Kenneth R. Vaught v. Green Bankshares, Inc.

IN THE COURT OF APPEALS OF TENNESSEE
AT KNOXVILLE
February 9, 2016 Session
KENNETH R. VAUGHT v. GREEN BANKSHARES, INC., ET AL.
Appeal from the Chancery Court for Knox County
No. 1818482 Clarence E. Pridemore, Jr., Chancellor
No. E2015-01259-COA-R3-CV-FILED-APRIL 18, 2016
This appeal arises from an effort by a former bank employee to collect certain deferred
compensation payments. Kenneth R. Vaught (―Vaught‖) filed a complaint against his
former employer, Green Bankshares, Inc., and its wholly owned subsidiary, Greenbank
(―Greenbank‖), in the Chancery Court for Knox County (―the Trial Court‖). Both sides
agree Vaught is entitled to certain deferred compensation. The issue is the amount.
According to Greenbank, Federal Deposit Insurance Corporation (―FDIC‖) and Troubled
Asset Relief Program (―TARP‖) regulations prevent payment of the total amount
requested by Vaught as it would constitute a prohibited ―golden parachute.‖ After a trial,
the Trial Court found in favor of Vaught, awarding him the full amount. Greenbank
appeals. On appeal, FDIC, amicus curiae, argues that the additional deferred
compensation payment to Vaught constitutes a prohibited golden parachute. We hold
that the Trial Court‘s judgment places Greenbank in the untenable position of having to
either disobey the Trial Court‘s judgment or flout federal regulations and FDIC. We
vacate the judgment of the Trial Court, remand this case to the Trial Court, and order a 60
day stay, during which time Vaught may pursue, should he elect to do so, other avenues
of relief, including via the Administrative Procedure Act (―the APA‖) to challenge
FDIC‘s determination.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Vacated;
Case Remanded
D. MICHAEL SWINEY, C.J., delivered the opinion of the court, in which CHARLES D.
SUSANO, JR., and THOMAS R. FRIERSON, II, JJ., joined.
Edward H. Trent and Mary M. Helms, Knoxville, Tennessee, for the appellants, Green
Bankshares, Inc. and Greenbank.
Craig L. Garrett, Maryville, Tennessee, for the appellee, Kenneth R. Vaught.
Colleen J. Boles, Assistant General Counsel, Kathryn R. Norcross, Senior Counsel, and,
Jerome A. Madden, Counsel, Arlington, Virginia, for amicus curiae Federal Deposit
Insurance Corporation.
OPINION
Background
This appeal concerns the ramifications of a 2004 Non-Competition
Agreement (―the Agreement‖) Vaught entered into with his then employer, Greenbank.
Pursuant to the Agreement, Vaught was entitled to deferred compensation. The
Agreement provided that payment under the Agreement was to begin when he turned 50
years old in July 2014 or upon his termination, whichever occurred later, and continue for
ten years. The annual benefit upon termination was slated to be $84,924 paid in equal
payments over a ten year period resulting in a total of $849,240.
In August 2011, Vaught was terminated as President and Chief Operating
Officer of Greenbank. At the time, Greenbank officially was designated as in ―troubled
condition.‖ This designation had important implications for Vaught‘s compensation. At
the time of Vaught‘s termination, the amount accrued on the books toward his deferred
compensation was $521,497. The essence of this appeal is which total figure Vaught is
entitled to: $849,240 over ten years as originally contemplated, or $521,497 over ten
years as accrued at the time of his termination. The parties do not dispute that Vaught is
entitled to the latter figure. However, Greenbank and FDIC, as amicus curiae, contend
that, given Greenbank‘s troubled condition at the time of Vaught‘s termination, a full
payment of $849,240 over ten years would constitute an impermissible golden parachute
under applicable TARP and FDIC regulations.
Vaught sued Greenbank in December 2011.1 Vaught asserted, among other
things, that he was entitled to severance and change in control benefit payments.
Greenbank filed a motion for summary judgment in opposition. In February 2014,
Vaught amended his complaint by seeking declaratory relief regarding the amount he was
owed under the Agreement in deferred compensation. In August 2014, the Trial Court
granted Greenbank‘s motion for summary judgment relative to the severance and change
in control benefits, concluding they were prohibited golden parachutes under TARP
regulations. In May 2015, the issue of deferred compensation was tried. At trial, the
Trial Court deemed inadmissible as hearsay an FDIC opinion letter dated May 28, 2014
opining that Vaught was limited to $521,497 and that the additional sum would amount
1
Vaught also sued North American Financial Holdings and Capital Bank, N.A., but they are not parties to
this appeal.
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to a prohibited golden parachute. The Trial Court found in favor of Vaught. By June
2015 order, the Trial Court entered its findings and conclusions as follows:
1. In 1998, Kenneth Vaught (hereinafter Plaintiff) was working at
First Tennessee Bank in Maryville, Blount County, Tennessee.
2. Plaintiff was recruited by Greenbank (hereinafter Defendant) to
come to work for Defendant in 1998 to operate and run two (2) branches of
Greenbank in Blount County, Tennessee, then operated as American
Fidelity Bank.
