Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-99-01230/USCOURTS-caDC-99-01230-0/pdf.json

Parties Involved:
Federal Deposit Insurance Corporation
Respondent
Michael D. Landry
Petitioner

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 19, 1999 Decided March 3, 2000

No. 99-1230

Michael D. Landry,

Petitioner

v.

Federal Deposit Insurance Corporation,

Respondent

On Petition for Review of an Order of the

Federal Deposit Insurance Corporation

John C. Deal argued the cause and filed the briefs for

petitioner.

Kathryn R. Norcross, Counsel, Federal Deposit Insurance

Corporation, argued the cause for respondent. With her on

the brief were Ann S. DuRoss, Assistant General Counsel,

and Colleen J. Boles, Senior Counsel. Thomas A. Schulz,

Assistant General Counsel, and Ashley Doherty and Thomas

L. Holzman, Counsel, entered appearances.

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Before: Edwards, Chief Judge, Williams and Randolph,

Circuit Judges.

Opinion for the Court filed by Circuit Judge Williams.

Separate opinion concurring in part and concurring in the

judgment filed by Circuit Judge Randolph.

Williams, Circuit Judge: Congress has given the Federal

Deposit Insurance Corporation ("FDIC") a variety of weapons to use against individuals whose actions threaten the

integrity of federally insured banks or savings associations.

Among these is the power to remove a bank officer from his

position and to bar him from further participation in the

operations of a federally insured depository institution. See

12 U.S.C. s 1818(e)(1). On April 30, 1996 the FDIC notified

Michael D. Landry that it intended to seek such an order

against him because of his conduct as Senior Vice President,

Chief Financial Officer, and Cashier of First Guaranty Bank,

Hammond, Louisiana.

As required by statute, the FDIC assigned the matter to

an administrative law judge for a formal, on-the-record, administrative hearing. See 12 U.S.C. s 1818(e)(4); 5 U.S.C.

ss 554, 556. The ALJ held a two-week hearing and then

issued a decision recommending that the FDIC issue the

proposed prohibition order.1 Landry filed exceptions to the

ALJ's recommendation, and the case was forwarded to the

FDIC's Board of Directors for a final decision. The Board

agreed with the recommendation and issued an order of

removal and prohibition. See In re Michael D. Landry,

FDIC 95-65e, May 25, 1999 ("Order"), Joint Appendix

("J.A.") 218, 264-66. Landry filed a timely petition for

review. The principal issue for review is Landry's argument

that the FDIC's method of appointing ALJs violates the

__________

1 In the same proceedings, FDIC enforcement counsel also

sought, and ultimately received, a prohibition order against Alton B.

Lewis, a member of the Bank's Board of Directors who also did

some legal work for the bank. Lewis's petition for review is

pending before the United States Court of Appeals for the Fifth

Circuit. See Lewis v. FDIC, No. 99-60412 (5th Cir. filed June 18,

1999).

Appointments Clause of the Constitution, Art. II, s 2, cl. 2.

Landry also argues that the evidence against him did not

meet the statutory minimum for the remedies against him

and that the FDIC violated various procedural requirements.

We affirm.

* * *

From the late 1980s to early 1993, First Guaranty was in

serious financial trouble. In 1990, the FDIC issued a capital

directive requiring it to obtain a $4.7 million infusion of

capital by January 1, 1991. The Bank tried unsuccessfully

to raise capital through a stock solicitation, and when the

FDIC completed its 1991 examination the Bank's position

looked bleaker than ever. Soon afterward, the FDIC told

the Bank's board of directors that it would seek to terminate

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the Bank's deposit insurance. It agreed, however, to delay

termination proceedings while further recapitalization plans

proceeded. In early 1992 the FDIC conducted another examination and found that the Bank's financial position had

improved slightly, but that it was still a candidate for nearterm failure. After Landry and others pursued a series of

attempts to add capital to the Bank--some of which can only

be described as bizarre and desperate--the Bank's board on

September 17, 1992 accepted an offer of purchase, and in

December 1992 the Bank received the necessary capital infusion.

Landry's alleged malfeasance occurred in connection with a

capital enhancement plan initially proposed by Rick A. Jenson, the Bank's former president, and Scott Crabtree, a

consultant, involving a corporation called Pangaea. The

FDIC and Landry agree that he had a role in this plan but

disagree as to the scope of his role, his motivation, and the

significance of his conduct. The FDIC Board, adopting the

ALJ's factual findings, found that Landry and his two associates were the incorporators of Pangaea Corporation, and that

they planned to use Pangaea to acquire an 80% interest in the

Bank. They hoped to raise $16 million by selling 30% of

Pangaea's stock, retaining 70% for themselves. Of the $16

million Pangaea would use $7.5 million to beef up the Bank's

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capital through purchases of its stock, $6.5 million to form a

limited partnership to buy real estate from the Bank's portfolio, and $2 million to pay Pangaea expenses and to finance

other ventures. They presented this plan as a means of

finding capital for the Bank, and obtained approval at an

executive meeting of the Bank's board of directors on August

8, 1991, but as Landry would later admit, the board was

misled because the plan was "not presented as a management

takeover/buyout of the Bank." Instead, the Bank's board was

led to believe that Pangaea was an arm of the Bank so that a

capital infusion would entail no genuine change in control of

the Bank. After board approval, the Bank forwarded a draft

copy of a descriptive booklet to the FDIC examiners. They

rejected the plan because they believed it offered no short

term capital infusion and Pangaea had no serious prospect of

actually raising the $16 million. (The FDIC had determined

that investors could have acquired complete ownership of the

entire bank for $5 million, so that investors would not be

willing to pay $16 million for a 30% interest in an entity

(Pangaea) that would own only 80% of the Bank.)

Undeterred, Jenson, Crabtree and Landry pursued a variety of imaginative sources of capital, many of which involved

Pangaea. These sources included: individuals seeking United States citizenship under a provision of the immigration

laws admitting individuals who invest $1 million in a new

business venture that creates ten or more new jobs; pension

funds solicited for the immigration scheme with the help of an

image-enhancement firm with pension fund contacts; a preferred stock offering for Pangaea prepared by Funding Placement Services; and an Ecuadorian currency scheme through

which one could purportedly obtain a 500% return in six

weeks.

Although this "Pangaea plan" never much developed, and

although Pangaea was unlikely ever to have received approval

to acquire the Bank from its board of directors or federal

regulators, the FDIC Board found that Landry's fellow Pangaea incorporators--with Landry's full knowledge and cooperation--executed enough of the plan to cause the Bank to

lose substantial sums of money in the form of promotional

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expenses, see Order at 14, 17-18, 29-30, J.A. at 231, 234-35,

246-47, questionable loans, see id. at 14-15, 17, J.A. 231-32,

234, and other unwise or illegal banking activities, see id. at

13, 16, 20, J.A. at 230, 233, 237, without informing the

directors that their plan was designed to enrich the incorporators while providing little or no benefit to the Bank itself.

The Board also found Landry had failed to satisfy FDIC

rules requiring disclosure of material changes in the Bank's

operations. See Order at 20, J.A. at 237.

