Inequality at U.S. Supreme Court: Administrative Agencies v. Bankruptcy Courts (Lucia v. SEC)

A Federal Courthouse

By: Donald L. Swanson

“Mom always liked you best.”

–Smothers Brothers.

I finished reading the U.S. Supreme Court’s Lucia v. SEC opinion (decided June 21, 2018). And I’m irritated: the entire situation is just-not-fair to bankruptcy courts and judges.

–It’s obvious that the U.S. Supreme Court always liked judicial authority of administrative agencies, like the Securities and Exchange Commission (“SEC”), better than bankruptcy court authority.

Here’s what I mean:

In Lucia v. SEC, the Supreme Court allows administrative law judges and agencies to exercise wide-ranging judicial authority with little-or-no restriction; but

Restrictions on authority of bankruptcy judges in bankruptcy cases have been established and enforced by the Supreme Court, over four decades, with fastidious care.

I’ll try to explain the unfairness.


Let’s start with the Lucia facts to compare authority of administrative law judges and agencies against that of bankruptcy judges and courts.

Raymond J. Lucia is charged by the SEC with making “material misrepresentations to prospective clients” about his “Buckets of Money” strategy for investing other people’s money.

Lucia pitched his “Buckets of Money” strategy to prospective clients through dog-and-pony show presentations. He used a slideshow that:

Started with two historically-bad market periods—(i) two declining-market years (1973 and 1974), and (ii) sixteen stagnant-market years (starting in 1966);

Used those two periods to compare how his “Buckets of Money” strategy would have performed against actual performances of three different strategies:

(i) a conservative strategy (100% bonds) he called, “Conservative Campbells”;
(ii) an aggressive strategy (100% stocks) he called, “High Rolling Hendersons”; and
(ii) a hybrid strategy (60% stocks and 40% bonds) he called, “Balanced Buttafuccos”; and

Claimed that “Buckets of Money” would have out-performed all three.

However, Lucia’s slideshow details are defective because he used a mixture of historical data and assumptions for the “Buckets of Money” analysis and couldn’t re-construct many of the supporting calculations.

In defense, Lucia insists that the slideshow fully disclosed all assumptions, did not deceive anyone, and was lawful when utilized.

What Actually Happened in Lucia at SEC and Beyond

The SEC charged Lucia with violating U.S. securities laws. Lucia faced those charges before an administrative law judge appointed by SEC staff, who exercised judicial authority comparable to that of a federal district judge conducting a bench trial.

After nine days of testimony and argument, the administrative law judge:

Concluded that Lucia’s slideshow contained misrepresentations and omissions that willfully violated SEC laws; and

Sanctioned Lucia by revoking his professional licenses and assessing civil penalties totaling $300,000.

Then the SEC performed “an independent review” of the Lucia record, accepted the judge’s essential findings, and adopted the judge’s sanctions—with two Commissioners dissenting.

[Note:  Had the Commission opted against reviewing the administrative law judge’s decision, that decision would become the final act of the Commission.]

Lucia appealed from the SEC’s decision to the U.S. Circuit Court of Appeals for the D.C. Circuit, which affirmed.

Lucia then petitioned the U.S. Supreme Court, which reversed, holding that the SEC administrative law judge should have been appointed by the head of the SEC, not by staff members, and remanded the case for a new hearing before a different, and properly appointed, administrative law judge.

Deferential Review of Lucia at Circuit Court of Appeals

The Circuit Court of Appeals for the D.C. Circuit showed great deference to the SEC in affirming its Lucia decision.

–Violation Issues—Deferential

The Circuit Court deferred to the SEC on violation issues:

The first question is whether “substantial evidence” exists to support the Commission’s determination; and

Then, Commission conclusions can be set aside only if “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”

The Circuit Court concluded that substantial supporting evidence did exist and that Lucia did violate SEC law.

–Sanctions Issues—Especially Deferential

Then, the Circuit Court applied an “especially deferential” standard, giving “greatest weight” to the Commission’s “choice of sanctions.” The Circuit Court said:

–the Commission’s “judgement regarding sanctions” is “entitled to the greatest weight” and will not be questioned on appeal, unless the chosen remedy is “unwarranted in law” or “without justification in fact.”

