Garcia v. Island Program Designer, Inc., Civ. No. 91-1679 GG.

• Decision Date: 28 October 1994
• Docket Number: Civ. No. 91-1679 GG.
• Citation: 875 F. Supp. 940
• Parties: Juan Antonio GARCIA, et al., Plaintiff, v. ISLAND PROGRAM DESIGNER, INC., Defendant.
• Court: U.S. District Court — District of Puerto Rico

875 F. Supp. 940

Juan Antonio GARCIA, et al., Plaintiff, v. ISLAND PROGRAM DESIGNER, INC., Defendant.

Civ. No. 91-1679 GG.

United States District Court, D. Puerto Rico.

October 28, 1994.

Jose O. Vazquez-Garcia, U.S. Attys. Office, Civ. Div., Hato Rey, PR, Josh Eagle, Trial Atty. Tax Div., U.S. Dept. of Justice, Washington, DC, for plaintiff.

Jesus R. Rabell-Mendez, Rosello-Rentas and Rabell-Mendez, San Juan, PR, for defendant.

OPINION AND ORDER

GIERBOLINI, Senior District Judge.

I. Introduction and Facts

Island Program Designer, Inc. (IPD) was a health service organization under Puerto Rico law. IPD made a statutory deposit of $100,000.00 with the Treasury Department of the Commonwealth of Puerto Rico, as required by law. IPD became insolvent and the Superior Court of Puerto Rico entered an order for liquidation of IPD's assets. The Final Report of the Administrator-Liquidator of IPD indicates that IPD's assets are comprised of what remains of the $100,000.00 statutory deposit.

The U.S. Internal Revenue Service moved to intervene in the state liquidation proceedings and removed the case to federal district court. We then decided that the federal priority statute, 31 U.S.C. § 3713, which grants federal tax claims first priority to a bankrupt company's assets, did not preempt a Puerto Rico insurance company liquidation statute, P.R. Laws Ann. tit. 26, § 4019, which imposes filing deadlines for claims, deadlines which the Internal Revenue failed to meet. The IRS's failure to comply with the filing deadlines placed the priority of the federal tax claim last. We remanded the case to state court. See Juan Antonio Garcia v. Island Program Designer, 791 F.Supp. 338 (D. Puerto Rico 1992).

Basing its decision on Department of Treasury v. Fabe, ___ U.S. ___, 113 S.Ct. 2202, 124 L.Ed.2d 449 (1993), the First Circuit Court of Appeals decided that the federal statute preempted the Puerto Rico filing deadline statute. The Court granted a petition for mandamus, setting aside our remand order. See Juan Antonio Garcia v. Island Program Designer, 4 F.3d 57 (1st Cir.1993). Upon remand to the district court from the circuit court, both the Insurance Commissioner of Puerto Rico and the United States filed motions for summary judgment, which we address in this opinion and order.

II. Standard

Summary judgment is proper when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). We consider the undisputed facts in the light most favorable to the non-moving party. General Office Products Corp. v. A.M. Capen's Sons, Inc., 780 F.2d 1077 (1st Cir.1986); Attallah v. United States, 955 F.2d 776, 779 (1st Cir. 1992). The burden is on both parties to file necessary materials with the court to support their claims for and against summary judgment. Fed.R.Civ.P. 56(e) and Stepanischen v. Merchants Despatch Transportation Corp., 722 F.2d 922, 929-30 (1st Cir.1983). The party who moves for summary judgment bears the burden of showing that there is no genuine dispute concerning facts which are material to the issues raised in the pleadings. Emery v. Merrimack Valley Wood Products, Inc., 701 F.2d 985, 991 (1st Cir.1983). At the same time, the opponent must demonstrate, by competent evidence, the existence of a triable issue which is both genuine and material to its claim. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). The nonmoving party "may not rest upon the mere allegations or denials of the ... pleadings, but ... must set forth specific facts showing that there is a genuine issue for trial." Fed. R.Civ.P. 56(e). There is no trialworthy issue unless there is enough competent evidence to enable a finding favorable to the nonmoving party.

"Genuine" means that the evidence about the issue is such that a reasonable jury could resolve the point in favor of the nonmoving party. United States v. One Parcel of Real Property with Bldgs., 960 F.2d 200, 204 (1st Cir.1992). "Material" means that the fact may alter the outcome of the litigation. Rivera-Muriente v. Agosto-Alicea, 959 F.2d 349, 352 (1st Cir.1992); Griggs-Ryan v. Smith, 904 F.2d 112, 115 (1st Cir.1990). Materiality is determined under the applicable substantive law. Gadson v. Concord Hospital, 966 F.2d 32, 33 (1st Cir.1992).

