English courts since 1975 have issued so-called Mareva injunctions to prohibit defendants from transferring assets before judgment. See Mareva Compania Naviera S. A. v. International Bulkcarriers S. A., 2 Lloyd’s Rep. 509.
In his January 31 opinion, Bankruptcy Judge Craig T. Goldblatt of Delaware explained how the Supreme Court in 1999 barred the use of Mareva injunctions in the U.S. by holding “that a federal court may not freeze a defendant’s assets when the plaintiff asserts what is only a legal claim against the defendant.” See Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308, 333 (1999).
In the case before Judge Goldblatt, the bankruptcy trustee had mounted a fraudulent transfer action against multiple defendants seeking the recovery of millions of dollars in property. Although a fraudulent transfer action is typically seen as an action at law, Judge Goldblatt decided that he had authority to enter a preliminary injunction freezing some of the defendants’ assets because the trustee was seeking the return of specific property and was also asking for equitable relief in the form of an accounting.
Bad Facts
Before even considering whether Grupo would prohibit freezing the defendants’ assets, Judge Goldblatt was obliged to determine whether the facts would justify a preliminary injunction. As it turns out, the facts were sufficient.
The debtor was a government contractor. Before bankruptcy, several creditors had obtained judgments against the debtor for about $6.3 million. The debtor filed a chapter 11 petition when the creditors were commencing supplemental proceedings to locate and attach assets.
The creditors filed a motion to dismiss or convert to chapter 7. Given several “bad facts” that came out at the hearing, Judge Goldblatt was prepared to dismiss or convert. At the creditors’ behest, he converted the case to chapter 7.
The chapter 7 trustee filed suit against several insiders for recovery of fraudulent transfers, breach of fiduciary duty, constructive trust and an accounting. Immediately, the trustee filed a motion for a preliminary injunction to freeze the defendants’ assets.
Judge Goldblatt’s 35-page opinion details some of the bad facts that came out during the conversion and injunction hearings and previously in litigation in Florida state court. He said that some of the debtor’s business records had been “fabricated” or altered. He recounted how the state court had “pointed out that the debtor had made a number of substantial prepetition transfers to its insiders and, more troubling, had taken steps to conceal the fact of those transfers.” In addition, there was false, sworn testimony and no evidence that the debtor was on the cusp of collecting a claimed $20 million receivable from the government.
The bankruptcy trustee discovered other allegedly bad facts after his appointment. Judge Goldblatt said that newly discovered evidence “suggests that the debtor’s fabrication of business records and concealment of transfers to insiders was more prevalent than the Court had previously appreciated based on the prior hearings.”
The Loophole in Grupo
Judge Goldblatt’s opinion is required reading for anyone pursuing an injunction to freeze defendants’ assets. In detail, he describes what Grupo prohibits and what it allows in terms of asset freezes.
In brief, Judge Goldblatt described Grupo as holding “that a federal court may not freeze a defendant’s assets when the plaintiff asserts what is only a legal claim against the defendant.” On the other hand, the Supreme Court said “that such an injunction is available in a case in which the plaintiff seeks equitable relief.” [Emphasis in original.]
In addition, Judge Goldblatt cited authority for the notion “that courts have greater authority to freeze assets for the benefit of a creditor that has obtained a judgment.” Suffice it to say, he explained historically why the distinction between legal and equitable relief determines whether a plaintiff can be entitled to an asset freeze.
When the plaintiff seeks equitable relief like an accounting, Judge Goldblatt said that the limitation on the court’s authority under Grupo “has no application.” In fact, “a plaintiff seeking equitable relief need not show that the specific asset it seeks to freeze is one in which the plaintiff has an interest.”
Alongside Grupo, Judge Goldblatt parsed Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), where the Supreme Court said that a fraudulent transfer suit may sound in both law and equity, depending on the relief being sought by the plaintiff.
The trustee’s motion to freeze real property “is permitted,” Judge Goldblatt said, “since the claim to require the return of that real estate sounds in equity.” In contrast, the motion to freeze cash “is more controversial.”
Judge Goldblatt decided that a freeze on cash “is nevertheless permitted . . . because in addition to seeking to recover the value of that cash as a fraudulent conveyance, the complaint also includes a claim for an accounting of the disposition of that cash.” He buttressed his conclusion by citing Granfinanciera for holding that an “accounting is an equitable remedy.”
Summing up, Judge Goldblatt held:
[W]here a plaintiff in a fraudulent conveyance action seeks either to recover a specific asset (such as real estate) or requires an accounting, such a claim would be viewed as sounding in equity, and thus fit within the equitable exception described in Grupo Mexicano . . . . And because the plaintiff here seeks an accounting, this Court concludes that it has the authority to impose an asset freeze in this case. [Emphasis in original.]
Having found authority for an asset freeze, Judge Goldblatt turned to the question of whether the trustee had shown the requisites for a preliminary injunction.
P.I. Standards Satisfied
Judge Goldblatt found “a reasonable probability of success on the merits,” because badges of fraud were “amply present.” While purely economic injuries ordinarily do not justify injunctive relief, Judge Goldblatt found irreparable harm because the “defendants may move or conceal assets.”
To justify issuance of an injunction, Judge Goldblatt found that an “appropriately tailored” injunction would not “unduly prejudice” the defendants and that the public interest favored granting an injunction.
Rather than imposing a blanket asset freeze, Judge Goldblatt adopted a “surgical” approach by limiting the freeze to the extent of valid claims against the estate. To prevent the freeze from being “punitive,” he carved out enough “for ordinary course expenditures.” He allowed the trustee to obtain the injunction without a bond under Bankruptcy Rule 7065.
English courts since 1975 have issued so-called Mareva injunctions to prohibit defendants from transferring assets before judgment. See Mareva Compania Naviera S. A. v. International Bulkcarriers S. A., 2 Lloyd’s Rep. 509.
In his January 31 opinion, Bankruptcy Judge Craig T. Goldblatt of Delaware explained how the Supreme Court in 1999 barred the use of Mareva injunctions in the U.S. by holding “that a federal court may not freeze a defendant’s assets when the plaintiff asserts what is only a legal claim against the defendant.” See Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308, 333 (1999).
In the case before Judge Goldblatt, the bankruptcy trustee had mounted a fraudulent transfer action against multiple defendants seeking the recovery of millions of dollars in property. Although a fraudulent transfer action is typically seen as an action at law, Judge Goldblatt decided that he had authority to enter a preliminary injunction freezing some of the defendants’ assets because the trustee was seeking the return of specific property and was also asking for equitable relief in the form of an accounting.