Some years ago, the question whether New York courts have subject matter jurisdiction over petitions to dissolve foreign business entities garnered much interest amongst business divorce lawyers and on this blog. The debate was resolved against subject matter jurisdiction following an inter-departmental split that the Appellate Division, First Department, patched up in its 2016 Raharney decision.
The same cannot be said for petitions seeking inspection of the books and records of foreign business entities. Decisions addressing subject matter jurisdiction in such cases have been few and far between, with minimal appellate guidance.
In two decisions of interest handed down earlier this month by two different Manhattan judges in two separate cases involving New York-based foreign entities — one a Delaware corporation and the other a Nevada LLC — the courts addressed two very different approaches by plaintiffs to access books and records, with mixed results.
The Sparse Precedent
First, some background. In Sachs v Adeli, decided by the First Department in 2005, the appellate court reversed the lower court's denial of a motion to compel the defendant New York-based, Delaware LLC to authorize the release of tax returns relevant to the plaintiff's fraud claim.
While the action was not framed as a books and records proceeding, the defendant argued that § 18-305(f) of the Delaware LLC Act governing inspection rights ("Any action to enforce any right arising under this section shall be brought in the Court of Chancery") stripped New York courts of subject matter jurisdiction. The First Department disagreed, reasoning that a foreign state's statute granting the courts of that state exclusive jurisdiction over certain controversies does not divest New York courts of jurisdiction over such controversies, and also finding that the doctrine of comity favored New York jurisdiction.
The Sachs opinion's legal analysis only sketchily identified the vehicle for enforcing inspection rights in that case. IMHO, it awkwardly cited the New York LLC Law's books and records statute § 1102(b) in support of enforcing the plaintiff's right of access to the Delaware LLC's tax returns. It then went on to state that "[e]ven if this case were controlled by Delaware law, the outcome would be the same" under DLLCA § 18-305.
Did Sachs enforce New York's inspection statute, or Delaware's inspection statute, or both? Or neither? Sachs could be read as simply deciding a discovery dispute. That may help explain why, as far as I can tell, the opinion hasn't been cited or followed in any books and records cases that I can find other than a 2008 lower court decision in Primestone, LLC v Lichtenstein — another case rejecting a jurisdictional defense to discovery of a defendant Delaware LLC's records, i.e., not brought as a books and records proceeding. Then there's one of this month's decisions, discussed next.
Matter of Mojtahedi v Craddock
In Matter of Mojtahedi v Craddock, decided some weeks ago, the petitioner brought an Article 78 special proceeding demanding inspection of books and records of a New York-based Delaware corporation under § 220 of the Delaware General Corporation Law.
The defendant filed a motion to dismiss the petition, arguing that the New York court lacked subject matter jurisdiction to enforce the Delaware statute. The defendant also contended that the internal affairs doctrine (IAD) and the corporation's forum selection clause in its articles of incorporation precluded adjudication in New York.
Relying on Sachs and a 1984 opinion by the Second Department in Broida v. Bancroft, the court rejected the subject matter and IAD jurisdictional challenges, writing,
[t]he fact that the parties agree that Delaware law applies to the books and records request likewise does not defeat this Court's jurisdiction over the issue, as the Court of Appeals recently stated that once another jurisdiction's laws govern a matter, New York courts have 'significant flexibility and discretion in deciding whether to take notice of that foreign law and apply it to the case at hand.'" Eccles v Shamrock Cap. Advisors, LLC, 2024 N.Y. Lexis 690, 1 (2024).
The court also rejected the defendant's argument based on the forum selection clause, finding that the facts alleged in the petition and supporting affidavits (which I won't belabor) demonstrated that the clause did not apply.
The court accordingly denied defendant's motion to dismiss and ordered that it file an answer to the petition.
Goldman v Icaro Media Group, Inc.
In Goldman v Icaro Media Group, Inc., also decided earlier this month, the petitioner took a different and ultimately unsuccessful approach to enforcing inspection of books and records of a New York-based foreign corporation.
The plaintiff in Goldman filed an Article 78 petition to inspect corporate records of a Nevada corporation. The petition requested names and addresses of all shareholders plus a laundry list of other financial, tax, and customer records. The petition asserted the right of inspection solely under New York law, specifically, Business Corporation Law (BCL) §§ 624 and 1315, and New York common law.
The court first addressed BCL § 1315 which authorizes a shareholder of a foreign corporation doing business in New York to require the corporation to produce shareholder information including names, addresses, number and class of shares held by each, and record ownership dates. The defendant corporation broadly argued that the IAD precluded the application of New York law.
That argument fell flat with the court based on the statute's explicit language — an "exception" to the IAD, said the court — authorizing access to shareholder information.
But the petitioner failed to convince the court that, beyond shareholder information, BCL § 1315 gives shareholders the same, broad rights of inspection of foreign corporation books and records as BCL § 624 gives to shareholders of New York corporations. "Because [defendant] is a foreign corporation," the court held, "petitioner is only entitled to the shareholder information listed in BCL § 1315."
And that's all petitioner got. The court rejected petitioner's arguments under BCL § 624 and the more expansive common law for the right to inspect financial, tax, and customer records, noting that the petitioner "does not cite any case law granting these rights to a shareholder of a foreign corporation."
The Upshot . . . At Least for Now
Two lower court decisions do not make settled law. Until we see more cases and some appellate case law, here's the most I can comfortably offer:
- The argument that New York courts lack subject matter jurisdiction to adjudicate books and records proceedings involving foreign entities is on the ropes, if not counted out.
- Shareholders of foreign companies authorized to do business in New York cannot rely on BCL § 1315 to demand inspection of anything more than the types of shareholder information listed in the statute.
- A petitioner using New York courts to demand inspection rights for foreign entities has a better chance of success relying on the laws of the state of formation rather than New York's own inspection statutes.
- If the information sought is relevant to other statutory, contract, or tort claims in the pleadings, the discovery devices made available by Article 31 of the New York Civil Practice Law and Rules may suffice without resort to unsettled case law concerning the inspection rights of non-controlling owners of foreign entities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
