Calcutt v. FDIC

598 U.S. 623

• Court: Supreme Court of the United States
• Decided: May 22, 2023
• Docket: 22-714
• Status: Published

Opinion

Per Curiam

SUPREME COURT OF THE UNITED STATES HARRY C. CALCUTT, III v. FEDERAL DEPOSIT INSURANCE CORPORATION ON PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT No. 22–714. Decided May 22, 2023

PER CURIAM. The Federal Deposit Insurance Corporation (FDIC) brought an enforcement action against petitioner, the for- mer CEO of a Michigan-based community bank, for mis- managing one of the bank’s loan relationships in the wake of the “Great Recession” of 2007–2009. After proceedings before the agency concluded, the FDIC ordered petitioner removed from office, prohibited him from further banking activities, and assessed $125,000 in civil penalties. Peti- tioner subsequently filed a petition for review in the Court of Appeals for the Sixth Circuit. That court determined that the FDIC had made two legal errors in adjudicating petitioner’s case. But instead of remanding the matter back to the agency, the Sixth Circuit conducted its own review of the record and concluded that substantial evidence sup- ported the agency’s decision. That was error. 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.” SEC v. Chenery Corp., 332 U. S. 194, 196 (1947). “[A]n agency’s discretionary order [may] be upheld,” in other words, only “on the same basis articulated in the order by the agency itself.” Burlington Truck Lines, Inc. v. United States, 371 U. S. 156, 169 (1962). By affirming the FDIC’s sanctions against petitioner based on a legal ra- tionale different from the one adopted by the FDIC, the Sixth Circuit violated these commands. We accordingly grant the petition for certiorari limited to the first question 2 CALCUTT v. FDIC

presented; reverse the judgment of the Sixth Circuit; and order that court to remand this matter to the FDIC so it may reconsider petitioner’s case anew in a manner con- sistent with this opinion. I Under §8(e) of the Federal Deposit Insurance Act (FDIA), 12 U. S. C. §1818(e), as amended by the Financial Institu- tions Reform, Recovery, and Enforcement Act of 1989, §903, 103 Stat. 453, the FDIC may remove and prohibit individu- als from working in the banking sector if certain conditions are met. First, the FDIC must determine that an individual committed misconduct. That occurs when, as relevant here, the individual has “engaged or participated in any unsafe or unsound practice,” or breached his “fiduciary duty.” §§1818(e)(1)(A)(ii)–(iii). Second, the FDIC must find that a bank or its depositors were harmed, or that the individual personally benefited, “by reason of ” the individual’s mis- conduct. §1818(e)(1)(B). Finally, the individual’s miscon- duct must “involv[e] personal dishonesty” or “demonstrat[e] willful or continuing disregard . . . for the safety or sound- ness” of the bank. §1818(e)(1)(C). In this case, the FDIC brought an enforcement action un- der these provisions against petitioner Harry C. Calcutt, III. From 2000 to 2013, Calcutt served as CEO of North- western Bank, headquartered in Traverse City, Michigan. During Calcutt’s tenure, the Bank developed a lending re- lationship with the Nielson Entities, a group of 19 family- owned businesses that operate in the real estate and oil in- dustries. In 2009, the lending relationship—by then, the Bank’s biggest—began to sour. On September 1 of that year, facing financial difficulties due to the Great Reces- sion, the Entities stopped paying their loans outright. At the time, they owed the Bank $38 million. A few months later, the parties reached a multistep agreement known as the Bedrock Transaction to bring all Cite as: 598 U. S. ____ (2023) 3

