Greene v. United States ( 2006 )

United States Court of Appeals for the Federal Circuit
05-5032
JOHN A. GREENE,
Receiver for the Great Global Assurance Company,
Plaintiff-Appellee,
v.
UNITED STATES,
Defendant-Appellant.
Douglas J. Schmidt, Blackwell Sanders Peper Martin LLP, of Kansas City,
Missouri, argued for plaintiff-appellee. With him on the brief were Ernest M. Fleischer
and Michael D. Fielding.
Robert W. Metzler, Attorney, Tax Division, Appellate Section, United States
Department of Justice, of Washington, DC, argued for defendant-appellant. With him
on the brief were Eileen J. O’Connor, Assistant Attorney General and David I. Pincus,
Attorney.
Stephen S. Kaye, Bryan Cave LLP, of Washington, DC, for amicus curiae
National Association of Insurance Commissioners.
Frank S. Swain, Baker & Daniels LLP, of Washington, DC, for amici curiae
National Organization of Life and Health Insurance Guaranty Associations and National
Conference of Insurance Guaranty Funds.
Appealed from: United States Court of Federal Claims
Judge Marian Blank Horn
United States Court of Appeals for the Federal Circuit
05-5032
JOHN A. GREENE,
Receiver for the Great Global Assurance Company,
Plaintiff-Appellee,
v.
UNITED STATES,
Defendant-Appellant.
________________________
DECIDED: March 8, 2006
________________________
Before MICHEL, Chief Judge, BRYSON and GAJARSA, Circuit Judges.
GAJARSA, Circuit Judge.
This is the second appeal in an action by John Greene (“Greene”), receiver in
liquidation for Great Global Assurance Company (“Great Global”), to recover $699,849
in tax and interest paid by Great Global in 1990 for the tax year 1983. On March 27,
1996, Greene filed for a refund in the United States Court of Federal Claims (“CFC”),
arguing that the tax was improperly assessed, and in the alternative that Great Global’s
policyholder and guaranty fund claimants were entitled to priority of distribution over the
Internal Revenue Service (“IRS”). Greene intended to distribute the refund to these
entities on behalf of the insolvent insurer.
The CFC dismissed Greene’s complaint as not having been timely filed. See
Greene v. United States, 42 Fed. Cl. 18 (1998) (“Greene I”). Greene appealed, and we
reversed, holding that the lower court had misconstrued the statute of limitations. See
Greene v. United States, 191 F.3d 1341 (Fed. Cir. 1999) (“Greene II”). On remand, the
CFC entered summary judgment on October 13, 2004, in favor of Greene. The
Government filed a timely notice of appeal. This court has jurisdiction pursuant to 28
U.S.C. § 1295(a)(3). For the reasons discussed below, we reverse the judgment of the
CFC.
I. BACKGROUND
A. Facts
The Life Insurance Company Tax Act of 1959 (“Tax Act”) introduced a three-
phase taxation scheme for life insurance companies. See Pub. L. No. 86-169, 73 Stat.
112 (codified as amended at 26 U.S.C. § 801-20). Of relevance here is Great Global’s
Phase II and Phase III income. Phase II income represented one-half of an insurer’s
underwriting gains for that year, and it was tax exempt if it was deposited in a
policyholder’s surplus account (“PSA”). The policy behind the Tax Act was to
incentivize insurers to create PSA cash reserves that would augment their capacity to
satisfy future claims. When funds in the PSA were withdrawn, reallocated, or no longer
used to further compliance with the insurer’s obligations to policyholders, the PSA funds
were then taxed as so-called Phase III income. See Greene v. United States, 62 Fed.
Cl. 418, 420 (Ct. Cl. 2004) (“Greene III”).
To qualify as a life insurance company for tax purposes a company must meet
the requirements set forth in 26 U.S.C. § 801(a) (1982). One condition that would
trigger tax liability on an insurer’s tax-sheltered PSA income was its having ceased to
operate as a life insurance company for any two consecutive years. See 26 U.S.C.
05-5032 2
§ 815(d)(2)(A)(ii) (1982) (providing that if “for any two successive taxable years the
taxpayer is not a life insurance company, then the amount taken into account under
section 802(b)(3) for the last preceding taxable year for which it was a life insurance
company shall be increased . . . by the amount remaining in its policyholders surplus
account at the close of such last preceding taxable year”).
In 1983, Great Global filed a federal Life Insurance Company Income Tax
Return, on which it claimed zero tax liability. Greene III, 62 Fed. Cl. at 418. However,
in 1984 and 1985, it failed to qualify as an insurance company, triggering a retroactive
tax liability on $820,961 (its PSA funds) for the 1983 tax year. Id. at 420-21. On
February 7, 1986 the Superior Court of the State of Arizona declared Great Global to be
insolvent, placed it in receivership, and on June 8, 1988, ordered that it be liquidated.
