WASHINGTON -- The Justice Department's solicitor general and two big banks have petitioned the Supreme Court to resolve a legal controversy that has thrown bank insurance powers into jeopardy.

At issue are two closely related cases in which lower courts reached opposite conclusions about the authority of national banks to sell insurance from small towns.

The outcome of the appeals -- involving U.S. National Bank, Portland, Ore., and Chase Manhattan Bank, New York -- is being closely watched in the banking industry because hundreds of institutions already sell insurance and many more would like to get into the business.

Substantial Fees at Stake

If the Supreme Court declines to review the lower court rulings, the banking industry could be locked out of insurance sales, an attractive market that is seen as a source of substantial fee income.

In the first case, the solicitor general -- acting on behalf of the Comptroller of the Currency -- and U.S. National Bank have each challenged a ruling handed down last February by the U.S. Court of Appeals for the District of Columbia Circuit. (U.S. National is the lead bank of U.S. Bancorp.)

The appeals court ruled that a 1916 law allowing national banks to market insurance from towns with fewer than 5,000 residents was inadvertently repealed two years later. The ruling forced U.S. National Bank to suspend insurance sales through its small-down branches.

|Plainly Erroneous Decision'

In the second case, Chase Manhattan is challenging a ruling by the U.S. Court of Appeals for the Second Circuit, based in New York. Last June, this appeals court concluded that the 1916 law was still in effect, notwithstanding the other appellate finding.

But the New York ruling said the under-5,000 exemption implicitly blocks banks in larger towns and cities from selling insurance. As a result, it concluded, two Chase subsidiaries that sold title insurance were operating illegally.

"If left standing, the adverse economic consequences to the national banking system engendered by this plainly erroneous decision will be substantial," Chase said in its petition to the Supreme Court.

Banking lawyers saw a strong likelihood that the Supreme Court will decide to review the cases.

One reason: The U.S. National Bank case is bolstered by the Justice Department's decision to appeal on behalf of the Comptroller of the Currency, which had authorized small-town insurance sales.

Federal Support Welcomed

"It's just a fact of life that having the government on your side does make a difference," said Michael Crotty, deputy general counsel for the American Bankers Association.

Another factor: The Supreme Court is inclined to resolve disputes between appeals courts.

"One of the most important aspects of the case is that there is a disagreement between two circuit courts of appeal" about the existence of the 1916 law, said an attorney for U.S. National Bank, who did not want to be identified.

Both rulings have had a chilling effect on banks' insurance business, which had been a growth area before the courts stepped in, said the ABA's Mr. Crotty. "Nobody's getting out of the business, but I don't think anyone's getting into it, either," he said.

Ruling Possible Next Summer

Mr. Crotty speculated that the Supreme Court would decide by early December whether to hear the cases. If it does, "I think you'll get a decision in June or July."

Mr. Crotty estimated that 160 to 170 national banks currently sell insurance from small towns but added that this tally understates the importance of the cases.

"It's all part and parcel of what we've been working on for a dozen years -- an incremental improvement in the products and services banks can offer," Mr. Crotty said. "There's a lot of things banks can do now that they once couldn't."

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