Opposition Brief — NationsBank of North Carolina, N. A. v. Variable Annuity Life Insurance

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/ Meapreme Court, a. ]

FILED

6) 5) MAY 13 1004

Nos. 93-1612, 93-1613 | OFFICE OE THE CLERK

IN THE ~

Supreme Court of the United States

OCTOBER TERM, 1993

EUGENE LUDWIG,

COMPTROLLER OF THE CURRENCY, ET AL.,

Petitioners,

VARIABLE ANNUITY LIFE INSURANCE COMPANY,

Respondent.

On Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Fifth Circuit

BRIEF FOR THE RESPONDENT IN OPPOSITION

MARTIN E. LYBECKER

DAVID OVERLOCK STEWART

(Counsel of Record)

ALAN G. PRIEST

RAYMOND C. ORTMAN, JR.

ROPES & GRAY

WILLIAM A. WILSON __ 1001 Pennsylvania Avenue, N.W.

The Variable Annuity Suite 1200 South

Life Insurance Co. Washington, DC 20004

2929 Allen Parkway (202) 626-3900

Houston, TX 77019

(713) 831-5491

Of Counsel

Balmar Legal Publishing Services, Washington, D.C., (202) 682-9800

QUESTIONS PRESENTED

1. Whether the Fifth Circuit misapplied the Chevron

standard when it did not adopt the Comptroller’s new construc-

tion of 12 U.S.C. § 24(7) or his new determination that annuities

do not constitute “insurance” for purposes of 12 U.S.C. § 92,

even though the Comptroller contradicted his prior construction

of those statutes. (No. 93-1612)

2. Whether 12 U.S.C. § 92, which provides that, “in

addition to” their other powers, national banks located in places

with 5,000 or fewer inhabitants may act as the agent for “any

fire, life, or other insurance company,” impliedly bars national

banks in more populous places from brokering annuities. (No.

93-1612)

3. Whether the federal law permits national banks wher-

ever located, to act as agents in the sale of annuities. (No.

93-1613)

4. Whether the sale of annuity contracts is “necessary to

Carry on the business of banking” under 12 U.S.C. § 24(7).

DISCLOSURE OF CORPORATE PARENT

American General Corporation is the parent corporation of

respondent, Variable Annuity Life Insurance Company.

ill

TABLE OF CONTENTS

PAGE

QUESTIONS PRESENTED ............. i

DISCLOSURE OF CORPORATE PARENT .... ii

TABLE OF AUTHORITIES ............. Vv

RE ee ae

COUNTER-STATEMENT OF THECASE ..... 2

A. 1916: Congress Allows Small-Town

National Banks To Act As Agent For

InsuranceCompanies ............ 2

B. 1968: The Fifth Circuit Holds That

Section 92 Bars National Banks From

Acting As Agents For Insurance

Companies In Towns With Population

re cr ets oo 6 0 3

C. 1978: The Comptroller Rules That Section

92 Bars The Sale Of Annuity Contracts

By Large-Town National Banks ...... 4

D. 1990: The Comptroller Reverses

Himself On the Sale Of Annuity

Contracts By National Banks ........

E. Proceedings Below .............

REASONS FOR DENYING THE WRIT ......

I. THE COURT OF APPEALS CORRECTLY

INTERPRETED SECTION 92 ....... 8

A. The Court of Appeals Correctly

Construed The Banking Statutes .... 8

B. The Court Of Appeals Properly

Applied Chewon ............ 12

Il. THERE IS NO CONFLICT AMONG THE

ee ae

Ill. THE SALE OF ANNUITY CONTRACTS

IS NOT “NECESSARY TO CARRY ON

THE BUSINESS OF BANKING” ...._ .

CIS 66 oe we se wee cee se

MEd o's ils o-a-o-0 Goo 2 hee ee

TABLE OF AUTHORITIES

CASES PAGE

American Land Title Ass'n v. Clarke, 968 F.2d 150

(2d Cir. 1992), cert. denied sub nom., Ludwig v.

American Land Title Ass'n, 113 S. Ct. 2959

STE ae ee a a ae des oe a ee ein passim

Botany Worsted Mills v. United States, 278 U.S. 282

Be er, os ee ee 8

Bowen v. Georgetown Univ. Hospital, 488 U.S. 204

arts ore-8 Cara als atk wy os 12

Chevron U.S.A., Inc. v. Natural Resources Defense

Council, Inc., 467 U.S. 837 (1984) . . . 6-7, 12-13, 15

Group Life & Health Ins. Co. v. Royal Drug Co.,

e.g Oe bce eo 5” 10

Independent Bankers Ass'n v. Heimann, 613 F.2d

1164 (D.C. Cir. 1979), cert. denied, 449 U.S.

SES a ee ee ee 14-15

Independent Ins. Agents of Am., Inc. v. Ludwig, 997

ko 16

Lechmere, Inc. v. NLRB, 112 S. Ct. 841 (1992) . . 13

Mu'Min v. Virginia, 111 S.Ct. 1899 (1991)... . 10

New York State Ass'n of Life Underwriters, Inc. v.

New York State Banking Dep't, 83 N.Y .2d 353

Se 5 Ee ee ee ee ee ele ea 17

Pauley v. Bethenergy Mines, Inc., 111 S. Ct. 2524

tC 2 ae wid abe ke wae + © 6 12

Presley v. Etowah County Comm'n, 112 S. Ct.

IRE aE ar re ae 6, 13

Ross v. Moffitt, 417 U.S. 600 (1974) ........ 8

Saxon v. Georgia Ass'n of Indep. Ins. Agents, 399

F.2d 1010 (Sth Cir. 1968) ........ 3, 5-6, 12, 14-15

SEC v. United Benefit Life Ins. Co., 387 U.S. 202

SR bak a eae Oo 4k ee 12

SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65

SOs oie a bie ee eee ee 11

Variable Annuity Life Ins. Co. v. Clarke, 786 F.

