Opposition Brief — Grode v. United Services Automobile Ass'n

| Supreme Court, U.S.

rice np

No. 86-561

DEC 5 1986

IN THE JOSEPH F, SPANIOL, JR,

SUPREME COURT OF THE UNITED STATES —cter«

October Term, 1986

GEORGE F. GRODE, Insurance Commissioner

of the Commonwealth of Pennsylvania,

Petitioner

v.

UNITED SERVICES AUTOMOBILE ASSOCIATION.

a Texas Reciprocal Interinsurance Exchange, and

USAA CASUALTY INSURANCE COMPANY,

USAA LIFE INSURANCE COMPANY, and

USAA ANNUITY AND LIFE INSURANCE COMPANY,

Texas Stock Insurance Companies.

Respondents

ON PETITION FOR A WRIT OF

CERTIORARI TO THE UNITED

STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

RESPONDENTS’ BRIEF IN OPPOSITION

Michael L. Browne

Christopher K. Walters’

J. Thomas Morris

REED SMITH SHAW & MCCLAY

1600 Avenue of the Arts Bldg.

Philadelphia, PA 19107

(215) 875-4300

Robert B. Hoffman

REED SMITH SHAW & MCCLAY

300 North Second Street

Harrisburg, PA 17108

Counsel for Respondents

Counsel of Record

STATEMENT OF QUESTIONS

PRESENTED FOR REVIEW

1. Where no adequate opportunity to raise federal

challenges in state judicial proceedings existed because

the federal plaintiffs would suffer “devastating economic

consequences” from state administrative proceedings

before their federal claims could be heard on appeal, did

the Court of Appeals properly decline to abstain under

Younger?

2. Should this Court review the Court of Appeals’

factual “findings” of the devastating economic harm

which would be caused by a Pullman abstention, espe-

cially where an alternate ground for not abstaining under

Pullman was also present?

LIST OF PARTIES AND RULE 28.1 LIST

The parties to the proceedings below were William J.

Muir, Ul, Acting Insurance Commissioner of the Com-

monwealth of Pennsylvania, and the Respondents

United Services Automobile Association, USAA Casualty

Insurance Company, USAA Life Insurance Company,

and USAA Annuity and Life Insurance Company.! The

Petitioner before this Court is George F. Grode, the cur-

rent Insurance Commissioner of the Commonwealth of

Pennsylvania.

1. The parent of Respondent USAA Casualty Insurance Com-

pany and Respondent USAA Life Insurance Company is Respon-

dent United Services Automobile Association (“USAA”), a Texas

Reciprocal Interinsurance Exchange. The parent company of the

fourth Respondent, USAA Annuity and Life Insurance Company, is

Respondent USAA Life Insurance Company. Respondent USAA

Life Insurance Company has another subsidiary, USAA Life Gen-

eral Agency, Inc. Respondent USAA has the following subsidiaries

in addition to the above-mentioned Respondents: USAA Consumer

Services, Inc., USAA Special Services Company, USAA General In-

demnity Company, USAA General Agency, Inc., USAA Limited,

USAA Satellite Communications Company, USAA CAF Company,

USAA Real Estate Company, USAA Investment Management Com-

pany and USAA Capital Corporation.

il

TABLE OF CONTENTS

Page

STATEMENT OF QUESTIONS PRESENTED ;

I aii Wid se Sees ex ye Ck 8 0d eo i

LIST OF PARTIES AND RULE 28.1 LIST....... ii

UMM MERGE ke cece eee iii

fo Se egy 8 8 i | Oe iv

8 OS 2 2

meveweeeuen Cen bese, CASE .............4.5. 3

Desmeeemee Sr AGSUMEINT................... 8

ea oar 9

ea pn amar re ee 21

act he 6 by dod ni 9 ae bcn sb os oa 4s 1A

ill

TABLE OF AUTHORITIES

Cases: Page

Aluminum Co. of America v. Utilities Comm’n, 713

F.2d 1024 (4th Cir. 1983), cert. denied, 465

io CE: oo og ec ok 5 vs oes oo 18

Baggett v. Dept. of Professional Regulation, 717

ae ere © 0 NU Re, Soe bck Be ee eke ewes 14

Capital Service, Inc. v. NLRB, 347 U.S. 501

PE oy ae, lew ONTOS eas ok cia wages 13

Champion Int'l Corp. v. Brown, 731 F.2d 1406 (9th

ae NOR 5s 9:0 ¥ erat eae eb a eR ea 14

City Investing Co. v. Simcox, 633 F.2d 56 (7th Cir.

| En ene Sarre er ene rier rer 18, 19

Conference of Federal Savings and Loan Associa-

tions v. Stein, 604 F.2d 1256 (9th Cir. 1979),

summarily aff'd, 445 U.S. 921 (1980)........ 17

Druker v. Sullivan, 458 F.2d 1272 (lst Cir.

Dee eats Alaa hatch uae eae 18, 19

Federal Home Loan Bank Board v. Empie, 778 F.2d

BGT. rere Grek RO oss we ws hp te ie 19

Fidelity Federal Savings and Loan Association v. de

ia Cuesta, 458 U.S. 141 (1982)......... a tak?

Gibson v. Berryhill, 411 U.S. 564 (1973).10, 15, 16, 20

Hagans v. Lavine, 415 U.S. 528 (1974) ....... 19, 20

Hawaii Housing Authority v. Midkiff, 467 U.S. 229

CR cs eA eas ee ee 13

International Brotherhood of Electrical Workers v.

Public Service Commission, 614 F.2d 206 (9th

Ro as eee en ek ire mae bana peed 20

Kentucky West Va. Gas Co. v. Pa. P.U.C., 791 F.2d

eae Ce Nc ee oe ae eee 14

TABLE OF AUTHORITIES—( Continued )

Cases: Page

Knudsen Corp. v. Nevada State Dairy Commission,

G76 P.20 374.(6tr Cie F062) is. ica 19

Lake Carriers’ Assoc. v. MacMullan, 406 U.S. 498

CBE os As Woke aes ee ee 17

Middle South Energy, Inc. v. Arkansas Public Ser-

vice Comm., 772 F.2d 404 (8th Cir. 1985), cert.

denied, 106 S. (t. GB4 (3906). ¢ o.55 5a 14

Middlesex County Ethics Committee v. Garden

State Bar Association, 457 U.S. 423 (1982)... 12

Ohio Civil Rights Commission et al. v. Dayton

Christian Schools, Inc., et al., 106 S. Ct. 2718

TOO) iH oe ee ee ee 8, 9, 11, 20

Pike v. Bruce Church, Inc., 397 U.S. 137 (1970) .. 11,

14, 20

Swift & Co. v. Wickham, 382 U.S. 111 (1965).... 20

Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119

CTO) oo os a ee ee 7

Statutes:

Home Owners’ Loan Act of 1933, as amended, 12

U.8.0, $3401 of eG i eee eee 2,4

McCarran-Ferguson Act, 15 U.S.C. $1011 et seq. .6, 16

National Housing Act, as amended, 12 U.S.C.

DR Gee Ot OO se oN ei ee ee 4

Pennsylvania Insurance Department Act of 1921,

as amended, 40 PS. $201. ooo oie thkee es 4

No. 86-561

IN THE

SUPREME COURT OF THE UNITED STATES

October Term, 1986

GEORGE F. GRODE,

Petitioner

v.

UNITED SERVICES AUTOMOBILE ASSOCIATION,

USAA CASUALTY INSURANCE COMPANY,

USAA LIFE INSURANCE COMPANY, AND

USAA ANNUITY AND LIFE INSURANCE COMPANY,

Respondents

RESPONDENTS’ BRIEF IN OPPOSITION

Respondents United Services Automobile Associa-

tion, USAA Casualty Insurance Company, USAA Life

Insurance Company and USAA Annuity and Life Insur-

ance Company respectfully request that this Court deny

the petition for certiorari, seeking review of the Third

Circuit’s opinion in this case. The opinion is reported at

792 F.2d 356 (3d Cir. 1986).

2

STATUTES INVOLVED

Section 5(a) of the Home Owners’ Loan Act of 1933.

as amended, 12 U.S.C. §1464(a) provides:

(T|he Board is authorized, under such rules and reg-

ulations as it may prescribe, to provide for the orga-

nization, incorporation, examination, operation, and

regulation of associations to be known as Federal

savings and loan associations, or Federal savings

banks, and to issue charters therefor, giving primary

consideration to the best practices of thrift institu-

tions in the United States.

STATEMENT OF THE CASE

United Services Automobile Association and its co-

respondents (hereafter “USAA”) are Texas-domiciled in-

surers duly licensed to transact insurance business in all

fifty states, including Pennsylvania. USAA’s member-

policyholders are present and former officers in the

United States armed forces — Army, Navy, Air Force

and Marines. USAA, which does insurance business

. throughout the nation, received over $35,000,000 in pre-

miums from its 40,000 Pennsylvania policyholders in

1983 alone.

