- Fighting for Home Court Advantage in Multi-State Business Divorce Litigation
- July 2, 2013 | Author: Peter A. Mahler
- Law Firm: Farrell Fritz, P.C. - New York Office
There’s nothing new about cross-border business ventures in which a resident of State A is a co-owner of a closely held business entity organized in State B. As happens most frequently with business entities formed in Delaware, the organizational filing may be the only nexus with the state of formation, in which case for practical reasons internal conflicts that ripen into litigation tend to be fought in the jurisdiction where the business operates which also may coincide with the co-owners’ domiciles. In other words, it’s not at all unusual to see co-owners of a New York-based business organized in Delaware or Nevada duking it out in a New York court which can and will decide the internal dispute by applying the laws of the organizational state.
The same cannot be said for internal disputes that prompt one of the co-owners to seek judicial dissolution of the business entity. By and large, courts will decline jurisdiction over dissolution suits involving foreign entities based on the principle of interstate comity. One consequence of this jurisdictional exception is the phenomenon of dueling lawsuits in different states in which business co-owners attempt to secure the home court advantage, with one side bringing a dissolution action in the business’s state of formation and the other bringing an “ordinary” lawsuit for damages and/or injunctive relief in that party’s distant home state.
That is exactly what happened in Picarella v. HMA Properties, LLC, 2013 NY Slip Op 31354(U) (Sup Ct Suffolk County June 17, 2013), a multi-jurisdictional turf battle between co-members of a Florida limited liability company (LLC) decided last month by Suffolk County Commercial Division Justice Elizabeth Hazlett Emerson. Justice Emerson’s ruling, dismissing the New York action on the legal grounds of forum non conveniens in favor of a pending dissolution proceeding in Florida, provides highly useful guidance for business divorce litigants and their counsel who are either contemplating or find themselves in a multi-state contest.
Picarella involves a member-managed Florida LLC formed in 2003 to own and operate a residential apartment building in Miami. The plaintiff, a New York resident, held a 35% membership interest. The three defendants, all Florida residents, held the remaining 65%. In 2011, the property’s mortgage lender brought a foreclosure action. In early 2012, the defendants voted to sell the property to a third party for $540,000 in order to pay off the mortgage debt on which the members were personal guarantors.
The Competing New York and Florida Actions
In February 2012, the plaintiff filed the New York action and obtained a temporary restraining order preventing the property sale which the plaintiff claimed was under-valued. In April 2012, the parties entered into a stipulation permitting the sale to close, resulting in net proceeds to the LLC under $10,000. The stipulation was without prejudice to plaintiff’s continued prosecution of his claims seeking to recover damages for breach of fiduciary duty and for denying plaintiff his right to withdraw from the LLC and to receive a distribution for his interest.
Following the stipulation the New York proceedings apparently were sidetracked temporarily by a defense motion to disqualify the plaintiff’s counsel, which Justice Emerson denied in September 2012. Shortly afterward, the defendants in the New York case filed a petition in the Florida courts for judicial dissolution of the LLC. The Florida dissolution action also asserted damages claims against the New York plaintiff for unjust enrichment, breach of fiduciary duty and conversion.
The next, predictable move by the New York defendants was to file a motion in the New York case asking Justice Emerson to dismiss the action in favor of the Florida dissolution case based on the doctrine of forum non conveniens (Latin for “forum not agreeing”). The defendants primarily contended that the Florida statutes applicable to dissolution of Florida LLCs and derivative suits vest jurisdiction exclusively in Florida courts. The plaintiff countered with an amended complaint which, he argued, alleged individual tort claims against the defendants litigable in New York.
Justice Emerson’s Ruling
Under the common-law doctrine of forum non conveniens, as explained in Justice Emerson’s ruling, “the court may stay or dismiss an action when it determines that, although it has jurisdiction over the action, the action would be better adjudicated elsewhere,” particularly when “the claim has no substantial nexus with New York.” As Justice Emerson next explained, the analysis requires consideration and balancing of a number of factors:
"The New York courts consider and balance various competing factors when evaluating whether or not to retain jurisdiction over a particular action. Although not every factor is necessarily articulated in every case, collectively, courts have considered and balanced the following factors: the existence of an adequate alternative forum, the situs of the underlying transaction, the residency of the parties, the state of incorporation, the potential hardship to the defendant, the location of documents, the location of a majority of the witnesses, and the burden on the New York courts. The determination rests within the exercise of the court’s sound discretion, and no one factor is controlling. The fact that the company was created in another state weighs in favor of dismissal. When an action involves the internal affairs of a foreign corporation, the state of creation has a paramount interest in hearing the claim. [Citations omitted.]"
Applying these factors in Picarella led Justice Emerson to conclude that the defendants met their burden of establishing “that the selection of New York as the forum will not best serve the ends of justice and the convenience of the parties.” First and foremost in the court’s analysis is the fact that “there is a dissolution proceeding pending in Florida” which “can only be heard in Florida and the New York court has no jurisdiction.” Moreover, she noted,
"the purpose of a dissolution claim is to ultimately establish the valuation of the entity, complete a winding up of its affairs, and to make appropriate distributions to the members. To the extent the plaintiff’s claims in the New York action, as articulated in his amended complaint, are derivative, these must be evaluated and determined before the Florida court can complete valuation. To the extent the claims are between members, they must be established before any distribution takes place."
Other factors found to weigh in favor of adjudicating all claims in Florida included:
- The claims in each action were based on the same facts, the defendants’ claims in the Florida action being the “mirror image” of the plaintiff’s claims against the defendants in the New York action. If kept separate, there could be inconsistent judgments, and the timing of a judgment in one action could be detrimental to the other.
- The facts and circumstances pertinent to the New York action occurred in Florida.
- The company was created in Florida.
- The parties relied upon Florida law when drafting the LLC agreement.
- The action’s only connection to New York was that some of the members in the company reside in New York.
It’s interesting to note that, unlike jurisdictional contests in many other types of lawsuits where the first to file often prevails, in Picarella the prevailing Florida action wasn’t filed until almost a year after the start of the New York case. As Picarella illustrates, the race to the courthouse is immaterial to the exclusive jurisdiction of the state of formation to entertain a dissolution petition.
Finally, jurisdictional contests of this sort can readily be avoided by including a well-drafted choice of forum provision in the owners’ agreement, requiring that any lawsuit between co-owners relating to the business entity be brought exclusively in a specified locality.