The executives worked for the troubled bank. The executives’ employment contracts with the troubled bank entitled them to four types of compensation: (1) change-in-control benefits in which the troubled bank would pay the executives if the troubled bank “underwent a change in control, as through a merger,” (2) severance packages which allowed the troubled bank to terminate the executives without cause upon sixty days’ notice in exchange for giving the executives their base salaries for the unexpired term of the agreements, (3) attorneys’ fees if the executives had to retain legal counsel to enforce the change-in-benefits agreement, and (4) ordinary salary and benefits for work completed. Additionally, the contracts contained assumption provisions that required any successor of the troubled bank to perform on the contracts. Following the Federal Deposit Insurance Corporation’s (FDIC) finding that the troubled bank was “in a troubled condition,” the troubled bank sought to merge with the financially healthy bank. The contract for the proposed merger limited the executives’ roles and reduced their benefits. The executives refused to approve the merger, and the troubled bank subsequently fired the executives and completed the merger. Initially, the executives sued both banks in state court, and the parties sought formal guidance from the FDIC to resolve the issue. The FDIC decided all the benefits in the executives’ contracts with the troubled bank were golden parachute payments: payments that the FDIC may prohibit. In response, the executives sued both banks and the FDIC in federal district court to challenge the FDIC’s determination. Following a convoluted procedural history, the district court considered the parties’ cross-motions for summary judgment.
In Bauer v. FDIC, No. 18-3047 (RJL) 2023 WL 6388814, 2023 U.S. Dist. LEXIS 174720 (D.D.C. Sept. 20, 2023) (unpublished opinion), the court held the FDIC had properly determined that all but the ordinary salary and benefits were golden parachute payments and entered summary judgment accordingly. As a threshold matter, the court addressed the parties’ disagreement over whether payments arising from settlements or damages’ judgments would qualify as golden parachute payments which the FDIC could regulate. Because, hypothetically, the settlement or damages’ amount would be calculated based on the employment agreements, the court ruled the FDIC had the power to determine if the payments were golden parachute payments. The court then reviewed the FDIC’s decision for each of the four types of benefits under the arbitrary and capricious standard of review. Earlier in the opinion, the court identified a golden parachute payment in the context of banks as an agreement to make a payment to a business’s high-ranking employee that “is contingent on the termination of such party’s affiliation with the institution or covered company,” and “is received on or after the date on which” the appropriate government agency (here, the FDIC) determines that the bank is a troubled financial institution.
First, concerning the change-in-control benefits, the court ruled the FDIC’s definition of “termination” included any end of a worker’s affiliation with a company, including through a merger that ends the company’s existence. Because the change-in-control benefits took effect upon the troubled bank ceasing to exist, which would have necessarily terminated the executives’ association with the troubled bank had they not been fired, the court upheld the FDIC’s decision that the change-in-control benefits were golden parachute payments. As the court explained, the agreement that the healthy bank would pay the benefits did not matter because the FDIC may limit the enforcement of golden parachute payments from banks which take over troubled banks, due to the policy interest in preventing bankers from performing mergers solely to obtain benefits for themselves. Second, concerning the severance packages, the court ruled the FDIC may apply golden parachute limitations to financially healthy banks which enter into agreements with troubled banks. Accordingly, the court found the FDIC had the authority to determine that any payment the financially healthy bank paid as a severance package pursuant to an agreement with the troubled bank was a golden parachute payment. Third, concerning the attorneys’ fees, the court cited caselaw for the proposition that attorneys’ fees are “plainly compensatory in nature” and noted any potential attorneys’ fees were derivative of the change-in-control payments. Therefore, the court upheld the FDIC’s determination that the fees were subject to golden parachute payment regulations. Finally, the court held the executives’ request for at least sixty days of ordinary salary and benefits as provided for in their employment agreements were not golden parachute payments. Unlike the other damages the executives sought, their base salaries were not contingent on their termination with the troubled bank, thus failing to meet the elements of a golden parachute payment.
By Gregory Ferrer [email protected]
Edited By Melissa Hightower [email protected]
Edited By Peter Benson [email protected]