3. Over the course of the next twelve (12) months, Plaintiff either
recruited or hired approximately twenty-five (25) new employees to come
work for him at Greenbank operating the two (2) American Fidelity
branches.
4. Plaintiff‘s original employment contract with Defendant contained
both a non-compete provision and also contained a bonus provision to
provide for bonuses based on a formula connected to the bottom line
profitability of the two (2) American Fidelity branches managed by
Plaintiff.
5. Over the next several years the American Fidelity branches
managed by Plaintiff were profitable and upon expiration of Plaintiff‘s
existing employment contract, the parties desired to enter into new
employment contracts.
6. The parties entered into two (2) new contracts. One contract was
the Employment Contract and the other was a Non-Competition Agreement
that is the subject of this litigation.
7. The Non-Competition Agreement entered into by the parties and
stipulated as Exh. No. 1, provided in paragraph no. 2 that for and in
consideration of the deferred compensation benefits granted by the
company to the employee under the terms of the agreement that Plaintiff,
during the term of his employment and for a period from termination,
whether by resignation or otherwise, would not compete with Defendant
until his 46th birthday, directly or indirectly. At the time of the execution
of the contract, Plaintiff was 40 years old.
8. Paragraph No. 8 of the Non-Competition Agreement titled
―Deferred Compensation Benefits‖, provided that in consideration of the
covenants contained therein, that the Defendant agreed to provide deferred
compensation benefits to Plaintiff in the amount set forth in Schedule A
under the column ―Annual Benefit Upon Termination‖ for the age specified
in said schedule upon termination of his employment.
9. Schedule A to the Non-Competition Agreement showed the
annual benefit grew each year that Plaintiff remained employed at the bank.
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10. The agreement specifically provided that under no circumstances
would Plaintiff receive the first annual benefit payment under the contract
until he reached age 50 and, that if Plaintiff‘s employment was terminated
from the bank prior to age 50, his benefit payment would not start until his
50th birthday.
11. The agreement further provided that if Plaintiff chose to remain
employed at the bank after reaching age 50 and chose to continue to be
bound by the Non-Competition Agreement, then the annual benefit would
continue to grow until Plaintiff‘s 60th birthday at which time payments
would begin.
12. The footnote to Schedule A provided that if Plaintiff‘s
termination of his employment occurs after age 50, that payments would
commence the month following termination and the annual payments
would continue for ten (10) years.
13. The footnote to Schedule A also provided the accrual liability
balance is based on accruals required under Generally Accepted
Accounting Principals (GAAP) and was based on a plan commencement
date of September 1, 2004, the method of calculating interest was a 6.5%
discount rate compounded monthly.
14. This Court has previously held that the change of control benefit
was barred by the federal TARP regulations. However, the same is not at
issue in this present litigation.
15. At the time the Defendant and Plaintiff entered into the Non-
Competition Agreement, the Defendant bought two (2) bank owned life
insurance policies (BOLI) to fund Plaintiff‘s non-compete agreement for
the $2,500,000.00
16. The BOLI policies were not put into a specific trust for the
Plaintiff‘s contract, but were purchased by the Defendant to fund Plaintiff‘s
Non-Competition Agreement.
17. Defendant has argued that the lower annual benefit of
$52,149.70 is mandated by two sets of federal regulations (i.e. TARP and
FDIC) because the greater payment of $84,924.00 would constitute a
golden parachute under these regulations.
18. There is no dispute that the lower payment of $52,149.70 is
deferred compensation which is a clear exception to both the TARP and
FDIC regulations prohibiting golden parachutes.
19. Both the TARP and FDIC regulations provide seven (7)
requirements for a benefit plan to meet the deferred compensation
exclusion. The TARP requirements are listed at 31 CFR 30.01. The FDIC
requirements are found at 12 CFR 359.1(d).
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20. It is undisputed that the annual benefit under Plaintiff‘s Non-
Competition Agreement meet the first six (6) requirement of both
definitions.
21. The only disputed portion is the seventh requirement which reads
as follows: ―... and payments pursuant to the plan are not in excess of the
accrued liability computed in accordance with GAAP‖ (TARP definition,
31 CFR 30.1) ―...payments pursuant to such plans shall not be in excess of
the accrued liability computed in accordance with GAAP‖ ( FDIC
definition CFR 359.1(d)).
22. Neither of the above cited regulations require accrual to stop at
termination.
23. The $521,497.00 accrued at the time of Plaintiff‘s termination in
August 2011 was the then present value of the future payments of $84,924
which were to begin upon Plaintiff‘s 50th birthday in July 2014 and to be
payable for a period of ten (10) years.
24. The original accrual schedule set up by the bank and its
consultant, Clark Consulting, was prepared pursuant to GAAP and
anticipated that accrual would occur until Plaintiff‘s 50th birthday which
was assumed to be when the first payment would begin. This accrual
schedule was prepared to GAAP.
25. The bank continued to accrue liability for the annual benefit past
Plaintiff‘s termination and up to the date of his 50th birthday. This
continued accrual was done pursuant to GAAP.
26. As of December 31, 2015, the Defendant has accrued
$852,743.18 towards Plaintiff‘s annual benefit.
