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Bender v. Jordan

August 11, 2008

MORTON A. BENDER, ET AL., PLAINTIFFS,
v.
CAROLYN D. JORDAN, ET AL., DEFENDANTS.
INDEPENDENCE FEDERAL SAVINGS BANK, CROSS-PLAINTIFF,
v.
CAROLYN D. JORDAN, ET AL., CROSS-DEFENDANTS.



The opinion of the court was delivered by: Rosemary M. Collyer United States District Judge

MEMORANDUM OPINION

Morton and Grace Bender, dissident shareholders, sued five of the directors and the President/CEO of Independence Federal Savings Bank ("IFSB" or the "Bank") over their handling of a contested election for seats on the Board of Directors of IFSB (the "Board") and the related shareholders' meeting. Pursuant to regulations issued by the Office of Thrift Supervision ("OTS"), the Bank agreed to pay all legal fees incurred by the five director defendants and the President/CEO. The five director defendants as well as the President/CEO agreed to repay the Bank if it were later determined that they were not entitled to indemnification. In July 2006, this Court entered a preliminary injunction in favor of Plaintiffs; over the next few months, each of the director defendants left the Board, and the President/CEO left his position. A notice of appeal was filed but was withdrawn before briefs were filed, as the original majority lost control of the Board. A few months after the Court issued its preliminary injunction, the Benders voluntarily dismissed three of the former directors from the case. By means of a cross-claim, the Bank, as cross-plaintiff, now demands repayment of all legal fees from the two former directors who were not dismissed and from the former President/CEO. The cross-defendants resist.

Each of the five director defendants and the then-acting President/CEO promised to repay the Bank "any amounts so paid on my behalf if it is later determined that I am not entitled to indemnification with respect to the litigation" under OTS regulations. See IFSB Statement of Undisputed Material Facts (filed with Cross-Pl.'s Mot. for Summ. J. ("Pl.'s Mem.")) ("IFSB Facts") ¶ 7-9 (citing Affidavit of Robert B. Isard ("Isard Aff.") ¶ 8, Ex. 1; id. ¶ 9, Ex. 2; id. ¶ 10, Ex. 3) [Dkt. # 104]. Because the six original defendants did not receive a final judgment on the merits in their favor, indemnification was not mandatory, and because the Board determined that the three cross-defendants were not entitled to indemnification, they must repay the Bank. However, each of the six original defendants agreed to pay his "fair share" of amounts paid on his behalf. See id. ¶ 7-9 (citing Isard Aff. ¶ 8, Ex. 1; id. ¶ 9, Ex. 2; id. ¶ 10, Ex. 3). This language can only mean that the three cross-defendants are required to repay their pro-rata share of the total amount advanced. Because the Board determined only that the three cross-defendants were not entitled to indemnification, and because all six original defendants were represented by the same law firm and asserted the same defenses, each cross-defendant is severally liable for one-third of the total amount of the monies advanced by the Bank.

I. BACKGROUND

IFSB is a federal stock savings association subject to regulation by the OTS. See id. ¶ 1. Cross-Defendants are Carolyn D. Jordan, former Chair of the IFSB Board; David Wilmot, former Vice-Chair of the Board; and Thomas L. Batties, former acting President and Chief Executive Officer of IFSB (collectively, the "Cross-Defendants"). Id. ¶¶ 2-4. Plaintiffs Morton and Grace Bender*fn1 are now the largest shareholders of the Bank. As Mr. Bender increased his holdings in the Bank, and his criticisms of the Board, an epic struggle for control ensued.*fn2 Its most recent iteration in court was this suit, filed in January 2006, in which Mr. Bender alleged violations of numerous securities laws and IFSB's bylaws by the actions of five former directors of the Bank (the "Director Defendants")*fn3 , including Ms. Jordan and Mr. Wilmot, and the former acting President and CEO, Mr. Batties, leading up to, and in conducting, a shareholders' meeting of October 2005. See Compl. [Dkt. # 1]. On February 15, 2006, the Board of Directors of IFSB, by a vote of five to four, adopted a Resolution authorizing the advancement of legal expenses incurred by the Director Defendants and Mr. Batties. IFSB Facts ¶ 6.

Ms. Jordan executed a Request for Advancement of Expenses for Claims Against an Officer or Director on February 20, 2006; Messrs. Wilmot and Batties signed similar agreements on February 28, 2006. Each of these agreements provided:

Pursuant to the Regulations of the Office of Thrift Supervision ("OTS") governing advancement of expenses to directors and officers of a federal savings association, 12 C.F.R. § 545.121(3) (the "Regulation"), with respect to claims brought against a director or officer arising from service as a director or officer of a federal savings association, I hereby request that Independence Federal Savings Bank (the "Bank") pay reasonable expenses and costs that have been or will be incurred in the defense or settlement of the litigation styled as Morton A. Bender, et al. v. Carolyn D. Jordan, et al. Under the Regulation, I hereby agree that I will repay the Bank any amounts so paid on my behalf by the Bank if it is later determined that I am not entitled to indemnification with respect to the litigation under 12 C.F.R. § 121 [sic], and I represent that I have sufficient assets to repay my fair share of such amounts.

Id. ¶¶ 7-9 (citing Isard Aff. ¶ 8, Ex. 1; id. ¶ 9, Ex. 2; id. ¶ 10, Ex. 3).

