Alleghany Corp. v. Pomeroy

898 F.2d 1314, 1990 WL 16955

• Court: Court of Appeals for the Eighth Circuit
• Decided: February 27, 1990
• Docket: Nos. 89-5033, 89-5034
• Status: Published

Opinions

JOHN R. GIBSON, Circuit Judge.

This is another case arising out of Alle-ghany Corporation’s efforts to acquire control of the St. Paul Companies. The North Dakota Insurance Commissioner, Earl R. Pomeroy, rejected Alleghany’s application to acquire control of the St. Paul Companies, including the St. Paul Insurance Company of North Dakota. Alleghany filed this action in federal court instead of appealing Pomeroy’s decision to the North Dakota state courts. The district court refused to abstain, and held that the North Dakota Insurance Holding Company Systems Act, §§ 26.1-10-01 to 26.1-10-12 (1989), violated the commerce clause of the United States Constitution. The essence of the appellants’ argument is that the district court should have abstained under Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971), because there was an ongoing state judicial proceeding that both implicated important state interests and afforded Alleghany an adequate opportunity to assert its constitutional claims.¹ We are persuaded by this argument, and we reverse the judgment of the district court.

Alleghany sought to purchase over 10% of the stock of St. Paul Companies, Inc., a Minnesota corporation. St. Paul Companies owned all of the stock of St. Paul Fire and Marine Insurance Company, which was also a Minnesota corporation. In turn, St. Paul Fire and Marine had wholly-owned subsidiaries incorporated under the laws of eight states,² including St. Paul Insurance Company of North Dakota, incorporated in North Dakota. Alleghany filed in ten states for approval to purchase the St. Paul Companies’ stock.³ The application in North Dakota was necessary because Alle-ghany hoped to acquire control of a North Dakota domestic insurer. See N.D.Cent. Code §§ 26.1-10-01, 26.1-10-03. Commissioner Pomeroy denied Alleghany’s application because he concluded that a transfer of control was not in the best interest of St. Paul of North Dakota’s policyholders. Commissioner of Insurance Decision at 49-50.⁴

The district court refused to abstain because it concluded that, under North Dakota law, Alleghany could not raise constitutional claims in state-court review of the administrative procedure. The court based this decision primarily on its analysis of First Bank of Buffalo v. Conrad, 350 N.W.2d 580 (N.D.1984), in which the North Dakota Supreme Court stated that it preferred that constitutional challenges to administrative actions be asserted in a collateral declaratory judgment action rather than on direct appeal of the administrative action. Id. at 584. The district court concluded that Conrad distinguished this case from Huffman v. Pursue, Ltd., 420 U.S. 592, 95 S.Ct. 1200, 43 L.Ed.2d 482 (1975). See 698 F.Supp. 809, 812-13 (D.N.D.1988). In Huffman, the Supreme Court applied Younger when state judicial proceedings had not been exhausted. Huffman, 420 U.S. at 607-09, 95 S.Ct. at 1209-11. Since the district court in this case did not abstain, it considered the merits of Allegha-ny’s constitutional arguments in a separate order and concluded that North Dakota’s Insurance Holding Company Systems Act directly regulated interstate commerce in violation of the commerce clause of the United States Constitution. See 700 F.Supp. 460, 467 (D.N.D.1988). The court recognized that the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015 (1988), authorizes state insurance regulation, but rejected the argument that North Dakota’s regulation of the proposed acquisition was protected from commerce clause scrutiny by the McCarran-Ferguson Act. 700 F.Supp. at 462-66. Then, relying primarily on Edgar v. MITE Corp., 457 U.S. 624, 102 S.Ct. 2629, 73 L.Ed.2d 269 (1982), the court held that the North Dakota Insurance Holding Company Systems Act constituted “purely economic protectionism of those currently in control of the insurance company,” and thus violated the commerce clause. 700 F.Supp. at 467.

We heard this appeal at the same time as the appeal involving Alleghany’s attempt to obtain approval in Nebraska. See McCartney, 896 F.2d 1138 (8th Cir.1990),⁵ which we also decide today. In that case, we engaged in a comprehensive discussion of the Younger abstention doctrine. See id. at 1142-1145. In this opinion, we concentrate upon the unique abstention issues presented by North Dakota law.

I.

As we observed in McCartney, although the abstention doctrine of Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 was originally applied in a criminal context, Younger abstention has been extended to administrative proceedings, see Ohio Civil Rights Comm’n v. Dayton Christian Schools, 477 U.S. 619, 627, 106 S.Ct. 2718, 2722-23, 91 L.Ed.2d 512 (1986), and a three-part test articulated in Middlesex County Ethics Committee v. Garden State Bar Association, 457 U.S. 423, 102 S.Ct. 2515, 73 L.Ed.2d 116 (1982), guides the abstention analysis in such cases. Pursuant to that test, we must first determine whether there are pending state judicial proceedings. If so, we must decide whether the pending judicial proceedings “implicate important state interests” and if there is “an adequate opportunity in the state proceedings to raise constitutional challenges.” Id. at 432, 102 S.Ct. at 2521.

