 United States Court of Appeals for the Federal Circuit

                                       05-5032


                                  JOHN A. GREENE,
                  Receiver for the Great Global Assurance Company,

                                                     Plaintiff-Appellee,

                                          v.


                                  UNITED STATES,

                                                     Defendant-Appellant.



      Douglas J. Schmidt, Blackwell Sanders Peper Martin LLP, of Kansas City,
Missouri, argued for plaintiff-appellee. With him on the brief were Ernest M. Fleischer
and Michael D. Fielding.

       Robert W. Metzler, Attorney, Tax Division, Appellate Section, United States
Department of Justice, of Washington, DC, argued for defendant-appellant. With him
on the brief were Eileen J. O’Connor, Assistant Attorney General and David I. Pincus,
Attorney.

      Stephen S. Kaye, Bryan Cave LLP, of Washington, DC, for amicus curiae
National Association of Insurance Commissioners.

      Frank S. Swain, Baker & Daniels LLP, of Washington, DC, for amici curiae
National Organization of Life and Health Insurance Guaranty Associations and National
Conference of Insurance Guaranty Funds.

Appealed from: United States Court of Federal Claims

Judge Marian Blank Horn
 United States Court of Appeals for the Federal Circuit

                                          05-5032

                                   JOHN A. GREENE,
                   Receiver for the Great Global Assurance Company,

                                                               Plaintiff-Appellee,

                                               v.

                                     UNITED STATES,

                                                               Defendant-Appellant.

                               ________________________

                                DECIDED: March 8, 2006
                               ________________________


Before MICHEL, Chief Judge, BRYSON and GAJARSA, Circuit Judges.

GAJARSA, Circuit Judge.

       This is the second appeal in an action by John Greene (“Greene”), receiver in

liquidation for Great Global Assurance Company (“Great Global”), to recover $699,849

in tax and interest paid by Great Global in 1990 for the tax year 1983. On March 27,

1996, Greene filed for a refund in the United States Court of Federal Claims (“CFC”),

arguing that the tax was improperly assessed, and in the alternative that Great Global’s

policyholder and guaranty fund claimants were entitled to priority of distribution over the

Internal Revenue Service (“IRS”). Greene intended to distribute the refund to these

entities on behalf of the insolvent insurer.

       The CFC dismissed Greene’s complaint as not having been timely filed. See

Greene v. United States, 42 Fed. Cl. 18 (1998) (“Greene I”). Greene appealed, and we
reversed, holding that the lower court had misconstrued the statute of limitations. See

Greene v. United States, 191 F.3d 1341 (Fed. Cir. 1999) (“Greene II”). On remand, the

CFC entered summary judgment on October 13, 2004, in favor of Greene.                The

Government filed a timely notice of appeal. This court has jurisdiction pursuant to 28

U.S.C. § 1295(a)(3). For the reasons discussed below, we reverse the judgment of the

CFC.

                                  I.     BACKGROUND

                                        A.    Facts

       The Life Insurance Company Tax Act of 1959 (“Tax Act”) introduced a three-

phase taxation scheme for life insurance companies. See Pub. L. No. 86-169, 73 Stat.

112 (codified as amended at 26 U.S.C. § 801-20). Of relevance here is Great Global’s

Phase II and Phase III income. Phase II income represented one-half of an insurer’s

underwriting gains for that year, and it was tax exempt if it was deposited in a

policyholder’s surplus account (“PSA”).       The policy behind the Tax Act was to

incentivize insurers to create PSA cash reserves that would augment their capacity to

satisfy future claims. When funds in the PSA were withdrawn, reallocated, or no longer

used to further compliance with the insurer’s obligations to policyholders, the PSA funds

were then taxed as so-called Phase III income. See Greene v. United States, 62 Fed.

Cl. 418, 420 (Ct. Cl. 2004) (“Greene III”).

       To qualify as a life insurance company for tax purposes a company must meet

the requirements set forth in 26 U.S.C. § 801(a) (1982). One condition that would

trigger tax liability on an insurer’s tax-sheltered PSA income was its having ceased to

operate as a life insurance company for any two consecutive years. See 26 U.S.C.




05-5032                                        2
§ 815(d)(2)(A)(ii) (1982) (providing that if “for any two successive taxable years the

taxpayer is not a life insurance company, then the amount taken into account under

section 802(b)(3) for the last preceding taxable year for which it was a life insurance

company shall be increased . . . by the amount remaining in its policyholders surplus

account at the close of such last preceding taxable year”).

      In 1983, Great Global filed a federal Life Insurance Company Income Tax

Return, on which it claimed zero tax liability. Greene III, 62 Fed. Cl. at 418. However,

in 1984 and 1985, it failed to qualify as an insurance company, triggering a retroactive

tax liability on $820,961 (its PSA funds) for the 1983 tax year. Id. at 420-21. On

February 7, 1986 the Superior Court of the State of Arizona declared Great Global to be

insolvent, placed it in receivership, and on June 8, 1988, ordered that it be liquidated.

