Case CSS Doc 216 Filed 01/14/16 Page 1 of 13 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

Transcription

1 Case CSS Doc 216 Filed 01/14/16 Page 1 of 13 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ) In re: ) Chapter 11 ) AFFIRMATIVE INSURANCE ) Case No (CSS) HOLDINGS, INC., et al., 1 ) ) (Jointly Administered) Debtors. ) ) Related to Docket No: 191 DEBTORS OBJECTION TO MOTION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF AFFIRMATIVE INSURANCE HOLDINGS, INC., ET AL. FOR ENTRY OF AN ORDER CONVERTING THE DEBTORS CHAPTER 11 CASES TO CASES UNDER CHAPTER 7 OF THE BANKRUPTCY CODE PURSUANT TO 11 U.S.C. 1112(B) Affirmative Insurance Holdings, Inc. and certain of its wholly-owned direct and indirect subsidiaries, as debtors and debtors in possession (collectively, the Debtors ) in the abovecaptioned chapter 11 cases (these Chapter 11 Cases ), hereby submit this objection (the Objection ) to the Motion of the Official Committee of Unsecured Creditors of Affirmative Insurance Holdings, Inc. et al. for Entry of an Order Converting the Debtors Chapter 11 Cases to Cases Under Chapter 7 of the Bankruptcy Code Pursuant to 11 U.S.C. 1112(b) [Docket No. 191] (the Motion to Convert ) filed by the Official Committee of Unsecured Creditors (the Committee ) on December 30, In support of this Objection, the Debtors have 1 The Debtors, together with the last four digits of each Debtor s federal tax identification number, are: Affirmative Insurance Holdings, Inc. (0432); Affirmative Management Services, Inc. (7252); Affirmative Services, Inc. (7255); Affirmative Underwriting Services, Inc. (7250); Affirmative Insurance Services, Inc. (8823); Affirmative General Agency, Inc. (2345); Affirmative Insurance Group, Inc. (7246); and Affirmative, L.L.C. (2347). The location of the Debtors corporate headquarters and the service address for all Debtors is 150 Harvester Drive, Suite 250, Burr Ridge, Illinois

2 Case CSS Doc 216 Filed 01/14/16 Page 2 of 13 concurrently filed the Declaration of Michael J. McMclure (the McClure Declaration ), and respectfully state as follows: 2 Preliminary Statement 1. The Committee s argument for conversion rests entirely on the suggestion that the Debtors are administratively insolvent. The Debtors are not administratively insolvent. As discussed below, the Debtors currently have access to approximately $750,000 of unencumbered cash. This fact, alone, is sufficient for this Court to deny the Motion to Convert. 2. Additionally, the Committee s Motion to Convert is premature, having been filed a mere 10 weeks after the Petition Date. Conversion at this early stage, when the Debtors are not administratively insolvent and are engaged in active plan negotiations, would not be in the best interests of creditors and the estates. As this Court routinely orders in response to conversion motions filed shortly after a chapter 11 case is commenced, the Debtors should be permitted to continue negotiating a plan with all of their constituents (not just the Committee), thereby fulfilling the Debtors fiduciary obligations by proposing a confirmable plan that maximizes value. Background 3. On October 14, 2015 (the Petition Date ), each of the Debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. 4. The Debtors continue to operate their business and manage their properties as debtors in possession pursuant to Bankruptcy Code sections 1107(a) and On October 30, 2015, the United States Trustee for the District of Delaware appointed Alesco Preferred Funding X, Ltd., Alesco Preferred Funding VI, Ltd., Trapeza CDO 2 The Committee granted an extension of time for the Debtors to respond to the Motion to Convert through 9:00 p.m. (ET) on January 14,

3 Case CSS Doc 216 Filed 01/14/16 Page 3 of 13 IX, Ltd., Trapeza Edge CDO, Ltd., and The Bank of New York Mellon Trust Co., N.A. to serve as members of the Committee. 6. A description of the Debtors business, capital structure, and the circumstances leading to these Chapter 11 Cases is set forth in the Declaration of Michael J. McClure in Support of Debtors Chapter 11 Petitions and First Day Pleadings [Docket No. 2], filed on the Petition Date and incorporated herein by reference. Objection 7. The Committee argues that the Chapter 11 Cases should be converted to cases under chapter 7 of the Bankruptcy Code for cause pursuant to Bankruptcy Code section 1112(b)(1). Specifically, the Committee asserts that cause for conversion exists under Bankruptcy Code section 1112(b)(4)(A) because there is a substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation. 11 U.S.C. 1112(b)(4)(A) (emphasis added). The movant must demonstrate (i) a substantial or continuing loss to or diminution of the estate and (ii) the absence of a reasonable likelihood of rehabilitation. In re Lykes Bros. S.S. Co., Inc., 196 B.R. 586, 595 (Bankr. M.D. Fla. 1996) (emphasis added). 8. Conversion or dismissal of a chapter 11 case is a drastic measure and the burden is on the movant to prove the relief requested is warranted and not premature. In re Dark Horse Tavern, 189 B.R. 576, 580 (Bankr. N.D.N.Y. 1995). The harshness of conversion or dismissal mandates that it result only upon a strong evidentiary showing. Id. (emphasis added); see also Lykes Bros., 196 B.R. at 595 ( In order to prevail under 1112(b) in the early stages of a case, the moving party has the burden to prove that the whole scheme is no more than a pipe dream an utterly hopeless and unrealistic prospect totally devoid of any factual basis to support the Debtor s rehabilitation. ) (citing In re Economy Cab & Tool Co., 44 B.R. 721 (Bankr. D. Minn

