United States Department of Treasury v. Fabe

PETITIONER:United States Department Of Treasury et al.
RESPONDENT:Fabe
LOCATION:North Carolina General Assembly

DOCKET NO.: 91-1513
DECIDED BY: Rehnquist Court (1991-1993)
LOWER COURT: United States Court of Appeals for the Sixth Circuit

CITATION: 508 US 491 (1993)
ARGUED: Dec 08, 1992
DECIDED: Jun 11, 1993

ADVOCATES:
James R. Rishel – on behalf of the Respondent
Robert A. Long, Jr. – on behalf of the Petitioners

Facts of the case

Question

Audio Transcription for Oral Argument – December 08, 1992 in United States Department of Treasury v. Fabe

William H. Rehnquist:

We’ll hear argument next in number 91-1513, United States Department of Treasury v. George Fabe.

Mr. Long, you may proceed.

Robert A. Long, Jr.:

Thank you, Mr. Chief Justice, and may it please the Court:

For more than 200 years, Congress has determined the priority of Federal claims against insolvent debtors.

The Federal priority statute, section 3713 of title 31, provides that claims of the United States in nonbankruptcy proceedings shall be paid first.

This Court has repeatedly held that only the plainest inconsistency would warrant our finding an implied exception to the operation of so clear a command.

The question in this case is whether the McCarran-Ferguson Act created an exception to the clear command of section 3713.

In our view, it did not, and our argument has three basic points.

First, the McCarran Act exemption applies to the business of insurance.

A State statute regulating the priority of claims against the estate of an insolvent insurance company does not regulate any business activity of insurance companies.

Consequently, it is not a regulation of the business of insurance within the ordinary meaning of those words.

Second, the State priority statute does not possess the three characteristics of the regulation of the business of insurance identified in this Court’s decisions.

It does not result in the transfer or spreading of risk.

It is not an integral part of the contractual relationship between insurer and insured, and it involves entities wholly outside the insurance industry.

Well, may I ask, Mr. Long why the statute doesn’t perhaps meet the National Securities test since it is aimed at protecting directly or indirectly the relationship between the insurer and the insured to the extent that it covers the payout in the event of insolvency.

I mean, there… to that extent, it seems to perhaps meet the test.

Robert A. Long, Jr.:

Well, let me give a two-part answer to that question.

Well, maybe not the whole statute, but insofar as it protects the insured.

Robert A. Long, Jr.:

Well, first of all, I think the test that this Court has developed in cases since National Securities is a three-part test.

It’s considerably narrower than simply whether the State regulation has some effect on the risk that the policyholder will not be paid.

We think that test would be too broad if it were simply reduced back to that single factor.

The other part of the answer is, in fact, the priority statute has relatively little to do with whether a policyholder’s claim is paid.

Of course, it only comes into play in the event that the insurer becomes insolvent, and that’s likely to be viewed as a relatively unlikely event by a policyholder.

If it does happen, though, the real insurance against insolvency–

Well, it’s more likely these days, isn’t it?

It might be a real concern.

Robert A. Long, Jr.:

–It may be more likely these days, and if it is a real concern of a policyholder, the real insurance against insolvency is not the priority statute, it is insurance guaranty funds, which have been established by all 50 States to pay claims of policyholders in the event the insurance company becomes insolvent.

Well, that may be, but I still think to the extent that the statute tries to deal with this situation, that it may very well be covered by McCarran-Ferguson.

Robert A. Long, Jr.:

Well, to the extent that it does and that it meets the other factors that this Court has identified, it could be, but as I say, we don’t think that it is… has a… is sufficiently close to the contractual relationship.

It only applies in the event of insolvency.

Robert A. Long, Jr.:

Then the guaranty fund is what steps in to pay the claims.

And, you know, if the policyholder were required to rely on the priority statute, it would not provide a very good assurance because–

Well, it would provide something, wouldn’t it?

Robert A. Long, Jr.:

–Well, only if there are enough assets in the estate of the defunct insurer to pay policyholder claims after paying–

Which varies from reorganization or insolvency to insolvency–

Robert A. Long, Jr.:

–That’s correct.

–You can’t say categorically that the policyholders might not be helped by some sort of insolvency proceeding–

Robert A. Long, Jr.:

I cannot.

In the event that there is an insolvency and the guaranty fund does not cover a claim, if the assets of the insolvent insurance company were sufficient, it is true that a policyholder might recover a portion of his claim I would think in the typical case; in an unusual case, the entire claim.

But that possibility is not enough to bring the statute within the regulation of the business of insurance.

–Well–

–You said in your opening statement that you were going to show that this was not the business of insurance, as that term is ordinarily used.

I think if you take the term as ordinarily used, you would say this did regulate the business of insurance.

