Applied Underwriters, Inc. v. Ricardo Lara

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

APPLIED UNDERWRITERS, INC., a No. 21-15679

Nebraska Corporation; APPLIED RISK

SERVICES, INC., a Nebraska D.C. No.

Corporation, 2:20-cv-02096-

Plaintiffs-Appellants, WBS-AC

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.

2 APPLIED UNDERWRITERS V. LARA

CALIFORNIA INSURANCE COMPANY, No. 21-16159

a New Mexico corporation,

Plaintiff-Appellant, D.C. No.

v. 2:21-cv-00030-

WBS-AC

RICARDO LARA, Insurance

Commissioner for the State of

California, in his official capacity; OPINION

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.

Appeal from the United States District Court

for the Eastern District of California

William B. Shubb, District Judge, Presiding

Argued and Submitted December 7, 2021

Pasadena, California

Filed June 10, 2022

Before: Marsha S. Berzon, Carlos T. Bea, and

Jacqueline H. Nguyen, Circuit Judges.

Opinion by Judge Bea;

Concurrence by Judge Nguyen

APPLIED UNDERWRITERS V. LARA 3

SUMMARY *

Civil Rights/Federal Judicial Abstention

The panel affirmed the district court’s dismissal of an

action brought under 42 U.S.C. § 1983 against the California

Insurance Commissioner alleging various constitutional

violations arising out of the conservatorship of the California

Insurance Company, an insurance company in the State of

California which partnered with appellants to sell, among

other things, workers’ compensation insurance.

The California Insurance Commissioner filed an ex parte

conservation application in the Superior Court of San Mateo

to place the California Insurance Company (CIC I) in a

conservatorship after CIC I’s president, Steven Menzies,

attempted to consummate a purchase transaction with

Berkshire Hathaway without the Commissioner’s approval,

and then attempted to bypass the California insurance

regulatory scheme by merging CIC I with the California

Insurance Company (CIC II), a New Mexico-domesticated

shell company formed by Menzies. The Superior Court

granted the Commissioner’s conservatorship application and

appointed the Commissioner as Conservator of CIC I. After

CIC I unsuccessfully challenged the bases of the

conservatorship in state court, Applied Underwriters, of

which Menzies is the Chief Executive Officer, and CIC II

filed separate actions in federal court asserting causes of

actions under § 1983.

*

This summary constitutes no part of the opinion of the court. It

has been prepared by court staff for the convenience of the reader.

4 APPLIED UNDERWRITERS V. LARA

The district court dismissed both actions pursuant to

Federal Rule of Civil Procedure 12(b)(1) on the basis that it

lacked jurisdiction to hear the cases under both the Younger

abstention doctrine and the prior exclusive jurisdiction rule.

The panel held that because important considerations of

federalism were at stake, the district court’s reliance on

Younger abstention as a ground for dismissal was in error.

The panel held that 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,” making the application of

Younger improper in this case.

The panel nevertheless held that dismissal of appellants’

claims was warranted on account of the prior exclusive

jurisdiction rule, which holds that when a court of competent

jurisdiction has obtained possession, custody, or control of

particular property, that possession may not be disturbed by

any other court. In applying the prior exclusive jurisdiction

rule, the panel determined that the insurance conservatorship

was an in rem proceeding and that the federal actions seeking

to end the conservatorship’s control over CIC I’s assets were

either in rem or quasi in rem proceedings.

To the panel’s knowledge, this was the first case in this

Court implicating the prior exclusive jurisdiction rule in

connection with a § 1983 action. The panel noted that

limitations on the exclusive jurisdiction rule may be

necessary in unusual circumstances in which the

adjudication of constitutional rights might be compromised

but concluded that this case did not present any such

circumstances. Thus, appellants’ interests were well

represented in the conservatorship action; they had an

APPLIED UNDERWRITERS V. LARA 5

adequate opportunity to raise constitutional challenges; they

failed to sufficiently allege that the conservatorship action

was brought in bad faith; and they failed to demonstrate

irreparable injury arising from extraordinary circumstances

which might justify an exception to the prior exclusive

jurisdiction rule. Accordingly, federal judicial abstention

due to the San Mateo Superior Court’s prior exclusive

jurisdiction of the CIC I res was warranted.

Concurring in the result, Judge Nguyen agreed that

affirming the district court’s dismissal of these federal

actions was warranted. But she wrote separately because, in

her view, the district court correctly dismissed under

Younger abstention. In reversing the district court’s

dismissal on this ground, the majority held that insurance

conservatorships were not the type of civil enforcement

proceedings to which Younger abstention applies. Judge

Nguyen wrote that to the contrary, insurance

conservatorships embody all of the characteristics which

define that category. Rather than applying the Younger

doctrine, which was tailor-made for this situation, the

majority instead attempted to modernize the doctrine of prior

exclusive jurisdiction. Because Judge Nguyen believed

Younger abstention applied, she concurred only in the result.

6 APPLIED UNDERWRITERS V. LARA

COUNSEL

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.

OPINION

BEA, Circuit Judge:

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.

1

Virgil, Aeneid, 10:284.

APPLIED UNDERWRITERS V. LARA 7

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

8 APPLIED UNDERWRITERS V. LARA

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.

I. BACKGROUND

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

2

See Cal. Ins. Code § 24 (defining “admitted” as “entitled to transact

insurance business in this state, having complied with the laws imposing

conditions precedent to transaction of such business”).

APPLIED UNDERWRITERS V. LARA 9

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.

10 APPLIED UNDERWRITERS V. LARA

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).

Also on November 4, 2019, again without any notice to

Appellants, the Superior Court granted the Commissioner’s

conservation application, appointing California Insurance

Commissioner Ricardo Lara as the Conservator of CIC I. In

justifying lack of notice to Appellants, the Superior Court

explicitly found

that the Commissioner has . . . established

good cause to believe that the State of

California would be prejudiced were it to

provide respondent advanced notice of this

proceeding in that [CIC I] has within its

authority power to at any time complete the

ostensible consummation of the transaction,

APPLIED UNDERWRITERS V. LARA 11

which would have the effect of at least

forfeiting [CIC I’s] certificate of authority,

rendering California policyholders ostensibly

insured by an out-of-state insurer without

authority to transact insurance in California

....

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 Superior Court denied CIC I’s

application to vacate the conservatorship on August 11,

2020, for the following reasons:

Respondents attempted to take [CIC I] and its

assets out of California via a merger without

adequate protection of policyholders and the

public and the Conservatorship was ordered

on those grounds. Respondents have failed

to demonstrate that the conditions

necessitating conservation no longer exist. In

light of Respondent’s prior conduct, the

Conservation Order ensures that

Respondents do not again attempt to take

[CIC I] and its assets out of California . . .

[and] the Commissioner’s preference to

pursue a Rehabilitation Plan [for CIC I] is

reasonable and sufficient under the

circumstances.

12 APPLIED UNDERWRITERS V. LARA

Following this denial, CIC I filed an application for

interlocutory appellate review with the California Court of

Appeal, which was also denied. The record does not

demonstrate whether a writ was sought from the California

Supreme Court. On October 19, 2020, the Commissioner

filed a proposed Rehabilitation Plan (“Rehabilitation Plan”)

with the Superior Court which articulated the terms he would

accept to end the conservatorship of CIC I. CIC I has refused

to accept the Commissioner’s stated terms, so the

conservatorship proceedings remain ongoing.

After CIC I had unsuccessfully challenged the bases of

the conservatorship in state court, Appellants Applied and

CIC II filed separate actions in federal court, asserting causes

of action under 42 U.S.C. § 1983 alleging various

constitutional violations (“the federal actions”). Appellants

sought, among other forms of relief, orders “declaring the

Commissioner’s actions, as alleged, violate [Appellants’]

rights to due process and equal protection under the

Fourteenth Amendment to the United States Constitution.”

