Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-93-05093/USCOURTS-caDC-93-05093-0/pdf.json

Nature of Suit Code: 430
Nature of Suit: Banks and Banking
Cause of Action: 

---

<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued May 13, 1994 Decided July 1, 1994

No. 93-5093

OFFICE AND PROFESSIONAL EMPLOYEES 

INTERNATIONAL UNION, LOCAL 2,

STEPHEN WILDER, JACQUELINE WARREN, JEAN BENJAMIN,

PAMELA BLAND, DELORES CLAY, BARBARA SAMUELS,

LORETTA SCOTT,

APPELLANTS

v.

FEDERAL DEPOSIT INSURANCE CORPORATION,

FEDERAL DEPOSIT INSURANCE CORPORATION,

AS RECEIVER OF NATIONAL BANK OF WASHINGTON,

RIGGS NATIONAL BANK,

APPELLEES

Appeal from the United States District Court

for the District of Columbia

(90cv2454)

-

David R. Levinson argued the cause for appellants. With him on the

briefs was Lucinda M. Finley.

Jaclyn C. Taner, Counsel, Federal Deposit Insurance Corporation,

argued the cause for appellees. With her on the brief were Ann S.

DuRoss, Assistant General Counsel, Colleen B. Bombardier, Senior

Counsel, and Lawrence H. Richmond, Counsel, Federal Deposit

Insurance Corporation.

Before: WALD, SILBERMAN and RANDOLPH, Circuit Judges.

Opinion for the Court filed by Circuit Judge SILBERMAN.

SILBERMAN, Circuit Judge: Appellants, a union and the

terminated bank employees it represents, appeal the district

court's determination that the FDIC, as receiver, is not liable for

severance payments under a collective bargaining agreement that the

agency repudiated. We reverse.

USCA Case #93-5093 Document #67168 Filed: 07/01/1994 Page 1 of 14
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

I.

The National Bank of Washington and the Union were parties to

a collective bargaining agreement that provided, inter alia, that

if a reduction of staff was necessary for economic reasons, the

Bank would make severance payments to the terminated employees.

Employees who had worked for the Bank for more than six months but

less than one year were entitled to one week of pay upon

termination. Those who had worked for more than one year were to

receive two weeks' pay for each year of service.

On August 10, 1990, the Comptroller of the Currency declared

the Bank insolvent and appointed the FDIC as its receiver pursuant

to 12 U.S.C.A. §§ 191, 1821(c) (West 1989). Prior to its

appointment, the FDIC had engaged in negotiations to sell the Bank

to Riggs National Bank. Riggs and the FDIC agreed that the former

would purchase the Bank's assets but would not employ its existing

staff. Accordingly, on the same day that the FDIC was appointed

receiver, FDIC officials notified Bank employees gathered at

various branches that they were being laid off and told at least

some that severance payments would not be made. Four days later,

on August 14, 1990, FDIC officials met with union representatives

and formally repudiated the collective bargaining agreement, as the

agency is permitted to do under the Financial Institution Reform,

Recovery and Enforcement Act (FIRREA). See id. § 1821(e)(1)(A).

In accordance with statutory procedures, the employees filed

claims with the FDIC for severance pay, accrued vacation pay and

health benefits. After the agency refused to honor the employees'

claims, the union filed suit on their behalf. The FDIC acquiesced

USCA Case #93-5093 Document #67168 Filed: 07/01/1994 Page 2 of 14
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

partially and processed the claims for vacation pay and health

benefits, leaving severance pay as the only controverted item. The

district court initially dismissed the case on grounds that the

union lacked standing to bring the claims of Bank employees, a

decision that we reversed in Office & Professional Employees Int'l

Union, Local 2 v. FDIC, 962 F.2d 63 (D.C. Cir. 1992). On remand,

the district court granted summary judgment to the government on

the merits. See Office & Professional Employees Int'l Union, Local

2 v. FDIC, 813 F. Supp. 39 (D.D.C. 1993). The court determined

that the employees' rights to severance pay under the agreement had

not accrued at the moment of the insolvency because they were

contingent upon the employees' terminationwhich did not occur

until after the FDIC was appointed receiver. The court reasoned

that the FDIC's repudiation of the collective bargaining

agreementalthough not formally effected until four days after the

employees were terminated"relates back" to the moment of

insolvency because FIRREA limits the FDIC's liability for such

repudiation to damages "determined as of the date of the

appointment of the ... receiver." 12 U.S.C.A. §

1821(e)(3)(A)(ii)(I) (West 1989). Therefore, the court concluded,

the FDIC is not liable for severance pay under FIRREA.