Id. The receivership is still in existence today. On July 9, 1990, the receiver filed an
amended return on behalf of Great Global and paid $699,849 in back taxes for 1983,
consisting of $357,392 in revised tax liability and $342,457 in interest. On September
24, 1990, the IRS assessed the additional tax and interest on Great Global pursuant to
26 U.S.C. § 6501(c)(6) (1982). See Greene III, 62 Fed. Cl. at 421 (permitting
assessment “within three years after the return was filed (whether or not such return
was filed on or after the date prescribed) for the taxable year for which the taxpayer
ceases to be an insurance company, the second taxable year for which the taxpayer is
not a life insurance company, or the taxable year in which the distribution is actually
made as the case may be”) (quoting 26 U.S.C. § 6501(c)(6)).
On July 8, 1993, Greene filed for a second amended tax return and requested a
refund of $699,849, stating two alternative bases for recovery. First, Greene argued
05-5032 3
that notwithstanding the plain language of the statute, the IRS could not properly assess
a Phase III tax against an insurer in receivership, where shareholders receive nothing,
because the purpose of the tax was “to give assurance that underwriting gains made
available to shareholders will be subject to the full payment of tax.” Second, Greene
argued that the tax was incorrectly collected over the competing claims of policyholders,
or more precisely, the claims of the Arizona Guaranty Corporation to recover what it had
paid to policyholders on Great Global’s behalf. The IRS denied Greene’s refund claim,
which led Greene to file a complaint in the CFC. See Greene I, 42 Fed. Cl. 18. As
explained above, the CFC dismissed Greene’s claim for untimeliness; Greene
appealed, and we reversed that decision and remanded to the CFC.
B. CFC Decision on Remand
In remand proceedings before the CFC in Greene III, Greene and the
government cross-filed for summary judgment. See 62 Fed. Cl. at 423. Greene
advanced two principal arguments. First, he argued that the tax was not properly due
and payable, because the sole purpose of the tax was to assure that underwriting gains
made available to shareholders would be subject to the full payment of tax, and in light
of Great Global’s insolvency, shareholders had received nothing. Refusing to delve into
legislative intent, the CFC rejected Greene’s policy argument, noting that the statutory
language was clear on its face—namely, that 26 U.S.C. § 815(d)(2)(A)(ii) (1982)
“require[d] that an insurance company’s failure to qualify as a life insurance company for
two years renders its entire [PSA] balance taxable as income for the last year in which
the company qualified as a life insurance company.”
05-5032 4
Greene’s second argument was based on the McCarran-Ferguson Act § 2(b),
15 U.S.C. § 1012(b) (1982). Greene recognized that the federal superpriority statute
provided that “[a] claim of the United States Government shall be paid first when a
person indebted to the Government is insolvent and . . . an act of bankruptcy is
committed.” 31 U.S.C. § 3713(a)(1)(A)(iii). However, he argued that the section 2 of
the McCarran-Ferguson Act limited the superpriority statute because it stated that “[n]o
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[.]” Greene pointed to the 1997 revision of Arizona’s insurance liquidation
statutes, which he argued were regulatory in nature, see Greene III, 62 Fed. Cl. at 423,
and which made clear that policyholders’ claims and claims by guaranty funds were
both senior in priority to IRS claims. See Ariz. Rev. Stat. Ann. § 20-629(A)(1)-(10)
(1997) (providing in relevant part for the following claim distribution order from the
assets of a delinquent insurer: costs related to administration of the delinquency
proceedings; guaranty fund claims; policyholders’ insurance claims; federal government
claims; employee compensation claims; state and local government claims; claims of
other general creditors; and three additional classes of claims).
Greene argued for the applicability of the 1997 version of the Arizona statute
over the revisions in effect at any of the following relevant times: 1983, the taxable year;
December 31, 1985, the end of the second year that Great Global failed to qualify as a
life insurance company under 26 U.S.C. § 815(d)(2)(A)(ii); February 7, 1986, when the
Arizona Supreme Court declared Great Global insolvent; June 8, 1988, when the court
05-5032 5
entered a liquidation order; July 9, 1990, when Great Global’s receiver filed an amended
1983 tax return and paid the tax; July 8, 1993, when Greene filed a second amended
tax return; and March 27, 1996, when Greene filed for a refund in the CFC. Greene’s
preference for the 1997 revision was understandable as unlike earlier revisions, it made
crystal clear the priority of policyholder and guaranty fund claims over those of the
federal government. However, Greene argued that even under the 1977 revision, which
was in effect in 1990 when the tax was assessed and collected, policyholders held
“preferred claims” that were entitled to priority over what he alleged to be the mere
“general creditor” claims of the federal government. See Ariz. Rev. Stat. Ann. §§ 20-
611(A), -629(E) (1977). He urged that the 1977 revision was protected from preemption
because of the McCarran-Ferguson Act.
