In Costello v. Molloy, Justice Gretchen Walsh of the Westchester County Commercial Division denied Plaintiff William Costello’s request for a mandatory injunction against Defendants Ronald Molloy and Curis Partners, LLC reinstating Costello as a member of the LLC.[1]  Although the Court found that Costello demonstrated a likelihood of success on the merits of his claim that his LLC membership was wrongfully terminated, the Court held he failed to clearly establish the type of extraordinary circumstances necessary to warrant the granting of mandatory injunctive relief reinstating his membership in Curis.

Background

This action arises out of Defendants’ attempt to divest Costello of his membership interest in Curis, a company which provides home health care services.[2]  In 2015, Molloy, Costello, and two other members entered into an Operating Agreement forming Curis as a New York limited liability company.  Pursuant to the agreement, Molloy was named Curis’s Chief Executive Officer and Manager, and Costello was named Curis’s Chief Operating Officer.[3]

In December 2020, Molloy provided Costello with a “notice of termination and release from Curis Partners LLC” effective December 31, 2020.[4]  Molloy contended that a provision of the Operating Agreement governing “termination of employment” gave him authority to expel a member who was no longer willing or able to perform work on Curis’s behalf.[5]  According to Molloy, by at least early 2020, Costello was no longer contributing to Curis’s success because he was absent from the office and did no work for the company between March and September 2020.[6]  The termination letter stated that Costello would be paid the outstanding balance of his capital account pursuant to the terms of the Operating Agreement.[7]  In January 2021, having determined that Costello’s membership interest was divested based on the termination letter, the remaining Curis members amended the Operating Agreement to remove Costello, and his membership interest was reallocated among the remaining members.[8]  Curis never made any payment to Costello upon his termination based on Molloy’s contention that Costello had a negative balance in his capital account.[9]

Predictably, Costello disputed Molloy’s version of the events leading to his termination. According to Costello, he had always worked from home, and Molloy used his absence from the office during the pandemic as a pretext to justify his termination, which Costello contended was in fact the result of the unraveling of Molloy’s and Costello’s friendship and business partnership.[10]  Costello claimed that the parties’ friendship began to deteriorate in 2018 as a result of certain business decisions and distributions taken by Molloy.  In 2019, Molloy transferred all of Costello’s work away from him and cut off Costello’s access to Curis’s systems, leaving him unable to work.[11] 

After Costello received the termination letter, he filed a complaint asserting claims for breach of contract and breach of fiduciary duty, among others, based on Defendants’ alleged breach of the Operating Agreement and alleged unlawful attempt to terminate him without justification.[12] The Court granted Costello’s motion for a temporary restraining order and enjoined Defendants from passing any resolution that would adversely affect Costello’s rights or interest in Curis.[13]  Costello subsequently moved for a preliminary injunction ordering Defendants to (1) restore him to his position as a fully vested member in Curis, (2) facilitate his access to Curis’s book and records, and (3) refrain from taking any action that affects Costello’s rights or interest in Curis.[14]

Costello’s Motion for Preliminary and Mandatory Injunctive Relief

The Court began its analysis by explaining the requirements for obtaining a preliminary injunction, pursuant to which a plaintiff must demonstrate:  (1) a likelihood of success on the merits, (2) irreparable injury absent the injunction, and (3) a balance of equities in his favor.[15] The Court then quickly dispensed with Costello’s claim that Defendants unlawfully denied him access to Curis’s books and records, which was unopposed by Defendants.  After noting that New York Limited Liability Company Law § 1102 requires an LLC to maintain certain records for inspection by a member, including recent tax filings, the Court ordered Defendants to produce Curis’s tax returns for the three most recent fiscal years.[16]  

Justice Walsh turned next to Costello’s request that he be reinstated as a member of Curis.  The Court held that Costello failed to meet the heavy burden to obtain a mandatory injunction despite establishing a likelihood of success on his claim that Defendants breached the Operating Agreement by attempting to terminate his membership.  First, the Court analyzed the section of the Operating Agreement cited in Costello’s termination letter, which pertained to “termination of employment (with or without cause) of a Member.”[17]  The Court found this provision ambiguous as applied to Costello because “none of the indicia of employment” such as a being a W-2 salaried employee or needing consent to take time off was present in connection with Costello’s work for Curis.  Instead, Costello held a membership interest in the LLC, and provisions of the Operating Agreement distinguished between officers and employees.[18]

Ultimately, the Court determined that it need not resolve whether the “termination of employment” provision in the Operating Agreement applied to Costello because Costello had demonstrated that Curis’s attempt to buy out Costello’s membership interest without paying him likely violated other provisions of the Operating Agreement. [19]  Based on evidence presented at the preliminary injunction hearing, the Court was not persuaded that Costello’s capital account properly reflected a negative balance.[20]  The Court also noted that if it is ultimately determined that Costello’s capital account had any value, Defendants may have forfeited their rights to cause a forced buy-out of Costello’s membership by failing to make the required payment within the time limit prescribed by the Operating Agreement.[21]

Despite finding that Costello had established a likelihood of success on his claim that Defendants breached the Operating Agreement, the Court nonetheless denied Costello’s request for a mandatory injunction reinstating him as a Curis member.  Specifically, the Court explained that a mandatory injunction is an “extraordinary and drastic remedy” that should only be granted when essential to maintain the status quo pending trial.[22]  Because the injunctive relief enjoining Defendants from taking any actions that would prejudice Costello’s purported rights or membership in the LLC—which the Court extended under the requested preliminary injunction—was sufficient to protect Costello’s interests, such a drastic remedy was not necessary.  The Court also reasoned that absent extraordinary circumstances, a mandatory injunction should not issue where, as here, to do so would grant the movant the ultimate relief to which he would be entitled in a final judgment.[23]

The Court’s decision highlights the particularly stringent standard for obtaining mandatory injunctive relief under New York law.  Even when a plaintiff can demonstrate a likelihood of success on the merits, such relief will not be granted absent extraordinary circumstances demonstrating that no other relief is available to preserve the status quo.