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Nos. 83-1703, 83-1724

1985.C06.366, 758 F.2d 189

April 4, 1985


ON APPEAL from the United States District Court for the Eastern District of Michigan.

Attorneys For Appellant: Frank J. Kelley, Attorney General of Michigan, 525 West Ottawa Street, Lansing, Michigan 48913, Harry G.
Iwasko, Jr., William Chenoweth (argued).

Attorneys For Appellee: Ronald E. Westen (argued), Thomas F. Kauza (argued), Harvey, Kruse, Westen and Milan, 1590 First
National Building, Detroit, Michigan 48226, Amicus Curiae Counsel, William A. Boos, 1108 Michigan National Tower, Lansing,
Michigan 48933.

Merritt and Milburn, Circuit Judges; Weick, Senior Circuit Judge.

The opinion of the court was delivered by: Merritt

MERRITT, Circuit Judge.

This action arises from the termination of plaintiff Richard Nagy's insurance agency contract with defendant Farmers Insurance
Group. Nagy sought damages from Farmers on the ground that the termination of his contract was illegal under the Michigan
Essential Insurance Act, M.C.L.A. 500.1209. Farmers then joined the Michigan Insurance Commissioner as an involuntary
plaintiff, alleging that the Commissioner was advising insurance agents to breach their contracts, and that the Essential Insurance
Act (E.I.A.) was unconstitutional under the contract, equal protection and due process clauses of the United States Constitution. The
District Court found that Farmers' termination of Nagy was permissible under state law, and Nagy has not appealed this decision.
Instead, the present appeal is brought by both Farmers and the Commissioner as cross appellant, who are contesting the scope of
the District Court's declaratory judgment holding part of the E.I.A. violate of federal due process guarantees. We find that the District
Court should never have reached this question given its disposition of the state law issues, and that a consequence the present
appeal does not present a justiciable question suitable for our resolution by declaratory judgment. Consequently, we dismiss the
appeal and cross appeal.


On October 16, 1976, Nagy, a resident of McComb County, Michigan, became an insurance agent for Farmers Insurance
Exchange. He did so pursuant to an Agency Appointment Agreement with Farmers under which he was permitted to place
insurance business with other companies only after offering Farmers the right of first refusal. The contract also provided that it could
be terminated if Nagy switched insurance policies from Farmers to another agency. During the latter part of 1980, Nagy wrote two
hundred and fifty policies for companies which competed with Farmers. Half of those policyholders had been previously insured by
Farmers. In the spring of 1981, Farmers sent a three month written notice of termination of Nagy, as required by their agreement.

Before Farmers terminated him, Nagy sued Farmers in the McComb County state court, alleging that Farmers terminated his
contract in violation of the Michigan E.I.A. because Farmers gave improper notice of termination, failed to notify the Insurance
Commissioner of the termination and because Nagy was terminated for refusing to engage in conduct which was illegal under the
E.I.A. Nagy sought damages and a preliminary injunction prohibiting Farmers from terminating him.

Farmers denied that the termination of Nagy's contract violated state law, and then removed the action to federal district court with
jurisdiction predicated on diversity of citizenship. On September 15, 1981, Farmers joined the Insurance Commissioner as an
"involuntary plaintiff and/or third party defendant" under Fed. Rule Civ. Pro. 19(a), which requires joinder of necessary parties.
Farmers alleged that the Commissioner was advising Nagy and other agents that they were not exclusive agents and could not be
terminated except for certain statutory grounds. Farmers requested a preliminary injunction preventing the Commissioner from
advising agents that they could not be terminated, and also sought a declaratory judgment that retroactive application of the
Michigan E.I.A. would violate the due process, equal protection and contract clauses of the federal constitution.

On February 15, 1983, the District Court issued a preliminary injunction prohibiting the Commissioner from interfering with Farmers'
contractual rights with Nagy and advising Nagy and other agents that they could only be terminated for grounds enumerated in
sections 500.1209(1) and (3). *fn1 The court held that M.C.L.A. 500.1209(1) and (3) violate the due process clause of the
Fourteenth Amendment because those provisions do not "protect a broad social purpose" and tend to limit the rates charged for

Several months later, the court granted summary judgment for Farmers against Nagy, holding that Nagy was a nonexclusive agent
of Farmers, but that he had switched insurance from Farmers to other carriers, and that this provided grounds for termination
under his contract and hence was permissible under M.C.L.A. 500.1209(3)(b) and (3)(d). In the same opinion, the court entered
summary judgment for Farmers against the Commissioner, adopting the reasoning of its prior opinion in issuing the preliminary
injunction. The court observed that Commissioner had failed to provide it with "sufficient data would indicate that the nonexclusive
agent network in Michigan is of sufficient size and magnitude to exert competitive leverage . . . in a manner and degree which
fosters the availability of fair and reasonable rates." It thus held that M.C.L.A. 500.1209(1) and (3) violate due process, and it is
this judgment which is contested on appeal.


