Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-93-09500/USCOURTS-ca10-93-09500-0/pdf.json

Parties Involved:
Office of Thrift Supervision
Respondent
Harry Rapp
Petitioner
Lori Rapp
Petitioner
Mark Rapp
Petitioner
Mary Rapp
Petitioner
Michael Rapp
Petitioner
Patricia Rapp
Petitioner
Tom Rapp
Petitioner
Debra Wallace
Petitioner

Document Text:

PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

TOM RAPP I HARRY RAPP I MARK RAPP I 

LORI RAPP, PATRICIA RAPP, 

MARY RAPP, MICHAEL RAPP, AND 

DEBRA WALLACE I 

Petitioners, 

v. 

UNITED STATES DEPARTMENT OF 

TREASURY, OFFICE OF THRIFT 

SUPERVISION, 

Respondent. 

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FILED . United States Court of App~u.3 

Tenth Circuit 

APR 14 1995 

PATRICK FISH"EU Cler~ 

No. 93-9500 

On Petition for Review of a Final Order of the Office of Thrift 

Supervision, United states Department of the Treasury (OTS Order 

No. AP 92-148, December 4, 1992). 

James R. Cage (Magdalena c. Bowen with him on the brief), 

Berryhill, Cage & North, P.C., Denver, Colorado, for Petitioners. 

Elizabeth R. Moore, Assistant Chief Counsel (Carolyn B. 

Lieberman, Acting Chief Counsel, and Thomas J. Segal, Deputy 

Chief Counsel with her on the brief), Office of Thrift 

Supervision, Washington, D.C., for Respondent. 

Before SEYMOUR and TACHA, Circuit Judges, and VRATIL, District 

Judge.* 

VRATIL, District Judge. 

*The Honorable Kathryn H. Vratil, United States District 

Judge for the District of Kansas, sitting by designation. 

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Appellate Case: 93-9500 Document: 01019282514 Date Filed: 04/14/1995 Page: 1 
Petitioners Tom Rapp, Harry Rapp, Mark Rapp, Lori Rapp, 

Patricia Rapp, Mary Rapp, Michael Rapp, and Debra Rapp Wallace 

("the Rapps") petition for review of an order of the Director of 

the Office of Thrift Supervision ("OTS") dated December 4, 1992. 

In that order, the Director found that the Rapps in concert had 

willfully acquired andjor retained control of a federally-insured 

thrift without filing prior notice, in violation of the Change in 

Bank Control Act of 1978 ("the Control Act"), 12 u.s.c. § 

1817(j), and the Savings and Loan Holding Company Act ("the 

Holding Company Act"), 12 u.s.c. § 1467a. Pursuant to that 

finding, the Director assessed various civil money penalties, in 

the aggregate amount of $1,415,243, against the individual Rapps. 

This Court has jurisdiction under 12 u.s.c. §§ 

1467a(i)(2)(C), 1817(j)(16)(F), and 1818(h)(2). For reasons 

stated below, we affirm the Director's order. 

A. FACTUAL BACKGROUND 

The Rapps are related family members. Tom and Harry are 

brothers. Harry is married to Patricia. Tom is married to Mary 

and they have four children: Mark, Lori, Michael, and Debra. 

In 1984, Charles Bartlett recruited Tom to help organize 

First Northern Savings ("FNS"), a new local savings and loan 

association in Greeley, Colorado. Tom believed that he had a 

conflict of interest due to his involvement with a local bank, so 

he suggested that his daughter Lori participate. As a result, 

Lori became an organizer of FNS and served on its Board of 

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Appellate Case: 93-9500 Document: 01019282514 Date Filed: 04/14/1995 Page: 2 
Directors from its inception in 1984 until August 21, 1990. 

Although Tom was not formally an organizer of FNS, he was 

extremely active in marketing and selling FNS shares, and he 

vastly influenced the Rapp family's acquisition of FNS stock. In 

addition, Tom served as director of FNS from July 15, 1985, 

through October 31, 1989, holding positions as chairman of the 

board and vice president. 

Between October, 1984, and July, 1985, the Rapps and two 

Rapp-owned partnerships, RAPCO and TRASC0, 1 collectively acquired 

at least 87,000 shares- 43 percent- of outstanding FNS stock. 

The Rapps acquired the stock as a short-term investment, 

expecting to sell a control block at two to three times its book 

value within several years. 

In late August or early September of 1985, Tom divined 

through a newspaper article that the Rapp family might need 

government approval to own 43 percent of FNS stock. As a result, 

he and FNS president Charles Bartlett solicited legal advice on 

behalf of FNS. By letter dated September 17, 1985, counsel 

advised that the Rapp stock ownership constituted a control 

violation and that one of two things must occur: either (1) the 

Rapps should give notice of their control ownership to the 

Federal savings and Loan Insurance Corporation ("FSLIC") pursuant 

1

RAPCO is an investment partnership comprised of Tom's wife 

Mary and their children, Mark, Lori, Michael and Debra, 

petitioners herein. TRASCO is an investment partnership 

comprised of Harry's wife Patricia and their three sons. The 

sons are not parties to this action. 

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Appellate Case: 93-9500 Document: 01019282514 Date Filed: 04/14/1995 Page: 3 
to 12 c.F.R. § 563.18-2 {1985), 2 or {2) as a group, the Rapps 

should immediately divest sufficient shares to bring their 

combined ownership to less than 25 percent of total outstanding 

shares. The Rapps elected not to file notice with FSLIC, but 

within one week they transferred 38,750 shares {approximately 45 

percent of their holdings) to other individuals. 

