Appeals Court Offers No Decision On Priority Issue

The Court of Appeals for the 4th Circuit on Jan. 28 heard argument in the Nortwestern Security Life Insurance Company case regarding the treatment of certain federal income taxes as administrative expenses, whether the state priority statute is severable if any portion were to be found invalid, and whether the provision for guaranty association priority is pre-empted by federal priority law. The federal trial court ruled in favor of the federal government on the issue of administrative expenses and made no findings on the remaining issues. If it affirms the trial court's holding, the appeals court similarly need not address the other issues. The appeals court, however, made no findings on any of the issues, but indicated it may defer ruling on the merits of the case in order to certify the state law issues to the North Carolina Supreme Court for determination.

The taxes at issues are deferred income taxes on pre-paid premiums. The liquidator argued that these taxes were not incurred in the course of administration of the estate and that payment of taxes on "phantom income" does not constitute the conservation or administration of estate taxes within the meaning of the liquidation statute. Also, while the taxes accrued post-insolvency, they arguably were incurred prior to insolvency and therefore are not administrative costs. The panel noted the distinctions between pre- and post-insolvency expenses, but questioned why estate creditors should benefit from the company's deferral of payment of these taxes. There were strong indications that the appeals court will seek the guidance of the state supreme court.

Regarding severability of the state's priority statute, the liquidator offered extensive state authority in support of severability and argued that if the court resolves the priority issues in favor of the guaranty association, than the court need not consider the issue of severability because there would be no lower priority claim at issue.

Counsel for the guaranty associations, arguing for guaranty association priority, presented an analysis of the protections afforded the states in their regulation of insurance, and a broad explanation as to the role of the associations operating as part of a balanced regulatory scheme designed to protect policyholders. They argued that the court should determine whether the guaranty system is part of the states' regulation of insurance and therefore protected by federal law, and should not consider, as the government suggests, whether the isolated act of payment to the associations under the priority scheme protects policyholders.

The government conceded that the guaranty associations provide policyholder protection; however, expenditures by the estate in paying back the guaranty associations do not protect policyholders and do not survive scrutiny under the standards set forth by the U.S. Supreme Court in the Fabe case. The panel voiced its rejection of any such narrow reading of the Fabe opinion. It is uncertain whether the court will have the opportunity to rule on this issue in the case. Moreover, to the extent the issue of guaranty association priority is reached on the merits, the case may be remanded to the federal trial court for further findings.

ETC.

Legal Committee News
NOLHGA's Legal Committee met Jan. 15-16 in Tampa, Fla. to review pending projects and discuss topics for 1998. The committee heard updates on the Interstate Compact Receivership Law, recent bankruptcy code amendments affecting alien insurers, federal challenges to guaranty association priority and a proposed legislative response, guaranty association claim valuation, closing estates, liability for unpaid assessments, and coverage issues, including equity indexed annuities, charitable gift annuities and health risk bearing entities.

The committee also discussed NOLHGA's proposed form assumption reinsurance agreement, antitrust issues, current bidding practices for block dispositions and plans for the 1998 Legal Seminar.
Staff Contact -- Joni Forsythe 703/787-4103

Herb Knox Dies
Herbert G. Knox, former chairman and director of the West Virginia Life and Health Insurance Guaranty Association, died Jan. 7 in Ohio following a heart attack. Mr. Knox was a lobbyist for Nationwide Insurance Company in Columbus, Ohio, where he was employed for 31 years. Mr. Knox's wife, Sharon, may be reached at 6452 Berry Pond Way, Canal Winchester, OH 43110. Memorials may be made to the American Heart Association or the Diabetes Association.

MPC Schedule
A schedule of task force meetings and other events will be published in the Feb. 6 and Feb. 13 editions of the Weekly Wire.

NOLHGANet Reminder
The Weekly Wire generally is uploaded onto NOLHGANet between 4 and 5 pm on Fridays. Technical difficulties have caused a delay this week, however. Those who prefer to retrieve the Wire from the website, rather than wait until Monday morning for fax delivery, are asked to call Lisa Meyer or Beth Watson at NOLHGA, 703/481-5206.

CALENDAR

Feb. 2-3 Joint Meeting of the NOLHGA Board of Directors, MPC Executive Committee and Insolvency Task Force Chairs, San Diego Feb. 3 Audit Committee, San Diego Feb. 3-4 NOLHGA Board of Directors, San Diego Feb. 23-25 Members' Participation Council, San Diego