Opposition Brief — Taylor v. First National Bank of Eastern Arkansas

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JOSEPH F. SPANIOL, JR,

CLERK

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No. 90-525 j

IN THE ee

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1990 !

RON TAYLOR, COMMISSIONER OF

THE INSURANCE DEPARTMENT FOR THE

STATE OF BAAR 56 ok. 55 oko 0's hee dda edness ss Petitioner

AND

ARKANSAS CREDIT INSURANCE

ASSOCIATION (INTERVENOR BELOW)............ Petitioner

VS.

First NATIONAL BANK OF EASTERN

ARKANSAS, A NATIONAL BANKING

ASSOCIATION 00400 0's cashsdnauedeevanaeewe Respondent

ON PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

RESPONDENT'S BRIEF IN OPPOSITION

‘

By: Pup Hicky, II

BAR No. 66031

Counsel of Record

BUTLER, HICKY & LONG

ATTORNEYS AT LAW

2216 NORTH WASHINGTON

P.O. Box 989

Forrest City, ARKANSAS 72335

(S01) 633-4611

Attorneys for Respondent

ARKANSAS LEGISLATIVE DIGEST. INC

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QUESTION PRESENTED FOR REVIEW

WHETHER DEBT CANCELLATION AGREEMENTS

AS AUTHORIZED BY THE COMPTROLLER OF THE

CURRENCY ARE WITHIN THE INCIDENTAL POWERS

OF 12 U.S.C. §24 (SEVENTH) AND GOVERNED BY

THE NATIONAL BANK ACT AND THE RULES AND

REGULATIONS THEREOF, OR ARE DEBT CANCEL-

LATION AGREEMENTS THE BUSINESS OF INSUR-

ANCE AND, IF DETERMINED TO BE THE LATTER,

WHETHER THE NATIONAL BANK ACT SUPERCEDES

AND PREEMPTS REGULATION BY THE ARKANSAS

INSURANCE DEPARTMENT AND THE RULES

THEREOF.

TABLE OF CONTENTS

QUESTION FOR REVIEW .........2.-05.

TABLE OF CONTENTS ...........0.0000:

TABLE OF AUTHORITIES .............:.

STATEMENT OF THE CASE ...........-.

SUMMARY OF THE ARGUMENT .......

ARGUMENT (Reasons for Denying Writ)

I. Considerations in Granting a

,. ¢ SSS sear. Op perry a

II. No Error Regarding the

“Incidental Powers” Question ........

Ill. No New Revision of the McCarren-

Ferguson Act and No New Authority

SOS CRE COMNRUGEES 2 cc cscs ccavesess

CITE fF oscoskivececcsadereiensasns

CERTIFICATE OF SERVICE ...........02-

APPENDIX: Opinion of the Court of

Appeals for the Eighth Circuit .........

ili

TABLE OF AUTHORITIES

Page

CASES:

American Ins. Assn. vs. Clarke,

Ce : 8

American Society of i:avel Agents, Inc. vs.

Bank of America National Trust and Savings

Assoctation, 385 F. Supp. 1084 (D. Cal. 1974) .... 10

Arnold Tours, Inc. vs. Camp,

DS 4) 8, 10, 11

Attorney Gen. ex rel. Monk vs. C. E. Osgood

Company. 144 N.E. 371 (Mass. 1924) ............ 18

Colorado National Bank vs. Bedford,

eek Gas bei e.nacsvcccccccese 8

First National Bank vs. Missouri, 263 U.S. 640..... 11, 15

Group Life and Health Insurance Company vs.

Royal Drug Company, 440 U.S. 205 (1979) ....... 15

M & M Leasing vs. Seattle First National Bank, 563

F.2d 1377 (9th Cir. 1977), cert. denied,

ne ci ecencnncveces 8,9, 19

S.E.C. vs. Variable Annuity Life Insurance

A 6 >) 18

Securities Indus. Assn. vs. Clarke, 885 F.2d 1034 -

(2d Cir. 1989), cert. denied, 110 S.Ct. 1113 (1990)... 8

State vs. Beardsley, 88 Minn. 20, 92 N.W. 472 (1902) .. 18

Union Labor Life Insurance Company vs. Pireno,

CO ode nbs psc bv vesccevosess 15, 17

iV

Page

CASES:

United Sec. Life and Trust Company vs. Bond,

UFR Bids FI LEED ccciesescceciecviseccces 18

Ware vs. Heth, 237 S.W.2d 362

go ts Me ee er er er ee err er rere 17

STATUTES:

I LeDL ie t cc cenSeeahesenaneaed keuaaen 1

III 5 Ns cb h pence eccuase cues 15

ee i cbr ees l

REGULATIONS:

12 C.F.R. §7.7495 ......... Uy oe c heehee ieant 1, 12

Interpretive Letter No. 99 ....'.....00000. POTEET ee 12

PROSTOGIEUE RCUET BOG. 277 occ ccc cccsncevsccesesses 12

OTHER AUTHORITIES:

Eh SR, SE BD pine ncvnteccssccpesedies 6

Letter dated January 7th, 1988, from Senior

Deputy Comptroller, J. Michael Shepherd ........ 12

No. 90-525

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1990

RON TAYLOR, COMMISSIONER OF

THE INSURANCE DEPARTMENT FOR THE

Fon cos ib ccacbidcowescekes Petitioner

AND

ARKANSAS CREDIT INSURANCE

ASSOCIATION (INTERVENOR BELOW)............ Petitioner

VS.

