Applied Underwriters, Inc. v. Lara

Decision Date30 March 2021
Docket NumberNo. 2:20-cv-02096 WBS AC,2:20-cv-02096 WBS AC
Citation530 F.Supp.3d 914
Parties APPLIED UNDERWRITERS, INC., a Nebraska corporation; and Applied Risk Services, Inc., a Nebraska Corporation, Plaintiffs, v. Insurance Commissioner of the State of California Ricardo LARA, in his official Capacity; et al., Defendants.
CourtU.S. District Court — Eastern District of California

Beko Osiris Ra Reblitz-Richardson, Maxwell V. Pritt, Reed Forbush, PHV, Pro Hac Vice, Boies Schiller Flexner LLP, San Francisco, CA, Joshua I. Schiller, Boies Schiller Flexner LLP, New York, NY, Samuel C. Kaplan, PHV, Pro Hac Vice, Boies Schiller Flexner LLP, Washington, DC, for Plaintiffs.

Caroline Calvert Chiappetti, Dale K. Larson, Julia Gabriela Michel, Michael J. Strumwasser, Strumwasser & Woocher LLP, Los Angeles, CA, Cynthia J. Larsen, Justin R. Giovannettone, Orrick, Herrington & Sutcliffe LLP, Sacramento, CA, for Defendants.

ORDER RE: DEFENDANTSMOTION TO DISMISS

WILLIAM B. SHUBB, UNITED STATES DISTRICT JUDGE

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 (collectively, "defendants"), in response to defendants’ imposition of a conservation over non-party California Insurance Company ("CIC") in San Mateo Superior Court in November 2019 (the "Conservation Proceeding"). (See First Amended Complaint ("FAC") (Docket No. 26).) Plaintiffs--affiliates of CIC--allege that defendants’ actions leading up to and including the Conservation violated their rights to equal protection and due process under the Fourteenth Amendment, as well as their First Amendment right to criticize officials in the press and petition the government, in violation of 42 U.S.C. § 1983. (FAC ¶¶ 135-90.) Plaintiffs further allege that defendants’ actions constituted unlawful takings in violation of the Fifth and Fourteenth Amendments, and levy an as-applied challenge against California Insurance Code § 1011(c) under the Dormant Commerce Clause of the United States Constitution, Art. I, § 8, cl. 3. (Id. )

Defendants have moved to dismiss plaintiffs’ complaint for lack of subject matter jurisdiction and for failure to state a claim upon which relief may be granted. (See Defs.’ Mot. to Dismiss ("Mot. to Dismiss") (Docket No. 35).)

I. Factual and Procedural Background

Plaintiffs write workers’ compensation insurance through multiple insurance companies in all 50 states. (FAC ¶ 2.) CIC is the largest of those companies. (Id. ) Plaintiffs and CIC are closely related companies. All three are subject to common management and control: Steven Menzies indirectly owns CIC and serves as its CEO, and is the President of CIC, Applied, and ARS. (See FAC ¶¶ 48, 51, 52); Defs.’ Req. for Judicial Notice, Exs. 8, 9 (Docket No. 36.) The three entities also share the same Secretary and General Counsel, Jeffrey Silver. (See id. at Exs. 8, 9.) According to the Nebraska Secretary of State's website, Menzies and Silver serve as the sole directors of both Applied and ARS, and Menzies serves as President and Treasurer for both Applied and ARS. (See id. ) Moreover, Applied and ARS’ operative agreements with CIC indicate that they remain subject to CIC's supervision and control. (See id. at Exs. 1, 2.)

The First Amended Complaint ("FAC") alleges that Applied profits from CIC's operations by receiving administrative fees from CIC clients--which Applied charges as a percentage of each client's payroll--pursuant to the CIC and Applied's Management Services Agreement ("MSA"). (FAC ¶ 106.) Plaintiffs allege that ARS profits from its Underwriting Agent Agreement ("UAA") with CIC in a manner similar to Applied. (Id. at ¶ 107.)

Plaintiffs allege that defendants have engaged in a bad-faith campaign of unlawful activity aimed at CIC, beginning in 2019, when Menzies (at the time an indirect owner of 11.5% of CIC's shares) sought to purchase Berkshire Hathaway's ("Berkshire") controlling interest in CIC. (See FAC ¶¶ 48-63.) In January 2019, Menzies entered into an agreement with Berkshire to purchase the company by September 30th, or else Menzies would be subject to a $50 million "breakup fee" (the "Berkshire/Menzies Agreement"). (See id. ) Though Applied, Menzies, and CIC informed defendants of the details of the proposed sale, due to additional requests for information from the California Department of Insurance ("CDI"), Menzies had to submit new "Form A" filings multiple times between April and September, and CDI ultimately did not rule on Menzies’ pending application prior to the September 30, 2019 deadline. (Id. at ¶¶ 53-63.)

In response, Applied, CIC, and Menzies created a new entity in New Mexico, "CIC II," and sought to merge CIC with CIC II so that the transaction could be completed under the supervision of New Mexico's Insurance Department rather than CDI. (FAC ¶¶ 64-66.) This process culminated in a conference call and Form A approval hearing on October 9, 2019, in which regulators from New Mexico, Texas, and California (including CDI) participated and attended. (Id. ) According to plaintiffs, CDI did not object to the merger or the sale's consummation during the hearing, during which New Mexico's Superintendent of Insurance, Superintendent Franchini, approved the merger. (Id. ) Rather, plaintiffs allege that CDI attorneys told Superintendent Franchini that the "proposed merger presented no risks to California policyholders." (Id. ) Following Superintendent Franchini's order approving the merger, Berkshire informed the New Mexico Department of Insurance that, based on the lack of objection at the Form A approval hearing, it planned to proceed with the closing scheduled for October 10, 2019.1 (Id. at ¶ 69.)

