Foreign Business Entities

shortsTraditions are good. This blog has two annual traditions. First, at the end of each year I write a post listing the year’s top ten business divorce decisions. Second, each August I offer readers who are (or ought to be) on summer vacation some light reading in the form of three, relatively short case summaries.

So here we are in what’s been a particularly felicitous August weather-wise (at least here in the Northeast U.S.), with another edition of Summer Shorts. This edition’s summaries feature two out-of-state cases — one from Florida involving expulsion of an LLC member and one from Delaware involving the valuation upon redemption of an LLC member’s interest — and a New York appellate court decision involving the removal of a limited partnership’s general partner.

The Anti-Chiu: Florida Court Upholds LLC Member’s Expulsion

Froonjian v Ultimate Combatant, LLC, No. 4D14-662 [Fla. Dist. Ct. App. May 27, 2015].  The Florida intermediate appellate court’s ruling in Froonjian makes for a fascinating contrast with New York case law represented most prominently by the Second Department’s 2010 decision in Chiu v Chiu holding that, absent express authorization in the LLC’s operating agreement, a member’s involuntary expulsion is not permitted. Going 180° in the other direction, the Froonjian court upheld the majority members’ expulsion of a minority member from a Florida LLC that had no operating agreement, reasoning that the Florida default statute vesting all decision-making authority in the members acting by majority vote encompasses the authority to expel a member. Continue Reading Summer Shorts: Member Expulsion and Other Recent Decisions of Interest

Jurisdiction2Thanks 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%). Continue Reading Delaware LLC Agreement Says Members Waive Right to Sue Outside New York, But New York Judge Says Otherwise in Dissolution Case

TulsaThe Tulsa Shock of the WNBA, originally known as the Detroit Shock before moving to Tulsa in 2010, are on the move again, this time to the more populous Dallas-Fort Worth area, that is, unless a lawsuit brought by an “oppressed” minority owner succeeds in stopping it.

The team is owned by an Oklahoma limited liability company known as Tulsa Pro Hoops, LLC (TPH), whose majority member is Bill Cameron, a successful banker and insurance executive. Cameron publicly announced the move on July 20th. Cameron’s press release explained the team’s reasons for relocating after six unimpressive and financially unrewarding basketball seasons in Tulsa:

“This is a very difficult decision, and I know it is particularly difficult for the Tulsa investors,” he said. “From a business perspective, it was necessary to evaluate options to place the team and the organization in the best position to achieve financial success. After a thorough review, I believe the Dallas-Fort Worth area holds the greatest potential to achieve our long-term business objectives.”

In a letter addressed to Tulsa’s mayor released the same date, Cameron also acknowledged the disappointment for a number of his Tulsa co-investors: Continue Reading No Slam Dunk for This Oppressed Minority Shareholder Petition

The statutes and judge-made law governing dissolution and other claims among co-owners of closely held business entities can vary significantly from state to state. Depending on the states, there also can be much in common, which is why I like to keep an eye on developments outside New York, and not just Delaware which tends to have the most advanced business-law jurisprudence.

Below are five business divorce cases decided by appellate courts outside New York that made a splash in 2014. As you might expect, four of the five involve that relatively new business entity form, the limited liability company. The one involving a traditional business corporation, however, likely made the biggest splash.

Ritchie v Rupe, 2014 WL 2788335 [Tex. Sup Ct June 20, 2014]. The Lone Star State takes the prize for the most controversial business divorce decision in 2014, thanks to the Texas Supreme Court’s decision in Ritchie which, as one commentator put it, effectively “gutted the cause of action for shareholder oppression in Texas.” A Texas intermediate appellate court ruling in 1988, which had been followed ever since, recognized a compulsory buyout remedy for oppressed minority shareholders under a broad test for oppression mirroring New York’s reasonable-expectations standard. No more. The Ritchie court, in a 6-3 decision, narrowly defined oppressive conduct by majority shareholders as “when they abuse their authority over the corporation with the intent to harm the interests of one or more of the shareholders, in a manner that does not comport with the honest exercise of their business judgment, and by doing so create a serious risk of harm to the corporation.” The Ritchie majority then applied the coup de grâce by construing the applicable Texas statute as limiting the remedy for oppressive conduct to the appointment of a “rehabilitative receiver.” Bye bye buyout. For a more detailed analysis of Ritchie‘s impact on Texas business divorce litigation, check out my friend Ladd Hirsch’s posts here, here, and here on his Texas Business Divorce blog.   Continue Reading Round-Up of Recent Business Divorce Cases From Across the Country

“[T]he Court concludes that it lacks subject-matter jurisdiction to dissolve a Delaware corporation, and thus dismisses the First Cause of Action.”