The Circuit Court affirmed the SEC’s sanctions against Lucia.

A Bankruptcy Hypothetical—For Comparison

The Lucia case stands in sharp contrast to the authority of a bankruptcy judge on similar issues in a bankruptcy case.

Let’s say, hypothetically, that, after a dog-and-pony show, an investor entrusts money with Lucia for “Buckets of Money” investments, then loses the investment, and ends up in bankruptcy. The retiree owes Lucia money for other services, so Lucia files a proof of claim in the bankruptcy.

In bankruptcy, debtor objects to Lucia’s proof of claim and files a counterclaim under state law for Lucia’s fraudulent misrepresentations.

Lucia protests the counterclaim. Whereupon, the world of bankruptcy judge authority starts crashing down:

–“Danger!! Danger!!” Sirens blare—“You can’t do this!!”

What’s the problem? Here’s the problem:

Bankruptcy courts have no authority, according to the U.S. Supreme Court, to decide a fraudulent misrepresentation counterclaim like this (absent consent of all parties);

That’s because fraudulent misrepresentation is one of the traditional actions tried in Courts at Westminster back in 1789 (that’s the year the U.S. Constitution was adopted); and

The U.S. Constitution requires, the Supreme Court tells us, that such “traditional actions” be resolved by “independent” judges with life-tenure under Article III—not by Article I bankruptcy judges having terms of only 14 years.

So . . . here’s how the hypothetical works out in bankruptcy court:

The bankruptcy judge has “related to” jurisdiction over the fraudulent misrepresentation counterclaim and can try the case; but

The bankruptcy judge can only provide proposed findings of fact and conclusions of law to the Article III district court, which then reviews the proposals without any deference, whatsoever, in making an independent decision; and

The district court’s decision is then appealable to the circuit court of appeals, where usual standards of review are applied.

Hyper-Technical Authority Distinctions

In the SEC’s Lucia proceedings, there is no Article III judge—anywhere—until the case gets to the Circuit Court of Appeals. Yet:

The case involves a charge of misrepresentation (like the traditional misrepresentation action tried in Courts at Westminster back in 1789);

The SEC’s sanctions are harsh—a lifetime removal of Lucia from the investment industry and $300,000 penalties; and

The SEC’s decisions are reviewed with deference (even “greatest” deference) at the Circuit Court of Appeals.

It is certainly true that:

Congress can create an agency;

Congress and the agency can create their own rules; and

The agency can enforce such rules through judicial-type actions, without violating Article III.

But still:

Congress created bankruptcy courts (as explicitly authorized by Article I of the U.S. Constitution);

Congress created the bankruptcy Code, the bankruptcy courts, and the office of bankruptcy judges; yet

Bankruptcy judges have only limited authority to resolve “related to” issues in bankruptcy cases, because of Article III.

Such authority distinctions between agencies and bankruptcy courts seem hyper-technical, unwarranted and unfair.

Judicial Independence Inequalities

Moreover, bankruptcy courts and judges are independent, just like Article III judges; while, agencies and their administrative law judges are not.

–Independent Article III Judges

Article III judges are different from other federal officials in their constitutionally-insured independence. Article III, Section 1, of the U.S. Constitution says:

“Judges . . . shall hold their Offices during good Behaviour, and shall . . . receive for their Services, a Compensation, which shall not be diminished during their Continuance in Office.”

Article III judges, therefore, have lifetime appointments and cannot have their salaries reduced: that’s what makes them independent.

–Independent Bankruptcy Judges

Bankruptcy judges are not Article III judges because they have fourteen-year terms, instead of lifetime appointments.

[Note: Sound reasons exist for creating and maintaining this term-length distinction, as discussed in this linked article.]

