Bank of Floyd parent company's lawsuit against former bank executive

IN THE UNITED DISTRICT COURT FOR THEWESTERN DISTRICT OF VIRGINIA

Roanoke Division

CARDINAL BANKSHARESCORPORATION,

Plaintiff,

v.

HENRY A. LOGUE,

Defendant.

SERVE: Henry A. Logue115 Overlook Point Cir.Ridgeland, MS 39157

))))))))))))))

Case No. __________________

JURY TRIAL DEMANDED

VERIFIED COMPLAINT

Plaintiff, Cardinal Bankshares Corporation (hereinafter “Cardinal” or “Plaintiff”),

by its undersigned counsel, submits this Verified Complaint against Defendant Henry A.

Logue (hereinafter “Logue” or “Defendant”) for damages and injunctive relief; and as

grounds therefor states as follows:

NATURE OF COMPLAINT

1. This is an action for breach of contract seeking both money damages and

injunctive relief. On April 3, 2010, Defendant and Cardinal entered into an employment

agreement, whereby Defendant was hired by Cardinal as its Executive Vice President and

as the President of Cardinal’s subsidiary, the Bank of Floyd (the “Bank”). After it was

discovered that Defendant breached his fiduciary duties to Cardinal and the Bank,

Defendant and Cardinal on May 20, 2011 executed a “Change in Employment Status”

Agreement which terminated Defendant’s employment. Defendant has breached his

fiduciary duty and continues to breach the Termination Agreement by taking actions

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detrimental to the Plaintiff and by making, assisting, or causing others to make

disparaging remarks regarding Plaintiff. As a result of Defendant’s breaches, Plaintiff

has suffered and continues to suffer substantial injury.

PARTIES

2. Cardinal is a corporation duly organized and operating under the laws of

the Commonwealth of Virginia with its headquarters and principal place of business

located at 101 Jacksonville Circle, Floyd, Virginia 24091.

3. Logue is a resident of Mississippi. Logue is Cardinal’s former Executive

Vice President and also was employed by the Bank as its President and Chief Executive

Officer from April 3, 2010 to April 30, 2011.

JURISDICTION AND VENUE

4. There is complete diversity of citizenship between Cardinal and Logue,

and the amount in controversy is in excess of $75,000, exclusive of interests and costs.

Thus, this Court has jurisdiction over this action pursuant to 28 U.S.C. § 1332.

5. Venue is proper in this Court pursuant to 28 U.S.C. §1391(a)(2) as a

substantial part of the events or omissions giving rise to the claims occurred in the

Western District of Virginia.

6. This Court has personal jurisdiction over Logue because this action arises

from Logue’s transaction of business in Virginia.

STATEMENT OF FACTS

7. On April 3, 2010, Defendant entered into an employment agreement with

Cardinal pursuant to which he was hired by Cardinal as its Executive Vice President and

as the President of the Bank.


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8. Thereafter, on November 15, 2010, Logue was appointed to the position of

Chief Executive Officer of the Bank, while retaining his title as President of the Bank.

9. In connection with his executive positions with the Bank and Cardinal,

Logue was entrusted with, obtained knowledge of, and compiled confidential and

proprietary information about the Bank and Cardinal’s business. This information

included, but is not limited to, the Bank and/or Cardinal’s loan portfolio, the identity and

holdings of Cardinal’s shareholders and other highly sensitive business information, all of

which was treated as confidential by Plaintiff (hereinafter referred to as the “Confidential

Information”).

10. The Defendant’s position with the Bank and Cardinal was one of a

fiduciary and involved a high degree of trust and loyalty.

11. Beginning as early as July 15, 2010, Logue began communicating with

Mr. John Paul Houston (“Houston”). Houston is an owner and officer in Stone, Houston

& Associates, Inc., a seller of financial and insurance products located in Floyd, Virginia

(“SHA”).

12. Without the approval of Cardinal’s Board of Directors (the “Cardinal

Board”), the Bank’s Board of Directors (the “Bank Board”), or Mr. Leon Moore,

President and CEO of Cardinal (“Cardinal’s CEO”), Logue entered into negotiations with

Houston for a “leasing agreement” with SHA and its business affiliate INVEST Financial

Corporation, whereby SHA would provide exclusive securities brokerage and securities

investment advice to Cardinal and Bank customers.

13. Beginning in October 2010, without the approval of the Cardinal Board,

the Bank Board, or Cardinal’s CEO, Defendant began “due diligence” on the SHA


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arrangement. By December 2010, these negotiations had progressed to sharing draft

contracts between SHA and Logue.

