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Lingle v. PSB Bancorp, Inc.

United States District Court, E.D. Pennsylvania
Apr 15, 2004
CIVIL ACTION No. 02-1165 (E.D. Pa. Apr. 15, 2004)

Opinion

CIVIL ACTION No. 02-1165

April 15, 2004


MEMORANDUM


On March 31, 2004, plaintiffs' "Motion for Summary Judgment Declaring Plaintiffs' Options Valid and Enforceable" was granted; and defendants' cross-motion was denied, Fed.R.Civ.P.56. This is an explanatory memorandum.

Plaintiffs are Carl Lingle, Raymond Silverstein, Conwell Ltd. Partnership, Gerald Lehrfeld, Joan Lehrfeld, Jay Rosemann, and Lynn Rosemann.

Defendants are PSB Bancorp, Inc. and First Penn Bank. First Penn is the subsidiary resulting from the 1999 merger of First Bank of Philadelphia and PSB. A claim against the law firm Dilworth Paxson, LLP was dismissed without prejudice pending resolution of plaintiffs' claims against PSB and First Penn.

"Summary judgment is proper when the evidence shows "that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. . . . In reviewing the record we are required to view the inference to be drawn from the underlying facts in the light most favorable to [the non-moving party], as the party opposing the motion, and to take his allegations as true when supported by proper proofs whenever these allegations conflict with those of [the movant.]" Kopec v. Tate, No. 02-4188, — F.3d —, 2004 WL 515495, at *2 (3d Cir., Mar. 17, 2004) (citations omitted).

On March 6, 2002, plaintiffs filed this declaratory judgment action involving the issuance of defendant PSB Bancorp., Inc. stock options. Jurisdiction is diversity. 28 U.S.C. § 1332.

In 1999, when First Bank of Philadelphia merged with PSB Bancorp, Inc., plaintiffs. who were officers and directors of FBP, owned options to purchase 16 million shares of FBP stock. Under the merger agreement, plaintiffs' outstanding FBP stock options were to be assumed by PSB and converted into PSB stock options. Exhibit 20 to Burger Affidavit. On October 12, 1999, the merger became effective; the options were converted; and plaintiffs received official notification of the conversion of their options from Anthony Di Sandro, PSB's President and Chief Operating Officer. Exhibit 22 to Burger Affidavit.

Plaintiffs received the options in 1995 as part of a "Standby Purchase Agreement" entered into when FBP offered 16 million shares of stock to raise capital. Under the agreement, Goodman, Lingle and Shaffer agreed to purchase any unsubscribed shares; in return, they were given the option to purchase an additional 16 million shares at $.25 per share within 10 years after the agreement's closing. Exhibit 4 to Affidavit of David C. Burger. The offering was oversubscribed. Exhibit 31 to Burger Affidavit, at 2.

The merger followed months of due diligence performed by PSB's counsel, Stevens Lee, as to events in the three years preceding the merger; it did not include the 1995 FBP stock offering or the related Standby Purchase Agreement. See, e.g., Exhibit 19 to Burger Affidavit.

The letter stated, "Section 1.02(f) [of the Agreement and Plan of Reorganization entered into by FBP and PSB] detailed the conversion of and outstanding FBKP stock options into options to purchase the common stock of PSB. In accordance with the terms of the above referenced action, this letter is official notification to you of the conversion of your options." Exhibit 22 to Burger Affidavit (separate letters to each plaintiff advising each of extent of holding of PSB stock options following merger).

On June 15, 2000, the PSB board discussed strategies to repurchase plaintiffs' PSB options. See item in 2000 Capital Management Plan ("Purchase options held by former shareholders of First Bank of Philadelphia"), Exhibit 27 to Burger Affidavit. On January 29, 2001, counsel for PSB wrote to Lingle, as former president of FBP, requesting documents relating to the FBP options and referring to PSB's interest in acquiring the PSB options. Exhibit 30 to Burger Affidavit. On August 1, 2001 and October 3, 2001, however, PSB counsel wrote to Lingle and Goodman, respectively, characterizing the FBP options as invalid because, inter alia:

1. There was no evidence of FBP board approval of the issuance of the options, or approval by the Pennsylvania Department of Banking — as required when options are granted to bank officers and employees;

2. There was no Stock Option Registry Book confirming the identity of the option holders or the size of their holdings;

3. "Proper regulatory approval" was lacking for the acquisition of the options; and

4. The authenticity of the copies of the option certificates in PSB's possession was questionable.

Exhibits 37 and 38 to Burger Affidavit. The letter informed Lingle and Goodman that their options could not be "exercised or sold."Id.

