| Under CPLR 7502(c), a court in “the county in which an arbitration is pending…[is permitted to] entertain an application…for a preliminary injunction in connection with an arbitration that is pending or that is to be commenced inside or outside this state.” |
 Giorgio Trovato, Unsplash |
A recent decision from Justice Anar R. Patel of the Manhattan Commercial Division in Conlon Holdings LLC v Chanos & Company demonstrates that mere threats of imminent dissipation of funds are insufficient grounds for the issuance of a preliminary injunction under CPLR 7502(c).
Background
Petitioners Conlon Holdings LLC and ConlonBeithir LLC (“Petitioners”) moved by Order to Show Cause seeking injunctive relief in aid of arbitration under CPLR 7502(c). Petitioners sought recovery for breach of contract and promissory estoppel, among other claims, in connection with a loan agreement (“Loan Agreement”) executed by James S. Chanos and Chanos & Company LP (the “Company”) (together, the “Respondents”).
This arbitration was precipitated by Mr. Chanos’s sale of a residential property located in Miami Beach, Florida (“Miami Residence”). Petitioners, who were investors in the Company, claimed that Mr. Chanos failed to disclose the sale of the Miami Residence to them notwithstanding the terms of the Loan Agreement requiring Mr. Chanos to identify the Miami Residence as security for the loan. Petitioners sought to enjoin Respondents from “transferring the proceeds of the sale of the [Miami Residence]”; to remove Kynikos Associates Ltd as a General Partner of the Company; and to appoint a temporary receiver until a new general partner was selected. Ultimately, the court denied Petitioners’ application.
Analysis
“[T]he party who seeks a preliminary injunction in aid of arbitration must show, in addition to the potential ineffectiveness of the award, the usual three requirements for equitable relief: (1) likelihood of success on the merits of the claim; (2) irreparable injury in the absence of the injunction, and (3) a balance of equities in favor of the moving party” (emphasis added).
First, the court denied Petitioners’ request to freeze all proceeds from the sale of the Miami Residence while the parties engaged in arbitration. The court found that that Petitioners were misguided in arguing that, in order to establish that the potential arbitration award would be ineffective, “they must only show…the purported violation of their rights [under the Loan Agreement].” Justice Patel noted that Petitioners cited no authority for that proposition. Further, the court noted that, in making their argument, Petitioners “have misapprehended and/or conflated the appropriate standard of review” because it was for the arbitration panel to decide whether there was purported breach. The court declined to rely on Petitioners allegations alone, absent any evidence, that Respondents intended to “transfer the funds outside of the jurisdiction or make poor investment decisions to yield substantial losses, which would adversely impact Respondents themselves” and render the potential arbitration award ineffective.
Second, the court found that Petitioners did not demonstrate a sufficient likelihood of success in arbitration because they did not have standing to enforce the Loan Agreement. The court found that Petitioners failed to (1) demonstrate that their “status as aggrieved parties as investors in the Company affords them standing to enforce the Loan Agreement”; (2) allege the necessary elements of a promissory estoppel claim because there were no allegations that “they reasonably relied upon Mr. Chanos’s…promise to repay the loan in deciding to invest in the Company, and sustained a resulting injury”; and (3) demonstrate that they were parties to the Loan Agreement because “Petitioners were not limited partners [of the Company at the execution of the] Loan Agreement on December 31, 2018.”
Third, the court held that Petitioners would not be irreparably injured absent the grant of injunctive relief, reasoning that monetary damages were otherwise available to Petitioners. The court also noted that Petitioners did not argue that they would suffer irreparable harm, but instead adopted a “standard of urgency,” claiming that Mr. Chanos would likely dissipate the funds. The court, however, highlighted the fact that the alleged “urgency” – i.e. breach of the Loan Agreement –occurred way back in June 2023, thereby undermining “the sense of urgency that ordinarily accompanies a motion for injunctive relief.”
Finally, the court found that given “the Petitioners’ failure to establish a likelihood of success on the merits and the availability of money damages, the balance of equities is in Respondents’ favor.”
The court also found that the Petitioners’ request for the removal of the general partner of the Company and the appointment of a receiver were premature as the relief hinged on the ultimate findings in the pending arbitration proceeding.
Takeaway
Demonstrating the “potential ineffectiveness of the award” within the meaning of CPLR 7502(c), requires substantial evidence. Courts are hesitant to grant preliminary injunctions in aid of arbitration seeking to freeze assets based solely on vague allegations of threats of imminent dissipation of funds.
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