LAWRENCE B. SEIDMAN v. SPENCER SAVINGS BANK, S.L.A., et al.

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-3899-04T53899-04T5

LAWRENCE B. SEIDMAN,

Plaintiff-Respondent,

v.

SPENCER SAVINGS BANK, S.L.A.,

RAYMOND BAUMKIRCHNER, GERALD M.

BEDRIN, JOSEPH C. D'AUTORIO,

MILDRED P. DAMIANO, JOSE B.

GUERRERO, PETER J. HAYES,

EVERETT E. KUNKEL, NICHOLAS

LORUSSO and ROBERT MOTTA,

Defendants-Appellants.

______________________________________________

 

Argued: December 5, 2005 - Decided March 23, 2006

Before Judges A. A. Rodr guez and Yannotti.

On appeal from the Superior Court of New Jersey, Chancery Division, Passaic County, PAS-C-190-04.

Michael M. Horn argued the cause for appellants (McCarter & English, attorneys; Mr. Horn, of counsel and on the brief).

Peter R. Bray argued the cause for respondent (Bray, Chiocca & Miller, attorneys; Mr. Bray, on the brief).

PER CURIAM

Plaintiff Lawrence B. Seidman filed a verified complaint in the Chancery Division seeking an order to show cause for temporary and permanent injunctive relief against Spencer Savings Bank, S.L.A. and its nine Directors (collectively "Bank"). The Bank is a mutual savings institution regulated by the Commissioner of Banking and Insurance (Commissioner). Its depositors are Members of the institution. Seidman is a Member who sought to run for election to the Bank's Board of Directors (Board). Because the Bank is established pursuant to the Savings and Loan Act (1963) N.J.S.A. 17:12B-1 to -319 (SLA), the identities and addresses of its Members are confidential. In order to communicate in writing with Members to promote his candidacy, Seidman was required to apply to the Board and to provide the information required by N.J.S.A. 17:12B-118.

Prior to July 2004, Article 31 of the Bank's by-laws required that:

[n]o Director shall be eligible for election unless he shall have been nominated in writing by a majority of the Board or by members representing ten percent (10%) or more of the votes entitled to be cast by members, and the nominations are filed with the Secretary at least thirty days before the annual meeting of members at which the nomination is to be voted upon, and members shall not nominate a greater number of candidates than the number to be elected.

However, the Board amended the by-laws to increase the percentage of Members needed to nominate from ten to twenty. This amendment was approved by the Commissioner on August 5, 2004 pursuant to the exclusive power granted to the Commissioner by N.J.S.A. 17:12B-39. That section of the SLA requires that any by-law or change in by-law must be approved by the Commissioner and the "approval shall not be withheld . . . unless a proposed by-law or any change in the by-laws is in conflict with the provisions of this act." N.J.S.A. 17:12B-39.

Instead of following the procedure set by the SLA for communicating with Members, Seidman prepared a nominating petition for himself and Frank Russomanno and sent it to the Bank with a request that it be mailed immediately to all Members. The Bank determined that Seidman had failed to submit an application that complied with section 118 of the SLA, and so advised Seidman.

Seidman filed a verified complaint that sought, among other relief, the following: a permanent injunction to prevent the Bank "from communicating with [its] Members concerning the election of Directors[] at the 2005 Annual Meeting of Members" and compelling the Bank to mail his materials to all Members (Count 1); a declaration that the Bank had breached its fiduciary duty to Members by adopting the by-laws amendment and a request that the court schedule and monitor the 2005 election to the Board (Count 2); a declaration that the Bank breached its fiduciary duty by engaging in corporate waste relating to the compensation of the Bank's President and Chief Executive Officer Jose B. Guerrero and a Board retreat in Spain that was paid by the Bank (Count 3); and a request for counsel fees and costs (Count 4).

On the return date, the judge denied Seidman's requests to compel the Bank to mail his communications to the Members, and to adjourn the annual meeting for his convenience. The Bank moved to dismiss the complaint. With respect to Count 2 the Bank argued that the Chancery Division lacked jurisdiction over a challenge to the by-laws. In the alternative, the Bank moved to have the matter transferred to this court. With respect to Count 3, the Bank argued that Seidman failed to comply with the requirements of R. 4:32-5, or to state a claim for which relief can be granted pursuant to R. 4:6-2(e).

