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   [5171A] In the Matter of Steven J. Hirsch, James V. Hirsch, C.R. Hackworthy, Paul W. Hamblin, Bradley C. Lundeen, James W. O'Connell, William J. Radosevich, Richard R. Schmitz, and Richard O. Stout, Bank St. Croix, Roberts, Wisconsin, Docket No. FDIC-91-24k (12-19-91).

   Board rejects ALJ's recommendation and finds that Respondents violated FDIC and Wisconsin regulations by opening a Bank branch after FDIC's Regional Director withdrew his approval for the branch; remands case to the ALJ for a determination of appropriate civil money penalties. (A Federal District Court denied Bank St. Croix an injunction to suspend enforcement of a temporary cease and desist order issued by the FDIC when the branch opened, 755 F. Supp. 455 (D.D.C. 1991). See also ¶10,195 and ¶15,374 for related matters.)

   [.1] Bank Branches—Application Process—Authority of FDIC Regional Director
   Regional Director has delegated authority to approve application for establishment of a branch; this includes the authority to impose standard conditions and to alter or suspend the approval during the pendency of the application if developments warrant.

   [.2] Bank Branches—Application Process—Withdrawal of Approval
   Withdrawal of approval by Regional Director, pending determination on the application by FDIC's Division of Supervision, does not deny the application, but forwards it to the Director or Associate Director of the Division of Supervision for approval or denial.

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   [.3] Bank Branches—Operation in Violation of State Law
   Operating a branch without meeting a condition imposed by state banking commissioner (failure to increase capital stock by infusion of funds from outside the Bank) constitutes operating without the commissioner's approval and is a violation of state law.

   [.4] Civil Money Penalties—Liability—Factors Determining
   In determining the civil money penalty for opening a branch after withdrawal of FDIC's conditional approval and in violation of state law, the ALJ may consider that the violations were short-lived and have been rectified, and that the Bank is now operating under a consent agreement.

In the Matter of
STEVEN J. HIRSCH, JAMES V.
HIRSCH
, C.R. HACKWORTHY,
PAUL W. HAMBLIN, BRADLEY C.
LUNDEEN
, JAMES W. O'CONNELL,
WILLIAM J. RADOSEVICH,
RICHARD R. SCHMITZ, and
RICHARD O. STOUT, individually,
and as institution-affiliated parties of
BANK ST. CROIX
ROBERTS, WISCONSIN
(Insured State Nonmember Bank) DECISION AND ORDER
REMANDING PROCEEDING
FOR FURTHER
DETERMINATION

FDIC-91-24k

I. INTRODUCTION

   The Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Assessment of Civil Money Penalties, Findings of Fact and Conclusions of Law, Order to Pay, and Notice of Hearing ("Notice") against Steven J. Hirsch, James V. Hirsch, C.R. Hackworthy, Paul W. Hamblin, Bradley C. Lundeen, James W. O'Connell, William J. Radosevich, Richard R. Schmitz, and Richard O. Stout, ("Respondents") as individual directors and institution-affiliated parties of Bank St. Croix, Roberts, Wisconsin ("Bank"), on February 11, 1991. This Notice seeks to impose civil money penalties in the amount of $5,500.00 on each Respondent for violations of section 18(d)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1828(d)(1); section 221.04(1) (jm)(1) of the Wisconsin Statutes, Wis. Stat. § 221.04(1)(jm)(1); and section 328.2 of the FDIC Rules and Regulations, 12 C.F.R. § 328.2, by opening and operating a branch bank in Hudson, Wisconsin ("branch"), without approval of the FDIC or the Commissioner of Banking for the State of Wisconsin ("Commissioner"). Respondents admitted violating 12 C.F.R. § 328.2 by failing "to display at the branch an `official bank sign'" in their Answer, but denied all other violations. Answer at 3–4.1
   Prior to the issuance of the Notice2, the Bank3 filed suit against the FDIC in the United States District Court for the District of Columbia seeking an injunction to sus-pend the effect of a temporary cease-and-desist order issued by the FDIC. On January 30, 1991, the District Court issued its order denying the requested relief. Bank St. Croix v. FDIC, 755 F. Supp. 455 (D.D.C. 1991). The Bank sought an order from the Court:

    to suspend or set aside the temporary cease

1 Citations to the record of this proceeding shall be as follows:
ALJ's Recommended Decision, "R.D. at ____."
Hearing Transcript, "Tr. at ____."
Joint Stipulations, "Joint Stip. No. ____."
Respondents' Answer, "Answer at ____."

2 On November 16, 1990, the Bank was notified that the Associate Director of the FDIC's Division of Supervision had denied its branch application. Further, the FDIC issued a Temporary Order to Cease and Desist and Notice of Charges and of Hearing ("Notice of Charges") regarding the branch bank, qualifications of management, growth plans, loan policies, capital requirements, and dividends, among other issues. In response, the Bank filed suit seeking a temporary restraining order and a permanent injunction, but the suit only resolved the Bank's allegations regarding the withdrawal of the approval by the FDIC's Chicago Regional Director (Supervision) ("Regional Director") and denial of the branch application by the FDIC in Bank st. Croix v. FDIC, 755 F. Supp. 455 (D.D.C. 1991). The remaining issues raised in the November 16, 1990, Notice of Charges were resolved with the entry of a Consent Order in In the Matter of Bank St. Croix, FDIC-91-65b, 3 P-H FDIC Enf. Dec. ¶ 10,195 (March 15, 1991).

3 Respondents were not named parties to the District Court litigation. However, as the managing directors of the Bank, Respondents authorized and directed the litigation on behalf of the Bank.
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    and desist order pending completion of an administrative hearing and to declare the FDIC's denial of its branch application ineffective and void.
Bank St. Croix v. FDIC, 755 F. Supp. at 456. See R.D. at 14, n. 16.
   The Bank's suit sought to challenge Regional Director George J. Masa's withdrawal of approval and his recommendation to the FDIC's Director of Supervision that the application not be granted. Id. Although the Respondents, as the managing directors of the Bank, challenged the actions of the FDIC and the Regional Director, they did not challenge4 the actions of the Commissioner in "suspending" approval of the branch. The District Court denied the Bank's application for a preliminary injunction and granted the FDIC's motion for summary judgment holding that:
    [b]ecause the Court has found the FDIC's denial of the Bank's branch application to be both valid and effective, it must also hold that the FDIC did not abuse its discretion in issuing the temporary cease and desist order in this case.
755 F. Supp. at 458.
   A hearing in the civil money penalty proceeding was held in Chicago, Illinois, on July 2, 1991, before Administrative Law Judge Steven M. Charno ("ALJ"). The parties stipulated to certain facts and submitted briefs on the legal issues. After Enforcement Counsel presented their case, the ALJ granted Respondents' motion for a "directed verdict." The ALJ filed his Recommended Decision with the FDIC's Office of the Executive Secretary on August 7, 1991.
   The ALJ's Recommended Decision concludes that (1) the FDIC's Regional Director did not have delegated authority to withdraw branch application approval5 and therefore the "approval was valid and in effect at all relevant times" (R.D. at 7–14); (2) the Bank fulfilled all the conditions imposed by the Commissioner for the establishment of the branch, including the required increase of the Bank's capital stock or surplus from an outside source6 (R.D. at 15–17); (3) the Commissioner's approval of the branch was "invalidly suspended, and the Commissioner and the FDIC are estopped from claiming that it expired" (R.D. at 17–23); and (4) the admitted violation of 12 C.F.R. § 328.2 "does not merit the imposition of civil money penalties against Respondents." R.D. at 23.
   For the reasons articulated below, the Board rejects the ALJ's Recommended Decision and remands this action for further proceedings consistent with this Decision.

II. STATEMENT OF FACTS
7

   On June 29, 1989, Respondent Steven J. Hirsch, president of the Bank, submitted an application to the Commissioner requesting approval for the establishment of a branch of the Bank in Hudson, Wisconsin. R.D. at 2., Joint Stip. No. 1. The Commissioner issued an Order approving the branch on July 25, 1989, and informed the Bank of the approval by letter dated August 4, 1989. R.D. at 3, Joint Stip. No. 2. The Bank submitted its second application8 to the FDIC for approval of the branch on March 22, 1990. R.D. at 3, Joint Stip. No. 3. Thereafter, in a letter dated May 30, 1989, the Bank requested that the Commissioner extend the approval of the branch application until November 1, 1990. R.D. at 3, Joint Stip. No. 4.
   The Commissioner granted the extension contingent on the Bank's satisfying three conditions:

    1) The Bank's board of directors (Respondents herein) was to execute the FDIC's

4 There are no references in the administrative record before the Board of Directors ("Board") of the FDIC which indicate that Respondents challenged any of the Commissioner's decisions or determinations in a legal or administrative proceeding.

