St. Paul Companies, Inc. v. Hatch

• Decision Date: 15 December 1989
• Docket Number: No. C5-88-2392,C5-88-2392
• Parties: The ST. PAUL COMPANIES, INC., Petitioner, Appellant, v. Michael A. HATCH, Commissioner of the Minnesota Department of Commerce, et al., Alleghany Corporation, Respondents.
• Court: Minnesota Supreme Court

Page 130

449 N.W.2d 130

The ST. PAUL COMPANIES, INC., Petitioner, Appellant, v. Michael A. HATCH, Commissioner of the Minnesota Department of Commerce, et al., Alleghany Corporation, Respondents.

No. C5-88-2392.

Supreme Court of Minnesota.

Dec. 15, 1989.

Syllabus by the Court

Minn.Stat. Sec. 60D.12, subd. 1 (1988), which provides for de novo review of orders of the Commissioner of the Minnesota Department of Commerce is constitutionally valid on its face.

James B. Loken, Jeannine L. Lee, Lori A. Wagner, Faegre & Benson, Minneapolis, for appellant.

Hubert H. Humphrey, III, Atty. Gen., Alan I. Gilbert, Gregory P. Huwe, Peggy J. Birk, St. Paul, for Michael Hatch.

Thomas W. Tinkham, Leslie J. Anderson, David R. Abrams, Dorsey & Whitney, Minneapolis, for Alleghany Corp.

Heard, considered and decided by the court en banc.

YETKA, Justice.

Is a statute which provides for a trial de novo review by the district court of a decision by the Commissioner of Commerce under Minn.Stat. Sec. 60D.12, subd. 1 (1988) (the Insurance Holding Company Systems Act) constitutional? If so, how should such a review be conducted and what is the scope of the trial court's authority? Both the trial court and the court of appeals refused to undertake a review of the commissioner's order under the aforesaid statute and held the statute unconstitutional on its face under article III, section l of the Minnesota Constitution.

We reverse both the trial court and the court of appeals and remand to the trial court for trial.

Appellant, The St. Paul Companies, Inc. (hereinafter "SPCI"), appeals from the decision of the Minnesota Court of Appeals which affirmed the judgment of the Ramsey County District Court which dismissed SPCI's petition for judicial review of an order of the Commissioner of the Minnesota Department of Commerce. The order, dated January 11, 1988, granted Alleghany Corporation permission under the Minnesota Insurance Holding Company Systems Act, Minn.Stat. ch. 60D, to acquire a "controlling" ¹ interest in SPCI.

On January 22, 1988, SPCI filed a petition for judicial review of the order in Ramsey County District Court pursuant to Minn.Stat. Sec. 60D.12, subd. 1, which provides for review "by trial de novo." On February 5, 1988, Alleghany filed a motion to dismiss SPCI's petition for judicial review on the grounds that section 60D.12's provision for "trial de novo" violates article III of the Minnesota Constitution by delegating non-judicial authority to the district court. By order dated August 8, 1988, the Ramsey County District Court granted Alleghany's motion to dismiss SPCI's petition. That court concluded that the commissioner's functions were primarily executive in nature; therefore, the "trial de novo" provision improperly delegated executive power to the district court.

By decision dated March 22, 1989, the Minnesota Court of Appeals affirmed the district court's judgment. 437 N.W.2d 666. This court granted SPCI's petition for review of the court of appeals' decision on May 18, 1989.

The St. Paul Companies, Inc. is a Minnesota corporation with its headquarters in St. Paul, Minnesota. SPCI employs 2,600 people in downtown St. Paul and has 10,000 employees nationwide. SPCI is the holding company for one of the largest groups of property-liability insurance underwriters in the United States. It owns five domestic Minnesota insurance companies, all of which are Minnesota corporations with their home offices in St. Paul. SPCI also owns subsidiaries engaged in investment banking and insurance and reinsurance brokerage activities. As of September 30, 1987, the total assets of SPCI were Eight Billion, Three Hundred Eight Million, Four Hundred Forty Thousand and No/100 Dollars ($8,308,440,000.00). Total shareholders' equity as of September 30, 1987, was One Billion, Seven Hundred Thirty-five Million, Three Hundred Thirty-four Thousand and No/100 Dollars ($1,735,334,000.00). The common stock of SPCI is publicly traded and quoted on the NASDAQ National Market System. In December 1987, there were about 46,301,857 shares of SPCI common stock outstanding.

