Opinion
Nos. X08 CV 03 0198437, X08 CV 04 0465933
March 12, 2004
MEMORANDUM OF DECISION RE DEFENDANTS' MOTIONS TO DISMISS (TURONIS: 109.00, 110.00/MARKS 108.50, ETC.)
The two above-captioned cases are putative class actions that come before the court on motions to dismiss filed by the several defendants. Turonis v. Patterson was filed in the fall of 2003 and subsequently assigned to the complex litigation docket whereupon in December this court set up a briefing and argument schedule for the motions to dismiss. Marks v. Patterson was commenced in January 2004 and the Superior Court for the judicial district of New Haven (Pittman, J.) established a briefing schedule for similar motions. When Marks was subsequently transferred in February to the complex litigation docket, this court, with the very helpful cooperation of the parties and counsel, scheduled and heard argument on all the motions to dismiss on February 24, 2004.
Both cases arise out of the proposed conversion of the venerable New Haven Savings Bank from a mutual savings bank to a capital stock bank. While the plaintiffs' claims in the two actions differ to some degree, the factual background and the gravamen of the various motions to dismiss for lack of subject matter jurisdiction are very similar. For those reasons the court will dispose of all the motions in both cases in this memorandum of decision.
I. Background Facts
The New Haven Savings Bank (NHSB) is a mutual savings bank chartered by a Special Act of the Connecticut legislature in 1838. As such, the bank has no shareholders. Ownership of NHSB resides in the bank's depositors. Presently, according to the Turonis complaint, NHSB has the largest "market share" of banks doing business in the greater New Haven area, has "approximately $2.3 billion in assets, $1.8 billion in deposits" and a little less than $400 million in "equity."
In July 2003 the Board of Directors of NHSB adopted a plan to convert the bank to a capital stock bank. Such conversions are governed by General Statutes § 36a-136 which among other things authorizes the state Banking Commissioner to adopt regulations to govern the conversion process which regulations are to be "similar in scope and content" to federal regulations on the same subject found at 12 C.F.R. Part 563b. General Statutes § 36a-136(h); see also Regs., Conn. State Agencies § 36-142m-4 seq; 12 C.F.R. § 303.160 et seq. The adoption of the plan of conversion by the NHSB board of directors was the first step of the conversion process. See Regs., Conn. State Agencies § 36-142m-4.
Another step in the process is the submission to and approval by the bank's corporators of the plan of conversion. The role of corporators in the conversion process is spelled out, in part, in a document entitled "Policy and Interim Requirements Concerning Conversions of Mutual Savings Banks to Capital Stock Banks and Reorganizations of Mutual Savings Banks to Mutual Holding Companies" issued by the Connecticut Banking Commissioner dated October 31, 1995 (Policy). One of the purposes of the Policy is to establish a means for a vote on the proposed conversion by persons who "are not insiders and do not have a potential conflict of interest in the conversion . . . in order to avoid management abuse and excessive enrichment of insiders." Id., 1. According to the Policy, the Federal Deposit Insurance Corporation (FDIC) requires a vote by mutual bank depositors in favor of the proposed conversion. See 12 C.F.R. § 333.4(c)(2). The Connecticut Banking Commissioner stated in the Policy that such a depositor vote was contrary to Connecticut law and not justified in any event. Therefore, to induce the FDIC to waive this requirement and to alleviate FDIC concerns the Commissioner's Policy requires that sixty percent of the bank corporators be independent of the bank (i.e. not employees, officers, directors or significant borrowers) and that the conversion be approved by a majority of all corporators and a majority of all "independent" corporators. Policy 1-2.
The Policy sets forth some interim requirements for conversions "until such time as permanent regulations are adopted." Id., 2.
Following distribution of informational material about the plan, materials approved by both the Commissioner and the FDIC, the NHSB held a vote of its corporators on September 8, 2003 which vote approved the plan of conversion in accordance with the Policy requirements. Subsequently, the FDIC, at the request of NHSB, waived the requirement of a depositor vote. Specifically, the FDIC reviewed the procedures for selecting corporators, the corporators themselves and the vote of the corporators. The request for waiver was reviewed pursuant to 12 C.F.R. § 303.162(a) and (b). The criteria of the latter subsection were that
the requested waiver [of a depositor vote], if granted, would not result in any effects that would be detrimental to the safety and soundness of the institution, entail a breach of fiduciary duty on the part of the institution's management or otherwise be detrimental or inequitable to the institution, its depositors, any insured depository institution, the federal deposit insurance funds, or to the public interest.
12 C.F.R. § 303,162(b)
On September 29, 2003 NHSB submitted its plan of conversion to the Banking Commissioner. The plan consisted of converting NHSB into a capital stock bank known as New Alliance Bank and for the formation of a holding company, New Alliance Bancshares, Inc. The holding company would acquire two other holding companies each of which owned a Connecticut bank and these two banks, Tolland Bank and The Savings Bank of Manchester, would be merged into NHSB and operate under the name New Alliance Bank. According to the Turonis complaint the result would be the second largest savings bank in Connecticut and the fifth largest bank overall ranked by deposits.
