Court Opinion

ID: 2964179
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:21:45.833146+00
Date Added: 2024-06-11T15:02:14.521869
License: Public Domain

USCA1 Opinion

	

          J      u      l      y   1      2      ,   1      9      9      6
                            United States Court of Appeals
                                For the First Circuit
                                 ____________________

        No. 95-2106

                         CARR INVESTMENTS, INC., EDWARD CARR
                                AND RODMAN & RENSHAW,

                                     Petitioners,

                                          v.

                         COMMODITY FUTURES TRADING COMMISSION
                                AND RICHARD C. DAVIS,

                                     Respondents.

                                 ____________________

                        ON PETITION FOR REVIEW OF AN ORDER OF 
                       THE COMMODITY FUTURES TRADING COMMISSION

                                 ____________________

                                        Before

                               Torruella, Chief Judge,
                                          ___________
                          Boudin and Stahl, Circuit Judges.
                                            ______________

                                 ____________________

                                     Errata Sheet
                                     Errata Sheet

            The opinion of this Court issued on June 24, 1996, is amended as
        follows:

            On cover sheet delete "respondents" and insert "respondent
            Commodity Futures Trading Commission and Jeffrey V. Boxer for
                                                     ________________
            respondent Richard C. Davis."

                            United States Court of Appeals
                                For the First Circuit
                                 ____________________

        No. 95-2106

                         CARR INVESTMENTS, INC., EDWARD CARR
                                AND RODMAN & RENSHAW,

                                     Petitioners,

                                          v.

                         COMMODITY FUTURES TRADING COMMISSION
                                AND RICHARD C. DAVIS,

                                     Respondents.

                                 ____________________

                        ON PETITION FOR REVIEW OF AN ORDER OF 
                       THE COMMODITY FUTURES TRADING COMMISSION

                                 ____________________

                                        Before

                               Torruella, Chief Judge,
                                          ___________
                          Boudin and Stahl, Circuit Judges.
                                            ______________

                                 ____________________

            Jeffry M. Henderson with whom Daniel G. Dolan, Jr. and Henderson
            ___________________           ____________________     _________
        & Becker were on brief for petitioners.
        ________
            George G. Wilder, Attorney, with whom Pat G. Nicolette, Acting
            ________________                      ________________
        General Counsel, Jay L. Witkin, Deputy General Counsel, and William S.
                         _____________                              __________
        Liebman, Assistant General Counsel, Commodity Futures Trading
        _______
        Commission, were on brief for respondent Commodity Futures Trading
        Commission and Jeffrey V. Boxer for respondent Richard C. Davis.
                       ________________

                                 ____________________

                                    June 24, 1996
                                 ____________________
                      STAHL, Circuit Judge.  Appellants Carr Investments,
                      STAHL, Circuit Judge.
                             _____________

            Inc. and Edward Carr seek review of an order of the Commodity

            Futures Trading Commission reversing, as an abuse of

            discretion, an administrative law judge's decision to award

            them attorney's fees and costs.  Because we find that the

            Commission's decision was not the product of reasoned

            decisionmaking, we vacate its order and remand for further

            consideration consistent with this opinion.

                                          I.
                                          I.
                                          __

                                      Background
                                      Background
                                      __________

            A.  The Relevant Facts
            ______________________

                      In January 1992, Richard Davis opened a futures and

            options trading account with Carr Investments, Inc. ("CII"),

            a commodity futures brokerage firm.  Edward Carr was Davis's

            account executive.  In March 1992, Davis gave Carr

            discretionary authority to trade his account.  Over the

            subsequent months, Davis deposited a total of $66,500 into

            the account, and Carr actively traded options and futures

            contracts on Davis's behalf.  However, by December 1992,

            trading losses had exhausted Davis's $66,500 account balance,

            and the account was closed.

