A new decision from the Eighth Circuit Court of Appeals reaffirms the challenge presented by the Federal Deposit Insurance Corporation (FDIC) "golden parachute" prohibitions for boards of directors of banks in "troubled condition" when considering payments to terminated executives who may be viewed by the FDIC to have been substantially responsible for the bank's regulatory problems.
Jerry Von Rohr was an executive at Reliance Bank, serving as chairman, president, and chief executive officer. In June 2011, the bank notified Von Rohr that it would not renew his employment agreement when it terminated that September. Von Rohr countered that his contract did not expire for another year and claimed he was entitled to compensation for that year.
The bank turned to the FDIC. The regulator advised Reliance that Von Rohr was seeking a "golden parachute payment," which the bank could not make without prior FDIC approval. The bank declined to pay.
Von Rohr then filed suit against the bank and the FDIC. He alleged he was terminated in breach of his contract and requested $405,000 in damages. The Missouri federal court stayed the action while Von Rohr applied to the FDIC for a final agency determination as to whether the compensation he sought was a prohibited golden parachute under the Federal Deposit Insurance Act and its implementing regulations.
The Act defines "golden parachute payment" to include "any payment (or any agreement to make any payment) in the nature of compensation by any insured depository institution … for the benefit of any institution-affiliated party" (IAP) that is also "contingent on the termination" of the IAP and received when the institution is in "troubled condition." Once the FDIC determines a payment constitutes a golden parachute, a bank cannot make the payment without the agency's approval. However, the agency does have the authority to grant an exception under limited circumstances.
In 2013, the FDIC determined Von Rohr was an IAP seeking a golden parachute from a bank in troubled condition. In its opinion letter, the FDIC did not address whether to approve an exception because Von Rohr did "not meet even the basic application requirements prescribed."
The federal court upheld the FDIC's determination and entered summary judgment for the bank. Von Rohr appealed but a panel of the Eighth Circuit affirmed.
The agency's designation of the payment as a golden parachute was consistent with its previous positions, the court said, rejecting Von Rohr's reliance on a footnote in an FDIC guidance document stating that the restrictions "do not apply to the payment of salaries or bonuses." The agency's letter to Von Rohr barred post-termination payments to him "for services he did not render," the panel said, but nothing in the FDIC's opinion prevented him from receiving salary and bonuses owed to him for work he had performed.
As for other case law, the panel distinguished it as a ruling on statutory claims, distinct from the contract claims raised by Von Rohr. Calling the distinction "sensible," the court explained that when a terminated bank exec sues for breach of contract, the basis of the claim is an agreement, which the FDIC is authorized to restrict to prevent golden parachute payments. Alternatively, the FDIC does not have the same authority when the basis of the claim is a statute (such as a discrimination claim under Title VII), because the agency is not authorized to restrict bank employees' statutory protections.
Von Rohr also challenged the FDIC determination that he sought payment "contingent on" his termination. He would have received the same amount if he had worked for the one year left on his contract instead of being terminated, he told the court. But even if the former executive was correct, it did not mean the agency determination was arbitrary, the court said.
"One could reasonably characterize the payment obligation as contingent on either Von Rohr's termination or his continued employment," the panel wrote. "If a third event occurred, such as Von Rohr choosing to quit, the obligation would not arise. Von Rohr alleged the bank came to owe the payment because of his termination, not because of services he rendered. The agency therefore determined the payment was contingent on termination. We cannot find that this determination was arbitrary or capricious."
Von Rohr's alternative argument, that the FDIC should regulate only those arrangements that specifically contemplate compensation solely in the event of termination, "would create a giant loophole," the court said. "Banks and executives could structure their agreements to allow for post-termination payments that would function as golden parachutes but avoid the magic words triggering the FDIC's regulations."
Either Von Rohr or the bank could have attempted to render the golden parachute payment possible by applying for an exception, the court pointed out, but Von Rohr failed to meet the basic application requirements for an exception, and as a result, "the FDIC never decided whether to approve an exception.… [H]aving failed to initiate the process with the agency, Von Rohr cannot now ask the Court to examine whether he should receive an exception."
Further, Reliance maintained it did not apply for an exception because it could not meet the requirement under the regulations that the bank certify "it does not possess and is not aware of any information, evidence, documents or other materials which would indicate that there is a reasonable basis to believe … [t]he IAP is substantially responsible for … the troubled condition." In support, the bank referenced an October 2011 letter stating that among the Board of Directors' reasons for Von Rohr's termination was "the opinion that your leadership was significantly responsible for the Bank's current financial conditions."
While Von Rohr objected to the letter as unsupported hearsay, the panel said it was not admitted to prove the truth of the matter. The relevant issue was "not whether he was in fact responsible but whether the bank can certify it does not possess information giving it a reasonable basis to believe Von Rohr was substantially responsible," the court wrote. "Von Rohr failed to create a genuine dispute on this issue," and "he did not submit any evidence to rebut the bank's evidence showing it could not make the certification."
The panel affirmed summary judgment in the bank's favor.
To read the opinion in Von Rohr v. Reliance Bank, click here.
Why it matters
The decision shows there are bumps and minefields in the road for bank boards and executives facing the issue of whether a payment constitutes a "golden parachute" subject to FDIC approval. The panel affirmed the agency's determination as consistent with its prior objections to post-termination payments that were not for services rendered and found the distinction between contract claims and statutory claims to be reasonable after interpretation of the law. Boards of banks in troubled condition act at their own peril if they support what may be prohibited "golden parachute" payments to departed executives whose leadership they may have supported for years. Additionally, neither termination of troubled condition status nor the acquisition of a troubled bank by a healthy bank changes the harsh impact of the golden parachute rules. Once prohibited, golden parachute payments are forever prohibited.