Harry Calcutt III v. FDIC

RECOMMENDED FOR PUBLICATION

Pursuant to Sixth Circuit I.O.P. 32.1(b)

File Name: 22a0122p.06

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

┐

HARRY C. CALCUTT III,

│

Petitioner, │

> No. 20-4303

│

v. │

│

FEDERAL DEPOSIT INSURANCE CORPORATION, │

Respondent. │

┘

On Petition for Review of an Order of the Federal Deposit Insurance Corporation;

Nos. FDIC-12-568e; FDIC-13-115k.

Argued: October 20, 2021

Decided and Filed: June 10, 2022

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

_________________

COUNSEL

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.

BOGGS, J., delivered the opinion of the court in which GRIFFIN, J., joined. MURPHY,

J. (pp. 54–91), delivered a separate dissenting opinion.

No. 20-4303 Calcutt v. FDIC Page 2

_________________

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, 138 S. Ct. 2044 (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

No. 20-4303 Calcutt v. FDIC Page 3

he is entitled to relief. See Collins v. Yellen, 141 S. Ct. 1761, 1789 (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

No. 20-4303 Calcutt v. FDIC Page 4

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).

No. 20-4303 Calcutt v. FDIC Page 5

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 home office is located. 12 U.S.C. § 1818(h)(2).

B. FDIC Composition and Structure

The FDIC Board consists of five members: the Comptroller of the Currency, the Director

of the Consumer Financial Protection Bureau (“CFPB”), and three additional directors who are

appointed by the President with the advice and consent of the Senate. 12 U.S.C. § 1812(a)(1).

The Comptroller of the Currency and the CFPB Director are also appointed by the President with

Senate advice and consent. Id. § 2 (Comptroller of the Currency); id. § 5491(b)(2) (CFPB

Director). The Board also incorporates a measure of partisan balancing, with a maximum of

three directors permitted to be members of the same political party. Id. § 1812(a)(2).

No. 20-4303 Calcutt v. FDIC Page 6

The three members of the Board not appointed by virtue of another office serve fixed

terms, and the parties agree that they are not removable at will. During the proceedings before

the ALJs in this case, the CFPB Director also enjoyed for-cause protection from removal under

12 U.S.C. § 5491(c)(3); however, before the Board issued its final order, the Supreme Court held

this removal restriction to be unconstitutional. Seila Law LLC v. Consumer Fin. Prot. Bureau,

140 S. Ct. 2183 (2020). The Comptroller of the Currency’s term lasts for five years “unless

sooner removed by the President, upon reasons to be communicated by him to the Senate,” and

Calcutt concedes that this provision provides for at-will removal. 12 U.S.C. § 2. In practice,

however, the FDIC Board has had several vacancies during the proceedings in Calcutt’s case;

additionally, at least one board member continued to serve after his term expired until a

successor was appointed. See 12 U.S.C. § 1812(c)(3) (providing for continuation of service of

appointed members after expiration of term before a successor is appointed).

The ALJs who hear FDIC removal and prohibition proceedings are part of a pool housed

in the Office of Financial Institution Adjudication (“OFIA”), an interagency body established by

FIRREA that presides over enforcement proceedings brought by the FDIC, the Office of the

Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System

(“FRB”), and the National Credit Union Administration (“NCUA”). See FIRREA § 916, 103

Stat. 183, 486–87 (codified at 12 U.S.C. §1818 note); 12 C.F.R. § 308.3 (defining OFIA as “the

executive body charged with overseeing the administration of administrative enforcement

proceedings” of OCC, FRB, FDIC, and NCUA).1 These agencies signed an agreement that

provides for cost-sharing and specifies that the FDIC is the “Host Agency,” responsible for the

employment of an office staff consisting of ALJs and administrative employees. See Ex. L to

Emergency Motion for Stay Pending Review, at 1–6. The agreement also states: “Any change to

the Office Staff personnel shall be subject to the prior written approval of all Agencies.” Id. at 3.

Two ALJs currently make up the pool in OFIA. See Our Judges, Office of Financial Institution

Adjudication, https://www.ofia.gov/who-we-are/our-judges.html (last visited May 24, 2022).

1

Initially, the Office of Thrift Supervision served as “host agency” for OFIA, but that agency’s

responsibilities were transferred to FRB, OCC, and FDIC in Title III of the Dodd-Frank Wall Street Reform and

Consumer Protection Act, Pub. L. No 111-203, 124 Stat. 1376 (2010).

No. 20-4303 Calcutt v. FDIC Page 7

Until Lucia, these ALJs were not appointed by the FDIC. After the Supreme Court held

in Lucia that SEC ALJs were officers who must be appointed by the President, a court of law, or

a head of department, see 138 S. Ct. at 2051–54, the FDIC Board then newly appointed the same

ALJs without conceding that their previous appointments had been unconstitutional. The FDIC

ALJs may only be removed “for good cause” determined by the Merit Systems Protection Board

(“MSPB”) on the record after an opportunity for a hearing. 5 U.S.C. § 7521(a). Members of the

MSPB, in turn, may be removed by the President “only for inefficiency, neglect of duty, or

malfeasance in office.” 5 U.S.C. § 1202(d).

C. Calcutt’s Actions at Northwestern Bank

With this background, we turn to the facts of the present case. Calcutt was the President,

CEO, and Chairman of the Board of Directors of Northwestern Bank (the “Bank”), which had its

principal place of business in Traverse City, Michigan. He also served as a member of the

Bank’s senior loan committee and as CEO of the Bank’s holding company, Northwestern

Bancorp. The Bank was an insured state nonmember bank subject to the FDI Act, as well as

associated regulations and Michigan state laws. Calcutt retired from his positions at the Bank in

2013 and now serves as the Chairman of State Savings Bank in Michigan and its holding

company. Northwestern Bank was purchased by a competitor in 2014.

Under the Bank’s management structure, twenty employees reported directly to Calcutt,

including Richard Jackson, an Executive Vice President and board member. A commercial-loan

officer named William Green also worked for the Bank.

By 2009, the Bank’s largest loan relationship was with a group of nineteen limited

liability companies controlled by the Nielson family (the “Nielson Entities”). These businesses’

activities involved development of real estate, holding vacant and developed real estate, and

holding oil and gas interests. At that time, the Bank’s loans to the Nielson Entities (the “Nielson

Loans”) amounted to approximately $38 million. The value of the Nielson Entities’ holdings

during this time was approximately $112 million, with $7–9 million in cash or cash equivalents,

and $80 million available in real estate or oil and gas assets that could be used for collateral or

loan-payment purposes.

No. 20-4303 Calcutt v. FDIC Page 8

As early as 2008, FDIC examiners identified several of the Nielson Entities as a single

borrower and identified the Bank’s loans to these businesses as a “concentration of credit”—

defined as a lending relationship that exceeds twenty-five percent of a bank’s Tier 1 capital.

Although in practice the Nielsons could use cash derived from one entity to pay the loans of

another entity, the loans were not cross-collateralized, meaning that the collateral in one Nielson

Entity did not secure loans to other Nielson Entities, despite the common control. Neither were

the loans supported by personal guarantees: If a Nielson Entity failed, the Bank could not

compel the Nielsons to personally satisfy the obligation. Loans lacking personal guarantees were

considered to be an exception to the Bank’s commercial-loan policy.

In April 2008, Calcutt and Green met Cori Nielson, one of the managers of the limited-

liability company that managed the Nielson Entities, and Autumn Berden, the chief financial

officer of that company. Calcutt and Green requested that the Nielsons stop reporting transfers

between Nielson Entities as intercompany loans on their balance sheets; instead, the bankers

recommended that when an entity needed funds, another entity should distribute funds to its

members, who could then loan or give the funds to the cash-strapped entity. Such a payment

mechanism would not be reported to regulators as an intercompany transfer and would conceal

the Nielson Entities’ “common use of funds.” According to the FDIC, over the following

months this strategy also masked the interrelationship of the Nielson Entities and hid loans to

Entities that had no positive cash flow by routing funds through other actors in the Nielson

group.

The relationship between the Bank and the Nielsons began to deteriorate during the Great

Recession. Although in May 2009 several of the Nielson Entities wrote to Calcutt stating that

they had sufficient cash flow for debt service, by August multiple loans were past due. More

were scheduled to mature on September 1. On August 10, Berden told the Bank that the Nielson

Entities would need to restructure their loans, and on August 21, Cori Nielson made a similar

communication. The Bank did not oblige, and the Nielson Entities stopped paying their loans on

September 1.

Over the following months, the Nielsons and the Bank continued to negotiate, but their

efforts were fruitless. The Nielsons sought measures such as debt forbearance, reduction of loan

No. 20-4303 Calcutt v. FDIC Page 9

payments, or deeds in lieu of foreclosure,2 because ongoing problems in the real-estate market

had diminished their ability to repay existing debts. Calcutt, on the other hand, later testified that

he thought that the Nielsons were “posturing” and possessed sufficient funds to pay their loans.

The Bank attempted to convince the Nielsons to refinance and provide greater payments on their

loans. Cori Nielson later testified that in response to her communications, Calcutt expressed

concerns about raising “red flags” to regulators about the Bank’s relationship with the Nielson

Entities. By November 30, 2009, several of the loans to the Nielson entities were automatically

placed on nonaccrual status by the Bank, meaning that they were ninety days past due.

Also on November 30, the Bank and the Nielson Entities finally reached an agreement

that would bring all the loans current. First, the Bank extended a loan of $760,000 to Bedrock

Holdings LLC, one of the Nielson Entities (the “Bedrock Loan”), which would be used for the

companies’ future required loan payments until April 2010. After receipt of the loan, Bedrock

Holdings transferred the funds into accounts at the Bank for other Nielson Entities. Second, the

Bank agreed to release $600,000 worth of collateral in investment-trading funds that had been

granted to it by another Nielson Entity, Pillay Trading LLC (the “Pillay Collateral”).3 This

collateral release allowed the Nielson Entities to bring their past-due loans current. Finally, the

Bank renewed the Nielson Entities’ matured loans, including a loan of $4,500,000 to Bedrock

Holdings. The parties refer to this agreement, which took effect in December 2009, as the

“Bedrock Transaction.” Consequently, the Nielson Entities’ loans were removed from the

Bank’s nonaccrual list on December 1.

The FDIC Board would later find that the actions surrounding the Bedrock Transaction

violated the Bank’s commercial-loan policy. That policy required that “all commercial loans are

to be supported by a written analysis of the net income available to service the debt and by

written evidence from the third parties supporting the collateral value of the security,” yet the

Bank did not conduct these analyses or collateral appraisals prior to providing the Bedrock Loan

2

Through a deed in lieu of foreclosure, “a mortgagee . . . take[s] a conveyance from the mortgagor in full or

partial satisfaction and as a substitute for foreclosure.” Restatement (Third) of Property (Mortgages) § 8.5 cmt. b

(Am. Law Inst. 1997).

3

As discussed below, a year later Northwestern Bank also released $690,000 in collateral from Pillay

Trading LLC. We refer to the $600,000 and $690,000 disbursements together as the “Pillay Collateral.”

No. 20-4303 Calcutt v. FDIC Page 10

and releasing the Pillay Collateral. At the 2019 hearing, however, Calcutt testified that he

thought that the Bedrock Transaction was in the Bank’s best interest, because it provided time

for the Nielson Entities to pay off their debt and because he believed they had the resources to do

so.

Moreover, the commercial-loan policy required approval by two-thirds of the board of

directors for loans “where the total aggregate exposure is between 15 and 25 percent of the

Bank’s Regulatory Capital.” Ibid. The loans to the Nielson Entities were approximately half of

the Bank’s Tier 1 capital, thereby qualifying for the voting requirement. According to the FDIC,

however, the board did not approve the Bedrock Transaction until March 2010—approximately

four months after the disbursements. The loan write-up for the Bedrock Transaction that was

presented to the board in March 2010 also contained inaccurate information, including misstating

the purpose of the Bedrock Loan as “working capital requirements” and omitting that the

Bedrock Transaction had already occurred.

That loan write-up was prepared by a credit analyst based on information provided by

Green, and Calcutt and Jackson both initialed the document. Before the FDIC, Calcutt argued

that: (a) the write-up’s errors and mischaracterization could not be attributed to him; (b) the

board of directors was aware of the difficulties with the Nielson Entities in November 2009

because of materials it had received; and (c) the board of directors verbally approved the

Bedrock Transaction in November and December 2009. The ALJ and FDIC Board, however,

found against him on these points.

Calcutt’s actions surrounding the FDIC’s June 2010 examination of the Bank also

attracted scrutiny. In May 2010, Calcutt signed an Officer’s Questionnaire required by the

agency. The first question required him to list the loans that the Bank had renewed or extended

since the previous year’s examination by accepting separate notes for the payment of interest or

without fully collecting interest, as well as any loans made for the direct benefit of anyone other

than the named recipients of the loans. On the questionnaire, Calcutt answered that he was not

aware of any such loans. He later testified that these answers were incorrect in light of the

Bank’s activities with the Nielson Entities, but argued that the misstatements were “inadvertent

and unintentional.” (Brackets omitted.)

No. 20-4303 Calcutt v. FDIC Page 11

Additionally, Calcutt participated in a decision to sell several Nielson Entity loans to two

of Northwestern Bank’s affiliates in May 2010, shortly before the FDIC examiners were due to

arrive. Green told Berden that he and Calcutt would continue to serve as the points of contact on

those loans. In late September 2010, the Bank repurchased the loans, at which point the loans

were delinquent and past maturity.

Despite these actions, by September 2010 the Nielson Entities’ position remained

precarious. Beginning on September 1, they again stopped making payments on their loans.

Several additional months of negotiations ensued, and in December 2010 the parties agreed to an

additional release of $690,000 of collateral from Pillay Trading LLC to fund the Nielson

Entities’ debt service from September 2010 to January 2011. The Bank’s board of directors

agreed to this arrangement. At the end of that period, however, the Nielson Entities yet again

stopped making payments, and they have been in default since then.

D. The 2011 Examination

Shortly before the FDIC’s 2011 regular examination of the Bank was set to begin on

August 1, 2011, Cori Nielson sent the agency a binder with approximately 267 pages of

correspondence between herself, Berden, Green, and Calcutt. The binder’s contents went

beyond the correspondence that FDIC examiners had found in the Bank’s loan file. According to

Calcutt, Nielson’s move also began a series of actions in which she and Berden improperly

influenced the FDIC’s Case Manager, Anne Miessner, and Miessner became biased against

Calcutt while participating in the examination.

During his September 14, 2011 meeting with examiners from the FDIC and the Michigan

Office of Financial and Insurance Regulation,4 Calcutt made several false statements about the

Bedrock Transaction. First, in response to a question about his understanding as to the purpose

of the Bedrock Loan, Calcutt said that the funds were meant to provide “working capital” in

connection with an acquisition of another business, although their true purpose was to help pay

off the loans to Nielson Entities. Second, when examiners asked him about the release of the

Pillay Collateral, he responded, “I thought we still had them,” although he had authorized

4

This agency has been renamed the Michigan Department of Insurance and Financial Services.

No. 20-4303 Calcutt v. FDIC Page 12

releases of the collateral in 2009 and 2010. Third, when queried about how the Nielson Entities

managed to bring their loans current in December 2010, he answered that they used their “vast

resources between oil, gas, and rentals,” although the December 2010 release of Pillay Collateral

was in fact used to satisfy these obligations.

In its 2011 examination, the FDIC also noted that the Nielson relationship “should have

been reported as nonaccrual on quarterly Call Reports beginning no later than December 2009,”

and that its omission “has resulted in a material overstatement in earnings both in the form of

falsely inflated interest income and of grossly understated provision expense.” Calcutt signed

the Call Reports, yet he later testified that he was not involved in their preparation.

Ultimately, the FDIC’s 2011 examination report identified the Bank’s failures in securing

and analyzing the Bedrock Transaction, its reporting inaccuracies, and its misstatements during

the examination. It ordered the Bank to charge off $6.443 million on the loans to Nielson

Entities, which represented the amount that the Bank would be unlikely to collect.5 On July 31,

2012, the Bank charged off an additional $30,000 specifically on the Bedrock Loan.

