Applied Underwriters, Inc. v. Lara, et al

Filing 56

ORDER signed by Senior Judge William B. Shubb on 3/30/2021 GRANTING 34 Motion to Dismiss for Lack of Jurisdiction. CASE CLOSED. (Tupolo, A)

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1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 EASTERN DISTRICT OF CALIFORNIA 10 ----oo0oo---- 11 12 13 14 APPLIED UNDERWRITERS, INC., a Nebraska corporation; and APPLIED RISK SERVICES, INC., a Nebraska Corporation, 17 18 19 20 21 22 23 24 25 26 27 28 ORDER RE: DEFENDANTS’ MOTION TO DISMISS Plaintiffs, 15 16 No. 2:20-cv-02096 WBS AC v. INSURANCE COMMISSIONER OF THE STATE OF CALIFORNIA RICARDO LARA, in his official Capacity; et al., Defendants. ----oo0oo---Plaintiffs Applied Underwriters, Inc. (“Applied”) and Applied Risk Services, Inc. (“ARS”) (collectively, “plaintiffs”) brought this action against defendants Ricardo Lara, Insurance Commissioner of the State of California (“Lara” or “Commissioner”), and Kenneth Schnoll and Bryant Henley, California Department of Insurance Deputy Commissioners 1 1 (collectively, “defendants”), in response to defendants’ 2 imposition of a conservation over non-party California Insurance 3 Company (“CIC”) in San Mateo Superior Court in November 2019 (the 4 “Conservation Proceeding”). 5 (Docket No. 26).) 6 defendants’ actions leading up to and including the Conservation 7 violated their rights to equal protection and due process under 8 the Fourteenth Amendment, as well as their First Amendment right 9 to criticize officials in the press and petition the government, (See First Amended Complaint (“FAC”) Plaintiffs--affiliates of CIC--allege that 10 in violation of 42 U.S.C. § 1983. (FAC ¶¶ 135-90.) Plaintiffs 11 further allege that defendants’ actions constituted unlawful 12 takings in violation of the Fifth and Fourteenth Amendments, and 13 levy an as-applied challenge against California Insurance Code 14 § 1011(c) under the Dormant Commerce Clause of the United States 15 Constitution, Art. I, § 8, cl. 3. (Id.) 16 Defendants have moved to dismiss plaintiffs’ complaint 17 for lack of subject matter jurisdiction and for failure to state 18 a claim upon which relief may be granted. 19 Dismiss (“Mot. to Dismiss”) (Docket No. 35).) 20 I. (See Defs.’ Mot. to Factual and Procedural Background 21 Plaintiffs write workers’ compensation insurance 22 through multiple insurance companies in all 50 states. 23 ¶ 2.) 24 and CIC are closely related companies. 25 common management and control: Steven Menzies indirectly owns CIC 26 and serves as its CEO, and is the President of CIC, Applied, and 27 ARS. 28 Exs. 8, 9 (Docket No. 36.) CIC is the largest of those companies. (Id.) (FAC Plaintiffs All three are subject to (See FAC ¶¶ 48, 51, 52; Defs.’ Req. for Judicial Notice, The three entities also share the 2 1 same Secretary and General Counsel, Jeffrey Silver. 2 Exs. 8, 9.) 3 website, Menzies and Silver serve as the sole directors of both 4 Applied and ARS, and Menzies serves as President and Treasurer 5 for both Applied and ARS. 6 operative agreements with CIC indicate that they remain subject 7 to CIC’s supervision and control. 8 9 (See id. at According to the Nebraska Secretary of State’s (See id.) Moreover, Applied and ARS’ (See id. at Exs. 1, 2.) The First Amended Complaint (“FAC”) alleges that Applied profits from CIC’s operations by receiving administrative 10 fees from CIC clients--which Applied charges as a percentage of 11 each client’s payroll--pursuant to the CIC and Applied’s 12 Management Services Agreement (“MSA”). 13 allege that ARS profits from its Underwriting Agent Agreement 14 (“UAA”) with CIC in a manner similar to Applied. 15 (FAC ¶ 106.) Plaintiffs (Id. at ¶ 107.) Plaintiffs allege that defendants have engaged in a 16 bad-faith campaign of unlawful activity aimed at CIC, beginning 17 in 2019, when Menzies (at the time an indirect owner of 11.5% of 18 CIC’s shares) sought to purchase Berkshire Hathaway’s 19 (“Berkshire”) controlling interest in CIC. 20 In January 2019, Menzies entered into an agreement with Berkshire 21 to purchase the company by September 30th, or else Menzies would 22 be subject to a $50 million “breakup fee” (the “Berkshire/Menzies 23 Agreement”). 24 informed defendants of the details of the proposed sale, due to 25 additional requests for information from the California 26 Department of Insurance (“CDI”), Menzies had to submit new “Form 27 A” filings multiple times between April and September, and CDI 28 ultimately did not rule on Menzies’ pending application prior to (See id.) (See FAC ¶¶ 48-63.) Though Applied, Menzies, and CIC 3 1 the September 30, 2019 deadline. 2 (Id. at ¶¶ 53-63.) In response, Applied, CIC, and Menzies created a new 3 entity in New Mexico, “CIC II,” and sought to merge CIC with CIC 4 II so that the transaction could be completed under the 5 supervision of New Mexico’s Insurance Department rather than CDI. 6 (FAC ¶¶ 64-66.) 7 Form A approval hearing on October 9, 2019, in which regulators 8 from New Mexico, Texas, and California (including CDI) 9 participated and attended. This process culminated in a conference call and (Id.) According to plaintiffs, CDI 10 did not object to the merger or the sale’s consummation during 11 the hearing, during which New Mexico’s Superintendent of 12 Insurance, Superintendent Franchini, approved the merger. 13 Rather, plaintiffs allege that CDI attorneys told Superintendent 14 Franchini that the “proposed merger presented no risks to 15 California policyholders.” 16 Franchini’s order approving the merger, Berkshire informed the 17 New Mexico Department of Insurance that, based on the lack of 18 objection at the Form A approval hearing, it planned to proceed 19 with the closing scheduled for October 10, 2019.1 (Id.) (Id.) Following Superintendent (Id. at ¶ 69.) 20 On October 18, 2019, defendants informed CIC that, due 21 to CIC’s merger into CIC II, CIC’s California-issued Certificate 22 of Insurance--which authorizes CIC to sell insurance in the 23 state--would be extinguished by operation of law and that the 24 surviving entity would not be qualified to transact insurance in 25 California. 26 27 28 (Id. at ¶ 75.) Though plaintiffs allege that CIC Though the FAC does not explicitly state that Berkshire and Menzies completed the sale of CIC, paragraph 31 indicates that CIC has been “wholly owned by Steven Menzies” since October 10, 2019. (FAC ¶ 31.) 4 1 1 voluntarily refrained from taking any further action relating to 2 the merger, on November 4, 2019, the Commissioner filed an ex 3 parte application in San Mateo County Superior Court (the 4 “Superior Court”), requesting that the court place CIC in 5 conservation, with Lara as conservator, because CIC had attempted 6 to effect a merger without regulatory approval in violation of 7 California Insurance Code § 1011. 8 Superior Court granted the Commissioner’s request. 9 Req. for Judicial Notice, Ex. 7 (the “Conservation Order”).) (Id. at ¶¶ 79, 81, 101.) The (See Defs.’ As 10 a result, defendants have exercised control over the assets and 11 operations of CIC since November 4, 2019, and CIC has been unable 12 to transfer its assets to CIC II. 13 (Id.; FAC ¶ 92.) CIC has posed multiple challenges to the Conservation 14 Proceeding in state court, arguing that the Commissioner acted 15 arbitrarily and capriciously, that his basis for imposing the 16 Conservation was pretextual, and that the Proceeding violates 17 CIC’s constitutional rights. 18 with the Superior Court to vacate the conservatorship. 19 Req. for Judicial Notice, Exs. 10, 13.) 20 denied the application, CIC filed an application for 21 interlocutory appellate review with the California Court of 22 Appeal, which was also denied. 23 First, CIC filed an application (Defs.’ After the Superior Court (See id., Exs. 11, 15). Defendants then filed an application for approval of a 24 non-consensual rehabilitation plan in Superior Court (the 25 “Proposed Rehabilitation Plan”). 26 Rehabilitation Plan would (1) require CIC to transfer and 27 reinsure its book of California business to another California- 28 admitted insurer, and (2) require CIC and plaintiffs to settle (FAC at ¶ 102.) 5 This Proposed 1 over 40 separate pending legal proceedings regarding CIC and 2 plaintiffs’ “EquityComp” program--a loss sensitive workers’ 3 compensation program that has been the subject of dozens of 4 lawsuits involving plaintiffs and CIC--by paying claimants in the 5 pending legal proceedings any of three restitution amounts that 6 the claimant selects. 7 Rehabilitation Plan would also limit the amount CIC and 8 plaintiffs may collect under the policies they issue or service. 9 (Id.) (Id. at ¶¶ 38-47; 104-110.) The Proposed Plaintiffs allege that these portions of the Proposed 10 Rehabilitation Plan constitute an unconstitutional transfer of 11 contract and other property rights from one set of private 12 litigants to another, depriving CIC and plaintiffs of their due 13 process right to litigate the claims. 