Court Opinion

ID: 8978711
Source: CourtListenerOpinion
Date Created: 2022-11-27 11:09:52.160668+00
Date Added: 2024-06-11T17:10:36.777395
License: Public Domain

JOHN R. BROWN, Senior Circuit
Judge, concurring in part and dissenting in part.
I concur in the opinion of the court with respect to the holding that the district court for the District of North Dakota (Conmy, J.) should have abstained under Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971). See also, Alleghany Corp. v. McCartney, 896 F.2d 1138 (8th Cir.1990) (Decided simultaneously with this case). I also agree with the court that “the district court opinion in this case, which was published, is infected with serious error.” Alleghany Corp. v. Pomeroy, See p. 1319. (8th Cir.1990).
I dissent from the court’s failure to address and determine the merits of the commerce clause claim and “to make it abundantly clear that our actions not only deprive that opinion of any precedential value, but also foreclose claims that it has persuasive weight.” Id. at 1319.

The Framework

The Commerce Clause provides that “Congress shall have Power ... To regulate Commerce ... among the several States.” U.S. Const. Art. I, § 8, cl. 3. It acts as an implied limit on the power of the States to burden interstate commerce (the “dormant” Commerce Clause), although Congress may authorize the states to do so and any action taken within the scope of that authority is invulnerable to Commerce Clause challenge. Western & Southern Life Ins. Co. v. State Board of Equalization of California, 451 U.S. 648, 653, 101 S.Ct. 2070, 2075, 68 L.Ed.2d 514, 520 (1981); see also Northeast Bancorp, Inc. v. Board of Governors, 472 U.S. 159, 174, 105 S.Ct. 2545, 2553, 86 L.Ed.2d 112, 125 (1985).
Historically, insurance was not considered “commerce” for Commerce Clause purposes. See Paul v. Virginia, 8 Wall. 168, 19 L.Ed. 357, 361 (1869). However, that all came to an almost calamitous end in United States v. South-Eastern Underwriters’ Assoc., 322 U.S. 533, 553, 64 S.Ct. 1162, 1173, 88 L.Ed. 1440, 1457 (1944). The Supreme Court held that insurance was subject to the Commerce Clause. Congress acted quickly in response to this case by passing the McCarran-Ferguson Act, 15 U.S.C. §§ 1011, 1012 (West 1976). It provides, in relevant part:
[§ 1]1 Declaration of Policy. Congress declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States.
[§ 2] (a) The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.
(b) No 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, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance....
In effect, the Act protects state regulation and taxation of the “business of insurance” from Commerce Clause attack.
The Constitutional question to be answered here is whether North Dakota Cen*1321tury Code § 26.1-10-03(1)2 (hereafter the North Dakota statute), regulating transactions among owners of stock in insurance companies violates the Commerce Clause.

The Wrong Approach

The trial court held that the North Dakota statute did not regulate the “business of insurance” as that phrase is used in the McCarran-Ferguson Act. It looked first to Securities & Exchange Commission v. National Securities, Inc., 393 U.S. 453, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969), and concluded that the statute regulated insurance companies rather than the “business of insurance.” The trial court also applied the three-factor analysis set forth in Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129, 102 S.Ct. 3002, 3009, 73 L.Ed.2d 647, 656 (1982), to determine whether the North Dakota statute regulates the “business of insurance” and held that it did not.
Having thus found that the North Dakota statute was not invulnerable to Commerce Clause attack, the trial court had to determine whether the statute violated the Commerce Clause. Pike v. Bruce Church, Inc., 397 U.S. 137, 142, 90 S.Ct. 844, 847, 25 L.Ed.2d 174, 178 (1970), held that the Commerce Clause will permit incidental regulations of interstate commerce as long as the burden is not excessive in relation to the local interests served. The trial court looked to Edgar v. MITE Corp., 457 U.S. 624, 102 S.Ct. 2629, 73 L.Ed.2d 269 (1982)3, and determined that this was a direct regulation of interstate commerce, rather than an incidental one, and thus prohibited.
I disagree with the trial court’s conclusions.