E. Administrative Proceedings

1. The 2015 Hearing

On April 13, 2012, the FDIC formally opened an investigation into the Bank’s officers.

Its investigation ended on August 20, 2013, and the agency issued a Notice of Intention to

Remove from Office and Prohibit from Further Participation against Calcutt, Jackson, and

Green, as well as a notice of assessment of civil money penalties (the “Notice”). In 2015, both

Jackson and Green stipulated to orders prohibiting them from banking activity, and Jackson

agreed to a $75,000 CMP. Calcutt proceeded to discovery and further administrative

proceedings.

In September 2015, ALJ C. Richard Miserendino held an eight-day hearing on Calcutt’s

charges. Among the several witnesses who testified were Calcutt, Jackson, Nielson, Berden,

Miessner, and Dennis O’Neill (one of the FDIC examiners). ALJ Miserendino released a

5

The parties disagree about whether a charge-off necessarily qualifies as a loss. See infra at 45.

No. 20-4303 Calcutt v. FDIC Page 13

recommended decision on June 6, 2017. However, before the Board issued its final decision, it

stayed the case pending the Supreme Court’s decision in Lucia, because ALJ Miserendino had

not been appointed by an agency head.

2. The 2019 Hearing

Following Lucia, the FDIC Board formally appointed Miserendino and its other ALJ,

Christopher B. McNeil, then remanded and reassigned each ALJ’s pending cases to the other

ALJ “for a new hearing and a fresh reconsideration of all prior actions, including summary

dispositions, taken before the hearing.” See FDIC Resolution Seal No. 085172, Order in Pending

Cases (July 19, 2018). The Board permitted each new ALJ to conduct a paper hearing on

remand, but if a party objected to the paper hearing, the Board ordered that the ALJ “must

conduct a new oral hearing in accordance with 12 C.F.R. § 308.35, except that the ALJ may

accept the written transcript of prior testimony of any witnesses for which the parties agreed to

accept such testimony.”

Calcutt’s case was reassigned to ALJ McNeil, who stated that he would conduct an oral

hearing and requested that the parties submit objections to ALJ Miserendino’s prehearing

rulings. In response, Calcutt asserted that the prior proceedings were entirely void under Lucia

because the prior ALJ had not been appointed by an agency head. ALJ McNeil rejected this

argument, and proceeded to request that the parties submit specific examples where the prior

proceeding’s outcome turned on evidence that should have been included or excluded, or

“elements, such as witness demeanor, that are not readily determined from a review of the

written record.”

Calcutt then reasserted his argument that “the original proceeding was void ab initio” and

objected to the inclusion of the record from the 2015 proceedings because the case “turn[ed]

entirely on credibility assessments.” In an order dated March 19, 2019, ALJ McNeil rejected

these arguments, concluding that the second hearing would not be de novo, and that “[t]he prior

proceedings have not been deemed void ab initio, but instead serve as the primary source of the

evidentiary record, subject to review and reconsideration by the new ALJ.” ALJ McNeil went

on to observe that although credibility assessments were material to the decision of the case,

No. 20-4303 Calcutt v. FDIC Page 14

Calcutt had not established that a review of the 2015 hearing transcript would be hindered by an

inability to view witnesses’ demeanor. Finally, he rejected Calcutt’s objections to the admission

of several exhibits from the 2015 proceedings.

On March 20, 2019, ALJ McNeil released an additional prehearing order, which among

other things specified that the parties should identify witnesses by May 15, 2019 and indicate

each witness’s expected testimony. The order specified that “during the evidentiary hearing,

witness testimony will be limited to the descriptions provided in this summary.” Calcutt sought

an interlocutory appeal before the FDIC Board on ALJ McNeil’s limitations on the oral hearing.

The Board granted his request for a new oral hearing on all issues considered at the prior hearing,

including live witness testimony, but it denied his request for an entirely new proceeding as

untimely.

In the next prehearing order, ALJ McNeil granted enforcement counsel’s motions to

strike Calcutt’s affirmative defenses of laches, entrapment, and examiners’ violation of the

agency’s own procedural rules. Then, in response to the parties’ motions in limine, he permitted

introduction of Green and Jackson’s testimony and the parties’ stipulations at the 2015 hearing,

among other evidentiary rulings.

The hearing lasted from October 29 to November 6, 2019. Calcutt was among twelve

witnesses who testified. During the proceedings, Calcutt’s counsel unsuccessfully attempted to

cross-examine witnesses, including Berden, Miessner, and Nielson, about the theory that

Miessner and the FDIC were biased against Calcutt due to their relationship with the Nielsons.

In sustaining enforcement counsel’s objections to this testimony, ALJ McNeil reasoned that

these questions were outside the scope of direct examination, and that in accordance with his

March 20, 2019 order, Calcutt could have identified these witnesses in a prehearing submission

as subject to questioning about bias but failed to do so.

On April 3, 2020, ALJ McNeil issued the Findings of Fact, Conclusions of Law, and

Recommended Decision on Remand (the “Recommended Decision”), finding that Calcutt’s

actions surrounding the Bedrock Transaction amounted to unsafe or unsound practices and

breached his fiduciary duties of care and candor; that these actions caused the Bank to suffer

No. 20-4303 Calcutt v. FDIC Page 15

damages and financially benefitted Calcutt; and that the actions involved personal dishonesty and

willful and continuing disregard for the Bank’s safety and soundness. See 12 U.S.C.

§ 1818(e)(1). Finding that Calcutt’s actions satisfied the requirements for a removal and

prohibition order and civil money penalties, ALJ McNeil recommended that Calcutt be

prohibited from banking and assessed a $125,000 CMP.

Calcutt filed exceptions to the FDIC Board, challenging many of these findings and

conclusions. He also argued that the proceedings were invalid because the restrictions on ALJ

McNeil’s removal were unconstitutional, and because the new hearing granted after Lucia did

not remedy the Appointments Clause violation in the previous proceedings before ALJ

Miserendino. He did not argue that the Board was also improperly shielded from removal.

Upon review, the FDIC Board accepted ALJ McNeil’s findings and conclusions, and on

December 15, 2020, it issued a final Decision and Order to Remove and Prohibit from Further

Participation and Assessment of Civil Money Penalties (the “Removal and Prohibition Order”).

The Board concluded that Calcutt’s involvement with the Bank’s loans to the Nielson Entities, as

well as his misrepresentations to regulators and the board of directors, were both unsafe and

unsound practices and breaches of his fiduciary duties. See 12 U.S.C. § 1818(e)(1)(A). It also

found that sufficient effects had occurred by reason of Calcutt’s malfeasance: loan charge-offs;

the Bank’s increased investigative, legal, and auditing expenses; and Calcutt’s receipt of

dividends from the Bank’s holding company that reflected the Nielson portfolio’s inflated value.

See 12 U.S.C. § 1818(e)(1)(B). And it concluded that Calcutt acted with the requisite

culpability. See 12 U.S.C. § 1818(e)(1)(C). The Board similarly upheld ALJ McNeil’s

conclusions regarding the appropriateness of the civil money penalty. See 12 U.S.C. § 1818(i).

Finally, it rejected Calcutt’s exceptions regarding the ALJ’s insulation from removal, the

adequacy of the new hearing after Lucia, the ALJ’s evidentiary rulings, the statute of limitations,

and the ALJ’s bias.

Calcutt petitioned this court for review the following day. On December 21, 2020, he

moved for an emergency stay. A panel of this court granted the stay on January 5, 2021. We

have jurisdiction over Calcutt’s petition for review of the FDIC’s order under 12 U.S.C.

§ 1818(h)(2).

No. 20-4303 Calcutt v. FDIC Page 16

II. STANDARD OF REVIEW

The judicial-review provisions of the APA apply to FDIC removal and prohibition orders

and orders assessing CMPs. 12 U.S.C. § 1818(h)(2). Accordingly, we must hold unlawful and

set aside agency actions, findings, or conclusions that are “arbitrary, capricious, an abuse of

discretion, or otherwise not in accordance with law”; “contrary to constitutional right, power,

privilege, or immunity”; “in excess of statutory jurisdiction, authority, or limitations”;

“without observance of procedure required by law”; or “unsupported by substantial evidence.”

5 U.S.C. § 706(2). Furthermore, “due account shall be taken of the rule of prejudicial error.”

Ibid.; see Nat’l Ass’n of Home Builders v. Defs. of Wildlife, 551 U.S. 664, 659–60 (2007)

(explaining that this statutory language refers to a harmless-error rule). Though a court does not

“substitute its judgment for that of the agency” over decisions within the agency’s delegated

authority in applying the APA’s arbitrary-and-capricious standard, the agency’s conclusions must

still be based on “reasoned decision making.” Wollschlager v. FDIC, 992 F.3d 574, 581–82 (6th

Cir. 2021).

We review other agency determinations differently. Questions of law are reviewed

de novo, but we defer to an agency’s interpretation of a provision in a statute that it is entrusted

with administering, if (1) Congress has not “directly spoken to the precise question at issue,” and

(2) “the agency’s answer is based on a permissible construction of the statute.” N. Fork Coal

Corp. v. Fed. Mine Safety & Health Rev. Comm’n, 691 F.3d 735, 739 (6th Cir. 2012) (quoting

Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842–43 (1984)). And an

agency’s factual findings are reviewed for substantial evidence, which is “more than a scintilla of

evidence but less than a preponderance; it is such relevant evidence as a reasonable mind might

accept as adequate to support a conclusion.” Gen. Med., P.C. v. Azar, 963 F.3d 516, 520 (6th Cir.

2020) (quoting Cutlip v. Sec’y of Health & Hum. Servs., 25 F.3d 284, 286 (6th Cir. 1994)).

“The substantiality of evidence must take into account whatever in the record fairly detracts from

its weight.” Universal Camera Corp. v. NLRB, 340 U.S. 474, 488 (1951).

No. 20-4303 Calcutt v. FDIC Page 17

III. REMOVAL PROTECTIONS

Calcutt maintains that two features of the structure of the FDIC violate Article II and the

separation of powers and thus compel invalidation of the agency’s proceedings against him.

First, relying principally on Seila Law, he argues that the members of the FDIC Board are

unconstitutionally insulated from removal by the President. Second, he contends that the FDIC’s

ALJs are insulated by multiple levels of for-cause protection in contravention of the Supreme

Court’s holding in Free Enterprise Fund v. Public Company Accounting Oversight Board,

561 U.S. 477 (2010).

Neither alleged infirmity, however, compels invalidation of the FDIC proceedings against

Calcutt. As the Court recently explained in Collins v. Yellen, even if an agency’s structure

unconstitutionally shields officers from removal, a party challenging the agency’s action is not

entitled to relief unless that unconstitutional provision “inflict[s] compensable harm.” 141 S. Ct.

at 1789. Calcutt has not demonstrated that the removal protections of the FDIC Board or the

FDIC ALJs caused such harm to him.

A. FDIC Board Structure

We first address Calcutt’s challenge to the FDIC Board’s structure. To start, we conclude

that Calcutt has not forfeited this claim. However, Calcutt has not demonstrated that the

purported constitutional infirmity inflicted harm. See Collins, 141 S. Ct. at 1789. Thus, he is not

entitled to invalidation of the proceedings on this basis.

1. Issue Exhaustion

At the outset, we disagree with the argument by the FDIC that Calcutt has forfeited his

challenge to the Board’s removal protections by not raising it in his exceptions to the

recommended decision of ALJ McNeil. This is a question of “issue exhaustion,” a rule in many

administrative contexts that requires a party to present an issue to an agency before pursuing

judicial review on that issue. Carr v. Saul, 141 S. Ct. 1352, 1358 (2021).

No. 20-4303 Calcutt v. FDIC Page 18

We have recognized three types of issue-exhaustion requirements. First, many

“requirements of administrative issue exhaustion are largely creatures of statute.” Sims v. Apfel,

530 U.S. 103, 107 (2000). Second, an agency’s regulations may require exhaustion, id. at 108,

so long as the regulations “comport with the statute” and are not applied arbitrarily, Island Creek

Coal Co. v. Bryan, 937 F.3d 738, 747 (6th Cir. 2019). Third, a court may impose an issue-

exhaustion requirement without either a statute or regulation. Sims, 530 U.S. at 108; see Bryan,

937 F.3d at 747–48 (describing “prudential exhaustion” and its unclear doctrinal source). In this

last context, “[t]he desirability of a court imposing a requirement of issue exhaustion depends on

the degree to which the analogy to normal adversarial litigation applies in a particular

administrative proceeding.” Carr, 141 S. Ct. at 1358 (quoting Sims, 530 U.S. at 109). This

resemblance to an adversarial litigation in turn depends on “whether claimants bear the

responsibility to develop issues for adjudicators’ consideration.” Ibid.

The FDIC argues that its regulations (namely 12 C.F.R. § 308.39(b)) compelled Calcutt

to raise any Appointments Clause challenge to the Board’s structure in his exceptions to the

Recommended Decision before raising them before this court. Moreover, the agency adds,

Carr’s limitation on imposing issue-exhaustion requirements in non-adversarial proceedings do

not apply here, because Calcutt’s adjudication was adversarial.

Calcutt responds that § 308.39(b) requires exhaustion only of issues over which the

agency has jurisdiction, and that because agencies lack “authority to entertain a facial

constitutional challenge to the validity of a law,” he did not need to exhaust the removal issue

before the ALJ or the Board. Reply Br. 2 (quoting Jones Bros., 898 F.3d at 673); see 12 C.F.R.

§ 308.39(c)(1) (stating that exceptions “must be confined to the particular matters in, or

omissions from, the administrative law judge’s recommendations”). Relatedly, he argues that an

agency proceeding is an inappropriate forum to consider a structural constitutional claim such as

the Board’s removability, because the Board has no special expertise in Appointments Clause

jurisprudence and has previously disclaimed authority to entertain constitutional challenges to

statutes, meaning that raising this issue before the Board would have been futile.

We think Calcutt has the better of the argument, and that in the “particular administrative

scheme at issue” in this case, no statute, regulation, or prudential principle required him to raise

No. 20-4303 Calcutt v. FDIC Page 19

his challenge to the FDIC Board during the administrative proceedings. Joseph Forrester

Trucking v. Dir., Off. of Workers’ Comp. Programs, 987 F.3d 581, 590 (6th Cir. 2021) (quoting

Weinberger v. Salfi, 422 U.S. 749, 765 (1975)). To begin with, the judicial review provision of

the FDI Act, 12 U.S.C. § 1818(h), says nothing bearing on exhaustion. We have explained that a

statute must contain language “directing parties to raise issues” before the agency in order to

create a statutory issue-exhaustion requirement. See Bryan, 937 F.3d at 749; Jones Bros., Inc. v.

Sec’y of Lab., 898 F.3d 669, 673–74 (6th Cir. 2018).

The applicable FDIC regulations hit closer to the mark. They provide that the “[f]ailure

of a party to file exceptions . . . is deemed a waiver of objection thereto.” 12 C.F.R.

§ 308.39(b)(1). This text might be read to create an issue-exhaustion requirement in light of our

decision in Bryan, where we detected an issue-exhaustion requirement in a regulation requiring

that a petition for review list “specific issues to be considered” for appeals from Black Lung

Benefits Act adjudications to the Benefits Review Board. 937 F.3d at 749 (quoting 20 C.F.R.

§ 802.211(a)). However, there is an important difference between Bryan and this case. Calcutt

raises a facial constitutional challenge to the FDI Act, and the FDIC has no power to invalidate

its own organic statute; thus, it could never entertain Calcutt’s separation-of-powers challenge to

the FDIC Board in the first place. See Jones Bros., 898 F.3d at 673–74 (reading statute not to

impose issue-exhaustion requirement on facial constitutional challenges where agency could not

“invalidate the statute from which it derives its existence and that it is charged with

implementing”). True, we have explained that an agency may entertain certain facial

constitutional challenges and therefore impose issue-exhaustion requirements where it has long

asserted that authority. See Joseph Forrester Trucking, 987 F.3d at 588–89; Bryan, 937 F.3d at

753. But the FDIC Board has previously disclaimed the authority to determine the

constitutionality of statutes. See Matter of the Bank of Hartford, No. FDIC-92-212kk, at A-2525

(FDIC Apr. 11, 1995), https://www.fdic.gov/bank/individual/enforcement/5223.html (last visited

June 8, 2022)). Though the FDIC now offers a list of examples in which it has considered

constitutional claims in adjudications, almost none of those decisions considered a constitutional

challenge to the authority or structure of the FDIC, and the decision that did so—Matter of ***,

No. 20-4303 Calcutt v. FDIC Page 20

No. FDIC-85-363e, 1986 WL 379631 (FDIC Apr. 21, 1986)—predates Bank of Hartford.6 And

even if we recognize that the FDIC has asserted authority to decide some constitutional issues,

we cannot say that this constitutes an established practice for the type of separation-of-powers

claim at issue here.

