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Federal Energy Regulatory Commission v. Powhatan Energy Fund, LLC

United States District Court, E.D. Virginia, Richmond Division

December 28, 2017

FEDERAL ENERGY REGULATORY COMMISSION, Petitioner,
v.
POWHATAN ENERGY FUND, LLC, HOULIAN "ALAN" CHEN, HEEP FUND, INC., and CU FUND, INC., Respondents.

          MEMORANDUM OPINION

          M. HANNAH LAUCK, UNITED STATES DISTRICT JUDGE

         This matter comes before the Court on cross-briefs filed by Petitioner Federal Energy Regulatory Commission ("FERC" or the "Commission"), (ECF No. 39), and Respondents Powhatan Energy Fund, LLC ("Powhatan"), Houlian "Alan" Chen ("Chen"), HEEP Fund, Inc. ("HEEP Fund"), and CU Fund, Inc. ("CU Fund") (collectively, the "Respondents"), (ECF No. 38). Both briefs discuss, as ordered by the Court, the meaning of this Court's de novo review under Section 31 of the Federal Power Act ("FPA"), codified at 16 U.S.C. § 823b(d)(3)(B).[1] (ECF No. 36.) The parties also have submitted supplemental briefs, (ECF Nos. 52, 53), filed pursuant to this Court's January 8, 2016 Order, (ECF No. 44), and a great deal of supplemental authority. (ECF Nos. 55-1, 68, 69, 78, 83, 85, 88-1.) With the Court's leave, a group of administrative law professors filed a Brief as Amici Curiae, (ECF No. 82), and the Commission responded, (ECF No. 84). The Court heard oral argument, and the matter is ripe for disposition. The Court exercises jurisdiction pursuant to 16 U.S.C. § 823b(d)(3)(B) and 28 U.S.C. § 1331.[2] For the reasons that follow, the Court concludes that the Respondents are entitled to a trial de novo governed by the Federal Rules of Civil Procedure and the Federal Rules of Evidence.

         I. Factual and Procedural Background

         A. Factual Background

         In 2010, the Commission's Office of Enforcement ("Enforcement") began investigating Respondents[3] for engaging in allegedly manipulative and fraudulent energy trading.[4] (Compl. 2, ECF No. 1; Penalty O. at 13.) On August 25, 2010, the Commission issued an order formalizing the investigation. (Penalty O. at 13.) On August 9, 2013, nearly three years later, Enforcement staff issued letters of preliminary findings to Respondents, and "invited Respondents to provide argument or evidence suggesting [that] the preliminary conclusion was incorrect." (Commission Br. 10, ECF No. 39.) Two months later, Respondents replied. (Penalty O. at 14.) On August 5, 2014, the Commission issued a Notice of Alleged Violations. (Penalty O. at 14.)

         On December 17, 2014, after failed attempts at settlement, the Commission issued its Order to Show Cause ("OSC"). (Compl. at 3.) The OSC directed Respondents to show cause as to why they should not be found to have violated the statute and regulation forbidding the use of manipulative behaviors in connection with the purchase or sale of electric energy[5]: 16 U.S.C. § 824v(a)[6] and 18 C.F.R. § 1c.2, [7] respectively. (Penalty O. at 14.) The OSC also ordered Respondents to elect either a formal hearing before an administrative law judge prior to the assessment of a penalty, pursuant to 16 U.S.C. § 823b(d)(2), or to proceed under 16 U.S.C. § 823b(d)(3)(A), under which the Commission would "promptly" assess penalties upon a finding of violation.[8] (Penalty O. at 15.) No further factfinding occurred after the Commission issued the OSC. Accordingly, the entire record before the Court-to which FERC refers as the "administrative record"-consists of information compiled before the Commission issued the OSC and before Respondents made their penalty assessment election. On January 12, 2015, after the Commission granted Respondents an extension of time, the Respondents each opted for the more immediate penalty assessment and elected to proceed in accordance with § 823b(d)(3)(A). (Compl. ¶ 9; Penalty O. at 16.)