Appellants also sought orders “directing the Commissioner

to take all necessary steps to end [CIC I’s] conservatorship

pursuant to California Insurance Code § 1012, and enjoining

the Commissioner from continuing the conservation.” 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.

II. STANDARD OF REVIEW

A district court’s determination of subject matter

jurisdiction, including its application of the prior exclusive

jurisdiction rule, is reviewed de novo. Chapman v. Deutsche

Bank Nat. Trust Co., 651 F.3d 1039, 1043 (9th Cir. 2011).

APPLIED UNDERWRITERS V. LARA 13

A district court’s determination to apply Younger abstention

is reviewed de novo. Bean v. Matteucci, 986 F.3d 1128,

1132 (9th Cir. 2021).

III. ANALYSIS

A. Younger abstention is not proper in an action

challenging an insurance conservatorship

In “exceptional circumstances,” the Younger abstention

doctrine instructs federal courts to decline to hear a case

when a parallel state proceeding is ongoing. New Orleans

Pub. Serv., Inc. v. Council of New Orleans (NOPSI),

491 U.S. 350, 368 (1989). Younger abstention is rooted in

“the basic doctrine of equity jurisprudence that courts of

equity should not act . . . to restrain a criminal prosecution,

when the moving party has an adequate remedy at law and

will not suffer irreparable injury if denied equitable relief.”

Younger v. Harris, 401 U.S. 37, 43–44 (1971) (emphasis

added). Following a period of continuous expansion,

including to some civil proceedings, the Supreme Court

firmly cabined the scope of the doctrine, holding that

Younger applies only to three categories of cases (the NOPSI

categories): 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.” Sprint Commc’ns, Inc. v. Jacobs,

571 U.S. 69, 78 (2013) (cleaned up). If a state proceeding

falls into one of these three categories, Younger abstention is

applicable, but only if the three additional factors laid out in

Middlesex County Ethics Committee v. Garden State Bar

Association, 457 U.S. 423, 432 (1982) are also met: that the

state proceeding is 1) “ongoing”; 2) “implicate[s] important

state interests”; and 3) “provide[s] adequate opportunity . . .

to raise constitutional challenges.” Herrera v. City of

14 APPLIED UNDERWRITERS V. LARA

Palmdale, 918 F.3d 1037, 1044 (9th Cir. 2019) (quoting

Middlesex, 457 U.S. at 432) (cleaned up).

Here, the district court found that the Superior Court

insurance conservatorship was a “civil enforcement

proceeding” sufficient to warrant Younger, and that the three

Middlesex factors were met. This holding was in error.

The hallmark of the civil enforcement proceeding

category for Younger purposes is that such proceedings are

“akin to a criminal prosecution” in “important respects.”

Huffman v. Pursue, Ltd., 420 U.S. 592, 604 (1975). As noted

in Sprint,

Such enforcement actions are

characteristically initiated to sanction the

federal plaintiff, i.e., the party challenging

the state action, for some wrongful act. In

cases of this genre, a state actor is routinely a

party to the state proceeding and often

initiates the action. Investigations are

commonly involved, often culminating in the

filing of a formal complaint or charges.

Sprint, 571 U.S. at 79–80 (citations omitted). Admittedly,

the current situation bears some resemblance to a criminal

prosecution. Here, the insurance conservatorship was

brought by the Commissioner “acting under and within [the]

police power” of the state of California pursuant to

California Insurance Code § 1011. Carpenter v. Pac. Mut.

Life Ins. Co. of Cal., 10 Cal. 2d 307, 331 (1937).

Specifically, the ex parte application alleged that, upon an

investigation of the Commissioner, “Menzies’s attempt to

merge [CIC I] into and with CIC II without having filed and

obtained written approval of the Commissioner to merge

[CIC I] into a New Mexico domestic insurer is ground for

APPLIED UNDERWRITERS V. LARA 15

conservation of an insurer pursuant to section 1011.”

Moreover, as noted above, in reviewing CIC I’s challenge to

vacate the conservation order, the Superior Court found that

“Respondents attempted to take [CIC I] and its assets out of

California via a merger without adequate protection of

policyholders and the public and the Conservatorship was

ordered on those grounds. Respondents have failed to

demonstrate that the conditions necessitating conservation

no longer exist.” It was on these grounds that the district

court found the conservatorship was a “civil enforcement

action” sufficient to merit Younger abstention.

This insurance conservatorship, however, cannot be said

to have been brought “to sanction the federal plaintiff . . . for

some wrongful act,” Sprint, 571 U.S. at 79, which is the

quintessential feature of a Younger-eligible “civil

enforcement action.” Indeed, in every case of the civil

enforcement genre cited by Sprint where Younger abstention

was found to be valid, the parallel proceedings were either

“in aid of and closely related to criminal statutes,” Huffman,

420 U.S. at 604, or were aimed at punishing some wrongful

act through a penalty or sanction, see, e.g., Ohio Civ. Rights

Comm’n v. Dayton Christian Schools, Inc., 477 U.S. 619,

629 (1986) (state-initiated administrative proceedings to

enforce state civil rights laws, noting “potential sanctions for

the alleged sex discrimination”); Middlesex, 457 U.S. at 427,

433–34 (state-initiated disciplinary proceedings against

lawyer for violation of state ethics rules, noting the

availability of “private reprimand” and “disbarment or

suspension for more than one year”); Moore v. Sims,

442 U.S. 415, 419–20, 423 (1979) (state-initiated

proceeding to gain custody of children allegedly abused by

their parents, noting the action was “in aid of and closely

related to criminal statutes”); Trainor v. Hernandez,

431 U.S. 434, 435, 444 (1977) (civil proceeding “brought by

16 APPLIED UNDERWRITERS V. LARA

the State in its sovereign capacity” to recover welfare

payments defendants had allegedly obtained by fraud, “a

crime under Illinois law”); Huffman, 420 U.S. at 596–98

(state-initiated proceeding to enforce public nuisance laws,

which provided for “closure for up to a year of any place

determined to be a nuisance,” “preliminary injunctions

pending final determination of status as a nuisance,” and

“sale of all personal property used in conducting the

nuisance”).

Here, the complete lack of sanctions being sought

against Appellants belie any punitive character to the

insurance conservatorship action. This feature underscores

why Younger abstention is not proper in this case. As noted

long ago by the California Supreme Court, in an insurance

conservatorship brought under the California Insurance

Code,

[t]he commissioner [is] not prosecuting an

action “for the enforcement or protection of a

right,” or for the “redress or prevention of a

wrong,” or for the “punishment of a public

offense.” The proceeding [is] had under

sections 1010 to 1061 of the Insurance Code

which specially deal with the rehabilitation

and liquidation of insurance companies.

Those sections set up a comprehensive

statutory scheme to accomplish those results.

The proceeding is not one in which another

party is prosecuting another party at all. It is

simply a proceeding in which the state is

invoking its power over a corporate entity

permitted by the state to engage in a business

vitally affected with the public interest upon

APPLIED UNDERWRITERS V. LARA 17

condition of continuing compliance with the

requirements provided by the state.

Carpenter, 10 Cal. 2d at 327.

To be sure, the nature of the conservatorship in

Carpenter was insolvency, id. at 315, not one like here,

where CIC I was, and appears to remain, a financially viable

entity. Notably, Appellants contend that, before this

contested conservatorship, insurance conservatorships in

California have usually been brought only when a firm has

become insolvent or was at risk of becoming insolvent.

