Applied Underwriters, Inc. v. Lara
| Decision Date | 10 June 2022 |
| Docket Number | 21-15679, No. 21-16159 |
| Parties | APPLIED UNDERWRITERS, INC., a Nebraska Corporation; Applied Risk Services, Inc., a Nebraska Corporation, Plaintiffs-Appellants, v. Ricardo LARA, Insurance Commissioner for the State of California, in his official capacity; Kenneth Schnoll, California Dept. of Insurance Deputy Commissioner, in his official capacity; Bryant Henley, California Dept. of Insurance Deputy Commissioner, in his official capacity, Defendants-Appellees. California Insurance Company, a New Mexico corporation, Plaintiff-Appellant, v. Ricardo Lara, Insurance Commissioner for the State of California, in his official capacity; Kenneth Schnoll, California Department of Insurance Deputy Commissioner, in his official capacity; Bryant Henley, California Department of Insurance Deputy Commissioner, in his official capacity, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Samuel C. Kaplan (argued), Boies Schiller Flexner LLP, Washington, D.C.; Maxwell V. Pritt, Beko O. Reblitz-Richardson, and Reed D. Forbush, Boies Schiller Flexner LLP, San Francisco, California; for Plaintiffs-Appellants.
Michael J. Strumwasser (argued), Dale K. Larson, Caroline Chiappetti, and Julia Michel, Strumwasser & Woocher LLP, Los Angeles, California; Cynthia J. Larsen, Justin Giovannettone, and Mark C. Smith, Orrick Herrington & Sutcliffe LLP, Sacramento, California; for Defendants-Appellees.
Before: Marsha S. Berzon, Carlos T. Bea, and Jacqueline H. Nguyen, Circuit Judges.
Opinion by Judge Bea ;
In business, as in life, it is necessary to take risks. Indeed, fortune favors the bold.1 Sometimes you win, sometimes you lose. And when you lose, the loss should be paid. Here, Steven Menzies, Chief Executive Officer of Applied Underwriters, Inc. ("Applied") and President of California Insurance Company ("CIC I"), made a $50 million bet with Berkshire Hathaway ("Berkshire") that he could complete the purchase of Berkshire's controlling interest in CIC I by September 30, 2019. Unfortunately for Menzies, the deal could not be completed in time, as the California Insurance Commissioner, Ricardo Lara ("Commissioner"), failed to approve the sale by that deadline.
Instead of accepting this loss, Menzies decided on a different approach. Menzies consummated the transaction with Berkshire without the Commissioner's approval, and then attempted to bypass the California insurance regulatory regime altogether by merging CIC I with New Mexico-domesticated California Insurance Company ("CIC II"), a shell company formed by Menzies to serve as the vehicle to effect CIC I's domestication outside of California. In response to Menzies's attempted out-of-state merger, the Commissioner filed an ex parte conservation application in the Superior Court of San Mateo to place CIC I in a conservatorship. That application was granted; the Superior Court appointed the Commissioner as the Conservator of CIC I. As Conservator, the Commissioner controlled CIC I and its assets, subject to the Superior Court approval. Subsequently, CIC I contested the grounds upon which the conservatorship was instituted by filing an application to vacate the order instituting the conservatorship in the Superior Court. CIC I claimed that the conditions cited for imposing the conservatorship no longer existed. The Superior Court denied CIC I's application. CIC I then sought a writ of mandate from the California Court of Appeal seeking to overturn the Superior Court's denial of CIC I's application to vacate the order instituting the conservatorship, and that petition for writ was also denied.
After CIC I unsuccessfully challenged the bases of the conservatorship in state court, both Applied and CIC II filed separate actions in federal court, asserting causes of action under 42 U.S.C. § 1983 alleging various constitutional violations. While characterized in various ways, the relief sought in both actions was the same—dissolution of the conservatorship of CIC I. The district court dismissed both actions pursuant to Federal Rule of Civil Procedure 12(b)(1), with each order holding that the district court lacked jurisdiction to hear the cases under both the "prior exclusive jurisdiction" rule and the Younger abstention doctrine.
