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Seidman v. Clifton Savings Bank

August 19, 2009


On appeal from Superior Court of New Jersey, Chancery Division, Passaic County, Docket No. C-152-05.

Per curiam.


Argued May 5, 2009

Before Judges Fuentes, Gilroy and Chambers.

Plaintiffs Lawrence Seidman and Seidman and Associates, L.L.C., brought a derivative stockholders action against defendant Clifton Savings Bank, S.L.A. (Clifton) and its Board of Directors. Plaintiffs alleged that the Board breached its fiduciary duties and committed corporate waste by: (1) approving an excessive salary and compensation package for the Chairman of the Board, defendant John A. Celentano, Jr.; (2) approving excessive allocations under a shareholder approved Equity Incentive Plan; (3) approving a Retirement Plan that unjustly enriched the directors; and (4) approving consulting agreements with the former Chairman of the Board, defendant Frank J. Hahofer.

The trial court dismissed all of plaintiffs' claims, except a claim for corporate waste related to consulting agreements with Hahofer. The court ordered directors, Celentano, Hahofer, Raymond L. Sisco, Thomas A. Miller, John H. Peto, Joseph C. Smith and John Stokes, to reimburse Clifton for the compensation paid to Hahofer, and awarded counsel fees to plaintiffs.

Plaintiffs now appeal arguing that the court misinterpreted and misapplied the business judgment rule and the doctrine of waste. They also contend that the court improperly reduced the amount to be reimbursed to Clifton under the Hahofer consulting agreements, as well as plaintiffs' award of counsel fees.

After reviewing the record before us, and mindful of prevailing legal standards, we affirm the trial court's ruling dismissing plaintiffs' claims based on the business judgment rule and doctrine of waste. Pursuant to Rule 1:7-4, we remand for further consideration and explanation of the court's award of damages relating to the consulting agreements with defendant Hahofer, and its award of counsel fees.


Clifton was originally formed as a state-chartered mutual Savings and Loan Association (Mutual). As such, it took deposits and made loans; its members were either depositors or borrowers. N.J.S.A. 17:12B-12, 74. In 1998, Seidman became a depositor at, and hence a member of, Mutual.

Hahofer served as a director of Mutual from 1941 until the bank converted to a stock entity on March 4, 2004. Hahofer thereafter served as a director of Clifton from the date of conversion until his retirement from the Board in February 2007. Hahofer served as Chairman of the Board until 2001, when he was replaced by Celentano, who had also been a director since 1962.

When Celentano replaced Hahofer as Chairman, the Board entered into a consulting contract with Hahofer to, among other things, inspect and evaluate real estate on which Clifton was considering making mortgage loans. The rationale behind this consulting agreement was to take advantage of Hahofer's knowledge and experience, thereby obviating the expense of refunding appraisal fees on loan applications that may ultimately been deemed unsuitable.

At first blush, Hahofer was not the ideal candidate for this position. Although he had been on the Board for nearly sixty years, he had only a seventh grade education and no formal experience in the appraisal of property. Despite the absence of formal education, Hahofer had performed these loan-suitability inspections for many years, at no cost to Clifton. The Board thus had a rational basis to believe that his services had sufficient value to warrant the continuation of Hahofer's involvement in this capacity. Indeed, there was evidence that during the period Hahofer reviewed collateral for mortgage loans, Clifton did not have any mortgage-related losses.

From 2001 to 2006, Hahofer entered into seven one-year consulting agreements with Clifton. He was almost ninety years old at the time he executed the first consulting agreement. The initial annual consulting fee was $12,060.00, ultimately increasing to $16,417.41. Hahofer did not negotiate the amount of compensation, and did not know how they were calculated. As a matter of simple arithmetic, however, the consulting payments amount to the difference between the annual compensation received by a director and that received by the Chairman of the Board.

By 2001, Sisco (a member of the Board and named defendant in this suit), came to the conclusion that, due to his age, Hahofer should step down as Chairman of the Board. Sisco specifically testified, however, that the consulting agreement was not intended to induce Hahofer to give up his position as Chairman in favor of Celentano. Sisco believed that Clifton was entering into "a new era of banking." In his view, the Board was obligated to get someone new to serve as Chairman.

Given Sisco's experience as Chairman of the Board of Jefferson National Bank for twenty-five years, other directors suggested that he should become Chairman; Sisco declined. Instead, Sisco recommended Celentano, whom he knew both as a fellow Board member at Clifton, and as a practicing attorney who represented Clifton, Jefferson National Bank, and other financial institutions in connection with loans secured by real estate mortgages. The Board accepted Sisco's recommendation.

Conversion from Mutual to Stock Entity

At first, Mutual did not hire Celentano as a full-time employee; thus in addition to his responsibilities at Mutual, Celentano remained engaged in the full-time practice of law. Sisco thought this arrangement did not leave Celentano with enough time to deal with the complexities associated with converting a Mutual Savings institution into a publicly traded bank. After Sisco conveyed his views to other directors, the Board hired Celentano as a full-time executive. In April of 2004, Celentano became a full-time employee of Mutual at an annual salary of approximately $350,000; his title was "Chairman of the Board with executive powers." He was sixty-nine years old.

