Opposition Brief — Stephens v. Owensboro National Bank

n ~ Supreme Court, U.S.

ma cL. BS

No. 95-74 SEP 13 1995

SUPREME COURT OF THE UNITED STATES —

October Term, 1995

—

DON W. STEPHENS, Commissioner,

Department of Insurance, Commonwealth

of Kentucky, et al., Petitioners,

v.

THE OWENSBORO NATIONAL BANK,

et al., Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Sixth Circuit

BRIEF OF RESPONDENTS,

.- THE OWENSBORO NATIONAL BANK,

THE FIRST NATIONAL BANK OF LOUISA,

CITIZENS NATIONAL BANK OF PAINTSVILLE,

AND KENTUCKY BANKERS ASSOCIATION,

IN RESPONSE TO THE PETITION

Of Counsel: M. THURMAN SENN

M. BROOKS SENN Counsel of Record

Vice President & General Counse) MORGAN & POTTINGER, P.S.C.

Kentucky Bankers Association 601 West Main Street

Waterfront Plaza, Suite 1000 Louisville, KY 40202

325 West Main Street (502) 589-2780

Louisville, KY 40202 Counsel for Respondents, The

(502) 582-2453 Owensboro National Bank,

Citizens National Bank of

Paintsville, The First National

Bank cf Louisa, and Kentucky

Bankers Association

September 13, 1995

WESTERFIELD-BONTE CO., 619 W. KENTUCKY-P.O. BOX 3251, LOUISVILLE, KY.

i

QUESTIONS PRESENTED

Whether the United States Court of Appeals for the

Sixth Circuit correctly decided that, under a traditional

preemption analysis, the Commonwealth of Kentucky could

not enact a statute which would prohibit national banks in

small towns from exercising their express power under 12

U.S.C. §92 (1994) to “act as the agent for any fire, life or

other insurance company”?

Whether the United States Court of Appeals for the

Sixth Circuit correctly decided that a state statute which

prohibits a national bank from exercising one of its ex-

press statutory powers is not a law “enacted by any State

for the purpose of regulating the business of insurance”

within the meaning of §2(b) of the McCarran-Ferguson Act,

15 U.S.C. §1012(b) (1994)?

Whether 12 U.S.C. §92, which expressly authorizes a

national bank in a small town to “act as the agent for any

fire, life or other insurance company” and which specifi-

cally contains the word “insurance” five times, is a statute

which “specifically relates to the business of insurance”

within the meaning of §2(b) of the McCarran-Ferguson Act,

15 U.S.C. §1012(b)?’

*Pursuant to Supreme Court Rule 29.1, Respondents state

that (a) The Owensboro National Bank is a wholly-owned sub-

sidiary of Area Bancshares Corporation, (b) Citizens National

Bank of Paintsville is a wholly-owned subsidiary of Citizens Na-

tional Corporation, and (c) The First National Bank of Louisa is

a wholly-owned subsidiary of Community Holding Company. Ken-

tucky Bankers Association does not have a parent company.

il

TABLE OF CONTENTS

QUESTION PRESENTED .................ccccsssssssssssesees

A EE GET IEE EE sccenerscccercerssncetesuesteenereventigne

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

STATEMENT OF THE CASE...............ccssccsssssseeees

A. Historical Perspective ..................cccccceeceeeeees

1. Congress’ Long Established Plenary Power

To Control National Bank Powers ...............

SII nreicevcsnesecpnsiinesonesiuocenehuieipihaattuimeaimenttatdenins

BET eveiininicis sessions ain aden amidase

4. Ky.Rev.Stat. §287.030(4) .........::cccccscceeereesees

Son BS TUE cect secreenetenniniiniticencnenicniens

THE WRIT SHOULD NOT BE HELD IN

ABEYANCE. IT SHOULD BE GRANTED

BUT ONLY ON THE McCARRAN-

FP RRROLTU IE. FAL 7E GISEED. cnttevininninnstamipsanienietnavenn

I. The Sixth Circuit Correctly Applied Tradi-

tional Federal Preemption Analysis About

Which There Is No Conflict...................cccesee0

II. The McCarran-Ferguson Act Issue Is An

Important Question Deserving Review By

Te IS oincennusincdedacsinienieieenieveanasiaaaaaietliaaiatie aden

III. This Case Is An Appropriate Vehicle For

Presenting The McCarran-Ferguson

Be RN iicnnsiccsinisinsenssccebiiinnaiiaiaiidaaiak amidated

CII cnn snsesitusiscnpitiecsdndenenmnptianinaimumiatil

APPENDIX:

A. Letter from John Skelton Williams,

Comptroller of the Currency, to Senator

Robert L. Owen (June 8, 1916), reprinted in

53 Cong. Rec. $11,001 (1916) ...............cccccseeeeee

18

19

22

la

ili

TABLE OF AUTHORITIES

PAGE

Cases:

Barnett Bank of Marion County, N.A. v.

Gallagher, 43 F.3d 631 (11th Cir. 1995), cert.

petition filed No. 94-1837 (May 8,

A ocisinsveccersnevees 2, 18, 19, 21, 22

Davis v. Elmira Savings Bank, 161 U.S. 275

ESE OEE SE 5

Easton v. Iowa, 188 U.S. 220 (1903) ................0.... 5

Farmers’ and Mechanics’ Nat'l Bank v. Dearing,

ER ES 4

Fidelity Federal Savings and Loan Assn. v. de la

Cuesta, 458 U.S. 141 (1982) ...............cccccccseseees 20

First Advantage Ins., Inc. v. Green, 652 So.2d 562

(La.Ct.App., First Cir. 1995), cert. denied, No.

95-C-0820 (La.Sup.Ct. May 5, 1995), cert.

petition filed No. 94-2130 (June 27, 1995)....2, 19, 21

Franklin Nat'l Bank v. New York, 347 U.S. 378 ...

aS GIES SESS 4,5, 20

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

OS I I sv sconnnriavanenaneansecseerecsecececerse 8

Hillsborough County, Florida v. Automated

Medical Labs., Inc., 471 U.S. 707 (1985) ......... 20

Independent Ins. Agents of America, Inc. v. Ludwig,

Pe oe We CE. Cir. 1GBG) .....ccccecccorsesencseees 2

John Hancock Mutual Life Ins. Co. v. Harris Trust

And Savings Bank, __ U.S. ____, 114 S.Ct. 514

arcs sasmeupuactooweunecss 10, 17, 21

McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316

ee . cseunpensnsseurenesatias 3, 4

Owensboro Nat'l Bank v. Moore, 803 F. Supp.

