People ex rel. Garamendi v. American Autoplan, Inc.

• Decision Date: 24 November 1993
• Docket Number: No. B070317,B070317
• Citation: 20 Cal.App.4th 760,25 Cal.Rptr.2d 192
• Parties: The PEOPLE ex rel. John GARAMENDI, as Insurance Commissioner, etc., Plaintiff and Respondent, v. AMERICAN AUTOPLAN, INC., et al., Defendants and Appellants.
• Court: California Court of Appeals Court of Appeals

Page 192

25 Cal.Rptr.2d 192

20 Cal.App.4th 760

The PEOPLE ex rel. John GARAMENDI, as Insurance Commissioner, etc., Plaintiff and Respondent, v. AMERICAN AUTOPLAN, INC., et al., Defendants and Appellants.

No. B070317.

Court of Appeal, Second District, Division 5, California.

Nov. 24, 1993.

Certified for Partial Publication ^*

Rosner & Goodman and Dennis Neil Jones, Los Angeles, for defendants and appellants.

Daniel E. Lungren, Atty. Gen., Edmond B. Mamer, Supervising Deputy Atty. Gen., and Richard W. Bakke, Deputy Atty. Gen., for plaintiff and respondent.

GRIGNON, Associate Justice.

Defendants and appellants American Autoplan, Inc., Nicholas Neu and Bruce Virga appeal from an order of the Los Angeles Superior Court granting a preliminary injunction requested by plaintiff and respondent State of California, acting through the Insurance Commissioner, John Garamendi ("the Commissioner"). Appellants sought declaratory relief in Riverside Superior Court in connection with a cease and desist order of the Commissioner. Thereafter, the Commissioner sought injunctive relief in the Los Angeles Superior Court in connection with the same cease and desist order. The Commissioner's application for a preliminary injunction was granted by the Los Angeles Superior Court. Appellants contend the Los Angeles Superior Court was without jurisdiction to grant the preliminary injunction under the rule of exclusive concurrent jurisdiction. Alternatively, they argue that the injunction was not properly issued on the merits.

In the published portion of this opinion (Part I), we discuss the rule of exclusive concurrent jurisdiction. We conclude the rule of exclusive concurrent jurisdiction is a judicial rule of priority or preference and is not jurisdictional in the traditional sense of the word. We also conclude that the rule of exclusive concurrent jurisdiction is properly raised by demurrer or answer and requires a stay of the action; the rule of exclusive concurrent jurisdiction is not a defense to an application for a preliminary injunction. Accordingly, the trial court did not lack jurisdiction to grant the preliminary injunction. In the unpublished portion of this opinion (Part II), we discuss the merits of the preliminary injunction and conclude the trial court properly granted the injunction. We affirm.

FACTS AND PROCEDURAL BACKGROUND

In 1986, Neu and Michael Gershuney were officers of a Delaware corporation, Automobile Maintenance Contracts, Inc. (AMC), engaged in the business of selling automobile repair contracts. By 1987, AMC had sold approximately 8,000 automobile repair contracts in Southern California. After an assistant commissioner for the California Department of Insurance opined that the automobile repair contracts were contracts of insurance, Neu and Gershuney moved to Northern California and operated a similar business called American Maintenance Contracts, Inc. (AMC-2).

On May 18, 1988, the Commissioner filed suit in Los Angeles Superior Court (case No. 680646) against Neu, AMC, Gershuney and others. The Commissioner requested an injunction arguing that AMC, Neu and Gershuney In January 1989, Neu, Virga and American Autoplan, Inc. (formerly American Automobile Plan, Inc.) ² began selling automobile repair contracts similar to those previously sold by AMC. ³ Neu was president of American Autoplan and Virga was vice-president. American Autoplan's repair facility was located in Riverside. The automobile repair contracts were sold as a part of a "physical damage automobile repair cost containment and insurance fraud prevention program" through insurance agents and brokers and underwritten by non-admitted carriers. Appellants solicited licensed insurance agents and brokers in California to sell the automobile physical damage benefits provided by American Autoplan; furnished and accepted applications from California agents or brokers; processed the applications; issued the contracts evidencing coverage; invoiced and collected premiums; and paid claims.