14 (Id.) On July 30, 2020, the Superior Court set a briefing 15 schedule and hearing date, and established procedures for 16 opposing the Commissioner’s application for an order approving 17 the Proposed Rehabilitation Plan. 18 Notice, Ex. 4 (the “Procedural Order”).) 19 expressly invites plaintiffs and other affiliates of CIC to 20 present their objections to the Proposed Rehabilitation Plan in 21 writing and orally at the scheduled hearing. 22 (See Defs.’ Req. for Judicial The Procedural Order (See id.) Following the Superior Court’s issuance of the 23 Procedural Order, plaintiffs filed this suit, requesting that 24 this court intervene in the ongoing state court proceeding by 25 “vacating the Commissioner’s conservatorship of CIC” and 26 “enjoining the Commissioner from continuing to hold CIC under 27 conservation.” 28 1).) (See Compl., Prayer for Relief ¶ C (Docket No. While plaintiffs have since amended their complaint, the 6 1 FAC still requests that this court effectively enjoin the ongoing 2 state court proceeding by directing the Commissioner to terminate 3 the Conservation and withdraw the Proposed Rehabilitation Plan. 4 (See FAC, Prayer for Relief ¶¶ C-G.) 5 As of the date of this Order, the Superior Court has 6 not yet approved or denied the Proposed Rehabilitation Plan; a 7 hearing on the Commissioner’s application is scheduled for April 8 15, 2021. 9 II. (See Defs.’ Req. for Judicial Notice, Ex. 5.) Discussion 10 Federal Rule of Civil Procedure 12(b)(1) authorizes 11 dismissal for lack of subject matter jurisdiction. 12 dismiss based on exclusive in rem jurisdiction of a state court 13 are properly analyzed under Rule 12(b)(1). 14 Deutsche Bank Nat. Trust Co., 651 F.3d 1039, 1043 (9th Cir. 15 2011). 16 also properly brought under Rule 12(b)(1). 17 for a Better Env’t, 523 U.S. 83, 100 n.3 (1998) (treating Younger 18 abstention as jurisdictional); Washington v. Los Angeles Cnty. 19 Sheriff’s Dep’t, 833 F.3d 1048, 1058 (9th Cir. 2016) (recognizing 20 “a dismissal due to Younger abstention [is] similar to a 21 dismissal under Rule 12(b)(1)”). 22 A. 23 Motions to See Chapman v. A motion to dismiss on Younger2 abstention grounds is Steel Co. v. Citizens Requests for Judicial Notice Though a court generally may not consider material 24 outside the complaint on a motion to dismiss under Rule 12(b)(1), 25 the court may look beyond the pleadings “at documents 26 incorporated into the complaint by reference, and matters of 27 28 2 Younger v. Harris, 401 U.S. 37 (1971). 7 1 which a court may take judicial notice.” 2 Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). 3 Tellabs, Inc. v. Makor A defendant may seek to incorporate a document by 4 reference into the complaint “if the plaintiff refers extensively 5 to the document or the document forms the basis of the 6 plaintiff’s claim.” 7 (9th Cir. 2003). 8 of the complaint’” and “may assume that its contents are true for 9 purposes of a motion to dismiss,” United States v. Ritchie, 342 F.3d 903, 907 “The court may treat such a document as ‘part Marder v. Lopez, 450 F.3d 445, 10 448 (9th Cir. 2006) (emphases added), so long as such assumptions 11 do not only serve to dispute facts in the complaint. 12 Orexigen Therapeutics, Inc., 899 F.3d 988, 1003 (9th Cir. 2018). 13 Khoja v. Under Federal Rule of Evidence 201, a court may take 14 judicial notice of an adjudicative fact that is “not subject to 15 reasonable dispute because it: (1) is generally known within the 16 trial court’s territorial jurisdiction; or (2) can be accurately 17 and readily determined from sources whose accuracy cannot 18 reasonably be questioned.” 19 court may take judicial notice of matters of public record. 20 Khoja, 899 F.3d at 999. 21 documents on file in federal or state courts, see, e.g., Harris 22 v. Cnty. of Orange, 682 F.3d 1126, 1132 (9th Cir. 2012) (taking 23 judicial notice of declaration filed in prior litigation), and 24 information on government websites, Gerritsen v. Warner Brothers 25 Entertainment Inc., 112 F. Supp. 3d 1011, 1033 (C.D. Cal. 2015). 26 Fed. R. Evid. 201(b). Accordingly, a Courts routinely take judicial notice of The court hereby takes judicial notice of Exhibits 1 27 and 2 to defendants’ Request for Judicial Notice, the MSA and 28 UAA, under the incorporation-by-reference doctrine. 8 See Ritchie, 1 342 F.3d at 907. 2 throughout the FAC, and they are central to the plaintiffs’ 3 claims of injury. 4 Plaintiffs refer extensively to these documents (See FAC ¶¶ 106-108, 176.) The court also takes judicial notice of Exhibit A to 5 Exhibit 3, and Exhibits 4, 5, 6, 7, 10, 11, 12, 13, 14, and 15 to 6 defendants’ request for judicial notice. 7 is a copy of the Proposed Rehabilitation Plan, and is judicially 8 noticeable both as a matter of public record and pursuant to the 9 incorporation by reference doctrine. Exhibit A to Exhibit 3 See Cnty. of Orange, 682 10 F.3d at 1132; Ritchie, 342 F.3d at 907. 11 Procedural Order, Order to Continue Certain Briefing Deadlines 12 for the Conservator’s Rehabilitation Plan, Clerk’s Notice of 13 Hearing, the Conservation Order, Order Denying Respondent’s 14 Verified Application to Vacate the Conservation Order, Order 15 Denying Petition for Writ of Mandate, Memorandum of Points and 16 Authorities and Reply in Support of Application to Vacate the 17 Conservation Order, and Petition for Writ of Mandate (Exhibits 4, 18 5, 6, 7, 10, 11, 13, 14, and 15 to defendants’ Request for 19 Judicial Notice, respectively) are all judicially noticeable on 20 the ground that they are matters of public record as documents on 21 file in the state court. 22 court further notes that plaintiffs do not object to defendants’ 23 request for Exhibits 5, 6, 7, 11, 13, 14, or 15. 24 The Superior Court’s Cnty. of Orange, 682 F.3d at 1132. The The court further takes judicial notice of Exhibits 8 25 and 9 to defendants’ Request for Judicial Notice, which are 26 business entity profiles for plaintiffs Applied and ARS, 27 retrieved from the Nebraska Secretary of State website, and thus 28 matters of public record not subject to reasonable dispute. 9 See 1 Gerritsen, 112 F. Supp. 3d at 1033. 2 Finally, plaintiffs request that the court take 3 judicial notice of defendants’ Ex Parte Application for an Order 4 Appointing the Insurance Commissioner as Conservator and of the 5 Commissioner’s Memorandum in Opposition to Respondent’s 6 Application to Vacate Order Appointing Conservator. 7 for Judicial Notice, Exs. P2, P7 (Docket No. 44).) 8 hereby takes notice of these documents on the ground that they 9 are matters of public record. 10 11 B. (Pls.’ Req. The court Cnty. of Orange, 682 F.3d at 1132. Prior Exclusive Jurisdiction The “ancient and oft-repeated . . . doctrine of prior 12 exclusive jurisdiction” holds “that when a court of competent 13 jurisdiction has obtained possession, custody, or control of 14 particular property, that possession may not be disturbed by any 15 other court.” 16 Te-Moak Tribe of W. Shoshone Indians of Nev., 339 F.3d 804, 809 17 (9th Cir. 2003) (quoting 14 Charles Alan Wright, Arthur R. 18 Miller, Edward H. Cooper, Federal Practice and Procedure § 3631, 19 at 8 (3d ed. 1998)). 20 rem jurisdiction over a res, a second court will not assume in 21 rem jurisdiction over the same res.” 22 713 F.3d 533, 536 (9th Cir. 2013) (citations omitted). 23 purpose of the rule is the maintenance of comity between courts; 24 such harmony is especially compromised by state and federal 25 judicial systems attempting to assert concurrent control over the 26 res upon which jurisdiction of each depends.” 27 28 State Eng'r of State of Nev. v. S. Fork Band of “That is, when one court is exercising in Sexton v. NDEX West, LLC, “The Id. To determine whether prior exclusive jurisdiction applies, the court first must evaluate the priority of the 10 1 actions. 2 BTM (KSC), 2016 WL 7438326, at *6 (S.D. Cal. Dec. 27, 2016). 3 Second, the court must determine how to characterize the 4 concurrent actions. 5 LEK-KSC, 2017 WL 424851, at *3 (D. Haw. Jan. 31, 2017) (citing 6 Gustafson, 2016 WL 7438326, at *6). 7 actions are in rem or quasi in rem, the prior exclusive 8 jurisdiction doctrine applies.” 9 See Gustafson v. Bank of Am., N.A., Case No. 16cv1733 See Pascua v. OneWest Bank, No. CV 16-00016 “If both of the pending Id. Here, the Conservation Proceeding clearly has priority, 10 as it was commenced almost a year before plaintiffs filed this 11 action. 12 action if it determines that both actions are in rem or quasi in 13 rem. 14 (See FAC ¶ 81). The court must therefore dismiss this See Chapman, 651 F.3d at 1044. The question of whether an action is in rem, quasi in 15 rem, or in personam “turns on what, precisely, is at issue in the 16 state and federal court proceedings.” 17 Goncalves v. Rady Childs. Hosp. San Diego, 865 F.3d 1237, 1253 18 (9th Cir. 2017). 19 interests in specific property as against the whole world.” 20 State Eng'r, 339 F.3d at 811 (quoting In Rem, BLACK'S LAW 21 DICTIONARY (6th ed. 1990)). 