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{{1-31-93 p.A-2131}}
   [5188] In the Matter of Ernest P. Pettinari and James R. Kearnan, Milford Savings Bank, Milford, Massachusetts, Docket No. FDIC-91-284b (11-17-92).

   Citing circumstances particular to this case and specifically stating that the decision has no precedential value, the FDIC Board adopts ALJ's recommendation and finds in favor of the respondents. It dismisses action seeking restitution of executives' severance benefits, paid pursuant to valid employment contracts predating bank's insolvency, when the bank closed.

   [.1] Officers—Compensation—"Golden Parachute"
   Acceptance of severance pay, where respondents' employment contracts predated bank's insolvency and escrow account for severance funds was established by directors without respondents' participation, is not an unsafe or unsound banking practice on the part of respondent executives.

In the Matter of

ERNEST P. PETTINARI, individually,
and as President, Trustee, and
institution-affiliated party of
Milford Savings Bank, Milford,
Massachusetts,
and
JAMES R. KEARNAN, individually,
and as Executive Vice President,
Trustee, and institution-affiliated
party of Milford Savings Bank,
Milford, Massachusetts,
and
MILFORD SAVINGS BANK
MILFORD, MASSACHUSETTS
(Insured State Nonmember Bank-In
Receivership)
DECISION AND ORDER
FDIC-91-284b

INTRODUCTION

   This matter is before the Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") following the issuance on September 17, 1991, of a Notice of Charges and of Hearing ("Notice") pursuant to section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §1818(b). The Notice charged that Respondents Ernest P. Pettinari and James R. Kearnan ("Respondents")1individually, and as trustees and/or officers, and institution-affiliated parties, engaged in unsafe and unsound banking practices in conducting the business of the Bank and breached their fiduciary duties to the Bank which resulted in Respondents being unjustly enriched. The Notice sought restitution of $620,000 allegedly improperly obtained by Respondents.
   A hearing was held before Administrative Law Judge Arthur L. Shipe ("ALJ") on February 19 and 20, 1992. The ALJ issued a Recommended Decision on June 26, 1992, which found in favor of the Respondents and recommended that the charges against them be dismissed. Thereafter, FDIC Enforcement Counsel submitted Exceptions to the Recommended Decision and Respondents submitted a Motion for Permission to File a Reply Brief to Petitioner's Exceptions to the Administrative Law Judge's Recommended Decision and a Reply Brief. The FDIC's Rules of Practice and Procedures do not provide for a response to Exceptions filed by either party. To insure a full review of the positions of the parties, however, the Board has considered this submission.
   Like the ALJ, the Board finds that in the limited and very specific circumstances of this case, the Notice against these Respondents should be dismissed.

BACKGROUND2

   The following facts are agreed upon by the parties and are adopted by the Board:


1A third respondent, Louis N. Ianzito, entered into a Stipulation and Consent to the Issuance of an Order to Cease and Desist on November 25, 1991.

