The Ohio Supreme Court has closed a loophole that let many of the state's community banks observe a document-disclosure standard that was decidedly less rigorous than those in most other states.
In a 4-to-3 decision, the court ruled that Ohio banks could be compelled to disclose board minutes and other sensitive financial information if they are the only subsidiaries that their holding companies operate.
The decision, announced last week, has prompted concern from banking trade groups, lawyers, and even one of the justices who voted against it. They worry that dozens of banks and thrifts throughout the state would be forced to disclose information they would much prefer to keep private.
That certainly seems to be the situation faced by Croghan Colonial Bank, the defendant in Danziger v. Luse.
Jared Danziger said Wednesday that in addition to Croghan Colonial's minutes, he and his fellow plaintiffs - his father, Samuel, and his uncle, Nathan Danziger - want to see the analysis that went into the bank's loan-loss provisioning. (Jared, a third-year law student, argued the case for the Danzigers; he was allowed to do so because he was also a plaintiff.)
In short, they want to better understand why the $414 million-asset Fremont bank has reduced its reserves when the local economy is struggling, he said. Though Croghan Colonial is not reporting a surge in loan losses, it did acknowledge in a Securities and Exchange Commission filing that "potential problem loans" increased by more than $2 million in the second quarter.
In addition to seeking the loan-loss data, Jared Danziger said, the plaintiffs are considering hiring a forensic accountant to help them examine the bank's records.
Samuel and Nathan Danziger are both longtime Croghan Bancshares Inc. shareholders. Jared Danziger said their stakes, combined with his holdings, amount to about 1% of Croghan's stock. The Danzigers have expressed dissatisfaction with Croghan's management for several years; both Nathan and Samuel Danziger have run unsuccessfully for seats on its board.
Steven C. Futrell, its president and chief executive officer, would not discuss the case.
But Thomas B. Ridgley, the lawyer who represented Croghan Bancshares in the suit, said other banks could face similar requests from shareholders, who could cite Danziger v. Luse as a precedent.
"As it relates to the issue of a shareholder in a public parent with a single bank downstream, it has general applicability," he said.
Howard T. Boyle, the president of the $101 million-asset Home Savings Bank in Kent, said banks are typically loath to disclose anything more than the "general philosophy" behind their provisioning decisions. "When you're asking about specific calculations … that would be a point any bank would be very cautious about" disclosing.
Justice Terrence O'Donnell, one of the three dissenters, wrote in his minority opinion that the case would "further distinguish Ohio as a state where corporations will be less likely to conduct business in this form."
But Justice Paul E. Pfeifer, who wrote the majority opinion, argued that Croghan Bancshares was nothing more than an "alter ego" of its subsidiary.
"Shareholders have a right at common law to inspect the records of a wholly owned subsidiary … when the parent corporation so controls and dominates the subsidiary that the separate corporate existence of the subsidiary should be disregarded," Justice Pfeifer wrote.
Jared Danziger said the decision merely adopts a standard that most other states - particularly Pennsylvania, New York, and Michigan - adopted in the first half of the 20th century.
