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NY Business Divorce Information on Dissolution and Other Disputes Among Owners of New York Corporations, LLCs and Partnerships

A Question of Procedure: Are Merits-Based Pre-Answer Dismissal Motions Allowed in Dissolution Proceedings?

Posted in Dissolution Procedure

The New York Supreme Court’s Commercial Division, which hears the bulk of corporate dissolution cases, operates in 11 counties across the state including Suffolk County on eastern Long Island. The pictured courthouse in Riverhead, New York, is home to the newest member of the Suffolk County Commercial Division, Justice Thomas F. Whelan, who last month handed down a thoughtful decision on an arcane but important procedural question: Can the respondent in a corporate dissolution proceeding move for dismissal in lieu of answering based on factual assertions contesting the merits of the petition?

In other words, can the respondent essentially move for a summary judgment of dismissal based on undisputed facts, prior to answering the petition?  Or is the respondent limited at the pre-answer stage to a dismissal motion based on the facial inadequacy of the petition’s allegations assuming them to be true, or on other non-merits grounds such as statute of limitations, lack of standing, lack of personal jurisdiction, etc.? 

Justice Whelan’s decision in Matter of Langella (Front Door Associates, Inc.), 34 Misc. 3d 1212(A), 2012 NY Slip Op 50058(U) (Sup Ct Suffolk County Jan. 13, 2012), involves a petition brought under §1104-a of the Business Corporation Law (BCL) for judicial dissolution of two closely-held corporations based on the controlling shareholder’s allegedly oppressive conduct. The petitioner claimed to own 22% of Corporation #1 and 50% of Corporation #2. In lieu of answering the petition, the respondent corporations moved to dismiss the petition on the grounds that petitioner lacked standing to seek dissolution of Corporation #1 because he owned less than the requisite 20% voting interest, and based on the purported lack of merit of petitioner’s claims of oppressive conduct with respect to Corporation #2.

Corporation #2: Dismissal Based on Lack of Merit

Justice Whelan’s decision tackles the latter ground first. He notes that the procedural aspects of a special proceeding for judicial dissolution under BCL Article 11 are governed by the provisions of Article 4 of the Civil Practice Law and Rules (CPLR) “except to the extent that BCL Article 11 or some other applicable statute provides otherwise.”  CPLR §404, he goes on, requires that a legal defense to claims in a special proceeding must be raised in an answer as an “objection in point of law” — a term the statute does not define — or in a pre-answer motion to dismiss. Justice Whelan then cites a number of decisions in special proceedings of various sorts for the proposition that objections in point of law

should not involve a contest on the merits of the targeted claims, but instead, should be limited to the assertion of one or more of defenses in bar of the type contemplated by CPLR 3211(a). Accordingly, motions to dismiss special proceedings interposed pursuant to CPLR 404 . . . should be predicated upon defenses in bar, such as failure to state a claim, lack of standing or capacity to sue, statute of limitations, accord and satisfaction, res judicata and the others contemplated by CPLR 3211(a). [Citations omitted.]

Applying this rule, Justice Whelan concludes that the arguments made by the respondents in support of the dismissal motion regarding Corporation #2 must be denied because they

are not predicated upon objections in points of law within the contemplation of CPLR 404 and 3211(a). Instead, the respondents challenge the merits of the [petitioner's] claims for such relief by disputing the factual assertions set forth in the petition regarding the allegedly wrongful conduct which form the basis for the petitioner’s demands for dissolution of [Corporation #2] under BCL 1104-a. Since such challenges are beyond the scope of this pre-answer application, the respondents’ cross motion for dismissal of the petitioner’s demands for dissolution of [Corporation #2] is denied. To the extent that the respondents’ challenges may be read as being predicated upon legal insufficiency, they are rejected as unmeritorious.

Justice Whelan’s discussion highlights the interplay between CPLR Article 4′s rules generally applicable to all special proceedings, and the specific requirements in BCL Article 11 governing dissolution proceedings. BCL §1109 provides that, “[a]t the time and place specified in the order to show cause, or at any other time and place to which the hearing is adjourned, the court or the referee shall hear the allegations and proofs of the parties and determine the facts.” The “hearing” specified in the order to show cause that initiates the dissolution proceeding (see BCL §1106) does not necessarily contemplate an evidentiary hearing.

A number of appellate court decisions, such as Matter of Williamson, 259 AD2d 362 (1st Dept 1999), Matter of HGK Asset Management, Inc., 228 AD2d 246 (1st Dept 1996), and Matter of Goodman, 200 AD2d 670 (2d Dept 1994), authorize the trial court to grant dissolution without an evidentiary hearing in cases where, whether by motion to dismiss or by answer, the respondent fails to raise material issues of fact in response to the petition’s allegations of oppressive conduct or deadlock. These decisions effectively confer upon the trial court the same authority to make summary determinations upon the return date of the initial show cause order as exists under CPLR §3212 governing post-answer summary judgment motions generally. Such authority also is granted explicitly by CPLR §409(b) stating that the court ”shall make a summary determination upon the pleadings, papers and admissions to the extent that no triable issues of fact are raised” and ”may make any orders permitted on a motion for summary judgment.”

Corporation #1: Dismissal Based on Lack of Standing

Justice Whelan finds no similar procedural bar to the respondents’ motion to dismiss the petition as to Corporation #1, finding that the argument based on petitioner’s alleged ownership of less than 20% of the corporation’s shares, is a “quintessential defense in bar, namely, that the petitioner lacks ‘standing’ to prosecute his claims in this dissolution proceeding.” In the discussion that follows, Justice Whelan helpfully cites numerous case authorities concerning the burden of proof to establish standing – it rests on the petitioner; the necessity for a hearing to “aid the court’s determination of the threshold ownership issue in those cases where the record is replete with factual issues”; and cases in ”other special proceeding contexts, such as Article 78 proceedings,” in which courts have denied pre-answer dismissal motions where issues of fact exist “without prejudice to the assertion of appropriate affirmative defenses in an answer, thereby leaving threshold issues presented on the pre-answer motion to the court’s ultimate determination of the proceeding.”

Based on the unresolved issues of fact surrounding the Langella petitioner’s stock ownership, largely concerning his compliance or non-compliance with a shareholders’ agreement that contemplated the issuance to him of additional shares upon satisfaction of certain conditions, Justice Whelan ultimately denies without prejudice the respondents’ motion to dismiss the petition as to Corporation #1. “[I]n light of the procedural posture of this proceeding,” he adds, “determination of the threshold issue of the petitioner’s ownership should be made as part of the court’s ultimate determination of the petition, as the same includes the petitioner’s separate dissolution claims with respect to [Corporation #2].” 

The Takeaway.  As I’ve said before, if you’re a petitioner in a dissolution proceeding you need to load up your petition (or supplemental affidavits) with as many facts as are available in support of your claims; bare “notice” pleading will not suffice. My advice to respondents wishing to oppose dissolution essentially is the same: whether you file an answer or a motion to dismiss, don’t hold back, put in everything you’ve got by way of factual affidavits with as much documentary support as possible.