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

Judicial Muddle Persists Over Power to Dissolve Foreign Entities

Posted in Delaware, Dissolution Procedure, Foreign Business Entities, Partnerships

A recent decision by a Manhattan trial judge in Holdrum Investments, N.V. v. Edelman, 2013 NY Slip Op 30369(U) (Sup Ct NY County Jan. 31, 2013), brings into sharp relief the longstanding state of uncertainty surrounding the authority of a New York court to entertain a lawsuit seeking the involuntary dissolution of a New York-based foreign business entity.

Holdrum is a lawsuit brought in Manhattan Supreme Court by a limited partner of a New York-based, Delaware limited partnership formed in 1996 known as Museum Partners L.P.  The general partner is the former corporate raider, Asher Edelman, who, in the late 1980′s, left Wall Street and turned his considerable energies and resources to the fine arts and art financing. (Read here a 2010 Wall Street Journal profile of Edelman entitled The Art World’s Gordon Gekko.)

Holdrum’s Second Amended Complaint (read here) alleges that Museum Partners was formed for the purpose of obtaining an ownership position in a French publicly-traded company controlled by the Taittinger family, whose holdings included banking, hotel and champagne producer interests. Edelman sought either to obtain control of the company or to force the Taittinger family to purchase Museum Partner’s holding at a large profit.

After the strategy to force up the stock price failed, Edelman brought a series of unsuccessful lawsuits in France and the United States against the Taittingers seeking to wrest control of the company.  Holdrum’s complaint alleges that the lawsuits wasted Museum Partners’ assets; that Edelman diverted assets to his personal investment purposes; and that Museum Partners should be wound down and dissolved.

Holdrum’s Motion to Dissolve the Partnership

In July 2012, Holdrum moved for summary judgment on its claim for judicial dissolution of Museum Partners. Its memorandum of law (read here) contended that judicial dissolution is warranted under § 17-801 and § 17-802 of the Delaware Revised Uniform Limited Partnership Act (DRULPA) because the partnership no longer serves any purpose and is beyond the dissolution date specified in the partnership agreement.

Edelman opposed the motion on substantive and procedural grounds. The latter included his argument that DRULPA § 17-802′s express provision for judicial dissolution of a limited partnership “[o]n application by or for a partner [to] the [Delaware] Court of Chancery” deprives any other court of the power to enter a decree of dissolution (read here Edelman’s opposing memorandum of law).

Holdrum’s reply memorandum of law (read here) countered that the language of § 17-802 does not confer exclusive jurisdiction on the Delaware Chancery Court. It also cited New York case law for the general proposition that New York courts may exercise jurisdiction over disputes involving the internal affairs of foreign corporations.

Surprisingly, neither side cited any of the handful of New York cases that directly address the authority of New York courts to decide dissolution cases involving foreign entities, much less did they acknowledge the differences among those authorities.

The Court’s Decision

Before addressing the jurisdictional issue, Manhattan Supreme Court Justice Anil C. Singh took note of the strong Delaware policy promoting freedom of contract among the parties to a Delaware limited partnership. He then found that Holdrum had not established as a matter of law that Edelman’s conduct was wrongful, and that a trial must be had concerning the appropriateness of Edelman’s pursuit of a litigation strategy against the Taittinger family, and whether the limited partners accepted the strategy well past the time set forth for dissolution in the partnership agreement.

Justice Singh next turned to Edelman’s contention that the New York court lacks jurisdiction to dissolve a Delaware entity which, the court noted, is supported by “both logic and authority,” citing Rimawi v. Atkins, 42 AD3d 799 (3d Dept 2007), where the Albany-based Appellate Division, Third Department, squarely held that the plaintiffs’ claim in that case for dissolution of a Delaware LLC “is one over which the New York courts lack subject matter jurisdiction.”

Justice Singh nevertheless concluded that he was bound to follow the decision in Matter of Hospital Diagnostic Equipment Corp., 205 AD2d 459, 613 NYS2d 884 (1st Dept 1994), where the Manhattan-based Appellate Division, First Department, found “without merit” the argument that New York courts lack subject matter jurisdiction to dissolve foreign corporations. “There is no basis,” Justice Singh reasoned,

to treat a foreign limited partnership differently from a foreign corporation and, since this court must follow the binding appellate authority of Hospital Diagnostics, Edelman’s cross motion to dismiss Holdrum’s cause of action for dissolution of Museum is denied. 

Appellate Clarity is Needed

This is not the first time I’ve written about the muddled state of the law on the question of authority to hear dissolution applications for foreign business entities. In June 2009, I wrote about a ruling by the Brooklyn-based Appellate Division, Second Department, in Matter of HMS Venture Management Corp. (UtiliSave, LLC), 63 AD3d 840, 2009 NY Slip Op 04906 (2d Dept June 9, 2009), in which that court cited with approval the Third Department’s Rimawi decision in dismissing for lack of subject matter jurisdiction a petition to dissolve a New York-based Delaware corporation.

My post on the HMS case (read here) provides additional background, including discussion of Hospital Diagnostics in which the First Department dismissed a petition for judicial dissolution of a Delaware corporation under the forum non conveniens doctrine based on the corporation’s lack of substantial contacts with New York.

Why does Hospital Diagnostics continue to be cited in support of a New York court’s power to hear dissolution cases involving foreign entities? It’s because the court there rejected the Attorney General’s argument that the lower court should have dismissed the case for lack of subject matter jurisdiction without ever reaching the issue of  forum non conveniens. As I noted back then, likely the Attorney General was most concerned with the threat to interstate comity posed by the prospect of New York courts issuing dissolution decrees directed at New York-based foreign business entities and the prospect of foreign courts reciprocating with New York entities based in other states.

Inconsistent jurisdictional rulings concerning dissolution of foreign entities are not solely a New York problem. I previously wrote about a pair of New Jersey decisions in 2008 refusing to dismiss dissolution proceedings involving Massachusetts and Delaware corporations (read here) and about a 2009 Vermont decision which went the other way, dismissing a dissolution proceeding involving a Delaware LLC (read here). In an update to the latter post I also mention a 2012 New Jersey decision rejecting jurisdiction to hear a dissolution petition for New York LLCs.

So where does that leave us? In two of New York’s four judicial “departments” — the Second and Third — courts may not hear judicial dissolution proceedings involving foreign entities while in the First Department they can based on a ruling that rejected a jurisdictional challenge but dismissed on other grounds. I’m not aware of any rulings in the Rochester-based Fourth Department. Moreover, none of the decisions offers an analytical construct for treating the issue as a matter of subject matter jurisdiction versus  forum non conveniens versus the abstention doctrine such as that used by federal courts in declining to exercise jurisdiction over corporate dissolution claims.

It is essential that the courts of New York speak with one voice on the issue, not only because of the inconsistent treatment afforded owners of New York-based foreign business entities, but also because of the sensitive “foreign policy” implications for interstate relations. Perhaps Mr. Edelman, who supposedly takes to litigation like paint splatter to a Jackson Pollock canvas, will do us a favor and pursue an appeal of Justice Singh’s ruling to the First Department and, if need be, to New York’s highest court, the Court of Appeals, based on inconsistent inter-departmental rulings.