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 former CEO of
a Michigan-based community bank, for mismanaging 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.
Petitioner 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 supported 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 rationale 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 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 consistent 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 Institutions Reform, Recovery, and Enforcement Act of
1989, §903, 103Stat. 453, the FDIC may remove and prohibit
individuals 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 misconduct.
§1818(e)(1)(B). Finally, the individual’s misconduct must
“involv[e] personal dishonesty” or “demonstrat[e] willful or
continuing disregard . . . for the safety or soundness”
of the bank. §1818(e)(1)(C).
In this case, the FDIC brought an enforcement
action under these provisions against petitioner Harry C. Calcutt,
III. From 2000 to 2013, Calcutt served as CEO of Northwestern Bank,
headquartered in Traverse City, Michigan. During Calcutt’s tenure,
the Bank developed a lending relationship with the Nielson
Entities, a group of 19 family-owned businesses that operate in the
real estate and oil industries. 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 Recession, 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
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
prohibit them from further participation in the banking industry.
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 relationship 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 Transaction 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 testified. On
April 3, 2020, the ALJ issued his written decision, 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 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 practices.” App. to Pet. for Cert.
150a
.
The Board then addressed the issue of causation.
In doing so, the Board concluded that an individual “need not be
the proximate cause of the harm to be held liable under section
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 Transaction; second, the Bank
suffered $6.4 million in losses on other Nielson Loans; and third,
the Bank incurred investigative, auditing, and legal expenses in
managing the Bedrock 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
conclusions 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 questions
presented to him during examinations,” “concealed documents showing
the true condition of the loans,” and “falsely testified that Board
members had been fully apprised 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 Circuit, identifying several purported errors in the
Board’s decision. Two are relevant here.
First, petitioner contended that the Board had
misapplied the FDIA’s “by reason of ” requirement by
concluding 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
effects as a matter of law. See §1818(e)(1)(B). The Sixth Circuit
agreed in part. Petitioner had indeed proximately caused the
$30,000 charge off on one of the Bedrock Transaction 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. Petitioner 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 analysis, the Sixth Circuit nevertheless affirmed the
Board’s decision 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.
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 relevant factors, . . . the proper course, except in
rare circumstances, is to remand to the agency for additional
investigation 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 conclusions 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 administrative 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 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 action, we have
observed, “[t]hat it provided a different rationale 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 petitioner’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 Appeals for the Sixth Circuit is reversed, and the case is
remanded for further proceedings consistent with this opinion.
It is so ordered.