The CFC did not decide which statutory revision, 1997 or 1977, applied.
Sidestepping the issue, it appeared to assume that policyholders would have priority
under either statute. The court then focused on whether the Arizona Guaranty fund and
the Arizona priority statute had the purpose of regulating the business of insurance and
of protecting policyholders. Following the First Circuit’s opinion in Ruthardt v. United
States, the CFC held that the Arizona state priority statute was exempt from preemption
under the McCarran-Ferguson Act.1 303 F.3d 375 (1st Cir. 2002). It therefore held in
favor of Greene, whom it deemed to be entitled to a refund of taxes paid to the
1
The CFC also cited Ariz. Rev. Stat. Ann. § 20-672, which characterizes
guaranty funds as essentially being subrogated to the rights of policyholder claimants.
In supplemental briefs, the parties make clear that this was an erroneous citation, which
should have been to an analogous provision—namely, § 20-682(A).
05-5032 6
government, reasoning that the money should have gone to the Guaranty Fund to
reimburse it for payments made to policyholders of the insolvent insurer.
C. Issues
This case presents us with four issues: first, whether the federal tax was due and
payable; second, which version of the Arizona insurance liquidation statutes should be
applied in this case; third, whether the applicable state statute granted policyholders’
claims priority over those of the federal government; and fourth, if so, did it do it in a
manner that escaped preemption—pursuant to the provisions of the McCarran-
Ferguson Act—by the federal superpriority statute.
This is an appeal from the CFC’s grant of summary judgment, which we review
de novo. Promac, Inc. v. West, 203 F.3d 786, 788 (Fed. Cir. 2000). As explained
below, we hold that the tax was due and payable, and that the 1977 Arizona priority
statute is applicable. Furthermore, because the 1977 statute does not elevate the
priority of policyholders above that of government claimants, there is no conflict
between the federal superpriority statute and state law. Consequently, McCarran-
Ferguson’s anti-preemption provisions are not triggered. Because the 1977 statute
does not mention guaranty funds, we do not need to decide whether the McCarran-
Ferguson Act would allow the claims of guaranty funds to have a priority over those of
the federal government, such as is provided for by the 2001 revision of the Arizona
priority statute. See Ariz. Rev. Stat. Ann. § 20-629(A)(1)-(11).
05-5032 7
II. ANALYSIS
A. The Tax Was Due and Payable
Pursuant to 26 U.S.C. § 815(d)(2)(A)(ii), Phase III tax liability is imposed upon
insurers after a two-year lapse in their insurance operations. Greene argues that this
provision was designed to prevent shareholders from taking advantage of the deferred
taxation scheme even while discontinuing obligations to policyholders. According to
Greene, because this concern is not present when an insurance company involuntarily
ceases operations, such as by reason of insolvency, this court should decline to give
effect to the plain language of the statute. We reject Greene’s invitation to ignore the
unambiguous terms of this statute. Accordingly, we hold the Phase III tax to have been
due and payable.
B. Priority
We now turn to the issue of priority, namely, whether the federal government’s
claim against Great Global is entitled to preference over the claims of Great Global’s
policyholders, or more precisely, preference over the claims of guaranty funds that have
paid the policyholders’ claims and seek reimbursement from the assets of the insolvent
insurer. Is there a dialectic tension among the various statutes? The answer to this
question depends on the interaction between, and the applicability of, several state and
federal statutes.
As we explain below, the first such statute is the federal “superpriority” statute,
which provides that the federal government is entitled to first satisfaction of its claims
against an insolvent entity. See 31 U.S.C. § 3713(a)(1)(A)(iii). The Supreme Court of
05-5032 8
the United States has held that this federal priority right attaches upon insolvency and is
indefeasible. See Massachusetts v. United States, 333 U.S. 611, 625 (1948).
Other relevant statutes are the multiple revisions of Arizona’s scheme for
distributing the assets of an insolvent insurer. See Ariz. Rev. Stat. Ann. § 629 (1954)
(as amended by acts of 1977, 1991, 1993, 1995, 1997 & 2001). The more recent
revisions of the priority statute clearly direct that policyholders and guaranty funds are to
be paid ahead of the federal government, and these recent revisions thereby conflict
with the mandate of the federal superpriority statute. In addition, the 1997 revision
explicitly provides for its retroactive application in all pending insolvency proceedings.