The Board's most compelling evidence came in the form of

a 16-page letter dated June 3, 1993 that Landry himself

wrote to bank examiner G. Martin Cooper ("Landry letter"),

and to which he attached more than 500 pages of supporting

material. The Landry letter described the activities at issue

here and linked them to Pangaea. Landry's personal culpability, laid bare in this letter, was reinforced by Landry's

resignation letter (not accepted by the Bank's board of directors), in which he described his conduct as "self dealing"

and "for the good of Pangaea Corporation at the expense of

First Guaranty Bank," as well as his May 12, 1995 deposition,

in which he admitted that Pangaea had become a vehicle to

"make money off the bank." After examining all of the

evidence, the FDIC Board concluded that although other

wrongdoers may have been more culpable, Landry's conduct

met the statutory criteria and thus warranted a removal and

prohibition order. See Order at 21-22, J.A. at 238-39.

Appointments Clause

Landry argues that the FDIC's method for appointing

ALJs violates the Appointments Clause of the Constitution:

[The President] ... shall nominate, and by and with the

Advice and Consent of the Senate, shall appoint ...

Officers of the United States, whose Appointments are

not herein otherwise provided for, and which shall be

established by Law: but the Congress may by Law vest

the Appointment of such inferior Officers, as they think

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proper, in the President alone, in the Courts of Law, or

in the Heads of Departments.

U.S. Const., Art. II, s 2, cl. 2.

Landry would classify ALJs who conduct administrative

proceedings for the various federal banking agencies as "inferior officers" of the United States. If so, Congress's instruction to the banking agencies to "establish their own pool of

administrative law judges" to conduct such hearings, see

Federal Institutions Reform, Recovery, and Enforcement Act

("FIRREA"), s 916, 103 Stat. at 486, codified at 12 U.S.C.

s 1818 note, would be unconstitutional because it vests appointment authority in a set of agencies that are not (according to Landry) "departments" under the Appointments

Clause. The FDIC counters that the ALJs in question need

not be appointed by heads of departments because they are

employees rather than inferior officers.

The FDIC also makes a preliminary objection--that Landry has shown no prejudice from any Appointments Clause

violation that may have occurred. The FDIC itself determined Landry's responsibility after reviewing the ALJ's recommended decision de novo. See 12 U.S.C. s 1818(h)(1)

(requiring the FDIC to make its own findings of fact when

issuing its final decision); 12 CFR ss 304.38, 304.40 (requiring the FDIC Board to issue the agency's final decision).

The Supreme Court has not decided whether an Appointments Clause violation requires reversal where it appears to

have done a party no direct harm. Ryder v. United States,

515 U.S. 177, 182-83, 186 (1995). But in Freytag v. Commissioner, 501 U.S. 868 (1991), in reaching the Appointments

Clause issue despite its not having been raised below, the

Court classified the clause as "structural," because of its

purpose to prevent encroachment of one branch on another

and to preserve the Constitution's structural integrity. Id. at

878-79. Here, of course, the issue was raised all right; the

problem is that Landry's injury may be questionable. But

the Court uses the term "structural" for a set of errors for

which no direct injury is necessary--such as a criminal

defendant's indictment by a grand jury chosen in a racially or

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sexually discriminatory manner. See Vasquez v. Hillery, 474

U.S. 254, 261 & n.4, 263 (1986) (race); Ballard v. United

States, 329 U.S. 187, 195 (1946) (sex). In such cases, of

course, the later conviction by a petit jury supplies virtual

certainty that a properly constituted grand jury would have

indicted, as the Court has observed in regard to lesserranking grand jury errors. See United States v. Mechanik,

475 U.S. 66, 70-71 & n.1 (1986). As grand juries do not draft

opinions for the petit jury, the latter's insulating effect is

positively surgical compared to the FDIC's action here, however independent its review of the ALJ's decision.

The Court recently noted its use of the label "structural,"

observing that only in a limited class of cases has it "found an

error to be 'structural,' and thus subject to automatic reversal." Neder v. United States, 119 S. Ct. 1827, 1833 (1999).

Issues of separation of powers (including Appointments

Clause matters, Freytag, 501 U.S. at 878), seem most fit to

the doctrine; it will often be difficult or impossible for

someone subject to a wrongly designed scheme to show that

the design--the structure--played a causal role in his loss.

And in Plaut v. Spendthrift Farm, Inc., 514 U.S. 211 (1995),

the Court gave a further explanation: "[S]eparation of powers is a structural safeguard rather than a remedy to be

applied only when specific harm, or risk of specific harm, can

be identified.... [I]t is a prophylactic device, establishing

high walls and clear distinctions because low walls and vague

distinctions will not be judicially defensible in the heat of

interbranch conflict." Id. at 239. For Appointments Clause

violations, demand for a clear causal link to a party's harm

will likely make the Clause no wall at all.

There is certainly no rule that a party claiming constitutional error in the vesting of authority must show a direct

causal link between the error and the authority's adverse

decision. In fact, the opposite is often true. For example, in

a challenge to the authority of a non-Article III court on the

grounds that the challenger is entitled to a court enjoying

Article III's exceptional tenure provisions, the assumption

that inadequate tenure may prejudice the challenger is so

automatic that it usually goes unmentioned. See Northern

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Pipeline Construction Co. v. Marathon Pipe Line Co., 458

U.S. 50 (1982); Palmore v. United States, 411 U.S. 389 (1973);

Crowell v. Benson, 285 U.S. 22 (1932). Bowsher v. Synar, 478

U.S. 714 (1986), extended this principle to general separationof-powers claims. Although the union plaintiffs there had

clearly been injured by a suspension and proposed cancellation of their cost-of-living adjustments, see id. at 721, there

was no showing that the Comptroller General's exposure to

removal by Congress in any way increased the probability of

the cuts. Instead, the Court seemed to presume that subtle

variations in the quality of tenure would affect conduct. See

also Ryder, 515 U.S. at 182-83, 186-88.

Of course in the above cases there was no de novo review

following the decision of the (arguably) unlawfully designated

official. (But see Vasquez v. Hillery, 474 U.S. at 261 & n.4,

263, and Ballard v. United States, 329 U.S. at 195, reversing

convictions based on indictment by discriminatorily selected

grand jury, despite later petit jury verdict, discussed above at

6-7.) Here there is. But Freytag itself indicates that judicial

review of an Appointments Clause claim will proceed even

where any possible injury is radically attenuated. There, the

Court made plain that, had it not found the "inferior officer"

appointed in a constitutional way, it was ready to throw out

the Tax Court's decision simply on the ground that special

trial judges ("STJs") held what it viewed as clearly the

powers of an "inferior officer" (to make final decisions), even

though the STJ had not exercised any power to make final

decisions in Freytag's case. See 501 U.S. at 871-72 & n.2,

882. Indeed, the Court made no attempt to explain how the

STJ's possession of powers not used in Freytag's case could

possibly have prejudiced him. Id.

