August 18, 2010
JOHN E. SULLIVAN, PETER G. STEWART, RAYMOND M. DURKIN AND LEONARD M. SCHNEIDER, INDIVIDUALLY, AND AS FORMER MEMBERS OF THE BOARD OF DIRECTORS OF WEST JERSEY COMMUNITY BANK, INC. AND WEST JERSEY BANCSHARES, INC., PLAINTIFFS-APPELLANTS,
SILLS, CUMMIS, ZUCKERMAN, RADIN, TISCHMAN, EPSTEIN & GROSS, STEVEN E. GROSS, ESQ., FREDERICK TUDOR, ESQ., AND VICTOR H. BOYAJIAN, ESQ., DEFENDANTS-RESPONDENTS.
On appeal from the Superior Court of New Jersey, Law Division, Hudson County, Docket No. L-3684-07.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued January 11, 2010
Before Judges Rodríguez, Reisner and Yannotti.
Plaintiffs John E. Sullivan, Peter G. Stewart, Raymond M. Durkin, and Leonard M. Schneider, are former directors of West Jersey Community Bank, Inc. (WJCB) and its holding company, West Jersey Bancshares, Inc. (WJB). They sued the law firm Sills, Cummis, Zuckerman, Radin, Tischman, Epstein & Gross (Sills Cummis) and its employees, Steven E. Gross, Frederick Tudor, and Victor H. Boyajian (collectively "the Sills Cummis defendants"), alleging that defendants committed legal malpractice in drafting a merger agreement between WJB and Sovereign Bancorp (Sovereign), the holding company for Sovereign Bank. Plaintiffs contend that defendants' negligence resulted in loss of fees and stock options they would have received as members of a post-merger advisory board because defendants failed to incorporate into the agreement oral promises made by Sovereign executives. Judge Maurice Gallipoli granted summary judgment to defendants, finding that the complaint was barred by the statute of limitations; and, alternatively, that plaintiffs' claims lacked merit. We affirm.
These are the relevant facts. Plaintiffs are very experienced in the world of banking. Durkin and Schneider also had substantial experience in the world of finance. Stewart was a director and Chairman of the Board of WJB and WJCB. Sullivan served as director on both the WJCB and the WJB boards and was the owner and Chief Executive Officer (CEO) of Heritage Financial Resources. Durkin was the vice president of both WJB and WJCB, and a founder of WJB. Schneider, a CPA for approximately twenty-five years, was a director on WJCB's board.
In July 1994, WJB engaged Ryan, Beck & Co. (Ryan Beck) to act as its financial advisor and to explore merger possibilities with companies of equal value. One year later, WJB decided to also pursue the potential of merging with larger companies. Over the course of a few months, WJB met with several of those larger financial institutions, including Sovereign, a Pennsylvania corporation. Sovereign's proposal offered the most favorable terms.
At the time the merger was contemplated, Sovereign's assets were approximately $7.9 billion, including a "network of 120 community banking offices, located in Pennsylvania, New Jersey, and Delaware." Comparatively, WJB's assets totaled approximately $95.3 million, and WJCB "engage[d] in the commercial banking business throughout northern New Jersey, with primary emphasis on Fairfield Township and surrounding northern Essex County . . . communities."
Stewart was selected as head of the WJB's mergers and acquisitions committee and was responsible for negotiating the merger terms with Sovereign. Sullivan, who was a member of the WJB's executive and long range planning committees, also was selected to serve on the mergers and acquisitions committee.
In August 1995, Stewart, along with John Van Voorhis, the president and CEO of WJB, met informally with Jay Sidhu, the CEO of Sovereign. The following month, Stewart, Sullivan, Van Voorhis, and James Hill, the senior vice president of Ryan Beck, met with Sidhu and Richard Mohn, Sovereign's board chairman. According to Stewart, the meeting was intended "to begin discussions about . . . deal points." The possibilities of a West Jersey advisory board and Sovereign stock options for directors were discussed, although Sovereign was not planning an option plan at that time. Plaintiffs alleged that they were orally promised options at the same level as those offered to Mohn. However, Stewart admitted in his deposition that no agreement was reached. In Mohn's deposition, he denied plaintiffs' allegation, calling it "ludicrous."
