MEMORANDUM OPINION
Autоmotive Professionals, Inc. (“API”) filed a petition under chapter 11 of the Bankruptcy Code. The State of Illinois filed a motion to dismiss API’s case based on five grounds: (i) API is ineligible for bankruptcy relief because it is a domestic insurance company; (ii) API’s officers lacked authority to file the bankruptcy petition because a state court appointed the Illinois Director of Insurance (“Director”) as conservator of API’s assets before it filed its bankruptcy petition; (iii) API has no assets to administer in bankruptcy because of a prepetition assignment for the benefit of creditors; (iv) sovereign immunity protects the Director from having to turn over API’s assets; and (v) the automatic stay does not apply to an action filed by the Director in state court to liquidate API under the rehabilitation and liquidation provisions of the Illinois Insurance Code.
I. Background and Facts
The following facts are undisputed. API is an Illinois corporation based in Schaumburg, Illinois. It sells vehicle service contracts to owners of vehicles. The purchaser pays API a fixed amount and API agrees to pay for the cost of certain vehicle repairs for a fixed period of time after the expiration of the original manufacturer’s warranty. API’s vehicle service contracts are sold through automobile dealerships.
API has outstanding vehicle service contracts with approximately 325,000 consumers in 49 states, including approximately 16,250 consumers in Illinois. API has been registered with the Illinois Director of Insurance as an authorized service contract provider under the Illinois Service Contract Act (“Act”), 215 ILCS 152/1 et seq. (2006), since at least 2002. Each year the State has approved API’s contract forms.
Most states have their own version of the Act, usually based at least to some degree on the Service Contracts Model Act. These laws generally require a service contract provider to demonstrate its financial ability to perform the contracts either through insurance, reserves or some other means. API’s vehicle service contracts are backed by а combination of funds on deposit in various reserve accounts and insurance policies. The amount and type of insurance coverage or other financial backing for each of API’s vehicle service contracts is based on the law of the state in which the vehicle service contract is sold.
If a company selling service contracts in Illinois satisfies the financial requirements of the Act through an insurance policy, the policy must provide “first dollar coverage” — meaning that it covers any liability that the service contract provider has under the service contract with the customer. All of API’s vehicle service contracts sold in Illinois are backed by first dollar insurance coverage issued by Marathon Financial Insurance Co., Inc. (“Marathon”), Allstate Insurance Company or Travelers Insurance Company, Marathon also provides less comprehensive coverage for many of API’s vehicle service contracts sold in states that do not require first dollar coverage.
For the last three years, API has operated at a cash deficit. There is now a cash shortfall of approximately $9 million in the reserve accounts relating to some of the vehicle service contracts. API’s situation is complicated by provisions of the Marathon insurance policies that apply to vehicle service contracts sold in states that do not require first dollar coverage. Marathon contends that its coverage does not attach to cover claims until all funds placed in API’s reserve accounts in the aggregate have been paid out for repair costs. Marathon may also assert that it has no obligation to pay on the non-first dollar policies for other reasons.
On March 2, 2007, Michael McRaith, the Illinois Director of Insurance, filed a complaint against API and the API Creditors’ Trust in the Circuit Court of Cook County. He obtained an Order of Conservation and Injunctive Relief (“Order of Conservation”), effectively freezing Kayman’s activities as API’s assignee. The complaint was brought in part under the Act. On April 4, 2007, McRaith filed a Complaint for Rehabilitation in state court seeking to “rehabilitate, wind down and terminate” the business and affairs of API under the rehabilitation and liquidation provisions of the Illinois Insurance Code. There has been no adjudication of any issues in connection with this second complaint.
API filed its bankruptcy petition in May 2007. The State filed its motion arguing that the case should be dismissed and the Director should be permitted to liquidate API under the rehabilitation and liquidation provisions of the Illinois Insurance Code.
II. Eligibility for Relief Under the Bankruptcy Code
The primary issue raised in the State’s motion is whether API is eligible to be a debtor under the Bankruptcy Code. The State argues that API is a “domestic insurance company” and therefore not eligible to be a debtor under § 109(b)(2) and (d) of the Bankruptcy Code, 11 U.S.C. § 109(b)(2) and (d). Section 109(b) provides that “[a] person may be a debtor under chapter 7 of this title only if such person is not — ... (2) a domestic insurance company....” Section 109(d) provides that “[o]nly ... a person that maybe a debtor under chapter 7 of this title ... may be a debtor under chapter 11 of this title.” Thus, if API is a domestic insurance company, it may not be a debtor under either chapter 7 or chapter 11 of the Bankruptcy Code.