Robert A. Long, Jr.:

Well, we think it does not come within the ordinary meaning of the business of insurance because it doesn’t regulate any business activity of insurers.

There are, of course, State laws that are designed to regulate business.

Well, certainly insolvency may be the last step in the business.

Robert A. Long, Jr.:

Well, but at the point where this statute comes into play, the insurance company has been declared insolvent.

All of its assets have been taken over by a liquidator.

Its business has been wound up, and the question is who gets the assets.

There are different categories of claimants lined up, and–

But surely, how those assets are disposed of can very plausibly be argued to be a part of the business of insurance.

How do you liquidate an insurance company when it goes bust?

Robert A. Long, Jr.:

–Well, as I say, in our view because it’s not a regulation of the business activities of the insurers, it should not be held to be a regulation of the business of insurance, and we don’t think it meets the three-part test that this Court has identified, which is considerably more discriminating than simply a question of whether this statute may lead to the payment of a policyholder’s claim.

And even to the extent you focus on that single factor, we think that the priority statute is really not very good protection in most cases.

It’s not something a policyholder, when he enters into a policy of insurance, is likely to think about as an important protection.

There may be an analogy to if you deposit your money in the bank, you might think about the Federal Deposit Insurance.

That’s equivalent to the guaranty fund.

It’s unlikely you would think, well, the priority of claims in the event of insolvency is something that’s also important.

It’s simply too remote from the contract of insurance.

Well, insurance companies are rated for solvency and financial strength all the time, and that’s one of the first things a policyholder looks to.

Robert A. Long, Jr.:

Well–

And it seems to me that when a policyholder, especially a major policyholder, looks at an insurance company, he looks at the strength of its assets.

Robert A. Long, Jr.:

–I think that’s–

I think that’s the most… one of the most critical determinants in your choice of insurance companies, and your… you say that it’s irrelevant the moment the insurance company goes out of business.

Robert A. Long, Jr.:

–Well, of course, this statute applies if the State’s regulations that are designed to protect the solvency of insurance companies fail and the insurance company is not solvent, but then the protection is the guaranty fund.

That’s what insures that the claim is paid.

Let me discuss the three factors that this Court has identified as relevant to determining whether a statute regulates the business of insurance because the test is broader than simply whether the statute was enacted to protect policyholders or whether it may affect the likelihood of a claim being paid.

In the Variable Annuity Life Insurance case, the Court concluded that the concept of insurance must involve some investment risk taking on the part of the company.

In the National Securities case, the Court held that the Federal securities laws applied to a merger of insurance companies that had been approved by State insurance regulators.

It concluded that the McCarran Act did not make the States supreme in regulating all the activities of insurance companies and that State laws aimed at protecting the interests of shareholders are not laws regulating the business of insurance.

Then in the Royal Drug case, the Court held that agreements between an insurer and pharmacies to supply prescription drugs to policyholders were not part of the business of insurance.

And most recently in Union Labor Life Insurance against Pireno, the Court held that an insurer’s use of a peer review committee to determine whether policyholder claims are covered by the insurance contract is also not the business of insurance.

So, the Court has developed a three-factor test… and it’s a rather demanding test… to define the boundaries of the business of insurance.

The practice must have the effect of transferring or spreading risk from the policyholder to the insurance company.

It must be an integral part of the policy relationship, and it must be limited to entities in the insurance industry.

And the Ohio priority statute fails that demanding three-part test.

What part does it fail?

Robert A. Long, Jr.:

In our view it fails–

It makes two out of three anyway, doesn’t it?

Robert A. Long, Jr.:

–In our view it fails all three parts of the test.

The questions you’ve been asking go to whether it’s an integral part of the relationship between the policyholder and the insurance company.

We think it fails that part and clearly fails the other two parts as well.

I can briefly explain our reasoning.

We think it clearly does not involve any transfer of risk from the policyholder to the insurance company.

It just determines the order in which the–

Because Pireno is explicit on that, isn’t it?

Robert A. Long, Jr.:

–I think Pireno is explicit on that, yes.

It says that the risk is transferred at the time the contract is entered, and whether or not the claim is paid is not what the transfer of risk is all about.

And there’s also no risk spreading because that requires independent risks.

Here we’re talking about the risk of insolvency.

Robert A. Long, Jr.:

All the policyholders and, indeed, all the creditors of the insurance company face precisely the same risk.

So, let me turn to the second factor, which is the one that is troubling you, whether it’s an integral part of the relationship between the insurer and the insured.

Now, again, in Pireno, the Court defined that rather narrowly.

It noted first that it was distinct from the question whether the insurance contract is valid and the amount of the policyholder’s claim under the contract… and that’s true here as well.

It’s quite separate from that.

And the priority statute also doesn’t address the relationship between the insurer and the insured.