2References to the record shall be as follows:
   Recommended Decision . . . "R.D. at ____."
   Transcript Volume . . . "Tr. at 1-____ or 2-____."
   Petitioner's Exhibit . . . "Pet. Ex. ____."
   Respondent's Exhibit . . . "Resp. Ex. ____."
   Pettinari Affidavit . . . "Pettinari Aff. ¶____."
{{1-31-93 p.A-2132}}Respondents assumed senior executive positions at the Bank on May 19, 1989, when it already had serious problems. Answer ¶6a. Respondents made improvements in the Bank's operations, but were unable to raise its capital level sufficiently. Respondents' Memorandum of Law in Opposition to the FDIC's Motion for Summary Judgment at 4, 10. In October 1989, Respondents entered into Executive Employment Agreements ("Employment Agreements") with the Bank which provided that in the event the employment of Respondents were to be terminated by the Bank without cause or by the Respondents with cause, the Bank was obligated: (1) for a two-year period to continue to pay the base salary of each Respondent; and (2) for a twelve-month period to provide each Respondent all additional benefits set forth therein. Pet. Ex. 8, 9. The Bank underwent a joint examination by the FDIC and the Commonwealth of Massachusetts as of February 9, 1990, which found the Bank to be insolvent. Pet. Ex. 10. A special meeting of the Bank's board of trustees was held on the morning of April 11, 1990, for the oral presentation to the board of the findings of the February 9, 1990 examination. Answer ¶6b. Following this special meeting, also on April 11, 1990, the Bank's board of trustees reconvened without Respondents Pettinari and Kearnan present. At this meeting, the board authorized the creation of escrow accounts at another institution funded by the Bank to provide the severance benefits for Respondents set forth in their Employment Agreements. Answer ¶6d. On June 5, 1990, Respondent Pettinari was told by the FDIC that unless the Bank were to be able to raise capital immediately the Bank was going to be liquidated. Pettinari Aff. ¶46. On July 3, 1990, Respondent Pettinari was apprised by an FDIC official that the Bank would be closed on July 6, 1990. Tr. at 1–168; Pettinari Aff. ¶52. The escrow accounts at Eastland Savings Bank, Woonsocket, Rhode Island, were closed on the morning of July 6, 1990. Answer ¶6h. Checks in amounts consistent with the terms of the Employment Agreements were issued to Respondents.3Pettinari Aff. ¶53; Answer ¶¶6e, 6g, 6h. The Commissioner of Banks for the Commonwealth of Massachusetts closed the Bank on the afternoon of July 6, 1990, and the FDIC was appointed receiver for the failed institution. Answer ¶6g.

DISCUSSION

   [.1] Two previous cases, In the Matter of Harold A. Hoffman, 2 FDIC Enforcement Decisions, ¶5140 (1989),4and In the Matter of Richard A. Palmer, et al., 2 FDIC Enforcement Decisions, ¶5169 (1991), make it clear that, once management is on notice that the regulators consider an institution to be insolvent, "they must act to preserve assets for the protection of the depositor and other creditors, rather than expend assets for their own benefit, . . ." In the Matter of Harold A. Hoffman, at A - 1494; Palmer at A - 1810. The Board reaffirms its holdings in these cases and they ordinarily should be recognized as controlling. Nonetheless, the instant case involves a number of unique facts and circumstances which, with respect to these Respondents in these specific circumstances, cause the Board to exercise its discretion to dismiss the Notice.
   In reaching this decision, the Board is aware that a final rule making regarding golden parachutes is still pending, and the Board has not made final policy determinations in many important areas that will be covered by these regulations when issued. For example, the applicability to incumbent employees of the "white knight" exception to the prohibition against golden parachutes and the magnitude of reasonable golden parachutes are still under consideration. This decision is not intended to nor does it express any final policy decisions or determinations of the Board with respect to these issues. Similarly, this decision may not be relied upon as precedent in any other enforcement action involving severance or other future benefits received by bank officers or directors. Moreover, this decision is not to be read to condone the practice of placing funds in escrow to put them beyond the reach of the receiver. Rather, this decision represents the exercise of its discretion by the Board in this particular matter.

CONCLUSION

   Based upon its thorough review of the record in this proceeding, the Board con-


3Each Respondent received two years' salary plus a $30,000 allowance for outplacement service. At the time the funds were withdrawn, taxes were not withheld by the Escrow Agent on behalf of Respondents. Subsequently, however, Respondents paid all taxes due.

4In the Matter of Harold A. Hoffman was affirmed by the U.S. Court of Appeals for the 9th Circuit, Hoffman v. FDIC, 912 F.2d 1172 (9th Cir. 1990).
{{1-31-93 p.A-2133}}cludes that under the unique circumstances of this case Respondents should not be held liable for restitution for the severance payments received. Accordingly, the Board will enter an order dismissing the Notice.