USAA through a subsidiary applied for and obtained

a federal charter and all necessary approvals from both

the Federal Home Loan Bank Board (the “Board”’) and

the Federal Savings and. Loan Insurance Corporation

(the “FSLIC”) to establish, own and operate a new fed-

eral savings bank to be known as the USAA Federal Sav-

ings Bank (the “Bank’’) in San Antonio, Texas. In that

process, these federal agencies were fully informed of

USAA’s deep involvement in the insurance business.

Both these agencies approved the ownership of the Bank

within the USAA group of companies, and imposed cer-

tain operational limitations and conditions on USAA.

(1A-10A.)2 The federal charter was issued and the new

federal bank commenced its cperations December 31.

1983.

The Bank has no operations, accepts no deposits,

and does no business in Pennsylvania. (Pet. App. 46a,

3a. )

Regulation of the ownership, incorporation and op-

eration of banks in the federal savings and loan system

lies within the exclusive control of Congress and its des-

ignated agencies, the Board and the FSLIC. See Fidelity

Federal Savings and Loan Association v. de la Cuesta,

2. References marked as | A) refer to page A in the

attached lege ndix of respondents. References to Petitoner’s Appen-

dix are, e.g.. Pet. App a.

4

458 U.S. 141, 160 (1982); 12 U.S.C. §1464(e); 12 C.F.R.

§§541 et seq.

In mid-1984, the Pennsylvania Insurance Depart-

ment notified USAA that its ownership of the Bank, al-

though approved by the two federal agencies, was

prohibited by Section 641 of the Pennsylvania Insurance

Department Act of 1921, as amended, 40 P.S. §281. Sec-

tion 641(b) prohibits insurers licensed to do business in

Pennsylvania from owning or being affiliated with any

“lending institution, . . . bank holding company [or]

savings and loan holding company.” 40 P.S. §281(b). Pe-

titioner’s Insurance Department then advised USAA of

its choices: it must either divest itself of its new federal

savings bank (in which USAA had invested over

$20,000,000), or face revocation of its Pennsylvania in-

surance licenses and attendant loss of its substantial

(over $35,000,000 in annual premiums) Pennsylvania

insurance business.

Faced with this conflict between its federally-

approved bank ownership and the prohibitions of Penn-

sylvania law, USAA commenced this civil rights action in

federal court under 42 U.S.C. § 1983. The suit, filed on

November 27, 1984, sought declaratory and injunctive

relief against Pennsylvania’s Acting Insurance Commis-

sioner (hereafter “Commissioner” or “petitioner’’), the

state official responsible to enforce Pennsylvania’s insur-

ance laws. No state proceeding of any sort was then

pending.

The Complaint’s Supremacy Clause challenge did

not attack the facial validity of Section 641(b) but

averred that the statute was unenforceable if and as ap-

plied to USAA’s affiliation with the Bank, because the

organization, ownership, and operation of that Bank

(and its parent savings and loan holding company) are

preempted from state regulation by the Home Owners’

Loan Act of 1933, as amended,12 U.S.C. §1461 et seq.,

by the National Housing Act, as amended, 12 U.S.C.

5

§§ 1730, 1730a, the regulations implementing these stat-

utes and by federal agency actions thereunder. The

Complaint also raised several issues of pure constitu-

tional interpretation under the Commerce, Equal Pro-

tection and Due Process Clauses of the United States

Constitution.

On December 24, 1984, the Commissioner’s Insur-

ance Department commenced an administrative license

revocation proceeding by issuance of a Show Cause Or-

der, alleging that USAA was in violation of Section 641

and that revocation of all respondents’ insurance li-

censes was required. (1A-16A.) Under applicable Penn-

sylvania procedure, the Commissioner himself will

decide the outcome of this proceeding. On the same day,

counsel for the Commissioner filed in the district court a

Motion to Dismiss the federal Complaint on grounds of

Pullman and Burford abstention only, urging that the

pendency of the license revocation proceedings (com-

menced only that same day) warranted such abstention.

The Commissioner’s own internal documents, obtained

in discovery, showed that the administrative proceed-

ings were themselves instituted, as later noted by the

Court of Appeals (Pet. App. 74a), to defeat federal juris-

diction.

On January 25, 1985, USAA filed in the District

Court a Motion for Summary Judgment on Preemption

Grounds. USAA also filed a Motion for Preliminary In-

junction to enjoin the revocation proceedings and

briefed both motions. These motion papers advised the

district court of the devastating economic harm which a

license revocation order would cause USAA in the mar-

ketplace. The district court never eddressed these mo-

tions. |

Instead, relying on the pendency of the Insurance

Department’s administrative proceedings and various

abstention doctrines, including the Younger doctrine

6

(never argued or briefed), the district court on Septem-

ber 30, 1985 abstained and dismissed respondents’ Com-

plaint. The district court identified a single state interest

to be served by abstention—the state’s authority to reg-

ulate the insurance industry as manifested by the

McCarran-Ferguson Act, 15 U.S.C. §1011 et seq.

USAA then filed an Application for Injunction Pend-

ing Appeal, setting forth the substantial economic loss

and harm which would result from license revocation,

even if a revocation order were’stayed pending appeal.

After denial by the district court, the Court of Appeals,

per Judges Hunter and Garth (Mansmann dissenting)

granted the injunction on November 22, 1985. (22A.)

The Third Circuit reversed the district court. Find-

ing from the facts presented that USAA would suffer

“devastating economic consequences” (Pet. App. 62a)

from a license revocation order even if stayed pending

appeal to a state court*, the Court of Appeals held ab-

stention inappropriate. The economic consequences and

harm which the lower court found would be caused by

abstention and license revocation were detailed at

length. (Pet. App. 61a-62a. )

Because of this harm, the Court of Appeals in its

Pullman discussion held that “the district court erred by

holding that state appeal and supersedeas procedures

adequately protected USAA’s interests.” (Pet. App. 77a. )

The Third Circuit's Younger discussion emphasized by

use of italics that Younger abstention would have been

appropriate only if the state’s appeal and supersedeas

procedures “were adequate to vindicate [USAA’s| federal

claims.” (Pet. App. 75a. )

Moreover, the Third Circuit rejected the district

court’s holding that a countervailing state interest might

ie am arom

3. Petitioner’s brief, acknowledging these findings, argues that

“These ‘findings’ of potential damage by the Court of Appeals are no

more than speculation, unsupported by the record.” As pointed out

infra, these findings of economic harm are not only supported by the

record, but are uncontroverted.

t

iii a

be served by abstention. It concluded instead that

Pennsylvania’s interest in the regulation of the “busi-

ness of insurance”, properly understood under the

guidelines established by this Court in Union Labor Life

Ins. Co. v. Pireno, 458 U.S. 119 (1982) and similar

cases, was not implicated by the affiliation between

USAA and the Bank. (Pet. App. 70a-72a.) In fact, the

Court of Appeals expressed skepticism whether absten-

tion would serve any Pennsylvania state interest what-

ever given the unusual facts of this case, referring to “the

vague claim of risks to the state from a Texas bank not

doing business in Pennsylvania.” (Pet. App. 62a. )

Finally, the Third Circuit, recognizing the substan-

tial conflict shown by USAA’s Supremacy Clause claim

(viz.: Congress’ broad grant of plenary authority to fed-

eral agencies to determine who shall own, manage and

operate banks within the Federal Savings and Loan Sys-

tem, versus Pennsylvania’s insistence that USAA sur-

render that ownership or suffer a multimillion dollar loss

of all its Pennsylvania business), held on an alternative

ground that Pullman abstention was inappropriate here,

where a strong federal preemption claim, involving no

su stantive constitutional interpretation, was present.

(Pet. App. 63a-68a. )

The Commissioner thereafter did not seek to stay or

recall the Third Circuit’s mandate. Accordingly, this

case was remanded to the district court. There, by order

entered July 1, 1986, the district judge granted USAA

a preliminary injunction against any administrative

license revocation. The Commissioner did not appeal

from that injunction. Instead, he announced in

mid-August 1986 an intention to seek a writ of certiorari

from this Court.

At the present time the only extant state proceeding

(albeit enjoined) is the administrative license revocation

proceeding pending before the Commissoner.

8

SUMMARY OF ARGUMENT

The Court of Appeals for the Third Circuit declined

Pullman and Younger abstention after concluding that

abstention-in this case would cause the federal plaintiffs

“devastating economic consequences” against which

state appeal and supersedeas procedures were inade-

quate remedies. |

The Third Circuit’s Younger decision is not in

conflict with this Court's later decision in Ohio Civil

Rights Commission et al. v. Dayton Christian Schools,

Inc. et al., 106 S. Ct. 2718 (1986). Dayton emphasized

that Younger abstention requires “an adequate opportu-

nity” to vindicate federal claims in the state proceedings.

