State v. American Bankers Insurance Co.

STATE of South Plaintiff Appellee,

AMERICAN BANKERS INSURANCE

COMPANY, Defendant and

Appellant.

No. 14690.

Supreme Court of South Dakota.

Argued Feb. 1985. Sept.

Decided Moreno, Gen., Atty.

Mark A. Asst. Pierre, plaintiff appellee; Mark V. Pierre, Meierhenry, Gen., Atty. on brief. Adam, May, David A. Gerdes of Gerdes Pierre, Thompson, ap- & for defendant and pellant.

WOLLMAN, Justice. appeal judgment is an final This from a granting entered the trial court summa- ry judgment ordering favor of the Company Bankers American Insurance (American Bankers) pay pre- 15-7-1 and 15-7-2. The held court mium We constitutional, taxes. reverse and remand with premium tax statute to be complaint. directions to dismiss the state’s ordering all American Bankers to owing due and since 1981. undisputed. here are generally facts Bankers, corpo- based Texas ration, been has never licensed to transact I. in

business South Dakota. It owns and has Personal Jurisdiction policies in force insurance on South Dakota residents. American Bankers first contends that it subject personam jurisdic- to the in 1, 1981, September Prior to Mid-America of the Specifi- tion South Dakota courts. Company, Dubuque, Insurance located in cally, argue American Bankers con- Iowa, and authorized to in do business tacts with the State of South Dakota are Dakota, wholly South was a owned subsidi- insufficient to fulfill the process due re- ary of September American Bankers. On quirement of “minimum contacts.” 1,1981, Mid-America to one Integ- was sold Corporation. sale, Incident to this support contention, of its American ownership American Bankers assumed of following Bankers cites the facts: Ameri- policies insuring those residents of South can Bankers has never solicited the sale of Dakota. any of policies dispute, in nor has it directly any entered into of insur- acquisition, contract Since this American Bankers any Dakota; with ance individual in has to South premiums continued collect from policies producing premiums policyholders upon South Dakota well as as to pay impose premi- which the state seeks to respective claims made on their poli- acquisition tax acquired by cies. um were bulk Mid-America; this transaction was en- law, Under South Dakota each unli- tered into and for in State contracted of censed or doing unauthorized insurer busi- Texas; American Bankers has no certifi- ness in required the state is to an of to in authority cate do South business premium 10-44-2(3). tax. SDCL Dakota; servicing policies no has ever 2, 1981, 7, On 1982, December December Dakota; done in been South American 14, 23, July 1983, August and Bankers in does not maintain offices South State Division Insurance advised Ameri- it any property nor does own with- can pursuant Bankers that to SDCL 10-44- state; American Bankers does not 2(3) it was to the for liable state taxes on policies solicit sale of new South premiums those policies collected on representa- Dakota and no salesmen or force in South Dakota. working tives either within the state or American Bankers denied that it was do- through the mail to sell insurance ing an insurance business South Dakota residents; to South Dakota and claims and it subject asserted that was not to the policyholders made South Dakota premium tax. processed Texas. Following issuance of a summons and provides part: SDCL 15-7-2 state, complaint by the Any person subject jurisdic- raised the personal defense of lack of and any tion of the courts of this as to subject jurisdiction, matter well as as chal- arising doing cause of action from the lenging constitutionality the taxing personally, through employee, any statute. Both the state and American through agent through or a subsidi- summary judgment. Bankers moved ary, any following acts: granted The trial court the state’s motion (1) The any transaction of for summary judgment, finding American within the state. jurisdiction pursuant Bankers to to long-arm South Dakota’s statute. SDCL

