author: Justice Breyer Justice Thomas,

text:
    ARCHER et ux. v. WARNER
    No. 01-1418.
    Argued January 13, 2003
    Decided March 31, 2003

      Breyer, J., delivered the opinion of the Court, in which Rehnquist, C. J., and O’Connor, Scalia, Kennedy, Souter, and Ginsburg, JJ., joined. Thomas, J., filed a dissenting opinion, in which Stevens, J., joined, post, p. 323.

      Craig Goldblatt argued the cause for petitioners. With him on the briefs was Seth P. Waxman.

      Lisa Schiavo Blatt argued the cause for the United States as amicus curiae urging reversal. With her on the brief were Solicitor General Olson, Assistant Attorney General

      McCallum, Deputy Solicitor General Clement, William Kanter, and Robert Kamenshine.

      Donald B. Ayer argued the cause for respondent. With him on the brief were Jack W. Campbell TV and Rayford K. Adams III.

      Briefs of amici curiae urging reversal were filed for the State of Ohio et al. by Betty D. Montgomery, Attorney General of Ohio, David M. Gormley, State Solicitor, and Marcus J. Glasgow and John K. McManus, Assistant Attorneys General, and by the Attorneys General for their respective jurisdictions as follows: Bruce M. Botelho of Alaska, Janet Napo-litano of Arizona, Bill Lockyer of California, M. Jane Brady of Delaware, Robert A. Butterworth of Florida, Thurbert E. Baker of Georgia, Alan G. Lance of Idaho, James E. Ryan of Illinois, Steve Carter of Indiana, Thomas J. Miller of Iowa, Thomas F. Reilly of Massachusetts, Mike Hatch of Minnesota, Mike Moore of Mississippi, Jeremiah W (Jay) Nixon of Missouri, Frankie Sue Del Papa of Nevada, David Samson of New Jersey, Eliot Spitzer of New York, Roy Cooper of North Carolina, Wayne Stenehjem of North Dakota, Robert Tenorio Torres of the Northern Mariana Islands, W. A. Drew Edmondson of Oklahoma, Hardy Myers of Oregon, D. Michael Fisher of Pennsylvania, Anabelle Rodriguez of Puerto Rico, Paul G. Summers of Tennessee, John Cornyn of Texas, Mark L. Shurtleff of Utah, Christine O. Gregoire of Washington, and Hoke Mac-Millan of Wyoming; for AARP by Walter Dellinger, Jonathan D. Hacker, Stacy J. Canan, Deborah M. Zuckerman, and Michael R. Schuster; and for G. Eric Brunstad, Jr., by Mr. Brunstad, pro se, and Rheba Rutkowski.

   Justice Breyer

delivered the opinion of the Court.

The Bankruptcy Code provides that a debt shall not be dischargeable in bankruptcy “to the extent” it is “for money ... obtained by ... false pretenses, a false representation, or actual fraud.” 11 U. S. C. § 523(a)(2)(A). Can this language cover a debt embodied in a settlement agreement that settled a creditor’s earlier claim “for money ... obtained by ... fraud”? In our view, the statute can cover such a debt, and we reverse a lower court judgment to the contrary.

I

This case arises out of circumstances that we outline as follows: (1) A sues B seeking money that (A says) B obtained through fraud; (2) the parties settle the lawsuit and release related claims; (3) the settlement agreement does not resolve the issue of fraud, but provides that B will pay A a fixed sum; (4) B does not pay the fixed sum; (5) B enters bankruptcy; and (6) A claims that B’s obligation to pay the fixed settlement sum is nondischargeable because, like the original debt, it is for “money . . . obtained by . . . fraud.”

This outline summarizes the following circumstances: In late 1991, Leonard and Arlene Warner bought the Warner Manufacturing Company for $250,000. About six months later they sold the company to Elliott and Carol Archer for $610,000. A few months after that the Archers sued the Warners in North Carolina state court for (among other things) fraud connected with the sale.

In May 1995, the parties settled the lawsuit. The settlement agreement specified that the Warners would pay the Archers “$300,000.00 less legal and accounting expenses” “as compensation for emotional distress/personal injury type damages.” App. 61. It added that the Archers would “execute releases to any and all claims . . . arising out of this litigation, except as to amounts set forth in [the] Settlement Agreement.” Id., at 63. The Warners paid the Archers $200,000 and executed a promissory note for the remaining $100,000. The Archers executed releases “discharging]” the Warners “from any and every right, claim, or demand” that the Archers “now have or might otherwise hereafter have against” them, “excepting only obligations under” the promissory note and related instruments. Id., at 67; see also id., at 70. The releases, signed by all parties, added that the parties did not “admi[t] any liability or wrongdoing,” that the settlement was “the compromise of disputed claims, and that payment [was] not to be construed as an admission of liability.” Id., at 67-68, 71. A few days later the Archers voluntarily dismissed the state-court lawsuit with prejudice.

In November 1995, the Warners failed to make the first payment on the $100,000 promissory note. The Archers sued for the payment in state court. The Warners filed for bankruptcy. The Bankruptcy Court ordered liquidation under Chapter 7 of the Bankruptcy Code. And the Archers brought the present claim, asking the Bankruptcy Court to find the $100,000 debt nondischargeable, and to order the Warners to pay the $100,000. Leonard Warner agreed to a consent order holding his debt nondischargeable. Arlene Warner contested nondischargeability. The Archers argued that Arlene Warner’s promissory note debt was nondis-chargeable because it was for “money . . . obtained by . . . fraud.”

