Bauer v. FDIC
Bauer v. FDIC
(20-5314) (D.C. Cir.) Briefed and argued as court-appointed amicus in defense of district court decision regarding FDIC authority to restrict bank executive payments at troubled financial institutions. Adam's argument starts at 30:40.
Unofficial transcript for users of mofo.com
Speaker 1 (00:01):
Case number 20-5314 et al. F. Scott Bauer and Jeffrey T. Clark versus Federal Deposit Insurance Corporation, appellant. Southern Community Financial Corporation, et al. Mr. Stevens for the appellants FDIC, et al., Mr. Graebe for appellees F. Scott Bauer et al., and Mr. Sorensen, Amicus Curiae.
Duncan Stevens (00:33):
May it please the court. Duncan Stevens of the FDIC arguing on behalf of all the defendant’s appellants. And Mr. Paul Sun represents the bank. The bank defendants is in the courtroom. The FDIC had the authority to address the golden parachute applications that were submitted to it under the plain text of the statute and the regulations. Common sense likewise supports what the FDIC did here in addressing the golden parachute applications because the FDIC had the information it needed to resolve the applications, and it would benefit no one for the FDIC to withhold a decision pending the completion of the North Carolina litigation.
Duncan Stevens (01:21):
Should the court reach the merits of this issue, we ask? We believe that the FDIC correctly found that these were golden parachute applications.
Speaker 2 (01:27):
Do you think we should reach the merits if we—if—hypothetically, if we were to disagree with the district court on its ruling, or should we remand?
Duncan Stevens (01:39):
I think the court has enough information. It is a matter of law. There are no factual disputes. The parties cross-moved for summary judgment below. I don’t think there are any matters of fact that have to be resolved at trial, so I think the court has enough information, but we certainly—we have no position as far as whether it’s better for the court to resolve in at this point.
Speaker 2 (02:02):
The FDIC doesn’t have a position on whether it would prefer that we go ahead and decide it now.
Duncan Stevens (02:09):
No, Your Honor. The FDIC has given—we submit all the court—the information it needs to address the question but does not have a strong view on if the court believes that a remand is preferable. Wants the district court to develop the issues further. That’s not something that the FDIC is going to be very concerned about. So we think—so starting with the authority issue.
Duncan Stevens (02:39):
There are several features of the statute that we think support what the FDIC did here. First, the statute covers agreements, and not simply payments, not simply golden parachute payments, and that’s significant because many, many agreements are expressed not in terms of fixed dollar amounts, but in terms of variable amounts, multiples of compensation, payment of life insurance premiums, payment of health benefits. Those—and given that Congress gave the authority to resolve agreements and not simply payments of definite dollar amounts, we think that supports the idea that Congress was not limiting the FDIC to specific amounts. And even if the statute didn’t include agreements within the definition of golden parachutes, it includes payments without any kind of temporal restriction. It doesn’t—that the FDIC can address future payments, anticipated payments just as well as it can address present payments, as long as the information it needs is all presented. And the fact that the Congress said the FDIC can—may prohibit or limit by regulation or order any golden parachute payment. It defines golden parachute payment as any payment or any agreement. And then payment is defined as any direct or indirect transfer of any funds or any assets. Any, any, any—Congress clearly meant to cast a broad net in this statute. And we think what the FDIC did is well within that broad—
Speaker 2 (04:14):
FDIC has an explicit procedure for parties to come and ask for authorization to make what has been characterized as a golden parachute payment. They can try to obtain FDIC approval. That’s sort of step one, step two, that right counsel for Mr. Bauer, Mr. Clark referenced. Does the FDIC have a procedure for parties to come and ask the step one question? Think not everyone tried to shovel this into the, what I’m going to call the step two question.
Duncan Stevens (04:48):
Your Honor, there isn’t a separate procedure. In section 359.6, the FDIC simply says for filing requirements, consult section 303.244. So what the FDIC—
Speaker 2 (05:01):
What authority or what basis was the FDIC making a step one ruling here? How do parties know they could even ask that from the FDIC? Is there just an established practice of doing this?
Duncan Stevens (05:13):
Right? So if a party wants to know what to do, given that if it’s not seeking a full consent and simply seeking the up or down on whether it’s a golden parachute payment, if the party calls up the FDIC, the FDIC will say, “Look, submit the information you have, and if we need more information, we’ll ask for it.” So while it’s not specifically set forth in the regulations, what the FDIC does is interpret section 303.244 broadly enough to encompass what Bauer and Clark called is the step one phase. And if the FDIC needs more information just for step one, it’ll ask for it. And if it doesn’t need more information, the FDIC will proceed to a decision based on the information submitted. So in our view, section 303.244 gives the FDIC the flexibility to ask for more information and the flexibility to proceed on the information it does receive. But there is not a separate set of filing requirements. There isn’t a separate established procedure.
Speaker 2 (06:15):
FDIC also said in its decision that the FDIC has consistently maintained the golden parachute payments by a healthy acquirer are subject to the golden parachute rules. But there were no citations when you said that they have consistently maintained that. Can you tell me where I can find that?
Duncan Stevens (06:32):
Sorry, Your Honor. Can you repeat the question?
Speaker 2 (06:35):
Sure. Your brief says that the FDIC’s decision here says that they have consistently maintained the golden parachute payments by a healthy acquirer here. Like, if it were capital—are subject to the golden parachute rules, but there were no citations when you said they’ve consistently maintained that. So where can I find that the FDIC has consistently taken that position? I understand the written rationale of it. I just would like to know where they’ve decided that before.
