Calcutt v. FDIC

Cite as: 598 U. S. ____ (2023) 1
Per Curiam
SUPREME COURT OF THE UNITED STATES
HARRY C. CALCUTT, III v. FEDERAL DEPOSIT
INSURANCE CORPORATION
ON PETITION FOR WRIT OF CERTIORARI TO THE UNITED
STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT
No. 22–714. Decided May 22, 2023
PER CURIAM.
The Federal Deposit Insurance Corporation (FDIC)
brought an enforcement action against petitioner, the for-
mer CEO of a Michigan-based community bank, for mis-
managing one of the bank’s loan relationships in the wake
of the “Great Recession” of 2007–2009. After proceedings
before the agency concluded, the FDIC ordered petitioner
removed from office, prohibited him from further banking
activities, and assessed $125,000 in civil penalties. Peti-
tioner subsequently filed a petition for review in the Court
of Appeals for the Sixth Circuit. That court determined
that the FDIC had made two legal errors in adjudicating
petitioner’s case. But instead of remanding the matter back
to the agency, the Sixth Circuit conducted its own review of
the record and concluded that substantial evidence sup-
ported the agency’s decision.
That was error. It is “a simple but fundamental rule of
administrative law” that reviewing courts “must judge the
propriety of [agency] action solely by the grounds invoked
by the agency.” SEC v. Chenery Corp., 332 U. S. 194, 196
(1947). “[A]n agency’s discretionary order [may] be upheld,”
in other words, only “on the same basis articulated in the
order by the agency itself.” Burlington Truck Lines, Inc. v.
United States, 371 U. S. 156, 169 (1962). By affirming the
FDIC’s sanctions against petitioner based on a legal ra-
tionale different from the one adopted by the FDIC, the
Sixth Circuit violated these commands. We accordingly
grant the petition for certiorari limited to the first question
2 CALCUTT v. FDIC
Per Curiam
presented; reverse the judgment of the Sixth Circuit; and
order that court to remand this matter to the FDIC so it
may reconsider petitioner’s case anew in a manner con-
sistent with this opinion.
I
Under §8(e) of the Federal Deposit Insurance Act (FDIA),
12 U. S. C. §1818(e), as amended by the Financial Institu-
tions Reform, Recovery, and Enforcement Act of 1989, §903,
103 Stat. 453, the FDIC may remove and prohibit individu-
als from working in the banking sector if certain conditions
are met. First, the FDIC must determine that an individual
committed misconduct. That occurs when, as relevant here,
the individual has “engaged or participated in any unsafe
or unsound practice,” or breached his “fiduciary duty.”
§§1818(e)(1)(A)(ii)–(iii). Second, the FDIC must find that a
bank or its depositors were harmed, or that the individual
personally benefited, “by reason of ” the individual’s mis-
conduct. §1818(e)(1)(B). Finally, the individual’s miscon-
duct must “involv[e] personal dishonesty” or “demonstrat[e]
willful or continuing disregard . . . for the safety or sound-
ness” of the bank. §1818(e)(1)(C).
In this case, the FDIC brought an enforcement action un-
der these provisions against petitioner Harry C. Calcutt,
III. From 2000 to 2013, Calcutt served as CEO of North-
western Bank, headquartered in Traverse City, Michigan.
During Calcutt’s tenure, the Bank developed a lending re-
lationship with the Nielson Entities, a group of 19 family-
owned businesses that operate in the real estate and oil in-
dustries. In 2009, the lending relationship—by then, the
Bank’s biggest—began to sour. On September 1 of that
year, facing financial difficulties due to the Great Reces-
sion, the Entities stopped paying their loans outright. At
the time, they owed the Bank $38 million.
A few months later, the parties reached a multistep
agreement known as the Bedrock Transaction to bring all
Cite as: 598 U. S. ____ (2023) 3
Per Curiam
of the Entities’ loans current. That agreement stabilized
the Nielson lending relationship for the following year. But
on September 1, 2010, the Entities again stopped making
their loan payments. Another short-term agreement was
reached, allowing the Entities to continue servicing their
debt for the next few months. But in January 2011, the
Entities once more stopped making their loan payments.
They have remained in default ever since.