Giving effect to this retroactivity provision, however, would require stripping the federal
government of its indefeasible right to first priority, as granted by the federal
superpriority statute. The 1977 revision—the one that was in effect at the time that
Great Global was declared insolvent—did not directly address the relative priorities of
the government and policyholders. See Ariz. Rev. Stat. Ann. § 629.
This case would be straightforward—with federal law simply preempting state law
in each instance—were it not for the McCarran-Ferguson Act, a federal law that can
save state laws from preemption, but only if the purpose of the state law is to regulate
the business of insurance. However, as we set forth in more detail below, the
McCarran-Ferguson Act does not restrain the federal superpriority statute from
preempting the retroactive application of Arizona’s newer priority statutes. The only
revision of the priority statute not thereby preempted was the one in effect in 1986 when
the Great Global insolvency was declared—namely, the 1977 revision. After additional
analysis, however, we conclude that the McCarran-Ferguson Act does not save even
05-5032 9
the 1977 revision from preemption by the federal superpriority statute. Thus, the
government is entitled to priority of payment of the tax due.
1. Federal Superpriority Statute
The federal superpriority statute provides that “[a] claim of the United States
Government [e.g., for taxes] shall be paid first when a person indebted to the
Government is insolvent and . . . an act of bankruptcy is committed.” 31 U.S.C.
§ 3713(a)(1)(A)(iii). Section 3713 “is the direct descendent of § 3466 of the Revised
Statutes, which had been codified in 31 U.S.C. § 191.” United States v. Estate of
Romani, 523 U.S. 517, 519 n.1 (1998).
Not only does the federal superpriority statute provide that the federal
government be paid first, but it has been construed to provide that once the right to first
payment has attached, that right is vested and indefeasible. See Massachusetts v.
United States, 333 U.S. at 625 (holding that pursuant to § 3466 of the Revised Statutes,
the predecessor of the current superpriority statute, “the priority given is in terms
absolute, not conditional[ and o]nce attaching, it is final and conclusive”); id. at 627 n.26
(“Congress . . . created a conclusive priority attaching as of the time of
insolvency . . . .”).
2. McCarran-Ferguson Act
The McCarran-Ferguson Act provides that “[n]o 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 . . . .”
McCarran-Ferguson Act, Pub. L. No. 79-15, § 2(b), ch. 20, 59 Stat. 33, 34 (1945)
05-5032 10
(codified as amended at 15 U.S.C. § 1012(b) (2005)). Before examining the meaning of
the act, we briefly describe its history.
Before 1944, the United States Supreme Court had consistently held that the
dormant Commerce Clause of the United States Constitution did not invalidate state
laws relating to insurance. See, e.g., United States v. South-Eastern Underwriters
Ass’n, 322 U.S. 533, 534 (1944) (“For seventy-five years this Court has held . . . that the
Commerce Clause of the Constitution does not deprive the individual states of power to
regulate and tax specific activities of foreign insurance companies which sell policies
within their territories . . . [notwithstanding that] negotiation and execution of the
companies’ policy contracts involved communications of information and movements of
persons, moneys, and papers across state lines.”). Indeed, in 1869 the Court had
declared, in the context of a Dormant Commerce Clause case that “issuing a policy of
insurance is not a transaction of commerce.” Paul v. Virginia, 75 U.S. (8 Wall.) 168, 183
(1869).
In 1944, the United States Supreme Court was first confronted with a challenge
to the power of Congress to affirmatively regulate interstate insurance pursuant to its
Commerce Clause powers. In South-Eastern Underwriters, a number of insurance
companies had been indicted for violating sections of the Sherman Act that prohibited
the monopolization of commerce; and the district court had sustained a demurrer on the
grounds that insurance was not “commerce.” 322 U.S. at 534-35. In reversing the
district court’s dismissal of the indictment, the Supreme Court made clear that the
regulation of interstate insurance was within Congress’ power pursuant to the
Commerce Clause. See id. at 553 (“No commercial enterprise of any kind which
05-5032 11
conducts its activities across state lines has been held to be wholly beyond the
regulatory power of Congress under the Commerce Clause. We cannot make an
exception of the business of insurance.”).
Congress reacted to the holding in South-Eastern Underwriters by passing the
McCarran-Ferguson Act. See United States Dep’t of Treasury v. Fabe, 508 U.S. 491,
499 (1993) (discussing the history of the Act). The McCarran-Ferguson Act provides
that statutes enacted pursuant to Congress’s Commerce Clause powers could not
preempt state insurance laws unless the federal statute has explicitly provided for such
preemption. In other words, the act “impos[es] what is, in effect, a clear-statement rule.”
Id. at 508.
