Securities & Exchange Commission v. Chenery Corp.

Mr. Justice Jackson,

dissenting. *

The Court by this present decision sustains the identical administrative order which only recently it held invalid. *210 S. E. C. v. Chenery Corp., 318 U. S. 80 . As the Court correctly notes, the Commission has only “recast its rationale and reached the same result.” (Par. I.) 1 There being no change in the order, no additional evidence in the record and no amendment of relevant legislation, it is clear that there has been a shift in attitude between that of the controlling membership of the Court when the case was first here and that of those who have the power of decision on this second review.

I feel constrained to disagree with the reasoning offered to rationalize this shift. It makes judicial review of administrative orders a hopeless formality for the litigant, even where granted to him by Congress. It reduces the judicial process in such cases to a mere feint. While the opinion does not have the adherence of a majority of the full Court, if its pronouncements should become governing principles they would, in practice, put most administrative orders over and above the law.

I.

The essential facts are few and are not in dispute. 2 This corporation filed with the Securities and Exchange Commission a voluntary plan of reorganization. While the reorganization proceedings were pending sixteen officers and directors bought on the open market about 7%% of the corporation’s preferred stock. Both the Commission and the Court admit that these purchases were not forbidden by any law, judicial precedent, regulation or rule of the Commission. Nevertheless, the Commission has *211 ordered these individuals to surrender their shares to the corporation at cost, plus 4% interest, and the Court now approves that order.

It is helpful, before considering whether this order is authorized by law, to reflect on what it is and what it is not. It is not conceivably a discharge of the Commission’s duty to determine whether a proposed plan of reorganization would be “fair and equitable.” It has nothing to do with the corporate structure, or the classes and amounts of stock, or voting rights or dividend preferences. It does not remotely affect the impersonal financial or legal factors of the plan. It is a personal deprivation denying particular persons the right to continue to own their stock and to exercise its privileges. Other persons who bought at the same time and price in the open market would be allowed to keep and convert their stock. Thus, the order is in no sense an exercise of the function of control over the terms and relations of the corporate securities.

Neither is the order one merely to regulate the future use of property. It literally takes valuable property away from its lawful owners for the benefit of other private parties without full compensation and the Court expressly approves the taking. It says that the stock owned by these persons is denied conversion along with similar stock owned by others; “instead, it was to be surrendered at cost plus dividends accumulated since the purchase dates.” (Par. 5.) It should be noted that this formula was subsequently altered to read “cost plus 4% interest.” That this basis was less than its value is recognized, for the Court says “That stock had been purchased in the market at prices that were depressed in relation to what the management anticipated would be, and what in fact was, the earning and asset value of its reorganization equivalent.” (Par. 24.) Admittedly, the value above cost, and interest on it, simply is taken from the owners, *212 without compensation. No such power has ever been confirmed in any administrative body.

It should also be noted that neither the Court nor the Commission purports to adjudge a forfeiture of this property as a consequence of sharp dealing or breach of trust. The Court says, “The Commission admitted that the good faith and personal integrity of this management were not in question; . . . (Par. 24.) And again, “It was frankly admitted that the management’s purpose in buying the preferred stock was to protect its interest in the new company. It was also plain that there was no fraud or lack of disclosure in making these purchases.” (Par. 4.)

n.

The reversal of the position of this Court is due to a fundamental change in prevailing philosophy. The basic assumption of the earlier opinion as therein stated was, “But before transactions otherwise legal can be outlawed or denied their usual business consequences, they must fall under the ban of some standards of conduct prescribed by an agency of government authorized to prescribe such standards . . . .” S. E. C. v. Chenery Corp., 318 U. S. 80, 92-93 . The basic assumption of the present opinion is stated thus: “The absence of a general rule or regulation governing management trading during reorganization did not affect the Commission’s duties in relation to the particular proposal before it.” (Par. 13.) This puts in juxtaposition the two conflicting philosophies which produce opposite results in the same case and on the same facts. The difference between the first and the latest decision of the Court is thus simply the difference between holding that administrative orders must have a basis in law and a holding that absence of a legal basis is no ground on which courts may annul them.