As a preliminary matter, the State argues that the court does not have subject matter jurisdiction over bankruptcy cases involving domestic insurance companies. However, the question is not one of jurisdiction — the court has subject matter jurisdiction over all cases filed under the Bankruptcy Code.
See Promenade Nat’l Bank v. Phillips (Matter of Phillips),
Congress did not define “domestic insurance company” in the Bankruptcy Code. To fill this gap, the Seventh Circuit adopted the “state classification” test to determine whether a debtor is a domestic insurance company.
Matter of Estate of Medcare HMO,
The Act provides an exemption from compliance with the Illinois Insurance Code for service contract providers who comply with the Act. The State argues that API is not exempt from the Insurance Code because it has not complied with the Act. It also asserts that API is the substantial equivalent of insurance company. API contends that it is not an insurance company because the Act completely exempts service contract providers from insurance regulation whether or not they comply with it, and because API has complied with the Act in any event.
For the reasons discussed below, the court concludes that the Act provides an exemption to service contract providers who comply with the financial and registration requirements of the Act. API has complied with those provisions and is therefore exempt from compliance with and is not subject to any provision of the Illinois Insurance Code. It therefore is not classified as an insurance company under Illinois law for purposes of the state classification test.
A. Illinois Service Contract Act
The Act provides that service contract providers complying with the Act are not subject to and need not comply with any provision of the Illinois Insurance Code. It sets forth a statutory framework under which a service contract provider can do business in Illinois and not be treated as an insurance company. Section 5 of the Act states that “ ‘service contract provider’ means a person who is contractually obligated to the service contract holder under the terms of the service contract.” It then specifically states that “[a] service contract provider does not include an insurer.” 215 ILCS 152/5 (emphasis added). Section 10 of the Act, entitled “Exemptions,” provides that service contract providers “complying with this Act” are not required to comply with and are not subject to any provision of the Illinois Insurance Code. 215 ILCS 152/10.
Sections 15 and 25 contain the financial and registration requirements for service contract providers to do business in Illinois. Section 15, entitled “Financial requirements,” provides that no service contract shall be issued, sold or offered for sale in Illinois unless one of the thrеe conditions specified is satisfied. 215 ILCS 152/15. A service contract provider must either have first dollar insurance coverage for its service contracts, meet certain reserve requirements or have a net worth of at least $100 million. Id. Section 25 of the Act provides the registration requirements for service contract providers. It requires service contract providers to register with the State by providing specified information, including a statement indicating the provision of § 15 under which the service contract provider qualifies to do business in this state and a copy of all service contracts to be sold in the state.
Sections 20 (“Reimbursement policy; required provisions”), 30 (“Required service contract disclosures”), 35 (“Cancellations and refunds”) and 40 (“Incidental benefits”) all govern the contents of the contracts and the rights of consumers under those contracts. Section 45 imposes record keeping requirements on service contract providers, and § 50 contains the examination and enforcement provisions. Section 50 allows the Director to enforce a violation of the Act by various means, including issuing orders, prohibiting service contract providers from selling in violation of the Act, imposing civil penalties, or bringing an action in state court. The enforcement powers in § 50 do not incorporate the liquidation and rehabilitation provisions of the Insurance Code.
API argues that the definition of a service contract provider in § 5 alone makes all service contract providers exempt from the Insurance Code. It therefore asserts that service contract providers are never treated as insurers under Illinois law. Section 5 of the Act describes a service contract provider and then specifically excludes insurers from that definition by providing that “[a] service contract provider does not include an insurer.” This exclusion makes clear that companies operating as insurance companies (presumably those registered as insurance companies in Illinois) do not have to comply with the Act. It also suggests that service contract providers are not insurers for purрoses of Illinois law. API contends that this sentence conclusively excludes any service contract provider from being treated as an insurer under Illinois law. Although the legislature could have stated the proposition more directly (i.e., it could have simply said “a service contract provider is not an insurer” instead of saying “a service contract provider does not include an insurer”), the language supports API’s interpretation until § 10 is taken into account.
Section 10, entitled “Exemptions,” provides that service contract providers “complying with the Act” need not comply with and are not subject to any provision of the Insurance Code. This provision makes clear beyond doubt that service contract providers complying with the Act are not insurers under Illinois law. But it also suggests that service contract providers not complying with the Act are not exempt from the Insurance Code. Because the exemption is for service contract providers “complying with the Act,” this provision does not create a blanket exemption for all service contract providers regardless of whether they comply with the Act. This specific requirement in § 10 that service contract providers comply with the Act to qualify for the exemption is sufficient overcome the debtor’s argument that the exclusion of insurers from the definition of service contract provider in § 5 was intended to eliminate the possibility that a service contract provider would ever be treated as an insurer under Illinois law.
