Appendix — United Services Automobile Ass'n v. Foster

i

89-449 >) | stoma

No. ia SEP 6 ise9

CLERK

IN THE ——

Supreme Court of the United States

OcTOBER TERM, 1989

UNITED SERVICES AUTOMOBILE ASSOCIATION, et al.,

Petitioners

v.

CONSTANCE FOSTER, INSURANCE COMMISSIONER

OF THE COMMONWEALTH OF PENNSYLVANIA, et al.,

Respondents.

APPENDIX TO

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

DONALD B. AYER

Counsel of Record

ROBERT H. KLONOFF

JONES, DAY, REAVIS & POGUE

1450 G Street, N.W.

Washington, D.C. 20005

(202) 879-3939

_ MICHAEL L. BROWNE

CHRISTOPHER K. WALTERS

W. THOMAS McGOUGH, JR.

REED, SMITH, SHAW & MCCLAY

2500 One Liberty Place

Philadelphia, PA 19103

(215) 851-8100

Counsel for Petitioners

WILson - Eras Printing Co., Inc. - 789-0096 - WasHiINGTON. D.C. 20001

TABLE OF CONTENTS

Page

Appendix A (court of appeals decision dated May 5,

a. snmeetsnenatnasennaccceses la

Appendix B (court of appeals denial of petition for

rehearing and rehearing en banc dated June 9,

1989) 0) LS ie EE 4la

Appendix C (district court decision dated December 23,

i. ccuinstugnemencorterens 45a

Appendix D (United States Supreme Court denial of

petition for certiorari dated January 12, 1987) ......... 67a

Appendix E (court of appeals decision dated June 6,

1986) (OAs 68a

Appendix F (district court decision and order dated

ESSELTE EE eee 88a

-la

APPENDIX A

UNITED STATES COURT OF APPEALS

THIRD CIRCUIT

Nos. 88-1339, 88-5077, 88-5078 and 88-5121

ForRD MoTOR COMPANY and FORD MOTOR CREDIT CoM-

PANY, and THE AMERICAN ROAD INSURANCE COMPANY

and Forp LIFE INSURANCE COMPANY, and First Na-

TIONWIDE FINANCIAL CORPORATION and FIRST NATION-

WIDE BANK v.

INSURANCE COMMISSIONER OF THE

COMMONWEALTH OF PENNSYLVANIA

Appeal of PENNSYLVANIA ASSOCIATION OF INDEPENDENT

INSURANCE AGENTS; JOHN ULRICH, JR.; PROFESSIONAL

INSURANCE AGENTS ASSOCIATION OF PENNSYLVANIA,

MARYLAND AND DELAWARE,:INC.; CHARLES P. LEACH,

JR.; PENNSYLVANIA ASSOCIATION OF LIFE UNDER-

WRITERS; and HAROLD E. ALEXANDER, in 88-1339

UNITED SERVICES AUTOMOBILE ASSOCIATION, a Texas Re-

ciprocal Interinsurance Exchange, USAA CASUALTY

INSURANCE COMPANY, a Texas Stock Insurance Com-

pany, USAA LIFE INSURANCE CoMPANY, a Texas Stock

Insurance Company, and USAA ANNUITY AND LIFE

INSURANCE COMPANY, a Texas Stock Insurance,

Vv.

Muir, WILLIAM J., III, Acting Insurance Commissioner

of the Commonwealth of Pennylvania

Appeal of PENNSYLVANIA ASSOCIATION OF INDEPENDENT

INSURANCE AGENTS; JOHN ULRICH, JR.; PROFESSIONAL

INSURANCE AGENTS ASSOCIATION OF PENNSYLVANIA,

MARYLAND AND DELAWARE, INC.; CHARLES P. LEACH,

JR.; PENNSYLVANIA ASSOCIATION OF LIFE UNDER-

WRITERS; and HAROLD E. ALEXANDER, in 88-5077

2a

UNITED SERVICES AUTOMOBILE ASSOCIATION, a Texas Re-

ciprocal Interinsurance Exchange, USAA CASUALTY

INSURANCE COMPANY, a Texas Stock Insurance Com-

pany, USAA LIFE INSURANCE COMPANY, a Texas Stock

Insurance Company, and USAA ANNUITY AND LIFE

INSURANCE COMPANY, a Texas Stock Insurance,

Vv.

MulIr, WILLIAM J., III, Acting Insurance Commissioner

of the Commonwealth of Pennsylvania,

PENNSYLVANIA ASSOCIATION OF INDEPENDENT INSURANCE

AGENTS; JOHN ULRICH, JR.; PROFESSIONAL INSURANCE

AGENTS ASSOCIATION OF PENNSYLVANIA, MARYLAND

AND DELAWARE, INC.; CHARLES P. LEACH, JR.; PENN-

SYLVANIA ASSOCIATION OF LIFE UNDERWRITERS; and

HAROLD E. ALEXANDER

Appeal of Constance Foster, in 88-5078

UNITED SERVICES AUTOMOBILE ASSOCIATION, a Texas Re-

ciprocal Interinsurance Exchange, USAA CASUALTY

INSURANCE COMPANY, a Texas Stock Insurance Com-

pany, USAA LIFE INSURANCE COMPANY, a Texas Stock

Insurance Company, and USAA ANNUITY AND LIFE

INSURANCE COMPANY, a Texas Stock Insurance,

V.

Murr, WILLIAM J., III, Acting Insurance Commissioner

of the Commonwealth of Pennsylvania,

PENNSYLVANIA ASSOCIATION OF INDEPENDENT INSURANCE

AGENTS; JOHN ULRICH, JR.; PROFESSIONAL INSURANCE

AGENTS ASSOCIATION OF PENNSYLVANIA, MARYLAND

AND DELAWARE, INC.; CHARLES P. LEACH, JR.; PENN-

SYLVANIA ASSOCIATION OF LIFE UNDERWRITERS; and

HAROLD E. ALEXANDER

Appeal of United Services Automobile Association,

USAA Casualty Insurance Company,

USAA Life Insurance Company, and

USAA Annuity and Life Insurance Company, in 88-5121

3a

Argued Oct. 5, 1988

Decided May 5, 1989

William R. Balaban, Balaban & Balaban. Harrisburg,

Pa., Jonathan B. Sallet (argued), Miller, Cassidy, Lar-

roca & Lewin, Washington, D.C., for appellants PA Assoc.

of Ind. Ins. Agents in 88-1339, and 88-5077, and for

appellees, PA Assoc. of Ind. Ins. Agents in 88-5121 and

88-5078.

Harvey Bartle, III (argued), Dechert, Price & Rhoads,

Philadelphia, Pa., for appellee Ford in 88-1339.

John B. Knoor, III (argued), Chief Deputy Atty. Gen.,

Office of Atty. Gen., Harrisburg, Pa., for appellee, Con-

stance Foster in 88-5121, 88-5077 and 88-5078..

Christopher K. Walters (argued), Reed, Smith, Shaw

& McClay, Philadelphia, Pa., Robert B. Hoffman, Reed,

Smith, Shaw & McClay, Harrisburg, Pa., for appellant

United Services Auto. Ass’n, in 88-5121, 88-5077 and

88-5078.

Before HIGGINBOTHAM, MANSMANN and GREEN-

BERG, Circuit Judges.

OPINION OF THE COURT

A. LEON HIGGINBOTHAM, JR., Circuit Judge.

On these appeals we are revisited by significant ques-

tions concerning the appropriate applications of the doc-

trines of abstention and preemption, and of the dormant

commerce clause of the United States Constitution. Al-

though all such cases present issues that require delicate

balancing, these cases are particularly sensitive because

they concern both a federal scheme designed to assist the

nation’s failing savings and loans companies and the im-

portant state interest in regulating the state insurance

4a

industry. Upon our review of the contentions raised on

these appeals, we conclude: (1) that the principles of

Younger do not require abstention in these cases; (2) that

Pennsylvania’s statute that precludes companies that sell

insurance in Pennsylvania from affiliation with savings

and loan institutions is preempted to the extent that the

state statute is applicable to companies authorized pur-

suant to federal legislation to purchase failing thrifts

and (3) the state statute is not preempted in its applica-

tion to other than failing thrifts and, in that application,

does not violate the Commerce Clause. In our view, that

statute neither discriminates impermissibly in favor of

in-state residents, nor presents a burden on interstate

commerce and, it therefore, does not present harm pre-

cluded by the Commerce Clause. Accordingly, we will

affirm the decisions of the district courts in these cases

in part and reverse in part.

I. Background

These appeals are taken from the judgments of district

courts in two declaratory actions that were filed to deter-

mine the constitutionality of § 641 of the Insurance De-

partment Act of 1921, as amended, P.L. 1148 (1987),

codified at 40 Pa.Stat.Ann. (Purdon 1987 Supp.).' Al-

though the cases are wholly separate and were filed inde-

pendently, they were consolidated for the purposes of

appeal because of the commonality of the underlying facts

and the significant identity of the issues presented for

review. The facts of neither case are in dispute. For

1In pertinent part, §641 provides that

[n]jo lending institution, . . . bank holding company, savings

and loan company or any subsidiary or affiliate of the fore--

going, or officer or employee thereof, may directly or indirectly,

be licensed or admitted as an insurer... in this State

40 Pa.Stat.Ann. § 281(b) (Purdon 1987 Supp.). Such institutions

may be licensed to “sell credit life, health and accident insurance

and to sell and underwrite title insurance in accordance with

regulations promulgated by the Insurance Commissioner.” Jd.

” ee

5a

the purposes of this discussion, we review the facts and

procedural histories of each case briefly:

A. Pennsylvania Ass’n of Independent Insurance

Agents v. Ford Motor Co. (“Ford”)

In December 1985, Ford Motor Company (‘Ford’’)

acquired the First Nationwide Financial Corporation

(“FNFC”) which is a California based savings and loan

holding company. Ford also acquired FNFC’s subsidiary,

First Nationwide Savings which Ford renamed First Na-

tionwide Bank (“FNB’). At that time, FNB had offices

located in California, New York, Florida and Hawaii.

In June 1986 Ford, through its new subsidiaries FNFC

and FNB, arranged to purchase two Ohio based savings

and loan companies, (“S & L’s”) that were failing and

had been placed into receivership with the Federal Sav-

ings and Loan Insurance Corporation (“FSLIC”). FSLIC

had solicited applications for the purchase of these S & L’s

pursuant to federal statutory guidelines designed to limit

liability exposure for these failed companies which were

federally insured. See 12 U.S.C. §1730a (1982).2 The

2 That statute provides for the “[rJegulation of holding com-

panies.” In its several sections, it provides explicit guidelines for,

inter alia, the “registration and examination” of holding com-

panies, see § 1730a(b); regulations of “[h]Jolding company activi-

ties,” see §1730a(c); “transactions,” see §1730a(d) and “acqui-

sitions,” see § 1730a(e) (1). Significant to the present cases, that

statute also provides for “{e]mergency thrift acquisitions.” See

§ 1730a(m). In pertinent part, that section provides that:

[nJotwithstanding any provision of the laws or constitution

of any State or any provision of Federal law, except as pro-

vided in subsections (c), (e) (2) and (1) of this section, and

in clause (iii) of this subparagraph, the Corporation, upon

its determination that severe financial conditions exist which

threaten the stability of a significant number of insured insti-

tutions, or of insured institutions possessing significant finan-

cial resources, may authorize, in its discretion and where it

determines such authorization would lessen the risk to the

Corporation, an insured institution that is eligible for assist-

6a

failing Ohio S & L’s were merged with FNB to create a

larger national savings and loan entity. Subsequently, in

February 1987, Ford requested and was granted permis-

sion by the Federal Home Loan Bank Board to open two

additional branches of the newly constituted FNB. One

of these new branches was in Pennsylvania.

Among the numerous subsidiary companies that are

owned and controlled by Ford are the American Road

Insurance Company (“American Road”), which is a

wholly owned subsidiary of Ford, and the Ford Life In-

surance Company (“Ford Life”), which is wholly owned

by American Road. Both of these companies are licensed

to sell insurance in Pennsylvania and have been engaged

in that business for over twenty years. Ford’s simul-

taneous ownership of these insurance companies and

FNB, however, placed it in violation of § 641 of the

Pennsylvania insurance act.

Accordingly, in June 1987, three months after FNB’s

Pennsylvania branch office was opened, Ford filed a com-

plaint in the United States district court for declaratory

relief from Pennsylvania’s enforcement of that statute

which, Ford alleged, was unconstitutional on several

grounds. Ford claimed, inter alia that, to the extent that

the statute placed a restriction upon its ownership of a

savings and loan institution, it was preempted by 12

U.S.C. § 1730a(m) (1987). Additionally, Ford contended

that § 641 was constitutionally infirm because it was vio-

lative of the dormant commerce clause of the United

ance pursuant to section 1729(f) of this title to merge or con-

solidate with, or to transfer its assets and liabilities to, any

other insured institution or any insured bank (as such term

“insured bank” is defined in section 1813(h) of this title),

may authorize any other insured institution to acquire control

of said insured institution, or may authorize any company

to acquire control of said insured institution or to acquire

the assets or assume the liabilities thereof.

12 U.S.C. § 1730a(m) (1) (A) (i) (1987 Supp.).

on SS mae rin se tl," nantataalaliaatasl

ee ee

a

States Constitution. The Insurance Commissioner of the

State of Pennsylvania (“Insurance Commissioner” or “the

Commissioner”) filed a reply challenging the merits of

the contentions raised by Ford. The CommissiGner was

joined by the appellants in this case, the Pennsy!vania

Association of Independent Insurance Agents (“Insurance

Agents”) who had successfully petitioned the district

court for leave to intervene. Together with that motion

to intervene, the Insurance Agents aiso filed a motion to

dismiss Ford’s complaint in which it petitioned the dis-

trict court to abstain from adjudication of the complaint

pursuant to the Younger doctrine of abstention.’ Prior to

intervening in the case, the Insurance Agents had filed

a complaint with the Insurance Commissioner initiating

an administrative proceeding that sought the revocation

of American Road’s and Ford Life’s insurance licenses

because those companies were in violation of § 641. Sub-

sequent to the insurance agents’ intervention in this case,

Ford filed a motion in the district court seeking an in-

junction of the state administrative proceedings.

Ford also filed a motion for summary judgment on

three grounds: it contended that the statute was uncon-

stitutional as a violation of the equal protection clause,

that federal legislation preempted the entire field con-

cerning the acquisition and ownership of savings and

loans and that federal legislation that specifically ad-

dressed the acquisition of failing savings and loan in-

stitutions preempted § 641.

3 See Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d

669 (1971). That case represents the starting point for a judicial

doctrine “designed to protect the institutional autonomy of state

governments by limiting the power of federal courts to grant

declaratory or injunctive relief against unconstitutional state action

in circumstances where paraliel state proceedings involving the

federal litigants provide them with an adequate forum for airing

their constitutional claims.” L. Tribe, American Constitutional

Law 201-02 (2d ed. 1988).

8a

The district court concluded that neither of the first

two contentions raised by Ford for summary judgment

were meritorious. It concluded, however, that the lan-

guage and legislative history of § 1730a(m) evinced Con-

gress’s clear intent to preempt state laws that hindered

the acquisition of failing S & L’s and determined, accord-

ingly, that § 641 had been preempted. Because its deci-

sion rested on preemption grounds, the district court also

held that abstention was improper. The insurance agents

challenge each of the district court’s conclusions on this

appeal.*

B. Foster v. United Services Automobile Ass’n

(“USAA”)

The United Services Automobile Association (“USAA”’)

is a group of four Texas based insurance companies that

are engaged in the insurance business nationwide. It is

licensed to sell insurance in Pennsylvania and has been

doing so for a number of years. In 1983, USAA was

granted permission by the Federal Home Loan Bank

Board and FSLIC to create the USAA Federal Savings

Bank in Texas. In accordance with all applicable federal

regulations, USAA organized and capitalized that bank,

which then began doing business in Texas.° During the

following year, the Pennsylvania Insurance Commissioner

notified USAA that its simultaneous ownership of the

Texas bank and continued sale of insurance policies in

Pennsylvania, violated § 641. It advised USAA that pur-

suant to § 641, it must either cease the sale of insurance

in Pennsylvania or divest itself entirely from ownership

4 Ford does not cross-appeal from the decision of the district

court concerning the alternate bases on which it sought summary

judgment. Accordingly, none of these issues are before us on this

appeal. Also, the Insurance Commissioner, although a named

defendant, does not join as an appellant in this case.

5 The record does not indicate—and the insurance commissioner

does not contend—that this bank has ever solicited deposits from

Pennsylvania citizens, or otherwise done any business in Pennsyl-

vania.

a

9a

in the Texas bank. USAA filed a omplaint in the district

court seeking declaratory relief from enforcement of the

statute, which it challenged as unconstitutional on its face

and as preempted by federal regulation. Subsequent to

that complaint, the insurance department commenced state

administrative proceedings for the revocation of USAA’s

license to sell insurance in Pennsylvania and, in light of

those proceedings, filed a motion for dismissal in the dis-

trict court on abstention grounds. USAA cross-filed a

motion for summary judgment on the grounds that § 641

was preempted by § 1730a.

The district court concluded that abstention was appro-

priate under each of three types of abstention: Younger,

Pullman* and Burford.’ We reversed that decision and

held that abstention by the district court under any of

these theory was improper. See United Services Auto-

mobile Ass’n v. Muir, 792 F.2d 356 (3d Cir. 1986), cert.

denied, sub nom. Grode v. United Services Automobile

Ass’n, 479 U.S. 1031, 107 S.Ct. 875, 93 L.Ed.2d 830

(1987) (“USAA I’). Accordingly, we remanded this

matter to the district court for hearing.

On remand, the Insurance Commissioner again peti-

tioned the district court to abstain. The Commissioner

limited this request to Younger abstention and contended

that this Court’s decision in USAA I had been overruled

by intercedent precedent of the Supreme Court in the case

Ohio Civil Rights Comm’n v. Dayton Christian Schools,

Inc., 477 U.S. 619, 106 S.Ct. 2718, 91 L.Ed.2d 512 (1986)

(“Dayton Schools”). The Commissioner argued that

USAA I had held that Younger abstention was inappro-

priate only because of this Court’s view that the State

administrative proceedings were an inadequate forum for

® See Ruilroad Comm’n of Texas v. Pullman Co., 312 U.S. 496,

61 S.Ct. 643, 85 L.Ed. 971 (1941).

7 See Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87

L.Ed. 1424 (1943). :

Ba Ns ee ee

10a

the constitutional claims raised. The Commissioner ar-

gued that that conclusion was no longer valid in light of

Dayton Schools and, accordingly, that abstention pursu-

ant to Younger was appropriate.

