Petition — Moody v. Meyers

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82-2091 FE 1 j

No. JUN 20 |

IN THE os.

Supreme Court of the United States

OCTOBER TERM, 1982

SHEARN Moopy, JR.,

Petitioner,

DAVID C. MEYERS, et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

GROVER REES III H. BARTOW FARR III *

727 East 26th Street ONEK, KLEIN & FARR

Austin, Texas 78705 2550 M Street, N.W.

Washington, D.C. 20037

(202) 775-0184

JOHN M. HARMON

GRAVES, DOUGHERTY, HEARON &

MoobDy

2300 Interfirst Tower

P.O. Box 98

Austin, Texas 78767

(512) 478-6421

* Counsel of Record

WILSON - EPES PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

QUESTIONS PRESENTED

1. Whether the federal courts in this case should have

abstained from deciding claims that collaterally at-

tacked determinations made by state insurance reg-

ulators.

2. Whether the court of appeals exceeded its authority

by declaring principles of general law at variance

with governing state law.

3.- Whether the principles set forth in Bangor Punta

Operations, Inc. v. Bangor & Aroostook Railroad, 417

U.S. 703 (1974), barring the use of the federal courts

to obtain windfall recoveries, are inapplicable to wind-

falls for which the plaintiffs ostensibly bargained.

PARTIES TO THE PROCEEDING

This litigation was commenced by the filing of two

shareholders’ derivative suits. Plaintiffs in the first suit,

suing on behalf of Empire Life Insurance Company of

America and Credit Factoring, Inc., were Bernard Haines,

Louis Mast, William Sosniak, and Jack Sosniak. Named

as defendants were Shearn Moody, Jr., Emp: "n-

surance Company of America, and Credit Fa: r, ine.

Plaintiffs in the second suit, suing on behalf vo ” ire

Life Insurance Company of America, were David C.

Meyers, Frank Habicht, and Peter N. Todhunter. Named

as detendants were Shearn Moody, Jr.; Clay Cotton, Com-

missioner of Insurance for the State of Texas; Tom I.

McFarling, temporary receiver for Empire Life Insurance

Company of America; E. V. Omholt, Montana receiver of

Empire Life Insurance Company of America; John G.

Bookout, Alabama receiver of Empire Life Insurance

Company of America; E. Gene Sykes, Arkansas receiver

of Empire Life Insurance Company of America. These

, Suits were eventually dismissed. The remaining suit was

* filed by John G. Bookout, as statutory receiver on behalf

of Empire Life Insurance Company of America, against

Shearn Moody, Jr.

(i)

TABLE OF CONTENTS

ERS Pe NDE IS TORRE IN

BO FANT II onesrecevecenceeseienscxesersocess Dksleibacpataieasatalags

I rs 8 oe sachenmeiondessatenasbae uous

ERE RL ET A EERE ROMA NTO DE eR EST

I Sits 0 ian soa cndiceasldases eubgamiddaieiosadenonniehnaciaolbeeiants

Reasons for Granting the Writ ..........................222.....------

I. The Decision Below Is Inconsistent With Deci-

sions of This Court And Other Courts of Appeals

Requiring Deference to State Administration of

EIT EON LEONEL ETI

II. The Court of Appeals Improperly Substituted

Its Own Views For the Applicable State Law....

III. The Decision Below, By Allowing Respondent A

Duplicative Recovery, Is Inconsistent With the

Decision of This Court In Bangor Punta Oper-

ations, Inc. V. Bangor & Aroostook Railroad Co.,

Ms I PIED oeiesceestretpcccesccerereeussenewtvoniwnis

RES AE RIE nr ae eee ee TEE

(iii)

TABLE OF AUTHORITIES

Cases Page

Alabama Public Service Comm’n v. Southern Ry.

we ok |S eee, 7,9, 16

Allstate Insurance Co. v. Sabbagh, 603 F.2d 228

i QO Ee. aRRARNEERC eae eee ELE NAR eo aaa N ener 7,14, 16

Baltimore & Ohio R.R. v. Baugh, 149 U.S. 368

SN Allie SS eRe: SON BORLA O RI ee ae 19, 20

Bangor Punta Operations, Inc. v. Bangor & Aroos-

took Railroad Co., 417 U.S. 703 (1974) ............ 5, 7, 24

Barry v. St. Paul Fire and Marine Ins. Co., 555

F.2d 3 (1st Cir. 1977), aff’d, 438 U.S. 531

8 Rae: Rea eaaane Ta ee Ne mn ae 16

Bolton v. Coats, 514 S.W.2d 482 (Tex.Civ.App.

ASAD TANASE an aA a CP gn eR reese ACR ake Ay ee 18, 19

Burford v. Sun Oil Co., 319 U.S. 315 (1943) ....7, 9, 14, 16

City of Huntsville v. Goodenrath, 68 So.2d 676

| RES Sane Rd eR TR Oe Bee Reet 13

Colorado River Water Conservation District v.

United States, 424 U.S. 800 (1976) .......0........... 10

Commonwealth of Pennsylvania v. Williams, 294

Bs er to a RN PO SER is)

Construction Aggregates Corp. v. Rivera de

Vicenty, 573 F.2d 86 (1st Cir. 1978) -......00.0.0....... 16

Courtland Manor, Inc. v. Leeds, 347 A.2d 144 (Del.

ee I eee a re ig er ee 25

Empire Life Insurance Co. v. Moody, 584 S.W.2d

ee 16

Equitable Life Insurance Co. v. Halsey, 312 U.S.

EE EE Fcc tecca eee oeeta secon apt s

Erie Railroad Co. v. Tompkins, 304 U.S. 64

_<__ SEREAERORER Nceee Re oa ASL Ree OLR AEE | 7, 18, 19, 20

Fair Assessment in Real Estate Ass’n, Inc. v. Mc-

Peery, GEG TB. FEB CIDE nnnnecnccrecteeccccee 6, 8, 10, 14

Great Lakes Dredge & Dock Co. v. Huffman, 319

ok RRP CL ee eR 8

Hawks v. Hamill, 288 U.S. 52 (1933) 0.000000... 7,9

In re REA Express Inc., Private Treble Damage

Antitrust Litigation, 412 F. Supp. 1239 (E.D.

i, AEE SAA ae ALE Meese OSE TRON 25

TABLE OF AUTHORITIES—Continued

Kentucky Central Life Insurance Co. v. Commis-

i fle kG. | ER ere

Kirby Lumber Co. v. Adams, 62 S.W.2d 366 (Tex.

re pcewenaniahines

Louisiana Power & Light Co. v. Thibodaux, 360

Sn Oe aeepdiiaaniid

Matthews v. Rogers, 284 U.S. 521 (1932) -...............

Milwaukee v. Illinois, 451 U.S. 304 (1981) ............

Modern Woodmen of America v. Casados, 17 F.

Sapp. 768 (ON... 1987) ........-...-...---...:............,..

National Union Electric Corp. v. Matsushita Elec-

tric Industrial Co., 498 F. Supp. 991 (E.D.Pa.

i a oc delbebinnnn

Parratt v. Taylor, 451 U.S. 527 (1981) ............. aes

Paul v. Davis, 424 U.S. 693 (1976) ........00000000000.....

