Tuesday, March 07, 2017

Ironridge amicus brief tells judges to overrule Landry, find SEC in-house judges unconstitutional

By Mark S. Nelson, J.D.

Ironridge Global Partners, LLC wasted little time in urging the full D.C. Circuit to find the SEC’s administrative law judges are unconstitutionally appointed in the wake of last month’s blockbuster announcement that the full court will rehear (on the same day in May) two earlier panel decisions, one in Lucia upholding the SEC’s ALJs, and another faulting the director-led structure of the Consumer Financial Protection Bureau. As part of its friend of the court brief, Ironridge picked up on the court’s invitation to Raymond J. Lucia Companies, Inc. and the SEC to explain the validity of the court’s Landry decision in which a panel majority said the Federal Deposit Insurance Corporation’s ALJs were employees, not inferior officers, for purposes of the U.S. Constitution’s Appointments Clause (Raymond J. Lucia Companies, Inc. v. SEC, March 2, 2017).

The D.C. Circuit’s now vacated Lucia decision had provided the initial impetus for a developing circuit split. A divided Tenth Circuit panel concluded in Bandimere that the SEC ALJ in that case was an inferior officer and, thus, unconstitutionally appointed. The full D.C. Circuit’s Lucia decision will be closely watched both for its impact on the SEC’s in-house courts, but also for its influence on the full court’s decision in the CFPB case. Ironridge had fought its own battle against the SEC until its hopes were dashed by an Eleventh Circuit decision in another case that held the district court lacked jurisdiction to halt SEC administrative proceedings. By contrast, Lucia and Bandimere more squarely present the constitutional issue.

Overrule Landry? The D.C. Circuit’s order granting en banc rehearing in Lucia specifically asked the parties in the case to address whether Landry should be overruled. The Landry panel upheld an associational bar imposed by an FDIC ALJ against a bank executive, although one judge concurred in order to emphasize that while he found the decision resulted in no prejudice to the bank executive, he disagreed with the panel majority’s handling of the Supreme Court’s Freytag opinion.

In Freytag, the Supreme Court found that Internal Revenue Service Special Trial Judges were inferior officers under the Appointments Clause. The concurring judge in Landry read Freytag as being less demanding on the issue of finality than did the Landry majority. The Landry majority, and the unanimous panel in Lucia, found that decisional finality was the dividing line between inferior officers and employees. The Landry majority had relied on at least one of the several formulations of this dividing line; another often quoted version from the Supreme Court’s Buckley v. Valeo opinion posits that an officer of the U.S. is someone who wields “significant authority.”

Like the concurring judge in Landry, Ironridge would have the full D.C. Circuit either overrule Landry or, alternatively, cabin Landry’s reach by finding the SEC’s ALJs are constitutionally infirm despite existing circuit law. Ironridge further argued that the government’s winning view in the Supreme Court’s Edmunds opinion, which involved military officers, drew a clearer line in the sand regarding finality: in this approach, finality has less to do with the divide between inferior officers and employees than it does in distinguishing principal officers from inferior officers.

Ironridge also noted what it considers to be inconsistencies in the SEC’s position before the courts. For one, Ironridge suggested that the SEC conceded that Freytag did not turn on finality. This conclusion derived from Ironridge’s reading of an earlier SEC panel brief in Lucia. Ironridge similarly noted a discrepancy between the SEC’s website, which touts its ALJs as “independent adjudicators,” and the SEC’s arguments in Lucia asserting that its ALJs are “employees who are wholly subordinate to the Commission.”

What about Tucker? According to Ironridge, the D.C. Circuit may have presaged the eventual outcome in Lucia in a decision five years ago. The case, Tucker v. Commissioner, involved a day trader’s unpaid tax bill and the IRS’s refusal to accept the taxpayer’s offer-in-compromise made at a collection due process hearing as a substitute for the IRS’s partial installment plan.

Circuit Judge Williams, writing for a unanimous panel in Tucker, and also the author of the majority opinion in Landry, concluded that the IRS’s “Appeals employees” (comprising team managers, settlement officers, and appeals officers) were employees because they lacked sufficient discretion to be inferior officers. The Tucker panel noted the murkiness of the line between inferior officers and employees but suggested that “significance” of matters handled, “discretion,” and “finality” are the “main criteria” for making this distinction. The panel sidestepped Landry-driven issues about whether the IRS positions at issue were “established by law” under the Appointments Clause.

Ironridge characterized Tucker as a “step away” from the finality-centric Landry decision. Specifically, Ironridge focused on the implications of one paragraph in Tucker which, after beginning with a brief recitation of Freytag, said:
If the tasks assigned a position allowed the holder no choice, obviously, it would be pointless to classify him as an “Officer” even though the consequences of his ministerial decisions were both vital and final. And in this case, in fact, we conclude that the lack of discretion is determinative, offsetting the effective finality of Appeals employees’ decisions within the executive branch.
According to Ironridge, this passage “implied” that the Tucker panel applied a “sliding scale” that treated “effective finality” in a way that could allow the full court to view finality in a more flexible manner than did the Landry majority. As a result, Ironridge suggested that Tucker might offer a way to bring the SEC’s ALJs within the Appointments Clause without overruling Landry.

The case is No. 15-1345.

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