In this case, no such adequate opportunity existed be-

cause the federal plaintiffs would suffer “devastating

economic consequences” before their federal claims

could be resolved.

This Court also need not review the lower court’s

Pullman decision, which squarely rested on its “find-

ings” of the economic harm of abstention, especially in

view of the presence of an alternate ground for its Pull-

man decision.

9

ARGUMENT

I. Unlike Dayton Christian Schools, The Decision Below

Turned On A Factual Finding That Respondents Would

Suffer “Devastating Economic Consequences” If The

District Court Were To Abstain Under Younger.

In Ohio Civil Rights Commission et al. v. Dayton

Christian Schools, Inc. et ai., 106 S. Ct. 2718 (1986)

(hereafter “Dayton”), decided three weeks after the

Court of Appeals’ decision in this case, this Court held

Younger abstention appropriate to allow the Ohio Civil

Rights Commission to conduct an investigation into

whether there was probable cause. for a hearing on

charges of a discriminatory discharge of a teacher.* The

record in Dayton showed that the Ohio Commission had

been sensitive to first amendment (i.e. religious) justifi-

cations for otherwise illegal discrimination and had

sometimes dismissed complaints of religious discrimina-

tion after considering such justifications. Absent any

suggestion that appellee Dayton Christian Schools

would suffer great or irreparable injury from such ad-

ministrative proceedings, and noting that the school’s

constitutional objections to any administrative remedy

could certainly be presented on appeal to a state court,

this Court approved a Younger abstention, saying: “We

. have no reason to doubt that Dayton will receive an

adequate opportunity to raise its constitutional claims.”

106 S. Ct. at 2723-24.

By contrast, the precise opposite is true here. Here,

the Third Circuit found that USAA would suffer “dev-

astating economic consequences” before its federal

claims could be resolved. (Pet. App. 62a.) The reason is

that Pennsylvania is not here engaging in a mere inves-

tigation, as Ohio was in Dayton. Rather, Pennsylvania is

4. Under the administrative scheme, only after finding proba-

ble cause might a hearing be held on the charges.

10

here seeking the harshest of sanctions, a license revo-

cation order, which will devastate USAA’s impeccable

reputation with consumers and financial institutions,

frighten away policyholder renewals, suggest fraudulent

activity or financial instability in the marketplace, and

impair USAA’s ability to represent that its policies are

available nationally to the highly mobile group of armed

forces officers who comprise its member-policyholders.

As the Third Circuit found, a supersedeas or stay will not

ameliorate these economic consequences, because of the

unique nature of the proceedings at issue below.°

Given these unusual facts, the Court of Appeals was

properly unable to find, for Younger purposes, that

Pennsylvania's state judicial process provided USAA an

“adequate opportunity” to present its federal claims in

state court. Accordingly, abstention was held inappropri-

ate.

That this is so is demonstrated by the Third Circuit's

discussion of its reasons for not abstaining under

Younger.° The Third Circuit took care to italicize in its

opinion (Pet. App. 75a) that Younger abstention is ap-

propriate only where “the [state] proceedings are ade-

quate to vindicate federal claims.” By use of such

emphasis, it is clear that the Court of Appeals was fo-

cusing upon the adequacy of USAA’s opportunity to “vin-

dicate” its federal claims in the state proceedings.

5. In Gibson v. Berryhill, 411 U.S. 564 (1973), a case cited in

Dayton, the economic and reputational harm there to be caused by

am administrative delicensing order ied this Court to dismiss the

argument — similar to petitioner’s here — that later state court re-

view sufficed to provide the necessary “adequate” opportunity for

resolution of the federal challenges. 411 U.S. at 577

6. Consistent with the fact that the Commissioner's abstention

mouon had relied only on Pullman and Burford abstention ( Younger

abstention was added to the district Court's opinion sua sponte), the

Commissioner gave Younger abstention little emphasis in the lower

courts

1]

This focus is of course utterly consistent with this

Court's teaching in Dayton and its predecessor cases.

This Court made clear in Dayton that Younger absten-

tion may apply to administrative proceedings only if the

federal plaintiff has “a full and fair opportunity” to liti-

gate his constitutional claim. 106 S. Ct. at 2723. The

crux of the Third Circuit’s holding was precisely that

where the particular administrative proceedings afforded

the federal plaintiffs no opportunity to raise federal chal-

lenges until after they have suffered what the court had

already found would be devastating economic conse-

quences, such opportunity could hardly be deemed “ad-

equate.” Thus, such proceedings should not be treated

as part of the state’s judicial process for Younger pur-

poses. *

The Commissioner begins his contrary argument by

flatly saying that “The Court of Appeals reversed the Dis-

trict Court’s holding that Younger abstention was proper

for one reason only — USAA could not raise constitu-

tional claims during its administrative proceeding before

the Insurance Department and therefore that proceed-

ing was not a part of the state’s judicial process for

Younger purposes.” (Petition, at 27.) This argument ig-

nores much of the Third Circuit’s opinion and

misconceives the true basis for the decision. What the

Court of Appeals actually said was that:

7. The inappropriateness of abstention where such abstention

will cause devastating economic consequences is not only consis-

tent with Pike v. Bruce Church, Inc... 397 U.S. 137, 140 n.3 (1970),

cited by the Third Circuit, but also with Younger’s roots in the eq-

uitable doctrine that federal injunctions were permissible against

pending state proceedings if needed to prevent great and immediate

irreparable harm. Here, the devastating economic harm which

USAA will suffer has been amply recognized both by the majority of

the Court of Appeals panel (Pet. App. 59a-62a), and by Circuit

Judges Hunter and Garth in issuing the injunction pending appeal

ae

We believe a state administrative proceeding is part

of its judicial process, for Younger purposes, only if

it provides an adequate opportunity to raise consti-

tutional challenges.

(Pet. App. 77a.) (Emphasis added.) In evaluating this

crucial question of the adequacy of the available state

procedures, the Court of Appeals, as already set forth un-

der its Pullman discussion (Pet. App. 62a), had reasoned

as follows:

Weighing the legal issues and the devastating

economic consequences a license revocation would

impose upon USAA on the one hand and the vague

claim of risks to the state from a Texas bank not

doing business in Pennsylvania we conclude that

the district court erred by holding that state appeal

and supersedeas procedures adequately protected

USAA’s interests.

(Emphasis added. )

In short, given its finding that USAA’s interests (in

having a fuil and fair opportunity to resolve its federal

claims) were not adequately protected from devastating

harm by the available state appeal and supersedeas pro-

cedures, the Court of Appeals’ further determination that

the federal claims could not be resolved in the Insurance

Department’s own proceeding meant, inevitably, that ab-

stention was inappropriate. Hence the court held that,

given the facts found in this case, the state’s adminis-

trative proceedings should not be considered part of the

state’s judicial process for Younger purposes.

Finally, subsequent events have made a Younger ab-

stention even more inappropriate.* Because of the Com-

missioner’s failure either to stay or to recall the Third

8. These developments may be considered in reviewing

Younger abstention questions. See, e.g., Middlesex County Ethics

Committee v. Garden State Bar Association, 457 U.S. 423 (1982).

13

Circuit’s mandate, this case was remanded to the district

court and further proceedings have been occurring. On

July 1, 1986, after further briefing and oral argument,

the district court issued a preliminary injunction in favor

of USAA because the court found, inter alia, a likelihood

‘that respondents would succeed on the merits of their

preemption and other claims. The Commissioner took no

appeal. The district court fixed a briefing schedule and

USAA and the Commissioner have since filed supple-

mentary briefs on the issues raised in USAA’s summary

judgment motion on preemption grounds. Only after

such further proceedings did the Commissioner’s coun-

sel in mid-August 1986 reveal an intention to seek a writ

of certiorari in this Court. But the federal action by then,

with the Commissioner’s full acquiescence, had “pro-

ceeded well beyond the ‘embryonic stage’.” Ordinarily,

“considerations of economy, equity and federalism coun-

sel against Younger abstention at that point.” Hawaii

Housing Authority v. Midkiff, 467 U.S. 229, 238 (1984).

