CFTC v. Schor
478 U.S. 833 (1986)

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U.S. Supreme Court

CFTC v. Schor, 478 U.S. 833 (1986)

Commodity Futures Trading Commission v. Schor

No. 85-621

Argued April 29, 1986

Decided July 7, 1986*

478 U.S. 833

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

THE DISTRICT OF COLUMBIA CIRCUIT

Syllabus

Section 14 of the Commodity Exchange Act (CEA) provides that any person injured by a commodity broker's violation of the Act or regulations of the Commodity Futures Trading Commission (CFTC) may apply to the CFTC for an order directing the offender to pay reparations to the complainant, and may enforce that order in federal district court. The CFTC promulgated a regulation that allows it in a reparations proceeding to adjudicate counterclaims "aris[ing] out of the transaction or occurrence or series of transactions or occurrences set forth in the complaint." Respondents filed separate reparations complaints (later consolidated) with the CFTC against petitioner commodity futures broker (petitioner) and one of its employees, alleging that a debit balance in their accounts with petitioner, resulting from respondents' futures trading losses and expenses being in excess of the funds deposited in the accounts, was the result of petitioner's violations of the CEA. In the meantime, petitioner filed a diversity action in Federal District Court to recover the debit balance, but, after respondents moved to dismiss on the ground that the reparations proceeding would resolve all rights of the parties, petitioner voluntarily dismissed the action and presented its debit balance claims as counterclaims in the CFTC reparations proceeding. The Administrative Law Judge (ALJ) in that proceeding ruled in petitioner's favor on both respondents' claims and petitioner's counterclaims. Respondents then for the first time challenged the CFTC's statutory authority to adjudicate the counterclaims. The ALJ rejected the challenge, and the CFTC declined to review the decision, allowing it to become final. Respondents filed a petition for review with the Court of Appeals, which upheld the CFTC's decision on respondents' claims in most respects, but ordered dismissal of petitioner's counterclaims on the ground that the CFTC lacked authority to adjudicate common law counterclaims. The court held that, in light of the constitutional problems posed by the CFTC's adjudication of such counterclaims, the CEA should be construed

Page 478 U. S. 834

to authorize the CFTC to adjudicate only counterclaims arising from violations of the CEA or CFTC regulations.

Held:

1. The CEA empowers the CFTC to entertain state law counterclaims in reparations proceedings. 478 U. S. 841-847.

(a) While the Court of Appeals' reading of the CEA permitted it to avoid a potential Article III problem, it did so only by doing violence to the statute, for its distinction between common law counterclaims and counterclaims based on violations of the statute cannot be drawn from the statute's language or history, nor reconciled with the congressional purpose in creating reparations proceedings to promote efficient dispute resolution. Pp. 478 U. S. 841-842.

(b) Section 8(a)(5) of the CEA, which empowers the CFTC to promulgate such regulations as are reasonably necessary "to effectuate any of the provisions or to accomplish any of the purposes of [the CEA]," clearly authorizes a regulation providing for adjudication of common law counterclaims. To require a bifurcated examination of a single dispute would destroy the efficacy of the reparations remedy. Pp. 478 U. S. 842-844.

(c) The CFTC's longstanding interpretation of the statute as empowering it to take jurisdiction over counterclaims such as petitioner's is reasonable, is well within the scope of its delegated authority, and accordingly is entitled to considerable weight, especially where Congress has twice amended the CEA since the CFTC issued its counterclaim regulation without overruling it, and indeed has explicitly affirmed the CFTC's authority to dictate the scope of its counterclaim jurisdiction. Pp. 478 U. S. 844-847.

2. The CFTC's assumption of jurisdiction over common law counterclaims does not violate Article III of the Constitution. Pp. 478 U. S. 847-858.

(a) As a personal right, Article III's guarantee of an impartial and independent adjudication by the federal judiciary is subject to waiver. Here, respondents indisputably waived any right they may have had to the full trial of petitioner's counterclaims before an Article III court by expressly demanding that petitioner proceed with its counterclaims in the reparations proceedings, rather than before the District Court. Even if there were no express waiver, respondents' election to forgo their right to proceed in state or federal court and to seek relief in the CFTC constituted an effective waiver. Pp. 478 U. S. 847-850.

