New York Courts Will Not Dissolve Out-of-State Corporate Entity
New York Courts do not have the power to order the dissolution of a corporate entity that operates in the State of New York, but was formed under the laws of another state. In Re Matter of Raharney Capital, LLC v. Capital Stock, LLC, 138 A.D. 3d 83 (1st Dept. 2016).
In that case, Plaintiff, Raharney Capital, LLC, (“Raharney”) a Delaware limited liability company with a principal place of business located in the State of New York filed an action against Capital Stock, LLC, (“Capital Stock”) in the State of New York seeking juridical dissolution pursuant to Section 18-802 of Delaware’s Limited Liability Act of a Delaware entity formed by Raharney and Capital Stock. That entity, Daily Funder was a Delaware Limited Liability Company, with a principal place of business in New York City. Raharney and Capital Stock each owned 50% of Daily Funder.
According to Raharney, the members of Daily Funder were unable to agree upon their respective roles and duties, the terms of an Operating Agreement, and the terms for withdrawal of either members. Moreover, Raharney alleged that the parties were hopelessly deadlocked, and that it was not reasonably practicable for the Daily Funder to continue operating. Raharney filed in an action in the Supreme Court of New York, New York County, seeking a judicial judgement dissolving Daily Funder and compelling its members to wind up the company’s affairs.
Capital Stock filed a pre-answer motion to dismiss pursuant to C.P.L.R. 3211, asserting that the New York Court did not have subject matter jurisdiction to dissolve a foreign corporation. The trial court agreed and dismissed the case.
Raharney appealed the trial court’s decision.
The New York Appellate Division, First Department affirmed the trial court. The Appellate Court looked at other New York Appellate Division decisions who have addressed this issue and “concluded that courts in New York do not have subject matter jurisdiction to dissolve an out-of-state forum entity.” Citing, Rimawi v. Atkins, 42 A.D. 3d 799 (3d Dept. 2007); Matter of MHS Venture Mgt. Corp. v. Utilsave, LLC 63 A.D.3d 840, 841 (2nd Dept. 2009).
Furthermore, in affirming the trial court’s decision, the Appellate Court looked to other states’ courts’ decisions on the issue. In doing so, the Court found that a majority of courts outside of New York have also found that they do not have subject matter jurisdiction to dissolve a foreign corporation.
New Jersey does not follow the majority approach. A New Jersey Court may dissolve or adjudicate issues related to the internal affairs of a foreign corporate entity, if it finds that there are enough contacts with the Garden State. New Jersey courts would adjudicate a case if the foreign corporation has a principal place of business in New Jersey; a significant percentage of the members are New Jersey residents; and/or the result of the litigation could affect a substantial number of New Jersey employees. That, of course is not to say that New Jersey will adjudicate every dispute involving a foreign corporation. Rather, New Jersey courts will apply an equitable determination before it decides the issue.
The same is untrue in New York. Courts in the Empire State do not have subject matter jurisdiction to order the dissolution of a foreign corporate entity. Those disputes must be adjudicated in the place of formation/incorporation or possibly in a State, like New Jersey if there are enough contacts where the Court feels it has the equitable and legal powers to adjudicate the dispute.