Business divorce clients often arrive in the throes of a crisis, complaining of co-owners siphoning, diverting, depleting, or denying access to company assets and resources for their own personal use or for the benefit of a competing entity at the expense of the business and the client. We usually hear some variation of the question, “How do we stop it?” More often than not, the answer is: “An injunction.”
The Injunction Remedy
An injunction is a kind of court order. It usually comes in the form of a prohibition against a person or entity acting in a particular way (for example, in a business divorce case, from drawing funds from corporate accounts). Less frequently, it can come in the form of a mandate to do or engage in certain conduct (for example, in a business divorce case, to provide ongoing access to corporate books and records). The injunction has three species, each defined primarily by the temporal duration of the relief granted.
The first – a temporary restraining order – is a form of injunction the court issues based upon the submission of papers by the applicant alone at the very beginning of the motion briefing process, usually at the very first court appearance where papers are first processed and presented to the judge, before the opposing party has an opportunity to submit papers in response. Courts typically issue a temporary restraining order (or “TRO”) in emergency situations pending the “return date” (i.e., the date on which all motion papers are finally submitted to the court at the end of the motion briefing process), to prohibit conduct that could alter the “status quo” and cause the movant “irreparable harm.”
The second – a preliminary injunction – is a form of injunction with greater duration than, but often the same substance as, a temporary restraining order. In practice, what usually happens when a court grants a preliminary injunction is that it “converts” the temporary restraining order it previously issued into a preliminary injunction, meaning that the court orders the injunctive relief granted in the temporary restraining order to continue until the conclusion of the litigation, or until the parties have litigated the case to such a degree that the court can conclude that a preliminary injunction is no longer needed or appropriate. Another alternative at the preliminary injunction stage is for the court to conclude, based upon the submissions from the party opposing the preliminary injunction, that the court should not have issued a temporary restraining order, to “vacate” the temporary restraining order, and to deny a preliminary injunction.
The third – a permanent injunction – is the form of injunction with greatest duration. When a court issues a permanent injunction, it orders the imposition of injunction relief essentially in perpetuity, including after the litigation ceases, unless altered or modified by a judge at some later date.
The Injunction Standard
What does one need to prove to obtain an injunction?
“To be entitled to a preliminary injunction” or a temporary restraining order, “a movant must establish (1) a probability of success on the merits, (2) a danger of irreparable injury in the absence of an injunction, and (3) a balance of the equities in the movant’s favor” (Congregation Erech Shai Bais Yosef, Inc. v Werzberger, 2020 NY Slip Op 07538 [2d Dept Dec. 16, 2020]).
“These elements must be established by clear and convincing evidence” (Jones v State Farm Fire & Cas. Co., 2020 NY Slip Op 08050 [2d Dept Dec. 30, 2020]).
As one court explained, “Clear and convincing evidence is a higher, more demanding standard than the preponderance [of the evidence] standard” that typically applies in civil cases, requiring “evidence that is neither equivocal nor open to opposing presumptions” (In re Duane II, 151 AD3d 1129 [3d Dept 2017]).
The Eikenberry Case
A recent decision by Kings County Commercial Division Justice Leon Ruchelsman, Eikenberry v Lamson, 2020 NY Slip Op 33992(U) [Kings County Nov. 30, 2020], is a fine springboard for exploring the application of these legal standards to business divorce litigation where (as is often the case) the injunction movant’s ownership status in the business is hotly contested.
According to the complaint, Eikenberry and Lamson entered into a dual romantic / business relationship in the late 1990s, forming an alleged oral partnership the plaintiff called “EL Partnership” to acquire, develop, and sell real estate in New York and New Jersey through six separate real estate LLCs and corporations, several of which Eikenberry admitted were “held solely in one or the other partner’s name,” but which she alleged “are all beneficially owned by the Partnership.”
Eikenberry brought claims for accounting, breach of fiduciary duty, breach of contract, unjust enrichment, constructive trust, fraudulent conveyance, and judicial dissolution of the partnership under Section 63 of the Partnership Law, alleging that Lamson excluded her from the partnership and “concealed and transferred significant assets” after their romantic relationship fizzled (a common phenomenon about which we have written previously).
Shortly after the litigation began, Eikenberry moved by order to show cause for a temporary restraining order and preliminary injunction seeking, in the words of Justice Ruchelsman, an order “restraining the defendant from transferring any partnership assets and providing the plaintiff with access to all partnership distributions and from cancelling health insurance, her cell phone and the use of an automobile.” Here you can read Eikenberry’s moving affidavit and memorandum of law. The most unusual component of the relief sought, and which the Court granted as part of the TRO application, was a provision requiring distribution of money from the partnership’s accounts to pay for Eikenberry and Lamson’s children’s school tuition.
