ASSET FREEZE ORDER
LITIGATION IN FEDERAL COURT
Leonard L. Gumport*
Gumport | Reitman
550 South Hope St., Ste. 825
Los Angeles, California 90071
[*The assistance of other panelists
in preparing this outline is
acknowledged
on page 1 of the attached outline.]
ABA Criminal Justice, White Collar
Crime Committee; West Coast Region
January 17, 2001 Seminar
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TABLE OF CONTENTS
Page
I.
INTRODUCTION ............................................................................................ 1
II.
POWER OF FEDERAL COURTS TO GRANT PROVISIONAL INJUNCTIONS
THAT FREEZE ASSETS............................................................................... 2
A.
Inherent Power of Federal Courts to Grant Asset Freeze Orders ......... 2
B.
Statutory Power of Federal Courts to Grant Asset Freeze Orders ........ 4
1.
Federal Debt Collection Procedures Act .................................... 4
2.
RICO ........................................................................................ 5
3.
18 U.S.C. § 1345 ..................................................................... 5
4.
18 U.S.C. § 983(j) and 21 U.S.C. § 853(e) ............................ 7
5.
Fed.R.Civ.P. 64 and State Law Provisional Remedies, Including
The Uniform Fraudulent Transfer Act......................................... 7
C.
Grupo’s Limitations on Power of Federal Courts to Freeze Assets to
Secure Payment of a Money Judgment ............................................... 8
1.
Pre-Grupo Case Law ................................................................ 8
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D.
2.
The Grupo Case ....................................................................... 9
3.
Post-Grupo Developments........................................................ 12
Standards Applied under Fed.R.Civ.P. 65 in Determining Whether to
Issue an Asset Freeze Order ............................................................. 14
1.
General Rules .......................................................................... 14
2.
Special Rule in Government Enforcement Proceedings ............. 15
3.
Examples of Cases Weighing Whether to Freeze Assets.......... 17
a.
FTC v. Affordable Media ................................................ 17
TABLE OF CONTENTS (cont’d)
Page
4.
b.
FTC v. H.N. Singer, Inc. ................................................ 17
c.
FTC v. Evans Products .................................................. 18
d.
SEC v. Manor Nursing ................................................... 19
Examples of Cases Addressing Living Expenses and Attorney
Fee Issues in Asset Freeze Litigation ....................................... 19
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a.
Living Expenses ............................................................. 19
b.
Attorney Fees ............................................................... 20
i.
In General........................................................... 20
ii.
Retainers ............................................................. 21
iii.
Forfeitures and Restraining Orders That Preclude
Attorney Fees ..................................................... 22
E.
F.
Notice Requirements for Obtaining Order under Fed.R.Civ.P. 65
1.
Notice Requirement for Preliminary Injunction .......................... 24
2.
Notice Requirement for TRO ................................................... 24
Evidentiary Issues in Litigation under Fed.R.Civ.P. 65 ...................... 25
1.
Use of Inadmissible Evidence ................................................. 25
2.
Use of Evidence at Trial and Consolidation with Trial on
Merits ..................................................................................... 26
3.
G.
Live Testimony at Preliminary Injunction Hearing ..................... 26
Persons Bound by and Territorial Reach of Asset Freeze Order
under Fed.R.Civ.P. 65 ...................................................................... 26
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1.
Persons Bound by Order ......................................................... 26
TABLE OF CONTENTS (cont’d)
Page
2.
III.
Territorial Reach of Order ....................................................... 27
H.
Bond Requirement of Fed.R.Civ.P. 65(c) ......................................... 28
I.
Appeal of Preliminary Injunctions under Fed.R.Civ.P. 65 ................... 28
J.
Contempt Sanctions for Violating Preliminary Injunction ..................... 29
1.
Civil versus Criminal Contempt................................................ 29
2.
The “Inability to Comply” Defense in Asset Freeze Litigation ... 30
PARALLEL PROCEEDING ISSUES IN ASSET FREEZE LITIGATION ......... 31
A.
Stay of Civil Proceeding Pending Resolution of Criminal and Fifth
Amendment Issues ............................................................................. 31
B.
Criminal Liability That May Result from Misconduct during Asset
Freeze Litigation ............................................................................... 35
1.
Criminal Contempt................................................................... 35
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2.
Fraudulently Transferring Property ........................................... 35
3.
Transporting Stolen Property ................................................... 35
4.
Perjury .................................................................................... 35
5.
Fraudulently Concealing Property from an Officer of the Court 35
6.
Fraudulently Withholding Property from an Officer of the Court
after Filing of Bankruptcy Case ............................................... 35
7.
Fraudulently Transferring Property in Contemplation of or
During Bankruptcy Case.......................................................... 36
C.
Impact on Sentencing of Conduct during Asset Freeze Litigation ....... 36
1.
Acceptance of Responsibility ................................................... 36
TABLE OF CONTENTS (cont’d)
Page
2.
D.
IV.
Substantial Assistance to Authorities ....................................... 36
Parallel Civil Proceedings .................................................................. 37
BANKRUPTCY ISSUES IN ASSET FREEZE ORDER LITIGATION ............ 37
A.
Power of District Court to Prevent Bankruptcy Filing ......................... 37
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B.
Power of Federal Court to Withdraw Reference ................................. 39
C.
The Automatic Stay – 11 U.S.C. § 362............................................. 39
1.
D.
V.
Scope of Automatic Stay – § 362(a)-(b) ............................... 39
a.
In General..................................................................... 39
b.
Contempt Proceedings ................................................... 41
2.
Modification of Automatic Stay – § 362(d)
......................... 42
3.
The Price of the Automatic Stay – Bankruptcy Restrictions .... 43
Denial of Discharge – 11 U.S.C. § 727............................................. 44
1.
11 U.S.C. § 727(a)(2) ........................................................... 44
2.
11 U.S.C. § 727(a)(3) ........................................................... 45
3.
11 U.S.C. § 727(a)(5) ........................................................... 45
APPOINTMENT OF A RECEIVER .............................................................. 45
A.
Inherent Power of Federal Court to Appoint Receiver as Ancillary
Equitable Remedy ............................................................................. 45
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B.
Statutory Power of Federal Court to Appoint Receiver ....................... 47
1.
Federal Debt Collection Procedures Act .................................. 47
TABLE OF CONTENTS (cont’d)
Page
2.
18 U.S.C. § 1345 ................................................................... 47
3.
18 U.S.C. § 983(j) ................................................................. 47
4.
Fed.R.Civ.P. 64 and the Uniform Fraudulent Transfer Act ....... 48
C.
Broad Discretion of Federal Court to Supervise Receivership ............ 48
D.
Receivership and Bankruptcy ............................................................ 48
E.
Power of Receiver to File Litigation ................................................... 50
F.
Control by Receiver of Attorney-Client Privilege ................................. 51
G.
Protection of the Receiver from Litigation ........................................... 51
H.
Duty of Receiver to Comply with State Law ...................................... 53
I.
Duty of Receiver to Account ............................................................. 53
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VI.
J.
Claimants and Distribution of Receivership Assets ............................. 53
K.
Assessment of Receivership Costs .................................................... 54
L.
Appeal of Receivership Orders .......................................................... 54
ASSET FORFEITURE ISSUES ................................................................... 55
A.
Civil Asset Forfeiture Reform Act ...................................................... 55
B.
CAFRA Imposes Various Procedures and Deadlines for Government
and Claimants ................................................................................... 55
C.
CAFRA Switches the Burden of Proof ............................................... 56
D.
CAFRA Codifies the “Innocent Owner” Affirmative Defense ............... 56
E.
CAFRA Codifies Supreme Court Constitutional Law .......................... 56
TABLE OF CONTENTS (cont’d)
Page
F.
CAFRA Changes the Statute of Limitations ....................................... 56
G.
CAFRA Extends Reach of Forfeiture ................................................. 57
H.
CAFRA Expands Forfeiture of Fungible Property ............................... 57
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I.
CAFRA Codifies Procedures for Forfeiting Real Property ................... 57
J.
CAFRA Allows Recovery of Attorney Fees ........................................ 57
K.
CAFRA Punishes as a Crime any Destruction, Transfer, or Disposal
of Property ........................................................................................ 57
L.
CAFRA Provides for Sanctions .......................................................... 58
M.
CAFRA Reinstates Fugitive Disentitlement Doctrine ........................... 58
N.
CAFRA Maintains Pre-Trial Restraining Orders ................................. 58
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ASSET FREEZE ORDER LITIGATION IN FEDERAL COURT
by Leonard L. Gumport1
I.
INTRODUCTION
This outline discusses asset freeze order litigation in civil and criminal
proceedings in federal court. For purposes of this outline, “asset freeze order”
means a prejudgment order restraining a party from transferring or disposing of a
substantial portion of its assets.
1
This outline incorporates materials, suggestions, and/or comments provided
by: (a) Mark E. Beck and Anthony A. De Corso of Beck, De Corso, Daly &
Kreindler, (b) Valerie Caproni, Regional Director of the Securities and Exchange
Commission, (c) the Hon. Audrey B. Collins, U.S. District Judge, (d) Frederick D.
Friedman of O’Neill, Lysaght & Sun LLP, (e) Richard M. Pachulski of Pachulski,
Stang, Ziehl, Young & Jones, and (f) Consuelo S. Woodhead, Chief Assistant
United States Attorney for the Central District of California. Messrs. Beck and De
Corso and Ms. Woodhead were especially helpful in preparing materials relating to
the Civil Asset Forfeiture Reform Act, and Part VI of this outline is primarily the
result of their invaluable assistance. I thank all the panelists for their help. All
views expressed and any errors contained in this outline are exclusively mine and
should not be construed as reflecting the views of the other panelists or any of our
respective clients, agencies, or employers.
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1.
E.g., in Republic of Philippines v. Marcos, 862 F.2d
1355, 1358 (9th Cir. 1988), cert. denied, 490 U.S. 1035, 109 S.Ct.
1933, 104 L.Ed.2d 404 (1989) (“Marcos”), the Ninth Circuit affirmed a
preliminary injunction that enjoined the defendants from “disposing of
any of their assets save for the payment of attorney fees and normal
living expenses” pending a trial on the merits of plaintiff’s constructive
trust claim.
2.
E.g., in FTC v. H.N. Singer, Inc., 668 F.2d 1107, 1111
(9th Cir. 1982), the Ninth Circuit affirmed a preliminary injunction that
restrained the defendants from “directly or indirectly, transferring,
liquidating, encumbering, pledging, assigning, or otherwise disposing of
any property of Singer, or of any of their personal assets or property
(except for ordinary living expenses) unless allowed by further order of
this Court.”
3.
E.g., in FTC v. J.K. Publications, Inc., 99 F.Supp.2d
1176, 1179 (C.D. Cal. 2000) (“J.K. Publications”), the district court
granted the FTC a temporary restraining order that “froze the
defendants’ assets and required, inter alia, that the defendants be
temporarily enjoined from conducting certain business practices and
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[that] the defendants disclose all assets held by them, for their benefit
or under their direct or indirect control;” in that decision, which contains
an extensive factual and legal analysis, the district court also appointed
a receiver.
4.
See Walczak v. EPL Prolong, Inc., 198 F.3d 725, 730
(9th Cir. 1999) (preliminary injunction preventing consummation of
stock swap was not a “freeze” order because “this injunction does not
completely prohibit Appellants from taking any action with regard to
their assets”).
This outline discusses various types of asset freeze orders, including
preliminary injunctions and receivership orders. This outline also discusses the Fifth
Amendment, asset forfeiture, sentencing, and bankruptcy issues that may arise when
an asset freeze order is granted against a defendant.
In addition, this outline discusses the Supreme Court’s recent decision in
Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308,
119 S.Ct. 1961, 144 L.Ed.2d 319 (1999) (“Grupo”), in which the Supreme Court
declined to follow Mareva Compania Naviera S.A. v. International Bulkcarriers S.A.,
2 Lloyd’s Rep. 509 (1975) (“Mareva”).
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II.
POWER OF FEDERAL COURTS TO GRANT PROVISIONAL INJUNCTIONS
THAT FREEZE ASSETS
A.
Inherent Power of Federal Courts to Grant Asset Freeze Orders
An asset freeze order may take the form of a preliminary injunction or
temporary restraining order in a federal civil action. See, e.g., Marcos, 862 F.2d at
1355-58; FTC v. H.N. Singer, Inc., supra, 668 F.2d at 1107-11; J.K. Publications,
Inc., 99 F.Supp.2d at 1176-79.
///
Fed.R.Civ.P. 65 generally governs the procedure for obtaining provisional
injunctive relief in any civil action in federal court. See Fed.R.Civ.P. 1 (Federal
Rules of Civil Procedure apply to all civil actions “with the exceptions stated in Rule
81"). See, e.g., 18 U.S.C. § 1345(b) (action by Attorney General to enjoin
disposition of property traceable to banking law violations and other offenses “is
governed by the Federal Rules of Civil Procedure . . . .”); United States v. Crozier,
777 F.2d 1376, 1384 (9th Cir. 1985) (Rule 65 applied to procedure for obtaining
post-indictment, pre-trial restraining order under 21 U.S.C. § 853); United States v.
Roth, 912 F.2d 1131, 1132-33 (9th Cir. 1990) (explaining Crozier’s application of
Rule 65 as follows: “In the absence of valid procedural guidelines in the forfeiture
provisions of [the Comprehensive Forfeiture Act of 1984, 21 U.S.C. § 853], we
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held that Rule 65 of the Federal Rules of Civil Procedure applies to require a
district court to hold a prompt hearing after a TRO is granted to determine whether
a preliminary injunction should issue”); United States v. Real Property Located at
Incline Village, 958 F.Supp. 482, 486 (D. Nev. 1997) (“Generally, procedure in
civil in rem forfeiture actions is governed by the Federal Rules of Civil to the extent
consistent with the Supplemental Rule for Certain Admiralty and Maritime Claims,
and otherwise by the Supplemental Rules themselves”).
However, Rule 65 “is not a source of power for a district court to enter an
injunction. Rather, it regulates the issuance of injunctions otherwise authorized.”
United States v. Cohen, 152 F.3d 321, 325 (4th Cir. 1998) (emphasis added); see
Reebok International, Ltd. v. Marnatech Enterprises, Inc., 970 F.2d 552, 558 (9th
Cir. 1992) (“Reebok International”) (“Rule 65 of the Federal Rules of Civil
Procedure governs the procedure for the issuance of a preliminary injunction: the
authority for the injunction issued in Reebok II must arise (if at all) elsewhere”).