Given that the Commissioner himself permitted the fed-

eral machinery to proceed to and beyond the issuance of

a preliminary injunction by the district court, his request

that this Court now grant certiorari to permit a possible

Younger abstention is unwarranted. If a federal injunc-

tion against further administrative proceedings had re-

ally prejudiced Pennsylvania or its Insurance Com-

missioner, there would have been greater effort to use

the remedies available to prevent it.°

9. Another reason to decline Younger abstention is the Third

Circuit’s conclusion, made in the context of its Pullman analysis

(Pet. App. 63a-68a), that abstention is often inappropriate where the

federal plaintiff presents a substantial preemption challenge. See

Capital Service, Inc. v. NLRB, 347 U.S. 501 (1954) (abstention in-

appropriate where federal government has preempted field of labor

policy). Here, the conflict presented is whether ownership of a fed-

eral savings and loan in Texas shall be determined by the Federal

Home Loan Bank Board and the FSLIC (which, as this Court said

in Fidelity Federal Savings & Loan Association v. de la Cuesta, 458

U.S. at 160, have “plenary authority” over such matters) or whether

—

—

Il. The Court of Appeals’ Alternative Reasons For Declin-

ing Pullman Abstention Do Not Warrant Review.

The Commissioner challenges both of the Third Cir-

cuit’s alternative reasons for not abstaining under the

Pullman doctrine. Neither challenge presents important

questions and neither has merit.

A. The Third Circuit’s Pullman Decision Rests

Squarely On Its “Findings” Of The “Devastating

Economic Consequences” Of Abstention.

In Part III-B of its opinion, the Court of Appeals held

Pullman abstention inappropriate because — the

“devasting economic consequences” of abstention out-

weighed the state’s countervailing interest in abstention.

In this regard, Commissioner Grode complains of

what he admits were the “findings” ( Petition at 43) of the

Third Circuit that USAA will suffer “devastating eco-

nomic consequences” from the outcome of the license

revocation proceedings, even if a stay of the license re-

vocation order were granted. Cf. Pike v. Bruce Church,

Inc., 397 U.S. 137, 140 & n. 3 (1970) (no abstention

NOTES (Continued )

such ownership shall be forcibly divested by the state of Pennsvl-

vania (through its threatened use of delicensing power). The lower

courts have consistently held that the presence of a substantial pre-

emption challenge weighs against Younger abstention. Middl

South Energy, Inc. v. Arkansas Public Service Comm., 772 F.2d 404

417 (8th Cir. 1985), cert. denied, 106 S. Ct. 884 (1986) (the legit

imate state interest contemplated by Younger “does not exist when

the state action has been preempted”); Champion Intl Corp. %

Brown, 731 F.2d 1406, 1409 (9th Cir, 1984) (“Montana has no cog

nizable state interest in enforcing those age discrimination laws that

are preempted by Federal law’); Baggett v. Dept. of Professional

Regulation, 717 F.2d 521, 524 (11th Cir. 1983) (abstention inap

propriate when “assertion of preemption went to the jurisdiction and

power of the state administrative agency to proceed at all”); Ken-

tucky West Va. Gas Co. v. Pa. P.ULC., 791 F.2d 1111. 1117 (3d Cir.

1986) (Younger’s respect for comity is “not strained when federal

court cuts off state proceedings that entrench upon the federal

domain.” )

15

where allegedly unconstitutional state regulation threat-

ened $700,000 crop loss); Gibson v. Berryhill, supra

(nonabstention approved where unconstitutional

administrative license revocation proceeding would

harm federal plaintiff). But his complaint that such find-

ings were unsupported by the district court record is sim-

ply incorrect. To begin with, evidence of the harm of

license revocation was presented to the district court by

affidavit with USAA’s Motion for Summary Judgment on

Preemption Grounds (filed January 25, 1985). This harm

was also discussed in USAA’s Supplemental Brief Op-

posing Defendant’s Abstention Motion at pp. 2-3 (filed

March 1, 1985), in USAA’s Memorandum Of Law In

Support Of Motion For Preliminary Injunction at pp.

6-12 (filed July 11, 1985), and, after the Commissioner

offered to agree to a supersedeas, was further elaborated

on to the district court by the affidavit supporting

USAA’s Application for Injunction Pending Appeal (17A-

21A) (filed October 7, 1985). Just as important, the Com-

missioner and his Insurance Department have never

contested the devastating economic consequences of a

license revocation order even if stayed, and never offered

any contrary evidence. !°

Nor can such findings be deemed “speculative”, as

the Commissioner suggests. Indeed, less impressive

findings of harm were relied on by this Court in rejecting

abstention in Gibson v. Berryhill; supra. In Gibson, state

officials had sought abstention in favor of a state admin-

istrative proceeding to revoke a medical license. A three-

judge district court found that, because of administrative

bias, the federal plaintiffs had no meaningful opportu-

nity to present their federal challenge to the state statute

in the revocation proceeding. The state officials con-

10. Indeed, the Commissioner acknowledged on page 19 of his

Brief In Opposition To Motion For Preliminary Injunction filed in

the district court on September 23, 1985: “Defendant does not dis-

pute that revocation of the license(s) of plaintiffs would create prob-

lems for plaintiffs.”

16

tended that such an opportunity nonetheless would be

provided by de novo review in a state court from an ad-

ministrative delicensing order. This Court rejected such

contention. In upholding the district court’s refusal to

abstain, this Court pointedly referred to the lower court’s

finding, similar to those in this case, that:

[T]he revocation by the Board of appellees’ licenses

to practice their profession, “together with the atten-

dant publicity which would inevitably be associated

therewith, would cause irreparable damage” to the

appellees for which no adequate remedy is afforded

by state law.

411 U.S. at 577 n.16.!! The Third Circuit's rejection of

Pullman abstention here was consistent with this

Court’s decision in Gibson.}2

B. The Court Of Appeals’ Alternate Pullman Ground

Presents No Conflict With Other Decisions.

The Commissioner finally argues against the Third

Circuit's alternate holding that Pullman-type abstention

is inappropriate in this case in light of USAA’s substan-

tial!’ preemption claim. Contrary to Commissioner

11. This Court ultimately did decide to abstain in Gibson for

other reasons.

12. The Commissioner also overlooks that Pullman abstention

was also inappropriate for lack of an important countervailing state

interest. The Third Circuit rightly rejected the only important state

interest ever posited by the Commissioner, saying “Regulations

such as Section 641 have no place in the business of insurance un-

der McCarran-Ferguson”. (Pet. App. 69a-72a.) Indeed, given that

the USAA Federal Savings Bank does no business in Pennsylvania

and is located in Texas, the Court of Appeals was skeptical of the

existence of any Pennsylvania interest to be served by abstention,

referring to petitioner's “vague claim of risks to the state from a

fexas bank not doing business in Pennsylvania... .” (Pet. App.

62a.) This lack of an important state interest is another reason for

denying Younger abstention in this case.

13. That USAA’s preemption claim is a substantial one is un-

derlined by the district court having granted USAA a preliminary

17

Grode’s suggestion, this holding is not in conflict with

this Court’s decision to abstain in Lake Carriers’ Assoc.

v. MacMullan, 406 U.S. 498 (1972). The parties in Lake

Carriers had agreed that federal regulations promul-

gated under the federal Water Quality Improvement Act

would preempt the Michigan Watercraft Pollution Con-

trol Act, but only once those federal regulations were is-

sued and became effective (which this Court found would

be some years in the future). The justiciable controversy

in that case was limited to whether the Michigan statute

was constitutionally enforceable in the interim period be-

fore the federal regulations even became effective. Id. at

504-508. Abstention in Lake Carriers simply permitted

Michigan to resolve its immediate state law ambiguities

without risking collision with the existing federal regu-

latory scheme. !*

For these reasons, this Court in Lake Carriers had

no occasion to decide or even to discuss whether a pre-

emption claim presents a substantial constitutional

question for Pullman purposes. By contrast, this Su-

premacy Clause issue had to be considered in weighing

abstention here because it was immediate and substan-

tial: according to the Commissioner, the Pennsylvania

NOTES (Continued )

injunction on July 1, 1986, reflecting that court's belief after full

briefing and argument that USAA showed a substantial likelihood of

success on the merits. Moreover, as this Court itself has pointed out

in Fidelity Federal, supra at n.9, the Ninth Circuit has concluded

that “the regulatory control of the |Federal Home Loan] Bank Board

over federal savings and loan associations is so pervasive as to leave

no room for state regulatory control.” Conference of Federal Savings

and Loan Associations v. Stein, 604 F.2d 1256, 1260 (9th Cir.

1979), summarily aff'd, 445 U.S. 921 (1980).

14. In Lake Carriers, however, this Court considered it settled

for purposes of defining the jurisdiction of three-judge courts, that

Supremacy Clause claims were not “constitutional” claims, and that

such preemption claims could only be decided under the pendent

jurisdiction of such courts if a nonfrivolous “constitutional” claim

was also present. 406 U.S. at 504 n.5.

18

statute (Section 641) prohibited the very affiliation al-

ready approved by the federal agencies having plenary

regulatory jurisdiction.

