Kenneth R. Vaught v. Green Bankshares, Inc.

IN THE COURT OF APPEALS OF TENNESSEE

AT KNOXVILLE

February 9, 2016 Session

KENNETH R. VAUGHT v. GREEN BANKSHARES, INC., ET AL.

Appeal from the Chancery Court for Knox County

No. 1818482 Clarence E. Pridemore, Jr., Chancellor

No. E2015-01259-COA-R3-CV-FILED-APRIL 18, 2016

This appeal arises from an effort by a former bank employee to collect certain deferred

compensation payments. Kenneth R. Vaught (―Vaught‖) filed a complaint against his

former employer, Green Bankshares, Inc., and its wholly owned subsidiary, Greenbank

(―Greenbank‖), in the Chancery Court for Knox County (―the Trial Court‖). Both sides

agree Vaught is entitled to certain deferred compensation. The issue is the amount.

According to Greenbank, Federal Deposit Insurance Corporation (―FDIC‖) and Troubled

Asset Relief Program (―TARP‖) regulations prevent payment of the total amount

requested by Vaught as it would constitute a prohibited ―golden parachute.‖ After a trial,

the Trial Court found in favor of Vaught, awarding him the full amount. Greenbank

appeals. On appeal, FDIC, amicus curiae, argues that the additional deferred

compensation payment to Vaught constitutes a prohibited golden parachute. We hold

that the Trial Court‘s judgment places Greenbank in the untenable position of having to

either disobey the Trial Court‘s judgment or flout federal regulations and FDIC. We

vacate the judgment of the Trial Court, remand this case to the Trial Court, and order a 60

day stay, during which time Vaught may pursue, should he elect to do so, other avenues

of relief, including via the Administrative Procedure Act (―the APA‖) to challenge

FDIC‘s determination.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Vacated;

Case Remanded

D. MICHAEL SWINEY, C.J., delivered the opinion of the court, in which CHARLES D.

SUSANO, JR., and THOMAS R. FRIERSON, II, JJ., joined.

Edward H. Trent and Mary M. Helms, Knoxville, Tennessee, for the appellants, Green

Bankshares, Inc. and Greenbank.

Craig L. Garrett, Maryville, Tennessee, for the appellee, Kenneth R. Vaught.

Colleen J. Boles, Assistant General Counsel, Kathryn R. Norcross, Senior Counsel, and,

Jerome A. Madden, Counsel, Arlington, Virginia, for amicus curiae Federal Deposit

Insurance Corporation.

OPINION

Background

This appeal concerns the ramifications of a 2004 Non-Competition

Agreement (―the Agreement‖) Vaught entered into with his then employer, Greenbank.

Pursuant to the Agreement, Vaught was entitled to deferred compensation. The

Agreement provided that payment under the Agreement was to begin when he turned 50

years old in July 2014 or upon his termination, whichever occurred later, and continue for

ten years. The annual benefit upon termination was slated to be $84,924 paid in equal

payments over a ten year period resulting in a total of $849,240.

In August 2011, Vaught was terminated as President and Chief Operating

Officer of Greenbank. At the time, Greenbank officially was designated as in ―troubled

condition.‖ This designation had important implications for Vaught‘s compensation. At

the time of Vaught‘s termination, the amount accrued on the books toward his deferred

compensation was $521,497. The essence of this appeal is which total figure Vaught is

entitled to: $849,240 over ten years as originally contemplated, or $521,497 over ten

years as accrued at the time of his termination. The parties do not dispute that Vaught is

entitled to the latter figure. However, Greenbank and FDIC, as amicus curiae, contend

that, given Greenbank‘s troubled condition at the time of Vaught‘s termination, a full

payment of $849,240 over ten years would constitute an impermissible golden parachute

under applicable TARP and FDIC regulations.

Vaught sued Greenbank in December 2011.1 Vaught asserted, among other

things, that he was entitled to severance and change in control benefit payments.

Greenbank filed a motion for summary judgment in opposition. In February 2014,

Vaught amended his complaint by seeking declaratory relief regarding the amount he was

owed under the Agreement in deferred compensation. In August 2014, the Trial Court

granted Greenbank‘s motion for summary judgment relative to the severance and change

in control benefits, concluding they were prohibited golden parachutes under TARP

regulations. In May 2015, the issue of deferred compensation was tried. At trial, the

Trial Court deemed inadmissible as hearsay an FDIC opinion letter dated May 28, 2014

opining that Vaught was limited to $521,497 and that the additional sum would amount

1

Vaught also sued North American Financial Holdings and Capital Bank, N.A., but they are not parties to

this appeal.

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to a prohibited golden parachute. The Trial Court found in favor of Vaught. By June

2015 order, the Trial Court entered its findings and conclusions as follows:

1. In 1998, Kenneth Vaught (hereinafter Plaintiff) was working at

First Tennessee Bank in Maryville, Blount County, Tennessee.

2. Plaintiff was recruited by Greenbank (hereinafter Defendant) to

come to work for Defendant in 1998 to operate and run two (2) branches of

Greenbank in Blount County, Tennessee, then operated as American

Fidelity Bank.