14. In October, 2010, Logue contacted a brokerage, investment banking and

financial service business (the “Securities Broker”) regarding the large block of Cardinal

shares then owned by Hot Creek Capital LLC (“Hot Creek”). At the time, Hot Creek

owned 6.04% of Cardinal’s outstanding shares. Logue did not inform the Cardinal Board

or Cardinal’s CEO of this discussion with this Securities Broker.

15. Logue contacted the Securities Broker in the fall of 2010 to discuss the

potential acquisition by a group of investors formed by Logue, and including Logue, of

Hot Creek’s position in Cardinal.

16. In early December, 2010, Logue approached Cardinal’s CEO about

Logue’s interest in moving forward with the acquisition of the Cardinal shares owned by

Hot Creek. Cardinal’s CEO warned Logue that the proposed purchase of shares by or

with the involvement of an executive officer of Cardinal, particularly such a large block

of shares, prior to the public release of the annual financial results of Cardinal would be

illegal and against Cardinal policy.

17. On January 26, 2011, Logue had a meeting with Houston.

18. On January 31, 2011, Houston purchased at least 1,000 shares of Cardinal

stock for $8.90 per share.

19. The next day, on February 1, 2011 just over a month before Cardinal

released to the public its very positive year-end 2010 financial results, Mr. Douglas E.

Schaller (“Schaller”), through his company Schaller Equity Partners, a North Carolina

Limited Partnership (“SEP”), began purchasing Cardinal stock.


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20. On February 2, 2011, Houston wrote to Logue that “you can’t hide good

leadership,” with a quotation of Cardinal’s market price for the day. The same day, SEP

purchased an additional 3,200 Cardinal shares.

21. On February 7, 2011, SEP purchased 73,394 Cardinal shares.

22. On February 8, 2011, Houston asked Logue to lunch.




26. On February 15 and 16, 2011, Houston sold all of the Cardinal shares he

had acquired on January 31, 2011 for approximately $13.50 per share.

27. By the close of business on February 16, 2011, SEP, Schaller and/or the

Schaller Investment Group, Inc. or their related entities, had acquired 128,000 Cardinal

shares or 8.3% of Cardinal’s outstanding stock. Upon information and belief, SEP

between February 1, 2011 and February 16, 2011 purchased all of the Cardinal shares

owned by Hot Creek.

28. Logue was aware of Schaller and SEP’s ownership of Cardinal shares at

least by February 9, 2011, and before any other Cardinal director or executive officer

knew of it.

29. No other director or executive officer of Cardinal was aware of SEP’s

purchase of Cardinal shares until Cardinal’s CEO was informed by Schaller on February

16, 2011 in a telephone call that Schaller had bought a considerable amount of Cardinal

shares and, according to Schaller, had become Cardinal’s largest shareholder.


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30. Upon information and belief, at least by early February, 2011, Logue and

Schaller had discussed this acquisition by Schaller of a substantial block of Cardinal’s

stock and prospective changes in the management, operations and strategic direction of

the Bank and Cardinal as an independent financial institution. These discussions were

conducted without the knowledge or approval of the Cardinal Board, the Bank Board or

Cardinal’s CEO and involved Logue revealing to Schaller Cardinal’s Confidential

Information, including plans for expanding customer services by upgrading online

banking, remote deposit operations, and new branch development; the acquisition of

outside insurance services; expansion of the Bank’s secondary mortgage market program;

the offering of new investment products; and the acquisition of a mortgage company in

Roanoke, Virginia. None of these matters had been disclosed to Cardinal’s other

shareholders or the market.

31. In SEP’s “Second Open Letter to the Shareowners of Cardinal Bankshares

– The Bank of Floyd” dated December 22, 2011, Schaller confirms the nature of these

discussions:

“When Schaller Equity Partners (the “Fund”) invested in the Company,

our interest was very straightforward. We believed that the Bank’s new

President, Mr. Henry Logue, would make strategic changes that could

significantly enhance profitability and pave the way for future growth.”

32. Similarly, Schaller is quoted in the October 3, 2011 issue of The American

Banker as follows (emphasis added):

“Schaller said he started buying Cardinal’s shares in February in hopes

that Logue would spearhead growth.”


