Underwriters National Assurance Company v. North Carolina Life & Accident & Health Insurance Guaranty Assn – Oral Argument – November 09, 1981

Media for Underwriters National Assurance Company v. North Carolina Life & Accident & Health Insurance Guaranty Assn

Audio Transcription for Opinion Announcement – March 24, 1982 in Underwriters National Assurance Company v. North Carolina Life & Accident & Health Insurance Guaranty Assn


Warren E. Burger:

We will hear arguments first this morning in Number 80-1496, Underwriters National Assurance Company against the North Carolina Life and Accident Association.

I think we will wait just a moment, counsel, for our friends to go and sign the register.


You may proceed whenever you are ready.

Theodore R. Boehm:

Mr. Chief Justice, and may it please the Court, this case raises the question whether the Indiana judgments relating to the rehabilitation of UNAC, as the insurance company involved in this case is colloquially called, are entitled to full faith and credit in North Carolina as a result of the procedures that were implemented.

There are two judgments of the Indiana Court that UNAC submits are entitled to full faith and credit, and preclude relitigation of the issues that the Respondents seek to raise.

The history of this proceeding started in 1974, when the Indiana Department of Insurance, pursuant to a statutory mandate to take over the operations of a failing insurance company organized under Indiana law, did just that.

As a result, pursuant to the Indiana statute, the Indiana Insurance Commissioner, as rehabilitator, became in possession of the business and assets of UNAC.

That is the statutory language.

Subsequent to that time, a notice was sent out by the Court.

The first notice that went out in 1975 was a Rule 23(B)(3) notice with which this Court is fully familiar, because Indiana trial procedure is exactly the same as federal trial procedure in this respect, and just about exactly at the same time that the Indiana Commissioner took over UNAC, UNAC was sued in two class actions, one in state court in Illinois and one in federal court in Virginia.

The state court in Illinois case was removed to federal court in Illinois, and each case was then stayed pursuant initially to an injunction issued by the Indiana court and then ultimately by agreement.

The class plaintiffs in those two lawsuits then intervened in the Indiana proceeding, and those class plaintiffs were ultimately certified as class plaintiffs on behalf of all policyholders.

The claims they were asserting were essentially that UNAC had defrauded the policyholders into entering into the policyholder relationship.

So, the first thing that went out was a Rule 23(B)(3) notice with respect to those claims.

It also explicitly told the policyholders that whether or not you opt out of the class pursuant to Rule 23(B)(3), you may ultimately be bound by a plan of rehabilitation in your capacity as a policyholder.

We don’t know at this time whether there will be a plan of rehabilitation, but if there is one, you are in court in Indiana in your policyholder capacity, irrespective of whether you want these plaintiffs to represent you in prosecuting these fraud claims.

So, there are two jurisdictional hooks, if you will, operating on this situation.

No North Carolina policyholder opted out.

As a result, all of the North Carolina policyholders were in court in Indiana, both as class plaintiffs and as policyholders.

If one had opted out, would we have a different situation?

Theodore R. Boehm:

Well, we would have a different situation with respect to one issue, but not as to the fundamental issue that UNAC relies on, which is that qua policyholders, the policyholders are bound by the plan of rehabilitation, which is entitled to full faith and credit in all states once entered as a judicial decree.

There is a second, if you will, fall-back position that UNAC has that they are also bound as non-opting out plaintiffs by a settlement of their class claims as well, but that raises another whole complex of issues as to the nature of a multi-state Rule 23(B)(3) claim, and how the plaintiffs relate to the state of jurisdiction.

There are cases that hold, and they are cited in our brief… the Kansas Supreme Court Shutts case is the leading one, that holds that a plaintiff who is a member of a class is in court and can be bound even though he is not a resident of the state and has no other jurisdictional connection with the state, but that issue is only reached in this case if you should hold, which we submit would be incorrect, that UNAC’s plan of rehabilitation cannot bind the policyholders as such.

Mr. Boehm, in one of the two Indiana actions, some of the North Carolina parties’ action intervened, did they not?

Theodore R. Boehm:

Yes, sir.

At that point in my narrative, that happened.

The North Carolina Guaranty Association intervened at the point after the class was certified, and after the time for opting out had expired, but before any plan of rehabilitation had been implemented.

The North Carolina Guaranty Association, as you know, is here in its capacity as assignee of the policyholders’ claims by operation of the North Carolina statutory framework, which makes them liable to make good on the policyholders but also gives them whatever rights it gives the company.

Mr. Boehm, is that the group that has an appeal pending in the Indiana courts?

Theodore R. Boehm:


From which of the judgments, the rehabilitation–

Theodore R. Boehm:

The second.

–The second?

Theodore R. Boehm:

The second.

And that is the basic one, is it?

Theodore R. Boehm:

That is really the supplemental.


Theodore R. Boehm:

Yes, sir.

What is the status of that appeal now?

Theodore R. Boehm:

It is pending.

Oral argument was held a few months ago, and the court took it under submission and indicated that it would stay proceedings pending a resolution of this Court’s proceeding.

Until this Court decides.

Theodore R. Boehm:

They are waiting for you, is what it boils down to.

But there was never any appeal from the 1976–

Theodore R. Boehm:

That is correct, and that is the key point, or key point.

That 1976 judgment that implemented the plan of rehabilitation is binding, and the time for appeal has run, and it is entitled to full faith and credit.

Now, when the North Carolina Guaranty Association, subsequent to the plan’s implementation, and subsequent to its becoming a binding final judgment, instituted a lawsuit in North Carolina.

At that point, UNAC went back into court under the continuing jurisdiction provisions of the rehabilitation decree and said essentially, court, what do we do?

We have been sued in North Carolina, we think we shouldn’t be continuing to honor the service agreement that we’ve got with the Guaranty Association, if they are claiming they are entitled to something beyond what they get under the rehabilitation plan.

The Indiana court then held another hearing at which the North Carolina Guaranty Association appeared and argued and was heard and presented its arguments.

Essentially, the issue presented by that hearing was, is the first judgment conclusive, and the Indiana court said, yes, I decided this once before, and I am deciding it again, and I had jurisdiction then and I have it now, and that is the end of the matter.

Now, that is what is on appeal, that second order.

–Mr. Boehm, did that occur after the proceeding in North Carolina?

Theodore R. Boehm:

It occurred before any judgment was entered in North Carolina.

It was after the complaint was filed and before any judgment or summary judgment motion was entered.

So which takes precedence–

Theodore R. Boehm:

The Indiana court.

–on the litigation of the jurisdictional question?

Theodore R. Boehm:

The Indiana court clearly under settled rules of res judicata.

Theodore R. Boehm:

The first judgment wins, I think, under settled rules of both Indiana and federal procedure.

Is it your position that the question of subject matter jurisdiction was fully litigated in the Indiana court?

Theodore R. Boehm:

Yes, although I am frank to say, Justice O’Connor, I don’t know what subject matter jurisdiction means in this context.

