# Tilton v. Securities & Exchange Commission

> Court of Appeals for the Second Circuit · June 1, 2016 · 824 F.3d 276

URL: https://www.frixlaw.com/law-library/cases/8414005

## Case

- **Full name:** Lynn TILTON, Patriarch Partners, LLC, Patriarch Partners VIII, LLC, Patriarch Partners XIV, LLC, and Patriarch Partners XV, LLC v. SECURITIES AND EXCHANGE COMMISSION
- **Court:** Court of Appeals for the Second Circuit
- **Decided:** June 1, 2016
- **Citations:** 824 F.3d 276; 2016 U.S. App. LEXIS 9970; 2016 WL 3084795
- **Precedential status:** Published
- **Opinion:** Dissent by Droney
- **Judges:** Droney, Newman, Sack
- **Cited by:** 47 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/8414005

## How later opinions describe it (automated extraction)

- holding, in Appointments Clause challenge to SEC judges, that the injury of “ ‘being subjected to an unconstitutional adjudicative procedure,’ with the attendant ‘embarrassment, expense, * * * ordeal, * * * [and] state of anxiety and insecurity’ ” was not an “irremediable harm”
- holding, in Appointments Clause challenge to SEC judges, that the injury of “‘being subjected to an unconstitutional adjudicative procedure,’ with the attendant ‘embarrassment, expense, * * * ordeal, * * * [and] state of anxiety and insecurity’” was not an “irremediable harm”
- concluding that the Exchange Act precluded district court jurisdiction over an Appointments Clause challenge to an ongoing SEC proceeding
- concluding that “appellants have identified no such additional, irremediable harm here” because “[t]he only prospective injury that they describe is being subjected to an unconstitutional adjudicative procedure”
- holding that when this factor "weighs strongly against district court jurisdiction," "closer questions" on the other factors are insufficient to give rise to district court jurisdiction

## Opinion text

DRONEY, Circuit Judge,
dissenting:
This case is nearly indistinguishable from Free Enterprise Fund v. Public Co. Accounting Oversight Board, 561 U.S. 477 , 130 S.Ct. 3138 , 177 L.Ed.2d 706 (2010). It differs in only one significant way: administrative proceedings have begun against the appellants. The majority concludes that this distinction alone warrants a different outcome, finding that the fact of the ongoing proceedings means that the three factors identified by the Supreme Court in Thunder Basin Coal Co. v. Reich, 510 U.S. 200 , 114 S.Ct. 771 , 127 L.Ed.2d 29 (1994) for determining whether Congress intended to limit jurisdiction of the district courts are satisfied. Consequently, the majority holds that there was no subject matter jurisdiction before the district court.
I respectfully dissent. The majority’s application of the Thunder Basin factors has stripped the “wholly collateral” and “outside the agency’s expertise” factors of any significance: in its view, as long as administrative proceedings have been initiated, those two factors are always satisfied. The majority bases its understanding of this substantive-to-procedural switch in those two factors on their application by the Supreme Court in Elgin v. Department of Treasury, - U.S. -, 132 S.Ct. 2126 , 183 L.Ed.2d 1 (2012), but the nature of the constitutional claim presented in Elgin was entirely different. I disagree with the majority’s interpretation of Elgin and conclude that those two Thunder Basin factors must be analyzed substantively to determine their weight in each particular case.
I conclude that Free Enterprise controls here. In my view, those two factors here have precisely the same weight as they did in Free Enterprise, and the application of the remaining factor does not change the result. Thus, I would find that the district court had subject matter jurisdiction .to consider the constitutional challenge.
I. The Thunder Basin Factors
The Supreme Court in Thunder Basin identified the following three factors as helpful in determining whether a statute which provides for administrative review of agency action was intended by Congress to preclude district court jurisdiction over claims before a final administrative determination: whether the claims are “wholly collateral to a statute’s review provisions,” *293 whether they are “outside the agency’s expertise,” and whether “a finding of preclusion could foreclose all meaningful judicial review.” Id. at 212-13, 114 S.Ct. 771 (internal quotation marks omitted). The Court referred to each as helping determine whether it is “fairly discernible” from a “statutory scheme” that Congress “has allocated initial review to an administrative body.” Id. at 207, 212-13 , 114 S.Ct. 771 . 1
I disagree somewhat with the majority’s interpretation of the third factor, “meaningful judicial review,” but it is the majority’s application of the two other factors— “wholly collateral” and “outside the agency’s expertise” — with which I most disagree.
