Mercado-Boneta v. Administracion Del Fondo De Compensacion Al Paciente Ex Rel. Insurance Commissioner

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.

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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

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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

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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

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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)).

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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

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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

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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).

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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

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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

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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).

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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

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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.

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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

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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

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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

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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.

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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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