Nor does the Third Circuit’s decision conflict with

those of other circuit courts. In Aluminum Co. of Amer-

ica v. Utilities Comm’n, 713 F.2d 1024 (4th Cir. 1983),

cert. denied, 465 U.S. 1052 (1984), cited by the Com-

missioner, the court’s holding was not on Pullman

grounds, but on Burford grounds. Moreover, the Fourth

Circuit there merely declined to adopt Alcoa’s per se ar-

gument that Burford abstention is never appropriate if a

federal plaintiff asserts a preemption claim. Indeed, the

Fourth Circuit, recognizing that a substantial preemp-

tion claim often counsels against abstention, said:

We decline to adopt such a per se rule. The presence

of a preemption claim, however, may in some cases

require a refusal to abstain. . . . For example, absten-

tion is inappropriate where the federal government

has preempted the field... or where there is a di-

rect. facial conflict between state and federal stat-

utes.... In such cases, the basic premise of

abstention avoiding needless federal court inter-

vention into important matters within the state’s ju-

risdiction to regulate — obviously is lacking. The

challenged state action clearly conflicts with pre-

emptive federal law.

Id. at 1030 (citations omitted ). In short, the Fourth Cir-

cuit’s view that a substantial preemption claim is a factor

which weighs against a Pullman abstention is consistent

with the Third Circuit's opinion in this case.

The last two cases relied on by petitioner to show a

conflict in the circuits are also inapposite. Neither

Druker v. Sullivan, 458 F.2d 1272 (1st Cir. 1972) nor

City Investing Co. v. Simcox, 633 F.2d 56 (7th Cir.

1980). addressed whether a preemption claim should be

deemed a substantial constitutional question for Pull-

man purposes, because both cases turned on their own

19

peculiar facts. In Druker, the First Circuit simply al-

lowed an abstention decision to stand because of its need

for state court interpretation of unusually complex state

legislation, legislation which the First Circuit variously

referred to as “a riddle”, and “a draftsman’s corkscrew.”

Id. at 1276. And in City Investing Co., supra, there sim-

ply was no contention made that the federal plaintiffs’

preemption claim was not a substantial constitutional

claim for Pullman purposes.

On the other hand, as fully reviewed in Part III-C of

the Third Circuit's opinion, the Ninth Circuit and Tenth

Circuit Courts of Appeals have expressly addressed and

discussed this issue. Knudsen Corp. v. Nevada State

Dairy Commission, 676 F.2d 374, 377 (9th Cir. 1982);

Federal Home Loan Bank Board v. Empie, 778 F.2d

1447, 1451 n.4 (10th Cir. 1985). These Ninth and Tenth

Circuit decisions are consistent with the Third Circuit's

present decision. There is no conflict among the cir-

cuits. !>

The Commissioner also argues that this and other

courts have viewed Supremacy Clause claims as “con-

stitutional” claims. But the holdings in the cases cited by

the Commissioner do not support this view. Instead, they

show that Supremacy Clause claims are often consid-

ered “statutory” or “non-constitutional”, depending upon

the purpose such labels would serve. For example, in

Hagans v. Lavine, 415 U.S. 528 (1974), this Court

clearly recognized that preemption claims are to be con-

sidered “statutory” claims for purposes of analyzing the

jurisdiction of three-judge courts. Indeed, in that case

15. The Commissioner also complains that the Third Circuit's

Pullman decision would allow “any plaintiff” to “defeat an otherwise

appropriate abstention simply by appending a Supremacy Clause

claim.” This argument lacks merit. Such argument would have

been correct only if the Third Circuit had adopted a per se rule that

Pullman abstention is never appropriate if any preemption claim is

present.

20

this Court pointed out, in language since used for guid-

ance by lower courts in abstention cases that, “where the

- Supremacy Clause is implicated: ‘the federal courts are

particularly appropriate bodies for the application of pre-

emption principles.’ ” 415 U.S. at 550. And consistent

with Swift & Co. v. Wickham, 382 U.S. 111 (1965), relied

on by the court below, a preemption claim in another

case cited by the Commissioner (International Brother-

hood of Electrical Workers v. Public Service Commission,

614 F.2d 206 (9th Cir. 1980)) was held to be a

nonconstitutional statutory claim. Id. at 211.

In summary, this case, like Pike v. Bruce Church,

Inc., supra, and Gibson v. Berryhill, supra, but unlike

Dayton, presents findings that devastating and irrepa-

rable harm will be suffered before the federal plaintiff

has an opportunity to have his federal claims resolved in

the state court system. This Court decided in Gibson

that, when such unique facts are present, the adminis-

trative proceeding (with its right of appeal) may well not

afford the delicensed federal plaintiff an adequate oppor-

tunity to litigate its federal or constitutional challenges.

The Third Circuit’s decision, which preceded Dayton,

fully accords with this principle using the particular find-

ings here present. No purpose would be served by review

of these findings in this Court or by remand of this case.

21

CONCLUSION

For these reasons, the petition for a writ of certiorari

should be denied, in all respects.

Respectfully submitted,

Michael L. Browne

Christopher K. Walters*

J. Thomas Morris

Reed Smith Shaw & McClay

1600 Avenue of the Arts Bldg.

Broad and Chestnut Streets

Philadelphia, PA 19107

Robert B. Hoffman

Reed Smith Shaw & McClay

300 North Second Street

Harrisburg, PA 17108

Counsel for Respondents

“Counsel of Record

December 3, 1986

APPENDIX

1-A

FEDERAL HOME LOAN BANK BOARD

No. 83-708

Date: December 15, 1983

WHEREAS, the Federal Home Loan Bank Board has

considered the record and merits of the application of

Robert F. McDermott, et al., San Antonio, Texas, dated

April 4, 1983, for permission to organize a new Federal

stock savings bank to be known as “USAA Federal Sav-

ings Bank” to be located at, or in the immediate vicinity

of, Huebner Road and Interstate 10, San Antonio, Texas;

and

WHEREAS, it is determined that the applicants are

persons of good character and responsibility, that there is

a necessity for such an association in the area to be

served, that there is a reasonable probability of its use-

fulness and success, and that it can be established with-

out undue injury to properly conducted existing thrift

and home-financing institutions; and

WHEREAS, the Board has, as required by the Com-

munity Reinvestment Act of 1977, taken into account

the applicant’s proposed statement to meet the credit

needs of the entire community it will serve, including the

low- and moderate-income neighborhoods therein;

WHEREAS, in a related filing the United States Au-

tomobile Association has applied to acquire 100% of the

shares to be issued by the USAA Federal Savings Bank;

and whereas any approval of said holding company ap-

plication would be subject to the condition that USAA

and any subsidiary thereof agree not to engage in invest-

ment banking activities and to restrict activities related

to securities brokerage and advising mutual funds to less

than 5% of USAA’s assets on a consolidated basis;

THEREFORE, IT IS HEREBY RESOLVED, that said ap-

plication is hereby approved provided that the following

conditions are complied with in a manner satisfactory to

the Supervisory Agent at the Federal Home Loan Bank

of Dallas not later than six months from the date of this

2-A

Resolution, unless, prior to the expiration of such period,

a request to the said Supervisory Agent for an extension

of such time limit shall have been received and granted;

provided further that, except as herein required, there

have been no substantial changes in the information cur-

rently before the Board relating to said applicant; and

provided further, that there has been received no addi-

tional information having an adverse bearing on any fea-

ture of the application, and that the applicant has:

1. Submitted, to the Supervisory Agent, one

signed and three conformed copies of such proposed

charter and bylaw along with a certification by the

secretary of the association that the charter con-

forms to Section 552.3 of the Federal Regulations

and the bylaws contain sufficient provisions to gov-

ern the association in accordance with the require-

ments of Section 552.6 through 552.6-4 of the

Federal Regulations and shall not contain any pro-

vision which is inconsistent with applicable laws,

rules, regulations, or the charter, and has submitted

such documentation to the said Supervisory Agent

for approval;

2. Amended, if necessary, all security forms to

conform with the Rules and Regulations for Insur-

ance of Accounts and has obtained approval from the

Supervisory Agent for the issuance of the security

forms;

3. Submitted a written opinion of its counsel

that the securities adopted by the association can be

legally issued under applicable law and regulations

and its charter and bylaws;

4. Not opened for business prior to compliance

with all rules and regulations of Federal and State

law:

3-A

5. Submitted, in a form satisfactory to the Su-

pervisory Agent at the Federal Home Loan Bank of

Dallas, a comprehensive business plan covering a

period of three years. The Supervisory Agent shall

monitor the applicant’s progress in implementing

the business plan for a period of three years;

6. Upon issuance of a Federal charter, submit-

ted evidence that all funds collected on subscriptions

are adequately safeguarded and that all Rules and

Regulations of the Federal Savings and Loan System

and other applicable Federal laws and regulations

have been complied with;