First NATIONAL BANK OF EASTERN

ARKANSAS, A NATIONAL BANKING

SE 5 5c Cia aie ks ne Cae dan dee enton Respondent

ON PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

RESPONDENT'S BRIEF IN OPPOSITION

STATEMENT OF THE CASE

This case involves the issue of whether a national! bank,

such as First National Bank of Eastern Arkansas (the Bank),

can enter into debt cancellation agreements with its bor-

rowers. National banks are regulated by the National Bank

Aci, 12 U.S.C. §1, et seq., and the Comptroller of the Currency

_ is the official charged with the administration of the National

Bank Act. 12 U.S.C. §93(a). In 1964, the Comptroller of the

Currency issued a regulation designated 12 C.F.R. §7.7495

which authorized national banks to enter into debt can-

2

cellation agreements with its borrowers. The Bank began

entering into debt cancellation agreements with some of its

customers in 1987. The Bank initially charged the same fee

as credit life insurance companies, with the intent to adjust

the fee according to its experience. The Bank later reduced the

fee by approximately 10%. A few weeks after it began issuing

debt cancellation agreements, the bank was advised by the

Arkansas Department of Insurance to cease issuing debt

cancellation agreements. The bank filed this action seeking to

determine whether its actions in regard to debt cancellation

agreements are considered to be the business of banking,

thereby governed by the National Bank Act and the rules and

regulations thereof, or the business of insurance and,

if determined to be the latter, whether the National Bank

Act supercedes and preempts regulation by the Arkansas

Insurance Department under the insurance laws of the State

of Arkansas and the rules and regulations issued pursuant

thereto. The District Court found that the Bank’s debt

cancellation agreements are within the incidental powers

necessary to carry on the business of banking and do not

constitute the business of insurance. The Eighth Circuit Court

of Appeals found that the Comptroller's authorization of debt

cancellation agreements was reasonable and within the

incidental powers granted by the National Bank Act and that

debt cancellation agreements do not constitute the ‘business

of insurance” under the McCarren-Ferguson Act.

3

SUMMARY OF ARGUMENT

A Writ of Certiorari is not a matter of right and will only

be issued for special and important reasons. There are no

special or important reasons for this Honorable Court to issue

a Writ of Certiorari in this case. The question presented is one

of first impression and does not conflict with any decision of

this Court, any United States court of appeal, or any state court

of last resort. The Eighth Circuit did not commit any errors in

its analysis of this matter and followed the applicable

decisions of this Honorabie Court.

The Eighth Circuit did not commit an error in its analysis

of whether a debt cancellation agreement was an “incidental

power” as defined by the National Bank Act by failing to

adequately scrutinize the issue. A careful and proper analysis

was undertaken and all the relevant cases were properly

considered by the Eighth Circuit. Further, there was no

improper deference to the Comptroller's opinion.

The question presented is a narrow one confined only to

a determination of whether debt cancellation agreements are

within the “incidental powers” granted by the National Bank

Act and whether such agreements constitute the “business of

insurance” so as to invoke the McCarren-Ferguson Act.

The Eighth Circuit's decision will not open any floodgates

to unregulated and uninhibited insurance underwriting

activities by national banks as alleged by the Petitioners.

The Eighth Circuit panel’s decision does not grant the

Comptroller of the Currency any power over the McCarren-

Ferguson Act and the Eighth Circuit did not find that because

the activity was “incidental” to the business of banking that it

cannot be within the ambit of the McCarren-Ferguson Act.

4

These were separate and distinct issues that were addressed by

the Eighth Circuit panel separately. The Eighth Circuit panel

first found that debt cancellation agreements were within the

“incidental powers” granted by the National Bank Act. The

Court then analyzed the issue of whether these agreements

constituted the “business of insurance”. The Eighth Circuit

found debt cancellation agreements do not constitute the

“business of insurance” under the McCarren-Ferguson Act.

As to both issues, the Eighth Circuit underwent a proper legal

analysis.

The panel's decision that debt cancellation agreements

do not constitute the “business of insurance” did not cast any

doubt on the continued viability of the McCarren-Ferguson

Act and it does not give the Comptroller any additional

powers.

No errors were committed by the Eighth Circuit in

analyzing the issues in this case. Further, the decision does not

conflict with any other decision of this Honorable Court.

There is no important or special reason for this Honorable

Court to issue a Writ of Certiorari in this case. Therefore, the

Petitioners’ request for a Writ of Certiorari should be denied.

5

ARGUMENT

I.

CONSIDERATIONS IN GRANTING A WRIT OF CER-

TIORARI

The Petitioners are asking this Court to grant a Writ of

Certiorari in this case because they feel that the decision of the

Eighth Circuit panel has “rewritten the McCarren-Ferguson

Act and expanded the National Bank Act powers of the

Comptroller and of national banks”. They further claim that

this was accomplished by way of a legal analysis which

conflicts with pricr decisions of this Honorable Court. This

simply is not the case.

This case presents an issue that has never been addressed

by this Court, a United States court of appeals, or a state court

of last resort. It is a question of first impression and the

Eighth Circuit analyzed and followed the relevant cases

decided by this Court in determining that debt cancellation

contracts are an “incidental power” necessary to carry on the

“business of banking” as defined by the National Bank Act

and that such agreements do not constitute the “business of

insurance” as that term is defined in the McCarren-Ferguson

Act. There is no conflict between the Eighth Circuit's decision

in this case and prior decisions of this Honorable Court.

The Eighth Circuit's decision did not rewrite the

McCarren-Ferguson Act nor did it expand the National Bank

Act. The decision is a narrow one in which the Court simply

determined that the Comprroller's authorization of debt

cancellation contracts is reasonable and within the “incidental

powers granted by the National Bank Act and that debt

cancellation agreements do not constitute the “business of

6

insurance” as defined by the McCarren-Ferguson Act. The

Eighth Circuit simply followed the applicable decisions and

interpreted the language of two (2) Federal statutes. This has

been done numerous times by the United States courts of

appeal and is one of the reasons we have United States courts

of appeal.

A Writ of Certiorari is not a matter of right, but of

judicial discretion. It will only be granted for special and

important reasons. U. S. Supreme Court, Rule 10. S6me

reasons considered are:

(1) When a United States court of appeals has

rendered a decision in conflict with the decision of

another United States court of appeals on the same

matter; or has decided a federal question in a way in

conflict with a state court of last resort; or has so far

departed from the accepted and usual course of judicial

proceedings, or sanctioned such a departure by a lower

Court, as to call for an exercise of this Court's power of

supervision.

(2) When a state court of last resort has decided a

federal question in a way that conflicts with the decisions

of another state court of last resort or of a United States

court of appeals.

(3) When a state court or a United States court of

appeals has decided an important question of federal law

which has not been, but should be, settled by this Court,

or has decided a federal question in a way that conflicts

with applicable decisions of this Court.

Supreme Court Rule 10.

