Employment Law Daily Bank exec’s covert ‘lift-out’ operation violated severance contract and fiduciary duty
News
Monday, October 29, 2018

Bank exec’s covert ‘lift-out’ operation violated severance contract and fiduciary duty

By Ronald Miller, J.D.

A bank executive who orchestrated a covert “lift-out” operation, which lured a team of commercial lenders away from his employer to a competitor, breached a “Change-in-Control” agreement that prohibited him from engaging in activities contrary to the business affairs or interests of the bank, ruled the Fifth Circuit. There was no doubt that the executive had a fiduciary duty not to act to diminish the bank’s assets, including recruiting a team of commercial lenders away from the bank to a competitor. Further, the lower court correctly rejected the executive’s claim that bank breached his employment agreement by failing to pay a success bonus. Despite a contractual duty of loyalty and fiduciary duty to disclose any potential conflicts of interest, the executive failed to disclose that he had entered an employment agreement to join a rival bank (IberiaBank v. Broussard, October 25, 2018, Higginson, S.).

From 1996 to May 31, 2014, the executive worked as a senior vice president of a state-chartered bank. In 2013, unbeknownst to the executive, the bank’s principal executives began looking for potential merger partners. In September 2013, the executive entered into a “Change-in-Control Severance Agreement,” which required the bank to pay him a bonus of 2.99 times his base salary in the event of a merger. In return, the executive promised to remain loyal to the bank. The agreement allowed the bank to withhold the bonus if he was terminated for just cause; it also contained an arbitration clause.

Merger partner. In late 2013, the executive heard rumors that IberiaBank was emerging as the probable merger partner. He contacted a recruiter to “put some feelers out” for him. A month later, the employer decided to merge with IberiaBank. They entered an agreement in which the employer warranted to “use reasonable best efforts to maintain and preserve the business, executives, and advantageous business relationships. The executive received a copy of that agreement.

One day before the merger was to be announced, the executive signed an employment agreement with IberiaBank. He was hired for the same executive role. Moreover, he was promised a “success bonus” of $250,000 for the successful conversion of the employer’s branch and operating systems. The executive promised to “devote his full professional and business time and attention to the business of the bank.” This employment agreement also included an arbitration agreement.

Meetings with competitor. But in March 2014, the executive met with the CEO of JD Bank, a direct competitor of IberiaBank. He explained that his team wanted to stay together but did not want to work for IberiaBank because of the merger. The executive and members of his team used confidential information to formulate a business plan for JD Bank. On April 15, JD Bank hired the executive and his team.

The merger closed as planned, and the executive was paid his bonus. Two days later he commenced employment with IberiaBank. The executive’s tenure with IberiaBank lasted approximately one month; during that month, he did not disclose to IberiaBank that he had helped negotiate employment for himself and several team members with JD Bank. He was fired for cause on July 3.

Arbitration or lawsuit. The same day the executive was terminated, IberiaBank filed an arbitration demand. In August 2014, IberiaBank filed suit invoking the Computer Fraud and Abuse Act (CFAA) and seeking declaratory judgment that it was not required to pay the executive his success bonus. Ultimately, the parties agreed to close the arbitration and pursue any claims in the court action.

IberiaBank accused the executive of orchestrating a covert “lift-out” operation that wrongfully divested it of valuable human resources for which it had negotiated in the merger agreement. The executive was accused of breach of contract, violation of the CFAA, and unfair trade practices. The executive counterclaimed for breach of the bonus provision, intentional interference with business relations, and breach of an attorneys’ fee provision. The district court granted summary judgment on some claims, and a bench trial was conducted on the remaining claims. Both parties appealed adverse rulings.

Breach of contract. The Fifth Circuit agreed with the trial court that the executive breached the “Change-in-Control” agreement, which prohibited the executive from engaging in activities contrary to the business affairs or interests of the bank. The evidence showed that the bank’s interests included complying with the merger agreement. Louisiana law makes clear that fiduciaries like the executive must disclose any potential conflicts of interest to their beneficiaries. There was no doubt that the executive had a fiduciary duty not to “take action to diminish the bank’s assets,” nor to recruit a team of commercial lenders away from the bank to a competitor, and not to give advice to a competitor on how to take the bank’s customers’ away. Sufficient evidence at trial supported the lower court’s finding that the executive disregarded those obligations.

Executive counterclaim. With regard to the executive’s counterclaim that IberiaBank breached his employment agreement by failing to pay his success bonus, the appeals court agreed that he failed to prove a breach. The employment agreement was a “commutative contract” in that “the performance of the obligation of each party was correlative to the performance of the other.” As the party seeking to recover on a commutative contract, the executive had the burden to “prove performance of his agreement.” He failed to do so. Despite a contractual duty of loyalty and fiduciary duty to disclose any potential conflicts of interest, the executive failed to disclose that he had already entered an employment agreement to join a rival bank. Therefore IberiaBank had no duty to perform.

Computer fraud claim. Next, the executive challenged the district court’s conclusion that he violated the CFAA. CFAA Section 1030(a)(5)(A) prohibits intentionally damaging a computer system when there is no permission to engage in that particular act of damage. The executive argued that the trial court clearly erred in finding that he lacked authorization to delete files from his H:drive during the weeks before and after the merger. The evidence revealed that before the merger, the executive signed an agreement forbidding him from harming IberiaBank systems or any stored information data. Because there was sufficient evidence to support the trial court’s finding that the executive lacked authorization to delete IberiaBank files, the CFAA ruling also was affirmed.

Unfair trade practices claim. Finding that a district court applied an incorrect standard of law, the Fifth Circuit agreed with IberiaBank that it could recover attorneys’ fees under the Louisiana Unfair Trades Practices Act (LUTPA). The trial court concluded that IberiaBank was not entitled to relief under the LUTPA because (1) a LUTPA violation should be found only when the plaintiff has no other means of recourse, and (2) IberiaBank failed to present evidence establishing “acts or omissions by the employee that were unfair to the bank’s customers or were undertaken in his activities on behalf of the bank in the course of its commercial activities.” But the appeals court found that these were not prerequisites for a LUTPA claim.

To the contrary, Louisiana courts permit LUTPA claims to be based on breaches of ethical standards even if there are “parallel remedies” for similar conduct. Further, a LUTPA plaintiff need not show that harm accrued to its customers. Additionally, LUTPA is not limited to misconduct committed on behalf of the plaintiff in the course of the plaintiff’s commercial activities. Accordingly, the trial court’s judgment on IberiaBank’s LUTPA claim was vacated and remanded. The judgment of the district court was affirmed in all other respects.

Interested in submitting an article?

Submit your information to us today!

Learn More
Employment Law Daily

Employment Law Daily: Breaking legal news at your fingertips

Sign up today for your free trial to this daily reporting service created by attorneys, for attorneys. Stay up to date on employment legal matters with same-day coverage of breaking news, court decisions, legislation, and regulatory activity with easy access through email or mobile app.

Free Trial Learn More