III. Puerto Rico Insurance Commissioner's Arguments for Summary Judgment

In Department of Treasury v. Fabe, the Supreme Court stated that some sequential priority provisions of insurance company liquidation statutes could survive preemption by the federal priority statute. In order to survive preemption, the provision must have been enacted for the "purpose of regulating the business of insurance" within the meaning of Section 2(b) of the McCarran-Ferguson Act. To determine whether a statute meets this test, courts will focus on the relationship between an insurance company and its policyholders.

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.

Fabe, ___ U.S. at ___, 113 S.Ct. at 2208, quoting SEC v. National Securities, Inc., 393 U.S. 453, 460, 89 S.Ct. 564, 568, 21 L.Ed.2d 668 (1969). The Court held that provisions which were enacted to regulate or protect policyholders meet this test and can survive preemption. As an example, the court held that a provision which grants priority to the administrative costs entailed in liquidation is an insurance-regulating provision designed to protect policyholders. Therefore, such a provision would not be preempted. But the Court also indicated that priorities given to employee wage and general creditor claims were preempted because their "ultimate aim of insurance is too tenuous." Fabe, ___ U.S. at ___, 113 S.Ct. at 2212.

The Insurance Commissioner argues in his motion for summary judgment that P.R.Laws Ann. tit. 26, § 1914 gives providers of health services a second priority, after subscribers, to the assets of a liquidated HMO. The Insurance Commissioner also argues that the priority given to the claims of health care providers in the liquidation of an HMO are not preempted by federal law because such a priority involves the regulation of the business of insurance and is designed to regulate, protect, or advance the interests of policyholders.

The agreement between IPD and its subscribers included a "hold harmless" clause which prevented health care providers from seeking remuneration for health care services from subscribers and which required them instead to make their claims directly to IPD. The Insurance Commissioner therefore analogizes the policyholder claims in Fabe, which the Supreme Court held were not preempted, with the claims of the health care providers in this HMO context. He argues that the health care providers are making essentially the same claims against IPD that the HMO subscribers would have made if they paid the health care providers directly and later sought reimbursement from IPD. The Commissioner seems to argue that because hold-harmless clauses prevent health care providers from collecting from HMO subscribers, it would be in the interest of HMO subscribers that health care providers be paid ahead of other creditors. The Insurance Commissioner states that if health care providers are granted a priority, no assets will remain from which the IRS can recover federal taxes because the assets of IPD have dwindled from $100,000, from the statutory deposit, to approximately $32,000.

In addition, the Commissioner argues that even if we find that the IRS has a priority over the claims of health care providers the federal priority statute does not apply to IPD's sole asset, the $100,000 statutory deposit, because title to this asset was transferred from the insolvent IPD to the Puerto Rico Secretary of Treasury pursuant to P.R.Laws Ann. tit. 26, § 801, before the time of insolvency. Therefore the deposit does not form part of the insolvent's estate. The Insurance Commissioner seems to suggest that health care provider claims could nevertheless be paid from the funds remaining from the $100,000 statutory deposit, because the statutory deposit is a "special" deposit and the health care provider claims are "special deposit claims," under P.R.Laws Ann. tit. 26, § 4012(3).

IV. United States' Arguments for Cross-Motion for Summary Judgment

The United States argues in its cross-motion for summary judgment that the claims of health care providers are not entitled to a priority over the claim of the IRS for federal taxes. The government argues that the McCarran-Ferguson Act does not apply in the HMO context. HMOs, even if covered by state insurance liquidation statutes, are not in the business of insurance for McCarran-Ferguson purposes because in the HMO context there are no insurance policies, policyholders, or insureds. The hold-harmless clause of the HMO/subscriber agreement requires that health care providers apply directly to IPD for remuneration. Unlike policyholders under medical insurance plans, subscribers to an HMO pre-pay for medical services and "would not have claims for money they had paid to doctors and for which they sought reimbursement pursuant to an insurance contract." United States' Cross-Mot. for Summ. J., at 15. The government argues that the health care providers under the IPD HMO plan were either employees or independent contractors of the plan. Their claims for...