A further consideration counsels against imposing an issue-exhaustion requirement here:

Calcutt’s challenge to the removal protections of the FDIC Board is a structural constitutional

challenge over which the FDIC Board has no special expertise. See Carr, 141 S. Ct. at 1360.

And had Calcutt raised this challenge before the Board, his efforts would have been futile.

See id. at 1361 (“[T]his Court has consistently recognized a futility exception to exhaustion

requirements.”).7 To illustrate, consider what remedy the Board could have offered if Calcutt

had raised the issue and the Board had agreed that it was unconstitutionally shielded from

removal. The remedies granted by Article III courts, such as severing and striking the Board’s

for-cause protections from the FDIC’s organic statute, would have been unavailable, because the

Board, an agency of the Executive Branch, cannot edit its own organic statute. Cf. Seila Law,

140 S. Ct. at 2207–09. Similarly, the Board could hardly have told the President to treat it as if it

had no protections from removal, since an agency cannot compel the President to act (let alone

violate a statute). Another possibility would be for it to vacate Calcutt’s penalty, but that would

not resolve the constitutional issue, because the removal restrictions would persist. Requiring

issue exhaustion in this situation would have been a pointless exercise.

In sum, Calcutt has not forfeited his claim that the FDIC Board is unconstitutionally

insulated from removal.

6

This is not to say that the FDIC has disavowed authority to address any constitutional claim. As the FDIC

notes, it has previously addressed Appointments Clause and separation-of-powers challenges to ALJs. See Matter of

Sapp, Nos. FDIC-13-477(e), FDIC-13-478(k), 2019 WL 5823871, at *18–19 (FDIC Sept. 17, 2019); Matter of

Landry, No. FDIC-95-65e, 1999 WL 440608, at *27–29 (FDIC May 25, 1999); Matter of Leuthe, Nos. FDIC-95-

15Ee, FDIC-95-16k,1998 WL 438323, *10–11 (FDIC June 26, 1998). Those decisions, however, did not concern a

separation-of-powers challenge to the FDIC Board.

7

While the Supreme Court has cautioned that courts should hesitate to apply exceptions to mandatory

exhaustion requirements in a statute, see Ross v. Blake, 136 S. Ct. 1850, 1857–58 (2016), that concern does not

apply here because, as we have explained, the FDI Act does not clearly mandate an issue-exhaustion requirement.

No. 20-4303 Calcutt v. FDIC Page 21

2. FDIC Board Structure

Calcutt would have us hold that the FDIC Board is unconstitutionally shielded from

removal and therefore asks us to invalidate his entire proceeding. Under the framework set out

by the Supreme Court’s recent separation-of-powers decisions, however, he is not entitled to

invalidation of his proceedings. See Collins, 141 S. Ct. at 1783–89; Seila Law, 140 S. Ct. at

2198–2204. In particular, Collins indicates that Calcutt is not entitled to the relief he seeks,

because he has not specified the harm that occurred as a result of the allegedly unconstitutional

removal restrictions. See 141 S. Ct. at 1788–89.

Article II of the Constitution states that “[t]he executive Power shall be vested in a

President,” U.S. Const. art. II, § 1, cl. 1, and requires the President to “take Care that the Laws be

faithfully executed,” id. art. II, § 3. This language establishes a core principle of constitutional

separation of powers: “[T]he President’s removal power is the rule, not the exception.” Seila

Law, 140 S. Ct. at 2206; see also Myers v. United States, 272 U.S. 52, 163–64 (1926).

In Seila Law, the Court provided the framework for analyzing the constitutionality of a

restriction on the President’s removal authority. 140 S. Ct. at 2198. At the first step, we ask

whether an officer’s tenure protection falls within an established exception to the general

removal authority. Id. at 2198. As relevant here, one such exception, identified in Humphrey’s

Executor v. United States, 295 U.S. 602 (1935), permits for-cause removal protections for

“multimember expert agencies that do not wield substantial executive power.” Seila Law,

140 S. Ct. at 2199–2200.8 To determine whether an agency falls within this category, we

consider whether (a) the agency is a “body of experts,” id. at 2200 (quoting Humphrey’s Ex’r,

295 U.S. at 624); (b) the agency is nonpartisan or balanced along partisan lines, ibid.; and (c) the

agency is closer to “a mere legislative or judicial aid” that “was said not to exercise any

enforcement power,” id. at 2199–2200, or rather an enforcement body that may “promulgate

binding rules,” “unilaterally issue final decisions awarding legal and equitable relief in

8

The Seila Law Court also recognized an exception for “inferior officers with limited duties and no

policymaking or administrative authority” under Morrison v. Olson, 487 U.S. 654 (1988). See Seila Law, 140 S. Ct.

at 2199–2200. However, this exception does not apply to the FDIC Board, which qualifies as the head of a

department. See Free Enter. Fund, 561 U.S. at 512–13 (explaining that multimember commissions can qualify as

head of a department).

No. 20-4303 Calcutt v. FDIC Page 22

administrative adjudications,” and “seek daunting monetary penalties against private parties on

behalf of the United States in federal court,” id. at 2200.

At the second step, if an agency structure does not fall within an established exception,

we must determine “whether to extend those precedents to the ‘new situation.’” Seila Law,

140 S. Ct. at 2201 (quoting Free Enter. Fund, 561 U.S. at 483). In concluding that the CFPB

Director was unconstitutionally shielded from removal, the Seila Law Court emphasized two key

features: the historical novelty of an agency headed by a single director removable only for

cause, and the inconsistency of this design with constitutional structure. Id. at 2201–04.

As for the historical inquiry, the Court canvassed American history and found only

“modern and contested” examples of agencies headed by a single director who enjoyed good-

cause tenure, such as the Federal Housing Finance Agency (“FHFA”) Director, and a “one-year

blip” during the Civil War in which the Comptroller of the Currency received for-cause

protections. Id. at 2202; see also Collins, 141 S. Ct. at 1783 (holding that removal restriction for

FHFA Director was unconstitutional, and that Seila Law was “all but dispositive” on the

question).

As for the structural inquiry, the Court underscored that the constitutional scheme’s

combination of the separation of powers and democratic accountability foreclosed

executive officers from exercising significant authority without direct presidential supervision.

The Constitution emphasizes the division of power, but it also recognized the need for an

“energetic executive” to respond quickly and flexibly to challenges. Seila Law, 140 S. Ct. at

2203 (discussing The Federalist No. 51 (James Madison) and The Federalist No. 70 (Alexander

Hamilton)). To resolve these dueling priorities, the Constitution makes the President directly

accountable to the American people through elections, allowing him to delegate authority to

subordinate officials to complete the tasks of governance so long as that delegated authority

“remains subject to the ongoing supervision and control of the elected President.” Ibid. The

CFPB Director’s for-cause protections violated this structure because, by eliminating the

President’s ability to remove the CFPB Director at will, the CFPB concentrated power in a

single officer while insulating him from presidential control. Id. at 2204. This infirmity was

exacerbated by the CFPB Director’s five-year term, which meant that “some Presidents may not

No. 20-4303 Calcutt v. FDIC Page 23

have any opportunity to shape its leadership,” and the agency’s independence from the normal

appropriations process. Ibid.

We need not delve deeply into the Seila Law inquiry in this case, however, because

Collins instructs that relief from agency proceedings is predicated on a showing of harm, a

requirement that forecloses Calcutt from receiving the relief he seeks. See 141 S. Ct. at 1788–89.

Collins concerned the Director of the Federal Housing Finance Agency, an agency with authority

to regulate and act as the conservator or receiver of the Federal National Mortgage Association

(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Collins,

141 S. Ct. at 1770. Acting as the companies’ conservator, the FHFA amended stock purchasing

agreements with the Treasury Department, which altered the dividends that Fannie Mae and

Freddie Mac were required to pay to Treasury in exchange for capital. See id. at 1772–75.

Shareholders of the companies brought suit against the FHFA and the FHFA Director as a result.

See id. at 1775. As relevant here, the shareholders argued that the statutory for-cause removal

protection of the FHFA Director violated the separation of powers, see id. at 1778, and that

therefore the amendment to the FHFA-Treasury agreement “must be completely undone,” id. at

1787.

The Supreme Court agreed that the for-cause removal provision was unconstitutional, as

its decision in Seila Law was “all but dispositive.” Id. at 1783. Just as the CFPB in that decision

presented a “novel context of an independent agency led by a single Director” whose for-cause

removal protections “lack[ed] a foundation in historical practice and clashe[d] with constitutional

structure by concentrating power in a unilateral actor insulated from Presidential control,” so too

did the single-director structure and removal protections in the FHFA unconstitutionally limit the

President’s removal power. Id. at 1783–84 (quoting Seila Law, 140 S. Ct. at 2192).

Yet although the removal restriction was unconstitutional, the Court held that the

shareholders were not entitled to relief absent further findings by the lower courts. The

shareholders were not entitled to a prospective remedy, because a subsequent agreement between

the FHFA and Treasury had deleted the dividend formula that caused the alleged injury. Id. at

1779–80. As to retrospective relief for the claimed injury during the years that the dividend

formula was in effect, the Court observed that “[a]lthough the statute unconstitutionally limited

No. 20-4303 Calcutt v. FDIC Page 24

the President’s authority to remove the confirmed Directors, there was no constitutional defect in

the statutorily prescribed method of appointment to that office.” Id. at 1787. Thus, the Director

“lawfully possess[ed]” the power to implement the provision. Id. at 1788.

The Court explained that the shareholders would be entitled to relief if the

unconstitutional removal restriction “inflict[ed] compensable harm,” and it remanded the case to

the Court of Appeals to conduct this inquiry. Id. at 1789. To establish such harm, the

shareholders would need to show that the removal restriction specifically impacted the agency

actions of which they complained:

Suppose, for example, that the President had attempted to remove a Director but

was prevented from doing so by a lower court decision holding that he did not

have “cause” for removal. Or suppose that the President had made a public

statement expressing displeasure with actions taken by a Director and had

asserted that he would remove the Director if the statute did not stand in the way.

In those situations, the statutory provision would clearly cause harm.

Ibid. Several concurring Justices confirmed that a petitioner would have to establish that an

unconstitutional removal protection specifically caused an agency action in order to be entitled to

judicial invalidation of that action. See id. at 1789 (Thomas, J., concurring) (agreeing with

majority’s remedial analysis “that, to the extent a Government action violates the Constitution,

the remedy should fit the injury”); id. at 1801 (Kagan, J., concurring in part and concurring in the

judgment) (“I also agree that plaintiffs alleging a removal violation are entitled to injunctive

relief—a rewinding of agency action—only when the President’s inability to fire an agency head

affected the complained-of decision.”); id. at 1803 n.1 (Sotomayor, J., concurring in part and

dissenting in part) (agreeing with majority’s remedial discussion).

Calcutt attempts to distinguish Collins by observing that the decision concerned only

retrospective relief, because the FHFA had already ended the challenged action, whereas

Calcutt’s Removal and Prohibition Order remains in effect and operates prospectively. That

distinction does not matter here. The Collins inquiry focuses on whether a “harm” occurred that

would create an entitlement to a remedy, rather than the nature of the remedy, and our

determination as to whether an unconstitutional removal protection “inflicted harm” remains the

same whether the petitioner seeks retrospective or prospective relief (particularly when we

No. 20-4303 Calcutt v. FDIC Page 25

review an adjudication that has already ended). Collins, 141 S. Ct. at 1789. In other words,

Collins instructs that we must ask whether the FDIC Board’s for-cause protections “inflicted

harm,” such as by preventing superior officers from removing Board members when they

attempted to do so, or possibly by altering the Board’s behavior. Ibid. The Removal and

Prohibition Order’s prospective effect does not change a court’s ability to conduct that inquiry.

Collins thus provides a clear instruction: To invalidate an agency action due to a removal

violation, that constitutional infirmity must “cause harm” to the challenging party. Ibid. Our

sister circuits that have considered the question agree that this is the key inquiry. See Kaufmann

v. Kijakazi, 32 F.4th 843, 849 (9th Cir. 2022) (explaining that “[a] party challenging an agency’s

past actions must . . . show how the unconstitutional removal provision actually harmed the

party”); Bhatti v. Fed. Housing Fin. Agency, 15 F.4th 848, 854 (8th Cir. 2021) (identifying issue

under Collins as whether unconstitutional removal restriction “caused compensable harm”);9

Decker Coal Co. v. Pehringer, 8 F.4th 1123, 1137 (9th Cir. 2021) (stating that, under the

“controlling” authority of Collins, “[a]bsent a showing of harm, we refuse to unwind the

[agency] decisions below”).

Calcutt has not demonstrated that the structure of the FDIC Board caused him harm.

He first states that the FDIC Board’s Removal and Prohibition Order “inflicts ongoing harm” by

preventing him from participating in banking activities. Reply Br. 10. However, Collins does

not say that any administrative penalty imposed by an unconstitutionally-structured agency must

be vacated. Instead, the constitutional violation must have caused the harm. See Collins,

141 S. Ct. 1789 (identifying inquiry as whether “an unconstitutional provision . . . inflict[ed]

compensable harm”).

Calcutt also argues that the possibility that the FDIC would have taken different actions in

his case, if the Board not been unconstitutionally shielded from removal, means that we should

9

In Bhatti, the Eighth Circuit also remanded to the district court “to determine if the shareholders suffered

‘compensable harm’ and are entitled to ‘retrospective relief.’” Bhatti, 15 F.4th at 854 (quoting Collins, 141 S. Ct. at

1789). This language does not conflict with our conclusion that Collins does not rest on whether relief is

prospective or retrospective, because Bhatti concerned the same agency actions as Collins did. See id. at 852.

Because the Collins Court recognized that only retrospective relief was available to Fannie Mae and Freddie Mac

shareholders, the Bhatti court followed that precedent. See ibid.

No. 20-4303 Calcutt v. FDIC Page 26

vacate and remand. Taken in isolation, some language in Collins might be read to support this

view. See, e.g., ibid. (“[T]he possibility that the unconstitutional restriction on the President’s

power to remove a Director of the FHFA could have such an effect [of inflicting compensable

harm] cannot be ruled out.”). But such a broad reading would effectively eliminate any need to

show that unconstitutional removal protections caused harm, because a petitioner could always

assert a possibility that an agency with different personnel might have acted differently. The

Collins Court was not deterred from its holding by the very possibility that harm might occur;

rather, it indicated that a more concrete showing was needed.

Calcutt also posits that if the FDIC Board had not been unconstitutionally insulated from

removal, after Lucia it might have “altered [its] behavior,” ibid., and provided new proceedings

as recommended by the Solicitor General, see Mem. from the Solicitor General to Agency

General Counsels, Guidance on Administrative Law Judges after Lucia v. SEC (S. Ct.) 8–9,

https://static.reuters.com/resources/media/editorial/20180723/ALJ--SGMEMO.pdf (last visited

May 24, 2022). While failure to follow executive-branch policy could certainly help indicate

that a removal restriction inflicted harm, that is not what happened here. As we explain further

below, the FDIC provided a new hearing to Calcutt consistent with Lucia. See infra at 30–35.

We also fail to see how the FDIC disregarded the Solicitor General’s guidance. The Solicitor

General told agencies that while “a full soup-to-nuts redo of the administrative proceeding” was

“the safest course” after Lucia, it was not the only course available:

While litigants may be expected to argue otherwise, however, we do not believe a

complete do-over is constitutionally required. We believe that a ‘new hearing’

will be constitutionally adequate as long as the new ALJ is careful to avoid any

taint from the prior ALJ’s decision. Thus, we do not think it is necessarily fatal if

the new ALJ starts with the existing record in the proceeding (including hearing

transcripts), much of which there would be little purpose in generating anew.