Moreover, Appointments Clause analysis of purely decisionrecommending employees presents a special problem. Suppose that a purely recommendatory power, i.e., one followed

as here by de novo review, can make an employee an "inferior

officer" within the meaning of the Appointments Clause--a

hypothesis we must assume at this stage. If the process of

final de novo review could cleanse the violation of its harmful

impact, then all such arrangements would escape judicial

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review, unless the officer's powers happened fortuitously, as

in Freytag, to be combined with still greater powers. Recognition of this problem may well explain the Court's statement

in United States v. L.A. Tucker Truck Lines, 344 U.S. 33

(1952), that a defect in the appointment of an "examiner"

(precursor of today's ALJ) was, if properly raised, "an irregularity which would invalidate a resulting order." Id. at 38.

Thus, to refuse to entertain Landry's claim is to rule, in

effect, that officers holding purely recommendatory powers

subject to de novo review are not "inferior officers," i.e., it is

to resolve the merits without purporting to do so.

For this reason our decision here is not inconsistent with

Doolin v. OTS, 139 F.3d 203 (D.C. Cir. 1998). There we

relied on Mechanik, 475 U.S. at 70-71, to conclude that

although enforcement proceedings culminating in a "cease

and desist order" were initiated by an improperly appointed

Director of the OTS and therefore defective, the ultimate

issuance of the final merits order by a properly appointed

Director ratified the initiation and cured the error. Doolin

139 F.3d at 212-14. But Doolin did not present the catch-22

of the present case, where the government's argument requires one to believe that, even if we assume that a pure

power to recommend is enough to lift an employee into the

august "inferior officer" realm, it is not enough to taint the

ultimate judgment and thus give the loser a chance to raise

the issue.

Finally, we note that in United States v. Colon-Munoz, 192

F.3d 210 (1st Cir. 1999), the First Circuit said that "structural" has two meanings, referring not only to errors related to

the constitutional structure but also to ones simply deemed so

"fundamental" as to deprive a criminal trial of basic fairness.

Id. at 217-18 n.9. The court used the distinction to justify

not applying Freytag's rejection of the waiver argument, a

problem not before us. But Colon-Munoz never passed on

the issue that is before us--whether an issue that is structural in the sense that it derives from the constitutional structure can be reviewed even where the link between the error

and the party's harm is conjectural.

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We now turn to whether a violation of the Appointments

Clause occurred. The line between "mere" employees and

inferior officers is anything but bright. See Nick Bravin,

Note, Is Morrison v. Olson Still Good Law? The Court's

New Appointments Clause Jurisprudence, 98 Colum. L. Rev.

1103, 1114-15 (1998) ("Early Supreme Court attempts to

define the term 'officer' provide inexact, if any, judicially

manageable standards"); Edward Susolik, Note, Separation

of Powers and Liberty: The Appointments Clause, Morrison

v. Olson, and Rule of Law, 63 S. Cal. L. Rev. 1515, 1545

(1990) ("[A] definitive understanding of the term 'officer' is

not forthcoming for two simple reasons: (1) there are too few

cases for any consistent precedential principle to be articulated, and (2) the few cases that do exist posit conclusions rather

than arguments and provide little insight to justify their

results."). In fact, the earliest Appointments Clause cases

often employed circular logic, granting officer status to an

official based in part upon his appointment by the head of a

department. See, e.g., United States v. Mouat, 124 U.S. 303,

307 (1888) ("Unless a person in the service of the Government

... holds his place by virtue of an appointment by the

President, or of one of the courts of justice or heads of

Departments authorized by law to make such an appointment,

he is not, strictly speaking, an officer of the United States");

United States v. Germaine, 99 U.S. 508, 510 (1878); United

States v. Hartwell, 73 U.S. (6 Wall) 385, 393 (1867). In an

attempt to clarify the inquiry, the Court has often said that

"any appointee exercising significant authority pursuant to

the laws of the United States is an 'Officer of the United

States,' " Buckley v. Valeo, 424 U.S. 1, 126 n.162 (1976); see

also Edmond v. United States, 520 U.S. 651, 662 (1997);

Ryder v. United States, 515 U.S. 177 (1995); Freytag, 501

U.S. at 881-82,2 but ascertaining the test's real meaning

__________

2 In its Order, the Board seemed to agree with Landry that the

ALJs were inferior officers but found this status irrelevant because

the federal banking agencies are "departments" capable of accepting Congress's delegation of appointment power. The FDIC has

abandoned its apparent concession and now argues that the ALJs

are not inferior officers. Because we agree that the ALJs in

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requires a look at the roles of the employees whose status

was at issue in other cases.

In the most analogous case, Freytag, the Court decided

that STJs were inferior officers. 501 U.S. at 881-82. In so

finding, the Court relied on authority of the STJs not

matched by the ALJs here. In particular, the Court noted

that STJs have the authority to render the final decision of

the Tax Court in declaratory judgment proceedings and in

certain small-amount tax cases. See id. at 882. But the

ALJs here can never render the decision of the FDIC. See

12 CFR s 308.38 (noting that ALJs must file a "recommended decision, recommended findings of fact, recommended conclusions of law, and [a] proposed order" (emphasis

added)). Final decisions are issued only by the FDIC Board

of Directors. See 12 CFR s 308.40(a), (c). Moreover, even

for the non-final decisions of the type made by the STJ in

Freytag, the Tax Court was required to defer to the STJ's

factual and credibility findings unless they were clearly erroneous, see Tax Court Rule 183(c), 26 U.S.C. App. (1994);

Stone v. Commissioner, 865 F.2d 342, 344-47 (D.C. Cir. 1989),

whereas here the FDIC Board makes its own factual findings,

see 12 U.S.C. s 1818(h)(1); 12 CFR s 308.40(c); see also In

re Landry, FDIC-95-65e, 1999 WL 639568, at *1 (FDIC July

8, 1999) (noting that the FDIC had given Landry's case "an

exhaustive de novo review"). Landry argues that the FDIC

Board did not undertake a de novo review of his case, but his

characterization of the FDIC's work goes only to its carefulness, not its authority.

It is, to be sure, uncertain just what role the STJs' power

to make final decisions played in Freytag. Many of the

features of the STJ job that the Court found to contribute to

its being covered by the Appointments Clause have analogues

__________

question are not inferior officers we need not decide whether any of

the federal banking agencies are in fact "departments" for purposes

of the Appointments Clause. Moreover, because the issue before us

does not depend on the FDIC's interpretation of the statute or

exercise of its discretion, there is no problem under SEC v. Chenery

Corp., 332 U.S. 194, 196 (1947).

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here. The office of STJ was "established by Law" (the

threshold trigger for the Appointments Clause) and the

"duties, salary, and means of appointment" for the office were

specified by statute, a factor that has proved relevant in the

Court's Appointments Clause jurisprudence. Freytag, 501

U.S. at 881. The ALJ position here is also "established by

Law," as are its specific duties, salary, and means of appointment. See 5 U.S.C. s 5372 (pay scales for ALJs); 5 U.S.C.

s 3105 (hiring practices); 5 U.S.C. ss 556-557 (functions); 12

CFR pt. 308 (same). Similarly, both the ALJs here and the

STJs in Freytag "take testimony, conduct trials, rule on the

admissibility of evidence, and have the power to enforce

compliance with discovery orders." Freytag, 501 U.S. at 881-

82. And, the Court observed, "In the course of carrying out

these important functions, the special trial judges exercise

significant discretion," id. at 882, rather a magic phrase under

the Buckley test. Further, the Court introduced mention of

the STJs' power to render final decisions with something of a

shrug: "Even if the duties" of STJs involving conduct of nonfinal proceedings "were not as significant as we and the two

courts [Tax Court and Fifth Circuit] have found them to be,

our conclusion would be unchanged." Id. Only then did it go

on to discuss the STJs' power to make final decisions.

