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Redmond, Brooke Trustee v. Davidson Babcock et al, 10-06162 (Bankr. D. Kan. Jun. 26, 2012) Doc. # 182
SIGNED this 25th day of June, 2012.
For on-line use but not print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
BROOKE CORPORATION, et al.,
CHRISTOPHER J. REDMOND,
Chapter 7 Trustee of Brooke
Corporation, Brooke Capital
Corporation, and Brooke Investments,
Hull & Co., Inc. (Adv. No. 10-06162);
Graham Rogers, Inc. (Adv. No. 1006162);
Allied Group, Inc. d/b/a Allied
Mutual Insurance Company (Adv. No.
10-06198); Dairyland Insurance
CASE NO. 08-22786
ADV. NOS. 10-06162,
10-06198, 10-06201, 10-06204, and
Case 10-06162 Doc# 182 Filed 06/25/12 Page 1 of 17
Company (Adv. No. 10-06198); Explorer
Insurance Company d/b/a ICW Group
(Adv. No. 10-06198); Mendota Insurance
Company (Adv. No. 10-06201); Peachtree
Special Risk Brokers, LLC (Adv. No. 1006204);
Victoria Fire & Casualty Co.
d/b/a Victoria Insurance Group d/g/a
Titan Auto Insurance (Adv. No. 1006209);
United Underwriters, Inc. (Adv.
No. 10-06209); and Universal Casualty
Company (Adv. No. 10-06209),
MEMORANDUM OPINION AND ORDER DENYING MOTIONS TO
DISMISS COMPLAINTS BASED UPON TRUST FUND DEFENSE
Numerous insurance companies named as defendants in several materially
identical adversary complaints1 filed by the Trustee of Debtors Brooke Corporation,
Brooke Capital Corporation, and Brooke Investments, Inc. (collectively Debtors), move
to dismiss the Complaints against them for preferential transfers, fraudulent transfers, and
related claims by which the Trustee seeks to avoid and recover for the benefit of the
Debtors’ bankruptcy estates transfers made in payment of insurance premiums on policies
written by agents of the Brooke family of companies. The Defendants contend that as a
matter of law, the Trustee cannot prevail since the funds transferred by the Debtors to
them were subject to statutory trusts and were not property in which the Debtors had an
1 The adversary proceedings and the defendants whose motions to dismiss are under advisement
are identified in the caption. The defendant taking the lead is the Allied Group, Inc., d/b/a Allied Mutual
Insurance Company, a defendant in Adversary No. 10-6198. The additional moving defendants joined in
the arguments of Allied. Allied appeared through Michele Craycroft of Fields and Brown, LLC, and
Quintin F. Lindsmith and James P. Schuck of Bricker & Eckler LLP. The Trustee appeared by John J.
Cruciani and Michael D. Fielding of Husch Blackwell LLP.
Case 10-06162 Doc# 182 Filed 06/25/12 Page 2 of 17
interest.2 For the following reasons, the Court denies the motions to dismiss.
Prepetition, the Debtors and approximately thirty other affiliated companies were
engaged primarily in the business of selling insurance and related services.3 Debtor
Brooke Capital, a Kansas corporation, was an insurance agency and finance company that
distributed insurance services through a network that, at one time, totaled nearly 900
franchisee- and company-owed locations.4 Neither Debtors Brooke Corporation nor
Brooke Capital had contracts with the insurance companies. Rather, Brooke Agency
Services Company LLC (BASC), a bankruptcy-remote, special-purpose entity and
wholly-owned subsidiary of Brooke Corporation, was the party to the Brooke contracts
with the numerous insurance companies for which Brooke agents sold policies.
Generally, BASC had the obligation to pay premiums owed by policy holders to the
insurance companies on policies written by Brooke agents.
