Full opinion text
MEMORANDUM OPINION HORACE T. WARD, District Judge. I. Introduction This matter arises out of a proxy contest in connection with the election of members of the Board of Directors at Peachtree Federal Savings and Loan Association (“Peach-tree Federal” or “Association”) in January of 1981. The plaintiffs are D. Kimbrough King, a member of the Board of Directors and former secretary of the Association, William A. Hanger, a former member of the Board of Directors of the Association, and John C. Jackson, the former treasurer of the Association. Plaintiffs are suing individually and on behalf of Peachtree Federal. The original defendants were David C. Edwards, a member of the Board and the president of the Association, George J. Cotsakis, the chairman of the Board of Directors, and Peachtree Federal. The plaintiffs subsequently joined Ben B. Blackburn, III, Thomas M. Lowe, Jr., and Fred R. Tonney, all of whom were elected to the Board in the contested election. In essence, plaintiffs contend that the proxy solicitation materials employed by defendants Edwards and Cotsakis in the proxy contest were materially misleading in violation of the applicable proxy solicitation rules promulgated under relevant federal statutes. Plaintiffs also assert that defendants Edwards and Cotsakis breached their fiduciary duties to Peachtree Federal in connection with the contest. This court’s jurisdiction is invoked pursuant to 28 U.S.C. § 1331(a), 28 U.S.C. § 1337, and the doctrine of pendent jurisdiction. Defendants deny the basic allegations of the complaint and have asserted a counterclaim based on plaintiffs’ initiation of the proxy contest. Further, defendants have raised several affirmative defenses to plaintiffs’ claims. This matter was tried without a jury for seventeen (17) days during the period between November 30, 1981 and January 11, 1982, with supplemental written briefs being filed on February 1, 1982. The witnesses included experts for both sides, Federal Home Loan Bank Board (“FHLBB”) officials, and present and former officers and directors of the Association. Extensive documentary evidence, including letters, minutes of Board meetings, and depositions, were introduced. This memorandum constitutes the court’s findings of fact and conclusions of law. II. Findings of Facts and Conclusions of Law A. Factual Background Peachtree Federal is a federally-chartered mutual savings and loan association founded in 1948. As such, the Association is subject to the supervision of the FHLBB. The principal office of Peachtree Federal is located at 3030 Peachtree Road, Atlanta, Georgia, and there are branch offices at various locations in the metropolitan Atlanta area. The evidence did not reveal any significant financial problems for Peachtree Federal until the middle 1970’s, when the fortunes of the Association began to wane. The Association had been involved in several major real estate transactions, and consequently many of its problems coincided with the general economic decline of the real estate industry in the middle 1970’s. Also, the Association had been involved in certain loan transactions that proved detrimental. As a result of its problems, Peachtree Federal experienced net worth deficiencies which prompted the FHLBB to take affirmative steps in an attempt to return the Association to a stable financial position. These affirmative steps included subjecting the Association to a supervisory agreement which placed certain limitations on the operations of the Association. At about the same time that the Association became subject to the supervisory agreement, the defendant David C. Edwards (“Edwards”) was elected as the president and a member of the Board of Directors of the Association. Gradually over the next few years, the finances of the Association improved, leading to the release from the supervisory agreement in late 1979. In the middle of 1980, problems arose between certain of the principals of the Association. These problems eventually re-suited in the polarization of the Board, with Mr. King on one side and Mr. Edwards on the other. The parties disagree about the genesis of this dissension, and the evidence is not completely clear on this question. Plaintiffs assert that the dispute between Board members arose as a result of dissatisfaction with Edwards’ performance as president. They contend that under Edwards’ leadership, the Association had failed to keep pace with its competitors in offering a broad range of new services to the public, and argue that new management philosophies were needed at the Association in order to improve its financial condition. On the other hand, the defendants assert that Mr. Edwards had provided productive leadership, and had performed adequately in spite of adverse economic conditions in the industry. They further contend that while there were differences of philosophy among Board members, there did not exist-an obvious split until a dispute arose concerning the legal fees of the general counsel of the Association, Mr. Alex McLennan. Mr. McLennan was the principal organizer of the Association. He served as a director and chairman of the Board from 1948 to 1977, and maintained substantial influence over the Association for many years. Two of the plaintiffs are related to Mr. McLennan by marriage, D. Kimbrough King (son-in-law) and William A. Hanger (brother-in-law). It is clear that during the fall of 1980, Mr. King became convinced that Mr. Edwards should be replaced as president, and he informally sought the support of other Board members in this regard. However, the majority of the Board members backed Mr. Edwards. The problems among Board members escalated during the late fall of 1980, with two distinct factions eventually emerging. The schism between the groups crystallized with the resignation of two members of the Board. The then chairman of the Board, Mr. Harold Ivey, resigned in September, 1980, and Dr. Marvin Mitchell required in December, 1980. The circumstances surrounding these resignations will be more fully discussed below. The resignations left the Board deadlocked with regard to major policy decisions, with Messrs. Edwards and Cotsakis (the new chairman) on one side and Messrs. King and Hanger on the other. This unsettled state of affairs led to a power struggle between the two factions from which the proxy contest and subsequent litigation ensued. In December of 1980, it had apparently become obvious that a proxy contest was a distinct possibility. In view of this potentiality, each group took preparatory steps. By letter dated December 18, 1980, Mr. King sought access from the FHLBB to a list of the members of the Association for purposes of soliciting their proxies. In a letter dated December 19,1980 to Mr. King, and a letter dated December 23,1980 to Mr. Edwards’ attorney, a supervisory agent of the FHLBB granted access to the membership list of the Association. As conditions of its approval of access to the membership list, the FHLBB required the parties to submit their respective solicitation materials to the FHLBB for prior approval, and required each side to bear its own expenses. By late December, the solicitation materials of both factions had been submitted to the FHLBB, and changes required by the agency had been effected. It was the feeling of the FHLBB that a proxy contest would not be in the best interest of the Association, and the agency endeavored to prod the