Mem. from the Solicitor General to Agency General Counsels 8–9. Thus, we disagree with

Calcutt’s suggestion that the FDIC Board failed to follow executive-branch policy—let alone that

it did so because of its removal protections.

Finally, Calcutt asks this court to remand to the FDIC to determine whether the removal

restriction “inflicted harm” in his case, as the Collins court also remanded for further findings.

No. 20-4303 Calcutt v. FDIC Page 27

We do not think this step is necessary. The record is sufficiently clear that the removal

protections did not cause harm, and Calcutt provides only vague, generalized allegations in

response. See Decker Coal Co., 8 F.4th at 1137 (declining to remand where “the record is

clear”). We also note that, unlike the Collins Court or the Eighth Circuit in Bhatti, we would be

remanding to an agency rather than another court. See Collins, 141 S. Ct. at 1789 (remanding to

court of appeals); Bhatti, 15 F.4th at 854 (remanding to district court to determine whether

Fannie Mae and Freddie Mac shareholders suffered compensable harm entitling them to relief

under Collins). We do not see how yet another proceeding before the FDIC would aid in

developing the record on this point.

B. FDIC ALJ Structure

Calcutt’s separation-of-powers challenge to the removal protections of FDIC ALJs is

unsuccessful for similar reasons as his challenge to the structure of the FDIC Board. First and

foremost, even if we were to accept that the removal protections for the FDIC ALJs posed a

constitutional problem, Calcutt is not entitled to relief unless he establishes that those protections

“inflict[ed] compensable harm,” and he has not made this showing. Collins, 141 S. Ct. at 1789.

Second, even if he established that the removal protections caused him harm, Free Enterprise

Fund explicitly excludes ALJs from its prohibition on multiple levels of for-cause removal

protection, and thus, like Seila Law, it only provides weak support for his position. See Free

Enter. Fund, 561 U.S. at 507 n.10.

To recall, FDIC ALJs can only be removed if the MSPB finds that there is “good cause”

for removal on the record after an opportunity for a hearing. 5 U.S.C. § 7521(a). The President

may remove MSPB members “only for inefficiency, neglect of duty, or malfeasance in office.”

5 U.S.C. § 1202(d). Additionally, the FDIC ALJs are housed in an interagency body—the Office

of Financial Institution Adjudication, or OFIA—composed of the FDIC, OCC, FRB, and NCUA.

The memorandum of understanding for OFIA states: “Any change to the Office Staff personnel

shall be subject to the prior written approval of all Agencies.” See Ex. L to Emergency Motion

for Stay Pending Review, at 3. According to Calcutt, OFIA’s structure “magnifies the

constitutional problem” by requiring all four member agencies to consent before “initiat[ing]

ALJ removal proceedings.” Br. of Petitioner 30.

No. 20-4303 Calcutt v. FDIC Page 28

We begin with the Collins issue. As previously discussed, that decision requires a

showing that an unconstitutional removal restriction “cause[d] harm” to invalidate an agency

action. 141 S. Ct. at 1789.10 Here, again, Calcutt offers vague assertions that it “cannot be ruled

out” that the multiple levels of for-cause removal protections insulating ALJ McNeil caused him

harm, but a generalized allegation is insufficient for affording relief. Reply Br. 18 (quoting

Collins, 141 S. Ct. at 1789). He also argues that had these removal restrictions not been in place,

ALJ McNeil would have been more responsive to executive-branch policy, would have properly

offered a new hearing after Lucia, and would not have issued a recommended decision

that conflicted with the FDI Act. But those arguments are premised on the success of Calcutt’s

other claims of constitutional and statutory violations, and as we explain below, none of those

claims succeed. See infra at 30–35, 37–53. Thus, he cannot rely on those allegations of harm,

either.

An additional feature in this case further suggests that no harm was caused by the

removal restrictions. Before Lucia, FDIC adjudications were performed by two ALJs who were

not appointed by the FDIC Board: ALJ Miserendino and ALJ McNeil. After Lucia held that

similar ALJs in the SEC were inferior officers who must be appointed by the President, a court of

law, or a head of department, see 138 S. Ct. at 2051 (citing U.S. Const. art. II, § 2, cl. 2), the

FDIC could have appointed new ALJs. However, it simply appointed the officials who had

previously been acting as ALJs—including ALJ McNeil. In the specific circumstances of this

case, where the FDIC newly appointed an ALJ when it had the option not to do so, it is unlikely

that the restriction on the removal of the ALJ prevented the agency from pursuing a different

path respecting Calcutt.

Even if relief were available, we doubt Calcutt could establish a constitutional violation

from the ALJ removal restrictions. Though Free Enterprise Fund concluded that the two layers

of for-cause protections enjoyed by the members of the Public Company Accounting Oversight

Board were “incompatible with the Constitution’s separation of powers,” Free Enter. Fund,

10

Even if the restrictions on the removal of FDIC ALJs were invalid, both parties agree that ALJ McNeil

was validly appointed. Therefore, we need not address whether Calcutt would be entitled to relief on grounds

specifically relating to McNeil’s appointment. See Collins, 141 S. Ct. at 1787–88.

No. 20-4303 Calcutt v. FDIC Page 29

561 U.S. at 498, the Court took care to omit ALJs from the scope of its holding, id. at 507 n.10

(“[O]ur holding also does not address that subset of independent agency employees who serve as

administrative law judges.”). The Court explained that its decision did not apply to ALJs for

several reasons: “Whether administrative law judges are necessarily ‘Officers of the United

States’ is disputed,” and many ALJs “perform adjudicative rather than enforcement or

policymaking functions, . . . or possess purely recommendatory powers.” Ibid. (citing Landry v.

FDIC, 204 F.3d 1125 (D.C. Cir. 2000) (statutory citations omitted)). Similarly, as then-Judge

Kavanaugh explained in dissent in the District of Columbia Circuit proceedings, the for-cause

protections of ALJs are distinguishable because agencies can choose not to use ALJs in

adjudications; ALJs may not be officers (as the law stood at that time); and many ALJs perform

adjudicatory functions that are subject to review by higher agency officials, which “arguably

would not be considered ‘central to the functioning of the executive Branch’ for purposes of the

Article II removal precedents.” Free Enter. Fund v. Pub. Co. Acct. Oversight Bd., 537 F.3d 667,

699 n.8 (D.C. Cir. 2008) (Kavanaugh, J., dissenting) (quoting Morrison v. Olson, 487 U.S. 654,

691–92 (1988)).

Other than the argument that ALJs are not officers, which Lucia forecloses, see 138 S. Ct.

at 2053–54, these rationales still apply to the FDIC ALJs. First, the FDIC ALJs perform

adjudicatory functions, and they file a recommended decision that is subject to review by the

FDIC Board. See Free Enter. Fund, 561 U.S. at 496 n.10; Free Enter. Fund, 537 F.3d at 699 n.8

(Kavanaugh, J., dissenting); 12 C.F.R. § 308.38(a). Second, “Congress has not tied the

President’s hands and hindered his control over his subordinates here.” Decker Coal Co., 8 F.4th

at 1133. Rather, the FDIC must conduct hearings “in accordance with the provisions of [the

APA],” 12 U.S.C. § 1818(h)(1), and the APA permits an agency to choose whether to preside

over an adjudication itself, allow one or more members to be presiding officers, or use an ALJ,

5 U.S.C. § 556(b). In short, though Calcutt is correct that Free Enterprise Fund left open

whether it applied to ALJs, that decision’s reasoning for exempting ALJs still extends to this

case.

Calcutt and amicus Chamber of Commerce of the United States of America also argue

that the structure of OFIA provides particularly egregious removal protections for FDIC ALJs

No. 20-4303 Calcutt v. FDIC Page 30

that violate the separation of powers. Under OFIA’s governing memorandum of understanding,

all the constituent agencies of OFIA—the FDIC, OCC, FRB, and NCUA—must approve

“[a]ny change to the Office Staff personnel.” Ex. L to Emergency Motion for Stay Pending

Review, at 3. According to Calcutt, this provision means that each agency has veto power over

any other agency’s attempt to remove an ALJ. Exacerbating this problem, he adds, several of the

agencies who must agree to removal also enjoy for-cause protection. See 12 U.S.C. § 242

(FRB); 12 U.S.C. § 1752a(c) (NCUA Board members serve fixed terms); supra at 6 (FDIC for-

cause protections).

Although OFIA may present a “novel structure,” Free Enter. Fund, 561 U.S. at 495, the

Free Enterprise Fund exception for ALJs centers on their status as adjudicatory officials that

issue non-final recommendations to an agency, and not on how many levels of removal

protections they enjoy, see id. at 496 n.10. Consequently, OFIA does not present a reason for us

to hold that the removal restrictions for FDIC ALJs violates constitutional separation of powers.

More importantly, even if we were to find such a violation, Collins decisively precludes relief for

Calcutt.

C. Appointments Clause

The Appointments Clause requires that “Officers of the United States” be appointed by

the President with the advice and consent of the Senate, but Congress may allow “inferior

Officers” to be appointed by the President alone, by courts, or by heads of departments.

U.S. Const. art. II, § 2, cl. 2. “[T]he ‘appropriate’ remedy for an adjudication tainted with an

appointments violation is a new ‘hearing before a properly appointed official.’” Lucia,

138 S. Ct. at 2055 (quoting Ryder v. United States, 515 U.S. 177, 188 (1995)). Calcutt argues

that he did not receive this “new hearing,” but he is wrong.

Calcutt states that the FDIC ALJs are “inferior Officers,” and the FDIC does not contest

this point. We agree that FDIC ALJs are inferior officers and that they were improperly

appointed before Lucia. Cf. Burgess v. FDIC, 871 F.3d 297, 302–03 (5th Cir. 2017)

(reasoning that FDIC ALJs are officers). Because they are inferior officers, the FDIC ALJs must

be appointed by the President, a court, or the FDIC Board. U.S. Const. art. II, § 2, cl. 2. Prior to

No. 20-4303 Calcutt v. FDIC Page 31

2018, the FDIC Board did not appoint the ALJs, so their appointments were invalid. See Jones

Bros., 898 F.3d at 679.

Calcutt and the FDIC also agree up to a point that the remedy for the prior Appointments

Clause violation is “a new ‘hearing before a properly appointed’ official” distinct from the

previous ALJ. Lucia, 138 S. Ct. at 2055 (quoting Ryder, 515 U.S. at 188). However, Calcutt

argues that a new hearing must consist of an entirely new proceeding, where the new adjudicator

starts from scratch and ignores the record from the prior proceeding. He specifically objects to

ALJ McNeil’s admission of stipulations and transcripts from the 2015 proceedings, and he

contends that ALJ Miserendino’s procedural rulings in 2015 narrowed the scope of discovery in a

manner that impacted the 2019 proceedings. The FDIC, in contrast, contends that the “new

hearing” requires only a new, independent evaluation of the merits of a case without limiting

consideration of the prior record, and that therefore ALJ McNeil’s use of the 2015 record was

proper.

Lucia does not specify what features a “new hearing” must contain, other than a new

adjudicator. 138 S. Ct. at 2055. Other decisions addressing the remedies for Appointments

Clause violations are similarly vague. See Ryder, 515 U.S. at 188 (holding that petitioner “is

entitled to a hearing before a properly appointed panel” of military court); Jones Bros., 898 F.3d

at 679 (holding that petitioner “is entitled to a new hearing before a constitutionally appointed

administrative law judge” and remanding for “fresh proceedings”).

Other decisions indicate that courts afford agencies more leeway on remand after

Appointments Clause violations than Calcutt’s all-or-nothing position suggests. In Lucia, for

example, the Supreme Court recognized that in situations where “there is no substitute

decisionmaker” after an Appointments Clause violation, a new hearing before the original

decisionmaker could be proper. Lucia, 138 S. Ct. at 2055 n.5 (citing FTC v. Cement Inst.,

333 U.S. 683, 700–03 (1948)). The Federal Circuit, after finding that administrative patent

judges were invalidly appointed, also explained that it required a “new hearing” before a “new

panel” of judges, but that it saw “no error in the new panel proceeding on the existing record”

and left to the agency’s “sound discretion” whether to “allow additional briefing or reopen the

record in any individual case.” Arthrex, Inc. v. Smith & Nephew, Inc., 941 F.3d 1320, 1340

No. 20-4303 Calcutt v. FDIC Page 32

(Fed. Cir. 2019), vacated on alternate grounds and remanded sub nom. United States v. Arthrex,

Inc., 141 S. Ct. 1970 (2021).11 For its part, the Court of Appeals for the District of Columbia

Circuit rejected a petitioner’s claim that a new proceeding by a properly appointed official must

involve entirely new proceedings that ignore the prior record. Intercollegiate Broad. Sys., Inc. v.

Copyright Royalty Bd., 796 F.3d. 111, 117–19 (D.C. Cir. 2015). Instead, that court concluded

that a subsequent proceeding is valid when “a properly appointed official has the power to

conduct an independent evaluation of the merits and does so,” id. at 117, and that as a

constitutional matter this “independent evaluation” could include a review of prior records and

transcripts, see id. at 122.

This reluctance to adopt a bright-light rule makes sense. To hold that all adjudications

must start from zero after a judicial decision invalidating ALJ appointments would result in

cumbersome, repetitive processes throughout the executive branch simply to produce findings

and orders that would often be identical the second time around. Moreover, as the District of

Columbia Circuit observed, an “independent evaluation of the merits” does not require an ALJ to

ignore all past proceedings: Independence is not a synonym for ignorance. See id. at 121–23.12

Thus, our inquiry focuses on whether ALJ McNeil’s consideration of the 2015

stipulations and testimony showed “sufficient continuing taint arising from the first

[proceeding]” to demonstrate that the second proceeding was not “an independent, de novo

11

We note that although the Supreme Court stated that a new hearing was unnecessary in Arthrex, it

explained that Arthrex was not entitled to a new hearing before a new panel “[b]ecause the source of the

constitutional violation is the restraint on the review authority of the Director [of the Patent and Trademark Office],

rather than the appointment of [administrative patent judges] by the Secretary [of Commerce].” Arthrex, 141 S. Ct.

at 1988 (emphases added). This decision thus did not reject the Federal Circuit’s conclusion that, if the

administrative patent judges’ appointments had been invalid, a new hearing would be appropriate, including some

consideration of the original record.

12

Our dissenting colleague characterizes our approach as a cost-benefit balancing exercise. See Dissent at

74. But determining whether a new ALJ can conduct an “independent evaluation of the merits,” see Intercollegiate

Broad. Sys., 796 F.3d at 117, involves analyzing the impact of those past proceedings on a current adjudication—an

inquiry that bears little resemblance to a weighing of the relative costs and benefits of a new administrative

proceeding. Though we mention prudential considerations that favor our approach, we do not rely on them.

Instead, our conclusion rests on the principle illustrated in Intercollegiate Broadcasting System and other decisions

that, following an Appointments Clause violation, a new proceeding affords adequate remedy when a new

decisionmaker can independently consider the merits. See id. at 117–20; Arthrex, 941 F.3d at 1340.

No. 20-4303 Calcutt v. FDIC Page 33

decision.” Id. at 124 (citing Fed. Election Comm’n v. Legi-Tech, Inc., 75 F.3d 704, 708 n.5 (D.C.

Cir. 1996)). No such ongoing impact occurred here.

First, ALJ Miserendino’s general ability to shape the record at the 2015 hearing does not

demonstrate that ALJ McNeil lacked independence. Calcutt implies that any decision at a prior

proceeding that shapes the record of a later proceeding invalidates the latter’s outcome. That

goes too far. See Intercollegiate Broad. Sys., 796 F.3d at 124 (explaining that “not every possible

kind of taint is fatal because, if it were, there would be no way to remedy an Appointments

Clause violation”); Legi-Tech, 75 F.3d at 708–09 (accepting that past Appointments Clause

violation will have some impact on later proceedings, but refusing to restart administrative

process). And where a party receives an opportunity to submit additional evidence and to specify

alleged defects in the first proceeding, as the FDIC’s order after Lucia provided here, the

subsequent proceeding is even more likely to be independent.

