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Storm at SEC Over Appointments Clause Violations Concerning its ALJs and Possible Implications as to Circular 230 ALJs, Part III

Posted on June 15, 2016

We welcome back frequent guest blogger Carl Smith who brings us up to date on a non tax case with potential tax implications that he has written about previously.  Keith

This is an update post – the bottom line of which is that there are, as yet, still no court of appeals rulings addressing the Appointments Clause problems alleged with respect to SEC ALJs.

Early last September, I did two posts here and here about rulings of two district courts that tax lawyers who represent practitioners in hearings before Circular 230 ALJs should keep an eye on.  The posts concerned Duka v. SEC, 2015 U.S. Dist. LEXIS 100999 (S.D.N.Y. Aug. 3, 2015), and Hill v. SEC, 114 F. Supp. 3d 1297 (N.D. Ga. Jun. 8, 2015).

Prior to Dodd-Frank, the SEC had to pursue enforcement actions through district courts.  In Duka and Hill, the SEC had used its new powers under Dodd-Frank to pursue enforcement actions, at its option, in its own administrative tribunal.  In its new tribunal, the SEC assigned ALJs to try enforcement actions in the first instance.  If a person lost before the ALJ, appeal could be made, first, to the entire SEC, then to a court of appeals.  Before the ALJs held their trials, both Duka and Hill brought suits in district courts to enjoin the SEC proceedings, arguing, among other things, that the SEC ALJs needed to be, but were not, properly appointed under the Constitution’s Appointments Clause.  In my posts, I noted that similar, and perhaps other, problems may affect Treasury ALJs who hold trials concerning Circular 230 sanctions.

Duka and Hill were two of more than a half dozen district court suits brought to stop pending SEC ALJ proceedings.  What I did not note in my prior posts was that most district courts dismissed such suits for lack of jurisdiction – on the theory that the constitutional arguments could be raised before the ALJs and the SEC and so could eventually get reviewed by courts of appeals later.  Duka and Hill were unusual in that, in those cases, (1) the district court judges ruled that they had jurisdiction to address the constitutional issue now, and (2) both judges issued injunctions precluding further ALJ proceedings because they held that the Appointments Clause had been violated.  Both courts held that, even though SEC ALJs don’t render the final decision after trial (because of potential SEC review), they exercise significant authority on behalf of the United States, making them have to be appointed under the Appointments Clause the same way that Tax Court Special Trial Judges were held to have to be properly appointed in Freytag v. Commissioner, 501 U.S. 868 (1990).  But, the SEC had never appointed the ALJs.  Apparently, the ALJs were just hired as employees by some staffer at the SEC.  Thus, the Appointments Clause – at least requiring appointment by the entire SEC (as the “Head[] of [a] Department[]”) – was violated.

So, what has happened since my last posts?

Well, even before my posts on Duka and Hill, people losing the jurisdictional question in other district court suits brought appeals in several Circuits.

In Bebo v. SEC, 799 F.3d 765 (7th Cir. Aug. 24, 2015), and Jarkesy v. SEC, 803 F.3d 9 (D.C. Cir. Sept. 29, 2015), the Seventh and D.C. Circuits affirmed dismissals for lack of jurisdiction – telling the appellants to go finish their administrative proceedings, and, if they lost both before the ALJs and the SEC, they could make their Appointments Clause arguments later, when they took an appeal from the SEC.

There were several conflicting district court cases in district courts in the Second Circuit.  The first that reached that appeals court, though, was not Duka, so the oral argument in Duka was postponed.  Instead, oral argument was had in another case – one where the district court had dismissed for lack of jurisdiction, so did not reach the Appointments Clause violation issue.  On June 1, 2016, a divided 3-judge panel of the Second Circuit in Tilton v. SEC, 2016 U.S. App. LEXIS 9970, affirmed the district court’s dismissal.  The Second Circuit ruled that the Appointments Clause issue was not one wholly collateral to the underlying administrative proceeding, and the injury of being forced to try a case before a tribunal that might be improperly constituted was only monetary, which the court did not feel was the kind of irreparable injury that might require addressing the constitutional issue at this early stage.

Presumably now, another panel of the Second Circuit will shortly dismiss the Duka case, also for lack of jurisdiction.  On the other hand, perhaps an internal fight will brew at the Second Circuit, resulting in an en banc hearing on the jurisdictional question.

The Eleventh Circuit heard oral argument in Hill on February 24, 2016.  The docket sheet on for the appeal, Docket No. 15-12831, shows that over 10 people have ordered from the Eleventh Circuit copies of the oral argument on CD.  (Unlike some other Circuits, the Eleventh Circuit does not post the audio of its oral arguments on its website.)  A report on the oral argument indicates that the Eleventh Circuit was focused more on the jurisdictional question than the Appointments Clause violation.  See

Who knows where this is going?  Perhaps to SCOTUS, eventually?

We’ll keep you updated periodically.

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