Nonetheless, it is immaterial for Younger purposes that here,

the conservatorship was brought because of an attempt by

CIC I to consummate an unapproved sale of controlling

interest and merger and to move the company’s assets out of

state, instead of for reasons of insolvency.

For one, as in conservatorships brought on by a firm’s

insolvency, the Commissioner’s actions here were motivated

by the purpose of ensuring “adequate protection of

policyholders and the public.” As the Commissioner’s

conservatorship application explained, if CIC I were

“permitted to consummate” the Merger, then CIC I

policyholders in California might “be left holding policies of

a non-admitted insurer,” such that “policyholders, including

employees with serious work-related injuries and other

claimants entitled to vital and necessary insurance benefits,

may not have recourse to benefits.” Thus, as with a

conservatorship brought on by insolvency, the CIC I

conservatorship is not a proceeding aimed at “punishment of

18 APPLIED UNDERWRITERS V. LARA

a public offense” but rather one “by the state in the interest

of the public.” Id. at 327. 3

Moreover, insolvency is itself often driven by acts that

are in disregard of the public interest, as is an unapproved

sale of controlling interest and concomitant merger attempt.

Yet the disregard-of-public-interest factor alone does not

impart those acts with the requisite “wrongful” nature such

that punitive sanctions are merited. Indeed, in Carpenter,

the noted insolvency had a readily identifiable cause: “that

the hazardous and insolvent condition is principally caused

by reason of the fact that for many years the company has

issued a large number of noncancellable accident and health

policies . . . at a rate inadequate to maintain the lawful

reserves behind such policies.” Id. at 315. Even though the

insolvency was brought on because of clearly identifiable

imprudent acts by the managers of the insolvent firm, these

imprudent acts in no way impacted the California Supreme

Court’s analysis that the conservatorship was not brought to

prosecute “an action for the enforcement or protection of a

right, or for the redress or prevention of a wrong, or for the

punishment of a public offense.” Id. at 327 (internal

quotation marks omitted).

3

As noted by the concurrence, “individualized inquiries into motive

are not part of [the Younger] analysis,” citing Bristol-Meyers Squibb Co.

v. Connors, 979 F.3d 732, 737 (9th Cir. 2020). We agree. However, this

fact cuts against the concurrence’s argument, given that, as demonstrated

above, conservatorships are fundamentally brought “by the state in the

interest of the public,” and not for the “punishment of a public offense.”

Carpenter, 10 Cal. 2d at 327. It is only after attempting to divine the

Commissioner’s true motive in bringing the conservatorship of CIC I

that the concurrence is able to determine that this conservatorship is a

sanction.

APPLIED UNDERWRITERS V. LARA 19

We therefore decline to extend the class of “civil

enforcement proceedings” sufficient to warrant application

of Younger to actions divorced from a quasi-criminal

context. See Sprint, 571 U.S. at 81. Accordingly, the district

court’s application of the Younger abstention doctrine to this

case was in error. 4 Nonetheless, dismissal of Appellants’

4

Appellees contend that in addition to falling within the “civil

enforcement action” NOPSI category, insurance conservatorships also

fall within the category of “civil proceedings involving certain orders

that are uniquely in the furtherance of the state courts’ ability to perform

their judicial functions.” 491 U.S. at 368. This argument is meritless.

This third category has been explained to stand “in aid of the authority

of the judicial system, so that its orders and judgments are not rendered

nugatory,” Pennzoil Co. v. Texaco, Inc., 481 U.S. 1, 13 (1987) (cleaned

up), and has been applied by the Supreme Court to require federal

abstention in order to avoid interfering with civil contempt orders,

Juidice v. Vail, 430 U.S. 327, 336 n. 12 (1977), and to avoid interfering

with state requirements to post bond pending appeal, Pennzoil Co.,

481 U.S. at 3, 18. The district court correctly found that the insurance

conservatorship does not implicate “the regular operation of [a state

court’s] judicial system” with respect to “the processes by which the

State compels compliance with the judgements of its courts,” Pennzoil

Co., 481 U.S. at 13–14 (cleaned up), and that it is therefore not within

the scope of this category.

Appellees’ argument that Worldwide Church of God, Inc. v.

California, 623 F.2d 613 (9th Cir. 1980) (per curiam), demands

otherwise is unpersuasive. Worldwide Church conforms with the

established proposition that Younger applies to certain “civil

enforcement actions,” as at issue in that case was the court-ordered

imposition of a permanent receivership of a church allegedly engaged in

the fraudulent distribution of charitable donations to the personal

accounts of those who controlled the church. Id. at 614–15 (emphasis

added). Notably, Worldwide Church was decided before Middlesex,

Pennzoil, NOPSI, or Sprint were decided and so does not reflect NOPSI’s

and Sprint’s cabining of Younger to the three distinct “exceptional

circumstances” described above. NOPSI, 491 U.S. at 368. And, in any

event, Worldwide Church did not cite Juidice or purport to extend the

logic of Juidice’s abstention holding beyond proceedings that lie “at the

20 APPLIED UNDERWRITERS V. LARA

claims was warranted on account of the prior exclusive

jurisdiction rule.

B. The prior exclusive jurisdiction rule bars federal

interference

“[T]he ancient and oft-repeated . . . doctrine of prior

exclusive jurisdiction [holds] that when a court of competent

jurisdiction has obtained possession, custody, or control of

particular property, that possession may not be disturbed by

any other court.” State Eng’r v. S. Fork Band of Te-Maok

Tribe of W. Shoshone Indians, 339 F.3d 804, 809 (9th Cir.

2003) (cleaned up). Said another way, where one court first

takes proper in rem jurisdiction over a res, another court “is

precluded from exercising its jurisdiction over the same res.”

Kline v. Burke Const. Co., 260 U.S. 226, 229 (1922); see also

Princess Lida of Thurn & Taxis v. Thompson, 305 U.S. 456,

466–67 (1939).

As a threshold matter, the application at the heart of this

case seeking an insurance conservatorship was first filed on

November 4, 2019, and the conservatorship of CIC I was

granted on the same day. The federal actions currently on

appeal were first filed on October 20, 2020 (Applied action)

and January 6, 2021 (CIC II action). Therefore, if both the

insurance conservatorship and the federal actions are either

in rem or quasi in rem proceedings, the prior exclusive

jurisdiction rule applies to bar the federal actions, subject to

the limited exceptions we announce below.

core of the administration of a State’s judicial system.” Juidice, 430 U.S.

at 335.

APPLIED UNDERWRITERS V. LARA 21

1. The insurance conservatorship is an in rem

proceeding

Looking to the insurance conservation order itself, the

Superior Court asserted in rem jurisdiction over CIC I by

authorizing the Conservator to take title to CIC I:

11. The Conservator is authorized in his or

her discretion to take possession of any and

all assets of [CIC I], including books,

records, property (both real and personal),

accounts, safe deposit boxes, rights of action,

and all such assets as may be in the name of

[CIC I], wheresoever situated.

12. Title to all property and assets of [CIC I],

designated by the Conservator in his or her

discretion, including deposits, securities,

contracts, rights of actions, books, records,

and other assets of every type and nature, and

including both those presently in [CIC I’s]

possession and those that may be discovered

hereafter, wheresoever situated, that are

necessary or appropriate for the orderly

conservation of [CIC I] is to be vested in the

Conservator or his or her successor in office,

in his official capacity as Conservator. The

Conservator is authorized to deal with such

assets in his or her own name as Conservator

or in the name of [CIC I], and all persons are

enjoined from interfering with Conservator’s

possession and title to such assets.