The Bankruptcy Court, finding the promissory note debt dischargeable, denied the Archers’ claim. The District Court affirmed the Bankruptcy Court. And the Court of Appeals for the Fourth Circuit, dividing two to one, affirmed the District Court. 283 F. 3d 230 (2002). The majority reasoned that the settlement agreement, releases, and promissory note had worked a kind of “novation.” This novation replaced (1) an original potential debt to the Archers for money obtained by fraud with (2) a new debt. The new debt was not for money obtained by fraud. It was for money promised in a settlement contract. And it was consequently dischargeable in bankruptcy.

We granted the Archers’ petition for certiorari, 536 U. S. 938 (2002), because different Circuits have come to different conclusions about this matter, compare In re West, 22 F. 3d 775, 778 (CA7 1994) (supporting the novation theory), with United States v. Spicer, 57 F. 3d 1152, 1155 (CADC 1995) (“The weight of recent authority rejects” the novation theory), cert. denied, 516 U. S. 1043 (1996).

II

We agree with the Court of Appeals and the dissent, post, at 324-325 (opinion of Thomas, J.), that “[t]he settlement agreement and promissory note here, coupled with the broad language of the release, completely addressed and released each and every underlying state law claim.” 283 F. 3d, at 237. That agreement left only one relevant debt: a debt for money promised in the settlement agreement itself. To recognize that fact, however, does not end our inquiry. We must decide whether that same debt can also amount to a debt for money obtained by fraud, within the terms of the nondischargeability statute. Given this Court’s precedent, we believe that it can.

Brown v. Felsen, 442 U. S. 127 (1979), governs the outcome here. The circumstances there were the following: (1) Brown sued Felsen in state court seeking money that (Brown said) Felsen had obtained through fraud; (2) the state court entered a consent decree embodying a stipulation providing that Felsen would pay Brown a certain amount; (3) neither the decree nor the stipulation indicated the payr ment was for fraud; (4) Felsen did not pay; (5) Felsen entered bankruptcy; and (6) Brown asked the Bankruptcy Court to look behind the decree and stipulation and to hold that the debt was nondischargeable because it was a debt for money obtained by fraud. Id., at 128-129.

The lower courts had held against Brown. They pointed out that the relevant debt was for money owed pursuant to a consent judgment; they noted that the relevant judgment-related documents did not refer to fraud; they added that the doctrine of res judicata prevented the Bankruptcy Court from looking behind those documents to uncover the nature of the claim that had led to their creation; and they consequently concluded that the relevant debt could not be characterized as one for money obtained by fraud. Id., at 130-131.

This Court unanimously rejected the lower court’s reasoning. The Court conceded that the state law of claim preclusion would bar Brown from making any claim “ ‘based on the same cause of action’” that Brown had brought in state court. Id., at 131 (quoting Montana v. United States, 440 U. S. 147, 153 (1979)). Indeed, this aspect of res judicata would prevent Brown from litigating “all grounds for . . . recovery” previously available to Brown, whether or not Brown had previously “asserted” those grounds in the prior state-court “proceeding.” 442 U. S., at 131. But all this, the Court held, was beside the point. Claim preclusion did not prevent the Bankruptcy Court from looking beyond the record of the state-court proceeding and the documents that terminated that proceeding (the stipulation and consent judgment) in order to decide whether the debt at issue (namely, the debt embodied in the consent decree and stipulation) was a debt for money obtained by fraud. Id., at 138-139.

As a matter of logic, Brown’s holding means that the Fourth Circuit’s novation theory cannot be right. The reduction of Brown’s state-court fraud claim to a stipulation (embodied in a consent decree) worked the same kind of no-vation .as the “novation” at issue here. (Despite the dissent’s suggestions to the contrary, post, at 327, it did so by an agreement of the parties that would seem to have “severed] the causal relationship,” ibid., between liquidated debt and underlying fraud no more and no less than did the settlement and releases at issue here.) Yet, in Brown, this Court held that the Bankruptcy Court should look behind that stipulation to determine whether it reflected settlement of a valid claim for fraud. If the Fourth Circuit’s view were correct — if reducing a fraud claim to settlement definitively changed the nature of the debt for dischargeability purposes — the nature of the debt in Brown would have changed similarly, thereby rendering the debt dischargeable. This Court’s instruction that the Bankruptcy Court could “weigh all the evidence,” 442 U. S., at 138, would have been pointless. There would have been nothing for the Bankruptcy Court to examine.

Moreover, the Court’s language in Brown strongly favors the Archers’ position here. The Court said that “the mere fact that a conscientious creditor has previously reduced his claim to judgment should not bar further inquiry into the true nature of the debt.” Ibid.; accord, Grogan v. Garner, 498 U. S. 279, 290 (1991) (assuming that the Bankruptcy Code seeks to “permit exception from discharge of all fraud claims creditors have successfully reduced to judgment”). If we substitute the word “settlement” for the word “judgment,” the Court’s statement describes this case.

Finally, the Court’s basic reasoning in Brown applies here. The Court pointed out that the Bankruptcy Code’s nondis-chargeability provision had originally covered “only ‘judgments’ sounding in fraud.” 442 U. S., at 138. Congress later changed the language so that it covered all such “ ‘liabilities.’” Ibid. This change indicated that “Congress intended the fullest possible inquiry” to ensure that “all debts arising out of” fraud are “excepted from discharge,” no matter what their form. Ibid.; see also 11 U. S. C. § 523(a) (current “any debt” language). Congress also intended to allow the relevant determination (whether a debt arises out of fraud) to take place in bankruptcy court, not to force it to occur earlier in state court at a time when nondischargeability concerns “are not directly in issue and neither party has a full incentive to litigate them.” Brown, 442 U. S., at 134.