The district court agreed that USAA I had been ovér-

ruled by Dayton Schools regarding the issue of Younger

abstention. It concluded, however, that because of the

potential for irreparable harm to USAA, abstention was

nonetheless improper. In light of that conclusion, the dis-

trict court evaluated the merits of the constitutional

claims presented. It concluded that USAA’s claim that

§ 641 was preempted by § 1730a was without merit, but

determined that § 641 was unconstitutional as a violation

of the Commerce Clause.

On this appeal, the Insurance Commissioner and the

Insurance Agents challenge the district court’s decision

not to abstain and its determination that § 641 is uncon-

stitutional. USAA cross-appeals from the decision of the

district court that enforcement of § 641 against it is not

preempted by the federal regulatory scheme.

II. Abstention

Although the analyses of the district courts regarding

this issue arise from different circumstances, the thresh-

old concern of both is whether abstention pursuant to

Younger was warranted. That doctrine of abstention,

characterized as one of equitable restraint, instructs us

that due deference must be paid to state proceedings ini-

tiated to resolve controversies that raise significant state

issues when federal court intervention is sought.* Defer-

8 Younger abstention precludes intervention by federal courts

into on-going state proceedings. The doctrine has been extended,

however, to apply to circumstances in which the filing of a federal |

action preceded the initiation of the state proceedings. See Hick? v.

Miranda, 422 U.S. 332, 349, 95 S.Ct. 2281, 2291, 45 L.Ed.2d 223

(1975) (federal court should abstain in favor of state proceeding

initiated subsequent to federal action if no “proceedings of sub-

bes eter teak wit

lla

ence to state proceedings pursuant to Younger, however,

is not absolute. The appropriate focus of a court’s inquiry

when the question of Younger abstention is raised, there-

fore, is whether the state proceeding provides an adequate

forum for the resolution of the federal claims that have

been asserted, see Dayton Schools, 477 U.S. at 627, 106

S.Ct. at 2723 (Younger principle is applicable to “state

administrative proceedings in which important state in-

terests are vindicated, so long as in the course of those

proceedings the federal plaintiff would have a full and

fair opportunity to litigate his constitutional claim’’) ; °

and whether deference to the state proceeding will present

a significant and immediate potential for irreparable

harm to the federal interests asserted. See Wooley v.

Maynard, 430 U.S. 705, 712, 97 S.Ct. 1428, 1434, 51

L.Ed.2d 752 (1977) (Younger abstention improper where

federal intervention “necessary in order to afford ade-

quate protection of constitutional rights”); Kugler v.

Helfant, 421 U.S. 117, 124-25, 95 S.Ct. 1524, 1530-31, 44

L.Ed.2d 15 reh’g denied, 421 U.S. 1017, 95 S.Ct. 2425,

44 L.Ed.2d 686 (1975).

stance on the merits” in the federal action have occurred); USAA

I, 792 F.2d at 365 (“[s]o long as ‘the federal litigation was in an

embryonic stage and no contested matter had been decided,’ the dis-

trict court may abstain under ‘Younger’’) (quoting Doran v. Salem

Inn, Inc., 422 U.S. 922, 929, 95 S.Ct. 2561, 2566, 45 L.Ed.2d 648

(1975) ). Thus, despite the fact that in both of these cases the

federal declaratory action preceded the initiation of the state

proceedings, the inquiry into whether Younger abstention should

apply was proper because no “proceedings of substance on the

merits” had yet occurred in the federal courts.

® This rule has been extended to include non-judicial state court

proceedings that provide a full and fair opportunity for hearing

of the federal claims. See Dayton Schools, 477 U.S. at 627, n.2,

106 S.Ct. at 2723, n. 2; Gibso:. v. Berryhill, 411 U.S. 564, 576-77,

93 S.Ct. 1689, 1696-97, 36 L.Ed.2d 488 (1973) (“administrative

proceedings looking toward the revocation of a license to practice

medicine may in proper circumstances command the respect due

court proceedings”) ; Williams v. Red Bank Bd. of Education, 662

F.2d 1008 (3d Cir. 1981).

12a

In the present cases, we are persuaded that Pennsyl-

vania maintains the significant interest in the regulation

of its insurance industry sufficient to support abstention

under this doctrine. In light of the Supreme Court’s de-

cision in Dayton Schools, we are also persuaded that the

scheme for administrative adjudication and. judicial re-

view of the claims presented is adequate for Younger

purposes.

A. Abstention And The Adequacy of State Administra-

tive Proceedings

In. USAA I, this Court held that “administrative pro-

ceedings suffice for Younger purposes only when they ‘are

‘adequate to vindicate federal claims.’” USAA I, 792

F.2d at 365. See also Willams v. Red Bank Bd. of Edu-

‘cation, 662 F.2d 1008 (3d Cir. 1981). In that light, we

concluded that because the Insurance Commission pro-

ceeding did not provide a forum for the adjudication of

the constitutional claims, abstention was inappropriate.

See Middlesex Ethics Comm. v. Garden State Bar Ass’n,

457 U.S. 423, 432, 102 S.Ct. 2515, 2521, 73 L.Ed.2d 116

(1982) (Younger abstention not available where there is ©

no “adequate opportunity [in the state proceedings] to

raise the constitutional claims.”).

Subsequent to our decision in USAA I, the Supreme

Court held that state administrative proceedings that do

not provide an opportunity for the resolution of the claim-

ant’s constitutional contention, are adequate for Younger

abstention if the state’s judicial review of the administra-

tive proceeding provides opportunity for de novo hearing

of the constitutional claim. Dayton Schools, 477 U.S. at

629, 106 S.Ct. at 2724. Cf. Watts v. Burkhart, 854 F.2d

839 (6th Cir. 1988) (the fact that the state agency would

not consider the constitutional claims raised did not pre-

clude Younger abstention where the constitutional claims

could be presented on review in the state court); Christ

the King Regional High School v. Calvert, 815 F.2d 219

13a

(2d Cir.) (same), cert. denied —— U.S. ——, 108 S.Ct.

102, 98 L.Ed.2d 63 (1987). Accordingly, we hold now

that, to the extent that our decision in USAA I concluded

that Younger abstention is inappropriate in cases where

the administrative proceeding itself does not provide a

forum for the adjudication of constitutional claims—with-

out regard to the opportunity that exists to pursue those

claims on judicial review—it has been overruled by Day-

ton Schools.

In the present cases, this conclusion necessarily results

in the determination that the Pennsylvania administrative

proceeding in question is sufficient for purposes of

Younger abstention. The Pennsylvania statutes concern-

ing administrative law and procedure clearly provide for

adequate judicial review of state administrative determi-

nations. The statute expressly provides that

[a]Jny person aggrieved by an adjudication of a

Commonwealth agency who has a direct interest in

such adjudication shall have the right to appeal

therefrom to the court vested with jurisdiction of

such appeals...

2 Pa. Cons.Stat.Ann. § 702 (Purdon 1988). Significantly,

the statute provides further that

[a] party who proceeded before a Commonwealth

agency under the terms of a particular statute shall

not be precluded from questioning the validity of the

statute in the appeal, but such party may not raise

upon appeal any other question not raised before the

agency (notwithstanding the fact that the agency

may not be competent to resolve such question) unless

allowed by the court upon due cause shown.

2 Pa. Cons.Stat.Ann. § 703(a) (Purdon 1988) (emphasis

added). We read these provisions of the Pennsylvania

law to permit the assertion of the unconstitutionality of

a statute on judicial review of an administrative proceed-

ing in which that statute has been applied and, in light

14a

of Dayton Schools, conclude that the administrative pro-

ceedings in this case are sufficient for application of

Younger principles.

Our inquiry into the propriety of Younger abstention

for the present cases, however, is not terminated here.

The district courts in these cases relied on reasons apart

from the adequacy of the state- proceedings to support

their decisions that Younger abstention was improper

and, on one of these alternate grounds, we affirm their

conclusions.

B. Abstention and “Our Federalism”

In Ford, the district court’s decision not to abstain was

predicated upon its view that § 641 had been preempted

by federal legislation enacted to provide for the acquisi-

tion of failing savings and loans. Relying upon this

Court’s decision in Kentucky West Virginia Gas Co. v.

Pennsylvania Public Utility Comm’n, 791 F.2d 1111 (8d

Cir. 1986) (“Kentucky West’), the district court held

that because the supremacy clause was implicated, ab-

stention in favor of the state proceeding was improper.

See Ford Motor Co. v. Insurance Commissioner of Penn-

sylvania, 672 F. Supp. 841, 849-50 (E.D.Pa. 1987). The

district court stated that “dispositive [of its decision] is

a line of cases from the Courts of Appeals for the Third,

Eighth, Ninth and Eleventh Circuits that hold that there

can be no important state interest that the federal court

should defer to in enforcing a state law that has been

preempted by federal law.” Jd. at 849.*°

10We note that an alternative argument against abstention,

which is not addressed by the district court, is raised in Ford

concerning the fact that private individuals—and not the state—

initiated the proceedings at issue. This Court has noted that the

state’s interests in adjudication of a controversy is entitled to less

deference in the abstention inquiry where the proceeding was not

begun by the state. See Johnson v. Kelly, 583 F.2d 1242, 1249

(3d Cir. 1978) (abstention improper in a challenge of tax sales of

property when state action to quiet title was brought by private

i i aa at

‘ae. Can NRG a el i LCS OM a

15a

In this case, as in Kentucky West, we note that there

is no absolute rule prohibiting the application of Younger

abstention doctrine whenever the Supremacy Clause is

invoked. See Kentucky West, 791 F.2d at 1117 (“[iJt

would . . . be an overstatement to suggest that Younger

abstention is never appropriate when the question pre-

sented is one of preemption.”) The presence of a claim

of preemption in such cases, however, requires review of

the state interest to be served by abstention, in tandem

with the federal interest that is asserted to have usurped

the state law. In performing that inquiry, this Court

and other appellate courts have “concluded that the notion

of ‘comity’ embodied by the Younger doctrine is ‘not

strained when a federal court cuts off state proceedings

that entrench upon the federal domain.’” Jd. (quoting

Middle South Energy, Inc. v. Arkansas Public Service

Comm’n, 772 F.2d 404, 417 (8th Cir. 1985), cert. denied,

474 U.S. 1102, 106 S.Ct. 884, 88 L.Ed.2d 919 (1986) ).

Cf. Champion Int’l Corp. v. Brown, 731 F.2d 1406, 1409

(9th Cir. 1984) (“Montana has no cognizable state in-

terest in enforcing those age discrimination laws that are

preempted by federal law’’). In the present cases, we see

no beneficial purpose, as contemplated by the Younger

citizens). This Court has also previously concluded that “where

the pending state proceeding is a privately initiated one, the state’s

interest in that proceeding is not strong enough to merit Younger

abstention, for it is no greater than its interest in any other liti-

gation that takes place in its courts.” Williams, 662 F.2d at 1019.

These decisions are intended to exclude cases that are initiated for

the adjudication of essentially private controversies from the pur-

view of Younger abstention. They are distinguishable from the

present cases in which the state’s interest in its proceeding is

readily apparent. Despite their initiation by a private complainant,

the proceedings at issue necessarily involve the Insurance Com-

missioner and are conducted by the state commission which enforces

the insurance statute. Moreover, as we stated above, we recognize

the state’s significant interest in the regulation of its insurance

industry, and we reiterate our conclusion in Williams that “Younger

commands respect for important state interests, not technicalities

of form.” Id.

16a

doctrine, that would be served by the district court’s ab-

stention in favor of Pennsylvania’s enforcement of § 641.

Although Pennsylvania’s interest in the regulation of its

insurance industry is significant, there exists a counter-

vailing significant federal interest in insuring the un-

hindered enforcement of federal law. Balancing these in-

terests in the present cases, we are persuaded that the

scales weigh decidedly in favor of federal intervention so

that the federal courts could determine the extent to

which § 641 had been preempted.

As a preface to our holding on this issue, we note our

view that the intent of § 641 is not ambiguous. That sec-

tion was designed clearly to proscribe affiliations between

all state licensed insurance companies and any savings

and loans institutions. Accordingly, no detailed factual

proceedings are necessary to determine the statute’s ap-

plicability to Pennsylvania licensed insurance companies

that purchase savings and loan institutions pursuant to

§ 1730a. See Wisconsin v. Constantineau, 400 U.S. 433,

439, 91 S.Ct. 507, 511, 27 L.Ed.2d 515 (1971) (“[w]here

there is no ambiguity in the state statute, the federal

court should not abstain but should proceed to decide the

federal constitutional claim”); cf. Aluminum Co. of

America v. Utilities Comm’n of North Carolina, 713 F.2d

1024, 1030 (4th Cir. 1983) (abstention is inappropriate

where conflict between challenged state action and federal

law is “readily discernible from the pleadings”) cert.

denied, 465 U.S. 1052, 104 S.Ct. 1826, 79 L.Ed.2d 722

(1984). Moreover, on the records of these cases, we can

discern no construction of the state statute that would

limit its application such that review of the federal con-

stitutional claims would be unnecessary." In cases in-

11USAA reasserts on this appeal its contention that it is not

subject to the prohibitions of § 641, even if the constitutionality of

that statute is upheld, because it’s banking affiliate “neither accepts

deposits nor lends money in Pennsylvania and[,] therefore[,} is

not a ‘lending institution’ within the meaning of the statute.”

Appellee, Cross-Appellant (USAA) Brief at 19 (emphasis in orig-

-17a

volving a facial challenge to a statute, the pivotal ques-

tion in determining whether abstention is appropriate

is whether the statute is ‘fairly subject to an interpreta-

tion which will render unnecessary or substantially mod-

ify the federal constitutional question.’ ” City of Houston,

Texas v. Hill, 482 U.S. 451, 107 S.Ct. 2502, 2513, 96

L.Ed.2d 398 (1987) (quoting Harman v. Forssenius, 380

U.S. 528, 534-35, 85 S.Ct. 1177, 1181-82, 14 L.Ed.2d 50

(1965) ) (other citations omitted). When the possibility

for such an interpretation is not apparent, however, the

district court’s decision to exercise its jurisdiction does

not constitute error. Moreover, where the core of the

controversy itself is the federal constitutional claims, and

the state proceedings are initiated for enforcement rather

than interpretation of the state statute, we do not con-

clude that the exercise of federal jurisdiction is intrusive.

In our view, the principles of comity and federalism

upon which the Younger doctrine is predicated, are not

undermined by federal intervention in these cases, which

would forestall the state proceedings in order to deter-

mine whether enforcement of the state statute conflicts

with an important federal scheme. Cf. Pennzoil Co. v.

Texaco, Inc., 481 U.S. 1, 107 S.Ct. 1519, 1526, 95 L.Ed.2d

1 (1987) (Younger abstention warranted when “civil

proceedings are pending, if the State’s interests in the

proceeding are so important that exercise of the federal

judicial power would disregard the comity between the

States and the National Government.”) (emphasis added).

Federal intervention in these cases does not intrude upon

inal). The district court’s-decision on remand from USAA /! does

not address this contention and, on this record, it is not apparent

that the appellee continued to pursue this claim in the district

court. We cannot conclude that the issue, which requires factual

inquiry as well as the interpretation and application of Pennsyl-

vania state law, is properly before us. Accordingly, we do not

reach this issue. We will remand this question to the district

court, however, to determine the viability of this claim and, if

viable, for initial decision on the merits.

18a

the principles of our federalism given the nature of the

state proceedings at issue and the significance of the fed-

eral claims asserted. Accordingly, we conclude in both

of the present cases, that the challenge to § 641 on the

grounds that is preempted, together with the significant

federal interest that is implicated, counsel in favor of

the district courts’ decisions not to abstain.’? We will,

therefore, affirm the decisions of the district courts not to

abstain.'®

12 Our conclusion that Younger abstention was not warranted in

these circumstances applies to each case, despite our holding, that

the preemption claim prevails only with regard to one of the trans- —

actions in one of the cases. See infra, § III. Our holding regarding

Younger.is predicated upon the significance of the federal interest

invoked in these cases and our determination that the principles

of comity and federalism are not undermined by the intervention

of the federal court into the state proceedings in these cases. The

determination of whether abstention is proper where preemption is

alleged does not rest upon whether the preemption claim will ulti-

mately prevail. Accordingly, just as the presence of a claim of

preemption will not preclude abstention in every case, the decision

that abstention is improper in light of a claim of preemption that

has been asserted, need not result in the finding that the state

statute has in fact been preempted.

13 Although we have concluded that the district court’s decision

not to abstain in USAA was appropriate, we are compelled to

address the rationale upon which the district court relied. On

remand from our decision in USAA TI the district court recognized

that Dayton Schools overruled our decision with regard to the ade-

quacy of the Pennsylvania proceedings, see USAA v. Foster, 680

F.Supp. 712, 175 (M.D.Pa. 1987). The district court declined to

abstain, however, based on its interpretation of this Court’s decision

in Sullivan v. City of Pittsburgh, 811 F.2d 171 (3d Cir.) cert.

denied, US. , 108 S.Ct. 148, 98 L.Ed.2d 104 (1987). The

district court determined that in Sullivan this Court added a sepa-

rate “irreparable harm” factor to the inquiry of when Younger

abstention is proper. Accordingly, the district court concluded that

prior to invoking Younger abstention it had to ascertain whether

abstention would result in irreparable harm to USAA and, on that

point, the district court held that it was bound by the decision of

19a

III. Preemption

Both Ford and USAA contend that § 641 has been

completely displaced by federal legislation and is there-

this Court in USAA I concerning the affect that abstention would

have upon USAA. It held that “[iJn [USAA I], the Third Circuit

decided that USAA would suffer irreparable harm if we were to

abstain.” USAA, 680 F.Supp. at 715.

The district court’s interpretation of Sullivan was in error.

Sullivan did not create a new criterion to be evaluated in the

Younger analysis, but rather interpreted—in light of the specific

circumstances of the case under review—a factor that has always

been an appropriate part of that inquiry. In Younger and in its

companion cases, the Supreme Court affirmed a long standing judi-

cial policy that deference to a state action is improper where

“extraordinary circumstances [exist] in which . . . irreparable

injury” to the litigant’s ability to vindicate the constitutional claim

is demonstrated. Younger, 401 U.S. at 55, 91 S.Ct. at 755. See also,

Samuels v. Mackell, 401 U.S. 66, 69, 91 S.Ct. 764, 766, 27 L.Ed.2d 688

(1971) (“im the Younger case, we set out in detail the historical

and practical basis for the settled doctrine of equity that a federal

court should not enjoin a state criminal prosecution begun prior to

the institution of the federal suit except in very unusual situa-

tions, where necessary to prevent immediate irreparable injury.”).

