Opinion ID: 155004
Heading Depth: 1
Heading Rank: 4

Heading: C.2., infra.

Text: -14- resources and good faith of the violator; (2) the gravity of the violation; (3) the history of previous violations; and (4) such other matters as justice may require. 12 U.S.C. § 1818(i)(G) (1994); 12 C.F.R. § 263.62; Burke, 940 F.2d at 1366. The Board's regulations also require the Board to consider the economic benefit derived by the person from the misconduct. 12 C.F.R. § 263.62; see also Miller v. Federal Deposit Ins. Corp., 956 F.2d 58, 62-63 (4th Cir. 1992) (financial benefit is the starting point in determining a penalty). In assessing the civil penalty against Mr. Long, the Board considered the statutory mitigating factors set forth in 12 U.S.C. § 1818(i)(G) as well as the economic benefit Mr. Long derived from the violation. The Board determined Mr. Long acted in bad faith and the gravity of his misconduct was severe. The Board found not only had Mr. Long knowingly proceeded with the unlawful merger without Board approval, but he had attempted to conceal the transaction and had refused to reverse the transaction once it was discovered by bank examiners. Although there was no history of previous violations, the violations continued over a period of five years. The Board also found Mr. Long had obtained an economic benefit of at least $567,941 from the unlawful merger. In arriving at a total sanction of $717,941, the Board determined a $150,000 penalty was necessary to deter future violations. The Board found Mr. Long had a net -15- worth of more than $2.3 million and was, therefore, financially able to pay the civil penalty. We believe the Board did an exemplary job in considering the required statutory and regulatory factors and determining an appropriate sanction. Notwithstanding Mr. Long's contentions to the contrary, the Board was under no obligation to compare the penalty in this case to those imposed by the Board in previous cases. A determination of the appropriate monetary penalty depends on the facts and circumstances of the particular case at issue, not on a comparison of penalties charged to other individuals. Indeed, the Board previously has noted it assesses penalties based on the particular facts of each case and comparisons with penalties assessed in other cases are of little relevance. In re CBC, Inc., 79 Fed. Res. Bull. 247, 248 (1993), aff'd, 13 F.3d 404 (10th Cir. 1993), cert. denied, 511 U.S. 1142 (1994). Mr. Long has cited no authority to the contrary. Thus, we conclude the Board did not err by failing to undertake a comparison of Mr. Long's penalty with penalties assessed by the Board in prior cases. Furthermore, even if the penalty assessed against Mr. Long is disproportionate to other penalties, we find it was properly entered pursuant to 12 U.S.C. §§ 1818(i)(G) and 1847(b)(1). 2. Bad Faith -16- Mr. Long contends the Board's finding Mr. Long acted in bad faith and conducted the merger in knowing and intentional violation of Board authority is not supported by evidence in the record. Mr. Long claims he believed in good faith his application had been approved by operation of law when the Board failed to notify him of its decision within the original sixty-day period. Furthermore, Mr. Long claims there is no evidence in the record to support the Board's finding that James Long reported to his father that Board staff did not agree with their view that the transactions had been approved because the 60 day period had passed. Mr. Long contends the Board's determination of bad faith is flawed because it was premised on this specific finding. After conducting a thorough review of the record, we conclude there is substantial evidence in the record to support the Board's finding that at the time of the unlawful transaction, Mr. Long knew the Board did not agree his application had been approved by operation of law. It is undisputed that on December 29, 1989, seven days after the original sixty-day period had expired, Mr. Long received a letter from the Board stating the Board would need an additional period of time to evaluate his application. The Board's letter did not even remotely suggest Mr. Long's application had been approved by operation of law. Upon receipt of the Board letter, Mr. Long instructed his attorney and son, -17- James Long, to telephone Board staff and advise them he believed the application had been approved by operation of law. During James Long's conversation with Board staff, he was explicitly advised the sixty-day time period was merely an internal processing period and the application had not been approved. Mr. Long testified before the Administrative Law Judge that James Long informed him following his conversation with Board staff that he had disagreement ... with the Board decision or the sixty day position on the letter. In