22 proceeds in rem [only] where property is ‘seized and sought to be 23 held for the satisfaction of an asserted charge against property 24 without regard to the title of individual claimants to the 25 property.’” 26 1085, 1109 (N.D. Cal. 2014) (quoting Lee v. Silva, 197 Cal. 364, 27 240 P. 1015, 1016 (1925)). 28 brought “against the defendant[s] personally” but “the [parties'] Goncalves by and through An action is in rem when it “determine[s] “Under California law, a suit Hanover Ins. Co. v. Fremont Bank, 68 F. Supp. 3d An action is quasi in rem when it is 11 1 interest[s] in the property ... serve[ ] as the basis of the 2 jurisdiction.” 3 original). 4 merely to ‘determine the personal rights and obligations of the 5 [parties],’ the court asserts in personam jurisdiction.” 6 Ins. Co., 68 F.Supp.3d at 1109 (quoting Pennoyer v. Neff, 95 U.S. 7 714, 727 (1877)). 8 State Eng'r, 339 F.3d at 811 (alterations in “On the other hand, where a party initiates an action Hanover The court’s jurisdiction in the underlying suit may be 9 in rem or quasi in rem even if the property at issue was not 10 “actually seized under judicial process before a second suit 11 [was] instituted.” 12 States v. Bank of N.Y. & Tr. Co., 296 U.S. 463, 477 (1936)). 13 doctrine “applies as well where suits are brought to marshal 14 assets, administer trusts, or liquidate estates, and in suits of 15 a similar nature, where, to give effect to its jurisdiction, the 16 court must control the property.” 17 doctrine, courts should not ‘exalt form over necessity,’ but 18 instead should ‘look behind the form of the action to the 19 gravamen of a complaint and the nature of the right sued on.’” 20 Chapman, 651 F.3d at 1044 (quoting State Eng'r, 339 F.3d at 810). 21 It cannot seriously be doubted that, here, the Superior Goncalves, 865 F.3d at 1254 (quoting United Id. The “When applying the 22 Court’s jurisdiction over CIC is in rem. The Superior Court’s 23 Order appointing the Commissioner as conservator of CIC, pursuant 24 to California Insurance Code § 1011(c), effectively seizes the 25 res--all property and assets of CIC--and vests full title and 26 control to the Commissioner, as conservator. 27 Order at ¶ 12); Hanover, 68 F. Supp. 3d at 1109. 28 Conservation Order authorizes the Commissioner to take possession 12 (See Conservation The 1 of any and all assets of CIC, to maintain and invest any of those 2 assets or funds according to his discretion, and to exercise all 3 powers of the directors, officers, and managers of CIC. 4 (Conservation Order at ¶¶ 11-14.) 5 Contrary to plaintiffs’ contention, it makes no 6 difference that the Conservation Order vests title to CIC and its 7 assets in the Commissioner, rather than the court itself. 8 Pls.’ Opp’n at 44-45.) 9 Supreme Court addressed the issue of prior exclusive jurisdiction (See In United States v. Bank of N.Y., the 10 in the context of a court-ordered liquidation of the Moscow Fire 11 Insurance Company. 12 the state court had directed the state’s superintendent of 13 insurance to take possession of the Bank of N.Y.’s United States 14 branches and “conserve those assets until its further order.” 15 Id. 16 Supreme Court held that that the proceeding was “essentially one 17 in rem” because the superintendent “took possession under the 18 direction of the court,” “the fund was at all times subject to 19 the court's control,” and “the superintendent was protected by a 20 sweeping injunction in the unimpeded liquidation of the 21 sequestered property.” 22 See Bank of N.Y., 296 U.S. at 471. There, Though the superintendent was a statutory liquidator, the See id. Likewise, here, the Commissioner--a statutory 23 conservator--has taken title to CIC and its assets “under the 24 direction” of the Superior Court. 25 Though the Commissioner may take possession of the property and 26 conduct the business of CIC, he merely does so “as a minister of 27 the superior court in its statutory responsibility to protect the 28 public interest and conserve the rights of the creditors and 13 (See Conservation Order.) 1 policyholders of the conservatee.” In re Pac. Std. Life Ins. 2 Co., 9 Cal. App. 4th 1197, 1201 (1992). 3 ultimately remains subject to the control of the Superior Court, 4 who both grants him the authority to act and must find, after a 5 full hearing, that the ground for the Conservation Order no 6 longer exists or has been removed before the conservation may be 7 lifted. 8 (requiring that the Commissioner, in his capacity as liquidator 9 or conservator, obtain permission of the court prior to entering The Commissioner See Cal. Ins. Code § 1012; see also id. at § 1037(d) 10 transactions for the sale or transfer of estate property 11 exceeding $20,000 in fair market value). 12 further protected by a “sweeping injunction” allowing him to 13 proceed with the Conservation unimpeded by third parties, similar 14 to the statutory liquidator in Bank of N.Y. 15 Order ¶ 17); Cal. Ins. Code § 1020(a) (“Upon the issuance of an 16 order . . . under Section 1011 . . . the court shall issue such 17 other injunctions or orders as may be deemed necessary to prevent 18 . . . interference with the commissioner or the proceeding.”); 19 see also Garamendi v. Exec. Life, 17 Cal. App. 4th 504, 523 (2d 20 Dist. 1993) (holding that the superior court’s in rem 21 jurisdiction under § 1020 extends to assets of third parties that 22 have an “identity of interest” with an insolvent insurer). 23 The Commissioner is (See Conservation Adjudicating plaintiffs’ claims in this case would also 24 require this court to assert in rem jurisdiction, or at the 25 least, quasi in rem jurisdiction, over the res at issue, CIC and 26 its assets. 27 classified as in rem because their operative complaint does not 28 ask this court to “seize and control” any property. Plaintiffs argue that the federal action cannot be 14 (See Pls.’ 1 Opp’n at 42.) 2 directed “exclusively at defendants to remedy their 3 constitutional violations.” 4 Rather, plaintiffs urge, the relief they seek is (See id.) However, this argument takes an unduly narrow view of 5 the nature of the right plaintiffs have sued upon and the relief 6 they seek. 7 behind the form of the action to the gravamen of a complaint . . 8 . lest we exalt form over necessity.” 9 at 810. Binding precedent dictates that the court must “look See State Eng’r, 339 F.3d In Bank of N.Y., for instance, the Supreme Court held 10 that suits brought in federal court by the United States for 11 accounting and delivery of funds originally owned by several 12 insurance companies invoked the court’s in rem jurisdiction 13 because they would “necessarily interfere with the jurisdiction 14 or control by the state court,” which had placed the funds in the 15 hands of court-appointed receivers. 16 at 477-78. 17 its suits in personam, the Court rejected this characterization, 18 concluding that “the object of the suits [was] to take the 19 property from the depositaries and from the control of the state 20 court, and to vest the property in the United States to the 21 exclusion of all those whose claims are being adjudicated in the 22 state proceedings.” 23 See Bank of N.Y., 296 U.S. Though the United States argued that it had brought Id. at 478. Here, though plaintiffs nominally ask this court to 24 enter orders aimed at the Commissioner and his deputy 25 commissioners at the California Department of Insurance, it is 26 clear that their ultimate goal is similarly to “interfere with,” 27 or even terminate, the Conservation Proceeding. 28 original complaint simply requested that this court “vacat[e] the 15 Id. Plaintiffs’ 1 Commissioner’s conservatorship of CIC.” 2 Relief ¶ C.) 3 for Relief, the operative complaint still seeks orders directing 4 the Commissioner to “take all necessary steps to end CIC’s 5 conservatorship” and “enjoining the Commissioner from continuing 6 the conservation.” 7 operative complaint also asks this court to order the 8 Commissioner to withdraw the Proposed Rehabilitation Plan (id. at 9 ¶¶ D-G), which was filed pursuant to an order of the Superior 10 (See Compl., Prayer for While plaintiffs have since amended their Prayer (See FAC, Prayer for Relief ¶ C.) The Court and which the Superior Court is currently reviewing. 11 Therefore, though plaintiffs do not explicitly ask the 12 court to “seize” CIC or its assets from the Superior Court, they 13 do ask the court to issue orders that would “disturb” the state 14 court’s control of CIC and its assets in a manner that would 15 amount to the assertion of in rem, or, at the least, quasi in rem 16 jurisdiction.3 17 339 F.3d at 810 (holding that, although contempt action was 18 styled as an in personam action, there could “be no serious 19 dispute that [it] was brought to enforce a decree over a res”-- 20 the Humboldt River--and, therefore, adjudication by the federal See Bank of N.Y., 296 U.S. at 478; State Eng’r, 21 22 23 24 25 26 27 28 The fact that plaintiffs also seek declaratory relief does not alter the court’s analysis. Though plaintiffs seek declarations that the Commissioner has acted unconstitutionally, the gravamen of their complaint is clearly to bring an end to the Conservation Proceeding currently pending in Superior Court. See Pascua v. OneWest Bank, No. CV 16-00016 LEK-KSC, 2017 WL 424851, at *9 (D. Haw. Jan. 31, 2017) (noting that “[a]lthough Plaintiff alleges constitutional violations [under the Fifth, Ninth, and Fourteenth Amendments] and infliction of emotional distress, the gravamen of her Complaint is that she is challenging Defendant’s ability to bring the Foreclosure Action . . . [thus,] the instant case is an in rem — or at least a quasi in rem — action”). 