MARCIANO V. NAKASH
535 A.2d 400 (1987)
NATURE OF THE CASE: Action for dissolution. Marciano (P) challenged a decision, which
held that interested director loans made by Nakash (D) were not voidable as self-dealing
transactions.
FACTS: Fifty percent of Gasoline, LTD is owned by Ari, Joe, and Ralph Nakash (D) and
fifty percent by Georges, Maurice, Armand and Paul Marciano (P). The liquidation proceeding
marked the end of a joint venture launched in 1984 by the P and D to market designer jeans
and sportswear. Initially the venture was to market Guess creations. Ps entered into
negotiations with Ds who owned Jordache Enterprises, and agreed that Ds would get 50% of the
stock of Guess for $4.7 million. Ds joined Ps on the Guess board of directors, each having
three seats. When Gasoline was formed, stock ownership and board composition was shared
equally by the two families. Gasoline functioned in New York under the D's operational
guidance while the parent, Guess, continued under the primary attention of the P's.
Differences surfaced with resulting deadlocks at the director level of both Guess and
Gasoline. A custodian was appointed. In 1987 the custodian advised the Court of Chancery
that because of a lack of financing Gasoline had no prospects of continuation and
recommended liquidation. A court-approved plan of liquidation authorized the custodian to
sell the assets of Gasoline. The determination of those debts, in particular the loan claims
asserted by D, was sharply disputed in the Court of Chancery and is the focus of this
appeal. Gasoline had secured financing to support its inventory purchases from the Israel
Discount Bank in New York. The bank advanced funds at one percent above prime rate secured
by Gasoline's accounts receivable and Ds' personal guarantee. Ps were unwilling to
participate in loan guarantees because of their dissatisfaction with the D's management. Ds
withdrew their guarantees causing the Israel Discount Bank to terminate its outstanding loan
of $1.6 million. Without consulting Ps, Ds advanced approximately $2.3 million of their
personal funds to Gasoline to enable the corporation to pay outstanding bills and acquire
inventory. In 1986, Ds arranged for U.F. Factors, an entity owned by them, to assume their
personal loans and become Gasoline's lender. U.F. Factors charged interest at one percent
over prime to which Ds added one percent for their personal guarantees of the U.F. Factors
loan. Gasoline's debt to U.F. Factors amounted to $2,575,000 of which $25,000 represented
P's guarantee fee. Another D entity, Jordache Enterprises, also sought payment from Gasoline
of two percent of the company's gross sales, or $30,000 for warehousing and invoicing
services. Ds then replaced the U.F. Factors loan, secured by a series of promissory notes
executed by Gasoline, with a line of credit collateralized by Gasoline's assets including
trademarks and copyrights. This action took place without the knowledge or consent of the
custodian and was subsequently rescinded by Ds. At the time of the court-ordered sale of
assets, Ds and their entities were general creditors of Gasoline. If allowed in full Ds
claim will exhaust Gasoline's assets, leaving nothing for its shareholders. The loans made
by D to Gasoline were interested transactions. Because of the control deadlock, the
questioned transactions did not receive majority approval of Gasoline's directors or
shareholders. Ps argue that the loan transaction is voidable at the option of the
corporation notwithstanding its fairness or the good faith of its participants. The Court of
Chancery rejected this contention. Ps appealed.
ISSUE:
RULE OF LAW:
HOLDING AND DECISION:
LEGAL ANALYSIS:
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