5 The parties stipulated that the Regional Director approved the branch application by letter dated September 27, 1990, retaining for the FDIC the "right to alter, suspend, or withdraw its approval should any interim development be deemed to warrant such action." R.D. at 4, Joint Stip. No. 10.

6 The Recommended Decision concludes that the alleged infusion of $55,000.00, by transferring that amount from the Bank's undivided profits account (which is utilized to meet the capital requirements set forth in 12 C.F.R. Part 325 and the FDIC's "Statement of Policy on Capital," see 12 C.F.R. § 303.7(a)(1)(iii)(C)), to the Bank's capital account is an infusion of capital to meet the final condition set by the Commissioner. R.D. at 16. As discussed infra, this did not constitute an infusion of capital into the Bank from an outside source.

7 All of the factual statements in this Decision were either stipulated by the parties below or constitute findings of the District Court in Bank St. Croix v. FDIC, 755 F. Supp. 455 (D.D.C. 1991).

8 The Bank's initial application was transmitted to the FDIC on April 3, 1989, and forwarded to the Director of the Division of Supervision for final determination on September 7, 1989.
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    and Commissioner's proposed Memorandum of Understanding ("MOU")9;
    2) The Bank was to eliminate all assets classified as loss in the May 22, 1990, examination from the books of the Bank; and
    3) The Bank was required to increase its capital stock or surplus by no less than $75,000 from a source outside the Bank.10
R.D. at 3, Joint Stip. No. 5. In a letter dated September 27, 1990, the Regional Director approved the branch application subject to the condition "until such time as the branch is established, the Corporation shall have the right to alter, suspend, or withdraw its approval ... " R.D. at 4, Joint Stip. No. 8, 12 C.F.R. § 303.0(a)(26)(iii). This condition is one of the "standard conditions," defined by regulation, which the Regional Director has discretion to impose when granting approval. The Bank notified the Commissioner by letter dated October 29, 1990, which was received on November 6, 1990, that the branch would open on November 5, 1990. R.D. at 4, Joint Stip. No. 10.
   The Regional Director hand-delivered a letter to Bank President Hirsch on November 1, 1990, which stated:
    I am withdrawing approval of the branch application and have forwarded to our Washington office a formal recommendation for denial of the application based upon the condition of the Bank as we now know it.
R.D. at 5, Joint Stip. No. 11. The Commissioner suspended conditional approval of the branch by letter11 on the same day. R.D. at 5, Joint Stip. No. 12. The Bank's board of directors, except for James V. Hirsch and Bradley C. Lundeen, who were not present, met on November 5, 1990, unanimously voting to open the branch after the Bank's counsel advised them to open the branch immediately and accept deposits to "establish the branch." R.D. at 5, Joint Stip. No. 13. The Bank operated the branch, which accepted deposits, from November 5 to November 16, 1990. R.D. at 5, Joint Stip. No. 14. The FDIC denied the Bank's branch application on November 8, 1990; the letter advising the Bank of the denial was received by the Bank on November 16, 1990. R.D. at 6, Joint Stip. No. 15.
   A meeting was held on November 8, 1990, among the Bank's directors (except for Respondent Lundeen), FDIC Deputy Regional Director James Kielczewski, FDIC Regional Counsel William M. Lloyd, FDIC Review Examiner Jeffrey Bonham, and the Commissioner's Division Administrator, Michael Mach, during which the Bank was advised that the Commissioner's approval had expired on November 1, 1990, and had not been extended. R.D. at 6, Joint Stip. Nos. 16 and 17. Further, Review Examiner Bonham "admitted that he had told Mr. Hirsch [President of the Bank] that if the Bank first signed the MOU, its branch application would be approved." R.D. at 6, Joint Stip. No. 16. During the meeting, Respondents, except for Bank Director Lundeen, were advised by Division Administrator Mach that:
    [the Commissioner's] approval had expired November 1st, that they needed to close the branch immediately, and that if they didn't, our office would take whatever action necessary to close the branch.
Tr. at 42, July 2, 1991. The parties stipulated that the Bank did not display a sign indicating FDIC insurance of deposits at the branch12 as required by FDIC regulations, 12 C.F.R. § 328.2, until November 23, 1990. R.D. at 6, Joint Stip. No. 18.
   The Bank, through its President, was personally served with the FDIC's Temporary

9 The MOU was executed on August 15, 1990.

10 The Bank transferred $55,000.00 from the Bank's undivided profits account (a capital account) to its surplus account (a capital account) on October 22, 1990. Further, the Bank's holding company paid an additional $20,000.00 into a capital account on October 31, 1990. R.D. at 4, Joint Stip. No. 9. The Division Administrator for the Commissioner testified at the hearing that this transaction did not meet the Commissioner's requirement because the transaction had no impact on the Bank's financial condition; in essence, "the net effect would have been zero." Tr. at 39, July 2, 1991.

11 The letter was certified as received by Bank Director James O'Connell's spouse on November 3, 1990; by Bank Directors James Hirsch and Richard Schmitz on November 5, 1990; by Bank Director William J. Radosevich on November 6, 1990; and by Bank President Steven Hirsch and Bank Director Bradley C. Lundeen on November 14, 1990. The certified letter was not received by Bank Director Paul W. Hamblin, and the date of receipt of the letter by Bank Director C.R. Hackworthy is unknown. R.D. at 5, Joint Stip. No. 12.

12 The branch was opened on June 10, 1991, after the Bank's holding company infused an additional $55,000.00 into the institution. The Bank did not pay dividends to its holding company and the funds infused into the Bank were obtained by the holding company as a result of a settlement of claims against the Bank's prior owners. Tr. at 48, July 2, 1991.
{{4-30-92 p.A-1849}}Order to Cease and Desist and Findings of Fact and Conclusions of Law, which ordered the Bank to cease operating the branch in violation of state and federal law. R.D. at 6, Joint Stip. No. 19. In response to the FDIC's order, the Bank, through Respondents, filed suit seeking a temporary restraining order and a permanent injunction against the FDIC. Bank St. Croix, supra. United States District Court Judge Revercomb denied the request for a temporary restraining order and held a hearing on the Bank's request for a permanent injunction. Id.
   The Bank argued, as do Respondents in this proceeding, that:
    The original condition imposed in the Regional Director's September 27 approval of its branch application was not authorized by the applicable statute. Thus, the Bank asserts, the FDIC's later withdrawal of its approval and its later denial of the approval were ineffective and void.
Id. Further, the Bank asserted that the denial was not timely in that the Bank had already established the branch. Id. at 458. The District Court rejected each of the arguments set forth by the Bank's counsel. Id.
   The District Court held "the FDIC's denial of the Bank's branch application to be both valid and effective," in that "12 C.F.R. § 303.0(a)(26) lists certain `standard conditions' and permits the Regional Director to impose those conditions, or `variations thereof,' on approvals of branch applications" and that "the condition placed on the Bank's approval in this case is a variation ... and, thus, was properly imposed." Id. Further, the District Court found "that the condition [for withdrawal of approval] was neither vague nor overbroad" and that "the Regional Director did no more than exercise the right he reserved in his original approval to withdraw that approval based on interim developments." Id.
   In reaching its decision, the District Court concluded that:
    [t]he Bank operated its branch in flagrant disregard of the FDIC's denial of the branch application; because the denial ... was supported by the FDIC's concerns for the Bank's financial condition, the FDIC was justified in issuing a temporary cease and desist order to enjoin the operation of that branch ... . For the foregoingreasons, the plaintiff's Application for a Preliminary Injunction is DENIED, and the defendant's Motion for Summary Judgment is GRANTED.
Id. Further, the District Court declined to address "the Bank's other arguments concerning the merits of items listed in the FDIC's Notice of Charges in support of its order," stating that the "Bank will have ample opportunity to litigate its case before the administrative proceeding ... ." Id.
   The remaining issues—regulatory violations—were resolved by the entry of a Consent Order. See FDIC-91-65b, 3 P-H FDIC Enf. Dec. ¶10,195. Bank St. Croix agreed to cease and desist from a number of regulatory infractions13 in the March 15, 1991 Consent Order. Further, the Consent Order provides:
    [w]hile this ORDER is in effect, the Bank shall not establish the operation of a branch, including the acceptance of deposits and making of loans, in Hudson, Wisconsin, or at any other location ...
FDIC-91-65b, 3 P-H FDIC Enf. Dec. ¶10,195, at 10,195.1.

