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In the Matter of Stockholder

May 1, 2012


On appeal from the Department of Banking and Insurance.

Per curiam.


Argued October 4, 2011

Before Judges Messano, Espinosa and Kennedy.

Appellant is a group of shareholders (Shareholder Group) who collectively own over 50% of the shares of Liberty Bell Bank (the Bank). The Shareholder Group appeals from a final administrative agency decision of the New Jersey Department of Banking and Insurance (DOBI) that denied its application to inspect the books and records of the Bank. We affirm, substantially for the reasons stated in the written decision of the Acting Commissioner of DOBI dated February 24, 2010.

The controversy here has its roots in the formation of the Bank in 2003 and the subsequent departure of Michael Kwasnik, the founding Chairman of the Board, from its Board of Directors in 2006.

In July 2005, Kwasnik resigned as Chairman of the Board but remained on the Board of Directors. By letter dated December 29, 2005, Kwasnik expressed dissatisfaction with the leadership of the Bank and nominated a slate of fourteen directors for the Board. In addition to himself, he nominated the following members of the Shareholder Group: his law partner, Howard Kanovitz; Russell DiBella; Russell Bates; John Rocco; and Dennis Ferry.

By letter dated January 18, 2006, William C. Dunkelberg, Chairman, and Kevin L. Kutcher, President and Chief Executive Officer of the Bank, responded. They warned Kwasnik that it was "apparent" he had violated several state and federal banking and securities laws by engaging in action to acquire control of the Bank without complying with applicable federal and state laws and regulations. They identified conduct which they stated violated the Change in Bank Control Act, 12 U.S.C. § 1817(j)(1), the federal proxy rules set forth in Section 14(a) of the Securities Exchange Act, 15 U.S.C. § 78n, Section 13(d) of the Securities Exchange Act, 15 U.S.C. § 78m(d), and N.J.S.A. 17:9A-411.

Kwasnik responded by letter dated January 23, 2006, "vehemently disput[ing] the existence of" any obligation to comply with the statutes and regulations because he only owned or controlled approximately 4.6% of the Bank's outstanding stock. Kwasnik admitted to "currently exploring the possibility of engaging in a proxy contest to bring about the much needed change in the composition of the Bank's Board of Directors[.]" Although he denied acting in concert to acquire control of the Bank, he alluded to his prior statement "that holders of a majority of the Bank's outstanding shares (consisting of only 25 shareholders) have expressed support for the proposed slate of directors[,]" and explained:

This statement was based upon information that I have obtained during discussions I have had over the past 6 months with various shareholders of the Bank. As you may recall, many of the Bank's initial and subsequent investors were members of my family, as well as my clients, friends and business associates.

In February 2006, Howard Kanowitz, Kwasnik's law partner and a member of the Shareholder Group, wrote a letter to the Bank, demanding inspection of the stockholder records of the Bank pursuant to N.J.S.A. 17:9A-97. On February 24, 2006, the Bank denied the application on the ground that Kanowitz failed to provide the required five-days written notice. On the same date, Kutcher submitted an inquiry to the Office of Attorney Ethics (OAE). Without identifying Kwasnik or his law firm, Kutcher asked if the following conduct constituted a violation of attorney ethics rules:

On approximately 24 occasions, the managing partner of this law firm wrote checks against the firm's operating account at a time when there were insufficient funds in that account to cover such checks. On each of these occasions, we immediately contacted the managing partner and he wrote a check from or gave instruction to Bank personnel to transfer directly from the firm's attorney trust account to his operating account to cover the shortfall.

By letter dated March 7, 2006, the OAE asked Kutcher to provide additional information regarding the attorneys and transactions to permit an inquiry to determine whether there had been unethical conduct. One week later, Kwasnik resigned from the Board of Directors. The Bank reported his departure to the Federal Deposit Insurance Corporation (FDIC) and subsequently supplied the OAE with the details of the transactions it had questioned regarding Kwasnik and his law firm, Kwasnik, Rodio, Kanowitz & Buckley, P.C.

In May 2006, Kwasnik, four other members of the Shareholder Group and his law firm applied collectively as one borrower and secured a $4.2 million interest-only loan, secured by their shares of Bank stock. Kwasnik used $634,116.80 of those funds to purchase 131,542 shares of Bank stock. As a result of this purchase, Kwasnik beneficially owned 9.38% of the outstanding common stock of the Bank.

In September 2006, Kwasnik; his mother, Carol Kwasnik; his brother, Steven Kwasnik; the Irrevocable Trust of Steven Kwasnik; and Liberty State Financial Holding Corporation*fn1 filed an application with DOBI for acquisition of control of the Bank. Although DOBI conditionally approved the application, the FDIC declined to accept the application in light of the pending OAE investigation.

In December 2007, a second application for acquisition of control of the Bank was filed with DOBI. The "proposed acquirer(s)" were all shareholders who became members of the Shareholder Group: Erik Jason Deitsch, Kwasnik's friend, former classmate and business associate; Russell Thomas DiBella; Hemant Jayantilal Desai; Russell Hayes Bates; Raymond John Norton; Hansford Herndon Rowe; and the Robert Motter Irrevocable Family Trust. The application stated that the named shareholders collectively held 10.213% of the outstanding stock of the Bank. Kwasnik was not among the shareholders named on the application. The application was subsequently withdrawn.

OAE filed a complaint against Kwasnik in December 2008, later amended to include six counts, alleging misappropriation of his clients' funds held in the Bank for the benefit of Liberty State Financial Holding ...

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