WJB retained Sills Cummis to represent it with respect to the merger. WJB worked specifically with Gross, Tudor and Boyajian. Stewart and Schneider admitted that the Board members understood the firm only represented the WJB Board as an entity, and not each of them as individuals. Stewart, who was selected to act as the liaison between the Board and the attorneys, also noted that Gross informed the Board members that they could obtain their own individual counsel.
On the day of retention, Sills Cummis sent a letter to Stewart with an attached memorandum "outlining the duties of the members of the Board of Directors in connection with the consideration of strategic business matters." Stewart was instructed to forward copies of the memo to all Board members. Among the actions necessary for satisfying the requisite duty of care, the memorandum included "consulting and reviewing documentation with independent outside legal counsel," and "carefully reviewing all documents and other information presented." In contrast, the memo also listed "actions and omissions . . . viewed unfavorably by courts[,]" including "blind reliance on the opinions of legal or financial advisors without independent fact gathering or decision-making," and "lack of deliberate, informed decision-making."
Despite this advice, Stewart admitted that he did not believe his duty required him to read the draft agreements. He believed he was obligated to review the documents and information connected with the merger, however, he also believed that he fulfilled that obligation by reading only final versions because drafts were "subject to change." Thus, Stewart admitted that he never read the draft documents, relying instead on Sills Cummis to inform him of changes and issues to be resolved. Similarly, Durkin did not read any of the drafts and admitted to relying on Stewart to tell him what was included. Schneider could not recall reading drafts, although he claimed to have read the final agreement. Finally, Sullivan stated that he only looked over the final agreement for about ten or fifteen minutes.
On September 20, 1995, Sovereign's counsel presented the initial draft agreement to Sills Cummis. The agreement provided that WJB would "merge with and into Sovereign" and cease to exist, although WJCB would "be operated as a separate division of Sovereign Bank under the name 'West Jersey Federal Savings Bank' for at least three years." Section 1.02(d)(vi) of the agreement provided that, on the effective date (closing date as per Article I) Sovereign would "create an advisory board of directors of the West Jersey Community Bank division of Sovereign bank" consisting of seven directors who would serve for at least three years and would receive the same meeting fees as they were receiving prior to September 19, 1995. Section 4.11(c), dealing with the stock option plan, stated in pertinent part:
If Sovereign adopts a stock option plan for the benefit of the directors of Sovereign Bank, the members of the advisory Board of Directors of the West Jersey Community Bank division of Sovereign Bank will be permitted to participate in such plan until a date no later than three years from the Effective Date.
On September 21, 1995, Boyajian sent a memorandum to Stewart entitled "Summary of Material Terms of Proposed Agreement and Plan of Merger". The memorandum noted that the draft agreement did "not provide for options yet to be granted to directors." Both Stewart and Sullivan acknowledged receiving the memorandum. Nonetheless, Stewart insisted in his deposition that:
Boyajian . . . always and repeatedly stated that there would be language in the agreement regarding the ability of West Jersey Bank to participate in the Sovereign plan. He never said anything to the contrary.
Stewart testified that he asked Boyajian what the language in the memo meant. Boyajian responded that the stock option language in the proposed agreement "needed to be refined and clarified" because "[h]e was not comfortable with" it. Stewart asserted that Boyajian and Tudor informed him that the first draft was inadequate, in part due to the absence of the desired option language, but assured him that "they would change the wording to make sure and to protect each member of the board of directors that these promises would survive closing and be enforceable in the event there was ever a breach."
On Saturday, September 23, 1995, attorneys from Sills Cummis met for five hours with Stewart, Van Voorhis, and Hill. Sullivan was absent from the meeting for personal reasons. Stewart stated that they discussed the option plan and that the attorneys pointed out that no provision existed for options for the advisory board directors. Stewart claimed that it was understood by all that the directors "were to be folded into the option plan of Sovereign." Stewart believed he informed the attorneys that Mohn promised they would receive whatever he received.
Three days later, Boyajian sent a memo to the WJB directors, including a list of material points which noted a plan to grant 100,000 WJB options to the directors. According to Hill, Sovereign objected to WJB's plan to award options to WJB non-employee directors because Sovereign did not provide options to the non-employee directors of Sovereign Bank. Hill stated that the options issue "was a significant can't deal issue on both sides."
Moreover, Sidhu stated in his deposition that it would have been a deal breaker if WJB insisted that non-employee directors of the advisory board be allowed to participate in an option plan designed for Sovereign directors. However, because Sidhu had considered providing such a plan and because the issue became crucial to the outcome of the merger agreement, according to Hill "the ultimate resolution of this issue was . . . that if and when Sovereign adopted an option program for its non-employee directors in its bank subsidiary that the then-current members of the board of the commercial banking division of Sovereign would be permitted to participate, period."
