Summary
characterizing attempts to block foreclosure as "stalling the market"
Summary of this case from YL Sheffield LLC v. Wells Fargo BankOpinion
03 Civ. 9623 (JFK)
January 20, 2004
COUDERT BROTHERS LLP, New York, for Plaintiffs Pacific Electric Wire Cable Co., Ltd. and Asia Pacific Wire Cable Corp., Ltd.
KAYE SCHOLER LLP, New York, for Intervenor Plaintiff Pacific Electric Wire Cable Co., Ltd.
BAKER McKENZIE, New York, for Defendant Set Top International, Inc.
WOLLMUTH MAKER DEUTSCH LLP, New York, NY, for Defendant Frank Wei-Feng Lin
JONES DAY, New York, for Defendant Tom Ching-Yun Tung
PATTERSON, BELKNAP, WEBB TYLER LLP, New York, for Defendant Robert Everett Wolin, Esq.
ORDER
The facts before this Court have changed from those summarized in this Court's Memorandum Opinion and Order dated December 29, 2003 ["December 29 Order"] only in that defendant Set Top International Inc. ["Set Top"] has given notice of a foreclosure sale of the 50.44% block of shares of Asia Pacific Wire Cable Corporation ["APWC"], to be held on January 21, 2004. Plaintiff and intervenor plaintiff Pacific Electric Wire Cable Company ["PEWC"] both move, by separate Orders to Show Cause, for a temporary restraining order to prevent this sale.
Familiarity with the December 29 Order is assumed. See Pac. Elec. Wire Cable Co. v. Set Top Int'l Inc., No. 03 Civ. 9623 (JFK), 2003 WL 23095564; 2003 U.S. Dist. LEXIS 23270 (S.D.N.Y. Dec. 29, 2003).
As the Court explained in the December 29 Order, control of PEWC is in dispute. See December 29 Order at n. 4. The Sun faction of PEWC, as plaintiff in this case, is represented by Coudert Brothers LLP. The Tung faction of PEWC, represented by Kaye Scholer LLP, moved to intervene, and the Court granted the motion on January 12, 2004. The question of control over PEWC is pending before a court in Taipei. At this time, this Court does not know the status of those proceedings. For clarity, in the meantime, the Court refers to the Sun faction as "plaintiff" and the Tung faction as "intervenor plaintiff." Where appropriate, and to the extent that plaintiff's and intervenor plaintiff's claims or arguments are identical, the Court refers to the corporation in general as "PEWC."
Intervenor plaintiff, in its application, requested an ex parte temporary restraining order and a preliminary injunction to stop the January 21 sale. The Court denied the request for a temporary injunction. See Order to Show Cause, January 7, 2004. Because of the many unresolved factual disputes that exist in this case, this Court cannot grant a preliminary injunction without an evidentiary hearing. Therefore, the Court treats intervenor plaintiff's application for a preliminary injunction as one for a temporary restraining order.
Plaintiff (but not intervenor plaintiff) also asks for a temporary restraining order preventing the sale of the 22.4% block of APWC stock. This Court heard arguments from counsel for plaintiff, intervenor plaintiff, defendant Set Top, and defendant Robert Everett Wolin on January 14, 2004.
Both plaintiff and intervenor plaintiff rely almost exclusively on the language of the December 29 Order, arguing that the imminence that was lacking in December, and on which this Court based (in part) its dissolution of the temporary restraining order, now exists. Therefore, both parties argue, the balance of hardships now tips in favor of PEWC. Plaintiff and intervenor plaintiff also reiterate their claims that the sale of the shares will cause PEWC irreparable harm.
Set Top argues that foreclosure is proper. The loan between PEWC's subsidiary Pacific U.S.A. Holdings Corp. ["PUSA"] and its creditor Swiss Re Financial Products Corp. ["Swiss Re] (no longer a party to this action), and the pledge of APWC shares as security for that loan; PEWC's default on its obligation to repay PUSA's loan; and Swiss Re's transfer to Set Top of its secured claim against PEWC, Set Top says, are undisputed. Furthermore, Set Top claims that there can be no irreparable harm in this instance because the injury PEWC seeks to avoid was self-inflicted or at least avoidable.
Defendant Wolin also submits a memorandum arguing that, because he has no control over the shares and no power to cause or prevent the sale of the shares, an injunction as to him should be denied.
