American Deposit Corp. v. Schacht, 95 C 207.
| Decision Date | 24 May 1995 |
| Docket Number | No. 95 C 207.,95 C 207. |
| Parties | AMERICAN DEPOSIT CORPORATION, and Blackfeet National Bank, Plaintiffs, v. James W. SCHACHT, individually and as Acting Director of Insurance of the State of Illinois, Defendant. |
| Court | U.S. District Court — Northern District of Illinois |
COPYRIGHT MATERIAL OMITTED
Robert A. Knuti, Lord, Bissell & Brook, Chicago, IL, Eugene F. Assaf, Kirkland & Ellis, Washington, DC, David O. Stewart, Ropes & Gray, Dennis M. Gingold, Anderson, Aukamp & Gingold, Washington, DC, Douglas J. Kurtenbach, Kirkland & Ellis, Chicago, IL, Thaddeus Holt, Point Clear, AL, for plaintiffs.
Thomas A. Ioppolo, Andrew Neal Levine, Asst. Atty. Gen., Illinois Atty. General's Office, Daniel I. Schlessinger, Damon Nicholas Vocke, Robert A. Knuti, Lord, Bissell & Brook, Chicago, IL, for defendant.
Ann M. Kappler, Jenner & Block, Chicago, IL, for NALU.
Before the court are the cross-motions of plaintiffs American Deposit Corp. ("ADC") and Blackfeet National Bank, ("Blackfeet"), and defendant James W. Schacht, Acting Director of Insurance of the State of Illinois, ("Schacht"), for summary judgment. The American Council of Life Insurance ("ACLI") and the National Association of Life Underwriters ("NALU") have filed briefs as amici curiae.
ADC has developed a new investment vehicle, referred to as a Retirement Certificate of Deposit ("Retirement CD"), which, while having traditional features of a certificate of deposit, also contains terms and features of an annuity. (Complaint at 20-22). ADC licensed the Retirement CD, for offering and sale, to Blackfeet, a National Banking Association organized and operated pursuant to the National Bank Act, Title 12 U.S.C. § 21 et seq ("Bank Act").
In 1994, Blackfeet began to market the Retirement CD, in a rather limited fashion, in Illinois by sending informational packets to ten persons who requested them. Blackfeet did not, and has not, accepted any deposits from Illinois residents. Since the Retirement CD had annuity-like features ordinarily associated with life insurance, Schacht issued a cease and desist order against Blackfeet and ADC, and scheduled a hearing to investigate whether Blackfeet and ADC were engaging in insurance activities subject to state regulation. ADC and Blackfeet, in response to Schacht's order, filed a complaint on January 11, 1995, seeking injunctive and declaratory relief against Schacht. The Complaint contends that the Bank Act authorizes the offering of the Retirement CD, and that the Supremacy Clause and the Dormant Commerce Clause prohibit Schacht's actions to regulate the offering of the Retirement CD. Both parties have filed motions for summary judgment in this case, essentially asking the court to determine whether the Retirement CD is an insurance-type instrument subject to state regulation or a certificate of deposit which, under the Bank Act, would be outside state regulation. The parties have filed the requisite statements of undisputed facts under Local Rule 12, but this case really turns on the characterization of the Retirement CD under applicable law.1 Accordingly, we begin our analysis with an outline of the statutory framework the parties have placed in issue, and then review the terms of the Retirement CD along with the characterizations of the instrument the parties have offered.
The parties' dispute stems from the tension between federal banking law, as embodied in the Bank Act, and Illinois' regulation of the insurance industry. Under the McCarran-Ferguson Act, 15 U.S.C. §§ 1011 et seq., state laws enacted "for the purpose of regulating the business of insurance" are exempted from traditional federal preemption principles. 15 U.S.C. § 1012(b)2. The statute was enacted in 1945 in response to the Supreme Court's decision in United States v. South-Eastern Underwriters Assn., 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440 (1944), in which the Court first held that the business of insurance was interstate commerce subject to the coverage of the Sherman Act.3 Congress's primary concern in enacting the legislation was to ensure states would continue to have the ability to tax and regulate the business of insurance without fear of Commerce Clause attack. Group Life & Health Ins. v. Royal Drug Co., 440 U.S. 205, 217-218, 99 S.Ct. 1067, 1076-77, 59 L.Ed.2d 261 (1979). The McCarran-Ferguson Act "overturned 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 a federal statue specifically requires otherwise." U.S. Dept. of Treasury v. Fabe, ___ U.S. ___, ___, 113 S.Ct. 2202, 2211, 124 L.Ed.2d 449 (1993). The parties' discord, understandably, involves the issue of whether the Retirement CD falls within the business of insurance thereby subjecting it to state regulation.
