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Ludwick v. Harbinger Group, Inc.

United States Court of Appeals, Eighth Circuit

April 13, 2017

Dale R. Ludwick, on behalf of Herself and All Others Similarly Situated Plaintiff- Appellant
Harbinger Group, Inc.; Fidelity & Guaranty Insurance Company; Raven Reinsurance Company; Front Street Re (Cayman), Ltd. Defendants-Appellees

          Submitted: November 16, 2016

         Appeal from United States District Court for the Western District of Missouri - Kansas City

          Before RILEY, [1] Chief Judge, WOLLMAN and KELLY, Circuit Judges.

          RILEY, Chief Judge.

         The question in this case is whether letting Dale Ludwick pursue her federal racketeering claims against an insurance company and its affiliates would impair state regulation of the insurance business in Iowa, Maryland, or Missouri. We agree with the district court[2] that it would, and the McCarran-Ferguson Act forbids that result. See 15 U.S.C. § 1012(b). We affirm the dismissal of Ludwick's claims.

         I. BACKGROUND

         The essence of Ludwick's case is that Fidelity & Guaranty Insurance Company (F&G)-directed by the hedge fund that owns it, Harbinger Group, Inc., and abetted by two related subsidiaries, Raven Reinsurance Company and Front Street Re (Cayman), Ltd.-misled her into paying too much for an F&G annuity. F&G did so, Ludwick says, by disseminating reports and marketing materials that did not properly reflect sham transactions F&G undertook to hide its true financial state. The details and ultimate propriety of those transactions are largely immaterial to our resolution of this appeal. As relevant, Ludwick's theory is that between 2011 and 2013, F&G took billions of dollars in liabilities off its books by transferring them to its affiliates Raven and Front Street, even though those companies did not have sufficient assets to cover them. At the same time, F&G marked up its valuation of the Raven stock it owned. And after quickly unwinding one of the transactions and taking some liabilities back from Raven, F&G arranged for an unaffiliated insurance company-apparently gratuitously-to assume those liabilities, plus others, while taking assets worth significantly less (and otherwise lacking the resources to cover them).

         According to Ludwick, if F&G had properly accounted for these transactions under the principles promulgated by the National Association of Insurance Commissioners, as F&G claimed to do in its annual statements, F&G would have had to report its "surplus" was in fact negative-in other words, that its liabilities exceeded its assets. Instead, F&G reported billion-dollar surpluses in each of 2011, 2012, and 2013. Based, in part, on F&G's apparent financial good health, Ludwick bought an annuity in 2013.

         Ludwick eventually became convinced F&G was not in as good shape as it seemed, and thus her annuity was not worth what she paid for it. She sued under the Racketeer Influenced and Corrupt Organizations Act (RICO), see 18 U.S.C. § 1964(c), alleging F&G-under Harbinger's control and facilitated by the subsidiaries (collectively, F&G, from here on, except where context dictates otherwise)-committed numerous acts of mail and wire fraud in the course of a book-cooking scheme, most straightforwardly by distributing paper and electronic copies of its deceptive reports and marketing materials.[3] See id. § 1962(c), (d) (imposing liability for conducting an enterprise's affairs through a pattern of racketeering activity and for conspiring to do so); see also id. § 1961(1) (defining racketeering activity). The district court granted F&G's motion to dismiss for failure to state a claim on which relief can be granted, see Fed.R.Civ.P. 12(b)(6), relying on the McCarran-Ferguson Act and not reaching the merits of Ludwick's RICO claims. Ludwick appeals. See 28 U.S.C. § 1291 (appellate jurisdiction).


         The McCarran-Ferguson Act provides: "No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance." 15 U.S.C. § 1012(b). There is no suggestion RICO "specifically relates" to insurance, and no dispute Iowa, Maryland, and Missouri (respectively, where F&G is based now, where it was based until 2013, [4] and where Ludwick lives) regulate the insurance business. Nor would imposing RICO liability for F&G's alleged misconduct "invalidate" or "supersede" Iowa, Maryland, or Missouri law. See Humana Inc. v. Forsyth, 525 U.S. 299, 307 (1999) (giving the terms their ordinary meanings). The only question is whether Ludwick's RICO charges would "impair" state insurance regulation.

         This question, like the sufficiency of Ludwick's allegations more generally, is a legal issue we review de novo. See, e.g., Saunders v. Farmers Ins. Exch., 537 F.3d 961, 963 (8th Cir. 2008). The Supreme Court articulated the governing standard in Humana Inc. v. Forsyth: "When federal law does not directly conflict with state regulation, and when application of the federal law would not frustrate any declared state policy or interfere with a State's administrative regime, the McCarran-Ferguson Act does not preclude its application." Humana, 525 U.S. at 310.

         Ludwick insists her suit threatens no conflict, frustration, or interference because it is just about F&G's bookkeeping, not the underlying propriety of the transactions or state regulators' approval of them. The distinction cannot bear the weight of Ludwick's argument. "In applying Humana's fact-intensive interpretation of the word 'impair, ' our focus must be on the precise federal claims asserted, " because "a statute might 'impair' state insurance laws when applied in some ways, but not in others." Saunders, 537 F.3d at 967. The precise claims asserted in this case arise out of F&G, in Ludwick's words, "misrepresent[ing] the true financial condition of [the company] in its public reports and marketing materials, artificially inflating its purported assets and surplus." Ruling on those claims would necessarily involve deciding whether the supposed sham transactions left F&G in the healthy financial position it reported, or whether Ludwick is correct that a proper accounting would have shown liabilities substantially exceeding F&G's assets (as Ludwick says, "a negative statutory surplus").

         Questions about insurance companies' solvency are, no surprise, squarely within the regulatory oversight by state insurance departments. In Maryland (as elsewhere) deals like those underlying Ludwick's case-namely, reinsurance transactions with affiliates-must be submitted to the insurance commissioner for review before they can be consummated. See Md. Code Ann., Ins. § 7-703(a)(1), (c), (d)(4); see also Iowa Code § 521A.5(1)(c)(1). See generally Saunders, 537 F.3d at 965 ("Like most States, Missouri thoroughly regulates the business of insurance."). And the commissioner is directed to consider both whether the transaction "potentially adversely affects the interests of policyholders" and whether "after the transaction, . . . the insurer has assets and surplus as regards policyholders that: (i) bear a reasonable relation to the insurer's outstanding liabilities; and (ii) are adequate to meet the insurer's financial needs." Md. Code Ann., Ins. §§ 7-702(3), -703(e); see also Iowa Code § 521A.5(1)(a)(6), (f). For all practical purposes, that is the same inquiry Ludwick's claims seek. A federal court could not rule in Ludwick's favor without holding, more or less explicitly, that state insurance regulators were wrong to let the transactions proceed, because the negative surplus Ludwick alleges would be patently unreasonable and inadequate. Cf. Saunders, 537 F.3d at 968 ("'[A] more complete overlap with the state [agency's] . . . decisions is impossible to conceive.'" (second alteration in original) (quoting Dehoyos v. Allstate Corp., 345 F.3d 290, 302 (5th Cir. 2003) (Jones, J., concurring in part and dissenting in part))); Doe v. Mut. of ...

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