Mississippi Surplus Lines Assn. v. State of Mississippi, 011508 FED5, 06-60803

Docket Nº:06-60803
Case Date:January 15, 2008
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit




No. 06-60803

United States Court of Appeals, Fifth Circuit

January 15, 2008

Appeal from the United States District Court for the Southern District of Mississippi USDC No. 3:04-CV-670LN

Before HIGGINBOTHAM, SMITH, and OWEN, Circuit Judges.



Mississippi Surplus Lines Association ("MSLA"), a private, non-profit corporation working at the behest of the Mississippi Insurance Commissioner, collected funds, as permitted by law, to cover operating costs incurred under its duties to the Commissioner. The funds collected exceeded its operating costs. The State later amended the code to declare the funds public. MSLA challenged the State's action in district court.1 The district court granted summary judgment for the State. MSLA timely appealed.


The State of Mississippi admits and licenses some insurers to do business in Mississippi; others, "surplus line insurers," are not admitted but are allowed to operate once Mississippi's Insurance Commissioner deems them eligible under the relevant state insurance laws. The Commissioner reviews applications of agents who wish to procure business for surplus line insurers, collects fees from these agents, and publishes a list of eligible surplus line insurers, among other duties. By statute, Mississippi permits the Commissioner to delegate some of this work to a non-profit association, provided the Commissioner determines that the association meets certain standards. The code establishing these standards, as originally enacted in 1997 and amended in 2002 and 2004, states,

(1) The Commissioner of Insurance may establish a stamping procedure for all eligible nonadmitted/surplus lines insurance policies sold on risks subject to the payment of premium taxes to the State of Mississippi.

(2) The Commissioner of Insurance may rely upon the advice and assistance of a duly constituted association of surplus lines agents in carrying out the purposes of this chapter, if the association files with the commissioner:

(a) A copy of the association's constitution and articles of agreement of association or the association's certificate of incorporation and bylaws and any rules and regulations governing the association's activities;

(b) A list of the association's members; and

(c) The name and address of a resident of this state upon whom notices or orders of the commissioner or process issued by the commissioner may be served.

(3) The Commissioner of Insurance may examine the association's records concerning the functions or duties performed on behalf of the commissioner by the association.

(4) The association shall provide a means for the examination of all surplus lines coverages written to determine whether such coverages comply with the law and such rules or regulations as may be issued by the Commissioner of Insurance.

(5) The Commissioner of Insurance may refuse to accept, or may suspend or revoke the acceptance of, an association for any of the following reasons:

(a) It reasonably appears that the association will not be able to carry out the purposes of this chapter;

(b) The association does not maintain and enforce rules and regulations which will ensure that members of the association and persons associated with those members will comply with this chapter, other applicable state law or rules or regulations promulgated under either;

(c) The rules or regulations of the association do not ensure a fair representation of its members in the selection of directors and in the administration of its affairs;

(d) The rules or regulations of the association do not provide for an equitable allocation of reasonable dues, fees and other charges among members;

(e) The rules or regulations of the association impose an undue burden on competition; or

(f) The association fails to meet other applicable requirements prescribed in this chapter.

(6) A surplus lines agent shall cooperate with the association and the Commissioner of Insurance in fulfilling the surplus lines agent's statutory responsibility under this chapter.

(7) Upon request from the association, the Commissioner of Insurance may approve the levy of an examination fee of not more than one percent (1%) of premiums charged under this chapter for the operation of the association to the extent that such operation relieves the commissioner of duties otherwise required of the Commissioner of Insurance under this chapter.

(8) The association may revoke the membership of, and the Commissioner of Insurance may revoke the license in this state of, any licensee who fails to pay the examination fee when due, if the examination fee has been approved by the Commissioner of Insurance.

(9) [Added by amendment in 2004]: The fees levied and collected by the association pursuant to this section have been and remain public funds and shall be subject to transfer to the Department of Insurance Special Fund by act of the Legislature; provided, however, that not more than Two Million Dollars ($ 2,000,000.00) shall be transferred.2

In 1997, the Commissioner asked private individuals to form an association. In response to this request, the Mississippi Surplus Lines Association organized as a non-profit. The Commissioner reviewed MSLA's Plan of Operation, approved the association to assist him in his duties, and in 1997 approved a 1% examination fee, or "stamping fee," on surplus line policy gross premiums to fund MSLA. The association began collecting examination fees and twice recommended a reduction of these fees, both of which the Insurance Commissioner approved, reducing the fee to 0.5% in 2000 and 0.25% in 2003. MSLA used the fees collected to pay for its operating expenses, as permitted by statute, and invested the surplus. MSLA collected approximately $5.2 million in fees but spent approximately $1.6 million from 1997 through 2005, accumulating excess funds of more than $3.6 million.

In 2004, when the State's budget was tight, the Mississippi legislature amended the code to require a transfer of $2 million from MSLA to the Insurance Department's Fund, and then to the State's Budget Contingency Fund. MSLA challenged this action, refusing to transfer the funds and requesting declaratory and injunctive relief in district court. The court granted the State's cross-motion for summary judgment, determining that "the excess examination fees held by MSLA are not its private funds but rather are held on behalf of the State, and accordingly, may be claimed by the State without violence to any constitutionally protected interest of MSLA." MSLA appealed. Because the Mississippi legislature has not attempted to appropriate any of MSLA's interest from its investment of the surplus, the funds at issue are the $2 million in fee proceeds claimed by the State.

MSLA argued before the district court that the Mississippi legislation violates the Fifth and Fourteenth Amendments as uncompensated takings and as deprivations of private property without due process. On appeal, it urges that the district court erred in finding no constitutional violations and granting summary judgment for the State and alternatively, in holding that there were no genuine issues of material fact.


We address the takings issue first, reviewing de novo the district court's grant of summary of judgment for the State.3 MSLA relies primarily on two cases, Texas Catastrophe Property Insurance Association v. Morales, 4 and the Seventh Circuit's Illinois Clean Energy Community Foundation v. Filan.5 It argues that the district court erred in finding no taking, urging that the appropriate inquiry under Morales and Filan is "on the state's relationship to the organization at issue." We agree that the private or public nature of the organization is a necessary step in an inquiry when an entity acting for a state initiates legal action against the state. As we held in Morales, "the relevant inquiry . . . is one of identity: the material question is whether [the association] is a part of the state."6 Yet Morales was not a takings case. In addressing whether MSLA is a private or public entity, we cannot avoid the crucial question of whether the funds at issue are private or public property; this is the very essence of the takings inquiry.

In Morales, the nature of the organization and its connection to the state were central to our inquiry because an insurance pool challenged a code provision that required the pool to use the Texas Attorney General as counsel. Although the right to counsel question forced a close look at whether the organization was part of the state and could be required to use state counsel, we also looked to the nature of the pool's funds, holding that because "the state holds, and exercises, the coercive power to force private insurers doing business in Texas to cover certain risks does not mean that the money coming out of the companies' bank accounts is state money."7 And in Filan, although Judge Posner focused on the private nature of the organization controlling the assets at issue, he also discussed the "private character of the property."8 The Seventh Circuit similarly held in Great Lakes Higher Education Corp. v. Cavazos,9 analyzing the "purpose of the instrumentality" as well as the public or private nature of the property managed by the instrumentality.10 In sum, we must look both to the nature of the organization holding the funds and to the nature of the funds claimed by the State to determine whether the funds are private or public property.

Both MSLA and its funds exist at the whim of the Mississippi legislature and are public in nature. In Filan, the Seventh Circuit held,

[A] grant that is expressly provisional would not create a property right and alternatively the acceptance of the grant by the...

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