4 Case CSS Doc 216 Filed 01/14/16 Page 4 of ) (emphasis added)). Courts have broad discretion to determine whether cause for conversion exists. Loop Corp. v. U.S. Trustee, 379 F.3d 511, 515 (8th Cir. 2004). I. The Debtors are Not Administratively Insolvent 9. Prior to the Petition Date, the Debtors served as managing general agents for various state-regulated insurance companies that possess the certificates of authority necessary to transact business and issue policies (the Regulated Entities ). McClure Declaration 3. Pursuant to agreements between the Debtors and the Regulated Entities, the Debtors collected insurance premiums for the policies issued by the Regulated Entities, and these insurance premiums were regularly deposited into at least two of the Debtors bank accounts (the Premium Accounts ). 3 McClure Declaration 4. Approved insurance claims paid to insured parties and claimants were also funded from funds held in the Premium Accounts. McClure Declaration Debtor Affirmative Insurance Services, Inc. is the named account holder on the Premium Accounts. McClure Declaration As of the Petition Date, the aggregate balances in the Premium Accounts were $572, and $168,859.20, respectively. See Exhibit A. To date, no person has filed a proof of claim or any pleading in these Chapter 11 Cases asserting that the funds held in the Premium Accounts are not the Debtors property under Bankruptcy Code section 541. McClure Declaration 7. However, Affirmative Insurance Company ( AIC ), a Regulated Entity and subsidiary of the Debtors, has asserted informally through counsel that the insurance premiums deposited into the Premium Accounts are held in trust for the benefit of AIC. 3 The Premium Accounts discussed herein end in 8387 and 8352 and are held at UMB Bank, n.a. McClure Declaration 4. The Debtors maintained more than two accounts into which insurance premiums were deposited. However, the two Premium Accounts discussed herein represent the two largest bank account balances as of the Petition Date that held insurance premiums (and other funds), and are thus most illustrative for purposes of this objection. The Debtors reserve all rights with respect to the amounts held in any of the Debtors bank accounts

5 Case CSS Doc 216 Filed 01/14/16 Page 5 of First, the insurance premiums deposited into the Premium Account ending in 8352, the balance of which was $572, as of the Petition Date, were made in connection with insurance policies written by Old American County Mutual Fire Insurance Company ( Old American ), not AIC. McClure Declaration 8. Old American and AIC are not affiliated in any way, and the Debtors have not received any communication from Old American, or any other person, asserting entitlement to the funds held in Premium Account ending in Second, to the extent that AIC, or any other party, successfully argues that the insurance premiums deposited into the Premium Accounts were held in trust, 4 this Court would use the lowest intermediate balance test as a result of significant commingling that occurred in the Premium Accounts, as discussed further below. 14. When funds are commingled, and a trust recipient claims a right in those funds, a claimant must make two showings: (1) demonstrate that the trust relationship and its legal source exist, and (2) identify and trace the trust funds if they are commingled. In re Strategic Techs., Inc., 142 F. App x 562, 566 (3d Cir. 2005) (citing Goldberg v. N.J. Lawyers Fund for Client Prot., 932 F.2d 273, 280 (3d Cir. 1991)). In cases where the trust property has been commingled, courts resolve the issue with reference to the so-called lowest intermediate balance rule, which is grounded in the fiction that, when faced with the need to withdraw funds from a commingled account, the trustee withdraws non-trust funds first, thus maintaining as much of the trust s funds as possible. In re Dameron, 155 F.3d 718, 724 (4th Cir.1998) (internal citations omitted); see In re Columbia Gas Sys., 997 F.2d 1039, 1063 (3d Cir. 1993); In re Catholic Diocese of Wilmington, Inc., 432 B.R. 135, 151 (Bankr. D. Del. 2010); In re Brooke Corp., No , 2012 WL (Bankr. D. Kan. June 25, 2012). 4 The Debtors reserve all rights with respect to whether the funds held in the Premium Accounts were held in trust

6 Case CSS Doc 216 Filed 01/14/16 Page 6 of Under the [lowest intermediate balance test], a court assumes that trust funds are the last monies withdrawn from a commingled account. In re Strategic Techs., 142 F. App x at 566 (citing City of Farrell v. Sharon Steel Corp., 41 F.3d 92, 102 (3d Cir.1994)). However, once trust money is removed (i.e. the balance of the commingled account dips below the total amount of money claimed as trust funds), that money is not replenished, even if more funds are deposited. Id. (emphasis added). A. Insurance Premiums Were Commingled With Other Funds in the Premium Accounts 16. As supported by the McClure Declaration, the Debtors review of prepetition bank statements for the Premium Accounts strongly indicates that amounts other than insurance premiums were commingled in the Premium Accounts. For example, commissions owed to the Debtors on account of their role as the managing general agent for the Regulated Entities were routinely deposited into the Premium Accounts. McClure Declaration 9. Courts have explicitly held that the commingling of a debtor s commissions with insurance premiums collected on behalf of an insurer implicates the lowest intermediate balance test. In re Brooke Corp., No , 2012 WL (Bankr. D. Kan. June 25, 2012); Redmond v. Progressive Corp., 2012 WL (D. Kan. June 12, 2012); see also Mem. of Decision Den. Mot. For Relief from Automatic Stay, In re Quality Telecom, No (Bankr. D. Md. Mar. 15, 2005), ECF No. 145, motion to reconsider denied, 2006 Bankr. LEXIS 4512 (Bankr. D. Md. Feb. 27, 2006) (applying the lowest intermediate balance test to bank account into which the debtor-general contractor deposited payments that were comprised of fees owed to the debtor and amounts held in trust for the debtor s subcontractor). 17. Additionally, insurance premiums deposited into the Premium Accounts in connection with insurance policies written by any particular Regulated Entity, such as AIC, were - 6 -

