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WBK Industry News - Litigation Developments

5th Circuit Issues Stay in Case Challenging Constitutionality of FDIC ALJs

The Fifth Circuit has granted a motion to stay an FDIC order pending the resolution of the merits of an appeal.  The appeal came as a result of an investigation by the FDIC of the director and former officer of a bank (“Bank Director”) for alleged improper expense practices and misuse of bank property.  An FDIC Administrative Law Judge (“ALJ”) conducted a hearing as to the matter and recommended findings of fact and conclusions of law.

Following this, the FDIC Board adopted the ALJ’s recommendations and issued an order assessing a civil penalty and requiring that the Bank Director withdraw from the banking industry as soon as September 8, 2017.  The Bank Director sought review by the Fifth Circuit and filed a motion to stay the order, alleging that the FDIC ALJ is an inferior Officer of the United States, who holds his office in violation of the Appointments Clause to the U.S. Constitution (“the Clause”).

In order to grant the stay, the Bank Director had to show that (1) there is a strong likelihood of success on the merits of the case; (2) that irreparable harm would occur if a stay is not granted; (3) that the potential harm to the Bank Director outweighs the harm to the FDIC if the stay is not granted; and (4) that the granting of the stay would serve public interest.

The Clause requires that inferior Officers be appointed by the President, the courts of law, or the heads of departments only.  A government worker is deemed an “Officer of the United States,” and therefore subject to the Clause if he or she exercises significant authority pursuant to the laws of the United States.

The Supreme Court examined the issue of what constitutes exercising significant authority pursuant to the laws of the U.S. in Freytag v. Commissioner of Internal Revenue.  In that case, the Court considered the significance of the duties, and the level of discretion that a special trial judge possessed to determine whether the judge exercised significant authority pursuant to U.S. laws. In the Freytag case, the judge had the authority to hear the proceeding and prepare proposed findings and opinions, but not to issue final judgments. Ultimately, the Court held that the special trial judge was an inferior Officer, subject to the Clause, because the judge was empowered to exercise significant discretion over important functions, among other things.

The D.C. Circuit previously considered whether FDIC ALJs are inferior Officers subject to the Appointments clause.  It held that because FDIC ALJs do not have final decision-making authority, and thus should not be considered Officers.  The Fifth Circuit, however, disagreed with the D.C. Circuit in the present case.

The Fifth Circuit stated in its opinion that final decision-making authority is not a necessary condition for Officer status, and that the duties of the FDIC ALJs are sufficiently important, and their discretion sufficiently significant so as to render them Officers under the Supreme Court’s analysis in Freytag.

For this reason, the Fifth Circuit held that there is a strong likelihood of success on the merits of the Bank Director’s case.  It also found that because the Bank Director would be forced to leave the banking industry, irreparable injury would be caused if the stay was not granted, and that those injuries outweighed the potential injuries to the FDIC.  Lastly, the Fifth Circuit found that public interest did not weigh against a stay in this matter.  Therefore, the standard for granting a stay was met, and the stay was granted in favor of the Bank Director.

For more information, the opinion can be found here.