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Supreme Court gives banned banker another shot at relief

The justices chided the lower court that had confirmed penalties on a bank executive despite errors in his case. 

WASHINGTON (CN) — A bank executive facing a lifetime ban from the industry for his role in a 2009 default found Supreme Court reprieve on Monday. 

The justices summarily reversed in favor of Harry Calcutt, the former president, CEO and chairman of the board of directors at Northwestern Bank. Calcutt is facing $125,000 in fines and a lifetime ban for his role in the default on loans given by Northwestern. The Sixth Circuit affirmed his penalties, but Monday’s decision returns the case for further review. 

“That court determined that the FDIC had made two legal errors in adjudicating petitioner’s case,” the court wrote in an unsigned opinion. “But instead of remanding the matter back to the agency, the Sixth Circuit conducted its own review of the record and concluded that substantial evidence supported the agency’s decision. That was error.” 

Seen as a course correction, advocacy groups said the court’s ruling would force the appeals court to apply the correct legal standard. 

“The Sixth Circuit showed much hubris by ignoring the FDIC’s confession of error,” John Masslon, senior litigation counsel at the Washington Legal Foundation, said in a statement. The group filed an amicus brief in the case. “The Supreme Court’s decision corrects this legal error.”

Northwestern gave about $38 million to a group of companies controlled by the Nielson family. These loans were not cross-collateralized against one another, nor had had the Nielsons personally guaranteed them. 

After financial troubles led the Nielson family to stop repaying their loans to Northwestern in 2009, they entered an agreement coined the bedrock transaction. Northwestern agreed to loan Bedrock Holdings, one of the Nielson entities, $760,000, to cover the group's loan payments through April 2010. The bank also allowed the Nielsons to access $600,000 in investment-trading funds and renewed the group’s matured loans. Northwestern entered this transaction without gathering the required financial information, and the family failed to consult its board of directors. 

Even with the agreement, the Nielson’s defaulted again. Northwestern gave them another $690,000 in secured funds, but the group would default for a third time in January 2011. 

The Federal Deposit Insurance Corporation attempted to remove Calcutt from office and prevent him from working in the banking sector in 2013 for his role in the default. After a seven-day hearing, an administrative law judge recommended Calcutt face a ban from banking and pay $125,000. Accepting the judge’s findings, the FDIC Board issued a final removal and prohibition order, along with the $125,000 penalty. 

Calcutt asked the Sixth Circuit to review the board’s order in 2020. The appeals court granted an emergency stay, pausing the ruling. The Sixth Circuit found the FDIC made legal errors in Calcutt’s case but concluded that the evidence supported the agency’s decision. 

Referring to his imposed penalties as “the death penalty of administrative sanctions,” Calcutt petitioned the Supreme Court for review. Calcutt said that while agencies have broad power to impose these types of penalties, but they must follow the law to do so. 

“In administrative law as elsewhere, with great power comes great responsibility,” Sarah Harris, an attorney with Williams & Connolly representing Calcutt, wrote in his petition. “Agencies can impose career ending bans and ruinous monetary penalties through inhouse agency proceedings. To wield their immense authority, agencies must follow the law and operate within our constitutional structure.” 

Instead of urging the court to uphold the appeals court ruling in its favor, the government agreed the court should summarily reverse and remand the case to the FDIC Board. 

The court said it is well-established in administrative law that appeals courts should remand if additional investigation is needed. 

“The proper course for the Sixth Circuit after finding that the Board had erred was to remand the matter back to the FDIC for further consideration of petitioner’s case,” the court wrote. “‘The guiding principle, violated here, is that the function of the reviewing court ends when an error of law is laid bare.’” 

In some cases, the court explained, remand can be unwarranted if there is no uncertainty in the outcome of the agency proceedings. The court said this exception should only be used in narrow circumstances. 

‘That exception does not apply in this case,” the court wrote. “The FDIC was not required to reach the result it did; the question whether to sanction petitioner — as well as the severity and type of any sanction that could be imposed — is a discretionary judgment.” 

The court’s reversal sends the case back to the FDIC Board for further review. 

The Department of Justice declined to comment on the case, and Harris did not respond to requests for comment on the ruling. 

Categories:Appeals, Financial, Government

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