Specifically, on September 17, 1985, Harry and Patricia 

transferred 16,500 shares of FNS stock to Judy Nelson, who worked 

as a secretary at Harry's company. On September 18, 1985, Tom 

and Mary transferred 12,250 shares to Ivan Shupe, a long-time 

family friend. And on September 23, 1985, Mark transferred 

10,000 shares to his business partner, Bruce Copp. The Director 

found that these stock transfers were sham transactions, 

structured to reserve the attributes of ownership and control to 

the Rapp family while formally registering the stock in the names 

of third parties. 3 

2

Apparently this advice was based on the premise that late 

notice is better than no notice at all. Section 563.18-2{c) 

requires 60 days prior written notice whenever any person or 

persons acting in concert will acquire direct or indirect power 

to direct the management or policies of an insured institution or 

to vote 25 percent or more of any class of voting securities of 

an insured institution. Within the 60-day review period, FSLIC 

may disapprove the proposed acquisition. See 12 C.F.R. § 563.18-

2 {g) • 

3Each transfer was structured as a "sale" in which the buyer 

executed a non-recourse, interest-bearing demand note for the 

full purchase price of the stock. The Rapps retained the stock 

certificates, endorsed in blank by the buyers, as security. The 

buyers executed hypothecation agreements which permitted the 

Rapps to pledge the stock as collateral. These transactions were 

free of risk to the buyers. The buyers were not responsible for 

interest or principal on the notes unless and until third parties 

(continued •.. ) 

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Appellate Case: 93-9500 Document: 01019282514 Date Filed: 04/14/1995 Page: 4 
After the stock transfers, the Rapps continued to search for 

potential buyers for the stock which they had already - at least 

nominally- sold to Nelson, Shupe and Copp. Indeed, on March 17, 

10d6, Mark sold to Harold Winograd the stock which he had 

nominally transferred to Copp. 4 

on August 20, 1987, Nelson asked Harry to take the FNS 

shares out of her name and cancel and return the promissory note 

and agreement. 5 On September 9, 1987, Harry cancelled and 

returned the agreement and promissory note, but he did not 

transfer the stock out of Nelson's name. Shortly thereafter, 

Nelson informed FNS that she had assigned the stock back to Harry 

and Patricia and on October 30, 1987, FNS notified the Federal 

Home Loan Bank Board ("FHLBB") that the Rapp family might be in 

violation of the Control Act. 6 

3 ( ••• continued) 

purchased the stock. In that event, depending upon the resale 

price, Nelson, Shupe or Copp could pay off the notes and retain 

the profit, or default on the notes and walk away from the 

transaction with no personal liability whatsoever. 

4

Copp played no role in this transaction. Mark informed 

Copp that he had a buyer and was going to take the stock back. 

Mark (not Copp) received the sale proceeds, and the sale to 

Winograd was for $70,000 less than the purported sale to Copp 

some six months earlier. 

5

Shortly after the transfer to Nelson, Harry and Patricia 

signed an agreement wherein they retained all right, title and 

interest in the stock purportedly sold to Nelson, including the 

right to dividends. In the agreement, Harry and Patricia also. 

assumed liability for any capital gains tax resulting from 

Nelson's sale of the stock. 

6

Shortly thereafter, on December 11, 1987, the state of 

Colorado sent Nelson a questionnaire concerning her ownership of 

FNS stock. Harry completed the questionnaire, stating that 

(continued ••• ) 

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Appellate Case: 93-9500 Document: 01019282514 Date Filed: 04/14/1995 Page: 5 
On December 29, 1987, Harry transferred the "Nelson" shares 

to Harry Asmus, Tom's neighbor and long-time acquaintance, and 

Kathryn Landrum, Harry's sister-in-law. Through TRASCO, Harry's 

wife and sons provided full financing for the transactions and 

took back non-recourse demand notes secured by the stock. Asmus 

and Landrum endorsed the stock certificates and Harry retained 

possession of them. Asmus and Landrum paid no interest or 

principal on the notes. On December 9, 1988, Harry informed 

Landrum that he had overstated the financial condition of FNS and 

would discount her note to reflect year-end book value. Landrum 

replied that she had no alternative but to return the stock and 

that she expected Harry to cancel the note and waive interest to 

date. Harry subsequently sold the stock to an unrelated third 

party for half what Landrum had purportedly paid him. 

After the Rapps learned of their control violation in 

September, 1985, and even after they had executed the nominal 

transfers to Nelson, Shupe and Copp, the Rapps acquired 

additional shares of FNS stock. On April 11, 1986, Tom purchased 

500 FNS shares. On the same date Tom's sister, Katherine Rapp 

Miller, purchased 1,000 shares. On December 31, 1987, Lori 

exercised stock warrants for an additional 2,500 shares. 

Throughout the time that the Rapp family was in violation of 

the control statutes, Tom was actively involved in efforts to 

6 ( ••• continued) 

Nelson still owned 16,500 shares of FNS stock. At the 

administrative hearing Harry denied that he had completed the 

form but both the ALJ and the Director found otherwise and their 

findings are supported by substantial evidence. 

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Appellate Case: 93-9500 Document: 01019282514 Date Filed: 04/14/1995 Page: 6 
sell a control block of FNS stock at a premium price. He placed 

numerous advertisements in national publications, claiming that 

he and his family and friends owned over 50 percent of FNS stock 

and offering to coordinate a sale of that stock for a personal 

fee. 

On January 10, 1990, the OTS issued Enforcement Review 

committee Resolution No. ERC 90-7, along with a Notice of 

Assessment of a Civil Money Penalty ("Notice of Assessment"), 

charging that since July, 1985, the Rapps had continually owned 

and had the power to vote more than 25 percent of the outstanding 

voting stock of First Northern Savings, in willful violation of 

Section 1817(j) (16) of the Control Act. The notice assessed a 

$1,000,000 penalty against Tom Rapp, with an additional $10,000 

penalty for each day the violation continued. The notice also 

assessed penalties of $50,000, plus $1,000 for every day of 

continuing violation, against each of the seven remaining 

petitioners. 1 

On February 2, 1990, the Rapps answered the Notice of 

Assessment and requested an administrative hearing. The 

Administrative Law Judge ("AI..J") recommended summary judgment 

against the Rapps on, inter alia, the Rapps• affirmative defenses 

of estoppel and breach of contract. The AI..J held an 

administrative hearing from November 13 through 14, 1990, and 

7

The Notice of Assessment also imposed penalties against 

stan Rapp, a brother of Tom and Harry. The Director found that 

penalties were not warranted as to Stan, because of his minimal 

involvement in the scheme. The Rapps do not challenge this 

finding and Stan is not a party to this appeal. 

