HARRY C. CALCUTT III, Petitioner, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Respondent.
No. 20-4303
UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT
Decided and Filed: June 10, 2022
RECOMMENDED FOR PUBLICATION Pursuant to Sixth Circuit I.O.P. 32.1(b); File Name: 22a0122p.06; Argued: October 20, 2021; Before: BOGGS, GRIFFIN, and MURPHY, Circuit Judges.
COUNSEL
ARGUED: Sarah M. Harris, WILLIAMS & CONNOLLY LLP, Washington, D.C., for Petitioner. Michelle Ognibene, FEDERAL DEPOSIT INSURANCE CORPORATION, Arlington, Virginia, for Respondent. ON BRIEF: Sarah M. Harris, Ryan T. Scarborough, William B. Snyderwine, Helen E. White, WILLIAMS & CONNOLLY LLP, Washington, D.C., Barry D. Hovis, MUSICK, PEELER & GARRETT LLP, San Francisco, California, for Petitioner. Michelle Ognibene, John Guarisco, FEDERAL DEPOSIT INSURANCE CORPORATION, Arlington, Virginia, for Respondent. John M. Masslon II, WASHINGTON LEGAL FOUNDATION, Washington, D.C., Ilya Shapiro, CATO INSTITUTE, Washington, D.C., Michael Pepson, AMERICANS FOR PROSPERITY FOUNDATION, Arlington, Virginia, Andrew J. Pincus, MAYER BROWN LLP, Washington, D.C., Robert D. Nachman, BARACK FERRAZZANO KIRSCHBAUM & NAGELBERG LLP, Chicago, Illinois, for Amici Curiae.
BOGGS, J., delivered the opinion of the court in which GRIFFIN, J., joined. MURPHY, J. (pp. 54–91), delivered a separate dissenting opinion.
BOGGS, Circuit Judge. Harry C. Calcutt III, a bank executive and director, petitions for review of an order issued by the Federal Deposit Insurance Corporation (“FDIC“) that removes him from his position, prohibits him from participating in the conduct of the affairs of any insured depository institution, and imposes civil money penalties. In addition to attacking the conduct and findings in his individual proceedings, he also brings several constitutional challenges to the appointments and removal restrictions of FDIC officials.
His first hearing in these proceedings occurred before an FDIC administrative law judge (“ALJ“) in 2015. Before the ALJ released his recommended decision, the Supreme Court decided Lucia v. SEC, 138 S. Ct. 2044 (2018), which invalidated the appointments of similar ALJs in the Securities and Exchange Commission (“SEC“). The FDIC Board of Directors then appointed its ALJs anew, and in 2019 a different FDIC ALJ held another hearing in Calcutt‘s matter and ultimately recommended penalties.
Broadly, Calcutt‘s claims fall into two categories. First, he brings structural constitutional challenges, contending that: The FDIC Board of Directors is unconstitutionally shielded from removal by the President; the FDIC ALJs who oversee enforcement proceedings are also unconstitutionally insulated from removal; and the second hearing before a different ALJ failed to afford him a “new hearing,” as mandated by Lucia. In his second group of challenges, Calcutt attacks the procedure used and results reached in his post-Lucia adjudication. He begins by contending that the ALJ abused his discretion by curtailing
We deny his petition. Calcutt‘s challenges to the removal restrictions at the FDIC are unavailing, because even if he were to establish a constitutional violation, he has not shown that he is entitled to relief. See Collins v. Yellen, 141 S. Ct. 1761, 1789 (2021). We also conclude that his 2019 hearing satisfied Lucia‘s mandate. As for the limits on cross-examination at that hearing, any error committed by the ALJ was harmless. Finally, there is substantial evidence in the record to support the FDIC Board‘s findings regarding the elements of
I. BACKGROUND
A. Overview of FDIC Enforcement Proceedings
Among other functions, the FDIC conducts examinations and investigations to ensure banks’ safety, soundness, and compliance with statutes and regulations. See
Section 8(e) of the Federal Deposit Insurance Act (“FDI Act“),
To commence these enforcement proceedings, the FDIC first serves the party with a notice of intention to remove the party from office and/or prohibit that party from participating in other insured depository institutions. See
An ALJ conducts the adversarial hearing in accordance with the Administrative Procedure Act (“APA“),
The regulations also provide that evidence that would be admissible under the Federal Rules of Evidence is admissible in adjudicatory proceedings,
After the hearing, the ALJ must file and certify a record of the proceeding, including a recommended decision, recommended findings of fact, recommended conclusions of law, and a proposed order.
The Board then reviews the ALJ‘s recommendations and issues a final decision.
The FDIC Board consists of five members: the Comptroller of the Currency, the Director of the Consumer Financial Protection Bureau (“CFPB“), and three additional directors who are appointed by the President with the advice and consent of the Senate.
The three members of the Board not appointed by virtue of another office serve fixed terms, and the parties agree that they are not removable at will. During the proceedings before the ALJs in this case, the CFPB Director also enjoyed for-cause protection from removal under
The ALJs who hear FDIC removal and prohibition proceedings are part of a pool housed in the Office of Financial Institution Adjudication (“OFIA“), an interagency body established by FIRREA that presides over enforcement proceedings brought by the FDIC, the Office of the Comptroller of the Currency (“OCC“), the Board of Governors of the Federal Reserve System (“FRB“), and the National Credit Union Administration (“NCUA“). See FIRREA § 916, 103 Stat. 183, 486–87 (codified at
Until Lucia, these ALJs were not appointed by the FDIC. After the Supreme Court held in Lucia that SEC ALJs were officers who must be appointed by the President, a court of law, or a head of department, see 138 S. Ct. at 2051–54, the
C. Calcutt‘s Actions at Northwestern Bank
With this background, we turn to the facts of the present case. Calcutt was the President, CEO, and Chairman of the Board of Directors of Northwestern Bank (the “Bank“), which had its principal place of business in Traverse City, Michigan. He also served as a member of the Bank‘s senior loan committee and as CEO of the Bank‘s holding company, Northwestern Bancorp. The Bank was an insured state nonmember bank subject to the FDI Act, as well as associated regulations and Michigan state laws. Calcutt retired from his positions at the Bank in 2013 and now serves as the Chairman of State Savings Bank in Michigan and its holding company. Northwestern Bank was purchased by a competitor in 2014.
Under the Bank‘s management structure, twenty employees reported directly to Calcutt, including Richard Jackson, an Executive Vice President and board member. A commercial-loan officer named William Green also worked for the Bank.
By 2009, the Bank‘s largest loan relationship was with a group of nineteen limited liability companies controlled by the Nielson family (the “Nielson Entities“). These businesses’ activities involved development of real estate, holding vacant and developed real estate, and holding oil and gas interests. At that time, the Bank‘s loans to the Nielson Entities (the “Nielson Loans“) amounted to approximately $38 million. The value of the Nielson Entities’ holdings during this time was approximately $112 million, with $7–9 million in cash or cash equivalents, and $80 million available in real estate or oil and gas assets that could be used for collateral or loan-payment purposes.
As early as 2008, FDIC examiners identified several of the Nielson Entities as a single borrower and identified the Bank‘s loans to these businesses as a “concentration of credit“—defined as a lending relationship that exceeds twenty-five percent of a bank‘s Tier 1 capital. Although in practice the Nielsons could use cash derived from one entity to pay the loans of another entity, the loans were not cross-collateralized, meaning that the collateral in one Nielson Entity did not secure loans to other Nielson Entities, despite the common control. Neither were the loans supported by personal guarantees: If a Nielson Entity failed, the Bank could not compel the Nielsons to personally satisfy the obligation. Loans lacking personal guarantees were considered to be an exception to the Bank‘s commercial-loan policy.
In April 2008, Calcutt and Green met Cori Nielson, one of the managers of the limited-liability company that managed the Nielson Entities, and Autumn Berden, the chief financial officer of that company. Calcutt and Green requested that the Nielsons stop reporting transfers between Nielson Entities as intercompany loans on their balance sheets; instead, the bankers recommended that when an entity needed funds, another entity should distribute funds to its members, who could then loan or give the funds to the cash-strapped entity. Such a payment mechanism would not be reported to regulators as an intercompany
The relationship between the Bank and the Nielsons began to deteriorate during the Great Recession. Although in May 2009 several of the Nielson Entities wrote to Calcutt stating that they had sufficient cash flow for debt service, by August multiple loans were past due. More were scheduled to mature on September 1. On August 10, Berden told the Bank that the Nielson Entities would need to restructure their loans, and on August 21, Cori Nielson made a similar communication. The Bank did not oblige, and the Nielson Entities stopped paying their loans on September 1.
Over the following months, the Nielsons and the Bank continued to negotiate, but their efforts were fruitless. The Nielsons sought measures such as debt forbearance, reduction of loan payments, or deeds in lieu of foreclosure,2 because ongoing problems in the real-estate market had diminished their ability to repay existing debts. Calcutt, on the other hand, later testified that he thought that the Nielsons were “posturing” and possessed sufficient funds to pay their loans. The Bank attempted to convince the Nielsons to refinance and provide greater payments on their loans. Cori Nielson later testified that in response to her communications, Calcutt expressed concerns about raising “red flags” to regulators about the Bank‘s relationship with the Nielson Entities. By November 30, 2009, several of the loans to the Nielson entities were automatically placed on nonaccrual status by the Bank, meaning that they were ninety days past due.
Also on November 30, the Bank and the Nielson Entities finally reached an agreement that would bring all the loans current. First, the Bank extended a loan of $760,000 to Bedrock Holdings LLC, one of the Nielson Entities (the “Bedrock Loan“), which would be used for the companies’ future required loan payments until April 2010. After receipt of the loan, Bedrock Holdings transferred the funds into accounts at the Bank for other Nielson Entities. Second, the Bank agreed to release $600,000 worth of collateral in investment-trading funds that had been granted to it by another Nielson Entity, Pillay Trading LLC (the “Pillay Collateral“).3 This collateral release allowed the Nielson Entities to bring their past-due loans current. Finally, the Bank renewed the Nielson Entities’ matured loans, including a loan of $4,500,000 to Bedrock Holdings. The parties refer to this agreement, which took effect in December 2009, as the “Bedrock Transaction.” Consequently, the Nielson Entities’ loans were removed from the Bank‘s nonaccrual list on December 1.
The FDIC Board would later find that the actions surrounding the Bedrock Transaction violated the Bank‘s commercial-loan policy. That policy required that “all commercial loans are to be supported by a written analysis of the net income available to service the debt and by written evidence from the third parties supporting
and releasing the Pillay Collateral. At the 2019 hearing, however, Calcutt testified that he thought that the Bedrock Transaction was in the Bank‘s best interest, because it provided time for the Nielson Entities to pay off their debt and because he believed they had the resources to do so.
Moreover, the commercial-loan policy required approval by two-thirds of the board of directors for loans “where the total aggregate exposure is between 15 and 25 percent of the Bank‘s Regulatory Capital.” Ibid. The loans to the Nielson Entities were approximately half of the Bank‘s Tier 1 capital, thereby qualifying for the voting requirement. According to the FDIC, however, the board did not approve the Bedrock Transaction until March 2010—approximately four months after the disbursements. The loan write-up for the Bedrock Transaction that was presented to the board in March 2010 also contained inaccurate information, including misstating the purpose of the Bedrock Loan as “working capital requirements” and omitting that the Bedrock Transaction had already occurred.
That loan write-up was prepared by a credit analyst based on information provided by Green, and Calcutt and Jackson both initialed the document. Before the FDIC, Calcutt argued that: (a) the write-up‘s errors and mischaracterization could not be attributed to him; (b) the board of directors was aware of the difficulties with the Nielson Entities in November 2009 because of materials it had received; and (c) the board of directors verbally approved the Bedrock Transaction in November and December 2009. The ALJ and FDIC Board, however, found against him on these points.
Calcutt‘s actions surrounding the FDIC‘s June 2010 examination of the Bank also attracted scrutiny. In May 2010, Calcutt signed an Officer‘s Questionnaire required by the agency. The first question required him to list the loans that the Bank had renewed or extended since the previous year‘s examination by accepting separate notes for the payment of interest or without fully collecting interest, as well as any loans made for the direct benefit of anyone other than the named recipients of the loans. On the questionnaire, Calcutt answered that he was not aware of any such loans. He later testified that these answers were incorrect in light of the Bank‘s activities with the Nielson Entities, but argued that the misstatements were “inadvertent and unintentional.” (Brackets omitted.)
Additionally, Calcutt participated in a decision to sell several Nielson Entity loans to two of Northwestern Bank‘s affiliates in May 2010, shortly before the FDIC examiners were due to arrive. Green told Berden that he and Calcutt would continue to serve as the points of contact on those loans. In late September 2010, the Bank repurchased the loans, at which point the loans were delinquent and past maturity.
Despite these actions, by September 2010 the Nielson Entities’ position remained precarious. Beginning on September 1, they again stopped making payments on their loans. Several additional months of negotiations ensued, and in December 2010 the parties agreed to an additional release of $690,000 of collateral from Pillay Trading LLC to fund the Nielson Entities’ debt service from September 2010 to January 2011. The Bank‘s board of directors agreed to this arrangement. At the end of that period, however, the Nielson Entities yet again stopped making payments, and they have been in default since then.
Shortly before the FDIC‘s 2011 regular examination of the Bank was set to begin on August 1, 2011, Cori Nielson sent the agency a binder with approximately 267 pages of correspondence between herself, Berden, Green, and Calcutt. The binder‘s contents went beyond the correspondence that FDIC examiners had found in the Bank‘s loan file. According to Calcutt, Nielson‘s move also began a series of actions in which she and Berden improperly influenced the FDIC‘s Case Manager, Anne Miessner, and Miessner became biased against Calcutt while participating in the examination.
During his September 14, 2011 meeting with examiners from the FDIC and the Michigan Office of Financial and Insurance Regulation,4 Calcutt made several false statements about the Bedrock Transaction. First, in response to a question about his understanding as to the purpose of the Bedrock Loan, Calcutt said that the funds were meant to provide “working capital” in connection with an acquisition of another business, although their true purpose was to help pay off the loans to Nielson Entities. Second, when examiners asked him about the release of the Pillay Collateral, he responded, “I thought we still had them,” although he had authorized
releases of the collateral in 2009 and 2010. Third, when queried about how the Nielson Entities managed to bring their loans current in December 2010, he answered that they used their “vast resources between oil, gas, and rentals,” although the December 2010 release of Pillay Collateral was in fact used to satisfy these obligations.
In its 2011 examination, the FDIC also noted that the Nielson relationship “should have been reported as nonaccrual on quarterly Call Reports beginning no later than December 2009,” and that its omission “has resulted in a material overstatement in earnings both in the form of falsely inflated interest income and of grossly undеrstated provision expense.” Calcutt signed the Call Reports, yet he later testified that he was not involved in their preparation.
Ultimately, the FDIC‘s 2011 examination report identified the Bank‘s failures in securing and analyzing the Bedrock Transaction, its reporting inaccuracies, and its misstatements during the examination. It ordered the Bank to charge off $6.443 million on the loans to Nielson Entities, which represented the amount that the Bank would be unlikely to collect.5 On July 31, 2012, the Bank charged off an additional $30,000 specifically on the Bedrock Loan.
E. Administrative Proceedings
1. The 2015 Hearing
On April 13, 2012, the FDIC formally opened an investigation into the Bank‘s officers. Its investigation ended on August 20, 2013, and the agency issued a Notice of Intention to Remove from Office and Prohibit from Further Participation against Calcutt, Jackson, and Green, as well as a notice of assessment of civil money penalties (the “Notice“). In 2015, both Jackson and Green stipulated to orders prohibiting them from banking activity, and Jackson agreed to a $75,000 CMP. Calcutt proceeded to discovery and further administrative proceedings.