On April 13, 2012, the FDIC opened an investigation into
the Bank’s officers for their role in the Nielson matter. The
investigation concluded on August 20, 2013, at which time
the agency issued a notice of intention to remove petitioner
as well as two other Bank executives from office, and to pro-
hibit them from further participation in the banking indus-
try. The agency also issued a notice of assessment of civil
penalties. The bases for the proposed sanctions were the
agency’s allegations that petitioner had, in violation of
§1818(e), mishandled the Nielson Entities lending relation-
ship in various ways: The Bedrock Transaction failed to
comply with the Bank’s internal loan policy; the Bank’s
board of directors was misled or misinformed of the nature
of the Transaction; petitioner failed to respond accurately
to FDIC inquiries about the Transaction; and the Transac-
tion was misreported on the Bank’s financial statements.
On October 29, 2019, an FDIC Administrative Law Judge
(ALJ) began a 7-day evidentiary hearing into petitioner’s
conduct. Petitioner was among one of 12 witnesses who tes-
tified. On April 3, 2020, the ALJ issued his written deci-
sion, recommending that petitioner be barred from the
banking industry and be assessed a $125,000 civil penalty
based on his mishandling of the Nielson Loan relationship.
Petitioner appealed the ALJ’s decision to the FDIC Board.
The FDIC Board began its review by determining, first,
whether petitioner had engaged in an unsafe or unsound
banking practice. Such a practice, according to the Board,
“is one that is ‘contrary to generally accepted standards of
4 CALCUTT v. FDIC
Per Curiam
prudent operation’ whose consequences are an ‘abnormal
risk of loss or harm’ to a bank.” App. to Pet. for Cert. 150a
(quoting Michael v. FDIC, 687 F. 3d 337, 352 (CA7 2012)).
The Board held that standard satisfied, concluding that
“the record in this matter overwhelmingly establishes that
[petitioner] engaged in numerous unsafe or unsound prac-
tices.” App. to Pet. for Cert. 150a.
The Board then addressed the issue of causation. In do-
ing so, the Board concluded that an individual “need not be
the proximate cause of the harm to be held liable under sec-
tion 8(e).” Id., at 160a. With that understanding in mind,
the Board found that petitioner had caused the Bank harm
in three ways: First, the Bank had to charge off (i.e., forgive)
$30,000 of one of the loans made in the Bedrock Transac-
tion; second, the Bank suffered $6.4 million in losses on
other Nielson Loans; and third, the Bank incurred investi-
gative, auditing, and legal expenses in managing the Bed-
rock Transaction and its fallout. Id., at 159a–166a.
Finally, the Board turned to the issue of culpability. It
found that the record “well supported” the ALJ’s conclu-
sions that petitioner “persistently concealed . . . the true
common nature of the Nielson Entities Loan portfolio, [and]
problems with that portfolio.” Id., at 167a–168a. The
Board also found that petitioner “falsely answered ques-
tions presented to him during examinations,” “concealed
documents showing the true condition of the loans,” and
“falsely testified that Board members had been fully ap-
prised of the nature of the Nielson Loan portfolio.” Ibid.Based on these findings, the Board issued a final decision
imposing the penalties that the ALJ had recommended. Id.,at 184a–185a.
Petitioner then filed a petition for review in the Sixth Cir-
cuit, identifying several purported errors in the Board’s de-
cision. Two are relevant here.
First, petitioner contended that the Board had misap-
plied the FDIA’s “by reason of ” requirement by concluding
Cite as: 598 U. S. ____ (2023) 5
Per Curiam
that a showing of proximate cause was not needed. 12
U. S. C. §1818(e)(1)(B). The Sixth Circuit agreed. The
court “observed that [t]he Supreme Court has repeatedly
and explicitly held that when Congress uses the phrase ‘by
reason of ’ in a statute, it intends to require a showing of
proximate cause.” 37 F. 4th 293, 329 (2022) (some internal
quotation marks omitted); see also ibid. (citing for that
proposition Hemi Group, LLC v. City of New York, 559 U. S.
1, 9 (2010), and Holmes v. Securities Investor Protection
Corporation, 503 U. S. 258, 268 (1992)).
Second, petitioner argued that he had not proximately
caused the harms that the Board had identified or, in the
alternative, that those harms did not qualify as harmful ef-
fects as a matter of law. See §1818(e)(1)(B). The Sixth Cir-
cuit agreed in part. Petitioner had indeed proximately
caused the $30,000 charge off on one of the Bedrock Trans-
action loans, the court held, because he had “participated
extensively in negotiating and approving the Bedrock
Transaction.” 37 F. 4th, at 330. But the $6.4 million in
losses on other Nielson Loans were a different matter. Pe-
titioner could be held responsible only for “part” of that
harm, the court explained, because “[t]he Bank probably
would have incurred some loss no matter what Calcutt did.”
