ANALYSIS OF JANUARY 14, 2016 SUPREME COURT OPINIONS[Posted January 18, 2016] On Thursday, the Supreme Court handed down two published opinions, both from cases argued in early November.
The financial crisis that began in 2007 spurred Congress to pass legislation designed to bail out banks. That included the Troubled Assets Relief Program. Some of TARP’s provisions are at the heart of Hampton Roads Bankshares v. Harvard.
This Harvard isn’t the university up in Boston; he’s the former president of a smaller bank that got eaten by Hampton Roads Bankshares. In January 2008, Harvard took a job with the now-parent bank as an executive VP, with what most folks would regard as a generous compensation package. The employment agreement also contained a provision commonly known as a golden parachute.
I first heard that expression a few of years after law school. One of my classmates took a job with a corporation instead of a law firm. Within a year or two, that company got bought out, and I was told that he was there just long enough to merit a golden parachute. Although I had never heard the term before, it wasn’t hard to figure out that my classmate had just received a substantial payment for not showing up at work the next day.
Harvard’s deal provided that if the bank experienced a change of control in the parent bank, the new Executive VP could terminate his deal and receive a lump sum of 2.99 times his normal salary and benefit package. Keep that number in mind.
In October of that year, Congress created TARP, which contained significant limits on executive compensation. One of those limits was the payment of golden parachutes. But the definition of the term was just outside Harvard’s deal – it required a payment of three or more times the base compensation. So far, so good.
At the end of that year – I mean the very end; December 31 – the bank decided it had to dip into the TARP program to stay afloat, so it inked a deal with the Treasury. That deal contained an unusual provision: the government was allowed to amend the agreement unilaterally if needed to comply with changes in federal statutes.
On the same day, Harvard agreed with the bank that his contract, specifically including the golden parachute, would be subject to the deal with the Treasury.
One last thing happened that day: Hampton Roads Bankshares ate another small bank. That qualified as a change in control, triggering Harvard’s right to terminate his contract. He had six months to act.
We still aren’t through with the legislative portion of the setup. In February 2009, Congress amended the law governing TARP by getting rid of the 3x multiplier. From that point forward, any payment to a senior executive in consideration of his departure was considered a prohibited golden parachute.
The Treasury didn’t act immediately to amend its contract with the bank; it waited until June 15 to do so. Nine days later, and six days before his contract deadline, Harvard terminated his employment and demanded payment of all that loot. The bank checked with the Treasury before telling Harvard, “Sorry; no parachute for you.”
Harvard went straight to court, suing for breach of contract. He wanted his parachute, and his attorney’s fees for having to sue for it. The bank filed a plea in bar, asserting that it would be against the law for it to pay Harvard anything. The circuit court overruled the plea, holding that if the June action by the Treasury barred payment, it was a taking of a contract right without just compensation. The court gave Harvard a judgment for $655K plus unspecified attorney’s fees.
On appeal, the feds jumped in; the United States filed an amicus brief arguing that the June adjustment wasn’t an unconstitutional taking. But the justices have always preferred the statutory route over the constitutional route when it comes to deciding case. In this decision, they find that Congress’s action in amending the law rendered performance legally impossible – Harvard didn’t disagree with that – so the bank could use that impossibility as a defense, so long as it did so in good faith. The bank’s phone call to the Treasury before refusing the payment met that criterion.
If that ruling seems harsh to you, I invite you to consider the jurisprudential considerations behind it:
This rule encourages parties to conduct their affairs under the law as it evolves, without requiring the promisor to mount expensive challenges to the validity of a law that apparently renders performance of a contractual provision impossible, or analyze the relative cost of penalties for noncompliance with a law on one hand and damages for breach of contract on the other. The rule also prevents parties from using private contract disputes to attack the validity of a law when, as here, the government is not a party and cannot be enjoined from enforcing the allegedly invalid law.
The way I see it, that makes perfect sense, and I agree that this is the right result in this case. Harvard expressly agreed to allow his contract to be governed by the law as it evolved, so he can hardly be heard to complain that it did so.