Nonetheless, in another way the Court laid exceptional

stress on the STJs' final decisionmaking power. After noting

those powers, the Court went on to explain why Freytag

could raise the claim even though in his case the STJ had not

been exercising them:

Special trial judges are not inferior officers for purposes

of some of their duties under [the enabling statute], but

mere employees with respect to other responsibilities.

The fact that an inferior officer on occasion performs

duties that may be performed by an employee not subject to the Appointments Clause does not transform his

status under the Constitution.

Id. All this explanation would have been quite unnecessary if

the purely recommendatory powers were fatal in themselves.

Accordingly, we believe that the STJs' power of final decision

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in certain classes of cases was critical to the Court's decision.

As the ALJs hired pursuant to s 916 of FIRREA have no

such powers, we conclude that they are not inferior officers.

Privilege and Brady/Jencks claims

During pre-trial discovery the FDIC asserted claims of

deliberative process, law enforcement, and attorney-client

privilege in various permutations to justify withholding 97

documents. As required by the FDIC's rules, see 12 CFR

s 308.25(e), FDIC enforcement counsel produced a privilege

log which briefly described each document and indicated its

date, author, and recipient and the privileges claimed. In

addition, enforcement counsel produced the affidavit of Cottrell L. Webster, the Memphis regional director of the FDIC's

division of supervision, claiming to have personally reviewed

each of the withheld documents, formally invoking the law

enforcement and deliberative process privileges, and explaining how each privilege applied.

The ALJ rejected an initial effort to compel production of

the documents, and the FDIC denied interlocutory review.

It specifically rejected Landry's claim that there were documents that Brady v. Maryland, 373 U.S. 83 (1963), required

the FDIC to disclose. In doing so it observed that enforcement counsel's assurance that no such withheld documents

existed was enough to defeat Landry's claims in the absence

of some source of doubt rising above Landry's unadorned

"suspicions." The ALJ also denied several requests to compel production made during the hearing itself. But when the

hearing was over, the FDIC Executive Secretary ordered

that the record be reopened and that FDIC enforcement

counsel submit a more detailed privilege log. After reviewing

the revised privilege log, the Board upheld the assertion of

privilege for 44 of the documents but reopened the record a

second time and ordered enforcement counsel to produce the

remaining 46 documents (seven had been produced to Landry

for other reasons) for in camera inspection.

After reviewing the newly submitted documents, the Board

found most of them not to be privileged but did not order

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disclosure because it found the error harmless in light of the

cumulative nature of the information withheld. See Order at

5-6, 51-52, J.A. at 223-24, 268-69. The FDIC Board did not

address any of Landry's claims under Jencks v. United

States, 353 U.S. 657 (1957). Because the FDIC had not ruled

on Landry's Brady and Jencks claims for the documents that

it did not review in camera, we ordered the FDIC to produce

these documents so that we could decide whether material

had been withheld improperly.

Privilege. We begin with Landry's challenges to the

FDIC's claims of privilege. His most substantial argument is

that the deliberative process and law enforcement privileges

were not properly invoked. Assertion of either of these

qualified, common law executive privileges requires: (1) a

formal claim of privilege by the "head of the department"

having control over the requested information; (2) assertion

of the privilege based on actual personal consideration by that

official; and (3) a detailed specification of the information for

which the privilege is claimed, with an explanation why it

properly falls within the scope of the privilege. See In re

Sealed Case, 856 F.2d 268, 317 (D.C. Cir. 1988) (noting the

requirements for invoking the law enforcement privilege);

Northrop Corp. v. McDonnell Douglas Corp., 751 F.2d 395,

399 (D.C. Cir. 1984) (same for deliberative process privilege).

Landry's argument is that assertion merely by the Memphis

regional director of the FDIC's division of supervision, Cottrell L. Webster, rather than by the head of the FDIC, is

inadequate.

The argument mistakenly assumes that only assertion by

the head of the overall department or agency is enough. Our

cases hold to the contrary. In Tuite v. Henry, 98 F.3d 1411

(D.C. Cir. 1996), we allowed Counsel to the Justice Department's Office of Professional Responsibility, rather than the

Attorney General herself, to assert the law enforcement

privilege for information obtained during investigations of

potentially illegal Justice Department recordings of conversations between a defendant and his lawyer. See id. at 1417.

Similarly, in Friedman v. Bache Halsey Stuart Shields, Inc.,

738 F.2d 1336 (D.C. Cir. 1984), in rejecting enforcement

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counsel's assertion of the law enforcement privilege, we implied that officials other than the head of the department

could assert the privilege, stating: "the files had not been

examined for this purpose by responsible members or officers

of CFTC." Id. at 1342 (emphasis added); see also Kerr v.

United States Dist. Ct. for North. Dist. of Cal., 511 F.2d 192,

198 (9th Cir. 1975) (finding common law executive privilege

inapplicable because "[n]either the Chairman of the [California Adult] Authority nor the Director of Corrections nor any

official of these agencies asserted, in person or writing, any

privilege in the district court" (emphasis added)), aff'd, 426

U.S. 394 (1976). District courts in this Circuit have also

allowed lesser officials to assert these privileges. See, e.g.,

Koehler v. United States, 1991 WL 277542, at *5 (D.D.C. Dec.

9, 1991) (allowing the head of the U.S. Army Criminal Investigation Command to assert privilege); Alexander v. FBI, 186

F.R.D. 154, 166 (D.D.C. 1999) (implying that affidavits of FBI

general counsel or inspector general would have been sufficient if they had provided enough information to assess

whether the law enforcement privilege applied).

For these privileges, it would be counterproductive to read

"head of the department" in the narrowest possible way. The

procedural requirements are designed to "ensure that the

privilege[s are] presented in a deliberate, considered, and

reasonably specific manner." In re Sealed Case, 856 F.2d at

271. As we have seen, built into the requirements is the need

for "actual personal consideration" by the asserting official.

Id. Insistence on an affidavit from the very pinnacle of

agency authority would surely start to erode the substance of

"actual personal" involvement. See generally Note, The Military and State Secrets Privilege: Protection for the National

Security or Immunity for the Executive?, 91 Yale L.J. 570,

572 n.18 (1982) (noting widespread belief that official claims of

privilege by department heads are often made after perfunctory review of subordinates' decisions). Further, both privileges advance important goals; the gains from imposing

demands in the interest of careful assertion must be balanced

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stringent procedures. See United States Dep't of Energy v.

Brett, 659 F.2d 154, 155-56 (Temp. Emer. Ct. App. 1981).

Under our cases, the head of the appropriate regional

division of the FDIC's supervisory personnel is of sufficient

rank to achieve the necessary deliberateness in assertion of

the deliberative process and law enforcement privileges.