SEE, BEND vcvncwciecenvconseservnsess pa PISO 13-15, 23

Owensboro Nat’! Bank v. Owensboro, 173 U.S. 664

eo. enessnnsennqleiueansioene 5

Owensboro Nat’l Bank v. Stephens, 44 F.3d 388...

acs ccscuceswetiuciraceeeasoesarse 15-18, 20

iv

Cases—Continued

Paul v. Virginia, 75 U.S. (8 Wall.) 168 (1869)....... 3

Pauley v. Bethenergy Mines, 501 U.S. 680 (1992) . 22

Russello v. United States, 464 U.S. 16 (1983) ....... 22

Securities Exchange Comm’n v. National :

Securities, Inc., 393 U.S. 453 (1968) ................ 8

Securities Exchange Comm’n v. Variable Annuity

Life Ins. Co., 359 U.S. 65 (1959)............cccseceeees 10

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

CR a henectthsctcadsetehieiais Rimi categ n a aan 14, 15, 16

United Services Auto Ass’n v. Muir, 792 F.2d 356

(3rd Cir. 1986), cert. denied, 479 U.S. 1031

5 RES ig A TROIS ton I ed Pa tA a lech EO 15

United States v. South-Eastern Underwriters

AGa Nr, SES U.S. BEB (IDES) ..nccrcccccccececcsscsssocecsess 8

United States Dept. of Treasury v. Fabe,

_. USB... , LIB SLA. Bae OG) ccccisce 10, 15-18, 21

United States National Bank of Oregon v.

Independent Insurance Agents of America,

Inc., 508 U.S. __, 113 S.Ct. 2173 (1999)......... 6

United States Constitution and Statutes:

United States Constitution, Art. VI, Clause 2 ...... 4

Act of June 3, 1864, 13 Stat. 99 (1864) (National

Bank Act of 1864) (codified as amended at

12 U.S.C. $21 et seg. (1994)) ............cccccccsccscceeee 4,5

Act of December 23, 1913, ch. 6, §8, 38 Stat. 251,

gE Creeae rs eenettaL es 2. Sree ae en 6

Act of September 7, 1916, Pub. L. No. 64-270,

39 Stat. 752, 753-754 (codified as amended at

SR i a ID hreccrsitrddbchericasacarbsiconeciices passim

Act of June 11, 1940, ch. 301, 54 Stat. 261 (1940).. 6

Act of March 9, 1945, ch. 20, 59 Stat. 33 (1945)

(McCarran-Ferguson Act) (codified as amended

at 15 U.S.C. §1011 et seq. (1994)) ........ eens 8

a 8,9

Be as IIE -secsssaichscndiratninianasenedavdemieisbcecinedcul: passim

Vv

State Statutes and Legislation:

Ky. Rev. Stat. §287.030(4) (Baldwin 1994)............ passim

po Es Ry | Sane eee 1]

isa ad cidgsacnepcnctasrninasbin 12

Fla. Stat. Ann. §626.988 (West Supp. 1995).......... 17

Miscellaneous:

Or icc hdscbssistsbiiaintbannddsnsaie 2

Letter from John Skelton Williams, Comptroller

of the Currency, to Senator Robert L. Owen

(June 8, 1916), reprinted in 53 Cong. Rec.

EE CRUE cihnaiesaiickeidsatinornibiinenttassntabntonntvcess 6, 7

hs CN SII sciecccccastaciecisitninncsvntendsinsterresagtasnenens 11, 22

Bhs I scintinceiessnasdaininveqsdeiphosssucteasceckieanieaiis 1]

Supreme Court Misle 10.1 ......cccccsessecoccesesssrscccseeeeses 22

SO, CRA NP Bos

No. 95-74

IN THE

SUPREME COURT OF THE UNITED STATES

October Term, 1995

Don W. STEPHENS, Commissioner, Department

of Insurance, Commonwealth of Kentucky,

et al., Petitioners,

v.

THE OWENSBORO NATIONAL BANK, et al., Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Sixth Circuit

BRIEF OF RESPONDENTS,

THE OWENSBORO NATIONAL BANK,

THE FIRST NATIONAL BANK OF LOUISA,

CITIZENS NATIONAL BANK OF PAINTSVILLE,

AND KENTUCKY BANKERS ASSOCIATION,

IN RESPONSE TO THE PETITION

Respondents, The Owensboro National Bank, The First

National Bank of Louisa, Citizens National Bank of

Paintsville, and the Kentucky Bankers Association (collec-

tively referred to as the “National Banks”) submit this

brief in response to the petition for a writ of certiorari filed

by Petitioners.

2

STATEMENT OF THE CASE

This petition is one of three petitions for a writ of cer-

tiorari currently pending before the Court concerning the

identical issue — does §2(b) of the McCarran-Ferguson Act

(15 U.S.C. §1012(b) (1994)) authorize the states to prohibit

national banks located in small towns from exercising their

express statutory power under 12 U.S.C. §92 (1994) to act

as insurance agents?

The second petition seeks review of the decision of the

United States Court of Appeals for the Eleventh Circuit in

Barnett Bank of Marion County, N.A. v. Gallagher, 43 F.3d

631 (11th Cir. 1995), cert. petition filed No. 94-1837 (May

8, 1995).

The third petition seeks review of the decision of the

Louisiana Court of Appeals, First Circuit, in First Advan-

tage Ins., Inc. v. Green, 652 So.2d 562 (La.Ct.App., First

Cir. 1995), cert. denied, No. 95-C-0820 (La.Sup.Ct. May 5,

1995), cert. petition filed No. 94-2130 (June 27, 1995).

In this case, the Sixth Circuit concluded that §2(b) of

McCarran-Ferguson did not protect a Kentucky banking

statute from preemption. Both the Eleventh Circuit and

the Louisiana Court of Appeals decided that §2(b) of the _

McCarran-Ferguson Act preserved the state statutes in

question from preemption and prevents national banks in

Florida and Louisiana from exercising their powers under

12 U.S.C. §92.!

1Technically, the Louisiana Commissioner of Insurance sought

to revoke the insurance agent license of First Advantage Insur-

ance, Inc., a wholly-owned subsidiary of First National Bank of

Denham Springs. However, it is undisputed that a national

bank may exercise its powers through the vehicle of wholly-

owned subsidiaries. See 12 C.F.R. §5.34(c); Independent Ins.

Agents of America, Inc. v. Ludwig, 997 F.2d 958 (D.C. Cir. 1993).

3

While the National Banks believe that the result

reached by the Sixth Circuit is correct, the controversy

created by these conflicting decisions merits review by this

Court. Thus, for the reasons set forth below, the National

Banks urge this Court to grant the petitions in all three

__cases on the McCarran-Ferguson issue, consolidate the cases

for review, and finally resolve this important issue.

A. Historical Perspective.

1. CONGRESS’ LONG ESTABLISHED PLENARY POWER

TO CONTROL NATIONAL BANK POWERS.

Petitioners in this case (collectively the “Insurance In-

dustry”) would have this Court believe that the history of

the interrelationship of state and federal law relating to

national banks began in 1869 when this Court in Paul v.

Virginia, 75 U.S. (8 Wall.) 168 (1869), determined the busi-

ness of insurance was not at that time to be treated as

interstate commerce within the meaning of the Commerce

Clause of the United States Constitution.

Rather, that history began fifty years earlier at the

dawn of this country with the seminal decision of McCulloch

v. Maryland, 17 U.S. (4 Wheat.) 316 (1819). Chief Justice

Marshall declared in that case that Congress’ authority to

establish a national bank was a necessary and proper inci-

dent to its constitutional powers to establish a currency,

raise and support armies, and in general carry on the fis-

cal operations of a national government. Id. at 399-423.

