Dissident Crown Shareholder Files Suit on Proxy Vote : Seeks to Disqualify Election of Four Incumbent Directors

Frustrated that no compromise has yet been worked out among a warring board of directors at Crown Bancorp, dissident shareholder Ed Schmidt on Friday filed suit against Crown and four of its directors in an attempt to validate his proxy votes cast at last month’s annual meeting.

Schmidt, who tried to vote 9.9% of the total proxies, asked in his lawsuit that his votes be counted and that four incumbent directors who were elected--including Chairman Philip Akre and President Michael Justice--be disqualified.

Last month, after a bitter, monthslong proxy solicitation effort, three dissidents were elected to Crown’s seven-member board. In an effort to cool tensions and negotiate a compromise, directors called for a moratorium to several lawsuits that had been filed both by and against Crown.

Compromise talks have apparently not been successful, and Schmidt’s lawsuit Friday decreases the likelihood of an out-of-court settlement, according to sources close to the company.

One of the stumbling blocks has been management’s insistence that Schmidt not be included on a compromise board of directors.

Schmidt’s votes would have been the largest bloc gathered at Crown’s annual meeting had his proxies not been voided by a three-member inspector of elections committee, who judged that Schmidt had solicited his proxies improperly.

Since the election, Crown has appointed another management-backed director--Coronado insurance executive Dick Goodenough, who came in 11th in a field of 12 candidates. Schmidt’s lawsuit also asks that Goodenough not be allowed to serve on the board. Crown’s bylaws allow a maximum of nine directors.

If Schmidt is successful in his challenge, a Superior Court judge could either order a new election or count Schmidt’s votes, which would mean that the lowest vote-gatherer be removed from the board.

Complicating the issue is the fact that there were three incumbent directors tied for the lowest vote-getter--Akre and outside directors Ron Beaubien and Marco Palumbo. Corporate law would require all three to be bumped from the board, according to Steve Joplin, Schmidt’s attorney.

The issue could go to court by year’s end, Joplin said.

Crown officials could not be reached for comment.

Meanwhile, Crown until this week was in financial default on a $1.5-million note that is secured by stock in Crown’s two bank subsidiaries, according to sources close to the bank.

But a recent $85,000 cash infusion allowed the Coronado-based holding company to make its regular note payment, which was due Aug. 20.

Crown missed its $21,127 principal payment last month to Canadian Commercial Bank on a $1.5-million note that is secured by stock in Bank of Coronado and Capital Bank of Carlsbad.

As a result, Crown placed itself in jeopardy of the noteholder demanding payment of the stock or, under a worst-case scenario, taking control of the bank stock.

Crown President Justice would not comment earlier this week on the note default.

Canadian Commercial, now in liquidation, loaned Crown $1.5 million in 1984 to pay for the opening of Capital Bank of Carlsbad.

The $85,000 cash infusion was secured when former Crown President James Klingensmith exercised stock options for more than 23,600 shares of Crown stock at about $3.60 per share.

Klingensmith’s right to exercise the option expired Aug. 31.

Crown established a $150,000 reserve last year to pay for this year’s portion of the note. There is some dispute about what happened to that reserve. According to sources close to the company, Crown exhausted the reserve last month, partly because it paid its outside legal firm more than $55,000.

Typically, companies pay debt service before paying off creditors.

Once the note was in financial default, the Canadian Commercial Bank liquidator could have demanded immediate payment. Under a lengthy, worst-case scenario, the liquidator could have tried to take over the stock of both subsidiary banks, which is now held by Crown. Crown, in turn, is publicly traded and owned by its shareholders.

Sources close to Crown said that there is an unidentified third party interested in buying the Canadian Commercial note.

David Rae, in charge of liquidating Canadian Commercial Bank, would not comment earlier this week on what action he might take.

Crown has for the past year been operating under regulatory orders to increase its capital base.

Because of its need for capital, Crown, with more than $60 million in assets, also is in violation of some of the covenants of the Canadian Commercial loan. As a result, the note has technically been due on demand since January, according to Crown’s annual report.

Crown lost about $500,000 for the six months ended June 30 and $2.5 million last year. Its capital base is 7.1% of its assets, and regulators have ordered the ratio increased to 7.5%.