No. 08-9132

In the

Supreme Court of the United States

________________________________________________________________________

ASHFORD & HALEY LLP,

Petitioner

---- v.----

DAVID HELM,

Respondent ________________________________________________________________________

On Writ of Certiorari to the United States to the Supreme Court of the State of Radnor

__________________________________

Brief for Petitioner

__________________________________

Team # 19

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Questions Presented

1. Do the Radnor Rules of Appellate Procedure comport with the Due Process Clause of the Fourteenth Amendment in that they do not afford a defendant at least one appeal as of right to review judgments that award punitive damages?

2. Does the McCarran-Ferguson Act “reverse preempt” the Federal Arbitration Act and thereby permit state law to abrogate an arbitration agreement covering an ordinary tort suit between the rehabilitator of an insolvent insurer and its accountant?

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Table of Contents Questions Presented…………………………………………………………….............................ii

Table of Authorities …………………………………………………………………...................iv

Statement of Jurisdiction………………………………………………………………………......v

Statement of the Case……………………………………………………………………………...1

Course of proceedings……………………………………………………………………..1

Statement of the Facts……………………………………………………………………..2

Summary of the Argument……………………………………………………………...................3

Argument………………………………………………………………………………………….5

I. DUE PROCESS REQUIRES APPELLATE REVIEW OF PUNITIVE DAMAGES JUDGMENTS, SO THE CHANGES TO THE RADNOR RULES OF APPELLATE PROCEDURE, WHICH MAKE APPELLATE REVIEW PURELY DISCRETIONARY, VIOLATE THE DUE PROCESS CLAUSE OF THE FOURTEENTH AMENDMENT………………...………………………………….................................................5

A. When a State’s Common and Statutory Law Has Traditionally Provided an Automatic Right to Appellate Review of Punitive Damages Awards, This Sets the Foundation of Due Process and the State Cannot Eliminate it Without Providing an Effective Substitute. ……………………………………………………………………………………………..5

B. An Appeal as of Right from a Punitive Damages Judgment is Necessary to Protect the Significant Interest in Not Being Deprived Arbitrarily of Property……………………..11

II. THE MCCARRAN FERGUSON ACT’S REVERSE PREEMPTION DOCTRINE IS INAPPLICABLE TO THIS CASE, BECAUSE THE UNDERLYING SUIT IS A TORT ACTION, AND NOT A REHABILITATION PROCEEDING UNDER RIRA…………………………………………………………………………………………….14

A. The Radnor Insurance Rehabilitation Act Does Not Apply to a Tort Suit Brought by a Rehabilitator on Behalf of an Insolvent Insurance Company, Because Such a Tort Action is Not a Rehabilitation Proceeding.………………………...............................................16

B. The McCarran-Ferguson Act Does Not Permit General State Tort Law to Reverse Preempt the Federal Arbitration Act.…………………………….……………………...20

C. Application of the Federal Arbitration Act to Resolve a Tort Claim Will Not Invalidate, Impair, or Supersede the Radnor Insurance Rehabilitation Act or the Efforts to Rehabilitate Respondent.…………………………………………………………...……22

D. Even if Radnor Insurance Rehabilitation Act did Apply to a Tort Suit Brought by a Rehabilitator, Radnor Insurance Rehabilitation Act’s Exclusive Jurisdiction and Anti-Arbitration Provisions Do Not Reverse Preempt the Federal Arbitration Act Because These Particular Provisions Do Not Regulate the Business of Insurance…………….....23

Conclusion……………………………………………………………………………………….25

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Table of Authorities

United States Supreme Court Decisions

AmSouth Bank v. Dale, 386 F.3d 763 (6th Cir. 2004)………………………………..………17,18

BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996)……………………………………11

Cooper Indus., Inc. v. Leatherman Tool Group, Inc., 532 U.S. 424 (2001)…………………12, 14

Evitts v. Lucey, 469 U.S. 387 (1985)……………………………………………………………..8

Griffin v. Illinois, 351 U.S. 12 (1956)…………………………………………………………….8

Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205 (1979). ………………….……22

Honda Motor Co., Ltd. v. Oberg, 512 U.S. 415 (1994)……………………………….5, 6, 7, 9, 11

Humana Inc. v. Forsyth, 525 U.S. 299 (1999)……………………………………………….…..23

Mathews v. Eldridge, 424 U.S. 319 (1976)……………………………………………………...11

McKane v. Dunston, 153 U.S. 684 (1894)………………………………………………………..8

Moses H. Cone Memorial Hospital v. Flood & Mercury Const. Corp., 460 U.S. 1 (2009)……..16

Pacific Mut. Life Ins. Co. v. Haslip, 499 U.S. 1 (1991)……………………………..5, 6, 7, 12, 14

Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967)…………………………16

Southland Corp. v. Keating, 465 U.S. 1 (1984)………………………………………………….16

State Farm Mut. Automobile Ins. Co. v. Campbell, 538 U.S. 408 (2003)…………………..12, 13

Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119 (1982)………………………………………24

United States Department of the Treasury v. Fabe, 508 U.S. 491 (1993). ……………...21, 25, 26

Federal Appellate Court Decisions

Ainsworth v. Allstate Ins. Co., 634 F. Supp. 52 (WD. Mo. 1985). ……………………..………20

Bennett v. Liberty Nat’l Fire Ins. Co., 968 F.2d 969 (9th Cir. 1992). …………………...………20

Bernstein v. Centaur Ins. Co., 606 F. Supp. 98 (S.D.N.Y. 1984). ………………………………20

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D’Amiante Du Quebec, Ltee. v. Am. Home Assurance Co., 864 F.2d 1033 (3rd Cir. 1988)……25

Davister Corp. v. United Republic Life Ins. Co., 152 F.3d 1277 (10th Cir. 1998), cert. denied,

525 U.S. 1177. ………………………………………………………………………………21, 26

Green Oil Co. v. Hornsby, 539 So. 2d 218 (Ala. 1989)…………………………………………...6

Grode v. Mut. Fire, Marine and Inland Ins. Co., 217 F.3d 208 (2000) ………………...17, 21, 22

Gross v. Weingarten, 217 F.3d 208 (4th Cir. 2000)………………………………………….…..22

Int'l Ins. Co. v. Duryee, 96 F.3d 837 (6th Cir. 1996)……………………………………………21

Melahn v. Pennock Ins., Inc., 965 F.2d 1497 (8th Cir. 1992).………………………………21, 22

Murff v. Prof’l Med. Ins. Co., 97 F.3d 289 (8th Cir. 1996)………………..…………………….23

Munich Am. Reins. Co. v. Crawford, 141 F.3d 585 (5th Cir.), cert. denied, 525 U.S. 1016 (1998)