         After cross-briefing[9] and a review of the extensive record, the Commission issued its eighty-nine-page Order Assessing Civil Penalties (the "Penalty Order") on May 29, 2015. In the Penalty Order, the Commission found that Respondents had "violated section 222 of the [FPA] and section 1c.2 of the Commission's regulations, which prohibit energy market manipulation, through a scheme to engage in fraudulent Up-To Congestion (UTC) transactions in [P]M's] energy markets to garner excessive amounts of certain credit payments to transmission customers." (Compl. ¶ 10; see Penalty O. at 2.) The Commission also determined that the trades engaged in by Respondents constituted "a wash trading scheme in violation of the Commission's prohibition of that practice." (Compl. ¶ 10.) As a result of these findings, and pursuant to 16 U.S.C. § 823b(c), [10] the Commission assessed civil penalties of $16, 800, 000 against Powhatan; $10, 080, 000 against CU Fund; $1, 920, 000 against HEEP Fund; and, $1, 000, 000 against Chen." (Compl. ¶ 11.) The Commission also directed disgorgement of unjust profits, plus interest, in the amounts of $3, 465, 108 for Powhatan; $1, 080, 576 for CU Fund; and, $173, 100 for HEEP Fund.

         After Respondents failed to pay the penalties within 60 days, pursuant to § 823b(d)(3)(B), [11] the Commission filed the action in this Court. FERC demands a jury trial, if the Court finds that the statute allows such a trial. (Compl. ¶¶ 1, 29.)

         B. Procedural Background

         After FERC filed this action, Respondents filed motions to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6).[12] Respondent Powhatan argued that it did not receive "fair notice" that the Commission would consider the trades at issue illegal because the Commission had not previously listed the specific types of trades engaged in as unlawful. (ECF No. 20.) Respondents Chen, HEEP Fund, and CU Fund posed a similar argument in their motion to dismiss, but further focused on: whether the Complaint alleges fraud with specificity; whether the statute of limitations bars much of the Commission's claims; and, whether the Commission could bring such an action and penalty against Chen, an individual. (ECF No. 22.)

         Powhatan's memoranda in support of its motion to dismiss failed to address the procedural requirements of this case, specifically, what procedures the Court must follow in conducting the "review de novo [of] the law and the facts involved" required by § 823b(d)(3)(B). (See ECF Nos. 20, 21, 33.) Likewise, FERC's response to Powhatan's motion neglected to take up that threshold issue. (See ECF No. 28.) The memoranda in support of and opposition to Chen, HEEP Fund, and CU Fund's motion only briefly addressed the Court's procedure and the standard of review. (Chen Mem. Supp. Mot. Dismiss 4-7, ECF No. 23; FERC Resp. Chen Mot. Dismiss 29, ECF No. 29; Chen Reply Mot. Dismiss 3 n.l, 4-8, ECF No. 34.) Because the procedure the Court follows in conducting its "review de novo [of] the law and the facts involved" necessarily will impact the lens through which it views the motions to dismiss, the Court ordered the parties to submit briefing "detailing the respective party's position regarding the procedure mandated by 16 U.S.C. § 823b(d)(3)(B)." (ECF No. 36.)

         After the parties submitted cross-briefs discussing the meaning of this Court's de novo review procedure under § 823b(d)(3)(B), the Court denied the motions to dismiss without prejudice and ordered additional briefing. (ECF No. 44.) The parties then filed their respective supplemental briefs.[13] (ECF Nos. 52, 53.)

