subject matter jurisdiction

After two years, 300+ docket entries, and 12 motions, a lawsuit among members of a Delaware LLC that owned a 5-story apartment building on Manhattan’s Upper East Side (the “UES Building”) acquired to provide short-term rentals for international leisure and corporate travelers, and whose business was decimated by anti-Airbnb legislation, is barely past the pleadings stage and likely can look forward to years more litigation.

Manhattan Commercial Division Justice Jennifer G. Schechter’s recent decision in Favourite Ltd. v Cico, 2018 NY Slip Op 32781(U) [Sup Ct NY County Oct. 30, 2018], permitting the LLC and some of its members to file an amended pleading against the LLC’s former managing members, addresses several issues of interest including whether the legislature’s action automatically triggered dissolution under the operating agreement’s arguably conflicting provisions, and whether the former managers’ attempted reinvestment of proceeds from the UES Building’s sale in another property violated the operating agreement’s purpose clause.

According to the Second Amended Complaint ultimately allowed by the court, the two defendants as sole managing members of Upper East Side Suites, LLC, formed in Delaware in 2007, solicited investors from Italy’s business community who contributed $4.75 million to buy the UES Building to operate a short-term rental business. What allegedly followed is a scheme by the defendants of “self-dealing, mismanagement, waste of assets, fraud, and forgery that resulted in the loss of every cent of the $4.75 million invested.” Continue Reading Outlawing of LLC’s Short-Term Rental Business Brings Long-Term Litigation

Rosalyn H. Richter - Assocaite Justice, Appellate Division, First Department 042809

For more than 20 years, there’s been a split among New York’s several intermediate appellate courts on the question whether the state’s courts have subject matter jurisdiction in proceedings seeking judicial dissolution of foreign business entities.

No more. Last week, in a signed opinion by Associate Justice Rosalyn H. Richter (photo right), writing for a unanimous panel of the Manhattan-based Appellate Division, First Department, in Matter of Raharney Capital, LLC v Capital Stack LLC, 2016 NY Slip Op 01425 [1st Dept Feb. 25, 2016], the court abandoned its contrary 1994 ruling in Matter of Hospital Diagnostic Equipment Corp. and, realigning itself with decisions by the Brooklyn-based Second Department and Albany-based Third Department, held that New York courts lack subject matter jurisdiction over foreign company dissolution proceedings.

The Raharney case involves a petition filed in October 2014 in Manhattan Supreme Court by a 50% member of a two-member Delaware LLC with no written operating agreement, seeking judicial dissolution under § 18-802 of the Delaware LLC Act based on intractable deadlock (read petition here). The petition alleges that both members are New York residents, that the Delaware LLC’s place of business is New York, and that the LLC’s only connection to Delaware is its state of formation. The petitioner’s supporting memorandum of law predicated the court’s subject matter jurisdiction on Hospital Diagnostic in which the First Department found “without merit” the State Attorney General’s argument that the courts of New York lack subject matter jurisdiction to dissolve a foreign corporation. Continue Reading A Split No More: First Department Agrees, No Subject Matter Jurisdiction to Dissolve Foreign Business Entities

articlesThis week I’m departing from my usual, case-focused, long-form post due to time constraints of an impending trial. Instead, I’m putting a well-deserved spotlight on two recently published articles of special interest to business divorce practitioners.

The first concerns one of my favorite topics, on which I’ve written several posts (here, herehere, and here), about whether the courts of one state have subject matter jurisdiction over involuntary dissolution petitions for a business entity formed in another state. The article, entitled Judicial Dissolution: Are the Courts of the State that Brought You In the Only Courts that Can Take You Out?, is co-authored by Peter B. Ladig and Kyle Evans Gay and is published in the Fall 2015 issue of The Business Lawyer (available here).

Ladig and his firm, Morris James LLP, represented one of the members of a Philadelphia-based newspaper publishing company organized as a Delaware LLC in a recent, high-profile dissolution case that initially played out as a game of jurisdictional ping-pong between the Pennsylvania and Delaware courts. Ultimately the Pennsylvania court sided with Ladig’s client and ruled against its own jurisdiction, allowing the case to proceed unobstructed in the Delaware Court of Chancery. It therefore comes as no surprise that Ladig’s thoroughly researched, scholarly article strongly supports the argument against subject matter jurisdiction to dissolve foreign business entities. Continue Reading Recent Articles Highlight Dissolution of Foreign Entities and Delaware LLC Litigation

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

“[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

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

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

See full size imageA Vermont trial court’s decision earlier this year lures me back to one of my favorite topics:  Are the courts of one state authorized to judicially dissolve business entities formed under the laws of another state?

In most states, including New York, courts will not hear petitions to dissolve foreign firms even if the firm’s operations are wholly within the judicial forum’s state.   Early this year, I wrote about an extraordinary pair of New Jersey cases decided in late 2008 that went against the grain, in which the courts not only accepted jurisdiction to hear dissolution petitions involving New Jersey-based Massachusetts and Delaware corporations, they also applied New Jersey’s dissolution statute which provided the petitioner with substantive rights and remedies significantly greater than the counterpart Massachusetts and Delaware statutes.  More recently, and in contrast to the New Jersey cases, I wrote about a June 2009 decision by a New York appellate court squarely holding that the court lacked subject matter jurisdiction over a petition to dissolve a New York-based Delaware limited liability company (LLC).

The Vermont case, Casella Waste Systems, Inc. v. GR Technology, Inc., Decision and Order, Docket No. 409-6-07 Rdcv (Vt. Super. Ct. Feb. 13, 2009), also involves a Delaware LLC and also concludes that the court lacks subject matter jurisdiction.  What makes Casella worth reading and writing about is its in-depth analysis of the jurisdictional issue.  

Continue Reading Vermont Court Declines Jurisdiction Over Dissolution of Delaware LLC