Raharney Capital, LLC v. Capital Stack LLC

• Decision Date: 25 February 2016
• Parties: In re RAHARNEY CAPITAL, LLC, etc., Petitioner–Appellant, v. CAPITAL STACK LLC, etc., Respondent–Respondent.
• Court: New York Supreme Court — Appellate Division

138 A.D.3d 83

25 N.Y.S.3d 217

In re RAHARNEY CAPITAL, LLC, etc., Petitioner–Appellant,

v.CAPITAL STACK LLC, etc., Respondent–Respondent.

Supreme Court, Appellate Division, First Department, New York.

Feb. 25, 2016.

Giuliano McDonnell & Perrone, LLP, Mineola (Nicholas P. Giuliano and Christopher R. Murray of counsel), for appellant.

Carter Ledyard & Milburn LLP, New York (Jeffrey S. Boxer and Andriy R. Pazuniak of counsel), for respondent.

PETER TOM, J.P., ROLANDO T. ACOSTA, KARLA MOSKOWITZ, ROSALYN H. RICHTER, and BARBARA R. KAPNICK, JJ.

RICHTER, J.

In this appeal, we are asked to determine whether a New York court has the power to order the dissolution of a limited liability company that operates in this state, but was formed under the laws of another state. We conclude, consistent with decisions from the Court of Appeals, this Court, and our sister departments of the Appellate Division, that the courts of this state do not have subject matter jurisdiction to judicially dissolve a foreign business entity. Instead, the decision as to whether dissolution is appropriate lies with the courts of the state in which the entity was created.

Petitioner Raharney Capital, LLC (Raharney) is a Delaware limited liability company, and respondent Capital Stack, LLC (Capital Stack) is either a New York or a Nevada limited liability company. Raharney and Capital Stack each has its principal place of business in New York County, and each company has a sole member residing in New York. In September 2012, the principals of Raharney and Capital Stack agreed to embark upon a joint venture to act as a news source and forum for the nontraditional business finance industry. In furtherance of their endeavor, Raharney and Capital Stack formed Daily Funder, LLC (Daily Funder), a limited liability company organized under the laws of Delaware, with its sole place of business in New York County.¹ Raharney and Capital Stack each own a 50% interest in Daily Funder and have equal membership and management rights in the company. Daily Funder does not have a written operating agreement.

In October 2014, Raharney brought a petition seeking an order judicially dissolving Daily Funder pursuant to section 18–802 of Delaware's Limited Liability Company Act. 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 member. Raharney alleged that the parties were hopelessly deadlocked, and that it was not reasonably practicable for the company to continue operating. Raharney sought a judgment dissolving Daily Funder, and compelling its members to wind up the company's affairs and to execute the necessary documents to effect the dissolution of the company. Capital Stack cross-moved to dismiss the petition for lack of subject matter jurisdiction and for failure to state a claim. The motion court granted Capital Stack's motion to the extent of dismissing the proceeding on jurisdictional grounds. Raharney appeals, and we now affirm.

In Vanderpoel v. Gorman, 140 N.Y. 563, 571–572, 35 N.E. 932 [1894], in discussing the distinction between domestic and foreign corporations, the Court of Appeals expressed its view that a corporation could only be dissolved by the state that created it, and that courts in New York could not dissolve a foreign corporation (see also Sokoloff v. National City Bank of N.Y., 239 N.Y. 158, 167, 145 N.E. 917 [1924] [government of Russia could not dissolve a corporation formed under New York laws]; Merrick v. Van Santvoord, 34 N.Y. 208, 222 [1866] ["a corporate franchise granted by one State, cannot be revoked or annulled by the courts of another"] ). This Court echoed that sentiment in Miller v. Barlow, 88 App.Div. 529, 533, 85 N.Y.S. 310 [1st Dept.1903], revd. on other grounds 179 N.Y. 294, 72 N.E. 116 [1904], where we observed that "neither the Legislature nor the courts of this State would have the power to dissolve a corporation organized under the laws of another State." Likewise, in Tosi v. Pastene & Co., 34 A.D.2d 520, 520, 308 N.Y.S.2d 472 [1st Dept.1970], we found that, although allegations of mismanagement of a foreign corporation would allow the plaintiff to obtain some unspecified relief, they "may not entitle the court to direct a dissolution of the foreign [entity]."