Subject matter jurisdiction in the federal context means, is there a federal question, is there diversity.

In the state context, we had a court here of general jurisdiction in Indiana, and it had jurisdiction to adjudicate any dispute, any dispute that is cognizable by an Indiana court, and this is one of them.

The only question is, did it have personal jurisdiction, we submit, over the parties, and it clearly did as to the North Carolina Guaranty Association.

Mr. Boehm, does the Indiana statutory scheme provide for judicial review of the administrative proceedings leading to rehabilitation?

Theodore R. Boehm:

Oh, yes.

Indeed, it is a judicial decree, Your Honor.

All the–


The ultimate rehabilitation decree is a judicial decree.

Theodore R. Boehm:

–Yes, sir, it is a judgment of a court of general jurisdiction.

Indeed, all the administrative proceeding is, it is not an administrative proceeding at all.

The administrator is a party to the proceeding, and he proposes a plan of rehabilitation.

You then send out a notice to everybody in the world who might be affected by it, which included, by the way, the state insurance commissioners of all 50 states as well as policyholders, creditors, agents, all manner of people.

You then hold a hearing at which everybody–

Including the custodian of this North Carolina fund?

Theodore R. Boehm:

–Well, it is argued that the Commissioner of Insurance is the custodian.

Now, apparently under Indiana… under North Carolina law the deposit is made with the Insurance Commissioner, who then registers it in the name of the treasurer, but it is the Insurance Commissioner who receives the deposit and to whom UNAC gave it.

Now, if he turned around and holds it in street name, if you will, that is his business, is our view.

It is the Insurance Commissioner who is the arm of the state of North Carolina that is involved here, and he was given notice.

Is this not in effect a streamlined statutory receivership, much like an old-fashioned receivership?

Theodore R. Boehm:

Yes, sir, that is exactly what it is, I think, in common sense terms.

It merely is tailored to fit the particular industry here.

Theodore R. Boehm:

That is right, and the reason, of course, that you have a statutory proceeding is that the bankruptcy laws don’t apply to insurance.

Otherwise, you really wouldn’t need this… this relatively unusual state law creature.

Did the Insurance Commissioner of North Carolina take any part in the Indiana case?

Theodore R. Boehm:


You said he did receive notice.

Theodore R. Boehm:


And I think you said the treasurer of North Carolina, in whose name the bonds were registered, took no part either.

Theodore R. Boehm:

That’s correct.

And both of those officers are parties to this case.

Theodore R. Boehm:

That’s correct.

They are parties defendant, by the way.

The plaintiffs sued them along with UNAC for whatever interest they may have.

They then filed a cross claim that in effect asked for no relief.

It is our view that they are nominal parties at best.

Well, Mr. Boehm, I gather, of course, the Indiana court took the position that this fund, whatever you want to call it, the deposit was before it.

Theodore R. Boehm:

Not exactly, sir.


Justice Brennan, what was before it was the beneficial interest of UNAC in the fund.

In other words, this… the Indiana courts did not adjudicate the trust, if you want to use the parlance of the North Carolina parties, was invalid.

It adjudicated, to use the trust analogy, that the beneficiaries had assigned their interest to UNAC in exchange for ongoing insurance.

And is that the holding of the Indiana rehabilitation court?

Theodore R. Boehm:

I think that is a fair characterization of it in those terms.

How did it say the deposit or the interest in the deposit got before it?

Theodore R. Boehm:

It said that all parties before it are before… the policyholders are before it, and that whatever claims they have against any asset of UNAC, which includes UNAC’s beneficial interest in the trust, are hereby compromised and dismissed.

Was that resisted?

Was that issue contested in the Indiana court?

Theodore R. Boehm:


Of course, as you said, the North Carolina authorities never appeared.

Theodore R. Boehm:

Well, the policyholders appeared and the North Carolina Guaranty Association appeared, and the Commissioner–

But neither resisted the–

Theodore R. Boehm:

–That’s correct.

–the insistence that the equitable interest belonged–

Theodore R. Boehm:

There was no argument about that deposit or any deposit in any other state.

The only issue about deposits that caused problems were those outside the United States, where there was a real question, and the plan explicitly dealt with the problem that we don’t have a full faith and credit clause that binds–

–Well, didn’t the policyholders appear only through the association?

I mean, no policyholders were there in person.

Theodore R. Boehm:

–Oh, roughly 40 policyholders were there in person.

Through their attorneys?

Theodore R. Boehm:

But none of them were North Carolina… yes.

Well, but no North Carolina policyholder was there–

Theodore R. Boehm:

That’s correct.

–except to the extent that they had assigned their claims by operation of law to the association.

Theodore R. Boehm:

Well, they were there in the metaphysical sense, Justice White.

Well, only through the association.

Theodore R. Boehm:

No, they were there… if nobody had ever intervened in this proceeding, the policyholders–

I know, that is your fall-back position.

Theodore R. Boehm:

–No, no, that is not our fall-back position, if I may respectfully–

Well, you say you were there only because they were parties to a class action.

Theodore R. Boehm:

–No, that’s the fall-back position.

They are also there because they are policyholders of the company, and if no policyholder had intervened, we still could have had a valid rehabilitation, simply by sending them notice.

Well, you ought to be glad you don’t have to argue that.

Theodore R. Boehm:


Because you certainly can argue that they were there through the association.

Theodore R. Boehm:

–Oh, yes, we have that position, which is a good position and a winning position.

But if that had not happened–

You only need to win on one, don’t you?

Theodore R. Boehm:


We’re got three, really.

Does that position depend on North Carolina law?

Theodore R. Boehm:


No, it depends on Indiana law.

Indiana decides as to who has possession of that money in North Carolina?

Theodore R. Boehm:

No, sir.

Indiana decides–

Well, that is what I am talking about.

Theodore R. Boehm:

–Indiana does not decide that it had that pot, nor did Indiana decide that if the North Carolina policyholder had wished to assert a claim against that pot in North Carolina it couldn’t have done so.

They could have done so.

A North Carolina claim either in North Carolina–

I just don’t see how Indiana courts got jurisdiction over the money in North Carolina.

Theodore R. Boehm:

–They didn’t.

They got jurisdiction over the claim of UNAC to that–

Well, how can they get… is that a North Carolina claim?

Theodore R. Boehm:

–Well, it’s in Indiana, where UNAC is, just like all of the assets are.

In fact–

Is that determined by North Carolina law?

Theodore R. Boehm:

–No, it is determined by Indiana law.

Well, how can Indiana law apply to North Carolina?

Theodore R. Boehm:

It doesn’t, except in the sense that–

Isn’t that what you are trying to do?

Theodore R. Boehm:

–Well, no.

All we are saying is that every policy–

Well, suppose when this case is over and you win, and North Carolina says, come and get it.

Theodore R. Boehm:

–We are… it is on deposit in North Carolina.

If we default–

How could you get it?

Theodore R. Boehm:

–We can’t.

I mean, it is on deposit pursuant to this arrangement–

Well, what am I talking about then if the money is not involved?

