United States Department of Treasury v. Fabe

1993-06-11

Headline: Insurance insolvency rules: Court allowed Ohio to give policyholders and liquidation costs priority over federal government claims, but limited state law when it ranks other creditors above the United States.

Holding: The Court decided that Ohio’s insurance liquidation law is protected from federal preemption when it prioritizes payment to policyholders and necessary liquidation costs, but federal law overrides state priorities that favor other creditors over the United States.

Real World Impact:

Lets states favor policyholder claims and liquidation costs over federal claims.
Stops states from placing employees or general creditors ahead of federal claims.
Sends case back to lower courts to apply this split priority rule.

Topics: insurance insolvency, government claims priority, state insurance regulation, federal preemption

Summary

Background

An Ohio official ran the court-ordered liquidation of an insolvent insurance company after a state court found it unable to pay claims. The United States filed more than $10.7 million in claims from bonds the company issued and said federal law requires government claims be paid first. Ohio’s liquidation law, however, places administrative costs, wages, and policyholder claims ahead of government claims, giving federal claims only fifth priority.

Reasoning

The Court asked whether Ohio’s priority rules are a state law meant to regulate insurance and therefore safe from federal override under the McCarran-Ferguson Act, which protects state insurance regulation unless a federal law specifically addresses insurance. The majority said paying policyholder claims and covering the costs of running the liquidation are part of enforcing insurance contracts and thus further the state’s purpose of protecting policyholders. But the Court also said priorities for employees and ordinary creditors are not closely linked enough to insurance goals, so federal priority law controls those parts.

Real world impact

As a result, Ohio can give policyholders and necessary liquidation expenses priority over the United States’ claims, but it cannot place other creditor claims ahead of federal claims. The decision splits the Ohio statute: some parts are immune from federal preemption, and other parts are not. The case was sent back to the appeals court to apply this rule and for state courts to work out remaining state-law questions.

Dissents or concurrances

A four-Justice dissent argued the Ohio liquidation rules regulate creditor priorities, not the insurance business itself, and would have held federal law to override the Ohio statute entirely.