7 Case CSS Doc 216 Filed 01/14/16 Page 7 of 13 often commingled with insurance premiums received in connection with insurance policies written by other Regulated Entities. For example, Premium Account ending in 8387 received insurance premium deposits in connection with (i) insurance policies written by AIC and (ii) insurance policies written by Affirmative Insurance Company of Michigan. McClure Declaration 10. This, too, constitutes commingling, thereby implicating the lowest intermediate balance test. See, e.g., In re Brooke Corp., No , 2012 WL (Bankr. D. Kan. June 25, 2012). 18. The Debtors have identified a number of additional transactions in the Premium Accounts that may have resulted in commingling, but additional analysis is necessary. 5 Again, these Chapter 11 Cases have been pending for merely three months. 19. There is substantial evidence that the insurance premiums deposited into the Premium Accounts were commingled with other funds. Assuming that the insurance premiums were held in trust by the Debtors, the lowest intermediate balance test would be used to determine the amount of funds in the Premium Accounts traceable to the insurance premiums. B. The Lowest Intermediate Balances of the Premium Accounts Are Negligible 20. The Debtors review of prepetition bank statements reveals that the lowest intermediate balances in the Premium Accounts since the time when commingling began are significantly lower than the amounts on deposit in the Premium Accounts as of the Petition Date. For example, the closing balance for Premium Account ending in 8387 as of January 31, 2015 was $ McClure Declaration 11. And the closing balance for Premium Account ending in 8352 as of January 31, 2015 was $ McClure Declaration These unknown transactions include, among others, remote deposit capture (RDC) deposits and wire transfer deposits

8 Case CSS Doc 216 Filed 01/14/16 Page 8 of Unless and until this Court finds that the amounts held in the Premium Accounts are not the Debtors property, such amounts remain the Debtors property. See In re Davis, 476 B.R. 191, 196 (Bankr. W.D. Pa. 2012) ( The burden of proving the existence of an express trust is on the party asserting its existence. ); In re 1031 Tax Grp., LLC, 439 B.R. 47, 70 (Bankr. S.D.N.Y.) supplemented, 439 B.R. 78 (Bankr. S.D.N.Y. 2010) ( [M]oney in a bank account in the name of a debtor is presumed to be property of the bankruptcy estate. ) (quoting In re LandAmerica Fin. Grp., Inc., 412 B.R. 800, 809 (Bankr. E.D. Va. 2009)); In re Amdura Corp., 75 F.3d 1447, 1451 (10th Cir. 1996) ( We presume that deposits in a bank to the credit of a bankruptcy debtor belong to the entity in whose name the account is established. ). 22. In any event, as detailed above, the Debtors have uncovered significant evidence of commingling in the Premium Accounts. As a result, the amounts to which a purported beneficiary, such as AIC, of the insurance premiums deposited into the Premium Accounts may be entitled is minimal given the lowest intermediate balances in the Premium Accounts. 23. This evidence strikes at the heart of the Committee s assertion that the Debtors are administratively insolvent, and it is this false assertion that serves as the Committee s sole basis for conversion of these Chapter 11 Cases. The Debtors are not administratively insolvent and should be permitted to continue to do what they set out to do three months ago propose a confirmable plan, which would include the payment of administrative expense claims. B. The Motion to Convert is Premature 24. The Motion to Convert is premature, and the Committee has not demonstrated the absence of a reasonable likelihood of rehabilitation at this time. At the outset of filing these Chapter 11 Cases, the Debtors acknowledged that because of their financial position, they had a short runway. Yet, the Chapter 11 Cases were filed three months ago, and the Debtors have - 8 -

9 Case CSS Doc 216 Filed 01/14/16 Page 9 of 13 begun working toward a plan with all of their constituents, including the Regulated Entities, the Debtors secured lender, and the Committee The Debtors dispute the Committee s position that the Debtors do not have the ability to confirm a plan. The Debtors are not administratively insolvent, and any proposed plan would provide for the payment of administrative expense claims. Such plan would also resolve a number of outstanding, and important, issues, including the Debtors net operating losses, the dispute over $8.5 million held in the Debtors bank account, and certain litigation claims. The Debtors therefore submit that there is no cause for conversion at this time. Rather, it is in the best interests of the Debtors creditors if the Court affords the Debtors additional time to continue their negotiations toward a confirmable plan. 26. Importantly, the term rehabilitation, as used in Bankruptcy Code section 1112(b)(4)(A), includes not only a plan of reorganization, but also an orderly liquidation, and cases in this and other districts routinely recognize that liquidation is not only permissible, but routinely used in chapter 11. See In re Klein/Ray Broadcasting, 100 B.R. 509, 511 (9th Cir. B.A.P. 1987) (affirming denial of a motion to convert because the Bankruptcy Code contemplates that a debtor corporation may be liquidated in a Chapter 11. ); In re Cooper Props. Liquidating Trust, Inc., 61 B.R. 531 (Bankr. W.D. Tenn. 1986) (holding that a bankruptcy petition should not be dismissed where a liquidating plan would benefit all creditors and the bankruptcy served the purpose of allowing the debtor to wind up its affairs and obtain confirmation of a liquidating plan); In re Ionosphere Clubs, Inc., 184 B.R. 648, 654 (S.D.N.Y. 1995) (collecting cases holding that liquidation is encompassed under and permissible in reorganization plans). 6 The Committee acknowledges as much in the Motion to Convert, stating that the Debtors, the Debtors secured lender, the Illinois insurance regulator, and the Committee recently engaged in negotiations with respect to a plan of liquidation. [Docket No. 191, 11]

