Split Ninth Circuit Panel Applies Prior Exclusive Jurisdiction Rule to Affirm Dismissal of Federal Action Against State Insurance Commission

In Applied Underwriters v. Laras,  No. 21-15679 (9th Cir. June 10, 2022), a split panel affirms the dismissal of a federal civil-rights action in favor of a pending state conservatorship action, but disagrees on the grounds. The panel majority would affirm under the prior exclusive jurisdiction rule, while the concurring judge would rely (as did the district court) on Younger abstention.

This action commenced in state court as a dispute between Applied Underwriters, Inc. (“Applied”), and the California Insurance Commissioner, Ricardo Lara (“Commissioner”) over the lawfulness of merger between Applied and California Insurance Company (“CIC I”). “[T]he 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.” Menzies challenged this order up through the state-court system but obtained no relief.

Still seeking to overturn the state regulator’s conservatorship, “Applied and [successor entity] 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.

The Ninth Circuit affirms, but on divided grounds. The panel majority rejects the Younger ground adopted by the district court. “[T]he Younger abstention doctrine instructs federal courts to decline to hear a case when a parallel state proceeding is ongoing,” although such state proceedings must narrowly concern the categories recognized in Sprint Commc’ns, Inc. v. Jacobs, 571 U.S. 69, 78 (2013): (1) “ongoing state criminal prosecutions”; (2) “certain civil enforcement proceedings”; and (3) “civil proceedings involving certain orders . . . uniquely in the furtherance of the state courts’ ability to perform their judicial functions.” The panel majority analyzes the conservatorship action and holds that it does not fall into any of these three categories.

Nonetheless, the panel majority holds that that the prior exclusive jurisdiction rule applies. That doctrine provides that where “one court first takes proper in rem jurisdiction over a res, another court ‘is precluded from exercising its jurisdiction over the same res.’” The panel majority first finds that the state action in this case is an in rem proceeding because it authorized “the Conservator to take title to CIC I.” Then it finds that the § 1983 action is likewise “directed at ending conservatorship’s control over CIC I’s assets,” because the prayer for relief seeks declaratory orders that would “interfere with the state court’s control over the CIC I res, imparting an inherently in rem nature to the federal actions.”

The panel majority notes the novelty of applying the prior exclusive jurisdiction rule to a § 1983 case that redresses federal constitutional violations. It “is clear that abstention under the prior exclusive jurisdiction rule can be proper even though the federal action asserts a 42 U.S.C. § 1983 claim.” Nevertheless, considering the federal judiciary’s role in enforcing the U.S. Constitution, the rule cannot be used as a shield to prevent constitutional accountability.

In this case, though, the panel majority holds that the parties had “adequate opportunity to raise constitutional challenges in insurance conservatorship proceedings . . . . Indeed, due process challenges have been raised in CIC I’s application for interlocutory appellate review with the California Court of Appeal.” There was also no evidence of “bad faith” by the state commissioner to evade due process review of its actions. Likewise, there was no “irreparable injury” to appellants because they had “sufficient ability to challenge the conservatorship in the Superior Court.”

Judge Nguyen, concurring in the result, would rest affirmance instead on the Younger doctrine and avoid the novel questions presented in the majority opinion. “[T]he majority breaks new ground to determine how the prior exclusive jurisdiction doctrine should apply when a federal plaintiff asserts constitutional violations in a pending state court proceeding. Younger addresses how federal courts should proceed in this situation, which explains why the majority must import aspects of Younger into its extension of the prior exclusive jurisdiction doctrine. Rather than reinvent the wheel, I would apply Younger, which the majority’s own analysis confirms is a better fit.”

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