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Posted: February 29, 2016

New York Courts Cannot Dissolve Business Entities Formed Under Another State’s Laws

On February 25, 2016, the First Department issued a decision in Matter of Raharney Capital, LLC v. Capital Stack LLC, 2016 NY Slip Op. 01425, reversing an earlier precedent and holding that a New York court does not have jurisdiction to dissolve a business entity formed under another state’s laws.

In Matter of Raharney Capital, the First Department was “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.” It concluded that it does not, and rather that “the decision as to whether dissolution is appropriate lies with the courts of the state in which the entity was created.” The Court explained:

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. 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.

We recognize that in Matter of Hospital Diagnostic Equip. Corp. [HDE Holdings-Klamm], this Court, in a brief memorandum decision, rejected a challenge to the court’s jurisdiction to dissolve a foreign corporation. We now conclude that Hospital Diagnostic should no longer be followed in light of the principles enunciated by the Court of Appeals in Vanderpoel, Sokoloff and Merrick, and by this Court in Miller and Tosi. Hospital Diagnostic also cannot be reconciled with the rulings of the other departments of the Appellate Division and the overwhelming weight of authority from other jurisdictions.

The short decision in Hospital Diagnostic relies solely on a citation to Broida v Bancroft, a shareholder derivative action that did not involve a request for corporate dissolution. In Broida, the court concluded that jurisdiction could be exercised over an action involving the internal affairs of a foreign corporation doing business in New York, unless New York was an inappropriate or inconvenient forum. Although we do not quarrel with that proposition, we believe that judicially dissolving a foreign business entity is entirely distinct from resolving a dispute over its internal affairs. An order of dissolution from a New York court would infringe on the sovereign authority of another state by, in effect, forcing that state to extinguish an entity formed under its own laws.

We recognize that New York State courts play a critical role in resolving disputes involving business entities, and our limited holding here is only that New York courts lack subject matter jurisdiction to dissolve a business entity created under another state’s laws, an extremely narrow subset of cases. This case does not involve the authority of our courts to adjudicate the myriad disputes involving foreign entities doing business in this state, or to grant provisional relief in the course of hearing such controversies. The only relief sought here is the judicial dissolution of a foreign limited liability company, which can only be granted by the state that created it.

Finally, we disagree with petitioner that Delaware has only a minimal interest in the question of whether a business entity created in that state should be dissolved. Indeed, Delaware has a strong interest in determining whether business entities formed under its own laws continue to exist at all, and we should refrain from telling Delaware whether or not it should dissolve business entities formed in that state. In any event, the question here is not whether New York or Delaware is the more appropriate forum, an issue that would be part of a forum non conveniens analysis, but rather whether New York has subject matter jurisdiction in the first instance.

(Internal quotations and citations omitted).

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