Bischoff & Hanlon, Portland.
Before Perry, Chief Justice, and McAllister, Sloan, O’Connell, Goodwin, Denecke and Lusk, Justices.

Opinion:
GOODWIN, J.
Plaintiff is the Oregon receiver for Superior Mutual Insurance Co., an insolvent Wisconsin corporation. Defendants are two Oregon corporations, Manhattan Agencies, Inc., which placed automobile liability insurance with Superior and other insurance companies, and E-Z Pay Plan, Inc., which discounted the time-payment contracts of Manhattan's customers as a means of financing their insurance premiums. Manhattan and E-Z Pay appeal a decree in favor of Superior's receiver.
At the time of Superior's insolvency, the account between Manhattan and Superior showed credits favoring Superior in the sum of $39,194.29 (earned premiums and other credits), and credits favoring Manhattan in the sum of $112,907.22.
Manhattan's favorable balance included $30,663.63 in unearned premiums due Manhattan from Superior for distribution to Manhattan's customers as the result of cancellations effected in the regular course of business prior to Superior's insolvency. The remainder of the balance shown to be in Manhattan's favor was made up of unearned premiums that became "unearned" upon Superior's insolvency. Holz v. Smullan, 277 F2d 58, 62 (7th Cir 1960).
(In outlining the facts we have used figures quoted by the parties solely for the purposes of illustrating their legal theories, and we do not adopt any of these figures or treat them as established for accounting purposes.)
Manhattan, when notified of Superior's insolvency, was holding cash premiums which had been advanced by E-Z Pay in the sum of $46,991.36. This sum was returned to E-Z Pay by Manhattan and is the principal subject matter of this litigation.
The money advanced by E-Z Pay was in each instance secured by the assignment to E-Z Pay of the customer's insurance policy. E-Z Pay was, therefore, ultimately entitled to any unearned premium that might be refunded by Superior in the event of the cancellation of any policy so assigned to E-Z Pay.
At all material times prior to Superior's insolvency, Superior and Manhattan had been settling accounts with each other under an arrangement known in the insurance industry as an "account current, seventy days."
An account current is defined as "the insurance agent's statement of policies written and premiums returned on cancellation during the month, net premiums being recorded whether paid or not." 16 Appleman, Insurance Law and Practice § 8786, at 229 (1944). Such accounts are not unusual in the type of business being conducted in this case. See Bushnell, Receiver v. Krafft et al, 133 Ind App 474, 183 NE2d 340 (1962).
An "account current, seventy days," according to the testimony, is the same as a thirty-day "account current" except that the agent has seventy days after a policy is issued in which to remit net balances, if any, that may be due the insurer.
The receiver does not deny that if insolvency had not intervened, Manhattan would have been entitled to continue to settle its account periodically by remitting only the net balances credited to Superior on any given settlement date. The record shows, for example, that ten days before the insolvency occurred, Manhattan had forwarded to' Superior all sums due Superior under the accounting system employed.
Under the method of doing business followed by Manhattan and Superior, Manhattan received from Superior (or deducted from premiums due Superior) and credited to its customers' accounts unearned premiums resulting from cancellations. (As is apparently the custom in the trade, these unearned premiums were rarely returned in cash to the customer, but were ordinarily used in the customer's behalf either to satisfy his debt to E-Z Pay or to obtain new insurance to replace the insurance which had been canceled. See, for a case involving similar practices, Downey v. Humphreys, 102 Cal App 2d 323, 227 P2d 484 (1951).)
The testimony in the case at bar indicated that most, if not all, cancellations in the course of business were actually made by Manhattan, usually because of the nonpayment of a premium installment when due. Superior apparently allowed Manhattan unlimited discretion in making such cancellations. These cancellations were the only practical method available to Manhattan to encourage payment of installments. In case of such a cancellation, Manhattan would credit Superior with the amount of the refund and then pay over to E-Z Pay the unearned premium. No money would move from Superior to Manhattan, but the "account current" would show that the refund had reduced the amount due Superior from Manhattan.
On the theory that Manhattan was a trustee and thus bound to pay unconditionally all premium money, earned or unearned, received from policy holders to Superior's receiver upon notice of Superior's insolvency, the receiver obtained an order to show cause against both Manhattan and E-Z Pay. The order apparently was drawn according to the receiver's theory that Manhattan's payment to E-Z Pay after notice of insolvency was a conversion and that the receiver could therefore follow the money into E-Z Pay's hands by treating E-Z Pay either as a converter or as a constructive trustee.
The record shows that E-Z Pay and Manhattan had certain officers and shareholders in common. The two defendants concede that they worked closely together, Manhattan producing the insurance business and E-Z Pay financing the premiums. The business attempted to satisfy the insurance needs of young or "rated" drivers, virtually all of whom had difficulty buying insurance. In such a business, the premiums and the risks were high. Most of the premiums had to be financed and paid in monthly installments.
