Amboy Bancorp. v. The Bank Advisory Group Inc.
| Decision Date | 25 April 2011 |
| Docket Number | No. 10-1870, No. 10-1638 |
| Parties | AMBOY BANCORPORATION, A New Jersey Corporation v. THE BANK ADVISORY GROUP, INC., a Texas Corporation; JENKENS & GILCHRIST, a Professional Coporation |
| Court | U.S. Court of Appeals — Third Circuit |
NOT PRECEDENTIAL
Amboy Bancorporation, Appellant in No. 10-1638
The Bank Advisory Group, Inc., Appellant in No. 10-1870
On Appeal from the United States District Court
for the District of New Jersey
(D.C. Civil No. 2-02-cv-05410)
Before: SCIRICA, AMBRO and VANASKIE, Circuit Judges
Dennis T. Kearney, Esq. (Argued)
Counsel for Appellant/Cross-Appellee Amboy Bancorporation
Mitchell B. Seidman, Esq. (Argued)
Counsel for Appellee/Cross-Appellant The Bank Advisory Group, Inc.
Edward B. Deutsch, Esq. (Argued)
James G. Gardner, Esq.
Counsel for Appellee Jenkens & Gilchrist
At issue on this appeal is whether misrepresentations in a proxy statement attributable to a law firm (Appellee Jenkens & Gilchrist ("Jenkens")) and a consultant (Appellee The Bank Advisory Group, Inc. ("BAG")) can be regarded as a proximate cause of the damages incurred by their client, Appellant Amboy Bancorporation ("Amboy"), as a result of a successful minority shareholder action in which it was determined that Amboy's minority shareholders received substantially less than fair value for their shares in a cash-out corporate reorganization. The District Court interpreted the opinion of the Appellate Division of the New Jersey Superior Court in the minority shareholder action, Casey v. Brennan, 780 A.2d 553 (N.J. Super. Ct. App. Div. 2001), as holding that the misleading proxy statement was not material to the determination that minority shareholders were entitled to an award of damages measured by the differencebetween the price offered for their shares and the actual fair value of those shares. Based upon this interpretation, the District Court concluded that the misleading proxy statement could not have been a proximate cause of the damages Amboy incurred in the minority shareholder action. Contrary to the District Court's interpretation, we find that the existence of misrepresentations in the proxy statement was regarded by the New Jersey state court as a material factor in its liability determination. Accordingly, we will vacate, in part, the District Court's judgment in favor of Amboy and remand for further proceedings.
As we write only for the parties, who are familiar with the facts and procedural history of this case, we relate only the information essential to our analysis.
In 1997, Amboy retained Jenkens and BAG to assist Amboy with its reorganization into a Subchapter S corporation under the Internal Revenue Code. To qualify for Subchapter S status, Amboy had to reduce the number of its shareholders from 420 to no more than 75. See 26 U.S.C. § 1361(b)(1)(A) (1996). To that end, Amboy's board of directors, who were also majority shareholders of Amboy, planned a cash-out merger of the minority shareholders. Amboy retained Jenkens to advise it in connection with the merger plan and retained BAG to render an opinion as to the "fair market value" of Amboy's common stock. BAG determined that the "cash fair market value" of Amboy stock was $69.50 per share. BAG's valuation included marketability and minority discounts. Amboy's board of directors voted to pursue a Subchapter S election and, relying on BAG's valuation, approved an offer price of $73 per share.
Jenkens prepared the proxy statement issued in connection with the merger. The proxy statement explained that if the merger plan is approved, shareholders who own 15,000 shares of Amboy or who purchase Amboy shares to increase their holdings to 15,000 shares would continue to be shareholders. All other shareholders, except for those who "perfect their dissenters' rights" in accordance with the provisions of the New Jersey Business Corporation Act, would receive $73 per share. (J.A. 418.) The proxy statement further provided that shareholders who receive cash for their shares pursuant to the merger would have no right to dissent from the merger. Additionally, the proxy statement related the board's belief that the $73 per share price "represents a fair value." (J.A. 407.) The proxy statement referenced BAG's fairness opinion, which concluded that the $73 per share price was "fair, from a financial standpoint," to the shareholders. (J.A. 408-10, 493.)
