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July 9, 2004.

MORTON A. BENDER, et al., Defendants.

The opinion of the court was delivered by: ROSEMARY COLLYER, District Judge

Morton and Grace Bender (the "Benders"), as joint tenants, are the beneficial owners of 326,000 shares of common stock of Independence Federal Savings Bank ("Independence" or "Bank"), and thereby own approximately 21% of the outstanding stock of the Bank. In March 2004, the Bank's Board of Directors unanimously voted to accept a bid from Carver Bancorp, Inc. ("Carver") to acquire the Bank for $21.00 cash per share. The Benders oppose the Carver acquisition. Mr. Bender wishes to increase his stock position to reduce the chance that the necessary three-quarters of outstanding shares would vote in favor of it and to improve his opportunity to change Bank personnel and policies. In response, the Board of Directors of the Bank adopted a Shareholders Rights Plan ("Rights Plan"), more commonly known as a "poison pill," that would effectively dilute the Benders' position if they purchase a single additional share.*fn1 Pending before the Court is the Benders' application for a preliminary injunction to require the Bank to rescind the Rights Plan or to declare it invalid and ineffective until final approval by the Office of Thrift Supervision ("OTS"). A hearing on the application was held on June 28, 2004, at which time both parties submitted uncontested exhibits.


  This is the second time these parties have been before the Court concerning the future direction of the Bank, which was labeled a "troubled" institution by the OTS in November 2003. Benders' Motion for Preliminary Injunction ("Motion") Exh. P. The Benders have been shareholders of the Bank since March 1999 and in October 2002 owned 5.8% of the Bank's outstanding stock. By October 2003, after a successful proxy fight, Mr. Bender had placed two of his nominees on the Board of Directors and had obtained OTS approval to buy up to 100% of the Bank's stock. He unsuccessfully sued the Bank in December 2003 to force a special shareholders meeting to remove most of the Board. Bender v. Parks, No. 03-2485 (RMC). Since that time, the Bank completed the process of accepting bids to acquire the Bank. Mr. Bender participated in the bid process through the course of due diligence, but then declined to make an offer. After assessing the offers received with the advice of various professionals, the Board of Directors unanimously approved the Carver offer, at $21.00 cash per share, by which Independence would be merged into Carver. One of the attractions of the Carver merger is that it would continue the Bank's status as a minority bank.

  After the Carver merger plan was announced, the Benders repeatedly increased their investment in the Bank and repeatedly stated, in filings with the OTS accompanying each stock purchase transaction, that they intended to oppose the merger. See, inter alia, Plaintiff's Opposition to Benders' Application for Preliminary Injunctive Relief ("Opp.") Exh. 7, Amend. No. 7 to Schedule 13D, filed 4/7/04 ("Mr. Bender does not support this [Carver] transaction. At this time, he does not intend to vote his shares of Common Stock in favor of the Merger Agreement . . . Mr. Bender may make additional purchases of shares of Common Stock . . . in order to further increase his ownership level. . . . Mr. Bender intends to take action to effect [a] change in the management and directors of the [Bank], if the Merger Agreement is not approved."). Alarmed that the Carver merger was at risk, the Bank's Board of Directors, with the Bender nominees absent, voted to pursue three strategies: 1) adopt the Rights Plan; 2) institute this lawsuit against the Benders;*fn2 and 3) create a holding corporation over the Bank to alter the vote necessary to approve the merger from two-thirds of the shareholders to one-half. The third strategy has since been discarded.

  The underlying complaint alleges that the Benders have violated Section 13(d) of the Exchange Act, breached a fiduciary duty of loyalty and conspired to breach a fiduciary duty of loyalty,*fn3 and tortiously interfered with business relations between the Bank and Carver. To this complaint, the Benders filed a counterclaim, including the allegation that the adoption of the Rights Plan was invalid and in violation of OTS regulations. Although the parties have agreed to a schedule that will allow discovery and a determination of the issues by September 2004, the Benders are pursuing immediately their request that the Rights Plan be declared invalid so that they can continue to purchase Bank stock without fear of triggering dilution of their shares.