It really addresses the relationship among all the creditors of this insurance company that has become insolvent.

And of course, many of those creditors are not policyholders, and some of them come ahead of policyholders.

And as we were discussing earlier, we don’t believe that the Ohio statute so closely affects the reliability interpretation and enforcement of the contract as to satisfy this factor.

We concede that it has some effect on the reliability in the sense that it may in some cases determine whether a part of a policyholder claim, in a very unusual case the entire claim, is paid, but this Court’s decisions make clear that some effect is not enough.

Broadly viewed, any State regulation of insurance could be said to affect the reliability of the insurance contract.

Certainly in Pireno the peer review committee, which the very purpose of it was to decide whether claims were covered and should be paid.

You could argue… certainly could argue that that was rather close to the–

Would you be making the same argument if administrative expenses and wages weren’t also prior to the United States claim?

Robert A. Long, Jr.:

–Yes, we would be making the same argument.

We think the fact that–

But the policyholders would be much more benefited then I suppose.

Robert A. Long, Jr.:

–Yes, they would be in an even better position, but again we don’t think it meets the three-part test.

It’s not a regulation of the business of insurance, and the–

Well, I suppose the business of insurance includes living up to their contract to pay claims–

Robert A. Long, Jr.:

–Well–

–which the policy requires them to do if they’ve got the assets I suppose.

Robert A. Long, Jr.:

–We are not suggesting that that factor is not part of this Court’s analysis.

We’re suggesting, though, it is only a part and that it is not sufficient by itself to bring this State statute within the regulation of the business of insurance.

Well, I wonder what a policyholder would say about that, that it isn’t part of the–

Robert A. Long, Jr.:

Well, as I say–

–part of the business of insurance to pay what he has been remitting his premiums for.

Robert A. Long, Jr.:

–Well, I think a policyholder looks first to the soundness of the insurance company and if the insurance company fails to these guaranty funds.

The priority statute is really not something the policyholder is likely to think about or rely on and, indeed, he would be quite unwise to rely on it because it would rarely result in the payment of his claims.

And we also… let me mention briefly the third Pireno factor.

Robert A. Long, Jr.:

We think it’s clear that this is not limited to entities within the insurance industry.

It involves all types of claims, including claims of suppliers of goods and services–

But they are claims against the insurance company, aren’t they?

Robert A. Long, Jr.:

–Well, they’re all claims against the insurance company, but in Royal Drug, the contracts with the pharmacies were all claims involving insurance companies–

Well, but a lot of that language in the earlier cases is dicta.

I mean, you don’t… you didn’t need that to decide those cases.

Robert A. Long, Jr.:

–Well, it was a factor.

It was clearly a factor that the Court relied on in both Royal Drug and Pireno.

The Court was not clear about which factors were necessary to the decision of its case, but it was a part of its analysis.

It has become an established part of the test for the business of insurance.

It’s… it is one factor to consider.

Let me mention a third argument we have, which I haven’t gotten to yet, which in many ways I think is our strongest argument in this case.

We think the purpose and enactment history of the McCarran Act, which is something this Court has considered in its prior cases, strongly indicate that Congress did not allow… intend to allow the States to determine the priority of claims against the United… claims of the United States against insolvent insurance companies.

The Federal priority statute that’s at issue in this case is one of the oldest statutes of the United States.

It was enacted in 1789.

It was the fifth statute enacted by the first Congress.

It has remained in effect throughout the history of the United States with very little substantive change.

It provides that claims of the United States in nonbankruptcy proceedings shall be paid first.

And as I said, the Court has held in three case, Moore, Key, and Emory, that only the plainest inconsistency would warrant our finding an implied exception to the operation of so clear a command.

It’s uncontested, by the way, that the Federal priority statute applies to the claims at issue in this case, and would preempt the State priority statute unless it’s blocked by the McCarran Act.

And we don’t believe, looking at the purpose in history of the McCarran Act, that this is what Congress had in mind.

And we look first… I think the best way to understand this is chronologically.

If you look first at 1936, in that year this Court decided a case, United States against Knott, Knott, that involved the application of the Federal priority statute to claims of the United States against an insolvent insurance company.

And in that case, the Court held that the Federal priority statute applied, and it preempted an inconsistent State law, a Florida law.

8 years later–

Let me stop you with Knott for a second.

I haven’t reread that.

Is that the case that said that if the assets had been in trust, they would not have been part of the estate.

And so, if they set up… the statute had set up the liquidation procedure a little differently, the United States could not have reached the assets.

Robert A. Long, Jr.:

–That’s absolutely right.

Robert A. Long, Jr.:

That was the principal issue in Knott, but the first part of the holding was that the Federal priority statute applied to these claims as long as they were assets of the insolvent insurance company.