As a national bank, Blackfeet is incorporated, organized, and chartered exclusively under the Bank Act. Its main office is located in the town of Browning, Montana, on the Blackfeet Indian Reservation. The plaintiffs argue that the Bank Act provides the sole authority under which they need operate. The Bank Act authorizes national banks such as Blackfeet to receive "deposits" as part of the exercise of "such incidental powers as shall be necessary to carry on the business of banking." 12 U.S.C. § 24 (Seventh). The Office of the Comptroller of the Currency ("OCC"), the administrator of the Bank Act, has characterized the Retirement CD as a new form of "deposit." (See infra at 1071). Essentially, the plaintiffs argue that the Bank Act preempts state regulation of national banks as Schacht attempts in this case, and that Schacht's efforts to regulate the Retirement CD are invalid under the Supremacy Clause.
The State of Illinois regulates the insurance industry under the Illinois Insurance Code, 215 ILCS 5/1 et seq. ("Insurance Code"). The Insurance Code includes "annuity contracts" in its definition of life insurance, 215 ILCS 5/44, but offers no definition of annuity or annuity contract. The Illinois Department of Insurance has determined that the Retirement CD is within the definition of life insurance and annuities and, therefore, is subject to regulation under the Insurance Code. Pursuant to the Insurance Code, the Department of Insurance issued a "cease and desist" order to Blackfeet, charging that it was conducting insurance business without authority and without first procuring a certificate of authority in violation of 215 ILCS 5/121. Under that provision, it is "unlawful for any company including an association, such as Blackfeet, under 215 ILCS 5/2(e) ... to transact insurance business in this State, without a certificate of authority from the director ..." The Insurance Code provides for the issuance of a certificate of authority to domestic companies, 215 ILCS 5/24; 5/51, or foreign or alien companies. 215 ILCS 5/111. Domestic companies are those organized under the laws of the state of Illinois. 215 ILCS 5/2(f). A foreign company is one organized under the laws of any other state or territory of the United States, or the District of Columbia. 215 ILCS 5/2(g). An alien company is one organized under the laws of a country other than the United States. 215 ILCS 5/2(h). Organized under the Bank Act, Blackfeet does not qualify as a domestic, alien, or foreign company, which would lead one to believe that there are no circumstances under which it could receive a certificate of authority, even if it were to submit to the administrative hearing and agree to comply with the Insurance Code. There is another provision in the Insurance Code, however, that allows a national bank located in a town of 5000 or less — such as Blackfeet — to register with the director in order to transact insurance business as an insurance agency in Illinois. 215 ILCS 5/499.1(a); 215 ILCS 5/499.1(e).5 Yet another provision that would appear to be an insurmountable hurdle for Blackfeet states that companies that engage in other business in addition to the life insurance business may not be certified to transact insurance business under the Insurance Code. 215 ILCS 5/111(c). A bank such as Blackfeet obviously engages in many federally-authorized banking activities that would violate this provision.
The Insurance Code, then, includes a certain amount of seeming incongruities, when the facts of this case are considered, that the parties have had some difficulty resolving. Essentially, it would appear that a national bank could act as an agent for insurance products, but could not underwrite insurance risks as would an insurance company. In supplemental briefing in this matter, Schacht has submitted that the practical effect of these regulations is that the only way Blackfeet could sell and underwrite the Retirement CD — should the instrument qualify as insurance — is to set up a subsidiary for that purpose. Plaintiffs point out that such a requirement demonstrates that the Insurance Code discriminates against national banks such as Blackfeet. The applicability of this or any other requirement under the statutory framework, of course, is wholly dependent on the nature of the Retirement CD.
Blackfeet promotional materials (Plaintiff's Memorandum in Support of its Motion for Summary Judgment ("Pl. MSJ"), Ex. 3), describe the terms and conditions of the Retirement CD. The customer is required to open the Retirement CD with an minimum initial balance of $5000. At that time the Customer also selects a Maturity Date, which is often the customer's expected retirement. Interest, calculated under a formula tied to the then current five-year, U.S. Government Treasury Note yield, begins to accrue from the date of deposit. Under applicable IRS regulations, this interest is designed to be tax deferred. The initial rate is in...
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