Supp. 639 (S.D. Tex. 1991), reversed, 998 F.2d

1295 (Sth Cir. 1993), reh’g denied, 13 F.3d 833

IN sos 6 5 s/s 0 8 ok ee 5

Variable Annuity Life Ins. Co. v. Clarke, 998 F.2d

1295 (Sth Cir. 1993), reh’g denied, 13 F.3d 833

IS ro 4 xo 4 8 Ure a passim

STATUTES AND RULES

EE 6 6 5. 0 hos oe 9 @ ble wes 10

Ga ca saa ue a whe 0% a 00rd passim

es a ys ss le ae. 0 ble ee oF passim

CRU PIED ot ee tee eee 1]

EE ka sk sk ee ee ee 10

RE a ea aa a 10

er eee 10

ee ee ee 10

Garn-St Germain Depository Institutions Act of

1982, Pub. L. No. 97-320 , §§ 118(a), 601

NN ge eg ain se yk 14

SS Ee rrr roe 8

LEGISLATIVE AND ADMINSTRATIVE MATERIALS

53 Cong. Rec. 11001 (July 14,1916) ....... 2, 3,9

2 Fed. Res. Bull. 73 (Feb. 1,1916)......... 2

Vii

OCC Interpretive Letter No. 241, reprinted in

Whiting, A Guide to the Federal Law of

Banking and Insurance (1991) ........

OCC Interpretive Letter No. 331, reprinted in

[1985-1987 Transfer Binder] Fed. Banking L.

Rep. (CCH) ¥ 85,501 (Apr. 4, 1985) .....

OTHER MATERIALS

S. Huebner and K. Black, Life Insurance (6th ed.

btn ae UTE ei Cle ae eg gy

R. Keeton, Insurance Law § 1.2 (aX1971).....

David W. Roderer, “Congress Should Defer Action

on Bank Annuity Sales,” American Banker

i Sees « ls 's <6 66 ae wee 6s 2

Nos. 93-1612, 93-1613

IN THE

Supreme Court of the United States

OCTOBER TERM, 1993

EUGENE LUDWIG,

COMPTROLLER OF THE CURRENCY, ET AL..,

Petitioners,

VARIABLE ANNUITY LIFE INSURANCE COMPANY,

Respondent.

On Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Fifth Circuit

BRIEF FOR THE RESPONDENT IN OPPOSITION

SUMMARY

This Court should not review the decision below, which

was a correct and unremarkable interpretation of 12 U.S.C. §§

92 and 24(7). The Fifth Circuit’s decision is consistent with

American Land Title Ass'n v. Clarke, 968 F.2d 150 (2d Cir.

1992), cert. denied sub nom., Ludwig v. American Land Title

Ass'n, 113 S. Ct. 2959 (1993), and is no more worthy of review

than that case was a year ago. This case presents no conflict

among the lower courts, and petitioners’ suggestions of grave

peril to the banking industry are greatly exaggerated.

COUNTER-STATEMENT OF THE CASE

A. 1916: Congress Allows Small-Town National Banks To

Act As Agent For Insurance Companies

In 1916, at the request of then-Comptroller of the Currency

John Skelton Williams, Congress enacted 12 U.S.C. § 92 (‘“‘sec-

tion 92”), which provides that national banks (emphasis added):

located and doing business in any piace the population

of which does not exceed five thousand inhabitants ...

[may] act as the agent for any fire, life, or other

insurance company authorized by the authorities of

the State in which such bank is located to do business

in such State, by soliciting and selling insurance and

collecting premiums on policies issued by such com-

pany....

In a letter to Congress proposing this provision, Comptrol-

ler Williams observed that under existing law, “[n]Jational banks

are not given either expressly nor by necessary implication the

power to act as agents for insurance companies.” 53 Cong. Rec.

11001 (July 14, 1916). Four months earlier, the Federal Reserve

Board also had concluded that national banks had no authority

to engage in insurance agency activities. 2 Fed. Res. Bull. 73,

74 (Feb. 1, 1916).

Judging that “small national banks” would benefit from

additional sources of revenue, Comptroller Williams asked Con-

gress to grant “limited” authority to national banks located in

small “villages and towns” “to act as agents for insurance

companies in the placing of policies of insurance.” 53 Cong.

Rec. 11001. He sought congressional action because “the

Comptroller of the Currency has no right to authorize or permit

a national bank to exercise powers not conferred upon it by law.”

Id.

Wary of allowing banks “to trespass upon outside business

naturally belonging to others,” Comptroller Williams also ex-

plained that the small amount of business generated by this new

insurance power would “not [be] likely to assume such propor-

tions as to distract the officers of the bank from the principal

business of banking.” Jd. Indeed, Comptroller Williams point-

edly advised Congress that “it would be unwise and therefore

undesirable to confer this privilege generally upon banks in large

cities where the legitimate business of banking affords ample

scope for the energies of trained and expert bankers.” /d.

B. 1968: The Fifth Circuit Holds That Section 92 Bars

National Banks From Acting As Agents For

Insurance Companies In Towns With Population

Over 5,000

Saxon v. Georgia Ass'n of Indep. Ins. Agents, 399 F.2d

1010, 1012-1013 (Sth Cir. 1968), construed section 92 to “pro-

hibit national banks from carrying on the business of insurance

agents in places of more than 5,000 population.” Applying the

principle of expressio unius est exclusio alterius,! Saxon rea-

soned that by conferring limited insurance agency powers upon

small town national banks, Congress “clear[ly]” intended to

deny “any other power” for national banks to act as insurance

agents. Jd., at 1014, 1016. Noting the legislative genesis of

section 92, Saxon further explained that prior to its enactment,

it was “universally understood that no national banks possessed

any power to act as insurance agents.” /d., at 1013 (emphasis

in original). Saxon therefore rejected the assertion that national

banks could act as insurance agents under 12 U.S.C. § 24(7),

which grants banks “all such incidental powers as shall be

necessary to carry on the business of banking.”

| “The expression of one thing is the exclusion of another.”

C. 1978: The Comptroller Rules That Section 92 Bars The

Sale Of Annuity Contracts By Large-Town National

Banks

In an opinion letter dated June 16, 1978, the Comptroller

ruled that a national bank’s proposal to broker annuity contracts

as agent for an insurance company “would constitute the bank

a seller or broker of i insurance in violation of the provisions of

12 U.S.C. § 92.” R. 7-8.” The Comptroller rejected an attempt

by that bank to evade section 92 by characterizing its role as

“fiduciary.” The Comptroller observed that “in reality” “the

bank is receiving [a fee] for the sale of insurance.” Jd.

