Case ID: ny-2d_3/html/0518-01.html
Source: Caselaw Access Project
Author: {"author": "\n      Chief Judge Conway. Fuld, J. (dissenting).", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Max Eisen, Respondent, v. John Post, Jr., et al., Appellants, et al., Defendant.
    Argued May 8, 1957;
    decided December 6, 1957.
    
      
      Joseph Feldman, Herbert M. Rosenberg and Irwin H. Rosenberg for John Post, Jr., and others, appellants.
    
      Irving D. Lipkowitz, Richard Lieb, William Hughes Lewis and Roy Plaut for Louis Schweitzer, appellant.
    
      
      John J. Redfield and Jacquelin A. Swords for New York State Title Association, amicus curice, in support of appellants’ position.
    
      Justin M. Golenbock, Stanley Goldstein and Donald D. Shack for respondent.
   Chief Judge Conway.

This is a derivative action brought by Max Eisen, owner of 50% of the stock of Senior Estate, Ltd., a real estate corporation, primarily to set aside the sale of a sublease by said corporation through its officers John Post, Jr., and Anita Post Litsky, to defendant Louis Schweitzer. The sublease was of the Theatre de Lys located in Greenwich Village, New York City. While several causes of action were pleaded and tried below, the sole ground upon which the transfer is assailed in this court is that it was consummated without stockholder consent as required by section 20 of the Stock Corporation Law which provides, in part: “ A stock corporation * * * may voluntarily sell, lease or exchange its property, rights, privileges and franchises, or any interest therein or any part thereof; provided, however, that if such sale, lease or exchange is not made in the regular course of business of the corporation and involves all or substantially all of its property, rights, privileges and franchises, or an integral part thereof essential to the conduct of the business of the corporation, such sale, lease or exchange shall not be made without the consent of either the holders of record of all of its outstanding shares entitled to vote thereon given in writing without a meeting or the holders of record of two-thirds of its outstanding shares entitled to vote thereon obtained at a meeting of the stockholders called pursuant to section forty-five.

If in view of the purposes and objects for which the corporation was created the particular sale may be regarded as one in the normal course of the business of the corporation, section 20 is inapplicable for, as we said in Matter of Miglietta (2660 Broadway Corp.) (287 N. Y. 246, 254-255): “ The test applied by the courts is not the amount involved, but the nature of the transaction, whether the sale is in the regular course of the business of the corporation and in furtherance of the express objects of its existence, or something outside of the normal and regular course of the business. (Matter of Timmis, 200 N. Y. 177, 181, 182.) ” (Emphasis supplied.) Stated conversely, if the sale is such as to render the corporation unable, in whole or in part, presently to accomplish the purposes or objects for which it was incorporated, section 20 is applicable (see, e.g., Matter of Kunin [Title Guar, & Trust Co.], 281 App. Div. 635, affd. 306 N. Y. 967; Matter of Hake [Hake Mfg. Co.], 285 App. Div. 316; Matter of Drosnes [Film Amusement Co.], 187 App. Div. 425; Matter of Nulle [Savarins, Inc.], 194 Misc. 622).

In the present case the certificate of incorporation of Senior Estate, Ltd.,— and the certificate, of course, determines the business a corporation is authorized to do — provides that such corporation was organized primarily and specifically: “To be engaged in the business of buying, owning, selling, .leasing and generally trading and dealing in lands, buildings and structures; to operate, let and sublet buildings and structures; * * * to buy, sell, trade and deal within the limits allowed by law in the stocks, bonds and obligations of this and other corporations and to perform any and all further acts and things which may in anywise contribute to the enhancement of its business

Thus, it will readily be seen that Senior Estate, Ltd., is a so-called real estate corporation whose stated object and purpose was the general trading and dealing in lands, buildings and structures. We have already pointed out that section 20 has no application to the transaction of the very business a corporation is incorporated to perform. This must be so even where, as here, the corporation is a so-called real estate corporation. Otherwise, a corporation formed for the specific purpose of buying, selling and dealing in interests in real estate could never carry on that business except by the concurrence of the holders of at least two thirds of its outstanding shares. The Legislature has not chosen to declare that such a rule applies to real estate corporations and we are without power to announce such a principle by way of engrafting an exception upon the language of section 20 — it is of universal application to all stock corporations. Accordingly, it must be held the transaction here involved was not such as the statute allows only upon stockholder consent as provided therein. That being so, it is unnecessary to consider the other issues raised by Eisen.

