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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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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----oo0oo----

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APPLIED UNDERWRITERS, INC., a
Nebraska corporation; and
APPLIED RISK SERVICES, INC., a
Nebraska Corporation,

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ORDER RE: DEFENDANTS’ MOTION
TO DISMISS

Plaintiffs,

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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
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(collectively, “defendants”), in response to defendants’

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imposition of a conservation over non-party California Insurance

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Company (“CIC”) in San Mateo Superior Court in November 2019 (the

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“Conservation Proceeding”).

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(Docket No. 26).)

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defendants’ actions leading up to and including the Conservation

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violated their rights to equal protection and due process under

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the Fourteenth Amendment, as well as their First Amendment right

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to criticize officials in the press and petition the government,

(See First Amended Complaint (“FAC”)

Plaintiffs--affiliates of CIC--allege that

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in violation of 42 U.S.C. § 1983.

(FAC ¶¶ 135-90.)

Plaintiffs

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further allege that defendants’ actions constituted unlawful

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takings in violation of the Fifth and Fourteenth Amendments, and

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levy an as-applied challenge against California Insurance Code

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§ 1011(c) under the Dormant Commerce Clause of the United States

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Constitution, Art. I, § 8, cl. 3.

(Id.)

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Defendants have moved to dismiss plaintiffs’ complaint

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for lack of subject matter jurisdiction and for failure to state

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a claim upon which relief may be granted.

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Dismiss (“Mot. to Dismiss”) (Docket No. 35).)

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I.

(See Defs.’ Mot. to

Factual and Procedural Background

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Plaintiffs write workers’ compensation insurance

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through multiple insurance companies in all 50 states.

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¶ 2.)

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and CIC are closely related companies.

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common management and control: Steven Menzies indirectly owns CIC

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and serves as its CEO, and is the President of CIC, Applied, and

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ARS.

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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
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same Secretary and General Counsel, Jeffrey Silver.

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Exs. 8, 9.)

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website, Menzies and Silver serve as the sole directors of both

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Applied and ARS, and Menzies serves as President and Treasurer

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for both Applied and ARS.

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operative agreements with CIC indicate that they remain subject

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to CIC’s supervision and control.

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(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

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fees from CIC clients--which Applied charges as a percentage of

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each client’s payroll--pursuant to the CIC and Applied’s

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Management Services Agreement (“MSA”).

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allege that ARS profits from its Underwriting Agent Agreement

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(“UAA”) with CIC in a manner similar to Applied.

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(FAC ¶ 106.)

Plaintiffs

(Id. at ¶ 107.)

Plaintiffs allege that defendants have engaged in a

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bad-faith campaign of unlawful activity aimed at CIC, beginning

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in 2019, when Menzies (at the time an indirect owner of 11.5% of

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CIC’s shares) sought to purchase Berkshire Hathaway’s

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(“Berkshire”) controlling interest in CIC.

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In January 2019, Menzies entered into an agreement with Berkshire

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to purchase the company by September 30th, or else Menzies would

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be subject to a $50 million “breakup fee” (the “Berkshire/Menzies

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Agreement”).

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informed defendants of the details of the proposed sale, due to

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additional requests for information from the California

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Department of Insurance (“CDI”), Menzies had to submit new “Form

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A” filings multiple times between April and September, and CDI

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ultimately did not rule on Menzies’ pending application prior to

(See id.)

(See FAC ¶¶ 48-63.)

Though Applied, Menzies, and CIC

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the September 30, 2019 deadline.

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(Id. at ¶¶ 53-63.)

In response, Applied, CIC, and Menzies created a new

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entity in New Mexico, “CIC II,” and sought to merge CIC with CIC

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II so that the transaction could be completed under the

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supervision of New Mexico’s Insurance Department rather than CDI.

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(FAC ¶¶ 64-66.)

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Form A approval hearing on October 9, 2019, in which regulators

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from New Mexico, Texas, and California (including CDI)

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participated and attended.

This process culminated in a conference call and

(Id.)

According to plaintiffs, CDI

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did not object to the merger or the sale’s consummation during

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the hearing, during which New Mexico’s Superintendent of

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Insurance, Superintendent Franchini, approved the merger.