There are three cases in which the Supreme Court has reviewed the application of these three factors: Thunder Basin, Free Enterprise, and Elgin . In each, the Supreme Court’s analysis of the “wholly collateral” and “outside the agency’s expertise” factors has focused on the substance of the claims.
In Thunder Basin, a non-union mine owner filed an action in district court challenging its employees’ designation of certain union representatives to be involved in safety inspections under the Federal Mine Safety and Health Amendments Act (“Mine Act”). The Mine Act provided for administrative hearings and decisions concerning safety issues, and ultimate appeal to the Courts of Appeals. Respondents contended that this “comprehensive review process,” id. at 208, 114 S.Ct. 771 , in the Mine Act indicated that Congress intended that the safety claim be exclusively reviewed in the “statutory structure,” id. at 212 , 114 S.Ct. 771 , and that there was no subject matter jurisdiction for the mine owner’s suit in the district court.
In its analysis of whether the mine owner’s claims must first be brought in an administrative proceeding, the Supreme Court analyzed the “wholly collateral” and “outside the agency’s expertise” factors only by considering the substance of the claims with no mention of the procedural aspects of the case. Id. at 213-14 , 114 S.Ct. 771 (noting that “Petitioner’s statutory claims at root require interpretation of the parties’ rights and duties under [the Mine Act and accompanying regulations], and as such arise under the Mine Act and fall squarely within the Commission’s expertise” and that the agency has “extensive experience interpreting the walk-around rights” that were at issue).
The Supreme Court engaged in the same sort of substantive analysis in Free Enterprise. In Free Enterprise, an accounting firm filed an action in the district court which challenged a report issued by the newly created Public Company Accounting Oversight Board (“PCAOB”). The PCAOB was created as an accounting reform in the Sarbanes-Oxley Act of 2002 and its members were appointed by the SEC. The report had criticized the firm’s *294 accounting procedures, but no sanctions were imposed. Thus, the accounting firm could not utilize the' statutory administrative review proceedings available before the SEC. The action in the district court by the accounting firm challenged the appointments of the PCAOB members by the SEC, claiming that they violated the Appointments Clause of the Constitution and the members had no authority to issue the negative report. The PCAOB sought to dismiss the action on the basis that the district court had no subject matter jurisdiction to consider the accounting firm’s claim.
In its analysis of the “wholly collateral” and “outside the agency’s review” factors, the Free Enterprise Court examined the substance of the constitutional claim as it related to agency expertise, 561 U.S. at 491 , 130 S.Ct. 3138 (“[T]he statutory questions involved do not require technical considerations of agency policy.” (quotation marks and alterations omitted)), and explained the “wholly collateral” factor in terms of the substantive content of the challenge, id. at 490, 130 S.Ct. 3138 . (“[Petitioners object to the Board’s existence, not to any of its auditing standards. Petitioners’ general challenge to the Board is collateral to any Commission orders or rules from which review might be sought.”). It made no reference to the procedural aspects of the claim.
II. Elgin v. Department of Treasury
The third case in which the Supreme Court addressed the Thunder Basin factors was Elgin v. Department of Treasury, — U.S. -, 132 S.Ct. 2126 , 183 L.Ed.2d 1 (2012). The majority concludes that the Elgin Court considerably altered the “wholly collateral” and “outside the agency’s expertise”" factors, but I disagree. I believe the outcome in Elgin was not produced by varying those factors, but by the different type of constitutional claim presented.
In Elgin , the plaintiffs challenged their dismissal from federal employment for failure to comply with the Military Selective Service Act by not .registering for the draft. Although the plaintiffs had available to them the right to challenge their dismissals through administrative hearings before the Merit Systems Protection Board (“MSPB”) and subsequent judicial review in the Federal Circuit, they instead brought suit in federal district court. 2 Their constitutional arguments were that the Selective Service Act discriminates on the basis of sex by requiring only males to register and is a bill of attainder. Id. at 2131 . Notably, the plaintiffs made no challenge to the available administrative process; they argued only that the substance of the laws being enforced against them— laws routinely administered by the MSPB — was unconstitutional. Unsurprisingly, then, the Supreme Court’s analysis of the “wholly collateral” and “outside of the agency’s expertise” factors, and its conclusion that those two factors in Elgin weighed in favor of dismissal of the district court action, was necessarily quite different from that in Free Enterprise.