In September 2015, ALJ C. Richard Miserendino held an eight-day hearing on
recommended decision on June 6, 2017. However, before the Board issued its final decision, it stayed the case pending the Supreme Court‘s decision in Lucia, because ALJ Miserendino had not been appointed by an agency head.
2. The 2019 Hearing
Following Lucia, the FDIC Board formally appointed Miserendino and its other ALJ, Christopher B. McNeil, then remanded and reassigned each ALJ‘s pending cases to the other ALJ “for a new hearing and a fresh reconsideration of all prior actions, including summary dispositions, taken before the hearing.” See FDIC Resolution Seal No. 085172, Order in Pending Cases (July 19, 2018). The Board permitted each new ALJ to conduct a paper hearing on remand, but if a party objected to the paper hearing, the Board ordered that the ALJ “must conduct a new oral hearing in accordance with
Calcutt‘s case was reassigned to ALJ McNeil, who stated that he would conduct an oral hearing and requested that the parties submit objections to ALJ Miserendino‘s prehearing rulings. In response, Calcutt asserted that the prior proceedings were entirely void under Lucia because the prior ALJ had not been appointed by an agency head. ALJ McNeil rejected this argument, and proceeded to request that the parties submit specific examples where the prior proceeding‘s outcome turned on evidence that should have been included or excluded, or “elements, such as witness demeanor, that are not readily determined from a review of the written record.”
Calcutt then reasserted his argument that “the original proceeding was void ab initio” and objected to the inclusion of the record from the 2015 proceedings because the case “turn[ed] entirely on credibility assessments.” In an order dated March 19, 2019, ALJ McNeil rejected these arguments, concluding that the second hearing would not be de novo, and that “[t]he prior proceedings have not been deemed void ab initio, but instead serve as the primary source of the evidentiary record, subject to review and reconsideration by the new ALJ.” ALJ McNeil went on to observe that although credibility assessments were material to the decision of the case,
Calcutt had not established that a review of the 2015 hearing transcript would be hindered by an inability to view witnesses’ demeanor. Finally, he rejected Calcutt‘s objections to the admission of several exhibits from the 2015 proceedings.
On March 20, 2019, ALJ McNeil released an additional prehearing order, which among other things specified that the parties should identify witnesses by May 15, 2019 and indicate each witness‘s expected testimony. The order specified that “during the evidentiary hearing, witness testimony will be limited to the descriptions provided in this summary.” Calcutt sought an interlocutory appeal before the FDIC Board on ALJ McNeil‘s limitations on the oral hearing. The Board granted his request for a new oral hearing on all issues considered at the prior hearing, including live witness testimony, but it denied his request for an entirely new proceeding as untimely.
In the next prehearing order, ALJ McNeil granted enforcement counsel‘s motions to strike Calcutt‘s affirmative defenses of laches, entrapment, and examiners’ violation of the agency‘s own procedural
The hearing lasted from October 29 to November 6, 2019. Calcutt was among twelve witnesses who testified. During the proceedings, Calcutt‘s counsel unsuccessfully attempted to cross-examine witnesses, including Berden, Miessner, and Nielson, about the theory that Miessner and the FDIC were biased against Calcutt due to their relationship with the Nielsons. In sustaining enforcement counsel‘s objections to this testimony, ALJ McNeil reasoned that these questions were outside the scope of direct examination, and that in accordance with his March 20, 2019 order, Calcutt could have identified these witnesses in a prehearing submission as subject to questioning about bias but failed to do so.
On April 3, 2020, ALJ McNeil issued the Findings of Fact, Conclusions of Law, and Recommended Decision on Remand (the “Recommended Decision“), finding that Calcutt‘s actions surrounding the Bedrock Transaction amounted to unsafe or unsound practices and breached his fiduciary duties of care and candor; that these actions caused the Bank to suffer
damages and financially benefitted Calcutt; and that the actions involved personal dishonesty and willful and continuing disregard for the Bank‘s safety and soundness. See
Calcutt filed exceptions to the FDIC Board, challenging many of these findings and conclusions. He also argued that the proceedings were invalid because the restrictions on ALJ McNeil‘s removal were unconstitutional, and because the new hearing granted after Lucia did not remedy the Appointments Clause violation in the previous proceedings before ALJ Miserendino. He did not argue that the Board was also improperly shielded from removal.
Upon review, the FDIC Board accepted ALJ McNeil‘s findings and conclusions, and on December 15, 2020, it issued a final Decision and Order to Remove and Prohibit from Further Participation and Assessment of Civil Money Penalties (the “Removal and Prohibition Order“). The Board concluded that Calcutt‘s involvement with the Bank‘s loans to the Nielson Entities, as well as his misrepresentations to regulators and the board of directors, were both unsafe and unsound practices and breaches of his fiduciary duties. See
Calcutt petitioned this court for review the following day. On December 21, 2020, he moved for an emergency stay. A panel of this court granted the stay on January 5, 2021. We have jurisdiction over Calcutt‘s
II. STANDARD OF REVIEW
The judicial-review provisions of the APA apply to FDIC removal and prohibition orders and orders assessing CMPs.
We review other agency determinations differently. Questions of law are reviewed de novo, but we defer to an agency‘s interpretation of a provision in a statute that it is entrusted with administering, if (1) Congress has not “directly spoken to the precise question at issue,” and (2) “the agency‘s answer is based on a permissible construction of the statute.” N. Fork Coal Corp. v. Fed. Mine Safety & Health Rev. Comm‘n, 691 F.3d 735, 739 (6th Cir. 2012) (quoting Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842–43 (1984)). And an agency‘s factual findings are reviewed for substantial evidence, which is “more than a scintilla of evidence but less than a preponderance; it is such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.” Gen. Med., P.C. v. Azar, 963 F.3d 516, 520 (6th Cir. 2020) (quoting Cutlip v. Sec‘y of Health & Hum. Servs., 25 F.3d 284, 286 (6th Cir. 1994)). “The substantiality of evidence must take into account whatever in the record fairly detracts from its weight.” Universal Camera Corp. v. NLRB, 340 U.S. 474, 488 (1951).
III. REMOVAL PROTECTIONS
Calcutt maintains that two features of the structure of the FDIC violate Article II and the separation of powers and thus compel invalidation of the agency‘s proceedings against him. First, relying principally on Seila Law, he argues that the members of the FDIC Board are unconstitutionally insulated from removal by the President. Second, he contends that the FDIC‘s ALJs are insulated by multiple levels of for-cause protection in contravention of the Supreme Court‘s holding in Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010).
Neither alleged infirmity, however, compels invalidation of the FDIC proceedings against Calcutt. As the Court recently explained in Collins v. Yellen, even if an agency‘s structure unconstitutionally shields officers from removal, a party challenging the agency‘s action is not entitled to relief unless that unconstitutional provision “inflict[s] compensable harm.” 141 S. Ct. at 1789. Calcutt has not demonstrated that the removal protections of the FDIC Board or the FDIC ALJs caused such harm to him.
We first address Calcutt‘s challenge to the FDIC Board‘s structure. To start, we conclude that Calcutt has not forfeited this claim. However, Calcutt has not demonstrated that the purported constitutional infirmity inflicted harm. See Collins, 141 S. Ct. at 1789. Thus, he is not entitled to invalidation of the proceedings on this basis.
1. Issue Exhaustion
At the outset, we disagree with the argument by the FDIC that Calcutt has forfeited his challenge to the Board‘s removal protections by not raising it in his exceptions to the recommended decision of ALJ McNeil. This is a question of “issue exhaustion,” a rule in many administrative contexts that requires a party to present an issue to an agency before pursuing judicial review on that issue. Carr v. Saul, 141 S. Ct. 1352, 1358 (2021).
We have recognized three types of issue-exhaustion requirements. First, many “requirements of administrative issue exhaustion are largely creatures of statute.” Sims v. Apfel, 530 U.S. 103, 107 (2000). Second, an agency‘s regulations may require exhaustion, id. at 108, so long as the regulations “comport with the statute” and are not applied arbitrarily, Island Creek Coal Co. v. Bryan, 937 F.3d 738, 747 (6th Cir. 2019). Third, a court may impose an issue-exhaustion requirement without either a statute or regulation. Sims, 530 U.S. at 108; see Bryan, 937 F.3d at 747–48 (describing “prudential exhaustion” and its unclear doctrinal source). In this last context, “[t]he desirability of a court imposing a requirement of issue exhaustion depends on the degree to which the analogy to normal adversarial litigation applies in a particular administrative proceeding.” Carr, 141 S. Ct. at 1358 (quoting Sims, 530 U.S. at 109). This resemblance to an adversarial litigation in turn depends on “whether claimants bear the responsibility to develop issues for adjudicators’ consideration.” Ibid.
The FDIC argues that its regulations (namely
Calcutt responds that
We think Calcutt has the better of the argument, and that in the “particular administrative scheme at issue” in this case, no statute, regulation, or prudential principle
his challenge to the FDIC Board during the administrative proceedings. Joseph Forrester Trucking v. Dir., Off. of Workers’ Comp. Programs, 987 F.3d 581, 590 (6th Cir. 2021) (quoting Weinberger v. Salfi, 422 U.S. 749, 765 (1975)). To begin with, the judicial review provision of the FDI Act,
The applicable FDIC regulations hit closer to the mark. They provide that the “[f]ailure of a party to file exceptions . . . is deemed a waiver of objection thereto.”
No. FDIC-85-363e, 1986 WL 379631 (FDIC Apr. 21, 1986)—predates Bank of Hartford.6 And even if we recognize that the FDIC has asserted authority to decide some constitutional issues, we cannot say that this constitutes an established practice for the type of separation-of-powers claim at issue here.
A further consideration counsels against imposing an issue-exhaustion requirement here: Calcutt‘s challenge to the removal protections of the FDIC Board is a structural constitutional challenge over which the FDIC Board has no special expertise. See Carr, 141 S. Ct. at 1360. And had
In sum, Calcutt has not forfeited his claim that the FDIC Board is unconstitutionally insulated from removal.
2. FDIC Board Structure
Calcutt would have us hold that the FDIC Board is unconstitutionally shielded from removal and therefore asks us to invalidate his entire proceeding. Under the framework set out by the Supreme Court’s recent separation-of-powers decisions, however, he is not entitled to invalidation of his proceedings. See Collins, 141 S. Ct. at 1783–89; Seila Law, 140 S. Ct. at 2198–2204. In particular, Collins indicates that Calcutt is not entitled to the relief he seeks, because he has not specified the harm that occurred as a result of the allegedly unconstitutional removal restrictions. See 141 S. Ct. at 1788–89.
In Seila Law, the Court provided the framework for analyzing the constitutionality of a restriction on the President’s removal authority. 140 S. Ct. at 2198. At the first step, we ask whether an officer’s tenure protection falls within an established exception to the general removal authority. Id. at 2198. As relevant here, one such exception, identified in Humphrey’s Executor v. United States, 295 U.S. 602 (1935), permits for-cause removal protections for “multimember expert agencies that do not wield substantial executive power.” Seila Law, 140 S. Ct. at 2199–2200.8 To determine whether an agency
At the second step, if an agency structure does not fall within an established exception, we must determine “whether to extend those precedents to the ‘new situation.’” Seila Law, 140 S. Ct. at 2201 (quoting Free Enter. Fund, 561 U.S. at 483). In concluding that the CFPB Director was unconstitutionally shielded from removal, the Seila Law Court emphasized two key features: the historical novelty of an agency headed by a single director removable only for cause, and the inconsistency of this design with constitutional structure. Id. at 2201–04.
As for the historical inquiry, the Court canvassed American history and found only “modern and contested” examples of agencies headed by a single director who enjoyed good-cause tenure, such as the Federal Housing Finance Agency (“FHFA”) Director, and a “one-year blip” during the Civil War in which the Comptroller of the Currency received for-cause protections. Id. at 2202; see also Collins, 141 S. Ct. at 1783 (holding that removal restriction for FHFA Director was unconstitutional, and that Seila Law was “all but dispositive” on the question).
As for the structural inquiry, the Court underscored that the constitutional scheme’s combination of the separation of powers and democratic accountability foreclosed executive officers from exercising significant authority without direct presidential supervision. The Constitution emphasizes the division of power, but it also recognized the need for an “energetic executive” to respond quickly and flexibly to challenges. Seila Law, 140 S. Ct. at 2203 (discussing The Federalist No. 51 (James Madison) and The Federalist No. 70 (Alexander Hamilton)). To resolve these dueling priorities, the Constitution makes the President directly accountable to the American people through elections, allowing him to delegate authority to subordinate officials to complete the tasks of governance so long as that delegated authority “remains subject to the ongoing supervision and control of the elected President.” Ibid. The CFPB Director’s for-cause protections violated this structure because, by eliminating the President’s ability to remove the CFPB Director at will, the CFPB concentrated power in a single officer while insulating him from presidential control. Id. at 2204. This infirmity was exacerbated by the CFPB Director’s five-year term, which meant that “some Presidents may not have any opportunity to shape its leadership,” and the agency’s independence from the normal appropriations process. Ibid.
We need not delve deeply into the Seila Law inquiry in this case, however, because Collins instructs that relief from agency proceedings is predicated on a showing of harm, a requirement that forecloses Calcutt from receiving the relief he seeks. See 141 S. Ct. at 1788–89. Collins concerned the Director of the Federal Housing Finance Agency, an agency with authority to regulate and act as the conservator or receiver of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Collins, 141 S. Ct. at 1770. Acting as the companies’ conservator, the FHFA amended stock purchasing agreements with the Treasury Department, which altered the dividends that Fannie Mae and Freddie Mac were required to pay to Treasury in exchange for capital. See id. at 1772–75. Shareholders of the companies brought suit against the FHFA and the FHFA Director as a result. See id. at 1775. As relevant here, the shareholders argued that the statutory for-cause removal protection of the FHFA Director violated the separation of powers, see id. at 1778, and that therefore the amendment to the FHFA-Treasury agreement “must be completely undone,” id. at 1787.
The Supreme Court agreed that the for-cause removal provision was unconstitutional, as its decision in Seila Law was “all but dispositive.” Id. at 1783. Just as the CFPB in that decision presented a “novel context of an independent agency led by a single Director” whose for-cause removal protections “lack[ed] a foundation in historical practice and clashe[d] with constitutional structure by concentrating power in a unilateral actor insulated from Presidential control,” so too did the single-director structure and removal protections in the FHFA unconstitutionally limit the President’s removal power. Id. at 1783–84 (quoting Seila Law, 140 S. Ct. at 2192).
Yet although the removal restriction was unconstitutional, the Court held that the shareholders were not entitled to relief absent further findings by the lower courts. The shareholders were not entitled to a prospective remedy, because a subsequent agreement between the FHFA and Treasury had deleted the dividend formula that caused the alleged injury. Id. at 1779–80. As to retrospective relief for the claimed injury during the years that the dividend formula was in effect, the Court observed that “[a]lthough the statute unconstitutionally limited the President’s authority to remove the confirmed Directors, there was no constitutional defect in the statutorily prescribed method of appointment to that office.” Id. at 1787. Thus, the Director “lawfully possess[ed]” the power to implement the provision. Id. at 1788.
The Court explained that the shareholders would be entitled to relief if the unconstitutional removal restriction “inflict[ed] compensable harm,” and it remanded the case to the Court of Appeals to conduct this inquiry. Id. at 1789. To establish such harm, the shareholders would need to show that the removal restriction specifically impacted the agency actions of which they complained:
Suppose, for example, that the President had attempted to remove a Director but was prevented from doing so by a lower court decision holding that he did not have “cause” for removal. Or suppose that the President had made a public statement expressing displeasure with actions taken by a Director and had asserted that he would remove the Director if the statute did not stand in the way. In those situations, the statutory provision would clearly cause harm.