As there admittedly is no law or regulation to support this order, we peruse the Court’s opinion diligently to find *213 on what grounds it is now held that the Court of Appeals, on pain of being reversed for error, was required to stamp this order with its approval. We find but one. That is the principle of judicial deference to administrative experience. That argument is five times stressed in as many different contexts, and I quote just enough to identify the instances: “The Commission,” it says, “has drawn heavily upon its accumulated experience in dealing with utility reorganizations.” (Par. 9.) “Rather it has derived its conclusions from the particular facts in the case, its general experience in reorganization matters and its informed view of statutory requirements.” (Par. 19.) “Drawing upon its experience, the Commission indicated . . . ,”etc. (Par. 22.) “. . . the Commission has made a thorough examination of the problem, utilizing statutory standards and its own accumulated experience with reorganization matters.” (Par. 26.) And finally, of the order the Court says, “It is the product of administrative experience,” etc. (Par. 29.)

What are we to make of this reiterated deference to “administrative experience” when in another context the Court says, “Hence, we refuse to say that the Commission, which had not previously been confronted with the problem of management trading during reorganization, was forbidden from utilizing this particular proceeding for announcing and applying a new standard of conduct.”! (Par. 17.) (Emphasis supplied.)

The Court’s reasoning adds up to this: The Commission must be sustained because of its accumulated experience in solving a problem with which it had never before been confronted!

Of course, thus to uphold the Commission by professing to find that it has enunciated a “new standard of conduct” brings the Court squarely against the invalidity of retroactive law-making. But the Court does not falter. “That such action might have a retroactive effect *214 was not necessarily fatal to its validity.” (Par. 17.) “But such retroactivity must be balanced against the mischief of producing a result which is contrary to a statutory design or to legal and equitable principles.” (Par. 17.) Of course, if what these parties did really was condemned by “statutory design” or “legal and equitable principles,” it could be stopped without resort to a new rule and there would be no retroactivity to condone. But if it had been the Court’s view that some law already prohibited the purchases, it would hardly have been necessary three sentences earlier to hold that the Commission was not prohibited “from utilizing this particular proceeding for announcing and applying a new standard of conduct.” (Par. 17.) (Emphasis supplied.)

I give up. Now I realize fully what Mark Twain meant when he said, “The more you explain it, the more I don’t understand it.”

III.

But one does not need to comprehend the processes by which other minds reach a given result in order to estimate the practical consequences of their pronouncement upon judicial review of administrative orders.

If it is of no consequence that no rule of law be existent to support an administrative order, and the Court of Appeals is obliged to defer to administrative experience and to sustain a Commission’s power merely because it has been asserted and exercised, of what use is it to print a record or briefs in the case, or to hear argument? Administrative experience always is present, at least to the degree that it is here, and would always dictate a like deference by this Court to an assertion of administrative power. Must the reviewing court, as this Court does in this opinion, support the order on a presumptive or imputed experience even though the Court is obliged to discredit such experience in the very same opinion? Is *215 fictitious experience to be conclusive in matters of law and particularly in the interpretation of statutes, as the Court’s opinion now intimates, or just in fact finding which has been the function which the Court has heretofore sustained upon the argument of administrative experience?

I suggest that administrative experience is of weight in judicial review only to this point — it is a persuasive reason for deference to the Commission in the exercise of its discretionary powers under and within the law. It cannot be invoked to support action outside of the law. And what action is, and what is not, within the law must be determined by courts, when authorized to review, no matter how much deference is due to the agency’s fact finding. Surely an administrative agency is not a law unto itself, but the Court does not really face up to the fact that this is the justification it is offering for sustaining the Commission action.

Even if the Commission had, as the Court says, utilized this case to announce a new legal standard of conduct, there would be hurdles to be cleared, but we need not dwell on them now. Because to promulgate a general rule of law, either by regulation or by case law, is something the Commission expressly declined to do. It did not previously promulgate, and it does not by this order profess to promulgate, any rule or regulation to prohibit such purchases absolutely or under stated conditions. On the other hand, its position is that no such rule or standard would be fair and equitable in all cases. 3

*216 IV.