The Supreme Court’s application of the “wholly collateral” factor rejected the plaintiffs’ argument that their constitutional claims had “nothing to do” with the “day-to-day personnel actions adjudicated by the MSPB.” Id. at 2139 . The Supreme Court pointed out that a challenge to dismissal from employment based on federal statutes is “precisely the type of personnel *295 action regularly adjudicated by the MSPB and the Federal Circuit within the [Civil Service Reform Act (“CSRA”) ] scheme.” Id. at 2140 . Whether or not that particular challenge involved a constitutional question, it was — in the words of the Supreme Court — “a challenge to CSRA-covered employment action brought by CSRA-covered employees requesting relief that the CSRA routinely affords.” Id.
The majority here concludes that Elgin held that “a claim is not wholly collateral if it has been raised in response to, and so is procedurally intertwined with, an administrative proceeding,” Majority Op. at 287, pointing to the Supreme Court’s statement that the constitutional claims in Elgin were “the vehicle by which [the petitioners] s[ought] to reverse the removal decisions” made against them, id. at 2139 . However, that overstates what the Supreme Court did in its application of that factor. That portion of the opinion meant nothing more than that the plaintiffs were challenging actions against them under the statutes committed to the MSPB by attacking the constitutionality of those very statutes — it does not suggest that no challenge that would end ongoing proceedings could be considered collateral to a statute’s review provisions. Such an interpretation would swallow the rule, for there would no longer be any need to evaluate the substance of a claim as long as the claim could somehow serve to end administrative proceedings in a plaintiffs favor. This is inconsistent with Thunder Basin and Free Enterprise (and, in fact, with Elgin , which looked carefully at the substance of the challenge). It would also turn the factor into an easy, binary question: Is a proceeding ongoing? If yes, then no claim that would end the proceeding can be wholly collateral. This cannot be what the Elgin Court intended. In my view, it held only that a claim involving the substance of the very act entrusted to the agency for implementation and requesting the types of relief that the agency regularly gives — -a far cry from the present case, where the constitutional claim has no relation to the securities laws entrusted to the SEC and the requested remedy of disallowing the proceedings before the ALJ is obviously not a routine outcome — cannot be considered “wholly collateral” to the administrative scheme.
As for the “outside the agency’s expertise” factor, the Elgin Court made clear that this factor would weigh against jurisdiction in cases where a claim needing agency expertise was a “threshold” or “preliminary question” that would “obviate the need to address the constitutional challenge.” Id. at 2140 . This described the situation in Elgin , where before deciding that the Selective Service Act was unconstitutional the MSPB had to decide “threshold questions” to which the MSPB could apply its expertise, such as whether constructive discharge occurred as well as whether additional claimed violations of employment statutes took place, which “might fully dispose of the case.” Id. Those decisions could be informed by its agency expertise in the area of employment law. Id. In such a context, the MSPB’s expertise could properly be “brought to bear” on the constitutional claim. Id. (quoting Thunder Basin, 510 U.S. at 214-15 , 114 S.Ct. 771 ). The majority here acknowledges that an issue of federal jurisdiction or the appropriate composition of an adjudicatory body — such as the Appointments Clause challenge presented in this case — logically precedes a merits adjudication; therefore, there is no “threshold” or “preliminary” question that would “obviate the need to address the constitutional challenge.”
The majority nonetheless concludes that the Elgin Court interpreted this factor to mean that “an agency may bring its expertise to bear on a constitutional claim *296 indirectly, by resolving accompanying, potentially dispositive issues in the same proceeding.” Majority Op. at 289. It does so by citing the Elgin Court’s reference to a situation in which an appeal involves “other statutory or constitutional claims that the MSPB routinely considers, in addition to a constitutional challenge to a federal statute.” Elgin, 132 S.Ct. at 2140 . The majority thus concludes that an issue to which an agency may apply its expertise need only be dispositive, not necessarily “preliminary,” for it to weigh against jurisdiction. Majority Op. at 289-90.
