People who hear the term “business divorce” for the first time tend to automatically focus on the word “divorce” and ignore the word “business”. Ironically, most commercial divorce cases have nothing to do with marital disputes.
But that’s not always the case. Sometimes we write about marital disputes spilling over into commercial courts and vice versa.Last fall, I wrote an article about marital dispute Reality TV personality Julia Hart and her ex-lover, billionaire Silvio Scalia, are both in Delaware Chancery Court and Manhattan’s Marriage Division over the model agency Elite World Group, Inc. Ownership is debated.
However, it’s not common to see business dissolution proceedings in marriage court, which is why a recent ruling by Manhattan Supreme Court Justice Katherine Waterman-Marshall is so fascinating.
question
In a well written decision, NF v JD (2022 NY Slip Op 51294[U] [Sup Ct, NY County Dec. 21, 2022]), Judge Waterman-Marshall considered several interesting issues:
- New York Marriage Court Has Judicial Dissolution of Closely Controlled Business Entities Deemed “Marital Assets”
- Power of marriage court to order spouse to dissolve entity extrajudicially
- Power of the Matrimonial Court to appoint interim receivers of commercial entities, including receiverships of non-party controllers of matrimonial assets of commercial entities
- Marriage court orders interim receivers to decide whether to seek dissolution
Hedge funds set up by marriage and conjugal property
In 2010, the couple got married. Husband works in the financial industry covering emerging markets. The husband and wife have substantial securities holdings, invested together in three separate brokerage accounts, worth between $2 and $3 million.
In 2018, a husband and wife formed a hedge fund, a limited liability company incorporated in Delaware (the “Company”), to hold and manage their investments and transfer assets from their three brokerage accounts Fund the company.
Husband and wife enter into a limited liability company agreement (“LLC Agreement”) stating that husband and wife are 50% members of the corporation. “Principally,” the court wrote, “the addition of the wife to the corporation was a recognition of the fact that it was a marital asset.”
The firm’s investments in emerging markets — “China and Russia in particular” — are known for high volatility, including potentially high returns but also significant losses.
The Management Company is an independent, limited liability company incorporated in New York, exclusively owned and managed by the Husband (“Management”).
husband violates automatic order
In 2020, the wife filed for divorce.
under Family Relations Law (“DRL”) § 236 BThe filing of matrimonial proceedings creates what is known as an “autonomous order”, provided that neither party must, among other things:
Sell, transfer, mortgage, hide, transfer, remove or in any way dispose of any property without the written consent of the other party or a court order. . . held by the parties individually or jointly, except in the ordinary course of business, for customary household expenses or reasonable attorneys’ fees in connection with this proceeding.
Without the knowledge of the wife, the husband signed several amended and restated LLC agreements for the company in 2021, in part to invest in a dozen third parties as part of a plan previously agreed upon by the husband and wife The former offered company benefits, but in the process, the wife canceled her membership benefits without her knowledge or consent.
In the words of the court, “The end result of the 2021 LLC agreement is simple: the husband disposes of the wife’s membership interest in the company and takes complete ownership and control of the company and its assets for himself.”
The wife was allegedly unaware that she had lost her membership interests in the company or that her husband had sold the membership interests in the company to investors until entering matrimonial proceedings as part of the pretrial discovery process.
At the same time, the company was heavily exposed to Russian securities, which the court wrote were “locked up and possibly lost forever,” apparently due to global sanctions stemming from the Ukraine war. “As a result,” the court wrote, “the value of the company was reduced from $6.7 million to $1.6 million, for a loss of approximately $5.1 million.”
Motions to Dissolution and/or Appointment of Receivers
Wife Moved Immediately After Learning of $5.1 Lost in Company Value, According to DRL §234for orders to dissolve a company, to liquidate and distribute its assets, or to appoint a temporary receiver to manage the company during proceedings.
The Court characterized the issue as follows:
This case involved examining the breadth and limitations of the court’s equitable authority under DRL § 234 to issue preliminary injunctive relief to protect military assets subject to equitable distribution. The powers are not broad enough to allow this Court to judicially dissolve foreign LLCs that are marital property. However, where one party mismanages the other party’s interest in it, refuses to comply with a court order, and allegedly mismanages the company, causing the company to suffer substantial losses, the court can take remedial measures to protect the company. it’s worth it.
Under the doctrine that New York courts lack subject matter jurisdiction to dissolve foreign entities (read the doctrine Gentlemen and Gentlemen), the court refused to dissolve the company. The court also failed to appoint a receiver for the company because language in the company’s LLC agreement only allows for a receivership in the event of liquidation.
