Cochran v. Paco, Inc.

• Decision Date: 02 January 1979
• Docket Number: 76-2675,Nos. 76-1956,s. 76-1956
• Citation: 606 F.2d 460
• Parties: Doreen M. COCHRAN, Plaintiff-Appellant, v. PACO, INC., Defendant-Appellee. Clara M. JONES, Plaintiff-Appellant, v. PACO, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 460

606 F.2d 460

51 A.L.R.Fed. 731

Doreen M. COCHRAN, Plaintiff-Appellant, v. PACO, INC., Defendant-Appellee.

Clara M. JONES, Plaintiff-Appellant, v. PACO, INC., Defendant-Appellee.

Nos. 76-1956, 76-2675.

United States Court of Appeals Fifth Circuit.

Jan. 2, 1979.

Joseph H. King, Jr., Atlanta, Ga., for Doreen M. Cochran.

Jeraud C. Kluckman, Asst. Director, Bd. of Governors of the Federal Reserve System, Washington, D. C., for amicus curiae Bd. of Governors of the Federal Reserve System.

Joseph H. King, Jr., Graydon W. Florence, Jr., Atlanta, Ga., for Clara M. Jones.

Jerry B. Blackstock, Robert L. Connelly, Jr., Atlanta, Ga., for Paco, Inc.

Appeals from the United States District Court for the Northern District of Georgia.

Before BROWN, Chief Judge, THORNBERRY and MORGAN, Circuit Judges.

THORNBERRY, Circuit Judge:

These consolidated cases, along with two others also decided this day, ¹ require us to examine the relationship between the McCarran-Ferguson Act ("McCarran Act"), 15 U.S.C. §§ 1011 Et seq., and the Truth in Lending Act ("TIL"), 15 U.S.C. §§ 1601 Et seq. Here we must decide whether the McCarran Act precludes application of TIL's disclosure requirements to a credit agreement between a lending institution and a borrower who had obtained the loan to purchase automobile insurance.

The district court, faced with the borrower's suit alleging violations of TIL, held that the lender was engaged in the business of insurance within the meaning of the McCarran Act and entered summary judgment in favor of the lender. For the reasons stated below, we reverse.

I. FACTUAL BACKGROUND

Paco, Inc. is a premium finance company licensed by the Georgia Insurance Commissioner under the state's Insurance Premium Finance Company Act, Ga. Code Ann. §§ 84-5301 Et seq. In March 1975, Doreen Cochran entered into a contract with Paco whereby Paco agreed to finance the premiums on an automobile insurance policy that Cochran purchased from Cotton States Mutual Insurance Company. This premium financing agreement contained disclosures ² mandated by Georgia law, as well as others that are permissible but not required. ³ Paco took a security interest in the policy and was granted a power of attorney, enabling it to cancel the insurance if the installment payments were not made. See Ga. Code Ann. § 84-5312(a). When Cochran defaulted, Paco cancelled the policy.

Cochran brought this action, alleging that Paco had violated the disclosure requirements of TIL and Regulation Z, 12 C.F.R. § 226. ⁴ Paco moved to dismiss on the basis of the McCarran Act and later moved for summary judgment. The case was referred to a special master, who recommended that Paco's motion be denied. However, the district judge rejected that recommendation and entered summary judgment in favor of Paco, holding that the lender was engaged in the business of insurance which is regulated by the State of Georgia and that application of TIL to the premium financing agreement would supersede Georgia law, in contravention of the McCarran Act. Cochran's subsequent motion to alter or amend this decision was denied. Cochran v. Paco, Inc., 409 F.Supp. 219 (N.D.Ga.1976).

On the basis of this decision, Paco's motion to dismiss was granted in a similar case, Jones v. Paco, Inc., No. C76-90A (N.D.GA., May 5, 1976). Appeals were taken in both cases, which were then consolidated. Because the facts in Jones are substantially the same as those in Cochran, we will not recite them. The legal issues in the two cases are identical. ⁵

II. THE McCARRAN-FERGUSON ACT

These cases call into play the first two sections of the Act, 15 U.S.C. §§ 1011 & 1012, which provide as follows:

§ 1011. Declaration of policy

Congress declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States.

§ 1012. Regulation by State law; Federal law relating specifically to insurance; applicability of certain Federal laws after June 30, 1948

(a) The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.

(b) No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance; Provided, That after June 30, 1948, the Act of July 2, 1890, as amended, known as the Sherman Act, and the Act of October 15, 1914, as amended known as the Clayton Act, and the Act of September 26, 1914, known as the Federal Trade Commission Act, as amended, shall be applicable to the business of insurance to the extent that such business is not regulated by State law.

