Did the Supreme Court just raise the bar on banking enforcement actions?

The Supreme Court’s decision to ask the Federal Deposit Insurance Corp. to review its lifetime ban of a Michigan banker could make financial regulators more hesitant to levy enforcement actions against individuals.

The court on Monday said that the 6th U.S. Circuit Court of Appeals erred when it upheld the FDIC’s ruling even after taking issue with the agency’s legal argument. Last September, the Supreme Court put the matter on hold pending a ruling.

Courts that review the actions of an agency “must judge the propriety of agency action solely by the grounds invoked by the agency,” the Supreme Court said.

The ruling continues a trend by the Supreme Court of requiring agencies to reargue enforcement actions when courts find errors in the justification for them, said Jennifer Dickey, deputy chief counsel at the U.S. Chamber of Commerce Legal Center, which submitted an amicus brief on the case.

“The Supreme Court is saying that the lower court must send it back to the agency because the agency is the entity that makes those enforcement decisions,” Dickey said. “It’s not up to courts to correct agencies when they get it wrong.”

In the case, Harry C. Calcutt III v. Federal Deposit Insurance Corporation, the lower court noted two legal errors underlying the FDIC’s action against the Michigan banker. They related to Calcutt’s level of responsibility for the bank’s losses and the sufficiency of proof offered by the FDIC.

The Supreme Court decision comes at a time when regulators are facing scrutiny for not cracking down harder on Silicon Valley Bank and Signature Bank before their failures earlier this year. Congress this month questioned regulators and bank executives about what went wrong in a series of hearings on the recent banking crisis.

Federal agencies have long enjoyed wide discretion in regulatory matters. The decision in the Calcutt case indicates the Supreme Court could be rolling back its traditional deference, making it more difficult for agencies to win cases.

Still, it may be a safer option for the FDIC and other regulatory agencies to pursue enforcement actions, said David Baris, president of the American Association of Bank Directors. 

“There’s rarely any criticism when they do too much, and there’s a lot of criticism when they don’t do enough,” Baris said.

The decision marked the Supreme Court’s first summary reversal, or the overturning of a lower court’s decision without a written brief or oral arguments, this year. There are typically only a handful of summary reversals each term, and most cases involving the FDIC are settled before they reach the Supreme Court.

The case dates back to the 2008 financial crisis, when a large business client of Northwestern Bank, a community bank based in Traverse City, Michigan, began to default on its debts. The FDIC alleges that Calcutt, who served as Northwestern’s CEO from 2000 to 2013, violated the bank’s lending policies in his efforts to restructure the client’s debt. 

Calcutt also allegedly misinformed the bank’s board of directors about the debt restructuring, didn’t adequately reply to regulators’ requests for information and recorded the debt incorrectly on financial statements. Those actions cost the bank close to $6 million, according to the FDIC.

The FDIC permanently banned Calcutt from working in banking, sometimes regarded as the death penalty in the industry, and ordered him to pay a fine of $125,000. The case’s multiple appeals and years going through the legal process meant neither the ban nor fine were never enforced, and Calcutt has been working in the industry without interruption.

Now that the case has been sent back to the FDIC, the agency can choose whether to  pursue the case under a fresh legal argument. The FDIC did not immediately respond to requests for comment.

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