Kahan v. Carrizo Gorge Railway CA4/1
- Proceeding
- appeal from an order
- Trial court
- Superior Court of San Diego County · No. 37-2012-00095975-CU-BT-CTL
- Trial judge
- Judith F. Hayes
- Outcome
- affirmed — Affirmed.
- Area
- civil
- Panel
- Judith D. McConnell (author), O'Rourke, Joan K. Irion
Analysis
The trial court denied Kahan's application for a preliminary injunction, finding he lacked a probability of success on the merits because the 2007 bylaw amendment was ineffective under Corporations Code section 204. The Court of Appeal affirmed, holding that the amendment was invalid because it required shareholder approval for actions not otherwise mandated by statute without being included in the articles of incorporation.
| Ruling reviewed | Standard | The court | The model |
|---|---|---|---|
Denial of application for preliminary injunction“We conclude Kahan did not demonstrate a probability of succeeding on the merits of his claims and affirm the trial court's order.” | abuse of discretion | correct | agree with court The appellate court correctly applied the standard of review for preliminary injunctions and independently reviewed the legal question regarding the validity of the bylaw amendment. The conclusion that the amendment was ineffective under Corporations Code section 204, subdivision (a)(9) is supported by the statutory text and legislative history, as the provision required shareholder approval for actions not otherwise required by statute and was not contained in the articles of incorporation. |
Authorities
- relied: SB Liberty, LLC v. Isla Verde Assn., Inc. (2013) 217 Cal.App.4th 272 — Establishes the two-factor test for preliminary injunctions (likelihood of success and balance of harms) and the standard of review (abuse of discretion).
- relied: Huong Que, Inc. v. Luu (2007) 150 Cal.App.4th 400 — Establishes that questions of law underlying a preliminary injunction order are reviewed independently.
The appellate opinion: sound — The opinion is sound because it correctly identifies the legal standard for preliminary injunctions and applies the specific statutory requirement of Corporations Code section 204, subdivision (a)(9) to the facts. It effectively distinguishes the statutory requirement of section 1001 from the broader bylaw provisions, demonstrating why the bylaws were ineffective.
How this analysis was made · dispute it
unusual dispositionThe trial court denied shareholder Ken Kahan's application for a preliminary injunction against Carrizo Gorge Railway's settlement agreement and stock issuance, finding the balance of harms favored denial and that Kahan was unlikely to prevail because the 2007 bylaw amendment requiring shareholder approval was ineffective under Corporations Code section 204. The Court of Appeal affirmed solely on the likelihood-of-success ground, holding that under section 204, subdivision (a)(9), a shareholder-approval requirement is ineffective unless placed in the articles of incorporation, and declined to reach the balance-of-harms finding or Kahan's evidentiary objections.
| Ruling reviewed | Standard | The court | The model |
|---|---|---|---|
Denial of preliminary injunction on the ground that Kahan had no reasonable likelihood of prevailing because the 2007 bylaw amendment (requiring outstanding-share approval for stock issuances and transactions over $100,000 or one year) was ineffective under Corporations Code section 204, subdivision (a)(9), as it was not in the articles of incorporation“The court also found Kahan was not likely to prevail on the merits of his claims because the 2007 amendment was ineffective under Corporations Code section 204.” | mixed | correct | agree with court Section 204(a)(9) states on its face that a provision requiring outstanding-share approval for corporate action not otherwise required by statute is not effective unless expressly in the articles, and section 212(b)(1) permits bylaws to carry only section 204(b)-(d) provisions. Kahan did not contend the articles contained the provision. His section 1001(a) argument was properly rejected: his complaint pleaded only violation of the bylaw, and the bylaw sweeps far beyond transfers of substantially all assets (covering any stock issuance and any transaction over $100,000 or one year), so section 1001 cannot validate it. The court correctly applied de novo review to this legal question within the abuse-of-discretion framework. The opinion's reference to 'section 209, subdivision (a)' appears to be a typographical slip for section 204 and does not affect the analysis. |