respective factions toward compromise. Despite the efforts of the FHLBB, no settlement of the matter was reached. In a final effort to forestall the proxy contest, the FHLBB “withdrew its consent” to the commencement of the proxy solicitation contest. Based upon the belief that the FHLBB did not have authority to prohibit the proxy solicitations, the King faction proceeded to mail its proxy solicitation materials on January 6, 1981. With the authorization of the FHLBB, the Edwards materials were mailed the following day. The FHLBB subsequently “authorized” the Edwards group to reimburse itself for expenses incurred as a result to the proxy contest. A proxy contest agreement was entered into between the parties on January 15, 1981. This agreement purported to govern the conduct of the annual meeting of the Association for which the proxies were being solicited, and to govern the tabulation of the proxies. Pursuant to this agreement, the accounting firm of Peat, Marwick, Mitchell & Co. was selected as the inspectors of election. The annual meeting of the Association was held on January 21,1981. At this meeting, votes of the members (including the proxies) were cast for the election of directors. In late January, prior to the tabulation of the votes cast at the annual meeting, plaintiffs instituted this action. Plaintiffs contended that the proxy materials of the Edwards group had been materially misleading in violation of the relevant federal regulations. Plaintiffs sought an injunction halting the tabulation of votes, asserting that a continuation of the count would be unnecessarily expensive in view of the fact that the election was tainted. This court found that any harm caused by the allegedly tainted election was not irreparable, and did not outweigh the possible harm to the Association that could be caused by an injunction. Accordingly, the court denied plaintiffs’ request for injunctive relief. After a tally of the votes cast at the annual meeting, it was determined that the Edwards group had prevailed in the proxy contest, and the slate of directors proposed by that group was elected. As a consequence of this election, plaintiff Hanger was ousted from the Board of Directors and the Edwards group took control of the Association. Plaintiffs proceeded with this action, continuing to maintain that the proxy solicitation materials of the Edwards faction were materially false and misleading. Specifically, plaintiffs argue that the Edwards solicitation is materially misleading in that it conveys the impression that it is the official solicitation of the Association, implying approval by the Board of Directors. Plaintiffs contend that this impression is misleading because at the time of the proxy solicitation, neither group could represent itself as officially representing the Association. Both groups were composed of two directors, as well as key officers of the Association. Plaintiffs further seek relief for what they assert to be a breach of fiduciary duty by the Edwards group. Plaintiffs state that defendants Edwards and Cotsakis breached their fiduciary duty to the Association by causing the Association to reimburse the Edwards group for expenses incurred in connection with the proxy solicitation and this litigation without prior approval of the Board of Directors. As relief, plaintiffs are no longer seeking to have the court order a re-solicitation of proxies. Rather, plaintiffs suggest that more appropriate relief would be to restore the Board to its status quo prior to the proxy contest and for the court to fill the vacancies on the board from a slate of nominees proffered by the parties. With regard to the alleged breach of a fiduciary duty, plaintiffs seek to have the Edwards group to repay the Association the amounts paid from Association funds in connection with the proxy contest. Defendants defend this action on several fronts. They argue that the Edwards materials are not materially misleading in view of the facts and circumstances of this case.' They decry the application of cases arising under the federal securities laws regarding the misleading and material nature of proxy materials. Defendants assert that the standards under the regulations applicable to this case are different than those applicable to securities actions, and that their proxy materials were adequate under these different standards. Defendants also offer several affirmative defenses which they contend bar plaintiffs from prevailing. It is argued that plaintiffs have unclean hands in this action for equitable relief in view of several allegedly misleading aspects of plaintiffs own proxy solicitation materials. Defendants also assert that plaintiffs have no private right of action under the applicable regulations to bring this action. Other affirmative defenses include the doctrine of equitable estoppel and the doctrine of primary jurisdiction. Defendants have also filed a counterclaim against plaintiffs for losses incurred by the Association as a result of plaintiffs’ initiation of the proxy contest. Specific findings relating to the above chronology of events will be discussed more fully in connection with the legal claims to which they relate. B. Jurisdictional Defenses The court will initially address the defendants’ contention that plaintiffs do not have a private right of action under the applicable regulations. Several courts have held that a private right of action exists for violations of the Home Owners’ Loan Act of 1933 and the FHLBB’s regulations promulgated thereunder. Eg., Milberg v. Lawrence Cedarhurst Federal and Savings Loan Association, 496 F.2d 523 (2d Cir. 1974); Murphy v. Colonial Federal Savings and Loan Association, 388 F.2d 609 (2d Cir. 1967). See also Gibson v. First Federal Savings and Loan Association of Detroit, 504 F.2d 826 (6th Cir. 1974); City Federal Savings and Loan Association v. Crowley, 393 F.Supp. 644 (E.D.Wis.1975). Defendants argue that the results in these cases would be changed by the recent Supreme Court decisions in Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 100 S.Ct. 242, 62 L.Ed.2d 146 (1979), and Touche Ross & Company v. Redington, 442 U.S. 560, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979). It is .their position that these eases mandate the application of stricter standards for implied private rights of action under federal statutes. In Touche Ross & Company v. Redington, supra, the Court held that there was no implied cause of action for damages under § 17(a) of the Securities Exchange Act of 1934 (“1934 Act”), 15 U.S.C. § 78q(a). Section 17(a) requires certain broker-dealers to maintain such records and file such reports as prescribed by the Securities and Exchange Commission (“SEC”). The Court based its decision not to imply a private right of action on what it perceived to be the congressional intent. In divining the congressional intent, the Court noted that § 17(a) merely imposes a record-keeping and reporting requirement on the regulated businesses. The Court found that the purpose of these requirements is to assist the SEC in its regulatory functions and that a private right of action is not necessary to effectuate this purpose. The Court supported its decision by noting that certain provisions of the 1934 Act include explicit grants of private rights of action. In Transamerica Mortgage Advisors, Inc. (“TAMA”) v. Lewis, supra, the Court addressed the question of whether a private right of