2Petitioners are Don W. Stephens, the current Commissioner

of the Kentucky Department of Insurance, the Kentucky State

Association of Life Underwriters, the Independent Insurance

Agents of Kentucky, Inc., and the Kentucky Association of Pro-

fessional Insurance Agents. Commissioner Stephens has been

substituted for former Commissioner Elizabeth Wright who was

originally named, in her official capacity, as a Defendant in the

complaint filed by the National Banks. The District Court per-

mitted the insurance agent trade associations to intervene in

opposition to the National Banks.

4

This Court in McCulloch v. Maryland further declared

unconstitutional, under the Supremacy Clause of the United

States Constitution (Art. VI, Clause 2), a Maryland statute

that taxed the branches of the Bank of the United States

even though there was no federal statute expressly pre-

cluding such a state tax. Id. at 423-438.

When Congress chose to enact the National Bank Act

of 1864 (Act of June 3, 1864, 13 Stat. 99 (1864)) and estab-

lish the current national bank system, this Court in Farm-

ers’ and Mechanics’ Nat'l Bank v. Dearing, 91 U.S. 29 (1875),

described the basis for that law and the limits on state

regulation of national banks in the same constitutional

language:

The constitutionality of the act of 1864 is not ques-

tioned. It rests on the same principle as the act creat-

ing the second bank of the United States. The reason-

ing of Secretary Hamilton and of this court in

McCulloch v. Maryland (4 Wheat. 316) and in Osborne

v. The Bank of the United States (9 id. 708), therefore,

applies. The national banks organized under the act

are instruments designed to be used to aid the gov-

ernment in the administration of an important branch

of the public service.... Being such means, .. . the

States can exercise no control over them, nor in any

wise affect their operation, except in so far as Con-

gress may see proper to permit. ... Against the

national will the States have no power, by taxation or

otherwise, to retard, impede, burden, or in any man-

ner control....

Id. at 33-34.

In the Farmers’ and Mechanics’ Nat’l Bank decision,

the Court held that a provision of the National Bank Act

requiring forfeiture of only interest in an usurious loan

transaction preempted a New York law requiring forfei-

ture of both principal and interest.

In the following years, this Court has repeatedly de-

clared invalid state laws which conflicted with Congres-

sional regulation of national banks. See Franklin Nat'l

5

Bank v. New York, 347 U.S. 373 (1954) (national bank’s

powers under 12 U.S.C. §24 (Seventh) to “receive deposits”

and exercise “all such incidental powers as shall be neces-

sary to carry on the business of banking” preempted a

New York law prohibiting use of the words “saving” or

“savings” in a national bank’s advertisements); Easton v.

Iowa, 188 U.S. 220 (1903) (an Iowa statute making it a

crime for an officer of any bank in Iowa, including national

banks, to receive deposits at a time when the bank was

insolvent was preempted because the National Bank Act

only prohibited a national bank from receiving deposits

after the Comptroller took control of the bank); Davis v.

Elmira Savings Bank, 161 U.S. 275 (1896) (§5236 of the

Revised Statutes, requiring that the assets of an insolvent

national bank be distributed ratably among its creditors,

preempted a New York state law requiring that assets of

any insolvent bank in New York be first applied to repay

the depositors).

Indeed, the chronicle of federal preemption in the na-

tional bank context includes a chapter concerning Respon-

dent, The Owensboro National Bank (“ONB”). Almost 100

years ago, ONB requested this Court to reverse a decision

by Kentucky’s highest court holding that Kentucky had

the power to tax it. The basis for that appeal was that

Congress had specified how national banks could be taxed

and thereby preempted conflicting Kentucky law. This

Court, in an unanimous opinion, reversed the Kentucky

court’s decision and precluded Kentucky from taxing ONB

contrary to Congress’ plan. Owensboro Nat'l Bank v.

Owensboro, 173 U.S. 664 (1899).

Congress has occasionally acted to preserve state au-

thority over national banks. For example, §30 of National

Bank Act of 1864 expressly provided that the interest rate

national banks generally could charge was “at the rate

allowed by the laws of the state or territory where the

bank is located, and no more”. See Act of June 3, 1864, ch.

106, §30, 13 Stat. 99, 108 (1864).

6

Another example occurred in 1913 when Congress

amended §44 of the National Bank Act (then codified at

R.S. §5414) relating to the conversion of state banks to

national banks by adding a new proviso that such a con-

version “shall not be in contravention of the State law.”

See Act of December 23, 1913, ch. 6, §8, 38 Stat. 251, 258

(1913).

Yet another example occurred in 1940 when Congress

amended 12 U.S.C. §24 by adding a paragraph authorizing

national banks to make charitable contributions if the na-

tional bank “is located in a State the laws of which do not

expressly prohibit State banking institutions from contrib-

uting to such funds”. See Act of June 11, 1940, ch. 301, 54 |

Stat. 261 (1940).

But in each case, state authority over national banks

was preserved only by an express statutory reservation.

This is not the case with respect to 12 U.S.C. §92.

2. THE ACT OF SEPTEMBER 7, 1916 (12 U.S.C. §92).

With its paramount authority over national banks thus

long established, Congress in 1916 decided that national

banks in small communities should have the power to act

as insurance agents.

At the suggestion of the Comptroller of the Currency,

Congress enacted 12 U.S.C. §92 to strengthen national

banks in small towns by providing them with an addi-

tional source of revenue.? Then Comptroller J. Skelton

3See Act of September 7, 1916, Pub. L. No. 64-270, 39 Stat.

752, 753-754. This statute was codified in first edition of the

United States Code in 1926 at 12 U.S.C. §92, but was “omitted” |

from the 1952 and subsequent editions of the United States

Code based upon the codifier’s opinion that the punctuation of a

1918 statute caused the provision to be accidentally repealed.

However, because this Court recently held that the statute has

always been in effect, the statute has now been again included

in the United States Code at 12 U.S.C. §92 (1994). See United

States National Bank of Oregon v. Independent Insurance Agents

of America, Inc., 508 U.S. __, 113 S.Ct. 2173 (1993).

pe ee a eal ae ee

7

ae

Williams’ letter to Senator Robert L. Owen is the only

contemporaneous legislative history concerning §92 and a

copy is reproduced in Appendix A to this Brief.*

Section 92 expressly provides:

In addition to the powers now vested by law in na-

tional banking associations . . . any such association

located and doing business in any place the popula-

tion of which does not exceed five thousand inhabit-

ants, as shown by the last preceding decennial cen-

sus, may, under such rules and regulations as may be

prescribed by the Comptroller of Currency, act as the

agent for any fire, life or other insurance company

authorized by the authorities of the State in which

said bank is located to do business in said State, by

soliciting and selling insurance and collecting premi-

ums on policies issued by such company;....

Section 92 did not then, and does not now, contain any

language providing that a national bank’s exercise of its

insurance agent powers is generally conditioned upon state

law. Rather, the statute expressly provides that the na-

tional bank agency powers may be exercised “under such

rules and regulations as may be prescribed by the Comp-

troller of the Currency”. The only reference to state law is

the requirement that the “insurance company” (not the

insurance agent) be “authorized by the authorities_of the

State in which said bank is located to do business in said

State ....” Congress did not elect to otherwise condition

exercise of §92 power on compliance with state law.