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33. Cardinal filed its Report on Form 10-K with the U.S. Securities and

Exchange Commission reporting to the public its very positive year-end 2010 results on

March 10, 2011 – after Schaller’s acquisition of 8.3% of Cardinal’s shares during the

preceding two weeks.

34. As reported in the Roanoke Times on October 16, 2011, SEP had

purchased shares of Cardinal “at a bargain price…in February, 2011.”

35. On February 24, 2011, Hot Creek filed an Amendment to its Form 13G

with the U.S. Securities and Exchange Commission reporting that it had disposed of all of

its Cardinal shares.

36. On or about, March 15, 2011, Logue attended the American Banking

Association’s Government Relations Summit meeting in Washington D.C. (the

“Summit”). While at the Summit, Logue approached the Executive Vice President of

another bank (the “Potential Acquirer”), and raised the subject of, and discussed, a

possible merger or acquisition whereby this Potential Acquirer would purchase the Bank

of Floyd and/or Cardinal.

37. Logue was not authorized by the Cardinal Board, the Bank Board, or

Cardinal’s CEO to initiate or have any discussions with the Potential Acquirer.

38. Logue did not disclose this discussion to the Cardinal Board, the Bank

Board, or Cardinal’s CEO.

39. Logue’s discussion with the Potential Acquirer was in direct violation of

Cardinal and Bank policy and a breach of Sections 8(c)(4) and 8(c)(5) of the Employment

Agreement.


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40. Upon information and belief, Logue asked the executive he contacted at

the Potential Acquirer not to disclose their conversation to anyone.

41. This executive at the Potential Acquirer found Logue’s actions at the

Summit to be highly improper and communicated the substance of the discussion, and its

improper nature, to Cardinal’s CEO.

42. Logue’s actions in discussing possible mergers, acquisitions and takeovers

with the Potential Acquirer were detrimental to the interests of and disparaging to

Cardinal and the Bank and a breach of Logue’s fiduciary duty to those entities.

43. On April 7, 2011, members of the Cardinal Board called a meeting with

Logue. During this meeting, Logue stated that he would never discuss a possible merger

or acquisition involving Cardinal or the Bank with any person or entity without first

advising and receiving authorization from the Cardinal Board.

44. Logue’s statement to the Board on April 7, 2011 was false, and his failure

to disclose his prior conversations with the Potential Acquirer and his conversations with

Houston and Schaller constituted a breach of his fiduciary duty to Cardinal and the Bank.

Although the Cardinal Board became aware of Logue’s approach to the Potential

Acquirer in March, 2011, Logue’s prior discussions with Houston and Schaller remained

unknown to the Cardinal Board and Cardinal’s CEO.

The Termination Agreement

45. As a result of Logue’s actions involving the Potential Acquirer, on May

20, 2011, Logue resigned his employment and entered into a “Change in Employment

Status” Agreement with Cardinal (the “Termination Agreement”); a true and correct copy

of which is attached hereto as Exhibit A.


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46. Pursuant to the Termination Agreement, Logue and Cardinal mutually

agreed to terminate Logue’s employment with Cardinal and the Bank effective April 30,

2011 (the “Termination Date”). (Termination Agreement, Sec. 1.)

47. The terms and conditions of the Termination Agreement prohibit Logue

from continuing any actions or taking any action which is detrimental to any interest of

Cardinal or the Bank. Specifically, Section 11 of the Agreement provides:

Executive [Logue] understands and agrees that he will refrain fromany action which is detrimental to any interest of Cardinal followinghis termination. Consequently, Executive understands and agrees thatthe payments described in this Agreement will not be owed or due toExecutive if he takes any action which is detrimental to the interests ofCardinal at any time from the Termination Date through the date eachremaining severance payment is due or if he otherwise breaches thisAgreement at any time through the date each remaining payment is due.Nothing in this paragraph is intended to waive any legal or equitableremedies Cardinal may have against Executive for any breach of thisAgreement or a violation of duty that Executive owes Cardinal under thisAgreement. (Emphasis added).

48. Section 10 of the Termination Agreement provides that neither party shall

make disparaging comments regarding each other:

The parties agree that they will make no statements that in any waydisparage each other. Executive agrees that he will not make, or causeto be made, any statements that disparage in any way Cardinal, itsemployees, or its operations including but not limited to making,disparaging or detrimental statements or the like, whether verbally, inwriting, or otherwise, to the media, on the Internet, to current or futureclients, employees, or competitors, to any future employers of Executive,or to any other individuals or entities. (Emphasis added).

