United Services Auto. Ass'n. v. Muir

• Decision Date: 06 June 1986
• Docket Number: No. 85-5662,85-5662
• Citation: 792 F.2d 356
• Parties: UNITED SERVICES AUTOMOBILE ASSOCIATION, a Texas Reciprocal Interinsurance Exchange and USAA Casualty Insurance Company, a Texas Stock Insurance Company and USAA Life Insurance Company, a Texas Stock Insurance Company and USAA Annuity And Life Insurance Company, a Texas Stock Insurance Company v. William J. MUIR, III, Acting Insurance Commissioner of the Commonwealth of Pennsylvania. Appeal of UNITED SERVICES AUTOMOBILE ASSOCIATION, USAA Casualty Insurance Company, USAA Life Insurance Company, and USAA Annuity and Life Insurance Company, Appellants.
• Court: U.S. Court of Appeals — Third Circuit

Page 356

792 F.2d 356

55 USLW 2002

UNITED SERVICES AUTOMOBILE ASSOCIATION, a Texas Reciprocal Interinsurance Exchange and USAA Casualty Insurance Company a Texas Stock Insurance Company and USAA Life Insurance Company, a Texas Stock Insurance Company and USAA Annuity And Life Insurance Company, a Texas Stock Insurance Company v. William J. MUIR, III, Acting Insurance Commissioner of the Commonwealth of Pennsylvania Appeal of UNITED SERVICES AUTOMOBILE ASSOCIATION, USAA Casualty Insurance Company, USAA Life Insurance Company, and USAA Annuity and Life Insurance Company, Appellants.

No. 85-5662.

United States Court of Appeals Third Circuit.

Argued March 6, 1986.

Decided June 6, 1986.

Michael L. Browne, Christopher K. Walters, (Argued), J. Thomas Morris, Reed Smith Shaw & McClay, Philadelphia, Pa., Robert B. Hoffman, Reed Smith Shaw & McClay, Harrisburg, Pa., for appellants.

Leroy S. Zimmerman, Atty. Gen., Ellis M. Saull, (Argued), Deputy Atty. Gen., Andrew S. Gordon, Senior Deputy Atty. Gen., Allen C. Warshaw, Executive Deputy Atty. Gen., Office of Atty. Gen., Harrisburg, Pa., for appellee.

Before GIBBONS, BECKER, and ROSENN, Circuit Judges.

OPINION OF THE COURT

ROSENN, Circuit Judge.

This appeal requires us to examine various forms of abstention advanced by the district court in choosing to refrain from exercising jurisdiction. Included is an unsettled question under the abstention doctrine promulgated in Railroad Commission of Texas v. Pullman, 312 U.S. 496, 61 S.Ct. 643, 85 L.Ed. 971 (1941): whether a claim that federal statutes preempt state law under the supremacy clause raises a substantial constitutional question which permits abstention.

United Services Automobile Association (USAA) and some of its subsidiary insurance companies filed suit against William J. Muir, III, as Acting Insurance Commissioner of the Commonwealth of Pennsylvania, seeking to enjoin the state insurance department from revoking USAA's license to insure persons in Pennsylvania. The insurance department asserts that USAA following its purchase of a Texas bank is in violation of a Pennsylvania statute prohibiting mergers between financial institutions and insurers. USAA argues that such a construction of the state statute is preempted by federal banking statutes that permitted it to purchase the bank and otherwise violates the constitution. The United States District Court for the Middle District of Pennsylvania concluded that abstention applied, and dismissed the suit. ¹ We disagree and reverse.

I.

The relevant facts as stated in USAA's complaint are not disputed in this appeal. USAA is a reciprocal interinsurance exchange ² organized under the laws of Texas. USAA and three of its wholly owned insurance company subsidiaries, with which it filed this suit, have their principal place of business in San Antonio, Texas. They limit their insurance services primarily to commissioned officers of the United States armed forces and do business nationwide. They provided insurance services in 1983 to more than 40,000 Pennsylvania policy holders who paid more than $35,000,000 in annual policy premiums.

That year, USAA Financial Services Company (then known as USAA Development Company), a wholly owned subsidiary of USAA, applied for and received from the Federal Home Loan Bank Board and the Federal Savings & Loan Insurance Corporation (FSLIC) permission to organize and operate the USAA Federal Savings Bank (the Bank) in San Antonio, Texas. USAA Financial Services also received permission from the FSLIC to serve as a unitary savings and loan holding company. The insurance department does not allege that USAA failed to comply with any requirements of federal law in organizing the Bank. USAA has made an initial investment of more than $20,000,000 through its subsidiary to capitalize the Bank. The subsidiary holding company and the Bank are not parties to this suit. The Bank does not solicit deposits from Pennsylvania residents or do business in Pennsylvania.

