United States District Court, E.D. Pennsylvania
April 15, 2004.
CARL LINGLE, et al.
PSB BANCORP, INC., et al
The opinion of the court was delivered by: EDMUND LUDWIG, Senior District Judge
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
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."
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