Trust & Inv. Advisers, Inc. v. Hogsett

• Decision Date: 19 December 1994
• Docket Number: No. 93-2117,93-2117
• Citation: 43 F.3d 290
• Parties: TRUST & INVESTMENT ADVISERS, INCORPORATED, Plaintiff-Appellant, v. Joseph H. HOGSETT, Secretary of State of Indiana, in his official capacity and Miriam Smulevitz Dant, Indiana Securities Commissioner, individually and in her official capacity, Defendants- Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 290

43 F.3d 290

TRUST & INVESTMENT ADVISERS, INCORPORATED, Plaintiff-Appellant, v. Joseph H. HOGSETT, Secretary of State of Indiana, in his

official capacity and Miriam Smulevitz Dant,

Indiana Securities Commissioner,

individually and in her

official capacity,

Defendants-

Appellees.

No. 93-2117.

United States Court of Appeals, Seventh Circuit.

Argued Jan. 18, 1994.

Decided Dec. 19, 1994.

B. Keith Shake (argued), Thomas A. Withrow, and O. Wayne Davis, Henderson, Daily, Withrow & Devoe, Indianapolis, IN, for plaintiff-appellant.

John Thomas Roy and Richard E. Shevitz (argued), Office of the Atty. Gen., Indianapolis, IN, for defendants-appellees.

Before FLAUM, and ROVNER, Circuit Judges, and WILLIAMS, District Judge. ^*

ANN CLAIRE WILLIAMS, District Judge.

Plaintiff Trust & Investment Advisers, Inc. ("TIA"), an Indiana financial investment company, is the subject of an Indiana Securities Division ("Division") administrative proceeding. The Division seeks to revoke, or at least suspend, TIA's registration as an investment advisor with the Division because TIA allegedly failed to properly supervise the activities of Robert W. Rousey, one of its agents. Seeking to block the state proceeding, TIA filed this suit with the United States District Court for the Southern District of Indiana against Joseph H. Hogsett, Indiana's Secretary of State, and Miriam Smulevitz Dant, the Indiana Securities Commissioner, pursuant to Title 42 U.S.C. Section 1983. ¹ In Count I of its complaint, TIA seeks a declaration that the defendants' actions in investigating and bringing the proceeding against TIA violated plaintiff's procedural due process rights and an injunction prohibiting further unconstitutional conduct. Count II is directed against Dant as an individual, seeking money damages for injuries resulting from her allegedly illegal efforts to revoke TIA's license.

The district court dismissed TIA's suit, finding that Dant was immune from damages liability under theories of qualified and absolute immunity, and that notions of comity and equity mandated the dismissal of TIA's claim for declaratory and equitable relief under Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971). TIA appeals, arguing that Dant is not entitled to either qualified or absolute immunity and that Younger abstention is improper because the state administrative proceeding was institutionally biased and Dant had impermissibly prejudged the case. The district court's dismissal of Count I is reversed and the case is remanded for further proceedings consistent with this opinion. The dismissal of Count II is affirmed.

I. Background

Plaintiff TIA is a financial investment company headquartered in Indianapolis. As of December 31, 1991, TIA employed eight people and managed over $500,000,000 of its clients' assets. Defendant Hogsett is the Secretary of State of Indiana and under Indiana law is responsible for the direction and control of the Indiana Securities Commission. At all relevant times, defendant Dant was the acting Indiana Securities Commissioner. As Securities Commissioner, Dant was responsible for the administration of the Indiana Securities Act, Indiana Code Sec. 23-2-1 et seq., and the direction and control of the Division. ²

In early November 1991, Dant initiated an official Division investigation into the conduct of Robert Rousey who then worked either as an independent contractor for TIA (according to TIA) or as a TIA employee (according to the defendants). According to the Division's administrative complaint, Rousey had offered and sold non-existent, preferred stock in Eli Lilly & Co. in a scheme to defraud several Indiana residents. Rousey was eventually convicted for his fraudulent activities, receiving a sentence of eight years.

In January 1992, Dant broadened her investigation to include TIA. The expanded investigation focused on whether TIA had properly supervised Rousey while he was affiliated with the company. Dant allegedly played an active role in the investigation, personally requesting and receiving information and documentary evidence from TIA. By February 1992, TIA and the Division had engaged in preliminary discussions about TIA's potential liability for Rousey's unchecked conduct. On February 18, 1992, as part of this dialogue, Dant wrote to TIA's counsel, allegedly informing him that her investigation had uncovered evidence establishing TIA's liability for failing to reasonably supervise Rousey's activities. ³

The parties' preliminary settlement negotiations quickly broke down, and on March 5, 1992, the Division filed an administrative complaint against TIA and Rousey. The complaint was signed by Nancy Sweet, a Deputy Commissioner for the Division. Along with the complaint, TIA was served with an Order to Show Cause executed by the Division's Chief Deputy Commissioner Joan Moore Mernitz on defendant Hogsett's behalf. The Order stated that "grounds exist under the Indiana Securities Act, IC 23-2-1, to suspend or revoke the investment adviser registration of TIA ... and that this Order is in the public interest." The Order further provided that a hearing would be scheduled within 45 days of a written request from TIA. Shortly prior to the filing of the Division's complaint, Dant had informed TIA's counsel that in light of her involvement in the underlying investigation, she intended to appoint a hearing officer to preside over the Division's complaint.

