Court Opinion

ID: 9491280
Source: CourtListenerOpinion
Date Created: 2023-08-05 14:09:12.076905+00
Date Added: 2024-06-11T17:54:37.910831
License: Public Domain

JERRY E. SMITH, Circuit Judge,
dissenting:
The lynehpin of the majority opinion is its legal conclusion that we may characterize an insurance policy not according to its unambiguous terms or to the state law controlling its application, but by the performance of the insurer under the policy. Because I cannot join in this unprecedented application of the substance-over-form doctrine, I respectfully dissent.
I agree with the majority that insurance purchased “in lieu of’ filing under 15 U.S.C. § 1605(d)(2) cannot cover risks that would not have arisen, but for the creditor’s failure to file.1 I cannot agree, however, that this policy, which by its terms and under Louisiana law covered only such risks, is anything but non-filing insurance in accordance with § 1605(d)(2).
I.
A.
Nó other court of appeals has looked beyond the explicit terms of an insurance policy to characterize its nature according to the claims payment practices of the insurer. The majority’s citation of other TILA cases is inapposite, for those eases properly looked to substance over form to give meaning to the necessarily ambiguous terms “credit” and “creditor” in the Act. Thus, the Court in Mourning v. Family Publications Serv., 411 U.S. 356, 93 S.Ct. 1652, 36 L.Ed.2d 318 (1973), decided that Congress had intended merchants not to be able to escape “creditor” status simply by reformulating what would otherwise be credit transactions as “installment sales.” Id. at 363-69, 93 S.Ct. 1652.
Also, for example, in Joseph v. Norman’s Health Club, Inc., 532 F.2d 86 (8th Cir.1976), the case cited for its substance-over-form analysis in both Meyers v. Clearview Dodge Sales, Inc., 539 F.2d 511, 515 (5th Cir.1976), and Hickman v. Cliff Peck Chevrolet, Inc., 566 F.2d 44, 46 (8th Cir.1977), a health club sold “ ‘lifetime memberships’ for $360, payable in twenty-four monthly installments of $15, or for cash, with a discount of ten to fifteen percent, and then sold the notes to finance companies.” 532 F.2d at 88. Unsur--prisingly, the court found these to be credit transactions in substance. See Joseph, 532 F.2d at 93-94.
Here, there is no comparable need to engage in a searching substance-over-form analysis, for there is no ambiguity that needs resolution. In Joseph, on the other hand, Congress expressed concern in the terms of *444the statute, in the delegation of rulemaking-capability, and in the legislative history, that the term “credit” not be used in- a hyper-formal sense to restrict the TILA’s coverage. See Mourning, 411 U.S. at 363-69, 93 S.Ct. 1652. In essence, Congress knowingly left a statutory interstice to be filled by regulators and courts. See id. at 365, 93 S.Ct. 1652.
The statute, the regulation, and Louisiana law — not a court’s impression of the “economic realities” — must dictate our disposition. To be sure, the statute does not define “insurance,”2 but that does not give us carte blanche to create a new rule of law under which insurance is characterized not by its terms but by a fact-intensive, substance-over-form analysis that cannot be resolved on summary judgment.
Rather, the silence of the statute directs us to the regulations and to the applicable background of state common law. The Supreme Court has often remarked that courts must look to the established meaning of common law terms when interpreting statutes.3 Furthermore, Regulation Z provides that otherwise undefined terms “have the meanings given to them by state law or contract.” 12 C.F.R. § 226.2(b)(3) (1998). The rights and obligations of the parties under this policy, and the characterization of that policy as non-filing insurance or something else, depend upon the controlling state law.
B.
Under Louisiana law, which governs this policy, the arrangement between Your Credit and Voyager is non-filing insurance. A Louisiana insurance contract is interpreted according to general contract principles. See Battig v. Hartford Accident & Indem. Co., 608 F.2d 119 (5th Cir.1979). Louisiana law provides that
the parties’ intent, as reflected by the words of the policy, determines the extent of coverage. Such intent is to be determined in accordance with the plain, ordinary, and popular sense of the language used in the policy, unless the words have acquired a technical meaning.... An insurance contract should not be given an interpretation which would enlarge or restrict its provisions beyond what is reasonably contemplated by its terms or which would lead to an absurd conclusion. If the language in an insurance contract is clear and unambiguous, the agreement must be enforced as written. In such a case, the meaning and intent of the parties to the written contract must be sought within the four corners of the instrument and cannot be explained or contradicted by parol evidence. ... [Tjhe use of extrinsic evidence is proper only where a contract is ambiguous after an examination of the four corners of the instrument.
Highlands Underwriters Ins. Co. v. Foley, 691 So.2d 1336, 1340 (La.App. 1st Cir.1997) (citations omitted).4
This insurance contract unambiguously defines the scope of its coverage. By its plain terms, the agreement insures against losses incurred “solely as the result of the failure of the Insured duly to record or file.” Under Louisiana law, accordingly, the policy is non-filing insurance.5
*445Furthermore, it does not matter whether the contract included an explicit or implicit stop-loss provision: Insurers are permitted, under Louisiana law, to limit their liability and impose reasonable conditions _ on their obligations, so long as those do not conflict with law or public policy. See Scarborough v. Travelers Ins. Co., 718 F.2d 702, 707 (5th Cir.1983).
In short, the characterization of this insurance policy is directly controlled by Louisiana law, under which the policy covers only losses caused by failure to file. A federal court should not interfere by holding to the contrary.
II.
Even if it is sometimes appropriate to apply a substance-over-form analysis to characterize insurance under the TILA, the form of this policy is not at odds with its substance. Rather, the form of the policy and the pattern of performance thereunder are in keeping with legitimate business practices, rather than the sort of sham to which courts will assign consequences based on its substance, rather than form. Substance-over-form is inapplicable on these facts.