Finding that the balance of interim harms favored denying the preliminary injunction“We also need not decide whether the court correctly found the balance of harms favored denying the injunction or Kahan's related evidentiary objections.” | unclear | not reached | agree with court Because a preliminary injunction cannot issue absent some possibility of success on the merits regardless of the balance of harms (SB Liberty), the appellate court properly declined to review this finding once it concluded Kahan showed no likelihood of prevailing. |
Rulings on Kahan's evidentiary objections relating to the balance-of-harms evidence“We also need not decide whether the court correctly found the balance of harms favored denying the injunction or Kahan's related evidentiary objections.” | unclear | not reached | agree with court The evidentiary objections were tied to the balance-of-harms determination, which became immaterial once the likelihood-of-success prong was dispositive; declining to reach them was appropriate. |
Authorities
- relied: SB Liberty, LLC v. Isla Verde Assn., Inc. (2013) 217 Cal.App.4th 272 — A trial court weighs likelihood of success on the merits and relative interim harm when deciding a preliminary injunction, must deny the injunction if there is no reasonable likelihood the movant will prevail regardless of the balance of harms, and the order is generally reviewed for abuse of discretion.
- relied: Huong Que, Inc. v. Luu (2007) 150 Cal.App.4th 400 — To the extent a preliminary injunction ruling depends on a determination of a question of law, the appellate court reviews that determination independently.
The appellate opinion: sound — The opinion identifies the correct two-factor preliminary injunction test and standard of review, then resolves the appeal on a straightforward reading of section 204(a)(9) and section 212(b)(1), directly answering Kahan's section 1001(a) counterargument on both pleading and scope grounds. It is short and unpublished but relies on the statutory text and legislative committee comment, and properly leaves the unnecessary balance-of-harms and evidentiary issues undecided.
Opinion
Filed 12/12/13 Kahan v. Carrizo Gorge Railway CA4/1 NOT TO BE PUBLISHED IN OFFICIAL REPORTS California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
KEN KAHAN, D062526
Plaintiff and Appellant, v. (Super. Ct. No. 37-2012-00095975- CU-BT-CTL) CARRIZO GORGE RAILWAY, INC., Defendant and Respondent.
APPEAL from an order of the Superior Court of San Diego County, Judith F.
Hayes, Judge. Affirmed.
Law Offices of Michael A. Gardiner and Michael A. Gardiner for Plaintiff and Appellant.
Turner & Maasch and Mark A. Maasch for Defendant and Respondent. INTRODUCTION Shareholder Ken Kahan appeals from an order denying his application for a preliminary injunction to enjoin a corporation from implementing a settlement agreement and from counting votes attributable to a stock issuance without prior approval of the outstanding shares. He contends the court erred in denying his application because he demonstrated both that the balance of harms favored granting the injunction and that he had a probability of succeeding on the merits of his claims. We conclude Kahan did not demonstrate a probability of succeeding on the merits of his claims and affirm the trial court's order.
BACKGROUND1
Kahan is a shareholder in Carrizo Gorge Railway, Inc. (Railway). In 2002 Railway obtained the rights to operate over the "Desert Line," a stretch of approximately 70 miles of railroad tracks extending alongside the United States-Mexico border from Division to Plaster City. The Desert Line had not been in use "due to a series of washouts, tunnel collapses and maintenance issues." However, Railway intended to "reopen the Desert Line by reconstructing the line to accommodate freight service." The record does not show Railway ever achieved this objective.
On January 5, 2011, Railway entered into an assignment, assumption, and settlement agreement (settlement agreement) with Pacific Imperial Holdings, LLC 1 Although this case has a colorful history, we relate only the facts necessary to resolve this appeal.
