15‐2589‐cv (L) Kernan v. New York State Depʹt of Fin. Servs., et al.

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURTʹS LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION ʺSUMMARY ORDERʺ). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

At a stated term of the United States Court of Appeals for the Second Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the 2nd day of November two thousand seventeen.

PRESENT: DENNY CHIN, CHRISTOPHER F. DRONEY, Circuit Judges, JANE A. RESTANI, Judge.* ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐x

JAMES M. KERNAN, individually and on behalf of all those independent entrepreneurs, small and disadvantaged business enterprises, suffering serious, permanent and irreparable economic and social injury and damage as a result of actions by the Defendants to limit, ORISKA CORPORATION, ORISKA INSURANCE COMPANY,

Plaintiffs‐Appellants, 15‐2589‐cv 15‐2600‐cv v. 16‐3643‐cv 16‐3658‐cv

* Jane A. Restani, Judge for the United States Court of International Trade, sitting by designation.

NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES, FKA New York State Department of Insurance, BENJAMIN M. LAWSKY, Superintendent of New York State Department of Financial Services, CHARLES BUZZ SAWYER, Assistant Chief Investigator, JAMES MASTERSON, Supervising Insurance Examiner, Property Bureau, MICHAEL V. IMBRIANO, Principal Insurance Examiner, EUGENE BENGER, ESQ., Deputy General Counsel Insurance, JON G. ROTHBLATT, ESQ., former Principal Counsel, JEFFREY A. STONEHILL, ESQ., Hearing Officer, HOWARD D. MILLS, III, former Superintendent, UNITED STATES OF AMERICA, as their several interests may appear, PAUL DEROBERTIS, CHRISTINE GRALTON, BERTRAM A. HOROWITZ, BERTRAM HOROWITZ, INC., GLORIA HUBERMAN, THOMAS HURLEY, SHEIK MOHAMED,

Defendants‐Appellees,

MICHAEL A. MARK, Investigator, BETH COHEN, ESQ., Associate Attorney, EDWARD R. BROTON, Assistant United States Attorney, JAMES HANSON, KEVIN MCCARTY, ROBIN WESCOTT, Individually, and collectively, alone and in concert with present and former associates and other still unidentified parties, ANDREW BORON, Director of the Illinois Department of Insurance, PATRICK HUGHES, Deputy Director of the Illinois Office of the Special Deputy, ILLINOIS OFFICE OF THE SPECIAL DEPUTY, ILLINOIS DEPARTMENT OF INSURANCE, FLORIDA OFFICE OF INSURANCE REGULATION,

Defendants.

‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐x

FOR PLAINTIFFS‐APPELLANTS: LEIGHTON R. BURNS, Kernan and Kernan, P.C., Utica, New York.

2

FOR DEFENDANTS‐APPELLEES: ANDREW RHYS DAVIES, Assistant Solicitor General (Barbara D. Underwood, Solicitor General, Steven C. Wu, Deputy Solicitor General, on the brief), for Eric T. Schneiderman, Attorney General, State of New York, New York, New York.

Appeal from the United States District Court for the Eastern District of

New York (Seybert, J.).

UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,

ADJUDGED, AND DECREED that the judgment and order of the district court are

AFFIRMED.

Plaintiffs‐appellants James M. Kernan, Oriska Corporation, and Oriska

Insurance Company appeal from a July 27, 2015 judgment of the district court

dismissing their amended complaint with prejudice and a September 29, 2016 order of

the district court denying their second motion to supplement the record on appeal.1

The amended complaint alleges, inter alia, that defendants‐appellees the New York State

Department of Financial Services (ʺNYSDFSʺ), the Superintendent of NYSDFS, and

thirteen other individuals currently or formerly affiliated with NYSDFS discriminated

against potential customers of plaintiffsʹ insurance business and conspired to violate

1 The appeals of Kernan and the Oriska entities from the judgment (15‐2589‐cv, 15‐ 2600‐cv) and from the order denying their motion to supplement the record on appeal (16‐3643‐ cv, 16‐3658‐cv) have been consolidated, and this order disposes of all four appeals.

