Court of Appeals and Federal Reserve Put the Kibosh on Troubled Bank’s Settlement With Exec

| Jason M. Knott

"The Federal Reserve"

Usually, a plaintiff feels pretty good when he gets the opposing party to sign a settlement agreement promising to pay him money.  It’s nice to wrap up a hotly disputed case and move forward with the assurance that you’ll get what is promised under the settlement.

But then there’s the unusual case of Joe Martinez.  Martinez was the president of Rocky Mountain Bank before the bank fired him in 2010.  His contract entitled him to one year’s base pay ($200k) if he was terminated without cause.  However, he didn’t get the money after he was fired, because three months earlier, the Federal Reserve had notified the bank that it was in a “troubled condition” as defined by federal regulations.  If a bank’s in a “troubled condition,” under rules established by the Federal Deposit Insurance Corporation, it can’t make a so-called “golden parachute” severance payment.

Martinez quickly sued for the money due under his employment contract, and eventually negotiated a settlement with Rocky Mountain Bank for $100,000.  The bank told Martinez that it needed to get approval for the payment from the Federal Reserve.  Shortly thereafter, the Federal Reserve told the bank that it couldn’t pay.  As a result, Martinez had to ask the district court to enforce the settlement, which it refused to do.

Last week, the Tenth Circuit affirmed the district court’s decision on three grounds.  Martinez v. Rocky Mountain Bank, No. 11-8076 (10th Cir. Oct. 4, 2013). 

First, it said, the Federal Reserve’s approval was a necessary condition precedent for the settlement to be effective.  Without the approval, the agreement couldn’t take effect.  Second, the doctrine of impracticability, which allows a party to escape an agreement when required by governmental regulation or order, permitted the bank to avoid its duty to pay.  Third, although Martinez argued that the payment should have fallen within one of the exceptions to the regulation barring golden parachute payments, he waived that argument by failing to make it in the district court.

So what’s next for Martinez?  He still has some viable claims left in the district court, because the case came to the Tenth Circuit on an interlocutory appeal, which is an appeal brought before the final resolution of the case below.  And the Tenth Circuit’s opinion noted that the district court has already denied the bank’s motion to find that it was impracticable to comply with Martinez’s original employment contract.  So perhaps Martinez will get from the original contract what he couldn’t under the settlement, although the Tenth Circuit’s reasoning suggests that it’s unlikely.