Alleghany Corp. v. Pomeroy

• Decision Date: 31 October 1988
• Docket Number: Civ. No. A1-88-096.
• Citation: 700 F. Supp. 460
• Parties: ALLEGHANY CORPORATION, Plaintiff, v. Earl R. POMEROY, Commissioner of Insurance of the State of North Dakota, Defendant. and The St. Paul Companies, Inc., and St. Paul Insurance Company of North Dakota, Intervening Defendants.
• Court: U.S. District Court — District of South Dakota

700 F. Supp. 460

ALLEGHANY CORPORATION, Plaintiff, v. Earl R. POMEROY, Commissioner of Insurance of the State of North Dakota, Defendant and The St. Paul Companies, Inc., and St. Paul Insurance Company of North Dakota, Intervening Defendants.

Civ. No. A1-88-096.

United States District Court, D. North Dakota, Southwestern Division.

October 31, 1988.

H. Patrick Wier and Harlan G. Fuglesten, Fargo, N.D., Thomas Tinkham, Richard Bond and Leslie J. Anderson, Minneapolis, Minn., for plaintiff.

Merle T. Pederson, Bismarck, N.D., for Pomeroy.

Patrick Durick, Joel W. Gilbertson and David E. Reich, Bismarck, N.D., and James A. McDermott, James A. Strain, Eric R. Moy, Peter J. Rusthoven and David Hamilton, Indianapolis, Ind., for amici curiae.

Thomas O. Smith, Bismarck, N.D., for St. Paul Companies.

MEMORANDUM AND ORDER

CONMY, Chief Judge.

The essential facts necessary to resolve the present suit are not disputed by the parties. Those facts, as stated in this court's previous decision, are as follows:

Alleghany Corporation is a Delaware corporation with its headquarters in New York. Its common stock is listed and traded on the New York Stock Exchange. Alleghany, through its subsidiaries, is engaged in the sale and underwriting of title insurance and in the property and casualty insurance business.

St. Paul Companies, Inc. is incorporated under the laws of the state of Minnesota with its headquarters located in St. Paul, Minnesota and is an insurance holding company for one of the largest groups of property-liability insurance underwriters in the United States. Through its subsidiaries it is engaged in investment banking, insurance, and reinsurance brokerage activities. St. Paul Companies, Inc. wholly owns St. Paul Fire and Marine Insurance Company, a Minnesota corporation with its home office in St. Paul, Minnesota, which in turn wholly owns the St. Paul Insurance Company of North Dakota. St. Paul Insurance Company of North Dakota is a North Dakota corporation with its offices located in Fargo, North Dakota, and is a writer of professional liability insurance for physicians in North Dakota.

In July, 1987, Alleghany began to purchase common stock of St. Paul Companies, Inc. According to Alleghany it currently owns directly or through its subsidiaries approximately 9.2 percent of about 46,301,857 shares of outstanding common stock of St. Paul Companies, Inc. Alleghany seeks to acquire up to 20% of the stock.

In order to acquire the additional stock, however, Alleghany, pursuant to Minnesota's Insurance Holding Company Act, was required to obtain prior approval from the Commissioner of the Minnesota Department of Commerce. The Insurance Holding Company Act provides that the Commissioner of Commerce must give his approval for acquisition of control of a domestic insurer so long as the acquisition does not cause a material change in St. Paul Companies' business which would be unfair to policyholders or not in the public interest.

On November 19, 1987, Alleghany filed an Amended Form A pursuant to section 60D.02 of the Minnesota Insurance Holding Company Act proposing to acquire up to 20% of the stock of St. Paul Companies, Inc. On January 11, 1988, a Deputy Commissioner of the Minnesota Department of Commerce gave Alleghany approval to acquire up to and including 20% of the common stock of the St. Paul Companies, Inc. The Deputy Commissioner determined that Alleghany's plans and proposals were not unfair and unreasonable to the policyholders of the Insurers and that they were not contrary to the public interest within the meaning of the Insurance Holding Company Act. The decision of the Deputy Commissioner is currently under review in the Minnesota courts.