light of the fact Mr. Long specifically directed James Long to speak with Board staff concerning whether the application had been approved by law, we believe Mr. Long's testimony that James Long informed him he had disagreement with Board staff is sufficient to support the Board's finding that Mr. Long knew the Board did not believe his application had been approved by operation of law. Moreover, even if there were no record evidence that James Long had advised Mr. Long of Board staff's position, James Long's knowledge of Board staff's position would be imputed to Mr. Long because James Long was acting as Mr. Long's attorney when he spoke with Board staff. See Irwin v. Department of Veterans Affairs, 498 U.S. 89, 92 (1990) ([u]nder our system of representative litigation, each party is deemed bound by the acts of his lawyer-agent and is considered to have notice of all facts, notice of which can be charged upon the attorney) -18- (quoting Link v. Wabash R. Co., 370 U.S. 626, 634 (1962)) (internal quotation marks omitted). Thus, we conclude at the time Mr. Long effectuated the unlawful merger, he was aware Board staff did not believe his application had been approved by operation of law. Furthermore, we find the record is replete with other evidence supporting the Board's finding Mr. Long acted in bad faith and in knowing and intentional violation of Board authority. As determined by the Board, Mr. Long's motivation in conducting the merger was personal gain. Mr. Long testified he transferred the shares in January 1990 in order to get the tax benefits of the transaction for the full year. Following the unlawful transaction, Mr. Long did not inform the Board he had transferred his Sumner County shares to Cedar Vale. Instead, Mr. Long continued to communicate with Board staff with respect to his application as if the transaction had not been consummated. In a January 24, 1990 letter to Board staff, James Long stated he would be advising Mr. Long to complete the transaction, thus falsely implying the merger had not yet occurred. Following the Board's denial of Mr. Long's application in February 1990, Mr. Long did not inform the Board of the unlawful merger or reverse the transaction. Rather, the merger went undiscovered until May 1990, when bank -19- examiners uncovered the transaction during a routine inspection of Sumner County. Following the discovery, the Board informed Mr. Long on numerous occasions the transaction violated the Bank Holding Company Act and if it was not reversed, he could face substantial penalties. However, Mr. Long refused to undo the unlawful merger. In fact, Mr. Long allowed the merger to go uncorrected for nearly five years, until January 1, 1995, when he merged Cedar Vale into the Bank of Commerce. We believe Mr. Long's conduct in completing the transfer for personal gain, concealing the transfer from the Board, and refusing to correct the violation for almost five years supports the Board's determination of bad faith. Moreover, Mr. Long's claim he acted in good faith is also undermined by the actual substance of the transaction he conducted on January 3, 1990. The application Mr. Long claims was approved by law sought permission for Cedar Vale to purchase 90.5% of the shares of Commerce Bank. However, the transaction Mr. Long caused to occur on January 3, 1990 was a merger between Sumner County and Cedar Vale. Thus, even if the application had been approved by operation of law, Mr. Long could only have reasonably believed he had the authority to cause Cedar Vale to purchase 90.5% of the shares of Commerce Bank; Mr. Long could not have harbored an objectively reasonable belief that he had Board approval to engage in -20- the January 3, 1990 merger. Based on the foregoing evidence, we conclude the Board's determination Mr. Long acted in bad faith and in knowing and intentional violation of Board authority finds ample support in the record. 3. Economic benefit portion of penalty The $717,941 civil penalty entered against Mr. Long consists of two components. The Board imposed $150,000 of this award to serve as a penalty and to deter future noncompliance. The Board based the remainder of the award, $567,941, on the economic benefit the Board determined Mr. Long obtained from the unlawful merger. Mr. Long contends the economic benefit portion of the civil penalty is not supported by law or substantial evidence in the record. Although not perfectly clear, we construe Mr. Long's attack on the economic benefit portion of the penalty as a two-prong attack. First, Mr. Long appears to contend tax benefits are not economic benefits under the Board's regulations. In determining the amount of a civil penalty to assess, the Board is required to consider the economic benefit derived by the person from the misconduct. 