  A. The Rights Plan

  The Independence Board of Directors met in a special meeting on May 4-5, 2004. Mr. Deckelbaum was not in attendance and Mr. Hall excused himself after the Chairman of the Board, Janus Parks, suggested that Mr. Hall might have a conflict of interest.*fn4 The perceived conflict existed between his role as part of the "Bender Group,"*fn5 interested in advancing Mr. Bender's interests, and the rest of the Board, interested in the Carver merger. The meeting adjourned shortly after Mr. Hall's departure, following a discussion of the Rights Plan, and was continued to the next day so that counsel for the Bank could confer with OTS. At the continuation of the meeting, the Rights Plan was discussed and approved.*fn6

  The record shows that representatives from the Bank first met with OTS regulators on April 14, 2004, to discuss the possibility of the Bank adopting a shareholders rights plan. Opp. Exh. 21. By letter to OTS dated April 15, 2004, the Bank identified the authorities that supported Independence's authority to adopt a rights plan. Id. Further correspondence on the Rights Plan was sent to OTS on April 28, 2004. See Opp. Exh. 22. This letter provided a more extensive description of the Rights Plan. It concluded, "[I]f we do not hear from you to the contrary by the close of business Monday, May 3, 2004, IFSB will assume you have no objection and will proceed." Id. In both of these letters, the Bank took the position that OTS securities-offering regulations, 12 C.F.R. Part 563g, would not apply to require an offering circular upon adoption of a rights plan. See id.; Opp. Exh. 21. OTS responded that it could not be sure that its administrative process would be completed by May 3, 2004, and that the Bank could not assume its approval. See Bender MH Exh. 9 ("OTS cannot commit to resolving these outstanding issues within the timeframe referenced on page eight of your letter. . . . You will be contacting OTS Washington staff to discuss the proposals.").

  Representatives from the Bank met with regulators at OTS on May 4, 2004 and, thereafter, on that date sent to OTS copies of similar rights plans previously approved by the Federal Home Loan Bank Board, the predecessor agency to OTS. See Opp. Exh. 23. Finally, on the morning of May 5, 2004, the Bank sent a revised Rights Plan, along with a red-lined version showing all changes, to the OTS.*fn7 See Opp Exh. 26. This revised Rights Plan was adopted by the Board of Directors in the afternoon/evening of May 5, 2004. As described by the Benders,
The [Rights] Plan provides for the distribution of one common stock purchase right for each share of Independence common stock. The right represents the right to purchase one-tenth of a share of Independence common stock. The Plan states that "[t]he Purchase Price for each full share of Common stock [sic] pursuant to the exercise of a Right shall initially be $60." Shareholder Rights Plan at 13. A right to purchase stock cannot be exercised until a triggering event occurs, as set forth in the Plan. A triggering event occurs if a shareholder acquires twenty percent (20%) or more of the Bank's common stock. Since the Benders have already acquired more than twenty percent (20%) of the Bank's common stock, they are considered a "Grandfathered Shareholder" under the Plan, but only so long as they do not purchase any more shares than they owned as of May 5, 2004. The Merger Agreement with Carver is expressly deemed not to be a triggering event. After a triggering event occurs, each non-triggering shareholder has the right to purchase a number of common shares having a market value of twice the exercise price (which is set at $60 per share in the Plan). As such, under the terms of the Plan, if the Benders purchase one additional share of Independence common stock, a triggering event occurs, and the stock ownership interest of the Benders is subject to massive dilution.
Motion at 18-19; see also Opp. Exhs. 21, 22, 26 (Bank letters to OTS explaining the Rights Plan); Exh. 26 (Rights Plan, as adopted).