Nonetheless, Stewart asserted in his deposition that Boyajian assured him that the directors' "entitlements were protected in the agreement." Additionally, at some point in time, Stewart sent a memo to Van Voorhis attaching a 1996 "Proposed Stock Option Plan for Directors." He noted, however, that they had "agreed with Sovereign that we will not go forward with this Stock Option Plan but will agree . . . that our surviving directors will be included in Sovereign's proposed Stock Option Plan in an equivalent manner."
During the course of negotiations, the merger agreement went through numerous drafts. The final merger agreement was executed on September 29, 1995, nine days after the initial draft was produced. As part of the agreement, the WJB directors and executive officers executed a letter agreement in which they agreed to vote for the merger and to "use his or her reasonable best efforts to cause the [m]erger to be consummated."
Section 1.02(d)(vi) of the final agreement, dealing with creation of the advisory board, provided that:
On the effective date of the Bank Merger, Sovereign will create an autonomous board of directors for the commercial bank division of Sovereign Bank which shall consist of seven individuals selected by WJB. Sovereign shall cause such persons to be elected as directors of the commercial bank division of Sovereign Bank effective as of the effective date of the Bank Merger, and each shall hold office for at least a period of three years from the Effective Date and until his successor is elected and qualified, and each shall continue to receive the same per meeting Board fees for service on the board as such persons were receiving immediately prior to September 19, 1995.
Section 4.11(c), the provision dealing with stock options, remained essentially as it was in the initial draft:
If Sovereign adopts a stock option plan for the benefit of the directors of Sovereign Bank, the members of the Board of Directors of the commercial bank division of Sovereign Bank will be permitted to participate in such plan until a date no later than three years from the Effective Date.
The agreement also contained a survival clause. Section 7.02 provided that "[a]ll representations, warranties and, except to the extent specifically provided otherwise herein, agreements and covenants, other than those covenants set forth in Sections 4.05(b), (c) and (d) which will survive the Merger, shall terminate on the Closing Date."
Plaintiffs admitted that they did not compare the initial drafts to the final one. However, the Board unanimously approved the merger agreement because it was "fair to, and in the best interests of WJB's stockholders."
Two months later, Sovereign filed the requisite "Form S-4 Registration Statement" with the Securities and Exchange Commission (SEC). It included a paragraph detailing what the directors would receive in connection with the merger, stating specifically that:
Sovereign has agreed in the Merger Agreement to elect, on an annual basis, seven individuals selected by WJB to comprise an autonomous Board of Directors of the WJCB commercial bank division of Sovereign Bank for a period of at least three years. These individuals will be permitted to participate in any stock option plan adopted by Sovereign for the benefit of directors of Sovereign Bank.
Plaintiffs received copies of the S-4 to review prior to filing. However, they admit not reading it.
The merger closed on May 31, 1996. It is undisputed that Sovereign did not on that date, nor at any point in the future, create the autonomous board for the commercial bank division of Sovereign Bank, although four months earlier, Stewart had sent Tudor a memo listing the seven directors chosen to sit on the WJCB advisory board and "agreed to by Sovereign and" Stewart.
Almost one year after the closing date, Sovereign had not established the advisory board. Tudor sent a letter to Stewart attaching those portions of the merger agreement involving the advisory board and options for the directors. Stewart wrote to Sidhu on behalf of the members of the advisory board, attaching the relevant sections and asking for clarification as to how to proceed. This was followed up five weeks later, when Stewart again wrote to Sidhu asking him to contact him as soon as possible.
In 1997, Sovereign created a stock option plan for its non-employee directors, but did not include those of Sovereign Bank or, therefore, the advisory board directors. The plan was filed with the SEC on March 16, 1998.
On May 20, 1997, Stewart sent a letter to Tudor, enclosing his correspondence to Sidhu to which he had not received a reply. Stewart requested that Sills Cummis contact Sovereign's counsel. At some point, Boyajian recommended that plaintiffs seek other counsel if they wished to file suit against Sovereign given the possibility that he and the other Sills Cummis attorneys could become witnesses in that case. As a result, plaintiffs hired the firm Dillon, Bitar and Luther to represent them. On October 25, 2000, Stewart wrote to Boyajian informing him that their new counsel would be contacting him for information. Plaintiffs' new counsel forwarded documents to Boyajian for his review. However, the attorneys advised Stewart and Sullivan that no one from Sills Cummis had responded to their efforts.