In Sullivan, we noted that “the nature of the term ‘irreparable

harm’ makes it difficult to define every situation the term encom-

passes”. Sullivan, 811 F.2d at 178 (citing Trainor v. Hernandez,

431 U.S. 434, 442 n. 7, 97 S.Ct. 1911, 1917 n. 7, 52 L.Ed.2d 486

(1977)). We also noted the Supreme Court’s instruction that

“circumstances are extraordinary in the relevant Younger sense

where they create ‘an extraordinary pressing need for immediate

federal equitable relief” Sullivan, 811 F.2d at 179 (quoting Kugler,

421 U.S. at 124-25, 95 S.Ct. at 1530-31). See also Wooley, 430 U.S.

at 712, 97 S.Ct. at 1434 (extraordinary circumstances, in terms of

Younger, exist where “‘an injunction is necessary in order to

afford adequate protection of constitutional rights.’”) (quoting

Spielman Motor Co. v. Dodge, 295 U.S. 89, 95, 55 S.Ct. 678, 680, 79

L.Ed. 1322 (1935)). We reiterate here that this exception is

intended to be applied with careful scrutiny and only to the

extraordinary case.

In Sullivan, we concluded that extraordinary circumstances were

present that warranted immediate federal court intervention. That

case concerned recovering alcoholics who sought declaratory and

injunctive relief—predicated upoa claims of constitutional depriva-

20a

fore invalid under the Supremacy Clause of the Constitu-

tion. See U.S. Const. art VI, cl. 2.% They argue that

Congress has preempted the field of regulation regarding

savings and loan institutions and, thus, that § 641 has

been superceded by the federal scheme. To the extent that

§ 641 applies to the acquisition of failing thrifts we are

convinced that it has been preempted by federal law.

We are unpersuaded, however, as were the district courts,

tion—from the city of Pittsburgh’s decision to close alcoholic treat-

ment centers. The district court had made a factual finding that

“if recovering alcoholics at the Center were improperly forced

from the center and into a community which cannot provide treat-

ment for their abuse, these alcoholics” might suffer severe injury or

death as a result. Sullivan, 811 F.2d at 180. We determined that

this factual finding was not in error and held that “the threat of

this type of injury is precisely what the irreparable harm exception

to Younger is intended to prevent.” Jd. Specifically, we noted that

[a] wrongful deprivation by the City of Pittsburgh in this

case would threaten not only to do harm to appellees’ present

enjoyment of rights to Equal Protection, Due Process and

equal treatment under the Rehabilitation Act of 1973, but to

eliminate the possibility of appellees’ enjoyment or exercise of

any federal constitutional or statutory rights in the future.

Id. (emphasis added). In the present cases, on the récords before

us, we cannot say with certainty that the same potential for ir-

reparable injury to the appellees’ right to vindicate their federal

claims exist, and thus that “extraordinary circumstances” are

present that compel immediate federal intervention. Accordingly,

we will not affirm the district court’s rationale in USAA that

irreparable harm mandated disregard for Younger. In light of

our holding that abstention was nonetheless proper, however, we

will uphold the district court’s judgment.

14 In pertinent part, that provision states that the “Constitution,

and the Laws of the United States which shall be made in Pur-

suant thereof ... shall be the supreme Law of the Land .. .”

U.S. Const. Art. VI cl. 2. See also Gibbons v. Ogden, 22 U.S. (9

Wheat.) 1, 211, 6 L.Ed. 28 (1824) (“to such acts of the State

Legislatures as do not transcend their powers, but . . . interfere

with, or are contrary to the law of Congress, made in pursuance

of the constitution, . . . [i]m every such case, the act of Congress

. .. is supreme; and the iaw of the State . . . must yield to it.”)

2la

that Congress intended to preempt entirely the states’

authority to impose reguiations upon savings and loan

institutions that operate within the state’s borders, or, as

in the present case, to impose regulations upon other fi-

nancial institutions that seek affiliations with savings and

loans.

In reaching this conclusion, we are guided by the

Supreme Court’s instruction that preemption analysis

should be “tempered by the conviction that the proper

approach is to reconcile ‘the operation of both statutory

schemes with one anvther rather than holding one com-

pletely ousted.’” Merrill Lynch v. Ware, 414 U.S. 117,

127, 94 S.Ct. 383, 389, 38 L.Ed.2d 348 (1973). Cf.

Florida Lime and Avocado Growers, Inc. v. Paul, 373

U.S. 132, 142, 83 S.Ct. 1210, 1217, 10 L.Ed.2d 248 reh.

denied, 374 U.S. 858, 83 S.Ct. 1861, 10 L.Ed.2d 1082

(1963) (“federal regulation of a field of commerce should

not be deemed pre-emptive of state regulatory power in

the absence of persuasive reasons—either that the nature

of the regulated subject matter permits no other conclu-

sion, or that Congress has unmistakenly so ordained’).

In light of this presumption in favor of the validity of

state regulation, and because there is no clear indication

that federal legislation is intended exclusively to provide

for every aspect of the regulation of savings and loan

institutions, we conclude that, apart from its application

to savings and loan companies acquired pursuant to

§ 1730a(m), § 641’s proscription of affiliations between

insurance companies and savings and loan institutions has

not been preempted.

A. Section 641 is Pre-empted Regarding the Acquisition

of Failing Thrifts

“The question [of] whether the regulation of an entire

field has been reserved by the Federal Government is,

essentially, a question of ascertaining the intent under-

lying the federal scheme.” Hillsborough County v. Auto-

22a

mated Medical Laboratories, Inc., 471 U.S. 707, 713, 105

S.Ct. 2371, 2875, 85 L.Ed.2d 714 (1985) (citing Rice v.

Santa Fe Elevator Corp., 331 U.S. 218, 67 S.Ct. 1146,

91 L.Ed. 1447 (1947) ; California Savings and Loan Ass’n

v. Guerra, 479 U.S. 272, 281, 107 S.Ct. 683, 689, 93

L.Ed.2d 613 (1987) (“[i]n determining whether a state

statute is pre-empted by federal law and therefore invalid

under the Supremacy Clause of the Constitution, our sole

task is to ascertain the intent of Congress.’’) Signifi-

cantly, we note that Congress may decide not to displace

state law entirely and, consequently, “may .. . preempt

state law to the extent that the state law actually con-

flicts with federal law. Such a conflict arises when com-

pliance with both state and federal law is impossible.”

Michigan Canners & Freezers Ass’n., Inc. v. Agricultural

Marketing & Bargaining Bd., 467 U.S. 461, 469, 104

S.Ct. 2518, 2523, 81 L.Ed.2d 399 (1984) (citing Florida

Lime & Avocado Growers v. Paul, 373 U.S. at 142-43, 83

S.Ct. at 1217-18). A conflict arises also where the state

law “stands as an obstacle to the accomplishment and

execution of the full purposes and objectives of Congress.”

Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 399, 404,

85 L.Ed.2d 581 (1941); see also Hillsborough County,

471 U.S. at 713, 105 S.Ct. at 2375. i

In the present cases, we have no difficulty discerning

Congress’ intent from the language and legislative history

of § 1730a(m) which, in our view, clearly provides that

§ 641 is preempted to the extent that it applies to Ford’s

acquisition of failing savings and loans.

In pertinent part, §1730a(m) provides that “[n]ot-

withstanding any provisions of the laws or constitutions

of any State or any provision of Federal law... [FSLIC,

upon its determination that severe financial conditions

exist which threaten the stability of a significant number

of insured institutions . . . may authorize any company

to acquire control of said insured institution.” 12 U.S.C.

23a

§1730a(m) (Supp. 1987) (emphasis added). This lan-

guage amply demonstrates Congress’ intent to preempt

all other legislation that might inhibit the purchase of a~

failing thrift by a FSLIC approved buyer. Although that

language, by itself, is sufficient to support our conclusion,

Congress has left an even more explicit statement of its

intent. In the conference report on the reenactment of

1730a(m), Congress expressly noted that with regard to

the circumstances presented by one of these cases

[e]xcept as [limited by other sections of the federal

statute] section 408(m) (A) (i) preempts other pro-

visions of Federal and State law that would have the

effect of preventing a company from acquiring a fail-

ing thrift institution. Thus, for example if a life

insurance company invested in or acquired a thrift

institution under section 408(m) [enacted and codi-

fied as 1730a(m)]), that section would preempt any

state law that would prevent the company from con-

tinuing to engage in the life insurance business be-

cause of that investment or acquisition .. .

H.R.Rep. No. 261, 100th Cong., 1st Sess., Cong.Rec. H

6857, H 6895 (daily ed. July 31, 1987) (emphasis added),

U.S. Code Cong. & Admin. News 1987, p. 489. This

legislative history provides unmistakable guidance to us

for the disposition of this issue. See United States v. Bd.

of Comm’rs of Sheffield, 435 U.S. 110, 134, 98 S.Ct. 965,

980, 55 L.Ed.2d 148 (1978) (“the legislative background

of [a] reenactment is conclusive ... [w]hen a Congress

that reenacts a statute voices its approval of an adminis-

trative or other interpretation thereof, Congress is treated

as having adopted that interpretation and this Court is

bound thereby”). We hold that Congress’s intent to pre-

clude any impediment to the acquisition of failing thrifts

is clear. In the present cases, therefore, we conclude that

§ 641 is preempted with regard to Ford’s purchase of the

Ohio thrifts and the authorized branch offices of those

thrifts opened in Colorado and Pennsylvania.

4

‘4

24a

We reach the latter part of this holding in light of the

factual finding by the district court that an essential

aspect of Ford’s agreement with FSLIC to purchase the

Ohio thrifts was the authorization that Ford received to

open the branch offices of the thrift. Ford, 672 F.Supp.

at 843. Specifically, the district court found that, “un-

der the authority of 12 U.S.C. §1730a(m), the Bank

Board granted to FNB the right to open branches in

Pennsylvania and [Colorado].” Jd. The district court

took note of the Bank Board finding that

“the Acquisition and Merger [of FNB and the Ohio

thrifts] are of very substantial benefit to the FSLIC

in a measure sufficient to constitute a compelling

factor in determining to make an award of branch-

ing rights in Pennsylvania and Colorado to [FNB]”

Id. (quoting Bank Board resolution approving acquisi-

tion of Ohio thrifts) (emphasis added). The district

court concluded that “FNB would not have acquired the

Ohio savings and loan associations if it did not get the

right to open branches in these two states in return.”

Id. We do not find that determination to be clearly er-

roneous. We are compelled by it, and the rationale un-

derlying § 1730a(m), to preclude application of § 641 to

the Pennsylvania or Colorado branches of the thrift. In

our view, application of § 641 to these branches would

frustrate the intent of the federal legislation just as

would the application of the state statute directly to the

purchase of the Ohio thrifts themselves. Accordingly,

§ 641 is preempted as to these authorized branches as

well as the Ohio thrifts and enforcement by Pennsyl-

vania of § 641 as to Ford’s ownership of these thrifts

is precluded.

We do not reach a similar conclusion concerning thrifts

acquired or capitalized outside of the purview of § 1730

a‘m). The legislative intent to preempt the application

of § 641 beyond cases involving the acquisition of failing

25a

thrifts is not evident, and accordingly, as to those cases,

§ 641 has not been preempted.

B. Federal Regulations That Concern The Savings and

Loan Industry, Although Comprehensive, Do Not

Evidence Congress’s Intent to Displace State Regu-

lation Entirely and Did Not Pre-empt § 641

In these cases, USAA and Ford argue that the regu-

latory scheme that Congress enacted for the savings and

loan industry was intended to occupy that field exclu-

sively. They contend that the federal scheme was in-

tended to regulate more than just the operations of sav-

ings and loan institutions, but also to regulate every as-

pect “regarding the organization, ownership, incorpora-

tion and operation of federal savings banks.” Appellee

(USAA) Brief at 21. See also, Appellee (Ford) Brief at

24 (“[section] 641 is preempted as applied . . . because

it frustrates federal purposes and ‘stands as an obstacle’

to the broad and pervasive federal regulatory scheme

governing the ownership and control of federal S &

L’s’”). They assert that the comprehensiveness of the

federal regulatory scheme, together with the significant

federal interest in the regulation of savings and loan in-

stitutions, evinces congressional intent to preclude sup-

plemental state regulation. We do not agree.

In cases such as these, where Congress has not ex-

pressly preempted a state’s statute, its “intent to pre-

empt all state law in a particular area may be inferred

where the scheme of federal regulation is ‘sufficiently

comprehensive to make reasonable the inference that Con-

gress ‘left no room’ for supplementary state regulation.”

Hillsborough County, 471 U.S. at 714, 105 S.Ct. at 2375.

See also Guerra, 479 U.S. at 280, 107 S.Ct. at 689 (con-

gressional intent to preempt may be inferred where the

scheme of federal regulation is “sufficiently comprehensive

to make reasonable the inference that Congress ‘left no

room’ for supplementaly state regulation”).

26a

In both cases, the district courts acknowledged the

comprehensiveness of the federal regulatory scheme. See

USAA, 680 F.Supp. at 716; Ford, 672 F.Supp. at 846.

Both district courts, however, concluded that the intent

of the federal scheme was to regulate the operation of

federally insured thrifts. Accordingly, each court con-

cluded that the federal regulations did not preclude sup-

plemental state regulations which, as in these cases, im-

posed a restriction upon the affiliations that the thrift

could have and were designed more to regulate the in-

surance industry rather than to control the operation of

the savings and loan industry. Our review of the fed-

eral regulatory scheme leads us to a similar conclusion.

We reiterate that our conclusion on this issue is in-

formed by the Supreme Court’s instruction that “federal

regulation of a field of commerce should not be deemed

pre-emptive of state regulatory power in the absence of

persuasive reasons—either that the nature of the regu-

lated subject matter permits no other conclusion, or that

Congress has unmistakenly so ordained.” Florida Lime

and Avocado Growers, Inc. v. Paul, 373 U.S. at 142, 83

S.Ct. at 1217. We are unconvinced that the federal bank-

ing regulatory scheme permits no conclusion other than

that Congress intended to occupy the field exclusively.

Initially we note that the comprehensive nature of the

federal regulatory scheme, by itself, is not sufficient to

support a conclusion that Congress intended to preempt

all state regulation. See Hillsborough, 471 U.S. at 717,

105 S.Ct. at 2377 (“[t]o infer preemption whenever an

agency deals with a problem comprehensively is vir-

tually tantamount to saying that whenever a federal

agency decides to step into a field, its regulations will be

exclusive’). Indeed, precisely because the regulatory

scheme at issue in these cases is so detailed, we interpret

the absence of clear preemptive language as indicative

that Congress did not intend to displace state law en-

tirely. We note, as has the Supreme Court, that “be-

27a

cause agencies normally address problems in a detailed

manner and can speak through a variety of means...

we can expect that they will make their intentions clear

if they intend for their regulations to be exclusive.” Id.

Moreover, the regulations at issue in the present cases

provide explicitly for preemption of state law on two

issues, see 12 C.F.R. § 590 (1988) (“Preemption of State

Lending Restrictions) (expressly preempting state usury

laws and state due on sale laws), but no where indicate

that all state regulation is preempted. Indeed, in one

section, the regulations clearly demonstrate Congress’ rec-

ognition that the federal scheme might be supplemental

by state regulation. Section 555.17(b) precludes officers

or directors of savings and loan associations from refer-

ring insurance business generated by members of the

S & L to insurance companies with which the officers or

directors are affiliated.’*> Such referrals would constitute

a usurpation of the S & L’s corporate opportunity to en-

gage in the insurance business. Significantly, however,

§ 555.17 is limited by specific exceptions enumerated else-

where in the section. One of those exceptions provides

that

[n]o corporate opportunity for a Federal association

to enter the insurance business is deemed to have

existed

[while a specific State statute or regulation pre-

cluded Federal association service corporations .. .

from engaging in the insurance business

12 C.F.R. § 555.17 (c) (iii) (1988) (emphasis added).

15 In pertinent part, that section provides that

referral of insurance business of an association’s members to

an insurance agency owned by one or more officers or directors

of the association, or by one or more persons having the

power to direct its management, constitutes usurpation of the

association’s corporate opportunity to engage in the insurance

business.

12 C.F.R. § 555.17(b) (1988)

28a

Appellees correctly assert that the circumstance pro-

vided for in § 555.17 is not at issue in these cases. In

our view, however, the existence of this provision pro-

vides compelling evidence that Congress did not envision

that all state regulations would be in conflict with the

federal regulatory scheme. Moreover, the subject matter

of § 555.17(c) (iii) is particularly significant because it

demonstrates Congress’s specific awareness of the exist-

ence of state statutes such as § 641. In that light, we

cannot conclude that, by these regulations, “Congress ‘left

no room’ for supplementary state regulation.” Hills-

borough County, 471 U.S. at 713, 105 S.Ct. at 2378. Ac-

cordingly, we also cannot conclude that Congress intended

exclusively to occupy this field of regulation.

IV. Dormant Commerce Clause

Upon their conclusions that abstention was not war-

ranted and that § 641 was not wholly preempted, the dis-

trict courts reviewed Ford’s and USAA’s claim that

§ 641 was invalid as a violation of the dormant Com-

merce Clause. See U.S. Const. art. I, § 8, cl. 3.2° On that

16In pertinent part, that clause provides that “Congress shall

have Power ... [t]o regulate Commerce . . . among the several

states.” U.S. Const. art. 1 § 8, cl. 3.

In light of its conclusion that USAA’s creation of a Bank in

Texas was not preempted by federal law because it did not fall

within the scope of 1730a(m), the district court granted summary

judgment to USAA on the grounds that enforcement of § 641

against that insurer violated the Commerce Clause.

In Ford, the district court initially did not reach the merits

of this constitutional issue. It’s decision held only that federal law

preempted application of §641 to the acquisition of the failing

Ohio S & L’s and the Pennsylvania and Colorado branches. Subse-

quent to that decision, the Commissioner moved for amendment

of the district court’s order because it did not address Ford’s

acquisition of FNFC and FNB in 1985, which the commissioner

asserted was a violation of § 641. The Commissioner contended

that application of § 641 was not preempted because those institu-

tions had not been purchased pursuant to the failed S & L provi-

-

|

.

