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GORDON v. FORD MOTOR CREDIT CO.

August 19, 1992

BROOKS GORDON, on behalf of himself and of all others similarly situated, Plaintiff,
v.
FORD MOTOR CREDIT COMPANY, a Delaware Corporation, Defendant.



The opinion of the court was delivered by: ROBERT F. PECKHAM

 Defendant Ford Motor Credit Company (FMCC"), an automobile financing company, requires that its customers purchase collision and comprehensive insurance on vehicles financed by FMCC. When FMCC's customers fail to provide such insurance, the financing agreement entities FMCC to protect its security interest in the financed vehicles by purchasing collateral protection for the vehicles. FMCC purchases this collateral insurance from the American Road Insurance Company ("TARIC"), a related corporation, and transfers those costs to those customers who have failed to provide the contractually requisite insurance. *fn1"

 FMCC now brings a Motion to Dismiss under Federal Rules of Civil Procedure ("F.R.C.P.") 12(b) (6) on two alternative bases: first, that the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1012 (1945) ("Act"), leaves the subject matter of this Complaint to the regulation of the states and; second, that the Complaint fails to allege each element required to support a civil RICO action.

 DISCUSSION

 The McCarran-Ferguson Act (the "Act") leaves regulation of the "business of insurance" to individual states unless Congress enacts legislation which specifically relates to the "business of insurance." In applying the Act, courts have articulated a four-step procedure for determining whether the Act precludes application of a particular federal statute to a challenged activity or practice. First, courts must ask whether the federal statute being applied specifically relates to insurance. If not, courts must determine whether the practice in question constitutes the "business of insurance." If so, courts must then determine whether the state in question has enacted laws regulating the activities being challenged. Finally, if such state legislation exists, courts must decide whether the application of the federal statute would "invalidate, impair or supersede" the applicable state law. Cochran v. Paco, Inc., 606 F.2d 460, 464 (5th Cir. 1979).

 Plaintiff opposes the Motion to Dismiss by arguing that the practices challenged in this action do not fall within the scope of the exemption for three reasons. First, he suggests that the exemption under the Act applies only to insurance companies and, therefore, does not extend to defendant, an automobile financing company in this case. Second, plaintiff argues that the activities and practices alleged in the Complaint do not constitute the "business of insurance." *fn2" Third, he argues that the application of RICO under these circumstances would not "invalidate, impair or supersede" applicable state law. These arguments are addressed below. *fn3"

 A. FMCC's Status Under the Act

 Plaintiff argues that the Act applies only to insurance companies, a category to which FMCC does not belong. Defendant counters that the Act exempts any activity or practice that constitutes the business of insurance independent of the entity conducting that activity or practice. Neither the Supreme Court nor the Ninth Circuit has addressed the applicability of the Act to non-insurer defendants. *fn4" Resolution of this dispute requires delving into the history and purposes of the Act.

 The Act rests on the premise that "the continued regulation and taxation by the several States of the business of insurance is in the public interest." 59 Stat. 33 (1945), 15 U.S.C. § 1011. To promote this premise, the Act leaves regulation of the business of insurance to individual states and bars application of federal legislation in this area except where Congress enacts legislation specifically related to insurance. In this way, the Act embodies a congressional commitment to return to the states the plenary power to regulate insurance that they had enjoyed prior to United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533 (1944).

 This view of the policies underlying the Act logically corresponds to an interest in the activities or practices of the insurance industry rather than a concern with the status of insurance companies. Securities & Exchange Commission v. National Securities, Inc., 393 U.S. 453 (1969) ("National Securities"). In fact, the National Securities Court defined the scope of the Act relative to insurance-related activities rather than relative to labels placed on the parties in a particular action:

 The relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation, and enforcement -- these were the core of the "business of insurance." Undoubtably, other activities of insurance companies relate so closely to their status as reliable insurers that they too must be placed in the same class. But whatever the exact scope of the statutory term, it is clear where the focus was -- on the relationship between the insurance company and the policyholder.

 Id., 393 U.S. at 459-60. National Securities expressly deemphasized the parties involved and the labels placed on them:

 The statute did not purport to make the States supreme in regulating all activities of insurance companies; its language refers not to the persons or companies who are subject to state regulation, but to laws "regulating the business of insurance." Insurance companies may do many things which are subject to paramount federal ...


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