ORDER

   The Board of the FDIC has considered the entire record in this proceeding, including the ALJ's Recommended Decision and Order and Exceptions to the Recommended Decision filed by FDIC Enforcement Counsel, and has concluded that in the exercise of its discretion Respondents shall not be held liable for restitution.
   ACCORDINGLY, IT IS HEREBY ORDERED, that the Notice against Respondents Ernest P. Pettinari and James P. Kearnan is dismissed.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 17th day of November, 1992.

/s/ Hoyle L. Robinson
Executive Secretary

_____________________________________________
RECOMMENDED DECISION

In the Matter of
Ernest P. Pettinari, individually
and as President, Trustee and
institution-affiliated party of
Milford Savings Bank, Milford,
Massachusetts,
and
James R. Kearnan, individually and
as Executive Vice President,
Trustee, and institution-affiliated
party of Milford Savings Bank,
Milford, Massachusetts,
and
Milford Savings Bank
Milford, Massachusetts
(Insured State Nonmember Bank—In
Receivership)

   Arthur L. Shipe, Administrative Law Judge: Office of Financial Institution Adjudication
   This proceeding was instituted by the Federal Deposit Insurance Corporation on September 17, 1991, by the issuance of a Notice of Charges pursuant to the Federal Deposit Insurance Act (12 U.S.C. §1811 et seq). The action was initiated to determine whether the respondents should be required to make restitution to the failed depository institution under the provisions of Section 8(b) of the Act.
   The matter was tried in Boston, Massachusetts, on February 19 and 20, 1992, wherein the FDIC and respondents appeared through the above counsel.
   On the record as a whole, including my observations of the witnesses, briefs, and arguments presented, I enter the following Recommended Decision.
   I. Introduction
   Before its closure by state regulators on July 3, 1990, the Milford Savings Bank was an insured state-chartered nonmember bank doing business in Milford, Massachusetts. Respondents Pettinari and Kearnan were officers and directors of the institution, while respondent Ianzito, the bank's treasurer for some 30 years, had retired as a full-time officer, but continued his affiliation with the institution as chairman of the Board of Trustees.1
   The Notice alleges in its most basic terms that respondents engaged in unsafe and unsound banking practices by causing and facilitating the escrow of certain severance payments pursuant to Executive Employment Agreements previously adopted by resolution of the Board of Trustees. The Escrow Agreements appointed respondent Ianzito as agent of the funds, to be held for the benefit of respondents Pettinari and Kearnan. The terms of the agreements provided severance compensation to each of the officers in the event the bank should cease operations for whatever reason.
   On July 3, 1990, the institution was closed by the Bank Commissioner for the Commonwealth of Massachusetts. Earlier that day, the severance payments were withdrawn from the Escrow Account, which was maintained at another financial institution, and were paid to the respondents by Mr. Ianzito, the trustee.
   The Notice of Charges alleges that the payment of this severance compensation was made in contemplation of the bank's pending closure, in preference to the bank's other creditors, and with notice of the bank's insolvent condition. The contention, therefore, is that receipt of these payments con-


