See full size imageA 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.  

Casella involved two Vermont-based companies called Green Mountain Glass LLC and CulChrome LLC, both organized under Delaware law for the purpose of developing and licensing intellectual property related to the recycling of mixed-color waste glass.  The plaintiff and defendant respectively held majority and minority interests in both LLCs.

The plaintiff’s complaint alleged that the managing members were so deeply divided over the management of the companies that the business relationship had become irretrievably broken.  Among other claims, the plaintiff requested judicial dissolution of the LLCs on the ground it was no longer reasonably practicable to carry on the business purposes for which the LLCs were formed.

The defendant responded with a motion to dismiss the dissolution claim on the ground the court lacked subject matter jurisdiction to dissolve a Delaware LLC.

The events triggering dissolution as specified in the operating agreements of both LLCs included entry of a decree of judicial dissolution “pursuant to” the Delaware LLC Act’s dissolution provision, §18-802.  “This means,” the court stated, “that the parties intended for §18-802 to apply to any petition for judicial dissolution,” and that the “fundamental question” was whether the statute authorized a Vermont court to dissolve Delaware LLCs, “and if not, whether any other source of authority does.”

The court launched its analysis by examining the text of §18-802, which authorizes an LLC member or manager to seek judicial dissolution “on application [to] the Court of Chancery . . ..”   This language, the court concluded, grants subject matter jurisdiction to the Delaware Court of Chancery — and to no other court.  The court elaborated:

It does not identify any other court by name, and it does not use permissive or generic terms suggesting that subject matter jurisdiction would be appropriate in any court where personal jurisdiction can be maintained.  It says only that the Court of Chancery may decree dissolution whenever the standard has been met.

The court acknowledged “some tension” with other provisions in the Delaware LLC Act contemplating the possibility of jurisdiction in other states, e.g. §18-109[d] which states that members may consent in the operating agreement “to be subject to the nonexclusive jurisdiction of the courts of, or arbitration in, a specified jurisdiction”.  But, the court explained,

there is a fundamental difference between dissolution and actions that merely seek to interpret an operating agreement or resolve differences among members.  Judicial dissolution is a drastic remedy that terminates the existence of an entity created pursuant to an enabling statute.  As a matter of comity, courts have declined jurisdiction to dissolve business entities — corporations, limited liability companies, and limited partnerships alike — organized under the laws of another state. . . . [T]here are enough similarities between corporations and limited liability companies — in particular, the involvement of the secretary of state in the formation and cancellation of the businesses — to conclude that the principle should be entitled to some persuasive weight here as an explanation for why dissolution proceedings are treated differently than other actions under the Delaware LLC Act.

The plaintiff raised several arguments in support of jurisdiction, none of which persuaded the court, the main ones being:

  • First, plaintiff argued that declining jurisdiction would be “contrary to the spirit of freedom of contract embodied by the Delaware LLC Act.”  Whether or not the parties could have modified the default jurisdictional provisions of §18-802, the court replied, they did not do so here.  To the contrary, the operating agreements expressly contemplate dissolution proceedings “pursuant to” the Delaware LLC Act.
  • Second, plaintiff argued that §18-802 merely confers non-exclusive jurisdiction upon the Court of Chancery and thus did not divest any other court of subject matter jurisdiction.  Even if so, the court countered, it did not explain where the Vermont court’s jurisdiction came from.  The court’s general jurisdiction to hear causes of action rooted in common law and equity did not allow it “to exercise jurisdiction over a statutory cause of action where the enabling statute does not grant it authority to do so.”
  • Third, plaintiff argued that principles of comity do not apply because Delaware courts have no special interest in retaining jurisdiction over dissolution proceedings.  This argument, the court responded, does not explain why the Delaware legislature “chose to vest subject matter jurisdiction over dissolution proceedings only in the Court of Chancery, at least as a default rule.” 

Interestingly, Casella posits a Tennessee case, ARC MedLife, Inc. v. AMC-Tennessee, Inc., 183 S.W.3d 1 (Tenn. Ct. App. 2005), as one in which a non-Delaware court exercised subject matter jurisdiction over the dissolution of a Delaware LLC.  Casella then goes on to distinguish ARC on the ground that, unlike Vermont’s LLC Act, the Tennessee LLC Act “apparently” authorizes dissolution of a foreign LLC.  However, my reading of ARC indicates, first, that the members of the LLC agreed to dissolve the company before any litigation commenced; second, that the litigation centered on an accounting and financial claims arising from the winding up and liquidation of the business; third, that the jurisdictional issue was not contested.  I also found nothing in the Tennessee LLC Act addressing much less authorizing dissolution of foreign LLCs. 

Perhaps some of you out there have come across other cases in which the courts grappled with jurisdiction over dissolution of foreign business entities.  If so, I’d love to hear from you.

Update October 4, 2012: Jay McDaniel’s N.J. Business Dissolution Journal highlights a recent New Jersey trial court’s decision in Lerner v. Heidenberg BER-C-64-12 (Chancery Div. June 8, 2012), declining jurisdiction to adjudicate claims for dissolution of two New York limited liability companies.