……………………………………………………………………………………………….20, 26

Nationwide Mut. Ins. Co. v. Cisneros, 52 F.3d 1351 (6th Cir. 1995)……………………………23

Nichols v. Vesta Fire Ins. Corp., 56 Supp.2d 778 (1999)…………………….……...………17,18

Schacht v. Beacon Ins. Co., 742 F.2d 386 (7th Cir. 1984). ………………………………..……20

Suter v. Munich Reinsurance Co., 223 F.3d 150 (3d Cir. 2000) ……………………………17, 21

Statutes and Constitutional Provisions

9 U.S.C. § 2…………………………………………………………………………………..14 15 U.S.C. § 1012(B)……………………………………………………………………..15, 22 Ky. Rev. Stat. 304.33-040(3)(a)……………………………………………………………..18 Radnor Code § 11.140………………………………………………………………………...4 Radnor Code § 11.152………………………………………………………………………..1 Radnor Rule of Appellate Procedure 3………………………………………………………3

Jurisdiction

The Petition for Certiorari by Petitioners was filed and granted. This Court has jurisdiction pursuant to 28 U.S.C. § 1257(a)

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STATEMENT OF THE CASE

A. Course of Proceedings

Respondent Helm, acting in his capacity as rehabilitator for Allegiance Health Insurance

Company (“Allegiance”), filed a lawsuit against Petitioner Ashford & Haley in Marshall Circuit

Court alleging negligence, breach of fiduciary duty, fraud, and deception arising out of

accounting services that Ashford & Haley provided to Allegiance. This suit sought compensatory

and punitive damages. Ashford & Haley moved to compel arbitration based on an arbitration

clause in Section 22 of its contract with Allegiance. The Marshall Circuit Court refused to

compel arbitration, holding that the exclusive jurisdiction provision in the Radnor Insurance

Rehabilitation Act (“RIRA”), Radnor Code § 11.152, voided the arbitration clause in the contract

and any contrary provisions in the Federal Arbitration Act (“FAA”). The Marshall Circuit Court

relied on the McCarran-Ferguson Act, 15 U.S.C. § 1012(b) for its conclusion that RIRA “reverse

preempted” the FAA.

Helm’s tort suit against Ashford & Haley then proceeded to a bench trial. The circuit

court entered a judgment against Ashford & Haley, and awarded Respondent Helm $2,000,000

in compensatory damages and $10,000,000 in punitive damages. Since the State of Radnor in

2008 eliminated its immediate appellate courts, Ashford & Haley filed a petition for appeal with

the Radnor Supreme Court. The petition sought review of the judgment, including the punitive

damages award, and review of the circuit court’s order denying Ashford & Haley’s motion to

compel arbitration. Under Radnor Rule of Appellate Procedure 3(d), the Supreme Court has

complete discretion whether to grant an appeal, and accordingly it denied the petition for review.

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Ashford & Haley then filed a petition for certiorari with the United States Supreme

Court. This Court granted the petition for certiorari on two issues: 1) whether Radnor’s

elimination of a right to appeal a punitive damages judgment violates the Due Process Clause of

the Fourteenth Amendment; and 2) whether the McCarran Ferguson Act applies to permit an

ordinary state law tort action to “reverse preempt” the Federal Arbitration Act in a suit brought

by an insolvent insurance company against its accounting firm.

B. Statement of the Facts

Ashford & Haley is a well-respected firm that provides accounting and consulting

services and provided such services to Allegiance. David Helm, the Commissioner of the Radnor

Department of Insurance, took control of Allegiance in 2008 when he discovered trouble with

Allegiance’s financial statements and determined that Allegiance lacked sufficient resources to

remain in compliance with state requirements and was insolvent. R. at 3. Helm took control of

the company pursuant to powers granted him under RIRA. After conducting his own

investigation into Allegiance’s financial condition, Helm alleges that Ashford & Haley was

negligent in its valuation of certain assets and liabilities and that a former partner of Ashford &

Haley, Carolyn Rand, intentionally and fraudulently misstated certain liabilities. R. at 4. Carolyn

Rand has since resigned from the partnership at Ashford & Haley. R. at 5.

Also in 2008, in an effort to reduce government spending, Radnor enacted legislation that

eliminated Radnor’s intermediate appellate court, and vested appellate jurisdiction solely in the

Radnor Supreme Court. R. at 2. Both the Radnor State Bar Association and the Judicial

Conference of Radnor opposed this legislation. Id. Prior to the enactment of this legislation, all

litigants in civil or criminal matters retained the automatic right to an appeal from decisions of

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the county circuit courts to the Radnor Court of Appeals. Further review by the Radnor Supreme

Court was within the discretion of that court. Id.

While the 2008 legislation eliminated the intermediate appellate courts, it did not alter the

fact that appellate review in the Radnor Supreme Court was purely discretionary. After the

enactment of this 2008 legislation, the Radnor Supreme Court recognized they would not be able

to provide an appeal as of right in every case, and they therefore amended the Radnor Rules of

Appellate Procedure (“RRAP”) to eliminate the automatic right to an appeal. Id.

The Revised Appellate Rule 3 requires any party seeking review of a judgment from the

circuit court to file a Petition for Appeal with the Radnor Supreme Court. Petitions may contain

no more than 4000 words, Rule 3(c), R. at 8. Rule 3 provides little guidance on the

circumstances that warrant review and gives the justices broad discretion in choosing whether to

review a case. R. at 3, 8. The 2008 changes to Radnor’s longstanding appellate system had a

drastic impact in reducing appeals. In 2007, before the enactment of the legislation, Radnor

appellate courts decided approximately 4000 cases. After the enactment of the legislation, the

Radnor Supreme Court decided approximately 800 cases, an 80 percent reduction in the number

of cases that receive even one level of review. R. at 3.

Summary of the Argument

This case encompasses two issues. First, the RRAP violate the Due Process Clause of the

Fourteenth Amendment because they do not afford a defendant at least one appeal as of right to

review judgments that award punitive damages. The law is firmly established that appellate

review of punitive damages awards is required to ensure a defendant is not arbitrarily deprived of

property as the result of bias, passion or prejudice and to ensure that the punishment is

appropriate to accomplish the state’s goal of punishment and deterrence. The necessity of

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appellate review is further supported by consideration of the factors necessary to satisfy due

process considerations because erroneous deprivation of the defendant’s pecuniary interest is a

likely outcome of judicial assessment of punitive damages awards, but can be mitigated by the

additional procedural safeguard of a guaranteed right to appellate review. Moreover, appellate

review serves governmental interests by helping to ensure the creation of a uniform body of law.