Under this franchise system, for most policies, Brooke agents collected the
premiums from the policy holders on behalf of BASC. But neither the agents nor BASC
2 This Court has jurisdiction over the parties and the subject matter pursuant to 28 U.S.C.
§§ 157(a) and 1334(a) and (b), and the Standing Order of the United States District Court for the District
of Kansas that exercised authority conferred by § 157(a) to refer to the District’s bankruptcy judges all
matters under the Bankruptcy Code and all proceedings arising under the Code or arising in or related to a
case under the Code, effective July 10, 1984. Furthermore, these matters are core proceedings pursuant to
28 U.S.C. § 157(b)(2)(F) and (H), and no party has objected to this Court hearing and finally adjudicating
the matters. There is no objection to venue or jurisdiction over the parties.
3 Case No. 08-22786, Dkt. 16, ¶ 6.
4 Id. at ¶ 5.
Case 10-06162 Doc# 182 Filed 06/25/12 Page 3 of 17
retained the collected premiums in segregated accounts for transmittal to the insurance
companies. Rather, the agents and BASC transferred the insurance premiums to the
Brooke system for processing premiums. That system involved an interrelated web of
bank accounts in the names of various Brooke-related entities in which the premiums
owed to various insurance companies were commingled, not only with premiums owed to
other companies, but also with Brooke operating funds and commission payments owed
to Brooke. In addition, several of these accounts were frequently overdrawn. At times,
even if the Brooke franchisees did not collect the premiums or failed to remit the
premiums to Brooke, funds from Brooke accounts were processed as if they had been
remitted by the agents. Rather than the payments to the insurance companies being made
from BASC accounts, the premiums were transferred to the insurance companies from
accounts of Brooke Capital, one of the Debtors. The Trustee alleges it is impossible to
trace specific premium dollars collected from the point of receipt by a Brooke agent and
deposit into the Brooke system to the point of payment from Brooke Capital to a specific
The Trustee seeks to avoid premiums transferred to the Defendants by Brooke
Capital prepetition. In the fraudulent transfer counts, the Trustee alleges that during the
four-year period prior to the Debtors’ bankruptcy filings, transfers were made to the
Defendants for the payment of premiums from the accounts of Brooke Capital, property
in which the Debtors had an interest. That interest is alleged to have arisen from Brooke
Capital’s control of the accounts, the commingling of premium deposits with other funds
Case 10-06162 Doc# 182 Filed 06/25/12 Page 4 of 17
of the Debtors, and the Debtors’ use of their own funds to pay premiums on behalf of
some agents. It is alleged that these transfers were not for or on account of a debt of
Brooke Capital, since it was not obligated to remit premiums to the insurance companies,
and Brooke Capital therefore did not receive reasonably equivalent value for the transfers.
As an alternative to the fraudulent transfer claims, the Trustee seeks to avoid payments
made within 90 days prepetition as preferential transfers. The Trustee alleges that if
Brooke Capital had an obligation to transfer the funds to the Defendants (because when
the premium payments from the Brooke agents were commingled with Brooke assets, the
Defendants became unsecured creditors of the Debtors), the transfers were on account of
antecedent debts. In addition to avoidance of the transfers, the Trustee also seeks to
recover the transfers and to disallow proofs of claim filed by the Defendants.
THE MOTIONS TO DISMISS
The Defendants move to dismiss on the basis that as a matter of law, the Debtors
had no interest in the property transferred as premium payments. They allege the
premiums remained property of the Defendants’ policyholders, and Brooke held the
premium payments in trust for the benefit of the Defendants. This defense relies upon
fundamental principles of avoidance law under the Bankruptcy Code, and upon state law
that deems insurance premiums collected by insurance agents to be held in trust. Section
548(a)(1),5 the fraudulent transfer section of the Code, provides for the avoidance of a
5 11 U.S.C. § 548(a)(1). All references in the text to title 11, the Bankruptcy Code, shall be to the
section number only.
Case 10-06162 Doc# 182 Filed 06/25/12 Page 5 of 17
transfer “of an interest of the debtor in property.” Likewise, § 547(b), addressing
preferential transfers, provides for the avoidance of a transfer “of an interest of the debtor
in property.” But § 541(d) excludes from the estate any property in which the debtor has
no equitable interest, which includes property held in trust.6 A Kansas statute, K.S.A.
