Encounter, Inc. v. Borker, 49 N.Y.2d 417 (1980)

A defendant may recover damages on an undertaking posted for a preliminary injunction if it is finally determined that the plaintiff was not entitled to the preliminary injunction, regardless of the ultimate outcome of the main action.

Summary

This case clarifies the conditions under which a defendant can recover damages based on an undertaking filed by a plaintiff who obtained a preliminary injunction. Encounter, Inc. was subject to a preliminary injunction that was later vacated on appeal. Although the main action was discontinued, Encounter sought to recover damages under the undertaking. The Court of Appeals held that the relevant determination for recovery is whether the plaintiff was entitled to the preliminary injunction when it was granted, not whether the plaintiff ultimately prevails in the main action. The court emphasized the importance of protecting defendants from improperly issued preliminary injunctions.

Facts

Encounter, Inc., a drug rehabilitation organization, leased premises in Manhattan. Tenants and a neighborhood association sued to permanently enjoin Encounter from occupying the premises. The Supreme Court granted a preliminary injunction conditioned on the plaintiffs posting a $10,000 undertaking. Encounter vacated the premises. The Appellate Division vacated the preliminary injunction but affirmed the denial of the motion to dismiss the complaint. Encounter moved back in, but later vacated the premises due to external factors. The plaintiffs then sought to discontinue the action and discharge the undertaking.

Procedural History

The Supreme Court initially granted the preliminary injunction. The Appellate Division vacated the preliminary injunction. The Supreme Court then denied the discharge of the undertaking but discontinued the action. A special referee found that Encounter sustained damages exceeding the undertaking but was not entitled to recover them because there was no final determination that the plaintiffs were not entitled to an injunction. The Supreme Court confirmed the referee’s report and discharged the undertaking. The Appellate Division affirmed. The New York Court of Appeals reversed.

Issue(s)

Whether the phrase “if it is finally determined that [plaintiff] was not entitled to an injunction” in CPLR 6312(b) refers to a determination on the merits of the underlying action or to a determination regarding the propriety of granting the preliminary injunction itself.

Holding

No, because the statute refers to a final determination that the plaintiffs were not entitled to the preliminary injunction, rather than a determination with respect to their right to a permanent injunction or other favorable outcome on the merits of the main action.

Court’s Reasoning

The Court of Appeals reasoned that a preliminary injunction is an extraordinary remedy that should only be granted upon a special showing. “If it is later finally determined that the preliminary injunction was improperly granted there will then be a ready source from which the defendant may recover for damages which he may have sustained.” The court emphasized that the defendant’s right to damages hinges on whether the plaintiff was entitled to the preliminary injunction, not on the ultimate outcome of the case. The court distinguished the present case from Williams v. Montgomery, 148 N.Y. 519 (1896), where the plaintiff was entitled to the preliminary injunction when issued, even though the plaintiff eventually lost on the merits. The Court also noted that CPLR 6312(b) lacks an alternative provision regarding the final outcome of the underlying action, unlike statutes governing undertakings for arrest and attachment. The Appellate Division’s vacating of the preliminary injunction, based on a finding that the plaintiffs had not demonstrated irreparable harm, constituted a “final determination that plaintiffs were not entitled to the preliminary injunction.” The court stated, “The interest of the minors not having been shown to be adversely affected, the injunction rests on no foundation at all and must be vacated.” (45 AD2d, at p 834). Further, the discontinuance of the underlying action was made “without prejudice to defendants’ rights, if any, that may exist under CPLR 6314 [presumably should be CPLR 6315]”, preserving Encounter’s rights to recover damages on the undertaking.