3. Over the course of the next twelve (12) months, Plaintiff either

recruited or hired approximately twenty-five (25) new employees to come

work for him at Greenbank operating the two (2) American Fidelity

branches.

4. Plaintiff‘s original employment contract with Defendant contained

both a non-compete provision and also contained a bonus provision to

provide for bonuses based on a formula connected to the bottom line

profitability of the two (2) American Fidelity branches managed by

Plaintiff.

5. Over the next several years the American Fidelity branches

managed by Plaintiff were profitable and upon expiration of Plaintiff‘s

existing employment contract, the parties desired to enter into new

employment contracts.

6. The parties entered into two (2) new contracts. One contract was

the Employment Contract and the other was a Non-Competition Agreement

that is the subject of this litigation.

7. The Non-Competition Agreement entered into by the parties and

stipulated as Exh. No. 1, provided in paragraph no. 2 that for and in

consideration of the deferred compensation benefits granted by the

company to the employee under the terms of the agreement that Plaintiff,

during the term of his employment and for a period from termination,

whether by resignation or otherwise, would not compete with Defendant

until his 46th birthday, directly or indirectly. At the time of the execution

of the contract, Plaintiff was 40 years old.

8. Paragraph No. 8 of the Non-Competition Agreement titled

―Deferred Compensation Benefits‖, provided that in consideration of the

covenants contained therein, that the Defendant agreed to provide deferred

compensation benefits to Plaintiff in the amount set forth in Schedule A

under the column ―Annual Benefit Upon Termination‖ for the age specified

in said schedule upon termination of his employment.

9. Schedule A to the Non-Competition Agreement showed the

annual benefit grew each year that Plaintiff remained employed at the bank.

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10. The agreement specifically provided that under no circumstances

would Plaintiff receive the first annual benefit payment under the contract

until he reached age 50 and, that if Plaintiff‘s employment was terminated

from the bank prior to age 50, his benefit payment would not start until his

50th birthday.

11. The agreement further provided that if Plaintiff chose to remain

employed at the bank after reaching age 50 and chose to continue to be

bound by the Non-Competition Agreement, then the annual benefit would

continue to grow until Plaintiff‘s 60th birthday at which time payments

would begin.

12. The footnote to Schedule A provided that if Plaintiff‘s

termination of his employment occurs after age 50, that payments would

commence the month following termination and the annual payments

would continue for ten (10) years.

13. The footnote to Schedule A also provided the accrual liability

balance is based on accruals required under Generally Accepted

Accounting Principals (GAAP) and was based on a plan commencement

date of September 1, 2004, the method of calculating interest was a 6.5%

discount rate compounded monthly.

14. This Court has previously held that the change of control benefit

was barred by the federal TARP regulations. However, the same is not at

issue in this present litigation.

15. At the time the Defendant and Plaintiff entered into the Non-

Competition Agreement, the Defendant bought two (2) bank owned life

insurance policies (BOLI) to fund Plaintiff‘s non-compete agreement for

the $2,500,000.00

16. The BOLI policies were not put into a specific trust for the

Plaintiff‘s contract, but were purchased by the Defendant to fund Plaintiff‘s

Non-Competition Agreement.

17. Defendant has argued that the lower annual benefit of

$52,149.70 is mandated by two sets of federal regulations (i.e. TARP and

FDIC) because the greater payment of $84,924.00 would constitute a

golden parachute under these regulations.

18. There is no dispute that the lower payment of $52,149.70 is

deferred compensation which is a clear exception to both the TARP and

FDIC regulations prohibiting golden parachutes.

19. Both the TARP and FDIC regulations provide seven (7)

requirements for a benefit plan to meet the deferred compensation

exclusion. The TARP requirements are listed at 31 CFR 30.01. The FDIC

requirements are found at 12 CFR 359.1(d).

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20. It is undisputed that the annual benefit under Plaintiff‘s Non-

Competition Agreement meet the first six (6) requirement of both

definitions.

21. The only disputed portion is the seventh requirement which reads

as follows: ―... and payments pursuant to the plan are not in excess of the

accrued liability computed in accordance with GAAP‖ (TARP definition,

31 CFR 30.1) ―...payments pursuant to such plans shall not be in excess of

the accrued liability computed in accordance with GAAP‖ ( FDIC

definition CFR 359.1(d)).

22. Neither of the above cited regulations require accrual to stop at

termination.

23. The $521,497.00 accrued at the time of Plaintiff‘s termination in

August 2011 was the then present value of the future payments of $84,924

which were to begin upon Plaintiff‘s 50th birthday in July 2014 and to be

payable for a period of ten (10) years.

24. The original accrual schedule set up by the bank and its

consultant, Clark Consulting, was prepared pursuant to GAAP and

anticipated that accrual would occur until Plaintiff‘s 50th birthday which

was assumed to be when the first payment would begin. This accrual

schedule was prepared to GAAP.

25. The bank continued to accrue liability for the annual benefit past

Plaintiff‘s termination and up to the date of his 50th birthday. This

continued accrual was done pursuant to GAAP.

26. As of December 31, 2015, the Defendant has accrued

$852,743.18 towards Plaintiff‘s annual benefit.