Instead, a more reasonable interpretation that gives meaning to each of these provisions is that service contract providers who meet the financial requirements of § 15 and register under § 25 are exempt from the Insurance Code. These two provisions contain the ground rules for selling service contracts in Illinois. They create three alternatives for service contract providers to demonstrate the financial ability to perform their contracts that would justify the exemption from the Insurance Code provided in § 10. Complying with one of these three alternatives would satisfy the legislature’s apparent desire to protect consumers from service contract providers who do not have the financial ability to perform without requiring the providers to comply with the extensive regulatory system imposed on insurance companies. While this interpretation leaves open the question of what was intended by the exclusion of insurers from the definition of a service contract provider in § 5, that oddly phrased exception to a definition must give
The State would go much farther, arguing that if a service contract provider violates any provision of the Act, it loses the exemption in § 10 and is immediately subject to the Insurance Code.
1
While § 10 does not expressly limit the provisions with which a service contract provider must comply to be exempt from the Insurance Code, neither does it provide that a failure to comply with any provision of the Act results in a loss of the exemption. In interpreting an Illinois statute, a court must ascertain the legislative intent, first looking to the language of the statute, examining the language of the statute as a whole, and considering each part or section in connection with every other part or section.
Antunes v. Sookhakitch,
The only interpretation of the Act that gives meaning to all of its statutory provisions is that once a service contract provider complies with the financial requirements of § 15 and registers according to § 25, it is exempt from compliance with the Insurance Code and is not considered an insurer under Illinois law. If an exempt service contract provider fails to comply with the other requirements of the statute, it is not then treated as an insurer but instead is subject to the enforcement provisions in § 50. Therefore, for purposes of applying the state classification test to determine whether API is classified as an insurer under Illinois law, the court must determine whether API has complied with the financial and registration provisions of the Act.
B. API Is Exempt Under § 10 of the Act
It is undisputed that API has first dollar coverage for all service contracts sold in Illinois, and that is has complied with the registration requirements of the Act. The Director has approved API’s registration to sell service contracts in Illinois since at least 2002, and has approved the form contracts API has used in every year since at least 2002. Thus, the Director has already determined that API is in compliance with the registration and financial requirements of the Act. Nonetheless, the State argues that API is not exempt from compliance with the Insurance Code because it has failed to comply with two provisions of the Act: (1) the requirement in § 15(1) of first dollar insurance coverage for all contracts issued in the state, and (2) the cancellation requiremеnts in Section 35. Neither argument is persuasive.
1. The Act Does Not Require First Dollar Coverage for Contracts Sold in All States
First, the State argues that API is not exempt from the Illinois Insurance
API has first dollar coverage only for contracts sold in Illinois and the six other states requiring such coverage. The State argues that § 15(1)(A) requires API to have first dollar coverage for all contracts API “issued” anywhere in the world, not just those sold in Illinois. Section 15 provides that “[n]o service contract shall be issued, sold or offered for sale in this State unless ... (1)(A) the service contract provider is an insured under a service contract reimbursement insurance policy issued by an insurer ... and рroviding that the insurer will pay ... all sums that the service contract provider is legally obligated to pay ... under the service contracts issued or sold by the service contract provider.” 215 ILCS 152/15. The State contends that “issued ... in this State” means any contract issued by service contract providers like API who are headquartered in Illinois to customers located anywhere in the world. It asserts that all contracts API enters into are necessarily “issued” from its headquarters in Illinois. It also argues that “issued” in the state must mean something different than “sold” in the state or the word “issued” in § 15 would be rendered superfluous.
Thus, the pivotal question is what is meant by the word “issued” in the prefatory language of § 15. “Issued” is not defined in the Act and Illinois courts have not construed it. Courts interpreting this word in the context of insurance contracts have held that a contract is not issued until it is received by the purchaser. As the court explained in
Homestead Fire Ins. Co. v. Ison,
The Seventh Circuit applied a similar definition or “issued” from Webster’s Dictionary — the “act of sending out, or causing to go forth, delivery,” in
Prestige Cas. Co. v. Mashburn,
However, some courts applying choice of law provisions have assumed that insurance contracts are issued from the domicile of the insurer.
See Diamond State Ins. Co. v. Chester-Jensen Co., Inc.,
As noted above, when construing an Illinois statute, if the legislative intent of a provision is not clear from the words of the statute, the court must look to the other provisions of the act, the statute as a whole, and the legislative history to ascertain the legislature’s intent.
