Opinion ID: 6348791
Heading Depth: 3
Heading Rank: 3

Heading: An Order directing the Commissioner to

Text: take all necessary steps to end CIC’s conservatorship pursuant to California Insurance Code § 1012, and enjoining the Commissioner from continuing the conservation; Appellants’ prayers for relief seeking declaratory orders also seek to interfere with the state court’s control over the CIC I res, imparting an inherently in rem nature to the federal actions. Moreover, in State Engineer, the Court rejected Appellants’ argument that the underlying “contempt actions [were] in personam rather than in rem,” 339 F.3d at 810, recognizing that “the contempt action was brought to enforce a decree over a res,” id. at 811. In this respect, State Engineer mirrors the instant federal actions, which, as noted above, seek “necessarily [to] interfere with the jurisdiction or control by the state court over the res”—here, the assets of CIC I. Bank of N.Y., 296 U.S. at 478. Similarly, in Bank of New York, although the underlying complaints were brought by the United States in form as in personam actions in “accounting and delivery” against two New York banks APPLIED UNDERWRITERS V. LARA 25 concerning the United States’ claim to ownership over certain funds, id. at 470, the Supreme Court looked through the form of the actions to observe that “the object of the suits is to take the property from the depositaries and from the control of the state court, and to vest the property in the United States to the exclusion of all those whose claims are being adjudicated in the state proceedings,” id. at 478, and were thus in rem proceedings. For these reasons, the federal actions are necessarily proceeding either in rem or quasi in rem. And as the state court insurance conservatorship is also one proceeding in rem and was filed first, it appears the federal actions must be dismissed. 3. Prior exclusive jurisdiction and 42 U.S.C. § 1983 This case does, however, have a unique and important feature. To our knowledge, it is the first case in this Court implicating the prior exclusive jurisdiction rule in connection with a 42 U.S.C. § 1983 action. 5 And as it is currently formulated in the caselaw, the prior exclusive jurisdiction rule presents as an absolute bar to federal court involvement in state court suits when both suits are either in rem or quasi in rem, regardless of the presence of any claimed deprivations of constitutional rights occurring in the 5 In a recent unpublished decision, the Third Circuit considered a 42 U.S.C. § 1983 action which also implicated the prior exclusive jurisdiction rule, finding that the prior exclusive jurisdiction rule barred jurisdiction in that case. Dyno v. Dyno, No. 20-3302, 2021 WL 3508252, at  (3rd Cir. Aug. 10, 2021) (referring to the prior exclusive jurisdiction rule as “the Princess Lida doctrine,” citing Princess Lida, 305 U.S. at 466). 26 APPLIED UNDERWRITERS V. LARA initial action. 6 Accordingly, we take occasion to discuss limitations on the prior exclusive jurisdiction rule that may be necessary in unusual circumstances in which the adjudication of constitutional rights might be compromised, but conclude that this case does not present any such circumstances. At core, abstention doctrines are rooted in policy considerations which allow federal courts to exercise “discretion in determining whether to grant certain types of relief—a discretion that was part of the common-law background against which the statutes conferring jurisdiction were enacted.” NOPSI, 491 U.S. at 359. Accordingly, “there are some classes of cases in which the withholding of authorized equitable relief because of undue interference with state proceedings is ‘the normal thing to do.’” Id. (quoting Younger, 401 U.S. at 45). Still, abstention is only “the normal thing to do” in “exceptional circumstances.” Sprint, 571 U.S. at 78 (quoting NOPSI, 491 U.S. at 368). Such “exceptional circumstances” have been generalized to embody situations “where denying a federal forum would clearly serve an important countervailing interest, for example, where abstention is warranted by considerations of proper constitutional adjudication, regard for federal-state relations, or wise judicial administration.” Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 716 (1996) (cleaned up). “Few public interests have a higher claim upon the discretion of a federal chancellor than the avoidance of needless friction with state 6 To be sure, the prior exclusive jurisdiction rule applies with equal force in prohibiting a state court from interfering with a federal court that first takes in rem or quasi in rem jurisdiction over a disputed res. See, e.g., United States v. Alpine Land & Reservoir Co., 174 F.3d 1007, 1012–14 (9th Cir. 1999). APPLIED UNDERWRITERS V. LARA 27 policies, whether the policy relates to the enforcement of the criminal law, or the administration of a specialized scheme for liquidating embarrassed business enterprises, or the final authority of a state court to interpret doubtful regulatory laws of the state.” Id. at 717–18 (quoting R.R. Comm’n of Tex. v. Pullman, 312 U.S. 496, 500 (1941)). And to be sure, “[s]tates, as a matter of tradition and express federal consent, have an important interest in maintaining precise and detailed regulatory schemes for the insurance industry.” Id. at 733 (Kennedy, J., concurring) (citing McCarran-Ferguson Act, Pub. L. No. 79-15, 59 Stat. 33 (1945) (codified as amended at 15 U.S.C. § 1011 et seq.)). Standing in contrast to the abstention doctrines, Ex parte Young, 209 U.S. 123 (1908), and its progeny explicitly permit injunctions against state officials preventing them from prosecuting criminal actions “where the danger of irreparable loss is both great and immediate,” Younger, 401 U.S. at 45 (quoting Fenner v. Boykin, 271 U.S. 240, 243 (1926)). Notably, Younger itself refused to extend Ex parte Young to enjoin a prosecution that “was already pending in the state court” and which afforded the moving party “an opportunity to raise his constitutional claims.” Id. at 49. The Younger Court emphasized that “the possible unconstitutionality of a statute ‘on its face’ does not in itself justify an injunction against good-faith attempts to enforce it, and that [the party seeking the injunction] failed to make any showing of bad faith, harassment, or any other unusual circumstance that would call for equitable relief.” Id. at 54. With this background, it is clear that abstention under the prior exclusive jurisdiction rule can be proper even though the federal action asserts a 42 U.S.C. § 1983 claim. By maintaining otherwise, Appellants ask this Court to craft a broad, Ex parte Young-type exception to the prior exclusive 28 APPLIED UNDERWRITERS V. LARA jurisdiction rule for any 42 U.S.C. § 1983 action brought against state officials when such suits seek to enjoin an ongoing state court in rem proceeding. This we shall not do. Nor are there any special circumstances in this case justifying a limitation on the prior exclusive jurisdiction rule. Appellants first argue in this regard that they are unable to present any objections in the insurance conservatorship at all, given that they are not parties to that action. However, Appellants’ interests are well represented in the conservatorship action, given that each of CIC I, CIC II, and Applied are all subject to the common management and control of Steven Menzies and Jeffrey Silver. 7 Further, as noted by the district court, any party with a material interest in CIC I has been “expressly invited . . . to submit any objections—constitutional or otherwise—they have to the Proposed Rehabilitation Plan in writing and orally at the hearing on the Commissioner’s application to approve the Plan.” Appellants next argue that certain procedural characteristics of the conservatorship proceeding will prevent them from adequately raising their constitutional claims, alleging that “the limitations of conservation 7 Here, an analogy exists to Younger abstention principles. Supreme Court precedent holds that Younger abstention is applicable when nominally distinct parties to the state and federal actions are nonetheless “so closely related that they should all be subject to the Younger considerations which govern any one of them.” Doran v. Salem Inn, Inc., 422 U.S. 922, 928 (1975). Moreover, in Herrera v. City of Palmdale, 918 F.3d 1037 (9th Cir. 2019), this Court held that Younger abstention was applicable where the state action was brought against a corporation while the federal action was brought by the co-founders of the corporation and their family, id. at 1041, 1047. Appellants offer no reasons why these same considerations should not apply in the prior exclusive jurisdiction analysis. APPLIED UNDERWRITERS V. LARA 29 proceedings under California law foreclose any realistic ability for Appellants to develop and present fact-based constitutional claims hinging on proof of motive and conduct rather than the facial validity of a law.” However, state caselaw firmly establishes the contrary—that Appellants do have adequate opportunity to raise constitutional challenges in insurance conservatorship proceedings. Carpenter, the earlier mentioned California Supreme Court case, for example, reviewed arguments “that the provisions of the Insurance Code dealing with rehabilitation of insolvent insurance companies were unconstitutional in that they violated the due process, equal protection of the law, and the contract clauses of the Federal Constitution.” Carpenter, 10 Cal. 2d at 328–32. 