What’s really frustrating, however, is that bankruptcy judges, as a practical matter, have the same independence as Article III judges. Here’s how:

28 U.S.C. § 152(a)(1) gives bankruptcy courts a nearly-Article III status:

“Bankruptcy judges shall serve as judicial officers of the United States district court established under Article III of the Constitution”; and

The only impediment to Article III independence for bankruptcy judges is their 14-year term, instead of life tenure; but

Even this limited-term shortfall is minimized—if not eliminated—because:

Bankruptcy judges are appointed by Article III judges;
Bankruptcy judges are subject to removal, only for cause, by Article III judges; and
Salaries of bankruptcy judges are set by statute and pegged to the salary scale of Article III judges.

Accordingly, bankruptcy judges are every-bit as independent as Article III judges.

–Administrative Law Judges and Agencies Are NOT Independent

Federal agencies, like the SEC, enforce their own rules and rules established for them by Congress. There is nothing independent about such an arrangement.

Moreover, an agency’s administrative law judges are to be appointed, the Supreme Court tells us in Lucia v. SEC, by the head of the agency. That’s a major strike against the independence of such judges, from the outset.

Administrative law judges are, theoretically, independent from their appointing agency because there is no specified term of service—they have, arguably, life tenure.  However, this linked 2016 law review article says that administrative law judges “are quick to note” that they are always subject to attack:

“agencies have sought to remove more than twenty ALJs since 1946, and the SSA — which employs most ALJs — has sought to obtain authority to “discipline” ALJs for “offenses” without prior findings by the MSPB.”

Accordingly, the theory of independence is lost in the actual practice of agencies pushing back against nonconformist administrative law judges—and administrative law judges are well-aware of this fact.

Source of the Problem

—Negativity Toward Bankruptcy at U.S. Supreme Court

The problem for the Bankruptcy Code, when enacted in 1978, is that the Supreme Court justices didn’t like it. In particular, they didn’t like its broad grant of jurisdiction to the bankruptcy courts and judges. For example:

• In 1982 the Supreme Court came within one vote [in Northern Pipeline] of declaring unconstitutional the entire grant of jurisdiction, in the Bankruptcy Code, to bankruptcy courts and judges. A four-Justice plurality opinion in that case ends with the conclusion that:

“the broad grant of jurisdiction to the bankruptcy courts . . . is unconstitutional.”

• As late as 1989 a majority of U.S. Supreme Court justices were still referring [in Footnote 16 of Granfinanciera] to the Bankruptcy Code as bringing “sweeping changes” and creating “radical reforms.”

–Negativity is Eroding

Such negativity has been gradually eroding. In 2011, for example, four dissenting Justices sign onto these propositions in Stern v. Marshall, where the five-Justices majority upheld a restriction on bankruptcy court authority:

• Agency analogy—the majority opinion “understates the importance of a watershed opinion” that demonstrates “the constitutional basis for the current authority of administrative agencies to adjudicate private disputes”; and

• Independence—bankruptcy judges, despite their 14-year terms, are still independent from political pressures because:

They are appointed by federal courts of appeals;
They are removable by the circuit judicial counsel (made up of federal court of appeals and district court judges) and only for cause;
Their salaries are pegged to those of federal district court judges; and
The costs of their courthouses and other work-related expenses are paid by the Judiciary.

Hopefully, in the intervening years since Stern v. Marshall, a majority of Supreme Court justices have come around to the Stern v. Marshall dissenting view.


The Supreme Court’s new Lucia v. SEC opinion highlights a deficiency in its bankruptcy rulings. The deficiency is that it has placed, over four decades, unwarranted and unnecessary restrictions on the authority of bankruptcy courts and judges.

When compared with freedoms granted to administrative agencies and their administrative law judges, the unfairness of bankruptcy restrictions comes into focus.

Over time, the Supreme Court’s dislike of bankruptcy court jurisdiction seems to be subsiding. Hopefully, that trend is continuing!

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

3 thoughts on “Inequality at U.S. Supreme Court: Administrative Agencies v. Bankruptcy Courts (Lucia v. SEC)

Add yours

  1. Nice job, Don, in summarizing the history of Bk Judge authority and jurisdiction since the reform of the old Bankruptcy Act. Your comparison of this case with a Bk case really crystallizes the discrimination. I suppose had Congress retained the Bankruptcy Referee concept of the Act and housed it under an executive branch function as an admin law Judge for the new Code, things would have been different.

    Liked by 1 person

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