1The terms "Trustee" and "Director" are used interchangeably throughout the record.
{{1-31-93 p.A-2134}}stituted unjust enrichment to the individual respondents, for which affirmative restitution should be ordered.
   Accordingly, the FDIC initiated this action to determine whether respondents should be required to make restitution to the failed institution in the amounts representing the payments they received under the severance provisions of their Executive Employment Contracts.
   By Stipulation and Consent Agreement executed November 19, 1991, the charges pending against respondent Ianzito were formally settled and dismissed by the Regional Director. The matter thereafter proceeded to hearing on the remaining allegations involving respondents Pettinari and Kearnan.
   II. Discussion of Facts
   Respondent Pettinari joined the Milford Savings Bank in the Fall of 1986. He was a practicing attorney of some nine years in the local community, and had occasionally acted as part-time bank counsel before being offered a position with the institution. He left what appeared to be a stable private law practice, and assumed the full-time position of Executive Vice-President of Milford Savings Bank.
   Respondent Kearnan joined the institution in March of 1988. He assumed the title of Vice President of Operations and Chief Financial Officer, and had previously worked as a Certified Public Accountant for some 22 years.
   Commencing on October 14, 1988, the bank underwent a joint examination by both Massachusetts and FDIC examiners. The results of the examination were presented to the Board of Trustees in January of 1989, and to say the least, the results were somewhat alarming. The report noted numerous violations of both state and federal banking law, particularly with respect to the bank's lending practices. The institution was assigned a composite Uniform Financial Institution Rating of 4, largely as a result of serious financial weakness and other unsatisfactory operating conditions.
   The Report of this Examination was transmitted to the bank's Board of Directors on May 15, 1989. Two days later, after negotiating a severance package of some $680,000 in value, the former president of the institution, one Mr. Raymond Lambert, resigned. Respondent Pettinari was then appointed as bank President, and respondent Kearnan was promoted to the position of Executive Vice President.
   The findings of the examination ultimately resulted in the stipulation to, and entry of, a Cease and Desist Order on June 23, 1989. Among other things, the Order required the bank to retain qualified management, to correct a number of operational deficiencies, and to file a series of policy proposals and reports with the Regional Director of the FDIC.
   The Bank's Board of Trustees retained the services of new bank counsel, one Mr. Charles E. White, whose principal responsibilities were to assist the bank in negotiating and thereafter complying with the various articles of the Cease and Desist Order. Mr. White, an attorney of substantial banking experience, advised the board on a number of matters, and instituted several changes.
   During the summer of 1989, the Board of Trustees directed their counsel to draft written employment agreements for both executive officers, Messrs. Pettinari and Kearnan. The agreements, intended for the benefit of both the institution as well as the respondents, defined the term, scope, and duties of each officer, imposed certain covenants of noncompetition, and finally provided for salary, compensation, and other benefits, including severance payments upon termination of their employ.
   The terms of the above agreements were duly approved by the Board of Trustees, and each agreement was executed by the respondents on October 4, 1989.
   The bank underwent its next joint examination as of the close of business February 9, 1990. The results of this examination were again very alarming, but for somewhat different reasons. While significant improvement was noted in the areas previously criticized, the institution was badly undercapitalized, and was suffering from negative capital asset ratios. The bank was assigned a Uniform Financial Institution Rating of 5, and required immediate corrective measures, in the form of recapitalization, merger, capital assistance, or acquisition, in order to avoid the institution's likely failure.
   These findings were presented to the Board of Trustees in a special executive session on April 11, 1990. Four representatives of the Federal Deposit Insurance Corporation attended this meeting, as did three representative of the state banking and bank insurance commissions. Though the institution {{1-31-93 p.A-2135}}was in seriously poor condition, the general theme of the meeting was very positive, and the directors and officers of the institution were reassured that the bank was not slated for immediate closure and that management retained full direction and control of the bank.
   The directors and officers were commended for their accomplishments, and were encouraged to employ their best efforts to restore the bank to a safe and sound condition. Management was particularly noted for its successful efforts in complying with the outstanding Cease and Desist Order.