When §92 was enacted, there was no outcry that the

legislation exceeded Congress’ powers. There was no com-

‘Comptroller Williams’ letter was published in the Congres-

sional Record and this is the source for the copy reproduced in

the National Banks’ Appendix A. See 53 Cong. Rec. $11001

(1916).

8

plaint that Congress was acting in a sphere that was the

exclusive province of the states. There was no suggestion

that a national bank’s authority to act as an insurance

agent should be contingent upon state law even though

Congress had previously expressly placed such conditions

on other national bank powers. In sum, §92 was recog-

nized for what it was — the exercise of Congress’ plenary

power to strueture the operations of national banks as it

saw fit.

3. §2(B) OF THE MCCARRAN-FERGUSON ACT OF 1945.

Thus, it is surprising that the federal legislation relied

upon by the Insurance Industry was not enacted for an-

other 29 years. In 1945, Congress enacted the McCarran-

Ferguson Act (15 U.S.C. §1011 et seq.) (1994) in response

to this Court’s decision in United States v. South-Eastern

Underwriters Ass’n, 322 U.S. 533 (1944).5 In South-East-

ern Underwriters, this Court held that the insurance in-

dustry was subject to regulation by Congress under the

Commerce Clause, and therefore insurance company ac-

tivities were subject to federal antitrust laws.

The McCarran-Ferguson Act “operates to assure that

the States are free to regulate insurance companies with-

out fear of Commerce Clause attack.” Group Life & Health

Ins. Co. v. Royal Drug Co., 440 U.S. 205, 218 n. 18 (1979).

“Congress was mainly concerned with the relationship be-

tween insurance ratemaking and the antitrust laws, and

with the power of the States to tax insurance companies.”

Securities Exchange Comm’n v. National Securities, Inc.,

393 U.S. 453, 459 (1968).

The “Declaration of Policy” provision of McCarran-

Ferguson stresses that,

Congress declares that the continued regulation and

taxation by the several states of the business of insur-

5Act of March 9, 1945, ch. 20, 59 Stat. 33 (1945).

9

ance is in the public interest, and that the silence on

the part of the Congress shall not be construed to im-

pose any barrier to the regulation or taxation of such

business by the several States.

15 U.S.C. §1011 (1994) (emphasis added).

Of course, in 1945, Congress could not have been pre-

serving a “continued regulation” by the several States of

the express powers of national banks since this Court had

long before ruled that the states did not possess the power

to override national banking powers. Nor had Congress

been silent on the issue of small town national bank insur-

ance agent powers since in 1916 Congress had expressly

granted that power by enacting §92. Indeed, the Insur-

ance Industry has not identified a single piece of legisla-

tive history demonstrating that Congress understood

McCarran-Ferguson to be creating any new type of limita-

tion on its previous plenary power over national banks.

Nevertheless, the Insurance Industry now relies upon

Section 2(b) of the McCarran-Ferguson Act (15 U.S.C.

§1012(b)) which provides, in relevant part:

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, . . .,

unless such Act specifically relates to the business of

insurance....

This statute establishes a rule of statutory construc-

tion which precludes a court from construing a federal law

to “supersede” a state law — but only if two separate re-

quirements (or “prongs”) are met:

1. The state law was “enacted . . . for the purpose of

regulating the business of insurance”; and

2. The federal law does not “specifically relat[e] to the

business of insurance”.

10

Federal law, and not state law, governs the meaning these

terms. Securities Exchange Comm’n v. Variable Annuity

Life Ins. Co., 359 U.S. 65, 69 (1959).

This Court has only addressed the meaning of this spe-

cific provision three times. In two cases, the Court has

addressed the first prong of §2(b). See Securities Exchange

Comm’n v. National Securities, Inc., 393 U.S. 453 (1968);

United States Dept. of Treasury v. Fabe,___ U.S. __, 113

S.Ct. 2202, 2208 (1993). In one case, the Court has ad-

dressed the second prong. See John Hancock Mutual Life

Ins. Co. v. Harris Trust And Savings Bank, ___ U.S. __,

114 S.Ct. 514 (1993).

4. KY. REV. STAT. §287.030(4).

The Insurance Industry argues that a Kentucky stat-

ute — Ky.Rev.Stat. §287.030(4) (Baldwin 1994) — prohib-

its any national bank in Kentucky which is owned by a

holding company from acting as an insurance agent for

any type of insurance except certain credit-related insur-

ance. They further argue that §2(b) of McCarran-Ferguson

insulates this statute from preemption by §92.

Ky.Rev.Stat. §287.030(4) is contained in Chapter 287

of the Kentucy Revised Statutes which is entitled “Banks

And Trust Companies”.® The statute currently states:

No person who after July 13, 1984, owns or acquires

more than one-half (1/2) of the capital stock of a bank

shall act as insurance agent or broker with respect to

any insurance except credit life insurance, credit health

insurance, insurance of the interest of a real property

mortgage in the mortgaged property, other than title

insurance.

6Kentucky’s Insurance Code is codified at Chapter 304 of the

Kentucky Revised Statutes.

11

This statutory prohibition did not exist prior to 1972.

Prior to 1972, Ky.Rev.Stat. §287.030(3) (where the statute

was codified at that time) only prohibited a person from

owning more than one-half of the capital stock of a bank.

In effect, Kentucky prohibited bank holding companies,

and the prohibition was enacted “as a means of preventing

the concentration of financial power in one person or com-

pany.” See Ky. OAG 70-643 at p.4 (reprinted in Pet. App. I

at 60a-63a).? This purpose is entirely consistent with the

language of the statute which would not, under any read-

ing, prohibit a bank from acting as an insurance agent if

no single person owns more than one-half of its capital

stock.

In 1972, Kentucky amended Ky.Rev.Stat. §287.030(3)

to authorize the formation of one-bank holding companies.

See 1972 Ky. Acts Ch. 174, §1. It was at that time that the

prohibition on non-credit insurance agent activities by a

person who owns or acquires more than one-half of the

capital stock of a bank was enacted. In 1981, the Ken-

tucky Attorney General stated that “the clear intent of the

legislature [was] to limit the involvement of majority bank

shareholders, including one-bank holding companies, in in-

surance related activities.” See Ky. OAG 81-173 at p.4.

In 1984, Kentucky amended its banking statutes to

authorize the formation of multi-bank holding companies.

At that time, the prohibition on insurance agent activity

was amended to its current form (which involved no sub-

7Prior to 1972, Ky.Rev.Stat. §287.030(3) stated:

“No person shall, directly or indirectly, hold or own more

than one half of the capital stock of a bank or combined

bank and trust company, exclusive of stock held as collat-

eral; but there is no limitation on the amount of capital

stock that may be held by the United States or by a corpo-

ration in which the United-States owns or holds the major-

ity of the stock.”

12

stantive change for purposes of this case) and moved from

subsection (3) to its current codification in subsection (4).

See 1984 Ky. Acts Ch. 130, §2.

