WBK Industry News - Litigation Developments

FDIC’S Authority Regarding Golden Parachutes Affirmed

Earlier this month, the Court of Appeals for the D.C. Circuit reversed the ruling of the district court that the FDIC lacked sufficient information to determine whether change-in-control payments sought by two high-level bank executives following their terminations qualified as “golden parachute payments.”

This ruling stems from a suit brought by the two banking executives in state court following their termination during a merger over their refusal to accept a pay reduction previously agreed to in their employment contracts.  Both executives sued the bank that terminated them, as well as the remaining bank that absorbed their former employer.  Defendant-banks sought guidance from the FDIC regarding the payments sought in this suit.  The FDIC in turn determined these payments would constitute “golden parachute payments”, statutorily restricted by 12 C.F.R. § 359.2, and that the FDIC would not grant an exception to the general bar against such payments. 

The executives sued the FDIC in the U.S. District Court for the District of Columbia alleging its determination to be unlawful under the Administrative Procedure Act (APA).  Although the Court declined to reach the merits of the allegations, the Court ruled that the FDIC lacked information regarding the specific amounts sought to determine whether payments in the underlying suit constituted golden parachute payments, finding their determination was based on “hypothetical payments in ongoing litigation” rather than a specific proposed amount and vacated the FDIC’s decision. 

On Appeal, the D.C. Circuit highlighted that the Federal Deposit Insurance Act – under which the FDIC is authorized to supervise and examine covered institutions to ensure financial stability and soundness – explicitly authorizes the FDIC to provide its views, when requested, on whether a payment constitutes a golden parachute payment.  The Court elaborated that the FDIC makes these determinations based on the circumstances in which payments are made rather than focusing on the specific amounts.  “Under the Federal Deposit Insurance Act, the FDIC is directed to, ‘prescribe, by regulation, the factors to be considered’ in prohibiting or limiting these payments.”  After reviewing the statutory definition of a golden parachute payment, and finding these plaintiff-executives were institution-affiliated parties who were terminated when the bank was in a troubled condition and sought payment tied to and payable after their termination, the Court reversed the district court’s finding, concluding that any payment to these plaintiff-executives would constitute a parachute payment.  “The FDIC’s answer would be the same regardless of whether the litigation resulted in a $1 or $1,000,000 payment to [the bank executives].  So for the parties to spend years and countless resources litigating to a judgment that the FDIC can readily tell in advance will be a forbidden golden parachute, whatever the amount, would be a fool’s errand.”

The matter has been remanded to district court to be decided on the merits of the plaintiff-executives claims.