FDIC seal

Very, as the FDIC case against Harry Calcutt III illustrates.

First, the agency produces a one-sided examination report that is arguably influenced by examiner bias against the individual. In Mr. Calcutt’s case, evidence of bias includes extensive ex parte communications with a defaulted borrower, personal animosity, and entrapment of the target in an interview during the examination without proper notice of an ongoing investigation.

Second, the agency initiates a removal and lifetime ban from the banking industry, based on mistaken interpretations of statutory language that are so broad that most bank directors and officers could be removed at the whim of the agency.

Third, the administrative law judge (ALJ) bars cross-examination of the examiners for bias. The full story of the influence that the bias may have had on the drafting of the report of examination, and on the FDIC’s decision to ban the individual from banking, may never be known.

Finally, the court reviewing the target’s appeal, despite finding numerous agency errors, chooses to cleanse the record and rule in favor of the removal and ban, instead of remanding the case to the agency for further deliberation.

This is how the FDIC case against Mr. Calcutt proceeded. Was he fairly treated, as required by law? We don’t think so.

It is not just Mr. Calcutt who should be concerned. All bank directors and officers are subject to the same laws, interpretations, and procedures. We all know that bank examinations are sometimes fraught with peril. The FDIC’s examination in this case was especially so, according to the record. Questions about examiner bias had been raised, yet Mr. Calcutt’s attorneys were not able to cross-examine the examiner during the last ALJ hearing about the examiner’s seemingly inappropriate contact with a borrower who was central to the case. The results of the examination then served as a basis to pursue Mr. Calcutt.

The Sixth Circuit Federal Court of Appeals (with one dissent) recently affirmed the FDIC’s decision to remove Mr. Calcutt and ban him from banking. We therefore have filed an amicus brief with the court.

The transactions in question occurred over a decade ago, during the Great Recession. They involved loan workouts, on which the agencies historically have given banks some latitude and encouragement to assist borrowers and help salvage the loans. Not here.

The importance of the report of examination cannot be overemphasized. Any defect in the examination procedures, or the report itself, should be raised by a bank immediately, in writing. Unfortunately, the FDIC recently discarded its procedure for internal appeals of material supervisory determinations. The new procedures now allow ex parte communications between the supervisory office that produced the report and the reviewing body without disclosing the communications with the appealing party, while continuing to allow the supervisory office to review all the appealing party’s submissions. As before, the procedures place the burden of proof on the appealing party rather than treating the appealing party and supervisory office the same. The new procedures also reconstitute the reviewing body, rendering it less independent than under the previous procedures.

AABD, along with other banking trade associations, has asked the FDIC to reconsider its action. Our next alert will address the FDIC action in depth.

While it is normally very easy to remove a director or officer if the agency sets its mind to do it, the Calcutt litigation was more complicated. Mr. Calcutt fought back, a rare event. Most targets acquiesce to the agency’s demands both because their personal financial resources are not sufficient to resist an agency that has essentially limitless resources and because the likelihood of winning against formidable odds is small.

Barack Ferrazzano Kirschbaum & Nagelberg LLP, a nationally recognized banking law firm based in Chicago, prepared the AABD brief.