Theodore R. Boehm:

–Well, the money continues to remain in North Carolina in–

Is the money what is involved in this case?

Theodore R. Boehm:

–Well, I guess it is fair to say we are all here because–

If not, where do we get jurisdiction?

Theodore R. Boehm:

–I beg your pardon, sir?

If not, where do we get jurisdiction?

Theodore R. Boehm:

Where does this Court get jurisdiction?

Theodore R. Boehm:

Or where does Indiana court?

I am not sure I understand the question, sir.

If money is not what is involved, how does this Court get jurisdiction?

Theodore R. Boehm:

Well, the dispute to the rights to the money are involved.

What North Carolina is saying is that it can liquidate that sum and pay it over to the Guaranty Association.

And you say it isn’t in dispute as to money and money.

Theodore R. Boehm:

Yes, and we are saying they can’t do that–


All right.

Theodore R. Boehm:

–because the Indiana court adjudicated all that and it is res judicata.

May I ask, Mr. Boehm, I gather… or is it your position that because you had those… or Indiana courts, rather, had the Guaranty Association before it, it had that jurisdiction.

Even if it had no jurisdiction over the fund itself, nevertheless the Indiana court may enforce its order requiring that the fund be part of the assets.

Is that it?

Theodore R. Boehm:

Yes, sir.

That is a position.

That is actually another fall-back position.

The basic position is that a rehabilitation works even if nobody appears in Indiana court, that all you need to do to adjust the rights of the Indiana policyholders and all policyholders in the United States is send them a notice and say, here is our plan of reorganization, just like a bankruptcy court does, and to the extent that you are a policyholder of this company, unless you appear and object, your rights are going to be adjusted by this plan, and if you can’t do that, you can’t rehabilitate an insurance company.

Do you think you have some old receivership cases that said that the receivership court could adjudicate the claims to assets outside the state if no one who has… who had any claim to those assets appeared in the receivership court?

That is what you are essentially saying.

Theodore R. Boehm:

Well, I–

That this rehabilitation proceeding could adjudicate claims to property in North Carolina even though the people who also had claims to that property never appeared in the receivership proceeding?

That seems to be your basic position.

Theodore R. Boehm:

–I am not sure.

And yet… I don’t know.

Must you win on this ground?

Theodore R. Boehm:


No, we can win on the ground that Justice Brennan articulated, and that–

Well, then you can win on the ground that the policyholders are there through the association.

Theodore R. Boehm:


That only works for North Carolina.

And that they… and that they had a chance to litigate everything they wanted to.

Theodore R. Boehm:

That’s correct.

On behalf of the shareholder.

Theodore R. Boehm:

That’s correct.

That would determine this case as to the North Carolina policyholders.

But even if the policyholders weren’t there, doesn’t the full faith and credit clause, assuming that there was jurisdiction in the Indiana courts, require North Carolina to recognize the Indiana decree?

Theodore R. Boehm:


Well, yes, that is if it is bound by the jurisdictional holding, but who is bound by a jurisdictional determination if he hasn’t had a chance to litigate it?

Theodore R. Boehm:

Well, Your Honor–

And who litigated it in Indiana?

Theodore R. Boehm:

–The North Carolina Guaranty Association did, the second time.


Theodore R. Boehm:

The first time–

There is it, and there are the shareholders, the policyholders, and they are there litigating jurisdiction, or at least they had a chance to.

Theodore R. Boehm:

–I don’t disagree for a moment that that is dispositive of this case, but there is another, more fundamental point.

If the question of jurisdiction had never come up in the Indiana court and the policyholders weren’t there, they had never had a chance to litigate it except from way back in North Carolina, just the recitation of having jurisdiction would be–

Theodore R. Boehm:

No, but the policyholders–

–Would it, or not?

Theodore R. Boehm:


It has to be litigated.

Theodore R. Boehm:

–I don’t accept the premise that the policyholders weren’t there.

The policyholders–

No, I said assume they weren’t there through the Association.

Theodore R. Boehm:

–All right.

I am saying they were there–

I know that.

I want you to assume that they were not there.

Theodore R. Boehm:

–No, but I am saying, they were there other than through the Association.

They were there at least to the extent of their claims against UNAC.

There is an in rem jurisdiction–

But not with respect to their claims against property in North Carolina.

Theodore R. Boehm:

–Well, they assigned those claims.

That was what the deal was.

They took on–

Well, I don’t think you can have it both ways.

Either they were there through the Association or they weren’t.

Theodore R. Boehm:

–Well, they were there through the Association; they were also there in their capacity as class plaintiffs and in their capacity as policyholders.

In other words, they were there in three capacities, in our submission.

Well, you certainly have a simple claim at the front end of your–

Theodore R. Boehm:

Oh, I agree.

–It may be right or wrong, but I don’t know why we have to try to settle all of your problems that you have all around the United States.

What would be the situation if this were in a bankruptcy framework, traditional bankruptcy?

Theodore R. Boehm:

There would be no question that a nationwide notice to all creditors everywhere would bind everyone, I think.

That would be, of course, as a matter of federal law.

Now, I am not a bankruptcy expert, but I am quite confident that is correct, that a reorganization under the bankruptcy laws works nationwide.

Mr. Boehm, let’s assume for the moment that there was a creditor in North Carolina, your insurance company, and that that creditor had, let’s say had a mortgage on North Carolina property or he had a North Carolina judgment that gave him a lien on North Carolina property.

Is it your position that the Indiana court, without the presence of either the rece or the creditor could have wiped it out or adjusted it, taken the property away and given him a general claim?

Just by sending him notice and say, show up or else?

Theodore R. Boehm:

I think ultimately that would be our position, yes, that that is what it means to say that the Indiana statute has… that the Indiana commissioner assumes title to whatever beneficial interest the company has.

Do you think an old-fashioned receiver could do that?

Theodore R. Boehm:

No, I think that the Indiana statute gives the insurance rehabilitator, because of the unique nature of insurance, that power.

In that sense, the receivership analogy breaks down, I think.


That is where it… the Indiana law can take away the rights of the North Carolina policyholders.

Theodore R. Boehm:

Well, that is just the–

You see, that is my problem.

Theodore R. Boehm:

–That is the deal the policyholder makes when he contracts with an Indiana insurance company.

He shouldn’t buy insurance in an out of state company if he doesn’t want to take that risk.

Is that your position?

Theodore R. Boehm:

That is exactly what it amounts to.

Theodore R. Boehm:

And indeed, consider what the situation is if that is not the law, if we can’t bind all creditors everywhere.

How do you rehabilitate an insurance company.

Yes, but why does your company want to sell in North Carolina if it doesn’t accept the North Carolina law requiring it to make deposits?

Theodore R. Boehm:

Oh, it does.

It does.

And if a North Carolina policyholder had said, I don’t want my rights under the rehabilitation plan, I want my rights under the deposit, he gets them, plain and simple.

The problem is, that didn’t happen in regard to–

How did he say that?