of the Entities’ loans current. That agreement stabilized the Nielson lending relationship for the following year. But on September 1, 2010, the Entities again stopped making their loan payments. Another short-term agreement was reached, allowing the Entities to continue servicing their debt for the next few months. But in January 2011, the Entities once more stopped making their loan payments. They have remained in default ever since. On April 13, 2012, the FDIC opened an investigation into the Bank’s officers for their role in the Nielson matter. The investigation concluded on August 20, 2013, at which time the agency issued a notice of intention to remove petitioner as well as two other Bank executives from office, and to pro- hibit them from further participation in the banking indus- try. The agency also issued a notice of assessment of civil penalties. The bases for the proposed sanctions were the agency’s allegations that petitioner had, in violation of §1818(e), mishandled the Nielson Entities lending relation- ship in various ways: The Bedrock Transaction failed to comply with the Bank’s internal loan policy; the Bank’s board of directors was misled or misinformed of the nature of the Transaction; petitioner failed to respond accurately to FDIC inquiries about the Transaction; and the Transac- tion was misreported on the Bank’s financial statements. On October 29, 2019, an FDIC Administrative Law Judge (ALJ) began a 7-day evidentiary hearing into petitioner’s conduct. Petitioner was among one of 12 witnesses who tes- tified. On April 3, 2020, the ALJ issued his written deci- sion, recommending that petitioner be barred from the banking industry and be assessed a $125,000 civil penalty based on his mishandling of the Nielson Loan relationship. Petitioner appealed the ALJ’s decision to the FDIC Board. The FDIC Board began its review by determining, first, whether petitioner had engaged in an unsafe or unsound banking practice. Such a practice, according to the Board, “is one that is ‘contrary to generally accepted standards of 4 CALCUTT v. FDIC

prudent operation’ whose consequences are an ‘abnormal risk of loss or harm’ to a bank.” App. to Pet. for Cert. 150a (quoting Michael v. FDIC, 687 F. 3d 337, 352 (CA7 2012)). The Board held that standard satisfied, concluding that “the record in this matter overwhelmingly establishes that [petitioner] engaged in numerous unsafe or unsound prac- tices.” App. to Pet. for Cert. 150a. The Board then addressed the issue of causation. In do- ing so, the Board concluded that an individual “need not be the proximate cause of the harm to be held liable under sec- tion 8(e).” Id., at 160a. With that understanding in mind, the Board found that petitioner had caused the Bank harm in three ways: First, the Bank had to charge off (i.e., forgive) $30,000 of one of the loans made in the Bedrock Transac- tion; second, the Bank suffered $6.4 million in losses on other Nielson Loans; and third, the Bank incurred investi- gative, auditing, and legal expenses in managing the Bed- rock Transaction and its fallout. Id., at 159a–166a. Finally, the Board turned to the issue of culpability. It found that the record “well supported” the ALJ’s conclu- sions that petitioner “persistently concealed . . . the true common nature of the Nielson Entities Loan portfolio, [and] problems with that portfolio.” Id., at 167a–168a. The Board also found that petitioner “falsely answered ques- tions presented to him during examinations,” “concealed documents showing the true condition of the loans,” and “falsely testified that Board members had been fully ap- prised of the nature of the Nielson Loan portfolio.” Ibid. Based on these findings, the Board issued a final decision imposing the penalties that the ALJ had recommended. Id., at 184a–185a. Petitioner then filed a petition for review in the Sixth Cir- cuit, identifying several purported errors in the Board’s de- cision. Two are relevant here. First, petitioner contended that the Board had misap- plied the FDIA’s “by reason of ” requirement by concluding Cite as: 598 U. S. ____ (2023) 5

that a showing of proximate cause was not needed. 12 U. S. C. §1818(e)(1)(B). The Sixth Circuit agreed. The court “observed that [t]he Supreme Court has repeatedly and explicitly held that when Congress uses the phrase ‘by reason of ’ in a statute, it intends to require a showing of proximate cause.” 37 F. 4th 293, 329 (2022) (some internal quotation marks omitted); see also ibid. (citing for that proposition Hemi Group, LLC v. City of New York, 559 U. S. 1, 9 (2010), and Holmes v. Securities Investor Protection Corporation, 503 U. S. 258, 268 (1992)). Second, petitioner argued that he had not proximately caused the harms that the Board had identified or, in the alternative, that those harms did not qualify as harmful ef- fects as a matter of law. See §1818(e)(1)(B). The Sixth Cir- cuit agreed in part. Petitioner had indeed proximately caused the $30,000 charge off on one of the Bedrock Trans- action loans, the court held, because he had “participated extensively in negotiating and approving the Bedrock Transaction.” 37 F. 4th, at 330. But the $6.4 million in losses on other Nielson Loans were a different matter. Pe- titioner could be held responsible only for “part” of that harm, the court explained, because “[t]he Bank probably would have incurred some loss no matter what Calcutt did.” Id., at 331. Finally, none of the investigative, auditing, and legal expenses incurred in dealing with the Nielson Entities could qualify as harms to the Bank, because those expenses occurred as part of the Bank’s “normal business.” Ibid. Despite identifying these legal errors in the Board’s anal- ysis, the Sixth Circuit nevertheless affirmed the Board’s de- cision by a 2-to-1 vote. The court concluded that substantial evidence supported the Board’s sanctions determination, even though the Board never applied the proximate cause standard itself or considered whether the sanctions against Calcutt were warranted on the narrower set of harms that the Sixth Circuit identified. See id., at 333–335. We now reverse. 6 CALCUTT v. FDIC