Ibid. Several concurring Justices confirmed that a petitioner would have to establish that an unconstitutional removal protection specifically caused an agency action in order to be entitled to judicial invalidation of that action. See id. at 1789 (Thomas, J., concurring) (agreeing with majority’s remedial analysis “that, to the extent a Government action violates the Constitution, the remedy should fit the
Calcutt attempts to distinguish Collins by observing that the decision concerned only retrospective relief, because the FHFA had already ended the challenged action, whereas Calcutt’s Removal and Prohibition Order remains in effect and operates prospectively. That distinction does not matter here. The Collins inquiry focuses on whether a “harm” occurred that would create an entitlement to a remedy, rather than the nature of the remedy, and our determination as to whether an unconstitutional removal protection “inflicted harm” remains the same whether the petitioner seeks retrospective or prospective relief (particularly when we review an adjudication that has already ended). Collins, 141 S. Ct. at 1789. In other words, Collins instructs that we must ask whether the FDIC Board’s for-cause protections “inflicted harm,” such as by preventing superior officers from removing Board members when they attempted to do so, or possibly by altering the Board’s behavior. Ibid. The Removal and Prohibition Order’s prospective effect does not change a court’s ability to conduct that inquiry.
Collins thus provides a clear instruction: To invalidate an agency action due to a removal violation, that constitutional infirmity must “cause harm” to the challenging party. Ibid. Our sister circuits that have considered the question agree that this is the key inquiry. See Kaufmann v. Kijakazi, 32 F.4th 843, 849 (9th Cir. 2022) (explaining that “[a] party challenging an agency’s past actions must . . . show how the unconstitutional removal provision actually harmed the party”); Bhatti v. Fed. Housing Fin. Agency, 15 F.4th 848, 854 (8th Cir. 2021) (identifying issue under Collins as whether unconstitutional remоval restriction “caused compensable harm”);9 Decker Coal Co. v. Pehringer, 8 F.4th 1123, 1137 (9th Cir. 2021) (stating that, under the “controlling” authority of Collins, “[a]bsent a showing of harm, we refuse to unwind the [agency] decisions below”).
Calcutt has not demonstrated that the structure of the FDIC Board caused him harm. He first states that the FDIC Board’s Removal and Prohibition Order “inflicts ongoing harm” by preventing him from participating in banking activities. Reply Br. 10. However, Collins does not say that any administrative penalty imposed by an unconstitutionally-structured agency must be vacated. Instead, the constitutional violation must have caused the harm. See Collins, 141 S. Ct. 1789 (identifying inquiry as whether “an unconstitutional provision . . . inflict[ed] compensable harm”).
Calcutt also argues that the possibility that the FDIC would have taken different actions in his case, if the Board not been unconstitutionally shielded from removal,
Calcutt also posits that if the FDIC Board had not been unconstitutionally insulated from removal, after Lucia it might have “altered [its] behavior,” ibid., and provided new proceedings as recommended by the Solicitor General, see Mem. from the Solicitor General to Agency General Counsels, Guidance on Administrative Law Judges after Lucia v. SEC (S. Ct.) 8–9, https://static.reuters.com/resources/media/editorial/20180723/ALJ--SGMEMO.pdf (last visited May 24, 2022). While failure to follow executive-branch policy could certainly help indicate that a removal restriction inflicted harm, that is not what happened here. As we explain further below, the FDIC provided a new hearing to Calcutt consistent with Lucia. See infra at 30–35. We also fail to see how the FDIC disregarded the Solicitor General’s guidance. The Solicitor General told agencies that while “a full soup-to-nuts redo of the administrative proceeding” was “the safest course” after Lucia, it was not the only course available:
While litigants may be expected to argue otherwise, however, we do not believe a complete do-over is constitutionally required. We believe that a ‘new hearing’ will be constitutionally adequate as long as the new ALJ is careful to avoid any taint from the prior ALJ’s decision. Thus, we do not think it is necessarily fatal if the new ALJ starts with the existing record in the proceeding (including hearing transcripts), much of which there would be little purpose in generating anew.
Mem. from the Solicitor General to Agency General Counsels 8–9. Thus, we disagree with Calcutt’s suggestion that the FDIC Board failed to follow executive-branch policy—let alone that it did so because of its removal protections.
Finally, Calcutt asks this court to remand to the FDIC to determine whether the removal restriction “inflicted harm” in his case, as the Collins court also remanded for further findings. We do not think this step is necessary. The record is sufficiently clear that the removal protections did not cause harm, and Calcutt provides only vague, generalized allegations in response. See Decker Coal Co., 8 F.4th at 1137 (declining to remand where “the record is clear”). We also note that, unlike the Collins Court or the Eighth Circuit in Bhatti, we would be remanding to an agency rather than another court. See Collins, 141 S. Ct. at 1789 (remanding to court of appeals); Bhatti, 15 F.4th at 854 (remanding to district court to determine whether Fannie Mae and Freddie Mac shareholders suffered compensable harm entitling them to relief under Collins). We do not see how yet another proceeding before the FDIC would aid in developing the record on this point.
B. FDIC ALJ Structure
Calcutt’s separation-of-powers challenge to the removal protections of FDIC ALJs is unsuccessful for similar
To recall, FDIC ALJs can only be removed if the MSPB finds that there is “good cause” for removal on the record after an opportunity for a hearing.
We begin with the Collins issue. As previously discussed, that decision requires a showing that an unconstitutional removal restriction “cause[d] harm” to invalidate an agency action. 141 S. Ct. at 1789.10 Here, again, Calcutt offers vague assertions that it “cannot be ruled out” that the multiple levels of for-cause removal protections insulating ALJ McNeil caused him harm, but a generalized allegation is insufficient for affording relief. Reply Br. 18 (quoting Collins, 141 S. Ct. at 1789). He also argues that had these removal restrictions not been in place, ALJ McNeil would have been more responsive to executive-branch policy, would have properly offered a new hearing after Lucia, and would not have issued a recommended decision that conflicted with the FDI Act. But those arguments are premised on the success of Calcutt’s other claims of constitutional and statutory violations, and as we explain below, none of those claims succeed. See infra at 30–35, 37–53. Thus, he cannot rely on those allegations of harm, either.
An additional feature in this case further suggests that no harm was caused by the removal restrictions. Before Lucia, FDIC adjudications were performed by two ALJs who were not appointed by the FDIC Board: ALJ Miserendino and ALJ McNeil. After Lucia held that similar ALJs in the SEC were inferior officers who must be appointed by the President, a court of law, or a head of department, see 138 S. Ct. at 2051 (citing
Even if relief were available, we doubt Calcutt could establish a constitutional violation from the ALJ removal restrictions. Though Free Enterprise Fund concluded that the two layers of for-cause protections enjoyed by the members of the Public Company Accounting Oversight Board were “incompatible with the Constitution’s separation of powers,” Free Enter. Fund, 561 U.S. at 498, the Court took care to omit ALJs from the scope of its holding, id. at 507 n.10 (“[O]ur holding also does not address that subset of independent agency employees who serve as administrative law judges.”). The Court explained that its decision did not apply to ALJs for several reasons: “Whether administrative law judges are necessarily ‘Officers of the United States’ is disputed,” and many ALJs “perform adjudicative rather than enforcement or policymaking functions, . . . or possess purely recommеndatory powers.” Ibid. (citing Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000) (statutory citations omitted)). Similarly, as then-Judge Kavanaugh explained in dissent in the District of Columbia Circuit proceedings, the for-cause protections of ALJs are distinguishable because agencies can choose not to use ALJs in adjudications; ALJs may not be officers (as the law stood at that time); and many ALJs perform adjudicatory functions that are subject to review by higher agency officials, which “arguably would not be considered ‘central to the functioning of the executive Branch’ for purposes of the Article II removal precedents.” Free Enter. Fund v. Pub. Co. Acct. Oversight Bd., 537 F.3d 667, 699 n.8 (D.C. Cir. 2008) (Kavanaugh, J., dissenting) (quoting Morrison v. Olson, 487 U.S. 654, 691–92 (1988)).
Other than the argument that ALJs are not officers, which Lucia forecloses, see 138 S. Ct. at 2053–54, these rationales still apply to the FDIC ALJs. First, the FDIC ALJs perform adjudicatory functions, and they file a recommended decision that is subject to review by the FDIC Board. See Free Enter. Fund, 561 U.S. at 496 n.10; Free Enter. Fund, 537 F.3d at 699 n.8 (Kavanaugh, J., dissenting);
Calcutt and amicus Chamber of Commerce of the United States of America also argue that the structure of OFIA provides particularly egregious removal protections for FDIC ALJs that violate the separation of powers. Under OFIA’s governing memorandum of understanding, all the constituent agencies of OFIA—the FDIC, OCC, FRB, and NCUA—must approve “[a]ny change to the Office Staff personnel.” Ex. L to Emergency Motion for Stay Pending Review, at 3. According to Calcutt, this provision means that each agency has veto power over any other agency’s attempt to remove an ALJ. Exacerbating this problem, he adds, several of the agencies who must agree to removal also enjoy for-cause protection. See
C. Appointments Clause
The
Calcutt states that the FDIC ALJs are “inferior Officers,” and the FDIC does not contest this point. We agree that FDIC ALJs are inferior officers and that they were improperly appointed before Lucia. Cf. Burgess v. FDIC, 871 F.3d 297, 302–03 (5th Cir. 2017) (reasoning that FDIC ALJs are officers). Because they are inferior officers, the FDIC ALJs must be appointed by the President, a court, or the FDIC Board.
Calcutt and the FDIC also agree up to a point that the remedy for the prior
Lucia does not specify what features a “new hearing” must contain, other than a new adjudicator. 138 S. Ct. at 2055. Other decisions addressing the remedies for
Other decisions indicate that courts afford agencies more leeway on remand after
This reluctance to adopt a bright-light rule makes sense. To hold that all adjudications must start from zero after a judicial decision invalidating ALJ appointments would result in cumbersome, repetitive processes throughout the executive branch simply to produce findings and orders that would often be identical the second time around. Moreover, as the District of Columbia Circuit observed, an “independent evaluation of the merits” does not require an ALJ to ignore all past proceedings: Independence is not a synonym for ignorance. See id. at 121–23.12
Thus, our inquiry focuses on whether ALJ McNeil’s consideration of the 2015 stipulations and testimony showed “sufficient continuing taint arising from the first [proceeding]” to demonstrate that the second proceeding was not “an independent, de novo
decision.” Id. at 124 (citing Fed. Election Comm’n v. Legi-Tech, Inc., 75 F.3d 704, 708 n.5 (D.C. Cir. 1996)). No such ongoing impact occurred here.
First, ALJ Miserendino’s general ability to shape the record at the 2015 hearing does not demonstrate that ALJ McNeil lacked independence. Calcutt implies that any decision at a prior proceeding that shapes the record of a later proceeding invalidates the latter’s outcome. That goes too far. See Intercollegiate Broad. Sys., 796 F.3d at 124 (explaining that “not every possible kind of taint is fatal because, if it were, there would be no way to remedy an Appointments Clause violation”); Legi-Tech, 75 F.3d at 708–09 (accepting that past
Second, ALJ McNeil’s reliance on stipulations that the FDIC, Calcutt, Green, and Jackson made during the 2015 proceedings before Green and Jackson settled did not taint the proceedings. Calcutt and amicus Washington Legal Foundation argue that the settlement altered the facts that Calcutt would have conceded. At most, however, the cases cited by the parties show that courts sometimes accept stipulations made in prior proceedings and sometimes do not, and that these decisions are reviewed for abuse of discretion. See United States v. Kanu, 695 F.3d 74, 78 (D.C. Cir. 2012); Waldorf v. Shuta, 142 F.3d 601, 616 (3d Cir. 1998); Hunt v. Marchetti, 824 F.2d 916, 918 (11th Cir. 1987). To the extent that these decisions about judicial proceedings apply to administrative adjudications, ALJ McNeil did not abuse his discretion. In Waldorf, the court specified that “a stipulation does not continue to bind the parties if they expressly limited it to the first proceeding or if the parties intended the stipulation to apply only at the first trial,” 142 F.3d at 616, and in this case the parties had agreed to stipulations at the 2015 proceedings without expressly limiting the stipulations to those proceedings. Moreover, while stipulations from prior proceedings may be excluded if their admission would create a “manifest injustice,” Kanu, 695 F.3d at 78, Calcutt did not deny that the stipulations were accurate, but rather argued that they were irrelevant or inappropriate to the new proceeding now that that his co-respondents had settled. The ALJ did not abuse his discretion by admitting the stipulations when Calcutt had failed to show that their admission would produce manifest injustice and had failed to expressly limit their use to the prior proceedings.
Finally, Calcutt contends that ALJ McNeil and the FDIC Board’s use of the record of the 2015 hearing hampered their ability to make an independent judgment. At the 2019 hearing, Calcutt objected to using that record for all but two witnesses,13 except for impeachment purposes. ALJ McNeil indicated that he was willing to use the entire 2015 record for substantive as well as impeachment purposes, and he ultimately used that record at several points throughout the hearing and his recommended decision. The FDIC Board then referred to the 2015 record in its final decision at several points, including instances when the 2015 record was the only cited evidence. It also concluded that it could consider Calcutt’s testimony
This inclusion of the 2015 record also did not prevent ALJ McNeil and the Board from conducting an “independent evaluation of the merits.” Intercollegiate Broad. Sys., 796 F.3d at 122. To begin with, Calcutt’s prior testimony likely qualifies as an opposing party’s statement, despite his objection. See
In sum, Lucia required that Calcutt receive a new hearing, and that is what he got. A new hearing need not be from scratch; rather, the impact of the prior proceeding must be sufficiently muted that the new adjudicator can independently consider the merits. ALJ McNeil and the
FDIC Board did not abuse their discretion by admitting the 2015 materials when they remained capable of drawing their own conclusions about Calcutt’s case.
IV. HEARING CHALLENGES
We now turn from Calcutt’s structural constitutional challenges to his claims regarding the specifics of his 2019 hearing. These fall into three categories: a challenge relating to the decision of the ALJ to limit cross-examination on bias at the hearing, a challenge to the substance of the FDIC Board’s findings and conclusions, and an abuse-of-discretion challenge to the FDIC Board’s choice of sanction.
A. Cross-Examination
Under the FDI Act and the APA, parties are entitled “to conduct such cross-examination as may be required for a full and true disclosure of the facts.”
We review an ALJ’s exclusion of evidence under an abuse-of-discretion standard. NLRB v. Jackson Hosp. Corp., 557 F.3d 301, 305–06 (6th Cir. 2009). An abuse of discretion occurs when the ALJ “applies the wrong legal standard, misapplies the correct legal standard, or relies on clearly erroneous findings of fact.” B & G Mining, Inc. v. Dir., Off. of Workers’ Comp. Programs, 522 F.3d 657, 661 (6th Cir. 2008) (quotation marks omitted).
Yet, “due account must be taken of the rule of prejudicial error.”
We need not reach whether ALJ McNeil abused his discretion in limiting cross-examination on the bias of Berden, Nielson, and Miessner, because even if he did, that error was harmless. As we have explained in the civil context, an adjudicator’s erroneous exclusion of evidence is not prejudicial, and therefore is harmless, “if other substantially equivalent evidence of the same facts [was] admitted into evidence.” In re Air Crash Disaster, 86 F.3d 498, 526 (6th Cir. 1996) (quoting Leonard v. Uniroyal, Inc., 765 F.3d 560, 567 (6th Cir. 1985) (alteration in original)). Thus, we recently observed that where a court excluded evidence of police interview transcripts but the record contained depositions of “most of the same witnesses” quoted in the transcripts, any error was harmless. M.J. v. Akron City Sch. Dist. Bd. of Educ., 1 F.4th 436, 447 (6th Cir. 2021); see also Smith v. Woolace Elec. Corp., 822 F. App’x 409, 417 (6th Cir. 2020) (potential error over excluding witness’s testimony was harmless where plaintiff “introduced substantially equivalent evidence” through another witness’s testimony).