A few years later, the Comptroller similarly ruled that

section 92 would prohibit a national bank from acting as agent

in the sale of life insurance. OCC Interpretive Letter No. 241,

reprinted in Whiting, A Guide to the Federal Law of Banking

and Insurance (1991), p. 328 (Mar. 26, 1982) (“OCC Ltr. 241”).

The Comptroller explained:

it is highly unlikely that a court would consider the

activities of a national bank which acted as an agent

in the sale of life insurance as incidental to the busi-

ness of banking under 12 U.S.C. 24(7).

D. 1990: The Comptroller Reverses Himself On the Sale

Of Annuity Contracts By National Banks

In 1989, NationsBank (then NCNB) sought permission

from the Comptroller to sell annuity contracts through a subsid-

iary. R. 57-59. According to NationsBank, the new activities

would involve “the offering and sale, on an agency basis, of

various annuity contracts . . . offered by a number of insurance

companies.” R. 11-12. NationsBank explained that purchasers

could choose from annuity contracts having fixed annuity fea-

2 References to “R. ___” herein are page references to the record on

appeal to the court of appeals. The text of the June 16, 1978 letter is

reproduced at Appendix A, infra.

tures, variable annuity features, or a combination of fixed and

variable features. R. 13.

By letter dated March 21, 1990 (the “Approval’), the

Comptroller approved the proposal. The Approval conceded

that “annuities have historically been a product of insurance

companies” and that “annuities often share with insurance the

need for actuarial calculations” of “mortality risk.”

NationsBank Pet. App. 38a-39a. To avoid the statutory limits

on the insurance activities of national banks, however, the

Comptroller renamed fixed annuity contracts, calling them “fi-

nancial investment instruments.”” He then decreed that national

banks have the inherent power to “broker a wide variety of

financial investment instruments.” /d., at 38a. The Comptroller

added that fixed annuity contracts are “similar to” variable

annuity contracts, which he previously had allowed national

banks to broker. /d., at 39a; OCC Interpretive Letter No. 331,

reprinted in [1985-1987 Transfer Binder] Fed. Banking L. Rep.

(CCH) ¥ 85,501 at 77,773-77 (Apr. 4, 1985) (“OCC Ltr. 331”).

The Approval disagreed with Saxon’s holding that the

limited “insurance agency power in Section 92 . . . negates the

existence of any other power to act as an insurance agent.” 399

F.2d at 1014; NationsBank Pet. App. 42a. The Approval also

expressed “doubt[] that the word ‘insurance’ in section 92 can

be construed to include annuities.” Jd., at 43a. The Approval

never mentioned the Comptroller’s 1978 conclusion that section

92 bars national banks from selling annuity contracts, except in

small towns.

E. Proceedings Below

VALIC brought suit challenging the Approval as contrary

to statute. The district court denied VALIC’s motion for sum-

mary judgment and granted petitioners’ cross-motions for sum-

mary judgment. Variable Annuity Life Ins. Co. v. Clarke, 786

F. Supp. 639 (S.D. Tex. 1991) (NationsBank Pet. App. 29a-34a).

The court of appeals reversed. Variable Annuity Life Ins. Co. v.

Clarke, 998 F.2d 1295 (Sth Cir. 1993), reh’g denied, 13 F.3d

833 (Sth Cir. 1994) (NationsBank Pet. App. 1a-28a).

Finding that the language and legislative genesis of section

92 plainly establish Congress’ meaning, the court of appeals

reaffirmed Saxon’s central holding that “under § 92 ‘national

banks have no power to act as insurance agents in cities of over

5,000 population.’” NationsBank Pet. App. 6a, 10a. In reach-

ing that conclusion, the court noted that deference to an admin-

istrative interpretation is not appropniate under Chevron U.S.A.,

Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837

(1984), when the intent of Congress is clear. NationsBank Pet.

App. 9a (citing Presley v. Etowah County Comm'n, 112 S. Ct.

820 (1992)).

The court drew further support from the 1992 ruling in

American Land Title Ass'n v. Clarke, supra, which reversed a

decision by the Comptroller that allowed national banks to act

as agents for title insurance companies. The court of appeals

emphasized that American Land Title, like Saxon (NationsBank

Pet. App. 7a),

cogently deduced that ‘had Congress intended to grant

national banks located in towns with a large popula-

tion the authority to sell insurance, it would never

have limited the grant of authority in section 92 to

nationa! banks in locations with under 5,000 inhabi-

tants.’

The court of appeals also disagreed with the Comptroller’s

alternative contention that section 92 does not apply because

“annuities are not insurance.” NationsBank Pet. App. 10a. The

court observed that the Comptroller had conceded that “annui-

ties have historically been a product of insurance companies”

and that annuity contracts are based on “actuarial calculations”

of mortality risk. /d., at 10a, 13an.4. Indeed, the court reported

that “[aJll fifty states currently regulate annuities under their

insurance laws.” /d., at lla. Explaining that many annuity

contracts transfer and distribute mortality risk, the court con-

cluded that annuity contracts are “insurance in the true sense of

the term.” /d., at 12a, n.3.

Finally, the court of appeals rejected the Comptroller’s

assertions that section 92 does not apply to “specialized” insur-

ance products like annuity contracts and that the selling of

annuity contracts is an “incidental power” granted to national

banks under 12 U.S.C. § 24(7). Stressing section 92’s bar

against large-town national banks serving as agents for “any . . .

insurance company,” the court refused to engage in the “arbi-

trary exercise of examining whether a particular type of insur-

ance product conforms to a platonic form of ‘general’

insurance.” NationsBank Pet. App. 13a (quoting American

Land Title, 968 F.2d at 156), 14a. The court of appeals also

observed that the sale of annuity contracts is by no means

“necessary to carry on the business of banking” under § 24(7),

and even if it were necessary, the specific terms of section 92

would control over that more general statute. /d., at 15a (citing

American Land Title, 968 F.2d at 157).

The full court of appeals denied the petition for rehearing

en banc, with four judges dissenting. NationsBank Pet. App.

19a. Six judges were recused, while one member of the panel

was a senior judge and did not participate in the en banc process.