As stated earlier, this case presents a question of first

ee

7

impression of this Honorable Court, as well as for the Eighth

Circuit Court of Appeals. For that matter, no other United

States.court of appeals or a state court of last resort has

addressed the question presented by this case. |

Turning to the first consideration, the Eighth Circuit's

decision in this case did not conflict with the decision of

another United States court of appeals on the same matter nor

did the Eighth Circuit's decision decide a federal question in a

way so as to conflict with a state court of last resort. Further,

there is nothing in the record that indicates that the Eighth

Circuit has so far departed from the accepted and usual course

of judicial proceedings as to call for an exercise of this Court's

power of supervision. Clearly, the first consideration is not

applicable.

The second consideration has no application because this

is a request for a Writ of Certiorari from a decision of a United

States court of appeals and not from a state court of last resort.

As to the third consideration, the question presented in

this case is not one that should be settled by this Honorable

Court. The Eighth Circuit was simply called upon to interpret

the language of two (2) federal statutes. The Eighth Circuit

analyzed and followed the applicable decisions of this

Honorable Court, as well as analyzing the decisions in other

United States courts of appeal. The Eighth Circuit's decision

in this case does not in any way conflict with the applicable

decisions of this Honorable Court. In fact, the Eighth Circuit

cited several decisions of this Honorable Court as support for

its decision.

For the foregoing reasons, the Petitioners’ request for a

Writ of Certiorari from this Honorable Court should be

denied.

8

II.

NO ERROR REGARDING THE “INCIDENTAL

POWERS” QUESTION

The Eighth Circuit panel, as well as the trial court in the

first instance, did not ignore or fail to adequately scrutinize

the issue of whether a national bank’s issuance of debt

cancellation agreements meet the test of “incidental powers”

as defined by the National Bank Act. The panel analyzed the

issue by addressing the question of whether the activity is

closely related to an express power and is useful in carrying

out the business of banking. This is similar to the test that is

set out in Arnold Tours, Inc. vs. Camp, 472 F.2d 427 (1st Cir.

1972), which is the test that most courts have adopted in

making the determination of whether a national bank's

activity is authorized as an incidental power necessary to carry

on the business of banking. The panel then cited five (5) cases,

along with their holdings, as support for its decision that debt

cancellation agreements are incidental to an express power of

national banks. Colorado National Bank vs. Bedford, 310 U.S.

41 (1939); Securities Indus. Assn. vs. Clarke, 885 F.2d 1034

(2d Cir. 1989), cert. denied, 110 S.Ct. 1113 (1990); American

Ins. Assn. vs. Clarke, 865 F.2d 278 (D.C. Cir. 1988); M& M

Leasii » vs. Seattle First National Bank, 563 F.2d 1377 (9th

Cir. 1977), cert. denied, 436 U.S. 956 (1978); Arnold Tours,

Inc. vs. Camp, 472 F.2d 427 (1st Cir. 1972). See Appendix,

Page 5. Based upon these cases, the panel found that the debt

cancellation agreements in issue in this case are directly

related to First National Bank of Eastern Arkansas’ expressly

authorized lending power; are a convenient method of

extinguishing debt in case of death; and enable First National

Bank of Eastern Arkansas to avoid the time, expense and risk

associated with attempting to collect the balance of the loan

9

from the borrower's estate. See Appendix, Page 6.

There really is no need for any further analysis. It has

already been determined that banks can act as an agent selling

credit life insurance in connection with its loans as an

incidental power. Debt cancellation agreements were being

offered by the bank to its customers in connection with a loan

as well. The service to the customer is the same — i.e., the

estate is not responsible for the debt. Therefore, the debt

cancellation agreement is a service being offered that is

“incidental” to the lending of money. There was no error

committed by the Eighth Circuit panel's analysis that debt

cancellation agreements are within the “incidental powers” of

the National Bank Act.

The Petitioners then listed several “factors” that have

been mentioned in some of the cases dealing with the issue of

whether an activity was within the “incidental powers” of

national banks. These were only some of the considerations

that the various cases discussed and were merely arguments

offered by the parties in those cases in an attempt to establish

that the activity at issue was closely related to an express

power and was useful in carrying out the “business of

banking”. Let’s take a brief look at the factors:

(1) Whether the activity involves a traditional

function of the banks versus a new and unfamiliar

venture. See M & M Leasing Corp. vs. Seattle First

National Bank, 563 F.2d 1377 (9th Cir. 1977), cert.

denied, 436 U.S. 956 (1978) (Certain leasing activities by

national banks were considered “incidental” because

leasing was incidental to the lending of money on

personal security. The Court recognized that the powers

of national banks must be construed to permit new ways

10

of conducting the business of banking.)

(2) Whether the new activity sought to be con-

ducted is one which is already subject to regulation by

non-banking agencies. This activity has always been

regulated by the Comptroller. It is not an activity that has

been conducted in another area, such as leasing. It is

simply a new activity carried on by national banks as a

part of their business of banking.

(3) Whether the new activity would expose na-

tional banks to risks of operation which Congress did not

intend the banks to assume. See American Society of

Travel Agents, Inc. vs. Bank of America National Trust

and Savings Association, 385 F. Supp. 1084 (D. Cal.

1974). (The Court struck down a national bank being

able to operate a full scale travel club that was offered to

the public at large because Congress wanted to avoid the

risk that the reputation of a bank would be tied to the

successful operation of a business venture, subject to the

vicissitudes of the marketplace, which is not incidental to

the business of banking. The bank would have to put

money into a failing business to protect the reputation of

the bank and the public's confidence in the bank.)

(4) Whether the Comptroller has been consistent

and logical in his positions with regard to the “inci-

dental” nature of thegproposed activity. See Arnold

Tours, Inc. vs. Camp, 472 F.2d 427 (1st Cir. 1972). (The

Court found that since the Comptroller had not been

consistent in his interpretation of the statute, that his

regulation finally authorizing national banks to engage

in the travel agency business should not be given a

dispositive deference. )

11

(5) Whether national banks have previously

sought to avail themselves of an activity that is

“convenient and useful” to the “business of banking”. See

Arnold Tours, Inc. vs. Camp, 472 F.2d 427 (1st Cir.

1972). (The bank tried to argue it was convenient and

useful to operate a travel agency because many banks

operated a travel agency business. The Court did not find

this argument persuasive because not many banks did, in

fact, operate a travel agency business.)

