Carter v. Warren Five Cents Sav. Bank

• Decision Date: 09 January 1991
• Citation: Carter v. Warren Five Cents Sav. Bank, 564 N.E.2d 579, 409 Mass. 73 (Mass. 1991)
• Parties: Richard P. CARTER v. WARREN FIVE CENTS SAVINGS BANK.
• Court: Supreme Judicial Court of Massachusetts

Page 579

564 N.E.2d 579

409 Mass. 73

Richard P. CARTER v. WARREN FIVE CENTS SAVINGS BANK.

Supreme Judicial Court of Massachusetts Essex.

Argued October 3, 1990.

Decided Jan. 9, 1991.

Richard L. Neumeier (Paul M. Moretti, Boston, with him), for plaintiff.

Wilfred J. Benoit, Jr. (Daniel R. Deutsch, Boston, with him), for defendant.

Before LIACOS, C.J., and WILKINS, ABRAMS, NOLAN and O'CONNOR, JJ.

WILKINS, Justice.

The plaintiff (Carter), a former vice-president of the defendant (Warren Five), seeks recovery under a June 23, 1986, severance agreement between Carter and the Beverly Savings Bank (Beverly). On August 1, 1988, Warren Five acquired Beverly by merger and thereby assumed Beverly's obligations to Carter, who had been the senior vice-president of Beverly. Following the merger, Warren Five proposed to adjust Carter's responsibilities. Carter claims that changes in his duties after the merger triggered his right to resign, as he did on August 1, 1988, and to obtain amounts due under the severance agreement. The agreement provided that, if the obligation to pay arose, Carter was entitled to one dollar less than three times his average annual compensation over the five most recent years.

A judge of the Superior Court allowed Carter's motion for summary judgment and subsequently allowed his motion for attorney's fees but, without explanation, reduced the amount. Each party has appealed.

Warren Five argues that G.L. c. 172, § 14 (1988 ed.), forbids the payment of lump sum compensation on termination of the employment of an officer of a bank like Warren Five and thus bars Carter's claim. We reject this argument. We do, however, agree with Warren Five that there is a dispute of material fact, foreclosing the entry of summary judgment, concerning whether conditions have occurred that triggered Warren Five's obligation to pay Carter under the severance agreement. We also conclude that Carter is entitled to recover attorney's fees under the express terms of his severance agreement and that in such a circumstance, the judge could not properly award less than the attorney's fees charged to Carter without a ruling, supported by explicit findings of fact, that the fees charged were unreasonable.

1. The bank argues that, because G.L. c. 172, § 14, provides that officers elected by the bank's board of directors "shall hold their respective offices during the pleasure of the directors," the provision in Carter's severance agreement for the payment of a lump sum on "termination of his employment," as defined in that agreement, is unenforceable. This court might well conclude that, if a bank governed by § 14 discharged an officer who had a contract for his services for a fixed term, the bank would not be liable to that employee for the compensation agreed on for the balance of the term of the contract. Such is the nearly universal result in cases involving analogous language appearing both in the National Banking Act (12 U.S.C. § 24 [Fifth] [1982] [the bank's directors may dismiss officers "at pleasure"] ) ¹ and in certain State statutes. ² The reasoning behind the general rule is that no inhibition on a board's exercise of its pleasure to discharge an officer should be tolerated and that an obligation to pay future salary on the termination of an officer's employment would be such an inhibition.

The question before us is whether the general principle just expressed, assuming it were this court's view of the scope of § 14, should be applied to Carter's severance agreement and thus invalidate the bank's agreement to pay Carter the equivalent of almost three years' compensation, if, after a change of control, Carter resigned following what he, in good faith, judged to be a demotion. In effect, we must decide whether a bank subject to § 14 is forbidden from offering enforceable "golden parachutes" ³ to its officers. ⁴

When the language now appearing in § 14 was first adopted in this State, circumstances were different. There were no golden parachutes. We are unwilling to read into a statute that says nothing explicitly about executive compensation a rule that invalidates an arm's-length transaction entered into to benefit the bank, by encouraging a key executive to stay in its employ in the face of the uncertain consequences of a possible merger of the employer-bank into another entity.

We are not dealing here with a demotion or discharge made for cause or due to financial constraints, reasons that would typically result from directors' action taken to protect the interests of a bank. Rather, in order to allay Carter's concerns about his future employment if the employer-bank were not to survive any merger and were not to retain his services during the transition (and beyond) and to encourage his continued employment, Beverly entered into the separation agreement with him. See Koenings v. Joseph Schlitz Brewing Co., 126 Wis.2d 349, 370-371, 377 N.W.2d 593 (1985).

The Warren Five was fully aware of Carter's severance agreement and those of other Beverly officers. As part of the merger, other officers waived the change of control provisions of their severance agreements. Carter did not. The Warren Five understood that it would be liable to Carter if it demoted him, as defined in the agreement, after a change in the ownership of Beverly. The Warren Five is entitled to argue that conditions triggering its severance obligations to Carter have not occurred (a point we come to next), but § 14 does not invalidate those severance obligations. We are strengthened in our view of the limited reach of § 14 by the absence of any case invalidating a similar agreement under the cognate Federal and State statutes. ⁵

2. The crucial issue under the terms of Carter's severance agreement is whether, in Carter's good faith judgment, there was a significant change in his responsibilities or duties after the merger. The severance agreement provides that, if certain events occur within seven years after a change of control of Beverly (there was such a change), Carter may resign his employment and receive severance compensation. The only event on which Carter relies is that set forth in the agreement as follows: "in the judgment of the Executive (such judgment being exercised in good faith), a significant change in the Executive's responsibilities and/or duties which constitutes, when compared to the Executive's responsibilities and/or duties before the 'change of control' ..., a demotion."

To recover Carter must have made a good faith judgment that there was a significant change in his duties or responsibilities that constituted a demotion. Warren Five argues that Carter may recover only if in good faith he resigned because of the demotion. The reason for Carter's resignation is not referred to in his severance agreement. ⁶ The sole issue concerning good faith is whether Carter in good faith judged that he had been demoted. ⁷

The question is whether Carter believed, subjectively and in good faith, that he had been demoted. If he did, he is entitled to recover. If, however, he did not believe in good faith that he had been demoted but rather used the circumstances to claim a demotion and to resign, he is not entitled to recover. In deciding whether Carter exercised his judgment in good faith, the perception of the circumstances by a reasonable person in Carter's position is relevant. If such a reasonable person would not have regarded the change as a demotion, Carter would have to prove that he nevertheless did so regard it. On the other hand, the fact that a reasonable person in Carter's position would conclude that he was demoted would tend to support the good faith of his subjective judgment on the issue.

The evidence in the summary judgment record shows a dispute of material fact concerning whether Carter made a good faith judgment that his duties after the change of ownership changed significantly so as to constitute a demotion. Clearly, Warren Five changed the duties that Carter was to perform after the merger. Carter had been Beverly's only senior vice- president. He was responsible for residential real estate lending, including construction lending (which represented about half of Beverly's lending activity), commercial lending, commercial real estate, consumer lending, loan servicing and joint ventures. He had approximately thirty-five people reporting to him. It was proposed that Carter would be one of Beverly's four senior vice-presidents and its senior residential lending officer, with responsibility for all...