action existed under various provisions of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-1 et seq. The Court held that § 215 of the Act, 15 U.S.C. § 80b-15, which declares certain kinds of contracts void, did create a limited right of action for purposes of rescinding such contracts or enjoining the operation of such contracts, and for restitution. Conversely, the Court held that § 206 of the Act, 15 U.S.C. § 80b-6, which proscribed certain kinds of conduct by investment advisors, did not create a private right of action for monetary damages. As in Touche Ross, the basis of the decision as to both provisions of the Investment Advisors Act was the Court’s perception of congressional intent. After careful consideration, this court is of the opinion that the decisions in Touche Ross and Transamerica do not alter the result of prior cases holding that a private right of action exists under the Homeowner’s Loan Act and regulations thereunder. The court concludes that the congressional intent was to create a private right of action under this statute and its regulations. By a 1974 amendment to § 12(i) of the 1934 Act, Congress directed the FHLBB to “issue substantially similar regulations to regulations and rules issued by the [Securities and Exchange Commission] ...” for purposes of enforcing certain provisions of the 1934 Act, including the proxy solicitation provisions, against institutions insured by the Federal Savings and Loan Insurance Corporation (“FSLIC”). 15 U.S.C. § 787 (i). Pursuant thereto, the FHLBB promulgated 12 C.F.R. § 563d.1, which adopted certain SEC regulations, including the regulations regarding proxy solicitations, as the regulations of the FHLBB. Thus, by virtue of the 1974 amendment to § 12(i) of the 1934 Act, Congress expressed its intent that federally insured savings and loan associations be governed in connection with proxy contests by rules similar to those applicable to proxy contests under the 1934 Act. At the time of the 1974 amendment, the Supreme Court had implied a private cause of action under § 14(a) of the 1934 Act and Rule 14a-9(a) promulgated thereunder, for improper proxy solicitations. See Mills v. Electric Auto-Lite Company, 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970); J. I. Case Company v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964). It is a reasonable assumption that Congress was aware that a private right of action existed under the SEC’s proxy solicitation rules at the time it directed the FHLBB to promulgate similar rules. Accordingly, it is logical to assume that Congress intended a private right of action to exist under FHLBB rules. The court’s conclusion that a private . right of action exists under the Act and the regulations applicable to this case is buttressed by the fact that at least one of the decisions finding the existence of the private right of action prior to the . recent Supreme Court cases did, indeed, allude to congressional intent. In Murphy v. Colonial Federal Savings and Loan Association, supra, Judge Friendly rejected an argument that the vesting of powers in the FHLBB regarding enforcement of certain provisions of the Act precluded court action by parties attempting to enforce those same provisions. In rejecting this argument, Judge Friendly stated in a footnote that “It seems much more likely that Congress intended parties to be able to pursue their ordinary remedies in the courts, ...” rather than bring an action against the FHLBB. 388 F.2d at 613, n.5. Similarly, this court concludes that it is likely that Congress intended parties to be able to pursue ordinary court remedies to redress the violations of the rules governing proxy solicitations promulgated by the FHLBB. Congress apparently recognized that private actions would be brought under the Homeowners Loan Act. In § 5(d)(1) of the Act, Congress stated that the FHLBB would “be subject to suit (other than suits on claims for money damages) by any federal savings and loan association or director or officer thereof with respect to any matter under this section or other applicable law, or rules and regulations thereunder, ....” 12 U.S.C. § 1464(d)(1) (emphasis implied). This section apparently contemplates that private actions would be brought to effectuate the purposes of the Homeowners Loan Act. There is no indication that Congress did not envision private actions when the FHLBB is not a party. It should be noted that the existence of a private right of action under a particular statute is determined primarily by analyzing the statute for purposes of determining congressional intent. See Crane Co. v. Harsco Corp., supra. Thus, such a determination can only be made on a statute-by-statute basis. A holding that Congress did not intend a private right of action under a particular statute does not necessarily mean that such an action was not intended under an entirely dissimilar statute. For the reasons set forth above, the court concludes that plaintiffs have a private right of action to enforce alleged violations of the Homeowners Loan Act of 1933, and the regulations promulgated thereunder. Defendants also argue that this action is barred by the doctrine of primary jurisdiction. Generally, that doctrine requires the submission of an issue to the relevant federal agency for an administrative determination prior to seeking judicial relief. However, the court holds that that doctrine does not bar the instant action. All proxy solicitation materials were submitted to the FHLBB prior to being mailed out, and that agency had an opportunity to act on any violations contained therein. Thus, as the FHLBB did have an opportunity to act on the alleged violations, plaintiff’s failure to resubmit their claims to the FHLBB is not a bar to this action. See Milberg v. Lawrence Cedarhurst Federal Savings and Loan Association, supra; Murphy v. Colonial Federal Savings and Loan Association, supra; pity Federal Savings and Loan Association v. Prowley, supra. Having now determined that plaintiffs do have the right to bring a private cause of action to remedy the violations complained of in this action, the court will now address the merits of their case. C. Proxy Materials of the Edwards Group Plaintiffs’ primary claim in this action is that the materials used by the Edwards’ group in connection with the solicitation of proxies were materially false and misleading in violation of applicable federal regulations. Specifically, plaintiffs seek relief under 12 C.F.R. § 545.28 and 12 C.F.R. § 569.4. 12 C.F.R. § 545.28 was promulgated by the FHLBB pursuant to the Federal Home Owners Loan Act of 1933, as amended, 12 U.S.C. § 1461 et seq. and reads in relevant part as follows: (c) Right of communication with other members. A member of a federal mutual association has the right to communicate ... with other members of the association regarding any matter related to the association’s affairs, except for improper communications as defined in paragraph (e) ... (e) Improper communications. A communication is an “improper communication” if it contains material which (1) at the time and in the light of the circumstances under which it is made (i) is false or misleading with respect to any material fact or (ii) omits a material fact necessary to make the statements therein not false or misleading, or necessary to correct a statement in ¿n earlier communication on the same subject which has become false or misleading. 