Continental Bank & Trust Co. v. W. A. R. Realty Corp.

Dore, J. The main issue on the merits in these appeals -is the same, whether under section 20 of the Stock Corporation Law notice to stockholders and affirmative consent of two thirds thereof were mandatory on the sale of a hotel, the last and chief asset of Midtown Enterprises Corporation, formed pursuant, to a plan of- reorganization under the Burchill Act. (Real Property Law, §§ 119-123.) We have already affirmed an order denying to a stockholder of the corporation an injunction against the sale and dismissing the stockholder’s complaint: (Strauss v. Midtown Enterprises, 270 App. Div. 837.) On that appeal the court unanimously considered the complaint was properly dismissed as an attempted collateral attack by injunction upon the court’s order. Of the remaining two appeals, the first to be considered is by one Lubetkin, a director and bondholder, but not a stockholder. He appeals directly from the order approving the sale. Although Lubetkin is not a stockholder, we think as a bondholder who objected to the sale, he is a party aggrieved and may raise on the merits any issue of claimed illegality in the sale even though the alleged illegality relates to lack óf notice to and consent of stockholders.' In this appeal, therefore, we consider the question presented on the merits. The real issue on all the facts disclosed, is not lack of notice to stockholders but the claimed necessity of stockholders’ two-thirds affirmative consent under section 20 of the Stock Corporation Law. Stock of the corporation, Midtown Enterprises, Inc., had originally been issued only in connection with bonds [580] and it- is only in the small number of cases in which bonds were redeemed that there is any stock ownership existing apart from ownership of bonds. Only 3,065 shares out of 64,825 have become detached from bonds, and thus 95 % of the stockholders received actual notice of the sale by receiving the notice concededly directed to them as bondholders. Neither in this appeal nor in any of the appeals is aiiy issue raised by a stockholder who did not receive notice. Strauss, the stockholder on the other appeals, concededly had notice. Accordingly, the real issue presented- is the question of the necessity of affirmative consent by two thirds of the stockholders pursuant to section 20 of the Stock Corporation Law. We restrict our decision to the facts presented in connection with this sale. No fraud, bad faith, collusion or personal profit is claimed. The price is $1,000,000 more than the price refused about a year before. After open and active bidding, the highest offer of $2,335,000, made by a company that operates a number of large hotels, was' accepted and' approved by the board of directors of the corporation and by the court. The sale will realize for the bondholders approximately 97 cents on the dollar basis, of the original bonds, or 137 cents on the dollar for the new bonds. On the record it cannot- be said the action of the board of directors was arbitrary on unreasonable (Blaustein v. Pan American Petroleum & Transport Co., 293 N. Y. 281, 303-304). On all the facts and circumstances here presented, we think Special Term correctly determined that séction 20 of the Stock Corporation Law was not applicable. This is not the usual business corporation referred to in Matter of Timmis (200 N. Y. 177). Ordinarily, of course, in reason and justice as well .as statutory law. no business corporation should be permitted to sell all its assets on a vote of its directors and consent of bondholders without notice to and consent by the stockholders, the owners of the corporation and its assets. But Midtown Enterprises Corporation is not an ordinary hotel business corporation. It was not organized by persons buying stock therein for1 the purpose of conducting a hotel business. It was organized under the Burchill Act to protect bondholders after the equity of the original owners of the property had been wiped out.. Stock in Midtown Enterprises. was issued only as an incident to bonds. The company was incorporated for the express purpose of holding the assets for the protection of the bondholders until they could be liquidated.* Originally the corporation had five properties but has disposed of all but the hotel property. The [581] order and plan of reorganization, the certificate of incorpora tion, the by-laws of Midtown Enterprises, and the mortgage indenture — all indicate that the purpose of forming the corporation and issuing stock therein to the bondholders was to carry out the liquidation for which the corporation was primarily organized, after which its certificate provides that the corporation be dissolved. The plan of reorganization does not provide for notice to stockholders; the plan requires that notice be given to the bondholders and the trustee. Such notice was given as required. Less than 33%% in principal of bonds outstanding voted against the proposed sale. Under section 122 of the Beal Property Law (Burchill Act) “ the reorganization plan shall be deemed binding on all holders of bonds or certificates of shares or parts unless within twenty days after the approval of the plan one-third in principal sum of such holders shall file with the court duly acknowledged dissents therefrom * * V’ As such one-third dissents were not filed, the plan of reorganization became binding on all the bondholders and the provisions of the plan were binding on the new corporation and those to whom its stocks and bonds were issued pursuant to the plan. Section 122 became effective on May 3, 1933 (L. 1933, ch. 729), long after section 20 had been enacted; it relates specifically to a corporation such as that herein involved and is controlling. Matter of Miglietta (2660 Broadway Corp.) (287 N. Y. 246) involved the sale by a salvage corporation authorized to liquidate property acquired by a fiduciary on the foreclosure of mortgaged property where the mortgage had been divided into shares or participations. The issue determined was that a dissenting share owner of such corporation could not demand appraisal of his stock under section 20 of the Stock Corporation Law, and payment for his stock according to such appraisal when the corporation sold the property. While no question of notice to or consent of stockholders was involved, the court held that the sale to carry out the liquidation was the only purpose of the corporation’s existence and was, therefore, a sale in the regular course of business, and that a dissenting stockholder could not obtain an appraisal of his stock under section 20. That section provides in the same paragraph for consent to the sale by two thirds of the shareholders and also for an appraisal for dissenting shareholders. It would seem that section 20 should either apply in its entirety or not at all. The Court of Appeals in the Miglietta case has held that its appraisal provisions have no application to a salvage corporation. Implicit in that decision is, we think, the [582] inference that the two-thirds consent provisions are also inapplicable to such corporations. Here, as there, the primary purpose of the corporation was the liquidation of the assets when they could be sold. The plan is a contract whose terms are binding on the bondholders and stockholders who received stock only in connection with the receipt of the bonds. (Matter of Duer, 270 N. Y. 343, 349.) On the third appeal the issue is whether the court could strike out nunc pro tuno a provision in the original order to show cause that notice be given also to the stockholders. In view of our decision on the main appeal, such notice- was unnecessary and surplusage and accordingly curable nunc pro tunc under sections 105-109-a of the Civil Practice Act. The orders appealed from should in all respects be affirmed, with $20 costs and disbursements of each appeal to respondents.