   In most respects, the general tone of the meeting seemed to suggest that Milford Savings Bank could and would recover from its current situation, but only with the diligent and devoted efforts of bank management.
   During the meeting, Director Ianzito inquired of the FDIC representatives whether the executive employment agreements would be honored if the institution were merged, acquired, or liquidated. There had previously been expressed great uncertainty on the part of the FDIC concerning this issue, and Mr. Carl Schnapp, the FDIC representative in attendance at the meeting, advised the Board of Trustees that the employment contracts would not be honored by the successor to the institution, including the FDIC if it were appointed as receiver.
   Mr. Pettinari was extremely disturbed at this response. A rather heated discussion ensued, at which point Mr. Pettinari suggested that his employment agreement, if later subject to repudiation by the FDIC, simply offered him no incentive to stay with the ailing institution. Mr. Schnapp then replied that the employment agreement was an enforceable contract, which bound Mr. Pettinari to a five year term. At this suggestion, that the FDIC would consider enforcement of the contract, to the extent that it committed Mr. Pettinari, but would dishonor the contract, to the extent that it rewarded or compensated him, clearly enraged Mr. Pettinari, apparently disturbed the bank's Board of Trustees, and perplexes even me.
   At the conclusion of this meeting, and after the departure of the federal and state regulators, the Board of Directors, with their counsel, Mr. White, convened an executive session of the Board. Neither Mr. Pettinari nor Mr. Kearnan were permitted attendance at the ensuring discussion, which concerned fear on the part of the Board members that the bank's two most important employees might leave. Based on the testimony presented at the hearing, and the demeanor of the witnesses that appeared before me, it is my very distinct impression that the fear was well-founded, and the concern genuine.
   Accordingly, after a thorough discussion of the various possibilities available to the Board, the members concluded that the institution would be best served by the establishment of an escrow account outside of Milford Savings Bank, in which the severance compensation provided for in the previously-executed Employment Agreements would be deposited. The board reasoned that establishing such accounts was absolutely necessary to insure the continued services of their badly-needed executive officers.
   I am convinced that at the time this decision was rendered, all parties to this proceeding were optimistic that the Milford Savings Bank could recover. There is nothing in the record that suggests any representation by the FDIC or state regulators that at the time this decision was made, the institution was slated for closure.
   Nor is there any evidence in the record that the directors of Milford Savings Bank acted out of any other interest than that of the Bank. Accordingly, the members voted, approving the escrow accounts described above.
   Counsel for the board drafted the agreements, and on April 30, 1991, they were accepted and executed by the respondents. Shortly thereafter, Mr. Ianzito caused the funds to be transferred to the escrow account.
   In the following months, Mr. Pettinari and Mr. Kearnan began diligent, unprecedented efforts to salvage the institution. They actively pursued capital assistance from the FDIC, submitted extensive plans and proposals for such assistance, and met and negotiated with various officials in their attempts to revive the Milford Savings Bank. Their efforts were nothing short of outstanding, and by all indications, were motivated not out of any self interest, but out of a sincere desire to save the institution.
   Fueled by rumors circulating through the local community that the institution was troubled, the bank experienced a massive run on {{1-31-93 p.A-2136}}its deposits on June 7 and 8, 1990. Customers demanded cash, and during this 48 hour period, over five million dollars was withdrawn from the institution.
   The respondents worked frantically to calm this public panic. They appeared on a local radio station to broadcast their assurance to the bank's customers that deposits were safe, and worked feverishly to insure adequate cash was on hand at the bank's branch offices. In all respects the respondents committed their complete efforts to "weather the storm."
   Following this run on deposits, the institution was notified that the FDIC was suspending any consideration of capital assistance to the Milford Savings Bank. Capital assistance had been considered the most promising alternative for the institution, and now the prospects of procuring such assistance seemed jeopardized. Mr. Pettinari immediately contacted and met with FDIC officials, in what would later prove to be his last concerted effort to save the institution. On June 26, 1990, after meeting with an FDIC official by the name of Mr. John Lane, it became evident to Mr. Pettinari that the institution would not survive.
