The prosecution or defense of a business divorce case, like any other civil litigation, is subject to a mind boggling set of procedural rules which, in the event of noncompliance, can deal either side a significant setback or even dismissal. Adding to the complexity are the rules specific to business divorce cases, which are contained in the statutes governing judicial dissolution cases.
Besides the potential jeopardy to a client’s position on the merits, failure to comply can cost the client time and money. The client’s confidence in his or her attorney also can be compromised by needless errors that detract from achievement of the client’s litigation goals.
Recently, I was asked about the most common mistakes attorneys make when filing or defending dissolution cases. I figured others might benefit from the answer, so compiled below is a list of 10 snafus highlighted in cases that I’ve previously featured on this blog. Follow the links to read more about each one.
- File a bare-bones dissolution petition. Judicial dissolution of a corporation must be brought by way of petition in a special proceeding, that is, not by ordinary summons and complaint where the rules essentially permit a bare-bones pleading that alleges the elements of a claim in conclusory fashion. The petition is different. It must provide detailed and, if necessary, documented facts establishing entitlement to dissolution. Failure to do so likely will result in a painful dismissal. Read more here.
- Use attorney verification for petition. Summary proceedings for dissolution require that the petition be verified, that is, accompanied by a sworn and signed acknowledgment that the petition’s allegations are truthful and are made on personal knowledge of the verifier. General rules of civil procedure authorize, under certain conditions, the attorney to verify a pleading instead of the party. At the initial stage of a summary dissolution proceeding, however, the court’s task is to determine whether there exist disputed issues of fact requiring a hearing, or whether dissolution can be granted (or denied) on the papers. Therefore, relying solely on a petition verified by an attorney, who has no personal knowledge of the petition’s factual allegations, can lead to dismissal. Read more here.
- Fail to comply with publication requirements. Section 1106 of the Business Corporation Law requires that the order to show cause in a corporate dissolution proceeding be published in a general circulation newspaper 3 times in the 3 weeks preceding the hearing date. Failure to comply, at best, will result in a lengthy adjournment of the hearing or, at worst, a dismissal of the case without prejudice to re-filing. Read more here.
- File petition in wrong venue. It’s natural to assume that if a business is physically based in County X that a dissolution proceeding is properly brought in Supreme Court in County X. But the statutes governing venue in dissolution cases depend not on the physical presence of the business, but on the county listed in the certificate of incorporation or, for an LLC, the articles of organization, which for various reasons is not always the same county where the business is located. The mistake can cost valuable time and create embarrassment for the filing attorney. Read more here.
- Seek dissolution by “mere” motion. Section 1106 of the Business Corporation Law unequivocally requires that an application to dissolve a corporation be commenced by petition and order to show cause. Dissolution cannot be sought by way of a motion in an existing lawsuit asserting other types of claims and seeking other forms of relief. Such a motion will be denied. The LLC Law’s rules for judicial dissolution have no analog to Section 1106, but it too must be sought by a pleading (petition, complaint, counterclaim) and not by “mere” motion. Read more here.
- Rely on Business Corporation Law to dissolve an LLC. The Appellate Division, Second Department’s 2010 decision in the 1545 Ocean Avenue case made it clear that LLCs and corporations are governed by different statutory schemes with different dissolution statutes providing different standards for dissolution. Still, I continue to see LLC dissolution petitions that mistakenly rely on the Business Corporation Law statutes and standards, explicitly or tacitly, which can result in dismissal. Read more here.
- Assume dissolution is not subject to arbitration. I’m not sure where it comes from, but there seems to be a common misperception that arbitrators do not have authority to determine corporate dissolution proceedings. Not so. A typical, broad arbitration clause in a shareholders’ or operating agreement will be enforced when a judicial dissolution proceeding is commenced in Supreme Court. Read more here.
- Seek dismissal on the merits pre-answer. At least one court has held it’s improper to seek dismissal of a summary proceeding for dissolution based on alleged lack of merit — as opposed to “defenses in bar” such as failure to state a claim, lack of jurisdiction or standing, etc.– before the respondent files an answer to the petition. It’s not fatal to the defense, but it can amount to a wasted, expensive effort. Read more here.
- Fail to preserve buy-out election. Business Corporation Law Section 1118 provides a 90-day period for the respondent in an oppressed minority shareholder dissolution case to elect to purchase the petitioner’s shares for fair value. After 90 days, an election is up to the judge’s discretion. A respondent who wants to oppose dissolution without electing, but also wants to preserve the right to elect in the event his or her opposition does not initially succeed, risks forfeiting a buy-out option by not applying within the 90 days for an extension pending the court’s determination of the respondent’s initial opposition or dismissal motion. Read more here.
- Take discovery for granted. Unlike in plenary actions initiated by summons and complaint, the rules governing summary proceedings for judicial dissolution permit discovery proceedings only with the court’s discretionary approval. If the petitioner’s alleged basis for dissolution warrants gaining access to company documents or taking witness depositions, failure to raise the issue of discovery at the earliest stages of the case enhances the risk the court will send the case to trial without the opportunity for pretrial disclosure. Read more here.