Merchants Home Delivery Service, Inc. v. Frank B. Hall & Co., Inc.

• Decision Date: 28 March 1995
• Docket Number: 93-56589,Nos. 93-56302,94-55035,s. 93-56302
• Citation: 50 F.3d 1486
• Parties: , RICO Bus.Disp.Guide 8778 MERCHANTS HOME DELIVERY SERVICE, INC., a California corporation, Plaintiff-Appellant, v. FRANK B. HALL & CO., INC., a Delaware corporation; Prometheus Liquidating Corp., a Delaware corp.; Frank B. Hall Insurance Brokers, Inc., a Delaware corp.; James Dwight Ismay, an individual; Terry Don Smalridge, an individual; Paul C. Carter, an individual, Defendants-Appellees. MERCHANTS HOME DELIVERY SERVICE, INC., a California corporation, Plaintiff-Appellant, v. FRANK B. HALL & CO., INC., a Delaware corp.; Prometheus Liquidating Corp., a Delaware corp.; Frank B. Hall Insurance Brokers, Inc., a Delaware corporation, Defendants, and Paul C. Carter, an individual, Defendant-Appellee. MERCHANTS HOME DELIVERY SERVICE, INC., a California corporation, Plaintiff-Appellant, v. FRANK B. HALL & CO., INC., a Delaware corporation; Prometheus Liquidating Corp., a Delaware corp.; Frank B. Hall Insurance Brokers, Inc., a Delaware corp.; James Dwight Ismay, an individual; Terry Don Smalridge, an individual, Defendants-Appellees, and Paul C. Carter, an individual, Defendant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1486

50 F.3d 1486

63 USLW 2616, RICO Bus.Disp.Guide 8778

MERCHANTS HOME DELIVERY SERVICE, INC., a California

corporation, Plaintiff-Appellant, v. FRANK B. HALL & CO., INC., a Delaware corporation;

Prometheus Liquidating Corp., a Delaware corp.; Frank B.

Hall Insurance Brokers, Inc., a Delaware corp.; James

Dwight Ismay, an individual; Terry Don Smalridge, an

individual; Paul C. Carter, an individual, Defendants-Appellees.

MERCHANTS HOME DELIVERY SERVICE, INC., a California

corporation, Plaintiff-Appellant, v. FRANK B. HALL & CO., INC., a Delaware corp.; Prometheus

Liquidating Corp., a Delaware corp.; Frank B.

Hall Insurance Brokers, Inc., a Delaware

corporation, Defendants,

and

Paul C. Carter, an individual, Defendant-Appellee.

MERCHANTS HOME DELIVERY SERVICE, INC., a California

corporation, Plaintiff-Appellant, v. FRANK B. HALL & CO., INC., a Delaware corporation;

Prometheus Liquidating Corp., a Delaware corp.; Frank B.

Hall Insurance Brokers, Inc., a Delaware corp.; James

Dwight Ismay, an individual; Terry Don Smalridge, an

individual, Defendants-Appellees,

and

Paul C. Carter, an individual, Defendant.

Nos. 93-56302, 93-56589, 94-55035.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted, March 8, 1995.

Decided March 28, 1995.

Stephen R. Knapp and John B. Wallace, Bishop, Barry, Howe, Haney & Ryder, Los Angeles, CA, and G. Robert Blakey, Notre Dame, IN, for plaintiff-appellant.

James C. Martin, Crosby, Heafey, Roach & May, Los Angeles, CA, for defendants-appellees.

Appeals from the United States District Court for the Central District of California.

Before: BROWNING, BOOCHEVER and BEEZER, Circuit Judges.

BEEZER, Circuit Judge:

Plaintiff Merchants Home Delivery Service, Inc. ("Merchants") appeals the district court's judgments dismissing Merchants' action against its former insurance broker, Frank B. Hall & Co., Inc. and associated defendants (collectively "Hall"). Merchants' complaint asserts claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO"). See 18 U.S.C. Secs. 1961-1968. The district court granted Hall's motion for judgment on the pleadings due to the court's determination that section 2(b) of the McCarran-Ferguson Act (15 U.S.C. Sec. 1011, et seq.) precluded the application of RICO to Hall's alleged wrongdoing. We have jurisdiction pursuant to 28 U.S.C. Sec. 1291. We reverse and remand.

I

Merchants' complaint alleges: Merchants is a national company engaged in shipping and delivering packages. It retained Hall on a continuing basis to secure numerous insurance policies and to process claims for which Merchants was self-insured. Merchants says that employees of Hall, with Hall's knowledge or acquiescence, defrauded Merchants in three ways: (1) by overbilling Merchants for insurance premiums on actual policies, (2) by billing Merchants for premiums on nonexistent policies, and (3) by billing Merchants for direct, uninsured claims that were never paid to the claimants. Merchants alleges that these fraudulent acts were accomplished through use of the mails and wires, thus bringing them within the scope of RICO.

Merchants asserts numerous state law claims in addition to its RICO claims. The district court declined to exercise supplemental jurisdiction over the state law claims, and Merchants is pursuing those claims in state court. Hall moved for judgment on the pleadings (Fed.R.Civ.P. 12(c)), which the district court granted, ultimately disposing of the claims against all defendants in three successive judgments. Merchants timely appealed from each judgment and the appeals were consolidated.