II.

Appellants do not challenge the FDIC's authority to repudiate

the contract. Under the statute, the FDIC, within a reasonable

time after being appointed receiver, may repudiate any contract

that it thinks burdensome. See 12 U.S.C.A. § 1821(e)(1) (West

1989). The issue before us is the extent of the FDIC's liability

USCA Case #93-5093 Document #67168 Filed: 07/01/1994 Page 3 of 14
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

for damages. On that subject, FIRREA provides:

(3) Claims for damages for repudiation

(A) In general

Except as otherwise provided in subparagraph

(C) and paragraphs (4), (5), and (6), the liability

of the conservator or receiver for the

disaffirmance or repudiation of any contract

pursuant to paragraph (1) shall be

(i) limited to actual direct compensatory

damages; and

(ii) determined as of

(I) the date of the appointment of the

conservator or receiver; or

(II) in the case of any contract or

agreement referred to in paragraph (8),

the date of the disaffirmance or

repudiation of such contract or

agreement.

(B) No liability for other damages

For purposes of subparagraph (A), the term

"actual direct compensatory damages" does not

include

(i) punitive or exemplary damages;

(ii) damages for lost profits or opportunity;

or

(iii) damages for pain and suffering.

Id. § 1821(e) (emphasis added).

The union claims that the employees are entitled to severance

pay as "actual direct compensatory damages" stemming from the

repudiations. The FDIC counters with a two-pronged argument, that

appellants have no cognizable legal claim and alternatively that

the damages they seek do not qualify under the statute. The

district court, accepting the FDIC's first prong, determined that

the FDIC could terminate the Bank employees without incurring any

USCA Case #93-5093 Document #67168 Filed: 07/01/1994 Page 4 of 14
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

liability for severance pay because at the time the FDIC was

appointed receiver the employees' contractual rights to severance

pay had not yet "accrued"; the employees have valid claims only

after they are terminated. We disagree. The employees had a right

to severance pay as of the date of the appointmentalbeit a

contingent oneand that right should be treated essentially the

same as the right to accrued vacation pay or health benefits.

That severance payments are not paid unless and until an

employee is terminated (laid-off) for economic reasons, while

significant for determining the value of the payments at any given

time, does not mean that the right to such severance payments is

worthless until the date of termination. If the Bank, for

instance, had repudiated the collective bargaining agreement and

the union had chosen to sue for damages under section 301 of the

Taft-Hartley Act rather than, as would be typical, for enforcement

of the agreement, the district court surely would be obliged to

award the value of the repudiated severance pay provisions as

damages to the employees. So viewed, the employees' right to

severance pay is, contrary to the district judge's assumption,

"vested." It is part of the employee's compensation package which,

like health or life insurance, has a real present value

(discounted, as we explain below, by the likelihood that the

contingency triggering payment will not occur).

We do not quarrel with the district court's conclusion that no

significance attaches to the fact that the FDIC formally repudiated

the contract four days after the employees were terminated; under

(A)(ii)(I), the FDIC's repudiation relates back to the date of its

USCA Case #93-5093 Document #67168 Filed: 07/01/1994 Page 5 of 14
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

1Cf. Covey v. Commercial Nat'l Bank of Peoria, 960 F.2d 657,

660-61 (7th Cir. 1992) (discounting the value of a contingent

liability to determine whether a debtor is insolvent under 11

U.S.C. § 548(a)); In re Xonics Photochemical, Inc., 841 F.2d 198

(7th Cir. 1988); In re Chase & Sanborn Corp., 904 F.2d 588, 594

(11th Cir. 1990). 

appointmentat least for purposes of measuring the FDIC's

liability. The damages for which the FDIC is responsible are, by

statute, to be determined as of the date of the appointment of the

receiver. That means that the value of the severance payments

under the agreement should be discounted for the risk that the

employees would not be discharged for economic reasonsfor

instance, that the employees would quit, retire, die, or be

discharged for misconduct.1 (In this case, since the appointment

of the FDIC and the termination of the employees both occurred on

the same datethereby eliminating the contingenciesit is not

necessary to so discount the value of the severance payments.)

