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SCHWARTZ v. COMMONWEALTH LAND TITLE INS. CO.

February 20, 1974

Harlan SCHWARTZ and Daniel T. Danzi, Jr. on behalf of themselves and all others similarly situated
v.
COMMONWEALTH LAND TITLE INSURANCE COMPANY et al.


Edward R. Becker, District Judge.


The opinion of the court was delivered by: BECKER

EDWARD R. BECKER, District Judge.

I. Preliminary Statement

 This is an antitrust case. Before us are the motions of all defendants to dismiss the complaint for failure to state a claim upon which relief can be granted, under F.R. Civ. P. 12(b) (6). Defendants are title insurance companies or agents, and the rating bureau for Pennsylvania title insurance companies. Plaintiffs are two individuals who sold real property to buyers who purchased title insurance on that property from some of the defendants. At issue is the fee charged to plaintiffs and other sellers of real estate at closings held in the defendants' offices. This seller charge *fn1" was instituted in 1967 by the companies to cover part of the expense of performing services inuring to the benefit of the seller, consisting generally of the mechanical arrangements incident to a sale of real property. *fn2" Prior to that time the title companies' entire charge for insurance and services was paid by the buyer.

 Because the seller charge, like all other title insurance rates, was set at a level agreed upon by all the companies through their rating bureau, the basis of plaintiffs' complaint is that in instituting the seller charge, the defendants conspired to fix prices in violation of section 1 of the Sherman Act, 15 U.S.C. § 1. *fn3" For purposes of the motion to dismiss, of course, the facts pleaded in the complaint are taken as true. Succinctly stated, the relevant allegations are that the defendants agreed among themselves to charge a fixed fee from any seller of real estate whose buyer purchased title insurance from a title company doing business in Pennsylvania, where the closing took place in Pennsylvania, in violation of the antitrust laws. The complaint seeks injunctive relief and treble damages for members of a class of plaintiffs consisting of all persons who paid the seller charge to any of the defendants.

 The sole ground underlying the motions to dismiss presently before us is that the seller charge, like the title companies' rates charged to buyers, is exempt from the Sherman Act prohibition by virtue of the McCarran-Ferguson Act of 1945. *fn4" Basically, that statute leaves the states free to regulate "the business of insurance" and exempts such business from the Sherman Act, Clayton Act, and Federal Trade Commission Act to the extent that such business is regulated by state law. The broad issues raised by these motions are, accordingly, (1) whether the seller charge is comprehended within the term "the business of insurance," and (2) whether the seller charge is "regulated by state law." Before we directly address these issues, a review of the regulation of title insurance in Pennsylvania will be helpful.

 II. The Statutory Scheme For Regulation of Title Insurance in Pennsylvania

 The title insurance industry in Pennsylvania is pervasively regulated by the Insurance Department ("Department") pursuant to statute in the manner hereinafter described. *fn5"

 Domestic and foreign corporations are subject to stringent financial requirements. These requirements cover such areas as the minimum capital of the insurance company, impairment of capital, and paid-in initial surplus, §§ 910-5, 910-6. Reserves against unearned premiums and unpaid losses are regulated, as are the types of investments into which a title insurance company may place its capital, §§ 910-14 to 910-18, 910-32 to 910-35.

 The Commissioner of Insurance is empowered to examine all changes in control of the ownership of title insurance companies and to satisfy himself of the character, experience, and financial responsibility of those acquiring control, and that the change will not jeopardize the public interest, § 910-53. Similarly, all proposed mergers and consolidations of domestic title insurance companies with either domestic or foreign title insurance companies and the corporate acquisitions of domestic companies must be filed with and approved by the Commissioner, §§ 910-51, 910-52.

 The power of title insurance companies to insure titles is statutorily defined, § 910-8. There are also further statutory restrictions on their business. They are prohibited from guaranteeing the payment of mortgages on real property, §§ 910-9, 910-10; from engaging in the banking business, § 910-11; from acting as a trustee, guardian, or similar fiduciary, § 910-12; and from issuing insurance other than title insurance, § 910-13. The foregoing regulation aimed primarily at the structure and powers of title insurance companies is accompanied by extensive regulation of their title insurance operations.

 Before issuing a policy, every title insurance company must conduct a title search, and the abstract of title or search report must be preserved for at least 20 years after issuance of the policy, § 910-7. The form of title policies is subject to disapproval by the Commissioner, 40 Pa. Stat. Ann. § 477b.

 All agents for title insurance companies must be licensed by the Commissioner, § 910-26. They must keep their books and records, which are open to the Commissioner, in such a form that the Insurance Department can readily ascertain whether the law is being complied with, and they must reply promptly in writing to the Department's inquiries.

 The rates a title company charges are fully regulated. Every classification, rule, plan, schedule of fees, and commission must be filed with the Department for its approval, § 910-37. Every rate filing must be accompanied by a statement of justification, which becomes a public record after the rate became effective, § 910-38. In reviewing the filing, the Commissioner must consider a number of factors including, inter alia, the past and prospective loss experience of the company, expenses, revenues, and a reasonable margin for profit. Under the law, rates may not be higher than necessary to enable title insurance companies to pay their expenses and losses and to make a reasonable profit, § 910-39. Determination of what is a "reasonable" profit must include (1) the rates of profit of other industries, (2) the desirability of rate stability, (3) the necessity of growth in assets in times of prosperity to protect the financial solvency of title insurance companies in times of depression, and (4) the necessity for earning sufficient dividends to induce capital to be invested in title insurance companies, § 910-39.