In mid-1984, the Pennsylvania insurance department notified USAA that its ownership of a bank violated section 641 of the Pennsylvania Insurance Act of 1921, and that "USAA must, to continue its business in Pennsylvania, divest itself of the Bank, or, failing such divestiture, risk revocation of its license to transact insurance business in Pennsylvania." The Pennsylvania Insurance Act of 1921, section 641, as amended in 1974, provides in relevant part:

(b) No lending institution, ... bank holding company, savings and loan holding company [as defined in federal statutes] or any subsidiary or affiliate of the foregoing, or officer or employee thereof, may directly or indirectly, be licensed or admitted as an insurer ... in this State....

(c) The Insurance Commissioner is authorized to promulgate regulations in order to effectuate the purposes of the section, which are to help maintain the separation between lending institutions and public utilities and the insurance business and to minimize the possibilities of unfair competitive practices by lending institutions ... against insurance companies, agents and brokers.

Codified at 40 Pa.Stat.Ann. Sec. 281 (Purdon 1985 Supp.).

The insurance department argued that because USAA Financial Services is a federally regulated savings and loan holding company, as defined by federal statutes and USAA solely owns USAA Financial Services, the latter is its affiliate and USAA is therefore in violation of section 641(b). In reply, USAA asserted that section 641 is ambiguous and can be read not to apply to it. Section 641(c) states that the purpose of section 641 is to help maintain the separation between lending institutions and the insurance business and minimize the possibilities of unfair competitive practices by lending institutions. Under section 641(a)(1), ³ a lending institution means any institution that does banking business in Pennsylvania. By reading parts (a)(1) and (c) of section 641 together, USAA argued that the purpose of the section is limited to preventing financial institutions doing business in Pennsylvania from competing or being affiliated with Pennsylvania insurers; as the Bank is based and does business only in Texas, the section does not apply to USAA.

USAA and its plaintiff subsidiaries filed suit in the district court under 42 U.S.C. Sec. 1983, alleging that the insurance department's proposed reading of section 641 violated the supremacy, equal protection, and due process clauses of the constitution, and seeking declaratory and injunctive relief. One month after USAA filed suit, the insurance department commenced state administrative proceedings for the revocation of USAA's insurance licenses in Pennsylvania and filed in the district court a motion to dismiss the suit on abstention grounds. While the district court considered this motion, USAA filed a motion for summary judgment on preemption grounds. Citing Pullman, supra, Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943), and Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971), the district court concluded that it should abstain from addressing USAA's suit, and dismissed the suit without considering USAA's summary judgment motion. USAA appealed.

On November 22, 1985, this court granted a motion for an injunction preventing the insurance department from revoking USAA's licenses pending resolution of this appeal. The Pennsylvania Insurance Commissioner has heard testimony in the administrative proceedings to revoke USAA's licenses, but, as of oral argument, he had not announced any decision.

II.

Abstention from the exercise of federal jurisdiction is, in all its forms, "the exception, not the rule." Colorado River Water Conservation District v. United States, 424 U.S. 800, 813, 96 S.Ct. 1236, 1244, 47 L.Ed.2d 483 (1976). It is an extraordinary and narrow exception to the district court's duty to adjudicate a controversy properly before it, justified only in the exceptional circumstances where resort to state proceedings clearly serves an important countervailing interest. Id.

In reviewing abstention decisions, appellate courts apply the various criteria for abstention articulated by the Supreme Court in much the same way they would apply provisions of a statute. 1A J. Moore, Federal Practice p 0.203 at 2106 (1985). A district court has little or no discretion to abstain in a case that does not meet traditional abstention requirements. C-Y Development Co. v. City of Redlands, 703 F.2d 375, 377 (9th Cir.1983). Within these constraints, determination whether the exceptional circumstances required for abstention exist is left to the district court, and will be set aside on review only if the district court has abused its discretion. Harman v. Forssenius, 380 U.S. 528, 534, 85 S.Ct. 1177, 1181, 14 L.Ed.2d 50 (1965); United States v. City of Pittsburgh, 757 F.2d 43, 45 (3d Cir.1985). Determinations that are essentially legal, such as deciding whether interpretation of a state law is unsettled, are reviewed de novo on appeal. D'Iorio v. County of Delaware, 592 F.2d 681, 686 (3d Cir.1978), overruled on other grounds, Kershner v. Mazurkiewicz, 670 F.2d 440 (3d Cir.1982) (in banc). We therefore turn to an analysis of the abstention grounds on which the district court relied.

III.

Pullman abstention, as most recently defined by the Supreme Court, instructs "that federal courts should abstain from decision when difficult and unsettled questions of state law must be resolved before a substantial federal constitutional question can be decided." Hawaii Housing Authority v. Midkiff, 467 U.S. 229, 236, 104 S.Ct. 2321, 2327, 81 L.Ed.2d 186 (1984). USAA advances three principal grounds for not applying Pullman abstention in this case: there is no unsettled question of state law; abstention would cause USAA substantial and irreparable economic harm; and its preemption claim does not constitute a substantial federal constitutional...