same result as Manufacturers Hanover court).
A case involving even more strikingly similar facts is Washburn v. Brown, 1986 WL 7062 (N.D. Ill. June 17, 1986). In that case, the Illinois Insurance Director sued officers of an insurance company alleging, inter alia, violations of RICO. The insurance company allegedly engaged in a scheme in which different policies were secretly shifted among various subsidiaries of the company, which created the illusion that the company was solvent when in fact it was highly undercapitalized in proportion to the number of policies it had written. The complaint alleged that the officers had engaged in a scheme to defraud the policyholders and the company's shareholders. Although the defendants urged that the practice in question was the offer and sale of reinsurance, the court disagreed and characterized the practice as mail fraud. The court found that mail fraud was not the business of insurance and held that the RICO claims were not barred by the McCarran-Ferguson Act.
This court agrees with the approach taken by the Manufacturers Hanover and Washburn courts. This case involves more than a straightforward insurance transaction: there is an allegation of an ongoing nation-wide scheme on the part of the defrauding insurer to find borrowers who could not obtain credit and to serve as a surety on their behalf to unsuspecting lenders.
Having properly formulated the practice at issue, all that remains is to evaluate this practice in light of the criteria for determining whether a given practice constitutes the "business of insurance" under the McCarran-Ferguson Act set forth by the Supreme Court in Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 102 S. Ct. 3002, 73 L. Ed. 2d 647 (1982). The Pireno Court identified three factors:
first, whether the practice has the effect of transferring or spreading a policyholder's risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance industry.
458 U.S. at 129. The fraudulent practice alleged to have occurred in this case satisfies none of the three criteria identified in Pireno. First, because Commonwealth had essentially no assets, the guarantee to pay if Great Lakes defaulted was worthless and no risk shifted from FNB to Commonwealth.
Second, a scheme to defraud plays no role in the typical policy relationship between the insurer and the insured. Third, there is no reason to conclude that only an entity within the insurance industry could engage in such a practice. Both insurance companies as well as other types of companies engage in the sale of credit enhancement guaranty policies. See Freedman, "Financial Guarantees: Too Hot to Handle?," Best's Rev. Property/Casualty Ed. 16, 132 (Oct. 1985); Note, "Financial Guaranty Insurance: Is It "The Business of Insurance" Under the McCarran Act?," 1988 Colum. Bus. L. Rev. 855, 857. Furthermore, it is a debatable proposition whether Commonwealth should properly be classified as an "entity within the insurance industry."
Thus, the alleged fraudulent conduct at issue in this case does not constitute the business of insurance under the McCarran-Ferguson Act. Because no business of insurance is at issue in this case, the McCarran-Ferguson Act does not apply; there is no need to consider the other issues presented by a McCarran-Ferguson preemption analysis.
An appropriate order will follow.
AND NOW, this 14th day of May, 1992,
IT IS HEREBY ORDERED that the Motion for Partial Summary Judgment filed by the Plaintiff, the First National Bank of Pennsylvania, is GRANTED IN PART and DENIED IN PART. It is adjudged that the conduct of Defendants Sedgwick James of Minnesota, Joseph W. Steman, and Daniel M. Militzer violated 40 Pa. Stat. Ann. § 1006.3(a). In all other respects, said motion is denied.
IT IS FURTHER ORDERED that the Motion for Partial Judgment on the Pleadings filed by Defendants Sedgwick James of Minnesota, Joseph W. Steman, and Daniel M. Militzer is DENIED.
Glenn E. Mencer
United States District Judge