12 C.F.R. § 569.4 was promulgated pursuant to the National Housing Act, 12 U.S.C. § 1701 et seq. That regulation provides in part as follows: No solicitation of a proxy shall be made by means of any statement, form of proxy, notice of meeting, or other communication, written or oral, which: (c) (1) contains any statement that is false or misleading with respect to any material fact or (2) omits to state any material fact (i) necessary in order to make the statements therein not false or misleading or (ii) necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter that has subsequently becoihe false or misleading. In substance, both regulations prohibit the use of materially false or misleading information in proxy solicitations. Plaintiffs contend that these regulations were violated by the Edwards group in that their solicitation materials conveyed the impression that it was the official solicitation of Peachtree Federal. Plaintiffs argue that since the competing factions in the proxy contest were both composed of members of an equally divided Board of Directors, as well as officers of the Association, the materials of neither faction could be cast as the official solicitation of the Association. Plaintiffs assert that defendants’ depiction of their materials as those of the Association influenced the voting decision of members of the Association, and tainted the election. Defendants deny that their proxy materials were misleading. They assert that the central issue in the proxy contest was the relative merit of the management philosophies of the two groups, and that all information relevant to this issue was clearly and fairly set forth. Defendants also point to the fact that the proxy materials of the King group make several references to “management.” It is defendants’ position that their proxy materials are not false and misleading when considered in light of the surrounding facts and circumstances. Although defendants’ argument is appealing, a close analysis leads to a contrary conclusion. The 1971 decision in Dillon v. Berg, 326 F.Supp. 1214 (D.Del.), aff’d 453 F.2d 876 (3rd Cir. 1971), decided under Securities Exchange Act of 1934, is instructive. Dillon involved a proxy contest in which one of two competing factions represented itself as speaking for management. The Court held those representations to be misleading because less than a majority of the Board of Directors had approved the materials. The Court stated that “Representing the proxy materials as ‘management’ and designating [defendants’ nominees to the board] as ‘management’ nominees amounted to misstatements ...” 326 F.Supp. at 1234. Based in part on these misleading statements, the Court set aside the proxy results and ordered a re-solicitation. The re-solicitation of proxies also resulted in litigation. See National Home Products, Inc. v. Gray, 416 F.Supp. 1293 (D.Del.1976). In the second case, the Court was faced, inter alia, with a contention that the proxy materials of one group were misleading because they gave an unwarranted connotation of managerial and judicial approval. The Court held that the subject proxy materials did convey a misimpression regarding managerial and judicial approval, and were thus misleading. The Court stated that under the circumstances of that' case, “it was incumbent upon those issuing proxy materials ... to clearly and compactly disclose their identity ...” 416 F.Supp. at 1319. After consideration of the evidence and the relevant law, the court concludes that the proxy solicitation materials employed by the Edwards group in this case were materially misleading. The general tenor of these materials clearly gave the impression that it was the official solicitation of the Association. The misleading nature of these materials is demonstrated by the title: “STATEMENT OF MANAGEMENT WITH RESPECT TO SOLICITATION OF PROXIES FOR 1981 ANNUAL MEETING.” Further, the Edwards group describes its nominees to the Board as having been selected by “the nominating committee of the Board of Directors .... ” The materials further state that “this statement is provided in connection with the management's request for proxies ....’’ Also, the statement declared that it was “the understanding of management that proxies ... are also being solicited by Mr. D. Kimbrough King.” The conclusion that the above statements gave the impression that the Edwards materials were the official solicitation of the Association is inescapable. The tone of this proxy solicitation statement, particularly the constant reference to it being management’s statement, would lead to the conclusion that it was the official solicitation of the Association as approved by the Board of Directors. As both factions were composed of an equal number of members of the Board of Directors, as well as officers of the Association, it is highly misleading for the materials of one group to be passed off as the official solicitation of the Association. At no point does the Edwards materials describe the equal division of the Board or the fact that the King faction also included certain officers and directors of the Association. The court thus concludes that the Edwards materials were false and misleading in violation of the applicable regulations. The materiality of the misleading statements is clear. The leading case on this question is TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976). In that case, the Supreme Court held that a fact was material “if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” 426 U.S. at 449, 96 S.Ct. at 2132. There is a substantial likelihood that a reasonable member of the Association would consider it important in deciding how to vote if he thought that his proxy was being solicited officially on behalf of the Association. Hence, the court concludes that the misleading aspect of the Edwards’ materials meets the Northway test of materiality. The court’s decision is supported by the testimony of plaintiffs’ expert, Mr. Oliver Lee. Mr. Lee, currently engaged in the private practice of law, was an attorney for the SEC for approximately six years. He performed a variety of services for the commission, including approximately one year as special counsel and legal assistant to one of the SEC commissioners. In rendering his opinion, Mr. Lee was asked to assume that neither faction had the authority to represent itself as the official soliciting agent of the Association. He opined that the Edwards materials appeared to be the official solicitation of the Association, and based on the above assumption, that they were materially false and misleading. Although the defendants question Mr. Lee’s ability to render an opinion as to FHLBB regulations, the court finds his testimony to be probative. The court’s conclusion is also supported by other testimony in the case. Mr. Benjamin Blackman, III, one of the newly elected directors, testified by deposition that the Edwards’ materials appeared to be an official solicitation on behalf of the current management of Peachtree Federal. Similarly, Dr. David Rochester, an economist called as an expert witness by defendants, testified that the Edwards’ materials were a solicitation on behalf of the Association. However, the supervisory agent of the FHLBB that participated in the review of the proxy solicitation materials testified that neither faction had the authority to represent its solicitation as being the board’s official solicitation. This