Regulating the “Business of Insurance”

In reaching its conclusion that the North Dakota statute violated the Commerce Clause, the trial court relied heavily on Securities & Exchange Commission v. National Securities, Inc., 393 U.S. 453, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969), where the Court had stated:
The statute [McCarran-Ferguson] did not purport to make the States supreme in regulating all activities of insurance companies; its language refers not to the persons or companies who are subject to state regulation, but to laws “regulating the business of insurance.” Insurance companies may do many things which are subject to paramount federal regulation; only when they are engaged in the “business of insurance” does the statute apply.
393 U.S. at 459-60, 89 S.Ct. at 569, 21 L.Ed.2d at 676 (emphasis in original).
*1322On this authority, the trial court drew a distinction between the “business of insurance,” which is protected from Commerce Clause attack by the MeCarran-Ferguson Act, and the “business of insurance companies ” which is not. It held that the North Dakota statute regulated the “business of insurance companies.”
In its discussion of the National Securities case, the district court did not go far enough. The paragraph it quoted in part goes on to address more particularly the question at issue.
Certainly the fixing of rates is part of this business [of insurance]; that is what South-Eastern Underwriters was all about. The selling and advertising of policies, ... and the licensing of companies and their agents, ... are also within the scope of the statute. Congress was concerned with the type of state regulation that centers around the contract of insurance.... The relationship between insurer and insured, its reliability, interpretation, and enforcement — these were the core of the “business of insurance.” Undoubtedly, other activities of insurance companies relate so closely to their status as reliable insurers that they too must be placed in the same class. But whatever the exact scope of the statutory term, it is clear where the focus was — it was on the relationship between the insurance company and the policyholder. Statutes aimed at protecting or regulating this relationship, directly or indirectly, are laws regulating the “business of insurance.”
National Securities, 393 U.S. at 459-60, 89 S.Ct. at 568-69, 21 L.Ed.2d at 676 (citations omitted). Had the trial court used this more expansive version of the National Securities test, it would have been compelled to find that the North Dakota statute does regulate the business of insurance.
National Securities itself points to this result. The state’s approval of the merger at issue in that case had been given pursuant to two Arizona statutes. The first gave the Arizona Insurance Commissioner the power to determine whether the merger was “equitable to shareholders” of an insurer; the second was part of the Commissioner’s general licensing authority and required him to determine that the merger would not “substantially reduce the security of and service to be rendered to policyholders.” 393 U.S. at 462, 89 S.Ct. at 569, 21 L.Ed.2d at 677. The first statute was held not to relate to the business of insurance because it focused on the insurance company/shareholder relationship. 393 U.S. at 460, 89 S.Ct. at 568, 21 L.Ed.2d at 676. The second was found to clearly relate to the “business of insurance.” 393 U.S. at 462, 89 S.Ct. at 569, 21 L.Ed.2d at 677.
The North Dakota statute is analogous to the second Arizona statute in National Securities. It is the equivalent of a licensing statute. The purposes underlying the statute were recognized by Judge Van Sickle of the United States District Court in North Dakota.
In the nature of this business, insurance companies tend to be liquid and thus ripe for exploitation to the potential injury of the insureds. The existence of multiple holding companies, as here, can insulate ultimate management from identification and exposure to the insureds who might be victimized by mismanagement. In fact, the Insurance Holding Company Systems Act addresses itself to this very problem.
Walden v. Wigen, No. A1-83-117, Slip op. at 6-7 (D.N.D. July 29, 1983). The same sentiment was expressed by Magistrate Groh in his Report and Recommendation on the Wisconsin Commissioner’s motion to dismiss.
Insurance companies receive large sums of money from the public in exchange for the companies’ promise to fulfill the insurance contract when the risk insured against occurs.... It seems elementary that the regulatory authorities will wish to assure themselves that the stewards of those funds are not only trustworthy but are also informed and prudent managers.
Alleghany v. Haase, No. 88-C-368-C, Magistrate’s Report at 39 (W.D.Wisc. Dec. 12, *13231988). Finally, North Dakota Insurance Commissioner Pomeroy’s affidavit, adequate for summary judgment purposes, stated that the North Dakota statute serves as a “necessary adjunct to” the licensing regulations.
Without the North Dakota statute, those provisions of the North Dakota statutes which govern the initial issuance of a certificate of authority would be fatally undermined because control of a domestic insurer could be transferred without meaningful regulatory oversight to dishonest or unqualified parties — the very sort of persons against whom the certificate of authority provisions are designed to initially protect policyholders.
Pomeroy Affidavit at 5 (Aug. 31, 1988).
The North Dakota statute is clearly designed primarily to protect policyholders; its effect on the insurance company/shareholder relationship is secondary. This statute authorizes the Commissioner to (1) determine whether the financial condition of a potential acquirer will “prejudice the interests of its policyholders,” § 26.1-10-03(4)(c); (2) analyze the plans and proposals of such acquirer to determine if they are “unfair and unreasonable to policyholders,” § 26.1-10-03(4)(e); and (3) scrutinize the “competence, experience and integrity” of the acquirer to determine if the acquisition will be “in the interest of policyholders.” § 26.1-10-03(4)(f). Thus Commissioner Pomeroy’s disapproval of Al-leghany’s application was based primarily on its potential harm to St. Paul’s policyholders, many of whom will be residents, citizens of North Dakota, corporate assureds, and in all likelihood, the state fisc, which would likely have to bear the burden of the insurance company’s insolvency.
Because the North Dakota statute is so closely analogous to a licensing statute, I am confident it falls within the National Securities description of regulations which do relate to the “business of insurance.” But even outside the analogy, the North Dakota statute is clearly among those “other activities of insurance companies [which] relate so closely to their status as reliable insurers that they must be placed in the same class”4 with other regulations of the “business of insurance.”
The trial court also applied the three-factor analysis set forth in Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 102 5.Ct. 3002, 73 L.Ed.2d 647 (1982) to determine whether the North Dakota statute regulates the “business of insurance” and held that it did not.
Pireno looks at the following characteristics to determine whether an activity is the “business of insurance” within the meaning of the McCarran-Ferguson Act:5 “first, whether the practice has the effect of transferring or spreading a policyholder’s risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance industry.” Pireno, 458 U.S. at 129, 102 S.Ct. at 3009, 73 L.Ed.2d at 656.
The first factor is met because the North Dakota statute, like a licensing statute, does have the effect of transferring or spreading risk by determining who is capable of assuming policyholders’ risks.6 The focus of the second factor is the “relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation, and enforcement.” Pire-*1324no, 458 U.S. at 128, 102 S.Ct. at 3008, 73 L.Ed.2d at 655.7 The North Dakota statute satisfies this criteria because its principal purpose is to ensure that the insurer is capable of fulfilling its obligations to its policyholders. Finally, the third factor is met because the North Dakota statute applies only to acquisitions of control of North Dakota insurance companies or their parents.
Thus, under both the National Securities and Pireno tests, the North Dakota statute is one which regulates the “business of insurance.”