Whether, as matter of policy, corporate managers during reorganization should be prohibited from buying or selling its stock, is not a question for us to decide. But it is for us to decide whether, so long as no law or regulation prohibits them from buying, their purchases may be forfeited, or not, in the discretion of the Commission. If such a power exists in words of the statute or in their implication, it would be possible to point it out and thus end the case. Instead, the Court admits that there was no law prohibiting these purchases when they were made, or at any time thereafter. And, except for this decision, there is none now.

The truth is that in this decision the Court approves the Commission’s assertion of power to govern the matter without law, power to force surrender of stock so purchased whenever it will, and power also to overlook such acquisitions if it so chooses. The reasons which will lead it to take one course as against the other remain locked in its own breast, and it has not and apparently does not intend to commit them to any rule or regulation. This administrative authoritarianism, this power to decide without law, is what the Court seems to approve in so many words: “The absence of a general rule or regulation *217 governing management trading during reorganization did not affect the Commission’s duties . . . .” (Par. 13). This seems to me to undervalue and to belittle the place of law, even in the system of administrative justice. It calls to mind Mr. Justice Cardozo’s statement that “Law as a guide to conduct is reduced to the level of mere futility if it is unknown and unknowable.” 4

V.

The Court’s averment concerning this order, that “It is the type of judgment which administrative agencies are best equipped to make and which justifies the use of the administrative process,” (Par. 29) is the first instance in which the administrative process is sustained by reliance on that disregard of law which enemies of the process have always alleged to be its principal evil. It is the first encouragement this Court has given to conscious lawlessness as a permissible rule of administrative action. This decision is an ominous one to those who believe that men should be governed by laws that they may ascertain and abide by, and which will guide the action of those in authority as well as of those who are subject to authority. 5

I have long urged, and still believe, that the administrative process deserves fostering in our system as an expeditious and nontechnical method of applying law in special *218 ized fields. 6 I can not agree that it be used, and I think its continued effectiveness is endangered when it is used, as a method of dispensing with law in those fields.

Mr. Justice Frankfurter joins in this opinion.

Filed October 6, 1947.

For convenience of reference, I have numbered consecutively the paragraphs of the Court’s opinion, and cite quotations accordingly.

The facts and the law of the case generally are fully set forth in the first opinion of Mr. Chief Justice Groner of the Court of Appeals which reversed the Commission’s order (75 U. S. App. D. C. 374, 128 F. 2d 303 ) and in his second opinion (80 U. S. App. D. C. 365, 154 F. 2d 6 ) again reversing the Commission’s order after it had “recast its rationale.”

The Commission, speaking of such a rule, appends the following note to its opinion:

“Without flexibility the rule might itself operate unfairly. Limitation to cost appears appropriate here, but would be inappropriate in a case where the cost of the security purchased was in excess of its reorganization value, and in some instances cash payment by the company would not be feasible. In addition, special treatment of any sort might be inappropriate for incidental purchases not made *216 as part of a program in contemplation of reorganization benefits. In this connection, we wish to emphasize that our concern here is not primarily with the normal corporate powers which make it possible for officers and directors to influence the market for their own gain, in the absence of reorganization, by a choice of dividend policies, accounting practices, published reports, and the like. The questions of fairness and detriment here presented arise before us in the context of a capital readjustment. At that point our scrutiny is called for, and that our scrutiny is to be vigilant cannot be doubted. See Appendix to Sen. Rep. No. 621 (74th Cong., 1st Sess.) on S. 2796, at p. 58, quoted supra.”

The Growth of the Law, p. 3.

On the same day, the Court denied its own authority to recognize and enforce, without Congressional action, an unlegislated liability much less novel than the one imposed here, and that in the field of tort law which traditionally has developed by decisional rather than by legislative process. The result is to confirm in an executive agency a discretion to act outside of established law that goes beyond any judicial discretion as well as beyond any legislative delegation. Compare United States v. Standard Oil Co., 332 U. S. 301 .

See statement before House of Delegates, American Bar Association, 1939. (1939 Proceedings, House of Delegates, XXV A. B. A. Journal 95.) Also see Report as Attorney General to President Roosevelt recommending veto of Walter-Logan Bill — made part of veto message, Vol. 86, Part 12, Congressional Record, 76th Congress, 3d Session, p. 13943.