The opinion of the court was delivered by: SWEET
In this action brought under 42 U.S.C. § 1983, plaintiff American Motor Club, Inc. ("AMC") has moved for a preliminary injunction to prevent defendants, officers and employees of the Department of Insurance of the State of New York (the "Department"), from taking action against brokers in regard to any AMC matters. For the reasons stated below, the request for a preliminary injunction is granted in part.
AMC filed this action on August 8, 1986 and on that day by order to show cause sought a temporary restraining order pending the resolution of its motion for preliminary injunction. At conference between the parties it was agreed and ordered that no brokers' licenses would be revoked "as consequence of their relationship with the plaintiff" during the pendency of this motion. AMC's motion to bar further investigation was denied.
On September 9, 1986 the motion for preliminary injunction was heard on affidavits and memoranda and the testimony of Nicholas Neu, president of AMC, was taken. On the basis of these proceedings, the following findings and conclusion have been reached.
AMC is a New York corporation engaged in business as an automobile club providing certain benefits to its members. By petition served and filed on October 8, 1985, the Department sought to enjoin the sale of AMC memberships on the ground that the membership benefits constitute insurance and that AMC is not authorized to sell insurance in the State of New York. See People v. American Motor Club, Inc., No. 43138/85 (N.Y.Sup.Ct.,N.Y.County, filed Oct. 8, 1985). AMC defended the proceeding on the ground that its memberships are not insurance. The issue was submitted to the Supreme Court of the State of New York, County of New York on December 12, 1985 and is sub judice.
Sometime in early 1986, the Department commenced an investigation of brokers who sell AMC memberships. In March through May, 1986, several brokers were summoned to appear and produce documents at the Department of Insurance in connection with AMC matters. On or about July 24, 1986, twenty-six or more brokers received letters from defendant Alan DiPiazza ("DiPiazza"), senior insurance examiner, indicating that they were the subject of an investigation of licensees who "may have improperly placed insurance business with [AMC]. "On or about July 30, approximately one hundred and thirty brokers received letters from DiPiazza indicating that they were also the subject of such an investigation.
Some brokers were advised orally by employees of the Department that their relationship to AMC and failure to promptly settle claims refused by AMC might cause cancellation of their licenses. This finding and certain of those which follow are based on hearsay in affidavits as well as sworn testimony. Nevertheless, this evidence gives rise to "sufficiently serious questions going to the merits to make them a fair ground for litigation," Jack Kahn Music Co. v. Baldwin Piano & Organ Co., 604 F.2d 755, 758 (2d Cir. 1979), and thus is admissible for the purposes of this motion.
As a result of the Department's recent activities, AMC's business has fallen drastically. While the number of membership sales increased from the time of the commencement of the state proceeding in October, 1985, through the first half of 1986, sales dropped after the mailing of the Department's July 24, 1986 letter from an average of 110 new memberships a day for the proceeding eight Tuesdays to 32 new memberships on August 4, 1986 - a drop of 70%. After this court entered a temporary restraining order on consent on August 8, 1986, enjoining the Department from revoking any licenses "as a consequence of their relationship with the plaintiff," sales went back up from 70% decline to a 35% decline over prior sales. This represents a loss of 200 memberships a month, at $1,000 annual fee. In addition, approximately 45 of the 450 brokers who previously sold AMC memberships no longer do business with AMC.
AMC alleges that the state defendants are violating its due process rights by continuing to conduct a state administrative investigation and, through threats, harassment, coercion and intimidation, attempting to restrain or prohibit the sale of allegedly unauthorized insurance prior to a determination in the state case. By such actions, the state defendants are allegedly attempting to prohibit the sale of AMC memberships without the hearing required by New York law and thus depriving AMC of its due process. The authority standing for the proposition that no such cancellation or injunction against the brokers can issue without a hearing and state determination, see American Auto. Consumer Repair Agreement, Ltd. v. Corcoran, 108 A.D. 2d 547, 489 N.Y.S.2d 732 (1st Dep't 1985), is not challenged by the Department. Therefore, at least facially a § 1983 violation appears to be properly alleged.
The Department defends against the motion by urging abstention from the exercise of jurisdiction under § 1983 because of the pending state proceedings against AMC. Under current Supreme court doctrine, abstention is "an extraordinary and narrow exception to the duty of a District Court to adjudicate a controversy properly before it." Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 813, 47 L. Ed. 2d 483, 96 S. Ct. 1236 (1976).
Abdication of the obligation to decide cases can be justified under this doctrine only in the exceptional circumstances where the order to the parties to repair to the State court would clearly serve an important countervailing interest. County of Allegheny v. Frank ...