During its most recent term, the Supreme Court issued one of the most significant insurance decisions in decades. The Court’s decision in National Federation of Independent Business v. Sebelius, Case Nos. 11-393, 11-398, 11-400 (U.S. June 28, 2012), has been and will be debated for years. The essential holding of the majority is that the individual mandate of the Patient Protection and Affordable Care Act is within Congress’s power to tax and that Congress cannot condition existing levels of Medicaid funding on a state’s participation in the expansion of Medicaid under the Act. A different majority held the Act unconstitutional under the Commerce Clause, accepting the challengers’ argument that Congress may not require the purchase of insurance and then regulate it.
In Armour v. City of Indianapolis, Case no. 11-161 (U.S. June 4, 2012), the Court addressed constitutional considerations in the context of refunds of taxes and assessments. The City of Indianapolis funded sewer projects by apportioning the costs equally among abutting lots. After the completion of a particular project, the City sent affected homeowners formal notice of their payment obligations. The assessed owners could pay the assessment either in a lump sum or in installments. Of 180 affected homeowners, 38 elected to pay the lump sum. The following year, the City abandoned that method of financing in favor of bond issues. The City then relieved owners who had elected to pay in installments from any further obligation but refused to refund lump sum payments. The City contended that the administrative burden of refunds constituted a sufficient distinction under the Equal Protection Clause.
The Supreme Court agreed, finding that the City’s distinction needed to pass only a rational basis test and that administrative convenience may justify tax-related distinctions. The rational basis test applied because it did not involve fundamental rights or a suspect classification, such as race or religion, and the City did not distinguish between out-of-state owners and in-state owners.
The practical teaching is that procrastination is good. Unless a particular statute or administrative regulation provides for a refund mechanism based upon changes in the law, any business paying taxes may not benefit from any change in the tax assessment method.
In Radlax Gateway Hotel, LLC v. Amalgamated Bank, Case No. 11-166 (U.S. May 29, 2012), the Court upheld a secured creditor’s right to credit bid in an auction under the bankruptcy code’s “cram-down” provisions. The bankruptcy plan at issue provided for the sale of a hotel property at auction with the proceeds distributed according to statutory priorities. The twist was that the plan provided that secured creditors could not “credit bid,” i.e. submit bids based upon the offset of secured debt as opposed to a cash payment.
The Supreme Court held that creditors have a statutory right to credit bid and that an asset cannot be sold free and clear of a secured lien without the consent of the creditor.
This decision is important to the insurance industry in two ways. First, insurers often are secured creditors in bankruptcy, given that substantial assets are held in real estate loans. Second, state insurer insolvency decisions often look to bankruptcy decisions for guidance. The insolvency laws of many states do not even mention secured creditors, but decisions generally recognize that an insolvency court cannot affect the rights of secured creditors.
The Real Estate Settlement Procedures Act (“RESPA”) requires certain disclosures in real estate transactions and prohibits kick-backs or fee-splitting. See 12 U.S.C. § 2607. Over the last several years, title insurers have been the target of numerous putative class actions attacking payments to title insurers and title agents. In Freeman v. Quicken Loans, Inc., Case No. 10-1042 (U.S. May 24, 2012), the Court held that RESPA does not regulate the payment and retention of unearned fees. In that case, consumers alleged that a loan company had charged them for fees for which services were not provided in return. The Supreme Court rejected the consumers’ contention, holding that RESPA proscribes only fee-splitting, not a single provider’s retention of an unearned fee.
