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

Background

KDH Consulting Group LLC invested $1,000,000 in a limited partnership with Defendants: Iterative Capital Management L.P.; Iterative Capital GP, LLC; Iterative OTC, LLC; Iterative Mining, LLC; Brandon Buchanan; and Christopher Dannen. KDH demanded books and records concerning a proposed restructuring. After Defendants objected, KDH sought a temporary restraining order (TRO) to stop the restructuring and require production of the requested documents.

On April 27, 2020, the court granted the TRO and required KDH to post a $20,000 security bond under Federal Rule of Civil Procedure 65(c). On May 5, 2020, after considering Defendants’ request to dissolve the TRO, the court found that injunctive relief was not warranted because KDH had not shown sufficiently compelling irreparable harm and the balance of the equities did not favor KDH. The court dissolved the TRO.

Defendants first sought payment from the bond for alleged damages. The court denied that request in its November 9, 2020 order because some claimed costs were incidental rather than costs incurred to comply with the TRO, and because the remaining costs were not properly supported. The court did not deny that request with prejudice and allowed Defendants to file a renewed motion.

Separately, in a March 23, 2021 order, the court granted in part and denied in part Defendants’ motion to dismiss KDH’s amended complaint. The court dismissed with prejudice KDH’s claims concerning alleged federal securities-law misstatements made after KDH’s investment, including alleged misstatements connected with the proposed restructuring.

Arguments

Defendants’ renewed motion sought $8,030 in legal fees for analyzing and attempting to comply with the TRO’s document-production requirement and $16,500 for approximately thirty hours Buchanan spent identifying and locating responsive materials. Defendants supported the amounts with affidavits from their counsel, Robert Boller, and Buchanan.

KDH argued that the renewed motion was an improper second attempt and that the claimed costs were speculative and intertwined with Defendants’ general litigation strategy. KDH also argued that Defendants should have searched for the documents even without the TRO or lawsuit and again requested return of the bond.

Legal Standard

The court explained that a party wrongfully restrained by an injunction is presumed entitled to recover provable damages from a Rule 65(c) bond. Before that presumption applies, however, the restrained party must show that the damages were proximately caused by the injunction and must support the damages with evidence. The recoverable amounts are costs and damages incurred because of compliance with the wrongful injunction. Legal fees for litigating the injunction are not recoverable, but legal fees incurred in complying with it are.

Court’s Analysis

The court rejected KDH’s argument that Defendants’ renewed motion was an impermissible second attempt. Because the November 9 order had not denied Defendants’ request with prejudice, the court had permitted a renewed motion supported by additional evidence.

The court found that Defendants were wrongfully restrained by the TRO. It relied on the March 23 dismissal with prejudice of KDH’s claims concerning the proposed restructuring, which the court treated as a complete adjudication in Defendants’ favor for purposes of the bond motion. The court therefore concluded that Defendants had been prevented from undergoing the restructuring and withholding certain related documents and records even though they had the right to do so.

The court found that Defendants incurred some damages from complying with the TRO but concluded that the requested amounts were not fully supported. It accepted Boller’s representation that Defendants incurred approximately $8,030 in attorneys’ fees for compliance-related legal work. The court ruled that those fees were recoverable because they resulted directly from the TRO’s document-production requirement, rather than merely from litigating the case.

The court did not accept Buchanan’s $16,500 labor estimate. Buchanan calculated it using a $550 rate he had charged earlier in his career when he was a practicing attorney. The court stated that Buchanan was no longer a practicing attorney and that the record did not establish that his time was still worth that rate. The court nevertheless found that Defendants incurred some labor-related damages and reduced the requested amount by 40%, awarding $9,900.

The court declined to decide whether KDH had a state-law right to inspect the books and records because that issue was not before the court and was unnecessary to resolve the bond motions.

Disposition

The court ordered the Clerk’s Office to deduct $17,930 from KDH’s $20,000 bond and disburse that amount to Defendants. It ordered the remainder of the bond returned to KDH. Thus, Defendants’ renewed motion for disbursement was granted in part, and KDH’s motion for return of the bond was also granted in part. Judge Victor Marrero signed the decision and order.