Court Blocks “End Run” Around Bar to Subject Matter Jurisdiction in Suit to Dissolve Foreign LLC
July 29, 2019
Many thousands of closely held corporations, limited liability companies, and limited partnerships formed under Delaware law (and, to a much lesser extent, other foreign states) make their home in New York. Those entities, while tending to have more sophisticated organizational documents than domestic entities, are no more or less immune to internal dissension and litigation including applications for judicial dissolution.
New York jurisprudence and, for that matter, American jurisprudence, has evolved over many decades on the question of the judicial power of courts in one state to resolve disputes concerning the internal affairs of business organizations formed under the laws of another state. By now, it is universally recognized, at least as concerns non-existential matters, that courts can exercise jurisdiction in such cases. New York courts, especially those based in Manhattan, routinely decide disputes involving contract and tort claims among co-owners of Delaware entities and, in doing so, follow and apply Delaware law.
As for existential matters, it took even longer for New York law to coalesce around the question of subject matter jurisdiction to hear petitions to dissolve foreign business organizations — a question never addressed by the Court of Appeals, the state’s highest court. In 2016, however, the Manhattan-based Appellate Division, First Department, in Matter of Raharney Capital, joined ranks with prior rulings by other intermediate appellate courts categorically holding that New York courts lack subject matter jurisdiction over petitions to dissolve foreign business entities.
Behind Raharney and other decisions of its ilk lurks an interesting question never fully answered in the case law: even if New York courts cannot dissolve foreign entities, do they have jurisdiction to hear what are called quasi-dissolution cases, that is, petitions alleging grounds for dissolution but seeking only lesser remedies such as compelling a buyout, adoption of a dividend policy, an accounting, or injunctive relief?
Rosania v Gluck
As far as I know, the first case to raise that lurking question post-Raharney is Rosania v Gluck, 2019 NY Slip Op 32087(U) [Sup Ct NY County July 8, 2019], decided earlier this month by Manhattan Commercial Division Justice Saliann Scarpulla.
The Rosania case got off to a shaky start when it was filed in August 2017.
The plaintiff’s original complaint sought judicial dissolution under both New York’s and Delaware’s LLC dissolution statutes of 17 single-asset realty holding companies owning investment properties in New York City. Each entity was organized as a Delaware LLC. The plaintiff held membership interests in each entity ranging from around 8% to 33%.
Some of the LLCs had operating agreements with Delaware choice-of-law provisions while others (oddly) had New York choice-of-law provisions. All had New York forum selection provisions.
The defendant, who held controlling interests in each LLC, predictably reacted with a motion to dismiss the lawsuit for lack of subject matter jurisdiction based on Raharney.
Whether the plaintiff filed for dissolution of foreign entities as a matter of strategy or oversight, we’ll never know. In any event, one week after the filing of the dismissal motion, the plaintiff filed an amended complaint scrapping his remedial requests for judicial dissolution. Instead, invoking the court’s “inherent authority” to grant “equitable relief,” the amended complaint sought a “forced sale of assets” or, alternatively, a “forced buy/sell.”
The defendant predictably re-filed a new dismissal motion, this time arguing that the requested remedies of forced asset sale and buyout effectively were the same as, or ancillary to, dissolution and therefore no more capable of conferring subject matter jurisdiction on the court as the original complaint that had explicitly sought dissolution, winding up and liquidation.
The plaintiff opposed the motion, arguing that Raharney was limited to cases seeking the specific remedy of dissolution and that the court had jurisdiction to grant the kinds of equitable relief requested in the amended complaint. The plaintiff cited in support of his argument several decisions by New York courts in dissolution cases involving foreign corporations (not LLCs) in which the courts retained jurisdiction limited to the possibility of awarding remedies short of dissolution. (I mention two of those cases — Dohring and Sokol — in this 2009 post.)
The Court’s Decision
The court heard oral argument of the dismissal motion in September 2018 at which the plaintiff’s position took somewhat of a drubbing. It appears that Justice Scarpulla held off issuing her decision for many months while the parties attempted to mediate.
In her recent decision, Justice Scarpulla characterized the amended complaint as not seeking judicial dissolution per se but nonetheless seeking “equitable relief associated with judicial dissolution.”
She then quickly brought down the hammer on the plaintiff’s equitable relief argument, writing that the forced sale and buyout remedies requested “are identical to the relief [plaintiff] previously sought in [his original complaint] through judicial dissolution” and that the amended complaint “is clearly an ill-disguised attempt to make an end-run around the rule expressed in Raharney.”
Justice Scarpulla took a slightly harsher view of the request for a forced sale versus a forced buyout. Here’s what she said as to the former:
The [LLCs] are each single purpose entities, set up for the sole purpose of owning each Stellar investment property. Granting [plaintiff] an order to sell the assets of each LLC and to distribute the proceeds would be tantamount to ordering the dissolution of each LLC. I cannot grant such relief because, as explained in Raharney, “judicial dissolution of a foreign [business entity] . . . can only be granted by the state that created it.” [Citations omitted.]
And here’s what she said as to the latter:
Although the forced buy-out relief [plaintiff] seeks does not appear to present the same problem because it would not require dissolution of the LLCs, this remedy is not available here. See Kassab v Kassab, 2015 WL 11090346, * 2 (Sup Ct, Queens County 2015) (LLC member had no right to buyout where claim for dissolution dismissed and LLC’s operating agreement did not contain buyout provision); see also Belardi-Ostroy, Ltd. v American List Counsel, Inc., 2016 NY Slip Op 30727 [U], 10 n.8 (Sup Ct, NY County 2016) (“the remedy of ‘equitable buyout’ is unavailable when [plaintiff] fails to state a claim for dissolution”), citing, inter alia, Mizrahi v Cohen, I04 AD3d 917, 920 (2d Dept 2013) (“in certain circumstances, a buyout may be an appropriate equitable remedy upon the dissolution of an LLC’ (emphasis added)).
The decision dismissed the complaint in its entirety but also granted the plaintiff leave to replead his cause of action for breach of fiduciary duty “to assert proper relief, i.e., damages” in lieu of forced sale and buyout.
A Door Ajar, Ever So Slightly?
New York’s LLC Law has no buyout provision. The Mizrahi case cited by Justice Scarpulla and, more pointedly, the Kassab case also cited in her decision support the proposition that the court does not reach the question of an equitable buyout remedy unless and until the court finds that the alleged grounds for dissolution have been proven.
The proposition assumes the plaintiff’s complaint states on its face a viable dissolution claim.
Justice Scarpulla’s ruling in Rosania did not address the sufficiency of the plaintiff’s claim for dissolution. Contrast that with the Kassab case where the court found that the plaintiff did not state a valid claim for LLC dissolution before holding that he could not seek an equitable buyout,
On the other hand, Kassab concerned a New York LLC, not a foreign LLC. No case of which I’m aware explicitly addresses the question whether a New York court has subject matter jurisdiction over a complaint alleging grounds for dissolution of a foreign LLC under the law of the LLC’s state of formation, but only for the purpose of seeking an equitable buyout.
That question in turns raises another question, whether the availability of an equitable buyout is governed by New York law which supports an equitable buyout under certain circumstances, or the law of the LLC’s state of formation. If, for instance, Delaware law governs the issue, I’m not aware of any Delaware statute or case law authorizing an equitable buyout in lieu of dissolution.
Difficult questions like these may help explain why, in the wake of Raharney, so very few cases seeking quasi-dissolution remedies for foreign LLCs have come to the fore.