Law Updates

Jurisdictional Infirmity does not preclude an order of dissolution of LLC and Partnership

Joseph M. Della Ratta , et al. v. Edward J. Dyas, Jr., No. 23 (Md. June 9, 2010), Jr., No. 23 (Md. June 9, 2010) | View pdf

(January 1, 2017) Tony W. Torain, II, Summer Associate.

For more information, contact Paul Farquharson

In this case involving the wind up and dissolution of a limited liability company (“LLC”) and a partnership, the Maryland Court of Appeals decided whether the “principal office” clauses in Sections 4A-903, 4A-904(b) and 9A-803(a) of the Corporations and Associations Article limit subject matter jurisdiction to the circuit court of the county in which the principal office of the business is located. In addition, the State’s highest court decided the validity of the dissolution between partners, and the legitimacy of the trial court’s finding that the parties entered a fixed price contract to build a hotel. Edward J. Dyas, Jr. (“Dyas”) and Joseph M. Della Ratta (“Della Ratta”) formed a partnership and limited liability company in 2002. The business practices of the two men differed and led to the dissolution of the partnership. Dyas formed a LLC for each new project to shield himself from liability and preferred bank financing, while Della Ratta transferred money between his businesses to cover construction costs. For example, Della Ratta would lend money to the partnership through his solely owned entities on favorable terms. Dyas felt as if Della Ratta’s self-interested actions undermined the partnership.

On another occasion, the partners disagreed on how to spend revenue gained from the sale of forty condominiums. Della Ratta wished to pay off a bank loan with the revenue, but Dyas believed the revenue should be used for other reasons. Dyas alleged that Della Ratta deceptively used the partnership funds to pay off the loan and tried to force Dyas out of the partnership by obtaining an assignment of the loan to foreclose on Dyas. Dyas became fed up with the partnership in December of 2004 during the construction of the New Hotel. Della Ratta issued three capital call letters, requiring Dyas to pay back costs associated with other construction projects and other alleged advances. In January of 2005, Dyas filed a Complaint in the Circuit Court for Anne Arundel County to obtain temporary restraining orders on Della Ratta’s capital call letters. The following month, Dyas amended his Complaint to include judicially supervised dissolution of the partnership.

On November 2005, Della Ratta sought a transfer of the case to the Circuit Court of Montgomery County. He argued that Section 9A-803(a) of the Maryland Revised Uniform Partnership Act granted exclusive jurisdiction to the Montgomery County Circuit Court because it is the location of the partnership’s principal office. Dyas amended the Complaint again to request dissolution of the LLC under Section 4A-903 of the Corporations and Associations Article. Della Ratta then challenged the subject matter jurisdiction of the Circuit Court for Anne Arundel County with respect to the dissolution of the LLC. The Circuit Court for Anne Arundel County held a trial on the merits and ruled in favor of Dyas, granting an injunction on Della Ratta’s capital calls and ordering an auditor to inspect the books of the LLC and the partnership. Judge Philip T. Caroom found that Della Ratta’s conduct prohibited the partnership from operating in a reasonably practical manner and ordered the dissolution. But, he reversed the order of dissolution pending a transfer of the case to Montgomery County.

In June 2006, Chief Judge Robert M. Bell, in accordance with the Maryland Declaration of Rights, assigned Judge Caroom to preside over the case in Montgomery County. Judge Caroom ordered the dissolution and further ordered Della Ratta to return over $3 million to the LLC before dissolution. After the judgment on the merits, an auditor prepared statements of the accounts of both the LLC and the partnership. Della Ratta wanted to introduce evidence of twelve checks that he drew, payable to the partnership. However, the circuit court refused to reopen the evidence for the admission of the checks.