Appellants challenge this view, contending that because

title to CIC I was vested in the Commissioner instead of the

22 APPLIED UNDERWRITERS V. LARA

Superior Court itself, the conservatorship is not properly

understood as proceeding in rem. This view is unpersuasive,

for two reasons. First, it ignores the Superior Court’s own

explicit assertion of in rem jurisdiction over CIC I:

11. Powers of the Court and the

Conservator. This Court shall continue to

assert and to maintain sole and exclusive

jurisdiction, to the exclusion of all other

courts or tribunals, over and to all assets of

[CIC I] of whatsoever kind or nature and

wherever or however owned or held.

Second, United States v. Bank of New York & Trust Co.,

296 U.S. 463 (1936) forecloses Appellants’ argument.

There, the Court noted that while “the state court directed the

superintendent of insurance to take possession of the assets”

of the conserved insurance firms, “[t]he proceeding was

essentially one in rem,” id. at 475, later noting that “the

superintendent still holds possession by virtue of [the state

court’s] authorization, and the res thus remains under the

court’s jurisdiction,” id. at 476.

Garamendi v. Executive Life Insurance Co., 17 Cal. App.

4th 504 (1993), further supports the in rem classification

here. Garamendi considered an appeal of a Superior Court

order in an insurance conservatorship arising under

California Insurance Code § 1011. Id. at 508–09. The

conservatorship concerned assets of a limited partnership in

which the insurance company under conservatorship owned

a 92% interest. Id. at 509. Garamendi held that the

insurance company under conservatorship and the affected

limited partnership shared an “identity of interest” sufficient

to give the Superior Court jurisdiction over the limited

partnership’s assets pursuant to the original conservation

APPLIED UNDERWRITERS V. LARA 23

order. Id. at 523. In doing so, Garamendi explicitly

categorized the Superior Court’s jurisdiction in that action as

in rem. Id. This view was subsequently endorsed by this

Court in Morgan Stanley Mortgage Capital Inc. v. Insurance

Commissioner, 18 F.3d 790, 792 (9th Cir. 1994).

Based on the cited cases, the state court insurance

conservatorship here challenged is one proceeding in rem.

2. The federal actions are either in rem or quasi in rem

proceedings

In form, the federal actions are in personam actions

asserting claims under 42 U.S.C. § 1983 directed against

certain state officials. However, State Engineer instructs

courts to look “behind the form of the action to the gravamen

of a complaint and the nature of the right sued on” when

determining the true jurisdictional nature of a case. 339 F.3d

at 810 (cleaned up).

Here, in both federal actions, the gravamen of the

complaint is directed at ending the conservatorship’s control

over CIC I’s assets:

PRAYER FOR RELIEF

WHEREFORE, in connection with the

preceding paragraphs, Plaintiffs respectfully

request that the Court enter judgment in their

favor against Defendants, and award the

following relief:

A. An Order declaring the Commissioner’s

actions, as alleged, violate Plaintiffs’ rights to

due process and equal protection under the

24 APPLIED UNDERWRITERS V. LARA

Fourteenth Amendment to the United States

Constitution;

B. An Order declaring the Commissioner’s

actions, as alleged, constitute a violation of

the Dormant Commerce Clause and an

unlawful taking of Plaintiffs’ property

interests in violation of the Fifth and

Fourteenth Amendments to the United States

Constitution;

C. An Order directing the Commissioner to

take all necessary steps to end CIC’s

conservatorship pursuant to California

Insurance Code § 1012, and enjoining the

Commissioner from continuing the

conservation;

Appellants’ prayers for relief seeking declaratory orders also

seek to interfere with the state court’s control over the CIC I

res, imparting an inherently in rem nature to the federal

actions.

Moreover, in State Engineer, the Court rejected

Appellants’ argument that the underlying “contempt actions

[were] in personam rather than in rem,” 339 F.3d at 810,

recognizing that “the contempt action was brought to enforce

a decree over a res,” id. at 811. In this respect, State

Engineer mirrors the instant federal actions, which, as noted

above, seek “necessarily [to] interfere with the jurisdiction

or control by the state court over the res”—here, the assets

of CIC I. Bank of N.Y., 296 U.S. at 478. Similarly, in Bank

of New York, although the underlying complaints were

brought by the United States in form as in personam actions

in “accounting and delivery” against two New York banks

APPLIED UNDERWRITERS V. LARA 25

concerning the United States’ claim to ownership over

certain funds, id. at 470, the Supreme Court looked through

the form of the actions to observe that “the object of the suits

is to take the property from the depositaries and from the

control of the state court, and to vest the property in the

United States to the exclusion of all those whose claims are

being adjudicated in the state proceedings,” id. at 478, and

were thus in rem proceedings.

For these reasons, the federal actions are necessarily

proceeding either in rem or quasi in rem. And as the state

court insurance conservatorship is also one proceeding in

rem and was filed first, it appears the federal actions must be

dismissed.

3. Prior exclusive jurisdiction and 42 U.S.C. § 1983

This case does, however, have a unique and important

feature. To our knowledge, it is the first case in this Court

implicating the prior exclusive jurisdiction rule in

connection with a 42 U.S.C. § 1983 action. 5 And as it is

currently formulated in the caselaw, the prior exclusive

jurisdiction rule presents as an absolute bar to federal court

involvement in state court suits when both suits are either in

rem or quasi in rem, regardless of the presence of any

claimed deprivations of constitutional rights occurring in the

5

In a recent unpublished decision, the Third Circuit considered a

42 U.S.C. § 1983 action which also implicated the prior exclusive

jurisdiction rule, finding that the prior exclusive jurisdiction rule barred

jurisdiction in that case. Dyno v. Dyno, No. 20-3302, 2021 WL 3508252,

at *2 (3rd Cir. Aug. 10, 2021) (referring to the prior exclusive

jurisdiction rule as “the Princess Lida doctrine,” citing Princess Lida,

305 U.S. at 466).

26 APPLIED UNDERWRITERS V. LARA

initial action. 6 Accordingly, we take occasion to discuss

limitations on the prior exclusive jurisdiction rule that may

be necessary in unusual circumstances in which the

adjudication of constitutional rights might be compromised,

but conclude that this case does not present any such

circumstances.

At core, abstention doctrines are rooted in policy

considerations which allow federal courts to exercise

“discretion in determining whether to grant certain types of

relief—a discretion that was part of the common-law

background against which the statutes conferring

jurisdiction were enacted.” NOPSI, 491 U.S. at 359.

Accordingly, “there are some classes of cases in which the

withholding of authorized equitable relief because of undue

interference with state proceedings is ‘the normal thing to

do.’” Id. (quoting Younger, 401 U.S. at 45). Still, abstention

is only “the normal thing to do” in “exceptional

circumstances.” Sprint, 571 U.S. at 78 (quoting NOPSI,

491 U.S. at 368). Such “exceptional circumstances” have

been generalized to embody situations “where denying a

federal forum would clearly serve an important

countervailing interest, for example, where abstention is

warranted by considerations of proper constitutional

adjudication, regard for federal-state relations, or wise

judicial administration.” Quackenbush v. Allstate Ins. Co.,

517 U.S. 706, 716 (1996) (cleaned up). “Few public

interests have a higher claim upon the discretion of a federal

chancellor than the avoidance of needless friction with state

6

To be sure, the prior exclusive jurisdiction rule applies with equal

force in prohibiting a state court from interfering with a federal court that

first takes in rem or quasi in rem jurisdiction over a disputed res. See,

e.g., United States v. Alpine Land & Reservoir Co., 174 F.3d 1007,

1012–14 (9th Cir. 1999).

APPLIED UNDERWRITERS V. LARA 27

policies, whether the policy relates to the enforcement of the

criminal law, or the administration of a specialized scheme

for liquidating embarrassed business enterprises, or the final

authority of a state court to interpret doubtful regulatory laws

of the state.” Id. at 717–18 (quoting R.R. Comm’n of Tex. v.