The letters did not acknowledge the conversion of the FBP stock options to PSB stock options upon the completion of the 1999 merger. The record does not reflect whether plaintiffs tried to exercise any of the options, or whether there is any time limit applicable to such exercise.

The declaration sought by Count I of the complaint is that the FBP options were valid and enforceable. Defendants counter that the options were issued in contravention of the implementing contract (the Standby Purchase Agreement) and without appropriate federal and state regulatory approvals — and contained irregularities on their face. Accordingly, it would be a breach of PSB's fiduciary duty to its shareholders not to contest the FBP options' validity — and, in turn, to withhold or revoke the issuance of the PSB options.

The complaint also alleges breach of the official notification letter sent by PSB in the course of the 1999 merger (Count II); breach of the 1999 merger agreement (Count III); promissory estoppel (Count I); equitable estoppel (Count VI); breach of the Standby Purchase Agreement (Count VII); and breach of the FBP option certificates(Count VIII).

Upon review of the parties' motions, it is determined that the Rule 56 submissions do not disclose any triable issues, and the facts, as presented, do not support defendants' contentions. Regardless whether FBP should have issued the options, it did so as an integral part of the Standby Purchase Agreement, which was approved by its board of directors. Burger Affidavit, ¶ 12. Also contrary to defendants' assertions, the lack of adequate regulatory approval is not borne out factually.See, e.g., Defendants' Exhibits 4-9, Exhibit 11 to Burger Affidavit. When defendants contacted the Pennsylvania Department of Banking in 2001, they were informed that "approval of the options as part of a plan was subsumed into the approvals that were granted by the Department for the change in control filing." Burger Affidavit, ¶ 12, quoting February 12, 2001 memo from Stevens Lee regarding FBP Options, at ¶ 2. Therefore, the absence of specific approvals — for example, under § 1409 of the Banking Code — would not invalidate the options.

If there is merit to the argument based on the non-existence of a Stock Option Registry Book, defendants concede the defect can be cured by indemnification agreements, which plaintiffs are willing to sign. That the appearance of the options certificates may raise authenticity queries — e.g., they do not resemble each other, they contain bracketed language, as though not intended to be final documents, and so on — these without more are insufficient to produce an issue of validity. According to the proffered materials, the options themselves were duly authorized by the FBP board and received the requisite governmental approval. Whether or not they were issued in proper form is not a viable defense to this declaratory judgment action. The inferences that defendants say may be gleaned from the appearance of the options certificates are vague, dubious and belated, and not buttressed by any independent matters. Whatever their worth, given the history and circumstances of this case, they did not justify a refusal of plaintiffs' motion for summary judgment.

Defendants' repudiation of the options would alternatively constitute a breach of the clear language of the merger agreement or a recision. Count III.
In their cross-motion, defendants would invalidate the options portion of the merger agreement as a matter of law. This would effectuate a partial recision of the contract. Partial recision is not recognized under Pennsylvania law. Keystone Helicopter v. Textron, Inc., No 97-257, 1999 WL 305517, *2 (E.D. Pa. 1999, May 11, 1999) (citation omitted). Moreover, "[r]ecision is ordinarily granted only where the parties to the contract can be restored to substantially the same position they occupied when the contract was made." Cabot v. Jamie Record Co., No. 96-4672, 1999 WL 236737, *8 (E.D. Pa., Apr. 19, 1999) (citations omitted). Here, the merger occurred in October 1999, nearly five years ago and the status quo ante the merger cannot now be established.


Summaries of

Lingle v. PSB Bancorp, Inc.

United States District Court, E.D. Pennsylvania
Apr 15, 2004
CIVIL ACTION No. 02-1165 (E.D. Pa. Apr. 15, 2004)
Case details for

Lingle v. PSB Bancorp, Inc.

Case Details

Full title:CARL LINGLE, et al. v. PSB BANCORP, INC., et al

Court:United States District Court, E.D. Pennsylvania

Date published: Apr 15, 2004

Citations

CIVIL ACTION No. 02-1165 (E.D. Pa. Apr. 15, 2004)