12 C.F.R. § 263.62. The Board's own policy statements provide a significant consideration [in assessing a penalty] should be -21- the financial or economic benefit the respondent obtained from the violation. 45 Fed. Reg. 59423, 59424 (1980). Although neither the regulations nor the Board's policy statements define the phrase economic benefits, we conclude the phrase should be interpreted broadly to encompass tax benefits. If the Board had intended, as Mr. Long asserts, to limit the phrase economic benefits to those benefits obtained by an unlawful loan or by a bank officer's diversion of funds for his personal use, the Board certainly could have done so by means of precise limiting language. Having failed to use such language, we believe economic benefits should be broadly interpreted to effectuate the purposes of the civil money penalty provisions. Congress enacted the civil money penalty provisions to provide the Board with the flexibility it needs to secure compliance with the Bank Holding Company Act and to serve as deterrents to violations of laws, rules, regulations and orders of the agencies. House Report No. 95-1383 at 17, 95th Cong., 2d Sess. (1978), reprinted in 1978 U.S.C.C.A.N. 9273, 9289. As is obvious from the present case, tax benefits are one of the primary reasons bank holding companies are formed. See Board of Governors v. First Lincolnwood Corp., 439 U.S. 234, -22- 238 (1978). Thus, in order to effectively deter violations of the Bank Holding Company Act, the Board must be permitted to divest illegally formed bank holding companies of their unlawfully gained tax benefits. Otherwise, the Board would be deprived of some of the flexibility it needs to secure compliance with the Bank Holding Company Act. Furthermore, if the Board were not empowered to recoup unlawfully obtained tax benefits, companies and individuals who violate the Bank Holding Company Act would obtain an unfair advantage over their competitors who have complied with the Bank Holding Company Act's requirements. We therefore conclude the phrase economic benefits encompasses tax benefits derived from a violation of the Bank Holding Company Act. 11 Second, Mr. Long argues there was insufficient evidence to support the economic benefit portion of the penalty entered against him. We must look to the record to determine if substantial evidence supports this finding. We note the broad interpretation of economic benefits finds support in 11 previous Board decisions. For example, in In re CBC, the Board determined accounting fees saved as a result of the respondents' violation of the Bank Holding Company Act were economic benefits that should be considered in assessing a civil penalty. 79 Fed. Res. Bull. at 248. Similarly, in In re Vic Sather & Assocs., Inc., 79 Fed. Res. Bull. 160, 164 (1993), the Board concluded saved compliance costs are a pecuniary benefit and an important factor in assessing an appropriate penalty. -23- At the hearing before the Administrate Law Judge, John S. Gray, Examiner II of the Federal Reserve Bank, testified that as a result of the unlawful merger, Cedar Vale was able to use its net operating loss carry-overs and avoid paying any income taxes from 1990 through 1994. Mr. Gray testified that if Sumner County and Cedar Vale had not merged, Sumner County's income tax liability from 1990 through 1994 would have been $567,941. Hence, Cedar Vale and Sumner County derived $567,941 in tax benefits from the violation of the Bank Holding Company Act. Mr. Gray further testified Mr. Long benefitted directly from these tax savings. Because Mr. Long was the sole shareholder of both Cedar Vale and Sumner County, Mr. Gray concluded the value of his investment was increased by at least $567,941. Indeed, even Mr. Long's accountant, Kenneth L. Cooper, Jr., testified Cedar Vale's use of the net operating loss carry-overs benefitted the stockholders of Cedar Vale and Sumner County. Furthermore, we can easily infer that as the sole shareholder, chairman and president of Cedar Vale, Mr. Long benefited from the tax savings because he had direct control over how these funds were spent. -24- The unlawful transaction also economically benefited Mr. Long by providing him with a source of income to service the Debt. Through the merger of Sumner County and Cedar Vale, Cedar Vale was able to service the Debt by means of untaxed dividends and estimated tax payments from the Bank of Commerce. In the absence of this merger, Mr. Long, who was a co-maker of the Debt, would have had to service the Debt, at least in part, with personal funds taxable at his individual income rate -- as he had from 1985 through 1989. Thus, because the merger enabled the Debt to be serviced with untaxed funds, Mr. Long derived a significant additional tax benefit from the unlawful transaction. Based on the foregoing record evidence, we conclude the economic benefit portion of the civil penalty is supported by substantial evidence. 