Second, ALJ McNeil’s reliance on stipulations that the FDIC, Calcutt, Green, and

Jackson made during the 2015 proceedings before Green and Jackson settled did not taint the

proceedings. Calcutt and amicus Washington Legal Foundation argue that the settlement altered

the facts that Calcutt would have conceded. At most, however, the cases cited by the parties

show that courts sometimes accept stipulations made in prior proceedings and sometimes do not,

and that these decisions are reviewed for abuse of discretion. See United States v. Kanu,

695 F.3d 74, 78 (D.C. Cir. 2012); Waldorf v. Shuta, 142 F.3d 601, 616 (3d Cir. 1998); Hunt v.

Marchetti, 824 F.2d 916, 918 (11th Cir. 1987). To the extent that these decisions about judicial

proceedings apply to administrative adjudications, ALJ McNeil did not abuse his discretion. In

Waldorf, the court specified that “a stipulation does not continue to bind the parties if they

expressly limited it to the first proceeding or if the parties intended the stipulation to apply only

at the first trial,” 142 F.3d at 616, and in this case the parties had agreed to stipulations at the

2015 proceedings without expressly limiting the stipulations to those proceedings. Moreover,

while stipulations from prior proceedings may be excluded if their admission would create a

“manifest injustice,” Kanu, 695 F.3d at 78, Calcutt did not deny that the stipulations were

accurate, but rather argued that they were irrelevant or inappropriate to the new proceeding now

that that his co-respondents had settled. The ALJ did not abuse his discretion by admitting the

No. 20-4303 Calcutt v. FDIC Page 34

stipulations when Calcutt had failed to show that their admission would produce manifest

injustice and had failed to expressly limit their use to the prior proceedings.

Finally, Calcutt contends that ALJ McNeil and the FDIC Board’s use of the record of the

2015 hearing hampered their ability to make an independent judgment. At the 2019 hearing,

Calcutt objected to using that record for all but two witnesses,13 except for impeachment

purposes. ALJ McNeil indicated that he was willing to use the entire 2015 record for substantive

as well as impeachment purposes, and he ultimately used that record at several points throughout

the hearing and his recommended decision. The FDIC Board then referred to the 2015 record in

its final decision at several points, including instances when the 2015 record was the only cited

evidence. It also concluded that it could consider Calcutt’s testimony during 2015 as either

impeachment or substantive evidence.

This inclusion of the 2015 record also did not prevent ALJ McNeil and the Board from

conducting an “independent evaluation of the merits.” Intercollegiate Broad. Sys., 796 F.3d at

122. To begin with, Calcutt’s prior testimony likely qualifies as an opposing party’s statement,

despite his objection. See 12 C.F.R. § 308.36(a)(2) (permitting admission of evidence that would

be admissible under Federal Rules of Evidence); United States v. Cunningham, 679 F.3d 355,

383 (6th Cir. 2012) (explaining that Federal Rule of Evidence 801(d)(2)(A) allows “a party’s

own statement to be offered as evidence against that party even where the statement would

otherwise be inadmissible as hearsay”). Additional testimony from 2015 was corroborated by

other evidence. The remaining isolated instances in which either ALJ McNeil or the Board relied

on the 2015 record for substantive conclusions do not convince us that the agency was unable to

independently consider the merits of Calcutt’s case. And, if there was error at these points in its

analysis, it was likely harmless due to the abundance of evidence in the record supporting the

agency’s decision. See 5 U.S.C. § 706(2); see also infra at 37–53.

In sum, Lucia required that Calcutt receive a new hearing, and that is what he got. A new

hearing need not be from scratch; rather, the impact of the prior proceeding must be sufficiently

muted that the new adjudicator can independently consider the merits. ALJ McNeil and the

13

The parties agreed by stipulation to introduce the 2015 testimony of Dennis O’Neill and Charles Bird,

two FDIC examiners.

No. 20-4303 Calcutt v. FDIC Page 35

FDIC Board did not abuse their discretion by admitting the 2015 materials when they remained

capable of drawing their own conclusions about Calcutt’s case.

IV. HEARING CHALLENGES

We now turn from Calcutt’s structural constitutional challenges to his claims regarding

the specifics of his 2019 hearing. These fall into three categories: a challenge relating to the

decision of the ALJ to limit cross-examination on bias at the hearing, a challenge to the

substance of the FDIC Board’s findings and conclusions, and an abuse-of-discretion challenge to

the FDIC Board’s choice of sanction.

A. Cross-Examination

Under the FDI Act and the APA, parties are entitled “to conduct such cross-examination

as may be required for a full and true disclosure of the facts.” 5 U.S.C. § 556(d); see 12 U.S.C.

§ 1818(h)(1) (requiring FDIC hearings to be conducted in accordance with APA adjudication

procedures). The FDIC’s regulations provide that evidence which would be admissible under the

Federal Rules of Evidence is also admissible in an enforcement hearing, 12 C.F.R.

§ 308.36(a)(2), and that evidence that would be inadmissible under the Federal Rules of

Evidence is admissible in the hearing if it is “relevant, material, reliable, and not unduly

repetitive,” id. § 308.36(a)(3); see id. § 308.36(a)(1). Calcutt argues that ALJ McNeil erred

under these provisions by limiting cross-examination of Autumn Berden, Cori Nielson, and Anne

Miessner regarding their purported bias against Calcutt, and that the Board erred by accepting

these limitations. The parties agree that neither Berden, Nielson, nor Miessner testified about

bias at the hearing.

We review an ALJ’s exclusion of evidence under an abuse-of-discretion standard. NLRB

v. Jackson Hosp. Corp., 557 F.3d 301, 305–06 (6th Cir. 2009). An abuse of discretion occurs

when the ALJ “applies the wrong legal standard, misapplies the correct legal standard, or relies

on clearly erroneous findings of fact.” B & G Mining, Inc. v. Dir., Off. of Workers’ Comp.

Programs, 522 F.3d 657, 661 (6th Cir. 2008) (quotation marks omitted).

No. 20-4303 Calcutt v. FDIC Page 36

Yet, “due account must be taken of the rule of prejudicial error.” 5 U.S.C. § 706(2); see

12 U.S.C. § 1818(h)(2) (providing that the APA governs review of FDIC enforcement

proceedings). This language applies the federal harmless-error standard from civil cases. See

Shinseki v. Sanders, 556 U.S. 396, 406–07 (2009). We employ a “case-specific application of

judgment, based upon examination of the record,” id. at 407, to determine whether the error

“affect[ed] the substantial rights of the parties,” 28 U.S.C. § 2111. An error is not harmless

when, for example, an agency violates its own procedural rules and the petitioner shows that he

“has been prejudiced on the merits or deprived of substantial rights because of the agency’s

procedural lapses.” Wilson v. Comm’r of Soc. Sec., 378 F.3d 541, 547 (6th Cir. 2004) (quotation

marks and emphasis omitted).

We need not reach whether ALJ McNeil abused his discretion in limiting cross-

examination on the bias of Berden, Nielson, and Miessner, because even if he did, that error was

harmless. As we have explained in the civil context, an adjudicator’s erroneous exclusion of

evidence is not prejudicial, and therefore is harmless, “if other substantially equivalent evidence

of the same facts [was] admitted into evidence.” In re Air Crash Disaster, 86 F.3d 498, 526 (6th

Cir. 1996) (quoting Leonard v. Uniroyal, Inc., 765 F.3d 560, 567 (6th Cir. 1985) (alteration in

original)). Thus, we recently observed that where a court excluded evidence of police interview

transcripts but the record contained depositions of “most of the same witnesses” quoted in the

transcripts, any error was harmless. M.J. v. Akron City Sch. Dist. Bd. of Educ., 1 F.4th 436, 447

(6th Cir. 2021); see also Smith v. Woolace Elec. Corp., 822 F. App’x 409, 417 (6th Cir. 2020)

(potential error over excluding witness’s testimony was harmless where plaintiff “introduced

substantially equivalent evidence” through another witness’s testimony).

ALJ McNeil and the FDIC Board had access to the 2015 record, which contained

substantially equivalent evidence regarding Berden, Nielson, and Miessner’s bias. See supra at

31–35. During those earlier proceedings, Calcutt’s counsel examined Berden, Nielson, and

Miessner about their bias and alleged collaboration. Other documents in the record were also

relevant to bias, including an email where Nielson told Miessner about difficulties with

Northwestern Bank, requested that the FDIC contact Michigan regulators, and stated, “I just wish

there was a fresh face to talk to at the bank—all this collateral damage is meaningless”; an email

No. 20-4303 Calcutt v. FDIC Page 37

in which Miessner communicated with Michigan regulators regarding Nielson’s request;

Berden’s handwritten notes from meetings with FDIC officials; and an email correspondence

between Miessner, Nielson, and Berden about FDIC charges against Calcutt, titled “A little news

to brighten your weekend.” Although further cross-examination would have allowed Calcutt to

further develop his bias argument, the availability of these other materials indicates that the

agency’s factfinders possessed sufficient information regarding the possible bias of Berden,

Nielson, and Miessner to render any error harmless. Thus, the limits on cross-examination do

not necessitate a new proceeding.

B. Substantive Challenges

As previously discussed, Section 8(e) of the FDI Act permits the FDIC to enter a removal

and prohibition order against an institution-affiliated party after finding that three elements have

been met: misconduct, effects, and culpability. See Dodge, 744 F.3d at 152. Misconduct occurs

when a party has “directly or indirectly” violated a law or regulation, “engaged or participated in

any unsafe or unsound practice” connected with an insured institution, or breached a fiduciary

duty. 12 U.S.C. § 1818(e)(1)(A). The requisite effects take place when, “by reason of” the

misconduct, the insured institution “has suffered or will probably suffer financial loss or other

damage,” its depositors’ interests are prejudiced, or the party “has received financial gain or

other benefit by reason of” the misconduct. Id. § 1818(e)(1)(B). And the culpability element is

met when the party’s action “involves personal dishonesty” or “demonstrates willful or

continuing disregard . . . for the safety or soundness” of the insured institution. Id.

§ 1818(e)(1)(C). We review the FDIC Board’s factual findings for substantial evidence and set

aside the agency’s legal conclusions if they are “arbitrary, capricious, an abuse of discretion, or

otherwise not in accordance with law.” Pharaon v. Bd. of Governors of Fed. Rsrv. Sys., 135 F.3d

148, 152 (D.C. Cir. 1998) (quoting 5 U.S.C. § 706(2)(A)).14

Calcutt argues that the FDIC exceeded its statutory authority by finding misconduct when

none of his actions qualified under the statutory definitions, failing to demonstrate that any

14

Though the FDIC Board’s interpretation of Section 8(e) of the FDI Act may receive persuasive weight, at

least one of our sister circuits has explained that the FDIC receives no Chevron deference to its interpretation of the

Act, because several agencies administer that statute. Dodge, 744 F.3d at 155.

No. 20-4303 Calcutt v. FDIC Page 38

effects resulted “by reason of” of the misconduct, and failing to identify qualifying effects.

He therefore does not challenge the Board’s finding as to his culpability, so we do not address

that part of the Removal and Prohibition Order. He also challenges his civil money penalty only

to the extent that the Board’s reasoning for the penalty overlaps with its analysis supporting the

Removal and Prohibition Order.

1. Misconduct

As to misconduct, Calcutt maintains that the FDIC Board erred by determining that his

actions constituted an “unsafe or unsound practice” or a breach of fiduciary duties under the

statute.15 We disagree.

a. Unsafe or Unsound Practice

The FDI Act does not define an “unsafe or unsound practice,” and the term is interpreted

flexibly. See Seidman v. Off. of Thrift Supervision (Matter of Seidman), 37 F.3d 911, 926–27

(3d Cir. 1994). However, courts have generally treated the phrase as referring to two

components: “(1) an imprudent act (2) that places an abnormal risk of financial loss or damage

on a banking institution.” Id. at 932; see also Michael v. FDIC, 687 F.3d 337, 352 (7th Cir.

2012) (same); Landry, 204 F.3d at 1138 (identifying imprudent-act and abnormal-financial-risk

components).

Calcutt emphasizes the financial-risk component and argues that the Bedrock Transaction

did not pose an abnormal financial risk to Northwestern Bank. Along with amicus American

Association of Bank Directors, he characterizes the Bedrock Transaction as a good-faith attempt

to shore up one of the Bank’s largest lending relationships during the tumult of the Great

Recession by releasing collateral and extending a loan that amounted to only a fraction of the

Nielson Entities’ total debt. And even if the $760,000 loan and $600,000 in collateral were

ultimately not collected, he says, that loss would have been insignificant, considering that the

Bank’s Tier 1 capital totaled more than $70 million.

15

The FDIC does not argue that Calcutt’s actions violated any explicit statute, regulation, cease-and-desist

order, or other similar requirement. Cf. 12 U.S.C. § 1818(e)(1)(A)(i).

No. 20-4303 Calcutt v. FDIC Page 39

The FDIC responds that the statute does not require a finding of a threat to bank stability

in order to find “unsafe or unsound” practice, and that “[c]ourts have affirmed prohibition orders

based on unsafe and unsound practices with a much more limited effect.” Br. of Respondent 46.

That reading contradicts the analyses of our sister circuits in Seidman, Michael, and Landry, and

the decisions that the agency cites in support of its interpretation are not convincing. Ulrich v.

U.S. Department of Treasury is a Ninth Circuit memorandum in which the court concluded that a

loan “fraught” with financial risk, not just a limited effect, was an unsafe or unsound practice.

129 F. App’x 386, 390 (9th Cir. 2005). Other decisions that the FDIC cites—Gully v. National

Credit Union Administration Board, 341 F.3d 155 (2d Cir. 2003), First State Bank of Wayne

County v. FDIC, 770 F.2d 81 (6th Cir. 1985), and Jameson v. FDIC, 931 F.2d 290 (5th Cir.

1991)—did not engage with the question of whether financial risk to the institution was

necessary to demonstrate an unsafe or unsound practice. Still other cited decisions linked a

finding of unsafe or unsound practices to abnormal financial risks, again controverting the FDIC.

See Gulf Fed. Sav. & Loan Ass’n of Jefferson Parish v. Fed. Home Loan Bank Bd., 651 F.2d 259,

264 (5th Cir. 1981); Matter of ***, FDIC-83-252b&c, FDIC-84-49b, FDIC-84-50e

(Consolidated Action), 1985 WL 303871, at *9 (FDIC Aug. 19, 1985).

Whether or not we interpret the statute to require a finding of abnormal financial risk,

however, the FDIC’s finding that Calcutt committed an “unsafe or unsound practice” is

supported by substantial evidence. First, Calcutt does not address the Board’s finding that he

“repeatedly concealed material information about the Nielson Loans” from regulators, and that

such misrepresentations “constitute unsafe or unsound practices.” See De la Fuente, 332 F.3d at

1224 (“Failure to disclose relevant information to a government investigator can constitute an

unsound banking practice.”); Seidman, 37 F.3d at 937 (stating that “hindering [a financial

regulatory agency] investigation is an unsafe or unsound practice”).

Second, the record supports the FDIC Board’s conclusion that Calcutt committed

additional imprudent acts that posed an abnormal financial risk. In particular, the Board

underscored that when the Nielson Entities indicated to the Bank that they would not be able to

pay off their loans in 2009, Calcutt declined to seek additional financial information and instead

approved the Bedrock Transaction, which extended further credit to the Entities and renewed the

No. 20-4303 Calcutt v. FDIC Page 40

outstanding $4.5 million in loans to Bedrock Holdings. The Board also found that Calcutt’s

actions violated the Bank’s commercial-loan policy because he approved the Bedrock

Transaction without either determining that the Nielson Entities had sufficient income to service

their debt, obtaining personal guarantees on the loans, or receiving approval by a two-thirds

majority of the board of directors.