27. Pursuant to the terms of the Non-Competition Agreement, the
benefit did not continue to grow after Plaintiff‘s termination, but the accrual
would have continued up until the date of the first payment on July 2, 2014,
such that the accrual as of the date of payment would have been the present
value of July 2, 2014, of the annual payments of $84,924 payable over ten
(10) years. This is the accrual required by GAAP. The present value of the
stream of payments due to Plaintiff was included in the $852,743.18 on the
Defendant‘s books.
28. The annual benefit payment was for and in consideration of the
non-compete and was not a severance payment for departure.
29. That the payments met the definition of deferred compensation,
which is excluded from the golden parachute definitions.
30. In April 2011, the Defendant was advised by the FDIC in a letter
entered as Exh. No. 7, that they were prohibited from paying or agreeing to
pay any golden parachute payments without the approval of the FDIC.
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31. The Defendant acknowledged receipt of the FDIC‘s April 2011
letter and stated in the letter stipulated as Exh. No. 11, that Defendant
would not pay or agree to pay any golden parachute payment without the
approval of the FDIC.
32. In May 2012, Defendant entered into an agreement with North
American Financial Holdings/ Capital Bank to be acquired in a merger
wherein the acquirer would acquire 90% of the stock of Defendant.
33. The merger of the two banks required the preparation of a Final
Proxy Statement that would be voted upon by the Defendant‘s
shareholders.
34. The Final Proxy Statement which was stipulated as Exh. No. 12
is a detailed and comprehensive document that describes in detail the
merger transaction along with a detailed section regarding executive
compensation of the bank officers.
35. Both sides to the merger process had significant input into the
preparation of the proxy documents and the proxy documents were
reviewed by law firms for both parties, accountants for both parties and
bank officers for both parties.
36. The Final Proxy Statement (Exh. No. 12) provided that if
Plaintiff was terminated in 2011, that the annual benefit he was entitled to
for ten (10) years would be $84,924. There was no mention in the Final
Proxy by Defendant that any portion of this $84,924 was considered to be a
golden parachute.
37. Plaintiff was terminated from his employment with Defendant by
letter dated August 9, 2011, which was stipulated as Exh. No. 13.
38. Plaintiff‘s termination letter was signed by bank CEO Stephen
Rowand.
39. Plaintiff‘s termination letter was drafted by the bank‘s legal
counsel Bass, Berry and Sims.
40. The Defendant was aware of FDIC and TARP regulations
regarding golden parachute payments at the time of both the Final Proxy
Statement and Plaintiff‘s termination letter.
41. Plaintiff‘s termination letter concluded that the proper annual
benefit was $84,924 and that the same was not a golden parachute, but
appropriate deferred compensation and that the Defendant agreed in the
termination letter to pay Plaintiff the $84,924 benefit for ten (10) years
beginning on his 50th birthday.
42. Plaintiff presented the testimony of James Adams, who was the
former CFO of Defendant.
43. This Court found Mr. Adams to be an expert on Generally
Accepted Accounting Procedures (GAAP).
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44. This Court found Mr. Adams‘ testimony to be credible and
helpful to the Court.
45. The Defendant has failed to present any witnesses to support
their position that any payment above $52,149.70 would be considered a
golden parachute payment.
46. The Defendant has failed to provide any explanation as to why it
has changed its opinion as to Plaintiff‘s annual benefit amount since the
time of the termination letter and the 2011 Final Proxy Statement.
47. The Defendant has provided no testimony that would require the
accrual for Plaintiff‘s annual benefit to cease at the time of his termination
in 2011 rather than at the time payments began in July 2014.
48. The current issue before this Court was not part of Plaintiff‘s
original Complaint filed in December 2012.
49. Subsequent to the filing of the December 2012 Complaint,
Plaintiff became aware of the Defendant‘s intention to not pay the full
annual benefit of $84,924 and amended his Complaint to add Count V,
which is the subject of this current matter before the Court.
50. When the first annual benefit payment became due on Plaintiff‘s
50th birthday (July 2, 2014), the Defendant made no payment to Plaintiff in
any amount.
51. In April 2015, Plaintiff received a check in the mail from the
Defendant in the amount of $52,149.70, dated April 16, 2015, which came
directly to Plaintiff‘s home and did not go through Plaintiff‘s legal counsel.
The check did not include any interest for being late.
CONCLUSIONS OF LAW
A. This Court finds that the Annual Benefit Upon Termination under
Plaintiff‘s Non-Competition Agreement is not a golden parachute payment,
under either the TARP regulations or the FDIC regulations.
B. This Court has previously ruled that the annual benefit was
deferred compensation and not a golden parachute payment under the
TARP regulations when it granted Plaintiff‘s Motion for Summary
Judgment on this issue and this Court reiterates and reaffirms that finding.
C. This Court finds that the annual benefit under the Non-
Competition Agreement was not paid as a result of Plaintiff‘s departure or
for a change of control but was for work performed and benefits accrued.
D. This Court finds that the consideration for the Non-Competition
Agreement was Plaintiff‘s covenant not to compete and that Plaintiff fully
complied with this covenant by not competing with the Defendant until his
46th birthday.
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E. This Court finds that the annual benefit under the Non-
Competition Agreement was not for Plaintiff‘s departure and that the only
effect that Plaintiff‘s termination had on the benefit was to determine the
amount to be paid under Schedule A of the Non-Competition Agreement.