Under General Statutes § 36a-136 the Commissioner is empowered to approve a plan of conversion if the bank has complied with the law, the plan does not reduce capital, does not result in a taxable transaction, and if "the plan of conversion is fair to depositors." General Statutes § 36a-136(j).
Pursuant to his statutory responsibilities the Banking Commissioner reviewed the application, held two public hearings thereon, and ultimately issued a certificate of conditional approval of the plan after the bank had made some significant modifications to the plan as initially proposed.
II. The Litigations A. Turonis Case
Joanne Turonis has sued NHSB and its directors alleging breach of fiduciary duty and violation of the Connecticut Unfair Trade Practices Act, General Statutes § 42-110a et seq. (CUTPA). Turonis seeks class certification with herself as representative of all depositors of NHSB except those related to or affiliated with the defendants. Among the questions of law and fact that Turonis alleges are common to the class of depositors she seeks to represent are whether the conversion transaction "is grossly unfair to the depositors" and whether the defendants "have breached . . . fiduciary and other common law duties owed by them to the plaintiff."
The allegations of the complaint describe the conversion plan, the proposed mergers, and the proposed subscription offering of the capital stock to be issued. The complaint notes that several local leaders in New Haven and politicians have voiced opposition to the conversion. Specifically the complaint alleges that the plan
Is fundamentally unfair to depositors in that it will enrich and entrench defendants and NHSB management at the expense of NHSB depositors without fair, adequate and full compensation.
Rather than benefiting depositors, the conversion plan benefits the management of NHSB and the individuals that have the capital and knowledge to benefit from the change of ownership.
For example, while depositors are being offered the opportunity to buy stock in NHSB, they are not being offered any discount on the price depending on how long they have had their accounts or and are not being offered stock in proportion to their respective deposits. In fact, depositors get no credit for the millions of dollars in equity they helped to amass and technically own.
However, once the conversion takes place and the Bank becomes public, it is defendants and NHSB executives and management who stand to become enriched by the inevitable stock options, stock grants and other incentives that they would not receive were NHSB not to undergo the conversion. These benefits will be even more valuable when the Bank ultimately is purchased by a megabank after the five year anti-takeover wait period adopted by NHSB. As [New Haven Mayor] DeStefano has noted, "I don't want anyone walking away with my money and the money of my fellow depositors who have helped build this bank over the years."
If the conversion is approved as is, NHSB's depositors will be deprived of the opportunity for substantial gains which defendants and NHSB will be realizing. The current plan does not impose limits on the Individual Defendants or other members of management from granting themselves stock and stock options beyond any minimal restrictions that may be contained in the law.
Incredibly, and in further derogation of their fiduciary responsibilities to NHSB's depositors, the Bank reportedly has asked the FDIC to waive depositors' vote on the conversion plan.
Complaint ¶¶ 35-40 (emphasis in original).
As a result of the above alleged facts Turonis claims that the defendants breached fiduciary duties owed her and other depositors. A second count alleging violation of CUTPA adds the requisite allegations of unfair and deceptive practices and economic loss, but relies on the same substantive allegations. Among the various claims for relief such as damages and certain declarations of wrongdoing, the plaintiff seeks a modification of the conversion plan "so that it is fair to depositors." Prayer for Relief, ¶ 4.
B. The Marks Case
The plaintiffs Towanna Marks, Stephen Black and Cathy Sykes are depositors of NHSB and have sued NHSB, its individual directors and corporators alleging breach of fiduciary duties, breach of contract, and tortious interference with contract. The three plaintiffs seek to represent a class consisting of all NHSB depositors, essentially the same class as in the Turonis case. They allege common questions as to whether they have a vested property interest in NHSB's income and profits and whether the defendants have breached fiduciary duties owed.
The Marks plaintiffs allege that NHSB was created by an 1838 Special Act of the Connecticut legislature which Act stated:
That all deposits of money received by said corporation, shall be used and improved to the best advantage, by loaning the same in a manner not inconsistent with the laws of this state, or by investing the same by purchase in bank stock in any bank in this state, or any public stock of any state or of the United States, and disposing of said bank stock and public stock as the interest of said corporation may require; and the income and profits of said loans and investments shall be applied and divided among the persons making the deposits, their executors or administrators, in just proportion, with such reasonable deduction as may be chargeable thereon . . .
(Emphasis in Complaint, not in Special Act.)
It is further alleged that the above provisions remain in effect. Complaint ¶ 47, 53, 54.
The plaintiffs allege that they have rights to the approximately $460 million "equity" of NHSB and that the conversion plan would destroy those rights without compensation therefore. Id., ¶¶ 59, 65. They also allege that the appointment of corporators by the bank was designed to eliminate their right to vote on the plan, id., ¶ 76, and that the plan will enrich management unfairly and to the detriment of depositors. Id., ¶¶ 68-73.
The Marks complaint alleges that the defendants have breached their fiduciary duties (Count Two), have breached the depositors' rights to the banks surplus and future profits (Count Three) and have tortiously interfered with the depositors' contract rights (Count Four).