49. Section 6 of the Termination Agreement provides that Logue shall not

divulge any of Cardinal’s confidential information:

The Executive [Logue] will return to Cardinal, all Cardinal records anddocuments and electronic data relating to Cardinal and Cardinal propertyincluding any keys and computer not later than three (3) days after thedate hereof. Executive further agrees that he will not, without the prior


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written consent of Cardinal, communicate or divulge any secret,confidential or proprietary information, knowledge or data relating toCardinal and its respective businesses which Executive shall haveobtained during his employment and which shall not be public knowledge,except as may be required by law.

50. Finally, Section 13 of the Termination Agreement contains a limited

release by Cardinal. In particular, Cardinal released Logue only from “any charges

against Executive by Cardinal or its subsidiaries for any conversations he may have had

with [Potential Acquirer] regarding a potential acquisition of or merger with Cardinal and

any conversations between Executive and Cardinal and its subsidiaries’ directors,

employees, or others with regard to such conversations.”

51. After entering into the Termination Agreement, Logue has continued to

engage in actions which are detrimental to the interests of Cardinal and the Bank,

including assisting Schaller in making disparaging statements regarding the management

of Cardinal and the Bank.

52. In particular, Logue and Schaller communicated between December 28,

2011 and January 4, 2012.

53. During this time period, Schaller sought input and assistance from Logue

and, upon information and belief, Logue assisted in drafting, provided input, and/or

caused Schaller to make, statements against Cardinal and Cardinal’s Board, including but

not limited to statements referring to the resignation of Logue as a failure of the Cardinal

Board who rather than doing their fiduciary duty to the shareholders and employees were

simply “rubber stamp[ing]” the agenda of Cardinal’s CEO.


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54. Upon information and belief, Logue has continued to communicate with

Houston and Schaller regarding the employees, management and strategic direction of the

Bank and Cardinal.

55. Upon information and belief, Logue also has communicated with Schaller

and Houston in support of an ongoing proxy fight and the removal of Cardinal’s Board,

all actions which are detrimental to the interests of Cardinal and the Bank. These

communications include providing assistance in preparing for public circulation

derogatory communications regarding Cardinal’s management and Board.

56. Upon information and belief, Logue has also been in communication with

at least one Bank employee in regard to the ongoing proxy fight and removal of

Cardinal’s Board and management.

57. Logue’s actions in discussing employees, management and strategic

direction of the Bank and Cardinal as well as taking action with regard to the ongoing

proxy fight and control of the Cardinal Board with Houston and Schaller are detrimental

to the interests of the Bank and Cardinal and are disparaging to those entities, their

operations, employees and the Cardinal Board and the Bank Board.

58. Upon information and belief, Logue has divulged, during and after his

employment with Cardinal and the Bank, the Confidential Information of the Bank and

Cardinal, including by disclosing Confidential Information concerning Cardinal’s

employees, the Bank’s assets and operations to Schaller and Houston.

59. Logue’s actions of disclosing the Bank and Cardinal’s Confidential

Information are detrimental to the interests of the Bank and Cardinal.


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COUNT I: BREACH OF FIDUCIARY DUTY

60. Paragraphs 1 through 59 are incorporated herein by reference as if fully set

forth.

61. After entering into the Termination Agreement, Cardinal discovered

previously undisclosed communications between Logue, Houston and/or Schaller that

preceded the Termination Agreement. These communications concerned Schaller and/or

SEP’s acquisition of Cardinal stock and, upon information and belief, prospective

changes in infrastructure, operations and strategic direction and other Confidential

Information of Cardinal and the Bank.

62. These actions by Logue constituted breaches of the fiduciary duty owed

by him to Cardinal; and to the extent that he disclosed any proprietary information of

Cardinal or the Bank, also violated his obligations under the Employment Agreement.

63. As a direct and proximate result of Logue’s breach of fiduciary duty,

Cardinal has suffered damages and losses which it is entitled to recover from Logue.

64. Plaintiff prays that it be awarded damages in the amount of $250,000.00

plus interest, resulting from the breaches by Logue of his fiduciary duty and Employment

Agreement; and that the Court award against Logue and in favor of Cardinal such other

relief and damages as the Court deems just.

COUNT II: BREACH OF TERMINATION AGREEMENT


forth.


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66. The Termination Agreement prohibits Logue from taking any action

which is detrimental to any interest of the Bank and Cardinal and from making any

disparaging comments about those entities.

67. The Termination agreement prohibits Logue from disclosing any

Confidential Information of the Bank or Cardinal.

