Former executives of banks that received money from the Troubled Asset Relief Program better not shred their old employment contracts just yet.
Banks that received Tarp funds are banned from making so-called golden parachute payments to departed employees. But at least three ex-employees of Hampton Roads Bankshares (HMPR) have filed lawsuits against the Norfolk, Va., company, claiming it used Tarp as an excuse to deny them compensation they are rightfully owed.
Other Tarp participants should follow the cases because the outcomes could provide wiggle room for other former bank officers to sue for unpaid compensation, lawyers say.
If former executives triumph over Tarp compensation rules, "it would certainly open up other situations" for challenges, says Thomas Vartanian at Dechert. "To the extent that these employees prevail, other banks will be watching these cases."
Hampton Roads argues in legal filings that Tarp rules bar it from making certain payouts to former officers. The $2.1 billion-asset company claims in filings tied to ongoing litigation with Scott Harvard, a former president of its Shore Bank, that it cannot pay Harvard the severance he is seeking because Uncle Sam won't permit the payment.
The Treasury Department's "Interim Final Rule's prohibition on 'golden parachute payments' to 'senior executive officers' unequivocally prohibits payment by the Bank of the amounts demanded by" Harvard, Scott Kezman, a Hampton Roads' lawyer, wrote in a June 12 filing in the U.S. District Court for the Eastern District of Virginia.
Harvard countered that Hampton Roads breached a contract when it terminated him, negating its Tarp argument. "The Bank failed to pay Harvard certain compensation to which he is entitled under an agreement in place when Harvard was employed," Charles Sims, one of Harvard's lawyers, wrote in a July 3 filing.
Harvard's case remains active. Kezman, Sims and a representative for Hampton Roads did not return calls seeking comment. Patricia Geoghegan, the Treasury's special master for Tarp, said the agency does not comment on pending legislation.
The question of whether employment contracts preempt Tarp's ban on golden parachutes remains unanswered, says Stacey Trimmer, a lawyer at Chadbourne & Parke.
In a 2011 case, a former employee of Royal Bancshares of Pennsylvania (RBPAA), claimed that the Narbeth company breached his contract when it terminated him, and must pay him severance. The $829 million-asset Royal argued that it wasn't required to pay James Kirkpatrick because it accepted Tarp funds.
A federal judge last September ruled in favor of Kirkpatrick, but the opinion did not clearly address the question of whether an employment contract supersedes Tarp, Trimmer says.
The "decision suggests that banks governed by the Tarp prohibition against golden parachute payments, as well as bank executives, may at times have a viable argument that severance payments to executives are permitted under the exception for 'payments for services performed or benefits accrued," Trimmer wrote in a Dec. 1 note to her clients.
Though other former bank executives are considering lawsuits, Hampton Roads appears to be the only banking company with active litigation. And Harvard isn't the only former executive fighting the company.
Two other former executives have fought Hampton Roads in court over unpaid compensation. In those cases, the company's has also argued that Tarp bars it from making payments.
A lawsuit by Eddie Campbell, a former regional president of Hampton Roads' Gateway Bank, remains active in Circuit Court for the City of Norfolk. Another lawsuit, filed in U.S. District Court for the Eastern District of Virginia by Jack Gibson, a former CEO, was dismissed after the parties reached a settlement.
Campbell's lawyers, Harris Butler and Paul Falabella, declined to comment.
Other employees may have negotiated pay agreements with Hampton Roads that revolved around the Tarp issue. The company said last week that it had reached a $25,000 settlement with Andy Davies Jr., a former president and chief executive, though the agreement did not mention Tarp.