Palmer v. U.S. Sav. Bank of America

• Decision Date: 06 February 1989
• Docket Number: No. 88-181,88-181
• Citation: 131 N.H. 433,553 A.2d 781
• Parties: Ansell W. PALMER, et al. v. U.S. SAVINGS BANK OF AMERICA, et al.
• Court: New Hampshire Supreme Court

Page 781

553 A.2d 781

131 N.H. 433

Ansell W. PALMER, et al. v. U.S. SAVINGS BANK OF AMERICA, et al.

No. 88-181.

Supreme Court of New Hampshire.

Feb. 6, 1989.

Hamblett & Kerrigan P.A., Nashua (John P. Griffith, on the brief and orally), for plaintiffs.

McLane, Graf, Raulerson & Middleton P.A., Manchester (Bruce W. Felmly, on the brief and Wilbur A. Glahn, III, on the brief and orally), for defendant Joseph Fanaras, filed joint brief and argued orally on behalf of all defendants.

Devine, Millimet, Stahl and Branch P.A. of Manchester, for defendant U.S. Savings Bank of America.

Shaines & McEachern, Portsmouth, for defendant Richard K. Parker, Jr.

Brown and Lapointe, Exeter, for defendants Jeffrey Breiseth, Charles Mutrie and James N. Walsh.

Aeschliman & Tober, Portsmouth, for defendants Charles Keenan, Kenneth Malcolm and Theresa Sparks.

JOHNSON, Judge.

The plaintiffs, Ansell W. Palmer, Frederick W. Lowell, Roberta W. Young and Thomas T. Hodge, appeal from an order of the Superior Court (Gray, J.) dismissing the derivative action they brought on behalf of the U.S. Savings Bank of America (the Bank). The action, which alleges breach of fiduciary duties by the defendant directors of the Bank, Joseph Fanaras, Richard K. Parker, Jr., Jeffrey Breiseth, Charles Mutrie, Kenneth Malcolm, Paul McInnis, Charles Keenan, Theresa Sparks, Frank Conte and James N. Walsh, was dismissed on the ground that the plaintiffs lack standing to bring the action because they do not fairly and adequately represent other similarly situated shareholders. For the reasons that follow, we affirm.

Because the relationships of the parties, and the acts taken by them prior to the institution of this suit, formed the basis for the trial court's determination, we review the background of this action in some detail.

The U.S. Savings Bank of America, a nominal defendant in this action, is a New Hampshire corporation with its principal place of business in Seabrook. Plaintiff Lowell, an incorporator and promoter of the Bank, which opened in June 1984, became its first president and a member of its initial board of directors. In April 1986, the majority of the board, made up of current defendants Fanaras, Mutrie, Walsh, Breiseth, and Parker, held an election of officers and voted to terminate Lowell's contract as president. In response, Lowell petitioned the superior court to enjoin the board's actions during the April meeting, claiming that the bylaws had been breached by these directors, both by causing the election to take place and by terminating his employment contract. The suit was resolved that summer, when Lowell was allowed to return to the Bank.

In October 1986, the same majority of the board of directors voted to suspend Lowell as the Bank's president, until the next meeting of the board in November. Lowell refused to leave the Bank or turn in his keys. Eventually he was ordered by the Superior Court (Murphy, J.) to return his keys, divulge his combination to the vault, and leave the Bank.

Also in the fall of 1986, Director Fanaras acquired a controlling interest in the Bank by purchasing the stock in the Bank owned by Central Savings Bank. On December 18, 1986, plaintiffs Hodge and Young, as well as more than twenty other shareholders, brought suit seeking, inter alia, to have the court find that the transfer of stock was in violation of a restrictive agreement voted on by the shareholders. They also asked the court to enjoin a December 22, 1986 special meeting of shareholders, during which a new board of directors would be elected. The plaintiffs failed to obtain a preliminary injunction, however, and on December 22, the meeting was held and a new board of directors elected. On December 29, the new board voted to terminate Lowell's employment as president. The issue of whether the stock transfer could take place was resolved by a decision dated February 16, 1988, in which the Court (Gray, J.) found that the transfer was not restricted.

