-
USCA1 Opinion
United States Court of Appeals United States Court of Appeals
For the First Circuit For the First Circuit
____________________
No. 97-1354
MANUEL MERCADO-BONETA, ET AL.
Plaintiffs, Coappellants,
DR. ELLIOT M. FERNANDEZ
Codefendant, Coappellant
v.
ADMINISTRACION DEL FONDO DE COMPENSACION AL PACIENTE through the
Insurance Commissioner of Puerto Rico,
Codefendant, Appellee.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Salvador E. Casellas, U.S. District Judge] ___________________
____________________
Before
Lynch, Circuit Judge, and _____________
Hill* and Gibson,** Senior Circuit Judges, _____________________
___________________
Alberto J. Perez-Hernandez, with whom Rafael E. Garcia-Rodon was __________________________ ______________________
on brief, for appellants.
Juan A. Moldes-Rodriguez, Counsel for Administracion del Fondo de ________________________
Compensacion al Paciente (Patient's Compensation Fund Administration),
for appellee.
____________________
September 10, 1997
____________________
____________________
* Hon. James C. Hill, of the Eleventh Circuit, sitting by designation.
** Hon. John R. Gibson of the Eighth Circuit, sitting by designation.
LYNCH, Circuit Judge. This case raises questions LYNCH, Circuit Judge. _____________
under the Contract Clause of the United States Constitution
concerning a government's power to regulate insurance
companies facing insolvency by barring claims asserted after
a particular date by insureds. If that power is upheld, then
Dr. Fernandez is essentially uninsured on the malpractice
claim and it may be that the malpractice plaintiffs will
recover nothing regardless of the merits of their claim.
Manuel Mercado-Boneta brought a medical malpractice
action against Dr. Elliot Fernandez and Fernandez's insurer,
the Patient's Compensation Fund Administration ("PCFA"). Dr.
Fernandez also claimed over against PCFA. PCFA moved for
dismissal on the grounds that, inter alia, PCFA had been __________
dissolved by an act of the legislature and was no longer
liable on Dr. Fernandez's insurance policy. The district
court granted the motion. Dr. Fernandez and Mercado-Boneta
appeal jointly from that dismissal, arguing that the act of
the legislature violates the Contract Clause of the United
States Constitution. We find no constitutional violation,
and affirm.
I.
During the time of the alleged malpractice, Dr.
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Fernandez was covered by PCFA under an occurrence policy.1
However, PCFA was abolished before Mercado-Boneta filed his
claim against Dr. Fernandez.2 The Legislature of the
Commonwealth of Puerto Rico abrogated PCFA by Act of Dec. 30,
1986, Act No. 4, 1986 P.R. Laws 869 ("Act No. 4"), stating
____________________
1. An occurrence policy, which provides coverage for
occurrences within the policy period regardless of when the
claim is made, is distinguished from a claims-made policy,
which only covers the insured for claims that are actually
made during the policy period.
2. Manuel Mercado-Boneta and his wife Milagros Molina, on
behalf of their minor daughter Veronica Mercado-Molina, filed
their medical malpractice claim against Dr. Fernandez and his
insurance companies on June 24, 1992, almost eight years
after the alleged malpractice. Veronica was born on January
1, 1983, and was treated by Dr. Fernandez from that point
until the end of June, 1984. Plaintiffs' complaint alleges
that Veronica developed a high fever in early 1984, and was
taken several times to Dr. Fernandez who prescribed
medications, but refused to hospitalize Veronica. Not
satisfied with Dr. Fernandez's treatment of their daughter,
plaintiffs took Veronica to another physician who immediately
hospitalized the child. Plaintiffs allege that Dr. Fernandez
was negligent in failing to properly diagnose Veronica's
condition and in failing to hospitalize her. They claim that
Dr. Fernandez's negligence caused Veronica to suffer severe
physical disability and emotional distress, including the
permanent loss of approximately 75% of her hearing in both
ears, speech impairment, loss of future income, and emotional
problems associated with living with a physical handicap.
(Plaintiff's complaint, appendix pp. 36-37). Plaintiffs
allege total damages in the amount of $1,600,000. Dr.