Each of the defendants in the two cases has moved to dismiss the relevant complaint, pursuant to Practice Book § 10-30 on the ground that the court lacks subject matter jurisdiction over the claims because the plaintiffs failed to exhaust their administrative remedies.
III. Review of Applicable Legal Standards
When ruling on a motion to dismiss the court must take the facts as they are alleged in the complaint, including those necessarily implied therefrom, and construe those facts in a manner most favorable to the plaintiff. Lawrence Brunoli, Inc. v. Branford, 247 Conn. 407, 410-11 (1999).
Where, however . . . the motion is accompanied by supporting affidavits containing undisputed facts, the court may look to their content for determination of the jurisdictional issue and need not conclusively presume the validity of the allegations of the complaint.
Barde v. Board of Trustees, 207 Conn. 59, 62 (1988) (citation omitted; internal quotation marks omitted).
The thrust of the defendants' argument is that the two complaints at issue are directed at the plan, approved by the Banking Commissioner, to convert NHSB from a mutual to a capital stock bank. They contend that the Commissioner's conditional approval was the result of a lengthy and detailed administrative process established by legislation in General Statutes § 36a-136 and further established by the regulations, both state and federal. Although somewhat vague as initially articulated, the defendants have focused their argument on the fact that neither Turonis, nor the Marks plaintiffs, availed themselves of the procedures available to bring their complaints before the Banking Commissioner during the administrative process which culminated in the Commissioner's approval of the plan of conversion. The defendants also contend that the complaints are an improper collateral attack seeking to interfere with and usurp the legislatively granted authority of the Banking Commissioner to consider and determine whether to approve a plan of conversion.
The doctrine of exhaustion of administrative remedies is well recognized in Connecticut.
The doctrine of exhaustion of administrative remedies is well established in the jurisprudence of administrative law . . . The doctrine provides that no one is entitled to judicial relief for a supposed or threatened injury until the prescribed administrative remedy has been exhausted . . . the requirement of exhaustion may arise from explicit statutory language or from an administrative scheme providing for agency relief . . .
BRT General Corp. v. Middlebury WPCA, 265 Conn. 114, 123 (2003), quoting Waterbury v. Washington, 260 Conn. 506, 529, 530 (2002). The rationale supporting the doctrine is two-fold: it recognizes the expertise an administrative body can bring to a specific issue, thereby focusing the court's energies on issues already sifted, considered and evaluated by that agency, and it recognizes the appropriate balance between equal and coordinate branches of government.
A primary purpose of the doctrine is to foster an orderly process of administrative adjudication and judicial review, offering a reviewing court the benefit of the agency's findings and conclusions. It relieves courts of the burden of prematurely deciding questions that, entrusted to an agency, may receive a satisfactory administrative disposition and avoid the need for judicial review . . . Shortt v. New Milford Police Dept., 212 Conn. 294, 306 n. 10, 562 A.2d 7 (1989); accord Johnson v. Statewide Grievance Committee, supra, 248 Conn. 95. Moreover, the exhaustion doctrine recognizes the notion, grounded in deference to [the legislature's] delegation of authority to coordinate branches of Government, that agencies, not the courts, ought to have primary responsibility for the programs that [the legislature] has charged them to administer. McCarthy v. Madigan, supra, 503 U.S. 145; accord Cannata v. Dept. of Environmental Protection, [ supra, 215 Conn. 625]. Therefore, exhaustion of remedies serves dual functions: it protects the courts from becoming unnecessarily burdened with administrative appeals and it ensures the integrity of the agency's role in administering its statutory responsibilities. (Citation omitted; internal quotation marks omitted.)
Stepney v. Town of Fairfield, 263 Conn. 558, 564-65 (2003) [quoting Hartford v. Hartford Municipal Employees Assn., CT Page 3887 259 Conn. 251, 281-82 (2002)].
The failure to exhaust administrative remedies invokes the issue of the court's subject matter jurisdiction. If a party fails to exhaust an available administrative remedy, that failure deprives the court of subject matter jurisdiction over a claim on the same issue that the administrative procedure was designed to test. Bauer v. Waste Management of Connecticut, Inc., 234 Conn. 221, 231 (1995); see also Stepney v. Town of Fairfield, 263 Conn. 558 (2003); Johnson v. Statewide Grievance Committee, 248 Conn. 87 (1999).
It is a settled principal of administrative law that if an adequate administrative remedy exists, it must be exhausted before the Superior Court will obtain jurisdiction to act in the matter.
LaCroix v. Board of Education, 199 Conn. 70, 83-84 (1987).
IV. Discussion A. General
Both the three Marks plaintiffs and Turonis argue through differing, but overlapping, theories that their rights as depositors and "owners" of the mutual bank NHSB are being impaired by the conversion plan for the benefit of the bank's management and insiders in a manner both illegal and unfair. As an initial point it is useful to understand exactly what the ownership rights of mutual bank depositors consist of. Several appellate opinions have delved into the topic. The United States Supreme Court, in a tax case, distinguished the value of ownership of stock in a capital stock bank from the ownership interest of a depositor of a mutual bank.
