Alert June 03, 2014

U.S. District Court Upholds FDIC’s Golden Parachute Decision

The U.S. District Court for the Eastern District of Missouri (the “District Court”) issued a memorandum and order (the “Order”) in which the District Court upheld a decision of the FDIC that contract damages sought by the former chairman, president and chief executive officer (the “CEO”) of an FDIC-insured bank (the “Bank”) would constitute a “golden parachute payment” under 12 U.S.C. § 1828(k) and 12 C.F.R. § 359 of the FDIC’s regulations and, accordingly, could not be paid without the prior written consent of the FDIC.  The District Court concluded that the FDIC had not abused its discretion in reaching its decision in the matter.

In the case, Von Rohr v. Reliance Bank and FDIC, the CEO had an employment agreement (the “Employment Agreement” or the “Agreement”) with the Bank’s holding company, which was subsequently assigned to the Bank.  Under the terms of the then most recent extension (which was for three years) of the Employment Agreement, the Agreement would expire on September 1, 2012.  Prior to June 16, 2011, the FDIC notified the Bank that it was deemed to be in troubled condition and on June 16, 2011 the Bank notified the CEO that it would not renew the Employment Agreement and that the Agreement would terminate as of September 1, 2011.  In the case, the CEO asserted that despite the Bank’s notice of termination to him as of September 1, 2011, he was entitled to salary, contributions to his retirement plan and additional benefits (in the aggregate, the “Proposed Payment”) through September 1, 2012 (the end of the three-year term) because the Bank had prematurely terminated the Employment Agreement and, in the CEO’s view, the Proposed Payment was not a “golden parachute payment.”

In response to the Bank’s request that the FDIC determine whether the Proposed Payment was a prohibited golden parachute payment (which request was not accompanied by an application certifying that the CEO was not responsible for the Bank’s troubled condition), the FDIC issued a written determination that the Proposed Payment was a golden parachute payment that could not be paid without prior written FDIC consent.

The FDIC concluded that the Proposed Payment was a prohibited golden parachute payment because: (1) it would be compensation to the CEO under a binding agreement; (2) it would be contingent upon, and paid after, the CEO’s termination; (3) it would be received after the Bank was in a troubled condition; and (4) the CEO was terminated while the Bank was in a troubled condition.  In the Order, the District Court also took note of the fact that the CEO had not provided services to the Bank during the one-year period for which he sought damages.