Last week, in Matter of Gould Erectors & Rigging, Inc., 2014 NY Slip Op 05004 [3d Dept July 3, 2014], an upstate appellate panel affirmed in part and reversed in part a lower court’s decision that highlights the special rules governing the filing and service of petitions seeking judicial dissolution of close corporations under Article 11 of the Business Corporation Law.
In an “ordinary” lawsuit, due process as embodied in the rules of civil procedure requires service of the summons and complaint on named defendants to confer personal jurisdiction over them. If service is not effected, or if service is not effected properly, the non-served defendant can appear and move to dismiss, which can have especially drastic consequences if the statute of limitations has expired in the interim. A non-served defendant who doesn’t appear in the case, i.e., who defaults, and against whom a judgment is entered, can later apply to have the judgment vacated.
The rules for corporate dissolution proceedings are different. The first important difference is that each of the statutory grounds for dissolution, including deadlock under BCL § 1104 and shareholder oppression under BCL § 1104-a, authorizes the filing of a “petition” — not a complaint — in what New York practice refers to as a “special proceeding” governed by Article 4 of the Civil Practice Law and Rules. In general, the rules for special proceedings provide for expedited judicial review in statutorily delimited categories of disputes. One of the other, more frequent uses of special proceedings is for challenges to decisions made by administrative and other quasi-judicial governmental bodies under CLPR Article 78.
The second, important difference concerns the persons to be served with the dissolution petition. In the usual special proceeding, CPLR § 403 requires that copies of the petition, notice of petition (or order to show cause) and supporting affidavits be served on each adverse party — called “respondents” in special proceedings — in the same manner as a summons and complaint in an ordinary action. In dissolution proceedings, however, CPLR § 403 is overridden by BCL § 1106 which:
- upon presentation of a dissolution petition, directs the court to issue an order “requiring the corporation and all persons interested in the corporation to show cause . . . why the corporation should not be dissolved” [§ 1106(a)];
- requires pre-hearing publication of the order to show cause in one or more general circulation newspapers in the county in which the office of the corporation is located [§ 1106(b)];
- requires service of a copy of the order to show cause “upon the state tax commission and the corporation and upon each person named in the petition . . .” [§ 1106(c)]; and
- requires the petitioner to file with the county clerk a copy of the order to show cause and the petition [§ 1106(d)].
Notably absent from § 1106’s filing and service scheme is any requirement for copies of the dissolution petition and supporting affidavits to be served upon the corporation or the other, non-petitioning shareholders who may or may not be named as respondents.
The Gould Case
In Gould, a minority shareholder commenced a special proceeding seeking judicial dissolution of two corporations under BCL § 1104-a. The petition named the majority shareholder as respondent, against whom the petition also demanded an accounting for alleged looting, waste and diversion of assets for non-corporate purposes.
In compliance with BCL § 1106, the petitioner filed the petition with the Albany County Clerk and served the corporation and its majority shareholder with the order to show cause sans petition. The majority shareholder then moved to dismiss the proceeding, arguing that the court lacked personal jurisdiction due to the petitioner’s failure to serve the respondents with the petition.
The trial court denied the motion, finding that the petitioner’s compliance with § 1106 was sufficient to confer jurisdiction (read here my prior post on the trial court’s decision). Respondents’ subsequent appeal argued that the trial court erred by ignoring CPLR § 403(a)’s requirement that “the petition . . . be served on any adverse party.”
Last week’s unanimous ruling by the Appellate Division, Third Department, rejected the argument, agreeing with the lower court that the specific service provision governing dissolution proceedings in BCL § 1106 displaces the “inconsistent,” general service provision in CPLR § 403. “Inasmuch as petitioner’s compliance with Business Corporation Law § 1106 gave Supreme Court jurisdiction over the corporations,” wrote the court, “we find that the court properly denied respondents’ motion to dismiss the first and third causes of action seeking judicial dissolution of the corporations.”
Interestingly, the appellate court took a different view of the petitioner’s accounting claim against the majority shareholder included in the dissolution petition, finding that it did not qualify for treatment under BCL § 1106 and therefore had to be served on the majority shareholder to confer personal jurisdiction. Here’s what the court wrote:
We agree with respondents, however, that Supreme Court erred in denying their motion to dismiss for lack of personal jurisdiction with respect to the second and fourth causes of action for an accounting of Flach individually. These causes of action are not governed by Business Corporation Law article 11. Thus, with respect to them, petitioner was required to comply with the service provisions set forth in the CPLR. As it is undisputed that the only pleading personally served on Flach was the order to show cause — which contains no mention of the accounting causes of action — personal jurisdiction was not obtained and, therefore, the second and fourth causes of action should have been dismissed.
The idea behind BCL § 1106, that a non-petitioning shareholder served only with a dissolution order to show cause, but whose personal interests will be gravely affected by the petition’s outcome, must traipse down to the county clerk’s office to view the petition, seems positively archaic in these days of mandatory electronic filing in many New York courts. Also, there seems little reason for the petitioning shareholder not to serve all concerned parties with the petition, other than causing them inconvenience. Nonetheless, as Gould illustrates, so long as § 1106 governs, a respondent not served with the petition will need to incur whatever inconvenience there may be, by going to the county clerk’s office or accessing the petition online in an e-filed case.
Practitioners also need to keep in mind that petitions for judicial dissolution of limited liability companies are not governed by BCL Article 11 and, therefore, BCL § 1106’s exceptional provision does not apply. The LLC Law has no similar provision. Personal jurisdiction of named respondents in LLC dissolution cases brought as special proceedings therefore must be achieved via traditional service of the petition and notice of petition or order to show cause.
Update November 1, 2014: In an unrelated dissolution case decided last month also involving application of BCL § 1106, the Third Department ruled that service of a single copy of the initiating order to show cause upon the respondent 50% shareholder, who also was a corporate officer, sufficed to obtain jurisdiction over the corporation. Matter of Stony Creek Preserve, Inc., 2014 NY Slip Op 07236 [3d Dept Oct. 23, 2014].