781 S.E.2d 172
Va.2016Background
- Scott C. Harvard was CEO of Shore Bank and, after a merger, became EVP of Hampton Roads Bankshares (HRB) under an Employment Agreement that provided a severance "golden parachute" (2.99x base pay, paid over 60 months) triggered by a change in control.
- In late 2008 HRB entered TARP and accepted $80.3 million from Treasury; the TARP Agreement required HRB to comply with EESA §111 limits on executive compensation and allowed Treasury to require amendments to comply with federal law.
- Harvard amended his Employment Agreement contemporaneously to conform to then-applicable TARP rules; a Gateway Bank acquisition constituted a Change in Control, and Harvard resigned in June 2009 seeking the severance payment.
- Congress and Treasury broadened the prohibition on "golden parachute payments" (ARRA and the June Rule), treating most departure/change-in-control payments as prohibited while Treasury held an equity/debt position; Treasury advised HRB it could not make the payment.
- Harvard sued HRB in Virginia circuit court for breach of contract and attorneys’ fees; the circuit court held the federal prohibition effected a taking as applied and awarded damages and fees. HRB appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether federal prohibition on golden parachute payments can be asserted as a defense to Harvard's breach-of-contract claim | Harvard: Federal law is an unconstitutional taking as applied; HRB cannot invoke the statute to avoid its contractual obligation | HRB: EESA §111 (as implemented) makes payment impossible/illegal, so impossibility of performance discharges HRB | Held: HRB may assert the federal prohibition; impossibility of performance due to valid federal law discharged HRB’s obligation; trial court erred in ordering payment |
| Whether Harvard may collaterally attack EESA §111 as a taking in the contract action | Harvard: The statute effects a taking of his contractual right to compensation without just compensation | HRB/US: Takings claim against the government must be pursued against the United States; here the case is a contract dispute | Held: Court resolves case on contract-law grounds (impossibility); did not reach takings question |
| Whether HRB acted in good faith in relying on Treasury guidance and the law | Harvard: HRB should have challenged the law; reliance bad faith | HRB: Sought Treasury guidance and complied in good faith to avoid criminal/civil exposure | Held: HRB acted in good faith reliance on federal law and Treasury guidance; defense valid |
| Whether the Employment Agreement’s fee-shifting provision constitutes a prohibited golden parachute payment | Harvard: Fees awarded are separate and permissible | HRB: Fees are contingent on change in control/litigation over change-in-control clause and thus are golden parachute payments | Held: Section 11 attorneys’ fees are tied to a change-in-control dispute and fall within the June Rule’s definition of a golden parachute; fees barred by federal law |
Key Cases Cited
- Alexandria Redevelopment & Hous. Auth. v. Walker, 290 Va. 150 (2015) (court should decide cases on narrowest grounds)
- Merrell Dow Pharm., Inc. v. Thompson, 478 U.S. 804 (1986) (existence of a federal defense generally does not create federal jurisdiction)
- Yearsley v. W. A. Ross Constr. Co., 309 U.S. 18 (1940) (no contractor liability for executing government will)
- Eastern Enterprises v. Apfel, 524 U.S. 498 (1998) (takings remedies and limits on private suits against governmental action)
- Housing Auth. of Bristol v. East Tennessee Light & Power Co., 183 Va. 64 (1944) (impossibility of performance doctrine under Virginia law)
- Harriscom Svenska v. Harris Corp., 3 F.3d 576 (2d Cir. 1993) (good-faith compliance with government restrictions can excuse contractual performance)