Alleghany is a Delaware corporation with its headquarters in New York, New York. Through its subsidiary, Chicago Title and Trust Company, Alleghany is engaged in underwriting title insurance and trust company services. Over the past 40 years, Alleghany has controlled operating companies in the railroad, retail financial services, motor freight, metal and steel fabrication, and insurance industries. It has also, from time to time, acquired substantial equity positions in certain companies, held the stock for a short period of time, and then sold the stock at a profit. From 1949 to January 1984, except during the period from 1955 to 1960, Alleghany owned a controlling interest in Investors Diversified Services, Inc. (hereinafter "IDS"), a financial services company headquartered in Minneapolis. During this time, IDS played a leading role in the development of downtown Minneapolis, including the construction of the IDS Center, which was completed in 1973. In January 1984, Alleghany sold IDS to American Express Company. Since December 1986, Alleghany has owned the Shelby Insurance Co., an Ohio based regional property and casualty insurer.

On November 12, 1987, in accordance with Minn.Stat. Sec. 60D.02, Alleghany filed an application with the Minnesota Department of Commerce for permission to acquire more than 10% of SPCI's common stock. The commissioner ordered that a public hearing on Alleghany's proposed stock purchase be held before an administrative law judge. Although Minn.Stat. Sec. 60D.02, subd. 4(2) provides only that the hearing must be held within 60 days of the filing of the application, ² the commissioner ordered an expedited hearing so that he would be able to hold a hearing and render a final decision within 60 days. SPCI contends that this accelerated hearing procedure prejudicially curtailed its right to discovery and a fair hearing.

The administrative hearing was held on December 16 and 17, 1987. At the hearing, under Minn.Stat. Sec. 60D.02, subd. 4, it was Alleghany's burden to show that none of the following conditions exist:

(i) after the change of control the domestic insurer would not be able to satisfy the requirements for the issuance of a license to write the line or lines of insurance for which it is presently licensed;

(ii) the effect of the acquisition of control would be substantially to lessen competition in insurance in this state or tend to create a monopoly;

(iii) the financial condition of any acquiring party might jeopardize the financial stability of the insurer, or prejudice the interest of its policyholders or the interests of any securityholders who are unaffiliated with the acquiring party;

(iv) the terms of the offer, request, invitation, agreement or acquisition are unfair and unreasonable to the securityholders of the insurer;

(v) the plans or proposals which the acquiring party has to liquidate the insurer, sell its assets or consolidate or merge it with any person, or to make any other material change in its business or corporate structure or management, are unfair and unreasonable to policyholders of the insurer and not in the public interest; or

(vi) the competence, experience and integrity of those persons who would control the operation of the insurer are such that it would not be in the interest of policyholders of the insurer and of the public to permit the acquisition of control.

During the course of the hearing, it was revealed that, at one point, Alleghany considered various proposals to take over SPCI and prepared a detailed analysis of the feasibility of a leveraged buy-out financed by liquidating some of SPCI's assets. Alleghany admitted preparing the analysis, but argued that it had, at least for the present time, abandoned any takeover plans.

On December 29, 1987, the administrative law judge issued Findings of Fact, Conclusions and Recommendation. With respect to Alleghany's present investment plans, the administrative law judge found:

[I]t is concluded that Alleghany's present intent is, as it has stated, to limit its investment to 20% of the common stock of [SPCI]. The testimony of its executives in this regard was not successfully impeached and it appears more likely than not that it presently seeks only a limited investment in [SPCI]. It is therefore concluded that it has met its burden to show that it has no present plans to liquidate [SPCI] or to sell its assets or to merge it or to make any other material change in its business or corporate structure or management. It appears that such plans were considered and rejected in the past. What Alleghany intends in the future cannot be determined with any certainty based upon this record. What the [Insurance Holding Company Systems] Act plainly requires is an examination of present plans ("plans or proposals which the acquiring party has ").

Findings of Fact, Conclusions and Recommendation at 27. Although the administrative law judge found that Alleghany had no present plans to buy out SPCI, he found that if the buy-out plan Alleghany had once considered were implemented, "the evidence in this record preponderates in favor of a conclusion that it would be unfair and unreasonable to policyholders." The administrative law judge recommended that Alleghany be granted approval to acquire up to 20% of the common stock of SPCI on the condition that future purchases would have to be approved by the commissioner after a hearing. Recognizing that such conditional approval requires a somewhat liberal construction of Minn.Stat. Sec. 60D.02, the administrative law judge stated:

To the extent that such an interpretation of the Act is deemed to constitute policymaking, the relevant case law establishes that an agency may, in its discretion, establish new policies in the course of its adjudicatory process. SEC v. Chenery Corp., 332 U.S. 194 [67 S.Ct. 1575, 91 L.Ed....