Id. The receivership is still in existence today. On July 9, 1990, the receiver filed an

amended return on behalf of Great Global and paid $699,849 in back taxes for 1983,

consisting of $357,392 in revised tax liability and $342,457 in interest. On September

24, 1990, the IRS assessed the additional tax and interest on Great Global pursuant to

26 U.S.C. § 6501(c)(6) (1982).       See Greene III, 62 Fed. Cl. at 421 (permitting

assessment “within three years after the return was filed (whether or not such return

was filed on or after the date prescribed) for the taxable year for which the taxpayer

ceases to be an insurance company, the second taxable year for which the taxpayer is

not a life insurance company, or the taxable year in which the distribution is actually

made as the case may be”) (quoting 26 U.S.C. § 6501(c)(6)).

      On July 8, 1993, Greene filed for a second amended tax return and requested a

refund of $699,849, stating two alternative bases for recovery. First, Greene argued




05-5032                                        3
that notwithstanding the plain language of the statute, the IRS could not properly assess

a Phase III tax against an insurer in receivership, where shareholders receive nothing,

because the purpose of the tax was “to give assurance that underwriting gains made

available to shareholders will be subject to the full payment of tax.” Second, Greene

argued that the tax was incorrectly collected over the competing claims of policyholders,

or more precisely, the claims of the Arizona Guaranty Corporation to recover what it had

paid to policyholders on Great Global’s behalf. The IRS denied Greene’s refund claim,

which led Greene to file a complaint in the CFC. See Greene I, 42 Fed. Cl. 18. As

explained above, the CFC dismissed Greene’s claim for untimeliness; Greene

appealed, and we reversed that decision and remanded to the CFC.

                            B.     CFC Decision on Remand

      In remand proceedings before the CFC in Greene III, Greene and the

government cross-filed for summary judgment.        See 62 Fed. Cl. at 423.       Greene

advanced two principal arguments. First, he argued that the tax was not properly due

and payable, because the sole purpose of the tax was to assure that underwriting gains

made available to shareholders would be subject to the full payment of tax, and in light

of Great Global’s insolvency, shareholders had received nothing. Refusing to delve into

legislative intent, the CFC rejected Greene’s policy argument, noting that the statutory

language was clear on its face—namely, that 26 U.S.C. § 815(d)(2)(A)(ii) (1982)

“require[d] that an insurance company’s failure to qualify as a life insurance company for

two years renders its entire [PSA] balance taxable as income for the last year in which

the company qualified as a life insurance company.”




05-5032                                        4
       Greene’s second argument was based on the McCarran-Ferguson Act § 2(b),

15 U.S.C. § 1012(b) (1982). Greene recognized that the federal superpriority statute

provided that “[a] claim of the United States Government shall be paid first when a

person indebted to the Government is insolvent and . . . an act of bankruptcy is

committed.” 31 U.S.C. § 3713(a)(1)(A)(iii). However, he argued that the section 2 of

the McCarran-Ferguson Act limited the superpriority statute because it stated that “[n]o

Act of Congress shall be construed to invalidate, impair, or supersede any law enacted

by any State for the purpose of regulating the business of insurance, or which imposes

a fee or tax upon such business, unless such Act specifically relates to the business of

insurance[.]” Greene pointed to the 1997 revision of Arizona’s insurance liquidation

statutes, which he argued were regulatory in nature, see Greene III, 62 Fed. Cl. at 423,

and which made clear that policyholders’ claims and claims by guaranty funds were

both senior in priority to IRS claims. See Ariz. Rev. Stat. Ann. § 20-629(A)(1)-(10)

(1997) (providing in relevant part for the following claim distribution order from the

assets of a delinquent insurer: costs related to administration of the delinquency

proceedings; guaranty fund claims; policyholders’ insurance claims; federal government

claims; employee compensation claims; state and local government claims; claims of

other general creditors; and three additional classes of claims).

       Greene argued for the applicability of the 1997 version of the Arizona statute

over the revisions in effect at any of the following relevant times: 1983, the taxable year;

December 31, 1985, the end of the second year that Great Global failed to qualify as a

life insurance company under 26 U.S.C. § 815(d)(2)(A)(ii); February 7, 1986, when the

Arizona Supreme Court declared Great Global insolvent; June 8, 1988, when the court




05-5032                                         5
entered a liquidation order; July 9, 1990, when Great Global’s receiver filed an amended

1983 tax return and paid the tax; July 8, 1993, when Greene filed a second amended

tax return; and March 27, 1996, when Greene filed for a refund in the CFC. Greene’s

preference for the 1997 revision was understandable as unlike earlier revisions, it made

crystal clear the priority of policyholder and guaranty fund claims over those of the

federal government. However, Greene argued that even under the 1977 revision, which

was in effect in 1990 when the tax was assessed and collected, policyholders held

“preferred claims” that were entitled to priority over what he alleged to be the mere

“general creditor” claims of the federal government. See Ariz. Rev. Stat. Ann. §§ 20-

611(A), -629(E) (1977). He urged that the 1977 revision was protected from preemption

because of the McCarran-Ferguson Act.