Duncan Stevens (07:05):
Well, I think the BBX Capital case from Eleventh Circuit is a good example of that. Because what happened in that case, similar to this case, was that a troubled institution was acquired by a healthy institution. The healthy institution acquired—inherited with that acquisition the troubled institutions, severance obligations, and the executives there argued, “Well, the pay orders here would be healthy institutions.” So the golden parachute provision—how it doesn’t apply. And the Eleventh Circuit said, “No, the focus of this—of the golden parachute statute is obligations incurred by troubled institutions.” And the fact that they might hand off their obligations to a healthy institution doesn’t change the applicability of the statute. The Eleventh Circuit explained that if that were the case, it would be fairly easy to get around the golden parachute statute just by creating some other shell companies, some non-banking institution, something that is outside the scope of troubled institution parameters. And presto, you have something other than a golden parachute. So the Eleventh Circuit was pretty clear in BBX that when there is a healthy acquirer, it doesn’t change the applicability of the statute if it kicked in for troubled institution in the first place.
Speaker 2 (08:21):
So the decision also said that they have consistently treated court claims arising out of claims disputes over golden parachute payments as covered by the prescriptions on golden parachutes. But again, didn’t have citations. Where can I find citations to that?
Duncan Stevens (08:39):
Well, I think the Harrison case, also from the Eleventh Circuit, is a good example of that because in Harrison, the Eleventh Circuit—
Speaker 2 (08:46):
Like FDIC decisions, you’re just going to point me to a case for each one of these, but you said consistently, so I had thought there would be a body of like FDIC case law on these two propositions. What you’re talking about is positions they have taken in litigation, right?
Duncan Stevens (09:00):
Right. So it’s the positions that with the FDIC have taken in litigation follow on from decisions by the FDIC on the administrative level. So while the FDIC’s golden parachute decisions are not—there isn’t a public body of them, so it’s difficult to point to the decisions on the administrative level. What the FDIC has done is reflected at least in a couple of instances on the appellate level. And in Harrison, there was a wide variety of tort claims presented. There, a settlement agreement was entered into, or at least proposed to resolve the torque claims, and the Eleventh Circuit found that all of the claims reflected in the settlement agreement, including the torque claims, including statutory tort claims, were covered by the golden parachute statute. So that’s one example of court’s deeming.
Speaker 3 (09:53):
Let me ask you a question that goes to whether I completely understand your position here. Is it your position, the FDIC’s position, that it didn’t need to know the amount of a proposed payment or what the potential was. Because this was a troubled institution, and these two individuals, officers, who were involved were responsible for putting the bank into that state, and therefore, no matter what the payment would be, we would reject.
Duncan Stevens (10:30):
Yes, Your Honor. That’s correct. Because the regulations, section 359.4B, the regulations make the responsibility issue a threshold factor that comes before the discretionary analysis of—that’s in 359.4B, which would include the cost.
Speaker 3 (10:48):
Now you’ve also framed it up in terms of the corporation waving requirements with respect to a bank coming to them and asking for approval. Did you make a waiver argument in the district court? I can’t find that you did.
Duncan Stevens (11:08):
Your Honor, I was—when the district court asked for briefing on this issue, I don’t believe we made—we raised that waiver point. But it is a secondary point because we don’t think there’s anything.
Speaker 3 (11:17):
You never get to that under your—
Duncan Stevens (11:19):
Right. It’s not necessary.
Speaker 3 (11:22):
That’s why I asked you the first question.
Duncan Stevens (11:24):
Sure. And it’s not necessary to reach the waiver point. If in fact there were no requirements on the FDIC to wave, and we think that’s the case here given that under the 359.4 analysis, you never get to the cost issue and 303.244 doesn’t in any way constrain the FDIC.
Speaker 3 (11:40):
Got it. Okay.
Speaker 2 (11:41):
I have just one more question for you, and that is Messrs. Bauer and Clark say that, in their North Carolina litigation, they have raised a distinct claim not about collecting golden parachute payments, but about—what you characterize as golden parachute payments, but about collecting about their—that they would’ve with absent capital’s interference, they would’ve been able to just continue their employment and continue getting a salary, not any of the terms from the changing conditions. Just, “We wouldn’t have been fired. I could have kept working, kept in my job, maybe retired in three years.” How was—where does the FDIC explain how that claim constitutes a golden parachute?
Duncan Stevens (12:32):
A couple points, Your Honor. First, that theory that they would’ve continued as employees of Capital Bank wasn’t presented to the FDIC and it wasn’t in the applications, so you will not find it in the FDIC’s final determinations.
Speaker 2 (12:46):
So is that aspect of the North Carolina litigation not displaced by your decision? That claim can go forward in North Carolina? I mean, they can all go forward, I guess. It would be a pointless thing, but you’re not saying—and say they won damages for the equivalent of two or three more years of salary, just salary that they would’ve had because they would’ve continued employment. Whatever a jury finds the amount is. That would not be covered? Or the FDIC just hasn’t taken a position on that claim?
Duncan Stevens (13:13):
Well, the FDIC didn’t take a position on the administrative level. Now we’ve suggested in our briefs before the court that it wouldn’t change the golden parachute analysis. And the reason it wouldn’t change is that—
Speaker 2 (13:25):
Does Chenery allow you in the brief to make that decision for the FDIC?
Duncan Stevens (13:30):
Sorry, say it one more time?
Speaker 2 (13:31):
Does Chenery allow you to make that decision for the FDIC in your brief?
