Nov. 20—TRAVERSE CITY — A local banker appealing a steep fine and a lifetime ban from the banking industry for what federal regulators in 2013 said was commercial loan misconduct, has secured a temporary stay order signed by Supreme Court Justice Brett M. Kavanaugh.
Harry C. Calcutt, former president and chief executive officer of Northwestern Bank, was investigated in 2012 by examiners with the Federal Deposit Insurance Corporation for accused mishandling of $38 million in commercial loans the bank made to a holding company, Nielson Entities.
Nielson Entities, court records show, was a group of 19 limited liability companies with assets in oil and gas, vacant land acquisition, rental properties and real estate development controlled by members of the Nielson family.
FDIC examiners said as the U.S. was sinking into a recession and the Nielson loans became past due in 2009, Calcutt and two Northwestern colleagues concealed this status from the bank's board of directors and from state and federal investigators.
Calcutt denied these allegations and one of his attorneys, Mark Hullman of Traverse City, described two aspects of his client's ongoing appeals.
"One is the constitutional issues as related to the removal power of the agency and the administrative law judge," Hullman said. "The problem here is, the administrative law judge is protected by about four or five layers of bureaucracy, none of which has the power to directly remove him."
The second issue, Hullman said, was that Calcutt's due process rights had been denied during the FDIC hearing when an administrative law judge did not allow FDIC witnesses to be cross-examined.
"That is clearly contrary to the federal rules and procedures," Hullman said.
More than a decade of court filings made on Calcutt's behalf by Hullman and several Washington D.C.-based attorneys provide insight into how and why the regulatory action against a former president of a small, regional bank eventually garnered relief from a U.S. Supreme Court justice.
In 2013, FDIC agency records show Calcutt was fined $125,000 and banned from regulated banking activity, he then retired from Northwestern Bank that same year, as previously reported, and has been appealing his FDIC penalty in federal court ever since.
In 2014, Northwestern Bank was acquired by Midland-based Chemical Bank for a reported $120 million, as previously reported.
In 2015, Richard Jackson, a former Northwestern executive vice-president, and William Green, a former Northwestern commercial loan officer also were cited by the FDIC for their actions on the Nielson loans but did not appeal, records show.
Calcutt's appeals, however, have so far successfully blocked the FDIC from levying the fine or the ban and corporate filings show Calcutt currently serves in a leadership role with Central-State Bancorp, which owns State Savings Bank.
Central-State Bancorp also owned Central State Bank, based in Beulah, which the holding company combined into a single entity with State Savings Bank in 2018.
The Calcutt family had acquired control of Central State Bank in 1979, and this acquisition, decades before issues at Northwestern, had attracted the attention of government regulators, records show, who said in court it violated the Sherman Act.
The Sherman Act is a 1890 federal statute prohibiting activities that restrict interstate commerce and competition.
The government said State Savings Bank and Central State Bank offered the same services in one county — Benzie — while the Calcutt family argued the new single entity was actually offering a "cluster" of services in several northern Michigan counties.
The district court ruled in the Calcutt family's favor, the government appealed and, in 1987, a three-judge panel of the U.S. Court of Appeals for the Sixth Circuit affirmed the district court's decision. State Savings Bank has since grown and expanded, corporate filings show.
In the Northwestern Bank case, Calcutt testified in FDIC hearings that he'd made decisions based on what he believed was best for the bank.
In federal court filings Calcutt, Hullman confirmed, has continued to target constitutional questions about a little-known aspect of the federal judiciary — administrative law judges — and the power they wield.
Heads of federal agencies like the FDIC, and the ALJs who interpret agency decisions, are considered proxies of the President of the United States and serve at his or her pleasure.
Legal groups who filed amicus briefs in support of Calcutt say, too often, ALJs ignore this executive restraint.
Calcutt's Washington D.C.- based attorney, Sarah Harris, made this same argument.
"When Congress validly vests discretionary enforcement decisions in an agency, courts usurp executive power by making their own decisions about appropriate penalties," Harris, who is representing Calcutt in his appeal, said in court filings.
Harris, of Williams & Connolly, LLP, did not return a call or email seeking comment.
In 2015 and again in 2019, ALJs, responding to Calcutt's appeals of the FDIC board decision, separately recommended Calcutt be fined and banned, court records show.
Calcutt appealed both these ALJ's decisions, arguing after the 2019 hearing that his rights were violated when he was not allowed to cross-examine witnesses, as the second ALJ, Christopher B. McNeil, refused to disallow prehearing rulings from the first ALJ, Richard Miserendino.
"The remedy for not having applied the appropriate standards is reconsideration of the consequences by the agency, in this case the FDIC," Hullman said.
Calcutt argued any ruling by Miserendino was void because Miserendino had not been appointed by an agency head, as mandated by the U.S. Supreme Court in another financial services case, Lucia v. Securities and Exchange Commission.
The timing of that Supreme Court case added a level of complexity to Calcutt's appeals, being as it was decided in 2018, after Calcutt's first hearing in front of an ALJ, but before his second.
Nevertheless, in late 2020, the FDIC board accepted ALJ McNeil's recommendation and issued a decision upholding the fine and the ban.
"The Board concluded that Calcutt's involvement with the Bank's loans to the Nielson Entities, as well as his misrepresentations to regulators and the board of directors, were both unsafe and unsound practices and breaches of his fiduciary duties," court records state.
"It also found that sufficient effects had occurred by reason of Calcutt's malfeasance: loan charge-offs; the Bank's increased investigative, legal, and auditing expenses; and Calcutt's receipt of dividends from the Bank's holding company that reflected the Nielson portfolio's inflated value," court records state.
That was Dec. 15, 2020; the very next day, on Calcutt's behalf, Harris appealed to the United States Court of Appeals for the Sixth Circuit, court filings show.
On June 10, a three-judge COA panel ruled 2-1 against Calcutt, stating there was substantial evidence to support the FDIC Board's findings and the 2019 hearing satisfied the mandate resulting from the Supreme Court's Lucia decision.
"Calcutt's challenges to the removal restrictions at the FDIC are unavailing because even if he were to establish a constitutional violation, he has not shown that he is entitled to relief," the published opinion, signed by Circuit Judges Danny Julian Boggs and Richard Allen Griffin, states.
Judge Eric E. Murphy dissented, stating although he agreed with Boggs and Griffin that Calcutt had not proved his constitutional claims, Calcutt was entitled to other statutory relief.
Murphy, in his dissent, said the FDIC board could not levy a lifetime ban without first proving Northwestern suffered loss as a result of Calcutt's accused misconduct.
The majority disagreed, Calcutt's penalty was again active and about to be levied, Calcutt sought a stay of the COA's decision, it was denied and court filings show the FDIC prepared to enact the fine and ban Sept. 22.
On Sept. 29, however, Kavanaugh signed the stay order, pending the outcome of another court filing from Calcutt — a writ of certiorari, which in layman's terms is a formal request to the U.S. Supreme Court to review the case.
If the writ is granted, Calcutt has 45 days to file a brief on the merits of his argument. If the writ is denied, Calcutt can file a petition for rehearing.
Hullman estimated the Supreme Court would not likely rule until sometime next spring.
In the meantime, Kavanaugh's order stays — or pauses — the fine and the ban.