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FIRST NATL. BANK OF EASTERN ARKANSAS v. EUBANKS

January 24, 1989

FIRST NATIONAL BANK OF EASTERN ARKANSAS, A National Banking Association, PLAINTIFF,
v.
ROBERT M. EUBANKS, III, Commissioner of the Insurance Department for the State of Arkansas, DEFENDANT, ARKANSAS CREDIT INSURANCE ASSOCIATION, INTERVENOR


George Howard, Jr., United States District Judge.


The opinion of the court was delivered by: HOWARD, JR.

GEORGE HOWARD, JR., UNITED STATES DISTRICT JUDGE

 This action was instituted by First National Bank of Eastern Arkansas, a National Banking Association, (First National) against Robert M. Eubanks, III, Commissioner for the Insurance Department of the State of Arkansas (Commissioner Eubanks) *fn1" seeking a declaratory judgment. The jurisdiction of this Court is invoked pursuant to Title 28 U.S.C. §§ 1331 and 2201. The central issue for resolution is whether First National's debt cancellation agreements with borrowers, whereby any unpaid indebtedness is assumed by First National or cancelled at the borrowers' death, by resorting to a cash reserve, constitute the sale of insurance making the transaction subject to regulation by Arkansas's Insurance Department.

 Subsidiary issues to be resolved are:

 1. Whether debt cancellation contracts are incidental to traditional banking activities; and,

 2. Whether debt cancellation contracts are in conflict with the McCarran-Ferguson Act, 15 U.S.C. § 1011 et seq.

 RELEVANT FACTS

 On March 1, 1964, the United States Comptroller of the Currency issued the following regulation which appears in 12 C.F.R. 7.7495:

 
Debt Cancellation Contract. A national bank may provide for losses arising from cancellation of outstanding loans upon the death of borrowers. The imposition of an additional charge and the establishment of necessary reserves in order to enable the bank to enter into such debt cancellation contracts are a lawful exercise of the powers of a national bank and necessary to the business of banking. (Emphasis added)

 In 1987, preparatory to entering into debt cancellation agreements with some of its customers, in lieu of the usual practice of credit life insurance coverage, First National formulated a plan and prepared documents for the contemplated debt cancellation venture *fn2" and advised the Insurance Department of the State of Arkansas, by letter, of its plans. On April 21, 1987, David V. Simmons, Assistant Commissioner and Chief Counsel for the Arkansas Insurance Department, advised First National by letter:

 
An agreement between the obligee and the obligor calling for the cancellation of obligations in the event of death, conditioned upon the payment of a fee, would not be 'insurance' . . . and would not be regulated by this Department. If the debt were to be 'guaranteed' by any third party rather than cancelled, or if the bank was agreeing to extinguish an obligation no longer held by that bank, the agreement would be 'insurance' and, therefore, would be improper. Privity of contract is absolutely essential to the determination.
 
It also should be noted that the lender must not represent or imply in any manner that the Debt Cancellation Contract is insurance. Confusion and misrepresentation will expose the lending institution to sanctions by this Department.

 After receipt of Commissioner Simmons' letter, First National began entering into debt cancellation agreements with some of its customers. *fn3" On July 27, 1987, First National received the following letter from Commissioner Simmons:

 
Dear Mr. Glover:
 
The Insurance Commissioner has been asked to review the opinion expressed to you on the above subject [debt cancellation contracts] in my letter of April 21, 1987. Since this matter is being reviewed, we felt that you should be advised in that we could be planning to take some action based upon the April 21, 1987, letter. If, in fact, you have already commenced to issue debt cancellation contracts, we would as a matter of information appreciate being copied with copies of your debt cancellation contracts and any mathematical formulas utilized to establish the reserves on those contracts.
 
I would appreciate hearing from you as soon as possible, and the Department will communicate directly with you in the event that the opinion expressed in my previous letter is revised.

 On September 1, 1987, Commissioner Simmons advised Mr. Glover:

 
This letter is to inform you that the position of the insurance department on the above subject [debt cancellation contracts], as previously announced in my letter of April 21, 1987, has been reversed upon further research and review. Ark. Stat. Ann. § 66-202 defines insurance as:
 
". . . a contract whereby one undertakes to indemnify another or pay a specified amount or provide a designated benefit ...

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