The substance-over-form principle is a doctrine of tax law that prohibits taxpayers from avoiding the tax consequences of a transaction by disguising it as something that it is not. Thus, for example, where a taxpayer purchased bonds with an interest rate of 2.5 percent and financed that purchase with a debt to the bond issuer at a rate of 3.5 percent, the Supreme Court found the transaction to be a “sham,” crafted solely as a tax avoidance scheme. See Knetsch v. United States, 364 U.S. 361, 366, 81 S.Ct. 132, 5 L.Ed.2d 128 (1960). There was no economic reason to engage in the transaction — no chance for profit, other than tax-avoidance— and the Court therefore looked to substance rather than form. The search for substance over form has been analogized to the practice of piercing the corporate veil. See 1 Boris I. Bittker and Lawrence Lokken, Federal Taxation of Income, Estates and Gifts ¶ 4.3.3, at 4-34 n. 36 (2d ed.1989). In either case, however, the respective doctrines are applied only in exceptional circumstances— circumstances unlike those presented here.
An individual’s chosen form will not be set aside lightly. Indeed, it has been said that “lawyers who do not know’that sometimes form controls, should not be practicing law.” Id. at 4-34 (quoting Paul, Studies in Federal Taxation 89 n. 304 (1937)). Thus, where there is a “genuine multiple-party transaction with economic substance which is compelled or encouraged by business or regulatory realities, is imbued’with tax-independent considerations, and is not shaped solely by tax-avoidance features that have meaningless labels attached, the Government should hon- or the allocation of rights and duties effectuated by the parties.” Frank Lyon Co. v. United States, 435 U.S. 561, 584-85, 98 S.Ct. 1291, 55 L.Ed.2d 550 (1978). Similarly, when a corporation is not used for an illegal purpose, its veil will be pierced only where it is a sham or is the alter ego of its shareholders. See Fidelity & Deposit Co. v. Commercial Cas. Consultants, Inc., 976 F.2d 272, 274-5 (5th Cir.1992). Courts pierce veils and look to transactions’ “substance” only when they are convinced that legal formalities are devoid of real consequence, used solely to avoid-tax or other liability.
There is a legitimate business reason for Voyager’s payment of claims beyond the terms of the policy: The cost of investigating those claims would have been far greater than the value of the claims paid. As far as I-am aware, it is a common and perfectly legitimate practice for an insurer to pay, rather than always to dispute, claims outside the scope of coverage. This policy specifically provided that the insurer retained the right to “pay, compromise, reject, or deny” any claim. An insurer may choose to pay a claim for any reason, with or without an evaluation of its merit. The TILA does not impose on insurers a duty to investigate.
There is a legitimate business reason— outside any purported desire to skirt the TILA — to characterize the policy as non-filing insurance rather than as general default. Although Voyager might pay small claims, there is every reason to believe that it would investigate and, in appropriate' circumstances, refuse to pay claims involving any *446significant amount of money. The summary judgment is consistent with this conclusion. Therefore, the policy’s coverage of risk arising “solely as a result from -the ... failure to file” is not an empty formality, but has real substance. Even were it generally appropriate to apply a substance-over-form analysis to characterize insurance policies, the policy at issue here would remain what it purports to be: insurance purchased in lieu of filing.
III.
Finally, I note the policy implications of-this unprecedented and improper application of the substance-over-form doctrine. The majority’s rule will encourage litigation, for plaintiffs may properly read this decision as holding that a pattern of performance will trump plain contractual provisions in determining parties’-rights and obligations. Once such litigation is filed, the majority’s fact-intensive analysis will allow most, if not all, plaintiffs to survive summary judgment.
Furthermore, by effectively imposing a duty to investigate and dispute potentially bogus claims, this rule will hamper the free and efficient functioning of the insurance industry. In essence, this duty to investigate will hinder insurers from issuing small policies, where the likely value of claims asserted will be less than the likely cost of investigation. That is, a rational insurer should calculate its rates based upon the settlement value of claims: their dollar amount or the cost of disputing them, whichever is-lower. -Under this rule, insurers must instead incur and pass on the cost of disputing all potentially illegitimate claims, even where its settlement value is less than the cost of disputing it.
Moreover, the majority’s rule will do nothing to help debtors such as Edwards. True, the inclusion of non-filing insurance premiums in the amount financed raises the effective interest rate on the underlying principal. But if the market will bear such a high price for money, which it apparently will; there is every reason to believe that creditors will continue to charge that price. Whether' some portion of the total price is included (and disclosed) on one line rather than another is largely irrelevant to the debtor’s bottom line: the amount he pays for the loan.
Where the market will bear a given bottom line, creditors will naturally achieve this bottom line by the inclusion of various charges. And debtors will continue to pay astronomical prices for cash. While we may believe that certain debtors--act improvidently, and while ■ we may privately condemn certain creditors for tempting individuals with the lure of quick money at high rates, as a matter of both law and economics we cannot prevent these transactions from taking place.
IV.
The majority disregards the unambiguous language of this insurance policy and its plain effect under Louisiana law. It requires a federal court to characterize the scope and coverage of an insurance policy according to the performance of the parties thereunder. As a result, it transforms contract interpretation — a quintessential question of law — into a question of fact that will almost always allow industrious plaintiffs to survive summary judgment. Because I cannot join this unprecedented departure, I respectfully dissent.