We note that decisions involving the more sensitive and

absolute privilege for state and military secrets have been

more insistent on assertion at the highest level. See, e.g.,

United States v. Reynolds, 345 U.S. 1, 7-8 n.20 (1953) (quoting Duncan v. Cammell, Laird & Co., [1942] A.C. 624, for the

proposition that the decision to invoke the state secrets

privilege should be taken by "the minister who is the political

head of the department"); Clift v. United States, 597 F.2d

826, 829 (2d Cir. 1979) (declining to require disclosure where

the Secretary of Defense did not invoke the privilege because

of a statute criminalizing such disclosure but noting "the

Government would be wiser not to put courts to this test in

the future"); Kinoy v. Mitchell, 67 F.R.D. 1, 9-10 (S.D.N.Y.

1975) (requiring Attorney General himself to lodge a formally

sufficient claim of privilege); 26 Charles Alan Wright &

Kenneth W. Graham, Jr., Federal Practice and Procedure

s 5670 (1992). We express no opinion on who may assert

that privilege.

Landry's claim that the FDIC fell fatally short by not

including the disputed documents in the record is meritless.

See Vaughn v. Rosen, 484 F.2d 820, 825-26 (D.C. Cir. 1973)

(noting the immense and unjustifiable cost to the appellate

courts of mandatory review of documents for privileged material). But see Kerr v. United States Dist. Ct. for North. Dist.

of Cal., 426 U.S. 394, 405-06 (1976) (noting that in camera

review may be used to resolve a privilege dispute).

Landry also argues that the FDIC waived its privileges by

initiating this action. He is mistaken. Here he relies on an

erroneous reading of In re Subpoena Duces Tecum Served on

the OCC, 145 F.3d 1422 (D.C. Cir.), reh'g granted, 156 F.3d

1279 (D.C. Cir. 1998). In our first pass at the case, we said

that the deliberative process privilege was unavailable where

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"the Constitution or a statute makes the nature of governmental officials' deliberations the issue," offering Title VII

cases as an archetypal instance. See 145 F.3d at 1424. But

when the government in petition for rehearing expressed

anxiety that any claim of arbitrary and capricious decisionmaking would necessarily call the government's deliberations

into question, we responded by explaining that "our holding

... is limited to those circumstances in which the cause of

action is directed at the agency's subjective motivation." 156

F.3d at 1280. Because an ordinary enforcement action in no

way implicates the FDIC's subjective motivations, and Landry makes no credible claims that improper factors motivated

this enforcement action, there is no waiver.

Brady/Jencks. In its order the FDIC Board assumed

without deciding that Brady v. Maryland, 373 U.S. 83 (1963),

applies to enforcement proceedings, and though the Board's

order did not address Jencks v. United States, 353 U.S. 657

(1957), FDIC counsel assures us that the FDIC has the same

view of it. Thus we also assume without deciding that both

cases apply. Cf. Communist Party of the United States v.

Subversive Activities Control Bd., 254 F.2d 314, 327-28 (D.C.

Cir. 1958) (holding that in agency adjudications in which the

government has not claimed privilege, written reports made

at the time of an event must be produced when the credibility

of the witness on matters discussed in the report is in

question). After reviewing the documents alleged to contain

Jencks and Brady material, we find no reason to disturb the

FDIC's order.

We begin with Brady. After Landry requested that the

FDIC produce all Brady materials, the government informed

the ALJ and the FDIC Board that it had reviewed the

contested documents and had disclosed all exculpatory factual

material. Normally we accept the government's representations as to whether documents in its possession constitute

Brady material. See Pennsylvania v. Ritchie, 480 U.S. 39,

59 (1987) (noting that a prosecutor's decision as to whether

exculpatory Brady information exists or is material is usually

final); United States v. Lloyd, 992 F.2d 348, 352 (D.C. Cir.

1993) (same). As the FDIC observed in denying interlocuUSCA Case #99-1230 Document #500781 Filed: 03/03/2000 Page 17 of 31
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tory review, it takes more than the adverse party's conclusory

suspicions to impel the adjudicator to delve behind the government's representation that it has conducted a Brady review and found nothing.

Landry's Jencks claims have more merit. He argues that

the withheld reports by Jerry Cox and G. Martin Cooper, the

bank examiners who testified at his hearing, touch upon the

events and activities discussed in their testimony and therefore must be produced. See Jencks, 353 U.S. at 668. Because the FDIC concedes Jencks's applicability in this case,

Landry has established a prima facie violation if the documents in question cover the same territory as the examiners'

testimony. After examining the documents and the examiners' testimony we find that several of them do so. Even so, a

privilege might beat the Jencks claim. See Norinsberg Corp.

v. USDA, 47 F.3d 1224, 1229 n.5 (D.C. Cir. 1995) (presuming

that, in a license revocation hearing in which the agency had

adopted the Jencks Act, a witness's opinions in a report that

formed part of the deliberative process would be protected

from Jencks Act disclosure); see also Communist Party, 254

F.2d at 327. But see Jencks, 353 U.S. at 671-72 (noting that

criminal actions must be dismissed when the government

chooses not to comply with a court order to produce relevant

statements or reports on the ground of privilege). But the

FDIC here makes no claim that privilege defeats its Jencks

obligations--though the ALJ did.

The FDIC does, however, claim harmless error, and the

claim is sound. Because these documents merely duplicate

other evidence in the record, we find the error harmless even

under the strict application of harmless error used to assess

Jencks violations. See Norinsberg Corp., 47 F.3d at 1230;

United States v. Lam Kwong-Wah, 924 F.2d 298, 310 (D.C.

Cir. 1991).

Evidence Satisfying the Statutory Standard

The statute authorizes a prohibition or removal order:

Whenever the [FDIC] determines that--

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(A) any institution-affiliated party has, directly or indirectly--

...

(ii) engaged or participated in any unsafe or unsound

practice in connection with any insured depository institution or business institution; or

(iii) committed or engaged in any act, omission, or

practice which constitutes a breach of such party's fiduciary duty;

(B) by reason of the violation, practice, or breach described in ... subparagraph (A)--

(i) such ... institution ... has suffered or will probably suffer financial loss or other damage;

...

(iii) such party has received financial gain or other

benefit by reason of such violation ...; and

(C) such violation, practice, or breach--

(i) involves personal dishonesty on the part of such

party; or

(ii) demonstrates willful or continuing disregard by

such party for the safety or soundness of such ...

institution....

12 U.S.C. s 1818(e)(1) (1994). That is, the statute requires:

misconduct, with certain adverse effects, committed with a

culpable state of mind. Landry argues that each of these

three factors is absent.

Misconduct. The Board ruled that Landry's actions constituted both unsafe and unsound banking practices under

s 1818(e)(1)(A)(ii) and breaches of his fiduciary duty under

s 1818(e)(1)(A)(iii). Because there is significant overlap between the two categories, see Kaplan v. OTS, 104 F.3d 417,

421 & n.2 (D.C. Cir. 1997) (recognizing that both involve

undue risk and that a fiduciary breach can qualify as an

unsafe or unsound practice), it is unsurprising that the Board

found that most of Landry's misconduct fit into both categories. Landry argues that fiduciary breach is a matter of state

rather than federal law, an issue we left open in Kaplan v.

