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Azar v. 1-800 Doctors

September 17, 2007


The opinion of the court was delivered by: Kimba M. Wood, U.S.D.J.


Marsha Azar, Michael Hakimi, Yosef Hakimi, and Century Ventures Limited (collectively "Plaintiffs") have filed a breach of contract action against 1-800 Doctors, Inc. ("Defendant"), alleging that Defendant failed to redeem Plaintiffs' stock pursuant to the terms of a stock purchase agreement between the parties. For the reasons stated below, Plaintiffs' motion for partial summary judgment is denied and Defendant's cross-motion for summary judgment is granted.

I. Background

The facts material to these motions are not in dispute. On or about December 10, 1999, Plaintiffs purchased preferred stock from Defendant pursuant to a stock purchase agreement (the "Agreement"). (Pls.' Rule 56.1 Statement ¶ 1.) The Agreement contains a provision (the "Mandatory Redemption Provision"), which states that if Defendant fails to consummate an initial public offering ("IPO") within two years of issuing the preferred stock, Plaintiffs may require Defendant to redeem their shares for cash. (Id. ¶¶ 3, 4.)

To date, Defendant has not consummated an IPO. (Id. ¶ 9.) On October 20, 2004, Plaintiffs asked Defendant to redeem their stock pursuant to the Mandatory Redemption Provision of the Agreement. (Id. ¶¶ 10-13.) Defendant denied Plaintiffs' request, on the ground that doing so would "impair" its capital and thereby violate Delaware law. (Id. ¶¶ 14-17.) Plaintiffs then filed suit in this Court. Both parties agree that venue is proper and that Delaware law governs this dispute.*fn1 The parties have now filed cross-motions for summary judgment.

II. Summary Judgment Standard

Summary judgment is appropriate only when the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Tindall v. Poultney High Sch. Dist., 414 F.3d 281, 284 (2d Cir. 2005). "[S]ubstantive law will identify which facts are material," Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986), and a "material fact is 'genuine[]' . . . if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id.; Mitchell v. Shane, 350 F.3d 39, 47 (2d Cir. 2003).

III. Discussion

The parties dispute whether the Mandatory Redemption Provision of the Agreement requires Defendant to redeem Plaintiffs' stock. To resolve that dispute, the Court must address a more abstract question: under Delaware law, may Defendant redeem its stock if its capital is impaired at the time a stockholder requests redemption? Plaintiffs agree that Defendant's obligation to redeem is dependent upon whether its capital is impaired, but contend that the relevant point for measuring whether a corporation's capital is impaired is the time at which the parties entered the Agreement . Defendant argues that, under Delaware law, the point at which to measure impairment is the date upon which Plaintiff requested redemption. The Court agrees with Defendant.

Under Delaware law, a corporation's capital is "impaired" when funds necessary for redemption exceed the corporation's "surplus." Del. Code Ann. tit. 8, § 154 (2007). A corporation's "surplus" is "[t]he excess, if any, at any given time, of the net assets of the corporation over the amount so determined to be capital." Id. A corporation whose capital is impaired generally may not redeem its stock.*fn2

The plain language of the statute makes it clear that the relevant point at which to measure whether a corporation's capital is impaired is the time a stockholder requests redemption. Id. § 160(a) ("no corporation shall . . . [p]urchase or redeem its own shares of capital stock for cash or other property when the capital of the corporation is impaired"); see Klang v. Smith's Food & Drug Ctrs., Inc., 702 A.2d 150,154-55 (Del. 1997) (using the date the corporation repurchased its stock to measure whether its capital was impaired under Del. Code Ann. tit. 8, § 160).

Plaintiffs argue that the Agreement falls under an amendment to the governing statute, which provides that, "nothing in this subsection shall invalidate or otherwise affect a note, debenture, or other obligation" given by a corporation as consideration for stock, "if at the time such note, debenture, or obligation was delivered by the corporation[,] its capital was not then impaired." Del. Code Ann. tit. 8, § 160(a)(1).*fn3 More simply, where a transaction involves notes, debentures, or obligations, a court should determine impairment at the time the corporation issues the instrument. Id. Plaintiffs' argument fails because the amendment, by its terms, applies only to notes, debentures, or obligations, not preferred stock agreements.*fn4

See, e.g., Halmi v. Qintex Entm't, Inc., 8 F.3d 1353, 1357 (9th Cir. 1993) (holding that the amendment did not apply where plaintiff attempted to invoke a contractual right to force defendant corporation to repurchase its stock); United States v. Evans, 375 F.2d 730, 731 (9th Cir. 1967) ("Stock is an equity; it represents an ownership interest. It is to be distinguished from obligations such as notes or bonds which are not equities, and represent no ownership interest.").

The Seventh Circuit's reasoning in Reliable Manufacturing, the decision upon which Plaintiffs rely primarily to support their argument, does not advance their argument.*fn5 In Reliable Manufacturing, the Seventh Circuit concluded that, under Delaware law, a corporation's guaranty of its stock purchase price was valid so long as its capital was not impaired at the time it issued the guaranty. 703 F.2d at 1002. The status of the corporation's capital at the time the guaranty was enforced was not relevant to the analysis. See id. at 1001-02. Central to the Seventh Circuit's conclusion, however, was its recognition Plaintiffs' invocation of this ...

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