Court Opinion

ID: 4027218
Source: CourtListenerOpinion
Date Created: 2016-08-22 19:20:57.823714+00
Date Added: 2024-06-11T14:34:13.046639
License: Public Domain

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON

JOHN GROGAN, an individual,                     No. 73704-0-

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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).
                                            -5-
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).
                                           -6-
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))).
                                             -7-
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.
                                       -8-
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.
                                            -9-
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).
                                         -10-
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.

                                                       /&&**# sV
WE CONCUR:

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