(b) Nor does the CFTC's common law counterclaim jurisdiction contravene the nonwaivable protections Article III affords separation of powers principles. Examination of the congressional scheme in light of a number of factors, including the extent to which the "essential attributes of judicial power" are reserved to Article III courts, and conversely, the extent to which the non-Article III forum exercises the

Page 478 U. S. 835

range of jurisdiction and powers normally vested only in Article III courts, the origins and importance of the right to be adjudicated, and the concerns that drove Congress to depart from the requirements of Article III, yields the conclusion that the limited jurisdiction the CFTC asserts over state law claims as a necessary incident to the adjudication of federal claims willingly submitted by the parties for initial agency adjudication does not impermissibly threaten the institutional integrity of the Judicial Branch. Pp. 478 U. S. 850-856.

(c) Even assuming that principles of federalism are relevant to Article III analysis, those principles do not require invalidation of the CFTC's counterclaim jurisdiction. The fact that petitioner's counterclaims are resolved by a federal, rather than a state, tribunal is not objectionable, because federal courts can, without constitutional hazard, decide such counterclaims under their ancillary jurisdiction. Moreover, respondents have identified no historical support for the argument that Article III embodies a compact among the Framers that all state law claims heard in a federal forum be adjudicated by judges possessing the tenure and salary protections of Article III. Pp. 478 U. S. 856-858.

248 U.S.App.D.C. 155, 770 F.2d 211, reversed and remanded.

O'CONNOR, J., delivered the opinion of the Court, in which BURGER, C.J., and WHITE, BLACKMUN, POWELL, REHNQUIST, and STEVENS, JJ., joined. BRENNAN, J., filed a dissenting opinion, in which MARSHALL, JJ., joined, post, p. 478 U. S. 859.

JUSTICE O'CONNOR delivered the opinion of the Court.

The question presented is whether the Commodity Exchange Act (CEA or Act), 7 U.S.C. § 1 et seq., empowers the Commodity Futures Trading Commission (CFTC or Commission) to entertain state law counterclaims in reparation

Page 478 U. S. 836

proceedings and, if so, whether that grant of authority violates Article III of the Constitution.

I

The CEA broadly prohibits fraudulent and manipulative conduct in connection with commodity futures transactions. In 1974, Congress "overhaul[ed]" the Act in order to institute a more "comprehensive regulatory structure to oversee the volatile and esoteric futures trading complex." H.R.Rep. No. 93-975, p. 1 (1974). See Pub.L. 93-463, 88 Stat. 1389. Congress also determined that the broad regulatory powers of the CEA were most appropriately vested in an agency which would be relatively immune from the "political winds that sweep Washington." H.R.Rep. No. 93-975, at 44, 70. It therefore created an independent agency, the CFTC, and entrusted to it sweeping authority to implement the CEA.

Among the duties assigned to the CFTC was the administration of a reparations procedure through which disgruntled customers of professional commodity brokers could seek redress for the brokers' violations of the Act or CFTC regulations. Thus, § 14 of the CEA, 7 U.S.C. § 18 (1976 ed.), [Footnote 1] provides that any person injured by such violations may apply to the Commission for an order directing the offender to pay reparations to the complainant and may enforce that order in federal district court. Congress intended this administrative procedure to be an "inexpensive and expeditious" alternative to existing fora available to aggrieved customers, namely, the courts and arbitration. S.Rep. No. 95-850, p. 11 (1978). See also 41 Fed.Reg. 3994 (1976)

Page 478 U. S. 837

(accompanying CFTC regulations promulgated pursuant to § 14).