That interpretation does not comport with the language of Elgin , however, which explicitly set that description out as an example of a situation in which there might be “threshold questions” that would allow the initial agency reviewing the case to not reach the constitutional question. 3 Nor would such an expansive interpretation be consistent with the facts underlying and the setting of Elgin , where the potentially dispositive issue was clearly a “preliminary” or “threshold question.”
To read Elgin as broadly as the majority does would mean that as long as a proceeding is ongoing, the “outside the agency’s expertise” factor must weigh against jurisdiction — because any time a proceeding has commenced there is of course some possibility that a plaintiff may prevail on the merits. This would turn a substantive factor into a purely procedural — and binary — one, which is inconsistent with the description of the factor in Thunder Basin, Free Enterprise, or Elgin itself.
In sum, to agree with the majority’s interpretation of Elgin , one must conclude that the Supreme. Court intended to eliminate any substantive analysis of the “wholly collateral” and the “outside the agency’s expertise” factors in any case where an administrative proceeding is ongoing. 4 To the contrary, Elgin itself engages with the substance of the precluded claims in a way that the majority seems to believe is now unnecessary.
The majority’s interpretation also serves to move the Thunder Basin factors away from their original function, which was to assist in a holistic analysis to determine whether it is “fairly discernible” from a “statutory scheme” that Congress “has allocated initial review to an administrative body.” Thunder Basin, 510 U.S. at 207 , 114 S.Ct. 771 . Elgin recognized this function: it engaged in an extensive analysis of the history and structure of the relevant statutes before turning to the Thunder Basin factors, which it referred to as “three additional factors in arguing that [the petitioners’] claims are not the type that Congress intended to be reviewed *297 within the CSRA scheme.” 132 S.Ct. at 2136 .
I would apply the three Thunder Basin factors for divining legislative intent faithful to Thunder Basin, Free Enterprise and Elgin .
III. Application of the Thunder Basin Factors
A.“Wholly Collateral to a Statute’s Review Provisions”
The Supreme Court in Free Enterprise concluded that the constitutional claim there was “wholly collateral” to any administrative proceedings that might be brought against the plaintiffs. That challenge was essentially the same as the challenge here: that the appointment of the members of the PCAOB by the SEC violated the Appointments Clause of the Constitution. It explained that the plaintiffs’ “general challenge to the Board is ‘collateral’ to any Commission orders or rules from which review might be sought” because they “object to the Board’s existence, not to any of its auditing standards.” Free Enterprise, 561 U.S. at 490 , 130 S.Ct. 3138 (emphasis added). Here, as well, the appellants object to the very existence of SEC administrative proceedings conducted by ALJs who are, in their view, not appointed in accordance with the Appointments Clause.
The majority finds that this factor weighs against jurisdiction based only on its interpretation of Elgin , which I have addressed above. I would reject that interpretation. I see no difference between the Appointments Clause challenge in Free Enterprise and here; it is completely collateral to the work of the PCAOB as well as to the work of the SEC and its ALJs. I would find that this factor weighs strongly in favor of jurisdiction.
B. “Outside the Agency’s Expertise”
In Free Enterprise , the Supreme Court explained that the Appointments Clause claim relating to the appointment of the PCAOB by the SEC was “outside the Commission’s competence and expertise,” requiring no understanding of a particular industry and no “technical considerations of agency policy.” Id. at 491 , 130 S.Ct. 3138 (internal quotation marks and alterations omitted). The same conclusion applies to the Appointments Clause issue here. Like the determination of the appointment authority for the PCAOB members in Free Enterprise , the SEC has no particular expertise in determining whether the system of appointing its Administrative Law Judges comports with the Appointments Clause of the Constitution.
The majority agrees as far as Free Enterprise goes, concluding only that this Thunder Basin factor has been changed by Elgin . For the reasons discussed above, I disagree. I see no difference in the application of this factor here to the SEC and its application to the SEC in Free Enterprise . I would find that this factor also weighs strongly in favor of jurisdiction.