In considering the rights of the parties in this case, we deem it irrelevant that Manhattan and E-Z Pay shared common ownership and were more or less under common management. There has been no pleading or proof of any impropriety in their method of doing business. Accordingly, the two corporations, for the purposes of this case, are treated as if they were strangers acting in the ordinary course of business.
Manhattan defended the show-cause order by asserting a right of setoff. Manhattan argued that as Superior's creditor it could set off against any claims of Superior all sums due Manhattan on behalf of its customers according to the method of accounting employed between Manhattan and. Superior at all times prior to insolvency. Prior to insolvency, there is no doubt that Superior had treated all unearned premiums as money "due" Manhattan. In the periodic settlement of their mutual account, Superior had always allowed Manhattan to set off all unearned premiums against premiums to be accounted for by Manhattan in striking the net balance between them.
Upon the insolvency of Superior, the consideration for the premiums theretofore paid by Manhattan's policy holders failed and the policy holders or their assignee became entitled to the return of the unearned portions of the premiums. Notwithstanding the fact that E-Z Pay, as an assignee, was the ultimate "owner" of most of the unearned premiums, Manhattan, as a broker, remained Superior's creditor for the purpose of settling accounts with Superior and making eventual disbursement to policy holders.
The trial court, however, disregarded the established business practices of Manhattan and Superior, and relied upon cases decided on dissimilar facts to hold that Manhattan was, in effect, a trustee for both the earned and the unearned premiums. The result was to make Manhattan a converter of the $46,991.36 returned to E-Z Pay. This was error. Manhattan was a creditor, and was entitled to a setoff.
Setoff is usually allowed where, through a course of separate transactions, two parties become indebted to each other. If one of the parties becomes insolvent, the other, instead of paying his debt in full and receiving a dividend on what is owed him, is held only for the difference, if any, between his debt and the insolvent's. The reason for such a rule is said to lie in the injustice of a contrary rule. Carr v. Hamilton, 129 US 252, 255, 9 S Ct 295, 32 L Ed 669 (1889).
Between solvent merchants, setoffs are a matter of routine bookkeeping. Emerick Co. v. Bohnenkamp & Assoc., 242 Or 253, 409 P2d 332 (1965). When insolvency occurs, the party exercising the setoff, in most cases, obtains a preference as compared to creditors who do not have a setoff. Courts of equity do not regard such a preference as discriminatory or unfair to other general creditors. In essence, general creditors are entitled to look only to the favorable balance, if any, as an asset of the insolvent's estate. The preferential effect of setoff, like that of other forms of security, is well recognized but has not prevented setoff being favored in bankruptcy. See Emerick Co. v. Bohnenkamp & Assoc., supra, and 4 Collier, Bankruptcy 708, § 68.02, notes 18 & 19 (14th ed 1964).
Ordinarily, in the absence of a statute or an agreement to the contrary, when an insurance company issues policies to policy holders in reliance exclusively upon the credit of the agent who produced the business and looks solely to that agent for payment, as the record shows was the practice in the case at bar, the company and the producing agent are creditor and debtor. Wallace v. American Life Ins. Co., 116 Or 195, 237 P 974 (1925).
In a debtor-creditor relationship, setoff upon the insolvency of either is a recognized and accepted practice. See Downey v. Humphreys, supra. On the other hand, where the relationship is that of principal and agent, with premiums to be remitted only when and if collected, the producing agent is treated as a trustee of the premiums and has no right to deviate from the terms of the agency agreement by setting off any of his claims against the trust fund. Bohlinger v. Ward & Co., 20 NJ 331, 120 A2d 1 (1956). To like effect, see Bohlinger v. Mayville Realty Company, 135 NYS2d 865 (1954), affirmed without opinion, 285 App Div 1045, 141 NYS2d 509 (1955).
As noted, there was no written agreement between Superior and Manhattan upon which their relationship can be documented. No Oregon statute characterizes a relationship such as existed between Superior and Manhattan as a matter of law. Accordingly, the legal effect of the relationships between Superior and Manhattan and between Manhattan and its customers must be established from their manner of doing business. The method of doing business was clearly a mutual debtor-creditor relationship at all times prior to insolvency.
The phenomenon of insolvency did not, of itself, work a change in Manhattan's relationship to Superior, nor in Manhattan's relationship to its customers. We need not decide in this case the extent of Manhattan's liability to its policy holders, as that matter is not before us. But insofar as Manhattan's accounts with Superior are concerned, it is clear that Manhattan had a right at all times prior to Superior's insolvency to exercise a setoff.
It is a well-established principle that a liquidator or receiver occupies no better position than his insolvent occupied at the time of insolvency. Bohlinger v. Zanger, 306 NY 228, 117 NE2d 338 (1954). He takes the property and rights of the one for whom he acts, subject to the same equities and defenses in others that existed before insolvency. Downey v. Humphreys, supra.
We hold that Manhattan was entitled to set off the moneys due from Superior against premiums in Manhattan's hands. The net result leaves Manhattan with a claim as a general creditor against Superior.
Reversed.