A Broader Perspective

Even if the North Dakota statute did not regulate “the business of insurance,” it would be exempt from Commerce Clause attack. Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 99 S.Ct. 1067, 59 L.Ed.2d 261 (1979), addressed the question of what constitutes the “business of insurance” under the McCarran-Fergu-son Act. The specific issue in that case was the scope of the antitrust exemption contained in § 2(b) of the Act. However, to reach its result, the Court analyzed and distinguished the meaning of the phrase “the business of insurance” under the two sections of the Act.
The primary concern of Congress ... was in enacting legislation that would ensure that the States would continue to have the ability to tax and regulate the business of insurance. This concern is reflected in §§ 1 and 2(a) of the Act.... [Congress’] secondary concern was the applicability of the antitrust laws to the insurance industry.
There is no question that the primary purpose of the McCarran-Ferguson Act was to preserve state regulation of the activities of insurance companies.... The McCarran-Ferguson Act operates to assure that the States are free to regulate insurance companies without fear of Commerce Clause attack.
The repeated insistence in the dissenting opinion that the McCarran-Ferguson Act should be read as protecting the right of the States to regulate what they traditionally regulated is thus entirely correct — and entirely irrelevant to the issue now before the Court.... For the question here is not whether the McCar-ran-Ferguson Act made state regulation of these Pharmacy Agreements exempt from attack under the Commerce Clause. It is the quite different question whether the Pharmacy Agreements are exempt from the antitrust laws.
In short, the McCarran-Ferguson Act freed the States to continue to regulate and tax the business of insurance companies, in spite of the Commerce Clause. It did not, however, exempt the business of insurance companies from the antitrust laws. It exempted only “the business of insurance.”
440 U.S. at 217-18 and 218-19 n. 18, 99 S.Ct. at 1076-77 and 1077 n. 18, 59 L.Ed.2d at 272 and 272-73 n. 18 (emphasis added in part).
This view that regulation of the insurance industry is exempt from Commerce Clause attack has been supported by even more recent Supreme Court pronouncements.
Congress removed all Commerce Clause limitations on the authority of the States to regulate and tax the business of insurance when it passed the McCarran-Fer-guson Act_ The unequivocal language of the Act suggests no exceptions.
Western & Southern Life Ins. Co. v. State Board of Equalization, 451 U.S. 648, 653, 101 S.Ct. 2070, 2075, 68 L.Ed.2d 514, 520-21 (1981); see also Western & Southern, 451 U.S. at 655, 101 S.Ct. at 2076, 68 L.Ed.2d at 522 (“[T]he McCarran-Ferguson Act ‘left the matter of regulation ... of insurance companies to the states.’ ”) (citation omitted); Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869, 880, 105 S.Ct. 1676, 1683, 84 L.Ed.2d 751, 761 (1985) (“[T]he McCarran-Ferguson Act exempts the in*1325surance industry from Commerce Clause restrictions_”).
Based on these cases, I hold — and regret that my distinguished colleagues are hesitant to join me, not because they differ, but because they feel reluctant to address the problem in view of our unanimous conclusion that the trial judge ought to have abstained — that the North Dakota statute was exempt from Commerce Clause attack as a state regulation of the insurance industry.

