# Glen Ridge I Condominiums, Ltd. v. Federal Savings & Loan Insurance Corp.

> Texas Court of Appeals, 5th District (Dallas) · June 25, 1987 · 734 S.W.2d 374

URL: https://www.frixlaw.com/law-library/cases/9771785

## Case

- **Full name:** GLEN RIDGE I CONDOMINIUMS, LTD., Et Al., Appellants, v. FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, Et Al., Appellees
- **Court:** Texas Court of Appeals, 5th District (Dallas)
- **Decided:** June 25, 1987
- **Citations:** 734 S.W.2d 374; 1987 Tex. App. LEXIS 8054
- **Precedential status:** Published
- **Opinion:** On rehearing by Devany
- **Judges:** Akin, Devany, Scales, Lagarde, Thomas
- **Cited by:** 10 later opinions in the Frix Law Library

## Citator (automated)

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## Opinion text

SUPPLEMENTAL OPINION ON MOTION FOR REHEARING
DEVANY, Justice.
Federal Savings and Loan Insurance Corporation (FSLIC) contends that our previous opinion is in error (1) in failing to apply the analysis mandated by the most recent decision of the Supreme Court of the United States regarding Article III concerns, (2) in failing to require exhaustion of administrative remedies as a condition to the appeal of Glen Ridge I Condominiums, et al. (Glen Ridge), and (3) in failing to construe the applicable statutes in such a manner as to avoid constitutional issues. FSLIC concludes that had we applied this analysis, required such a condition, or made such a construction, we would be compelled to dismiss Glen Ridge’s appeal or affirm the trial court’s dismissal of Glen Ridge’s suit. Because this analysis supports our original decision, because the doctrine of exhaustion of administrative remedies is inapplicable, and because the statutes are susceptible to no other construction, we cannot agree. Consequently, FSLIC’s motion for rehearing is denied.
FSLIC claims that resolution of this case depends upon evaluation of a set of factors derived from the most recent decision of the Supreme Court considering adjudication of certain causes of action by non-article III tribunals, Commodity Futures Trading Commission v. Schor, — U.S. —, 106 S.Ct. 3245 , 92 L.Ed.2d 675 (1986). FSLIC argues that our original opinion failed to consider these factors and that, when all such factors are weighed and considered together, FSLIC’s adjudication of Glen Ridge’s causes of action cannot be said to violate Article III of the Constitution of the United States of America. We agree that the Schor analysis aids in the disposition of this case, but we conclude that such analysis supports our original decision.
The question presented in Schor was whether the Commodity Exchange Act (CEA), 7 U.S.C. § 1 , et seq., empowered the Commodity Futures Trading Commission (CFTC) to entertain state law counterclaims in CEA reparation proceedings and, if so, whether that grant of authority violated Article III of the Constitution. The CEA created a comprehensive regulatory structure to prevent fraudulent and manipulative conduct in the futures trading industry. As part of such structure, CFTC administers a reparations procedure through which disgruntled customers of professional commodity brokers can seek redress for the brokers’ violation of the CEA or CFTC regulations. CFTC promulgated a regulation allowing the respondent in a reparations proceeding to present counterclaims arising out of the transaction or occurrence described in the complaint.
Schor filed complaints with the CFTC, alleging that ContiCommodity Services, Inc. (Conti) had run up an account debit against Schor through violations of CFTC regulations. Conti, before being served, commenced a diversity action in Federal District Court to recover the balance due on Schor’s account. Schor moved to dismiss the federal district court action on grounds that the CFTC reparation proceed *388 ing afforded full resolution and adjudication of all rights of the parties with respect to the transactions which were the subject matter of Conti’s suit. Conti thereupon dismissed its suit and filed a CFTC counterclaim for the debit balance. Conti alleged that it had not violated the CEA but that Schor’s debit balance resulted from losses sustained by Schor’s trading and from the expenses, including brokerage commissions, incurred in connection with such trading. The CFTC Administrative Law Judge ruled in Conti’s favor on both Schor’s claims and Conti’s counterclaims. After such ruling, Schor raised for the first time the issue of CFTC’s statutory authority to adjudicate Conti’s counterclaim. The Court of Appeals ordered dismissal of the counterclaims on grounds that CFTC jurisdiction over such claims violated article III as applied in Northern Pipeline Construction Co. v. Marathon Pipeline Company, 458 U.S. 50 , 102 S.Ct. 2858 , 73 L.Ed.2d 598 (1982).