Fernandez denies the allegations of negligence, and submits
that Veronica's hearing impairment was the likely result of
head trauma Veronica suffered when she fell from a slide in
January of 1986. The record is sparse regarding when
plaintiffs first became aware of Veronica's hearing and
speech problems. It appears, however, that they were aware
of the problem by August of 1986, when Veronica's
pediatrician referred her to a hearing specialist for
evaluation of possible hearing impairment. (report of Dr.
Zapata, record)
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that PCFA was not adequately fulfilling its intended purpose
and was at risk of imminent insolvency. The operations of
PCFA were endangered and the insureds and their patients were
at risk of not being compensated for their losses. Id. at ___
871 ("Statement of Motives").
Despite the legislature's dissolution of PCFA,
Mercado-Boneta sued PCFA3 as an insurer of Dr. Fernandez.4
PCFA moved for dismissal on the grounds that it had been
dissolved by Act No. 4, that it lacked funds to assume
financial responsibility for claims, and that it was immune
from suit in Federal Court under the Eleventh Amendment. The
district court granted PCFA's motion to dismiss on the first
ground alone. The court found that PCFA was legally extinct,
and that Act No. 4 did not permit the Insurance Commissioner,
as PCFA's legal representative, to honor claims filed against
PCFA subsequent to its abolition on December 30, 1986.
Because Mercado-Boneta filed his claim against Dr. Fernandez
later than December 30, 1986, the Insurance Commissioner was
held not responsible to Dr. Fernandez for any liability he
incurred as a result of Mercado-Boneta's claim. The court
____________________
3. Act No. 4 directs the Insurance Commissioner of Puerto
Rico to represent PCFA in matters pending before PCFA or in
actions involving PCFA in the courts. Act No. 4, 3, 1986
P.R. Laws 871, 885. As a result, the Insurance Commissioner
represents PCFA in this action.
4. The law of Puerto Rico permits a plaintiff to sue
defendant's liability insurer directly. 26 L.P.R.A. sec.
2003.
-4- 4
also found that PCFA's successor for certain purposes, the
Insurers' Syndicate, was not responsible for any claims filed
against PCFA.
Both Mercado-Boneta and Dr. Fernandez moved for
reconsideration of the dismissal of PCFA on the grounds that
Act No. 4, as interpreted by the district court, violated the
Contract Clause of the United States Constitution. The
district court held that although Act No. 4 did substantially
impair a contractual obligation, the Act was reasonable and
necessary to an important public purpose, and thus did not
violate the Contract Clause.
II.
A.
As an initial matter, we note that we have
jurisdiction to resolve the merits of this case. PCFA has
raised this issue on appeal. PCFA argues that because it is
an "arm of the state," and because the suit is one
potentially involving money damages, the Eleventh Amendment
bars a federal court from hearing this claim against it. The
parties raised this issue in the district court, but that
court did not reach the issue, disposing of the suit against
PCFA on other grounds. Whether PCFA is an "arm of the state"
for Eleventh Amendment (or, for that matter, Contract Clause)
purposes is a difficult question. Because we readily find
-5- 5
that Act No. 4 bars suit against PCFA for claims filed after
Dec. 30, 1986, and that such a result does not violate the
Contract Clause, we pretermit resolution of this
jurisdictional issue. See Norton v. Mathews, 427 U.S. 524, ___ ______ _______
530-32 (1976) (where merits can be readily resolved in favor
of the party challenging jurisdiction, resolution of complex
jurisdictional issue may be avoided); Birbara v. Locke, 99 _______ _____
F.3d 1233, 1237 (1st Cir. 1996).
B.
We review de novo orders allowing a motion to ________
dismiss for failure to state a claim. Aulson v. Blanchard, ___________________
83 F.3d 1, 3 (1st Cir. 1996). It is clear, constitutional
issues aside, that Act No. 4 bars the claims of both Dr.
