May 1, 2012
IN THE MATTER OF STOCKHOLDER APPLICATION PURSUANT TO N.J.S.A. 17:9A-97, FOR THE INSPECTION OF THE BOOKS AND RECORDS OF LIBERTY BELL BANK.
On appeal from the Department of Banking and Insurance.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
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 Corp., his law firm and the Bank during its formation.
By letter dated November 20, 2009, appellant's counsel wrote to the corporate secretary of the Bank, stating he represented the holders of the majority of the outstanding common stock shares of the Bank (the Shareholder Group). A list of the shareholders represented and the amount of stock each owned was attached. The holdings of Kwasnik, the Kwasnik Family Trust (for benefit of M. Kwasnik), Carol Kwasnik, the Irrevocable Trust of Steven C. Kwasnik, Liberty State Financial Holdings Corp., and Deitsch constituted over 29% of the outstanding shares.
The letter demanded an opportunity to inspect and copy the stock ledger and current list of the shareholders of the Bank within five business days pursuant to N.J.S.A. 17:9A-97. The letter further demanded the opportunity to inspect and copy other documents and that a special shareholders' meeting be held within thirty days. The letter described the intent of the Shareholder Group as follows:
To be clear, this letter does not constitute parties "acting in concert" to acquire shares of the Bank to effectuate a "change in control", as those terms are defined by federal and state regulations.
Rather, it is an action by longtime shareholders who already have control of the bank by virtue of their percentage of ownership in the Bank's shares, and who are justifiably concerned about the Bank's consistent and ongoing pattern of financial loss, seeking to chart a new business course intended to ensure the safety and soundness of the institution as well as to achieve institutional profitability.
The Bank rejected the demand by letter dated November 30, 2009, directed to appellant's counsel. The letter specifically took issue with counsel's statement that he represented the majority of the shareholders, and noted the following regarding the list of shareholders provided:
1. 58 of the 80 names on your list are not stockholders of record of the Bank, and therefore have no standing as stockholders of the Bank.
2. You have incorrect share ownership information listed for 17 of the 22 stockholders of record on the list.
3. You are not a stockholder of record, and your letter did not present any evidence of your authority to act on behalf of the stockholders of record listed in your letter.
The Shareholder Group then filed the subject application for inspection with DOBI, accompanied by certifications from Beverly Weiman, Lindsay Weiman and Shannon Weiman, in which each of the Weimans stated the purpose of the application was to afford them an opportunity to communicate with fellow shareholders about the condition of the Bank and what action "shareholders can take to improve its condition - effectuating a change in Liberty Bell's Management and Board of Directors, in accordance with New Jersey law and Liberty Bell's Bylaws."
DOBI advised counsel for the Shareholder Group that the application's failure to provide proof of stock ownership for each group member rendered it deficient. DOBI asked for a certification from any individual included on the application whose purpose differed from that identified on the Weiman certifications and further asked that counsel address the merits of the deficiencies noted in the Bank's response to the application.
Counsel for the Shareholder Group responded with documentation to support stock ownership and a blanket statement that all of the group members shared the purpose identified by the Weimans. Counsel further stated that no response to the Bank's objections was possible due to the "lack of specifics" in the objections or necessary because the objections had no merit.
The Acting Commissioner of DOBI denied the Shareholder Group's application for inspection, finding:
(1) This shareholder group is acting in concert with the ulterior motive to gain control of Liberty Bell Bank without having filed and gained the approval for a change in control of Liberty Bell Bank in violation of N.J.S.A. 17:9A-411.
(2) This shareholder group is ultimately acting in concert under the suggestion and direction of Michael Kwasnik.
(3) There is, upon information and belief, a reasonable likelihood that the underlying purpose of Michael Kwasnik and/or his associates is to gain access to the names of other shareholders of Liberty Bell Bank in order [to] increase the size of the group acting in concert to holders of 2/3 of the outstanding shares of the bank[,] in order to amend the bank's certificate of incorporation, bylaws or stock option plan and in order to vote Michael Kwasnik and/or his associates onto the board of directors.