These cases were considered by the Eighth Circuit panel.

The Eighth Circuit did not err in its analysis of whether a debt

cancellation agreement meets the test for “incidental powers”

as defined by the National Bank Act.

Finally, the Court did note that this Court has made clear

that the Comptroller's interpretation of the National Bank

Act must be given great weight. First National Bank vs.

Missourt, 263 U.S. 640 (1924). However, the panel did not

“defer uncritically to the Comptroller's own self-serving

pronouncements on the subject” in lieu of a detailed and

careful analysis of the issue. After determining that debt

cancellation agreements are directly connected to the Bank’s

lending activities, the panel deemed the Comptroller's

authorization of this activity as reasonable and within the

incidental powers granted by the National Bank Act. See

Appendix, Page 6. No new standard was created whereby

National Banks could conduct “virtually any insurance activity

and, indeed, any business, so long as the Comptroller

approves, and the activity has any remote connection to the

extension of loans’, as argued by the Petitioners. The Court

applied the test set out in Arnold Tours in finding this activity

to be incidental to the “business of banking”.

12

Also, contrary to that stated in the Petitioners’ Brief, the

Comptroller has always approved of national banks issuing

debt cancellation agreements since 1964. See 12 C.F.R.

§7.7495; Public statement of May 18th, 1964, by Comprtrolier

Saxton (all activities of a national bank, including its activities

in executing debt cancellation contracts, are performed under

its corporate powers and are governed by federal legislation

and regulations pertaining to banking activities of national

banks); Comptroller's Interpretive Letter No. 99, June 8th,

1979 (the Comptroller asked why national banks don’t simply

perform underwriting in-house through writing “debt can-

cellation contracts” as allowed by 12 C.F.R. §7.7495);

Interpretive Letter No. 277, December 21st, 1983 (Comptrol-

ler determined that underwriting of credit life insurance was

incidental to the business of banking); Letter of January 7th,

1988, from Senior Deputy Comptroller J. Michael Shepherd

(Debt canceliation agreements are a form of self-protection

and not the business of insurance). Clearly the Comptroller

has always been consistent in his position that debt

cancellation agreements are incidental to the business oi

banking.

The Eighth Circuit did not commit an error in its analysis

of whether a debt cancellation agreement was an “incidental

power’ as defined by the National Bank Act by failing to

analyze the legal issue. A careful and proper analysis was

undertaken by the Eighth Circuit. Further, there was no

improper deference to the Comptroller's opinion. It was only

a consideration given by the Court and no error was

committed in regard thereto.

13

Ill.

NO NEW REVISION OF THE McCARREN-FERGUSON

ACT AND NO NEW AUTHORITY FOR THE COMP-

TROLLER

Nowhere in the pleadings, briefs or other matters before

the District Court, the Eighth Circuit Court of Appeals, or this

Honorable Court is it admitted, and the Respondents take a

strong position against such a contention, that debt can-

cellation agreements are an insurance product. In fact, that is

one of the issues in this case — that is, whether debt

cancellation agreements constitute the “business of insur-

ance’. The panel made the determination that debt can-

cellation agreements were not the “business of insurance”.

The panel further found that the Comptroller's authorization

of such agreements as an “incidental power” under the

National Bank Act was reasonable. No applicable precedent

was ignored and no new standard was created for marking the

boundaries of state regulation of insurance matters under the

McCarren-Ferguson Act. In reaching its decision, the panel

simply applied the relevant decisions of this Court, as well as

decisions of various United States courts of appeal.

The panel found that debt cancellation agreements do

not constitute the “business of insurance”. The panel cited the

following two (2) reasons for its holding that the debt

cancellation agreements offered by the Bank did not con-

stitute the “business of insurance” under the McCarren-

Ferguson Act:

(1) The McCarren-Ferguson Act was not directed

at the activities of national banks;

(2) Debt cancellation contracts issued by banks in

|

14

connection with loans differ significantly from tradi-

tional insurance contracts.

See Appendix, Pages 7 and 9.

The Petitioners do not seem to understand the holding in

this case. The Petitioners repeatedly argue that the Eighth

Circuit panel applied a new standard — that First National

Bank of Eastern Arkansas’ “credit life insurance under-

writing” is not the “business of insurance” because it is

conducted by a national bank. This holding cannot be found

anywhere in the Eighth Circuit's opinion in this case. The

Petitioners completely ignore the fact that the Eighth Circuit

panel was called upon to determine whether debt cancellation

agreements constitute the “business of insurance” and that

the Eighth Circuit found debt cancellation agreements do not

constitute the “business of insurance’. On the premises of this

misinterpretation of tne panel's decision, the Petitioners then

allege that the Eighth Circuit committed two (2) errors:

(1) The panel's approach to the issue concedes to

the Comptroller of the Currency full power of interpre-

tation over the McCarren-Ferguson Act because under

the panel's decision, if the Comptroller first determines

that an activity is within a national bank's “incidental

powers’ then there is no need, indeed, no possibility, of

going on to consider whether this activity is within the

“business of insurance” and, thus, subject to regulation by

the states; and,

(2) Tae panel's approach discards the 3-part test

for the “business of insurance” under McCarren-Fer-

guson.

First of all, the panel did not concede to the Comptroller

15

of the Currency fuil power of interpretation over the

McCarren-Ferguson Act. The Comptroller simply interpreted

that “incidental powers” under 12 U.S.C. §24 (Seventh) of the

National Bank Act included debt cancellation agreements.

The Comptroller has no authority to determine and did not |

determine what is the “business of insurance” under the

McCarren-Ferguson Act. This decision does not grant him

any such power, either expressly or implicitly. This Hon-

orable Court has already recognized that great weight should

be given to the Comptroller's interpretations. First National

Bank vs. Missouri, 263 U.S. 640 (1924). The Court did not

simply accept his determination, but underwent its own

analysis in making its decision. Nothing in the Court's

decision indicates that the Comptroller has any authority to

interpret the McCarren-Ferguson Act or that if an activity is

found to be within an “incidental power” of the national bank,

that there is no possibility that that activity could also

constitute the “business of insurance”.

