Calcutt v. Federal Deposit Insurance Corporation
Date: May 22, 2023
Issue: Whether the Sixth Circuit erred in affirming the Federal Deposit Insurance Corporation Board’s disciplinary order against Northwestern Bank executive Harry Calcutt, despite the FDIC Board using an incorrect legal standard.
Case Summary: In an unsigned per curiam opinion, the U.S. Supreme Court reversed a Sixth Circuit decision upholding an FDIC disciplinary order against former Northwestern Bank executive Harry Calcutt.
Under section 8(e) of the Federal Deposit Insurance Act (FDIA), FDIC may ban individuals from the banking industry if certain conditions are met. First, FDIC must determine an individual committed misconduct, which occurs when an individual engaged in an unsafe or unsound practice or breached a fiduciary duty. Second, FDIC must determine a bank or its depositors were harmed, or the individual personally benefited, “by reason of” the individual’s misconduct. Finally, the individual’s misconduct must “involve personal dishonesty” or “demonstrate willful or continuing disregard for the safety or soundness” of the bank.
On Aug. 20, 2013, FDIC announced a notice of intention to remove Calcutt and two other bank executives from office and ban them from banking industry. Calcutt served as CEO of Northwestern Bank in Traverse City, Michigan. During his tenure, the bank developed a lending relationship with the Nielson Entities, a group of 19 family-owned businesses that operate in the real estate and oil industries. Northwestern Bank loaned the Nielson Entities over $38 million. But the Nielson Entities defaulted on their loan repayments to Northwestern on multiple separate occasions and had to reach agreements, such as the bedrock transaction, to bring their loans current.
FDIC investigated the bank’s officers for their role in the Nielson matter. FDIC alleged Calcutt violated the FDIA by mishandling the Nielson Entities lending relationship in various ways. According to FDIC: the Bedrock Transaction flouted the bank’s internal loan policy; the bank’s board of directors was misled or misinformed of the nature of the transaction; Calcutt failed to respond accurately to FDIC inquiries about the transaction; and the transaction was misreported on the bank’s financial statements. On Oct. 29, 2019, an FDIC administrative law judge (ALJ) began a seven-day evidentiary hearing into Calcutt’s conduct. The ALJ issued a written decisions recommending Calcutt’s removal from the banking industry and assessed a $125,000 civil penalty.
Afterward, the FDIC Board reviewed the ALJ’s decision. The FDIC Board determined Calcutt engaged in unsafe or unsound banking practices. Addressing causation, the FDIC Board concluded an individual “need not be the proximate cause of the harm to be held liable under section 8(e).” The FDIC Board found that Calcutt caused the bank harm in three ways. First, the bank charged off $30,000 for a bedrock transaction loan. Second, the bank suffered $6.4 million in losses on other Nielson loans. Third, the bank incurred investigative, auditing and legal expenses in managing the bedrock transaction and its fallout. Addressing culpability, the FDIC Board found that Calcutt persistently concealed the truth about the Nielson Entities loan portfolio. Calcutt filed for review in the Sixth Circuit.
In a 2-1 decision, a Sixth Circuit panel affirmed. Calcutt contended the FDIC Board misapplied the FDIAs “by reason of” requirement when it concluded proximate cause is unnecessary to prove liability. The panel agreed, concluding the FDIC Board used an incorrect legal standard to decide to sanction Calcutt. According to the panel, Congress intended a showing of proximate cause in FDIA section 8(e). However, the panel upheld the order against Calcutt, concluding substantial evidence supported the FDIC Board’s sanctions determination, even though it did not apply the proximate cause standard.
The U.S. Supreme Court reversed the panel’s decision, finding the agency’s legal analysis was flawed. The Court emphasized the panel erred by allowing the order against Calcutt to stand, despite the legal error. According to the Court, “it is a simple but fundamental rule of administrative law that reviewing courts must judge the propriety of agency action solely by the grounds invoked by the agency.” The Court explained an agency’s discretionary order must be upheld on the same basis articulated in the order by the agency itself. By affirming FDIC’s sanctions against Calcutt based on a legal rationale different from the one adopted by FDIC in the administrative record, the Court concluded the Sixth Circuit erred.
The Court also declared if the grounds propounded by the agency for its decision are inadequate or improper, a court is powerless to affirm the administrative action by substituting what it considers to be the more proper basis. In the Court’s view, after the Sixth Circuit ruled the FDIC Board erred, the proper course for the Sixth Circuit was to remand the case to FDIC for further consideration. While the Court acknowledged “narrow circumstances” exist where remand is unwarranted, after finding agency error, that exception did not apply. The Court pointed out the decision to sanction Calcutt was “a discretionary judgment” and “highly fact specific and contextual.”
The Court acknowledged remand may be unwarranted when “there is not the slightest uncertainty as to the outcome.” However, the Court emphasized the exception does not apply. The Court explained at the Sixth Circuit, questions remained on whether to sanction Calcutt and the severity and type of sanctions that could be imposed. Further the judgment was highly fact specific and contextual. According to the Court to conclude any outcome was “foreordained” was to deny the agency flexibility in addressing issues in the banking sector as Congress has allowed.
Bottom Line: The Court’s reversal returns the case to the FDIC Board for further review.