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), 63 AD3d 840, 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 AD3d 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.

In April 2008, Westchester County Commercial Division Justice Kenneth W. Rudolph  sua sponte issued an order dismissing the dissolution petition for failure to demonstrate prima facie that UtiliSave is unable to function as intended or failing financially.  Then something unusual happened, as described in the Second Department’s decision:

MHS then moved to vacate the order entered April 21, 2008, asserting that, subsequent to the court’s denial of the petition for failure to make a prima facie case, it learned that the court lacked subject matter jurisdiction over a proceeding to dissolve a foreign limited liability company.  Desirous of bringing a dissolution proceeding in Delaware, but concerned that it would be bound by the order denying the petition for failure to make a prima facie case, MHS moved to vacate the order entered April 21, 2008, and requested that the proceeding instead be dismissed for lack of subject matter jurisdiction. 

In other words, after losing the case, the petitioner challenged the court’s jurisdictional basis to hear its own petition!  Justice Rudolph denied MHS’s motion in an August 2008 order, writing as follows:

Having filed an admittedly sparse and factually incorrect pleading, and having filed the petition upon a good faith belief that this Court had subject matter jurisdiction, petitioner’s attorneys now contend that this Court has no jurisdiction to dissolve a Delaware limited liability company.  The Court notes that its [prior] decision did not dissolve UtiliSave but dismissed the petition for its failure, prima facie, to demonstrate that UtiliSave was unable to function as intended or failing financially or unable to reasonably operate as a going concern.

MHS’s appeal from the two orders contended that, under the Third Department’s Rimawi decision and Second Department case law dismissing petitions to dissolve foreign corporations, the court lacked subject matter jurisdiction to entertain a petition to dissolve a foreign LLC.  The respondent countered that any possible limitation on the court’s subject matter jurisdiction was never implicated because the court did not actually dissolve the LLC, and that the court’s power to dismiss the petition for failure to state a valid claim was within permissible bounds of the internal affairs doctrine.

The Second Department’s decision accepted MHS’s argument without elaboration and vacated the order dismissing the petition, writing as follows:

A claim for dissolution of a foreign limited liability company is one over which the New York courts lack subject matter jurisdiction (see Rimawi v Atkins, 42 AD3d 799; Matter of Porciello v Sound Moves, 253 AD2d 467; Matter of Warde-McCann v Commex, Ltd., 135 AD2d 541). “[A] court’s lack of subject matter jurisdiction is not waivable, but may be [raised] at any stage of the action, and the court may, ex mero motu [on its own motion], at any time, when attention is called to the facts, refuse to proceed further and dismiss the action'” (Matter of Fry v Village of Tarrytown, 89 NY2d 714, 718, quoting Robinson v Oceanic Steam Nav. Co., 112 NY 315, 324).

“A judgment or order issued without subject matter jurisdiction is void, and that defect may be raised at any time and may not be waived” (Editorial Photocolor Archives v Granger Collection, 61 NY2d 517, 523). As such, the order entered April 21, 2008, which denied the petition on the merits is void, the motion to vacate that order should have been granted, and the proceeding must instead be dismissed for lack of subject matter jurisdiction. 

The court’s citations to Warde-McCann and Porciello are Second Department rulings from 1987 and 1998, respectively, dismissing dissolution petitions involving New York-based foreign corporations.  Neither one expressly refers to the court’s subject matter jurisdiction.  Indeed, Warde-McCann seems to predicate its holding on the internal affairs doctrine which assumes jurisdiction but declines to exercise it in the interests of interstate comity.  The Third Department’s Rimawi decision, also cited in the above passage, does state explicitly that New York courts lack subject matter jurisdiction to dissolve foreign LLCs, however, Rimawi‘s support for the statement consists of citations to Warde-McCann and Porciello.  In addition, Rimawi (but not the MHS decision) expressly acknowledges the First Department’s contrary ruling in the Hospital case.

Hospital involved a petition for dissolution of a Delaware corporation based on shareholder dissension under BCL Section 1104(a)(3).  The respondent shareholders successfully moved in the trial court to dismiss the case on the ground of forum non conveniens, based on the corporation’s lack of substantial contacts with New York.  The New York Attorney General, undoubtedly sensitive to how courts in sister states might treat dissolution disputes involving New York corporations, also had moved for dismissal of the petition insofar as it sought dissolution, but on the different ground that the court lacked subject matter jurisdiction to dissolve a foreign corporation.  The losing petitioner appealed to the Manhattan-based Appellate Division, First Department.  The Attorney General filed a brief in which it argued that the trial court should have dismissed the dissolution claim based on lack of jurisdiction rather than on forum non conveniens grounds, since the latter assumes the court’s subject matter jurisdiction in the first instance.  The First Department’s decision upheld the dismissal based on forum non conveniens, adding that the Attorney General’s position, “that the courts of New York  lack subject matter jurisdiction to dissolve a foreign corporation” is “without merit.”

In the 15 years since Hospital was decided, I’m aware of only one case in which a lower court within the First Department  issued a ruling refusing to dismiss a petition for dissolution of a foreign entity.   So, is there any practical significance here, or is it just an academic exercise to determine the borderline between subject matter jurisdiction and the internal affairs doctrine, where the application of either generally will result in the dismissal of a petition to dissolve a foreign business entity?

It’s hard to say.  There are a number of New York cases holding that the court can adjudicate a dissolution dispute involving a foreign entity insofar as it can grant remedies short of dissolution, e.g., a compelled buy-out of a minority shareholder.  Matter of Dohring (CVC Products, Inc.), 142 Misc 2d 429, 537 NYS2d 767 (Monroe County 1989), and Sokol v. Ventures Education Systems Corp., 10 Misc 3d 1055(A) (Sup Ct NY County 2005), are the best known of these cases.  A court that deems itself without subject matter jurisdiction is unlikely to keep the case to consider lesser remedies.

Finally, last March I wrote about a recent New Jersey state court decision in which the court asserted its jurisdiction not only to hear a dissolution petition involving a New Jersey-based Delaware corporation, but also to apply New Jersey’s dissolution statute to the Delaware entity.  The contrast in judicial philosophy between that case and HMS could not be starker.

Update July 13, 2011:   In Byrnes-Kane v. Strasser, Short Form Order, Index No. 022934/10 (Sup Ct Nassau County June 29, 2011), Nassau County Commercial Division Justice Stephen A. Bucaria denied a motion to dismiss a claim for judicial dissolution of a Delaware LLC.  Justice Bucaria agrees that under Ramawi the court lacks subject matter jurisdiction to seek dissolution, but the claim survives because it seeks “the alternative relief of directing the parties to commence a dissolution proceeding in the State of Delaware.”  The question is, why does the plaintiff need to ask a New York court for permission to start a dissolution action in Delaware?