8 Rhode Island Insurance Co. v. Downey, 95 Cal. App. 2d 220 (1949), considered a “[p]etition for a writ of mandate directing the superior court to vacate its ‘Order Appointing Conservator and Restraining Order’ in a proceeding brought against petitioner by respondent Insurance Commissioner of the State of California” which argued “that to make the application of statutes providing for summary seizure constitutional there must be a reasonable necessity for taking, coupled with an adequate remedy giving the company whose assets are seized the right to show that the seizure was unnecessary and unjustified,” id. at 223, 238–39. And In re Executive Life Insurance Co., 32 Cal. App. 4th 344 (1995), considered the appellants’ “claim that the nature of the confirmation hearing on the modified [rehabilitation] plan denied them their First Amendment rights of speech and petition,” id. at 391. To the extent that Appellants are genuinely unable to raise fact-based “claims of unconstitutional retaliation” “for 8 Carpenter was then further affirmed by the U.S. Supreme Court in Neblett v. Carpenter, 305 U.S. 297 (1938). 30 APPLIED UNDERWRITERS V. LARA [CIC I’s] and Appellants’ First Amendment activity,” there would unquestionably be a proper due process challenge under the Fourteenth Amendment to the facial validity of the relevant provisions of the California Insurance Code, a challenge the Superior Court, Court of Appeals, and California Supreme Court are able to pass upon, as thoroughly demonstrated by the California state caselaw cited above. 9 Indeed, due process challenges have been raised in CIC I’s application for interlocutory appellate review with the California Court of Appeal. Specifically, CIC I asserted in its petition for writ of mandate or other relief that the “Superior Court’s Failure to Conduct a Full Hearing And to Construe the Relevant Statute Was Legal Error And Violated the Express Terms of Section 1012 and [CIC I’s] Right to Due Process.” And as stated above, CIC I filed an application to vacate the conservatorship with the Superior Court, arguing that: 1) the conservatorship was obtained under false pretenses; 2) the conditions cited for imposing the conservatorship no longer existed; 3) the Commissioner acted arbitrarily, capriciously, and in bad faith; and 4) the conservatorship continues to harm CIC I. Contrary to Appellants’ representation that “the Superior Court concluded that state law forecloses any scrutiny of Appellees’ choice to pursue a conservation over an injunction,” the Superior Court explicitly found, on the merits, that “the Commissioner’s preference to pursue a Rehabilitation Plan is reasonable and sufficient under the circumstances,” evincing that the Superior Court considered 9 Just as in Younger, whether the party seeking to enjoin ongoing proceedings has “an adequate opportunity to raise constitutional claims” “does not turn on whether the federal plaintiff actually avails himself of the opportunity to present federal constitutional claims in the state proceeding, but rather whether such an opportunity exists.” Herrera, 918 F.3d at 1045–46. APPLIED UNDERWRITERS V. LARA 31 CIC I’s arguments of whether the Commissioner was justified in pursuing a conservatorship over an injunction. We will also consider, as in Younger cases, “bad faith” and “irreparable injury” exceptions to the otherwise valid application of the prior exclusive jurisdiction rule. In the context of Younger, “bad faith ‘generally means that a prosecution has been brought without a reasonable expectation of obtaining a valid conviction.’” Baffert v. Cal. Horse Racing Bd., 332 F.3d 613, 621 (9th Cir. 2003) (quoting Kugler v. Helfant, 421 U.S. 117, 126 n.6 (1975)). Such “bad faith” might arise in cases involving “repeated harassment by enforcement authorities with no intention of securing a conclusive resolution” or where there is evidence of “pecuniary bias by the tribunal.” Partington v. Gedan, 961 F.2d 852, 861–62 (9th Cir. 1992). The Second Circuit has provided the following helpful guidance for determining what constitutes an allegation of “bad faith”: “it is only when the state proceeding is brought with no legitimate purpose that [the] state interest in correcting its own mistakes dissipates” and the “bad faith” exception to Younger applies. Diamond “D” Const. Corp. v. McGowan, 282 F.3d 191, 200 (2nd Cir. 2002) (emphasis added). Moreover, the Supreme Court in Hicks v. Miranda, 422 U.S. 332 (1975), stated that where there are allegations of “repeated judicial authorization” for the alleged bad faith conduct of the federal defendant, “we cannot agree that bad faith and harassment were made out” unless there is an allegation that the judicial authorization itself was steeped in the bad faith actions of the judicial officers involved, id. at 351. In view of these teachings, it is clear there are no sufficient allegations of “bad faith” here to merit an exception to the valid application of the prior exclusive 32 APPLIED UNDERWRITERS V. LARA jurisdiction rule. As previously noted, the conservatorship action was brought for a legitimate reason—indeed, Appellants’ own factual allegations make out a violation of § 1215.2(d) sufficient to trigger a conservatorship under § 1011(c). The allegations make clear that Appellants neither sought nor received approval from the CDI for the proposed purchase of the