But the court concluded:
Husband seeks preliminary injunctive relief to protect and Preserve the wife’s expectations of the company and prevent it from dissipating further.
According to what the court described as “Under DRL § 234, the court has broad equitable power to issue orders concerning the possession of matrimonial assets to prevent their disposition or dissipation while the matrimonial proceedings are pending,” the court ruled that it “may direct” Husband, “in his capacity as the sole member-manager of the management of a New York limited liability company, has jurisdiction over it to extrajudicially dissolve the corporation”.
But the court ultimately declined to order the husband to dissolve the company because “the record does not demonstrate that dissolution is strictly necessary or appropriate at this time” and could harm third-party investors in the company.
Instead, relying on the broad powers described in DRL § 234 “to appoint interim receivers for marital assets in the event of risk of loss, damage, or destruction of equitably distributed property,” the court held that it could “appoint an interim A management receiver”—rather than the company itself—“in place of the husband, that person will assume management’s duties and obligations to protect and preserve the company’s assets during the proceedings.”
Recognizing that management was a non-party entity, the court concluded that it still had the power to bind it to an injunction/reception order because “it was a captive entity of the husband” and “does not operate independently of the husband”.
As part of its duties, the court directed receivers to “evaluate the assets and liabilities of the company, and the risks and benefits of dissolution, if such action is necessary”.
In other words, the court puts the onus on the receiver to decide whether to dissolve the company in the first place.
Matrimonial Court Judicial Dissolution of Family Entities
Is there any reason, in theory, that the marriage court of the Supreme Court might not have the power to dissolve a domestic corporate entity in the right circumstances? I don’t think so.
Under the New York State Constitution, only the Supreme Court has the authority to order the dissolution of a marriage. Under the state constitution, the Supreme Court is an “ordinary primitive” court (IE“unlimited”) jurisdiction, meaning that it “has jurisdiction to entertain all causes of action, unless its jurisdiction has been expressly barred” (People v. Correa15 New York 3d 213 [2010] [quotations omitted]).
Of course, most commercial divorce cases are heard in the commercial division of the Supreme Court, although occasionally they end up in proxy court (read Gentlemen and Gentlemen). This is partly because most business dissolution statutes, including limited partnerships (ocean Partnership Act Section 121-802), company (ocean Business Corporations Act Section 1112) and LLCs (ocean Section 702 of the Limited Liability Company Act), providing that proceedings for judicial dissolution shall be instituted in the entity’s “Supreme Court of the jurisdiction in which the office is located”.
Under the rules, there does not appear to be any reason in theory that the Marriage Division of the Supreme Court should not have jurisdiction to dissolve a domestic business entity if the Supreme Court finds it necessary to protect matrimonial assets.
In fact, more than a decade ago, Peter Mahler wrote Rossignol v Rossignol (82 AD3d 1335 [3d Dept 2011]), in which the court implied (though did not directly rule) that marriage courts were empowered by DRL § 234 to dissolve entities owned solely by husband and wife, in Rossignol “Determination of all issues pertaining to property owned by both parties,” the court said.
The court concluded that it had the power to order the husband to dissolve the company extrajudicially, and in particular, this was unlike anything I’ve seen in commercial divorce cases in commercial courts, where it often has frustrating challenges sex, to say the least, to persuade courts to dissolve entities, especially in Strict LLC Dissolution Criteria.
I asked Michael DiFalco of Aiello & DiFalco LLP, a bridal boutique in Garden CityCommenting on the Court’s broad view of its powers, and the unusual relief it has developed, in NF v JD.
Here’s Michael’s take:
Before the automatic order that now applies to all matrimonial actions was enacted in 2009, marriage courts relied on DRL § 234 to limit matrimonial property in order to protect them before courts had the opportunity to distribute them equitably.
While the automatic order now restricts parties from transferring assets to prevent the dissipation of marital assets, the primary remedy for violations is contempt of a party.Such blunt tools don’t help wives effectively NF v JD. Instead, the court crafted an appropriate order under DRL § 234.
NF v JD. demonstrates the surprising flexibility of the simple provisions contained in DRL § 234 in tailoring equitable remedies. The same single-paragraph statute that allows a court to grant ownership or exclusive use and possession of a matrimonial home to one party, or to recover transfers from a joint bank account, applies to the unique set of facts of appointing a receiver to control a hedge fund and possibly dissolve the entity. Provides powerful relief for spouses in need of redress.
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