612 Court, 15-7-2, corpora- Superior For of SDCL 436 purposes U.S. 98 S.Ct. person. (1978); tion is deemed to be a SDCL 15-7- L.Ed.2d v. Shaffer Heitner, 97 S.Ct. L.Ed.2d 683 58-1-2(15), SDCL defines “insur “the of all ance business” as transaction principal consideration is whether contract, pertaining and all matters “purposefully the nonresident defendant arising any or out of contract matters established minimum contact in the forum Because the collection claim thereunder.” Rudzewiez, Burger King state.” payment of claims are pertaining arising out of an matters (1985)(citing Internation- contract, 15-7-2 58-1- Shoe, supra, at al 2(15), together, sup when construed lend 102). port the trial court’s decision that it had Concerning “interstate contractual obli- personal jurisdiction over Bank gations,” King the Court stated: Burger ers. emphasized parties have that “who [W]e then, inquiry, Our is limited to beyond reach out one state and create application long- whether such an of our continuing relationships obligations arm the Due Process statute violates another with citizens of state” sub- Clause the Fourteenth Amendment to ject regulation and sanctions the United States Constitution. We hold the consequences other state for of their does not. that it activities. Chemicals, In Russell v. Balcom 328 -, 2182, 471 U.S. at 105 at S.Ct. 85 476, (S.D.1983), recapi- N.W.2d 478-79 we (citing L.Ed.2d at 541 Travelers Health set a long tulated standards forth in 643, 647, Virginia, 339 Association v. U.S. line of United States deci- 929, 927, 1154, 70 S.Ct. 94 L.Ed.2d 1161 regarding jurisdiction sions over nonresi- (1950)). The Court further observed: dents: “deliberately” Where the defendant In International Shoe v. Co. Wash- engaged in significant activities within a 310, 154, ington, 326 66 90 U.S. S.Ct. state, “continuing or has created obli- (1945), 95 L.Ed. the Court held that gations” between and residents himself jurisdiction could if states exercise forum, manifestly he has availed nonresidents had such “minimum con- privilege conducting himself of tacts” with the state “that the mainte- there, and, his because actions of the nance suit does not offend ‘tradi- protec- “the are shielded benefits and play notions tional of fair and substantial laws, presump- tions” of the forum’s it is ” 316, justice.’ 326 at at U.S. 66 S.Ct. tively require not unreasonable to him to 158, (quoting L.Ed. at 90 102 Milliken v. litigation submit the burden of that 457, 463, 339, Meyer, 311 U.S. 61 S.Ct. forum as well. 343, 278, (1940)). pro- 283 Due 85 2184, at 105 at 471 U.S. S.Ct. 85 requires act by cess “some which the added). (emphasis L.Ed.2d at 543 purposefully defendant avails itself of “purposeful privilege conducting availment” re activities State, designed invoking quirement prevent the forum a nonresi thus protections' being benefits and of its laws.” dent defendant haled into a Denckla, 235, 253, “solely ‘random,’ jurisdiction v. 357 78 as a Hanson U.S. result 1228, 1240, ‘fortuitous,’ 2 S.Ct. L.Ed.2d 1298 or ‘attenuated’ contacts.” 471 (1958). at -, process requires Due also S.Ct. 85 U.S. 105 (citing Magazine, the defendant’s conduct and connection at 542 v. Keeton Hustler Inc., with forum state be such that he U.S. being reasonably anticipate (1984)); haled

should L.Ed.2d 790 Volks Worldwide Woodson, Corporation into court there. Kulko v. wagon California 286, 299, process 62 L.Ed.2d 490 requires Due that the sub (1980). is, however, only necessary It ject matter of the action have somé rela the nonresident defendant’s contacts tionship with to the upon juris contacts proximately the forum state result from its Savchuk, diction is found. See Rush v. actions. 471 U.S. S.Ct. at U.S. 100 S.Ct. 62 L.Ed.2d 516 (citing 85 L.Ed.2d at 542 McGee v. subject matter of this action Co., International directly flows from the economic conse 199, 201, 2 L.Ed.2d 226 quences of American Bankers’ ongoing (1957)). commercial activities with residents of South Dakota. Inasmuch as the insurance light foregoing principles, of the object themselves are the of the we are satisfied that American Bankers is tax, we hold that American Bankers could personal jurisdiction amenable reasonably being have foreseen haled into South Dakota courts. As a direct result of court in South Dakota to account for its acquisition of insurance contracts from activity economic here. Mid-America, American Bankers has en- “continuing tered into a obligation” with