In respect to the applicability of section 20 to this transaction, there is only one serious disagreement between Eisen and Schweitzer. It is Eisen’s position that whether or not the certificate of incorporation establishes Senior Estate, Ltd., as a real estate corporation only, is not controlling. The claim is made that while trading in real estate may have been the only authorized business for Senior, we must judge the applicability of section 20 on the basis of the business in which the corporation was actually engaged. Eisen’s argument is that Senior was actually engaged in the operation of a theatre and production of plays, that the sale of the lease and chattels effectively put it out of that business, and that, therefore, stockholder consent was necessary under the statute. Thus, he argues that the business of Senior Estate was the operation of the Theatre de Lys; that its sole asset was the leasehold interest in the premises on which the theatre was located; that it licensed the theatre to various productions and gave advice and guidance to its licensees; that it approved the plays, selected the manager, press agent, stage hands, electricians, porters and ticket takers and purchased props. While we do not think that Senior was actually engaged in the operation of a theatre, there is no necessity to refer further to the facts upon which the claim is based, for even if Senior were actually engaged in such a business, we would have to reach the same result.

Eisen’s test which makes the actual business of a corporation the controlling feature, rather than its charter powers and purpose, is based in large measure upon certain language in the cases cited above, an example of which is the passage previously quoted from Matter of Miglietta (supra), viz., “ The test applied by the courts is not the amount involved, but the nature of the transaction, whether the sale is in the regular course of the business of the corporation and in furtherance of the express objects of its existence, or something outside of the normal and regular course of the business.” (Emphasis added.) Eisen concludes that to be deemed in the regular course of business, the transaction must be viewed in the light of a corporation’s normal day-to-day activity.

Initially it must be noted that in the cases referred to above, the businesses in which the corporations were actually engaged were businesses which were authorized by their charters. They were not engaged in an ultra vires activity or business. Moreover, the rationale of those eases in no way supports the notion that an activity not authorized by the charter — hence, an ultra vires activity — may be considered the business of the corporation for the purposes of section 20, a statute which, as we read it, assumes that corporations are legally engaged in doing what the State has granted them authority to do. We are not suggesting that the certificate of incorporation determines the business a corporation is in fact doing. Our holding is simply that an ultra vires activity cannot be deemed the regular business of the corporation within the meaning of section 20. The effect of our holding is not to render section 20 applicable only where the transaction is ultra vires. We do hold that if the only business conducted is ultra vires, it may not be deemed the regular business within the meaning of section 20. Obviously, a transaction may require stockholder consent though it be not ultra vires if it is “ not made in the regular course of business * * * and involves all or substantially all of its property * * *. ” What may be deemed the regular course of business cannot depend on some ultra vires and unauthorized pursuit, but rather upon the business which is conducted pursuant to the sovereign grant of power via the certificate of incorporation. Assignees and grantees are entitled to rely on the charter and to presume compliance therewith. The efficacy of transfers of interests in real property, and the titles thereto, cannot be made to depend upon whether or not such conveyance is in or out of the course of an unauthorized corporate activity, when to the world it is entirely consonant with, and in the course of, the authorized business as stated in the recorded certificate of incorporation.

It is patent that the transaction here did not affect, in the slightest degree, the power or ability of Senior Estate, Ltd., to carry on the business of buying and trading in real estate, for which it was chartered. Therefore, section 20 of the Stock Corporation Law is inapplicable.

The order of the Appellate Division should be reversed and the judgment of Special Term reinstated, with costs in this court and in the Appellate Division. The question certified should be answered in the negative.

Fuld, J. (dissenting).

I cannot accept the court’s thesis that the corporation’s sale of the leasehold, the only property it ever owned or, as far as the record discloses, ever intended to own, was made, within the sense of section 20 of the Stock Corporation Law, “ in the regular course of [the corporation’s] business ”, and, in reaching that conclusion, I place no reliance (as the majority apparently does) upon any alleged ultra vires acts performed by, or attributed to, the corporation. As I see the case before us, the question presented, briefly stated, is this: Does section 20 cover a so-called real estate corporation which, although organized to buy, sell and deal in real estate generally, has engaged only in the business of operating and managing the single piece of property which it sold?

