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CALIFORNIA CORPORATE & SECURITIES LAW

Are California Statutes Authorizing Desist And Refrain Orders Facially Unconstitutional?

In December 2008, the Commissioner of Corporations issued a desist and refrain order based on alleged violations of the Corporate Securities Law and the Finance Lenders’ Law.  Nearly seven years later, the respondents challenged the order by filing a complaint in the U.S. District Court.  The complaint included four causes of action: (1) violation of procedural due process (U.S. Const. amend. XIV, § 1); (2) violation of free speech (U.S. Const. amend. I § 1); (3) violation of procedural due process under the California Constitution (Cal. Const. art. I, § 7(a)); and (4) violation of the Public Records Act of California (Cal. Gov’t Code §§ 6250-6276.48).  The plaintiffs sought declaratory, injunctive, and monetary relief.

Earlier this month, Judge Morrison C. England, Jr. ruled on the Commissioner’s motion to dismiss.  Shurnas v. Owen, 2016 U.S. Dist. LEXIS 18640 (E.D. Cal. Feb. 16, 2016).  Judge England ruled that the plaintiffs’ First Amendment, Due Process and California Constitution claims were barred by the statute of limitations and he dismissed them without leave to amend.  He also found that the plaintiffs’ conclusory allegations failed to state a procedural due process challenge to Corporations Code Section 25532(f) and Financial Code Section 22712, the statutes authorizing the Commissioner to issue desist and refrain orders under the CSL and CFL.  However, Judge England found that the Commissioner failed to demonstrate that amendment of the complaint would be futile.  Thus, he gave the plaintiffs an opportunity to amend their complaint.  Someday, perhaps, we may have a ruling on the merits of the claim itself.

The plaintiffs were also unsuccessful on their California Public Records Act claims.  Judge England concluded that if he granted relief, he would be directing a state agency to comply with state law and that result that would violate the Eleventh Amendment (“The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.”)

 

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