Eighth Circuit Affirms $5 Million Deferred Compensation to Former Executive

When I was a practicing attorney, we had a case in which our client was sued by the fired CEO of one of its subsidiaries. The former CEO had managed to destroy the business in eighteen months, but his contract provided for a generous severance package.  This was the Go-Go 90s, and executive compensation packages were on generous terms. This one provided that the former CEO could sue our client if he thought his severance had been miscalculated, and the client would pay his attorneys’ fees. 

The former CEO did sue, and it fell to me to draft the motion to dismiss the complaint. I had no problem explaining to the court that the contract was clear, that our reading of it was the only reasonable way of reading it, and that the plaintiff’s construction of the contract was not a reasonable way of reading it. On his reading, he made more as a fired employee than he would have made had he remained in his position. The only place where I stumbled was trying to figure out how to persuade the court to dismiss his claim for attorneys' fees.  After all, we had invited him to sue us and promised to pay his attorneys’ fees. The partner pushed me to move for dismissal of that claim as well because the client was in a NOPE (not one penny ever) state of mind. 

We won dismissal on all counts. The court was persuaded that his reading of his entitlement was unreasonable. In fact, the court found that his arguments were not colorable, and thus he was not entitled to attorneys’ fees. Lesson learned. I thought his reading was slightly less reasonable than our clients’ offer that he could sue us for free. The court decided to leave the bandits where it found them.

But now we have entered a new Gilded Age that would make all but the boldest surfers of the dot-com wave blush. Crain Automotive Holdings, LLC (Crain) hired Barton Hankins in 2019 to be its chief operating officer. Four years later, he resigned and sought compensation under Crain’s deferred  compensation plan. When Crain refused, Mr. Hankins brought suit under the Employee Retirement Income Security Act of 1974 (ERISA). The District Court awarded him $5 million plus pre-judgment interest and attorneys' fees. Crain appealed.

In Hankins v. Crain Automotive Holdings, LLC, the Eighth Circuit affirmed.  When Mr. Hankins joined Crain, he signed up for a deferred compensation package (DCP) that offered him up to 5% of Crain’s fair market value. In order for Mr. Hankins’ entitlement to fully vest, he had to stay for five years. As he stayed for four years, he should have been entitled to 80% of his potential payout under the DCP. Crain refused to pay on the ground that Mr. Hankins had not signed two important agreements referenced in Article 4 of the DCP.

Mr. Hankins never signed because the two agreements did not exist. They did not exist, according to Crain, because Mr. Hankins, as COO, was supposed to have created them, and he failed to do so. The District Court concluded that Mr. Hankins had no duty to create the agreements, and so there was no basis for denying him his payout under the DCP. Moreover, the District Court found that Mr. Hankins was entitled to recover his attorneys’ fees.

On appeal, Crain’s main argument was that the DCP provided that Mr. Hankins could be terminated for cause if he breached either of the two non-existent agreements. Because they did not exist, Crain could not determine whether he was in breach. We usually only get arguments this ludicrous in our Reefer Brief feature. The parties knew at the time of the DCP that the two referenced agreements did not exist. The Eighth Circuit reasoned that the reference to those two agreements created a condition subsequent. Should those agreements come into existence, Mr. Hankins could be terminated for violating them. They did not come into existence and so there was no failure of the condition subsequent.

The Court rejected Crain’s suggestion that the reference to the two agreements created a condition precedent.  Mr. Hankins could not be bound by terms of non-existent agreements. To so construe the DCP would turn it into an agreement to agree. The Court also refused to consider Crain’s arguments in reliance on extrinsic evidence. Because the DCP was unambiguous and Crain’s reading of that document was implausible, there could be no recourse to extrinsic evidence. The District Court did not abuse its discretion in awarding attorneys’ fees to Mr. Hankins.

This is clearly the right result in the case. As in the case I handled, it seems like the original mistake was the up-front commitment to an absurdly generous back-end payout. Perhaps that downside protection made sense based on Mr. Hankins past experience. Its reasons for denying the payment were borderline farcical. Fortunately for Crain, the weakness of its arguments made the loss on attorneys’ fees relatively painless, as attorneys fees amounted to only $20,000. Still, that was an expense that Crain could have saved itself.