Id., at 331. Finally, none of the investigative, auditing, and
legal expenses incurred in dealing with the Nielson Entities
could qualify as harms to the Bank, because those expenses
occurred as part of the Bank’s “normal business.” Ibid.
Despite identifying these legal errors in the Board’s anal-
ysis, the Sixth Circuit nevertheless affirmed the Board’s de-
cision by a 2-to-1 vote. The court concluded that substantial
evidence supported the Board’s sanctions determination,
even though the Board never applied the proximate cause
standard itself or considered whether the sanctions against
Calcutt were warranted on the narrower set of harms that
the Sixth Circuit identified. See id., at 333–335.
We now reverse.
6 CALCUTT v. FDIC
Per Curiam
II
It is a well-established maxim of administrative law that
“[i]f the record before the agency does not support the
agency action, [or] if the agency has not considered all rele-
vant factors, . . . the proper course, except in rare circum-
stances, is to remand to the agency for additional investiga-
tion or explanation.” Florida Power & Light Co. v. Lorion,
470 U. S. 729, 744 (1985). A “reviewing court,” accordingly,
“is not generally empowered to conduct a de novo inquiry
into the matter being reviewed and to reach its own conclu-
sions based on such an inquiry.” Ibid. For if the grounds
propounded by the agency for its decision “are inadequate
or improper, the court is powerless to affirm the adminis-
trative action by substituting what it considers to be a more
adequate or proper basis.” Chenery, 332 U. S., at 196; see
also Smith v. Berryhill, 587 U. S. ___, ___ (2019) (slip op.,
at 15) (“Fundamental principles of administrative law . . .
teach that a federal court generally goes astray if it decides
a question that has been delegated to an agency if that
agency has not first had a chance to address the question”).
As both petitioner and the Solicitor General representing
respondent agree, the Sixth Circuit should have followed
the ordinary remand rule here. That court concluded the
FDIC Board had made two legal errors in its opinion. The
proper course for the Sixth Circuit after finding that the
Board had erred was to remand the matter back to the
FDIC for further consideration of petitioner’s case. “[T]he
guiding principle, violated here, is that the function of the
reviewing court ends when an error of law is laid bare.”
FPC v. Idaho Power Co., 344 U. S. 17, 20 (1952); see also
Gonzales v. Thomas, 547 U. S. 183, 187 (2006) (per curiam)
(remanding to agency based on failure by Court of Appeals
to “appl[y] the ordinary remand rule” (internal quotation
marks omitted)); INS v. Orlando Ventura, 537 U. S. 12, 18
(2002) (per curiam).
The Sixth Circuit, for its part, believed that remand was
Cite as: 598 U. S. ____ (2023) 7
Per Curiam
unnecessary because it “would result in yet another agency
proceeding that amounts to ‘an idle and useless formality.’ ”
37 F. 4th, at 335 (quoting NLRB v. Wyman-Gordon Co., 394
U. S. 759, 766, n. 6 (1969) (plurality opinion)). It is true
that remand may be unwarranted in cases where “[t]here is
not the slightest uncertainty as to the outcome” of the
agency’s proceedings on remand. Id., at 767, n. 6. But we
have applied that exception only in narrow circumstances.
Where the agency “was required” to take a particular ac-
tion, we have observed, “[t]hat it provided a different ra-
tionale for the necessary result is no cause for upsetting its
ruling.” Morgan Stanley Capital Group Inc. v. Public Util.
Dist. No. 1 of Snohomish Cty., 554 U. S. 527, 544–545
(2008).
That exception does not apply in this case. The FDIC was
not required to reach the result it did; the question whether
to sanction petitioner—as well as the severity and type of
any sanction that could be imposed—is a discretionary
judgment. And that judgment is highly fact specific and
contextual, given the number of factors relevant to peti-
tioner’s ultimate culpability. To conclude, then, that any
outcome in this case is foreordained is to deny the agency
the flexibility in addressing issues in the banking sector as
Congress has allowed.
* * *
The petition for writ of certiorari is granted limited to the
first question presented. The judgment of the Court of Ap-
peals for the Sixth Circuit is reversed, and the case is re-
manded for further proceedings consistent with this opinion.
It is so ordered.