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,
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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
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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
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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.
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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.
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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
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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
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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.
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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
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`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)
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(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
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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
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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).
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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,
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"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
____
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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
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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.
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III.
III.
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Conclusion
Conclusion
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For the reasons stated above, we vacate the
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Commission's order and remand for further consideration
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consistent with this opinion.
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