testimonial evidence clearly supports the court’s conclusion. D. The Unauthorized Reimbursements Plaintiffs also filed a claim against the Edwards’ faction based on an alleged breach of fiduciary duty. It is asserted that defendants breached their fiduciary duties by requiring the Association to reimburse or directly pay their expenses incurred in connection with the proxy contest without proper authorization. Defendants admit that they caused the Association to pay the expenses of conducting their proxy solicitation before receiving Board authorization. However, defendants claim that the payment was justified in that it was authorized by the FHLBB and subsequently ratified by the Board of Directors. The court finds this argument unconvincing. The proxy solicitation by the Edwards’ group was a personal effort as opposed to an effort on behalf of the Association. The solicitation was based on their desire to have their slate of candidates elected to the board of directors. Hence, the expenses of the solicitation were personal obligations of the solicitors, and not obligations of the Association. It is well settled that the funds of an entity cannot be used to satisfy personal obligations of an officer. Garner v. First National City Bank, 465 F.Supp. 372 (S.D.N.Y.1979); Corbin v. Corbin, 429 F.Supp. 276 (N.D.Ga.1977). It is no defense that the FHLBB authorized the payments, as there is no statutory or regulatory authority for the FHLBB to authorize expenditures of Association funds in that manner. Moreover, the court is of the opinion that the subsequent ratification by the Board, which was based in part on the FHLBB authorization, would be ineffective to make those payments valid. For the foregoing reasons, the court concludes that the actions of Edwards and Cotsakis in causing the Association to pay their expenses incurred in connection with the proxy contest were not properly authorized. See Moran v. Edson, 493 F.2d 400 (3rd Cir. 1974). E. The Doctrine of Unclean Hands The court has determined in the preceding section that the Edwards proxy materials are in violation of applicable law. Now, the court must determine whether plaintiffs are guilty of unclean hands and, if so, whether it bars them from prevailing. It is generally recognized that when a party seeking equitable relief is itself guilty of a violation of law or general equitable principles, the doctrine of unclean hands allows the court to withhold relief to the extent it deems appropriate. The doctrine is applicable in a private lawsuit for the violation of proxy regulations where the party seeking relief is also guilty of wrongdoing in the proxy contest. See, e.g., Chris-Craft Industries, Inc. v. Independent Stockholders Committee, 354 F.Supp. 895 (D.Del.1973); Gaudiosi v. Franklin, 166 F.Supp. 353 (D.C.Pa.1958). This doctrine has been recognized and applied in the Fifth Circuit. See Wolf v. Frank, 477 F.2d 467 (5th Cir. 1973), cert. denied, 414 U.S. 975, 94 S.Ct. 287, 38 L.Ed.2d 218 (1973). The defendants strongly argue that if the court were to apply a pure disclosure standard to the various proxy materials at issue in this case, the King materials would clearly be deficient. Defendants further assert that the King materials are in violation of FHLBB regulations in numerous significant respects. Thus, the defendants assert, even if the Edwards’ materials are found to be legally deficient, it would be clearly inequitable for the plaintiffs to prevail in this case. In response to this defense, the plaintiffs assert that the doctrine of unclean hands is clearly inapplicable to the facts of this case. The plaintiffs correctly point out that the defendants have the burden of proof as to the essential element of the unclean hands defense. In resolving this phase of the case the court will address two aspects of the unclean hands defense. First, the court will address the validity of the King proxy materials with regard to the claims of the defendants.' Secondly, the court will address the propriety of conducting a proxy contest under the circumstances then existing. 1. The King Proxy Materials The King proxy materials consisted of a printed document divided into two parts, an introductory statement consisting of two pages and a proxy statement comprising approximately four and one half pages. These materials indicated that three officers or directors of the association had formed a “Peachtree Federal Members Protective Committee” to solicit proxies for the upcoming annual meeting. It was stated that the committee consisted of William A. Hanger, a director of the Association, John C. j ackson, treasurer of the Association, and D. Kimbrough King, secretary and director of the Association. In summary, the defendants contend that the King proxy materials violated applicable law and regulations in the following particulars: the violation of 12 C.F.R. § 569-2(c); misrepresentations regarding losses of the Association and the failure to disclose the supervisory agreement; the failure to disclose the McLennan relationship; the failure to disclose Mr. Bradbury’s lack of consent to serve on the Board; the failure to disclose the withdrawal of FHLBB’s approval of King solicitation; the failure to disclose the intentions of the King group to discharge the chief loan officer; nondisclosure of the Home Federal Merger negotiations and the Peach State proposal; the failure to disclose the circumstances of the Ivy and Mitchell resignations; and the misleading character of the “suggestions” in the King materials. Plaintiffs admit to two deficiencies in their proxy statement. The plaintiffs, concede that they were technically in violation of 12 C.F.R. § 569.2(c), which mandates that the proxy be clearly labeled “Revocable Proxy” in boldface type. However, plaintiffs point out that their statement did contain language and details explaining the revocability of the proxy in the body of the materials. The. general counsel of the FHLBB, in ruling on the matter, expressed the opinion that the omission of the words “revocable proxy” did not constitute a “material enough” omission to bar the materials. The plaintiffs also concede that Mr. Jackson had not officially held the title of treasurer of the Association since August of 1976, as indicated in the King proxy materials. The court concludes that while there might be some ambiguity relating to the period of Jackson’s tenure as treasurer, any misleading communications resulting from this confusion would not be material. It is the court’s opinion that neither of the above claimed violations would meet the North-way definition of materiality. Defendants also assert that the King materials were materially misleading in that they contained misrepresentations regarding losses of the Association and failed to disclose the existence of the supervisory agreement. It is not disputed that one of the basic issues of the proxy contest was whether the Edwards’ management policies and philosophies should be continued or whether the changes advocated by the .King group should be adopted. The proposals of the King group included the firing of Mr. Edwards as president of the Association. The court concludes that the King materials may be fairly read to imply that the Association had suffered losses during the years preceding the proxy contest and that such losses were mainly attributable to the poor management of Mr. Edwards as president. Such an implication is materially