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Seidman v. Spencer Savings Bank, S.L.A.

A-1067-07T2, A-1036-07T2, and A-1343-07T2 (N.J. Super. App. Div. 2010) (Unpublished)

BANKS; SAVINGS AND LOAN ASSOCIATIONS; BYLAWS — Where the Commissioner of the Department of Banking and Insurance, on a full record, reasonably determines that the bylaws of a savings and loan institution can be amended to set a 15% threshold for the nomination of directors by association-depositors, a court will not set that determination aside.

A depositor-member of a savings and loan association challenged the adoption and implementation of several by-law amendments put into effect by the association and its board of directors. These amendments were all approved by the Commissioner of the Department of Banking and Insurance (DOBI). The depositor-member alleged that the effect of the amendments was to disenfranchise the association’s members’ by diluting their voting rights. Prior to these amendments, nominees for a director’s position required either a majority vote of the board or by a vote of at least ten percent of the association’s members (savings members or borrowing members). The first amendment increased the minimum threshold of members voting for directorate nominations from ten percent to twenty percent.

The depositor-member filed suit to challenge the first amendment. The lower court struck the twenty percent threshold after finding that many board members were unaware of the amendment’s underlying rationale and had no idea how many votes were necessary to reach the twenty percent threshold. The Court ordered the board to revisit the voting requirement and state its reasons for any increase of the ten percent requirement. The Court also reallocated reasonable counsel fees in favor of the depositor-member as his litigation provided a benefit to other members of the bank interested in making nominations to the board of directors. The association appealed the lower court’s orders.

The board’s solution was to adopt a second amendment setting the nomination threshold at fifteen percent. The Commissioner of the DOBI approved the by-law as not inconsistent with the association’s enabling legislation. The depositor appealed this administrative determination. Upon remand for an agency proceeding, the DOBI concluded that the fifteen percent nomination requirement was achievable, not unduly burdensome, and was not an attempt at disenfranchisement. After the board adopted the second amendment with the fifteen percent requirement, the depositor did not file a new suit, but sought relief under his earlier suit instead, suggesting the new amendment continued to disenfranchise the association members, and requested an independent committee to propose a more suitable, replacement by-law. The lower court granted no further relief, holding that unless a board’s action is so frivolous or clearly arbitrary, a court should defer to the board and, thus, the Commissioner of DOBI. The depositer-member also appealed this ruling also.

The Appellate Division affirmed both lower court and DOBI rulings. The Court recognized the DOBI for its expertise in the oversight of mutual savings and loan associations and their voting procedures for the election of directors and officers. First, it found the lower court’s findings were supported by adequate, substantial, and credible evidence. Specifically, the Court upheld the lower court’s ruling that the depositor’s lawsuit was a lawful derivative action because members of the association were equally affected by an increased minimum voting requirement. There was no evidence that the depositor-member was furthering a personal interest, and was not seeking damages. He simply wanted a more realistic method for nominating directors.

The Court also affirmed the lower court’s order directing the board to reevaluate its first by-law amendment, based upon reasonable findings that the first amendment had no rational relationship to bank governance or operations, and that no board member was fully clear as to why there was a need to raise the minimum voting requirement. The Court also affirmed the lower court’s ruling to reallocate counsel fees to the depositor in his derivative action, despite the lack of other monetary damages. The depositor’s success in invalidating the first amendment to the by-law affected and benefited all of the association’s members and conferred an intangible benefit upon the institution itself.

As to the DOBI’s validation of the association’s amended minimum fifteen percent requirement for directorate nominations, the Court held that, upon the record, the Commissioner of the DOBI properly and reasonably determined that the amended requirement did not conflict with any provision of state law governing savings and loan associations. The Court was not persuaded that the Commissioner’s Decision on Remand was either based on an incorrect analysis or was otherwise capricious. Additionally, the Court found that the lower court properly denied relief to the depositor-member in response to the second amendment, as there was no apparent violation of its earlier order – the association revisited the by-law, examined the ten percent requirement, and set forth reasons for its change to fifteen percent. The Court said that if the depositor-member had wished to challenge the adjusted percentage of fifteen percent as a breach of fiduciary duty or breach of statute or policy, he was obligated to file a new lawsuit.

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