KDH Consulting Group LLC v. Iterative Capital Management L.P.

Background

KDH Consulting Group LLC invested $1,000,000 as a limited partner in Iterative Capital, L.P. KDH sued Iterative Capital Management L.P., related Iterative entities, Brandon Buchanan, and Christopher Dannen. KDH alleged that Defendants fraudulently induced its investment by misrepresenting the fund’s purpose, prior performance, and withdrawal rights. KDH also alleged that Defendants shifted substantial assets into cryptocurrency-mining operations, made the investment illiquid, and engaged in self-dealing with affiliated businesses.

Defendants planned to restructure the investment partnership into a limited liability company and consolidate it with an affiliated cryptocurrency trading business. Investors were offered three options: continue investing in the new venture, withdraw based on the remaining assets minus restructuring expenses, or receive a proportional distribution of digital assets and mining equipment.

On April 27, 2020, the court issued a temporary restraining order blocking the restructuring, preventing Defendants from acting on the offer to investors, prohibiting destruction of documents, restricting actions that could impair the fund’s value, and initially requiring production of specified books and records. The court later suspended the books-and-records requirement.

Motion to Dissolve the Temporary Restraining Order

Defendants asked for immediate relief from the temporary restraining order. The court treated their May 1 letter as a motion under Federal Rule of Civil Procedure 65(b)(4) to dissolve the order. During a May 5 conference, the court considered whether KDH had shown irreparable harm and either a likely success on its claims or sufficiently serious questions for litigation together with a favorable balance of hardships.

Court’s Analysis

The court held that KDH had not shown irreparable harm. It found that KDH’s alleged injuries—including harm from the restructuring, changes to distribution rights and its interest in the new entity, and the failure to provide requested records—were economic injuries that could be addressed with money damages. The court noted that KDH had not demonstrated current or imminent insolvency. It also expressed serious doubts about KDH’s asserted right to the requested documents under the partnership agreement and the Delaware statute discussed by the parties.

The court further found that keeping the temporary restraining order in place would harm Defendants. The order could increase the costs and uncertainty of the restructuring and had affected Escher/Iterative OTC, which Defendants described as a separate money-services business. The court also considered the effect on other investors, including investors who had chosen to liquidate their investments while the partnership held volatile assets.

The court additionally found that the balance of the equities did not favor KDH. KDH had notice of the planned restructuring and its exit options before seeking emergency relief, and the court found that KDH waited until shortly before the offer’s deadline to request records and seek the temporary restraining order.

Disposition

The court granted Defendants’ motion to dissolve the temporary restraining order under Rule 65(b)(4). The decision did not resolve the ultimate merits of KDH’s claims; it decided whether the temporary restraining order should remain in effect while the case proceeded.