Williams Act Pre-emption

In addition to its Commerce Clause claims, Alleghany asserts that the North Dakota statute is pre-empted by § 13(d) of the Williams Act, 15 U.S.C. § 78m(d)(l).8
In deciding a pre-emption question,
[Ajppellees must overcome the presumption against finding pre-emption of state law in areas traditionally regulated by the States_ When Congress legislates in a field traditionally occupied by the States, “we start with the assumption that the historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress.”
California v. ARC America Corp., 490 U.S. -, -, 109 S.Ct. 1661, 1665, 104 L.Ed.2d 86, 94 (1989) (citations omitted). Alleghany fails to meet this burden because (i) the North Dakota statute is protected from pre-emption by the McCarran-Ferguson Act, and (ii) § 13(d) of the Williams Act does not clearly “manifest [a] purpose” to supersede the traditional power of the states to regulate insurance.
The McCarran-Ferguson Act provides, in § 2(b), that acts of Congress are not to be construed as impairing or superseding state laws regulating insurance unless the “Act specifically relates to the business of insurance.” Section 13(d) of the Williams Act does not.
The Williams Act was amended in 1970 to cover equity securities issued by insurance companies along with all of the other securities it covers. As Congress has since acknowledged,
nothing contained in the Williams Act or the rules and regulations thereunder invalidates, impairs, or supersedes current state insurance holding company laws— including notice, hearing and precom-mencement approval provisions — which provide, for the protection of policyholders, a comprehensive scheme of state regulation over the acquisition of control of the insurance companies. These laws are protected from Federal preemption by the McCarran-Ferguson Act.9
Section 13(d) does not “specifically relate” to the business of insurance merely because it refers to it. The amendment which added this reference was made to cover transactions in insurance company securities which had previously been exempted from Williams Act coverage. The Williams Act primarily deals with securities transactions. It does not “specifically relate to” the business of insurance within the meaning of the McCarran-Ferguson Act merely because it covers transactions in the securities of insurance companies.
Even if the North Dakota statute was not protected by the McCarran-Ferguson Act against pre-emption by the Williams Act, there would still be no Williams Act pre-emption. This is a situation where both the North Dakota statute and the Williams Act may be complied with simultaneously *1326(as Alleghany has proved by doing so). It is only where compliance with both the state and the Federal law is impossible or where the state law stands as an obstacle to compliance with the objectives of Congress that pre-emption occurs. CTS v. Dynamics Corp. of America, 481 U.S. 69, 78-79, 107 S.Ct. 1637, 1647, 95 L.Ed.2d 67, 78 (1987). The North Dakota statute does not prevent disclosure of the ownership of 5% or more of the equity securities in an insurance company and does not require any disclosure prior to the time the Williams Act does. In fact, the North Dakota statute does not come into play at all until the acquirer wishes to obtain more than 10%.
Furthermore, the Williams Act does not address the substantive concerns covered by traditional state regulation of insurance. In its role of protecting shareholders in takeover and tender offer situations, the Williams Act does not in any way seek to protect insurance policyholders in the way the North Dakota statute does. A finding of pre-emption would thus result in a lack of any statutory protection of policyholders’ interests.
In sum, I am positive the North Dakota statute is protected from pre-emption by the Williams Act by operation of the McCarran-Ferguson Act. However, even if it was not, there would be no pre-emption because the statute and the Act are compatible and overlap only in limited respects.

