Business Divorce Alert: Forum Selection Clauses Do Not Confer Subject Matter Jurisdiction in Foreign Entity Dissolution Cases

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As I wrote here, in 2016 the Manhattan-based Appellate Division, First Department decided Raharney Capital LLC v Capital Stack LLC, overruling its own precedent and joining appellate rulings by the other Departments holding that New York courts lack subject matter jurisdiction over petitions to dissolve foreign business entities.

New York courts are not the only ones to come to that conclusion, albeit not necessarily expressed in terms of subject matter jurisdiction. For those interested in the topic, I highly recommend a 2015 article in The Business Lawyer by Peter B. Ladig and Kyle Evans Gay entitled Judicial Dissolution: Are the Courts of the State that Brought You In the Only Courts that Can Take You Out? The article examines doctrinal underpinnings and highlights court rulings from a number of states holding that the power to judicially dissolve a business entity belongs exclusively to courts in the state of its formation.

You’d think we’d seen the last of the issue, at least in New York, after Raharney closed the door five years ago. But there’s one wrinkle that Raharney and its kindred decisions didn’t address: Where should a business owner seeking judicial dissolution of a New York-based foreign business entity bring suit when the governing shareholder, partnership, or operating agreement includes a broad forum selection clause consenting to the exclusive jurisdiction and venue of New York courts in any litigation among the signatories?

Manhattan Commercial Division Justice Jennifer G. Schecter gave the answer in her decision last month in Durst Buildings Corp. v Edelman Family Co.

Durst Files for Dissolution in New York Per the LLC Agreement’s Forum Selection Clause

In Durst, the petitioneran affiliate of the The Durst Organization, one of New York City’s largest real estate owner/operators — sought judicial dissolution of Artemus USA LLC, an art-leasing business founded in 2014 by financier and art collector Asher Edelman. Artemus is a Delaware LLC with its principal place of business in Manhattan. Artemus’s Second Amended and Restated Operating Agreement identifies an Edelman-controlled company as 50% managing member and the Durst affiliate as 50% non-managing member.

Durst’s Amended Petition alleges Artemus’s status as a Delaware LLC and seeks its judicial dissolution on various grounds under Section 18-801 of the Delaware LLC Act. Paragraph 20 of the Amended Petition, in a section entitled “Jurisdiction and Venue,” alleges:

Pursuant to section 30 of the Company’s LLC Agreement, the Company, Petitioner, and Respondent all consent to the exclusive jurisdiction and venue of any state or federal court sitting in the City of New York, Borough of Manhattan for any action arising out of matters related to the Company’s LLC Agreement.

Sure enough, Section 30 of the LLC Agreement, entitled “Venue,” reads as follows:

The Company and each of the Members consent to the jurisdiction of any state or federal court sitting in The City of New York, Borough of Manhattan, for any action arising out of matters related to this Agreement. The Company and each of the Members waive the right to commence an action in connection with this Agreement in any court outside of the state and federal courts sitting in The City of New York, Borough of Manhattan, other than to enforce a judgment of a proper court against a Member or its Affiliates.

The Court Sua Sponte Questions Its Own Jurisdiction

True to Section 30, Edelman’s answer to the Amended Petition did not challenge Durst’s right to seek dissolution in a New York court. Rather, that was left to the court to raise on its own which it did at a preliminary conference at which the court questioned whether in light of appellate precedent it had subject matter jurisdiction notwithstanding Section 30.

The court asked counsel to confer and submit a letter choosing among three options: (1) have the court determine whether it has jurisdiction, (2) re-commence a dissolution proceeding in Delaware while continuing to litigate the petition’s non-dissolution claims, or (3) discontinue the proceeding and re-file in Delaware for judicial determination of dissolution and all other related relief.

Durst’s counsel subsequently wrote to the court, accepting the court’s third option provided that Edelman stipulates that the LLC Agreement permits the Delaware filing. In his responsive letter to the court, Edelman’s counsel declined to so stipulate. Instead, counsel contended that since both sides “agree to dissolution” but just can’t agree how to accomplish it, for the sake of efficiency the New York court should retain jurisdiction in accordance with the parties’ agreement in Section 30 while the parties work things out under the supervision of a mediator or liquidation trustee, “provided such agent takes cooperative direction from both parties.”

The Court Dismisses the Case

The parties’ failure to agree on one of the three options left the court with no choice but to determine its own jurisdiction, which it did in two steps.

First, it issued an order directing the parties to file briefs showing cause why the court should not dismiss the dissolution-related causes of action in the Amended Petition for lack of subject matter jurisdiction under the authority of the First Department’s Raharney decision. The order also reminded counsel that litigants cannot waive a court’s lack of subject matter jurisdiction.

Durst’s counsel took the hint in his response to the order, stating that Durst “does not seek to challenge authority presented by this Court regarding jurisdiction” and requesting that the court issue a decision “directing that all relief sought in this proceeding must be sought in Delaware court and cannot be sought in this or any New York court for lack of jurisdiction so that there is no question as to the lack of merit of Respondent’s objection to proceeding in Delaware.” Alternatively, along the lines of Edelman’s suggestion, Durst’s counsel proposed that the court enter an order “to approve and enforce in this proceeding the members’ agreement for this Court to promptly select and appoint a receiver or trustee to liquidate and dissolve the Company consistent with the Company’s LLC Agreement and applicable law.”

Edelman’s counsel’s response stated without elaboration that his client “consents to the court issuing a decision as soon as practicable directing all relief sought in Petitioner’s petitioner to be dismissed with prejudice.” Counsel offered no argument or authority supporting the court’s subject matter jurisdiction, or agreeing that the court lacks jurisdiction, or suggesting why the dismissal should be with prejudice if subject matter jurisdiction is lacking.

Within a half hour after receiving counsel’s correspondence, Justice Schecter issued an order dismissing the Amended Petition without prejudice, simply adding that “the claims can and should proceed in Delaware.”

The Takeaway

Durst sends a simple and clear message to litigation counsel in dissolution cases involving New York-based foreign business entities: It doesn’t matter what agreement the parties make concerning venue or jurisdiction, don’t bother filing in New York.

Counsel also should bear in mind that, even if a less astute court did not raise on its own the question of subject matter jurisdiction, if the case went forward to any type of judicial disposition, the losing side could subsequently file a post-judgment motion or appeal to vacate all prior orders and proceedings. Such was the fate of the unfortunate litigant who initially succeeded in winning dismissal on the merits of a dissolution petition involving a Delaware LLC only to see its victory vacated on appeal for lack of subject matter jurisdiction, in Matter of MHS Venture Management Corp. v Utilisave, LLC.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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