The only difference we can find between Brown and the present case consists of the fact that the relevant debt here is embodied in a settlement, not in a stipulation and consent judgment. But we do not see how that difference could prove determinative. The dischargeability provision applies to all debts that “aris[e] out of” fraud. Id., at 138; see also Cohen v. de la Cruz, 523 U. S. 213, 215 (1998). A debt embodied in the settlement of a fraud case “arises” no less “out of” the underlying fraud than a debt embodied in a stipulation and consent decree. Policies that favor the settlement of disputes, like those that favor “repose,” are neither any more nor any less at issue here than in Brown. See 442 U. S., at 133-135. In Brown, the doctrine of res judicata itself ensured “a blanket release” of the underlying claim of fraud, just as the contractual releases did here, post, at 324. See supra, at 318-319. Despite the dissent’s protests to the contrary, post, at 323-327, what has not been established here, as in Brown, is that the parties meant to resolve the issue of fraud or, more narrowly, to resolve that issue for purposes of a later claim of nondischargeability in bankruptcy. In a word, we can find no significant difference between Brown and the case now before us.

Arlene Warner argues that we should affirm the Court of Appeals’ decision on alternative grounds. She says that the settlement agreement and releases not only worked a novation by converting potential tort liabilities into a contract debt, but also included a promise that the Archers would not make the present claim of nondischargeability for fraud. She adds that, in any event, because the Archers dismissed the original fraud action with prejudice, North Carolina law treats the fraud issue as having been litigated and determined in her favor, thereby barring the Archers from making their present claim on grounds of collateral estoppel. But cf. Arizona v. California, 530 U. S. 392, 414 (2000) (“[Settlements ordinarily occasion no issue preclusion . . . unless it is clear .. . that the parties intend their agreement to have such an effect”).

Without suggesting that these additional arguments are meritorious, we note that the Court of Appeals did not determine the merits of either argument, both of which are, in any event, outside the scope of the question presented and insufficiently addressed below. See Roberts v. Galen of Va., Inc., 525 U. S. 249, 253-254 (1999) (per curiam). We choose to leave initial evaluation of these arguments to “[t]he federal judges who deal regularly with questions of state law in their respective districts and circuits,” and who “are in a better position than we,” Butner v. United States, 440 U. S. 48, 58 (1979), to determine, for example, whether the parties intended their agreement and dismissal to have issue-preclusive, as well as claim-preclusive, effect, and to what extent such preclusion applies to enforcement of a debt specifically excepted from the releases, supra, at 317; post, at 325. The Court of Appeals remains free, on remand, to determine whether such questions were properly raised or preserved, and, if so, to decide them.

We conclude that the Archers’ settlement agreement and releases may have worked a kind of novation, but that fact does not bar the Archers from showing that the settlement debt arose out of “false pretenses, a false representation, or actual fraud,” and consequently is nondischargeable, 11 U. S. C. § 523(a)(2)(A). We reverse the Court of Appeals’ judgment to the contrary. And we remand this case for further proceedings consistent with this opinion.

It is so ordered.

Justice Thomas,

with whom Justice Stevens joins, dissenting.

Section 523(a)(2) of the Bankruptcy Code excepts from discharge “any debt... for money, property, [or] services, . . . to the extent obtained by . . . false pretenses, a false representation, or actual fraud.” 11 U. S. C. § 523(a)(2)(A) (emphasis added). The Court holds that a debt owed under a settlement agreement was “obtained by” fraud even though the debt resulted from a contractual arrangement pursuant to which the parties agreed, using the broadest language possible, to release one another from “any and every right, claim, or demand . . . arising out of” a fraud action filed by petitioners in North Carolina state court. App. 67. Because the Court’s conclusion is supported neither by the text of the Bankruptcy Code nor by any of the agreements executed by the parties, I respectfully dissent.

The Court begins its description of this case with the observation that “the settlement agreement does not resolve the issue of fraud, but provides that B will pay A a fixed sum.” Ante, at 317 (emphasis added). Based on that erroneous premise, the Court goes on to find that there is “no significant difference between Brown [v. Felsen, 442 U. S. 127 (1979),] and [this case].” Ante, at 322. The only distinction, the Court explains, is that “the relevant debt here is embodied in a settlement, not in a stipulation and consent judgment” as in Brown v. Felsen, 442 U. S. 127 (1979). Ante, at 321.

Remarkably, however, the Court fails to address the critical difference between this case and Brown: The parties here executed a blanket release, rather than entered into a consent judgment. And, in my view, “if it is shown that [a] note was given and received as payment or waiver of the original debt and the parties agreed that the note was to substitute a new obligation for the old, the note fully discharges the original debt, and the nondischargeability of the original debt does not affect the dischargeability of the obligation under the note.” In re West, 22 P. 3d 775, 778 (CA7 1994). That is the case before us, and, accordingly, Brown does not control our disposition of this matter.

In Brown, Brown sued Felsen in state court, alleging that Felsen had fraudulently induced him to act as guarantor on a bank loan. 442 U. S., at 128. The suit was settled by stipulation, which was incorporated by the court into a consent judgment, but “[n]either the stipulation nor the resulting judgment indicated the cause of action on which respondent’s liability to petitioner was based.” Ibid. The Court held that principles of res judicata did not bar the Bankruptcy Court from looking behind the consent judgment and stipulation to determine the extent to which the debt was “obtained by” fraud. The Court concluded that it would upset the policy of the Bankruptcy Code for “state courts to decide [questions of nondischargeability] at a stage when they are not directly in issue and neither party has a full incentive to litigate them.” Id., at 134. Brown did not, however, address the question presented in this case — whether a creditor may, without the participation of the state court, completely release a debtor from “any and every right, claim, or demand ... relating to” a state-court fraud action. App. 67.