Theodore R. Boehm:

–We sent him an elaborate plan, 40 pages long, that says in six places–

And you take his assent from silence?

Theodore R. Boehm:

–Well, that’s correct.


Theodore R. Boehm:

That’s correct.

That’s like in default, if you don’t answer a complaint in a lawsuit, you–

Theodore R. Boehm:


–you assent to whatever default judgment may be entered, do you not.

Theodore R. Boehm:

That’s right, and you assent to that proceeding by entering into a contract with the Indiana company.

That isn’t so in an ordinary contract suit, if the defendant happens to be out of state.

Theodore R. Boehm:

Of course it is not, but you don’t have a statute that says, in the event your insurance company becomes insolvent, the Insurance Commissioner in his state of domicile is going to take him over and may adjust your rights vis-a-vis him.

Mr. Boehm, do you make anything of McCarren-Ferguson in respect of the authority of the Indiana Insurance Commissioner?

Theodore R. Boehm:

The only point we make of McCarren-Ferguson is that it evidences a Congressional policy to support state regulatory schemes, and to that extent it supports the notion that the Indiana Commissioner can do exactly–

That still doesn’t eliminate the full faith and credit federal constitutional question we have here.

Theodore R. Boehm:

–It does not, I don’t believe, although it could be viewed as a Congressional policy in part implementing the delegation of Congress to legislate under full faith and credit to support these state schemes, and indeed, what the Indiana Commissioner did here is what every rehabilitator does in every multi-state rehabilitation, and there is no alternative.

If they cannot adjust all these things, where are we?

How do–

There is no federal tribunal.

Theodore R. Boehm:

–There is no federal tribunal, and there is only one state that seeks to do this.

This is completely unlike the Delaware Stott sequestration situation, where the jurisdiction that is asserted is different from the claim that is being adjusted.

Here, the only jurisdiction that is being asserted is over the very claim that is in dispute.

Mr. Boehm, could you help me with a simple factual question here?

Would you tell me what happens to the $100,000 bond in North Carolina if you win and what happens if you lose?

Theodore R. Boehm:

If we win–

In terms of what happens to policyholders and to your opponent.

Theodore R. Boehm:

–If we win, it stays there.

I understand the bond stays there, but what happens to… how much difference does it make in terms of dollars to policyholders?

What is happening to the policyholders?

There are only about a dozen of them, I think.

Theodore R. Boehm:

The policyholders have no interest in this litigation.

The policyholders have assigned their claims to the North Carolina Guaranty Association.

All right, so that if your opponent is… it is the Guaranty Association that gets the benefit of your defeat, if at all.

Theodore R. Boehm:


Now, just exactly what does it get?

Does that help it pay premiums, or help it pay claims?

Theodore R. Boehm:

It just gets the money, and it puts it in its general asset, and it is that much richer, so that it can… I mean, it is going to pay the claims whether or not it gets the money from us.

It is solvent.

It is an association of insurers with over 600 members, all the big insurance companies that do business in North Carolina.

And it does business in states other than North Carolina?

Theodore R. Boehm:


It does not?

Theodore R. Boehm:

There is a separate one created under the statute of every state that has one.

The oddity here is, the Guaranty Associations are a relatively recent national phenomenon.

But am I correct in believing that the policy… the 17 or 18 policyholders in North Carolina have no interest in the outcome of this litigation?

Theodore R. Boehm:

They have absolutely none.

They have assigned whatever claim they have against UNAC or any of its assets to the Guaranty Association, and in exchange–

And what additional burden has the Indiana rehabilitation proceeding put on the Guaranty Association?

What obligation do they have that they did not otherwise have?

Theodore R. Boehm:

–They have to make up the difference between what the policyholders will get under the restructured policy and what they had under the original policy as written.

In other words, essentially what caused the rehabilitation to take place was, the company was writing Cadillac policies at Volkswagen prices.

The Guaranty Association has to now deliver that Cadillac, and gets the Volkswagen income, if that is–

They are basically a reinsurer.

Theodore R. Boehm:

–It puts them in that posture, yes.

Mr. Boehm, before the Guaranty Fund was created, the policyholders would have had a very serious interest in the outcome of this case, wouldn’t they?

Theodore R. Boehm:


Well, assuming they… yes, and they could have then elected to assert a claim against the deposit.

Now, there is one point that needs to be made.

They have no practical need… I mean, this is a little deposit.

It is a $100,000 face bond.

It may be $50,000.

One judgment that the Indiana Commissioner had to make was, does it make any sense at all to have little mini-liquidations going around all over the nation over essentially immaterial amounts of money?

The legal profession would be the only beneficiary of that doctrine.

No policyholder would end up better over a squabble over how to handle that $50,000.

I mean, that is the practicality of this thing.

And only because we’ve got a solvent entity that can pursue this claim do we find ourselves in Court here today, that has an interest that it seeks to assert.

May I save the rest of my time?

Mr. Boehm, is the position on the North Carolina officials in this litigation different from anyone else?

Theodore R. Boehm:

Well, I think… yes.

They have no interest, first.

Second, they were given the same notice anybody else has, and by the way, the North Carolina Uniform Insurance Liquidation Act expressly gives the Commissioner the election to seek to foreclose the deposit in that state if it wants to, if he determines… if he determines that it makes economic sense to do so.

He didn’t do that.

The plan went through, became a binding judgment, and now, after the fact, the Guaranty Association, having litigated this twice, wants to relitigate.

Well, Mr. Boehm, the treasurer did not receive notice.

Is that correct?

Theodore R. Boehm:

Yes, he… of the second provision, but not the first.

And in any event–

Theodore R. Boehm:

But he is the custodian.

–it is your position that his interest is not such that he requires notice?

Theodore R. Boehm:

That’s right.

That is, the state–

Theodore R. Boehm:

The state of North Carolina’s arm that is in charge of this situation is the Insurance Commissioner, not the treasurer.

He is just a registered holder.

Theodore R. Boehm:

He has no interest in the thing other than doing what the Commissioner tells him to do.

May I save the rest of my time for rebuttal?

Warren E. Burger:

Mr. Patterson?

William S. Patterson:

Mr. Chief Justice, and may it please the Court, as a condition to its doing business in North Carolina, UNAC agreed to transfer title to securities to a trust located in North Carolina, and subject to North Carolina trustees.

UNAC agreed that the sole purpose of this trustee, of this trust would be for the protection of North Carolina policyholders in the event that UNAC should default on any of its obligations, whether by reason of insolvency or otherwise.

UNAC subsequently became insolvent.

The final order of rehabilitation in the Indiana court allowed UNAC to substantially diminish its policy obligations owed to policyholders in return for UNAC being allowed to continue to do business.

During the entire pendency of the rehabilitation proceeding, there was not one single notice to the policyholders of the existence of this deposit or their special statutory rights in the deposit.

UNAC… or the rehabilitation proceeding in Indiana was conducted as if the deposit did not exist.