B. Proceedings Below.

This dispute over the §92 began in late 1990 when the

National Banks each attempted to exercise their powers

under 12 U.S.C. §92.8 Each, by counsel, submitted to the

Kentucky Department of Insurance (the “Department”) a

request for applications to apply for licenses to act as “gen-

eral lines” and “life” insurance agents. Relying upon

Ky.Rev.Stat. §287.030(4), the Department refused to pro-

vide the National Banks with the requested applications.

The National Banks then filed this action on January

24, 1991, in the United States District Court for the East-

ern District of Kentucky, Frankfort Division, against the

Department and its Commissioner seeking a declaration of

rights and injunctive relief. During the proceedings, the

insurance trade associations intervened on behalf of the

Department and its Commissioner. The United States of

America intervened as a plaintiff in support of the Na-

tional Banks.

The National Banks’ Complaint alleged that

Ky.Rev.Stat. §287.030(4), contrary to the historical posi-

tion of the Department, does not prohibit banks from act-

ing as agents for the sale of non-credit related insurance.

8It is undisputed that Respondents, The Owensboro National

Bank, The First National Bank of Louisa and Citizens National

Bank of Paintsville are national banks located and doing busi-

ness in a town in Kentucky with a population which does not

exceed 5,000 inhabitants as shown by the 1990 Census. It is

also undisputed that each is a wholly-owned subsidiary of a

bank holding company. Respondent, Kentucky Bankers Associa-

tion (the “KBA”) is a trade association of banks in Kentucky, and

each of the three respondent national banks is a member of the

KBA.

13

The section only applies to a “person who . . . owns or

acquires more than one-half (1/2) of the capital stock of a

bank”, e.g., a bank holding company, not to the “bank”

itself. Alternatively and assuming the Department’s state

law interpretation was correct, the National Banks alleged

that §92 preempted Ky.Rev.Stat. §287.030(4).

On April 18, 1991, the National Banks filed a motion

for summary judgment. For purposes of the motion, the

National Banks assumed that the Department’s position

that Ky.Rev.Stat. §287.030(4) applies to bank subsidiaries

was correct.? Thus, the issue presented by that motion

was whether or not §92 preempted Ky.Rev.Stat. §287.030(4).

In response, the Insurance Industry conducted discov-

ery and then it filed a cross-motion for summary judgment

which relied exclusively on Ky.Rev.Stat. §287.030(4) as the

sole state law precluding licensing of the National Banks.

The Insurance Industry argued that, under traditional pre-

emption analysis, §92 should not be interpreted to pre-

empt Ky.Rev.Stat. §287.030(4). The Insurance Industry

also argued that §2(b) of the McCarran-Ferguson Act insu-

lated Ky.Rev. Stat. §287.030(4) from preemption. !°

On August 4, 1992, the District Court granted sum-

mary judgment in favor of the National Banks. Applying a

®The National Banks specifically advised the District Court

that “in the event this Court rejects the National Banks’ pre-

emption argument, the National Banks reserve the right to liti-

gate, by further proceedings in this court or otherwise, the pre-

cise scope of KRS 287.030(4).” See Plaintiffs’ Memorandum In

Support Of Their Motion For Summary Judgment at p.11, n.6.

The National Banks have continued to reserve this right and do

so here as well.

1°The Insurance Industry also raised other arguments before

the District Court. However, all of those argument were re-

jected, and the Insurance Industry has not asked this Court to

review those decisions.

14

standard preemption analysis, the District Court stated

that it “has no difficulty concluding that §92 preempts

Ky.Rev.Stat. §287.030(4)”, and the National Banks “may

not be prevented from applying for insurance licenses.”

Owensboro Nat’l Bank v. Moore, 803 F. Supp. 24, 33-35

(E.D. Ky. 1992) (Pet. App. B at 41a-45a).

The District Court then concluded that neither

§287.030(4) nor §92 involves regulation of the “business of

insurance” within the meaning of either the first or second

prong of §2(b) of McCarran-Ferguson. With respect to §92,

the District Court observed that the “function” of §92 is “to

grant additional powers to national banks” and concluded

that merely because the power “involves insurance does

not transform this section into a regulation of the business

of insurance.” Id., 803 F. Supp. at 36 (Pet. App. B at 46a).

With respect to Ky.Rev.Stat. §287.030(4), the District

Court “reache[d] the inescapable conclusion” that the stat-

ute “does not regulate the business of insurance” within

the meaning of §2(6) of McCarran-Ferguson. The Court

observed that the statute “regulates bank holding compa-

nies”, does not appear in the chapter of the Kentucky Re-

vised Statutes regulating insurance, and does not “relat{e]

... to the powers of insurance companies or agents”. Id.

The District Court then examined how the three fac-

tors identified by this Court in Union Labor Life Ins. Co. v.

Pireno, 458 U.S. 119 (1982), for determining what is the

“business of insurance” applied to the statute.!! The Dis-

The three factors identified in Pireno are:

“[F]irst, whether the practice has the effect of transferring

or spreading a policyholder’s risk; second, whether the prac-

tice is an integral part of the policy relationship between

the insurer and the insured; and third, whether the prac-

tice is limited to entities within the insurance industry.”

Pireno, 458 U.S. at 129.

15

trict Court concluded that none of the three factors were

applicable. Finally, the District Court cited the Third

Circuit’s decision in United Services Auto Ass’n v. Muir,

792 F.2d 356, 364 (8rd Cir. 1986), cert. denied, 479 U.S.

1031 (1987), in which that court held that a Pennsylvania

statute prohibiting the affiliation of insurance companies

and lending institutions was designed to prevent competi-

tion and had “no part in the business of insurance under

McCarran-Ferguson.” Id.

The Insurance Industry appealed to the United States

Court of Appeals for the Sixth Circuit. On December 29,

1994, the Sixth Circuit affirmed the District Court's judg-

ment in a 2-1 decision. Owensboro Nat’! Bank v. Stephens

44 F.3d 388 (6th Cir. 1994) (Pet. App. A at la-25a). All

three judges agreed that §92 preempts §287.030(4) under

traditional preemption analysis. Jd. at 390-391, 393. How-

ever, the judges disagreed as to the proper application of

§2(b) of McCarran-Ferguson in light of this Court’s deci-

sion in United States Department of Treasury v. Fabe,

__._~;U.S. ___, 113 S.Ct. 2202 (1993), which was decided

after the District Court’s decision.

In analyzing the first prong of McCarran-Ferguson §2(b),

the majority in Owensboroquoted the general test estab-

lished by Fabe that “[t]he broad category of laws enacted

‘for the purpose of regulating the business of insurance’

consists of laws that possess the ‘end, intention, or aim’ of

adjusting, managing, or controlling the business of insur-

ance”. Owensborg 44 F.3d at 392 (Pet. App. A at 9a). The

majority then stated that “[i]f .. . the issue arises of whether

a particular activity is part of the ‘business of insurance,’

the Pirenocriteria apply.” Id.