Like Minnesota, eight other states, including North Dakota, required Alleghany to obtain approval for the acquisition of more than 10% of the stock of St. Paul Companies, Inc. pursuant to similar Insurance Holding Company Acts because St. Paul Companies, Inc. had a wholly owned subsidiary in each of those states.¹ In North Dakota, the Act forbids any person from acquiring control of a domestic insurer unless the person files a disclosure statement as required by the Act and the acquisition has been approved by the commissioner. N.D.Cent.Code § 26.1-10-03 (Cum. Supp.1987). For purposes of the North Dakota Act a domestic insurer includes any person in control of a domestic insurance company. Id. Further, control is presumed to exist if any person, directly or indirectly, owns, or otherwise controls, ten percent or more of the voting securities. N.D.Cent.Code § 26.1-10-01(1) (Cum.Supp. 1987). Consequently, Alleghany was required to obtain approval from the North Dakota Insurance Commissioner before any further acquisitions could be made because St. Paul Insurance Company of North Dakota is a wholly owned subsidiary of the St. Paul Fire & Marine Insurance Company, which is wholly owned by the St. Paul Companies, Inc. Thus on November 23, 1987, Alleghany filed with the Commissioner its proposal to acquire up to 20% of the stock of the St. Paul Companies, Inc. pursuant to section 26.1-10-03 of the North Dakota Century Code. On March 29, 1988, the Insurance Commissioner ordered that Alleghany could not proceed with its proposed acquisition. Contrary to the findings of Minnesota (the state of domicile for St. Paul Companies, Inc.) the Insurance Commissioner of North Dakota concluded that the 20% acquisition was not in the best interest of the public nor in the interest of the policyholders.

Thereafter Alleghany filed the present action in federal district court seeking declaratory and injunctive relief. Specifically Alleghany seeks to have section 26.1-10-03 of the Insurance Holding Company Act declared invalid and unenforceable and to enjoin the Defendant from invoking said section. Alleghany contends that the North Dakota Act, specifically section 26.1-10-03, violates the Commerce, Supremacy, and Due Process Clauses of the United States Constitution. As indicated in this court's order dated August 11th, 698 F.Supp. 809, the issues raised in this case are ideally suited for resolution by summary judgment. Accordingly, the parties have filed cross motions for summary judgment. Several of the parties have also requested oral argument on the motions. Having been literally inundated with voluminous briefs on the issues, however, the court fails to see what else could be said at oral argument which was not covered in the briefs. The court finds that oral argument will not aid the court in its determination and resolution of the issues presented for review. Accordingly, the requests for oral argument are denied.

Alleghany contends that section 26.1-10-03(1) of the North Dakota Century Code violates the Commerce Clause because it prevents it from purchasing ten percent or more of common stock of an out-of-state insurance holding company from willing sellers in interstate commerce without receiving approval from the North Dakota Insurance Commissioner. It asserts that the North Dakota Act directly regulates interstate commerce in securities and imposes a burden on interstate commerce that is clearly excessive in comparison with its putative benefits in the state of North Dakota. The Defendants argue that the actions of the State have been authorized by the Congress and are therefore invulnerable to constitutional attack under the Commerce Clause.

The Commerce Clause provides that "Congress shall have Power ... to regulate Commerce ... among the several States." U.S. Const. Art. I, § 8, cl. 3. The Court has held that the Commerce Clause contains an implied limitation on the power of the States to interfere with or impose burdens on interstate commerce. See Western & Southern Life Insurance Company v. State Board of Equalization of California, 451 U.S. 648, 101 S.Ct. 2070, 68 L.Ed.2d 514 (1981). Congress may, however, confer upon the States the ability to restrict interstate commerce. Id. Thus if Congress authorizes that the States may freely regulate an area of interstate commerce, any action taken by the State within the scope of that authorization is invulnerable to Commerce Clause challenge. Id. at 653, 101 S.Ct. at 2075; Northeast Bancorp, Inc. v. Board of Governors, 472 U.S. 159, 105 S.Ct. 2545, 86 L.Ed.2d 112 (1985).

The Defendants contend that in the instant case the Commerce Clause is not applicable since Congress has removed all Commerce Clause limitations on the State's authority to tax and regulate the business of insurance with the passage of the McCarran-Ferguson Act. The Act provides in relevant part:

Declaration of Policy. The Congress hereby 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.

(a). State regulation. 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). Federal regulation. 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....

15 U.S.C. §§ 1011, 1012. The McCarran-Ferguson Act was Congress' response to the Court's decision in United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440 (1944), wherein the Court held for the first time that insurance is subject to the Commerce Clause. Prior to the South-Eastern decision the Court had held that the "issuing of a policy of insurance is not a transaction of commerce." Paul v. Virginia, 8 Wall 168, 19 L.Ed. 357 (1869); Hooper v. California, 155 U.S. 648, 15 S.Ct. 207, 39 L.Ed....