27. Pursuant to the terms of the Non-Competition Agreement, the

benefit did not continue to grow after Plaintiff‘s termination, but the accrual

would have continued up until the date of the first payment on July 2, 2014,

such that the accrual as of the date of payment would have been the present

value of July 2, 2014, of the annual payments of $84,924 payable over ten

(10) years. This is the accrual required by GAAP. The present value of the

stream of payments due to Plaintiff was included in the $852,743.18 on the

Defendant‘s books.

28. The annual benefit payment was for and in consideration of the

non-compete and was not a severance payment for departure.

29. That the payments met the definition of deferred compensation,

which is excluded from the golden parachute definitions.

30. In April 2011, the Defendant was advised by the FDIC in a letter

entered as Exh. No. 7, that they were prohibited from paying or agreeing to

pay any golden parachute payments without the approval of the FDIC.

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31. The Defendant acknowledged receipt of the FDIC‘s April 2011

letter and stated in the letter stipulated as Exh. No. 11, that Defendant

would not pay or agree to pay any golden parachute payment without the

approval of the FDIC.

32. In May 2012, Defendant entered into an agreement with North

American Financial Holdings/ Capital Bank to be acquired in a merger

wherein the acquirer would acquire 90% of the stock of Defendant.

33. The merger of the two banks required the preparation of a Final

Proxy Statement that would be voted upon by the Defendant‘s

shareholders.

34. The Final Proxy Statement which was stipulated as Exh. No. 12

is a detailed and comprehensive document that describes in detail the

merger transaction along with a detailed section regarding executive

compensation of the bank officers.

35. Both sides to the merger process had significant input into the

preparation of the proxy documents and the proxy documents were

reviewed by law firms for both parties, accountants for both parties and

bank officers for both parties.

36. The Final Proxy Statement (Exh. No. 12) provided that if

Plaintiff was terminated in 2011, that the annual benefit he was entitled to

for ten (10) years would be $84,924. There was no mention in the Final

Proxy by Defendant that any portion of this $84,924 was considered to be a

golden parachute.

37. Plaintiff was terminated from his employment with Defendant by

letter dated August 9, 2011, which was stipulated as Exh. No. 13.

38. Plaintiff‘s termination letter was signed by bank CEO Stephen

Rowand.

39. Plaintiff‘s termination letter was drafted by the bank‘s legal

counsel Bass, Berry and Sims.

40. The Defendant was aware of FDIC and TARP regulations

regarding golden parachute payments at the time of both the Final Proxy

Statement and Plaintiff‘s termination letter.

41. Plaintiff‘s termination letter concluded that the proper annual

benefit was $84,924 and that the same was not a golden parachute, but

appropriate deferred compensation and that the Defendant agreed in the

termination letter to pay Plaintiff the $84,924 benefit for ten (10) years

beginning on his 50th birthday.

42. Plaintiff presented the testimony of James Adams, who was the

former CFO of Defendant.

43. This Court found Mr. Adams to be an expert on Generally

Accepted Accounting Procedures (GAAP).

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44. This Court found Mr. Adams‘ testimony to be credible and

helpful to the Court.

45. The Defendant has failed to present any witnesses to support

their position that any payment above $52,149.70 would be considered a

golden parachute payment.

46. The Defendant has failed to provide any explanation as to why it

has changed its opinion as to Plaintiff‘s annual benefit amount since the

time of the termination letter and the 2011 Final Proxy Statement.

47. The Defendant has provided no testimony that would require the

accrual for Plaintiff‘s annual benefit to cease at the time of his termination

in 2011 rather than at the time payments began in July 2014.

48. The current issue before this Court was not part of Plaintiff‘s

original Complaint filed in December 2012.

49. Subsequent to the filing of the December 2012 Complaint,

Plaintiff became aware of the Defendant‘s intention to not pay the full

annual benefit of $84,924 and amended his Complaint to add Count V,

which is the subject of this current matter before the Court.

50. When the first annual benefit payment became due on Plaintiff‘s

50th birthday (July 2, 2014), the Defendant made no payment to Plaintiff in

any amount.

51. In April 2015, Plaintiff received a check in the mail from the

Defendant in the amount of $52,149.70, dated April 16, 2015, which came

directly to Plaintiff‘s home and did not go through Plaintiff‘s legal counsel.

The check did not include any interest for being late.

CONCLUSIONS OF LAW

A. This Court finds that the Annual Benefit Upon Termination under

Plaintiff‘s Non-Competition Agreement is not a golden parachute payment,

under either the TARP regulations or the FDIC regulations.

B. This Court has previously ruled that the annual benefit was

deferred compensation and not a golden parachute payment under the

TARP regulations when it granted Plaintiff‘s Motion for Summary

Judgment on this issue and this Court reiterates and reaffirms that finding.

C. This Court finds that the annual benefit under the Non-

Competition Agreement was not paid as a result of Plaintiff‘s departure or

for a change of control but was for work performed and benefits accrued.

D. This Court finds that the consideration for the Non-Competition

Agreement was Plaintiff‘s covenant not to compete and that Plaintiff fully

complied with this covenant by not competing with the Defendant until his

46th birthday.

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E. This Court finds that the annual benefit under the Non-

Competition Agreement was not for Plaintiff‘s departure and that the only

effect that Plaintiff‘s termination had on the benefit was to determine the

amount to be paid under Schedule A of the Non-Competition Agreement.