Based oh the sweeping language of the general release, it is inaccurate for the Court to say that the parties did not “resolve the issue of fraud.” Ante, at 317. To be sure, as in Brown, there is no legally controlling document stating that respondent did (or did not) commit fraud. But, unlike in Brown, where it was not clear which claims were being resolved by the consent judgment, the release in this case clearly demonstrates that the parties intended to resolve conclusively not only the issue of fraud, but also any other “right[s], claimfs], or demand[s]” related to the state-court litigation, “excepting only obligations under [the] Note and deeds of trust.” App. 67. See McNair v. Goodwin, 262 N. C. 1, 7, 136 S. E. 2d 218, 223 (1964) (“‘[A] compromise agreement is conclusive between the parties as to the matters compromised’ ” (quoting Penn Dixie Lines v. Grannick, 238 N. C. 552, 556, 78 S. E. 2d 410, 414 (1953))).

The fact that the parties intended, by the language of the general release, to replace an “old” fraud debt with a “new” contract debt is an important distinction from Brown, for the text of the Bankruptcy Code prohibits discharge of any debt “to the extent obtained by” fraud. 11 U. S. C. § 523(a)(2) (emphasis added). In interpreting this provision, the Court has recognized that, in order for a creditor to establish that a debt is not dischargeable, he must demonstrate that there is a causal nexus between the fraud and the debt. See Cohen v. de la Cruz, 523 U. S. 213, 218 (1998) (describing §523(a)(2)(A) as barring discharge of debts “‘resulting from’ ” or “ ‘traceable to’ ” fraud (quoting Field v. Mans, 516 U. S. 59, 61, 64 (1995))). Indeed, petitioners conceded at oral argument that the “obtained by” language of § 523(a)(2) requires a creditor to prove that a debtor’s fraud is the proximate cause of the debt. Tr. of Oral Arg. 10, 12; see also 1 Am. Jur. 2d, Actions § 57, p. 760 (1994) (“What is essential is that the wrongful act charged be the proximate cause of the damage; the loss must be the direct result of, or 'proximately traceable to, the breach of an obligation owing to the plaintiff” (emphasis added)).

This Court has been less than clear with respect to the requirements for establishing proximate cause. In the past, the Court has applied the term “‘proximate cause’ to label generically the judicial tools used to limit a person’s responsibility for the consequences of that person’s own acts.” Holmes v. Securities Investor Protection Corporation, 508 U. S. 258, 268 (1992). The Court has explained that, “[a]t bottom, the notion of proximate cause reflects ‘ideas of what justice demands, or of what is administratively possible and convenient.’ ” Ibid, (quoting W. Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser and Keeton on Law of Torts §41, p. 264 (5th ed. 1984) (hereinafter Keeton)); see also Palsgraf v. Long Island R. R. Co., 248 N. Y. 339, 352, 162 N. E. 99, 103 (1928) (Andrews, J., dissenting) (“What we do mean by the word ‘proximate’ is, that because of convenience, of public policy, of a rough sense of justice, the law arbitrarily declines to trace a series of events beyond a certain point”). While the concept of proximate cause is somewhat amorphous, see Keeton 279, the common law is clear that certain intervening events — otherwise called “superseding causes” — are sufficient to sever the causal nexus and cut off all liability. See Exxon Co., U. S. A. v. Sofec, Inc., 517 U. S. 830, 837 (1996) (“ ‘The doctrine of superseding cause is ... applied where the defendant’s negligence in fact substantially contributed to the plaintiff’s injury, but the injury was actually brought about by a later cause of independent origin that was not foreseeable’ ” (quoting 1 T. Schoenbaum, Admiralty and Maritime Law §5-3, pp. 165-166 (2d ed. 1994))); 57A Am. Jur. 2d, Negligence § 790, p. 701 (1989) (“The intervention, between the negligence of the defendant and the occurrence of an injury to the plaintiff, of a new, independent, and efficient cause, or of a superseding cause, of the injury renders the negligence of the defendant a remote cause of the injury, and he cannot be held liable, notwithstanding the existence of some connection between his negligence and the injury”).

In this case, we are faced with the novel situation where the parties have, by agreement, attempted to sever the causal relationship between the debtor’s fraudulent conduct and the debt. In my view, the “intervening” settlement and release create the equivalent of a superseding cause, no different from the intervening negligent acts of a third party in a negligence action. In this case, the parties have made clear their intent to replace the old “fraud” debt with a new “contract” debt. Accordingly, the only debt that remains intact for bankruptcy purposes is the one “obtained by” voluntary agreement of the parties, not by fraud.

Petitioners’ own actions in the course of this litigation support this conclusion. Throughout the proceedings below and continuing in this Court, petitioners have sought to recover only the amount of the debt set forth in the settlement agreement, which is lower than the total damages they allegedly suffered as a result of respondent’s alleged fraud. See Brief for Petitioners 21 (“[T]he nondischargeability action was brought solely in order to enforce the agreement to pay [the amount in the settlement agreement]”). This crucial fact demonstrates that petitioners seek to recover a debt based only in contract, not in fraud.

The Court concludes otherwise. The Court, however, does not explain why it permits petitioners to look at the settlement agreement for the amount of the debt they seek to recover but not for the character of that debt. Neither this Court’s precedents nor the text of the Bankruptcy Code permits such a selective implementation of a valid agreement between the parties.

* * *

The Court today ignores the plain intent of the parties, as evidenced by a properly executed settlement agreement and general release, holding that a debt owed by respondent under a contract was “obtained by” fraud. Because I find no support for the Court’s conclusion in the text of the Bankruptcy Code, or in the agreements of the parties, I respectfully dissent.

       There are no allegations that petitioners were fraudulently induced to execute the settlement agreement or the general release.

