Introduction

The Supreme Court of Virginia's decision in Hampton Roads Bankshares, Inc., et al. v. Scott C. Harvard (291 Va. 42, 2016) addresses critical issues surrounding the enforceability of employment agreements in the context of federal financial regulations. The case centers on whether Hampton Roads Bankshares, Inc. (HRB), a financial institution that participated in the Troubled Assets Relief Program (TARP), could invoke federal prohibitions against "golden parachute payments" as a defense against a breach of contract claim brought by Scott C. Harvard, a former senior executive.

Summary of the Judgment

The Supreme Court of Virginia ruled in favor of Hampton Roads Bankshares, holding that the federal prohibition on golden parachute payments under the Emergency Economic Stabilization Act of 2008 (EESA), as implemented by subsequent regulations, barred HRB from honoring the severance payment outlined in Harvard's employment agreement. Consequently, the court reversed the lower circuit court's judgment, which had favored Harvard by awarding damages and attorney's fees.

Analysis

Precedents Cited

The judgment references a series of precedents to bolster its reasoning:

• Housing Auth. of Bristol v. East Tennessee Light & Power Co. — Established that impossibility of performance due to changes in domestic law can excuse contractual obligations.
• White v. J.M. Brown Amusement Co. — Affirmed that subsequent invalidation of a law does not revive contracts that were voided due to the law.
• Finkel Outdoor Prods., Inc. v. Bell — Emphasized that private parties cannot attack the validity of a law through contract disputes.
• Other cases cited include Schuiling v. Harris, Merrell Dow Pharm., Inc. v. Thompson, and Alexandria Redevelopment & Hous. Auth. v. Walker, which collectively support the court's stance on jurisdiction and contract interpretation.

These precedents collectively support the notion that when federal law explicitly prohibits certain contractual stipulations, such as golden parachute payments, private contracts cannot override or ignore these federal mandates.

Legal Reasoning

The court's legal reasoning can be distilled into several key points:

• Impossibility of Performance: HRB invoked the defense that fulfilling the golden parachute payment was rendered impossible due to federal law. The court agreed, citing Virginia contract law principles that excuse performance when external factors, such as changes in law, make contractual obligations unfeasible.
• Supremacy of Federal Law: The Employment Agreement between HRB and Harvard was subject to federal regulations under EESA and TARP. The court upheld that when federal law prohibits certain compensation structures, private contracts must comply, even if this results in a breach of contract.
• Good Faith Compliance: HRB acted in good faith by consulting with the Treasury Department and abiding by the guidance received. This adherence to federal mandates meant that HRB could not be held liable for failing to make payments that were legally barred.
• Rejection of Collateral Attack: Harvard's attempt to challenge the constitutionality of EESA § 111 as a collateral attack was dismissed. The court held that private parties cannot use contract disputes to contest the validity of federal laws.

By analyzing these points, the court concluded that HRB was legally justified in its refusal to honor the golden parachute payment, and the enforcement of the employment agreement was thus nullified under federal law.

Impact

This judgment has significant implications for the interplay between federal regulations and private contractual agreements, particularly in the financial sector:

• Strengthening Federal Oversight: Financial institutions participating in federal programs like TARP must adhere strictly to federal compensation regulations, even if this requires modifying or voiding existing employment contracts.
• Contract Drafting Considerations: Parties entering into employment agreements with federally regulated entities must account for potential changes in law and include provisions that comply with such regulations to avoid future disputes.
• Legal Precedent: The decision reinforces the principle that federal law supersedes private contracts, especially in regulated industries, ensuring that private agreements do not undermine public policy objectives.
• Employee Protections: While the decision limits the ability of employees to claim contractual rights in the face of federal restrictions, it also underscores the importance of clear and compliant contract terms when entering agreements with regulated entities.

Complex Concepts Simplified

• Golden Parachute Payment: A substantial compensation package provided to executives if their employment is terminated due to a merger or acquisition. These payments can include bonuses, severance packages, and other financial incentives.
• TARP (Troubled Assets Relief Program): A federal program established during the 2008 financial crisis to purchase troubled assets and provide capital to financial institutions to stabilize the economy.
• Impossibility of Performance: A contract law principle that excuses a party from fulfilling their contractual obligations when unforeseen events make performance impossible.
• Takings Clause: Part of the Fifth Amendment of the U.S. Constitution, it prohibits the government from taking private property for public use without just compensation.
• Plea in Bar: A legal defense where the defendant introduces evidence that, if true, would negate the plaintiff's claim regardless of the merits.

Conclusion

The Supreme Court of Virginia's decision in Hampton Roads Bankshares, Inc., et al. v. Scott C. Harvard underscores the paramount importance of complying with federal regulations, especially within regulated industries like banking and finance. By invalidating the enforcement of the employment agreement's golden parachute provision, the court reinforced that federal law takes precedence over private contracts. This ruling serves as a critical reminder to both employers and employees to consider prevailing federal laws when drafting and entering into employment agreements, ensuring that contractual obligations remain enforceable and compliant in the face of evolving legal landscapes.