A.

In McCartney, we held that administrative proceedings such as those before the State Insurance Commissioner are judicial proceedings because the Commissioner “investigates, declares and enforces liabilities as they stand on present or past facts and under laws supposed already to exist.” McCartney, 896 F.2d at 1143, (quoting New Orleans Pub. Serv. v. Council of New Orleans, — U.S. -, 109 S.Ct. 2506, 2519, 105 L.Ed.2d 298 (1989) {NOPSI) (quoting, in turn, Prentis v. Atlantic Coast Line Co., 211 U.S. 210, 226, 29 S.Ct. 67, 69, 53 L.Ed. 150 (1908))). Similarly, Commissioner Pomeroy’s actions in this case were judicial because he applied an established doctrine to a particular set of facts.

The next question is whether there are “pending” state proceedings. Instead of attempting to raise its constitutional challenges in the North Dakota state courts, Alleghany filed this federal action. Thus, the claims which are advanced in this federal suit have never been considered, and are not now being considered, by any state court. As the majority in NOPSI recently explained, the Supreme Court has "never squarely faced” the question whether these facts satisfy the Middlesex requirement that there be pending state proceedings. NOPSI, 109 S.Ct. at 2518-19 n. 4.⁶ However, even the majority in NOPSI indicated that the Supreme Court’s decision in Dayton Christian Schools “suggests, perhaps, that an administrative proceeding to which Younger applies cannot be challenged in federal court even after the administrative action has become final.” Id.

Even though NOPSI confined the holdings of Middlesex and Dayton Christian Schools to situations in which state administrative proceedings are ongoing, id., it is well-settled that parties may not avoid the strictures of Younger simply by allowing a state judgment to become final. See Huffman v. Pursue, Ltd., 420 U.S. 592, 95 S.Ct. 1200. In Huffman, the Court stated that:

Federal post-trial intervention, in a fashion designed to annul the results of a state trial, also deprives the States of a function which quite legitimately is left to them, that of overseeing trial court dispositions of constitutional issues which arise in civil litigation over which they have jurisdiction.... In short, we do not believe that a State’s judicial system would be fairly accorded the opportunity to resolve federal issues arising in its courts if a federal district court were permitted to substitute itself for the State’s appellate courts.

Id. at 609, 95 S.Ct. at 1210-11 (footnote omitted).

Unless there is some reason to distinguish Huffman, this element of the Mid-dlesex test is satisfied here because Alle-ghany failed to present its constitutional claims to the state courts. One significant difference between this case and Huffman is that federal consideration of Alleghany’s claims would involve little, if any, duplication of the state litigation. Commissioner Pomeroy was precluded from considering the constitutional questions which are the subject of this federal action, Johnson v. Elkin, 263 N.W.2d 123, 126 (N.D.1978), and Alleghany does not challenge the Commissioner’s findings. This distinction makes abstention seem less appropriate in this case than in Huffman. See Steffel v. Thompson, 415 U.S. 452, 462, 94 S.Ct. 1209, 1217, 39 L.Ed.2d 505 (1974). However, just as did the state in Huffman, North Dakota has an interest in exercising a supervisory power over the decisions of state adjudicatory bodies. This interest has two facets.

First, the state courts may construe state law in a way which renders a constitutional decision unnecessary. See Pennzoil Co. v. Texaco, 481 U.S. 1, 11, 107 S.Ct. 1519, 1525, 95 L.Ed.2d 1 (1987) (stating that an “important reason for abstention is to avoid unwarranted determination of federal constitutional questions”); see also Ronwin v. Dunham, 818 F.2d 675, 678 (8th Cir.1987); cf. Railroad Comm’n v. Pullman Co., 312 U.S. 496, 499-501, 61 S.Ct. 643, 644-45, 85 L.Ed. 971 (1941) (holding that federal courts should abstain when the determination of an unsettled issue of state law by state courts could avoid the necessity of deciding a federal constitutional question). As the Supreme Court stated in Moore v. Sims, 442 U.S. 415, 99 S.Ct. 2371, 60 L.Ed.2d 994 (1979):

Almost every constitutional challenge ... offers the opportunity for narrowing constructions that might obviate the constitutional problem and intelligently mediate federal constitutional concerns and state interests. When federal courts disrupt that process of mediation while interjecting themselves in such disputes, they prevent the informed evolution of state policy by state tribunals.