       Petitioners argue that any prepetition waiver of nondischargeability protections should be deemed unenforceable because it is inconsistent with the Bankruptcy Code and impairs the rights of third-party creditors. Brief for Petitioners 24. As respondent points out, however, a creditor forfeits the right to contest dischargeability if it fails to affirmatively request a hearing within 60 days after the first date set for the meeting of the creditors. See 11 U. S. C. § 523(c)(1); Fed. Rule Bkrtcy. Proc. 4007(c). Thus, presumably, creditors may choose, for any or no reason at all, to forgo an assertion of nondischargeability under § 523(a)(2). Indeed, petitioners have failed to point to any provision of the Bankruptcy Code that specifically bars a creditor from entering into an agreement that impairs its right to contest dischargeability.


source: Caselaw Access Project

author: Justice Scalia

license: Public Domain

text:
    KENTUCKY ASSOCIATION OF HEALTH PLANS, INC., et al. v. MILLER, COMMISSIONER, KENTUCKY DEPARTMENT OF INSURANCE
    No. 00-1471.
    Argued January 14, 2003
    Decided April 2, 2003

      Scaiia, J., delivered the opinion for a unanimous Court.

      Robert N. Eccles argued the cause for petitioners. With him on the brief were Karen M. Wahle, Jonathan D. Hacker, and Barbara Reid Hartung.

      Elizabeth A. Johnson argued the cause for respondent. With her on the brief were Julie Mix McPeak and William J. Nold.

      James A. Feldman argued the cause for the United States as amicus curiae urging affirmance. With him on the brief were Acting Solicitor General Clement, Deputy Solicitor General Kneedler, Howard M. Radzely, Allen H. Feldman, Nathaniel I. Spiller, and Gary K. Stearman.

      Briefs of amici curiae urging reversal were filed for the American Association of Health Plans, Inc., et al. by Daly D. E. Temchine, Stephanie W. Kanwit, Jan S. Amundson, and Quentin Riegel; for Community Health Partners et al. by Thomas C. Goldstein and Amy Howe; and for the Society for Human Resource Management by Mark A. Casciari, Deborah S. Davidson, and James M. Nelson.

      Briefs of amici curiae urging affirmance were filed for the State of Texas et al. by John Comyn, Attorney General of Texas, Howard G. Baldwin, Jr., First Assistant Attorney General, Jeffrey S. Boyd, Deputy Attorney General, Julie Parsley, Solicitor General, and David C. Mattox and Christopher Livingston, Assistant Attorneys General, and by the Attorneys General and other officials for their respective jurisdictions as follows: Bill Lockyer, Attorney General of California, Gregory D’Auria, Associate Attorney General of Connecticut, M. Jane Brady, Attorney General of Delaware, Robert A Butterworth, Attorney General of Florida, Earl I. Anzai, Attorney General of Hawaii, James E. Ryan, Attorney General of Illinois, Albert B. Chandler III, Attorney General of Kentucky, J-Joseph Curran, Jr., Attorney General of Maryland, W. A. Drew Edmond-son, Attorney General of Oklahoma, Annina M. Mitchell, Solicitor General of Utah, Darrell V. McGraw, Jr., Attorney General of West Virginia, and Anabelle Rodriguez, Attorney General of Puerto Rico; for the American College of Legal Medicine by Miles J. Zaremski, Gary Bimbaum, and Bruce A Brightwell; for the American Medical Association et al. by Mark E. Rust and Stanley C. Fickle; and for the Council of State Governments et al. by Richard Ruda and Steven H. Goldblatt.

   Justice Scalia

delivered the opinion of the Court.

Kentucky law provides that “[a] health insurer shall not discriminate against any provider who is located within the geographic coverage area of the health benefit plan and who is willing to meet the terms and conditions for participation established by the health insurer, including the Kentucky state Medicaid program and Medicaid partnerships.” Ky. Rev. Stat. Ann. §304.17A-270 (West 2001). Moreover, any “health benefit plan that includes chiropractic benefits shall ... [p]ermit any licensed chiropractor who agrees to abide by the terms, conditions, reimbursement rates, and standards of quality of the health benefit plan to serve as a participating primary chiropractic provider to any person covered by the plan.” §304.17A-171(2). We granted certiorari to decide whether the Employee Retirement Income Security Act of 1974 (ERISA) pre-empts either, or both, of these “Any Willing Provider” (AWP) statutes.

I

Petitioners include several health maintenance organizations (HMOs) and a Kentucky-based association of HMOs. In order to control the quality and cost of health-care delivery, these HMOs have contracted with selected doctors, hospitals, and other health-care providers to create exclusive “provider networks.” Providers in such networks agree to render health-care services to the HMOs’ subscribers at discounted rates and to comply with other contractual requirements. In return, they receive the benefit of patient volume higher than that achieved by nonnetwork providers who lack access to petitioners’ subscribers.

Kentucky’s AWP statutes impair petitioners’ ability to limit the number of providers with access to their networks, and thus their ability to use the assurance of high patient volume as the quid pro quo for the discounted rates that network membership entails. Petitioners believe that AWP laws will frustrate their efforts at cost and quality control, and will ultimately deny consumers the benefit of their cost-reducing arrangements with providers.

