The opinion of the court was delivered by: EDWARD A. BOBRICK
Before the court are the cross-motions of plaintiffs American Deposit Corp. ("ADC") and Blackfeet National Bank, ("Blackfeet"), and defendant James W. Schacht, Acting Director of Insurance of the State of Illinois, ("Schacht"), for summary judgment. The American Council of Life Insurance ("ACLI") and the National Association of Life Underwriters ("NALU") have filed briefs as amici curiae.
ADC has developed a new investment vehicle, referred to as a Retirement Certificate of Deposit ("Retirement CD"), which, while having traditional features of a certificate of deposit, also contains terms and features of an annuity. (Complaint at 20-22). ADC licensed the Retirement CD, for offering and sale, to Blackfeet, a National Banking Association organized and operated pursuant to the National Bank Act, Title 12 U.S.C. § 21 et seq ("Bank Act").
In 1994, Blackfeet began to market the Retirement CD, in a rather limited fashion, in Illinois by sending informational packets to ten persons who requested them. Blackfeet did not, and has not, accepted any deposits from Illinois residents. Since the Retirement CD had annuity-like features ordinarily associated with life insurance, Schacht issued a cease and desist order against Blackfeet and ADC, and scheduled a hearing to investigate whether Blackfeet and ADC were engaging in insurance activities subject to state regulation. ADC and Blackfeet, in response to Schacht's order, filed a complaint on January 11, 1995, seeking injunctive and declaratory relief against Schacht. The Complaint contends that the Bank Act authorizes the offering of the Retirement CD, and that the Supremacy Clause and the Dormant Commerce Clause prohibit Schacht's actions to regulate the offering of the Retirement CD. Both parties have filed motions for summary judgment in this case, essentially asking the court to determine whether the Retirement CD is an insurance-type instrument subject to state regulation or a certificate of deposit which, under the Bank Act, would be outside state regulation. The parties have filed the requisite statements of undisputed facts under Local Rule 12, but this case really turns on the characterization of the Retirement CD under applicable law.
Accordingly, we begin our analysis with an outline of the statutory framework the parties have placed in issue, and then review the terms of the Retirement CD along with the characterizations of the instrument the parties have offered.
The parties' dispute stems from the tension between federal banking law, as embodied in the Bank Act, and Illinois' regulation of the insurance industry. Under the McCarran-Ferguson Act, 15 U.S.C. §§ 1011 et seq., state laws enacted "for the purpose of regulating the business of insurance" are exempted from traditional federal preemption principles. 15 U.S.C. § 1012(b)
The statute was enacted in 1945 in response to the Supreme Court's decision in United States v. South-Eastern Underwriters Assn., 322 U.S. 533, 88 L. Ed. 1440, 64 S. Ct. 1162 (1944), in which the Court first held that the business of insurance was interstate commerce subject to the coverage of the Sherman Act.
Congress's primary concern in enacting the legislation was to ensure states would continue to have the ability to tax and regulate the business of insurance without fear of Commerce Clause attack. Group Life & Health Ins. v. Royal Drug Co., 440 U.S. 205, 217-218, 99 S. Ct. 1067, 59 L. Ed. 2d 261 (1979). The McCarran-Ferguson Act "overturn[ed] the normal legal rules of preemption" by imposing a rule "that state laws enacted for the purpose of regulating the business of insurance do not yield to conflicting federal, statutes unless a federal statue specifically requires otherwise." U.S. Dept. of Treasury v. Fabe, U.S. , , 113 S. Ct. 2202, 2211, 124 L. Ed. 2d 449 (1993). The parties' discord, understandably, involves the issue of whether the Retirement CD falls within the business of insurance thereby subjecting it to state regulation.
As a national bank, Blackfeet is incorporated, organized, and chartered exclusively under the Bank Act. Its main office is located in the town of Browning, Montana, on the Blackfeet Indian Reservation. The plaintiffs argue that the Bank Act provides the sole authority under which they need operate. The Bank Act authorizes national banks such as Blackfeet to receive "deposits" as part of the exercise of "such incidental powers as shall be necessary to carry on the business of banking." 12 U.S.C. § 24 (Seventh). The Office of the Comptroller of the Currency ("OCC"), the administrator of the Bank Act, has characterized the Retirement CD as a new form of "deposit." (See infra at 10). Essentially, the plaintiffs argue that the Bank Act preempts state regulation of national banks as Schacht attempts in this case, and that Schacht's efforts to regulate the Retirement CD are invalid under the Supremacy Clause.
