A rare appellate reversal earlier this month of a trial court’s decision over the proper venue of a corporate dissolution contest prompts a closer look at the rules and considerations involved when trying to secure the home field advantage in litigation of this sort.  Matter of Supplier Distribution Concepts, Inc., 2011 NY Slip Op 00084 (3d Dept January 6, 2011). 

First, some basics.  When lawyers talk about the proper “venue” of a case, they mean the location where it will be heard, i.e., which county if the case is in state court, or which federal district if the case is in federal court.  The venue rules contained in the state and federal codes of civil procedure generally require the physical presence of a party or some other nexus between the case and the locality.

When litigation adversaries reside in different states or in different counties in the same state, and when jurisdiction and venue properly lie in both places, there’s an incentive to grab the home field advantage by being the first to file a lawsuit in one’s local courthouse.  For the client, having to litigate in a distant place can mean significant additional expense, not to mention the perception if not the reality that the judge will lean in favor of local interests represented by local courthouse denizens.  Likewise, lawyers almost always prefer to argue their case before a judge they know and who knows them.  It’s human nature.

You don’t see many fights over venue in corporate dissolution proceedings even when the shareholders reside in different states or different counties in the same state, for two reasons.  First, even if a court in State #1 technically has jurisdiction to decide a dissolution contest involving a corporation formed in State #2, under the so-called “internal affairs” doctrine, as a matter of comity and deference to the state under whose laws the corporation was formed, the State #1 court will not hear the dissolution petition.  Imagine, for instance, how awkward (to say the least) it would be to present to the Delaware Secretary of State a New York judge’s order directing the dissolution of a Delaware corporation, and vice versa.  (Read here, here and here my prior posts on the subject.)

Second, in New York as in most if not all other states, the rules governing venue in applications for judicial dissolution of corporations (Business Corporation Law 1112) and limited liability companies (LLC Law 702) specifically require the proceeding to be brought in the “judicial district” — for the moment, think county — “in which the office of the corporation [or LLC] is located.”  Although you might think this could lead to disputes when the business has multiple offices in different counties within the state, as used in the statutes “office of the corporation” does not necessarily mean an actual place of business.  Rather, it means the county of business stated in the certificate of incorporation or, in the case of an LLC, in the articles of organization whether or not the business has an actual place of business there.

Which brings us to the Third Department’s decision this month in Matter of Supplier Distribution Concepts, Inc., in which Stephen Richards, as one-third owner of a close corporation (“SDC”) and an affiliated limited liability company (“MDR”), sought to dissolve both by petition filed in the Supreme Court in Binghamton, New York, located within the Broome County judicial district where he resides and his lawyer practices.  Richards’ petition identically described each company as having “a place of business located in Broome County, New York.”  Note how the description varies slightly but importantly from the statutory language, “the judicial district in which the office of the [entity] is located.” 

It turns out, the difference in locution was no oversight.  SDC’s certificate of incorporation, as amended in 2003, designated Monroe County as the location of the corporation’s office, as did MDR’s articles of organization filed the following year.  Monroe County, the seat of which is Rochester, is about 100 miles from Binghamton.  It’s also the residence of the managing owner, Charles Dekar, and the bricks-and-mortar location of the companies’ main operations.

Richards’ filing in Broome County did not sit well with Dekar and his Rochester-based lawyers who quickly filed a motion to change the venue to Monroe County Supreme Court under BCL 1112 and LLC Law 702 based on the office location designated in the organizational documents on file with the Secretary of State.  Richards responded with a cross motion to retain venue in Broome County under Section 510(3) of the Civil Practice Law and Rules which gives judges broad discretion to change venue where “the convenience of material witnesses and the ends of justice will be promoted by the change.”