No one, least of all the policyholders, had any idea that UNAC was… or that the rehabilitation proceeding was attempting to assert jurisdiction over this deposit.

Mr. Patterson, your client knew about it, didn’t it?

William S. Patterson:

Our client was aware of the deposit, Justice Stevens, but it had absolutely no reason to believe that UNAC was attempting to assert jurisdiction over it.

This was–

Didn’t they schedule it as an asset in their balance sheet, whatever it was?

William S. Patterson:

–The deposit was scheduled, and I think this is discussed at some length in the briefs, because of this discrepancy, the deposit was listed in the balance sheet of the convention blanks that UNAC filed with the North Carolina Department of Insurance and with the other Departments of Insurance.

However, the deposit in that convention blank was listed as a general asset of the insolvent insurer, which is patently incorrect.

I don’t think UNAC would object to that description of the listing as being… as being just as incorrect as it could possibly be.

If one were to look at this convention blank, the only assumption that he could draw is that this was a general asset of the insolvent insurer, which is just not the truth.

It was a… not only was it not a general asset, it was an asset to which UNAC did not even hold title.

It had been transferred to a trust.

The terms of the trust are the terms of the Uniform Insurance Liquidation Act in North Carolina.

They quite explicitly say that in the event that there is a default, the deposit will be used for the benefit of the North Carolina policyholders.

Mr. Patterson, is it your position that the proposed final plan for rehabilitation and the first final judgment did not in any way indicate to the North Carolina Guaranty Association that UNAC was assuming and the Indiana court was assuming that it had control in effect over that deposit?

William S. Patterson:

That is correct, Justice O’Connor, and it is consistent with… with the many cases at the state court level that have been decided with regard to deposits.

Indeed, there are two cases in North Carolina, one a federal court case interpreting North Carolina law, and the second a very recent North Carolina Supreme Court case that specifically says that these deposits are a trust, and they are not an asset of the insolvent insurer, and they are not subject to the jurisdiction of the domiciliary insolvency proceeding.

So, consistent with North Carolina law, the Guaranty Association certainly had no basis on which to conclude that UNAC was going to assert jurisdiction in this deposit.

But North Carolina can’t determine for itself, can it, whether or not Indiana has jurisdiction over a particular rece or a particular set of facts, or a particular case?

That remains for the Fourteenth Amendment and the International Shoe and that type of case?

William S. Patterson:

That’s correct, Justice Rehnquist.

It can’t determine for itself, but I think under Durfee v. Duke, it is certainly entitled to determine whether jurisdiction was fully and fairly considered in the proceeding in the other state, which is exactly what happened in the subsequent North Carolina proceeding.

William S. Patterson:

The court looked at the Indiana proceeding.

There was absolutely no mention of the deposit.

There was no notice to the policyholders of either the deposit or the statutory rights in it.

The court looked to the entire record and saw absolutely no mention of this deposit within the insolvency proceeding.

Indeed, the closest mention of any… of the interplay of an insolvency proceeding with this sort of deposit occurs in the brief that UNAC’s current counsel submitted to the rehabilitation court in support of rehabilitation.

In that brief, counsel quotes from Couch on Insurance, a very well recognized treatise that acknowledges… a passage that acknowledges that a rehabilitation proceeding does not have priority over… or does not have control over assets in another jurisdiction when there are special statutes in that jurisdiction pertaining to this asset.

But isn’t at least the second Indiana judgment, remaining unreversed as it is, an official act or entry subject to the full faith and credit clause even though it may not be final in Indiana?

William S. Patterson:

Well, Justice Rehnquist, that proposition is a little bit hard to swallow if you look at it from the North Carolina side.

North Carolina first challenges the jurisdiction of Indiana to determine the right of the proceeding.

The Guaranty Association initiated a proceeding in North Carolina saying that the Indiana proceeding lacked jurisdiction over the deposit.

Under, I think the cases that this Court has handed down dealing with collateral attack, it is fairly obvious that a court can come up with the wrong conclusion as to jurisdiction, but if it appears that jurisdiction was fully and fairly considered, it can’t be attacked.

All right.

Now, what we have here is a situation where the Court didn’t come up with any conclusion, didn’t fully and fairly consider jurisdiction as to the deposit at all in its first proceeding.

Then, when it is about… when a proceeding is filed in another state, starting a collateral attack as to jurisdiction, and one, I think, that UNAC could truly lose, UNAC initiates another proceeding in Indiana and says, all right, we missed… we neglected to fully and fairly consider jurisdiction in the original proceeding, but we will fully and fairly consider it now, and that will relate back to the rehabilitation proceeding.

In other words, the–

Isn’t the assumption that a judicial decree of any state or federal court presumptively had jurisdiction, and it is up to the person attacking it to show that it did not have jurisdiction?

William S. Patterson:

–That is correct, and I think that is exactly what happened in North Carolina when the rehabilitation proceeding was collaterally attacked in North Carolina.

It was very clear that the Indiana proceedings seemed to have swept this asset in by mistake, as much as anything.

It was just totally unaware of the nature of the asset, of the fact that it was subject to statutes in North Carolina.

What UNAC seems to be arguing is almost… could best be termed jurisdiction by mistake rather than jurisdiction by necessity or anything else.

We just think jurisdiction would not lie in this situation, and the North Carolina court is free to conclude that, after looking at the record and determining whether jurisdiction had been fully and fairly considered.

Well, I gather, Mr. Patterson, that is that the nature of this trust was such that that deposit could never be an asset of UNAC in the rehabilitation proceeding unless what?

William S. Patterson:

Justice Brennan, I don’t think it could be an asset in the proceeding in any event.

I think North Carolina–

It is just not property of UNAC at all?

William S. Patterson:


UNAC had–

Well, is that really fair?

Supposing all the policyholders… there are only 17 policyholders in North Carolina?

Supposing they all accepted a liquidation of their claims.

They had a choice of either to keep the policies in effect at a different basis or liquidate.

Isn’t that right?

William S. Patterson:

–That’s right.

Supposing they liquidated, and the total cost of liquidation were less than the face value of this bond.

Is it not true that the remainder of the bond would have reverted to the general assets of the company?

William S. Patterson:

Ultimately, but I think we have a situation there where all of the–

Assume they cease doing business.

William S. Patterson:


They are at best a contingent beneficiary of this trust.

To the extent that they honor their policy obligations, then their contingent interest in the trust would be activated, and title would revert to the Indiana company.

Well, don’t you agree that the Association was the assignee of the policyholders’ interests?

William S. Patterson:


Under North Carolina law?

William S. Patterson:

–Yes, Justice Rehnquist.

And don’t you agree that the Association did appear in the Indiana proceeding?

William S. Patterson:

There is no doubt about that.

And didn’t the plan that it either agreed to or was subject to there, didn’t it define the extent of its interests?

William S. Patterson:

Of the Guaranty Association’s interest?


William S. Patterson:

Yes, it–

And didn’t the Guaranty Association accept that?

William S. Patterson:


And that was the extent of it?

William S. Patterson:

That’s correct.