10 Case CSS Doc 216 Filed 01/14/16 Page 10 of Furthermore, courts have recognized that a debtor s participation in a chapter 11 liquidation may generate greater returns and be more efficient than a chapter 7 liquidation. See, e.g., In re Deer Park, Inc., 10 F.3d 1478, 1481 (9th Cir. 1993) ( [A] debtor s continuing participation in a planned liquidation may be necessary to bring about maximum recovery for creditors. ); In re Copy Crafters Quickprint, Inc., 92 B.R. 973, 986 (Bankr. N.D.N.Y. 1988) ( In certain instances, a Chapter 11 liquidating plan is preferable to a Chapter 7 proceeding because the disposition of assets will be conducted in a less expensive, swifter and more orderly manner by a debtor-in possession, as opposed to a trustee, who, while disinterested, is still a third party unfamiliar with the property of the estate. ) (emphasis added). 28. Here, the Debtors two remaining officers, as the holders of all information related to the Debtors complex prepetition business operations, have been integral to the plan negotiation process and identifying unencumbered assets that can be used to satisfy claims against the Debtors. Indeed, the Committee, AIC, and other parties in interest have relied to a significant degree on the information provided by the Debtors officers since the outset of these Chapter 11 Cases. Appointment of a chapter 7 trustee at this early stage of these Chapter 11 Cases would significantly increase the costs of administration, leading to reduced recoveries for all parties. 29. The facts in Loop Corporation v. United States Trustee, a case cited by the Committee, are similar to the facts in these Chapter 11 Cases in that the debtors in Loop had no ongoing business operations and their assets consisted of cash, litigation claims, and net operating losses. 379 F.3d 511. The United States Trustee filed a motion to convert the cases from chapter 11 to chapter 7, which was opposed on the grounds that the Debtors needed additional time to negotiate a plan. Id. at

11 Case CSS Doc 216 Filed 01/14/16 Page 11 of Although the court ultimately granted the motion to convert, it did so only after affording the debtors additional time to negotiate a plan. The motion to convert was filed five months after the petition date, and was heard nearly six months after the petition date. Id. at Perhaps most notably, at the initial hearing on conversion, the court found that cause existed to convert the case, but nonetheless exercised its discretion and continued the hearing for another month to give the debtors further time to negotiate a confirmable plan. Id. at 514. Only after the debtors were unable to propose a plan before the continued hearing date, which was over seven months after the petition date, did the court grant the motion to convert. Id. 31. The Committee does not cite a single case in which a motion to convert was granted a mere three months after the petition date, at a time when the debtors were still actively engaged in negotiations regarding a plan. For example, in In re Reserves Resort, Spa & Country Club LLC, another case cited by the Committee, the motion to convert was granted eight months after the petition date WL (Bankr. D. Del. July 12, 2013); see also In re NuGelt, Inc., 142 B.R. 661 (Bankr. D. Del. 1992) (motion to convert or dismiss chapter 11 case granted forty-four months after the petition date); In re Taub, 427 B.R. 208 (Bankr. E.D.N.Y. 2010) (chapter 11 trustee appointed twenty-one months after the petition date). 32. Furthermore, in Reserves and other cases cited by the Committee, there were additional factors warranting conversion that are not present here. See, e.g., Reserves, 2013 WL , at *3 (noting that the facts that one of the debtors, who was the sole member of the other debtor, had borrowed funds without the court s approval and treated income as his own rather than accounting for it and depositing it into the debtor-in-possession account weighed in favor of converting the chapter 11 cases); NuGelt, 142 B.R. 661, 666 (noting that the debtors

12 Case CSS Doc 216 Filed 01/14/16 Page 12 of 13 misuse of estate funds and other breaches of fiduciary duty to the estate constituted cause for conversion or dismissal). 33. Here, the Motion to Convert was filed a mere ten weeks after the Petition Date, and the Committee is seeking conversion three months after the Petition Date. There is simply no cause for conversion of these Chapter 11 Cases. The Debtors should be allowed a reasonable period of time to complete their analysis of the Premium Accounts, among other issues, and propose a confirmable plan. The Committee s quick on the draw mentality should be rejected by this Court