The judge rejected these arguments and refused to dismiss Counts 2 and 3. The judge signed an order to this effect on January 19, 2005 and issued an opinion finding that a challenge to the Bank's denial of Seidman's request for mailing of notices to Membership "more appropriately belonged before the [Commissioner]" pursuant to the SLA. However, the judge retained jurisdiction regarding any election issues pending the Commissioner's decision, relying on In the Matter of Veloso v. Penn Savings & Loan Association of Newark, 93 N.J. Super. 186, 193 (App. Div. 1966), certif. denied, 48 N.J. 580 (1967). The judge retained jurisdiction to set the election aside based on the Commissioner's decision on the merits. The judge further concluded that the process of electing Board members was to be overseen by the Chancery Division, citing Kanengiser v. First Savings and Loan Association of Jersey City, 50 N.J. Super. 427 (App. Div. 1958) for the proposition that "the Superior Court has plenary jurisdiction over savings and loan association elections." The motion judge denied defendant's motion to dismiss Count 2 of the complaint.

By leave granted, the Bank appeals contending that the judge erred by: (1) concluding that the Chancery Division was the proper forum for an action challenging an administrative action such as approval of the by-law amendments; and (2) declining to dismiss the waste claim.

THE BY-LAWS AMENDMENT

We begin our analysis by reciting Count 2 of Seidman's complaint, which alleges in pertinent part the following:

As originally formulated, [the Bank's] Bylaws improperly and wrongfully entrenched management, who were the only ones that could realistically nominate themselves, or persons whom they hand-picked, for election to the Board of Directors.

When the Director-Defendants became aware that Seidman would seek to secure a nomination for himself, and another person, they wrongfully took steps to insure that neither Seidman, nor any other Member, could nominate anyone for election to the Board of Directors.

The Director-Defendants acted as aforesaid, by amending the Bylaws ( 30) to increase the number Members, who must align themselves together to nominate a person, from 10% to 20%.

Seidman only became aware of this amendment to the Bylaws on or about October 13, 2004, when he received the current Bylaws from Spencer Savings.

The Director-Defendants have acted as aforesaid, and formulated this planned course of conduct, to eliminate the threat to their incumbency posed by Seidman's nominees.

This aforesaid conduct is inequitable, unfair and unreasonable per se. Further, the conduct is in breach of the fiduciary duty the Director-Defendants owe to Spencer Savings and its Members.

. . . .

The aforesaid conduct is not justified by any compelling business justification, does not reasonably respond to any legally cognizable threat to corporate policy and is not the product of a good faith pursuit of legitimate corporate goals.

Upon information and belief, Spencer Savings and the Director-Defendants have acted as aforesaid because of the self-interest of the Director-Defendants, who are acting to entrench themselves and to preserve their prerequisites as Directors.

In acting in this manner, Spencer Savings and the Director-Defendants will have purposefully interfered with the Members' franchise.

In acting in this manner, the Director-Defendants have breached their duties of loyalty and fidelity.

Seidman seeks, and is entitled to, a declaration determining that this misconduct breaches the fiduciary duties the Director-Defendants owe to the Members.

Under the circumstances, this Court should determine that the aforesaid provisions of the Bylaws are inoperative; and, this Court should rule that the nominations of Seidman and Frank [Russomano] should be accepted and they should stand eligible for election at the next Annual Meeting.

We do not read Seidman's complaint as one seeking review of the Commissioner's decision to approve the by-law amendment. Rather, his is a claim for breach of fiduciary duty, which may be properly adjudicated in the Chancery Division. Kanengiser, supra, 50 N.J. Super. at 433.

It is clear that the Commissioner must approve the by-laws unless the proposed by-law or change in by-law conflicts with SLA. N.J.S.A. 17:12B-39. The Commissioner has exclusive jurisdiction over that issue, and his approval of the amended by-laws constitutes a final determination by an administrative agency. See In re Failure by the Dept. of Banking, 336 N.J. Super. 253, 261-62 (2001) (construing action or inaction by the Commissioner as the final determination by an administrative agency). Therefore, any review of this decision must be made to the Appellate Division pursuant to R. 2:2-3.

