Since the last column, the world has changed dramatically. In addition to navigating the challenges of the COVID-19 pandemic, the Western District mourned the loss of a giant when on March 5, 2020 Senior Judge Michael A. Telesca passed away. As Western District Chief Judge Frank P. Gerac, Jr. noted on the court's website: Judge Telesca will be sorely missed. "The legacy he leaves behind will serve as a model for all those providing justice in the future, assuring that everyone will be treated with dignity and respect."

On a happier note, District Judge John L. Sinatra Jr. assumed his role on the court, filling the vacancy left when District Judge William M. Skretny assumed senior status on March 8, 2015.

Against the backdrop of social distancing and remote working, most federal courts moved forward. Shortly before the pause in New York, U.S. District Judge Elizabeth A. Wolford decided a case brought against the Securities and Exchange Commission (SEC, Commission or defendant) for allegedly violating the Appointments Clause of the Constitution. Dembski v. SEC, No. 1:19-CV-00358 EAW, 2020 U.S. Dist. LEXIS 18101 (W.D.N.Y. Feb. 4, 2020). Although neither party raised the issue on defendant's motion to dismiss the complaint, Judge Wolford dismissed the case, finding the court lacked subject matter jurisdiction. After making that finding, Judge Wolford addressed the other issues raised by the motion, for completeness, and determined they also supported dismissal.

Factual Background

In September 2014, the SEC staff members hired Jason S. Patil as an ALJ at the Commission. Id. at *2. On Dec. 10, 2014, the SEC commenced an administrative proceeding against plaintiff, Reliance Financial Advisors (Reliance) (the company plaintiff owned and served as managing partner), and a co-owner of Reliance. Id. On the same day, the SEC also issued a consent order against a Reliance employee in a separate proceeding. Id. Shortly thereafter, ALJ Patil consolidated the two proceedings and held a hearing on the proceedings. Id. Reliance and Reliance's co-owner later settled with the SEC. Id.

On Jan. 11, 2016, ALJ Patil found that plaintiff violated federal securities laws and permanently disbarred him from the securities industry. Id. at *2-3. Plaintiff appealed the ALJ's decision to the Commission. Id. at *3. The Commission affirmed the ALJ's decision. Id. Plaintiff then filed a petition for review with the Second Circuit seeking reversal of the SEC decision. Id. Plaintiff's petition did not raise any constitutional issues related to ALJ Patil's role or the Appointments Clause. Id. On Feb. 27, 2018, the Second Circuit denied plaintiff's petition for review. Id.

Several months later, on June 21, 2018, the Supreme Court of the United States issued a decision in Lucia v. Securities and Exchange Commission, 138 S. Ct. 2044, 2051-2055 (2018), holding that SEC administrative law judges are "Officers of the United States," and as such they must be appointed by the procedures prescribed in the Appointments Clause of the Constitution (U.S. Const., Art. II, §2, cl. 2). That meant that a president, a court of law, or a head of department must appoint an SEC ALJ. Dembski, 2020 U.S. Dist. LEXIS 18101 at *3. In the present case, SEC staff members, not a president, court of law, or department head hired ALJ Patil.

In light of Lucia, plaintiff filed a motion to recall the mandate and vacate the judgment with the Second Circuit on July 6, 2018. Id. at *3-4. He requested that the Second Circuit revoke its denial of review of the Commission's decision, issue a mandate nullifying the Commission's decision and preclude the Commission from taking any steps to enforce any portion of the sanctions it imposed on him. Id. at *4. In response, the Commission argued that Plaintiff had forfeited his Appointments Clause challenge by failing to raise it at any point prior to the Second Circuit's order denying his petition for review. Id. The Second Circuit agreed with the SEC and on July 20, 2018, issued an order denying plaintiff's motion to recall and motion to vacate. Id.

Plaintiff commenced the present proceeding in this court almost eight months later, on March 15, 2019. In this proceeding, plaintiff is seeking a declaration that defendant's decision regarding him violated the Appointments Clause of the Constitution and an order reinstating his ability to participate in the securities industry. Id. at *1. Defendant filed a motion to dismiss in response. Id. at *4-5.

Subject Matter Jurisdiction

Before turning to the defendant's Motion to Dismiss, Judge Wolford noted that subject matter jurisdiction is a threshold issue which she is obligated to consider before addressing the merits of any case even if neither party raises it. Id. at *5. She outlined the statutory scheme pursuant to the Securities Act for bringing enforcement actions. Id. at *5-6. When bringing an enforcement action, the SEC can do so by either initiating an administrative action or an injunctive action in a federal district court. Id. at *5. For administrative actions, the SEC delegates its adjudicative functions to an ALJ. Id. After assignment to an ALJ, the ALJ holds a hearing and issues a decision, which can be appealed to the Commission. Id. at *5-6. Only the Commission has the authority to issue a final agency decision in the proceeding. Id. at *6. After the Commission issues a final decision, the aggrieved person may file a petition for review of that decision with a court of appeals. Id. "Once the petition for review is filed, the court of appeals has jurisdiction, which becomes exclusive on the filing of the record, to affirm or modify and enforce or to set aside the order in whole or in part." Id. (internal quotations omitted).

Based upon this statutory structure and relevant case law, Judge Wolford concluded that "the statutory scheme established by Congress in the Securities Act [15 U.S.C. §78a-gg] entirely deprives federal district courts of jurisdiction over requests for review of final SEC orders." Id. at *6-10 (emphasis added) Thus, this court lacks subject matter jurisdiction.