A federal court has inherent power – and does not need statutory authority –
to grant an asset freeze order for the purpose of preserving the federal court’s
ability to grant effective final equitable relief. Reebok International, 970 F.2d at
559 (“We need not determine, however, whether [Fed.R.Civ.P.] Rule 64 or the
Lanham Act itself authorizes the prejudgment asset freeze entered in Reebok II
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because, regardless of the scope of those provisions, the injunction is authorized by
the district court’s inherent equitable power to issue provisional remedies ancillary to
its authority to provide final equitable relief”). See De Beers Consolidated Mines,
Ltd. v. United States, 325 U.S. 212, 220, 65 S.Ct. 1130, 89 L.Ed. 1566 (1945)
(stating in dicta that “A preliminary injunction is always appropriate to grant
intermediate relief of the same character as that which may be granted finally”).
Reebok International and Marcos illustrate this principle:
1.
In Reebok International, the Ninth Circuit concluded that
the district court had authority to grant an asset freeze order to protect
the plaintiff’s right to the final equitable relief of an accounting. Id.,
970 F.2d at 559 (“Because the Lanham Act authorizes the district
court to grant Reebok an accounting of Betech’s profits as a form of
final equitable relief, the district court had the inherent power to freeze
Betech’s assets in order to ensure the availability of that final relief”).
2.
In Marcos, 862 F.2d 1355, the gravamen of the plaintiff’s
complaint was to recover money damages for conversion of public
property. However, the complaint included a cause of action to impose
a constructive trust. The Ninth Circuit held that this cause of action
was equitable and that the district court did not abuse its discretion in
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concluding that an asset freeze order was necessary to preserve the
possibility of that equitable relief. Id., at 1364 (federal court has power
the power to issue a preliminary injunction “to prevent a defendant from
dissipating assets in order to preserve the possibility of equitable
remedies”).
B.
Statutory Power of Federal Courts to Grant Asset Freeze Orders
The inherent equitable power of federal courts is not their exclusive source of
authority to issue asset freeze orders. Certain statutes expressly authorize federal
courts to grant asset freeze orders. The following are several examples.
1.
Federal Debt Collection Procedures Act
The Federal Debt Collection Procedures Act, 28 U.S.C. § 3001 et seq.,
expressly authorizes the United States to obtain provisional remedies in debt
collection actions. 28 U.S.C. § 3101. Those remedies include attachment, a
receiver, garnishment, and sequestration of the debtor’s assets. Id., §§ 3102-05.
Section 3101(b) of title 28 provides that the grounds for obtaining such provisional
relief include the following:
“(b) Grounds. – Subject to section 3101, 3103, 3104, or
3105, a prejudgment remedy may be granted by any court
if the United States shows reasonable cause to believe
that –
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(1) the debtor –
(A) is about to leave the jurisdiction of
the United States with the effect of hindering,
delaying or defrauding the United States in
its effort to recover a debt;
(B) has or is about to assign, dispose,
remove, conceal, ill treat, waste, or destroy
property with the effect of hindering, delaying,
or defrauding the United States; . . . .”
2.
RICO
The Racketeer Influenced and Corrupt Organizations Act (“RICO), 18 U.S.C.
§ 1961 et seq., expressly authorizes the Attorney General to seek pre-trial
restraining orders in civil actions. 28 U.S.C. § 1964(a) provides that district courts
“shall have jurisdiction to prevent and restrain violations of section 1962 of this
chapter by issuing appropriate orders . . . .” Section 1964(b) provides:
“The Attorney General may institute proceedings
under this section. Pending final determination thereof,
the court may at any time enter such restraining orders or
prohibitions, or take such other actions, including the
acceptance of satisfactory performance bonds, as it shall
deem proper.”
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In addition, RICO authorizes the United States to obtain pre-trial restraining
orders in criminal cases to preserve property for forfeiture. 18 U.S.C. § 1963(d).
3.
18 U.S.C. § 1345
18 U.S.C. § 1345 is sometimes referred to as the “fraud injunction statute”
and came into existence as part of the Comprehensive Crime Control Act of 1984,
Pub.L. No. 98-473. See United States v. Brown, 988 F.2d 658, 662 (6th Cir.
1993) (“The legislative history of the original version of 18 U.S.C. § 1345 indicates
that Congress perceived great need to expand the Attorney General’s ability to seek
injunctive relief in fraudulent scheme cases”).
18 U.S.C. § 1345(a)(1) expressly authorizes the Attorney General to file a
civil action to enjoin violations of various criminal statutes, including but not limited
to false claims (18 U.S.C. § 287), conspiracy to defraud the United States or its
agencies (18 U.S.C. § 371), mail fraud (18 U.S.C. § 1341), bank fraud (18 U.S.C.
§ 1344), and health care fraud (18 U.S.C. § 1347). In addition, § 1345 authorizes
the Attorney General to seek provisional relief to prevent the disposition of property
traceable to certain offenses. Section 1345(a)(2) of title 18 provides:
“(2) If a person is alienating or disposing of
property, or intends to dispose of property, obtained as a
result of a banking law violation (as defined in [18
U.S.C.] section 3322(d) of this title or a Federal health
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care offense) or property which is traceable to such
violation, the Attorney General may commence a civil
action in any Federal court –
(A) to enjoin such alienation or
disposition of property; or
(B) for a restraining order to –
(i) prohibit any person from
withdrawing, transferring, removing,
dissipating, or disposing of any such property
or property of equivalent value; and
(ii) appoint a temporary receiver to
administer such restraining order.”
Although § 1345(a)(2) only refers to provisional relief in connection with
banking law violations, § 1345(b) authorizes pre-trial restraining orders and does
not limit itself to banking law violations. In United States v. Brown, supra, 988
F.2d at 662, the Sixth Circuit concluded that § 1345's asset-freeze remedy is not
limited to banking-law violations. Section 1345(b) provides in part that the district
court “shall proceed as soon as practicable to the hearing,” and that, at any time
before final determination, “enter such restraining order or prohibition” as is
warranted “to prevent a continuing and substantial injury to the United States or to
any person or class of persons for whose protection the action is brought.”
4.
18 U.S.C. § 983(j) and 21 U.S.C. § 853(e)
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18 U.S.C. § 983(j), enacted as part of the Civil Asset Forfeiture Reform Act,
expressly authorizes restraining orders in forfeiture proceedings. See § VI, below.
Other forfeiture statutes also authorize pre-trial restraining orders. See, e.g., 21
U.S.C. § 853(e).
5.
Fed.R.Civ.P. 64 and State Law Provisional Remedies,
Including The Uniform Fraudulent Transfer Act
Federal courts have authority under Fed.R.Civ.P. 64 to grant provisional
remedies authorized by state law “for seizure of person or property for the purpose
of securing satisfaction of the judgment ultimately to be entered” in the action.
See, e.g., United States v. Oncology Associates, P.C., 198 F.3d 489, 501 (4th Cir.
1999) (in granting an asset freeze order – a writ of attachment and a conditional
preliminary injunction – pursuant to Maryland law and Fed.R.Civ.P. 64, circuit court
stated: “Accordingly, we conclude that the scope of Federal Rule of Civil Procedure
64 incorporates state procedures authorizing any meaningful interference with
property to secure satisfaction of a judgment, including any state-authorized
injunctive relief for freezing assets to aid in satisfying the ultimate judgment in the
case”).
One state law that may be utilized pursuant to Fed.R.Civ.P. 64 in civil asset
freeze litigation is Cal. Civ. Code § 3439.07, which is a part of California’s Uniform
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Fraudulent Transfer Act (the “UFTA”), Cal. Civ. Code § 3439 et seq. The UFTA’s
definition of fraudulent transfer includes a transfer made by a debtor with “actual
intent to hinder, delay, or defraud any creditor of the debtor.” Cal. Civ. Code §
3439.04(a). Section 3439.07 of the Civil Code, provides:
“(a) In an action for relief against a transfer or
obligation under this chapter, a creditor, subject to the
limitations in Section 3439.08, may obtain:
(1) Avoidance of the transfer or obligation to the
extent necessary to satisfy the creditor’s claim.
(2) An attachment or other provisional remedy
against the asset transferred or its proceeds in
accordance with the procedures described in Title 6.5
(commencing with Section 481.010) of Part 2 of the
Code of Civil Procedure.
(3) Subject to applicable principles of equity and in
accordance with applicable rules of civil procedure, the
following:
(A) An injunction against further
disposition by the debtor or a transferee, or
both, of the asset transferred or its proceeds.
(B) Appointment of a receiver to take
charge of the asset transferred or its
proceeds.
(C) Any other relief the circumstances
may require.”
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C.
Grupo’s Limitations on Power of Federal Courts to Freeze Assets
to Secure Payment of a Money Judgment
In Grupo, the Supreme Court addressed whether a federal court has inherent
equitable power to provisionally freeze a defendant’s assets solely for the purpose
of protecting the plaintiff’s ability to obtain a collectible money judgment. See Grupo
Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308, 119 S.Ct.
1961, 144 L.Ed.2d 319 (1999).
1.
Pre-Grupo Case Law
In 1945, prior to the Supreme Court’s decision in Grupo, the Supreme Court
ruled that a preliminary injunction could not be granted solely for the purpose of
sequestering assets to ensure payment of contempt penalties that might be imposed
if and when the court subsequently granted a final injunction and adjudged the
defendant in contempt. De Beers Consolidated Mines, Ltd. v. United States, supra
325 U.S. 212.
Disagreeing about De Beers’s meaning, the circuit courts by 1999 were
divided on the issue of whether a federal court has the power to enter a preliminary
injunction freezing the assets of a defendant before trial where the plaintiff ultimately
seeks only money damages.
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a.
The Ninth Circuit followed the majority rule, which
authorized such provisional relief. See In re Estate of Ferdinand
Marcos Human Rights Litigation, 25 F.3d 1467, 1480 (9th Cir. 1994)
(“We join the majority of circuits in concluding that a district court has
authority to issue a preliminary injunction where the plaintiffs can
establish that money damages will be an inadequate remedy due to
impending insolvency of the defendant or that the defendant has
engaged in a pattern of secreting or dissipating assets to avoid
judgment”), cert. denied, 513 U.S. 1126, 115 S.Ct. 934, 130 L.Ed.2d
879 (1995).
b.
A minority of the circuits, including the Eleventh Circuit,
ruled that federal courts do not have authority to grant such relief.
Rosen v. Cascade International, Inc., 21 F.3d 1520, 1530 (11th Cir.
1994) (“We repeat: preliminary injunctive relief freezing a defendant’s
assets in order to establish a fund with which to satisfy a potential
judgment for money damages is simply not an appropriate exercise of
a federal district court’s authority”).
2.
The Grupo Case
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In Grupo, the plaintiffs were eleven investment funds that had purchased $75
million of $250 million in unsecured notes issued by a Mexican toll road operator
(“GMD”) and guaranteed by GMD’s subsidiaries. In August 1997, several years
after issuing the notes, GMD became insolvent, or nearly insolvent, and defaulted
on interest payments due on the notes. In addition to the debts owed to the
investors on the notes, GMD and its subsidiaries owed $450 million to the Mexican
government, Mexican banks, and other Mexican creditors. In October 1997, GMD
announced that it was placing certain of its assets in trust for creditors other than
the investors. GMD also announced that it had transferred its right to receive
approximately $100 million to the Mexican government, apparently to pay back
taxes. In December 1997, the investors filed a civil action in district court against
GMD. The investors sought damages from GMD for breach of its contractual
obligations on the notes. The investors also sought a preliminary injunction
restraining GMD from assigning certain of its assets (receivables called “Toll Road
Notes”), which GMD had already disclosed it planned to assign to other creditors as
part of an effort to restructure GMD’s debts. The investors alleged that GMD was
preferring its Mexican creditors and that its actions, unless enjoined, would frustrate
any
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judgment the investors might obtain. Significantly, the investors did not allege a
claim for fraudulent transfer, nor did the investors seek any form of permanent
equitable relief.
The district court in Grupo granted the investors a temporary restraining order
and preliminary injunction that prevented GMD and its subsidiaries from dissipating,
transferring, conveying, or otherwise encumbering GMD’s’ rights to receive or
otherwise benefit from the Toll Road Notes. The district court found that GMD was
at risk of insolvency and that any judgment would be frustrated if GMD was
permitted to continue to prefer its Mexican creditors; the district court further found
that the investors were almost certain to prevail on the merits.
GMD appealed and the Second Circuit Court of Appeals affirmed. Alliance
Bond Fund, Inc. v. Grupo Mexicano de Desarrollo, S.A., 143 F.3d 688 (2d Cir.
1998). The court of appeals noted that it had previously approved the use of
Fed.R.Civ.P. 65 to freeze assets “when those assets are the subject matter in
dispute.” Id., at 693 (citing Republic of Philippines v. Marcos, 806 F.2d 344 (2d
Cir. 1986)). In affirming the district court, the Second Circuit stated that it “join[ed]
the majority of circuits in concluding that a district court has authority to issue a
preliminary injunction where the plaintiffs can establish that money damages will be
an inadequate remedy due to impending insolvency of the defendant or that
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defendant has engaged in a pattern of secreting or dissipating assets to avoid
judgment.” Alliance Bond Fund, Inc., supra, 143 F.3d at 696 (quoting In re Estate
of Marcos, supra, 25 F.3d at 1480.
The Supreme Court granted GMD’s petition for certiorari, presumably to
resolve the existing split among the circuit courts as described above. In the
Supreme Court, none of the briefs submitted by the parties, nor by the United
States as amicus, discussed the application of the provisional remedy provisions of
the UFTA (i.e., the Uniform Fraudulent Transfer Act). This was understandable in
light of the plaintiff-investors’ failure to allege a fraudulent transfer claim against
GMD, notwithstanding its near insolvency and the likelihood that its transfers to its
Mexican creditors would hinder the investors from enforcing their claims.
Nevertheless, during oral argument, one or more justices asked questions about
what the outcome would be if the case involved a claim to restrain or set aside a
fraudulent transfer by GMD. At the close of oral argument, one of the justices
asked whether a ruling in GMD’s favor would “necessarily be disavowing the Marcos
case, or are there distinctions between the two so that Marcos could stand and you
could still prevail?” GMD replied that a ruling in its favor would require overruling
Marcos. (The Supreme Court transcript of oral argument can be found at 1999 WL
21677.)