Fernandez and Mercado-Boneta. At the time that Mercado-
Boneta brought his malpractice claim against Dr. Fernandez,
the Legislature of the Commonwealth of Puerto Rico had
expressly abolished PCFA by Act No. 4, and replaced it with
the Insurers' Syndicate. Act No. 4 at 3, 1986 P.R. Laws
871, 885. PCFA was no longer legally capable of fulfilling
its obligations under the insurance policy. The Act further
provided that the Insurance Commissioner of Puerto Rico would
oversee the implementation of the newly formed Insurers'
Syndicate, "it being understood, that the Syndicate shall not
assume financial responsibility for any claims filed against
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the abolished Patient's Compensation Fund Administration."
Id. According to the plain language of this statute, the ___
Insurers' Syndicate was not the successor in interest of PCFA
for purposes of assuming PCFA's liabilities, and could not be
held liable for claims arising under policies issued by PCFA.
Nor could the Insurance Commissioner be held liable
as PCFA's representative for claims filed against PCFA
subsequent to the enactment of Act No. 4. Although the Act
provides that the Insurance Commissioner shall continue to be
responsible for claims and procedures initiated with PCFA on
or before the enactment of Act No. 4, it makes no provision
for claims filed with PCFA after the enactment of Act No. 4.
Id. Act No. 4 exempts PCFA from liability on malpractice ___
claims filed after December 30, 1986, through the Insurers'
Syndicate, the Insurance Commissioner, or otherwise.
C.
Mercado-Boneta5 and Dr. Fernandez argue that Act
No. 4 nonetheless violates the prohibition in Article 1,
____________________
5. Mercado-Boneta lacks standing to assert a Contract Clause
claim, as he has no contractual relationship with PCFA. See ___
General Motors v. Romein, 503 U.S. 181, 186-87 (1991) (the ______________ ______
first step in a Contract Clause analysis is determining
whether a contractual relationship in fact exists); McGrath _______
v. Rhode Island Retirement Board, 88 F.3d 12, 16 (1st Cir. ______________________________
1996) (in a Contract Clause analysis, "a court must first
inquire whether a contract exists"). Dr. Fernandez does have
standing, however, so we analyze the issue.
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10, cl. 1 of the United States Constitution, that "[n]o state
shall . . . pass any . . . law impairing the obligation of
contracts. . . ." Mercado-Boneta and Fernandez assert that
under Dr. Fernandez's occurrence policy with PCFA, PCFA was
contractually obligated to reimburse Dr. Fernandez for future
claims arising out of negligent acts which occurred during
the time the policy was in effect. They argue that because
Act No. 4 prevents them from seeking performance from PCFA
under the contract, the Act substantially impairs a
contractual obligation. They further contend that Act No. 4
is not reasonable and necessary to an important public
purpose.
The threshold issue in Contract Clause analysis is
"whether the change in state law has 'operated as a
substantial impairment of a contractual relationship.'"
General Motors Corporation v. Romein, 503 U.S. 181, 186 ____________________________ ______
(1991) (quoting Allied Structural Steel Co. v. Spannaus, 438 ___________________________ ________
U.S. 234, 244 (1978)). This inquiry is broken down into three
distinct parts: "whether there is a contractual
relationship, whether a change in law impairs that
contractual relationship, and whether the impairment is
substantial." Id. If we find that a law does substantially ___
impair a contractual relationship, we will nevertheless
uphold the law if it is "reasonable and necessary to an
important public purpose." United States Trust Company of _______________________________
-8- 8
New York v. New Jersey, 431 U.S. 1, 25 (1976); see also ________ ___________ ___ ____
McGrath v. Rhode Island Retirement Board, 88 F.3d 12, 16 (1st _______ _____________________________
Cir. 1996) (citing Energy Reserves Group v. Kansas Power & ______ _____________________ _______________
Light, 459 U.S. 400, 411-12 (1983)). This inquiry is more _____
searching than the rational basis review employed in Due
Process or Equal Protection analysis. Although deference is
due to the legislature, and weight is given to the
legislature's own statement of purposes for the law, a court
must undertake its own independent inquiry to determine the
reasonableness of the law and the importance of the purpose
behind it. As noted in McGrath, "a state must do more than _______
mouth the vocabulary of the public weal in order to reach
safe harbor . . . ." 88 F.3d at 16.
