King v. Edwards

• Decision Date: 01 October 1982
• Docket Number: Civ. A. No. C81-193A.
• Citation: 559 F. Supp. 75
• Parties: D. Kimbrough KING, William A. Hanger, and John C. Jackson, both individually and on behalf and in the right of Peachtree Federal Savings and Loan Association, a federally-chartered mutual savings and loan association, Plaintiffs, v. David C. EDWARDS, George J. Cotsakis, Ben B. Blackburn, III, Thomas M. Lowe, Jr., Fred R. Tonney and the Peachtree Federal Savings and Loan Association, a federally-chartered mutual savings and loan association, Defendants.
• Court: U.S. District Court — Northern District of Georgia

559 F. Supp. 75

D. Kimbrough KING, William A. Hanger, and John C. Jackson, both individually and on behalf and in the right of Peachtree Federal Savings and Loan Association, a federally-chartered mutual savings and loan association, Plaintiffs, v. David C. EDWARDS, George J. Cotsakis, Ben B. Blackburn, III, Thomas M. Lowe, Jr., Fred R. Tonney and the Peachtree Federal Savings and Loan Association, a federally-chartered mutual savings and loan association, Defendants.

Civ. A. No. C81-193A.

United States District Court, N. D. Georgia, Atlanta Division.

April 2, 1982.

Final Order May 3, 1982.

On Motion for Reconsideration October 1, 1982.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Richard Sinkfield, Allen Perry, Marvin Arrington, Atlanta, Ga., for plaintiffs.

Sidney Johnson, Thomas Jones, Atlanta, Ga., for defendants.

MEMORANDUM OPINION

HORACE T. WARD, District Judge.

I. Introduction

This matter arises out of a proxy contest in connection with the election of members of the Board of Directors at Peachtree Federal Savings and Loan Association ("Peachtree Federal" or "Association") in January of 1981. The plaintiffs are D. Kimbrough King, a member of the Board of Directors and former secretary of the Association, William A. Hanger, a former member of the Board of Directors of the Association, and John C. Jackson, the former treasurer of the Association. Plaintiffs are suing individually and on behalf of Peachtree Federal. The original defendants were David C. Edwards, a member of the Board and the president of the Association, George J. Cotsakis, the chairman of the Board of Directors, and Peachtree Federal. The plaintiffs subsequently joined Ben B. Blackburn, III, Thomas M. Lowe, Jr., and Fred R. Tonney, all of whom were elected to the Board in the contested election. In essence, plaintiffs contend that the proxy solicitation materials employed by defendants Edwards and Cotsakis in the proxy contest were materially misleading in violation of the applicable proxy solicitation rules promulgated under relevant federal statutes. Plaintiffs also assert that defendants Edwards and Cotsakis breached their fiduciary duties to Peachtree Federal in connection with the contest. This court's jurisdiction is invoked pursuant to 28 U.S.C. § 1331(a), 28 U.S.C. § 1337, and the doctrine of pendent jurisdiction. Defendants deny the basic allegations of the complaint and have asserted a counterclaim based on plaintiffs' initiation of the proxy contest. Further, defendants have raised several affirmative defenses to plaintiffs' claims. This matter was tried without a jury for seventeen (17) days during the period between November 30, 1981 and January 11, 1982, with supplemental written briefs being filed on February 1, 1982. The witnesses included experts for both sides, Federal Home Loan Bank Board ("FHLBB") officials, and present and former officers and directors of the Association. Extensive documentary evidence, including letters, minutes of Board meetings, and depositions, were introduced. This memorandum constitutes the court's findings of fact and conclusions of law.

II. Findings of Facts and Conclusions of Law

A. Factual Background

Peachtree Federal is a federally-chartered mutual savings and loan association founded in 1948. As such, the Association is subject to the supervision of the FHLBB. The principal office of Peachtree Federal is located at 3030 Peachtree Road, Atlanta, Georgia, and there are branch offices at various locations in the metropolitan Atlanta area. The evidence did not reveal any significant financial problems for Peachtree Federal until the middle 1970's, when the fortunes of the Association began to wane. The Association had been involved in several major real estate transactions, and consequently many of its problems coincided with the general economic decline of the real estate industry in the middle 1970's. Also, the Association had been involved in certain loan transactions that proved detrimental.¹ As a result of its problems, Peachtree Federal experienced net worth deficiencies which prompted the FHLBB to take affirmative steps in an attempt to return the Association to a stable financial position. These affirmative steps included subjecting the Association to a supervisory agreement which placed certain limitations on the operations of the Association.² At about the same time that the Association became subject to the supervisory agreement, the defendant David C. Edwards ("Edwards") was elected as the president and a member of the Board of Directors of the Association. Gradually over the next few years, the finances of the Association improved, leading to the release from the supervisory agreement in late 1979.