16 3 1 court would necessarily invoke in rem jurisdiction because it 2 would “disturb[] the first court’s jurisdiction over the res”). 3 Accordingly, the doctrine of prior exclusive jurisdiction 4 dictates that the court dismiss plaintiffs’ claims.4 5 C. 6 See id. Younger Abstention Alternatively, the court finds that dismissal of 7 plaintiffs’ claims is warranted under the doctrine of Younger 8 abstention. 9 401 U.S. 37 (1971) and those that have followed “espouse a strong The Supreme Court’s decision in Younger v. Harris, 10 federal policy against federal-court interference with pending 11 state judicial proceedings absent extraordinary circumstances.” 12 Middlesex Cnty. Ethics Comm. v. Garden State Bar Assoc., 457 U.S. 13 423, 431 (1982). 14 because a pending state-court proceeding involves the same 15 subject matter . . . [the Supreme Court] has recognized . . . 16 certain instances in which the prospect of undue interference 17 with state proceedings counsels against federal relief.” 18 Commc’ns, Inc. v. Jacobs, 571 U.S. 69, 72 (2013) (citing New 19 Orleans Pub. Serv., Inc. v. Council of City of New Orleans, 491 20 U.S. 350, 373 (1989) (“NOPSI”)). 21 22 23 24 25 26 27 28 Though abstention is not required “simply Sprint Younger exemplified one class of cases in which Defendants also urge the court to dismiss plaintiffs’ claims under the Barton doctrine, which requires that, “before suit is brought against a receiver, leave of the court by which he was appointed must be obtained.” Barton v. Barbour, 104 U.S. 126, 127 (1881). Similar to the prior exclusive jurisdiction doctrine, the Barton doctrine precludes courts from exercising subject matter jurisdiction over a later-filed and unapproved action brought against a receiver appointed by another court. See id. Because the court finds in this Memorandum and Order that the prior exclusive jurisdiction applies, the court need not address whether dismissal under the Barton doctrine is warranted. 17 4 1 federal-court abstention is required: when there is a parallel, 2 pending state criminal proceeding, federal courts must refrain 3 from enjoining the state prosecution. 4 since extended Younger abstention to two additional categories: 5 civil enforcement proceedings and “civil proceedings involving 6 certain orders that are uniquely in furtherance of the state 7 courts' ability to perform their judicial functions.” 8 (citing NOPSI, 491 U.S. at 367-78). “[T]hese three categories 9 are known as the NOPSI categories.” Herrera v. City of Palmdale, 10 11 Id. The Supreme Court has Id. 918 F.3d 1037, 1044 (9th Cir. 2019). If the state proceeding falls into one of the NOPSI 12 categories, Younger abstention is appropriate as long as three 13 additional factors, known as the Middlesex factors, are met: the 14 state proceeding must be “(1) ‘ongoing,’ (2) ‘implicate important 15 state interests,’ and (3) provide ‘an adequate opportunity . . . 16 to raise constitutional challenges.’” 17 (quoting Middlesex, 457 U.S. at 432). 18 19 20 1. Herrera, 918 F.3d at 1044 Whether the Conservation Proceeding falls into one of the NOPSI Categories The first and third NOPSI categories do not accommodate 21 the Conservation Proceeding. The Conservation is plainly civil, 22 not criminal, and does not involve the sort of order that 23 uniquely touches on the state court’s ability to perform its 24 judicial function. 25 like Juidice v. Vail, 430 U.S. 327, 336 (1977), or Pennzoil Co. 26 v. Texaco, Inc., 481 U.S. 1, 13 (1987), this case does not 27 involve orders such as a contempt order or an order to post bond 28 pending appeal--orders through which the state “compels See Sprint, 571 U.S. at 79. 18 Unlike cases 1 2 compliance with the judgments of its courts.” The court finds, however, that the Conservation falls 3 within the second NOPSI category for certain civil enforcement 4 proceedings. 5 applies are “akin to a criminal prosecution” in “important 6 respects,” in that they 7 8 9 10 11 The civil enforcement proceedings to which Younger are characteristically initiated to sanction the federal plaintiff, i.e., the party challenging the state action, for some wrongful act. In cases of this genre, a state actor is routinely a party to the state proceeding and often initiates the action. Investigations are commonly involved, often culminating in the filing of a formal complaint or charges. 12 Bristol-Myers Squibb Co. v. Connors, 979 F.3d 732, 735–36 (9th 13 Cir. 2020) (quoting Sprint, 571 U.S. at 79 (citations omitted)). 14 The Ninth Circuit has cautioned that, in setting forth these 15 characteristics, the Supreme Court “described the characteristics 16 of quasi-criminal enforcement actions in general terms by noting 17 features that are typically present, not in specific terms by 18 prescribing criteria that are always required.” 19 Id. California conservation proceedings resemble the civil 20 enforcement actions described in Sprint. 21 Code § 1011 authorizes the Commissioner, “acting under and within 22 [the State’s] police power,” Carpenter v. Pac. Mut. Life Ins. Co. 23 of Cal., 10 Cal. 2d 307, 331 (Cal. 1937), to apply for an order 24 from the superior court establishing a conservatorship over an 25 insurance provider if one or several conditions are present: if 26 an insurer “has violated its charter or any law of the state,” 27 id. at § 1011(e), if an “officer or attorney in fact of the 28 person has embezzled, sequestered, or wrongfully diverted any of 19 California Insurance 1 the assets of the person,” id. at § 1011(g), if the insurer has 2 not “compl[ied] with the requirements for the issuance to it of a 3 certificate of authority,” id. at § 1011(h), or if the insurer, 4 “without first obtaining the consent in writing of the 5 commissioner, has transferred, or attempted to transfer, 6 substantially its entire property or business or, without 7 consent, has entered into any transaction the effect of which is 8 to merge, consolidate, or reinsure substantially its entire 9 property or business in or with the property or business of any 10 11 other person,” id. at § 1011(c). Even the provisions of § 1011 authorizing conservation 12 based on the financial health of an insurer are inextricably 13 linked to California laws requiring adequate capitalization, 14 reserves, and other mandates governing the company’s relationship 15 to its policyholders. 16 insurer transacting business in this state shall at all times 17 maintain reserves in an amount estimated in the aggregate to 18 provide for the payment of all losses and claims for which the 19 insurer may be liable . . . .”). 20 the Commissioner with a tool to enforce various provisions of the 21 Insurance Code and protect the public once he determines that an 22 insurance provider has committed a “wrongful” or harmful action 23 by violating one of the Code’s provisions. 24 § 1011; (Superior Court’s Order Denying CIC’s Application to 25 Vacate the Conservation Order, at 4 (“The Legislature has given 26 the Commissioner the discretion to deal with this case under 27 either section 1011 or section 1215.2 and the choice of 28 enforcement tool is [his] to make.”)). See, e.g., Cal. Ins. Code § 923.5 (“Each 20 Section 1011 therefore provides See Cal. Ins. Code 1 The process of applying for a conservation and 2 formulating a rehabilitation plan also involves “investigation.” 3 Sprint, 571 U.S. at 179-80. 4 authorized to order a conservation “upon the filing by the 5 commissioner of [a] verified application showing any of the 6 conditions” set out in § 1011 exist. 7 The Commissioner must perform an investigation to determine if 8 any of those conditions exist and bring a verified application 9 before the superior court, akin to a “formal complaint or The Superior Court is only 10 charges.” 11 similarly investigate and file a verified application with the 12 superior court before the court may order a rehabilitation plan 13 or terminate the conservation. 14 Sprint, 571 U.S. at 179-80. See Cal. Ins. Code § 1011. The Commissioner must See Cal. Ins. Code §§ 1012, 1043. Plaintiffs present several arguments as to why the 15 Conservation Proceeding cannot constitute a civil enforcement 16 action, none of which is persuasive. 17 the Conservation Proceeding is not aimed at “sanctioning” CIC for 18 any wrongful act because, once a conservation has been imposed, 19 it becomes the Commissioner’s “duty to operate the company and to 20 try to remove the causes leading to its difficulties,” 21 Carpenter, 10 Cal. 2d at 331, and once the condition that led to 22 the conservation has been lifted, the conservation is complete 23 and must also be lifted. 