Senior Estate, Ltd., was organized in 1947 — according to the record, for tax saving ” purposes — as an “ affiliate ” of the John Post Construction Corporation and was chartered to engage “ in the business of buying, owning, selling, leasing and generally trading and dealing in lands, buildings and structures ”, The company apparently did nothing until March, 1953, when it acquired a sublease of certain theatre premises, located in Greenwich Village, New York City. A year later, in 1954, Eisen purchased 50% of the corporation’s stock from its two stockholders, John Post and his sister Anita Post Litsky. The corporation never acquired or sought to acquire any other property, the only business it ever did was to hold and operate the leasehold and the only assets it ever had were the leasehold and its appurtenances. In 1955, it sold that leasehold and those appurtenances to defendant Schweitzer for $37,500, pursuant to a plan that such proceeds be distributed among the stockholders in proportion to their respective holdings.

Bisen refused to accept his one-half share of the sales price, urging that, by reason of section 20 of the Stock Corporation Law, the company could not sell all of its assets without at least obtaining the consent of two thirds of its stockholders, and this suit followed to invalidate the sale. The trial court decided that section 20 was not applicable and that, in any. event, even if it were, plaintiff, by reason of his misleading conduct, was prevented from urging that it should have been complied with. The Appellate Division, in unanimously reversing, indicated its disagreement on both scores.

Section 20, designed to protect minority stockholders, after authorizing a corporation to sell, lease or exchange its property and assets, goes on to provide that, “ if such sale, lease or exchange is not made in the regular course of business of the corporation and involves all or substantially all of its property * * ® such sale, lease or exchange shall not be made without the consent ” of either all of its stockholders “ given in writing without a meeting ’ ’ or two thirds of the stockholders “ at a meeting * * ® called pursuant to section forty-five.” It is conceded that Senior sold “ all or substantially all ” of its property. However, the court is taking the position that, since its charter empowered the corporation to engage in the business of buying and selling real estate, any sale of realty which it makes must be deemed “ in the regular course of business ”. This, in effect, is a holding that the corporation’s regular course of business must be determined solely by an examination of the words found in the certificate, without considering the activity upon which the company is actually engaged.

In my opinion, as the cases seem plainly to hold, that cannot be. (See Matter of Kunin [Title Guar. & Trust Co.], 306 N. Y. 967; Matter of Hodes [1299 Realty Corp.], 278 App. Div. 803; Matter of Borea [Locust Ct. Apts.], 234 App. Div. 450; Star rett Corp. v. Fifth Ave. & 29th St. Corp., 1 F. Supp. 868, 871; see, also, Matter of Hurd [Broadway & 58th St. Corp.], 5 Misc 2d 443.) In the Kunin case, for instance, this court held that, in determining whether a particular transaction was to be regarded as one in the regular course of a corporation’s business, we must examine not only the corporate charter, but also the character of the assets disposed of and the resultant changes in the nature of the corporate business. And, indeed, in the Hades case [supra, 278 App. Div. 803), the very question now before us was decided. The charter authorized the corporation there involved to buy, sell, rent and deal in real estate. The court, however, concluding that that recital was not controlling, held that the sale of an apartment house, which had been the company’s sole asset for some years, could not be deemed one in the regular course of business under sections 20 and 21 of the Stock Corporation Law.

A corporation empowered to buy, sell and generally trade in real estate may not be said to be carrying on that “ business ” if its entire corporate life has been devoted to owning, managing and operating but a single piece of property. There is, it seems almost self-evident, a great difference between a company which owns, or has owned, a number of lots or buildings and is, or has been, engaged in turning them over — that is, buying, selling and buying again — and a company which acquires but one piece of property, as an investment and not for resale, derives all of its income from it and spends all of its time and energies upon its operation and management. The “ business ” of a corporation, its regular course of business ”, just as that of a partnership or an individual, is the business upon which it is actually engaged, not the business which it was originally authorized to carry on.

It is significant that the statute refers, not to what the corporation’s charter empowers it to do, but to its “ regular course of business ”. And, of equal importance, stockholders make investments in a particular corporation on the basis of the business which the corporation is actually conducting, not the business it may be authorized to pursue — and the purpose of provisions such as those found in section 20 is to prevent the nature of that investment from being changed, to protect minority stockholders from being forced into a business different from the one in which they had invested. (See Matter of Kunin [Title Guar. & Trust Co.], supra, 306 N. Y. 967.)

