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Priorities ‐ Federal
U.S. Supreme United States v. Knott, 298 U.S. 544 (1936). The New Jersey receiver of
domiciliary surety company sought to enjoin the Florida Treasurer from
disposing of any securities of the company held by the Florida Treasurer.
When the New Jersey liquidation proceeding began, there were no
outstanding judgments against the insolvent insurer in Florida. A Florida
statute gave power to a Florida court to sell the securities and distribute the
proceeds to Florida claimants. The U.S. Supreme Court held that this statute
did not perfect a lien on the securities in favor of the Florida creditors, and
therefore, claims of the United States would take priority.
First Circuit Ruthardt v. United States, 303 F.3d 375 (1 st Cir. 2002), aff’g 164 F. Supp. 2d 232
(D. Mass. 2001), cert. denied, Bowler v. United States, 538 U.S. 1031 (2003). The
Liquidator of an insurer sought to resolve two issues with the United States
concerning the interaction of state insurer liquidation priority statutes, the
federal priority statute and the McCarran‐Ferguson Act. First, the United States
sought priority for its claims over guaranty funds. The Court held that guaranty
fund claims had priority over those of the United States because guaranty funds
assure prompt payment to policyholders, and thus constitute a mechanism to
protect policyholders that is in accordance with “the logic and spirit of Fabe.”
Second, the United States argued that it was not bound by the claims bar date
in the liquidation proceeding, relying on the First Circuit’s prior decision in Garcia
v. Island Program Designer, Inc., 4 F.3d 57 (1 st Cir. 1993). The Court held that
Garcia correctly applied Fabe because a claim bar date for United States’ claims
does not affect policyholders, who have priority over the United States in any
event. However, the Court also stated that such a result is “simply terrible
public policy” that may warrant legislative action.
Fourth Circuit Gordon v. U.S. Dept. of the Treasury, 668 F. Supp. 483 (D. Md. 1987), aff'd, 846
F.2d 272 (4th Cir. 1988). The liquidation of an insolvent insurance company and
the prioritizing of claims to be paid do not constitute the "business of
insurance" as that term is used in the McCarran‐Ferguson Act. Therefore, the
federal statute giving the Untied States absolute priority in collecting money
due from an insolvent debtor was upheld over the State insurance scheme, in
which the Government's claims would have fallen within the fourth category of
priority.
Sixth Circuit
Fabe v. United States Department of Treasury, 939 F.2d 341 (6th Cir. 1991), cert.
granted, 112 S. Ct. 1934 (May 18, 1992). This is an appeal of a district court
decision (Fabe v. U.S. Department of the Treasury, No. C‐2‐88‐778, 1990 U.S.
Dist. LEXIS 17761 (S.D. Ohio 1990)) which held that the Ohio insurance
liquidation priority scheme regulates only the business of insurance companies
and not the "business of insurance" within the meaning of the McCarran‐
Ferguson Act and therefore the claims of the United States are to be granted
priority. The appeals court found that the state liquidation priority scheme is
exempt from federal preemption as a regulation of the "business of insurance"
within the McCarran‐Ferguson Act. In so holding, the appeals court applied the
three‐prong test set out in Union Labor Life Insurance Company v. Pireno, 458
U.S. 119 (1982).
Ninth Circuit State of Idaho ex rel. Soward v. United States, 858 F.2d 445 (9th Cir. 1988).
The court determined that an Idaho statute establishing priority among
creditors of insolvent insurance companies is not a law regulating the
"business of insurance" within the contemplation of the McCarran Act, since
such insurers are no longer conducting insurance business. Therefore, the
Federal Insolvency Statute controls and the United States would be entitled to