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Appellate Case: 93-9500 Document: 01019282514 Date Filed: 04/14/1995 Page: 7 
April 16 through 19, 1991. On August 22, 1991, the ALJ issued 

his recommended decision, finding that the Rapps had engaged in a 

pattern of misconduct in willful violation of the Control Act. 

He recommended civil penalties in the amount of $100,000 against 

Tom Rapp and $20,000 against each of the remaining Rapps. Both 

the Rapps and the OTS filed exceptions to the ALJ's recommended 

decision. 

On December 4, 1992, the OTS Director issued his Decision 

and Order on Assessment of Civil Money Penalties ("Final 

Decision"), which found that from June 26, 1985 through November 

13, 1990, over consecutive time periods, the Rapps in concert had 

violated both the Holding Company Act and the Control Act. More 

specifically, the Director found that from June 26, 1985, through 

December 31, 1989, the Rapps had violated the Holding Company 

Act, while from January 1, 1990, through November 13, 1990, the 

Rapps had violated the Control Act. As a consequence of these 

findings, the Director imposed statutory penalties in the 

following amounts: $971,600 against Tom Rapp; $186,900 against 

Harry Rapp; $186,900 against Mark Rapp; $29,370 against Lori 

Rapp; $16,020 against Patricia Rapp; $13,585 against Mary Rapp; 

$5,434 against Michael Rapp; and $5,434 against Debra Rapp 

Wallace. 

The Rapps challenge the penalties on three separate grounds. 

First, they argue that the Director erroneously rejected their 

affirmative defenses that the OTS had breached an agreement to 

settle the civil money penalties for $5,000 or, alternatively, 

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Appellate Case: 93-9500 Document: 01019282514 Date Filed: 04/14/1995 Page: 8 
that the OTS was estopped from asserting civil money penalties in 

excess of $5,000. Second, the Rapps assert that the record does 

not justify second-tier penalties against individual family 

members. Finally, the Rapps claim that the OTS violated their 

constitutional due process rights. 

B. STANDARD OF REVIEW 

Judicial review of OTS action is governed by the 

Administrative Procedure Act ("APA"), 5 u.s.c. § 701 et seg. 

Under the APA we must "hold unlawful and set aside agency 

[adjudicatory] action, findings, and conclusions found to be (A) 

arbitrary, capricious, an abuse of discretion, or otherwise not 

in accordance with law; [or] • • • (E) unsupported by substantial 

evidence •••• " 5 u.s.c. § 706(2); Citizens to Preserve 

overton Park. Inc. v. Volpe, 401 u.s. 402, 413-14 (1971), 

overruled on other grounds, Califano v. Sanders, 430 u.s. 99, 105 

(1977). Section 706 sets forth separate and distinct standards 

and each requires us to engage in a "substantial inquiry." 

overton Park, 401 u.s. at 415; Bowman Transp .. Inc. v. ArkansasBest Freight Sys •. Inc., 419 u.s. 281, 284 (1974). Although an 

agency's decision is entitled to a presumption of regularity, 

"that presumption is not to shield [the agency's] action from a 

thorough, probing, in-depth review." Overton Park, 401 u.s. at 

415. 

Under the arbitrary and capricious standard, we ascertain 

whether the agency examined the relevant data and articulated a 

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Appellate Case: 93-9500 Document: 01019282514 Date Filed: 04/14/1995 Page: 9 
rational explanation for its decision. Motor Vehicle Mfrs. Ass'n 

of u.s .. Inc. v. State Farm Mut. Auto. Ins. Co., 463 u.s. 29, 43 

(1983). In reviewing the agency's explanation, we determine 

whether the agency considered the relevant factors and whether it 

made a clear error of judgment. Id. at 43. Normally, we set 

aside agency action as arbitrary and capricious if 

the agency has relied on factors which Congress has not 

intended for it to consider, entirely failed to 

consider an important aspect of the problem, offered an 

explanation for its decision that runs counter to the 

evidence before the agency, or is so implausible that 

it could not be ascribed to a difference in view or the 

product of agency expertise. 

Id. As the reviewing court, we may not compensate for such 

deficiencies by supplying a reasoned basis for the agency's 

action that the agency itself has not given. Id. 

Evidence is substantial under the APA if it is enough to 

justify, if the trial were to a jury, refusal to direct a verdict 

on a factual conclusion. Olenhouse v. Commodity Credit Corp., 42 

F.3d 1560, 1575 (lOth Cir. 1994); see also Richardson v. Perales, 

402 U.S. 389, 401 (1971). Under the substantial evidence test, 

we consider conflicts in the record and specifically define those 

facts which support the agency's decision. See Olenhouse, 42 

F.3d at 1576. "This requires a plenary review of the record as 

it existed before the agency." Id. at 1575. 

C. DISCUSSION 

1. Affirmative Defenses 

As noted above, the Rapps requested an administrative 

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Appellate Case: 93-9500 Document: 01019282514 Date Filed: 04/14/1995 Page: 10 
hearing on certain "affirmative defenses" to the Notice of 

Assessment dated January 10, 1990. More specifically, the Rapps 

argued that the OTS had agreed to settle all claims upon payment 

of a $5,000 penalty or, in the alternative, that the OTS was 

estopped from collecting a penalty greater than $5,000. The ALJ 

found that the OTS was entitled to summary judgment on 

petitioners• defenses, which they characterized as breach of 

contract and estoppel defenses. The Director adopted the ALJ 

recommendation in this regard, and petitioners challenge that 

decision. Because of the summary nature of these rulings, we 

take as true for purposes of appeal all facts properly asserted 

by the Rapps. See, ~' Oberstar v. FDIC, 987 F.2d 494, 498 

(8th Cir. 1993). 