So, is the… ultimately at stake in this case is whether the States perhaps have to adopt a little different program where they make sure these assets are kept in trust and therefore avoid your priority claim.

Robert A. Long, Jr.:

That is… the Federal priority statute only applies to assets that are assets of the debtor that are in the debtor’s estate.

If the assets were not in the debtor’s estate, the Federal priority statute would not apply.

While I’ve got you interrupted, could you also explain to me?

They have a footnote in their brief that points out that it’s only as to insurance companies that this problem exists because in the bankruptcy code, the statute does not apply.

It seems to me almost perverse for the Government to take this position to derogate the claims of policyholders whereas it doesn’t as to general creditors normally.

How does that all fit together?

Robert A. Long, Jr.:

Well, that is what Congress has done.

Congress amended this priority statute in 1978 when it passed the bankruptcy code.

So, Congress is very clear that it has the somewhat lower priorities for Federal claims in bankruptcy, but it has maintained this first priority in nonbankruptcy proceedings.

Is it possible that they assumed that McCarran-Ferguson, even though I understand your argument to the contrary, took care of the insurance companies?

That just seems to me a senseless distinction.

Now, maybe there’s a reason–

Robert A. Long, Jr.:

I have a strong argument that I’d like to make in a second, but I don’t think it’s necessarily a senseless distinction if you recognize that Congress is not writing these priorities.

There’s actually a difficult problem of draftsmanship that occurs when you may have two competing priority systems.

But Congress may have felt that if it’s not writing the priorities and Federal judges are not applying them, that it’s going to stick with the old first priority from 1798, and we don’t think that’s unreasonable.

But let me get back to our… very quickly go through our argument about purpose and enactment history.

8 years after Knott in 1944, the Court decided the South-Eastern Underwriters case.

It held that the business of insurance is interstate commerce.

That was what precipitated the McCarran-Ferguson Act 1 year later in 1945.

And this Court has recognized time and time again that McCarran was a response to South-Eastern Underwriters.

It was basically intended to turn back the clock to the days prior to that decision by giving back to the States their traditional authority to tax and regulate the business of insurance.

Congress made clear that it did not intend to confer any additional regulatory authority on the States that they did not possess prior to South-Eastern Underwriters.

And, of course, this Court had held in Knott, prior to South-Eastern Underwriters, that the States had no authority to overrule the Federal priority statute in insurance company insolvency proceedings.

And it’s not surprising that the Court reached that result in Knott and reached it unanimously because prior to South-Eastern Underwriters and prior to the McCarran Act, even under the narrow view of the Commerce Clause that prevailed as to insurance companies at that time, it was clear that Congress had the power to enact a Federal priority statute under the Bankruptcy Clause, under a separate head of power under the Constitution.

So, we think it would be extraordinary to conclude that in enacting the McCarran Act, Congress intended to expand the regulatory authority of the States beyond the authority that they had traditionally exercised and to leave the determination of the priority of claims of the United States entirely to the States, which predictably would result in the kind of priority statute that we have here where the claims of the United States are not only subordinated to claims of policyholders, but also to claims of general creditors, which of course can’t possibly be justified on the basis of protecting policyholders.

So, to summarize our argument, we think the Ohio priority statute falls outside the ordinary meaning of the business of insurance because it does not regulate any business activity of insurers.

We think it does not satisfy this Court’s three-part test for defining the business of insurance, which is a narrow and demanding test, and finally, it was clearly not part of the States’ traditional authority, prior to South-Eastern Underwriters and the McCarran Act, to regulate the priority of claims of the United States.

And the McCarran Act was passed to restore, but not expand the States’ authority.

Robert A. Long, Jr.:

Mr. Chief Justice, if there are no further questions, I’d like to reserve the balance of my time.

–Very well, Mr. Long.

Mr. Rishel, we’ll hear from you.

James R. Rishel:

Mr. Chief Justice, and may it please the Court:

There’s one point that I want to make clear at the outset before going to the core legal question in this case, and that is even after an insurance company is found to be insolvent, it still functions as an insurance company with respect to the claims of its policyholders that arose before a finding of insolvency.

The company’s contractual relationship with these policyholders is unchanged.

The risk the company assumed upon contracting with these policyholders remains and is still being developed, and the company’s obligation to pay these claims of these policyholders is unsatisfied, unrelieved.

That would lead to the conclusion I suppose that the trustee in bankruptcy of a… an insolvent insurance company is subject to entirely State regulation because that’s the business of insurance.

Right?

James R. Rishel:

Largely that’s true.

Does that mean the Federal bankruptcy act can’t… that a State could have rules that contradict the Federal bankruptcy act?

James R. Rishel:

Absolutely.

Absolutely, and we do.

