FDIC in-house proceedings
Burgess v. Federal Deposit Insurance Corporation
Date: Jan. 22, 2025
Issue: Whether the Federal Deposit Insurance Corporation (FDIC) civil enforcement proceedings violate the Seventh Amendment’s constitutional right to a jury trial.
Case Summary: The American Bankers Association filed a coalition amicus brief with the Fifth Circuit supporting Cornelius Campbell Burgess, former CEO of Herring Bank, in his lawsuit challenging the constitutionality of FDIC’s in-house proceedings.
In SEC v. Jarkesy, the Supreme Court, in a 6-3 decision written by Chief Justice John Roberts, upheld the Fifth Circuit’s ruling that the Security and Exchange Commission’s (SEC) use of in-house judicial forums to impose civil money penalties (CMPs) violates the Seventh Amendment. The Court ruled that the SEC’s anti-fraud provisions mirror common-law fraud, bringing the action under the scope of the Seventh Amendment. It also ruled the “public rights” exception to Article III jurisdiction does not apply because the case does not fall into any category of governmental prerogatives that require resolution outside an Article III court without a jury.
FDIC alleged Burgess abused his position while serving as president and CEO of Herring Bank. According to FDIC, Burgess used the bank’s corporate cards to pay his personal expenses. FDIC launched an enforcement proceeding against Burgess before an FDIC administrative law judge (ALJ). The ALJ determined Burgess should be permanently banned from the banking industry and ordered him to pay a $200,000 CMP. Burgess appealed the ALJ’s decision to FDIC, but his appeal was denied.
Afterward, Burgess sued FDIC, arguing its proceedings were unconstitutional on various grounds. Burgess claimed the proceeding deprived him of his Seventh Amendment right to a jury trial. He also claimed a tenure-protected ALJ ran the proceeding, and the agency has an unconstitutionally structured board. The district court granted Burgess a preliminary injunction, but only on his claim that the procedure violated Burgess’ constitutional right to a jury trial. FDIC and Burgess both appealed to the Fifth Circuit, which stayed the appeals while the U.S. Supreme Court considered Jarkesy.
In its brief, ABA made four main arguments. First, ABA argued that the district court correctly held that Burgess is entitled to a jury in an Article III court. In Jarkesy, the Supreme Court clarified that the Seventh Amendment applies to a statutory claim if the claim is “legal in nature,” and courts evaluate whether a suit is “legal in nature” by examining the cause of action and the remedy it seeks. In this case, ABA argued both the cause of action and remedy are legal in nature: a CMP is a “prototypical common law remedy,” and FDIC’s breach of fiduciary duty claim shares a nexus to the common law.
Second, ABA argued that banking agencies’ civil penalty enforcement actions are not wholesale exempt under the “public rights exception.” In FDIC’s view, this exception broadly covers all banking enforcement actions, and banking regulation relates to the “protection of public funds” and thus is comparable to other areas in which the Court has found public rights. ABA explained, however, that the history of banking regulations distinguishes it from the limited categories of “public rights” cases. Federal regulation began only when Congress passed the National Bank Acts of 1863 and 1864. During that time, courts tried cases involving bank misconduct before juries, without removing the right to a jury trial when money damages were at stake. Moreover, ABA claimed the Deposit Insurance Fund does not convert FDIC’s enforcement actions into claims covered by the “public rights” exception. The deposit insurance fund functions like a private insurer, funded by bank assessments, and most actions to secure it are handled in Article III courts. For these reasons, ABA emphasized the FDIC has no factual basis to link its enforcement actions to the fund’s protection.
Third, ABA argued that in-house banking enforcement actions raise serious constitutional concerns that necessitate the protections guaranteed by the Seventh Amendment and Article III. ABA noted that the enforcement schemes of banking agencies restrict the potential for judicial review and lack appropriate checks and balances against conflicted decision-makers. ABA also pointed out that the unfairness of banking agency ALJ proceedings places coercive settlement pressure on banks and almost entirely excludes adjudication of banking supervision and enforcement cases.
Finally, ABA argued that Section 1818(i)(1) of the Federal Deposit Insurance Act gave the district court jurisdiction to consider this collateral structural challenge. ABA underscored that the district court correctly determined that Section 1818(i)(1) does not strip courts of jurisdiction to hear the Seventh Amendment claims. While Section 1818(i)(1) may prevent courts from reviewing the merits of ongoing FDIC proceedings, it does not block jurisdiction over structural constitutional claims that are wholly collateral to the merits.
Bottom Line: As of Feb. 1, oral argument has not yet been scheduled.
Document: Brief
