Chancery Refuses to Enjoin Transfer of Assets to New Competing Entity

Henson v. Sousa, C.A. No. 8057-VCG (Del. Ch. Dec. 19, 2012).

Issue Addressed: Whether the prerequisites for injunctive relief were satisfied in connection with a  request that the Court enjoin the majority-members of an LLC from wrongfully transferring the customer relationships and assets of the LLC to a new entity which excluded the minority member. Short Answer: Injunctive relief was denied.

Brief Background

Three members of an LLC based in Australia each owned a one-third interest.  Two of the three members decided to form a new entity and transfer business relationships and other assets to the new entity, and to exclude the minority member.  For reasons explained in the opinion, although the Court found a colorable claim, the prerequisites of irreparable harm and balancing of the equities were not satisfied.  Money damages were sufficient.

Analysis

Several useful principles of Delaware law were recited.  A few of the more noteworthy principles are highlighted below.

●          The prerequisites for a TRO are as follows:  (i) existence of a colorable claim, (ii) irreparable harm that will be suffered if relief is not granted, and (iii) a balance of hardships favoring the moving party.  See footnote 46.

●          Although a colorable breach of fiduciary duty claim was established, due to legal proceedings in Australia that limited the ability to transfer any customer relationships or assets to a new entity, irreparable harm was not established.

●          Importantly, the Court recognized precedent in Delaware law for granting injunctive relief to prevent the “danger of losing valuable revenue-generating relationships” which “may not be compensable in any manner other than injunctive relief.”  See footnote 51. 

●          However the Court concluded in this case that there was no showing of irreparable damage to a “continuing income stream and goodwill gained from a sustained relationship between a company and its customers.”  See footnote 52. 

●          The next unsuccessful argument for irreparable harm was based on an allegation of a fraudulent transfer under the Uniform Fraudulent Transfer Act (“UFTA”).  However, the Court noted that Section 1307(a)(3)(a) of the UFTA (at Title 6 of the Delaware Code), conditions injunctive relief to prevent fraudulent transfer as being “subject to applicable principles of equity.”  See footnote 59.  Thus, one still bears the burden of showing that irreparable harm will occur due to the fraudulent transfer if the TRO is not granted. 

●          The Court cited to Roseton OL, LLC v. Dynegy Holdings Inc. as a case where a plaintiff failed to demonstrate irreparable harm notwithstanding the effort to seek a TRO to enjoin the defendants from reorganizing their business and engaging in fraudulent transfer.  See 2011 WL 3275965, at *17-19 (Del. Ch. July 29, 2011).  That case also discussed the TRO v. Preliminary Injunction standards. See highlights of that case on these pages here and here.

●          The Court also distinguished the decision in Mitsubishi Power Systems Ams., Inc. v. Babcock & Brown Infrastructure Grp. US, LLC, 2009 WL 1199588, at *4 (Del. Ch. Apr. 24, 2009). (See highlights of that case on these pages.) The Court described that case as being unclear to the extent that the Court conflated a showing of colorable claim under the UFTA with a showing of actual, threatened, irreparable harm; and the threat of actual irreparable harm appeared to be consistent with the facts of that case.  See id. at *4-5 (referring to findings in that case of likely insolvency).

●          Based in part on relief already granted by an Australian Court which also was overseeing the dissolution of related entities, the Court found that there was an absence of a “clear showing of imminent irreparable harm” to justify the request in the TRO in this case.