A preliminary injunction is one of the available provisional remedies, namely, equitable relief entered by a court prior to a final determination of the merits. The relief usually orders a party to restrain from a course of conduct or compels a party to continue with a course of conduct until the action has been decided. Preliminary injunctions differ from temporary restraining orders in that TROs are usually granted pending a hearing for a preliminary injunction where a court determines that “immediate and irreparable injury, loss or damage will result unless the defendant is restrained before the hearing can be held.” See CPLR § 6301.

The standard that a party seeking a preliminary injunction must satisfy to obtain such “extraordinary” relief is the well-settled three-prong test: (1) a probability of success on the merits, (2) danger of irreparable injury in the absence of an injunction and (3) a balance of equities in its favor. See Nobu Next Door, LLC v. Fine Arts Hous., Inc., 4 N.Y.3d 839, 840 (2005).

Injunctive relief is not designed to determine the merits of the action, rather its function is to preserve the status quo pending the outcome of an action. For this reason, preliminary injunctions can be used as a significant weapon in commercial and business litigation. Nevertheless, it is important to understand when this remedy is available and when it is not.

Establishing the second prong of the test often proves to be the most difficult since the vast majority of commercial and business litigation cases seek monetary damages—something that can be remedied at the disposition of a litigation and therefore not worthy of the extraordinary remedy of injunctive relief. By definition, the concept of irreparable injury seeks relief for a type of harm for which there is no adequate remedy at law (e.g., no monetary damages).

New York County Commercial Division Judge Sherwood recently denied an application for a preliminary injunction for two reasons: the plaintiff sought a remedy which would alter, not maintain, the status quo and because plaintiff could not show irreparable harm.

In that case, the plaintiff sought to have the Court compel the defendant to deliver shares in defendant’s company to plaintiff based on the terms of a purchase and sale agreement between the parties. However, defendant argued that the transfer of shares would be in violation of various SEC rules preventing the plaintiff from acquiring further shares of defendant’s common stocks. Ultimately, Sherwood decided that compelling the defendant to transfer the shares would alter the status quo because it would be giving plaintiff its ultimate relief it sought by allowing it to bypass a potentially illegal transfer of shares. See Crede CG III, Ltd. v. Tanzanian Royalty Exploration Corp., 2018 NY Slip Op 32918 (New York County, 2018).  This type of relief, also known as a “mandatory” injunction, is granted only upon a much higher burden. See Lehey v. Goldburt, 90 A.D.3d 410, 411 (1st Dep’t 2011).

Next the plaintiff argued that it would be irreparably harmed if its application for a preliminary injunction was not granted because the defendant was “on the verge of insolvency” threatening plaintiff’s ability to collect on a potential judgment issued at the conclusion of the case. Here, defendant was a publicly traded company created to help fund some of its gold and precious metal mining projects in Tanzania. At the time of the application it had current assets of $1.3 million and debts of over $10 million along with $50 million in assets located in Tanzania where the law of that country does not currently recognize United States judgments.

Judge Sherwood reaffirmed the principle that the relief of a preliminary injunction is not available in an action seeking solely money damages. He reasoned that plaintiff’s damages consisted of the value of publicly traded stock of defendant’s company which could easily and readily be calculated. Sherwood reasoned that the fact that defendant might not have any assets left by the end of the litigation was not enough to award a preliminary injunction because an “unsecured creditor has no cognizable interest in a debtor’s property until the creditor obtained a judgement.” He went on to say that a creditor therefore “has no equitable prejudgment remedy that will interfere with the debtor’s use of its property—even if the defendant threatens to strip itself of assets.”

In conclusion, commercial litigators must remember that the extraordinary remedy of a preliminary injunction, can be used as a weapon, but such relief is only available to maintain the status quo and where irreparable harm exists.

What consequences might an attorney face if she allows her client to deliberately disregard a court order? A recent decision by Justice Sherwood held that civil contempt is not an appropriate sanction for such complicity so long as the attorney herself did not engage in conduct that violated a court order.

In A&F Hamilton Heights Cluster, Inc. v Urban Green Mgt., Inc. (653038/2014), an action seeking damages for alleged mismanagement and to determine ownership and control of a partnership, Justice Kornreich, prior to her retirement, appointed a receiver and managing agent for the partnership’s five rental properties in West Harlem. Justice Kornreich ordered that the partners and their agents cease collection of partnership receivables and turn over all partnership money to the receiver. Justice Sherwood took over the case in July 2017.