Discussion
As none of the most drastic tools in the arsenal of judicial remedies," injunctive relief "must be used with great care." Hanson Trust PLC v. ML SCM Acquisition Inc., 781 F.2d 264, 273 (2d Cir. 1986). An applicant for a preliminary injunction or a temporary restraining order must demonstrate "(1) the likelihood of irreparable injury in the absence of such an injunction, and (2) either (a) likelihood of success on the merits or (b) sufficiently serious questions going to the merits to make them a fair ground for litigation plus a balance of hardships tipping decidedly in [applicant's] favor." Wisdom Imp. Sales Co. v. Labatt Brewing Co., 339 F.3d 101, 108 (2d Cir. 2003) (quoting TCPIP Holding Co., Inc., v. Haar Communications. Inc., 244 F.3d 88, 92 (2d Cir. 2001)); see Aim Int'l Trading, LLC, v. Valcucine SpA., 188 F. Supp.2d 384, 386 (S.D.N.Y. 2002) (noting that the standard for granting a temporary restraining order is identical to that for a preliminary injunction). Absent an abuse of discretion, a district court's decision granting or denying injunctive relief will not be disturbed on appeal. Aim Int'l, 188 F. Supp.2d at 387. (quoting Reuters Ltd, v. United Press Int'l, Inc., 903 F.2d 904, 907 (2d Cir. 1990)).
This Court's December 29 Order denied plaintiff's, intervenor plaintiff's, and defendant's applications for temporary restraining orders. The Court found that, based on the many factual disputes surrounding the case, no party could show that it was likely to succeed on the merits, that the balance of hardships did not tip decidedly in favor of one party over another, and that, in any event, no party could prove imminent harm. Although the December 29 Order sets up the lack of imminent harm as a stumbling block for plaintiff and intervenor plaintiff, the removal of that obstacle does not necessarily warrant injunctive relief: Harm may be imminent without being irreparable. Because the December 29 Order discusses only whether the harm is imminent, the Court now considers whether the injury that PEWC may face — sale of either the 50.44% block or the 22.4% block of APWC stock — is irreparable.
Some confusion seems to have arisen regarding the analysis of the standard for a preliminary injunction or a temporary restraining order. The Court notes that imminence as it relates to irreparable injury does not necessarily affect the analysis of likelihood of success on the merits or serious questions going to the merits coupled with a balance of hardships tipping in the movant's favor.
Cases where courts have found irreparable harm in corporate or commercial settings fall into roughly three categories, none of which categorically equate the loss of a majority interest in a corporation with irreparable harm. In the first category, courts express a concern for letting the market run its course. To that end, courts have held that preventing a ready, willing, and able buyer from purchasing a majority interest in a corporation — either in the context of an outright purchase or a tender offer — constitutes irreparable harm. See United Acquisition Corp. v. Banque Paribas, 631 F. Supp. 797 (S.D.N.Y. 1985); LTV Corp. v. Grumman Corp., 526 F. Supp. 106 (E.D.N.Y. 1981). The second category demonstrates the courts' concern for protecting the voice of a corporation's shareholders. Thus, courts have found irreparable harm where defendant, the majority shareholder, threatened to elect two directors to the board, which would have reduced the minority shareholder's representation on the board of directors to 10%, see Street v. Vitti, 685 F. Supp. 379 (S.D.N.Y. 1988); where management of a corporation denied shareholders a voice by preventing shareholders from voting their shares or from having representation on the board of directors, see Int'l Banknote Co. v. Muller, 713 F. Supp. 612 (S.D.N.Y. 1989); and where defendant breached an agreement giving plaintiffs certain minority rights, which rights are "irretrievably lost upon breach, and may not be compensable by non-speculative damages [because] [t]he only way to render the [minority rights] provision truly viable is to enforce it," Wisdom, 339 F.3d at 114. Finally, cases falling in the third category show the courts' desire to prevent the moving party from losing its livelihood or its position in a business that the movant helped to start. This group of cases includes Davis v. Rondina, 741 F. Supp. 1115 (S.D.N.Y. 1990), in which plaintiff had been denied the opportunity to continue to manage a company which plaintiff helped to build from the ground up and for which plaintiff personally guaranteed substantial loans, and Roso-Lino Beverage Distributors, Inc., v. Coca-Cola Bottling Co., 749 F.2d 124 (2d Cir. 1984) and Semmes Motors, Inc. v. Ford Motor Co., 429 F.2d 1197 (2d Cir. 1970), in which defendant threatened to revoke plaintiffs' franchise agreements, thus depriving plaintiffs of their means of livelihood that they had pursued for many years. None of these cases, however, establish the notion that loss of a majority of shares in a corporation constitutes irreparable harm with the black-letter clarity that plaintiff and intervenor plaintiff urge.
Moreover, none of the concerns that courts finding irreparable harm have expressed are present in this case. Set Top's planned foreclosure is not preventing market forces from running their course. If anything, PEWC's repeated attempts to block the foreclosure are stalling the market by preventing Set Top, as a creditor, from receiving the money indisputably owed to it. Plaintiff's and intervenor plaintiff's shareholders are not suffering from an impermissible denial of a voice in the corporation's affairs brought about by managerial shenanigans. Any loss of voice shareholders suffered occurred when PEWC pledged the APWC shares as security for the loan between Swiss Re and PUSA. Because no party disputes the validity of foreclosure on the APWC shares by Swiss Re, and because no one argues that Set Top's acquisition of Swiss Re's claim caused PEWC to default on its loan payments, plaintiff and intervenor plaintiff cannot complain that Set Top is denying PEWC shareholders a voice in management. Finally, Set Top is not denying any party its means of livelihood. APWC is neither a small family owned business nor a start-up venture where the key participants depend on the business as a means of making a living. The concerns courts have expressed regarding this category of cases, therefore, are not present here.