misleading. The misleading nature of the materials is compounded by the fact that the King materials failed to mention the FHLBB supervisory agreement under which the Association operated from the spring of 1975 through the first three months of fiscal year 1980. In this connection, the following statements from pages one and two of the King introductory statement are noteworthy: ... [W]e believe better management could have improved your association’s performance ... ... [Management has not responded satisfactorily to the board’s request for proposals; [Management policies which produced losses in the protective environment of the past would be worse in competitive markets of the future. [W]hile we intend to preserve jobs of association employees, if we are successful, we intend to hire a new president for the association (emphasis supplied). It is perhaps true that one or more of the above-quoted statements standing alone would be innocuous. However, when read together in the context of the King proxy materials, these. statements and their resulting inferences are materially false and misleading. Since Mr. Edwards was not elected president until May of 1975, his management policies could not be solely responsible for losses for fiscal year 1975, as he was president for only the last four months of that fiscal year. In each of the next four consecutive fiscal years of the Association (1976, 1977, 1978 and 1979), the Association realized net profits. The Association did realize a loss for fiscal year 1980 which could be partially attributed to Mr. Edwards’ management policies, but these losses could also be attributed to a general decline in the savings and loan industry. The King materials imply that the Association had been suffering a continuous series of losses due to Edwards’ management. This implication is simply not supported by the facts. Moreover, the King materials failed to disclose information necessary to make the statements made not misleading. A very important disclosure item when discussing the losses of the Association is the fact that the Association was subjected to a supervisory agreement by the FHLBB from the spring of 1975 to the first three months of fiscal year 1980. The supervisory agreement was imposed due to losses which occurred prior to the time of Mr. Edwards’ involvement as a member of the Board or as president of the Association, a fact that was not disclosed by the King materials. It is beyond debate that the imposition of a supervisory agreement is a drastic arrangement imposed upon an association when its net worth falls below regulatory levels. The supervisory agreement imposed on Peachtree Federal mandated substantial restrictions on the investment activities of the Association during a period of highly volatile market conditions, including escalating interest rates. The testimony of defendants’ expert, Dr. Rochester, and the report of his company, Kaplan, Smith & Associates, Inc., reveals the significant influence of the supervisory agreement upon the Association’s performance. The following extract from this report is noteworthy: ... Peachtree Federal’s performance was severely hampered by a supervisory agreement imposed upon the association about mid-1975 that constrained the ability of management to carry out its policies since policies of management had to be approved by the supervisory agent. The record shows that the constraints placed upon Peachtree Federal especially put it in a non-competitive position in raising funds through long-term certificates from about mid-1975 through much of 1978. While there is room for differences of opinion as to the actual impact of the supervisory agreement on the Association’s operation, the court concludes that it was a substantial factor in restricting management options and activities and thus hampered the performance of the Association during a substantial portion of the period to which the criticisms of the King materials are directed. In so ruling, the court is not concluding that the mere failure to mention the supervisory agreement in the King materials was a material omission standing alone. Rather, the failure to disclose the existence of the supervisory agreement, coupled with other representations as to the cause of losses constitutes a fatal defect and violates the FHLBB regulations cited above regarding communications with members and proxy solicitations. Defendants also contend that it was materially misleading for plaintiffs not to disclose the relationship of Mr. Alex McLennan to the plaintiffs and to this litigation. As discussed above, Mr. McLennan was the principal organizer of the Association, and served as Chairman of its Board of Directors from 1948 through 1977. At the time of the proxy contest, he was serving as the Association’s general counsel, from which he derived a substantial portion of his legal income. Defendants argue that from its inception, the Board of Directors of Peachtree Federal had been comprised largely of relatives and close business associates of Mr. McLennan. The evidence revealed that Mr. King is Mr. McLennan’s son-in-law and that Mr. Hanger is Mr. McLennan’s brother-in-law. The defendants point out that Mr. McLennan’s interest in the proxy contest was confirmed by the fact that he made a loan of at least $50,000.00 to Mr. King to finance this litigation. Defendants assert that it would have been important for members of the Association to know the relationship of the King group to Mr. McLennan because of the fact that he derives a substantial portion of his income from the Association, and because of his past influence over the affairs of the Association. As pointed out in another section of this opinion, defendants strongly contend that the proxy contest was principally initiated because of a dispute between the Edwards’ group and the King group over legal fees to be paid to Mr. McLennan. The Edwards’ proxy materials appear to imply that because of the relationship to Mr. McLennan, Mr. Hanger, and Mr. King, as well as their Board nominees, might be less than independent in exercising judgment in the conduct of the affairs of the Association. This implication is not borne out by the evidence. The nominees other than Hanger named in the King proxy materials, while friends or associates of Mr. King, were not relatives or business associates of Mr. McLennan. They were relatively young, engaged in various enterprises, and appeared to be of independent minds. In view of the foregoing, the court concludes that the failure of the King materials to disclose the family relationship between Messrs. McLennan, King, and Hanger was not a material omission. It is clear that McLennan previously had substantial influence over the operations of the Association, and possessed a definite financial interest in the Association. There is no question that he has made numerous contributions to the development and success of Peachtree Federal. However, the evidence does not establish that the King group was merely the alter ego of Mr. McLennan, or that Mr. McLennan was in fact the principal unnamed moving force of the King group. Despite the defendants’ suggestions throughout the course of the trial, the evidence presented is simply insufficient to support such a finding. We now turn to defendants’ contention that the failure of the King materials to disclose the withdrawal of FHLBB approval of the King proxy solicitation rendered the King