In insurance insolvency, a winding up is not governed by the Federal bankruptcy laws.

It’s governed by an entire chapter of our revised code that provides for the… all the provisions with respect to the authority of the superintendent of insurance when he winds up an insolvent company.

They do not go into Federal court at all?

James R. Rishel:

No, they do not, Your Honor.

In fact, we’ve cited cases in our brief where officers, directors, or owners of insurance companies have tried to take insurance companies into Federal bankruptcy… in bankruptcy court arguing that once there was a finding of insolvency, they were no longer an insurance company.

They were something else.

And the Federal courts have held that the insolvency of the company does not change the entity.

It is still an insurance company, and it cannot be a debtor in Federal bankruptcy court.

You said the insurance company is liable for claims that arose before the insolvency?

James R. Rishel:

Yes, Your Honor.

That was the point I made as respect… it’s unchanged as to those.

Now, as to the core legal test here from the Court’s case in Pireno, we believe that test applies, and we believe the statute meets that test.

I don’t–

winding up?

James R. Rishel:

–Well, Justice White, there is typically in these insolvencies the provision of State law that terminates those… the… terminates–

The policies?

James R. Rishel:

–the policies usually 30 or 60 days after a finding of insolvency.

Right.

James R. Rishel:

A notice goes out.

The policyholders are afforded an opportunity to get new coverage, and the coverage is cut off–

Right, right.

James R. Rishel:

–so as to minimize the claims and maximize the assets that can be distributed.

And what do the… what right does the policyholder whose policy has been cancelled have against the insurance company?

James R. Rishel:

If he has a claim that–

No, not if he has a claim.

Does he… say he hasn’t had any accidents or anything.

He just… normally he might have been able to cancel his policy and get a refund.

James R. Rishel:

–Well, he can get a return of the premiums.

Okay.

James R. Rishel:

Okay?

If there’s any money.

James R. Rishel:

If there’s any money, yes.

Would that claim be among the preferred?

James R. Rishel:

It would be the same class as if there were… it would be classified the same as if the policyholder had a claim.

Okay.

James R. Rishel:

With respect to the–

Mr. Rishel, how about the provision of the Ohio statute giving priority to general creditors over the Federal Government?

How does that relate to the business of insurance and fall within the exception?

James R. Rishel:

–I think it gets to a question that’s really not the legal question here, Your Honor, and that is the question isn’t how has Ohio chosen to regulate the business of insurance.

The question is whether we have chosen to regulate the business of insurance.

I don’t think that question would be changed if the order in our statute were the State of Ohio gets its claims paid first, the Federal Government’s claims are paid next, and then the policyholders’ claims are paid.

From a practical standpoint, we might not be here, but the legal question is the same.

It’s not how Ohio has regulated the payment of claims in the event of insolvency.

It’s that we have done that.

We have regulated.

Well, do you think we have to look at each provision of the statute to see whether it survives, or do you think we have to look at it as a whole?

James R. Rishel:

No.

James R. Rishel:

I don’t think you need to look at each provision.

I think you have to look at it as a whole and ask does it do something to regulate the relationship between the insolvent company and its policyholders to effectuate the payment of claims.

And it does that.

And as I said, the question isn’t how have we regulated.

The question is have we regulated the business of insurance as defined by the Court in Pireno.

I gathered from your brief that you were asserting that the protection of policyholders was really the primary purpose of this liquidation process.

James R. Rishel:

In actuality and practice it is, Your Honor, but it need not be to satisfy this Court’s test in Pireno.

I know, but it’s pretty hard to think that the primary purpose is protection of policyholders if you put some other claims ahead of it.

James R. Rishel:

Well, in terms of the administrative claims that are ahead of it–

That’s normal.

James R. Rishel:

–that’s normal.

And also, the minute second class of claims, employee wages up to $1,000, that’s fairly typical also in other claims priorities, and they really don’t dilute that.

Well, I know, but it still cuts into what the policyholders get.

James R. Rishel:

Well, it would to a certain extent.

Well–

James R. Rishel:

In this case, the assets of this company have grown from the time of insolvency from about $26 million up to over $68 million, and that’s after all the administrative expenses have been paid.

–And you think that it was perfectly proper to… as a regulation of insurance, to put general creditors ahead of the United States.

James R. Rishel:

Yes, Your Honor, I do.

And the State of Ohio put them in front of their own claims also.

As to Pireno, I would agree with the Solicitor General this morning that… his argument is to the effect I believe that you can’t just have a mechanical application of this test.

As he says in his brief, you have to appreciate the pedigree of Pireno, and I would also say that’s the essence of Pireno.

And that comes from National Securities.

And the real essence of this whole question is whether or not the State law is aimed at protecting regulating the relationship between the company and its policyholders either directly and indirectly.

