John Grogan, App. v. Seattle Bank, Et Ano, Resps. , 195 Wash. App. 500 ( 2016 )

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
JOHN GROGAN, an individual, No. 73704-0-
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Appellant, DIVISION ONE r~*c:
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PUBLISHED OPINION -,--'*
SEATTLE BANK, a Washington 3»» t/jph
State registered bank; and PATRICK
PATRICK, an individual; and S9
J.D. DELAFIELD, an individual, CO
FILED: August 22, 2016
Respondents.
Leach, J. — John Grogan appeals the trial court's dismissal of this lawsuit
against Seattle Bank (Bank). When the Bank hired Grogan, it agreed to pay
severance equal to three years' salary if his employment ended within 12 months
of a change in the Bank's control. As required by their agreement and Federal
Deposit Insurance Corporation (FDIC) regulations, the Bank sought FDIC
approval to pay an agreed severance payment plus attorney fees, costs, and
interest. The FDIC determined that any payment to Grogan greater than 12
months' salary, inclusive of amounts allocated to fees, costs, and interest,
violated its regulations about golden parachute payments and denied approval.
Grogan claims that the trial court should have ignored the FDIC determination
because it was wrong. The trial court decided that FDIC's determination
NO. 73704-0-1 / 2
preempted its authority to order any further payment to Grogan. We agree and
affirm.
FACTS
Seattle Bank hired John Grogan as its chief credit officer and executive
vice president in October 2008. The Bank agreed to pay Grogan a severance
payment equal to three years' salary if the Bank changed control and Grogan
resigned. The Bank did not seek preapproval of this employment agreement
from the FDIC. In December, the FDIC designated the Bank as "troubled." The
FDIC issued a cease and desist letter to the Bank in June 2009, which was
replaced by a memorandum of understanding.
In June 2010, Seattle Financial Group, the Bank's sole shareholder, sold
its shares, and the new shareholders elected a new board of directors. Grogan
resigned in May 2011 and requested a $540,000 severance payment he claimed
under his employment agreement. The Bank disputed that a change in control
had occurred and informed him that it needed FDIC approval before it could pay
him any amount. The parties negotiated unsuccessfully.
Grogan sued the Bank, its CEO (chief executive officer), Patrick Patrick,
and a board member, J.D. Delafield. In March 2013, the Bank and Grogan
negotiated a $500,000 settlement, subject to FDIC and Washington Department
of Financial Institutions approval. The Bank asked the FDIC for approval. In
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NO. 73704-0-1 / 3
May 2013, the FDIC rejected the settlement because the settlement amount
constituted a golden parachute payment under its regulations. It indicated that it
would consider approving a settlement that did not exceed 12 months' salary.
On April 25, the trial court ordered the Bank to obtain the regulatory
permission it needed to pay Grogan one year's salary, $180,000. The trial court
also ordered the Bank to pay Grogan attorney fees and costs and prejudgment
interest, with the amounts to be determined later. The FDIC sent a letter dated
May 6 to the Bank stating that
any payments to lAPs [institution-affiliated parties] that left the Bank
while a troubled designation was in force would be subject to
golden parachute restrictions and prohibited without prior FDIC
approval. Such payments include any amounts payable to or for
the benefit of lAPs pursuant to arbitration awards, judgments,
orders or other payments.
The Bank applied to the FDIC on May 23 for permission to pay Grogan
$180,000.00. Before the FDIC responded, the trial court awarded Grogan
$300,114.38 in attorney fees and $1,597.16 in costs but did not address
prejudgment interest. On June 12, the FDIC confirmed its receipt of the
application and advised the Bank that it would consider any attorney fees, costs,
and prejudgment interest subject to golden parachute regulations. It reminded
the Bank that it could not make these payments without first obtaining FDIC
approval and also reminded the Bank that it had denied the Bank's earlier
application to pay Grogan $500,000.
NO. 73704-0-1 / 4
The Bank filed a supplemental application on June 20 requesting
permission to pay Grogan the attorney fees and costs awarded by the trial court,
plus interest. It included a request that the FDIC make separate determinations
for the severance payment, the attorney fees, costs, and interest. In a July 2
letter, the FDIC denied all requests. It considered the requested payments in the
aggregate and found that together they constituted an excessive golden
parachute payment. It stated that it considered the amounts requested in the
aggregate because "the entire amount is for the benefit of Mr. Grogan and
therefore no meaningful distinction exists between the various types of proposed
payments for purposes of regulatory approval." The Bank requested
reconsideration on July 17, which the FDIC denied.
The parties then agreed to a $250,000 settlement, subject to FDIC
approval or nonobjection. The FDIC denied approval because the settlement
amount exceeded 12 months' salary.