In April 1997, petitioners filed suit against respondent, the Commissioner of Kentucky’s Department of Insurance, in the United States District Court for the Eastern District of Kentucky, asserting that ERISA, 88 Stat. 832, as amended, pre-empts Kentucky’s AWP laws. ERISA preempts all state laws “insofar as they may now or hereafter relate to any employee benefit plan,” 29 U. S. C. § 1144(a), but state “law[s]. .. which regulat[e] insurance, banking, or securities” are saved from pre-emption, § 1144(b)(2)(A). The District Court concluded that although both AWP statutes “relate to” employee benefit plans under § 1144(a), each law “regulates insurance” and is therefore saved from preemption by § 1144(b)(2)(A). App. to Pet. for Cert. 64a-84a. In affirming the District Court, the Sixth Circuit also concluded that the AWP laws “regulat[e] insurance” and fall within ERISA’s saving clause. Kentucky Assn. of Health Plans, Inc. v. Nichols, 227 F. 3d 352, 363-372 (2000). Relying on UNUM Life Ins. Co. of America v. Ward, 526 U. S. 358 (1999), the Sixth Circuit first held that Kentucky’s AWP laws regulate insurance “as a matter of common sense,” 227 F. 3d, at 364, because they are “specifically directed toward ‘insurers’ and the insurance industry ...,” id., at 366. The Sixth Circuit then considered, as “checking points or guideposts” in its analysis, the three factors used to determine whether a practice fits within “the business of health insurance” in our cases interpreting the McCarran-Ferguson Act. Id., at 364. These factors are: “first, whether the practice has the effect of transferring or spreading a policyholder’s risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance industry.” Union Labor Life Ins. Co. v. Pireno, 458 U. S. 119, 129 (1982). The Sixth Circuit found all three factors satisfied. 227 F. 3d, at 368-371. Notwithstanding its analysis of the McCarran-Ferguson factors, the Sixth Circuit reiterated that the “basic test” under ERISA’s saving clause is whether, from a commonsense view, the Kentucky AWP laws regulate insurance. Id., at 372. Finding that the laws passed both the “common sense” test and the McCarran-Ferguson “checking points,” the Sixth Circuit upheld Kentucky’s AWP statutes. Ibid.

We granted certiorari, 536 U. S. 956 (2002).

II

To determine whether Kentucky s AWP statutes are saved from pre-emption, we must ascertain whether they are “law[s]... which regulat[e] insurance” under § 1144(b)(2)(A).

It is well established in our case law that a state law must be “specifically directed toward” the insurance industry in order to fall under ERISA’s saving clause; laws of general application that have some bearing on insurers do not qualify. Pilot Life Ins. Co. v. Dedeaux, 481 U. S. 41, 50 (1987); see also Rush Prudential HMO, Inc. v. Moran, 536 U. S. 355, 366 (2002); FMC Corp. v. Holliday, 498 U. S. 52, 61 (1990). At the same time, not all state laws “specifically directed toward” the insurance industry will be covered by § 1144(b)(2)(A), which saves laws that regulate insurance, not insurers. As we explained in Rush Prudential, insurers must be regulated “with respect to their insurance practices,” 536 U. S., at 366. Petitioners contend that Kentucky’s AWP laws fall outside the scope of § 1144(b)(2)(A) for two reasons. First, because Kentucky has failed to “specifically direc[t]” its AWP laws toward the insurance industry; and second, because the AWP laws do not regulate an insurance practice. We find neither contention persuasive.

A

Petitioners claim that Kentucky’s statutes are not “specifically directed toward” insurers because they regulate not only the insurance industry but also doctors who seek to form and maintain limited provider networks with HMOs. That is to say, the AWP laws equally prevent providers from entering into limited network contracts with insurers, just as they prevent insurers from creating exclusive networks in the first place. We do not think it follows that Kentucky has failed to specifically direct its AWP laws at the insurance industry.

Neither of Kentucky’s AWP statutes, by its terms, imposes any prohibitions or requirements on health-care providers. See Ky. Rev. Stat. Ann. §304.17A-270 (West 2001) (imposing obligations only on “health insurer[s]” not to discriminate against any willing provider); § 304.17A-171 (imposing obligations only on “health benefit plants] that includ[e] chiropractic benefits”). And Kentucky health-care providers are still capable of entering exclusive networks with insurers who conduct business outside the Commonwealth of Kentucky or who are otherwise not covered by §§304.17A-270 or 304.17A-171. Kentucky’s statutes are transgressed only when a “health insurer,” or a “health benefit plan that includes chiropractic benefits,” excludes from its network a provider who is willing and able to meet its terms.

It is of course true that as a consequence of Kentucky’s AWP laws, entities outside the insurance industry (such as health-care providers) will be unable to enter into certain agreements with Kentucky insurers. But the same could be said about the state laws we held saved from pre-emption in FMC Corp. and Rush Prudential. Pennsylvania’s law prohibiting insurers from exercising subrogation rights against an insured’s tort recovery, see FMC Corp., supra, at 55, n. 1, also prevented insureds from entering into enforceable contracts with insurers allowing subrogation. Illinois’ requirement that HMOs provide independent review of whether services are “medically necessary,” Rush Prudential, supra, at 372, likewise excluded insureds from joining an HMO that would have withheld the right to independent review in exchange for a lower premium. Yet neither case found the effects of these laws on noninsurers, significant though they may have been, inconsistent with the requirement that laws saved from pre-emption by § 1144(b)(2)(A) be “specifically directed toward” the insurance industry. Regulations “directed toward” certain entities will almost always disable other entities from doing, with the regulated entities, what the regulations forbid; this does not suffice to place such regulation outside the scope of ERISA’s saving clause.

B

Petitioners claim that the AWP laws do not regulate insurers with respect to an insurance practice because, unlike the state laws we held saved from pre-emption in Metropolitan Life Ins. Co. v. Massachusetts, 471 U. S. 724 (1985), UNUM, and Rush Prudential, they do not control the actual terms of insurance policies. Rather, they focus upon the relationship between an insurer and third-party providers — which in petitioners’ view does not constitute an “insurance practice.”