Because the parties do not raise the issue on
appeal, we assume arguendo that a contract between PCFA and
Dr. Fernandez indeed existed.6 The parties also agree that
____________________
6. We note, however, that in Contract Clause analysis, where
the state or a state agency is a party to the allegedly
impaired contract, the existence of a contract is not a
matter of state contract law, but of federal law. It is not
clear whether appellants seek to characterize PCFA as an arm
of the state or as a private insurance company. If PCFA is
viewed as an arm of the state, in order to find that the
state has committed itself to a contractual obligation, there
must be a "clear indication that the legislature intends to
bind itself in a contractual manner." Parker v. Wakelin, ______ _______
1997 WL 436704 (1st Cir. Aug. 11, 1997). This requirement is
referred to as the "unmistakability doctrine". Id. ___
Even where the state is not alleged to be a party to the
contract, the question of whether a contract exists for
Contract Clause purposes is still a question of federal,
rather than state law. See General Motors v. Romein, 503 ___ _______________ ______
-9- 9
Act No. 4 impairs the contractual relationship between PCFA
and Dr. Fernandez, and that that impairment is substantial,
under the second and third prongs of the analysis.
As to whether any impairment is substantial, we
note that in Contract Clause analysis, the expectations of
the parties to the alleged contract play an important role in
determining the substantiality of the contractual impairment.
Energy Reserves Group v. Kansas Power and Light Co., 459 U.S. _____________________ __________________________
400, 416 (the complaining party's reasonable expectations had
not been impaired by a statute, and so the statute did not
violate the Contract Clause, although it altered the parties'
obligations). A key factor in determining the parties'
expectations is whether the parties were operating in a
heavily regulated industry. Id. at 411 ("In determining the ___
extent of the impairment, we are to consider whether the
industry the complaining party has entered has been regulated
in the past.") (citing Allied Structural Steel Co., 438 U.S. ___________________________
at 242, n. 13). In Energy Reserves, the Supreme Court held _______________
that a Kansas statute imposing certain regulations on oil and
gas contracts did not impair existing contractual obligations
between an oil company and a public utility. 438 U.S. at
____________________
U.S. 181, 186 (1992) ("The question whether a contract was
made is a federal question for purposes of Contract Clause
analysis . . . and 'whether it turns on issues of general or
purely local law, we cannot surrender the duty to exercise
our own judgment.'") (quoting Appleby v City of New York, 271 _______ ________________
U.S. 364, 380 (1926)).
-10- 10
416. The Court found that because the parties were operating
in a heavily regulated industry, and could readily foresee
future regulation involving the subject matter of their
contract, their expectations under the contract were not
significantly affected. Id. ___
The parties here were also in a heavily regulated
context. Insurance companies in Puerto Rico operate under
the highly detailed and comprehensive Insurance Code of
Puerto Rico. 26 L.P.R.A. 201 et seq. Among its numerous
and extensive provisions, the Code permits the Insurance
Commissioner to liquidate insolvent insurance companies and
establish procedures for the resolution of claims against the
company. 26 L.P.R.A. 4002, 4008, 4019. The breadth of
Puerto Rico's regulation of the insurance industry was
acknowledged in Gonzalez v. Media Elements, Inc., 946 F.2d ________ ____________________
157 (1st Cir. 1991) ("Puerto Rico has constructed a
comprehensive framework for the liquidation of insolvent
insurance companies and the resolution of claims against
them."); see also Garcia v. Island Program Designer, 791 F. ________ ______ _______________________
Supp. 338, 341, rev'd on other grounds, 4 F.3d 57 (1st Cir. ______________________
1993) (noting that the Puerto Rico insurance scheme is "an
intricate and highly specialized administrative system,
adopted by the Commonwealth of Puerto Rico to regulate the
life of insurance companies from incorporation to dissolution
. . . . [It] provides a comprehensive program for the
-11- 11
rehabilitation and liquidation of domestic insurance
companies . . . ."). Dr. Fernandez was aware, when he
contracted with PCFA for medical malpractice insurance, that
the subject matter of the contract might well undergo further
regulation, including potential cancellation of the contract
in the event of PCFA's insolvency. See Veix v. Sixth Ward ___ ____ __________
Bldg. & Loan Ass'n, 310 U.S. 32, 38 (1940) (noting that when ___________________
one "purchase[s] into an enterprise already regulated in the
particular to which he now objects, he purchase[s] subject to
further legislation upon the same topic."). Just as the
legislature created PCFA because of an insurance crisis, it
was reasonable to expect that the legislature could terminate
PCFA's existence in the event that PCFA did not fulfill its
purposes, or a new crisis ensued. This is exactly what
transpired, and we do not believe that these events were
unforeseeable.
