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Palumbo v. Deposit Bank and E.H. Brubaker

March 27, 1985

ANTONIO J. PALUMBO APPELLANT
v.
DEPOSIT BANK AND E.H. BRUBAKER



Appeal From the United States District Court For the Western District of Pennsylvania (Erie) D.C. Civil No. 83-140.

Hunter, Garth, and Van Dusen, Circuit Judges.

Author: Hunter

HUNTER, Circuit Judge:

1. On August 7, 1984, the United States District Court for the Western District of Pennsylvania entered summary judgment against Antonio J. Palumbo in his suit challenging his exclusion from the Board of Directors of Deposit Bank. Palumbo contends that the district court erred in assuming jurisdiction over the case, granting summary judgment in favor of the bank and its president, and denying appellant's motion for extraordinary relief. We find that the district court acted properly in all respects and affirm the entry of summary judgment.

2. Appellee Deposit Bank is a Pennsylvania bank and trust company and appellee E.H. Brubaker serves as its president and one of its directors. At all relevant times, Palumbo owned 26,332 shares of Deposit Bank stock, representing about 5.55% of the outstanding shares. He was the largest shareholder of the bank and served as a member of the Board of Directors from 1977 to 1982. The record indicates that Palumbo participated actively in the management of the bank, but often disagreed with the decisions of the other directors.

3. At the bank's 1982 annual meeting, the shareholders approved by a vote of 353,311 to 128,689 an amendment to the bylaws of the bank providing that:

All Directors who have attained the age of 70 by March 1, 1981, shall retire from the Board at the annual meeting following the attainment of age 75. All other Directors shall retire from the Board at the annual meeting following the attainment of age 72.

As Palumbo was 75 years old at the time of the 1982 annual meeting. The Board of Directors refused to nominate him for re-election to the Board. Palumbo opposed the amendment to the by-laws on the ground that it was intended only to exclude him. He organized a shareholder committee, offering an alternative slate of directors, of which he was one. Palumbo's shareholder committee succeeded in securing the election of three directors, not including Palumbo, but the Board retained control with 12 of its nominees elected.

4. At the 1983 annual meeting, Palumbo again organized a committee to oppose the Board's choices for directors. This time, Palumbo was not among the candidates proposed by his committee, and the committee succeeded in securing the election of only one director. The remaining 15 vacancies were filled by the choices of the Board.

5. According to Palumbo, he disagreed with the Board primarily on the question of when, if and with whom Deposit Bank should merge. He claims that he favored an advantageous merger while the Board was unwilling to discuss, or at least unwilling to discuss with him, the possibility of any merger. On May 5, 1983, Palumbo filed a complaint in equity in the Court of Common Pleas of Elk County, Pennsylvania, seeking, inter alia, to have the election of directors at the 1983 annual meeting set aside, an injunction to prevent people who do not have the requisite share ownership from serving as directors, an injunction to prevent enforcement of the age restriction and various other forms of relief.

6. To support his plea that the election of directors be set aside, Palumbo contends that the appellees secured proxies by misrepresenting their efforts towards merger. On the of basis of this contention, Brubaker and Deposit made a timely removal to the United States District Court for the Western District of Pennsylvania. They believed, we think correctly, that Palumbo's assertions of misrepresentations in connection with the solicitation of proxies raised a claim under section 14 of the Securities Exchange Act of 1934, 15 U.S.C. § 78(n) (1982), and the rule of the Federal Deposit Insurance Corporation dealing with the solicitation of proxies by nonmember banks, 12 C.F.R. § 355.206(2a-3a) (1984). Palumbo moved for a partial remand, asking that his state claims be sent back to state court. The district court refused, finding that it could legitimately exercise pendent jurisdiction since all Palumbo's claims arose out of a common nucleus of facts.

7. After the institution of Palumbo's suit, Deposit Bank entered into a tentative agreement to merge with a wholly-owned subsidiary of First Commonwealth Financial Corporation ("FCFC"), a registered Pennsylvania bank holding holding company. Palumbo received a letter dated July 21, 1983 notifying him of the possible merger. The bank mailed notice to all shareholders of a special meeting to be held on January 17, 1984 at which the shareholders would consider and vote on the proposed merger. Palumbo received the notice and on January 10, 1984 filed a motion for hearing and extraordinary relief, requesting that the district court "set a hearing and thereafter order such extraordinary relief, if any, as this court deems appropriate." At the January 17 meeting, before the district court heard argument on the motion, 88.75% of the shareholders voted in favor of the merger. The district court heard Palumbo on his motion for extraordinary relief on February 2, and denied it.

8. The merge occurred on March 19, 1984, and Deposit Bank became a wholly-owned subsidiary of FCFC. After the merger, those who did not tender their shares for cash of Deposit Bank stock became shareholder of FCFC, and FCFC became the sole shareholder of Deposit. FCFC reelected Deposit's Board of Directors and instituted by-laws containing no stock ownership requirement for directors. On August 7, 1984, the district court entered summary judgment in favor of Deposit Bank and Brubaker on all claims.

9. Palumbo first contends that the district court improperly assumed jurisdiction over the case. Because he did not give proxies to management in reliance on the alleged misrepresentations, he asserts that he had no standing to bring a claim under Section 14(a) of the Securities Exchange Act of 1934. He concludes that the district court had no federal jurisdiction, and therefore, abused its discretion in assuming pendent jurisdiction over the state claims. We disagree and note that Palumbo, in order to ...


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