See Kunkel v. Walton,
First, other provisions of the Act demonstrate that it was not intended to apply to contracts sold outside the state of Illinois. The enforcement provisions in § 50 contain language showing a clear intent to limit application of the Act to protect contract purchasers in Illinois. Section 50(a) provides that the Director may conduct examinations “ ‘to enforce this Act’ and protect service holders in this State.” 215 ILCS 152/50(a) (emphasis added). Section 50(b) provides that the Director “may take action that is necessary or appropriate to enforce the provisions of this Act and the Director’s rules and orders and to protect service contract holders in this State.” 215 ILCS 152/50(b) (emphasis added). It further stаtes that, if the a service contract provider engages in a pattern or practice that violates the Act and the Director reasonably believes threatens to render the service contract provider insolvent or cause irreparable loss or injury to “the property or business of any person or company located in this State ” the director may take certain actions. Id. Thus, the enforcement provisions in § 50 provide strong support for the view that the Act is intended to apply only to sales of contracts in Illinois, Section 25 of the Act also requires that a service contract providers submit only copies of contracts “to be sold in this State.” 215 ILCS 152/25(a)(4). If the legislature intended to regulate contracts sold in other states, it would have required service contract providers to submit those contracts as well.
In addition, the legislative history of the Act shows that the Illinois legislature was following the Model Act and was aware that this kind of statute was being enacted “nationally,” meaning in states across the nation. Ill. House of Representatives, 90th Gen. Assemb., Transer. Deb. (May 20, 1998). Applying the Act to impose Illinois’ strict first dollar insurance requirements on sales made in other states is inconsistent with the laws of each of those states, which provide their own financial requirements for service contract providers. The State’s interpretation of § 15 would create a highly anomalous situation in which a service contract provider headquartered in Illinois would have to comply with Illinois’ more strict financial requirements to sell
In addition, limiting the phrase “issued, sold or offered for sale in this State” to contracts sold or issued to by purchasers in Illinois is consistent with the use of the word “issued” in the Model Act. As noted above, the Act contains many provisions from the Model Act. The Model Act assumes that service contracts are exempt from the state insurance code under a different statute. Section 1(D) of the Model Act then provides that it shall not apply to service contracts “issued at the point of sale” or within 60 days of the original purchase date of the property, which strongly suggests that the service contract is “issued” in the state in which the sale is made. Section 3 of the Model Act contains provisions very similar to the provisions of § 15 of the Act, including the introductory language that service contracts shall not be “issued, sold or offered for sale in this state” unless certain requirements for doing business are met, and then contains language similar to § 15(1)(A) regarding reimbursement insurance policies. The word “issued” in Section 3 of the Model Act presumably has the same meaning that it had in Section 1(D) of the Model Act. Section 1(A) of the Model Act also provides that one of its purposes is to “create a legal framework within which service contracts may be sold in this state.” There is no indication in the Model Act of any intention that it apply to contracts sold outside of the enacting state. To the contrary, the drafters presumably intended that each state would enact its own law based on the Model Act so there would be no need for any state to regulate the contracts sold in any other state.
The court’s interpretation of the meaning of “issued, sold or offered for sale in this State” in § 15 is consistent with the language of the contracts used by API (DX 5). The front page of the contract provides, “[cjoverage begins on the Contract Purchase Date and at 0 miles. Coverage expires according to the time of the term of the Contract or when the odometer reaches the term of the coverage selected, whichever occurs first.” The contract is signed only by the dealer’s representative and the “applicant” or customer. Thus, the contract can be viewed as being “issued” at the time and place of purchase by the customer at a car dealership. A “note” on the first page of the contract that says that “[t]his application together with your Contract Confirmation and Terms and Conditions constitute your verified and accepted Contract by the Administrator.” Under the
Prestige Casualty
analysis, to the extent the confirmation notice contained terms or conditions that varied from the original terms on the contract form, those additional terms and conditions would not be effective until they were received by the purchaser — again at the location of the purchaser.
See
The Director’s own actions in approving API’s registration and contracts over the years also supports the court’s interpretation of § 15. API’s contract form contains modifications to the principal contract terms based on the state law requirements of each state in which API sold contracts.
The State argues that its interpretation of “issued” is supported by the wording of the three options in the financial requirements provisions of § 15. It argues that only the second option allowing a funded reserve account contains any express language limiting its coverage to contracts “issued and outstanding in this State.” The State argues that by including this specific language in the second option only the legislature evidenced an intent that the other two options be followed for all contracts issued by any service contract provider located in Illinois, not just for contracts issued to residents of Illinois. This argument has no merit for several reasons.