The Supreme Court evaluated the Court of Appeals decision by considering several factors, none of which is considered disposi-tive. These factors were: (1) whether the litigant asserting article III issues had waived his right to an article III tribunal; (2) the extent to which the non-article III body exercised the range of jurisdiction and powers normally vested only in article III courts; (3) the extent of judicial review of the non-article III tribunal; (4) the balance to be struck between the “private”, state-law aspects of the litigant’s claim and the ability of the non-article III body to achieve its legislative purpose; and (5) whether submission to the non-article III forum is optional on the part of the litigant asserting a state law counterclaim. After evaluation of these factors, the Court held that article III was not offended by the CFTC adjudicatory scheme. However, application of these factors to the case at bar convinces us that FSLIC’s claims of exclusive jurisdiction do offend the basic principles of article III and are, therefore, unconstitutional.
First, the Court stated that, inasmuch as article III serves primarily to protect individual and personal interests in having claims decided before article III judges who are free from potential domination by other branches of government, the concept of waiver is a significant factor in determining whether or not article III requires adjudication of a claim by article III courts. 106 S.Ct. 3256 . Schor’s express demand that Conti’s district court suit be dismissed and that Conti proceed on its counterclaim in the CFTC reparations proceeding constituted such a waiver. This waiver served to uphold the propriety of CFTC jurisdiction over Conti’s counterclaims. In contrast, Glen Ridge has vigorously challenged FSLIC adjudication of Glen Ridge’s counterclaims. Therefore, the initial Schor factor supports our original decision in this case.
Next, the Court examined the allocation of powers between CFTC and article III courts. The Court noted that only CFTC’s jurisdiction over common law counterclaims departs from the traditional agency model. 106 S.Ct. 3258 . The Court further noted that “wholesale importation of concepts of pendent or ancillary jurisdiction ... may create greater constitutional difficulties ...” than those presented by CFTC’s narrow jurisdiction. Id. FSLIC argues that this court must dismiss Glen Ridge’s appeal because, literally, its enabling act “precludes any court action, in either state or federal court, that would restrain or affect the exercise of the powers or functions of FSLIC ...” (emphasis added), and because such legislation absolutely proscribes judicial enforcement of any of the various causes of actions alleged by Glen Ridge because such judgments would restrain or affect FSLIC’s actions.
Section 1464 has been applied broadly and literally to proscribe any judicial action over FSLIC whatsoever, save for the limited review under the Federal Administrative Procedure Act. Federal Savings and Loan Insurance Corporation v. Bonfanti, 818 F.2d 864 (5th Cir.1987) (unpublished); Chupik Corporation v. Federal Savings and Loan Insurance Corporation, 790 F.2d 1269 (5th Cir.1986). Clearly, if FSLIC may take whatever actions it decides upon with regard to a litigant’s claim and no *389 court anywhere may take the slightest action with regard thereto, FSLIC has usurped all the functions of article III courts. It says nothing to claim that FSLIC does not exercise the range of powers and jurisdiction of an article III court because it does not conduct jury trials or issue “judgments” if the harsh reality is that FSLIC adjudication completely replaces the right to trial by jury and the ability of the courts to issue a judgment. Under the construction urged by FSLIC, it would have far more powers than an article III court because it can act as plaintiff, judge, and jury in deciding a litigant’s claims. To claim otherwise is to adopt the formalism rejected by the Supreme Court in Thomas and Schor . Clearly, the construction of 12 U.S.C. §§ 1729 and 1464 offered by FSLIC bears no resemblance to the limited authority of CFTC to entertain voluntary counterclaims arising out of the transaction from which the reparation proceeding grew. Instead, this position argues in favor of the very wholesale importation of concepts of pendent or ancillary jurisdiction of which the Sckor court warned. Therefore, the second factor in Schor supports our original decision.
Next, the Schor court examined the extent of review of CFTC provided by the federal courts, finding that CFTC’s jurisdiction was not objectionable because subject to “de novo” review in federal court rather than deferential review under the “weight of the evidence” standard. FSLIC contends that it is subject to review under the “de novo” rather than the “weight of the evidence” standard. According to the federal Administrative Procedure Act, FSLIC is not subject to “de novo” review or to the more deferential “weight of the evidence” standard but review of FSLIC is under the most deferential “arbitrary and capricious” or “substantial evidence” standards. 5 U.S.C. §§ 554 (a), 706(2)(E); Morrison-Knudsen Co., Inc. v. CHG International, Inc., 811 F.2d 1209, 1222 (9th Cir.1987). Consequently, the third prong of the Schor test supports our original decision.