Railroad Comm’n of Texas v. Pullman, 312 U.S.

Se eiabicuitioem

Railroad Commission v. Marathon Oil Co., 89

S.W.2d 517 (Tex.Civ.App. 1935) -....0000000...

Railroad Commission v. McKnight, 619 S.W.2d 255

I ns uivouenion

Rizzo v. Goode, 423 U.S. 362 (1976) ............02002000....

Rock River Savings and Loan Association v. Amer-

ican States Insurance Co., 594 F.2d 633 (7th Cir.

Baek al Te AER LE een eo RNS CR PRE SO

Securities and Exchange Commission v. National

Securities, Inc., 393 U.S. 453 (1969) 00000.

Smith v. Metropolitan Property & Liability Insur-

ance Co., 629 F.2d 757 (2d Cir. 1980) ....7, 14, 16,

State v. Brooks, 53 So.2d 329 (Ala. 1951) _..........

Stefanelli v. Minard, 324 U.S. 117 (1951) _............

Texarkana v. Arkansas Louisiana Gas Co., 306 U.S.

188 (1939) ........... eae er a ee

United States v. Chemical Foundation, Inc., 27

Rie IE cs. creda cdoandectdekoceaaerniemsoomccaeomeronnds

United States v. South-Eastern Underwriters

Ase’n, 382 U.S. 588 (1944) .................-.02..............

Younger v. Harris, 401 U.S. 37 (1971) —00000000000..

Page

17, 18

TABLE OF AUTHORITIES—Continued

Page

Statutes and Miscellaneous Authorities

Ee Seana eee 10

OU | ee 11

ss dcnoniniennienncenis 1

McCarran-Ferguson Act, 59 Stat. 34 (1945) ........ 10

Alabama Code § 27-2-31(a) (1975) -.........00.00.0000.. 13

Alabama Code § 27-2-32 (1975) —.0000.0.0000......2eecee 13, 15

Alabama Code § 27-32-15(a) (1975) —...000...0000000.... 5

Alabama Code §§ 27-37-1, et seq. (1975) ............ 2,12

Alabama Code Title 28 § 61 (1959) 00000. 2,3, 12

Texas Ins. Code Ann. art. 1.15, § 4 (Vernon 1981).. 15

C. Wright, Handbook on the Law of Federal

Courts, §§ 55, 56 (3d ed. 1976) ........00000. en... 20

IN THE

Supreme Court of the United States

OCTOBER TERM, 1982

No.

SHEARN Moopy, JR.,

7 Petitioner,

DAVID C. MEYERS, et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Shearn Moody, Jr., petitions for a writ of certiorari to

review the judgment of the United States Court of Ap-

peals for the Fifth Circuit in this case.

OPINION BELOW

The opinion of the court of appeals is reported at 693

F.2d 1196. The opinion is reprinted as Appendix A in

the separate Appendix to this petition. The opinion of

the district court is reported at 475 F. Supp. 232. It is

reprinted as Appendix B in the separate Appendix to

this petition.

JURISDICTION

The judgment of “he court of appeals was entered on

December 23, 1982. The court of appeals denied a peti-

tion for rehearing and rehearing en banc on March 1,

1983. On May 12, 1983, Justice White extended the time

for filing a petition for a writ of certiorari to and in-

cluding June 20, 1983. The jurisdiction of this Court is

invoked under 28 U.S.C. § 1254(1).

STATEMENT

This lawsuit was filed against petitioner, a former ma-

jority stockholder, director and officer of Empire Life In-

surance Company, seeking to impose liability for certain

activities ordered or approved by the Alabama Depart-

ment of Insurance.’ After a jury verdict for respondent,

the district court entered a judgment against petitioner

for $5,319,000 in compensatory damages and $1,000,000

in punitive damages. The court of appeals affirmed.

The events giving rise to the suit began in 1963. In

June of that year, petitioner incorporated Empire Life

Insurance Company (“Empire’’) in the State of Alabama.

Pet. App. 3. The following month, petitioner assigned to

Empire 40 per cent of his interest in the Libbie Shearn

Moody Trust, a trust whose principal asset was nearly

ten million shares of stock in American National Insur-

ance Company.’ In return for that interest, petitioner

received an unpaid debenture for $200,000. Pet. App. 3.

The valuation of the trust interest lies at the heart of

the dispute. Under Alabama law, as in other states, the

valuation of assets of an insurance company is the re-

sponsibility of the Department of Insurance. 28 Ala.

Code §61 (1959); Ala. Code §§ 27-37-1 et seg. (1977).

While an insurance company must provide the Depart-

ment with financial] statements and other necessary infor-

mation, the Department of Insurance must ultimately

determine the extent of liabilities and the availability of

assets to cover them. In 1964, Alabama law provided that

“(t]he superintendent of insurance shall allow to the

1 The complaint alleged claims under the federal securities laws,

as well as state claims. Jurisdiction over the state claims, the only

claims on which the court of appeals grounded liability, was predi-

cated on theories of pendent jurisdiction and diversity jurisdiction.

2 American National Insurance Company was, and is, one of the

largest stock life insurance companies in the United States. See

DX 37.

credit of an insurance company, in the account of its

financial condition, on such assets as are or can be made

available for the payment of losses in Alabama.” 28 Ala.

Code $61 (1959).

The valuation of a life interest is a mixture of art and

science. Since a life interest terminates, of course, on the

death of the beneficiary, the first variable to be consid-

ered is the age of the beneficiary and, with the guidance

of actuarial tables, his life expectancy. The evaluator

must then determine the likely stream of income to be

received during the term of the life estate, a calculation

that in this case involved projections regarding future

dividend distributions from American National Insur-

ance Company. Once this figure has been calculated, it

must be discounted for the effects of inflation in order to

arrive at a present value. See Pet. App. 4. After con-

sideration of these factors, the Superintendent in 1964

valued the life interest held by Empire at $5,813,440.

Pet. App. 4-5.

Early in 1965 American National Insurance Company

announced an increase in its dividend. Pet. App. 5. Since

that increase changed one of the variables for determin-

ing the value of the trust interest, Empire provided the

Department of Insurance with revised figures showing a

range of different values for the trust interest. After

these figures were reviewed by Alabama insurance ex-

aminers, a formal valuation hearing was held before the

Superintendent of Insurance. Pet. App. 7-8. The Super-

intendent then determined that the life interest should

be valued at a figure of $14,213,440. DX 6.°

3 Throughout its opinion the court of appeals mistakenly says that

the Superintendent placed a value of $14,403,200 on the life interest,

strongly implying that he adopted one of the figures submitted to

him by the Company. See, e.g., Pet. App. 7, 10, 15, 21, 22, 37 and

DX 64. In fact, after his own review of the figures, the Super-

intendent placed a lower value on the life interest, which Empire

subsequently observed. DX 6.

This figure remained unchanged for the next three

years, during which time Empire made numerous ac-

quisitions. The Department of Insurance, as required by

Alabama law, reviewed each of the acquisitions to deter-

mine whether they jeopardized the financial stability of

the Company. For these purposes, the Department con-

tinued to value the life interest at the $14 million figure.