24 Commissioner had intended to sanction CIC, plaintiffs contend, he 25 would have pursued injunctive relief under California Insurance 26 Code § 1215.2, rather than a conservation. 27 28 Plaintiffs first argue that (See Pls.’ Opp’n at 51-52.) If the Not only does it strain credulity to accept that an order seizing a company’s assets and vesting title to and control 21 1 over them in a state official does not constitute a “sanction,” 2 the Supreme Court has rejected the premise that Younger 3 abstention is inappropriate simply because a proceeding may be 4 aimed at “remedying” harmful conduct. 5 593 n.6 (rejecting inquiry adopted by several courts of appeals 6 as to whether a state proceeding is “coercive” rather than 7 “remedial” as not “necessary or inevitably helpful, given the 8 susceptibility of the designations to manipulation”); see also 9 Worldwide Church of God, Inc. v. State of Cal., 623 F.2d 613, 614 See Sprint, 571 U.S. at 10 (9th Cir. 1980) (affirming abstention over suit, brought by 11 California Attorney General, to enjoin court-appointed 12 receivership of a church to prevent diversion of church assets). 13 Whether its purpose is remedial or coercive, the 14 California Insurance Code authorizes the Commissioner to apply 15 for a conservation if an insurer has committed any of the 16 wrongful acts set forth in § 1011(a)-(j). 17 acknowledged at oral argument, the court must employ a 18 categorical approach when assessing whether Younger abstention 19 applies to a particular type of state proceeding. 20 Meyers Squibb, 979 F.3d at 737 (“What matters for Younger 21 abstention is whether the state proceeding falls within the 22 general class of quasi-criminal enforcement actions--not whether 23 the proceeding satisfies specific factual criteria.”). 24 therefore will not “accept [plaintiffs’] invitation to scrutinize 25 the particular facts” of the Conservation Proceeding to determine 26 whether the Commissioner’s decision to pursue a conservation 27 rather than injunctive relief to enforce the provisions of the 28 California Insurance Code was appropriate. 22 As plaintiffs’ counsel See Bristol- The court See Bristol-Myers 1 Squibb, 979 F.3d at 737.5 2 Plaintiffs further argue that Younger abstention is not 3 appropriate in this case because they are not the subject of the 4 Conservation Proceeding--rather, CIC is. 5 52.) 6 federal plaintiffs are defendants in the ongoing state 7 proceeding, most circuits, including the Ninth Circuit, have 8 upheld decisions to abstain under Younger where the parties to 9 the federal and state actions are not identical, but are “so (See Pls.’ Opp’n at 51- While Younger abstention traditionally applies when the 10 closely related that they should all be subject to the Younger 11 considerations which govern any one of them.” 12 F.3d at 1046-47 (holding that co-founder of a motel subject to a 13 state-court nuisance proceeding, as well her children, who lived 14 at the motel, had sufficiently intertwined interests to warrant 15 abstention); Hicks v. Miranda, 422 U.S. 332, 348–49 (1975) 16 (holding that abstention from adjudicating a suit by owners of an 17 adult movie theater to recover their obscene films was 18 appropriate because the owners’ interests were sufficiently 19 “intertwined” with those of their employees, who faced 20 prosecution in state court for showing the films). 21 See Herrera, 918 Here, CIC and plaintiffs are both subject to the 22 23 24 25 26 27 28 Plaintiffs also suggest that the Conservation Proceeding should not be considered a civil enforcement action because defendants have utilized private counsel, rather than turning to the California Attorney General’s Office. (See Pls.’ Opp’n at 55-56.) The Ninth Circuit has expressly stated, however, that the State’s choice of counsel is irrelevant for determining whether the state proceeding qualifies for Younger abstention. See Bristol-Myers Squibb, 979 F.3d at 736 (“We see no reason why the application of Younger should turn on the State’s choice of lawyers.”). 23 5 1 management and control of Steven Menzies and Jeffrey Silver. 2 (See FAC ¶¶ 48, 51, 52; Defs.’ Req. for Judicial Notice, Exs. 8, 3 9.) 4 they both remain subject to CIC’s supervision and control or act 5 as its behalf as its agent. 6 Notice, Exs. 1, 2.) 7 that their income stream and value depend on providing policy and 8 payroll services to CIC policyholders. 9 plaintiffs’ complaint is replete with allegations that their Applied and ARS’ operative agreements with CIC indicate that (See Defs.’ Req. for Judicial Plaintiffs also allege in their complaint (See FAC ¶ 49.) In fact, 10 reputation is connected to that of CIC’s, and that imposition of 11 the Conservation has severely impaired plaintiffs’ goodwill and 12 standing in the business community. 13 134, 142, 176.) 14 rights with CIC,” id. at ¶ 168, are wholly derivative of CIC’s 15 right to continue operating in California--precisely what it is 16 at issue in the pending Conservation Proceeding. 17 interests are therefore not only aligned with CIC’s, they are 18 wholly “intertwined” in that they share the same interest in 19 contesting the validity of the state litigation. 20 918 F.3d at 1047 (“The federal claims of Mona and her children 21 present the same risk of interference in the state proceeding as 22 do the federal claims of Bill and Palmdale Lodging--indeed, all 23 the federal plaintiffs seek the same relief from the state court 24 proceedings.”). 25 (See id. at ¶¶ 127, 131, Any interests plaintiffs have in “contractual Plaintiffs’ See Herrera, Finally, plaintiffs argue that conservation proceedings 26 cannot give rise to Younger abstention because they involve 27 different procedural protections and burdens of proof than 28 criminal prosecutions and analogous civil enforcement 24 1 proceedings. 2 contend that the Superior Court reviews the Commissioner’s 3 actions in conservation proceedings under a deferential “abuse of 4 discretion” standard, In re Exec. Life Ins. Co., 32 Cal. App. 4th 5 at 358 (requiring only that the Commissioner’s actions be 6 “reasonably related to the public interest” and “not be arbitrary 7 or improperly discriminatory”), that the burden rests on the 8 conserved party to establish that the condition giving rise to 9 the conservation no longer exists, Cal. Ins. Code § 1012, and 10 that many provisions of the California Code of Civil Procedure 11 governing statements of decision, post-trial motions, and 12 automatic stays pending appeal do not apply to conservation 13 proceedings. 14 Support of Opp’n (Docket No. 48).) 15 (See Pls.’ Opp’n at 53.) Specifically, plaintiffs (See Pls.’ Opp’n at 53-54; Pls.’ Supp. Authority in As discussed further below, the fact that certain 16 provisions of the Code of Civil Procedure do not apply to 17 conservation proceedings does not diminish the state court’s 18 ability to adjudicate plaintiffs’ claims, constitutional or 19 otherwise. 20 by the Supreme Court when listing the “important respects” in 21 which a civil proceeding must be akin to a criminal proceeding to 22 determine if Younger should apply. 23 After all, civil proceedings typically apply different standards 24 of review than criminal proceedings, and most involve different 25 procedural protections. 26 More crucially, none of these factors were discussed See Sprint, 571 U.S. at 79. Ultimately, plaintiffs do not identify a single case in 27 which a court has found that the burden of proof, standard of 28 review, or applicability of the Code of Civil Procedure should 25 1 affect whether a civil proceeding is considered a “civil 2 enforcement action” for the purposes of Younger abstention. 3 the contrary, courts analyzing whether state enforcement 4 proceedings qualify for Younger abstention under Sprint have 5 largely focused on whether the state itself initiated the 6 proceeding, and whether the proceeding is aimed at sanctioning a 7 party for some wrongful act--factors which, as described above, 8 are met by California conservation proceedings. 9 Sprint, 571 U.S. at 80 (holding that Younger did not apply To See, e.g., 10 because “a private corporation, Sprint, initiated the action . . 11 . no state authority conducted an investigation into Sprint’s 12 activities,” and “the [state agency’s] adjudicative authority was 13 invoked to settle a dispute between two private parties, not to 14 sanction Sprint for commission of a wrongful act”); ReadyLink 15 Healthcare, Inc. v. State Compensation Ins. Fund, 754 F.3d 754, 16 760 (9th Cir. 2014) (holding that Younger did not apply to state 17 court proceedings because the proceedings involved a dispute 18 between private parties, which was adjudicated by a state 19 officer). 20 For these reasons, the court finds that the 21 Conservation Proceeding is a civil enforcement proceeding for the 22 purposes of determining whether abstention is appropriate. 