Prior to appointment of the receiver, an interrelated group of entities and their affiliates had managed the properties—referred to here as “Partner A” and “Partner B.” Partner A brought a motion seeking imposition of fines and imprisonment for civil and criminal contempt arising from Partner B’s, Partner B’s attorneys’ (Tendy Law, “Tendy”), and the property management agent retained by Partner B (“Managing Agent”)’s, failure to comply with the court’s orders concerning cessation of partnership receivables and turnover of money to the receiver. The court stated the relevant standard for civil contempt as follows:

To establish civil contempt based on an alleged violation of a court order, the movant must establish, by clear and convincing evidence, that a lawful order of the court expressing an unequivocal mandate was in effect, and that the order was disobeyed to a reasonable certainty (see In re Department of Envt’l. Protection of City of N. Y. v Dep’t of Envt’l. Conservation of State of NY, 70 NY2d 233 [1987]; In re McCormick v. Axelrod, 59 NY2d 574, amended 60 N.Y.2d 652 [1983]; Vujovic v Vujovic, 16 AD3d 490 [2d Dep’t 2005]). The party to be held in contempt must be shown to have had knowledge of the order, and the disobedience must have prejudiced the rights of another party (see McCain v Dinkins, 84 NY2d 216 [1994]; In re McCor11ack, 59 NY2d 574; Garcia v Great Atl. & Pac. Tea Co., 231 A.D.2d 401 [1st Dep’t 1996]).

In a decision dated November 2, 2018, the court granted the motion. The court found that Partner B and the Managing Agent had “engaged in a pattern of conduct contrary to the direction of the court,” including continuing to collect rents, withholding funds in the partnership account, paying itself fees using partnership funds, and eventually transferring the partnership account’s balance to Partner B. Because these actions comprised a longstanding, repeated pattern of conduct, the court rejected Partner B’s and the Managing Agent’s defense that the transactions were “complex” and that payments had been made “in error.”

As for Tendy, the court found it “complicit” in Partner B and Managing Agent’s disregard of the court’s orders concerning cessation of partnership receivables and turnover of money. In particular, Tendy had “feigned a need for guidance” from the court and sought permission from the court to allow Managing Agent to return funds to Partner B. Tendy also misrepresented to the court the amount remaining in the partnership’s account. In light of the receiver’s multiple complaints concerning Partner B’s and Managing Agent’s disregard of the court’s orders, the court found that Tendy had, at best, “engaged in studied indifference to the contempts of their client and its agent.” However, notwithstanding such complicity, the court declined to hold Tendy in contempt, because Tendy had not violated any court order.

The court’s order raises questions concerning an attorney’s obligations when its client refuses to comply with a court order. Though Tendy avoided liability by failing to take an active role in withholding funds from the receiver, its indifference to its client’s misconduct did not escape the court’s approbation. Counsel finding themselves in such circumstances would thus be wise to tread carefully.

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Over the past year or so, we have made a point of highlighting in the “Check the Rules” series on this blog periodic updates to the individual practice rules of certain Commercial Division Justices, including Justice Eileen Bransten in New York County (twice, in fact), Justices Marguerite A. Grays and Leonard Livote in Queens County, and Justice Sylvia G. Ash in Kings County.

Continuing with this theme of local-rule vigilance, Commercial Division practitioners should take note some recent changes to the individual practice rules of Manhattan Commercial Division Justice O. Peter Sherwood.

Justice Sherwood’s Practices for Part 49, which were revised as of this month, provide some notable additions (and omissions) from his prior rules, which dated back to May 2014 before most of the Commercial Division Advisory Council’s new-rule proposals and amendments were adopted and implemented.

Be Prepared, Be Authorized. Justice Sherwood opens his practice rules with an express and emphatic reminder to attorneys practicing in his Part of the requirements under Rule 1 of the Commercial Division Rules that “counsel . . . must be fully familiar with the case . . . and fully authorized to enter into agreements, both substantive and procedural, on behalf of their clients.” In other words, appearing in Part 49 is no “cattle-call.” Attorneys should have factual command of their cases, as well as the requisite authority to bind their clients.

Separate and Describe Your Exhibits. Justice Sherwood now requires attorneys practicing in his Part who wish to annex exhibits to their correspondence or motion papers to separately e-file their exhibits and designate them with a “descriptive title.” In other words, a simple designation of “Exhibit A” won’t cut it. Attorneys must provide a description (e.g. “Operating Agreement, dated as of September 20, 2018”) so that adversaries and court personnel viewing the docket or other notice of filing can immediately understand what has been filed.

Get Advance Permission to Adjourn Appearances. Justice Sherwood now requires that requests for adjournment be submitted a full two business days in advance of the scheduled appearance. Justice Sherwood conferences his cases on Tuesdays, so that means attorneys must get their requests for adjournment in by no later than Thursday of the prior week.