Id. at 429-30, 99 S.Ct. at 2380.

Second, interests of comity are advanced, and friction reduced, if the courts of a state, rather than the federal courts, determine that the United States Constitution requires the state to alter its practices. The North Dakota Supreme Court has not had this opportunity. In cases such as this, Younger and its progeny stand for the proposition that federal courts should refrain from annulling the decisions of inferior state judicial bodies, see Wooley v. Maynard, 430 U.S. 705, 710-11, 97 S.Ct. 1428, 1433-34, 51 L.Ed.2d 752 (1977); Huffman, 420 U.S. at 608-09, 95 S.Ct. at 1210-11, and we conclude that the interests of comity which underlie Huffman also support abstention in this case.

B.

We follow our conclusion in McCartney that the proceedings before Commissioner Pomeroy implicate important state interests, and thus satisfy the second component of the Middlesex test. McCartney, 896 F.2d at 1144. In conducting this inquiry, we are guided by the Supreme Court’s admonition that when courts:

inquire into the substantiality of the State’s interest in its proceedings [they] do not look narrowly to its interest in the outcome of the particular case — which could arguably be offset by a substantial federal interest in the opposite outcome. Rather, what [they] look to is the importance of the generic proceedings to the state.

NOPSI, 109 S.Ct. at 2516 (emphasis in original). See id. at 2516 (substantial interest in regulating intrastate utility rates); Dayton Christian Schools, 477 U.S. at 628, 106 S.Ct. at 2723 (substantial interest in preventing sex discrimination against employees); Middlesex, 457 U.S. at 434, 102 S.Ct. at 2522 (substantial state interest in regulating attorney conduct). The McCarran-Ferguson Act, which states that the “regulation and taxation by the several States of the business of insurance is in the public interest,” 15 U.S.C. § 1011, is indicative of North Dakota’s interest in regulating the insurance provided to its residents.

In addition to its general interest in regulating the insurance industry, North Dakota has a particular interest in regulating the medical liability insurance industry because “approximately 60% of North Dakota physicians are [currently] insured with [St. Paul of North Dakota].” Commissioner of Insurance Decision at 7. Moreover, “[t]he medical malpractice [insurance] field has been particularly volatile and has experienced large losses in recent years. For that reason, the medical malpractice and products liability insurance fields require large reserves relative to capital and surplus.” Id. at 38.

C.

As we observed in McCartney, the Supreme Court stated in both Middlesex and Dayton Christian Schools that the third element of the Middlesex test is satisfied whenever a party can assert its constitutional claims in state-court judicial review of the administrative action. Dayton Christian Schools, 477 U.S. at 629, 106 S.Ct. at 2723; Middlesex, 457 U.S. at 436, 102 S.Ct. at 2523. Furthermore, especially “when a litigant has not attempted to present his federal claims in related state-court proceedings, a federal court should assume that state procedures will afford an adequate remedy, in the absence of unambiguous authority to the contrary.” Pennzoil, 481 U.S. at 15, 107 S.Ct. at 1528 (emphasis added). When interpreting state law, federal courts “cannot assume that state judges will interpret ambiguities in state procedural law to bar presentation of federal claims.” Id.

The district court failed to correctly apply this element of the Middlesex test. North Dakota cases lead to the conclusion that there was an adequate opportunity for Alleghany to assert its constitutional claims in state court. The district court summarized North Dakota law as follows:

In First Bank of Buffalo v. Conrad, the North Dakota Supreme Court ruled that the Administrative Procedures Act is not designed to resolve constitutional issues. First Bank of Buffalo v. Conrad, 350 N.W.2d 580, 584 (N.D.1984). The court indicated that where one attacks the constitutionality of the very law which the administrative agency is to administer the proper procedure is to seek declaratory judgment pursuant to section 32-23 et seq. of the North Dakota Century Code and not challenge the constitutionality of the law through the Administrative Procedures Act. See Id. at 585. Although the [North Dakota Supreme Court] has found that in certain cases a party may assert that the administrative decision is in violation of constitutional rights of a party, See Application of Otter Tail Power Co., 354 N.W.2d 701, 704 (N.D.1984) and Johnson v. Elkin, 263 N.W.2d 123 (N.D.1978); it has indicated that the more appropriate and helpful method of determining the constitutionality of a particular law would be in a collateral proceeding rather than through the administrative procedures. See Otter Tail Power Co., 354 N.W.2d at 704, and First Bank of Buffalo, 350 N.W.2d at 584.

698 F.Supp. at 812-13.

The district court’s analysis contains no unambiguous indication that Alleghany could not have advanced its constitutional challenge on appeal from the administrative action. Especially since Alleghany did not attempt to present its claims to the North Dakota courts, we will not assume that the North Dakota courts would refuse to hear these claims. See Pennzoil, 481 U.S. at 15, 107 S.Ct. at 1528.

