This is a derivative action by the minority shareholders of Northeast Community Bancorp, Inc.(Bancorp) against its directors for breaches of fiduciary duty.

In motion sequence 005, the defendants Diane B. Cavanaugh, Arthur M. Levine, Charles A. Martinek, Kenneth A. Martinek, John F. McKenzie, Salvatore Randazzo, Harry (Jeff) A.S. Read, Linda M. Swan, Kenneth H. Thomas, Eugene M. Magier (collectively, the Directors) and North East Community Bancorp, MHC (MHC, collectively with the Directors, the MHC Defendants) move pursuant to CPLR 3212 to dismiss the plaintiff Stilwell Value Partners IV, LP's (Stilwell) second amended and supplemental complaint (the Complaint).

In motion sequence 006, Stilwell moves pursuant to CPLR 3212 for summary judgment on its causes of action for breach of fiduciary duty against the MHC Defendants for their failure to [*2]initiate a second step conversion (the Second Step).

Stilwell is a minority shareholder of Bancorp, owning 9.67% of its shares.

Northeast Community Bank (the Bank) is a federally chartered mutual holding company that employs a three-tiered corporate structure consisting of MHC, Bancorp, and the Bank (collectively, NECB).

MHC itself is the top-tier entity of NECB.

Bancorp is a publicly traded bank stock holding company, and is the middle-tier of NECB. MHC is the majority shareholder of Bancorp, owning 55% of its shares. The remaining 45% of Bancorp's shares are publicly traded on the NASDAQ.

The Bank is a wholly owned subsidiary of Bancorp and is the bottom-tier of NECB, with branch locations in Massachusetts and New York. The Bank's depositors are, in turn, the members of MHC.

The Directors serve on the boards of MHC, Bancorp, and the Bank.

For a full recitation of the facts, see this Court's decision, filed on September 28, 2012.

Briefly, in October 2012, Stilwell sent a demand to the Bancorp board of directors, requesting that they either initiate the Second Step - a transaction through which Bancorp would become a fully public company, eliminating the current NECB structure - or in the alternative, appoint independent board members capable of considering such the Second Step without conflict.

After the Directors refused Stilwell's demand, Stilwell commenced this action asserting causes of action against the MHC Defendants for breach of fiduciary duty, and a cause of action against MHC for aiding and abetting the Directors' breach. Having survived the MHC Defendants' motion to dismiss pursuant to CPLR 3211, Stilwell now moves for summary judgment on its causes of action relating to the decision not to proceed with the Second Step.

In the alternative, Stilwell moves for partial summary judgment determining that MHC Defendants' decision to forgo the Second Step is not protected by the business judgment rule, thus requiring a showing that their decision was entirely fair to all shareholders.

The MHC Defendants separately move for summary judgment on the grounds that its decision to forgo the Second Step is entitled to the protection of the business judgment rule and that Stilwell's Complaint should be dismissed.

A motion for summary judgment may be granted when there is [*3]no triable issue of fact and shall be denied if any party shows facts sufficient to require a trial of any issue of fact (CPLR 3212 [b]). "Where the moving party has demonstrated its entitlement to summary judgment, the party opposing the motion must demonstrate by admissible evidence the existence of a factual issue requiring a trial of the action or tender an acceptable excuse for his failure to do so" (Zuckerman v City of New York, 49 NY2d 557, 560 [1980]).

Stilwell's causes of action relating to corporate governance "are governed by the laws of Delaware as issues of corporate governance are determined by the State in which the corporation is chartered" (Kikis v McRoberts Corp., 225 AD2d 455, 455 [1st Dept 1996]).

The MHC Defendants assert that Stilwell lacks standing to bring a derivative suit on Bancorp's behalf on grounds that certain decisions by the Directors could, in certain circumstances, result in benefits to Bancorp and a breach of fiduciary duty to the members of MHC. This argument mischaracterizes a reference in Stilwell's papers to the Directors' conflicts of interests.

In alluding to potential harms suffered by members of MHC, Stilwell merely points out one possible manifestation of the structural conflict it sees present. It does not seek redress on their behalf.

The MHC Defendants argue that Stilwell is estopped from bringing causes of action arising out of NECB's allegedly conflicted corporate structure, because it had notice of this risk, and nonetheless acquired, and periodically increased, its stake in NECB.

The MHC Defendants contend that, Stilwell ratified NECB's corporate governance and structure because certain disclosures were made in the investment prospectus provided to Stilwell before it purchased shares of NECB, which provide that:

"[T]he board of directors of [MHC] must ensure that the interests of depositors of Northeast Community Bank are represented and considered in matters put to a vote of stockholders of [Bancorp]. Therefore, the votes cast by [MHC] may not be in your personal best interest as a stockholder...Stockholders will not be able to force a merger or second-step conversion transaction without the consent of [MHC]."

However, under Delaware law, the mere fact that directors participating in a corporate transaction were self-interested or conflicted is insufficient by itself to void that transaction (8 Del. C 144).

Furthermore, Delaware principles of equity require that Stilwell not be left without recourse to ensure that the Directors fulfill their fiduciary duties even though Stilwell acquired its stake in Bancorp after learning of this inherent conflict (Sample v Morgan, 914 A2d 647, 664 [Del. Ch. 2007] ["Although the fact of stockholder approval might have some bearing on consideration of a fiduciary duty claim in that context, it does not, by itself, preclude such a claim...Stockholders can entrust directors with broad legal authority precisely because they know that that authority must be exercised consistently with equitable principles of fiduciary duty"]).

