Court Opinion

ID: 3001031
Source: CourtListenerOpinion
Date Created: 2015-09-24 20:12:01.31197+00
Date Added: 2024-06-11T15:03:03.394108
License: Public Domain

In the
    United States Court of Appeals
               For the Seventh Circuit
                          ____________

No. 06-3214
STROMAN REALTY, INC.,
                                              Plaintiff-Appellant,
                                 v.

DEAN MARTINEZ,
Secretary of the Illinois
Department of Financial and
Professional Regulation,1
                                             Defendant-Appellee.
                          ____________
            Appeal from the United States District Court
       for the Northern District of Illinois, Eastern Division.
           No. 06 C 1187—Robert W. Gettleman, Judge.
                          ____________
    ARGUED MARCH 30, 2007—DECIDED OCTOBER 10, 2007
                     ____________

 Before EASTERBROOK, Chief Judge, and BAUER and
WILLIAMS, Circuit Judges.
   WILLIAMS, Circuit Judge. Stroman Realty, a national
timeshare brokerage company, was notified by the
Illinois Department of Financial and Professional Regula-

1
  After this appeal was filed, Dean Martinez replaced Fernando
Grillo as the Secretary of the Illinois Department of Financial
and Professional Regulation. We therefore substitute Dean
Martinez as the Appellee in this action. See Fed. R. App. P. 43(c).
2                                               No. 06-3214

tion that it had been conducting unlicensed brokerage
activities that involved Illinois residents and property
as well as timeshare developers that had offices in the
state. Stroman continued its activities, against the Depart-
ment’s instructions, and filed for injunctive relief in
federal court from the Department’s enforcement of its
regulations. The basis of Stroman’s complaint was that
such enforcement violated the dormant Commerce Clause.
The Department subsequently filed an administrative
complaint with the State’s Office of Banks and Real
Estate against Stroman to enforce Illinois licensing re-
quirements and then moved to dismiss Stroman’s fed-
eral complaint. The district court granted the Depart-
ment’s motion on abstention grounds.
  We agree with this decision as we believe that the
district court was required to abstain from interfering
with a state proceeding that is ongoing, judicial in nature,
and implicates the Department’s important interest in
regulating the real estate profession. We also find that the
state proceeding affords Stroman an adequate opportunity
to raise its federal claims. Since this case presents no
exceptional circumstances that would warrant federal
court intervention, we affirm.

                   I. BACKGROUND
  Stroman bills itself as the world’s largest resale broker
of vacation resort timeshares, maintaining a database of
over one million property buyers, sellers, and renters.
Stroman’s business is built around a computer listing
system that allows it to match buyers with timeshares.
When a sale is made, Stroman mails contracts to the
buyer and seller, and these transactions often involve
parties and properties in multiple states, including Illinois.
Stroman runs its operation out of Conroe, Texas, and
No. 06-3214                                               3

employs sales associates that hold only Texas real estate
licenses.
   On May 10, 2005, the Illinois Department of Financial
and Professional Regulation mailed a cease-and-desist
letter to Stroman’s Texas office. The letter notified
Stroman that the Department had received a complaint
from an Illinois resident and had subsequently discovered
that Stroman was engaged in timeshare brokerage activi-
ties in Illinois without the required licensure. In particu-
lar, the Department accused Stroman of (1) soliciting
Illinois citizens in the purchase, sale, and rental of
timeshare properties and (2) maintaining client relation-
ships with Illinois citizens, timeshare developers who
owned timeshares in Illinois, and timeshare developers
with business offices located in Illinois. The letter in-
structed Stroman to either obtain an Illinois license or
to stop doing business in Illinois.
   Stroman responded on June 13, 2005, by seeking injunc-
tive relief from the Department’s enforcement of its
licensing requirements in a federal court in the Southern
District of Texas. Stroman’s complaint alleged that the
Department’s attempted regulation of its timeshare
resale brokerage business violated the dormant Com-
merce Clause of the Constitution. The Department, in
turn, filed an administrative complaint against Stroman
in which it alleged that, from August 1, 2000, until
August 1, 2005 (the date of the Department’s filing),
Stroman had been engaged in timeshare resale brokerage
in Illinois without a license in violation of the state’s
Real Estate Timeshare Act of 1999, 765 Ill. Comp. Stat.
§ 101/15-70(a), and the Real Estate License Act of 2007,
225 Ill. Comp. Stat. § 454/20-10(a). The administrative
complaint charged Stroman with (1) serving as a
timeshare resale agent for owners of property physically
located in Illinois and for developers whose business
offices were located in Illinois, and (2) offering its
4                                                No. 06-3214

