Westport Bank & Trust Co. v. Geraghty, 593

Citation90 F.3d 661
Decision Date25 July 1996
Docket NumberNo. 593,D,593
PartiesIn the Matter of the Interpleader Between WESTPORT BANK & TRUST COMPANY, Plaintiff, v. M. James GERAGHTY and Norman M. Steere, Defendants-Cross-Claimants-Appellants, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Defendant-Cross-Defendant-Appellee. ocket 95-6101.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Evan M. Tager, Washington, D.C. (Andrew L. Frey, Mayer, Brown & Platt, Washington, D.C., of counsel), for Defendants-Cross-Claimants-Appellants.

Maria Beatrice Valdez, Federal Deposit Insurance Corporation, Washington, D.C. (Ann S. DuRoss, Assistant General Counsel, Colleen B. Bombardier, Senior Counsel, Jaclyn C. Taner, Counsel, Federal Deposit Insurance Corporation, Washington, D.C., of counsel), for Defendant-Cross-Defendant-Appellee.

Before: MAHONEY, LEVAL, and CABRANES, Circuit Judges.

MAHONEY, Circuit Judge:

This is an interpleader action brought by plaintiff Westport Bank & Trust Company ("Westport") against defendant-cross-defendant-appellee the Federal Deposit Insurance Corporation (the "FDIC") and defendants-cross-claimants-appellants Norman M. Steere and M. James Geraghty (collectively "Appellants"), the competing claimants to the corpora of three trusts that Westport served as trustee. The United States District Court for the District of Connecticut, Warren W. Eginton, Judge, granted the FDIC's motion for summary judgment on its claims to the corpora of the three trusts, denied Appellants' motions for summary judgment, and entered a corrected final judgment in favor of the FDIC on June 15, 1995.

We affirm the judgment of the district court.

Background

This action arises out of the failure of Citytrust, a state chartered, federally insured depository institution located in Bridgeport, Connecticut. In 1990, Citytrust qualified as a lending institution in a "troubled condition" within the meaning of § 32(a)(3) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Pub.L. No. 101-73, § 32(a)(3), 103 Stat. 183, 484 (1989) (codified at 12 U.S.C. § 1831i(a)(3)). 1 As a result, a Memorandum of Understanding dated October 17, 1990 (the "MOU") was entered into between the Board of Directors of Citytrust, the Regional Director of the FDIC, and the Banking Commissioner of the State of Connecticut (the "Commissioner") that imposed various requirements upon Citytrust to "address[ ] the financial and administrative deficiencies cited in [a] Report of Examination dated February 23, 1990." One such requirement was that Citytrust retain "management acceptable to the Regional Director and the Commissioner," including "a qualified individual to assume the duties of president."

Pursuant to the MOU, Citytrust undertook a search for a new president. Steere, who had retired in 1987 as vice chairman and a director of Mellon Bank Corporation and its subsidiary, Mellon Bank, N.A., soon became the leading candidate for the position, and Citytrust entered into negotiations with him. Steere made it clear that he would accept the position, which required him to relocate to Connecticut, only if he was provided adequate insurance against, inter alia, the possibility that Citytrust would terminate him before his employment contract expired. Citytrust then developed, in consultation with the FDIC, an arrangement whereby two separate trusts, each funded by $350,000, would be established as additional security for Steere in the event that Citytrust did not remit to him the severance benefits to which he would be entitled under his proposed employment agreement, which provided for Steere's employment as president and chief executive officer of Citytrust from November 5, 1990 to December 31, 1992, and for extension by mutual agreement for two additional two-year periods. When these trusts were subsequently established, Westport was designated trustee of both of them.

Paragraph 13(a) of the employment agreement provided that if Steere terminated the agreement because of an uncured default by Citytrust, Steere would be entitled to receive his annual base salary for the remainder of the agreement (i.e., to December 31, 1992) in a lump sum within thirty days of termination. Paragraph 13(e) provided that if Citytrust terminated the agreement other than for cause, Steere would be entitled to one year's salary in a lump sum within thirty days of termination. Steere's base salary was $350,000 per annum, and was to increase to $400,000 per annum on January 1, 1992.

