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WASHBURN v. CORCORAN

September 15, 1986

JOHN E. WASHBURN, Director of Insurance of the State of Illinois, as Rehabilitator of Optimum Insurance Company of Illinois, Petitioner,
v.
JAMES P. CORCORAN, Superintendent of Insurance of the State of New York, as Liquidator of Ideal Mutual Insurance Company, Respondent



The opinion of the court was delivered by: LEVAL

PIERRE N. LEVAL, U.S.D.J.

OPINION AND ORDER

 This action involves a conflict between the Federal Arbitration Act, 9 U.S.C. § 1 et seq. (1976), and the McCarran-Ferguson Act, 15 U.S.C. § 1011, et seq. (1982). The action is brought by the Illinois Director of Insurance, as Rehabilitator of Optimum Insurance Company of Illinois, against the New York State Superintendent of Insurance, as Liquidator of Ideal Mutual Insurance Company. The action seeks to compel arbitration. The facts are not disputed.

 Ideal and Optimum entered into a reinsurance agreement on April 1, 1980 which contained an arbitration clause. Thereafter both companies were placed in rehabilitation, and, on February 7, 1985, Ideal was placed in liquidation under Article 74 of the New York Insurance Law by order of the New York Supreme Court.

 Article 74 requires the liquidator "subject to the direction of the [New York State Supreme court" to take steps to liquidate the affairs of the company. New York Insurance Law, Article 74, § 7409 (c) (McKinney 1984). The order stayed prosecution of all claims against Ideal otherwise than in the liquidation proceeding.

 Pursuant to the Article 74 order, the New York Superintendent petitioned the New York Supreme Court, in the liquidation proceeding, to declare the rights under Ideal's reinsurance agreement with Optimum. The Illinois rehabilitator of Optimum neither answered the state court action nor moved to refer the suit to arbitration but instead brought this action federal court under the Federal Arbitration Act seeking to compel arbitration of the reinsurance contract dispute. The New York liquidator moves to dismiss contending that the McCarren-Ferguson Act bars application of the Arbitration Act to this dispute. The motion is granted.

 Discussion

 The McCarran-Ferguson Act establishes an "express federal policy of noninterference in insurance matters" and a clear "[congressional mandate] that regulation of the insurance industry be left to the individual states." Levy v. Lewis 635 F.2d 960, 963-964 (2d Cir. 1980). The Act provides in pertinent 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. (15 U.S.C. § 1012(b).)

 Article 74 of the New York Insurance Law which regulates the liquidation of domestic insurance companies is a "law enacted by [a] . . . State for the purpose of regulating the business of insurance." It has been construed by the highest court of New York to confer exclusive jurisdiction over the liquidation of insurance companies on the New York Supreme Court that takes charge of the liquidation, and to override and nullify arbitration agreements. Knickerbocker Agency v. Holz, 4 N.Y.2d 245, 251, 173 N.Y.S.2d 602, 607, 149 N.E.2d 885 (1958). An Act of Congress requiring enforcement of such an arbitration agreement would unquestionably "impair or supersede" Article 74 in that respect. The application of the Federal Arbitration Act to require arbitration in spite of the contrary command of Article 74 is therefore barred by McCarran-Ferguson.

 A. The "Business of Insurance" Test

 New York's contention that Article 74 is not a law enacted "for the purpose of regulating the business of insurance" is untenable. The Act provides a "complex administrative and judicial system for regulating and liquidating domestic insurance companies." Levy v. Lewis, supra at 963. It "furnishe[s] a comprehensive, economical and efficient method for winding up of the affairs of such insurance companies by the Superintendent of Insurance . . . . Those provisions of the Insurance Law [Article 74] are exclusive in their operation and furnish a complete procedure for the protection of the rights of all parties interested . . . ." Matter of Knickerbocker Agency, Inc. v. Holz, supra at 607. Article 74 necessarily "involve[s] the adjustment of thousands of claims against the insurer by policyholders and those who claim under them. . . ." Levy v. Lewis, supra at 963. Indeed, federal courts have long held that state laws protecting or regulating the relationship between the insurance company and the policyholder, either directly or indirectly, like law providing for the rehabilitation, liquidation or dissolution of insurance companies, are "laws regulating the business of insurance." See, e.g., SEC v. National Securities, Inc., et al., 393 U.S. 453, 21 L. Ed. 2d 668, 89 S. Ct. 564 (1969); Levy v. Lewis, supra.

 B. "Impaired, Invalidated or Superseded"

 Article 74 requires that the liquidation of an insurance company be conducted within the jurisdiction of the New York Supreme Court. See §§ 7417, 7403, 7405, 7409, 7432, 7434. The highest court of New York made clear in Knickerbocker that this grant of jurisdiction was exclusive and further required that all proceedings in liquidation be unified under the "single management of one court" to insure economical, efficient and orderly liquidation. Knickerbocker at 608 (" It is the Supreme Court, upon the institution of suit by the Superintendent of Insurance which has exclusive jurisdiction of a liquidation proceeding"). ...


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