2011 Supp. 40-247, provides that an insurance agent receiving any money or property as
a premium for a contract of insurance is deemed to hold such property in trust. Therefore,
since Kansas law deems collected premiums to be held in trust and Brooke Capital’s
transfers to the Defendants were for payment of insurance premiums owed by the policy
holders, the transfers were of trust property in which the Debtors had no interest.
According to the Defendants, based upon Begier v. Internal Revenue Service,7 a Supreme
Court case addressing trust-fund taxes, Brooke Capital’s payment of premiums to the
Defendants identified the funds transferred as trust funds, without the necessity of tracing.
The Defendants submit that because the transfers were of trust funds, the claims for
fraudulent conveyances and preferential transfers fail to state claims upon which relief
can be granted, the related claims for turnover of the avoided transfers must be dismissed,
and the claims for disallowance of proofs of claim should be dismissed as moot.
The Trustee responds that tracing would be required to establish that the funds
transferred to the Defendants prepetition were subject to a statutory trust and thereby
excluded from the Debtors’ property interests. Since the specific payments have not been
6 496 U.S. 53, 59 (1990).
Case 10-06162 Doc# 182 Filed 06/25/12 Page 6 of 17
traced to the accounts from which the transfers were made to the Defendants, the Trustee
submits that the motions to dismiss fail. The Trustee makes additional arguments in
support of his opposition to dismissal, including arguments that the allegations of the
Complaints satisfy the plausibility standard of Iqbal8 and that, because the payments of
premiums to the Defendants were made with money that had been commingled with the
Debtors’ own funds and were paid to the Defendants from a Brooke Capital deposit
account, the Debtors’ interest in the property transferred is sufficiently alleged. But
because the motions to dismiss are premised upon a question of law and the Court
concludes that tracing, which the Defendants have not undertaken, is required to identify
moneys transferred to the Defendants in payment of premiums as statutory trust funds, the
Court does not address these and other contentions of the Trustee in opposition to the
motions to dismiss.
The determinative question posed by the motions to dismiss is whether the
transfers in payment of premiums owed on policies written by Brooke agents were of
trust funds, excluded by § 541(d) from property of the Debtors’ bankruptcy estates. As
the basis for the alleged trust, all the Defendants except one, Explorer Insurance
Company,9 rely upon K.S.A. 2011 Supp. 40-247(a).10 It provides in part:
8 Ashcroft v. Iqbal, 556 U.S. 662 (2009).
9 Explorer states it sold auto insurance in California, not Kansas. Case No. 10-6198, Dkt. 96 at 2.
Although it essentially concedes that K.S.A. 2011 Supp. 40-247 does not apply to premiums collected on
its behalf, it nevertheless relies upon the trust fund defense asserted by the other Defendants based upon a
Case 10-06162 Doc# 182 Filed 06/25/12 Page 7 of 17
(a) An insurance agent or broker who acts in negotiating or
renewing or continuing a contract of insurance including any
type of annuity by an insurance company lawfully doing
business in this state, and who receives any money or
substitute for money as a premium for such a contract from
the insured, whether such agent or broker shall be entitled to
an interest in same or otherwise, shall be deemed to hold such
premium in trust for the company making the contract. If
such agent or broker fails to pay the same over to the
company after written demand made upon such agent or
broker, less such agent’s or broker’s commission and any
deductions, to which by the written consent of the company
such agent or broker may be entitled, such failure shall be
prima facie evidence that such agent or broker has used or
applied the premium for a purpose other than paying the same
over to the company.
When ruling on the motions to dismiss, the Court will assume, without deciding
the question, that under K.S.A 2011 Supp. 40-247, at least a portion of the insurance
premiums collected from the Defendants’ policyholders by Brooke agents should be
deemed to be held in trust.11 This is a reasonable assumption. The Defendants contend
provision of the California Insurance Code, Cal. Ins. Code § 1733, which states: “All funds received by
any person acting as a licensee under this chapter . . . as premium or return premium on or under any
policy of insurance or undertaking of bail, are received and held by that person in his or her fiduciary
capacity.” According to Explorer’s counsel, this statute imposed a statutory trust on premiums Brooke
collected for it. Case No. 10-6198, Dkt. 96 at 2. For purposes of this opinion, the Court will assume that
Explorer is correct and that a statutory trust similar to that in Kansas applied to insurance premiums
collected by Brooke agents or brokers for Explorer policies. The Court’s analysis will therefore focus
exclusively upon the Kansas statute.
