Kermanshah v. Kermanshah, --- F.Supp.2d ----, 2008 WL 3338369 (SDNY August 11, 2008).
A recent shareholder oppression case decided in the United States District Court for the Southern District of New York raises an interesting federal procedure question involving oppression claims. Certainly, there is no shortage of federal cases involving oppression claims, yet in this recent case, the federal court exercised its equitable power to abstain from jurisdiction over the minority shareholder's claim for oppressive conduct. New York is somewhat unusual in that the compulsory buy-out remedy arises under the state's dissolution statute. McKinney's Business Corporation Law §1104-a. New York case law has required plaintiffs to request dissolution in the pleadings in order to invoke the buy-out remedy. In Kermanshah v. Kermanshah, the Southern District of New York abstained from jurisdiction of the plaintiff's oppression claim under Burford v. Sun Oil Co., 319 U.S. 315, 332-34, 63 S.Ct. 1098, 1106-07 (1943), on the grounds that judicial dissolution of corporations is a matter uniquely to be addressed by the New York state courts. The Second Circuit has recognized that dissolving a New York corporation implicates the Burford abstention doctrine, in which "[a] federal court may abstain from hearing a case or claim over which it has jurisdiction to avoid needless disruption of state efforts to establish coherent policy in an area of comprehensive state regulation." Friedman v. Revenue Management of N.Y., Inc., 38 F.3d 668, 671 (2d Cir.1994) (noting the "comprehensive regulation of corporate governance and existence by New York."). The court cited to other cases reaching similar conclusions under the Burford doctrine, noting that courts within the Second Circuit "have almost uniformly ruled that even if federal courts have subject matter jurisdiction over claims for corporate dissolution, they should abstain from exercising it." Feiwus v. Genpar, Inc., 43 F.Supp.2d 289, 296 n. 6 (E.D.N.Y.1999); see, e.g., Astroworks, Inc. v. Astroexhibit, Inc., 257 F.Supp.2d 609, 619 n. 14 (S.D.N.Y.2003) (finding it "doubtful that this Court would have been able to hear" a § 1104-a dissolution claim); Nutronics Imaging, Inc. v. Danan, No. Civ. 96-2950, 2000 WL 33128504 at *1 (E.D.N.Y. July 27, 2000) (abstaining from exercising jurisdiction over claim for corporate dissolution without ruling on subject matter jurisdiction); Zamer v. Diliddo, No. 97-CV-32, 1999 WL 606731 at *5 (W.D.N.Y. Mar. 23, 1999); Kuo v. Kuo, 96 Civ. 5130, 1999 WL 123379 at *7 n. 1 (S.D.N.Y. Mar. 4, 1999) (abstention appropriate even if court has jurisdiction), aff'd, 216 F.3d 1072 (2d Cir.2000); Langner v. Brown, 913 F.Supp. 260, 270-71 (S.D.N.Y.1996) (same); Harrison v. CBCH Realty, Inc., No. 92-CV-434, 1992 WL 205839 at *l-4 (N.D.N.Y. Aug. 13, 1992); Cuddle Wit, Inc. v. Chan, No. 89 Civ. 7299, 1990 WL 115620 at *1-2 (S.D.N.Y. Aug. 7, 1990); In re English Seafood (USA) Inc., 743 F.Supp. 281, 286-89 (D.Del.1990) (holding that the court has subject matter jurisdiction over the plaintiff's claim for corporate dissolution, but that the court should abstain from exercising it); Codos v. Nat'l Diagnostic Corp., 711 F.Supp. 75, 78 (E.D.N.Y.1989); see also Boucher v. Sears, No. 89-CV-1353, 1997 WL 736532 at *16-19 (N.D.N.Y. Nov. 21, 1997) (finding supplemental jurisdiction over state claim to dissolve corporation but abstaining from exercising jurisdiction over dissolution claim). The same result was reached by the Sixth Circuit in Caudill v. Eubanks Farms, Inc., 301 F.3d 658, 663 (6th Cir. 2002), and by the federal district court in Neary v. Miltronics Mfg. Serv., Inc. 534 F.Supp.2d 227 (D.N.H. 2008).
While the Burford abstention doctrine arguably makes sense regarding dissolution of a corporation, its application is far less obvious in the case of an individual shareholder seeking equitable remedies, particularly a compulsory buy-out, for shareholder oppression. Equitable remedies for shareholder oppression are certainly grounded in the same powers as the equitable power of judicial dissolution; yet in actual practice, these lawsuits are much more like an individual claim for damages for breach of fiduciary duties. However, the court in Kermanshah did not make any distinction. The Eastern District of New York case, Feiwus v. Genpar, Inc., 43 F.Supp.2d 289, 299 (E.D.N.Y.1999), explicitly dealt with the question and abstained from hearing requests to dissolve corporation, appoint receiver, compel buy-out of minority shareholder, compel accounting, and void results of shareholders' meetings. Likewise, the district court in Neary v Miltronics Mfg. Serv., Inc., held that it would abstain from hearing not only plaintiffs' dissolution claims, but their other claims for equitable relief as well. 534 F.Supp.2d at 231 (abstaining from claims to compel inspection of corporate records, injunction to prevent ouster of certain directors, and a claim for an accounting). However, both Feiwus v. Genpar, Inc. and Neary v. Miltronics Mfg. Serv., Inc. held that abstention was not required for damages claims for breach of fiduciary duties. Both courts held that the appropriate resolution for the damages claims was to stay those claims pending resolution of the equitable claims in state court. Feiwus, 43 F.Supp.2d at 301; Neary, 534 F.Supp.2d at 232.
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