   Seven days later, on July 3, 1990, Mr. Pettinari was apprised by FDIC officials that the institution would close for liquidation on July 6, 1990. On the morning of July 6, 1990, immediately before closure of the Milford Savings Bank, the respondents met with Mr. Ianzito, the Escrow Agent, to receive disbursement of the respective severance funds established by the bank's Board of Trustees. The funds were distributed to the respondents, and the Milford Savings Bank was thereafter closed by the state regulators.
   Since the closure of this institution, as might be expected, neither of the respondents has been gainfully employed. In the banking industry in particular, the effect of one "going down with his ship" is not particularly enhancing. Yet that was a risk for which respondents bargained, and to now hold that the benefit of that bargain should be denied respondents I think is unfair. In may opinion, the benefits provided were both fair and reasonable, and as conceded by counsel for the Federal Deposit Insurance Corporation, their establishment was principally intended for the benefit of the bank. Accordingly, I make the following findings of fact:
   1. The Bank, at all times pertinent to the charges contained herein, was a corporation existing and doing business under the laws of the Commonwealth of Massachusetts, having its principal place of business in Milford, Massachusetts. It was an insured State nonmember bank subject to the Act, 12 U.S.C. §§1811–18311, the Rules and Regulations of the FDIC, 12 C.F.R. Chapter III, and the laws of the Commonwealth of Massachusetts.
   2. At all times pertinent to the charges contained herein, Respondent Ernest P. Pettinari was President of the Bank, a member of the Board of Trustees, and an institution-affiliated party thereto.
   3. At all times pertinent to the charges contained herein, Respondent James R. Kearnan was Executive Vice President of the Bank, a member of the Board of Trustees, and an institution-affiliated party thereto.
   4. The employment of Respondents Pettinari and Kearnan was governed by Executive Employment Agreements dated October 4, 1989. The Agreements, which are virtually identical in form, provide that in the event the employment of Respondents Pettinari and Kearnan were to be terminated by the Bank without cause or by the executive with cause, then the Bank is obligated: (1) for at two-year period to continue to pay the base salary of the terminated executive; and (2) for a twelve month period the terminated executive shall continue to receive all additional benefits described in the Agreement.
   5. A Special Meeting of the Bank's Board of Trustees was held on the morning of April 11, 1990, for the verbal presentation to the Board of the findings of the February 2, 1990, joint Commonwealth/FDIC examination of the Bank.
   6. FDIC representatives, after being asked by Board members whether the Executive Employment Agreements would be honored, replied that the Agreements would be disapproved by any successor to the Bank, including the FDIC as receiver. When Respondent Pettinari voiced dissatisfaction with that interpretation, and suggested he might leave the Bank, he was then apprised by the FDIC representative that the Executive Employment Agreement was a binding contract that committed his services to the Bank.
   7. Following the departure of the examiners, a Special Meeting of the Board was reconvened, and the Trustees passed a Resolution establishing an escrow account, iden- {{1-31-93 p.A-2137}}tifying Respondent Ianzito as the Escrow Agent. The Resolution furthermore authorized deposit into the Escrow Account for the benefit of Respondent Pettinari, a sum in the amount of $330,000, and for the benefit of Respondent Kearnan a sum in the amount $290,000, to be paid to the respective individuals in the event that the Bank ceased to exist as an independent Massachusetts Savings Bank for any reason.
   8. Escrow Agreements for Respondents Pettinari and Kearnan, in dollar amounts consistent with the Board Resolution, were executed on April 30, 1990.
   9. On May 2, 1990, $620,000 of the Bank's money was wired to Eastland Savings Bank, Woonsocket, Rhode Island, into two accounts with Respondent Ianzito as Escrow Agent.
   10. The Milford Savings Bank was closed by the Commissioner of Banks for the Commonwealth of Massachusetts on July 6, 1990, and the FDIC was appointed receiver of the failed institution.
   11. The escrow accounts at Eastland Savings Bank were closed on the morning of July 6, 1990, hours before the Bank closed. Four checks were issued: $330,000 to Respondent Pettinari, $290,000 to Respondent Kearnan, and two checks totalling $7,031.12, representing the accrued interest on the two accounts, to Respondent Ianzito.
   12. The escrow accounts were established at a time when the Bank was in serious financial difficulty. The accounts were established for the benefit of the Bank, so as to assure the continued services of the badly needed bank officers.