On June 29, 1987, Lowell brought a contract action against the Bank and its directors alleging breach of contract, malicious conduct, wrongful discharge, and, as against the directors as individuals, tortious breach of contract. Lowell alleged damages of one million dollars and sought an attachment of assets. On July 5, 1988, the Court (Gray, J.), following a hearing, found that the board had just cause to terminate Lowell's employment. The court, however, held that because the board failed to articulate the reasons for the termination, the board had breached Lowell's contract, and that he was therefore entitled to the salary which accrued up to such time as the board properly terminated his employment, if it chose to do so. The board took this action soon after, at which time Lowell's damages were $104,272.48. In September 1988, Lowell filed an appeal with this court alleging, inter alia, that he was entitled to the full present value of his salary over the term of his ten-year employment contract. The Bank filed a cross-appeal, claiming that the Bank did not have to provide Lowell with specific reasons for his termination as president. Both the appeal and cross-appeal were accepted for review. The issue of the amount of damages, if any, to which Lowell is entitled, is thus not settled because of the pending appeal.

On October 29, 1987, the plaintiffs filed the present derivative suit. In their complaint, the plaintiffs allege that the defendants breached their fiduciary duties as directors, officers and shareholders based on various acts or omissions. The complaint requested the court, pending a final decree, to remove the current directors and officers from their positions, and to appoint Lowell as the receiver of the Bank's assets. The request to name Lowell as receiver was later withdrawn. On December 22, 1987, the defendants filed a motion to dismiss, alleging, inter alia, that the plaintiffs are not able to bring the suit because they do not fairly and adequately represent the interest of the other shareholders of the Bank. Following a hearing, the Court (Gray, J.) ruled on January 12, 1988, that Lowell, because of his clear conflict of interest, was not representative of the class, and granted the motion to dismiss as to the temporary relief sought by the plaintiffs. The court found:

"[What we have is a] series of lawsuits which when viewed in context and in their numerical totality reveal attempts by two separate factions of shareholders and/or directors to gain control of the bank; not necessarily for private gain but certainly for the purpose of operating the bank in accordance with their separate management philosophy.... What we have here is a fight between various factions as to who will control the bank."

The court held that the other plaintiffs were "inextricably entwined" with Lowell.

In response to defendants' January 21, 1988 motion for clarification or reconsideration, the court stated that the plaintiffs are not fair and adequate representatives of the shareholders and therefore could not bring the lawsuit. The court found that although Lowell's contract action is "entirely within his rights, ... it is also in conflict with the interests of the shareholders as a class." It held that the other plaintiffs' request to name Lowell as receiver "is indicative of the fact that the plaintiffs are not seeking to represent the interests of the shareholders, but are merely seeking to facilitate the goals of Mr. Lowell, namely, to regain control of the bank."

Following a hearing on plaintiffs' motion for reconsideration on March 18, 1988, the court on April 7, 1988, affirmed its earlier order, stating:

"It is clear that Mr. Lowell's contract claim, while entirely within his right, places him in conflict with the interests of the shareholders in the context of a derivative suit. The contract claim creates economic antagonism dictated by Mr. Lowell's personal interests which cannot enjoy support from other shareholders since it depletes the corporation of assets. The original remedy sought by the plaintiffs; to name Lowell as receiver, further exacerbates the difference between Mr. Lowell and other shareholders. Plaintiff's withdrawal of this remedy cannot change this. The Court is not ruling that proper parties' plaintiff cannot sue under a stockholder's derivative action.... The Court is simply ruling that, however legitimate the concerns of the present plaintiffs may be to them, they simply cannot fairly represent all of the shareholders given their other conflicting interests."

This appeal followed.

The plaintiffs argue that they have standing to bring the derivative suit based on their ownership of stock at the time of the alleged wrong. There is no dispute that the plaintiffs owned stock at the time of the alleged wrongdoing and continue to do so. At trial, it was indicated that Lowell owns at least 11% of the Bank's shares, while the other plaintiffs own approximately 5-6% combined. The plaintiffs argue that they do not have to satisfy a separate requirement of fair and adequate representation.

RSA 293-A:49 sets forth several provisions relating to shareholder derivative suits. RSA 293-A:49, I, states the requirement of contemporaneous ownership of stock or voting trust certificates at the time of the alleged wrong in order to bring a derivative action. RSA 293-A:49, II relates to the payment of reasonable expenses by the plaintiff under certain circumstances. RSA 293-A:49, III states when a security bond may be required. Although the statute does not expressly state that the named plaintiff in a derivative action must fairly and adequately represent the interests of other similarly situated shareholders, such a requirement should be implied, given the nature of a derivative action. See Youngman v. Tahmoush, 457 A.2d 376, 379 (Del.Ch.1983); Barrett v. Southern Connecticut Gas Co., 172 Conn. 362, 373, 374 A.2d 1051, 1057 (1977).

In a shareholder derivative...