,

29a

claim, however, the courts concluded that to the extent

that § 641 was not preempted, it was nonetheless con-

stitutionally infirm because it imposed an excessive bur-

den upon interstate commerce. -

The courts determined that § 641’s proscription of af-

filietions between Pennsylvania insurance companies and

financial institutions—whether or not located in Pennsyl-

vania—indirectly regulated interstate commerce. Accord-

ingly, the district courts held that resolution of the con-

stitutional validity of § 641 turned upon application of

the Supreme Court’s holding in Pike v. Bruce Church,

Inc., 397 U.S. 137, 90 S.Ct. 844, 25 L.Ed.2d 174 (1970).

In Pike, the Supreme Court stated that °

sion of federal law. In response to that motion the district court

concluded that, although § 1730a did not preempt the application

of § 641 to FNFC and FNB, “enforcement of section 641 on insur-

ance companies that own banking affiliates that do not operate in

Pennsylvania is invalid as a violation of the commerce clause of

the Constitution.” Ford Motor Co. v. Insurance Commissioner,

No. 87-3241 (Supplemental Memorandum) slip op. at 5, 1988 WL

29342 (E.D.Pa. Mar. 22, 1988) reprinted at Jt.App. at 148. (citing

USAA). In reaching its conclusion, the district court relied en-

tirely upon the rationale expressed in USAA v. Foster. Accord-

ingly, our discussion of the propriety of application of the Com-

merce Clause to § 641 focuses upon the decision issued in USAA

and attributes that holding to both cases. We note, however, that

the decision of the district court in USAA striking § 641 as vio-

lative of the Commerce Clause, relied in significant part upon the

fact that the insurer in that case did not own an affiliated bank

that transacted business in Pennsylvania. See USAA, 680 F.Supp.

at 722. That circumstance, obviously, is not true in Ford. The

decision in USAA, in dicta, did note that in cases that involved

insurers who were affiliated with Pennsylvania banks “the con-

cerns of the Commissioner and the [Independent Agents] become

very real,” Id. at 721-22, bui summarily concluded that that statute

would nonetheless be invalid as overbroad. In our view, that con-

clusion is insufficient of itself to support the judgment in Ford.

For that reason, even if we were to sustain the decision of the dis-

trict court in USAA, we could not, on this record, affirm the judg-

ment of the district court in Ford.

30a

[w]here the statute regulates evenhandedly to ef-

fectuate a legitimate local public interest, and its

effects on interstate commerce are not incidental, it

will be upheld unless the burden imposed on such

commerce is clearly excessive in relation to the puta-

tive local benefits

Id. at 142, 90 S.Ct. at 847.

In the present cases, the district courts concluded in

light of Pike that, although the imposition on interstate

commerce that resulted from the enforcement of § 641 is

incidental, that burden is still “excessive” because the

benefits to Pennsylvania are not sufficiently realized by

§ 641 to support the burden upon interstate commerce.

For that reason, the district court struck § 641 as uncon-

stitutional. In arriving at this balance between the sig-

nificance of the state interest in precluding the affilia-

tions between insurers and banking institutions, and the

effect of that regulation upon interstate commerce, how-

ever, the district courts erred. Because that statute regu-

lated indiscriminately—affording no preference to in-state

interests over others—we cannot conclude that it pre-

sented a burden to interstate commerce and, in that light,

we hold that it did not violate the Commerce Clause.

Indiscriminate Regulution Of Commerce Does Not Neces-

sarily Burden “Interstate Commerce”

The Insurance Commissioner asserts that § 641 effects

three important state goals: “to protect the insurance in-

dustry from . . . unfair concentration; . . . to protect

consumers from coercive ‘tic-ins’ and other forms of

subtle pressure tactics by lending institutions; and... .

to protect the ability of the insurance examiners to moni-

tor adequately the insurance industry.” USAA, 680 F.

Supp. at 720. The district courts did not question the

legitimacy of these goals, but concluded that “the adverse

effects of affiliation are not present where the affiliated

8la

bank is outside the jurisdiction, or are readily prevented

in ways less burdensome than is prescribed in Section

641(b).” Id.

Resolution of the issue of applicability of the Com-

merce Clause to these cases is dependent upon the level

of scrutiny that is applied to review the Pennsylvania

statute. As we have previously noted, three standards

of review are applied in performing dormant Commerce

Clause inquiry:

1) state actions that purposefully or arbitrarily dis-

criminate against interstate commerce or undermine

uniformity in areas of particular federal importance

are given heightened scrutiny; 2) legislation in areas

of peculiarly strong state interest is subject to very

deferential review; and 3) the remaining cases are

governed by a balancing rule, under which state law

is invalid only if the incidental burden on interstate

commerce is clearly excessive in relation to the puta-

tive local benefits.

Norfolk Southern Corp. v. Oberly, 822 F.2d 388, 398-99

(3d Cir. 1987). Under the highest level of scrutiny “the

burden falls upon the State to demonstrate both that

the statute ‘serves a legitimate local purpose,’ and that

this purpose could not be served as well by available non-

discriminatory means.” Maine v. Taylor, 477 U.S. 131,

138, 106 S.Ct. 2440, 2448, 91 L.Ed.2d 110 (1986) (quot-

ing Hughes v. Oklahoma, 441 U.S. 322, 336, 99 S.Ct.

1727, 1736, 60 L.Ed.2d 250 (1979)). “In practice, such

heightened scrutiny is applied with considerable rigor

and turns out to be ‘a virtually per se rule of invalid-

ity.’” Norfolk Southern Corp., 822 F.2d at 400 (quoting

Philadelphia v. New Jersey, 437 U.S. 617, 624, 98 S.Ct.

2531, 2535, 57 L.Ed.2d 475 (1978) ).

In the present cases, heightened scrutiny of § 641 is

not warranted because that provision does not discrimi-

nate in the manner that it regulates. As we have held

82a

“Tthjeightened scrutiny is the standard of review for

‘simple economic protectionism.’ . . . [this] category of

protectionism includes those state measures that discrimi-

nate on their face against out-of-state interests or in

favor of in-state interests.” Norfolk, 822 F.2d at 400

(citing Philadelphia, 487 U.S. 617, 98 S.Ct. 2531, 57

L.Ed.2d 475 (1978); Hughes; South-Central Timber De-

velopment, Inc. v. Wunnicke, 467 U.S. 82, 104 S.Ct. 2237,

81 L.Ed.2d 71 (1984)). The state statute at issue, how-

ever, is not the “simple economic protectionism” that the

Commerce Clause precludes. Accordingly, because height-

ened scrutiny is not applicable, § 641 must be upheld if

the incidental burden that it imposes upon interstate

commerce is not “clearly excessive in relation to the puta-

tive local benefits.” Pike, 397 U.S. at 142, 90 S.Ct. at

847. See also, Minnesota v. Clover Leaf Creamery, Co.,

449 U.S. 456, 471, 101 S.Ct. 715, 727, 66 L.Ed.2d 659 reh.

denied, 450 U.S. 1027, 101 S.Ct. 1735, 68 L.Ed.2d 222

(1981) ."”

As we have previously noted in performing that in-

quiry, “[t]he ‘incidental burden on interstate commerce’

appropriately considered in Commerce Clause balancing

is the degree to which the state action incidentally dis-

criminates against interstate commerce relative to intra-

state commerce. It is a comparative measure.” Norfolk

Southern, 822 F.2d at 406 (emphasis added). In our

view, “the Commerce Clause is concerned with protection-

ism and the need for uniformity . . . legislation will not

be invalidated under the Pike test in the absence of dis-

criminatory burdens on interstate commerce.” Id.

The Supreme Court’s decision in Exxon Corp v. Gover-

nor of Maryland, 437 U.S. 117, 98 S.Ct. 2207, 57 L.Ed.2d

17 We do not reach the inquiry of whether § 641 is entitled to the

second standard of review set forth in Norfolk Southern. Although

Pennsylvania has a significant interest in the regulation of its

insurance industry, its concern is not “pecularily local” such that

it invokes this most differential standard of review.

33a

91, reh. denied sub nom., Shell Oil Co. v. Governor of

Maryland, 439 U.S. 884, 99 S.Ct. 232, 58 L.Ed.2d 200

(1978), provides useful instruction. In Exxon, the Court

addressed a Maryland statute that precluded companies

that refined petroleum from owning retail service stations

within Maryland. The proscription applied to in-state

owners of oil refineries as well as to out of state re-

fineries, and because no competitive advantage to local

interest was discernible, the court upheld the constitution-

ality of the statute. In reaching its conclusion, the Court

noted that the state act “create[d] no barriers whatso-

ever against interstate independent dealers; it [did] not

prohibit the flow of interstate goods, place added costs

upon them, or distinguish between in-state and out-of-

state companies in the retail market.” Exxon, 437 U.S.

at 126, 98 S.Ct. at 2214. The Court concluded that “the

absence of any of these factors fully distinguishes this

case from those in which a State has been found to have

discriminated against interstate commerce.” Id. (em-

phasis added). it held that

[while the refiners will no longer enjoy their same

status in the Maryland market, in-state independent

dealers will have no competitive advantage over out-

of-state dealers. The fact that the burden of a state

regulation falls on some interstate companies does

not, by itself, establish a claim of discrimination

against interstate commerce.

437 U.S. at 126, 98 S.Ct. at 2214 (emphasis added). See

also CTS Corp. v. Dynamics Corp. of America, 481 U.S.

69, 88, 107 S.Ct. 1687, 1649, 95 L.Ed.2d 67 (1987)

(“[{b]ecause nothing in the Indiana Act imposes a greater

burden on out-of-state [entities] than it does on similarly

situated Indiana [entities], we rejected the contention

that the Act discriminates against interstate commere’”’).

This Court has similarly concluded that

{[w]here the “burden” on out-of-state interests is no

different from that placed on competing in-state in-

84a

terests ... it is a burden on commerce rather than a

burden on interstate commerce. In such cases, noth-

ing in Commerce Clause jurisprudence entitles out-

of-state interests to more strict judécial review than

that to which the in-state interests are entitled.

Norfolk Southern, 822 F.2d at 406 (emphasis in origi-

nal). We are persuaded that this same conclusion is ap-

plicable to the present cases. Section 641 places no dis-

criminatory burdens on interstate insurers. It does

not add increased costs to them or otherwise distinguish

between in-state insurers and out-of-state insurers in the

insurance market. Indeed, as the district court in USAA

found, USAA “could not make... [the] argument [that

§ 641 discriminates against interstate commerce in favor

of local business because] Section 641(b) treats all insur-

ance companies and all savings and loans alike, whether

or not they are based in Pennsylvania.” See USAA, 680

F.Supp. at 719 n. 6. For these reasons, we conclude that

the Commerce Clause has not been violated.’®

—

18 Our holding in these cases is consonant with the Supreme

Court’s guidance in this area. The Court has previously noted that

where regulations “affect alike shippers in interstate and intra-

state commerce in large numbers within as well as without[,] the

state is a safeguard against their abuse.”*South Carolina State

Highway Dep’t v. Barnwell Bros., 303 U.S. 177, 187, 58 S.Ct. 510,

515, 82 L.Ed. 734 (1938). That holding endorses the rationale that

the state’s regulatory scheme will be adequately monitored because

an instate constituency is-similarly affected, and will act in its

interests to keep the legislature from overreaching. See elso, South-

ern Pacific Co. v. Arizona, 325 U.S. 761, 783, 65 S.Ct. 1515, 1527,

89 L.Ed. 1915 (1945); L. Tribe, American Constitutional Law at

409-10 & nn. 4-8 (2d ed. 1988).

One possible source of this rationale is the famous “footnote 4”

of Carolene Products. See United States v. Carolene Products Co.,

304 U.S. 144, 152 n. 4, 58 S.Ct. 778, 783 n. 4, 82 L.Ed. 1234 (1938).

Consistent with the overall view of that case, the court articulated

a view that one commentator has described in the following manner:

[w]hen states adopt economic regulations that affect out-of-state

interests, those out-of-state interests are likely to be short-

85a

_ The district courts, in reaching the conclusions that

the Commerce Clause invalidates § 641, appear to have

been most persuaded by the significant economic effect

that enforcement of § 641 will have upon Ford an&

USAA. Indeed, the district court in USAA concluded

that “[{i]f the Insurance Department enforces Section

641(b) against USAA, USAA will be forced to abandon

its insurance business in Pennsylvania or relinquish its

interest in the Texas bank. If USAA opts to allow its

insurance license to be revoked, this revocation could re-

changed because they are not represented in the political proc-

ess that produces the regulations. But everyone who is affected

ought to be represented. Therefore we have judicial review of

state economic regulation that affects out-of-state interests in

order to give those interests “virtual representation.”

Regan, The Supreme Court and State Protectionism: Making Sense

of the Dormant Commerce Clause, 84 Mich.L.Rev. 1091, 1160

(1986). The value of this analytical approach is debated. Compare

id. (asserting that implicit in such an approach is the reliance

upon state and federal interests, and arguing that such an approach

should be replaced by inquiry of the state legislature’s motivation)

with Tushnet, Rethinking the Dormant Commerce Clause, 79 Wis.

L.Rev. 125 (1979) (discussing a political theory of judicial review

in dormant commerce clause cases in which the focus of concern is

the adequacy of the legislature to protect important interests).

This rationale however, is firmly entrenched in our jurisprudence,

see, e.g., Minnesota v. Clover Leaf Creamery Co., 449 U.S. 456,

473 n. 17, 101 S.Ct. 715, 728 n. 17, 66 L.Ed.2d 659 reh. denied, 450

U.S. 1027, 101 S.Ct. 1735, 68 L.Ed.2d 222 (1981) (“[t]he existence

of major in-state interests adversely affected by the [state statute]

is a powerful safeguard against legislative abuse) ; Raymond Motor

Transp., Inc. v. Rice, 434 U.S. 429, 444 n. 18, 98 S.Ct. 787, 795 n.18,

54 L.Ed.2d 664 (1978) (“The Court’s special deference to state

highway regulations derives in part from the assumption that

where such regulations do not discriminate on their face against

interstate commerce, their burden usually f...s on local economic

interests as well as other states’ economic interests, thus insuring

that a state’s own political processes will serve as a check against

unduly burdensome regulations”), and persuades us in the present

cases, that the protections afforded by the Commerce Clause are not

implicated.

36a

sult in devastating economic consequences.” USAA, 680

F.Supp. at 721. On this point, the district court quoted

this Court’s opinion in USAA I in which we concluded, in

our holding that Pullman abstention was inappropriate,

that USAA would suffer “devastating economic conse-

quences” if its license to sell insurance in Pennsylvania

was revoked. See id. (quoting USAA I, 792 F.2d at 363).

We are not unaware, nor are we insensitive to this

“burden” that results from the enforcement of the state

provision. We cannot say, however, that the dormant

Commerce Clause is the proper remedy. Both Ford and

USAA appear to have adopted corporate strategies that

seek to expand their corporate bases by the acquisition

of other companies. That strategy is their own choosing

and we express no value judgments concerning it. In

making those choices, however, the companies must ex-

pect that they will be required to comply with all ap-

plicable state as well as federal regulations. They can-

not hope to invoke the Constitution at every turn to cir-

cumvent state regulation and insure unrestricted expan-

sion and protection of their opportunity to obtain the

greatest margin of profit.

On this point we are again guided by Exxon. In that

case, the Supreme Court noted arguments that, as the

result of the state divestiture regulation, some oil refin-

ers would stop selling in Maryland. See Exxon, 487 U.S.

at 127, 98 S.Ct. at 2215. The Court also recognized that

the result of that occurrence might be that Maryland

consumers would be deprived of some special services that

had previously been provided by the affiliated retail sta-

tions. Jd. Although it assumed, argwendo, the accuracy

of these contentions, the Court nonetheless concluded that

the protections of the Commerce Clause, had not been

triggered. Significantly, it concluded that even if those

refiners chose to withdraw entirely from the Maryland

market “there [was] no reason to assume that their share

of the entire supply [would] not be promptly replaced by

87a

other interstate refiners . . interstate commerce is not

subjected to an impermissible burden simply because an

otherwise valid regulation causes some business to shift

from one interstate supplier to another.” Exxon, 437

U.S. at 127, 98 S.Ct. at 2215. Similarly, in the present

cases, the district courts, holdings give us no reason to

conclude that interstate commerce will be adversely af-

fected by enforcement of § 641. There is no reason for

us to assume that USAA’s or Ford’s share of the insur-

ance products sold in Pennsylvania will not be promptly

replaced by other interstate insurers. Accordingly, we

cannot conclude that § 641 places an impermissible burden

upon interstate commerce.

The district courts disinguish Exxon on the grounds

that the statute at issue in that case “did not have the

practical effect of indirectly regulating the refiners’ own-

ership of other entities outside the state.” USAA, 680

F.Supp. at 722. In that light, the courts concluded that

“unlike [§ 641], the Maryland statute in the Exxon case

did not reach beyond the borders of the state,” id. and,

because § 641 precluded Pennsylvania insurers from af-

filiations with S & L’s wherever located, its affect upon

interstate commerce was different from that involved in

Exxon. We believe that this narrow reading of Exxon

is in error.

We do not view the Court’s decision in Exxon as predi-

cated upon the conclusion that the state statute did not

regulate beyond the Maryland borders. Indeed, we note

that Justice Blackmun’s dissent departs from the Court

majority precisely because of the recognition that the

Maryland statute had the actual effect of precluding

many out-of-state businesses from participating in the

retail market in Maryland. See Exxon, 437 U.S. at 138,

98 S.Ct. at 2220 (“[o]f the ciass of enterprises excluded

entirely from participation in the retail gasoline market,

95% were out-of-state firms.”) (Blackmun, J., concurring

and dissenting). In our view, the focus of the majority

88a

opinion was the manner by which the statute regulated.

The Court concluded that the fact that the statute regu-

lated indiscriminately compelled the conclusion that the

Commerce Clause had not been violated.”

As the Supreme Court has noted, “[t]he Commerce

Clause [does not] protect{] the particular structure or

method of operation in a retail market .. . the Clause

protects the interstate market, not the particular inter-

state firms, from prohibitive or burdensome regulations.”