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.) Continue Reading Court Declines Jurisdiction Over Claim for Common-Law Dissolution of Delaware Corporation

What are the current, hot topics in the law of business divorce? I’ve been thinking about this in preparation for a speaking engagement later this month, and thought I’d preview my choices for the hot-topic list in the hope that some interested readers might offer their own ideas about unsettled areas of the law governing dissolution cases and other types of disputes among co-owners of closely held business entities.

Not surprisingly, a majority of the topics I’ve come up with concern limited liability companies, which first came into being in New York in 1994. Case law applying the LLC Law got off to a tepid start — it wasn’t until 2010 that an appellate court authoritatively construed LLC Law § 702 governing judicial dissolution — but the pace of court decisions concerning LLCs has quickened in recent years as the LLC slowly but surely has supplanted the traditional business corporation as the preferred form of entity for privately-owned companies.

So, without further ado, here’s my list of hot topics in business divorce:

Equitable Buy-Out in LLC Dissolution Cases.  In contrast to oppressed minority shareholder dissolution petitions involving closely-held corporations (see Business Corporation Law § 1118), the LLC Law has no provision authorizing courts to compel a buy-out of the complaining or respondent LLC members as a remedy in judicial dissolution cases brought under LLC Law § 702. There nonetheless have been several appellate decisions affirming or ordering a compulsory buyout as an “equitable” remedy, of which the most notable is the Second Department’s 2013 ruling in Mizrahi v. Cohen where the court compelled a buy-out requested by the petitioner of the respondent member’s 50% interest. These few cases, each involving their own, peculiar set of facts, provide little guidance as to the circumstances under which courts will or won’t grant an equitable buy-out, or as to the interplay between equitable buy-out and LLC agreements that may limit dissolution remedies. It also remains to be seen whether buy-out awards in LLC cases will be based on the fair value standard used in statutory buy-outs of oppressed minority shareholders. Continue Reading Hot Topics in Business Divorce

Here we go again.

Last month, in Matter of Bianchi (Fragrance Systems International, Inc.), Short Form Order, Index No. 29627-2013 [Sup Ct, Suffolk County Apr. 22, 2014], Suffolk County Commercial Division Justice Emily Pines issued a decision dismissing a petition for judicial dissolution of a New York-based, Delaware corporation on the ground the court lacked subject matter jurisdiction.

The decision is short. Here’s the pertinent excerpt:

Although there is conflicting case law as to whether New York courts lack subject matter jurisdiction over a claim for dissolution of a foreign corporation, absent a decision from the Court of Appeals, this Court is bound to follow the decisions of the Appellate Division, Second Department (see 28 NYJur2d Court and Judges § 221). There is no decision from the Court of Appeals on this issue. The law in the Second Department is that New York courts lack subject matter jurisdiction over proceedings to dissolve foreign corporations (see Matter of Warde-McCann v Commex, Ltd., 135 AD2d 541, 542 [2d Dept 1987]; Matter of Porciello v Sound Moves, 253 AD2d 467 [2d Dept 1998]) and foreign limited liability companies (see Matter of MHS Venture Mgt. Corp. v Utilisave, LLC, 63 AD3d 840 [2d Dept 2009]). The Petitioners fail to address, or even acknowledge, the Second Department decisions on this issue in their opposition papers. Although this Court has read significant First Department decisions permitting New York Courts to hear these cases, it is constrained to follow the current rulings of the Second Department. Accordingly, the respondents’ motion is granted and the Verified Petition is dismissed. Continue Reading The Conflict Continues Over Judicial Dissolution of Foreign Corporations

There’s nothing new about cross-border business ventures in which a resident of State A is a co-owner of a closely held business entity organized in State B. As happens most frequently with business entities formed in Delaware, the organizational filing may be the only nexus with the state of formation, in which case for practical reasons internal conflicts that ripen into litigation tend to be fought in the jurisdiction where the business operates which also may coincide with the co-owners’ domiciles. In other words, it’s not at all unusual to see co-owners of a New York-based business organized in Delaware or Nevada duking it out in a New York court which can and will decide the internal dispute by applying the laws of the organizational state. (Read here my recent post about the “internal affairs” doctrine.)