Della Ratta appealed to the Maryland Court of Special Appeals, which affirmed the judgment of the lower court. Della Ratta then filed a Petition for Writ of Certiorari to the Maryland Court of Appeals. The Court of Appeals granted certiorari to decide the following issues : 1) whether the trial court had subject matter jurisdiction to dissolve and supervise the winding up of the partnership and LLC, 2) whether the trial court erred in disassociating Della Ratta as a general partner based on his conduct, 3) whether the trial court erred in refusing to allow Della Ratta to introduce evidence of checks paid to the partnership, and 4) whether the lower courts erred in finding that the parties entered into an enforceable fixed price contract to build condominiums.

The Maryland Court of Appeals found, and Della Ratta conceded, that Section 9A-801 of the Corporations and Associations Article places no limitation on which court could make a judicial determination of whether dissolution of a partnership is warranted. The Circuit Court of Anne Arundel County possessed the authority to hear the dissolution matter and enter the final order of dissolution. However, Della Ratta contented that the wind up failed because the statute requires a partner to file for dissolution in the county where the principal office of the partnership is located, in this case Montgomery County, although any court may make a judicial determination. In response to this contention, the Court agreed with the Intermediate Appellate Court and found that the plain language of the statute does not require a partner to apply for dissolution in the county where the principal office of the partnership is located. In addition, the Court of Appeals disagreed with Della Ratta’s contention that the statute required severance of the dissolution actions from Dyas’ other claims. According to the Court, requiring such severance of claims would not be a commonsense application of the statute.

With respect to the dissolution and winding up of the LLC, the Court of Appeals, disagreeing with the Court of Special Appeals, found that the statute conferred exclusive subject matter jurisdiction for ordering dissolution of an LLC on the county where the principal office of the LLC is located. The Court opined that the inclusion of the principal office provision in the Maryland LLC statute and the exclusion of the provision in the Maryland partnership statute reveals the General Assembly’s intent to impose an additional limitation in the LLC statute. While the LLC statute imposes the jurisdictional element, the Court found that the special assignment of Judge Caroom and transfer of the case to Montgomery County cured any jurisdictional defect. In addition, when Judge Caroom sat in Anne Arundel County, he explained that the judgment was not final because that Court lacked jurisdiction, although the evidence supported an order of dissolution. Furthermore, Judge Caroom appropriately relied on his findings in Anne Arundel County to enter the order of dissolution in Montgomery County.

In response to Della Ratta’s contention that the trial court erred in deciding to disassociate him from the partnership, the Court of Appeals held that the trial court had sufficient evidence to conclude that Della Ratta’s inappropriate conduct made it unreasonable and impracticable for the partnership to continue with Della Ratta as a partner. The evidence showed Della Ratta’s attempts to issue capital calls after taking steps to deprive the partnership and Dyas of the means to meet the obligations. The trial court found that the capital calls were made in bad faith for the sole benefit of Della Ratta. In regard to Della Ratta’s challenge to the trial court’s exclusion of evidence proffered after the trial on the merits, the Court of Appeals noted that the trial court gave guidelines for the accounting. One of the guidelines limited the accounting to documents and exhibits provided by the parties in the trial. The High Court of Maryland stated that the order limiting the documents from which the accounting was based to those presented at trial was within the discretion of the trial judge. Furthermore, the trial court’s decision found support in the fact that Della Ratta and his company, which was charged with accounting for the LLC and partnership, did not comply with the partnership’s management agreement and was “an accountant’s nightmare.”Because the trial court used its discretion when it excluded Della Ratta’s untrustworthy evidence, the Court of Appeals saw no error.

Finally, the Court of Appeals addressed the issue of the fixed price contract. Della Ratta argued that the contract for his company to build a hotel for the limited liability company was a cost-plus contract. He argued that the indication in the contract of a fixed price contract was a clerical error. The trial judge decided that Della Ratta’s evidence was not credible and ruled that the contract was for a fixed price. The Court of Appeals believed that there was sufficient evidence to show that the parties entered into a fixed price contract, and that the trial court’s findings were not clearly erroneous.

For more information, contact Paul Farquharson