ALJ McNeil and the FDIC Board had access to the 2015 record, which contained substantially equivalent evidence regarding Berden, Nielson, and Miessner’s bias. See supra at 31–35. During those earlier proceedings, Calcutt’s counsel examined Berden, Nielson, and Miessner about their bias and alleged collaboration. Other documents in the record were also relevant to bias, including an email where Nielson told Miessner about difficulties with Northwestern Bank, requested that the FDIC contact Michigan regulators, and stated, “I just wish there was a fresh face to talk to at the bank—all this collateral damage is meaningless”; an email in which Miessner communicated with Michigan regulators regarding Nielson’s request; Berden’s handwritten notes from meetings with FDIC officials; and an email correspondence between Miessner, Nielson, and Berden about FDIC charges against Calcutt, titled “A little news to brighten your weekend.” Although further cross-examination would have allowed Calcutt to further develop his bias argument, the availability of these other materials indicates that the agency’s factfinders possessed sufficient information regarding the possible bias of Berden, Nielson, and Miessner to render any error harmless. Thus, the limits on cross-examination do not necessitate a new proceeding.
B. Substantive Challenges
As previously discussed, Section 8(e) of the FDI Act permits the FDIC to enter a removal and prohibition order against an institution-affiliated party after finding that three elements have been met:
Calcutt argues that the FDIC exceeded its statutory authority by finding misconduct when none of his actions qualified under the statutory definitions, failing to demonstrate that any
effects resulted “by reason of” of the misconduct, and failing to identify qualifying effects. He therefore does not challenge the Board’s finding as to his culpability, so we do not address that part of the Removal and Prohibition Order. He also challenges his civil money penalty only to the extent that the Board’s reasoning for the penalty overlaps with its analysis supporting the Removal and Prohibition Order.
1. Misconduct
As to misconduct, Calcutt maintains that the FDIC Board erred by determining that his actions constituted an “unsafe or unsound practice” or a breach of fiduciary duties under the statute.15 We disagree.
a. Unsafe or Unsound Practice
The FDI Act does not define an “unsafe or unsound practice,” and the term is interpreted flexibly. See Seidman v. Off. of Thrift Supervision (Matter of Seidman), 37 F.3d 911, 926–27 (3d Cir. 1994). However, courts have generally treated the phrase as referring to two components: “(1) an imprudent act (2) that places an abnormal risk of financial loss or damage on a banking institution.” Id. at 932; see also Michael v. FDIC, 687 F.3d 337, 352 (7th Cir. 2012) (same); Landry, 204 F.3d at 1138 (identifying imprudent-act and abnormal-financial-risk components).
Calcutt emphasizes the financial-risk component and argues that the Bedrock Transaction did not pose an abnormal financial risk to Northwestern Bank. Along with amicus American Association of Bank Directors, he characterizes the Bedrock Transaction as a good-faith attempt to shore up one of the Bank’s largest lending relationships during the tumult of the Great Recession by releasing collateral and extending a loan that amounted to only a fraction of the Nielson Entities’
The FDIC responds that the statute does not require a finding of a threat to bank stability in order to find “unsafe or unsound” practice, and that “[c]ourts have affirmed prohibition orders based on unsafe and unsound practices with a much more limited effect.” Br. of Respondent 46. That reading contradicts the analyses of our sister circuits in Seidman, Michael, and Landry, and the decisions that the agency cites in support of its interpretation are not convincing. Ulrich v. U.S. Department of Treasury is a Ninth Circuit memorandum in which the court concluded that a loan “fraught” with financial risk, not just a limited effect, was an unsafe or unsound practice. 129 F. App’x 386, 390 (9th Cir. 2005). Other decisions that the FDIC cites—Gully v. National Credit Union Administration Board, 341 F.3d 155 (2d Cir. 2003), First State Bank of Wayne County v. FDIC, 770 F.2d 81 (6th Cir. 1985), and Jameson v. FDIC, 931 F.2d 290 (5th Cir. 1991)—did not engage with the question of whether financial risk to the institution was necessary to demonstrate an unsafe or unsound practice. Still other cited decisions linked a finding of unsafe or unsound practices to abnormal financial risks, agаin controverting the FDIC. See Gulf Fed. Sav. & Loan Ass’n of Jefferson Parish v. Fed. Home Loan Bank Bd., 651 F.2d 259, 264 (5th Cir. 1981); Matter of ***, FDIC-83-252b&c, FDIC-84-49b, FDIC-84-50e (Consolidated Action), 1985 WL 303871, at *9 (FDIC Aug. 19, 1985).
Whether or not we interpret the statute to require a finding of abnormal financial risk, however, the FDIC’s finding that Calcutt committed an “unsafe or unsound practice” is supported by substantial evidence. First, Calcutt does not address the Board’s finding that he “repeatedly concealed material information about the Nielson Loans” from regulators, and that such misrepresentations “constitute unsafe or unsound practices.” See De la Fuente, 332 F.3d at 1224 (“Failure to disclose relevant information to a government investigator can constitute an unsound banking practice.”); Seidman, 37 F.3d at 937 (stating that “hindering [a financial regulatory agency] investigation is an unsafe or unsound practice”).
Second, the record supports the FDIC Board’s conclusion that Calcutt committed additional imprudent acts that posed an abnormal financial risk. In particular, the Board underscored that when the Nielson Entities indicated to the Bank that they would not be able to pay off their loans in 2009, Calcutt declined to seek additional financial information and instead approved the Bedrock Transaction, which extended further credit to the Entities and renewed the outstanding $4.5 million in loans to Bedrock Holdings. The Board also found that Calcutt’s actions violated the Bank’s commercial-loan policy because he approved the Bedrock Transaction without either determining that the Nielson Entities had sufficient income to service their debt, obtaining personal guarantees on the loans, or receiving approval by a two-thirds majority of the board of directors.
Calcutt responds that such actions do not constitute “unsafe or unsound” practices absent abnormal financial risk to the Bank, and that his actions did not present such a risk. His first proposition may be correct. See Seidman, 37 F.3d at 932. However, Calcutt’s actions concerned the Bank’s largest lending relationship—the Nielson Entities—which represented approximately $38 million in loans and half of the Bank’s Tier 1 capital. The FDIC Board
b. Breach of Fiduciary Duties
The FDIC Board also concluded that the misconduct element was satisfied because Calcutt breached his fiduciary duties of care and candor. See
Siegler, 355 N.W.2d 654, 694-95 (Mich. Ct. App. 1984) (recognizing that courts may toll the statute of limitations for fraudulent concealment actions when a fiduciary fails to inform a principal of material facts relating to the claim, because “there is an affirmative duty to disclose where the parties are in a fiduciary relationship“).
On appeal, Calcutt presents three arguments, none availing. First, he contends that he cannot have violated his duty of care, because his actions did not create an “undue risk” to the Bank. Br. of Petitioner 51 (quoting Kaplan v. Off. of Thrift Supervision, 104 F.3d 417, 421 (D.C. Cir. 1997)). This argument echoеs his position that he did not commit an “unsafe or unsound” practice with regard to the Bedrock Transaction.16 See Landry, 204 F.3d at 1138 (noting overlap in analyses of breach of fiduciary duties and unsafe or unsound practices). And it fails for the same reason as his unsafe-or-unsound claim: The record presents substantial evidence to support a finding of financial risk.
Second, Calcutt argues that the Board‘s finding that he failed to supervise his subordinates (namely Green, Jackson, and other Bank employees) does not indicate that he breached his duty of care. It is true that an officer does not necessarily violate a duty of care merely because subordinates failed to follow orders. See Doolittle v. Nat‘l Credit Union Admin., 992 F.2d 1531, 1537 (11th Cir. 1993); see also Kaplan, 104 F.3d at 422 (explaining that director‘s approval of plan that ultimately led other officers and directors to “dishonestly short circuit the required procedures”
But even if Green, Jackson, and other employees committed many of the actions related to the Nielson Entities, Calcutt remains responsible if he knew about their actions and permitted them to occur. Failure to supervise subordinates breaches an officer‘s duty of care when the officer knows about subordinates’ activities or buries his head in the sand. See Hoye v. Meek, 795 F.2d 893, 896 (10th Cir. 1986) (holding that bank director and president inadequately supervised subordinate, because “[w]here suspicions are aroused, or should be aroused, it is the directors’ duty to make necessary inquiries“). In Doolittle, for instance, the Eleventh Circuit clarified that an officer was not responsible for his subordinates’ actions when he gave proper orders to them, they failed to follow those orders, and he attempted to take remedial measures, but that those circumstances did not present “a case where a fiduciary engaged in imprudent lending activities or stood idle and allowed damage to increase.” 992 F.2d at 1537.17
The record provides substantial evidence that Calcutt knew about his subordinates’ activities and permitted them to continue. For instance, in 2008, he was involved in discussions with Green and the Nielsons involving the suggestion that they change their methods of intercompany loans. Calcutt was aware of the Nielson Entities’ difficulty in paying their loans, although he testified that he thought that they were “posturing.” He received correspondence directly from the Nielsons. Berden testified that though Calcutt would not attend all meetings, Green often sought his approval before proceeding in negotiations. Calcutt had received a memo from Green in November 2009 describing the loan to Bedrock Holdings. He was aware of (and possibly participated in approving) the sale of Nielson Entity loans to affiliated banks. And Green reported directly to Calcutt. There was ample evidence for the FDIC Board to find that he had breached his duty of care by failing to supervise subordinates.
Finally, Calcutt resists the Board‘s conclusion that he breached his duty of candor to the Bank‘s board of directors by failing to timely disclose the information about the status of the Nielson Loans and the Bedrock Transaction. He asserts that the duty of candor requires corporate fiduciaries to “disclose only ‘material information relevant to corporate decisions from which [the fiduciary] may derive a personal benefit,‘” and that he did not have a personal interest in the Bedrock Transaction. Br. of Petitioner 53 (quoting De la Fuente, 332 F.3d at 1222 (alteration in original)). Even if we accept this framing of the duty, however, the FDIC concluded that Calcutt derived a personal benefit from misrepresenting the status of the Nielson Loans to regulators, because he received dividends through the Bank‘s holding company that reflected the Bank‘s artificially inflated income. To the extent that substantial evidence supports the personal-benefit determination, the finding that Calcutt breached his duty of
In sum, we decline to set aside the Board‘s conclusions that Calcutt met the misconduct element of the statute.
2. Effects
Under the FDI Act, the FDIC must find that “by reason of” Calcutt‘s misconduct, one or more of the following effects resulted: The Bank “has suffered or will probably suffer financial loss or other damage,” its “depositors have been or could be prejudiced,” or Calcutt “has received financial gain or other benefit.”
Calcutt commences by arguing that the Board erred by failing to read the statute‘s “by reason of” language to require proximate causation. In its final decision, the FDIC was unwilling to apply a proximate-causation standard, instead stating that “an individual respondent need not be the proximate cause of the harm to be held liable under section 8(e).”
Because Section 8(e) requires that a bank‘s loss or potential loss, or a party‘s benefit, occur “by reason of” the misconduct, it mandates proximate causation.
The FDIC alternatively argues that its formulation—that “by reason of” requires only “a causal ‘nexus’ between the misconduct and harm, or that harm was reasonably foreseeable“—is consistent with proximate causation. Br. of Respondent 50. This has some appeal; after all, it is notoriously difficult for judges to define proximate cause. See Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 535-36, 535 n.32 (1983); Crosby, 921 F.3d at 623-24. We also recognize that in prior adjudications, the FDIC has
The decisions cited by the FDIC as support for its view are consistent with a proximate-causation definition of “by reason of” that incorporates substantiality, directness, and foreseeability. In De la Fuente, for example, the Ninth Circuit held that a risk of loss must be “reasonably foreseeable,” but did not conclude that reasonable foreseeability alone was enough for liability. 332 F.3d at 1223; see also United States v. Gamble, 709 F.3d 541, 549 (6th Cir. 2013) (holding that harms must be reasonably foreseeable tо be proximately caused, but not stating that reasonable foreseeability is sufficient). Haynes v. FDIC, a memorandum, seemingly treated “reasonably foreseeable” as interchangeable with “by reason of,” but did so in a summary fashion that we do not consider persuasive. See 664 F. App‘x 635, 637 (9th Cir. 2016). Although in Landry, the Court of Appeals for the District of Columbia Circuit recognized that an individual could be liable for the effects of misconduct even if he acted “only indirectly,” the court was construing the misconduct element of Section 8(e). 204 F.3d at 1139; see
With the causation standard established, we consider the statutory effects identified by the FDIC Board. We conclude that substantial evidence supports the conclusion that some—but not all—of the impacts to the Bank are “effects” under Section 8(e) and were proximately caused by Calcutt‘s misconduct.
a. The $30,000 Charge-Off on the $760,000 Bedrock Loan
The charge-off on the loan to Bedrock Holdings, which was part of the Bedrock Transaction, is an effect under the statute. Calcutt argues that a charge-off does not reflect actual losses but rather estimates possible future loss, but the FDI Act is clear that a loss that a bank will “probably suffer” qualifies as an effect,
b. Investigative, Auditing, and Legal Expenses
The FDIC Board also agreed with ALJ McNeil that Calcutt‘s misconduct
The FDIC Board reasoned that though legal fees “presumptively are a normal cost of doing business,” they can constitute an effect when they “are coupled with other ‘non-neutral indicia of loss,‘” and that the Bank‘s payments to a CPA firm and loan charge-offs constituted such other non-neutral indicia. See Matter of Proffitt, FDIC-96-105e, 1998 WL 850087, at *9 n.11 (FDIC Oct. 6, 1998) (considering “a [court] judgment of improper and illegal behavior” in a related lawsuit to be a non-neutral indicium). We are unpersuaded by this rationale: If professional fees are not a loss unless they are coupled with other “non-neutral indicia of loss,” then it may be that the fees do not have any independent significance. The two FDIC decisions cited by the Board exemplify this problem, since in both instances banks suffered losses in addition to their payment of professional fees. In Matter of Proffitt, the Board explained that “a judgment of improper and illegal behavior“—in that context, a court judgment awarding a bank to pay damages—plus legal fees could establish a qualifying loss. Id. at *3, *9 & n.11. And in Matter of Shollenburg, the bank suffered additional losses besides professional fees in order to satisfy tax laws that the respondents had violated. See FDIC-00-88e, 2003 WL 1986896, at *12-13 (FDIC Mar. 11, 2003).
c. $6.443 Million in Other Losses
Next, the Board found that Calcutt‘s actions cost the Bank $6.443 million in losses from other loans to the Nielson Entities, and that his approval of the release of approximately $1.2 million in Pillay Collateral prevented the Bank from using those funds to recoup part of those losses. Apart from asserting that the Board failed to apply a proximate-causation standard, Calcutt argues that under that standard, the $6.443 million loss does not count as an effect, because it represents a probable future loss from the entire Nielson Entity loan portfolio that would have occurred regardless of his actions, and because the $1.2 million in released collateral was used to pay off the Nielson Entities’ debts, thereby benefitting the Bank.18
Only part of the $6.443 million in charge-offs can be described as an effect proximately caused by Calcutt‘s misconduct. Recall that the Nielson Entities indicated that they were unable to pay off debts as early as 2009. The Bank probably would have incurred some loss no matter what Calcutt did: Although multiple parties’ actions can proximately cause the same outcome, the state of the Bank‘s relationship with the Nielson Entities suggests that Calcutt‘s actions did not substantially or directly contribute to all of its ultimate losses.