REASONS FOR DENYING THE WRIT

Petitioners offer two reasons why this Court shouid grant

the petition. First, the government contends the court of appeals

erred because it did not “adequately justify” its rejection of the

Comptroller’s interpretation of section 92 under Chevron.

Gov’t Pet. at 11; accord NationsBank Pet. at 10, 14. Second,

the government asserts that the issue whether “Section 92 limits

banks’ ability to make agency sales” has “produced a conflict

among the circuits.” Gov't Pet. at 19; accord NationsBank Pet.

at 22. Neither contention is correct, or warrants review by this

Court.

Moreover, petitioners totally ignore the Fifth Circuit’s

holding that the sale of annuity contracts is beyond a bank’s

powers under § 24(7); that holding provides a fully adequate

basis for sustaining the ruling below that would pretermit con-

sideration of the questions petitioners argue to this Court.

I. THE COURT OF APPEALS CORRECTLY

INTERPRETED SECTION 92

Petitioners’ principal claim is that the court of appeals

erred. This Court reviews for error only in cases of exceptional

importance. S. Ct. Rule 10.1; Ross v. Moffitt, 417 U.S. 600,

616-17 (1974). The unremarkable statutory interpretation in

this case presents neither error nor any issue of exceptional

importance.

A. The Court of Appeals Correctly Construed The

Banking Statutes

Petitioners challenge three factors in the court of appeals’

interpretation of section 92, arguing (i) that section 92 grants

additional bank insurance powers without imposing any limita-

tion upon those powers, (ii) that section 92 applies only to

so-called “broad forms” and not to so-called “specialized forms”

of insurance like annuity contracts, and (iii) that annuity con-

tracts are not “insurance” under section 92. These claims are

without force.

First, the court of appeals properly held that the affirmative

grant of insurance powers to small town banks necessarily

included a denial of such powers to banks in more populous

areas. NationsBank Pet. App. 6a, 10a. See Botany Worsted

Mills v. United States, 278 U.S. 282, 289 (1929) (“when a statute

limits a thing to be done in a particular mode, it includes the

negative of any other mode”). Quoting from American Land

Title, the court reasoned (NationsBank Pet. App. 7a):

had Congress intended to grant national banks located

in towns with a large population the authority to sell

insurance, it would never have limited the grant of

authority in section 92 to national banks in locations

with under 5,000 inhabitants.

The court of appeals also properly emphasized the genesis

of section 92, which was enacted in response to Comptroller

Williams’ recommendation in 1916. Comptroller Williams

noted that national banks had no powers to act as insurance

agents and recommended that such powers “should be limited

to banks in small communities.” Jd. (quoting 53 Cong. Rec.

11001 (1916)). Indeed, the government concedes that “Section

92 carries some negative implication” and that “there would be

little point in granting small-town banks the power to act as

insurance agents if any bank could already do so... .” Gov't

Pet. at 16.

Second, the court of appeals joined the Second Circuit in

rejecting the Comptroller’s claim that section 92 applies only to

“general” types of insurance. NationsBank Pet. App. 13a-14a.

That contention fundamentally misreads the phrase “fire, life,

or other insurance company” in section 92. The words “fire, life

or other” modify the term “insurance company,” not the word

“insurance.” Petitioners have long conceded that NationsBank

is selling annuity contracts as agent for “life insurance” compa-

nies. R. 53-55. NationsBank’s activities thus are covered by

the statutory phrase “fire, life or other insurance company.”

Third, petitioners claim that annuity contracts are not “in-

surance.” This claim is belied by the Approval’s concession that

“annuities have historically been a product of insurance compa-

nies” and include mortality factors and actuarial projections.

NationsBank Pet. App. 10a, 13a n.4. The government also

> Indeed, respondent, which specializes in annuity products, is named

the Variable Annuity Life Insurance Co.

acknowledges that annuity contracts “share with insurance the

need for actuarial calculations” and that the element of “mortal-

ity risk” is present in many annuity contracts. Gov't Pet. at 7.4

Moreover, all fifty states regulate annuity contracts under their

insurance laws. NationsBank Pet. App. 1 1a (collecting author-

ities). The unanimous view of state legislatures that annuity

contracts are an insurance product is entitled to considerable

weight. See Mu’Min v. Virginia, 111 S. Ct. 1899, 1905 (1991)

(noting that prior decision “relied heavily on a unanimous body

of state court precedents’’).

Other federal laws also “reflect the fact that annuities are

an insurance product.” NationsBank Pet. App. 11a (citing 26

U.S.C. § 816(a)). Accord 26 U.S.C. § 408(b) (“individual

retirement annuity” defined as “an annuity contract. . . issued

by an insurance company”); 26 U.S.C. § 501 (“{flor purposes

of this subsection, the issuance of annuity contracts shall be

treated as providing insurance’’); 26 U.S.C. § 814(b) (“insurance

contract” defined to include “annuity contract”). The govern-

ment attempts to minimize these authorities by asserting that

“annuities are treated sui generis for tax purposes,” Gov't Pet.

at 12, n.4, but non-tax statutes also treat annuity contracts as

insurance. See, e.g., 10 U.S.C. § 7082 (requiring Navy civilian

The court of appeals concluded that because annuity contracts both

transfer and distribute the actuarially-derived risk of outliving one’s re-

sources, annuity contracts meet the functional test of insurance. NationsBank

Pet. App. 12a; Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205,

211 (1979) (“{iJnsurance is an arrangement for transferring and distributing

risk”’) (quoting R. Keeton, Insurance Law § 1.2(a) (1971)). Annuity contracts

(which insure against outliving one’s resources) may be called the “inverse”

or “mirror image” of life insurance, which insures against the economic risk

of dying prematurely. That does not establish, as petitioners contend, that

annuity contracts are not insurance, but only that annuity contracts and life

insurance are different insurance products. As one insurance authority writes,

life insurance and annuities “are both insurance in the true sense of the term.”

NationsBank Pet. App. 12a, quoting S. Huebner and K. Black, Life Insurance,

at p. 105 (6th ed. 1964).

employees to carry annuity policy in “life insurance corpora-

tion”).

Indeed, the Bank Holding Company Act (“BHC Act’)

reflects Congress’ view that annuity contracts are insurance.