7. Obtained blanket bond coverage from an ap-

proved surety company, in at least the amount re-

quired by the Insurance Regulations;

8. Obtained approval from the office of General

Counsel at the Federal Home Loan Bank Board of

the offering circular prior to the issuance of any

stock in the Federal Savings Bank, or if an exception

is claimed, a copy of the legal opinion regarding the

proposed offering and any information required for

non-public offerings;

Installed, or arranged to install, a modern sys-

tem of accounting and supporting records, including

standards substantially equivalent to those con-

tained in the Standard Accounting Manual and an

adequate system of internal checks and controls;

10. Established permanent nonwithdrawable

capital and paid-in surplus aggregating at least

$3,000,000, which amount is to be divided between

permanent stock and paid-in surplus in a manner

satisfactory to the Corporation;

11. Submitted a certification to the Supervisory

Agent of the adoption by the stockholders of the

institutions’s proposed stock option plan;

4-A

12. Received the approval of the Principal Su-

pervisory Agent, pursuant to Section 563.41 of the

Insurance Regulations, of any real property transac-

tions between the association and USAA for its office

quarters;

13. Executed and submitted an agreement with

the Corporation which shall provide that, in consid-

eration of the granting of insurance of its accounts,

the operating policies as hereinafter set forth as re-

quirements for insurance shall be effective as of the

date of insurance of its accounts and shall remain in

full force and effect as long as its accounts are in-

sured by the Corporation, unless, with the written

approval of the Corporation, a change therein is

made, said agreement to include provisions, satisfac-

tory to the Corporation:

(a) The composition of the institution’s

management shall comply with the provisions

of: (1) the Depository Institutions Management

Interlocks Act of 1978, as amended, (2) the reg-

ulations implementing that Act, (3) Section

563.33 of the Rules and Regulations for Insur-

ance of Accounts (“Insurance Regulations” ), (4)

the Change in Savings and Loan Control Act

and the Savings and Loan Holding Company

Act (both of which require prior notice and ap-

proval for acquisitions and changes of control of

FSLIC insured stock institutions) and (5) any

future statutory or regulatory changes related to

the composition of the institution’s manage-

ment;

(b) The institution shall adopt a home fi-

nancing policy which is consistent with eco-

nomical home financing and the purposes of

Tidle IV of the National Housing Act:

5-A

(c) Lending plans and policies, covering

lending territory, and origination of loans will be

equally extended to all sources of origin; interest

rates, premiums, service charges and other loan

costs will be such as to enable the institution to

obtain and hold the best loans available;

(d) The institution shall establish and

maintain, at the proposed or other acceptable lo-

cation, independent office quarters, accessible

to the general public consistent with general in-

dustry practice, at which the association shall

conduct its business, including the taking of de-

posits;

(e) The institution shall establish a con-

struction loan procedure which includes the use

and recording of adequate inspection reports on

all properties securing such loans;

(f) The institution shall adopt loan appraisal

practices and procedures conforming to the best

established practices in the industry;

(g) The institution shall establish a proce-

dure, with respect to hazard insurance coverage

on all properties mortgaged to the institution, al-

lowing mortgage borrowers a free choice in the

selection of hazard insurance brokers or agents;

(h) Adequate internal checks and controls

shall be established and maintained;

(i) A plan shall be adopted to ensure the

continuation or succession of competent man-

agement in the event of the managing officer's

incapacity or resignation;

(j) No dividend, other than a stock dividend

on permanent nonwithdrawable capital, shall be

paid if the net worgh of the institution, as defined

/

6-A

in the Insurance Regulations, is or would be-

come, as a resu.t of the payment of such divi-

dend, less than that required by Section 563.13

of the Insurance Regulations, as said section

currently reads or may hereafter be amended;

(k) Any amount remaining in the paid-in

surplus account after the absorption of any def-

icit shall remain as part of the permanent capital

structure of the institution;

(1) Except with the Principal Supervisory

Agent's prior approval, brokered deposits, in-

cluding rollovers therefrom, shall be limited to

five percent of the institution’s deposit base for

the period between the commencement of op-

erations and the beginning of the first full fiscal

vear and for three vears following the beginning

of the first full fiscal vear;

(m) A plan shall be adopted to ensure di-

versification of investments and avoidance of

concentration in a particular type of investment

and in a particular geographic location:

(n) The institution shall adopt a business

plan, as described in Section 571.6(b) of the In-

surance Regulations, which shall include provi-

sions for the prior approval by the Principal

Supervisory Agent of any material change in, or

deviation from, the business plan during the pe-

riod beginning with the commencement of op-

erations and the beginning of the first full fiscal

vear and tor the three vears following the begin-

ning of the first full fiscal vear;: and

0) That the institution shall provide for

employment of a qualified tull-lime executive

managing officer, subject to approval by the

Principal Supervisory Agent. on a salaried basis

1-A

who shall be charged with full administrative

and managerial responsibilities of the institution

under policies established by its board of direc-

tors. In the event of the managing officer's re-

moval, incapacity or resignation during the

period between the commencement of opera-

tions and the beginning of the first full fiscal

year and for the three vears following the begin-

ning of the first full fiscal vear, the continuation

or succession of competent management will

also be subject to the Principal Supervisory

Agent’s approval.

By the Federal Home Loan

Bank Board

J. G. Finn

Secretary

December 28, 1983

George H. Ensley, President

USAA Financial Services Company

USAA Building

San Antonio, Texas 78288

Application by USAA Financial Services Company

(FINCO), San Antonio, Texas (H-506), a subsidiary

of the USAA group of companies, San Antonio,

Texas, for permission to acquire control of USAA

Federal Savings Bank (USAA Bank), San Antonio,

Texas

Dear Mr. Ensley:

The subject application has been reviewed by this office

in keeping with the provisions of Section 408(e) of the

National Housing Act, as amended, and Section 584.4 of

the Regulations for Savings and Loan Holding Compa-

nies.

Pursuant to the authority delegated to this office, the ap-

plication is hereby approved, provided that the following

conditions are complied with in a manner satisfactory to

this office:

1. The proposed acquisition shall be consum-

mated no later than 120 days after the date of this

letter;

2. FINCO shall file an affidavit with the Super-

visory Agent certifving to the consummation of the

acquisition in accordance with the provisions of the

9-A

subject application and specifying the exact number

of shares of stock of the insured institution acquired;

3. FINCO shall stipulate to the Bank Board that

as long as it controls the subject institution, it will

cause the net worth of USAA Bank to be maintained

at a level consistent with that required by Section

563.13(a)(2)(ii)(a) of the Rules and Regulations for

Insurance of Accounts for de novo institutions, and

where necessary to infuse sufficient additional eq-

uity capital, in a form satisfactory to the Supervisory

Agent, to effect compliance with such requirement;

4. FINCO shall stipulate to the Bank Board

that, unless prior written approval has been obtained

from the Supervisory Agent with the concurrence of

the Director of the Office of Examinations and Su-

pervision, dividends paid by USAA Bank in any fiscal

year shall be limited to 50 percent of net income for

that fiscal year, as reflected on its quarterly financial

reports to the Bank Board, provided that any divi-

dends permitted under this limitation may be de-

ferred and paid in a subsequent year, but in no event

may dividends be paid that would reduce the subject

institution’s net worth below the level required by

the Insurance Regulations;

5. The USAA group of companies agree not to

engage in investment banking activities and, specif-

ically (1) agree not to underwrite corporate debt and

equity securities; and (2) agree not to act as principal

in the sale of corporate debt and equity securities.

6. USAA Investment Management Company

and any other affiliate of the USAA group of com-

panies that should become engaged in managing,

10-A

advising or servicing open end investment compa-

nies or become engaged in securities brokerage ac-

tivities at some future date, agree that their .

aggregate assets will not exceed 5 percent of the as- |

sets of USAA on a consolidated basis.

7. The USAA group of companies may request

relief from compliance with conditions 5 and 6,

which will be granted if future legislative, judicial or

regulatory action occurs which, in the Board’s view.

eliminates the need for imposition of the conditions.

Very truly yours,

Joseph E. Settle

Supervisory Agent

JES:TH:jo

11-A

BEFORE THE INSURANCE COMMISSIONER

OF THE

COMMONWEALTH OF PENNSYLVANIA

IN RE: - ALLEGED VIOLATIONS:

UNITED SERVICES AUTOMOBILE : Section 641 of the Insurance

ASSOCIATION : Department Act of 1921, Act of

USAA CASUALTY COMPANY : May 17, 1921, P.L. 789, as

USAA LIFE INSURANCE : amended, 40 P.S. §281

COMPANY

USAA ANNUITY AND LIFE

INSURANCE COMPANY

USAA Building

San Antonio, TX 78288 - Docket No. C84-12-5

ORDER TO SHOW CAUSE

And Now, this 24th day of December, 1984, pursu-

ant to the statutes captioned above and in accordance

with 1 Pa. Code §35.14, Respondents are hereby OR-

DERED to appear at a formal administrative hearing be-

fore the Insurance Commissioner of the Commonwealth

of Pennsylvania, or his duly designated Presiding Of-

ficer, and TO SHOW CAUSE w hy the Insurance Com-

missioner, upon consideration of the Factual Allegations

pursuant to Applicable Law, and in accordance with Pro-

cedures cited herein, should not impose the specified

Penalties, as said terms are described below.