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In a narrowly written 5-4 decision issued on the last day of the term, the
Supreme Court in Grupo reversed the Second Circuit. The Supreme Court
concluded that federal courts do not have inherent power to grant a preliminary
injunction freezing a defendant’s assets for the purpose of protecting the plaintiff’s
ability to collect a money judgment.
a.
In determining the equity power of federal courts, the
Supreme Court focused on whether the equitable relief granted by the
district court was available in England’s High Court of Chancery in
1789, when Congress enacted the Judiciary Act of 1789. The
Supreme Court concluded that, in 1789, “It was well established,
however, that, as a general rule, a creditor’s bill could be brought by
only by a creditor who had already obtained a judgment establishing
the debt.” Grupo, 527 U.S. at 319.
b.
The Supreme Court declined to follow the decision of
England’s Court of Appeal in Mareva Compania Naviera S.A. v.
International Bulkcarriers S.A., 2 Lloyd’s Rep. 509 (1975), in which
that court held that “[i]f it appears that the debt is due and owing –
and there is a danger that the debtor may dispose of his assets so as
to defeat it before judgment – the Court has jurisdiction in a proper
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case to grant an interlocutory judgment so as to prevent him [sic]
disposing of those assets.” Grupo, 527 U.S. at 328 (quoting Mareva,
2 Lloyd’s Rep. at 510). Since Mareva was decided in 1975, it was
not probative of the type of equitable relief available in England’s High
Court of Chancery in 1789.
c.
The Supreme Court stated that it was not deciding any of
the following issues: (i) whether the district court’s preliminary
injunction was authorized by New York law and Fed.R.Civ.P. 64
(Grupo, 527 U.S. at 318 fn. 3); (ii) whether a different outcome was
required by Fed.R.Civ.P. 18(b), which permits a claim for money
damages to be joined with a fraudulent conveyance claim (Grupo, 527
U.S. at 323-24); or (iii) whether the plaintiff could obtain provisional
relief under fraudulent transfer law (id., at 324 fn. 7) (“Because this
case does not involve a claim of fraudulent conveyance, we express no
opinion on the point”). Perhaps for this reason, the majority decision
in Grupo did not state whether it was overruling In re Estate of
Ferdinand Marcos, supra, 25 F.3d 1467, which authorized an asset
freeze order when the defendant was either insolvent or “has engaged
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in a pattern of secreting or dissipating assets to avoid judgment.” Id.,
at 1480.
3.
Post-Grupo Developments
Cases decided since Grupo illustrate its limited scope. Post-Grupo, federal
courts continue to recognize that they have the power to grant provisional equitable
relief when the plaintiff seeks permanent equitable relief, including the recovery of a
specific asset. See United States v. Oncology Associates, P.C., supra, 198 F.3d at
496 (distinguishing Grupo, circuit court stated that “when the plaintiff creditor
asserts a cognizable claim to specific assets of the defendant or seeks a remedy
involving those assets, a court may in the interim invoke equity to preserve the
status quo pending judgment where the legal remedy might prove inadequate and
the preliminary relief furthers the court’s ability to grant the final relief requested”);
see also CSC Holdings, Inc. v. Greenleaf Electronics, Inc., 2000 WL 715601 (N.D.
Ill. 2000), in which the court denied a motion to dissolve an asset freeze order and
stated:
“10. Continuing the asset freeze is appropriate. A
court has no authority to issue a preliminary injunction
preventing a party from disposing its assets pending
adjudication of a claim for money damages. However, a
court still has the equitable power to freeze a party’s
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assets where injunctive relief is sought. The power to
freeze assets includes cases where a combination of
monetary and equitable relief is sought. . . . [¶]
Continuing the asset freeze is appropriate because it
would preserve the availability of a constructive trust as a
remedy; make it easier to impound and destroy existing
illegal decoders; and facilitate further equitable relief
preventing future sales of ‘pirate’ decoders by making it
more difficult for Defendants to simply pick up and move
their enterprise to a new location.” Id., at *8 (footnotes
and citations omitted).
Grupo also does not limit provisional injunctive relief when the final relief
sought by the plaintiff consists of recovery of money by means of an equitable
remedy. See United States v. Oncology Associates, P.C., supra, 198 F.3d at 498
(“A constructive trust remains an equitable remedy even though it might ultimately
reach a fund of money”) (internal quotations and citation omitted). The Fourth
Circuit in Oncology Associates approved a post-Grupo asset freeze order to protect
a claim for a constructive trust because, inter alia, “It is clear that this case does
not present the pure money damage claim addressed in Grupo Mexicano . . . .
That money damages are claimed along with equitable relief does not defeat the
district court’s equitable powers.” Id. See also F.T. International, Ltd. v. Mason,
2000 WL 1514881 at *1-*2 (E.D. Pa. 2000) (post-Grupo asset freeze order
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granted where plaintiff alleged equitable claims for unjust enrichment and
constructive trust).
Grupo also does not limit provisional relief when the plaintiff seeks an asset
freeze order under Fed.R.Civ.P. 64, which makes state law provisional remedies
available in federal court. United States v. Oncology Associates, supra, 198 F.3d at
501 (affirming asset freeze order – a writ of attachment and a conditional
preliminary injunction – pursuant to Maryland law and Fed.R.Civ.P. 64).
Grupo also does not apply to claims for provisional relief to enjoin fraudulent
transfers. See Grupo, 527 U.S. at 322 (“ . . . . we suspect there is absolutely
nothing new about debtors’ trying to avoid paying their debts . . . . The law of
fraudulent conveyances and bankruptcy was developed to prevent such conduct; an
equitable power to restrict a debtor’s use of his unencumbered property before
judgment was not”). Post-Grupo, plaintiffs may utilize the provisional remedies
provisions of the UFTA, made available by Fed.R.Civ.P. 64, to enjoin fraudulent
transfers. Section 3439.07 of California’s UFTA, Civ. Code § 3439 et seq.,
authorizes a court to grant injunctive relief and “[a]ny other relief the circumstances
may require” in connection with a creditor’s claim to set aside a fraudulent transfer.
Finally, a recent Ninth Circuit decision suggests that Grupo may not apply
when the asset freeze order has limited scope. See Walczak v. EPL Prolong, Inc.,
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198 F.3d 725, 730 (9th Cir. 1999) (distinguishing Grupo, circuit court stated that
preliminary injunction preventing consummation of stock swap was not a “freeze”
order because “this injunction does not completely prohibit Appellants from taking
any action with regard to their assets,” so that “the injunction in this case is
distinguishable from the injunction in Grupo Mexicano”).
D.
Standards Applied under Fed.R.Civ.P. 65 in Determining Whether to
Issue an Asset Freeze Order
1.
General Rules
Although Fed.R.Civ.P. 65 is not a source of power for the granting of asset
freeze orders, Rule 65 nevertheless sets standards that must, in general, be
satisfied in order to obtain a temporary restraining order or preliminary injunction
freezing assets.
“In determining whether to grant a preliminary injunction which freezes assets
against a potential recovery, we apply the standard test used in this circuit to
evaluate claims for preliminary injunctive relief.” FTC v. Evans Products Co., 775
F.2d 1084, 1088 (9th Cir. 1985). “Under the first part of this test, the movant
must show 1) irreparable injury, 2) probable success on the merits, 3) a balance of
hardships that tips in the movant’s favor, and 4) that a preliminary injunction is in
the public interest.” Id. “Alternatively, a court may issue an injunction if the moving
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party demonstrates either a combination of probable success on the merits and
irreparable injury or that serious questions are raised and the balance of hardships
tips in his favor.” Id., at 1088-89.
a.
Although Evans Products, supra, 775 F.2d 1084, correctly
states the general rule, a different standard will sometimes apply in
government enforcement proceedings, as discussed below. See, e.g.,
FTC v. Warner Communications, Inc., 742 F.2d 1156, 1159 (9th Cir.
1984) (15 U.S.C. § 53(b) “places a lighter burden on the Commission
than that imposed on private litigants by the traditional equity standard
. . . .”).
b.
The leading Ninth Circuit case on the general standards
for issuance of a preliminary injunction states: “One moving for a
preliminary injunction assumes the burden of demonstrating either a
combination of probable success and the possibility of irreparable injury
or that serious questions are raised and the balance of hardships tips
sharply in his favor.” Benda v. Grand Lodge of Intern. Ass’n of
Machinists & Aerospace Workers, 584 F.2d 308, 314-15 (9th Cir.
1978) (“Benda”), cert. dismissed, 441 U.S. 937, 99 S.Ct. 2065, 60
L.Ed.2d 667 (1979) (quoting Wm. Inglis & Sons Baking & Co. v. ITT
24
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Continental Baking Co., 526 F.2d 86, 88 (9th Cir. 1975)). These
two tests are not “really” entirely separate tests, but “merely extremes
of a single continuum.” Benda, 584 F.2d at 315.
“The critical element in determining the test to be applied is the relative
hardship to the parties. If the balance of harm tips decidedly toward the plaintiff,
then the plaintiff need not show as robust a likelihood of success on the merits as
when the balance tips less decidedly. [Citation omitted.] No chance of success at
all, however, will not suffice. The irreducible minimum has been described by one
court as a fair chance of success on the merits, [citation omitted], while another
has said the questions must be serious enough to require litigation, [citation
omitted]. The difference between the two formulations is insignificant. Therefore,
we accept either as satisfactory.” Benda, 584 F.2d at 315.
“Under any formulation of the test [for a preliminary injunction], plaintiff must
demonstrate that there exists a significant threat of irreparable injury.” Oakland
Tribune, Inc. v. The Chronicle Publishing Co., Inc., 762 F.2d 1374, 1376 (9th Cir.
1985).
2.
Special Rule in Government Enforcement Proceedings
In a government enforcement proceeding, the test for provisional injunctive
relief will sometimes be different than the test applicable to civil litigation filed by a
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non-governmental entity. “[T]he fact that a federal statute is being enforced by the
agency charged with that duty may alter the burden of proof of a particular element
necessary to obtain injunctive relief.” United States v. Odessa Union Warehouse Coop, 833 F.2d 172, 175 (9th Cir. 1987). See, e.g., FTC v. Affordable Media, LLC,
179 F.3d 1228 (9th Cir. 1999) (15 U.S.C. § 53(b) imposes a “more lenient
standard” on the FTC so that it need not show irreparable injury to obtain a
preliminary injunction).
In Odessa Union, the United States brought an enforcement action for
violations of the Food, Drug, and Cosmetic Act. The defendant conceded that it
had violated the Act, but disputed whether injunctive relief should be granted. In
affirming the injunction, the Ninth Circuit stated: “Where an injunction is authorized
by statute, and the statutory conditions are satisfied as in the facts presented here,
the agency to whom the enforcement of the right has been entrusted is not required
to show irreparable injury.” Odessa Union, 833 F.2d at 175 (footnote omitted).
In United States v. Nutri-Cology, Inc., 982 F.2d 394, 397-98 (9th Cir.
1992), the Ninth Circuit distinguished Odessa Union and explained that the
government in a statutory enforcement proceeding is entitled to a “presumption” of
irreparable injury only when the statutory violations are conceded or when the
government shows that it is likely to succeed on the merits of its claims: “In
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statutory enforcement cases where the government has met the ‘probability of
success’ prong of the preliminary injunction test, we presume it has met the
‘possibility of irreparable injury’ prong because the passage of the statute is itself an
implied finding by Congress that violations will harm the public.” Nutri-Cology,
supra, 982 F.2d at 398.
Some statutes expressly waive the requirement that the government agency
show irreparable injury. See, e.g., 12 U.S.C. § 1821(d)(19)(A) (in action by
conservator of federally insured financial institution, “Rule 65 of the Federal Rules of
Civil Procedure shall apply with respect to any proceeding [for provisional injunctive
relief] under paragraph (18) without regard to the requirement of such rule that the
applicant show that the injury, loss, or damage is irreparable and immediate”); see
FDIC v. Garner, 125 F.3d 1272, 1279 (9th Cir. 1997) (“Other courts have held that
this provision does not eliminate the requirement for demonstrating some form of
injury”).
///
The mere cessation of violations is not a defense to a government
enforcement action for injunctive relief. Odessa Union, supra, 833 F.2d at 176
(“Moreover, cessation of violations does not itself foreclose issuance of an
injunction. Courts must beware of attempts to forestall injunctions through remedial
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efforts and promises of reform that seem timed to anticipate legal action, especially
when there is the likelihood of recurrence”) (citations omitted).
3.
Examples of Cases Weighing Whether to Freeze Assets
a.
FTC v. Affordable Media
In FTC v. Affordable Media, LLC, 179 F.3d 1228 (9th Cir. 1999), the Ninth
Circuit decided whether an asset freeze order granted to the FTC was too onerous
to the defendants. In finding that the district court did not abuse its discretion in
granting the order, the Ninth Circuit noted the limited scope of the order:
“The Andersons also argue that the district court
ignored the hardships borne by the Andersons and
Financial because of the issuance of the preliminary
injunction. This argument ignores the fact that the district
court released monies to pay Inter Com’s operating
expenses, to pay Inter Com’s employees, and to pay for
the Andersons’ living expenses and attorneys’ fees.
Therefore, the burden of the preliminary injunction,
although not insubstantial, is not as great as the
Andersons claim.” Id., 179 F.3d at 1236 (footnote
omitted).
b.
FTC v. H.N. Singer, Inc.
In FTC v. H.N. Singer, Inc., supra, 668 F.2d 1107, the Ninth Circuit found
that the asset freeze order was justified because: (1) the defendants were already
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out of business, so that an asset freeze order would not unduly disrupt their
business; and (2) the defendants’ activities “lead to the conclusion that, absent a
freeze, they would either dispose of, or conceal, or send abroad, all of the moneys
that they have obtained from their victims.” Id., at 1113. In arriving at this
conclusion, the Ninth Circuit quoted with approval the following language from SEC
v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2d Cir. 1972):
“. . . [T]he decision to order a temporary freeze on
defendants’ assets as ancillary relief in an SEC
enforcement action requires particularly careful
consideration by the district court. One of the chief
reasons for requiring defendants to refund illegally
obtained proceeds of a public offering is to compensate
defrauded investors. To effect this purpose there may be
circumstances where a district court should temporarily
freeze defendants’ assets to insure that they will be
available to compensate public investors. Freezing assets
under certain circumstances, however, might thwart the
goal of compensating investors if the freeze were to cause
such disruption of defendants’ business affairs that they
would be financially destroyed. Thus, the disadvantages
and possible deleterious effect of a freeze must be
weighed against the considerations indicating the need for
such relief.” Id., 458 F.2d at 1105-06.
c.