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Rather, plaintiffs allege that CDI attorneys told Superintendent

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Franchini that the “proposed merger presented no risks to

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California policyholders.”

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Franchini’s order approving the merger, Berkshire informed the

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New Mexico Department of Insurance that, based on the lack of

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objection at the Form A approval hearing, it planned to proceed

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with the closing scheduled for October 10, 2019.1

(Id.)

(Id.)

Following Superintendent

(Id. at ¶ 69.)

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On October 18, 2019, defendants informed CIC that, due

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to CIC’s merger into CIC II, CIC’s California-issued Certificate

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of Insurance--which authorizes CIC to sell insurance in the

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state--would be extinguished by operation of law and that the

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surviving entity would not be qualified to transact insurance in

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California.

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(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.)
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voluntarily refrained from taking any further action relating to

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the merger, on November 4, 2019, the Commissioner filed an ex

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parte application in San Mateo County Superior Court (the

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“Superior Court”), requesting that the court place CIC in

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conservation, with Lara as conservator, because CIC had attempted

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to effect a merger without regulatory approval in violation of

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California Insurance Code § 1011.

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Superior Court granted the Commissioner’s request.

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Req. for Judicial Notice, Ex. 7 (the “Conservation Order”).)

(Id. at ¶¶ 79, 81, 101.)

The

(See Defs.’
As

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a result, defendants have exercised control over the assets and

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operations of CIC since November 4, 2019, and CIC has been unable

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to transfer its assets to CIC II.

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(Id.; FAC ¶ 92.)

CIC has posed multiple challenges to the Conservation

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Proceeding in state court, arguing that the Commissioner acted

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arbitrarily and capriciously, that his basis for imposing the

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Conservation was pretextual, and that the Proceeding violates

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CIC’s constitutional rights.

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with the Superior Court to vacate the conservatorship.

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Req. for Judicial Notice, Exs. 10, 13.)

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denied the application, CIC filed an application for

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interlocutory appellate review with the California Court of

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Appeal, which was also denied.

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First, CIC filed an application
(Defs.’

After the Superior Court

(See id., Exs. 11, 15).

Defendants then filed an application for approval of a

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non-consensual rehabilitation plan in Superior Court (the

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“Proposed Rehabilitation Plan”).

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Rehabilitation Plan would (1) require CIC to transfer and

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reinsure its book of California business to another California-

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admitted insurer, and (2) require CIC and plaintiffs to settle

(FAC at ¶ 102.)

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This Proposed

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over 40 separate pending legal proceedings regarding CIC and

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plaintiffs’ “EquityComp” program--a loss sensitive workers’

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compensation program that has been the subject of dozens of

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lawsuits involving plaintiffs and CIC--by paying claimants in the

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pending legal proceedings any of three restitution amounts that

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the claimant selects.

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Rehabilitation Plan would also limit the amount CIC and

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plaintiffs may collect under the policies they issue or service.

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(Id.)

(Id. at ¶¶ 38-47; 104-110.)

The Proposed

Plaintiffs allege that these portions of the Proposed

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Rehabilitation Plan constitute an unconstitutional transfer of

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contract and other property rights from one set of private

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litigants to another, depriving CIC and plaintiffs of their due

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process right to litigate the claims.

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(Id.)

On July 30, 2020, the Superior Court set a briefing

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schedule and hearing date, and established procedures for

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opposing the Commissioner’s application for an order approving

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the Proposed Rehabilitation Plan.

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Notice, Ex. 4 (the “Procedural Order”).)

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expressly invites plaintiffs and other affiliates of CIC to

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present their objections to the Proposed Rehabilitation Plan in

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writing and orally at the scheduled hearing.

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(See Defs.’ Req. for Judicial
The Procedural Order

(See id.)

Following the Superior Court’s issuance of the

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Procedural Order, plaintiffs filed this suit, requesting that

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this court intervene in the ongoing state court proceeding by

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“vacating the Commissioner’s conservatorship of CIC” and

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“enjoining the Commissioner from continuing to hold CIC under

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conservation.”

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1).)

(See Compl., Prayer for Relief ¶ C (Docket No.

While plaintiffs have since amended their complaint, the
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FAC still requests that this court effectively enjoin the ongoing

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state court proceeding by directing the Commissioner to terminate

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the Conservation and withdraw the Proposed Rehabilitation Plan.