Next, the Schor court balanced the “private” aspect of the right there in issue against the congressional policies vindicated by the grant of jurisdiction to a non-article III tribunal. An important consideration in striking this balance was whether or not the non-article III body’s jurisdiction was optional with the litigant. In Schor , as here, the right in issue was a private, common law right derived from state law. 106 S.Ct. at 3259 . The Court described the proper analysis by stating:
The counterclaim ... is therefore a claim of the kind assumed to be at the “core” of matters normally reserved to Article III courts.... The risk that Congress may improperly have encroached on the federal judiciary is obviously magnified when Congress “withdraw(s) from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity ...” ... (W)here private, common law rights are at stake, our examination of the congressional attempt to control the manner in which those rights are adjudicated has been searching ...
Id. The Court then recognized the propriety of Congress’ purpose in affording an expeditious procedure for CEA disputes. The Court concluded that, in the Schor situation, separation of powers concerns underlying article III are not offended because:
Congress gave the CFTC the authority to adjudicate ... but the decision to invoke this forum is left entirely to the parties and the power of the federal judiciary to take jurisdiction of these matters is unaffected.
Id. The balance between a litigant’s right to article III adjudication of a state-law cause of action and the interest of Congress in an expeditious remedy was tipped in favor of the administrative agency by the consensual nature of the remedy and the fact that no jurisdiction was withdrawn from the courts. Clearly, the Schor analysis does not uphold the constitutionality of a scheme wherein the parties are compelled to abide FSLIC adjudication and where judicial power is not only affected, but where, in addition, no court can take any action to affect the administrative agency.
*390 Since FSLIC claims the authority to adjudicate those matters which reside at the core of judicial power, and claims to have power to compel parties to accept FSLIC adjudication, and claims to be able to oust any court from any jurisdiction over FSLIC, our searching examination of this statutory scheme compels us to hold that the jurisdiction claimed by FSLIC, and granted by 12 U.S.C. §§ 1464 and 1729, violates article III of the Constitution of the United States.
FSLIC further contends that we erred in not dismissing Glen Ridge’s appeal for failure to exhaust administrative remedies. However, the doctrine of exhaustion of remedies is not a jurisdictional rule but is a matter committed to judicial discretion and an exercise of comity only. Morrison-Knudsen, 811 F.2d at 1223 . Further, where the presence of constitutional questions is coupled with the inadequacy of administrative procedures, a reviewing court may dispense with such doctrine. Aircraft & Diesel Equipment Corporation v. Hirsch, 331 U.S. 752, 773 , 67 S.Ct. 1493, 1503 , 91 L.Ed. 1796 (1947). As detailed in our original opinion, there are serious constitutional questions in this case and FSLIC’s procedures are patently inadequate. Consequently, Glen Ridge’s appeal is properly before us.
FSLIC further argues that our original opinion should have avoided the constitutional question by construing the FSLIC enabling statutes in such a manner as to hold them constitutional. We are aware that the United States Court of Appeals for the Ninth Circuit has construed these acts in a manner that avoids a constitutional issue by simply ruling that the acts do not contemplate FSLIC jurisdiction over state law counterclaims. Morrison-Knudsen Co., Inc., et al. v. CHG International, Inc., et al., 811 F.2d 1209 (9th Cir.1987). We respect the reasoning of the Ninth Circuit Court, but in light of the literal construction of 12 U.S.C. §§ 1464 and 1729 given by the United States Court of Appeals for the Fifth Circuit, and numerous United States District Court decisions following it, we cannot strain the language of the acts that far. North Mississippi Savings and Loan Association v. Hudspeth, 756 F.2d 1096 (5th Cir.1985); Chupik Corporation v. Federal Savings and Loan Insurance Corporation, 790 F.2d 1269 (5th Cir.1986); Federal Savings and Loan Insurance Corporation v. Bonfanti, 818 F.2d 864 (5th Cir.1987) (unpublished). Similarly, in Schor , the Supreme Court was asked to uphold the opinion of the Court of Appeals that CFTC enabling statutes could be construed to deny them authority over counterclaims under the rubric of avoiding questions of constitutionality where a particular statutory construction may avoid them. Schor, 106 S.Ct. at 3252 . The Court rejected this reasoning because, though a court will strain to construe a statute so as to avoid a constitutional issue, it will not judicially rewrite the statute to do so. Id. The unvarnished language of §§ 1729 and 1464, and the prevailing construction of those statutes, are too plain to support a construction that will avoid their constitutional infirmity. Thus, we must address that issue.
The motion for rehearing is overruled.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/9771785. Public record. Not legal advice.