Whether or not there is a substantial contractual
impairment7 involved in this case, we find, turning to the
____________________
7. Dr. Fernandez correctly points out the dangers that
Contract Clause analysis would be enervated if the mere fact
of regulation meant there was always foreseeability of more
regulation and thus no substantial impairment. We need not
decide whether there was indeed a "substantial" impairment
here, given the ease of the analysis of the Commonwealth's
justifications for any impairment. In that context, we note
that such an impairment was foreseeable, and that, in turn,
has some bearing on the level of scrutiny to which Act No. 4
is subjected. See Allied Structural Steel Co., 438 U.S. at ___ ___________________________
245 ("The severity of impairment measures the height of the
hurdle the state legislation must clear.");see also Energy _________ ______
Reserves, 459 U.S. at 411 ("The severity of the impairment is ________
-12- 12
fourth part of the Contract Clause analysis, that Act No. 4
was reasonable and necessary to an important public purpose.
Although apparently absolute on its face, "[t]he
Contract Clause's prohibition of any state law impairing the
obligation of contracts must be accommodated to the State's
inherent police power to safeguard the vital interests of its
people." Energy Reserves, 459 U.S. at 410. A court's task _______________
is "to reconcile the strictures of the Contract Clause with
the 'essential attributes of sovereign power' necessarily
reserved by the States to safeguard the welfare of their
citizens." United States Trust, 431 U.S. at 20 (quoting Home ___________________ ____
Bldg. & Loan Ass'n v. Blaisdell, 290 U.S. 398, 435 (1934)). __________________ _________
The Commonwealth's interests are revealed by the
statutory scheme. The legislature originally created PCFA in
1976, to "solve the problem of medical and hospital
malpractice risks." Act No. 4, 1986 P.R. Laws 869, 869
("Statement of Motives"). To achieve its goals, the
legislature created two insurance structures: the Joint
Underwriting Association ("JUA") and PCFA. Id. The JUA was ___
"composed of all insurers licensed to contract accident
insurance in Puerto Rico, and its purpose was to provide
medicohospital professional liability insurance for medical
professionals and health service institutions that could not
____________________
said to increase the level of scrutiny to which the
legislation will be subjected.") (citing Allied Structural __________________
Steel, 438 U.S. at 245). _____
-13- 13
obtain said insurance on the open market." Id. The goal of ___
the JUA was to distribute profits and losses evenly among all
insurance underwriters.
The Commonwealth established the second insurance
structure, PCFA, to "provide medicohospital professional
liability coverage in excess of seventy-five thousand dollars
($75,000) per claim, furnished by the market and/or the
Association, up to a limit of one hundred and fifty thousand
dollars ($150,000)." Id. at 870. PCFA was to be funded by ___
premiums imposed on the insured, in much the same manner that
private insurance companies are funded.
Neither the JUA nor PCFA proved effective in
achieving the Commonwealth's goals. In enacting Act No. 4,
the Commonwealth sought to eradicate both structures and
create a new, improved insurance structure called the
Insurers' Syndicate. We quote, as did the District Court,
from the "Statement of Motives" in Act No. 4:
It has been proven that the
Patient's Compensation Fund has serious
faults which sooner or later shall make
it a totally inoperative system. It does
not have an adequate capital structure,
so that it lacks the resources to face
adverse fluctuations in loss occurrence.
The mechanism of the demand which the
Fund has to cover operational deficits is
inadequate because the law establishes a
maximum limit to the additional
contribution that can be levied in a
fiscal year.
