Thanks to a recent decision by a Manhattan Commercial Division judge, it’s “once more unto the breach, dear friends, once more” (Shakespeare, Henry V, Act 3, Scene 1) on the pesky question whether New York courts have subject matter jurisdiction over judicial dissolution proceedings involving foreign business entities.
The unreported transcript decision is by Justice Jeffrey K. Oing in a case called Matter of Activity Kuafu Hudson Yards LLC, NY County Supreme Court Index No. 650599/15, in which the judge dismissed for lack of subject matter jurisdiction a petition to dissolve an allegedly deadlocked Delaware LLC, notwithstanding a provision in its operating agreement waiving the members’ right to bring an action relating to the agreement “in any court outside New York County, New York.”
This is one of my favorite topics on which I’ve written several posts over the years (read here, here, here, and here). As you would expect, most of the cases involve New York-based Delaware entities, and of late the debate has shifted from Delaware corporations to the ever-more-popular Delaware limited liability company.
The Kuafu lawsuit involves a real estate project known as Hudson Rise that is part of the massive redevelopment of midtown Manhattan’s west side near the Javits convention center, to be built atop the existing railroad yards. The Hudson Rise project is being developed by a manager-managed Delaware LLC named Reedrock Kuafu Development Co., LLC. Reedrock was formed in 2013 and has three members, each of which is a New York LLC, which I’ll refer to in shorthand fashion as Kuafu (50%), Siras and Ludwick (together, 50%).
In February 2015, Kuafu filed a petition for judicial dissolution of Reedrock in Manhattan Supreme Court based on irreconcilable deadlock between Reedrock’s co-managers appointed by Kuafu and Siras. Kuafu’s petition (read here) and its supporting memorandum of law (read here) seek dissolution under Section 18-802 of the Delaware LLC Act and allege that the proceeding is properly brought in New York state court under Sections 12.04 and 12.16 of Reedrock’s Operating Agreement (read here). The former section has a Delaware choice of law provision, while the latter, entitled “Venue,” states as follows:
Each of the Members consents to jurisdiction of any court located in New York County in the State of New York for any action arising out of matters related to this Agreement. Each of the Members waives the right to commence an action in connection with this Agreement in any court outside of New York County, New York. [Italics added.]
Siras opposed the petition and moved for dismissal on the ground the court lacks subject matter jurisdiction over a claim for dissolution of a foreign business entity. Siras’s opening and reply memoranda of law (read here and here) cited a number of supporting case precedents, the most recent of which is the Second Department’s 2009 decision in MHS Venture Mgmt. Corp. v Utilisave, LLC (which I wrote about here) where the court dismissed for lack of subject matter jurisdiction a petition seeking dissolution of a Delaware LLC. Siras also relied heavily on the First Department’s 2007 decision in Appell v LAG Corp. affirming without comment a lower court’s dismissal for lack of subject matter jurisdiction of a claim for judicial dissolution of a Delaware limited partnership.
Siras also argued that the waiver in the Operating Agreement’s venue provision has no legal significance, first, under the general rule that parties cannot create subject matter jurisdiction even by consent; second, because Kuafu’s dissolution petition runs afoul of Section 11.01 of Reedrock’s Operating Agreement, entitled “Dissolution,” which requires “the written determination of at least 75% of the Managers to terminate the Company”; and third, because Delaware LLC Act § 18-802 (“the Court of Chancery may decree dissolution of a limited liability company”) vests exclusive jurisdiction in the Delaware Chancery Court over dissolution proceedings involving Delaware LLCs.
Kuafu’s opposing memorandum of law (read here) portrayed Delaware law and public policy as strongly favoring freedom of contract as embodied in the LLC’s operating agreement, and it distinguished the MHS Venture and Appell cases as not involving a contractual restriction on the LLC’s member’s choice of forum as found in Section 12.16 of Reedrock’s Operating Agreement. Kuafu also argued that the use of the word “may” in Delaware LLC Act § 18-802 renders the statute permissive, not mandatory, with respect to Chancery Court’s jurisdiction over dissolution proceedings.
In a supplemental letter brief (read here), Kuafu emphasized the First Department’s 1994 ruling in the Hospital Diagnostic Equipment Corp. case, where the court expressly rejected the argument that the court lacks subject matter jurisdiction over a claim for judicial dissolution of a Delaware corporation, and instead applied a forum non conveniens analysis.
Justice Oing’s ruling, which begins at page 40 of the 49-page transcript, holds that a New York court lacks subject matter jurisdiction over a petition to dissolve a Delaware LLC. Primarily, he construes Delaware LLC Act § 18-802 as conferring upon Chancery Court exclusive jurisdiction over claims seeking equitable remedies including dissolution, as opposed to claims seeking legal remedies (i.e., damages). The First Department’s Appell decision, Justice Oing comments, also requires dismissal for lack of subject matter jurisdiction. In any event, Justice Oing suggests, Kuafu’s dissolution petition is barred by Section 11.01 of Reedrock’s Operating Agreement requiring 75% manager approval.
In the course of the oral argument, at page 12 of the transcript, Justice Oing observes:
I have a funny feeling that this case is not going to end here. At some point we will get final authority on this issue, but at this point I’m not so sure that the case law I have . . . supports the argument that this case is properly — I have subject matter jurisdiction over this case.
Whether the case ever will be decided on appeal, as intimated by Justice Oing, is uncertain. While Kuafu filed its notice of appeal last May, a Siras press release dated August 14, 2015, states that Kuafu “has agreed to try and resolve this dispute amicably through mediation.” However, a story published by Real Estate Weekly five days later, titled “Hudson Rise Dispute Gets Messy,” quotes a Kuafu statement indicating that Siras canceled a scheduled mediation, and accusing Siras of being unable “to act in a cooperative and constructive manner” in an effort to “delay any resolution.”
And what if Kuafu decides, instead of appealing Justice Oing’s decision, to file a petition for judicial dissolution of Reedrock in Delaware Chancery Court? If so, will Siras raise as a defense the Operating Agreement’s provision placing venue exclusively in New York, which would leave Kuafu with no judicial forum to plead its case for dissolution? We’ll just have to wait and see.