The District Court erred in issuing judgment finding sections 500.1209(1) and (3) unconstitutional. Its decision that state law allowed
Farmers to terminate Nagy effectively resolved the suit and removed the underlying controversy from consideration. Farmers'
request for injunctive relief against the Commissioner was obviously no longer relevant to the underlying action, since Nagy had lost
and the Commissioner was no longer advising him to pursue other administrative relief. The court therefore granted purely
declaratory relief against a third party after finding no liability when it determined that sections 500.1209(1) and (3) were
unconstitutional. After resolution of the liability issue on state law grounds, the third party was no longer a necessary or appropriate
party to the lawsuits. In reaching and resolving this constitutional issue, the District Court ignored the basic and longstanding rule of
construction that when two questions are raised, and resolution of the non-constitutional question makes unnecessary a decision on
the constitutional question, only non-constitutional question, only the non-constitutional question should be decided. Alma Motor Co.
v. Timken Co., 329 U.S. 129, 136, 91 L. Ed. 128, 67 S. Ct. 231 (1946).

Final resolution of the original dispute between Nagy and Farmers on state law grounds pretermitted the remaining constitutional
issues, making them nonjustifiable and inappropriate for declaratory judgment. See 6A Moore's Federal Practice 57.13, 57-115
(1984). An additional justiciability problem is that the District Court declared section 500.1209 unconstitutional without holding an
evidentiary hearing. The record does not contain the necessary facts to issue a sweeping constitutional mandate based on the
perceived competitive effects of section 500.1209.

In addition, even if were otherwise appropriate to consider declaratory relief, under the standards set forth by this court recently in
Grand Trunk Railroad Co. v. Consolidated Rail Corporation, 746 F.2d 323 (6th Cir. 1984), we would decline to render a declaratory
judgment on the constitutionality of section of section 500.1209 based on this limited record, where the underlying controversy has
already been resolved under state law and resolution of the constitutional issue is unnecessary to clarify the rights of the parties.
See Id. at 326. Farmers argues that it needs declaratory relief to clarify its rights under state law. However, its rights with respect to
Nagy have been upheld, and to permit it to now continue to litigate an issue which has no bearing on the underlying dispute would
be to allow the Commissioner's involuntary joinder to be used to impermissibly expand the scope of the lawsuit. The
Commissioner's forced participation, if justifiable at all, was only necessary because the Commissioner had advised Nagy with
respect to bringing the suit and other administrative action, and because the Commissioner had an interest in the question of the
E.I.A.'s constitutionality. Resolution of the case in Farmers' favor on state law grounds, however, removed both of these reasons for
the Commissioner's participation. On appeal, we are faced with neither a live constitutional issue nor with a concrete dispute
between proper adverse parties.

Accordingly, we dismiss the present appeal and cross appeal and vacate the District Court's decision insofar as it holds M.C.L.A.
500.1209(1) and (3) violative of due process.

Opinion Footnotes

*fn1 M.C.L.A. sections 500.1209(1) and (3) read as follows:

Sec. 1209. (1) Notice, necessity, contents; liability of insurer. An insurer shall give to the commissioner and the agent immediate
written notice of the termination of an agent's authority to represent the insurer. The notice shall include the full disclosure with
supporting evidence of acts or omissions by the agent which reasonably may be construed to be a violation of this act, or of any
other statute, and acts and omissions, which may reflect on the agent's qualifications as an agent or which may adversely affect the
public interest. There shall not be liability on the part of, and a cause of action of any nature shall not arise against, the
commissioner, and insurer, or an authorized representative of either for any statement made or evidence provided pursuant to this

(3) Reasons for terminating agent's authority. As a condition of maintaining its authority to transact insurance in this state, an insurer
transacting automobile insurance or home insurance in this state shall not cancel an agent's contract or otherwise terminate to
agent's authority to represent the insurer with respect to automobile insurance or home insurance, except for 1 or more of the
following reasons:

(a) Malfeasance

(b) Breach of fiduciary duty or trust.

(c) A violation of this act.

(d) Failure to perform as provided by the contract between the parties.

(e) Submission of less than 25 applications for home insurance and automobile insurance within the immediately preceding
12-month period.


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