Pullman, 312 U.S. 496, 500 (1941)). And to be sure,

“[s]tates, as a matter of tradition and express federal consent,

have an important interest in maintaining precise and

detailed regulatory schemes for the insurance industry.” Id.

at 733 (Kennedy, J., concurring) (citing McCarran-Ferguson

Act, Pub. L. No. 79-15, 59 Stat. 33 (1945) (codified as

amended at 15 U.S.C. § 1011 et seq.)).

Standing in contrast to the abstention doctrines, Ex parte

Young, 209 U.S. 123 (1908), and its progeny explicitly

permit injunctions against state officials preventing them

from prosecuting criminal actions “where the danger of

irreparable loss is both great and immediate,” Younger,

401 U.S. at 45 (quoting Fenner v. Boykin, 271 U.S. 240, 243

(1926)). Notably, Younger itself refused to extend Ex parte

Young to enjoin a prosecution that “was already pending in

the state court” and which afforded the moving party “an

opportunity to raise his constitutional claims.” Id. at 49. The

Younger Court emphasized that “the possible

unconstitutionality of a statute ‘on its face’ does not in itself

justify an injunction against good-faith attempts to enforce

it, and that [the party seeking the injunction] failed to make

any showing of bad faith, harassment, or any other unusual

circumstance that would call for equitable relief.” Id. at 54.

With this background, 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. By

maintaining otherwise, Appellants ask this Court to craft a

broad, Ex parte Young-type exception to the prior exclusive

28 APPLIED UNDERWRITERS V. LARA

jurisdiction rule for any 42 U.S.C. § 1983 action brought

against state officials when such suits seek to enjoin an

ongoing state court in rem proceeding. This we shall not do.

Nor are there any special circumstances in this case

justifying a limitation on the prior exclusive jurisdiction rule.

Appellants first argue in this regard that they are unable to

present any objections in the insurance conservatorship at

all, given that they are not parties to that action. However,

Appellants’ interests are well represented in the

conservatorship action, given that each of CIC I, CIC II, and

Applied are all subject to the common management and

control of Steven Menzies and Jeffrey Silver. 7 Further, as

noted by the district court, any party with a material interest

in CIC I has been “expressly invited . . . to submit any

objections—constitutional or otherwise—they have to the

Proposed Rehabilitation Plan in writing and orally at the

hearing on the Commissioner’s application to approve the

Plan.”

Appellants next argue that certain procedural

characteristics of the conservatorship proceeding will

prevent them from adequately raising their constitutional

claims, alleging that “the limitations of conservation

7

Here, an analogy exists to Younger abstention principles. Supreme

Court precedent holds that Younger abstention is applicable when

nominally distinct parties to the state and federal actions are nonetheless

“so closely related that they should all be subject to the Younger

considerations which govern any one of them.” Doran v. Salem Inn,

Inc., 422 U.S. 922, 928 (1975). Moreover, in Herrera v. City of

Palmdale, 918 F.3d 1037 (9th Cir. 2019), this Court held that Younger

abstention was applicable where the state action was brought against a

corporation while the federal action was brought by the co-founders of

the corporation and their family, id. at 1041, 1047. Appellants offer no

reasons why these same considerations should not apply in the prior

exclusive jurisdiction analysis.

APPLIED UNDERWRITERS V. LARA 29

proceedings under California law foreclose any realistic

ability for Appellants to develop and present fact-based

constitutional claims hinging on proof of motive and conduct

rather than the facial validity of a law.” However, state

caselaw firmly establishes the contrary—that Appellants do

have adequate opportunity to raise constitutional challenges

in insurance conservatorship proceedings. Carpenter, the

earlier mentioned California Supreme Court case, for

example, reviewed arguments “that the provisions of the

Insurance Code dealing with rehabilitation of insolvent

insurance companies were unconstitutional in that they

violated the due process, equal protection of the law, and the

contract clauses of the Federal Constitution.” Carpenter,

10 Cal. 2d at 328–32. 8 Rhode Island Insurance Co. v.

Downey, 95 Cal. App. 2d 220 (1949), considered a

“[p]etition for a writ of mandate directing the superior court

to vacate its ‘Order Appointing Conservator and Restraining

Order’ in a proceeding brought against petitioner by

respondent Insurance Commissioner of the State of

California” which argued “that to make the application of

statutes providing for summary seizure constitutional there

must be a reasonable necessity for taking, coupled with an

adequate remedy giving the company whose assets are

seized the right to show that the seizure was unnecessary and

unjustified,” id. at 223, 238–39. And In re Executive Life

Insurance Co., 32 Cal. App. 4th 344 (1995), considered the

appellants’ “claim that the nature of the confirmation hearing

on the modified [rehabilitation] plan denied them their First

Amendment rights of speech and petition,” id. at 391.

To the extent that Appellants are genuinely unable to

raise fact-based “claims of unconstitutional retaliation” “for

8

Carpenter was then further affirmed by the U.S. Supreme Court in

Neblett v. Carpenter, 305 U.S. 297 (1938).

30 APPLIED UNDERWRITERS V. LARA

[CIC I’s] and Appellants’ First Amendment activity,” there

would unquestionably be a proper due process challenge

under the Fourteenth Amendment to the facial validity of the

relevant provisions of the California Insurance Code, a

challenge the Superior Court, Court of Appeals, and

California Supreme Court are able to pass upon, as

thoroughly demonstrated by the California state caselaw

cited above. 9 Indeed, due process challenges have been

raised in CIC I’s application for interlocutory appellate

review with the California Court of Appeal. Specifically,

CIC I asserted in its petition for writ of mandate or other

relief that the “Superior Court’s Failure to Conduct a Full

Hearing And to Construe the Relevant Statute Was Legal

Error And Violated the Express Terms of Section 1012 and

[CIC I’s] Right to Due Process.” And as stated above, 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.

Contrary to Appellants’ representation that “the Superior

Court concluded that state law forecloses any scrutiny of

Appellees’ choice to pursue a conservation over an

injunction,” the Superior Court explicitly found, on the

merits, that “the Commissioner’s preference to pursue a

Rehabilitation Plan is reasonable and sufficient under the

circumstances,” evincing that the Superior Court considered

9

Just as in Younger, whether the party seeking to enjoin ongoing

proceedings has “an adequate opportunity to raise constitutional claims”

“does not turn on whether the federal plaintiff actually avails himself of

the opportunity to present federal constitutional claims in the state

proceeding, but rather whether such an opportunity exists.” Herrera,

918 F.3d at 1045–46.

APPLIED UNDERWRITERS V. LARA 31

CIC I’s arguments of whether the Commissioner was

justified in pursuing a conservatorship over an injunction.

We will also consider, as in Younger cases, “bad faith”

and “irreparable injury” exceptions to the otherwise valid

application of the prior exclusive jurisdiction rule. In the

context of Younger, “bad faith ‘generally means that a

prosecution has been brought without a reasonable

expectation of obtaining a valid conviction.’” Baffert v. Cal.

Horse Racing Bd., 332 F.3d 613, 621 (9th Cir. 2003)

(quoting Kugler v. Helfant, 421 U.S. 117, 126 n.6 (1975)).

Such “bad faith” might arise in cases involving “repeated

harassment by enforcement authorities with no intention of

securing a conclusive resolution” or where there is evidence

of “pecuniary bias by the tribunal.” Partington v. Gedan,

961 F.2d 852, 861–62 (9th Cir. 1992). The Second Circuit

has provided the following helpful guidance for determining

what constitutes an allegation of “bad faith”: “it is only when

the state proceeding is brought with no legitimate purpose

that [the] state interest in correcting its own mistakes

dissipates” and the “bad faith” exception to Younger applies.

