Often, in the context of a partnership dispute or business divorce, clients ask me if there is a way to stop the opposition from doing something that is hurting the business or hurting the client as a co-owner of the business.
Under New York law, one can restrain or enjoin a party from engaging in certain conduct provided it meets the high legal standard. At the beginning of a case this is called a “preliminary injunction”.
Pursuant to CPLR §6301, the grounds for issuing a preliminary injunction and temporary restraining order are as follows: “A preliminary injunction may be granted in any action where it appears that the Defendants threatens or is about to do, or is doing or procuring or suffering to be done, an act in violation of the Plaintiff’s rights respecting the subject of the action, and tending to render the judgment ineffectual, or in any action where the Plaintiff has demanded and would be entitled to a judgment restraining the Defendants from the commission or continuance of an act, which, if committed or continued during the pendency of the action, would produce injury to the Plaintiff. A temporary restraining order may be granted pending a hearing for a preliminary injunction where it appears that immediate and irreparable injury, loss or damage will result unless the Defendants is restrained before the hearing can be had”.
Courts have come up with a 3-part test for determining whether they will grant a request (a “motion”) for a preliminary injunction.
In order to obtain a preliminary injunction, a moving party must demonstrate: (1) a likelihood of ultimate success on the merits; (2) irreparable injury absent the granting of the injunction; and (3) that the equities balance in the movant’s favor (Benjamin Kurzban & Son, Inc. v. Board of Education of the City of New York, 129 A.D.2d 756 [2d Dept. 1987], citing McLaughlin, Piven, Vogel, Inc. v. W.J. Noland & Company, Inc., 114 A.D.2d 165 [2d Dept. 1986]).
Let’s take a look at this 3 part test in greater detail and specifically in the context of a partnership dispute or business divorce.
Likelihood of success on the merits:
This means that you have to get into detail about the claims you’re asserting in your lawsuit, how the facts satisfy the elements of each claim, and why you believe you will be successful on your claims. You need only make a prima facie showing of likelihood of success on the merits, and need not demonstrate a certainty of success on a motion for a preliminary injunction. See Parkmed Co. v. Pro-Life Counselling, Inc., 91 A.D.2d 551, 552 (1st Dept. 1982); see also Terrell v. Terrell, 279 A.D.2d 301, 303 (1st Dept. 2001) (evidence showing likelihood of success on the merits need not be conclusive); Demartini v. Catham Green, Inc., 169 A.D.2d 689, 690 (1st Dept. 1991) (same). That being said, you will want to bring as much information to the table to support your claims.
Even “the existence of a factual dispute will not bar the granting of a preliminary injunction if one is necessary to preserve the status quo and the party to be enjoined will suffer no great hardship as a result of its issuance.” Mr. Natural, Inc. v Unadulterated Food Products, Inc., 152 A.D.2d 729, 730, (2d Dep’t 1989) (a preliminary injunction may be granted where injunctive relief is deemed necessary to maintain the status quo, even if the movant’s success on the merits cannot be determined at the time that the application for a preliminary injunction is brought). Id; see also, U.S. Ice Cream Corp. v Carvel Corp., 136 A.D.2d 626, 628 (2d Dep’t 1988); Burmax Co. v B & S Indus., Inc., 135 A.D.2d 599, 600 (2d Dep’t 1987).
Irreparable injury is probably the most significant prong of the 3-part test for injunctive relief. It means that the injury claimed must be more than just money damages. If money will rectify the issue then you’re going to run into a tough hurdle to prove irreparable injury.
“Irreparable injury is an injury that is neither remote nor speculative, but rather actual and imminent (Khan v. State University of New York Health Science Center at Brooklyn, 271 A.D.2d 656 [2d Dept., 2000]).” Spivak ex rel. Eyeball On the Floor, Inc. v. Bertrand, Index No. 653712/2015, at *15-16 (N.Y. Sup. Ct. 2016)
Courts in this State have uniformly found irreparable injury where an equity holder is being squeezed out of control or management.
A bargained for right to participate in management of a company has value in and of itself and denial of that right gives rise to irreparable harm or injury. See Alcatel Space, S.A. v. Loral Space & Communications Ltd., 154 F. Supp 2d 570, 584 (S.D.N.Y. 2001)(holding that loss of certain bargained for minority rights under an alliance agreement constituted irreparable harm), aff d by summary order, 25 Fed. Appx. 83 (2nd Cir 2002); Davis v. Rondina, 741 F. Supp 1115, 1125 (S.D.N.Y. 1990) (breach of shareholders agreement by excluding minority shareholder from management of corporation constituted irreparable harm); Street v. Vitti, 685 F. Supp 379, 384 (S.D.N.Y. 1988) (potential infringement of minority shareholder voice in management” by majority shareholder constituted irreparable injury); Louis Foodservice Corp. v. Konstantinos Vouviouklis, 2002 WL 31663230 (Sup. Ct., Kings Cty, 2002) (loss of control of a closely held business constitutes irreparable injury); see Spivak ex rel. Eyeball On the Floor, Inc. v. Bertrand, Index No. 653712/2015, at *17 (N.Y. Sup. Ct. 2016).
In Oracle Real Estate Holdings Co. 1 v. Adrian Holdings Co. 1, LLC, 582 F Supp.2d 616, 621 (SD NY 2008), the court granted a preliminary injunction where the issue was loss of control of a company, finding irreparable harm, noting that “[plaintiff] seeks to enforce (1) a bargained-for right to corporate control (2) that is difficult or almost impossible to value, which (3) could be meaningless or substantially diminished in value by the end of the litigation in the absence of injunctive relief.” See also, Bank of America, N.A. v. U.S. Bank National Association, 2010 WL 4243437, at *10-11 (Sup Ct NY Co. 2007) (finding irreparable harm where in the absence of injunctive relief, plaintiffs would lose their bargained-for right to control the management of property which consisted of approximately 11,000 units, 25,000 residents and 550 employees).
In Cantwest Global Communications Corp. v. Mirkaei Tikshoret Limited, 9 Misc. 3d 845, 804 N.Y.S.2d 549 (NY Ct. 2005), Justice Edmead held that the lost bargained-for right to participate in the management of a company constituted irreparable harm. In addition, the Court held that the (1) firing of employees (2) moving of operations (3) and changing of vendors further necessitated a finding of irreparable harm.
Irreparable injury may be demonstrated by the loss of customers, permanent loss of revenues and loss of good will. See for example Wisdom Import Sales Company v. Labatt Brewing Company, Ltd., 339 F.3d 101 (2d Cir 2003).
Irreparable harm may also be found where absent a preliminary injunction the plaintiff would in sum and substance be terminated as a member and employee of the company. See Matter of Madelone v. Whitten, 18 Misc.3d 1131(A) [Sup. Ct., Albany Cty., 2008].
To sum things up, you can show irreparable harm by showing: you have lost any right to management and control of the Company that is caused by your business partner’s conduct such as: (1) where the defendant has made it impossible for the Company to profit (2) where the defendant has utterly defeated your reasonable expectations in profits (3) where the defendant has made it impossible for the Company to conduct business (4) where the defendant has destroyed the Company’s goodwill, and (5) where the defendant’s conduct has resulted in loss/permanent loss of the Company’s customers.
For a detailed consultation regarding your partnership dispute, business dispute, or business divorce, contact us today!