In Fabe, the United States Supreme Court made clear that “[t]he McCarran-
Ferguson Act did not simply overrule South-Eastern Underwriters and restore the status
quo[, but that t]o the contrary, it transformed the legal landscape by overturning the
normal rules of pre-emption.” 508 U.S. at 507. As explained by the Supreme Court in
Humana Inc. v. Forsyth, the McCarran-Ferguson Act is triggered only by a clear conflict
between state insurance law and a federal statute of general applicability. 525 U.S.
299, 310 (1999) (“When federal law does not directly conflict with state regulation, and
when application of the federal law would not frustrate any declared state policy or
interfere with a State’s administrative regime, the McCarran-Ferguson Act does not
preclude its application.”). McCarran does not create reverse field preemption. See id.05-5032 12
3. The Arizona Priority Statutes
Until 1977, Arizona did not provide any special treatment for policyholders’
claims. Then, the legislature revised its statutes to provide that “[u]npaid claims,
including claims for unearned premiums or cash values, which arise out of and are
within the coverage of insurance policies issued by the insolvent insurer shall have
preference over and shall be paid prior to payments of claims of general creditors.”
Ariz. Rev. Stat. Ann. § 20-629(E) (1977) (replaced by § 20-629(A) (1993)). Read in
combination with the definition of a “preferred claim,” see § 20-611, the Arizona statutes
in effect from 1977 to 1993 afforded policyholders the status of preferred claimants. Of
course, in light of the federal superpriority statute, § 20-611 would also seem to make
the federal government a preferred claimant, and the Arizona statute that was in effect
through 1993 provided no explicit resolution on the issue of whether the state statute
ranked policyholder claims higher than those of the federal government.
This version of the statute remained in effect through March 25, 1993, during
which time the IRS assessed and collected the tax on Great Global. This provision was
replaced by a far more specific distribution statute, which provided in relevant part for
the following distribution order: administrative costs; certain employee wage claims;
guaranty fund claims; policyholder claims; claims of the federal, state and local
governments; and other general creditor claims. See Act of March 26, 1993, Ch. 141,
§ 3, 1993 Ariz. Legis. Serv. (West) (codified at Ariz. Rev. Stat. Ann. § 20-629(A)).
On June 11, 1993, less than three months after Arizona enacted the new
distribution statute, the United States Supreme Court declared portions of a similar Ohio
statute not to be “’for the purpose of regulating the business of insurance,’ within the
05-5032 13
meaning of . . . the McCarran-Ferguson Act . . . .” Fabe, 508 U.S. at 493. The Ohio
statute had ranked government claims behind administrative expenses, wage claims,
policyholders’ claims and claims of general creditors. See id. at 493, 495 & n.2 (citing
Ohio Rev. Code Ann. § 3903.42 (1989)). The Court held that “the Ohio priority statute
escapes pre-emption . . . to the extent that it protects policyholders.” Id. at 491. Thus, it
held that the McCarran-Ferguson Act’s anti-preemption provisions extended to the
preferential payment of administrative costs, as these were indirectly necessary to
protect policyholders. See id. at 509 (“Without payment of administrative costs,
liquidation could not even commence.”). However, it held that wage claims and other
general creditor claims, did not escape preemption. See id. at 509 (explaining that
“[t]he preferences conferred upon employees and other general creditors . . . do not
escape pre-emption because their connection to the ultimate aim of insurance is too
tenuous”).
On remand, the district court applied Ohio law to conclude that the preempted
provisions of the state distribution statute were not severable from the section as a
whole, and accordingly found the section to be invalid in its entirety. See Duryee v. U.S.
Dep’t of the Treasury, 6 F. Supp. 2d 700, 706 (D. Ohio 1995). While Duryee was
pending, Arizona made minor revisions to the statute in 1995, choosing to retain its pre-
Fabe scheme. See Act of March 29, 1995, Ch. 19, § 1, 1995 Ariz. Legis. Serv. (West)
05-5032 14
(codified at Ariz. Rev. Stat. Ann. § 20-629(A)).2 The district court filed its decision in
Duryee less than five months later, on August 14, 1995.
After Duryee, the severability of Arizona’s preempted wage claim priority from the
remainder of the statute (and consequently, the validity of the statute) remained
undecided under Arizona state law, as Fabe did not invalidate the entire section of the
Ohio statute, but only the wage claim preference. However, Arizona legislators did
appear to respond to Fabe and Duryee in 1997 when they provided amended priority
rankings in which only administrative costs and policyholder and guaranty fund claims
were superior to federal government claims. The new legislation provided for the
following priority: administrative costs; guaranty fund claims; policyholders’ claims;
federal government claims; state and local government claims; claims of other general
creditors; and claims by three additional lower-ranked groups.3 See Act of April 29,
1997, Ch. 272, § 1, 1997 Ariz. Legis. Serv. (West) (codified at Ariz. Rev. Stat. Ann.
§ 20-629(A)).