It Is Hereby Ordered that Respondents file an An-

swer to this Order to Show Cause in writing within the

time specified herein, in accordance with 1 Pa. Code

§35.37. Such Answer shall specifically admit or deny

each of the Factual Allegations made herein, and shall

set forth the facts and state concisely the matters of law

upon which Respondents rely. If Respondents fail to file

an Answer within the time allowed herein, the Factual

Allegations shall be deemed admitted, and the Insurance

Commissioner may issue an Order imposing such Pen-

alties as he deems appropriate.

12-A

FACTUAL ALLEGATIONS

1. Respondent United Services Automobile Associ-

ation (“USAA”) is a Texas-domiciled reciprocal insur-

ance exchange with its principal place of business at

USAA Building, San Antonio, Texas.

2. USAA is licensed in this Commonwealth to en-

gage in the businesses of fire and allied insurance, in-

land marine and physical damage insurance, ocean

marine insurance, general liability insurance, burglary

and theft insurance, automobile liability insurance and

personal property insurance pursuant to Subsections (b)

(1), (2) and (3) and (c) (4), (6), (11) and (13) of Section

202 of the Insurance Company Law of 1921, Act of May

17, 1921, P.L. 687, as amended, 40 P.S. §382.

3. Respondent USAA Casualty Insurance Company

is a Texas-domiciled stock insurance company with its

principal place of business at USAA Building, San

Antonio, Texas.

4. USAA Casualty Insurance Company is licensed

in this Commonwealth to engage in the businesses of

fire and allied insurance, inland marine and physical

damage insurance, ocean marine insurance, general li-

ability insurance, burglary and theft insurance, automo-

bile liability insurance and personal property insurance

pursuant to Subsections (b) (1), (2) and (3) and (c) (4),

(6), (11) and (13) of Section 202 of the Insurance Com-

pany Law of 1921, Act of May 17, 1921, P.L. 687, as

amended, 40 P.S. §382.

5. Respondent USAA Life Insurance Company is a

Texas-domiciled stock insurance company with its prin-

cipal place of business at USAA Building, San Antonio,

Texas.

Mi hth Saini stecid OER DPS

13-A

6. USAA Life Insurance Company is licensed in this

Commonwealth to engage in the businesses of life in-

surance and annuities and accident and health insur-

ance pursuant to Subsections (a) (1) and (2) of Section

202 of the Insurance Company Law of 1921, supra, 40

P.S. §382.

7. Respondent USAA Annuity and Life Insurance

Company is a Texas-domiciled stock insurance company

with its principal place of business at San Antonio,

Texas.

8. USAA Annuity and Life Insurance Company is

licensed in this Commonwealth to engage in the busi-

ness of life insurance and annuities pursuant to Subsec-

tion (a) (1) of Section 202 of the Insurance Company

Law of 1921, supra, 40 P.S. §382.

9. USAA Casualty Insurance Company, USAA Life

Insurance Company and USAA Annuity and Life Insur-

ance Company are wholly-owned subsidiaries of USAA.

10. USAA Financial Services Company (formerly

known as USAA_ Development Company) is a

wholly-owned subsidiary of USAA acting as the holding

company for USAA’s non-insurance subsidiaries.

11. On or about April 14, 1983, USAA Financial

Services Company (then known as USAA Development

Company), filed an application with the Federal Home

Loan Bank Board for a de novo Federal Savings Bank

Charter for the USAA Federal Savings Bank.

12. Concurrent with the aforementioned filing,

USAA Financial Services Company (then known as

USAA Development Company), filed with the Federal

Savings and Loan Insurance Corporation an Application

H(e) (1) to serve as a unitary savings and loan holding

company.

13. The aforementioned applications were approved

effective December 15, 1983, and the USAA Federal

Savings Bank began operations on December 30, 1983.

14-A

14. As such, USAA, through its subsidiary, USAA

Financial Services Company, currently owns and con-

trols the USAA Federal Savings Bank.

15. As such, USAA constitutes a savings and loan

holding company as defined by Section 64 1(a) of the In-

surance Department Act of 1921, Act of May 17, 1921,

P.L. 789, as amended, 40 P.S. §281(a).

16. As such, USAA Casualty Insurance Company,

USAA Life Insurance Company and USAA Annuity and

Life Insurance Company are subsidiaries of a savings

and loan holding company as defined by Section 64 1(a)

of the Insurance Department Act of 1921, supra, 40 P.S.

§64 1(a).

APPLICABLE LAW

Based on the foregoing Factual! Allegations, it is al-

leged that Respondents have violated the following stat-

ute: Section 641(b) of the Insurance Department Act of

1921, Act of May 17, 1921, P.L. 789, as amended, 40 P.S.

§281(b), which states in its entirety:

No lending institution, public utility, bank hold-

ing company, savings and loan holding company or

any subsidiary or affiliate of the foregoing, or office

or employee thereof, may, directly or indirectly, be

licensed or admitted as an insurer or be licensed to

sell insurance in this State either as a broker or as an

agent except that a lending institution or bank hold-

ing company, subsidiary or affiliate of a lending in-

stitution may be licensed to sell credit life, health

and accident insurance and to seil and underwrite

title insurance in accordance with regulations pro-

mulgated by the Insurance Commissioner.

Reference should also be made to the following stat-

utes and regulations:

1. Administrative Agency Law, 2 Pa.C.S.

§§101-508 and §$§701-704.

.

Pailin trates 4

i emer ilinte rain ements

15-A

2. General Rules of Administrative Practice and

Procedure, | Pa. Code §§31. 1-35. 193, 35.225-35.251.

3. Special Rules of Administrative Practice and

Procedure, 31 Pa. Code §§56. 1-56.3.

PENALTIES

After the Procedures set forth herein, if the Insur-

ance Commissioner finds the Factual Allegations set

forth herein to be true and correct, and determines that

Respondents have violated any provision of Applicable

Law, the Insurance Commissioner at his discretion may

impose the following Penalty: Revocation of any and all

insurance licenses issued by the Commissioner and cur-

rently held by Respondents.

PROCEDURES

The formal jadministrative hearing in this matter

shall be held in accordance with the Administrative

Agency Law, Act of April 28, 1978, P.L. 202 (2 Pa.C.S.

§§ 101-508 and 701-704); General Rules of Administra-

tive Practice and Procedure, 1 Pa. Code §§31.1-35.193,

35.225-35.251; Special Rules of Administrative Practice

and Procedure, 31 Pa. Code §§56.1-56.3; and other rel-

evant procedural provisions of law.

The hearing shall be held before the Insurance Com-

missioner of the Commonwealth of Pennsylvania, or his

duly designated Presiding Officer, in accordance with 1

Pa. Code §35.185.

Respondents may appear, with or without counsel,

and offer testimony or other evidence in their behalf.

In the event Respondents fail to respond to this Or-

der to Show Cause or to appear at said hearing, the Fac-

tual Allegations contained herein shall be deemed

admitted, and the Insurance Commissioner shall issue

an Order imposing such Penalties cited herein as he, in

his discretion, deems appropriate.

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ORDER RETURNABLE at such time and place as

shall be fixed for the convening of the formal adminis-

trative hearing on this Order to Show Cause. Answers,

motions preliminary to those at hearing, protests, peti-

tions to intervene, or notices of intervention, if any, must

be filed in writing with the Docket Clerk, Insurance De-

partment, Room 1342 Strawberry Square, Harristown

State Office Building No. 1, Harrisburg, Pennsylvania

17120 no later than twenty (20) days from the date no-

tice of this Order is published in the Pennsylvania Bul-

letin.

NOTICE of this Order to Show Cause shall be given

by the Insurance Department by forwarding a copy by

first-class mail to the Respondents named herein and by

publication in accordance with 1 Pa. Code §35.105 and

31 Pa. Code §57.1.

/s/

JOHN J. SHEEHY

Chief Deputy Insurance Commissioner

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UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

UNITED SERVICES

AUTOMOBILE

ASSOCIATION, et al. :

-: CIVIL ACTION NO. 84-1596

Plaintiffs.

v.

WILLIAM J. MUIR, III

Detendant.