FTC v. Evans Products
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In FTC v. Evans Products Co., supra, 775 F.2d 1084, the Ninth Circuit found
that the trial court did not abuse its discretion in denying an asset freeze order
sought by the FTC in an enforcement action under 15 U.S.C. § 53(b):
i.
“The potential for irreparable harm in this case is limited.
We find no evidence that Evans is, or is likely to, secret[e] away
assets before relief can be effectuated. Moreover, Evans’ status as a
debtor in Chapter 11 limits its ability to transfer assets to the
disadvantage of potential judgment creditors.” Id., 775 F.2d at 1089.
ii.
“The balance of hardships favors Evans. If the FTC’s
ancillary relief were granted, Evans would be required to maintain and
pay taxes on several hundred homes during the pendency of the FTC’s
permanent injunction action, and the marketability of Evans’ consumer
financing notes would be impaired at a time when interest rates places
these mortgages at what Evans avers may be their maximum worth.
On the other hand, in the absence of ancillary relief, Evans’ customers
may still obtain relief through state court action tailored to the specific
misrepresentations alleged in their individual cases.” Id.
iii.
“In light of the serious harm which ancillary relief could
cause to Evans’ precarious financial position, the availability of private
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actions, and the lack of evidence that Evans’ assets will be insufficient
to satisfy potential judgments absent ancillary relief, we hold that the
district court did not abuse its discretion in declining to exercise its
inherent equitable powers.” Id.
d.
SEC v. Manor Nursing
In SEC v. Manor Nursing Centers, Inc., supra, 458 F.2d at 1106, the circuit
court found that defendants’ fraudulent conduct justified an asset freeze order:
“Here, while the question is a close one, we are
satisfied that in balance the district court’s decision
temporarily to freeze appellants’ assets was justified.
Because of the fraudulent nature of appellants’ violations,
the court could not be assured that appellants would not
waste their assets prior to refunding public investors’
money. Moreover, at the time the court’s order was
entered, a great deal of uncertainty existed with respect to
the total amount of proceeds received and their location.
Appellants’ failure to present evidence to remove this
uncertainty warranted a measure designed to preserve the
status quo while to court could obtain an accurate picture
of the whereabouts of the proceeds of the public offering.
In addition, the continued failure of some appellants to
furnish the information necessary to a complete
understanding of the current situation justified extension of
the temporary freeze until appellants have refunded the
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proceeds. Under the circumstances, we hold that there is
no basis for disturbing the district court’s finding that the
temporary freeze was necessary to protect the public
interest.” Id., 458 F.2d at 1106 (footnote omitted).
4.
Examples of Cases Addressing Living Expenses and Attorney
Fee Issues in Asset Freeze Litigation
a.
Living Expenses
In Marcos, the Ninth Circuit affirmed an asset freeze order that enjoined the
Marcoses “from disposing of any of their assets save for the payment of attorney
fees and normal living expenses.” Marcos, 862 F.2d at 1358. In arriving at this
result, the circuit court stated: “The Marcoses have offered no evidence of any
hardship they would suffer if the injunction were issued. Indeed, the district court
stipulated in the injunction that the Marcoses may use their assets to cover normal
living expenses and legal fees. Irreparable injury was weighed against zero
evidence of hardship. On this record, the balance of hardships tipped decidedly in
the Republic’s favor.” Id., at 1362. See also SEC v. Coates, 1994 WL 455558
(S.D.N.Y 1994) (finding that defendant had adequate income from other sources
and the defendant’s claimed expenses were inflated and unnecessary, court refused
to modify asset freeze order to permit payment of defendant’s living expenses).
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b.
Attorney Fees
i.
In General
“A district court may, within its discretion, forbid or limit payment of attorney
fees out of frozen assets.” CFTC v. Noble Metals International, Inc., 67 F.3d 766,
775 (9th Cir. 1995), cert. denied, 519 U.S. 815, 117 S.Ct. 64, 136 L.Ed.2d 26
(1996); see FSLIC v. Ferm, 909 F.2d 372, 375 (9th Cir. 1990) (approving
limitation on attorney fees); see also SEC v. Coates, supra, 1994 WL 455558 at
*3 (in refusing to modify asset freeze order to permit defendant to retain defense
counsel, court found “no basis upon which this court could conclude that
[defendant’s] legal defense is of critical importance to investors . . . .”).
In Noble Metals, supra, 67 F.3d 766, the Ninth Circuit upheld an asset
freeze order that precluded payment of the defendants’ attorney fees. The circuit
court explained:
“According to the record, the frozen assets fell far
short of the amount needed to compensate Noble’s and
Moorgate’s customers. This was reason enough in the
circumstances of this case for the district court, in the
exercise of its discretion, to deny the attorney fee
application. [Citations omitted.] We do not, however,
intimate that attorney fee applications may always be
denied where the assets are insufficient to cover the
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claims. Discretion must be exercised by the district court
in light of the fact that wrongdoing is not yet proved when
the application for attorney fees is made.” Id., at 775.
In SEC v. Current Financial Services, 62 F.Supp.2d 66, 69 (D.C. Cir.
1999), the district court refused to modify an asset freeze order to permit defendant
to pay attorney fees from frozen assets because, inter alia, (1) “A defendant is not
entitled to foot his legal bill with funds that are tainted by his fraud,” and (2) “the
amount of money defrauded from the investors heavily outweighs the amount of
money in the frozen account, and therefore, the Court finds it irrelevant that the
funds are not traceable to” investor funds.
ii.
Retainers
Depending on the terms of the retainer agreement between the client and its
law firm, an asset freeze order may reach a retainer/deposit given to a law firm
before the effective date of the asset freeze order against the client:
1.
If the retainer is an advance deposit against future fees,
then the unearned portion of the retainer belongs to the client and can
be frozen by an asset freeze order. SEC v. Interlink Data Network of
Los Angeles, Inc., 77 F.3d 1201, 1205 (9th Cir. 1996) (court
remanded case for hearing on whether asset freeze order
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encompassed retainer held by law firm; court stated that the freeze
order may have precluded law firm from drawing on retainer because
the law firm’s “fee agreement created an advance deposit against
future fees that remained property of [the defendant] until services
were rendered”).
2.
In SEC v. Credit Bancorp, Ltd., 109 F.Supp.2d 142, 144-
46 (S.D.N.Y. 2000), the court determined that a retainer held in a law
firm’s trust account remained property of the client, and was therefore
subject to an asset freeze order against the client, even though the
firm had rendered services that had not been paid. In arriving at this
conclusion, the court focused on the terms of the law firm’s retainer
agreement, which indicated that the retainer did not become property of
the law firm until the retainer was transferred from the client trust
account of the law firm to its general account. The court declined to
decide whether the law firm had a right to set-off its claim for unpaid
services against the retainer.
3.
In CFTC v. Co Petro Marketing Group, Inc., 700 F.2d
1279 (9th Cir. 1983), the circuit court affirmed an order requiring a
law firm to disgorge a $60,000 retainer.
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On May 7, 1980, the district
Asset freeze llg 1.wpd
court filed an asset freeze order against Co Petro. On May 8, 1980,
the law firm received a $60,000 cashier’s check, and the law firm
knew that Co Petro was the source of the $60,000.
The law firm
alleged that it did not know of the terms of the asset freeze order until
after receiving the $60,000 cashier’s check. At the time the law firm
received the check, the law firm knew that the CFTC was seeking an
asset freeze order against Co Petro and that the district court had
issued a decision on May 7.
The Ninth Circuit ruled that the law
firm’s ignorance of the terms of the asset freeze order was not a
defense:
“As an officer of the court, [the law firm] was under a
duty to inquire as to the exact terms of the district court’s
decision before depositing the check. Consequently, we
agree with the district court that [the law firm] violated
the permanent injunction against transfer of Co Petro
assets when it deposited the check.” 700 F.2d at 1285.
iii.
Forfeitures and Restraining Orders That
Preclude Attorney Fees
In United States v. Monsanto, 491 U.S. 600, 109 S.Ct. 2657, 105 L.Ed.2d
512 (1989), the Supreme Court affirmed an asset freeze order under 21 U.S.C. §
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853(e) that precluded the accused from paying counsel fees with assets shown
likely to be subject to forfeiture. In Monsanto, the Supreme Court explained: “Put
another way: if the Government may, post-trial, forbid the use of forfeited assets to
pay an attorney, then surely no constitutional violation occurs when, after probable
cause is adequately established, the Government obtains an order barring a
defendant from frustrating that end by dissipating his assets prior to trial.” 491 U.S.
at 616. On remand from the Supreme Court, the Second Circuit Court of Appeals
decided that the Fifth and Sixth Amendments of the U.S. Constitution entitled the
defendant to a pre-trial hearing concerning whether the restraining order should be
modified to permit payment of counsel fees:
“We conclude that (1) the fifth and sixth
amendments, considered in combination, require an
adversary, post-restraint, pretrial hearing as to probable
cause that (a) the defendant committed crimes that
provide a basis for forfeiture, and (b) the properties
specified as forfeitable in the indictment are properly
forfeitable, to continue a restraint of assets (i) needed to
retain counsel of choice and (ii) ordered ex parte pursuant
to 21 U.S.C. § 853(e)(1)(A) (1988); and (2) consistent
with 21 U.S.C. § 853(e)(3) (1988), the court may
receive and consider at such a hearing evidence and
information that would be inadmissible under the Federal
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Rules of Evidence; and (3) grand jury determinations of
probable cause may be reconsidered in such a hearing.”
United States v. Monsanto, 924 F.2d 1186, 1202 (2d Cir.) (en banc), cert. denied,
502 U.S. 943, 112 S.Ct. 382, 116 L.Ed.2d 333 (1991); see also United States v.
Unimex, 991 F.2d 546, 551 (9th Cir. 1993) (reversing criminal conviction of
corporation (Unimex) whose assets were seized prior to trial: “Unimex’s right to
counsel under the Sixth Amendment and to Due Process under the Fifth
Amendment were violated by taking away all of its assets, denying it an opportunity
to show cause prior to criminal trial that an amount it could have used for attorneys’
fees was nonforfeitable, and then forcing it to trial without counsel”).
Addressing the Supreme Court’s Monsanto decision in the context of a civil
enforcement proceeding by the SEC, the Seventh Circuit ruled that Monsanto did
not require the district court to modify a freeze order to permit the defendants to pay
defense counsel because, inter alia, the defendants refused “to submit an
accounting which would reveal which funds, if any, were not proceeds” of their
securities trading activity. SEC v. Cherif, 933 F.2d 403, 417 (7th Cir. 1991), cert.
denied, 502 U.S. 1071, 112 S.Ct. 966, 117 L.Ed.2d 131 (1992); see also SEC v.
Current Financial Services, supra, 62 F.Supp.2d at 67 (in refusing to modify asset
freeze order to permit defendant to retain civil defense counsel, court observed that
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“the Sixth Amendment provides defendants the right to counsel only in criminal, not
civil, proceedings”).
E.
Notice Requirements for Obtaining Order under Fed.R.Civ.P. 65
1.
Notice Requirement for Preliminary Injunction
Fed.R.Civ.P. 65(a)(1) provides that “No preliminary injunction shall be issued
without notice to the adverse party.” However, giving notice may defeat the purpose
of the asset freeze order if the defendant is involved in secreting assets or other
fraudulent activities. In that event, the moving party may need to seek a temporary
restraining order.
Local Civil Rule 7.4.1 requires a pre-filing conference among counsel before
the filing of motions. Rule 7.4.1 exempts from this requirements applications for
temporary restraining orders, but does not exempt preliminary injunction motions.
2.
Notice Requirement for TRO
Fed.R.Civ.P. 65(b) authorizes a temporary restraining order to be issued
“without written or oral notice to the adverse party of that party’s attorney only if (1)
it clearly appears from specific facts shown by affidavit or by the verified complaint
that immediate and irreparable injury, loss, or damage will result to the applicant
before the adverse party or that party’s attorney can be heard in opposition, and (2)
the applicant’s attorney certifies to the court in writing the efforts, if any, which have
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been made to give the notice and the reasons supporting the claim” that notice
should not be required.
Courts disfavor ex parte applications. See, e.g., Mission Power Engineering
Co. v. Continental Casualty Co., 883 F.Supp. 488, 489 (C.D. Cal. 1995); In re
Intermagnetics America, Inc., 101 B.R. 191 (C.D. Cal. 1989). A plaintiff seeking an
ex parte asset freeze order should thoroughly justify the need for ex parte relief.
See, e.g., (Suppressed) v. (Suppressed), 109 F.Supp.2d 902 (N.D. Ill. 2000), in
which the court granted an ex parte temporary asset freeze order and stated:
“Plaintiff’s request for ex parte consideration of the
motion was amply supported, as required by Fed.R.Civ.P.
65(b), by affidavits indicating that if plaintiff were required
to give notice of the order, there would be a significant
risk that defendants would destroy or conceal the
descrambling devices, their books and records, and/or
their assets. The Court likewise concluded that plaintiff
had demonstrated all of the factors necessary to obtain a
temporary restraining order barring defendants from selling
the devices; permitting plaintiff, via the United States
Marshal, to enter defendants’ premises and seize records;
and to freeze defendants’ assets for a brief period until a
full hearing could be held. See Fed.R.Civ.P. 65(b)
(temporary restraining order issued ex parte may last no
more than ten days).” Id., 109 F.Supp.2d at 903-04.
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Fed.R.Civ.P. 65(b) states that any TRO granted without notice “shall be
indorsed with date and hour of issuance; shall be filed forthwith in the clerk’s office
and entered of record; shall define the injury and state why it is irreparable and why
the order was granted without notice; and shall expire by its terms within such time
after entry, not to exceed 10 days, as the court fixes, unless within the time so fixed
the order, for good cause shown, is extended for a like period or unless the party
against whom the order is directed consents that it may be extended for a longer
period. The reasons for the extension shall be entered of record. In case a
temporary restraining order is granted without notice, the motion for a preliminary
injunction shall be set down for hearing at the earliest possible time and take
precedence of all matters except older matters of the same character. . . .” See
also Local Civil Rule 7.18 (governing ex parte applications).
F.
Evidentiary Issues in Litigation under Fed.R.Civ.P. 65
1.
