Cochran v. Paco, Inc., C75-1356A.

• Decision Date: 16 March 1976
• Docket Number: No. C75-1356A.,C75-1356A.
• Citation: 409 F. Supp. 219
• Parties: Doreen M. COCHRAN v. PACO, INC.
• Court: U.S. District Court — Northern District of Georgia

409 F. Supp. 219

Doreen M. COCHRAN v. PACO, INC.

No. C75-1356A.

United States District Court, N. D. Georgia, Atlanta Division.

December 22, 1975.

On Motion to Alter or Amend March 16, 1976.

Joseph H. King, Jr., Atlanta, Ga., for plaintiff.

Randall L. Hughes and Robert L. Connelly, Jr., Powell, Goldstein, Frazer & Murphy, Atlanta, Ga., for defendant.

ORDER

EDENFIELD, Chief Judge.

This is an action brought pursuant to the Truth in Lending Act, 15 U.S.C. § 1640(e), which was referenced to a bankruptcy judge designated as a special master, under the provisions of Local Rule 250, to determine the issues and to make a written report of findings of fact and conclusions of law with a recommendation to this court for final action. This court has received the special master's report and is constrained to REJECT the recommendations therein.

The plaintiff has charged the defendant with violating various disclosure provisions of the Act. The defendant, an insurance premium finance company licensed under Georgia Code Ann. § 84-5304, moved for summary judgment before the special master on the grounds that Section 2(b) of the McCarran-Ferguson Act, 15 U.S.C. § 1012(b),¹ precludes application of the Truth in Lending Act to defendant. The special master found that the finance agreement between the parties was outside the "business of insurance" within the meaning of the McCarran Act, and that such Act was therefore inapplicable. The special master recommended denial of defendant's motion; this court does not agree.

The purpose of the McCarran Act and the reasons for its enactment are fully reviewed by the Supreme Court in SEC v. National Securities, Inc., 393 U.S. 453, 457-61, 89 S.Ct. 564, 566, 21 L.Ed.2d 668, 671 (1969). It need only be emphasized here that the main purpose of the Act was "to assure that the activities of insurance companies in dealing with their policyholders would remain subject to state regulation." Id. at 459, 89 S.Ct. at 568, 21 L.Ed.2d at 676. More specifically the Court noted that "the relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation, and enforcement . . . are the core of the `business of insurance.' Undoubtedly other activities of insurance companies relate so closely to their status as reliable insurers that they to must be placed in the same class." Id. at 460, 89 S.Ct. at 568, 21 L.Ed.2d at 676. The special master reasoned that since the insurance company was not a party to the agreement at issue, the transaction was not within the scope of the Act. The master distinguished this case from Gerlach v. Allstate Insurance Co., 338 F.Supp. 642 (S.D.Fla.1972), on the grounds that Gerlach dealt with a transaction between the insurer and the insured.

In Gerlach, the court found that an insurer's installment contract for the payment of premiums was not a credit transaction within the meaning of the Truth in Lending Act and that, in any event, the McCarran Act precluded application of the Truth in Lending laws to the insurance contract. The court reasoned that (1) the Truth in Lending Act was not an act which "specifically relates to the business of insurance" within the meaning of 15 U.S.C. § 1012(b) and that (2) the very presence of a Florida statute dealing with disclosure of costs in an insurance contract was all that was needed to foreclose application of the federal disclosure laws, 338 F.Supp. at 649-650.²

The plaintiff is correct in her assertion that Gerlach is not dispositive under the facts here. This case involves the somewhat more subtle question of where the "business of insurance" ends and the business of consumer financing begins. The defendant performs the same role in the insurance business as do other financing companies in the consumer sales business. The defendant pays the insurer the premiums, and the insured pays the defendant installment payments over a certain period of time. If the debtor defaults in a normal credit transaction, the creditor generally accelerates the debt and forecloses on the security if the debtor is unable to pay the balance due. The security, of course, often includes the items actually purchased in the financed transaction. In a similar way, the insurance premium finance company has the power to "repossess the goods" when the insured fails to pay installments; the company is entitled to include a power of attorney clause in the finance agreement enabling the company to cancel the insurance when installments are not paid, § 84-5312. If such cancelation does occur, the finance company must comply with the strict notice and rebate requirements of §§ 84-5312 and 84-5313, because the finance company is legally presumed to be cancelling on behalf of the insured vis-a-vis the insurance company.