Section 3 of this Act also included a severability provision to guard against any
possibility of total invalidation, as had occurred with Ohio’s priority statute in Duryee. Id.Section 2 made explicit that the 1997 revision was to apply retroactively “to all
delinquency proceedings begun after the effective date of this act and to all delinquency
2
The 1995 Act, which amended parts of both § 20-629 and -682, included
language making a small portion of the changes retroactive. See Act of March 29,
1995, ch. 19, § 3(B) (“This act does not affect currently pending litigation concerning
guaranty fund coverage for guaranteed investment contracts that are issued by an
insurer that is the subject of receivership proceedings that are commenced before the
effective date of this act.”).
3
See also Ariz. Circular Letter 97-6 (July 21, 1997) (open letter from John
Greene in his capacity as Director of Insurance, describing the 1997 revisions as “Fabe
Cure Legislation”).
05-5032 15
proceedings pending on the effective date of this act in which a final distribution in
payment of claims has not been made . . . .” Id. (emphasis added). In this case, it is
not disputed that the proceedings were pending in 1997, and that no final distribution
has been made.
In 2001, the Arizona legislature made only minor changes to the distribution
statute, which remains in effect today. See Act of May 4, 2001, Ch. 328, § 2, 2001 Ariz.
Legis. Serv. (West) (codified as amended at Ariz. Rev. Stat. Ann. § 20-629(E) (2005)).
Unlike the 1997 Act, however, the 2001 Act did not contain an explicit retroactivity
statement. Id.
4. Choice of State Priority Statute
Here, we must first decide which version of the Arizona statute to apply.
Although on appellate review courts do not generally apply statutes retroactively to pre-
enactment events, there are exceptions to that rule. See Landgraf v. USI Film Prods.,
511 U.S. 244, 273 (1994) (recognizing a presumption against statutory retroactivity, but
explaining that “in many situations, a court should apply the law in effect at the time it
renders its decision, even though that law was enacted after the events that gave rise to
the suit” and that a presumption against retroactivity will not apply when the legislature
has unambiguously provided for the retroactive application of a new law); United States
v. Schooner Peggy, 5 U.S. 103, 1 Cranch. 103 (1801) (reversing a decree in response
to a treaty that issued while the appeal was pending and that provided for the
retroactive reassignment of rights to a French vessel as between its French owners and
the U.S. government). Indeed, outside of the context of criminal statutes, legislatures
are generally free to impart retroactivity upon statutes through the use of express
05-5032 16
provisions. See, e.g., U.S. Trust Co. v. New Jersey, 431 U.S. 1, 17 n.13 (1977) (“The
Due Process Clause of the Fourteenth Amendment generally does not prohibit
retrospective civil legislation, unless the consequences are particularly “harsh and
‘oppressive.’” (quoting Welch v. Henry, 395 U.S. 134, 147 (1938))).
When the legislature has not included an express retroactivity provision,
however, the determination of whether or not a statute should be applied retroactively
becomes more intricate. For example, under Arizona law, the general rule is that a law
can be accorded retroactive effect only if the law explicitly provides for retroactive
application. See Ariz. Rev. Stat. Ann. § 1-244 (2005) (“No statute is retroactive unless
expressly declared therein.”). However, there is a judicially-created exception to that
rule: Even if the law does not explicitly provide for retroactive application, it may be
applied retroactively only if it is merely procedural, rather than substantive. See Aranda
v. Indus. Comm’n, 11 P.3d 1006, 1009 (Ariz. 2000) (“This court has . . . created an
exception to the general rule requiring express language of retroactivity. Enactments
that are procedural only, and do not alter or affect earlier established substantive rights
may be applied retroactively.” (citing In re Shane B., 7 P.3d 94 (Ariz. 2000))).
At first blush, this court appears to be confronted with the necessity of deciding a
question of Arizona law—namely whether the current (2001) version of the priority
statute, § 20-629(A), which lacks an express retroactivity provision, nonetheless has
retroactive application. This, in turn, would require us to predict whether the Arizona
courts would consider priority rights to be substantive or procedural pursuant to the
Aranda test. However, we do not need to reach this issue, because we conclude that a
state cannot retroactively deprive the federal government of its priority rights—not even
05-5032 17
where it does so explicitly, as it has done in its 1997 revisions. The relative order of
relevant priorities is identical under both the 1997 and 2001 revisions.
The fundamental problem with the retroactive application of a priority statute that
divests the United States of its right to priority is that it conflicts with the federal priority
statute as construed by the Supreme Court to provide a priority right that is indefeasible
as of the date of insolvency—which in this case is February 7, 1986. See
Massachusetts v. United States, 333 U.S. at 625, 627 n.26. In short, the conflict is this:
under federal law, the government’s priority right cannot be altered by events that occur
post-insolvency; Arizona’s amended priority laws, to the extent that they are retroactive,
alter this indefeasible right of the government to priority of payment under federal law.
