Opinion ID: 788088
Heading Depth: 3
Heading Rank: 3

Heading: McCarran-Ferguson Act and Burford Abstention

Text: 27 In their AmSouth appeal, the Receivers argue that McCarran-Ferguson Act reverse preemption and Burford abstention form independent grounds for the district court to have found it lacked jurisdiction. The district court did not address the McCarran-Ferguson Act argument, but it was raised by the Receivers below. Reviewing the lines of cases cited by the parties, it becomes clear that often when faced with suit in the federal courts, a state commissioner of insurance as receiver or liquidator of an insurance company placed under the state's care will rely on one or both of these doctrines to attempt to defeat federal court jurisdiction. Because state liquidation proceedings of insolvent insurers are exactly the sort of intricate state regulation on behalf of state-resident policyholders that these doctrines are intended to protect, these arguments have some force when angry creditors attempt to sue insolvent insurance companies in federal court to jump ahead in the queue of claims, but they have less force here, where the insurance companies are themselves the natural plaintiffs, as Receivers vociferously argue. This dispute involves the Receivers' attempt to recover money in an ordinary common-law-damages suit; the Banks do not here attempt to disrupt a coherent state scheme in favor of enriching their own pockets. 28 First, the Receivers claim that the McCarran-Ferguson Act, 15 U.S.C. § 1012(b), which provides that [n]o 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, reverse-preempts the Declaratory Judgment Act in this case. They argue that if the Declaratory Judgment Act allows this action against them, it impairs the operation of state laws providing for the liquidation of insurance companies, including those providing for antisuit injunctions. Antisuit injunctions were issued as part of the liquidation proceedings for each of the insolvent insurance companies controlled by the Receivers. See, e.g., Tenn. ex rel. Sizemore v. Franklin Am. Life Ins. Co., No. 99-1326-II (Tenn. Ch. Oct. 25, 1999) (Consent Final Order of Liquidation; Finding of Insolvency; and Permanent Injunction, at 4) ([N]o action at law or equity or in arbitration shall be brought against the insurer or liquidator.), J.A. FTB at 812, 815. Those injunctions bar suits against the insurance companies in any court; both parties agree on appeal that the injunctions of their own force cannot limit federal judicial power, but the Receivers argue that McCarran-Ferguson gives them that power. 29 McCarran-Ferguson reverse preemption depends upon the policies that undergird state law. Where a state law protects state insurance-policyholders, it is a law enacted ... for the purpose of regulating the business of insurance; when it protects other interests, for instance, those of stockholders in those insurance companies, it is not such a law within the meaning of the Act. See SEC v. Nat'l Sec. Inc., 393 U.S. 453, 457, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969). The connection to the protection of policyholders cannot be too attenuated; in United States Department of the Treasury v. Fabe, 508 U.S. 491, 508, 113 S.Ct. 2202, 124 L.Ed.2d 449 (1993), in the course of finding that an Ohio insurer-liquidation statute providing for a creditor-preference order contrary to general federal law reverse-preempted the federal law to the extent it privileged policyholders and the administration of the system in furtherance of the privilege of policyholders, the Court noted the difficulty. 30 Of course, every preference accorded to the creditors of an insolvent insurer ultimately may redound to the benefit of policyholders by enhancing the reliability of the insurance company. This argument, however, goes too far: But in that sense, every business decision made by an insurance company has some impact on its reliability ... and its status as a reliable insurer. [ Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 216-17, 99 S.Ct. 1067, 59 L.Ed.2d 261 (1979)]. Royal Drug rejected the notion that such indirect effects are sufficient for a state law to avoid pre-emption under the McCarran-Ferguson Act. 31 Fabe, 508 U.S. at 508-09, 113 S.Ct. 2202. Finally, when assessing whether a general federal statute that creates a cause of action impairs the operation of a state law, the proper inquiry is whether the particular suit being brought would impair state law. See Humana Inc. v. Forsyth, 525 U.S. 299, 311, 313, 119 S.Ct. 710, 142 L.Ed.2d 753 (1999) (analyzing effect of McCarran-Ferguson Act on RICO suit with respect to particular suit, rather than only general operation of statute). 