Updates to our Terms of Use

We are updating our Terms of Use. Please carefully review the updated Terms before proceeding to our website.

Thursday, March 28, 2024 | Back issues
Courthouse News Service Courthouse News Service

Failed Bank’s Bonuses Sent Back to FDIC

(CN) - The Federal Deposit Insurance Corp. will have to clarify why it refuses to pay golden parachute bonuses to former officers of failed Washington Mutual Bank, a federal judge ruled.

WMI Liquidating Trust, receiver for Washington Mutual, sued the FDIC last year in the District of Columbia for refusing to approve "golden parachute payments" to former officers and employees of the failed bank.

Golden parachutes are large payments made to executives when a company is taken over and the executive's job is lost due to the merger. Federal laws prohibit golden parachute payments when the insured depository institution is troubled or insolvent.

Washington Mutual filed for bankruptcy and was placed in receivership in 2008, becoming the biggest bank failure in U.S. history. JPMorgan Chase bought it for $1.9 billion in September 2008, in a deal brokered by the federal government. WaMu had $310 billion in assets when it collapsed.

The WMI Liquidating Trust has been resolving claims from WaMu's creditors, including former employees and executives who want severance and other benefits. Federal regulations require WMI to seek approval for the payments from the FDIC.

When the FDIC denied WMI's proposed settlements, it called the settlements golden parachute payments issued a blanket denial.

WMI sued, claiming the payments "do not run afoul of the text or spirit" of golden parachute regulations and that honoring the settlements would prevent litigation costs.

"Contrary to the Final FDIC Determination, the Payment Application and each Settlement Payment to the Settling Claimants contemplated therein do not run afoul of the text, or the spirit, of the Golden Parachute Regulations or the FDIA," the liquidating trust claimed. "The contracts and benefit plans that gave rise to the settlement payments were entered into by WMI or WMB in an effort to secure for WMI or WMB, as applicable, the service of certain employees. The making of the settlement payments is consistent with generating the greatest recovery for the debtors' creditors and potentially former shareholders by avoiding potential litigation and costs. Thus, the making of the settlement payments under the facts and circumstances in this case is consistent with the policy goals of the Golden Parachute Regulations and of the FDIC's and FRB's [Federal Reserve Bank] broader safety and soundness concerns. Indeed, as a result of the Final FDIC Determination, WMILT will be subject to continued and protracted litigation in the Bankruptcy Court relating to the settled claims rather than allowing the settlement payments to be made to the settling claimants."

U.S. District Judge Reggie Walton on Monday ruled on both parties' motions for summary judgment.

Walton remanded to the FDIC to clarify why it rejected the payments and to reconsider payment of a retention bonus due to one employee.

Noting that the FDIC concluded that WMI failed to properly certify that the employees did not commit fraud, breach fiduciary duty, commit insider abuse or have a substantial role in the insolvency, Walton wrote: "This alone could have been a sufficient basis for denying the plaintiff's payment application."

The FDIC also erred in identifying the certifications as an "independent basis" for wholesale denial of the payments.

"The FDIC's failure to address the impact of this flaw seemingly implies that applicants can qualify for exceptions to golden parachute payments, even though they fail to satisfy their certification obligations under 12 C.F.R. § 359.4(a)(4). Such an implication runs counter to the plain language of the regulation that the FDIC promulgated and conveys the perception of arbitrary and capricious decision-making on its part," Walton wrote.

He remanded for the FDIC to clarify whether WMI's improper certification alone was sufficient to reject the payments.

Walton also ordered the FDIC to reconsider paying one employee a retention bonus. The employee executed the bonus agreement in 2006, "well before the debtors collapse in 2008."

WMI's attorney David Hird, with Weil Gotshal & Manges, did not return a request for comment Wednesday, nor did the FDIC.

Categories / Uncategorized

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.

Loading...