                      Vexed by the loss, Davis filed a reparation

            complaint with the Commodity Futures Trading Commission

            ("CFTC" or "the Commission") charging CII and Carr with

            fraudulently inducing him to open the account, churning,

            breach of fiduciary duty, and unauthorized trading, all in

            violation of the Commodity Exchange Act and certain of the

                                         -3-
                                          3

            Commission's regulations.  Davis sought to recover $66,500 in

            out-of-pocket losses and $78,155 in lost profits.  Davis also

            requested that the case proceed under the Commission's

            voluntary decisional proceeding, 17 C.F.R.    12.100-.106,

            and paid the required $25 filing fee, 49 Fed. Reg. 6692 (Feb.

            22, 1984).1

                      A voluntary decisional proceeding is a "no-frills"

            adjudication by a CFTC Judgment Officer based on the parties'

            documentary and tangible submissions of proof.  Both parties

            must elect this proceeding for it to apply.  17 C.F.R.  

            12.26(a).  In agreeing to a voluntary decisional proceeding,

            the parties waive their rights to an oral evidentiary

            hearing, to a written statement of findings of fact and

            conclusions of law, to the recovery of attorney's fees and

            costs, and to appeal the final decision to the Commission. 

            Id.    12.100(b), 12.105-.106.
            ___

                      In their answer, however, CII and Carr elected the

            Commission's formal decisional proceeding, a "full-blown"

            adjudication by an administrative law judge ("ALJ") that

            includes all of the rights waived in a voluntary decisional

            proceeding.  Id.    12.300-.315.  At the relevant time, in
                         ___

            order to invoke a formal decisional proceeding, the amount of

                                
            ____________________

            1.  Although the regulations governing reparation proceedings
            were  amended in 1994 to  increase the amount  of filing fees
            and the amount  in controversy,  59 Fed. Reg.  9637 (Mar.  1,
            1994), we cite  to the  regulations in effect  in 1993,  when
            Davis filed his complaint.

                                         -4-
                                          4

            the claim had to exceed $10,000 and only one of the parties

            needed to elect it.  49 Fed. Reg. 6630 (Feb. 22, 1984).  By

            electing the formal decisional procedure, respondents had to

            pay a $175 filing fee.  Id. at 6629.  Finding these
                                    ___

            requirements satisfied here, the Commission commenced a

            formal decisional proceeding and assigned the case to an ALJ. 

            After considering the evidence presented at an oral

            evidentiary hearing and the parties' post-hearing memoranda,

            the ALJ issued his decision.

            B.  The ALJ's Decision
            ______________________

                      The ALJ's decision had two principal holdings. 

            First, the ALJ held that Davis failed to establish CII's and

            Carr's liability on any of his four claims.  Specifically,

            the ALJ found that Davis had undermined the merits of all but

            one of his claims (as well as his credibility) by disavowing,

            at the evidentiary hearing, the key facts alleged in his

            complaint.  The ALJ noted that minutes after Davis's attorney

            outlined his claims in opening argument, Davis recanted many

            of them, testifying that Carr had not guaranteed him any

            profit much less "enormous profits," and that he was aware of

            the risks associated with options and futures trading.  In

            fact, the ALJ observed, Davis conceded that he was an

            extremely sophisticated and experienced investor.  As for

            Davis's remaining claim, the ALJ concluded that the record

            contained no credible evidence of unauthorized trading.

                                         -5-
                                          5

                      Second, citing his discretion under 17 C.F.R.  

            12.314(c) and CFTC precedent for awarding attorney's fees and

            costs to a prevailing litigant if the losing party acted in

            bad faith, the ALJ held that Davis's bad faith in pursuing

            the action warranted an award of attorney's fees and costs to

            CII and Carr.  The ALJ inferred Davis's bad faith from the

            following facts:  the gross contradictions between the

            representations in his filings and his testimony at the

            evidentiary hearing, his contradictory testimony on whether

            he had in fact read the complaint, his concession that

            certain of his discovery responses and statements in his

            complaint were misleading, and his assertion in post-hearing

            filings of allegations he had repudiated at the evidentiary

            hearing.  Citing the dual purpose of compensating CII and

            Carr and deterring other complainants from such abusive

            conduct, the ALJ ordered Davis to pay CII and Carr $19,417.75

            for attorney's fees and costs incurred in defending the

            litigation.