4. Penalty unreasonable under Administrative Procedure Act Mr. Long also argues the penalty is plainly unreasonable and invalid under the [Administrative Procedure Act]. 12 Mr. Long contends his decision to restructure the corporations to realize substantial tax benefits was an exercise of sound business judgment that [a]ny reasonable person ... would try to facilitate 12 Mr. Long does not actually argue the penalty violates any specific provision of the Administrative Procedure Act. We therefore construe his argument as a general attack on the magnitude of the penalty in light of the record in this case. -25- ... prompt[ly]. According to Mr. Long, the Board substantially contributed to his violation by failing to act within the sixty-day period and by belatedly granting itself an extension [to act on his application]. Because the Board is partially at fault and because the violation was a technical one with no adverse financial implications for the institutions involved, Mr. Long argues the penalty must be seen as capricious and set aside. After thoroughly reviewing Mr. Long's contentions, we are strained to find any merit to them. It is true any reasonable person in Mr. Long's position would likely have sought legal ways to avail himself or herself of potential tax savings. However, we are confident no reasonable person would have undertaken the illegal course of conduct Mr. Long pursued. Mr. Long's violation of the Bank Holding Company Act was not merely technical. As discussed in section III.B.2., supra, the record reveals Mr. Long proceeded to merge Sumner County and Cedar Vale even though he knew the Board had not approved his application and did not agree with his position that his application had been approved by operation of law. Following the unlawful transaction, Mr. Long attempted to conceal the merger from the Board and Mr. Long refused to reverse the transaction for nearly five years, despite the Board's numerous requests to do so. -26- Although the Board failed to render a decision on Mr. Long's application within the original sixty-day period, the Board did not in any way contribute to Mr. Long's illegal conduct. Prior to entering the unlawful transaction, the Board informed Mr. Long's attorney the sixty-day period was merely an internal processing period. There is nothing in the Board's regulations or correspondence with Mr. Long that reasonably could have led Mr. Long to believe the failure of the Board to act within this period would result in automatic approval of his application. We believe the evidence reveals Mr. Long knew the chances of his application being approved by the Board were highly unlikely. Thus, Mr. Long tried to take advantage of the Board's internal processing period to accomplish and justify what he knew was unlikely to be accomplished lawfully. The fact none of the institutions involved were harmed by the unlawful transaction does not render Mr. Long's conduct any less egregious. We find, based on the totality of the circumstances, the Board's penalty against Mr. Long was reasonable, in accordance with applicable law and supported by substantial evidence. -27- 5. Penalty is denial of due process Mr. Long contends the penalty in this case is so excessive it is invalid under the Due Process Clause. Mr. Long reiterates his actions were objectionably reasonable and his violation of the Bank Holding Company Act was technical. Mr. Long correctly points out the Due Process Clause of the Fourteenth Amendment imposes substantive limits 'beyond which penalties may not go.' TXO Production Corp. v. Alliance Resources Corp., 509 U.S. 443, 453-54 (1993) (quoting Seaboard Air Line R. Co. v. Seegers, 207 U.S. 73, 78 (1907)). However, a penalty must be grossly excessive to run afoul of the Due Process Clause. See id. at 458. Here, the civil penalty entered against Mr. Long is simply not grossly excessive on the record. As stated, Mr. Long knowingly and intentionally entered into an unlawful transaction. He deliberately concealed this transaction and refused to reverse it for almost five years. Given the duration of Mr. Long's wrongful conduct, the Board was authorized to assess a maximum penalty of $45,600,000 against Mr. Long. See 12 U.S.C. § 1847(b)(1). However, the Board decided to impose a penalty of $717,941. In arriving at this amount, the Board appropriately determined a penalty of $567,941 was necessary to deprive him of the fruits of his unlawful conduct. The Board also properly determined a -28- $150,000 penalty was essential to deter future misconduct. We conclude the penalty does not violate the Due Process Clause. C. Did the Board Violate the Bank Holding Company Act or Mr. Long's Due Process Rights by Imposing a Penalty in Excess of the Notice of Assessment? The Board imposed a penalty of $717,941 against Mr. Long even though the Notice of Assessment of Civil Money Penalties only sought a penalty of $300,000 from Mr. Long. Mr. Long contends the Board violated the Bank Holding Company Act and his due process rights by imposing a penalty of more than twice the amount stated in the original notice. 