In re Beacon Health, Inc.

• Decision Date: 18 September 1989
• Docket Number: Bankruptcy No. 89-702.
• Parties: In re BEACON HEALTH, INC., Debtor.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of New Hampshire

105 B.R. 178 (1989)

In re BEACON HEALTH, INC., Debtor.

Bankruptcy No. 89-702.

United States Bankruptcy Court, D. New Hampshire.

September 18, 1989.

William S. Gannon, Wadleigh, Starr Offices, Manchester, N.H., for Beacon Health.

Douglas N. Jones, Asst. Atty. Gen., Civ. Bureau, Concord, N.H., for N.H. Dept. of Ins. and Ins. Com'r Louis E. Bergeron.

Lawrence M. Edelman, Hampton, N.H., for Robert L. Vaccaro and Jacqueline E. Vaccaro.

MEMORANDUM OPINION

JAMES E. YACOS, Bankruptcy Judge.

This chapter 11 case is presently before the court upon a Motion to Dismiss, filed by the New Hampshire Insurance Department and Insurance Commissioner Louis E. Bergeron ("the State"). Objections have been filed by Robert L. Vaccaro and Jacqueline E. Vaccaro, and by debtor Beacon Health, Inc. ("Beacon"). The court took evidence and heard oral argument on this matter on the 16th, 21st, and 23rd of August, 1989.

The State requests dismissal of this chapter 11 case or, in the alternative, for a declaratory ruling that certain administrative and state court regulatory proceedings involving Beacon's health insurance activities may properly continue without regard to the automatic stay provision of section 362(a) of the Bankruptcy Code.

For the reasons stated in this memorandum opinion, the court holds that for purposes of the Bankruptcy Code the debtor is a "domestic insurance company" within the meaning of 11 U.S.C. § 109(b)(2) and (d) and, accordingly, Beacon cannot be a debtor under chapter 11 of the Bankruptcy Code.

FACTS

Beacon is a New Hampshire corporation chartered by the State on May 21, 1984 as a "for profit" health maintenance organization (HMO) regulated by the New Hampshire Insurance Department under the provisions of RSA Chapter 420-B, entitled "Health Maintenance Organizations". A certificate of authority to operate as an HMO was issued to Beacon by the Insurance Department on August 21, 1984 pursuant to RSA 420-B:5.

In July of 1989, the State determined that Beacon's surplus was deficient by at least $500,000, and that the company was insolvent. An informal demand for $500,000 additional capital was made to Beacon. Beacon indicated that it was unable to generate that amount and requested an opportunity to seek a qualified buyer to assume control of its health insurance business. The State agreed to defer liquidation proceedings for a reasonable period while Beacon negotiated with potential buyers. Beacon was given until July 31, 1989 to produce the necessary additional surplus. On the afternoon of July 31, 1989, Beacon advised the State that it could not produce the additional capital and had not located a qualified buyer.

On August 1, 1989 (at approximately noon), the State filed a petition in Merrimack County Superior Court pursuant to RSA 402-C:20 seeking a judicial declaration of insolvency and authority to liquidate Beacon. On August 1, 1989, the State also commenced an administrative action pursuant to RSA 420-B:13 that directed Beacon to show cause why its insurance license should not be revoked on the grounds that it no longer possessed the necessary financial qualifications to operate in accordance with RSA 420-B:5.

Beacon filed for relief under chapter 11 of the Bankruptcy Code on August 1, 1989. According to the petition, assets of Beacon total $278,000 and liabilities total $1,189,000. From the schedules filed on August 17, 1989, it appears that there are 226 unsecured creditors, plus an unknown number of "enrolled participants" in Beacon health plans who may have claims.

JURISDICTION

This court has jurisdiction pursuant to 28 U.S.C. § 1334(a) and (d), 28 U.S.C. § 157(b)(2)(A) and (O), and the general reference order dated February 1, 1985 entered by the district judges to the undersigned with regard to bankruptcy cases.

ANALYSIS

Section 109 of the Bankruptcy Code defines who may be a debtor. This section provides that a "domestic insurance company" may not be a debtor under chapter 7 or chapter 11 of the Bankruptcy Code. 11 U.S.C. § 109(b)(2) and (d). This court must determine whether an HMO, specifically Beacon, is within the definition of a "domestic insurance company" such as to be excluded from federal relief under section 109 of the Bankruptcy Code.

The State maintains that Beacon is an insurance company for section 109 purposes because, regardless of its classification as an HMO, Beacon is engaged in the business of insurance. The State asserts that state legislation enacted in 1989 "clearly reflects an intention to treat health maintenance organizations in the same manner as other insurers for all purposes which may be relevant to the instant bankruptcy proceeding." The debtor responds that "the weight of authority favors the position that health maintenance organizations are not domestic insurance companies," and the court should therefore deny the State's Motion to Dismiss.