First, it fails to recognize that the introductory phrase of Section 15 makes it applicable to service contracts “issued, sold, or offered for sale in this State ” for all three options, not just the second “reserve account” option. 215 ILCS 152/15 (emphasis addеd). There was no need to restate this limitation in each subparagraph of § 15. Second, the “issued and outstanding in this State” language in § 15(2)(A) does not help explain in any way the meaning of the word “issued.” It simply repeats the word “issued” that was already used in the introductory phrase of § 15, and adds the phrase “and outstanding.” The “issued and outstanding in this State” language, which comes from the Model Act, was most likely added only to the second option to address issues that would arise only with respect to calculating the proper reserve amount, which must be continually updated to take into account payments made under contracts and the expiration of contracts. This language does not support the State’s theory that any contract sold by a service contract provider domiciled in Illinois is “issued in Illinois.”
Third, the State has failed to proffer any rational reason why the legislature would give service contract providers worth less than $100 million two ways to demonstrate a financial ability to perform their contracts, but would make one method apply to any contract sold anywhere in the world while the other method applies only to contracts sold in the state. There is no logical reason why the legislature would require a service contract provider to maintain reserves relating only to contracts “issued” in the state but require it to buy first dollаr insurance policies for all policies it “issued” both inside and outside the state. If the legislature had intended such a disparate application of these two alternatives, it would have expressed it in clear language.
See Antunes v. Sookhakitch,
Considering the language of § 15, the other provisions of the Act, the purpose of the Act, the context provided by the Model Act and the limited legislative history, the most reasonable interpretation of § 15 is that it was intended to apply only to service contracts sold or issued to persons located in Illinois. It is simply unreason
For all of these reasons, the court rejects the State’s contention that API must have first dollar reimbursement insurance coverage for every contract it sells to anyone located anywhere to comply with the financial requirements of § 15(1)(A). Instead, the court concludes that API must have first dollar coverage only for contracts sold in Illinois. Because it is undisputed that API has first dollar coverage for all of the contracts it sold in Illinоis, API has complied with § 15. It is also undisputed that API has complied with the registration provisions in § 25 of the Act. The court therefore concludes that API is exempt from compliance with and is not subject to any provision of the Illinois Insurance Code.
2. Other Alleged Violations of the Service Contract Act
The State also argues that API is not exempt from compliance with the Illinois Insurance Code because it violated § 35 of the Act. The State contends that § 35, which permits service contract holders to cancel their contracts, implicitly prohibits service contract providers from unilaterally canceling contracts. The State argues that API unilaterally cancelled the majority of its contracts in violation of § 35 when Kayman, API’s assignee, sent a notice to dealers and agents stating that “[n]o further claims against API Vehicle Service Contracts ... will be authorized or approved [after] February 19, 2007.” The State asserts that this action look API outside of any exemption provided by the Act and made it subject to the provisions of the Insurance Code.
The State’s argument lacks merit for at least two reasons. First, as discussed above, violation of any provision other than the registration and financial requirements of §§ 15 and 25 do not result in the loss of the exemption. Instead, the Director may use the enforcement provisions in § 50 if he believes § 35 has been violated. Second, § 35 does not prohibit service contract providers from refusing to perform or cancelling service contracts in any event. It requires that service contracts clearly state that the holder may cancel the contract. It then spells out the parties’ rights in the event that the contract holder cancels the contract. Section 35 does not prohibit service contract providers from cancelling contracts or refusing to authorize or approve claims under contracts. Contrary to the state’s suggestion, the Act does not attempt to regulate all aspects of service contracts. Instead, it regulates only those specific areas addressed in the statute, leaving the service contract to govern the rest of the relationship between the parties. Although it is possible that Kayman’s action was a breach of contract, it was not a violation of the Act. Thus, even if a violation of § 35 could result in a loss of exemption from compliance with the insurance Code, API did not violate § 35 when Kayman sent the February 19 notice.
The State also argues that the assignment for benefit of creditors itself violated the Act and caused a loss of any exemption from the Insurance Code that might have previously applied to API. However, the State has not identified any provision that the assignment violated or shown how the assignment results in a lоss of the exemption from the Insurance Code.
Finally, the State argues that API should be deemed non-exempt under § 10 because it alleges that Marathon is not in fact paying claims made under its first
The State has failed to raise any valid basis for concluding that API is not entitled to the exemption from the Insurance Code provided in § 10 of the Act. Under § 10, API is exempt from compliance with and is not subject to any provision of the Insurance Code. The court therefore concludes that Illinois law does not classify API as an insurer.
C. API Is Not the Substantial Equivalеnt of an Insurance Company
Under the state classification test, if the court concludes that API is not classified as an insurer under state law, the court must then analyze whether API is the substantial equivalent of an insurer under state law.
Medcare HMO,
The only factor that potentially weighs in favor of finding that API is the substantial equivalent of an insurer under Illinois law is the first factor- — whether API has the “essential attribute” of an insurance company under state law.
