Conway v. ASTORIA FINANCIAL CORP., C.A. No. 19499.
| Decision Date | 16 July 2003 |
| Docket Number | C.A. No. 19499. |
| Citation | 837 A.2d 30 |
| Parties | James J. CONWAY, Jr., Plaintiff, v. ASTORIA FINANCIAL CORPORATION, Defendant. |
| Court | Court of Chancery of Delaware |
Michael D. Goldman, Richard L. Renck, Potter Anderson & Corroon, Wilmington; Thomas P. Puccio, Law Offices of Thomas P. Puccio, New York City; Lawrence S. Robbins, Arnon D. Siegel, Robbins, Russell, Englert, Orseck & Untereiner, LLP, Washington, DC, for Plaintiff.
Alan J. Stone, Megan E. Ward, Morris, Nichols, Arsht & Tunnell, Wilmington; Michael L. Hirschfeld, Mathew B. West, Daniel M. Perry, Milbank, Tweed, Hadley & McCloy, LLP, New York City, for Defendant.
LAMB, Vice Chancellor.
This action arises under a regulation adopted by the predecessor of the Office of Thrift Supervision, a bureau of the United States Department of the Treasury. That regulation was promulgated in 1969, in order to make uniform the director and officer indemnification practices of federally chartered savings associations. In this case, a former corporate officer who engaged in substantial misconduct in office seeks indemnification for his attorneys' fees and expenses relating to a class action resulting from his misconduct. This unquestioned malefactor refused to become a party to a stipulation of settlement that, nevertheless, resulted in the dismissal of all claims against him with prejudice. The question presented is whether by the simple ploy of refusing to participate in the settlement that greatly benefited him, the former officer can convert his indemnification claim from one that is permissive under the federal regulation to one that is mandatory. After examining the language, structure and purpose of the regulation, the court concludes that the claimant's refusal to participate in the settlement has no effect on the basis for his claim for indemnification. Because the judgment of dismissal was, conclusively, the product of a good faith settlement, the claim for indemnification is entirely permissive in character.
Astoria Financial Corporation ("AFC"), a Delaware corporation, is a bank holding company. AFC owns, among others, Astoria Federal Savings and Loan Association ("Astoria Federal"), the successor by merger of Long Island Savings Bank ("LISB" or the "Bank").1 James J. Conway, Jr. was the Chairman of the Board of Trustees of LISB from 1976 until July 1993 and was the Chief Executive Officer of LISB from 1983 until July 1993.
During his tenure with LISB, Conway maintained an ownership interest in Conway & Ryan, P.C. (the "Law Firm"). Conway initially held 65% of the Law Firm stock. In December 1984, he transferred 51% of the Law Firm stock to his daughter, Susan Conway Petrelli, and 5% to his other partners, leaving Conway with 9%. In January 1987, Petrelli transferred half of her interest, 25.5% of the Law Firm stock, to her sister-in-law, Denise Whelan Conway ("Whelan"). From 1982 until 1992, LISB was the Law Firm's primary client. The Law Firm represented LISB in most residential mortgage loan transactions. The fees from the mortgage transactions accounted for more than 90% of the Law Firm's revenues.
Despite performing no client-related work for the Law Firm in 1982 or thereafter, Conway received nearly $4 million from the Law Firm. Petrelli, a recent law school graduate when she joined the Law Firm in 1984, received approximately $5 million from the Law Firm between 1985 and 1989. Whelan, also a junior attorney when she joined the Law Firm, received over $2 million from the Law Firm between 1987 and 1989. A portion of the money received by Petrelli and Whelan was spent at the direction or for the benefit of Conway.
In 1989, in connection with certain litigation, LISB's attorneys ("Outside Counsel") performed a due diligence investigation into LISB officers' compensation and perquisites. Outside Counsel met with Conway as part of this work in March 1990, at which time Conway revealed details of his and his family's financial relationship with the Law Firm. In September 1990, Conway asserted that his communications with Outside Counsel were privileged and warned Outside Counsel that he would take legal action against them if they disclosed the communications to LISB. At the suggestion of Outside Counsel, a special committee of the LISB board was formed to investigate the relationship among Conway, members of his family, and the Law Firm. Conway and his family members refused to cooperate with the investigation, and Outside Counsel declined to cooperate in light of Conway's contention that his communication to Outside Counsel was privileged.