F. This Court finds that the annual benefit under the Non-
Competition Agreement was not a severance benefit or a termination
benefit which would meet the TARP definition of a golden parachute.
G. This Court further finds that the Annual Benefit Upon
Termination meets the definition under both TARP and FDIC regulation for
bona fide deferred compensation, which is an exclusion to the golden
parachute under both sets of regulations.
H. This Court finds that the $521,497 accrued on the Defendant‘s
books as of Plaintiff‘s termination in August 2011 was the then present
value of the $84,924 annual benefit payable over ten (10) years beginning
July 2, 2015, and this amount was accrued on the Defendant‘s books
according to GAAP which requires and mandates that the Defendant accrue
only the present value of a future stream of benefits on its books.
I. This Court finds that the Defendant continued to accrue for
Plaintiff‘s annual benefit upon termination and this continued accrual was
pursuant to GAAP which requires and mandates that a bank or other entity
accrue to the full eligibility date which this Court finds to be July 2, 2014
(Plaintiff‘s 50th birthday). This Court further finds that neither the TARP
regulations or the FDIC regulations require under their definition of
deferred compensation that the Defendant stop accruing for deferred
compensation at the time of the employee‘s termination unless the
employee‘s benefits begin at termination. Plaintiff‘s benefits did not begin
at termination but began later upon his 50th birthday.
J. This Court finds that the annual benefit payment in [sic] not
limited to the $521,497 accrued on the Defendant‘s books in August 2011
because this amount was merely the present value of the future stream of
benefits to begin in July 2014.
K. This Court finds that since the $521,497 was the present value in
August 2011 of $84,924 annually, beginning in July 2014, then the
payments of $84,924 annually for ten (10) years beginning in July 2014
would not be in excess of the amount accrued on the Defendant‘s books
and would not be contrary to either the TARP or FDIC definition of
deferred compensation.
L. This Court finds that as of the date of the first payment due
Plaintiff on July 2, 2014, the bank had fully accrued on its book the present
value of the ten (10) year payment stream that Plaintiff was to receive in the
amount of $84,924 and as such, the payment of the annual benefit in that
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amount would not exceed the accrued liability on the Defendant‘s books as
of that date.
M. This Court finds that the accrual of liability per GAAP is merely
an account entry recognizing a liability on the books of the bank.
N. This Court finds that by continuing to accrue for the liability after
Plaintiff‘s termination, that the Defendant did not increase the actual benefit
amount but only increased the liability accrual up until the payments began.
O. This Court finds that accrual under GAAP is based upon and
considers the time value of money.
P. This Court finds that both TARP and FDIC regulations recognize
the time value of money, by requiring accrual pursuant to GAAP.
Q. This Court finds that the Plaintiff is entitled to the annual benefit
of $84,924 which payments were to begin on July 2, 2014, and be paid
annually for a period of ten (10) years.
R. This Court finds that the declaratory judgment statutes of the
State of Tennessee allow and require the court to give complete relief in
conjunction with a ruling for declaratory relief.
S. This Court finds that Plaintiff is entitled to prejudgment interest
from July 2, 2014, forward at a rate of 5.25%.
T. This Court finds that the Plaintiff is entitled to pre-judgment
interest on the difference between the $84,924 payment due and the
$52,149.70 payment received, which is a difference of $32,774.30 at a rate
of 5.25% from April 16, 2015, until the date declaratory judgment is
entered. Thereafter, judgment interest would accrue per statute.
U. This Court finds that Plaintiff shall have a monetary judgment
against the Defendant for $32,774.30, along with pre-judgment interest as
set forth above, for which execution may issue. Plaintiff shall prepare said
money judgment.
V. This Court finds that Plaintiff is entitled to future annual
payments of $84,924 payable for nine (9) more years, with the next
payment being due on July 2, 2015, and July 2nd of each year thereafter.
W. This Court orders that in the event payment is not made by the
Defendant on July 2nd of each year, and if the Plaintiff files an affidavit
with the Court to that effect after the due date, that the Plaintiff shall be
allowed to submit a monetary judgment with his affidavit for that year‘s
annual payment plus statutory interest for the time that the same is not paid
and the Court will grant judgment for which execution may issue.
X. The cost associated with this cause are taxed to the Defendant
Greenbank, for which execution may issue.
In July 2015, the Trial Court entered its final judgment, stating:
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This matter came before the Court for trial on Count V of Plaintiff,
Kenneth R. Vaught‘s Amended Complaint. Previously, the Court granted
Defendants, Green Bankshares, Inc. and GreenBank‘s Motion for Summary
Judgment as to Counts I, III, and IV of the Amended Complaint. Based on
this Court‘s August 20, 2014 Order, as clarified by Order dated October 22,
2014, and based on this Court‘s June 11, 2015 Findings of Facts and
Conclusion of Law and Order following trial on Count V, the Court enters
this Final Judgment pursuant to Rule 54.02, Tenn. R. Civ. P. as to all claims
filed by Plaintiff against Defendants Green Bankshares, Inc. and
GreenBank finding that there is no reason to delay entry of judgment on
these claims, which involve all issues between these parties.