Additionally, the FDIC‘s explanation for considering the $1.2 million of released collateral in its loss calculation is unconvincing. In its decision, the FDIC
Nevertheless, there is substantial evidence that part of the $6.443 million in losses was an effect of Calcutt‘s actions. The record indicates that Calcutt, knowing that the Nielson Entities were near default and that they were a large lending relationship, extended credit and renewed loans to them while concealing these transactions and the scale of the problem from the Bank‘s board and from regulators. ALJ McNeil also found that, in 2009, the Nielson Entities had proposed loan renewals, forbearance, deeds in lieu of foreclosure, and other mechanisms to relieve their obligations. Though Calcutt may have thought that these options would have resulted in “sure losses” to the Bank, the FDIC could have concluded from the record that his decision to extend additional loans ultimately exacerbated the problem.
Additionally, there is substantial evidence that Calcutt‘s actions resulted in probable future losses to the Bank. Cf.
d. Holding Company Dividends
Finally, the Board concluded that the dividends Calcutt received from the Bank‘s holding company qualified as a financial
As in the circumstance of the FDIC‘s categorization of the $6.443 million in losses, the record compels an answer somewhere in between the two parties’ positions. On one hand, the FDIC did not point to specific evidence in the record showing that Northwestern Bancorp‘s dividends with certainty reflected the inflated earnings from the Nielson Entities. It simply assumed (and reasonably so) that the dividends paid by the holding company reflected the value of the dividends paid by the Bank. On the other hand, Calcutt does not really challenge the findings that the Bank paid a dividend to the holding company, nor that the Bank‘s dividend reflected its inflated representation of the Nielson Loans’ performance. Rather, his position is that the holding company still might have paid out dividends from its other sources of income. He does not provide evidence (other than his own testimony, which is stated in general terms)20 that the holding company had ever paid dividends over and above a reflection of the Bank‘s perceived performance. Absent such evidence, we are skeptical that the Bank‘s earnings did not impact its holding company‘s dividend payments. On balance, the evidence and common sense support the agency‘s position as to this effects finding.
e. Cumulative Effects
In sum, the support for the effects findings made by the FDIC Board are mixed. Taken together, the $30,000 charge-off on the Bedrock Loan, some of the $6.443 million in other losses related to the Nielson Entities, and some of the dividend payments that Calcutt received from Northwestern Bancorp occurred “by reason of” his misconduct surrounding loan activities and misrepresentations to the Bank‘s board of directors and regulators. But the Bank‘s auditing and legal fees do not qualify as an effect, and Calcutt‘s actions may not have proximately caused some of the losses and dividend payments.
These conclusions lead to a further question: If some, but not all, of the FDIC‘s effects findings are supported, should the Removal and Prohibition Order be remanded? One might argue that had the FDIC only considered those effects for which the record presented substantial evidence, it would not have thought it appropriate
A remand is not necessary, for several reasons. To start, the text of the statute indicates that if substantial evidence supports the FDIC‘s finding as to one effect out of multiple possibilities, the fact that it fails to adequately support its other effects findings does not limit its power to issue a removal and prohibition order. Section 8(e)(1)(B) separates the categories of permissible effects by the disjunctive term “or“: The agency must find that “by reason of” the misconduct,
(i) such insured depository institution . . . has suffered or will probably suffer financial loss or other damage;
(ii) the interests of the insured depository institution‘s depositors have been or could be prejudiced; or
(iii) such party has received financial gain or other benefit . . . .
Additionally, other circuits have also suggested that when such a finding can be supported by one of several alternative bases, courts should deny petitions challenging the agency‘s order. In Dodge, for example, the District of Columbia Circuit upheld an effects finding when substantial evidence supported the Comptroller of the Currency‘s conclusions that a bank‘s depositors could be prejudiced under Section 8(e)(1)(B)(ii) and that the petitioner received a financial benefit under Section 8(e)(1)(B)(iii)—even when the court declined to rely on the Comptroller‘s finding of potential harm to the bank under Section 8(e)(1)(B)(i). 744 F.3d at 158. And in De la Fuente, the Ninth Circuit held that the FDIC Board “correctly concluded that De La Fuente‘s [sic] actions had an impermissible effect because he received financial benefit from the transaction and/or because the interests of [the bank‘s] depositors were prejudiced thereby.” 332 F.3d at 1223 (emphasis added). That is, the court suggested that even if the Board had incorrectly concluded that the petitioner received financial benefit, its separate finding of prejudice to depositors was sufficient to satisfy the effects element.
Finally, a remand would be in tension with the substantial-evidence standard of review for factual findings. In conducting this review, we consider the whole record,
Our dissenting colleague would nonetheless remand the petition to the FDIC, reasoning that only that remedy is consistent with the principle that courts may not uphold an agency‘s order “unless the grounds upon which the agency acted in exercising its powers were those upon which its action can be sustained.” SEC v. Chenery Corp., 318 U.S. 80, 95 (1943). While we do not question Chenery, that decision does not mean that a court must remand where thе agency makes any legal error, especially where substantial evidence amply supports an agency‘s findings. Remand is unnecessary where an agency‘s “incorrect reasoning was confined to that discrete question of law and played no part in its discretionary determination,” and it reaches a conclusion that it was bound to reach. United Video, Inc. v. FCC, 890 F.2d 1173, 1190 (D.C. Cir. 1989); see also Morgan Stanley Cap. Grp. Inc. v. Pub. Util. Dist. No. 1., 554 U.S. 527, 545 (2008) (“That [the agency] provided a different rationale for the necessary result is no cause for upsetting its ruling.“). Reading Chenery so broadly as to compel remand in such circumstances would result in yet another agency proceeding that amounts to “an idle and useless formality.” NLRB v. Wyman-Gordon Co., 394 U.S. 759, 766 n.6 (1969) (plurality op.). And it would risk contradicting the harmless-error rule in courts’ review of agency action. See Sanders, 556 U.S. at 406-07.
Thus, we do not uphold the FDIC‘s order in this case simply by substituting our reasoning for the agency‘s discretionary determinations. Rather, our inquiry focuses on whether substantial evidence supports the FDIC‘s factual findings that the charge-offs, dividends, and other expenses were “effects” under the statute. Notwithstanding the agency‘s error in identifying the appropriate causation standard, and our conclusion that legal expenses do not qualify as “effects,” the agency‘s findings clear this hurdle. We decline to remand the petition to the FDIC.
3. Sanction
Finally, Calcutt claims that the FDIC‘s order removing him from his position and prohibiting him from future banking activities is an abuse of discretion. Courts review a removal sanction for abuse of discretion. Grubb v. FDIC, 34 F.3d 956, 963 (10th Cir. 1994). A sanction constitutes an abuse of discretion when it “is unwarranted in law or without justification in fact.” Ibid. (quoting Butz v. Glover Livestock Comm‘n Co., 411 U.S. 182, 185-86 (1973)) (quotation marks omitted). According to Calcutt, his penalty is “plainly excessive” in light of his subsequent, misconduct-free work for State Savings Bank, his age, and the harshness of the penalty. Br. of Petitioner 63. True, removal and prohibition are “extraordinary sanction[s].” De la Fuente, 332 F.3d at 1227. And, as Calcutt notes, the FDIC could have opted to proceed with only a cease-and-desist order or civil monetary penalty. But for the reasons we have explained, Section 8(e) clearly permits removal and prohibition for the actions that the FDIC alleges in this case, and the FDIC‘s conclusions are well supported. The agency‘s sanction choice is not an abuse of discretion under these circumstances.
V. CONCLUSION
For the reasons above, we deny Calcutt‘s petition for review and vacate our
Calcutt v. FDIC
No. 20-4303
U.S. Court of Appeals for the Sixth Circuit
DISSENT
MURPHY, Circuit Judge, dissenting. After adjudging Harry Calcutt guilty of misconduct in the management of a bank, the Federal Deposit Insurance Corporation (FDIC) issued an order that would bar him from working in his profession and fine him $125,000. Calcutt challenges this order on constitutional and statutory grounds. My colleagues reject all of his claims. I agree with them on his constitutional claims but must part ways on his statutory ones.
Calcutt‘s three constitutional claims do not entitle him to relief. He first alleges that Congress has unconstitutionally restricted the President‘s right to terminate (and so to control) the FDIC‘s Board of Directors. But his argument rests on a misreading of the Board‘s enabling statute. It gives the President complete authority to fire most of the Board‘s members. Calcutt next argues that Congress at least gave one Board member and the FDIC‘s administrative law judges unconstitutional protections from removal. Even assuming that this claim has merit, however, he fails to show why these unconstitutional statutes would entitle him to the relief that he seeks—vacatur of the FDIC‘s actions in his case as “void.” The Constitution itself requires no remedy. And I would read recent Supreme Court precedent to bar his preferred remedy because that reading best comports with the historical practices that we should follow until Congress says otherwise. Calcutt lastly notes that the first administrative law judge who heard his case had not been appointed in a manner that comported with the Constitution‘s Appointments Clause. The Board agreed and gave him a new hearing before a new judge. Calcutt now claims that the Appointments Clause barred this new judge from relying on any evidence developed at the initial hearing. But again, nothing in the Constitution required any remedy, let alone Calcutt‘s expansive one.
Calcutt‘s statutory claims are another matter. The FDIC misread the statute on which it relied to sanction him. Of most note, the FDIC cannot bar Calcutt from banking unless it proves that his bank will suffer a loss (or that he will receive a benefit) “by reason of” his misconduct.
I. Background
Calcutt served for years as the President and Chairman of Northwestern Bank
These events led the FDIC to seek to “remove” Calcutt “from office” and to impose a “civil penalty” on him.
II. Constitutional Claims
I agree with my colleagues that Calcutt‘s constitutional arguments all fall short. But my reasoning rests largely on different grounds.
A. Restrictions on the President‘s Ability to Control the FDIC
Calcutt first argues that the FDIC‘s statutory scheme gives the President constitutionally insufficient control over the agency‘s exercise of executive power. Why? He assumes that the statute creating the FDIC‘s five-member Board of Directors bars the President from removing most of its members except “for cause.” See
As an intermediate judge, I find this constitutional question difficult. On the one hand, Humphrey‘s Executor relied on the FTC‘s nonpartisan, multimember structure to uphold the provision limiting the President‘s ability to fire its commissioners. Id. at 624-25. The FDIC shares the same structure. Compare
On the other hand, Humphrey‘s Executor may not be directly on point. It also upheld the FTC‘s removal protections because, as the Court understood the FTC‘s duties in 1935, the agency undertook “no part of the executive power[.]” 295 U.S. at 628. The FDIC, by contrast, performs core executive functions. Here, it has essentially brought a civil-enforcement suit against Calcutt to ban him from banking and impose a hefty fine on him. It thus is executing (i.e., carrying into effect) the law barring “unsafe or unsound” banking practices.
But I see no reason to resolve the parties’ constitutional debate because I do not read the FDIC‘s statutory scheme to implicate it. Rather, I read the statute that creates the FDIC‘s Board (
So the President‘s ability to control the Board turns on whether he has free rein to fire its three appointed members. The statute creating their offices provides: “Each appointed member shall be appointed for a term of six years.” Id.
Historical context confirms that § 1812 does not interfere with the President‘s ability to remove the Board‘s appointed members. The provision establishing their six-year term dates to the creation of the FDIC in 1933. Banking Act of 1933, Pub. L. No. 73-66, § 8, 48 Stat. 162, 168. At that time, a “well-approved” “rule of” “statutory construction” directed courts to interpret laws that gave the President the power to appoint an executive officer as including the power to remove the officer. Myers, 272 U.S. at 119. So if a law was silent on removal, the President could terminate the officer for any reason. See Shurtleff v. United States, 189 U.S. 311, 316 (1903); Parsons, 167 U.S. at 338-39. The Congress that created the FDIC operated against this interpretive rule. See Collins v. Yellen, 141 S. Ct. 1761, 1782 (2021). And while the Court has since departed from the rule once, it relied on the “philosophy of Humphrey‘s Executor” to do so. Wiener v. United States, 357 U.S. 349, 356 (1958). That philosophy did not exist in 1933.
A constitutional concern points the same way. Before Humphrey‘s Executor, the Supreme Court had broadly held that Congress could not constitutionally limit the President‘s power to fire officers who are appointed with the advice and consent of the Senate. See Myers, 272 U.S. at 109-76. The FDIC was created between Myers and Humphrey‘s Executor—when the Court treated these removal protections as presumptively invalid. Myers “aroused wide interest,” Morgan, 115 F.2d at 992, so Congress would have known that such protections raised “grave” constitutional “doubts,” United States v. Jin Fuey Moy, 241 U.S. 394, 401 (1916). These concerns make it all the more implausible to read a law passed at this time as silently including them. See Free Enter. Fund v. Pub. Co. Acct. Oversight Bd., 561 U.S. 477, 545-46 (2010) (Breyer, J., dissenting). In short, the President has unfettered power to fire (and control) most of the FDIC‘s Board.
To be sure, both parties seem content to assume that the statute grants the Board protections from removal. Cf. United States v. Sineneng-Smith, 140 S. Ct. 1575, 1579 (2020). In a related case, the Supreme Court also assumed that another agency had these protections. Free Enter. Fund, 561 U.S. at 487. Yet parties cannot force courts to accept their stipulations of law. See Young v. United States, 315 U.S. 257, 258-59 (1942). Under basic avoidance principles, moreover, our power to address an unraised issue reaches its apex when parties ask us to resolve a weighty constitutional question that a statute might not present. Cf. Nw. Austin Mun. Util. Dist. No. One v. Holder, 557 U.S. 193, 205 (2009). That is especially true here. Calcutt‘s constitutional claim, if accepted, would take us right back to a statutory “severability” question: Which parts of the statute must we set aside as unconstitutional? See Free Enter. Fund, 561 U.S. at 508-10; John Harrison, Severability, Remedies, and Constitutional Adjudication, 83 Geo. Wash. L. Rev. 56, 88-89 (2014). If the removal protections are imaginary, this question has an easy answer. We should disregard those protections. Since we may have to consider this statutory issue even if we reach Calcutt‘s constitutional claim, we might as well reach it immediately. See William Baude, Severability First Principles, 109 Va. L. Rev. ____ (forthcoming 2023) (manuscript at 44-45).
*
Even so, Calcutt responds, the President and Board believed that § 1812 contained removal protections. This belief, Calcutt argues, “shows that the Board enjoyed de facto tenure protections while pursuing this enforcement action, causing” him harm. Reply Br. 7 n.1. I agree that the executive branch likely read the statute this way. But why would “de facto” protections violate the law? Consider a hypothetical: Disagreeing with my reading, the President issues an order stating that he
I fail to see why it would violate the Constitution. Like the Supreme Court when resolving cases, the President must interpret the Constitution when performing his constitutional duties. See Island Creek Coal Co. v. Bryan, 937 F.3d 738, 753 (6th Cir. 2019) (citing Frank H. Easterbrook, Presidential Review, 40 Case W. Res. L. Rev. 905 (1990)). Presidents have routinely done so. When exercising his pardon power, President Jefferson pardoned those convicted under the Sedition Act of 1798 because he believed that the convictions violated the First Amendment. See New York Times Co. v. Sullivan, 376 U.S. 254, 273-76 (1964). When exercising his veto power, President Jackson vetoed a bill reauthorizing the national bank because he believed that Congress lacked the power to create it. See Easterbrook, supra, at 909-10. Like these powers, the removal power belongs to the President. See Seila Law, 140 S. Ct. at 2197-98. So what constitutional provision would the President offend by self-limiting this power? If anything, a court‘s intrusion on his authority would raise the concerns. If an injured bank customer had sued President Jackson over his national-bank veto, nobody (I hope) would claim that a court could enjoin the President‘s veto with a citation to McCulloch v. Maryland, 17 U.S. 316 (1819). See Collins, 141 S. Ct. at 1794 (Thomas, J., concurring). We would raise identical separation-of-powers problems if we intruded on the President‘s lawful exercise of the removal power with a citation to Seila Law.