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(See FAC, Prayer for Relief ¶¶ C-G.)

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As of the date of this Order, the Superior Court has

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not yet approved or denied the Proposed Rehabilitation Plan; a

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hearing on the Commissioner’s application is scheduled for April

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15, 2021.

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II.

(See Defs.’ Req. for Judicial Notice, Ex. 5.)

Discussion

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Federal Rule of Civil Procedure 12(b)(1) authorizes

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dismissal for lack of subject matter jurisdiction.

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dismiss based on exclusive in rem jurisdiction of a state court

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are properly analyzed under Rule 12(b)(1).

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Deutsche Bank Nat. Trust Co., 651 F.3d 1039, 1043 (9th Cir.

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2011).

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also properly brought under Rule 12(b)(1).

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for a Better Env’t, 523 U.S. 83, 100 n.3 (1998) (treating Younger

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abstention as jurisdictional); Washington v. Los Angeles Cnty.

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Sheriff’s Dep’t, 833 F.3d 1048, 1058 (9th Cir. 2016) (recognizing

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“a dismissal due to Younger abstention [is] similar to a

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dismissal under Rule 12(b)(1)”).

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A.

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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

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outside the complaint on a motion to dismiss under Rule 12(b)(1),

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the court may look beyond the pleadings “at documents

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incorporated into the complaint by reference, and matters of

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Younger v. Harris, 401 U.S. 37 (1971).
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which a court may take judicial notice.”

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Issues & Rights, Ltd., 551 U.S. 308, 322 (2007).

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Tellabs, Inc. v. Makor

A defendant may seek to incorporate a document by

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reference into the complaint “if the plaintiff refers extensively

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to the document or the document forms the basis of the

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plaintiff’s claim.”

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(9th Cir. 2003).

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of the complaint’” and “may assume that its contents are true for

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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,

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448 (9th Cir. 2006) (emphases added), so long as such assumptions

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do not only serve to dispute facts in the complaint.

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Orexigen Therapeutics, Inc., 899 F.3d 988, 1003 (9th Cir. 2018).

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Khoja v.

Under Federal Rule of Evidence 201, a court may take

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judicial notice of an adjudicative fact that is “not subject to

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reasonable dispute because it: (1) is generally known within the

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trial court’s territorial jurisdiction; or (2) can be accurately

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and readily determined from sources whose accuracy cannot

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reasonably be questioned.”

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court may take judicial notice of matters of public record.

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Khoja, 899 F.3d at 999.

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documents on file in federal or state courts, see, e.g., Harris

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v. Cnty. of Orange, 682 F.3d 1126, 1132 (9th Cir. 2012) (taking

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judicial notice of declaration filed in prior litigation), and

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information on government websites, Gerritsen v. Warner Brothers

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Entertainment Inc., 112 F. Supp. 3d 1011, 1033 (C.D. Cal. 2015).

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Fed. R. Evid. 201(b).

Accordingly, a

Courts routinely take judicial notice of

The court hereby takes judicial notice of Exhibits 1

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and 2 to defendants’ Request for Judicial Notice, the MSA and

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UAA, under the incorporation-by-reference doctrine.
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See Ritchie,

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342 F.3d at 907.

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throughout the FAC, and they are central to the plaintiffs’

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claims of injury.

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Plaintiffs refer extensively to these documents

(See FAC ¶¶ 106-108, 176.)

The court also takes judicial notice of Exhibit A to

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Exhibit 3, and Exhibits 4, 5, 6, 7, 10, 11, 12, 13, 14, and 15 to

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defendants’ request for judicial notice.

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is a copy of the Proposed Rehabilitation Plan, and is judicially

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noticeable both as a matter of public record and pursuant to the

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incorporation by reference doctrine.

Exhibit A to Exhibit 3

See Cnty. of Orange, 682

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F.3d at 1132; Ritchie, 342 F.3d at 907.