  Independence issued a press release on May 6, 2004, in which it announced that the Board had adopted "a shareholder rights plan (commonly known as a `poison pill') in order to deter abusive control tactics by shareholder Morton Bender and his affiliates, who chose not to submit a bid for Independence during the Bank's bidding process or to commence a tender offer for all shares of the Bank, and who have been accumulating shares in the open market. . . ." Bender MH Exh. 12. A copy of the press release was sent to Mr. Bender's counsel on May 6, 2004, with a cover letter warning that "any further purchases of common stock of the Bank by or on behalf of Morton Bender may result in Mr. Bender becoming an `Acquiring Person,'" and trigger the Rights Plan. Opp. Exh. 27. B. Dealings with OTS

  After adoption of the Rights Plan, the Bank continued to pursue the idea of reorganizing into a holding company structure. By letter dated June 16, 2004, OTS advised that such a reorganization would require a two-thirds vote of shareholders and not a simple majority as the Bank had anticipated. See Benders MH Exh. 14. That letter concluded with the following paragraph, upon which Mr. Bender puts great weight:
[W]e remind you that with respect to the Bank's Shareholders Rights Plan (Plan), the Bank has to date failed to perform all steps necessary to comply with OTS regulations to implement the Plan. Specifically, OTS staff advised the Bank and its counsel that the Plan would NOT be effective until all necessary prerequisites, including the Bank's filing of an offering circular under 12 C.F.R. Part 563g, and OTS' declaring the offering circular effective, are completed. It is clear that the public is unaware that the Plan is not yet effective, and accordingly again, because we share your concerns regarding misperceptions on the part of the public, the Bank must immediately issue a press release stating that the Plan is not in effect until all necessary steps are taken to comply with OTS regulations.
Id. at 4; see also Benders' Notice of Filing of Additional Exhibit [same].

  Pursuant to this warning from OTS, the Bank filed Amendment No. 1 to the Rights Plan on June 22, 2004. The Amendment was executed by the Bank and by American Stock Transfer & Trust Company, the Rights Agent. The Amendment was adopted to

provide that the dividend of Rights pursuant to the Rights Agreement will be payable to holders of record of common stock of the Bank as of the close of business on the tenth business day after the effective date of the Offering Circular which the Bank is required to file with the Office of Thrift Supervision.
Opp. Exh. 28 at 2. More specifically, the Amendment itself reads:
WHEREAS, the Board of Directors of the Company has authorized and declared a dividend distribution of one common stock purchase right (a "Right") for each share of Common Stock, par value $.01 per share, of the Company (the "Common Stock") outstanding at the close of business on the tenth business day following the date on which an offering circular filed with the [OTS] on an appropriate form under 12 C.F.R. Part 563g (the "Securities Offering Regulation") with respect to the securities purchasable upon exercise of the Rights is declared effective (the "Record Date"), each Right representing the right to purchase one-tenth of a share of Common Stock . . .
Id. at 4 (emphasis added). A press release titled, "Independence Federal Announces Intention to File Offering Circular" was issued on June 22, 2004, and also filed with OTS. Opp. Exh. 28 at 9. The press release explained,
The offering circular relates to the Rights Agreement . . . which was entered into on May 5, 2004. IFSB also announced today that it has amended the Rights Agreement to provide that the dividend of rights pursuant to the Rights Agreement will be payable to the shareholders of record on the tenth business day following the date that the offering circular becomes effective. Shareholders of IFSB will have no rights to acquire IFSB stock and no shares may be issued by IFSB pursuant to the Rights Agreement until the offering circular is declared effective by the OTS and the rights are distributed pursuant to the terms of the Rights Agreement. An Acquiring Person (as defined in the Rights Agreement) will not be eligible to exercise such person's rights to acquire common stock in the event the rights become exercisable. The OTS has advised the Bank of its view that the Rights Agreement will not be effective until the offering circular has been declared effective. The Bank believes that the Rights Agreement is a contract [between the Bank and the Rights Agent] that was effective upon its execution on May 5, 2004 and that irrespective of any distinction in this regard, under the terms of the Rights Agreement, upon distribution of the rights ...

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