10 Subsection (b) defines a violation of subsection (a) to be a felony or a misdemeanor, depending
upon the amount of premium not paid to the company.
11 In doing so, the Court is not precluding the Trustee from contesting the applicability of K.S.A.
2011 Supp. 40-247 during the future course of this litigation. Several possible reasons for such a
conclusion appear in the pleadings before the Court. For example, there is an issue of which state’s law is
applicable to Brooke’s dealings with the various insurance companies, and the possibility that the
applicable law could be determined by contracts which are not presently before the Court. The Trustee
alleges that on some occasions when agents failed to collect premiums or agents collected premiums but
Case 10-06162 Doc# 182 Filed 06/25/12 Page 8 of 17
that they are insurance companies “lawfully doing business in Kansas.” The parties agree
that Brooke franchisees and their agents were engaged in the business of selling insurance
and acted as brokers12 or agents for the Defendants. Making this assumption allows the
Court to focus on what it finds to be the controlling issue of law presented by the motions
to dismiss: Assuming that Brooke agents collected premiums from the Defendants’
policyholders, that such premiums were deemed by state law to be held in trust, and that
the premium payments were hopelessly commingled with other Brooke funds, were the
Debtors’ transfers of the funds to the Defendants sufficient to identify the funds as trust
property, without the need for common-law tracing.
The Defendants assert that for a statutory trust, such as the trust in insurance
premiums that is deemed to exist under K.S.A. 2011 Supp. 40-247, the nexus between the
trust res and the transfers to the insurance companies is established by the voluntary act of
payment, without the necessity of tracing that is required to identify the res of a common-
law express or constructive trust. The primary authority relied upon is the Supreme
Court’s Begier13 opinion. In Begier, the Court considered whether prepetition payments
did not deposit them to Brooke for processing, Brooke used its own funds to make premium payments to
insurance companies. K.S.A. 2011 Supp. 40-247 may not apply to such payments. In addition, the
Trustee contends, assuming that K.S.A. 2011 Supp. 40-247 applies, the Defendants have by their conduct
waived the requirement that the funds be held in trust.
12 Under Kansas law, “‘an insurance broker is one who acts as a middleman between the insured
and the insurer; one who solicits contracts from the public under no employment from any special
company.’” Rosedale Securities Co. v. Home Ins. Co., 120 Kan. 415, 418, 243 P.1023, 1023 (1926)
(quoting 9 Corpus Juris. 509).
13 496 U.S. 53.
Case 10-06162 Doc# 182 Filed 06/25/12 Page 9 of 17
of withholding and excise taxes (commonly referred to as trust-fund taxes) to the Internal
Revenue Service (IRS) from the debtor’s general operating account could be avoided and
recovered as preferential. The issue was whether the money transferred was property that
the debtor held in trust for the IRS. The analysis began with 26 U.S.C. § 7501, the
Internal Revenue Code’s trust-fund provision, which provided: “Whenever any person is
required to collect or withhold any internal revenue tax from any other person and to pay
over such tax to the United States, the amount of tax so collected or withheld shall be held
to be a special fund in trust for the United States.”14 Based upon the statutory scheme for
collection of taxes, the Court rejected segregation of the funds as a prerequisite to the
creation of a trust in “the amount of tax.” Thus, a § 7501 trust was created at the moment
when the relevant payments were made. But that statutory scheme did not answer the
question whether the particular dollars that the debtor paid to the IRS from its general
operating account were “property of the debtor ” or were assets belonging to the statutory
trust.15 Because § 7501 created “a trust in an abstract ‘amount’ — a dollar figure not tied
to any particular assets — rather than in the actual dollars withheld,”16 the statutory
scheme was identified as “radically different from the common-law paradigm,”17 and the
common-law tracing rules for identifying particular property held in trust were found to