(4) There is, upon information and belief, a reasonable likelihood that Michael Kwasnik and/or one or more of his associates are acting with the improper purpose of attempting to utilize the bank as a capital source for repayment of a private loan secured by Liberty Bell Bank stock and/or for the benefit of Liberty State Financial Holding Corporation and/or its subsidiaries or affiliated companies, including but not limited to, Liberty Bell Financial Holding Corp., Liberty State Benefits, Inc., Liberty State Benefits of Pennsylvania, Inc., Liberty Bell Investments, Inc., Liberty Bell Insurance Services, Inc., Liberty Bell Credit, Inc., and Liberty State Wealth Management, Inc., (all unrelated to Liberty Bell Bank) which purpose is not germane to Michael Kwasnik's and/or his associate's interest as a shareholder of Liberty Bell Bank and which may potentially further additional unlawful purposes.
(5) The safety and soundness of Liberty Bell Bank, including but not limited to, the interests of the depositors and shareholders of Liberty Bell Bank will not be furthered by permitting Michael Kwasnik and/or his associates to inspect the books and records of Liberty Bell Bank in order to increase its group acting in concert without authorization.
The Shareholder Group moved for reconsideration, which was denied, and now presents the following issues for our consideration in this appeal:
THE DEPARTMENT ERRED IN REFUSING THE GROUP'S REQUEST FOR LBB'S SHAREHOLDER LIST BECAUSE THE GROUP CLEARLY ESTABLISHED ITS STATUTORY AND CONTRACTUAL RIGHT TO OBTAIN IT
THE DEPARTMENT ERRED IN CONCLUDING THAT THE GROUP WAS "ACTING IN CONCERT" IN VIOLATION OF BANK CHANGE IN CONTROL LAWS
THIS MATTER SHOULD BE REMANDED TO THE DEPARTMENT FOR A HEARING BECAUSE ITS DECISIONS ARE BASED ON MISSTATEMENTS OF FACTS, INCOMPLETE FACTS AND UNFOUNDED ALLEGATIONS REGARDING GROUP MEMBER MICHAEL KWASNIK
A. ALLEGATIONS REGARDING
LAWSUITS AND ETHICS COMPLAINTS FILED AGAINST MICHAEL KWASNIK AS A REASON FOR DENYING THE GROUP'S APPLICATION
B. OTHER EXAMPLES OF MISSTATEMENTS OF FACT, INCOMPLETE FACTS AND UNFOUNDED ALLEGATIONS IN THE DEPARTMENT'S DECISION
The scope of our review in an appeal from a final decision of an administrative agency is limited. Circus Liquors, Inc. v. Governing Body of Middletown Twp., 199 N.J. 1, 9 (2009). This court may not reverse an agency's decision unless: (1) it is arbitrary, capricious or unreasonable; (2) it violates express or implied legislative policies; (3) it offends the State or Federal Constitution; or (4) the findings on which it is based are not supported by substantial, credible evidence in the record. Univ. Cottage Club of Princeton N.J. Corp. v. N.J. Dep't of Envtl. Prot., 191 N.J. 38, 48 (2007). Strictly legal issues are reviewed without deference; however, where an agency interprets its own enabling legislation this court must accord substantial deference. See Pressler and Verniero, Current N.J. Court Rules, comment 7.2 on R. 2:10-2 (2012); Patel v. N.J. Motor Vehicle Comm'n., 200 N.J. 413, 420 (2009). Review of an agency's factfinding is limited to whether the findings made could reasonably have been reached on sufficient credible evidence present in the record, considering the proofs as a whole, with due regard to the opportunity of the one who heard the witnesses to judge of their credibility and with due regard also to the agency's expertise where such expertise is a pertinent factor. [Jackson v. Concord Co., 54 N.J. 113, 117-18 (1969) (internal quotation marks and citations omitted).]