Therefore, the retroactivity provision of the Arizona statute must fall pursuant to
the Supremacy Clause of the U.S. Constitution, unless it is protected by the McCarran-
Ferguson Act, which provides that “[n]o 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 . . . .” Pub. L. No. 79-
15, § 2(b), ch. 20, 59 Stat. 33, 34 (1945) (emphasis added). In turn, the question is
whether Arizona’s retroactive shuffling of priorities to payment of claims against an
insolvent insurer is “for the purpose of regulating the business of insurance.” Id.We hold that it is not. In so doing, we recognize that in Fabe, the Supreme Court
rejected the notion that “regulation of insurance” was restricted to the “business of
insurance,” Fabe, 508 U.S. at 505 (emphasis added), making clear that the touchstone
of regulation is instead the extent to which it protects policyholders:
05-5032 18
The Ohio priority statute is designed to carry out the enforcement of
insurance contracts by ensuring the payment of policyholders’ claims
despite the insurance company's intervening bankruptcy. Because it is
integrally related to the performance of insurance contracts after
bankruptcy, Ohio’s [prospectively applied] law is one “enacted by any
State for the purpose of regulating the business of insurance.”
Id. at 504 (citing the McCarran-Ferguson Act, 15 U.S.C. § 1012(b)) (emphasis added).
Notwithstanding, Fabe did not involve a priority statute that was being applied
retroactively, and it did not decide the issue that is before us today. We are keen to
avoid inappropriately expanding the holding of Fabe, especially given that such an
expansion would tend to eviscerate the McCarran-Ferguson Act’s “regulation”
constraint. Our concerns are heightened by the perverse consequences of extending
McCarran-Ferguson protection to retroactively-applied statutes. Consider the following.
This action was filed on March 27, 1996 under 28 U.S.C. § 1341(a)(1), which grants
jurisdiction over actions “for the recovery of any internal-revenue tax alleged to have
been erroneously or illegally assessed or collected.” It would seem peculiar to read
§ 1341(a)(1) as permitting actions for the recovery of taxes that were properly and
legally collected at the time of collection and at the time of filing suit, and that were only
rendered erroneous by subsequent state legislation. Doing so would likely invite state
legislatures to exempt their citizens from federal tax liability by simply enacting
appropriate statutes that apply retroactively. See Van Den Wymelenberg v. United
States, 397 F.2d 443, 445 (7th Cir. 1968) (“Were the law otherwise there would exist
considerable opportunity for ‘collusive’ state court actions having the sole purpose of
reducing federal tax liabilities.”); Piel v. Comm’r, 340 F.2d 887, 891 (2d Cir. 1965)
(“What is income is controlled by federal law and retroactive judgments of state courts
cannot thus affect the rights of the federal government under its tax laws.”).
05-5032 19
Consequently, the 1997 and 2001 versions of the Arizona statute cannot retroactively
render erroneous a tax that was properly and legally collected at the time of collection
and at the time of filing suit.
In short, we hold that the retroactive application of new priority statutes—whether
pursuant to the express provision of the 1997 Arizona priority statute or as a
consequence of whatever retroactive effect might be accorded to the 2001 statute in
light of Arizona decisional law—simply fails to constitute regulation of the business of
insurance, as required by the McCarran-Ferguson Act. Consequently, the McCarran-
Ferguson Act does not prevent the preemption of those provisions of state law that
provide for the application of state priority laws to insolvency proceedings commenced
before the enactment of the substantive change in the priority statute.
5. Arizona’s 1977 Priority Statute is Preempted
Thus, we must apply the 1977 version of the Arizona priority statute—the statute
that was in effect in 1986, at the time of the insurer’s insolvency. From 1954 to the
present, Arizona has defined a “preferred claim” against an insolvent insurer as being
“any claim with respect to which the law of the state or of the United States accords
priority of payments from the general assets of the insurer.” Ariz. Rev. Stat. Ann. § 20-
611(8) (1954) (currently codified at § 20-611(9), pursuant to Act of April 6, 2001, ch. 58,
§ 10 (S.B. 1022) 2001 Ariz. Legis. Serv. (West)).
Here, there are two relevant § 20-611 “preferred claims”: the tax claim of the
United States government and policyholder claims. The former claims are “preferred”
pursuant to the federal superpriority statute. The latter are “preferred” pursuant to Ariz.
Rev. Stat. Ann. § 20-629(E) (1977), which provides that “[u]npaid claims, including
05-5032 20
claims for unearned premiums or cash values, which arise out of and are within the
coverage of insurance policies issued by the insolvent insurer shall have preference
over and shall be paid prior to payments of claims of general creditors.” (emphasis
added). The statute does not explicitly provide for the priority of one of these “preferred
claims” over the other.