In support of their contention, petitioners rely on Group Life & Health Ins. Co. v. Royal Drug Co., 440 U. S. 205, 210 (1979), which held that third-party provider arrangements between insurers and pharmacies were not “the ‘business of insurance’” under §2(b) of the McCarran-Ferguson Act. ERISA’s saving clause, however, is not concerned (as is the McCarran-Ferguson Act provision) with how to characterize conduct undertaken by private aetors, but with how to characterize state laws in regard to what they “regulate.” It does not follow from Royal Drug that a law mandating certain insurer-provider relationships fails to “regulate insurance.” Suppose a state law required all licensed attorneys to participate in 10 hours of continuing legal education (CLE) each year. This statute “regulates” the practice of law— even though sitting through 10 hours of CLE classes does not constitute the practice of law — because the State has conditioned the right to practice law on certain requirements, which substantially affect the product delivered by lawyers to their clients. Kentucky’s AWP laws operate in a similar manner with respect to the insurance industry: Those who wish to provide health insurance in Kentucky (any “health insurer”) may not discriminate against any willing provider. This “regulates” insurance by imposing conditions on the right to engage in the business of insurance; whether or not an HMO’s contracts with providers constitute “the business of insurance” under Royal Drug is beside the point.

We emphasize that conditions on the right to engage in the business of insurance must also substantially affect the risk pooling arrangement between the insurer and the insured to be covered by ERISA’s saving clause. Otherwise, any state law aimed at insurance companies could be deemed a law that “regulates insurance,” contrary to our interpretation of § 1144(b)(2)(A) in Rush Prudential, 536 U. S., at 364. A state law requiring all insurance companies to pay their janitors twice the minimum wage would not “regulate insurance,” even though it would be a prerequisite to engaging in the business of insurance, because it does not substantially affect the risk pooling arrangement undertaken by insurer and insured. Petitioners contend that Kentucky’s AWP statutes fail this test as well, since they do not alter or affect the terms of insurance policies, but concern only the relationship between insureds and third-party providers, Brief for Petitioners 29. We disagree. We have never held that state laws must alter or control the actual terms of insurance policies to be deemed “laws . . . which regulat[e] insurance” under § 1144(b)(2)(A); it suffices that they substantially affect the risk pooling arrangement between insurer and insured. By expanding the number of providers from whom an insured may receive health services, AWP laws alter the scope of permissible bargains between insurers and insureds in a manner similar to the mandated-benefit laws we upheld in Metropolitan Life, the notice-prejudice rule we sustained in UNUM, and the independent-review provisions we approved in Rush Prudential. No longer may Kentucky insureds seek insurance from a closed network of health-care providers in exchange for a lower premium. The AWP prohibition substantially affects the type of risk pooling arrangements that insurers may offer.

W H-(

Our prior decisions construing § 1144(b)(2)(A) have relied, to varying degrees, on our cases interpreting §§ 2(a) and 2(b) of the McCarran-Ferguson Act. In determining whether certain practices constitute “the business of insurance” under the McCarran-Ferguson Act (emphasis added), our cases have looked to three factors: “first, whether the practice has the effect of transferring or spreading a policyholder’s risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance industry.” Pireno, 458 U. S., at 129.

We believe that our use of the McCarran-Ferguson case law in the ERISA context has misdirected attention, failed to provide clear guidance to lower federal courts, and, as this case demonstrates, added little to the relevant analysis. That is unsurprising, since the statutory language of § 1144(b)(2)(A) differs substantially from that of the McCarran-Ferguson Act. Rather than concerning itself with whether certain practices constitute “[t]he business of insurance,” 15 U. S. C. § 1012(a), or whether a state law was “enacted . . . for the purpose of regulating the business of insurance,” § 1012(b) (emphasis added), 29 U. S. C. § 1144(b)(2)(A) asks merely whether a state law is a “law ... which regulates insurance, banking, or securities.” What is more, the McCarran-Ferguson factors were developed in cases that characterized conduct by private actors, not state laws. See Pireno, supra, at 126 (“The only issue before us is whether petitioners’ peer review practices are exempt from antitrust scrutiny as part of the ‘business of insurance’ ” (emphasis added)); Royal Drug, 440 U. S., at 210 (“The only issue before us is whether the Court of Appeals was correct in concluding that these Pharmacy Agreements are not the ‘business of insurance’ within the meaning of §2(b) of the McCarran-Ferguson Act” (emphasis added)).

Our holdings in UNUM and Rush Prudential — that a state law may fail the first McCarran-Ferguson factor yet still be saved from pre-emption under § 1144(b)(2)(A) — raise more questions than they answer and provide wide opportunities for divergent outcomes. May a state law satisfy any two of the three McCarran-Ferguson factors and still fall under the saving clause? Just one? What happens if two of three factors are satisfied, but not “securely satisfied” or “clearly satisfied,” as they were in UNUM and Rush Prudential? 526 U. S., at 374; 536 U. S., at 373. Further confusion arises from the question whether the state law itself or the conduct regulated by that law is the proper subject to which one applies the McCarran-Ferguson factors. In Pilot Life, we inquired whether Mississippi’s law of bad faith has the effect of transferring or spreading risk, 481 U. S., at 50, whether that law is integral to the insurer-insured relationship, id., at 51, and whether that law is limited to the insurance industry, ibid. Rush Prudential, by contrast, focused the McCarran-Ferguson inquiry on the conduct regulated by the state law, rather than the state law itself. 536 U. S., at 373 (“It is obvious enough that the independent review requirement regulates ‘an integral part of the policy relationship between the insurer and insured’” (emphasis added)); id., at 374 (“The final factor, that the law be aimed at a ■practice . . . limited to entities within the insurance industry’ is satisfied ..(emphasis added; citation omitted)).