So any policyholder’s interest in this fund, the Association had.

William S. Patterson:

That’s correct.

And they accepted something else in exchange for it.

William S. Patterson:

The policyholders accepted something else?

No, the policyholders are out, aren’t they?

William S. Patterson:


William S. Patterson:

Well, the policyholders have been made whole by the Guaranty Association.

Exactly, so we can just forget about them.

Their only interest, if they have any, is in the association.

William S. Patterson:

That’s correct.

And the Association accepted a plan which defined fully the extent of its interests.

William S. Patterson:

Yes, but if you will look at the definition of the Guaranty Association’s interest in that plan, the definition of the Guaranty Association’s interest is that it has the… it has the same rights that the policyholders that it made whole would have.

So, by virtue of subrogation, it stands on–

Well, I know, but they… suppose it had been just as express as it could possibly be in the plan that not only… they would put a footnote, and you also, Mr. Association, release any claim you have to the fund in North Carolina.

Suppose the plan had just said that, in just plain black and white, and they accepted it.

Do you think the association would be permitted under those circumstances nevertheless to say, we still own the fund in North Carolina?

William S. Patterson:

–I think it would be inequitable to do so, but probably–

I am talking about the law.

And in those circumstances, in those circumstances it is claimed that the judgment of the Indiana Court is entitled to full faith and credit, because the Association certainly had a chance to say, we have a claim to this fund, but they didn’t say that.

William S. Patterson:

–I think the first–

They gave up any claim they had.

They accepted the plan in full satisfaction of any claim they had, didn’t they?

William S. Patterson:

–Well, the first issue that would have to be answered is whether the Indiana court had any right to adjudicate rights at all in this deposit.

Well, I think that gets back to what you answered me earlier, doesn’t it, Mr. Patterson, that this fund simply never can be and never was under any circumstances part of the assets of UNAC.

William S. Patterson:

It is not an asset of UNAC–

It never was, I think, is your position.

William S. Patterson:

–The Guaranty Association’s position is that no matter what the Indiana rehabilitation proceedings said about this asset, it simply lacked jurisdiction to deal with the asset.

Even though the people who own the claims to the fund, who were the beneficiaries of the fund, the policyholders, had given their interest to the Association, you say the Association was powerless to surrender its interest in the fund in Indiana litigation?

That sounds strange.

William S. Patterson:

I don’t think the Indiana court had any jurisdiction to require it to do anything with the deposit.

The deposit was clearly a North Carolina asset.

What if the Association had employed a driver to drive an automobile to St. Louis to attend an insurance convention, and drove through Indiana, and was involved in an accident, and Indiana sought to exert long arm jurisdiction over the Association.

Would you say that the assets of the fund were not available to satisfy any judgment if a long arm jurisdiction were proffered–

William S. Patterson:

Any judgment against Indiana?

–Any judgment against the North Carolina Association.

William S. Patterson:

I am afraid I don’t understand the question, Justice Rehnquist.

Well, you are saying somehow that this fund can never be reached, no matter what the North Carolina Association does, and I am suggesting to you that if the North Carolina Association engages in perhaps ventures that it may not be empowered to do under state law, of those ventures have an effect in another state, and the other state can get jurisdiction over the Association by a long arm statute, the fund may be an asset which can be used to satisfy a judgment rendered in those proceedings.

William S. Patterson:

Against the Guaranty Association?


William S. Patterson:

Would this be based on an assumption that the Guaranty Association had become a… been assigned some sort of beneficial interest in the trust?

Well, perhaps I am laboring under a misapprehension, Just what is this trust?

William S. Patterson:

Well, the trust is for the sole benefit and protection of North Carolina policyholders.

The Guaranty Association has absolutely no right to this trust until there has been a default by some insurance company, UNAC here.

At that point, the Guaranty Association would pay the policyholders of UNAC the amount of the fault, and could then move against the deposit, which is where the policyholders would have gone absent the Guaranty Association.

The North Carolina statutory scheme is such that the policyholders really have two sources to make them whole.

First, they have the Guaranty Association, which is statutorily required to step in.

If the Guaranty Association weren’t there, they would still have this deposit that the policyholders could have gone to.

The statutory scheme intermeshes, and what happens is, if the Guaranty Association pays the policyholders off then and only then does the Guaranty Association become subrogated to the policyholders’ rights in such a way that it can move against the deposit.

Would you say that in effect North Carolina is a law unto itself regardless of the full faith and credit clause with respect to this particular matter?

William S. Patterson:

I think again the full faith… the application of the full faith and credit clause has to do… gets back to jurisdiction.

If the Indiana court lacked jurisdiction to adjudicate rights in the deposit, which North Carolina says it does, then yes, the full faith and credit clause is not applicable.

I think the initial question, though, should be, how did Indiana get around applying the full faith and credit clause as to the North Carolina statute, which specified the policyholder rights in this deposit?

Well, if the North Carolina… if the Indiana court did purport to do that, and did it wrongly, wasn’t the North Carolina Association’s remedy by appeal through the Indiana courts rather than collateral attack?

William S. Patterson:

I think it would have been had Indiana or had the rehabilitator given anyone even the slightest hint that it purported to be dealing with this deposit.

Until… It was over a year after the rehabilitation proceeding closed that UNAC first contended that rights in the deposit were cut off by this rehabilitation proceeding.

Mr. Patterson–

–What is the issue–

–Excuse me.

Go ahead.

What is the issue before the Indiana Supreme Court on the Guaranty Association’s appeal?

William S. Patterson:

The issues there are basically the same as they are here.

The question is, did–

They are arguing you had absolutely no jurisdiction over this particular deposit, just as you are arguing here.

William S. Patterson:

–That’s correct.

Mr. Patterson, let me ask you a question about how the fund may be used.

As I understand it, the rehabilitation proceeding has modified the rights of the policyholders so that, to take an example, a claim for a $1,000 injury before the rehabilitation proceeding might now only be worth $700.

All right.

Now, if such a claim is made arising out of an incident that occurs after the plan had been approved, would it be your view that the policyholder just has the $700 entitlement, in my hypothetical example?

And doesn’t that in turn mean that the likelihood that the fund may be exhausted has changed because the obligations that it might have to satisfy have been reduced?

So, inevitably, has not the possibility that that fund will be used in certain ways have been changed by what happened in Indiana?

William S. Patterson:

I think it could be in some insolvency… there could be a rehabilitation proceeding that would reduce rights in that way.

Well, they did… in this case, I thought everyone agreed that the rights of the North Carolina policyholders are less than they were before, which in turn means that their right to recover from the fund is different.

In the event that… say your client is bankrupt.

Now they would get from the state the $100,000 on deposit in North Carolina, they would only get $700 instead of $1,000.

William S. Patterson:

That’s correct.

So that isn’t it inevitably true–

–But they get that from the Association.

William S. Patterson:

But at the same time, the Association has a continuing obligation to make the policyholders whole.

And as long as the Association can do it, there will be no need to resort to the bond.