The motions were heard by Broome County Supreme Court Justice Ferris D. Lebous who ruled in favor of Richards.  As reflected in the transcript of the oral argument on the motions (read here), Justice Lebous was swayed to retain venue for several reasons.  First, while agreeing that as a “general rule” venue in dissolution cases is determined by the office location stated in the filed organizational documents, there is an “exception” where the petitioner seeks relief beyond dissolution, such as enforcement of other shareholder or director rights.  Second, with respect to the presence in Broome County of material witnesses — Richards submitted a list of 42 supposed witnesses residing in Broome and nearby counties — he focused on the fact that Dekar had contacted police authorities and the district attorney’s office in Broome County to pursue allegations that Richards had misappropriated company property.  Third, expressing his hope that he could preside over a more prompt settlement of the case, Justice Lebous states that

the ends of justice will be promoted and judicial economy will be promoted by getting a handle on these things now, putting the brakes on, and getting this thing resolved in as mutually agreeable a fashion as possible. [Transcript p. 30]

Justice Lebous signed a formal order retaining venue on June 21, 2010 (read here), from which Dekar appealed to the Albany-based Appellate Division, Third Department.  The appellate court’s decision reversing Justice Lebous’s order does not address the latter’s stated goal of judicial economy, but it does make short work of his two other rationales.  After citing the BCL’s and LLC Law’s venue provisions, the appellate court addresses and rejects the other-relief issue as follows:

[E]ven assuming that a proceeding seeking judicial dissolution which also requests other types of relief may be brought in a venue other than where the offices of the corporation or limited liability company are located (see e.g. Matter of Tashenberg v Breslin, 89 AD2d 812, 812 [1982]), our review of the record reveals that petitioner did not request any other relief here, only minimal disclosure. While petitioner alleges in his petition that respondents, among other things, failed to authorize dividends or cash distributions and attempted to deprive him of compensation, he does not seek any relief based upon these alleged wrongdoings other than dissolution.

The court also faults the lower court’s reliance on the presence of material witnesses in Broome County, finding that Richards did not adequately substantiate grounds to depart from the special venue statutes governing dissolution.  Here’s what the court said:

Regarding petitioner’s cross motion, we are cognizant that a court may, in its discretion, change or retain venue upon consideration of “the convenience of material witnesses and the ends of justice” (CPLR 510 [3]; see Vasta v Village of Liberty, 235 AD2d 1006 [1997]). However, in order to retain venue in Broome County, it was petitioner’s burden to provide “the names and addresses of the witnesses, the substance and materiality of their testimony relative to the issues in the case, [and assurances] that the witnesses have been contacted and are willing to testify on behalf of the movant, and the manner in which they will be inconvenienced” (Gissen v Boy Scouts of Am., 26 AD3d 289, 290-291 [2006]). “A discretionary change of venue under CPLR 510 (3) is addressed to the convenience of nonparty witnesses” (State of New York v Quintal, Inc., ___ AD3d ___, ___, 2010 NY Slip Op 09061 [2010] [emphasis added and citations omitted]; see State of New York v Slezak Petr. Prods., ___ AD3d ___, 910 NYS2d 268 [2010]). Inasmuch as petitioner failed to delineate the substance or materiality of the nonparty witnesses’ testimony as it relates to respondents’ dissolution and proffered only conclusory statements as to the manner or extent to which those witnesses would be inconvenienced by trial in the Seventh Judicial District [Monroe County] (see Frontier Ins. Co. in Rehabilitation v Big Apple Roofing Co., Inc., 50 AD3d 1239, 1239-1240 [2008]; Root v Brotmann, 41 AD3d 247, 247 [2007]; Gissen v Boy Scouts of Am., 26 AD3d at 290-291), his cross motion to retain venue in Broome County should have been denied.

The case will now be transferred to Rochester and a new judge, almost nine months after its commencement.  The Broome County Supreme Court docket information available online only shows a recent motion to compel disclosure, so it’s hard to tell how far the case has progressed in the interim or whether the majority owners elected to purchase Richards’ interest.  We’ll just to wait and see whether the change in venue will expedite an out-of-court settlement or harden the parties’ positions.