Use of Inadmissible Evidence
A federal court may give weight to inadmissible evidence in deciding whether
to grant a preliminary injunction. Marcos, 862 F.2d at 1363 (“It was within the
discretion of the district court to accept this hearsay for purposes of deciding
whether to issue the preliminary injunction”); Flynt Distrib. Co., Inc. v. Harvey, 734
F.2d 1389, 1394 (9th Cir. 1984) (“The urgency of obtaining a preliminary injunction
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necessitates a prompt determination and makes it difficult to obtain affidavits from
persons who would be competent to testify at trial. The trial court may give even
inadmissible evidence some weight, when to do so serves the purpose of preventing
irreparable harm before trial”).
///
Local Civil Rule 7.5.3 states that declarations “shall contain only factual,
evidentiary matter and shall conform as far as possible with the requirements of
F.R.Civ.P. 56(e).” Rule 56(e) states that affidavits “shall be made on personal
knowledge, [and] shall set forth such facts as would be admissible in evidence . . .
.”
2.
Use of Evidence at Trial and Consolidation with Trial on
Merits
Evidence received at the preliminary injunction hearing may be considered at
trial, and the trial on the merits may be consolidated with the preliminary injunction
hearing. See Fed.R.Civ.P. 65(a)(2). Even when consolidation is not ordered, any
evidence received upon a motion for a preliminary injunction which would be
admissible upon the trial on the merits becomes a part of the trial record and need
not be repeated at trial. Id. Rule 65(a)(2) states that it “shall be construed and
applied as to save to the parties any rights they may have to trial by jury.”
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3.
Live Testimony at Preliminary Injunction Hearing
Local Civil Rule 7.5.4 provides that, not less than ten days prior to a
scheduled hearing on a preliminary injunction, a party may file a request to crossexamine a declarant who is not beyond the subpoena power of the Court and who
is reasonably available to the party who offered the declarant’s declaration.
G.
Persons Bound by and Territorial Reach of Asset Freeze Order
under Fed.R.Civ.P. 65
1.
Persons Bound by Order
Fed.R.Civ.P. 65(d) states: “Every order granting an injunction and every
restraining order . . . is binding only upon the parties to the action, their officers,
agents, servants, employees, and attorneys, and upon those persons in active
concert or participation with them who receive actual notice of the order by personal
service or otherwise.”
“The purpose of Rule 65(d) is in essence to ensure that defendants may not
nullify a decree by carrying out prohibited acts through aiders and abettors, although
they were not parties to the original proceeding.” Select Creations, Inc. v. Paliafito
America, Inc., 852 F.Supp. 740, 779 (E.D. Wis. 1994) (quotations and citations
omitted). Aider and abettor liability under Rule 65(d) requires (1) intent plus (2)
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an overt act designed to aid in the success of the venture. Select Creations, supra,
852 F.Supp. at 779.
A related issue is whether an asset freeze order may be granted against a
third party not accused of wrongdoing.
The SEC has obtained such orders. See
SEC v. The Better Life Club of America, Inc., 995 F.Supp. 167, 180 (D.D.C. 1998)
(SEC was entitled to disgorgement order against transferees of securities law
violators because “It is clear that a gratuitous donee of fraudulently obtained funds is
not a bona fide purchaser and may be subject to a constructive trust”); see also
SEC v. Lybrand, 2000 WL 913894, at * 12 (S.D.N.Y. 2000) (in granting asset
freeze order against certain trusts, court stated: “Federal courts may order equitable
relief against a person who is not accused of wrongdoing in a securities
enforcement action where that person: (1) has received ill-gotten funds; and (2)
does not have a legitimate claim to those funds”) (citations and quotations omitted).
2.
Territorial Reach of Order
If the court has in personam jurisdiction of a party, then an injunction against
that party can prevent it from dissipating its assets no matter where they are
located. See, e.g., Marcos, 862 F.2d at 1364 (“Because the injunction operates in
personam, not in rem, there is no reason to be concerned about its territorial
reach”). See FTC v. Affordable Media, LLC, supra, 179 F.3d at 1238-44 (affirming
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contempt decree against defendants for failing to comply with preliminary injunction
directing defendants to repatriate the assets in their Cook Islands trust); see also
Haisten v. Grass Valley Medical Reimbursement Fund, Ltd., 784 F.2d 1392, 1396
(9th Cir. 1985) (district court had in personam jurisdiction of Cayman Islands entity,
because it intentionally caused effects in California); Fed.R.Civ.P. 4(f) (methods for
service of process on foreign residents).
“A court is authorized to impose a preliminary injunction on assets which were
controlled by a party, even if that party did not expressly own or possess those
assets.” FDIC v. Garner, 125 F.3d 1272, 1280 (9th Cir. 1997).
///
///
H.
Bond Requirement of Fed.R.Civ.P. 65(c)
Fed.R.Civ.P. 65(c) states: “No restraining order or preliminary injunction
shall issue except upon the giving of security by the applicant, in such sum as the
court deems proper, for the payment of such costs and damages as may be
incurred or suffered by any party who is found to have been wrongfully enjoined or
restrained. No such security shall be required of the United States or . . . an
agency thereof . . . .”
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A party is “wrongfully enjoined within the meaning of Rule 65(c) when it
turns out the party enjoined had the right all along to do what it was enjoined from
doing.” Nintendo of America, Inc. v. Lewis Galoob Toys, Inc., 16 F.3d 1032, 1036
(9th Cir.), cert. denied, 513 U.S. 822, 115 S.Ct. 85, 130 L.Ed.2d 37 (1994). In
Nintendo, the Ninth Circuit ruled: “we join what appears to be the majority [rule]
and hold there is a rebuttable presumption that a wrongfully enjoined party is
entitled to have the bond executed and recover provable damages up to the amount
of the bond.” Id., at 1036.
Rule 65(c) “grants district courts wide discretion in setting the amount of a
security bond.” Walczak v. EPL Prolong, Inc., supra, 198 F.3d at 733. Certain
statutes excuse the posting of a bond. See, e.g., 15 U.S.C. § 78u(d)(1) (SEC
may obtain preliminary injunction or temporary restraining order without posting a
bond); Fed.R.Bankr.P. 7065 (bankruptcy trustee may obtain preliminary injunction
or temporary restraining order without posting a bond).
I.
Appeal of Preliminary Injunctions under Fed.R.Civ.P. 65
An order granting injunctive relief can be appealed, even if the order is
otherwise interlocutory. 28 U.S.C. § 1292(a)(1) states: “(a) Except as provided in
subsections (c) and (d) of this section, the court of appeal shall have jurisdiction of
appeals from: [¶] (1) Interlocutory orders of the district courts of the United States .
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. . granting, continuing, modifying, refusing or dissolving injunctions, or refusing to
dissolve or modify injunctions, except where a direct review may be had in the
Supreme Court . . . .”
The filing of an appeal does not automatically stay the injunction.
Fed.R.Civ.P. 62(a) states in relevant part: “Unless otherwise ordered by the court,
an interlocutory or final judgment in an action for an injunction or in a receivership
action . . . shall not be stayed during the period after its entry and until an appeal is
taken or during the pendency of the appeal . . . .”
a.
Fed.R.Civ.P. 62(c) states in relevant part: “When an
appeal is taken from an interlocutory or final judgment granting,
dissolving, or denying an injunction, the court in its discretion may
suspend, modify, restore, or grant an injunction during the pendency of
the appeal upon such terms as to bond or otherwise as it considers
proper for the security of the rights of the adverse party. . . .”
b.
Fed.R.Civ.P. 62(g) states in relevant part: “The
provisions of this rule do not limit any power of an appellate court or a
judge or justice thereof to stay proceedings during the pendency of an
appeal or to suspend, modify, restore, or grant an injunction during the
pendency of an appeal or to make any order appropriate to preserve
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the status quo or the effectiveness of the judgment subsequently to be
entered.”
The standard of review on appeal is the lenient abuse of discretion standard.
“The grant or denial of a preliminary injunction ordinarily will be reversed only if
there has been an abuse of discretion by the lower court.” Benda v. Grand Lodge
of Intern. Ass’n of Machinists & Aerospace Workers, supra, 584 F.2d at 314.
J.
Contempt Sanctions for Violating Preliminary Injunction
1.
Civil versus Criminal Contempt
Violation of a preliminary injunction or temporary restraining order may be
punished as contempt. “A contempt sanction may be either civil or criminal in
nature.” SEC v. Credit Bancorp, Ltd., 2000 WL 968010, at *2 (S.D.N.Y. 2000);
SEC v. American Board of Trade, Inc., 830 F.2d 431, 439 (2d Cir. 1987) (“When
a district court’s order has been violated, the court may impose either civil contempt
remedies or criminal contempt sanctions, or both”).
“A contempt sanction, whether civil or criminal, can take the form of
incarceration and/or imposition of a monetary fine.” SEC v. Credit Bancorp., supra,
2000 WL 968010, at *3. A criminal sanction is imposed retrospectively, to punish
a completed act of disobedience. A contempt sanction is civil if it serves to
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compensate the complainant for losses sustained or is designed to coerce the
defendant into compliance. Id., at *2.
“The imposition of either civil or criminal contempt sanctions must comport
with due process.” SEC v. Credit Bancorp, Ltd., supra, 2000 WL 968010 at *3.
A criminal contempt requires proof beyond a reasonable doubt and the defendant
has a right to jury trial and other criminal procedural protections. See id. Those
protections do not apply in a civil contempt proceeding. Id.
The standard for finding a party in civil contempt is: “The moving party has
the burden of showing by clear and convincing evidence that the contemnors
violated a specific and definite order of the court. The burden then shifts to the
contemnors to demonstrate why they were unable to comply.” FTC v. Affordable
Media, LLC, supra, 179 F.3d at 1239 (quotations and citation omitted). “A court
has the power to adjudge in civil contempt any person who willfully disobeys a
specific and definite order requiring him to do or refrain from doing an act.” Shuffler
v. United Heritage Bank, 720 F.2d 1141, 1146 (9th Cir. 1983).
“Sanctions for civil contempt can be imposed for one or both of two distinct
purposes: (1) to compel or coerce obedience to a court order . . . ; and (2) to
compensate the contemnor’s adversary for injuries resulting from the contemnor’s
noncompliance . . . .” Shuffler v. Heritage Bank, supra, 720 F.2d at 1147.
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2.
The “Inability to Comply” Defense in Asset Freeze Litigation
“A party’s inability to comply with a judicial order constitutes a defense to a
charge of civil contempt.” FTC v. Affordable Media, LLC, supra, 179 F.3d at 1239
(citing United States v. Rylander, 460 U.S. 752, 757, 103 S.Ct. 1548, 75 L.Ed.2d
521 (1983)). However, in Affordable Media, the Ninth Circuit affirmed a civil
contempt decree notwithstanding the defendants’ assertion that they had no ability to
comply with an order requiring them to repatriate assets in their Cooks Islands trust.
In doing so, the Ninth Circuit explained that: (1) the defendants had the burden of
proving their impossibility defense; and (2) “In the asset protection trust context,
moreover, the burden on the party asserting an impossibility defense will be
particularly high because of the likelihood that any attempted compliance with the
court’s orders will be merely a charade rather than a good faith effort to comply.”
Affordable Media, 179 F.3d at 1241. See also SEC v. Credit Bankcorp, Ltd., supra,
2000 WL 968010 at *6 (contemnor failed to carry his burden of showing an
inability to comply with court’s order); In re Lawrence, 251 B.R. 630 (S.D. Fla.
2000) (self-created impossibility in transferring assets into trust was not a defense
to civil contempt for violating order to turn over trust assets, notwithstanding
defendant’s contention that it was currently impossible to comply with the turnover
order).
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III.
PARALLEL PROCEEDING ISSUES IN ASSET FREEZE LITIGATION
A.
Stay of Civil Proceeding Pending Resolution of Criminal and Fifth
Amendment Issues
The target of civil asset freeze litigation may also be the target of a related
criminal investigation or proceeding. The defendant may want to stay the civil asset
freeze litigation in order to avoid testifying until after resolution of all criminal issues.
The case law gives a federal district court broad discretion to permit the civil asset
freeze litigation to proceed notwithstanding a pending related criminal investigation or
proceeding.
“The Constitution does not ordinarily require a stay of civil proceedings
pending the outcome of criminal proceedings.” Keating v. Office of Thrift
Supervision, 45 F.3d 322, 324 (9th Cir. 1995), cert. denied, 516 U.S. 827, 116
S.Ct. 94, 133 L.Ed.2d 49 (1995) (“Keating”).
“‘In the absence of substantial prejudice to the rights of the parties involved,
[simultaneous] parallel [civil and criminal] proceedings are unobjectionable under
our jurisprudence.’” Keating, 45 F.3d at 324 (quoting SEC v. Dresser Industries,
628 F.2d 1368, 1374 (D.C. Cir.), cert. denied, 449 U.S. 993, 101 S.Ct. 529, 66
L.Ed.2d 289 (1980) (“Dresser”).
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“Nevertheless, a court may decide in its discretion to stay civil proceedings . .
. ‘when the interests of justice seem [ ] to require such action.’” Keating, 45 F.3d
at 324 (quoting Dresser, 628 F.2d at 1375 and United States v. Kordel, 397 U.S.
1, 12 fn. 27, 90 S.Ct. 763, 25 L.Ed.2d 1 (1970)); see FSLIC v. Molinaro, 889
F.2d 899, 902 (9th Cir. 1989) (“Molinaro”) (“While a district court may stay civil
proceedings pending the outcome of parallel criminal proceedings, such action is not
required by the Constitution”). “The case for staying civil proceedings is ‘a far
weaker one’ when ‘[n]o indictment has been returned [, and] no Fifth Amendment
privilege is threatened.’” Molinaro, 889 F.2d at 903 (quoting Dresser, 628 F.2d at
1376).
In deciding whether to grant a stay of a civil proceeding pending the outcome
of parallel criminal proceedings, the court should consider “the extent to which the
defendant’s fifth amendment rights are implicated.” Keating, 45 F.3d at 324
(quoting Molinaro, 889 F.2d at 902). See Applied Materials, Inc. v.
Semiconductor Spares, Inc., 1995 WL 261451 at *4 fn. 1 (N.D. Cal. 1995) (in
denying stay motion, court noted that corporate defendant did not have a fifth
amendment privilege because “corporations have no fifth amendment rights”). In
addition, in deciding whether to grant a stay, “the decisionmaker should generally
consider the following factors: (1) the interest of the plaintiffs in proceeding
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expeditiously with this litigation or any particular aspect of it, and the potential
prejudice to plaintiffs of a delay; (2) the burden which any particular aspect of the
proceedings may impose on defendants; (3) the convenience of the court in the
management of its cases, and the efficient use of judicial resources; (4) the
interests of persons not parties to the civil litigation; and (5) the interest of the
public in the pending civil and criminal litigation.” Keating, 45 F.3d at 324-25
(citing Molinaro, 889 F.2d at 903)).
