Repayment Of Wachovia Promissory Notes Cut In Wells Fargo Arbitration

May 5, 2014

In today's Blog installment of the old employee forgivable loan ("EFL") saga, we consider the repayment obligation of a former Citigroup rep who received three EFLs, the first in the form of a bonus in 2008 for moving his book over to Wachovia Securities, LLC, which ultimately morphed into Wells Fargo Advisors, LLC. Would the former employee get a full or partial forgiveness of his EFLs because Wells Fargo allegedly failed to honor the expectations of a workplace that he believed Wachovia had promised to him? Would Wells Fargo's lawyers obtain full compensation for attorneys' fee even if the submitted claim contained redactions for specific charges?  A fascinating case with a superb Decision.

Three EFLs

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in June 2011, Claimant Wells Fargo Advisors sought to collect the balances due on three promissory notes dated July 30, 2008, October 23, 2009, and May 28, 2010. Claimant ultimately sought the principal amounts, respectively, of $307,210.57; $86,361.47, and $72,811.18  plus interest, attorneys' fees, and costs. In the Matter of the FINRA Arbitration Between Wells Fargo Advisors, LLC, formeriy known as Wachovia Securities, LLC, Claimant/Counter-Respondent, vs. Steven H. Grundstedt, Respondent/Counter-Claimant (FINRA Arbitration 11-02245, April 25, 2014).

A Counterclaim

Respondent Grundstedt generally denied the allegations, asserted various affirmative defenses and counter-claimed on the basis of, among other causes, breaches of contract and the implied covenant of good faith. Grundstedt sought damages of between $458,383.00 and $588,970.00 after crediting the amounts Claimant sought on the three notes.

The Decision

The FINRA Arbitration Panel found Respondent Grundstedt liable to and ordered him to pay to Claimant Wells Fargo Advisors:
  • $189,745.63 on the 2008 note inclusive of an offset for Respondent Grundstedt's Counterclaim;
  • $91,811.53 on the 2009 note;
  • $77,101.84 on the 2010 note; and
  • $60,000 in attorneys' fees. 
Bill Singer's Comment

Regrettably, the bulk of FINRA's arbitration decisions would typically abandon us at this point. We would know little more than the amounts of the note(s) in dispute and have to make do with a conclusory award in favor of one party or the other.  Worse, we would be tantalized by the 2008 note offset but unable to understand why it was awarded. As I often lament, such decisions are bereft of content and context.

Thankfully, the decision in this case is exemplary in both detail and explanation and, as such, I offer the Panel's excellent analysis and explanations:

WFA's claims against Grundstedt are for failure to repay three (3) separate forgivable promissory notes incident to his employment with WFA's predecessor, Wachovia Securities, LLC ("Wachovia"). Note 1 Is in the principal amount of $320,000.00 and dated July 30, 2008. it was the "transitional bonus" Grundstedt was rewarded with for moving his book of business from his former employer, Citigroup. Like the other notes in this case, the principal portion of Note 1 could be taken as a lump sum (the option Grundstedt chose), or could be taken in monthly installments. In either case, each monthly re-payment of principal and interest was to be offset by the forgiveness of an equivalent amount so long as Grundstedt remained in Wachovia's employ.

At the time Grundstedt accepted employment with Wachovia, he signed multiple agreements including a "representative agreement," an "offer summary," and loan documents relating to "transitional bonus." Notably, Grundstedt signed two separate registered representative agreements. One of these agreements ("Exhibit Q") promised Grundstedt that he would receive various elements of "support" from Wachovia including, but not limited to, "re-assignment of accounts, walk-ins, prospective customer leads . . . " and such other forms of support. Notably, a subsequent representative agreement Grundstedt signed did not contain these same promises, but neither did it contain a "merger clause" and the evidence was uncontradicted that the promises in Exhibit Q were consistent with the oral promises made to Grundstedt by Wachovia's hiring manager, both before and after he joined the company.

Wachovia initially lived up to its promises, but things changed after Wachovia was acquired by WFA in the aftermath of the financial crisis of 2008. In the fall of 2009, after the merger was announced, WFA began to do things well run and efficient businesses are inclined to do. These things included consolidating operations, closing branches, changing payouts and various other things presumably designed to make the overall business more efficient and profitable. And while WFA was, and is, entitled to manage its business in the "best" possible way, some of its decisions violated Grundstedt's reasonable expectations under the agreement(s) he signed with Wachovia, which WFA became subject to following the merger.