See also Sager v. O.A. Peterson Constr. Co., 182 N.J. 156, 163-64 (2004); Klusaritz v. Cape May Cnty., 387 N.J. Super. 305, 313 (App. Div. 2006), certif. denied, 191 N.J. 318 (2007). N.J.S.A. 17:9A-97 governs the Shareholder Group's request to inspect the Bank's records. The request was permitted by Subsection A, which provides in pertinent part:
Any person who has been a stockholder of record of a bank for at least 6 months immediately preceding his demand, or any person holding, or so authorized in writing by the holders of, at least 5% of the outstanding stock of a bank, upon at least 5 days' written demand shall have the right for any proper purpose to examine in person or by agent or attorney, during usual business hours, its minutes of the proceedings of its stockholders and record of stockholders and to make extracts therefrom at the place where such minutes and record are kept.
If, as here, the bank refuses, the shareholder may "apply to the commissioner for an order directing the bank to permit such an examination or the making of such an extract." N.J.S.A. 17:9A-97(B). The commissioner then reviews the application to determine whether "the purpose for which it is made is a proper one and is made in good faith[.]" N.J.S.A. 17:9A-97(B). If the commissioner is "satisfied" the purpose is proper and the application is made in good faith, he must order the bank to show cause why the demand should not be allowed. Ibid. If the commissioner is "satisfied that it is not made for a proper purpose or is not made in good faith," he must issue an order denying the demand and provide a statement of reasons for the denial. N.J.S.A. 17:9A-97(C).
Here, the Acting Commissioner provided an extensive written opinion, setting forth the reasons for the denial. He acknowledged that it is not improper for a shareholder to seek to inspect the books and records of a corporation for the purpose of gaining voting control of the stock. However, when the corporation is a bank, specific statutory and regulatory prohibitions apply.
The Acting Commissioner noted that, pursuant to N.J.S.A. 17:9A-411(a), no person may acquire a New Jersey bank without prior approval by the commissioner. Moreover, N.J.A.C. 3:1-2.19(d) provides more specific guidance as to indirect action and the percentage of stock ownership that is prohibited:
On or after May 7, 2007, no individual may subscribe, directly or indirectly (which term shall include, but not be limited to, ownership of a holding company that owns a depository institution, and ownership through the individual's spouse, children, siblings or parents, or business associates acting in concert), for stock in excess of 24.9 percent of the total voting shares of the depository institution, either at formation of the depository or any time subsequent thereto, except [under circumstances not applicable here.] [Emphasis added.]
As previously noted, when the subject application was made in this case in 2009, Kwasnik, his mother, his brother's irrevocable trust, the corporation Kwasnik founded, and Deitsch held 814,882 shares, which constituted over 29% of the outstanding shares. Therefore, if the shareholders were acting in concert, their acquisition of that percentage of shares was prohibited by N.J.A.C. 3:1-2.19(d). The Shareholder Group does not deny the relationships described by the Commissioner as to these or other shareholders but disputes the conclusion that the shareholders were acting in concert to acquire control without
the approval of the Commissioner.
We are satisfied there was substantial credible evidence to support the Acting Commissioner's conclusion that the Shareholder Group was impermissibly "acting in concert" to acquire control.
As the Acting Commissioner observed, Kwasnik, his mother, his brother's irrevocable trust, the corporation Kwasnik founded, and Deitsch had each participated in a prior application for approval to acquire control of the Bank. Each of the prior applications was withdrawn without securing the approval of the commissioner for the acquisition of control. Over 40% of the total outstanding shares of the Bank had come within the control of these and other shareholders who had participated in prior efforts to acquire control or were otherwise close associates of Kwasnik. Hansford Rowe, Hemant Desai, Russell Bates, Russell DiBella, Raymond Norton, and the Robert Motter Irrevocable Family Trust collectively owned 136,244 shares and had participated in the December 2007 application to acquire control. The Acting Commissioner also identified Kwasnik's father, William, and a number of business associates of Kwasnik who were members of the Shareholder Group and collectively owned 168,052 shares.*fn2 The pattern of involvement by close associates of Kwasnik and individuals or entities who had participated in prior applications to acquire control provided additional support for the Acting Commissioner's conclusion that the Shareholder Group had improperly acted in concert to acquire control, providing adequate grounds for the denial of the application.
We are further satisfied that the Shareholder Group's remaining arguments lack sufficient merit to warrant discussion in a written opinion, R. 2:11-3(e)(1)(E).