III. DISCUSSION

   The Board has carefully and thoroughly reviewed the entire record in this proceeding, including the parties' submissions14, the cases cited in the briefs, the ALJ's Recommended Decision, and the March 15, 1991, Consent Order entered into by the parties. Initially, the Board finds that all issues of material fact as to the violations of law and regulations have been resolved by stipula-


13 The violations included (1) operating with an inadequate level of capital protection for the kind and quality of assets held; (2) engaging in hazardous lending and lax collection practices; (3) violating federal regulations and State of Wisconsin legal lending limits; (4) operating with an inadequate allowance for loan and lease losses; (5) operating with an excessive level of loans to deposits; (6) failing to document business expenses; (7) failing to properly monitor insider transactions; (8) operating with management whose practices and policies are detrimental to the Bank; and (9) operating with a board of directors whose practices and policies are detrimental to the Bank. FDIC-91-65b, 3 P-H FDIC Enf. Dec. ¶10,195, at 10.195.

14 The Board rejects the Findings of Fact not stipulated by the parties (Nos. 1 and 2 set forth in the Recommended Decision). R.D. at 23–24. Conclusions of Law Nos. 1–7, which have been stipulated by the parties, are adopted by the Board. R.D. at 24–26. Moreover, the remaining Conclusions of Law, Nos 8–16, which have not been stipulated to by the parties and are inconsistent with the record, are rejected by the Board. R.D. at 26.
{{4-30-92 p.A-1850}}tion and only issues of law remain for he Board.
   The Board finds that the conditional approval of the branch application was properly withdrawn by the Regional Director and notice given to the Bank prior to the establishment15 of the branch on November 5, 1990.16 Further, the Board finds that Respondents opened and operated the branch in violation of Wis. Stat. § 221.04(1)(jm)1.
   The Commissioner's requirement that $75,000.00 be contributed from an outside source to "stock or stock surplus accounts" of the Bank was for the purpose of bringing the Bank into regulatory capital compliance and to enable the Bank to safely open the branch. Respondents opened a branch, after receiving notice from the Regional Director that he was "withdrawing approval of the branch application," and continued to operate the branch in violation of state and federal law until receipt of the FDIC's Temporary Order to Cease and Desist. Joint Stip. Nos. 11–19. Such a blatant disregard of state and federal law cannot be excused by Respondents' assertion that they relied on "the advice of legal counsel."

   [.1] A. Regional Directors Have Authority To Withdraw Conditional Branch Application Approval.
   The FDIC's Regional Directors have authority to impose "standard conditions," as defined in 12 C.F.R. § 303.0(a)(26), in the branch application process. The "standard condition" applicable to this proceeding provides that the Regional Director, during the pendency of a branch application, may "alter, suspend or withdraw [FDIC's] commitment should any interim development be deemed to warrant such action" until such time as "the conditional commitment of the FDIC becomes effective." 12 C.F.R. § 303.0(a)(26)(iii).
   Although Regional Directors have delegated authority to approve an application for establishment of a branch pursuant to 12 C.F.R. § 303.7(a)(1)(i), authority to deny a branch application is only delegated to the Director or Associate Director of the Division of Supervision. The delegation of authority to "deny applications for consent to establish branch facilities" to the Director or Associate Director17 does not prohibit, as the ALJ determined, the Regional Director from exercising his authority "to alter, suspend or withdraw [FDIC's] commitment should any interim development be deemed to warrant such action"18 or impose any standard condition. Any other construction of the regulation leaves the Regional Director without an ability to quickly respond to a change in the Bank's condition19 and leaves the FDIC and depositors open to potential losses.

   [.2] Withdrawal of the Regional Director's approval, pending a determination of the Bank's application by the FDIC's Director or Association Director of the Division of Supervision, is not a denial of the appli-


15 Respondents argued that they relied on the advice of counsel in reaching their decision to open the branch. Although good faith of the person charged is a factor to be considered in reaching the amount of the penalty to be imposed, it does not negate Respondents' failure to follow directions given by the Regional Director in his letter delivered to Respondent Hirsch on November 1, 1990, and during the meeting of November 8, 1990. See Fitzpatrick v. FDIC, 765 F.2d 569, 578 (5th Cir. 1985). Imposition of Part 325 Tier I civil money penalties is based on the occurrence of a violation, not the intent or willfulness of the Respondent. See 12 U.S.C. § 1818(i)(2).

16 The United States District Court for the District of Columbia reached the same conclusion. Bank St. Croix v. FDIC, supra.

17 FDIC's regulation states that:
    (ii) Authority is delegated to the Director, and where confirmed in writing by the Director, to an associate director:
    (A) To deny applications for consent to establish branch facilities (including remote service facilities, courier services and foreign branches of domestic banks) or relocations; and
    (B) To approve such applications where the applicant satisfies the requisites listed in paragraph (a)(1)(iii) of this section but does not agree in writing to comply with any condition imposed by the delegate.
12 C.F.R. § 303.7(a)(1)(ii).

18 Enforcement Counsel properly assert that 12 C.F.R. § 303.10 [Applications and enforcement matters where authority is not delegated] does implicitly grant Regional Directors authority to withdraw approval of a branch application when necessary to protect "the interest of the FDIC."

19 Respondents argued that, 12 C.F.R. § 303.10, to the extent it:
    constitutes a "catchall" provision, it only encompasses situations" ... requiring prompt action ... for the better protection of the FDIC and to achieve flexibility and expedition in its operations and in the exercise of its functions in connection with the FDIC's litigation and liquidation matters and with the payment of claims for insured deposits ... ."
R.D. at 12. This "interpretation" of the regulation is inconsistent with its purpose and would severely restrict the ability of the FDIC to quickly respond to changes in a bank's financial condition.
{{4-30-92 p.A-1851}}cation. 12 C.F.R. § 303.7(a)(1). Upon withdrawal of approval by the Regional Director, the branch application is forwarded to the Director or Associate Director of the Division of Supervision who may approve or deny the application. The Board, therefore, rejects the ALJ's determination "that, as a matter of law, Regional Director Masa had no delegated authority to withdraw the FDIC's September 27, 19990 approval of the Bank's branch application for all the reasons propounded by Respondents." R.D. at 12. The Board finds that the regulation is not obtuse or unclear despite the ALJ's conclusion that the regulation "is silent as to who at the FDIC has authority to withdraw approval." R.D. at 10. FDIC regulations, at 12 C.F.R. §§ 303.0(a)(26)(iii) and 303.10, grant Regional Directors authority to withdraw conditional branch application approval as part of their authority to impose conditions, and that is what was done here.20
   The Recommended Decision cites to "[a] universally recognized rule of statutory construction" for penal statutes. R.D. at 14, n. 15. The statutory construction of the relevant statute and regulations, 12 U.S.C. § 1828(d)(1), 12 C.F.R. § 303.0(a)(26)(iii), and 12 C.F.R. § 303.10, is not bound by "penal statute" statutory construction rules. The statute and regulations, which set forth the basis for approval of a branch application, are not penal in nature, nor do they impose "quasi-criminal sanctions." It is the Board's view that the ALJ did not attempt to perform a meaningful analysis of the regulations.
   Furthermore, the Recommended Decision does not provide a "common sense" interpretation of the regulations, nor does it look to the purpose of the regulations or "the practical consequences of the suggested interpretation." See New York State Com'n on Cable Tel. v. FCC, 571 F.2d 95, 97 (2d Cir. 1978). For these reasons, the Board is reversing the Recommended Decision.

   B. Operation of the Branch Violated Wisconsin Statutes.

   [.3] The Recommended Decision concluded that the Bank met all of the conditions imposed by the Commissioner for establishment of a branch prior to November 5, 1990. R.D. at 15–17. This conclusion is based on the ALJ's finding that the infusion of $55,000.00 into the surplus account, as transferred from the Bank's undivided profits account, is sufficient to meet the Commissioner's third condition21. To the contrary, the Board finds that the infusion of funds from one capital account, the undivided profits account, into another capital account, the surplus account, did not increase the Bank's capital.
   FDIC regulations at 12 C.F.R. § 325.2(h) define primary capital as "the sum of common stock, perpetual preferred stock, capital surplus, undivided profits ... " The Commissioner's third condition, as articulated by the Commissioner and in light of FDIC regulations and accounting principles, intended that the Bank raise its overall capital by $75,000.00, including primary capital. The increase was to be accomplished by infusion of $75,000.00 into either the capital stock or surplus accounts from a source outside the bank. The expert testimony of Michael Mach, the Division Administrator for the Bank Division of the Commissioner's office, established that the $55,000.00 of the required $75,000.00 did not come from the source outside the Bank, and, therefore, did not satisfy the third condition. See Tr. at 38–39 and 46–47.
   After a review of the entire record, the Board concludes that the transfer of $55,000.00 from the Bank's undivided profits capital account to the Bank's surplus capital account is not an infusion of additional


20 "It is well established `that an agency's construction of its own regulations is entitled to substantial deference.'" Martin v. Occupational Safety and Health Review Commission, 111 S. Ct. 1171, 1175 (1991), citing Lyng v. Pyne, 476 U.S. 926, 939 (1986); accord, Udall v. Tallman, 380 U.S. 1, 16–17 (1965). Justice Marshall, writing on behalf of the Court in an unanimous decision, further stated that:
    Because applying an agency's regulations to complex or changing circumstances calls upon the agency's unique expertise and policymaking prerogatives, we presume that the power authoritatively to interpret its own regulations is a component of the agency's delegated lawmaking powers. See Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 566, 568, 100 S.Ct. 790, 797, 798, 63 L.Ed. 2d 22 (1980).
Id. at 1176.