Exxon, 437 U.S. at 127, 98 S.Ct. at 2215 (emphasis

added) (citation omitted). Thus, although § 641 may

provide somewhat of a boon to independent insurance

agents who sell insurance in Pennsylvania, that boon is

no less available to independent agents who are based

outside of the state as it is to such agents for whom

Pennsylvania is home. To the extent that the regulation

infringes upon the commercial association rights of lend-

ing institutions outside of Pennsylvania, it infringes upon

those same rights of lending institutions within Pennsyl-

vania. In that light, even if § 641 is viewed as “protec-

tionist” of the economic interests of unaffiliated insurers,

because it does not afford that protection only to local

agents, it is not violative of the Commerce Clause.”

19 We are not unaware that, even a statute that is facially indis-

criminate may nonetheless be determined to be violative of the

Commerce Clause because it has a discriminatory effect. Nothing

in the records of the present cases, or in the decisions of the district

courts, however, indicates that enforcement of § 641 will have the

effect of favoring in-state interests over out-of-state interests.

20 Finally, USAA and Ford argue that heightened scrutiny of

§ 641 is proper because of the significant need for uniformity in

the regulation in this area. Their argument on this point appears,

essentially, to be that the prohibition of a “financially sound” insti-

tution from eligibility to be a purchaser of a S & L conflicts with

the federal policy. They argue that, pursuant to Southern Pacific,

the Commerce Clause should render the statute unconstitutional be-

cause the “federal government has a compelling interest ‘in the

uniformity of regulation’ in connection with the ownership, acqui-

sition and control of federally insured thrift institutions.” Appellee

SSSGMUnILSAi 2 ase Uaiaad.. .. vasinin str whadiedidheadan detains acd tastes Lovaennds a

39a

V. Conclusion

In light of the foregoing, we reach the following con-

clusions in these cases: In Ford, we wil! affirm the deci-

sion of the district court not to abstain. We will also

affirm the district court’s decision that § 641 was inappli-

cable to Ford’s acquisition of the two failing Ohio S & L’s

under the provisions of 12 U.S.C. §1730a(m) (1982),

and the branches authorized in connection with that acqui-

sition, because the state statute has been preempted by

the federal law concerning the emergency acquisition of

failing thrifts. We will also affirm the district court’s

conclusion that § 641 is not preempted by federal law in

its application to circumstances other than those provided

by §1730a(m). We will reverse, however, the district

court’s judgment that § 641 is violative of the dormant

Commerce Clause.

In USAA, we will affirm the decision of the district

court not to abstain, although we will not affirm the

(Ford) Brief at 30 (quoting Southern Pacific, 325 U.S. at 770, 65

S.Ct. at 1521). To succeed on this argument, however, the appellees

must demonstrate the presence of a national scheme to regulate

completely the transfer and affiliations of every S & L throughout

the country. They have failed in that demonstration and neither is

the existence of such a scheme apparent on the face of the federal

legislation. :

In our view, the appellees’ assertions on this point are merely

the preemption argument dressed in different clothing. See Rice,

331 U.S. at 230, 67 S.Ct. at 1152 (federal preemption will be

inferred where the field is one in which the federal interest is so

dominant that the “federal system wil! be assumed to preclude

enforcement of state laws on the same subject”), see also, Hills-

borough County, 471 U.S. at 713, 2374. (sic) As we have held in

this opinion supra, to the extent that § 641 imposes restrictions or

regulations that affect the ability of an otherwise viable institution

to purchase a failing thrift, it conflicts with federal legislation, and,

therefore, is preempted. Apart from that circumstance, however,

we do not discern a conflict between the state statute and federal

regulation of the savings and loan industry that requires invalida-

tion of the state statute.

40a

rationale upon which it relied. We will also affirm the

holding of the district court that § 641 is not preempted

by federal law in its application to USAA’s establishment

of a Texas savings and loan company. We will reverse,

however, the district court’s judgment that § 641 is vio-

lative of the dormant commerce clause and we will re-

mand this matter to the district court for its determina-

tion of the viability of USAA’s claim that the state

statute is otherwise inapplicable to it. See supra, n. 11.

All parties in these cases will bear their own costs.

4la

APPENDIX B _

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

Nos. 88-5077, 88-5078 & 88-5121

UNITED SERVICES AUTOMOBILE ASSOCIATION,

a Texas Reciprocal Interinsurance Exchange

and

USAA CASUALTY INSURANCE COMPANY,

a Texas Stock Insurance Company,

and

USAA LIFE INSURANCE COMPANY,

a Texas Stock Insurance Company,

and

USAA ANNUITY AND LIFE INSURANCE COMPANY,

a Texas Stock Insurance

v.

Mur, WILLIAM J., III,

Acting Insurance Commissioner of the

Commonwealth of Pennsylvania

PENNSYLVANIA ASSOCIATION OF INDEPENDENT INSURANCE

AGENTS; JOHN ULRICH, JR.; PROFESSIONAL INSURANCE

AGENTS ASSOCIATION OF PENNSYLVANIA, MARYLAND

AND DELAWARE, INC.; CHARLES P. LEACH, JR.; PENN-

SYLVANIA ASSOCIATION OF LIFE UNDERWRITERS; and

HAROLD E. ALEXANDER,

Appellants in 88-5077

42a

UNITED SERVICES AUTOMOBILE ASSOCIATION,

a Texas Reciprocal Interinsurance Exchange

and

USAA CASUALTY INSURANCE COMPANY,

a Texas Stock Insurance Company,

and

USAA LIFE INSURANCE COMPANY,

a Texas Stock Insurance Company,

and

USAA ANNUITY AND LIFE INSURANCE COMPANY,

a Texas Stock Insurance

V.

Murr, WILLIAM J., III,

Acting Insurance Commissioner of the

Commonwealth of Pennsylvania

PENNSYLVANIA ASSOCIATION OF INDEPENDENT INSURANCE

AGENTS; JOHN ULRICH, JR.; PROFESSIONAL INSURANCE

AGENTS ASSOCIATION OF PENNSYLVANIA, MARYLAND

AND DELAWARE, INC.; CHARLES P. LEACH, JR.; PENN-

SYLVANIA ASSOCIATION OF LIFE UNDERWRITERS; and

HAROLD E. ALEXANDER,

CONSTANCE FOSTER,

Appellant in 88-5078

43a

UNITED SERVICES AUTOMOBILE ASSOCIATION,

a Texas Reciprocal Interinsurance Exchange

and

USAA CASUALTY INSURANCE COMPANY,

a Texas Stock Insurance Company

and

USAA LIFE INSURANCE COMPANY,

a Texas Stock Insurance Company

and

USAA ANNUITY AND LIFE INSURANCE COMPANY,

a Texas Stock Insurance

V.

Muir, WILLIAM J., III,

Acting Insurance Commissioner of the

- Commonwealth of Pennsylvania

PENNSYLVANIA ASSOCIATION OF INDEPENDENT INSURANCE

AGENTS; JOHN ULRICH, JR.; PROFESSIONAL INSURANCE

AGENTS ASSOCIATION OF PENNSYLVANIA, MARYLAND

AND DELAWARE, INC.; CHARLES P. LEACH, JR.; PENN-

SYLVANIA ASSOCIATION OF LIFE UNDERWRITERS; and

HAROLD E, ALEXANDER,

UNITED SERVICES AUTOMOBILE ASSOCIATION,

USAA CASUALTY INSURANCE COMPANY,

USAA LIFE INSURANCE COMPANY, and

USAA ANNUITY AND LIFE INSURANCE COMPANY,

Appellants in 88-5121

On Appeal from the United States District Court for the

Middle District of Pennsylvania

(D.C. Civil Action No. 84-1596)

44a

SUR PETITION FOR REHEARING

Present: GIBBONS, Chief Judge, SEITZ,

HIGGINBOTHAM, SLOVITER, BECKER,

STAPLETON, MANSMANN, GREENBERG,

HUTCHINSON, SCIRICA, COWEN,

and NYGAARD, Circuit Judges.

The petition for rehearing filed by appellant in the

above-entitled case having been submitted to the judges

who participated in the decision of this Court and to all

the other available circuit judges of the circuit in regular

active service, and no judge who concurred in the decision

having asked for rehearing, and a majority of the circuit

judges of the circuit in regular service not having voted

for rehearing, the petition for rehearing by the panel and

the Court in bance, is denied.

BY THE COURT,

/s/ Leon Higginbotham

Circuit Judge

Dated: June 9, 1989 ;

-

45a.

APPENDIX C

UNITED STATES DISTRICT COURT

M.D. PENNSYLVANIA

Civ. No. 84-1596

UNITED SERVICES AUTOMOBILE ASSOCIATION, et al.,

Plaintiffs,

V.

CONSTANCE FOSTER,

Defendant.

Dec. 23, 1987

Michael L. Browne, Christopher K. Walters, Reed,

Smith, Shaw & McClay, Philadelphia, Pa., Robert B.

Hoffman, Reed, Smith, Shaw & McClay, Harrisburg, Pa.,

for plaintiffs. -

Andrew S. Gordon, Ellis M. Saull, Dist. Attys. Gen.,

Allen C. Warshaw, Sr. Deputy Atty. Gen., Office of

Atty. Gen., Harrisburg, Pa., for defendant.

Karen Balaban, William Balaban, Harrisburg, Pa., for

intervenors.

MEMORANDUM

HEPMAN, District Judge.

In this action against the Insurance Commissioner of

the Commonwealth of Pennsylvania (hereinafter “Com-

missioner’), the plaintiffs, United Services Automobile

Association, U.S.A.A. Casualty Insurance Company,

U.S.A.A. Life Insurance Company, and U.S.A.A. Annu-

ity and Life Insurance Company (hereinafter “USAA’’)

challenge the constitutionality of Section 641 of Penn-

46a

sylvania’s Insurance Department Act of 1921, 40 Pa.

C.S.A. § 281.1. Presently before us are three motions:

the motion of the Commissioner for summary judgment

on abstention grounds; the motion of USAA for sum-

mary judgment on pre-emption grounds; and the motion

of USAA for summary judgment on Commerce Clause

grounds.

I. BACKGROUND

USAA, a reciprocal interinsurance exchange organized

and existing under the laws of Texas with its principal

place of business in San Antonio, is licensed to sell in-

surance in Pennsylvania. In April, 1984, USAA Finan-

cial Services, a wholly-owned subsidiary of USAA, filed

an application with the Federal Home Loan Bank Board

for a Federal Savings Bank Charter for the USAA Fed-

eral Savings Bank. The bank received its charter and

began operations in San Antonio in December, 1983. The

bank has no locations in Pennsylvania.

In July and August, 1984, the Pennsylvania Insurance

Department notified USAA that its indirect ownership

of the bank in Texas constituted a violation of Section 641

of the Insurance Department Act and advised USAA

that it must divest itself of the bank or risk revocation

‘of its licenses to transact insurance business in Penn-

sylvania. In November, 1984, USAA brought the present

action under 42 U.S.C. § 1983, seeking declaratory and

1 Section 641, in pertinent part, provides:

(b) No lending institution, public utility, bank holding com-

pany, savings and loan holding company or any subsidiary or

affiliate of the foregoing, or officer or employe 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 holding

company, subsidiary or affiliate of a lending institution may be

licensed to sell credit life, health and accident insurance and to

sell and underwrite title insurance in accordance with regula-

tions promulgated by the Insurance Commissioner.

47a

injunctive relief against the Commissioner, and, in De-

cember, 1984, the Commissioner initiated state agency

proceedings to revoke the plaintiffs’ insurance licenses.

After consideration of the motion of the Commissioner

to dismiss the federal action on abstention grounds, we

ordered the action dismissed on September 30, 1985.

USAA appealed from our order.

In June, 1986, the Court of Appeals for the Third

Circuit reversed the judgment and remanded the case

for further proceedings consistent with its opinion. See

United Services Automobile Association v. Muir, 792

F.2d 356 (3d Cir. 1986). Thereafter, we issued a pre-

liminary injunction which prohibits the Commissioner

from revoking the plaintiffs’ insurance licenses pending

further order.

In October, 1986, the Commissioner filed a Petition

for a Writ of Certiorari in the Supreme Court. The

Supreme Court denied the petition.

On August 21, 1987, we granted the motion of

the Pennsylvania Association of Independent Insurance

Agents, John M. Ulrich, -Jr., Professional Insurance

Agents Association of Pennsylvania, Maryland and Dela-

ware, Inc., Charles P: Leach, Jr., Pennsylvania Associ-

ation of Life Underwriters and Harold E. Alexander,

to intervene in the action. Oral argument on the motions

for summary judgment was held September 16, 1987.

II. ABSTENTION

In our September, 1986, ruling in this case, we dis-

missed USAA’s complaint on abstention grounds. We

relied on the three different types of abstention set forth

in Railroad Commission of Texas v. Pullman, 312 U.S.

496, 61 S.Ct. 643, 85 L.Ed. 971 (1941); Burford v. Sun

Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424

(1943); and Younger v. Harris, 401 U.S. 37, 91 S.Ct.

746, 27 L.Ed.2d 669 (1971). The Court of Appeals for

48a

the Third Circuit reversed our ruling and held that none

of the three types of abstention applied. USAA v. Muir,

792 F.2d 356. On remand, the Insurance Commissioner

has again moved for abstention based solely on the

Younger abstention. For the following reasons, we shall

deny the motion.

The Commissioner has renewed the motion for sum-

mary judgment on abstention grounds basing his argu-

ment on the holding in the recent Supreme Court case of

Ohio Civil Rights Commission v. Dayton Christian

Schools, 477 U.S. 619, 106 S.Ct. 2718, 91 L.Ed.2d 512

(1986). In Dayton, the Supreme Court held that Younger

abstention applies “to state administrative proceedings

in which important state interests are vindicated, so long

as in the course of those proceedings the federal plaintiff

would have a full and fair opportunity to litigate his

constitutional claim.” Jd. at 627, 106 S.Ct. at 2723, 91

L.Ed.2d at 522. The Court further ruled that even if

the state administrative agency could not itself consider

the constitutionality of a state statute it is called upon

to enforce, “it would seem an unusual doctrine . . . to

say that [the agency] could not construe its own statu-

tory mandate in the light of federal constitutional prin-

ciples. ... In any event, it is sufficient . . . that consti-

tutional claims may be raised in state court judicial re-

view of the administrative proceeding.” Jd. at 629, 106

S.Ct. at 2724, 91 L.Ed.2d at 523.

Although we agree with the Commissioner that the

holding of the Supreme Court in Dayton appears to over-

rule the Third Circuit’s holding in USAA v. Muir on

the issue of Younger abstention, the Third Circuit’s latest

decision involving Younger abstention, Sullivan v. City

of Pittsburgh, 811 F.2d 171 (8d Cir. 1987), requires us

to reject the Commissioner’s motion for summary judg-

ment. In addition to the requirement under the Younger

abstention doctrine that there be an ongoing state pro-

ceeding in which constitutional claims can be raised, the

49a

Third Cireuit in Sullivan added the requirement that, in

order to invoke Younger abstention, irreparable injury

may not be threatened.’

In USAA v. Muir, the Third Circuit decided that

USAA would suffer irreparable harm if we were to ab-

stain.* Therefore, on the issue of abstention, we are

bound by the Third Circuit’s prior opinion in this case.

If the Third Circuit in Sullivan had not added the

requirement of no threat of irreparable harm to the

Younger abstention doctrine, we would have leaned to-

ward granting the Commissioner’s renewed motion for

summary judgment on abstention grounds. However,

because of the Sullivan opinion, we are clearly bound

2 The court in Sullivan stated:

Since Younger, the Court has recognized that extraordinary

circumstances may threaten irreparable injury which justifies

federal intervention in ongoing state proceedings even in the

absence of bad faith or harassment by state officials. Although

the Court has acknowledged that the nature of the term ‘irrep-

arable harm’ makes it difficult to define every situation the

term encompasses, the Court has stated that circumstances are

extraordinary in the relevant Younger sense where they create

‘an extraordinarily pressing need for immediate federal equita-

ble relief,’ and do not simply present a unique or unusual fac-

tual situation. Such need for relief appears justified upon a

showing ‘ “that an injunction is necessary in order to afford

adequate protection of constitutional rights.” ’

Sullivan, 811 F.2d at 179 (citations omitted).

8 The Third Circuit held:

Weighing the legal issues and the devastating economic con-

sequences 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 on the other hand, we

conclude that the district court erred by holding that the state

appeal and supersedeas procedures adequately protected USAA’s

interests. t

USAA »v. Muir, 792 F.2d at 363.

50a

by the Third Circuit’s decision in USAA v. Muir under

the law-of-the-case doctrine.‘

III. PRE-EMPTION

USAA has moved for summary judgment on pre-

emption grounds, arguing that Section 641(b) as applied

to USAA is invalid under the Supremacy Clause of the

United States Constitution. Specifically, USAA claims

that Section 641(b) is preempted by the Home Owners’

Loan Act of 1933 (“HOLA”), 12 U.S.C. § 1461 et seq.,

the National Housing Act, 12 U.S.C. §$ 1730, 1730a,

and the regulations promulgated pursuant to these acts.

USAA offers two reasons to support its claim of pre-

emption: (1) Congress has occupied the entire field

regarding the organization, ownership, incorporation and

operation of federal savings banks; and (2) Section 641

is in actual conflict with federal law, standing as an

obstacle to the full accomplishment of the federal gov-

ernment’s purposes in that the federal government,

through the Federal Home Loan Bank Board and the

Federal Savings and Loan Insurance Corporation, ap-

proved USAA’s ownership of the savings bank in Texas.

Pre-emption of a state law by a federal law or regula-

tion has its roots in the Supremacy Clause which pro-

vides that the “Constitution, and the Laws of the United

States which shall be made in Pursuance thereof; .. .

4 The law-of-the-case doctrine applies to issues that were dis-

cussed by the court in a prior appeal. Schultz v. Onan Corp., 737

F.2d 339, 345 (3d Cir. 1984). Generally, a court will refuse to

reopen what has already been decided. Zichy v. City of Philadcl-

phia, 590 F.2d 503, 508 (8d Cir. 1979). The court, however, has

the duty to apply “a supervening rule of law despite its prior deci-

sions to the contrary when the new legal rule is valid and applicable

to the issues of the case.” Jd. Based on this duty to apply a super-

vening rule of law, we would have considered. the defendant’s re-

newed motion based on the Supreme Court’s ruling in Dayton had

the Sullivan decision not explained the Third Circuit’s stance on

the irreparable harm requirement.