The asserted interest of the depositors is in the surplus of the bank, which is primarily a reserve against losses and secondarily a repository of undivided earnings. So long as the bank remains solvent, depositors receive a return on this fund only as an element of the interest paid on their deposits. To maintain their intangible ownership interest, they must maintain their deposits. If a depositor withdraws from the bank, he receives only his deposits and interest. If he continues, his only chance of getting anything more would be in the unlikely event of a solvent liquidation, a possibility that hardly rises to the level of an expectancy. It stretches the imagination very far to attribute any real value to such a remote contingency, and when coupled with the fact that it represents nothing which the depositor can readily transfer, any theoretical value reduces almost to the vanishing point.
Society for Savings of Cleveland v. Bower, 349 U.S. 143, 150 (1955). The Supreme Judicial Court of Maine has said,
[s]ignificant characteristics of ownership are missing in the mutual context. The depositors in a mutual institution have no legal title to the surplus of the institution and do not share in any risk of loss since their deposits are insured. The only `vested' interest a depositor has in the mutual institution is in the depositor's funds on account. These rights remain unchanged in a conversion.
Lovell v. The One Bancorp, 614 A.2d 56, 66-67 (1992). Historically, mutual bank depositors provided the initial funds for mutual banks to make loans, and their deposits were at risk if the bank performed poorly. Such risk, which might justify a greater right to the bank's surplus as a concomitant reward, no longer exists to any significant degree because of bank regulation, and more importantly, the availability of deposit insurance. See Appeal of Concerned Corporators of Portsmouth Savings Bank, 129 N.H. 183, 210-15 (Brock, C.J., dissenting).
As a second point, one of the significant policies underlying the doctrine of exhaustion of administrative remedies is the desire to have administrative agencies develop a full record through questions and answers, submissions and hearings upon which the agency can apply its experience and expertise to determine the facts and issues which the legislature has, at least in the first instance, entrusted to it. See Stepney v. Town of Fairfield, supra, 263 Conn. 568; Fish Unlimited v. Northeast Utilities Service Co., 254 Conn. 1, 20 (2002), overruled on other grounds, Waterbury v. Washington, 260 Conn. 506 (2002).
Nevertheless, the exhaustion doctrine is not all encompassing. Its application is subject to a number of exceptions not the least of which are cases where the subject matter is beyond the authority of the administrative agency involved or where the administrative remedy available is inadequate to satisfy the legitimate requests of a party. See Mendillo v. Board of Education, 246 Conn. 456 (1998); OG Industries, Inc. v. Planning Zoning Commission, 232 Conn. 419 (1995). In Connecticut jurisprudence, however, the exceptions to the doctrine are not frequently recognized and are narrowly construed. Stepney v. Town of Fairfield, supra, 263 Conn. 55.
With the above background in mind the court turns to the specific claims, defenses and contentions in these two cases.
B. Turonis v. Patterson
In support of their motions to dismiss for failure to exhaust administrative remedies the defendants contend that Turonis failed to avail herself or take part in any of the administrative or regulatory processes involved in the Banking Commissioner's review and eventual approval with modifications of the NHSB's plan of conversion. As an initial matter, Turonis does not deny that she did not involve herself in the process; rather, she asserts that her lawsuit was commenced before the process began and therefore there was no administrative process extant for her to exhaust. She points out that her complaint is dated September 26, 2003, three days before the bank's conversion plan was filed with the Commissioner. Plaintiff points to Loulis v. Parrott, 241 Conn. 180 (1997), overruled on other grounds, Munroe v. Zoning Board of Appeals, 261 Conn. 263 (2002), in support of her contention. Loulis is inapposite to the facts here. In that case the plaintiffs brought an action in February 1995 seeking to bar the use of certain property as a liquor store. While the action was pending the defendant sought and obtained a permanent certificate of zoning compliance. The plaintiffs were not given notice of this; nevertheless they found out about it during the defendants' deposition and appealed the issuance to the zoning board. The Connecticut Supreme Court held that defendants' argument that plaintiffs should exhaust their appeal before the board insufficient to justify dismissal of plaintiffs' case. The court determined, on the very involved facts of that case (there were several other administrative decisions about which the plaintiffs had no notice) that the defendants' commencement of an agency action, without notice to the plaintiffs after the plaintiffs had sought judicial relief, and over which the plaintiffs had no control was an inappropriate situation to apply the exhaustion doctrine. More simply the court would not apply the doctrine where the plaintiffs had no control whether to invoke or forego the administrative process.
The parties in Turonis have stipulated to the following. The summons and complaint were served on the bank and its directors on September 26, 2003. An amended summons (indicating 12, not 21, defendants) was served on September 29, 2003.
Turonis was fully aware before filing suit that the administrative process was necessarily going to take place and her claimed injury and damages would not even occur until and unless the Banking Commissioner acted to approve the conversion plan pursuant to General Statutes § 36a-136. Indeed, her entire case is predicated on the Commissioner's approval of the plan of conversion because without such approval the plan of conversion, whatever it contained, was a nullity. Unlike the Loulis plaintiffs, Turonis had a full opportunity to choose whether to participate in the administrative process, and she declined to do so.