The same cannot be said for internal disputes that prompt one of the co-owners to seek judicial dissolution of the business entity. By and large, courts will decline jurisdiction over dissolution suits involving foreign entities based on the principle of interstate comity. (Read herehere, and here some of my prior posts on the subject.) One consequence of this jurisdictional exception is the phenomenon of dueling lawsuits in different states in which business co-owners attempt to secure the home court advantage, with one side bringing a dissolution action in the business’s state of formation and the other bringing an “ordinary” lawsuit for damages and/or injunctive relief in that party’s distant home state.

That is exactly what happened in Picarella v. HMA Properties, LLC, 2013 NY Slip Op 31354(U) (Sup Ct Suffolk County June 17, 2013), a multi-jurisdictional turf battle between co-members of a Florida limited liability company (LLC) decided last month by Suffolk County Commercial Division Justice Elizabeth Hazlett Emerson. Justice Emerson’s ruling, dismissing the New York action on the legal grounds of forum non conveniens in favor of a pending dissolution proceeding in Florida, provides highly useful guidance for business divorce litigants and their counsel who are either contemplating or find themselves in a multi-state contest.

Continue Reading Fighting for Home Court Advantage in Multi-State Business Divorce Litigation

The internal affairs doctrine is a choice of law rule under which a court will apply the law of the state of the subject entity’s formation (lex incorporationis) rather than the law of the jurisdiction where suit is brought (lex fori) to governance disputes and other internal conflicts concerning rights and duties among the entity, its owners and managers. So, for instance, when a shareholder or member of a New York based Delaware corporation or LLC brings suit in a New York court against an officer or manager for breach of fiduciary duty, the New York judge ordinarily will adjudicate the claim under Delaware law, which may differ materially from the analogous New York common or statutory law.

The internal affairs doctrine in theory acknowledges the superior interest of the state of formation in the application of its laws to the entity’s internal governance, even when the entity is based outside the state and has no connection with the state other than its formation. The doctrine also serves to avoid the uncertainty and high transactional costs that would occur if a business entity operating in multiple states was subject to different rules of governance in each state. Finally, it reflects a strong presumption that those who chose to form their entity in a particular state desire to have their legal relations governed by the laws of that state.

I don’t think I’m going out on a limb stating that the overwhelming majority of partnership agreements, shareholder agreements and LLC agreements that contain an express choice of law provision select the law of the state of formation, i.e., there is no inconsistency between the parties’ contractually stated preference and the internal affairs doctrine. But once in a while I come across an exceptional case. Those of you who followed the Pappas v. Tzolis saga may recall that the New York-based Delaware LLC involved in that case had an operating agreement with a New York choice of law clause. As I noted in one of my several posts about the case (read here), the trial judge side-stepped the conflicts of law issue by finding the result the same under either state’s law, and the issue unfortunately was not addressed in the subsequent appellate rulings deciding the case under New York law.

Another exceptional case recently came to my attention. Gelman v. Gelman, Index No. 12664/10 (read here), is an unreported decision dated April 3, 2013, by Nassau County Supreme Court Justice Daniel Palmieri involving a dispute between two siblings who co-own a Delaware LLC. The court enforced a New York choice of law provision in the operating agreement in deciding the right to appointment of a receiver. As in Pappas, however, the court opined that the result would be the same under either state’s law. Continue Reading What Law Applies When Internal Affairs Doctrine Clashes With Choice-of-Law Clause?

A recent decision by a Manhattan trial judge in Holdrum Investments, N.V. v. Edelman, 2013 NY Slip Op 30369(U) (Sup Ct NY County Jan. 31, 2013), brings into sharp relief the longstanding state of uncertainty surrounding the authority of a New York court to entertain a lawsuit seeking the involuntary dissolution of a New York-based foreign business entity.

Holdrum is a lawsuit brought in Manhattan Supreme Court by a limited partner of a New York-based, Delaware limited partnership formed in 1996 known as Museum Partners L.P.  The general partner is the former corporate raider, Asher Edelman, who, in the late 1980’s, left Wall Street and turned his considerable energies and resources to the fine arts and art financing. (Read here a 2010 Wall Street Journal profile of Edelman entitled The Art World’s Gordon Gekko.)

Holdrum’s Second Amended Complaint (read here) alleges that Museum Partners was formed for the purpose of obtaining an ownership position in a French publicly-traded company controlled by the Taittinger family, whose holdings included banking, hotel and champagne producer interests. Edelman sought either to obtain control of the company or to force the Taittinger family to purchase Museum Partner’s holding at a large profit. Continue Reading Judicial Muddle Persists Over Power to Dissolve Foreign Entities