13 Case CSS Doc 216 Filed 01/14/16 Page 13 of 13 WHEREFORE, the Debtors respectfully request that the Court enter an order denying the Motion to Convert or, in the alternative, continuing the hearing on the Motion to Convert until at least March 1, 2016, and issuing such other relief as the Court deems appropriate. Dated: January 14, 2016 Wilmington, Delaware Respectfully submitted, POLSINELLI PC /s/ Christopher A. Ward Christopher A. Ward (Del. Bar No. 3877) Shanti M. Katona (Del. Bar No. 5352) Jarrett Vine (Del. Bar No. 5400) 222 Delaware Avenue, Suite 1101 Wilmington, Delaware Telephone: (302) Facsimile: (302) and- MCDERMOTT WILL & EMERY LLP Timothy W. Walsh (admitted pro hac vice) Darren Azman (admitted pro hac vice) 340 Madison Avenue New York, New York Telephone:(212) Facsimile: (212) Counsel to the Debtors and Debtors in Possession

14 Case CSS Doc Filed 01/14/16 Page 1 of 32 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ) In re: ) Chapter 11 ) AFFIRMATIVE INSURANCE ) Case No (CSS) HOLDINGS, INC., et al., 1 ) ) (Jointly Administered) Debtors. ) ) Related to Docket No: 191 DECLARATION OF MICHAEL J. MCCLURE IN SUPPORT OF DEBTORS OBJECTION TO MOTION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF AFFIRMATIVE INSURANCE HOLDINGS, INC., ET AL. FOR ENTRY OF AN ORDER CONVERTING THE DEBTORS CHAPTER 11 CASES TO CASES UNDER CHAPTER 7 OF THE BANKRUPTCY CODE PURSUANT TO 11 U.S.C. 1112(B) I, Michael J. McClure, hereby declare under penalty of perjury, pursuant to section 1746 of title 28 of the United States Code, that: 1. I have served as Chief Executive Officer of Affirmative Insurance Holdings, Inc. ( HoldCo and, together with each of its wholly-owned direct and indirect subsidiaries that are debtors and debtors in possession in these chapter 11 cases, the Debtors or Affirmative ) since October 1, 2013, and as HoldCo s principal financial officer since October 2, I previously served as HoldCo s Acting Chief Executive Officer from April 4, 2013 to October 1, 2013, and as HoldCo s Chief Financial Officer from December 1, 2007 to September 10, The Debtors, together with the last four digits of each Debtor s federal tax identification number, are: Affirmative Insurance Holdings, Inc. (0432); Affirmative Management Services, Inc. (7252); Affirmative Services, Inc. (7255); Affirmative Underwriting Services, Inc. (7250); Affirmative Insurance Services, Inc. (8823); Affirmative General Agency, Inc. (2345); Affirmative Insurance Group, Inc. (7246); and Affirmative, L.L.C. (2347). The location of the Debtors corporate headquarters and the service address for all Debtors is 150 Harvester Drive, Suite 250, Burr Ridge, Illinois

15 Case CSS Doc Filed 01/14/16 Page 2 of 32 In these capacities, I have become familiar with the Debtors day-to-day operations, business, and financial affairs. 2. Except as otherwise indicated herein, all of the facts set forth in this declaration are based upon my personal knowledge, information supplied to me by other members of Affirmative s management or professionals, information learned from my review of the relevant documents, or my experience and knowledge of the Debtors operations and financial condition and the insurance industry, generally. If called as a witness, I could and would testify to the facts set forth in this declaration. I am authorized to submit this declaration on behalf of the Debtors. 3. Prior to the Petition Date, the Debtors served as managing general agents for various state-regulated insurance companies that possess the certificates of authority necessary to transact business and issue policies (the Regulated Entities ). 4. Pursuant to agreements between the Debtors and the Regulated Entities, the Debtors collected insurance premiums for the policies issued by the Regulated Entities, and these insurance premiums were regularly deposited into at least two of the Debtors bank accounts (the Premium Accounts ). The Premium Accounts are held at UMB Bank, n.a., ending in 8387 and Approved insurance claims paid to insured parties and claimants were also funded from funds held in the Premium Accounts 6. Debtor Affirmative Insurance Services, Inc. is the named account holder on the Premium Accounts. See Exhibits A and B. 7. To date, no person has filed a proof of claim or any pleading in these Chapter 11 Cases asserting that the funds held in the Premium Accounts are not the Debtors property under Bankruptcy Code section 541.

16 Case CSS Doc Filed 01/14/16 Page 3 of The insurance premiums deposited into the Debtors Premium Account ending in 8352, the balance of which was $572, as of the Petition Date, were made in connection with insurance policies written by Old American County Mutual Fire Insurance Company ( Old American ). 9. Fees owed to the Debtors on account of their role as the managing general agent for the Regulated Entities were routinely deposited into the Premium Accounts. 10. Premium Account ending in 8387 received insurance premiums in connection with (i) insurance policies written by AIC and (ii) insurance policies written by Affirmative Insurance Company of Michigan. 11. The closing balance for Premium Account ending in 8387 as of January 31, 2015 was $ See Exhibit C. 12. The closing balance for Premium Account ending in 8352 as of January 31, 2015 was $ See Exhibit D.

17 Case CSS Doc Filed 01/14/16 Page 4 of 32 I declare under penalty of perjury, pursuant to section 1746 of title 28 of the United States Code, that the foregoing is true and correct to the best of my knowledge, information, and belief. Dated: January 14, 2016 By: Chief Executi fficer Affirmative Insurance Holdings, Inc.