Lastly, the defendants argue, and the court agrees, that the administrative process had begun when Turonis commenced suit. As set forth above, the majority vote of NHSB's corporators and independent corporators in favor of the plan of conversion was required. That vote took place on September 8, 2003. Blankensteen Affidavit, December 15, 2003, ¶ 5. Before the vote took place informational material about the proposed conversion had to be distributed to the corporators and such material had to be reviewed and approved by the Commissioner. Policy, 2. Additionally while it is not entirely clear from the Policy when this occurs, it appears that considerable information about the corporators and their relationship to the bank had to be provided to the Commissioner prior to the vote. Id. What is clear, however, is that pursuant to statute and regulations the Commissioner was substantially involved in the NHSB conversion plan prior to the commencement of the Turonis case.
The more substantive thrust of Turonis' arguments involves the contention that her claim is that the defendant NHSB and its directors breached the fiduciary duties owed to the bank depositors by proposing the plan of conversion which purportedly treated them poorly and treated others, such as insiders, much more lucratively. In her brief opposing the motion to dismiss (at pp. 12-15) Turonis claims the fiduciary duties were breached in the following ways: (1) the corporators were appointed by the bank solely for the purpose of approving the conversion; (2) they were given too little time, information and counseling to consider adequately the conversion; (3) the bank directors had already entered into the merger arrangement and faced a $33 million termination penalty if the conversion and merger were not approved; (4) the fact that one third of the corporators were also bank directors who already had voted for conversion poisoned the corporators' deliberations; and (5) the corporators were not independent of the bank.
Turonis argues that the Commissioner cannot determine breach of fiduciary issues, that he cannot order money damages, cannot certify a class, or order injunctive relief. In short, she contends that her claim of breach of fiduciary duty and violation of CUTPA could not be dealt with by the Commissioner.
The court disagrees with this analysis. As the defendants point out an administrative remedy was available to the plaintiff. Under Connecticut's Administrative Procedure Act at General Statutes § 4-176(a) any person may initiate a proceeding for a declaratory ruling by an agency as to the applicability of a provision of law to specified circumstances. Thus any NHSB depositor, such as Turonis, could have sought a declaratory judgment as to whether the bank's proposed plan of conversion was fair to the bank depositors as called for under General Statutes § 36a-136. An adverse decision on the petition for declaratory relief may be appealed to the Superior Court. General Statutes § 4-184.
The Banking Commissioner's major task in reviewing a plan of conversion, other than making sure it complies with the law and certain IRS rules, is to determine whether it is fair to depositors. He may not approve the plan unless he determines that the fairness criterion is met. General Statutes § 36a-136(j). The Banking Department Regulations state it another way: "No application for conversion shall be approved if the commissioner finds that: . . . [t]he plan of conversion is not fair to depositors." Regs., Conn. State Agencies § 36-142m-3(a)(5).
As part of her declaratory action petition Turonis could have raised her claims regarding the defendants' breaches of fiduciary duties set out in her opposition memorandum and described above concerning the decision to appoint corporators and the deficiencies in the corporators' vote of approval. The Commissioner would have been obligated to consider these claims and determine whether the depositors had been treated fairly. The court presumes this was done in any event during the review of the plan of conversion process, because the Policy sets forth very stringent controls on the selection and independence of corporators and on the information provided them before their vote.
Turonis argues that the fairness to depositors criterion set forth in the conversion statute and regulations is not the equivalent of determining whether a breach of fiduciary duty has occurred. This court disagrees. "Fair" or "fairness" is a flexible concept, but the statute and regulations make it more specific; the Commissioner must consider whether the plan is "fair to depositors." He need not consider fairness to anyone else, just depositors. In this court's view the "fair to depositors" criterion requires consideration of the fiduciary relationship between the defendants and depositors such as Turonis. In Appeal of Concerned Corporations, supra, the New Hampshire Supreme Court came to the same conclusion. The New Hampshire board of trust company incorporation, that state's administrative agency which oversaw conversion of mutual banks to capital stock banks, found that the plan of conversion proposed by the Portsmouth Savings Bank complied with state regulations and that the plan was fair to depositors. However, the board concluded that the existence of a fiduciary duty owed was not relevant to the fairness determination. In fact, the chairman of the board, who dissented from the board's decision, characterized the majority's concept of fairness as being limited to strict adherence to the requirements of the board's regulations governing conversions.
Upon appeal from the board's approval of conversion the New Hampshire Supreme Court said the board's analysis was
too narrow because the question of fairness under [the board regulations] depends by definition on the relationship between the parties. What fairness demands of a person charged with an ordinary duty of care is less than what fairness demands of one in whom a fiduciary trust has been reposed.