            C.  The CFTC's Order
            ____________________

                      Davis appealed the ALJ's decision to the

            Commission, challenging, inter alia, the "no liability"
                                     _____ ____

            determination and the propriety of the fee award.  After

            reviewing the parties' appellate briefs and the record below,

            the Commission issued its order, affirming the ALJ's "no

            liability" determination but reversing the fee award.  In

                                         -6-
                                          6

            affirming the ALJ's "no liability" determination, the

            Commission summarily adopted the findings and conclusions of

            the ALJ.  In reversing the fee award, however, the Commission

            supplied its own analysis, sustaining the ALJ's finding of

            Davis's bad faith but concluding that the ALJ's fee award was

            an abuse of discretion because of "four mitigating factors."

                      First, the Commission referred generally to the

            circumstances under which Davis signed the complaint. 

            Specifically, the Commission noted that the complaint in the

            record contained only a faxed copy of the signature page,

            although there was no evidence that the faxed signature was

            not in fact that of Davis.  Recognizing the ALJ's "strenuous

            efforts" to determine whether Davis had read the complaint

            (i.e., the ALJ garnered conflicting testimony from Davis on
             ____

            this issue), the Commission nevertheless concluded that it

            was reluctant to award attorney's fees and costs "in the

            absence of Davis's original signature." 

                      Second, the Commission noted the relative

            culpability of Davis and his attorney.  Although it sustained

            the ALJ's finding of Davis's bad faith, the Commission found

            that Davis's attorney, not Davis, was responsible for the

            majority of the problems that the ALJ relied upon in deciding

            to assess attorney's fees and costs against Davis.  Noting

            that its regulations, unlike Rule 11 of the Federal Rules of

            Civil Procedure, permit the assessment of attorney's fees and

                                         -7-
                                          7

            costs against parties only, and not against attorneys, the

            Commission concluded that assessing fees and costs against

            Davis was inappropriate because Davis's lawyer was more

            culpable than Davis.

                      Third, the Commission relied upon the ALJ's

            inclusion in the fee award of expenses for CII and Carr's

            hotel, meals, air fare, and taxis.  Noting that its case law

            prohibits the inclusion of travel expenses in an award of

            costs, the Commission apparently concluded that the ALJ's

            inclusion of these prohibited expenses undercut the ALJ's

            decision to grant a fee award.

                      Fourth and finally, the Commission cited the fact

            that CII and Carr, not Davis, had elected the formal

            decisional proceeding.  Davis, the Commission noted, had

            requested a voluntary decisional proceeding, in which

            attorney's fees and costs are not assessable.  The Commission

            concluded that it would be unfair, therefore, to assess

            attorney's fees and costs against Davis for his misuse of a

            forum that he had not chosen.  Also under this factor, the

            Commission cited the ALJ's inclusion in the award of CII and

            Carr's $175 filing fee and transcript fee, costs attributable

            to their choice of a formal decisional proceeding.

                                         -8-
                                          8

                                         II.
                                         II.
                                         ___

                                       Analysis
                                       Analysis
                                       ________

                      CII and Carr appeal the Commission's reversal of

            the ALJ's decision to award them attorney's fees and costs,

            arguing that the conclusion that the ALJ abused his

            discretion is not supported in the Commission's order.  The

            Commission's four "mitigating factors," they argue, are

            largely irrelevant to whether a fee award should have been

            assessed and do not establish, either independently or

            collectively, that the ALJ's decision to award fees was an

            abuse of his discretion.

