Federal Trade Commission v. Dixie Finance Company, Inc. And Transouth Financial Corporation

REAVLEY, Circuit Judge,

dissenting:

Our question is whether § 2(b) of the McCarran-Ferguson Act (the “McCarran Act”), 15 U.S.C. § 1012 (b), bars the application of disclosure provisions of the Federal Trade Commission (“FTC”) Act, 15 U.S.C. § 45 when a finance company allegedly requires its loan customers to purchase insurance policies through the finance company by falsely representing to the customer that the purchase of insurance is a prerequisite to obtaining a loan. I would hold that the McCarran Act does bar application of the provisions of the FTC Act.

It is now well-established that the McCarran Act exemption 1 is for the “business of insurance” rather than the “business of insurers.” Group Life & Health Insurance v. Royal Drug Co., 440 U.S. 205, 211 , 99 S.Ct. 1067, 1073 , 59 L.Ed.2d 261 (1979). Thus, it is of no import here that the defendants are consumer finance or small loan companies; the relevant inquiry is into the nature of the transactions at issue. Perry v. Fidelity *932 Union Life Insurance Co., 606 F.2d 468, 470 (5th Cir.1979), cert. denied, 446 U.S. 987 , 100 S.Ct. 2973 , 64 L.Ed.2d 845 (1980). This court has previously held that a loan company’s selling of cancer insurance policies constituted the “business of insurance” for McCarran Act purposes, although its financing of the premium did not; in other words, the mere fact that the loan company sold the policies it financed did not preclude application of the Truth-in-Lending Act to the credit feature of the transaction, since the financing alone was insufficient to invoke the McCarran Act exemption. Cody v. Community Loan Corporation, 606 F.2d 499 , 503 (5th Cir.1979), cert. denied, 446 U.S. 988 , 100 S.Ct. 2973 , 64 L.Ed.2d 846 (1980). When a finance company tells a borrower/buyer that he must buy an insurance policy in order to complete the desired transaction, the finance company is selling insurance. If the borrower/buyer accedes to the selling tactic and agrees to buy the insurance, only then does the activity move to the financing of the cost of that insurance.

The facts here are in effect identical to those in Dexter v. Equitable Life Assurance Society, 527 F.2d 233 (2d Cir.1975) and Addrisi v. Equitable Life Assurance Society, 503 F.2d 725 (9th Cir.1974), cert. denied, 420 U.S. 929 , 95 S.Ct. 1129 , 43 L.Ed.2d 400 (1975). Both of these cases held that the tying of insurance policies to mortgage loans, whereby persons obtaining such loans were required to buy life insurance from the lender, constituted the “business of insurance” for McCarran Act purposes, thus precluding application of federal antitrust laws to invalidate the tying arrangements. The fact that the customers were required to buy insurance was of critical significance:

Even if we agreed with plaintiffs that the lending of mortgage money by an insurance company does not in itself constitute “the business of insurance” and so is subject to the antitrust laws, a question we need not decide here, the very basis of the Dexters’ complaint is that Equitable used the mortgage loan to coerce the purchase of an insurance policy. Forcing people to buy insurance may well be an undesirable practice — and we do not suggest that we approve of it — but it is part of “the business of insurance.” ... An insurance company’s methods of inducing people to become policyholders pertain to the company-policyholder relationship, and thus constitute an integral part of “the business of insurance.”

Dexter, 527 F.2d at 235 (footnote omitted).

The district court below felt that Dexter and Addrisi had “lost their viability and [were] distinguishable in light of the Supreme Court’s decision in Royal Drug, supra, wherein the emphasis was placed on the particular activity being questioned. In both Dexter [s/c] and Addrisi [s/c] the practices under attack were being performed by insurance companies and concerned the relationship between the insurer and the policyholder. Were the respondents in this matter insurance companies, the holdings of Dexter and Addrisi might carry more weight.” This looks at the Court’s holding in Royal Drug upside down. The Supreme Court in that case held that the McCarran Act exemption is for the “business of insurance”, not the “business of insurers,” which means to me that it was irrelevant that the party defendants in Dexter and Addrisi were themselves insurance companies.

This court has implied that a loan company’s inducing or requiring customers to purchase insurance constitutes the “business of insurance.” In distinguishing the applicability of Dexter and Addrisi in the case where an insurance company provided premium financing in connection with the sale of insurance policies, the Perry court wrote that “in these cases the inducement was actually a requirement, and forcing prospective policyholders to buy insurance cannot be equated with making the purchase ‘easier’ by offering premium financing.” Perry, 606 F.2d at 470 -71 n. 6. In the situation here, where customers of the finance companies have been falsely informed that the purchase of insurance is a mandatory prerequisite to the obtaining of a loan, the Perry court’s rationale for distinguishing Dexter and Addrisi would re *933 quire us to reach a contrary result. This conclusion is supported by FTC v. National Casualty Co., 357 U.S. 560 , 78 S.Ct. 1260 , 2 L.Ed.2d 1540 (1958), where the Supreme Court held that another method of inducing the purchase of insurance, misleading advertising, was within the MeCarran Act exemption.

I would hold that the sale of an insurance policy, induced by the true or false representation that its purchase is necessary to obtain a loan, constitutes the “business of insurance”, thus triggering the MeCarran Act exemption and precluding application of federal antitrust law or the FTC Act’s provisions on unfair or deceptive acts. Furthermore, I would hold that the “business of insurance” as it is present here is regulated by state law and that application of the FTC Act would “invalidate, impair, or supercede” such state law in contravention of the MeCarran Act exemption. The district court’s opinion analyzed how Louisiana insurance law would regulate the practices complained of in this case. See La.Rev. Stat.Ann. §§ 22:1214(1), (2), (9) (West 1978). Moreover, even if some of the states in which the defendants conduct their insurance business do not prohibit the practices now complained of, it does not follow that such activities are thereby “unregulated” by a state or that application of the FTC Act would not “invalidate, impair or supercede” state law. See Perry, 606 F.2d at 478-84 (Brown, J., dissenting); Dexter, 527 F.2d at 235-36 .

While I certainly do not condone the practice of finance companies falsely informing their customers that the purchase of insurance is a prerequisite to obtaining a loan, activities of this sort, involving (as I believe they do) the “business of insurance” may only be regulated by the states, and not by application of the FTC Act in contravention to the clear dictate of the MeCarran' Act exemption.

I respectfully dissent.

. The exemption provides:

No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance: Provided, .. . That the Federal Trade Commission Act, as amended, shall be applicable to the business of insurance to the extent that such business is not regulated by state law.

15 U.S.C. § 1012 (b).