Such questions, however, deal not with whether appellants have a

claim but rather with how much the claim is worth. It is

established that the general rule requiring reasonable certainty in

damages"that all damages resulting necessarily and immediately and

directly from the breach are recoverable, and not those that are

contingent and uncertain," Story Parchment Co. v. Paterson

Parchment Paper Co., 282 U.S. 555, 563 (1931)applies only to the

former question and not to the latter. See id.; see also 1 ROBERT

DUNN, RECOVERY OF DAMAGES FOR LOST PROFITS § 1.3, at 11 (4th ed. 1992)

("While the proof of the fact of damages must be certain, proof of

the amount can be an estimate, uncertain or inexact."). In this

case, although the obligation to pay attaches only if an employee

USCA Case #93-5093 Document #67168 Filed: 07/01/1994 Page 6 of 14
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

2Since the severance payment clause is part of a collective

bargaining agreement, an employee is not guaranteed that such a

provision will remain in future agreements, or that the

collective bargaining relationship will last indefinitely

(although both typically do). Yet the Supreme Court held in

Nolde Bros., Inc. v. Local No. 358, Bakery and Confectionery

Workers Union, 430 U.S. 243 (1977), that a company which shut

down a plant and terminated its employees four days after a

collective bargaining agreement expired nevertheless was obliged

to proceed to arbitration to determine whether severance payments

had "accrued" or "vested" under the contract prior to its

expiration. (Like the FDIC here, the company agreed to pay

accrued vacation time.) And, in any event, there is no question

here that the agreement was in force when the FDIC repudiated it. 

were laid off for economic reasons, it can hardly be suggested that

this sort of protection lacks any immediate valueparticularly

after the last few years of "downsizing" in the American labor

market.2

The FDIC points to cases under ERISA which hold that severance

benefits are not "vested" under that statute and therefore the

employer has the right to terminate such benefits. See, e.g.,

Reichelt v. Emhart Corp., 921 F.2d 425, 430 (2d. Cir. 1990), cert.

denied, 111 S. Ct. 2854 (1991); Adams v. Avondale Indus., Inc.,

905 F.2d 943, 947 (6th Cir.), cert. denied, 498 U.S. 984 (1990);

Young v. Standard Oil (Indiana), 849 F.2d 1039, 1045 (7th Cir.),

cert. denied, 488 U.S. 981 (1988). These cases are inapposite,

however, since they stand only for the proposition that under

ERISA, unfunded, unvested severance pay provisions are "welfare"

benefit plans that the employer enjoys considerable flexibility to

alter, as opposed to "pension" benefit plans subject to much more

stringent statutory requirements. See Reichelt, 921 F.2d at 429;

compare 29 U.S.C. §§ 1021-31, 1101-14 (1988) with id. §§ 1051-85.

These cases do not address whether a promise to make severance

USCA Case #93-5093 Document #67168 Filed: 07/01/1994 Page 7 of 14
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

payments may be binding and enforceable under contract law. Cf.

Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 7 (1987) (state law

mandating certain severance benefits is not preempted by ERISA).

The agency's reliance on Massachusetts v. Morash, 490 U.S. 107

(1989), likewise is of no moment. The Court, in that ERISA case,

stated that "[u]nlike normal severance pay, the employees' right to

compensation for accrued vacation time is not contingent upon the

termination of employment." Id. at 120. That dictum merely

acknowledges the background contingency of this case; it does not

address the issue before us. 

The closest analogy to an obligation to make severance

payments that has been brought to our attention is a bank's

issuance of a standby letter of credit, which entitles the holder

of the letter to its face value from the bank if a third party

defaults. In traditional bank receivership law, where claims are

similarly determined at the date of insolvency, see United States

ex rel. White v. Knox, 111 U.S. 784, 787 (1884), it is settled that

standby letters of credit are valid ("provable" in receivership

parlance) claims against the receiver even though the bank's

obligation to pay is still contingent as of the date of insolvency.

See, e.g., Citizens State Bank of Lometa v. FDIC, 946 F.2d 408, 415

(5th Cir. 1991); FDIC v. Liberty Nat'l Bank & Trust Co., 806 F.2d

961 (10th Cir. 1986); First Empire Bank-New York v. FDIC, 572 F.2d

1361, 1367 (9th Cir.), cert. denied, 439 U.S. 919 (1978).