Duncan Stevens (13:35):
On an issue that wasn’t presented to the agency? I don’t think Chenery is going to speak to that, because I don’t think Chenery is going to foreclose—
Speaker 2 (13:43):
Well if they’re silent, and so you’re now trying to add—the brief would be adding decision—adding an aspect of decision that just wasn’t there.
Duncan Stevens (13:53):
I agree, Your Honor. But under the circumstances, I think Chenery allows an agency enough flexibility to respond in litigation to new theories presented in the litigation. But I do want come back to Your Honor’s point because if Bower and Clark have different theories that were never presented to the FDIC in the first round that they want to file another golden parachute application about, they can do so. We have not told Bower and Clark this is it, you can never come back to us. All the FDIC did was address what was presented to it. And if this theory wasn’t part of it, they can seek a golden parachute determination as that theory. Now—
Speaker 3 (14:37):
The corporation says that the bank, whichever one it is, cannot make a payment because of our golden parachute rules. What if the North Carolina court says you are hereby ordered to make a payment for these two individuals? What do you do then?
Duncan Stevens (15:02):
We would encourage the bank to appeal the judgment of the state court. But it’s our view that the supremacy clause would prevent the bank from making a payment that is forbidden by federal law, and not withstanding that a state court feels otherwise—
Speaker 3 (15:23):
You have litigating authority to seek an injunction?
Duncan Stevens (15:29):
To seek an injunction directly against the court?
Speaker 3 (15:31):
Against the bank.
Duncan Stevens (15:36):
We certainly could. We certainly could do so. I don’t know that the question has ever arisen of the FDIC bringing its own suit to enjoin a bank from making a golden parachute payment.
Speaker 3 (15:47):
Well, I guess what I’m getting at is that your decision here is not something that voids the state court litigation. You don’t have any authority to tell the parties that they can’t go forward with their case. Right?
Duncan Stevens (16:06):
Correct. But the bank defendants could, and we think it would be a complete defense to the claims in the litigation that the FDIC has said you can’t make these payments. That would be illegal. That is the defense under state law that we think would carry the day if it—
Speaker 3 (16:24):
There’s an ancient doctrine—I can’t remember the last case that was decided. It’s called primary jurisdiction. Are you familiar with that?
Duncan Stevens (16:33):
I’ve encountered it, Your Honor. Though, it’s been a while.
Speaker 3 (16:35):
Yeah. If a federal agency has the primary jurisdiction to regulate a particular activity, and there’s a lawsuit going on, then the court, after a proper motion, refers the matter to the agency. It’s much more complicated than that, but that in a nutshell is what it is.
Duncan Stevens (16:56):
Right. And it does sometimes happen as here that there is state court litigation simultaneous with the FDIC’s golden parachute determination. But I don’t know that the issue is arisen of coming into direct conflict in that way.
Speaker 2 (17:12):
The state courts—haven’t they stayed the state court litigation? Okay. So the state court is sort of done something like that, right, by saying it’s litigation pending the FDIC decision.
Duncan Stevens (17:21):
Right. And we think the state courts volunteering—the state recognizes that the FDICs determination is going to be going be significant here. And so it certainly everyone’s hope that this sort of conflict wouldn’t arise.
Speaker 2 (17:36):
Any more questions? Great. Thank you very much. We’ll give you a couple minutes for rebuttal.
Duncan Stevens (17:40):
Thank you.
Christopher Graebe (17:57):
Your Honors, I’m Chris Graebe. I represent Scott Bauer and Jeff Clark. Let me first say that we are obviously requesting that the court address this matter on the merits. I’m pleased to hear the FDIC doesn’t oppose that, and we hope the court will take this matter up on the merits. I’d like to speak directly if I may, Your Honors, to the questions that were out from the bench during Mr. Stevens argument. The Congress—the first assertion Mr. Stevens made, Congress intended to cast a broad net. It didn’t intend to cast it that broadly because it regulated only golden parachute payments, and so ipso facto all payments that are not golden parachute payments are not within the scope of the regulation. And so unless the damages that we are seeking in the state court action would qualify as golden parachute payments under the strict definition in the regulations, they’re not within the scope of the FDIC’s authority to prohibit. And that’s—
Speaker 2 (18:56):
Let’s back up one thing on the question on the district court’s decision here. You don’t—just want to confirm, you don’t complain in any way that you were injured by the decision of the FDIC to go forward and make a decision without that particular piece of information about the amount in dispute?
Christopher Graebe (19:15):
I’m not sure I follow your question.
Speaker 2 (19:16):
You don’t claim—you don’t disagree. I’ll try it again. Your position is that you fully agree that the FDIC could go forward and decide the applications that were submitted to it without having the precise amount of money in dispute before it?
Christopher Graebe (19:34):
We do. We believe that the amount requirement is a requirement of 303.244, which is an application to make a payment as the Amicus argued better than I did. What was going on here was not an application to make a payment. It was an application to prevent one. And so this was strictly constrained to the step one inquiry. Are these damages that we’re seeking in the state court action, do they implicate the golden parachute rules at all? Are they seeking golden parachute payments? And so we believe the—
Speaker 2 (20:05):
So you weren’t injured by the FDIC’s willingness to go forward and decide the matters that were submitted to it.
Christopher Graebe (20:11):
We are—no.
Speaker 2 (20:14):
Then, but just to clarify—oh, go ahead. Finish your sentence.
Christopher Graebe (20:17):
We are not injured by the fact that the FDIC made a final determination without knowing the amount.