Each of the acquisitions was approved by the Department.

See e.g., DX 483A, DX 44, DX 47.

Had these events been the extent of the story, no law-

suit would have ensued. But in 1969, an appraisal pre-

pared by the American Appraisal] Company suggested

alternative valuations for the life interest of $8,600,000

(for continued use) and $4,250,000 (for orderly liquida-

tion). Pet. App. 10. A second Superintendent of Insur-

ance rejected those figures, issuing an administrative or-

der expressly authorizing Empire to carry the life inter-

est at an asset figure of $14.2 million. DX 19.* In 1972,

however, a third Superintendent revived the earlier ap-

praisal and ordered that the life interest be carried at a

figure of $4,250,000, a revision that caused Empire to be-

come insolvent under statutory accounting principles. Pet.

App. 11. The Superintendent made no finding that the

life interest was incorrectly valued in 1965, concluding

only that, as of the date of his determination, a different

value was appropriate.

Thrown into financial convulsion by the sudden change

in valuation, Empire was placed into receivership in June

1972. Pet. App. 11. Eighteen months later, the receiver-

ship court ordered that Empire be liquidated and ap-

proved a bulk reinsurance agreement with Protective Life

Insurance Company (‘Protective’). Pet. App. 11.

4 The order, noting that petitioner’s life expectancy decreased as

he got older, provided for the establishment of a reserve fund to be

increased annually and required the maintenance of adequate insur-

ance on petitioner’s life. DX 19.

This lawsuit, instituted on behalf of Empire in 1974,°

in essence attacks the decision to value the life interest at

$14 million and to pursue a series of acquisitions based

upon that figure. Although petitioner has consistently

noted that the valuation was set, and the acquisitions ap-

proved, by the Alabama Department of Insurance, the

district court declined to defer to those judgments, elect-

ing to consider the reasonableness of such actions on a de

novo basis. The jury thus heard expert testimony on much

the same issues as the Superintendent of Insurance had

resolved years before. Apparently concluding that the

higher valuation and the subsequent acquisitions had been

unreasonable, the jury awarded over six million dollars

in damages under federal and state law. Pet. App. 12.

The court of appeals took the same approach. Putting

aside the claims under federal law, the court concluded

that the valuation and subsequent acquisition program

were sufficient to sustain common law claims of misman-

agement and breach of fiduciary duty. Pet. App. 20-25.

Like the district court, the court of appeals gave no

weight to the fact that the Alabama Department of In-

surance had made the determinations at issue. Rather,

the court fashioned its own rule to govern the case, stat-

ing: “An insurance company may not delegate responsi-

bility for valuation of its assets to a state agency, and the

mere fact that an insurance commissioner accepts a com-

pany’s asset valuation does not immunize the company

from liability arising from that valuation.” Pet. App.

22 n.11.

The court also declined to apply the principles of Bangor

Punta Operations, Inc. v. Bangor & Aroostook Railroad

5 Two shareholders’ derivative suits were brought on behalf of

Empire in 1972. After this derivative action was filed, with the

Receiver serving pursuant to Alabama statute (Ala. Code § 27-32-

15(a) (1975) ), the shareholders’ actions were dismissed. Pet. App.

12 &n.7.

Co., 417 U.S. 703 (1974), to this case. Although this Court

in Bangor Punta disapproved the use of federal courts to

secure windfall profits, the court of appeals concluded

that Bangor Punta was inapplicable where the plaintiff

had bargained for the windfall. Pet. App. 16-18.

REASONS FOR GRANTING THE WRIT

The decision of the court of appeals, while set in the

framework of an action for daraages, is in fact a collat-

eral attack on several determinations committed by state

law to the Alabama Department of Insurance. During the

period from 1965-1970, the Department not only con-

cluded that Empire Life Insurance Company was entitled

to carry an assigned life interest on the books for $14.2

million but then approved a series of acquisitions by Em-

pire based upon that figure. No challenges to those deci-

sions were made then or later in the Alabama courts.

Instead, respondent filed a suit in federal court for dam-

ages nine years after the valuation and six years after

the last acquisition, claiming that the valuation and ac-

quisitions were unreasonable. The courts below, showing

little or no deference for the role of the State agency,

agreed.

This belated judicial review suffers from several de-

fects. To begin with, in declaring that companies (and

their officers and directors) may be found liable for de-

cisions made by state agencies, the court of appeals has

introduced a rule of law that will unsettle relations be-

tween businesses and state officials for years to come.

Even more importantly, the decision puts the federal

courts in the role of second-guessing the decisions of state

administrators, a role for which they are ill-situated and

ill-suited. This seizure of authority is particularly inap-

propriate here for it occurs in the complex field of insur-

ance regulation, which Congress has emphatically en-

trusted te the primary care of the states.

We believe that the decisions of this Court counsel a

different course. See, e.g., Fair Assessment in Real Estate

Ass’n, Inc. v. McNary, 454 U.S. 1006 (1981); Alabama

Public Service Comm’n v. Southern Ry. Co., 341 U.S. 341

(1951); Burford v. Sun Ou Co., 319 U.S. 315 (1943).

In such cases, the Court has held that federal courts

should refrain from exercising jurisdiction where its exer-

cise would intrude on state regulation of essentially local

matters. See also Hawks v. Hamill, 288 U.S. 52 (1933).

By the same token, the Courts of Appeals for the First

and Second Circuits have recognized that abstention is

particularly appropriate in the area of insurance. See

Alistate Insurance Co. v. Sabbagh, 603 F.2d 228 (1st Cir.

1979) ; Smith v. Metropolitan Property & Liability In-

surance Co., 629 F.2d 757 (2d Cir. 1980). The same def-

erence to state regulation should have been accorded here.

We also believe that, even if jurisdiction was properly

exercised, the court of appeals improperly applied law of

its own invention. It is well-established, of course, that a

federal court exercising pendent or diversity jurisdiction

over state claims must apply state law in the same man-

ner as a state court would do. See Erie Railroad Co. v.

Tompkins, 304 U.S. 64 (1938). Despite these principles,

however, the court of appeals felt free to fashion its own

rule, directly contrary to state law, that determinations

by state administrative agencies could be set aside in a

private suit for damages. This judicial lawmaking flies

in the face of nearly fifty years of decisions by this Court

forbidding federal courts to create “federal common law”

in pendent and diversity cases.

Finally, the court of appeals devised a novel exception

to the principles set forth by this Court in Bangor Punta

Operations, Inc. v. Bangor & Aroostook Railroad Co., 417

U.S. 703 (1974). Although the Court made clear in

Bangor Punta that the federal courts should not be used

to obtain windfall recoveries, the court of appeals found

those principles inapplicable to windfalls for which the

plaintiff had ostensibly bargained. The exception is un-

warranted and unwise.

I. The Decision Below Is Inconsistent With Decisions Of

This Court And Other Courts Of Appeals Requiring

Deference To State Administration of State Programs.