13 1. Bank Holding Company Act We first review Mr. Long's argument the increased penalty is not permitted under the Bank Holding Company Act. 12 U.S.C. § 1818(i)(2)(F) provides [a]ny appropriate Federal banking agency may compromise, modify, or remit any penalty which such agency may assess or had already assessed. (Emphasis added.) The Board contends the use of the term modify in this provision grants 13 The Board argues we should not consider these issues because Mr. Long failed to raise them before the Board. We assume, without deciding, Mr. Long raised before the Board the issues of whether an increased penalty violated the Bank Holding Company Act, and his due process rights. -29- the Board authority to decrease or increase the amount of a civil penalty. Mr. Long, however, contends the word modify, when read in conjunction with compromise and remit, must be construed as authorizing only a reduction of a civil penalty. In interpreting a statute, the starting point is the statutory language. Consumer Product Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980). Absent a clearly expressed legislative intention to the contrary, that language must ordinarily be regarded as conclusive. Id. In other words, '[u]nless the statutory language is ambiguous or would lead to absurd results, the plain meaning of the statute must control.' United States v. Koch Indus., Inc., 971 F.2d 548, 552 (10th Cir. 1992) (quoting United States ex rel. Williams v. NEC Corp., 931 F.2d 1493, 1498 (11th Cir. 1991)), cert. denied, 507 U.S. 951 (1993). Webster's Ninth New Collegiate Dictionary (1987) provides, inter alia, the following definitions for modify: to make less extreme; to make minor changes in; to make basic or fundamental changes in and to undergo change. Thus, the dictionary provides support for both Mr. Long's and the Board's interpretation of the term modify. Similarly, the Random House Thesaurus (1984) provides the following synonyms for modify: alter, vary, change, reduce, -30- moderate, and temper. Because both Mr. Long's and the Board's interpretation of modify find dictionary and thesaurus support, we conclude the term modify, as used in 18 U.S.C. § 1818(i)(2)(F), is ambiguous. 14 Where the plain language of a statute is ambiguous and Congress has not spoken on the issue, we must give considerable deference to an agency's interpretation of a statute it is charged with administering. Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 844 (1984). We must sustain the agency's construction of the statute as long as its construction is reasonable. Id. at 845. Here, we believe the Board's interpretation of modify as permitting the Board to increase or decrease a civil penalty is reasonable for several reasons. First, as previously mentioned, the interpretation finds support in both Webster's Dictionary and Random House's Thesaurus. See supra. Second, the Board's interpretation is consistent with other rules of statutory construction. The Supreme Court has stated that, if possible, a statute must be construed in such a 14 It appears there is no legislative history concerning Congress' intent with respect to the term modify. Neither party has provided the court with any legislative history on the issue, and our independent research has failed to uncover any direct statements of Congress' intent with respect to the term modify. -31- manner that every word has some operative effect. United States v. Nordic Village, Inc., 503 U.S. 30, 36 (1992). It is the court's duty to attempt to give effect to every clause and word of a statute. United States v. Menasche, 348 U.S. 528, 538-39 (1955). Similarly, we have determined the use of a disjunctive in a statute generally indicates alternatives were intended. Knutzen v. Eben Ezer Lutheran Hous. Ctr., 815 F.2d 1343, 1349 (10th Cir. 1987). Here, the relevant statute permits the Board to compromise, modify, or remit any civil penalty. 12 U.S.C. § 1818(i)(2)(F). Both of the parties agree the term remit merely permits the Board to reduce a statutory penalty. If we were to interpret the term modify to allow only a reduction of a statutory penalty, we would not be giving the term modify any separate effect. Rather, we would be interpreting modify in the same manner as remit, rendering the term redundant. On the other hand, interpreting modify to permit an increase or decrease in the statutory penalty, as the Board contends, is consistent with the aforementioned rules of statutory construction. Such an interpretation acknowledges the use of a disjunctive and gives operative effect to each of the statute's words. Because the Board's interpretation is harmonious with prevailing rules of statutory construction, we find its interpretation to be reasonable. -32- We also believe the Board's interpretation of 12 U.S.C. § 1818(i)(2)(F) is reasonable on policy grounds. As discussed, the Board is required, in assessing a civil penalty, to consider the economic benefit derived from the violation. 