Bolger v. First State Financial Services

• Decision Date: 14 February 1991
• Docket Number: Civ. A. No. 90-5030.
• Citation: 759 F. Supp. 182
• Parties: David F. BOLGER, Individually and as Trustee for the David F. Bolger Revocable Trust; and Two-Forty Associates, a limited partnership, Plaintiffs, v. FIRST STATE FINANCIAL SERVICES, Defendant.
• Court: U.S. District Court — District of New Jersey

759 F. Supp. 182

David F. BOLGER, Individually and as Trustee for the David F. Bolger Revocable Trust; and Two-Forty Associates, a limited partnership, Plaintiffs, v. FIRST STATE FINANCIAL SERVICES, Defendant.

Civ. A. No. 90-5030.

United States District Court, D. New Jersey.

February 14, 1991.

William R. Thompson, Klehr, Harrison, Harvey, Branzburg & Ellers, Cherry Hill, N.J., for plaintiffs.

Seth T. Taube, McCarter & English, Newark, N.J., for defendant.

OPINION

LECHNER, District Judge.

This is a motion brought by David F. Bolger ("Bolger") and by Two-Forty Associates, a Pennsylvania limited partnership of which Bolger is the general partner ("Two-Forty Associates") (collectively, the "Plaintiffs"), for preliminary and permanent injunctive relief. The Plaintiffs seek to enjoin First State Financial Services, Inc. ("First State") from holding its 16 January 1991 annual stockholders meeting (the "16 January Meeting"), at which four directors will be elected, until First State has issued corrective proxy statements to shareholders.¹ Jurisdiction is alleged pursuant to § 27 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78aa, and 28 U.S.C. §§ 1331 and 1347.

At the 14 January 1991 oral argument on the application for a preliminary injunction, First State and the Plaintiffs ("the Parties") agreed there was no dispute on the facts. Accordingly, the oral argument on the motion for a preliminary injunction was converted to a final hearing on the merits with respect to permanent injunctive relief, the only relief sought in the complaint.

For the following reasons, as stated on 14 January 1990, the motion for permanent injunctive relief is denied and the Verified Complaint is dismissed.²

FACTS

First State is a Delaware corporation. First State common stock is registered under section 12 of the Securities Exchange Act, 15 U.S.C. § 78l, publicly traded in the over-the-counter-market and approved for quotation under NASDAQ. Stipulation of Facts, ¶ 3. The Chairman of the Board and Chief Executive Officer of First State is Michael J. Quigley, III ("Quigley"). Id., ¶ 8.

First State conducts its principal business activity through its wholly owned subsidiary, First DeWitt Savings and Loan Association ("DeWitt Savings"). The principal place of business of DeWitt Savings is West Caldwell, New Jersey. Id., ¶ 3. DeWitt Savings operates ten full-service offices in New Jersey and, as of 30 September 1990, reported total assets of approximately $450,000,000. Id. As of 12 December 1990, the number of outstanding First State common stock was 3,175,000 shares. Of this number, the Plaintiffs own 314,325 shares, or 9.9% of total shares, as reported in an amendment to an 11 August 1988 Rule 13d-1 filing submitted to the Securities and Exchange Commission (the "SEC"). Id., ¶ 4.

During fiscal year 1990 (which commenced 1 October 1989), First State reported a second-quarter loss of $2.9 million, compared to earnings of $802,000 for the same period during fiscal year 1989. Losses for the first six months of fiscal year 1990 totalled $2.6 million, compared to earnings of $1.5 million for the same period of fiscal year 1989. Id., ¶ 5. First State's 1990 Annual Report, dated 10 December 1990, attributed these losses largely to the deterioration of the New Jersey real estate market during this period. 1990 Annual Report at 4.

In addition, the price for common stock at the close of trading on 20 December 1990 was approximately $2.13, when at the close of fiscal year 1989 (approximately fifteen months earlier) it had reached a high of $7.625 and a low of $5.625. Stipulation of Facts, ¶ 7.