OTS, 104 F.3d 417, 421 n.2 (D.C. Cir. 1997); see also Atherton

v. FDIC, 519 U.S. 213, 217-26 (1997), as we do again today:

the evidence is enough to show his participation in unsafe or

unsound practices.

In Kaplan we suggested that an "unsafe or unsound practice" was one that posed a "reasonably foreseeable" "undue

risk to the institution." 104 F.3d at 421. Other courts seem

to have agreed, using slightly different language. The Third

Circuit in In re Seidman, 37 F.3d 911 (3d Cir. 1994), for

example, said that an "imprudent act ... pos[ing] an abnormal risk to the financial stability of the banking institution"

would qualify. Id. at 928. We trust that "undue" risks are

abnormal in the banking industry, so we see no difference

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there. Plunging ahead with such a risk where its character is

"reasonably foreseeable" surely constitutes the imprudence of

which the Third Circuit speaks.

The acts attributable to Landry meet both parts of the test.

The ALJ's and the Board's findings leave no doubt as to their

imprudence. After a thorough review of the transactions we

summarized above, the Board correctly concluded: "The list

of misguided and aborted projects and relationships that

management entered into with minimal information and virtually no expertise is shocking." That these activities exposed

the Bank to abnormal risk is also unassailable. Conduct

attributable to Landry included substantial involvement in at

least one large loan to an uncreditworthy out-of-territory

borrower, long-term contracts with consultants whose fees

were "proportionately greater than the services rendered,"

and the use of Bank funds for travel and related expenses in

pursuit of breathtakingly irresponsible schemes. In the

Bank's weakened condition, these expenditures created an

undue and abnormal risk of insolvency. As the FDIC Board

found:

[R]ather than preserve the Bank's few remaining assets,

Landry chose to dissipate them in furtherance of his

personal takeover of the Bank.

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... [Landry] failed to disclose that Bank funds were

being spent in furtherance of Pangaea and IAIS [a

partnership intended to be used for the immigration law

scheme]. He failed to disclose the contracts and certain

uncreditworthy loans to which he or Jenson had committed the Bank, or the fee-splitting arrangements, which

benefited him and Pangaea to the Bank's detriment.

Order at 26, J.A. at 243.

Landry argues that the continuing profitability of the Bank

during the relevant period forecloses a finding of undue risk,

but in so arguing he misconstrues the concept of risk, which

is independent of the outcome in a particular case. Just as a

loss, without more, does not prove that an act posed an

abnormal risk, see Johnson v. OTS, 81 F.3d 195, 204 (D.C.

Cir. 1996), a profit does not establish its absence.

Effects. The Board found that Landry's misdeeds had the

forbidden effects, see Order at 29-30, J.A. at 246-47, because

they caused both financial loss to the Bank, see 18 U.S.C.

s 1818(e)(1)(B)(i), and personal financial gain for Landry, see

id. s 1818(e)(1)(B)(iii). The losses consisted of $278,000 in

expenses paid by the Bank in promoting Pangaea, and

$174,900 in loan write-offs. Order at 29, J.A. at 246. (Although relatively small in relation to large-scale banking

transactions, these expenses constitute over 12% of the

amount ultimately used to recapitalize the bank.) Landry

argues that none of the loans that yielded losses are properly

attributed to him, but his method is simply to show that most

of the misconduct at issue consisted of actions more directly

attributable to his co-incorporators. Section 1818(e) authorizes punishment for actions taken "directly or indirectly."

So long as the misconduct at issue meets the stringent

preconditions for a removal order it doesn't matter that

Landry engaged in many of the proscribed acts only indirectly, though knowingly, and certainly not that others may have

been more guilty.

Landry also argues that his expenses cannot be considered

losses because they were approved by the appropriate Bank

officers and the Bank's shareholders. But these approvals

were tainted, even assuming they could otherwise salvage the

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expenses. Landry's own letters show that he understood that

his expenses and those of his co-incorporators were incurred

on behalf of Pangaea to the detriment of the Bank, without

the shareholders' having understood the fact.

Culpability. The Board found that Landry's misconduct

doubly satisfied the culpability prong because it involved both

personal dishonesty, see 12 U.S.C. s 1818(e)(1)(C)(i), and

willful or continuing disregard for the safety or soundness of

the Bank, see id. s 1818(e)(1)(C)(iii). The courts of appeals

that have examined the question are in agreement that both

standards of culpability require some showing of scienter.

See Kim v. OTS, 40 F.3d 1050, 1054-55 (9th Cir. 1994)

(collecting cases). We have no trouble upholding the finding

of personal dishonesty. In his letters and deposition testimony Landry repeatedly admitted that he solicited money for

Pangaea in the guise of seeking capital for the Bank. See

Order at 31-32, J.A. at 248-49. Knowing participation in a

scheme that used the Bank's funds for personal gain while

representing the scheme as the Bank's own, above-board plan

to recapitalize itself qualifies as personal dishonesty. See

Greenberg v. Board of Governors of the Fed. Reserve Sys.,

968 F.2d 164, 171 (2d Cir. 1992) (finding that failure to

disclose insider transactions provided ample support for a

finding of personal dishonesty); Van Dyke v. Board of Governors of the Fed. Reserve Sys., 876 F.2d 1377, 1379 (8th Cir.

1989) (accepting the Board's definition of personal dishonesty

which included "deliberate deception by pretense and stealth"

and "want of fairness and [straightforwardness]" (alteration

in original)).

Landry offers two arguments against this finding. First,

he claims that a requirement that a bank control transaction

must secure approval by the bank's directors and by regulators "provide[s] the ultimate assurance of fairness that

precludes a sanction against Landry," citing Kaplan, 104 F.2d

at 424. In Kaplan, however, we said only that when a

director cast a vote in favor of an arguably risky transaction,

his anticipation of the need for board and regulatory approval

afforded "reasonable assurance that an unfair transaction

would not take place." Id. There the vote was completely

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independent of a later scheme by others to circumvent the

OTS's and the S&L board's approval processes. Id. at 422.

Here, Landry and his co-incorporators' conduct, when viewed

ex ante, was far from blameless. Instead, it accomplished the

step missing in Kaplan by disguising wrongdoing from the

regulators and the Bank's board of directors and directly

misleading both.

Second, Landry argues, once again, that the Bank's approval of his expenses, and the failure of its board of directors and

the FDIC to seek to remove him after fully initially examining the transactions at issue here, proves that he did not act

dishonestly. But neither the independent audits commissioned by the Bank after the recapitalization, nor Landry's

cooperation with the 1993 examination, eliminate his prior

involvement as a co-incorporator and participant in the

scheme. His later honesty, forthrightness, and integrity are

to be commended, and his continued employment at the Bank

show that its management found that his role in the Pangaea

scheme was outweighed by the benefits he offered the Bank.

But we do not have the power to substitute our judgment--or

the Bank's management's--for that of the FDIC. Once we

conclude that Landry's conduct satisfies the statutory preconditions, we must uphold its decision.

Landry also argues that the FDIC reached its decision

without taking account of exculpatory evidence. It is well

established that the substantial evidence rule requires consideration of the evidence on both sides; evidence that is substantial viewed in isolation may become insubstantial when

contradictory evidence is taken into account. See Universal

Camera Corp. v. NLRB, 340 U.S. 474, 488 (1951); Johnson v.