5la

shall be the supreme Law of the Land; ... any Thing

in the Constitution or Laws of any State to the Contrary

notwithstanding.” U.S. Const. art. VI, cl. 2. It is well-

settled that pre-emption may occur in any of the follow-

ing three ways:

First, in enacting the federal law, Congress may

explicitly define the extent to which it intends to pre-

empt state law. Second, even in the absence of ex-

press pre-emptive language, Congress may indicate

an intent to occupy an entire field of regulation, in

which case the States must leave all regulatory ac-

tivity in that area to the Federal Government.

Finally, if Congress has not displaced state regula-

tion entirely, it may nonetheless pre-empt state law

to the extent that the state law actually conflicts

with federal law. Such a conflict arises when com-

pliance with both state and federal law is impossible

or when the state law “stands as an obstacle to the

accomplishment and execution of the full purposes

and objectives of Congress.”

Michigan Canners and Freezers Assoc. v. Agricultural

Marketing and Bargaining Board, 467 U.S. 461, 469, 104

S.Ct. 2518, 2523, 81 L.Ed.2d 399 (1984) (quoting Hines

v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 399, 404, 85

L.Ed. 581 (1941)) (citations omitted).

USAA does not argue that Congress has explicitly

defined its intent to pre-empt Section 641(b). Instead,

USAA argues that pre-emption has occurred in either

the second or the third way as set forth in the above-

excerpted quote from Michigan Canners.

We shall first address USAA’s argument that Section

641 is pre-empted because Congress has occupied the en-

tire field of regulation pertaining to savings banks. The

Supreme Court has explained that congressional intent

to pre-empt may be inferred where the scheme of fed-

eral regulations is “sufficiently- comprehensive to make

52a

reasonable the inference that Congress ‘left no room’

for supplementary state regulation,” California Savings

and Loan Association v. Guerra, 479 U.S. 272, ——, 107

S.Ct. 683, 689, 93 L.Ed.2d 618, 623 (1987); or “where

the field is one in which ‘the federal interest is so domi-

nant that the federal system will be assumed to preclude

enforcement of state laws on the same subject.’” Hilis-

borough County v. Automated Medical Laboratories, Inc.,

471 U.S. 707, 718, 105 S.Ct. 2371, 2375, 85 L.Ed.2d

714 (1985).

In considering whether or not to infer pre-emption

from the federal law’s occupancy of the field or dominant

federal interest, the Supreme Court has expressed the

following cautionary note: “Undoubtedly, every subject

that merits congressional legislation is, by definition, a

subject of national concern. That cannot mean, however,

that every federal statute ousts all related state law.”

Id. at 719, 105 S.Ct. at 2378. This cautionary note is

in accord with other statements by the Supreme Court

to the effect that pre-emption analysis is to be “tempered

by the conviction that the proper approach is to reconcile

‘the operation of both statutory schemes with operation

of both statutory schemes with one another rather than

holding one completely ousted,’” Merrill Lynch v. Ware,

414 U.S. 117, 127, 94 S.Ct. 388, 389-90, 38 L.Ed.2d 348

(1973); and “federal regulation of a field of commerce

should not be deemed pre-emptive of state regulatory

power in the absence of persuasive reasons—either that

the nature of the regulated subject matter permits no

other conclusion, or that Congress has unmistakenly so

ordained.” Florida Lime and Avocado Growers, Inc. v.

Paul, 373 U.S. 182, 142, 83 S.Ct. 1210, 1217, 16 L.Ed.2d

248 (1963).

Analyzing the case before us in light of these princi-

ples, we find that Section 641(b) is not pre-empted be-

cause of occupancy of the field by federal law.

53a

It should first be noted that we do not dispute many

of the arguments advanced by USAA. For example, we

agree that the federal scheme under HOLA and the Na-

tional Housing Act creates “a uniform and compre-

hensive federally regulated thrift system without state

interference.” ° Furthermore, after carefully considering

the Supreme Court’s decision in Fidelity Federal Sav-

ings and Loan Association v. de la Cuesta, 458 U.S. 141,

102 S.Ct. 3014, 73 L.Ed.2d 664 (1982), we recognize,

as USAA points out, that “Congress invested the Board

with broad authority to regulate federal savings and

loans so as to effect the statute’s purposes, and plainly

indicated that the Board need not feel bound by existing

state law.” Id. at 162, 102 S.Ct. at 3027. In fact, the

broad authority vested in the Board is clearly expressed

in the federal regulations:

The regulations in this Part 545 are promulgated

pursuant to the plenary and exclusive authority of

the Board to regulate all aspects of the operations

of Federal associations, as set forth in section 5(a)

of the Home Owners’ Loan Act of 1933, 12 U.S.C.

1464, as amended. This exercise of the Board’s au-

thority is preemptive of any state law purporting

to address the subject of the operations of a Federal

association.

12 C.F.R. § 545.2. Lastly, we do not dispute USAA’s

statement that the federal regulations governing federal

savings banks are voluminous and comprehensive.

Despite our agreement with these arguments advanced

by USAA, we cannot infer that federal law has left no

room for a state law, such as Section 641(b), which con-

cerns the state’s insurance industry. While the federal

regulations do occupy the entire field of regulation con-

cerning the opération of federal savings banks, we can-

5 Plaintiff’s Brief Supporting Motion for Summary Judgment in

Preemption Issue at 18.

ee 54a

not infer that these federal regulations also occupy the

field of regulation concerning the relationship of these

banks with other entities, such as insurance companies.

The Supreme Court in Fidelity Federal Savings and

Loan expressly suggested that Congress may not have

occupied the entire field:

As we noted above, a savings and loans’ mortgage

lending practices are a critical aspect of its “opera-

tion,” over which the Board unquestionably has ju-

risdiction. Although the Board’s power to promul-

gate regulations exempting federal savings and loans

from the requirements of state law may not be

boundless, in this case we need not explore the outer

limits of the Board’s discretion.

Fidelity Federal Savings & Loan, 458 U.S. at 167, 102

S.Ct. at 3029-30.

We find here that Section 641(b) does not address the

operations of federal savings banks. In other words, it

does not attempt to govern the operations of USAA’s

bank in Texas. Instead, Section 641(b) simply regulates

the relationships between licensed insurers in Pennsy]l-

vania and other non-insurance entities. Hence, it is our

opinion that the federal regulations governing the opera-

tions of federal savings banks and the state statute gov-

erning affiliations and ownership of insurance companies

can coexist.

In a similar vein, USAA’s argument that the sheer

volume and comprehensiveness of the federal regulations

governing federal savings banks indicate the intent to

occupy the entire field fails in light of the Supreme

Court’s statement in Hillsborough County:

We are even more reluctant to infer pre-emption

from the comprehensiveness of regulations than from

the comprehensiveness of statutes. As a result of

their specialized functions, agencies normally deal

with problems in far more detail than does Congress.

esaperesees

55a

To infer pre-emption whenever an agency deals with

a problem comprehensively is virtually tantamount

to saying that whenever a federal agency decides to

step into a field, its regulations will be exclusive.

Such a rule, of course, would be inconsistent with

the federal-state balance embodied in our Su»remacy

Clause jurisprudence.

Hillsborough County, 471 U.S. at 717, 105 S.Ct. at 2377.

In the instant case, the regulations are admittedly com-

prehensive; however, the Home Loan Bank Board has

indicated an intent to pre-empt only those regulations

governing the operations of federal savings banks.

USAA’s alternative ground for arguing that Section

641(b) is pre-empted is that the state statute is in actual

conflict with the federal law. An actual conflict between

federal law and state law may pre-empt the state law to

the extent it actually conflicts with the federal law.

California Savings and Loan Association, 479 U.S. at

, 107 S.Ct. at 689,-93 L.Ed. at 628. Such a conflict

“occurs either because ‘compliance with both federal and

state regulations is a physical impossibility,’ Florida Lime

& Avocado Growe~s, Inc. v. Paul, 373-U.S. 182, 142-143

[83 S.Ct. 1210, 1217], . . ., or because the state law

stands ‘as an obstacle to the accomplishment and execu-

tion of the full purposes and objectives of Congress.’ ” /d.,

(quoting Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct.

399, 404, 85 L.Ed. 581 (1941)). USAA argues that

Section 641(b) stands as an obstacle to the federal gov-

ernment’s purpose when it approved USAA’s ownership

of USAA’s bank in Texas.

Determining whether state law frustrates congressional

purpose is a two-step procedure. First, the court must

engage in construction and interpretation of the state

and federal statutes, and only then determine if a con-

flict exists. “[I]n deciding whether any conflict is pres-

ent, a court’s concern is necessarily with ‘the nature of

the activities which the States have sought to regulate,

56a

rather than on the method of regulation adopted.’” Chi-

cago and North Western Transportation Company v. Kalo

Brick and Tile Co., 450 U.S. 311, 317-318, 101 S.Ct.

1124, 1180, 67 L.Ed.2d 258 (1981) (quoting San Diego

Building Trades Council v. Garmon, 359 U.S. 236, 248,

79 S.Ct. 778, 778, 3 L.Ed.2d 775 (1959) ).

It is clear from the state statute that Pennsylvania is

seeking only to regulate the insurance industry and not

the banking industry. Section 641(b) deals exclusively

with who may be licensed to sell insurance in this state.

It says nothing about who may appropriately become a

bank or savings and loan holding company. Admittedly,

an insurance company that becomes affiliated with a sav-

ings and loan holding company will risk losing its in-

surance license in Pennsylvania, but that is because the

state legislature has determined an affiliation between

an insurance company and a saving and loan holding

company would adversely affect the insurance industry.

The statute does not regulate or protect any industry

other than the insurance industry.

It is equally clear that the federal laws in question

regulate only the savings and loan industry and not the

licensing of insurance companies by states. Indeed, the

House Report concerning the Savings and Loan Holding

Company Amendments of 1967 explicitly states the pur-

pose of that Act to be-

to provide a comprehensive statutory framework for

the registration, examination and regulation of hold-

ing companies controlling one or more savings and

loan associations, the accounts of which are insured

by an agency of the Federal Government—the Fed-

eral Savings and Loan-Insurance Corporation.

H.R.Rep. No. 997, 90th Cong., 2d sess., 1968 U.S.

Code Cong. & Ad.News 1601, 1603. Nothing in the Act

nor in the Federal Home Loan Bank Board regulations

even intimates that the purpose of the Act was to allow

57a

insurance companies to become savings and loan holding

companies. Furthermore, nothing in either of the Acts

guarantees a state license to sell insurance to an insur-

ance company that becomes affiliated with a savings and

loan. The federal and state acts are aimed at two com-

pletely separate purposes; they. regulate two separate in-

dustries; and nothing in the federal act requires states to

allow an affiliation between the two. Because there is no

actual conflict between federal law and state law in the

instant case, USAA has failed to demonstrate federal

pre-emption of Section 641(b).

For the foregoing reasons, we shall deny USAA’s mo-

tion for summary judgment on pre-emption grounds.

IV. COMMERCE CLAUSE

USAA has also moved for summary judgment on Com-

merce Clause grounds. USAA argues that Section

641(b), when applied to USAA, places a severe burden on

interstate commerce, a burden which is excessive in rela-

tion to the putative local benefits derived from Section

641(b). USAA further argues that Section 641(b)

forces USAA either to cease transacting their insurance

business with citizens of Pennsylvania or to surrender

their federally-approved ownership of a federal bank in

Texas.®

The Commerce Clause of the United States Constitu-

tion provides that “Congress shall have Power . . . To

regulate Commerce . .. among the several States.”

U.S. Const. art. I, § 8, cl. 3. The Supreme Court has

interpreted the Commerce. Ciause “not only as an author-

ization for congressional action, but, even in the absence

of a conflicting federal statute, as a restriction on per-

missible state regulation.” Hughes v. Oklahoma, 441

®USAA does not argue that the Pennsylvania law discriminates

against interstate commerce in favor of local business. Indeed, it

could not make such an argument because Section 641(b) treats all

insurance companies and all savings and loans alike, whether or not

they are based in Pennsylvania.

58a

U.S. 322, 326, 99 S.Ct. 1727, 1731, 60 L.Ed.2d 250

(1979). Although a state has the power to regulate mat-

ters of legitimate local concerns, it may not impede the

free flow of commerce by “discriminating against the

articles of eommerce coming from outside the state,”

Lewis v. B.T. Investment Managers, Inc., 447 U.S. 27,

36, 100 S.Ct. 2009, 2015, 64 L.Ed.2d 702 (1980), or by

reguiating matters of predominant national concern

“which, because of the need for national uniformity, de-

mand that their regulation, if any, be prescribed by a

single authority.” Southern Pacific Co. v. Arizona, 325

U.S. 761, 767, 65 S.Ct. 1515, 1519, 89 L.Ed. 1915 (1945).

The Commerce Clause “also precludes the application of

a state statute to commerce that takes place wholly out-

side of the State’s borders, whether or not the commerce

has effects within the state.” Edgar v. Mite Corp., 457

U.S. 624, 642-48, 102 S.Ct. 2629, 2641, 73 L.Ed.2d 269

(1982). Similar to the limitations placed on the jurisdic-

tion of state courts, “any attempt ‘directly’ to assert ex-

traterritorial jurisdiction . . . would offend sister States

and exceed the inherent limits of the State’s power.” Id.

at 648, 102 S.Ct. at 2641, (quoting Shaffer v. Heitner,

433 U.S. 186, 197, 97 S.Ct. 2569, 2576, 53 L.Ed.2d 683

(1977) ).

A state statute that regulates interstate commerce

indirectly may also be precluded by the Commerce Clause.

The appropriate test to apply to a regulation that indi-

rectly regulates interstate commerce is the test enuaci-

ated by the Supreme Court in Pike v. Bruce Church, Inc.,

397 U.S. 187, 90 S.Ct. 844, 25 L.Ed.2d 174 (1970):

Where the statute regulates evenhandedly to effec-

tuate a legitimate local public interest, and its effects

on interstate commerce are only incidental, it will be

upheld unless the burden imposed un such commerce

is clearly excessive in relation to the putative local

benefits. Huron Cement Co. v. Detroit, 362 U.S. 440,

443[80 S.Ct. 818, 816, 4 L.Ed.2d 852 (1960)]. Ifa

59a

legitimate local purpose is found, then the question

becomes one of degree. And the extent of the burden

that will be tolerated will of course depend on the

nature of the local interest involved, and on whether

it could be promoted as well with a lesser impact on

interstate activities.

Id. at 142, 90 S.Ct. at 847.

Because Section 641(b) regulates “everi-handedly to

effectuate a legitimate local public interest,” and because

it affects commerce only incidentally, we have determined

that the Pike test is the appropriate test to apply to the

facts of the case at bar.

Thus, in accordance with the Pike test, we must uphold

Section 641(b) unless the burden it imposes on interstate

commerce is “clearly excessive in relation to the putative

local benefits.” We shall first examine the local benefits

conferred by Section 641(b). The Commissioner and the

intervenors suggest three primary local benefits: (1) to

protect the insurance industry from, inter alia, unfair

competition and economic concentration; (2) to protect

consumers from coercive “tie-ins” and other forms of

subtle pressure tactics by lending institutions; and (3)

to protect the ability of the insurance examiners to mon-

itor adequately the insurance industry. The Commis-

sioner argues that these local benefits will be adversely

affected if affiliations between insurance companies and

lending institutions are permitted. It is our opinion, how-

ever, that in this case the adverse effects of affiliation are

either not present where the affiliated bank is outside the

jurisdiction, or are readily prevented in ways less burden-

some than is prescribed in Section 641(b).

First, the Commissioner and intervenors express con-

cern that without the protection of Section 641(b), the

insurance industry faces the risk of unfair competition

and economic concentration. However, testimony by Ron-

ald Chronister, the former Acting Deputy Insurance Com-

missioner, indicates that concentration of economic power

60a

and decreased competition is not a concern with respect

to USAA’s affiliation with a Texas bank. See Notes of

Testimony of Ronald Chronister, November 14, 1985, at

17-18. While we agree with the Commissioner that the

consolidation of a large insurer and a large bank, such as

Citibank, would produce significant economic clout,’ here

we are dealing with a smaii bank in Texas which at the

present time has no locations in Pennsylvania.* Secondly,

the Commissioner and the intervenors state that Section

641(b) protects the consumer particularly from subtle

“tie-in” sales.° The risk of a “tie-in” sale, however, to a

resident of Pennsyivania by a Texas bank is almost “nil.”

Id. at 11. Last, the Commissioner and the intervenors

suggest that Section 641(b) protects the insurance exam-

iner’s ability to examine the solvency of affiliated insur-

ance companies. While the prohibition of all affiliations

between lending institutions and insurance companies pro-

vides an easier task for the insurance examiners in their

examinations of insurance companies, we find that even

in the absence of Section 641(b) the insurance examiners

would still be able to examine the solvency of affiliated

companies. Under the Federal Home Loan Bank Board

regulations, the results of bank examinations by the Fed-

eral Home Loan Bank Board are available “to other agen-

cies of the United States or a State for use where neces-

sary in the performance of their official duties.” 12

C.F.R. § 505.5 (b).?°

T Notes of Testimony of Ronald Chronister, November 14, 1985,

at 16-17.

8 It should be noted, however, that several Pennsylvania residents

have credit cards issued by the Texas bank. While we have consid-

ered this fact, we find it but one small factor of the man factors

we have weighed.

* A “tie-in sale” occurs when a bank conditions the granting of -

credit upon the purchase of insurance from an affiliated agercy or

insurance company. 3

10 We acknowledge the unsworn declaration of Ronald Chronister

filed September 10, 1987, that expresses the Insurance Department’s

6la

Now we shall turn to the burdens imposed on commerce

by Section 641(b). We find that Section 641(b)’s impact

on commerce, when it is applied to USAA, is clearly ex-

cessive in relation to its putative local benefits. The

Texas bank was properly approved by the appropriate

federal agencies. It operates its business in accordance

with the applicable federal regulations. It has no loca-

tions in Pennsylvania. And, specifically, it sells no insur-

ance in Pennsylvania. USAA’s insurance company has

more than 40,000 policyholders in Pennsylvania. Its

premium income in Pennsylvania exceeds $35 million per

year. Furthermore, it services officers and members of

the United States armed forces who frequently move about

the nation.

If the Insurance Department enforces Section 641(b)

against USAA, USAA will be forced to abandon its

insurance business in Pennsylvania or relinquish its in-

terest in the Texas bank. If USAA opts to allow its

insurance license to be revoked, this revocation could

result in devastating economic consequences.'' On the

difficulty in obtaining reports of examinations pursuant to 12 C.F.R.