Secondly, the first “error” is based upon a misinterpre-

tation of the holding. The Eighth Circuit panel determined

(1) debt cancellation agreements were not the “business of

insurance” and (2) the Comptroller's authorization of the

debt cancellation agreement was reasonable. These were two

(2) different issues that needed to be resolved. The Court

analyzed both issues separately and made independent

findings as to each.

As to the second “error’’, the panel did analyze and follow

Union Labor Life Insurance Company vs. Pireno, 458 U.S. 119

(1982), and Group Life and Health Insurance Company vs.

Royal Drug Company, 440 U.S. 205 (1979), as well, as other

decisions of this Honorable Court. In Pireno and Royal Drug.

the Court identified three (3) criteria relevant in determining

16

whether a particular practice is part of the “business of

insurance”:

(1) Whether the practice has the effect of trans-

ferring or spreading a policyholder's risk;

(2) Whether the practice is an integral part of the

policy relationship between the insurer and the insured;

(3) Whether the practice is limited to entities

within the insurance industry.

The Court went on to find that none of these criteria is

determinative in itself.

Turning to the first criterion, there is no spreading of

risk among policyholders. The risk occurs when the bank

loans the money to its customer. The debt cancellation

agreement is offered by the bank as a means of handling the

borrower's debt should he die before he can repay the loan.

This enables the bank to avoid the time, expense, and risk

associated with attempting to collect the balance of the loan

from the borrower's estate.

In addition, there is no risk to the borrower because the

debt will be extinguished, whether or not the bank is solvent.

The Court found that debt cancellation agreements differ

significantly from the traditional insurance contracts in that

debt cancellation agreements do not require the bank to make

a payment to the borrower's estate and, therefore, the

prevention of insolvency is not of concern with the debt

cancellation agreement. It is the primary concern with credit

life insurance. The insurance company must be solvent to pay

off the debt to the bank if its policyholder dies before the debt

has been repaid. The bank does not have to make such a

17

payment, but simply extinguishes the debt. This is a very

important difference between these two (2) products.

Looking at the second criterion, it is clear that debt

cancellation agreements are not an integral part of a policy

relationship between insurer and insured and, therefore, that

criteria did not need to be discussed at all. The debt

cancellation agreements were a separate contractual arrange-

ment between the bank and its customers in regard to the

distribution of services (i.e., lending of money) other than

insurance which resulted in a cost savings to its customers.

The debt cancellation agreements were a separate arrange-

ment between the bank and its borrowers, neither of which

are engaged in the business of insurance.

in looking at this case, the panel focused its attention

mostly on the third criterion. It is obvious that the debt

cancellation agreements are not limited to entities within the

insurance industry. This case involves an activity carried on by

a national bank and its customers. No entity within the

insurance industry is involved at all. This Court has been

reluctant to extend the definition of the “business of

insurance” to include parties wholly outside the insurance

industry. Union Labor Life Insurance Company vs. Pireno,

458 U.S. 119 (1982). The Court in Pireno further noted that

the McCarren-Ferguson Act was intended primarily to

protect “intra-industry cooperation” in the underwriting of

risk.

The panel properly applied federal law in reaching its

decision and no new test was established. The panel was not

bound by the decisions of a few State Appellate Courts which

found debt cancellation contracts to fall within their State's

definitions of “insurance”. See Ware vs. Heth, 237 S.W.2d 362

18

(Tex. Civ. App. 1951); Attorney Gen. ex rel. Monk vs. C. E.

Osgood Company, 144 N.E. 371 (Mass. 1924); State vs.

Beardsley, 88 Minn. 20,92 N.W. 472 (1902); See aiso United

Sec. Life and Trust Company vs. Bond, 16 App. D.C. 579

(1902). State law defining insurance is not controlling on the

issue of whether an activity falls within the “business of

insurance” as defined in the McCarren-Ferguson Act. S.E.C.

vs. Variable Annuity Life Insurance Company, 359 U.S. 65

(1959). See Appendix, Page 10.

The Petitioners next allege an “error” in the Court's use

of the language “investment risk” to the bank because “it does

not focus upon how it effects the relationship between the

insurer and the insured, but rather the investment risk to the

bank”. The Petitioners seem to have missed the point the

Court was trying to make. The Court was not concerned with

the effect these debt cancellation agreements might have on

the solvency of the bank; that is for the Comptroller to

regulate. The Court was focusing on the fact that there is no

risk whatsoever to the customer with a debt cancellation

agreement because the bank is simply extinguishing the debt

as opposed to guaranteeing that the bank will pay a third party

the balance of the debt. The borrower is not dependent upon

the bank to remain solvent with a debt cancellation agree-

ment; however, the borrower is at risk insofar as credit life

insurance if the irsurance company becomes insolvent. That

is the primary and traditional concern behind the state

insurance regulations and it is not a concern with a debt

cancellation agreement.

Finally, one of a national bank's express powers is to loan

money. Before loaning money to a borrower, the bank looks at

the creditworthiness of the applicant and usually the value of

the collateral offered to secure the loan. The Eighth Circuit

19

panel's decision does not offer any prospect for a wholesale

usurpation of the state regulation of insurance by allowing

banks to underwite automobile physical damage insurance

through an agreemeni to cancel the debt if the automobile is

destroyed in an accident, or fire insurance in the evens of the

burning of a mortgaged home, as stated by the Petitioners.

The bank would still look to the borrower for the payment of

his debt if one of these events happened and the destruction of

the collateral is only secondary to the loan. Debt cancellation

agreements are only being offered so as to enable the bank to

lend money to certain borrowers and avoid the time, expense

and risk associated with attempting to collect the balance of

the loan from a borrower's estate.

In addition, M & M Leasing Corp. vs. Seattle First

National Bank, 563 F.2d 1377 (9th Cir. 1977), cert, dented,

436 U.S. 956 (1978), recognized that a national bank cannot

offer operational services such as repairs, maintenance,

insurance coverage, license rcnewals, etc., because such

services are not those of a national bank. In M & M Leasing,

the Court found that the bank could engage in certain leasing

activities.

None of the alleged errors cited by the Petitioners were

committed by the Eighth Circuit Court of Appeals and,

therefore, this Court should deny the Petitioners’ request that

a Writ of Certiorari be issued in this case.