Speaker 2 (20:26):
Okay. And when you say that, do you say you’re not injured by the step one decision or also the—what was your great phrase phraseology also their step two decision. They also made a discretionary decision.
Christopher Graebe (20:38):
We are not challenging the discretionary decision. We made that clear in the district court. I believe Judge Leon cited us for a changing course to use his phrase that we are not challenging the discretionary determination. We are not challenging the discretionary determination.
Speaker 2 (20:55):
You’re all about step one.
Christopher Graebe (20:56):
We’re all in that these are not rolled in parachutes.
Speaker 2 (20:59):
All right. Just want to make sure I was clear on that. Go ahead.
Christopher Graebe (21:01):
Let me address some of the case law that Mr. Stevens cited. Your Honor, Judge Millett, I believe you asked what’s your citation for the assertion that the FDIC has consistently maintained that healthy acquirers are subject to the rule. What I would start with there is where have they said it in the regulation, because it’s nowhere in the regulation. You’ll not find the word successor. You’ll not find the word acquirer anywhere in the regulation. You’ll also not find it in any of the official guidance from the FDIC. And so if you look at the financial institutional letter, which is in the joint appendix financial institution letter 66-10, which is JA51, you can read that entire document and you’ll find nothing about a healthy acquirers or successors.
Christopher Graebe (21:48):
In fact, when the FDIC in its official guidance is telling the world what these regulations govern, you just have to look at bullet point number one in their guidance on golden parachutes where they begin with the highlights, and bullet one is golden parachute payments referred to amounts paid by troubled entities to an institution-affiliated party that are contingent on the IAP’s termination. Bullet two, the FDI act and it’s implementing rule implementing rules preclude troubled institutions, those rated composite four or five or meeting other criteria for making golden parachute payment, except as provided by the rules. Nothing about successors.
Speaker 2 (22:30):
Well, it covers—it does cover affiliated holding companies.
Christopher Graebe (22:34):
Correct. And Capital Bank was a completely unaffiliated third party and doesn’t fall with an affiliated holding company. And so it also puts the FDIC’s interpretation at odds with the treasury rule governing TARP payments, and Southern Community also had received TARP money where treasury in the interim final rule, and we cited this in our briefing, makes clear that healthy acquirers are not subject to the golden parachute restrictions after acquisition, nor are the highly compensated employees subject to them. And so this rule puts the FDIC directly at odds with the philosophy anyway of the treasury department’s corresponding rule.
Speaker 2 (23:18):
Well, they can coexist. You’re not suggesting a conflict?
Christopher Graebe (23:21):
They can. I’m not saying they have to agree.
Speaker 2 (23:23):
Sometimes different agencies make different decisions
Christopher Graebe (23:25):
Understood, Your Honor. The BBX Capital case, this was not a case where a successor was responsible for a payment. That opinion, although that opinion is—it’s a little bit opaque, I will say, but that opinion is clear when you dig into it. And if you look back in the record that it was BBX Bank Corp, a troubled institution, that agreed to make those payments. It was not BB&T, which was the healthier player. BB&T had no contractual obligation to make any payments to these executives. And so that was a case where a troubled institution was going to be responsible for making payments on a changing control. That’s what the golden parachute rules are about. Likewise—
Speaker 2 (24:13):
Here, you had a provision that said Southern, the troubled company, had an obligation to make sure the successor, Capital, had a contractual obligation to make sure the successor assumed that responsibility. Now why would the golden parachute provisions not apply to something like that?
Christopher Graebe (24:36):
Well, for numerous reasons, Your Honor. The first is that this is a payment that is not required to be made by a troubled institution, and so the purpose of the rules to protect and preserve the assets of troubled institutions simply aren’t implicated by a healthy institution making payments. Second, this was a single trigger change in control. It doesn’t fall within the contingent on or by its terms payable on or after termination, which is a definitional element of the rule that these single trigger changing control payments were due from the successor simply by the change in control. There was no termination required for these change control payments to be triggered. And so for those two reasons, this is distinct from a situation where a troubled institution has an obligation to make a change in control payment prior to acquisition.
Christopher Graebe (25:29):
None of the assets of Southern Community Bank were implicated here in the least. This was all the healthy acquirer. Let me speak briefly to some of these other issues, Your Honor. The Harrison case—you asked about tort claims. You said what about the independent tortious conduct of Capital Bank here? We have claims for tortious interference with contract and tortious interference with prospective advantage. What about those claims? Those are targeting the independent conduct of an institution that’s never been troubled and doesn’t implicate the assets of a troubled institution. And they say, well, we consistently treat tort claims, and Harrison. Harrison were—what the executive had done in Harrison was simply to assert a basket of claims against the bank. Everything from breach of contract to civil rights violations, intentional infliction of emotional distress. They threw the kitchen sink at the troubled institution, and the troubled institution proposed to pay a million dollars of its troubled institution money to the executive, and the FDIC prohibited that. Fine.
Christopher Graebe (26:33):
It’s prohibiting payments golden. It’s prohibiting payments by a troubled institution. And the fact that the executive repackaged its contract claim against a troubled institution as a tort claim made no difference. That’s fine. That’s not this case. This is a claim against a third party, a never-troubled institution based on its own independent forces conduct. There’s nothing in the language of the regulation or the statute that could possibly be read to immunize healthy institutions from liability for their own tortious conduct. Finally, as to the waiver argument, it’s just simply not accurate. We, in our letters to the FDIC, we made clear—well, first of all—
Speaker 2 (27:19):
You’re talking about waving the straight-up employment claim? What waiver are you talking about?