By denying appellate review, the Radnor procedure grants too much deference to individual trial

judges and allows constitutional issues to be determined in isolation and only at the discretion of

trial court judges.

The McCarran-Ferguson Act does not reverse preempt the Federal Arbitration Act and

does not permit Radnor Insurance Rehabilitation Act (RIRA) to repudiate an arbitration

agreement covering a garden variety tort suit between the rehabilitator of an insolvent insurer.

The RIRA does not apply to a tort suit brought by a rehabilitator on behalf of an insolvent

insurance company, because such a tort action is not a rehabilitation proceeding within meaning

of Radnor Code 11.140. The Radnor Code §11.140 permits “any rehabilitation proceedings” and

does not refer to provisions and policies themselves. The McCarran-Ferguson Act does not

permit general state tort law to reverse preempt the Federal Arbitration Act. In addition the

application of the Federal Arbitration Act to resolve a tort claim will not invalidate, impair, or

supersede the Radnor Insurance Rehabilitation Act or the efforts to rehabilitate Respondent.

Even if Radnor Insurance Rehabilitation Act did apply to a tort suit brought by a rehabilitator,

Radnor Insurance Rehabilitation Act’s exclusive jurisdiction and anti-arbitration provisions do

not reverse preempt the Federal Arbitration Act because these particular provisions do not

regulate the business of insurance.

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ARGUMENT

I. DUE PROCESS REQUIRES APPELLATE REVIEW OF PUNITIVE DAMAGES JUDGMENTS, SO THE CHANGES TO THE RADNOR RULES OF APPELLATE PROCEDURE, WHICH MAKE APPELLATE REVIEW PURELY DISCRETIONARY, VIOLATE THE DUE PROCESS CLAUSE OF THE FOURTEENTH AMENDMENT.

A. When a State’s Common and Statutory Law Has Traditionally Provided an Automatic Right to Appellate Review of Punitive Damages Awards, This Sets the Foundation of Due Process and the State Cannot Eliminate it Without Providing an Effective Substitute.

In Honda Motor Co., Ltd. v. Oberg, 512 U.S. 415 (1994), this Court held that appellate

review of a judgment for punitive damages is constitutionally required by the Due Process clause

of the Fourteenth Amendment. Under this controlling precedent, it is clear that when Radnor

eliminated its intermediate appellate courts and abrogated its long-standing practice of providing

an automatic right to appellate review, it violated the due process rights of all parties subjected to

judgments of punitive damages.

Both Oberg and its predecessor case, Pacific Mut. Life Ins. Co. v. Haslip, 499 U.S. 1

(1991), emphasized that the traditional common law procedural practices to control and review

punitive damages that have long prevailed in the majority of states inform the requirements of

due process. The common law method of assessing punitive damages, including trial court

review of jury verdicts as well as appellate review of both jury and trial court determinations,

was well established by the time the Fourteenth Amendment was enacted, and nothing in that

amendment supports an intent to diverge from these common law methods. Haslip, 499 U.S. at

17-18. Under the common law, a jury instructed to consider the gravity of the wrong and the

necessity of deterring similar wrongful conduct initially determined the amount of a punitive

damages award. Id. at 15. Trial and appellate courts then reviewed the jury’s determination of

the size of the punitive award to ensure that it was reasonable. Id. This Court noted that at

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common law, post verdict judicial review, including by appellate courts, was available to ensure

that the punitive damages were not grossly out of proportion to the severity of the offense and

had some reasonable relationship to the compensatory damages. Id. at 22. As this Court noted,

an additional level of review at the appellate level provides an important check on the jury or

trial court’s discretion. Haslip then held that these common law procedures were sufficient to

comport with due process. Id.

Because Haslip did not involve a state’s attempt to limit appellate review, the Court was

not required at that time to determine whether every part of the traditional common law process

was mandatory. That question was squarely presented in Oberg, which involved an Oregon

constitutional amendment that prohibited appellate courts from reviewing the justification for or

amount of punitive damage awards. In Oberg, this Court elevated the traditional common law

procedure, including appellate review, to a constitutional due process requirement, and held that

a fact finder’s discretion to award punitive damages must be subject to judicial review in order to

ensure that the award is not the result of bias, passion, prejudice, corruption or other improper

motive. 512 U.S. at 425. See also Green Oil Co. v. Hornsby, 539 So. 2d 218, 222 (Ala. 1989).

Courts have recognized that some level of review above the trial level is always necessary

because even a properly functioning jury or trial judge has the potential to issue an excessive

award. Hornsby, 539 So. 2d 218 at 222.

Both Haslip and Oberg make clear that a trial court review of a jury’s verdict, standing

alone, without further appellate review, is not sufficient to meet due process requirements.

Consequently, the fact that in the present case it was the trial judge who imposed the punitive

damages award, rather than a jury, is not relevant to the due process issue. As this Court

explained in Haslip, procedural due process in the punitive damages arena focuses on constraints

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on the discretion of the fact finder, whether the jury or a judge. Id. at 22. The Haslip decision

was motivated by concerns about “unlimited jury discretion,” and “unlimited judicial discretion

for that matter.” Id. at 18. Appellate review “provides an additional check on the jury’s or trial

court’s discretion.” Id. at 20-21 (emphasis added). An appellate court, whether reviewing a jury

or a trial court award, applies detailed substantive standards developed to assess the fairness of a

punitive award, and “makes certain that the punitive damages are reasonable in their amount and

rational in light of their purpose to punish what has occurred and to deter its repetition.” Id.

In Oberg, this Court specifically rejected Oregon’s argument that because its trial judges

could overturn jury punitive damages awards, its elimination of appellate review did not violate

due process. 512 U.S. at 429. The Court noted that while trial judges’ review of jury awards can

be a significant layer of protection from arbitrary or excessive awards, further appellate review

remains essential, and cited a study demonstrating that over half of all punitive damages awards

that are appealed are reversed or reduced by appellate courts. Id. at 433.

In the present case, Ashford & Haley did not even have the protection of a level of review

in the Marshall Circuit Court, because the trial judge was the fact finder. While it could be

argued that a judge is a more rational decision-maker than a jury, and is allowed to consider a

defendant’s financial situation to assist him in deciding on an appropriate punitive damages

award, the Radnor procedures simply do not require a level of comparative analysis at the

appellate level that this Court held in both Haslip and Oberg is so essential to comport with Due

Process requirements. Just as a properly functioning jury can issue an excessive award, so too

can a thoughtful trial level judge make an improper determination on the size of the award.