Accordingly, it is now
ORDERED AND ADJUGED:
1. Based on the Court‘s June 11, 2015 Findings of Facts and
Conclusion of Law and Order, above Findings of Fact and Conclusions of
Law, the Court enters judgment in favor of Plaintiff, Kenneth R. Vaught as
to Count V of the Amended Complaint seeking Declaratory Judgment
regarding the amount of the ―Annual Benefit Upon Termination‖ to which
he is entitled under his 2004 Non-Competition Agreement as follows:
a. Plaintiff is entitled to the annual benefit of $84,924, which
payments were to begin on July 2, 2014, and be paid annually for a period
of ten (10) years.
b. The declaratory judgment statutes of the State of Tennessee allow
and require the Court to give complete relief in conjunction with a ruling
for declaratory relief.
c. Plaintiff is entitled to prejudgment interest from July 2, 2014,
forward at a rate of 5.25%.
d. Plaintiff is entitled to pre-judgment interest on the difference
between the $84,924 payment due and the $52,149.70 payment received,
which is a difference of $32,774.30 at a rate of 5.25% from April 16, 2015,
until the date declaratory judgment is entered. Thereafter, judgment
interest would accrue per statute.
e. Plaintiff shall have a monetary judgment against the Defendant for
$32,774.30, along with pre-judgement interest as set forth above, for which
execution may issue.
f. Plaintiff is entitled to future annual payments of $84,924 payable
for nine (9) more years, with the next payment being due on July 2, 2015,
and July 2nd of each year thereafter.
g. In the event payment is not made by the Defendant on July 2nd of
each year, and if the Plaintiff files an affidavit with the Court to that effect
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after the due date, that the Plaintiff shall be allowed to submit a monetary
judgment with his affidavit for that year‘s annual payment plus statutory
interest for the time that the same is not paid and the Court will grant
judgment for which execution may issue.
2. Final Judgment is entered in favor of Defendants, Green
Bankshares, Inc. and GreenBank on Counts 1, III, and IV of the Amended
Complaint, consistent with the Court‘s August 20, 2014 Order.
3. The costs associated with this cause are taxed to Defendants,
Green Bankshares, Inc. and GreenBank.
Greenbank timely appealed to this Court.
Discussion
Although not stated exactly as such, Greenbank raises three issues on
appeal: 1) whether TARP regulations limit Vaught‘s deferred compensation to
$52,149.70 each year for 10 years rather than $84,924; 2) whether FDIC golden
parachute provisions limit deferred compensation benefits to amounts actually accrued on
the books; and, 3) whether the Trial Court erred in excluding a May 28, 2014 opinion
letter from an FDIC representative to Greenbank‘s counsel in which the FDIC
representative supported Greenbank‘s stance as to Vaught‘s deferred compensation, on
the basis that the letter was inadmissible hearsay. Vaught raises his own issue of whether
Greenbank‘s appeal is frivolous. FDIC, in an amicus curiae brief, raises the additional
issues of whether this Court even has subject matter jurisdiction and whether Vaught‘s
only recourse is through the APA and federal court.
Our review is de novo upon the record, accompanied by a presumption of
correctness of the findings of fact of the trial court, unless the preponderance of the
evidence is otherwise. Tenn. R. App. P. 13(d); Bogan v. Bogan, 60 S.W.3d 721, 727
(Tenn. 2001). A trial court‘s conclusions of law are subject to a de novo review with no
presumption of correctness. S. Constructors, Inc. v. Loudon County Bd. of Educ., 58
S.W.3d 706, 710 (Tenn. 2001).
This appeal requires an examination of federal regulations. Golden
parachute means: ―The term ―golden parachute payment‖ means any payment to a senior
executive officer for departure from a company for any reason, except for payments for
services performed or benefits accrued.‖ 12 U.S.C. § 5221(a)(2). Federal regulations
prohibit the payment of golden parachutes under a variety of circumstances. Deferred
compensation plans may be excluded from the golden parachute prohibitions as follows:
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(4) Payments from benefit plans and deferred compensation plans. A
payment from a benefit plan or a deferred compensation plan is treated as a
payment for services performed or benefits accrued only if the following
conditions are met:
(i) The plan was in effect at least one year prior to the employee‘s
departure;
(ii) The payment is made pursuant to the plan and is made in accordance
with the terms of the plan as in effect no later than one year before the
departure and in accordance with any amendments to the plan during this
one year period that do not increase the benefits payable hereunder;
(iii) The employee has a vested right, as defined under the applicable plan
document, at the time of the departure or the change in control event (but
not due to the departure or the change in control event) to the payments
under the plan;
(iv) Benefits under the plan are accrued each period only for current or
prior service rendered to the TARP recipient (except that an appropriate
allowance may be made for service for a predecessor employer);
(v) Any payment made pursuant to the plan is not based on any
discretionary acceleration of vesting or accrual of benefits which occurs at
any time later than one year before the departure or the change in control
event; and
(vi) With respect to payments under a deferred compensation plan, the
TARP recipient has previously recognized compensation expense and
accrued a liability for the benefit payments according to GAAP or
segregated or otherwise set aside assets in a trust which may only be used
to pay plan benefits, except that the assets of this trust may be available to
satisfy claims of the TARP recipient‘s creditors in the case of insolvency
and payments pursuant to the plan are not in excess of the accrued liability
computed in accordance with GAAP.