residents of the State of South Dakota. II. continuously American Bankers has collect- paid ed poli- claims on these Subject Matter Jurisdiction Consequently, cies since 1981. quality American Bankers next contends that of American relationship Bankers’ with this court lacks jurisdiction matter South Dakota reasonably cannot be charac- legislature inasmuch as the has not ex- “random,” “fortuitous,” terized as or “at- pressly right created a of action at to law Moreover, tenuated.” out of this relation- unpaid collect pursuant taxes to SDCL ch. ship with residents of South Amer- (insurance 10-44 company premium and an- ican steady Bankers realizes a source of tax). nuity argues that gain. economic the state’s sole remedy for the collection of delinquent taxes is restricted to the use of The absence physical of contacts pursuant a distress warrant to SDCL 10- with South Dakota compel does not a con 56-2. trary conclusion. Supreme Court has (Insur- The state contends that Title 15 long recognized that the methods of trans ance) of the South Dakota Code authorizes acting business in “modern commercial an action at law for the collection of taxes. life” has “obviated the physical need for 58-6-68, 58-4-5, The state cites SDCL presence within a state in which business is authorizing 58-4-6 as this action. Burger Rudzewiez, conducted.” King v. 105 S.Ct. at provides: SDCL 58-6-68 long L.Ed.2d at 543. “So as a commercial subject Insurers shall be to taxation actor’s efforts are ‘purposefully’ directed according provisions of Title 10 state,” toward residents of another an ab- and shall file such tax returns and re- physical sence of contacts will not defeat ports may director, as by be directed the personal jurisdiction there. 471 U.S. at provided, however, that no tax shall be 85 L.Ed.2d at 543 payable premiums due or as to or consid- (citing Keeton Magazine, v. Hustler su- erations received from or con- pra). tracts issued in pen- connection with a Bankers, nevertheless, argues sion, annuity plan profit-sharing or ex- assuming that even minimum contacts empt qualified are or under sections present, 403(b), 404, these 501(a) contacts are unrelated to the 408 or of the United Thus, matter of this action. the States Internal Code Revenue with re- personal jurisdiction assertion of by spect payable the to the tax in 1973 and state is annually unreasonable and unfair. thereafter. provides: granted

SDCL “The 58-4-5 director relief can be because the state is legal such or express implied shall institute suits other or authority reg- without to proceedings may required as be for the ulate or tax nonresident insur- any provisions enforcement of title.” of this company company ance when doing business within its borders. provides: SDCL 58-4-6 “The director gener- represented by attorney shall be the observed, previously we Ameri As assistants, al, by attorney his or such other is doing can Bankers insurance business designated by may at law as be the attor- meaning within the state within the of ney general.” 58-1-2(15). particularized SDCL The more 1-11-1, The state cites also SDCL inquiry is whether American ac Bankers’ empowers general prose- attorney to imposi tivities sufficient to warrant the cute all civil actions which an by tion a tax State South Dakota party. interested collected from South Dakota insureds. foregoing We hold the statutes im plicitly McCarren-Ferguson Act, by authorize action at law to collect enacted unpaid Congress from an empowers unlicensed and unau states company having regulate thorized insurance and tax all companies no property “doing located within the state. There is re- business” their legislature spective no indication that the borders. intended 15 U.S.C. 1011-15 §§ 10-56-2, (1949). distress warrant stat The breadth of the state’s authori- ute, regulate remedy ty be the sole and and tax exclusive interstate insurance available to the state transactions collection of under this act was examined unpaid premium taxes. United States Bd. State Insurance v. Todd Shipyards, Spink Our in County decision Hei Inc., Market, (S.D. nold 299 N.W.2d 811 1980), holding does not foreclose we Todd, reach here. Heinold held the Court cites the House re- state could not personal property port assess legislative history contained against on party Act, taxes cattle a holding which states in part: security a interest in holding cattle. Our provide reg- We should for the continued upon rested the fact that the then statutes ulation and taxation of insurance continually in force referred to “owner” states, however, subject always, to the referring per when to the assessment of controlling limitations set out in the deci- property. sonal at Id. 812. sions of the United States Court, as, instance, for Allgeyer To hold that the proceed state could (165 Louisiana U.S. 41 S.Ct. [17 against foreign only by insurers of means 832]), Compress St. Louis Cotton distress warrant would enable American (260 v. Arkansas Co. U.S. S.Ct. [43 similarly Bankers and other for situated 297]), 67 L.Ed. and Connecticut eign insurers stat circumvent tax (303 General v.Co. Johnson Accordingly, utes. we hold that state 673]), S.Ct. 82 L.Ed. [58 may maintain action at law to collect hold, alia, which inter that a does state foreign who no insurers have power have tax of insur- contracts property within the state. ance or reinsurance entered into outside jurisdiction by corpora- its or individuals

III. tions resident or domiciled therein cover- Lack Statutory Authority to ing risks regulate within the state or to of Regulate Foreign Insurers any way. such transactions in American Bankers contends that 370 U.S. at complaint upon fails to state a claim L.Ed.2d at 624.

