In Yee v. Chen, Index No. 704057/23 (N.Y. Sup. Ct., Queens Cnty. Sep. 27, 2023), the court granted a preliminary injunction to preserve the status quo of the parties’ business pending resolution of claims concerning misconduct by the managing member.
The parties were members of a limited liability company. Defendant Chen was the managing member. Plaintiffs alleged that Chen had seized control of the company by inducing plaintiffs on false pretenses to sign an amended operating agreement that gave Chen unsupervised control of the company. Plaintiffs also claimed that Chen was misappropriating the company’s assets. Chen denied plaintiffs’ allegations, maintaining that the amended operating agreement was legitimate and her uses of company funds were proper and known to plaintiffs, who had not previously objected.
After receiving a temporary restraining order granting emergency relief, plaintiffs sought a preliminary injunction requiring Chen to abide by the company’s original operating agreement and forbidding Chen from engaging in disputed uses of company funds until plaintiffs’ claims could be adjudicated.
A party seeking a preliminary injunction must establish (1) a likelihood of success on the merits, (2) a risk of irreparable injury in the absence of injunctive relief, and (3) a balancing of the equities favoring the movant. The court found that plaintiffs satisfied each element of this test and granted their motion.
Typically, litigants and courts step through this three-part analysis in sequence, addressing the movant’s ability to establish a likelihood of success on the merits before turning to the other factors. In Yee, however, the court altered the analysis by treating the second factor—the risk of irreparable harm—as the sine qua non for injunctive relief. While injunctive relief is inappropriate where money damages would suffice to make plaintiffs whole, money damages cannot restore control or management of a company, particularly where the non-movant’s actions may render the company insolvent. Thus, the court began by acknowledging that the alleged loss of corporate control and dissipation of corporate assets presented a risk of irreparable harm.
With the risk of irreparable harm thus established, the court made short work of the first and third elements of the test for injunctive relief. The court acknowledged that “despite the existence of factual issues herein, a preliminary injunction is still necessary to preserve the status quo, particularly since the defendant has not demonstrated she will suffer a great hardship if the injunction is granted.” In other words, having found a clear risk of irreparable harm and a lack of substantial prejudice to the defendant, the court directed relatively less scrutiny to plaintiffs’ ultimate ability to prove their case. The court granted plaintiffs’ preliminary injunction, pending plaintiffs’ payment of an undertaking in the amount of $10,000.
Injunctive relief is generally committed to the sound discretion of the trial court, and each application is decided on its facts. While the test for injunctive relief may appear simple and clear-cut, this case demonstrates that applications for injunctive relief can turn on the courts’ assessment of the overall equities of the case. Parties seeking to protect their rights must move swiftly but carefully to ensure that the court appreciates the unique circumstances that justify the relief sought. If you have questions about preliminary relief in your case, please contact Michael C. Rakower or Travis Mock.Yee