timeshare resale services to Illinois citizens via mail and
newspapers. The Department sought the assessment of
a civil penalty of up to $25,000 against Stroman. See 765
Ill. Comp. Stat. § 101/15-25.
  After filing its administrative complaint, the Department
moved to dismiss Stroman’s federal lawsuit citing the
district court’s lack of personal jurisdiction, improper
venue, and failure to state a claim. The Department also
argued that, because of the pending administrative
action, the district court should abstain from deciding the
case. The district court agreed that it lacked personal
jurisdiction over the Department and transferred the
case to the Northern District of Illinois. There, Stroman
moved for a default judgment or, alternatively, to stay the
administrative proceeding, which the district court
denied.2 The Department then filed an amended motion
to dismiss, which the district court granted without
prejudice. Stroman appeals.

                      II. ANALYSIS
  The district court did not reach the merits of Stroman’s
dormant Commerce Clause challenge, deciding instead
that abstention was appropriate in light of the pending
state court proceeding against Stroman. As the Supreme
Court explained in Younger v. Harris, 401 U.S. 37, 43
(1971), this doctrine of abstention reflects Congress’s
“desire to permit state courts to try state cases free from
interference by federal courts,” except in special circum-
stances. Therefore, federal courts must abstain from
enjoining or otherwise interfering in ongoing state court

2
  At oral argument, Stroman represented that neither party
has pushed the state administrative action forward, and, as far
as we know, it remains pending.
No. 06-3214                                               5

proceedings that are (1) judicial in nature, (2) involve
important state interests, and (3) provide an adequate
opportunity to raise the federal claims, as long as (4) no
exceptional circumstances exist that would make absten-
tion inappropriate. Green v. Benden, 281 F.3d 661, 666
(7th Cir. 2002) (citing Middlesex County Ethics Comm’n v.
Garden State Bar Ass’n, 457 U.S. 423, 432, 436-37 (1982)).
We review de novo the district court’s dismissal of
Stroman’s complaint on abstention grounds, Majors v.
Engelbrecht, 149 F.3d 709, 712 (7th Cir. 1998), and begin
by addressing the least controversial prongs of the
Middlesex framework in this case, (1) and (3).

A. The Proceeding Is Ongoing and Judicial in
   Nature.
  It is uncontested that the state proceeding at issue is
judicial in nature, as the motivating factor behind the
Department’s filing of its complaint was to enforce its
real estate licensing requirements against Stroman. See
id. at 712 (for Younger abstention purposes, administra-
tive proceedings are judicial in nature when they are
coercive, such as state enforcement proceedings). Yet
Stroman disagrees that this proceeding should be charac-
terized as “ongoing” since the Department filed its admin-
istrative complaint after Stroman filed its claim in federal
court. But the precise timing and order of the Depart-
ment’s filing is less important than the extent to which
the federal proceedings had progressed when the state
proceedings began. Younger abstention has been held to
apply when state proceedings begin after a federal com-
plaint is filed, “but before any proceedings of substance
on the merits have taken place in the federal court.” Hicks
v. Miranda, 422 U.S. 332, 349 (1975); see also Forty One
News, Inc. v. County of Lake, 491 F.3d 662, 666-67 (7th
Cir. 2007) (court’s resolution of Rule 12(b)(6) motion did
6                                              No. 06-3214