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Procedural Order, Order to Continue Certain Briefing Deadlines

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for the Conservator’s Rehabilitation Plan, Clerk’s Notice of

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Hearing, the Conservation Order, Order Denying Respondent’s

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Verified Application to Vacate the Conservation Order, Order

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Denying Petition for Writ of Mandate, Memorandum of Points and

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Authorities and Reply in Support of Application to Vacate the

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Conservation Order, and Petition for Writ of Mandate (Exhibits 4,

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5, 6, 7, 10, 11, 13, 14, and 15 to defendants’ Request for

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Judicial Notice, respectively) are all judicially noticeable on

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the ground that they are matters of public record as documents on

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file in the state court.

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court further notes that plaintiffs do not object to defendants’

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request for Exhibits 5, 6, 7, 11, 13, 14, or 15.

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The Superior Court’s

Cnty. of Orange, 682 F.3d at 1132.

The

The court further takes judicial notice of Exhibits 8

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and 9 to defendants’ Request for Judicial Notice, which are

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business entity profiles for plaintiffs Applied and ARS,

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retrieved from the Nebraska Secretary of State website, and thus

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matters of public record not subject to reasonable dispute.
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See

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Gerritsen, 112 F. Supp. 3d at 1033.

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Finally, plaintiffs request that the court take

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judicial notice of defendants’ Ex Parte Application for an Order

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Appointing the Insurance Commissioner as Conservator and of the

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Commissioner’s Memorandum in Opposition to Respondent’s

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Application to Vacate Order Appointing Conservator.

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for Judicial Notice, Exs. P2, P7 (Docket No. 44).)

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hereby takes notice of these documents on the ground that they

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are matters of public record.

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B.

(Pls.’ Req.
The court

Cnty. of Orange, 682 F.3d at 1132.

Prior Exclusive Jurisdiction
The “ancient and oft-repeated . . . doctrine of prior

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exclusive jurisdiction” holds “that when a court of competent

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jurisdiction has obtained possession, custody, or control of

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particular property, that possession may not be disturbed by any

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other court.”

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Te-Moak Tribe of W. Shoshone Indians of Nev., 339 F.3d 804, 809

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(9th Cir. 2003) (quoting 14 Charles Alan Wright, Arthur R.

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Miller, Edward H. Cooper, Federal Practice and Procedure § 3631,

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at 8 (3d ed. 1998)).

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rem jurisdiction over a res, a second court will not assume in

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rem jurisdiction over the same res.”

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713 F.3d 533, 536 (9th Cir. 2013) (citations omitted).

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purpose of the rule is the maintenance of comity between courts;

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such harmony is especially compromised by state and federal

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judicial systems attempting to assert concurrent control over the

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res upon which jurisdiction of each depends.”

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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
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actions.

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BTM (KSC), 2016 WL 7438326, at *6 (S.D. Cal. Dec. 27, 2016).

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Second, the court must determine how to characterize the

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concurrent actions.

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LEK-KSC, 2017 WL 424851, at *3 (D. Haw. Jan. 31, 2017) (citing

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Gustafson, 2016 WL 7438326, at *6).

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actions are in rem or quasi in rem, the prior exclusive

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jurisdiction doctrine applies.”

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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,

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as it was commenced almost a year before plaintiffs filed this

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action.

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action if it determines that both actions are in rem or quasi in

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rem.

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(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

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rem, or in personam “turns on what, precisely, is at issue in the

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state and federal court proceedings.”

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Goncalves v. Rady Childs. Hosp. San Diego, 865 F.3d 1237, 1253

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(9th Cir. 2017).

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interests in specific property as against the whole world.”

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State Eng'r, 339 F.3d at 811 (quoting In Rem, BLACK'S LAW

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DICTIONARY (6th ed. 1990)).

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proceeds in rem [only] where property is ‘seized and sought to be

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held for the satisfaction of an asserted charge against property

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without regard to the title of individual claimants to the

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property.’”

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1085, 1109 (N.D. Cal. 2014) (quoting Lee v. Silva, 197 Cal. 364,

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240 P. 1015, 1016 (1925)).

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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

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interest[s] in the property ... serve[ ] as the basis of the

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jurisdiction.”

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original).

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merely to ‘determine the personal rights and obligations of the

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[parties],’ the court asserts in personam jurisdiction.”

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Ins. Co., 68 F.Supp.3d at 1109 (quoting Pennoyer v. Neff, 95 U.S.

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714, 727 (1877)).

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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

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in rem or quasi in rem even if the property at issue was not

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“actually seized under judicial process before a second suit

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[was] instituted.”

