Taub v Kaplan

[*1] Taub v Kaplan 2007 NY Slip Op 51145(U) [15 Misc 3d 1145(A)] Decided on June 5, 2007 Supreme Court, Nassau County Austin, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on June 5, 2007
Supreme Court, Nassau County

David Taub and Marc Taub, Plaintiffs,

against

Richard Kaplan, The H. Company, Ltd. and PRK Stores LLC, Defendants,



12553-06



COUNSEL FOR PLAINTIFFS

Ruskin, Moscou Faltischek, P.C.

1425 Reckson Plaza

East Tower - 15th Fkoor

Uniondale, New York 11556

COUNSEL FOR DEFENDANTS

Levy & Schneps, P.C.

1615 Northern Boulevard

Manhasset, New York 11030

Leonard B. Austin, J.

Plaintiffs David Taub and Marc Taub (collectively "Taub") move to enjoin The H Company, Ltd ("H Co.") from borrowing money from Omega Capital unless the transaction is approved by the holders 81% of the shares of H Co.

BACKGROUND

H Co. operates a Hermes retail store in the Americana Mall in Manhasset. The store is operated pursuant to a licensing agreement with Hermes. Defendant Richard Kaplan ("Richard") is the President of H Co. and a shareholder of H Co. Taub allege they are shareholders owning slightly in excess of 19% of the outstanding shares of H Co.

Taub and Richard are also involved in the ownership of a Michael Kors Store in the Americana Mall. The Michael Kors store has been doing poorly. As a result, Kaplan entered into negotiations with Michael Kors. Ultimately, Richard was able to reach an agreement with Michael Kors pursuant to which it agreed to take over the operation of the Michael Kors store.

H Co.'s store was located next to the Michael Kors store. Part of the Agreement with Michael Kors required H Co. to vacate its premises so that Michael Kors could take over the space. The H Co. retained the right to remain in its current space through December 31, 2007.

The H Co. entered into a lease with the management of the Americana Mall for new and larger space for the Hermes store.

Taub were aware of the deal with Michael Kors and knew that H Co. was entering into a new lease with the management of Americana Mall. Taub did not object

to H Co. entering into the new lease and did not seek a shareholders meeting to approve the lease.

Hermes has prepared architectural plans for the new store. The only thing lacking is the funding needed to perform the construction for the new store. H Co. seeks to borrow the money to perform the build out of the new store from Omega Capital.

In September 2000, the shareholders of H Co. entered into a Shareholders Agreement.[FN1] Section 3 of the shareholders agreement provides that H. Co. cannot enter into an enumerated business transaction unless such transaction is approved by a vote of at least 81% of the [*2]shareholders of H Co.

Section 3(d) prohibits H Co. from selling, leasing, exchanging, transferring or otherwise disposing of any assets the fair market value of which is in excess of $500,000 outside the normal course of business unless 81% of the shareholders approve of the transaction. The term "transaction" is defined by the Shareholders Agreement, Section 1, to mean "...a sale, assignment, transfer, encumbrance, pledge, hypothecation, mortgage, gift, bequest or other transfer or disposition in any manner."

The loan H Co. is seeking from Omega Capital is in excess of $500,000. As part of the loan H Co. is required to pledge as security 100% of its leasehold improvements, furniture, fixtures, equipment and inventory with a unit value of $500 or more. H Co.'s board of directors apparently approved the loan.

Taub asserts that since H Co. is pledging corporate assets the value of which is in excess of $500,000 outside the ordinary course of business, shareholder approval is required. Thus, they seek a preliminary injunction enjoining Kaplan and H Co. from entering into the loan unless and until it is approved by a vote of 81% of the shareholders.

Taub have indicated that they will not vote to approve the loan. They believe the loan provides for an excessive interest rate and an inappropriate prepayment penalty. The proposed loan would also have a provision which would permit Omega Capital to declare the loan in default should Richard cease to manage H Co.

Since Taub own more than 19% of the shares of H Co., if the loan requires shareholder approval, they can prevent H Co. from entering into the loan.

DISCUSSION

The party seeking a preliminary injunction must establish (1) a likelihood of success on the merits, (2) irreparable harm in the absence of an injunction and (3) a balancing of the equities favoring the granting of an injunction. Aetna Ins. Co. v.

Capasso, 75 NY2d 860 (1990); Doe v. Axelrod, 73 NY2d 748 (1988); and Olabi v. Mayfield, 8 AD3d 459 (2nd Dept. 2004).