< n determining challenged Bankers has since 1981 as- a whether in- ownership responsibility rationally sumed classification is related to by residents of surance taken out legitimate pur- achievement of a state continuously Dakota for which it has (1) South pose, questions: we must two answer premiums paid claims. These received challenged legislation Does the have a having re- are not isolated transactions no (2) legitimate purpose? and Was it rea- Rather, lationship to Dakota. Amer- South sonable for the lawmakers to believe that continuing a ican Bankers has established challenged use of the classification would relationship contractual with residents of promote purpose?

this state. 451 U.S. at 101 S.Ct. at

Furthermore, contradiciton, is not a it as L.Ed.2d at 530-31. argues, at once an be Southern, In Western & the Court was “unauthorized insurer” and at the same retaliatory asked to decide whether a tax premiums to a tax on col- time be imposed by the State of California on a lected from South Dakota insureds. South insurer, foreign response assessed permits an unauthorized insur- Dakota law insurance tax laws insurer’s engage degree of er to a limited insur- state, equal protection home violated the speci- ance within the state under business clause. The Court found that the retali- circumstances, including the collection fied atory legitimate purpose tax had a not as a premiums payment of claims device, raising revenue but as means of policies. existing insurance SDCL 58- See pressuring other states to maintain low 6-4. taxes on California insurers. 451 U.S. at 68 L.Ed.2d at IV. “promotion industry by of domestic Equal

Denial Protection deterring to interstate barriers business legitimate purpose.” 451 U.S. at provides part: 10-44-2 68 L.Ed.2d at 532. “Any company doing insurance business prong went on to find the second this state shall a tax at the rates satisfied, holding: test 10-44-2(3) specified in this section.” SDCL imposes upon premiums paid a tax to an [Wjhether provision ac- fact the will insurer not licensed or authorized to do complish objectives ques- is not the in the state at a rate “one and Equal tion: the Protection Clause is sat- payable by one-half times the amount for that the isfied if we conclude California section, eign provided by insurers as this or Legislature rationally could have be- percent four whichever is retaliatory pro- tax would lieved that the greater.” greater percentage This is a objective. mote its paid by either than that domestic insurers at 451 U.S. at foreign companies or the licensed to do L.Ed.2d at 533. are business within South which Here, the state contends that the discrim- percent taxed at a rate of two and one-half inatory premium to: tax serves of the and one and one-fourth (1) encourage development the es- and percent annuity of the consideration for Dakota of tablishment within South 10-44-2(1), (2). contracts. SDCL foreign com- domestic and insurance & Southern Ins. Co. v. Western Life panies; Equalization, Bd. State (2) encourage capital investment and (1981), 68 L.Ed.2d 514 state; capital in the retention Supreme promulgated Court United States (3) promote development and mainte- two-part analyzing equal pro a test for competitive a insurance in- nance of challenge impos tection to a state tax that state; dustry in the foreign corpo more on es a onerous burden (4) revenue; corporations: raise and rations than on domestic (5) encourage . authorized insurers to L.Ed.2d 762. The Court transact business in the state. noted that “no matter how much of their Alabama, they foreign assets invest in in- purposes We examine these stated in the companies surance still required pay to light Metropolitan Co. higher gross premiums a tax than domestic Ward, 470 U.S. companies.” Id. (1985), in Court ruled do- unconstitutional Alabama’s distinguished The Court & Western preference mestic tax statute. Southern, supra, writing: statue, foreign attempt,

