Calcutt v. Fed. Deposit Ins. Corp.

• Decision Date: 10 June 2022
• Docket Number: 20-4303
• Citation: 37 F.4th 293
• Parties: Harry C. CALCUTT III, Petitioner, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Respondent.
• Court: U.S. Court of Appeals — Sixth Circuit

37 F.4th 293

Harry C. CALCUTT III, Petitioner,

v.FEDERAL DEPOSIT INSURANCE CORPORATION, Respondent.

No. 20-4303

United States Court of Appeals, Sixth Circuit.

Argued: October 20, 2021

Decided and Filed: June 10, 2022

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.

Before: BOGGS, GRIFFIN, and MURPHY, Circuit Judges.

BOGGS, J., delivered the opinion of the court in which GRIFFIN, J., joined. MURPHY, J. (pp. 336-62), 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 , ––– U.S. ––––, 138 S. Ct. 2044, 201 L.Ed.2d 464 (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 cross-examination about bias of the witnesses. He then argues that the FDIC Board failed to find that he had committed misconduct that caused "effects" for Northwestern Bank, as the governing statute, 12 U.S.C. § 1818(e)(1), requires. See Dodge v. Comptroller of Currency , 744 F.3d 148, 152 (D.C. Cir. 2014).

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 , ––– U.S. ––––, 141 S. Ct. 1761, 1789, 210 L.Ed.2d 432 (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 § 1818(e)(1).

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 12 U.S.C. § 1811. It has the authority to impose a range of enforcement remedies. Id. § 1818. These include removal and prohibition orders, in which the FDIC orders "an institution-affiliated party" to be removed from office or "prohibit[s] any further participation by such party, in any manner, in the conduct of the affairs of any insured depository institution." Id. § 1818(e)(1). An institution-affiliated party includes "any director, officer, employee, or controlling stockholder (other than a bank holding company or savings and loan holding company) of, or agent for, an insured depository institution." Id. § 1813(u)(1).

Section 8(e) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1818(e), as amended by the Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA"), P.L. No. 101-73, § 903, 103 Stat. 183, 453–54 (1989), provides that FDIC may remove an institution-affiliated party from office or prohibit the party from participating in conducting the affairs of any insured institution upon establishing three elements: "(1) the banker committed an improper act; (2) the act had an impermissible effect, either an adverse effect on the bank or a benefit to the actor; and (3) the act was accompanied by a culpable state of mind." De la Fuente v. FDIC , 332 F.3d 1208, 1222 (9th Cir. 2003). First, the Board of Directors of the FDIC ("FDIC Board" or "Board") must find that the party has committed misconduct, including engaging in "any unsafe or unsound practice in connection with any insured depository institution" or committing "any act, omission, or practice which constitutes a breach of such party's fiduciary duty." 12 U.S.C. § 1818(e)(1)(A)(ii)–(iii). Second, the Board must find that at least one requisite effect has occurred, i.e., that "by reason of" the party's action, the insured depository institution "has suffered or will probably suffer financial loss or other damage," its depositors have been or could be prejudiced, or the party has received financial gain or other benefit. Id. § 1818(e)(1)(B). Finally, the party must have had a culpable state of mind: The violation must be one that "involves personal dishonesty" or "demonstrates willful or continuing disregard by such party for the safety or soundness of such insured depository institution." Id. § 1818(e)(1)(C).

The FDIC may also issue civil money penalties ("CMPs") under a similar test. See 12 U.S.C. § 1818(i)(2). As relevant here, the agency may impose a "second tier" penalty of $25,000 per day of violation when a party "recklessly engages in an unsafe or unsound practice in conducting the affairs of [an] insured depository institution" or "breaches any fiduciary duty," and that action "is part of a pattern of misconduct," causes more than minimal loss to the institution, or benefits the institution-affiliated party. Id. § 1818(i)(2)(B).

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 id. § 1818(e)(1) ; see also id. § 1818(i)(2)(E)(i) (requiring notice for civil money penalty). The notice must contain a statement of facts establishing grounds for the removal and indicate a time and place for a hearing. Id. § 1818(e)(4). The institution-affiliated party may then appear at the hearing to contest the notice; failure to appear constitutes consent to the order. Ibid.

An ALJ conducts the adversarial hearing in accordance with the Administrative Procedure Act ("APA"), 5 U.S.C. §§ 551 – 559. See 12 U.S.C. § 1818(h)(1) (requiring hearings to be "conducted in accordance with the provisions of chapter 5 of Title 5"). Under the applicable regulations, an ALJ presiding over a removal proceeding has "all powers necessary to conduct a proceeding in a fair and impartial manner and to avoid unnecessary delay," 12 C.F.R. § 308.5(a), including the power to "receive relevant evidence and to rule upon the admission of evidence and offers of proof," id. § 308.5(b)(3) ; "[t]o consider and rule upon all procedural and other motions appropriate in an adjudicatory proceeding ...," id. § 308.5(b)(7) ; and "[t]o prepare and present to the Board of Directors a recommended decision," id. § 308.5(b)(8).

The regulations also provide that evidence that would be admissible under the Federal Rules of Evidence is admissible in adjudicatory proceedings, id. § 308.36(a)(2), and that except as otherwise provided, "relevant, material, and reliable evidence that is not unduly repetitive is admissible to the fullest extent authorized by the Administrative Procedure Act and other applicable law," id. § 308.36(a)(1). If evidence meets this latter standard but would be inadmissible under the Federal Rules of Evidence, the ALJ may not deem the evidence inadmissible. Id. § 308.36(a)(3).

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. Id. § 308.38(a). A party then has thirty days to file written exceptions for the FDIC Board's review objecting to particular matters or omissions in the ALJ's recommendations, but a failure to file an exception on a particular matter is treated as a waiver of that objection, and the Board need not consider any such objections that were not initially raised before the ALJ. Id. § 303.39.

The Board then reviews the ALJ's recommendations and issues a final decision. Id. § 308.40. Its review is "based upon review of the entire record of the proceedings," although it may limit its review to those arguments and exceptions that were raised by the parties. Id. § 308.40(c)(1). After the Board's final decision, a party may petition for review in the United States Court of Appeals for the District of Columbia Circuit or the circuit in which the institution's...