materials false and materially misleading. In this connection, the defendants argue that any proxy contest was to be conducted on a contractual arrangement with the FHLBB which expressly provided for prior approval of proxy materials by the FHLBB. Mr. Zimmerman, a supervisory agent of the FHLBB, testified that the intent of the agreement was to place the proxy contest under the control of the FHLBB. Accordingly, the solicitation of proxies by both groups was subject to conditions set forth in letters to Mr. King and to Mr. Edwards’ attorney. In accordance with these letters, the proxy materials of both groups were submitted to FHLBB, were re-written to address concerns of such officials, and in effect, the materials of both groups were “approved” for submission to the members. The FHLBB subsequently came to the conclusion that a proxy contest was not in the best interest of Peachtree Federal or the savings and loan industry in general. Unfortunately, efforts to prevail upon the competing groups to compromise were not successful. Upon learning that the King group was determined to go forth with the proxy solicitation, a letter dated January 2, 1981 to Mr. King’s attorney from Mr. Connell stated that “We are 'withdrawing our consent to your client’s request to mail the prepared material.” While it clearly appears that the efforts and concern of the supervising agents in question were genuine and sincere, the court concludes that they were without legal authority to “withdraw their consent” to the mailing of proxy materials. Members of the Association, including Mr. King and Mr. Edwards, have the full right to communicate with fellow members of the Association, including the mailing out of proxy materials, as long as such communications are not improper. 12 C.F.R. § 545.28. The FHLBB does not have to consent to any such mailing. Since the withdrawal of consent was legally meaningless, there was no obligation to disclose it. For the foregoing reasons, the court concludes that the failure of the King group to disclose the withdrawal of approval by the FHLBB did not render the King materials materially false and misleading. The actions of the supervisory agents might be of significance, however, in dealing with the propriety of conducting a proxy contest (discussed below). The court has considered the remaining contentions made by the defendants as to representations or omissions which render the King proxy materials false and misleading in various particulars. The court hereby concludes that none of the other assertions are sufficiently misleading or material to render the King materials in violation of applicable FHLBB regulations. However, some of these contentions may have significance to other matters covered in this opinion. 2. Propriety of Conducting the Proxy Contest. Throughout the litigation, the defendants have strongly argued that the proxy contest was initiated and maintained by the King group in disregard for the safety and soundness of Peachtree Federal. The defendants state that the deadlock on the Board of Directors was engineered by the plaintiffs by forcing directors they could not control off the Board (Ivey and Mitchell). Further, the defendants contend that the proxy contest was initiated in violation of the letter agreement with the FHLBB. Defendants also argue that as officers and directors of the Association, plaintiffs breached a fiduciary duty owed to the Association not to initiate an unauthorized or improper proxy contest with full knowledge that to do so would in all probability result in substantial savings outflows from the Association. Plaintiffs assert that they did not initiate the proxy contest. They state that the point which fixed the positions of the parties almost irreconcilably was on December 8, 1980, when the nominating committee appointed by Mr. Edwards made it clear that Mr. Hanger would not be renominated to the Board. It was allegedly unprecedented for a sitting director not to be renominated. Plaintiffs argue that this event, together with other differences, including the division over the retention of Mr. Edwards as President, left the two factions with the almost inevitable prospect of a proxy solicitation contest. The court is mindful that the position of the defendants regarding the propriety of the proxy contest are mainly set forth in the counterclaim, but the court feels that the subject matter is of such a nature as to be relevant to a consideration of whether the plaintiffs were guilty of unclean hands. It is clear from the evidence that the resignations of Mr. Ivey in September, 1980, and Dr. Mitchell in December, 1980 reduced the membership on the Board of Directors of the Association to four, thereby resulting in a situation where a deadlock on major issues was likely. The court is of the opinion that only the resignation of Dr. Mitchell is directly relevant to a discussion of the propriety of the proxy contest. The evidence indicates that Mr. King had diligently sought the support of Dr. Mitchell in his efforts to oust Mr. Edwards as President of the Association. However, Dr. Mitchell had declined, feeling that no justification had been shown for firing Mr. Edwards. On December 5, 1980, Mr. King visited Dr. Mitchell in his office and confronted him with an opinion from a lawyer stating that a particular out of state loan transaction was in violation of rules and policies of the Association, and that anyone connected with the transaction would be sued. Mr. King stated that the proposed suit would be dropped if Mr. Edwards was fired. Dr. Mitchell testified that while he did not feel threatened, the pressure placed on him to get rid of Mr. Edwards made him uncomfortable and the prospect of being involved in a lawsuit was enough for him to accept his son’s advice to resign from the Board. Thus, on February 5, 1980 Dr. Mitchell submitted his letter of resignation to the Board. It further appears that on the same day, Mr. King confronted Mr. Cotsakis with the legal opinion concerning the loan transaction, suggesting that he might be subject to a lawsuit because of his involvement with that transaction. Mr. King told Cotsakis that if he would vote to fire Mr. Edwards as President, the lawsuit would not be necessary. Cotsakis would not join the efforts to fire Mr. Edwards. Later, Mr. King presented the proposal to file suit regarding the subject transaction to the Board, and the vote on that proposition was predictably deadlocked. While the evidence is insufficient to support the original position of the defendants that Mr. King confronted Dr. Mitchell in order to force him off the Board thereby creating a deadlock, it does establish that the confrontation prompted Dr. Mitchell to resign. With the resignation of Dr. Mitchell and the refusal of Mr. Cotsakis to join the effort to oust Mr. Edwards, the die was cast for the proxy contest on December 5, 1980. This series of events, more than any other single factor, led to the proxy solicitation contest in this case. The court has ruled above that the consent of the FHLBB was not necessary for the King group to communicate with the members of the Association. On the other hand, the failure of the King group to acquiesce in the FHLBB’s request not to mail their proxy materials might be of significance in determining the propriety of continuing the proxy contest. It is clear that the Edwards group stood ready to postpone the proxy contest and to seek