Genius Group Limited v. LZG International, Inc.

Background

Genius Group Limited brought a proceeding seeking a preliminary injunction in aid of arbitration under Section 7502(c) of New York’s Civil Practice Law and Rules. The respondents were LZG International, Inc., Michael Thomas Moe, and Peter Ritz. VStock Transfer, LLC was named as a nominal respondent, and LZG’s shareholders intervened.

Genius and LZG entered an Asset Purchase Agreement on January 24, 2024. Genius acquired assets and liabilities through the purchase of all stock in FB Primesource Acquisition, LLC, a LZG subsidiary. As part of the transaction, LZG was to receive 73,873,784 shares of Genius common stock, with portions allocated to Moe and Ritz. The Agreement represented that the assets being sold were freely transferable and were not subject to restrictions or required third-party approval.

Genius later learned that documents executed two weeks before the Agreement allowed Yevgeniy Chsherbinin and Victor Nazarov to reclaim ownership of Prime Source Group and its assets if related debt was not fully paid. The court found that Respondents had not disclosed those documents to Genius before the Agreement. Genius alleged that this nondisclosure and the representations about transferability breached the Agreement.

LZG shareholders demanded that VStock transfer the Genius shares to them after the claimed restriction period expired. The shareholders then brought an earlier related proceeding. Genius began arbitration before the International Chamber of Commerce under the Agreement’s mandatory arbitration clause and sought to prevent the shares from being transferred before the arbitration concluded.

The court initially entered temporary restraining orders. Genius and Respondents later consented to a preliminary injunction. The intervening shareholders then sought reconsideration, saying they had not had an opportunity to oppose the injunction. The court treated that motion as the shareholders’ opposition to the preliminary-injunction application. Respondents ultimately took no position on that opposition.

Legal Standard

A party seeking a preliminary injunction must show a likelihood of success on at least one claim, likely irreparable harm without an injunction, a balance of hardships favoring relief, and that the public interest would not be harmed. A preliminary injunction in aid of arbitration may preserve the status quo while arbitration is pending.

Court’s Analysis

The court rejected Genius’s arguments that an immediate stock-price decline, loss of market capitalization, loss of reputation, loss of goodwill, or hostile takeover would independently establish irreparable harm. The court found those asserted injuries speculative, conclusory, or measurable through money damages.

The court nevertheless found a concrete and imminent risk of irreparable harm because Genius had commenced contractually required arbitration over whether Respondents were entitled to the shares at all. Without an injunction, the shares could be transferred before the arbitrator issued a final decision, potentially preventing Genius from obtaining meaningful relief. The court also found that completing the transaction could make restoration of the prior situation impossible.

The court held that Genius showed a likelihood of success on at least its claim that Respondents breached contractual representations and warranties. The record showed that the Agreement existed, that it represented the assets were freely transferable, and that documents executed before the Agreement allowed Chsherbinin and Nazarov to reclaim assets Genius believed it was acquiring. The court did not evaluate Genius’s other claims, including material omission and breach of fiduciary duty, because success on one claim was sufficient for preliminary relief.

The balance of hardships favored an injunction because Respondents had previously consented to the requested relief and the injunction would preserve the status quo during arbitration. The court also found that the public interest favored enforcing contracts and preserving the status quo while the arbitration proceeded.

Disposition

The court granted Genius’s motion for a preliminary injunction. Pending resolution of the International Chamber of Commerce arbitration, Respondents and their agents, employees, attorneys, affiliates, and VStock were enjoined from selling, transferring, assigning, encumbering, or otherwise disposing of the covered Genius shares or taking action that would enable such a disposition. They were also enjoined from participating in Genius shareholder meetings and voting.

Under Rule 65(c), the court required Genius to post a $500,000 bond by February 19, 2025, to provide security if the respondents were wrongfully restrained. The court also directed the Clerk to terminate docket entry 41, the intervening shareholders’ motion that had been treated as their opposition.