12 C.F.R. § 263.62. In many cases, as in the present case, the economic benefit obtained will be a substantial portion of the penalty. Often times, however, the economic benefit derived from the violation will increase after the Notice of Assessment is filed. In order for the Board to recoup the full economic benefit and effectively punish the violator, the Board must have the authority to assess a penalty greater than that set forth in the Notice of Assessment. Thus, we conclude the Board's interpretation of 12 U.S.C. § 1818(i)(2)(F) as permitting the Board to increase the amount of a civil penalty is reasonable and in accordance with law. Because this interpretation is reasonable, the penalty assessed against Mr. Long did not violate the Bank Holding Company Act. 2. Due Process Rights Mr. Long also argues the increased civil penalty violated his due process rights. According to Mr. Long, the Notice of Assessment did not provide him with fair notice of the penalty the government could impose. Section 554 of the Administrative Procedure Act requires procedural fairness in the administrative process. Rapp v. United States Dept. of Treasury, 52 F.3d 1510, 1519 (10th Cir. -33- 1995). According to 5 U.S.C. § 554(b)(3) (1994), an individual entitled to notice of an agency hearing must be timely informed of ... the matters of fact and law asserted. However, [a]s long as a party to an administrative proceeding is reasonably apprised of the issues in controversy, and is not misled, the notice is sufficient. Savina Home Indus., Inc. v. Secretary of Labor, 594 F.2d 1358, 1365 (10th Cir. 1979); Rapp, 52 F.3d at 1520. To establish a due process violation, an individual must show he or she has sustained prejudice as a result of the allegedly insufficient notice. Rapp, 52 F.3d at 1520; Abercrombie v. Clarke, 920 F.2d 1351, 1360 (7th Cir. 1990), cert. denied, 502 U.S. 809 (1991). In the instant case, the Recommended Decision of the Administrative Law Judge provided Mr. Long with adequate notice of the penalty that could be imposed upon him. Following the Recommended Decision, Mr. Long was given thirty days to challenge the recommended increase in penalty. See 12 C.F.R. § 263.39(a). However, Mr. Long did not challenge the increased penalty on due process grounds. Even if Mr. Long did not receive adequate notice of the potential civil penalty, Mr. Long has not demonstrated he was prejudiced by such notice. Mr. Long has failed to allege how he would have conducted the litigation any -34- differently if the final penalty had been stated in the Notice of Assessment. Mr. Long merely alleges that based upon the penalty alleged in the Notice of Assessment, he chose his son, a comparatively inexperienced lawyer with a potential conflict of interest, to represent him at the hearing. However, Mr. Long points to no specific actions his son took at the hearing that were prejudicial to his case. Nor does he allege that a more experienced attorney could have achieved a better result for Mr. Long. The record reveals that despite James Long's alleged legal inexperience, Mr. Long placed a significant amount of confidence in his son's legal skills. At the time of the hearing, James Long had been providing legal services for his father and his father's companies for nearly five years. Although James Long also was charged with violating the Bank Holding Company Act, we do not believe this prejudiced Mr. Long or affected the representation he received from his son. 15 Moreover, in addition to the representation James Long provided his father at the hearing, Mr. Long was also represented by attorney J. Greg Kite. Mr. Kite represented Mr. Long throughout the administrative proceedings and Mr. Kite 15 James Long settled the charges against him on the day the hearings began before the Administrative Law Judge. -35- took an active role at the hearing. Thus, we conclude Mr. Long has not established he was prejudiced by the representation he received from his son at the hearing. Accordingly, Mr. Long has not shown he was prejudiced by the allegedly insufficient notice he received. Because we find Mr. Long received adequate notice the penalty could be increased, and because we find Mr. Long was not prejudiced by the Notice of Assessment, we conclude Mr. Long's due process rights were not violated.