Notwithstanding their demonstrated similarity to other finance companies subject to the Truth in Lending Act, premium finance companies play an integral part in the insurance transaction and the State of Georgia has therefore required licensing of such companies by the Commissioner of Insurance in a manner similar to the licensing of insurance companies, compare Ga.Code Ann. §§ 84-5304-6 with §§ 56-312-7. In addition, the Commissioner is empowered to promulgate, and has promulgated, regulations for the premium financing industry, § 84-5308.

Thus, although the premium finance company performs much the same role as other finance companies, this role has been recognized by the state as forming an integral part of the insurer-insured relationship. The finance company is legally empowered to act as an agent for the insured, and to terminate a policy, much like an insurance company, if premium installments are not paid. If the state were free to regulate the terms of insurance contracts between the company and the insured, but not free to regulate the finance companies, the entire state regulatory structure could be frustrated. Georgia has recognized this and has therefore extended the Commissioner's control to such companies. Thus, it would appear that the McCarran Act requires that such control be free from federal regulatory interference.

The plaintiff argues, however, that even if premium finance agreements are part of the insurance business, the Truth in Lending Act does not in any way "invalidate, impair, or supersede" state law relating to such agreements. When the first part of § 1012(b) of the McCarran Act is read together with the proviso contained in that section, it is clear that the state need only promulgate regulations in the particular area of the insurance business at issue in order to preclude application of federal law. See Monarch Life Insurance Co. v. Loyal Protective Life Insurance Co., 326 F.2d 841 (2d Cir. 1963), cert. den., 376 U.S. 952, 84 S.Ct. 968, 11 L.Ed.2d 971 (1964); Gerlach, supra, at 650; cf. FTC v. National Casualty Co., 357 U.S. 560, 563, 78 S.Ct. 1260, 1262, 2 L.Ed.2d 1540, 1542 (1958). Georgia law clearly sets out in detail what the finance agreement must contain, including the total amount of premiums, the down payment, principal balance, service charge, and the like, Ga.Code Ann. § 84-5310. In any event, it is clear that the Truth in Lending Act would indeed "supersede" state law if it were applied in this area. That federal law requires disclosures substantially different from those required under state law is evident from a comparison of 15 U.S.C. § 1638 and 12 C.F.R. § 226.8 with Ga.Code Ann. § 84-5309. Moreover, 15 U.S.C. § 1610(a), which allows for compliance with state disclosure laws, does not erase these differences; that section requires the creditor to comply with state law in addition to complying with federal disclosure requirements, when such state law is not inconsistent with the federal requirements. See also 12 C.F.R. § 226.6(c).

In summary, the Truth in Lending Act may not be applied to premium financing agreements because (1) the Act does not specifically relate to the business of insurance and (2) the Act supersedes a valid state law regulating that business. The defendant's motion for summary judgment is therefore GRANTED.

ON MOTION TO ALTER OR AMEND DECISION

The plaintiff has moved to alter or amend this court's decision of December 22, 1975 which held that the Truth in Lending Act could not be applied to the activities of premium financing companies in Georgia. The plaintiff essentially asks this court to reconsider the three essential issues in this case: (1) whether a premium finance company is in the "business of insurance" within the meaning of the McCarran-Ferguson Act, (2) whether the Truth in Lending Act supersedes the Georgia statutes regulating premium financing companies, and (3) whether the Truth in Lending Act is a statute which "specifically relates to the business of insurance."

(1) As in her previous brief, the plaintiff places too much emphasis on the Supreme Court's statement in SEC v. National Securities, Inc., 393 U.S. 453, 460, 89 S.Ct. 564, 569, 21 L.Ed.2d 668, 676 (1969), that the McCarran-Ferguson Act was meant to apply only to the "relationship between the insurance company and the policyholder." (Emphasis added.) The Court was merely rejecting the contention that all the activities of an insurance company were exempt from federal regulation under the Act. The Act itself refers only to the "business of insurance" and the Court had no occasion in the National Securities case to address the question of whether companies which were not insurance companies per se could nonetheless be protected by the Act.

The plaintiff nevertheless seeks to convince the court that a premium financing company cannot be considered a part of the business of insurance because such a company has no control over the terms of an insurance policy, its reliability, or its cost. Rather, plaintiff argues, the company is merely a creditor, indistinguishable from other creditors, except for the fact that it has a power of attorney by which...