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Costabile v. Linoleum

Decided: December 6, 1967.


Herbert, J.s.c.


Plaintiffs base their suit upon our statute relating to deadlocked corporations, N.J.S.A. 14:13-15. They filed their verified complaint and obtained an order directing defendants to show cause why the statutory relief being sought should not be granted. On or about the return day of the order to show cause it became apparent that there were disputes which would have to be resolved in order to decide whether the statute should or should not be applied. About the same time answers were filed for all of the defendants, and in addition Pasquale Costabile filed a counterclaim in two counts, together with a cross-claim.

Instead of presenting disputed matters for decision on affidavits, counsel for all parties joined in a request that the case be set down for the taking of testimony. That was done, and it may be noted that the procedure thus adopted appears to be consistent with the comments about handling corporate deadlock cases which were made in Freidus v. Kaufman, 35 N.J. Super. 601 (Ch. Div. 1955). The hearing has now progressed to a point where it is clear that a basic question should be decided, for subsequent proceedings will depend upon what decision is reached.

This basic question relates to the power of a New Jersey corporation to issue its stock as security for a loan made to it by the person to whom the stock is to go. Essex Linoleum & Carpet Co. Inc. was incorporated in December 1948. The incorporators were plaintiffs and the individual defendants. Hugo, Americo and Anthony Costabile are brothers. Pasquale is their father. The certificate of incorporation provided for a total of authorized capital stock consisting of 2,500 shares of common stock without par value. It also provided for an initial issue of 120 shares, being

30 shares for each of the four incorporators. Article Fifth of the certificate reads:

"FIFTH: All or any part of said shares of common stock without nominal or par value, may be issued by the corporation from time to time and for such consideration as may be determined upon and fixed by the Board of Directors, as provided by law."

Differences have arisen between the four men which apparently are irreconcilable. On the one side are Pasquale, the father, and Anthony. On the other side are plaintiffs Hugo and Americo. If each man holds one-fourth of all of the stock legally issued by the Essex company, and each man is a director, then the deadlock statute would apply. Defendants contend, however, that the case does not come under the deadlock statute because Pasquale owns more than one-fourth of the outstanding stock of the Essex company. At the base of this contention is a resolution of the board of directors of the company which appears in the minute book only in the form of a certification by Anthony J. Costabile, as secretary-treasurer, that the resolution was duly adopted at a duly constituted meeting of the board of directors. The certification is dated December 22, 1953, but contains no statement about the date of the meeting of directors. The text of the resolution (as it appears in this certificate) is as follows:

"RESOLVED, that the president and secretary of this Corporation be and they are hereby authorized to borrow money for this company from Pasquale Costabile and to give therefor such promissory notes and pledges as to stock together with the right to vote such stock as may seem proper to secure such loans, and the said president and secretary are hereby authorized to make and execute with the said Pasquale Costabile such agreement or agreements with respect to securing of indebtedness of this company with common stock of this company together with voting rights therein as may be required or as may be expedient."

A note dated December 22, 1953 has been produced by Pasquale Costabile. By its terms it obligates Essex Linoleum

& Carpet Co. Inc. to pay him $30,000 on demand, with interest. The note was executed for the corporation by Pasquale Costabile, president, and opposite his signature appears that of Anthony J. Costabile, secretary-treasurer. Pasquale has also produced a note dated December 31, 1962 and a note dated August 2, 1963, each for $10,000. The first note recites the giving of 30 shares of stock as collateral security, and the second and third notes 10 shares each. Stock certificates have been marked in evidence which conform as to date and as to total amounts with the recitals in the three notes. Each of these certificates names Pasquale Costabile as the stockholder and each was executed for the corporation by Pasquale as president and Anthony as secretary-treasurer.

The three notes are in the same form except, of course, as to date, amount to be repaid, and number of shares to be issued as collateral ...

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