The 2021 pandemic environment is showing trends toward evasive debtors trying to protect their wealth by moving assets fluidly around the world as creditors evaluate the value of assets and the ability to recover claims and debts. This environment requires knowledge of debt enforcement strategies in trying to keep up with assets in transit by operators working remotely and the proliferation of electronic commerce.
Choosing the right recovery vehicle is critical to success. A creditor needs to evaluate in what jurisdiction should recovery be considered. That is predicated on the location of the parties, the willingness of courts to compel the party to freeze assets and the location of the assets. U.S. federal courts under the federal civil procedure rules have enabled a broad based discovery reach to conduct global depositions, and subpoena non-party testimony and documents. However, the ability to secure assets to enable creditors to ultimately recover their loss is not as broad-based. Obtaining a prejudgment preservation or freeze order in the U.S. is a nuanced practice that requires the proper pleading and understanding of the interplay of federal procedures and state law.
Since 1999, the United States Supreme Court, in Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund, 527 U.S. 308 (1999), teaches that “[a] District Court ha[s] no authority to issue a preliminary injunction preventing [a defendant] from disposing of [her] assets pending adjudication of [the plaintiff’s] contract claim for money damages.” 527 U.S. at 333; see also Gucci Am., Inc. v. Weixing Li, 768 F.3d 122, 130–31 (2d Cir. 2014); Dong v. Miller, 2018 WL 1445573, at *7 (E.D.N.Y. Mar. 23, 2018) (holding that Grupo Mexicano “makes clear that courts may not enter preliminary injunctions solely to preserve assets to satisfy a party’s essentially legal claims for money damages”).
Grupo Mexicano does not, however, preclude courts from entering asset-freezing preliminary injunctions. There are certain exceptions to this general rule, such as “(1) where the movant has an established legal or equitable right to the property; (2) where the injunction is necessary to preserve the Court’s ability to provide equitable relief as to an equitable action; and (3) where Congress has specifically provided authority to do so.” Residential Fin. Corp. v. Jacobs, No. 2:13–cv–1167, 2014 WL 682486, at *3 (S.D. Ohio Feb. 21, 2014).
As to the three exceptions, Grupo Mexicano does not implicate a district court’s authority to issue attachment remedies under state court laws pursuant to Federal Rule of Civil Procedure 64. For instance, a plaintiff in Illinois seeking attachment under 735 ILCS 5/4-101 can obtain a prejudgment attachment, inter alia: (i) where there is removal of property from the state that injures the creditor and (ii) within 2 years of the attachment petition, there is fraudulent concealment or disposal of property to hinder, delay or defraud a creditor. Likewise, Grupo Mexicano does not foreclose courts from issuing prejudgment injunctions when another federal statue governs. For example, injunctions under Section 105 (a) the Bankruptcy Code affords a bankruptcy court to assert equitable powers. See In re Dow Corning Corp., 280 F.3d 648, 657-58 (6th Cir. 2002). And, when a plaintiff seeks equitable relief, even when coupled with monetary claims, based on rescission or unjust enrichment, Grupo Mexicano does not precluded courts from entering asset-freezing preliminary injunctions. New Falls Corp v. Soni Holdings, LLC, No. CV19449ADSAKT, 2019 WL 4015170 at *10 (E.D.N.Y. July 5, 2019).
A freeze order is an extraordinary remedy. Courts hold creditors to a high burden as a result. Creditors who can demonstrate one of the exceptions under Grupo Mexicano can invoke the protections under U.S. law and the out reach those laws provide.