The first of the Steere trusts was denominated a "secular" trust. The trust agreement provided that "[t]he principal of the Trust and any earnings thereon shall be held separate and apart from other funds of [Citytrust] and shall be used exclusively for the uses and purposes ... set forth [in the trust agreement]," and that "the Trust shall be irrevocable and may not be amended or terminated by [Citytrust] in whole or in part," subject to immaterial exceptions and to provisions allowing the trust to be terminated and its assets returned to Citytrust if the purposes of the Trust had been fully satisfied and Steere was "no longer entitled to benefits" thereunder. The trust agreement further specified that "[t]he Trust shall not be subject to the claims of creditors of [Citytrust] in a receivership, bankruptcy or other insolvency proceeding under federal or state law, but shall be maintained for the exclusive purpose of providing benefits to [Steere]." As beneficiary of this trust, Steere was entitled to payment

in the event that [his] employment is terminated under paragraph 13(a) of the Contract, "Termination for Good Reason" or under paragraph 13(e) ... [,] "Termination for Other th[a]n Cause[,]" and the base salary specified in said paragraphs is not paid by [Citytrust] in a lump sum within thirty (30) days of the effective date of such termination of employment (as defined in said paragraphs).

The secular trust agreement also states that the trust "is a funded Trust and, as such, it is intended that [Steere] be taxed in accordance with [I.R.C. s] 402(b) and [that Citytrust] shall be entitled to a deduction for payments to the Trust in accordance with [I.R.C. s] 404(a)(5)." Section 402(b)(1) provides in pertinent part:

Contributions to an employees' trust made by an employer ... shall be included in the gross income of the employee in accordance with section 83 (relating to property transferred in connection with performance of services), except that the value of the employee's interest in the trust shall be substituted for the fair market value of the property for purposes of applying such section.

I.R.C. § 402(b)(1). Section 402(b)(3) provides, however, that a beneficiary of such a trust "shall not be considered the owner of any portion [thereof]." Steere's trust agreement specifies that the secular trust "is intended to be a trust of which [Citytrust] is treated as the owner for federal income tax purposes in accordance with [I.R.C. §§ 671-679]." Generally speaking, this means that aside from the tax treatment of the original contribution to the trust, which is governed by I.R.C. §§ 402(b) and 404(a)(5) as just described, there would be "included in computing the taxable income and credits of [Citytrust] those items of income, deductions, and credits against tax [generated by] the trust." I.R.C. § 671; see also Resolution Trust Corp. v. MacKenzie, 60 F.3d 972, 974 (2d Cir.1995).

The second trust created for Steere was denominated a "rabbi" trust. Its terms correspond to those of Steere's secular trust in all but two respects. First, although specifying that Citytrust would be the owner of the rabbi trust for purposes of §§ 671-679, the rabbi trust agreement contained no provision for Steere to be taxed in accordance with § 402(b). Second, the rabbi trust agreement explicitly provided that the trust's assets would be subject to the claims of Citytrust's creditors at all times, and that in the event of Citytrust's insolvency, defined to include the appointment of a receiver "with respect to [Citytrust], by a State or Federal regulatory agency," the Trustee would "deliver any undistributed principal and income in the Trust to satisfy such claims as a court of competent jurisdiction may direct." Both trusts, however, were designed to secure Steere's rights to severance benefits under pp 13(a) and 13(e) of his employment agreement.

As previously stated, the FDIC was apprised on a continuing basis concerning the formulation of Steere's employment agreement and related trust agreements, and approved Steere's employment by Citytrust after the final agreements were provided to the FDIC. Accordingly, Steere and Citytrust executed the employment agreement on December 5, 1990, effective as of November 5, 1990, Steere's first day at work for Citytrust. Execution of the trust agreements was completed on December 6, 1990.

When Citytrust and the FDIC entered into the MOU, Geraghty had been employed by Citytrust for twenty-one years and was then its senior executive vice president in charge of the special asset management division. Citytrust received the FDIC's approval of Geraghty as a member of Citytrust management, as required by the MOU. However, in view of Citytrust's troubled financial condition and prospects for gainful employment elsewhere, Geraghty informed the chairman of Citytrust's board of directors that he would resign his position unless Citytrust could provide him with further job security. Citytrust responded by proposing an arrangement similar to Steere's: Geraghty's employment agreement would provide for appropriate severance payments, and a secular trust would be established in the amount of $185,000 to secure those payments. When this trust was subsequently established, Westport was designated its trustee.

The secular trust created for Geraghty corresponds to Steere's secular trust in all material respects. It secured the compensation to...

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