On the other hand, if contingencies
occur such as a high incidence (even in
the case of losses under the $150,000
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limit) or high severity, especially in
limits between one hundred and fifty
thousand ($150,000) and five hundred
thousand ($500,000) dollars, the Fund
could find itself without adequate
resources to absorb its losses. In view
of the ascending trend in the incidence
and severity of the losses, the
postponement of the payment for
subsequent fiscal years could only
endanger the Fund's operations for said
years and bring about the protests of the
insured (because of high costs) and the
victims who will not receive their
payment in time.
Id. at 871. The legislature reasonably concluded that if ___
PCFA were not dissolved, it would continue to incur
liabilities and obligations which it would not be able to
meet. Under Contract Clause analysis, a court must consider
whether the proposed justification in fact serves public ______
interests and whether its mechanisms to serve those interests
reflect reasonable and necessary choices. __________ _________
Act No. 4 is in stark contrast to the narrowly
focused, private interest-oriented law that was struck down
in Allied Structural Steel Company v. Spannaus, 438 U.S. 234 _______________________________ ________
(1978). The Supreme Court there invalidated a law which
mandated certain pension rights for certain employees,
regardless of what the individual employment contracts or
pension plans provided, because the law had an "extremely
narrow focus," and was not enacted "to protect a broad
societal interest rather than a narrow class." Id. at 248-49 ___
(The law "applies only to private employers who have at least
-15- 15
100 employees, at least one of whom works in Minnesota, and
who have established voluntary private pension plans . . . .
And it applies only when such an employer closes his
Minnesota office or terminates his pension plan."). The
Commonwealth was not legislating on behalf of private
interests when it enacted Act No. 4, and sought only to
protect the legitimate interests of the public in having a
well-functioning medical malpractice insurance system.
The necessity analysis inquires whether the
Commonwealth "impose[d] a drastic impairment when an evident
and more moderate course would serve its purposes equally
well." United States Trust Co., 431 U.S. at 31. And the ________________________
reasonableness inquiry requires a determination that the law
is "reasonable in light of the surrounding circumstances."
Id. The Supreme Court has indicated that different levels of ___
deference are afforded to a legislature's determination of
reasonableness and necessity, depending on whether the
contracts at issue are public or private in nature. See U.S. ___ ____
Trust Co., 431 U.S. at 25-26. If the contract is a private _________
one, then "[a]s is customary in reviewing economic and social
regulation, . . . courts properly defer to legislative
judgment as to the necessity and reasonableness of a
particular measure." United States Trust Co., 431 U.S. at ________________________
22-23. On the other hand, "[w]here the contract allegedly
impaired is one created, or entered into, by the state
-16- 16
itself, less deference8 to a legislative determination of
reasonableness and necessity is required, because 'the
State's self-interest is at stake.'" Parker v. Wakelin, 1997 ______ _______
WL 436704 (quoting United States Trust Co., 431 U.S. at 25- _______________________
26).
Here, we find that although PCFA was created by the
Commonwealth, the insurance contracts PCFA entered into were
essentially more akin to private contracts than public ones.
We thus accord considerable deference to the Commonwealth's
assessment of the reasonableness and necessity of Act No. 4.
We believe the real issue in determining the level of
deference given to a legislative determination of
reasonableness and necessity is not so much whether the state
is arguably a nominal party to the contract, but whether the
state is acting in its own pecuniary or self-interested
capacity by impairing a contractual obligation it has
undertaken. See United States Trust Co., 431 U.S. at 26 ("If ___ _______________________
a State could reduce its financial obligations whenever it
wanted to spend the money for what it regarded as an
important public purpose, the Contract Clause would provide
____________________
8. However, even where public contracts are at issue, some
deference is due a legislature. See Local 589, Amalgamated ___ ______________________
Transit Union v. Massachusetts, 666 F.2d 618, 642 (1st Cir. _____________ _____________
1981) (even where public contracts are involved, courts are
not required to "reexamine de novo all the factors underlying _______
the legislation and to make a totally independent
determination" regarding the necessity and reasonableness of
the law).