controlling interest in CIC I and the concomitant CIC I / CIC II merger, as required by California Insurance Code § 1215.2(d), and that the merger was an obvious attempt to avoid the California insurance regulatory regime. It is possible to imagine a hypothetical situation in which the Commissioner is seeking, through his proposed Rehabilitation Plan, favorable settlements for politically allied recipients to compensate for past and future political contributions, or improper kickbacks for himself from settlement recipients or others who may conceivably be favored by other provisions of the proposed Rehabilitation Plan. This sort of skullduggery could make out a viable bad faith claim against the Commissioner. Before the district court below, Appellants did make some allegations vaguely to that effect, at least implicitly.10 However, Appellants’ allegations do not suggest that the Commissioner acted “with no intention of securing a conclusive resolution.” Partington, 961 F.2d at 862. What is more, an allegation of “bad faith” is not a talisman sufficient to overcome an otherwise proper exercise of abstention. For purposes of fashioning a “bad faith” 10 Appellants asserted, among other claims, that Appellees “are using their broad state conservation powers as a club to force settlement by parties in private litigation that they want policyholders and their attorneys to win.” Why they wanted those parties to win—for some nefarious purpose, or because those parties were entitled to prevail—was not spelled out. APPLIED UNDERWRITERS V. LARA 33 exception to the application of the prior exclusive jurisdiction rule, in addition to the due process exception already outlined, by analogy to Younger, Appellants in these circumstances—where state officials have sought and received “repeated judicial authorization for their conduct”—must allege that the state court itself is part of the Commissioner’s bad faith scheme, or is otherwise acting in bad faith to deprive Appellants of a fair chance to litigate the propriety of the exercise of in rem jurisdiction. Hicks, 422 U.S. at 351. Appellants have failed to make such allegations. 11 Likewise, Appellants have failed to demonstrate “irreparable injury” arising from “extraordinary circumstances” which might justify an exception to the prior exclusive jurisdiction rule. In the context of Younger, as noted by the district court, “such circumstances must be ‘extraordinary’ in the sense of creating an extraordinarily pressing need for immediate federal equitable relief, not merely in the sense of presenting a highly unusual factual situation.” Moore v. Sims, 442 U.S. 415, 433 (1979) 11 To be clear, where the state officials have sought and received judicial authorization for their conduct, the necessity of bad faith allegations against the Superior Court itself cannot be understated. Simply alleging that the Superior Court made an incorrect ruling, even a “clear error,” is not sufficient to defeat an otherwise proper application of abstention. A respect for federalism demands as much. Appellants can seek review of the Superior Court’s decision in the California Court of Appeals, the California Supreme Court, and ultimately, the Supreme Court of the United States. Without specific allegations that the Superior Court is itself acting in bad faith, this federal tribunal must respect the competency of the parallel state court system to correct any mistakes of law that are made in that system. “Minimal respect for the state processes, of course, precludes any presumption that the state courts will not safeguard federal constitutional rights.” Middlesex, 457 U.S. at 431 (emphasis in original). 34 APPLIED UNDERWRITERS V. LARA (quoting Kugler v. Helfant, 421 U.S. 117, 125 (1975)). Two recent Ninth Circuit cases have found “extraordinary circumstances” giving rise to “irreparable injury” sufficient to satisfy the exception to Younger. Bean v. Matteucci, 986 F.3d 1128 (9th Cir. 2021), held that an individual’s “due process right to avoid forcible administration of antipsychotic medications” was a harm that “cannot be fully vindicated after trial,” id. at 1134–35. Likewise, Arevalo v. Hennessy, 882 F.3d 763 (9th Cir. 2018), held that where “petitioner has been incarcerated for over six months without a constitutionally adequate bail hearing,” such a “[d]eprivation of physical liberty by detention constitutes irreparable harm,” id. at 767. Here, however, Appellants allege no such concrete irreparable harm. Instead, Appellants allege only speculative harms that may arise if the Superior Court adopts the Commissioner’s proposed Rehabilitation Plan. Even then, Appellants will have ample opportunity to have that decision reviewed by appellate state courts. 