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LINGLE v. PSB BANCORP

United States District Court, E.D. Pennsylvania


April 15, 2004.

CARL LINGLE, et al.
v.
PSB BANCORP, INC., et al

The opinion of the court was delivered by: EDMUND LUDWIG, Senior District Judge

MEMORANDUM

On March 31, 2004, plaintiffs'*fn1 "Motion for Summary Judgment Declaring Plaintiffs' Options Valid and Enforceable" was granted; and defendants'*fn2 cross-motion was denied, Fed.R. Civ. P.56.*fn3 This is an explanatory memorandum.

On March 6, 2002, plaintiffs filed this declaratory judgment action involving the issuance of defendant PSB Bancorp., Inc. stock options. Jurisdiction is diversity. 28 U.S.C. § 1332.

  In 1999, when First Bank of Philadelphia merged with PSB Bancorp, Inc., plaintiffs. who were officers and directors of FBP, owned options to purchase 16 million shares of FBP stock.*fn4 Under the merger agreement, plaintiffs' outstanding FBP stock options were to be assumed by PSB and converted into PSB stock options.*fn5 Exhibit 20 to Burger Affidavit. On October 12, 1999, the merger became effective; the options were converted; and plaintiffs received official notification of the conversion of their options from Anthony Di Sandro, PSB's President and Chief Operating Officer. Exhibit 22 to Burger Affidavit.*fn6

  On June 15, 2000, the PSB board discussed strategies to repurchase plaintiffs' PSB options. See item in 2000 Capital Management Plan ("Purchase options held by former shareholders of First Bank of Philadelphia"), Exhibit 27 to Burger Affidavit. On January 29, 2001, counsel for PSB wrote to Lingle, as former president of FBP, requesting documents relating to the FBP options and referring to PSB's interest in acquiring the PSB options. Exhibit 30 to Burger Affidavit. On August 1, 2001 and October 3, 2001, however, PSB counsel wrote to Lingle and Goodman, respectively, characterizing the FBP options as invalid because, inter alia:

  1. There was no evidence of FBP board approval of the issuance of the options, or approval by the Pennsylvania Department of Banking — as required when options are granted to bank officers and employees;

  2. There was no Stock Option Registry Book confirming the identity of the option holders or the size of their holdings;

  3. "Proper regulatory approval" was lacking for the acquisition of the options; and

  4. The authenticity of the copies of the option certificates in PSB's possession was questionable.

 Exhibits 37 and 38 to Burger Affidavit.*fn7 The letter informed Lingle and Goodman that their options could not be "exercised or sold." Id.

  The declaration sought by Count I of the complaint is that the FBP options were valid and enforceable.*fn8 Defendants counter that the options were issued in contravention of the implementing contract (the Standby Purchase Agreement) and without appropriate federal and state regulatory approvals — and contained irregularities on their face. Accordingly, it would be a breach of PSB's fiduciary duty to its shareholders not to contest the FBP options' validity — and, in turn, to withhold or revoke the issuance of the PSB options. Upon review of the parties' motions, it is determined that the Rule 56 submissions do not disclose any triable issues, and the facts, as presented, do not support defendants' contentions. Regardless whether FBP should have issued the options, it did so as an integral part of the Standby Purchase Agreement, which was approved by its board of directors. Burger Affidavit, ¶ 12. Also contrary to defendants' assertions, the lack of adequate regulatory approval is not borne out factually. See, e.g., Defendants' Exhibits 4-9, Exhibit 11 to Burger Affidavit. When defendants contacted the Pennsylvania Department of Banking in 2001, they were informed that "approval of the options as part of a plan was subsumed into the approvals that were granted by the Department for the change in control filing." Burger Affidavit, ¶ 12, quoting February 12, 2001 memo from Stevens & Lee regarding FBP Options, at ¶ 2. Therefore, the absence of specific approvals — for example, under § 1409 of the Banking Code — would not invalidate the options.

  If there is merit to the argument based on the non-existence of a Stock Option Registry Book, defendants concede the defect can be cured by indemnification agreements, which plaintiffs are willing to sign. That the appearance of the options certificates may raise authenticity queries — e.g., they do not resemble each other, they contain bracketed language, as though not intended to be final documents, and so on — these without more are insufficient to produce an issue of validity. According to the proffered materials, the options themselves were duly authorized by the FBP board and received the requisite governmental approval. Whether or not they were issued in proper form is not a viable defense to this declaratory judgment action.*fn9 The inferences that defendants say may be gleaned from the appearance of the options certificates are vague, dubious and belated, and not buttressed by any independent matters. Whatever their worth, given the history and circumstances of this case, they did not justify a refusal of plaintiffs' motion for summary judgment.


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