Fabe v. U.S. Dept. of Treasury, 90-3364

• Decision Date: 17 July 1991
• Docket Number: No. 90-3364,90-3364
• Citation: 939 F.2d 341
• Parties: George FABE, Superintendent of Insurance, State of Ohio, Plaintiff-Appellant, v. UNITED STATES DEPARTMENT OF the TREASURY; Mitchell A. Levine, Assistant Commissioner, Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 341

939 F.2d 341

George FABE, Superintendent of Insurance, State of Ohio Plaintiff-Appellant, v. UNITED STATES DEPARTMENT OF the TREASURY; Mitchell A Levine, Assistant Commissioner, Defendants-Appellees.

No. 90-3364.

United States Court of Appeals Sixth Circuit.

Argued Nov. 29, 1990.

Decided July 17, 1991.

David E. Northrop (argued), James R. Rishel, Gurley, Rishel, Myers & Kopech, Columbus, Ohio, for plaintiff-appellant.

Joseph E. Kane, Asst. U.S. Atty., Columbus, Ohio, J. Christopher Kohn, Sandra P. Spooner (argued), Office of Dept. of Justice, Civil Div., Washington, D.C., for United States Dept. of Treasury.

Joseph E. Kane, Asst. U.S. Atty., Columbus, Ohio, J. Christopher Kohn, Office of the Dept. of Justice, Civil Div., Washington, D.C., for Mitchell A. Levine, Assistant Commissioner.

Before MARTIN and JONES, Circuit Judges, and EDGAR, District Judge. ^*

BOYCE F. MARTIN, Jr., Circuit Judge.

In this declaratory judgment action, the district court found that certain claims of the United States against an insolvent Ohio insurance company are entitled to priority as provided by 31 U.S.C. Sec. 3713 (1988), notwithstanding contrary provisions of Ohio law. Because we find the Ohio insurance liquidation priority scheme at issue to be a regulation of the "business of insurance" within the meaning of the McCarran-Ferguson Act, 15 U.S.C. Sec. 1012(b) (1988), and thus subject solely to the provisions of state law absent explicitly conflicting federal legislation, we reverse.

The facts of this case are uncontested. On April 30, 1986, the Court of Common Pleas for Franklin County, Ohio declared the American Druggists' Insurance Company insolvent. Pursuant to Ohio Rev.Code Sec. 3903.01 et seq., the court directed that American Druggists' be liquidated and appointed George Fabe, the Superintendent of Insurance for the State of Ohio, to serve as liquidator.

The United States filed claims in the liquidation proceedings as obligee on various immigration, appearance, performance and payment bonds issued by American Druggists' as surety. The United States notified Fabe on August 28, 1986, that it would seek first priority for its claims by virtue of the federal superpriority statute, 31 U.S.C. Sec. 3713(a)(1)(A). ¹ Thereafter, Fabe filed for a declaratory judgment in federal district court arguing that the federal superpriority statute does not apply to Ohio's liquidation of American Druggists' because the controlling state priority statute, Ohio Rev.Code Sec. 3903.42, is a regulation of the "business of insurance" within the meaning of the McCarran-Ferguson Act. Accordingly, Fabe argues that Sec. 3903.42 takes precedence over the federal statute, entitling the United States to the lesser priority afforded by state law.

Before the district court, both parties stipulated that Ohio Rev.Code Sec. 3903.42 is a state law which regulates the insurance industry, that application of the federal priority statute would "invalidate, impair, or supercede" the state statute, and that the federal priority statute is not an act which specifically relates to the "business of insurance." See McCarran-Ferguson Act, 15 U.S.C. Sec. 1012(b). Therefore, the sole issue presented to both the district court and this court on appeal is whether the Ohio insurance liquidation priority statute is a state law regulating the "business of insurance" within the meaning of the McCarran-Ferguson Act. After a thorough review of relevant precedent, the district court entered judgment for the United States, concluding that Ohio Rev.Code Sec. 3903.42 regulates only the business of insurance companies, not the "business of insurance." See Securities & Exchange Commission v. National Securities, 393 U.S. 453, 460, 89 S.Ct. 564, 568, 21 L.Ed.2d 668 (1969). As a pure question of law, we consider this issue on appellate review independent of the district court's decision. Salve Regina College v. Russell, --- U.S. ----, 111 S.Ct. 1217, 113 L.Ed.2d 190 (1991).