31 C.F.R §30.1.
Seven requirements must be met in order for a plan to fulfill the definition
of a deferred compensation plan, as follows:
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(3) In the case of any nonqualified deferred compensation or supplemental
retirement plans as described in paragraphs (d)(1) and (2) of this section,
the following requirements shall apply:
(i) The plan was in effect at least one year prior to any of the events
described in paragraph (f)(1)(ii) of this section;
(ii) Any payment made pursuant to such plan is made in accordance with
the terms of the plan as in effect no later than one year prior to any of the
events described in paragraph (f)(1)(ii) of this section and in accordance
with any amendments to such plan during such one year period that do not
increase the benefits payable thereunder;
(iii) The IAP has a vested right, as defined under the applicable plan
document, at the time of termination of employment to payments under
such plan;
(iv) Benefits under such plan are accrued each period only for current or
prior service rendered to the employer (except that an allowance may be
made for service with a predecessor employer);
(v) Any payment made pursuant to such plan is not based on any
discretionary acceleration of vesting or accrual of benefits which occurs at
any time later than one year prior to any of the events described in
paragraph (f)(1)(ii) of this section;
(vi) The insured depository institution or depository institution holding
company has previously recognized compensation expense and accrued a
liability for the benefit payments according to GAAP or segregated or
otherwise set aside assets in a trust which may only be used to pay plan
benefits, except that the assets of such trust may be available to satisfy
claims of the institution‘s or holding company‘s creditors in the case of
insolvency; and
(vii) Payments pursuant to such plans shall not be in excess of the accrued
liability computed in accordance with GAAP.
12 C.F.R. § 359.1(d)(3).
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We first must establish whether this Court has subject matter jurisdiction.
Our Supreme Court held that state courts‘ jurisdiction had been preempted in the Wiggins
case, stating as follows in a case concerning the National Labor Relations Board:
There is no question made in the present case as to the identity of
issues or of the parties in the respective state and federal proceedings,
except to the extent that the landowner, Wiggins and Company, was found
not guilty of unfair labor practices in the N.L.R.B. case. It is not insisted,
however, that this fact should affect our disposition of the state court
proceedings or that Wiggins alone would be entitled to maintain in force an
injunction against the union. As noted previously, the property was under a
commercial lease and the premises were occupied in their entirety by
Kresge and Giant Foods. There were no other tenants in the shopping
center.
It is the principal insistence of appellees that this Court should either
withhold its decision until the Court of Appeals for the Sixth Circuit takes
final action upon review of the N.L.R.B. order or, in the alternative, that
this Court should leave in force the injunction ordered by the state Court of
Appeals until the federal appellate court acts. We find no merit in this
position. Once the Court of Appeals for the Sixth Circuit acts, it would still
be possible for appellees to seek review in the Supreme Court of the United
States. If appellees‘ contention had merit, the state courts might well leave
an injunction in force until the Supreme Court of the United States had
completed certiorari review.
We do not so understand the pre-emption doctrine. As a result of the
action of the state Court of Appeals, the Union has been enjoined from
doing the very acts which the N.L.R.B. expressly authorized it to do.
Appellees, on the other hand, are entitled to prohibit picketing under the
state court order while they are required to permit it and to post notices to
that effect under the order of the federal agency. Each of the parties is
subject to cross-injunctions which are diametrically conflicting.
Appellee insists that the action of the N.L.R.B. is erroneous and not
in accord with previous decisions of the federal courts. It insists that the
action may well be reversed, noting that in the majority opinion in the Sears
case, supra, it was stated that trespassory picketing has seldom been held to
be a protected activity.
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However this may be, that argument goes to the merits, or lack
thereof, of the N.L.R.B. decision, not to the question of state court
jurisdiction. We have already noted that the Court of Appeals for the Sixth
Circuit denied a stay of the N.L.R.B. order pending review. The issue of
whether the order should or should not be stayed until the federal appellate
court renders its decision is a matter for determination by the federal, not
the state, courts.
The judgment of the Court of Appeals is reversed and the cause is
dismissed because jurisdiction of the state courts has been pre-empted.
Costs will be taxed to appellees.
Wiggins and Co., Inc. v. Retail Clerks Union Local No. 1557, AFL-CIO, 595 S.W.2d 802,
804-05 (Tenn. 1980).
In the Hampton Roads Bankshares, Inc. case, the Supreme Court of
Virginia addressed whether TARP regulations prohibiting golden parachutes constituted
a taking without compensation:
Harvard filed an action for the breach of a private contract. In
response, HRB asserted EESA § 111 and the June Rule as an affirmative
defense. To avoid HRB‘s defense, Harvard alleged that EESA § 111 and
the June Rule effected an unconstitutional taking without just
compensation. Certainly, we have jurisdiction over the breach of contract
action, and we can apply federal law if necessary to resolve the dispute.
See Merrell Dow Pharm., Inc. v. Thompson, 478 U.S. 804, 808, 106 S. Ct.