21 The Bank was directed by the Commissioner to increase its capital stock or surplus by no less than $75,000.00 from a source outside of the bank. Joint Stip. No. 5. The parties stipulated that a $20,000.00 capital injection was made from the Bank's holding company to the Bank's surplus account prior to November 1, 19909. Tr. at 37–38 and Joint Stip. No. 9.
{{4-30-92 p.A-1852}}capital into the Bank from an "outside source" as required under the conditions set forth by the Commissioner. Therefore, the Board finds that the Respondents22 opened and operated the branch in violation of Wis. Stat. § 221.04(1)(jm)(1), which requires that the applicant obtain the Commissioner's approval.

   C. The Admitted Violation of 12 C.F.R. § 328.2.

   In light of the aforementioned violations of law, the Board finds that the ALJ's refusal to impose civil money penalties as to the admitted violation of 12 C.F.R. § 328.2, which requires insured banks to display an official bank sign, is inconsistent with the record, and therefore is reversed and remanded for reconsideration of the penalty issue.23

   D. Imposition of an Appropriate Civil Money Penalty.

   [.4] The Board, after a careful and thorough review of the entire record in this proceeding, remands this case to the Administrative Law Judge for a finding on the appropriate amount of civil money penalties to be imposed for opening a branch after receiving notice of the Regional Director's withdrawal of his conditional approval, and operating in violation of Wisconsin law and without an official bank sign. In light of the entry of the Consent Order, In the Matter of Bank St. Croix, supra., and the subsequent establishment of a branch after obtaining the requisite approvals from the Division of Supervision and the Commissioner, and consideration of the FDIC's "Interagency Policy Regarding the Assessment of Civil Money Penalties by the Federal Financial Regulatory Agencies," 45 Fed. Reg. 59,423 (September 9, 1980) ("Interagency Policy"), the Board remands for the imposition of an appropriate civil money penalty consistent with this Decision. The Board recognizes that the violations at issue were shortlived, have been rectified, and the Bank is now operating under a consent agreement.

CONCLUSION

   This proceeding is remanded for a further hearing on the sole issue of the amount of appropriate civil money penalties to be imposed on Respondents pursuant to 12 U.S.C. § 1818(i)(2)(G) and the Interagency Policy as set forth in this Decision.

ORDER

   The Board of the FDIC, having considered the entire record in this proceeding, hereby finds that the Administrative Law Judge's Recommended Decision granting a verdict in favor of Respondents is rejected, and the proceeding is remanded for a further hearing on the issue of appropriate civil money penalties to be assessed against Respondents consistent with the Notice of Assessment of Civil Money Penalties.
   ACCORDINGLY, IT IS HEREBY ORDERED THAT, the Respondents' Motion for a Directed Verdict is denied; and
   IT IS FURTHER ORDERED, that the matter is remanded to the Administrative Law Judge for a further hearing for assessment of appropriate civil money penalties for Respondents' violations of section 18(d)(1) of the Act, 12 U.S.C. § 1828(d)(1); section 221.04(jm)(1) of the Wisconsin Statutes, Wis. Stat. § 221.04(jm)(1); and section 328.2 of the FDIC's Rules and Regulations, 12 C.F.R. § 328.2.
   IT IS FURTHER ORDERED, that the Executive Secretary, or his designee, is instructed to execute and serve copies of this Decision and Order Remanding Proceeding for Further Determination on counsel for all parties, on the Administrative Law Judge, and on the Commissioner of Banking for the State of Wisconsin.
   By direction of the Board of Directors.
   Dated at Washington, D.C. this 19th day of December, 1991.

/s/ Hoyle L. Robinson
Executive Secretary


22 The Commissioner's extension of approval to establish the branch expired on November 1, 1990. Joint Stip. No. 5. Therefore, the Bank did not have the Commissioner's approval, even if all three of the Commissioner's conditions had been met, when the branch was opened on November 5, 1990.

23 The Board finds that the ALJ's conclusion that the Commissioner's approval was not suspended and did not expire and that the FDIC is estopped from relying on these facts is without merit. Respondents stipulated that at a meeting on November 8, 1990, a representative from the Commissioner's office informed them that the approval for the branch had expired on November 1, 1990, since the conditions of the approval had not been fulfilled. Joint Stip. No. 17.
{{4-30-92 p.A-1853}}
________________________________________
RECOMMENDED DECISION

In the Matter of
Steven J. Hirsch, James V. Hirsch,
C.R. Hackworthy, Paul W. Hamblin,
Bradley C. Lundeen, James W.
O'Connell, William J. Radosevich,
Richard R. Schmitz, and Richard
O. Stout, individually, and as
institution-affiliated parties of
Bank St. Croix,
Roberts, Wisconsin

Steven M. Charno, Administrative Law Judge:

   On February 11, 1991, pursuant to the provision of the Federal Deposit Insurance Act("Act"), 12 U.S.C. §§ 1811-1831k, Notices of Assessment of Civil Money Penalties ("Notices") were issued by the Federal Deposit Insurance Corporation ("Petitioner" or "FDIC") alleging that Respondents Steven J. Hirsch, James V. Hirsch, C.R. Hackworthy, Paul W. Hamblin, Bradley C. Lundeen, James W. O'Connell, William J. Radosevich, Richard R. Schmitz and Richard O. Stout ("Respondents"), as individual directors and institution-affiliated parties of Bank St. Croix, Roberts, Wisconsin ("Bank") had violated section 18(d)(1) of the Act, 12 U.S.C. § 1828(d)(1), section 221.04(jm)(1) of the Wisconsin Statutes, Wis. Stat. §221.04(jm)(1), and section 328.2 of the FDIC's Rules and Regulations, 12 C.F.R. §328.2, by opening and operating a new branch bank in Hudson, Wisconsin ("branch") without FDIC or State approval. The Notices sought to impose civil money penalties ("CMP") of $5,500 on each Respondent for the alleged violations. Respondents' Answer denied that Respondents had violated 12 U.S.C. § 1828(d)(1), denied that Respondents had violated Wis. Stat. §221.04(jm)(1), and admitted that Respondents had violated 12 C.F.R. §328.2 by failing to display at the branch an "official bank sign."
   This case was heard before me in Chicago, Illinois on July 2, 1991. Prior to the hearing and pursuant to a Pretrial Scheduling Order, the parties submitted extensive briefs on the legal issues in the matter, and stipulated to virtually all of the relevant facts in the case. Indeed, only two witnesses were present at the hearing, and their proposed testimony was limited to two factual disputes. The following facts were stipulated to by the parties:1
   1. On June 29, 1989, Bank St. Croix ("Bank") submitted to the Commissioner of Banking for the State of Wisconsin ("Commissioner of Banking") a complete application requesting approval to establish and maintain a branch of the Bank in Hudson, Wisconsin.
   2. On July 25, 1989, the Commissioner of Banking issued an order to the Bank approving the application (attached as Stipulated Exhibit 3(A)),2 and by letter dated August 4, 1989, the Commissioner informed the Bank of the approval (attached as Stipulated Exhibit 3(B)) (see, ALJ Ex. 2).
   3. On March 22, 1990, the Bank made its second application to the Federal Deposit Insurance Corporation ("FDIC") pursuant to section 18(d) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1828(d) (1), to establish a branch of the Bank in Hudson, Wisconsin.
   4. In a letter dated May 30, 1990 (attached as Stipulated Ex. 3(C)) (see, ALJ Ex. 2), the Bank requested that the Commissioner of Banking extend until November 1, 1990, the approval of the branch application.
   5. In a letter dated July 26, 1990, the Commissioner of Banking notified the Bank that pursuant to the Bank's request, the approval was extended to November 1, 1990, contingent on the Bank satisfying three conditions:

    a. The Bank's Board of Directors was to execute the Memorandum of Understanding proposed by the Federal Deposit Insurance Corporation and the State Commissioner on May 17, 1990 (this was done on August 15, 1990);
    b. The Bank was to eliminate from the books of the Bank all assets classified as loss in the Examination dated May 22, 1990 (this was done on August 31, 1990); and
    c. The Bank was to increase its capital

1 The parties' Stipulated Findings of Fact and Conclusions of Law were entered into evidence at the hearing as ALJ Ex. 1.