II

We review a judgment on the pleadings de novo. Westlands Water Dist. v. Firebaugh Canal, 10 F.3d 667, 670 (9th Cir.1993). Judgment on the pleadings is properly granted when, taking all allegations in the pleading as true, the moving party is entitled to judgment as a matter of law. Id. The district court determined that, irrespective of whether Merchants' complaint states a claim under RICO, judgment in favor of Hall was appropriate because the operation of the McCarran-Ferguson Act makes RICO inapplicable to the facts alleged.

III

Congress enacted the McCarran-Ferguson Act in part to allow the states to regulate the business of insurance free from inadvertent preemption by federal statutes of general applicability. See Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 218, 99 S.Ct. 1067, 1076, 59 L.Ed.2d 261 (1979). Section 2(b) of the Act accomplishes this purpose through a limited "inverse preemption," by directing that a federal law of general applicability does not apply to the "business of insurance" if the federal law conflicts with state laws enacted to regulate that business. See 15 U.S.C. Sec. 1012(b).

Section 2(b) provides, in relevant part: "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 ... unless such Act specifically relates to the business of insurance." Id. The terms of the statute suggest a four part inquiry for determining when Sec. 2(b) precludes the application of a federal statute. See Cochran v. Paco, Inc., 606 F.2d 460, 464 (5th Cir.1979). The McCarran-Ferguson Act precludes the application of a federal statute if: (1) the statute does not "specifically relate" to the business of insurance, (2) the acts challenged under the statute constitute the business of insurance, (3) the state has enacted a law or laws regulating the challenged acts, and (4) the state law would be superseded, impaired or invalidated by the application of the federal statute. Id. All four factors must be satisfied. The parties agree that this well-settled four factor test governs the present dispute.

The first and third elements are not at issue here. As Merchants concedes, RICO does not specifically relate to the business of insurance. See 18 U.S.C. Secs. 1961, 1962 (listing activities proscribed by RICO). Also, California has enacted a comprehensive insurance code, which prohibits the acts alleged by Merchants. ¹ See Feinstein v. Nettleship Co., 714 F.2d 928, 933 (9th Cir.1983), cert. denied, 466 U.S. 972, 104 S.Ct. 2346, 80 L.Ed.2d 820 (1984); Cal.Ins.Code Secs. 790-790.10 (West 1995). Thus, only the second and fourth elements are disputed.

IV

We first address whether the practices alleged by Merchants fall within the business of insurance under Sec. 2(b). We hold that overcharging for premiums on actual insurance policies is the business of insurance, but that collecting premiums on false policies and charging for unpaid, uninsured claims are not.

A

The parties contest the proper scope of inquiry concerning whether the acts challenged under RICO constitute the business of insurance. Merchants argues that the court must look only to the wrongful component of the acts alleged, positing that "fraud and theft cannot be the 'business of insurance.' " It finds support for this position in several district court decisions. See, e.g., Thacker v. New York Life Ins. Co., 796 F.Supp. 1338, 1342 (E.D.Cal.1992). Hall argues that this approach is much too narrow, and that the entire relationship between the parties must be examined to determine whether the challenged acts occurred in the business of insurance. Hall's position also has support from several district courts. See, e.g., Wexco, Inc. v. IMC, Inc., 820 F.Supp. 194, 199 (M.D.Pa.1993). The district court adopted Hall's reasoning.

Neither party has identified the proper scope of inquiry. The approach put forth by Hall is too broad. The Supreme Court has stated that the McCarran-Ferguson Act "does not exempt the business of insurance companies.... The exemption is for the 'business of insurance[.]' " Royal Drug, 440 U.S. at 210-11, 99 S.Ct. at 1073. Thus, the proper inquiry is whether a particular "practice constitutes the business of insurance," not whether the defendant and the plaintiff transact the business of insurance in general. See Nettleship, 714 F.2d at 931.

Merchants' proposed test, however, defines the challenged practice too narrowly. As the Seventh Circuit stated, "it is not helpful to point to a practice forbidden by federal law ... and observe that this practice is not itself insurance." NAACP. v. American Family Mut. Ins. Co., 978 F.2d 287, 294 (7th Cir.1992) (Easterbrook, J.), cert. denied, --- U.S. ----, 113 S.Ct. 2335, 124 L.Ed.2d 247 (1993). This interpretation of the rule would read the McCarran-Ferguson Act out of existence. Any practice which violated any federal statute would, by definition, not be the "business of insurance," resulting in all federal statutes applying to the business of insurance with their "full rigor." See id. This is not the result Congress intended. Therefore, we hold that the proper inquiry is whether, taken as a whole, the specific practice being challenged under federal law is a part of the "business of insurance."

B

The Supreme Court has identified three factors to be applied in determining whether a practice constitutes the business of insurance: (1) whether the practice has the effect of transferring or spreading the policyholders' risks, (2) whether the practice is an integral part of the policy relationship between the insurer and the insured, and (3) whether the practice is limited to entities within the insurance industry. ² See United Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129, 102 S.Ct. 3002, 3008-09, 73 L.Ed.2d 647 (1982). The Supreme Court has made it clear that the transfer or spreading of the risk is the primary or even "indispensable" characteristic of the business of insurance. Id. at 127, 102 S.Ct. at 3007-08; Royal Drug, 440 U.S. at 211-12, 99 S.Ct. at 1073-74. Our own cases applying these factors also "emphasize that the primary characteristic of the business of insurance is the transferring or spreading of risk." Nettleship, 714 F.2d at 931.

Merchants alleges three types of fraudulent practices by Hall: (1)...