Appeal of Concerned Corporators of Portsmouth Savings Bank, supra, 129 N.H. 203. Additionally, as pointed out above, the Connecticut conversion statute, § 36a-136(h), states that the Banking Department regulations should be similar in scope and content to the analogous federal conversion regulations and these latter regulations do take into account bank management's fiduciary relationship with bank depositors. See CT Page 3893 12 C.F.R. § 303.162(b) (quoted above). The plaintiffs have not offered any persuasive evidence that the Banking Commissioner does not, or cannot, consider the fiduciary duties and possible breaches thereof in considering and reviewing the fairness of the plan of conversion.
Therefore, this court concludes that the Connecticut Banking Commissioner can and should consider breaches of fiduciary duty in determining whether a conversion plan is fair to depositors.
Even if this court is incorrect that the fairness to depositors analysis includes or equates to a fiduciary duty analysis, its determination of the exhaustion of administrative remedies argument would not differ. If the Commissioner's clear obligation to consider and determine whether the plan of conversion is "fair to depositors" does not include consideration of fiduciary duties owed, the difference in the analysis applied would only be one of degree, not of kind. It is hard to imagine that the Banking Commissioner would need less or different facts, or that the scope of his review would be significantly less rigorous. The same information, the same data, would be required to be collected, placed in the record and considered in order to ascertain fairness regardless of whether fiduciary relationships are considered and that information would be fully available to a reviewing court on appeal. Indeed, one should not lose sight of the fact that one of the prayers for relief in Turonis' complaint is that the conversion plan be made "fair to depositors," underscoring how close the concepts of fairness and fiduciary duties are in this case.
Similarly Turonis' contention that the administrative process cannot provide her, or the class she purports to represent, with an adequate remedy is without merit. The Commissioner's power to disapprove a proposed plan of conversion would make the plan moot, if not a complete nullity, thereby providing Turonis and the entire putative class an effective remedy to their claim of breach of fiduciary duty or violation of CUTPA. To the extent the plaintiffs' class seeks what is in effect a larger slice of the supposed pie; i.e. greater subscription rights to the capital stock to be offered and concomitantly lesser rights to directors, corporators and upper management, the Commissioner has the power to order such changes in the plan before granting approval. As the Connecticut Supreme Court has recently reaffirmed, the remedy afforded by an administrative agency need not be perfect in order to be adequate. Stepney v. Town of Fairfield, supra, CT Page 3894 263 Conn. 568.
C. Marks et al. v. Patterson
The complaint of Marks, Black and Sykes reiterates several of the claims set forth by Turonis. In addition, their complaint alleges that they and other depositors have contract rights emanating from the original NHSB charter granted by the Connecticut legislature in 1838. The plaintiffs submitted an affidavit of Andrea Coles, President of the Connecticut Center for a New Economy (CCNE) a non-profit organization dedicated to improving the economic and social well being of urban families which has opposed the NHSB plan of conversion. Coles states that CCNE participated in filing a written submission with the Commissioner on October 17, 2003 opposing the bank's plan of conversion. That lengthy (46 pages) and well-documented (158 footnotes) submission opposed the conversion plan on several grounds: unfairness to depositors, impairing public access to credit, and against the public interest. The affidavit states that Towanna Marks attended both public hearings called by the Commissioner and spoke in opposition at the January 5, 2004 hearing (Coles Affidavit, February 13, 2004, ¶ 8).
The Coles affidavit also stated:
On January 26, 2004 the Banking Commission approved the conversion on a conditional basis that addressed some of the most egregious self-enrichment of the Bank's officers and directors, but, in my view almost completely failing to accommodate the depositor's ownership rights in the Bank.
Id., ¶ 13.
The defendants, NHSB, its directors and independent corporators contend, as was done in the Turonis case, that the Marks plaintiffs have not exhausted their administrative remedies, specifically they did not petition pursuant to General Statutes § 4-176(a) for a declaratory judgment.
At the outset it should be noted that the Banking Department has, pursuant to General Statutes § 4-176(b), adopted regulations governing declaratory judgment procedures. See Conn. Regs., Conn. State Agencies § 36-1-46. Both the statute and the Department regulation make clear that the declaratory judgment procedure was available to the plaintiffs; i.e. the process is open to "any person" [§ 9-176(a)] and "any interested person" (§ 36-1-46). The Connecticut Supreme Court has held in numerous cases that the failure of a party to utilize the declaratory judgment procedure, or an administrative appeal, is an impermissible failure to exhaust administrative remedies warranting dismissal of a law suit for lack of subject matter jurisdiction. In Pet v. Department of Health Services, 207 Conn. 346 (1988), a psychiatrist sought an injunction in Superior Court to stop the Department's hearings on charges the psychiatrist was not providing proper treatment. The Superior Court complaint alleged the psychiatrist's constitutional rights were impaired by the hearing procedures. The Connecticut Supreme Court held that the doctor's right to seek judicial review under General Statutes § 4-183(a) of the Department of Health proceedings precluded the Superior Court from having subject matter jurisdiction over the injunction action. The court said, "[s]imply bringing a constitutional challenge to an agency's actions will not excuse a failure to follow an available statutory appeal process" and further stated "adjudication even of constitutional claims is not warranted when the relief sought by a litigant might conceivably have been obtained through an alternative [statutory] procedure which the litigant has chosen to ignore." Id. 354 [quoting LaCroix v. Board of Education, 190 Conn. 70, 79, 87 (1986)].
