Alleghany Corp. v. McCartney

• Decision Date: 27 February 1990
• Docket Number: No. 89-1241,89-1241
• Citation: 896 F.2d 1138
• Parties: ALLEGHANY CORPORATION, Appellant, v. William H. McCARTNEY, in his official capacity as Director of Insurance for the State of Nebraska, Appellee, St. Paul Property and Casualty Company and the St. Paul Companies, Inc., Intervenors.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1138

896 F.2d 1138

58 USLW 2516

ALLEGHANY CORPORATION, Appellant, v. William H. McCARTNEY, in his official capacity as Director of Insurance for the State of Nebraska, Appellee St. Paul Property and Casualty Company and the St. Paul Companies, Inc., Intervenors.

No. 89-1241.

United States Court of Appeals Eighth Circuit.

Submitted June 12, 1989.

Decided Feb. 27, 1990.

Tim Tinkham, Minneapolis, Minn., for appellant.

Robert G. Lange, Lincoln, Neb. and Richard J. Urowsky, New York City, for appellee.

Before JOHN R. GIBSON, Circuit Judge, BROWN, ^* Senior Circuit Judge, and WOLLMAN, Circuit Judge.

JOHN R. GIBSON, Circuit Judge.

The Alleghany Corporation appeals from the dismissal of its action against William H. McCartney, Director of Insurance for the State of Nebraska, in which Alleghany sought a declaratory judgment that the Nebraska Insurance Holding Companies Act, Neb.Rev.Stat. Secs. 44-2101 to -2119 (Reissue 1988), was invalid and requested appropriate injunctive relief. Alleghany had sought approval from McCartney, as Director of Insurance, to acquire up to 20% of the common stock of the St. Paul Companies, Inc., a holding company incorporated and based in Minnesota, which, through a wholly-owned subsidiary, owned St. Paul Property and Casualty Company, an insurance subsidiary incorporated in Nebraska. McCartney held hearings on the proposed acquisition and then denied Alleghany's application, even though the transaction had already been approved by the Deputy Commissioner of Commerce in Minnesota. Alleghany then brought this suit which was dismissed by the district court ¹ on the ground that abstention was appropriate under Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971). On appeal, Alleghany asserts that Younger abstention serves no comity purpose here because this case presents an inherently interstate controversy. In addition, Alleghany argues that abstention is improper because this action involves challenges based on the commerce and supremacy clauses, and because there are no pending state administrative or judicial proceedings. We conclude that the district court properly abstained under Younger and affirm the order of dismissal.

I.

St. Paul Companies, through its Minnesota subsidiary, St. Paul Fire and Marine, wholly owns insurance subsidiaries incorporated in eight states, including the Nebraska corporation, St. Paul Property and Casualty. Alleghany started purchasing St. Paul Companies' stock in July 1987. By October 5, 1987, it had acquired 5% of the stock of the St. Paul Companies, and therefore filed a Schedule 13D with the Securities and Exchange Commission on October 15, 1987, as required by the Williams Act, 15 U.S.C. Sec. 78m(d) (1988); 17 C.F.R. Sec. 240.13d-1 (1988). It also filed a notice of its intent to purchase in excess of 15% of the stock of the St. Paul Companies with the Federal Trade Commission and Department of Justice as required by the Hart-Scott-Rodino Act, 15 U.S.C. Sec. 18a (1982), and approvals were granted on November 24, 1987. At the time of initiating this action, Alleghany already owned 9.5% of the 45 million outstanding shares of the common stock of the St. Paul Companies, and sought to purchase up to 20% of its stock.

St. Paul Property and Casualty accounts for .04% (four one-hundredths of one percent) of the statutory assets and approximately 1% of the premium income of the St. Paul Companies' insurance subsidiaries. Its role in the Nebraska insurance market, however, is much more significant. The record revealed that insurance coverage provided by St. Paul Property and Casualty included professional liability insurance coverage for over 70% of the physicians and hospitals in the state of Nebraska.