"When a transaction involving self-dealing by a controlling shareholder is challenged, the applicable standard of judicial review is entire fairness, with the defendants having the burden of persuasion...of proving that the transaction with the controlling stockholder was entirely fair to the minority stockholders" (In re Orchard Enterprises, Inc. Stockholder Litig., 88 A3d 1, 24 [Del. Ch. 2014]).

In its prior decision, this Court found that the fiduciary duties owed by the Directors to MHC's members and Bancorp's public shareholders are incompatible in considering whether to Second Step. (Stilwell Value Partners, IV, L.P. v Cavanaugh, 41 Misc 3d 1216(A) [Sup. Ct. 2013] ["By its nature, the [Second Step] conversion contemplates the dissolution of one company, MHC, for the benefit of the other, [NECB]. Consequently, the Directors cannot act in the best interest of one without forsaking the other"]).

The Directors' fiduciary duties to MHC and its members demand its continued existence and its majority stake in Bancorp. Conversely, the Directors' fiduciary duty to Bancorp's shareholders to maximize value at some point by executing the Second Step remains incompatible with the interests of MHC.

Beyond those structural conflicts, timing-specific issues are now implicated. The mere fact that the parties focus now solely on the timing of a Second Step does not eliminate the broader structural conflicts.

Stilwell contends that the Directors are duty-bound to MHC and its members to ensure that they have the opportunity to exercise subscription rights at the most favorable - in this case, lower - valuation regardless of how many members ultimately exercise those rights (In re Tyson Foods, Inc., 919 A2d 563, 592 (Del. Ch. 2007] ["A director's duty of loyalty includes the duty to deal fairly and honestly with the shareholders for whom he is a fiduciary"]).

If, as the MHC Defendants contend, NECB was undervalued at the time of their decision not to Second Step, and is currently [*4]poised for improved performance and growth, MHC members' interests were harmed by delaying the Second Step.

Conversely, the Directors are duty-bound to the public shareholders of Bancorp to initiate the Second Step at a higher valuation, securing them a more valuable stake in the new, fully public company. Thus, the public shareholders' interests may be harmed by a decision to Second Step in the near term. This is further complicated by Stilwell's assertions that improved performance - a higher stock price, higher market capitalization, increased chances of being acquired, and a more accountable corporate structure - would be best achieved through a near-term decision to Second Step.

The Court finds that such intertwining, conflicting duties are disabling with respect to the timing of the Second Step, and the entire fairness test is applicable here (Weinberger v UOP, Inc., 457 A2d 701, 710 [Del. 1983] [holding that where directors "are on both sides of a transaction, they are required to demonstrate their utmost good faith and the most scrupulous inherent fairness of the bargain"]).

In order to establish entire fairness, Defendants must establish a fair process and a fair price.

Stilwell contends that the Directors' deliberation process was unfair because the MHC and Bancorp boards overlap and the Directors could not possibly dispassionately choose a course of action going against their continued entrenchment and that the Directors' perpetual proxies as Directors of MHC and their refusal to appoint independent directors impose serious doubts on fairness.

Stilwell argues that the financial advice that the Directors received from Sandler O'Neill ("Sandler") and FinPro does not qualify as professional advice that the Directors could have relied upon to discharge their fiduciary responsibility of fairly considering the Second Step.

Stilwell contends that Sandler's representative, Catherine Lawton (Lawton), only conducted "an educational session...designed to give [the Directors] a sense of what options are available to them, what are the...pluses and minuses of the things they should consider" (Polansky Aff., Ex. 15, 65:21-66:14).

However, Stilwell ignores Lawton's further testimony, wherein she recalls opining "to the board that I did not believe it would be a good time for them to proceed with the [Second Step]" (id. at 67:20-68:9).

Furthermore, despite Stilwell's contention that the MHC Defendants could not have relied on the "fragmentary" advice provided by FinPro in making its decision, the MHC Defendants submit lengthy deposition testimony from FinPro's CEO, Donald [*5]Musso, stating that FinPro consistently through the years has opined to MHC Defendants, through written and verbal communications, that the Second Step was not the optimal course of action (Polansky Aff., Ex. 16, 17:22-18:17; 20:23-21:10; 38:19-39:4; 39:15-39:19).

This Court finds that neither party has presented any evidence that conclusively establishes the entire fairness, or lack thereof, of the process conducted by the MHC Defendants in deciding against the Second Step.

Moreover, a determination of what the relative interests are of the MHC shareholders versus the public shareholders is another triable issue that has been raised. For example, a crucial benefit of a Second Step pertains to increasing the value of a shareholder's subscription rights, but there is evidence to suggest that not all shareholders are ultimately concerned about those particular rights and may never benefit from them.

Therefore, the Court finds that a trial is required to evaluate the decision to forgo the Second Step under the entire fairness standard and the competing interests of the MHC shareholders and the public shareholders.

Accordingly, it is

ORDERED that the Stilwell Value Partners LP's motion for summary judgment is granted in part, to the extent of finding that the entire fairness standard applies, and it is further

ORDERED that the Defendants' motion for summary judgment is denied in its entirely, and it is further

ORDERED that the parties contact the Clerk of Part 53 within twenty (20) days of the filing of this decision to schedule a pre-trial conference.

This constitutes the decision and order of the Court.