Whether phrased in terms of comity, abstention, or

equitable discretion, this Court has long emphasized “‘[t] he

scrupulous regard for the rightful independence of state

governments which should at all times actuate the federal

courts.” Matthews v. Rogers, 284 U.S. 521, 525 (1932);

Fair Assessment in Real Estate Ass’n, Inc. v. McNary,

supra, 454 U.S. at 111. In setting aside state determi-

nations, and imposing liability on petitioner for acting in

accordance with those determinations, the courts below

showed no such “scrupulous regard.”

The requirement of deference to state activities, as the

Court has recently noted, is grounded in a “continuance

of the belief that the National Government will fare best

if the States and their institutions are left free to per-

form their separate functions in their separate ways.”

Younger v. Harris, 401 U.S. 37, 44 (1971), quoted in

Fair Assessment in Real Estate Ass’n, Inc. v. McNary,

supra, 454 U.S. at 112. Faced with repeated invita-

tions to disregard or discredit state efforts, “federal courts

must be constantly mindful of the ‘special delicacy of the

adjustment to be preserved between federal equitable

power and State administration of its own law.’” Rizzo

v. Goode, 423 U.S. 362, 378 (1976), quoting Stefanelli v.

Minard, 324 U.S. 117, 120 (1951). “It is in the public

interest that federal courts of equity should exercise their

discretionary power to grant or withhold relief so as to

avoid needless obstruction of the domestic policy of the

states.” Great Lakes Dredge & Dock Co. v. Huffman, 319

U.S. 293, 298 (1943).

Even where the jurisdiction of the federal courts has

been invoked for the advancement of federal rights, this

Court has warned against needless intrusion into state

programs. Thus, the Court has admonished that “the Na-

tional Government, anxious though it may be to vindicate

and protect federal rights and federal interests [should]

always endeavor[] to do so in ways that will not unduly

interfere with the legitimate activities of the States.”

Younger v. Harris, supra, 401 U.S. at 44. This admoni-

tion, of course, applies with even greater force when the

rights asserted are not federal rights at all but rights

based on state law. As Justice Cardozo has written for

the Court, “[r]eluctance there has been to use the process

of federal courts in restraint of state officials though the

rights asserted by the complainants are strictly federal in

origin. * * * There must be reluctance even greater when

the rights are strictly local * * *.” Hawks v. Hamill,

supra, 288 U.S. at 61.

These principles are more than historical musings. In

putting these principles into effect, this Court has or-

dered the outright dismissal of certain cases thought par-

ticularly intrusive on local concerns. See Burford v. Sun

Oil Co., supra; Alabama Publie Service Comm’n v. South-

ern Ry. Co., supra. In Burford, for example, the Court

ordered that a challenge to a drilling order of the Texas

Railroad Commission be dismissed, observing that “it ‘is

in the public interest that federal courts of equity should

exercise their discretionary power with proper regard for

the rightful independence of state governments in carry-

ing out their domestic policy.’” Jd. at 318, quoting

Commonwealth of Pennsylvania v. Williams, 294 U.S. 176,

185 (1935). Noting that Texas had a fully adequate ad-

ministrative and judicial scheme for challenging such or-

ders, the Court stated: “These questions of regulation of

the industry by the State administrative agency * * * so

clearly involve basic problems of Texas policy that equita-

ble discretion should be exercised to give the Texas courts

the first opportunity to consider them.” 319 U.S. at 332.

Similarly, in Alabama Public Service Commission, the

Court held that “{a]s adequate state court review of an

administrative order based upon predominately local fac-

tors is available to appellee, intervention of a federal

court is not necessary for the protection of federal rights.”

341 U.S. at 349. Pointing to the “usual rule of comity,”

the Court concluded that “[w]hatever rights appellee may

have are to be pursued through the state courts.” Id. at

350. See also Louisiana Power & Light Co. v. Thibodaux,

360 U.S. 25 (1959) ; Colorado River Water Conservation

District v. United States, 424 U.S. 800 (1976) .*

There is, of course, no bright line to separate activities

of particular importance to the states from other activi-

ties deemed less important. But, at this point in the his-

tory of federal-state relations, it is virtually beyond dis-

pute that regulation of insurance companies, the matter

at issue here, is a subject of unusual sensitivity to the

states. As the Court has recognized, for at least 75 years

prior to 1944, “regulation of insurance transactions was

thought to rest exclusively with the States.” Securities

and Exchange Commission v. National Securities, Inc.,

393 U.S. 453, 458 (1969). After the decision in United

States v. South-Eastern Underwriters Ass’n, 322 U.S.

533 (1944), which cast doubt upon the issue, Congress

promptly passed the McCarran-Ferguson Act, 59 Stat. 34

(1945), as amended, 15 U.S.C. $1011 et seq., to reaffirm

the primary role of the states in regulating the business

of insurance. That role has continued essentially undi-

minished to the present time.’

6 While these principles generally evolved in cases seeking equit-

able or declaratory relief, this Court has recently made clear that

they apply to suits for damages as well. In Fair Assessment in Real

Estate Ass’n, Inc. v. McNary, supra, the Court reasoned that the

determinations necessary to sustain an action for damages “would

be fully as intrusive as the equitable actions that are barred by

principles of comity.” 7d. at 113. The Court pointed out that “dam-

ages actions, no less than actions for an injunction, would hale state

officers into federal court every time a taxpayer alleged the requisite

elements of a § 1983 claim.” Jd. at 115. The controlling question in

every case, therefore, is not whether the suit seeks damages or an

injunction but whether it needlessly interferes with regulatory or

other activities of particular importance to the state.

7 The McCarran-Ferguson Act leaves little doubt about the limits

of federal intervention into insurance matters. In its first section,

The decision of the court of appeals in this case does

considerable violence to these policies. Without any effort

to divine actual or likely state law on the subject, the

court first announced a rule that administrative deter-

minations do not affect the liability of companies relying

on them. Pet. App. 22 n.11.* To make matters worse, it

proceeded to reopen the questions decided by the state

agency, ultimately concluding that the decisions were

erroneous. Pet. App. 22. As a result, petitioner has been

subject to liability on legal grounds that have no identi-

fiable basis in state law and on factual grounds that are

in conflict with findings of a state agency.® This judicial

venture has effectively made the state decisions meaning-

less.

for example, Congress expressly declared that “the continued regula-

tion and taxation by the several States of the business of insurance

is in the public interest.” 15 U.S.C. § 1011. The Act then provides

that “[n]o Act of Congress shall be construed to invalidate, impair,

or supersede any law enacted by any State for the purpose of regu-

lating the business of insurance * * * unless such Act specifically

relates to the business of insurance * * *.” 15 U.S.C. § 1012(b).

This Court in National Securities observed that “[t]he relationship

between insurer and insured, the type of policy which could be is-

sued, its reliability, interpretation, and enforcement—these were

the core of the ‘business of insurance.’” 393 U.S. at 460. The issue

of valuation of assets, in turn, goes directly to the question of the

“reliability” of a company’s insurance policies, since it determines

what assets are considered to be available for the payment of claims.

8 Rejecting arguments to the contrary as “spurious,” the court

stated: “An insurance company may not delegate responsibility for

valuation of its assets to a state agency, and the mere fact that an

insurance commissioner accepts a company’s asset valuation does not

immunize the company from liability arising from that valuation.”

