New York Court Disclaims Jurisdiction Over Dissolution of Delaware LLC

The New York Supreme Court in and for New York County recently issued the latest in a long series of New York decisions dealing with the issue of whether a New York court may exercise subject matter jurisdiction over an action for the judicial dissolution of a foreign (non-New York) business entity.  In Matter of Activity Kuafu Hudson Yards LLC[1], Justice Jeffrey K. Oing of the Commercial Division held that he did not have subject matter jurisdiction over a petition to dissolve a New York-based Delaware limited liability company.  At the New York Business Divorce blog, Peter Mahler (who has written volumes on this very topic) has ably and succinctly summarized the holding and the various grounds for it.  The operating agreement at issue contained the following language:

Each of the Members consents to jurisdiction of any court located in New York County in the State of New York for any action arising out of matters related to this Agreement. Each of the Members waives the right to commence an action in connection with this Agreement in any court outside of New York County, New York.

The respondent filed a motion to dismiss on the grounds that the court lacked subject matter jurisdiction, based on the language of 6 Del. C. § 18-802:

On application by or for a member or manager the Court of Chancery may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement.

Because the language of the statute expressly names the Court of Chancery as having jurisdiction over dissolution actions, the respondent argued that any court other than the Court of Chancery lacked subject matter jurisdiction.  This argument has found favor in a number of opinions from New York’s Appellate Division.[2] Earlier case law from the Appellate Division’s First Department held, however, that New York courts could exercise subject matter jurisdiction over the dissolution of foreign entities.[3] 

On the force, inter alia, of Section 18-802’s reference to the Court of Chancery, Justice Oing declined to exercise subject matter jurisdiction and dismissed the action.
It is interesting to note that it was long believed by most practitioners that Section 18-802, unlike other provisions of the Delaware Limited Liability Company Act that contain the language “unless otherwise specified in the operating agreement” (or words of similar import), was non-waivable.  Traditionally, legal opinions on the enforceability of an LLC’s operating agreement contained express disclaimers that no opinion was expressed as to the enforceability of any waiver of the right to seek judicial dissolution under Section 18-802. 

However, in 2008 the Court of Chancery held that freedom of contract trumped any narrow interpretation of the statute.  In R & R Capital, LLC v. Buck & Doe Run Valley Farms, LLC[4], the Delaware Court of Chancery upheld a provision in an LLC agreement purporting to eliminate members’ rights to judicial dissolution except as expressly granted therein, as long as the waiver was “knowing, voluntary and unambiguous.

The Court of Chancery has not weighed in directly on whether its subject matter jurisdiction over dissolution petitions is exclusive.  In the face of R & R Capital’s heavy emphasis on freedom to restrict and contract around dissolution rights, it seems likely that had this petition been brought in Delaware first, a motion to dismiss based on the contractual requirement that all disputes be heard in New York might well have succeeded.

[1] Matter of Activity Kuafu Hudson Yards LLC, NY County Supreme Court Index No. 650599/15 (April 22, 2015).
[2] E.g.,  Matter of MHS Venture Management Corp. (UtiliSave, LLC), 63 A.D.3d 840 (N.Y.A.D. 2d Dept. 2009); Rimawi v. Atkins, 840 N.Y.S.2d 217 (N.Y.A.D. 3d Dept. 2007).
[3]  Matter of Hospital Diagnostic Equipment Corp., 205 A.D.2d 459 (N.Y.A.D. 1st Dept. 1994).
[4] R & R Capital, LLC v. Buck & Doe Run Valley Farms, LLC, 2008 WL 3846318 (Del. Ch.); accord,  Aibar Huatuco, M.D. v. Satellite Healthcare, CA No. 8465-VCG (Del. Ch. Dec. 9, 2013)