23 2. Whether the Middlesex Factors are Met 24 To qualify for Younger abstention, the Conservation 25 Proceeding must also (1) be ongoing, (2) “implicate important 26 state interests,” and (3) there must be “an adequate opportunity 27 in the state proceedings to raise constitutional challenges.” 28 ReadyLink, 754 F.3d at 759 (quoting Middlesex, 457 U.S. at 432). 26 1 Plaintiffs do not dispute that the Conservation Proceeding is 2 ongoing. 3 that factors (2) or (3) are met in this case. 4 (See Pls.’ Opp’n at 60.) a. 5 They do, however, dispute Important State Interests The Younger doctrine recognizes that a state's ability 6 to enforce its laws “‘against socially harmful conduct that the 7 State believes in good faith to be punishable under its laws and 8 Constitution’” is a “basic state function” with which federal 9 courts should not interfere. Miofsky v. Superior Court of the 10 State of Cal., in and for Sacramento Cnty, 703 F.2d 332, 336 (9th 11 Cir. 1983) (quoting Younger, 401 U.S. at 51–52). 12 state is in an enforcement posture in the state proceedings, the 13 ‘important state interest’ requirement is easily satisfied, as 14 the state's vital interest in carrying out its executive 15 functions is presumptively at stake.” 16 Inc. v. Cnty. of Solano, 657 F.3d 876, 884 (9th Cir. 2011) 17 (citing Fresh Int'l Corp. v. Agric. Labor Rels. Bd., 805 F.2d 18 1353, 1360 n.8 (9th Cir. 1986)). “Where the Potrero Hills Landfill, 19 Here, California conservation proceedings implicate the 20 state’s interest in ensuring compliance with California Insurance 21 Code provisions, including provisions that require the 22 Commissioner’s consent before an insurer attempts to transfer 23 substantially its entire property or business or enters into a 24 merger. 25 Allstate Ins. Co., 517 U.S. 706, 733 (1996) (Kennedy, J., 26 concurring) (“States, as a matter of tradition and express 27 federal consent, have an important interest in maintaining 28 precise and detailed regulatory schemes for the insurance See Cal. Ins. Code §§ 1011(c), 1215.2; Quackenbush v. 27 1 industry.”). 2 plaintiffs, CIC, and Menzies created a new entity in New Mexico 3 and sought to merge CIC with that entity to effect the Berkshire 4 Hathaway ownership transfer. 5 these plans, defendants assumed an enforcement posture in state 6 court, filing an application for a conservation “to prevent this 7 illegal transfer . . . .” 8 Ex. P2 at ¶ 4.) 9 Plaintiffs’ own complaint acknowledges that (See FAC ¶ 66.) Upon learning of (See Pls.’ Req. for Judicial Notice, Plaintiffs argue that defendants cannot simply 10 “invo[ke] . . . the subject matter of California Insurance law” 11 to argue that the Conservation Proceeding implicates important 12 state interests. 13 657 F.3d at 884 (“[I]t is not the bare subject matter of the 14 underlying state law that we test to determine whether the state 15 proceeding implicates an ‘important state interest’ for Younger 16 purposes.”)).) 17 statement later in Potrero Hills that “the content of state laws 18 becomes ‘important’ for Younger purposes . . . when coupled with 19 the state executive’s interest in enforcing such laws.” 20 Hills, 657 F.3d at 885 (“Had Solano County enforced Measure E 21 against Potrero Hills and denied it the revised Use Permit, no 22 doubt the second Younger requirement would be satisfied.”). 23 Because the State, through the Commissioner, is indisputably in 24 an enforcement posture in this case, the content of California’s 25 state insurance laws is a relevant--indeed, persuasive--factor 26 indicating that the Conservation Proceeding satisfies the second 27 Middlesex factor. 28 (See Pls.’ Opp’n at 62 (quoting Potrero Hills, However, plaintiffs overlook the Ninth Circuit’s Plaintiffs further argue that the Conservation 28 Potrero 1 Proceeding cannot implicate important state interests because 2 defendants had allegedly concluded that the CIC-CIC II merger 3 would not harm policyholders and, in any event, CIC had allegedly 4 agreed not to move forward with the merger. 5 61-62.) 6 explained why a conservation, rather than other relief, such as 7 an injunction, was necessary to stop the merger. 8 argument does not alter the court’s analysis, however, because, 9 as the court has already noted, the court does “not look narrowly 10 to [the State’s] interest in the outcome of the particular case,” 11 but instead to “the importance of the generic proceedings to the 12 State.” 13 therefore concludes that the second Middlesex factor is met. 14 Plaintiffs again contend that defendants have never (See id.) NOPSI, 491 U.S. at 365 (emphasis omitted). b. 15 (See Pls.’ Opp’n at This The court Adequate Opportunity to Raise Constitutional Challenges 16 The inquiry under the third Middlesex prong is whether 17 the Conservation Proceeding will provide plaintiffs a sufficient 18 forum for raising their federal constitutional challenges. 19 Younger abstention reflects a general sense of respect for the 20 integrity of state proceedings, and a presumption “that state 21 procedures will afford an adequate remedy, in the absence of 22 unambiguous authority to the contrary.” 23 15. 24 court should abstain ‘unless state law clearly bars the 25 interposition of the constitutional claims.’” 26 of Superior Court, 883 F.2d 810, 815 (9th Cir. 1989) (quoting 27 Middlesex, 457 U.S. at 432). 28 whether the federal plaintiff actually avails himself of the Pennzoil, 481 U.S. at Thus, “[w]here vital state interests are involved, a federal Lebbos v. Judges This factor “does not turn on 29 1 opportunity to present federal constitutional claims in the state 2 proceeding, but rather whether such an opportunity exists.” 3 Herrera, 918 F.3d at 1046; Canatella v. Cal., 404 F.3d 1106, 1111 4 (9th Cir. 2005). 5 federal plaintiff to show ‘that state procedural law barred 6 presentation of [its] claims.’” 7 “[T]he burden on this point rests on the Pennzoil, 481 U.S. at 14. Plaintiffs first argue that they cannot influence the 8 Conservation Proceeding because they are not parties to it, 9 relying primarily on Vasquez v. Rackauckas, 734 F.3d 1025 (9th 10 Cir. 2013). Plaintiffs contend that federal plaintiffs who are 11 nonparties to the proceedings in state court need not attempt to 12 intervene in the state court proceedings or prove the inadequacy 13 of those proceedings to avail themselves of their right to 14 proceed in federal court. 15 (“Younger abstention cannot apply to one . . . who is a stranger 16 to the state proceeding.”). 17 is distinct from the one in Vasquez. 18 plaintiffs were affirmatively excluded from the state proceedings 19 at issue: the Orange County District Attorney “initially named 20 Plaintiffs as parties in the Superior Court action but 21 unilaterally dismissed them . . . precisely because of 22 Plaintiffs’ ‘effort . . . to fight’--that is, to present a 23 defense in state court.” 24 plaintiffs had made them “strangers” to the state case and caused 25 their interests to diverge from those against whom the state 26 court order was issued (as those who remained in the case did not 27 contest their status as gang members to whom the injunction would 28 apply). See Vasquez, 734 F.3d at 1035 However, the situation in this case Id. There, the federal Vasquez held that dismissal of the See id. 30 1 Plaintiffs, by contrast, have not been excluded from 2 participating in the Conservation Proceeding. Although there is 3 no statutory provision governing conservation proceedings that 4 expressly permits third parties to intervene, conservation 5 proceedings under California law differ from other civil actions 6 in that a multitude of persons typically have stakes in the 7 proceeding, and, therefore, the Superior Court judge has the 8 flexibility to employ procedures appropriate to the rights to 9 claimants and the orderly conduct of the conservation. See, 10 e.g., In re Exec. Life Ins. Co., 32 Cal. App. 4th at 391 11 (describing how third parties were invited to participate in 12 hearing before conservation court and allowed to raise due 13 process arguments on appeal). 14 Superior Court has expressly invited plaintiffs to submit any 15 objections--constitutional or otherwise--they have to the 16 Proposed Rehabilitation Plan in writing and orally at the hearing 17 on the Commissioner’s application to approve the Plan. 18 (Procedural Order at 2-4.) 19 Specifically in this case, the CIC will also be able to adequately represent 20 plaintiffs’ interests in the state proceeding. As already 21 discussed, plaintiffs and CIC remain under common management and 22 control of Steven Menzies and Jeffrey Silver. 23 49.) 24 are shared by CIC, as all of plaintiffs’ alleged injuries stem 25 from the same Conservation Order and Proposed Rehabilitation Plan 26 that the Commissioner seeks to impose on CIC. 27 Miranda, 422 U.S. 332, 348-49 (1975) (holding that interests of 28 owners of adult movie theater were intertwined with those of (See FAC ¶¶ 48, Plaintiffs interests vis a vis the Conservation Proceeding 31 See Hicks v. 1 their employees in showing that the basis for the state 2 prosecution for showing obscene material--brought only against 3 the employees--was unconstitutional). 