After the federal filings, Alleghany sought state regulatory approval in ten states, including Minnesota and Nebraska, as required by state insurance holding company statutes. Forty-eight states have similar insurance holding company statutes in effect, all of which are patterned after the Model Insurance Holding Company Systems Regulatory Act. While Alleghany took the position that these statutes were unconstitutional, it filed in compliance with the statutes in the hope that approval would make constitutional challenges unnecessary. Insurance regulatory commissions in four of the states, including Minnesota, approved Alleghany's applications to purchase St. Paul Property and Casualty stock, but commissions in four states, including Nebraska, disapproved. ²

At the administrative proceedings before the Nebraska Director of Insurance, the record of the administrative hearing in Minnesota approving Alleghany's proposed transaction was admitted into evidence, and additional evidence was also presented over a two-day period. The Director denied Alleghany's application on the basis of his conclusions that:

(a) The financial condition of Alleghany is such as would jeopardize the financial stability of St. Paul or prejudice the interest of its policyholders;

(b) The plans and proposals which the acquiring party has to liquidate the domestic insurer, cause it to declare dividends or make other distributions, sell any of its assets, consolidate or merge it with any person, make any material change in its business or corporate structure or management, are unfair and prejudicial to the policyholders of the insurer; and

(c) The competence and experience of Alleghany management, which would control the operations of St. Paul and its subsidiaries if Alleghany acquired control are such that it is not in the interest of the public and the policyholders of St. Paul to permit Alleghany to make the proposed acquisition.

The Director's order was entered on April 18, 1988. Under Neb.Rev.Stat. Sec. 84-917 (Reissue 1987), Alleghany had thirty days after service of the final decision to commence proceedings for review in the District Court of Lancaster County, Nebraska. Alleghany did not seek such review, but instead chose to file this complaint in federal district court during the thirty-day appeal period, which obviously has now passed.

In its district court action, Alleghany did not challenge the factual determinations of the Director of Insurance but did assert, pursuant to 42 U.S.C. Sec. 1983 (1982), commerce clause, supremacy clause, and due process clause challenges to those provisions of the Nebraska Act which regulate interstate and nationwide transactions involving securities issued by insurance holding companies. The St. Paul Companies and St. Paul Property and Casualty, as intervenors, and the Director moved to dismiss Alleghany's complaint on the basis of Younger or Burford abstention. The district court applied the three requirements of Younger, as refined by Middlesex County Ethics Committee v. Garden State Bar Association, 457 U.S. 423, 432, 102 S.Ct. 2515, 2521, 73 L.Ed.2d 116 (1982), and concluded that important state interests were involved, that there were ongoing state judicial proceedings, and that there existed an adequate opportunity in the state proceedings to raise the constitutional challenges.

The district court determined the nature of the available proceedings by examining state law, Neb.Rev.Stat. Sec. 84-917. This Nebraska statute authorized review in Nebraska state court on the record of the agency. The court found that this statute authorized a reviewing state court to affirm, remand, reverse, or modify the decision of the Director of Insurance if the decision was, among other things, "[i]n violation of constitutional provisions," "[i]n excess of the statutory authority or jurisdiction of the agency," "[a]ffected by other error of law," or "[a]rbitrary or capricious." Id. Sec. 84-917(6). The court then looked to the Nebraska Insurance Holding Companies Act, which permitted the Director to disapprove any acquisition of control--defined as ownership of 10% or more of a company's voting securities--if he finds that the acquisition could substantially lessen competition, create a monopoly, or if the financial condition of the acquiring company would jeopardize the financial stability of the insurer or prejudice the interest of the policyholders. Id. Sec. 44-2119. The court also noted that the authority of the Director of Insurance was similar to that given the State Board of Education under Neb.Rev.Stat. Sec. 79-1103.05 (Reissue 1987). The court found it persuasive that the Board of Education's authority had been found by the Supreme Court of Nebraska to be quasi-judicial in character and therefore subject to appeal under section 84-917. Richardson v. Board of Educ., 206 Neb. 18, 290 N.W.2d 803 (1980). The court then concluded that there was an ongoing judicial proceeding which implicated important state interests, and that Alleghany had an adequate opportunity to present its constitutional challenges in the Nebraska state courts. The court found it to be irrelevant that Alleghany had not appealed from the Director's decision, relying on Huffman v. Pursue, Ltd., 420 U.S. 592, 611 n. 22, 95 S.Ct. 1200, 1211 n. 22, 43 L.Ed.2d 482 (1975). It also observed that the McCarran-Ferguson Act, 15 U.S.C. Secs. 1011-1015 (1988), which provides that the business of insurance "shall be subject to the laws of the several States," emphasizes the strong state interest in allowing the state court system to interpret its laws and apply them in light of federal legislation and the Constitution.

On appeal, Alleghany asserts that federal abstention is improper under the circumstances of this case because the controversy, which involves ten states claiming the right to regulate the same securities transaction, has a unique interstate character. According to Alleghany, no single state has an interest which is sufficiently strong to require a federal court to abdicate its jurisdiction. Alleghany also urges that abstention is improper under the law of this circuit when the federal action involves commerce or supremacy clause challenges to...