Check Your E-Mail. Justice Sherwood’s new rules provide that the court may choose to communicate with counsel via e-mail “regarding scheduling matters or to make certain inquiries.” Note, however, that this line of communication only goes one way. It does not mean that attorneys practicing in Part 49 may “initiate communication with the court via email” or “use e-mail to make arguments.”

Complete Party Discovery Before Bothering Non-Parties. Justice Sherwood “strongly encourages” attorneys practicing in his Part to “attempt to confine their requests to parties to the action and resort to third-party disclosure only when it reasonably appears that the information being sought is otherwise unavailable.” Justice Sherwood also requires that all non-party subpoenas be “simultaneously served” on all parties, and that all documents and information produced in response be exchanged among all parties within five days of receipt.

Follow Instructions When Seeking to File Under Seal. Justice Sherwood’s updated practice rules provide specific instructions concerning the filing of documents under seal:

  • Applications to file under seal must be made by Order to Show Cause, which must be preceded by a meet-and-confer regarding the documents proposed for seal.
  • Motions will be considered in light of the limitations imposed under applicable case law, and the movant must propose redactions “as opposed to wholesale sealing.”
  • Any document proposed for seal must be filed in its original, un-redacted form as an exhibit, with the proposed redacted version filed “as a subset of that exhibit.”
  • All motions must be accompanied by a joint index of the documents proposed for seal, including the basis for sealing and any objection thereto.

Finally, as for notable omissions, Justice Sherwood appears to have dispensed with his former requirement – which, as far as I’m aware, was entirely unique to his Part – that  motion submissions also be provided to the court “in .rtf format on a computer disk.”

**Nota Bene** – Attention Kings County Commercial Division practitioners: How much is your case worth? The general practice rules for the Kings County Commercial Division also were updated this month to double the monetary threshold from $75,000 to $150,000.

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In the opening scene of the 2008 “stoner action comedy” Pineapple Express, as Eddy Grant’s “Electric Avenue” pumps out of the car’s stereo speakers, the film’s protagonist, Dale Denton (Seth Rogen), in various disguises serves subpoenas on unsuspecting defendants. A real-world outtake from this film recently played out in the New York County Supreme Court, Commercial Division, in Lenox NY LLC v. Goldman.

The defendant, James Goldman, was alleged to have defaulted on personal guarantees for the payment of rent due to the plaintiff landlord under two commercial leases. Plaintiff commenced the action by notice of motion for summary judgment pursuant to CPLR § 3213 and attempted to serve the defendant at the Pleasant Valley, New York address listed on the guarantees.

When the process server arrived at the Pleasant Valley address on September 29, 2017, the defendant did not answer the door. “Bill” did. According to the process server’s affidavit of service, “Bill” refused to provide his last name, but claimed to be a “friend” of the defendant. A short, slender middle-aged man whose hair color is best described as “shaved,” little else is known about Bill Doe.

The defendant filed an affidavit stating that he does “not know who ‘Bill Doe’ refers to, but it is certainly not me, a member of my family, nor any of my friends, nor anyone employed by me.” The defendant was “never contacted by a person named ‘Bill’ about this action.”

Was service proper?

CPLR 308(2) provides for service upon “a person of suitable age and discretion at the actual place of business, dwelling place or usual place of abode of the person to be served,” if followed by a mailing and filing of proof of service. A process server’s affidavit which attests to delivery to “a person of suitable age and discretion” is apparently sufficient to make a prima facie showing of proper service. The burden then shifts to the defendant to submit a “sworn denial of receipt of service” that contains “specific facts to rebut the statements in the process server affidavits.” See Indymac Federal Bank FSB v Quattrochi, 99 AD3d 763 (2d Dept 2012). The matter would then be referred for an evidentiary hearing. Id.

Applying this standard, the court (Sherwood, J.) held that the defendant had failed to rebut the process server’s affidavit of service because the defendant’s affidavit did not contain enough factual detail. In addition, the defendant’s affidavit did not address the process server’s affidavit, but instead focused on whether “Bill Doe” had ever forwarded the service to defendant. The final nail in the coffin was the defendant’s assertion that he was not at home on “August 29, 2017” (a month earlier than the process server’s visit).

Many other defendants have met with similar difficulty in refuting a process server’s affidavit. For example, in Indymac, the agent allegedly served with process swore that she did not recall being served and had no record of being served. However, the disorderly records of the agent’s “Subpoena Case Record” book negated her affidavit and no evidentiary hearing was required. The Second Department also took issue with the defendant’s affidavit in C&H Import & Export, Inc. v. MNA Global, Inc., 79 AD 3d 784, for failing to include an affidavit from the individual allegedly served or a denial that the individual was an agent of the defendant. Therefore, be forewarned—absent facts specifically refuting the process server’s affidavit, such efforts are likely to be futile.