2 (Pacific Holdings), Pacific Imperial Industries, LLC (Pacific Industries) and Sheila LeMire. The stated purpose of the settlement agreement was to globally resolve existing claims Pacific Holdings had against Railway for defaulted debts secured by Railway's assets as well as potential claims Pacific Industries and LeMire had against Railway for Railway's breaches of an ancillary agreement. Among its provisions, the settlement agreement transferred Railway's right to operate the Desert Line to Pacific Industries.2 Pacific Holdings, Railway's then majority shareholder, consented to the settlement agreement and Railway's board of directors approved it.3 On January 14, 2011, Railway issued a total of 4,825,000 new shares of stock to LeMire and others. Railway's board of directors approved the stock issuance. When Kahan learned of the settlement agreement and the stock issuance, he filed a complaint for declaratory and injunctive relief and sought a preliminary injunction enjoining Railway from implementing the settlement agreement and from counting votes attributable to the stock issuance until Railway's shareholders approved these actions.
According to Kahan, these actions were invalid because a 2007 amendment to Railway's bylaws (2007 amendment) precluded Railway's board of directors from issuing capital 2 Pacific Industries has since transferred the Desert Line operating rights to Pacific Imperial Railroad.
3 In a separate proceeding the same month Railway entered into the settlement agreement, a court determined Pacific Imperial owned 920,000 shares of Railway's stock and controlled another 137,000 shares. At the time, this was approximately 69 percent of Railway's outstanding stock 3 stock or engaging in transactions exceeding $100,000 or a one-year term without the approval of the outstanding shares.4 The court denied Kahan's application for a preliminary injunction, finding the balance of harms favored denying the injunction. The court also found Kahan was not likely to prevail on the merits of his claims because the 2007 amendment was ineffective under Corporations Code section 204.5
DISCUSSION
"A trial court must weigh two interrelated factors when deciding whether to grant a plaintiff's motion for a preliminary injunction: (1) the likelihood that the plaintiff will prevail on the merits at trial, and (2) the relative interim harm to the parties from the issuance or nonissuance of the injunction, that is, the interim harm the plaintiff is likely to sustain if the injunction is denied as compared to the harm the defendant is likely to suffer if the preliminary injunction is issued." (SB Liberty, LLC v. Isla Verde Assn., Inc.
(2013) 217 Cal.App.4th 272, 280.) " 'A trial court may not grant a preliminary injunction, regardless of the balance of interim harm, unless there is some possibility that the plaintiff would ultimately prevail on the merits of the claim.' [Citation.]
4 The 2007 amendment provided: "Without the approval of the outstanding shares, the Board of Directors shall not take any of the following actions: [¶] (a) issue any shares of capital stock or other securities convertible into shares of capital stock; [¶] (b) engage in transactions when the amount involved exceeds one hundred thousand dollars ($100,000) or the term of which shall exceed one (1) year."
5 Further statutory references are also to the Corporations Code.
4 Accordingly, the trial court must deny a motion for a preliminary injunction if there is no reasonable likelihood the moving party will prevail on the merits. [Citations.]" (Ibid.)
We generally review a court's order granting or denying an application for a preliminary injunction for abuse of discretion. (SB Liberty, LLC v. Isla Verde Assn., Inc., supra, 217 Cal.App.4th at pp. 280-281.) However, to the extent the court's order depends on its determination of a question of law, we independently review the determination.
(Huong Que, Inc. v. Luu (2007) 150 Cal.App.4th 400, 408-409.)
In this case, Railway asserts the court properly found Kahan had no reasonable likelihood of prevailing on the merits of his claims because the 2007 amendment upon which they were based was ineffective under section 204, subdivision (a)(9). Under this code section, a provision requiring a corporate action to be approved by the outstanding shares, where such approval is not otherwise required by statute, is not effective unless the provision is expressly included in the articles of incorporation. (§ 204, subd. (a)(9).)6 As explained in Assembly legislative committee comments made at the time of section 204's enactment, "Certain provisions are of such a nature (e.g., a requirement that specific corporate acts be approved by the vote of all of the shares or directors, as the case may be) that they ought not to be permitted unless stated in the articles. If restricted to the articles, the existence of such significant provisions is more easily determined and their 6 Section 204, subdivision (a)(9), states: "The articles of incorporation may set forth: [¶] (a) Any or all of the following provisions, which shall not be effective unless expressly provided in the articles: [¶] . . . [¶] (9) A provision requiring . . . the approval of the outstanding shares (Section 152) for any corporate action, even though not otherwise required by this division."