not constitute a proceeding of substance on the merits);
Mannheim Video v. County of Cook, 884 F.2d 1043, 1045-
46 (7th Cir. 1989) (same); Ciotti v. County of Cook, 712
F.2d 312, 313-14 (7th Cir. 1983) (same, for court’s determi-
nation that plaintiff had standing to sue). When the
Department filed its administrative complaint against
Stroman, no “proceedings of substance” had occurred as
the Department had yet to respond to Stroman’s complaint
in federal court. Therefore, for purposes of abstention, we
consider the state proceeding at issue to be ongoing. We
also conclude that this state proceeding provides Stroman
with an adequate opportunity to raise its federal constitu-
tional claim. In Green, an Illinois court’s review of the
administrative proceeding was determined to provide the
plaintiff with an adequate opportunity to raise his due
process and equal protection challenges. 281 F.3d at 666.
We see no reason why Stroman’s dormant Commerce
Clause claim could not also be adequately addressed on
judicial review in the event of an adverse administrative
decision. See 225 Ill. Comp. Stat. § 454/20-75 (subjecting
all final decisions of the Office of Banks and Real Estate
to judicial review).

B. An Important State Interest Is Involved and No
   Exceptional Circumstances Exist.
   Having resolved that the state proceeding is ongoing,
judicial in nature and can adequately address Stroman’s
claims, we consider whether it involves an important
state interest. See Green, 281 F.3d at 666. The Depart-
ment asserts that is has a legitimate, substantial interest
in regulating timeshare brokerage activities involving
Illinois residents or timeshare properties located within
the state. But Stroman contends that Younger is inapplica-
ble when an important federal interest is implicated.
Stroman’s argument is similar to the one rejected by
No. 06-3214                                              7

the Court in New Orleans Pub. Serv., Inc. [“NOPSI”] v.
Council of New Orleans, 491 U.S. 350, 364-65 (1989), in
that it essentially asserts, in light of its dormant Com-
merce Clause challenge, that the federal court should
peek ahead to the constitutional issue and attempt to
resolve it. In NOPSI, the Court responded to the peti-
tioner’s argument that abstention was inappropriate if
a federal court was presented with a “substantial claim”
that federal law preempts the challenged state action by
stating, “[T]he mere assertion of a substantial constitu-
tional challenge to state action will not alone compel the
exercise of federal jurisdiction.” Id. Therefore, when
inquiring into whether abstention is required, the Court
explained that “we do not look narrowly to [the State’s]
interest in the outcome of the particular case—which
could arguably be offset by a substantial federal interest
in the opposite outcome. Rather, what we look to is the
importance of the generic proceedings to the State.” Id. at
365. So Stroman’s contention that the Department’s
attempt to regulate its business violates the dormant
Commerce Clause in and of itself does not require us
to forgo consideration of the State’s interest in regulat-
ing the business of timeshare resales.
  Alternatively, Stroman urges us to adopt the view that
the Department’s enforcement of the State’s licensing
requirements improperly limits access to the real estate
brokerage market. In support, Stroman cites to Harper v.
Public Service Commission of West Virginia, 396 F.3d 348,
354-55 (4th Cir. 2005), where abstention was deemed
inappropriate in the face of a dormant Commerce Clause
challenge because the State’s licensing requirements did
not reflect a valid interest in preventing the improper
disposal of waste, but rather, “by its very nature serve[d]
to impede interstate commerce.” But we do not think the
Department’s interest is one which, by its very nature,
unduly burdens interstate commerce.
8                                               No. 06-3214

