Summary
denying prejudgment restraint on assets based on breach of contract claim for money damages only
Summary of this case from Newby v. Enron CorporationOpinion
00 Civ. 9802 (AKH)
February 13, 2001
MEMORANDUM AND ORDER DENYING MOTION FOR PRELIMINARY INJUNCTION AND GRANTING MOTION TO DISMISS
On January 25, 2001, the parties appeared for oral argument on plaintiff's Motion for Preliminary Injunction and defendant's Motion to Dismiss. For the reasons stated on the record and discussed further here, I deny the Motion for Preliminary Injunction and grant the Motion to Dismiss.
Factual Background
The motions presented for this Court's consideration arise from contractually-required arbitration between the parties. Talk.com, an on-line telecommunications services provider, and Traffix, a telemarketing firm, entered into a Marketing Agreement which provided that Traffix would market certain Talk.com telecommunications services in exchange for a fee. For reasons disputed by the parties, the October payment of approximately $3 million due from Talk.com to Traffix was not made.
As a result, Traffix commenced an arbitration proceeding against Talk.com with the American Arbitration Association on October 25, 2000, alleging that Talk.com improperly terminated the Agreement. Talk.com answered the demand, denied the allegations, and stated counterclaims for alleged breaches of the Agreement by Traffix.
On December 6, 2000, Traffix filed a petition in the Supreme Court of the State of New York, pursuant to CPLR § 7502(c), seeking to require Talk.com to post a bond in the amount of the disputed October payment. Talk.com removed Traffix's petition to this Court, and filed a Motion to Dismiss for failure to state a legally sufficient claim for relief.
Discussion
CPLR § 7502(c) allows the supreme courts in the county in which an arbitration is pending to "entertain an application for an order of attachment or for a preliminary injunction in connection with an arbitrable controversy, but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief." This section requires, however, that "[t]he provisions of articles 62 and 63 of [the CPLR] apply" to any applications made. Article 63 of the CPLR delineates the usual standards an applicant must meet to obtain a preliminary injunction. Accordingly, the parties do not dispute that Traffix is required to meet the equitable test for obtaining a preliminary injunction: likelihood of success on the merits, danger of irreparable harm to the petitioner should preliminary relief be denied, and a balancing of the equities that tips in petitioner's favor. See SG Cowen Securities Corp. v. Messih, 224 F.3d 79, 81 (2d Cir. 2000).
Traffix's motion is premised upon its belief that Talk.com is financially unstable and will be unable to satisfy an arbitral award in the event Traffix is successful. In an effort to address this issue, the parties have extensively briefed and argued the facts concerning the financial condition of Talk.com. Additionally, at the conclusion of argument, I requested that the defendant submit additional materials concerning the financial status of Talk.com at the conclusion of the year 2000, to aid in assessing the standards noted above. Upon carefully reviewing the record, including these additional submissions and plaintiff's response to them, I conclude that plaintiff has failed to demonstrate irreparable harm warranting the relief requested. As is clear from the transcript of the argument, the evidence does not support the argument that Talk.com is in dire financial condition, and nothing in the record supports an inference that the financial condition of Talk.com has changed for the worse since the time Traffix first entered into the Marketing Agreement in April of 2000. Accordingly, since there is insufficient evidence to support Traffix's contention that an arbitral award would be rendered ineffectual due to the financial insolvency of Talk.com, thus requiring the entry of a preliminary injunction, its motion seeking such relief is denied.
Even if I were to find that Traffix had appropriately met the standards required to obtain a preliminary injunction, the Supreme Court's decision in Grupo Mexicano de Desarroloos, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308 (1999), prevents this Court from granting the relief requested. Traffix, as appears uncontested, is a general, unsecured creditor of Talk.com, seeking damages for an alleged breach of a contractual duty to pay. The issue, in Grupo Mexicano, was "whether, in an action for money damages, a United States District Court has the power to issue a preliminary injunction preventing the defendant from transferring assets in which no lien or equitable interest is claimed." Id. at 310.
The Supreme Court held that the answer is no. Specifically, the Court ruled, "follow[ing] the well-established general rule that a judgment establishing the debt was necessary before a court of equity would interfere with the debtor's use of his property[,]" id. at 321, "that the District Court had no authority to issue a preliminary injunction preventing [defendants] from disposing of their assets pending adjudication of [plaintiff's] contract claim for money damages." Id. at 333.
This case, while factually distinct, presents the identical legal issue. Traffix does not hold any security interest or lien against Talk.com, and the underlying proceeding is nothing more than an action for money damages pursuant to a contract. This Court, in the exercise of its equitable powers, cannot grant the requested relief. See also Credit Agricole Indosuez v. Rossiyskiy Kredit Bank, 729 N.E.2d 683, 685, 708 N.Y.S.2d 26, 28 (2000) (New York courts have "consistently refused to grant general creditors a preliminary injunction to restrain a debtor's asset transfers that allegedly would defeat satisfaction of any anticipated judgment" where an unsecured contract creditor "whose ultimate objective is attaining an enforceable money judgment" and whose efforts to enjoin the dissipation of the defendant's assets "is incidental to and in aid of the monetary relief" sought.)
Plaintiff attempts to distinguish the facts and issues raised in the present case by arguing that the parties before me in essence impliedly agreed to the terms of CPLR § 7502(c) by agreeing to arbitrate any disputes that arose under the terms of the agreement in the State of New York. However, nothing in the record supports this implication, and no case law supports the theory that an agreement to arbitrate in New York conveys an implication that the parties agreed to change the usual law that a plaintiff cannot distrain a defendant's assets before it prevails, except when traditional requirements for granting equitable relief are satisfied.
Accordingly, the motion to dismiss is granted. The Clerk of the Court is ordered to mark this matter as closed.
SO ORDERED.