      The CFC did not decide which statutory revision, 1997 or 1977, applied.

Sidestepping the issue, it appeared to assume that policyholders would have priority

under either statute. The court then focused on whether the Arizona Guaranty fund and

the Arizona priority statute had the purpose of regulating the business of insurance and

of protecting policyholders. Following the First Circuit’s opinion in Ruthardt v. United

States, the CFC held that the Arizona state priority statute was exempt from preemption

under the McCarran-Ferguson Act.1 303 F.3d 375 (1st Cir. 2002). It therefore held in

favor of Greene, whom it deemed to be entitled to a refund of taxes paid to the




      1
             The CFC also cited Ariz. Rev. Stat. Ann. § 20-672, which characterizes
guaranty funds as essentially being subrogated to the rights of policyholder claimants.
In supplemental briefs, the parties make clear that this was an erroneous citation, which
should have been to an analogous provision—namely, § 20-682(A).


05-5032                                        6
government, reasoning that the money should have gone to the Guaranty Fund to

reimburse it for payments made to policyholders of the insolvent insurer.

                                      C.     Issues

       This case presents us with four issues: first, whether the federal tax was due and

payable; second, which version of the Arizona insurance liquidation statutes should be

applied in this case; third, whether the applicable state statute granted policyholders’

claims priority over those of the federal government; and fourth, if so, did it do it in a

manner that escaped preemption—pursuant to the provisions of the McCarran-

Ferguson Act—by the federal superpriority statute.

       This is an appeal from the CFC’s grant of summary judgment, which we review

de novo. Promac, Inc. v. West, 203 F.3d 786, 788 (Fed. Cir. 2000). As explained

below, we hold that the tax was due and payable, and that the 1977 Arizona priority

statute is applicable.   Furthermore, because the 1977 statute does not elevate the

priority of policyholders above that of government claimants, there is no conflict

between the federal superpriority statute and state law.       Consequently, McCarran-

Ferguson’s anti-preemption provisions are not triggered.       Because the 1977 statute

does not mention guaranty funds, we do not need to decide whether the McCarran-

Ferguson Act would allow the claims of guaranty funds to have a priority over those of

the federal government, such as is provided for by the 2001 revision of the Arizona

priority statute. See Ariz. Rev. Stat. Ann. § 20-629(A)(1)-(11).




05-5032                                         7
                                   II.        ANALYSIS

                         A.     The Tax Was Due and Payable

       Pursuant to 26 U.S.C. § 815(d)(2)(A)(ii), Phase III tax liability is imposed upon

insurers after a two-year lapse in their insurance operations. Greene argues that this

provision was designed to prevent shareholders from taking advantage of the deferred

taxation scheme even while discontinuing obligations to policyholders. According to

Greene, because this concern is not present when an insurance company involuntarily

ceases operations, such as by reason of insolvency, this court should decline to give

effect to the plain language of the statute. We reject Greene’s invitation to ignore the

unambiguous terms of this statute. Accordingly, we hold the Phase III tax to have been

due and payable.

                                         B.    Priority

       We now turn to the issue of priority, namely, whether the federal government’s

claim against Great Global is entitled to preference over the claims of Great Global’s

policyholders, or more precisely, preference over the claims of guaranty funds that have

paid the policyholders’ claims and seek reimbursement from the assets of the insolvent

insurer. Is there a dialectic tension among the various statutes? The answer to this

question depends on the interaction between, and the applicability of, several state and

federal statutes.

       As we explain below, the first such statute is the federal “superpriority” statute,

which provides that the federal government is entitled to first satisfaction of its claims

against an insolvent entity. See 31 U.S.C. § 3713(a)(1)(A)(iii). The Supreme Court of




05-5032                                           8
the United States has held that this federal priority right attaches upon insolvency and is

indefeasible. See Massachusetts v. United States, 333 U.S. 611, 625 (1948).

       Other relevant statutes are the multiple revisions of Arizona’s scheme for

distributing the assets of an insolvent insurer. See Ariz. Rev. Stat. Ann. § 629 (1954)

(as amended by acts of 1977, 1991, 1993, 1995, 1997 & 2001). The more recent

revisions of the priority statute clearly direct that policyholders and guaranty funds are to

be paid ahead of the federal government, and these recent revisions thereby conflict

with the mandate of the federal superpriority statute. In addition, the 1997 revision

explicitly provides for its retroactive application in all pending insolvency proceedings.