14 Id. at 60 (emphasis supplied).
15 Id. at 62.
Case 10-06162 Doc# 182 Filed 06/25/12 Page 10 of 17
be unhelpful.18 The Court therefore turned to the legislative history of the Bankruptcy
Code regarding the exclusion of trust-fund taxes from the bankruptcy estate. That history
evidenced that Congress expected the IRS would have to show some connection between
the § 7501 trust and the assets sought to be applied to the debtor’s trust-fund tax
obligation. As to that connection, the Court held that “[t]he debtor’s act of voluntarily
paying its trust-fund tax obligation . . . is alone sufficient to establish the required nexus
between the ‘amount’ held in trust and the funds paid.”19
The Defendants exaggerate the applicability of Begier when arguing that there is a
general rule that tracing is not required for statutory trusts. Several cases cited by the
Defendants in support of applying Begier to this case concern the creation of a statutory
trust, not the nexus required between payments sought to be avoided by a bankruptcy
trustee and the trust res.20 The Defendants do cite cases where the Begier rule of nexus by
payment has been applied to statutory trusts for the benefit of governmental entities,21 but
cite no cases where the rule has been applied for the benefit of a private entity. The
18 Id. at 62-63.
19 Id. at 66-67.
20 City of Farrell v. Sharon Steel Corp., 41 F.3d 92 (3rd Cir. 1994) (where municipality moved
for order for turnover of taxes withheld by Chapter 11 debtor prepetition, court held express trust was
created but remanded question whether nexus was established between money in debtor’s account and
withheld taxes); Owner Operator Indep. Drivers Ass’n, Inc., v. Comerica Bank (In re Arctic Express
Inc.), 636 F.3d 781 (6th Cir. 2011) (regulations created trust; tracing not an issue).
21 Suwannee Swifty Stores, Inc., v. Georgia Lottery Corp. (In re Suwanne Swifty Stores, Inc.), 266
B.R. 544 (Bankr. M.D. Ga. 2001) (revenues from sales of lottery tickets); Wasden v. Florida Dept. Of
Revenue (In re Wellington Foods, Inc.), 165 B.R. 719 (Bankr. S.D. Ga. 1994) (federal withholding taxes).
Case 10-06162 Doc# 182 Filed 06/25/12 Page 11 of 17
Defendants also rely upon cases deviating from the common-law tracing rules where trust
funds initially dissipated or commingled were restored, thereby negating the need for
tracing.22 That circumstance is not present here. Cases where government regulations
dispensed with the tracing requirement23 also are not helpful. The Defendants cite no
cases arising in circumstances similar to this case where payment alone was found to be
sufficient to identify trust property for purposes of excluding it from the estate under
In the Tenth Circuit prior to Begier, tracing was required when a trust beneficiary
sought to recover trust assets.24 The lowest intermediate balance test was applied to
identify trust property in commingled accounts in the debtor’s possession prior to the date
of filing.25 Subsequent to Begier, the Tenth Circuit has adhered to this rule. “‘[A]ny
party seeking to impress a trust upon funds for purposes of exemption from a bankrupt
22 Kupetz v. United States (In re California Trade Technical Schools, Inc.), 923 F.2d 641 (9th Cir.
1991) (under California law, debtor’s repayment of federal student assistance program monies could be
considered trust funds even if they could not be traced); Stevenson v. J.C. Bradford & Co. (In re Cannon),
277 F.3d 838 (6th Cir. 2002) (under Tennessee law, funds held in escrow for clients in commingled trust
account without tracing as to individual clients were subject to express trust and repayment from debtor’s
general funds to restore portion of monies previously converted from trust were not debtor’s property);
Suwanne Swifty Stores, Inc.), 266 B.R. 544 (commingled lottery funds restored to trust account to satisfy
lottery corporation’s weekly sweep conclusively presumed to be trust property).
23 C & E Enterprises, Inc., v. Milton Poulus, Inc. (In re Milton Poulos, Inc.), 94 B.R. 648 (Bankr.
C.D. Cal. 1988) (applying regulations implementing Perishable Agricultural Commodities Act).