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States v. Bank of N.Y. & Tr. Co., 296 U.S. 463, 477 (1936)).

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doctrine “applies as well where suits are brought to marshal

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assets, administer trusts, or liquidate estates, and in suits of

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a similar nature, where, to give effect to its jurisdiction, the

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court must control the property.”

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doctrine, courts should not ‘exalt form over necessity,’ but

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instead should ‘look behind the form of the action to the

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gravamen of a complaint and the nature of the right sued on.’”

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Chapman, 651 F.3d at 1044 (quoting State Eng'r, 339 F.3d at 810).

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It cannot seriously be doubted that, here, the Superior

Goncalves, 865 F.3d at 1254 (quoting United

Id.

The

“When applying the

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Court’s jurisdiction over CIC is in rem. The Superior Court’s

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Order appointing the Commissioner as conservator of CIC, pursuant

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to California Insurance Code § 1011(c), effectively seizes the

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res--all property and assets of CIC--and vests full title and

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control to the Commissioner, as conservator.

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Order at ¶ 12); Hanover, 68 F. Supp. 3d at 1109.

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Conservation Order authorizes the Commissioner to take possession
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(See Conservation
The

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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

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powers of the directors, officers, and managers of CIC.

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(Conservation Order at ¶¶ 11-14.)

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Contrary to plaintiffs’ contention, it makes no

6

difference that the Conservation Order vests title to CIC and its

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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

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in the context of a court-ordered liquidation of the Moscow Fire

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Insurance Company.

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the state court had directed the state’s superintendent of

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insurance to take possession of the Bank of N.Y.’s United States

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branches and “conserve those assets until its further order.”

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Id.

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Supreme Court held that that the proceeding was “essentially one

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in rem” because the superintendent “took possession under the

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direction of the court,” “the fund was at all times subject to

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the court's control,” and “the superintendent was protected by a

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sweeping injunction in the unimpeded liquidation of the

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sequestered property.”

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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

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direction” of the Superior Court.

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Though the Commissioner may take possession of the property and

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conduct the business of CIC, he merely does so “as a minister of

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the superior court in its statutory responsibility to protect the

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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

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longer exists or has been removed before the conservation may be

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lifted.

8

(requiring that the Commissioner, in his capacity as liquidator

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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

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exceeding $20,000 in fair market value).

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further protected by a “sweeping injunction” allowing him to

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proceed with the Conservation unimpeded by third parties, similar

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to the statutory liquidator in Bank of N.Y.

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Order ¶ 17); Cal. Ins. Code § 1020(a) (“Upon the issuance of an

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order . . . under Section 1011 . . . the court shall issue such

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other injunctions or orders as may be deemed necessary to prevent

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. . . interference with the commissioner or the proceeding.”);

19

see also Garamendi v. Exec. Life, 17 Cal. App. 4th 504, 523 (2d

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Dist. 1993) (holding that the superior court’s in rem

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jurisdiction under § 1020 extends to assets of third parties that

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have an “identity of interest” with an insolvent insurer).

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The Commissioner is

(See Conservation

Adjudicating plaintiffs’ claims in this case would also

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require this court to assert in rem jurisdiction, or at the

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least, quasi in rem jurisdiction, over the res at issue, CIC and

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its assets.

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classified as in rem because their operative complaint does not

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ask this court to “seize and control” any property.

Plaintiffs argue that the federal action cannot be

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(See Pls.’

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Opp’n at 42.)

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directed “exclusively at defendants to remedy their

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constitutional violations.”

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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

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they seek.

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behind the form of the action to the gravamen of a complaint . .

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. lest we exalt form over necessity.”

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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

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that suits brought in federal court by the United States for

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accounting and delivery of funds originally owned by several

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insurance companies invoked the court’s in rem jurisdiction

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because they would “necessarily interfere with the jurisdiction

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or control by the state court,” which had placed the funds in the

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hands of court-appointed receivers.

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at 477-78.

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its suits in personam, the Court rejected this characterization,

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concluding that “the object of the suits [was] to take the

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property from the depositaries and from the control of the state

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court, and to vest the property in the United States to the

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exclusion of all those whose claims are being adjudicated in the

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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

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enter orders aimed at the Commissioner and his deputy

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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

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