F. This Court finds that the annual benefit under the Non-

Competition Agreement was not a severance benefit or a termination

benefit which would meet the TARP definition of a golden parachute.

G. This Court further finds that the Annual Benefit Upon

Termination meets the definition under both TARP and FDIC regulation for

bona fide deferred compensation, which is an exclusion to the golden

parachute under both sets of regulations.

H. This Court finds that the $521,497 accrued on the Defendant‘s

books as of Plaintiff‘s termination in August 2011 was the then present

value of the $84,924 annual benefit payable over ten (10) years beginning

July 2, 2015, and this amount was accrued on the Defendant‘s books

according to GAAP which requires and mandates that the Defendant accrue

only the present value of a future stream of benefits on its books.

I. This Court finds that the Defendant continued to accrue for

Plaintiff‘s annual benefit upon termination and this continued accrual was

pursuant to GAAP which requires and mandates that a bank or other entity

accrue to the full eligibility date which this Court finds to be July 2, 2014

(Plaintiff‘s 50th birthday). This Court further finds that neither the TARP

regulations or the FDIC regulations require under their definition of

deferred compensation that the Defendant stop accruing for deferred

compensation at the time of the employee‘s termination unless the

employee‘s benefits begin at termination. Plaintiff‘s benefits did not begin

at termination but began later upon his 50th birthday.

J. This Court finds that the annual benefit payment in [sic] not

limited to the $521,497 accrued on the Defendant‘s books in August 2011

because this amount was merely the present value of the future stream of

benefits to begin in July 2014.

K. This Court finds that since the $521,497 was the present value in

August 2011 of $84,924 annually, beginning in July 2014, then the

payments of $84,924 annually for ten (10) years beginning in July 2014

would not be in excess of the amount accrued on the Defendant‘s books

and would not be contrary to either the TARP or FDIC definition of

deferred compensation.

L. This Court finds that as of the date of the first payment due

Plaintiff on July 2, 2014, the bank had fully accrued on its book the present

value of the ten (10) year payment stream that Plaintiff was to receive in the

amount of $84,924 and as such, the payment of the annual benefit in that

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amount would not exceed the accrued liability on the Defendant‘s books as

of that date.

M. This Court finds that the accrual of liability per GAAP is merely

an account entry recognizing a liability on the books of the bank.

N. This Court finds that by continuing to accrue for the liability after

Plaintiff‘s termination, that the Defendant did not increase the actual benefit

amount but only increased the liability accrual up until the payments began.

O. This Court finds that accrual under GAAP is based upon and

considers the time value of money.

P. This Court finds that both TARP and FDIC regulations recognize

the time value of money, by requiring accrual pursuant to GAAP.

Q. This Court finds that the Plaintiff is entitled to the annual benefit

of $84,924 which payments were to begin on July 2, 2014, and be paid

annually for a period of ten (10) years.

R. This Court finds that the declaratory judgment statutes of the

State of Tennessee allow and require the court to give complete relief in

conjunction with a ruling for declaratory relief.

S. This Court finds that Plaintiff is entitled to prejudgment interest

from July 2, 2014, forward at a rate of 5.25%.

T. This Court finds that the Plaintiff is entitled to pre-judgment

interest on the difference between the $84,924 payment due and the

$52,149.70 payment received, which is a difference of $32,774.30 at a rate

of 5.25% from April 16, 2015, until the date declaratory judgment is

entered. Thereafter, judgment interest would accrue per statute.

U. This Court finds that Plaintiff shall have a monetary judgment

against the Defendant for $32,774.30, along with pre-judgment interest as

set forth above, for which execution may issue. Plaintiff shall prepare said

money judgment.

V. This Court finds that Plaintiff is entitled to future annual

payments of $84,924 payable for nine (9) more years, with the next

payment being due on July 2, 2015, and July 2nd of each year thereafter.

W. This Court orders that in the event payment is not made by the

Defendant on July 2nd of each year, and if the Plaintiff files an affidavit

with the Court to that effect after the due date, that the Plaintiff shall be

allowed to submit a monetary judgment with his affidavit for that year‘s

annual payment plus statutory interest for the time that the same is not paid

and the Court will grant judgment for which execution may issue.

X. The cost associated with this cause are taxed to the Defendant

Greenbank, for which execution may issue.

In July 2015, the Trial Court entered its final judgment, stating:

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This matter came before the Court for trial on Count V of Plaintiff,

Kenneth R. Vaught‘s Amended Complaint. Previously, the Court granted

Defendants, Green Bankshares, Inc. and GreenBank‘s Motion for Summary

Judgment as to Counts I, III, and IV of the Amended Complaint. Based on

this Court‘s August 20, 2014 Order, as clarified by Order dated October 22,

2014, and based on this Court‘s June 11, 2015 Findings of Facts and

Conclusion of Law and Order following trial on Count V, the Court enters

this Final Judgment pursuant to Rule 54.02, Tenn. R. Civ. P. as to all claims

filed by Plaintiff against Defendants Green Bankshares, Inc. and

GreenBank finding that there is no reason to delay entry of judgment on

these claims, which involve all issues between these parties.