                      In so arguing, CII and Carr challenge the

            Commission's application of the law to the facts.  Some

            question exists in the context of this case as to how a court

            should review the Commission's decision.  For instance, where

            a decision involves agency expertise, courts generally have

            applied a deferential "reasonableness" or "rationality"

            standard of review.  See Monex Int'l, Ltd. v. CFTC, 83 F.3d
                                 ___ _________________    ____

            1130, 1996 WL 250438, at *3 (9th Cir. May 16, 1996); Morris
                                                                 ______

            v. CFTC, 980 F.2d 1289, 1293 (9th Cir. 1992); Malolely v.
               ____                                       ________

            R.J. O'Brien & Assocs., Inc., 819 F.2d 1435, 1440-41 (8th
            ____________________________

            Cir. 1987); cf. Northeast Utils. Serv. Co. v. FERC, 993 F.2d
                        ___ __________________________    ____

            937, 943-44 (1st Cir. 1993) (holding under "substantial

            evidence" standard of review that "we defer to the agency's

            expertise . . . so long as its decision is . . . reached by

                                         -9-
                                          9

            `reasoned decisionmaking'").  Where agency expertise is not

            involved, however, courts have reviewed under the more

            probing de novo standard.  See Northeast Utils., 993 F.2d at
                    __ ____            ___ ________________

            944 (holding that "pure" legal errors, those requiring no

            deference to agency expertise, are reviewed de novo); Morris,
                                                        __ ____   ______

            980 F.2d at 1293.  Because we find that the Commission's

            decision cannot survive either standard of review, we need

            not enter this thicket.  We will apply the more deferential

            "reasonableness" standard, and assume arguendo that the
                                                  ________

            decision to reverse the ALJ's fee award for abuse of

            discretion involved the Commission's expertise.

                      So framed, the issue before us is whether the

            Commission's conclusion that the ALJ abused his discretion in

            awarding attorney's fees and costs is the product of reasoned

            and rational decisionmaking, i.e., whether there is a
                                         ____

            rational connection between the Commission's conclusion and

            the reasons it propounded.  CFTC precedent establishes that

            under abuse of discretion review the Commission will not

            second-guess an ALJ's decision so long as it reflects a

            reasoned application of the appropriate factors.  See In re
                                                              ___ _____

            JCC, Inc., [1992-1994 Transfer Binder] Comm. Fut. L. Rep.
            _________

            (CCH)   26,080, at 41,580 (CFTC May 12, 1994) (reviewing

            ALJ's decision to award civil monetary sanctions for abuse of

            discretion); In re Newman, [1990-1992 Transfer Binder] Comm.
                         ____________

            Fut. L. Rep. (CCH)   25,356, at 39,191 (CFTC Aug. 6, 1992)

                                         -10-
                                          10

            (same).  Thus, we must ask whether the Commission's

            discussion of the four mitigating factors rationally explains

            why the ALJ did not make a reasoned application of the 

            factors appropriate to the decision whether to award fees and

            costs.  Mindful that the scope of review under this standard

            is narrow and that a reviewing court should not substitute

            its judgment for that of the Commission, see Burlington Truck
                                                     ___ ________________

            Lines v. United States, 371 U.S. 156, 168 (1962) (citing as a
            _____    _____________

            fundamental rule of administrative law that "an agency's

            discretionary order be upheld, if at all, on the same basis

            articulated in the order by the agency itself"), we

            nevertheless find that the four mitigating factors, as relied

            upon by the Commission in its order, do not provide reasoned

            support for its conclusion that the ALJ abused his

            discretion.