Christopher Graebe (27:27):
They claim that we didn’t waive—that we’ve waived the argument that we would have become employees of Capital Bank had you performed, or—
Speaker 2 (27:36):
They say you waived it. You just didn’t present it to them, but they weren’t ruling upon that claim?
Christopher Graebe (27:40):
But we did present it to them, is what I’m saying, Your Honor.
Speaker 2 (27:43):
Realize the FDIC is ruling upon that or not?
Christopher Graebe (27:46):
I believe the FDIC is so fundamentally misunderstood what our claims are about that it should have ruled on it. It was before the FDIC, but one of the errors the FDIC made was simply assuming, oh, you’re looking for termination payments from a troubled institution. And it doesn’t matter that they were acquired later. This is Hill v.—this is Hill v. Bank Corp. The end. And they simply didn’t take into account all the information before them, including the actual language of the tortious interference claim says JA 129 where we point out that but for the tortious interference, the agreements would’ve continued in effect indefinitely at Capital Bank, not intentionally and wrongfully induced Southern Community to terminate. That’s part of our tortious interference claim. In our letters—
Speaker 2 (28:38):
Can you—
Speaker 2 (28:40):
Which paragraph are you?
Christopher Graebe (28:40):
JA 129, Your Honor.
Speaker 2 (28:42):
Paragraph are you in? Sorry. Is that 115? The agreements would’ve.
Christopher Graebe (28:50):
JA 129 is the fourth claim for relief in the amended complaint.
Speaker 2 (28:53):
Paragraph 115. Is that what you were reading from?
Christopher Graebe (28:55):
Paragraph 115? Yes. Sure. I would also point out that in order to be sure that the FDIC understood what we were talking about, we actually put—and this is at JA 352—we actually put in all caps, bold face print in our letter because we understand that this is not self-evident. This may not be their daily fair. We put into our letter quote, Southern Community breached the agreements by failing to ensure that capital bank assume and agreed to perform the agreements, not for failing to make change in control payments before the merger closed. We also continued on and said, when entering, and this is this is in the same in the same letter, Your Honor, it may carry over into the next page, but in the same letter, we said, when entering into the merger agreement, Southern Community’s alternatives were A) required that Capital Bank assume and perform as required by the contracts, B) if Capital Bank refused to assume and perform, to forego the deal and honor the contracts. That is, they will remain employees of Southern Community and continue on where, which by the way, was rapidly recovering, was—had gone from, from a loss to profitability.
Christopher Graebe (30:10):
And that’s why they were such an attractive target for Capital Bank, but the argument that we never said anything to the FDIC about that theory is simply wrong on the facts, and it’s revealed by that claims relief in the complaint and by our letter to the FDIC. Your Honor, if I could have just a couple of minutes for rebuttal to the Amicus.
Speaker 2 (30:31):
You get a couple of minutes for rebuttal.
Adam Sorensen (30:33):
Okay.
Christopher Graebe (30:34):
I’m sorry. I didn’t mean to cut off any further questions.
Speaker 2 (30:36):
No. I think there’s no more questions. Thank you very much.
Adam Sorensen (30:50):
Good morning. May it please the court. Adam Sorenson on behalf of the court Amicus. I’d like to begin with the authority question under the statute and go back to Your Honor’s question about what exactly is the FDIC’s authority or claiming that all legal claims fall under the definition of golden parachute payments. And I think it’s important to draw the distinction specifically about the Harrison case that my friend mentioned. In that case, there were no claims filed. It was a settlement agreement for a definite amount, $1 million presented to the FDIC as part of an application under this very articulated statute. And the FDIC was able to determine by reading the settlement agreement, the proposed terms and the amount, that this was obviously—and it was an agreement because it was proposed—that they would pay this and that it was in the nature of compensation.
Adam Sorensen (31:39):
And I think that’s really the key language in the statute that to know whether something falls within the gambit of the FDIC’s authority in this area, we have to know whether it’s a payment or agreement in the nature of compensation. And I think that’s really the critical information that was missing here. This was not just a box that was left unchecked on the application. The missing information about the payment, its cost and impact on this institution, could not have been provided at this stage in the litigation. And I think that the district court correctly recognized that further development of the plaintiff’s theories of liability in the state court or some form of settlement agreement would’ve provided the FDIC the information that they needed to make this just threshold determination of whether is this an issue that is within their authority to begin?
Speaker 4 (32:29):
Why would we conclude that under these circumstances, the FDIC might not have had enough information to approve the payment, but it did have enough information to reject the payment?
Adam Sorensen (32:47):
So I think in order to reject or approve the payment, Your Honor, it would have to know whether it was a golden parachute payment. So the statute gives them authority to limit or prohibit golden parachute and to know whether it falls into that bucket or not. I think they need a few basic pieces of information. They need to know the amount and they need to know what is the nature of the liability to determine whether it’s in the nature of the compensation. So I definitely think that they could have said well, we need more information, or they could have said our general view of this kind of liability is that it falls under the statute, but that’s not what they did. They said that all claims—
Speaker 4 (33:27):
They say exactly what Judge Randolph posited earlier, which is we don’t need to know the amount because our determination is that a payment in any amount would be inappropriate.
Adam Sorensen (33:42):
So I think that would answer what the plaintiff’s called the step two question, which is if this—assuming that this is a golden parachute payment, would we allow it? But I think that the FDIC has long recognized, for example, that statutory claims, such as discrimination claims, are simply not payments or agreements to make payments or give rise to them within the meaning of this particular statute. So I don’t think that they would claim that if they were presented with a discrimination claim, like in Sterling Savings Bank case, that they could offer any opinion on whether that’s allowed or not because it’s simply not the kind of claim that falls within their authority. And it wouldn’t matter in the case.