On July 21, 2006, the Court entered its Opinion [Dkt. # 50] and Order [Dkt. # 51], granting a preliminary injunction as sought by Mr. Bender. In its Opinion, the Court found that the Plaintiffs were likely to succeed on the merits of certain claims that: 1) the Director Defendants, through their chairman, Ms. Jordan, and vice chairman, Mr. Wilmot, acted to acquire certain shares and voting power to solidify their control of the IFSB Board; acquired a beneficial ownership of said shares and voting power, which constituted nearly 10% of the Bank's outstanding shares, and violated § 13(d) of the Securities Exchange Act of 1934, 15 U.S.C. § 78m(d) (the "Exchange Act"), by failing to file the required Schedule 13D; 2) the Director Defendants and Mr. Batties sent proxy solicitations containing multiple false and misleading material statements which led to election of the Management Nominees in violation of § 14(a) of the Exchange Act; and 3) the Director Defendants and Mr. Batties violated § 45 of Robert's Rules by unilaterally allocating proxies after the polls closed. See Mem. Op. on Mot. for Prelim. Inj.*fn4 The Court made no findings that Defendant Director Michael J. Cobb, William B. Fitzgerald, IV, or Eugene K. Youngentob was an active transgressor of the securities laws or bylaws. See id.

On August 4, 2006, John E. Ryan, OTS Regional Director, sent a letter to the IFSB Board, notifying them that, "taking into consideration the weight of the findings in the Order," he had "determined that it would be unsafe and unsound to permit Independence to continue to advance unsecured legal and related expenses" on behalf of the Director Defendants and Mr. Batties. IFSB Facts ¶ 11. Mr. Ryan further advised that no further advancement of legal expenses should be permitted until the Director Defendants and Mr. Batties presented sufficient collateral to cover already-incurred expenses. Id.

The Director Defendants and Mr. Batties filed a Notice of Interlocutory Appeal on August 18, 2006. Id. ¶ 13. On that same date, E. Leroy Morris, the Interim President and CEO of the Bank*fn5 , sent a letter to the Director Defendants and Mr. Batties advising them that:

Pursuant to the letter received from John Ryan, Regional Director, Office of Thrift Supervision ("OTS") dated August 4, 2006, [of] which you have already been apprised, the Board of Directors, in order to comply with this letter, adopted a resolution on August 16, 2006, which, in part, directed me to take immediate steps to obtain collateral sufficient to ensure reimbursement to the Bank for advanced legal fees and expenses incurred by the firm of Shook Hardy and Bacon.

The amount to be collateralized per "Director Defendant" and Mr. Batties, as of 6/30/06, is One Hundred Eight Thousand, Two Hundred Sixty-Nine Dollars and no cents ($108,269.00).

The Bank expects tender immediately. Should you have any questions about tender, the method of collateralization, instruments to be executed or this letter generally, please contact me as soon as possible.

Id. (citing Isard Aff. ¶ 12, Ex. 5). Despite this letter, and a further letter to the same effect from Bank counsel on November 16, 2006, no collateral was offered by the Director Defendants or Mr. Batties.

On September 26, 2006, after the Court issued its Opinion granting the motion for preliminary injunction in which it made no findings that Mr. Cobb, Mr. Fitzgerald, or Mr. Youngentob was an active transgressor of the securities laws or bylaws, Mr. Bender entered into a Stipulation of Dismissal from the suit with each of them, see Dkt. # 70, which was approved by the Court on October 2, 2006. On January 11, 2007, the United States Court of Appeals for the D.C. Circuit entered an Order granting the voluntary dismissal of the interlocutory appeal. Id. ¶ 16. On January 12, 2007, counsel for IFSB sent letters to each of the Director Defendants and Mr. Batties advising them that:

With the appeal no longer pending, the matter will be remanded to the District Court for final disposition of the claims asserted by the Benders. With the dismissal of the appeal, there is no longer any possibility that the findings of fact and conclusions of law made by the District Court in its Memorandum Opinion of July 21, 2006 will be disturbed. Further, the terms and provisions of the Request for Advancement of Expenses for Claims Against an Officer or Director, which you signed for the benefit of the Bank, become operative. Simply stated, it is now appropriate for you to repay $108,269.00 to the Bank for sums advanced by the Bank on your behalf in the litigation referenced above. To that end, we respectfully request that you or your counsel contact the undersigned at your first convenient opportunity so that we might make arrangements for you to make such repayment.

Id. ¶ 17 (citing Isard Aff. ¶ 15, Ex. 8). None of the Director Defendants or Mr. Batties repaid, or offered to repay, any of the monies advanced by the Bank for their legal fees. Id. ¶ 22.

On February 15, 2007, IFSB filed a Motion for Leave to Amend Pleadings to State Cross-Claim Out-Of-Time [Dkt. # 78], which the Court granted on May 30, 2007. In an Opinion [Dkt # 90] and Order [Dkt # 91], dated May 31, 2007, the Court dismissed the First Amended Complaint filed by Mr. Bender as moot, with the exception of his claim for attorney fees pursuant to the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4(c). On June 20, 2007, by formal resolution and "based upon the findings of the Court," the IFSB Board determined that Ms. Jordan and Messrs. Wilmot and Batties "were not entitled to indemnity from the Bank for expenses incurred and should be required to immediately repay such advanced moneys." IFSB Facts ¶ 21 (citing Isard Aff. ¶ 17, ...


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