20

_ CONCLUSION

For all the foregoing reasons, the Petitioners’ request for

an issuance of a Writ of Certiorari to the Court of Appeals for

the Eighth Circuit, so that this Honorable Court may review

the Eighth Circuit panel's decision, should be denied.

Respectfully submitted,

Puiuip Hicky, II, BAR No. 66031

BUTLER, HICKY & LONG

2216 NORTH WASHINGTON

P.O. Box 989

FORREST CiTy, ARKANSAS 72335

(501) 633-4611 a

Counsel of Record

CERTIFICATE OF SERVICE

I, Philip Hicky, II, hereby certify that I have served copies

of the foregoing Brief in Opposition to Petition for Writ of

Certiorari in accordance with Suprerne Court Rules 29.3 and

29.5(b) by U.S. Mail, with sufficient pre-paid postage to

Mr. Allan W. Horne, Mr. Chet Roberts and Mr. Lee Douglass,

Davidson, Horne & Hollingsworth, 501 First Federal Savings

Plaza, P. O. Box 3363, Little Rock, Arkansas 72203, attorneys

for the Petitioners, this 19th day of October, 1990.

/s/ Philip Hicky, II

Butler, Hicky & Long .

APPENDIX

A-1

UNITED STATES COURT OF APPEALS

For the Eighth Circuit

No. 89-1260

First National Bank of Eastern *

Arkansas, A National Banking *

Association, *

*

Appellee, *

*

Vv. *

* Appeal from the United States

Ron Taylor,* Commissioner * District Court for the

of the Insurance Department * Eastern District of Arkansas.

for the State of Arkansas

Appellant,

Arkansas Credit Insurance

Association (Intervenor

Below),

Appellant.

++ + + + + +

Submitted: January 18, 1990

Filed: June 25, 1990

Before LAY, Chief Judge, FLOYD R. GIBSON, Senior Circuit

Judge, and JOHN R. GIBSON, Circuit Judge.

LAY, Chief Judge.

In July, 1987, First National Bank of Eastern Arkansas

*Ron Taylor succeeded Robert M. Eubanks, III, as Commissioner of

the Arkansas Insurance Department before the notice of appeal was filed.

Thus, he is substituted as an appellant. See Fed. R. Civ. P. 25(d)(1).

A-2

(FNB) began offering debt cancellation contracts as additional-

cost options :o customers borrowing $10,000 or less. These

contracts obligated FNB to cancel the unpaid loan balance

remaining at the borrower's death, regardless of the cause of

death. FNB offered the debt cancellation contracts at rates that

did not vary with a borrower's age or medical condition. A

regulation promulgated by the United States Comptroller of

Currency (Comptroller) authorizes national banks to enter into

debt cancellation contracts. See 12 C.F.R. § 7.7495 (1990).'

In September, 1987, the Arkansas Insurance Department

notified FNB that debt cancellation contracts were the equiva-

lent of credit life insurance policies, and thus subject to state

insurance laws. The Department requested that FNB stcp

offering the contracts.2 FNB complied, but then brought a suit in

federal district court seeking a declaration that the Department's

action was preempted by the National Bank Act, 12 U.S.C.

§§ 21-216d (1988). Jurisdiction was invoked pursuant to 28

112 C.E.R. § 7.7495 provides.

A national bank may provide for losses arising from can-

cellation of outstanding loans upon the death of borrowers. The

imposition of an additional charge and the establishment of

necessary reserves in order to enable the bank to enter into such debt

cancellation contracts are a lawful exercise of the powers of a

national bank and necessary to the business of banking.

?The Department indicated in its letter to FNB that the barik’s failure

to stop offering debt cancellation contracts would result in enforcement

action by the Commissioner. Under Ark. Code of 1987 Ann. § 23-65-105

(Supp. 1989), the Commissioner has authority to issue a cease and desist

order against any person who engages in the business of insurance without

a license.

A-3

U.S.C. §§ 1331 and 2201.3 The district court‘ held that the

National Bank Act protected FNB’s power to enter into debt

cancellation contracts, and that the contracts did not constitute

the “business of insurance” under section 2 of the McCarran-

Ferguson Act, 15 U.S.C. § 1012 (1988). The Commissioner of the

Arkansas Insurance Department (Commissioner) appeals.’ We

affirm the district court.

Our inquiry in this case is limited to the question whether

the Arkansas Insurance Commissioner may prohibit FNB from

3We raised a question about jurisdiction on our own motion after

argument. In Public Serv. Comm'n v. Wycoff Co., 344 U.S. 237, 248 (1952),

the Court suggested that federal-question jurisdiction may be lacking

when a declaratory complaint sets forth a claim of federal right that is in

the nature of a defense to a threatened state court action. Based on that

dicta, and the “well-pleaded complaint” rule, this court in Home Federal

Savs. & Loan Ass'n v. Insurance Dep't of lowa, 571 F.2d 423 (8th Cir. 1978)

and in Lawrence County v. South Dakota, 668 F.2d 27 (8th Cir. 1982),

rejected federal jurisdiction because the preemption claim was in the

nature of a defense to a state action. However, the Supreme Court has since

made clear that a party may apply directly to federal court for relief based

on an affirmative claim of preemption. See Lawrence County v. Lead-

Deadwood School Dist., 469 U.S. 256, 259 n.6 (1985); Shaw v. Delta Air

Lines, Inc., 463 U.S. 85, 96 n.14 (1983). Jurisdiction is not defeated simply

because a plaintiff requests declaratory relief rather than an injunction.

Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671-72 (1950); 13B

C. Wright, A. Miller, & E. Cooper, Federal Practice and Procedure § 3566,

at 99 (1984). Thus, we have jurisdiction to review the merits of this case.

. ‘The Honorable George Howard Jr., United States District Judge for

the Eastern District of Arkansas.

‘The Arkansas Credit Insurance Association intervened below, and

joins the Commissioner in this appeal.

A-4

entering into debt cancellation contracts.° The Commissioner

initially urges that such a prohibition does not conflict with

federal law because the National Bank Act does not grant

national banks the power to offer debt cancellation contracts.

The Commissioner argues that in authorizing the contracts, the

Comptroller has exceeded his authority. We disagree.