         II. Analysis

         This matter presents an issue of first impression in this District, and one which neither the Supreme Court of the United States nor the United States Court of Appeals for the Fourth Circuit has addressed.[14] The Court must determine whether, as Respondents contend, 16 U.S.C. § 823b(d)(3) entitles Respondents to a de novo trial governed by the Federal Rules of Civil Procedure and the Federal Rules of Evidence, [15] or whether, as FERC contends, § 823b(d)(3) merely grants the Court the "discretion to craft the procedure that will best facilitate its review, " (FERC Br. 2, ECF No. 39). The Court concludes, consistent with other district courts to decide this issue, [16] that the language and structure of the statute and principles of due process entitle Respondents to a de novo trial governed by the Federal Rules of Civil Procedure and the Federal Rules of Evidence.[17]

         A. Principles of Statutory Interpretation Must Guide the Court's Analysis

         The Court must employ traditional principles of statutory interpretation to determine what procedure is required when conducting a "review de novo" under § 823b(d)(3)(B). The purpose of statutory interpretation is "to try to determine congressional intent." Dole v. United Steelworkers of Am., 494 U.S. 26, 35 (1990). The analysis must "begin, as always, with the language of the statutory text, " and "[i]n the absence of a definition from Congress, [the Court] accord[s] words in a statute their ordinary, contemporary, common meaning." United States v. Midgett, 198 F.3d 143, 145-46 (4th Cir. 1999) (internal citation and quotation marks omitted). "The plainness or ambiguity of statutory language is determined by reference to the language itself, the specific context in which that language is used, and the broader context of the statute as a whole." Robinson v. Shell Oil Co., 519 U.S. 337, 341 (1997). Thus, the Court must look to the statute as a whole in determining the meaning of individual words because "the meaning of statutory language, plain or not, depends on context." King v. St. Vincent's Hosp., 502 U.S. 215, 221 (1991); see also Dole, 494 U.S. at 35 ("[I]n expounding a statute, we are not guided by a single sentence or member of a sentence, but look to the provisions of the whole law, and to its object and policy.") (internal citation and quotation marks omitted).

         When "the terms of a statute are unambiguous on their face, or in light of ordinary principles of statutory interpretation, " judicial inquiry normally ends. United States v. Morison, 844 F.2d 1057, 1064 (4th Cir. 1988). But if the "terms of a statutory provision are ambiguous [the Court may] consider other evidence to interpret the meaning of the provision, including the legislative history and the provision's heading or title." United States v. Hatcher, 560 F.3d 222, 226 (4th Cir. 2009) (citing Ratzlaf v. United States, 510 U.S. 135, 147-48 (1994); Bhd. of R.R. Trainmen v. Bait. & Ohio R.R. Co., 331 U.S. 519, 528-29 (1947)). At base,

[i]f the language is ambiguous, in that it lends itself to more than one reasonable interpretation, [the court's] obligation is to find that interpretation which can most fairly be said to be imbedded in the statute, in the sense of being most harmonious with its scheme and the general purposes that Congress manifested.

United States v. Joshua, 607 F.3d 379, 384 (4th Cir. 2010). Finally, under the doctrine of constitutional avoidance, if a statute is susceptible to more than one reasonable construction, courts should choose an interpretation that avoids raising constitutional problems. United States v. Jin Fuey Moy, 241 U.S. 394, 401 (1916) ("A statute must be construed, if fairly possible, so as to avoid not only the conclusion that it is unconstitutional, but also grave doubts upon that score.").

         B. The Language of the Statute

         The Court begins, as it must, "with the language of the statutory text, " and gives those words undefined by Congress[18] "their ordinary, contemporary, common meaning." See Midgett, 198 F.3d at 145-46. In interpreting the statute's text, the Court does not rely on "a single sentence or member of a sentence, but look[s] to the provisions of the whole law, and to its object and policy, " Dole, 494 U.S. at 35 (internal citation and quotation marks omitted), and determines the language's meaning "by reference to the language itself, the specific context in which the language is used, and the broader context of the statute as a whole, " Robinson, 519 U.S. at 341. The language of the statute, taken as a whole and interpreted in light of the context in which it is used makes plain that this Court should conduct a trial de novo on this matter governed by the Federal Rules of Civil Procedure and the Federal Rules of Evidence.[19]