The State of Illinois regulates the insurance industry under the Illinois Insurance Code, 215 ILCS 5/1 et seq. ("Insurance Code"). The Insurance Code includes "annuity contracts" in its definition of life insurance, 215 ILCS 5/4
, but offers no definition of annuity or annuity contract. The Illinois Department of Insurance has determined that the Retirement CD is within the definition of life insurance and annuities and, therefore, is subject to regulation under the Insurance Code. Pursuant to the Insurance Code, the Department of Insurance issued a "cease and desist" order to Blackfeet, charging that it was conducting insurance business without authority and without first procuring a certificate of authority in violation of 215 ILCS 5/121. Under that provision, it is "unlawful for any company [including an association, such as Blackfeet, under 215 ILCS 5/2(e)] . . . to transact insurance business in this State, without a certificate of authority from the director . . ." The Insurance Code provides for the issuance of a certificate of authority to domestic companies, 215 ILCS 5/24; 5/51, or foreign or alien companies. 215 ILCS 5/111. Domestic companies are those organized under the laws of the state of Illinois. 215 ILCS 5/2(f). A foreign company is one organized under the laws of any other state or territory of the United States, or the District of Columbia. 215 ILCS 5/2(g). An alien company is one organized under the laws of a country other than the United States. 215 ILCS 5/2(h). Organized under the Bank Act, Blackfeet does not qualify as a domestic, alien, or foreign company, which would lead one to believe that there are no circumstances under which it could receive a certificate of authority, even if it were to submit to the administrative hearing and agree to comply with the Insurance Code. There is another provision in the Insurance Code, however, that allows a national bank located in a town of 5000 or less--such as Blackfeet--to register with the director in order to transact insurance business as an insurance agency in Illinois. 215 ILCS 5/499.1(a); 215 ILCS 5/499.1(e).
Yet another provision that would appear to be an insurmountable hurdle for Blackfeet states that companies that engage in other business in addition to the life insurance business may not be certified to transact insurance business under the Insurance Code. 215 ILCS 5/111(c). A bank such as Blackfeet obviously engages in many federally-authorized banking activities that would violate this provision.
B. Terms of the Retirement CD
Blackfeet promotional materials (Plaintff's Memorandum in Support of its Motion for Summary Judgment ("Pl.MSJ"), Ex. 3), describe the terms and conditions of the Retirement CD. The customer is required to open the Retirement CD with an minimum initial balance of $ 5000. At that time the Customer also selects a Maturity Date, which is often the customer's expected retirement. Interest, calculated under a formula tied to the then current five-year, U.S. Government Treasury Note yield, begins to accrue from the date of deposit. Under applicable IRS regulations, this interest is designed to be tax deferred. The initial rate is in effect for one year, and is subsequently adjusted every five years. Prior to the Maturity Date, withdrawals are subject to penalty and IRS treatment as taxable income. On the Maturity Date, the customer may make a cash withdrawal in the amount of 2/3 of the account balance. Thereafter, the customer's lifetime Scheduled Monthly Withdrawal Payments will begin. The amount of the monthly payment is to be determined by the balance of the account after Maturity Date, the age of the customer, the monthly payment interest rate then in effect, and the Society of Actuaries annuity table. Once determined, the monthly payments to the customer will remained fixed over the customer's lifetime. For tax purposes, the payments will be apportioned from interest and principal. The FDIC, however, will only insure an amount equal to the customer's deposits and accrued interest; the total amount of lifetime monthly payments might exceed that amount but, once they do, they are not FDIC-insured.
C. Expert Characterizations of the Retirement CD
Each side to this dispute is armed with expert interpretations as to the nature of the Retirement CD. We begin our review of these with the OCC Interpretive Letter holding that the Retirement CD is within the powers of banks under the Bank Act under 12 U.S.C. § 24 (Seventh). (Pl.MSJ, Ex. 1). Essentially, the OCC felt that the offering of the Retirement CD was consistent with a bank's authority to receive deposits and to incur liabilities and to fund its operations. (Id. at 2-3). The OCC viewed the Retirement CD as a single financial product with a total return of the sum of (1) interest accrued until maturity, (2) the portion of the monthly, post-maturity payments allocable to interest, and (3) the amount of those monthly payments occurring after the return of the maturity balance. (Id. at 7). The OCC noted that, should the customer continue to live after the maturity balance was exhausted by monthly payments, the customer would nevertheless continue to receive monthly payments at the fixed rate. (Id.) The OCC referred to these payment as "nothing more than additional interest." (Id.). One of the conditions the OCC set for the offering of the Retirement CD was that Blackfeet mitigate the "risk of paying interest throughout the life of each [customer] even in situations where the maturity balance becomes exhausted," with consideration given to purchasing commercially available annuities from insurance companies to fund this obligation. (Id. at 8). Blackfeet was to submit its plan regarding such mitigation to the OCC. (Id.).