In January, 1989, FHLBB notified the Rapps of the alleged 

Control Act violation. At that time, FHLBB offered to settle the 

matter upon payment of a $10,000 civil penalty and entry of an 

agreed cease and desist order. More particularly, FHLBB proposed 

a cease and desist order which would have required the Rapps to 

transfer to an approved trust all stock exceeding 9.9 percent of 

outstanding FNS stock. FHLBB 1S proposed order would have 

required the Rapps to also obtain approval of a rebuttal of 

control submission under Section 574.4(e) (1) of the Control Act 

Regulations, or allow the trustee to sell the stock exceeding 9.9 

percent, with any profits being paid to FSLIC. 

On May 1, 1989, the Rapps rejected FHLBB 1 S offer and 

proposed to settle the civil penalties for $1,000. FHLBB 

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Appellate Case: 93-9500 Document: 01019282514 Date Filed: 04/14/1995 Page: 11 
rejected that proposal and proposed a $7,500 penalty. By letter 

dated May 24, 1989, the Rapps again rejected FHLBB'S offer and 

proposed a $5,000 settlement. FHLBB eventually agreed to the 

Rapp's $5,000 penalty offer and by letter dated June 22, 1989, 

sent them a proposed desist order which incorporated stipulations 

identical to those proposed in January, 1989. 

The Rapps refused to accept the proposed stipulations and 

order. For the first time, they objected to a requirement that 

FSLIC receive the profit resulting from any sale of their stock. 

The parties thereafter continued to negotiate this point, 

focusing on the definition of "profit." Finally, however, by 

letter dated October 30, 1989, the OTS (which had then succeeded 

FHLBB under FIRREA) informed the Rapps that it saw no basis for 

further negotiations. 8 

On November 21, 1989, the Rapps wrote to the OTS, expressing 

an interest in continued negotiations. The OTS rebuffed this 

overture by letter dated November 28, 1989, noting that the Rapps 

had rejected all prior proposals and stating that the OTS did not 

intend to make a further proposal. 

On December 18, 1989, the Rapps informed the OTS that its 

definition of profit was agreeable. They also expressed a belief 

that all issues were resolved and offered to sign and return 

corrected documents. The OTS did not respond to this proposal. 

8 In August, 1989, Congress enacted the Financial 

Institutions Reform, Recovery, and Enforcement Act ("FIRREA"), 

which abolished FHLBB and vested regulatory authority over 

federally-insured thrifts in the newly created Office of Thrift 

Supervision ("OTS"). See 12 u.s.c. § 1461, et seg. 

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Appellate Case: 93-9500 Document: 01019282514 Date Filed: 04/14/1995 Page: 12 
Instead, on January 10, 1990, it issued the Notice of Assessment 

of penalties against Tom Rapp in the amount of $1,000,000 plus 

$10,000 for each day of continuing violation, and against the 

remaining petitioners in the amount of $50,000 plus $1,000 for 

each day of continuing violation. The Rapps contend that this 

penalty constituted a breach of the parties' agreement to settle 

the civil money penalty for $5,000. In the alternative, 

petitioners contend that the OTS is estopped from assessing a 

penalty in excess of $5,000. 

a. Breach of Contract 

The Director found that no contract existed between the 

parties. Specifically, he noted that the amount of penalty was 

only one of many issues in a multi-faceted negotiation which 

continued long after the parties agreed to a $5,000 penalty. 

This finding is well-supported by the record and is not 

arbitrary, capricious, or an abuse of discretion. Although the 

parties agreed to the amount of penalty, the record clearly 

establishes that they failed to agree on other terms material to 

the settlement. See Weisberg v. u.s. Dep't of Justice, 745 F.2d 

1476, 1493 (D.C. Cir. 1984) (absence of agreement on material 

term prevents formation of contract) ; Mid-Continent Petroleum 

Corp. v. Russell, 173 F.2d 620, 622 (lOth Cir. 1949) (no contract 

created where material terms and conditions of agreement are 

unsettled). No contract resulted from the Rapps' last-ditch and 

arguably disingenuous "acceptance" of a proposal which they had 

long since rejected. Under any reasonable view of the record, 

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the OTS offer expired long before the Rapps attempted to accept 

it. Petitioners' breach of contract claim therefore fails as a 

matter of law, and the Director did not err in so holding. 

b. Estoppel 

Alternatively, the Rapps assert that the OTS is estopped 

from imposing a civil penalty exceeding $5,000. Specifically, 

the Rapps claim that the Director misapplied the law by requiring 

them to show affirmative misconduct by the government as a 

condition of estoppel. 

This Circuit has found that in order to prevail on a claim 

of governmental estoppel, the party seeking relief must show 

affirmative misconduct by the government. See Board of County 

Comm•rs of County of Adams v. Isaac, 18 F.3d 1492, 1499 (lOth 

Cir. 1994). The Director rejected the Rapps' allegation that the 

OTS had engaged in affirmative misconduct by enlarging the amount 

of penalties assessed against them. See Final Decision, p. 30-31 

n.34. In this regard, the Director did not err. "Affirmative 

misconduct means an affirmative act of misrepresentation or 

concealment of a material fact." Isaac, 18 F.3d at 1499~ The 

Rapps make no allegation that FHLBB or the OTS affirmatively 

misrepresented or concealed a material fact. Thus the Director's 

conclusion is well-supported in fact and in law. 9 

9

The Rapps also argue that at the administrative hearing, 

the ALJ improperly excluded evidence relating to the petitioners• 

breach of contract and estoppel claims, in violation of their due 

process rights and 5 u.s.c. § 556(c) and (d). By the time of the 

administrative hearing, however, the ALJ had properly eliminated 

the estoppel and breach of contract claims through summary 

(continued ••• ) 

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2. Penalty Assessment 

The Rapps challenge the Director's assessment of second-tier 

penalties - as opposed to lesser, first-tier penalties - under 

the Control Act. The Control Act imposes second-tier penalties 

in the maximum amount of $25,000 per day for any violation which 

{I) is part of a pattern of misconduct; 

{II) causes or is likely to cause more than a minimal loss 

to such institution; or 

{III) results in pecuniary gain or other benefit to such 

person. 