3229, 92 L. Ed. 2d 650 (1986) (the existence of a federal statutory defense
generally does not create federal subject matter jurisdiction). Indeed, the
United States District Court for the Eastern District of Virginia dismissed
HRB‘s prior action for declaratory judgment because the case turned on a
question of Virginia contract law, and the ―mere fact that TARP is
implicated‖ was insufficient to support the exercise of federal jurisdiction.
Shore Bank v. Harvard, 934 F. Supp. 2d 827, 841 (E.D. Va. 2013).
Although the dispute comes to us in a different posture, it still turns on a
question of Virginia contract law, and we will resolve it accordingly.
***
Harvard attempted to mount a collateral attack on the constitutionality of
EESA § 111, as amended by the June Rule. But the validity of the law
rendering performance impossible does not affect the validity of the
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defense, provided the promisor relies upon the law in good faith. See White
v. J.M. Brown Amusement Co., 360 S.C. 366, 601 S.E.2d 342, 345-46
(2004) (holding that subsequent invalidation of a law did not revive a
contract after the parties had ceased performing in good faith compliance
with the law); Gaunt v. Shelter Mut. Ins. Co., 808 S.W.2d 401 (Mo. Ct.
App. 1991) (holding that the respondent did not breach a settlement
agreement by making payment pursuant to a lien that was subsequently
declared invalid); Directions, Inc. v. New Prince Concrete Constr. Co., 200
N.J. Super. 639, 491 A.2d 1347 (Ct. App. Div. 1985) (concluding that the
appellant was not required to challenge an apparently valid administrative
order to determine its validity before refusing to perform a contract).
There is nothing in the record that would suggest HRB refused to
make the golden parachute payment in bad faith. After Harvard terminated
his employment, HRB sought guidance from Treasury regarding its
contractual obligation to make the disputed golden parachute payment, and
whether it could perform that obligation in light of EESA § 111, as
implemented by the June Rule. In response, Treasury provided informal
guidance indicating that HRB could not make the payment and comply
with EESA § 111. Where, as here, the government has clearly expressed its
intent to enforce the law, and the promisor cannot in good faith perform its
contractual obligation without violating the law, the promisor is discharged
from its obligation. See Harriscom Svenska v. Harris Corp., 3 F.3d 576 (2d
Cir. 1993) (finding that, in light of evidence that the government would not
allow continued sales, the seller complied in good faith with the
government‘s requirements and refused to perform its remaining
obligations); Restatement (Second) of Contracts § 264 cmt. b.
***
For these reasons, the circuit court erred when it ordered HRB to
make the golden parachute payment despite the federal prohibition on such
payments found in EESA § 111, and as implemented by the June Rule.
Hampton Roads Bankshares, Inc. v. Harvard, 291 Va. 42, 781 S.E.2d 172, 177, 179-80
(2016) (Footnotes omitted).
Our review of Wiggins and Hampton Roads Bankshares, Inc. persuades us
that the Trial Court, and this Court, have subject matter jurisdiction to hear the present
case. Unlike Wiggins, we are not dealing with the body of law stemming from the
National Labor Relations Act. Administrative procedures already had been undertaken in
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Wiggins, as well. In addition, Hampton Roads Bankshares, Inc. sustains the proposition
that, among other things, TARP‘s mere implication does not require exclusive federal
subject matter jurisdiction.
While our jurisdiction is not preempted, a separate question exists as to
what deference, if any, Tennessee courts are to extend to FDIC‘s interpretation of its
regulations. According to Vaught, the FDIC opinion letter dated May 28, 2014 which
takes the position that Vaught is not entitled to the additional deferred compensation
payments is merely an informal advisory opinion which is binding on no one. Vaught
asserts that the Trial Court correctly ruled that the letter was inadmissible hearsay.
Relevant case law suggests, however, that the issue of the FDIC‘s
interpretation and resulting stance does not begin or end with the question of whether the
letter was properly excluded as hearsay.2 In articulating a deferential standard to be
applied when an agency interprets its own regulations, the United States Supreme Court
provided:
In the absence of any unambiguous statute or regulation, we turn to
the FCC‘s interpretation of its regulations in its amicus brief. See, e.g.,
Chase Bank USA, N.A. v. McCoy, 562 U.S. ––––, ––––, 131 S. Ct. 871, 880,
178 L. Ed. 2d 716 (2011). As we reaffirmed earlier this Term, we defer to
an agency‘s interpretation of its regulations, even in a legal brief, unless the
interpretation is ― ‗plainly erroneous or inconsistent with the regulation [s]‘
‖ or there is any other ― ‗reason to suspect that the interpretation does not
reflect the agency‘s fair and considered judgment on the matter in
question.‘ ‖ Id., at ––––, ––––, 131 S. Ct., at 880, 881 (quoting Auer v.
Robbins, 519 U.S. 452, 461, 462, 117 S. Ct. 905, 137 L. Ed. 2d 79 (1997)).
Talk Am., Inc. v. Mich. Bell Tel. Co., 564 U.S. 50, 131 S. Ct. 2254, 2260-61, 180 L. Ed. 2d
96 (2011).