The BHC Act provides that, subject to exceptions not relevant

here, bank holding companies may not provide insurance as

principal, agent or broker because such activity “is not closely

related to banking.” 12 U.S.C. § 1843(c)(8) (reproduced in

Appendix B, infra). A further proviso in the BHC Act also bars

certain bank holding companies from selling “life insurance or

annuities except as provided in subparagraph (A), (B), or (C).”

Id. (emphasis added). Significantly, subparagraph (C) tracks

the language of section 92, and permits bank holding companies

to conduct (id.):

any insurance agency activity [including the sale of

annuities, as provided in the proviso] in a place that

(i) has a population not exceeding five thousand... .

Thus Congress specifically equated annuities with insurance in

a Statute that tracks the language of section 92. Annuity con-

tracts plainly are insurance under section 92.°

> Inan argument that the Comptroller does not join, the NationsBank

petitioners claim that the court of appeals’ decision violates this Court's

decision in SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65 (1959). But

that decision held only that variable annuity contracts are not exempt from

securities registration because the return to the annuitant is, by definition,

variable. The Court explained that because variable annuity contracts include

some investment risk for the purchaser (though the insurance company

assumes a mortality risk), they are covered by the pro-disclosure policies of

the Securities Act of 1933. Id., at 77 (Brennan, J., concurring). Nothing in

that opinion draws into question the court of appeals’ conclusion that fixed

annuity contracts are insurance under section 92. Although the petitions here

ambiguously lump together both variable annuity contracts and fixed annuity

contracts, Gov’ t Pet. at 17 n.9, SEC v. VALIC addressed only variable annuity

contracts. Indeed, the reasoning in SEC v. VALIC supports the court of

appeals’ decision that fixed annuity contracts are an insurance product. 359

a |

B. The Court Of Appeals Properly Applied Chevron

Petitioners challenge the court of appeals’ supposed failure

to pay sufficient homage to the Comptroller’s interpretation of

section 92. Gov’t Pet. at 21; NationsBank Pet. at 14. Petitioners

do not complain that the court of appeals ignored Chevron, nor

do they allege that it rejected or modified Chevron’s two-step

analysis. Rather, petitioners claim that the court of appeals

wrongly determined that deference was not appropriate because

the intent of Congress in section 92 is clear. This supposed error

does not warrant review by this Court, whose resources would

be sorely tried if it had to rectify every allegedly incorrect

application of Chevron. This Court has denied certiorari in two

dozen cases in the past five years that raised Chevron issues.

See Appendix C, infra.

Review by this Court also is unwarranted because the court

of appeals properly stated, understood, and applied Chevron.

Finding the language and legislative genesis of section 92 to

unambiguously bar NationsBank’s proposal, the court reaf-

firmed Saxon’s holding that “under § 92 ‘national banks have

no power to act as insurance agents in cities of over 5,000

population.’” NationsBank Pet. App. 6a. The court noted that

deference is not appropriate under Chevron when the intent of

Congress is so clear. Id., at 9a. Moreover, since the Approval

reversed the Comptroller’s previous interpretation of section 92

in 1978 and 1982, see pp. 4-5, supra, the Approval is not entitled

to significant deference under Chevron. Pauley v. Bethenergy

Mines, Inc., 111 S. Ct. 2524, 2535 (1991) (“the case for judicial

deference is less compelling with respect to agency positions

that are inconsistent with previously held views”); Bowen v.

Georgetown Univ. Hospital, 488 U.S. 204, 212-13 (1988).

U.S. at 71. See also SEC v. United Benefit Life Ins. Co., 387 U.S. 202, 206

(1967) (“provisions dealing with the operation of the fixed-payment annuity

were purely conventional insurance provisions”). Moreover, variable annu-

ity products are still regulated as insurance in all 50 states.

This Court recently warned that the principle of deference

“has its limits” and emphasized that “[dJeference does not mean

acquiescence.” Presley, 112 S. Ct. at 831. Several factors

support the court of appeals’ conclusion that annuity contracts

are insurance: (i) all fifty states regulate annuity contracts as

insurance; (ii) numerous federal statutes (including the Bank

Holding Company Act) treat annuity contracts as iisurance; (iii)

the Comptroller himself recognized annuity contracts to be

insurance as recently as 1978; and (iv) the Comptroller concedes

that “annuities have historically been a product of insurance

companies” and often involve an “element of mortality risk.”

Deference would not be appropriate here.

The government contends that the court of appeals’ failure

to accept the Comptroller’s new view of section 92 is a “partic-

ularly flagrant” failure to follow Chevron. But the Fifth

Circuit’s holding on section 92 simply followed the Second

Circuit’s decision in American Land Title, which also reversed

a ruling by the Comptroller and which this Court declined to

review. See Petition for Certiorari, Steinbrink v. American Land

Title Ass'n, No. 92-645, at i (question presented is whether

section 92 “impliedly bar[s]” large-town banks “from selling

forms of insurance..., that the Comptroller of the Currency has

determined are ‘incidental’ to the ‘business of banking’ under

12 U.S.C. 24 seventh”).

Finally, petitioners ask this Court to tum Chevron on its

head. The government complains that, following the Fifth

Circuit’s ruling, the statutory bar against national banks selling

annuity contracts is “beyond the power of federal regulators to

correct.” Gov’t Pet. at 25. Exactly. Congress clearly decided

that national banks in large towns may not act as agents for life

insurance companies, which includes the sale of annuity con-

tracts. That statutory requirement is indeed “beyond the power

of federal regulators to correct.” See Lechmere, Inc. v. NLRB,

112 S. Ct 841, 847-48 (1992) (“[o]nce we have determined a

Statute’s clear meaning, we adhere to that determination under

the doctrine of stare decisis, and we judge an agency’s later

interpretation of the statute against our prior determination of

the statute’s meaning”). If Congress has adopted bad policy, the

petitioners, as the Fifth Circuit advised, “‘should look to Con-

gress, not the Comptroller’ . . . . or the courts” for relief.

NationsBank Pet. App. 17a.®

Il. THERE IS NO CONFLICT AMONG THE LOWER

COURTS

Petitioners assert that this case presents a “classic” conflict

among the circuits over the extent to which section 92 limits

national banks’ power to sell insurance. Gov't Pet. at 19:

NationsBank Pet. at 22. Petitioners claim that even though this

Case agrees with the Second Circuit decision in American Land

Title, it supposedly conflicts with the D.C. Circuit’s decision in

Independent Bankers Ass'n v. Heimann, 613 F.2d 1164 (D.C.