12 u.s.c. § 1817{j) {16){B){ii). A Control Act violation under 

Section 1817{j) which does not meet these criteria qualifies for 

first-tier penalties in the maximum amount of $5,000 per day. 12 

U.S.C. § 1817{j) {16) {A). 

The Director held that second-tier penalties were 

appropriate because the individual petitioners had engaged in a 

"pattern of misconduct" and had received "other benefit" under 

Sections 1817{j) {16){B){ii) {I) and (III), respectively. 

Petitioners argue that the Director's statutory interpretation is 

unreasonable and that his factual findings are arbitrary, 

9 ( ••• continued) 

judgment. Evidence concerning those claims was not relevant to 

the issues presented at the hearing, and the Rapps were not 

entitled to an evidentiary hearing on those matters. See, ~, 

Puerto Rico Aqueduct and Sewer Auth. v. U.S. EPA, 35 F.3d 600, 

606 {1st Cir. 1994) (due process does not require agency to 

convene evidentiary hearing when no genuine issue of material 

fact exists), cert. denied, ___ U.S. ___ , 1994 WL 677196 (1995); 

Oklahoma Bankers Ass'n v. Federal Reserve Board, 766 F.2d 1446, 

1452 (lOth Cir. 1985) (agency must provide evidentiary hearing 

where dispute of material fact exists). See also 12 C.F.R. § 

509.26 (1990). Petitioners' due process argument is therefore 

without merit. 

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Appellate Case: 93-9500 Document: 01019282514 Date Filed: 04/14/1995 Page: 15 
capricious and unsupported by the evidence. 10 

a. Sham Transactions 

In finding a "pattern of misconduct," the Director concluded 

that the stock transfers to Nelson, Shupe and Copp were sham 

transactions. Petitioners challenge this conclusion, arguing 

that it is unsupported by the record. We disagree. On this 

record, the Director could easily find that the stock transfers 

to Nelson, Shupe and Copp were transfers in name only, designed 

to conceal the Rapps' control violation and buy time for them to 

find bona fide purchasers who would buy the stock at a premium 

price. 

The Rapps assert that the transactions were legitimate 

because Nelson, Shupe and Copp received genuine investment 

opportunities, in that they could pay off the notes and retain 

any profit. The record reflects that Nelson, Shupe and Copp had 

no intent of paying off the notes, however, and that they 

acquired their stock at prices which substantially exceeded the 

"going prices" of FNS shares. The likelihood that they would 

ever realize any profit was apparently slim or none. On this 

10Petitioners also complain that the Director's decision 

implies that the Rapps knew of their control violation in 1984 

and that the violation continued through the date of the 

Director's final decision. These arguments are immaterial to the 

outcome of this appeal. The Director imposed penalties only from 

September 17, 1985, through November 12, 1990, the day before the 

administrative hearing began. He imposed no penalties for any 

violation before September, 1985, or after the date of the 

administrative hearing. The Rapps were not prejudiced by any 

"implication" that they violated control regulations during other 

time periods. See 5 u.s.c. § 706 (on judicial review of 

administrative action "due account shall be taken of the rule of 

prejudicial error"). 

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Appellate Case: 93-9500 Document: 01019282514 Date Filed: 04/14/1995 Page: 16 
record, we readily affirm the Director's conclusion that the 

stock transfers were sham transactions. 

b. Pattern of Misconduct 

The Rapps challenge the Director's further finding that the 

control violations by individual Rapps were part of a "pattern of 

misconduct" under Section 1817(j) (16) (B) (ii) (I). Specifically, 

petitioners assert that a "pattern of misconduct" under 

subsection (I) requires two or more Control Act violations and 

that misconduct surrounding a single violation cannot give rise 

to a "pattern of misconduct" under the statute. 11 The Rapps also 

complain that factually, the record does not support a finding 

that each individual engaged in a "pattern of misconduct." 

The Control Act does not define a "pattern of misconduct" 

and the legislative history is seemingly silent on this point. 

Congress has not specifically addressed the issue and in fact has 

entrusted the OTS with responsibility for administering the 

statute. We therefore give considerable deference to the 

Director's interpretation and limit our review to a determination 

whether his construction of the statute is reasonable. See 

Chevron U.S.A .. Inc. v. Natural Resources Defense Counsel. Inc., 

467 u.s. 837, 845 (1984); Home Mortq. Bank v. Ryan, 986 F.2d 372, 

376 (lOth Cir. 1993). 

11The Rapps further argue that because a "pattern of 

misconduct" cannot arise from a single control violation, firsttime Control Act offenders (such as themselves) are immune from 

second-tier penalties under Section 1817(j)(16) (B) (ii)(I). The 

statutory language does not command this result, however, and the 

Director did not abuse his discretion in rejecting it. 

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Under the statute, any person who commits a control 

violation, "which violation . • • is part of a pattern of 

misconduct," is liable for second-tier penalties. 12 u.s.c. § 

1817(j)(16)(B) (ii) (I). The statutory language does not limit 

second-tier penalties to patterns of Control Act violations, nor 

does it stipulate that in order to incur liability for secondtier penalties each member of an offending control group must 

independently demonstrate a separate "pattern of misconduct." 

The plain language of the statute authorizes second-tier 

penalties if the control violation is part of a pattern of 

misconduct. In our view, the Director acted reasonably in so 

construing it. 

In this case, citing the Rapps' repeated efforts to conceal 

their control violations and their continuing refusal to comply 

with control regulations, the Director found a "pattern of 

misconduct" which authorized imposition of second-tier penalties. 

