Should a Regulator Know Actions Are Violating Due Process

   In a December 19, 2025 decision, the United States District Court for the Middle District of Tennessee, Nashville Division (Court) considered the Amended Complaint and the Defendants’ Motion to Dismiss the Amended Complaint to determine whether the Plaintiff’s Fourteenth Amendment procedural due process rights were violated by the Director of Registration, April Odom (Director). 

Parrott and his firm, Estate & Financial Strategies (EFS), were registered as an investment advisor representative (IAR) and an investment advisor (RIA) in Tennessee. In December 2020, a routine “books and records examination of EFS” was opened. Plaintiff Parrott cooperated with the examination and timely provided requested documents, corrected potential issues, and answered inquiries. In January 2021, a follow-up request for additional documents was sent to Plaintiffs, where Plaintiff Parrott again timely cooperated. In December 2021, additional information was requested with a January 7, 2022 deadline that was timely responded to as well. A findings letter noting alleged deficiencies was provided, and a call was conducted the next day with Plaintiff Parrott, noting books and records deficiencies.

On January 1, 2022, the annual registrations of Plaintiffs failed to automatically renew due to insufficient funds in the Plaintiffs’ designated account. The occurrence of insufficient funds upon renewal is common, and typically registrations are renewed retroactively by the Division without penalty. Plaintiff Parrott provided additional materials to renew on January 24, 2022 and thought his application would be approved the same date. However, the Director would not sign off on the renewal and requested that Plaintiffs sign a tolling agreement that extended the application period. Alternatively, the application would be immediately denied. Parrott signed the agreement; however, the registration process was delayed five (5) months, resulting in a “de facto” denial, as Plaintiffs were prevented from offering services. In June 2022, a Notice of Hearing and Charges was filed, requesting the Tennessee Department of Commerce and Insurance uphold an Order of Denial of the renewal. Plaintiffs claimed to be “unaware that the Order of Denial had been issued” and thus, no “notice or opportunity to be heard” was provided. Plaintiffs were not able to conduct advisory services until re-registration in March 2023.

Plaintiff brought suit against Defendants individually, not in their official capacities, under § 42 U.S.C. 1983, alleging violation of 14^th Amendment procedural due process rights based upon their property rights, and sought financial relief. In considering the Defendants’ Motion to Dismiss under Fed. R. Civ. P. 12(b)(6), the Court first looked to determine if the facts allege whether a violation of a constitutional right can be established. Next, the Court considered if the procedural due process right at issue “was clearly established when the event occurred such that a reasonable officer would have known that his conduct violated it.”  See Martin v. City of Broadview Heights, 712 F.3d 951 (6^th Cir. 2013). The Court must then look at whether the Plaintiffs can overcome the Defendants’ assertion of a qualified immunity defense. The Plaintiff must establish a property interest in the renewal of the registrations, not just a property interest in a valid and in-effect registration already attained. Here, the Court relies on precedent to determine whether, first, a property interest can exist even if seeking renewal creates procedural due process rights. Next, the Court needed to determine if “any officials in the Defendants’ positions measured objectively would understand that they were under an affirmative duty to refrain from using the tolling agreement in order not to violate Plaintiffs’ due process rights.”  See Edwards, 170 F. Supp. 2d 735. The Court here cannot determine whether officials in similar positions to the Defendants would have known to refrain from using a tolling agreement and that it could amount to a deprivation of a property right, as it was a novel legal issue.

Motion to Dismiss granted.