Securities and Exchange Commission v. Chenery Corp. (Chenery I)
318 U.S. 80 (1943)
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Rule of Law:
A court reviewing an administrative agency's action must judge the propriety of that action solely on the grounds invoked by the agency. A court cannot uphold an agency order on a different basis that the agency did not articulate.
Facts:
- Federal Water Service Corporation was a public utility holding company undergoing reorganization under the Public Utility Holding Company Act of 1935.
- The Respondents were officers, directors, and controlling stockholders of Federal.
- While multiple reorganization plans were being formulated and reviewed by the Securities and Exchange Commission (SEC), the Respondents purchased a large number of Federal's preferred stock.
- The Respondents purchased the stock on the open market, and their transactions were characterized by 'honesty, full disclosure, and purchase at a fair price.'
- The purpose of the purchases, as stated by the Respondents, was to protect their existing interests in the company.
- The final reorganization plan submitted to the SEC would have converted this preferred stock into common stock of the new company at a value significantly higher than the purchase price paid by the Respondents.
Procedural Posture:
- The Securities and Exchange Commission (SEC) issued an order approving a corporate reorganization plan, but modified it to limit the profits that the company's management (Respondents) could receive from stock they purchased during the reorganization process.
- The Respondents petitioned the U.S. Court of Appeals for the District of Columbia to review the SEC's order.
- The Court of Appeals set aside the SEC's order, siding with the Respondents.
- The Supreme Court granted certiorari to review the decision of the Court of Appeals.
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Issue:
Can an administrative agency's order be judicially upheld if the agency based its decision on an erroneous interpretation of judicial precedent, even if the order could have been justified on other grounds within the agency's statutory authority?
Opinions:
Majority - Justice Frankfurter
No. An administrative order cannot be upheld unless the grounds upon which the agency acted in exercising its powers were those upon which its action can be sustained. The SEC based its order limiting the Respondents' participation on its interpretation of general common law principles of equity that apply to fiduciaries. The Court found that the SEC misinterpreted this case law, as courts of equity had not established a rule that automatically forbids corporate officers from trading in their company's securities. Because the SEC's stated reason for its action was a misapplication of the law, the order cannot stand, even if the SEC might have had the power to reach the same result by promulgating a new rule based on its statutory authority and administrative expertise. A court cannot substitute its own rationale for the agency's; the agency must articulate a valid basis for its own decision.
Dissenting - Justice Black
Yes. The SEC's order should have been upheld because its decision was sound, and the majority's reasoning is overly formalistic. The Respondents, as fiduciaries, used their inside knowledge of the reorganization to purchase stock that would reap them an unconscionable profit. The SEC correctly identified this as 'unfair' and 'inequitable' under its statutory mandate to protect investors. The SEC's reliance on common law principles was appropriate to support its expert administrative conclusion. Remanding the case simply to require the agency to rephrase its reasoning creates unnecessary delay and improperly allows courts to intrude into the policy domain of administrative agencies.
Analysis:
This case establishes one of the most fundamental principles of administrative law, known as the 'Chenery I' rule. It requires that judicial review of an agency's decision be based exclusively on the reasoning provided by the agency at the time of the decision. This rule promotes agency accountability by forcing agencies to articulate the true basis for their actions and prevents courts from overstepping their role by creating post-hoc rationalizations for agency conduct. The decision reinforces the distinct roles of agencies (making policy and factual determinations) and courts (reviewing the legality of the agency's stated grounds).
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