If so, those laws are the business of insurance.

With respect to the three tests of Pireno, if I could start with the third test, the statute only applies to insurance companies.

It’s limited to an entity that’s in the insurance business, and that’s the insolvent company.

And all the claims against the insurance company are claims against the insurance company.

I think Pireno is easily satisfied.

Now, as to this third test, the Government interjects a requirement that I don’t think is in this Court’s opinions or is logical.

And they state in their brief that the regulation has to be peculiar or unique to the business of insurance.

James R. Rishel:

I don’t read that anyplace in the Court’s cases, nor does it make any sense because licensing is not a unique form of State regulation of insurance, but licensing or State laws which regulate the licensing of an insurance company clearly regulate the business of insurance.

As to the second test of Pireno, the Ohio statute reinforces the contractual relationship between the insurer and insured, and–

Excuse me.

I think what the Government is saying is suppose you have a licensing law that requires you to get a license to dispose of water into the street or something, and any business that wants to dispose of water has to get that license.

That would not… even though an insurance company also with other businesses has to get that license, that would not be a law regulating insurance.

James R. Rishel:

–No, absolutely it would not.

Well, that’s what the Government means by the fact that the law must be one directed at insurance and not a general one.

James R. Rishel:

I agree with that, but I don’t think that’s the point.

Maybe I wasn’t clear.

They said it had to be peculiar.

This type of regulation had to be peculiar, and since priority statutes weren’t peculiar to insurance, they couldn’t satisfy the third prong of the Pireno test, and that was my point.

I don’t think it has to be peculiar.

I think it has to regulate the business of insurance.

But if there were a separate priority statute just for insurance, your answer would be different.

Just for insurance company wind-ups.

James R. Rishel:

I don’t understand, Your Honor.

Is the… maybe I’m confused on something.

Is the Ohio priority statute a general statute which happens to mention insurance companies, or does it apply by its terms only to insurance company bankruptcies?

James R. Rishel:

It applies only to insurance company insolvencies, Your Honor.

It does not apply as a general proposition to anything but insurance companies.

So that you can say that the priority statute is limited within the meaning of Pireno.

James R. Rishel:

Absolutely.

Yes, okay.

James R. Rishel:

Absolutely.

–apply to paying off all the creditors of the insurance company before the United States claims, and it may be that some of the debts that they owe has hardly any connection with an insurance company.

James R. Rishel:

Well, they would… as to the general creditors, I mean, all the debts that are before, except for general creditors, relate to the actual business of insurance, the policyholders.

I mean, that’s what this statute regulates.

That’s why it prefers those claims.

Now, as to the second criteria, as I said, we believe it’s integral with the whole policy relationship.

It undergirds that relationship at a time when the policyholder is truly in a situation where they may not get paid, and it also satisfies the first prong of the Pireno test because it effectuates on a continuing basis the actual spreading of risk among policyholders.

James R. Rishel:

The arguments by the Government as to the guaranty fund, our response to that is, yes, guaranty funds exist.

Yes, they pay some policyholder claims, but that doesn’t matter.

The best evidence of the fact that guaranty funds are not the panacea that might be suggested is the fact that the Federal Government’s claim for $10.7 million is still unpaid.

It’s not covered by any guaranty fund.

Like many claims against the insurance company here, they’re not covered by the guaranty funds because they arose out of bonds.

Guaranty funds… and I’ll use Ohio’s as an indication.

The Ohio guaranty fund has a definition of what’s a covered claim, and then it has 18 enumerated exceptions from that coverage.

It also has a monetary limit.

So, as to those policyholders whose claims are not covered by guaranty funds or are not covered in whole by guaranty funds, the only chance they have to receive the protection they purchased is through the insolvency procedures in the State of Ohio.

As to the Knott decision, I thought that the Solicitor General did an excellent job of distinguishing that case from this case in his reply brief.

On page 14, his footnote number 9, I believe, the last sentence at the bottom of the page says Federal… Knott, and he gives the citation.

Federal priority statute inapplicable if State statute divests insurance company of title to assets.

I think that’s a very succinct holding of this Court’s decision in Knott.

And then I’d ask you to look at appendix page A in our brief, section 3903.18 of the Ohio Revised Code, another section of our insurance liquidation act, which says the liquidator shall be vested by operation of law with the title to all of the property, contracts, and rights of action and all of the books and records of the insurer ordered liquidated, wherever located, as of the entry of the final order of liquidation.

So, what didn’t happen in Knott happened here, and that as a matter of law, the title to the assets passed to the superintendent of insurance, and Knott is just plainly not applicable to this case.

But they didn’t pass before their Federal priority lien attached, did they?

James R. Rishel:

It passed at the moment of insolvency.