Accordingly, it is now

ORDERED AND ADJUGED:

1. Based on the Court‘s June 11, 2015 Findings of Facts and

Conclusion of Law and Order, above Findings of Fact and Conclusions of

Law, the Court enters judgment in favor of Plaintiff, Kenneth R. Vaught as

to Count V of the Amended Complaint seeking Declaratory Judgment

regarding the amount of the ―Annual Benefit Upon Termination‖ to which

he is entitled under his 2004 Non-Competition Agreement as follows:

a. Plaintiff is entitled to the annual benefit of $84,924, which

payments were to begin on July 2, 2014, and be paid annually for a period

of ten (10) years.

b. The declaratory judgment statutes of the State of Tennessee allow

and require the Court to give complete relief in conjunction with a ruling

for declaratory relief.

c. Plaintiff is entitled to prejudgment interest from July 2, 2014,

forward at a rate of 5.25%.

d. Plaintiff is entitled to pre-judgment interest on the difference

between the $84,924 payment due and the $52,149.70 payment received,

which is a difference of $32,774.30 at a rate of 5.25% from April 16, 2015,

until the date declaratory judgment is entered. Thereafter, judgment

interest would accrue per statute.

e. Plaintiff shall have a monetary judgment against the Defendant for

$32,774.30, along with pre-judgement interest as set forth above, for which

execution may issue.

f. Plaintiff is entitled to future annual payments of $84,924 payable

for nine (9) more years, with the next payment being due on July 2, 2015,

and July 2nd of each year thereafter.

g. In the event payment is not made by the Defendant on July 2nd of

each year, and if the Plaintiff files an affidavit with the Court to that effect

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after the due date, that the Plaintiff shall be allowed to submit a monetary

judgment with his affidavit for that year‘s annual payment plus statutory

interest for the time that the same is not paid and the Court will grant

judgment for which execution may issue.

2. Final Judgment is entered in favor of Defendants, Green

Bankshares, Inc. and GreenBank on Counts 1, III, and IV of the Amended

Complaint, consistent with the Court‘s August 20, 2014 Order.

3. The costs associated with this cause are taxed to Defendants,

Green Bankshares, Inc. and GreenBank.

Greenbank timely appealed to this Court.

Discussion

Although not stated exactly as such, Greenbank raises three issues on

appeal: 1) whether TARP regulations limit Vaught‘s deferred compensation to

$52,149.70 each year for 10 years rather than $84,924; 2) whether FDIC golden

parachute provisions limit deferred compensation benefits to amounts actually accrued on

the books; and, 3) whether the Trial Court erred in excluding a May 28, 2014 opinion

letter from an FDIC representative to Greenbank‘s counsel in which the FDIC

representative supported Greenbank‘s stance as to Vaught‘s deferred compensation, on

the basis that the letter was inadmissible hearsay. Vaught raises his own issue of whether

Greenbank‘s appeal is frivolous. FDIC, in an amicus curiae brief, raises the additional

issues of whether this Court even has subject matter jurisdiction and whether Vaught‘s

only recourse is through the APA and federal court.

Our review is de novo upon the record, accompanied by a presumption of

correctness of the findings of fact of the trial court, unless the preponderance of the

evidence is otherwise. Tenn. R. App. P. 13(d); Bogan v. Bogan, 60 S.W.3d 721, 727

(Tenn. 2001). A trial court‘s conclusions of law are subject to a de novo review with no

presumption of correctness. S. Constructors, Inc. v. Loudon County Bd. of Educ., 58

S.W.3d 706, 710 (Tenn. 2001).

This appeal requires an examination of federal regulations. Golden

parachute means: ―The term ―golden parachute payment‖ means any payment to a senior

executive officer for departure from a company for any reason, except for payments for

services performed or benefits accrued.‖ 12 U.S.C. § 5221(a)(2). Federal regulations

prohibit the payment of golden parachutes under a variety of circumstances. Deferred

compensation plans may be excluded from the golden parachute prohibitions as follows:

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(4) Payments from benefit plans and deferred compensation plans. A

payment from a benefit plan or a deferred compensation plan is treated as a

payment for services performed or benefits accrued only if the following

conditions are met:

(i) The plan was in effect at least one year prior to the employee‘s

departure;

(ii) The payment is made pursuant to the plan and is made in accordance

with the terms of the plan as in effect no later than one year before the

departure and in accordance with any amendments to the plan during this

one year period that do not increase the benefits payable hereunder;

(iii) The employee has a vested right, as defined under the applicable plan

document, at the time of the departure or the change in control event (but

not due to the departure or the change in control event) to the payments

under the plan;

(iv) Benefits under the plan are accrued each period only for current or

prior service rendered to the TARP recipient (except that an appropriate

allowance may be made for service for a predecessor employer);

(v) Any payment made pursuant to the plan is not based on any

discretionary acceleration of vesting or accrual of benefits which occurs at

any time later than one year before the departure or the change in control

event; and

(vi) With respect to payments under a deferred compensation plan, the

TARP recipient has previously recognized compensation expense and

accrued a liability for the benefit payments according to GAAP or

segregated or otherwise set aside assets in a trust which may only be used

to pay plan benefits, except that the assets of this trust may be available to

satisfy claims of the TARP recipient‘s creditors in the case of insolvency

and payments pursuant to the plan are not in excess of the accrued liability

computed in accordance with GAAP.