Pet App. 22 n.11. The court cited no authority for this proposition.

® Although the Department of Insurance later required the life

interest to be carried at a lower valuation (see page 4, supra),

it did not attempt to revise the earlier valuations retroactively. It

is the retroactive change in valuation, supplied by the court of ap-

peals, that is at issue here.

The legal questions decided by the court of appeals, far

from being peripheral issues, lie at the heart of the state

regulatory process. If it is true that “[a]n insurance

company may not delegate responsibility for valuation of

its assets to a state agency,” as the court of appeals de-

clared, then the final word on valuation of assets must

necessarily rest with the insurance companies themselves,

not the state agencies. In that case, it might naturally

follow that, as the court of appeals also concluded, “the

mere fact that an insurance commissioner accepts a com-

pany’s asset valuation does not immunize the company

from liability arising from that valuation.” But, if those

issues are decided the other way, and the decisions of the

state agency are deemed controlling, then the balance of

responsibility shifts markedly. It is just that sort of is-

sue that the state courts, rather than the federal courts,

are better positioned to decide.’®

It scarcely helps matters that the views of the court of

appeals are almost certainly wrong. Even a cursory

reading of state law shows clearly that the Alabama De-

partment of Insurance is, and long has been, given ulti-

mate responsibility for the valuation of assets. 28 Ala.

Code § 61 (1959); Ala. Code §§ 27-37-1 et seg. (1977).

Since state law has imposed that duty, no delegation from

the companies is needed or even possible. Once a valua-

tion has been set, the companies are then bound to respect

that valuation and may be subject to shareholder suits if

they let assets languish.

We also believe that the state courts would be far more

likely to support agency findings in the face of collateral

attack. Even where direct attacks are concerned, for ex-

ample, Alabama law requires that an order of the Insur-

ance Commissioner “be taken as just and reasonable.”

10 This Court, of course, has also recognized that uncertainty about

state law is an independent reason justifying abstention. See, e.g.,

Railroad Comm’n of Texas v. Pullman, 312 U.S. 496 (1941) ; Loutsi-

ana Power & Light Co. v. Thibodauz, supra.

Ala. Code § 27-2-32 (1975). Furthermore, “[i]t is an

accepted principle that [t]he rule which forbids the re-

opening of a matter once judicially determined by com-

petent authority applies as well to the judicial and quasi-

judicial acts of public, executive, or administrative offi-

cers and boards acting within their jurisdiction as to the

judgments of courts having general judicial powers.”

State v. Brooks, 58 So.2d 329, 333 (Ala. 1951) (in-

ternal quotes omitted). See also City of Huntsville v.

Goodenrath, 68 So. 676 (Ala. 1915). Since the acts

of the Alabama Commissioner are expressly made quasi-

judicial, Ala. Code § 27-2-31(a) (1975), we seriously

doubt whether the Alabama courts would recognize a

cause of action for damages based on a claim that earlier

factual determinations of the Commissioner were unrea-

sonable.! At the very least, the Alabama courts should

have the opportunity to make that choice for themselves.”

The evils of the court of appeals’ rule are well demon-

strated in this case. While the suit did not directly chal-

lenge the actions of the Alabama Department of Insur-

ance, the claims in the end invited the federal courts to

determine that those actions were wrong. It is undis-

puted that the events giving rise to this lawsuit were the

valuation of the life interest in 1965 and a series of

acquisitions from 1965-1968 (see Pet. App. 14); it is

11 At one point, the court of appeals seems to imply that it would

permit imposition of liability even if the administrative determina-

tions were reasonable. Pet. App. 22-23. Again, no authority is cited

for this proposition and, so far as we are aware, none could be.

12 Alabama law on these points is hardly out of step with other

jurisdictions. See cases cited at note 19, infra. Indeed, in a case

quite similar to this one, a three-judge federal court held that an

administrative determination was binding even on subsequent ad-

ministrators and that it could not be collaterally attacked. Modern

Woodmen of America v. Casados, 17 F. Supp. 763 (D.N.M. 1937).

13 As the court of appeals itself noted, “there was only one wrong

complained of and proved: the manipulation of the life interest

leading to fatal undercapitalized acquisition * * *.” Pet. App. 27.

likewise undisputed that the Department of Insurance,

after review by its examiners and a hearing on valuation,

decided to admit the life interest at a value of $14.2 mil-

lion and that the Department subsequently approved each

of the challenged acquisitions. Pet. App. 7-8; DX 6, DX

483A, DX 44, DX 47. Yet, notwithstanding these admin-

istrative decisions and the absence of any challenge to

those decisions in state court, the court below felt free to

conduct a de novo review of the wisdom of the determina-

tions and to conclude that they were “unreasonable.”

Pet. App. 22. This sort of second opinion suspends in-

surance companies between competing factfinding bodies.

Had the 1965 valuation or the later acquisitions

prompted a direct and immediate challenge in federal

court, we think that the principles of noninterference

established in Burford and McNary would have required

its dismissal. See also Allstate Insurance Co. v. Sabbagh,

supra, and Smith v. Metropolitan Property & Liability

Ins. Co., discussed at pages 16-17, infra. It should hardly

benefit respondent that, instead of filing an immediate

direct challenge, it chose to make a collateral attack in the

form of an action for damages some nine years later. To

begin with, as the cases cited above indicate (see page 13,

supra), it is well recognized that a collateral attack may

not do service for a direct appeal or act as a way around

neglected procedural requirements. But, in any event, the

interference with state regulatory efforts is, if anything,

even greater in such a case since a suit for damages not

only requires a finding that the administrative deter-

14 The court of appeals does make the gratuitous suggestion that

the Superintendent of Insurance “might have been swayed by con-

siderations of friendship and obligation in approving the increased

valuation of the life interest.” Pet. App. 8 n.4. In so surmising,

however, the court ignored not only the established presumption that

officials act in a proper manner (see, e.g., United States v. Chemical

Foundation, Inc., 272 U.S. 1, 14-15 (1926) ), but also the fact that a

subsequent Superintendent reached the same conclusion despite the

submission of other possible valuation figures. See page 4, supra.

minations were wrong but exacts an after-the-fact pen-

alty for acting on the basis of those determinations. In-

deed, it is to prevent this sort of uncertainty that both

Alabama and Texas have required chalienges to insur-

ance rulings to be made in a single, specified state court.

See Ala. Code § 27-2-32 (1975) (“circuit court of Mont-

gomery County, Alabama”); Texas Ins. Code Ann. art.

1.15, § 4 (Vernon 1981) (“any state district court located

in Travis County, Texas’’) .*

The intrusion on state regulation might be worth the

cost if the federal courts had something particular to con-

tribute, but the reverse is true. It merely states the ob-

vious to say that the federal courts have no notable ex-

pertise in valuations for insurance purposes. As the

opinion of the court of appeals aptly demonstrates, the

valuation of a life interest depends upon choices made

among a number of variables, including life expectancy,

projected income streams, and anticipated inflation rates.