In the present case, Greenbank received a letter from an FDIC
representative opining that Vaught must not be paid the excess deferred compensation,
lest this additional amount constitute a prohibited golden parachute. Moreover, FDIC
appeared at oral arguments, and submitted an amicus curiae brief adopting a position
contrary to Vaught‘s. If Vaught‘s argument is to be accepted, then we would be
constrained to ignore FDIC‘s position on a question that involves that agency and its
regulations. This Court declines to take such a view. Even if the FDIC letter was
2
We believe the FDIC letter was not hearsay. The FDIC letter was offered to prove FDIC‘s opinion on
the matter at issue, not that FDIC‘s opinion was correct. However, as we explain herein, the issue of the
letter‘s admissibility is moot.
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inadmissible hearsay, we know now by this point in the case unequivocally what FDIC‘s
position is. The issue of the admissibility of the FDIC letter as evidence that the
contested payments constitute an impermissible golden parachute is therefore moot. As
the United States Supreme Court stated in Talk America, our deference to an agency‘s
interpretation of its regulations can be based on the ―agency‘s interpretation of its
regulations, even in a legal brief . . . .‖ Id.
Deference, however, does not amount to abdication of a court‘s duty to
review. We still must determine whether the agency‘s interpretation is plainly erroneous
or inconsistent with the regulations, or, whether the interpretation reflects the agency‘s
fairly considered judgment. As to the latter analysis, FDIC‘s consistent and persistent
position in this case leaves us with no serious doubt as to whether that agency has taken a
carefully considered judgment on the present case. With respect to whether that
interpretation is plainly erroneous, or inconsistent with the regulations, Vaught advances
a number of arguments as to why FDIC‘s interpretation is entitled to no deference.
Among other things, Vaught points to testimony at trial supporting his position that the
deferred compensation was an accrued liability, and not ―vested.‖ This is a critical
distinction according to Vaught, which takes into account the ―the time value of money.‖
In other words, $521,497 was the present value in 2011 of the originally contemplated
$849,240 total amount in deferred compensation, and the latter figure is therefore not
excessive but part and parcel of what Vaught was entitled to all along. Vaught also notes
the inconsistency in Greenbank having previously approved his deferred compensation
package before reversing course.
While Vaught‘s position regarding accounting principles, trial testimony,
and the time value of his deferred compensation is not illogical, we disagree with his
implicit characterization of the issue confronting this Court on appeal. We perceive the
issue before us to be a legal issue, rooted in TARP and the applicable regulations. This
Court has found no case law, or indeed regulation, that unambiguously resolves a
scenario like that of the present case. FDIC presents the following argument in its amicus
brief:
First, under 12 C.F.R. § 359.1(d)(3)(vii), payments due to Mr.
Vaught cannot exceed the accrued liability computed under GAAP. As
reflected in Schedule A, there is no dispute that the Accrued Liability,
determined under GAAP, as of 2011 was $521,497. Therefore, as of the
date of termination, the Bank had no further obligation to continue to
accrue a liability in order to commence payments as of 2014; and whether it
did or not is irrelevant. Second, the court‘s interpretation of 12 C.F.R. §
359.1(d)(3)(vii)—accrual under GAAP—is inconsistent with the parties‘
agreement that the deferred compensation meet the requirements of 12
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C.F.R. § 359.1(d)(3)(iii)—vesting. 12 C.F.R. § 359.1(d)(3)(iii) provides
that the IAP must have ―a vested right, as defined under the applicable plan
document, at the time of termination of employment to benefits under such
plan.‖ Schedule A expressly provides that as of 2011 that Mr. Vaught was
100 percent invested in $521,497, the amount of the Accrued Liability—not
$849,240.
(Footnote omitted, emphasis in original). We find FDIC‘s interpretation of the
regulations to be a reasonable one, and hold that it is entitled to deference.
Greenbank has been placed in an untenable position. It either must comply
with the Trial Court‘s judgment, or flout FDIC and federal regulations which could
expose Greenbank to serious legal penalties. Having advanced a reasonable
interpretation of applicable regulations, FDIC‘s interpretation requires the courts‘ initial
deference. The judgment of the Trial Court is vacated, and this case is remanded.
FDIC argues in its amicus brief that ―Mr. Vaught does have a remedy,
however.‖ Vaught may yet pursue relief in federal court through the APA, where he may
challenge the FDIC‘s interpretation of the applicable regulations if he elects to do so. We
agree that Vaught should be given the opportunity to do so. Therefore, we order a 60 day
stay in this case while on remand in the Trial Court to allow Vaught to pursue such other
avenues of relief as are available to him, including filing a lawsuit against FDIC under
the APA, should he so choose. Should Vaught elect not to pursue these other potential
avenues of relief within the 60 day stay, the Trial Court is instructed to enter judgment in
favor of Greenbank. This would leave Vaught with a judgment to receive the deferred
compensation payments totaling $521,497, the amount all parties agree he is entitled to
receive. All other issues raised on appeal are pretermitted.
Conclusion
The judgment of the Trial Court is vacated, and this cause is remanded to
the Trial Court for further proceedings consistent with this opinion and for collection of
the costs below. The costs on appeal are assessed against the Appellee, Kenneth R.
Vaught.
____________________________________
D. MICHAEL SWINEY, CHIEF JUDGE
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