2 All Stipulated Exhibits were entered into evidence at the hearing as ALJ Ex. 2.
{{4-30-92 p.A-1854}}
    stock or surplus by no less than $75,000 from a source outside of the Bank.
    The July 26, 1990 letter is attached as Stipulated Exhibit 3(D) (see, ALJ Ex. 2).
   6. On August 1, 1990, Mr. Mach of the Commissioner of Banking Office together with Mr. Schlough called Respondent Steven Hirsch to discuss the November 1, 1990 extension.3
   7. The site of the proposed branch bank was purchased by the H Group, a partnership, and the building was built by that partnership. Respondent Hackworthy owned a 3.57 percent interest, Respondent Hamblin a 55.43 percent interest, Respondent O'Connell a 3.57 percent interest and Respondent Radosevich a 3.57 percent interest in the H Group. Respondents' pecuniary interest in the H group was not improper.
   8. By letter dated September 27, 1990, the FDIC's Chicago Regional Director, George J. Masa ("Regional Director"), approved the branch application, subject to the following:
    That until such time as the branch is established, the Corporation shall have the right to alter, suspend, or withdraw its approval should any interim development be deemed to warrant such action.
The September 27, 1990 letter is attached as Stipulated Exhibit 3(E) (see, ALJ Ex. 2).
   9. On October 22, 1990, the Bank transferred $55,000 from the Bank's undivided profits account to its surplus account, which is part of capital. The Bank added $20,000 to capital on October 31, 1990 from its holding company.
   10. By letter dated October 29, 1990 (attached as Stip. Ex. 3(F)) (see, ALJ Ex. 2), the Bank notified the State of Wisconsin that the branch would be opening on November 5, 1990. The State of Wisconsin did not receive the letter until November 6, 1990.
   11. By letter to the Bank dated October 31, 1990 and hand-delivered to President Hirsch on November 1, 1990, FDIC Regional Director George Masa stated in part:
       I am withdrawing approval of the branch application and have forwarded to our Washington office a formal recommendation for denial of the application based upon the condition of the Bank as we now know it. It is fully recognized that this decision will undoubtedly be a difficult one for the Bank; however, we feel the present circumstances dictate such an action, and, in fact, leave us with no other alternative.
   12. By letter dated November 1, 1990 (attached as Joint Ex. 4) (see, ALJ Ex. 2), the Commissioner of Banking suspended his conditional approval of the branch. The Wisconsin Commissioner's November 1, 1990 letter was accepted by Ruth O'Connell (the wife of James O'Connell, a member of the Bank's board of directors) on November 3, 1990; by Respondents James Hirsch and Schmitz, on November 5, 1990; by Respondent Radosevich on November 6, 1990, and by Respondents Steven Hirsch and Lundeen on November 14, 1990. Respondent Hackworthy received the certified letter, but the return receipt is undated. Respondent Hamblin did not receive the letter.
   13. At a meeting of the Bank's board of directors on November 5, 1990, the directors unanimously voted to open the branch in Hudson, Wisconsin, despite the withdrawal of the approval of the branch by the FDIC. Directors James V. Hirsch and Bradley C. Lundeen were not present. The Bank's counsel advised the board of directors to open the branch immediately and accept deposits to thereby establish the branch.4
   14. Between November 5, 1990 and November 16, 1990, the Bank operated a new domestic branch located in Hudson, Wisconsin, including the acceptance of deposits at the branch.
   15. By letter dated November 8, 1990, the FDIC denied the Bank's application to establish a branch in Hudson, Wisconsin. The November 8, 1990 letter was received at the Bank on November 16, 1990.
   16. On November 8, 1990, at the request of the Bank, the Board of Directors (all Respondents with the exception of Bradley Lun-

3 Mr. Mach testified at the July 2, 1991 hearing that he told Mr. Hirsch that the Office of the Commissioner would not extend the November 1, 1990 approval period without a written request from the Bank. The pretrial submissions by Respondents indicate that Mr. Hirsch's recollection of this telephone conversation differs substantially from Mr. Mach's. Mr. Hirsch recalls being told by Mr. Mach that if the Bank had FDIC approval, then the State wouldn't have any problem with extending the November 1, 1990 date. This factual dispute need not be resolved for the reasons discussed infra.

4 At the July 2, 1991 hearing, the parties further stipulated that all Respondents (with the exception of Steven Hirsch, who was present at the hearing and prepared to testify) relied in good faith on their attorney's advice to open the branch notwithstanding the FDIC's alleged withdrawal of approval.
{{4-30-92 p.A-1855}}deen) met with the FDIC and State of Wisconsin representatives in Chicago, Illinois. The FDIC representatives included Review Examiner Jeffrey Bonham, Deputy Regional Director James Kielczewski and Regional Counsel William Lloyd. At that meeting, Mr. Bonham admitted that he had told Mr. Hirsch that if the Bank first signed the MOU, its branch application would be approved.
   17. At the meeting on November 8, 1990, a representative of the Office of the Commissioner of Banks informed the Respondents that the approval for the branch had expired on November 1, 1990, as the conditions of the approval had not been fulfilled. He further informed the respondents that the approval had not been extended and therefore, the branch was being operated in violation of State law. Respondents were also informed that the Commissioner of Banks would take all steps necessary to ensure that the branch was closed.
   18. An official bank sign required by section 328.2 of FDIC Rules and Regulations, 12 C.F.R. §328.2, indicating FDIC insurance of deposits, was not displayed at the Hudson, Wisconsin branch facility until November 23, 1990.
   19. On November 16, 1990, Mr. Hirsch was personally served, on behalf of the Bank, with the FDIC's temporary Order to Cease and Desist and Findings of Fact and Conclusions of law issued pursuant to 12 U.S.C. § 1818(c), together with a Notice of Charges and Hearing issued pursuant to 12 U.S.C. § 1818(b). The Temporary Order to Cease and Desist ordered the Bank, inter alia, to cease and desist from operating the branch in Hudson, Wisconsin in violation of state and federal law.
   20. As of November 5, 1990, Investors Bancorporation, which owned 100 percent of the Bank's shares of stock, had 9,850 shares outstanding. Respondent Hackworthy owned 400 shares, Respondent James V. Hirsch owned 1,300 shares, Respondent Steven J. Hirsch owned 3,100 shares, Respondent Hamblin owned 400 shares, Respondent Lundeen owned 100 shares, Respondent O'Connell owned 100 shares, Respondent Radosevich owned 200 shares, Respondent Schmitz owned 400 shares, and Respondent Stout owned 100 shares of Investors Bancorporation stock.
   At the July 2, 1991 hearing, the FDIC rested its case following the testimony of its one witness, Michael Mach. Respondents then made a motion for a directed verdict. Pursuant to 12 C.F.R. § 308.40(b), I granted Respondents' motion, and hereby recommend that the FDIC Board of Directors dismiss the Notices for the reasons which follow.

DISCUSSION

A. THE BANK'S OPENING AND OPERATION OF ITS BRANCH DID NOT VIOLATE 12 U.S.C. § 1828(d)(1), BECAUSE REGIONAL DIRECTORS HAVE NO AUTHORITY TO WITHDRAW BRANCH APPLICATION APPROVAL; THEREFORE, THE FDIC'S SEPTEMBER 27, 1990 APPROVAL WAS VALID AND IN EFFECT AT ALL RELEVANT TIMES.
   12 U.S.C. § 1828(d)(1) provides in relevant part that "[n]o State nonmember insured bank ... shall establish and operate any new domestic branch unless it shall have the prior written consent of the [FDIC] ... ". By letter dated September 27, 1990, Regional Director George Masa, on behalf of the FDIC and pursuant to delegated authority,5 approved in writing the Bank's application for a new domestic branch in Hudson, Wisconsin.
   In its approval letter, the FDIC included as a condition precedent the following language:6
   That until such time as the branch is established, the corporation shall have the right to alter, suspend or withdraw its approval


5 See, 12 C.F.R. § 303.7(a).

6 12 C.F.R. §303.0(a)(26) states the conditions which may be imposed by an FDIC "delegate" (including a regional director) for approval of a branch application:
(26) The term "standard conditions" refers to conditions that any delegate may include as a matter of routine in an order approving an application, whether or not the applicant has agreed to their inclusion. The following conditions, or variations thereof, are "standard conditions":
(i) That the applicant has obtained all necessary and final approvals from the appropriate state authority or other applicable authority;
ii) That if the transaction does not take effect within a specified time limit, or unless, in the meantime, a
(Continued)