Giving effect to this retroactivity provision, however, would require stripping the federal

government of its indefeasible right to first priority, as granted by the federal

superpriority statute. The 1977 revision—the one that was in effect at the time that

Great Global was declared insolvent—did not directly address the relative priorities of

the government and policyholders. See Ariz. Rev. Stat. Ann. § 629.

       This case would be straightforward—with federal law simply preempting state law

in each instance—were it not for the McCarran-Ferguson Act, a federal law that can

save state laws from preemption, but only if the purpose of the state law is to regulate

the business of insurance.       However, as we set forth in more detail below, the

McCarran-Ferguson Act does not restrain the federal superpriority statute from

preempting the retroactive application of Arizona’s newer priority statutes. The only

revision of the priority statute not thereby preempted was the one in effect in 1986 when

the Great Global insolvency was declared—namely, the 1977 revision. After additional

analysis, however, we conclude that the McCarran-Ferguson Act does not save even




05-5032                                          9
the 1977 revision from preemption by the federal superpriority statute.                     Thus, the

government is entitled to priority of payment of the tax due.

                              1.         Federal Superpriority Statute

        The federal superpriority statute provides that “[a] claim of the United States

Government [e.g., for taxes] shall be paid first when a person indebted to the

Government is insolvent and . . . an act of bankruptcy is committed.”                       31 U.S.C.

§ 3713(a)(1)(A)(iii). Section 3713 “is the direct descendent of § 3466 of the Revised

Statutes, which had been codified in 31 U.S.C. § 191.” United States v. Estate of

Romani, 523 U.S. 517, 519 n.1 (1998).

        Not only does the federal superpriority statute provide that the federal

government be paid first, but it has been construed to provide that once the right to first

payment has attached, that right is vested and indefeasible. See Massachusetts v.

United States, 333 U.S. at 625 (holding that pursuant to § 3466 of the Revised Statutes,

the predecessor of the current superpriority statute, “the priority given is in terms

absolute, not conditional[ and o]nce attaching, it is final and conclusive”); id. at 627 n.26

(“Congress . . .    created    a        conclusive   priority   attaching   as   of   the    time   of

insolvency . . . .”).

                                   2.       McCarran-Ferguson Act

        The McCarran-Ferguson Act provides that “[n]o Act of Congress shall be

construed to invalidate, impair, or supersede any law enacted by any State for the

purpose of regulating the business of insurance, or which imposes a fee or tax upon

such business, unless such Act specifically relates to the business of insurance . . . .”

McCarran-Ferguson Act, Pub. L. No. 79-15, § 2(b), ch. 20, 59 Stat. 33, 34 (1945)




05-5032                                                10
(codified as amended at 15 U.S.C. § 1012(b) (2005)). Before examining the meaning of

the act, we briefly describe its history.

       Before 1944, the United States Supreme Court had consistently held that the

dormant Commerce Clause of the United States Constitution did not invalidate state

laws relating to insurance.     See, e.g., United States v. South-Eastern Underwriters

Ass’n, 322 U.S. 533, 534 (1944) (“For seventy-five years this Court has held . . . that the

Commerce Clause of the Constitution does not deprive the individual states of power to

regulate and tax specific activities of foreign insurance companies which sell policies

within their territories . . . [notwithstanding that] negotiation and execution of the

companies’ policy contracts involved communications of information and movements of

persons, moneys, and papers across state lines.”). Indeed, in 1869 the Court had

declared, in the context of a Dormant Commerce Clause case that “issuing a policy of

insurance is not a transaction of commerce.” Paul v. Virginia, 75 U.S. (8 Wall.) 168, 183

(1869).

       In 1944, the United States Supreme Court was first confronted with a challenge

to the power of Congress to affirmatively regulate interstate insurance pursuant to its

Commerce Clause powers.          In South-Eastern Underwriters, a number of insurance

companies had been indicted for violating sections of the Sherman Act that prohibited

the monopolization of commerce; and the district court had sustained a demurrer on the

grounds that insurance was not “commerce.” 322 U.S. at 534-35. In reversing the

district court’s dismissal of the indictment, the Supreme Court made clear that the

regulation of interstate insurance was within Congress’ power pursuant to the

Commerce Clause.        See id. at 553 (“No commercial enterprise of any kind which




05-5032                                        11
conducts its activities across state lines has been held to be wholly beyond the

regulatory power of Congress under the Commerce Clause.             We cannot make an

exception of the business of insurance.”).

       Congress reacted to the holding in South-Eastern Underwriters by passing the

McCarran-Ferguson Act. See United States Dep’t of Treasury v. Fabe, 508 U.S. 491,

499 (1993) (discussing the history of the Act). The McCarran-Ferguson Act provides

that statutes enacted pursuant to Congress’s Commerce Clause powers could not

preempt state insurance laws unless the federal statute has explicitly provided for such

preemption. In other words, the act “impos[es] what is, in effect, a clear-statement rule.”

Id. at 508.