3

plaintiffsʹ constitutional rights. We assume the partiesʹ familiarity with the facts,

procedural history, and issues on appeal.

The facts are drawn from plaintiffsʹ allegations in the complaint, which we

accept as true, and augmented by a series of federal and state proceedings related to

Kernanʹs ban from engaging in the business of insurance, of which we may and do take

judicial notice. See Tellabs, Inc. v. Makor Issues & Rights, Ltd.,

(2007).

Kernan owns and controls both Oriska Insurance Company and Oriska Corporation

(together, ʺOriskaʺ). In March 2009, Kernan pled guilty in the District Court for the

Northern District of New York to violating

(e)(1)(B), which prohibits

individuals from knowingly and willfully permitting convicted felons to engage in the

insurance business. In January 2010, he was sentenced principally to five yearsʹ

probation and fined $250,000.2

Kernanʹs conviction barred him from engaging in the insurance business

in a particular state absent consent by the stateʹs insurance regulator. See

(e)(1)(A) and (e)(2). In February 2013, NYSDFS, New York Stateʹs insurance

regulator, denied Kernanʹs application for consent to engage in the business of

insurance in New York. Plaintiffs filed a challenge to the determination pursuant to

N.Y. C.P.L.R. Article 78 in New York state court, which is still pending. That same

2 Kernanʹs appeal from the denial of his 2014 petition for a writ of coram nobis in connection with this conviction is pending before this court. See Kernan v. United States, No. 17‐ 1113‐cv.

4

month, NYSDFS also issued an ʺimpairment orderʺ prohibiting Oriska from issuing

insurance policies until its capital stock and policyholder surplus were sufficient to

cover its liabilities. The Supreme Court, Oneida County dismissed Oriskaʹs petition to

annul the impairment order in May 2014.

On June 4, 2013, plaintiffs filed the complaint in this action, alleging that

NYSDFS and its employees targeted plaintiffs for improper investigation and

prosecution. Plaintiffsʹ amended complaint asserts (1) claims under Title VI of the Civil

Rights Act of 1964 (ʺTitle VIʺ), 42 U.S.C. § 2000d et seq., and the Equal Protection Clause

on behalf of a class of ʺminority, women, veteran, and disabled business enterprisesʺ

that were unable to access Oriskaʹs products as a result of Kernanʹs bar from the

insurance industry, Supp. Appʹx 1; (2) a conspiracy claim, alleging that defendants

conspired to violate plaintiffsʹ constitutional rights; (3) a constitutional challenge to

, the basis for Kernanʹs 2009 conviction; and (4) an Article 78 claim to set

aside NYSDFSʹs denial of consent to Kernan engaging in the insurance business in New

York.

The district court granted defendantsʹ motion to dismiss the complaint in

July 2015. The district court concluded that plaintiffs lacked standing to bring claims on

behalf of minority‐owned businesses and failed to state a claim of conspiracy or as to

the unconstitutionality of

. Because plaintiffsʹ federal claims warranted

5

dismissal, the district court declined to exercise supplemental jurisdiction over the

Article 78 claim. This timely appeal followed.3

In April 2016, after filing notices of appeal, plaintiffs filed a motion in the

district court to supplement the record on appeal to include an email from NYSDFS to

Kernan, sent after the dismissal of the amended complaint, regarding his request under

New Yorkʹs Freedom of Information Law. The district court denied the motion because

the email had not been before the district court and was not a proper subject of judicial

notice. Plaintiffs timely appealed the denial of the motion, and the appeals have been

consolidated for this courtʹs consideration.