The other departments of the Appellate Division that have addressed this issue have concluded that courts in New York do not have subject matter jurisdiction to dissolve an out-of-state foreign entity. In Rimawi v. Atkins, 42 A.D.3d 799, 840 N.Y.S.2d 217 [3d Dept.2007], the plaintiffs commenced an action against Quik–Flight, a Delaware limited liability company that operated an air charter service in New York. The complaint included a cause of action seeking judicial dissolution of Quik–Flight. The defendants moved to dismiss the dissolution cause of action, and Supreme Court denied the motion. On appeal, the Third Department reversed and held that New York courts lack subject matter jurisdiction over the dissolution claim (id. at 801, 840 N.Y.S.2d 217 ). Similarly, in Matter of MHS Venture Mgt. Corp. v. Utilisave, LLC, 63 A.D.3d 840, 841, 881 N.Y.S.2d 452 [2d Dept.2009], the Second Department concluded that "[a] claim for dissolution of a foreign limited liability company is one over which the New York courts lack subject matter jurisdiction" (see also Matter of Porciello v. Sound Moves, 253 A.D.2d 467, 675 N.Y.S.2d 903 [2d Dept.1998] ; Matter of Warde–McCann v. Commex, Ltd., 135 A.D.2d 541, 522 N.Y.S.2d 19 [2d Dept.1987] ; Appell v. LAG Corp., 2006 N.Y. Slip Op. 30602[U], 2006 WL 6468394 [Sup.Ct., N.Y.County 2006], affd. 41 A.D.3d 277, 838 N.Y.S.2d 541 [1st Dept.2007] ).

The overwhelming majority of courts outside New York have come to the same conclusion (see P.G. Guthrie, Annotation, Dissolving or Winding Up Affairs of Corporation Domiciled in Another State, 19 A.L.R.3d 1279, § 3[a] [collecting cases] ). For example, in Young v. JCR Petroleum, Inc., 188 W.Va. 280, 283–284, 423 S.E.2d 889, 892–893 [1992], the court, interpreting certain state statutes, held that West Virginia courts have no jurisdiction to dissolve foreign corporations. To conclude otherwise, the court reasoned, would run afoul of the Full Faith and Credit clause of the United States Constitution, which "requires each state to respect the sovereign acts of the other states [,]" including "[t]he creation and dissolution of a corporation" (188 W.Va. at 283, 423 S.E.2d at 892 ; see also Lueker v. Rel Tech Group, Inc., 24 Va.Cir. 197, 200, 1991 WL 835011 [Va.Cir.Ct.1991] [a corporation could not be involuntarily dissolved "except by the act of a sovereign power by which it was created"]; Spurlock v. Santa Fe Pacific R.R. Co., 143 Ariz. 469, 482, 694 P.2d 299, 312 [Ariz.Ct.App.1984] ["The respective supremacies of the state and national governments in their particular spheres must be observed in regard to their power to create and destroy corporations. Neither may terminate the existence of a corporation of the other"], cert. denied 472 U.S. 1032, 105 S.Ct. 3513, 87 L.Ed.2d 642 [1985] ; Kirby Royalties, Inc. v. Texaco Inc., 458 P.2d 101, 103 [Wyo.1969] ; State v. Dyer, 145 Tex. 586, 591, 200 S.W.2d 813, 815 [Tex.1947] ).

We agree with the near-universal view that the courts of one state do not have the power to dissolve a business entity formed under another state's laws.² Because a business entity is a creature of state law, the state under whose law the entity was created should be the place that determines whether its existence should be terminated (see 17A Fletcher, Cyclopedia of Corporations § 8579 [2015] ["the state or country that grants the corporation its franchise has exclusive and supreme power to withdraw it and to forfeit the corporate charter or dissolve the corporation"]; 19 Am. Jur. 2d, Corporations § 2335 ["The existence of a corporation cannot be terminated except by some act of the sovereign power by which it was created"] ).

We recognize that in Matter of Hospital Diagnostic Equip. Corp. [HDE Holdings–Klamm], 205 A.D.2d 459, 613 N.Y.S.2d 884 [1st Dept.1994], this Court, in a brief memorandum decision, rejected a challenge to ...