Because punitive damages are subjective and cannot be determined as concretely as

compensatory damages, some level of review of the fact finder is always necessary to ensure the

8

award is not arbitrary. This review is necessary whether it is in the form of a trial judge’s review

of a jury’s award, or an appellate court’s review of a trial judge’s decision after a bench trial.

Moreover, unlike a jury trial that allows a defendant an opportunity to challenge the jury verdict

as excessive through post trial motions, with a bench trial there is an even greater need for

appellate review because it is the only level of judicial review available to defendants.

While Respondent may well argue that Radnor is not constitutionally obligated to provide

any appellate review at all, citing McKane v. Dunston, 153 U.S. 684 (1894), and its progeny, it is

dubious whether this line of cases, which says that due process does not require any right to an

appeal in criminal cases, survives Oberg. Moreover, neither Dunston nor any of the later cases

that cite to it involved the situation we have here, namely a State’s elimination of a right to

appeal. Only Oberg presents this precise issue, so it is the controlling precedent. What Dunston

and its progeny actually held is quite consistent with Oberg. While noting that the Due Process

clause may not require states to provide appellate courts or a right to appeal, these cases held that

once a state does provide an appellate system, it must provide a meaningful and fair right to

appeal to all, consistent with common law notions of due process and with the obligations of

equal protection. See, e.g. McKane v. Dunston, 153 U.S. 684, 687; Griffin v. Illinois, 351 U.S.

12, 18-19 (1956); Evitts v. Lucey, 469 U.S. 387, 393 (1985).1

1TheDunstonlineofcases,whichallconcernedappellatereviewofcriminal

judgments,isdistinguishablebecausegreaterdue process has already been accorded in the tribunal of first instance. Criminal cases are subjected to the higher standard of proof beyond a reasonable doubt, whereas in civil cases the burden of proof is merely a preponderance of the evidence. Additionally, criminal courts have the benefit of sentencing guidelines to limit the judge or jury’s discretion and impose criminal sentences that punish similarly situated defendants in a similar and proportional way. Finally, whereas the state has an interest or at least indifference not to make innocent persons wards of the state that serves as a check on the criminal justice system, there is no similar check on the amount of punitive damages awards.

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Oberg, following Haslip, placed great emphasis on the fact that once states did provide

full systems of appellate review, including an initial appeal as of right, this traditional practice

becomes the threshold for determining the requirements of due process of law. Thus, the problem

in Oregon was that by prohibiting any judicial review of the amount of punitive damages awards,

the state took away something that it had traditionally provided that had become an essential part

of the nation’s fabric of due process of law. As Justice Scalia noted in his Oberg concurrence,

when a state eliminates “a procedure traditionally accorded at common law, [t]he deprivation of

property without observing (or providing a reasonable substitute for) an important traditional

procedure … violates the Due Process Clause.” 512 U.S. at 436 (Scalia, J., concurring).

As the majority held, while all states are not required to follow the same procedures in

order to comply with due process, the fact that all federal courts and every other state afford

defendants appellate review of the amount of punitive damages awards, sets the benchmark for

what due process requires. Id. at 426. When a state abrogates a “well-established common law

protection against arbitrary deprivation of property,” this “raises a presumption that its

procedures violate the Due Process Clause.” Id. at 429. This presumption of unconstitutionality

can be overcome only by providing a similar, reasonably effective substitute for the protection of

appellate review. Id. at 430, 432. Any substitute review afforded must provide procedural

safeguards that meet a minimum level of ensuring that even a culpable defendant is not punished

unjustly through arbitrary deprivations of property. Id. at 430-31.

Like the Oregon state court procedures that were found to violate Due Process, the

Radnor Rules of Appellate Procedure deviate from what every other state provides in so far as

they do not guarantee the defendant a right of appeal regarding the size of punitive damages

awards. This removes a necessary level of review to ensure that the amount of punitive damages

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is not arbitrary or the result of passion or prejudice. Furthermore, in the present case, defendants

were not even provided with one level of review because the punitive damages award was

decided not by a jury, but only by the trial level judge. In making the drastic change from its and

every state’s traditional procedural protection of an automatic right to at least one appeal, Radnor

provided no reasonable substitute to satisfy Due Process concerns. While Respondent may argue

that Radnor permits defendants to seek appellate review, it is not sufficient to satisfy Due

Process that the RRAP merely provide an opportunity for discretional appellate review through

the filing of a petition to the Radnor Supreme Court. The opportunity to request review is hardly

an effective substitute for an automatic right to receive review. Moreover, in Radnor, the

opportunity to request rarely leads to actual appellate review. The Supreme Court has broad and

unreviewable discretion in deciding which cases to accept. R. at 3. In its discretion, it grants

review in only a small number of petitions each year. Radnor’s elimination of an automatic right

to appeal has led to an 80% reduction in the number of cases that ever receive any appellate

review. R. at 3. RRAP 3(c) also places serious constraints on a petitioner’s ability to convey all

issues and their merits to the Supreme Court, since petitions are limited to 4000 words. This

Rule also precludes the Supreme Court in considering the record or transcript in deciding

whether to hear an appeal. This latter restriction is particularly devastating to adequate

consideration of a punitive damages appeal, since the issues of the justification for and size of a

punitive damages award are necessarily highly dependent on the record in any particular case.

When Radnor departed from its long established common law practice, the Due Process

Clause obligated the State to do more than provide the ineffective substitute of a severely

constrained and rarely granted right to request discretionary review. Oberg compels the

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conclusion that Due Process requires Radnor to provide an appeal as of right to review the

propriety and size of punitive damages awards.

B. An Appeal as of Right from a Punitive Damages Judgment is Necessary to Protect the Significant Interest in Not Being Deprived Arbitrarily of Property. Reading Oberg to require an automatic right to appeal a punitive damages judgment,

rather than the mere opportunity to request review, is consistent with the well established test for

deciding what process is due as set out in Mathews v. Eldridge, 424 U.S. 319 (1976). Due

process requires consideration of three factors: “first, the private interest that will be affected by

the official action; second, the risk of an erroneous deprivation of that interest through the

procedures used and the probable value of additional procedural safeguards; and third, the

Government’s interest, including the function involved and the fiscal and administrative burdens

that the additional or substitute procedural requirement would entail.” Id. at 335.

As this Court stressed in Haslip and Oberg, with the financial punishment of punitive

damages, the defendant’s interest is in not being deprived of property arbitrarily or excessively.

Because fact finders have few concrete standards for determining the amount of this form of

financial punishment, and punitive awards are often determined by some greater ratio than the

actual harm done, the possibility for arbitrary deprivations of property is ever present. BMW of

N. Am, Inc. v. Gore, 517 U.S. 559, 575 (1996). A procedure such as Radnor’s that leaves the

determination of punitive damages solely to the discretion of the fact finder, with only a rarely

obtained purely discretionary right of any appellate review, presents grave risks that many

erroneous or excessive punitive awards will go uncorrected. The additional safeguard of a

required level of appellate review greatly reduces the risk of arbitrary deprivations of property.