In conformance with the congressional goal of promoting efficient dispute resolution, the CFTC promulgated a regulation in 1976 which allows it to adjudicate counterclaims "aris[ing] out of the transaction or occurrence or series of transactions or occurrences set forth in the complaint." Id. at 3995, 4002 (codified at 17 CFR § 12.23(b)(2) (1983)). This permissive counterclaim rule leaves the respondent in a reparations proceeding free to seek relief against the reparations complainant in other fora.

The instant dispute arose in February, 1980, when respondents Schor and Mortgage Services of America, Inc., invoked the CFTC's reparations jurisdiction by filing complaints against petitioner ContiCommodity Services, Inc. (Conti), a commodity futures broker, and Richard L. Sandor, a Conti employee. [Footnote 2] Schor had an account with Conti which contained a debit balance because Schor's net futures trading losses and expenses, such as commissions, exceeded the funds deposited in the account. Schor alleged that this debit balance was the result of Conti's numerous violations of the CEA. See App. to Pet. for Cert. in No. 85-621, p. 53a.

Before receiving notice that Schor had commenced the reparations proceeding, Conti had filed a diversity action in Federal District Court to recover the debit balance. ContiCommodity Services, Inc. v. Mortgage Services of America, Inc., No. 80-C-1089 (ND Ill., filed Mar. 4, 1980). Schor

Page 478 U. S. 838

counterclaimed in this action, reiterating his charges that the debit balance was due to Conti's violations of the CEA. Schor also moved on two separate occasions to dismiss or stay the District Court action, arguing that the continuation of the federal action would be a waste of judicial resources and an undue burden on the litigants in view of the fact that

"[t]he reparations proceedings . . . will fully . . . resolve and adjudicate all the rights of the parties to this action with respect to the transactions which are the subject matter of this action."

App. 13. See also id. at 19.

Although the District Court declined to stay or dismiss the suit, see id. at 15, 16, Conti voluntarily dismissed the federal court action and presented its debit balance claim by way of a counterclaim in the CFTC reparations proceeding. See id. at 29-32. Conti denied violating the CEA, and instead insisted that the debit balance resulted from Schor's trading, and was therefore a simple debt owed by Schor. Schor v. Commodity Futures Trading Comm'n, 239 U.S.App.D.C. 159, 162, 740 F.2d 1262, 1265 (1984); App. to Pet. for Cert. in No. 85-621, p. 53a.

After discovery, briefing, and a hearing, the Administrative Law Judge (ALJ) in Schor's reparations proceeding ruled in Conti's favor on both Schor's claims and Conti's counterclaims. After this ruling, Schor for the first time challenged the CFTC's statutory authority to adjudicate Conti's counterclaim. See id. at 62a. The ALJ rejected Schor's challenge, stating himself "bound by agency regulations and published agency policies." Id. at 62a-63a. The Commission declined to review the decision, and allowed it to become final, id. at 50a-52a, at which point Schor filed a petition for review with the Court of Appeals for the District of Columbia Circuit. Prior to oral argument, the Court of Appeals, sua sponte, raised the question whether CFTC could constitutionally adjudicate Conti's counterclaims in light of Northern Pipeline Construction Co. v. Marathon Pipe Line Co.,458 U. S. 50 (1982), in which this Court held that

"Congress may

Page 478 U. S. 839

not vest in a non-Article III court the power to adjudicate, render final judgment, and issue binding orders in a traditional contract action arising under state law, without consent of the litigants, and subject only to ordinary appellate review."

Thomas v. Union Carbide Agricultural Products Co.,473 U. S. 568, 473 U. S. 584 (1985).

After briefing and argument, the Court of Appeals upheld the CFTC's decision on Schor's claim in most respects, but ordered the dismissal of Conti's counterclaims on the ground that "the CFTC lacks authority (subject matter competence) to adjudicate" common law counterclaims. 239 U.S.App.D.C. at 161, 740 F.2d at 1264. In support of this latter ruling, the Court of Appeals reasoned that the CFTC's exercise of jurisdiction over Conti's common law counterclaim gave rise to "[s]erious constitutional problems" under Northern Pipeline. 239 U.S.App.D.C. at 174, 740 F.2d at 1277. The Court of Appeals therefore concluded that, under well-established principles of statutory construction, the relevant inquiry was whether the CEA was "fairly susceptible' of [an alternative] construction," such that Article III objections, and thus unnecessary constitutional adjudication, could be avoided. Ibid. (quoting Ralpho v. Bell, 186 U.S.App.D.C. 368, 380, 569 F.2d 607, 619 (1977)).