-17- 17
no protection at all."); Parker v. Wakelin, 1997 WL 436704 ______ _______
(1st Cir.) (state assessment of necessity and reasonableness
is given less deference where its own self-interest is at
stake). If the state has in fact altered none of its own
financial obligations, then the legislative decision deserves
significant deference because the state is essentially acting
not according to its economic interests, but pursuant to its
police powers.
The question then, is whether and to what extent
the Commonwealth of Puerto Rico has lessened its own
financial obligations by abrogating PCFA. The answer is that
it has not done so at all. The Commonwealth created PCFA,
but empowered it to act as an ordinary insurance company.
PCFA entered into insurance contracts and conducted its
affairs as a more or less independent entity, overseen by a
board of directors. Act of May 30, 1976, Act No. 74, sec. 1,
41.050(2), 1976 P.R. Laws 223, 228-29 ("Act No. 74"). PCFA
derived its funds from premiums imposed on the insureds, Act
No. 74, at sec. 1, 41.050(1)(b), 41.060, and there is no
indication that the Commonwealth ever intended to utilize
state funds to satisfy any of PCFA's insurance obligations.
In fact, Act No. 74 provided that in the event that the
amount of money contributed to PCFA by the insureds were "not
sufficient to meet the claims made against [PCFA] in a
specific year," the Commonwealth would not contribute any
-18- 18
funds, but rather "the Board [of PCFA would] require an
additional proportionate contribution of all the participants
for that fiscal year." Id. at 41.060(4). By creating PCFA, ___
the Commonwealth sought not to provide state funds to insure
medical professionals, but merely to set up an insurance
scheme that would provide the proper setting in which to
resolve the medical malpractice insurance crisis that was
occurring at the time. Because the Commonwealth was never
obligated to fund PCFA, when PCFA began to fail it was the
public welfare, not the Commonwealth's bank account, that
stood to lose.
Act No. 4 was plainly reasonable and necessary. In
Chicago Life Ins. Co. v. Needles, 113 U.S. 574 (1885), the ______________________ _______
Supreme Court upheld against Contract Clause attack a
legislative decision to liquidate an insolvent insurance
company. In that case, the Court stated:
But can it be possible that the state,
which brought this corporation into
existence for the purpose of conducting
the business of life insurance, is
powerless to protect the people against
it, when . . . its further continuance in
business would defeat the object of its
creation, and be a fraud upon the public,
and on its creditors and policy-holders?
. . . The [law in question] does not
contain any regulation respecting the
affairs of any corporation of Illinois
which is not reasonable in its character,
or which is not promotive of the
interests of all concerned in its
management.
-19- 19
Id. at 582. In response to the claim that the liquidation ___
violated the contract rights of policy-holders, the Court
noted that "it would be a doctrine new in the law that the
existence of a private contract of the corporation should
force upon it a perpetuity of existence contrary to public
policy, and the nature and objects of its charter." Id. at ___
584.
That the Act itself was reasonable and necessary
does not end the analysis. In the end, Dr. Fernandez's real
complaint is that, because of the claims bar date, his claim
is not among those which will be funded out of the wind-down
of PCFA. In an attempt to limit the financial and
administrative burdens of concluding the affairs of the
dissolved PCFA, the legislature provided that existing claims
would be honored, while claims filed with PCFA after the
enactment of Act No. 4 would not. Although this legislative
solution may appear unfair to those physicians who paid for
occurrence policies with PCFA and whose claims were not made
with PCFA before the claims bar date, it was not unreasonable
under the circumstances. In a sense, Act No. 4 sought to
accomplish a sort of legislative triage. That is, it sought
to make an equitable distribution of limited resources by
providing for existing, but not future claims.