Calcutt responds that such actions do not constitute “unsafe or unsound” practices absent

abnormal financial risk to the Bank, and that his actions did not present such a risk. His first

proposition may be correct. See Seidman, 37 F.3d at 932. However, Calcutt’s actions concerned

the Bank’s largest lending relationship—the Nielson Entities—which represented approximately

$38 million in loans and half of the Bank’s Tier 1 capital. The FDIC Board had substantial

evidence to find that his actions presented a risk in this context, even if it did not explicitly draw

that connection. See Allentown Mack Sales & Serv., Inc. v. NLRB, 522 U.S. 359, 377 (1998)

(explaining that substantial-evidence test “gives the agency the benefit of the doubt, since it

requires not the degree of evidence which satisfies the court that the requisite fact exists, but

merely the degree which could satisfy a reasonable factfinder” (emphasis omitted)). We

therefore hold that the FDIC Board did not err in determining that Calcutt engaged in unsafe or

unsound practices.

b. Breach of Fiduciary Duties

The FDIC Board also concluded that the misconduct element was satisfied because

Calcutt breached his fiduciary duties of care and candor. See 12 U.S.C. § 1818(e)(1)(A)(iii).

These duties are determined by state law rather than federal common law. See Atherton v. FDIC,

519 U.S. 213, 226 (1997) (holding that state law rather than federal common law defines

standard of care for corporate governance); Mickowski v. Visi-Trak Worldwide, LLC, 415 F.3d

501, 511–12 (6th Cir. 2005). Under Michigan law, bank directors and officers have a fiduciary

duty to act with the degree of care “that an ordinarily prudent person would exercise under

similar circumstances in a like position.” Mich. Comp. Laws Ann. § 487.13504(1) (2021).

And in other contexts, Michigan courts have recognized that “[a] fiduciary has an affirmative

duty to disclose” material facts relating to the fiduciary relationship to a principal. Silberstein v.

Pro-Golf of Am., Inc., 750 N.W.2d 615, 624 (Mich. Ct. App. 2008); see also Lumber Vill., Inc. v.

No. 20-4303 Calcutt v. FDIC Page 41

Siegler, 355 N.W.2d 654, 694–95 (Mich. Ct. App. 1984) (recognizing that courts may toll the

statute of limitations for fraudulent concealment actions when a fiduciary fails to inform a

principal of material facts relating to the claim, because “there is an affirmative duty to disclose

where the parties are in a fiduciary relationship”).

On appeal, Calcutt presents three arguments, none availing. First, he contends that he

cannot have violated his duty of care, because his actions did not create an “undue risk” to the

Bank. Br. of Petitioner 51 (quoting Kaplan v. Off. of Thrift Supervision, 104 F.3d 417, 421 (D.C.

Cir. 1997)). This argument echoes his position that he did not commit an “unsafe or unsound”

practice with regard to the Bedrock Transaction.16 See Landry, 204 F.3d at 1138 (noting overlap

in analyses of breach of fiduciary duties and unsafe or unsound practices). And it fails for the

same reason as his unsafe-or-unsound claim: The record presents substantial evidence to support

a finding of financial risk.

Second, Calcutt argues that the Board’s finding that he failed to supervise his

subordinates (namely Green, Jackson, and other Bank employees) does not indicate that he

breached his duty of care. It is true that an officer does not necessarily violate a duty of care

merely because subordinates failed to follow orders. See Doolittle v. Nat’l Credit Union Admin.,

992 F.2d 1531, 1537 (11th Cir. 1993); see also Kaplan, 104 F.3d at 422 (explaining that

director’s approval of plan that ultimately led other officers and directors to “dishonestly short

circuit the required procedures” was not “remotely foreseeable” and did not “contribut[e] to any

increased risk” to institution).

But even if Green, Jackson, and other employees committed many of the actions related

to the Nielson Entities, Calcutt remains responsible if he knew about their actions and permitted

them to occur. Failure to supervise subordinates breaches an officer’s duty of care when the

officer knows about subordinates’ activities or buries his head in the sand. See Hoye v. Meek,

795 F.2d 893, 896 (10th Cir. 1986) (holding that bank director and president inadequately

supervised subordinate, because “[w]here suspicions are aroused, or should be aroused, it is the

16

We note that the Board also concluded that the December 2010 release of Pillay Collateral violated the

duty of care, but it did not conclude that the collateral release constituted an unsafe or unsound practice. This

difference between the two types of misconduct findings does not affect our analysis.

No. 20-4303 Calcutt v. FDIC Page 42

directors’ duty to make necessary inquiries”). In Doolittle, for instance, the Eleventh Circuit

clarified that an officer was not responsible for his subordinates’ actions when he gave proper

orders to them, they failed to follow those orders, and he attempted to take remedial measures,

but that those circumstances did not present “a case where a fiduciary engaged in imprudent

lending activities or stood idle and allowed damage to increase.” 992 F.2d at 1537.17

The record provides substantial evidence that Calcutt knew about his subordinates’

activities and permitted them to continue. For instance, in 2008, he was involved in discussions

with Green and the Nielsons involving the suggestion that they change their methods of

intercompany loans. Calcutt was aware of the Nielson Entities’ difficulty in paying their loans,

although he testified that he thought that they were “posturing.” He received correspondence

directly from the Nielsons. Berden testified that though Calcutt would not attend all meetings,

Green often sought his approval before proceeding in negotiations. Calcutt had received a memo

from Green in November 2009 describing the loan to Bedrock Holdings. He was aware of (and

possibly participated in approving) the sale of Nielson Entity loans to affiliated banks. And

Green reported directly to Calcutt. There was ample evidence for the FDIC Board to find that he

had breached his duty of care by failing to supervise subordinates.

Finally, Calcutt resists the Board’s conclusion that he breached his duty of candor to the

Bank’s board of directors by failing to timely disclose the information about the status of the

Nielson Loans and the Bedrock Transaction. He asserts that the duty of candor requires

corporate fiduciaries to “disclose only ‘material information relevant to corporate decisions from

which [the fiduciary] may derive a personal benefit,’” and that he did not have a personal interest

in the Bedrock Transaction. Br. of Petitioner 53 (quoting De la Fuente, 332 F.3d at 1222

(alteration in original)). Even if we accept this framing of the duty, however, the FDIC

concluded that Calcutt derived a personal benefit from misrepresenting the status of the Nielson

17

Calcutt and amicus American Association of Bank Directors refer to the business-judgment rule and urge

us not to fault Calcutt for taking what they characterize as reasonable, good-faith, but ultimately mistaken decisions

in managing the Bank. Michigan courts have recognized that “[i]nterference with the business judgment of

corporate directors is not justified by allegations that a different policy could have been followed.” Matter of Est. of

Butterfield, 341 N.W.2d 453, 462 (Mich. 1983). However, they also recognize that a breach of fiduciary duty merits

judicial intervention. Ibid. The business-judgment rule thus does not prevent us from considering whether Calcutt

breached fiduciary duties.

No. 20-4303 Calcutt v. FDIC Page 43

Loans to regulators, because he received dividends through the Bank’s holding company that

reflected the Bank’s artificially inflated income. To the extent that substantial evidence supports

the personal-benefit determination, the finding that Calcutt breached his duty of candor would

also be sufficiently supported. In addition, even if Calcutt did not receive a personal benefit, the

support for the Board’s finding that he committed unsafe and unsound practices and violated the

duty of care means that this error would be harmless. See Sanders, 556 U.S. at 407.

In sum, we decline to set aside the Board’s conclusions that Calcutt met the misconduct

element of the statute.

2. Effects

Under the FDI Act, the FDIC must find that “by reason of” Calcutt’s misconduct, one or

more of the following effects resulted: The Bank “has suffered or will probably suffer financial

loss or other damage,” its “depositors have been or could be prejudiced,” or Calcutt “has

received financial gain or other benefit.” 12 U.S.C. § 1818(e)(1)(B). The FDIC Board found

that three types of harms qualified under this provision: (1) a $30,000 charge-off to the $760,000

Bedrock Loan that the Bank recorded; (2) $6.443 million in other charge-offs that the Bank

recorded on other Nielson Loans; and (3) investigative, legal, and auditing expenses that the

Bank incurred. It also found that Calcutt received a financial benefit, because he received

dividends from the Bank’s holding company that would have been smaller had he reported the

condition of the Nielson Loans and not approved the Bedrock Transaction or 2010 release of

Pillay Collateral.

Calcutt commences by arguing that the Board erred by failing to read the statute’s “by

reason of” language to require proximate causation. In its final decision, the FDIC was

unwilling to apply a proximate-causation standard, instead stating that “an individual respondent

need not be the proximate cause of the harm to be held liable under section 8(e).”

Because Section 8(e) requires that a bank’s loss or potential loss, or a party’s benefit,

occur “by reason of” the misconduct, it mandates proximate causation. 12 U.S.C.

§ 1818(e)(1)(B). Recently, we 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

No. 20-4303 Calcutt v. FDIC Page 44

showing of proximate cause.” Crosby v. Twitter, Inc., 921 F.3d 617, 623 (6th Cir. 2019)

(quoting Kemper v. Deutsche Bank AG, 911 F.3d 383, 391 (7th Cir. 2018)). This interpretation

has occurred in the context of other statutory schemes. See Hemi Grp., LLC v. City of New York,

559 U.S. 1, 9 (2010) (civil RICO statute, 18 U.S.C. § 1964(c)); Holmes v. Sec. Inv. Prot. Corp.,

503 U.S. 258, 268 (1992) (same); Crosby, 921 F.3d at 623 (Anti-Terrorism Act, 18 U.S.C.

§ 2333). The FDIC has not offered a reason why the phrase should not have the same meaning

in Section 8(e), and “[i]n the absence of any statutory definition to the contrary, courts assume

that Congress adopts the customary meaning of the terms it uses.” United States v. Detroit Med.

Ctr., 833 F.3d 671, 674 (6th Cir. 2016) (citing Morissette v. United States, 342 U.S. 246, 263

(1952)).

The FDIC alternatively argues that its formulation—that “by reason of” requires only “a

causal ‘nexus’ between the misconduct and harm, or that harm was reasonably foreseeable”—is

consistent with proximate causation. Br. of Respondent 50. This has some appeal; after all, it is

notoriously difficult for judges to define proximate cause. See Associated Gen. Contractors of

Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 535–36, 535 n.32 (1983); Crosby,

921 F.3d at 623–24. We also recognize that in prior adjudications, the FDIC has concluded

that a reasonably foreseeable loss “satisfies the ‘effects’ requirement.” Matter of Conover,

Nos. FDIC-13-214e, FDIC-13-217k, 2016 WL 10822038, at *22 (FDIC Dec. 14, 2016); see also

Matter of ***, 1985 WL 303871, at *114 (declining to characterize the causation standard as

proximate cause). However, while reasonable foreseeability may be a necessary component of

proximate causation, it is not sufficient: “substantiality, directness, and foreseeability are all

relevant in a proximate cause determination,” though these concepts may overlap. Crosby,

921 F.3d at 624.

The decisions cited by the FDIC as support for its view are consistent with a proximate-

causation definition of “by reason of” that incorporates substantiality, directness, and

foreseeability. In De la Fuente, for example, the Ninth Circuit held that a risk of loss must be

“reasonably foreseeable,” but did not conclude that reasonable foreseeability alone was enough

for liability. 332 F.3d at 1223; see also United States v. Gamble, 709 F.3d 541, 549 (6th Cir.

2013) (holding that harms must be reasonably foreseeable to be proximately caused, but not

No. 20-4303 Calcutt v. FDIC Page 45

stating that reasonable foreseeability is sufficient). Haynes v. FDIC, a memorandum, seemingly

treated “reasonably foreseeable” as interchangeable with “by reason of,” but did so in a summary

fashion that we do not consider persuasive. See 664 F. App’x 635, 637 (9th Cir. 2016).

Although in Landry, the Court of Appeals for the District of Columbia Circuit recognized that an

individual could be liable for the effects of misconduct even if he acted “only indirectly,” the

court was construing the misconduct element of Section 8(e). 204 F.3d at 1139; see 12 U.S.C.

§ 1818(e)(1)(A) (identifying relevant finding as whether a party has “directly or indirectly”

committed misconduct). We do not read that decision to say that when it comes to the effects

inquiry, reasonable foreseeability alone suffices to show causation.

With the causation standard established, we consider the statutory effects identified by

the FDIC Board. We conclude that substantial evidence supports the conclusion that some—but

not all—of the impacts to the Bank are “effects” under Section 8(e) and were proximately caused

by Calcutt’s misconduct.

a. The $30,000 Charge-Off on the $760,000 Bedrock Loan

The charge-off on the loan to Bedrock Holdings, which was part of the Bedrock

Transaction, is an effect under the statute. Calcutt argues that a charge-off does not reflect actual

losses but rather estimates possible future loss, but the FDI Act is clear that a loss that a bank

will “probably suffer” qualifies as an effect, 12 U.S.C. § 1818(e)(1)(B)(i). Similarly, an

estimated loss is sufficient. See Dodge, 744 F.3d at 158 (explaining that effects requirement “is

satisfied by evidence of either potential or actual loss to the financial institution, and the exact

amount of harm need not be proven”); Pharaon, 135 F.3d at 157 (holding that FDIC Board need

not “demonstrate the exact amount of harm”). Though Calcutt argues that some charge-offs are

too small to constitute effects, we need not address this issue, because the FDIC supplemented its

finding with respect to the $30,000 effect with several other findings of effects. And the record

indicates that, because Calcutt participated extensively in negotiating and approving the Bedrock

Transaction, his actions proximately caused the Bedrock Loan charge-off.

No. 20-4303 Calcutt v. FDIC Page 46

b. Investigative, Auditing, and Legal Expenses

The FDIC Board also agreed with ALJ McNeil that Calcutt’s misconduct caused the

Bank to incur expenses by retaining a CPA firm and a legal firm to conduct work relating to the

regulatory problems with the Nielson Entities relationship. We conclude, however, that such

professional fees are not “effects” under Section 8(e). Banks regularly engage accounting and

legal firms as part of their normal business, and we do not see how employing such businesses

for additional services related to imprudent loans is meaningfully different from their run-of-the-

mill engagements.

The FDIC Board reasoned that though legal fees “presumptively are a normal cost of

doing business,” they can constitute an effect when they “are coupled with other ‘non-neutral

indicia of loss,’” and that the Bank’s payments to a CPA firm and loan charge-offs constituted

such other non-neutral indicia. See Matter of Proffitt, FDIC-96-105e, 1998 WL 850087, at *9

n.11 (FDIC Oct. 6, 1998) (considering “a [court] judgment of improper and illegal behavior” in a

related lawsuit to be a non-neutral indicium). We are unpersuaded by this rationale: If

professional fees are not a loss unless they are coupled with other “non-neutral indicia of loss,”

then it may be that the fees do not have any independent significance. The two FDIC decisions

cited by the Board exemplify this problem, since in both instances banks suffered losses in

addition to their payment of professional fees. In Matter of Proffitt, the Board explained that “a

judgment of improper and illegal behavior”—in that context, a court judgment awarding a bank

to pay damages—plus legal fees could establish a qualifying loss. Id. at *3, *9 & n.11. And in

Matter of Shollenburg, the bank suffered additional losses besides professional fees in order to

satisfy tax laws that the respondents had violated. See FDIC-00-88e, 2003 WL 1986896, at *12–

13 (FDIC Mar. 11, 2003).

c. $6.443 Million in Other Losses

Next, the Board found that Calcutt’s actions cost the Bank $6.443 million in losses from

other loans to the Nielson Entities, and that his approval of the release of approximately

$1.2 million in Pillay Collateral prevented the Bank from using those funds to recoup part of

those losses. Apart from asserting that the Board failed to apply a proximate-causation standard,

No. 20-4303 Calcutt v. FDIC Page 47

Calcutt argues that under that standard, the $6.443 million loss does not count as an effect,

because it represents a probable future loss from the entire Nielson Entity loan portfolio that

would have occurred regardless of his actions, and because the $1.2 million in released collateral

was used to pay off the Nielson Entities’ debts, thereby benefitting the Bank.18

Only part of the $6.443 million in charge-offs can be described as an effect proximately

caused by Calcutt’s misconduct. Recall that the Nielson Entities indicated that they were unable

to pay off debts as early as 2009. The Bank probably would have incurred some loss no matter

what Calcutt did: Although multiple parties’ actions can proximately cause the same outcome,

the state of the Bank’s relationship with the Nielson Entities suggests that Calcutt’s actions did

not substantially or directly contribute to all of its ultimate losses.