Nor would this hypothetical executive order violate § 1812. The statute gives the President the power to remove any of the Board‘s appointed members for any reason. The President thus may retain any member for any reason—whether based on his reading of the statute or on the benefits of a civil-service system. In this respect, the statute is not much different than a provision that sets the minimum process that an agency must provide. That floor does not foreclose the agency from offering additional process. Cf. Vt. Yankee Nuclear Power Corp. v. Nat. Res. Def. Council, Inc., 435 U.S. 519, 543-49 (1978); Al-Saka v. Sessions, 904 F.3d 427, 432 (6th Cir. 2018); Easterbrook, supra, at 908. So while § 1812 does not impose for-cause removal protections on the President, it also does not bar him from imposing those protections on himself.
Now adjust my hypothetical slightly: Before the FDIC acted in Calcutt‘s case, “suppose that the President had made a рublic statement expressing displeasure with actions taken by [its Board] and had asserted that he would remove [its members] if [§ 1812] did not stand in the way.” Collins, 141 S. Ct. at 1789. If the President‘s (mis)reading of § 1812 does not violate the law once he knows that the courts will interpret it differently than he does, why would this
reading violate the law before he knows how they will interpret it? I am not sure. Yet I would leave open whether courts may vacate agency action as “arbitrary and capricious” under the
Calcutt responds that we should remand to the FDIC to allow him to seek discovery over whether any de facto protections harmed him. That leads to my final point. An FDIC regulation contains an issue-exhaustion rule that requires parties to raise all exceptions to an administrative law judge‘s decision with the Board.
B. Restrictions on Removal of the CFPB Director and Administrative Law Judge
Calcutt next challenges two unambiguous removal protections. First, the law that created the FDIC‘s final Board member—the CFPB Director—gives the Director these protections.
I see no need to opine on the merits of these claims. We must distinguish the constitutional questions that Calcutt raises (do the removal statutes violate the Constitution?) from a separate remedies question (if so, do these defects entitle him to his requested relief?). As his proposed remedy, Calcutt asks us to vacate the FDIC‘s order as “void.” But he fails to identify the source of law that requires (or permits) courts to treat the FDIC‘s past actions as void because potentially unconstitutional statutes attempted to insulate two of the FDIC‘s officers from the President‘s removal power. And my review of the relevant legal authorities leads me to conclude that Calcutt could not obtain this relief even if he successfully established the statutes’ unconstitutionality.
Because Calcutt seeks relief for a constitutional violation, the Constitution provides the place to start on this remedies question. But it says almost nothing about remedies. Cf. Hernandez v. Mesa, 140 S. Ct. 735, 741-43 (2020); Armstrong v. Exceptional Child Ctr., Inc., 575 U.S. 320, 324-27 (2015). Except for a few provisions like the requirement to pay “just compensation” for a taking, see Knick v. Township of Scott, 139 S. Ct. 2162, 2171 (2019), the Constitution sets only limits on government conduct without prescribing specific relief for violations, see Alfred Hill, Constitutional Remedies, 69 Colum. L. Rev 1109, 1118 (1969). One thus will search Article II in vain for an explicit constitutional remedy that applies to an invalid removal provision.
Where else should we look? The founders enacted the Constitution against the backdrop of a preexisting legal system with preexisting causes of action and remedies. See id. at 1131-32. Before the founding, for example, this system often allowed equity courts to issue injunctions to stop “illegal executive action[.]” Armstrong, 575 U.S. at 327; Ex parte Young, 209 U.S. 123, 150-51 (1908). The Supreme Court has held that we may use these preexisting “judge-made” remedies to redress constitutional wrongs unless Congress displaces them. Armstrong, 575 U.S. at 327-28.
But courts should not take this allowance too far. The Constitution does not give us freewheeling power to adopt federal common-law remedies based on our views of wise policy. See Hernandez, 140 S. Ct. at 741-42 (citing Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938)). And the Court “disfavor[s]” remedies that are rooted in legislative-like choices about the best way to deter illegal acts. Ziglar v. Abbasi, 137 S. Ct. 1843, 1857 (2017) (citation omitted).
This dichotomy points the way here. We lack an inherent power to treat the FDIC‘s actions as “void” because we think it would be a good idea. See Hernandez, 140 S. Ct. at 741-42. We instead must look to the causes of action and remedies that traditionally applied to claims like Calcutt‘s—that a statutory provision related to an office was illegal and that this defect rendered the officer‘s actions void. When courts traditionally chose remedies for this sort of claim, they distinguished between two types of officers: a “de facto officer” in a lawful office (whose actions were enforceable) and a “mere usurper” in an unlawful one (whose actions were void). Albert Constantineau, A Treatise on the De Facto Officer Doctrine §§ 5, 34, at 8-10, 52-53 (1910).
De Facto Officer in Lawful Office. For centuries, parties have alleged that an officer was unlawfully holding (and performing the duties of) an office. To give an example at the time of the founding, a party claimed that a sheriff could not hold that office because the sheriff had not lived in the county as long as the law required. State v. Anderson, 1 N.J.L. 318, 324-28 (N.J. 1795).
English courts channeled these claims into a specific writ (“quo warranto“) with a specific remedy (prospectively ousting the officer). See 3 William Blackstone, Commentaries *262-64; 2 Edward Coke, Institutes of the Laws of England 282, 494-99 (1642). American courts followed suit. Constantineau, supra, § 451, at 635 n.1; State v. Parkhurst, 9 N.J.L. 427, 437-38 (N.J. 1802). Three aspects of the quo warranto action deserve mention. For one, invalid officers caused public harms, so the government
Yet the process has always looked cumbersome. Rather than file a direct quo warranto suit to oust invalid officers, parties harmed by the officers’ actions have tried to collaterally attack their qualifications in suits involving the actions. Id. at 1496. Since 1431, English courts have rebuffed these attacks under the “de facto officer doctrine.” Constantineau, supra, § 5, at 8-10 (citing The Abbé de Fontaine, 1431 Y.B. 9 Hen. VI, fol. 32, pl. 3 (Eng.)); Clifford L. Pannam, Unconstitutional Statutes and De Facto Officers, 2 Fed. L. Rev. 37, 39-42 (1966). That doctrine treats the past actions of an officer with a colorable claim to office as valid whether or not the officer met all conditions to hold the office. Constantineau, supra, § 1, at 3-4. English courts introduced it “into the law as a matter of policy and necessity, to protect the interests of the public and individuals, where those interests were involved in the official acts of persons exercising the duties of an office, without being lawful officers.” State v. Carroll, 38 Conn. 449, 467 (1871).
American courts likewise adhered to the de facto officer doctrine as a corollary to the exclusive quo warranto remedy. See Cocke v. Halsey, 41 U.S. 71, 81-88 (1842); Taylor v. Skrine, 5 S.C.L. 516, 516-17 (S.C. 1815); Fowler v. Bebee, 9 Mass. 231, 234-35 (1812); People ex rel. Bush v. Collins, 7 Johns. 549, 554 (N.Y. 1811) (per curiam). Notably, these courts upheld the actions of invalid officers who did not meet constitutional conditions on their offices. An officer might not have taken an oath. Cf. Bucknam v. Ruggles, 15 Mass. 180, 182-83 (1818) (per curiam). Or the officer might have been appointed in an illegal way. Cf. Ex parte Ward, 173 U.S. 452, 454 (1899). Or the officer might have flunked an eligibility requirement. Perhaps the officer was too young. Cf. Blackburn v. State, 40 Tenn. 690, 690-91 (1859). Or maybe the officer had been in the Congress that increased the office‘s salary before taking office. Cf.
Courts granted much broader relief for this type of claim. Parties affected by an illegal office did not need to sue in quo warranto to dispute the officeholder‘s power to perform the challenged function. Parties instead could dispute the officer‘s conduct “in any kind” of suit. Walcott v. Wells, 24 P. 367, 370 (Nev. 1890); Mecham, supra, §§ 324-26, at 216-18. And the opposing party could not defend the officer‘s past acts using the de facto officer doctrine. Constantineau, supra §§ 34-36, at 51-55. The officer instead was “merely a usurper, to whose acts no validity can be attached[.]” Norton v. Shelby County, 118 U.S. 425, 449 (1886).
This rule extended to constitutional defects. The Supreme Court may have followed it as early as United States v. Yale Todd (U.S. 1794). United States v. Ferreira, 54 U.S. 40, 52-53 (1851) (note by Taney, C.J.). This unreported case addressed a law allowing pensions for disabled Revolutionary War veterans. The law ordered circuit courts to determine whether applicants were disabled and to send their findings to the Secretary of War. Circuit judges (including Supreme Court Justices) found that the law unconstitutionally gave courts executive power by making them the Secretary‘s administrators. Hayburn‘s Case, 2 U.S. 408, 410 n.* (1792). Given the law‘s benevolent goals, though, some judges awarded pensions by claiming to act as “commissioners.” See Wilfred J. Ritz, United States v. Yale Todd (U.S. 1794), 15 Wash. & Lee L. Rev. 220, 228-29 (1958). Congress ordered the Attorney General to seek Supreme Court review of pensions granted by judges “styling themselves commissioners.” Act of Feb. 28, 1793, 1 Stat. 324, 325. In Yale Todd‘s case, the Court required him to return the funds. Ritz, supra, at 228-30. As others have noted, the Court may well have found the judges’ actions void because they unconstitutionally undertook executive functions. Ferreira, 54 U.S. at 53 (note by Taney, C.J.); Keith E. Whittington, Judicial Review of Congress before the Civil War, 97 Geo. L.J. 1257, 1270-74 (2009).
Many decisions followed this remedial approach for claims that a legislative body had granted functions to an office that it could not lawfully possess. See Town of Decorah v. Bullis, 25 Iowa 12, 18-19 (1868); Hildreth‘s Heirs, 24 Ky. at 207-08; G. L. Monteiro, Annotation, De Jure Office as Condition of De Facto Officer, 99 A.L.R. 294 § III(a) (1935), Westlaw (database updated 2022). When, for example, a legislature assigned local-government functions to a board of commissioners that the state constitution vested in justices of the peace, the Supreme Court treated the board‘s actions as void. Norton, 118 U.S. at 441-49. It refused to apply the de facto officer doctrine because that doctrine required a valid (“de jure“) office. Id. at 444-45.
The Supreme Court‘s modern cases also treat an officer‘s actions as void if the generic office could “not lawfully possess” the power to take them. Collins, 141 S. Ct. at 1788. The Court thus found invalid a bankruptcy judge‘s decision in a suit that
2
This “long history of judicial review” has relevance for Calcutt‘s request that we vacate the FDIC‘s order in his case because invalid removal protections shielded two of its оfficers. Armstrong, 575 U.S. at 327. To begin with, the history refutes the theory that the Constitution of its own force compels courts to treat as “void” any action taken by officers whose exercise of an office does not comport with a constitutional command. That view would treat the de facto officer doctrine itself as unconstitutional. Yet it formed part of the legal backdrop against which the founders enacted the Constitution. Near the founding, judges described the doctrine as “a well settled principle of law,” Bush, 7 Johns. at 554, or “too well established to admit of a doubt,” Taylor, 5 S.C.L. at 517. Nothing in the Constitution can be read to do away with it.
This history also highlights the key inquiry for deciding whether courts may vacate an officer‘s actions as a “judge-made remedy” when a statute unconstitutionally limits the President‘s removal authority. Armstrong, 575 U.S. at 327. Does the unconstitutional removal provision show that Congress vested “sovereign functions” in an invalid office that cannot possess them? Mecham, supra, § 4, at 5; Norton, 118 U.S. at 449. If so, courts should treat the officer‘s actions as void wherever they arise. Or is the removal provision “distinct from the provisions creating the . . . office” such that the office itself is valid “even assuming that the [removal provision] is” not? McMartin, 43 N.W. at 572; Carroll, 38 Conn. at 449. If so, courts should enforce the officer‘s acts in suits involving third parties (in contrast to suits between the government and the officer).
Unfortunately for Calcutt, his claim falls on the wrong side of this divide. He does not even argue that the two executive officers (the CFPB Director and administrative law judge) sat in offices that constitutionally “could not exist” (because, for example, the Constitution vested their duties in another branch). Ashley v. Bd. of Supervisors of Presque Isle Cnty., 60 F. 55, 65 (6th Cir. 1893). Indeed, his argument‘s very premise—that Congress has illegally insulated the officers from the President—assumes that they perform executive functions. Cf. Seila Law, 140 S. Ct. at 2209. So I would treat the constitutional “condition” in this case (that an officer be accountable to the President) like other constitutional conditions the violation of which does not void an officer‘s acts. The condition is not much different than, say, a condition that an officer be of a certain age, see Blackburn, 40 Tenn. at 690-91, or be elected rather than appointed, see Constantineau, supra, § 192, at 264-65. If statutes departing from these mandates did not render an officer‘s actions void, I fail to see why an unconstitutional removal provision would. Under traditional remedial principles, then, Calcutt could not obtain the relief that he seeks in this case.
Challenges to the validity of removal provisions instead arose in employment disputes. See Humphrey‘s Executor v. United States, 295 U.S. 602, 618-19 (1935); Myers, 272 U.S. at 106; cf. Shurtleff v. United States, 189 U.S. 311, 311-12 (1903); Reagan v. United States, 182 U.S. 419, 424 (1901); Ex parte Hennen, 38 U.S. 230, 256-57 (1839). A discharged officer would sue to recover a salary (or seek reinstatement) on the ground that the termination violated a tenure-protection statute. Myers, 272 U.S. at 106. The government would respond that the statute could not restrict the President‘s power. Id. This different kind of suit required courts to resolve the constitutional question. Courts “almost universally recognized” that the de facto officer doctrine did not apply because the suit was between the government and the officer (not a third party) and because only valid officers could receive salaries. Constantineau, supra, § 236, at 331; 2 James Kent, Commentaries on American Law 355 n.2 (11th ed. 1867).
Modern precedent confirms my conclusion. The Supreme Court‘s recent cases have all held that unconstitutional removal provisions do not render the office to which they attach invalid or require courts to find actions taken by the officers void. See Collins, 141 S. Ct. at 1787-89; Seila Law, 140 S. Ct. at 2207-11; Free Enter. Fund, 561 U.S. at 508-10. Take Free Enterprise Fund. There, accountants under investigation by the Public Company Accounting Oversight Board filed an Ex Parte Young suit seeking to enjoin all of the Board‘s actions as void because of its removal protections. See 561 U.S. at 487, 491 n.2, 508. The Court agreed that various removal provisions unconstitutionally intruded on the President‘s authority. Id. at 492-98. But it refused to treat the Board‘s actions as void. Id. at 508-10. It held that the Board could perform the executive functions assigned to it despite the invalid removal provisions because they were “severable from the remainder of the statute.” Id. at 508. The Court analyzed this issue in terms of “severability.” See id. at 509. But it could just as well have reasoned that the unconstitutional statutes did not render the Board‘s actions void in third-party suits and so did not entitle the accountants to their requested remedy. Cf. McMartin, 43 N.W. at 572; Harrison, supra, at 73-75.
Seila Law fits a similar mold. The CFPB in that case issued a civil investigative demand seeking documents from a law firm. 140 S. Ct. at 2194. The firm refused to comply, so the CFPB filed a petition to enforce its demand. Id. The district court rejected the firm‘s request to deny the CFPB‘s petition on the ground that its Director‘s removal protections rendered all CFPB actions void. Id. After agreeing that the protections were unconstitutional, the controlling Supreme Court opinion again
Most recently in Collins, the Court expressly held that unconstitutional removal provisions do not render an officer‘s past actions void in suits by third parties. Headed by a director with removal protections, the agency in Collins served as the conservator to two large mortgage-financing companies. 141 S. Ct. at 1771-72. This agency entered into agreements with the Department of Treasury requiring the companies to pay large dividends to the Treasury. Id. at 1772-74. The companies’ shareholders sued to compel the Treasury to return the dividends on the ground that the director‘s removal protections were unconstitutional and that they voided the agency‘s past acts (including the challenged agreements). Id. at 1775. Although the Court agreed that the removal protections were unconstitutional, id. at 1783-87, it rejected the broad remedy, id. at 1787-89. The Court found “no reason to regard any of the actions taken by the” agency “as void” simply because its head had been protected by invalid removal provisions. Id. at 1787.