further compromises in early January of 1981. However, the King group rejected the compromise efforts and proceeded to mail their materials. In all fairness to the King group, the court recognizes that time was of the essence in that the bylaws of the Association provided that all proxies must have been received five days before the annual meeting at 4:00 p. m., January 21, 1981. All facts and circumstances considered, however, the court is of the opinion that postponement of the contest and a reasonable attempt to compromise was a viable alternative to conducting a proxy contest at the time, particularly in view of the financial condition of the Association. The court does not conclude that the King group was in any way legally barred from commencing and continuing the proxy contest. To so rule would have the effect of holding that proxy contests might be legal during good economic times, but not during bad times. The court knows of no legal authorities supporting such a position. The court simply concludes that given the facts and circumstances of this case, the decision of the King group to go forward with the proxy contest over the objections of the relevant regulatory agency is a fact that bears on the court’s determination of whether plaintiffs have clean hands for purposes of equity. In view of the foregoing findings regarding the King proxy materials, the circumstances leading to the proxy contest, and the propriety of the proxy contest, the court concludes that the plaintiffs are guilty of unclean hands. F. Counterclaim Defendants have filed a counterclaim seeking to recover damages resulting from plaintiffs’ commencement of the proxy contest. In essence, defendants argue that plaintiffs instituted this action in violation of an agreement not to mail their proxy materials without FHLBB approval. Defendants further assert that plaintiffs breached their fiduciary duty to the Association by commencing the action with kno vledge that it could cause substantial harm to the Association. Approximately four million dollars ($4,000,000.00) is sought as damages resulting from the proxy contest. After due consideration, the court concludes that defendants cannot recover on their counterclaim. The evidence in the case will not support a conclusion that plaintiffs breached any agreement with the FHLBB by instituting the proxy solicitation. Also, the evidence will not support a finding that plaintiffs breached their fiduciary duty. Although the court has found above that plaintiffs were guilty of unclean hands partly because of the commencement of the proxy solicitation contest, the court does not conclude that this constituted a breach of their fiduciary duty. Further, while the evidence is sufficient to show that there was some savings outflow resulting from the proxy contest, it is insufficient to show the exact amount. Any award of damages on this ground could only be based on speculation and conjecture, which is not allowed by the law. III. Remedies It is generally well settled that federal courts may employ broad equitable powers in shaping appropriate relief. E.g., Walters v. Marathon Oil Company, 642 F.2d 1098 (7th Cir. 1981); Sargent v. Genesco, Inc., 458 F.2d 9 (5th Cir. 1972). In a case involving the use of defective proxy statements, this would include the power to void an election and order a re-solicitation of proxies. See Kennecott Copper Corporation v. Curtiss-Wright Corp., 584 F.2d 1195 (2nd Cir. 1978); Plant Industries, Inc. v. Bregman, 490 F.Supp. 265 (S.D.N.Y.1980). The court has found the proxy materials of both plaintiffs and defendants in the case sub judice to be defective. Under general principles of equity, including the “doctrine of unclean hands,” it could be appropriate in some circumstances for a court to refuse to grant any relief if both parties are found to be guilty of wrongdoing. See Chris-Craft Industries, Inc. v. Independent Stockholders Committee, 354 F.Supp. 895 (D.Del.1973). However, equitable principles should not be applied when the result would be the frustration of the purposes of federal law. See Mitchell Brothers Film Group v. Cinema Adult Theater, 604 F.2d 852 (5th Cir. 1979) cert. denied 445 U.S. 917, 100 S.Ct. 1277, 63 L.Ed.2d 601; Bertoglio v. Texas International Company, 488 F.Supp. 630 (D.Del.1980). One of the obvious purposes of the proxy solicitation rules violated in this case is to allow the members of federal savings and loan associations to have the benefit of full and fair disclosure of all relevant information before making election decisions. A refusal to grant any relief would frustrate that purpose since the court has found both sets of proxy materials at issue to be defective. The best interests of the members of the Association would not be served by requiring them to continually live with the results of a tainted election. Accordingly, the court is of the opinion that the results of the election of directors at the annual meeting of Peachtree Federal in January of 1981 must be set aside. The parties recognize, and the court agrees, that a re-solicitation of proxies would not be in the best interest of the Association at this time. Plaintiffs suggest that the court order the Board of Directors to be reconstituted as it existed prior to the January, 1981 election, and to appoint interim directors to serve until the 1983 annual meeting of the Board of Directors. The defendants will be given a reasonable period of time after the entry of this opinion to respond to plaintiffs’ proposal and to proffer any suggestions as to how the Board of Directors should be constituted. It is also necessary for the court to determine an appropriate remedy for the Association’s improper payment of expenses associated with the proxy contest. Pursuant to the court’s ruling above, Edwards and Cotsakis will clearly have to refund payments made by the Association for expenses of the proxy contest exclusive of expenses connected with the defense of this lawsuit. Defendants will be given a reasonable amount of time after the entry of this opinion to show cause why expenses paid by the Association in connection with the defense of this lawsuit should not be refunded. All other relief sought, including plaintiffs’ request for expenses and attorneys’ fees are hereby DENIED. An appropriate order will be entered in accordance with this opinion. FINAL ORDER On April 2, 1982, the court entered a Memorandum Opinion in this case setting forth its findings of fact and conclusions of law. The court simultaneously entered an order directing the parties to submit additional written materials relating to the restructuring of the Board of Directors of Peachtree Federal and the question of whether defendants Cotsakis and Edwards should be required to reimburse the Association for legal fees and expenses paid in defense of this lawsuit. The order also declared that the current members of the Board of Directors were to remain in office until further order of the court. A. Composition of the Board of Directors. Upon due consideration of the contentions presented by the parties, it is hereby ORDERED that the election of directors of Peachtree Federal conducted at the January, 1981, annual meeting be set aside. It is further ORDERED that as of May 10, 1982, the directors elected at the January, 1981, annual meeting be permanently ENJOINED from serving as directors of the Association. The court hereby appoints the following nine (9