32 This court has previously rejected a claim that an Ohio law, Ohio Rev.Code § 3927.05, requiring the insurance commissioner to revoke the license of any foreign insurance company that removes an action initiated by a citizen of Ohio to federal court, was saved from its otherwise conceded unconstitutionality by the operation of the McCarran-Ferguson Act. See Int'l Ins. Co. v. Duryee, 96 F.3d 837, 838-40 (6th Cir.1996). The question in that case boiled down to whether the statute was aimed at protecting or regulating the performance of an insurance contract, the standard announced in Fabe, 508 U.S. at 505, 113 S.Ct. 2202 (internal quotation marks omitted). We held it was not, noting that whether litigation itself could be integral to that performance, the choice of forum was not; that unlike the statute at issue in Fabe, § 3927.05 did not increase the substantive rights of policyholders, but was in fact not limited to policyholders; and that the reach of the statute was not confined to policy disputes. Finding the statute not enacted so much `for the purpose of regulating the business of insurance' as for the parochial purpose of regulating a foreign insurer's choice of forum, Duryee, 96 F.3d at 840, we concluded that the statute was not within McCarran-Ferguson's sweep. 33 Two cases cited by the Receivers concluded that McCarran-Ferguson reverse preemption protects state insurer-liquidation courts' antisuit injunctions. In Munich American Reinsurance Co. v. Crawford, 141 F.3d 585, 590-96 (5th Cir.), cert. denied, 525 U.S. 1016, 119 S.Ct. 539, 142 L.Ed.2d 448 (1998), the Fifth Circuit faced the question of whether Oklahoma's antisuit injunctions, part of its Uniform Insurers Liquidation Act (the OUILA), were protected by McCarran-Ferguson such that they preempted the Federal Arbitration Act and the insolvent insurance company could not be compelled to enter arbitration. Deciding that the OUILA as a whole and its antisuit provisions in particular were enacted for the purpose of regulating the business of insurance, the court went on to conclude that ordering the reinsurers' action resolved in a forum other than the receivership court nevertheless conflicts with the Oklahoma law giving the state court the power to enjoin any action interfering with the delinquency proceedings. Id. at 595. The court did note that the precise degree to which a state statute may be impaired so as to trigger the McCarran-Ferguson Act is not well-settled, but found impairment sufficient to trigger it there. Id. Following Munich American, the Tenth Circuit in Davister Corp. v. United Republic Life Insurance Co., 152 F.3d 1277, 1280-82 (10th Cir. 1998), cert. denied, 525 U.S. 1177, 119 S.Ct. 1112, 143 L.Ed.2d 108 (1999), held similarly that the Federal Arbitration Act was reverse-preempted by the Utah statute consolidating all claims against a liquidating insurer. An earlier Second Circuit case, not cited by the Receivers, reaches a similar conclusion with respect to the effect on the Federal Arbitration Act of the Kentucky Insurers Rehabilitation and Liquidation Law, which contains an anti-arbitration clause. See Stephens v. Am. Int'l Ins. Co., 66 F.3d 41, 43-45 (2d Cir.1995). Finally, the Receivers cite Covington v. Sun Life of Canada (U.S.) Holdings, Inc., No. C-2-00-069, 2000 WL 33964592, - (S.D.Ohio May 17, 2000), which held that the federal removal and diversity jurisdiction provisions were reverse-preempted by Ohio law granting exclusive jurisdiction in liquidation-related legal matters to the Franklin County Court of Common Pleas. 34 On the other side is a different line of cases refusing to find reverse preemption. In Gross v. Weingarten, 217 F.3d 208, 222-23 (4th Cir.2000), the court rested its holding, after treating critically Munich American and its progeny, on the conclusion that concurrent federal jurisdiction over the defendants' counterclaims [does not] threaten[] to `invalidate, impair, or supersede'. . . . Virginia's efforts to establish a single equitable proceeding to liquidate or rehabilitate insolvent insurers. Id. at 222 (citing Humana, 525 U.S. at 307-10, 119 S.Ct. 710). This conclusion was dependent on the facts of the particular case before it, but the court also indicated that the sort of interference contemplated by the parties in that case could be dealt with through abstention doctrines. In Suter v. Munich Reinsurance Co., 223 F.3d 150, 160-62 (3d Cir.2000), the court, assuming the enacted for the purpose prong, found no impairment on the facts of the case, where the proceeding was a suit instituted by the Liquidator against a reinsurer to enforce contract rights for an insolvent insurer, which, if meritorious, will benefit the insurer's estate. In Grode v. Mutual Fire, Marine and Inland Insurance Co., 8 F.3d 953, 960 (3d Cir.1993), the court tersely rejected the McCarran-Ferguson Act argument made by the Insurance Commissioner, noting that the action instituted by the Commissioner in this case has nothing to do with Pennsylvania's regulation of insurance. And in Nichols v. Vesta Fire Insurance Corp., 56 F.Supp.2d 778, 780 (E.D.Ky.1999), the court concluded that under the Kentucky law the action it had before it — a common law breach of contract action which merely happens to involve an insolvent insurer — was not subject to the exclusive jurisdiction of the liquidation court. 