31 C.F.R §30.1.

Seven requirements must be met in order for a plan to fulfill the definition

of a deferred compensation plan, as follows:

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(3) In the case of any nonqualified deferred compensation or supplemental

retirement plans as described in paragraphs (d)(1) and (2) of this section,

the following requirements shall apply:

(i) The plan was in effect at least one year prior to any of the events

described in paragraph (f)(1)(ii) of this section;

(ii) Any payment made pursuant to such plan is made in accordance with

the terms of the plan as in effect no later than one year prior to any of the

events described in paragraph (f)(1)(ii) of this section and in accordance

with any amendments to such plan during such one year period that do not

increase the benefits payable thereunder;

(iii) The IAP has a vested right, as defined under the applicable plan

document, at the time of termination of employment to payments under

such plan;

(iv) Benefits under such plan are accrued each period only for current or

prior service rendered to the employer (except that an allowance may be

made for service with a predecessor employer);

(v) Any payment made pursuant to such plan is not based on any

discretionary acceleration of vesting or accrual of benefits which occurs at

any time later than one year prior to any of the events described in

paragraph (f)(1)(ii) of this section;

(vi) The insured depository institution or depository institution holding

company has previously recognized compensation expense and accrued a

liability for the benefit payments according to GAAP or segregated or

otherwise set aside assets in a trust which may only be used to pay plan

benefits, except that the assets of such trust may be available to satisfy

claims of the institution‘s or holding company‘s creditors in the case of

insolvency; and

(vii) Payments pursuant to such plans shall not be in excess of the accrued

liability computed in accordance with GAAP.

12 C.F.R. § 359.1(d)(3).

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We first must establish whether this Court has subject matter jurisdiction.

Our Supreme Court held that state courts‘ jurisdiction had been preempted in the Wiggins

case, stating as follows in a case concerning the National Labor Relations Board:

There is no question made in the present case as to the identity of

issues or of the parties in the respective state and federal proceedings,

except to the extent that the landowner, Wiggins and Company, was found

not guilty of unfair labor practices in the N.L.R.B. case. It is not insisted,

however, that this fact should affect our disposition of the state court

proceedings or that Wiggins alone would be entitled to maintain in force an

injunction against the union. As noted previously, the property was under a

commercial lease and the premises were occupied in their entirety by

Kresge and Giant Foods. There were no other tenants in the shopping

center.

It is the principal insistence of appellees that this Court should either

withhold its decision until the Court of Appeals for the Sixth Circuit takes

final action upon review of the N.L.R.B. order or, in the alternative, that

this Court should leave in force the injunction ordered by the state Court of

Appeals until the federal appellate court acts. We find no merit in this

position. Once the Court of Appeals for the Sixth Circuit acts, it would still

be possible for appellees to seek review in the Supreme Court of the United

States. If appellees‘ contention had merit, the state courts might well leave

an injunction in force until the Supreme Court of the United States had

completed certiorari review.

We do not so understand the pre-emption doctrine. As a result of the

action of the state Court of Appeals, the Union has been enjoined from

doing the very acts which the N.L.R.B. expressly authorized it to do.

Appellees, on the other hand, are entitled to prohibit picketing under the

state court order while they are required to permit it and to post notices to

that effect under the order of the federal agency. Each of the parties is

subject to cross-injunctions which are diametrically conflicting.

Appellee insists that the action of the N.L.R.B. is erroneous and not

in accord with previous decisions of the federal courts. It insists that the

action may well be reversed, noting that in the majority opinion in the Sears

case, supra, it was stated that trespassory picketing has seldom been held to

be a protected activity.

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However this may be, that argument goes to the merits, or lack

thereof, of the N.L.R.B. decision, not to the question of state court

jurisdiction. We have already noted that the Court of Appeals for the Sixth

Circuit denied a stay of the N.L.R.B. order pending review. The issue of

whether the order should or should not be stayed until the federal appellate

court renders its decision is a matter for determination by the federal, not

the state, courts.

The judgment of the Court of Appeals is reversed and the cause is

dismissed because jurisdiction of the state courts has been pre-empted.

Costs will be taxed to appellees.

Wiggins and Co., Inc. v. Retail Clerks Union Local No. 1557, AFL-CIO, 595 S.W.2d 802,

804-05 (Tenn. 1980).

In the Hampton Roads Bankshares, Inc. case, the Supreme Court of

Virginia addressed whether TARP regulations prohibiting golden parachutes constituted

a taking without compensation:

Harvard filed an action for the breach of a private contract. In

response, HRB asserted EESA § 111 and the June Rule as an affirmative

defense. To avoid HRB‘s defense, Harvard alleged that EESA § 111 and

the June Rule effected an unconstitutional taking without just

compensation. Certainly, we have jurisdiction over the breach of contract

action, and we can apply federal law if necessary to resolve the dispute.

See Merrell Dow Pharm., Inc. v. Thompson, 478 U.S. 804, 808, 106 S.Ct.