Cir. 1979), cert. denied, 449 U.S. 823 (1980). There is no

conflict. In fact, the Heimann court specifically found that its

ruling did not conflict with Saxon, the precedent that controlled

this case.

Heimann held that national banks have the incidental au-

thority under 12 U.S.C. § 24(7) to sell credit life insurance to

their borrowers. That is, in exchange for a fee, the borrower’s

debt will be satisfied if he dies before the loan is repaid. As the

Fifth Circuit found, and as the Comptroller’s Approval con-

cedes, Heimann discusses section 92 only in dicta. NationsBank

° The central holding below was first announced by the Fifth Circuit in

Saxon more than 25 years ago. Congress has had ample opportunity to repair

any error in that interpretation of section 92, but has not done so. To the

contrary, in amending the Bank Holding Company Act in 1982, Congress

extended to bank holding companies the prohibition on the sale of insurance

by national banks. Garn-St Germain Depository Institutions Act of 1982,

Pub. L. No. 97-320, §§ 118(a), 601 (1982) (sale of insurance “is not closely

related to banking”).

Pet. App., 42a. Heimann concluded that section 92 does not bar

credit life insurance, which is “a limited special type of coverage

written to protect loans,” a core banking function. 613 F.2d at

1170. Credit life insurance is designed primarily to protect the

assets of the bank, and only secondarily to aid the borrower.

Implicitly, Heimann concluded that credit life insurance is more

a banking product than it is insurance. In contrast, annuity

contracts are not tied to any banking operation.

Heimann stressed that because credit life insurance is so

closely tied to banking functions, its ruling did not conflict with

Saxon, which concerned insurance products unrelated to bank-

ing. Jd. By the same reasoning, Heimann does not conflict with

the Fifth Circuit ruling here, which concerns an insurance prod-

uct totally unrelated to any banking function.

The government concedes that this Court declined to re-

view this supposed conflict when it denied certiorari in Ameri-

can Land Title, and adds that it would not “normally seek further

review.” Gov't Pet. at 19-20. The government offers several

reasons why review nevertheless is appropriate; none is persua-

sive.

The government states that this case involves a “particu-

larly flagrant failure” to apply Chevron. As we have noted, that

argument is contradicted by this Court’s refusal to review Amer-

ican Land Title. See p. 13, supra.

Second, the Comptroller suggests that reversal of the court

of appeals’ ruling is necessary to “maintenance of a strong

banking industry.” Gov't Pet. at 20. Unless reversed, the

Comptroller frets, that ruling may imperil a profitable product

line for national banks (id., at 23).

Petitioners contradict their own suggestion. The Comp-

troller acknowledges that banks sold $12.2 billion of annuity

contracts in 1992, Gov’t Pet. at 23, but never discloses that most

of those sales will be totally unaffected by the outcome of this

case. Most of those sales are conducted through state-chartered

banks, bank subsidiaries, or third-party arrangements with na-

tional banks. See Gov’t Pet. at 22 n.12 (bank annuity contract

sales “are almost invariably conducted through brokerage sub-

sidiaries’’).

For example, nothing in the decision below affects “com-

monplace lobby lease and similar license arrangements used by

many vendors to sell annuities . . . through banks.” David W.

Roderer, “Congress Should Defer Action on Bank Annuity

Sales,” American Banker, (Nov. 3, 1993), p. 12. Typically,

licensed insurance agencies rent space in the national bank’s

lobby, placing their own employees or bank employees on the

premises to sell annuity contracts to the bank’s customers.

Payments to the national bank are based on the gross commis-

sions earned. Alternatively, a recent decision would permit

even big-city national banks to broker insurance nationwide, so

long as they conduct those sales from small town branches. See

Independent Ins. Agents of Am., Inc. vy. Ludwig, 997 F.2d 958

(D.C. Cir. 1993). National banks, therefore, have several meth-

ods for offering annuity contracts to their customers — and for

eaming revenues from those sales — despite the court of

appeals’ ruling.

The government also complains that it may not be able to

relitigate this legal question in other courts. It is “possible,”

according to the government, that judicial recusals will leave the

panel opinion intact in the Fifth Circuit, and that VALIC may

be able to challenge in the Fifth Circuit all national bank annuity

activities. Gov't Pet. at 22. Such speculations provide no basis

for granting certiorari. If those “possibilities” occur, and if they

then loom large for this Court, there will be ample time to

address them.

Finally, petitioners point to a recent decision by the New

York Court of Appeals that annuities are not insurance under

that state’s banking law, arguing that it “will generate substantia!

confusion and uncertainty.” NationsBank Pet. at 19-20. The

New York case, however, did not construe the powers of na-

tional banks; nor did it interpret section 92 or any state statute

resembling section 92, as the New York court acknowledged.

New York State Ass'n of Life Underwriters, Inc. v. New York

State Banking Dep't, 83 N.Y.2d 353 (1994). Accordingly, there

is no conflict between that case and the judgment below.

Ill. THE SALE OF ANNUITY CONTRACTS IS NOT

“NECESSARY TO CARRY ON THE BUSINESS

OF BANKING”

Petitioners ignore entirely the further holding of the court

of appeals that, if sustained by this Court, would prevent this

Court from reaching the questions petitioners now raise. The

court of appeals held that, regardless of the meaning of section

92, the selling of annuity contracts is not within the powers of a

national bank under § 24(7), which grants only “such incidental

powers as shall be necessary to carry on the business of bank-

ing.” NationsBank Pet. App. 15a. (Emphasis added.) The Fifth

Circuit held (id.):

The Comptroller argues that the selling of annuities is

an “incidental power” granted to national banks under

§ 24(7). The Comptroller's argument ignores the rest

of [the statutory provision], i.e., “necessary to Carry

on the business of banking.” Even conceding argu-

endo that the power to sell annuities would be one

incidental to banking, by no stretch of the imagination

can that power be deemed “necessary.”

Because the sale of annuity contracts is not “necessary to carry

on the business of banking” under § 24(7), this Court would have

no occasion to reach the questions presented in the Petitions.