After examining the CEA and its legislative history, the court concluded that Congress had no "clearly expressed" or "explicit" intention to give the CFTC constitutionally questionable jurisdiction over state common law counterclaims. See 239 U.S.App.D.C. at 166, 178, 740 F.2d at 1269, 1281. The Court of Appeals therefore "adopt[ed] the construction of the Act that avoids significant constitutional questions," reading the CEA to authorize the CFTC to adjudicate only those counterclaims alleging violations of the Act or CFTC regulations. Id. at 175, 740 F.2d at 1278. Because Conti's counterclaims did not allege such violations, the Court of Appeals held that the CFTC exceeded its authority in adjudicating those claims, and ordered that the

Page 478 U. S. 840

ALJ's decision on the claims be reversed and the claims dismissed for lack of jurisdiction. Id. at 161, 740 F.2d at 1264.

The Court of Appeals denied rehearing en banc by a divided vote. In a dissenting statement, Judge Wald, joined by Judge Starr, urged that rehearing be granted because the panel's holding would

"resul[t] in a serious evisceration of a congressionally crafted scheme for compensating victims of Commodity Futures Trading Act . . . violations"

and would, in practical, effect "decimat[e]" the efficacy of this "faster and less expensive alternative forum." App. to Pet. for Cert. in No. 85-621, p. 71a. This Court granted the CFTC's petition for certiorari, vacated the Court of Appeals' judgment, and remanded the case for further consideration in light of Thomas, supra, at 473 U. S. 582-593. 473 U.S. 473 U. S. 568 (1985). We had there ruled that the arbitration scheme established under the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA), 7 U.S.C. § 136 et seq., does not contravene Article III, and, more generally, held that

"Congress, acting for a valid legislative purpose pursuant to its constitutional powers under Article I, may create a seemingly 'private' right that is so closely integrated into a public regulatory scheme as to be a matter appropriate for agency resolution with limited involvement by the Article III judiciary."

473 U.S. at 473 U. S. 593.

On remand, the Court of Appeals reinstated its prior judgment. It reaffirmed its earlier view that Northern Pipeline drew into serious question the Commission's authority to decide debit-balance counterclaims in reparations proceedings; concluded that nothing in Thomas altered that view; and again held that, in light of the constitutional problems posed by the CFTC's adjudication of common law counterclaims, the CEA should be construed to authorize the CFTC to adjudicate only counterclaims arising from violations of the Act or CFTC regulations. See 248 U.S.App.D.C. 155, 157-158, 770 F.2d 211, 213-214 (1985).

Page 478 U. S. 841

We again granted certiorari, 474 U.S. 1018 (1985), and now reverse.

II

The Court of Appeals was correct in its understanding that "[f]ederal statutes are to be so construed as to avoid serious doubt of their constitutionality." Machinists v. Street,367 U. S. 740, 367 U. S. 749 (1961). See also NLRB v. Catholic Bishop of Chicago,440 U. S. 490, 440 U. S. 500-501 (1979). Where such "serious doubts" arise, a court should determine whether a construction of the statute is "fairly possible" by which the constitutional question can be avoided. Crowell v. Benson,285 U. S. 22 (1932). See also Machinists v. Street, supra, at 367 U. S. 750. It is equally true, however, that this canon of construction does not give a court the prerogative to ignore the legislative will in order to avoid constitutional adjudication;

"'[a]lthough this Court will often strain to construe legislation so as to save it against constitutional attack, it must not and will not carry this to the point of perverting the purpose of a statute . . .' or judicially rewriting it."

