Mareva Orders Fact or Fiction in the United States

In light of the globalization of the economy, U.S. courts have shown a greater
tendency in recent times to look to foreign precedent in determining how to apply and
shape U.S. law. Perhaps in the case of Mareva injunctions, U.S. courts and
lawmakers should more frequently adopt what has become the norm in other common-law
jurisdictions. Indeed, despite appearances to the contrary, Mareva is already a part
of the legal landscape, and it is important for practitioners to keep this in mind
when framing their pleadings.

U.S. courts have historically looked with disfavor upon the use of prejudgment
injunctions that restrain a defendant in a suit from dissipating or transferring assets
where the plaintiff simply seeks money damages and claims no interest in specific
property belonging to the defendant. Instead, some U.S. courts will sit idly by
and allow a debtor to dissipate its assets, undertake a scheme of fraudulent transfers
and wait for a trustee to be appointed in bankruptcy to try to "clean up the mess"
afterwards. Might it be better to avoid making the mess in the first place?

By contrast, English, Australian and other common-law courts regularly consider
and issue such prejudgment injunctions, known as Mareva orders. In England and
throughout the rest of the common-law world, the general rule remains that a plaintiff
alleging nothing more than a general claim for damages at law cannot seek an order
prohibiting a defendant from disposing of his assets prior to obtaining a judgment.
However, in 1975 an exception to the general rule was founded when the first

Mareva order was issued, the use of which was espoused and clarified in Mareva
Compania Naviera S.A. v. International Bulkcarriers S.A. [1975], 2 Lloyd's
Rep. 509 (C.A.). A Mareva order can be issued when it appears that a
debtor is undertaking a scheme designed to defraud certain creditors, and the basis
for such an action can be either actual or constructive fraud. The order does not
deprive the defendant of his property, but merely curtails the defendant's ability to
arbitrarily dispose of his property. Since the Mareva decision, requests for Mareva
injunctions have become commonplace in common-law jurisdictions.

Despite the almost unanimous common-law jurisdiction international support, the U.S.
Supreme Court has considered and rejected application of Mareva orders in the United
States.² In Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund Inc.,

119 S. Ct. 1961, 527 U.S. 308 (1999), the Supreme Court
overturned the Second Circuit Court of Appeals and held that federal courts may not
issue Mareva injunctions under their inherent equitable powers, citing the "well-established
general rule that a judgment establishing the debt was necessary before a court of equity
would interfere with the debtor's use of his property." Id. at 1969. In refusing
to authorize the issuance of Mareva orders, the Supreme Court "punted" the issue to
Congress, explicitly stating that such an expansion of a creditor's powers over debtors
should be resolved by Congress. See Id. at 1975. But did the Supreme Court
really foreclose the use of Mareva orders in the United States?

Since Grupo Mexicano, U.S. courts have facially adhered to the ruling of the Supreme Court.³ Nonetheless, courts and plaintiffs have discovered a means to "plead
around" the Grupo Mexicano ruling. Now, if a plaintiff seeking an injunction
prohibiting a defendant from dissipating his assets prejudgment includes some form of
equitable component to the requested relief, recent decisions have distinguished Grupo
Mexicano and been willing to issue the injunction on the basis that Grupo Mexicano
only concerned a claim solely for money damages, a strictly legal claim. See,
e.g., Walczak v. EPL Prolong Inc., 198 F.3d 725, 730 (9th Cir.
1999) (where minority shareholder brought action seeking to enjoin sale of
substantially all of a company's assets, Ninth Circuit distinguished Grupo Mexicano by
finding that the requested injunction did "not completely prohibit appellants from taking
any action with regard to their assets" and "merely restrains appellants from either
completing the 1998 agreement or liquidating [the company]."); United States,
Rahman v. Oncology Assoc. P.C., 198 F.3d 489, 497-98 (4th Cir.
1999) (finding that where a plaintiff included a request for imposition of a
constructive trust with its fraud claim, Grupo Mexicano was not implicated because "the
bill contains allegations which, if proved, entitle petitioners to some equitable
relief."); Slidell Inc. v. Millenium Inorganic Chem. Inc., 2002 WL
649086 at *3 (D. Minn. 2002) (plaintiff sought a preliminary injunction
preventing defendant from disassembling partially constructed packing equipment pending
judicial resolution of asserted claims. Court held that because plaintiff also sought
equitable relief in the form of a constructive trust, equitable lien and specific
performance, "Grupo does not deprive the court of jurisdiction to entertain [the
plaintiff's] claim for equitable relief."); Newby v. Enron Corp., 188 F.
Supp. 2d 684 (S.D. Tex. 2002) (court considered issuance of prejudgment
injunctive relief where insider trading claim was brought against Enron officers and
directors and plaintiff sought compensatory damages, restitution and constructive trust,
and while court denied the injunction, it did so because of a failure on the merits
and not because of a prohibition against issuing the injunction). In the bankruptcy
context, some courts have been willing to go even further. See In re Dow Corning
Corp., 280 F.3d 648, 657-58 (6th Cir. 2002) ("[w]e conclude
that due to this statutory grant of power [referring to §105(a) of the Bankruptcy
Code], the bankruptcy court is not confined to traditional equity jurisprudence, and
therefore, the bankruptcy court's Grupo Mexicano analysis was misplaced.").