The FDIC also offered its opinion as to the nature of the Retirement CD in order to determine whether it was a deposit entitled to FDIC insurance. (Pl.MSJ, Ex. 2). The FDIC determined that, in the event of a bank failure prior to maturity date, the Retirement CD would be insured to the extent of principal and accrued interest to the date of the failure. (Id. at 3). If a failure occurred after maturity date, the FDIC would pay the customer the balance of the account at maturity date--principal plus accrued interest--minus the sum of any withdrawal and monthly payments already made. (Id. at 3-4). Under no circumstances, however, would the FDIC insure the bank's commitment to make lifetime, monthly payments because the value of such payments was uncertain and could exceed the total account balance. (Id. at 4). This portion of the Retirement CD, according to FDIC interpretation, did not fit into the definition of deposit under the FDI Act because the expected value of the contractually agreed-to monthly payments did not reflect an account balance based on deposited principal plus accrued interest. (Id. at 4).
Schacht has submitted the opinions of two experts in the Illinois Department of Insurance regarding the nature of the Retirement CD: that of Arnold Dutcher, the Deputy Director of the Regulatory Division; and that of Larry Gorski, the department's Life Actuary. (Defendant's Memorandum of Law in Support of Motion ("Def. Mem."), Exs. A; B). Mr. Dutcher felt that the Retirement CD was a fixed annuity life insurance contract similar to those products the state regulates as insurance. (Id., Ex. A at P 5). His opinion was based on the Retirement CD's promise of a monthly payment contingent on the customer's continued life, which gave the Retirement CD a mortality risk. (Id. at P 7). The mortality risk means that the Retirement CD is not merely based on economic investment factors, according to Mr. Dutcher, but on the life at risk continuing beyond the expected term. (Id., Ex. A at P 8). Mr. Dutcher stated that dealing with this type of risk is the essence of the insurance underwriting industry. (Id., Ex. A at P 9). Mr. Dutcher also stated that the Insurance Code was designed to regulate underwriters and protect insureds in various specialized ways in view of these mortality risks. (Id., Ex. A at P 10).
Mr. Gorski basically agreed with Mr. Dutcher's assessment of the Retirement CD as an insurance product. (Id., Ex. B). Because of the mortality risk inherent in such products, Mr. Gorski explained that state regulations such as the Insurance Code have built-in, conservative features with respect to the necessary reserve amounts for underwriting. (Id., Ex. B at PP 12-13). These specialized regulations also touch on minimum capital and surplus amounts. (Id., Ex. B at P 15). Overall, then, the Insurance Code is designed to protect policyholders or annuitants given the specialized risks inherent in insurance or annuity products. (Id., Ex. B at PP 18-19).
Before returning to the Retirement CD itself, we must address Schacht's contentions that the federal court should abstain in this matter under two doctrines drawn from Supreme Court opinions: Younger v. Harris, 401 U.S. 37, 91 S. Ct. 746, 27 L. Ed. 2d 669 (1971); and Burford v. Sun Oil Co., 319 U.S. 315, 63 S. Ct. 1098, 87 L. Ed. 1424 (1943). In addressing these contentions we note, first, that "only exceptional circumstances justify a federal court's refusal to decide a case in deference to the States." New Orleans Public Service, Inc. v. Council of City of New Orleans ("NOPSI"), 491 U.S. 350, 368, 105 L. Ed. 2d 298, 109 S. Ct. 2506 (1989). Second, and on the other hand, courts have long recognized a few well-defined classes of cases that fall outside the norm where abstention is not only permissible but expected. Younger, 401 U.S. at 43-44, 91 S. Ct. at 750.
In Younger, the Supreme Court held that absent extraordinary circumstances, federal courts must abstain from enjoining ongoing state criminal proceedings. Id. at 41, 91 S. Ct. at 750. At the core of any justification for abstention the Court noted, are the notions of comity and federalism:
The concept does not mean blind deference to "States' Rights" any more than it means centralization of control over every important issue in our National Government and its courts. .. . What the concept does represent is a system in which there is sensitivity to the legitimate interests of both State and National Government, and in which the National Government, anxious though it may be to vindicate and protect federal rights and federal interests, always endeavors to do so in ways that will not unduly interfere with the legitimate activities of the States.
Id. at 44, 91 S. Ct. at 750. Although Younger involved a suit to enjoin a state criminal proceeding, the doctrine has since been expanded beyond state criminal prosecutions to civil proceedings in state court implicating important state interests, NOPSI, 491 U.S. at 367-68, 109 S. Ct. at 2517-18 (citing Huffman v. Pursue Ltd., 420 U.S. 592, 604, 95 S. Ct. 1200, 1208, 43 L. Ed. 2d 482 (1975); Moore v. Sims, 442 U.S. 415, 423, 99 S. Ct. 2371, 2377, 60 L. Ed. 2d 994 (1979)), and to certain state administrative proceedings that are judicial in nature. See Middlesex County Ethics Comm. v. Garden State Bar Assoc., 457 U.S. 423, 102 S. Ct. 2515, 73 L. Ed. 2d 116 (1982) (lawyer disciplinary proceeding initiated by state ethics committee); Ohio Civil Rights Comm'n v. Dayton Christian Sch., Inc., 477 U.S. 619, 106 S. Ct. 2718, 91 L. Ed. 2d 512 (1986) (barring injunction against an ...