Evidence that the defendant has a history of hiding assets militates against a
stay of the civil proceeding, even when the court in the civil proceeding has already
granted provisional injunctive relief. See, e.g., J.K. Publications, Inc., 99 F.Supp.2d
at 1197 (C.D. Cal. 2000) (in denying stay, court noted that plaintiff FTC would be
prejudiced by further delay because, among other things, “[a]s the record in this
case shows, Ken Taves has a history of hiding and attempting to dispose of his
assets”). Similarly, in Applied Materials, Inc. v. Semiconductor Spares, Inc., supra,
1995 WL 261451, the court rejected defendants’ contention that an asset freeze
order justified staying the civil action pending the outcome of a related criminal
investigation: “While defendant Biehl has some fifth amendment interests in staying
this case, the interests of plaintiffs, the court, and the public in proceeding promptly
with this litigation outweigh that interest.” Id. at *4.
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The timing of the stay motion, i.e., whether the motion is filed early or late in
the case, may affect whether it is granted. See, e.g., J.K. Publications, 99
F.Supp.2d at 1197 (in denying defendant’s motion for a stay, court noted that “This
case is now over fifteen months old”).
Whether the defendant has already testified may also affect whether the
defendant’s stay motion is granted. “Where a defendant already has provided
deposition testimony on substantive issues of the civil case, any burden on that
defendant’s Fifth Amendment privilege is ‘negligible.’” J.K. Publications, 99
F.Supp.2d at 1199 (quoting Molinaro, 889 F.2d at 903)).
Fifth Amendment self-incrimination issues may limit the scope of relief
obtained in an asset freeze order. See, e.g., (Suppressed v. Suppressed), 109
F.Supp.2d 902, 904 (N.D. Ill. 2000), in which the district court froze assets ex
parte but refused to issue an ex parte order requiring defendants to make an
accounting:
“As disclosed by plaintiff in its ex parte motion, the
sale of decoding devices like those defendants are
claimed to have offered and sold is prohibited by federal
criminal statute . . . . Under the circumstances,
information disclosing defendants’ purchases and sales of
the devices . . . might tend to incriminate the defendants .
...
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“It is difficult for this Court to imagine how an ex
parte order compelling the individual defendants to provide
such information can coexist with the Fifth Amendment . .
. . It is highly unlikely that an ordinary citizen, confronted
with such a show of force and served with a federal court
order directing him to provide information (some of it
immediately), would have the faintest idea that he had the
right to refuse to do so. Certainly nothing within the order
proposed by plaintiff directed the agents to advise the
defendants of their constitutional right to refuse to provide
the information, and even if such a provision were added
(an option the Court also considered), the same ordinary
citizen might not be expected to understand such advice
from a law enforcement agent as trumping a judge’s order
directing disclosure.” Id., 109 F.Supp.2d at 904-05
(footnote omitted).
However, in FTC v. H.N. Singer, Inc., supra, 668 F.2d 1107, the Ninth
Circuit rejected a Fifth Amendment challenge to an asset freeze order that required
the defendants to produce documents concerning their assets:
“Appellants argue, however, that the act of
producing documents in response to the order may
amount to authenticating them, and thus be compelled
self-incrimination. In the case of particular documents,
that might be so. But that possibility is not a valid ground
for holding that the order is void. . . .
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“If, as to a particular documents, an appellant
believes that his producing it may, by authenticating it,
incriminate him, he must make a showing to that effect,
so that the court can evaluate it. He cannot simply refuse
to comply with the order at all.” 668 F.2d at 1114
(citations omitted).
Further, “[n]ot only is it permissible to conduct a civil proceeding at the same
time as a related criminal proceeding, even if that necessitates invocation of the
Fifth Amendment privilege, but it is even permissible for the trier of fact to draw
adverse inferences from the invocation of the Fifth Amendment in a civil
proceeding.” Keating, 45 F.3d at 326 (citing Baxter v. Palmigiano, 425 U.S. 308,
318, 96 S.Ct. 1551, 47 L.Ed.2d 810 (1976)). The defendant’s assertion of a Fifth
Amendment privilege in civil asset freeze litigation may therefore result in the court’s
drawing adverse inferences against the defendant and, based on such inferences,
declining to modify the asset freeze order. See, e.g., SEC v. Schiffer, 1998 WL
30375, at *7 (S.D.N.Y. 1998) (after defendant asserted Fifth Amendment privilege
and refused to provide information, court concluded that “I have no alternative but to
assume all of Schiffer’s accounts and funds are of a suspect nature. Thus, not only
do I continue the asset freeze order, I also limit the release of funds authorized
under the order to meet Schiffer’s living expenses to those necessary to maintain
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assets subject to ultimate liquidation and disgorgement, and to attorney’s fees only
as substantiated by this court’s careful monitoring”).
///
///
///
B.
Criminal Liability That May Result from Misconduct during Asset
Freeze Litigation
1.
Criminal Contempt
18 U.S.C. § 401(3) authorizes a court to punish by “fine or imprisonment”
any “[d]isobedience or resistance to its lawful writ, process, order, rule, decree, or
command.”
2.
Fraudulently Transferring Property
Cal. Penal Code § 531 provides criminal penalties for a person who transfers
property with actual intent to defraud or hinder creditors. Section 531 applies,
among other things, to every person “who is a party to any . . . contract or
conveyance, had, made, or contrived with intent to deceive and defraud others, or to
defeat, hinder, or delay creditors or others of their just debts, damages, or demands
. . . .”
3.
Transporting Stolen Property
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18 U.S.C. § 2314 provides criminal penalties for a person who knowingly
transports in interstate commerce stolen property or money, or property or money
obtained by means of a scheme to defraud.
4.
Perjury
18 U.S.C. §§ 1621-23 provides criminal penalties for a person who commits
or suborns perjury.
5.
Fraudulently Concealing Property from an Officer of the Court
18 U.S.C. § 152(1) provides criminal penalties for a person who “knowingly
and fraudulently conceals from a custodian, trustee, marshal, or other officer of the
court charged with control or custody of property, or, in connection with a case
under title 11, from creditors or the United States Trustee, any property belonging to
the estate of a debtor . . . .”
6.
Fraudulently Withholding Property from an Officer of the Court
after Filing of Bankruptcy Case
18 U.S.C. § 152(9) provides criminal penalties for a person who “after the
filing of a case under title 11, knowingly and fraudulently withholds from a custodian,
trustee, marshal, or other officer of the court or a United States Trustee entitled to
its possession, any recorded information (including books, documents, records, and
papers) relating to the property or financial affairs of a debtor . . . .”
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7.
Fraudulently Transferring Property in Contemplation of or
During Bankruptcy Case
18 U.S.C. § 152(7) provides criminal penalties for a person who “in a
personal capacity or as agent or officer of any person or corporation, in
contemplation of a case under title 11 by or against the person or any other person
or corporation, or with intent to defeat the provisions of title 11, knowingly and
fraudulently transfers or conceals any of his property or the property of such other
person or corporation.”
C.
Impact on Sentencing of Conduct during Asset Freeze Litigation
1.
Acceptance of Responsibility
Section 3E1.1(a) of the U.S. Sentencing Guidelines provides: “If the
defendant clearly demonstrates acceptance of responsibility for his offense, decrease
the offense level by 2 levels.”
a.
The commentary to this Guideline states in part: “a
defendant who falsely denies, or frivolously contests, relevant conduct
that the court determines to be true has acted in a manner inconsistent
with acceptance with responsibility.”
b.
The commentary to this Guideline further provides that, in
“determining whether a defendant qualifies under subsection (a),
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appropriate considerations include, but are not limited to, the following:
. . . (b) voluntary termination or withdrawal from criminal conduct or
associations; (c) voluntary payment of restitution prior to adjudication of
guilt; . . . (e) voluntary assistance to authorities in the recovery of the
fruits and instrumentalities of the offense; (f) voluntary resignation from
the office or position held during the commission of the offense . . . .”
2.
Substantial Assistance to Authorities
Section 5K1.1 of the U.S. Sentencing Guidelines provide that “Upon motion of
the government stating that the defendant has provided substantial assistance in the
investigation or prosecution of another person who has committed an offense, the
court may depart from the guidelines . . . .” Note 2 of the Commentary to Section
5K1.1 states: “The sentencing reduction for assistance to authorities shall be
considered independently of any reduction for acceptance of responsibility.
Substantial assistance is directed to the investigation and prosecution of criminal
activities by persons other than the defendant, while acceptance of responsibility is
directed to the defendant’s affirmative recognition of responsibility for his own
conduct.”
D.
Parallel Civil Proceedings
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A defendant in asset freeze litigation may have transferred its assets to third
parties in foreign jurisdictions. The plaintiff may have difficulty establishing
jurisdiction of those third parties and may decide to initiate parallel asset freeze
litigation in the jurisdictions where those third parties are located.
Foreign jurisdictions, including the United Kingdom, grant asset freeze orders.
See, e.g., Mareva, 2 Lloyd’s Rep. 509 (“[i]f it appears that the debt is due and
owing – and there is a danger that the debtor may dispose of his assets so as to
defeat it before judgment – the Court has jurisdiction in a proper case to grant an
interlocutory judgment so as to prevent him [sic] disposing of those assets”).
A plaintiff may (or may have to) file a parallel proceedings in multiple
jurisdictions to freeze assets held there. National Union Fire Insurance Co. of
Pittsburgh, P.A. v. Kozeny, 115 F.Supp.2d 1243, 1245 (D. Col. 2000) (describing
how plaintiffs obtained asset freeze orders in England, United States, and Bahamas,
and noting that “Because the London freezing order is not enforceable outside the
jurisdiction of the London Court until it is enforced by a court in the relevant country,
the London Court permitted this case to brought in Colorado to freeze defendants’
assets located here”).
IV.
BANKRUPTCY ISSUES IN ASSET FREEZE ORDER LITIGATION
A.
Power of District Court to Prevent Bankruptcy Filing
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There is some authority for the proposition that a federal court may issue
either an injunction or a receivership order that prevents a defendant from filing
bankruptcy. See, e.g., United States v. Royal Business Funds Corp., 724 F.2d 12
(2d Cir. 1983) (although the general rule is that “a debtor may not agree to waive
the right to file a bankruptcy petition” and that a receivership does not preclude a
bankruptcy filing by the debtor, “[n]evertheless, a debtor subject to a federal
receivership has no absolute right to file a bankruptcy petition . . . .”); United States
v. Vulpis, 961 F.2d 368, 370-72 (2d Cir. 1992) (affirming order barring president
of corporation from filing bankruptcy petition on behalf of corporation); CFTC v.
FITC, Inc., 52 B.R. 935, 936 (N.D. Cal. 1985) (court ordered president of
corporation in receivership to withdraw bankruptcy petition that president filed for
corporation after the court appointed a receiver; court stated: “it was the receiver,
and only the receiver, who this Court empowered with the authority to place FITC in
bankruptcy”); SEC v. Sterns, 1991 WL 204901, at *1 (C.D. Cal. 1991) (court
directed defendants in asset freeze litigation to withdraw bankruptcy petitions; court
stated: “It is within the broad equitable powers of a district court to preclude
petitions in bankruptcy where there are compelling circumstances”); see also
Someone Claiming to Represent Oil & Gas Company v. Duryee, 9 F.3d 771, 773
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(9th Cir. 1993) (appointment of state court receiver for company ousted
management and precluded it from filing bankruptcy petition on behalf of company).
On the other hand, there is also contrary authority. In re Milestone
Educational Institute, Inc., 167 B.R. 716, 720 (Bankr. D. Mass. 1994) (“. . . the
appointment of receivers does not deprive the corporate directors of the power to
file a bankruptcy petition”); Paula Whitney Best, “Corporate Receiverships and
Chapter 11 Reorganizations,” 10 Cardozo L. Rev. 285 (1988) (“Does not the
receivership imply that management has been ‘fired’? Not always; numerous
courts have held that a dispossessed management does indeed have the right to file
a bankruptcy petition”). Further, 11 U.S.C. § 543(d) provides that, unless otherwise
ordered by the bankruptcy court, a receiver is to turn over all property of the debtor
to the trustee. Further, at least where the receiver is appointed by a state court,
“[i]t is up to the bankruptcy court to decide, in its discretion, whether the receiver
should be excused from turning over the assets of the bankruptcy estate, under
standards of federal law set forth in § 543.” State Street Bank and Trust Co. v.
Park (In re Si Yeon Park, Ltd.), 198 B.R. 956, 963 (Bankr. C.D. Cal. 1996)
B.
Power of Federal Court to Withdraw Reference
Even if the federal district court cannot prohibit the bankruptcy filing, the
federal district court that granted the asset freeze order against the debtor may take
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control of the debtor’s bankruptcy case after it is filed, provided that the debtor files
bankruptcy in the same district. This may be accomplished by withdrawing the
reference of all or a portion of the debtor’s bankruptcy case pursuant to 28 U.S.C.
§ 157(d) (“The district court may withdraw, in whole or in part, any case or
proceeding . . . .”). See, e.g., FTC v. American Institute for Research and
Development, 219 B.R. 639, 647-48 (D. Mass. 1998) (district court withdrew
reference and dismissed bankruptcy cases to prevent bankruptcy filings from
disrupting prior enforcement proceeding filed by FTC).
C.
The Automatic Stay – 11 U.S.C. § 362
1.
Scope of Automatic Stay – § 362(a)-(b)
a.
In General
The filing of a voluntary or involuntary petition under the Bankruptcy Code will
result in an automatic stay, which is a form of statutory injunction against creditors
and others from taking action against the debtor and the debtor’s property. The
automatic stay is “automatic” in the sense that it occurs without any supporting
evidence or judicial ruling. Instead, the automatic stay takes effect when a debtor
files a voluntary bankruptcy petition under 11 U.S.C. § 301. The automatic stay
also takes effect when creditors of the debtor file an involuntary petition against the
debtor under 11 U.S.C. § 303. The filing of an unjustified involuntary bankruptcy
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petition may result in liability for attorney’s fees and punitive damages under 11
U.S.C. § 303(i).
Under 11 U.S.C. § 362(a), the filing of an voluntary petition under 11 U.S.C.