On December 22, 1999, plaintiffs, along with two other former WJB directors, filed suit against Sovereign in the U.S. District Court for the District of New Jersey. Sovereign moved to dismiss for failure to state a claim upon which relief could be granted. Their argument focused primarily on the parol evidence rule as it related to alleged oral representations made during negotiations, and only briefly asserted that the advisory board and option provisions did not survive the agreement pursuant to Section 7.02. The District Court dismissed plaintiffs' complaint with prejudice, issuing a written opinion. The court's decision was based largely on application of the Pennsylvania parol evidence rule and that the holding that the written agreement was fully integrated and lacked uncertainty.
On May 22, 2001, plaintiffs' counsel sent a letter to Gross informing him that a key issue in the federal case was "whether failure to include a 'survival provision' which would have preserved the rights of the plaintiffs [wa]s fatal to [their] claim." Counsel advised Gross "that several of the plaintiffs wish to institute suit against [Sills Cummis] for malpractice, for failure to include a survival provision thereby causing [them] to lose the economic benefits of the Post-Closing Clauses that were vigorously negotiated and understood by plaintiffs to survive the closing."
Plaintiffs appealed the District Court's decision to the Third Circuit, focusing almost solely on the stock options issue. The Third Circuit affirmed the District Court, focusing its opinion specifically on plaintiffs' "claim that [the Sovereign] defendants breached an oral promise pertaining to stock options offered to non-employee directors as part of a planned merger of Sovereign Bank and [WJCB]."
Plaintiffs filed this suit for legal malpractice on January 21, 2003, more than seven years after the merger agreement was signed. The Sills Cummis defendants answered and moved for summary judgment. As stated above, the judge granted summary judgment and dismissed the complaint.
Plaintiffs appeal, contending that the trial court should have applied the discovery rule and found that their potential malpractice claim did not accrue until at least such time as defendants referred them to other counsel sometime after May 20, 1997, or when they received an adverse ruling from the District Court in their litigation against Sovereign on January 19, 2001. We reject this argument and affirm Judge Gallipoli's holding that the limitations period commenced on September 29, 1995, the date the merger agreement was signed.
The judge noted that "under a traditional reading and application of the statute of limitations, the period would begin to run on September 29, 1995, the date that the [WJB] Board ratified the merger agreement without language securing plaintiffs' alleged right to Sovereign  stock options, the plaintiffs' complained of injury." The judge found plaintiffs' argument for application of the discovery rule unpersuasive because, based on the evidence in the record, plaintiffs "knew or should have known about the absence of the stock option language in the merger agreement on at least five separate occasions before and on the date of ratification." The judge cited the following five instances:
1) the September 20, 1995 draft merger agreement sent to Sills Cummis and Stewart which included language indicating only the possibility of Sovereign  stock options for members of the proposed advisory board;
2) the September 21, 1995 memo prepared by Boyajian and sent to Stewart indicating that stock options in Sovereign  were not guaranteed for members of the proposed advisory board; 3) the September 23, 1995 meeting between attorneys from Sills Cummis, Stewart, Hill and Van Voorhis where the Sills Cummis attorneys reiterated that the proposed merger agreement did not contain an enforceable promise that prospective "advisory board" members would receive or be guaranteed Sovereign  stock options; 4)the September 29, 1995 final merger agreement which contained the same language governing stock options that had previously been reviewed[;] and 5) evidence that Sullivan became very upset and spoke to other Board members upon learning from Stewart that the draft submitted for approval and ratification failed to include the provision for stock options.
The judge concluded that plaintiffs either actually knew, or should have known, of defendants' alleged negligence and the likelihood of injury or damages as of September 29, 1995. Pursuant to the well-settled summary judgment standard, Rule 4:46-2(c) and Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995), the judge's analysis is correct.
Our review of the judge's grant of summary judgment requires application of the same standard. Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.), certif. denied, 154 N.J. 608 (1998). Legal conclusions, however, are subject to de novo review. Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995). Pursuant to N.J.S.A. 2A:14-1, a "legal malpractice action [must] commence within six years from the accrual of the cause of action." Vastano v. Algeier, 178 N.J. 230, 236 (2003). In general, a cause of action for legal malpractice accrues "when an attorney's breach of professional duty proximately causes a plaintiff's damages." Grunwald v. Bronkesh, 131 N.J. 483, 492 (1993). However, where special circumstances exist and the interests of justice require, courts apply "the discovery rule to postpone the accrual of a cause of action when a plaintiff does not and cannot know the facts that constitute an actionable claim." Ibid.
