Delaware Bankruptcy Court Confirms Bankruptcy Court Has Authority to Issue Preliminary Injunctions To Freeze Assets

In 1998, The U.S. Supreme Court in Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund, 527 U.S. 308, held that the District Court had no authority to issue a preliminary injunction preventing petitioners from disposing of assets pending adjudication of the respondents’ contract claim for money damages. Subsequently, courts have interpreted Grupo to carve out exceptions for equitable actions and legal claims with specific statutory authority for injunctive relief.

The Delaware Bankruptcy Court in Urban Commons Queensway, LLC v. EHT Asset Management, LLC, 21-10036, after examining Grupo and subsequent precedent found that the Grupo decision does not apply to bankruptcy courts in general and specifically to fraudulent transfer actions in bankruptcy. Therefore, a preliminary injunction will be granted where a) it is likely the plaintiff will win the litigation, b) without preliminary injunctive relief, the plaintiff will more likely be unable to recover damages and c) the overall balancing of the two preceding factors weighs in favor of the two other factors, possibility of harm to other interested parties and the public interest.

Here, the motion for preliminary injunctive relief sought to freeze funds to ensure that the $2.4 million Paycheck Protection Plan (“PPP”) loans that the defendants took from the plaintiff will be returned if the plaintiff succeeds in its fraudulent transfer action. The court found that defendants have a history of wrongful acts and have proven capable of transferring assets. Further, the defendants had misrepresented to the SBA by applying for a PPP loan to be used for wrongful purposes by signing a PPP loan application without the plaintiff’s knowledge or consent. The funds were then transferred to a wholly owned entity of defendants and then the funds disappeared.  The court decided that plaintiffs had met their burden to be accorded preliminary injunctive relief and the assets of defendants were to be frozen.

Thus, victims should consider the value a bankruptcy may present when faced with the potential fraudulent transfer of assets by a debtor and those involved with the debtor. Preliminary injunctive relief freezing assets is relief available to victims.