Parallel Business and Matrimonial Divorce Proceedings
January 08, 2024
Parallel business divorce proceedings in the same or different courts alleging overlapping or duplicative claims are common.
When it occurs, judges must often determine whether to dispose of one so the other may proceed in the first instance under the “another action pending” ground for dismissal in CPLR 3211 (a) (4), whether to consolidate or join the two lawsuits in a single proceeding under CPLR 602, or whether to simply allow the two cases to proceed concurrently.
In Malick, Ibrahim, an owner of two real estate owning limited liability companies, sued his wife and co-owner, Pramilla, in New York County Supreme Court, filing a ten-count complaint alleging a variety of tort and statutory causes of action arising from disagreements over their real estate businesses, including a single claim for judicial dissolution of the two LLCs.
But Pramilla beat Ibrahim to the punch.
Just days prior, Pramilla filed her own lawsuit against Ibrahim in New York County Supreme Court for dissolution of their marriage. In the divorce case, Pramilla apparently sought “equitable distribution” of her ownership stakes in the husband-and-wife owned LLCs.
This was the setup for two branches of the same court having potentially overlapping jurisdiction over the question of what to do with two marital owned LLCs, their equity interests, and their underlying real estate assets, upon the breakdown of Ibrahim and Pramilla’s marriage.
As we’ve written previously, insofar as the New York corporation and LLC judicial dissolution statutes provide for venue in the “Supreme Court,” and the Matrimonial Division (where marital dissolution cases are venued) is a branch of the Supreme Court, it seems likely that New York’s divorce courts could exercise jurisdiction, in a proper case, to judicially dissolve a New York entity co-owned by two divorcing New York domiciled spouses.
Malick addressed a more narrow question: should a commercial court dismiss under CPLR 3211 (a) (4) a judicial dissolution proceeding in favor of a previously-filed matrimonial proceeding where the commercial proceeding also includes business tort claims derivatively on behalf of an entity (i.e., breach of fiduciary duty, waste, conversion, and gross negligence), and those claims appear to potentially exceed the jurisdiction of matrimonial courts?
Case law interpreting CPLR 3211 (a) (4) supplies competing rules of decision.
On the other hand, complete overlap of parties and claims is not required to dismiss one case in favor of the other. All that is required is “substantial identity of the parties, the two actions are sufficiently similar, and the relief sought is substantially the same” in both cases (Ashwood v Uber USA, LLC, 219 AD3d 1289 [2d Dept 2023]).
In Raik, the appeals court ruled that the lower court “properly determined” that it would be “duplicative and counterproductive” to permit a judicial dissolution lawsuit to proceed concurrently with a marital dissolution proceeding, dismissing the former in favor of the latter. “The plaintiff’s claims with regard to his alleged interests in the . . . family businesses,” the Court held, “will be determined as part of the equitable distribution” in the divorce lawsuit.
But the Raik Court left the door open to additional litigation, should the matrimonial litigation prove inadequate to resolve all issues. “To the extent that it may later be determined that any of the plaintiff’s alleged business interests are beyond the reach of [the marital divorce action], as a matter of discretion in the interest of justice, the dismissal of [the corporate dissolution proceeding] is without prejudice to recommencement of that action after final resolution of the equitable distribution issues.”
Closely tracking the language of Raik, New York County Supreme Court Justice Verna L. Saunders ruled in Malick:
[T]his court grants that branch of the cross-motion seeking dismissal of the action pursuant to CPLR 3211 (a) (4). Resolution of the issues raised in this dissolution action would be duplicative and counterproductive given the pending divorce action in this court insofar as plaintiff’s alleged interest in the properties owned by defendants 302 LLC and 304 LLC would be subject to equitable distribution in the matrimonial action (citations omitted).
Like Raik, the Court dismissed the LLC dissolution proceeding without prejudice and with leave to refile:
To the extent it is later determined that any of the plaintiff’s alleged business interests are not subject to the matrimonial action, this court, in its discretion and in the interest of justice grants said dismissal without prejudice to recommencement of this action after final resolution of the equitable distribution issues. (citation omitted).
Lastly, the Court rejected Ibrahim’s argument that his filing of business tort claims against his spouse was reason, in and of itself, to deny dismissal:
Although plaintiff has asserted tort claims in this action that he maintains amount to ‘interspousal tort claims’ separate from the issues litigated in the divorce action, this court nevertheless finds that the claims raised here are substantially intertwined with the determination of ownership of the properties and the parties’ respective interests in the LLCs, an inquiry that is within the purview of the divorce action.
The upshot of Malick is that a modest but growing body of case law empowers matrimonial divorce litigants to successfully move for without-prejudice dismissal of an antagonistic spouse’s parallel business divorce lawsuit to permit the divorce court to resolve, in the first instance, intertwined issues of business and marital property ownership and equitable distribution consistent with the matrimonial court’s broad jurisdiction over the marital estate.