§ 505.5. Regardless, the procedure is available to the Insurance

Department and, therefore, it is not impossible for the Department

to obtain reports of examinations prepared by the Federal Home

Loan Bank Board.

11The Third Circuit stated the following in USAA v. Muir in

regard to the irreparable harm USAA would suffer if its insurance

license were revoked:

The threat of revocation might alarm an unknown of USAA’s

more than 40,000 Pennsylvania policyholders into cancelling

their insurance. Nationwide, a revocation order even if stayed,

would prevent USAA from continuing unqualifiedly to repre-

sent that its insurance contracts are available in all 50 states.

Because USAA limits its policies primarily to commissioned

officers of the United States armed forces, persons who move

frequently in the service of their country, the inability to offer

insurance coverage in every state may well be a major blow.

Weighing the legal issues and the devastating economic con-

sequences a license revocation would impose upon USAA on

62a

other hand, if USAA were to relinquish its interest in the

Texas bank, it would be giving up that which the federal

government has authorized it to own. Although Section

641(b) does not require USAA to relinquish its interest

in the Texas bank, Section 641(b) certainly has the

practical effect of interfering with the business of the

Texas bank. We agree with USAA that the choice facing

USAA, if Section 641 is enforced against it, is, in prac-

tical effect, no choice at all. ~

The instant situation is much like that encountered by

the Supreme Court in Edgar v. Mite Corp., 457 U.S. 624,

102 S.Ct. 2629, 73 L.Ed.2d 269 (1982). There, in an

effort to protect Illinois shareholders from hostile tender

offers, the Illinois legislature passed a law regulating

tender offers made to both in-state and out-of-state cor-

porations. The Supreme Court observed that the “most

obvious burden the Illinois Act imposes on interstate

commerce arises from the statute’s previously described

nationwide reach which purports to give Illinois the power

to determine whether a tender offer may proceed any-

where.” Jd. at 6438, 102 S.Ct. at 2641. Weighing this

burden against the legitimate local concerns of protecting

resident security holders and regulating the internal af-

fairs of companies incorporated under Illinois law, the

Court held:

We agree with the Court of Appeals that these as-

serted interests are insufficient to outweigh the

burdens Illinois imposes on interstate commerce.

While protecting local investors is plainly a legiti-

mate state objective, the State has no legitimate

interest in protecting non-resident shareholders. In-

the one hand and the vague claim of risks to the state from a

Texas bank not doing business in Pennsylvania on the other

hand, we conclude that the district court erred by holding that

state appeal and supersedeas procedures adequately protected

USAA’s interests.

USAA v. Muir, 792 F.2d at 362-63.

ahs cee

68a

so far as the Illinois law burdens out-of-state trans-

actions, there is nothing to be weighed in the balance

to sustain the law.

Id. at 644, 102 S.Ct. at 2641. The same can be said of

the instant Pennsylvania law. The burden imposed by

Section 641(b) is clearly excessive in relation to the

local benefits.

Furthermore, insofar as Section 641(b) is needed to

regulate affiliations between insurance companies and

lending institutions within Pennsylvania where the con-

cerns of the Commissioner and the intervenors become

very real, the statute can be more narrowly drawn so

that its burden on interstate commerce is lessened and its

objectives are still effectuated. In keeping with the

standard set forth in Pike and followed in Edgar, we

find that in the case before us the burden imposed on

commerce by the instant Pennsylvania law is clearly

excessive in relation to the putative local benefits.

The Commissioner argues that we should follow as

controlling precedent the case of Exxon Corp. v. Governor

of Maryland, 437 U.S. 117, 98 S.Ct. 2207, 57 L.Ed.2d 91

(1978). In Exxon, the plaintiffs challenged, on Commerce

Clause grounds, a Maryland statute prohibiting pro-

ducers and refiners of petroleum products from operating

retail service stations within the state. The Supreme

Court held that the Maryland statute was constitutional;

the statute did not discriminate against interstate goods,

favor local producers or refiners, or impermissibly burden

interstate commerce. One of the plaintiff’s arguments was

that the divestiture requirements would cause several re-

finers to stop selling in Maryland and deprive consumers

of their services. In response, the Court stated that these

factors did not warrant a finding of an impermissible

burden. The Court further stated that “/i]t may be true

that the consuming public will be injured by the loss of

. . . Stations operated by the independent refiners, but

again that argument relates to the wisdom of the statute,

64a

not to its burden on commerce.” Jd. at 128, 98 S.Ct.

at 2215.

We carefully considered the instant case in light of

the holding in Exxon. Indeed, there is one obvious simi-

larity. A corporation which has been conducting business

within a state is required by a state statute to cease

doing business in that state. Similar to the independent

refiners in the Exxon case, USAA, if Section 641(b) were

enforced against it, would be forced to leave Pennsylvania

due to a state law. Because of this basic similarity be-

tween Exxon and the instant case, it would be simple to

end the comparison of the cases at that point and declare

Section 641(b) constitutional. However, we find that un-

like the Pennsylvania statute in our case, the Maryland

statute in the Exon case did not reach beyond the bor-

ders of the state. It simply and unequivocally banned

refiners and producers from operating retail stations.

It did not have the practical effect of indirectly regulating

the refiners’ ownership of other entities outside the state.

In contrast, Section 641(b), in practical effect, reaches

beyond Pennsylvania’s borders to interfere with the own-

ership of a federal savings and loan bank in Texas which

was properly approved by and operates under the regula-

tions of the appropriate federal agencies. In this sense,

the instant case is more nearly like the situation presented

in Edgar wherein the Illinois statute had the practical

effect of reaching beyond the state borders to affect in-

directly commerce in other states.’”

12 The Commissioner also brought to our attention the cases of

Huron Portland Cement Co. v. Detroit, 362 U.S. 440, 80 S.Ct. 813,

4 L.Ed.2d 852 (1960), and Norfolk Southern Corporation v. Oberly,

$22 F.2d 388 (3d Cir. 1987). We distinguish both cases from our

case on the basis that they address environmental regulations, as

opposed to economic regulations. For example, in Huron the Court

stated:

In determining whether the state has imposed an undue bur-

den on interstate commerce, it must be borne in mind that the

65a

Finding that the burdens imposed on commerce by

Section 641(b) of the Pennsylvania Insurance Department

Act are clearly excessive in relation to the putative local

benefits and that Section 641(b) could be more narrowly

drawn and still serve the purposes for which the statute

was enacted, we find Section 641(b) as applied here un-

constitutional under the Commerce Clause of the United

States Constitution.’* We shall, therefore, grant USAA’s

motion for summary judgment and, accordingly, enter

judgment in favor of USAA and against the Insurance

Commissioner.

An appropriate order will be entered.

ORDER

AND NOW, this 23rd day of December, 1987, in ac-

cordance with the accompanying Memorandum, IT IS

HEREBY ORDERED that the defendant’s motion for

Summary judgment on abstention grounds and the plain-

tiffs’ motion for summary judgment on pre-emption

grounds are denied.

IT IS FURTHER ORDERED that the plaintiffs’ mo-

tion for summary judgment on Commerce Clause grounds

is granted. Section 641(b) of the Pennsylvania Insurance

Act of 1921, 40 Pa.S. § 281, as applied to the plaintiffs,

Constitution when ‘conferring upon Congress the regulation of

commerce, .. . never intended to cut the States off from legis-

lating on all subjects relating to the health, life, and safety of

their citizens, though the legislation might indirectly affect the

commerce of the country.’

Huron, 362 U.S. at 443-44, 80 S.Ct. at 816. Although the same bal-

ancing test is applicable in situations involving environmental. regu-

lations and economic regulations, it appears to us that more defer-

ence is typically given to a local or state environmental regulation.

18 We also find that there is no genuine issue as to any material

facts. Fed.R.Civ.P. 56(c).

ut

_ United States Constitution. Accordingly, the defendant is

permanently enjoined from taking further action to re-

66a

is unconstitutional under «he Commerce Clause of the

voke the plaintiffs’ insurance licenses.

IT IS FURTHER ORDERED that the Clerk of Court

is directed to enter judgment in favor of the plaintiffs

and against the defendant and to close the file in this

case.

67a

APPENDIX D

SUPREME COURT OF THE UNITED STATES

No. 86-561

GEORGE F.. GRODE, Insurance Commissioner of the

Commonwealth of Pennsylvania, ,

Petitioner

v.

UNITED SERVICES AUTOMOBILE ASSOCIATION, et al.

Case below, United Services Auto. Ass’n v. Muir, 792

F.2d 356.

Petition for writ of certiorari to the United States

Court of Appeals for the Third Circuit.

Jan. 12, 1987. Denied.

68a

APPENDIX E

UNITED STATES COURT OF APPEALS

THIRD CIRCUIT

No. 85-5662

UNITED SERVICES AUTOMOBILE ASSOCIATION, a Texas Re-

ciprocal Interinsurance Exchange, and USAA CASUALTY

INSURANCE COMPANY, a Texas Stock Insurance Com-

yany, USAA LIFE INSURANCE COMPANY, a Texas Stock

Insurance Company, and USAA ANNUITY AND LIFE

INSURANCE COMPANY, a Texas Stock Insurance Com-

pany

Vv.

WILLIAM J. Murr, III, Acting Insurance Commissioner

of the Commonwealth of Pennsylvania.

Appeal of United Services Automobile Association,

USAA Casualty Insurance Company, USAA Life

Insurance Company, and USAA Annuity and

Life Insurance Company,

Appellants.

Argued March 6, 1986

Decided June 6, 1986

Michael L. Browne, Christopher W. Walters, (Argued),

J. Thomas Morris, Reed Smith Shaw & McClay, Philadel-

phia, Pa., Robert B. Hoffman, Reed Smith Shaw & Mc-

Clay, Harrisburg, Pa., for appellants.

; ane ina

a esate! autre sath en aah sia

69a

Leroy S. Zimmerman, Atty. Gen., Ellis M. Saull, (Ar-

gued), Deputy Atty. Gen., Andrew S. Gordon, Senior

Deputy Atty. Gen., Allen C. Warshaw, Executive Deputy

Atty. Gen., Office of Atty. Gen., Harrisburg, Pa., for ap-

pellee.

Before GIBBONS, BECKER, and ROSENN, Circuit

Judges.

OPINION OF THE COURT

ROSENN, Circuit Judge.

This appeal requires us-to examined various forms of

abstention advanced by the district court in choosing to

refrain from exercising jurisdiction. Included is an un-

settled question under the abstention doctrine promul-

gated in Railroad Commission of Texas v. Pullman, 312

U.S. 496, 61 S.Ct. 648, 85 L.Ed. 971 (1941): whether a

claim that federal statutes preempt state law under the

supremacy clause raises a substantial constitutional ques-

tion which permits abstention.

United Services Automobile Association (USAA) and

some of its subsidiary insurance companies filed suit

against William J. Muir, III, as Acting Insurance Com-

missioner of the Commonwealth of Pennsylvania, seeking

to enjoin the state insurance department from revoking

USAA’s license to insure persons in Pennsylvania. The

insurance department asserts that USAA following its

purchase of a Texas bank is in violation of a Pennsyl-

vania statute prohibiting mergers bettveen financial in-

stitutions and insurers. USAA argues that such a con-

struction of the state statute is preempted by federal

banking statutes that permitted i* to purchase the bank

and otherwise violates the constitution. The United

States District Court for the Middle District of Pennsy]-

vania concluded that abstention applied. and dismissed

the suit.1 We disagree and reverse.

1 The district court had jurisdiction under 28 U.S.C. § 1331 (1982)

(federal questions), 28 U.S.C. § 13832 (1982) (diversity), and 28

70a

I.

The relevant facts as stated in USAA’s complaint are

not disputed in this appeal. USAA is a reciprocal inter-

insurance exchange’ organized under the laws of Texas.

USAA and three of its wholly owned insurance company

subsidiaries, with which it filed this suit, have their prin-

cipal place of business in San Antonio, Texas. They limit

their insurance services primarily to commissioned of-

ficers of the United States armed forces and do business

nationwide. They provided insurance services in 1983 to

more than 40,000 Pennsylvania policy holders who paid

more than $35,000,000 in annual policy premiums.

That year, USAA Financial Services Company (then

known as USAA Development Company), a wholly owned

subsidiary of USAA, applied for and received from the

Federal Home Loan Bank Board and the Federal Sav-

ings & Loan Insurance Corporation (FSLIC) permis-

sion to organize and operate the USAA Federal Savings

Bank (the Bank) in San Antonio, Texas. USAA Finan-

cial Services also received permission from the FSLIC

to serve as a unitary savings and loan holding company.

The insurance department does not allege that USAA

U.S.C. § 1837 (1982) (statutes affecting commerce). For diversity

purposes, USAA and its subsidiaries are residents of Texas, and

Muir is a resident of Pennsylvania. Dismissal following an absten-

tion order is a final judgment reviewable by this court under 28

U.S.C. § 1291 (1982). Baltimore Bank for Cooperatives v. Farmers

Cheese Cooperative, 583 F.2d 104, 109 (3d Cir. 1978).

2 In a reciprocal interinsurance exchange,

individuals, partnerships, or corporations engaged in a similar

line of business undertake to indemnify each other against a

certain kind or kinds of losses by means of a mutual exchange

of insurance contracts ... whereby each member separately

becomes both an insured and an insurer with several liability

only.

2 Couch on Insurance, § 18:11 at 614-15 (2d ed. 1984).

T1la

failed to comply with any requirements of federal law

in organizing the Bank. USAA has made an initial in-

vestment of more than $20,000,000 through its subsidi-

ary to capitalize the Bank. The subsidiary holding com-

pany and the Bank are not parties to this suit. The

Bank does not solicit deposits from Pennsylvania resi-

dents or do business in Pennsylvania.

In mid-1984, the Pennsylvania insurance department

notified USAA that its ownership of a bank violated

section 641 of the Pennsylvania Insurance Act of 1921,

and that “USAA must, to continue its business in Penn-

sylvania, divest itself of the Bank, or, failing such dives-

titure, risk revocation of its license to transact insurance

business in Pennsylvania.” The Pennsylvania Insurance

Act of 1921, section 641, as amended in 1974, provides

in relevant part: 4

(b) No lending institution, . . . bank holding com-

pany, savings and loan holding company [as de-

fined in federal statutes] or any subsidiary or af-

filiate of the foregoing, or officer or employee there-

of, may directly or indirectly, be licensed or ad-

mitted as an insurer... in this State. ...

(ec) The Insurance Commissioner is authorized to

promulgate regulations in order to effectuate the

purposes of the section, which are to help maintain

the separation between lending institutions and pub-

lic utilities and the insurance business and to mini-

mize the possibilities of unfair competitive practices

by lending institutions . . . against insurance com-

panies, agents and brokers.

Codified at 40 Pa.Stat.Ann. § 281 (Purdon 1985 Supp.).

The insurance department argued that because USAA

Financial Services is a federally regulated savings and

loan holding company, as defined by federal statutes and

USAA solely owns USAA Financial Services, the latter is

its affiliate and USAA is therefore in violation of section

641(b). In reply, USAA asserted that section 641 is

72a

ambiguous and can be read not to apply to it. Section

641(c) states that the purpose of section 641 is to help

maintain the separation between lending institutions and

the insurance business and minimize the possibilities of

unfair competitive practices by lending institutions. Un-

der section 641(a) (1),° a lending institution means any

institution that does banking business in Pennsylvania.

By reading parts (a) (1) and (c) of section 641 together,

USAA argued that the purpose of the section is limited

to preventing financial institutions doing business in

Pennsylvania from competing or being affiliated with

Pennsylvania insurers; as the Bank is based and does

business only in Texas, the section does not apply to

USAA.

USAA and its plaintiff subsidiaries filed suit in the

district court under 42 U.S.C. § 1983, alleging that the

insurance department’s proposed reading of section 641

violated the supremacy, equal protection, and due process

clauses of the constitution, and seeking declaratory and

injunctive relief. One month after USAA filed suit, the

insurance department commenced state administrative

proceedings for the revocation of USAA’s insurance

licenses in Pennsylvania and filed in the district court a

motion to dismiss the suit on abstention grounds. While

the district court considered this motion, USAA filed a

motion for summary judgment on preemption grounds.

Citing Pullman, supra, Burford v. Sun Oil Co., 319 US.

315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943), and Younger

v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669

(1971), the district court concluded that it should ab-

3 Section 641 (a) (1) provides:

(a) As used in this section [641]:

(1) “Lending institution” means any institution that accepts

deposits and lends money in the Commonwealth of Pennsyl-

vania, including banks and loan associations, but excluding

insurance companies.

Codified at 40 Pa.Stat.Ann. § 281(a)(1) (emphasis added).

73a

stain from addressing USAA’s suit, and dismissed the

suit without considering USAA’s summary judgment mo-

tion. USAA appealed.

On November 22, 1985, this court granted a motion for

an injunction preventing the insurance department from

revoking USAA’s licenses pending resolution of this ap-

peal. The Pennsylvania Insurance Commissioner has

heard testimony in the administrative proceedings to re-

voke USAA’s licenses, but, as of oral argument, he had

not announced any decision.

II.

Abstention from the exercise cf federal jurisdiction is,

in all its forms, “the exception, not the rule.” Colorado

River Water Conservation District v. United States, 424

U.S. 800, 813, 96 S.Ct. 1236, 1244, 47 L.Ed.2d 483

(1976). It is an extraordinary and narrow exception to

the district court’s duty to adjudicate a controversy prop-

erly before it, justified only in the exceptional circum-

stances where resort to state proceedings clearly serves

an important countervailing interest. Jd.

In reviewing abstension decisions, appellate courts ap-

ply the various criteria for abstention articulated by the

Supreme Court in much the same way they would apply

provisions of a statute. 1A J. Moore, Federal Practice

7 0.203[1] at 2106 (1985). A district court has little or

no discretion to abstain in a case that does not meet

traditional abstention requirements. C-Y Development Co.

v. City of Redlands, 703 F.2d 375, 877 (9th Cir. 1985).