Lamson’s opposing affidavit and memorandum of law argued that the oral partnership Eikenberry described was “nonexistent” and that the case “in reality is a familial dispute.” According to Lamson, “[u]nder no circumstances did Plaintiff and I enter into a blanket oral ‘partnership’ agreement that was to cover the individual corporate governance structures of each company.”
Likelihood of Success
Faced with these sharply conflicting factual accounts, the Court was forced to consider the basic question: did Eikenberry establish a “likelihood of success on the merits” on her allegation of the existence of an oral partnership agreement.
Eikenberry raises a broader question: does the existence of disputed factual issues about a petitioner / plaintiff’s ownership status necessarily defeat his or her entitlement to an injunction? The answer is: it may depend on the kind entity. As we have written about previously, oral partnerships are perhaps the easiest to prove as compared to corporations and LLCs, at least for purposes of surviving a motion to dismiss. As Justice Ruchelsman wrote in Eikenberry:
The entire basis for relief is premised upon the allegation the plaintiff and defendant were partners. This preliminary question must be explored. It is well settled that a partnership or joint venture need not be in writing to be enforceable. Moreover, the existence of an oral agreement is generally a question of fact. (citations omitted).
The Court found that the following evidence created a “question of fact” whether Eikenberry established the existence of an oral partnership:
- Eikenberry was registered agent, member, and signatory of the formation documents for two of the six entities.
- Eikenberry was listed as a member on a bank account application for one of the entities, one page of which listed her as “beneficial owner’ (defined as someone who “owns 25 percent or more of the equity interests”), another of which listed her as “key controller” (defined as someone “with significant responsibility to control or manage or direct the legal entity named in the application”).
- Eikenberry was issued a Work Permit by the New York City Department of Buildings for one of the entities in early 2020.
- Eikenberry was listed as a member of a third entity on the corporate formation documents.
- Eikenberry was listed as “key controller” on a bank account application for this third entity.
Considering this evidence together, the Court concluded that documentary evidence Eikenberry submitted raised questions of fact as to the existence of an oral partnership agreement, establishing a potential likelihood of success on the merits, at least at the very outset of the case:
There are certainly questions of fact presented whether the plaintiff was more than just the ‘wife’ or domestic partner of the defendant. Issues of financing or how partnership assets should be divided . . . have no bearing on whether a partnership was created but rather only speak to the percentages each party would be entitled to in the event of a dissolution. It may be true there are some corporations listed in the complaint to which the plaintiff cannot demonstrate any ownership. However, again, that merely points to the ownership interests of the entire business enterprise of the couple and does not undermine the possible existence of a partnership at all.
[T]here are cases that hold ‘for people at the economic margin of existence’ the deprivation of income in the present could not be made up by a later money judgement (see Chu Drua Cha v Noot, 696 F2d 594 [8th Cir 1982]). To be sure, the plaintiff cannot be characterized as someone in poverty, however, ‘the hunger or indignities that one may have to suffer from the unavailability of funds cannot be fully remedied by future payment of those sums. When the money is essential for life’s basic necessities, the considerations go beyond the merely ‘financial’ ones that defendants say this case involves’ (see Reed v Lukhard, 578 F Supp 40 [W. Dist. VA 1983]).
The Significance of Disputed Issues of Fact
Eikenberry arguably could have gone either way due to the existence of competing legal principles addressing the significance of disputed issues of fact in an injunction application.
Under one strand of case law, “[c]onclusive proof is not required, and a court may exercise its discretion in granting a preliminary injunction even where questions of fact exist” (Vanderbilt Brookland, LLC v Vanderbilt Myrtle, Inc., 147 AD3d 1104 [2d Dept 2017]). The Court explicitly relied upon this strand of case law in Eikenberry.
Under a second strand of case law, though, “[w]hen central facts are in dispute, it is more difficult to ascertain whether the movant has shown a likelihood of success on the merits” any may “subvert the plaintiff’s likelihood of success on the merits . . . to such a degree that it cannot be said that the plaintiff established a clear right to relief” (County of Westchester v United Water New Rochelle, 32 AD3d 979 [2d Dept 2006]).
In Eikenberry, the plaintiff’s proof of an alleged oral partnership was relatively threadbare. Another judge might have weighed the evidence differently. One thing that can be said with certainty about injunction motions in business divorce cases: the outcome of the motion will be highly dependent upon the facts and circumstances of the particular case, rendering the quality of the factual presentation and skill of the lawyer exceedingly important. So choose wisely.