In Polymer Resources, Ltd. v. Keeney, 227 Conn. 545 (1993) Polymer abided by an order of the Department of Environmental Protection to cease operations until pollution control equipment was installed. When manufacturing was resumed DEP ordered another cessation which Polymer complied with. After several weeks of negotiations and testing did not result in DEP lifting the stop work order Polymer sought and obtained injunctive relief in the Superior Court. The Connecticut Supreme Court held the court had no jurisdiction because Polymer had not exhausted its remedies by pursuing declaratory relief under General Statutes § 4-176(a). See also Housing Authority v. Papandrea, 222 Conn. 414 (1992) [failure to use § 4-176(a) warrants dismissal].
Based on these and other cases making plain the contours of the requirement to exhaust remedies the court holds that Mark's attendance and short remarks at a public hearing are not sufficient to meet that requirement, nor are the efforts of the other two plaintiffs, neither of whom participated directly in the administrative process.
The plaintiffs also contend that their claims raise a "core constitutional issue" involving Article I, Section 10 of the United States Constitution prohibiting any state from passing any law impairing the obligation of contracts. This provision has been held to apply to private corporations' charters Enfield Toll Bridge Co. v. Connecticut River Co., 7 Conn. 28, 47 (1828); Washington Bridge Co. v. Connecticut, 18 Conn. 52, 64-65 (1846). The plaintiffs argue that the plan of conversion unconstitutionally impairs their charter rights to the bank surplus and dividends. This unconstitutional deprivation, it is contended, cannot be addressed or adjudicated by the Banking Commissioner and therefore it would be futile to exhaust their remedies before him.
The above contention requires several different analyses. First, it must be understood that plaintiffs have not challenged the constitutionality of the conversion statute, General Statutes § 36a-136. In fact, their complaint does not advert to a constitutional issue at all. Instead they challenge Section 36a-136's potential effect; i.e. approval of a conversion plan which allegedly impairs their charter rights. Thus, as pointed out before, the Commissioner had the power to disapprove any conversion and by means of this power could provide a full administrative remedy to the plaintiffs. The argument of a constitutional violation does not necessarily excuse the failure to exhaust available administrative remedies. The test is whether the agency lacks the authority to grant adequate relief. Stepney v. Town of Fairfield, supra, 263 Conn. 570. In this case the authority was available.
Second, the conversion statute requires a bank converting from mutual to capital stock status to establish a "liquidation account" for the benefit of depositors. General Statutes § 36a-136(g); Regs., Conn. State Agencies § 36-142m-5. The liquidation account must be equal to the amount of the bank's surplus, undivided profits and general loss reserve, less certain subordinated debt. Regs., Conn. State Agencies § 36-142m-10(a). The liquidation account must stay in existence for ten years after conversion, and depositors who maintain their accounts shall have an inchoate interest in a portion of the liquidation account. Id.(b)(c). If liquidation of the bank takes place in the next ten years depositors will be entitled to a distribution from such account. Id.(c).
While one may argue whether the required liquidation account meets the claims and objections of the plaintiffs, this court has little doubt that such claims and objections could have been raised and adjudicated, through the mechanism of Section 4-176(a) in the context of whether the conversion plan and its required liquidation account were fair to depositors.
The plaintiffs' argument is also not supported by case law. The prohibitions of Article I, Section 10 of the United States Constitution have been interpreted by the United States Supreme Court so as to accommodate another constitutional consideration, that is the state's inherent police power to provide for and safeguard its citizens' vital interests. Energy v. Reserves Group, Inc. v. Kansas Power Light Co., 459 U.S. 400, 410 (1983). The threshold issue is whether the impairment of contract is substantial, and restrictions which permit a contract party to gain what was reasonably expected, but no more, are not necessarily substantial impairments. Id. 411. The Connecticut Supreme Court's interpretation is similar. See Serrano v. Aetna Ins. Co., 233 Conn. 437 (1999). In Serrano the court stated:
In adjudicating a claim that a legislative enactment runs afoul of the contract clause, we must "first ask whether the change in [the] law has operated as a substantial impairment of a contractual relationship." (Internal quotation marks omitted.) General Motors Corp. v. Romein, 503 U.S. 181, 186, 112 S.Ct. 1105, 117 L.Ed.2d 328 (1992); see also Energy Reserves Group, Inc. v. Kansas Power Light Co., supra, 459 U.S. 411; Schieffelin Co. v. Dept. of Liquor Control, 194 Conn. 165, 177, 479 A.2d 1191 (1984)." This inquiry has three components: whether there is a contractual relationship, whether a change in law impairs that contractual relationship, and whether the impairment is substantial." General Motors Corp. v. Romein, supra, 186; see also Energy Reserves Group, Inc. v. Kansas Power Light Co., supra, 411; Allied Structural Steel Co. v. Spannaus, supra, 438 U.S. 244. If upon application of this test it appears that the challenged legislation substantially impairs existing contract rights, the enactment may nevertheless withstand constitutional scrutiny if it serves a significant and legitimate public purpose; Energy Reserves Group, Inc. v. Kansas Power Light Co., supra, 411-12; United States Trust Co. v. New Jersey, supra, 431 U.S. 22; Schieffelin Co. v. Dept. of Liquor Control, supra, 182; and its "adjustment of the rights and responsibilities of the] contracting parties [is based] upon reasonable conditions and [is of a character appropriate to the public purpose justifying [the legislation's] adoption." (Internal quotation marks omitted.) Energy Reserves Group, Inc. v. Kansas Power Light Co., supra, 412; see also United States Trust Co. v. New Jersey, supra, 22; Schieffelin Co. v. Dept. of Liquor Control, supra, 184.
