Sounds familiar? It should. The above ruling, found in Nassau County Commercial Division Justice Timothy S. Driscoll’s decision last month in Bonavita v Savenergy Holdings, Inc., Short Form Order, Index No. 603891-13 [Sup Ct Nassau County Dec. 8, 2014], adds to the growing list of cases in New York’s Second and Third Departments in which courts have declined subject-matter jurisdiction over claims for judicial dissolution of a foreign business entity. It also accentuates the schism, about which I’ve previously written, between decisions in those Departments and a smaller number of First Department rulings upholding jurisdiction in similar cases.
The plaintiffs in Bonavita, likely aware of the Second Department precedent stacked against them, took a somewhat different tack by asserting in their complaint’s First Cause of Action (read here) a claim for common-law dissolution of the subject Delaware corporation rather than a statutory claim for judicial dissolution under Article 11 of the Business Corporation Law. (Delaware has no statute authorizing judicial dissolution at the behest of a minority shareholder.)
In their brief opposing defendants’ dismissal motion (read here), the plaintiffs emphasized that the New York-based corporation’s only connection to Delaware was its incorporation there, and they cited First and Second Department cases for the proposition that, other than as regards derivative claims, New York law applies to the internal affairs of foreign entities.
The defendants’ brief (read here) countered as one would expect, citing Second Department decisions squarely rejecting jurisdiction over foreign-entity dissolution, and also citing Delaware case law declining recognition of a cause of action for common-law dissolution of Delaware corporations.
The distinction between statutory and common-law dissolution made no difference to Justice Driscoll’s application of the binding Second Department precedent, which he summarized as follows:
A foreign corporation is controlled, as to its dissolution, by the laws of its domicile, and is not affected by laws which are intended to govern the dissolution of corporations created under local laws. Matter of Warde-McCann v. Commex, Ltd.,135 A.D.2d 541, 542 (2d Dept. 1987), citing 17A Fletcher’s Cyclopedia, Corporations § 8579, at 516 (Perm ed). In Matter of MHS Venture Management Corp. v. Utilisave, LLC, 63 A.D.3d 840 (2d Dept. 2009), the Second Department held that a claim for dissolution of a foreign limited liability company is one over which the New York courts lack subject matter jurisdiction. Id. at 841 citing, inter alia, Matter of Warde-McCann v. Commex, Ltd., supra. In Matter of MHS Venture Management Corp. v. Utilisave, LLC, the Second Department dismissed a proceeding pursuant to New York Limited Liability Company Law § 701 for the dissolution of a limited liability company formed in Delaware for lack of subject matter jurisdiction. 63 A.D.3d at 840.
Apart from the dissolution claim, Justice Driscoll’s decision addressed defendants’ arguments for dismissal of the complaint’s numerous other derivative and direct causes of action, some of which the court dismissed as to certain defendants and not others. The plaintiffs subsequently filed a notice of appeal, but not from the portion of the court’s decision dismissing the common-law dissolution claim.
Alas, whatever else happens in this case, it won’t be the eventual vehicle for a decision by the New York Court of Appeals resolving the departmental split on the issue of subject-matter jurisdiction to dissolve a foreign entity.
Update January 13, 2015: Maybe the East River isn’t such a divide after all. My friend and oft-cited McKinney’s commentator Bruce A. Rich at Carter Ledyard passed on a copy of a recent, transcribed bench decision by Manhattan Supreme Court Justice Alice Schlesinger in Matter of Raharney Capital, LLC, Index No. 160175/14 [Sup Ct NY County Nov. 24, 2014], in which she dismissed a petition for dissolution of a Delaware LLC based on the Second and Third Department case authorities. Justice Schlesinger distinguished the leading First Department authority sustaining jurisdiction — the Hospital Diagnostic case — on the ground it involved a corporation rather than an LLC, and she also characterized its jurisdictional finding as dicta.