Appellate courts provide de novo review and are far removed from the emotions of the trial.

Cooper Indus., Inc. v. Leatherman Tool Group, Inc., 532 U.S. 424, 431 (2001). They

12

dispassionately focus on legal standards to ensure that the damages are not grossly out of

proportion to the severity of the offense and that the fact finder exercised its discretion fairly and

reasonably. Haslip, 499 U.S. at 20-21.

In Gore, the Supreme Court recognized that the elusiveness of the concept of punitive

damages could lead to arbitrary deprivations of property, and so outlined three guideposts for

courts to consider in determining if damages are grossly excessive and erroneously deprive

defendants of property. The first guidepost is the degree of reprehensibility of the defendant’s

conduct; the second is the ratio of the punitive damages to the compensatory damages; the third

guidepost is any state sanctions for comparable misconduct. Id. These guideposts are intended to

serve elementary notions of fairness so that all people receive fair notice of both the conduct that

will subject him to punishment and the severity of the penalty the state may impose. Id. at 574.

The Court stressed that exacting appellate review of each of these guideposts is necessary to

ensure that a punitive damages award is based on the correct application of the law, and not the

decision maker’s caprice. State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 418 (2003).

Every defendant would benefit from additional levels of review of the second guidepost

from Gore concerning the ratio of damages. Although this Court has been reluctant to establish a

bright line ratio, in both Haslip and Gore, the Court cited punitive damages awards of more than

a 4-to-1 ratio as “close to the line of constitutional impropriety.” Campbell, 538 U.S. at 425. In

our case, the ratio of compensatory to punitive damages is 5-to-1. The ratio therefore is likely to

cross this unofficially established line of constitutional impropriety. In such close cases, because

a bright line ratio is not firmly established, the automatic right to an appeal, and not merely the

opportunity for discretionary review, is essential to ensure that even culpable defendants are not

arbitrarily deprived of property without due process of law. The additional level of review in

13

these circumstances has great value because case comparison at the appellate level exposes the

decision to a larger judicial community who can reassess the fairness of the original decision by

performing a comparative analysis with other cases that have come up for review.

Finally, regarding the third factor in consideration of due process issues, the government

interest implicated by punitive damages is to punish and deter the conduct in question in a

meaningful way that is proportional way to the wrong. Radnor’s interest in eliminating its

intermediate appellate courts was simply to save some money in tight fiscal times. The Supreme

Court then amended the RRAP to rescind the automatic right to an appeal in response to the

legislation that sought to reduce government spending. The Radnor Supreme Court’s interest

was in making sure it would have a manageable workload. While the government’s desire to

save money and its financial interest in the cost of an appeal is a valid consideration, as is the

administrative consideration of judicial workload, these interests do not rise to the same

constitutional level as the private interest at stake. An erroneous and arbitrary deprivation of

property outweighs government cost savings. The prevailing interest here should be in promoting

a properly functioning justice system that affords the procedural protections necessary to ensure

both that all defendants receive fair punishments and that the prospect of these punishments

serves a deterrent function to other citizens. With more complicated and subjective issues like

punitive damages, the promotion of the government’s interest requires a guaranteed level of

review because the balance between effectively and proportionately punishing a defendant

borders so closely with arbitrarily depriving the defendant of his property. Therefore, appellate

review is necessary as a check on the trial court’s discretion.

Moreover, additional levels of review further serve government interests because this

evolving body of law will benefit from comparative analysis at the appellate level. The judgment

14

entered against Ashford & Haley does little to either explain the parameters of the law or the

reasoning for the extent of the consequences. Such a judicial order is not helpful to judges in

understanding how to evaluate and assess future punitive damages awards. This Court noted in

Haslip that meaningful review includes some reflection in the record on reasons for upholding or

overruling a damages award. Haslip, 499 U.S. at 20. Legal principals gain clarity from this

reflection and from the levels of review that permit comparative analysis. Cooper, 532 U.S. at

436. The best reference for judges to use in making accurate and fair decisions in the future is a

well-articulated, coherent body of law that is created through appellate review.

Because the concept of gross excessiveness that limits punitive damage awards is

difficult to define, and because punitive damages will vary greatly from one case to the next,

depending on the wrong committed and the financial situation of the defendant, the

determination of punitive damages awards will never be a firmly settled area of law with

damages awards that can be handed down formulaically by trial courts alone. The issue of

punitive damages awards is one that requires at least some guaranteed level of review in order to

comport with Due Process and ensure the fair treatment of all individuals. Because the Radnor

rules do not provide any guaranteed level of appellate review, these rules violate Due Process.

II. THE MCCARRAN FERGUSON ACT’S REVERSE PREEMPTION DOCTRINE IS INAPPLICABLE TO THIS CASE, BECAUSE THE UNDERLYING SUIT IS A TORT ACTION, AND NOT A REHABILITATION PROCEEDING UNDER RIRA.

The Marshall Circuit Court mistakenly assumed, without analysis, that the RIRA applied

to Helm’s tort suit against Ashford & Haley. Based on this fundamental misunderstanding, the

court erred in failing to enforce the arbitration provision in Ashford & Haley’s contract with

Allegiance, despite the mandate of the FAA. The FAA preempts any state law that inhibits

arbitration of contracts within interstate commerce. 9 U.S.C. § 2. The McCarran-Ferguson Act

(“McCarran-Ferguson”) saves state laws regulating the business of insurance from preemption

15

and may even allow such laws to “reverse preempt” federal statutes. 15 U.S.C. § 1012(B). The

Marshall Circuit Court seemed to assume that just because Allegiance was in rehabilitation

proceedings, a tort suit brought by Helm in his capacity as rehabilitator was converted form an

ordinary tort action into a rehabilitation proceeding under RIRA. The court then found that RIRA

conflicted with the FAA and reverse preempted it under McCarran-Ferguson. (R at 6). When

properly analyzed, however, it is apparent that Helm’s tort suit is just that, and is not a

rehabilitation proceeding governed by RIRA. Thus, the only issue is whether McCarran

Ferguson permits Radnor’s tort law to reverse preempt the FAA. Since Radnor’s general tort law

has nothing to do with regulating the business of insurance, McCarran Ferguson reverse

preemption is irrelevant to this case. The overwhelming federal policy of the FAA must control.

