Parallel business and divorce proceedings | Farrell Fritz, PC

Parallel divorce proceedings in the same or different courts with alleged overlapping or duplicative claims are common.

When this happens, judges often must determine whether to dispose of one so that the other can proceed in the first instance on the “other pending action” ground of dismissal in CPLR 3211(a)(4)whether to combine or combine the two claims in one proceeding under c.d CPLR 602or whether to simply allow both cases to continue at the same time.

Side business and divorce proceedings? Not so often. But that’s exactly what happened in Malick v. 302 East 105th St. LLC (2023 NY Slip Op 34417(U) [Sup Ct, NY County Dec. 12, 2023]).

in MalikIbrahim, owner of two real estate holdings in limited liability companies, sued his wife and co-owner, Pramila, in New York County Supreme Court, filing complaint on ten counts asserting various tort and statutory causes of action arising out of disagreements over their real estate business, including one action seeking judicial dissolution of the two LLCs.

But Pramila beat Ibrahim to a punch.

Just days before, Pramila had filed her own suit against Ibrahim in New York County Supreme Court to dissolve their marriage. In the divorce case, Pramila apparently sought an “equitable distribution” of her ownership interests in the LLCs owned by the husband and wife.

This was the setup for two branches of the same court having potentially overlapping jurisdiction over the question of what to do with two LLCs owned by the spouses, their equity interests and their principal real estate assets, following the dissolution of Ibrahim and Pramila’s marriage.

As we wrote beforeinasmuch as the New York corporation and LLC dissolution statutes provide for “Supreme Court” venue, and the matrimonial division (where divorce cases are heard) is a branch of the Supreme Court, it seems likely that New York divorce courts may exercise jurisdiction, in an appropriate case, to judicially dissolve a New York entity jointly owned by two divorcing spouses residing in New York.

Malik addressed a narrower question: should a commercial court dismiss under CPLR 3211 (a) (4) a dissolution proceeding in favor of a previously filed matrimonial proceeding where the commercial proceeding also includes tort claims with respect to a business derivative of the name of the legal entity (i.ebreach of fiduciary duty, waste, conversion and gross negligence) and it appears that these claims potentially exceed the jurisdiction of the matrimonial courts?

Case law interpreting CPLR 3211 (a) (4) provides competing rules for decision making.

On the one hand, “jurisdiction must continue” in a court “where all rights can be properly determined in one action” (Matter of Ryan’s estate212 AD3d 902 [3d Dept 2023], lv rejected 39 NY3d 1095 [2023]).

On the other hand, complete overlap of parties and claims is not necessary to dismiss one case in favor of the other. All that is required is “substantial identity of the parties, the two actions are sufficiently similar, and the relief sought is substantially the same” in both cases (Ashwood v. Uber USA, LLC219 AD3d 1289 [2d Dept 2023]).

According to this principle, “[i]it is not necessary that the exact legal theories presented in the first action be presented in the second action” (JPMorgan Chase Bank, NA v. Luxama172 AD3d 1341 [2d Dept 2019]), as long as both suits match “aris[e] of the same subject or series of alleged errors’ (JFK Family Ltd. Partnership v. Millbrae Nat. Gas Dev. Fund 2005, LP169 AD3d 775 [2d Dept 2019]).

When these conditions are met, courts generally follow the “first time rule, which means that the court that first accepted jurisdiction is the one in which the matter must be decided” (Seneca Specialty Ins. Co. vs. TBD Capital, LLC143 AD3d 971 [2d Dept 2016]).

To apply these norms of the law, Malik The court was not writing on a blank slate.

in Raik v. Clinton Devs., LLC (282 AD2d 513 [2d Dept 2001]), the Court addressed essentially the same issue: whether to dismiss a later-filed corporate dissolution proceeding in favor of an earlier-filed marital divorce proceeding.

in Rijk, the appeals court ruled that the lower court “correctly determined” that it would be “duplicative and counterproductive” to allow a dissolution proceeding to proceed concurrently with a divorce proceeding, dismissing the former in favor of the latter. “Plaintiff’s claims as to his alleged interests in . . . family businesses,” the court ruled, “will be determined as part of the equitable distribution” in the divorce case.

But on Rijk The court left the door open to further litigation if the matrimonial trial proved inadequate to resolve all issues. “To the extent that any of the plaintiff’s alleged business interests may later be found to be outside the scope of [the marital divorce action]at discretion in the interest of justice, the dismissal of [the corporate dissolution proceeding] without prejudice to the reopening of this action after the final resolution of the issues of equitable distribution.’

Careful tracking of the language of RijkNew York County Supreme Court Justice Verna L. Saunders ruled Malik:

[T]his court granted this branch of the countermotion to dismiss the claim pursuant to CPLR 3211 (a) (4). Resolution of the issues raised in this dissolution action would be duplicative and counterproductive in light of the pending divorce action in this court, insofar as plaintiff’s purported interest in the properties owned by defendants 302 LLC and 304 LLC would be subject to equitable distribution in the marital claim (citations omitted).

like RijkThe court dismissed the LLC’s dissolution proceeding without prejudice and with leave to refile:

To the extent it is later determined that any of the plaintiff’s alleged business interests are not subject to the matrimonial action, this court, in its discretion and in the interests of justice, will grant the dismissal without prejudice to the reopening of this case after the final resolution of the dispute questions of equitable distribution. (citation omitted).

Finally, the Court rejected Ibrahim’s argument that the filing of tort claims against his wife alone was reason to deny dismissal:

Although plaintiff has asserted tort claims in this action, which he maintains constitute “spousal tort claims,” ​​separate from the issues at issue in the divorce action, this Court nevertheless finds that the claims raised here are substantially intertwined with the determination of property ownership and the parties’ respective interests in LLCs, an inquiry that is within the scope of a divorce case.

The result of Malik is that a modest but growing body of case law enables divorcing parties to successfully move for a smooth dismissal of an antagonistic spouse’s parallel business divorce case to allow the divorce court to resolve, in the first instance, intertwined issues of with the business and marital property ownership and equitable distribution consistent with the matrimonial court’s broad jurisdiction over the marital property.

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