3229, 92 L.Ed.2d 650 (1986) (the existence of a federal statutory defense

generally does not create federal subject matter jurisdiction). Indeed, the

United States District Court for the Eastern District of Virginia dismissed

HRB‘s prior action for declaratory judgment because the case turned on a

question of Virginia contract law, and the ―mere fact that TARP is

implicated‖ was insufficient to support the exercise of federal jurisdiction.

Shore Bank v. Harvard, 934 F.Supp.2d 827, 841 (E.D. Va. 2013).

Although the dispute comes to us in a different posture, it still turns on a

question of Virginia contract law, and we will resolve it accordingly.

***

Harvard attempted to mount a collateral attack on the constitutionality of

EESA § 111, as amended by the June Rule. But the validity of the law

rendering performance impossible does not affect the validity of the

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defense, provided the promisor relies upon the law in good faith. See White

v. J.M. Brown Amusement Co., 360 S.C. 366, 601 S.E.2d 342, 345-46

(2004) (holding that subsequent invalidation of a law did not revive a

contract after the parties had ceased performing in good faith compliance

with the law); Gaunt v. Shelter Mut. Ins. Co., 808 S.W.2d 401 (Mo. Ct.

App. 1991) (holding that the respondent did not breach a settlement

agreement by making payment pursuant to a lien that was subsequently

declared invalid); Directions, Inc. v. New Prince Concrete Constr. Co., 200

N.J. Super. 639, 491 A.2d 1347 (Ct. App. Div. 1985) (concluding that the

appellant was not required to challenge an apparently valid administrative

order to determine its validity before refusing to perform a contract).

There is nothing in the record that would suggest HRB refused to

make the golden parachute payment in bad faith. After Harvard terminated

his employment, HRB sought guidance from Treasury regarding its

contractual obligation to make the disputed golden parachute payment, and

whether it could perform that obligation in light of EESA § 111, as

implemented by the June Rule. In response, Treasury provided informal

guidance indicating that HRB could not make the payment and comply

with EESA § 111. Where, as here, the government has clearly expressed its

intent to enforce the law, and the promisor cannot in good faith perform its

contractual obligation without violating the law, the promisor is discharged

from its obligation. See Harriscom Svenska v. Harris Corp., 3 F.3d 576 (2d

Cir. 1993) (finding that, in light of evidence that the government would not

allow continued sales, the seller complied in good faith with the

government‘s requirements and refused to perform its remaining

obligations); Restatement (Second) of Contracts § 264 cmt. b.

***

For these reasons, the circuit court erred when it ordered HRB to

make the golden parachute payment despite the federal prohibition on such

payments found in EESA § 111, and as implemented by the June Rule.

Hampton Roads Bankshares, Inc. v. Harvard, 291 Va. 42, 781 S.E.2d 172, 177, 179-80

(2016) (Footnotes omitted).

Our review of Wiggins and Hampton Roads Bankshares, Inc. persuades us

that the Trial Court, and this Court, have subject matter jurisdiction to hear the present

case. Unlike Wiggins, we are not dealing with the body of law stemming from the

National Labor Relations Act. Administrative procedures already had been undertaken in

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Wiggins, as well. In addition, Hampton Roads Bankshares, Inc. sustains the proposition

that, among other things, TARP‘s mere implication does not require exclusive federal

subject matter jurisdiction.

While our jurisdiction is not preempted, a separate question exists as to

what deference, if any, Tennessee courts are to extend to FDIC‘s interpretation of its

regulations. According to Vaught, the FDIC opinion letter dated May 28, 2014 which

takes the position that Vaught is not entitled to the additional deferred compensation

payments is merely an informal advisory opinion which is binding on no one. Vaught

asserts that the Trial Court correctly ruled that the letter was inadmissible hearsay.

Relevant case law suggests, however, that the issue of the FDIC‘s

interpretation and resulting stance does not begin or end with the question of whether the

letter was properly excluded as hearsay.2 In articulating a deferential standard to be

applied when an agency interprets its own regulations, the United States Supreme Court

provided:

In the absence of any unambiguous statute or regulation, we turn to

the FCC‘s interpretation of its regulations in its amicus brief. See, e.g.,

Chase Bank USA, N.A. v. McCoy, 562 U.S. ––––, ––––, 131 S.Ct. 871, 880,

178 L.Ed.2d 716 (2011). As we reaffirmed earlier this Term, we defer to

an agency‘s interpretation of its regulations, even in a legal brief, unless the

interpretation is ― ‗plainly erroneous or inconsistent with the regulation [s]‘

‖ or there is any other ― ‗reason to suspect that the interpretation does not

reflect the agency‘s fair and considered judgment on the matter in

question.‘ ‖ Id., at ––––, ––––, 131 S.Ct., at 880, 881 (quoting Auer v.

Robbins, 519 U.S. 452, 461, 462, 117 S.Ct. 905, 137 L.Ed.2d 79 (1997)).

Talk Am., Inc. v. Mich. Bell Tel. Co., 564 U.S. 50, 131 S. Ct. 2254, 2260-61, 180 L.Ed.2d

96 (2011).