         1. The Two Procedural Pathways in Section 31(d)

         FPA Section 31(d), which governs the assessment of penalties in this case, creates two procedural pathways by which a penalty may be imposed. In both cases, the Commission first issues a notice of the proposed penalty to the alleged wrongdoer. 16 U.S.C. § 823b(d)(1). Under the first pathway, to which the Court will refer as the "Default Option, "

the Commission shall assess the penalty, by order, after a determination of violation has been made on the record after an opportunity for an agency hearing pursuant to [5 U.S.C. § 554, the Administrative Procedure Act, ] before an administrative law judge appointed under section [5 U.S.C. § 3105]. Such assessment order shall include the administrative law judge's findings and the basis for such assessment.

16 U.S.C. §823b(d)(2)(A).

         After the formal hearing before the administrative law judge ("ALJ"), "[a]ny person against whom a penalty is assessed" under the Default Option may "institute an action in the United States court of appeals for the appropriate judicial circuit for judicial review of such order in accordance with chapter 7 of Title 5, " which governs the procedures for judicial review of agency actions. 16 U.S.C. § 823b(d)(2)(B); see also 5 U.S.C. §§ 701 et seq. (setting forth the procedures governing judicial review of agency action). Under the Default Option, the court of appeals has "jurisdiction to enter a judgment affirming, modifying, or setting aside in whole or in [p]art, the order of the Commission." 16 U.S.C. § 823b(d)(2)(B) (footnote omitted). The court of appeals may also "remand the proceeding to the Commission for such further action as the court may direct." Id. If "any person fails to pay an assessment of a civil penalty after it has become a final and unappealable order" under the Default Option, "the Commission shall institute an action to recover the amount of such penalty in any appropriate district court of the United States." 16 U.S.C. § 823b(d)(5). In that action, the "validity and appropriateness of such final assessment order or judgment shall not be subject to review." Id. And in proceedings under the Default Option, "[t]he Commission shall be represented by the Attorney General, or the Solicitor General, as appropriate." 16 U.S.C. § 823b(d)(6)(B).

         The Default Option "thus describes a traditional form of judicial review of agency action, based on the record developed in an agency proceeding, " City Power, 199 F.Supp.3d at 230, governed at each step by the relevant section of the Administrative Procedures Act, utilizing appellate lawyers to conduct the litigation, and relying on federal district courts to enforce final assessments.

         The second pathway, to which the Court will refer as the "Alternate Option, " requires the alleged wrongdoer to "elect in writing within 30 days after" receiving the notice of proposed penalty to have the Alternate Option procedures-rather than the Default Option procedures- apply. 16 U.S.C. § 823b(d)(1). Under the Alternate Option, "the Commission shall promptly assess such penalty, by order." 16 U.S.C. § 823b(d)(3)(A). After the penalty has been assessed, if it

has not been paid within 60 calendar days . .., the Commission shall institute an action in the appropriate district court of the United States for an order affirming the assessment of the civil penalty. The court shall have authority to review de novo the law and the facts involved, and shall have jurisdiction to enter a judgment enforcing, modifying, and enforcing as so modified, or setting aside in whole or in [p]art such assessment.

16 U.S.C. § 823b(d)(3)(B) (emphasis added) (footnote omitted).

         If "any person fails to pay an assessment of a civil penalty" after the "district court has entered final judgment in favor of the Commission" under the Alternate Option, "the Commission shall institute an action to recover the amount of such penalty in any appropriate district court of the United States." 16 U.S.C. § 823b(d)(5). In that action, the "validity and appropriateness of such final assessment order or judgment shall not be subject to review." Id. In proceedings under the Alternate Option, "the Commission may be represented by the general counsel of the Commission (or any attorney or attorneys within the Commission designated by the Chairman) who shall supervise, conduct, and argue any civil litigation to which [the Alternate Option applies] in a court of the United States or in any other court, except the Supreme Court." 16 U.S.C. § 823b(d)(6)(A).