The claim alleged in Count 2, i.e., that the Directors breached their fiduciary duty by adopting the by-laws amendment, should not be dismissed at this juncture. The fact that the Directors had the authority to adopt the amendment and followed the required procedure for seeking the Commissioner's approval does not immunize them from fiduciary liability, if the plaintiff can show that their motives were improper or placed their self-interest in conflict with the interest of the Members. As noted in Kanengiser, although an earlier version of the SLA conferred upon the Commissioner the power to regulate administrative aspects of savings and loan associations, that version did not grant the Commissioner any authority to adjudicate savings and loan election controversies. Kanengiser, supra, 50 N.J. Super. at 433. The statute in its present form, SLA, does not grant the Commissioner with the authority to adjudicate controversies concerning the effect of an amended by-law. Therefore, the Superior Court may properly adjudicate such controversies. The Chancery Division would have the authority to grant appropriate relief on this claim, including injunctive relief compelling the Directors to amend the by-laws again, pursuant to the SLA, if their prior action represented a breach of fiduciary duty. In such case, the Chancery Division's order would be appealable to this court. Therefore, we reject the Bank's contention that Count 2 should be dismissed.

THE WASTE CLAIM

The Bank also contends that the judge erred by refusing to dismiss Seidman's waste claims for failure to comply with R. 4:32-5 and for failure to state a claim upon which relief can be granted. R. 4:6-2(e) Specifically, the Bank argues that Seidman's claims are merely conclusory and do not satisfy R. 4:32-5. We disagree.

R. 4:32-5 governs derivative action by Members. It requires that:

[t]he complaint shall also set forth with particularity the efforts of the plaintiff to secure from the managing directors or trustees and, if necessary, from the shareholders such action as is desired, and the reasons for the failure to obtain such action or the reasons for not making such effort.

[R. 4:32-5.]

Thus, if a Member fails to make a demand, the Member must explain why such action would be futile. In In re Prudential Ins. Co. Deriv. Litig., 282 N.J. Super. 256 (Ch. Div. 1995), the trial court adopted the factors set out in Aronson v. Lewis, 473 A.2d 805 (Del. Sup. Ct. 1984) wherein the Delaware Supreme Court established a two-part test to be used to evaluate claims of demand futility. Judge Alvin Weiss, the trial judge in Prudential, found:

In order for a complaint to withstand a motion to dismiss for failure to make demand, a complaint must plead with particularity facts creating a reasonable doubt either that: 1) the directors are disinterested and independent; or 2) the challenged transaction was otherwise than the product of a valid exercise of business judgment.

[Prudential, supra, 282 N.J. Super. at 275 (citation omitted).]

Judge Weiss noted, "Directorial interest exists when divided loyalties are present, or where the director stands to receive a personal financial gain from the transaction not equally shared by the shareholders." Id. at 276. The holding in Prudential was followed by the Supreme Court in In re PSE&G Shareholder Litigation, 173 N.J. 258, 282 (2002).

Here, the judge found three compelling factors that "raised reasonable doubt that Seidman would have been able to address the issues before the [Board] in any other way than by bringing this lawsuit," i.e., (1) the increase from ten percent to twenty percent creates an insurmountable barrier to Seidman; (2) the salaries of the three highest paid executives and the trip to Spain directly affect the Board; and (3) Seidman's correspondence with the Bank evidences his claim of demand futility.

 
We agree with the judge and conclude that Seidman's complaint contains enough specific allegations to raise reasonable doubts as to the actions of the Bank. His numerous letters to the Bank suggest the Bank's unwillingness to explain the allegedly high salaries and the nature of the trip to Spain. The corporate-funded trip to Spain implicated an unfair advantage of the Director Members over the other Members. Resolving all inferences in favor of Seidman, the party opposing the motion, Dolson v. Anastasia, 55 N.J. 2 (1969), the motion to dismiss was properly denied.

Affirmed.

The Directors are: Raymond Baumkirchner, Gerald M. Bedrin, Joseph C. D'Autorio, Peter J. Hayes, Mildred P. Damiano, Jose B. Guerrero, Everett E. Kunkel, Nicholas Lorusso and Robert Motta.

Seidman sought the Commissioner's permission to communicate with Members and directing the Bank to mail his proposed communication. The Commissioner denied this application on April 18, 2005.

Seidman v. Spencer Savings Bank, No. M-3114-04 (App. Div. March 31, 2005).

(continued)

(continued)

11

A-3899-04T5

March 23, 2006