                      For its first factor, the Commission listed Davis's

            failure to file a complaint bearing his original signature

            and cited two regulations, 17 C.F.R.    12.12, 12.13, as

            support.  Assuming arguendo that these regulations required
                               ________

            Davis to file a complaint bearing an original signature, it

            is nevertheless unclear how Davis's violation of these

            regulations undermined the ALJ's decision to assess

            attorney's fees and costs against him.  There is no

            suggestion that the signature on the complaint was not

            Davis's or that he did not wish to pursue this action.  To

                                         -11-
                                          11

            the contrary, by sustaining the ALJ's findings, the

            Commission found that Davis had consciously filed and pursued

            this action in bad faith.  Under these circumstances, where

            the connection between Davis's failure to file a complaint

            bearing an original signature and the ALJ's abuse of

            discretion is far from self-evident, the Commission had to do

            more than cite regulations of questionable applicability.2 

            This is particularly true where consideration of this factor

            appears to frustrate the equitable and deterrent purposes of

            fee awards by insulating from sanctions bad faith

            complainants who file a copy of the complaint's signature

            page in lieu of an original.

                                
            ____________________

            2.  In discussing the first  factor, the Commission also made
            oblique  references to  the circumstances  under which  Davis
            signed the  complaint and the  ALJ's efforts to  determine if
            Davis had  read the complaint  and stood  behind it.   To the
            extent  that the  Commission was thereby  introducing, albeit
            unartfully, a factor distinct from the originality of Davis's
            signature, i.e.,  the uncertainty  of whether Davis  read the
                       ____
            complaint  before  signing  it,  the  Commission   failed  to
            establish that the ALJ should have separately considered this
            factor in deciding whether to award fees but did not.  
                      Our review of the ALJ's decision reveals that he in
            fact relied on  Davis's equivocation about whether  or not he
            had ever read the complaint in  concluding that Davis pursued
            this  action in  bad  faith.   Therefore,  not only  can  the
            Commission  not complain that the ALJ failed to consider this
            "factor,"  the  Commission   implicitly  adopted  the   ALJ's
            analysis  thereof  in  sustaining  the  bad  faith  findings.
            Moreover,  even if the  Commission had not  adopted the ALJ's
            analysis, but had concluded instead that Davis never read the
            complaint  before  signing it,  this  conclusion  still would
            likely have supported a bad  faith finding because under CFTC
            regulations   Davis's  signature  on   the  complaint  was  a
            certification that  he had read  it, knew  its contents,  and
            attested  to the  truth  of its  statements.   17  C.F.R.    
            12.12(b), 12.13(2).

                                         -12-
                                          12

                      Also unclear from the Commission's order is how

            Davis's lesser culpability relative to that of his attorney,

            the second factor, undercut the ALJ's decision to assess

            attorney's fees and costs against Davis.  Without

            elaboration, the Commission simply concluded that because its

            regulations only envision assessing a fee award against

            parties and not also against their attorneys, it would be

            unfair to assess fees against Davis where his attorney was

            more culpable than he was.  The Commission's determination

            that Davis's attorney was more culpable than Davis, however,

            in no way negates its finding that Davis was also culpable.

                      CFTC precedent and Regulation   12.314(c) provide

            that where a losing party to a formal decisional proceeding

            acts in bad faith, the ALJ may require him to pay his

            opponent's attorney's fees and costs.  See Sherwood v. Madda
                                                   ___ ________    _____

            Trading Co., [1977-1980 Transfer Binder] Comm. Fut. L. Rep.
            ___________

            (CCH)   20,728, at 23,023-025 (CFTC Jan. 5, 1979); see also
                                                               ___ ____

            Scarborough v. Madda Trading Co., [1977-1980 Transfer Binder]
            ___________    _________________

            Comm. Fut. L. Rep. (CCH)   20,841, at 23,448 (CFTC June 11,

            1979); 17 C.F.R.   12.314(c).  The Commission did not point

            to any exception for a party who, although he acted in bad

            faith, did not act as badly as his attorney.  To the

            contrary, CFTC precedent suggests that where, as here, both

            the party and his attorney acted in bad faith, and the

            attorney's action caused monetary loss to the opposing party,

                                         -13-
                                          13

            "the award of attorney fees is perhaps the only adequate

            remedy" to compensate the opposing party for defending

            against a frivolous action.  Sherwood, [1977-1980 Transfer
                                         ________

            Binder] Comm. Fut. L. Rep. (CCH)   20,728, at 23,025 n.33

            (noting that while the Commission may impose civil monetary

            sanctions against errant attorneys, those monies are not paid

            to the opposing party).  In light of contrary precedent, the

            Commission was remiss simply in relying on Davis's attorney's

            greater relative culpability without also explaining how this

            greater culpability sufficiently excused Davis's culpability

            to a degree no longer warranting attorney's fees sanctions.