18 Case CSS Doc Filed 01/14/16 Page 5 of 32 EXHIBIT A

19 UMB Bank, n.a. Post Office Box Kansas City, Missouri UMB AFFIRMATIVE INSURANCE SERVICES INC AISI PREMIUM TRUST 4450 SJOURN DR ADDISON TX ACCOUNT NUMBER STATEMENT DATE PAGE I DIRECT WRITTEN INQUIRIES TO THE ABOVE ADDRESS. FOR PERSONAL ACCOUNTS YOU MAY CALL , FOR COMMERCIAL ACCOUNTS COMMERCIAL CHECKING ACCOUNT SUMMARY PREVIOUS STATEMENT , BALANCE OF 48 DEPOSITS AND OTHER CREDITS TOTALING 130 CHECKS AND OTHER DEBITS TOTALING CURRENT BALANCE AS OF STATEMENT DATE 967, ,882, ,416, , AVERAGE COLLECTED BALANCE THIS PERIOD 730, CHECKING ACCOUNT TRANSACTIONS DATE AMOUNT 65, , , , , , , , , , , , , , , , , , , ,5ll.54- l , , , , , ll9.15-1, , , , , , TRANSACTION DESCRIPTION FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA

20 UMB Bank, n.a. Post Office Box Kansas City, Missouri UMB AFFIRMATIVE INSURANCE SERVICES INC AISI PREMIUM TRUST 4450 SJOURN DR ADDISON TX ACCOUNT NUMBER STATEMENT DATE PAGE 2 98 DIRECT WRITTEN INQUIRIES TO THE ABOVE ADDRESS. FOR PERSONAL ACCOUNTS YOU MAY CALL , FOR COMMERCIAL ACCOUNTS CHECKING ACCOUNT TRANSACTIONS DATE ll 12-ll 12-ll 12-ll 12-ll 12-ll 12-ll 12-ll 12-ll AMOUNT , , , , , , , , , , , , ll, , , ll, ,2ll.25-84, ll, ll, , , , , , , llll2, , , , , ll2, , , ll TRANSACTION DESCRIPTION FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA

21 UMB Bank, n.a. Post Office Box Kansas City, Missouri UMB AFFIRMATIVE INSURANCE SERVICES INC AISI PREMIUM TRUST 4450 SJOURN DR ADDISON TX ACCOUNT NUMBER STATEMENT DATE PAGE 3 98 DIRECT WRITTEN INQUIRIES TO THE ABOVE ADDRESS. FOR PERSONAL ACCOUNTS YOU MAY CALL , FOR COMMERCIAL ACCOUNTS CHECKING ACCOUNT TRANSACTIONS DATE AMOUNT 92, , , , , , , , , ,ll , , , , , ,ll ,417.ll+ 21, , , , , , , , , , , ll, ll, , , , , , , TRANSACTION DESCRIPTION FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA

22 UMB Bank, n.a. Post Office Box Kansas City, Missouri UMB AFFIRMATIVE INSURANCE SERVICES INC AISI PREMIUM TRUST 4450 SJOURN DR ADDISON TX ACCOUNT NUMBER STATEMENT DATE PAGE 4 98 DIRECT WRITTEN INQUIRIES TO THE ABOVE ADDRESS. FOR PERSONAL ACCOUNTS YOU MAY CALL , FOR COMMERCIAL ACCOUNTS CHECKING ACCOUNT TRANSACTIONS DATE AMOUNT 6, ll , , , , , , ,9ll , , , , , , , , , , , , , TRANSACTION DESCRIPTION FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA BALANCES AFTER TRANSACTIONS - INCLUDING UNCOLLECTED FUNDS DATE BALANCE DATE BALANCE DATE BALANCE DATE BALANCE , , , , , , , , , ll 790, , , , , , , , , , , , ,592.72

23 An Easy Way to Balance Your Check Book appearing on Bank Statement. CHECK # AMOUNT Fill in the amounts from your check book and bank statement: Balance as shown on Bank Statement $ Add Deposits made and not on Bank Statement $ $ $ Subtract outstanding checks and withdrawals not yet on Bank Statement $ *Balance Balance as shown in Check Book $ $ Add Interest earned as shown on Bank Statement $ Subtract Service Charges and other charges not yet in Check Book $ *Balance $ TOTAL $ *These totals should agree, but if they do not agree, please check the following carefully: Did you balance last month's statement? Have you deducted from your check book all charges made by the bank? Service Charges, insufficient charges, check printing charges, etc.? Are all automatic deductions such as insurance drafts, loan payments, bond deductions, savings transfers, etc., entered in your check book? Are all deposits and checks entered in your check book? Are there any outstanding checks from prior statements still ourstanding? Have all balances been brought forward correctly on your check book stubs or register? Have you added interest paid, if any, to your check book balance? Does the amount of each check agree with the amount shown on the statement and the amount written in your check book? IN CASE OF ERRORS OR QUESTIONS ABOUT YOUR ELECTRONIC TRANSACTIONS, PLEASE CALL US OR WRITE US AT THE PHONE NUMBER OR ADDRESS SHOWN ON THE FRONT OF THIS STATEMENT AS SOON AS YOU CAN. If you think your statement or receipt is wrong, or if you need more information about a transfer listed on the statement or receipt, we must hear from you no later than 60 days after we send the FIRST statement on which the problem or error appeared. Tell us your name and account number. Describe the error or the transfer you are unsure about, and explain as clearly as you can why you believe it is an error or why you need more information. Tell us the dollar amount of the suspected error. If you tell us orally, we may require that you send us your complaint or question in writing within ten (10) business days. We will determine whether an error occurred within ten (10) business days after we hear from you and will correct any error promptly. If we need more time, however, we may take up to 45 days to investigate your complaint or question. If we decide to do this, we will credit your account within ten (10) business days for the amount you think is in error so that you will have the use of the money during the time it takes us to complete our investigation. If we ask you to put your complaint or question in writing and we do not receive it within ten (10) business days, we may not credit your account. For errors involving new accounts, point-of-sale, or foreign-initiated transactions, we may take up to 90 days to investigate your complaint or question. For new accounts, we may take up to 20 business days to credit your account for the amount you think is in error. We will tell you the results within three (3) business days after completing our investigation. If we decide that there was no error, we will send you a written explanation. You may ask for copies of the documents that we used in our investigation. UMB202 (Rev. 01/07)