  According to the Department, its regulation of real
estate professionals serves “to protect Illinois consumers
against evil, fraudulent, dishonest and incompetent
practices, to ensure a minimum level of competence
and familiarity with the State’s applicable laws, and to
assess the fitness to practice based on character and
trustworthiness.” The Department has a legitimate and
substantial interest in setting and enforcing the standards
for those who deal with property sales involving its
citizens. See, e.g., Coldwell Banker Residential Real Estate
Servs. of Ill., Inc. v. Clayton, 475 N.E.2d 536, 542 (Ill.
1985) (the State has a “substantial interest in regulating
the real estate profession”); see also Thompson v. Schmidt,
601 F.2d 305, 308 (7th Cir. 1979) (a given state has a
“legitimate and substantial interest” in setting the qualifi-
cations for professions that require special skills and
affect the general welfare). At best, Stroman has argued
that the statutes the Department seeks to enforce have
the type of incidental effects that a valid licensing
scheme has on out-of-state companies. This is different
from the state regulation at issue in Harper, which the
Fourth Circuit found aimed to limit access to the waste
removal market. In addition, as we noted in Midwestern
Gas Transmission Co. v. McCarty, 270 F.3d 536, 539 (7th
Cir. 2001), a state has no basis for invoking Younger if it
seeks to enforce an invalid interest, such as the regulation
of activities under exclusive federal control. In this case,
however, the Department’s interest does not concern the
regulation of an activity that is under exclusive federal
control, nor does it, as the district court pointed out, fall
under an area of even partial federal control. See Stroman
v. Grillo, 438 F. Supp. 2d 929, 934-35 (N.D. Ill. 2006).
Rather, we find that the proceeding involves a valid,
legitimate state interest—the regulation of real estate
professionals engaged in the business of timeshare
brokerage—and thereby meets the second abstention
prong.
No. 06-3214                                              9

  Based on the above findings, abstention is required
unless Stroman can demonstrate any exceptional circum-
stances that would require federal intervention. See Green,
281 F.3d at 666. For example, when “(1) the state pro-
ceeding is motivated by a desire to harass or is conducted
in bad faith, (2) there is an extraordinarily pressing
need for immediate equitable relief, or (3) the challenged
provision is flagrantly and patently violative of express
constitutional prohibitions,” federal intervention in the
state proceeding is appropriate. Jacobson v. Village of
Northbrook Mun. Corp. 824 F.2d 567, 569-70 (7th Cir.
1987) (internal quotations and citations omitted). Stroman
has shown no exceptional circumstances that warrant
reversing the district court’s decision to abstain.
   First, there is no indication that the Department filed
its complaint in bad faith. We are not troubled by the
timing of the filing, after Stroman filed its federal com-
plaint, because by that point it presumably became
evident to the Department that Stroman did not plan to
comply with the cease-and-desist letter by discontinuing
its brokerage practices. Nor do we find that there exists
an “extraordinarily pressing need” for equitable relief
in the form of a federal injunction. Stroman claims that
it will face repeated investigation and administrative
action, subjecting it to a $25,000 fine for each act of
allegedly regulated conduct. To date, however, only one
administrative action has been filed against Stroman, and
because that action remains pending, no fines have been
assessed against it. Stroman also claims that its reputa-
tion will suffer from the implication that it is operating
illegally. Without more, however, such speculation does
not rise to the level of irreparable harm that would
justify the intervention of a federal court.
  Finally, the statute is not of the type that we would
consider to be “flagrantly and patently” violative of the
Constitution. See Younger, 401 U.S. at 54 (“[T]he possible
10                                            No. 06-3214

unconstitutionality of a statute ‘on its face’ does not
in itself justify an injunction against good-faith attempts
to enforce it . . . .” (emphasis added)).

                  III. CONCLUSION
  For the reasons outlined above, the judgment of the
district court is AFFIRMED.

A true Copy:
      Teste:

                       ________________________________
                       Clerk of the United States Court of
                         Appeals for the Seventh Circuit

                  USCA-02-C-0072—10-10-07