FDIC enforcement
CBW Bank v. Federal Deposit Insurance Corporation
Date: Jan. 21, 2025
Issue: Whether the Federal Deposit Insurance Corporation’s (FDIC) $20.4 million civil money penalty (CMP) against CBW Bank via an in-house proceeding is unlawful per the Supreme Court’s Jarkesy ruling.
Case Summary: ABA filed a coalition amicus brief in Kansas federal court supporting CBW Bank in its lawsuit challenging FDIC’s authority to seek a $20.4 million CMP via an in-house proceeding, following the U.S. Supreme Court’s decision in SEC v. Jarkesy.
In Jarkesy, the U.S. Supreme Court upheld a Fifth Circuit decision that found the SEC’s use of its in-house judicial forum unconstitutional under the Seventh Amendment when imposing CMPs. 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 determined that 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.
On Nov. 19, 2024, FDIC filed a notice of charges to assess a CMP against CBW Bank related to its discontinued correspondent banking and money services businesses. Before proposing the penalty, FDIC conducted regular examinations of CBW’s Bank Secrecy Act (BSA) and anti-money laundering (AML) compliance as part of its routine supervisory authority. CBW Bank claimed that this oversight found no evidence suggesting deliberate misconduct or reckless or willful disregard of AML risks by the bank or its employees. CBW Bank sued FDIC, alleging the CMP imposed via an in-house proceeding violated its Seventh Amendment right to a jury trial under Jarkesy. CBW Bank also alleged the CMP was unreasonable and unprecedented for a bank of its size, complexity, and supervisory history. CBW also filed a motion for a preliminary injunction to enjoin the FDIC proceedings against it.
FDIC argued that CBW cannot win its Seventh Amendment claim because the public rights exception allows FDIC to adjudicate the case without a jury. FDIC asserted that the public rights exception applies since its CMP action addresses governmental prerogatives, protects sovereign interests historically resolved without a jury, and enforces BSA, which lacks common-law roots. Put differently, under FDIC’s view, the entire field of banking enforcement would satisfy the “public rights” exception and operate in a Seventh Amendment-free zone. FDIC also claimed that the district court lacks subject matter jurisdiction because Section 1818(i)(1) prohibits interference with its enforcement proceedings. Lastly, FDIC contended that CBW’s challenge to the removability of ALJs is invalid based on U.S. Supreme Court and Tenth Circuit precedent.
In its brief, ABA made two main arguments. First, ABA argued that Section 1818(i)(1) of the Federal Deposit Insurance Act (FDIA) does not block district courts from exercising jurisdiction or reviewing collateral constitutional claims. ABA claimed that CBW’s Seventh Amendment challenge targets the FDIA’s statutory review scheme itself, making it a structural issue. While Section 1818(i)(1) may prevent federal courts from reviewing the merits of ongoing FDIC proceedings, it does not bar jurisdiction over structural or collateral constitutional challenges. ABA pointed out that Congress must clearly express its intent to block judicial review of constitutional claims. In Burgess v. FDIC, the Northern District of Texas confirmed that Section 1818(i)(1) does not explicitly prohibit courts from reviewing such claims. ABA also warned that FDIC’s interpretation of Section 1818(i)(1) would block judicial review of the unconstitutional enforcement regime used by banking agencies. This interpretation would force banks and bankers to endure years of unconstitutional agency proceedings before they could assert their Seventh Amendment rights. According to ABA, FDIC’s stance essentially requires banks to waive their right to stop constitutional violations and only seek remedies afterward. This process would force regulated parties into biased in-house proceedings, causing irreparable constitutional harm. ABA argued that such an outcome undermines the Seventh Amendment and the role of Article III courts in preventing government abuse.
ABA also noted that FDIC’s reading of Section 1818(i)(1) would violate the Seventh Amendment and conflict with Jarkesy by effectively foreclosing judicial review of the banking agencies’ unconstitutional enforcement regime. FDIC, along with three other financial regulators, created the Office of Financial Institution Adjudication (OFIA) through an interagency memorandum to hear banking enforcement cases. The two ALJs at OFIA are appointed by the banking agencies, can be overruled by those agencies, and are subject to removal through agency-initiated proceedings. ABA argued that this structure allows the agencies to act as both prosecutor and judge in their own cases, creating an unavoidable bias. Put differently, ABA stressed that banks in FDIC’s in-house tribunals face structural embedded biases – including formal presumptions that enshrine deference to the opinions and determinations of the same agency staff that recommended initiating an enforcement action in the first place.
Second, ABA argued that FDIC’s civil penalty action does not meet the criteria for the “public rights” exception. Instead of disputing that its civil penalty action triggers the Seventh Amendment, FDIC relied on the “public rights” exception to claim that CBW does not have a right to a jury trial in an Article III court. This exception allows Congress to assign certain cases to agencies for internal adjudication when they involve public rights. FDIC argued that bank enforcement actions “directly implicate public funds” and are therefore similar to cases the U.S. Supreme Court has classified under the public rights exception. However, ABA countered that FDIC’s argument would improperly extend the doctrine to all banking enforcement actions, ignoring the Supreme Court’s directive in SEC v. Jarkesy that the exception requires “close attention to the basis for each asserted application.”
ABA also highlighted that the history of banking regulation distinguishes it from the limited categories of cases involving public rights. ABA noted that FDIC enforcement actions and similar bank enforcement cases closely resemble claims historically recognized at common law. Finally, ABA explained that the Deposit Insurance Fund does not justify reliance on the “public rights” exception, as FDIC contended. 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 FDIC has no factual basis to link its enforcement actions to the fund’s protection.
Bottom Line: On Jan. 21, 2025, the court granted a joint motion to stay all pretrial matters pending resolution of CBW’s motion for a preliminary injunction.
Document: Brief