{{4-30-92 p.A-1856}}should any interim development be deemed to warrant such action.7
   By letter dated October 31, 1990, the FDIC, by the Regional Director, purported to withdraw its approval of the branch application. By letter dated November 8, 1990 and received by the Bank on November 16, 1990, an FDIC Associate Director, pursuant to delegated authority,8 denied the application. In the meanwhile, on November 5, 1990, the branch bank was opened and became established.9 On November 16, 1990, based upon an FDIC-issued Temporary Order to Cease and Desist which required the immediate closure of the branch, the Bank ceased operations at the branch. Based on these facts, the FDIC argues that Respondents violated 12 U.S.C. § 1828(d)(1), the Respondents disagree.
   The FDIC must and does concede that under the FDIC's rules and regulations, Regional Directors do not have the delegated authority to deny a branch application.10 A regional director only has delegated authority to approve an application.11
   There is no specific statutory language that either permits or prohibits the withdrawal of approval of a regional director—the regulation states that the "FDIC" may withdraw approval (see, 12 C.F.R. §303.0(a)(26)(iii), but is silent as to who at the FDIC has authority to withdraw approval.
   The FDIC argues that 12 C.F.R. §303.10 [Applications and enforcement matters where authority is not delegated] implicitly provides regional directors with the authority to withdraw branch approvals.12 12 C.F.R. §303.10 provides:
   (a) Authority not specifically delegated is retained by the Board of Directors. (1) Except as otherwise provided in this part, or with respect to matters which generally involve conditions or circumstances requiring prompt action in the field for the better protection of the interest of the FDIC and to achieve flexibility and expedition in its operation and in the exercise of its functions in connection with the FDIC's litigation and liquidation matters and with the payment of claims for insured deposits, the Board of Directors does not delegate its authority and no delegations of final authority are made by the Board of Directors. Any person having a proper and direct concern therein may ascertain the scope of authority of any officer, agent or employee of the FDIC by communicating with the Executive Secretary of the FDIC.
   (2) In all cases where authority to act on applications, requests or enforcement matters listed in this part is not delegated to the Director, or to an associate director or a regional director or deputy regional director, the authority to act on such applications, requests, or enforcement matters remains vested in the Board of Directors of the FDIC. In addition, the Board of Directors retains the authority to act on any application, request or enforcement matter upon which any member of the Board of Directors wishes to act even if the authority to act on such application, request or enforcement matter has been delegated.
   The FDIC describes 12 C.F.R. § 303.10 as a "catchall provision which provides for action in the region when it's necessary for the efficient exercise of authority."13
   Respondents disagree. Respondents point out that the FDIC's Rules and Regulations contain no specific delegation of authority to a regional director to withdraw an ap-


6 Continued: request for an extension of time has been approved, the consent granted shall expire at the end of the said time period;
(iii) That until the conditional commitment of the FDIC becomes effective, the FDIC retains the right to alter, suspend or withdraw its commitment should any interim development be deemed to warrant such action ...

7 See, ALJ Ex. 2.

8 12 C.F.R. §303.7(a)(1)(ii).

9 The parties so stipulated.

10 Hearing Transcript ("Transcript"), pp. 4–5.

11 12 C.F.R. § 303.7(a)(1)(i) provides in relevant part:
    Authority is delegated to the Director, and where confirmed in writing by the Director, to an associate director, or to the appropriate regional director or deputy regional director, to approve applications for consent to establish branch facilities ... (emphasis added).
12 C.F.R. § 303.7(a)(1)(ii) provides in relevant part:
    Authority is delegated to the Director, and where confirmed in writing by the Director, to an associate director, (A) to deny applications for consent to establish branch facilities ... (emphasis added).
Pursuant to its own rules and regulations, the FDIC cannot delegate the authority to deny a branch application to regional directors.

12 See, Transcript, pp. 5–10.

13 Transcript, p. 5.
{{4-30-92 p.A-1857}}proval; therefore, pursuant to 12 C.F.R. § 303.10, that authority rests with the FDIC's Board of Directors. Respondent contend that their construction of 12 C.F.R. § 303.10 is consistent with the FDIC's official comment on delegations of authority, as contained in the Supplemental Information on Part 303 (Federal Register, December 29, 1989, 53554). The Supplemental Information, in describing changes to delegations of authority under § 303.8, states in relevant part:
    Section 303.8(a), relating to extensions of time, is amended by adding a new paragraph (a)(2). Paragraph (a)(2) clarifies that a delegate may exercise authority to deny a request for an extension of time within which to perform acts or meet conditions required by prior FDIC action on an application only if the delegate had authority to deny the underlying application. Considering that the denial of an extension of time has the same practical effect as a denial of the original application, this clarification precludes the delegate from indirectly denying an application that he or she could not have denied directly.
   Respondents acknowledge that 12 C.F.R. § 303.10 is not specifically addressed in the Supplemental Information, but assert that the Supplemental Information makes clear that if a delegate has no delegated authority to deny an application directly, then that delegate cannot deny an application indirectly. Respondents contend that since the Regional Director's "withdrawal of approval" was intended to prevent the branch from opening, it constitutes an indirect denial of the branch application.
   Finally, Respondents argue that to the extent that 12 C.F.R. §303.10 constitutes a "catchall" provision, it only encompasses situations "... requiring prompt action ... for the better protection of the FDIC and to achieve flexibility and expedition in its operations and in the exercise of its functions in connection with the FDIC's litigation and liquidation matters and with the payment of claims for insured deposits ..." (emphasis added) 12 C.F.R. §303.10. Respondents view the use of the conjunctive in 12 C.F.R. §303.10 as limiting implied delegations of authority thereunder to situations involving the protection of the FDIC's interests in connection with its litigation and liquidation matters. A branch application approval/disapproval falls into neither of these categories.
   After careful consideration of the parties' pretrial briefs and arguments at the hearing, I find that, as a matter of law, Regional Director Maas had no delegated authority to withdraw the FDIC's September 27, 1990 approval of the Bank's branch application for all of the reasons propounded by Respondents.14
   There is no question but that there exists no specific regulatory or statutory basis for permitting delegation of authority to withdraw approval to the level of a regional director. The FDIC contends that I should interpret an unclear provision so as to infer an inherent grant of authority on the premise that he who gives may also take away. Regional directors, however, are specifically denied the authority to take away with respect to branch applications. I find that 12 C.F.R. § 303.10 does not inherently grant "withdrawal" authority to regional directors. The use of the conjunctive in that regulation limits implied delegations of authority to litigation and liquidation matters. Finally, I am not unmindful of the FDIC's admonition that many regulations require interpretation, but I do not believe that it is appropriate to interpret a poorly drafted regulation to permit the imposition of quasicriminal sanctions upon the parties trying to interpret the regulation.15
   Because the FDIC has failed to demonstrate that regional directors have delegated

14 Both Respondents and the FDIC set forth in their Pre-trial submissions arguments in addition to those discussed in this decision in support of their respective positions. I do not address these arguments as I find that the matter can be decided based upon the arguments discussed herein.

15 When a statute fixes or provides for penalties/sanctions it must do in clear terms to avoid unfairness, arbitrary enforcement and any questions regarding the penal nature of the statute. 2A Sands and Sutherland, Statutory Construction, § 58.01 (1984). The words of a criminal statute must leave no reasonable doubt as to its meaning or the intent of the legislature. See, United States v. Corbett, 215 U.S. 233, 30 S. Ct. 81 (1909) quoting from United States v. Hartwell, 6 Wall 386 (In construing penal statues the legislative intent must be gathered from the words, and they must be such as to leave no room for doubt upon the subject); Geiger v. Eagen, 618 F.2d 26 (8th Cir. 1980) (When a criminal statute is involved, no one may be required at peril of life, liberty or property to speculate as to the meaning of the statute); Paccar v. Nat'l Highway Traffic Safety Admin., 573 F.2d 632 (9th Cir. 1978), cert. den. 439 U.S. 862, 99 S. Ct. 184 (Statutes prescribing penalties, civil or criminal, must be drafted without ambiguity); Dunn v. United States, 442 U.S. 100, 99 S. Ct. 2190 (1989) (To ensure that the legislature speaks with
(Continued)

{{4-30-92 p.A-1858}}
authority to withdraw approval of branch applications, I find that Respondents did not, and could not have, violated 12 U.S.C. § 1828(d)(1).16