At the Bank's request, the trial court vacated its orders and ordered the
Bank to seek FDIC approval to pay Grogan one year's severance. After the
FDIC approved the Bank's application, the Bank paid Grogan. The trial court
then dismissed the case. Grogan appeals.
NO. 73704-0-1 / 5
STANDARD OF REVIEW
This court reviews a trial court's order on summary judgment de novo,
affirming where no genuine issue of material fact exists and the moving party is
entitled to judgment as a matter of law.1
ANALYSIS
Grogan argues that the trial court should have ignored the FDIC decisions
denying the Bank permission to pay attorney fees, costs, interest, and the full
agreed severance amount. We disagree.
The FDIC insures all bank and savings association deposits and regulates
all insured depository institutions.2 FDIC regulations prohibit insured depository
institutions like the Bank from making golden parachute payments to lAPs like
Grogan.3 A "golden parachute payment" is one
in the nature of compensation by any insured depository
institution ... for the benefit of any current or former IAP pursuant
to an obligation of such institution .. . that. . . [i]s received on or
after... [a] determination by the insured depository
institution's . . . appropriate federal banking agency [that it is] in a
troubled condition.[4]
1 Annechino v. Worthy, 175 Wash. 2d 630, 635, 290 P.3d 126 (2012).
2 12U.S.C. §§ 1811, 1814.
3 12 U.S.C. § 1828(k); 12 C.F.R. § 359.
4 12 C.F.R. § 359.1(f).
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NO. 73704-0-1 / 6
FDIC's regulations permit payment of certain contractual obligations when that
payment falls outside the golden parachute payment definition or when an
exception applies.5
One exception allows payment when an employment contract provides for
a reasonable severance "not to exceed twelve months salary" to an IAP triggered
by a change in control of the institution.6 The FDIC must approve a payment
under this exception before it is made.7
The employment agreement between Grogan and the Bank made the
agreement terms subject to the FDIC's regulations about golden parachute
payments:
Notwithstanding anything in this Agreement to the contrary, if the
payments or benefits to be provided under this Agreement, together
with any other payments or benefits which the Executive has the
right to receive from the Bank or any entity which is a member of an
"affiliated group" of which the Bank is a member, constitute an
"impermissible parachute payment" (as defined in 12 CFR 359 et.
seq. (the "FDIC Parachute Payment Regulation")), then the
obligations under this Agreement shall be modified so as to be
consistent with FDIC Parachute Payment Regulation and the Bank
shall be allowed to modify the Agreement as required to ensure
ongoing compliance with such laws.
Grogan challenges the trial court's deference to two FDIC determinations.
He claims that the FDIC made wrong decisions that the trial court should have
5 12 C.F.R. § 359.1(f)(2); 12 C.F.R. § 359.4(a).
6 12 C.F.R. § 359.4(a)(3).
7 12 C.F.R. § 359.4(a)(3).
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NO. 73704-0-1 / 7
ignored. He contends that the FDIC improperly considered the payment of
attorney fees, costs, and interest to be part of a golden parachute payment. And
he claims that the FDIC erred by failing to apply an exception for payments
required by a state statute.8
Grogan argues that "[a]ttorneys' fee awards under Washington law are not
part of any 'golden parachute' and therefore do not require FDIC permission."
He asserts that an attorney fee award is not "'in the nature of compensation,'"
which is what golden parachute regulations control. He points to a different FDIC
regulation that prohibits the payment of both an indemnification payment and
attorney fees to an IAP and invokes a canon of statutory construction to show
that FDIC did not include attorney fee payments in the regulation barring golden
parachute payments.9
Grogan also points to an Internal Revenue Code (IRC) provision about
employer deductions that defines an excess parachute payment almost the same
as the FDIC regulations define a golden parachute payment. Because the IRC
provision has been interpreted by the Internal Revenue Service and courts not to
8 See 12 C.F.R. § 359.1 (f)(2)(vi).
9 See 12 C.F.R. §§ 359.1(l)(1), (2)(ii); Keene Corp. v. United States, 508
U.S. 200, 208, 113 S. Ct. 2035, 124 L Ed. 2d 118 (1993) ('"[W]here Congress
includes particular language in one section of a statute but omits it in
another. . . , it is generally presumed that Congress acts intentionally and
purposely in the disparate inclusion or exclusion.'" (alterations in original)
(internal quotation marks omitted) (quoting Russello v. United States, 464 U.S.
16, 23, 104 S. Ct. 296, 78 L. Ed. 2d 17 (1983))).
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NO. 73704-0-1 / 8
include attorney fees and costs paid or incurred in connection with excess
parachute payments, Grogan contends fees and costs cannot be considered part
of a golden parachute payment.10
Grogan also contends that the text of 12 C.F.R. § 359.1 (f)(2)(vi) excepts
attorney fees from the definition of a golden parachute payment:
(2) Exceptions. The term golden parachute payment shall not
include:
(vi) Any severance or similar payment which is required to be
made pursuant to a state statute or foreign law which is
applicable to all employers within the appropriate jurisdiction
(with the exception of employers that may be exempt due to
their small number of employees or other similar criteria).