Wrap Up

Thus, I concur in the court’s opinion that the trial court should have abstained.
I dissent with vigor from the failure of the Court to address the decisive questions which would put an end to this case, at least in North Dakota. The attack by Alle-ghany was directed and pungent: McCar-ran-Ferguson could not save the day from Commerce Clause attack. The trial judge followed this erroneous path. The issue was the primary subject of the briefs and almost the whole of an extended oral argument by counsel of excellent advocacy. The result was wrong. The result was directly attacked on the appeal.
Now the Court, for conscientiously held, but still erroneous views, declines to decide.
I must respectfully dissent.

. The bracketed section numbers indicate the McCarran-Ferguson Act section designations. They are included here for ease of reference. The United States Code, Title 15, numbers these sections 1011 and 1012, respectively.

. 26.1-10-03. Acquisition of control of or merger with domestic company — Filing requirements — Hearings—Exceptions—Violations— Jurisdiction — Consent to Service of Process.
1. A person other than the issuer may not make a tender offer for or a request or invitation for tenders of, or enter into any agreement to exchange securities for, seek to acquire, or acquire, in the open market or otherwise, any voting security of a domestic insurance company if, after consummation, the person would, directly or indirectly, or by conversion or by exercise of any right to acquire, be in control of the company, and a person may not enter into an agreement to merge with or otherwise to acquire control of a domestic insurance company, unless, at the time the offer, request, or invitation is made or the agreement is entered into, or prior to the acquisition of the securities if no offer or agreement is involved, the person has filed with the commissioner and has sent to the company, and the company has sent to its shareholders, a statement containing the information required by this section and the offer, request, invitation, agreement, or acquisition has been approved by the commissioner in the manner hereinafter prescribed. For purposes of this section, a domestic insurance company includes any other person in control of a domestic insurance company unless the other person is either directly or through its affiliates primarily engaged in business other than the business of insurance.

. The MITE Court held that:
"[A] state statute which by its necessary operation directly interferes with or burdens [interstate] commerce is a prohibited regulation and invalid, regardless of the purpose with which it was enacted." ... The Commerce Clause also precludes the application of a state statute to commerce that takes place wholly outside of the State's borders, whether or not the commerce has effects within the State.... ”[A]ny attempt ‘directly’ to assert extraterritorial jurisdiction over persons or property would offend sister States and exceed the inherent limits of the State’s power.”
457 U.S. at 642-43, 102 S.Ct. at 2641, 73 L.Ed.2d at 283 (citations omitted).

. National Securities, 393 U.S. at 460, 89 S.Ct. at 568, 21 L.Ed.2d at 676.

. Pireno arose as an antitrust action and examined the question of what constitutes "the business of insurance” under § 2(b) of the McCar-ran-Ferguson Act. As an exemption from the antitrust laws, this section of the statute is construed narrowly. 458 U.S. at 126, 102 S.Ct. at 3007, 73 L.Ed.2d at 654. Although the cause of action I deal with arises under the Commerce Clause and thus implicates a different section of the Act, I need not address the broader scope which the phrase "the business of insurance” might have under § 2(a) of the Act. I find that the North Dakota statute regulates the "business of insurance” even under Pireno's restrictive test.

. In fact, Commissioner Pomeroy specifically found that the proposed "acquisition was not in the best interest of the public nor in the interest of the policyholders.” Alleghany v. Pomeroy, 700 F.Supp. 460 (D.N.D.1988).

. Quoting, Group Life & Health Insurance v. Royal Drug Co., 440 U.S. 205, 215-16, 99 S.Ct. 1067, 1075, 59 L.Ed.2d 261, 671 (1979), quoting, in turn, SEC v. National Securities, Inc., 393 U.S. 453, 460, 89 S.Ct. 564, 568, 21 L.Ed.2d 668, 676 (1969).

. 15 U.S.C. § 78m(d)(l) (West 1981) provides, in pertinent part:
Any person who, after acquiring directly or indirectly the beneficial ownership of any equity security of a class which is registered pursuant to section 78/ of this title, or any equity security of an insurance company which would have been required to be so registered except for the exemption contained in section 78/(g)(2)(G) ... is directly or indirectly the beneficial owner of more than 5 per centum of such class shall, within 10 days after such acquisition, send to the issuer of the security ... and file with the Commissioner, a statement containing such of the following information, and such additional information, as the Commission may by rules and regulations, prescribe as necessary or appropriate in the public interest or for the protection of investors — _

. Reports of the Senate Committee on Banking, Housing and Urban Affairs on the Tender Offer Disclosure and Fairness Act of 1987, S.Rep. No. 100-265, 100th Cong., 1st Sess. 53 (1987). .