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Thursday, May 23, 2024 | Back issues
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Severance Didn’t Violate TARP Ban on Parachutes

PHILADELPHIA (CN) - A $48,000 payout to an outgoing executive vice president of Royal Bank America did not clearly violate the prohibition against "golden parachutes" outlined in the Troubled Assets Relief Program, a federal judge ruled.

The bank terminated James Kirkpatrick's employment as a VP and chief lending officer in February 2010, eight days after he refused to resign.

Two months later, Kirkpatrick exercised his right to arbitrate the termination, claiming the bank owed him about three months' pay because it failed to give him the 90-day termination notice to which he was entitled under his employment contract.

The bank claimed during arbitration that the payout was barred by the Troubled Assets Relief Program (TARP), a massive government bailout aimed at invigorating anemic financial institutions.

TARP, which came into effect at Royal Bank about a year before Kirkpatrick was canned, prohibits participants from offering outgoing execs exorbitant compensation packages, sometimes called "golden parachutes."

Royal Bank told the arbitrator that the post-termination pay sought by Kirkpatrick constitutes such a package, adding that Kirkpatrick had even signed a waiver of his right to bring a claim against the bank for TARP-caused changes to his compensation and benefits.

The arbitrator did not buy this argument, however, and awarded Kirkpatrick over $48,000, citing an exception under TARP that allows outgoing execs to be paid "for services performed or benefits accrued."

In February, the bank asked U.S. District Judge Timothy Savage to vacate the award, claiming it was made in "manifest disregard" of federal law - that is, TARP's prohibition against golden parachutes.

Savage disagreed in a 12-page opinion Friday and remanded the case to state court, saying the dispute is "controlled by state - not federal - law concerning employment contracts."

U.S. Circuit Courts are split as to whether a "manifest disregard" of federal law in an arbitration award is basis alone for a federal judge to retain jurisdiction and vacate the award, Savage noted.

But, he wrote, "It is not necessary for us to decide whether manifest disregard of the law is still a viable ground for vacating an arbitration award. Even if the doctrine is alive, Royal Bank has not shown that the arbitrator manifestly disregarded federal law."

The standard for proving "manifest disregard" is quite high, he added.

Quoting precedent, Savage said such disregard necessarily involves "some egregious impropriety" and intentional disregard of federal law by the arbitrator - something that Royal Bank America has failed to show.

"At best, Royal Bank asserts a disagreement with the arbitrator's reasonable legal holding," Savage wrote. "Royal Bank points to no evidence outside its disagreement with the arbitrator's conclusion to suggest that the arbitrator disregarded federal law. It cites no clearly defined legal standard governing TARP's definition of a 'golden parachute.' Nor does it offer any evidence that the arbitrator consciously disregarded any such standard."

On remand to state court, Kirkpatrick can try to have the award confirmed but cannot seek attorneys' fees for the attempted federal litigation.

Royal Bank "found itself in a hard place with TARP regulators looking at it from one end and the arbitrator at the other," Savage said. "It was trying to protect itself from potential liability for violating TARP."

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