In addition to enumerating specific powers, including the

lending of money, the National Bank Act grants national banks

the power to exercise “all such incidental powers as shall be

necessary to carry on the business of banking.” 12 U.S.C. § 24

(Seventh). The Comptroller, through 12 C.F.R. § 7.7495, has

interpreted “incidental powers” to include the offering of debt

cancellation contracts, and the Supreme Court has made clear

that the Comptroller's interpretation of the National Bank Act

must be given “great weight”:

“It is settled that courts should give great weight to any

reasonable construction of a regulatory statute adopted by

*Because the Commissioner's request that FNB stop offering debt

cancellation contracts was grounded on FNB's failure to obtain a state

license, the parties dispute whether this case should be regarded as one of

prohibition or regulation. However, Arkansas law requires licensees to

submit to extensive state regulation, including maintenance of specific\

capital and surplus levels, payment of licensing fees, financial information

disclosure, and inspection by the Commissioner. Compliance with these

requirements would pervert FNB’s status as a federal instrumentality.

Moreover, 12 U.S.C. § 484 (1988) prohibits states from exercising

“visitorial powers” over national banks. For these reasons, we regard the

Commissioner's request as a prohibition on FNB’s issuance of debt

cancellation contracts.

The Comptroller, in an amicus curiae brief, concedes that there may

be particular state insurance regulations (e.g., those limiting premium

rates) which apply to debt cancellation contracts and which do not conflict

with national banking powers. We agree with the Comptroller's argument

that these issues are more properly addressed on a case-by-case basis.

A-5

the agency charged with the enforcement of that statute.

The Comptroller of the Currency is charged with the

enforcement of banking laws to an extent that warrants the

invocation of this principle with respect to his deliberative’

conclusions as to the meaning of these laws. See First

National Bank v. Missouri, 263 US. 640, 658 [1924].”

Clarke v. Securities Indus. Ass'n, 479 U.S. 388, 403-04 (1987)

[quoting Investment Co. Institute v. Camp, 401 U.S. 617, 626-27

(1971)]. The Comptroller's determination as to what activities

are authorized under the National Bank Act should be sustained

if reasonable. See Clarke, 479 U.S. at 406, 409.

The “incidental powers” of national banks are not limited

to activities that are deemed essential to the exercise of express

powers. Rather, courts have analyzed the issue by asking

whether the activity is closely related to an express power and is

useful in carrying out the business of banking. For example, the

Supreme Court, in Colorado Nat'l Bank v. Bedford, 310 US. 41

(1939), held that a national bank was authorized to operate a

safe-deposit business, reasoning that this activity was incidental

to the bank's express power to accept special deposits. Id. at

49-50. See also Securities Indus. Ass'n v. Clarke, 885 F.2d 1034,

1049 (2d Cir. 1989) (sale of mortgage “pass-through” certificates

authorized by National Bank Act because “convenient and

useful” in connection with bank's sale of mortgage loans), cert.

denied, 110 S. Ct. 1113 (1990); American Ins. Ass'n v. Clarke,

865 F.2d 278, 281-82 (D.C. Cir. 1988) (sale of municipal bond

insurance by national bank subsidiary falls within incidental

powers because it is essentially a credit product); M & M Leasing

v. Seattle First Nat'l Bank, 563 F.2d 1377, 1382 (9th Cir. 1977)

(National Bank Act authorizes personal property leasing that is

incidental to national bank's express power to “loan money on

personal property’), cert. dented, 436 U.S. 956 (1978); cf. Arnold

A-6

Tours, Inc. v. Camp, 472 F.2d 427, 433-34 (1st Cir. 1972)

(operation of full-scale travel agency not within incidental

powers because not convenient or useful in connection with any

express power).

As the district court found, the debt cancellation contracts at

issue in this case are directly related to FNB's expressly-

authorized lending power. The contracts are sold only in

connection with loans made by FNB, and involve only FNB and

its borrowing customers. The contracts provide borrowers with

a convenient method of extinguishing debt in case of death, and

enable FNB to avoid the time, expense, and risk associated with

attempting to collect the balance of the loan from a borrower's

estate. Because we agree with the district court that the debt

cancellation contracts are directly connected to FNB's iending

activities, we deem the Comptroller's authorization of this

activity as reasonable and within the incidental powers granted

by the National Bank Act. .

II.

Having found that the National Bank Act authorizes

national banks to offer debt cancellation contracts as “incidental”

to the business of banking, we find in favor of FNB under the

principle of federal preemption. Because national banks are

considered federal instrumentalities, e.g., Franelin Nat'l Bank v.

New York, 347 US. 373, 375 (1954), states may neither prohibit

nor unduly restrict their activities. See id. at 378-79; Anderson

Nat'l Bank v. Luckett, 321 U.S. 233, 248 (1944). Thus, the

National Bank Act preempts the Commissioner's authority to

prohibit FNB from offering debt cancellation contracts.

The Commissioner argues, however, that section 2 of the

McCarran-Ferguson Act limits the preemptive power of the

A-7

National Bank Act in this case because it forbids courts to

construe the National Bank Act in a manner that impairs a

state's authority to regulate the “businéss of insurance.” 15

U.S.C. § 1012(b).’? The Commissioner urges that because debt

cancellation contracts have the same effect as credit life

insurance contracts, they are subject to the exclusive regulatory

authority of the state under the McCarran-Ferguson Act. We

reject this argument. We hold that because the debt cancellation

contracts offered by FNB fall within the incidental powers

granted by the National Bank Act, they do not constitute the

“business of insurance” under the McCarran-Ferguson Act.

We reach this holding for two reasons. The primary reason

is that the McCarran-Ferguson Act was not directed at the

activities of national banks. The McCarran-Ferguson Act was

passed by Congress in response to the Supreme Court's decision

in United States v. South-Eastern Underwriters Ass'n, 322 US.

533 (1944), which held that the insurance industry was subject to

regulation by Congress under the Commerce Clause, and that

insurance company activities were subject to federal antitrust

laws. Id. at 553. The McCarran-Ferguson Act was designed to

preserve traditional state regulation and taxation of insurance

companies, and to provide insurance companies with a partial

exemption from federal antitrust laws. Group Life & Health Ins.

’The relevant portion of section 2 of the McCarran-Ferguson Act

reads as follows:

(a) The business of insurance, and every person engaged

therein, shall be subject to the laws of the several States which relate

to the regulation or taxation of such business.