                      For its third factor, the Commission pointed to the

            fact that the ALJ improperly included travel expenses in his

            calculation of the award's costs.  In its brief to this

            court, however, the Commission effectively conceded that the

            inclusion in the award of prohibited costs did not support

            its conclusion that the ALJ's decision to award fees and

            costs was an abuse of discretion, stating that "Fairly read

            in the context of the opinion as a whole, it is clear that

            [the third factor] was more in the nature of clarification

            than a substantive basis for setting aside the award."  We

            agree, and we also extend this concession to a related

            argument, incorporated in the fourth factor, that the ALJ's

            inclusion of fees attributable to CII and Carr's choice of

            the formal decisional proceeding (i.e., the $175 filing fee
                                              ____

                                         -14-
                                          14

            and the transcript fee) justified its reversal of the entire

            fee award.

                      Finally, as its fourth factor, the Commission cited

            the fact that CII and Carr elected the formal decisional

            proceeding and that Davis had elected a voluntary decisional

            procedure in which attorney's fees and costs are not

            assessable.  From these facts, the Commission concluded that

            it would therefore be unfair to assess attorney's fees and

            costs against Davis for misuse of a forum he did not choose. 

            In so deciding, the Commission proclaimed that it was not

            suggesting "that a reparation complainant may completely

            insulate himself from an award of attorney fees and costs--no

            matter how frivolous his complaint or how vexatious his

            subsequent conduct--simply by initially requesting a

            voluntary decisional proceeding."  

                      While the Commission expressed this sentiment, it

            failed to explain what was distinctive about Davis's case

            that made consideration of the request for a voluntary

            decisional proceeding permissible here.  By failing to draw

            any lines limiting application of this factor to a discrete

            class of cases or to explain why Davis's situation warranted

            exception, the Commission did precisely what it rejected:  it

            insulated Davis from attorney's fees and costs solely because

            he elected the voluntary decisional proceeding.  CFTC

            Regulation   12.314(c), however, provides that attorney's

                                         -15-
                                          15

            fees and costs are a right associated with the formal

            decisional proceeding.  17 C.F.R.   12.314(c).  It does not

            take exception for a complainant who, although he elected a

            voluntary decisional proceeding in his complaint, continued

            to pursue his action in the reparations forum after the

            respondent elected a formal decisional proceeding. 

            Accordingly, where the Commission's consideration of a

            complainant's choice of a voluntary decisional proceeding

            contradicts its own stated intention as well as its

            regulations, it must explain how this factor nonetheless

            undermined the ALJ's fee award decision.  The Commission

            failed to do so here.

                      In sum, because the Commission's discussion of the

            four mitigating factors did not rationally explain why the

            ALJ's fee award decision was not a reasoned application of

            appropriate factors, we find wholly unreasonable the

            Commission's conclusion that the ALJ abused his discretion. 

            In so holding, however, we do not necessarily preclude the

            Commission from finding that the ALJ abused his discretion in

            awarding attorney's fees and costs against Davis.  We simply

            require that the Commission supply a reasoned analysis for

            doing so.  Such analysis is notably absent from the present

            order.

                                         -16-
                                          16

                                         III.
                                         III.
                                         ____

                                      Conclusion
                                      Conclusion
                                      __________

                      For the reasons stated above, we vacate the
                                                       ______

            Commission's order and remand for further consideration
                                   ______

            consistent with this opinion.

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                                          17