Grogan asserts that the Bank should never have asked the FDIC for
permission to pay the fees, costs, and interest awarded by the trial court. He
claims that the Bank's inclusion of these amounts in its supplemental request to
the FDIC caused the FDIC to err as described. Thus, Grogan asserts that the
trial court erred when it failed to order the Bank to pay him attorney fees and it
vacated its award of fees to him.
Grogan asked the trial court, and now asks this court, to review and
reverse the FDIC's decision about what is part of a golden parachute payment.
10 See 26 U.S.C. § 280G(b)(2)(A); 26 C.F.R. § 1.280G-1.
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NO. 73704-0-1 / 9
As the Bank correctly notes, the FDIC's decision preempts the authority of a
state court to decide what the Bank must pay Grogan.
Under the supremacy clause of the United States Constitution, federal law
preempts state law where Congress indicates an express or implied intent to
occupy a field or where a state law would conflict with federal law.11 A defendant
may assert federal preemption as a defense to state court actions.12 But "[t]here
is a strong presumption against preemption and '[s]tate laws are not superseded
by federal law unless that is the clear and manifest purpose of Congress.'"13
"Federal regulations, within the scope of an agency's authority, have the same
preemptive effect as federal statutes."14
The Bank acknowledges that the federal regulations at issue do not
contain an express preemption clause. But it contends that conflict preemption
precludes Grogan's claims because the Bank could not comply with both the
FDIC's direction not to pay Grogan anything more than 12 months' pay-
including any payment characterized as attorney fees, costs, or interest—and a
trial court order requiring it to pay more. We agree.
11 U.S. Const, art. VI, cl. 2; Inlandboatmen's Union of the Pac. v. Dep't of
Transp., 119 Wash. 2d 697, 701, 836 P.2d 823 (1992).
12 Stevedoring Servs. of Am., Inc. v. Egqert, 129 Wash. 2d 17, 23, 914 P.2d
737 (1996).
13 Stevedoring, 129 Wash. 2d at 24 (some alterations in original) (quoting
Wash. State Physicians Ins. Exch. & Ass'n v. Fisons Corp., 122 Wash. 2d 299, 327,
858P.2d 1054(1993)).
14 Inlandboatmen's Union, 119 Wash. 2d at 702.
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NO. 73704-0-1/10
And state courts may not enforce contract provisions that contradict
federal law.15
When a federal statute condemns an act as unlawful the extent and
nature of the legal consequences of the condemnation, though left
by the statute to judicial determin ation, are nevertheless federal
questions, the answers to which are to be derived from the statute
and the federal policy which it has adopted. To the federal statute
and policy, conflicting state law and policy must yield.[16]
Grogan responds that the Bank cannot show that conflict preemption
applies. He asserts that federal regulations governing golden parachute
payments do not include attorney fees awarded under state statutes. But he
ignores the circumstance that the FDIC denied the Bank's application to pay
Grogan attorney fees and costs based on its interpretation of its own regulations
and putting any contrary state court interpretation in direct conflict.
Grogan argues that Christensen v. Harris County17 provides courts with
authority to give FDIC determinations and letters less deference than FDIC
regulations. Thus, he contends that FDIC determinations do not preempt state
court authority. But Grogan fails to appreciate that the deference discussed in
15 Sola Elec. Co. v. Jefferson Elec. Co., 317 U.S. 173, 176, 63 S. Ct. 172,
87 L. Ed. 165(1942) (holding that violation of Sherman Anti-Trust Act of 1890, 15
U.S.C. §§ 1-7, precluded enforcement of contract requiring price fixing); Awotin v.
Atlas Exch. Nat'l Bank of Chicago, 295 U.S. 209, 214, 55 S. Ct. 674, 79 L Ed.
1393 (1935) (prohibiting enforcement of contract provision violating the National
Bank Act, 12 U.S.C. §§ 21-26).
16 Sola Elec. Co., 317 U.S. at 176.
17 529 U.S. 576, 587, 120 S. Ct. 1655, 146 L. Ed. 2d 621 (2000).
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NO. 73704-0-1/11
Christensen is the deference a federal court gives to a federal agency
interpretation offederal law when that court reviews a federal agency decision. It
does not apply to a preemption analysis under the supremacy clause.
CONCLUSION
The FDIC's determination that prohibits the Bank from paying Grogan
more than one year's salary as severance, including amounts for attorney fees,
costs, and interest, preempts any state court authority to order more. We affirm.
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WE CONCUR:
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