Skip to main content

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

A-3899-04T5 (N.J. Super. App. Div. 2006) (Unpublished)

BANKS; SHAREHOLDERS—While the Savings and Loan Act provides that the Banking Department shall approve by-laws promulgated by covered banks, a court still has the authority to decide if adoption of an approved by-law was tainted by a board member’s breach of his or her fiduciary duty.

A member of a bank sought to run for election to the bank’s board of directors. The bank was regulated by the Commissioner of Banking and Insurance. Also, the bank was established pursuant to the Savings and Loan Act (SLA), which required that to communicate with other bank members to promote a candidacy required an application to the board. Additionally, the board amended its by-laws to increase the percentage of members needed to nominate.

Rather than complying with the procedures, the member prepared a nominating petition for himself and sent it to the bank with a request that it be mailed immediately to all members. The bank decided that the member failed to submit an application that complied with the SLA, and so advised the member.

Subsequently, the member filed a complaint seeking, among other things, a permanent injunction to prevent the bank from communicating with its members concerning the election of directors at an annual meeting and compelling the bank to mail his materials to all members (Count 1); a declaration that the bank had breached its fiduciary duty to its members by adopting the by-laws amendment (Count 2); and a declaration that the bank breached its fiduciary duty by engaging in corporate waste (Count 3).

The lower court denied the member’s request to compel the bank to mail his communications to the members and to adjourn the annual meeting. The bank moved to dismiss the complaint. With respect to Count 2, the bank argued that the Chancery Division lacked jurisdiction over the by-laws. With respect to Count 3, the bank argued that the member failed to state a claim for which relief could be granted. The lower court rejected the bank’s arguments and refused to dismiss Counts 2 and 3.

On appeal, the bank claimed that the lower court erred by concluding that the Chancery Division was the proper forum for an action challenging administrative actions such as approval of the by-law amendments, and by declining to dismiss the waste claim.

Upon review of the complaint, the Appellate Division found that Count 2 of the member’s complaint was a claim for breach of fiduciary duty, and not a claim seeking review of the Commissioner’s decision to approve the by-law amendment. Thus, the breach of fiduciary duty claim was properly adjudicated in the Chancery Division. While the board had the authority to adopt the amendment and had followed the required procedures for seeking approval, the board member could still be held liable, as fiduciaries, if their motives were improper or placed their self-interest in conflict with the interest of other members. Furthermore, the SLA does not grant the Commissioner authority to adjudicate controversies concerning the effect of any amended by-law. The Chancery Division, however, would have the authority to grant appropriate relief, including compelling the board to amend the by-laws again. Accordingly, the Appellate Division rejected the bank’s contention that Count 2 should have been be dismissed.

Turning to Count 3, the bank contended that the lower court erred by refusing to dismiss the member’s waste claims because the claims were merely conclusory. The waste claim was brought under a statutory provision governing a derivative action brought by a member, which requires the complaint to plead the efforts made to demand an action from the board. Interpreting the statutory provision, the Appellate Division explained that if a member fails to make a demand, the member must explain why such action would be futile. The Court outlined a test to evaluate claims of demand futility: the complaint must plead reasonable doubt either that the directors were disinterested and independent or that the challenged transaction was a valid exercise of business judgment.

The lower court had found three compelling factors that raised reasonable doubt that the member would have been able to address the issues before the board in any other way than by bringing this action. The Appellate Division agreed with the lower court’s findings that the member had pled enough information to raise reasonable doubts as to the actions of the bank. Accordingly, the Court affirmed the judgment of the lower court denying the bank’s motion to dismiss the two remaining claims.

66 Park Street • Montclair, New Jersey 07042
tel: 973-783-3000 • fax: 973-744-5757 •