Diamond “D” Const. Corp. v. McGowan, 282 F.3d 191, 200

(2nd Cir. 2002) (emphasis added).

Moreover, the Supreme Court in Hicks v. Miranda,

422 U.S. 332 (1975), stated that where there are allegations

of “repeated judicial authorization” for the alleged bad faith

conduct of the federal defendant, “we cannot agree that bad

faith and harassment were made out” unless there is an

allegation that the judicial authorization itself was steeped in

the bad faith actions of the judicial officers involved, id.

at 351.

In view of these teachings, it is clear there are no

sufficient allegations of “bad faith” here to merit an

exception to the valid application of the prior exclusive

32 APPLIED UNDERWRITERS V. LARA

jurisdiction rule. As previously noted, the conservatorship

action was brought for a legitimate reason—indeed,

Appellants’ own factual allegations make out a violation of

§ 1215.2(d) sufficient to trigger a conservatorship under

§ 1011(c). The allegations make clear that Appellants

neither sought nor received approval from the CDI for the

proposed purchase of the controlling interest in CIC I and

the concomitant CIC I / CIC II merger, as required by

California Insurance Code § 1215.2(d), and that the merger

was an obvious attempt to avoid the California insurance

regulatory regime. It is possible to imagine a hypothetical

situation in which the Commissioner is seeking, through his

proposed Rehabilitation Plan, favorable settlements for

politically allied recipients to compensate for past and future

political contributions, or improper kickbacks for himself

from settlement recipients or others who may conceivably

be favored by other provisions of the proposed

Rehabilitation Plan. This sort of skullduggery could make

out a viable bad faith claim against the Commissioner.

Before the district court below, Appellants did make

some allegations vaguely to that effect, at least implicitly.10

However, Appellants’ allegations do not suggest that the

Commissioner acted “with no intention of securing a

conclusive resolution.” Partington, 961 F.2d at 862. What

is more, an allegation of “bad faith” is not a talisman

sufficient to overcome an otherwise proper exercise of

abstention. For purposes of fashioning a “bad faith”

10

Appellants asserted, among other claims, that Appellees “are

using their broad state conservation powers as a club to force settlement

by parties in private litigation that they want policyholders and their

attorneys to win.” Why they wanted those parties to win—for some

nefarious purpose, or because those parties were entitled to prevail—was

not spelled out.

APPLIED UNDERWRITERS V. LARA 33

exception to the application of the prior exclusive

jurisdiction rule, in addition to the due process exception

already outlined, by analogy to Younger, Appellants in these

circumstances—where state officials have sought and

received “repeated judicial authorization for their

conduct”—must allege that the state court itself is part of the

Commissioner’s bad faith scheme, or is otherwise acting in

bad faith to deprive Appellants of a fair chance to litigate the

propriety of the exercise of in rem jurisdiction. Hicks,

422 U.S. at 351. Appellants have failed to make such

allegations. 11

Likewise, Appellants have failed to demonstrate

“irreparable injury” arising from “extraordinary

circumstances” which might justify an exception to the prior

exclusive jurisdiction rule. In the context of Younger, as

noted by the district court, “such circumstances must be

‘extraordinary’ in the sense of creating an extraordinarily

pressing need for immediate federal equitable relief, not

merely in the sense of presenting a highly unusual factual

situation.” Moore v. Sims, 442 U.S. 415, 433 (1979)

11

To be clear, where the state officials have sought and received

judicial authorization for their conduct, the necessity of bad faith

allegations against the Superior Court itself cannot be understated.

Simply alleging that the Superior Court made an incorrect ruling, even a

“clear error,” is not sufficient to defeat an otherwise proper application

of abstention. A respect for federalism demands as much. Appellants

can seek review of the Superior Court’s decision in the California Court

of Appeals, the California Supreme Court, and ultimately, the Supreme

Court of the United States. Without specific allegations that the Superior

Court is itself acting in bad faith, this federal tribunal must respect the

competency of the parallel state court system to correct any mistakes of

law that are made in that system. “Minimal respect for the state

processes, of course, precludes any presumption that the state courts will

not safeguard federal constitutional rights.” Middlesex, 457 U.S. at 431

(emphasis in original).

34 APPLIED UNDERWRITERS V. LARA

(quoting Kugler v. Helfant, 421 U.S. 117, 125 (1975)). Two

recent Ninth Circuit cases have found “extraordinary

circumstances” giving rise to “irreparable injury” sufficient

to satisfy the exception to Younger. Bean v. Matteucci,

986 F.3d 1128 (9th Cir. 2021), held that an individual’s “due

process right to avoid forcible administration of

antipsychotic medications” was a harm that “cannot be fully

vindicated after trial,” id. at 1134–35. Likewise, Arevalo v.

Hennessy, 882 F.3d 763 (9th Cir. 2018), held that where

“petitioner has been incarcerated for over six months without

a constitutionally adequate bail hearing,” such a

“[d]eprivation of physical liberty by detention constitutes

irreparable harm,” id. at 767.

Here, however, Appellants allege no such concrete

irreparable harm. Instead, Appellants allege only

speculative harms that may arise if the Superior Court adopts

the Commissioner’s proposed Rehabilitation Plan. Even

then, Appellants will have ample opportunity to have that

decision reviewed by appellate state courts. 12

Moreover, Appellants’ claims of “irreparable harm”

suffer from a more fundamental defect. As noted above,

Appellants have sufficient ability to challenge the

conservatorship in the Superior Court, which includes the

ability to challenge the proposed Rehabilitation Plan. If the

Superior Court approves the Rehabilitation Plan, and the

Rehabilitation Plan is then affirmed by the California Court

12

Specifically, Appellants allege that “[t]he [irreparable] harm

includes forced settlements of litigation rights, millions of dollars in lost

property and assets, and nearly $100 million lost from the forced transfer

of CIC’s and Appellants’ book of business to third parties. And the best

means of repairing that harm—damages—is unavailable because the

relief would run against the state and thus is barred by the Eleventh

Amendment.”

APPLIED UNDERWRITERS V. LARA 35

of Appeals and the California Supreme Court, that properly

obtained judgment would not be a legally cognizable

“injury” for the purposes of § 1983 damages. So, although

Appellants note the fundamental concept that damages

against the state are generally barred by the Eleventh

Amendment (notwithstanding California Government Code

§§ 800–900 et seq.), a properly obtained judgment, even if

adverse to Appellants’ interests, cannot count as an “injury”

to a party such that the inability to obtain damages supports

federal injunctive relief. To hold otherwise would be to hold

that a state official can properly act within his authority to

impose a conservatorship on an insurance firm, propose a

Rehabilitation Plan approved by the Superior Court,

California Court of Appeals, and California Supreme Court,

then, at the same time, be subject to damages by the unhappy

owners and affiliates of the conserved insurance firm subject

to the Rehabilitation Plan. This result would be absurd.

Appellants allege a final source of potential “irreparable

injury” resulting from their present inability to service new

CIC I policies while CIC I is under the conservatorship,

thereby depriving Appellants of profits they would have

otherwise realized. In the event the Superior Court or an

appellate state court were to hold that the conservatorship

was entirely unfounded, denying the Commissioner’s

proposed Rehabilitation Plan, returning all assets to CIC I’s

management, and allowing the Merger with CIC II to

consummate, Appellants may well have suffered an

“irreparable injury,” given Appellants’ uncertain ability to

recover damages from the state. However, two reasons

prevent this claim from representing an “irreparable loss

[that] is both great and immediate” so as to merit an

exception to an otherwise valid exercise of abstention.

Younger, 401 U.S. at 45.