   III. Discussion of Law

   12 U.S.C. §1818(b)(6) provides in pertinent part that the authority to issue a cease and desist order requiring affirmative action to correct conditions resulting from violations or practices, includes the authority to require an institution or its affiliated party to "make restitution or provide indemnification, or guarantee against loss, if—such depository institution or such party was unjustly enriched in connection with such violation [of law] or [unsafe or unsound] practice."
   Thus, the threshold question presented by this proceeding is whether the acceptance by Messrs. Pettinari and Kearnan, of the severance payments provided by the bank's Board of Trustees, constitutes unsafe or unsound banking practices by which respondents were unjustly enriched, and for which they should be required to indemnify the institution's successor. I conclude that under the facts of this case, the authorization to make these payments was not a prohibited practice, nor did the payment thereof constitute the unjust enrichment of the respondents.
   I realize that FDIC Examiner Joseph Frackelton, who testified in the instant matter, characterized the authorization of the escrow payments as an unsafe and unsound practice. I further realize that the law on this issue requires that great deference be afforded to the unique opinion of FDIC Examiners. In the Matter of Anonymous, 1 FDIC Enf. Dec ¶5086 (1987 Adjudicated Decisions). I am not convinced, however, that the idea concerning the establishment of these escrow accounts did not in some way originate with Mr. Frackelton himself. The testimony on this issue is conflicting, and Mr. Frackelton denied that he ever suggested or countenanced the use of escrow agreements to accomplish payment to the officers. Having personally observed his testimony, however, I am somewhat concerned about this denial.
   When questioned about his past conversations concerning the escrow account, I found the testimony of Mr. Frackelton to be evasive, defensive, and unconvincing. Mr. Pettinari, on the other hand, struck me as the more believable and credible witness, and I am therefore persuaded, and inclined to believe, that Mr. Frackelton at some point mentioned, if not suggested, that escrow agreements might be used as a possible alternative to compensate the bank's officers.
   Given this inconsistency in the opinion expressed by the examiner, I think it now unfair to conclude, with the benefit of great hindsight, that the practice of establishing the escrow of severance benefits in the instant situation was per se unsafe or unsound.
   Even assuming, arguendo, that the practice was unsafe or unsound within the meaning of the Act, I think it improper and patently unfair that responsibility therefor be placed upon respondents. The evidence clearly establishes that the decision to approve the escrow agreements, and to thereafter establish the escrow accounts, came solely from the Board of Trustees. The re- {{1-31-93 p.A-2138}}spondents, by merely accepting the benefit of this decision, cannot be said to have caused nor necessarily facilitated the payments of these funds as has been alleged in the Notice of Charges.
   Next, there is the issue of whether respondents were unjustly enriched as a result of this practice. In my opinion they were not. Messrs. Pettinari and Kearnan bargained for a risky proposition that unfortunately failed. In consideration for that bargain, they devoted substantial service and effort to the great benefit of this bank, at their personal and professional peril. To conclude that what enrichment was afforded these officers was unjust, simply defies reason.2
   Finally, there is a rule of In the Matter of Hoffman, 2 FDIC Enf. Dec. ¶5140 (1991 Adjudicated Decisions). The holding basically provides as follows:

    Once findings of insolvency and an intention to close a bank have been communicated to the bank, it is no longer "business as usual." The fiduciary responsibilities of the officers and directors require that they act to preserve assets for the protection of the depositors and other creditors, rather than expend assets for their own benefit, no matter how prudent these expenditures may be in another context.

Id. at A-1494.
   The holding of this case, which acknowledges that circumstances of each individual case must be considered,3is critically premised upon certain questionable practices that are not present in the instant matter.
   First, at the time the Milford Board of Directors approved and executed the subject escrow agreements, there were no indications whatsoever that the bank regulators had any intention of closing the institution. In fact, the Report of Examination, presented to the Board on April 11, 1990, states in that portion of the Examiner's Comments and Conclusions:

    All aforementioned comments and conclusions were discussed, and bank management expressed no exceptions. They were encouraged to proceed in a prudent fashion with business-as-usual, and to take all necessary steps to obtain capital infusion.

