No one wants to imagine bad times for the bank. But it makes sense to plan in advance, just in case. Your bank needs to motivate and keep the executive management team in place during difficult times, and one way to ensure this is to put in place a competitive compensation package when times are good.
A troubled bank can have significant restrictions imposed on its executive compensation programs. In particular, 12 C.F.R. Part 359 (Part 359) broadly prohibits the payment of, or entering into an agreement for the payment of, any golden parachute payment without prior regulatory approval. For an overview of Part 359, see our BankDirector.com article dated September 23, 2011.
A decision in July of 2016 from the U.S. Court of Appeals for the 8th Circuit once again confirms the view of the “impossibility” of severance pay under Part 359 and serves as a reminder that prior planning can help a bank to work within those rules.
Overview of Von Rohr
Jerry Von Rohr was a long-serving senior executive at Reliance Bank, serving lastly as chief executive officer before Reliance terminated his employment. At the time, the bank was subject to Part 359. Von Rohr claimed he was entitled to compensation for a year following the effective date of his termination. Because it was subject to Part 359, Reliance asked the Federal Deposit Insurance Corp. (FDIC) whether the claimed payment could be made to Von Rohr. The FDIC advised that the payment would be a “golden parachute payment” under Part 359, which Reliance could not make without prior FDIC approval. Reliance declined to make the requested payment. Von Rohr filed a lawsuit against Reliance and the FDIC. He alleged breach of contract and requested a declaration that federal law does not prohibit the payment. The trial court upheld the FDIC’s determination and granted summary judgment to Reliance on the breach of contract claim. The appeals court affirmed the trial court’s decision.
In granting summary judgment to Reliance, the court affirmed the trial court’s finding that the FDIC’s determination made Reliance’s performance under Von Rohr’s contract “impossible.”
In upholding the FDIC’s determination that any post-employment payment to Von Rohr under his employment agreement would be a golden parachute because it would be a payment “for services he did not render,” the appeals court made clear that whether or not something is called severance or a “golden parachute” is irrelevant to the analysis as to whether it is prohibited under Part 359. Von Rohr had argued that the payment he was due was simply his compensation for the remainder of the term of his contract, not a payment solely and specifically contemplating his termination. The court indicated that, if it accepted Von Rohr’s view, it would “create a giant loophole” in the prohibitions of Part 359. The intent of the regulatory scheme is to prevent troubled banks from draining their already low resources with payments to terminated executives who may have been responsible for the bank’s condition. It would not serve that intent to allow artful drafting to avoid it.
Von Rohr also claimed that the FDIC’s position is in conflict with its consistently held view that Part 359 does not preclude payment of damages for statutory claims (e.g., discrimination, whistleblower retaliation, etc.). The court dismissed this claim by acknowledging the FDIC’s view on statutory claims and noting that Von Rohr was raising a contractual claim, not a statutory claim.
Significantly, exempt from the scope of the prohibition of Part 359 are payments under tax-qualified retirement plans, benefit plans, bona fide deferred compensation plans and nondiscriminatory severance plans, as well as those required by statute or payable following death or disability.
In particular, Part 359 exempts bona fide deferred compensations and nondiscriminatory severance plans only where such arrangements have been in place at least (and not modified to increase benefits within) one year prior to the troubled condition designation.
Between bona fide deferred compensation, nondiscriminatory severance and death or disability benefits, a bank should be able to build the basics of an attractive compensation package for a member of executive management. However, many banks put off current consideration of these types of arrangements for one reason or another. The Von Rohr case should serve as a reminder that Part 359 is inflexible. Therefore, banks should consider today whether to implement such arrangements.
Finally, should a bank find itself involved in litigation related to an executive’s termination, it should remember that Part 359 does not prohibit payment of damages for statutory claims.