CHICAGO — A federal appeals court has upheld the Federal Deposit Insurance Corp.’s use of an in-house proceeding to permanently bar a former bank director from working at an FDIC-insured institution and impose a $105,000 civil penalty, rejecting arguments that the process violated his constitutional right to a jury trial.
The U.S. Court of Appeals for the 7th Circuit ruled that the FDIC’s administrative adjudication of allegations involving unsafe or unsound banking practices and breach of fiduciary duty did not violate the Seventh Amendment, according to an analysis by JD Supra.
The former director had petitioned the court to review the FDIC’s action, which resulted in a permanent industry ban and the civil money penalty.
According to JD Supra, the appeals court applied the framework established by the U.S. Supreme Court in SEC v. Jarkesy, which addressed when defendants facing government civil penalties are entitled to a jury trial.
‘Public Rights Involved’
The 7th Circuit determined that the FDIC’s enforcement claims under federal banking law involved “public rights” that could be decided administratively rather than by a jury.
The court concluded that neither the “unsafe or unsound practice” standard nor breach of fiduciary duty in the banking context could be traced to a common law action that existed at the nation’s founding. The court noted that breach of fiduciary duty was historically considered an equitable action and did not appear at the time to extend to bank directors, according to JD Supra.
The appeals court acknowledged that the constitutional issue was “close,” particularly with respect to the fiduciary duty claim.
SCOTUS Review Expected
The court concluded, however, that the Supreme Court’s Jarkesy decision narrowed an earlier precedent, Atlas Roofing Co. v. Occupational Safety and Health Review Commission, for statutory claims resembling existing common law actions but not for claims traditionally considered equitable.
“In time the [U.S. Supreme Court] Justices are sure to consider this question,” the appeals court said. Until then, it said, “the appropriate path is to adhere to Atlas Roofing.”
Other Constitutional Challenges Rejected
The 7th Circuit also rejected the former director’s challenge to statutory protections limiting the president’s ability to remove FDIC board members and administrative law judges.
Applying the Supreme Court’s decision in Collins v. Yellen, the appeals court found that the former director failed to demonstrate that the removal restrictions caused him compensable harm, according to JD Supra.
The court also rejected his due process claims.
The combination of investigative and adjudicative responsibilities within the FDIC does not by itself violate due process, the court determined. It also found that the absence of pretrial depositions did not make the administrative hearing fundamentally unfair.
$1.25 Million Loan at Center of Case
The appeals court also upheld the FDIC’s findings underlying the enforcement action.
The court found “substantial evidence” supporting the FDIC board’s conclusion that the former director breached his fiduciary duty of care by pushing through a $1.25 million loan to two borrowers who were described as “not financially stable,” according to JD Supra.
The loan ultimately resulted in the bank recording a $513,760 charge-off.
The 7th Circuit hears federal appeals from Illinois, Indiana and Wisconsin.