   Petitioner's Exhibit 10, Page 1–8. Emphasis Supplied.
   It is not disputed that the institution was technically insolvent at the time. However, nothing in the record suggests that the institution was slated for closure, and all evidence points to the suggestion that the overall conclusion was that the institution could and would survive.
   Last, but not least, I must, if only briefly, address the issue of self dealing. In Hoffman, the bank's board of directors established a "Self-Insurance Indemnity Trust," in which they set aside bank funds to protect themselves from possible suits that might occur should the bank close.4The inside appropriation of bank assets for the benefit of oneself is a wholly different matter from that presented by the case of Messrs. Pettinari and Kearnan, who took no part in the decision of whether and how their compensation benefits would be established. Accordingly, I enter the following legal conclusions, and recommend entry of the proposed Order accompanying this decision.
   1. The establishment of the Escrow Agreements by the bank's Board of Trustees on April 11, 1990, was neither a violation of applicable law, nor an unsafe or unsound banking practice within the meaning of the Federal Deposit Insurance Act, 12 U.S.C. §1811 et. seq.
   2. The execution of the Escrow Agreements by the respondents on April 30, 1990, were neither violations of applicable law, nor unsafe or unsound practices within the Federal Deposit Insurance Act, Supra.
   3. Given the individual circumstances of this particular case, the transfer of funds authorized by the Board of Directors, pursuant to the terms of the above-described Escrow Agreements, were neither violations of applicable law, nor unsafe or unsound banking practices, within the meaning of the Act.
   4. Respondents themselves have not engaged in violations of law or unsafe or unsound banking practices by accepting the benefits of the Employment Contracts and Escrow Agreements described herein.

2Each respondent received severance pay in an amount roughly equal to two year's salary before taxes. Given the circumstances, this amount does not appear unreasonable, and in my opinion, can never be said to adequately compensate them for the hardship they have since endured.

3Id. at A-1491.

4Id. at A-1493.
{{2-28-93 p.A-2139}}
   5. Respondents were not unjustly enriched by the acceptance of the severance benefits provided for in the Employment Contracts and Escrow Agreements existing between themselves and the bank.
   6. Respondents are not personally liable for restitution of the severance benefits received pursuant to the above agreements.
   Dated this 26th day of June, 1992, in Washington, DC.

/s/ Arthur L. Shipe
Administrative Law Judge
Date: June 26, 1992

   PROPOSED ORDER

   1. The establishment of the Escrow Agreements by the bank's Board of Trustees on April 11, 1990, was neither a violation of applicable law, nor an unsafe or unsound banking practice within the meaning of the Federal Deposit Insurance Act, 12 U.S.C. §1811 et. seq.
   2. The execution of the Escrow Agreements by the respondents on April 30, 1990, were neither violations of applicable law, nor unsafe or unsound practices within the Federal Deposit Insurance Act, Supra.
   3. Given the individual circumstances of this particular case, the transfer of funds authorized by the Board of Directors, pursuant to the terms of the above-described Escrow Agreements, were neither violations of applicable law, nor unsafe or unsound banking practices, within the meaning of the Act.
   4. Respondents themselves have not engaged in violations of law or unsafe or unsound banking practices by accepting the benefits of the Employment Contracts and Escrow Agreements described herein.
   5. Respondents were not unjustly enriched by the acceptance of the severance benefits provided for in the Employment Contracts and Escrow Agreements existing between themselves and the bank.
   6. Respondents are not personally liable for restitution of the severance benefits received pursuant to the above agreements.
   7. The proceeding initiated by the Notice of Charges is therefore dismissed.

/s/ Board of Directors
Federal Deposit Insurance Corporation
Washington, DC

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