Yes, but that’s also when the Federal priority lien attached.

James R. Rishel:

At… yes, that’s one of the criteria.

So, we have a tie there.

Who wins on–

James R. Rishel:

Well, I think… well, I don’t think we have a tie, Your Honor.

I don’t think this act applies.

The history given by counsel is interesting, but I think the most interesting piece of the whole enactment history was Senator Ferguson’s answer to a question of whether or not this law applied to all Federal laws at the time, and his answer was a simple yes, that’s the intent of it.

And the statute says no act of Congress, and then it enumerates certain exceptions.

–Well, now you’re going into the McCarran-Ferguson argument rather than the distinction of Knott.

James R. Rishel:

That’s correct, but–

I was just questioning whether you really had a valid distinction of the Knott case.

James R. Rishel:

–Well, I do, if I can get back to that.

In the Knott case, the Federal Government went after certain monies that had been on deposit in Florida.

James R. Rishel:

They were placed there by a New Jersey company that became insolvent and went into rehabilitation in New Jersey, and the Federal Government went after those special deposits in Florida.

It didn’t come after the assets in the hands of the rehabilitator.

No, and it did not… it was not able to reach those deposits in Florida either.

James R. Rishel:

No, it was.

I mean, they were… in that case, they were granted priority to those assets in Florida.

The United States was.

James R. Rishel:

The United States was, yes.

Yes.

James R. Rishel:

Now, so, they didn’t go after those assets here.

They went after the assets, the title to which have transferred to the superintendent of insurance.

So, Knott is distinguishable, and indeed, the law in Knott I think supports our position better than theirs.

Well, did the lower court in this case address this argument?

Your… I understood Mr. Long to acknowledge that if the property was not part of the liquidation estate, the United States would have no claim.

Now you’re arguing that it was not part of the estate.

If that’s right, it seems we don’t even have to look at the McCarran Act.

James R. Rishel:

The property is part of the estate.

The question is whether or not the title to the property remains in the company.

In Knott, the title to those assets in Florida remained in the company.

It didn’t become assets of the estate.

The assets the Government seeks here are the assets of the liquidation estate, the title to which passed to the superintendent of insurance.

But am I correct that you are now arguing that you win regardless of how we construe the McCarran Act?

James R. Rishel:

I think we have the better position on Knott, and I think if you apply the test from Pireno, we win, yes.

Well, but Pireno has got to do with the McCarran Act.

I mean–

James R. Rishel:

Right.

–But I’m trying to understand if the assets are not part of the estate, then the United States doesn’t reach them under the statute, and if you’re right… that would have been a simple way for the court of appeals to decide the case, but they didn’t, as I understand.

They didn’t–

James R. Rishel:

No, they did not.

They applied the tests from Pireno after examining the other cases.

–Did you make this argument in the court of appeals?

James R. Rishel:

We made basically the same arguments–

About Knott?

James R. Rishel:

–We made… we tried to distinguish Knott.

What I didn’t have in the court of appeals was what I have here, and that’s the Solicitor General’s distinction of the case, which I think is terrific.

In conclusion, the court of appeals correctly found that the Ohio statute is part and parcel of the large, complex, specialized administrative system adopted by the State of Ohio to regulate the life of a domestic insurance company from inception to dissolution pursuant to the authority granted the State by McCarran-Ferguson.

The Government would transform that complex, specialized administrative system into a claims collection process for the primary benefit of the Federal Government.

To allow the Federal Government to assert a priority under the Federal Claims Priority Act would allow for the very Federal statutory interference with State regulation which Congress eliminated in McCarran-Ferguson.

Under a correct application of the McCarran-Ferguson Act and the phrase business of insurance, as defined by this Court, we believe that the Federal Government’s claim against the American Druggists’ Insurance Company is to be determined by the Ohio statute and not by the Federal Claims Priority Act.

We would respectfully request the Court to affirm the decision of the Sixth Circuit Court of Appeals.

Thank you.

Thank you, Mr. Rishel.

Mr. Long, you have 7 minutes remaining.

Robert A. Long, Jr.:

Thank you–

Mr. Long, before you get into anything else, does the Government agree with the proposition that the bankruptcy act doesn’t apply to–

Robert A. Long, Jr.:

–Yes, that’s correct.

Congress has–

–Well, then I really have trouble with the rest of your argument if, indeed, a trustee in bankruptcy is conducting the business of insurance–

Robert A. Long, Jr.:

–Well, Congress has–

–I cannot imagine how his paying out to one or another claimant or the order in which he pays out to a claimant isn’t part of the business of insurance.

Robert A. Long, Jr.:

–Well, Congress has expressly provided that insurance company insolvencies shall not be handled through the Federal bankruptcy process, but in passing the Federal bankruptcy code, they also amended this Federal priority statute that we have here before us today.