Under the FAA, whether the parties made an agreement to arbitrate is an issue of federal

law and all doubts are resolved in favor of arbitration. “The court is to make this determination

by applying the “federal substantive law of arbitrability, applicable to any arbitration agreement

within the coverage of the Act.” Moses H. Cone Mem’l Hosp. v. Flood & Mercury Const. Corp.,

460 U.S. 1, 24. See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 400-404,

(1967); Southland Corp. v. Keating, 465 U.S. 1, 12 (1984).” That body of law counsels “that

questions of arbitrability must be addressed with a healthy regard for the federal policy favoring

arbitration. The FAA establishes that, as a matter of federal law, any doubts concerning the scope

of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the

construction of the contract language itself or an allegation of waiver, delay, or a like defense to

arbitrability.” Moses H. Cone Mem’l Hosp., 460 U.S., at 24-25. The FAA compels both state

and federal courts to enforce arbitration clauses, such as Section 22 in the accounting services

contract between Allegiance and Ashford & Haley. Keating, 465 U.S. 1, 12 (1984).

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A. The Radnor Insurance Rehabilitation Act Does Not Apply to a Tort Suit Brought by a Rehabilitator on Behalf of an Insolvent Insurance Company, Because Such a Tort Action is Not a Rehabilitation Proceeding.

RIRA does not apply to a tort suit brought by Rehabilitator on Allegiance’s behalf

because the tort suit is not a rehabilitation proceeding within meaning of Radnor Code § 11.140.

Rather the instant claim is no more than a garden-variety tort suit with a plaintiff that just

happens to be a rehabilitator for an insolvent insurance company. See AmSouth Bank v. Dale,

386 F.3d 763, 783 (6th Cir. 2004); Nichols v. Vesta Fire Ins. Corp., 56 Supp.2d 778 (E.D. Ky.

1999). If Allegiance had not been insolvent and had filed this same tort claim against Ashford &

Haley, it is indisputable that this tort claim would fall outside the purview of the McCarran-

Ferguson Act. A state’s general tort law obviously is not intended to regulate the business of

insurance, so the McCarran Ferguson Act does not apply. Yet Respondent somehow assumes

that just because Allegiance is insolvent and he is now empowered to bring tort claims on its

behalf, this tort claim has been converted into a “rehabilitation proceeding” that is directly

concerned with the state’s regulation of insurance. Every court that has faced such a contention

has utterly rejected it. As the Fourth Circuit noted in Gross v. Weingarten, 217 F.3d 208, 222-23

(4th Cir. 2000), Congress did not intend for McCarran Ferguson to convert every claim by or

against an insolvent insurer into a rehabilitation or liquidation claim governed by state insurance

rehabilitation laws. See also Dale, 386 F.3d 763 (,6th Cir. 2004); Gross, 217 F.3d 208, 222-23 (4th

Cir. 2000); Suter v. Munich Reinsurance Co., 223 F.3d 150 (3d Cir. 2000); Nichols, 56 F. Supp.

2d 778 (E.D. Ky. 1999); Grode v. Mut. Fire, Marine and Inland Ins. Co., 8 F.3d 953 (3d Cir.

1993). Tort and contract claims do not get converted into rehabilitation or liquidation

proceedings just because they are brought on behalf of an insolvent insurance company. Helms’

tort claims on behalf of Allegiance arose out of a pre-insolvency contract, and are not considered

to be a part of the rehabilitation proceedings per se. The rehabilitator is simply acting on behalf

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of the insurance company whose claims are based on tort law rather than the rehabilitation

proceedings themselves. Id.

The present case is remarkably similar to Dale, 386 F.3d 763 (6th Cir. 2004). In Dale, the

receiver for an insolvent insurance company brought tort claims against several banks, alleging

that they had negligently failed to prevent an investor in the insurance company from using his

accounts at the banks to perpetuate an international embezzlement and money laundering scheme

that led to the insurance company’s collapse. The banks then filed an action in federal court to

enjoin the receiver from pursuing this state court litigation. The receiver argued that the federal

court lacked jurisdiction because McCarran Ferguson allowed the state insurance liquidation

laws to reverse pre-empt federal diversity jurisdiction laws. The Sixth Circuit rejected McCarran

Ferguson argument, noting that “where the insolvent insurer is itself a plaintiff in an ordinary

contract or tort action, courts tend to look unfavorably on claims of McCarran Ferguson

preemption of the FAA or the removal statutes so as to insulate that action from the federal

courts.” 386 F.3d at 783. The court concluded that the tort action had little to do with the state’s

regulation of insurance or the process for liquidating insolvent insurance companies, so

McCarran Ferguson did not apply.

Similarly, the Third Circuit ruled in Suter, 223 F.3d 150, 160-62 (3d Cir. 2000), that a

“suit instituted by the Liquidator against a reinsurer to enforce contract rights for an insolvent

insurer” was not a liquidation or rehabilitation proceeding within the meaning of the state’s

insurance rehabilitation law. It was simply a breach of contract action. The mere fact that if this

contract suit proved meritorious it would benefit the insolvent insurer’s estate did not convert it

into a liquidation proceeding. Thus, the McCarran Ferguson Act was inapplicable.

In Grode, 8 F.3d 953 (3d Cir. 1993), a rehabilitator, as part of his reorganization of the

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insurance company, brought a breach of contract action against other insurance companies,

seeking to collect on debts he claimed they owed under reinsurance contracts. The rehabilitator

moved for abstention under McCarran Ferguson when the foreign corporations removed the suit

to the federal district court based on diversity jurisdiction. The Third Circuit held that the district

court improperly relied upon McCarran Ferguson and other abstention doctrines in sending the

case back to state court. The circuit court found that the action was simply an ordinary contract

action. “Although the regulation of insolvent insurance companies is surely an important state

interest, this case does not involve the complex and highly regulated issues of insurance

regulation; rather it is a simple contract action involving an allegedly unpaid debt. The complex

regulations relating to insolvent insurance companies have to do with plans of rehabilitation and

payment to policyholders. Simple contract and tort actions that happen to involve an insolvent

insurance company are not matters of important state regulatory concern or complex state

interests.” Id. at 959.

Another case directly on point is Nichols, 56 F. Supp. 2d 778. The Kentucky Insurance

Commissioner, in his capacity as liquidator for an insolvent insurance company, brought a

breach of contract claim in state court against another insurance company. The defendant

removed the case to federal court and moved to compel arbitration based on the arbitration

clause in the contract between the two companies. The Commissioner as liquidator argued that

the contract suit was controlled by the exclusive jurisdiction and anti-arbitration provisions of

Kentucky’s Insurance Liquidation and Rehabilitation statute. Kentucky’s exclusive jurisdiction

was much broader than RIRA: it gave the liquidation court “exclusive jurisdiction” over all

matters “in any way relating to any delinquency proceeding” including “disputes involving

purported assets of the insurer.” Id. at 780; Ky. Rev. Stat. 304.33-040(3)(a). The district court

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held that it would be a misinterpretation of the statute to conclude that the breach of contract

claim was subject to Kentucky’s exclusive jurisdiction provision and McCarran Ferguson. “The

instant action before the Court is not a ‘delinquency proceeding;’ rather it is a common law

breach of contract action which merely happens to involve an insolvent insurer.” Id. at 781.

