A suit to recover a preference sounds in tort, not in contract, disabling a plaintiff from obtaining a prejudgment attachment under California law, as explained in a February 5 opinion by Bankruptcy Judge Robert Kwan of Los Angeles.
The plaintiff purchased a preference claim from a chapter 7 trustee and brought an adversary proceeding against the defendant in bankruptcy court to recover more than $500,000. Judge Kwan had already ruled that the plaintiff demonstrated the elements of a preference under Section 547(b) and scheduled a trial on the defendant’s affirmative defenses under Section 547(c).
Before trial, the plaintiff filed a motion for a prejudgment attachment under Section 483.010(a) of the California Code of Civil Procedure. The section provides that “an attachment may be issued only in an action on a claim or claims for money, each of which is based upon a contract, express or implied, where the total amount of the claim . . . is . . . not less than five hundred dollars ($500).”
Whether a preference claim could serve as the basis for a prejudgment attachment was a question of first impression in California, Judge Kwan said. To rule on whether the plaintiff was entitled to an attachment, he was called on to decide whether a preference claim sounds in tort or in contract.
Judge Kwan began by citing Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), which he paraphrased as holding that the parties were entitled to a jury trial because “actions to recover preferential or fraudulent transfers were actions for monetary relief bought at law as suits at common law.”
More to the point, Judge Kwan found that an intermediate California appellate court had held that a preference claim sounds in tort, not in contract, because receiving a preference is a wrongful act that interferes with the rights of other creditors. He found no case to the contrary.
“Because the California attachment statutes are strictly construed, including the requirement that under California Code of Civil Procedure § 483.010 a claim must be contract-based for an attachment,” Judge Kwan decided that he must deny the attachment motion “because attachment under applicable California law does not apply to a noncontract tort-based claim, such as Plaintiff’s preference claim.”
Observation
A preliminary injunction may be an avenue for freezing a preference defendant’s property before judgment when prejudgment attachment is not available. Disallowing so-called Mareva injunctions in federal practice, the Supreme Court created the opening for preliminary injunctions.
Since 1975, English courts have issued 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 Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308, 333 (1999), the Supreme Court barred Mareva injunctions in federal practice 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.”
In a typical preference suit, the complaint could be framed as something in addition to a purely legal claim. For instance, the complaint could seek the return of specific property or an accounting.
When a preference complaint was not purely legal, Bankruptcy Judge Craig T. Goldblatt of Delaware has held that the Grupo Mexicano prohibition does not apply. With appropriate protections for the defendant, he froze some of the preference defendant’s property, having found that the plaintiff satisfied the requirements for issuance of a preliminary injunction. Miller v. Mott (In re Team Systems Int. LLC), 23-50004, 2023 BL 30256 (Bankr. D. Del. Jan. 31, 2023). To read ABI’s report, click here.
A suit to recover a preference sounds in tort, not in contract, disabling a plaintiff from obtaining a prejudgment attachment under California law, as explained in a February 5 opinion by Bankruptcy Judge Robert Kwan of Los Angeles.
The plaintiff purchased a preference claim from a chapter 7 trustee and brought an adversary proceeding against the defendant in bankruptcy court to recover more than $500,000. Judge Kwan had already ruled that the plaintiff demonstrated the elements of a preference under Section 547(b) and scheduled a trial on the defendant’s affirmative defenses under Section 547(c).
Before trial, the plaintiff filed a motion for a prejudgment attachment under Section 483.010(a) of the California Code of Civil Procedure. The section provides that “an attachment may be issued only in an action on a claim or claims for money, each of which is based upon a contract, express or implied, where the total amount of the claim . . . is . . . not less than five hundred dollars ($500).”
Whether a preference claim could serve as the basis for a prejudgment attachment was a question of first impression in California, Judge Kwan said. To rule on whether the plaintiff was entitled to an attachment, he was called on to decide whether a preference claim sounds in tort or in contract.