On March 20, 1992, TIA filed the instant suit, seeking declaratory, injunctive, and monetary relief, as well as attorney's fees. Five days later, Dant appointed Raymond J. Hafsten, who is not employed by or otherwise affiliated with the Division, as an independent hearing officer. This March 25, 1992 Division Order purported to delegate to Hafsten the power to conduct a hearing and render a final determination on the Administrative Complaint. ⁴ Around this time, defendant Dant was quoted in several articles in Indiana newspapers discussing the administrative proceeding and the underlying investigation. On March 27, 1992, defendants filed their motion to dismiss TIA's suit. The motion was granted on April 8, 1993, 830 F.Supp. 463. This appeal followed.

II. Standard of Review

Our review of the district court's dismissal of Count II on immunity grounds is clearly de novo. Maltby v. Winston, 36 F.3d 548 (7th Cir.1994). The applicable standard for our review of the district court's decision to abstain is somewhat more elusive. In A.G. Edwards & Sons, Inc. v. Public Bldg. Comm'n, 921 F.2d 118, 121 (7th Cir.1990), we suggested that the abuse of discretion standard governs our review of all abstention decisions. As defendants readily note, in at least one prior decision, we applied the abuse of discretion standard in the specific context of a Younger abstention. See Sekerez v. Supreme Court of Indiana, 685 F.2d 202, 204-05 (7th Cir.1982). More recently, however, we have held that when a district court has been asked to abstain under the principles enunciated in Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971), our review of its decision is de novo. Arkebauer v. Kiley, 985 F.2d 1351, 1357 (7th Cir.1993) (citing Gartrell Constr. Inc. v. Aubry, 940 F.2d 437, 441 (9th Cir.1991)).

We are not alone in our vacillation. Our survey of the law in other circuits reveals no clear consensus on the issue. The Third, Fourth, Tenth, and Eleventh Circuits apply an abuse of discretion standard. See O'Neill v. City of Philadelphia, 32 F.3d 785 (3d Cir.1994); Martin Marietta Corp. v. Maryland Comm'n Human Relations, 38 F.3d 1392 (4th Cir.1994); Ramos v. Lamm, 639 F.2d 559 (10th Cir.1980); Rindley v. Gallagher, 929 F.2d 1552 (11th Cir.1991). The Sixth Circuit, on the other hand, appears to review all abstention decisions de novo. Traughber v. Beauchane, 760 F.2d 673, 675-76 (6th Cir.1985). Finally, the Ninth Circuit has adopted a hybrid approach, applying a de novo review for abstentions under Younger but an abuse of discretion standard for all other forms of abstention. See World Famous Drinking Emporium, Inc. v. City of Tempe, 820 F.2d 1079, 1080-81 (9th Cir.1987).

While mindful of the Supreme Court's general admonition to avoid drawing artificial distinctions among the various grounds for abstention, ⁵ we find that the Ninth Circuit's dual standard approach is the better rule. Unlike other forms of abstention, such as the Pullman doctrine, which explicitly vests the district court "with discretion to decline to exercise ... its jurisdiction," Harman v. Forssenius, 380 U.S. 528, 534, 85 S.Ct. 1177, 1881, 14 L.Ed.2d 50 (1965), application of the Younger doctrine is absolute. As the Supreme Court explained in Colorado River Water Conservation District v. United States, 424 U.S. 800, 816 n. 22, 96 S.Ct. 1236, 1246 n. 22, 47 L.Ed.2d 483 (1976), when a case meets the Younger criteria, the district court must abstain. A standard of review that asks us to review a lower court's decision for an abuse of discretion that simply does not exist is inappropriate. Our review of the lower court's decision to abstain here is therefore de novo. Accord Fresh Int'l Corp. v. Agricultural Labor Relations Bd., 805 F.2d 1353, 1356 n. 2 (9th Cir.1986).

III. Analysis

A. Abstention

Federal courts have a "virtually unflagging obligation to exercise the jurisdiction given them." Colorado River, 424 U.S. at 817, 96 S.Ct. at 1246. As the Supreme Court observed in New Orleans Public Service, Inc. v. Council of City of New Orleans, 491 U.S. 350, 368, 109 S.Ct. 2506, 2518, 105 L.Ed.2d 298 (1989), "only exceptional circumstances justify a federal court's refusal to decide a case in deference to the States." This being said, courts have long recognized a few well defined classes of cases that fall outside the norm where abstention is not only permissible but expected. Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971) and its progeny comprise one such class of cases.

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