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There was yet another a major development in the Republic First Bank proxy battle Wednesday, when the U.S. Court of Appeals for the Third Circuit overturned a ruling from Judge Paul Diamond that had called for a custodian to oversee the fractured board.

In a 30-page opinion, the panel of Judges Kent Jordan, Peter Phipps and David Porter dramatically reversed Diamond’s previous orders.

“Under Pennsylvania law, a court has the power to appoint a custodian to take control of a corporation if the corporation’s board of directors is deadlocked or if the directors’ acts are illegal, oppressive, fraudulent, or wasteful,” the panel’s opinion said. “But that power should be ‘used sparingly, with caution and with circumspection, and only in an extreme case.’”

“This is not such an extreme case, though its facts are dramatic,” the panel wrote.

Those dramatic facts center around the May 10 death of Ted Flocco, a board member and ally of CEO Vernon Hill, who is on one side of the proxy fight. Until Flacco’s passing, his side was deadlocked 4-4 with another group, headed by former Republic CEO Harry Madonna, and backed by two activist investor groups, led by George Norcross and Abbott Driver. The death of Flocco gave the Madonna side a 4-3 majority, with the bank bylaws calling for the majority to fill the vacancy—that would give Madonna a 5-3 majority.

With the new majority, the board quickly replaced Hill as chairman with Madonna. When Hill was likely on the verge of being ousted as CEO, he and his other allies, Brian Tierney and Barry Spevak, filed suit in District Court in Philadelphia to halt the proceedings ahead of a special meeting where he was expected to be removed as CEO.

Diamond quickly called for a pause in the action while he considered appointing a custodian, which he later did, installing Alfred Putnam to take control and hold a special shareholders’ meeting to fill the vacant board seat. Last month, Diamond directed Putnam to add a ninth board seat and to fill that seat at the special shareholders’ meeting, as well.

“In these circumstances, I will deny the request to defer the election until a September meeting that may well not take place,” Diamond ruled at the time. “The board election will be held in late July as reflected by the Company’s SEC filings. To prevent a continuing 4-4 board split, the custodian is directed to conduct that election so that shareholders will elect both a replacement for Mr. Flocco and a ninth director.”

“The District Court’s decision to displace the corporate governance structure of a publicly traded company, while no doubt well-intended, did not reflect the required caution, circumspection, or justification for such a drastic step,” the opinion said. “Republic First’s bylaws provide instructions for how the board should proceed after the death of a director, and in this case, the Madonna Directors followed those instructions.”

The judges continued by saying that the Madonna faction was entitled to fill the Flocco vacancy and thus gain a majority.

“Because the Madonna Directors were acting pursuant to the bylaws when they took steps to appoint a new director, there was no deadlock, illegality, oppression, or any other ground for appointing a custodian for Republic First. Having expedited consideration of the Madonna Directors’ appeal, we will now reverse,” the judges stated.

The Third Circuit Court noted that those company bylaws provide the contingency plan for this exact situation, and that by jettisoning that contingency plan with the custodian appointment, the District Court “abused its discretion.”

The judges continued that the Madonna faction would have that opportunity and control, at least until the upcoming shareholders’ meeting, where the shareholders would then have the opportunity to alter composition of the board.

“The fact that the Madonna Directors’ current conquest of the Board came about through a sad and unexpected event – rather than through a shareholder vote – does not justify judicial intervention,” the panel wrote. “We will therefore reverse and remand for proceedings consistent with this opinion.”

The Norcross-Braca group quickly supported the decision, which they say sets the stage for Hill’s removal.

“The group led by George E. Norcross, III, Gregory R. Braca and Philip A. Norcross today applauded the decision by the Third Circuit Court of Appeals reversing the District Court’s appointment of a custodian to oversee the operations of Republic First Bancorp, Inc., and allowing the removal of Vernon W. Hill, II as the Company’s chairman,” the group said in a statement. “In May, Hill filed the suit in federal district court to stop his removal as chairman after he was ousted by a majority of the Republic First Board following passing of Hill’s allied director, Theodore Flocco, which broke the board’s 4-4 deadlock.”

The Norcross group noted that the decision of the Third Circuit reinforced that the board majority “were and are entitled to fill the vacancy.”

“The Court further held that the majority may now appoint a replacement director and “then, with control of a full quorum, they can ratify past acts” including the removal of Hill as chairman,” the group said.

The Hill faction did not respond to a request for comment by publication of this story.