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Katcher v. Ohsman

Decided: May 11, 1953.

HENRY E. KATCHER, PLAINTIFF,
v.
EDWARD OHSMAN, HERMAN FRIEDLANDER AND CROWN FUR DYEING & DRESSING CORP., A NEW YORK CORPORATION AUTHORIZED TO DO BUSINESS IN NEW JERSEY, DEFENDANTS



Stein, J.s.c.

Stein

Plaintiff seeks a preliminary injunction to restrain the individual defendants Ohsman and Friedlander from conducting a special meeting of directors of the corporate defendant, Crown Fur Dyeing & Dressing Corp., the alleged purpose of which is to oust or remove the plaintiff as an officer and director of the company, and also to grant salaries to the individual defendants and to the exclusion of the plaintiff. The plaintiff and the defendant Ohsman are residents of this State; the defendant Friedlander is a resident of New York. The corporate defendant is a New York corporation, authorized to do business in New Jersey. Jurisdiction over the individual defendants and the corporate defendant was obtained by personal service within this State.

The company was organized in 1933. Its business consists of processing furs and skins. Since 1942 its industrial activities have been conducted wholly within this State, though it maintains a business office in New York City. The plaintiff and the two individual defendants own all the issued and outstanding common stock of the company, 200 shares in all, each owning an equal one-third thereof. Each of said

three individuals is an officer and director of the company. The three of them constitute the entire board of directors. Although there is some dispute as to the extent of the time and effort contributed by each individual to the corporate project, it is evident from the proofs that stock ownership and corporate management are vested entirely in the same three persons. Thus the company is the simplest example of a small closed corporation.

The plaintiff claims that when in 1938 he was invited to join the corporate enterprise and to become a stockholder therein, he was unwilling to do so for the reason, communicated by him to the defendants Ohsman and Friedlander, that he did not desire to enter into a business enterprise in which his interest could be adversely affected by the majority vote of the other stockholders. Plaintiff claims, and the defendants deny, that in order to induce him to buy his stock the defendants represented to the plaintiff that the corporate structure of the company was then such that no binding action could be taken either by the stockholders or directors unless 90% in stock interest voted in favor of such action, they making it clear that all affirmative stockholder action would require a minimum vote of 90% of stock interest and that all director action could be taken only by as many directors as together owned at least 90% of the outstanding stock. The plaintiff claims that not only was that the representation but that the individual defendants promised that that would be the required action in the future, and that because of that representation and promise the plaintiff felt assured that he could in no event and under no circumstances be bound by the action of his co-stockholders or his co-directors unless he too concurred in any proposed action. Plaintiff relied on the said representation and assurance, purchased his stock, and was promptly elected a director and the vice-president of the company, which offices he has held for over 14 years. Until recently the plaintiff had no cause or occasion to examine the by-laws of the company because, as he claims and it is not denied in the defendants' affidavits, all actions taken by the stockholders

and directors of the company during the last 14 years were always by unanimous approval, and that if at any time during that long period of years any proposed action met with any objection by any single stockholder or director, the proposed action was abandoned.

Since about January of this year dissension has arisen between the plaintiff and the two individual defendants. The cause of the dissension seems to be the plaintiff's acquisition of some stock interest in a New York warehouse. The plaintiff says, and the defendants do not deny, that that warehouse business is in no way competitive with the processing business of the corporate defendant. The root of the trouble seems to be the individual defendants' disappointment at the plaintiff's unwillingness to share with them his warehousing investment. I am not concerned with that quarrel nor with the question whether or not the attention which the plaintiff gives to the warehouse business in any way diverts time required by his duties as part of the management of the defendant company. The defendants do not claim that there is any interference with the plaintiff's performance of such duties as are his as an officer of the defendant company. I gather from the proofs and the arguments that the individual defendants regard the plaintiff's presence and contribution of effort as quite superfluous and that, as the plaintiff swears, they regard their business "family" as already too large because of his membership therein.

Plaintiff says that recently the individual defendants told him that unless he allowed them to participate in his New York investment they would throw him out of the business of the defendant company and see to it that he did not get his money therefrom, and that as a step in the direction of carrying out their threat they sent notices of a directors' meeting to be held on March 16, 1953, which meeting was adjourned to April 17, 1953; that upon receiving notice of the meeting plaintiff for the first time investigated the records of the company and learned that in one by-law it is provided that "at all meetings of the stockholders all questions, the manner of deciding which is not specifically [26 NJSuper Page 34] regulated by statute, shall be determined by a 90% vote of the stockholders present in person or by proxy," each stockholder being entitled to one vote for each share of stock owned by him, but that in another by-law it is provided that the directors shall act by a majority, each director to have one vote "irrespective of the number of shares of stock that he may hold," and that in another by-law it is provided that a director may be removed by a vote of stockholders holding a majority of the stock. Plaintiff claims that the presence of the two by-laws last mentioned, in conflict with the 90% by-law, are fraudulently present in the minute book of the company; that the fraud consists of the defendants either permitting those conflicting by-laws to continue despite their representation to the contrary at the time plaintiff bought his stock or that they were fraudulently inserted at some subsequent time. Plaintiff says that when he discovered the presence of the nonconforming by-law provisions he called that fact to the attention of the individual defendants and that their answer was that they could do with the minutes and minute books whatever suited their purpose. I believe that the representation and promise were made to the plaintiff. The presence in the by-laws of the 90% stock vote requirement is strongly corroborative, as is the plaintiff's undenied assertion that for 14 years no action was taken by the three stockholders or directors if any one of them disagreed with the action proposed. It is not necessary to determine whether or not the two conflicting by-laws, calling for less than 90% stock support, were injected after the plaintiff was induced to buy into the company. It is enough that the individual defendants made the representation above mentioned and that such representation had the effect of overcoming the plaintiff's hesitancy and inducing him to buy into the company. For 14 years the defendants permitted the plaintiff to continue under the belief that their representation was true in fact and now, when disharmony arises, they seek to assert a voting power in conflict with that which they represented to exist. That conduct cannot be tolerated unless the defendants' representation and assurance

call for something unlawful, which illegality is one of the contentions advanced by the defendants.

I not only find that the representation as claimed by the plaintiff was made by the individual defendants but I am of the further view that implicit in that representation was the promise that if the voting requirements called for by the by-laws in 1938 were not then as represented, the said defendants would put them into the represented condition. The complaint seeks specific performance of that promise, as well as reformation of the non-conforming by-laws. It would seem that if specific performance is warranted, then reformation accomplishes the two-fold objective of ...


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