Monday, July 06, 2015

‘Turnaround Queen’ Tilton Seeks Reversal of Fortune in Second Circuit

By Mark S. Nelson, J.D.

Self-proclaimed “Turnaround Queen” Lynn Tilton will take the path already trod by Laurie A. Bebo in the Seventh Circuit by taking her case disputing the constitutionality of the SEC’s administrative enforcement regime to the Second Circuit. Tilton, who opted to appeal the denial of a preliminary injunction by District Judge Ronnie Abrams earlier this week, will likely raise subject matter jurisdiction issues akin to those argued by Bebo’s lawyers in the federal appeals court in Chicago last month (Tilton v. SEC, July 1, 2015).

What the challengers want. Many observers of the nine cases against the SEC now percolating in district and appeals courts within three circuits (Second, Seventh, and Eleventh) pine for a major substantive opinion on the Article II appointments clause issues: Do the SEC’s administrative law judges (ALJs) enjoy too many layers of good cause removal? Should the Commission appoint its own ALJs?

Those looking for answers to these questions, including all of the SEC enforcement targets who have sued the agency, want federal courts to decide between two lines of cases. In one scenario, exemplified by the Supreme Court’s Freytag opinion, those contesting the SEC’s ALJs analogize them to the Tax Court’s special trial judges, who the Freytag court held were inferior officers (but whose appointments did not violate Article II). By contrast, the SEC defends its ALJs by analogizing them to the Federal Deposit Insurance Corporation’s “employee” ALJs who remain outside of Article II under the D.C. Circuit’s Landry opinion.

Leaping the jurisdictional hurdle. But prior to answering the big constitutional questions, the district courts have to decide (or be told by the appeals courts) if they can even hear the suits brought by those who dispute the SEC’s enforcement authority. This question likely depends on how courts apply the Supreme Court’s Thunder Basin, Free Enterprise, Elgin and McNary opinions.

Thunder Basin would allow pre-enforcement challenges to agency action if no meaningful route for judicial review exists, the suit is wholly collateral to the statutorily-prescribed review process, and the claims are beyond the agency’s expertise. In Tilton’s case, Judge Abrams ruled that the Exchange Act adequately provides for judicial review of an adverse order.

But Judge Abrams rejected a broader view of “meaningful” posed by Judge Richard M. Berman in Duka (also a case challenging the SEC’s ALJs, but ultimately denying the requested injunctive relief) in favor of a narrower view announced by Judge Lewis A. Kaplan in Chau (both Duka and Chau were decided by judges in the Southern District of New York). “Such an exception to the enforceability of statutory review schemes could swallow the schemes themselves; indeed, any arguably plausible claim in district court that an administrative proceeding should be enjoined as unconstitutional could confer jurisdiction and thus thwart Congress' intent to the contrary,” said Judge Abrams regarding a portion of the court’s reasoning in Duka.

Judge Abrams also noted that Tilton has judicial review options that were not available to those who challenged the PCAOB in Free Enterprise, or to the immigrants in McNary. In both cases, the persons suing the government agencies would have had to take adverse actions in order to spur agency enforcement actions against them that could in turn confer federal court jurisdiction.

As for the wholly collateral prong, Tilton tried to couch her claims as facial claims, rather than as-applied ones. But Judge Abrams said that while Tilton raised “a close question,” her claims are “intertwined” with the administrative proceeding because she raised the constitutional issues as an affirmative defense, she is within the statutory review framework, and she may yet get her desired result if the ALJ or the Commission rules in her favor. Judge Abrams said Tilton could still get a meaningful review if she loses the administrative case, even if constitutional issues are beyond the SEC’s ken.

What’s next. In the coming months, the public’s interest in the many suits trying to upend the SEC’s administrative regime will likely shift from what the federal trial courts can do for the challengers in the short term to whether the federal appeals courts might issue decisions that create a split of authority, one of the factors the Supreme Court can mull when asked to hear a case. For now, if a circuit split develops over the SEC’s ALJs, it will occur among the Second, Seventh, and Eleventh Circuits.

In the Bebo case, oral argument before a Seventh Circuit panel in June drew questions about how meaningful the statutory review process is under the securities laws, and whether the federal courts should stay out of the case on grounds analogous to Younger abstention. The Chicago-based appeals court has yet to issue its ruling in Bebo’s case, despite her lawyer’s request for an expedited decision. The SEC’s administrative proceeding against Bebo continued while she appealed the district court’s opinion.

In addition to the Bebo and Tilton appeals, the SEC has appealed its loss in the Hill case. The SEC recently asked the district judge who partially granted Charles L. Hill, Jr.’s request for a preliminary injunction to stop the SEC’s administrative proceeding against him to stay that order while the agency simultaneously appeals to the Eleventh Circuit.

The case is No. 15-cv-2472.

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