7th Circuit Affirms FDIC Use of In-House Tribunal for Administrative Enforcement Proceedings

The U.S. Court of Appeals for the Seventh Circuit ruled that the FDIC could use an administrative enforcement proceeding to target unsafe or unsound banking practices and rejected a bank executive’s claim that he was entitled to a jury trial.

The FDIC asserted that the bank executive engaged in a risky debt refinancing plan to help a distressed customer with whom the executive had a long-running banking relationship.  The executive allegedly exercised significant control over the bank and its employees and pushed through the financially-unsound loan.  The loan eventually defaulted.  Further, other errors in connection with the transaction resulted in the bank losing a security interest related to the loan.  The FDIC instituted an enforcement action before an in-house administrative law judge (ALJ) alleging that the executive engaged in unsafe or unsound banking practices and violated his fiduciary duty to the bank.  After a trial before the ALJ and review by the FDIC’s board of directors, the executive was barred from working at any federally insured bank and was subject to a $105,000 civil money penalty.

The executive appealed the FDICs order to the Seventh Circuit, claiming among other things that he was entitled to a jury trial for the enforcement action pursuant to the U.S. Supreme Court’s decision in SEC v. Jarkesy.  In Jarkesy, the Supreme Court held that the SEC could not bring a securities fraud enforcement action as an in-house proceeding before an ALJ because this violated the constitutional right to a jury trial under the Seventh Amendment.  The Supreme Court noted an exception to the jury trial requirement for cases involving certain “public rights” (as opposed to “private rights”), but held that the SEC’s fraud action did not fall under this exception (see here for more on Jarkesy).

The Seventh Circuit found—particularly based on the penalties sought—that the case raised legal issues which historically could have warranted a jury trial.  However, the court then considered whether the “public rights” exception applied and concluded that it did.  Congress may create new statutory public rights to address national problems and which are enforced by the government in its sovereign capacity, and it may assign these claims to be adjudicated by an administrative agency before which a jury trial would be incompatible.  Where such actions do not have any common law antecedent, a jury trial is not required.

The Seventh Circuit determined that claims for unsafe or unsound banking practices were part of a regulatory scheme designed to mitigate risks to the solvency of regulated banks with no historical common law roots, while the claims for breach of fiduciary duty were historically equitable claims which did not implicate the common law.  As such, the court found that the case involved public rights and rejected the executive’s claim that he was entitled to a jury trial.