See Medcare HMO,
Under most of API’s contracts, API assumes the risk that the service contract purchaser will need covered repairs during the contract period in exchange for a payment — the purchase price of the service contract. In fact, the Illinois Appellate Court has held that service contracts similar to those sold by API are insurance contracts covered by the Illinois Insurance Code.
See Griffin Systems,
However, eleven years after
Griffin Systems
was decided, the Illinois legislature created the statutory exemption from the Insurance Code in § 10 of the Act. The Act is now the controlling Illinois law regarding the classification of service contract providers, and it provides in effect that service contract providers are not insurers if they comply with the Act. There
The exemption in § 10 of the Act is also determinative of the second factor in the substantial equivalent analysis — whether API is subject to state statutory procedures for liquidation or rehabilitation. Section 10 renders the extensive rehabilitation and liquidation provisions in the Illinois Insurance Code inapplicable to service contract providers complying with the Act. As discussed above, § 10 specifically provides that service contract providers complying with the Act “are not required to comply with and are not subject to any provision of the Illinois Insurance Code.” 215 ILCS 152/10 (emphasis added). The legislature could not have been more clear in making the entire Insurance Code inapplicable to complying service contract providers.
The enforcement provisions in § 50 of the Act confirm that the rehabilitation and liquidation provisions of the Insurance Code do not apply to service contract providers. Section 50 gives the Director powers to examine service contract providers and take certain actions to enforce the Act. 215 ILCS 152/50. The Director may take one of four specified actions: (1) issue orders to cease and desist, (2) issue orders prohibiting the provider from selling contracts in violation of the Act, (3) issue orders imposing civil penalties, and (4) issue any combination of the foregoing. 215 ILCS 152/50(b). Section 50 specifically authorizes the Director to issue these orders when “the service contract provider engages in a pattern or practice of conduct that violates this Act and that the Director reasonably believes threatens to render the service contract provider insolvent or cause irreparable loss or injury to the property or business of any person or company located in this State.” Id. Thus, thе Act explicitly recognizes the possibility of a service contract provider becoming insolvent but does not permit the Director to take action against the provider under the rehabilitation and liquidation provisions of the Insurance Code.
As noted in
Medcare HMO,
the Illinois legislature expressly applied the rehabilitation and liquidation provisions of the Illinois Insurance Code to HMOs.
The State argues that API is subject to the rehabilitation and liquidation provisions of the Insurance Code for two reasons. First, it argues that API is not exempt from the Insurance Code because it has not complied with the financial requirements of § 25 of the Act and it violated § 35 of the Act when Kayman issued the February 19 notice. It therefore argues that the exemption in § 10 does not apply. However, as discussed above, the court has rejected both of the State’s arguments under §§10 and 25 of the Act and concluded that API is exempt from compliance with the insurance Code. Therefore, the rehabilitation provisions of the Insurance Code do not apply to API.
The State’s reading of these provisions would be correct were it not for the exemption in § 10 of the Act and the limited enforcement powers given to the Director in cases of insolvency or threatened insolvency under § 50(b) of the Act. The specific provisions оf the Act dealing with service contract providers limit the general rule set forth in the Illinois Insurance Code. “It is a fundamental rule of statutory construction that where there exists a general statutory provision and a specific statutory provision, either in the same or another act, which both relate to the same subject, the specific provision controls and should be applied.”
People v. Villarreal,
Neither of the final two factors in the “substantial equivalent” test support the State’s position that API is the substantial equivalent of an insurer under Illinois law. Service contract providers are not subject to extensive regulatiоn under the Act. Instead, the Act provides a relatively simple regulatory scheme — just ten operative provisions — that govern service contracts sold in Illinois. The limited nature of this regulation is abundantly clear when the Act is compared to the extensive regulation of HMO’s in Illinois. As the Seventh Circuit recognized in
Medcare HMO,
“HMOs are subject to extensive state regulation.... The more extensively an entity is regulated under state law, the stronger the state interest and the more likely it is that Congress intended to exclude the entity from bankruptcy relief and leave to the states the business of winding up.”
Finally, the fourth factor in the “substantial equivalent” analysis, whether API’s business is public or quasi-public in nature, also weighs in API’s favor. The length to which a state has or has not gone to protect affected constituents is a key indicator of whether a business is public in nature.
Medcare HMO,
998 F.2dat 446;
Cash Currency,
After weighing each of the four factors in the “substantial equivalent” test, the court concludes that service contract providers are not the substantial equivalent of insurers under Illinois law. Even though service contract providers accept the risk of third party purchasers for payment of a premium, the Illinois legislature has chosen not to treat them as insurers, has not created a rehabilitation or dissolution scheme for them, and has not treated them as public entitiеs warranting extensive regulation, API therefore is neither classified as an insurer nor treated as the substantial equivalent of an insurer under Illinois law.