The directors who had initiated the transaction controlled sufficient shares to guarantee the merger's approval, and on November 19, 1997, the merger was approved by the affirmative vote of more than the required two-thirds majority of the votes cast. The merger was completed on December 2, 1997, and the shareholders received their checks on or about January 7, 1998. All shareholders except six accepted the $73 per share consideration.
Three separate actions were subsequently initiated against Amboy and its board of directors in New Jersey state court alleging that the defendants failed to offer the selling shareholders a price that represented the fair value for their shares. The actions were consolidated for trial in the Superior Court of New Jersey, Chancery Division, UnionCounty, under the caption Casey v. Brennan. A class was certified consisting of all persons owning less than 15,000 shares of Amboy on November 19, 1997, whose shares were cashed out under the approved merger plan. Although Jenkens initially represented Amboy in the action, because the shareholders' allegations concerning inadequate proxy statement disclosures necessarily implicated Jenkens as the preparer of the proxy statement, it withdrew as counsel to avoid a conflict of interest.
The trial judge rendered an oral opinion in April 1999. He found that the proxy statement "contained... misleading statements of material facts and failed to disclose all material facts... regarding the true fair value and future prospects of Amboy and the true fair value of Amboy's common stock." (J.A. 603-04.) In finding the proxy statement materially deficient, the trial judge particularly relied on the fact that the proxy statement failed to disclose that the $73 per share offer price was derived first with the application of a 25% minority discount and then a 15% marketability discount. The trial judge, however, refused to impose liability on the individual directors because he found that they relied in good faith on BAG and Jenkens in arriving at the $73 share price.
Concluding that the fair value was $90 per share, the trial court entered judgment in favor of all plaintiffs, with the exception of the shareholders who voted against the plan but then surrendered their shares in exchange for the offer price.1 According to the trial court, those shareholders who voted against the plan were fully informed as to allmaterial facts relating to the merger and, thus, acquiesced in the merger by accepting the merger consideration.
On appeal, the Superior Court of New Jersey, Appellate Division, affirmed the trial court's finding that the proxy statement was materially misleading and inaccurate. The Appellate Division, however, reversed the trial court's ruling that shareholders who voted against the plan but then cashed in their shares were estopped from recovery. Accordingly, all shareholders were found to be entitled to recovery. The Appellate Division also reversed the trial court's determination of fair value and remanded the matter.
Ultimately, following a second remand, the Appellate Division affirmed the trial court's determination that the fair value of Amboy stock was $114 per share. As a result of this finding, Amboy was required to pay approximately $33 million to its minority shareholders.
In 2002, Amboy initiated this action in the Superior Court of New Jersey, Law Division, against Jenkens and BAG asserting claims for professional negligence, breach of fiduciary duty, and breach of contract. Jenkens removed the case to the United States District Court for the District of New Jersey.
As to the professional negligence claim, Amboy in part alleges that Jenkens and BAG failed to ascertain and advise Amboy that "fair value," not "fair market value," was the proper valuation standard in New Jersey. On the premise that it would not and could not have proceeded with the merger at $114 per share, Amboy alleges damages based on the New Jersey judgment requiring it to pay the shareholders the difference between the$73 merger price and the $114 adjudicated fair value price. Amboy also seeks attorney and expert fees incurred in defending the shareholder action, as well the fees incurred in prosecuting this suit.
In 2005, Jenkens moved for summary judgment with respect to Amboy's claim of damages resulting from the New Jersey court's fair value determination. Jenkens argued that Amboy could not establish that Jenkens's alleged negligence was the proximate cause of such damages because Amboy was legally obligated to pay its shareholders fair value for their shares regardless of the accuracy of the proxy statement. The District Court denied Jenkens's motion for summary judgment, concluding that material issues of fact existed as to whether Jenkens breached a duty to Amboy and whether the breach was a substantial factor in Amboy's damages.
In 2007, BAG filed a Chapter 7 bankruptcy petition in the United States Bankruptcy Court for the Western District of Texas. Amboy filed a motion to dismiss the Chapter 7 case. The Bankruptcy Court denied Amboy's motion, but modified the automatic stay of 11 U.S.C. § 362(a) to permit the District Court to determine whether complete relief could be accorded to Amboy and Jenkens if BAG were either severed or dismissed from the action. Amboy then filed a letter application in the District Court seeking "an order determining that complete relief cannot be accorded as to the remaining parties... without BAG remaining a party in...
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