We review de novo the district courtʹs grant of a motion to dismiss. MGM

Resorts Intʹl Glob. Gaming Dev. v. Malloy,

(2d Cir. 2017); Carlin v. Davidson

Fink LLP,

(2d Cir. 2017). To survive a motion to dismiss under Rule

12(b)(6), a complaint must contain factual allegations that, accepted as true, are

sufficient ʺto state a claim to relief that is plausible on its faceʺ; ʺ[t]hreadbare recitals of

the elements of a cause of action, supported by mere conclusory statements, do not

suffice.ʺ Carlin,

(quoting Ashcroft v. Iqbal,

(2009)

(internal citation marks omitted)).

3 Plaintiffs do not appeal the district courtʹs decision not to exercise supplemental jurisdiction over their Article 78 claim.

6

1. Discrimination claims

Plaintiffs allege that, by refusing to consent to plaintiffsʹ participation in

the insurance industry, NYSDFS discriminated against minority‐owned businesses

wanting to buy insurance from Oriska, in violation of Title VI and the Equal Protection

Clause. These claims fail because plaintiffs lack standing to assert the rights of this

purported class of potential customers.

To have Article III standing to bring a claim, a plaintiff must demonstrate

ʺ(1) injury‐in‐fact, which is a ʹconcrete and particularizedʹ harm to a ʹlegally protected

interestʹ; (2) causation in the form of a ʹfairly traceableʹ connection between the asserted

injury‐in‐fact and the alleged actions of the defendant; and (3) redressability, or a non‐

speculative likelihood that the injury can be remedied by the requested relief.ʺ W.R.

Huff Asset Mgmt. Co., LLC v. Deloitte & Touche LLP,

, 106‐07 (2d Cir. 2008)

(quoting Lujan v. Defs. of Wildlife,

, 560‐61 (1992)). As to the injury

requirement, ʺa plaintiff must have personally suffered an injury,ʺ id. at 107, because

ʺ[t]he Art[icle] III judicial power exists only to redress or otherwise to protect against

injury to the complaining party,ʺ id. (quoting Warth v. Seldin,

(1975)).

Plaintiffs do not allege that they are members of the class or that they have

been injured by NYSDFSʹs discrimination. Instead, they attempt to rely on injuries

ʺsuffered by other, unidentified members of the class . . . [that] they purport to

represent.ʺ Lewis v. Casey,

(1996). Accordingly, because the named

7

plaintiffs have not alleged that they were personally injured under Title VI and the

Equal Protection Clause, their discrimination claims must be dismissed for lack of

standing. See W.R. Huff Asset Mgmt.,

.4

2.

Next, plaintiffs challenge the constitutionality of

(e)(1)(A)

as it applies to Kernan. As an initial matter, plaintiffsʹ theory that Congress did not

intend § 1033ʹs statutory bar to apply to individuals convicted of the strict liability

offense in § 1033(e)(1)(B) is belied by the plain language of the statute. Section

1033(e)(2) provides that ʺ[a] person described in paragraph (1)(A) may engage in the

business of insurance or participate in such business if such person has the written

consent of any insurance regulatory official authorized to regulate the insurer.ʺ Section

1033(e)(1)(A), in turn, provides that:

Any individual who has been convicted of any criminal felony involving dishonesty or a breach of trust, or who has been convicted of an offense under this section, and who willfully engages in the business of insurance whose activities affect interstate commerce or participates in such business, shall be fined as provided in this title or imprisoned not more than 5 years, or both.

(e)(1)(A) (emphasis added). Plaintiffs do not dispute that Kernan was

convicted under § 1033(e)(1)(B), i.e., ʺan offense under this sectionʺ; thus, the bar applies

to Kernan by operation of the statute. Furthermore, plaintiffs offer no other explanation

4 This deficiency is not remedied by the proposed second amended complaint, as discussed further below.

8

of how the statute violates any of Kernanʹs constitutional rights, or why NYSDFS would

be liable for a federal prosecution under the statute in question. Accordingly, the

district court properly dismissed this claim.

3. Conspiracy

Plaintiffsʹ fourth claim alleges that defendants ʺconspired and agreed to

restrain for an unlawful purpose and prohibit lawful operations by Plaintiffs.ʺ Supp.