C. “Meaningful Judicial Review”
The “meaningful judicial review” factor presents the only significant difference between the present case and Free Enterprise . I agree with the majority that this factor tends to weigh in favor of preclusion because a subsequent appeal to this Court following a final Commission order is available.
Nonetheless, I do not believe that the difference between the available judicial review in Free Enterprise and in this case is so significant as to justify a different outcome, given the identical application of the other two factors, as well as a substantial question as to whether subsequent judicial review here would be “meaningful.”
*298 The majority is correct in noting that Free Enterprise differed from this case in that no renewable administrative order was possible unless the plaintiff “manufae-tur[ed] a new, tangential dispute that would require a Commission order.” Majority Op. at 283. And as the Free Enterprise Court noted, “[w]e normally do not require plaintiffs to bet the farm by taking the violative action before testing the validity of [a] law.” 561 U.S. at 490 , 130 S.Ct. 3138 (internal quotation marks and alterations omitted).
The Free Enterprise situation was not so different from the present one as to require a different outcome, however. Here, the administrative proceedings once concluded would have led to an order subject to judicial review — but only if the appellants had continued litigating before the SEC ALJ and lost on the merits. 5
Forcing the appellants to await a final Commission order before they may assert their constitutional claim in a federal court means that by the time the day for judicial review comes, they will already have suffered the injury that they are attempting to prevent. The majority finds that the “litigant’s financial and emotional costs in litigating the initial proceeding are simply the price of participating in the American legal system,” Majority Op. at 285, but the issue is less the costs and burden of litigation and more that the appellants are challenging the very existence of the ALJs as a part of the statutory scheme. The appellants seek to enjoin the SEC proceedings, but by the time that they access any judicial review, the proceedings will be complete, rendering the possibility of obtaining an injunction moot even if the final Commission order is vacated. In my view, this diminishes the weight of this factor, for while there may be review, it cannot be considered truly “meaningful” at that point.
The majority cites a number of decisions for the principle that “post-proceeding relief ... suffices to vindicate the litigant’s constitutional claim,” Majority Op. at 285, but none involves an analysis of the “meaningful judicial review” prong of this test. Germain v. Connecticut National Bank, 930 F.2d 1038, 1040 (2d Cir. 1991) involved an interlocutory appeal of the denial of a jury trial demand in a bankruptcy proceeding and the application of the collateral order doctrine exception that an order be “effectively unreviewable on appeal.” D’Ippolito v. American Oil Co., 401 F.2d 764 , 765 (2d Cir. 1968) addressed the question of whether an order by a district court transferring an antitrust action to another district was a “final judgment” under 28 U.S.C. § 1291 . In re al-Nashiri, 791 F.3d 71, 79 (D.C. Cir. 2015), addressed the “irreparable injury” test meriting the grant of a writ of mandamus to stop a military commission trial. And FTC v. Standard Oil Co. of California, 449 U.S. 232, 244 , 101 S.Ct. 488 , 66 L.Ed.2d 416 (1980) concerned whether the issuance of a complaint by the Federal Trade Commission caused “irreparable injury” allowing *299 for judicial review or whether final agency action was necessary.
When it comes to the “meaningful judicial review” factor, it is my view that we need look no further than Free Enterprise itself to understand that being forced to undergo an allegedly unconstitutional proceeding may play into the analysis of whether judicial review is “meaningful.” The Court in Free Enterprise identified a number of possible ways that the plaintiffs in that case could obtain review of their constitutional claims against the board (such as “seleet[ing] and challenging] a Board rule at random” or “incur[ring] a sanction (such as a sizable fine) by ignoring Board requests for documents and testimony,” 561 U.S. at 490 , 130 S.Ct. 3138 ); it simply decided that none of the options were reasonable to ask of the plaintiffs and therefore none provided “meaningful” judicial review. Id. at 490-91, 130 S.Ct. 3138 .
The Supreme Court in Free Enterprise also explained that the plaintiffs were “entitled to declaratory relief sufficient to ensure that the reporting, requirements and auditing standards to which they are subject mil be enforced only by a constitutional agency accountable to the Executive, ” and it allowed the plaintiffs to bring their claim at a time where no administrative proceedings had yet been formally brought against them. 561 U.S. at 513 , 130 5.Ct. 3138 (emphasis added). This suggests that the Supreme Court considers the very process of enforcement by an unconstitutional body to be an injury that can be relevant to the determination of whether post-proceeding review is “meaningful.”
