American Deposit Corp. v. Schacht

• Decision Date: 13 May 1996
• Docket Number: No. 95-2462,95-2462
• Citation: 84 F.3d 834
• Parties: AMERICAN DEPOSIT CORPORATION and Blackfeet National Bank, Plaintiffs-Appellants, v. James W. SCHACHT, individually and as Acting Director of Insurance of the State of Illinois, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 834

84 F.3d 834

64 USLW 2725

AMERICAN DEPOSIT CORPORATION and Blackfeet National Bank Plaintiffs-Appellants, v. James W. SCHACHT, individually and as Acting Director of Insurance of the State of Illinois, Defendant-Appellee.

No. 95-2462.

United States Court of Appeals Seventh Circuit.

Argued Jan. 12, 1996.

Decided May 13, 1996.

George L. Saunders, Jr., Thomas F. Bush, Jr., Saunders & Monroe, Chicago, IL, Thaddeus Holt (argued), Dennis M. Gingold, Anderson Aukamp & Gingold, Washington, DC, for Plaintiffs-Appellants.

Daniel I. Schlessinger, Robert A. Knuti, Damon N. Vocke, Lord, Bissell & Brook, Chicago, IL, Cacilia R. Masover (argued), Office of the Attorney General, Civil Appeals Division, Chicago, IL, for Defendant-Appellee.

Robert A. Kunti, Lord, Bissell & Brook, Chicago, IL, David Overlock Stewart, Martin E. Lybecker, Ropes & Gray, Washington, DC, for American Council of Life Insurance, Amicus Curiae.

Carl S. Nadler, Jenner & Block, Chicago, IL, Ann M. Kappler, Scott A. Sinder, Jenner & Block, Washington, DC, for National Association of Life Underwriters, Amicus Curiae.

Before CUMMINGS, FLAUM and DIANE P. WOOD, Circuit Judges.

CUMMINGS, Circuit Judge.

The National Bank Act ("Bank Act") arguably permits a national bank to sell an innovative investment product known as the "Retirement CD." The Illinois Insurance Code ("Insurance Code"), however, prohibits selling this product without a certificate of authority from the Director of Insurance. Defendant Blackfeet National Bank ("Blackfeet") has no such certificate and sued for a declaration that the Illinois Insurance Code cannot stand in the face of the National Bank Act. The district court concluded that the sale of the Retirement CD was the "business of insurance" within the meaning of the McCarran-Ferguson Act, which reverses the rule of federal preemption, and thus held that the Illinois Insurance Code applied regardless of whether the sale of the Retirement CD was authorized by the National Bank Act. For the following reasons, we affirm that decision.

I.

The following facts are undisputed. Plaintiff American Deposit Corporation, of Pine, Colorado ("ADC") owns and licenses to banks an investment vehicle known as the Retirement CD. The Retirement CD is structured such that the purchaser qualifies for special tax treatment by the Internal Revenue Service. A customer first deposits money with an individual bank and selects a maturity date in the future (usually the customer's anticipated retirement date). Interest then accumulates on the deposits until the maturity date, at which time the depositor may withdraw in a lump sum up to two-thirds of the account balance, including the accrued interest. Thereafter, the customer receives the remainder of the account in periodic payments for the rest of his life--essentially a lifetime annuity. The amount of each payment is determined according to mortality tables and a guaranteed interest rate. The customer is assured of receiving the entire amount of the account balance regardless of his lifespan; if he dies prior to receiving that amount in monthly payments, the remainder of the account is paid in a lump sum to his estate or designated beneficiary.

Blackfeet is a small national bank located on the Blackfeet Indian Reservation in Browning, Montana and is a licensee of the Retirement CD. By late 1994, Blackfeet was offering the Retirement CD to investors across the country, although it had yet to accept a deposit from an Illinois resident. Defendant Schacht, on behalf of the State of Illinois, issued an order on December 9, 1994, directing Blackfeet to "immediately cease and desist any and all practices which purport to offer [the Retirement CD] to residents of the State of Illinois." The basis for the order was that Blackfeet was engaging in the business of insurance without a certificate of authority to do so in violation of 215 ILCS 5/24. Plaintiffs concede that because of its lifetime monthly payments feature, the Retirement CD is essentially an annuity and that the Insurance Code includes "granting, purchasing or disposing of annuities" within the "life insurance" classification of the business of insurance. 215 ILCS 5/4(a). Section 5/24 of the Insurance Code dictates that "[n]o company shall transact any business of insurance until it has received a certificate of authority" from the Director of Insurance, which plaintiffs concede they do not have.