Plaintiff brings to the Court's attention Suchodolski Associates, Inc. v. Cardell Financial Corp., No. 03 Civ. 4148 (WHP) 2003 WL 22909149 (S.D.N.Y. Dec. 10, 2003), the facts of which are similar to the facts before this Court. In that case, Deltec Corporation ("Deltec") borrowed a large sum from Cardell Corporation ("Cardell") with shares of Deltec pledged as collateral. Id. at *1. Deltec was unable to pay the loan as it became due and sought interim financing elsewhere. Id. at *2. Alternative financing fell through, plaintiffs said, because Cardell, which held 25% of Deltec stock beyond the pledge of collateral, refused to waive a provision in the stockholders' agreement forbidding review of financial information by outsiders. Id. at *1-2. Plaintiffs claimed that Cardell was trying to stage a "corporate coup d' é tat" whereby Cardell would acquire a majority interest in Deltec. Id. at *2. The court granted injunctive relief, stating that "[t]he dilution of a party's stake in, or a party's loss of control of, a business constitutes irreparable harm." Suchodolski, 2003 WL 22909149 at *4-5.
Despite some factual similarities, I decline to follow theSuchodolski court's analysis. As explained above, the federal court cases cited in Suchodolski for the proposition that loss of a majority interest of shares equals irreparable harm, specificallyStreet and Semmes, are not on point with the facts before this Court and do not plainly support the proposition. In addition, the wrongdoing alleged in Suchodolski is not present here, because Set Top's involvement in this matter began well after PUSA declared bankruptcy and the APWC shares became subject to foreclosure.
In support of its argument that the sale should go forward, Set Top cites a Tenth Circuit case, Salt Lake Tribune Publishing Co. v. ATT Corp., 320 F.3d 1081 (10th Cir. 2003), in which the court denied injunctive relief to a plaintiff corporation that had sold its controlling interest in a newspaper to a subsidiary of defendant subject to an agreement that plaintiff would retain managerial control of the newspaper for a certain period, and that plaintiff would retain an option to buy back its interest. Id. at 1084-85. The earliest plaintiff could exercise its option to buy back the newspaper was a date one day after the expiration of the period of managerial control.Id. at 1084 When the plaintiff was faced with the gap of several weeks between the end of the period of plaintiff's managerial control and the actual closing of the transaction whereby plaintiff would re-purchase the newspaper, plaintiff sought injunctive relief to prevent defendant from controlling the newspaper during those several weeks.Id. at 1085. The Tenth Circuit denied relief, saying that the change of control "result[ed] from the express terms of the contract [plaintiff] negotiated, and therefore the removal of [plaintiff's] managers [was] a harm that [plaintiff] inflicted upon itself." Id. at 1106. Because the harm was self-inflicted, the court concluded, the harm could not be considered irreparable.Id. Therefore, the change in management that plaintiff sought to avoid did not constitute irreparable harm. Id.
Set Top likens the Salt Lake Tribnue scenario to the situation at hand: Having pledged shares of APWC as collateral in return for millions of dollars in loans, PEWC cannot now avoid the consequences of its default. The harm PEWC seeks to avoid, Set Top says, is self-inflicted and, therefore, not irreparable.
The Second Circuit has not issued an opinion that is on point with theSalt Lake Tribune opinion. I find the Tenth Circuit's logic persuasive, however, and a neat fit with the facts at hand. Because plaintiff and intervenor plaintiff have failed to demonstrate more than the imminent loss of a majority interest in APWC, and because the harm plaintiff and intervenor plaintiff seek to avoid is self-inflicted, this Court concludes that Set Top's foreclosure on any shares of APWC stock does not constitute irreparable harm. For these reasons, the applications for temporary restraining orders are denied.
As to the other requirements for the issuance of a temporary restraining order or preliminary injunction, little has changed since the issuance of the December 29 Order. The serious factual disputes that exist in this case continue to prevent this Court from determining which party might be likely to succeed on the merits. Serious questions going to the merits still exist, and the balance of hardships still fails to tip in favor of one party over another. PEWC still faces the loss of the APWC shares, while Set Top still faces the burden of standing as a creditor who cannot foreclose. Therefore, the balance does not tip decidedly in favor of the moving parties, and for that reason alone, plaintiff's and intervenor plaintiff's applications should be denied.