Vermont Court Declines Jurisdiction Over Dissolution of Delaware LLC
A Vermont trial court's decision earlier this year lures me back to one of my favorite topics: Are the courts of one state authorized to judicially dissolve business entities formed under the laws of another state?
In most states, including New York, courts will not hear petitions to dissolve foreign firms even if the firm's operations are wholly within the judicial forum's state. Early this year, I wrote about an extraordinary pair of New Jersey cases decided in late 2008 that went against the grain, in which the courts not only accepted jurisdiction to hear dissolution petitions involving New Jersey-based Massachusetts and Delaware corporations, they also applied New Jersey's dissolution statute which provided the petitioner with substantive rights and remedies significantly greater than the counterpart Massachusetts and Delaware statutes. More recently, and in contrast to the New Jersey cases, I wrote about a June 2009 decision by a New York appellate court squarely holding that the court lacked subject matter jurisdiction over a petition to dissolve a New York-based Delaware limited liability company (LLC).
The Vermont case, Casella Waste Systems, Inc. v. GR Technology, Inc., Decision and Order, Docket No. 409-6-07 Rdcv (Vt. Super. Ct. Feb. 13, 2009), also involves a Delaware LLC and also concludes that the court lacks subject matter jurisdiction. What makes Casella worth reading and writing about is its in-depth analysis of the jurisdictional issue.
Continue Reading...Appellate Rulings Clash Over Subject Matter Jurisdiction to Dissolve Foreign Business Entities
The Appellate Division, Second Department, last week issued a decision in a dissolution proceeding involving a New York-based Delaware limited liability company (LLC) in which it broadly pronounced that New York courts lack subject matter jurisdiction in such cases. The decision in Matter of HMS Venture Management Corp. (UtiliSave, LLC), 2009 NY Slip Op 04906 (2d Dept June 9, 2009), agrees with an appellate ruling two years earlier by the Third Department, also involving the requested dissolution of a Delaware LLC, in Rimawi v. Atkins, 42 AD2d 799, 840 NYS2d 217 (3d Dept 2007).
HMS and Rimawi both rely on precedents in which New York courts dismissed petitions seeking dissolution of foreign business corporations based on the hoary internal affairs doctrine under which courts traditionally declined to exercise jurisdiction where the determination of the rights of the litigants involves regulation and management of the internal affairs of a foreign corporation. What makes things particularly interesting, however, is a 1994 appellate decision by the Manhattan-based First Department, in Matter of Hospital Diagnostic Equipment Corp., 205 AD2d 459, 613 NYS2d 884 (1st Dept 1994), where that court expressly rejected the argument, made by no less a personage than the state Attorney General, that New York courts lack subject matter jurisdiction to dissolve foreign corporations.
Let's first look at HMS. The subject Delaware LLC, called UtiliSave, operates in New Rochelle, New York, where it audits utility bills and usage of corporate clients. Its only connection to Delaware is its legal formation there. In 2007, 40% member and co-manager MHS Venture filed a petition to dissolve UtiliSave in Westchester County Supreme Court. Its petition sought dissolution under the terms of the operating agreement, allegedly based on the company's failure to make certain distributions, and on the statutory ground that it was no longer reasonably practicable to carry on the business in conformity with the operating agreement. It's unclear whether the petition invoked statutory dissolution under Section 702 of the New York LLC Law or under Section 18-802 of the Delaware LLC Act or both.
Continue Reading...New Jersey Courts Apply State's Dissolution Statute to Foreign Corporations: Can it Happen in New York?
Many New York businesses are incorporated in other states, Delaware being the traditional favorite. In most instances these corporations are foreign in name only, i.e., their offices, assets, employees, shareholders and directors all are located in New York. Can a shareholder sue for dissolution of a New York-based foreign corporation in a New York court under New York's dissolution statutes?
The lead article in this month's online newsletter published by Drinker Biddle highlights two recent, unpublished New Jersey court decisions in which that state's dissolution statute was applied to foreign corporations based in New Jersey. In Krzastek v. Global Resource Industrial and Power, Inc., No. A-1815-06T2 (App. Div. Sept. 11, 2008), the New Jersey appellate court upheld application of the state's oppressed minority shareholder dissolution statute in a suit brought by a minority shareholder of a Massachusetts corporation. In Conway v. DialAmerica Marketing, Inc., No. BER-C-116-08 (Super.Ct. Sept. 30, 2008), the trial court did the same in a case brought by a minority shareholder of a Delaware corporation. In both cases, the courts applied New Jersey law based on an interests-based conflict of laws analysis. In both cases, the New Jersey dissolution statute afforded the plaintiffs rights and/or remedies (especially in regard to buyout) broader than those available under the laws of the states of incorporation. In both cases, the defendants unsuccessfully argued for dismissal based on the the "internal affairs doctrine" under which courts traditionally refused to exercise jurisdiction where the determination of the rights of the litigants involves regulation and management of the internal affairs of a foreign corporation.
Could it happen in New York? Case precedent suggests not, although the issue is not fully settled.
Continue Reading...One Case, Three Great Issues
When it comes to reading court decisions in business divorce cases, I have a number of pet issues. If I come across a decision with one such issue, I’m happy. Two in the same opinion, I’m thrilled. Three in the same opinion, it’s like hitting the trifecta.
A recent decision by Nassau County Commercial Division Justice Stephen A. Bucaria offers a winning threesome: (1) arbitrability of corporate dissolution petitions; (2) petitions seeking dissolution of out-of-state corporations; and (3) dissolution petitions that trigger mandatory buybacks under a shareholders’ agreement.
The case, Matter of Schneck (R&J Components Corp.), 2007 NY Slip Op 32966(U) (Sup Ct Nassau County Sept. 17, 2007), involves two brothers who went into, and eventually each inherited 50% interests in, an electronic parts business founded by their father who died in 1990. The business came to be organized as six separate companies, two of which were formed as out-of-state corporations but all of which operated in New York. The complaining Brother A claimed that Brother B had frozen him out of the business, denied him access to business records, and took hundreds of thousands of dollars more each year than Brother A was getting. Brother A sought judicial dissolution of all the companies based on internal dissension and deadlock under Business Corporation Law § 1104.
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