Appointments Clause

After reiterating that the court lacked subject matter jurisdiction over plaintiff's claims, for the sake of completeness, the court nevertheless went on to address the defendant's motion to dismiss for failure to state a claim as if it had jurisdiction. Defendant moved to dismiss the complaint arguing that plaintiff failed to make his Appointments Clause challenge either to ALJ Patil, the Commission or the Second Circuit. Id. at *11. Plaintiff contends that the SEC's decision against him violated the Appointments Clause because ALJ Patil was hired by SEC staff members, and this court should provide him relief based on Lucia. Lucia held that "[o]nly the President, a court of law, or a head of department can [appoint the SEC's ALJs]." Id. at *11-12 (citing Lucia, 138 S. Ct. at 2051-55). Judge Wolford noted, however, that Lucia also stated that Lucia was entitled to relief because he had made a timely challenge to the validity of the ALJ's appointment. Id. at *3, *14 (citing Lucia, 138 S. Ct. at 2055). Plaintiff did not make a challenge to ALJ Patil's appointment before this collateral attack.

After Lucia, courts differed on whether that decision's timeliness language means that Appointment Clause challenges are non-jurisdictional and can be waived or forfeited and what constitutes a timely challenge. Most courts which addressed the issue found that the timeliness language means that Appointment Clause claims are non-jurisdictional and can be waived. Id. at *12-13. The Second Circuit had yet to expressly address the issue. Id. at *12. Thus, Judge Wolford was deciding an issue of first impression in the Circuit.

After reviewing the case law across the federal system, Judge Wolford found that a challenge to the constitutional validity of the appointment of an officer must be timely and could be forfeited by failure to raise it at the administrative level. Id. at *13. To that end, the court highlighted that "[t]he SEC's governing statutes … explicitly provide that courts of appeals may not consider claims never raised before the SEC." Id. at *14. This determination is supported by Lucia itself, where the plaintiff did raise the Appointments Clause issue to the Commission. Id. He also raised it at the Court of Appeals. Id.

Plaintiff also contended that discovery was needed in order to decide whether he raised a timely Appointments Clause objection at the administrative level and argued that a full examination of the administrative proceeding records was required. Id. at *15. The court reminded plaintiff that he should know what arguments he himself raised before the ALJ and the Commission, and that the SEC proceedings, including hearing transcripts, are part of the public record. Id. at *15-16. Further, the SEC documents submitted by defendant indicated that the Appointments Clause argument was never raised before the SEC. Id. at *16. The court went on to note that even if the record was unclear as to whether plaintiff raised his objection in the administrative proceedings, he still failed to do so before the Second Circuit, which is fatal. Id. at *16-17 (citing Lucia, 138 S. Ct. at 2055) (indicating that a timely challenge should be made both in the SEC proceeding and during the judicial appeal).

The court similarly dismissed the remainder of plaintiff's arguments concerning the Appointments Clause, including that this type of claim should not be subject to the SEC's administrative review scheme. Id. at *18. In support, Judge Wolford relied upon Tilton v. Securities and Exchange Commission, 824 F.3d 276, 281-82 (2d Cir. 2016), in which the Second Circuit affirmed a district court's holding that it did not have jurisdiction to hear the plaintiff's Appointments Clause claim and that such a claim did not fall outside the scope of SEC review. Id. at *6-8, 18. The court also denied plaintiff's request that it exercise discretion to grant him relief despite the untimeliness of his claim. Id. at *18. To that end, the court cited to a recent decision from the Federal Circuit, Arthrex v. Smith & Nephew, 941 F.3d 1320 (Fed. Cir. 2019), which describes the circumstances where it is appropriate for a court to exercise its discretion to hear a claim over a waiver challenge. Id. at *20. The Arthrex court found it appropriate to exercise discretion where the decision would have "a wide-ranging effect on property rights and the nation's economy." Id. (citing Arthrex, 941 F.3d at 1326-27). In contrast, here, the court's decision would not have a wide-ranging impact, as Lucia had already accomplished that aim. Id. at *20. Instead, the decision would impact only the rights of plaintiff. Id.

Res Judicata

Lastly, the court agreed with defendant's argument that plaintiff's claims were barred by res judicata. Id. at *22. To determine whether the doctrine of res judicata bars a subsequent action, courts consider whether (1) the prior decision was a final judgment on the merits, (2) the litigants were the same parties, (3) the prior court was of competent jurisdiction, and (4) the causes of action were the same. Id. at *22-23.

In this case, the Second Circuit entered a final judgment on the merits, which was a decision that became unreviewable upon the expiration of the 90-day deadline under 28 U.S.C. §2101(c) for filing a petition for certiorari. Id. at *23. The litigants were the same as in the present case, and the Second Circuit is a court of competent jurisdiction. Id. Furthermore, "Plaintiff's Appointments Clause claim arises directly from the SEC's enforcement action and serves as an affirmative defense within the proceeding." Id. (internal quotations omitted). Plaintiff failed to cite any reason as to why his Appointments Clause claim could not have been fully and fairly litigated in the administrative proceedings or in the Second Circuit. Therefore, the principles of res judicata bar plaintiff from raising its claim. Id. at *23-24.

Conclusion

Overall, the court dismissed the case for lack of subject matter jurisdiction and noted that in the alternative, she would grant the motion to dismiss for failure to state a claim.

Sharon M. Porcellio is a member of Bond, Schoeneck & King, PLLC representing businesses and institutions in commercial litigation and employment matters. She can be reached at [email protected]. Alyssa Jones, an associate with the litigation department of the firm, assisted with the preparation of this article.