Hampton Roads Bankshares, Inc. v. Harvard

• Decision Date: 14 January 2016
• Docket Number: Record No. 150323.
• Citation: Hampton Roads Bankshares, Inc. v. Harvard, 291 Va. 42, 781 S.E.2d 172 (2016)
• Parties: HAMPTON ROADS BANKSHARES, INC., et al. v. Scott C. HARVARD.
• Court: Virginia Supreme Court

291 Va. 42

781 S.E.2d 172

HAMPTON ROADS BANKSHARES, INC., et al.

v.Scott C. HARVARD.

Record No. 150323.

Supreme Court of Virginia.

Jan. 14, 2016.

Scott W. Kezman(Kaufman & Canoles, on brief), Norfolk, for appellants.

William H. Shewmake(Charles M. Sims ; John "Jack"M. Robb, III; LeClairRyan, on brief), Richmond, for appellee.

Amicus Curiae: United States; Alisa B. Klein(William E. Havemann, on brief), in support of appellants.

Present: All the Justices.

Opinion by Justice WILLIAM C. MIMS.

In this appeal, we consider whether a financial institution participating in the federal Troubled Assets Relief Program ("TARP") can assert the federal prohibition on "golden parachute payments" as a defense to a breach of contract action brought by one of its former senior executive officers, and whether said officer may collaterally attack the prohibition as an unconstitutional taking without just compensation.We also consider whether a fee shifting provision in an employment agreement falls within the scope of a prohibited "golden parachute payment."

I.BACKGROUND AND MATERIAL PROCEEDINGS BELOW

A.Background

Scott C. Harvard("Harvard") was the president and chief executive officer of Shore Bank, as well as the chief executive officer of its parent holding company, Shore Financial Corporation.On January 8, 2008, Harvard and Shore Bank entered into a new employment agreement (the "Employment Agreement") occasioned by a merger between Shore Financial Corporation and Hampton Roads Bankshares.Hampton Roads Bankshares was the surviving entity.

Pursuant to the Employment Agreement, Harvard became an executive vice president of Hampton Roads Bankshares, while continuing to serve as Shore Bank's president and chief executive officer.¹The Employment Agreement provided a generous compensation package, including, among other benefits, an annual base salary of not less than $250,000, a $244,000 retention bonus, $400,000 in deferred compensation, a car allowance, country club membership dues, and a $175,000 non-compete payment.

The Employment Agreement contained additional provisions governing compensation in the event of termination.In relevant part, Section 3(b)(iii) permitted Harvard "to terminate his employment ... within six (6) months after the occurrence of a ‘Change in Control’ with respect to HRB, its successors or assigns, ... in which case Employer shall be obligated to pay the Officer and furnish him the benefits provided in Section 4 hereof."Section 4 provided for a "severance allowance," defined as "2.99 times (2.99x) the base amount" and payable in sixty equal monthly installments.The "base amount" was equal to Harvard's "average annualized includible compensation" for "the most recent three (3) taxable years ending before the date on which the Change of Control occurs."²

At the same time that the parties entered into the Employment Agreement, America was descending into the Great Recession, precipitated by a financial downturn that began in August 2007.SeeMarc Labonte, Cong. ResearchServ., R40198, The 2007–2009 Recession: Similarities to and Differences from the Past 7 (2010).On October 3, 2008, in response to the developing financial crisis, Congress enacted the Emergency Economic Stabilization Act of 2008, Pub.L. No. 110–343,122 Stat. 3765("EESA").Congress designed EESA"to immediately provide authority and facilities that the Secretary of the Treasury can use to restore liquidity and stability to the financial system of the United States."EESA § 2, 12 U.S.C. § 5201.To that end, the act created TARP and authorized the Secretary to purchase "troubled assets" from financial institutions to promote market stability.EESA §§ 3, 101, 12 U.S.C. §§ 5202, 5211.

EESA imposed conditions on financial institutions that elected to participate in TARP, requiring adherence to certain standards for executive compensation and corporate governance.As relevant to this case, it prohibited participating financial institutions from "making any golden parachute payment to its senior executive officer during the period that the Secretary holds an equity or debt position in the financial institution."EESA § 111(b)(2)(C)(then codified at 12 U.S.C. § 5221(b)(2)(C) ).At the time, the term "golden parachute payment" was not defined in EESA.

In subsequent regulations implementing EESA and TARP, Treasury defined a "golden parachute payment" as

any payment in the nature of compensation to (or for the benefit of) a [senior executive officer] made on account of an applicable severance from employment to the extent the aggregate present value of such payments equals or exceeds an amount equal to three times the [senior executive officer's] base amount.