In support of his conclusion, the Director cited the Rapps' 

ongoing acquisition of FNS stock, the sham stock transfers, Tom's 

misrepresentations to state regulators and FNS directors 

concerning the propriety of the sham transactions, Harry's 

attempt to mislead state investigators with respect to Nelson's 

stock ownership, and subsequent stock purchases by Tom and Lori 

after they had clearly learned of the control violation. See 

Final Decision, p. 26-27. 

These findings were supported by substantial evidence, and 

the Director did not exceed his authority in finding that each 

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petitioner's violation was part of a "pattern of misconduct" 

under Section 1817(j) {16) (B) (ii) (I). 

c. Other Benefit 

In part, the Director based the imposition of second-tier 

penalties on his finding that although petitioners had not 

received pecuniary profit from their control violation, they had 

received "other benefit" under Section 1817(j) (16) (B) (ii) (III). 

The Rapps contend that the Director erred in concluding that 

their control of FNS, without more, constituted "other benefit." 

As a preliminary matter, contrary to petitioners' argument, 

the Director did not find that control ownership alone 

constituted "other benefit" sufficient to justify imposition of 

second-tier penalties in this case. The Director did state that 

petitioners' control was a benefit, but he found that the benefit 

was more than de minimis. Indeed, the Director outlined various 

benefits which the Rapps had secured as a result of their control 

violation: they demanded and received seats on the FNS board of 

directors, with Tom serving as of chairman of the board, and 

through Tom, the Rapps advertised the institution for sale, 

demanding a premium price for the family's control block of stock 

and negotiating a personal fee to bring the transaction to 

completion. 12 See Final Decision, p. 28. 

More importantly, on this record, the Director's conclusion 

that petitioners benefitted from their control violation is not 

12That the Rapps considered their control a "benefit" is 

demonstrated by their refusal to relinquish it - even when 

confronted with knowledge that it was illegal. 

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arbitrary, capricious, or unsupported by the record. 13 See Motor 

Vehicle, 463 u.s. at 43. 

d. Mitigating Factors 

The Rapps complain that the Director failed to properly 

consider mitigating factors, especially the fact that FNS did not 

suffer financial loss as a result of the Rapps' misconduct. In 

determining the penalty to be assessed against each individual 

Rapp, however, the Director reduced the tentative penalty by 80 

percent because petitioners• conduct did not cause a loss or risk 

of loss to FNS, and because the Rapps had no prior control 

violations. On this record, we find that the Director 

sufficiently considered mitigating factors and did not abuse his 

discretion in imposing the penalties. See, ~' Morgan v. 

Secretary of Hous. and Urban Dev., 985 F.2d 1451, 1458 (lOth Cir. 

1993) (we will not disturb amount of penalty imposed unless it is 

abuse of discretion or otherwise arbitrary or capricious). 

3. Due Process 

Finally, the Rapps claim that the Director violated their 

statutory and constitutional due process rights in two 

respects. 14 First, they assert that the Director changed 

13Because the Director specifically found that the Rapps 

derived non-pecuniary benefit from their control violation, we do 

not address petitioners' argument that control in itself is not a 

benefit under 12 u.s.c. § 1817(j) (16) (B) (ii) (III). But cf. 

Oberstar v~ FDIC, 987 F.2d 494, 502 (8th Cir. 1993) (obtaining 

effective control of financial institution is no doubt "other 

benefit" under§ 1818(e) (1) (B) (iii)). 

14We reject without further discussion the Rapps' contention 

that the OTS penalized them for pursuing administrative remedies 

(continued ••• ) 

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theories midstream by imposing penalties against them under the 

Holding Company Act, when the Notice of Assessment and ALJ had 

imposed penalties under the Control Act. Second, they contend 

that by announcing a new matrix methodology for assessing civil 

money penalties, the Director wrongfully performed an act of 

broad policy-making in a single adjudicatory proceeding. To 

remedy these purported violations, the Rapps ask not that the 

matter be remanded for statutorily and constitutionally 

sufficient procedures, but that petitioners be entirely relieved 

from any penalties for proven violations. 

a. Notice of statutory Basis for Penalties 

The Notice of Assessment and the ALJ levied civil money 

penalties under the Control Act, but the Director found that 

petitioners had violated the Holding Company Act from June 26, 

1985, to December 31, 1989, because they had acted in concert 

with the RAPCO and TRASCO partnerships during that period. 15 The 

14 ( ••• continued) 

by imposing daily penalties for the period after the Notice of 

Assessment, before the administrative hearing. Based on the 

Director's finding that the Rapps continued to violate control 

regulations during this time, it was not improper to assess daily 

penalties against them. See, ~' Abercrombie v. occ, 833 F.2d 

672, 676-77 (7th Cir. 1987) ("As a practical matter, [persons] 

who know they are liable for a specified amount for each day a 

violation continues would be likely to cure the violation in a 

short order."). 

15The Director opined that control violations which involved 

joint participation by individuals and partnerships fell under 

both the Holding Company Act and the Control Act, but that the 

Control Act did not apply to transactions which were subject to 

the Holding Company Act. See 12 u.s.c. § 1817(j) (17) (C). He 

held that for the period when the Rapps acted jointly with RAPCO 

and TRASCO, they had violated the Holding Company Act and 

(continued ••• ) 

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Rapps do not claim that the Holding Company Act is inapplicable, 

and we assume for purposes of this appeal that it does apply. 

Likewise, the Rapps do not claim that the Holding Company Act and 

the Control Act are substantively different in any respect 

relevant to this case. Rather, they argue that in "suddenly 

switching statutes," the Director violated petitioners• statutory 

and constitutional right to notice of the legal claims asserted 

against them. 

Section 554 of the APA requires procedural fairness in the 

administrative process. See 5 u.s.c. § 554(b) (3) ("Persons 

entitled to notice of an agency hearing shall be timely informed 

of ••• (3) the matters of fact and law asserted."); Department 

of Educ. of State of Cal. v. Bennett, 864 F.2d 655, 659 (9th Cir. 