    B. THE OPERATION OF THE BRANCH DID NOT VIOLATE WISCONSIN STATUTE §221.04(jm)(1).
   Wisconsin Statute §221.04(jm)(1) provides that a properly chartered bank has the power "[t]o establish and maintain a branch bank with the approval of the Commissioner."
   On July 25, 1989, the Commissioner of Banking for the State of Wisconsin ("Commissioner") approved in writing the Bank's application for a branch bank in Hudson, Wisconsin.17 On July 26, 1990, pursuant to a written request by the Bank in May of 1990, the Commissioner extended his approval of the application to November 1, 1990, and included three conditions precedent in his approval.18
    1. THE BANK FULFILLED THE COMMISSIONER'S THREE REQUIREMENTS PRIOR TO ESTABLISHING THE BRANCH.
   The parties have stipulated that the first two conditions contained in the Commissioner's approval letter had been met prior to the establishment of the branch bank on November 5, 1990.19 The parties disagree as to fulfillment of the third condition; i.e., whether the Bank's capital stock of surplus account was increased by $55,000 from a source outside the Bank and prior to opening the branch.20 The parties agree that on October 22, 1990, $55,000 was transferred from the Bank's undivided profits account into its surplus account, which is part of capital. The FDIC takes the position that since these funds were moved from the Bank's undivided profits account (retained earnings) that this money was not provided from a source("outside the Bank" and that, therefore, the Commissioner's approval did not become final.
   The Respondents contend that the FDIC's argument elevates form over substance and that what the Bank in fact did was short circuit the payment of a dividend: had the Bank gone through the process of declaring a dividend payable to its parent holding company, it would have charged its undivided profits account in the amount of $55,000 and passed that money to the holding company. The holding company, which the parties agree is a "source outside the Bank",21 would then have contributed the $55,000 to the Bank as capital by a bookkeeping entry to the bank's surplus account. In other words, the debits and credits associated with the payment of the dividend to a holding company would have been identical and the only additional document would have been a check issued from the Bank to the holding company and endorsed back to the Bank22 (the Bank did not need the permission of the State of Wisconsin to declare or pay a dividend in the amount of $55,000).23

15 Continued: special clarity when making boundaries of criminal conduct, courts must decline to impose punishment for actions that are not plainly and unmistakably proscribed).
   A universally recognized rule of statutory construction is that penal statutes should be strictly construed against the government or parties seeking to enforce statutory penalties/sanctions and in favor of the persons on whom penalties/sanctions are sought to be imposed. Sands, Id., see, United States v. Enmons, 410 U.S. 396, 93 S. Ct. 1007 (1973) (criminal statutes must be strictly construed and any ambiguity must be resolved in favor of lenity); United States v. Besmajian, 910 F.2d 1153 (3rd Cir. 1990) (Criminal statutes must be strictly construed in order not to offend due process), State v. Vivier, 453 N.W. 2d 713 (Minn. App. 1990) (A firmly established rule requires strict construction of criminal statutes against the state and in favor of the defendant).

16 I am fully aware that the court in Bank St. Croix v. FDIC, 755 F. Supp. 455 (D.D.C. 1991) ("Bank St. Croix") found that the Bank had violated 12 U.S.C. §1828(d)(1) in opening its branch. The Bank St. Croix case was the impetus for an FDIC motion to strike several of Respondents' defenses based upon the collateral estoppel doctrine. For the reasons stated in a May 29, 1991 Transcript of the final pre-hearing conference in this matter, I denied the FDIC's motion. The court in Bank St. Croix did not address the delegation of authority issue, perhaps because the court recognized that the Bank would have "... ample opportunity to litigate its case before the administrative proceedings held pursuant to the Federal deposit Insurance Act." Bank St. Croix at 458. Respondents have now had that opportunity, and I find, on a more complete record than the Bank St. Croix court had before it, that 12 U.S.C. §1828(d)(1) was not violated.

17 The parties so stipulated.

18 The parties so stipulated.

19 See, ALJ Ex. 1.

20 The parties have stipulated that a $20,000 capital injection was made from the Bank's holding company to the Bank's surplus account prior to November 1, 1991. See, Transcript, pp. 37-38, and ALJ Ex. 1, para. 9.

21 Testimony of Michael Mach, Transcript, p. 45.

22 Testimony of Michael Mach, Transcript, p. 47.

23 Testimony of Michael Mach, Transcript, p. 38.
{{4-30-92 p.A-1859}}
   I agree with Respondents and find that the Bank fulfilled all three conditions precedent prior to the establishment of the branch. The Commissioner's condition required that the Bank "increase capital stock or surplus."24 It did not require an overall increase in capital; rather, it required that specific accounts — capital stock or surplus — be increased. The parties have stipulated that the Bank's surplus account was increased by the required amount prior to the establishment of the branch. There is no suggestion by the FDIC that the Bank's omission of paperwork (i.e., the one check) was intended to deceive or defraud the FDIC or the Commissioner.
   Absent such a suggestion, I do not regard the paperwork omission as sufficient to demonstrate a failure to comply with the condition precedent. Accordingly, I find that the three conditions precedent were met prior to the opening of the branch and prior to November 1, 1990 when the Commissioner attempted to suspend his approval.
    2. THE COMMISSIONER'S APPROVAL FOR BANK ST. CROIX TO ESTABLISH AND OPERATE A BRANCH IN HUDSON, WISCONSIN, WAS INVALIDLY SUSPENDED, AND THE COMMISSIONER AND FDIC ARE ESTOPPED FROM CLAIMING THAT IT EXPIRED.
   The parties have stipulated that the Commissioner approved the Bank's application to establish a branch bank on July 25, 1989, that the Bank requested in writing an extension of that approval from July 25, 1990 to November 1, 1990, and that the Commissioner granted that extension with three conditions precedent. By letter dated November 1, 1990 and sent to the Bank's directors at their homes (the dates of receipt of this letter have been stipulated to by the parties), the Commissioner stated that he was suspending the State's approval.25
   Based upon these facts. The FDIC argues that Respondents violated Wis. Stat. §221.04(jm)(1) in opening the branch because the Commissioner's approval, by its terms, expired on November 1, 1990.
   Respondents, on the other hand, contend that the FDIC is wrong for several reasons. First, Respondents correctly note that the Commissioner did not treat the Bank's branch application as though it had expired. Indeed, Michael Mach26 testified that it was the Commissioner's practice, upon the expiration of a branch bank approval, to require the requesting bank to submit a new application to restart the application process.27 In this matter, the Commissioner never required the Bank to resubmit a branch application prior to the branch's June 10, 1991 reopening.28
   Second, Mr. Mach also testified that it was the Commissioner's understanding, based upon an August, 1990 letter from the Bank, that "... the branch would be opened in late November, approximately around Thanksgiving."29 Mr. Mach's testimony suggested that the Commissioner had no objection and voiced no objection to the branch bank's proposed late November opening,30 even though the approval supposedly expired on November 1, 1990.
   In fact, virtually none of the Commissioner's policies or procedures, as testified to by Mr. Mach, were followed by the Commissioner with respect to this Bank. For instance, Mr. Mach testified that upon the expiration of a branch approval, the application process must be re-commenced.31 Yet, the Commissioner did not act upon the Bank's request for an extension until the year-time period had passed.32 Mr. Mach testified that the Bank's application was "reactivated" subsequent to the events discussed in this decision,33 but admitted that nothing in the Commissioner's rules al-

24 See, ALJ, Ex. 2.

25 The November 1, 1990 letter states in relevant part: "Based on this information, this office's approval of the bank's application to establish a branch in Hudson, Wisconsin is suspended." See, ALJ, Ex. 2.

26 Mr. Mach is currently the division administrator for the banks division, and has worked for the State of Wisconsin for 20 years. Transcript, p. 27.

27 Transcript, p. 49.

28 Transcript, pp. 83–84.

29 Transcript, p. 40.

30 Transcript, pp. 40, 69–71.

31 Transcript, p. 49.

32 Transcript, pp. 49–51.

33 Transcript, pp. 60–61.
{{4-30-92 p.A-1860}}lowed for a "reactivation".34 All in all, Mr. Mach's testimony can perhaps best be summarized by the following exchange:
    Q. Would you agree with me that when the State wants to it could be flexible with its policies such as extensions?
    A. Yes.
   Indeed, at the time that the November 1, 1990 suspension letter was sent by the Commissioner to Respondents, the Commissioner did not recall and was not aware that this approval allegedly expired on November 1, 1990.35
   Finally, and most importantly, the Commissioner's letter clearly states that the Commissioner's approval was suspended, rather than expired. Mr. Mach testified that, in his 20 years of experience with the Commissioner, "[e]xpiration would indicate to me that the approval was done, it's over with. The suspension would indicate to me that there is possibilities down the road that that approval may be reinstated."36
   The FDIC argues that the Commissioner changed his mind and on November 8, 1990 notified Respondents that the branch approval had expired. Based on the Commissioner's apparent change of heart, the FDIC contends that the suspension should be treated as an expiration. I disagree. As outlined above, the Commissioner never treated the branch approval as having expired, even after the Commissioner told Respondents that it had expired. Under these circumstances, I find that the FDIC is estopped from asserting its from over substance expiration argument.37
   Having determined to suspend his approval, the Commissioner failed to follow his own procedures for doing so. In order to legally suspend his approval, the Commissioner was required to do one of two things: hold a hearing pursuant to Wis. Stat. § 220.04(9)(b) or issue a Temporary Order pursuant to Wis. Stat. § 220.04(e). The Commissioner did not comply with either of these suspension requisites prior to the opening of the branch.38
       Wis. Stat. § 220.04(9)(b) provides in full:
    (b) Notice of Hearing. The commissioner may serve a notice of a hearing which complies with s. 227.44(1) and (2) on an official or regulated entity if, as a result of an examination or report made to the commissioner, the commissioner determines any of the following:
       1. The official or regulated, entity is violating or is about to violate the banking laws of this state or any rule or order issued by the commissioner.
       2. The regulated entity is being operated in an unsafe or unsound manner.
       3. An official is violating or is about to violate a written condition which the commissioner imposed in connection with granting an application or request by the regulated entity, or a written agreement entered into with the commissioner. (Emphasis added.)
   Mr. Mach testified that the Commissioner took action based upon an FDIC report, and because he believed that the Bank was engaging in unsafe and unsound practices. Transcript, pp. 62–63. Under these circumstances, his actions were subject to Wis. Stat. §220.04(9)(b). Yet, the Bank received no notice as required by that statute, and no hearing was held.
   Nor did the Commissioner issue a Temporary Order. In this regard, Wis. Stat. §220.04(9)(e) provides in full:
    (e) Temporary order. 1. If the commissioner finds that a violation or practice described in par. (b) is likely to cause insolvency or substantial dissipation of assets or earnings of the regulated entity or seriously prejudice the interest of its depositors, the commissioner may issue a temporary order requiring the official or regulated entity named in the notice of hearing to cease and desist from the vio-