§ 301 or an involuntary petition under 11 U.S.C. § 303 operates as an automatic
stay, except as provided in § 362(b). Among other things, § 362(a)(1) provides:
“(a) Except as provided in subsection (b) of this
section, a petition filed under section 301, 302, or 303 of
this title, or an application filed under section 5(a)(3) of
the Securities Investor Protection Act of 1970, operates as
a stay, applicable to all entities, of –
(1) the commencement or continuation, including
the issuance or employment of process, of a judicial,
administrative, or other action or proceeding against the
debtor that was or could have been commenced before
the commencement of the case under this title, or to
recover a claim against the debtor that arose before the
commencement of the case under this title; . . .
(3) any act to obtain possession of property of the
estate or of property from the estate or to exercise control
over property of the estate; . . .
(6) any act to collect, assess, or recover a claim
against the debtor that arose before the commencement of
the case under this title . . . .”
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The exceptions to the automatic stay are set forth in 11 U.S.C. § 362(b).
Among other things, § 362(b) states that the automatic stay does not stay “the
commencement or continuation of a criminal action or proceeding against the debtor
. . . .” 11 U.S.C. § 362(b)(1).
In addition, § 362(b)(4) provides a limited exception from the automatic stay
for “the commencement or continuation of an action or proceeding by a government
unit . . . to enforce such government unit’s . . . police and regulatory power,
including the enforcement of a judgment other than a money judgment, obtained in
an action or proceeding by the government unit to enforce such governmental unit’s
. . . police or regulatory power . . . .” 11 U.S.C. § 362(b)(4).
However, § 362(b)(4) by its terms creates exceptions to the automatic stay
of § 362(a)(1)-(3) and (6), not § 362(a)(4)-(5), which stay any act to create,
perfect, or enforce any lien against the bankruptcy estate or to create, perfect, or
enforce any lien against property of the debtor to the extent such lien secures a
claim that arose before the commencement of the bankruptcy case. Further, the
“police and regulatory power” exception in § 362(b)(4) by its terms does not apply
to a proceeding for “enforcement of a . . . money judgment.” See, e.g., SEC v.
Brennan, 230 F.3d 65, 69-76 (2d Cir. 2000) (police and regulatory power
exception in 11 U.S.C. § 362(b)(4) did not apply to proceeding by SEC to enforce
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order directing repatriation of offshore assets for the purpose of satisfying a money
judgment requiring disgorgement of $75 million); see also CFTC v. Co Petro
Marketing Group, Inc., supra, 700 F.2d at 1284 (automatic stay did not stay
proceeding to require law firm to disgorge $60,000 to receiver pursuant to prebankruptcy asset freeze order; “The district court’s order in this case is not the
enforcement of a money judgment; rather, it is the enforcement of the district court’s
injunction against transferring or dealing in Co Petro assets;” moreover, no
preference would result since “the receiver must turn over all assets of Co Petro,
including the $60,000, to the bankruptcy trustee for distribution with the rest of the
estate”).
b.
Contempt Proceedings
The automatic stay of 11 U.S.C. § 362 may – or may not – stay a contempt
proceeding against the debtor for violating an order issued prior to the debtor’s
bankruptcy filing. Courts have disagreed on the proper resolution of this issue.
Compare Goichman v. Bloom (In re Bloom), 875 F.2d 224, 226 (9th Cir. 1989)
(creditor violated the automatic stay if he filed contempt motion to enforce prepetition decree “with the purpose of securing assets protected by the stay or
harassing [the debtor] . . . .”); Dumas v. Atwood (In re Dumas), 19 B.R. 676,
678 (B.A.P. 9th Cir. 1982) (“We conclude, on the authority of Hooker, that the
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state court’s sentence for contempt after bankruptcy for disobeyance of the
subpoena before bankruptcy was not affected by the automatic stay of 11 U.S.C. §
362 . . . .”) (citing David v. Hooker, Ltd., 560 F.2d 412 (9th Cir. 1977) (decided
under the Bankruptcy Act 1898)) with Atkins v. Martinez (In re Atkins), 176 B.R.
998 (Bankr. D. Minn. 1994) (stating that In re Dumas, supra, and David v. Hooker,
Ltd., supra, “are not well-founded”)..
A criminal contempt proceeding may be exempt from the automatic stay
under 11 U.S.C. § 362(b)(1), which exempts from the stay “the commencement or
continuation of a criminal action or proceeding against the debtor.” However, 11
U.S.C. § 362(b) does not contain an express statutory exception for civil contempt
proceedings. See In re Atkins, supra, 176 B.R. at 1006 (stating that 11 U.S.C. §
362(b)(1) “would afford an exception from the automatic stay – but only for formal
proceedings for criminal contempt”).
In dealing with the issue of whether a contempt proceeding is exempt from
the automatic stay, courts have focused on a variety of factors, including: (1)
whether the contempt proceeding fits within one of the statutory exceptions to the
stay expressly delineated in 11 U.S.C. § 362(b); (2) whether the contempt
proceeding is for the purpose of vindicating the dignity of the court whose order was
violated; and (3) whether purpose of the contempt proceeding is to harass or collect
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money from the debtor. See, e.g., SEC v. Kenton Capital, Ltd., 983 F.Supp. 13,
14-15 (S.D.N.Y. 1997) (“This Court has concluded that this contempt proceeding is
not automatically stayed by the bankruptcy petition for two reasons: 1) the Court is
conducting this proceeding to uphold the dignity of the Court and to vindicate the
authority of the Court to enforce its orders, and 2) the applicability of 11 U.S.C. §
362(b)(4) & (5) as it relates to income and asset identification and an accounting,
and not the enforcement of the judgment”); Dock C-Food Ltd. v. Cherry (In re
Cherry), 78 B.R. 65, 70 (Bankr. E.D. Pa. 1987) (“Given our belief that the
automatic stay is extremely powerful, and allows few exceptions, it is easy to
understand why we are reluctant to accept the reasoning of those cases which hold,
with no apparent Code referrent, that even civil, as opposed to criminal, see 11
U.S.C. § 362(b)(1), contempt powers of courts other than the bankruptcy court are
somehow exempt from the stay”); International Distribution Centers, Inc. v. Walsh,
62 B.R. 723, 729 (S.D.N.Y. 1986) (dicta that automatic stay did not apply
because: “the Court finds that regardless of the source of the contempt motion, the
instant request is one designed to uphold an order of this Court, and is not one
calculated to enforce a money judgment, or to harass a defendant. Consequently, §
362 does not enjoin the Court from proceeding to enforce its order issued on
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August 20, 1994, a full ten months prior to the date upon which defendants filed in
Chapter 11).
2.
Modification of Automatic Stay – § 362(d)
Under 11 U.S.C. § 362(d), the bankruptcy court may terminate, annul, or
modify the automatic stay. Grounds for relief from stay include “for cause, including
lack of adequate protection” of an interest in property of the party requesting relief
from the stay. Because § 362(d) permits modification of the automatic stay, a
defendant’s bankruptcy filing may only delay, not stop, asset freeze litigation. See,
e.g., FDIC v. Garner, supra, 125 F.3d at 1276 (in response to asset freeze
litigation filed by FDIC, the defendants filed bankruptcy; shortly thereafter, “the
district court issued an order appointing a trustee in the bankruptcy proceeding” and
“modified the Chapter 11 automatic stay to permit [the defendants to appeal] and to
allow the FDIC to proceed with its underlying district court action against the
Garners and others”).
Because the bankruptcy court can modify the automatic stay, a debtor may
not violate a pre-petition court order with impunity, even if 11 U.S.C. § 362(a)
operates to stay contempt proceedings. For example, in Dock C-Food Ltd. v.
Cherry, supra, 78 B.R. 65, the bankruptcy court found that the automatic stay
applied to a civil contempt proceeding, but the bankruptcy court modified the stay to
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permit the claimant to pursue prospective injunctive relief against the debtor to
remedy the allegedly “illegal post-petition conduct” of the debtor. Id., at 74. See
also Rudaw/Empirical Software Products Ltd. v. Elgar Electronics Corp. (In re
Rudaw/Empirical Software Products Ltd.), 83 B.R. 241, 247 (Bankr. S.D.N.Y.
1988) (court modified stay to permit claimant “for the purpose of initiating contempt
proceedings against the debtor and its officers for the alleged violation of the
California Superior Court’s preliminary injunction order dated June 23, 1987").
3.
The Price of the Automatic Stay – Bankruptcy Restrictions
If a debtor files a voluntary bankruptcy petition, then the debtor must disclose
its assets in sworn bankruptcy schedules filed 15 days after the bankruptcy petition
or within such additional time period as the bankruptcy court allows. See
Fed.R.Bankr.P. 1007(b)-(c). In an involuntary bankruptcy case, the debtor must
file sworn schedules within 15 days of the order for relief (i.e., the bankruptcy
court’s determination that the involuntary bankruptcy petition was justified under 11
U.S.C. § 303), or within such additional time period after the order for relief as the
bankruptcy court may allow.
///
The commencement of a bankruptcy case creates a bankruptcy “estate” under
11 U.S.C. § 541(a). The bankruptcy estate consists of substantially all non-exempt
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property that the debtor owned as of the filing of the bankruptcy petition. The
Bankruptcy Code limits and restricts a debtor’s ability to use property of the
bankruptcy estate.
For example, under 11 U.S.C. § 701, a trustee will be
appointed if the debtor files a chapter 7 (liquidation) bankruptcy case; and, under 11
U.S.C. § 1104, a trustee may be appointed for cause or in the interest of creditors if
the debtor files a chapter 11 (reorganization) bankruptcy case. In addition, under 11
U.S.C. § 363(b)(1), property of the bankruptcy estate may not be used, sold or
leased outside the ordinary course of business except after notice and a hearing.
Because the Bankruptcy Code, if strictly enforced, places substantial
restrictions on a debtor, the debtor’s bankruptcy filing may lessen the need for an
asset freeze order against the debtor. See, e.g., FTC v. Evans Products Co.,
supra, 775 F.2d at 1089 (“The potential for irreparable harm in this case is limited.
We find no evidence that Evans is, or is likely to, secret[e] away assets before
relief can be effectuated. Moreover, Evans’ status as a debtor in Chapter 11 limits
its ability to transfer assets to the disadvantage of potential judgment creditors”).
In the event that a corporate defendant files bankruptcy and a bankruptcy
trustee is appointed, the trustee will have the right to control the attorney-client
privilege of the corporation. CFTC v. Weintraub, 471 U.S. 343, 105 S.Ct. 1986,
85 L.Ed.2d 372 (1985).
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D.
Denial of Discharge – 11 U.S.C. § 727
A defendant in asset freeze litigation may be tempted to conceal assets,
destroy records, or submit false testimony. This kind of misconduct, in addition to
having criminal consequences, will also prevent or impair the defendant’s ability to
obtain a discharge in bankruptcy.
1.
11 U.S.C. § 727(a)(2)
11 U.S.C. § 727(a)(2) provides that the “court shall grant the debtor a
discharge, unless “the debtor, with intent to hinder, delay, or defraud a creditor or
an officer of the estate charged with custody of property under this title, has
transferred, removed, destroyed, mutilated, or concealed or has permitted to be
transferred, removed, destroyed, mutilated, or concealed” property of the debtor
within one year before the date of the filing of the petition or property of estate after
the filing of the petition.
2.
11 U.S.C. § 727(a)(3)
11 U.S.C. § 727(a)(3) provides that the “court shall grant the debtor a
discharge, unless “the debtor has concealed, destroyed, mutilated, falsified, or failed
to keep or preserve any recorded information . . . , from which the debtor’s financial
condition or business transactions might be ascertained, unless such act or failure to
act was justified under all of the circumstances of the case . . . .”
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3.
11 U.S.C. § 727(a)(5)
11 U.S.C. § 727(a)(5) provides that the “court shall grant the debtor a
discharge, unless . . . the debtor has failed to explain satisfactorily, before
determination of denial of discharge under this paragraph, any loss of assets or
deficiency of assets to meet the debtor’s liabilities . . . .”
V.
APPOINTMENT OF A RECEIVER
A.
Inherent Power of Federal Court to Appoint Receiver as Ancillary
Equitable Remedy
A receiver may be appointed by a federal court to provide relief ancillary to
effective final equitable relief. SEC v. Wencke, 622 F.2d 1363, 1369 (9th Cir.
1980) (“The power of a district court to impose a receivership or grant other forms
of ancillary relief does not in the first instance depend on a statutory grant of power
from the securities laws. Rather, the authority derives from the inherent power a
court of equity to fashion effective relief”) (footnotes and citations omitted); Pioche
Mines Consolidated, Inc. v. Dolman, 333 F.2d 257, 272 (9th Cir. 1964)
(“Receivership is an ancillary remedy, and the substantive relief here sought does
not justify its use. . . . A receivership is not an end in itself; it is but a means to
an end”), cert. denied, 380 U.S. 956, 85 S.Ct. 1082, 13 L.Ed.2d 972 (1965).
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1.
E.g., SEC v. American Board of Trade, Inc., 830 F.2d
431, 436 (2d Cir. 1987) (“Although neither the Securities Act of 1933
nor the Securities Exchange Act of 1934 explicitly vests district courts
with the power to appoint trustees or receivers, courts have consistently
held that such power exists . . . where necessary to prevent the
dissipation of a defendant’s assets pending further action by the court”)
(citations omitted).
2.
E.g., although RICO does not expressly authorize the
prejudgment appointment of a receiver in a civil action, in United States
v. Ianello, 824 F.2d 203, 207 (2d Cir. 1987), the circuit court
affirmed the appointment of the receiver to manage a restaurant in an
action by the United States for injunctive relief under 18 U.S.C. §
1964(a) and (b). In Ianello, the Second Circuit stated:
“Defendants’ attack on the breadth of the
receivership need not detain us long. In 18 U.S.C. §
1964, [C]ongress empowered district courts ‘to prevent *
* * violations of section 1962 by issuing appropriate
orders, * * * ordering dissolution or reorganization of any
enterprise * * *, § 1964(a), and “to enter such
restraining orders or prohibitions, or take such other act *
* * as it shall deem proper,’ § 1964(b). Under these
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sections, the district court has considerable discretion to
frame the scope of a receivership to meet the needs of
the case.” 824 F.2d at 208 (ellipses in original)).