Thus, McCarran Ferguson did not apply, and the FAA governed to compel arbitration.

The Nichols, court’s holding rested on substantial precedent. See Bennett v. Liberty Nat’l

Fire Ins. Co., 968 F.2d 969 (9th Cir. 1992); Schacht v. Beacon Ins. Co., 742 F.2d 386 (7th Cir.

1984); Ainsworth v. Allstate Ins. Co., 634 F. Supp. 52 (WD. Mo. 1985); Bernstein v. Centaur

Ins. Co., 606 F. Supp. 98 (S.D.N.Y. 1984). Each of these cases involved similar breach of

contract suits arising out of pre-insolvency contracts brought by insolvent insurance company

liquidators or rehabilitators, and all involved statutory schemes with exclusive jurisdiction

provisions similar to RIRA, and motions to compel arbitration. In each case, the courts held that

the suits were not liquidation proceedings subject to the state insurance liquidation laws, so that

the FAA controlled and the parties had to arbitrate the disputes.

This overwhelming body of precedent establishes that Helm’s tort suit against Ashford &

Haley simply is not a “rehabilitation proceeding” subject to RIRA’s exclusive jurisdiction or

anti-arbitration provisions. It is nothing more than a tort suit that happens to involve an insolvent

insurance company as plaintiff. The mere fact that any damages recovered from the tort suit will

go into Allegiance’s estate and may be used to help rehabilitate it and pay policyholders does not

turn the tort suit into a rehabilitation proceeding. Such a conclusion would sweep any litigation

seeking damages commenced by a rehabilitator, whatever the cause of action – civil rights or

first amendment, securities fraud, breach of contract, tort -- into a state court rehabilitation

proceeding. No court has ever gone so far.

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The cases relied on by Helm are easily distinguishable. Munich Am. Reins. Co. v.

Crawford, 141 F.3d 585 (5th Cir.), cert. denied, 525 U.S. 1016 (1998), and Davister Corp. v.

United Republic Life Ins. Co., 152 F.3d 1277 (10th Cir. 1998), cert. denied, 525 U.S. 1177

(1999), both held that the FAA was reverse preempted under McCarran Ferguson by provisions

in state insurance liquidation statutes. These cases, however, did not involve tort or contract

claims initiated by the liquidators. Rather, they involved claims against the liquidator, alleging

entitlement to some assets he claimed belonged to the insolvent insurance company. In this

regard, they were indeed rehabilitation or liquidation proceedings governed by the state

liquidation statutes. The main purpose of such proceedings is to resolve claims against the assets

of the insolvent company and then work out a means to pay the claims in an orderly fashion.

Helm’s tort suit against Ashford & Haley is simply a tort suit, and not a rehabilitation

proceeding. Thus, RIRA does not apply to this case. The only state law at issue is Radnor tort

law. The only McCarran Ferguson question is whether a state’s tort law can reverse preempts the

FAA. U.S. Dep’t of the Treasury v. Fabe, 508 U.S. 491 (1993).

B. The McCarran-Ferguson Act Does not Permit General State Tort Law to Reverse Preempt the Federal Arbitration Act. McCarran-Ferguson gives no special preemptive power to state laws that do not directly

relate to the regulation of insurance. In order to be construed as a law regulating the business of

insurance, the law must directly relate to the state interest in protecting insurance policyholders.

Fabe, 508 U.S. 491 (1993). As the Sixth Circuit noted in Int'l Ins. Co. v. Duryee, 96 F.3d 837,

839-40 (6th Cir. 1996), “The McCarran-Ferguson Act was not meant to protect statute[s]

…tangentially related to insurance from the general rule of federal law supremacy.” It is self-

evident that Radnor’s general tort law of negligence, fraud and breach of fiduciary duty – the

causes of action in Helm’s suit – are not specific to insurance, and are not aimed even

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tangentially at the protection of insurance policyholders. Rather, tort law exists to protect the

general public. Thus, the United States Court of Appeals for the Third Circuit held that no

important state insurance regulatory interests are involved in an ordinary tort action by the

rehabilitator of an insolvent insurance company. Grode, 8 F.3d 953, 960-61 (3d Cir. 1993). The

United States Court of Appeals for the Eighth Circuit reached the same conclusion in Melahn v.

Pennock Ins., Inc., 965 F.2d 1497, 1506-07 (8th Cir. 1992), where it held that the adjudication of

a rehabilitator’s alleged liabilities would neither interfere with the rehabilitator’s control of the

insolvent insurer nor frustrate the state's insolvency proceeding.

The mere fact that Respondent’s tort claims against Ashford & Haley might eventually

help policyholders by adding to the funds of Allegiance is far too attenuated a connection to

make the state tort law into a law intended to directly benefit policyholders. Respondent is

attempting to making a judicial end-run by indirectly connecting its claims to the regulation of

insurance simply because the Respondent happens to a rehabilitator of insurance company. This

argument assumes that every suit by or transaction or dealings with the insolvent insurance

company can ultimately contribute to the benefit of policyholders by enhancing the financial

prospects of the insurance company. Id. This argument, however, goes too far: “But in that sense,

every business decision made by an insurance company has some impact on its reliability ... and

its status as a reliable insurer.” Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205,

216-17 (1979). Royal Drug rejected the notion that such indirect effects are sufficient for a state

law to avoid pre-emption under McCarran-Ferguson. Id. In sum, because state tort law is not

directly related to regulating the business of insurance, McCarran Ferguson is inapplicable to this

case, and the FAA therefore applies to compel arbitration despite the existence of the exclusive

jurisdiction and anti-arbitration provisions in RIRA.

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C. Application of the Federal Arbitration Act to resolve a tort claim will not invalidate, impair, or supersede the Radnor Insurance Rehabilitation Act or the efforts to rehabilitate Respondent.

The FAA applies to compel arbitration of Helm’s tort suit against Ashford & Haley for

an additional reason: arbitration of this claim will not impair, undermine or conflict with RIRA

or Helm’s efforts to successfully rehabilitate Allegiance. McCarran-Ferguson provides that “[n]o

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.” 15 U.S.C. § 1012(b). Application

of the FAA in this action will not “invalidate, impair, or supersede” a state law “regulating the

business of insurance” for purposes of McCarran-Ferguson reverse preemption.