Additionally, the FDIC’s explanation for considering the $1.2 million of released

collateral in its loss calculation is unconvincing. In its decision, the FDIC Board reasoned that

had Calcutt not participated in the release of the Pillay Collateral in 2009 and 2010, those funds

would have been available to pay off debts owed by certain Nielson Entities that were secured by

that collateral. But that view ignores that the release of Pillay Collateral was used to satisfy

other Nielson Entity debts, and that the FDIC, in calculating the $6.443 million in losses,

considered all of the Bank’s loans to the companies together. We fail to see how the agency

could reasonably consider the interrelatedness of the Nielson Entities in one part of its loss

calculation and ignore those connections in another. Thus, the mere release of the $1.2 million

in collateral does not qualify as an effect.

Nevertheless, there is substantial evidence that part of the $6.443 million in losses was an

effect of Calcutt’s actions. The record indicates that Calcutt, knowing that the Nielson Entities

were near default and that they were a large lending relationship, extended credit and renewed

loans to them while concealing these transactions and the scale of the problem from the Bank’s

board and from regulators. ALJ McNeil also found that, in 2009, the Nielson Entities had

proposed loan renewals, forbearance, deeds in lieu of foreclosure, and other mechanisms to

relieve their obligations. Though Calcutt may have thought that these options would have

18

Calcutt also suggests that because the $6.443 million was recorded in charge-offs, it does not qualify as a

loss. For the reasons previously discussed, this view fails. See supra at 45.

No. 20-4303 Calcutt v. FDIC Page 48

resulted in “sure losses” to the Bank, the FDIC could have concluded from the record that his

decision to extend additional loans ultimately exacerbated the problem.

Additionally, there is substantial evidence that Calcutt’s actions resulted in probable

future losses to the Bank. Cf. 12 U.S.C. § 1818(e)(1)(B)(i) (permitting effects finding where

bank “will probably suffer financial loss or other damage”); Proffitt v. FDIC, 200 F.3d 855, 863

(D.C. Cir. 2000) (noting that “the effect prong can be met by either potential or actual ‘financial

loss or other damage’”). Even if there were insufficient evidence that Calcutt’s actions

surrounding the Bedrock Transaction and 2010 release of Pillay Collateral caused an actual loss,

his negotiation with the Nielson Entities and approval of loans despite indications that they

would not be able to repay their debts was a direct, substantial, and foreseeable cause of a

situation in which the Bank could suffer a potential loss. The record also shows that Calcutt’s

actions prevented the board and regulators from discovering and mitigating the probable losses

from these activities. Cf. Seidman, 37 F.3d at 937 (noting, in the context of identifying an unsafe

or unsound practice, that a chairman of a board of director’s “attempt to obstruct the

investigation, if continued, would pose an abnormal risk of damage” to the agency). Relying on

board members’ testimony and contemporaneous board minutes,19 ALJ McNeil found that the

board did not approve the loan to Bedrock Holdings until several months after the loan had

already been made. And Miessner testified (despite Calcutt’s theory that she was biased) that, in

her opinion, misrepresenting the condition of the Bank’s loans with the Nielson Entities exposed

the Bank to additional risk. In these circumstances, we conclude from the record as a whole that

Calcutt’s actions proximately caused an actual and potential loss to the Bank—even if the loss

did not amount to the total of $6.443 million.

d. Holding Company Dividends

Finally, the Board concluded that the dividends Calcutt received from the Bank’s holding

company qualified as a financial benefit that satisfied the “effects” element. See 12 U.S.C.

§ 1818(e)(1)(B)(iii) (providing that an effect is present when a party “has received financial gain

or other benefit by reason of such violation, practice, or breach”). The holding company,

19

ALJ McNeil also found that Calcutt’s testimony regarding the timing of the board’s approval of the

Bedrock Transaction was not credible.

No. 20-4303 Calcutt v. FDIC Page 49

Northwestern Bancorp, wholly owned the Bank, and Calcutt held approximately ten percent of

the shares in the holding company. In 2010 and 2011, the Bank paid dividends to Northwestern

Bancorp. The holding company, in turn, paid a dividend to its shareholders. Calcutt argues that

his alleged misconduct cannot have proximately caused a financial benefit, because

Northwestern Bancorp operated independently from the Bank and had alternative sources of

income; thus, even if the Bank’s income appeared inflated due to the improper reporting of the

Nielson Loans, it did not substantially affect the holding company’s payout to shareholders.

As in the circumstance of the FDIC’s categorization of the $6.443 million in losses, the

record compels an answer somewhere in between the two parties’ positions. On one hand, the

FDIC did not point to specific evidence in the record showing that Northwestern Bancorp’s

dividends with certainty reflected the inflated earnings from the Nielson Entities. It simply

assumed (and reasonably so) that the dividends paid by the holding company reflected the value

of the dividends paid by the Bank. On the other hand, Calcutt does not really challenge the

findings that the Bank paid a dividend to the holding company, nor that the Bank’s dividend

reflected its inflated representation of the Nielson Loans’ performance. Rather, his position is

that the holding company still might have paid out dividends from its other sources of income.

He does not provide evidence (other than his own testimony, which is stated in general terms)20

that the holding company had ever paid dividends over and above a reflection of the Bank’s

perceived performance. Absent such evidence, we are skeptical that the Bank’s earnings did not

impact its holding company’s dividend payments. On balance, the evidence and common sense

support the agency’s position as to this effects finding.

e. Cumulative Effects

In sum, the support for the effects findings made by the FDIC Board are mixed. Taken

together, the $30,000 charge-off on the Bedrock Loan, some of the $6.443 million in other losses

related to the Nielson Entities, and some of the dividend payments that Calcutt received from

20

“Q. Did the holding company have sufficient capacity to make payments to shareholders regardless of

whether there were dividends being paid by the Bank to the holding company?

A. [Calcutt:] Yes, for some years the holding company not only had its own assets that generated some

income but it had a line of credit so it had capacity to make dividend payments to shareholders. Again, we were, we

were laughed at a bit in the industry because we had one of the lowest dividend payout ratios that was recorded.”

No. 20-4303 Calcutt v. FDIC Page 50

Northwestern Bancorp occurred “by reason of” his misconduct surrounding loan activities and

misrepresentations to the Bank’s board of directors and regulators. But the Bank’s auditing and

legal fees do not qualify as an effect, and Calcutt’s actions may not have proximately caused

some of the losses and dividend payments.

These conclusions lead to a further question: If some, but not all, of the FDIC’s effects

findings are supported, should the Removal and Prohibition Order be remanded? One might

argue that had the FDIC only considered those effects for which the record presented substantial

evidence, it would not have thought it appropriate to remove Calcutt from his banking positions

and prohibit him from participation in the industry. Or, perhaps one might say that the whittled-

down effects findings are sufficiently minimal to compel us to send the matter back to the agency

for further findings and proceedings.

A remand is not necessary, for several reasons. To start, the text of the statute indicates

that if substantial evidence supports the FDIC’s finding as to one effect out of multiple

possibilities, the fact that it fails to adequately support its other effects findings does not limit its

power to issue a removal and prohibition order. Section 8(e)(1)(B) separates the categories of

permissible effects by the disjunctive term “or”: The agency must find that “by reason of” the

misconduct,

(i) such insured depository institution . . . has suffered or will probably suffer

financial loss or other damage;

(ii) the interests of the insured depository institution’s depositors have been or

could be prejudiced; or

(iii) such party has received financial gain or other benefit . . . .

12 U.S.C. § 1818(e)(1)(B) (emphases added). Generally, “terms connected by a disjunctive [are]

given separate meanings, unless the context dictates otherwise.” Reiter v. Sonotone Corp.,

442 U.S. 330, 339 (1979). For example, when a statute lists two activities connected by “or,” the

natural reading is usually that it applies to either activity. See Encino Motorcars, LLC v.

Navarro, 138 S. Ct. 1134, 1141 (2018). Thus, the text of the FDI Act permits the FDIC to

remove and prohibit a party (assuming that the misconduct and culpability elements are met) as

long as the evidence supports a finding of one out of any of the options provided by Section

No. 20-4303 Calcutt v. FDIC Page 51

8(e)(1)(B). Because we conclude here that substantial evidence supports several of the FDIC’s

effects findings, the statutory text indicates that the Removal and Prohibition Order should stand.

Additionally, other circuits have also suggested that when such a finding can be

supported by one of several alternative bases, courts should deny petitions challenging the

agency’s order. In Dodge, for example, the District of Columbia Circuit upheld an effects

finding when substantial evidence supported the Comptroller of the Currency’s conclusions that

a bank’s depositors could be prejudiced under Section 8(e)(1)(B)(ii) and that the petitioner

received a financial benefit under Section 8(e)(1)(B)(iii)—even when the court declined to rely

on the Comptroller’s finding of potential harm to the bank under Section 8(e)(1)(B)(i). 744 F.3d

at 158. And in De la Fuente, the Ninth Circuit held that the FDIC Board “correctly concluded

that De La Fuente’s [sic] actions had an impermissible effect because he received financial

benefit from the transaction and/or because the interests of [the bank’s] depositors were

prejudiced thereby.” 332 F.3d at 1223 (emphasis added). That is, the court suggested that even

if the Board had incorrectly concluded that the petitioner received financial benefit, its separate

finding of prejudice to depositors was sufficient to satisfy the effects element.

Finally, a remand would be in tension with the substantial-evidence standard of review

for factual findings. In conducting this review, we consider the whole record, 5 U.S.C. § 706(2),

but we must uphold an agency’s decision even if we “would decide the matter differently . . . and

even if substantial evidence also supports the opposite conclusion.” Gen. Med., P.C., 963 F.3d at

520 (quoting Cutlip, 25 F.3d at 286). As we have explained, the record in this case provides

substantial evidence to conclude that Calcutt’s actions produced sufficient effects to merit the

FDIC’s sanction, even if some findings as to other effects were incorrect. We cannot nitpick the

agency’s factfinding more than that.

Our dissenting colleague would nonetheless remand the petition to the FDIC, reasoning

that only that remedy is consistent with the principle that courts may not uphold an agency’s

order “unless the grounds upon which the agency acted in exercising its powers were those upon

which its action can be sustained.” SEC v. Chenery Corp., 318 U.S. 80, 95 (1943). While we do

not question Chenery, that decision does not mean that a court must remand where the agency

makes any legal error, especially where substantial evidence amply supports an agency’s

No. 20-4303 Calcutt v. FDIC Page 52

findings. Remand is unnecessary where an agency’s “incorrect reasoning was confined to that

discrete question of law and played no part in its discretionary determination,” and it reaches a

conclusion that it was bound to reach. United Video, Inc. v. FCC, 890 F.2d 1173, 1190 (D.C. Cir.

1989); see also Morgan Stanley Cap. Grp. Inc. v. Pub. Util. Dist. No. 1., 554 U.S. 527, 545

(2008) (“That [the agency] provided a different rationale for the necessary result is no cause for

upsetting its ruling.”). Reading Chenery so broadly as to compel remand in such circumstances

would result in yet another agency proceeding that amounts to “an idle and useless formality.”

NLRB v. Wyman-Gordon Co., 394 U.S. 759, 766 n.6 (1969) (plurality op.). And it would risk

contradicting the harmless-error rule in courts’ review of agency action. See Sanders, 556 U.S.

at 406–07.

Thus, we do not uphold the FDIC’s order in this case simply by substituting our

reasoning for the agency’s discretionary determinations. Rather, our inquiry focuses on whether

substantial evidence supports the FDIC’s factual findings that the charge-offs, dividends, and

other expenses were “effects” under the statute. Notwithstanding the agency’s error in

identifying the appropriate causation standard, and our conclusion that legal expenses do not

qualify as “effects,” the agency’s findings clear this hurdle. We decline to remand the petition to

the FDIC.

3. Sanction

Finally, Calcutt claims that the FDIC’s order removing him from his position and

prohibiting him from future banking activities is an abuse of discretion. Courts review a removal

sanction for abuse of discretion. Grubb v. FDIC, 34 F.3d 956, 963 (10th Cir. 1994). A sanction

constitutes an abuse of discretion when it “is unwarranted in law or without justification in fact.”

Ibid. (quoting Butz v. Glover Livestock Comm’n Co., 411 U.S. 182, 185–86 (1973)) (quotation

marks omitted). According to Calcutt, his penalty is “plainly excessive” in light of his

subsequent, misconduct-free work for State Savings Bank, his age, and the harshness of the

penalty. Br. of Petitioner 63. True, removal and prohibition are “extraordinary sanction[s].”

De la Fuente, 332 F.3d at 1227. And, as Calcutt notes, the FDIC could have opted to proceed

with only a cease-and-desist order or civil monetary penalty. But for the reasons we have

explained, Section 8(e) clearly permits removal and prohibition for the actions that the FDIC

No. 20-4303 Calcutt v. FDIC Page 53

alleges in this case, and the FDIC’s conclusions are well supported. The agency’s sanction

choice is not an abuse of discretion under these circumstances.

V. CONCLUSION

For the reasons above, we deny Calcutt’s petition for review and vacate our stay of the

FDIC’s Removal and Prohibition Order.

No. 20-4303 Calcutt v. FDIC Page 54

_________________

DISSENT

_________________

MURPHY, Circuit Judge, dissenting. After adjudging Harry Calcutt guilty of

misconduct in the management of a bank, the Federal Deposit Insurance Corporation (FDIC)

issued an order that would bar him from working in his profession and fine him $125,000.

Calcutt challenges this order on constitutional and statutory grounds. My colleagues reject all of

his claims. I agree with them on his constitutional claims but must part ways on his statutory

ones.

Calcutt’s three constitutional claims do not entitle him to relief. He first alleges that

Congress has unconstitutionally restricted the President’s right to terminate (and so to control)

the FDIC’s Board of Directors. But his argument rests on a misreading of the Board’s enabling

statute. It gives the President complete authority to fire most of the Board’s members. Calcutt

next argues that Congress at least gave one Board member and the FDIC’s administrative law

judges unconstitutional protections from removal. Even assuming that this claim has merit,

however, he fails to show why these unconstitutional statutes would entitle him to the relief that

he seeks—vacatur of the FDIC’s actions in his case as “void.” The Constitution itself requires

no remedy. And I would read recent Supreme Court precedent to bar his preferred remedy

because that reading best comports with the historical practices that we should follow until

Congress says otherwise. Calcutt lastly notes that the first administrative law judge who heard

his case had not been appointed in a manner that comported with the Constitution’s

Appointments Clause. The Board agreed and gave him a new hearing before a new judge.

Calcutt now claims that the Appointments Clause barred this new judge from relying on any

evidence developed at the initial hearing. But again, nothing in the Constitution required any

remedy, let alone Calcutt’s expansive one.

Calcutt’s statutory claims are another matter. The FDIC misread the statute on which it

relied to sanction him. Of most note, the FDIC cannot bar Calcutt from banking unless it proves

that his bank will suffer a loss (or that he will receive a benefit) “by reason of” his misconduct.

12 U.S.C. § 1818(e)(1)(B). As the Supreme Court has long made clear, the phrase “by reason

No. 20-4303 Calcutt v. FDIC Page 55

of” incorporates common-law principles of but-for and proximate cause. Yet the FDIC’s order

ignored but-for cause and disavowed proximate cause. In fact, the agency held Calcutt liable for

his bank’s entire loss from underwater loans even though the Great Recession likely would have

caused the bank to suffer much (if not all) of this loss no matter what he did. Congress has given

the FDIC “extraordinary power” to regulate private parties with only limited judicial oversight.

In re Seidman, 37 F.3d 911, 929 (3d Cir. 1994). After Stern v. Marshall, 564 U.S. 462 (2011),

one might wonder whether the agency exercises judicial power by adjudicating cases that

deprive individuals of private rights. At the least, its significant authority should make us

diligent to ensure that the agency has “turn[ed] square corners when” dealing with the regulated

community. Niz-Chavez v. Garland, 141 S. Ct. 1474, 1486 (2021). Because the FDIC did not

do so in this case, I would remand for it to apply the proper law. I thus respectfully dissent.