. Cf., e.g., Webster’s Third New Int’l Dictionary 1306 (1986) (defining "in lieu of" as "in the place of; instead of”); American Aviation & Gen. Ins. Co. v. Georgia Telco Credit Union, 223 F.2d 206, 207 (5th Cir.1955) (pre-TILA non-filing policy covers losses "solely from [creditor’s] failure to file”).

. Again, I note that we may properly decide what sort of insurance qualifies as insurance purchased “in lieu of filing.” That is, we may decide what sort of risks may be covered by a policy in order to fall within the statutory terms. It goes far beyond our role as statutory interpreters, however, when we define as a matter of federal law which risks the policy covers.

. See, e.g., United States v. Wells, 519 U.S. 482, 117 S.Ct. 921, 927, 137 L.Ed.2d 107 (1997) (citing Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 322, 112 S.Ct. 1344, 117 L.Ed.2d 581 (1992) (citing Community for Creative Non-Violence v. Reid, 490 U.S. 730, 739-40, 109 S.Ct. 2166, 104 L.Ed.2d 811 (1989))).

. See also, e.g., La. Civ. Code Ann. art. 2046 (West 1987) (stating that "when the words of a contract are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties' intent”); Heinhuis v. Venture Assoc., 959 F.2d 551, 553 (5th Cir.1992) (holding that a "court applying Louisiana law should interpret a policy according to its plain meaning and not distort its meaning to introduce an ambiguity”).

. It may be that Your Credit filed, and Voyager paid, claims not within the scope of the coverage. That, however, is not properly the subject of this suit under the TILA. If bogus claims were filed and paid, Voyager and not Edwards may sue to enforce the terms of the policy.