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From Banking and Finance Law Daily, June 21, 2016

Paying off fired executive’s contract would be golden parachute

By Richard A. Roth, J.D.

A former bank executive who, after being terminated, claimed that his contract entitled him to another year of compensation was demanding a golden parachute payment that could only be made if the Federal Deposit Insurance Corporation approved, according to the U.S. Court of Appeals for the Eighth Circuit. The executive also passed up his chance to seek the FDIC’s approval, the court said (Rohr v. Reliance Bank, June 21, 2016, Ericksen, J.).

The bank told the executive that his contract would not be renewed later in the year, at least in part because he was responsible for the bank’s poor financial condition. The executive, however, claimed he had another year left on his contract and was owed more than $400,000. The bank asked the FDIC for advice, and the agency told the bank that paying the money would amount to a golden parachute.

As a result, the bank refused to make any further payments, and the executive sued the bank for breaching his employment contract. He also sued the FDIC, asking for a finding that a payment by the bank would not violate federal law.

The district court agreed to put the suit on hold while the executive asked the FDIC for a final determination about whether a payment would be a golden parachute. The FDIC said that it would be. The agency added that it did not need to consider whether to approve the payment because the executive had not met "even the basic application requirements."

What’s a golden parachute? Federal law (12 U.S.C. §1828(k)(4)) and implementing FDIC regulations (12 CFR §359.1(f)(l)(i)) offer essentially the same definition of a golden parachute: a payment in the nature of compensation to an institution-affiliated party that is contingent on that person’s termination and that is made when the institution is in a troubled condition.

Golden parachutes generally are prohibited. However, the FDIC has the authority to grant an exception from that prohibition under the right circumstances.

FDIC determination stands. The appellate court rejected the executive’s challenges to the FDIC’s decision that any payment would be a golden parachute. The agency’s determination was consistent with its previous positions.

First, the court pointed out, the agency always had objected to post-termination payments that were not for services rendered. Second, while the FDIC has interpreted the ban on golden parachutes as not applying to paying damages for a claim of violating a statute, there was no statute involved here. The executive was claiming damages for breach of contract, and separating the two types of damages was a reasonable interpretation of the law.

The FDIC’s decision that the demanded payment was contingent on the executive’s termination was reasonable as well.

No exception. The executive could not ask for a judgment that the payment would not violate the law because he had never asked the FDIC for an exception. The lack of an exception made it legally impossible for the bank to pay him, the court said, and legal impossibility was a defense to the breach of contract claim.

If the executive had submitted a completed application for an exception, which was denied by the FDIC, he could have appealed the denial, the court pointed out. But, he could not ask the court to review whether he should have received an exception he never asked for.

The case is No. 15-2392.

Attorneys: Elkin L. Kistner (Bick & Kistner, PC) for Jerry Von Rohr. Christina D. Arnone (Stinson Leonard Street LLP) for Reliance Bank. Andrew Jared Dober for the Federal Deposit Insurance Corporation.

Companies: Reliance Bank

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