Chancery Court Denies TRO After Alleged Defamation to SEC and FINRA

[T]he joint venture has a rather baroque organizational structure. Nominal Defendant CSP Nashville 3 LLC ("CSP"), a Delaware limited liability company, is the entity that owns the properties. Nominal Defendant CapStack MACC LLC ("CSM"), another Delaware limited liability company, serves as CSP's managing member. CSM, for its part, has two 50% members: Plaintiff CapStack Nashville 3 LLC ("CapStack") and Defendant MACC Venture Partners LLC ("MACC"). Like CSP and CSM, CapStack and MACC are Delaware limited liability companies. CSM has two managers: Plaintiff David Blatt (appointed by CapStack) and Defendant S. Anthony Azar (appointed by MACC) The properties themselves are managed by Defendant Capstone Multifamily Group, LLC, a North Carolina limited liability company affiliated with Azar and MACC

SIDE BAR: Get yer programs! Get yer programs here!  So . . . let's try and clarify who's who and their positions on the field: 

• CSP, a nominal defendant, owns the three properties;
• CSM, a nominal defendant, is CSP's managing member;
• Plaintiff CapStack and Defendant MACC each own 50% CSM;
• Plaintiff Blatt was appointed by CapStack as one of two managers of CSM;
• Defendant Azar was appointed by MACC as one of two managers of CSM; and
• Defendant Capstone Multifamily Group, an affiliate of Defendant Azar and Defendant MACC, manages the three properties.

We believe that investors, and the [Securities and Exchange Commission ("SEC")], would be most comfortable with the situation if David Blatt returned the funds taken at closing and he were no longer involved in the management of the investment.

nine claims, including fraud, breach of contract, breach of fiduciary duty, tortious interference with contract, and defamation and/or trade libel. The same day the Complaint was filed, the Plaintiffs moved for a TRO under Court of Chancery Rule 65(b). The Plaintiffs seek an order "temporarily enjoining Defendants and their respective partners, officers, agents, servants, employees, and those persons in active concert or participation with them, from making defamatory and libelous statements about Plaintiffs to the SEC, investors in CSP . . . , or any other third parties." The Defendants oppose the request . . .

Dear Counsel:

The road to a temporary restraining order ("TRO") is well-worn; it typically requires only that a movant show a non-frivolous claim of wrongdoing, and resulting threatened imminent irreparable harm, to trigger equity's solicitude. If a weighing of the equites then demonstrates that injunctive relief to maintain the status quo pending a final hearing is appropriate, Chancery will, typically, enter a TRO, limiting the freedom of action of the responding party.

Preventing harm is a public good, but it is not the only public good. In certain cases, other values trump maintenance of the status quo. In the Anglo-American judicial system, freedom of speech is a jealously guarded right. Historically, equity  denied itself jurisdiction over restraints on speech, leaving determinations of the actionability of potentially slanderous speech to a jury of the speaker's peers at an action at law. Both the Delaware and Federal Constitutions have enshrined the right to speak, casting further doubt on the ability of Chancery to place prior restraints on speech, particularly before a determination of whether the speech is entitled to constitutional protection following a hearing on the merits.

This TRO request illustrates this tension. Essentially, the movants contend that the respondents, the movants' business partners, have made false statements about the movants' conduct of the business, and threaten to make further such statements to investors and regulatory authorities, in an attempt to extort a business advantage. The respondents assert that the statements, and pending statements, are true. The movants' claims are colorable. For a number of reasons, however, I must decline to employ equity in prior restraint of the respondents' speech. I explain below.

The filings in this case are a matter of public record; none of the parties' papers have been filed under seal. Indeed, the Plaintiffs themselves attached to the Complaint the letters that contain the purportedly defamatory material. As a result, the allegedly false information the Defendants intend to convey to the SEC and other investors is already accessible to the public. It is unlikely, then, that further dissemination of this publicly available information would work irreparable harm on the Plaintiffs. Moreover, the Defendants represented at oral argument that NH Cohen, which received the July letters, has already disclosed the supposedly defamatory allegations to the Financial Industry Regulatory Authority. The Defendants also represented that, as a result of this disclosure, the SEC already has or will initiate an investigation into the allegations. These developments cast further doubt on the efficacy of Plaintiffs' attempt to demonstrate that future speech threatens irreparable harm.

"traditional maxim that equity will not enjoin a libel." This rule traces back to equity's traditional refusal "to exercise jurisdiction over a claim for defamation based on a prayer for injunctive relief." The rule now rests on additional considerations, primarily "the importance afforded to the constitutional protections of speech." Regardless of the rationale supporting the rule, "[t]he upshot is the same: a court of equity generally cannot issue an injunction in a defamation case."

When an injunction against speech is entered before a full trial on the merits, "it is almost always treated as an unconstitutional prior restraint." The reason is  straightforward: while such an injunction is in force, it "restrain[s] even speech that may ultimately prove to be protected."  Likewise, "since preliminary injunctions are often easier to get than final determinations on the merits and are granted based on less evidence and less deliberation, the danger that the court will get it wrong and mistakenly restrict protected speech is even greater." Thus, "[i]n all but the most exceptional circumstances, an injunction restricting speech pending final resolution of constitutional concerns is impermissible."  This rationale applies with equal force to First Amendment protections as well as the protections of speech and press found in the Delaware Constitution. . .

• Capstack
• Delaware
• Chancery Court
• TRO
• Defamation
• Libel
• SEC
• FINRA
• Irreparable Harm
• Prior Restraint
• First Amendment
• Absolute Privilege
• Qualified Privilege
• BrokeAndBroker
• Bill Singer