administrative law judge's supplemental initial decision, defendants acted in good faith throughout the proceedings. Defendants believe this should eliminate any genuine issue as to their good faith and entitle them to summary judgment under § 38(c). Second, defendants argue that even if a genuine issue still exists, the decision of the administrative law judge will bind plaintiff under the doctrines of res judicata and collateral estoppel if and when it is affirmed by the SEC. Thus, according to defendants, plaintiff should not be permitted to contest either the original or modified distribution arrangements in this court without first exhausting administrative remedies. Finally, defendants suggest that they are entitled to summary judgment under § 38(c) unless plaintiff can affirmatively show lack of good faith estopping defendants from asserting their statutory defenses.
First, we disagree that the administrative law judge determined whether defendants made their initial presentation to the SEC in good faith. The judge was chiefly concerned with the fairness of the modified formula, and made no express findings of good faith in the initial application.
Basically, defendants' argument is founded on the refusal of the administrative law judge to apply the modified formula retroactively in light of the temporary exemption given by the Commission. While we agree that good faith may be relevant to this decision, the judge may not have investigated that issue regarding the Commission's order as binding upon him under all circumstances. Whether the SEC will decide the good faith question in the course of its own assessment of the modified formula is problematic.
To determine whether the judicial doctrine of exhaustion of administrative remedies bars plaintiff's claims at this time, we must explore the varied purposes of the doctrine. Based on the " "long settled rule of judicial administration that no one is entitled to judicial relief for a supposed or threatened injury until the prescribed administrative remedy has been exhausted,' " the "primary purpose of this well-established doctrine is "the avoidance of premature interruption of the administrative process.' " First Jersey Securities, Inc. v. Bergen, 605 F.2d 690, 695 (3d Cir. 1979), quoting Myers v. Bethlehem Shipbuilding Corp., 303 U.S. 41, 50-51, 58 S. Ct. 459, 463-464, 82 L. Ed. 638 (1938) and McKart v. United States, 395 U.S. 185, 193, 89 S. Ct. 1657, 1662, 23 L. Ed. 2d 194 (1969). Requiring a plaintiff to first seek redress before the administrative agency allows application of agency expertise and discretion, gives the agency the opportunity to correct its own errors and minimizes piecemeal appeals of agency actions. First Jersey Securities, 605 F.2d at 695. See also, In Matter of Establishment of Restland Memorial Park, 540 F.2d 626 (3d Cir. 1976). Additionally, a requirement of exhaustion implements Congressional intent, preserves the separation of powers, American Federation of Government Employees v. Resor, 442 F.2d 993 (3d Cir. 1971), and at times may eliminate difficult constitutional questions. Babcock and Wilcox Co. v. Marshall, 610 F.2d 1128 (3d Cir. 1979). The doctrine is applicable to administrative remedies available before the SEC. See First Jersey Securities, 605 F.2d at 695.
According to defendants, the remedies plaintiff has failed to exhaust derive from the ongoing exemption proceeding. At present, the modified distribution arrangement is before the SEC for review. We agree that to the extent the issues presented here will be decided in the course of the SEC's review or require the exercise of the SEC's discretion or expertise, the doctrine allocates initial consideration to the SEC. The questions before the Commission centrally involve the fairness of the modified allocation formula approved by the administrative law judge after extensive hearings. Plaintiff may not challenge in this court the fairness of that formula.
If plaintiff wishes us to substitute our judgment for that of the SEC or interfere with the SEC proceeding, the complaint cannot stand. We will thus limit claims of unfairness only to the initial formula rejected by the administrative law judge, liability of course being subject to the good faith defense.
The fifth count of plaintiff's complaint is also encompassed within the matters before the SEC. In this count, plaintiff contends that shareholders who paid a sales charge (load) when they purchased their shares are unfairly required to pay similar charges as part of the joint arrangements. Administrative Law Judge Regensteiner found that "if fairness in the allocation method can be achieved, the overall benefits of the internalized distribution would be sufficient . . . to outweigh the disparity in impact upon different groups of investors." Initial Decision, 73-74. Based upon the facts found by the judge (its expertise) and its view of the policies of the Act (its informed discretion), the SEC will determine whether the proposal is fair to this group of shareholders. Consequently, Count V will be dismissed.
The other claims including breach of fiduciary duty, proxy violations, improper activities by Wellington Management Company and unfair exchange of assets do not fall within the Commission's current review. As discussed earlier, the Commission is considering whether the Funds should be granted exemptions and § 17(d) approval to participate in joint distribution. The remaining claims in this action will not be affected by the SEC proceeding. The administrative law judge has already found the initial arrangement unfair to Wellington Fund, and this decision (as opposed to approval of the modified formula) has not been contested. Defendants do not allude to any other administrative procedure required or even available to challenge the allegedly improper activity. The exhaustion doctrine is thus inapplicable to these claims. Having stayed the action until Judge Regensteiner's findings were made, we see no reason for further delay.
We also carefully distinguish the claims before us from the remedies proposed. Defendants argue that the SEC's jurisdiction over exemption issues requires that any claim which may interfere with implementation of the proposed arrangements be first presented to the SEC. We disagree. Silberman does not contend that the SEC proceeding is biased or improper. Compare First Jersey Securities, supra. Rather, he asserts that the Funds should not be permitted to avail themselves of any exemptions without proper shareholder approval. If plaintiff's request for an injunction was granted because allegedly misleading statements were made to shareholders in securing their approval, the Commission's ruling on the fairness of the modified formula would remain. Presumably, defendants would only be required to obtain shareholder approval before commencing joint distribution. Plaintiff's claims are not within the scope of the SEC exemption proceeding merely because the relief he seeks may affect continued implementation of an agreement under review by the SEC.
In the September 28 memorandum, I held that under § 38(c) defendants have the burden of proving the absence of any genuine issue that they procured the SEC order in good faith. Defendants request reconsideration of that holding, contending that actions taken prior to the issuance of the order are irrelevant in determining whether defendants acted in good faith in conformity with the order. They now argue that alleged misrepresentations in their application for a temporary order may constitute an estoppel, an issue as to which plaintiffs have the burden of proof. Because this complex question may be raised again at trial, additional comment may be helpful.
The good faith defense adds force to the Commission's rulings by insulating from liability those who act in good faith in conformity with an order. The grant of immunity makes it more likely that a party will promptly follow the Commission's order since it need not fear subsequent liability even if the order is later revoked or overturned. The Act permits a company to eliminate risk by placing facts before the Commission and obtaining a ruling.
If a company chooses to withhold or misrepresent facts in its presentation to the Commission, the purposes in granting the defense are eliminated. Prompt implementation of the order granting exemptions would be counterproductive where the Commission had not carefully considered the relevant facts. A court would not be upsetting the Commission's true view of the Act if the judgment was colored by a misrepresentation. To be sure, in considering a motion for summary judgment by defendants, placing the burden of proving the absence of any genuine issue of good faith in securing the order on defendants makes their task more difficult, but it also might promote greater candor with the SEC. Defendants' fear that good faith could never be shown on summary judgment is unfounded. Absent any evidence of bad faith, we would presume defendants acted honestly. Only because plaintiff has demonstrated that this material fact is in dispute, do we put defendants to their proof.