See Pet. App. 4. In concluding that the trust interest was

overvalued, the court of appeals simply advanced its own

view, with the not inconsiderable benefit of hindsight, on

the proper resolution of an issue resolved differently by

the Department of Insurance seventeen years before.’®

15 The presence of the unaddressed federal securities claims does

not change our view. The intrusion on state affairs would be just as

great, for example, if a stockholder sought to challenge an admin-

istrative valuation by suing the insurance company for including

that valuation on its balance sheet. We see no reason why the fed-

eral courts in such a case should have a license to force insurance

companies to choose, at their peril, between an administrative find-

ing and a judicial one.

16 For example, the court of appeals relied, among other things,

on “ANICO’s subsequent earnings history” as support for a more

conservative valuation. Pet. App. 22. The court also announced its

view that “the $14,403,200 valuation was clearly unreasonable in

relation to the life interest’s income,” Pet. App. 22, although the

same figures regarding trust income were before the Superintendent

when he made his determination that the $14 million figure was rea-

sonable. We also note that in the period from 1964-75, Empire re-

Whether or not the court of appeals is right, a point on

which experts may eternally differ, the fact remains that

the substitution of federal judges for state administra-

tors turns the regulation of insurance companies on its

head.

The willingness of the Fifth Circuit to meddle in these

issues is in marked contrast to the position taken by the

First and Second Circuits. See Allstate Insurance Co. v.

Sabbagh, supra; Smith v. Metropolitan Property & Lia-

bility Ins. Co., supra. See also Construction Aggregates

Corp. v. Rivera de Vicenty, 573 F.2d 86 (1st Cir. 1978);

Barry v. St. Paul Fire and Marine Ins. Co., 555 F.2d

3 (1st Cir. 1977), aff’d, 438 U.S. 531 (1978). In

Sabbagh, for example, the First Circuit upheld, on the

basis of Burford v. Sun Oil Co., supra, the decision to

abstain from a challenge to automobile insurance rates

established by the Massachusetts Commissioner of Insur-

ance. The court noted that, like the courts in Burford

and Alabama Public Service Commission, it was “dealing

with an area of intensely loca] interest.” 603 F.2d at

233. Furthermore, it observed that, as was the case here,

“[t]his case would inevitably involve detailed factual

analysis of the bases of the Commissioner’s decision and

[plaintiff’s] efforts to prove the Commissioner’s decision

unjustified.” bid. The court concluded that any such

review could be better conducted by the state courts. Id.

at 233-34."

ceived nearly $2.5 million in dividends from the life interest, Empire

Life Insurance Co. v. Moody, 584 S.W.2d 855, 859 n.2 (Tex. 1979),

and it has recsived substantially more since then.

17 The First Circuit in Construction Aggregates also took special

care not to create avenues of relief in federal court where none

would exist in state court. The court observed: “| Appellant! has

not cited any statute or authority granting to the Puerto Rico courts

jurisdiction to entertain an attack on an Insurance Fund rate in any

other manner. If the laws of Puerto Rico do not recognize a cause

of action permitting a collateral attack on these rates, a federal court

in the exercise of its diversity jurisdiction would be unable to enter-

The court in Smith followed a similar course, uphold-

ing the decision to abstain in a suit challenging the valid-

ity of an exclusionary clause in an automobile insurance

policy. First noting that state law on the issue was un-

clear, the court went on to emphasize that the state had

a vital interest “in the doctrinal integrity of its regula-

tory scheme.” 629 F.2d at 760. The court pointed out

that federal interference might have “a severe disruptive

impact on the state regulatory apparatus,” id. at 761,

finally concluding: “The fact that the insurance industry

is heavily regulated makes it all the more important that

we stay our hand in favor of a definitive and uniform

interpretation from the state courts. Abstention is par-

ticularly appropriate when dealing with a complicated

and comprehensive regulatory statute intended to strike

a balance between differing local interests.” Jd. at 761

‘internal quotes and citations omitted) .’*

in valuing the assets of an insurance company, state

regulators necessarily must “strike a balance between

differing local interests.” If assets are valued too high,

the protection afforded to policyholders will be eroded.

On the other hand, if assets are undervalued, the ability

of insurance companies to provide insurance coverage,

tain any such claim.” 573 F.2d at 96. The court of appeals in the

present case made no effort at all to determine whether the Alabama

courts would permit a suit of this sort.

18 These cases strongly suggest that the mischief of the decision

below, while ample in its own right, cannot readily be confined to

this particular case. For, if a plaintiff may seek damages in federal

court based upon his disagreement with agency determinations, then

the true effect of agency decisions cannot be known until such suits

are finally resolved. Thus, for instance, an insurance company

might become subject to class actions by policyholders for charging

rates previously approved by state regulators or to suits for enforc-

ing policy exclusions allowed by state regulators, even though no

direct challenge to such rates or exclusions had ever been made in

state court. In light of such continuing uncertainty, it will become

increasingly difficult for states to establish a coherent system of in-

surance regulation.

and thereby compete for insurance customers, will be

arbitrarily cut back. Thus, in addition to the usual diffi-

culties associated with valuing assets, insurance commis-

sioners must decide, on grounds of policy, whether they

will tolerate certain risks in exchange for more extensive

competition. Once those choices have been made, they

should not be subject to either direct or collateral attack

in federal court.

This is plainly a case where “intervention of a federal

court is not necessary for the protection of federal

rights.” Alabama Public Service Comm’n v. Southern

Ry. Co., supra, 341 U.S, at 349. The decision to exercise

jurisdiction was thus an improper interference with state

efforts to regulate insurance companies. ,

II. The Court Of Appeals Improperly Substituted Its Own

Views For The Applicable State Law.

Even if the courts below properly decided to exercise

jurisdiction, they were required to apply state law to the

state law claims. Erie Railroad Co. v. Tompkins, 304

U.S. 64 (1938). Yet, on the crucial question regarding

the 1965 valuation, the court of appeals seemingly made

no effort to do so, instead announcing its own erroneous

view that state factfinding does not affect the liability of

insurance companies.’® This casual lawmaking is pre-

19 The Court’s sweeping and summary disposal of the pivotal ques-

tion of law (see note 8, supra), while perhaps an eloquent state-

ment of its sense of what the law ought to be, flatly contradicts what

the States of Texas and Alabama have decreed that the law shall be.

In Texas (whose law the court of appeals generally applied on other

questions) collateral attacks on agency determinations, in private

suits for damages and otherwise, are forbidden. Bolton v. Coats, 514

S.W.2d 482 (Tex. Civ. App. 1974); Railroad Commission v. Mce-

Knight, 619 S.W.2d 255 (Tex. Civ. App. 1981); Railroad Commis-

sion v. Marathon Oil Co., 89 S.W.2d 517 (Tex. Civ. App. 1935);

Kirby Lumber Co. v. Adams, 62 8.W.2d 366 (Tex. Civ. App. 1933).

The law in Alabama is to the same effect. See cases cited at page

18, supra. Not even by alleging that an administrative finding

was procured by the defendant's own false statements as evidence

cisely the sort of judicial enterprise that Erie was in-

tended to stop.

