5th Circuit Throws Shade on FDIC ALJ Appointments

(CN) – The 5th Circuit ruled for a bank executive accused of fraud in his challenge to FDIC penalties, ruling that the agency’s process for hiring administrative law judges may violate the Appointments Clause.
In Freytag v. Commissioner of Internal Revenue, a 1991 Supreme Court ruling dealing with tax court judges, the Supreme Court defined an officer as an appointee who exercises significant authority regarding the nation’s laws, as contrasted with a mere agency employee.
Last year, the 10th Circuit ruled that the Securities and Exchange Commission illegally appoints administrative law judges in violation of the Constitution’s Appointments Clause to render decisions and impose penalties.
After reviewing precedent, the 5th Circuit found that accused bank fraudster Cornelius Campbell Burgess has a similar Appointments Clause objection to the hiring of FDIC administrative law judges.
Burgess was accused of using bank funds to pay personal expenses for himself and his girlfriend, resulting in a loss of $300,000 to Herring Bank.
On the recommendation of an administrative law judge, the FDIC issued a civil penalty against Burgess for this conduct, and barred him from the banking industry.
He challenged the penalties against him in federal court based on the claim that the administrative law judge who made that recommendation was unconstitutionally appointed, and the 5th Circuit found his claim likely to succeed.
“There is nothing in the record to suggest that FDIC ALJs’ discretion is curtailed sufficiently to distinguish it from that of the STJs [special trial judge] in Freytag. The duties of FDIC ALJs are therefore sufficiently ‘important,’ and their discretion sufficiently ‘significant,’ to render them officers under Freytag,” Judge Priscilla Owen said, writing for the three-judge panel.
Owen said that the administrative law judges’ broad authority to shape the course of a contested hearing supported Burgess’s position that the judges are officers rather than mere employees of the FDIC, even if they report to a superior.
The court granted him a stay of the FDIC’s penalties, finding that he and Herring Bank will face harm without one, pending further litigation.

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