The party seeking the preliminary injunction has the burden of establishing a prima facie entitlement to such relief. Gagnon Bus Co., Inc. v. Vallo Transportation, Ltd., 13 AD3d 334 (2nd Dept. 2004); and William M. Blake Agency, Inc. v. Leon, 283 AD2d 423 (2nd Dept. 2001). A preliminary injunction will be granted only if there is a clear right to the relief upon the law on the undisputed facts. JDOC Construction LLC v. Balabanow, 306 AD2d 318 (2nd Dept. 2003); Peterson v. Corbin, 275 AD2d 35 (2nd Dept. 2000); Carman v. Congregation De Mita of New York, Inc., 269 AD2d 416 (2nd Dept. 2000); and Anastasi v. Majopon Realty Corp., 181 AD2d 706 (2nd Dept. 1992).

Ordinarily, the business of a corporation is managed by the board of directors. See, Business Corporation Law ("BCL") §701. The Board of Directors has the authority to transfer corporate property in the ordinary course of the corporation's business. 14A NY Jur2d Business [*3]Relationships §578.

Business Corporation Law §202(a)(5) grants a corporation the authority to pledge or create a security interest in all of its property. Business Corporation Law §202(a)(7) specifically grants a corporation the authority to borrow money at such rates of interest as the corporation may determine and to secure such borrowing by pledging all or any of its property. See, 1-2 White, New York Business Entities P B202.12. Consent of the shareholders for such borrowing is not required unless the certificate of incorporation so

provides. See, BCL §202(a). See also, 8A West's McKinney's Forms Business Corporation Law §10:32.

The powers granted to a corporation by BCL §202 may be restricted by the corporation's certificate of incorporation or by statute. 1-2 White, New York Business Entities P B202.01. More specifically, limitations on a corporation's ability to borrow or pledge assets to secure an obligation must be contained in its certificate of incorporation. See, 14A NY Jur2d Business Relationships §§ 453, 458.The requirement for approval of 81% of the shareholders for certain corporate borrowing is not contained in H Co.'s certificate of incorporation or any amendment thereto. The Court questions whether the shareholders by private agreement can contravene and limit the specific authority granted to a corporation by BCL § 202.

Business Corporation Law §202(a)(5) and (7) gives the corporation authority to borrow and to pledge corporate assets as security for borrowing so long as the borrowing is for corporate purposes. The proposed borrowing herein is clearly for corporate purposes. The money is needed to permit H Co. to construct its new store and relocate to that location. Further, BCL § 911 provides that shareholder approval is not required for a corporate pledge unless specifically provided for by the certificate of incorporation.

Since H Co. has the statutory authority to borrow money and pledge its assets as security for such borrowing and restrictions on such powers are not contained in the certificate of incorporation as statutorily required, Taub have failed to establish a likelihood of success on the merits. Thus, their application for a preliminary injunction must be denied.

In addition, a balancing of the equities warrants denial of the motion. Taub are not opposed borrowing to pay for H Co.'s relocation and build out. Marc Taub believes the terms of the Omega Capital deal are imprudent.

H Co. is obligated to vacate its present location by December 31, 2007. Money is needed to build the new store. If this money is not obtained soon, H Co. will not have adequate time to do the construction necessary before it is obligated to move out of its present location. Taub have failed to establish that the money needed for the construction could be obtained on more favorable terms from another lender.

Marc Taub asserts he offered to loan the money needed for the relocation and construction to H Co. provided appropriate safeguards were in place to prevent the money from being misspent. However, Marc Taub has failed to place before the Court any of the terms for his loan, how that loan differed from, or was better than, the loan from Omega Capital or an indication that he has the financial ability to provide the money needed.

If H Co. does not obtain the funds soon, it may very well be in the position where it is required to surrender possession of its present premises before its new premises have been completed. This would put H Co. out of business. On balance, that is an unacceptable and imprudent alternative.

Accordingly, it is,

ORDERED, that Plaintiffs' motion for a preliminary injunction enjoining H Co. from entering into a loan agreement with Omega Capital unless such loan is approved by a vote of 81% of the shareholders is denied.

This constitutes the decision and Order of the Court.

Dated: Mineola, NY_____________________________

June 5, 2007Hon. LEONARD B. AUSTIN, J.S.C. Footnotes

Footnote 1:The Court notes that David Taub is not a signatory to the shareholders agreement which was allegedly executed by all of the H Co. shareholders. He has failed to place before the Court any evidence that he is, in fact, a shareholder of H Co.