Few legal principles have been stated as plainly as the

principle established in Erie: “[t]here is no federal com-

mon law.” Id. at 78. Not only does Congress “ha[ve]

no power to declare substantive rules of common law ap-

plicable in a state * * *,” id. at 78, but “no clause in the

Constitution purports to confer such a power upon the

federal courts.” Jd. at 78. Rather, this Court instructed

that “[e]xcept in matters governed by the Federal Con-

stitution or by acts of Congress, the law to be applied in

any case is the law of the state.” 304 U.S. at 78.

The reasons for the rule are many and various. To be-

gin with, the so-called “general law” of the federal courts

often has amounted to “little less than what the judge

advancing the doctrine [thought] at the time should be

general law on a particular subject * * *.” Baltimore &

Ohio R.R. v. Baugh, 149 U.S. 368, 401 (1893) (Field, J.,

dissenting). In addition, creation of general principles

introduces a lack of uniformity into the law, making the

effects of commercial transactions more uncertain and the

incentives to forum-shopping more seductive. 304 U.S. at

can a plaintiff prevent a defendant from “reiying on the order as a

shield of liability.” Bolton v. Coats, supra, 514 S.W.2d at 487.

As the Texas Attorney General pointed out in his amicus

brief supporting a rehearing en banc, the court of appeals’ “non-

delegation” language was simply a way of phrasing a rule of law

directly contravening the Texas and Alabama rules. Brief Amicus

Curiae of the State of Texas in Support of Appellant’s Suggestion

for Rehearing En Banc at 6-7. “It is the state, acting pursuant to

its responsibility to protect the public, that delegates responsibility

for the valuation of assets. The insurance companies do not delegate

any responsibility; insurance regulators value assets because the

law of the state requires them to, not because the company requests

them to.” Jd. at 7 (emphasis in original). The proposition that the

court of appeals rejected as “spurious” was not a proposition in-

vented by petitioner; rather, it was the law that would have been

applied had this case been brought in state court.

74. Finally, the imposition of federal common law in-

jures not only private litigants, but the states themselves,

and hence the structure of constitutional government. As

Justice Field had observed many years before Erie, “noth-

ing can be more disturbing and irritating to the states

than an attempted enforcement upon its people of a sup-

posed unwritten law * * * to which they have never

assented and which has no existence except in the brain

of the Federal judges in their conceptions of what the

law of the states should be on the subjects considered.”

Baltimore & Ohio R.R. v. Baugh, supra, 149 U.S. at 403

(Field, J., dissenting) .”

The decision of the court of appeals here simply returns

the allocation of lawmaking power to its condition before

Erie. Although the court obviously did not disavow Erie,

its statement of a broad general principle, without any

grounding in or reference to state law, produces the same

practical result. If the court of appeals had carefully

considered the relevant state authorities, and if it had

then rejected them as “spurious” on the ground that

they conflicted with a general rule that “an insurance

company may not delegate responsibility for valuation of

its assets to a state agency,” it would clearly have vio-

lated Erie and the Constitution. Since the basis for Frie

is that the federal courts lack jurisdiction to make law,

20 Indeed, perhaps the most significant aspect of the decision in

Erie was its formal recognition that the Constitution can be vio-

lated by the conduct of the federal courts themselves, independent of

any unconstitutional legislative or executive actions. Erie Railroad

Co. v. Tompkins, supra, 304 U.S. at 79-80; see C. Wright, Handbook

on the Law of Federal Courts § 56 at 259 (3d ed. 1976). “It is im-

possible to overstate the importance” of this holding, which “an-

nounces no technical doctrine of procedure or jurisdiction, but goes

to the heart of the relations between the federal government and

the states, and returns to the states a power that had for nearly a

century been exercised by the federal government.” C. Wright,

supra, § 55 at 255.

except where jurisdiction has been delegated by the Con-

stitution and by Congress, a covert or careless usurpation

of state lawmaking power is no less unconstitutional than

an open and intentional one.

The damage done by the usurpation here is particularly

acute because it transfers decisionmaking authority from

an administrative agency to a court. In deciding that the

Alabama Insurance Commissioner shall decide on the

value of insurance company reserve assets, the State of

Alabama chose to delegate this authority to an account-

able public official chosen for specialized knowledge and

competence in the insurance field. By decreeing that his

findings can be overridden by a federal court, the court

of appeals transferred decisionmaking power to a body

whose members are chosen without any regard for their

knowledge of the insurance industry, and who are given

life tenure precisely so that they will not be politically

accountable. Even if it were preferable for decisions

about insurance regulation to be made by life-tenured

generalists rather than by politically-accountable special-

ists, a proposition that we doubt, the point is that the

transfer of decisionmaking power is a substantial one

that restructures Alabama’s regulatory scheme in impor-

tant ways. If, as petitioner contends, the court below had

no authority under state law to effect such a transfer,

then its decision to do so is a serious error that de-

serves correction.

Although it may be presumed that federal courts often

make common law by simply erring in their reading of

state law, this case involves more than a mere misstep.

Here, the court of appeals did not even attempt to apply

state law to the question on which the case turned. That

disregard is particularly inappropriate in this case for

not only are there relevant authorities but they man-

date the opposite result. See note 19, supra. Finally, we

note that the manner of ignoring state law—sweeping

aside contentions about the specific positive law of a state

with a genera] statement about what the law must be—

suggests a return to precisely the judicial attitudes and

habits that Erie condemned.

These departures can ultimately be curtailed only by

this Court. This Court recognized recently in Milwaukee

v. Illinois, 451 U.S. 304, 317 n.9 (1981), that “[s]ince

the states are represented in Congress but not in the fed-

eral courts, the very concerns about displacing state law

which counsel against finding pre-emption of state law in

the absence of clear intent actually suggest a willingness

to find congressional displacement of federal common

law.” In this case—where the issue is whether a federal

court has displaced state lawmakers in an area incontest-

ably outside the legitimate scope of federal common law—

the same concerns should prompt a broad willingness by

this Court to review and scrutinize claims that the fed-

eral courts have exceeded their constitutional authority.

The Court, in fact, exhibited precisely that willingness

in several cases decided after Erie. In those cases, the

Court readily reversed decisions by federal courts that,

while acknowledging the obligation to apply state law, in

fact decided crucial points without reference to applicable

state decisions. See Texarkana v. Arkansas Louisiana

Gas Co., 306 U.S. 188 (1939), and Equitable Life Insur-

ance Co. v. Halsey, 312 U.S. 410 (1941). In Texarkana,

for example, the court of appeals had found it “perfectly

plain” that a certain contract clause was “completely in-

valid and unenforceable as an attempt to abdicate and

delegate” a legal duty. 97 F.2d at 9. This Court, how-

ever, reversed on the ground that the “perfectly plain”

proposition had been decisively rejected by the Texas

Supreme Court. 306 U.S. at 201-02. Similarly, the court

of appeals in Equitable Life cited no state cases for its

pivotal holding but simply declared: “We see no reason

why appellant should be held accountable,” since a certain

clause in a contract “constituted a valid defense.” This

Court again reversed, noting that the Supreme Court of

Iowa had held otherwise. 312 U.S. at 423-426. The les-

son of Erie, then, is that the federal courts must in fact

apply state law, not merely pay lip service to it.