On 3 July 1990, Bolger began a letter-writing campaign expressing to First State his displeasure with the financial performance of First State for fiscal year 1990; Bolger demanded responsive action by First State. Bolger wrote the first of a series of letters to First State on 3 July 1990. See 3 July 1990 Bolger Letter to First State. Bolger complained of the losses suffered by First State in his 3 July 1990 letter, basing his complaints on information contained in the annual and periodic reports issued by First State and DeWitt Savings, on SEC filings and on other information available to the public. In addition, Bolger complained of the drop in value of First State stock, of the "erratic pattern of additions to the general loan loss reserves of DeWitt Savings," and of a perceived conflict of interest by senior directors in approving certain loans made by DeWitt Savings. Bolger also complained of the size of the salaried and ancillary benefits paid to officers and directors and of the 28 June 1990 payment of dividends to shareholders, in light of losses incurred for the quarter ending 31 March 1990. 3 July 1990 Bolger Letter to First State. Finally, Bolger complained that First State's directors "kept the institution wrapped up in the harshest of anti-takeover defenses and insulated themselves and their salaries and benefits from the normal disciplines of the market place." Id.

Bolger demanded of First State that it provide "answers and explanations regarding the significant losses incurred by First State in recent periods," "the precipitous decline in the market value of First State's common stock," and "the recent trend in additions to DeWitt Savings' loan loss reserves." Id. at 1. In addition, Bolger demanded that First State "review, and commit to continue to review on an ongoing basis, all business relationships between or involving officers, directors and other fiduciaries of First State and/or DeWitt Savings." Id. at 2. Bolger further demanded that First State review the performance of Quigley and terminate him if his performance proved to be deficient or derelict, review all officer and director compensation, and "take all appropriate actions to terminate antitakeover defenses, `golden parachutes' and other impediments to the realization of shareholder value." Id. Bolger advised First State he submitted a copy of his letter with his Schedule 13D filed with the SEC.

In response to Bolger's letter, First State established on 18 July 1990 a special committee (the "Special Committee") of the Board of Directors (the "Board") composed entirely of directors independent of the management of First State and DeWitt Savings. Stipulation of Facts, ¶ 14. The Special Committee engaged special independent legal counsel ("Special Counsel") on 15 August 1990 to assist with the investigation to be conducted by the Special Committee. Id., ¶ 15.

First State responded to Bolger's 3 July 1990 letter with a 30 July 1990 letter, in which it advised Bolger: "A special committee of the board of directors has been formed to review the issues raised therein. This committee will conduct its review and report to the board in a manner that is appropriate under the circumstances." 30 July 1990 First State Letter to Bolger. First State also informed Bolger:

You should be advised that the board, at this stage, suspects that given the inflammatory, if not inaccurate, incomplete and misleading, nature of various allegations contained in your letters, together with your continued focus on antitakeover aspects of the company's corporate structure (which have been in place from day one of the company's existence and of which you should have been fully aware when you acquired your First State shares), there may be ulterior motives behind both your letters and the method by which they have been publicized by you.

Id.

On 8 August 1990, Bolger again wrote to First State. In his 8 August 1990 letter, Bolger again complained of alleged mismanagement of First State's loan portfolio and loss reserves, of the filing of reports with the SEC allegedly rendered false and misleading by their characterization of DeWitt Savings as a "well-run, well-capitalized, profitable institution," of allegedly excessive compensation for management and of the payment of dividends to shareholders. 8 August 1990 Bolger Letter to First State at 2-6. In his 8 August 1990 letter, Bolger demanded that First State and DeWitt Savings take "all appropriate steps, including the institution of litigation," against the officers and directors "responsible for acts of corporate mismanagement, waste of corporate assets, corporate misconduct, and breaches of fiduciary duty, as detailed below and as may be revealed upon further investigation." Id. at 1. He stated:

Should you fail to act as outlined here, I shall regard such failure as evidence of control and domination of the Boards of Directors by those responsible for the wrongful actions described above and evidence of the approval, acquiescence and participation by the majority of the Boards of Directors in the apparently wrongful and unlawful actions described.

Id. at 7. Finally, Bolger stated if he did not receive notice that First State was taking appropriate action with respect to his demands within ten working days, he would "take such action on behalf of the shareholders of the Companies, including litigation, as he may consider appropriate to redress the wrongs identified...." Id. at 8.

On 21 August 1990, First State responded to Bolger's 8 August 1990 letter, advising him his 8 August demands were "under active consideration by the Board of Directors." 21 August 1990 First State Letter to Bolger. It further advised Bolger: "The Board believes that it is unreasonable to expect, indeed that it would be imprudent to attempt to achieve, a decision as to whether the actions demanded should be instituted, within the ten ... working day time frame demanded in your August 8 letter." Id. Bolger was advised he would be notified of the decision of the Board after the Board had finished considering his demands. Id.

Bolger's final letter was written on 30 August 1990, in which he stated: "I am pleased to learn from the August 21 letter that `active consideration' is being given to my demand, as stated in my August 8, 1990 letter, ...