Federal Court Rejects Applied Underwriters…Again

Applied Underwriters’ second attempt to have a federal court halt the California Department of Insurance conservation of California Insurance Company (CIC) ended the same way as when it tried it just a few months ago. Case dismissed.

The U.S. District Court for the Eastern District of California didn’t buy the case – this time filed in the guise of its hastily created New Mexico corporation.

The judge made it quite clear: “In all material respects, this action is identical to the action the court dismissed in its March 31 order.”

Intervention by New Mexico’s political Attorney General did not change the outcome for Applied Underwriters. New Mexico AG Hector Balderas sought to intervene in the case by filing an amicus brief supporting Applied but was unable to sway the Court (for past coverage, see Commissioner Lara…). Balderas’ brief looked like Applied wrote it, says one observer.

In the earlier action, Applied Underwriters and Applied Risk Services filed the federal case. This time it was California Insurance Company II, the hastily created New Mexico corporation that CDI says Applied used to attempt to avoid California’s regulatory authority. Applied planned to merge the California based California Insurance Company into the New Mexico based California Insurance Company II when it could not win the California Department of Insurance’s consent for Steve Menzies to buy back the company from Berkshire Hathaway (see related story on page 6).

No New Parties or Arguments

“The plaintiff in this action, California Insurance Company, a New Mexico Corporation (“CIC II”), is the shell company owned and formed by the owner of CIC to effectuate the transfer of CIC’s assets to New Mexico,” federal judge William Shubb noted in the decision.

“Artful pleading cannot conceal the fact that the gravamen of this action, like the Applied Underwriters action, is to interfere with, and even terminate, the ongoing state conservation proceeding involving CIC.” –– Federal Judge William Shubb

Shubb also presided over the earlier case brought directly by Applied Underwriters. “CIC II is owned and controlled by the same individual (Steven Menzies) who serves as the President, Treasurer, and Director of the Applied Underwriters plaintiffs, and is represented by the same counsel as the Applied Underwriters plaintiffs.”

Beyond the commonality of the parties in the two proceedings, Judge Shubb noted that no new arguments were being raised to require a different outcome. “CIC II’s claims are nearly identical to those of the Applied Underwriters plaintiffs: CIC alleges that the same defendants – California Department of Insurance (“CDI”) officers Ricardo Lara, Kenneth Schnoll, and Bryant Henley, named in their official capacities – violated its rights under the U.S. Constitution based on the same alleged conduct set forth in the Applied Underwriters complaint,” Shubb noted. “Crucially, CIC II seeks essentially the same relief in this case as that sought in Applied Underwriters – a federal court order interfering with and potentially terminating the state conservation proceeding.”

Noting the duplication, the Court reached the same conclusion in the latest case as it did just four months earlier – case dismissed. As before, the Court there held that the San Mateo Superior Court overseeing the conservation of CIC has jurisdiction over the dispute. Further, the Court rejected allegations that the Department has been acting in bad faith.

“Artful pleading cannot conceal the fact that the gravamen of this action, like the Applied Underwriters action, is to interfere with, and even terminate, the ongoing state conservation proceeding involving CIC,” Shubb wrote. “[T]he Court concludes that dismissal is warranted under the prior exclusive jurisdiction doctrine for the same reasons articulated in the Court’s prior order.”

Copies of the Court’s order dismissing the case California Insurance Company, a New Mexico Corporation v. Insurance Commissioner Ricardo Lara are available in our Resource section or by clicking here.