As a result, the panel’s majority reached the quite un-

remarkable conclusion that “to have been ‘enacted. . . for

the purpose of regulating the business of insurance,’

[Kentucky's] section 287 must possess the aim of regulat-

16

ing activities that meet the Pireno criteria” for what is “the

business of insurance”. Jd. The panel majority explained

that it did not believe Ky.Rev.Stat. §287.030(4) met this

test:

Excluding a person from participation in an activity,

however, is different from regulating the manner in

which that activity is conducted. The former is regu-

lation of the person; the latter is the regulation of the

activity. Section 287 ... in no way governs the man-

ner in which the activities constituting the ‘business

of insurance’ are conducted. Section 287 thus is dif-

ferent in kind from the Ohio statute that was found to

regulate the business of insurance in Fabe, since the

Ohio statute set standards for ‘the actual performance

of an insurance contract.’ ___ ‘U.S. at___, 113 S.Ct. at

2210. . . . [W]e conclude that section 287 was enacted

for the purpose of regulating certain conduct by bank

holding companies, not the business of insurance... .

Owensboro, 44 F.3d at 392 (Pet. App. A at Ya).

In effect, the panel’s majority concluded that in en-

tirely prohibiting national banks from becoming agents of

insurance companies, Ky.Rev.Stat. §287.030(4) does not

“regulate” the “relationship between the ittswyance ‘com-

pany and the policyholder” and its “indirect effécts”, if any,

on policyholders are “too tenuous” under Fabe to fall within

the first prong of §2(b). See Fabe, 113 S.Ct. at 2212.

Since this disposed of the Insurance Industry’s

McCarran-Ferguson argument, the majority did not reach

the issue of whether or not §92 “specifically relates to the

business of insurance” within the meaning of the second

prong of McCarran-Ferguson.

Judge Batchelder dissented on the issue of how to ap-

ply §2(b) of McCarran-Ferguson. She concluded that both

prongs of McCarran-Ferguson were satisfied, thereby sav-

ing Ky.Rev.Stat. §287.030(4) from preemption.

17

With respect to the first prong of §2(b), Judge Batchelder

believed that Kentucky “enacted [its] statute out of a di-

rect concern for future policyholders.” Id. at 397. Relying

heavily on the view of the Florida District Court in Barnett

Bank of the purpose of Florida’s statute,!2 she believed

that Ky.Rev.Stat. §287.030(4) was intended to keep banks

from being licensed because “consumer[s] could feel co-

erced into purchasing insurance from the bank”. She also

believed that the statute was designed to “ensur[e] that

insurance companies remain solvent.” Jd.

Thus, Judge Batchelder concluded that the statute met

the requirement in Fabe that it be enacted to protect or

regulate the relationship between the insurer and the poli-

cyholder. Judge Batchelder further believed that

Kentucky’s prohibiting a class of persons from acting as

non-credit insurance agents was a sufficient “regulation”

of the “business of insurance” as to fall within the first

prong of McCarran §2(b).

Judge Batchelder then turned to the second prong of

§2(b) and concluded that 12 U.S.C. §92 does not “specifi-

cally relate” to the business of insurance. Judge Batchelder

_ did not consider this Court’s recent decision in John

Hancock Mutual Life Ins. Co. v. Harris Trust And Savings

Bank, __ U.S. __, 114 S.Ct. 514, 525 (1993), which con-

cluded that “ERISA, both in general and in the guaranteed

benefit policy provisign im particular, obviously and spe-

7

'

Ly

12Florida’s statute, which is contained in Florida’s Insurance

Code, prohibits all insurance agents from engaging in insurance

agency activities “as a employee, officer, director, agent, or asso-

ciate of a financial institution agency.” A bank is a “financial

institution” unless the bank is not a subsidiary or affiliate of a

bank holding company and is located in a city with a population

of less than 5,000. See Fla.Stat.Ann. §626.988 (West Supp. 1995).

18

cifically relates to the business of insurance.” Rather, she

believed that the decision in Fabe established a “clear state-

ment rule” under which a federal statute “must ‘clearly

state’ that it regulates the business of insurance or other-

wise intends to preempt a contrary state law.” Owensborg

44 F.3d at 398 (Pet. App. A at 22a). Judge Batchelder

believed that §92 did not meet this test because the “con-

text of §92 has always been within the regulation of bank-

ing rather than insurance.” Id.

After the Sixth Circuit denied the Insurance Industry’s

petitions for rehearing and rehearing en banc, the Insur-

ance Industry filed their petition for writ of certiorari.

THE WRIT SHOULD NOT BE HELD IN ABEYANCE.

IT SHOULD BE GRANTED BUT ONLY ON THE

McCARRAN-FERGUSON ACT ISSUE.

The Insurance Industry seeks to argue two principal

issues before this Court. One issue is a standard federal

preemption question. The second issue involves the proper

application of the first and second prongs of §2(b) of the

McCarran-Ferguson Act.

However, the Insurance Industry does not wish this

case to be the vehicle for deciding those issues. Instead,

they urge that “the Court hold this petition pending re-

view of the judgment entered by the United States Court

of Appeals for the Eleventh Circuit in Barnett Bank of

Marion County, N.A., 43 F.3d 631 (11th Cir. 1995), cert.

petition filed No. 94-487 (May 8, 1995), and then grant

the petition, vacate the Sixth Circuit’s decision, and re-

mand for reconsideration in light of this Court’s decision in

Barnett.” (Petition at 2).

The Insurance Industry is represented by the same law

firm that represents the insurance agent trade associa-

19

tions in the Barnett Bank case.'° Therefore, it is no sur-

prise that the Insurance Industry would be willing to have

the National Banks’ rights in this case turn on a decision

in Barnett Bank.

The National Banks do not believe that the Insurance

Industry should be permitted to have their counsel litigate

their dispute with the National Banks using the vehicle of

another case in which the National Banks have no voice.

If the National Banks’ rights are to be affected by a deci-

sion from this Court argued by their opponents’ counsel,

then fundamental fairness requires that the National Banks

be given the equivalent opportunity to participate as par-

ties before this Court.

Since the National Banks agree that the McCarran-

Ferguson issue is one which deserves review by this Court,

the National Banks submit that the only proper course is

to grant the petition in this case and consolidate the case

with Barnett Bank and First Advantage.

In granting the petition, however, the Court should

limit review to the McCarran-Ferguson issue and should

not review the decision that §92 preempts Ky.Rev.Stat.

§287.030(4) under traditional preemption analysis.

I. THE SIXTH CIRCUIT CORRECTLY APPLIED TRA-

DITIONAL FEDERAL PREEMPTION ANALYSIS

ABOUT WHICH THERE IS NO CONFLICT.

u below had any trouble “conclud[ing]

that, under conventional preemption analysis, §92 preempts

'8Ann M. Kappler of Jenner & Block, Washington, D.C., is

counsel of record for all of the Petitioners in this case as well as

for the R. »pondents, Florida Association of Life Underwriters,

Professional Insurance Agents of Florida, Inc. and Florida Asso-

ciation of Insurance Agents, in Barnett Bank. She is also coun-

sel of record for the Louisiana insurence trade associations in

First Advantage.

20

section 287.” Owensboro, 44 F.3d at 391 (Pet. App. A at

7a). Even dissenting Court of Appeals Judge Batchelder

agreed with this conclusion. Jd. at 393 (Pet. App. A at

lla).