OTS, 81 F.3d 195, 204 (D.C. Cir. 1996). But here the

evidence to which Landry points is not exculpatory; it shows

no more than that Landry had a lesser role than others in the

individual actions taken in furtherance of the illegal scheme

and that many of his actions were approved by the Bank.

The FDIC Board did consider these factors, however, and its

findings on all relevant facts are adequately supported by

record evidence, including Landry's own statements.

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Last, Landry says that the Board failed to provide adequate record citations for its factual findings. Indeed, Landry is correct that several critical findings lack record citation. Such omissions might render an agency's reasoning

incomprehensible, possibly requiring a remand. See generally SEC v. Chenery Corp., 332 U.S. 194, 196 (1947) ("If the

administrative action is to be tested by the basis upon which

it purports to rest, that basis must be set forth with such

clarity as to be understandable."). But here the FDIC Board

explicitly adopted the ALJ's findings of fact which, in turn,

contained ample record citations for the factual findings that

Landry disputes.

* * *

For the foregoing reasons, Landry's petition for review is

Denied.

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Randolph, Circuit Judge, concurring in part and concurring in the judgment: I join the court's opinion except for its

disposition of Landry's claim under the Appointments Clause

of the Constitution. In my view, Freytag v. Commissioner,

501 U.S. 868 (1991), cannot be distinguished. The Administrative Law Judge who presided over Landry's case was as

much an "inferior Officer" under Article II, s 2, cl. 2 of the

Constitution as the special trial judge in Freytag. I nevertheless would sustain the FDIC's decision and order because

Landry suffered no prejudicial error.

Rather than paraphrase the critical portion of Freytag, I

will quote it in full:

Petitioners argue that a special trial judge is an "inferior

Office[r]" of the United States....

The Commissioner, in contrast to petitioners, argues

that a special trial judge ... acts only as an aide to the

Tax Court judge responsible for deciding the case. The

special trial judge, as the Commissioner characterizes his

work, does no more than assist the Tax Court judge in

taking the evidence and preparing the proposed findings

and opinion. Thus, the Commissioner concludes, special

trial judges ... are employees rather than "Officers of

the United States."

"[A]ny appointee exercising significant authority pursuant to the laws of the United States is an 'Officer of

the United States,' and must, therefore, be appointed in

the manner prescribed by s 2, cl. 2, of [Article II]."

Buckley [v. Valeo, 424 U.S. 1, 126 (1976)]. The two courts

that have addressed the issue have held that special trial

judges are "inferior Officers." The Tax Court so concluded in First Western Govt. Securities, Inc. v. Commissioner, 94 T.C. 549, 557-559 (1990), and the Court of

Appeals for the Second Circuit in Samuels, Kramer &

Co. v. Commissioner, 930 F.2d 975, 985 (1991), agreed.

Both courts considered the degree of authority exercised

by the special trial judges to be so "significant" that it

was inconsistent with the classifications of "lesser functionaries" or employees. Cf. Go-Bart Importing Co. v.

United States, 282 U.S. 344, 352-353 (1931) (United

States commissioners are inferior officers). We agree

with the Tax Court and the Second Circuit that a special

trial judge is an "inferior Office[r]" whose appointment

must conform to the Appointments Clause.

The Commissioner reasons that special trial judges

may be deemed employees in subsection (b)(4) cases

because they lack authority to enter a final decision. But

this argument ignores the significance of the duties and

discretion that special trial judges possess. The office of

special trial judge is "established by Law," Art. II, s 2,

cl. 2, and the duties, salary, and means of appointment

for that office are specified by statute. See Burnap v.

United States, 252 U.S. 512, 516-517 (1920); United

States v. Germaine, 99 U.S. 508, 511-512 (1879). These

characteristics distinguish special trial judges from special masters, who are hired by Article III courts on a

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temporary, episodic basis, whose positions are not established by law, and whose duties and functions are not

delineated in a statute. Furthermore, special trial

judges perform more than ministerial tasks. They take

testimony, conduct trials, rule on the admissibility of

evidence, and have the power to enforce compliance with

discovery orders. In the course of carrying out these

important functions, the special trial judges exercise

significant discretion.

Even if the duties of special trial judges [just described] were not as significant as we and the two courts

have found them to be, our conclusion would be unchanged [because they may be assigned to conduct other

types of proceedings and render independent judgments].... Special trial judges are not inferior officers

for purposes of some of their duties ... but mere

employees with respect to other responsibilities.

501 U.S. at 880-82.

There are no relevant differences between the ALJ in this

case and the special trial judge in Freytag. Both held offices

"established by Law," Art. II, s 2, cl. 2; 501 U.S. at 881. In

both instances, "the duties, salary, and means of appointment

for that office are specified by statute." Id.; see maj. op. at

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12. Both "take testimony, conduct trials, rule on the admissibility of evidence, and have the power to enforce compliance

with discovery orders." 501 U.S. at 881-82; Samuels, 930

F.2d at 986; see 12 C.F.R. s 308.5 (defining the ALJ's

duties). "In the course of carrying out these important

functions," both the special trial judge in Freytag and the

ALJ in this case "exercise significant discretion." 501 U.S. at

882.

The majority attempts to distinguish Freytag on two

grounds. Neither survives close attention. First, the majority says that the Tax Court, in reviewing the special trial

judge's "non-final decision" in Freytag, gave deference to

factual and credibility findings pursuant to Tax Court Rule

183(c), whereas the FDIC reviewed the ALJ's decision de

novo. Maj. op. at 11. It would be odd for the constitutional

status of a special trial judge to depend on an internal rule of

procedure, particularly since the Tax Court had discretion to

pick whatever standard of review it saw fit. See 26 U.S.C.

s 7443A(c). Odd or not, the Supreme Court in Freytag

decided that Tax Court Rule 183 and its deferential standard

were "not relevant to our grant of certiorari"--and the Court

granted the writ, so it explained, in order "to resolve the

important questions the litigation raises about the Constitution's structural separation of powers." 501 U.S. at 874 n.3,

873.1 The majority's first distinction of Freytag is thus no

distinction at all. The fact that an ALJ cannot render a final

decision and is subject to the ultimate supervision of the

__________

1 There was doubt, despite this court's decision in Stone v.

Commissioner, 865 F.2d 342, 344-47 (D.C. Cir. 1989), whether the

Tax Court had authority to provide by rule that it would give

deference to special trial judge decisions rendered after an assignment pursuant to 26 U.S.C. s 7443A(b)(4). The Tax Court derived

its rulemaking authority from s 7443A(c), but on its face that

provision applied only to assignments under (b)(1) through (b)(3).

Hence, the petitioners in Freytag argued that "Congress did not

intend for Tax Court supervision of special trial judge findings and

opinions in (b)(4) cases to be appellate in nature." Brief for

Petitioners, 1991 WL 521270, at *22, Freytag v. Commissioner, 501

U.S. 868 (1991) (No. 90-762). The Supreme Court avoided deciding

the issue by deeming Rule 183 irrelevant to its disposition.