The amendment said that the Federal priority statute shall not apply in proceedings under the Federal bankruptcy code because of the different priorities Congress established.

But Congress left in effect the Federal priority statute, the first priority as to nonbankruptcy proceedings, and there was no indication that it intended to change the rule that the Federal priority statute applies in insurance company insolvency proceedings, just as it applies in other types of State receiverships and in proceedings against insolvent estates of decedents.

What is the provision that renders the bankruptcy act inapplicable?

It’s a provision of the bankruptcy act itself?

It’s not just simply McCarran.

Robert A. Long, Jr.:

Yes, I’m sorry.

I believe it’s cited in our brief, and I’m sorry I do not… cannot remember it.

But it is expressly provided in the bankruptcy code that it shall not apply to bankruptcies of insurance companies and financial institutions.

I see.

Well, might not that be considered an acknowledgement in the bankruptcy code that the United States considers a bankruptcy trustee to be engaging in the business of insurance?

Robert A. Long, Jr.:

No.

We think the opposite, and that’s really our basic position in this case, is that Congress has always been very precise about priorities of claims of the United States.

It has always decided that for itself.

When it wanted the United States to have any position other than first, it said so, and it has done that in the Federal bankruptcy act.

It has excluded insurance company insolvencies from the bankruptcy code, but it has left in effect… and it’s amended in ’78 and again in 1982, this Federal priority statute, which this Court has held many times is very broad, is very clear, and this Court will not imply an exception to its clear command unless Congress has very clearly indicated that there must be one.

And the history of the McCarran-Ferguson Act plainly indicates that this was not what Congress had in mind.

Let me say just a word about Knott.

I think the distinction suggested this morning, which is a new suggestion, was not argued below, doesn’t work anyway.

The Federal priority statute has been applied many times over the years when a receiver has been appointed or a liquidator to take over the assets of an insolvent debtor.

That’s one of the classic acts of bankruptcy.

That’s one of the main situations in which the statute is triggered, and it’s… the Court has never held that that works… it moves the assets away from the debtor.

It’s the debtor’s estate at that point.

The assets are still there.

They’re just in the debtor’s estate.

Priority statute gives the United States priority over administrative expenses in the liquidation?

Robert A. Long, Jr.:

Yes, that is… it is a first priority.

In… the practice of the Government has always been to allow, you know, reasonable administrative expenses to be paid, and I should add that we also have a practice–

But that’s just a matter of grace I gather.

Robert A. Long, Jr.:

–Yes.

Yes, all right.

Robert A. Long, Jr.:

And we also have a practice of granting a release once claims of the United States have been settled so that there’s not uncertainty about whether the United States will come forward with additional claims.

Mr. Long, you’re talking about the practice of the United States.

Have there been a fair number of State liquidation proceedings involving insurance companies in which there has been no contest about the Federal Government’s priority?

Robert A. Long, Jr.:

I–

Because there don’t seem to be many cases on–

Robert A. Long, Jr.:

–I tried to find that out from the Federal Government.

–Then where do you get the basis of your statement about practice?

Robert A. Long, Jr.:

I think there were not a great number of insolvencies, and the United States often didn’t file claims in the past.

And also, this practice of the States of prioritizing claims and placing the United States rather low seems to have begun only in the late ’60’s in Wisconsin.

It’s a fairly recent development.

Robert A. Long, Jr.:

We don’t have claims in every insurance company insolvency proceeding because we often don’t have any bonds with the company and may not have any tax claims.

The basic argument here today by respondent is that any State law aimed at protecting policyholders is a regulation of the business of insurance within the meaning of McCarran-Ferguson.

We think that is too broad a definition.

We think that is inconsistent with this Court’s prior decisions, and in particular, that would be inconsistent with the antitrust… the application of the antitrust laws to the business of insurance, which is also at issue here and is also an interest of the Federal Government.

So, we urge the Court not to reject its prior decisions and adopt that much broader test.

I mean, it really is true that in a general sense every State law regulating insurance companies is aimed at protecting policyholders.

And finally, very briefly, on the third factor, there was a argument that something that’s not unique to the insurance industry shouldn’t be covered by this factor.

In fact, the purpose of that factor, this Court has said, is to recognize the importance of intra-industry competition.

Congress thought that was particularly important in the insurance business that insurance companies needed to cooperate on rates and statistical information and so forth.

So, we think that is actually a relevant consideration, although again our principal submission under that factor is that a lot of these claims involve the ordinary business relationships of an insurance company with suppliers of goods and services like the relationship in Royal Drug with pharmacies that this Court said was not a part of the business of insurance.

If there are no further questions, I thank the Court.

William H. Rehnquist:

Thank you, Mr. Long.

The case is submitted.