The FDIC attempts to distinguish these cases by claiming that

the holder's rights actually "vest" when the letters are issued,

not when they are presented; the banks had contracted to honor the

USCA Case #93-5093 Document #67168 Filed: 07/01/1994 Page 8 of 14
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

3In bankruptcy law, to which we may look while interpreting

FIRREA, see Office & Professional Employees Int'l Union, Local 2

v. FDIC, 962 F.2d 63, 68 (D.C. Cir. 1992), a controversy has

arisen as to whether severance payments are "administrative

expenses" of the estate such that they would receive priority

under the Bankruptcy Code. A number of courts, consistent with

our reasoning today, have held that severance pay is compensation

for employment services, some of which were rendered before the

bankruptcy and therefore does not receive priority as an

administrative expense. See, e.g., In re Pacific Far East Line,

Inc., 713 F.2d 476, 478 (9th Cir. 1983); In re Health

Maintenance Foundation, 680 F.2d 619, 621 (9th Cir. 1982); In re

Mammoth Mart, Inc., 536 F.2d 950, 953 (1st Cir. 1976); In re

Public Ledger, Inc., 161 F.2d 762, 771 (3d Cir. 1947). We note,

however, that a competing line of cases hold that severance

payments are administrative expenses because they compensate for

the loss incident to termination and therefore are "earned" in

toto when the employees are dismissed by the estate. See, e.g.,

Trustees of Amalgamated Ins. Fund v. McFarlin's, Inc., 789 F.2d

98, 104 (2d Cir. 1986); York v. NLRB, 709 F.2d 1138 (7th Cir.

1983).

letters, insolvency or not. Unlike a commercial letter of credit,

however, which imposes an absolute obligation on the bank to pay

the face value, a standby letter of credit is payable only if a

third party defaults and thus it imposes only a contingent

liability on the bank. See American Ins. Ass'n v. Clarke, 865 F.2d

278, 282 (D.C. Cir.), withdrawn in not relevant part, 865 F.2d 287

(D.C. Cir. 1988). A standby letter of credit is similar to the

promise of severance pay in that regard. Each obliges the bank to

pay upon the occurrence of a certain event: the former when the

third party defaults and the latter when the employee is terminated

for economic reasons. The receiver is liable for the standby

letter of credit even if the third-party default occurs after the

insolvency, see Citizen's Bank, 946 F.2d at 415, and we see no

reason why the result should be different for severance payments

where the termination is not effected until after the appointment

of the receiver.3

USCA Case #93-5093 Document #67168 Filed: 07/01/1994 Page 9 of 14
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

We do not address the question whether severance pay is an

"administrative expense" of the receivership under 12 U.S.C.A. §

1821(e)(7)(B) (West 1989), since that section by its own terms

applies only to personal services rendered after appointment of

the receiver. Here, it is undisputed that the employees were

terminated immediately after the FDIC was appointed and did not

serve the receivership in any capacity. 

4We note that the FDIC has authority to ban those agreements

outright under the "golden parachute" provision of the statute,

12 U.S.C.A. § 1828(k)(4) (West Supp. 1993). 

We think, therefore, that the employees (and the union on

their behalf) have a valid legal claim for severance pay based on

the FDIC's repudiation of the agreement. There remains the FDIC's

argument that the kinds of damages sought for that breach are not

"actual direct compensatory damages," in support of which the

agency relies primarily on Howell v. FDIC, 986 F.2d 569 (1st Cir.

1993). In that case, the First Circuit held that severance pay

agreements negotiated by four bank officers with a savings and loan

that failed less than a year later did not entitle them to damages

under 1821(e). Although the opinion is thoughtfully crafted

(indeed, the court took care to note that it reached its conclusion

"not without some misgivings," Howell, 986 F.2d at 572) and the

panel was apparently troubled by the prospect of severance

agreements reached in the shadow of insolvency,4 we disagree with

the court's analysis.

The First Circuit saw an employer's agreement to make

severance payments as a form of liquidatedand therefore, by

definition, not actualdamages for an injury that an employee might

suffer when terminated. The executives in that case sought an

agreement to make severance payments as inducement for their

remaining at the bank during a financially rocky period. The court

USCA Case #93-5093 Document #67168 Filed: 07/01/1994 Page 10 of 14
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

said the "officers may, or may not, have suffered injury by

remaining at the bank, depending on what options they had in the

past that are not available now." Id. at 573. But the court

overlooked, in our opinion, the point that an employer's promise to

make severance payments is part of the consideration of the

employment contract. (In that regard the First Circuit's approach

is really a variant of the district court's analysisthat a right

to severance payments is not "vested" until the actual economic

layoff takes place.)