Speaker 2 (34:24):
Why would an amount wouldn’t matter there? And if amount wouldn’t matter here—I get why some other things, but I don’t know why you have to know the amount—know whether something is in the nature of compensation.
Adam Sorensen (34:36):
So, I think there are sort of two answers to that question. Specifically to the nature of compensation, I think the uncertainty over the amount is fundamentally related to the uncertainty over the nature of the claim. So, for example—
Speaker 2 (34:49):
I’m sorry, I didn’t—can you say that again? I didn’t hear.
Adam Sorensen (34:51):
So I think the uncertainty over the amount is related to the uncertainty over the nature of the claim and whether it’s in the nature of compensation. So in—for example, in [inaudible], the Eighth Circuit case, which the FDIC points to as sort of an example of where you could have a claim that has not been reduced to judgment or settlement, that was a simple contract claim or a known amount. And I think if you have a simple claim in the nature of compensation, you’re going to know in advance what the amount is, because it would be apparent from the compensation agreement. The uncertainty here and the reason—
Speaker 2 (35:29):
I’m not sure that’s true at all. I mean, first of all, would the jury have been bound to award that precise amount in the [inaudible] case?
Adam Sorensen (35:38):
So I don’t know that they would be bound to award that exact dollar amount. But I do think that the application itself would specified that that was the amount at issue, and that was what was being sought. And I also think it would’ve been clear that the basis for that amount was compensation itself. So in many of the cases that the FDIC cites or the proposition that, “well, we’ll never know exact an exact dollar amount,” almost all of those cases do actually have a specific dollar amount. And those that don’t have a calculable amount. So they’ll say three years’ salary, and we know that the base salary is $200,000, and it’s not to say that the FDIC needs to know—
Speaker 2 (36:24):
They had certain amounts in this place. It was four million something for Mr. Bower, and I think two million something for Mr. Clark that was submitted, that was before them. So the FDIC had numbers in front of it.
Adam Sorensen (36:38):
So that figure was in the application. It was not in the decision. And I do not read the decision.
Speaker 2 (36:43):
Why doesn’t have to be in the decision? It’s a different thing to say now, because the rule only requires it to be in the application.
Adam Sorensen (36:49):
Fair, Your Honor. I think that the application was not limited to those amounts, and the decision itself was not limited to the amounts. So what the application asked for and what the decision delivered was a statement that all claims arising out of this state court suit, be it statutory, torts, contract, or otherwise would inevitably give rise to prohibited golden parachute payments. And I think that was just a premature assessment at this stage before the—
Speaker 2 (37:20):
Was it premature because the numbers in there might be debated, the numbers that were provided, the amounts? I don’t understand how the provision of those numbers made it premature. One might imagine other arguments for why it was premature or not. I’m not getting to have this particular thing that the district court was focused on makes the difference by itself.
Adam Sorensen (37:42):
So I think that the amount is relevant, not just because it speaks to the nature of these claims. It’s also evident that it’s the FDIC and Congress considered it necessary to give a full evaluation. So in the statutory factors that the Congress deemed relevant this consideration, they asked the FDIC or gave it authority to consider whether these payments would be reasonable. And I think that’s—
Speaker 2 (38:17):
We’re focused on the fact that this is litigation claims. Say it’s not litigation and Southern wants to know whether it can make a payment—it’s going to terminate these guys and wants to know if it can, when it does, make this payment under the terms of the contract and, or even hypothesize in another case where it’s just crystal clear, if I’m terminated by you while our business is in a troubled condition, you have to give me two times the salary of the highest paid officer in the company. We’re not in litigation. And so the troubled entity comes to the FDIC and says is this a golden parachute payment? And can we make it? But just on the step one question. Is this—would this be a golden parachute payment? Is it your position they couldn’t answer that without first having someone tell them what two times the highest paid salary is in the company?
Adam Sorensen (39:16):
No, Your Honor. I think that if the amount is fundamentally calculable, that then that’s an entire—
Speaker 2 (39:22):
Because it’s calculable as opposed to on its face, it’s in the teeth of the golden parachute by its terms?
Adam Sorensen (39:28):
So I think it—well, I think that situation would be different in a few different respects. First, I don’t take the district court’s opinion to hold that the FDIC cannot give guidance on its view of the law or advised parties on its view of the law. I think that the FDIC here relied on and used a very particular font of authority in issuing an application decision under section 303.244. And I think we know from that section and the—
Speaker 2 (39:58):
What more did it do than tell the parties here’s our view on these? People can debate them, but here is our view on the status of these claims. It didn’t order the trial court to do anything. It didn’t direct parties to dismiss their litigation. So what did more did it do here?
Adam Sorensen (40:15):
It denied the application under 303.244, and sort of made a final determination that no matter what the party submitted, that none of the claims in this suit could give rise to a permissible.
Speaker 2 (40:30):
But, and—
Adam Sorensen (40:31):
I think that, I think that’s—
Speaker 2 (40:32):
They just provided their opinion. Maybe it was more definitive, but—or covered more territory than people can debate whether they should have, but he just told them their opinion.
Adam Sorensen (40:41):
Respectfully, I would just dispute the premise. I don’t think it was merely offering opinion. I think it was relying on this particular font of authority under 303.244, with these particular eyes of requirements.