36 APPLIED UNDERWRITERS V. LARA

First, as previously stated, Appellants’ own factual

allegations make out a violation of § 1215.2(d) sufficient to

trigger a conservatorship under § 1011(c). What is more,

after the Commissioner’s ex parte conservatorship

application was granted, the propriety of the conservatorship

has been twice affirmed, once by the Superior Court in

denying CIC I’s application to vacate the conservatorship,

and once by the California Court of Appeals in denying CIC

I’s application for interlocutory appellate review of the

Superior Court’s denial of CIC I’s application to vacate the

conservatorship. Given this background, it seems highly

unlikely Appellants would ever have any claim for recovery

based on a theory that the conservatorship was

impermissible.

Second, even in the event that the conservatorship is

vacated in full as baseless, Appellants have not established

that they would be categorically barred from relief under

California Government Code §§ 800–900 et seq. Moreover,

Appellants do not argue that the calculation of damages is

impossible. To be sure, it is unclear whether the institution

of a truly baseless conservatorship could serve as grounds

for waiver of state sovereign immunity under that statute, but

the possibility of such relief further underscores why

Appellants’ claim of “irreparable injury” is misplaced.

Accordingly, as Appellants have failed to allege here any

true “irreparable injury” arising from “extraordinary

circumstances,” application of the prior exclusive

jurisdiction rule requires federal judicial abstention in this

case.

Of course, we do not acknowledge these limitations on

the prior exclusive jurisdiction rule lightly, given the

potential embarrassment of competing federal and state

courts issuing injunctions against one another concerning

APPLIED UNDERWRITERS V. LARA 37

control of a disputed res. However, if such a case were to

arise where a state forum was irremediably depriving a

litigant of his constitutional rights, then federal interference

would be required, the prior exclusive jurisdiction rule

notwithstanding. 13 Indeed, if the initial proceeding were to

be wholly repugnant to the Constitution, the state forum

could not be said to have “competent jurisdiction” over the

res. State Eng’r, 339 F.3d at 809. But this case in no way

presents such an extraordinary situation. Accordingly,

federal judicial abstention due to the San Mateo Superior

Court’s prior exclusive jurisdiction of the CIC I res is

warranted.

IV. CONCLUSION

For the foregoing reasons, we AFFIRM the district

court’s dismissal of the federal actions.

NGUYEN, Circuit Judge, concurring in the result:

I agree that we should affirm the district court’s

dismissal of these federal actions. But I write separately

because, in my view, the district court correctly dismissed

under Younger abstention. In rejecting this ground for

dismissal, the majority holds that insurance conservatorships

are not the type of civil enforcement proceedings to which

13

In addition to the exceptions at issue in this case, federal

jurisdiction may be appropriate, notwithstanding the prior exclusive

jurisdiction rule, in a case involving enforcement of a statute that is

“flagrantly and patently violative of express constitutional prohibitions

in every clause, sentence and paragraph, and in whatever manner and

against whomever an effort might be made to apply it.” Watson v. Buck,

313 U.S. 387, 403 (1941).

38 APPLIED UNDERWRITERS V. LARA

Younger abstention applies. To the contrary, insurance

conservatorships embody all of the characteristics which

define that category.

Instead of applying Younger abstention, the 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.

I

A

The Supreme Court has said that Younger only applies to

civil enforcement proceedings that are “‘akin to a criminal

prosecution’ in ‘important respects.’” Sprint Commc’ns, Inc.

v. Jacobs, 571 U.S. 69, 79 (2013) (quoting Huffman v.

Pursue Ltd., 420 U.S. 592, 604 (1975)). First, “enforcement

actions are characteristically initiated to sanction the federal

plaintiff . . . for some wrongful act.” Id. Second, “a state

actor is routinely a party to the state proceeding and often

initiates the action.” Id. Third, “[i]nvestigations are

commonly involved, often culminating in the filing of a

formal complaint or charges.” Id. at 79–80.

The majority does not dispute that the second and third

of these characteristics are present in insurance

conservatorships. These characteristics are easily shown.

The proceedings here can only be initiated by a state actor—

California’s Insurance Commissioner—who not only

APPLIED UNDERWRITERS V. LARA 39

remains a party to those proceedings but controls the

insurer’s assets and business while the action is pending. See

Cal. Ins. Code § 1011; Bristol-Myers Squibb Co. v. Connors,

979 F.3d 732, 736 (9th Cir. 2020) (holding that a case was

sufficiently state-initiated because it could only be brought

by state officials), cert. denied, 141 S. Ct. 2796 (2021). And

insurance conservatorships can only be initiated by filing a

“verified application,” a formal statement of allegations

supporting relief, which obviously requires some prior

investigation. See Cal. Ins. Code § 1011. 1

The only issue is whether the first characteristic is

present. The majority explains that the district court erred

because “[t]his insurance conservatorship . . . cannot be said

to have been brought ‘to sanction the federal plaintiff . . . for

some wrongful act,’ Sprint, 571 U.S. at 79, which is the

quintessential feature of a Younger-eligible ‘civil

enforcement action.’” Maj. Op. at 15. I strongly disagree.

The Commissioner undoubtedly initiated the

conservatorship “to sanction [CIC I] for some wrongful act.”

Sprint, 571 U.S. at 79. How could it be otherwise? The

conservatorship was initiated as a direct response to CIC I’s

attempt to do an end-run around California’s regulators by

consummating an unapproved merger in brazen violation of

California law and the Insurance Commissioner’s direct

warning. See Cal. Ins. Code §§ 1011(c), 1215.2(d).

Yet the majority concludes that the conservatorship lacks

the requisite “punitive character” and “sanctions” to qualify

1

I assume for argument’s sake that these second and third

characteristics are not sufficiently indicative of civil enforcement

proceedings by themselves. But see Bristol-Myers Squibb, 979 F.3d

at 737 (“Nothing in [Sprint] suggests that the characteristics it identified

should be treated as a checklist . . . .”).

40 APPLIED UNDERWRITERS V. LARA

as a civil enforcement proceeding. Maj. Op. at 16. But what

would establish the requisite punitive character or sanction?

The majority doesn’t say. Appellants argue, and the

majority appears to accept, that Younger abstention cannot

apply when the purpose of a proceeding is to protect

consumers and the public and rehabilitate the insured.

But a state proceeding can still be subject to Younger

even if its purpose is to rehabilitate, to deter, or to protect the

public. In Middlesex, the Supreme Court applied Younger

abstention to attorney disciplinary proceedings even though

the purpose of those proceedings was “the protection of the

public, the purification of the bar and the prevention of a re-

occurrence.” 457 U.S. 423, 434 (1982) (citation omitted).

No case suggests that disciplinary proceedings would

become exempt from Younger abstention if they sought a

primarily rehabilitative remedy – such as mandatory

education or counseling – as opposed to disbarment or

suspension. Such individualized inquiries into motive are

not part of this analysis. See Bristol-Myers Squibb, 979 F.3d

at 737 (rejecting “case-specific inquiry” into “the State’s true

motive in bringing [a] case”). Middlesex thus shows that

proceedings geared towards “protection,” “prevention,” and

even rehabilitation can have the requisite punitive character.

457 U.S. at 434; see also Herrera v. City of Palmdale,

918 F.3d 1037, 1045 (9th Cir. 2019) (applying Younger

abstention to suit to abate conditions at a motel that “pose[d]

a severe life and health and safety hazard to any occupants,

nearby residents, and the public.”).

Focusing on the remedies sought, it is also clear that

insurance conservatorships are “sanctions.” This

characteristic of civil enforcement proceedings is supposed

to be “akin to a criminal prosecution.” Sprint, 571 U.S.

at 79. In the criminal context, of course, sentences are

APPLIED UNDERWRITERS V. LARA 41

shaped by interests in deterrence, protection of the public,

and rehabilitation. See 18 U.S.C. § 3553(a)(2)(B)–(D).