D. No Conflict with Federal Policy
In formulating the lest for determining whether a debtor is eligible for relief under the Bankruptcy Code, the
Medcare HMO
court held that while the state classification analysis is usually determinative, courts must be careful to insure that federal policy is not defeated by deferring to state law.
States cannot undermine Congressional intent by broadly classifying entities that are not insurance companies as insurance companies. Federal law preempts state law if it “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”
California Fed. Sav. & Loan
In this ease, permitting API to be a debtor is consistent with federal bankruptcy policy. The Illinois legislature has chosen not to treat service contract providers as insurers, and there is no compelling federal reason to reject Illinois’s classification. Allowing service contract providers like API to be debtors in bankruptcy comports with the fundamental purpose of the Bankruptcy Code: to provide a uniform process for reorganization and liquidation.
In fact, the need for a “single rational federal system” with strictly construed exceptions is particularly clear in this case. As a result of API’s nationwide business, over 325,000 consumers in 49 different states have potential claims against API. Each of those states may claim the right to exert jurisdiction over API. To put Illinois’ relative stake in perspective, less than 5% of API’s outstanding service contracts are held by Illinois residents. Thus, applying the Bankruptcy Code in this case carries out Congress’ intent to create a single uniform bankruptcy system that will apply to a debtor’s activities in every state. The court therefore concludes that API is eligible to be a debtor under chapters 7 and 11 of the Bankruptcy Code.
III. State’s Other Arguments for Dismissal
In addition to arguing that API is not eligible to be a debtor under the Bankruptcy Code, the State has raised four arguments in support of its motion to dismiss. First, the State asserts that API’s directors lacked the corporate authority to file this case because the Order of Conservation divested API’s management of that authority. Second, it argues that there are no assets in API’s bankruptcy estate to be administered because API transferred all of its assets to Kayman as the assignee under the prepetition Assignment for the Benefit of Creditors. Third, it argues that API’s bankruptcy estate has no assets because sovereign immunity protects the Director from any requirement to turn over to API the assets he controls under the Order of Conservation, Finally, the State contends that the automatic stay does not apply to its rehabilitation proceedings in state court so this proceeding is futile. None of these arguments has merit.
A. Corporate Authority to File Bankruptcy Petition
First, the State argues that API’s directors did not have the power to file a bankruptcy petition because the Order of Conservation issued by the state court placed the Director in control of API’s assets and business. It relies on the Order of Conservation, which gives the Director the right to “immediately take possession and control of the property, books, records, accounts, business and affairs, and all other assets” of API. It asserts that this order gave the Director complete control over API and divested officers and directors of any authority over API, including the power to file for bankruptcy protection. The State relies on a bankruptcy court decision addressing a director’s lack of authority to file a bankruptcy petition but fails to address controlling Seventh Circuit authority on the issue.
This case presents facts that are almost identical to those in
Cash Currency,
except that the Illinois Director of insurance is the Conservator who has also filed a complaint for rehabilitation against a service contract provider, instead of the Illinois Director of Financial Institutions acting as the receiver of a currency exchange. The result is the same. Neither an Order of Conservation nor the filing of a complaint for rehabilitation under the Illinois Insurance Code can impede API’s right to file for bankruptcy protection. Otherwise, states could defeat any entity’s right to file for bankruptcy protection simply by imposing some kind of receivership under state law before the entity filed for bankruptcy. State law can suspend the operation of Title 11 only when a debtor is not eligible for relief under § 109 of the Bankruptcy Code.
In re Corporate and Leisure Event Prods.,
The State relies on
In re Gem-Air Plumbing & Remodeling, Inc.,
More importantly, to the extent the Gem-Air decision contains dicta suggesting that a state receivership might prevent a board of directors from filing a bankruptcy petition (without any reference to Cash Currency), it is neither persuasive nor controlling. The directors of API had the authority to file its bankruptcy petition.
B. Assets Transferred to the API Creditors’ Trust
The State next asserts that API transferred all of its assets to the API
The State’s argument is refuted by the text of the Bankruptcy Code. Section § 543(b) requires a “custodian” to turn over to the trustee all property in his possession. 11 U.S.C. § 543(b). The definition of “custodian” explicitly includes “assignee under a general assignment for the benefit of the debtor’s creditors.” 11 U.S.C. § 101(11)(B):
see also Cash Currency,
C. The Director is Not Protected by Sovereign Immunity
The State also argues without citation that this court “is utterly without power under the United States Constitution” to require the Director to turn API’s assets over to API. It argues that the State has sovereign immunity under the Eleventh Amendment to the Unitеd States Constitution from such orders and that the Director is considered the State for purposes of sovereign immunity.