STATE OF TEXAS

: Bo

COUNTY OF BEXAR

AFFIDAVIT OF WILLIAM McCRAE IN SUPPORT OF

APPLICATION FOR INJUNCTION PENDING APPEAL

William McCrae, being duly sworn, upon his oath

deposes and says:

1. I am both Senior Vice President and Secre-

tary of the United Services Automobile Association

(“USAA”) and am authorized to make this Affidavit

on its behalf.

2. USAA has grown to become one of the larg-

est, most successful and most reputable insurance

companies in the United States. Its excellent repu-

tation is evidenced by the September, 1984 issue of

“Consumer Reports” which rates USAA as second

highest in the country among automobile insurance

companies with regard to claimants’ overall satisfac-

tion with the handling and settlement of claims. Ad-

ditionally, the August, 1985 issue of “Consumer

Reports” rates USAA as second highest in the coun-

try among homeowners’ insurance companies with

regard to claimants’ overall satisfaction. Copies of

the “Consumer Reports” articles are attached hereto

as Exhibit “A.”

18-A

3. USAA has consistently received the highest

possible rating (i.e. “A+”) with regard to financial

position and operating performance by the A. M.

Best Company ratings. A copy of the most current

A. M. Best Company rating is attached hereto as Ex-

hibit “B.”

4. USAA’s success is due in part to the low

claims ratio history of the class of persons it services,

namely, commissioned officers in the United States

armed services as well as candidates for commis-

sions.

3. USAA and co-plaintiffs are licensed to sell in-

surance in all fifty states. USAA’s availability in all

fifty states is an important factor for the highly mo-

bile officers in the armed forces which are serviced

by the USAA group of companies.

6. By letters dated July 3, 1984 and August 27,

1984, and in subsequent meetings, the Pennsylva-

nia Insurance Department expressed the view that

USAA’s ownership of the USAA Federal Savings

Bank in San Antonio, Texas, constitutes a violation

of Section 641 of the Insurance Department Act of

1921 as amended (40 P.S. §281) (hereafter “Section

641”). Copies of these letters are attached hereto as

Exhibits “C” and “D” respectively.

7. Moreover, prior to the filing of this lawsuit,

the Defendant's Insurance Department advised rep-

resentatives of USAA that USAA must divest the

Bank or else the Insurance Department would ini-

tiate proceedings to revoke the licenses of USAA to

transact business in Pennsylvania.

8. Defendant Muir, during his tenure as Acting

Insurance Commissioner, has entered an order re-

quiring one or more other insurance companies to

relinquish their Pennsylvania insurance licenses by

EON NIN ot act eR SN Ra. eam elle bad oon la wl acres es wee

19-A

reason of their affiliation with an out of state banking

institution. A copy of such order is attached as Ex-

hibit “E.”

9. On December 24, 1984, Defendant’s Insur-

ance Department issued an administrative “Show

Cause Order” alleging that USAA and co-plaintiffs

are in violation of Section 641 by reason of their af-

filiation with the Bank. A copy of the Insurance

Department’s Show Cause Order is attached hereto

as Exhibit “F.”

10. Before filing the administrative Show Cause

Order, Defendant Muir advised enforcement person-

nel of the Insurance Department that “A plain read-

ing of §641 with the broad prohibition would be

adopted.” See Exhibit “G” attached hereto.

11. Administrative hearings to revoke plaintiff's

insurance licenses have been rescheduled for No-

vember 14, 1985. A pre-hearing conference is sched-

uling for October 15, 1985. See Exhibit “H” attached

hereto.

12. An order revoking plaintiffs’ insurance li-

censes is substantially certain to occur following the

administrative hearings in defendani’s Insurance

Department in view of:

(a) The past enforcement of Section 641 by

the Department;

(b) The representations of the Department

that USAA must divest the Bank or suffer revo-

cation of its licenses;

(c) The service of an Administrative Show

Cause Order alleging that USAA and

co-plaintiffs are in violation of Section 641;

20-A

-(d) The statement of the Defendant that a

“plarn reading of Section 641 with its broad

prohibition” would be adopted:

(e) The fact of USAA’s affiliation with the

USAA Federal Savings Bank is admitted.

13. The Defendant’s Insurance Department

has never expressed any view contrary to its position

that USAA and co-piaintiffs are in violation of Sec-

tion 641.

14. An order revoking the licenses of USAA and

co-plaintiffs will have a devastating and irreparable

impact upon the business of USAA and co-plaintiffs,

which will not be mitigated by the availability of

supersedeas procedures in the state court system.

15. An order revoking plaintiffs’ licenses, and

the inevitable resulting publicity, will cause confu-

sion and uncertainty in the minds of the nearly

40,000 policyholders in Pennsylvania who have cho-

sen to insure their lives, homes, automobiles and

other property with plaintiffs. Many policyholders

will not understand the reason for the license revo-

cation or the effect on them pending appeal.

16. An uncertain number of these nearly

40,000 policyholders will likely terminate their rela-

tionship with USAA and co-plaintiffs upon learning

that the Pennsylvania Insurance Department has re-

voked plaintiffs’ licenses. This will occur even with

supersedeas due to the uncertain status of plaintiffs’

licenses pending appeal.

17. An uncertain number of prospective policy-

holders will be dissuaded from insuring their lives,

homes, automobiles and other property due to the

uncertain status of plaintiffs’ licenses pending ap-

peal. USAA’s competitors will be able to make use of

caacanvensi

21-A

information concerning the status of these licenses

in their marketing efforts.

18. It appears that USAA and co-plaintiffs will

be required to notify the Insurance Departments in

other states concerning any such order of revoca-

tion, despite a supersedeas. Most of these states do

not have statutes similar to Section 641. Plaintiffs

will be subject to damage to its outstanding reputa-

tion as well as unnecessarily increased regulatory

scrutiny in these states.

19. License revocation is an extreme sanction,

usually applied, if at all, only in cases where an in-

surance company has engaged in grossly illegal or

fraudulent practices or where the company is in poor

financial condition. Even with supersedeas, USAA

and co-plaintiffs will suffer serious damage to their

goodwill and excellent reputation in Pennsylvania

and elsewhere if the licenses of these companies are

revoked.

20. Only intervention by this court can prevent

irreparable harm to USAA and co-plaintiffs as de-

scribed above, and ensure that plaintiffs receive a

fair adjudication of their constitutional rights before

suffering such harm by reason of an order revoking

plaintiffs’ licenses.

/s/) WILLIAM MCCRAE

William McCrae

Sworn and subscribed

before me this 14th day

of October, 1985

/s/ LORETTA C. LANICEK

Notary Public Loretta C. Lanicek

My Commission expires 11/30/88

22-A

UNITED STATES COURT OF APPEALS

. Y y ]

FOR THE THIRD CIRCUIT #C-64

November 8, 1985

No. 85-5662

UNITED SERVICES AUTOMOBILE ASSOC.., et al.

US.

MUIR, WILLIAM J., III, etc.

Appellants

(M.D. Civil 84-1596)

Present: HUNTER, GARTH, and MANSMANN, Circuit

Judges.

1. Appellant’s motion for injunction pending appeal.

or in the alternative, for expedited argument, in which it

requests that this Court enter an order enjoining appel-

lee, pending appeal, from revoking appellant’s Pennsy]-

vania insurance licenses by reason of their federally-

approved affiliation with the USAA Federal Savings

Bank in San Antonio, Texas, in the above-entitled case.

Respectfully,

/s/

enc. Deputy Clerk 7-5019

ad

The foregoing Motion for injunction pending appeal

is granted. Motion to expedite is denied.

Judge Mansmann would deny the motion for injunc-

tion pending appeal.

By the Court,

‘s/ JAMES HUNTER, III

Judge

Dated: November 22, 1985

ad/cc: Christopher kK. Walters, Esq.

Ellis M. Saull, Esq.

23-A

IN THE UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

UNITED SERVICES

AUTOMOBILE

ASSOCIATION, ET AL.,

Plaintiffs

v. CIVIL NO. 84-1596

WILLIAM J. MUIR. III,

Defendant

ORDER

And Now, this Ist day of July, 1986, upon consid-

eration of Plaintiffs’ Renewed Motion For Preliminary

Injunction and Brief in support thereof, and finding that

unless this order is entered irreparable injury will result

to Plaintiffs before final adjudication of this matter, it is

ORDERED and DECREED as follows:

Defendant William J. Muir, III, his successors in of-

fice, and his and their officers, agents, servants, employ-

ees and attorneys and those in active concert or

participation with them are enjoined and restrained,

pending final judgment in this case, from taking any fur-

ther actions in connection with the administrative en-

forcement proceedings pending in the Pennsylvania

Insurance Department against plaintiffs herein. This

Preliminary Injunction shall take effect upon the posting

by plaintiffs of security pursuant to F.R.C.P. 65(c) in the

amount of $10,000.00.

By the Court:

R. DIXON HERMAN

United States District Judge