Kaplan v. U.S. Office of Thrift Supervision, 96-1080

• Decision Date: 10 January 1997
• Docket Number: No. 96-1080,96-1080
• Citation: 104 F.3d 417
• Parties: Donald M. KAPLAN, Petitioner, v. UNITED STATES OFFICE OF THRIFT SUPERVISION, Respondent.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 417

104 F.3d 417

322 U.S.App.D.C. 374

Donald M. KAPLAN, Petitioner, v. UNITED STATES OFFICE OF THRIFT SUPERVISION, Respondent.

No. 96-1080.

United States Court of Appeals District of Columbia Circuit.

Argued Nov. 13, 1996.

Decided Jan. 10, 1997.

On Petition for Review of an Order of the United States Office of Thrift Supervision.

Wesley G. Howell, Jr., New York City, argued the cause for petitioner, with whom Edward T. Ferguson, III, and Lawrence J. La Sala were on the briefs.

Elizabeth R. Moore, Assistant Chief Counsel, United States Office of Thrift Supervision, Washington, DC, argued the cause for respondent, with whom Thomas J. Segal, Deputy Chief Counsel, and Richard L. Rennert, Senior Attorney, were on the brief.

James V. Mattingly, Jr., General Counsel, Richard M. Ashton, Associate General Counsel, Katherine H. Wheatley, Assistant General Counsel, Board of Governors of the Federal Reserve System, Ann S. DuRoss, Assistant General Counsel, and Lawrence H. Richmond, Counsel, Federal Deposit Insurance Corporation, and Robert B. Serino, Deputy Chief Counsel, Office of the Comptroller of the Currency, Washington, DC, were on the joint brief of the federal amici curiae.

John J. Gill, III, Newport News, VA, Michael F. Crotty, Arthur W. Leibold, Jr., Frank J. Eisenhart, and Leonard J. Rubin, Washington, DC, were on the joint brief of amici curiae America's Community Bankers, et al.

Before: EDWARDS, Chief Judge, SILBERMAN, Circuit Judge, and BUCKLEY, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge SILBERMAN.

SILBERMAN, Circuit Judge:

Donald Kaplan petitions for review of an Office of Thrift Supervision (OTS) order holding him in violation of his duties as a director of a savings and loan in connection with a vote he cast as a director of the savings and loan's parent. We conclude that OTS' order lacks substantial evidence, and so grant the petition.

I.

The American Savings & Loan Association (the S&L) is a state-chartered thrift once held by the now-defunct Enstar Group. In early 1990, pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), which required thrifts to divest themselves of their high-yield corporate debt securities, the S&L sold its junk-bond portfolio to Enstar, which purchased it through a subsidiary. Under FIRREA, the S&L could sell the portfolio to its holding company, so long as OTS both "approved the transaction" and "at all times" found "acceptable" the collateral securing the note with which the holding company purchased the bonds. 12 U.S.C. § 1831e(e)(2)(F)(i), (3)(A) (1988 & Supp. V 1993). With the approval of OTS, then, Enstar purchased the portfolio with a note secured by the junk bonds themselves as well as by the stock of another Enstar subsidiary, Western Reserve (a life insurance company). The note Enstar used to purchase the junk bonds was not its only debt to the S&L, but it was by far its largest.

On June 8, 1990, the Enstar board of directors convened to discuss a number of topics. Kaplan, formerly chief economist at the Federal Home Loan Bank Board and a member of both the S&L and Enstar boards, participated in the meeting. Although the precise content of that meeting is the subject of some dispute, it is clear that Richard Grassgreen, the Chairman of Enstar, reported on the credit difficulties of Enstar's clothing subsidiary, Enstar Specialty Retail, Inc. (Retail). It seems that Retail had had a somewhat disappointing previous year, and its bank had refused to extend its credit line, leaving it in need of cash with which to finance the upcoming back-to-school and holiday seasons. The board therefore discussed methods by which Enstar could internally finance Retail's credit needs. Grassgreen's idea was to sell off some of the junk-bond portfolio acquired from the S&L and loan the proceeds to Retail. Those bonds, as well as the Western Reserve stock, it will be recalled, were serving as collateral on the S&L's note. It was thus apparent to the board that before it could loan to Retail the proceeds of the sale of some portion of the junk bonds, it needed to pledge additional collateral to the pool. In this context, the Enstar board adopted the following resolution:

BE IT RESOLVED that, it appearing to be in the best interests of [Enstar] to assure the availability of sufficient collateral under the Collateral Pledge Agreement by and between [Enstar] and [the S&L] ... the Chairman of [Enstar] is hereby authorized to pledge 100% of the common stock of [Retail] as additional collateral for the Promissory Note....