There are several approaches for determining whether an entity is excluded from federal bankruptcy relief under section 109. See, e.g., In re Cash Currency Exchange, Inc., 37 B.R. 617 (D.C.1984), aff'd 762 F.2d 542 (7th Cir.), cert. denied, 474 U.S. 904, 106 S.Ct. 233, 88 L.Ed.2d 232 (1985) (The "independent classification test" approach: court applies traditional rules of statutory construction); In re Portland Metro Health, 15 B.R. 102 (Bankr.D.Ore.1981) (The "state classification test" approach: court considers the classification of the entity under state law); and In re Republic Trust & Savings Co., 59 B.R. 606 (Bankr.N.D.Okla.1986) (The "alternate relief test" approach: court considers the purpose and intent of the Bankruptcy Code). This court's analysis under each of these approaches leads to the conclusion that Beacon is a domestic insurance company and therefore is ineligible for chapter 11 relief.

The "Independent Classification Test" Approach

The "independent classification test" is basically a statutory construction analysis by the bankruptcy courts "based upon their own definitions of the words of the Bankruptcy Code." 2 Collier on Bankruptcy, para. 109.02 at 109-14 (15th ed. 1979). "In applying the test, courts have adopted a common sense approach guided by legislative history and traditional rules of statutory construction." In re Family Health Services, Inc./In re Maxicare North Texas, Inc., 101 B.R. 618, 621 (Bankr.C.D.Cal. 1989) (hereinafter referred to as "Maxicare") citing In re Cash Currency Exchange, Inc., 37 B.R. at 621.

Section 109 of the Bankruptcy Code provides that a "domestic insurance company" may not be a debtor. 11 U.S.C. § 109(b) and (d). "The Code neither defines the term, domestic insurance company, nor mentions health maintenance organizations. Absent a definition, courts have applied traditional rules of statutory construction to determine what entities Congress intended to exclude from bankruptcy relief under section 109." Maxicare, 101 B.R. at 621.

The legislative history of section 109 indicates that "insurance companies are excluded from liquidation under the bankruptcy laws because they are bodies for which alternative provision is made for their liquidation under various regulatory laws." HR Rep. No. 95-595, 95th Cong, 1st Sess. 318-19 (1977); S.Rep. No. 95-989, 95th Cong, 2d Sess. 31 (1977), U.S.Code Cong. & Admin.News 5787, 5817, 6275. The rationale for excluding insurance companies from protection under the Bankruptcy Code was explained in Sims v. Fidelity Assur. Ass'n, 129 F.2d 442, 448-449 (4th Cir.1942):

No reasons for making these exceptions were assigned by the committees of Congress, but they may be surmised to lie in the public or quasi public nature of the business, involving other interests than those of creditors, in the desirability of an unarrested operation, the completeness of state regulation, including provisions for insolvency, and the inappropriateness of the bankruptcy machinery to their affairs. These considerations all apply to insurance corporations. . . . The most natural inference is that Congress meant to leave to local winding-up statutes the liquidation of such companies; that since the state commonly kept supervision over them during their lives, it was reasonable that they should take charge of their demise.

In order to determine whether Beacon is a domestic insurance company for section 109 purposes, the court must determine whether the aforementioned bases for excepting insurance companies from federal bankruptcy relief are applicable in this case. That is, does Beacon have attributes that are substantially equivalent to those of an insurance company such that the rationale for excepting insurance companies from federal bankruptcy relief also applies to Beacon? Under this analysis, in regard to HMOs specifically, courts have considered whether the HMO is engaged in the "business of insurance". See, e.g., In re Portland Metro Health, Inc., 15 B.R. 102 (Bankr.D.Ore.1981) and In re Maxicare, 101 B.R. 618 (Bankr.C.D.Cal.1989), coming to different conclusions.

In a different but somewhat analogous nonbankruptcy context, the courts have also had to address the fundamental underlying concept involved in insurance. In Group Life Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 99 S.Ct. 1067, 59 L.Ed.2d 261 reh'g denied 441 U.S. 917, 99 S.Ct. 2017, 60 L.Ed.2d 389 (1979), cert. denied after remand 469 U.S. 1160, 105 S.Ct. 912, 83 L.Ed.2d 925 (1985), the Supreme Court described the "primary elements of an insurance contract" as "the spreading and underwriting of a policy holder's risk." Id. at 211, 99 S.Ct. at 1073. The definition of the "business of insurance" was expanded upon in Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 102 S.Ct. 3002, 73 L.Ed.2d 647 (1982), in which the Supreme Court identified "three criteria relevant in determining whether a particular practice is part of the `business of insurance' exempted from the antitrust laws." Id. at 129, 102 S.Ct. at 3009. These three criteria are:

First, whether a particular

...