My pal George Somerville is Virginia’s reigning authority on standards of appellate review. He has identified a spectrum of standards that apply in several categories of appeals. The most favorable to appellants is de novo review, where the justices make up their own minds about the law, offering no deference to the trial judge’s decision. At the other end of the spectrum is the fairly debatable standard, the appellate courts’ most hands-off approach. That’s the relevant standard in EMAC, LLC v. Hanover County.
If you’ve driven I-95 between Richmond and Fredericksburg, you’ve undoubtedly seen the forest of expensive motor homes on the west side of the right-of-way, just north of Exit 89. That mammoth RV sales lot is just south of another parcel that’s planned for development into one of the most cherished used of American soil: an outlet mall. The area is called Northlake Park, and the plan is to allow you to buy your Brooks Brothers and Louis Vuitton bling without having to pay retail, or having to drive to Williamsburg.
Any good commercial development needs signage. This parcel, in a beautiful location next to the Interstate, was big enough to support two large signs, one at the northern end of the new tract, and the other just south of it, on land occupied by the RV lot. The adjacent parcels were owned by different entities; EMAC owned the RV lot and two other companies owned the future outlet-mall site.
Those two other companies filed with the county an application for a conditional use permit to allow the signs, which would feature big LED screens. In 2012, the board of supervisors approved the application with several conditions. The meaningful ones here are that the signs couldn’t be built until the outlet mall was almost ready to open, and the CUP would expire in one year if there had been no substantial construction.
Shortly before the year was up, the applicants asked for a one-year extension. The board agreed. But even then, progress was slow, and it looked like the permits would expire. Both EMAC and the mall developers filed applications for a second one-year extension.
That’s when things got ugly. A realty company that was working with the mall developers filed an application for a brand-new CUP. The major difference was that under this configuration, the southern sign would actually be on the mall parcel, not on the RV lot. The developers were cutting EMAC out of the deal, figuring that their unsuccessful negotiations thus far portended a dead end.
The county board took up the extension requests, and granted the mall developers’, but refused EMAC’s. That sent EMAC straight to court with a suit alleging that the county’s action was arbitrary and capricious. After all, the two applications were for the permit that the county had already twice approved. These signs are highly profitable, and EMAC sensed that the board’s action discriminated against EMAC. The suit sought almost $7 million in damages, plus attorney’s fees and costs.
The trial court was havin’ none of it. It sustained the county’s demurrer, noting that EMAC hadn’t alleged any facts to establish that the existing zoning ordinance was unreasonable. After all, the RV dealership was thriving. It also ruled that the county board’s decision “was supported by a rational basis and was fairly debatable.” The court also pointed to the rise of an adversarial relationship between EMAC and the developers, making the eventual completion of the original project unlikely.
On appeal, the justices first agree with EMAC on one aspect of the circuit court’s ruling. The reasonableness of the zoning ordinance isn’t a relevant factor in claims of discrimination in governmental action, so the success of the RV lot has nothing to do with the analysis. On this issue, the Supreme Court finds that the trial court erred.
But there was an alternative basis for the ruling, relating to the rational basis for the differing outcomes. The justices agree with the trial judge on this one, because they find that the developers and EMAC aren’t similarly situated. The county had a legitimate basis for granting one application and refusing the other one.
The primary distinction is that the mall developers were the ones who applied for the original permit; EMAC didn’t file an application and didn’t own the large parcel. That means that the permit for the southern sign was void from the time of its issuance. And that, you must admit, is a legitimate basis for rejecting an extension request.
The justices also agree that the widening gulf between the adjacent landowners gave the county a reasonable basis to say no to EMAC.
Justice Powell files a solo dissent. In her view, the only governmental objective served by walling off EMAC is to eliminate competition and preserve the mall developers’ economic advantage. That’s hardly in the public interest. She also feels that discriminatory-action analysis depends not on whether the owners are similarly situated, but on whether the properties are. She cites earlier caselaw that she feels implicitly forbids a court from considering who the owners are in making land-use decisions. The only difference between these two parcels, she argues, is the who owns them.
Justice Powell believes that EMAC is entitled to present evidence on its claims, since this case came to the Supreme Court on a sustained demurrer. That means the courts should treat the facts alleged as true, including EMAC’s assertion that the original application, which was filed by an agent, refers to both parcels and claims that the application complied with all county requirements.