Having in mind that that is the purpose underlying section 20, let us examine the situation here presented. Before the sale, Bisen, a 50% stockholder, had an investment in a corporation engaged, during its entire existence, in owning and operating a particular leasehold and earning a steady income. After the sale, all that he had was a liquidating dividend derived from the purchase price, a far cry from what he had invested in. In point of fact, once Senior Estate sold the only piece of property it ever owned, the asset upon which the enterprise depended, and then proceeded to distribute the moneys realized on the sale among the stockholders, it was, for all practical purposes, out of business, even though it still possessed a charter. It is difficult to understand how a sale effectively terminating the corporation’s “ business ” may be regarded as one made in its regular course, no matter how extensive the recitals of its charter.

Experience has taught that the certificate of incorporation is an unreal and uncertain, if not an impossible, determinant of the business actually conducted. None will dispute that charters ordinarily define the corporate purposes and powers in the broadest of terms to avoid any question of ultra vires. That being so, a corporation, though formed to engage in one business, may emerge as an operator of a quite different business which, however, because of the breadth of its charter terms, it is authorized to conduct. In such a case, if we are to ascertain what the company’s course of business really is, we must look beyond the charter.

Moreover, if we consider the charter alone, then, section 20 applies, if at all, only in the rarest case, and the manifest purpose of the statute — to protect minority stockholders (Matter of Timmis, 200 N. Y. 177, 181)—is plainly thwarted. In fact, if we examine only the charter, no transaction would fall within the protection afforded by section 20 unless it were outside the corporate purposes and beyond the corporate powers, in other words, unless it were ultra vires. Quite obviously, that is not the design of the statute, and it cannot be the law. Section 20 was not aimed at the ultra vires; it deals, as its wording renders plain, not with ultra vires transactions, but with sales “ not made in the regular course of business The thought behind the statute is that certain transactions may not be in the regular course of its business, even though within its corporate purposes and powers.

These considerations point up the necessity of looking beyond the charter to determine the regular course of a company’s business and that necessity exists just as much in the case of a so-called real estate corporation as any other. It may be true, as urged, that a title company has a more difficult task if it must examine more than the corporate vendor’s charter to determine whether a sale of real property was valid. But, surely, the court may not read into section 20 an exception not even suggested by the legislature and, certainly, it should not defeat the purpose of the statute and jettison the rights of minority stockholders in order to facilitate the work of title companies. As a matter of fact, the fears expressed on behalf of the title companies seem somewhat less than real. The view that section 20 required stockholder consent to a sale of a building by a corporation organized to buy, sell and deal in real estate is not new or novel; it was actually announced as the law of this state by the Appellate Division in 1951 (see Matter of Hodes [1299 Realty Corp.], supra, 278 App. Div. 803) and by a federal court in 1932 (see Starrett Corp. v. Fifth Ave. & 29th St. Corp., supra, 1 F. Supp. 868, 871). It is not to be supposed that the title companies failed to adapt their practice to the law thus expressed years ago, and it is not at all unreasonable to say that in so doing they encountered no insuperable obstacle.

My conclusion that section 20 applies to the sale under consideration provokes the further question — which the court does not reach — as to whether the plaintiff before us may insist on compliance with its provisions. Both courts below found that the plaintiff had orally consented to the sale and that the defendants had relied upon such acquiescence in consummating the transaction. The trial court, on the basis of these facts, intimated that the plaintiff was in no position to complain about the corporation’s failure to comply with section 20. The Appellate Division, however, reached a different conclusion; it was that court’s view that, since the statute was so explicit in its insistence upon either the consent of all stockholders given in writing without a meeting or the consent of two thirds of the stockholders obtained at a meeting called pursuant to section 45, testimony of an asserted oral consent given by the plaintiff could not be relied upon as a substitute. The question thus posed is not free from doubt (compare Starrett Corp. v. Fifth Ave. & 29th St. Corp., supra, 1 F. Supp. 868, 874, requiring strict compliance with statute, with Matter of J. A. M. A. Realty Corp., 92 F. 2d 3, 5-6; Matter of Victoria Fusilli Co., 79 F. 2d 611, 612-613, not requiring strict compliance with statute) and, since the majority has not considered the problem, I do no more than remark it. Accordingly, I merely record my disagreement with the court’s holding that section 20 did not cover the sale here under attack.

Judges Desmond, Dye, Froessel and Burke concur with Chief Judge Conway ; Judge Fuld dissents in an opinion on question as to applicability of section 20 of the Stock Corporation Law in which Judge Van Voorhis concurs.

Order reversed, etc.