24 Turley v. Mahan & Rowsey, Inc. (In re Mahan & Rowsey, Inc.), 817 F.2d 682, 684 (10th Cir.
25 Id. at 684-85.
Case 10-06162 Doc# 182 Filed 06/25/12 Page 12 of 17
estate must identify the trust fund in its original or substituted form.’”26 There are no
Tenth Circuit opinions adopting the nexus test in lieu of common-law tracing.
Generally, Begier has been narrowly construed by the courts. There is no basis to
predict that the Tenth Circuit would do otherwise. As the Ninth Circuit Court of Appeals
The exception to the common law treatment of trusts
elaborated in Begier, was justified by the language and
purpose of § 7501. . . .
Nor should we extend the holding of Begier more
broadly than is necessary to accomplish its purposes when
doing so necessarily undermines the Bankruptcy Code’s core
principle of equality of distribution among creditors.27
Similarly, a bankruptcy court has stated,
In establishing the nexus test in Begier, the Supreme Court deviated
from the long-standing LIBT [lowest intermediate balance test] due
to the unique facts and circumstances raised by the specific type of
trust at issue in the case. As such, the holding in Begier should be
narrowly construed and the nexus test should only apply in cases
where a court is faced with facts similar to those in Begier.28
Subsequent to Begier, courts have required tracing to identify commingled funds which,
26 Sender v. Nancy Elizabeth R. Heggland Family Trust (In re Hedged-Investments Assocs., Inc.),
48 F.3d 470, 474 (10th Cir. 1995) (quoting First Federal of Michigan v. Barrow, 878 F.2d 912, 915 (6th
27 Wyle v. S & S Credit Co. (In re Hamilton Taft & Co.), 53 F.3d 285, 289-290 (9th Cir. 1995),
case settled and decision vacated as moot, 53 F.3d 337 (1995).
28 Official Comm. Of Unsecured Creditors v. Catholic Diocese of Wilmington, Inc. (In re Catholic
Diocese of Wilmington, Inc.), 432 B.R. 135, 151 (Bankr. D. Del. 2010).
Case 10-06162 Doc# 182 Filed 06/25/12 Page 13 of 17
pursuant to statute, should have been held in trust.29
The Court declines to apply the Begier Court’s rejection of common-law tracing to
the circumstances of this case. The alleged statutory trust of insurance premiums bears no
similarity to the § 7501 trust for trust-fund taxes. Unlike the § 7501 trust, which is a trust
for the amount of trust-fund taxes, the insurance premium statutory trust under K.S.A.
2011 Supp. 40-247 is a trust comprised of the “money or substitute for money” collected.
Like a common-law express or constructive trust, the res of the insurance premium trust is
specific property, not an amorphous amount collected. Contrary to the Defendants’
suggestion, Begier does not stand for the general proposition that for statutory trusts,
identification to the purpose of the trust by payment is a substitute for tracing. The
Supreme Court’s rationale for this minimal nexus was legislative history supporting the
view that Congress intended to protect the prepetition payment of trust-fund taxes from
avoidance actions. There is no such history for K.S.A. 2011 Supp. 40-257.
To apply the Begier nexus test in this case would be contrary to the central
bankruptcy policy of equality of distribution to creditors,30 which is facilitated by the
preference and fraudulent transfer provisions of the Code. For example, assume that
shortly before filing, Brooke agents had collected $10,000 in premiums from
29 Meoli v. Kendall Electric, Inc. (In re R.W. Leet Electric, Inc.), 372 B.R. 846, 853-59 (6th Cir.
BAP 2007) (tracing required to sustain defense to preference avoidance that transfers were from funds
held in trust under Michigan Building Contract Fund Act); Appalachian Oil Co., Inc. v. Virginia State
Lottery Dep’t (In re Appalachian Oil Co., Inc.), 2012 WL 1067699, *10-13 (Bankr. E.D. Tenn. 2012)
(rejecting assertion of Virginia Lottery that voluntary payment established nexus between funds required
by statute to be held in trust and payments from commingled funds).
