Rapp v. U.S. Dept. of Treasury, Office of Thrift Supervision, 93-9500

Citation52 F.3d 1510
Decision Date14 April 1995
Docket NumberNo. 93-9500,93-9500
PartiesTom RAPP, Harry Rapp, Mark Rapp, Lori Rapp, Patricia Rapp, Mary Rapp, Michael Rapp, and Debra Wallace, Petitioners, v. UNITED STATES DEPARTMENT OF TREASURY, OFFICE OF THRIFT SUPERVISION, Respondent.
CourtUnited States Courts of Appeals. United States Court of Appeals (10th Circuit)

James R. Cage (Magdalena C. Bowen with him on the brief), Berryhill, Cage & North, P.C., Denver, CO, for petitioners.

Elizabeth R. Moore, Asst. 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, DC, for respondent.

Before SEYMOUR and TACHA, Circuit Judges, and VRATIL, District Judge. *

VRATIL, District Judge.

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 and/or 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. Sec. 1817(j), and the Savings and Loan Holding Company Act ("the Holding Company Act"), 12 U.S.C. Sec. 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. Secs. 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 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 TRASCO, 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 to 12 C.F.R. Sec. 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

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, 1986, 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

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 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. 7

On February 2, 1990, the Rapps answered the Notice of Assessment and requested an administrative hearing. The Administrative Law Judge ("ALJ") recommended summary judgment against the Rapps on, inter alia, the Rapps' affirmative defenses of estoppel and breach of contract. The ALJ held an administrative hearing from November 13 through 14, 1990, and 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, 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. Sec. 701 et seq. Under the APA we must "hold unlawful and set aside agency [adjudicatory] action,...

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