Within these constraints, determination whether the ex-

ceptional circumstances required for abstention exist is

left to the distzict court, and will be set aside on review

only if the district court has abused its discretion. Har-

man v. Forssenius, 380 U.S. 528, 534, 85 S.Ct. 1177, 1181,

14 L.Ed.2d 50 (1965); United States v. City of Pitts-

burgh, 757 F.2d 48, 45 (3d Cir. 1985). Determinations

that are essentially legal, such as deciding whether in-

74a

terpretation of a state law is unsettled, are reviewed de

novo on appeal. D’Iorio v. County of Delaware, 592 F.2d

681, 686 (38d Cir. 1978), overruled on other grounds,

Kershner v. Mazurkiewicz, 670 F.2d 440 (8d Cir. 1982)

(in banc). We therefore turn to an analysis of the ab-

stention grounds on which the district court relied.

ITI.

Pullman abstention, as most recently defined by the

Supreme Court, instructs “that federal courts should ab-

stain from decision when difficult and unsettled questions

of state law must be resolved before a substantial federal

constitutional question can be decided.” Hawaii Housing

Authority v. Midkiff, 467 U.S. 229, 236, 104 S.Ct. 2321,

2327, 81 L.Ed.2d 186 (1984). USAA advances three

principal grounds for not applying Pullman abstention in

this case: there is no unsettled question of state law; ab-

stention would cause USAA substantial and irreparable

economic harm; and its preemption claim does not con-

stitute a substantial federal constitutional question.

A.

For Pullman to apply, the state statute must be “ob-

viously susceptible of a limiting construction” and “a

bare, though unlikely, possibility that state courts might

render adjudication of the federal question unnecessary”

is insufficient. Hawaii Housing, 467 U.S. at 237, 104 S.

Ct. at 2327 (emphasis in original). A statute is unset-

tled for Pullman purposes when two of its provisions are

contradictory. Georgevich v. Strauss, 772 F.2d 1078,

1090-91 (3d Cir. 1985) (in banc), cert. denied, ——

U.S.—, 106 S.Ct. 1229, 89 L.Ed.2d 339 (1986). In

seeking Pullman abstention, the insurance department has

argued that the provisions of section 641 are ambiguous

and contradictory, and that with no state court decisions

interpreting the section, its meaning is unsettled. In

reply, USAA contends that the insurance department’s

St

75a

interpretation of the laws it is charged with enforcing

and its actions implementing that interpretation renders

the statute unambiguous.

The Supreme Court has held that Pullman abstention

is not appropriate if an otherwise ambiguous statute has

been authoritatively construed by the state courts, see

e.g., Kusper v. Pontikes, 414 U.S. 51, 55-56, 94 S.Ct. 303,

306-07, 38 L.Ed.2d 260 (1973), but it has not held that

an administrative interpretation will suffice as an au-

thoritative reading of state law. Although one court has

suggested that an administrative interpretation of a stat-

ute that creates a constitutional problem eliminates the

statute’s ambiguity, the challenged statute in that case

was clear on its face and not susceptible of any other

construction. National City Lines, inc. v. LLC Corp..

687 F.2d 1122, 1126 (8th Cir. 1982). Indeed, an admin-

istrative interpretation that would moot the constitu-

tional issue raised by another reading of an ambiguous

statute fortifies the claim for abstention. See, e.g., Bel-

lotti v. Baird, 428 U.S. 132, 148, 96 S.Ct. 2857, 2866,

49 L.Ed.2d 844 (1976) ; Georgevich, 772 F.2d at 1090-91.

Generally, an administrative interpretation of a faci-

ally ambiguous state statute will not remove the ambigui-

ty, for Pullman purposes. See Anderson v. Babb, 632 F.2d

300, 306 (4th Cir. 1980). In keeping with statutorily

imposed maxims for construing legislative intent, Penn-

sylvania courts ordinarily defer to administrative inter-

pretations of statutes. See 1 Pa. Cons.Stat.Ann. § 1921

(ce) (8) (Purdon 1985 Supp.). The interpretation given a

statute by the agency charged with its execution and

application “is entitled to great weight and should be

disregarded or overturned only for cogent reasons or if

such construction is clearly erroneous.” Cohen v. Penn-

sylvania Public Utility Commission, 90 Pa.Cmwlth. 98,

494 A.2d 58, 61 (1985); see Wiley House v. Scanlon, 502

Pa. 228, 465 A.2d 995, 999 (1983) (administrative inter-

pretation of a regulation followed unless it is plainly

76a

erroneous or inconsistent with the authorizing statute).

Although the insurance department’s interpretation of

section 641 is not clearly erroneous, USAA’s cogent alter-

native interpretation that the statute does not apply to

lending institutions that do not do business in Pennsyl-

vania might well be adopted by the state courts. Thus;

despite the deference Pennsylvania courts pay adminis-

trative interpretations, we cannot say that they would

accept the insurance department’s interpretation of sec-

tion 641 as a definitive statement of Pennsylvania law»

The state law is therefore unsettled for Pullman purposes.

B.

USAA also argues that the potential damage that its

business would suffer during state administrative and

court proceedings outweighs any important countervailing

interests of Pennsylvania in abstention. The Supreme

Court has held that a district court was fully justified in

not abstaining when the constitutionality of a narrow and

specific—though ambiguous—state statute was at issue,

and any delay in settling the issue would result in sub-

stantial economic losses. Pike v. Bruce Church, Inc., 397

U.S. 137, 140 & n. 3, 90 S.Ct. 844, 846 & n. 3, 25 L.Ed.2d

174 (1970) (allegedly unconstitutional state regulation

threatened loss of $700,000 fruit crop). This court ob-

served that undue delay and the increased cost of state

litigation made abstention unnecessary when the federal

court in resolving the constitutional issue “would not up-

set sensitive state programs” and the issue was neither

novel nor difficult. McKnight v. Southeastern Pennsyl-

vania Transportation Authority, 583 F.2d 1229, 1241

(3d Cir. 1978) (narrow due process rights of certain state

employees facing dismissal). The court, however, did not

find that the district court abused its discretion by ab-

staining. Jd. at 1242.

The insurance department has indicated a willingness

to expedite consideration of USAA’s claims in state pro-

cedures, and to agree to a stay of execution in the event

77a

of an administrative decision adverse to USAA until

judicial proceedings were completed. USAA explains

plausibly, however, how a state administrative order to

revoke its insurance license, even if stayed, would in

itself hurt its reputation generally and impair its mar-

keting of insurance, even in other states, regardless of

the time factor in litigating. It is uncontested that USAA

has an excellent nationwide reputation as an insurer and

is financially sound. The threat of a license revocation, a

harsh sanction, may suggest in the marketplace fraudu-

lent or illegal activity or financial instability. It could

be difficult or perhaps impossible for USAA to explain to

consumers and to the insurance industry that the license

revocation proceedings in Pennsylvania do not represent

such a sanction. The threat of revocation might alarm

an unknown number of USAA’s more than 40,000 Penn-

sylvania policyholders into cancelling their insurance.

Nationwide, a revocation order even if stayed, would pre-

vent USAA from continuing unqualifiedly to represent that

its insurance contracts are available in all 50 states. Be-

cause USAA limits its policies primarily to commissioned

officers of the United States armed forces, persons who

move frequently in the service of their country, the in-

ability to offer insurance coverage in every state may

well be a major blow.

Weighing the legal issues and the devastating eco-

nomic consequences a license revocution 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 on the other hand, we conclude that the

district court erred by holding that state appeal and su-

persedeas procedures adequately protected USAA’s in-

terests. See Professional Plan Examiners of New Jersey

v. Lefante, 750 F.2d 282, 290-91 (3d Cir. 1984).

78a

C.

Alternatively, USAA asserts that its claim that federal

statutes preempt contrary state insurance laws does not

pose the substantial federal constitutional claim required

for Pullman abstention. Hawaii Housing, 467 U.S. at

236, 104 S.Ct. at 2327. The Ninth Circuit supports this

claim for it has held that Pullman abstention is inappro-

priate for preemption questions grounded in the suprem-

acy clause. Knudsen Corp. v. Nevada State Dairy Com-

mission, 676 F.2d 374, 377 (9th Cir. 1982). “Although

preemption has its doctrinal base in the Constitution, the

quesiion is largely one of determining the compatibility

of a state and a federal statutory scheme. No constitu-

tional issues of substance are presented.” Jd. The Tenth

Circuit recently reached the same conclusion, stating in

strong dictum that “[t]he Supreme Court does not appear

to view federal preemption questions based only on the

Supremacy Clause as the type of constitutional issues

that the Pullman doctrine counsels courts to avoid.” Fed-

eral Home Loan Bank Board v. Empie, 778 F.2d 1447,

1451 n. 4 (10th Cir. 1985); see International Lougshore-

men’s Association, AFL-CIO v. Waterfront Commission

of New York Harbor, 495 F.Supp. 1101, 1113-14 & nn.

15-18 (S.D.N.Y. 1980), modified in other part, 642 F.2d

666 (2d Cir.), cert. denied, 454 U.S. 966, 102 S.Ct. 509,

70 L £d.2d 383 (1981). These recent cases appear to re-

flect a growing trend.

This court recently has also suggested in dicta that pre-

emption questions are not appropriate for Pullman ab-

stention. In reversing a district court abstention deci-

sion, we stated that “[i]t would be inconsistent with our

paramount duty to interpret and protect federal law to

invoke Pullman abstention in this preemption case.”

Kennecott Corp. v. Smith, 687 F.2d 181, 185 (3d Cir.

1980). Supremacy clause claims essentially involve fed-

eral policy and “the federal courts are particularly ap-

propriate bodies for the application of preemption prin-

79a

ciples.” Jd. (quoting Hagans v. Lavine, 415 U.S. 528,

550, 94 S.Ct. 1372, 1386, 39 L.Ed.2d 577 (1974)). Be-

cause the questioned state statute in Kennecott unambig-

uously conflicted with the federal statute, there was no

unsettled state law question requiring Pullman absten-

tion. 637 F.2d at 185.

The Supreme Court has held that “the basic question

involved in [preemption claims under the supremacy

clause] is never one of interpretation of the Federal Con-

stitution but inevitably one of comparing two statutes,”

Swift & Co. v. Wickham, 382 U.S. 111, 120, 86 S.Ct. 258,

263, 15 L.Ed.2d 194 (1965), and where a case involves a

nonconstitutional federal issue, the necessity for deciding

which depends on the decision of an underlying state

law, the federal courts, when necessary, decide both is-

sues. Propper v. Clark, 337 U.S. 472, 490, 69 S.Ct. 1333,

1343, 93 L.Ed. 1480 (1949). The holdings of Swift and

Propper, read together, suggest that a federal court

should not abstain under Pullman from interpeting a

state law that might be preempted by a federal law, be-

cause preemption problems are resolved through a non-

constitutional process of statutory construction. See 17

C. Wright, A. Miller & E. Cooper, Federal Practice and

Procedure § 4242 at 454-55 (1978) (Pullman abstention

inappropriate in a supremacy clause case); cf. 1A J.

Moore, Federal Practice §0.203[2] at 2141 (1985)

(where clear conflict between federal and state statutes,

no abstention appropriate).

‘Because USAA had pled other constitutional violations

in its complaint, the district court declined to consider

whether its preemption argument, taken alone, justified

preemption. USAA’s preemption claim was the sole basis

for its motion for summary judgment, however, and is

easily separable from its other claims should USAA

choose to pursue them. Accordingly, we hold that pre-

emption claims under the supremacy clause are not sub-

stantial federal constitutional issues for which Pullman

80a

abstention might be appropriate.* Thus, the district court

erred in deciding that the preemption claim also afforded

a basis for absention on Pullman grounds.

IV.

Under Burford, abstention is appropriate ‘where there

have been presented difficult questions of state law bear-

ing on policy problems of substantial public import whose

importance transcends the result in the case then at bar.”

Colorado River, 424 U.S. at 814, 96 S.Ct. at 1244. If the

exercise of federal review would be disruptive of state

efforts to establish a coherent policy, and the policy con-

cerns complicated local matters, abstention may be justi-

fied. Id. Generally, Burford abstention is justified where

a complex regulatory scheme is administered by a spe-

cialized state tribunal having exclusive jurisdiction. See,

Allegheny Airlines, Inc. v. Pennsylvania Public Utility

Commission, 465 F.2d 237, 241-45 (8d Cir. 1972), cert.

denied, 410 U.S. 943, 93 S.Ct. 1367, 35 L.Ed.2d 609

(1973) ; see generally, 1A J. Moore, supra {| 0.203[2] at

2140-41 (collecting cases).

The district court in the present case found that Bur-

ford abstention was appropriate because the McCarran-

Ferguson Act gave the states exclusive control over the

regulation of insurance, 15 U.S.C. § 1012 (1982), and

because section 641 is part of a complex regulatory

scheme governing insurance. It cited Levy v. Lewis, 635

F.2d 960 (2d Cir. 1980), which held that abstention was

proper to allow a state regulatory body to settle claims

against a liquidating insurer. The Levy court found it

“highly significant that the state scheme has been adopted

4 We note that a panel of this court has very recently held on

other grounds that preemption questions are often not suitable for

abstention under the doctrines announced in Burford and Younger.

Kentucky West Virginia Gas Co. v. Pennsylvania Public Utility Co.,

791 F.2d 1111, 1116-17, 1117-18 (3d Cir. 1986).

8la

pursuant to congressional authorization” under McCar-

ran-Ferguson. 635 F.2d at 963.

The Supreme Court has established a three-part test

for determining whether state regulation is part of the

business of insurance, 15 U.S.C. §1012(a) & (b), re-

served to the states by McCarran-Ferguson:

[F]irst, whether the practice has the effect of trans-

ferring or spreading a policyholder’s risk; second,

whether the practice is an integral part of the policy

relationship between the insurer and the insured;

and third, whether the practice is limited to entities

within the insurance industry.

Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129,

102 S.Ct. 3002, 3009, 73 L.Ed.2d 647 (1982). “None of

these criteria is necessarily determinative in itself.” Jd.

The state regulations implicated in Levy concerned both

the future coverage of policyholders and their relation-

ship with a defunct insurer, and so were authorized un-

der McCarran-Ferguson. The purpose of section 641, as

stated in its part (c), is to prevent competition between

insurers and Pennsylvania financia! institutions. Unlike

the regulations in Levy, the section is not concerned with

transferring or spreading the policyholder’s risk; affilia-

tion between insurers and banks has no integral connec-

tion to the relationship between the insured and insurer;

and banks are not entities within the insurance industry.

Regulations such as section 641 have no part in the busi-

ness of insurance under McCarran-Ferguson.

The district court also thought Burford abstention was

appropriate because section 641 is part of an “extensive

and complicated . . . state regulatory scheme.” The in-

terpretation of section 641 in this case does not require

consideration of any other Pennsylvania statute and

the relevant facts are simple and undisputed; no com-

plicated regulatory scheme is involved. The insurance

department has not suggested any peculiar local condi-

82a

tions or special expertise required to interpret the statute.

The state proceeding merely involves reading and con-

struing a statute, a task for which courts are best

equipped, and not administrative factual determinations,

such as are involved in the setting of a proper utility

rate. The district court erred in applying Burford to

this case.

V.

Under Younger, “interests of comity and federalism

counsel federal courts to abstain from jurisdiction when-

ever federal claims have been or could be presented in

ongoing state judicial proceedings that concern important

state interests.” Hawaii Housing, 467 U.S. at 237-38,

104 S.Ct. at 2327-28 (emphasis added). Younger ab-

stention is required only when the state court proceedings

are initiated prior to any proceedings on the substance

of the merits in federal court. Jd. at 238, 104 S.Ct. at

2328. USAA argues that Younger abstention was inap-

propriate here because state proceedings did not com-

mence until sometime after the federal suit was filed,

and because these proceedings were administrative and

could not address constitutional arguments.

The commencement of administrative proceedings after

the federal suit was filed, even with the intention of

removing federal jurisdiction by abstention, does not

preclude the application of Younger. So long as “the

federal litigation was in an embryonic stage and no con-

tested matter had been decided,” the district court may

abstain under Younger. Doran v. Salem Inn, Inc., 422

U.S. 922, 929, 95 S.Ct. 2561, 2566, 45 L.Ed.2d 64%

(1975). In the present case, the district court had taken

no action on the substance of USAA’s claim when admin-

istrative proceedings commenced.

This court has held that “where federal intervention

into state administrative proceedings would be substan-

tial and disruptive, and where the proceedings are ade-

quate to vindicate federal claims and reflect strong and

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compelling state interests, the district court, pursuant to

Younger, should abstain.” Williams v. Red Bank Board

of Education, 662 F.2d 1008, 1017 (3d Cir. 1981) (em-

phasis added). The Supreme Court, however, held in

Hawaii Housing that administrative proceedings that

are part of, and are not themselves, judicial proceedings,

do not trigger Younger abstention. 467 U.S. at 238, 104

S.Ct. at 2328. In Hawaii Housing an administrative ar-

bitration proceeding, by statute, was separate from any

subsequent judicial condemnation proceeding. In the pres-

ent case, where an administrative decision to revoke

USAA’s insurance license could be appealed through the

Pennsylvania courts, it is more diffcult to determine

whether the administrative proceeding is part of the

state’s judicial process.

USAA’s federal claims are of constitutional dimension.

As this court stated in Red Bank, administrative proceed-

ings suffice for Younger purposes only when they “are

adequate to vindicate federal claims.” The Supreme Court

has held that administrative proceedings that are for-

bidden by state law from considering federal constitu-

tion claims will not invoke Younger because there is no

“adequate opportunity in the state proceedings to raise con-

stitutional challenges.” Middlesex Ethics Comm. v. Gar-

den State Bar Ass’n, 457 U.S. 423, 432, 102 S.Ct. 2515,

2521, 73 L.Ed.2d 116 (1982). We believe a state ad-

ministrative proceeding is part of its judicial process, for

Younger purposes, only if it provides an adequate oppor-

tunity to raise constitutional challenges.

_ It appears to be settled law in Pennsylvania that an

administrative agency may not determine the constitution-

ality of the statutes it applies. Borough of Green Tree

v. Board, 459 Pa. 268, 328, A.2d 819, 825 (1974); Dela-

ware Valley v. Commissioner, 36 Pa.Cmwlth. 615, 389

A.2d 234, 237 (1978). The insurance department in its

internal documents has acknowledged this limitation. Be-

cause the insurance department in its administrative

proceedings cannot consider USAA’s constitutional argu-

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ments, its administrative proceedings are not part of

Pennsylvania’s judicial process and the district court

erred in abstaining under Younger.

VI.

We conclude that the district court erred in abstaining

from considering USAA’s preemption claim and dis-

missing its suit. The order of dismissal will be reversed

and the case remanded to the district court for proceed-

ings consistent with this opinion.

BECKER, Circuit Judge

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