The legal climate surrounding the Act's passage was neatly summarized by Justice Marshall in Securities & Exchange Comm'n v. National Securities, Inc., 393 U.S. 453, 458, 89 S.Ct. 564, 567-68, 21 L.Ed.2d 668 (1969):

(The Act) was passed in reaction to this Court's decision in United States v. South-Eastern Underwriters Assn., 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440 (1944). Prior to that decision, it had been assumed, in the language of the leading case, that "(i)ssuing a policy of insurance is not a transaction of commerce." Paul v. Virginia, 8 Wall. 168, 183, 19 L.Ed. 357 (1869). Consequently, regulation of insurance transactions was thought to rest exclusively with the States. In South-Eastern Underwriters, this Court held that insurance transactions were subject to federal regulation under the Commerce Clause, and that the antitrust laws in particular, were applicable to them. Congress reacted quickly. Even before the opinion was announced, the House had passed a bill exempting the insurance industry from the antitrust laws. 90 Cong.Rec. 6565 (1944). Objection in the Senate killed the bill, 90 Cong.Rec. 8054 (1944), but Congress clearly remained concerned about the inroads the Court's decision might make on the tradition of state regulation of insurance. The McCarran-Ferguson Act was the product of this concern. Its purpose was stated quite clearly in its first section; Congress declared that "the continued regulation and taxation by the several States of the business of insurance is in the public interest." 59 Stat. 33 (1945), 15 U.S.C. § 1011. As this Court said shortly afterward, "(o)bviously Congress' purpose was broadly to give support to the existing and future state systems for regulating and taxing the business of insurance." Prudential Insurance Co. v. Benjamin, 328 U.S. 408, 429, 66 S.Ct. 1142, 90 L.Ed. 1342 (1946).

Congress thus returned to the states the plenary power to regulate the business of insurance that they had enjoyed prior to the South-Eastern Underwriters decision. ⁶ If Congress intended to invoke its Commerce Clause powers to occupy part of the field of insurance regulation, it would expressly say so. Congress wanted to ensure that no future federal legislation enacted under the Commerce Clause and not specifically related to insurance would be construed as an implied repeal of the McCarran Act. 15 U.S.C. § 1012(b). ⁷

Finally, although the Act was passed primarily in response to South-Eastern Underwriters, an antitrust case, there is no doubt that its scope is much broader than the antitrust area. For example, state tax laws relating to the business of insurance are expressly covered by 15 U.S.C. §§ 1011 & 1012. In addition, these two sections speak of "regulation" of the insurance business, and that term is certainly not limited to antitrust regulation. Although debate naturally focused for the most part on the Act's antitrust implications, ⁸ Congress was clearly concerned with the overall regulatory picture, including "collection of premiums, general regulations, the issuing of licenses, and many other aspects of the business." 91 Cong.Rec. 481-82 (1945) (remarks of Senator Radcliffe). ⁹ Moreover, 15 U.S.C. § 1014 makes the National Labor Relations Act and the Fair Labor Standards Act specifically applicable to the business of insurance, also demonstrating Congress' intent to leave the states free to regulate insurance in areas having no relationship to antitrust.

Not surprisingly, the bulk of McCarran Act jurisprudence involves the Act's application in the antitrust context. While the antitrust cases are not dispositive of the issues presented in the instant cases, they do serve as useful guides for construing the terms of the statute, and where appropriate we shall feel free to borrow prior constructions of the Act's language from the antitrust cases.

III. DISCUSSION

The initial question is whether TIL "specifically relates to the business of insurance" within the meaning of 15 U.S.C. § 1012(b). If it does, the McCarran Act defense is automatically defeated and our inquiry is at an end. If it does not, then we must decide whether Paco's premium financing activities, carried out in connection with Cochran's purchase of an insurance policy from another company, constitute the "business of insurance" for purposes of § 1012(b). If those activities are not a part of the business of insurance, TIL would apply. If they are a part of such business, we must then determine whether Georgia has "enacted by any (law) . . . for the purpose of regulating" such activities. If the state has not done so, TIL would apply. If it has, we must finally decide whether TIL would "invalidate, impair, or supersede" such state law. See SEC v. National Securities, Inc., supra ; Lowe v. Aarco-American, Inc., 536 F.2d 1160 (7 Cir. 1976); Gerlach v. Allstate Ins. Co., 338 F.Supp. 642 (S.D.Fla.1972); Krischer, "Truth" in Insurance Premium Financing, 30 Bus.Lawyer 969 (1975).

A. "Specifically Relates"

Nowhere in...