Moreover, our examination of North Dakota law convinces us that the North Dakota Administrative Agencies Practice Act does give parties to an administrative proceeding the right to appeal an agency decision to a State district court and, if necessary, to the State Supreme Court. See N.D.Cent.Code §§ 28-32-15, 28-32-21 (Supp.1989). Section 28-32-19(2) of the North Dakota Century Code specifically provides that courts, when reviewing an administrative agency’s decision, may consider whether that decision is “in violation of the constitutional rights of the appellant.” Id. (Supp.1989). Furthermore, in Johnson v. Elkin, 263 N.W.2d 123 (N.D.1978), the North Dakota Supreme Court explicitly held that constitutional issues can be considered on appeal from an administrative decision. Id. at 127. See also Froysland v. North Dakota Workers Comp. Bureau, 432 N.W.2d 883, 892 & n. 8 (1988) (reviewing a constitutional challenge to agency action); In re Otter Tail Power Co., 354 N.W.2d 701, 704 (N.D.1984) (“We conclude ... that a collateral proceeding would have been more appropriate and more helpful to a thorough examination of the federal supremacy question, yet we cannot say that under present law the question can only be raised in a collateral proceeding”). Thus, while dictum in North Dakota cases suggests the desirability of raising constitutional issues in collateral proceedings, the North Dakota courts have plainly stated that the issues may be presented on direct appeal. This, under Middlesex, is an adequate opportunity to raise the constitutional issue.

III.

Because we hold that Younger abstention governs this case, we do not proceed to decide the merits. For two reasons, however, we feel compelled to make some further comments regarding the commerce clause issues. First, the judgment of the district court in this case was in conflict with an earlier decision by another judge in the same district. See Walden v. Wigen, No. A1-83-117, slip op. at 9-10 (D.N.D. July 29, 1983) (holding that North Dakota’s Insurance Holding Company Systems Act did not violate the commerce clause). Second, we are satisfied that the district court opinion in this case, which was published, is infected with serious error, and we wish to make it abundantly clear that our actions not only deprive that opinion of any precedential value, but also foreclose claims that it has persuasive weight.

In making these observations, we stop short of deciding the commerce clause question. Nevertheless, we wish to make it abundantly clear that we vacate both orders of the district court.

The case is remanded to the district court with instructions to vacate its judgment and earlier orders, and to dismiss the complaint.

1 .The appellants also argue that abstention was proper under the doctrine of Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943). Because we hold that Younger abstention is proper, we need not consider the Burford argument.

2 . The subsidiaries are organized under the laws of California, Delaware, Indiana, Nebraska, New York, North Dakota, Texas, and Wisconsin.

3 . As we described in Alleghany v. McCartney, 896 F.2d 1140 (8th Cir.), Minnesota and three other states approved Alleghany’s applications, while four states denied the applications.

4 . The Commissioner also found that a transfer of control would not have, been in the interest of St. Paul security holders. Commissioner of Insurance Decision at 49.

5 . For Younger purposes, McCartney is essentially indistinguishable from this case. One difference between the cases is that the federal action in McCartney was filed within the time for filing a state action, but this case was brought after the deadline for filing a state action had passed. This distinction does not call for a different result. In McCartney, we held that:

[T]his decision is guided by the Supreme Court's pronouncements refining the doctrine which originated in Younger v. Harris. The Court has held that Younger abstention applies to state administrative proceedings, see, e.g., Middlesex, and that appellate processes must be exhausted before a party such as Alleghany can seek relief in federal court, see Huffman. In Dayton Christian Schools, the Court held that it is sufficient under Middle-sex that constitutional claims can be raised in state judicial review of the administrative proceedings. These decisions lead to the conclusion that abstention under Younger is appropriate on the facts of this case.

McCartney, 896 F.2d at 1145.

6 . Two Justices in NOPSI disagreed with this interpretation of Supreme Court precedent. According to Chief Justice Rehnquist:

Nothing in [NOPSI] curtails our prior application of Younger to certain administrative proceedings which are “judicial in nature,” see [Dayton Christian Schools, 477 U.S. 619, 106 S.Ct. 2718; Middlesex, 457 U.S. 423, 102 S.Ct. 2515]; nor does it alter our prior case law indicating that such proceedings should be regarded as "ongoing” for the purposes of Younger abstention until state appellate review is completed, see Dayton Christian Schools, supra, 477 U.S., at 629, 106 S.Ct., at 2724.

NOPSI, 109 S.Ct. at 2521. (Rehnquist, C.J., concurring). Justice Blackmun also indicated his belief that prior decisions had decided the question. See id. (Blackmun, J., concurring).