Aptheker v. Secretary of State,378 U. S. 500, 378 U. S. 515 (1964) (quoting Scales v. United States,367 U. S. 203, 367 U. S. 211 (1961)). See also Heckler v. Mathews,465 U. S. 728, 465 U. S. 742-743 (1984).

Assuming that the Court of Appeals correctly discerned a "serious" constitutional problem in the CFTC's adjudication of Conti's counterclaim, we nevertheless believe that the court was mistaken in finding that the CEA could fairly be read to preclude the CFTC's exercise of jurisdiction over that counterclaim. Our examination of the CEA and its legislative history and purpose reveals that Congress plainly intended the CFTC to decide counterclaims asserted by respondents in reparations proceedings, and just as plainly delegated to the CFTC the authority to fashion its counterclaim jurisdiction in the manner the CFTC determined necessary to further the purposes of the reparations program.

Congress' assumption that the CFTC would have the authority to adjudicate counterclaims is evident on the face of

Page 478 U. S. 842

the statute. See, e.g., 7 U.S.C. § 18(c) (providing that, before action will be taken on complaints filed by nonresident complainants, a bond must be filed which must cover inter alia, "any reparation award that may be issued by the Commission against the complainant on any counterclaim by respondent") (emphasis added); § 18(d) ("any person for whose benefit [a reparation award] was made" may enforce the judgment in district court) (emphasis added). See also § 18(e) (judicial review available to "any party"). Accordingly, the court below did not seriously contest that Congress intended to authorize the CFTC to adjudicate some counterclaims in reparations proceedings. Rather, the court read into the facially unqualified reference to counterclaim jurisdiction a distinction between counterclaims arising under the Act or CFTC regulations and all other counterclaims. See 239 U.S.App.D.C. at 173, 740 F.2d at 1278. While the court's reading permitted it to avoid a potential Article III problem, it did so only by doing violence to the CEA, for its distinction cannot fairly be drawn from the language or history of the CEA, nor reconciled with the congressional purposes motivating the creation of the reparations proceedings.

We can find no basis in the language of the statute or its legislative history for the distinction posited by the Court of Appeals. Congress empowered the CFTC

"to make and promulgate such rules and regulations as, in the judgment of the Commission, are reasonably necessary to effectuate any of the provisions or to accomplish any of the purposes of [the CEA]."

7 U.S.C. § 12a(5) (emphasis added). The language of the congressional Report that specifically commented on the scope of the CFTC's authority over counterclaims unambiguously demonstrates that, consistent with the sweeping authority Congress delegated to the CFTC generally, Congress intended to vest in the CFTC the power to define the scope of the counterclaims cognizable in reparations proceedings:

Page 478 U. S. 843

"Counterclaims will be recognized in the [reparations] proceedings . . . on such terms and under such circumstances as the Commission may prescribe by regulation. It is the intent of the Committee that the Commission will promulgate appropriate regulations to implement this section."

H.R.Rep. No. 93-975, p. 23 (1974). Moreover, quite apart from congressional statements of intent, the broad grant of power in § 12a(5) clearly authorizes the promulgation of regulations providing for adjudication of common law counterclaims arising out of the same transaction as a reparations complaint, because such jurisdiction is necessary, if not critical, to accomplish the purposes behind the reparations program.

Reference to the instant controversy illustrates the crippling effect that the Court of Appeals' restrictive reading of the CFTC's counterclaim jurisdiction would have on the efficacy of the reparations remedy. The dispute between Schor and Conti is typical of the disputes adjudicated in reparations proceedings: a customer and a professional commodities broker agree that there is a debit balance in the customer's account, but the customer attributes the deficit to the broker's alleged CEA violations and the broker attributes it to the customer's lack of success in the market. The customer brings a reparations claim; the broker counterclaims for the amount of the debit balance. In the usual case, then, the counterclaim "arises out of precisely the same course of events" as the principal claim, and requires resolution of many of the same disputed factual issues. Friedman v. Dean Witter & Co., [1980-1982 Transfer Binder] CCH Comm.Fut.L.Rep.

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