Claims for judicial dissolution appear regularly in shareholder and LLC member disputes. Traditionally, dissolution requires the winding up of the entity’s business, the sale of its assets, and payment to all creditors, which can end successful businesses and threaten the livelihoods of owners and their employees. However, practitioners and clients frequently forget alternatives to judicial dissolution allowed under Washington law. Understanding these alternatives is of utmost importance when prosecuting or defending claims for judicial dissolution.
What is Judicial Dissolution?
Judicial dissolution is a legal process where a court orders the end—through liquidation—of a business entity, such as a corporation or LLC. Courts may grant dissolution upon deadlock or mismanagement, or when the business cannot carry out its purpose. This authority comes from Washington statutes. RCW 25.15.274 authorizes judicial dissolution for LLCs, while RCW 23B.14.300 authorizes judicial dissolution for corporations.
Courts Disfavor Judicial Dissolution
The seminal case in Washington regarding judicial dissolution, Scott v. Trans-System, 148 Wash. 2d. 701, 64 P.3d 1 (2003) involved claims related to a parent company involved in the trucking industry leasing equipment from its subsidiary. According to the minority shareholder, these lease arrangements were oppressive and wasteful because (a) the payments exceeded the equipment’s value and (b) the defendant majority shareholders repeatedly refused to purchase rather than lease of the equipment. The minority shareholder sought judicial dissolution, and the trial court agreed and required the company to be liquidated.
After multiple appeals, the matter arrived before the Washington Supreme Court, who overturned the trial court’s decision, and in so doing, set guidance as to why courts should disfavor judicial dissolution. The Supreme Court cautioned that “[d]issolution should not be granted as a matter of right” and “liquidation is so drastic that it must be invoked with extreme caution.” Scott, 148 Wn. 2d at 708-709. The Court then stated trial courts need to consider “the severity of the conduct and the interests of the shareholders and the public” when considering dissolution over other alternative remedies.
The Washington Supreme Court Offers Alternatives
In Scott, the Supreme Court determined that liquidation of the company at issue was too extreme and not justified under the circumstances. Instead, the Supreme Court identified alternatives courts could use instead of dissolution:
(a) The entry of an order requiring dissolution . . . at a specified future date, to become effective only in the event that the stockholders fail to resolve their differences prior to that date;
(b) The appointment of a receiver, not for the purposes of dissolution, but to continue the operation of the corporation for the benefit of all the stockholders, both majority and minority, until all differences are resolved or “oppressive” conduct ceases;
(c) The appointment of a “special fiscal agent” to report to the court relating to the continued operation of the corporation, as a protection to its minority stockholders, and the retention of jurisdiction of the case by the court for that purpose;
(d) The retention of jurisdiction of the case by the court for the protection of the minority stockholders without appointment of a receiver or “special fiscal agent”;
(e) The ordering of an accounting by the majority in control of the corporation for funds alleged to have been misappropriated;
…
(j) An award of damages to minority stockholders as compensation for any injury suffered by them as the result of “oppressive” conduct by the majority in control of the corporation.
The Washington Supreme Court ultimately remanded to the trial court with instructions to determine which alternative remedy would best serve the instant circumstances. While the Supreme Court did not determine which alternative remedy worked best, the decision made clear that trial courts need to tread carefully before choosing the extreme option of judicial dissolution.
Takeaways for Clients and Practitioners
Parties use claims for judicial dissolution in business divorce cases as the “nuclear weapon” to threaten mass destruction against opposing parties, and for good reason. The threat of liquidation of successful businesses is significant and extreme. However, clients and practitioners should be aware of the disfavored nature of judicial dissolution and the alternative remedies courts expressly approve to avoid the extremes of forced liquidation.
The lawyers at Beresford Booth have a wealth of experience in counseling and representing business clients. We would be happy to assist you. Please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100.