CONCLUSION

For all of the foregoing reasons, the Petitions for a Writ of

Certiorari should be denied.

WILLIAM A. WILSON

The Variable Annuity

Life Insurance Co.

2929 Allen Parkway

Houston, TX 77019

(713) 831-5491

Of Counse]

Respectfully submitted,

MARTIN E. LYBECKER

DAVID OVERLOCK STEWART

(Counsel of Record)

ALAN G. PRIEST

RAYMOND C. ORTMAN, JR.

ROPES & GRAY

1001 Pennsylvania Avenue, N.W.

Suite 1200 South

Washington, DC 20004

(202) 626-3900

- a

APPENDIX A

June 16, 1978

Dear Mr.

This is in response to your letter of March 21, 1978, to the

Regional Administrator’s Office in Denver, Colorado. You

state that the bank would purchase a group annuity policy from

an insurer and then sell annuity contracts as investments in trust

accounts. The insurer would pay a fee to the bank for these

contracts. You wish to know whether this activity would render

the bank a seller or broker of insurance in violation of the

provisions of 12 U.S.C. §92. You also ask whether the contract-

ing by your bank with a single insurer in and of itself would call

into question the prudence of the annuity investmeats or the

arm’s-length nature of the bank’s dealings with the insurer.

It is my opinion that an arrangement of the kind that you describe

would constitute the bank a seller or broker of insurance in

violation of the provisions of 12 U.S.C. §92. You also ask

whether the contracting by your bank with a single insurer in

and of itself would call into question the prudence of the annuity

investments or the arm’s-length nature of the bank’s dealings

with the insurer.

It is my Opinion that an arrangement of the kind that you describe

would constitute the bank a seller or broker of insurance within

the meaning of 12 U.S.C. §92. Although you indicate that the

bank would perform various duties for this fee and although you

state that this fee is a fiduciary fee which is more convenient for

the insurance company to pay, the fee is in reality a fee that the

bank is receiving for the sale of insurance. The duties that the

bank would perform in connection with this service are not such

as to take it out of the category of a broker or seller of insurance,

particularly where the bank has a financial interest in the amount

of insurance sold.

Furthermore, it is my opinion that contracting with a single

insurer in and of itself may call into question the prudence of

the annuity investments and the arm’s-length nature of the

bank’s dealings with the insurer. On its face it appears that this

arrangement is a business deal whereby the bank would be

compensated for representing the insurance company and en-

couraging the sale of a product that the insurance company has

to offer. The only purchasers of this service are trust accounts

under the bank’s administration. The bank, having a specific

pecuniary interest in this arrangement, might not be in a position

to render the highest investment advice in administering these

trust accounts. The bank might be viewed more as a fiduciary

and administrator of trust account and less as a broker or seller

of insurance if it did not have such a group contract in existence,

and if it were in a position of recommending individual annuity

contracts only in certain instances and where its own pecuniary

interest would not be as great or directly connected.

In addition, in any arrangements of the kind proposed in your

letter, the bank should be careful to abide by the provisions of

Section 9.12 of the Comptroller's Manual for National Banks

(12 C.F.R. 9.12) including in particular those contained in

subsection (a) thereof.

I trust this is responsive to your inquiry and will enable you to

take such action as you deem appropriate.