In assessing whether a general federal statute such as the FAA “impairs” the operation of

a state law, the proper inquiry is on the underlying cause of action in the suit for which a party is

seeking arbitration. The proper question here is whether arbitration of this underlying dispute

would in any way impair or conflict with Radnor’s efforts to rehabilitate Allegiance. Humana

Inc. v. Forsyth, 525 U.S. 296 (1999). The Supreme Court held that the civil action remedies

under the federal RICO statute were not reverse preempted by McCarran-Ferguson. 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,

McCarran-Ferguson does not preclude its application. Id. at 307-10. See also Nationwide Mut.

Ins. Co. v. Cisneros, 52 F.3d 1351, 1363 (6th Cir. 1995) (“the presence of additional remedies in

the Fair Housing Act does not cause the Act to invalidate, impair or supersede Ohio insurance

law”). McCarran-Ferguson reverse preemption applies only where an express conflict with the

letter of the state statutory law or a frustration of an officially articulated state regulatory goal

exists. Humana Inc., 528 U.S. at 299.

For these reasons, in Murff v. Prof’l Med. Ins. Co., 97 F.3d 289 (8th Cir. 1996) the court

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concluded that permitting the adjudication of an age discrimination suit against an insolvent

insurance company in a forum other than the rehabilitation proceeding court would not frustrate

or impair the state’s rehabilitation laws. As the Eighth Circuit noted, any judgment that the

plaintiff might obtain in the discrimination suit would have to become part of the rehabilitation

proceedings, and that was sufficient to protect the state’s interests. Just as in Murff, resolving the

Helms versus Ashford & Haley negligence and fraud suit in an arbitral forum rather than in

Marshall Circuit Court will not impair Radnor’s regulatory scheme under RIRA. The arbitrator is

just as capable of applying tort principles as the Radnor Court, and just as capable of weighing

evidence, including evidence of harm. The arbitrator is just as capable of awarding damages.

Any judgment that the arbitrator renders in Helm’s favor is just as capable of redounding to the

benefit of Allegiance’s financial condition as a court award. Once any arbitral award or judgment

is collected, it will then become part of Radnor’s rehabilitation proceedings governed by RIRA.

D. Even if Radnor Insurance Rehabilitation Act did apply to a tort suit brought by a rehabilitator, Radnor Insurance Rehabilitation Act’s exclusive jurisdiction and anti-arbitration provisions do not reverse preempt the Federal Arbitration Act because these particular provisions do not regulate the business of insurance. Even if this Court were to conclude that Helm’s tort suit is converted into a rehabilitation

proceeding subject to RIRA simply because the plaintiff is the rehabilitator for an insolvent

insurance company, McCarran Ferguson would still not require RIRA to reverse preempt the

FAA. As noted, McCarran Ferguson applies only to state laws that directly regulate the business

of insurance. Just as Radnor’s tort law does not pass this test, the specific parts of RIRA at issue

here – the exclusive jurisdiction and anti-arbitration provisions – are also not sufficiently directly

related to the regulation of insurance.

In Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119 (1982), this Court listed three

factors to use in determining what activities constitute the “business of insurance:” (1) “whether

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the practice has the effect of transferring or spreading a policyholder's risk;” (2) “whether the

practice is an integral part of the policy relationship between the insurer and the insured;” and,

(3) “whether the practice is limited to entities within the insurance industry.” Id. at 129. In Fabe,

this Court clarified the analysis, emphasizing that one need not look to the entire state regulatory

scheme at issue, but instead must parse the specific portions of the state statute at issue. 508 U.S.

491, 508-09. Only those portions of a state statute that are directly and primarily aimed at

protecting the interests of policyholders may preempt federal law under McCarran Ferguson.

In Fabe, the Court separately analyzed different parts of Kentucky’s insurance liquidation

and rehabilitation statutes, and concluded that only the part of the statute that gave policyholders

preference in having their claims paid would preempt a federal statute that gave preference to the

United States. The parts of the Kentucky statute that also set out the preference for claims of

creditors and shareholders were aimed at protecting those classes of people, not at policyholders.

Thus, they did not preempt the federal statute. The Court noted that it could be argued that a

state’s entire scheme for rehabilitating or liquidating insurance companies can be seen as aimed

at protecting policyholders but many parts of these rehabilitation statutes will be only indirectly

related to the overall aim. These parts that have only an attenuated connection to the protection

of policyholders cannot reverse preempt federal law. Id. at 511-13.

Applying Fabe’s admonition to examine only the exclusive jurisdiction and anti-

arbitration provision, rather than the entire rehabilitation scheme of RIRA, these two aspects of

the Radnor law are not directly aimed at protecting policyholders. As courts have noted, the

purpose of exclusive jurisdiction provisions in insurance rehabilitation statutes is to insure a

uniform and efficient resolution of the affairs of the insurance company. See, e.g., Lac

D’Amiante Du Quebec, Ltee. v. Am. Home Assurance Co., 864 F.2d 1033 (3rd Cir. 1988). These

25

provisions are intended to make sure that there are not different interpretations of similar creditor

claims, and conflicting orders about who has a valid claim against the estate and whose claims

must be paid in what order. While an orderly rehabilitation or liquidation process obviously can

benefit policyholders, it equally benefits stockholders, employees, creditors, the state, and the

general public. The need for an orderly and uniform process is not uniquely aimed at protecting

policyholders. Any benefits that redound to policyholder do so only indirectly, and to the same

extent as all others with an interest in the affairs of the insolvent company.

Courts that have found exclusive jurisdiction clauses to be connected to the regulation of

the business of insurance have not followed Fabe’s command to look only to the particular

provisions rather than the entire statutory scheme governing rehabilitation or liquidation. These

courts have erroneously considered the overall policy of rehabilitation, rather than the specific

aims of exclusive jurisdiction. See, e.g., Davister, 152 F.3d 1277 (10th Cir. 1998); Crawford, 141

F.3d 585 (5th Cir. 1998). Thus these cases are wrongly decided, and conflict with Fabe.

For these reasons, the provisions of RIRA at issue here are not sufficiently directly

connected to the protection of policyholders to constitute laws whose purpose is the regulation of

insurance. McCarran Ferguson reverse preemption therefore does not apply, and the FAA

governs this case.

Conclusion

For the foregoing reasons, the RRAP do not comport with Due Process and should be

declared unconstitutional. Additionally this Court should reverse the judgment below and

remand with instructions to compel arbitration of Helm’s claims against Ashford & Haley.

Respectfully Submitted,

Attorneys for Petitioner