TARP Capital Purchase Program, 73 Fed. Reg. 62205, 62209(Oct. 20, 2008)(then codified at 31 C.F.R. § 30.9(a) )("October Rule").

During the 2008 financial crisis, HRB was threatened by "[d]ramatic declines in the housing market," related "turmoil and tightening of credit" throughout the financial market, and a corresponding "lack of confidence in the financial market."Hampton Roads Bankshares, Form 10–K, Annual Report for the Fiscal Year EndedDecember 31, 2008, at 16.Consequently, HRB applied to participate in TARP.

On December 31, 2008, HRB and the federal Department of the Treasury("Treasury") entered into an agreement for TARP funding (the "TARP Agreement") whereby Treasury recapitalized HRB with an infusion of $80.3 million that HRB agreed to use "to expand the flow of credit to U.S. consumers and businesses ... to promote the sustained growth and vitality of the U.S. economy."³This cash infusion helped HRB weather significant losses throughout 2009.SeeHampton Roads Bankshares, Form 10–Q, Quarterly Report for the Quarterly Period EndedSeptember 30, 2009, at 4.The TARP Agreement required HRB to comply with the limits on executive compensation set forth in EESA and its implementing regulations.Significantly, in the TARP Agreement HRB also agreed that Treasury could "unilaterally amend any provision of this Agreement to the extent required to comply with any changes after the Signing Date in applicable federal statutes."

On the same day that HRB and Treasury entered into the TARP Agreement, Harvard agreed to amend the Employment Agreement to comply with EESA and its implementing regulations.Specifically, Harvard acknowledged that, in consideration of the $80.3 million cash infusion obtained pursuant to the TARP Agreement, HRB was required to amend its existing compensation agreements to comply with EESA.He also acknowledged that he would receive personal benefits from HRB's participation in TARP.Accordingly, Harvard agreed to a marginal modification of his golden parachute payment to comply with the October Rule.Harvard also agreed that the golden parachute payment provision in the amended Employment Agreement would be construed and administered to comply with EESA§ 111,12 U.S.C. § 5221.

Also on that day, HRB acquired Gateway Bank, which resulted in a "Change of Control" under the Employment Agreement.Thus, the acquisition triggered Harvard's right to terminate his employment within six months from the change in control and receive the golden parachute payment.

On February 17, 2009, Congress amended EESA by enacting the American Recovery and Reinvestment Act of 2009, Pub. L. No. 111–5,123 Stat. 115("ARRA").It overrode Treasury's definition of a "golden parachute payment" in the October Rule, defining the term as

any payment to a senior executive officer for departure from a company for any reason, except for payments for services performed or benefits accrued.

ARRA § 7001,12 U.S.C. § 5221(a)(2).⁴On June 15, 2009, Treasury issued an interim final rule implementing the ARRA amendments to EESA.TARP Standards for Compensation and Corporate Governance, 74 Fed. Reg. 28394(June 15, 2009)(codified at 31 C.F.R. pt. 30)("June Rule").The preamble to the June Rule explained that "[g]iven the language of the ARRA, there is no longer any exception for any amount of a golden parachute payment....In addition, a golden parachute payment is treated as paid at the time of the employee's departure, regardless of when the amounts are actually paid."Id. at 28399;see alsoid. at 38414(codified at 31 C.F.R. § 30.9 ).The June Rule further clarified that a "golden parachute payment" included a payment due to a change in control.Id. at 28408(codified at 31 C.F.R. § 30.1 ).

On June 24, 2009, Harvard terminated his employment, citing HRB's acquisition of Gateway Bank and requesting the golden parachute payment pursuant to the change in control provision in the Employment Agreement.After consulting with Treasury, HRB refused to make that payment.

B.Material Proceedings Below

Harvard filed a breach of contract action against Shore Bank and HRB in the Circuit Court of the City of Norfolk.In Count I, Harvard alleged that HRB had breached the Employment Agreement by refusing to make the golden parachute payment.In Counts II through IV, he alleged that HRB had breached the Employment Agreement by refusing to pay his attorney's fees for the current breach of contract action, a declaratory judgment action previously filed in the circuit court by Harvard, and a declaratory judgment action previously filed in federal court by HRB.

HRB filed a plea in bar to Count I.In its plea in bar, HRB argued that the prohibition on golden parachute payments in EESA § 111, as implemented by the June Rule, barred it from paying Harvard pursuant to the Employment Agreement.In its answer, HRB asserted that federal law also barred it from paying the attorney's fees sought by Harvard.In response, Harvard argued that HRB could not assert EESA § 111, as implemented by the June Rule, as an affirmative defense to his breach of contract claim.Harvard asserted that if federal law barred HRB from making the golden parachute payment, then it would result in a taking of his contractual rights without just compensation, and...