Walter Celuch was Mutual's and Clifton's president and CEO when Celentano became Chairman of the Board. He remained serving in this capacity even after Celentano was hired as a full-time employee; Celuch earned approximately $180,000 per annum. With the exception of Celentano, all of Clifton's employees reported to Celuch; his duties did not change after Celentano became a full-time employee of Clifton. The record shows, that the directors were satisfied with the way Celuch handled Clifton's day-to-day operations. Indeed, Celentano was hired to "take Clifton public," not to assume any of Celuch's operational duties.

Celentano's responsibilities were mostly limited to the conversion. They included: communicating and working with Clifton's accountants, attorneys, and appraisers; working with investment bankers on the initial public offering (IPO); and reviewing large volumes of related documents. He also spent considerable time locating new branch sites and negotiating for branch opportunities. Since his full-time employment, two new branches were opened and others were relocated or refurbished.

In 2003, the Board of Directors formally approved the conversion of Clifton from a mutual savings and loan to a stock entity. The approval established the Clifton Savings Bancorp, Inc. (Bancorp), and an initial offering of shares in Bancorp to the public. The Board also formed a mutual holding company to hold 55% of the Bancorp shares, with the public holding the 45% balance. The public filings in connection with the conversions included disclosures concerning Celentano's salary and the consulting contract with Hahofer.

Seidman and Associates, L.L.C., and Seidman, became shareholders after the conversion of Clifton. Seidman acquired stock in Clifton in the IPO in 2004; he sold those shares prior to the commencement of this action. Seidman and Associates, L.L.C., acquired one thousand shares of stock in Clifton on July 22, 2004, and remains a shareholder.

After the conversion was completed, Celentano remained responsible for the general management and control of the business and affairs of Clifton and its affiliates. Celuch continued to handle the day-to-day responsibilities of the bank.

The conversion increased the reporting and regulatory obligations for both Clifton and Bancorp.

Celentano was ultimately responsible for all regulatory and reporting compliance. Toward that end, Celuch, the chief financial officer, chief loan officer, and other department heads all reported to Celentano. Celentano was responsible to review Clifton's financial performance and to resolve any issues with state and federal regulators. He also remained active in seeking additional branch locations; and explored other modes of expansion, including discussions of possible mergers with and/or acquisitions of other financial institutions.

Under Celentano's management, Clifton explored expansion and investment opportunities and eventually deployed capital, leveraging $75,000,000. Clifton investigated and implemented two programs to reduce taxes on its income: (1) the formation of a recognized investment company, Botany, Inc., which has saved $200,000 per year; and (2) invested in the adoption of the Bank Owned Life Insurance program (BOLI), with a projected savings of $360,000 per year.

Conversely, through the testimony of fellow shareholder Robert Freidman, plaintiff attempted to paint for the court a totally different picture of Clifton's financial performance. Freidman has a background in the analysis of securities. He testified that Clifton has been an "under-performer" since it went public, and was one of the least profitable banks in the area.

According to Freidman, one of the ways to measure an entity's performance in the banking industry is the return on average tangible equity (ROATE). Celentano admitted that Clifton's ROATE was lower than the median return of other New Jersey institutions. At the time of conversion, Clifton's return was 4.37%; the median number was a little over 10%. The year after the conversion, Clifton's return had shrunk to 2.62%. During the same time period the median return was 8.12%.

Thomas Miller, a member of the Board of Directors and a co-defendant, testified that Clifton's ROATE was around 2%, and therefore below the median return in the industry. This was the result of an inability to "effectively deploy capital." Celuch agreed. Notwithstanding Clifton's poor ROATE, its net income for the fiscal-year ending March 31, 2004 was $3,689,000, and $5,280,000 for the fiscal-year ending March 31, 2005. Clifton's return on average assets ("ROAA") improved from .57 to .67, and its Efficiency Ratio*fn1 improved from 57.33% to 53.35%.

In setting Celentano's initial salary as the full-time employee and Chairman of the Board, both members of Clifton's compensation committee and the Board as a whole reviewed information on compensation paid to senior executives by other institutions in New Jersey. One source of information consulted by these two groups was the result of surveys conducted by the New Jersey League of Community & Savings Bankers (NJL). The NJL compiles the survey results, broken down by the asset size of the institution, and the components of compensation, and sends these results to its members. The NJL prepares both a statewide and a Northern New Jersey compilation for institutions with assets of $500,000,000 to $1,500,000,000.

The 2001 survey indicates that the mean base salary and bonus paid to "position 1 = Highest Paid" was $359,331, with the median being $324,188 and the high being $767,000. The 2002 NJL Executive Salary Survey for Northern New Jersey*fn2 indicates that the base salary and bonus paid to "Position 1 = Highest Paid" the mean was $379,055, with the median being $318,500 and the high being $817,000. For 2003, the mean base salary and bonus was $440,457, with the median being $390,000 and the high being $867,000. As for 2004, the mean base salary and bonus was $474,458, with the median being $385,673 and the high being $915,000.

Among all public New Jersey-based thrifts, for the period ending 3/31/05*fn3 for Clifton and 12/31/04 for the comparables, Celentano's base compensation as a percentage of net income was 9.2%; the median was 8.9%. For the period ending 3/31/06 for Clifton and 12/31/05 for the comparables, ...

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