Where Corporations Are: Why Casual Visits to New York Are Bad for Business

In this article, we examine the recent case of Hotel 71 Mezz Lender LLC v. Falor (2010), from the New York Court of Appeals. In this case, New York’s highest court held that LLCs are “present” in New York for jurisdictional purposes when the president of the LLC has submitted to New York jurisdiction in an unrelated law suit against him personally, and where the president came to New York for a deposition in that action. This, we claim, was unconstitutional. In addition, the New York Court of Appeals pronounced itself obliged by the United States Constitution to change the New York law of situs of intangible property. This, we argue, was erroneous. New York is under no constitutional obligation to adopt a specific situs rule about intangible property. Furthermore, the Court of Appeals relied on the situs rule of Harris v. Balk, 198 U.S. 215 (1905) in backward fashion. The Harris case equated the situs of an “account debtor” with the situs of the debt he owed. In Falor, the New York court equated the situs of an LLC with the situs of the equity owners of the LLC, effectively piercing the corporate veil sub silentio. This we view as a profound analytical error that could have far-reaching consequences for business litigation involving interests holders of LLCs.