RECENT DEVELOPMENT: DELLA RATTA V. DYAS. By: Shannon Laymon-Pecoraro

Transcription

1 Member, National Conference of Law Reviews UNIVERSITY OF BALTIMORE LAW FORUM VOLUME 41 Fall 2010 NUMBER ONE RECENT DEVELOPMENT: DELLA RATTA V. DYAS By: Shannon Laymon-Pecoraro

2 DELLA RATTA v. DYAS: JURISDICTIONAL ISSUES RELATING TO THE PRINCIPAL OFFICE CLAUSE OF THE MARYLAND CORPORATIONS AND ASSOCIATIONS ARTICLE ARE AVOIDED WHEN, AFTER A HEARING FOR JUDGMENT ON OTHER ISSUES, A CASE IS TRANSFERRED TO THE APPROPRIATE JURISDICTION PRIOR TO ENTRY OF A JUDGMENT ON DISSOLUTION. The Court of Appeals of Maryland held that jurisdictional issues are avoided if a case is transferred to the appropriate jurisdiction before entry of judgment on dissolution. Della Ratta v. Dyas, 414 Md. 556, 996 A.2d 382 (2009). The court made this determination although Sections 4A- 903, 4A-904(b), and 9A-803(a) of the Maryland Corporations and Associations Article ( Md. CA ) limit subject-matter jurisdiction for an order of dissolution and winding up of a limited liability company and an order for the winding up of a partnership to the county where the principal office is located. Id. at 388, 996 A.2d 587. Furthermore, the jurisdictional limitation is not applicable to other counts in a complaint, and severance of claims is not required. Id. at 560, 996 A.2d at 385. Edward Dyas ( Dyas ) and Joseph Della Ratta ( Della Ratta ) formed Spa Motel General Partnership ( Spa GP ) and Bay View Condominiums, LLC ( Bay View ) in 1987 and 2002, respectively. Dyas and Della Ratta contracted Della Ratta, Inc., owned by Della Ratta, to construct three hotels located in Ocean City, Maryland: the Best Western Sea Bay Inn ( Sea Bay ), Maresol Condominiums ( Maresol ), and Best Western Hotel and Suites ( Best Western ). Della Ratta and Dyas received substantial income from the sale of forty condominiums in Maresol. Despite Dyas s objections, Della Ratta used the money to repay a bank loan, then, attempting to force Dyas out of the partnership, sought an assignment of the loan. Shortly thereafter, Della Ratta demanded Dyas repay cash advances and costs associated with the construction of Sea Bay and Best Western. Seeking to invalidate Della Ratta s demand for repayment, Dyas filed a complaint in the Circuit Court for Anne Arundel County on January 10, One month later, Dyas amended the complaint to request dissolution of Spa GP. Della Ratta moved to transfer the case in accordance with Md. CA Section 9A-803(a), claiming that Spa GP s principal office was located in Montgomery County, and, 1

3 therefore, the Circuit Court for Anne Arundel County lacked subject-matter jurisdiction. In response, Dyas filed a third amended complaint requesting dissolution of Bay View, which Della Ratta also challenged, claiming lack of subject-matter jurisdiction under Md. CA Sections 4A-903 and 4A-904. During a bench trial in the Circuit Court for Anne Arundel County, Judge Caroom enjoined Della Ratta s demands and ordered an audit of both Spa GP s and Bay View s accounting records. Judge Caroom, appointed to sit for the Circuit Court for Montgomery County, entered a final judgment for the dissolution of both Spa GP and Bay View. Della Ratta appealed to the Court of Special Appeals of Maryland, and the trial court s decision was affirmed. The Court of Appeals of Maryland granted certiorari. Della Ratta argued that Dyas s claims for the dissolution and winding up of Spa GP and Bay View were inappropriately submitted to the Circuit Court for Anne Arundel County. Della Ratta, 414 Md. at 566, 996 A.2d at 388. Della Ratta s argument was based on the Md. CA, which states that the jurisdiction for an order for judicial dissolution and winding up of partnerships and limited liability companies is limited to the circuit court of the county in which the principal office... is located. Id. The Court of Appeals of Maryland determined that the language in Md. CA Section 9A-801 does not restrict subject-matter jurisdiction for the dissolution and winding up of Spa GP. Id. at 567, 996 A.2d at 389. Instead, the court found dissolution to be appropriate when a party submits an application for a judicial determination relying on the basis that it is not reasonably practicable to carry on the business of the partnership. Id. The court reasoned that by using the term of rather than to in Md. CA Section 9A-803, the General Assembly did not intend to limit where a partner may file. Id. Instead, the court found that Md. CA Section 9A-803 identifies a class of persons that have standing to request judicial supervision in the winding up process, and limits which court may order such supervision. Della Ratta, 414 Md. at 568, 996 A.2d at

4 The Court of Appeals of Maryland also rejected Della Ratta s claim that Dyas was required to sever dissolution from other counts in the complaint. Id. The court reasoned that other claims such as breach of fiduciary duty, breach of contract, and fraud are often coupled with an involuntary dissolution. Id. The court found that if severing of claims was required to effectuate dissolution, a court would grant a stay of the dissolution claim, and rely on collateral estoppel to determine whether dissolution was appropriate. Id. Thus, the court concluded that separating the claims would be inefficient. Id. Regarding Bay View, the Court of Appeals of Maryland disagreed with the lower court determination that the language in Md. CA Sections 4A-903 and 4A-904 was ambiguous and could infer a legislative preference for jurisdiction. Id. at 569, 996 A.2d at 390. Instead, the court found that such an interpretation would invalidate Section of the Maryland Courts and Judicial Proceedings Article, which allows a corporation to be sued where its principal office is maintained. Della Ratta, 414 Md. at 570, 996 A.2d at 390. The court also found that in drafting the Maryland Limited Liability Company Act ( MLLCA ), the General Assembly intended to borrow the circumstances for which judicial dissolution could be justified from the Maryland Revised Uniform Limited Partnership Act ( MRULPA ), but did not intend to change subject-matter jurisdiction. Id. at 572, 996 A.2d at 391. While restrictive language is not present in MRULPA s dissolution statute, the court noted express restriction in the MLLCA and MRULPA winding up statutes. Id. The court therefore concluded that subject-matter jurisdiction is restricted to the county where the principal office of the limited liability entity is located. Id. at 570, 996 A.2d at 390. The Court of Appeals of Maryland further held that transfer of the case to the appropriate jurisdiction solved the jurisdictional issue. Id. at 573, 996 A.2d at 392. The court noted that although Judge Caroom, while sitting for the Circuit Court of Anne Arundel County, made findings relating to all counts in the complaint, he explained that an order for dissolution must be granted by the Circuit Court for Montgomery County. Id. at 573, 996 A.2d at 392. Furthermore, the court 3

5 recognized that after transferring the case to the Circuit Court for Montgomery County, Judge Caroom allowed both parties to present additional arguments. Id. at 574, 996 A.2d at 393. The court found that by providing the parties this opportunity, Judge Caroom ensured that his order for dissolution met the statutory jurisdictional requirements. Id. In Della Ratta, the Court of Appeals of Maryland rejected a narrow application of the principal office clause. Favoring consolidation, the court simplified the requirements for partners and members seeking legal recourse, therefore promoting judicial efficiency and avoiding unnecessary cost and delay. Furthermore, plaintiffs may forum shop and select a court with a favorable position. As a result, attorneys assisting in partnership and limited liability formation should advise their clients to consider expressly limiting jurisdiction for disputes in the partnership or operating agreement to prevent potentially unfavorable jurisdiction choices in the future. 4