         The Alternate Option thus "sets out a less familiar path" than the Default Option. City Power, 199 F.Supp.3d at 230. Under the Alternate Option, no procedural requirements apply to the order assessing penalties except that it be "promptly assessed, " 16 U.S.C. § 823b(d)(3)(A); proceedings are not governed by the Administrative Procedures Act; the district court has no authority to remand the proceeding to the Commission; and the "civil litigation" may be conducted by "any attorney or attorneys within the Commission, " 16 U.S.C. § 823b(d)(6)(A).

         As discussed, Respondents chose the Alternate Option and did not pay the assessment within sixty days. The Court now must determine what specific procedures govern this "action in the appropriate district court" instituted by FERC.

         2. The Relevant Statutory Phrases in the Alternate Option

         The Court must determine what procedures it should employ to "review de novo the law and the facts involved" in this case. Respondents claim entitlement to a de novo trial, while FERC contends that the Court has the flexibility to craft a limited but effective procedure to conduct its review. The Court begins its analysis by examining the governing statutory phrases.

         a. "Institute an Action"

         Under the Alternate Option, after the Commission has "promptly assess[ed]" a penalty by order, and the alleged wrongdoer has not paid the assessment within sixty days, the Commission "shall institute an action" in a district court for an order affirming the assessment. 16 U.S.C. § 823b(d)(3)(B). The Court looks first to the phrase "institute an action" to see what, if any, light it sheds on the procedures the Court must utilize in this case.

         The Federal Rules of Civil Procedure "govern the procedure in all civil actions and proceedings in the United States district courts, except as stated in Rule 81.[20] Fed.R.Civ.P. 1. "[T]he Federal Rules of Civil Procedure provide the normal course for beginning, conducting, and determining controversies." N.H. Fire Ins. Co. v. Scanlon, 362 U.S. 404, 406 (1960) (internal citation omitted). Although summary disposition "of controversies over property and property rights is the exception in [the United States'] method of administering justice, " id, Congress, through "express statutory authorization, " has the power to "allow proceedings more summary than the full court trial, " id at 407 n.6. To do so, however, there must be a "clear expression of congressional intent to exempt actions ... from the operation of the Federal Rules of Civil Procedure." Califano v. Yamasaki, 442 U.S. 682, 700 (1979). No such clear exemption exists here.

         However, Congress's mere use of the word "action" in § 823b(d)(3) does not, in itself, require that this Court apply the Federal Rules of Civil Procedure to this case. The Supreme Court of the United States, and even the Federal Rules themselves, contemplate that the Civil Rules may not always "apply to summary proceedings created by statute." Fed.R.Civ.P. 1 advisory committee's note to 2007 amendment; see also Scanlon, 362 U.S. at 407 n.6 (citing examples of "express statutory authorization" for summary proceedings in place of a "full court trial").

         Further, Congress also used the phrase "institute an action" to describe the procedure a person against whom a penalty was assessed under the Default Option takes. 16 U.S.C. § 823b(d)(2)(B) ("Any person against whom a penalty is assessed under [the Default Option] may ... institute an action in the United States court of appeals for the appropriate judicial circuit for judicial review of such order"). Neither party contends that a proceeding in the court of appeals would be governed by the Federal Rules of Civil Procedure, nor would it make any sense for Congress to have devised such a scheme.[21] Finally, "Congress has in other cases called for the institution of 'a civil action' to review an administrative decision, while limiting that review to the administrative record." Barclays Bank, 247 F.Supp.3d at 1136 (citing 42 U.S.C. § 405(g) (setting forth the procedures for judicial review of a "final decision of the Commissioner of Social Security")).

         Thus, although the statute governing the procedures under the Alternate Option contains no express exemption from operation of the Federal Rules of Civil Procedure, neither is it clear, simply from Congress's use of the word "action" to characterize the proceeding, that the Default Option must be governed by the Federal Rules of Civil Procedure.

         b. "Review de ...


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