The conflict that the Sixth Circuit resolved in favor of

federal law was succinctly summarized in the majority opin-

ion — “while §92 provides that national banks such as

plaintiff ‘may’ act as insurance agents, section 287 pro-

vides that they ‘may not.’ ” See Owensboro, 44 F.3d at

390-391 (Pet. App. A at 5a). Accord Hillsborough County,

Florida v. Automated Medical Labs., Inc., 471 U.S. 707,

713 (1985) (preemption occurs “when compliance with both

federal and state regulations is a physical impossibility”).

The Insurance Industry does not argue that this con-

clusion was in conflict with the holding of another federal

Court of Appeals or a state court of last resort. Nor did

the Sixth Circuit’s reasoned analysis of the Insurance

Industry’s arguments conflict with the applicable decisions

of this Court. Rather, the Sixth Circuit correctly cited and

applied the decisions in Franklin National Bank v. New

York, 347 U.S. 373 (1954), and Fidelity Federal Savings

and Loan Assn. v. de la Cuesta, 458 U.S. 141 (1982), where

this Court similarly struck down state attempts to limit

optional powers of federally chartered financial institutions.

The Insurance Industry’s entire argument as to why

this conclusion should be revisited by this Court is set

forth in a single footnote in which the Insurance Industry

argues that “[bjecause the two provisions may be harmo-

nized, however, the Sixth Circuit’s conclusion is errone-

ous.” (Petition at 14, n.10). However, both the lower courts

expressly addressed this argument and easily rejected it.

There is no reason to revisit this conclusion.

21

Il. THE McCARRAN-FERGUSON ACT ISSUE IS AN

IMPORTANT QUESTION DESERVING REVIEW

BY THIS COURT.

The National Banks agree that there is a square con-

flict among the circuits and a state court of last resort as

to the proper application of the §2(b) of the McCarran-

Ferguson Act to national bank powers generally and §92

in particular. There is also much disagreement among

those courts as to how to apply this Court’s recent deci-

sions in Fabe and John Hancock to this dispute.

These conflicts and disagreements have been exhaus-

tively presented to this Court in the numerous writ peti-

tions, responses and amici briefs previously filed in Barnett

Bank and First Advantage."® In all of the filings, the

parties and amici have agreed that the issues are of great

import. No party or amicus has suggested to this Court

that review should not be had of these disputes.

Thus, the National Banks will not unduly burden this

Court with a repetitive analysis of why review should be

had on the important McCarran-Ferguson Act issue raised

by this and the other two cases. Quite simply, there are

Petition of Barnett Bank of Marion County, N.A, No. 94-

2130 (May 8, 1995); Response of Commissioner of Insurance, et

al., No. 94-2130 (July 28, 1995); Brief of the United States and

Comptroller of the Currency As Amici Supporting Petitioner, No.

94-2130 (July 7, 1995); Brief of the Amici Curiae Consumer Bank-

ers Association, et al., No. 94-2130 (July 7, 1995); Brief of the

New York Clearing House Association As Amicus Curiae No. 94-

2130 @Wuly 7, 1995); Brief of the Amici Curiae American Bank-

ers Association, et al, No. 94-2130 (July 7, 1995).

‘Petition of First Advantage Insurance, Inc. et al, No. 94-

2130 (June 27, 1995); Response of Commissioner of Insurance, et

al., No. 94-2130 (uly 28, 1995); Brief of the Amici Curiae Ameri-

can Bankers Association, et al., No. 94-2130 (July 17, 1995).

22

“special and important reasons” for this Court to grant

review. See Sup.Ct.Rule 10.1.

III. THIS CASE IS AN APPROPRIATE VEHICLE

FOR PRESENTING THE- McCARRAN-

FERGUSON ACT DISPUTE.

In other situations, this Court has consolidated for re-

view parallel petitions raising the same issue. See Pauley

v. Bethenergy Mines, 501 U.S. 680 (1991) (consolidated re-

view of conflicting decisions of the Third and Fourth Cir-

cuits on validity of Department of Labor regulations

implementing the Black Lung Benefits Reform Act of 1977).

Such consolidation is particularly appropriate here when

the Petitioners in this case are represented by the same

counsel who is counsel of record in Barnett Bank.

The Insurance Industry offers two reasons why such

consolidation should not occur. (Petition at 17-19). Both

reasons should be rejected.

First, the Insurance Industry argues that a proper

record does not exist in this case regarding Kentucky’s

“purpose in enacting its licensing prohibition.” The Na-

tional Banks disagree since the record includes the 1970

Kentucky Attorney General’s opinion which states that the

purpose of Ky.Rev.Stat. §287.030(4) is to “prevent the con-

centration of financial power in one person or company.”

See OAG 70-643 (Pet. App. I at 63a).!© Furthermore, the

Insurance Industry conducted discovery before the District

16The Insurance Industry also refers to a 1991 Resolution of

one chamber of the Kentucky General Assembly which is dated

7 days after the National Banks filed their lawsuit. (Petition at

10, n.7). This resolution does not have the force of law nor even

the weight of an attorney general’s opinion. It is merely apost

hoc opinion which is not entitled to any weight. Russello v.

United States, 464 U.S. 16, 26 (1983) (“[I]}t is well settled that

the views of a subsequent Congress form a hazardous basis for

inferring the intent of an earlier one.”).

23

Court and filed their own motion for summary judgment.

It is much too late for the Insurance Industry to argue that

there is an inadequate record. In addition, the Florida and

Kentucky statutes and their respective legislative histo-

ries may, in fact, aid this Court by providing two concrete

statutory schemes against which the Court can apply an

analysis of the first prong of McCarran-Ferguson §2(b).

Second, the Insurance Industry argues that the exist-

ence of a controversy over whether Ky.Rev.Stat. §287.030(4)

applies to a national bank should preclude review. Nei-

ther the District Court nor the Court of Appeals found this

to be an obstacle to review (particularly when the point

was not raised by the Insurance Industry before the Court

of Appeals). As the District Court succinctly explained, “it

is sufficient for the purpose of this inquiry [federal pre-

emption] that the Commissioner has applied it in such a

manner” as to restrict the National Banks’ activities.

Owensboro, 803 F. Supp. at 34, n.7 (Pet. App. B at 41a).

Barnett Bank of Marion County suggests two additional

reasons for reviewing the Barnett Bank decision in lieu of

this case. Petition of Barnett Bank of Marion County, N.A.,

No. 94-2130 (May 8, 1995) at 17. First, it argues that this

case does not present a “concrete setting”. That is not

correct. The National Banks initially were expressly pro-

hibited from obtaining insurance agent licenses and this

has concretely restricted their activities. Moreover, in com-

pliance with the District Court’s judgment, a non-credit

insurance agent license has been issued to Owensboro Na-

tional Bank which the Department would presumably at-

tempt to revoke if the Sixth Circuit’s decision were reversed.

Second, the Florida bank relies upon the failure of the

Sixth Circuit panel’s majority to address the “specifically

relates” prong of McCarran-Ferguson §2(b). The National

Banks believe that this legal issue has been sufficiently

framed by the opinions of District Judge Hood and Circuit

24

Judge Batchelder to justify reviewing this case along with

the Barnett Bank decision.