Very truly yours,

/s/

Charles F. Byrd

Assistant Director

Legal Advisory Services Division

APPENDIX B

12 U.S.C. § 1843(c) provides (emphasis added):

(8) shares of any company the activities of which the

Board after due notice and opportunity for hearing has deter-

mined (by order or regulation) to be so closely related to banking

or managing or controlling banks as to be a proper incident

thereto, but for purposes of this subsection it is not closely

related to banking or managing or controlling banks for a bank

holding company to provide insurance as a principal, agent, or

broker except (A) where the insurance is limited to assuring

repayment of the outstanding balance due on a specific exten-

sion of credit by a bank holding company or its subsidiary in the

event of the death, disability, or involuntary unemployment of

the debtor; (B) in the case of a finance company which is a

subsidiary of a bank holding company, where the insurance is

also limited to assuring repayment of the outstanding balance

on an extension of credit in the event of loss or damage to any

property used as collateral on such extension of credit and,

during the period beginning October 15, 1982, and ending on

December 31, 1982, such extension of credit is not more than

$10,000 ($25,000 in the case of an extension of credit which is

made to finance the purchase of a residential manufactured

home and which is secured by such residential manufactured

home) and for any given year after 1982, such extension of credit

is not more than an amount equal to $10,000 ($25,000 in the

case of an extension of credit which is made to finance the

purchase of a residential manufactured home and which is

secured by such residential manufactured home) increased by

the percentage increase in the Consumer Price Index for Urban

Wage Earners and Clerical Workers published monthly by the

Bureau of Labor Statistics for the period beginning on Janu-

ary 1, 1982, and ending on December 31 of the year preceding

the year in which such extension of credit is made; (C) any

insurance agency activity in a place that (i) has a population not

exceeding five thousand (as shown by the last preceding decen-

nial census), or (ii) the bank holding company, after notice and

Opportunity for a hearing, demonstrates has inadequate insur-

ance agency facilities; (D) any insurance agency activity which

was engaged in by the bank holding company or any of its

subsidiaries on May 1, 1982, or which the Board approved for

such company or any of its subsidiaries on or before May 1,

1982, including (i) sales of insurance at new locations of the

same bank holding company or the same subsidiary or subsidi-

anes with respect to which insurance was sold on May 1, 1982,

or approved to be sold on or before May 1, 1982, if such new

locations are confined to the State in which the principal place

of business of the bank holding company is located, any State

or States immediately adjacent to such State, and any State or

States in which insurance activities were conducted by the bank

holding company or any of its subsidiaries on May 1, 1982, or

were approved to be conducted by the bank holding company

or any of its subsidiaries on or before May 1, 1982, and (ii) sales

of insurance coverages which may become available after

May 1, 1982, so long as those coverages insure against the same

types of nisks as, or are otherwise functionally equivalent to,

coverages sold on May 1, 1982, or approved to be sold on or

before May 1, 1982 (for purposes of this subparagraph, activi-

ties engaged in or approved by the Board on May 1, 1982, shall

include activities carried on subsequent to that date as the result

of an application to engage in such activities pending on May 1,

1982, and approved subsequent to that date or of the acquisition

by such company pursuant to a binding written contract entered

into on or before May 1, 1982, of another company engaged in

such activities at the time of the acquisition); (E) any insurance

activity where the activity is limited solely to supervising on

behalf of insurance underwriters the activities of retail insurance

agents who sell (i) fidelity insurance and property and Casualty

insurance on the real and personal property used in the opera-

tions of the bank holding company or any of its subsidiaries, and

(ii) group insurance that protects the employees of the bank

holding company or any of its subsidiaries; (F) any insurance

agency activity engaged in by a bank holding company, or any

of its subsidiaries, which bank holding company, or any of its

subsidiaries, which bank holding company has total assets of

$50,000,000 or less: Provided, however, That such a bank

holding company and its subsidiaries may not engage in the sale

of life insurance or annuities except as provided in subparagraph

(A), (B), or (C); or (G) where the activity is performed, or shares

of the company involved are owned, directly or indirectly, by a

bank holding company which is registered with the Board of

Governors of the Federal Reserve System and which, prior to

January 1, 1971, was engaged, directly or indirectly, in insur-

ance agency activities as a consequence of approval by the

Board prior to January 1, 1971. In determining whether a

particular activity is a proper incident to banking or managing

or controlling banks the Board shall consider whether its perfor-

mance by an affiliate of a holding company can reasonably be

expected to produce benefits to the public, such as greater

convenience, increased competition, or gains in efficiency, that

outweigh possible adverse effects, such as undue concentration

of resources, decreased or unfair competition, conflicts of inter-

ests, or unsound banking practices. In orders and regulations

under this subsection, the Board may differentiate between

activities commenced de novo and activities commenced by the

acquisition, in whole or in part, of a going concern. Notwith-

standing any other provision of this chapter, if the Board finds

that an emergency exists which requires the Board to act im-

mediately on any application under this subsection involving a

thrift institution, and the primary Federal regulator of such

institution concurs in such finding, the Board may dispense with

the notice and hearing requirement of this subsection and the

Board may approve or deny any such application without notice

or hearing. If an application is filed under this paragraph in

connection with an application to make an acquisition pursuant

to section 13(f) of the Federal Deposit Insurance Act {12

U.S.C.A. § 1823(f)], the Board may dispense with the notice

and hearing requirement of this paragraph and the Board may

approve or deny the application under this paragraph without

notice or hearing. If an application described in the preceding

sentence is approved, the Board shall publish in the Federal

order approving the application and a description of the non-

banking activities involved in the acquisition;. . . .

APPENDIX C

RECENT DENIALS OF CERTIORARI IN CASES

PRESENTING QUESTION OF DEFERENCE TO

ADMINISTRATIVE AGENCY

American Waste & Pollution Control Co. v.

Ouachita Parish Police Jury, No. 92-1495, 61

U.S.L.W. 3735, 3771 (1993) (court below did

not defer)

Aulston v. United States, No. 90-1225, 59 U.S.L.W.

3621, 3763 (1991)

Bullard v. Madigan, No. 90-1272, 59 U.S.L.W.

3641, 3769 (1991)

California Public Util. Comm'n v. FERC, No.

90-505, 59 U.S.L.W. 3334, 3460 (1991)

(court below did not defer)

Cedar Coal Co. v. Shuff, No. 92-662, 61 U.S.L.W.

3389, 3478 (1993)

Clark v. Department of the Army, No. 93-515, 62

U.S.L.W. 3308, 3491 (1994)

Clinchfield Coal Co. v. Federal Mine Safety and

Health Review Comm'n, No. 90-77, 59

U.S.L.W. 3099, 3247 (1990)

Enron Oil & Gas Co. v. Babbitt, No. 92-1726, 61

U.S.L.W. 3824, 62 U.S.L.W. 3206 (1993)

Independent Ins. Agents of Am., Inc. v. Board of

Governors of the Fed. Reserve Sys., No.

89-1620, 58 U.S.L.W. 3726, 59 U.S.L.W. 3243

(1990)

Independent Ins. Agents of Am., Inc. v. Citicorp, No.

91-587, 60 U.S.L.W. 3361, 3478 (1992) (court

below did not defer)

Katsis v. INS, No. 93-423, 62 U.S.L.W. 3300, 3472

(1994)

Ludwig v. American Land Title Ass'n, No. 92-645,

61 U.S.L.W. 3384, 3830 (1993) (court below

did not defer)

MCI Telecommunications Corp. v. American

Telephone & Telegraph Co., No. 92-1684, 61

U.S.L.W. 3796, 3853 (1993) (court below did

not defer)

Mesa Operating Ltd. Partnership v. Department of

the Interior, No. 91-706, 60 U.S.L.W. 3410,

3498 (1992)

Mesa Verde Constr. Co. v. Northern Cal. Dist.

Council of Laborers, No. 89-1874, 58 U.S.L.W.

3824, 59 U.S.L.W. 3211 (1990)

Miller v. Rice, No. 90-529, 59 U.S.L.W. 3347, 3561

(1991)

PGDH Liquidating Trust v. Shalala, No. 93-348, 62

U.S.L.W. 3202, 3375 (1992)

Puerto Rico Aqueduct v. Comite Pro Rescate, No.

89-1185, 58 U.S.L.W. 3568, 3595 (1990)

Puget Sound Power & Light Co. v. Bonneville Power

Admin., No. 90-1415, 59 U.S.L.W. 3713, 3741

(1991)

Quantum Chemical Corp. v. Distillery, Wine and

Allied Workers, No. 89-1937, 59 U.S.L.W.

3009, 3244 (1990)

Southern Natural Gas Co. v. Fritz, No. 88-148, 57

U.S.L.W. 3244, 58 U.S.L.W. 3240 (1989)

(court below did not defer)

Texas Apparel Co. v. United States, No. 89-769, 58

U.S.L.W. 3399, 3427 (1990)

Wagner Seed Co. v. Bush, No. 91-1140, 60 U.S.L.W.

3586, 3687 (1992)

Western Fuels-Utah, Inc. v. Lujan, No. 89-1728, 58

U.S.L.W. 3759, 59 U.S.L.W. 3244 (1990)

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.