In April 1992, the LISB board passed a resolution directing Outside Counsel to disclose the substance of the information that Outside Counsel had gathered concerning Conway's relationship with the Law Firm.2 Outside Counsel informed Conway that Outside Counsel intended to comply with the resolution. Conway commenced Doe v. Poe on May 15, 1992, to prevent Outside Counsel from disclosing the information. The trial court found that Conway could not have reasonably expected the communications to be confidential from the LISB board.3 Conway's appeals were rejected4 and, on June 21, 1993, the information from Outside Counsel became available to the LISB board.
On February 12, 1993, the United States Office of Thrift Supervision ("OTS"), the federal agency with regulatory jurisdiction over federally chartered thrift institutions such as LISB, began a formal investigation into Conway's relationship with the Law Firm. On February 24, 1994, Conway settled the OTS Disciplinary Proceeding, agreeing to an OTS Order in which the OTS stated that it had found from 1983 through 1989 Conway had failed to make required disclosures to LISB, its mutual members, and the Federal Home Loan Bank Board ("FHLBB").5 The OTS concluded in its Order, as follows:
[Conway] engaged in violations of federal conflict-of-interest and disclosure regulations, participated in conflicts of interest constituting an unsafe or unsound practice within the meaning of [relevant OTS regulations], and breached his fiduciary duty owed to [LISB].6
Pursuant to 12 U.S.C. §§ 1818(b) and (e), the OTS Order imposed, and although admitting no wrongdoing Conway accepted, a lifetime ban on participation in the banking industry. Conway also was ordered to pay $1,300,000 in restitution to LISB.
In 1994, the United States Attorney for the Eastern District of New York began a criminal investigation into Conway's payments from the Law Firm. In February 1998, Conway entered into a plea bargain in which he pled guilty to a criminal misdemeanor information charging him with violating 18 U.S.C. § 215(a)(2).7 As part of the plea agreement, Conway paid a $200,000 fine and was placed on probation.8
The Weil Action, captioned Weil v. Long Island Savings Bank, began in March 1994,9 shortly after an article about the OTS Order appeared in a Long Island newspaper and came to the attention of class counsel.10 The class, consisting of more than 36,000 persons who had entered into residential mortgages with LISB between 1983 and 1992, filed the suit against LISB, Conway, other members of the LISB board, and members of the Law Firm, alleging violations of federal statutes including the Racketeer Influenced and Corrupt Organization Act ("RICO"), the Truth in Lending Act, and the Real Estate Settlement Procedures Act ("RESPA") as well as common law claims for fraud and negligent supervision, among others. The complaint alleged that Conway, members of his family, the Law Firm, LISB, and the other members of the LISB board had engaged in a scheme to defraud members of the class by charging inflated legal fees in connection with residential mortgage closings that were used to fund kickbacks to Conway and his family from January 1, 1983 through December 31, 1992.11
On November 7, 2001, all parties to the Weil Action except Conway executed a stipulation of settlement (the "Weil Stipulation") in which LISB agreed to pay a large monetary settlement on the condition that the claims against all defendants, including Conway, be dismissed. The Weil Stipulation recites that the dismissal with prejudice of the action as to all parties, including Conway, was effected "pursuant to the Settlement reached by the parties."12
Conway did not object to the dismissal of claims against him, although he now asserts that he refused to join the settlement because he was determined to pursue his defense. On November 13, 2001, Conway entered into a separate stipulation with LISB and others, providing, among other things, as follows:
[Conway] does not oppose approval of the settlement embodied in the [Weil Stipulation], including but not limited to the dismissal with prejudice of the action as against him, as specified in paragraph 14 of the [Weil Stipulation], and Conway will file no papers and offer no argument in opposition to the preliminary and final approval of the [Weil Stipulation].13
In this stipulation, AFC agreed that the settlement did not bar Conway from seeking indemnification.
On January 16, 2002, the federal district court approved the settlement and entered an order dismissing with prejudice the claims against Conway.14
On January 15, 2002, Conway made a written request to the AFC board of directors and Astoria Federal board of directors for indemnification pursuant to the OTS's indemnification regulation (the "Indemnification Regulation"). The Indemnification Regulation provides, in relevant part, as follows:
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