The tendency of federal] courts to invent their own law

has continued to occupy the attention of this Court. For

example, the Court recently recognized and attempted to

curtail the use of broadly-worded federal statutes as de-

vices for the transformation of federal courts into courts

of general common law. In Parratt v. Taylor, 451 U.S.

527 (1981), this Court rejected a lower federal court’s

attempt to enact the principle that “loss should not go

without redress” into a federal law imposing liability on

state officials under 42 U.S.C. § 1983. While suggesting

that this axiom ‘‘would be an admirable provision to be

contained in a code,” the Court observed that there is ‘“‘no

general common law applicable to federal courts” and

that the case must be resolved “not simply with a single,

general principle, however just that principle may be in

the abstract, but with the complex interplay of the Con-

stitution, statutes, and the facts which form the basis for

this litigation.” Jd. at 531-32. Similarly, in Paul v.

Davis, 424 U.S. 693 (1976), this Court rejected any con-

struction of the Due Process Clause that would “make of

the Fourteenth Amendment a font of tort law to be su-

perimposed upon whatever systems may already be ad-

ministered by the states.” Jd. at 701. It would make

little sense to allow federal courts, constrained by admo-

nitions against replacing state tort law with their own

preferred general principles under the authority of the

Constitution or a federal statute, to accomplish exactly

the same result under the rubric of interpreting state

law.

III. The Decision Below, by Allowing Respondent A Dupli-

cative Recovery, Is Inconsistent With The Decision Of

This Court In Bangor Punta Operations, Inc. v. Bangor

& Aroostook Railroad Co., 417 U.S. 703 (1974).

As the court ov appeals has recognized, the recovery in

this case will go, not to Empire, but to Protective Life

Insurance Company. Pet. App. 17. Since Protective has

already reaped the benefit of acquiring Empire’s assets

under the auspices of the receivership, the judgment here

is precisely the sort of windfall condemned in Bangor

Punta Operations, Inc. v. Bangor & Aroostook Railroad

Co., supra.

In Bangor Punta, this Court struck down a suit by a

corporation against its former owner, where “the real

party in interest and the principal beneficiary of any

recovery” was the new owner of the corporation. In ex-

plaining why such a suit could not go forward, the Court

relied on the “settled principle of equity that a share-

holder may not complain of acts of corporate mismanage-

ment if he acquired his shares from those who partic-

ipated or acquiesced in the allegedly wrongful transac-

tions.” 417 U.S. at 710. As the Court stated, this broad

rule applies “with special force where a shareholder pur-

chases all or substantially all the shares of a corporation

from a vendor at a fair price, and then seeks to recover

against that vendor for prior corporate mismanagement.”

Id. (emphasis added).

The Court noted that a verdict for the plaintiff under

such circumstances would produce two complementary

inequitable results. First, the new owner of the corpora-

tion would receive a “windfall,” because he would have

paid a depressed price for the company due to the prior

mismanagement, and then would also have received,

through the corporation’s suit, compensation for that mis-

management, which injured him not at all. Jd. at 711-

12.7: Second, where the defendant was also the former

21 The need to prevent new shareholders from “reap[ing] a profit

from the wrongs done to others,” id. at 711, may be viewed as the

sole or majority shareholder, that defendant would be

doubly punished for his wrongdoing. As Bangor Punta

recognized, 417 U.S. at 172, when such a shareholder

mismanages a company, he does the injury, as it were, to

himself. See also In Re REA Express Inc., Private Tre-

ble Damage Antitrust Litigation, 412 F.Supp. 1239, 1252

(E.D. Pa. 1976). Since that self-inflicted injury is re

flected in the depressed sale price received, id., a subse-

quent lawsuit can only have the “practical effect” of

requiring the former owner to “pay twice” for his wrong-

doing. See National Union Electric Corp. v. Matsushita

Electric Industrial Co., 498 F. Supp. 991, 1002 (E.D. Pa.

1980).

Those principles come into full play here. Just as in

Bangor Punta, petitioner is a former majority owner of

a company, facing a lawsuit for mismanagement brought

in the name of the corporation by its new “owner.” *

Here, under the reinsurance agreement between the re-

ceiver and Protective, the role of the nominal corporate

plaintiff is merely as a conduit because the contract guar-

antees that the bulk of any lawsuit proceeds will pass

through the corporation and go directly to Protective.

Thus, the real beneficiary in this case, as in Bangor

Punta, is simply seeking to recover for alleged corporate

central purpose of the Bangor Punta rule. Rock River Savings and

Loan Association v. American States Insurance Co., 594 F.2d 633,

635 (7th Cir. 1979). It is a need that comes into play whenever a

company is sold for a price that is depressed due to previous mis-

conduct and the buyer then seeks to recover for that misconduct.

E.g., id.; Courtland Manor, Inc. v. Leeds, 347 A.2d 144, 148 (Del.

Ch. 1975).

22In Bangor Punta, of course, that owner was a purchaser in a

conventional stock sale, whereas, here, petitioner lost his interest in

Empire Life through a combination of a receivership and a reinsur-

ance agreement transferring the policies and assets to a competitor

(Protective). Yet this difference does not alter the fundamental

fact that each case includes a real party in interest other than the

named corporate plaintiff. And it is clear that a reinsurance agree-

ment is effectively a “sale.” Kentucky Central Life Insurance Co. v.

Commissioner, 57 TC 482, 496 (1972).

mismanagement when the same mismanagement was the

basis for its acquisition on depressed terms. That re-

covery would seem to be a windfall of the purest sort.

The court of appeals, however, declined to apply Ban-

gor Punta, finding an exception where the buyer osten-

sibly “bargained for” the litigation proceeds. Pet. App.

17-18. We do not believe that any such exception exists.

Although one court has recognized that a buyer and seller

may include a valuable cause of action in their calcula-

tions of the appropriate price, that court properly limited

the exception to cases in which the cause of action lies

against third parties, not the former owners of the com-

pany. National Union Electric Corp. v. Matsushita Elec-

tric Industrial Co., supra, 498 F. Supp. at 1002. Indeed,

any broader exception would make little sense. It will

surely be the rare case where a seller of a corporation

sells with it a right to sue himself for an unknown and

unknowable amount of damages. And even if, for some

reason, the effects of mismanagement were a separate

item for discussion, it would be far more desirable to have

a rule that requires the buyer and seller to decide the

price of such mismanagement through negotiation, or

through arbitration, than by agreeing to institute or ex-

tend litigation in the federal courts.

In any event, the exception fashioned by the court of

appeals is wholly inapplicable to this case. While the

court apparently believed that the policyholders of Empire

would be the beneficiaries of the recovery, the jury ex-

pressly found that the policyholders suffered no injury.

Interrogatory No. 11. Thus, not one cent of the judgment

is intended to reimburse the policyholders. Moreover, it

is now clear that the policyholders will not get one cent

since any obligation of Protective to pay them has ended.*

It is Protective, and Protective alone, that the judgment

will enrich.

23TIt is now a matter of public record that Protective has no obli-

gation to pay any of the recovery to policyholders of Empire. See

Protective Corporation Annual Report, 1982, at 24.

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted,

GROVER REEs III H. BARTOW FARR III *