Finally, this is the only case of the three in which the

United States has participated as a party on behalf of the

Comptroller of the Currency. Given the importance of the

case for national bank powers nationwide, it is appropriate

that this Court’s review include the only case in which the

United States and the Comptroller are parties.

CONCLUSION

For the foregoing reasons, the National Banks respect-

fully urge this Court to grant the petition for a writ of

certiorari limited, however, to the proper interpretation

and application of §2(b) of the McCarran-Ferguson Act.

Respectfully submitted,

M. THURMAN SENN

Counsel of Record

Morcan & Porrtincer, P.S.C.

601 West Main Street

Louisville, KY 40202

(502) 589-2780

Counsel for Respondents, The

Owensboro National Bank,

Citizens National Bank of

Paintsville, The First National

Bank of Louisa, and Kentucky

Bankers Association

Of Counsel:

M. Brooks SENN

Vice President & General Counsel

Kentucky Bankers Association

Waterfront Plaza, Suite 1000

325 West Main Street

Louisville, KY 40202

(502) 582-2453

September 13, 1995

_ 7

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APPENDIX

la

APPENDIX A

TREASURY DEPARTMENT

COMPTROLLER OF THE CURRENCY

Washington, June 8, 1916.

MY DEAR SENATOR: The original national-bank act

of February 25, 1863, as reenacted by the act of June 3,

1864, authorizing the formation of national banks through-

out the country, provided that no national bank should be

authorized with a capital of less than $50,000 in any place;

that in a place with a population exceeding 6,000 the capi-

tal of the bank should not be less than $100,000, and

further provided that no national bank with a capital of

less than $200,000 should be organized in any place hav-

ing a population of over 50,000.

Later on it became manifest that there were many coun-

try towns and villages which needed banking facilities but

which did not have sufficient business to justify the orga-

nization of national banks with a capital of as much as

$50,000. To extend the benefits of banking facilities to

these small places the national-bank act was amended by

the act of March 14, 1900, so as to authorize the organiza-

tion in towns and villages with a population not exceeding

3,000 of banks with a minimum capital of $25,000.

Since this amendment to the bank act went into effect

there have been organized throughout the country 3,084

national banks having a capital of $25,000. Four hundred

and thirty-eight of these $25,000 banks have either failed

or gone into liquidation, some have increased their capital,

and the number of such banks with a capital of $25,000

now in operation is 2,079, or 27 per cent of the total num-

ber of national banks.

The average deposits (individual and bank) at this time

of all $25,000 banks is $178,138, or 7.13 times their capital

and 4.6 times their capital, surplus, and profits. A country

bank with $25,000 capital and with the average deposits is

able, with good management, to lend its money at rates

authorized by law and at the same time to return a rea-

2a

sonable dividend to its shareholders. But there are many

banks located in country communities where the small de-

posits which the banks receive may make it somewhat

difficult for the banks to charge on their loans only the

rates of interest permitted by law and at the same time

yield a satisfactory return to shareholders, and in many

such cases banks have been tempted to exact excessive

and in some cases grossly usurious rates on accommoda-

tions which they extend to local borrowers. It is unfortu-

nately true that ir many other cases banks have been

demanding usurious rates of interest even though they

had more than the average deposits and although adher-

ence to the legal rates would still yield them liberal divi-

dends on their shares.

For some time I have been giving careful consideration

to the question as to how the powers of these small na-

tional banks might be enlarged so as to provide them with

additional sources of revenue and place them in a position

where they could better compete with local State banks

and trust companies which are sometimes authorized un-

der the law to do a class of business not strictly that of

commercial banking.

Under section 5736, United States Revised Statutes,

the business of national banks at this time is limited to

the exercise of “such incidental powers as shall be neces-

sary to carry on the business of banking by (a) discounting

and negotiating promissory notes, drafts, bills of exchange

or either evidences of debt: (b) receiving deposits; (c) buy-

ing and selling exchange, coins, and bullion; (d) loaning

money on personal security; (e) obtaining, issuing, and cir-

culating notes according to the provisions of this title.”

Under the Federal reserve act the banks are further

authorized under specified restrictions to make certain loans

on real estate.

National banks are not given either expressly nor by

necessary implication the power to act as agents for insur-

ance companies or as brokers or agents for others in pro-

curing or making real estate loans.

3a

The courts have uniformly held that such corporations

can exercise only those powers which are expressly granted

or which are necessarily incidental to powers that are

granted.

As stated by Mr. Justice Harlan, in delivering the opin-

ion of the United States Supreme Court in the case of

Logan County National Bank v. Townsend (139 U.S., 67):

“It is undoubtedly true, as contended by the defendant,

that the national banking act is an enabling act for all

associations organized under it, and that a national bank

can not rightfully exercise any powers except those ex-

pressly granted by that act, or such incidental powers as

are necessary to carry on the business of banking for which

it was established.”

Again in the case of National Bank v. Matthews (98

U.S., 625), Mr. Justice Swan, in delivering the opinion of

the court, said:

“Section 5136 does not in terms prohibit a loan on real

estate, but the implication to that effect is clear. What is

so implied is as effectual as if it were expressed.”

It is certainly clear that the Comptroller of the Cur-

rency has no right to authorize or permit a national bank

to exercise powers not conferred upon it by law.

My investigations lead me respectfully to recommend

to Congress an amendment to the national-bank act by

which national banks located in villages and towns having

a population of not exceeding 3,000 may be permitted to

act as agents for insurance companies in the placing of

policies of insurance — fire, life, etc. — and that they may

also be authorized to act as agent for the negotiation of

loans on farms or other real estate in their respective sec-

tions of the country, where they may be in a position to

have some direct knowledge as to the value of the property

upon which such loans are to be secured.

It seems desirable from the standpoint of public policy

and banking efficiency that this authority should be lim-

ited to banks in small communities. This additional in-

come will strengthen them and increase their ability to

4a

make a fair return to their shareholders, while the new

business is not likely to assume such proportions as to

distract the officers of the bank from the principal busi-

ness of banking. Furthermore in many small places the

amount of insurance policies written or mortgages to be

placed on commission is not sufficient to take up the entire

time of an insurance broker, and the bank is not therefore

likely to trespass upon outside business naturally belong-

ing to others.

I think it would be unwise and therefore undesirable to

confer this privilege generally upon banks in large cities

where this legitimate business of banking affords ample

scope for the energies of trained and expert bankers. I

think it would be unfortunate if any movement should be

made in the direction of placing the banks of the country

in the category of department stores. The business is one

requiring training, skill, and application, and I think that

the profession of banking would suffer if there should be a

departure from the principles which should govern and

have heretofore governed.

[ enclose with this a draft of a proposed amendment to

the national banking act designed to empower national

banks located in towns of not over 3,000 population, under

such regulations and restrictions as may from time to time

be approved and promulgated by the Comptroller of the

Currency, to act as agents for the placing of insurance

policies and also to act as agent in making or procuring

loans on real estate.

I respectfully recommend and urge the adoption of such

an amendment for the reasons I have given.

I am to-day writing a letter similar to this to Congress-

man Glass, chairman of the Banking and Currency Com-

mittee of the House of Representatives.

Respectfully,

Jno. Skelton Williams,

Comptroller

Hon. Robert L. Owen,

United States Senate.

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