922 F.2d 1251 (6th Cir. 1991), 89-3451, Federal Sav. and Loan Ins. Corp. v. Quinn

Docket Nº:89-3451.
Citation:922 F.2d 1251
Party Name:FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION and Cardinal Federal Savings Bank, Plaintiffs-Appellees, v. Robert W. QUINN and Daniel J. Gannon, Defendants-Appellants.
Case Date:January 07, 1991
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

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922 F.2d 1251 (6th Cir. 1991)


Federal Savings Bank, Plaintiffs-Appellees,


Robert W. QUINN and Daniel J. Gannon, Defendants-Appellants.

No. 89-3451.

United States Court of Appeals, Sixth Circuit

January 7, 1991

        Argued April 5, 1990.

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        Irene C. Walker, Beth Whitmore, Harry D. Cornett, Jr. (argued), Arter & Hadden, Cleveland, Ohio, Stephen Kessler, Trial Atty., Office of the General Counsel, Washington, D.C., for plaintiffs-appellees.

        Nancy A. Shaw, Spieth, Bell, McCurdy & Newell, Cleveland, Ohio, Matthew J. Flynn (argued), John P. Fredrickson, James D. Friedman, Quarles & Brady, Milwaukee, Wis., for defendants-appellants.

        Before MERRITT, Chief Judge, KRUPANSKY and MILBURN, Circuit Judges.

        MERRITT, Chief Judge.

        This is an action to enjoin the payment of severance benefits arising from employment contracts between plaintiff Cardinal, a failed thrift, and defendant bank officials. The case requires an interpretation of whether a regulation allowing avoidance of some employment contracts of troubled savings and loans, 12 C.F.R. Sec. 563.39(5) (1990), permits the Federal Savings and Loan Insurance Corporation ("FSLIC") 1 and an insolvent thrift (Cardinal Federal Savings Bank) to avoid paying severance benefits to two officers recruited by FSLIC to prepare the thrift for acquisition. The regulation reads as follows:

        (5) All obligations under the [employment] contract shall be terminated, except to the extent determined that continuation of the contract is necessary of [sic] the continued operation of the association

        (i) by the Director or his or her designee, at the time the Federal Deposit Insurance Corporation or Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the association under the authority contained in 2(c) of the Federal Deposit Insurance Act; or

        (ii) by the Director or his or her designee, at the time the Director or his or her designee approves a supervisory merger to resolve problems related to operation of the association or when the association is determined by the Director to be in an unsafe or unsound condition.

Any rights of the parties that have already vested, however, shall not be affected by such action.

        12 C.F.R. Sec. 563.39(5)(i) and (ii) (1990). (Emphasis added).

        That ambiguous regulation provides in subsections (i) and (ii) that all obligations under employment contracts are terminated automatically by FSLIC at the time FSLIC enters an "agreement to provide assistance" to a struggling institution, or "approves a supervisory merger to resolve problems related to [the bank's] operation," or determines that the bank is "in an unsafe or unsound condition." 12 C.F.R. Sec. 563.39(5)(i) and (ii) (1990). There is an exception to termination, however, which we find to be applicable and to protect the contracts in question from termination. An employment agreement is made immune from termination under that regulation "to the extent determined that continuation of the contract is necessary [to] the continued operation of the institution." Id. at Sec. 563.39(5). Further, employee rights

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that have "vested" at the time of the assistance agreement are expressly excluded from automatic termination, id., a provision we find unnecessary to interpret in light of our disposition based on the above-mentioned exception.

        Defendants Quinn and Gannon, hired to manage the insolvent Cardinal Federal Savings Bank and to prepare it for acquisition, were fired after one year of service when First Nationwide Financial Services purchased Cardinal's assets and liabilities with FSLIC assistance. 2 After being fired by First Nationwide, defendants obtained the proceeds of certain letters of credit which secured the severance benefits, and Cardinal and FSLIC sued for a preliminary injunction to enjoin defendants from using the proceeds. The District Court issued the injunction. The defendant officers now appeal from District Judge Bell's order enjoining them from using the proceeds of letters of credit paid under a severance-pay agreement negotiated for Cardinal by FSLIC. Federal Sav. & Loan Ins. Corp. v. Quinn, 711 F.Supp. 366, 379 (N.D.Ohio 1989). We disagree with the District Court's conclusion that the preliminary injunction should issue. Although FSLIC, pursuant to section 563.39(5)(ii), apparently determined that Cardinal was in an "unsafe or unsound condition," which would ordinarily terminate Cardinal's obligations under its employment contracts with Quinn and Gannon, FSLIC triggered the exception through actions that amount to a determination that continuation of those employment contracts until their negotiated expiration date was necessary to improve Cardinal's "unsafe or unsound" condition. Therefore, because Quinn and Gannon were fired during the life of their employment contracts, which FSLIC knowingly entered into with the hope of rescuing Cardinal from insolvency, we vacate the District Court's order entering the preliminary injunction.