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FDIC shows only that the ALJ shares the common characteristic of an "inferior Officer." "[W]e think it evident that

'inferior officers' are officers whose work is directed and

supervised at some level by others who were appointed by

Presidential nomination with the advice and consent of the

Senate." Edmond v. United States, 520 U.S. 651, 663 (1997).

According to the majority opinion, the second difference

between this case and Freytag is that here the ALJ can never

render final decisions of the FDIC, whereas special trial

judges could, in cases other than the sort involved in Freytag,

render a final decision of the Tax Court. See maj. op. at 11,

12-13. It is true that the Supreme Court relied on this

consideration; the last paragraph of the opinion quoted above

indicates as much. What the majority neglects to mention is

that the Court clearly designated this as an alternative holding. The Court introduced its alternative holding thus:

"Even if the duties of special trial judges [just described]

were not as significant as we and the two courts have found

them to be, our conclusion would be unchanged." 501 U.S. at

882 (italics added). What "conclusion" did the Court have in

mind? The conclusion it had reached in the preceding paragraphs--namely, that although special trial judges may not

render final decisions, they are nevertheless inferior officers

of the United States within the meaning of Article II, s 2, cl.

2. The same conclusion, the same holding, had also been

rendered in Samuels, Kramer & Co. v. Commissioner, 930

F.2d 975, 986 (2d Cir. 1991), a decision the Supreme Court

cited and expressly approved. See 501 U.S. at 881. There

the Second Circuit held that a special trial judge performing

the same advisory function as the judge in Freytag was an

inferior officer; the court of appeals did not mention the fact

that in other types of cases, the judge could issue final

judgments.2

__________

2 The Second Circuit reached this conclusion for the same reasons

given in the third full paragraph of Freytag quoted in the text:

The special trial judges are more than mere aids to the judges

of the Tax Court. They take testimony, conduct trials, rule on

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That the ALJ in this case is an inferior officer thus follows

from Freytag. It follows also from the Supreme Court's

recognition that the role of the modern administrative law

judge "is 'functionally comparable' to that of a judge.... He

may issue subpoenas, rule on proffers of evidence, regulate

the course of the hearing, and make or recommend decisions.

See [5 U.S.C.] s 556(c)." Butz v. Economou, 438 U.S. 478,

513 (1978) (emphasis added). Furthermore, the ALJ, in

proposing findings of fact and a recommended decision, which

the FDIC reviewed de novo,3 performed functions essentially

like those of a federal magistrate assigned to conduct a

hearing and to submit proposed findings and recommendations to a district judge. See 28 U.S.C. s 636(b)(1)(B). When

there is an objection to a magistrate's findings and recommendations, the district judge--like the FDIC--must conduct

de novo review. See 28 U.S.C. s 636(b)(1)(C). Nonetheless,

it has long been settled that federal magistrates are "inferior

Officers" under Article II, which is why they are appointed by

"Courts of Law" under 28 U.S.C. s 631. See Rice v. Ames,

180 U.S. 371, 378 (1901); Go-Bart Importing Co. v. United

States, 282 U.S. 344, 352-54 (1931); Pacemaker Diagnostic

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the admissibility of evidence, and have the power to enforce

compliance with discovery orders. Contrary to the contentions

of the Commissioner, the degree of authority exercised by

special trial judges is "significant." See Buckley [v. Valeo, 424

U.S. 1, 126 (1976)]. They exercise a great deal of discretion and

perform important functions, characteristics that we find to be

inconsistent with the classifications of "lesser functionary" or

mere employee. Cf. Go-Bart Importing Co. v. United States,

282 U.S. 344, 352 (1931) (United States commissioners are

inferior officers).

930 F.2d at 986.

3 De novo review does not mean that the ALJ's recommended

decisions are without influence. In this case the FDIC "affirm[ed]

the recommendation of the ALJ and adopt[ed] his Recommended

Decision, Findings of Fact and Conclusions of Law, as discussed

herein." In re Landry, FDIC-95-65e, 1999 WL 440608, at *4

(FDIC May 25, 1999).

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Clinic v. Instromedix, 725 F.2d 537, 545 (9th Cir. 1984) (en

banc).

Because the ALJ in this case was an "inferior Officer," the

next question would ordinarily be whether he was duly appointed by the President, a Court of Law, or the Head of a

Department, as Article II requires. The FDIC assumed that

the ALJ was an inferior officer and ruled that he was

properly appointed, having been hired by the Office of Thrift

Supervision and assigned to this case by the Office of

Financial Institution Adjudication. See In re Landry,

FDIC-95-65e, 1999 WL 440608, at *28 & n.37 (FDIC May 25,

1999). In this court, the FDIC has given up on this claim.

For reasons it did not explain, it expressly abandoned the

argument that the ALJ was appointed by the head of a

department. See Brief for Respondent at 48 n.32. I accept

that as a waiver of the defense. It is true that "one who

makes a timely challenge to the constitutional validity of the

appointment of an officer who adjudicates his case is entitled

to a decision on the merits of the question and whatever relief

might be appropriate if a violation indeed occurred." Ryder

v. United States, 515 U.S. 177, 182-83 (1995). But I do not

take this salutary rule to mean that a court may not accept a

concession from the party defending the appointment.

The remaining question then is what relief is appropriate.

Given the FDIC's de novo review and the majority's thorough

rejection of Landry's various claims of error,4 I am persuaded

that he suffered no prejudice. The Administrative Procedure

Act contains a harmless error rule. See 5 U.S.C. s 706;

Doolin Sec. Sav. Bank, F.S.B. v. Office of Thrift Supervision,

139 F.3d 203, 212 (D.C. Cir. 1998). The majority suggests

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4 On some points, the FDIC supplied different rationales to reach

the same conclusions as the ALJ and on other matters the FDIC

reached different conclusions. See, e.g., In re Landry, 1999 WL

440608, at *33 (ordering release of certain documents withheld by

the ALJ under the due process privilege). In the end, the conclusive evidence came from Landry himself. See, e.g., id. at *13-14

(reproducing portions of Landry's resignation letter to the bank).

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that harmless error cannot apply because the constitutional

violation is "structural" in nature. But as the majority

acknowledges, in none of the "structural" cases it cites was

there de novo review. See maj. op. at 8. Still, the majority

reasons that "[i]f the process of final de novo review could

cleanse the violation of its harmful impact, then all such

arrangements could escape judicial review." Id. at 8-9. The

majority is not correct about this. The rule in Ryder, quoted

in the preceding paragraph, requires us to decide the Appointments Clause claim first, before we reach the question of

relief. If we had done so correctly here, our decision would

have been, in effect, a declaratory judgment that an ALJ

sitting on a case such as this had to be appointed by the head

of a department. Such a judgment would have been the

"practical equivalent" of mandamus, as we said in SanchezEspinoza v. Reagan, 770 F.2d 202, 208 n.8 (D.C. Cir. 1985).

If any litigant in the future wished to challenge the ALJ's

status before trial, mandamus would lie. Or a litigant could

refuse to present evidence before an unconstitutional officer,

or refuse to comply with an ALJ's discovery orders, and

bring the case here for review after the FDIC acted. See

Morrison v. Olson, 487 U.S. 654, 668 (1988). Then there

would be real prejudice. Here there is none and I therefore

join in the denial of Landry's petition for judicial review.

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