So viewed, the injury occurs when the contractual right is

repudiated, and it matters not whether the executives would have

had other options when they entered into the contract or whether

they could find comparable jobs after termination. By looking to

past options, the First Circuit seemed to question the value of the

consideration the executives put uptheir continued

employmentwhich is beside the point. And by focusing on potential

opportunities, the court seemed to view severance pay as an

approximation of the employee's future salary for an agreed term.

Yet, as the court noted, the executives did not have a term

agreement; neither the bank nor the executives were obligated to

continue the relationship. See id. at 570. The necessary

implication of that observation is that the promised severance

payment was not a provision for liquidated damages since the bank

did not breach the employment contract by laying off the

executives. Instead, the promised severance payment was merely a

modification of the at will relationship; the bank could terminate

the officers, but if it did so in a manner that activated the

USCA Case #93-5093 Document #67168 Filed: 07/01/1994 Page 11 of 14
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

clause, it was obligated to make severance payments. The court

seemed to acknowledge this point, but dismissed it rather

cryptically: "[T]he at will status of the appellants is not

decisive; they did have contracts and our task is to see whether

the promised payments fit into FIRREA's compensable-damage

pigeonhole." Id. at 573 n.3. In our view, the latter inquiry is

necessarily resolved by the former observation. The at will

relationship means that severance payments are properly

characterized as consideration for entering into (or continuing

under) the employment contract and therefore are compensable as

actual damages under FIRREA when the contract is repudiated.

Therefore, because we believe the First Circuit miscategorized

the nature of severance provisions in employment contracts, we are

not persuaded by its reasoning. The union's claim here cannot be

rejected as seeking "liquidated damages" instead of actual damages.

One could still ask, howeverand the FDIC at least hints at this

argumentwhether severance payments are analogous to the sorts of

damages, particularly lost profits or opportunities, which Congress

explicitly excluded in section 1821(e)(3)(B)(ii). We think not.

Congress appears to us to have wished to distinguish between those

damages which can be thought to make one whole and those that are

designed to go somewhat further and put a plaintiff securely in a

financial position he or she would have occupied but for the

breach. Thus, lost opportunities and lost profits have a

speculative nature that severance pay does not. The latter, as we

have noted, has already vested and only its amount is subject to

contingencies, whereas whether future profits and opportunities

USCA Case #93-5093 Document #67168 Filed: 07/01/1994 Page 12 of 14
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

will be realized at all is a matter of speculation, since they have

not accrued at the time of the repudiation. And lost profitslike

future rent, which the statute also specifically precludes, 12

U.S.C.A. § 1821(e)(4) (West 1989)looks to what the plaintiff would

have earned in the future but for the breach. The defendant owes

them to the plaintiff not because the plaintiff has already accrued

or earned that amount under the contract but because, absent the

breach, the plaintiff would have been in a position to earn those

sums.

The FDIC implores us to look to the underlying purpose of

FIRREA. While acknowledging the complete absence of "any

illuminating legislative history," the First Circuit stated that

"[i]t is fair to guess that Congress, faced with mountainous bank

failures, determined to pare back damage claims founded on

repudiated contracts." Howell, 986 F.2d at 572. That may be so,

but the observation does not address the specific question we face

in this casenamely which damage claims, however few, are

preserved, for Congress did not eliminate all claims founded on

repudiated contracts. The necessary corollary to the limitation

that damage claims are to be "determined as of the date" of

insolvency is that all claims existing on that date are preserved.

Cf. FDIC v. Liberty Nat'l Bank, 806 F.2d 961, 965 (10th Cir. 1986)

("[I]t is as much the purpose of insolvency statutes to preserve

the rights existing at the time of insolvency as to prevent new

rights from arising thereafter.").

* * * *

Accordingly, we reverse the judgment of the district court and

USCA Case #93-5093 Document #67168 Filed: 07/01/1994 Page 13 of 14
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

remand the case for calculation of damages consistent with this

opinion.

So Ordered.

USCA Case #93-5093 Document #67168 Filed: 07/01/1994 Page 14 of 14