We have jurisdiction under 28 U.S.C. § 1291. We conclude that because important considerations of federalism are at stake, the district court's reliance on Younger abstention as a ground for dismissal was in error. An insurance conservatorship is not sufficiently akin to a criminal prosecution to bring it within the purview of the Supreme Court's current understanding of what constitutes a similar, Younger -eligible "civil enforcement proceeding," thus making the application of Younger improper in this case. We nonetheless affirm the district court's dismissal based on the alternative ground relied upon, the prior exclusive jurisdiction rule. We also announce limitations to the prior exclusive jurisdiction rule, explaining how this doctrine would not provide an absolute bar to parallel federal court litigation if extraordinary circumstances were present, none of which are here present.
Appellants Applied Underwriters, Inc. and Applied Risk Services (collectively, "Applied") partner with CIC I to sell workers' compensation insurance and various payroll, agency, and claim services. CIC I is an admitted insurer in the State of California,2 which subjects it to regulation by the California Insurance Commissioner, a position currently held by Appellee Ricardo Lara. In January 2019, Steven Menzies, as Chief Executive Officer of Applied Underwriters, Inc. and as President of CIC I, entered into an agreement with Berkshire Hathaway to purchase Berkshire's controlling interest in CIC I (the "Agreement"). The Agreement included a $50 million "breakup fee" were the transaction not consummated by September 30, 2019.
California Insurance Code § 1215.2(d) requires the California Insurance Commissioner to approve any sale (or merger) of a controlling interest in an admitted California insurer, and further provides the Commissioner with 60 days to approve or disapprove such transactions upon submission of the information concerning the transaction required by § 1215.2(a). These required submissions are known as "Form A" submissions. On April 9, 2019, Menzies, acting on behalf of CIC I, submitted to the California Department of Insurance ("CDI") his first "Form A," which detailed the proposed Agreement and sought official approval. However, upon review, the CDI requested further information concerning the Agreement, requiring Menzies to withdraw the first Form A submission and to submit a second Form A on June 12, 2019. After this second Form A submission was found unsatisfactory, Menzies submitted his third (and final) Form A submission concerning the Agreement on September 7, 2019.
When it became clear the Agreement would not be approved by the Commissioner in time to avoid the $50 million "breakup fee," Menzies attempted to avoid the California regulatory process altogether by consummating the Agreement without CDI approval. Menzies sought to effect a merger (the "Merger") between CIC I, which he now purported to control, and a newly-formed New Mexico corporation, Appellant California Insurance Company ("CIC II"). This newly formed corporate insurer was not subject to California insurance regulations.
Menzies negotiated a ten-day Agreement deadline extension with Berkshire, at a cost of $10 million. On October 9, 2019, one day before the extended deadline was set to expire, the CDI notified Menzies that if the Merger were to be consummated without the approval of the CDI, "[CIC I] will cease to exist and [CIC II will be] an unlicensed insurer [ ] precluded from transacting the business of insurance in California." The uncertain fate of the Merger notwithstanding, the Agreement between Berkshire and Menzies closed on October 10, 2019, with CIC I becoming wholly owned by Menzies.
On November 4, 2019, before the CIC I/CIC II Merger could be completed, and without notice given to Appellants, the Commissioner filed an ex parte conservation application in the Superior Court of San Mateo which sought "an order appointing him as conservator of [CIC I]." The conservation application was based on the Commissioner's allegation that Menzies had not "filed and obtained written approval of the Commissioner" to consummate the Merger, in violation of California Insurance Code § 1215.2(d).
CIC I subsequently contested, unsuccessfully, the grounds upon which the conservatorship was instituted. Specifically, on March 12, 2020, CIC I filed an application to vacate the conservatorship with the Superior Court, arguing that: 1) the conservatorship was obtained under false pretenses; 2) the conditions cited for imposing the conservatorship no longer existed; 3) the Commissioner acted arbitrarily, capriciously, and in bad faith; and 4) the conservatorship continues to harm CIC I. After an August 6, 2020 hearing at which CIC I appeared by counsel, the...
To continue reading
Request your trial