       In Fabe, the United States Supreme Court made clear that “[t]he McCarran-

Ferguson Act did not simply overrule South-Eastern Underwriters and restore the status

quo[, but that t]o the contrary, it transformed the legal landscape by overturning the

normal rules of pre-emption.” 508 U.S. at 507. As explained by the Supreme Court in

Humana Inc. v. Forsyth, the McCarran-Ferguson Act is triggered only by a clear conflict

between state insurance law and a federal statute of general applicability. 525 U.S.

299, 310 (1999) (“When federal law does not directly conflict with state regulation, and

when application of the federal law would not frustrate any declared state policy or

interfere with a State’s administrative regime, the McCarran-Ferguson Act does not

preclude its application.”). McCarran does not create reverse field preemption. See id.




05-5032                                        12
                           3.     The Arizona Priority Statutes

       Until 1977, Arizona did not provide any special treatment for policyholders’

claims.   Then, the legislature revised its statutes to provide that “[u]npaid claims,

including claims for unearned premiums or cash values, which arise out of and are

within the coverage of insurance policies issued by the insolvent insurer shall have

preference over and shall be paid prior to payments of claims of general creditors.”

Ariz. Rev. Stat. Ann. § 20-629(E) (1977) (replaced by § 20-629(A) (1993)). Read in

combination with the definition of a “preferred claim,” see § 20-611, the Arizona statutes

in effect from 1977 to 1993 afforded policyholders the status of preferred claimants. Of

course, in light of the federal superpriority statute, § 20-611 would also seem to make

the federal government a preferred claimant, and the Arizona statute that was in effect

through 1993 provided no explicit resolution on the issue of whether the state statute

ranked policyholder claims higher than those of the federal government.

       This version of the statute remained in effect through March 25, 1993, during

which time the IRS assessed and collected the tax on Great Global. This provision was

replaced by a far more specific distribution statute, which provided in relevant part for

the following distribution order: administrative costs; certain employee wage claims;

guaranty fund claims; policyholder claims; claims of the federal, state and local

governments; and other general creditor claims. See Act of March 26, 1993, Ch. 141,

§ 3, 1993 Ariz. Legis. Serv. (West) (codified at Ariz. Rev. Stat. Ann. § 20-629(A)).

       On June 11, 1993, less than three months after Arizona enacted the new

distribution statute, the United States Supreme Court declared portions of a similar Ohio

statute not to be “’for the purpose of regulating the business of insurance,’ within the




05-5032                                        13
meaning of . . . the McCarran-Ferguson Act . . . .” Fabe, 508 U.S. at 493. The Ohio

statute had ranked government claims behind administrative expenses, wage claims,

policyholders’ claims and claims of general creditors. See id. at 493, 495 & n.2 (citing

Ohio Rev. Code Ann. § 3903.42 (1989)). The Court held that “the Ohio priority statute

escapes pre-emption . . . to the extent that it protects policyholders.” Id. at 491. Thus, it

held that the McCarran-Ferguson Act’s anti-preemption provisions extended to the

preferential payment of administrative costs, as these were indirectly necessary to

protect policyholders.    See id. at 509 (“Without payment of administrative costs,

liquidation could not even commence.”). However, it held that wage claims and other

general creditor claims, did not escape preemption. See id. at 509 (explaining that

“[t]he preferences conferred upon employees and other general creditors . . . do not

escape pre-emption because their connection to the ultimate aim of insurance is too

tenuous”).

       On remand, the district court applied Ohio law to conclude that the preempted

provisions of the state distribution statute were not severable from the section as a

whole, and accordingly found the section to be invalid in its entirety. See Duryee v. U.S.

Dep’t of the Treasury, 6 F. Supp. 2d 700, 706 (D. Ohio 1995).           While Duryee was

pending, Arizona made minor revisions to the statute in 1995, choosing to retain its pre-

Fabe scheme. See Act of March 29, 1995, Ch. 19, § 1, 1995 Ariz. Legis. Serv. (West)




05-5032                                         14
(codified at Ariz. Rev. Stat. Ann. § 20-629(A)).2 The district court filed its decision in

Duryee less than five months later, on August 14, 1995.

       After Duryee, the severability of Arizona’s preempted wage claim priority from the

remainder of the statute (and consequently, the validity of the statute) remained

undecided under Arizona state law, as Fabe did not invalidate the entire section of the

Ohio statute, but only the wage claim preference. However, Arizona legislators did

appear to respond to Fabe and Duryee in 1997 when they provided amended priority

rankings in which only administrative costs and policyholder and guaranty fund claims

were superior to federal government claims.           The new legislation provided for the

following priority: administrative costs; guaranty fund claims; policyholders’ claims;

federal government claims; state and local government claims; claims of other general

creditors; and claims by three additional lower-ranked groups.3 See Act of April 29,

1997, Ch. 272, § 1, 1997 Ariz. Legis. Serv. (West) (codified at Ariz. Rev. Stat. Ann.

