Steele v. First Deposit Nat. Bank
| Decision Date | 05 February 1999 |
| Citation | 732 So.2d 301 |
| Parties | Vola G. STEELE v. FIRST DEPOSIT NATIONAL BANK et al. |
| Court | Alabama Court of Civil Appeals |
J. Gusty Yearout and John G. Watts of Yearout, Myers & Traylor, P.C., Birmingham; and Jerry O. Larant of Lorant & Associates, P.C., Birmingham, for appellant.
John M. Johnson and William H. Morrow of Lightfoot, Franklin & White, L.L.C., Birmingham, for appellees.
Vola G. Steele filed an action against First Deposit National Bank and several other banks (hereinafter collectively referred to as "the banks") alleging that the banks were selling insurance in contravention of § 27-3-1, Ala.Code 1975. In her action, Steele alleged that "Credit Protection," a debt-deferral product offered by the banks, constituted a contract of insurance and that the banks violated Alabama law by selling the credit protection without the requisite license from the Alabama Department of Insurance. Steele later sought to have the case certified as a class action.
The banks moved for a summary judgment. After conducting a hearing, the trial court entered a summary judgment in favor of the banks, finding that the credit-protection contract did not constitute insurance and, therefore, that it was not subject to regulation by the State of Alabama. Steele appealed to the Supreme Court of Alabama, which transferred the appeal to this court, pursuant to § 12-2-7, Ala.Code 1975.
A motion for summary judgment is properly granted when no genuine issue of material fact exists and the moving party is entitled to a judgment as a matter of law. Chatham v. CSX Transportation, Inc., 613 So.2d 341, 343 (Ala. 1993). Evidence must be viewed in a light most favorable to the nonmoving party, and all reasonable doubts concerning the existence of a genuine issue of material fact must be resolved in favor of the nonmovant. Id. After the moving party makes a prima facie showing that there is no genuine issue of material fact, the burden shifts to the nonmoving party to present evidence creating a genuine issue of material fact. Id. The nonmoving party, to create a genuine issue of material fact, is required to present substantial evidence, i.e., "evidence of such weight and quality that fairminded persons in the exercise of impartial judgment can reasonably infer the existence of the fact sought to be proved." West v. Founders Life Assur. Co. of Florida, 547 So.2d 870, 871 (Ala.1989).
The banks offer credit protection in connection with their credit-card program. Credit protection allows the borrower to suspend his obligation to make payments on the debt, for up to nine months, upon the occurrence of certain events, including involuntary unemployment, hospitalization, accident, sickness, or disability. Credit protection does not cancel or forgive any portion of the borrower's debt owed to the banks. Rather, the borrower's account is "frozen," that is, interest ceases to accrue on the account and the borrower may not obtain additional credit from the account. Credit protection is an optional product. The borrower pays $.49 per $100 of the account's outstanding balance, to obtain credit protection;1 the maximum a borrower pays for credit protection on any balance is $19.95 per month.
Generally, where federal law and state law conflict, a federal law preempts a conflicting state law. U.S. Const., art. VI, cl. 2; American Deposit Corp. v. Schacht, 84 F.3d 834 (7th Cir. 1996), cert. denied, 519 U.S. 870, 117 S.Ct. 185, 136 L.Ed.2d 123 (1996). The National Bank Act grants national banks the power to exercise "all such incidental powers as shall be necessary to carry on the business of banking." 12 U.S.C. § 24 (Seventh). Steele argues that the credit protection offered by the banks is actually insurance and that the agreement regarding credit protection is therefore subject to state regulation pursuant to the McCarran-Ferguson Act, 15 U.S.C. § 1012.
The McCarran-Ferguson Act "`overturn[ed] the normal legal rules of preemption' by imposing a rule `that state laws enacted for the purpose of regulating the business of insurance do not yield to conflicting federal statues unless the federal statute specifically provides otherwise.'" American Deposit Corp. v. Schacht, 84 F.3d 834, 837-38 (7th Cir. 1996) (quoting United States Dep't of Treasury v. Fabe, 508 U.S. 491, 507, 113 S.Ct. 2202, 124 L.Ed.2d 449 (1993)). The McCarran-Ferguson Act provides in part:
15 U.S.C. § 1012. Thus, under the McCarran-Ferguson Act, federal law does not preempt the states' regulation or taxation of "the business of insurance." Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 99 S.Ct. 1067, 59 L.Ed.2d 261 (1979).
The issue in this case is whether offering credit protection is an "incidental power" of the banks pursuant to the National Bank Act or whether, as Steele argues, credit protection is insurance and therefore subject to state regulation pursuant to the McCarran-Ferguson Act, 15 U.S.C. § 1012. In order to answer that question, this court must resolve three issues: "(1) whether the pertinent sections of [Alabama's insurance code] were enacted `for the purpose of regulating the business of insurance;' (2) whether [credit protection] is properly considered `the business of insurance;' and (3) whether the pertinent provisions of the Bank Act `specifically relate to the business of insurance.'" American Deposit Corp. v. Schacht, 84 F.3d 834, 838 (C.A.7th 1996).
It is undisputed that Alabama's insurance code, and particularly § 27-3-1, Ala. Code 1975, which prohibits the sale of insurance without a license, were enacted for the purpose of regulating the business of insurance. The main dispute in this case regards the second of the Schacht criteria, whether the offering of credit protection by the banks is actually "the business of insurance."
The question whether a product is insurance for the purposes of the McCarran-Ferguson Act is a federal question. OCC Interpretative Letter No. 623 (May 10, 1993) (citing Sec. & Exch. Comm'n v. Variable Annuity Life Ins. Co., 359 U.S. 65, 79 S.Ct. 618, 3 L.Ed.2d 640 (1959)). See also First Nat'l Bank of Eastern Arkansas v. Taylor, 907 F.2d 775, 780, n. 8 (8th Cir. 1990)
(). The United States Supreme Court set forth three criteria for determining whether a particular practice or product constitutes "the business of insurance": "first, whether the practice [or product] has the effect of transferring or spreading a policyholder's risk; second, whether the practice [or product] is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice [or product] is limited to entities within the insurance industry." Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129, 102 S.Ct. 3002, 73 L.Ed.2d 647 (1982).
It is clear that credit protection does not transfer or spread the borrower's risk. The borrower's debt remains intact. His obligation to make payments on that debt, and the accumulation of interest on the debt, are temporarily suspended. Also, credit protection is not an integral part of the relationship between a bank as a lender and Steele as a borrower. Credit protection is an optional contract provision that the borrower may elect to purchase; it is not a term or condition of borrowing. Further, credit protection is not a product that is limited exclusively to entities within the insurance industry.
Thus, we conclude that the credit-protection contract is not "the business of insurance," under the criteria set forth in Pireno, su...
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Ogles v. Sec. Benefit Life Ins. Co.
...and Alabama have enacted laws to regulate insurance. See K.S.A. § 40-102 ; K.S.A. § 40-103 ; see also Steele v. First Deposit Nat'l Bank , 732 So. 2d 301, 303 (Ala. Civ. App. 1999) ("It is undisputed that Alabama's insurance code ... [was] enacted for the purpose of regulating the business ......