Prior to 1944 the authority to regulate insurance transactions rested exclusively with the several states. National Securities, 393 U.S. at 458, 89 S.Ct. at 567 (citing Paul v. Virginia, 75 U.S. (8 Wall.) 168, 183, 19 L.Ed. 357 (1869) (insurance transactions not considered "commerce")). That relationship changed following the Supreme Court's conclusion in United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440 (1944), that insurance transactions are commerce, subject to federal regulation under the Commerce Clause. Because Congress feared injury to the traditional policy of state regulation of the insurance industry, it quickly responded.

Declaring that "the continued regulation and taxation by the several States of the business of insurance is in the public interest[,]" 59 Stat. 33, 15 U.S.C. Sec. 1011, Congress passed the McCarran-Ferguson Act, 15 U.S.C. Sec. 1012, to protect the dominion of the states over the "existing and future ... systems for regulating and taxing the business of insurance." Prudential Insurance Co. v. Benjamin, 328 U.S. 408, 429, 66 S.Ct. 1142, 1155, 90 L.Ed. 1342 (1946). The 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, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance[.] ²

15 U.S.C. Sec. 1012. Although the Act exempts from federal preemption only those state regulations which concern the "business of insurance," neither the Act nor its legislative history is particularly enlightening as to the meaning of that term. National Securities, 393 U.S. at 459, 89 S.Ct. at 568. Accordingly, we turn to the Supreme Court's trilogy of cases construing the "business of insurance" to determine whether that term encompasses the Ohio statute.

The first of these three cases interpreting the "business of insurance" under the McCarran-Ferguson Act is Securities & Exchange Commission v. National Securities, id. at 453, 89 S.Ct. at 565. In National Securities the Court confronted the issue of whether the Securities & Exchange Commission had the power to regulate the activities of persons engaged in the insurance business. Specifically, the case focused on an Arizona insurance company which made a number of misrepresentations to shareholders in an attempt to secure their approval for a pending merger. The company sought to avoid prosecution for federal securities violations on the grounds that an Arizona statute aimed at protecting stockholders in domestic insurance companies regulated the "business of insurance," and thus superceded the federal securities act by operation of McCarran-Ferguson. The Supreme Court disagreed.

The Court determined that the Arizona statute was not protected from federal preemption by McCarran-Ferguson because the Act applied only to laws regulating the "business of insurance," not the business of insurance companies. Id. at 459, 89 S.Ct. at 568. The Court stated:

Congress was concerned with the type of state regulation that centers around the contract of insurance, the transaction which Paul v. Virginia held was not "commerce." 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. Statutes aimed at protecting this relationship, directly or indirectly, are laws regulating the "business of insurance."

Id. at 460, 89 S.Ct. at 568. Because the Arizona statute regulated the relationship between shareholder and corporation, rather than insured and insurer, it "is not insurance regulation, but securities regulation[,]" unprotected by McCarran-Ferguson. Id. That the Arizona statute applied exclusively to insurance companies is irrelevant: The crucial point is that here the State has focused its attention on stockholder protection; it is not attempting to secure the interests of those purchasing insurance policies. Such regulation is not within the scope of the McCarran-Ferguson Act.

Id.

The Court was next called upon to construe the meaning of "business of insurance" in Group Life & Health Insurance Company v. Royal Drug Company, 440 U.S. 205, 99 S.Ct. 1067, 59 L.Ed.2d 261 (1979). In Royal Drug the Court considered whether alleged anticompetitive agreements between an insurance company and several pharmacies were exempt from the federal antitrust laws. Group Life had entered into agreements with certain pharmacies under which those pharmacies agreed to furnish the insurer's policyholders with prescription drugs at the price of two dollars per prescription, while Group Life agreed to reimburse the participating pharmacies for their costs in acquiring the prescription drugs sold. Other non-participating pharmacies sued claiming that such agreements violated the Sherman Anti-Trust Act by fixing the retail price of drugs and by deterring policyholders from dealing with independent retailers. Group Life argued that the agreements were exempt from the antitrust laws as the "business of insurance" regulated by Texas law. Again the Supreme Court disagreed.

The Court began its analysis by noting that central to the definition of the "business of insurance" are "the spreading and underwriting of a policyholder's risk ... [and] the contract between the insurer and the insured." Id. at 211, 215, 99 S.Ct. at 1073,...