1988). Notice is sufficient as long as the party to an 

administrative proceeding is reasonably apprised of the issues in 

controversy and is not misled. State of Wyo. v. Alexander, 971 

F.2d 531, 542 (lOth Cir. 1992); Savina Home Indus .. Inc. v. 

Secretary of Labor, 594 F.2d 1358, 1365 (lOth Cir. 1979). In 

order to establish a due process violation, petitioners must 

demonstrate that they have sustained prejudice as a result of the 

allegedly insufficient notice. See Savina, 594 F.2d at 1365 (no 

due process violation where no prejudice alleged); Brock v. Dow 

Chemical U.S.A., 801 F.2d 926, 930-31 (7th Cir. 1986). 

15 ( ••• continued) 

therefore not the Control Act. The partnerships had relinquished 

their stock ownership by December 31, 1989, so the Director 

applied the Control Act for the latter period. 

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Petitioners claim they sustained prejudice because they 

would not have entered into stipulations regarding RAPCO and 

TRASCO if they had known that the Holding Company Act was at 

issue. Petitioners do not specify what stipulations were 

prejudicial, however, or why notice of the Holding Company Act 

ramifications was material to their strategy. RAPCO and TRASCO 

were major players in the Control Act violations and petitioners 

seemingly agree that if the Holding Company Act did not apply by 

virtue of 12 u.s.c. § 1817(j) (17) (C), their identical conduct in 

concert with RAPCO and TRASCO would have violated the Control 

Act. 16 See Final Decision, p. 17-18 n.21. We therefore 

comprehend no material prejudice with respect to petitioners• 

strategy concerning the stipulations. 

The Rapps complain that prior to FIRREA the Holding Company 

Act differed substantially from the Control Act, 17 in that the 

Control Act prohibited only willful violations and provided de 

novo review by a district court, while the Holding Company Act at 

that time did not. Contrary to petitioners• assertion, however, 

16The Director found that the Notice of Assessment provided 

adequate notice to the Rapps because the Control Act and the 

Holding Act prohibit the same activity, apply substantially 

identical legal standards, and permit the same maximum penalties 

on the facts of this case. Final Decision, p. 17 n.21. We 

agree. The two statutes prohibit identical activity (owning or 

controlling in excess of 25 percent of voting stock) by different 

entities, and the same regulations have applied to both statutes 

since 1985. See 12 C.F.R. § 574 et seg. 

17The Director imposed Holding Company Act penalties during 

both pre-FIRREA and post-FIRREA periods. Thus, petitioners• 

argument with regard to substantive differences between the preFIRREA statutes applies only to a portion of the Holding Company 

Act penalties assessed against them. 

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both statutes required proof that a violation was willful. 

Compare 12 u.s.c. § 1730a(j) (1988) with 12 u.s.c. § 1817(j) 

(1988). It is true that prior to FIRREA, the Control Act 

provided de DQYQ trial in district court for any action to 

collect a penalty, 18 while the Holding Company Act did not. 

Significantly, petitioners do not contend that the disparity 

in post-assessment collection procedures colored their 

participation in the administrative hearing or affected in any 

material way their due process rights at that hearing. 

Petitioners merely assert that the appellate procedures differed 

and that, g fortiori, the notice was insufficient and the 

resulting penalties are unenforceable because petitioners 

received insufficient opportunity to challenge the imposition of 

Holding Act penalties in an administrative hearing. The Rapps do 

not disclose how they would have challenged such penalties, or in 

what way lack of notice has prejudiced them. Indeed, even in 

this appeal, petitioners do not challenge the imposition of 

Holding Act penalties or contend that the Holding Act is 

inapplicable to their conduct. In short, the Rapps have 

identified no issue which they would have presented differently 

had the Notice of Assessment stated that penalties would be 

assessed under both the Control Act and the Holding Company Act. 

18Prior to FIRREA, the Control Act provided that in any 

action by the agency to collect a penalty, "the person against 

whom the penalty has been assessed shall have a right to a trial 

de novo." 12 u.s.c. § 1817(j) (16). In Miller v. FDIC, 906 F.2d 

972, 976 (4th Cir. 1990), the Fourth Circuit concluded that this 

section guaranteed a de novo review as to all aspects of a 

penalty assessment, including liability and amount. 

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on this record, petitioners have failed to allege material 

prejudice based on insufficiency of notice, and thus we find no 

violation of petitioners' due process rights. See Savina, 594 

F.2d at 1365. 

b. Penalty Matrix 

In 1980, the Federal Financial Institutions Examination 

Council ("FFIEC") issued a list of thirteen factors designed to 

assist federal bank and thrift regulatory agencies in deciding 

whether to impose civil money penalties and, if so, in what 

amounts. See Interagency Policy Regarding the Assessment of 

Civil Money Penalties by the Federal Financial Institutions 

Regulatory Agencies, 45 Fed. Reg. 59,423 (1980). In 1990, the 

OTS published a policy statement which, for internal use in 

assessing civil money penalties, contained a matrix incorporating 

the thirteen factors. See OTS Regulatory Bulletin 18-3 (1990). 

The matrix assigned to each factor a mathematical value which 

reflected its weight relative to the other factors. The OTS 

assigned each factor an additional value, reflecting (on a scale 

of 1 to 6) the degree to which that factor applied in the facts 

of the particular case. Through mathematical calculations 

prescribed in the regulatory bulletin, the OTS then arrived at a 

single number which when applied to the matrix, suggested a range 

of appropriate penalties. 