We have never held that the McCarran-Ferguson factors are an essential component of the § 1144(b)(2)(A) inquiry. Metropolitan Life initially used these factors only to buttress its previously reached conclusion that Massachusetts’ mandated-benefit statute was a “law . . . which regulates insurance” under § 1144(b)(2)(A). 471 U. S., at 742-743. Pilot Life referred to them as mere “considerations [to be] weighed” in determining whether a state law falls under the saving clause. 481 U. S., at 49. UNUM emphasized that the McCarran-Ferguson factors were not “ ‘require[d]’ ” in the saving clause analysis, and were only “checking points” to be used after determining whether the state law regulates insurance from a “common-sense” understanding. 526 U. S., at 374. And Rush Prudential called the factors “guideposts,” using them only to “confirm our conclusion” that Illinois’ statute regulated insurance under § 1144(b)(2)(A). 536 U. S., at 378.

Today we make a clean break from the McCarran-Ferguson factors and hold that for a state law to be deemed a “law .. . which regulates insurance” under § 1144(b)(2)(A), it must satisfy two requirements. First, the state law must be specifically directed toward entities engaged in insurance. See Pilot Life, supra, at 50, UNUM, supra, at 368; Rush Prudential, supra, at 366. Second, as explained above, the state law must substantially affect the risk pooling arrangement between the insurer and the insured. Kentucky’s law satisfies each of these requirements.

* * H:

For these reasons, we affirm the judgment of the Sixth Circuit.

It is so ordered.

       Petitioners also contend that Ky. Rev. Stat. Ann. §304.17A-270 (West 2001) is not “specifically directed toward” insurers because it applies to “self-insurer or multiple employer welfare arrangement[s] not exempt from state regulation by ERISA.” § 304.17A-005(23). We do not think § 304.17A-270’s application to self-insured non-ERISA plans forfeits its status as a “law . . . which regulates insurance” under 29 U. S. C. § 1144(b)(2)(A). ERISA’s saving clause does not require that a state law regulate “insurance companies” or even “the business of insurance” to be saved from pre-emption; it need only be a “law ... which regulates insurance,” ibid, (emphasis added), and self-insured plans engage in the same sort of risk pooling arrangements as separate entities that provide insurance to an employee benefit plan. Any contrary view would render superfluous ERISA’s “deemer clause,” § 1144(b)(2)(B), which provides that an employee benefit plan covered by ERISA may not “be deemed to be an insurance company or other insurer ... or to be engaged in the business of insurance ... for purposes of any law of any State purporting to regulate insurance companies [or] insurance contracts. . . .” That clause has effect only on state laws saved from pre-emption by § 1144(b)(2)(A) that would, in the absence of § 1144(b)(2)(B), be allowed to regulate self-insured employee benefit plans. Under petitioners’ view, such laws would never be saved from pre-emption in the first place. (The deemer clause presents no obstacle to Kentucky’s law, which reaches only those employee benefit plans “not exempt from state regulation by ERISA.”)
      Both of Kentucky’s AWP laws apply to all HMOs, including HMOs that do not act as insurers but instead provide only administrative services to self-insured plans. Petitioners maintain that the application to noninsur-ing HMOs forfeits the laws’ status as “law[s] . . . which regulat[e] insurance.” § 1144(b)(2)(A). We disagree. To begin with, these noninsuring HMOs would be administering self-insured plans, which we think suffices to bring them within the activity of insurance for purposes of § 1144(b)(2)(A). Moreover, we think petitioners’ argument is foreclosed by Rush Prudential HMO, Inc. v. Moran, 536 U. S. 355, 372 (2002), where we noted that Illinois’ independent-review laws contained “some over-breadth in the application of [215 Ill. Comp. Stat., ch. 125,] § 4-10 [(2000)] beyond orthodox HMOs,” yet held that “there is no reason to think Congress would have meant such minimal application to noninsurers to remove a state law entirely from the category of insurance regulation saved from preemption.”

       Section 2 of the McCarran-Ferguson Act provides:
      “(a) The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation 'or taxation of such business.
      “(b) No 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: Provided, That after June 30, 1948, the Act of July 2, 1890, as amended, known as the Sherman Act, and the Act of October 15,1914, as amended, known as the Clayton Act, and the Act of September 26,1914, known as the Federal Trade Commission Act, as amended, shall be applicable to the business of insurance to the extent that such business is not regulated by State law.” 59 Stat. 34, 15 U. S. C. § 1012 (emphasis added).

       While the Ninth Circuit concluded in Cisneros v. UNUM Life Ins. Co. of America, 134 F. 3d 939, 945-946 (1998), aff’d in part, rev’d and remanded in part, UNUM Life Ins. Co. of America v. Ward, 526 U. S. 358 (1999), that “the notice-prejudice rule does not spread the policyholder’s risk within the meaning of the first McCarran-Ferguson factor,” our test requires only that the state law substantially affect the risk pooling arrangement between the insurer and insured; it does not require that the state law actually spread risk. See supra, at 337-338. The notice-prejudice rule governs whether or not an insurance company must cover claims submitted late, which dictates to the insurance company the conditions under which it must pay for the risk that it has assumed. This certainly qualifies as a substantial effect on the risk pooling arrangement between the insurer and insured.

       This approach rendered the third McCarran-Ferguson factor a mere repetition of the prior inquiry into whether a state law is “specifically directed toward” the insurance industry under the “common-sense view.” UNUM Life Ins. Co. of America v. Ward, supra, at 375; Pilot Life Ins. Co. v. Dedeaux, 481 U. S. 41, 50 (1987).