Marciano v. Nakash

535 A.2d 400 (1987)

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Nature of the Case

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Facts

Fifty percent of Gasoline, LTD is owned by Ari, Joe, and Ralph Nakash (D) and fifty percent by Georges, Maurice, Armand and Paul Marciano (P). The liquidation proceeding marked the end of a joint venture launched in 1984 by the P and D to market designer jeans and sportswear. Initially, the venture was to market Guess creations. Ps entered into negotiations with Ds who owned Jordache Enterprises and agreed that Ds would get 50% of the stock of Guess for $4.7 million. Ds joined Ps on the Guess board of directors, each having three seats. When Gasoline was formed, stock ownership and board composition was shared equally by the two families. Gasoline functioned in New York under the D's operational guidance while the parent, Guess, continued under the primary attention of the P's. Differences surfaced with resulting deadlocks at the director level of both Guess and Gasoline. A custodian was appointed. In 1987, the custodian advised the Court of Chancery that because of a lack of financing Gasoline had no prospects of continuation and recommended liquidation. A court-approved plan of liquidation authorized the custodian to sell the assets of Gasoline. The determination of those debts, in particular, the loan claims asserted by D, was sharply disputed in the Court of Chancery and is the focus of this appeal. Gasoline had secured financing to support its inventory purchases from the Israel Discount Bank in New York. The bank advanced funds at one percent above prime rate secured by Gasoline's accounts receivable and Ds' personal guarantee. Ps were unwilling to participate in loan guarantees because of their dissatisfaction with the D's management. Ds withdrew their guarantees causing the Israel Discount Bank to terminate its outstanding loan of $1.6 million. Without consulting Ps, Ds advanced approximately $2.3 million of their personal funds to Gasoline to enable the corporation to pay outstanding bills and acquire inventory. In 1986, Ds arranged for U.F. Factors, an entity owned by them, to assume their personal loans and become Gasoline's lender. U.F. Factors charged interest at one percent over prime to which Ds added one percent for their personal guarantees of the U.F. Factors loan. Gasoline's debt to U.F. Factors amounted to $2,575,000 of which $25,000 represented P's guarantee fee. Another D entity, Jordache Enterprises, also sought payment from Gasoline of two percent of the company's gross sales, or $30,000 for warehousing and invoicing services. Ds then replaced the U.F. Factors loan, secured by a series of promissory notes executed by Gasoline, with a line of credit collateralized by Gasoline's assets including trademarks and copyrights. This action took place without the knowledge or consent of the custodian and was subsequently rescinded by Ds. At the time of the court-ordered sale of assets, Ds and their entities were general creditors of Gasoline. If allowed in full Ds claim will exhaust Gasoline's assets, leaving nothing for its shareholders. The loans made by D to Gasoline were interested transactions. Because of the control deadlock, the questioned transactions did not receive majority approval of Gasoline's directors or shareholders. Ps argue that the loan transaction is voidable at the option of the corporation notwithstanding its fairness or the good faith of its participants. The Court of Chancery rejected this contention. Ps appealed.