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BANK & TRUST CO. v. HANKIN

December 22, 1982

BANK AND TRUST COMPANY OF OLD YORK ROAD, et al.
v.
PERCH P. HANKIN, et al.



The opinion of the court was delivered by: GILES

 GILES, J.

 This action combines a claim under the federal securities laws for omissions in proxy materials with a state derivative action for breach of various fiduciary duties. Defendants now move for summary judgment. For the reasons which follow, the motion will be granted in part, and denied in part.

 I. BACKGROUND

 A. Parties

 Plaintiff Bernard M. Gross is a minority shareholder of the Bank of Old York Road ("Bank"). The Bank, designated in the complaint as a nominal defendant, is a Pennsylvania corporation.

 The remaining defendants allegedly are involved in a web of family relationships, ownership interests, and business dealings so complicated that a complete description is impossible without the equivalent of a scorecard.

 For example, defendant Perch Hankin is the brother of one defendant, uncle of three, brother-in-law of one, father-in-law of one, and father of another. He is a Bank officer and director. He controls two organizations which are defendants, is a partner in a third, and invests in a fourth organization, all of which allegedly dealt improperly with the Bank. In addition, Perch Hankin himself allegedly had wrongful dealings with the Bank. These dealings range from improper borrowing to laundering funds.

 For present purposes, however, the defendants can be divided into three categories, each of which depends on a defendant's relationship to the Bank. (Each defendant may fall into more than one group.) The first category consists of Bank officers and directors and those alleged to control the Bank. The members of this group are: Perch Hankin, Moe Hankin, Lowen Hankin, the law firm of Hankin, Hankin & Hankin, Mandell Shankin, George Miller, Frank J. Siegel, and Henry Hilger. I shall refer to the first category as the "Bank group."

 In the second category are the defendants who allegedly profited from direct improper dealings with the Bank. This group includes every defendant except Frank J. Siegel and Harry Hilger. I shall refer to the second category as the "dealing group."

 The third category consists of defendants alleged to be partners or investors in an entity in the dealing group. Its members are Perch Hankin, Moe Hankin, George Hankin, Lowen Hankin, Mark Hankin and Robert Wappen. The last category will be referred to as the "partner group."

 B. The Complaint

 Count I of plaintiff's complaint asserts that defendants violated the federal securities laws by omitting material facts from proxy statements. The proxies at issue were solicited to elect the Bank's Board of Directors between 1977 and the present. The alleged material omissions center around a course of conduct by which defendants sought to retain control over the Bank, operating it for their own benefit, rather than for the benefit of the other shareholders. Paragraph 25 of the complaint sets out twelve items which should have been disclosed so as not to make the proxy statements materially misleading. Each item in paragraph 25 will be analyzed below. However, examples of the alleged omissions include the terms of loans between defendants and the Bank, excessive legal fees, increases in one defendant's salary, the use of Bank monies for non-Bank purposes, improper auditing and false entries in corporate records.

 Count II is styled as a derivative action on behalf of the Bank, based upon a variety of breaches of fiduciary duties. The conduct underlying this Count is essentially the same as in Count I and jurisdiction is alleged to be pendent. Defendant's motion for summary judgment is based upon plaintiff's failure to exhaust his intercorporate remedies and post a security bond before embarking on this derivative suit.

 C. What Has Gone Before

 Earlier in this litigation, defendants moved to dismiss, or in the alternative, for summary judgment. In a Bench Opinion delivered on July 1, 1982, this court denied the motion to dismiss and left open the issue of summary judgment, pending further consideration. This opinion addresses that unresolved summary judgment motion.

 One of the issues disposed of in that Bench Opinion was the applicability of section 14(a) and Rule 14a-9 of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a)(1976); 17 C.F.R. § 240.14a-9 (1982), upon which the complaint was originally based. Defendant properly contended that the cause of action was encompassed by section 12(i), 15 U.S.C. § 78l(i) and its implementing Federal Deposit Insurance Corporation (FDIC) rule, 12 C.F.R. § 335.206(a) (1982). Plainly put, section 12(i) is the analogue to section 14(a) for Banks. Section 12(i) refers specifically to section 14(a) and allows the FDIC to promulgate "substantially similar regulations to regulations and rules issued by the Commission under this section and sections . . . 14(a) . . . ." Section 12(i), 15 U.S.C. § 78l(i). *fn1" Indeed, the rule promulgated pursuant to section 12(i) is virtually identical to rule 14a-9. Rule 14a-9 provides:

 
No solicitation subject to this regulation shall be made by means of any proxy statement, form of proxy, notice of meeting or other communication, written or oral, containing any statement which at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading.

 17 C.F.R. § 240.14a-9 (1982). The rule which implements section 12(i) reads as follows:

 
No solicitation or communication subject to this section shall be made by means of any statement, form of proxy, notice of meeting, or other communication, written or oral, containing any statement that, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or that omits to state any material fact necessary in order to make the statement therein not false or misleading or necessary to correct any statement in an earlier ...

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