The discovery rule is an equitable rule intended to remedy the unjust results that can occur when a rule of law is rigidly applied. Ibid. Under the rule, the limitations period begins to run when a plaintiff is aware of "the facts underlying" the injury and fault, and "not necessarily when a plaintiff learns the legal effect of those facts." Id. at 493. "Thus, the discovery rule encompasses two types of plaintiffs: those who do not become aware of their injury until the statute of limitations has expired, and those who are aware of their injury but do not know that it may be attributable to the fault of another." Ibid. Here, neither of those situations apply.
Plaintiffs contend that, pursuant to Sullivan v. Aslanides, 374 N.J. Super. 68 (App. Div.), certif. denied, 183 N.J. 218 (2005), the statute of limitations should have been tolled until the close of the District Court case against Sovereign. We disagree. Here, unlike the plaintiff in Sullivan, the damages suffered by plaintiffs occurred as soon as the merger agreement was signed without the language they sought because, under the terms of the agreement, they would not receive the stock options they desired.
Plaintiffs also contend that Judge Gallipoli "erred in granting summary judgment to defendants on the ground that they did not proximately cause plaintiffs' injuries with respect to the stock option provision of the merger agreement." We agree with the judge's analysis:
The defendants on numerous occasions informed plaintiffs that the Sovereign  stock option plan was not guaranteed in any draft of the merger agreement. Additionally, the defendants at the outset of the engagement outlined in a memo that it was the fiduciary duty of the plaintiffs, owed to themselves and all of their shareholders, to read each section of the merger agreement carefully before approving it. Had the plaintiffs heeded this warning and performed their fiduciary duty, then, again, they would have become aware of the absence of the language in the merger agreement about which they now complain.
The judge found that even if the Sills Cummis defendants negligently failed to inform plaintiffs about the lack of options language, "the damages that  plaintiffs are alleging are speculative at best." Plaintiffs provided no evidence that if they had objected to the agreement as written, Sovereign would have agreed to include plaintiffs' preferred language and continue with the merger. The judge also rejected plaintiffs' contention that they would have formed their own option plan prior to going through with the merger. Thus, the judge correctly granted "[Sills Cummis's] motion for summary judgment based on the defense of lack of proximate causation."
Plaintiffs also contend that the judge "erred by granting the Sills Cummis defendants' motion for reconsideration and granting summary judgment with respect to the advisory board provision of the merger agreement." We are not persuaded.
Plaintiffs argue that the merger agreement did not include a proper survival clause, which would have guaranteed establishment of an advisory board, and that the judge improperly considered parol evidence that was excluded by the District Court.
In granting the Sills Cummis defendants' reconsideration motion, Judge Gallipoli determined that "the plain language of Section 1.02(d)(vi) of the Merger Agreement" demonstrated that Sovereign "intended to establish an advisory board, consisting of individuals chosen by WJCB and [WJB], within the commercial bank division of Sovereign." He further interpreted that section "as falling into the limited auspices of the 'Unless Otherwise Provided' clause of Section 7.02, and thus surviving the closing of the Merger Agreement."
Moreover, the judge found that Sovereign's acknowledgement of its obligations in the Form S-4 "represent[ed] clear proof that the Merger Agreement" required it to form the advisory board. Thus, the judge determined that "[a]ny contention that the failure to establish the advisory board was due to  the Sills Cummis [d]efendants' negligence and not solely to Sovereign['s] actionable malfeasance is contrary to the weight of the evidence and not a finding that any reasonable fact finder could or should make." Therefore, "no genuine issue of material fact exist[ed] as to the alleged negligence of [d]efendants in failing to ensure in the Merger Agreement the creation of the advisory board." Neither the District Court nor the Third Circuit had addressed "the issues involved with the creation of the advisory board found in Section 1.02(d)(vi)." Hence, plaintiffs were attempting to litigate a claim for damages which they either unsuccessfully prosecuted or abandoned in federal courts. Thus, the judge correctly granted summary judgment and "dismissal of [p]laintiffs' 'advisory board fees' claim with prejudice."
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