In the middle of 1980, problems arose between certain of the principals of the Association. These problems eventually resulted in the polarization of the Board, with Mr. King on one side and Mr. Edwards on the other. The parties disagree about the genesis of this dissension, and the evidence is not completely clear on this question. Plaintiffs assert that the dispute between Board members arose as a result of dissatisfaction with Edwards' performance as president. They contend that under Edwards' leadership, the Association had failed to keep pace with its competitors in offering a broad range of new services to the public, and argue that new management philosophies were needed at the Association in order to improve its financial condition. On the other hand, the defendants assert that Mr. Edwards had provided productive leadership, and had performed adequately in spite of adverse economic conditions in the industry. They further contend that while there were differences of philosophy among Board members, there did not exist an obvious split until a dispute arose concerning the legal fees of the general counsel of the Association, Mr. Alex McLennan. Mr. McLennan was the principal organizer of the Association. He served as a director and chairman of the Board from 1948 to 1977, and maintained substantial influence over the Association for many years. Two of the plaintiffs are related to Mr. McLennan by marriage, D. Kimbrough King (son-in-law) and William A. Hanger (brother-in-law).

It is clear that during the fall of 1980, Mr. King became convinced that Mr. Edwards should be replaced as president, and he informally sought the support of other Board members in this regard. However, the majority of the Board members backed Mr. Edwards. The problems among Board members escalated during the late fall of 1980, with two distinct factions eventually emerging. The schism between the groups crystallized with the resignation of two members of the Board. The then chairman of the Board, Mr. Harold Ivey, resigned in September, 1980, and Dr. Marvin Mitchell required in December, 1980. The circumstances surrounding these resignations will be more fully discussed below. The resignations left the Board deadlocked with regard to major policy decisions, with Messrs. Edwards and Cotsakis (the new chairman) on one side and Messrs. King and Hanger on the other. This unsettled state of affairs led to a power struggle between the two factions from which the proxy contest and subsequent litigation ensued.

In December of 1980, it had apparently become obvious that a proxy contest was a distinct possibility. In view of this potentiality, each group took preparatory steps. By letter dated December 18, 1980, Mr. King sought access from the FHLBB to a list of the members of the Association for purposes of soliciting their proxies. In a letter dated December 19, 1980 to Mr. King, and a letter dated December 23, 1980 to Mr. Edwards' attorney, a supervisory agent of the FHLBB granted access to the membership list of the Association. As conditions of its approval of access to the membership list, the FHLBB required the parties to submit their respective solicitation materials to the FHLBB for prior approval, and required each side to bear its own expenses. By late December, the solicitation materials of both factions had been submitted to the FHLBB, and changes required by the agency had been effected.

It was the feeling of the FHLBB that a proxy contest would not be in the best interest of the Association, and the agency endeavored to prod the respective factions toward compromise. Despite the efforts of the FHLBB, no settlement of the matter was reached. In a final effort to forestall the proxy contest, the FHLBB "withdrew its consent" to the commencement of the proxy solicitation contest. Based upon the belief that the FHLBB did not have authority to prohibit the proxy solicitations, the King faction proceeded to mail its proxy solicitation materials on January 6, 1981. With the authorization of the FHLBB, the Edwards materials were mailed the following day. The FHLBB subsequently "authorized" the Edwards group to reimburse itself for expenses incurred as a result to the proxy contest. A proxy contest agreement was entered into between the parties on January 15, 1981. This agreement purported to govern the conduct of the annual meeting of the Association for which the proxies were being solicited, and to govern the tabulation of the proxies. Pursuant to this agreement, the accounting firm of Peat, Marwick, Mitchell & Co. was selected as the inspectors of election. The annual meeting of the Association was held on January 21, 1981. At this meeting, votes of the members (including the proxies) were cast for the election of directors.³

In late January, prior to the tabulation of the votes cast at the annual meeting, plaintiffs instituted this action. Plaintiffs contended that the proxy materials of the Edwards group had been materially misleading in violation of the relevant federal regulations. Plaintiffs sought an injunction halting the tabulation of votes, asserting that a continuation of the count would be unnecessarily expensive in view of the fact that the election was tainted. This...