35 Where the insolvent insurer is itself a plaintiff in an ordinary contract or tort action, courts tend to look unfavorably on claims of McCarran-Ferguson preemption of the FAA or the removal statutes so as to insulate that action from the federal courts. That seems to be motivated as much by frustration over the attempts by parties to evade federal jurisdiction as by reasoned doctrinal analysis, but one way to cast it in a favorable doctrinal light is to extend the rule of Humana — that impairment must be defined with respect to the particular cause of action — to the question of purpose. That is, an ordinary suit against a tortfeasor by an insolvent insurance company implicates a regulation of the business of insurance only in the attenuated fashion rejected in Fabe; an antisuit injunction would only be a regulation of the business of insurance to the extent it protected the assets of the insurance company from suit. Here, of course, the Banks seek only declaratory judgment, based in turn on a threatened ordinary common-law action against them, and the assets of the insurance companies are up for grabs only in that attenuated fashion. A second wrinkle is the narrow or broad definition of impair: in Munich American, impairment was defined ultimately quite broadly, in that any suit which was in violation of the antisuit provision would have impaired that provision. The Gross court, looking to the purpose of the antisuit provision, held that impairment does not occur unless the integrity of the core liquidation proceedings is attacked. Here those core proceedings are not implicated. Ultimately, we conclude that it would be an overly expansive reading of the case law and the purposes of the doctrine to find McCarran-Ferguson reverse preemption here. The threatened declaratory judgment actions against insolvent insurance companies for the purpose of evading liability in a threatened common-law coercive action by the insurance companies have only an attenuated connection to regulating the business of insurance. 36 Burford abstention is similarly inapplicable here. First invoked in Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943), Burford abstention requires a federal court to abstain from jurisdiction where to assume jurisdiction would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern. Colo. River Water Conservation Dist. v. United States, 424 U.S. 800, 814, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976). But Burford does not require abstention whenever there exists [a complex state administrative process], or even in all cases where there is a `potential for conflict' with state regulatory law or policy. New Orleans Pub. Serv., Inc. v. Council of New Orleans, 491 U.S. 350, 362, 109 S.Ct. 2506, 105 L.Ed.2d 298 (1989) (quoting Colo. River, 424 U.S. at 815-16, 96 S.Ct. 1236). Instead, This balance only rarely favors abstention, and the power to dismiss recognized in Burford represents an extraordinary and narrow exception to the duty of the District Court to adjudicate a controversy properly before it. Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 728, 116 S.Ct. 1712, 135 L.Ed.2d 1 (1996) (quotation omitted). State liquidation proceedings seem like an excellent candidate for Burford abstention, but it is difficult to see how a federal court's pronouncement on issues of common-law liability having nothing to do with insurance could be disruptive of those proceedings. Like under the McCarran-Ferguson analysis, that Receivers are covered by the antisuit provisions of the various liquidation laws seems mere coincidence, and abstention seems inappropriate. The cases cited by the Receivers are all distinguishable. 37 Gonzalez v. Media Elements, Inc., 946 F.2d 157, 157 (1st Cir.1991), involved a dispute over coverage with a solvent insurer that apparently became insolvent on appeal. A coverage claim against a now-insolvent insurer that arose prior to the insolvency is of course exactly the sort of claim that must be heard in the liquidation proceedings; although dismissal under Burford abstention is no longer appropriate under Quackenbush in damages actions, presumably McCarran-Ferguson protection would extend to this kind of claim. The court in Martin Insurance Agency, Inc. v. Prudential Reinsurance Co., 910 F.2d 249, 254-55 (5th Cir.1990), predicated its decision that Burford abstention was appropriate where the claims involve what are, on their face, assets of [the insolvent insurance company] owned solely by the receiver. And while Grimes v. Crown Life Insurance Co., 857 F.2d 699 (10th Cir.1988), does involve a receiver-instituted suit, the subject matter of the suit was recovering money damages from another insurance company based on a coverage dispute. The appeal center[ed] on the interpretation of certain provisions contained in the [reinsurance] Agreement [and] the effect of the interpretation of the Agreement by the Oklahoma Commissioner of Insurance. Id. at 700. Because Burford abstention is concerned with potential disruption of a state administrative scheme, rather than the mere existence of such a scheme, looking behind the action to determine whether it implicates the concerns of Burford is necessary, and the issues in this litigation, concerning the liability of the Banks for various non-insurance-related activities, federal law defenses, and state tort law, do not warrant Burford abstention. The district court thus did not abuse its discretion in refusing to abstain under Burford.