On October 18, 2019, defendants informed CIC that, due to CIC's merger into CIC II, CIC's California-issued Certificate of Insurance--which authorizes CIC to sell insurance in the state--would be extinguished by operation of law and that the surviving entity would not be qualified to transact insurance in California. (Id. at ¶ 75.) Though plaintiffs allege that CIC voluntarily refrained from taking any further action relating to the merger, on November 4, 2019, the Commissioner filed an ex parte application in San Mateo County Superior Court (the "Superior Court"), requesting that the court place CIC in conservation, with Lara as conservator, because CIC had attempted to effect a merger without regulatory approval in violation of California Insurance Code § 1011. (Id. at ¶¶ 79, 81, 101.) The Superior Court granted the Commissioner's request. (See Defs.’ Req. for Judicial Notice, Ex. 7 (the "Conservation Order").) As a result, defendants have exercised control over the assets and operations of CIC since November 4, 2019, and CIC has been unable to transfer its assets to CIC II. (Id.; FAC ¶ 92.)

CIC has posed multiple challenges to the Conservation Proceeding in state court, arguing that the Commissioner acted arbitrarily and capriciously, that his basis for imposing the Conservation was pretextual, and that the Proceeding violates CIC's constitutional rights. First, CIC filed an application with the Superior Court to vacate the conservatorship. (Defs.’ Req. for Judicial Notice, Exs. 10, 13.) After the Superior Court denied the application, CIC filed an application for interlocutory appellate review with the California Court of Appeal, which was also denied. (See id., Exs. 11, 15).

Defendants then filed an application for approval of a non-consensual rehabilitation plan in Superior Court (the "Proposed Rehabilitation Plan"). (FAC at ¶ 102.) This Proposed Rehabilitation Plan would (1) require CIC to transfer and reinsure its book of California business to another California-admitted insurer, and (2) require CIC and plaintiffs to settle over 40 separate pending legal proceedings regarding CIC and plaintiffs"EquityComp" program--a loss sensitive workers’ compensation program that has been the subject of dozens of lawsuits involving plaintiffs and CIC--by paying claimants in the pending legal proceedings any of three restitution amounts that the claimant selects. (Id. at ¶¶ 38-47; 104-110.) The Proposed Rehabilitation Plan would also limit the amount CIC and plaintiffs may collect under the policies they issue or service. (Id. ) Plaintiffs allege that these portions of the Proposed Rehabilitation Plan constitute an unconstitutional transfer of contract and other property rights from one set of private litigants to another, depriving CIC and plaintiffs of their due process right to litigate the claims. (Id. )

On July 30, 2020, the Superior Court set a briefing schedule and hearing date, and established procedures for opposing the Commissioner's application for an order approving the Proposed Rehabilitation Plan. (See Defs.’ Req. for Judicial Notice, Ex. 4 (the "Procedural Order").) The Procedural Order expressly invites plaintiffs and other affiliates of CIC to present their objections to the Proposed Rehabilitation Plan in writing and orally at the scheduled hearing. (See id. )

Following the Superior Court's issuance of the Procedural Order, plaintiffs filed this suit, requesting that this court intervene in the ongoing state court proceeding by "vacating the Commissioner's conservatorship of CIC" and "enjoining the Commissioner from continuing to hold CIC under conservation." (See Compl., Prayer for Relief ¶ C (Docket No. 1).) While plaintiffs have since amended their complaint, the FAC still requests that this court effectively enjoin the ongoing state court proceeding by directing the Commissioner to terminate the Conservation and withdraw the Proposed Rehabilitation Plan. (See FAC, Prayer for Relief ¶¶ C-G.)

As of the date of this Order, the Superior Court has not yet approved or denied the Proposed Rehabilitation Plan; a...

To continue reading

Request your trial
13 cases
  • Cal. Ins. Co. v. Lara
    • United States
    • U.S. District Court — Eastern District of California
    • 6 de julho de 2021
    ...halt the currently-pending conservation of CIC in San Mateo Superior Court. See Applied Underwriters, Inc. v. Lara, No. 2:20-cv-02096 WBS AC, 530 F. Supp. 3d 914, 936–37, (E.D. Cal. Mar. 31, 2021). The court held that it lacked jurisdiction over the Applied Underwriters action based on th......
  • Martin v. Marshall
    • United States
    • U.S. District Court — Eastern District of California
    • 6 de julho de 2022
    ... ... inferences.” Doe I v. Wal-Mart Stores, Inc. , ... 572 F.3d 677, 681 (9th Cir. 2009) (citation and internal ... See Applied Underwriters, Inc. v. Lara , 530 ... F.Supp.3d 914, 937 (E.D. Cal ... ...
  • Martin v. Blea
    • United States
    • U.S. District Court — Eastern District of California
    • 12 de julho de 2022
    ... ... inferences.” Doe I v. Wal-Mart Stores, Inc. , ... 572 F.3d 677, 681 (9th Cir. 2009) (internal quotation marks ... See ... Applied Underwriters, Inc. v. Lara , 530 F.Supp.3d 914, ... 937 (E.D. Cal ... ...
  • Kabir v. City of Grove
    • United States
    • U.S. District Court — Eastern District of California
    • 28 de setembro de 2022
    ...the standard for irreparable harm as a Younger exception is distinct from the showing of irreparable harm for injunctive relief. See id. (noting the irreparable harm exception under requires not only irreparable harm but also extraordinary circumstances). Courts have found the irreparable h......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT