J.A. Preston Corp. v. Fabrication Enterprises, Inc.

• Decision Date: 20 November 1986
• Citation: 509 N.Y.S.2d 520,502 N.E.2d 197,68 N.Y.2d 397
• Parties: , 502 N.E.2d 197 J.A. PRESTON CORPORATION et al., Appellants, v. FABRICATION ENTERPRISES, INC., et al., Respondents.
• Court: New York Court of Appeals Court of Appeals

Page 520

509 N.Y.S.2d 520

68 N.Y.2d 397, 502 N.E.2d 197

J.A. PRESTON CORPORATION et al., Appellants, v. FABRICATION ENTERPRISES, INC., et al., Respondents.

Court of Appeals of New York.

Nov. 20, 1986.

Frank H. Penski, New York City, Domenick L. Gabrielli, Rochester, and Abigail T. Reardon, New York City, for appellants.

Lorance Hockert and Leonard N. Flamm, New York City, for respondents.

OPINION OF THE COURT

MEYER, Judge.

Affirmance by the Appellate Division of an order granting a preliminary injunction is not a final determination of plaintiffs' entitlement to an injunction within the meaning of CPLR 6312(b) and does not entitle plaintiffs to an order discharging the undertaking given to obtain the preliminary injunction. The order of the Appellate Division should, therefore, be affirmed, with costs.

I

In the action underlying this appeal plaintiffs sought to recover for claimed theft of trade secrets and confidential business information, for unfair competition and as to two of the defendants for breach of fiduciary duty. On the basis of their verified complaint plaintiffs obtained an order, which was served together with the complaint on May 29, 1984, requiring defendants to show cause why a preliminary injunction should not issue. The order temporarily restrained defendants from utilizing the claimed trade secrets and business information and from competing unfairly but required no bond.

After an evidentiary hearing, Special Term, concluding that there were factual issues to be tried, granted plaintiffs a preliminary injunction conditioned upon their furnishing an undertaking in the amount of $100,000 "to secure the payment of defendants' damages and costs as may be sustained by any party who is found to be wrongfully restrained by reason of this preliminary injunction" and set the matter for trial at the September 1984 Trial Term. The bond as issued, however, was conditioned to pay "such damages and costs * * * as may sustain by reason of the issuance of the temporary re straining order, if the court finally decides that plaintiff was not entitled thereto." ¹ On defendants' appeal from the order granting the preliminary injunction the Appellate Division affirmed (106 A.D.2d 926, 484 N.Y.S.2d 1021).

Plaintiffs then moved for an order discharging the bond and, on stipulation of the parties, the matter was referred to a Judicial Hearing Officer (JHO) to decide all issues. By order dated April 15, 1985, the JHO discharged the undertaking but ordered that the preliminary injunction "shall otherwise remain in full force and effect". He held in reliance on Margolies v. Encounter, Inc., 42 N.Y.2d 475, 398 N.Y.S.2d 877, 368 N.E.2d 1243 that the issue was whether plaintiffs were entitled to a preliminary injunction, not whether they had a right to a permanent injunction, and concluded that on that question the Appellate Division's affirmance was the law of the case that the preliminary injunction had been properly issued.

On defendants' appeal from that order the Appellate Division reversed on the law and denied the motion to discharge the bond, two Justices dissenting (117 A.D.2d 997, 499 N.Y.S.2d 542), and certified to us the question whether its order was properly made. ² The majority, distinguishing Margolies, noted that the purpose of a preliminary injunction is to preserve the status quo even though plaintiff's right to ultimate relief has not been proven and that if it is finally determined that plaintiff has no cause of action defendant is entitled to recover damages sustained as a result of being enjoined from doing what he had a right to do. The dissenters construed Margolies as foreclosing such a holding, and the prior affirmance of the grant of the injunction the law of the case and not subject to relitigation.

Before us plaintiffs argue that, the undertaking having been discharged, the Appellate Division should have dismissed the appeal as moot; that the Appellate Division's prior affirmance is the law of the case; and that Margolies is controlling. We disagree and, therefore, affirm and answer the certified question in the affirmative.

II

The mootness argument is predicated on cases holding that the undertaking is the source of liability and, therefore, absent an undertaking there is no right, short of an action for malicious prosecution, to recover for damage resulting from the issuance of court process. While such holdings are undoubtedly good law (City of Yonkers v. Federal Sugar Refining Co., 221 N.Y. 206; Honeywell, Inc. v. Technical Bldg. Servs., 103 A.D.2d 433, 480 N.Y.S.2d 627; see, 7A Weinstein-Korn-Miller, N.Y.Civ.Prac. p 6315.05), it does not follow that when an undertaking has been required and is then improperly discharged the undertaking no longer exists and the impropriety of its discharge cannot be corrected by an appellate court. Indeed, Margolies v. Encounter, Inc., 42 N.Y.2d 475, 398 N.Y.S.2d 877, 368 N.E.2d 1243, supra, on which plaintiffs rely, is authority to the contrary for, notwithstanding that Special Term had "granted plaintiffs' motion to discharge the undertaking" (42 N.Y.2d, at p. 478, 398 N.Y.S.2d 877, 368 N.E.2d 1243), we reversed and remitted "for entry of an order directing payment of damages to Encounter to the extent of the full liability on the undertaking" (id.; cf. University of Tex. v. Camenisch, 451 U.S. 390, 101 S.Ct. 1830, 68 L.Ed.2d 175). The contention that defendants are barred by the law of the case because they appealed unsuccessfully the order granting the injunction to the Appellate Division and did not thereafter seek to appeal to this court stands plaintiffs in no better stead. Like arguments were made and rejected in Walker Mem. Baptist Church v. Saunders, 285 N.Y. 462, 474, 35 N.E.2d 42: "The plaintiff urges upon this appeal that the law of the case was conclusively determined by the order of the Appellate Division affirming the granting of the temporary injunction since that order, it is argued, constitutes an adjudication that the complaint sets forth a good cause of action. A complete answer to this contention is that the granting of a temporary injunction serves only to hold the matter is statu quo until opportunity is afforded to decide upon the merits. The granting or refusal of a temporary injunction does not constitute the law of the case or an adjudication on the merits, and the issues must be tried to the same extent as though no temporary injunction had been applied for. In addition, since the injunction order lay in the discretion of the Special Term and the Appellate Division, the decision thereon was not appealable to this court (Brown v. Keeney Settlement Cheese Assn., 59 N.Y. 242; Strasser v. Moonelis, 108 N.Y. 611, 15 N.E. 730; Schneider v. City of Rochester, 155 N.Y. 619, 50 N.E. 291), and the proceeding is not material here" ³

We are thus brought to the substantive issue--whether there has been a final determination of plaintiffs' right to an injunction within the meaning of CPLR 6312(b). That provision, so far as here pertinent, directs that "prior to the granting of a preliminary injunction, the plaintiff shall give an undertaking in an amount to be fixed by the court, that the plaintiff, if it is finally determined that he was not entitled to an injunction, will pay to the defendant all damages and costs which may be sustained by reason of the injunction". At common law New York courts were without power, absent malice, to award damages for injury occasioned by the issuance of an injunction even though it was determined in the action that the plaintiff was not entitled to it (City of Yonkers v. Federal Sugar Refining Co., 221 N.Y., at p. 208, supra; Lawton v. Green, 64 N.Y. 326, 330). It was not until the adoption of the 31st rule of the Court of Chancery, ⁴ thereafter incorporated in Code of Procedure § 222 (Field Code), that it acquired the power, limited by the amount of the undertaking, to do so (Lawton v. Green, supra). The Code provision which used the words "if the court shall finally decide that the plaintiff was not entitled thereto" was carried forward in essentially the same form into the Code of Civil Procedure (Throop Code) as section 620, into the Civil Practice Act as section 893 and ultimately into CPLR 6312(b), the words "finally decides" being changed in the present provision to "finally determined."

Of interest on the question before us is the fact that, as enacted in 1876, the Throop Code contained a section 622 which defined what "finally decided" meant. ⁵ Although the language of that section lends support to the conclusion reached by the Appellate Division majority, it is not determinative because the provision was stricken by Laws of 1877 (ch. 416, § 128), ⁶ thus leaving definition of the term to be worked out by the courts on a case-by-case basis. Plaintiffs argue that the Appellate Division decision affirming the preliminary injunction order is a final determination that the order was properly granted. It is, of course, true that such an order is final in the sense that no appeal from it will lie to this court except, perhaps, when the issue turns on a pure question of law, such as the sufficiency of the complaint, or upon irreparable injury (compare, Cohen and Karger, Powers of the New York Court of Appeals, at 156 with id., at 610). But the preliminary injunction here granted rested on Special Term's conclusion after an evidentiary hearing that there were issues of fact and, in any event, CPLR 6312(b) is concerned not with finality in terms of this court's jurisdiction, but with a final determination of rights between the parties.

Thus, when defendant consents to the discontinuance of the action without reserving his rights on the undertaking, there can be no recovery on the bond because there can be no such final determination (Palmer v. Foley, 71 N.Y. 106), but when, without defendant's consent, plaintiff discontinues the action his doing so is equivalent to a...