(b) No Act of Congress shall be construed to invalidate,

impair, or supersede any law enacted by any State for the purpose of

regulating the business of insurance, or which imposes a fee or tax

upon such business, unless such Act specifically relates to the

business of insurance * * * .

15 U.S.C. § 1012.

A-8

Co. v. Royal Drug Co., 440 U.S. 205, 217-18 (1979); Union Labor

Life Ins. Co. v. Pireno, 458 U.S. 119, 129 (1982). In holding that

certain pharmacy contracts involving health-care organizations

were not the “business of insurance,” the Court in Group Life

expressed doubt as to whether the McCarran-Ferguson Act

applied to entities commonly thought to be outside the insurance

industry:

There is not the slightest suggestion in the legislative

history that Congress in any way contemplated that arrange-

ments such as the Pharmacy Agreements in this case, which

involve the mass purchase of goods and services from

entities outside the insurance industry, are the “business of

insurance.”

At the time of the enactment of the McCarran-

Ferguson Act, corporations organized for the purpose of

providing their members with medical services and

hospitalization were not considered to be engaged in the

insurance business at all, and thus were not subject to state

insurance laws. * * * Since the legislative history makes

clear that Congress certainly did not intend the definition of

the “business of insurance” to be broader than its

commonly understood meaning, the contemporary percep-

tion that health-care organizations were not engaged in

providing insurance is highly significant in ascertaining

congressional intent.

440 U.S. at 224-27 (emphasis in original). See also Union Labor

Life, 458 U.S. at 133 ("§ 2(b) [of the McCarran-Ferguson Act]

was intended primarily to protect ‘intra-industry cooperation in

the underwriting of risks”) (quoting Group Life, 440 U.S. at 221)

(emphasis in original); United Servs. Auto. Ass'n v. Muir, 792

A-9

F.2d 356, 364 (3d Cir. 1986) (Pennsylvania statute prohibiting

mergers between banks and insurance companies not protected

by McCarran-Ferguson Act because, among other reasons, banks

are not entities within the insurance industry), cert. dented, 479

U.S. 1031 (1987).

The McCarran-Fergusom Act was not intended to give

States power to regulate beyond that which they had been

thought to possess prior to the South-Eastern Underwriters

decision. As the Court in SEC v. National Sec., Inc., 393 U.S. 453

(1969) said,

The McCarran-Ferguson Act was an attempt to turn back

the clock, to assure that the activities of insurance

companies in dealing with their policyholders would

remain subject to state regulation. As the House Report

makes clear, “[i}t [was] not the intention of Congress in the

enactment of this legislation to clothe the States with any

power to regulate or tax the business of insurance beyond

that which they had been held to possess prior to the

decision of the United States Supreme Court in the

Southeastern Underwriters Association case.” H.R. Rep.

No. 143, 79th Cong., Ist Sess., 3 (1945).

Id. at 459. See also Metropolitan Life Ins. Co. v. Ward, 470 US.

869, 880 n.8 (1985). Yet, well before the South-Eastern Under-

writers decision, regulation of national banks was within the

exclusive domain of the federal government. E.g., First Nat'l

Bank v. California, 262 U.S. 366, 369 (1923). This strongly

indicates that Congress did not intend the “business of

insurance” to encompass lawful activities of national banks.

Our second reason for holding that the debt cancellation

contracts offered by FNB are not the “business of insurance” is

A-10

that debt cancellation contracts issued by banks in connection

with loans differ significantly from traditional insurance con-

tracts. Although debt cancellation contracts may, as the Com-

missioner argues, transfer some risk from the borrower to the

bank,® the contracts do mot require the bank to take an

investment risk or to make payment to the borrower's estate.

The debt is simply extinguished when the borrower dies. Thus,

the primary and traditional concern behind state insurance

regulation — the prevention of insolvency — is not of concern to

a borrower who opts for a debt cancellation contract. As Justice

Brennan said in his concurring opinion in Variable Annuity Life,

359 US. at 90-91, “The prevention of insolvency and the

maintenance of ‘sound’ financial condition in terms of fixed-

dollar obligations is precisely what traditional state regulation

[of insurance] is aimed at.” The fact that debt cancellation

contracts issued by national banks in connection with loans do

not implicate this central concern of insurance regulation, at

least as it relates to the ability of the banks to fulfill their

obligations under the contracts, adds further support to our

®We acknowledge that in addition to the Commissioner a few state

appellate courts have found debt cancellation contracts to fall within their

states’ definitions of “insurance.” See Ware v. Heath, 237 S.W.2d 362

(Tex. Civ. App. 1951); Attorney Gen. ex rel. Monk v. C. E. Osgood Co., 144

N.E. 371 (Mass. 1924); State v. Beardsley, 88 Minn. 20, 92 N.W. 472

(1902); see also United Sec. Life & Trust Co. v. Bond, 16 App. D.C. 579

(1902). However, state law defining insurance is not controlling on the

issue of whether an activity falls within the ‘business of insurance” as that

term is used in the McCarran-Ferguson Act. SEC v. Variable Annuity Life

Ins. Co., 359 US. 65, 69 (1959).

A-11

holding that debt cancellation contracts should not be considered

the “business of insurance.”

III.

In conclusion, we hold that the National Bank Act precludes

the Arkansas Commissioner of Insurance from prohibiting

FNB, either by direct coercion or through a license requirement,

from entering into debt cancellation contracts with its bor-

rowers. The Comptroller has reasonably determined that these

contracts are authorized by the National Bank Act, and we think

that this determination must control. Therefore, ans judgment

of the district court 1s affirmed.

A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.

°The responsibility of ensuring the financial condition of the national

banking system has long been committed to the Comptroller. In the case of

debt cancellation contracts, the Comptroller has indicated that banks must

use prudent banking judgment, which may include the establishment of

reserves to cover losses resulting from early debt cancellation. See 12

C.F.R. § 7.7495; Letter from J. Michael Shepherd, Senior Deputy

Comptroller for Corporate and Economic Programs, to W. D. Glover,

FNB Chairman and President, (Jan. 7, 1988) (Trial Ex. 8). If a national

bank is engaging in “unsafe or unsound” banking practices, the

Comptroller, under 12 U.S.C. § 1818(b), may issue a cease and desist order.