§ 20-629(A)).

       Section 3 of this Act also included a severability provision to guard against any

possibility of total invalidation, as had occurred with Ohio’s priority statute in Duryee. Id.

Section 2 made explicit that the 1997 revision was to apply retroactively “to all

delinquency proceedings begun after the effective date of this act and to all delinquency



       2
               The 1995 Act, which amended parts of both § 20-629 and -682, included
language making a small portion of the changes retroactive. See Act of March 29,
1995, ch. 19, § 3(B) (“This act does not affect currently pending litigation concerning
guaranty fund coverage for guaranteed investment contracts that are issued by an
insurer that is the subject of receivership proceedings that are commenced before the
effective date of this act.”).
        3
               See also Ariz. Circular Letter 97-6 (July 21, 1997) (open letter from John
Greene in his capacity as Director of Insurance, describing the 1997 revisions as “Fabe
Cure Legislation”).


05-5032                                          15
proceedings pending on the effective date of this act in which a final distribution in

payment of claims has not been made . . . .” Id. (emphasis added). In this case, it is

not disputed that the proceedings were pending in 1997, and that no final distribution

has been made.

      In 2001, the Arizona legislature made only minor changes to the distribution

statute, which remains in effect today. See Act of May 4, 2001, Ch. 328, § 2, 2001 Ariz.

Legis. Serv. (West) (codified as amended at Ariz. Rev. Stat. Ann. § 20-629(E) (2005)).

Unlike the 1997 Act, however, the 2001 Act did not contain an explicit retroactivity

statement. Id.

                         4.     Choice of State Priority Statute

      Here, we must first decide which version of the Arizona statute to apply.

Although on appellate review courts do not generally apply statutes retroactively to pre-

enactment events, there are exceptions to that rule. See Landgraf v. USI Film Prods.,

511 U.S. 244, 273 (1994) (recognizing a presumption against statutory retroactivity, but

explaining that “in many situations, a court should apply the law in effect at the time it

renders its decision, even though that law was enacted after the events that gave rise to

the suit” and that a presumption against retroactivity will not apply when the legislature

has unambiguously provided for the retroactive application of a new law); United States

v. Schooner Peggy, 5 U.S. 103, 1 Cranch. 103 (1801) (reversing a decree in response

to a treaty that issued while the appeal was pending and that provided for the

retroactive reassignment of rights to a French vessel as between its French owners and

the U.S. government). Indeed, outside of the context of criminal statutes, legislatures

are generally free to impart retroactivity upon statutes through the use of express




05-5032                                        16
provisions. See, e.g., U.S. Trust Co. v. New Jersey, 431 U.S. 1, 17 n.13 (1977) (“The

Due Process Clause of the Fourteenth Amendment generally does not prohibit

retrospective civil legislation, unless the consequences are particularly “harsh and

‘oppressive.’” (quoting Welch v. Henry, 395 U.S. 134, 147 (1938))).

       When the legislature has not included an express retroactivity provision,

however, the determination of whether or not a statute should be applied retroactively

becomes more intricate. For example, under Arizona law, the general rule is that a law

can be accorded retroactive effect only if the law explicitly provides for retroactive

application. See Ariz. Rev. Stat. Ann. § 1-244 (2005) (“No statute is retroactive unless

expressly declared therein.”). However, there is a judicially-created exception to that

rule: Even if the law does not explicitly provide for retroactive application, it may be

applied retroactively only if it is merely procedural, rather than substantive. See Aranda

v. Indus. Comm’n, 11 P.3d 1006, 1009 (Ariz. 2000) (“This court has . . . created an

exception to the general rule requiring express language of retroactivity. Enactments

that are procedural only, and do not alter or affect earlier established substantive rights

may be applied retroactively.” (citing In re Shane B., 7 P.3d 94 (Ariz. 2000))).

       At first blush, this court appears to be confronted with the necessity of deciding a

question of Arizona law—namely whether the current (2001) version of the priority

statute, § 20-629(A), which lacks an express retroactivity provision, nonetheless has

retroactive application. This, in turn, would require us to predict whether the Arizona

courts would consider priority rights to be substantive or procedural pursuant to the

Aranda test. However, we do not need to reach this issue, because we conclude that a

state cannot retroactively deprive the federal government of its priority rights—not even




05-5032                                         17
where it does so explicitly, as it has done in its 1997 revisions. The relative order of

relevant priorities is identical under both the 1997 and 2001 revisions.

       The fundamental problem with the retroactive application of a priority statute that

divests the United States of its right to priority is that it conflicts with the federal priority

statute as construed by the Supreme Court to provide a priority right that is indefeasible

as of the date of insolvency—which in this case is February 7, 1986.                        See

Massachusetts v. United States, 333 U.S. at 625, 627 n.26. In short, the conflict is this:

under federal law, the government’s priority right cannot be altered by events that occur

post-insolvency; Arizona’s amended priority laws, to the extent that they are retroactive,

alter this indefeasible right of the government to priority of payment under federal law.