30 Begier, 496 U.S. at 58.
Case 10-06162 Doc# 182 Filed 06/25/12 Page 14 of 17
policyholders for each of fifty insurance companies, that the $500,000 of premiums had
been transferred to Brooke Capital and commingled with Brooke’s operating funds from
other sources, that several of the insurance company creditors had been owed past-due
premiums in an amount in excess of $500,000 each, and that Brooke Capital had paid one
of those companies $300,000 and had paid its trade creditors the remaining funds. If the
Trustee brought a preference action against the recipient of the $300,000 and the
Defendants’ theory prevailed, the transferee insurance company could successfully
defend the action by claiming that the funds transferred had been trust funds because of
the nexus created by the act of paying premiums that had been due. The Trustee would
be thwarted in efforts to recover a preferential payment which clearly preferred one
insurance company creditor over others.
In addition, requiring tracing to identify the res of a statutory trust of insurance
premiums is consistent with the wording of the Kansas statute. K.S.A. 2011 Supp. 40247(
a) defines the trust res to be the specific “money or substitute for money” collected
by the agent or broker.31 Although K.S.A. 2011 Supp. 40-247 and its predecessors have
31 A leading commentator on insurance law, when addressing the duty of agents to account to the
insurer for premiums, notes that tracing is required.
In some states the rule is followed, primarily by virtue of express statutory
provision, that the agent receives premiums as a trust fund, so that the insurer is entitled
to greater remedies than would be available against an ordinary debtor and is allowed to
assert a lien upon any bank account into which the insurer can trace the premiums, and to
a priority against the estate of an insolvent agent.
4 Couch on Insurance, § 54:5 (3rd ed., database updated through Nov. 2011) (emphasis added), available
on Westlaw at COUCH § 54:5.
Case 10-06162 Doc# 182 Filed 06/25/12 Page 15 of 17
been construed primarily in criminal litigation, there is one garnishment case in which
tracing was used to identify the trust property. In Meixner v. Heusser,32 Meixner, a
judgment creditor of Heusser, an insurance agent, attached Heusser’s bank account. An
unpaid insurer intervened. The trial court discharged the garnishment based upon
evidence that the monies in the account were insurance premiums collected by Heusser,
but not yet remitted to the insurance company. Although the specific method of tracing
was not discussed, the Kansas Supreme Court affirmed, finding the evidence sufficient
“to show that the sum in the bank account at the time of the garnishment was made up of
insurance premiums collected, was in fact a trust fund, within the meaning of the statute,
. . . and within the meaning of the agency contract, and did in fact belong to the
Subsequent to this matter being placed under advisement and the initial drafting of
this Memorandum Opinion, District Judge Lungstrom issued a Memorandum and Order
addressing the trust fund defense in Redmond v. Progressive Corporation,34 a Brooke
adversary proceeding substantially identical to these cases, but for which reference was
withdrawn from this Court. Judge Lungstom, like this Court, rejected the defense. He
Thus, the vital element from Begier that distinguished its
32 153 Kan. 558, 112 P.2d 103 (1941).
33 Id., 153 Kan. at 559, 112 P.2d at 104.
34 Redmond v. Progressive Corp. (In re Brooke Corp.), 2012 WL 2120736 (June 12, 2012).
Case 10-06162 Doc# 182 Filed 06/25/12 Page 16 of 17
statutory trust from other common-law trusts — a trust
involving an “amount” instead of a specific trust res — is not
present here. Thus, there is no basis to alter the usual rules
that would govern commingled trust funds. Moreover, the
Begier Court’s rule about voluntary payments providing the
necessary nexus to the original trust funds was based on
specific legislative history relating to Section 7501, and
defendant has not identified any similar legislative history
applicable to the present case. Thus, Begier’s limited holding,
applying specifically to trust-fund taxes, would not apply to
For the foregoing reasons, the Court denies the Defendants’ motions to dismiss
premised upon the trust fund defense. The nexus rule of Begier, under which statutory
trust-fund taxes paid from commingled funds were sufficiently identified by the debtor’s
act of payment, does not apply to the statutory trusts of insurance premiums alleged to
have arisen in these cases.
IT IS SO ORDERED.
# # #
35 Id. at *4.
Case 10-06162 Doc# 182 Filed 06/25/12 Page 17 of 17