Thus, knowledgeable counsel will include an equitable component with their legal claims
when confronted with a potential pre-petition fraudulent transfer scheme in order to bypass
the limitations of the Grupo Mexicano decision. Whereas the common-law jurisdictions allow
for such relief on a relatively straightforward basis, U.S. claimants are forced to play
these drafting games. Nonetheless, based on recent case law, Mareva orders appear to be
available if the plaintiff drafts its complaint in a certain manner.

Fraudulent transfer law under §548 of the Bankruptcy Code and under state laws
is intended to rectify past evils that an insolvent company has perpetrated on innocent
creditors by favoring one creditor or groups of creditors ahead of similarly situated
creditors. The avoidance powers under the Bankruptcy Code are powerful tools available
to a trustee and a court in their continuing efforts to "bring equity" to the
bankruptcy process. But why wait until after the fact? The avoidance process in a
U.S. bankruptcy takes a tremendous amount of time and absorbs a tremendous amount of
money that would otherwise be available for creditors. If there is a means to prevent
the "bad" act prior to the bankruptcy, does it not behoove creditors to take advantage
of that means? Of course, with any prejudgment seizure or injunction comes great risk
and potential violation of due process and basic rights under our laws. These factors
demand a cautious approach. Still, if a creditor can make a legitimate and reasonable
showing that its debtor, pre-bankruptcy, is dissipating its assets, perhaps that
creditor should be permitted to obtain a Mareva order.

Mareva orders do have a place in the United States. The fact that lawyers have
devised drafting techniques that allow their clients to end-run around the Grupo
Mexicano ruling further supports the conclusion that Mareva orders, while perhaps not
by their accepted name, do have a place in the U.S. legal system and are a
valuable tool in the insolvency arena. The fact that these drafting techniques, while
transparent, are still finding acceptance in recent case law provides even further
support for this conclusion. U.S. creditors should not have to wait until after the
fact to take action.

Footnotes

¹ Mr. Silverman is a partner of Bingham McCutchen LLP, resident in New York. Mr. Silverman's practice focuses on multinational financial
restructuring and insolvency proceedings. Mr. Kirshner is an associate in the New York office of Bingham McCutchen. Mr. Kirshner's practice
focuses on financial restructuring and insolvency proceedings. Return to article

² Other authors have considered whether Mareva relief is already available under the Uniform Fraudulent Transfer Act and the Uniform Fraudulent
Conveyance Act (see Young, David B., Mareva Orders in Australian and American Courts: Fraudulent Transfers, Preferences and Insolvency
Issues, Oct. 18, 2001, prepared for the Fall 2001 Meeting of the Business Bankruptcy Committee of the Business Law Section
of the American Bar Association). Return to article

³ The following is not a comprehensive list of all cases dealing with Mareva-like issues since Grupo Mexicano, but simply an overview
sampling and summary of such cases. Return to article