 A procedure for departmental review of the filings is set out, including hearings, a statement of reasons for a disapproval, and the opportunity to withdraw a filing, § 910-40. Moreover, public disclosure of all pertinent information is required to be made to any insured affected by a rate who has requested such information and each insurance company must afford aggrieved persons a reasonable opportunity to present their grievances, § 910-44.

 The Commissioner must, and does, provide rules and statistical plans, in as much form and detail as is necessary. These rules and plans are used by each title insurance company in reporting, on an annual basis, the composition of its business, and the loss and country-wide expense experience of it and its title insurance underwriters. The Commissioner may also require the recording and reporting of expense experience items which are specially applicable to Pennsylvania and not susceptible of determination by prorating country-wide expense experience, § 910-46.

 The Commissioner regulates trade practices of the insurance companies as well, 40 Pa. Stat. Ann. §§ 1151-1162. He has authority over misrepresentations and false advertising, boycotts, intimidation, coercion, and other unfair trade practices by title insurance companies.

 The statutory frame of reference clearly contemplates uniformity in title insurance company charges and joint action by the companies in connection therewith. Title insurance companies are authorized to form rating associations, which are licensed by the Commonwealth and are themselves subject to thorough regulation. The Commissioner can issue a license to a rating organization on finding that it is competent, trustworthy, and otherwise qualified, and that its constitution or articles, and its by-laws, rules, and regulations conform with the requirements of law. The duration of a license is three years. Rating organizations must furnish the Department with lists of their subscribers. All changes in the above items must be promptly reported to the Department. The association became subscribers to its rating services on a reasonable basis and the refusal to admit a title insurance company to subscriber status may be reviewed by the Commissioner, who has the power to order admission. Section 910-41.

 Cooperation among rating organizations and among title insurance companies is specifically authorized by statute, not only in ratemaking, but in other matters within the scope of the title insurance article, § 910-41. Provision is made for interchange of information among Pennsylvania title insurance companies and also with companies in other states, § 910-46. The Commissioner may review the activities and practices of the rating organization and the companies and their cooperation and may order any practice discontinued if it is unfair or unreasonable or otherwise inconsistent with the provisions of the title insurance article, § 910-41.

 Rating organizations may make filings of rates and, if they do so, the member title insurance companies need not file individually, § 910-37. Even companies which are not members may avoid the burden of making an individual filing by subscribing to the services of a rating organization. Id. Minority members are protected by a deviation procedure whereby they may file uniformly higher or lower rates, § 910-42. Moreover, minority members may appeal to the Commissioner from any proposed filing by their rating organization, § 910-43.

 Finally, the Act provides that "the Commissioner shall have the full power and authority, and it shall be his duty, to enforce and carry out by regulations, orders, or otherwise," each and every provision of the article regulating title insurance to the full intent of that article, § 910-46. His enforcement powers include the authority to levy fines and to suspend licenses, after hearing, for failure to obey an order, § 910-48.

 We will next review the background of the seller charge. The factual ingredients of that background were not pleaded in the complaint. We will note the source of the relevant facts and will comment infra on the relationship between these facts and the procedural ramifications of the 12(b) (6) motion before us.

 The seller charge of $10 per transaction was first filed with the Department by the Pennsylvania Title Insurance Rating Bureau on December 20, 1966. The filing was approved on January 18, 1967, and became effective on February 1, 1967. On February 8 the Department withdrew its approval and wrote to the rating bureau that the seller charge was not a statutorily defined "fee" and therefore need not be filed with the Department. On March 20, 1967, the Department amended and approved (after amendment) the wording of a release by the Rating Bureau to real estate agents and other interested persons announcing the continuation of the seller charge and the Department's ruling that it was not a "fee." *fn6" Three years later the Department's position was unchanged. On June 1, 1970, in an order disapproving a proposed rate increase, the Department specifically excluded from its disapproval a proposed $12.50 seller charge on the ground that it was not a fee and "therefore, is not a proper subject of review by this Department . . . ." *fn7"

 As soon as we became familiar with the case, it was obvious to us that the attitude of the Insurance Department in the matter might well be decisive. A new Insurance Commissioner, Herbert S. Denenberg, had replaced former Commissioner George F. Reed following a change of administration in Harrisburg, and we did not wish to be in the position of deciding the issue before us in ignorance of the present Commissioner's position; for instance, a contemporaneous exercise of regulation over the seller charge might place the matter in a new and different light. Accordingly, we formally advised the Department of the pendency of the litigation and invited a statement of its present position on the regulatory status of the seller charge. The Department's counsel appeared at oral argument on the motion to dismiss. He followed his appearance with a statement of present position. *fn8" The Department still does not regard the seller charge as a "fee" within the definition in 40 Pa. Stat. Ann. § 910-1(5). But it has now overruled the unstated minor premise of its earlier position: its submission to this Court takes the position that material to be filed for Departmental approval is not limited to "fees." The Department further informed the Court that it planned to require that the seller charge be formally filed for approval. *fn9" In seeking to regulate the seller charge, the Department relies for support upon a number of statutory provisions. Section 910-37(a) provides:


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