Appʹx 19. To bring a § 1983 conspiracy claim, a plaintiff must allege ʺ(1) an agreement

between two or more state actors . . . ; (2) to act in concert to inflict an unconstitutional

injury; and (3) an overt act done in furtherance of that goal causing damages.ʺ Pangburn

v. Culbertson,

(2d Cir. 1999). Plaintiffs allege in conclusory fashion that

the state regulators and the federal government worked together to ʺsnuff outʺ Oriska,

Supp. Appʹx 15, but include no facts from which we can infer the existence of such an

agreement. Additionally, as noted above, the amended complaint does not specify

which of plaintiffsʹ constitutional rights defendants conspired to violate. Nor does the

amended complaint allege what acts were taken in furtherance of such scheme.

Without any underlying facts to set forth the nature of the alleged conspiracy, the claim

must be dismissed. See Gallop v. Cheney,

(2d Cir. 2011) (ʺIt is well

settled that claims of conspiracy ʹcontaining only conclusory, vague, or general

allegations of conspiracy to deprive a person of constitutional rights cannot withstand a

motion to dismiss.ʹʺ (citation omitted)).

9

4. Due process

On appeal, plaintiffs argue that they also asserted a due process claim in

the amended complaint. Any due process claim asserted by plaintiffs fails due to a total

lack of factual allegations to support such a claim. Furthermore, NYSDFS afforded

Kernan notice and the opportunity to be heard prior to both the denial of consent to

operate in the business of insurance and the impairment order. Accordingly, to the

extent plaintiffs allege that defendants violated their due process rights, such claim was

properly dismissed by the district court.

5. Leave to amend

This Court ʺordinarily review[s] a district courtʹs denial of a motion to

amend the pleadings for abuse of discretion.ʺ AEP Energy Servs. Gas Holding Co. v. Bank

of Am., N.A.,

(2d Cir. 2010). Plaintiffsʹ proposed second amended

complaint added six new plaintiffs who, according to plaintiffs, cure any standing

defects due to their ʺassociations with Oriska.ʺ Appellantsʹ Br. at 20. Plaintiffs have not

alleged, however, that any of the new proposed plaintiffs previously bought or planned

to buy insurance from Oriska.5 Because leave to amend need not be granted where the

proposed amendments would be futile, Krys v. Pigott,

(2d Cir. 2014),

5 Although the proposed second amended complaint sought to add two entities that had purportedly entered memoranda of understanding to secure bonding from Oriska, neither entity was a contractor who could have benefitted from such bonding, and neither cured the complaintʹs standing problem.

10

we conclude that the district court acted within its discretion in denying plaintiffs leave

to amend again their complaint.

6. Documents outside the record on appeal

Finally, we review the district courtʹs decision not to supplement the

record on appeal or take judicial notice of a document for abuse of discretion. United

States v. Apple Inc.,

, 139 n.3 (2d Cir. 2015); Staehr v. Hartford Fin. Servs. Grp.,

Inc.,

(2d Cir. 2008).

We identify no abuse of discretion in the district courtʹs denial of plaintiffsʹ

motion to supplement the record on appeal with or to take judicial notice of the April

2016 email from NYSDFS to Kernan. To the extent plaintiffs ask this court to take

judicial notice of the email or supplement the record on appeal with the email, we

decline to do so. The email is not a proper subject of judicial notice. Furthermore,

ʺabsent extraordinary circumstances, federal appellate courts will not consider rulings

or evidence which are not part of the trial record.ʺ Intʹl Bus. Machs. Corp. v.

Edelstein,

, 45 (2d Cir. 1975) (per curiam). No such circumstances are

presented here, where no new allegations based on the email could cure plaintiffsʹ

conspiracy claim.

We have considered all of plaintiffsʹ remaining arguments and conclude

they are without merit. Accordingly, we AFFIRM the judgment of the district court.

FOR THE COURT: Catherine OʹHagan Wolfe, Clerk

11