. . .
Several factors are to be considered in determining the degree to which the challenged enactment operates as an impairment of the parties' contractual relationship. These include" the severity of the impairment, the extent to which it frustrates a party's reasonably contractual expectations and the extent to which the subject matter of the impairment has been regulated in the past."
Id., 447, 448 (certain citations omitted).
Using an Energy Reserves-Serrano analysis this court determines that the Marks plaintiffs do not allege a viable constitutional argument sufficient to excuse the failure to exhaust the administrative procedures. As noted above, the plaintiffs' ownership rights in the surplus of a mutual bank are tenuous and speculative at best. The conversion plan provides for the formation of a liquidation account which is designed to substitute for what ever rights a depositor may arguably lose through conversion. When the plaintiffs first acquired their status (it is alleged that Marks has been a depositor for 29 years) the banking industry was subject to considerable regulation, a factor which militates against the concept that the plaintiffs could have reasonable expectations that are impaired. Indeed, it is alleged by plaintiffs they did not even know of the 1838 charter and its provisions until late 2003, after the conversion plan had been proposed.
This last point, ironically, gives rise to plaintiffs' argument that a significant breach of the defendants' fiduciary duties is based on their failure to apprise the depositors of their rights purportedly based on the 1838 charter. Plaintiffs concede, however, that they were aware of the charter provisions by December 2003, ample time for them to commence a declaratory action.
Conclusion
In the final analysis these two complaints, despite how they denominate or describe their causes of action, attack the proposed plan of conversion as being inadequate, unfair, unconstitutional or otherwise illegal or improper. This is nothing more than saying the plan is wrong and should not go into effect. The Connecticut legislature has enacted legislation authorizing the Connecticut Banking Department and its Commissioner to establish procedures for the processing, review and approval or disapproval of plans of conversion in accordance with the statutory criteria. Under this statutory framework a conversion plan does not go into effect until and unless the Commissioner says so. The two lawsuits before this court seek to enjoin the NHSB plan of conversion or to alter it for the plaintiffs' benefit, a power which the legislature has specifically delegated, in the first instance, to the Banking Commissioner.
By these two lawsuits the plaintiffs have consciously sought to circumvent the legislatively enacted procedure. They have deliberately ignored the statutory plan which first provides for a reasoned and experienced review of the conversion plan and, second, provides the plaintiffs an avenue to bring their concerns and challenges directly to the authority which can act on them. Rather, the plaintiffs have sought this relief directly from this court, in effect usurping the Commissioner's statutory authority.
The problems inherent in this approach provide the rationale for the existence and efficacy of the exhaustion of administrative remedies doctrine. Without the full record of the Banking Commissioner's review of the conversion plan the court is bereft of basic information. Indeed nowhere in this court's record is the conversion plan itself, either as first presented by NHSB, or as approved by the Commissioner. The court does not have before it the information about the corporators, their independence or lack thereof, or the information they were provided by the bank, prior to the corporators' vote, all of which was presented to the Commissioner for its review. The court is also without the information presented to the Commissioner about the proposed capital stock offering, and the proposed mergers. Since the Commissioner is not a party to these cases the totality of the information may never be available. Similarly, the court is without the benefit of the Commissioner's analysis of the facts and issues based on his expertise, a key component and benefit of the administrative procedure established by statute.
A second amended and restated plan, dated November 2003, one of several modifications, was included with the affidavit of Attorney Lurie, representing Turonis.
It bears noting that perhaps the best known successful depositor challenge to a conversion of a mutual bank, Appeal of Concerned Corporators of Portsmouth Savings Bank, supra, arose out of an appeal from a final administrative decision where the court had the benefit of a fully developed agency record as well as the articulated reasoning for the agency decision.
While the court is not without sympathy for plaintiffs' desires to assure that the purported benefits of conversion to a capital stock bank are not overly siphoned off to upper management, these cases appear to provide a classic example of a failure, indeed a purposeful failure, to exhaust available remedies. The plaintiffs are not entitled to ignore well established rules of administrative procedure and then seek injunctive and other relief from the court on issues and matters that should have been brought before, and were well within the authority and expertise of, the Banking Commissioner.
For these reasons and those stated above, the two cases are dismissed for lack of subject matter jurisdiction.
TAGGART D. AGAMS SUPERIOR COURT JUDGE