24 Case CSS Doc Filed 01/14/16 Page 11 of 32 EXHIBIT B

25 UMB Bank, n.a. Post Office Box Kansas City, Missouri UMB AFFIRMATIVE INSURANCE SERVICES INC AISI TX PREM TRUST ACCT OACM 4450 SJOURN DR ADDISON TX ACCOUNT NUMBER STATEMENT DATE PAGE I DIRECT WRITTEN INQUIRIES TO THE ABOVE ADDRESS. FOR PERSONAL ACCOUNTS YOU MAY CALL , FOR COMMERCIAL ACCOUNTS COMMERCIAL CHECKING ACCOUNT SUMMARY PREVIOUS STATEMENT , BALANCE OF 25 DEPOSITS AND OTHER CREDITS TOTALING 52 CHECKS AND OTHER DEBITS TOTALING CURRENT BALANCE AS OF STATEMENT DATE 560, , , , AVERAGE COLLECTED BALANCE THIS PERIOD 568, CHECKING ACCOUNT TRANSACTIONS DATE AMOUNT TRANSACTION DESCRIPTION , , , ONLINE BANKING TRANSFER TO , ONLINE BANKING TRANSFER TO , , ONLINE BANKING TRANSFER TO , , ONLINE BANKING TRANSFER TO , , ONLINE BANKING TRANSFER TO FUNDS TRANSFER TO DDA , , ONLINE BANKING TRANSFER TO , , ONLINE BANKING TRANSFER TO , , ONLINE BANKING TRANSFER TO RDC DEPOSIT REF , ll 33, ll 26, ONLINE BANKING TRANSFER TO ll 33, ONLINE BANKING TRANSFER TO ll , , ONLINE BANKING TRANSFER TO FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA , , , ONLINE BANKING TRANSFER TO ,

26 UMB Bank, n.a. Post Office Box Kansas City, Missouri UMB AFFIRMATIVE INSURANCE SERVICES INC AISI TX PREM TRUST ACCT OACM 4450 SJOURN DR ADDISON TX ACCOUNT NUMBER STATEMENT DATE PAGE 2 98 DIRECT WRITTEN INQUIRIES TO THE ABOVE ADDRESS. FOR PERSONAL ACCOUNTS YOU MAY CALL , FOR COMMERCIAL ACCOUNTS CHECKING ACCOUNT TRANSACTIONS DATE AMOUNT TRANSACTION DESCRIPTION , ONLINE BANKING TRANSFER TO , , ONLINE BANKING TRANSFER TO , ONLINE BANKING TRANSFER TO , , ONLINE BANKING TRANSFER TO , , , ONLINE BANKING TRANSFER TO , ONLINE BANKING TRANSFER TO FUNDS TRANSFER TO DDA , , ONLINE BANKING TRANSFER TO ,261.ll , ONLINE BANKING TRANSFER TO , , ONLINE BANKING TRANSFER TO , , , ONLINE BANKING TRANSFER TO , ONLINE BANKING TRANSFER TO , ,850.ll- ONLINE BANKING TRANSFER TO BALANCES AFTER TRANSACTIONS - INCLUDING UNCOLLECTED FUNDS - - DATE BALANCE DATE BALANCE DATE BALANCE DATE BALANCE , , , , , , , , , ll 560, , , , , ,0ll , , , , , , ,299.52

