Bauer v. Fed. Deposit Ins. Corp.

38 F.4th 1114

F. Scott BAUER and Jeffrey T. Clark, Appellees

v.FEDERAL DEPOSIT INSURANCE CORPORATION, Appellant

Southern Community Financial Corporation, et al., Appellees

No. 20-5314

C/w 20-5315, 20-5322

United States Court of Appeals, District of Columbia Circuit.

Argued December 7, 2021

Decided July 5, 2022

Duncan N. Stevens, Counsel, Federal Deposit Insurance Corporation, argued the cause for appellant. With him on the briefs were J. Scott Watson, Senior Counsel, Paul K. Sun, Jr., Curtis J. Shipley, and Kelly Margolis Dagger.

Christopher T. Graebe argued the cause and filed the briefs for appellees F. Scott Bauer and Jeffrey T. Clark.

Adam L. Sorensen argued the cause as amicus curiae in support of the District Court's Order. With him on the brief was Joseph R. Palmore, appointed by the court.

Before: Millett and Katsas, Circuit Judges, and Randolph, Senior Circuit Judge.

Millett, Circuit Judge:

In the wake of a proposed merger, two high-level bank executives, F. Scott Bauer and Jeffrey T. Clark, were fired because they refused to accept a reduction in the amount of a payment that had been contractually provided for them if control of the bank changed hands. Bauer and Clark filed suit in state court against the bank that terminated them, as well as the bank with which it had merged. They alleged that they were legally entitled to the full change-in-control payments set out in their original employment agreements and other relief.

The banks turned to the Federal Deposit Insurance Corporation ("FDIC") for guidance as to whether any payments made to Bauer and Clark in the state court litigation would constitute statutorily restricted "golden parachute payment[s]," 12 C.F.R. § 359.2, and, if so, whether the FDIC would grant an exception to the general bar on such payments. After reviewing the parties’ submissions, the FDIC responded that any such payments would constitute golden parachutes, and that it would not grant consent for them to be made.

Bauer and Clark then filed suit in federal district court, challenging the FDIC's determination as unlawful under the Administrative Procedure Act ("APA"), 5 U.S.C. § 706(2).

Over the collective objection of the banks, Bauer, Clark, and the FDIC, the district court declined to reach the merits, instead holding that the FDIC lacked authority to render a golden parachute determination at all because the banks’ application to the FDIC did not identify a specific proposed payment amount.

We reverse. Nothing in the relevant statute or regulations requires that the FDIC be presented with a precise dollar figure before it has the power to determine whether a proposed payment qualifies as a golden parachute payment. As for the language in the regulations on which the district court relied, stating that the application "shall contain * * * [t]he cost of the proposed payment[,]" that provision imposes a procedural requirement only on the applicant. 12 C.F.R. § 303.244(c)(4). It does not constrain the FDIC's authority to act. For those reasons, we reverse the district court's holding that the FDIC exceeded its authority in issuing its golden parachute determination, and remand for the district court to address the merits of Bauer's and Clark's APA claims.

I

A

Under the Federal Deposit Insurance Act, the FDIC regulates the activities of both "insured depository institution[s]," which are banks and savings associations with deposits insured by the Corporation, and "institution-affiliated part[ies]," which include the directors, officers, employees, and controlling shareholders of insured depository institutions. 12 U.S.C. § 1813(c)(2), (u)(1). The FDIC's responsibilities include supervising and examining covered institutions to ensure financial stability and soundness. See id. §§ 1816–1818, 1822. If the FDIC finds that a bank is engaging in "unsafe or unsound" practices, the FDIC may issue a consent order under which it lays out remedial conditions that must be met and monitors the bank's compliance with those conditions. Id. § 1818(b).

One of the financial practices the FDIC closely superintends is the doling out of so-called "golden parachute payment[s]." 12 U.S.C. § 1828(k)(1). These are large payments promised in advance to executives in the event that they are fired or the company is acquired. See Wollschlager v. FDIC , 992 F.3d 574, 578 (6th Cir. 2021). Companies may promise golden parachute payments to entice sought-after executives or to ensure that those executives act in the best interests of the company even when doing so might put them out of a job (as in the case of a merger or takeover). But making good on those promised payments may put more financial stress on an already struggling institution or unjustly reward those who contributed to the financial woes of the institution.

