Seventh Circuit Upholds FDIC's In-House Enforcement Power Post-SCOTUS Jarkesy Ruling

The U.S. Court of Appeals for the Seventh Circuit has ruled that the Federal Deposit Insurance Corporation can continue to ban bankers and impose civil penalties through its own in-house administrative courts. In a closely watched decision, the appellate panel held that the FDIC's enforcement actions do not violate the Seventh Amendment right to a jury trial, preserving a core tool of federal banking oversight.[1][2]

The ruling in Bonan v. FDIC answers a critical constitutional question that has hung over the administrative state since the Supreme Court's landmark SEC v. Jarkesy decision. It separates what happened at the SEC from the broader regulatory powers of the federal government, establishing a firewall for agencies that police specialized industries.[1][3]

In 2024, the Supreme Court stripped the Securities and Exchange Commission of its ability to use administrative law judges for securities fraud cases. The justices ruled that such penalties are inherently legal in nature and require a federal jury under the Seventh Amendment.[1][5]

Following Jarkesy, corporate defendants and constitutional challengers launched a wave of litigation against other federal agencies. They argued that all agency-imposed financial penalties bypass the independent judiciary and are unconstitutional without a jury trial.[5][6]

The legal mechanism resolving this dispute hinges on the "public rights" doctrine. The Seventh Amendment guarantees a jury trial for "suits at common law." The Supreme Court interprets this to mean that traditional private rights—like fraud or breach of contract, which existed at the nation's founding—must go to a jury.[1][3]

However, under the Atlas Roofing precedent, Congress can assign the adjudication of statutory rights to administrative agencies if those rights are closely integrated into a federal regulatory scheme and have no direct Founding-era common-law equivalent. These are classified as public rights.[2][3]

Frank William Bonan II, a former chairman of Grand Rivers Community Bank in Illinois, became the test case for the FDIC's authority. In 2015, Bonan directed a $1.25 million loan to a struggling oil-drilling business run by his associates, despite the borrowers lacking the income to make the annual payments.[2][4]

The loan ultimately defaulted, costing the bank over $500,000. In 2021, the FDIC initiated an in-house enforcement action. Following an administrative hearing, the agency's board permanently barred Bonan from the banking industry and imposed a $105,000 civil penalty for "unsafe or unsound banking practices" and breach of fiduciary duty.[1][4]

Bonan petitioned the Seventh Circuit to vacate the orders, backed by amicus briefs from the Cato Institute and the U.S. Chamber of Commerce. The challengers argued that the FDIC's proceedings were functionally identical to the SEC proceedings struck down in Jarkesy, demanding a jury trial for the punitive fines.[5][6]

The Seventh Circuit disagreed. Writing for a unanimous panel, Judge Michael Scudder ruled that the FDIC's enforcement standards do not share the "common law soil" of securities fraud. The court separated the specific statutory text from broad common-law concepts.[1][2]

The panel traced the concept of an "unsafe or unsound practice" to nineteenth-century state banking laws, concluding it is a regulatory term of art rather than a traditional common-law claim. Because it lacks a Founding-era analogue, it falls safely under the public rights exception.[2][3]

The FDIC's second charge—breach of fiduciary duty—presented a more complex constitutional puzzle. Bonan argued that fiduciary duties are traditional private rights. The court acknowledged this was a "close and challenging call" that tested the boundaries of the public rights doctrine.[1][2]

Ultimately, the panel determined that fiduciary obligations historically originated in courts of equity, not courts of law. Because the Seventh Amendment applies specifically to "suits at common law," the equitable lineage of fiduciary duties allowed the agency to adjudicate them internally without a jury.[1][2]

The court also rejected Bonan's structural arguments regarding the unconstitutional insulation of FDIC administrative law judges from presidential removal. Applying the Supreme Court's Collins v. Yellen standard, the panel found Bonan failed to demonstrate any compensable harm resulting from those tenure protections.[2][4]

The ruling is a major victory for federal banking regulators. The FDIC and its defenders maintain that the government, which provides the ultimate backstop through deposit insurance, requires administrative authority to quickly remove reckless executives and halt unsafe practices without enduring the delays of crowded federal district courts.[1][3]

Despite the agency's win, the Seventh Circuit explicitly noted that the constitutional boundaries remain unsettled. The panel anticipated that the Supreme Court will eventually take up the treatment of equitable claims, leaving the long-term reach of the public rights doctrine open to further judicial review.[2][3]