William S. Patterson:

Well, that’s correct, but the Association–

So the bond is only important to the policyholders in the event that the reinsurer is also insolvent.

William S. Patterson:

–Well, the Guaranty Association is not a reinsurer, and I don’t think it should be analogized to one.

The Guaranty Association is a statutory organization–

Well, only in the event that it can’t perform its statutory duty, then.

William S. Patterson:


Then you would need to resort to the bond, and you would have a lesser claim against the bond because the policyholders there have received… have a different bargain than they had before the Indiana proceeding went forward.

You don’t challenge the power of the Indiana court to modify the kind of claim the policyholder can make against that bond.

William S. Patterson:


I think it is well settled that a rehabilitation proceeding in one jurisdiction can alter contractual policy rights and rights against the general assets of an insurer, and in such a way that it will affect policyholders in other jurisdictions.

That is well settled.

But what is not at all settled is how deposits fit into this scheme.

Deposits have been… and there is a great deal of state law, and there is a very interesting quote from this Court as to the status of deposits, and as to the fact that it is a special asset, and not subject to reach by anyone but the persons for whose benefit the deposit was made.

This Court, in Blake v. McClung, at 172 257, and this is quoted, I believe, at Page 59… Page 29–

That was decided while Poll and Virginia was still law?

William S. Patterson:


Decided while Poll and Virginia was still law?

William S. Patterson:

Yes, I suppose it would have been.

It would have been 1898, I believe.

I think the theory behind this has certainly been carried through into certainly more recent decisions.

This Court stated,

“Insurance funds set apart in advance for the benefit of hung policyholders of a foreign insurance company doing business in the state on a trust fund of a specific kind to be administered for the exclusive benefit of certain persons, policyholders in other states know that those particular funds are segregated from the mass of property owned by the company, and that they cannot look to them to the prejudice of those for whose special benefit they were deposited. “

That is exactly the theory and status that North Carolina has afforded to these deposits, that it is a trust fund, that it is no longer owned by the insolvent.

North Carolina has gathered jurisdiction into itself to deal with this deposit.

It is part of a statutory scheme.

Their interest… the state interest, of course, is to regulate foreign insurers and protect North Carolina policyholders who are doing business against foreign insurers.

Mr. Patterson, is it your position that the Indiana court could not at any time litigate the question of the subject matter jurisdiction insofar as the deposit is concerned?

William S. Patterson:

That’s correct, Justice O’Connor.

The Indiana court in your view could not even deal with the question in its courts of jurisdiction.

Is that your position?

William S. Patterson:

That’s correct, Justice O’Connor, since it wasn’t an asset of the insolvent insurer, it wasn’t an asset before the rehabilitation court.

Even though you would concede that the Indiana court had general jurisdiction over the rehabilitation proceeding and over all of the policyholders for whose benefit the North Carolina fund was held?

William S. Patterson:

That’s correct.

A lot has been said here about the general jurisdictional proposition that a rehabilitation court in one state can adjudicate rights of individuals residing in another state even though those individuals are not necessarily before the court.

I don’t think the parties disagree with that at all.

Would you agree that the Indiana court in the second proceeding did at least attempt to litigate this very question?

William S. Patterson:

I think it attempted to litigate it.

I think it fell short of the mark.

And did that judgment become entered before the North Carolina judgment was entered?

William S. Patterson:

It did become entered before… it was entered before the North Carolina judgment.

The question again would be, can the Indiana rehabilitation court go back and redo its prior mistake and relate that back to the insolvency proceeding.

Secondly, in attempting to do so, did it fully and fairly consider jurisdiction the second time?

We think not.

I think if–

But you are saying even if it tried to, it couldn’t ever.

William S. Patterson:

–That’s correct.

Is that right?

William S. Patterson:

That’s correct.

How can a rehabilitation proceeding in these complicated insurance matters ever do the job if the court asserting jurisdiction can’t deal with these questions of the deposits?

William S. Patterson:

Well, we… I think the appropriate move here would have been to have initiated… if UNAC wanted to attempt to adjudicate these rights prior to its final order of rehabilitation, then an ancillary proceeding in North Carolina would have been appropriate.

This would not have been a burden on UNAC, who did business in, I believe, 40 some states.

All right, and there were other states with similar special fund deposits.


William S. Patterson:

Only four, Justice O’Connor.

And they did not make similar claims such as North Carolin?

William S. Patterson:

Again, they are, were then and probably are to this day completely unaware that UNAC has asserted that its order cut off rights in this… in the deposit made in their state–

I think in addition to the question of subject matter jurisdiction, for lack of a better term, there are certainly other jurisdictional claims here.

The notice issue, I think, is quite significant.

Could the Indiana rehabilitation proceeding assert jurisdiction over the… this would be in a situation in which it might otherwise have jurisdiction, would it have had jurisdiction because of its… would it have lost jurisdiction or failed to assert jurisdiction because of its failure to give any notice of the existence of these deposits to the policyholders–

Well, Mr. Patterson, you refer to subject matter jurisdiction of a trial court of general jurisdiction of a state.

Don’t they have subject matter jurisdiction of all matters that are brought before them, unless excluded by the law of the state in which they sit?

William S. Patterson:

–Well, Indiana law, I think, is fairly clear that to adjudicate rights in the trust, it must have either the trust assets or the trustee before it.

Here it had neither.

Well, supposing that the Indiana court made a wrong decision.

It still is entitled to full faith and credit unless it had no jurisdiction.

William S. Patterson:

Well, assuming it fully and fairly considered jurisdiction, I think that is correct.

The issue here would be… in a collateral procedure, I think the relevant inquiry is, was jurisdiction fully and fairly considered, not whether the Indiana court actually had jurisdiction.

Conceivably, Indiana could have fully and fairly considered jurisdiction and incorrectly asserted it, and North Carolina would have been foreclosed, but that is not what happened here.

There was no consideration of jurisdiction at all.

Mr. Patterson, may I ask you another factual question?

Who got the interest on this bond, the $100,000?

William S. Patterson:

The interest on the bond is currently being accumulated by the trustee.

What happened between 1973 and the beginning of the rehabilitation?

William S. Patterson:

At that point, the interest was being collected and paid over to UNAC.

However, it was… UNAC or the Department of Insurance had the right to stop these payments at any time, and did so.


And then after the rehabilitation proceeding started, what happened to the interest then?

Was it accumulated right away, or was it continued to be paid for a period?

William S. Patterson:

It was… I think it started being accumulated… well, within a few years–

Within a few years?

William S. Patterson:

–I think it was actually within few years by virtue of oversight.

It was just–

Well, what happened during the oversight period?

Where did it go then?

Did it go to the rehabilitation trustee?

William S. Patterson:


Mr. Patterson, did the Guaranty Association file a claim in the proceeding in Indiana, and if so, what did it claim?

Did it file a claim as a contingent creditor?

William S. Patterson:

It didn’t file a claim per se.

What happened is, the original draft of the plan of rehabilitation contemplated certain future recoveries by the rehabilitation court.