The Federal Deposit Insurance Act expressly provides that the FDIC "may prohibit or limit, by regulation or order, any golden parachute payment[.]" 12 U.S.C. § 1828(k)(1). The Act's technical definition of "golden parachute payment" is:

any payment (or any agreement to make any payment) in the nature of compensation by any insured depository institution or covered company for the benefit of any institution-affiliated party pursuant to an obligation of such institution or covered company that—

(i) is contingent on the termination of such party's affiliation with the institution or covered company; and

(ii) is received on or after the date on which * * * the institution's appropriate Federal banking agency determines that the insured depository institution is in a troubled condition[.]

12 U.S.C. § 1828(k)(4)(A).

The FDIC's regulatory definition of "golden parachute payment" largely tracks that of the statute, though it adds that (1) the payment can be made by the insured depository institution itself or that institution's holding company, (2) the recipient can be either a former or current institution-affiliated party, (3) the payment can be contingent on, or by its terms payable on or after, the termination of the party's affiliation, and (4) the payment can be received on or after, or be made in contemplation of, the institution falling into a financially troubled condition. Compare 12 C.F.R. § 359.1(f), with 12 U.S.C. § 1828(k)(4)(A). The regulations also clarify that, to qualify as a golden parachute, the payment must be made to a party whose affiliation with the institution is terminated at a time when the institution is in a troubled condition. 12 C.F.R. § 359.1(f)(1)(iii).

The Act directs the FDIC to "prescribe, by regulation, the factors to be considered" in prohibiting or limiting golden parachute payments, adding that those factors "may include[,]" among other things, "[w]hether there is a reasonable basis to believe that the institution-affiliated party is substantially responsible for * * * the troubled condition of the depository institution[,]" and whether "the payment reasonably reflects compensation earned over the period of employment[.]" 12 U.S.C. § 1828(k)(2)(B)(iii), (k)(2)(F)(i).

The FDIC's regulations generally prohibit golden parachute payments, stating that "[n]o insured depository institution * * * shall make or agree to make any golden parachute payment, except as provided in this part." 12 C.F.R. § 359.2. The regulations then identify four narrow exceptions to that prohibition. See Id. § 359.4(a). One exception is if the FDIC "determines that such a payment or agreement is permissible[.]" Id. § 359.4(a)(1). But for that exception to apply, the applicant seeking FDIC consent must "demonstrate that it does not possess and is not aware of any information" indicating "a reasonable basis to believe, at the time such payment is proposed to be made," that the anticipated recipient of the payment "is substantially responsible for * * * the troubled condition" of the institution. Id. § 359.4(a)(4).

The regulations also provide that, in determining whether to make an exception, the FDIC "may consider: (1) [w]hether, and to what degree, the [recipient] was in a position of managerial or fiduciary responsibility; (2) [t]he length of time the [recipient] was affiliated with the [financial institution], and the degree to which the proposed payment represents a reasonable payment for services rendered over the period of employment; and (3) [a]ny other factors or circumstances which would indicate that the proposed payment would be contrary to the intent" of the statute or regulations. 12 C.F.R. § 359.4(b) (emphasis added).

Any entity seeking the FDIC's consent to a golden parachute payment must submit an application to the appropriate FDIC regional director. 12 C.F.R. § 303.244(b). That application "shall contain[:]"

(1) The reasons why the applicant seeks to make the payment; (2) An identification of the institution-affiliated party who will receive the payment;

(3) A copy of any contract or agreement regarding the subject matter of the filing;

(4) The cost of the proposed payment and its impact on the institution's capital and earnings;

(5) The reasons why the consent to the payment should be granted; and

(6) Certification and documentation as to each of the points cited in § 359.4(a)(4) [including that the recipient of the payment is not substantially responsible for the troubled condition of the institution].

Id. § 303.244(c).

B

Bauer and Clark were senior executives at Southern Community Bank and Trust and the bank's holding company, Southern Community Financial Corporation (collectively, "Southern Community"). Bauer founded the bank and was its Chief Executive Officer and Chairman of the Board of Directors. Clark joined the bank in its first year and served in the roles of President and Chief Commercial Banking Officer.

In 2006 and 2007, Bauer and Clark entered into a series of employment agreements with Southern Community. Under the agreements, Southern Community had the right to terminate Bauer and Clark without cause as long as it provided 60 days’ notice. If they were terminated without cause, Bauer and...