A federal district court judge has dealt a setback to Barnett Banks Inc.'s push into the insurance business, ruling that federal law does not preempt a Florida statute forbidding banks to sell insurance.

The Jacksonville, Fla.-based banking company promptly asked the U.S. Court of Appeals for the 11th Circuit, in Atlanta, to overturn the lower court's decision.

About 20 states have laws preventing banks from selling insurance. Consequently, an outcome unfavorable for Barnett could have negative ramifications for banks in other states that sell insurance.

Small Insurer Acquired

In the closely watched case, Barnett Banks had asked the U.S. district court in Jacksonville, Fla., to uphold the acquisition of a small-town insurance agency by a subsidiary bank, Barnett Bank of Marion County. The deal for the Linda Clifford Agency in Belleview, Fla., was closed in October, and immediately drew fire from Florida's insurance commissioner.

Barnett had argued that the acquisition was valid under a federal law that permits national banks to sell insurance from towns of 5,000 or fewer people, despite a Florida ban on such activities. Because the Marion County bank is federally chartered, federal law should prevail, according to Barnett.

The exemption for towns under 5,000 in population has been the subject of lengthy legal battles since the Comptroller of the Currency interpreted it to mean that even big banks can use small-town branches as a springboard for insurance sales. Different aspects of the law have been tried in several federal circuit courts, but a clear reading of the law has not emerged.

Congress Seen as Arbiter

In denying Barnett's request for a preliminary injunction against the Florida Department of Insurance, U.S. District Court Judge Harvey Schlesinger said he could not find sufficient ground to preempt the state law. The matter, he said, should properly be settled by Congress, not the courts.

"This case presents difficult questions concerning the interplay of federal and state legislation," Judge Schlesinger wrote. "Yet while the denouement of the present lawsuit will immediately frustrate [Barnett's] attempts to sell insurance, [the bank] is not without other, more appropriate avenues of relief."

A Barnett official said the bank has strong hopes for a favorable decision by the 11th circuit. "We were encouraged by the fact that the judge did say it was a close case," said David Palombi, a Barnett spokesman.

Decision Praised

The Florida insurance commissioner, Tom Gallagher, hailed the decision in a prepared release as a victory for consumers.

"The decade of the 1980s demonstrated what happens when financial institutions seek to grow too rapidly and too broadly in their responsibilities," Mr. Gallagher said. "Ultimately, as in the savings and loan debacle, the taxpayers got stuck and the consumers were the losers," he said.

Michael Crotty, associate general counsel for the American Bankers Association, said the Barnett case is one of several that the association is tracking. He noted that a recent federal court ruling in Kentucky went in the opposite direction, clearing the way for banks in that state to play a bigger role in insurance sales.

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