Judicial Dissolution: Are the Courts of the State that Brought You In the Only Courts that Can Take You Out?

63 Min Read By: Peter B. Ladig, Kyle Evans Gay

In early 2014, the then-managing members of the limited liability company (“LLC”) that owned The Philadelphia Inquirer, the Philadelphia Daily News, and philly.com filed nearly simultaneous petitions for judicial dissolution of the LLC in the Court of Common Pleas in Philadelphia and the Delaware Court of Chancery. The dual petitions created the anomaly that everyone agreed on dissolution, but no one could agree where it should take place. Both courts were asked to address a unique question: could a Pennsylvania court judicially dissolve a Delaware LLC? According to existing precedent, the answer was not so clear. This article proposes that the answer should be clear: a court cannot judicially dissolve an entity formed under the laws of another jurisdiction because dissolution is different than other judicial remedies. This approach gives full faith and credit to the legislative acts of the state of formation, but also permits the forum state to protect its own citizens by granting the remedies it feels necessary, short of dissolution.

An involuntary judicial dissolution is one of the key tools available to a lawyer advising a client seeking a business divorce. Once the client decides to pursue an involuntary judicial dissolution, an attorney’s first question should be: in which court? It is often the case that even if all of the parties are citizens of the same state, those parties formed their entity under the laws of another state. Under those circumstances, can the parties ask their home state court to judicially dissolve an entity formed pursuant to the laws of a foreign state?

This issue arose recently in the dissolution of Interstate General Media, LLC (“IGM”), the limited liability company that owned The Philadelphia Inquirer, the Philadelphia Daily News, and the website philly.com. IGM’s two managing members filed near simultaneous actions seeking judicial dissolution in the Commerce Court of the Philadelphia Court of Common Pleas and the Court of Chancery of the State of Delaware, respectively. The simultaneous filings required each court to decide which court should hear the request for dissolution. A principal issue in the analysis of this question was whether a Pennsylvania court could dissolve a Delaware limited liability company. The Commerce Court ultimately issued an order declining jurisdiction, which allowed the action in the Court of Chancery to proceed. In the opinion explaining that decision issued a few weeks later, the Commerce Court noted that IGM’s operating agreement provided that IGM could be dissolved by entry of a decree of dissolution under the Delaware Limited Liability Company Act (the “LLC Act”).1 The Commerce Court concluded it did not have subject matter jurisdiction to enter a decree of dissolution “under the [LLC] Act” because the LLC Act implies that “exclusive subject matter jurisdiction [to dissolve a limited liability company] lies with the Delaware Court of Chancery.”2

It makes sense on some level that a Delaware court exclusively should decide whether a Delaware entity should be dissolved. Although courts nationwide have held that they do not have the power to dissolve a foreign entity, that reasoning has not been universally adopted.3 For instance, in a dissenting statement from the Pennsylvania Supreme Court’s decision declining to exercise its discretion to hear an immediate appeal of the decision of the Commerce Court, then-Chief Justice Castille opined that the Commerce Court erred in interpreting the relevant section of the LLC Act to confer “exclusive” subject matter jurisdiction upon the Delaware courts to dissolve a Delaware limited liability company.4 In addition, in two recent decisions addressing matters other than involuntary judicial dissolution, the Court of Chancery has stated that Delaware statutes that confer exclusive jurisdiction on the Court of Chancery merely allocate jurisdiction within Delaware’s unique judicial system that has maintained the separation of law and equity, and not to the exclusion of the ability of any other state to provide the relief necessary.<...

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