Ninth Circuit Dismisses Applied Underwriters’ Lawsuit

The Ninth Circuit Court of Appeal handed Applied Underwriters and its California Insurance Company another defeat in its ongoing legal fight with the California Department of Insurance. It reaffirmed that the conservation of CIC was a legitimate response to Applied’s attempted end-run around California oversight while dismissing the Applied lawsuit.

The Ninth Circuit found that the San Mateo Superior Court overseeing CIC’s conservation retains exclusive jurisdiction. The decision covers the appeals filed by Applied Underwriters as well as another by its hastily created subsidiary in New Mexico. Both appeals sought the dissolution of the conservation proceeding. But it didn’t work.

“[A] ppellants’ interests were well represented in the conservatorship action; they had an 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,” the federal panel held.

The outcome was no surprise to those intimately familiar with Applied’s scorched earth litigation strategies.

“Applied has tried almost everything, even approaches that had no possibility of success, to stop the California Insurance Commissioner…”  –– Attorney Larry Lichtenegger

“Applied has tried almost everything, even approaches that had no possibility of success, to stop the California Insurance Commissioner from completing the plan of reorganization for California Insurance Company. This is just one, which most lawyers would describe as failed before it started,” says attorney Larry Lichtenegger who represents several former insureds against Applied Underwriters currently stayed by the conservation order.

“How could Applied think that a Federal District Court judge would step in and stop the California Insurance Commissioner from doing his duty under the law. Even the Ninth Circuit pointed out the facts that justified that action, something obvious from the beginning. Just another loss for Applied.”

Lost Bet

Writing for the court, Circuit Justice Carlos Bea likened the dispute to a bet that Applied Underwriters CEO Steve Menzies made, lost, and then tried to avoid paying. “In business, as in life, it is necessary to take risks. Indeed, fortune favors the bold. Sometimes you win, sometimes you lose. And when you lose, the loss should be paid,” Justice Bea notes.

The bet here was a $50 million breakup fee Menzies agreed to pay if he did not complete the buyback of California Insurance Company from Berkshire Hathaway by the agreed-upon date. The buyback required Departmental approval, which it never received.

“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,” Justice Bea noted in the decision.

Nevertheless – and the details have not been made public – the buyout from Berkshire Hathaway appears to have been completed without regulatory approval.

 CDI’s Takeover Justified

“As previously noted, the conservatorship action was brought for a legitimate reason – indeed, Appellants’ own factual allegations make out a violation of Section 1215.2(d) sufficient to trigger a conservatorship under Section 1011(c),” the court noted. “The allegations make clear that Appellants neither sought nor received approval from 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 Section 1215.2(d), and that the merger was an obvious attempt to avoid the California insurance regulatory regime.”

The court also rejected Applied’s vague claims that the Commissioner may have a hidden agenda for the conservation and that it was undertaken in bad faith. So too Applied’s claims of irreparable injury, which the court says suffer from a fundamental defect.

“Appellants have sufficient ability to challenge the conservatorship in the Superior Court, which includes the ability to challenge the proposed Rehabilitation plan,” the Ninth Circuit points out, noting that a properly obtained judgment cannot count as an injury to the appellant. “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.”

“In business, as in life, it is necessary to take risks. Indeed, fortune favors the bold. Sometimes you win, sometimes you lose. And when you lose, the loss should be paid,” –– Justice Carlos Bea

The proposed Rehabilitation plan would require Applied to sell off CIC’s California operations to an unaffiliated carrier. It also provides three options for settling the pending litigation between Applied and its former policyholders.

Concurring Opinion

Justice Jacquelin Nguyen penned a concurring opinion that supported the District Court’s dismissal of the claims but said the majority’s rejection of the Younger decision was wrong. The majority found that the case does not apply to insurance conservatorships.

“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,” Justice Nguyen writes. “Younger addresses how federal courts should proceed in this situation, which explains why the majority must import aspects of Younger inti 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.”

Copies of the Ninth Circuit’s opinion in Applied Underwriters v. Ricardo Lara, including Justice Nguyen’s concurring opinion, are available in our Resources section or by clicking here..

Applied Underwriters was once but is no longer an affiliate of Berkshire Hathaway. Applied’s management bought it. Berkshire Hathaway bears no responsibility for any of the events which have transpired involving Applied Underwriters’ or its subsidiaries including California Insurance Company.