                were violating the insurance laws by transacting an insurance business without first being admitted as an insurer in California and without obtaining a certificate to that effect;  acting as an agent for a non-admitted insurer;  advertising for a non-admitted insurer;  and aiding a non-admitted insurer to transact business in California.  (Ins.Code, §§ 700, 703.)   A preliminary injunction was requested to require appellants to refrain forthwith from selling any contract which violated Insurance Code sections 700 and 703.  A preliminary injunction was granted on May 18, 1988, and affirmed on appeal in People ex rel. Gillespie v. Neu (1989) 209 Cal.App.3d 1066, 257 Cal.Rptr. 778. 1  Thereafter, Neu and Gershuney executed a December 1991 stipulation for judgment of permanent injunction, which resolved case No. 680646.   In this stipulation, Neu and Gershuney denied violating the Insurance Code and agreed to refrain from violating it in the future.  A judgment of permanent injunction was thereafter entered
                

Consumers learned of the program through radio advertisements, from the lienholder on their vehicles or from their insurance agents or brokers. Many purchasers never received copies of the agreements. The program included two contracts: the automobile repair contract and a standard automobile liability insurance policy accompanied by a modified dual interest policy. Consumers paid an annual rate for the program which included the annual management fee for the automobile repair contract and the insurance premium. The premium for the insurance policy was sent by American Autoplan to Atlas Indemnity and Insurance Company, Ltd. The program covered loss to vehicles for comprehensive perils, such as fire, theft, earthquake, windstorm, rising water and vandalism and collision. American Autoplan also is a group policy holder of an automobile liability policy for its consumers.

Under the automobile repair contract, American Autoplan is appointed by the consumer as the consumer's exclusive manager and attorney-in-fact for all matters relating to repair of the consumer's automobile and as the exclusive repairer of the automobile. The contract requires the consumer to have repair work done at American Autoplan's Riverside repair facility. Consumers pay an annual management fee for the automobile repair contract which is similar to an insurance premium. Consumers also pay a service fee for each repair. The service fee is similar to an insurance deductible and is selected from three options, $250, $500 or $1000. The service fee bears the same relation to the management fee as a deductible bears to a premium, i.e., the higher the service fee the lower the management fee.

A repair under the automobile repair contract has the following economic consequences:

(1) The annual management fee may be applied at American Autoplan's option to the cost of repair;

(2) The consumer pays American Autoplan the applicable service fee;

(3) The consumer assigns to American Autoplan third party recoveries up to the amount of the cost of repair;

(4) If the sum of the management fee, the service fee and third-party recovery does not equal the cost of repair, the consumer agrees to pay the annual management fee for up to three years;

(5) American Autoplan is reimbursed for any excess cost by the proceeds of the companion insurance policy;

(6) If the companion insurance policy fails to reimburse American Autoplan for any excess costs, American Autoplan has the right to demand the excess from the consumer. However, in practice, consumers were not charged for such excess repair costs; and

(7) Any amounts received by American Autoplan in excess of the repair costs are retained by American Autoplan.

American Autoplan has sold tens of thousands of contracts to California residents since 1989, generating millions of dollars. The Commissioner received over 100 complaints from American Autoplan's contract holders for: shoddy repairs; lengthy delays in making repairs; and substantial delays in making settlements and in paying refunds when contracts were cancelled. ⁴

On May 7, 1992, the Commissioner issued a cease and desist order directing appellants to cease and desist from doing any act which violated Insurance Code sections 700 and 703 and from violating the preliminary injunction which had been issued on May 18, 1988. ⁵

On June 4, 1992, American Autoplan and Neu filed a declaratory relief action against the Commissioner in the Riverside Superior Court. Virga was not a party to this action. The action was served by June 10, 1992. The Riverside action alleged the Commissioner acted in excess of his jurisdiction when he issued the cease and desist order because the contracts entered into with consumers were not contracts of insurance. Appellants also alleged they did not unlawfully aid and abet violations of the Insurance Code and the stipulation signed by Neu in the Los Angeles action did not direct Neu to cease any conduct. The Riverside action was brought pursuant to Insurance Code section 1065.2, subdivision (c), which permits waiver of a hearing before the Commissioner and judicial review of a cease and desist order. ⁶

On June 15, 1992, the Commissioner filed this action in the Los Angeles Superior Court, a three-count complaint seeking an injunction against appellants. The complaint charged appellants with: transacting an insurance business without securing proper authority from the Commissioner in violation of Insurance Code section 700; aiding and abetting a non-admitted insurer in violation of Insurance Code section 703; and violating the May 7, 1992 cease and desist order. The Commissioner alleged that contracts entered into by appellants with consumers were contracts of insurance, but that appellants had never obtained authority from the Commissioner to sell such insurance. It was also alleged that the cease and desist order had The Commissioner contemporaneously filed an ex...