However, even after WFA implemented some of the changes about which Grundstedt now complains, he continued to accept bonuses in the form of forgivable loans-specifically in late October 2009 he took a loan in the amount of $87,707.00  (Note 2), and then again in May 2010 he took a further loan in the amount of $61,559.00 (Note 3).

Grundstedt resigned from WFA on or about October 15, 2010 to go to work for Mass. Mutual. Prior to signing on to work for Mass. Mutual, Grundstedt represented in a letter to his new employer, dated September 2010, that he would honor his financial obligations to WFA. WFA claims that Grundstedt owes the following amounts on the respective notes:

Note 1: $251,492.84 (principal)
            $55,717.73 (interest 6.75%)

Note 2: $72,152.47 (principal)
            $14,209.00 (interest 6%)
            $86,361 47

Note 3: $61,058.80 (principal)
            $11,752.38 (interest 5.87%)

On the other hand, Grundstedt claims WFA owes him somewhere between $458,383.00 and $588,970.00 after crediting the amounts WFA claims are due under the 3 notes detailed above. Grundstedt's theory is that WFA breached an implied contract and/or the covenant of good faith and fair dealing in the contracts Grundstedt did sign with Wachovia that caused him substantial economic damage. The Panel finds under the circumstances that WFA did breach the covenant of good faith and fair dealing in Wachovia s contracts with Grundstedt. However, the loans Grundstedt took pursuant to Note 2 and Note 3 were taken after WFA began implementing many of the changes about which Grundstedt now complains.

Therefore, we find Grundstedt fully liable for the amounts claimed by WFA under Note 2 and Note 3 above. Interest on the stated principal balances of those notes is as follows through May 1, 2014: Note 2 -- $19,659.06 and Note 3 -- $16,043.04. Therefore, the sums due on Note 2 and Note 3, respectively, are: $91 811.53 and $77,101.84.

As to Note 1, the evidence was thin but uncontradicted that as a result of some of the changes implemented by WFA, Grundstedt's production dropped from 25% to 50% in various categories. Based on these facts, we find that the balance on Note 1 should be discounted by one third. Doing so reduces the original principal balance to $213,333.33. Based on WFA's calculations, Grundstedt is entitled to a credit totaling $68,507.16 for the roughly 2.5 years Grundstedt worked at WFA. This arithmetic leaves an unpaid balance of $144,826.17; with interest through May 1, 2014 of $44,919.46, the balance due on Note 1 is $189,745.63.

In summary, the award in favor of WFA on promissory Note 1, Note 2 and Note 3, inclusive is as follows: Note 1 -- $189,745.63; Note 2 -- $91,811.53; and Note 3 -- $77,101.84 for an aggregate award, including prejudgment interest, totaling $358,659.00.

Finally, WFA has submitted a claim for attorneys' fees in excess of $116,000.00 based upon the contractual language contained in the respective notes. However, WFA's counsel has redacted all of the descriptions of services rendered leaving this Panel with no way to determine whether, or to what extent, all of the work performed was both reasonable and necessary and, indeed, whether some or all of the work was duplicative. Under the circumstances, the Panel believes an award of attorneys' fees in favor of WFA in the amount of $60,000.00 is fair and reasonable.

In light of the Panel's cogent analysis and rationale, there isn't much for me to add or explain. I would simply note -- by way of highlight -- that although employing broker-dealers are entitled to pursue organizational changes and restructurings, even this Panel concedes that when such decisions violate the reasonable expectations upon which the employee was prompted to sign an EFL agreement, that such altered circumstances may fall upon a continuum of allowable changes to breaches (the latter being the resting place of many such altered circumstances in this case).  

In my law practice, this is among the most cited reasons by registered persons for not wanting to repay and remaining balances due on an EFL. For many unhappy former employees, the dispute is not merely over the former firm's prerogative to pursue better (but different) policies and procedures than were in place when the EFL agreement was executed, but the dispute goes to a perception that the employing firm had materially changed to a point where it was not the same firm that the employee had agreed to join and that the level and quality of support services had materially degenerated to the point of harming the ability to retain and develop business.

Finally, I would urge all litigants confronted with demands by their adversary for the payment of attorneys' fee to take note of the commentary by this Panel, in which legitimate questions were raised by the redaction of descriptions in the documentation submitted in support for the claimed reimbursement. This Panel refused to engage in speculation and would not pursue the route of inappropriate inferences and implications. Consequently, the award for attorneys' fees was nearly halved based upon the quality of the documentation provided.