27 An Easy Way to Balance Your Check Book appearing on Bank Statement. CHECK # AMOUNT Fill in the amounts from your check book and bank statement: Balance as shown on Bank Statement $ Add Deposits made and not on Bank Statement $ $ $ Subtract outstanding checks and withdrawals not yet on Bank Statement $ *Balance Balance as shown in Check Book $ $ Add Interest earned as shown on Bank Statement $ Subtract Service Charges and other charges not yet in Check Book $ *Balance $ TOTAL $ *These totals should agree, but if they do not agree, please check the following carefully: Did you balance last month's statement? Have you deducted from your check book all charges made by the bank? Service Charges, insufficient charges, check printing charges, etc.? Are all automatic deductions such as insurance drafts, loan payments, bond deductions, savings transfers, etc., entered in your check book? Are all deposits and checks entered in your check book? Are there any outstanding checks from prior statements still ourstanding? Have all balances been brought forward correctly on your check book stubs or register? Have you added interest paid, if any, to your check book balance? Does the amount of each check agree with the amount shown on the statement and the amount written in your check book? IN CASE OF ERRORS OR QUESTIONS ABOUT YOUR ELECTRONIC TRANSACTIONS, PLEASE CALL US OR WRITE US AT THE PHONE NUMBER OR ADDRESS SHOWN ON THE FRONT OF THIS STATEMENT AS SOON AS YOU CAN. If you think your statement or receipt is wrong, or if you need more information about a transfer listed on the statement or receipt, we must hear from you no later than 60 days after we send the FIRST statement on which the problem or error appeared. Tell us your name and account number. Describe the error or the transfer you are unsure about, and explain as clearly as you can why you believe it is an error or why you need more information. Tell us the dollar amount of the suspected error. If you tell us orally, we may require that you send us your complaint or question in writing within ten (10) business days. We will determine whether an error occurred within ten (10) business days after we hear from you and will correct any error promptly. If we need more time, however, we may take up to 45 days to investigate your complaint or question. If we decide to do this, we will credit your account within ten (10) business days for the amount you think is in error so that you will have the use of the money during the time it takes us to complete our investigation. If we ask you to put your complaint or question in writing and we do not receive it within ten (10) business days, we may not credit your account. For errors involving new accounts, point-of-sale, or foreign-initiated transactions, we may take up to 90 days to investigate your complaint or question. For new accounts, we may take up to 20 business days to credit your account for the amount you think is in error. We will tell you the results within three (3) business days after completing our investigation. If we decide that there was no error, we will send you a written explanation. You may ask for copies of the documents that we used in our investigation. UMB202 (Rev. 01/07)

28 Case CSS Doc Filed 01/14/16 Page 15 of 32 EXHIBIT C

29 Case CSS Doc Filed 01/14/16 Page 16 of 32 Demand Deposit Statement Report Date 02/27/2015 Receiver ID UMB BANK, N. A. AFFIRMATIVE INSURANCE SERVICES INC ACCOUNT NUMBER 98 AISI PREMIUM TRUST SJOURN DR 0 ADDISON TX STATEMENT DATE PAGE COMMERCIAL CHECKING ACCOUNT SUMMARY PREVIOUS STATEMENT , BALANCE OF DEPOSITS AND OTHER CREDITS TOTALING 13,817, CHECKS AND OTHER DEBITS TOTALING 11,286, CURRENT BALANCE AS OF STATEMENT DATE 2,531, AVERAGE COLLECTED BALANCE THIS PERIOD 1,558, CHECKING ACCOUNT TRANSACTIONS DATE AMOUNT TRANSACTION DESCRIPTION , WIRE TRANSFER DEPOSIT , AIS PREM TRUST ACH AFFRMINS , WIRE TRANSFER DEPOSIT , WIRE TRANSFER DEPOSIT , WIRE TRANSFER DEPOSIT , WIRE TRANSFER DEPOSIT , AIS PREM TRUST ACH AFFRMINS , ONLINE BANKING TRANSFER TO , ONLINE BANKING TRANSFER TO , ONLINE BANKING TRANSFER TO AIS PREM TRUST RETURN AFFRMINS RETIRE , AIS PREM TRUST ACH AFFRMINS AIS PREM TRUST ACH AFFRMINS AIS PREM TRUST ACH AFFRMINS AIS PREM TRUST RETURN AFFRMINS RETIRE AIS PREM TRUST RETURN RETIRE AIS PREM TRUST ACH AFFRMINS , WIRE TRANSFER DEPOSIT Retrieval Date/Time: 03/02/ :14:45PM CT Page 1 of 10

30 Case CSS Doc Filed 01/14/16 Page 17 of , RDC DEPOSIT REF , RDC DEPOSIT REF , RDC DEPOSIT REF , RDC DEPOSIT REF , RDC DEPOSIT REF , AIS PREM TRUST ACH AFFRMINS , AIS PREM TRUST ACH AFFRMINS , AIS PREM TRUST ACH AFFRMINS INSURANCE AUTO A PAYABLES AFFIRMATIVE INS MW , AIS PREM TRUST RETURN RETIRE , RDC DEPOSIT REF , RDC DEPOSIT REF , AIS PREM TRUST ACH AFFRMINS , AIS PREM TRUST ACH AFFRMINS , AIS PREM TRUST ACH AFFRMINS AIS PREM TRUST ACH AFFRMINS , AIS PREM TRUST RETURN RETIRE AIS PREM TRUST ACH AFFRMINS , FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA , RDC DEPOSIT REF , RDC DEPOSIT REF , RDC DEPOSIT REF , RDC DEPOSIT REF , AIS PREM TRUST ACH AFFRMINS3 UMB BANK, N. A. AFFIRMATIVE INSURANCE SERVICES INC ACCOUNT NUMBER 98 AISI PREMIUM TRUST SJOURN DR ADDISON TX STATEMENT DATE PAGE CHECKING ACCOUNT TRANSACTIONS DATE AMOUNT TRANSACTION DESCRIPTION , AIS PREM TRUST ACH AFFRMINS , AIS PREM TRUST ACH AFFRMINS , AIS PREM TRUST ACH AFFRMINS AIS PREM TRUST ACH AFFRMINS , WIRE TRANSFER WITHDRAWAL , AIS PREM TRUST RETURN RETIRE AIS PREM TRUST ACH AFFRMINS , FUNDS TRANSFER TO DDA FUNDS TRANSFER TO DDA , RDC DEPOSIT REF Retrieval Date/Time: 03/02/ :14:45PM CT Page 2 of 10