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FDIC Can Rule on Golden Parachutes for Bank Execs, Court Says

July 5, 2022, 6:05 PM

The FDIC can determine whether severance payments to former executives at troubled banks are “golden parachutes” even if the payouts are being disputed by the parties, a federal appeals court ruled.

The U.S. Court of Appeals for the D.C. Circuit on Tuesday overturned a lower court ruling that the Federal Deposit Insurance Corp. lacked the authority to determine whether payments to a pair of executives at a bank that ran into trouble during the 2008 financial crisis were excessive.

“Nothing in the relevant statute or regulations requires that the FDIC be presented with a precise dollar figure before it has the power to determine whether a proposed payment qualifies as a golden parachute payment,” U.S. Circuit Judge Patricia A. Millett wrote for a unanimous three-judge panel.

The case now returns to the lower court, which had found the FDIC was not in position to deem any payments to be golden parachutes because the bank—which had since merged with another financial institution—and the two former executives were locked in litigation over whether they would be paid at all.

The dispute centers around payments that F. Scott Bauer, the former chairman and CEO of Southern Community Bank and Trust, and Jeffrey T. Clark, the bank’s former president and chief commercial banking officer, tried to recover after the bank merged with another North Carolina bank, Capital Bank N.A., in March 2012.

The two former executives were found to be at least partly responsible for Southern Community entering into a consent order with the FDIC in 2011 after running into trouble during the 2008 financial crisis. An external review recommended that Bauer and Clark be put into “positions of lesser responsibility,” according to the opinion, although it was unclear whether that happened.

The Federal Deposit Insurance Act and its implementing rules bar golden parachutes to any executives found to be at least partly responsible for a bank falling into “troubled” status.

Bauer’s and Clark’s employment contracts called for them to receive fixed payments of nearly $5 million and $2.6 million, respectively, should they be terminated without cause in the event Southern Community merged with another institution.

The two former executives refused to agree to modified employment agreements when Southern Community merged with Capital Bank and were terminated without receiving those payments.

Bauer and Clark sued over the canceled payments in November 2014. Capital Bank, which has since changed its name to First Horizon Bank following a 2019 merger with First Tennessee Bank, asked the FDIC whether payments to Bauer and Clark were golden parachutes because it couldn’t certify that the two former executives weren’t at least partly responsible for Southern Community’s problems.

The FDIC subsequently ruled that any payments to Bauer and Clark would be barred under agency rules in June 2017. The two former executives subsequently sued in December 2018, alleging violations of the Administrative Procedure Act.

Chris Graebe, a partner with Morningstar Law Group representing Bauer and Clark, said his clients were pleased with the decision.

“The D.C. Circuit has empowered the district court to conduct its judicial review of the FDIC’s determination now, as opposed to having to wait for the conclusion of underlying state court litigation,” he said in an email to Bloomberg Law.

The FDIC declined to comment. Attorneys for the bank didn’t respond to a request for comment.

Judge Richard J. Leon of the U.S. District Court for the District of Columbia ruled in September 2020 that the FDIC couldn’t make a judgment on the payments to Bauer and Clark because any determination would be “based on hypothetical payments in ongoing litigation” and vacated the agency’s recommendation.

Bauer and Clark, First Horizon, and the FDIC all appealed the ruling, with each party saying they disagreed with Leon’s reading of the case and asking for a judgment on the merits of the payments.

The D.C. Circuit said Leon’s reasoning was wrong, and sent the case back to the lower court to rule on the merits of Bauer and Clark’s arguments that the FDIC’s opinion on their payments was incorrect.

U.S. Circuit Judge Gregory G. Katsas and Senior U.S. Circuit Judge A. Raymond Randolph signed on to the opinion.

Bauer and Clark are represented by Morningstar Law Group.

First Horizon Bank is represented by Ellis & Winters LLP.

The FDIC is represented by in-house counsel.

The case is Bauer v. FDIC, D.C. Cir. App., No. 20-5314, Opinion and order 7/5/22

To contact the reporter on this story: Evan Weinberger in New York at eweinberger@bloomberglaw.com

To contact the editor responsible for this story: Melissa B. Robinson at mrobinson@bloomberglaw.com;Michael Ferullo at mferullo@bloomberglaw.com