       Therefore, the retroactivity provision of the Arizona statute must fall pursuant to

the Supremacy Clause of the U.S. Constitution, unless it is protected by the McCarran-

Ferguson Act, which provides that “[n]o Act of Congress shall be construed to

invalidate, impair, or supersede any law enacted by any State for the purpose of

regulating the business of insurance, or which imposes a fee or tax upon such business,

unless such Act specifically relates to the business of insurance . . . .” Pub. L. No. 79-

15, § 2(b), ch. 20, 59 Stat. 33, 34 (1945) (emphasis added). In turn, the question is

whether Arizona’s retroactive shuffling of priorities to payment of claims against an

insolvent insurer is “for the purpose of regulating the business of insurance.” Id.

       We hold that it is not. In so doing, we recognize that in Fabe, the Supreme Court

rejected the notion that “regulation of insurance” was restricted to the “business of

insurance,” Fabe, 508 U.S. at 505 (emphasis added), making clear that the touchstone

of regulation is instead the extent to which it protects policyholders:




05-5032                                           18
       The Ohio priority statute is designed to carry out the enforcement of
       insurance contracts by ensuring the payment of policyholders’ claims
       despite the insurance company's intervening bankruptcy. Because it is
       integrally related to the performance of insurance contracts after
       bankruptcy, Ohio’s [prospectively applied] law is one “enacted by any
       State for the purpose of regulating the business of insurance.”

Id. at 504 (citing the McCarran-Ferguson Act, 15 U.S.C. § 1012(b)) (emphasis added).

       Notwithstanding, Fabe did not involve a priority statute that was being applied

retroactively, and it did not decide the issue that is before us today. We are keen to

avoid inappropriately expanding the holding of Fabe, especially given that such an

expansion would tend to eviscerate the McCarran-Ferguson Act’s “regulation”

constraint. Our concerns are heightened by the perverse consequences of extending

McCarran-Ferguson protection to retroactively-applied statutes. Consider the following.

This action was filed on March 27, 1996 under 28 U.S.C. § 1341(a)(1), which grants

jurisdiction over actions “for the recovery of any internal-revenue tax alleged to have

been erroneously or illegally assessed or collected.” It would seem peculiar to read

§ 1341(a)(1) as permitting actions for the recovery of taxes that were properly and

legally collected at the time of collection and at the time of filing suit, and that were only

rendered erroneous by subsequent state legislation. Doing so would likely invite state

legislatures to exempt their citizens from federal tax liability by simply enacting

appropriate statutes that apply retroactively.     See Van Den Wymelenberg v. United

States, 397 F.2d 443, 445 (7th Cir. 1968) (“Were the law otherwise there would exist

considerable opportunity for ‘collusive’ state court actions having the sole purpose of

reducing federal tax liabilities.”); Piel v. Comm’r, 340 F.2d 887, 891 (2d Cir. 1965)

(“What is income is controlled by federal law and retroactive judgments of state courts

cannot thus affect the rights of the federal government under its tax laws.”).



05-5032                                          19
Consequently, the 1997 and 2001 versions of the Arizona statute cannot retroactively

render erroneous a tax that was properly and legally collected at the time of collection

and at the time of filing suit.

       In short, we hold that the retroactive application of new priority statutes—whether

pursuant to the express provision of the 1997 Arizona priority statute or as a

consequence of whatever retroactive effect might be accorded to the 2001 statute in

light of Arizona decisional law—simply fails to constitute regulation of the business of

insurance, as required by the McCarran-Ferguson Act. Consequently, the McCarran-

Ferguson Act does not prevent the preemption of those provisions of state law that

provide for the application of state priority laws to insolvency proceedings commenced

before the enactment of the substantive change in the priority statute.

                    5.      Arizona’s 1977 Priority Statute is Preempted

       Thus, we must apply the 1977 version of the Arizona priority statute—the statute

that was in effect in 1986, at the time of the insurer’s insolvency. From 1954 to the

present, Arizona has defined a “preferred claim” against an insolvent insurer as being

“any claim with respect to which the law of the state or of the United States accords

priority of payments from the general assets of the insurer.” Ariz. Rev. Stat. Ann. § 20-

611(8) (1954) (currently codified at § 20-611(9), pursuant to Act of April 6, 2001, ch. 58,

§ 10 (S.B. 1022) 2001 Ariz. Legis. Serv. (West)).

       Here, there are two relevant § 20-611 “preferred claims”: the tax claim of the

United States government and policyholder claims. The former claims are “preferred”

pursuant to the federal superpriority statute. The latter are “preferred” pursuant to Ariz.

