Kahan v. Carrizo Gorge Railway CA4/1 ( 2013 )

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NOT TO BE PUBLISHED IN OFFICIAL REPORTS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
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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."
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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.
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