All told, under traditional remedial rules, unconstitutional removal provisions do not render the offices to which they attach invalid and so do not allow courts to vacate the actions of officers as void in suits by third parties. This tradition compels me to reject Calcutt‘s proposed remedy.
3
I end with two disclaimers about things I need not decide. Disclaimer One: Congress may generally displace judge-made remedial principles. Armstrong, 575 U.S. at 327-29. Congress, for example, has sometimes restricted a court‘s power to grant Ex Parte Young‘s injunctive relief for violations of federal law. See id. And Bowsher teaches that Congress may adjust the relief for structural constitutional claims too. There, the Court followed the statutory remedy once it found that Congress had illegally entrusted a legislative officer with executive duties. 478 U.S. at 734-35. Congress thus may permit courts to vacate actions taken by officers subject to unconstitutional removal protections even if traditional judge-made remedial limits would foreclose relief.
Has Congress done so here? The FDIC‘s statute incorporates the APA.
In most structural constitutional cases, however, a private party claims that the challenged action itself is “contrary to constitutional right.”
And even if the APA expanded the available relief, recall that it requires courts to take “due account” “of the rule of prejudicial error.”
Disclaimer Two: The parties assume that the FDIC performs only executive functions. Our resolution should not be taken to have impliedly adopted that premise. The FDIC did not just prosecute this action. It also adjudicated the action—finding Calcutt guilty and imposing a punishment on him in the form of an end to his career and a $125,000 penalty. Once an Article III court finally enters the picture, moreover, it may review the FDIC‘s factual findings only under a deferential substantial-evidence test—a test that has been called more deferential than the one governing our review of a district court‘s factual findings. See Dickinson v. Zurko, 527 U.S. 150, 153 (1999).
Yet both Article III and the Due Process Clause generally require the government to follow common-law procedure (including, fundamentally, the use of a “court“) when seeking to deprive people of their private rights to property or liberty. See Stern, 564 U.S. at 482-84; Caleb Nelson, Adjudication in the Political Branches, 107 Colum. L. Rev. 559, 569-70 (2007). At first blush, one might think that the FDIC has sought to deprive Calcutt of his “core private rights” to both. B&B Hardware, Inc. v. Hargis Indus., Inc., 575 U.S. 138, 171 (2015) (Thomas, J., dissenting). According to Blackstone, Calcutt had a “property” interest in the thousands of dollars that the government seeks to take. See 1 Blackstone, supra, at *134-35. According to Coke, he had a “liberty” interest in continuing in his profession. See 2 Coke, supra, at 47. So perhaps the FDIC has undertaken judicial functions here—functions that the Constitution vests in courts. See Stern, 564 U.S. at 482-84. If the
The government traditionally has responded to this call for more “process” with the defense that its action seeks to vindicate “public rights,” rights that need not be litigated in a court with a jury. See Oil States Energy Servs., LLC v. Greene‘s Energy Grp., LLC, 138 S. Ct. 1365, 1373 (2018); Atlas Roofing Co. v. Occupational Safety & Health Rev. Comm‘n, 430 U.S. 442, 450-51 (1977). And maybe Calcutt did not raise this argument here because a healthy amount of caselaw has accepted that defense in the banking context. See Cavallari v. Off. of Comptroller of Currency, 57 F.3d 137, 145 (2d Cir. 1995); Simpson v. Off. of Thrift Supervision, 29 F.3d 1418, 1422-24 (9th Cir. 1994). Yet this precedent predates the Court‘s recent instructions in cases like Stern, which held that the adjudication of a state tort claim required an Article III court. See 564 U.S. at 487-501. And while Stern did not involve an agency, the Court “recognize[d]” that its cases may not provide “concrete guidance” on the scope of the public-rights doctrine in the administrative context. Id. at 494. Several Justices have also expressed concern with extending the doctrine too far. See Oil States, 138 S. Ct. at 1381-85 (Gorsuch, J., joined by Roberts, C.J., dissenting); B&B Hardware, 575 U.S. at 170-74 (Thomas, J., joined by Scalia, J., dissenting).
There must be some limit to the government‘s ability to dissolve the Constitution‘s usual separation-of-powers and due-process protections by waving a nebulous “public rights” flag at a court. When the government indicts a person for a crime, it also vindicates “public rights” that belong to the community. Spokeo v. Robins, 578 U.S. 330, 345 (2016) (Thomas, J., concurring) (citing Ann Woolhandler & Caleb Nelson, Does History Defeat Standing Doctrine?, 102 Mich. L. Rev. 689, 695-700 (2004)). But the government cannot send people to prison using a hearing room rather than a court room or an administrative officer rather than a jury of peers. N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 70 n.24 (1982) (plurality opinion). Why should this case be different simply because Calcutt must pay a civil penalty rather than a criminal fine? Cf. Jarkesy v. SEC, __ F.4th __, 2022 WL 1563613, at *2-7 (5th Cir. May 18, 2022). The FDIC one day must provide answers to these questions in a case that does not assume them.
C. Remedy for Appointments Clause Violation
Calcutt lastly challenges the FDIC‘s remedy for an undisputed constitutional wrong. The Appointments Clause sets the ground rules for the appointment of officers.
To decide what Lucia meant by its “new hearing” remedy, my colleagues engage in a cost-benefit balance that resembles the Supreme Court‘s test for whether a court should suppress evidence in a criminal trial under the Fourth Amendment‘s “exclusionary rule.” Davis v. United States, 564 U.S. 229, 236-38 (2011). They point out that Calcutt‘s remedy would impose heavy administrative costs (because it would require inefficient, duplicative processes). They add that it would offer few private benefits (because it is unnecessary to insulate the valid judge‘s decision from the first hearing‘s “taint“). Based on this prudential balancing, they reject Calcutt‘s claim that the second judge had to ignore items from the first hearing. Their balance seems reasonable enough. But I would reject Calcutt‘s view of Lucia based on structural grounds rooted in the best reading of the Appointments Clause and the Court‘s current approach to judge-made remedies.
At the outset, I do not mean to critique my colleagues for engaging in a cost-benefit inquiry. The Supreme Court‘s instructions in Appointments Clause cases may well be read to contemplate it. See Lucia, 138 S. Ct. at 2055 & nn.5-6; Ryder v. United States, 515 U.S. 177, 182-83 (1995). In Ryder, a court-martialed member of the Coast Guard had his conviction upheld by a panel that included judges whose appointments violated the Appointments Clause. 515 U.S. at 179-80. The Court of Military Appeals affirmed the panel‘s conviction under the de facto officer doctrine. Id. at 180. The Supreme Court reversed and refused to apply this doctrine. It held that “one who makes a timely challenge to the constitutional validity of the appointment of an officer who adjudicates his case is entitled to a decision on the merits of the question and whatever relief may be appropriate if a violation indeed occurred.” Id. at 182-83. Did Ryder look to the “original meaning” of the Appointments Clause to adopt this remedy and reject the de facto officer doctrine? Fin. Oversight & Mgmt. Bd. for P.R. v. Aurelius Inv., LLC, 140 S. Ct. 1649, 1659 (2020). No, the Court rested on a sentence of pure policy: “Any other rule would create a disincentive to raise Appointments Clause challenges[.]” Ryder, 515 U.S. at 183. The Court summarily found the “proper” remedy to be a second appeal before a lawfully constituted panel. See id. at 188.
Lucia followed the same reasoning. It noted that Ryder called for a new hearing before a properly appointed administrative law judge. 138 S. Ct. at 2055. It then added a new requirement: an agency may not assign the case to the judge who initially heard it even if that judge had been properly appointed in the interim. Id. When responding to the claim that this “new judge” remedy was not needed to further the Appointments Clause‘s purposes, the Court reasoned that its remedies in this area have been “designed not only to advance those purposes directly, but also to create ‘[]incentive[s] to raise Appointments Clause challenges.‘” Id. at 2055 n.5 (quoting Ryder, 515 U.S. at 183). In both cases, therefore, the Court chose a remedy to “incentivize” these claims.
Although Ryder might mesh well with Mapp, the Court in recent years has treated these types of judge-made innovations with a healthy dose of skepticism. See Hernandez, 140 S. Ct. at 747. The creation of remedies amounts to “lawmaking” that must balance the benefits of any remedy against its costs. Id. at 741-42. Yet the Constitution reserves this task to Congress, not the courts. See id. As a result, the Court has all but held that Bivens was wrong and has refused to extend it to any other constitutional right for some 40 years. See id. at 742-43 (citing cases); Abbasi, 137 S. Ct. at 1856-58. It has also continued to narrow the scope of the exclusionary rule, acknowledging that it is a “judicially created remedy” that must be applied cautiously only in cases of clear police misconduct. Davis, 564 U.S. at 238 (citation omitted); see, e.g., Utah v. Strieff, 579 U.S. 232, 237-38, 241 (2016); Herring v. United States, 555 U.S. 135, 140-44 (2009).
What do these principles mean for the issue that confronts us? I agree that Ryder and Lucia leave open whether a lawful judge at a “new ‘hearing‘” may rely on evidence developed at the invalid hearing or on orders entered by the invalid judge. Lucia, 138 S. Ct. at 2055 (quoting Ryder, 515 U.S. at 182-83). To resolve the ambiguity, I would read the cases in a way that best comports with the Constitution‘s “original meaning,” Aurelius, 140 S. Ct. at 1659, and with the Court‘s recent guidance to act cautiously before expanding judge-made remedies, Hernandez, 140 S. Ct. at 747. When analyzed in that fashion, the FDIC‘s remedy more than sufficed.
The Appointments Clause does not compel Calcutt‘s conclusion that a valid judge must ignore all prior proceedings before an invalid one. If anything, the clause itself requires no remedy. The de facto officer doctrine broadly applied to claims like Calcutt‘s that an officer had been appointed by the wrong person. See Constantineau, supra, §§ 182-86, at 248-55. An English judge who sat on the first case to enforce the doctrine in 1431 “apparently recognized” its application in this setting. Id. § 182, at 248. American courts routinely relied on it when an officer was unconstitutionally
Ryder and Lucia thus must rest on a power to create judge-made remedies for constitutional violations. But we must act with caution when asked to expand these remedies because the weighing of the costs and benefits amounts to a legislative task, not a judicial one. See Abbasi, 137 S. Ct. at 1856-57. On the benefits side, Calcutt‘s remedy would certainly promote the purposes of the Appointments Clause. See United States v. Arthrex, Inc., 141 S. Ct. 1970, 1979 (2021). But no provision—not even a constitutional one—“pursues its purposes at all costs.” Hernandez, 140 S. Ct. at 741-42 (citation omitted). And Calcutt‘s remedy comes with its burdens too. It would add to the “administrative costs” already associated with the new hearings. Abbasi, 137 S. Ct. at 1856. More fundamentally, courts long recognized that permitting parties to challenge an officer‘s validity at all in appeals of the officer‘s actions could create “endless confusion[.]” Norton, 118 U.S. at 441-42; see Constantineau, supra, § 4, at 7. That is why they channeled these challenges into special suits that would oust officers only prospectively, not into appeals that would reverse their actions retrospectively. See Constantineau, supra, § 451, at 635-36. I see no judicial mode of analysis that can resolve this legislative weighing of interests.
All told, the Court‘s cautious approach to judge-made remedies comports with traditional remedial practice governing challenges to the validity of an officer‘s appointment. See Hernandez, 140 S. Ct. at 742. I thus would not read Ryder and Lucia broadly to compel administrative judges to disregard all that occurred at a prior hearing. I would instead read them literally to compel a new hearing before a properly appointed judge. Calcutt got just that.
III. Statutory Claims
In my view, Calcutt‘s statutory claims fare better. The statute allowing the FDIC to bar bankers from the industry requires it to prove three things: that a banker has engaged in a listed kind of misconduct, that the misconduct will harm the bank (or benefit the banker), and that the banker acted with a culpable state of mind.
A. Misconduct
To remove Calcutt from the Bank, the FDIC first must prove that he engaged in one of three types of misconduct.
(i) violated—
(I) any law or regulation;
(II) any cease-and-desist order which has become final;
(III) any condition imposed in writing by a Federal banking agency in connection with any action on any application, notice, or request by such depository institution or institution-affiliated party; or (IV) any written agreement between such depository institution and such agency;
(ii) engaged or participated in any unsafe or unsound practice in connection with any insured depository institution or business institution; or
(iii) committed or engaged in any act, omission, or practice which constitutes a breach of such party‘s fiduciary duty[.]
1. Unsafe or Unsound Practice. The statute gives the FDIC the power to ban a banker from the profession if the banker has “engaged or participated in any unsafe or unsound practice in connection with any insured depository institution or business institution[.]”
This test was not intuitive to me from a review of the text, so I looked into its origins. One court transparently identified its source: “Because the statute itself does not define an unsafe or unsound practice, courts have sought help in the legislative history.” In re Seidman, 37 F.3d 911, 926 (3d Cir. 1994). The Fifth Circuit started down this path. See Gulf Fed. Sav. & Loan Ass‘n v. Fed. Home Loan Bank Bd., 651 F.2d 259, 263-65 (5th Cir. 1981). Rather than seek out the ordinary meaning of “unsafe or unsound practice,” it jumped to a “lively” debate in the congressional record. Id. at 263. During this debate, the court noted, a few legislators had treated as “authoritative” a definition proposed by an agency chairman. Id. at 264. Under the chairman‘s view, the phrase covered “any action” that “is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to an institution, its shareholders, or the agencies administering the insurance funds.” Id. (citation omitted). The court accepted his view as law. Id. at 264-65.
This straight-from-the-legislative-history test has spread widely since. The few courts with reasoned analysis regurgitate the same bit of legislative history. Seidman, 37 F.3d at 926. Most others, though, simply cite other precedent for this test without considering its origins. See Frontier State Bank v. FDIC, 702 F.3d 588, 604 (10th Cir. 2012); Michael, 687 F.3d at 352; Landry v. FDIC, 204 F.3d 1125, 1138 (D.C. Cir. 2000); Simpson, 29 F.3d at 1425; Doolittle v. Nat‘l Credit Union Ass‘n, 992 F.2d 1531, 1538 (11th Cir. 1993); Nw. Nat‘l Bank v. Dep‘t of Treasury, 917 F.2d 1111, 1115 (8th Cir. 1990).
I am troubled by this approach. The test springs from a mode of interpretation that no Justice on the Supreme Court would endorse today. In recent decades, the Court has given us clear marching orders:
I am also troubled by this approach because courts have chosen it to create a “flexible” statute allowing regulators to address “changing business problems[.]” Seidman, 37 F.3d at 927. What does this even mean? If an agency condones a banker‘s “new business model,” the agency can constrict the statute to give the banker a pass? Henson v. Santander Consumer USA Inc., 137 S. Ct. 1718, 1725-26 (2017). But if the agency disapproves of a competitor‘s practice, it can expand the statute to punish the competitor? This accordion-like view of the rule of law has no place in our constitutional order—one in which the President lacks any “dispensing” prerogative. Cf. Clark v. Martinez, 543 U.S. 371, 382 (2005); McConnell, supra, at 115-19. If anything, this view has things backwards. This statute can deprive citizens of their property and livelihoods. So it would better align with our interpretive traditions if we construed the phrase “strictly” rather than flexibly. 1 Blackstone, supra, *88; United States v. Wiltberger, 18 U.S. 76, 95 (1820). After all, the rule of lenity (the rule that we resolve ambiguities against the government) historically applied not just to criminal laws, but also to all laws considered “penal“—“that is, laws inflicting any form of punishment” like a civil penalty. Wooden v. United States, 142 S. Ct. 1063, 1086 n.5 (2022) (Gorsuch, J., concurring in the judgment). This statute fits that bill. See Proffitt v. FDIC, 200 F.3d 855, 860-62 (D.C. Cir. 2000). At the least, courts should give a phrase that affects core private rights its ordinary meaning—not a malleable one.