II It is a well-established maxim of administrative law that “[i]f the record before the agency does not support the agency action, [or] if the agency has not considered all rele- vant factors, . . . the proper course, except in rare circum- stances, is to remand to the agency for additional investiga- tion or explanation.” Florida Power & Light Co. v. Lorion, 470 U. S. 729, 744 (1985). A “reviewing court,” accordingly, “is not generally empowered to conduct a de novo inquiry into the matter being reviewed and to reach its own conclu- sions based on such an inquiry.” Ibid. For if the grounds propounded by the agency for its decision “are inadequate or improper, the court is powerless to affirm the adminis- trative action by substituting what it considers to be a more adequate or proper basis.” Chenery, 332 U. S., at 196; see also Smith v. Berryhill, 587 U. S. ___, ___ (2019) (slip op., at 15) (“Fundamental principles of administrative law . . . teach that a federal court generally goes astray if it decides a question that has been delegated to an agency if that agency has not first had a chance to address the question”). As both petitioner and the Solicitor General representing respondent agree, the Sixth Circuit should have followed the ordinary remand rule here. That court concluded the FDIC Board had made two legal errors in its opinion. The proper course for the Sixth Circuit after finding that the Board had erred was to remand the matter back to the FDIC for further consideration of petitioner’s case. “[T]he guiding principle, violated here, is that the function of the reviewing court ends when an error of law is laid bare.” FPC v. Idaho Power Co., 344 U. S. 17, 20 (1952); see also Gonzales v. Thomas, 547 U. S. 183, 187 (2006) (per curiam) (remanding to agency based on failure by Court of Appeals to “appl[y] the ordinary remand rule” (internal quotation marks omitted)); INS v. Orlando Ventura, 537 U. S. 12, 18 (2002) (per curiam). The Sixth Circuit, for its part, believed that remand was Cite as: 598 U. S. ____ (2023) 7

unnecessary because it “would result in yet another agency proceeding that amounts to ‘an idle and useless formality.’ ” 37 F. 4th, at 335 (quoting NLRB v. Wyman-Gordon Co., 394 U. S. 759, 766, n. 6 (1969) (plurality opinion)). It is true that remand may be unwarranted in cases where “[t]here is not the slightest uncertainty as to the outcome” of the agency’s proceedings on remand. Id., at 767, n. 6. But we have applied that exception only in narrow circumstances. Where the agency “was required” to take a particular ac- tion, we have observed, “[t]hat it provided a different ra- tionale for the necessary result is no cause for upsetting its ruling.” Morgan Stanley Capital Group Inc. v. Public Util. Dist. No. 1 of Snohomish Cty., 554 U. S. 527, 544–545 (2008). That exception does not apply in this case. The FDIC was not required to reach the result it did; the question whether to sanction petitioner—as well as the severity and type of any sanction that could be imposed—is a discretionary judgment. And that judgment is highly fact specific and contextual, given the number of factors relevant to peti- tioner’s ultimate culpability. To conclude, then, that any outcome in this case is foreordained is to deny the agency the flexibility in addressing issues in the banking sector as Congress has allowed. * * * The petition for writ of certiorari is granted limited to the first question presented. The judgment of the Court of Ap- peals for the Sixth Circuit is reversed, and the case is re- manded for further proceedings consistent with this opinion.

It is so ordered.