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Commercial Division Prevents End-Run Around Rule Precluding Judicial Dissolution of Foreign Business Entities

In Matter of Raharney Capital, LLC v. Capital Stack LLC,[1] the First Department held that New York courts lack subject matter jurisdiction over foreign company dissolution proceedings. Now, a recent Commercial Division decision rendered by Justice Saliann Scarpulla, Rosania v. Gluck,[2] has clarified that the Raharney rule also applies to litigants’ attempts to obtain equitable relief associated with a judicial dissolution of a foreign business.

Background

Plaintiff Robert Rosania (“Rosania”) filed his original verified complaint (“Original Complaint”) seeking the dissolution of 17 Delaware limited liability companies (“LLCs”) owning New York real estate in which Rosania and Defendant Laurence Gluck (“Gluck”) both held financial interests.[3]  Notably, some of the LLCs had Delaware and others had New York choice-of-law clauses.  All had forum selection clauses calling for suit in New York courts.  Rosania contended that dissolution of the LLCs was warranted under New York and Delaware law because Gluck’s misconduct had made their continued operation impracticable.[4]

Gluck moved to dismiss the Original Complaint, relying on the First Department’s decision in Raharney.[5] 

In response to Gluck’s motion to dismiss, Rosania filed an Amended Verified Complaint (“Amended Complaint”), dropping the dissolution requests, but asserting three equitable causes of action.[6] Thereafter, Gluck filed another motion to dismiss, this time addressed to the Amended Complaint.

Rosania’s Amended Complaint seeks equitable relief associated with a judicial dissolution

In ruling on the motion to dismiss, Justice Scarpulla determined that the relief Rosania requested in the Amended Complaint was significantly similar to the relief that he had requested in his Original Complaint—relief barred by Raharney.  According to the Court, the Amended Complaint’s first cause of action asserted that Gluck had breached his fiduciary duty to Rosania through fraudulent and abusive conduct in the management of several of the LLCs.[7]

The Commercial Division further noted that the Amended Complaint’s second and third causes of action—the underlying bases for which were identical to the alleged conduct essential to the Amended Complaint’s first cause of action—sought a forced sale of the LLCs’ assets or a forced buy-out of Rosania and Gluck’s respective interests in those LLCs.[8]

No end-run permitted around Raharney

Justice Scarpulla declined to grant Rosania the requested relief, holding that the remedies he sought in the second and third causes of action—i.e., the forced sale of assets, distribution of proceeds, and the forced purchase and sale of one party’s interests in the LLCs to the other party—were “identical to the relief Rosania previously sought in the [Original Complaint] through judicial dissolution.”[9]  Justice Scarpulla explained that such an “ill-disguised attempt to make an end-run around the rule expressed in Raharney” was untenable because “judicial dissolution of a foreign [business entity] . . . can only be granted by the state that created it.”[10]  The Court added that Rosania had no right to a forced buy-out since his claim for dissolution had been dismissed.[11]

Nonetheless, Justice Scarpulla suggested that Rosania’s allegations in the Amended Complaint might support other relief in the form of damages, and thus granted Rosania leave to replead to request the appropriate relief.[12]

Conclusion

The Rosania decision confirms the broad reach of the First Department’s holding in Raharney that, under New York law, judicial dissolution of a foreign business entity can only be granted by courts in the state where the entity was formed.  Rosania makes clear that, at least in the Commercial Division, New York County, the rule articulated by the First Department in Raharney, will also be applied to litigants’ thinly veiled attempts to obtain equitable relief associated with judicial dissolution for foreign business entities.  Despite this, it may be possible to recover damages for conduct that could otherwise support a judicial dissolution.

 

[1] 138 A.D.3d 83, 25 N.Y.S.3d 217 (1st Dep’t 2016).

[2] 655331/2017, 2019 NY Slip Op 32087(U) (Sup. Ct. July 8, 2019).

[3] See id. at * 1.

[4] See id.

[5] See id.

[6] See id.

[7] See id. at * 2.

[8] See id.

[9] Id.

[10] Id. at ** 2-3 (quoting Raharney, 138 A.D.3d at 88).

[11] See id. at ** 3-4.

[12] See id. at * 4.