Speaker 3 (40:54):
Aside from the portion of the North Carolina complaint seeking attorney’s fees, what other parts of the complaint or claims were accurate are unrelated to the payments that these gentlemen claim they were entitled to upon leaving the bank?
Adam Sorensen (41:18):
So I want to be careful in staking out my position here. I do not take the position that the plaintiffs do that their claims will not get—certainly not give rise to prohibited payments. And I also don’t take the position that I read the FDIC to take—
Speaker 3 (41:35):
Say what? I’m sorry, I didn’t hear you.
Adam Sorensen (41:36):
I don’t take this the same position that plaintiffs do that their complaint will necessarily never give rise to prohibited payments. And I also don’t take the position that the FDIC does that it will inevitably. I think I would just want to be careful in counting my answer in that. I think there’s uncertainty, and I can point you to the particular issues that I think have given rise—
Speaker 3 (42:01):
Your position is that the payment has to be made before the FDIC can forbid it?
Adam Sorensen (42:07):
No, Your Honor. I think reading the statute and regulations and agreement would not require money to change hands. You could have an agreement to make a payment, but I do think that there has to be a particular payment proposed. Whether or not—
Speaker 2 (42:21):
There has to be a jury judgment. There has to be a judgment from the jury?
Adam Sorensen (42:25):
No, Your Honor. I think a settlement agreement would consider a settlement.
Speaker 2 (42:29):
They put aside a settlement. So if they don’t settle, there would—FDIC could do nothing until there’s a judgment from the jury?
Adam Sorensen (42:35):
It’s not that they could do nothing. I think that if they’re not presented with a concrete proposed payment, that the statute has not conferred them authority to act in those circumstances. But also, I think that you don’t have to go that far because that’s really not this case. Here, we’re not presented with a situation like [inaudible], where you have one simple contract claim or a definite known amount here. We have, I think, a lot of uncertainty, and to Judge Randolph’s question about what exactly is going to be the nature of liability here? Are there going to be damages or tortious misconduct, which is unrelated to direct enforcement of the compensation terms of the contract? I just—I don’t read those answers to be clearly answered by the complaint.
Speaker 3 (43:21):
Do you agree with the district court that there’s something amiss by the FDIC rendering or an advisory opinion? FDIC is not bound by Article 3 of the Constitution. There’s nothing wrong with that, is there?
Adam Sorensen (43:39):
No. And I didn’t read the district court to be saying that the FDIC could not give parties guidance on its view of the law. I think what it meant by advisory opinion is that there are certain pieces of information that are just fundamentally unknown here. We don’t yet know the amount of any payment. We don’t net yet know the legal basis for recovery. And I read the district court to be saying that because those claims are hypothetical that is what renders this a—what do you call—an advisory opinion? Not that the agency can’t somehow offer the party’s guidance.
Speaker 2 (44:17):
Colleagues don’t have any further questions? No. All right. Mr. Sorensen, you are appointed by the court to defend the judgment of the district court, and we are very grateful for your assistance.
Adam Sorensen (44:29):
Thank you, Your Honor.
Speaker 2 (44:33):
Okay. Mr. Stevens, we’ll give you two minutes.
Duncan Stevens (44:40):
Thank you, Your Honor. I’ll do my best to be brief. Responding to Mr. Graebe. Just a couple points. It was the change of control that—in BBX, the changing control terminated the executive’s affiliation with the troubled institution. Here, the affiliation was nominally terminated a little bit before—about eight days before. But either way it comes to—it comes to the same thing. There are affiliations with Southern Community, even if the terminations didn’t happen eight days before, were terminated when Southern Community ceased to exist. The obligations were still those of Southern Community—of the troubled institution. And BBX is essentially—it presents essentially the same situation as this case.
Speaker 2 (45:32):
It seems like they did. They sent their complaint, and they did present this plain sort of employment breach of the employment contract, the right to keep working as an employee claim. It was in the papers before the FDIC. So are you here representing that the FDIC did not make a decision on whether that particular claim, if credited by a jury, would constitute a golden parachute, or not?
Duncan Stevens (45:59):
I want to be more precise on that, Your Honor. What was not presented to the FDIC was the theory that they would’ve become employees of the successor institution, which is a different theory. And I know it’s presented in the brief before this court, but it was not presented to the FDIC. What was presented to the FDIC was the idea that absent Capital Bank coming along and interfering with this relationship, Southern Community would’ve stuck around and they would’ve continued being employees of Southern Community. So that’s a different theory, and the idea is Southern Community team exist?
Speaker 2 (46:38):
They interfered with their continued employment. And everyone knew that Southern was going to get absorbed by Capital. And so they would’ve just gone on like I assume a lot of other Southern employees did after the merger and just keep on working. I don’t think anyone thought they were going to continue as Southern employees. Southern ceased to exist, did it not?
Duncan Stevens (46:58):
Yeah. And their theory is that they would’ve continued being Southern. And as I understand it, that Southern would’ve continued to exist. So that wouldn’t have been a merger. That is their—but what was not presented to the FDIC was the idea that they would’ve become employees of the successor institution. And that’s why I’m saying that this—that the theory was not presented to the FDIC.
Speaker 3 (47:29):
Is the FDIC decentralized?
Duncan Stevens (47:33):
I’m sorry.
Speaker 3 (47:34):
Is the corporation decentralized?
Duncan Stevens (47:38):
Decentralized?
Speaker 3 (47:40):
Right. Can decisions binding decisions over the signature of the FDIC be made by region?
Duncan Stevens (47:48):
Yes, they can.