IV. Conclusion
For all these reasons, I am unpersuaded that the “meaningful judicial review” prong has enough weight to overpower the other two factors and result in a finding of no jurisdiction. The other two factors clearly mirror those in Free Enterprise , and the available review is not meaningful enough to set those two factors aside. Thus, the Appointments Clause challenge here is not “of the type Congress intended to be reviewed within th[e] statutory structure.” 6 Thunder Basin, 510 U.S. at 212 , 114 S.Ct. 771 .
I would reverse the decision of the district court and remand for an adjudication of the merits of the Appointments Clause claim.
. The majority describes the Thunder Basin factors as coming into play only in the second part of a two-part test, seemingly splitting the analysis between asking (1) whether Congress intended to preclude district court jurisdiction and (2) whether Congress intended for the claims at issue to be reviewed within the statutory structure. Majority Op. at 281. I disagree with this dichotomy and the conclusion that the factors are relevant only to the second inquiry. See, e.g., Elgin, 132 S.Ct. at 2136 (referring to Thunder Basin factors as relevant to the single argument characterized variously as: “Congress does not intend to limit district court jurisdiction” (alterations omitted) and “[Petitioners'] claims are not the type that Congress intended to be reviewed within the [administrative] scheme”). However, the majority opinion does not return to this schema and thereafter focuses on the Thunder Basin factors as answering the ultimate question of whether the appellants are precluded from bringing their constitutional claims in the district court.
. One of the plaintiffs did pursue remedies through the MSPB, but declined to appeal the decision he received within the administrative system, instead joining the others in their suit in district court. Elgin, 132 S.Ct. at 2131 .
. That paragraph in Elgin makes clear that each of the sentences cited by the majority at Majority Op. 289-90 are examples of cases with “threshold questions,” not additional pathways to preclusion. See Elgin, 132 S.Ct. at 2140 ("But petitioners overlook the many threshold questions that may accompany a constitutional claim and to which the MSPB can apply its expertise. Of particular relevance here, preliminary questions unique to the employment context may obviate the need to address the constitutional challenge. For example, ... In addition, .... Or, an employee's appeal may involve other statutory or constitutional claims that the MSPB routinely considers, in addition to a constitutional challenge to a federal statute.” (emphases added)). The Supreme Court has elsewhere defined a “threshold question” as one "that must be resolved.... before proceeding to the merits [of another claim].” Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 88-89 , 118 S.Ct. 1003 , 140 L.Ed.2d 210 (1998).
. In fact, in Elgin , only one of tire plaintiffs had initiated administrative proceedings; the others had filed suit directly in the district court but could have initiated proceedings. Elgin, 132 S.Ct. at 2131 . Consequently, the implication of the majority’s reading of Elgin is likely to be even greater than this.
. Given that the vast majority of all S E C administrative proceedings end in settlements rather than in actual decisions, it might well be that choosing to litigate is, in fact, equivalent to "betting the farm.” See Brian Maho-ney, SEC Could Bring More Insider Trading Cases In-House, Law360 (June 11, 2014), http://www.law3 60.com/articles/547183/sec-could-bring-more-insider-trading-cases-in-house (quoting Andrew Ceresney, the head of the SEC’s Division of Enforcement, as explaining that the "vast majority of our cases settle,” and stating, "I will tell you that there have been a number of cases in recent months where we have threatened administrative proceedings, it was something we told the other side we were going to do and they settled”).
. Since the purpose of the application of the Free Enterprise factors is to determine whether Congress intended to deprive district courts of subject-matter jurisdiction to hear pre-administrative-adjudication claims, it seems relevant that Congress continues to authorize the SEC to choose whether it will pursue violations before its ALJs in administrative proceedings or in the district court as civil actions. To permit those subject to SEC enforcement actions to challenge administrative proceedings in the district courts on the basis of constitutional challenges that have nothing to do with the expertise of the SEC or with factual matters relevant to their Own *300 particular circumstances would seem consistent with that Congressional intent.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/8414005. Public record. Not legal advice.