Under the Alabama life Alabama made no as Cali- did, companies paid insurance a tax on their fornia to influence the gross premiums received from business other in to States order enhance its do- in . conducted Alabama at a rate of three companies’ ability operate mestic in- to percent, foreign companies selling and oth- terstate; rather, it has erected barriers types paid er of insurance at a rate of four to foreign companies wish do who to percent. compa- All domestic insurance to improve interstate business order nies, however, paid at of only a rate one ability compete domestic insurers’ to percent types premiums, all on insurance at home. foreign the result that with insurance com- The crucial distinction between the two panies doing type the same and volume of cases lies fact Alabama’s aim compa- business in Alabama as domestic promote industry purely to domestic generally nies would three to four completely discriminatory, designed gross premium times as much in as taxes industry to favor domestic within counterparts. Though their domestic un- State, no matter what the cost to foreign der Alabama statute insurance foreign corporations seeking do also companies could reduce the differential purpose, business there. Alabama’s con- gross premium paid by pre- investing California’s, trary very constitutes percentages scribed of their as- world-wide parochial sort of discrimination that the in specified sets Alabama assets and securi- Equal Protection Clause was intended to ties, they could gross never reduce their prevent. premiums tax rate to paid the same level 470 U.S. at by comparable companies. domestic L.Ed.2d at 759. State Alabama advanced ra- two Metropolitan The state contends that justification disparate tionales dispositive. First, Life, supra, un- of foreign companies treatment statue, 10-44-2(3) like the Alabama (1) encouraging, under the statute: for- impose higher foreign does not tax all companies Alabama, mation of new insurers, only on unlicensed and unautho- (2) encouraging capital investment for- Second, foreign rized insurers. South Da- eign companies in Alabama as- provides kota’s taxation scheme a means governmental sets securities. foreign higher insurers to eliminate rejected the first purpose, by obtaining tax a license or certificate of holding promotion of domestic authority from the director of insurance. by discriminating Therefore, the state contends South Dako- against foreign corporations that wish purpose imposing ta’s a more onerous compete by doing business there was not a unlicensed, tax burden on insurers at -, legitimate purpose. state 470 U.S. very cannot be said to constitute the sort 84 L.Ed.2d at 760. Sim “parochial equal protec- discrimination” the ilarly, encourage the Court found that the was prevent. tion clause intended to We capital ment of as investment in Alabama disagree. governmental sets and securities was not a legitimate by firmly purpose when furthered The rule is established that at -, imposition discriminatory discrimination. 470 a tax on is pro American Bankers situation that pretext on the foreign corporations greater imposed upon than that other in- industry the state moting domestic surers, equal protection clause. that statute is unconstitutional. by the prohibited Ward, 470 v. Metropolitan Co. Life judgment the case is is reversed and 105 S.Ct. U.S. at remanded to the circuit court with di- WHYY, (citing to Inc. v. L.Ed.2d at 759-60 complaint. rections to dismiss the state’s 117, 119-20, Glassboro, 89 S.Ct. 393 U.S. (1968); 286, 287, 21 L.Ed.2d 244-45 HENDERSON, JJ., and MORGAN and Glander, Corp. 337 U.S. Wheeling v. Steel WUEST, Justice, Acting concur. 1291, 1296, 562, 571, 93 L.Ed.2d 69 S.Ct. FOSHEIM, C.J., part concurs in and dis- 1544, 1551(1949); Hanover Fire Ins. Co. v. part. sents 494, 511, 47 S.Ct. Harding, 272 U.S. FOSHEIM, (concurring Justice Chief (1926); 49 A.L.R. 71 L.Ed. 380-81 dissenting part). part, Greene, (1926); Rwy. Co. v. Southern 400, 417, agree majority I with the SDCL (1910)). 536, 541 See Reserve 10-44-2(3) constitutionally defective and Bowers, 380 U.S. v. Ins. Co. remanded. How- that the case should be (1965). 951, 13 L.Ed.2d 959 ever, totally dismiss the remand need not complaint. the state’s argues that the discrimi The state 10-44-2(3) permis practiced by majority South Dakota is finds SDCL nation foreign unlicensed insur as the stat- inasmuch as be unconstitutional inasmuch sible equal imposes an foot unlicensed and unau- place can themselves on ute a tax on ers obtaining greater than ing foreign companies insurers with domestic thorized Dakota. Ac- imposed upon to do business South that tax other insurers. certificate This, argues, promotes a more on remand cordingly, the state the circuit court industry in competitive judgment South reduce the should be directed to by encouraging foreign Thus, insurers to Dakota amount. by the unconstitutional Dakota. do insurance business South will still be taxes under 10-44-2(3) imposed amount but the SDCL is, however, There a manifest conflict imposed on other com- will not exceed that purpose and 58- between this stated SDCL 10-44-2(1) panies under SDCL Bankers, 6-4(5), exempts American insurer, foreign obtaining a cer- as a authority

tificate of in South Dakota so

long only existing as it services Thus, foreign

policies. very class of exempt- legislature

insurers which requirement regulatory

ed from the state’s foreign is the same class of insurers sin- Dakota, Plaintiff STATE South gled higher out for a tax burden because Appellee, of au- they not obtained a certificate have discriminatory premium tax thority. The REUTTER, Defendant Robert seemingly pro- very conduct penalizes the Appellant. 58-6-4(5). appar- It is moted under SDCL No. 14612. ent, therefore, purposes that the stated imposition higher tax on unlicensed of a Dakota. of South high- foreign pretextual. The insurers are Argued 1985. Jan. raising appears er tax to be a revenue Sept. Decided device, discrimi- impermissible basis for nating against insurer. hold, therefore, inasmuch as

We 10-44-2(3) a tax on insurers imposes

Case Details

Case Name: State v. American Bankers Insurance Co.

Court Name: South Dakota Supreme Court

Date Published: Sep 6, 1985

Citation: 374 N.W.2d 609

Docket Number: 14690

Court Abbreviation: S.D.