The court need not decide whether the Director stands in the shoes of the State for purposes of sovereign immunity because the State has no such immunity. In
Central Virginia Community College v. Katz,
In this case, the obligation to obtain control of assets of the estate is a bankruptcy power even more fundamental than the right to retrieve preferential payments. Under
Central Virginia,
the states have unquestionably waived their sovereign immunity with respect to any issue relating to turnover of property of
D. The Automatic Stay Applies
Finally, the State argues that the automatic stay in 11 U.S.C. § 362(a) does not prevent the Director from liquidating API in state court so continuing with this bankruptcy case is futile. The State contends that the police and regulatory power exception to the automatic stay in § 362(b)(4) applies to the Director’s actions as Conservator and his efforts to liquidate API under the Illinois Insurance Code. Section 362(b)(4) provides that: “The filing of a petition ... does not operate as a stay — ... (4) under paragraph (1), (2), (3), or (6) of subsection (a) of this section, of the commencement or continuation of an action or proceeding by a governmental unit ... to enforce such governmental unit’s ... police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such governmental unit’s ... police or regulatory power.” 11 U.S.C. § 362(b)(4). The State asserts that the Director’s role as Conservator “serves the State’s regulatory functions” and that his effort to be appointed receiver in the state court “rehabilitation” action fall within his regulatory function under the Insurance Code. The State therefore argues that the Director is not subject to the automatic stay and can continue its liquidation proceedings against API in state court despite the filing of this bankruptcy case.
However, the State’s interpretation of § 362(b)(4) goes well beyond the limits of this exception. Interpreting § 362(b)(4) to permit a state to conduct parallel liquidation proceedings would defeat the fundamental purpose of the Bankruptcy Code. “[F]ederal bankruptcy law in general, and the automatic stay in particular, exist in part to centralize the process of distributing the debtor’s estate among its creditors.”
In re Emerald Casino, Inc.,
No. 03 A 01929,
The term “rеgulatory power: is not defined in the Bankruptcy Code.” However, “the statute’s legislative history states that § 362(b)(4) includes a governmental unit’s suits against a debtor ‘to prevent or slop violation of fraud, environmental protection, consumer protection, safety, or similar police or regulatory laws.’ ”
In re Phillips,
The Seventh Circuit addressed this issue in
Cash Currency,
The State argues that the 1998 amendments to § 362(b)(4) had the effect of overruling
Cask Currency.
Before 1998, the exception in § 362(b)(4) applied only to actions stayed in § 362(a)(1) — “the commеncement or continuation ... of a judicial, administrative, or other action or proceeding against the debtor....” 11 U.S.C. § 362(a)(1). In 1998, § 362(d)(4) was amended to apply to proceedings stayed in § 362(a)(3) — “to obtain possession of property of the estate ... or to exercise control over property of the estate.” 11 U.S.C. § 362(a)(3).
See In re Emerald Casino,
The State’s argument fails because the 1998 amendments to § 362(b)(4) only partially overruled
Cash Currency.
While state authorities are no longer prevented from taking regulatory action against property of the estate, the amendments did not affect the court’s conclusion that liquidation proceedings designed to protect the rights of creditors are not regulatory actions that fall within this exception. As noted in
Emerald Casino,
“the court [in
Cash Currency]
found that the State’s interest was to protect the rights of other creditors, an interest that is not regulatory within the meaning of § 362(b)(4).... Therefore, the State could not take control of the property when it did not have a valid regulatory interest.”
Emerald Casino,
The State in
Emerald Casino
was clearly pursuing a regulatory action. It sought to revoke the debtоr’s gaming license based upon the debtor’s prior misconduct.
Emerald Casino,
By contrast, in this case, the State is not enforcing any laws intended to protect the health, welfare or safety of the public. API had ceased conducting business in February 2007, before it filed for bankruptcy. The State filed its rehabilitation proceeding to control the liquidation of API’s assets, not to enforce any particular violation of the Act. As in
Cash Currency,
the State’s actions here are solely for the benefit of API’s creditors. Because the State is not acting in its regulatory capacity, the regulatory and police power exception to the automatic stay in § 362(b)(4) does not apply. Therefore, the regulatory
Conclusion
For all of the foregoing reasons, the State’s motion to dismiss this case is denied.
Notes
. In oral argument, the State conceded that not every violation of the Act results in a loss of the exemption from the Insurance Code. However, it was unable to draw any rational line between violations that destroy the exemption and violations that invoke only the enforcement provisions in § 50.