34 Transcript, p. 61.

35 Transcript, p. 44.

36 Transcript, p. 59.

37 The principle of estoppel applies to governmental agencies as well as private parties. General Accounting Office v. General Accounting Office Personnel Appeals Bd., 698 F.2d 516, 225 U.S. App. D.C. 350, appeal after remand, 707 F.2d 1559, 228 U.S. App. D.C. 154 (1983); Investors Research Corp. v. SEC, 628 F.2d 168, 202 U.S. App. D.C. 168, cert. denied 101 S. Ct. 317 (1980). When a government agent acts within his authority, the government can be estopped by his actions. Molton, Allen and Williams, Inc. v. Harris, 613 F.2d 176, 198 U.S. D.C. 443 (D.C. Cir. 1980).

38 On November 23, 1990, the State obtained an ex parte temporary restraining order from state court which required the Bank to give the State and the Court written notice of the opening of the branch Bank at least 10 business days in advance of the opening. This TRO has since been vacated at the State's request.
{{4-30-92 p.A-1861}}
    lation or practice and to take affirmative action to prevent insolvency, dissipation of assets or earnings or prejudice to depositors pending completion of the proceedings. The temporary order is effective upon service on the official or regulated entity named in the notice of hearing and remains effective and enforceable pending completion of the administrative proceedings unless suspended, set aside or limited by a court as provided in subd. 2.
    2. Within 20 days after an official or regulated entity is served with a temporary order under subd. 1, the official or regulated entity may apply to the circuit court for the county within which the regulated entity is located for an injunction setting aside, limiting or suspending the enforcement of the order pending the completion of the administrative proceeding.
   It is only through one of these two procedures that the Commissioner could suspend his approval of the branch application, given that the Bank had fulfilled all of the conditions precedent in the approval letter prior to the Commissioner's "suspension".39 I therefore find that the November 1, 1990 letter was ineffective to change the status of approval previously given and that Wis. Stat. § 221.04(jm)(1) was not violated by opening the branch on November 5, 1990.
    C. THE ADMITTED VIOLATION OF 12 C.F.R. § 328.2 DOES NOT MERIT THE IMPOSITION OF CIVIL MONEY PENALTIES AGAINST RESPONDENTS.
   Respondents have admitted that they violated 12 C.F.R. § 328.2 by failing to display an "official bank sign" at the branch during the branch's operation from November 5, 1990 to November 16, 1990. In view of the statutory mitigating factors set forth in 12 U.S.C. § 1818(i)(2)(G), and in view of the factors set forth in the FDIC's "Interagency Policy Regarding the Assessment of Civil Money Penalties by the Federal Financial Regulatory Agencies", 45 Fed. Reg. 59423 (September 9, 1980), I find that the imposition of civil money penalties based solely upon a violation of 12 C.F.R. § 328.2 is inappropriate in this proceeding.

FINDINGS OF FACT

   The Findings of Fact are as stipulated by the parties. See, ALJ, Ex. 1. I also find that the following facts are true:
   1. The Bank fulfilled the Commissioner's third condition precedent, as contained in the Commissioner's July 26, 1990 letter to the Bank, prior to November 1, 1990.
   2. The Commissioner at no time treated the Bank's branch approval as having expired.

CONCLUSION OF LAW40

   1. The Bank is an insured depository institution as that term is defined in section 3(c) of the Act, 12 U.S.C. §1813(c), is a corporation existing and doing business under the laws of the State of Wisconsin, and has its principal place of business in Roberts, Wisconsin. It is and has been, at all times pertinent to the charges herein, an insured state non-member bank subject to the Act, 12 U.S.C. §§1811–1831(k), the FDIC Rules and Regulations, 12 C.F.R. Chapter III, and the laws of the State of Wisconsin.
   2. At all times pertinent to the charges herein, Steven J. Hirsch, James V. Hirsch, C. R. Hackworthy, Paul W. Hamblin, Bradley C. Lundeen, James W. O'Connell, William J. Richard O. Stout, were "institution-affiliated parties" of the Bank, as that term is defined in section 3(u) of the Act, 12 U.S.C. §1813(u).
   3. The FDIC has jurisdiction over the Bank, the Respondents, and the subject matter of this proceeding.
   4. On September 27, 1990, the Regional Director of the Chicago Regional Office of the FDIC approved in writing the Bank's branch application, pursuant to delegated authority as authorized under § 303.7(a)(1) of the FDIC's Rules and Regulations, 12 C.F.R. § 303.7(a)(1).
   5. 12 C.F.R. § 303.0(a)(26) states the conditions which may be imposed by an FDIC delegate (including an FDIC regional director) for approval of a branch application:


39 When questioned as to why the Commissioner had failed to follow the statutory procedures described above, Mr. Mach testified that the procedures had not been followed because the Commissioner was not issuing a cease and desist order or temporary order. Transcript, pp. 64–65. This evasive response belies the statutory purposes of the cited Wisconsin law.

40 Conclusions of Law 1 through 7 have been stipulated to by the parties. See, ALJ, Ex. 2.
{{4-30-92 p.A-1862}
(26) The term "standard conditions" refers to conditions that any delegate may include as a matter of routine in an order approving an application, whether or not the applicant has agreed to their inclusion. The following conditions, or variations thereof, are "standard conditions":
    i) That the applicant had obtained all necessary and final approvals from the appropriate state authority or other applicable authority;
    (ii) That if the transaction does not take effect within a specified time limit, or unless, in the meantime, a request for an extension of time has been approved, the consent granted shall expire at the end of the said time period;
    (iii) That until the conditional commitment of the FDIC becomes effective, the FDIC retains the right to alter, suspend or withdraw its commitment should any interim development be deemed to warrant such action ...
   6. On November 5, 1990, the Bank "established" the branch in Hudson, Wisconsin.
   7. The Bank, and the Respondents, violated section 328.2 of the FDIC's Rules and Regulations, 12 C.F.R. § 328.2 by accepting deposits between November 5, 1990 and November 16, 1990, at a facility which did not have an "official bank sign" as required.
   8. The FDIC's Rules and Regulations do not delegate authority to Regional Directors to withdraw branch bank approval.
   9. Regional Director Masa's withdrawal of approval was ineffective as lacking authority.
   10. Respondents did not violate 12 U.S.C. §1828(d)(1) in opening and operating the branch bank.
   11. The Commissioner's branch approval became effective prior to November 1, 1990 upon the Bank's fulfillment of the conditions precedent contained therein.
   12. The Commissioner's approval did not expire by its own terms or otherwise.
   13. The Commissioner's approval did not expire by its own terms or otherwise.
   13. The Commissioner's suspension of the branch approval was ineffective in that the Commissioner failed to follow the statutory procedures for a suspension.
   14. Either Wis. Stat. §220.04(9)(b) and/or Wis. Stat. §220.04(9)(e) must be followed in order to suspend a branch bank approval.
   15. Respondents did not violate Wis. State. §221.04(jm)(1) in opening and operating the branch bank from November 5, 1990 to November 16, 1990.
   16. The assessment of civil money penalties based upon the violation of 12 C.F.R. §328.2 is inappropriate in light of 12 U.S.C. §1818(i)(2)(G) and the FDIC's Interagency Policy regarding the Assessment of Civil Money Penalties.
   Based upon the foregoing findings of fact and conclusions of law, and on the entire record in this proceeding, I hereby recommend that the FDIC's Notices of Charges against Respondents be dismissed in their entirety.
   Done at Rosslyn, Virginia this 5th day of August, 1991.

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