5 adoption or change is subject to the procedures for amendment of the articles.
Accordingly, [section 204] requires certain specifically enumerated provisions to be stated in the articles in order to be effective." (Legis. Com. com., 23E West's Ann. Corp.
Code (2013), foll. § 204, p. 84; see also § 212, subd. (b)(1) [authorizing corporate bylaws to contain the provisions enumerated in subdivisions (b), (c), or (d) of section 204, but not the provisions enumerated in subdivision (a)].)
The record does not show and Kahan does not contend Railway's articles of incorporation include the "approval of the outstanding shares" provisions contained in the 2007 amendment. Rather, Kahan contends section 204, subdivision (a)(9), does not apply to this case because section 1001, subdivision (a), already requires approval of the outstanding shares for transfers of all or substantially all of a corporation's assets.7 We find Kahan's contention unavailing for two reasons. First, the claims in Kahan's complaint are based solely on Railway's failure to comply with the 2007 amendment. They are not based on Railway's failure to comply with section 1001, subdivision (a), or any other provision of the Corporations Code.8 Second, the "approval 7 Section 1001, subdivision (a) provides: "A corporation may sell, lease, convey, exchange, transfer, or otherwise dispose of all or substantially all of its assets when the principal terms are approved by the board, and, unless the transaction is in the usual and regular course of its business, approved by the outstanding shares (Section 152), either before or after approval by the board and before or after the transaction."
8 At oral argument, Kahan's counsel insisted Kahan's claims were at least partially based on a violation of section 1001, subdivision (a). However, when we reviewed Kahan's complaint, we did not find any reference to this code section. Although Kahan did reference this code section in some of the other papers he filed below, he did not reference it in the context of asserting a claim for violation of the code section. Rather, 6 of the outstanding shares" provisions in the 2007 amendment are not limited to transfers of all or substantially all of a corporation's assets. The provisions apply to all stock issuances and to any transaction exceeding $100,000 or a one-year term. Consequently, section 1001, subdivision (a), does not obviate the requirement that the provisions be included in Railway's articles of incorporation to be effective.
As Kahan has not demonstrated the 2007 amendment was effective under section 209, subdivision (a), he has not demonstrated a probability of succeeding on the merits of his claims or that the court erred in denying his application for a preliminary injunction.
(SB Liberty, LLC v. Isla Verde Assn., Inc., supra, 217 Cal.App.4th at p. 280.) Given our conclusion, we need not address Railway's alternate contention the 2007 amendment was ineffective under section 204, subdivision (a)(8).9 We also need not decide whether the court correctly found the balance of harms favored denying the injunction or Kahan's related evidentiary objections.
as on appeal, he referenced it in the context of countering Railway's assertion the 2007 amendment was ineffectual because its provisions were not included in the articles of incorporation.
9 Section 204, subdivision (a)(8), states: "The articles of incorporation may set forth: [¶] (a) Any or all of the following provisions, which shall not be effective unless expressly provided in the articles: [¶] . . . [¶] (8) A provision conferring upon shareholders the right to determine the consideration for which shares shall be issued." Kahan contends this section does not apply here because the 2007 amendment did not seek to confer such rights on the shareholders. 7 DISPOSITION The order is affirmed. Respondent is awarded costs on appeal.
MCCONNELL, P. J.
WE CONCUR:
O'ROURKE, J.
IRION, J.
Cites, in this corpus
- SB Liberty v. Isla Verde Assn. CA4/1 D061261 · 2013-05-22
- HUONG QUE, INC. v. Luu H029713 · 2007-04-30