I think UNAC had several outstanding suits at that time, so there was a possibility of future recovery.

The rehabilitation proceeding did not… said that any of these future recoveries would go to the policyholder regardless of whether the Guaranty Association had taken their place.

The Guaranty Association came in and said, if we are going to make the policyholder whole, then any of these future benefits should flow back to the Guaranty Association.

That was its only claim in the… in the rehabilitation proceeding.

May I ask one other question about the interest?

What is your position as to the proper disposition of that interest today?

William S. Patterson:

Well, I think if the… the trustee would certainly be empowered to accumulate it for the benefit of the policyholders.

This would be particularly–

Not what he is empowered to do.

What is your position as to what he should do?

William S. Patterson:

–I think he should continue to accumulate the interest.

He should accumulate the interest indefinitely, even if there are no claims on the fund.

William S. Patterson:

If there were no claims, I don’t think there is that much justification for doing it, but–

But then who should get it, in your view?

William S. Patterson:

–Justice Stevens, if past practice of the department were followed, the interest would begin to be paid again to UNAC.

To the insurance company.

William S. Patterson:

In addition to being an income… or a contingent beneficiary, I suppose it would be fair to also characterize UNAC as a contingent income beneficiary as well as a contingent remaindermen in the trust.

William S. Patterson:

Thank you.

Warren E. Burger:

Mr. Boehm, do you have anything further?

Theodore R. Boehm:

We don’t accept the trust analogy.

It is a pledge.

The asset is UNAC’s, always is, always was, still is.

It is pledged to secure against the default, and in the event of default, and only then can the North Carolina Commissioner arrest the interest payments and do the other things that he is purporting to do here.

There is no default.

UNAC and the policyholders reached an agreement whereby UNAC would offer ongoing insurance and the policyholders accepted it.

Can’t North Carolina tell you to redeposit the $100,000 tomorrow?

Theodore R. Boehm:

Oh, we agree.

It is there.

It is in the deposit, and we can’t withdraw it unless we stop writing the insurance on North Carolina insureds, but it is there to secure a future default should we go in the tank again.

I don’t see what… it seems to me it is going to be there no matter who wins.

That is what puzzles me.

Theodore R. Boehm:

Well, they are seeking to liquidate.

The remedy they request is that it be paid over to the Guaranty Association.

And then you would have to make another deposit, if you wanted to write insurance in North Carolina.

Theodore R. Boehm:

That is correct, I suppose.


Theodore R. Boehm:

Although the basic–

That is what is really at stake, isn’t it?

Theodore R. Boehm:



I suppose that is correct.

We haven’t anticipated that point, but the logic of what you say seems correct, and we would have to make another deposit, although I expect we would as a practical matter stop writing insurance in that state.

Well, there was a time when some insurance companies declined to do business in certain states, notably Texas, for reasons of that kind.

Is that not so?

Theodore R. Boehm:

Oh, yes, and that is, again, the basic point of this case from our point of view is that this is an insurance case, and it is a regulated industry that has a state statutory framework that tells the state Commissioner in the state of domicile to do what the Indiana Commissioner did here, and purports to make it stick nationwide.

Mr. Boehm, I just didn’t really have a clear enough grasp of the facts here.

Is the reason they claim they are entitled to the $100,000 because there has been that much in defaults subsequent to this plan?

Theodore R. Boehm:

No, there is no claim that UNAC is in default of any post-rehabilitation obligation.

UNAC is honoring its policies as restructured today.

And so they are claiming it on account of default pre-rehabilitation–

Theodore R. Boehm:

Yes, yes.

–defaults, but I thought the policyholders had accepted the new plan, so I don’t understand what… what are the defaults on which they want this–

Theodore R. Boehm:

Your confusion is the same as ours, Your Honor.

We think it is as simple as day that the policyholders accepted the restructured policy, we are not in default, and the money is there in its pledged state, if you would, to secure future defaults.

–Mr. Boehm, I thought the funds were to be used to pay the increased premium charges that arose out of the rehabilitation.

Theodore R. Boehm:

That is going to be paid regardless of the disposition of this case.

As a matter of the North Carolina Guaranty Association’s statutory obligation to the policyholders, it has to make up the additional benefits to the policyholders in… UNAC… as between UNAC and the policyholders, the policies are written down.

Now, it is hard to explain this in a few words, because there is disability income insurance, and what in effect they did is change them from non-cancellable, which means you can’t raise the premium, to guaranteed renewable, which means we keep insuring these people.

We can’t terminate them.

And the premiums have gone up.

Theodore R. Boehm:

The premiums have gone up, and–

And isn’t the North Carolina Guaranty Association hoping to reach the deposit to repay itself–

Theodore R. Boehm:


–for the increased cost of the premiums?

Theodore R. Boehm:


Yes, it–

Isn’t that what we are talking about?

Theodore R. Boehm:

–Yes, as I understand it–

That is part of the–

–and the benefits have gone down.

There are two changes, basically.

And so it is a rather complicated actuarial proposition.

Mr. Boehm, don’t other states have laws similar to North Carolina’s–

Theodore R. Boehm:


–concerning these deposits?

Theodore R. Boehm:


Are they identical in fact?

Theodore R. Boehm:

I can’t represent that, but I believe–

Do most states have laws that are similar?

Theodore R. Boehm:

–Oh, I think so.

It is a question of administrative discretion whether they require a deposit before they will admit a company, but I think most states have a procedure for getting a deposit from a company that they regard as suspect.

And in many cases you end up with the situation we have here, where the amount of the deposit is really miniscule, not enough to warrant the very proceeding that your question focuses on.

Consider what would have happened if every policyholder were perfectly delighted with the plan of rehabilitation and nobody wanted to litigate or anything.

Nonetheless, the Respondent’s view would force a mini-liquidation or rehabilitation in eight states where there was nobody who was upset about it, because there would be no way to make the thing a binding adjudication in one form even though nobody was upset about anything.

Has the North Carolina court yet held that if you lose in this proceeding, that your opponent is entitled to use the bond to reimburse itself for the increased premium?

Theodore R. Boehm:

Yes, I think that is what the trial court held.

Yes, and you think the appellate court approved of that?

Theodore R. Boehm:

I think so.

I find the appellate court opinion a little opaque.

Well, frankly, I didn’t get that out of the appellate court opinion.

That is one reason–

Theodore R. Boehm:

Well, I may be prejudiced… I mean, my view of the appellate court opinion may be colored by what went on in the trial court that I am aware of.

That is what the trial court ordered, and–

–Well, was that order affirmed by the appellate court?

Theodore R. Boehm:

–I think so.

The word “affirmed” ends up at the end of the opinion.

Well, that is usually what it means, then, doesn’t it?

Theodore R. Boehm:

I am trying to parse the logic of that opinion.

We often say around here it is judgments we review not opinions.

Theodore R. Boehm:

Yes, sir.

Warren E. Burger:

Thank you, gentlemen.

The case is submitted.