Now, we are faced with a second preemption problem, again from the federal
superpriority statute. The federal superpriority statute clearly provides the government
with first priority. Conversely, in the 1977 priority statute, the Arizona legislature fails to
express any clear preference about whether government claims or policyholder claims
should be paid first. To the extent that there is conflict between these statutes, the state
statute must yield, except if it is protected from preemption by section 2(b) of the
McCarran-Ferguson Act.
The inquiry is whether the federal superpriority statute “invalidate[s], impair[s], or
supersede[s]” a state law relating to the “regulation of the business of insurance.” As
discussed above, the Supreme Court in Fabe was quite clear that state statutes that
protect policyholders from losses due to their insurer’s insolvency deal with the
“regulation of the business of insurance.” The sole question here is whether a federal
statute that requires the federal government to be paid first “invalidate[s], impair[s], or
supersede[s]” a state law that expresses, on its face, no preference in order of payment.
The Supreme Court’s holding in Humana Inc. v. Forsyth helps to answer this
question. There, the Court held that “[t]he term ‘invalidate’ ordinarily means ‘to render
ineffective, generally without providing a replacement rule or law.’” 525 U.S. at 307(internal citations omitted). Here, a federal statute that insists on a priority order cannot
05-5032 21
logically be said to render ineffective a statute that is silent. Similarly, the Supreme
Court held that “the term ‘supersede’ ordinarily means ‘to displace (and thus render
ineffective) while providing a substitute rule.’” Id. (internal citations omitted). Again, this
does not describe the situation at bar. No part of the Arizona statute has been
displaced. To the contrary, it has merely been supplemented. Finally, we turn to the
Humana Court’s construction of the term “impair.” It held that pursuant to the “impair”
prong of McCarran, “[w]hen federal law does not directly conflict with state regulation,
and when application of the federal law would not frustrate any declared state policy or
interfere with a State's administrative regime, the McCarran-Ferguson Act does not
preclude its application.” Id. at 310. Given that the state statute is silent as to the
relative priority of the federal government over policyholders within the same class of
claimants—the class of “preferred claimants”—we can discern no “impairment” here.
Therefore, the federal government is entitled to full priority of payment—a priority which
it has in fact received.
6. Guaranty Fund Issue
As discussed above, the Supreme Court in Fabe upheld an Ohio priority law that
was similar to the Arizona statute because it ranked the priority of insurance
policyholder claims above those of the United States. Fabe, 508 U.S. at 493. In
addition the Court upheld the preference “accorded by Ohio to the expenses of
administering the insolvency proceeding [as] reasonably necessary to further the goal of
protecting policyholders.” Id. at 509. In so doing, it suggested that not only would the
federal preemption statute be triggered where state law directly protected policyholders,
but where it also indirectly protected policyholders, such as through the state’s having
05-5032 22
priority to recover expenses (such as administrative costs necessary to liquidate the
company) that were “reasonably necessary” to protect their interests.
In the recent case of Ruthardt v. United States, the First Circuit applied Fabe’s
“reasonable necessity” test to determine what kinds of expenses could be recoverable
under state law as part of the cost of protecting a policyholder, while still satisfying the
requirements of the McCarran-Ferguson Act. 303 F.3d 375, 381-82 (1st Cir. 2002).
Specifically at issue was whether a state priority statute could avoid being preempted by
federal law where it allowed for a state guaranty fund to pay out claims to policyholders
and then assume priority creditor status with respect to those amounts. The court
recognized that “strictly speaking, the priority that Massachusetts gives to guaranty
funds is not absolutely ‘necessary’ – from a short-term perspective – to assure payment
by the funds to policyholders.” Id. at 381. However, it upheld the priority accorded to
guaranty fund claims as entitled to protection from preemption under the McCarran-
Ferguson Act. See id. at 382 (holding that “priorities that indirectly assure that
policyholders get what they were promised can also trigger McCarran-Ferguson
protection . . . ”).
In light of our decisions above, however, we need not reach these issues. The
1977 revision of the Arizona priority statute (Ariz. Rev. Stat. Ann. § 20-629) did not
mention guaranty fund claims. Moreover, even if guaranty funds were somehow viewed
to have had a status equivalent to that of policyholder claims, the result would be the
same: government claims would trump both. In summary, because we have held that
the 1977 revision of Arizona’s priority statutes did not provide policyholders’ claims with
05-5032 23
a preference over federal government claims, the government’s tax claims necessarily
take precedence over the claims of the guaranty fund, as well.
REVERSED
No costs.
05-5032 24