        FSLIC finally transferred Cardinal to First Nationwide on December 30, 1988, after exercising supervisory control for more than a year. During that period, Quinn (Chief Executive Officer) and Gannon (Chief Operating Officer) were recruited by FSLIC to help stave off Cardinal's impending insolvency flowing from years of alleged mismanagement by the prior officers, who stepped down under pressure from FSLIC. Shortly after beginning work on November 24, 1987, Quinn and Gannon, along with Cardinal's other officers, entered a consent agreement on December 17, 1987, under which the Federal Home Loan Bank Board ("Bank Board"), as operating head of FSLIC, took general supervisory control of Cardinal. Among the supervisory powers granted to the Bank Board was the right to approve or reject all employment contracts. Quinn and Gannon's contracts, approved by Cardinal on February 10, 1988 and by the Bank Board on July 14, 1988, followed lengthy negotiations with Gerald Summers, who supervised the insolvency and acquisition on behalf of FSLIC. The contracts were for one year, beginning November 24, 1987. When Quinn and Gannon were hired, they, FSLIC, and Cardinal understood that Cardinal would be acquired, that FSLIC assistance would be necessary to the acquisition, and that if anyone other than Chicago West Pullman--a private group of investors--acquired Cardinal, they would be fired.

        Apparently concerned about their job security in such uncertain times, Quinn and Gannon approached Summers and proposed some contractual protections for themselves, most of which were rejected. FSLIC did acquiesce, however, to a one-year automatic contract renewal if either party failed to give written notice of termination at least 90 days prior to the expiration of the contract. In fact, Quinn and

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Gannon's contracts were renewed on December 1, 1988 pursuant to this clause. 3 FSLIC also agreed to pay severance benefits to Quinn and Gannon if they were terminated without cause. Under the severance-benefits agreement, Cardinal was obligated to pay Quinn and Gannon's salaries until the end of the current term, plus 100% of their annual salaries, prorated benefits and unused vacation time, and to extend insurance and other benefits for one year. See Employment Agreements Sec. 2.5, J.A. at 307-09.

        In exchange for these benefits, Quinn and Gannon each accepted $100,000 less in annual salary than they had bargained for in the absence of the severance benefits. In addition to their $210,000 (Quinn) and $200,000 (Gannon) salaries, their benefits were collateralized by $820,000 (twice their annual salaries) in letters of credit issued by nonparty Society National Bank and secured by U.S. Treasury securities held by Cardinal. In order to draw down on the letters of credit, each officer needed only to present a sight draft and certificate of beneficiary showing that they were entitled to the funds.

        On December 30, 1988, First Nationwide Financial Services acquired Cardinal with FSLIC assistance and fired Quinn and Gannon eleven months before the expiration of their contracts. When Quinn and Gannon presented the required documentation to draw on the letters of credit, FSLIC and Cardinal sued, and FSLIC moved to enjoin payment. By agreement of the parties, and in order to release Society National Bank from further involvement in the dispute, the proceeds were paid to Quinn and Gannon, but were not to be wasted or otherwise encumbered pending the preliminary injunction hearing before Judge Bell. See Stipulated Judgment Entry.


        The District Court held that the employment contracts precluded the defendants, Quinn and Gannon, from obtaining their severance benefits. In so doing, the Court considered two distinct sections of the employment agreements. The first of those sections, section 2.8, incorporated the language of 12 C.F.R. Sec. 563.39 (1990), which releases FSLIC from all contractual obligations upon "entering an agreement to provide assistance on behalf of Employer." 4 That provision, however, "shall not effect rights hereunder which are vested at the time of such termination." Both Quinn and Gannon testified that they understood that section 2.8 was part of their employment agreements, and that it would be triggered in the event of a FSLIC-assisted acquisition. The District Court did not address that portion of section 2.8 and of the federal regulations referring to the continuation

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of contracts necessary to the continued operation of the troubled thrift.

        The second part of the employment agreements that the District Court addressed is section 4.1, which...

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