12 Moreover, Appellants’ claims of “irreparable harm” suffer from a more fundamental defect. As noted above, Appellants have sufficient ability to challenge the conservatorship in the Superior Court, which includes the ability to challenge the proposed Rehabilitation Plan. If the Superior Court approves the Rehabilitation Plan, and the Rehabilitation Plan is then affirmed by the California Court 12 Specifically, Appellants allege that “[t]he [irreparable] harm includes forced settlements of litigation rights, millions of dollars in lost property and assets, and nearly $100 million lost from the forced transfer of CIC’s and Appellants’ book of business to third parties. And the best means of repairing that harm—damages—is unavailable because the relief would run against the state and thus is barred by the Eleventh Amendment.” APPLIED UNDERWRITERS V. LARA 35 of Appeals and the California Supreme Court, that properly obtained judgment would not be a legally cognizable “injury” for the purposes of § 1983 damages. So, although Appellants note the fundamental concept that damages against the state are generally barred by the Eleventh Amendment (notwithstanding California Government Code §§ 800–900 et seq.), a properly obtained judgment, even if adverse to Appellants’ interests, cannot count as an “injury” to a party such that the inability to obtain damages supports federal injunctive relief. To hold otherwise would be to hold that a state official can properly act within his authority to impose a conservatorship on an insurance firm, propose a Rehabilitation Plan approved by the Superior Court, California Court of Appeals, and California Supreme Court, then, at the same time, be subject to damages by the unhappy owners and affiliates of the conserved insurance firm subject to the Rehabilitation Plan. This result would be absurd. Appellants allege a final source of potential “irreparable injury” resulting from their present inability to service new CIC I policies while CIC I is under the conservatorship, thereby depriving Appellants of profits they would have otherwise realized. In the event the Superior Court or an appellate state court were to hold that the conservatorship was entirely unfounded, denying the Commissioner’s proposed Rehabilitation Plan, returning all assets to CIC I’s management, and allowing the Merger with CIC II to consummate, Appellants may well have suffered an “irreparable injury,” given Appellants’ uncertain ability to recover damages from the state. However, two reasons prevent this claim from representing an “irreparable loss [that] is both great and immediate” so as to merit an exception to an otherwise valid exercise of abstention. Younger, 401 U.S. at 45. 36 APPLIED UNDERWRITERS V. LARA First, as previously stated, Appellants’ own factual allegations make out a violation of § 1215.2(d) sufficient to trigger a conservatorship under § 1011(c). What is more, after the Commissioner’s ex parte conservatorship application was granted, the propriety of the conservatorship has been twice affirmed, once by the Superior Court in denying CIC I’s application to vacate the conservatorship, and once by the California Court of Appeals in denying CIC I’s application for interlocutory appellate review of the Superior Court’s denial of CIC I’s application to vacate the conservatorship. Given this background, it seems highly unlikely Appellants would ever have any claim for recovery based on a theory that the conservatorship was impermissible. Second, even in the event that the conservatorship is vacated in full as baseless, Appellants have not established that they would be categorically barred from relief under California Government Code §§ 800–900 et seq. Moreover, Appellants do not argue that the calculation of damages is impossible. To be sure, it is unclear whether the institution of a truly baseless conservatorship could serve as grounds for waiver of state sovereign immunity under that statute, but the possibility of such relief further underscores why Appellants’ claim of “irreparable injury” is misplaced. Accordingly, as Appellants have failed to allege here any true “irreparable injury” arising from “extraordinary circumstances,” application of the prior exclusive jurisdiction rule requires federal judicial abstention in this case. Of course, we do not acknowledge these limitations on the prior exclusive jurisdiction rule lightly, given the potential embarrassment of competing federal and state courts issuing injunctions against one another concerning APPLIED UNDERWRITERS V. LARA 37 control of a disputed res. However, if such a case were to arise where a state forum was irremediably depriving a litigant of his constitutional rights, then federal interference would be required, the prior exclusive jurisdiction rule notwithstanding. 13 Indeed, if the initial proceeding were to be wholly repugnant to the Constitution, the state forum could not be said to have “competent jurisdiction” over the res. State Eng’r, 339 F.3d at 809. But this case in no way presents such an extraordinary situation. Accordingly, federal judicial abstention due to the San Mateo Superior Court’s prior exclusive jurisdiction of the CIC I res is warranted.