Speaker 3 (47:50):
Where does that authority come from?
Duncan Stevens (47:52):
Well, the FDIC board has executed delegations of authority that in many cases reached the regional directors. So here, the division of risk management supervision has authority over golden parachutes and specifically the regional director within the RMS division.
Speaker 3 (48:07):
That’s why I asked whether it was decentralized. And some agencies or not. The only binding agency decision has to come out of their headquarters in Washington. But this one came out of the region, right? It wasn’t even the regional director that made it. It was an assistant, wasn’t it?
Duncan Stevens (48:27):
I think there’s been a sub-delegation by the regional director to an assistant regional director, but the authority came from the board originally, but the board is—has the FDIC’s board, but the FDIC’s board has delegated this authority.
Speaker 3 (48:43):
Is that, is that in CFR? The delegation?
Duncan Stevens (48:47):
The delegations are not on the CFR, but they are in the FDIC’s website. And I think the footnote is in—I think there’s a footnote in one of our—in our brief that that explains the delegation issue. I assume I’m out of time, so I’m going—I’ll be extremely brief as to the [inaudible] argument regarding needing to know the amount, it’s simply not definitional in the statute. The statute addresses payments. It doesn’t make a specific payment for a specific amount part of the definition.
Duncan Stevens (49:23):
And I guess I should clarify, because right at the outset, I talked about reaching the merits of this case. And I talked about the FDIC’s position. I suspect the banks would like very much for this court to reach the merits of the golden parachute issue. And since the banks are not arguing separately, they haven’t had that opportunity. But I know that they they’ve been litigating this for many years and they would prefer to not make it a 20-year saga when it’s already been almost 10.
Speaker 2 (49:54):
Okay. My colleagues have any further questions. Right. Thank you very much.
Duncan Stevens (49:59):
Thank you.
Speaker 2 (50:02):
All right, Mr. Graebe, we’ll give you two minutes as well.
Christopher Graebe (50:10):
I’ll just take up some of the issues that have come up in the preceding two arguments. On the issue of substantial responsibility, I want to be clear that in 359.4, substantial responsibility is only relevant when an institution is applying for permission to make a payment. It’s one of the factors that the FDIC has to take into account. It doesn’t create it. It doesn’t transmute a non-golden parachute payment into a golden parachute payment. And so the FDIC’s finding that we believe incorrect that Mr. Bower, Mr. Clark were substantially responsible has nothing to do with whether any of the payments that here are golden parachute payments. Second, the Amicus are said—I believe I got this right. If the number is calculable, it’s okay. And as I read that there needs to be some measure of damages available, some way to calculate it.
Christopher Graebe (51:03):
And that’s true here. There are measures of damages under North Carolina law for breach of contract. You’re entitled to be put in the position you would’ve been in had the contract been performed. And it’s the same with tortious interference, although our law is less well-developed on measure of damages. You’re entitled to any actual damages resulting from the tortious interference. And so they are calculable, and there’s a difference between calculable and calculated. This goes to the issue of bifurcation as the example that I raised in our briefing, that this is no different from a determination of liability, and then a separate subsequent determination of actual damages, the number down the road. Your Honor, this is a final word. This court and Supreme Court have been clear that an agency is not entitled to stretch its regulations beyond their language. That the FDIC could pass regulations governing these sorts of payments that we’re seeking in our state court action, and they haven’t. This attempt to impose golden parachute rules on successor, healthy institution simply goes beyond what the language will bear. They’re making a new rule without giving anyone opportunity to comment on that rule or to make any take any position on its wisdom. And so we would ask the court—
Speaker 2 (52:21):
One quick question. The FDIC’s characterization of your claim, the pure employ—what I call the pure employment contract claim, is that right? That it was premised on Southern—that their merger not happening and Southern continuing to exist.
Christopher Graebe (52:38):
Well.
Speaker 2 (52:38):
Or was it? I had—I was reading. I had thought it was also that you would’ve continued on as employees of Capital, but that could be totally my mistake.
Christopher Graebe (52:45):
If they had—if Southern Community had performed its contract, it would have either gotten Capital to assume and agree to perform the employment contracts. It would have, I believe, Your Honor, used the word seamlessly. It would’ve seamlessly become employees of Capital in the merger. And Capital would’ve been the employer under the contract justice. Southern Community was the employer before. But they would’ve been a healthy, non-troubled employer not subject to the golden parachute.
Speaker 3 (53:11):
If the contract provision was unenforceable because of the reasons given by the FDIC, there can be no tortious interference with an unenforceable contract in there?
Christopher Graebe (53:27):
If the court concludes that it was unenforceable, that Southern community was, could not have gotten Capital to assume and agree to perform the contracts, yes. I want to be clear, Judge Randolph, though. We’re not saying Southern Community owed termination payments when they fired Mr. Bauer and Mr. Clark, and so capitalized successor is responsible for those payments that Southern Community otherwise owed. That’s not our case. That’s the Hill case that’s cited in the briefing. That’s not this case. What we’re saying is had they performed, Bauer and Clark would’ve become employees of Capital in non‑troubled institution. Or if Capital takes a position in litigation that well—we—then merger would’ve been off. We wouldn’t have done that deal, and then the Southern Community had performed its contractual obligations to Bower and Clark to insist on Capital’s assuming and agreeing to perform the contracts. Then they would’ve—Bauer and Clark would’ve continued on as employees of Southern Community. Thank you, Your Honor.
Speaker 2 (54:36):
Thank you. The case is submitted.
Practices