In the Rapps' case, the Director found that the matrix was 

inadequate because it did not appropriately account for the 

three-tiered penalty structure imposed by FIRREA and sometimes 

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resulted in "inconsistent and arbitrary" enalty assessments. 

see Final Decision, p. 37-38. As a result, the Director employed 

a different approach in weighing and evaluating the thirteen 

factors. 19 Specifically, using FIRREA's three-tier penalty 

structure as a starting point, the Director proposed an initial 

penalty amount for each petitioner. The Director increased or 

decreased that amount by various percentages, based on weights 

that he assigned to aggravating or mitigating factors 

corresponding with the thirteen matrix factors. 20 See Final 

Decision, p. 38-49. The Director detailed his decisional process 

at great length so as to provide "additional guidance on the 

assessment of civil money penalties in other matters." Final 

Decision, p. 19. 

Petitioners do not claim that the Director's chosen method 

of assessing penalties was itself improper. Nor do they 

challenge the manner in which the Director applied that method to 

the facts of this case. Petitioners' sole argument is that while 

the Director applied the previously published matrix factors, he 

did not follow the matrix methodology and the substituted 

19Actually, the Final Decision factors do not perfectly 

correspond to those listed in the matrix. They are substantially 

similar, however, both in terms of the factors identified and the 

relative weights assigned to them. 

20The thirteen decisional factors were as follows: (1) 

willfulness; (2) frequency or recurrence; (3) continuation of 

violation; (4) failure to cooperate; (5) concealment; (6) harm to 

the institution or public confidence; (7) gain or benefit; (8) 

restitution; (9) prior violations; (10) previous criticism; (11) 

compliance program; (12) unsafe or unsound practices, or breaches 

of fiduciary duty; (13) previous measures. See Final Decision, 

p. 44-49. 

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methodology resulted in higher penalties against them. The Rapps 

contend that use of the substituted methodology was unlawful, in 

that it constituted broad policy-making and application in a 

single adjudicatory proceeding. 21 

Administrative agencies are not precluded from announcing 

new principles in an adjudicative proceeding, however, and the 

choice between rule-making and adjudication lies in the first 

instance within the agency's discretion. See SEC v. Chenery 

Corp., 332 u.s. 194, 203 (1947) (agency must retain power to deal 

with problems on case-by-case basis if administrative process to 

remain effective): First Bancorporation v. Board of Governors of 

Fed. Reserve Sys., 728 F.2d 434, 437 (lOth Cir. 1984). Here, the 

Director chose to follow the methodology which was necessary, in 

his view, to appropriately account for the three-tier penalty 

structure in FIRREA. 22 This action did not amount to an abuse of 

discretion. 

The Director had a duty to assess penalties appropriately 

21Petitioners couch their argument in due process terms, but 

they do not assert that notice of the new methodology would have 

affected their conduct in any way. Instead, the Rapps assert 

that the mere act of announcing a broad policy in an adjudicative 

setting is impermissible and, therefore, the penalties must be 

vacated. 

22Although the matrix was published in 1990, after FIRREA 

had been enacted, the OTS had been working on the matrix prior to 

the enactment and the Director expressed concern that the matrix 

did not account for FIRREA's three-tier penalty hierarchy. 

Specifically, he found that under the matrix, "the sum of factors 

for a first-tier violation could indicate a penalty in excess of 

the statutory maximum: the sums for second-tier and third-tier 

violations could indicate penalties well below what Congress 

contemplated •••• " Final Decision, p. 37-38. 

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under the applicable statutes, "regardless of whether those 

standards previously had been spelled out in a general rule or 

regulation." Chenery, 332 u.s. at 201. To rigidly say that the 

Director could not alter or amend the previously articulated 

matrix methodology would unreasonably restrict his ability to 

deal with the specialized problem of penalty assessment, 

especially where - as the OTS admitted in this case - the agency 

had little experience under FIRREA. See id. at 202-03. 

By its terms, the OTS matrix methodology was an announcement 

of policy which the OTS hoped to implement in future 

adjudications. See Phillips Petroleum~o. v. Johnson, 22 F.3d 

616, 620, modified on other grounds, 1994 WL 48450 (5th Cir. 

1994); Pacific Gas & Elec. Co. v. Federal Power Comm'n, 506 F.2d 

33, 38 (D.C. Cir. 1974). In publishing the matrix methodology, 

the OTS stated that it was adopting the matrix because of new 

FIRREA changes and the agency's "relative inexperience" in the 

area. The OTS noted that it intended to revise the matrix as the 

agency gained experience in assessing penalties, and cautioned 

that the matrix "should be regarded as a living and evolving 

document." The OTS further stated that the matrix was "not a 

substitution for sound supervisory judgment," but was merely a 

"tool" in making penalty assessments. 

The record establishes that the OTS never intended to bind 

itself to the matrix, and that petitioners had no reasonable or 

legally protected expectation that the OTS would apply matrix 

methodology in their case. Indeed, petitioners claim no 

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detrimental reliance and demonstrate no prejudice, aside from 

speculation that a lower penalty might have resulted under the 

original scheme. 

"[W]here Congress has entrusted an administrative agency 

with the responsibility of selecting the means of achieving the 

statutory policy the relation of remedy to policy is peculiarly a 

matter for administrative competence." Butz v. Glover Livestock 

Commission, 411 u.s. 182, 185 (1973) (quoting American Power & 

Light Co. v. SEC, 329 u.s. 90, 112 (1946} (quotation omitted)). 

Thus, we will not disturb the amount of penalty imposed by the 

Director unless it is an abuse of discretion or otherwise 

arbitrary or capricious. See Morgan, 985 F.2d at 1458. While it 

is true that in some instances an agency's reliance on 

adjudication may amount to an abuse of discretion, see First 

Bancorporation, 728 F.2d at 437, that is not the situation here. 

This a not case in which the OTS sought to impose a new liability 

for past actions which were taken in good-faith reliance on OTS 

pronouncements and thus, on this record, the Director's action 

was not an abuse of discretion. See NLRB v. Bell Aerospace co. 

Div. of Textron, Inc., 416 u.s. 267, 295 (1974). 

D. CONCLUSION 

For the foregoing reasons, we AFFIRM the Director's order. 

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