Last week, I blogged on Piszel v. U.S., holding that a new statute or regulation can override a legally binding employment (or other) agreement. In that blog, I observed that the court’s holding created a bizarre Catch 22 for Piszel. The court found that the Housing and Economic Recovery Act of 2008 “did not outright prohibit all golden parachute payments, but rather left it to the Director of the FHFA to develop regulations determining which payments should, and should not, be made.” The Act did not take away his ability to pursue a breach of contract claim against his employer, but ensured that any such claim would be futile, because the claim would be subject to an impossibility defense.
I omitted any discussion about the “impossibility defense,” but inquiring readers have asked for more about information on it. So here it is.
In a similar case from earlier this year, Hampton Roads Bankshares, Inc. v. Harvard, the Supreme Court of the state of Virginia considered whether a financial institution participating in the Troubled Assets Relief Program (TARP), created by the Emergency Economic Stabilization Act of 2008, could assert the federal prohibition on “golden parachute payments” as a defense to a breach of contract action brought by one of its former officers, and whether said officer could collaterally attack the prohibition as an unconstitutional “taking” without just compensation.” The court then concluded that EESA § 111, as implemented by the interim final rules issued by the Department of the Treasury, rendered “HRB’s payment of the severance allowance impossible” [emphasis added].
Because federal law prohibits the golden parachute payment under these circumstances, Section 3(b)(iii) of the Employment Agreement is void and unenforceable. Accordingly, we reverse the judgment of the circuit court and vacate the award of damages in favor of Harvard. Moreover, because federal law also bars any payment pursuant to Section 11 of the Employment Agreement, we also reverse the judgment of the circuit court with respect thereto and vacate the award of attorney's fees in favor of Harvard.
Broc blogged on a similar case in June of this year. In Von Rohr v. Reliance Bank, Von Rohr was the chairman, president, and chief executive officer of the bank for 13 years until 2011, when the bank notified him it would not renew his employment agreement when the agreement expired on September 1, 2011. Von Rohr correctly pointed out that his contract did not expire for another year and claimed he was entitled to compensation for the full year. The FDIC, in response to an inquiry from the bank, advised it that Von Rohr sought a “golden parachute payment,” which the bank could not make without prior FDIC approval (the FDIC also was a named defendant in the lawsuit). The bank refused to make the payment. A federal district court upheld the FDIC’s determination and entered summary judgment for the bank, finding that the FDIC’s determination made the bank’s performance under the contract impossible. On appeal, the Eight Circuit affirmed the district court’s decision against Von Rohr.
Under Missouri law, “[i]f a party, by contract, is obligated to a performance that is possible to be performed, the party must make good unless performance is rendered impossible by an Act of God, the law, or the other party.” Farmers’ Elec. Co-op., Inc. v. Missouri Dep’t of Corr., 977 S.W.2d 266, 271 (Mo. banc 1998). Here, the bank’s obligation to pay Von Rohr was rendered impossible when the FDIC determined the payment was a golden parachute.
Many states have similar laws or court precedents. In addition to the Fifth Amendment, which I touched on last week, the “Contract Clause” [Article I, Section 10, Clause 1] of the U.S. Constitution provides that “No State shall...pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts” [emphasis added]. No mention is made of the federal government.