4 unlike Doran v. Salem Inn, 422 U.S. 922, 928-29 (1975), where the 5 Supreme Court held that two bar owners who sought an injunction 6 in federal court against the operation of a local ordinance 7 prohibiting topless entertainment in bars could proceed with 8 their federal case because they were “apparently unrelated in 9 terms of ownership, control, and management” from a third bar 10 This case is therefore owner who was prosecuted in state court. 11 Plaintiffs further argue that certain procedural 12 characteristics of California conservation proceedings either 13 have or will preclude them from adequately presenting their 14 constitutional claims to the state court. 15 69-72.)6 16 to prove that he has determined that grounds for conservation 17 exist--rather than proving that the grounds in fact exist--when 18 initially applying for a conservation order ex parte under 19 Insurance Code § 1011; that the burden shifts to the conserved 20 party or the Commissioner to show that the condition which gave 21 rise to the conservation no longer exists under § 1012; that 22 conservation proceedings are not subject to California Code of 23 Civil Procedure § 632 regarding findings of fact or conclusions 24 of law; and that the appellate court presumes there was a 25 Plaintiffs listed their grievances regarding the procedures employed by California superior courts in conservation proceedings on a PowerPoint slide presented at Oral Argument. (Docket No. 53). While the court does not reproduce this list verbatim, the substance of plaintiffs’ objections is addressed herein. 32 26 27 28 6 (See Pls.’ Opp’n at Plaintiffs point to the fact the Commissioner only has 1 reasonable factual basis for the lower court’s decision as 2 evidence of their inability to present constitutional claims to 3 the state court. 4 Los Angeles Cnty., 45 Cal. 2d 395, 401 (1955) (quoting Caminetti 5 v. Imperial Mut. L. Ins. Co., 59 Cal. App. 2d 476, 487 (1942)); 6 Garamendi, 128 Cal. App. 4th at 461 (2005) (citing Carpenter, 10 7 Cal. 2d at 328 (1937)). 8 9 See Fin. Indem. Co. v. Superior Ct. In & For Some of these objections ignore other provisions of California law that provide additional opportunities to object to 10 the conservation proceedings and other procedural protections. 11 For instance, while the Superior Court may defer to the 12 Commissioner’s judgment as to whether a conservation is warranted 13 under § 1011, § 1012 guarantees the conserved party a full 14 hearing before the court to show that the ground which gave rise 15 to the conservation no longer exists, a process which has 16 repeatedly been upheld as satisfying due process by state and 17 federal courts who have considered the issue. 18 Island, 95 Cal. App. 2d 220, 238-39 (1st Dist. 1949). 19 also ignore the substantial body of published appellate cases 20 arising from California conservation proceedings, which 21 demonstrates that, although superior courts are not required to 22 issue formal findings of fact or conclusions of law, appellate 23 courts routinely receive decisions and records from the 24 conservation court sufficient to permit appellate review, 25 including of constitutional objections. 26 Cal. 2d at 328-29; In re Exec. Life Ins. Co., 32 Cal. App. 4th at 27 391. 28 See, e.g., Rhode Plaintiffs See, e.g., Carpenter, 10 This substantial body of case law also reveals that 33 1 plaintiffs’ objections suffer from a more fundamental defect: 2 none of the purported infirmities to which plaintiffs point show 3 that plaintiffs have or will be barred from presenting their 4 constitutional claims, as it is their burden to show. 5 Pennzoil, 481 U.S. at 14. 6 shows that constitutional objections may be raised in a motion to 7 lift the conservation, in conjunction with the Superior Court’s 8 review of the Proposed Rehabilitation Plan, or on subsequent 9 appeals from decisions of the Superior Court. 10 See To the contrary, California case law In Carpenter v. Pacific Mutual Life Insurance of 11 California, for instance, non-conserved third parties appealed 12 the conservation court’s approval of the rehabilitation plan for 13 Pacific Mutual Life on grounds that it violated the Due Process, 14 Equal Protection, and Contract Clauses of the United States 15 Constitution. 16 Supreme Court heard the third-parties’ constitutional arguments 17 and affirmed the conservation court’s approval of the plan. 18 at 331, 335, 341. The United States Supreme Court affirmed the 19 decision as well. Neblett v. Carpenter, 305 U.S. 297 (1938). 20 number of other decisions by California Courts of Appeals 21 illustrate that state appellate courts routinely hear 22 constitutional challenges to procedures employed by the Superior 23 Court. 24 391 (reviewing third party’s First Amendment claims raised before 25 conservation court); Rhode Island, 95 Cal. App. 2d at 238-39 26 (reviewing constitutional objections to § 1012 on petition for 27 writ of mandate directing Superior Court to vacate its order 28 appointing conservator). Carpenter, 10 Cal. 2d at 328-29. The California Id. A See, e.g., In re Exec. Life Ins. Co., 32 Cal. App. 4th at 34 1 Here, plaintiffs have already been invited to present 2 their objections to the Proposed Rehabilitation Plan as part of 3 the Superior Court’s consideration of whether to approve the 4 Plan. 5 pursue interlocutory review of the Superior Court’s orders 6 through emergency writ--an avenue CIC has already pursued, albeit 7 unsuccessfully, because the Court of Appeal was unconvinced that 8 it was entitled to emergency relief--or other appellate review of 9 the Superior Court’s decisions within the California court system (See Procedural Order at 3.) Plaintiffs will be free to 10 and, ultimately, the United States Supreme Court. 11 Island, 95 Cal. App. 2d at 238-39; Carpenter, 10 Cal. 2d at 328- 12 41; Neblett, 305 U.S. at 297. 13 See Rhode California’s courts are entitled to the presumption 14 that these avenues for challenging the Conservation Proceeding on 15 constitutional grounds will satisfy the law. 16 U.S. at 14 (“We must assume that state procedures afford an 17 adequate remedy, in the absence of unambiguous authority to the 18 contrary.”). 19 “unambiguous authority” to the contrary, Pennzoil, 481 U.S. at 20 14, the court finds that the third Middlesex factor also weighs 21 in favor of abstention.7 22 23 24 25 26 27 28 See Pennzoil, 481 Because plaintiffs have failed to point to any The Ninth Circuit has articulated an “implied fourth requirement that the federal court action would enjoin the proceeding, or have the practical effect of doing so.” Potrero Hills, 657 F.3d at 882. For the same reasons that the court has found that adjudicating plaintiffs’ claims in the federal action would require the court to assert in rem or quasi in rem jurisdiction by “disturbing” the state court’s control over the res, see Section II.B., supra, the court finds that this implied requirement is amply met. Not only does plaintiffs’ operative complaint seek an order directing the Commissioner to “take all necessary steps to end CIC’s conservatorship,” it seeks orders 35 7 1 2 3 3. Younger Exceptions for “Bad Faith” and “Irreparable Injury” Even if all the requirements for Younger abstention 4 have been met, the Supreme Court has stated that a federal court 5 must nevertheless intervene in a state proceeding upon a showing 6 of “bad faith, harassment, or any other unusual circumstance that 7 would call for equitable relief.” 8 “A plaintiff who seeks to head off Younger abstention bears the 9 burden of establishing that one of the exceptions applies.” See Younger, 401 U.S. at 45. 10 Diamond "D" Const. Corp. v. McGowan, 282 F.3d 191, 198 (2d Cir. 11 2002) (citations omitted). 12 showing has been made here. 13 14 a. For the following reasons, no such Bad Faith The “bad faith” exception to Younger abstention is 15 narrow: “[o]nly in cases of proven harassment or prosecutions 16 undertaken by officials in bad faith without hope of obtaining a 17 valid conviction . . . is federal injunctive relief against 18 pending state prosecutions appropriate.” 19 U.S. 82, 85 (1971) (emphasis added); see also Hensler v. Dist. 20 Four Grievance Comm., 790 F.2d 390-92 (5th Cir. 1986) (holding 21 that court should not enjoin state court proceeding without 22 “allegations and proof of bad faith” (emphasis added)). 23 “Evidence of bad-faith harassment must be more than multiple 24 prosecutions, must be more than conclusory statements about 25 motive, must be more than a weak claim of selective prosecution, 26 27 28 Perez v. Ledesma, 401 requiring the Commissioner to withdraw the Proposed Rehabilitation Plan, an integral part of the Conservation Proceeding that defendants have filed pursuant to the Superior Court’s Procedural Order. (See FAC, Prayer for Relief ¶¶ C-G.) 36 1 and must be more than the prosecution of close cases.” 