The Director of Insurance issues certificates of authority only to domestic, foreign, or alien companies. "Domestic companies" are those organized under the laws of the State of Illinois, 215 ILCS 5/2(f), "foreign companies" are those organized under the laws of any other state or territory of the United States, or the District of Columbia, 215 ILCS 5/2(g), and "alien companies" are those organized under the laws of a country other than the United States, 215 ILCS 5/2(h). Because Blackfeet is a national bank organized under the Bank Act, it does not qualify for certification as any of the above. ¹ Additionally, 215 ILCS 5/111(c) dictates that companies which engage in other business in addition to the life insurance business--which, as a bank, Blackfeet obviously does--may not be certified. Therefore, Blackfeet is not permitted under the Insurance Code to sell and underwrite the Retirement CD in Illinois. The only way it could accomplish the sale in compliance with the Insurance Code would be to set up a subsidiary specifically for that purpose, which could then be issued a certificate of authority.

Blackfeet brought suit against Schacht for a declaration that the sale of the Retirement CD is not subject to regulation by the State of Illinois. Blackfeet argues that the Bank Act, through the express authority to receive deposits, 12 U.S.C. § 24 (Seventh), and to enter into contracts, 12 U.S.C. § 24 (Third), authorizes the sale of the Retirement CD. We will assume, arguendo, that it does. ² Magistrate Judge Bobrick granted summary judgement to Schacht, concluding that "the nature of the Retirement CD makes it an appropriate subject for regulation as an insurance product because it entails an insurance or mortality risk and a guaranteed return."

II.

We review the grant of a motion for summary judgment de novo, drawing all reasonable inferences in favor of the non-moving party. Smith v. Shawnee Library Sys., 60 F.3d 317, 320 (7th Cir.1995).

The tension in this case comes from an apparent overlap between activities arguably authorized by the Bank Act and activities that individual states have a legitimate interest in regulating. If we assume that Blackfeet is authorized to sell the Retirement CD under the Bank Act, the pertinent question is whether the Insurance Code can nonetheless prohibit the sale. It is well settled that a federal law preempts a conflicting state law under the Supremacy Clause of Article VI of the Constitution, and the Bank Act is no exception. See, e.g., Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25, 116 S.Ct. 1103, 134 L.Ed.2d 237 (holding that a provision of the Bank Act which allows national banks located in towns with populations of fewer than 5000 people to act as insurance agents preempts contrary state law); Franklin Nat'l Bank v. New York, 347 U.S. 373, 74 S.Ct. 550, 98 L.Ed. 767 (striking down an effort to apply state Saturday closing laws to national banks); Easton v. Iowa, 188 U.S. 220, 23 S.Ct. 288, 47 L.Ed. 452 (striking down state regulation of the circumstances in which a national bank can accept deposits). Thus under ordinary preemption rules, the provisions of the Bank Act would trump contrary Illinois law.

However, with regard to the "business of insurance," the McCarran-Ferguson Act "overturn[ed] the normal legal rules of preemption" by imposing a rule "that state laws enacted for the purpose of regulating the business of insurance do not yield to conflicting federal statutes unless the federal statute specifically provides otherwise." U.S. Dep't of Treasury v. Fabe, 508 U.S. 491, 507, 113 S.Ct. 2202, 2211, 124 L.Ed.2d 449. Specifically, Section 1012 of the McCarran-Ferguson Act provides:

(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 ... unless such Act specifically relates to the business of insurance....

Thus to decide whether the Insurance Code may stand in the face of the Bank Act we must resolve three issues: (1) whether the pertinent sections of the Insurance Code were enacted "for the purpose of regulating the business of insurance"; (2) whether the Retirement CD is properly considered "the business of insurance"; and (3) whether the pertinent provisions of the Bank Act "specifically relate to the business of insurance." Id.

A.

In SEC v. National Sec., Inc., 393 U.S. 453, 89 S.Ct. 564, 21 L.Ed.2d 668, the Court held that "statutes aimed at protecting or regulating th[e] relationship [between insurer and insured], directly or indirectly, are laws regulating the 'business of insurance.' " Id. at 460, 89 S.Ct. at 569. The opinion emphasized that the focus of the McCarran-Ferguson Act is upon the relationship between insurance companies and their customers:

The relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation, and enforcement--these were the core of the "business of insurance." Undoubtedly, other activities of insurance companies relate so closely to their status as reliable insurers that they too must be placed in the same class. But whatever the exact scope of the statutory term, it is clear where the focus was--it was on the relationship between the insurance company and the policyholder. Id.

The Court stated that the "broad...