Rev. Stat. Ann. § 20-629(E) (1977), which provides that “[u]npaid claims, including




05-5032                                         20
claims for unearned premiums or cash values, which arise out of and are within the

coverage of insurance policies issued by the insolvent insurer shall have preference

over and shall be paid prior to payments of claims of general creditors.” (emphasis

added). The statute does not explicitly provide for the priority of one of these “preferred

claims” over the other.

       Now, we are faced with a second preemption problem, again from the federal

superpriority statute. The federal superpriority statute clearly provides the government

with first priority. Conversely, in the 1977 priority statute, the Arizona legislature fails to

express any clear preference about whether government claims or policyholder claims

should be paid first. To the extent that there is conflict between these statutes, the state

statute must yield, except if it is protected from preemption by section 2(b) of the

McCarran-Ferguson Act.

       The inquiry is whether the federal superpriority statute “invalidate[s], impair[s], or

supersede[s]” a state law relating to the “regulation of the business of insurance.” As

discussed above, the Supreme Court in Fabe was quite clear that state statutes that

protect policyholders from losses due to their insurer’s insolvency deal with the

“regulation of the business of insurance.” The sole question here is whether a federal

statute that requires the federal government to be paid first “invalidate[s], impair[s], or

supersede[s]” a state law that expresses, on its face, no preference in order of payment.

       The Supreme Court’s holding in Humana Inc. v. Forsyth helps to answer this

question. There, the Court held that “[t]he term ‘invalidate’ ordinarily means ‘to render

ineffective, generally without providing a replacement rule or law.’” 525 U.S. at 307

(internal citations omitted). Here, a federal statute that insists on a priority order cannot




05-5032                                          21
logically be said to render ineffective a statute that is silent. Similarly, the Supreme

Court held that “the term ‘supersede’ ordinarily means ‘to displace (and thus render

ineffective) while providing a substitute rule.’” Id. (internal citations omitted). Again, this

does not describe the situation at bar.        No part of the Arizona statute has been

displaced. To the contrary, it has merely been supplemented. Finally, we turn to the

Humana Court’s construction of the term “impair.” It held that pursuant to the “impair”

prong of McCarran, “[w]hen federal law does not directly conflict with state regulation,

and when application of the federal law would not frustrate any declared state policy or

interfere with a State's administrative regime, the McCarran-Ferguson Act does not

preclude its application.” Id. at 310. Given that the state statute is silent as to the

relative priority of the federal government over policyholders within the same class of

claimants—the class of “preferred claimants”—we can discern no “impairment” here.

Therefore, the federal government is entitled to full priority of payment—a priority which

it has in fact received.

                                6.     Guaranty Fund Issue

       As discussed above, the Supreme Court in Fabe upheld an Ohio priority law that

was similar to the Arizona statute because it ranked the priority of insurance

policyholder claims above those of the United States.          Fabe, 508 U.S. at 493.       In

addition the Court upheld the preference “accorded by Ohio to the expenses of

administering the insolvency proceeding [as] reasonably necessary to further the goal of

protecting policyholders.” Id. at 509. In so doing, it suggested that not only would the

federal preemption statute be triggered where state law directly protected policyholders,

but where it also indirectly protected policyholders, such as through the state’s having




05-5032                                          22
priority to recover expenses (such as administrative costs necessary to liquidate the

company) that were “reasonably necessary” to protect their interests.

        In the recent case of Ruthardt v. United States, the First Circuit applied Fabe’s

“reasonable necessity” test to determine what kinds of expenses could be recoverable

under state law as part of the cost of protecting a policyholder, while still satisfying the

requirements of the McCarran-Ferguson Act. 303 F.3d 375, 381-82 (1st Cir. 2002).

Specifically at issue was whether a state priority statute could avoid being preempted by

federal law where it allowed for a state guaranty fund to pay out claims to policyholders

and then assume priority creditor status with respect to those amounts. The court

recognized that “strictly speaking, the priority that Massachusetts gives to guaranty

funds is not absolutely ‘necessary’ – from a short-term perspective – to assure payment

by the funds to policyholders.” Id. at 381. However, it upheld the priority accorded to

guaranty fund claims as entitled to protection from preemption under the McCarran-

Ferguson Act.          See id. at 382 (holding that “priorities that indirectly assure that

policyholders get what they were promised can also trigger McCarran-Ferguson

protection . . . ”).

        In light of our decisions above, however, we need not reach these issues. The

1977 revision of the Arizona priority statute (Ariz. Rev. Stat. Ann. § 20-629) did not

mention guaranty fund claims. Moreover, even if guaranty funds were somehow viewed

to have had a status equivalent to that of policyholder claims, the result would be the

same: government claims would trump both. In summary, because we have held that

the 1977 revision of Arizona’s priority statutes did not provide policyholders’ claims with




05-5032                                           23
a preference over federal government claims, the government’s tax claims necessarily

take precedence over the claims of the guaranty fund, as well.

                                     REVERSED

No costs.




05-5032                                       24
