“Golden Parachute” Severances and Violations of the Federal Deposit Insurance Act

“Golden Parachute” Severances and Violations of the Federal Deposit Insurance Act

by Erick Escamilla

Recent case of interest regarding “Golden Parachute” severances and violations of the Federal Deposit Insurance Act:

A recent United States Court of Appeals opinion reiterates that the FDIC can trump the right to enforce a contract as it applies to a “golden parachute” severance package.  See, Martinez v. Rocky Mountain Bank, –Fed.Appx.–, No. 11-8076, 2013 WL 5498121 (10TH Cir. Oct. 4, 2013).

The Federal Deposit Insurance Act authorizes the FDIC to regulate certain severance payments called “golden parachutes.” 12 U.S.C. § 1828(k).  Troubled banks are generally prohibited from making golden parachute payments without the consent of the appropriate federal banking agency and the written concurrence of the FDIC.  12 C.F.R. § 359.2 and § 359.4(a)(1).

In Martinez v. Rocky Mountain Bank, Plaintiff Joe F. Martinez, a former president and regional vice-president of Rocky Mountain Bank and Rocky Mountain Capital (collectively, “Bank”), sued the Bank to recover his severance pay.  The Bank settled but later refused to pay under the terms of the settlement agreement because federal regulators deemed the payment a prohibited “golden parachute.”

Plaintiff’s contract also provided for a severance package of one year’s base pay if he was terminated without cause, which was roughly $200,000.00.  Some three years later, the Bank was notified by its primary regulator, the Federal Reserve Board (“Federal Reserve”) that it was in a “troubled condition” as defined by 12 C.F.R. § 225.71(d).  That designation triggered the regulatory prohibition on golden parachute payments.  Shortly thereafter, Plaintiff was terminated by the Bank.  The Bank informed Plaintiff that the Federal Reserve and FDIC prohibited the severance package.  Plaintiff then filed a lawsuit against the Bank in order to recover the severance package.  The parties eventually reached a settlement.  The Bank even provided a risk analysis to the Federal Reserve assessing the Bank’s liability in order to obtain approval for the settlement.

The Board of Governors of the Federal Reserve System responded to the Bank and stated that the proposed settlement payment was in fact a prohibited golden parachute under 12 U.S.C. § 1828(k) and 12 C.F.R. § 359.2.  The Board informed the Bank that it could seek an exception to these restrictions, but doing so would require the Bank or Plaintiff to certify that they neither possessed nor were aware of any information indicating that Plaintiff was substantially responsible for the Bank’s troubled condition.  See 12 C.F.R. § 359.4(a)(4)(ii).  The Bank could not make this certification, however, because it had already discovered that Plaintiff was involved in originating risky loans that resulted in significant losses for the Bank.  Plaintiff reinstated his claims for his severance pay against the Bank.  The Bank then moved for a legal determination of impracticability, arguing that it could not legally make the payment due to the regulatory prohibitions.

Impracticability of performance is a legal justification or excuse for nonperformance of a contractual obligation.  After a contract is made, if a party’s performance is made impracticable by the occurrence of an event, the nonoccurrence of which was a basic assumption upon which the contract was made, that party is relieved of the obligation.  The Court of Appeals ultimately decided that the parties had no choice but to submit to the golden parachute regulations and obtain the Federal Reserve’s authorization, regardless of Plaintiff’s assent.  Thus, the Bank’s obligations associated with Plaintiff’s severance package were excused.

In summary, this decision solidifies the power of the FDIC and Federal Reserve Board to override the right to contract, even if said contract was executed prior to a financial institution being declared a troubled bank.  A golden parachute is popularly perceived as a multimillion dollar severance package given to top brass executives.  However, this decision clearly demonstrates that once declared troubled, any severance package, no matter the size, may be considered a golden parachute by the FDIC or Federal Reserve Board, thus potentially rendering it impractical to honor.
No information in this article is intended to constitute legal advice.  For specific legal advice, please contact an attorney.
If you have any questions or would like more information about the FDIC or the Federal Deposit Insurance Act, please contact Eric Mettenbrink at 713.220.9141 or emettenbrink@hirschwest.com.