The Commonwealth did not impose "a drastic
impairment when an evident and more moderate course would
-20- 20
serve its purposes equally well." United States Trust Co., ________________________
431 U.S. at 31. We cannot say that the Commonwealth was
obligated to fund PCFA until all potential occurrence claims
had been filed, regardless of PCFA's imminent insolvency and
inefficacy. What the legislature has done in this case is
not unlike the situation in bankruptcy wherein creditors must
file their claims against a debtor's estate within a
relatively short time period in order to have their claims
recognized. See Rule of Bankr.Proc. 3002(c) (in chapter 7 ___
liquidation proof of claims shall be filed within 90 days of
creditors' meeting). The time limitations for filing claims
against a bankrupt have been held to create an absolute bar
against asserting the claim, rather than merely an issue of
priority. See, e.g., Robinson v. Mann, 339 F.2d 547, 549 _________ ________ ____
(5th Cir. 1964) (time limitations for filing claims against
debtor's estate "operate as an absolute bar against creditors
who seek to present their claims beyond the [bar date].");
Norris Grain Co. v. United States, 81 B.R. 103, 106 (Bkrtcy. ________________ ______________
M.D. Fl. 1987) (claims bar date is 'in the nature of a
statute of limitations [which] must be strictly observed.'")
(quoting In re Kay Homes Inc., 57 B.R. 967, 971 (Bkrtcy. S.D. ____________________
Tex. 1986) (alterations in original)). The purpose behind
the claims bar date in bankruptcy, as in the case before us,
is "to provide the debtor and its creditors with finality"
and to "insure the swift distribution" of the liquidated
-21- 21
estate. In re Schaffer, 173 B.R. 393, 398 (Bkrtcy. N.D. Ill. ______________
1994) (quoting In re Zimmerman, 156 B.R. 192, 199 (Bkrtcy. _______________
W.D. Mich. 1993)). See also In re Kolstad, 928 F.2d 171, 173 _____________
(5th Cir. 1991) ("The deadlines have a purpose: they enable
a debtor and his creditors to know, reasonably promptly, what
parties are making claims against the estate and in what
general amounts."). "[A]lthough aware that a bar date, like
other limitation periods, would inevitably cause hardship on
those who failed to act timely, Congress decided that the
goal of finality is of greater benefit to the public than any
benefit derived from allowing individual exceptions to the
bar date." Norris Grain Co., 81 B.R. at 106 (citing Hoos & _________________ ______
Co. v. Dynamics Corporation of America, 570 F.2d 433, 439 (2d ___ _______________________________
Cir. 1978)); see also Hoos & Co., 570 F.2d at 439 (noting ________ __________
that permitting bankruptcy court to consider allowing late
claims in individual cases would "put the bankruptcy courts
in the unenviable position of indefinitely having to consider
claims" and that such a scenario "would destroy the objective
of finality which Congress obviously intended to promote.").
The same principles are involved here. The
legislature assigned to the Insurance Commissioner the task
of liquidating PCFA and distributing its assets. There was a
strong interest in rapidly resolving and quantifying all
claims against PCFA. If the Insurance Commissioner were
-22- 22
required to accept claims against the liquidated PCFA
indefinitely that would clearly contravene the legitimate
legislative goal of finality, and could well delay
distribution of funds to any claimant. Cf. In re Schaffer, ___ ______________
173 B.R. at 398 ("If creditors of any stripe were permitted
to file claims at their discretion . . . . Many estates would
be impossible to administer."). In addition to the
administrative difficulties involved in permitting the
continued filing of claims against PCFA, due to the limited
availability of funds, known claimants might be required to
await the filing of future claims before they could collect
on their own. Absent a claims bar date, neither the affairs
of PCFA nor the interests of pending claims could be
finalized. It was reasonable for the legislature to set a
cut-off date after which time claims against PCFA would not
be honored, and Dr. Fernandez's claim fell on the wrong side
of that line. We recognize that this places Dr. Fernandez,
Mercado-Boneta, and others like them in an unfortunate
situation. We also recognize, however, the legislature's
legitimate purpose in setting a claims bar date, and find
that it was reasonable and necessary under the circumstances.
D.
-23- 23
We hold that Act No. 4 bars plaintiff's suit
against PCFA, and that Act No. 4 does not violate the
Contract Clause of the United States Constitution. We affirm
the District Court's dismissal of this action.
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Document Info
Docket Number： 97-1354
Filed Date： 9/11/1997
Precedential Status： Precedential
Modified Date： 9/21/2015