2 Francisco, No. 15-CV-01168-KAW, 2016 WL 5682575, at *4 (N.D. Cal. 3 Oct. 3, 2016) (citations omitted). 4 case since Younger was decided in which the [Supreme] Court has 5 found that the exception for bad faith or harassment was 6 applicable,” Wright & Miller, 17B Fed. Prac. & Proc. Juris. 7 § 4255 (3d ed.), and plaintiffs do not cite to a single case from 8 this circuit in which a court has found the bad-faith exception 9 to apply (see Pls.’ Opp’n at 74-79). 10 Kihagi v. Accordingly, “[t]here is no Plaintiffs have not proven that bad faith exists in 11 this case. First, it cannot constitute bad faith for defendants 12 to rely on repeated judicial authorizations from California state 13 courts. 14 valid judicial warrant cannot lead to finding of bad faith and 15 harassment); Juidice, 430 U.S. at 338 (rejecting bad faith 16 exemption because, though complaint alleged bad faith on the part 17 of creditors, it made no such allegations about the state judges 18 who issued and enforced the contempt orders). 19 the Conservation Proceeding, defendants have received 20 authorization to proceed from the Superior Court. See Hicks, 422 U.S. at 351 (search and seizure based on At each step of 21 The Superior Court reviewed the Commissioner’s ex parte 22 application for an order appointing him as conservator of CIC and 23 ordered that the Conservation Proceeding commence because the 24 Commissioner had found that “the factual and legal conditions 25 exist to conserve CIC pursuant to Insurance Code section 1011, 26 subdivision (c).” 27 Court subsequently affirmed the decision to impose the 28 Conservation, denying CIC’s motion to vacate the Conservation (See Conservation Order at 2.) 37 The Superior 1 (Defs.’ Req. for Judicial Notice, Ex. 10), and the California 2 Court of Appeals denied CIC’s writ petition for immediate review, 3 (id. at Ex. 11). 4 Order establishing an orderly process for reviewing the 5 Commissioner’s Proposed Rehabilitation Plan after the 6 Commissioner represented that “a rehabilitation plan may well 7 result in CIC ceasing to do business in California.” 8 for Judicial Notice, Ex. P7 at 12 n.5; Defs.’ Req. for Judicial 9 Notice, Ex. 10, at 4.) 10 Finally, the Superior Court issued a Procedural (Pls.’ Req. Plaintiffs seek to impeach the Conservation Order by 11 claiming that the Superior Court granted it on false pretenses, 12 as defendants allegedly made several misrepresentations and 13 omissions when applying to the Superior Court. 14 at 77). 15 Superior Court when it filed its motion to vacate the 16 Conservation Order, and to the California Court of Appeals when 17 it petitioned for a writ of mandate setting aside the denial of 18 its motion to vacate. 19 13-15.) 20 Court maintained the conservation, even after becoming aware of 21 the alleged misrepresentations which plaintiffs raise. 22 Phelps v. Hamilton, 59 F.3d 1058, 1066 (10th Cir. 1995). 23 See (Pls.’ Opp’n However, CIC presented these exact arguments to the (See Defs.’ Req. for Judicial Notice, Exs. Both courts rejected CIC’s application, and the Superior See Plaintiffs further contend that defendants’ inclusion 24 of provisions in the Proposed Rehabilitation Plan requiring 25 plaintiffs and CIC to settle EquityComp lawsuits proves that 26 defendants are using the Conservation to retaliate against 27 plaintiffs for their constitutionally-protected use of the court 28 system and success in prior litigation. 38 See Cullen v. Fliegner, 1 18 F.3d 96, 103 (2d Cir. 1994); (FAC ¶¶ 6-8, 13.) But in order 2 to show bad faith, plaintiffs must show that “the state 3 proceeding [was] brought with no legitimate purpose.” 4 “D” Const. Corp. v. McGowan, 282 F.3d 191, 200 (2d Cir. 2002). 5 In other words, plaintiffs must prove that “the statute was 6 enforced against them with no expectation of convictions but only 7 to discourage exercise of protected rights.” 8 390 U.S. 611, 621 (1968) (emphasis added). Diamond Cameron v. Johnson, 9 Plaintiffs’ own allegations describe efforts by CIC and 10 plaintiffs to create a New Mexico Company, CIC II, into which CIC 11 could merge its assets to avoid California’s regulatory process. 12 (See FAC ¶¶ 64-75.) 13 consent to the merger, as they warned CIC that the merger would 14 extinguish its certificate of authority by operation of law. 15 (See id.) 16 was attempting to merge with another entity or transfer 17 substantially its entire property to another person without 18 consent, a valid basis for instituting conservation proceedings 19 under California Insurance Code § 1011(c). 20 own allegations provide a valid basis for the Conservation, and 21 because defendants’ actions have received repeated authorization 22 from state courts, this court cannot find that the state 23 proceeding lacks “[any] legitimate purpose,” and instead must 24 find that plaintiffs have failed to prove the existence of bad 25 faith in this case. 26 27 28 The FAC acknowledges that defendants did not Probable cause therefore existed to believe that CIC Because plaintiffs’ See Diamond “D”, 282 F.3d at 200.8 The fact that plaintiffs ask this court to intervene in the state proceeding to effectively enjoin the Superior Court from ruling on the validity of the Proposed Rehabilitation plan, before the Superior Court has even had a chance to issue its own 39 8 1 2 b. Irreparable Injury To establish the irreparable injury exception to 3 Younger abstention, plaintiffs must show the existence of 4 “extraordinary circumstances” that present a “danger of 5 irreparable loss [that] is both great and immediate.” 6 401 U.S. at 45. 7 the sense of creating an extraordinarily pressing need for 8 immediate federal equitable relief, not merely in the sense of 9 presenting a highly unusual factual situation.’” Younger, “[S]uch circumstances must be ‘extraordinary’ in Moore v. Sims, 10 442 U.S. 415, 433 (1979) (quoting Kugler v. Helfant, 421 U.S. 11 117, 124 (1975)). 12 Plaintiffs contend that the alleged deprivation of 13 their constitutional rights as a result of the Conservation 14 constitutes such an “extraordinary circumstance.” 15 allegations that a plaintiff’s constitutional rights were being 16 violated were sufficient to constitute “extraordinary 17 circumstances,” this exception to Younger would swallow the rule. 18 As the Supreme Court stated in NOPSI, “it is clear that the mere However, if 19 20 21 22 23 24 25 26 27 28 ruling, underscores the propriety of Younger abstention in this case. Even if the court were to agree with plaintiffs that the provisions of the Proposed Rehabilitation Plan violate plaintiffs’ Constitutional rights to Due Process and Free Expression, or constitute a taking without just compensation, it is possible that the Superior Court will approve a version of the Rehabilitation Plan that does not include these provisions or will deny the Commissioner’s request entirely. Younger abstention embodies a policy whereby federal courts “give [the] state[] the first opportunity--but not the only, or last--to correct those errors of a federal constitutional dimension that infect its proceedings.” See Diamond “D”, 282 F.3d at 200. Intervening in the Conservation Proceeding to wrest the decision as to the Proposed Rehabilitation Plan’s validity in the first instance away from the Superior Court would violate this principle. 40 1 assertion of a substantial constitutional challenge to state 2 action will not alone compel the exercise of federal 3 jurisdiction.” 4 NOPSI, 491 U.S. at 365. Plaintiffs argue that the harm the Conservation has 5 caused them is “irreparable” because they will be unable to 6 recover money damages in this case. 7 Cal. Pharmacists Ass’n v. Maxwell-Jolly, 563 F.3d 847, 852 (9th 8 Cir. 2009), cited by plaintiffs, was a preliminary injunction 9 case, not a Younger abstention case. (See Pls.’ Opp’n at 79.) Plaintiffs offer no basis 10 to apply the standard for a preliminary injunction here, where 11 the exception requires not only irreparable harm but 12 “extraordinary circumstances,” and provide no further explanation 13 as to why this case would present extraordinary circumstances. 14 The court therefore finds that plaintiffs have failed to 15 establish any of the Younger exceptions which would prevent its 16 application in this case. 17 In sum, defendants have established that the 18 Conservation Proceeding falls under the NOPSI category for civil 19 enforcement proceedings, that the three Middlesex factors are 20 met, that this action would have the practical effect of 21 enjoining the state court proceeding, and that neither the bad- 22 faith nor exceptional circumstances exceptions apply. 23 Accordingly, dismissal under Younger is appropriate. 24 Younger, 401 U.S. at 37. 25 See IT IS THEREFORE ORDERED that defendants’ motion to 26 dismiss (Docket Nos. 34-35) be, and the same hereby is, GRANTED. 27 The Clerk is directed to enter Judgment in this action 28 accordingly. 41 1 Dated: March 30, 2021 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 42

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