68. Logue has breached the Termination Agreement and continues to breach

the Termination Agreement.

69. Logue’s communications with Schaller wherein he assisted or caused

Schaller to make disparaging statements regarding Cardinal and its employees are in

breach of the Termination Agreement.

70. Logue’s conversations with and actions made in support of Houston and

Schaller related to a possible sale or takeover of the Bank and Cardinal and now an

ongoing proxy fight involving Schaller or related entities in pursuit of a change in

control, are a continuing course of conduct harmful to the interests of Cardinal and the

Bank and are in breach of the Termination Agreement.

71. Logue has breached and, upon information and belief, continues to breach

the Termination Agreement by disclosing the Bank and Cardinal’s Confidential

Information to third parties, including Schaller and Houston, without the prior written

consent of the Cardinal Board.

72. As a direct and proximate result of Logue’s breach of contract, Cardinal

has suffered direct, incidental and consequential damages and losses which it is entitled

to recover from Logue.


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73. Plaintiff prays that it be awarded damages in the amount of $133,341.36,

plus interest, for the payments made to Logue under the Termination Agreement and

which were not owed and due to him as a result of his detrimental conduct and actions in

breach of the Termination Agreement; and that the Court award against Logue and in

favor of Cardinal such other relief and damages as the Court deems just.

COUNT III: INJUNCTIVE RELIEF


forth.

75. Logue’s actions and conduct in breach of the Termination Agreement are

detrimental to the interests of the Bank and Cardinal and are causing and will cause

irreparable harm to the Bank and Cardinal absent preliminary injunctive relief.

76. Plaintiff, on the facts alleged and upon proof of same, is likely to succeed

on the merits of this action and that the balance of equities will tip strongly in its favor.

77. Finally, the public interest will benefit from the issuance of a preliminary

injunction.

78. Plaintiff prays that this Court enter an Order: (a) enjoining Logue from

engaging in any actions or conduct that are in breach of the Termination Agreement

including any action or conduct that is detrimental to any interest of the Bank and

Cardinal; (b) from making any disparaging comments or statements about the Bank and

Cardinal, and any employees, officers, directors or agents of those entities; and (c) from

disclosing any Confidential Information of the Bank or Cardinal to any person or entity

without the prior written consent of the Cardinal Board.


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PRAYER FOR RELIEF

WHEREFORE, Plaintiff prays this Honorable Court for the following relief:

(1) that Plaintiff be granted preliminary injunctive relief against Defendant:

(a) Prohibiting Defendant from taking any actions in violation of the

Termination Agreement;

(b) Ordering the Defendant to cease and desist from his continuing violations

and breaches of the Termination Agreement;

(c) Prohibiting Defendant from making any disparaging comments or

statements about Cardinal or the Bank;

(d) Ordering the Defendant to refrain from any action which is detrimental to

any interest of Cardinal or the Bank;

(e) Prohibiting Defendant from disclosing any Confidential Information of the

Bank or Cardinal to any person or entity without the prior written consent of the Cardinal

Board; and

(f) Providing Plaintiff with such other preliminary injunctive relief as is

necessary to enforce the terms and conditions of the Termination Agreement.

(2) That Plaintiff be awarded damages in the amount of $383,341.36 plus interest.

(3) That Plaintiff be awarded such other and further monetary and injunctive relief as

the Court may deem just and proper.

JURY TRIAL DEMANDED

The Plaintiff demands a jury trial on all issues raised by the Complaint.


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Respectfully submitted,

CARDINAL BANKSHARESCORPORATION

By: s/ James K. Cowan, Jr.Of Counsel

Douglas W. Densmore (Va. State Bar No. 19994)James K. Cowan, Jr. (Va. State Bar No. 37163)Brian S. Wheeler (Va. State Bar No. 74248)LeClairRyan, A Professional CorporationResearch Building 12, 1715 Pratt Drive, Suite 2700Blacksburg, Virginia 24060Telephone: (540) 961-2600Facsimile: (540) [email protected]@[email protected]

William B. Poff (Va. State Bar No. 3477)F. Elizabeth Burgin Waller (Va. State Bar No. 74726)Woods Rogers PLC10 South Jefferson Street, Suite 1400Roanoke, Virginia 24011Telephone: (540) 983-7625Facsimile: (540) [email protected]@woodsrogers.com

Counsel for Plaintiffs


Bank of Floyd parent company's lawsuit against former bank executive

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