How might an ordinary banker interpret the phrase? The legislative history reaches any “imprudent act.” Seidman, 37 F.3d at 932; see Gulf Federal, 651 F.2d at 264. Yet this definition does not adequately account for two parts of the actual text. For starters, the statute uses the word “practice,” not “act.”
American College Dictionary 951 (1970), or a “habitual or
The statute itself contemplates this distinction. One clause bars bankers from engaging in “any unsafe or unsound practice[.]”
Next, the statute does not cover every unsafe or unsound practice in the abstract. Rather, the practice must be “in connection with” a bank.
For the reasons that a D.C. Circuit decision has explained, I would read this clause to cover only “unsafe or unsound banking practices.” Grant Thornton, LLP v. Off. of the Comptroller of the Currency, 514 F.3d 1328, 1332-33 (D.C. Cir. 2008). This definition “harmonizes” this subsection with the rest of § 1818. Id. at 1332. The section includes several other provisions that regulate unsafe or unsound practices “in conducting the business” of a bank, including one permitting the FDIC to issue cease-and-desist orders.
All of this said, courts that apply a broad legislative-history test have recognized that their reading could lead to “open-ended supervision.” Gulf Fed., 651 F.2d at 265. So they compensate by adding a limiting principle that I do not necessarily see in the text either. They have read the phrase “unsafe or unsound practice” to require that an action pose a risk of extreme harm—one that threatens the bank‘s “financial stability,” Seidman, 37 F.3d at 928, or “integrity,” Johnson, 81 F.3d at 204 (quoting Gulf Fed., 651 F.2d at 267). An “unsafe” practice (one that exposes the bank to “danger or risk“) may well require a risk of some harm. 2 Oxford Universal Dictionary 2312 (3d ed. 1968).
Be that as it may, I would save the required financial-risk level for another appeal. When sanctioning Calcutt here, the FDIC did not apply my reading that the statute requires unsafe or unsound banking practices. I would remand for it to do so in the first instance. Most notably, the FDIC nowhere indicated that it must identify a banking “practice” as I read the phrase—i.e., a “habitual or customary action[.]” American Heritage, supra, at 1028. To the contrary, as Calcutt notes, the vast majority of its findings relied on a single loan—the Bedrock Transaction. It concluded, among other things, that Calcutt violated the Bank‘s lending policies and engaged in imprudent lending by approving that transaction. App. 19-21. It is not clear that Calcutt‘s actions with respect to this loan can rise to the level of an unsafe or unsound “practice.” This fact contrasts Calсutt‘s case with those that the FDIC cited—which involved a pattern of bad loans. See, e.g., First State Bank of Wayne Cnty. v. FDIC, 770 F.2d 81, 82-83 (6th Cir. 1985).
2. Breach of Fiduciary Duty.
The statute also gives the FDIC the authority to ban a banker from the profession if the banker has “committed or engaged in any act, omission, or practice which constitutes a breach of such party‘s fiduciary duty[.]”
Start with a choice-of-law question. Citing Atherton v. FDIC, 519 U.S. 213 (1997), my colleagues and Calcutt suggest that the relevant state‘s corporate-governance law supplies the rule of decision for determining whether a banker has breached a “fiduciary duty” within the meaning of
Turn to the substantive standards. The Board held that Calcutt had breached his duty of care to the Bank by acting incompetently in his approval of the Bedrock Transaction and in his failure to manage the Nielson Loans. App. 23-24. But from my review of the FDIC‘s order, I cannot even determine the substantive standards of conduct that it applied. Its order did not use the words “negligence” or “gross negligence.” And for decades, courts have debated which of these standards the statute incorporates. Julie Andersen Hill & Douglas K. Moll, The Duty of Care of Bank Directors and Officers, 68 Ala. L. Rev. 965, 986-92 (2017). The Board also neglected to mention the traditional “business-judgment rule,” the application of which is also contested. Patricia A. McCoy, A Political Economy of the Business Judgment Rule in Banking: Implications for Corporate Law, 47 Case W. Res. L. Rev. 1, 22-60 (1996). Yet another layer in this morass is that in the 1980s, Congress also adopted a “gross negligence” floor to govern the conduct of officers and directors in a related context.
Yet I would not authoritatively answer these choice-of-law or substantive questions now. As I explain below, I would remand to allow the FDIC to reconsider whether Calcutt‘s misconduct was the cause of any of the claimed harms. On remand, I would give the FDIC a chance to clarify its views on these legal questions about the meaning of this fiduciary-duty statute.
B. Causation
The statute next requires the FDIC to prove either that Calcutt‘s misconduct had the potential to harm the Bank or that Calcutt received a benefit from that misconduct. See
(B) by reason of the violation, practice, or breach described in any clause of subparagraph (A)—
- such insured depository institution or business institution has suffered or will probably suffer financial loss or other damage;
- the interests of the insured depository institution‘s depositors have been or could be prejudiced; or
- such party has received financial gain or other benefit by reason of such violation, practice, or breach[.]
The FDIC misinterpreted the causation element in this subparagraph. To show why, I start with the causation basics. The common law has long recognized two types of causation: factual (or “but for“) causation and legal (or “proximate“) causation. See William L. Prosser, Handbook of the Law of Torts §§ 45-46, at 311, 321-22 (1941). But-for causation creates a simple rule. As its name suggests, it requires a plaintiff to show that an injury would not have occurred “but for” the defendant‘s wrongful conduct. See Burrage v. United States, 571 U.S. 204, 211-12 (2014); Univ. of Tex. Sw. Med. Ctr. v. Nassar, 570 U.S. 338, 347 (2013). Suppose, for example, that after a neighbor‘s dam breaks and floods a plaintiff‘s property, the plaintiff sues the neighbor for building the dam negligently. See Restatement (Second) of Torts § 432 illus. 2 (Am. L. Inst. 1965). But-for causation requires a court to ask whether the plaintiff would have suffered this injury (the flooding) in a counterfactual world in which the neighbor did not commit the wrongful act (the negligent construction). See id. § 432(1) & cmt. a. And if a once-in-a-century storm would have caused the flooding even if the neighbor had built the dam to perfection, the negligent construction did not cause the harm. See id. § 432 illus. 2; Burrage, 571 U.S. at 211-12.
Proximate causation arose from the premise that a factual-cause test alone would lead to excessive liability. Prosser, supra, § 45, at 312. Courts recognized that, “[i]n a philosophical sense, the consequences of an act go forward to eternity, and the causes of an event go back to the discovery of America and beyond.” Id. They thus adopted “proximate cause” rules to cut off liability even if a defendant was a but-for cause of harm. Holmes v. Secs. Inv. Prot. Corp., 503 U.S. 258, 268 (1992). As one example, a defendant‘s conduct (say, its failure to keep a ship docked) may set in motion a chain of events that leads another party to negligently cause an injury (say, the captain incompetently runs the ship aground). See Exxon Co., U.S.A. v. Sofec, Inc., 517 U.S. 830, 832-34 (1996). Under a superseding-cause test, courts will not hold the defendant liable if the other party‘s negligence was unforeseeable. Id. at 837. As another example, a defendant‘s misconduct (say, stock manipulation) may directly harm one person (a stockbroker who goes bankrupt) and indirectly harm third parties (the stockbroker‘s creditors). See Holmes, 503 U.S. at 262-63. Under a directness test, courts will not allow the third parties to recover. Id. at 271-72.
These common-law rules have significance in this case. The Supreme Court presumes that Congress enacts statutory text with common-law concepts in mind. See Lexmark Int‘l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 132 (2014). It thus has long read common-law causation rules into statutes that use causal language like “because of” or “results from.” See Burrage, 571 U.S. at 213-14; Nassar, 570 U.S. at 350-52. Congress used one such phrase (“by reason of“) here. The FDIC must prove that the Bank suffered (or will likely suffer) a loss or that Calcutt received a benefit “by reason of” his misconduct.
But the FDIC has not adopted these causation rules. Its enforcement orders have all but ignored but-for cause. In fact, I have found only one such order that even used this phrase. See In re Adams, 1997 WL 805273, at *5 (F.D.I.C. Nov. 12, 1997). And it suggested that a “‘but for’ relationship” was not required. Id. (quoting ABKCO Music, Inc. v. Harrisongs Music Ltd., 772 F.2d 988, 995-96 (2d Cir. 1983)). The FDIC also failed to mention but-for cause in this case. It simply indicated: “An actual loss is not required; a potential loss is sufficient so long as the risk of loss to the Bank was ‘reasonably foreseeable’ to
The FDIC‘s legal error is all the more pronouncеd for proximate causation. For years, it has rejected outright any need to prove this causation. See Adams, 1997 WL 805273, at *5; In re ***, 1985 WL 303871, at *114 (F.D.I.C. Aug. 19, 1985). It did so in this case too, noting that “an individual respondent need not be the proximate cause of the harm to be held liable[.]” App. 26-27. Confusingly, however, the FDIC suggested that the loss needs to be “foreseeable.” App. 26, 31. Foreseeability is one component of the proximate-causation requirement that the FDIC said it was rejecting. See Hemi Grp., LLC v. City of New York, 559 U.S. 1, 12 (2010). If the FDIC meant to imply that the statute incorporates only proximate cause‘s foreseeability element, it still erred. Proximate causation contains a group of concepts other than foreseeability. See id. So the Supreme Court has already rejected this type of argument that a federal statute contains only a foreseeability test. See Bank of Am. Corp. v. City of Miami, 137 S. Ct. 1296, 1305-06 (2017).
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Maybe we could overlook the FDIC‘s failure to identify the governing causation law if it correctly applied that law to Calcutt. But it did no such thing. The FDIC held Calcutt responsible for three injuries to the Bank and one benefit to him. The Bank incurred $6.443 million in charge-offs from the Nielson Loans. App. 27-29. It incurred a $30,000 charge-off from the $760,000 Bedrock Transaction. App. 27. And it paid its lawyers and accountants for work related to these loans. App. 29-31. Calcutt lastly received dividends from the Bank‘s holding company despite the loans’ poor condition. App. 31-32. None of these “effects” sufficed.
As an initial matter, I agree with my colleagues that the FDIC failed to explain why the statute should even cover fees paid to lawyers or accountants. The statute reaches “financial loss or other damage” from Calcutt‘s misconduct.
That leaves the other three “effects.” The FDIC did not apply basic causation rules to any of them. Most tellingly, the FDIC held Calcutt responsible for all $6.443 million in charge-offs on the $38 million in Nielson Loans—that is, for the entire loss. App. 27-28; see id. at 6-7. But these loans were underwater in the aftermath of the Great Recession before Calcutt committed most of the identified misconduct. App. 625-26. As with my hypothetical about the negligently made dam, then, the FDIC needed to ask a “counterfactual” question: How much in charge-offs would the Bank have incurred if Calcutt had not engaged in that misconduct? Comcast, 140 S. Ct. at 1015. Suppose that the (hopefully) once-in-a-century recession would have caused $7 million in charge-offs if the Bank started collection efforts immediately because of the collapsed real-estate market. If so, a decision to enter into the Bedrock Transaction would have helped (not harmed) the Bank. And Calcutt‘s misconduct (for example, the failure to undertake the usual underwriting efforts, see App. 19) could not be described as a but-for cause of loss. I see nothing in the record on appeal that would help answer this critical but-for question, confirming that the FDIC did not even ask it.
The same error underlies the FDIC‘s decision to hold Calcutt liable for the $30,000 charge-off for the Bedrock Transaction. App. 27. The FDIC did not consider the “counterfactual” of what would have occurred if Calcutt had not engaged in misconduct. Comcast, 140 S. Ct. at 1015. As a generic matter, the Bank suffered a total of $6.473 million in charge-offs on all Nielson Loans (including the Bedrock Transaction) and the FDIC needed to consider the amount of likely charge-offs without this transaction. Would it have lost more? Less? The FDIC did not ask these questions. More granularly, Calcutt told the FDIC that the administrative law judge had erred “by failing to tether the $30,000 charge-off (and other actual and potential losses) to specific acts of misconduct[.]” App. 27. The judge found, for instance, that Calcutt breached his fiduciary duty of candor to the Bank‘s directors by failing to seek their preapproval for the Bedrock Transaction. App. 25-26. Suppose the directors would have approved the transaction even if he had done so. How could this specific misconduct have caused this harm? The FDIC responded that it was “unpersuaded” by this causation argument because the Bedrock Transaction was a “main focus” of the hearing and the judge catalogued Calcutt‘s many misdeeds in approving it. App. 27. This (non)response said nothing about causation—an element distinct from misconduct.
Both but-for and proximate-cause problems undergird the FDIC‘s decision that Calcutt benefited from his misconduct. He was the largest shareholder of the Bank‘s holding company, and the FDIC held that his misconduct allowed him to obtain a dividend from this company. App. 31-32. Its conclusion rested on the administrative law judge‘s finding that the Bank paid its own shareholder (the holding company) a $462,950 dividend in mid-2011 and that the FDIC would not have approved this payment (to the holding company) if it had known that the Nielson Loans were not
As a matter of proximate causation, the FDIC failed to consider a “directness” issue. If “by reason of” incorporates usual proximate-cause rules, it would require that Calcutt directly benefit from his misconduct. Under the FDIC‘s theory, though, the holding company was the direct beneficiary that received the dividend; Calcutt was an indirect beneficiary as a shareholder of that separate company. Is this a sufficiently “direct” benefit (analogous to a larger salary)? “The general tendency” in the law has been “not to go beyond the first step.” Bank of Am., 137 S. Ct. at 1306 (citation omitted). And this theory potentially rests on the “independent” decision of the holding company. Hemi, 559 U.S. at 15. But I would leave this question for the FDIC.
All told, I would remand for the FDIC—the fact finder—to apply the correct causation rules to the two charge-offs and the dividend payment in the first instance. My colleagues recognize many of the FDIC‘s legal errors but say there is no need to remand. I disagree. They first invoke the deferential substantial-evidence test. But that test governs our review of the agency‘s factual findings. See Dickinson, 527 U.S. at 162. I do not quibble with those. I take issue with the FDIC‘s failure to follow the proper causation law. The substantial-evidence test has nothing to say on that subject. And even the FDIC does not claim that we should defer to its legal views. See Grant Thornton, 514 F.3d at 1331; cf. Epic, 138 S. Ct. at 1629-30.
If anything, my colleagues’ analysis runs afoul of basic administrative-law principles. When an agency‘s decision rests on a collapsed legal foundation, we cannot affirm the decision on the ground that the agency might have reached the right outcome under a correct legal view. We must let the agency apply the proper law in the first instance. See Gonzales v. Thomas, 547 U.S. 183, 186 (2006) (per curiam); SEC v. Chenery Corp., 318 U.S. 80, 88 (1943); Henry J. Friendly, Chenery Revisited: Reflections on Reversal and Remand of Administrative Orders, 1969 Duke L.J. 199, 209-10. But my colleagues all but find facts by applying their view of the law to the record. Recall, for example, that the FDIC held Calcutt liable for all $6.443 million in charge-offs on the Nielson Loans—a finding that leaves no doubt that the agency erred. My colleagues do not defend this finding. They nevertheless say that the FDIC “could have” found that Calcutt‘s misconduct caused some unquantified percentage of the losses. Maj. Op. 48. But this “judicial judgment cannot be made to do service for an administrative judgment.” Chenery, 318 U.S. at 88.
Even if we could now find Calcutt liable for an (unknown) loss amount on a good-enough-for-government-work approach, I would still remand. The statute says that the FDIC “may” seek to remove a banker—not that it must do so—when the other requirements are met.
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For these reasons, I respectfully dissent.