In the present case, Greenbank received a letter from an FDIC

representative opining that Vaught must not be paid the excess deferred compensation,

lest this additional amount constitute a prohibited golden parachute. Moreover, FDIC

appeared at oral arguments, and submitted an amicus curiae brief adopting a position

contrary to Vaught‘s. If Vaught‘s argument is to be accepted, then we would be

constrained to ignore FDIC‘s position on a question that involves that agency and its

regulations. This Court declines to take such a view. Even if the FDIC letter was

2

We believe the FDIC letter was not hearsay. The FDIC letter was offered to prove FDIC‘s opinion on

the matter at issue, not that FDIC‘s opinion was correct. However, as we explain herein, the issue of the

letter‘s admissibility is moot.

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inadmissible hearsay, we know now by this point in the case unequivocally what FDIC‘s

position is. The issue of the admissibility of the FDIC letter as evidence that the

contested payments constitute an impermissible golden parachute is therefore moot. As

the United States Supreme Court stated in Talk America, our deference to an agency‘s

interpretation of its regulations can be based on the ―agency‘s interpretation of its

regulations, even in a legal brief . . . .‖ Id.

Deference, however, does not amount to abdication of a court‘s duty to

review. We still must determine whether the agency‘s interpretation is plainly erroneous

or inconsistent with the regulations, or, whether the interpretation reflects the agency‘s

fairly considered judgment. As to the latter analysis, FDIC‘s consistent and persistent

position in this case leaves us with no serious doubt as to whether that agency has taken a

carefully considered judgment on the present case. With respect to whether that

interpretation is plainly erroneous, or inconsistent with the regulations, Vaught advances

a number of arguments as to why FDIC‘s interpretation is entitled to no deference.

Among other things, Vaught points to testimony at trial supporting his position that the

deferred compensation was an accrued liability, and not ―vested.‖ This is a critical

distinction according to Vaught, which takes into account the ―the time value of money.‖

In other words, $521,497 was the present value in 2011 of the originally contemplated

$849,240 total amount in deferred compensation, and the latter figure is therefore not

excessive but part and parcel of what Vaught was entitled to all along. Vaught also notes

the inconsistency in Greenbank having previously approved his deferred compensation

package before reversing course.

While Vaught‘s position regarding accounting principles, trial testimony,

and the time value of his deferred compensation is not illogical, we disagree with his

implicit characterization of the issue confronting this Court on appeal. We perceive the

issue before us to be a legal issue, rooted in TARP and the applicable regulations. This

Court has found no case law, or indeed regulation, that unambiguously resolves a

scenario like that of the present case. FDIC presents the following argument in its amicus

brief:

First, under 12 C.F.R. § 359.1(d)(3)(vii), payments due to Mr.

Vaught cannot exceed the accrued liability computed under GAAP. As

reflected in Schedule A, there is no dispute that the Accrued Liability,

determined under GAAP, as of 2011 was $521,497. Therefore, as of the

date of termination, the Bank had no further obligation to continue to

accrue a liability in order to commence payments as of 2014; and whether it

did or not is irrelevant. Second, the court‘s interpretation of 12 C.F.R. §

359.1(d)(3)(vii)—accrual under GAAP—is inconsistent with the parties‘

agreement that the deferred compensation meet the requirements of 12

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C.F.R. § 359.1(d)(3)(iii)—vesting. 12 C.F.R. § 359.1(d)(3)(iii) provides

that the IAP must have ―a vested right, as defined under the applicable plan

document, at the time of termination of employment to benefits under such

plan.‖ Schedule A expressly provides that as of 2011 that Mr. Vaught was

100 percent invested in $521,497, the amount of the Accrued Liability—not

$849,240.

(Footnote omitted, emphasis in original). We find FDIC‘s interpretation of the

regulations to be a reasonable one, and hold that it is entitled to deference.

Greenbank has been placed in an untenable position. It either must comply

with the Trial Court‘s judgment, or flout FDIC and federal regulations which could

expose Greenbank to serious legal penalties. Having advanced a reasonable

interpretation of applicable regulations, FDIC‘s interpretation requires the courts‘ initial

deference. The judgment of the Trial Court is vacated, and this case is remanded.

FDIC argues in its amicus brief that ―Mr. Vaught does have a remedy,

however.‖ Vaught may yet pursue relief in federal court through the APA, where he may

challenge the FDIC‘s interpretation of the applicable regulations if he elects to do so. We

agree that Vaught should be given the opportunity to do so. Therefore, we order a 60 day

stay in this case while on remand in the Trial Court to allow Vaught to pursue such other

avenues of relief as are available to him, including filing a lawsuit against FDIC under

the APA, should he so choose. Should Vaught elect not to pursue these other potential

avenues of relief within the 60 day stay, the Trial Court is instructed to enter judgment in

favor of Greenbank. This would leave Vaught with a judgment to receive the deferred

compensation payments totaling $521,497, the amount all parties agree he is entitled to

receive. All other issues raised on appeal are pretermitted.

Conclusion

The judgment of the Trial Court is vacated, and this cause is remanded to

the Trial Court for further proceedings consistent with this opinion and for collection of

the costs below. The costs on appeal are assessed against the Appellee, Kenneth R.

Vaught.

____________________________________

D. MICHAEL SWINEY, CHIEF JUDGE

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