Appeal from the Order of the Commonwealth Court entered January 26, 2006 at No. 664 M.D. 2003. Appeal from the Order of the Commonwealth Court entered January 26, 2006 at No. 671 M.D. 2003.
The opinion of the court was delivered by: Madame Justice Todd
CASTILLE, C.J., SAYLOR, EAKIN, BAER, TODD, McCAFFERY, JJ.
In this direct appeal from a single-judge Commonwealth Court order, we consider whether an insurer's pre-liquidation payment for a covered loss to an insured constitutes a preference, and thus is recoverable by a liquidator of the insurer pursuant to 40 P.S. § 221.30(a). For the reasons stated below, we conclude a payment made by an insurer to an insured in the ordinary course of business does not constitute antecedent debt, and therefore, is not a preference under Section 221.30(a). Accordingly, we affirm the order of the Commonwealth Court, albeit upon different reasoning than employed by that tribunal.
By way of background, when an insurer becomes insolvent, it is subject to different statutory treatment under the laws of the various states. Our Commonwealth's law of insurance rehabilitation and insolvency is codified in Article V of the Pennsylvania Insurance Department Act of 1921 ("Insurance Act").*fn1 One concern when an insurer becomes insolvent is the issue of preferences. Generally speaking, preferences are monies or property transferred to creditors on the eve of an insolvency petition, which places those creditors in a better position than they would be in if the money or property had not been transferred. See McCoid, Bankruptcy, Preferences, and Efficiency: An Expression of Doubt, 67 Va. L. Rev. 249, 249, 259-60 (1981). The liquidator of an insolvent insurer may institute a preference action to void certain transfers of property. Of course, a transfer, however, may be non-preferential if it does not fit within the statutory definition of a preference.
The Insurance Act sets forth what constitutes a preference in Section 221.30:
§ 221.30 Voidable preferences and liens
(a) A preference is 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 under this article the effect of which transfer may be to enable the creditor to obtain a greater percentage of this debt than another creditor of the same class would receive. If a liquidation order is entered while the insurer is already subject to a rehabilitation order, then transfers otherwise qualifying shall be deemed preferences if made or suffered within one year before the filing of the successful petition for rehabilitation or within two years before the filing of the successful petition for liquidation, whichever time is shorter.
40 P.S. § 221.30(a). In other words, a preference consists of a transfer to a creditor for an antecedent debt made within a certain period of time prior to the filing of a liquidation or rehabilitation petition. Section 221.30 permits the liquidator to void such preferential transfers made within one year before the filing of a successful petition for liquidation, or, if the liquidation order is entered while the insurer is already subject to a rehabilitation order, then transfers are deemed preferential if made within one year of the successful filing of the petition for rehabilitation.*fn2 With these background principles in mind, we turn to the facts of the case.
The facts underlying this appeal are straightforward. In 1999, Reliance Insurance Company ("Reliance") issued various insurance policies each known as a "Trade Credit Insurance Policy" (each a "Policy" and, collectively, the "Policies") to Apple Computer, Inc. ("Apple"); H.J. Heinz Company, H.J. Heinz Company L.P., H.J. Heinz Finance Company, and Portion Pac, Inc. (collectively, "H.J. Heinz"); Ingram Micro, Inc. ("Ingram Micro"); and Mitsui & Co. ("Mitsui") (Apple, H.J. Heinz, Ingram Micro, and Mitsui, are collectively referred to as the "Policyholders"). Pursuant to each Policy, Reliance insured the respective Policyholder and agreed to indemnify the Policyholder for losses arising from the Policyholder's customers' nonpayment for goods and services.
Subsequently, each Policyholder suffered a loss falling within the terms of the Policy and, pursuant to the terms and conditions of the Policies, each Policyholder made a claim, through the filing of a Claim and Proof of Loss, with Reliance in 2000.*fn3 Following Reliance's determination that the losses were covered by the Policies, and execution of a "Certifications and Release Agreement" as required by the Policies, Reliance paid the various Policyholders amounts due under the Policies in 2000 and early 2001.*fn4
In May 2001, M. Diane Koken, then Insurance Commissioner for the Commonwealth, presented the Commonwealth Court with a petition to rehabilitate Reliance. By order dated May 29, 2001, and consistent with the Insurance Act, the Commonwealth Court appointed the Commissioner to serve as the rehabilitator of Reliance.*fn5 By the terms of that order, all assets of Reliance were placed under the control of the Commissioner and the Commonwealth Court. Thereafter, the Commissioner advised the Commonwealth Court that due to the large number of claims and the value of the estate, Reliance's condition was more precarious than initially presented, requiring immediate attention.
Approximately four months after Reliance's placement in receivership, on October 3, 2001, the Commissioner advised the Commonwealth Court that she consented to the entry of an order terminating the rehabilitation of Reliance and placing the insurer into liquidation.*fn6 The Commonwealth Court granted the petition and appointed the Commissioner as liquidator.*fn7
Thereafter, the Commissioner initiated actions against the Policyholders in Commonwealth Court seeking to avoid certain payments made prior to the entry of the liquidation order and to recover monies paid to the Policyholders pursuant to the Policies less than one year prior to the rehabilitation pursuant to Section 221.23*fn8 and Section 221.26.*fn9 Initially, the Commissioner took the position the Policyholders were not policyholders or insureds, and the Policies were not insurance policies, but financial guaranties.*fn10 Each Policyholder filed an answer and new matter to the Commissioner's complaint.
The Commonwealth Court consolidated the actions for the purpose of resolving the issue of whether the payments made to the Policyholders constituted preferences under Section 221.30.*fn11 The Commissioner filed a motion for summary judgment in which she argued that the payments made under the Policies represented preferential transfers and sought to avoid them pursuant to Section 221.30. The Policyholders filed cross-motions for summary judgment, contending, inter alia, the monies ...