The terms of the collateral pledge agreement between the S&L and Enstar were such that Grassgreen's supposed plan to substitute Retail stock for cash in the collateral pool could not (at least, not legally) be effectuated without two critical approvals. First, no asset could be substituted for another in the collateral pool unless its valuation had been approved by OTS. Enstar could pledge Retail stock to the pool, but that pledge would not allow other collateral to be withdrawn under the terms of the agreement until and unless OTS valued that stock. And second, no collateral could be withdrawn from the pool without the S&L's approval. Thus, even if Enstar obtained OTS approval of a valuation of Retail stock, it would still have to get the S&L's approval before withdrawing any particular excess collateral from the pool.

At the board meeting, Kaplan himself pointed out that OTS would have to approve any valuation of Retail's stock prior to its being used to substitute for other collateral that Enstar wished to pull out of the pool. Kaplan did not, however, bring up the requirement of the S&L's approval, nor did he or anyone else tell the full S&L board of what had transpired at the Enstar board meeting. Three of the S&L's six board members (Grassgreen, Kaplan, and the S&L's chairman and chief executive officer, Harris Friedman) sat on both boards and thus knew full well what the Enstar board had discussed. A fourth S&L board member also sat on Enstar's board, and although he missed the June 8 meeting, he presumably had access to the minutes, which reflected the pledge of Retail stock (but not the extent of Grassgreen's plan).

Rather than seeking the approval of OTS and the S&L board, and without informing any of Enstar's or the S&L's outside directors, on June 15, Grassgreen pledged the Retail stock to the collateral pool. Then, on June 22, Friedman authorized Enstar to withdraw $29 million from the collateral pool. That withdrawal was followed, on August 10 and September 7, by two more withdrawals totaling more than $9 million. Unfortunately for all involved, Retail encountered major problems in late 1990, its stock becoming virtually worthless as collateral for the S&L note. Following a subsequent OTS-supervised debt restructuring between the S&L and Enstar, the S&L calculated that it had lost almost $25 million on the note.

After obtaining settlements from Grassgreen and Friedman, OTS brought an enforcement proceeding against Kaplan, seeking a "cease and desist" order under 12 U.S.C. § 1818(b)(1) (1988 & Supp. V 1993) based on an alleged "unsafe or unsound practice" and a violation of a "law, rule, or regulation." OTS also sought restitution under § 1818(b)(6), which authorizes such an order if the practice or violation resulted in a loss to the savings and loan and the charged party was "unjustly enriched" or acted with a "reckless disregard for the law," and asked that Kaplan be barred from serving on the boards of both a savings and loan and its parent, which is warranted under § 1818(e) upon a determination that the charged party "demonstrate[d] willful or continuing disregard ... for the safety" of the savings and loan. Finally, OTS pursued "second tier" civil monetary penalties on the theory that Kaplan "recklessly engage[d] in an unsafe or unsound practice" or, in the alternative, that his fiduciary breach was "part of a pattern of misconduct." 12 U.S.C. § 1818(i)(2)(B). An administrative law judge (ALJ) recommended that all the charges be dismissed, in part because he concluded that in voting for the resolution, Kaplan "authorized the addition of collateral to the pool and nothing more," and in part because he determined that Kaplan had not caused the loss suffered by the S&L. That responsibility, he thought, rested on the shoulders of those "inside officers and directors whose direct misconduct caused the loss in question."

OTS' acting director disagreed. He found that Kaplan's vote in favor of pledging Retail stock to the collateral pool was a de facto ratification of Grassgreen's plan to substitute Retail stock for cash in the collateral pool. That vote, and Kaplan's ensuing failure to inform the S&L board of the events that had taken place at the Enstar board meeting, constituted, in the acting director's view, a breach of Kaplan's fiduciary duty to the S&L, because the plan "subjected [the S&L] to substantial risks that were obvious at the time [it] was considered." The acting director treated that breach as the violation of "a law" under § 1818(b)(1). He further concluded that the risk posed by Kaplan's breach was not just substantial, but also was "abnormal," amounting to an unsafe or unsound practice. These determinations justified an order that Kaplan cease and desist from violating the law and from engaging in unsafe or unsound banking practices. And because he thought Kaplan had acted recklessly, the acting director ordered that he pay $500,000 in restitution to the S&L, see 12 U.S.C. § 1818(b)(6), and that he be prohibited from serving simultaneously on the board of a savings and loan and its affiliate without OTS' permission, see 12 U.S.C. § 1818(e). ¹ As the final sanction, the acting director levied a $183,600 civil monetary fine against Kaplan, predicated on the conclusion that he was reckless in the commission of an unsafe or unsound practice and that his...