I. Background

Calcutt served for years as the President and Chairman of Northwestern Bank in Traverse

City, Michigan. During his tenure, entities controlled by the Nielson family (the “Nielson

Entities”) became the Bank’s largest borrowers with $38 million in loans. The Nielson Entities

ran real-estate businesses that struggled during the Great Recession. They defaulted in

September 2009. Two months later, the Bank entered into the “Bedrock Transaction” with the

entities. It issued them another $760,000 loan and released to them $600,000 of funds held as a

security interest. Yet things did not improve. The Nielson Entities again defaulted in September

2010. After the Bank released to them another $690,000 in secured funds, the entities defaulted

a final time in January 2011. The Bank incurred $6.443 million in “charge-offs” (amounts

unlikely to be collected) from the loans and $30,000 in charge-offs from the Bedrock

Transaction.

These events led the FDIC to seek to “remove” Calcutt “from office” and to impose a

“civil penalty” on him. 12 U.S.C. § 1818(e)(1), (i)(2)(B). The first administrative law judge

who heard his case had been unlawfully appointed, so the FDIC assigned him a new judge. This

judge found that Calcutt had committed many statutory violations and that the FDIC should bar

him from banking and fine him $125,000. The FDIC agreed. It held that Calcutt had engaged in

“unsafe or unsound practice[s]” and committed “breach[es]” of his “fiduciary dut[ies]” mainly in

No. 20-4303 Calcutt v. FDIC Page 56

connection with the Bedrock Transaction. Id. § 1818(e)(1)(A)(ii)–(iii). Among other

misconduct, it found that he had violated the Bank’s lending standards by agreeing to that

transaction, had hid the transaction’s true nature from the Bank’s board of directors, and, perhaps

most seriously, had lied to regulators about it. The FDIC also found that the Bank would likely

suffer “financial loss” and that Calcutt had “received financial gain” “by reason of” this

misconduct. Id. § 1818(e)(1)(B).

II. Constitutional Claims

I agree with my colleagues that Calcutt’s constitutional arguments all fall short. But my

reasoning rests largely on different grounds.

A. Restrictions on the President’s Ability to Control the FDIC

Calcutt first argues that the FDIC’s statutory scheme gives the President constitutionally

insufficient control over the agency’s exercise of executive power. Why? He assumes that the

statute creating the FDIC’s five-member Board of Directors bars the President from removing

most of its members except “for cause.” See 12 U.S.C. § 1812. This limit, Calcutt reasons,

impairs the President’s ability to command the “executive Power” and to “take Care that the

Laws be faithfully executed.” U.S. Const. art. II, § 1, cl. 1; id. § 3. He has a point. The

Supreme Court recently found unconstitutional similar “for cause” limits on the President’s

ability to remove the Director of the Consumer Financial Protection Bureau (CFPB). Seila Law

LLC v. CFPB, 140 S. Ct. 2183, 2197–2207 (2020). In response, the FDIC “does not dispute

Calcutt’s assumption” that § 1812 gives the Board these removal protections. Resp. Br. 17 n.7.

But it argues that they pass muster under Humphrey’s Executor v. United States, 295 U.S. 602

(1935), which upheld similar protections for the Federal Trade Commission (FTC). Id. at 626–

30.

As an intermediate judge, I find this constitutional question difficult. On the one hand,

Humphrey’s Executor relied on the FTC’s nonpartisan, multimember structure to uphold the

provision limiting the President’s ability to fire its commissioners. Id. at 624–25. The FDIC

shares the same structure. Compare 12 U.S.C. § 1812(a)(1)–(2), with 15 U.S.C. § 41. And while

Seila Law may well call Humphrey’s Executor into doubt, lower courts must follow a case that is

No. 20-4303 Calcutt v. FDIC Page 57

directly on point even if another decision has undercut it. See Agostini v. Felton, 521 U.S. 203,

237 (1997).

On the other hand, Humphrey’s Executor may not be directly on point. It also upheld the

FTC’s removal protections because, as the Court understood the FTC’s duties in 1935, the

agency undertook “no part of the executive power[.]” 295 U.S. at 628. The FDIC, by contrast,

performs core executive functions. Here, it has essentially brought a civil-enforcement suit

against Calcutt to ban him from banking and impose a hefty fine on him. It thus is executing

(i.e., carrying into effect) the law barring “unsafe or unsound” banking practices. 12 U.S.C.

§ 1818(e)(1)(A)(ii); see Saikrishna Prakash, The Chief Prosecutor, 73 Geo. Wash. L. Rev. 521,

537–40 (2005). For executive officers of this kind, “the President’s removal power [has been]

the rule, not the exception.” Seila Law, 140 S. Ct. at 2206; see Myers v. United States, 272 U.S.

52, 111–75 (1926); Michael W. McConnell, The President Who Would Not Be King 161–69,

335–41 (2020).

But I see no reason to resolve the parties’ constitutional debate because I do not read the

FDIC’s statutory scheme to implicate it. Rather, I read the statute that creates the FDIC’s Board

(12 U.S.C. § 1812) as giving the President full power to remove all but one of the Board’s five

members. Since the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Board

has consisted of the Comptroller of the Currency, the CFPB’s Director, and three other

presidentially appointed members. Pub. L. No. 111-203, § 336(a), 124 Stat. 1376, 1540 (2010);

12 U.S.C. 1812(a)(1). All agree that the President may fire the Comptroller for any reason.

12 U.S.C. § 2.

So the President’s ability to control the Board turns on whether he has free rein to fire its

three appointed members. The statute creating their offices provides: “Each appointed member

shall be appointed for a term of six years.” Id. § 1812(c)(1). This statute says nothing that

expressly grants for-cause removal protections to these members. Maybe the mere creation of a

fixed-year term implies that the President may not remove them before their terms end? That

view raises a host of problems. If read this way, wouldn’t the text create an “absolute” ban on

removal even if the President has an excellent reason (like fraud)? Parsons v. United States,

167 U.S. 324, 343 (1897). How can we read the text to include an implied gloss authorizing

No. 20-4303 Calcutt v. FDIC Page 58

some removals (for cause) on top of an implied restriction generally barring them? That is an

awful lot of implications. And if we were to create this gloss, how do we decide what counts as

adequate “cause”? Judicial intuition? Simply put, we would be legislating rather than

interpreting if we read § 1812 to bar all but for-cause removals. See Morgan v. Tenn. Valley

Auth., 115 F.2d 990, 992–93 (6th Cir. 1940).

Historical context confirms that § 1812 does not interfere with the President’s ability to

remove the Board’s appointed members. The provision establishing their six-year term dates to

the creation of the FDIC in 1933. Banking Act of 1933, Pub. L. No. 73-66, § 8, 48 Stat. 162,

168. At that time, a “well-approved” “rule of” “statutory construction” directed courts to

interpret laws that gave the President the power to appoint an executive officer as including the

power to remove the officer. Myers, 272 U.S. at 119. So if a law was silent on removal, the

President could terminate the officer for any reason. See Shurtleff v. United States, 189 U.S. 311,

316 (1903); Parsons, 167 U.S. at 338–39. The Congress that created the FDIC operated against

this interpretive rule. See Collins v. Yellen, 141 S. Ct. 1761, 1782 (2021). And while the Court

has since departed from the rule once, it relied on the “philosophy of Humphrey’s Executor” to

do so. Wiener v. United States, 357 U.S. 349, 356 (1958). That philosophy did not exist in

1933.

A constitutional concern points the same way. Before Humphrey’s Executor, the

Supreme Court had broadly held that Congress could not constitutionally limit the President’s

power to fire officers who are appointed with the advice and consent of the Senate. See Myers,

272 U.S. at 109–76. The FDIC was created between Myers and Humphrey’s Executor—when

the Court treated these removal protections as presumptively invalid. Myers “aroused wide

interest,” Morgan, 115 F.2d at 992, so Congress would have known that such protections raised

“grave” constitutional “doubts,” United States v. Jin Fuey Moy, 241 U.S. 394, 401 (1916). These

concerns make it all the more implausible to read a law passed at this time as silently including

them. See Free Enter. Fund v. Pub. Co. Acct. Oversight Bd., 561 U.S. 477, 545–46 (2010)

(Breyer, J., dissenting). In short, the President has unfettered power to fire (and control) most of

the FDIC’s Board.

No. 20-4303 Calcutt v. FDIC Page 59

To be sure, both parties seem content to assume that the statute grants the Board

protections from removal. Cf. United States v. Sineneng-Smith, 140 S. Ct. 1575, 1579 (2020). In

a related case, the Supreme Court also assumed that another agency had these protections. Free

Enter. Fund, 561 U.S. at 487. Yet parties cannot force courts to accept their stipulations of law.

See Young v. United States, 315 U.S. 257, 258–59 (1942). Under basic avoidance principles,

moreover, our power to address an unraised issue reaches its apex when parties ask us to resolve

a weighty constitutional question that a statute might not present. Cf. Nw. Austin Mun. Util. Dist.

No. One v. Holder, 557 U.S. 193, 205 (2009). That is especially true here. Calcutt’s

constitutional claim, if accepted, would take us right back to a statutory “severability” question:

Which parts of the statute must we set aside as unconstitutional? See Free Enter. Fund, 561 U.S.

at 508–10; John Harrison, Severability, Remedies, and Constitutional Adjudication, 83 Geo.

Wash. L. Rev. 56, 88–89 (2014). If the removal protections are imaginary, this question has an

easy answer. We should disregard those protections. Since we may have to consider this

statutory issue even if we reach Calcutt’s constitutional claim, we might as well reach it

immediately. See William Baude, Severability First Principles, 109 Va. L. Rev. ____

(forthcoming 2023) (manuscript at 44–45).

*

Even so, Calcutt responds, the President and Board believed that § 1812 contained

removal protections. This belief, Calcutt argues, “shows that the Board enjoyed de facto tenure

protections while pursuing this enforcement action, causing” him harm. Reply Br. 7 n.1. I agree

that the executive branch likely read the statute this way. But why would “de facto” protections

violate the law? Consider a hypothetical: Disagreeing with my reading, the President issues an

order stating that he will adhere to for-cause removal rules for the Board due to his views of

§ 1812 and the Constitution. If we conclude that this order misreads § 1812 and that the statute

would be unconstitutional if it imposed such protections, would the order violate the Constitution

or statute?

I fail to see why it would violate the Constitution. Like the Supreme Court when

resolving cases, the President must interpret the Constitution when performing his constitutional

duties. See Island Creek Coal Co. v. Bryan, 937 F.3d 738, 753 (6th Cir. 2019) (citing Frank H.

No. 20-4303 Calcutt v. FDIC Page 60

Easterbrook, Presidential Review, 40 Case W. Res. L. Rev. 905 (1990)). Presidents have

routinely done so. When exercising his pardon power, President Jefferson pardoned those

convicted under the Sedition Act of 1798 because he believed that the convictions violated the

First Amendment. See New York Times Co. v. Sullivan, 376 U.S. 254, 273–76 (1964). When

exercising his veto power, President Jackson vetoed a bill reauthorizing the national bank

because he believed that Congress lacked the power to create it. See Easterbrook, supra, at 909–

10. Like these powers, the removal power belongs to the President. See Seila Law, 140 S. Ct. at

2197–98. So what constitutional provision would the President offend by self-limiting this

power? If anything, a court’s intrusion on his authority would raise the concerns. If an injured

bank customer had sued President Jackson over his national-bank veto, nobody (I hope) would

claim that a court could enjoin the President’s veto with a citation to McCulloch v. Maryland,

17 U.S. 316 (1819). See Collins, 141 S. Ct. at 1794 (Thomas, J., concurring). We would raise

identical separation-of-powers problems if we intruded on the President’s lawful exercise of the

removal power with a citation to Seila Law.

Nor would this hypothetical executive order violate § 1812. The statute gives the

President the power to remove any of the Board’s appointed members for any reason. The

President thus may retain any member for any reason—whether based on his reading of the

statute or on the benefits of a civil-service system. In this respect, the statute is not much

different than a provision that sets the minimum process that an agency must provide. That floor

does not foreclose the agency from offering additional process. Cf. Vt. Yankee Nuclear Power

Corp. v. Nat. Res. Def. Council, Inc., 435 U.S. 519, 543–49 (1978); Al-Saka v. Sessions,

904 F.3d 427, 432 (6th Cir. 2018); Easterbrook, supra, at 908. So while § 1812 does not impose

for-cause removal protections on the President, it also does not bar him from imposing those

protections on himself.

Now adjust my hypothetical slightly: Before the FDIC acted in Calcutt’s case, “suppose

that the President had made a public statement expressing displeasure with actions taken by [its

Board] and had asserted that he would remove [its members] if [§ 1812] did not stand in the

way.” Collins, 141 S. Ct. at 1789. If the President’s (mis)reading of § 1812 does not violate the

law once he knows that the courts will interpret it differently than he does, why would this

No. 20-4303 Calcutt v. FDIC Page 61

reading violate the law before he knows how they will interpret it? I am not sure. Yet I would

leave open whether courts may vacate agency action as “arbitrary and capricious” under the

Administrative Procedure Act (APA) if the President’s reading tangibly affected the disputed

action. 5 U.S.C. § 706(2)(A); Collins, 141 S. Ct. at 1794 n.7 (Thomas, J., concurring). We need

not decide this question because the APA tells us to take “due account” “of the rule of prejudicial

error.” 5 U.S.C. § 706. Calcutt thus would have needed to show that any mistaken belief about

the Board’s removal protections harmed him (by, for example, affecting the Board’s makeup).

See Jicarilla Apache Nation v. U.S. Dep’t of Interior, 613 F.3d 1112, 1121 (D.C. Cir. 2010).

He presented no such evidence.

Calcutt responds that we should remand to the FDIC to allow him to seek discovery over

whether any de facto protections harmed him. That leads to my final point. An FDIC regulation

contains an issue-exhaustion rule that requires parties to raise all exceptions to an administrative

law judge’s decision with the Board. 12 C.F.R. § 308.39(b). Calcutt concedes that he did not

raise this facial constitutional challenge with the agency but says that exhaustion mandates

categorically do not apply to those challenges. I am not so confident. Courts must tread lightly

before creating implied exceptions to regulatory exhaustion rules (as opposed to judge-made

ones). Bryan, 937 F.3d at 751–52. Yet I find the FDIC’s specific regulation unclear as to

whether its text even covers these types of challenges. Cf. id. at 752. I thus would leave this

question for another day because exhaustion is a nonjurisdictional affirmative defense. See

Jones v. Bock, 549 U.S. 199, 211–12 (2007). A rejection of Calcutt’s claim on statutory grounds

makes the issue unnecessary to decide. Cf. Woodford v. Ngo, 548 U.S. 81, 101 (2006). Apart

from exhaustion, however, I see no reason why we should give Calcutt a redo to obtain discovery

that he did not seek the first time around.

B. Restrictions on Removal of the CFPB Director and Administrative Law Judge

Calcutt next challenges two unambiguous removal protections. First, the law that created

the FDIC’s final Board member—the CFPB Director—gives the Director these protections.

12 U.S.C. § 5491(c)(3). As noted, Seila Law found this provision unconstitutional. 140 S. Ct. at

2201–07. And while the President could control all of the other Board members, Calcutt claims

that Congress may not create a multimember agency with even one tenure-protected member.

No. 20-4303 Calcutt v. FDIC Page 62

Second, “dual for-cause limitations” on removal insulated the administrative law judge who

heard Calcutt’s case from presidential oversight. Free Enter. Fund, 561 U.S. at 492. The judge

could be fired only if the Merit System Protection Board found “good cause,” 5 U.S.C.

§ 7521(a), and the President could remove that entity’s members only for cause too, id.

§ 1202(d). Calcutt claims that the Constitution bars the judge’s “double insulation” from the

President. Compare Decker Coal Co. v. Pehringer, 8 F.4th 1123, 1129–36 (9th Cir. 2021), with

Fleming v. U.S. Dep’t of Agric., 987 F.3d 1093, 1113–18 (D.C. Cir. 2021) (Rao, J., concurring in

part and dissenting in part).

I see no need to opine on the merits of these claims. We must distinguish the

constitutional questions that Calcutt raises (do the removal statutes violate the Constitution?)

from a separate remedies question (if so, do these defects entitle him to his requested relief?).

As his proposed remedy, Calcutt asks

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