## Facts

- Scott C. Harvard served as president and CEO of Shore Bank and, after a merger, became an executive vice president of Hampton Roads Bankshares, Inc. while remaining Shore Bank’s president and CEO.
- In January 2008, Harvard and Shore Bank executed an employment agreement that included a change-in-control provision allowing Harvard to resign within six months after a “Change in Control” and receive severance.
- The severance benefit was defined as 2.99 times a base amount, payable in sixty equal monthly installments.
- Hampton Roads participated in TARP after enactment of the Emergency Economic Stabilization Act of 2008 (EESA) and agreed to comply with EESA and Treasury regulations, including later amendments, while Treasury held its investment.
- Harvard signed amendments acknowledging his agreement would be modified as necessary to comply with EESA and Treasury rules.
- A change in control occurred on December 31, 2008, when Hampton Roads acquired another bank, triggering Harvard’s contractual resignation window.
- In 2009, Congress and Treasury expanded and implemented restrictions prohibiting TARP recipients from making “golden parachute payments” (severance-type payments) to senior executive officers.
- On June 24, 2009, within the contractual window, Harvard resigned and demanded severance; Hampton Roads refused after Treasury indicated payment would violate the golden-parachute prohibition.
- Harvard sued for breach of contract in Virginia circuit court seeking severance and contractual attorneys’ fees; Hampton Roads asserted illegality under federal law as an affirmative defense.
- The circuit court awarded severance and attorneys’ fees to Harvard; Hampton Roads appealed.

## Issues

1. Whether federal EESA/TARP golden-parachute restrictions rendered performance illegal, excusing Hampton Roads from paying contractually promised severance and defeating a state-law breach-of-contract damages claim.
2. Whether Harvard could litigate, within a state-court contract suit against the bank, a claim that application of the federal prohibition effected an unconstitutional taking without just compensation.
3. Whether contractual fee-shifting (attorneys’ fees) constitutes a prohibited “golden parachute payment” under EESA/TARP restrictions.

## Decision

- The Supreme Court of Virginia held Hampton Roads could assert the federal golden-parachute prohibition as a defense because federal law made the severance payment illegal while the restrictions applied.
- The court reversed the award of severance, reasoning that a damages judgment for unpaid severance would effectively require payment of the prohibited exit benefit.
- The court held Harvard could not collaterally challenge the federal restriction as an unconstitutional taking in this contract action; any takings claim must be brought against the United States in an appropriate forum.
- The court held the contractual attorneys’ fee provision was not a golden parachute payment because it was not compensation for employment services or an exit-severance benefit.
- Disposition was reversed in part (severance) and affirmed in part (enforceability of the fee-shifting provision), with further proceedings as needed to apply the fee provision consistent with the litigation outcome.

## Legal Principles

- A party is excused from contract performance when supervening federal law renders performance illegal; state-law remedies may not impose damages that functionally compel the prohibited performance.
- Federal law is supreme over conflicting state contract enforcement; a court may not enforce private contract terms in a manner that would require violation of controlling federal statutes or regulations.
- A constitutional takings challenge to federal action generally must be brought against the United States and cannot be raised as a collateral attack within a state-law contract suit against a private party.
- “Golden parachute payment” restrictions target severance-like compensation to departing senior executive officers; contractual reimbursement of attorneys’ fees is not treated as prohibited executive compensation absent a regulatory basis to classify it as such.

## Conclusion

The court held that TARP-related golden-parachute restrictions barred payment of a senior executive’s contractual change-in-control severance, excusing the bank from performance, while leaving intact the contract’s attorneys’ fee-shifting provision and rejecting a takings argument raised collaterally in the contract action.


Hampton Roads Bankshares, Inc. v. Harvard, 781 S.E.2d 172 (Va. 2016)