# Harry Calcutt III v. FDIC

> Court of Appeals for the Sixth Circuit · June 10, 2022 · 37 F.4th 293

URL: https://www.frixlaw.com/law-library/cases/6348737

## Case

- **Court:** Court of Appeals for the Sixth Circuit
- **Decided:** June 10, 2022
- **Citations:** 37 F.4th 293
- **Precedential status:** Published
- **Opinion:** Opinion
- **Cited by:** 41 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/6348737

## How later opinions describe it (automated extraction)

- concluding that the FDIC’s argument “that the statute does not require a finding of a threat to bank stability in order to find ‘unsafe or unsound’ practice” contra- dicts the analysis of several circuit cases
- concluding that the ALJ did not abuse his discretion by admitting stipulations from prior proceedings
- holding that the two-level tenure protection scheme for FDIC ALJs is likely constitutional

## Opinion text

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 quali

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/6348737. Public record. Not legal advice.