Civil enforcement proceedings accordingly remain akin to

criminal prosecution even when their goal is in part to stop

wrongful conduct and to protect the public from its

consequences.

We have thus held that state-imposed receiverships,

which have similar aims to conservatorships, can be

sufficient sanctions to fall within Younger’s civil

enforcement category. See Herrera, 918 F.3d at 1045

(holding that “the appointment of a receiver to take

possession and control of the property” in a civil nuisance

action was a “sanction[] . . . consistent with the enforcement

actions described in Sprint . . . .”); Worldwide Church of

God, Inc. v. State of Cal., 623 F.2d 613, 614 (9th Cir. 1980)

(per curiam) (holding that Younger abstention applied to a

receivership imposed “to prevent diversion of Church assets

from charitable purposes to the personal benefit of persons

who controlled the Church.”). Like these state-imposed

receiverships, the Commissioner in conservation

proceedings manages an insurer’s property with a “fiduciary

dut[y]” to protect interested stakeholders. John K. DiMugno

& Paul E.B. Glad, California Insurance Law Handbook

§ 40.5 (2022). The Commissioner’s “initial objective is

almost always to rehabilitate the insolvent or delinquent

insurer.” Id. § 40.3. That its goals are protection and

rehabilitation does not mean that court-ordered

dispossession of an insurer’s assets at the request of state

officials does not amount to a sanction.

B

The majority also appears to suggest that the “imprudent

acts” of an insurer cannot be “wrongful conduct” of the

severity that a criminal prosecution would redress. Maj. Op.

42 APPLIED UNDERWRITERS V. LARA

at 18. The majority provides no authority that Younger

abstention should turn on the egregiousness of the conduct

addressed by parallel state proceedings. Regardless, the

Commissioner points out that some conduct triggering

conservation proceedings, including the conduct in which

CIC I engaged, can trigger criminal penalties under

California law. See Cal. Ins. Code §§ 700(b), 1215.11(d),

(f). And while short of what state law criminalizes, most of

the conditions that authorize a conservatorship describe

blatant malfeasance, such as defying orders of the

Commissioner or violating conditions of practice as an

insurer, see Cal. Ins. Code § 1011(a)–(c), (e)–(h), and are

appropriately categorized by state law as “Proceedings in

Cases of . . . Delinquency,” see id. Div. 1, Pt. 2, Ch. 1, Art.

14. Even if it mattered that insurance conservatorships are

usually brought to redress insolvency, see id. § 1011(d), (i),

there is no reason why a state could not treat such conduct as

worthy of sanction in a civil enforcement proceeding. In a

highly regulated field such as insurance, conduct innocent in

other contexts, such as running an insolvent business, can

take on such a “grave and important interest” that

“something must be done to remedy the situation.”

Carpenter v. Pac. Mut. Life Ins. Co. of Cal., 74 P.2d 761,

775 (Cal. 1937).

The majority’s only response to the concurrence – and to

this analysis of the different reasons for bringing insurance

conservatorships – is to mischaracterize it as an

“individualized inquir[y]” into “the Commissioner’s true

motive in bringing the conservatorship of CIC I.” Maj. Op.

at 18 n.3. It is because “[t]hat kind of case-specific inquiry

finds no support in precedent” that I (unlike the majority)

examine Cal. Ins. Code § 1011 as a whole. Bristol-Myers

Squibb, 979 F.3d at 737. That the facts of this case are so

“akin to criminal prosecutions” only illustrates how far the

APPLIED UNDERWRITERS V. LARA 43

majority strays from the Supreme Court’s characterization

of civil enforcement proceedings. Sprint, 571 U.S. at 72.

C

The majority gives great weight to a passage from the

California Supreme Court’s 1937 decision in Carpenter,

stating that insurance conservatorships are “not brought to

prosecute ‘an action for the enforcement or protection of a

right, or for the redress or prevention of a wrong, or for the

punishment of a public offense.’” Maj. Op. at 18 (quoting

Carpenter, 74 P.2d at 773). This quotation has little if any

relevance to the issues in this case. Carpenter was quoting

section 22 of the California Code of Civil Procedure, which

simply defines “ordinary proceeding[s]” as distinct from

“special proceeding[s],” which include conservatorships.

See Cal. Code Civ. Proc. §§ 22–23. The statute was only

quoted to answer a procedural question entirely unrelated to

the characteristics of civil enforcement proceedings –

whether the trial court was required to enter formal findings.

See Carpenter, 74 P.2d at 773–774.

Perplexingly, the majority also purports to find support

for its position in Carpenter's statement that insurance

conservatorships are “not a controversy between private

parties but a proceeding by the state in the interest of the

public.” Id. at 774; see Maj. Op. at 17–18. That language

strongly supports applying Younger abstention. Younger-

eligible civil enforcement proceedings are characteristically

initiated by the state, see Sprint, 571 U.S. at 79, and in order

to qualify for Younger they must “implicate important state

interests,” Middlesex, 457 U.S. at 432. Moreover,

Carpenter’s statement that conservatorships are “not a

controversy between private parties,” 74 P.2d at 774, clearly

distinguishes them from purely private disputes that fall

outside Younger’s reach. See Sprint, 571 U.S. at 80 (dispute

44 APPLIED UNDERWRITERS V. LARA

over fees between national and local telecommunications

carriers); Rynearson v. Ferguson, 903 F.3d 920, 926 (9th

Cir. 2018) (anti-stalking protection order sought by private

party against another private party); Cook v. Harding, 879

F.3d 1035, 1040 (9th Cir. 2018) (challenge to enforcement

of private surrogacy contract).

As Carpenter helps to confirm, all three characteristics

that Sprint identified are present here. Insurance

conservatorships are brought by the Commissioner,

following an investigation that results in a formal allegation

of wrongful conduct against an insurer, and they empower

the Commissioner to impose measures that will protect the

public from the insurer’s misconduct, prevent recurrence,

and rehabilitate the insurer. Under Sprint, insurance

conservatorships are thus civil enforcement proceedings and

Younger abstention applies.

II

After rejecting the district court’s conclusion on

Younger, the majority articulates various limitations to the

prior exclusive jurisdiction doctrine in the context of § 1983

actions. Maj. Op. at 26–37. As the majority recognizes,

these limitations are drawn directly from Younger

abstention. See id. at 27–34 & nn. 7, 9. The majority in

effect runs through the remainder of the Younger analysis,

and I fully agree with how the majority applies those

limitations to the facts of this case.

That the majority finds it necessary to transplant Younger

principles onto the prior exclusive jurisdiction doctrine is

revealing. Younger abstention was developed to reconcile

respect for state courts with the federal interest in enforcing

constitutional rights. See Middlesex, 457 U.S. at 431

(explaining that a policy underlying Younger is that

APPLIED UNDERWRITERS V. LARA 45

“[m]inimal respect for the state processes . . . precludes any

presumption that the state courts will not safeguard federal

constitutional rights.”). Younger v. Harris itself held that

abstention was proper in a constitutional challenge to

pending state proceedings because, in “vindicat[ing] and

protect[ing] federal rights and federal interests,” the federal

government must “not unduly interfere with the legitimate

activities of the States.” 401 U.S. 37, 44 (1971). It is

therefore unsurprising that the majority grafted aspects of the

Younger abstention framework onto its prior exclusive

jurisdiction analysis to grapple with these tensions.

In short, rather than applying a doctrine tailor-made for

this situation, the majority instead attempts to modernize the

“ancient” doctrine of prior exclusive jurisdiction. Maj. Op.

at 20. Because I believe Younger abstention applies, I

concur only in the result.