“A receiver is an extraordinary equitable remedy that is only justified in
extreme situations. Although there is no precise formula for determining when a
receiver may be appointed, factors typically warranting appointment are a valid claim
by the party seeking appointment; the probability that fraudulent conduct has
occurred or will occur to frustrate that claim; imminent danger that property will be
concealed, lost, or diminished in value; inadequacy of legal remedies; lack of a less
drastic equitable remedy; and likelihood that appointing the receiver will do more
good than harm.” Aviation Supply Corp. v. R.S.B.I. Aerospace, Inc., 999 F.2d 314,
316-17 (8th Cir. 1993) (affirming order appointing receiver).
///
///
B.
Statutory Power of Federal Court to Appoint Receiver
In addition to the inherent power of federal courts to appoint receivers as an
ancillary equitable remedy, various statutes expressly authorize the appointment of
receivers in asset freeze litigation. The following are several examples.
1.
Federal Debt Collection Procedures Act
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The Federal Debt Collection Procedures Act, 28 U.S.C. § 3001 et seq.,
expressly authorizes the appointment of a receiver as a provisional remedy in a civil
action by the United States to collect a debt. Section 3103 of title 28 provides in
relevant part:
“(a) Appointment of a receiver. – If the
requirements of section 3101 are satisfied, a court may
appoint a receiver for property in which the debtor has a
substantial nonexempt interest if the United States shows
reasonable cause to believe that there is a substantial
danger that the property will be removed from the
jurisdiction of the court, lost, concealed, materially injured
or damaged, or mismanaged.”
28 U.S.C. § 3103(b)-(g) specify the powers and duties of a receiver
appointed pursuant to 28 U.S.C. § 3103(a). The powers include the power to
manage the property subject to the receivership. Id., § 3103(b). The duties
include the duty to keep accounting records and to file reports at regular intervals as
directed by the court. Id., § 3103(d).
2.
18 U.S.C. § 1345
In a civil action by the Attorney General to enjoin transfers of property
traceable to certain crimes, including banking law violations, 18 U.S.C. §
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1345(a)(2)(B)(ii) authorizes the Attorney General to seek the appointment of
“temporary receiver to administer” property restrained by the court.
3.
18 U.S.C. § 983(j)
18 U.S.C. § 983(j), enacted as part of the Civil Asset Forfeiture Reform Act,
expressly authorizes federal courts to “create receiverships, appoint conservators,
custodians, appraisers, accountants, or trustees” for the purpose of securing,
maintaining, or preserving the availability of property subject to forfeiture.
///
4.
Fed.R.Civ.P. 64 and the Uniform Fraudulent Transfer Act
Federal courts have authority under Fed.R.Civ.P. 64 to grant provisional
remedies authorized by state law. Section 3439.07 of the UFTA authorizes the
appointment of a receiver as a provisional remedy in action to set aside a fraudulent
transfer. Cal. Civ. Code § 3439.07.
C.
Broad Discretion of Federal Court to Supervise Receivership
“[A] district court’s power to supervise an equity receivership and to
determine the appropriate action to be taken in the administration of the receivership
is extremely broad.” SEC v. Hardy, 803 F.2d 1034, 1037 (9th Cir. 1986).
Some statutes authorizing the appointment of a receiver, such as 28 U.S.C.
§ 3103, provide specific guidance as to rules governing the administration of the
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administration of the receivership. Other statutes providing for the appointment of a
receiver, such as 18 U.S.C. § 1345, provide little guidance. Fed.R.Civ.P. 66, as
supplemented by Local Civil Rule 25, provides additional guidance. Rule 66 states
in relevant part:
“. . . The practice in the administration of estates by
receivers or by other similar officers appointed by the
court shall be in accordance with the practice heretofore
followed in the courts of the United States or as provided
in rules promulgated by the district courts. In all other
respects the action in which the appointment of a receiver
is sought or which is brought by or against a receiver is
governed by there rules.”
Local Civil Rule 25 generally requires the receiver to keep records and to
give notice to parties and creditors. In addition, Local Rule 25.8 states: “Except as
otherwise ordered by the Court, a receiver shall administer the estate as nearly as
possible in accordance with practice in the administration of estates in bankruptcy.”
The Bankruptcy Code (title 11) and the Federal Rules of Bankruptcy Procedure
contain detailed rules on the administration of bankruptcy estates.
D.
Receivership and Bankruptcy
The reference to bankruptcy in Local Civil Rule 25.8, quoted above, is a
reminder that receiverships are analogous to bankruptcy cases. The Ninth Circuit
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has cautioned that a receivership involved in a liquidation should not be used as a
substitute for a bankruptcy case. “There are sound policy reasons for allowing
liquidation to take place only in a court of bankruptcy.” SEC v. Lincoln Thrift
Association, 577 F.2d 600, 605 (9th Cir. 1978). Among other things, bankruptcy
law “provides for notices to creditors” and “an established system for equitable
distribution of the assets to creditors.” Id., at 605-06 (footnote and citations
omitted); SEC v. American Board of Trade, Inc., supra, 830 F.2d at 437 (“we
stated that receiverships ancillary to SEC actions against brokers or broker-dealers
should not be continued, in a case involving insolvency, beyond the point necessary
to get the estate into the proper forum for liquidation – the bankruptcy court”)
(quotations and citations omitted). “Nevertheless, it is a recognized principle of law
that the district court has broad powers and wide discretion to determine the
appropriate relief in an equity receivership.” Lincoln Thrift, supra, 577 F.2d at 606.
In Lincoln Thrift, the Ninth Circuit concluded that the district court did not abuse its
discretion in refusing to transfer the liquidating receivership proceeding to bankruptcy
court. The Ninth Circuit noted the district court’s “intimate knowledge of the factual
data relevant to liquidation,” the receiver’s “expertise,” and the fact that an initial
distribution of $4.6 million had already been made by the receiver. Id., at 609.
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A litigant may prefer receivership to bankruptcy precisely because receivership
law does not have the same rigidity as bankruptcy law, which is largely defined by
the Bankruptcy Code and the Federal Rules of Bankruptcy Code. For example, the
Bankruptcy Code includes statutory priorities for distribution of assets to creditors.
See 11 U.S.C. §§ 507, 510, 726. By reason of the lack of statutorily defined
priorities in a receivership, a creditor who might have a subordinated or disallowed
claim in bankruptcy may prefer to have the debtor’s assets administered outside
bankruptcy. Similarly, a government enforcement agency may believe that the
Bankruptcy Code fails to accord an adequate priority to the statutory interests
protected by the government agency.
In the event that a corporation subject to a receivership files bankruptcy, the
receiver has a duty to turn over the receivership assets to the trustee or debtor-inpossession under 11 U.S.C. § 543(b). However, 11 U.S.C. § 543(d) gives the
bankruptcy court discretion to leave the receiver in control of the receivership assets
“if the interests of creditors and, if the debtor is not insolvent, of equity security
holders would be better served by permitting a custodian [i.e., a receiver] to
continue in possession, custody, or control of such property . . . .” In addition,
there is some authority for the proposition that the appointment of a receiver for a
corporation prevents corporate management from filing bankruptcy on behalf of the
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corporation. See Part IV, above; see also CFTC v. FITC, Inc., supra, 52 B.R. 935,
938 (“The action of Rubenstrunk in filing a petition in bankruptcy without the
consent of the Court and its receiver directly contravenes this Court’s Orders . . . .
[¶] The Court, therefore, orders defendant Rubenstrunk to withdraw the bankruptcy
In Re FITC BK-LV 85-258 (Chapter 11), within 48 hours of notice of this Order”).
E.
Power of Receiver to File Litigation
28 U.S.C. § 754 states that a receiver, upon giving bond as required by the
court in any civil proceeding involving property, shall “be vested with complete
jurisdiction and control of all such property with the right to take possession thereof,”
and “shall have capacity to sue in any district without ancillary appointment, and
may be sued with respect thereto as provided in section 959 of this title.” “Federal
receivers are empowered pursuant to 28 U.S.C. § 754 to collect assets anywhere
in the United States.” Select Creations, Inc. v. Paliafito, supra, 852 F.Supp. at
780.
Section 754 requires the receiver, within ten days of its appointment, to file
copies of the complaint and order of appointment in each district in which
receivership property is located. In addition, “a federal receiver may sue in the
court of its appointment through an ancillary proceeding ‘to accomplish the ends
sought and directed by the suit in which the appointment was made.’” Tcherepnin
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v. Franz, 439 F.Supp. 1340, 1343-44 (N.D. Ill. 1977) (quoting Pope v. Louisville,
New Albany & Chicago Ry. Co., 173 U.S. 573, 577, 19 S.Ct. 500, 43 L.Ed. 814
(1899)).
A receiver of a corporation has the power to sue to set aside fraudulent
transfers made by the corporation. Scholes v. Lehmann, 56 F.3d 750, 755 (7th
Cir. 1995) (“Now that the corporations created and initially controlled by Douglas
are controlled by a receiver whose only object is to maximize the value of the
corporations for the benefit of their investors and any creditors, we cannot see an
objection to the receiver’s bringing suit to recover corporate assets unlawfully
dissipated by Douglas”), cert. denied, 516 U.S. 1028, 116 S.Ct. 673, 133 L.Ed.2d
522 (1995). It is less clear whether the receiver of the assets of an individual can
seek to recover fraudulent transfers made by the individual. Scholes, supra, 56
F.3d at 755 (“[W]e can find no cases in which a receiver for a sole proprietorship
recovered a fraudulent conveyance”). Equitable defenses such as unclean hands
that would apply to the entity in receivership may not apply to the receiver. FDIC v.
O’Melveny & Myers, 61 F.3d 17, 19 (9th Cir. 1995) (“. . . defenses based on a
party’s unclean hands or inequitable conduct do not generally apply against that
party’s receiver”).
F.
Control by Receiver of Attorney-Client Privilege
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The receiver of a corporation may be granted power to control the attorneyclient privilege of a corporation. See CFTC v. Standard Forex, Inc., 882 F.Supp.
40, 44 (E.D.N.Y. 1995) (“Accordingly, in the absence of any individual asserting
the right to control Standard Forex or its successor entity, there is no prejudice that
would ensue by granting to the Receiver the right to control the company’s attorneyclient privilege”); see also CFTC v. Weintraub, supra, 471 U.S. 343 (bankruptcy
trustee controls attorney-client privilege of corporate debtor).
G.
Protection of the Receiver from Litigation
28 U.S.C. § 959(a) provides that receivers “may be sued, without leave of
the court appointing them, with respect to any of their acts or transactions in
carrying on the business connected with such property.” Under § 959(a), a
receiver may be sued without leave of court only based on acts or transactions that
consist of “carrying on the business” connected with the property. Further, §
959(a) states: “Such actions shall be subject to the general equity power of such
court so far as the same may be necessary to the ends of justice, but this shall not
deprive a litigant of his right to trial by jury.” As described below, receivers are
often immune from suit, and receivership courts have the power to issue blanket
stays to protect the receiver from litigation.
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“Because receivers are entitled to protection against unnecessary and
oppressive litigation, ‘consent to sue [under 28 U.S.C. § 959] will not be granted
where the receiver has kept clearly within the scope of his authority and acted
wholly under the direction of the court.’” FDIC v. J.D.L. Associates, 866 F.Supp.
76, 78-79 (D. Conn. 1994) (quoting Connecticut state precedent).
In many instances a court-appointed receiver has derivative judicial immunity.
See New Alaska Development Corp. v. Guetschow, 869 F.2d 1298, 1303 (9th Cir.
1989) (“Absent broad immunity, receivers would be a lightning rod for harassing
litigation aimed at judicial orders”) (quotations and citation omitted); Pioche Mines
Consolidated, Inc. v. Dolman, supra, 333 F.2d at 276 (“The receiver is not
personally liable for acts done by him within the scope of the authority conferred
upon him by the court”) see also Bennett v. Williams, 892 F.2d 822 (9th Cir.
1989) (discussion of derived judicial immunity of bankruptcy trustee).
In a receivership, a federal court has the power to issue a blanket stay,
effective against all persons, to prevent interference with the receivership. “The
power of the district court to issue a stay, effective against all persons, of all
proceedings against the receivership entities rests as much on its control over the
property placed in receivership as on its jurisdiction over the parties to the securities
fraud action.” SEC v. Wencke, supra, 622 F.2d at 1369; see SEC v. Credit
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Bancorp, Ltd., 93 F.Supp.2d 475, 477 (S.D.N.Y. 200) (“Moreover, where a court
has appointed a receiver and obtained jurisdiction over the receivership estate, as
here, the power to stay competing actions falls within the court’s inherent power to
prevent interference with the administration of that estate”).
The federal court’s power to issue a stay to protect the receivership is not
unlimited. See, e.g., SEC v. Black, 163 F.3d 188, 196 (3rd Cir. 1998). In SEC v.
Black, supra, the circuit court explained that the district court correctly vacated an
ex parte freeze order as to three accounts in a receivership case:
“The SEC argues in its brief that the District Court
had the authority to impose and to continue the asset
freeze order over the A, B and D accounts pursuant to
Federal Rule of Civil Procedure 66 since the freeze was
part of an ongoing receivership proceeding governed by
the jurisdictional provisions of the federal securities laws.
15 U.S.C. §§ 77v(a), 78aa, 80b-14. However, the case
law cited by the SEC actually supports the District Court’s
determination that the freeze as to these funds was
improper because in no case referenced by the SEC has
it been granted a freeze ex parte of assets where those
assets were anything other than property, or deemed
property, of a defendant or of a culpable third party.” 163
F.3d at 196.
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A defendant who disobeys a court’s receivership orders risks contempt
sanctions. See, e.g., SEC v. Credit Bancorp, Ltd., supra, 2000 WL 968010, at
*6-*19 (court imposed contempt sanctions on defendant who disobeyed order to
turn over property to receiver).
H.
Duty of Receiver to Comply with State Law
Under 28 U.S.C. § 959(b), a receiver “appointed in any cause pending in
any court of the United States . . . shall manage and operate property in his
possession as such . . . receiver . . . according to the requirements of the valid
laws of the State in which such property is situated, in the same manner that the
owner or possessor thereof would be bound to do if in possession thereof.”
I.
Duty of Receiver to Account
“In effecting the final discharge of the receiver, the court must have a full
accounting by him, upon notice and hearing.” Pioche Mines Consolidated, Inc. v.
Dolman, supra, 333 F.2d at 276.
J.
Claimants and Distribution of Receivership Assets
Non-parties to the litigation that result in the appointment of the receiver may
have claims to property held or recovered by the receiver. To participate fully in the
receivership, the non-party may need to obtain leave to intervene under
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Fed.R.Civ.P. 24. SEC v. Credit Bancorp, Ltd., 194 F.R.D. 457 (S.D.N.Y. 2000)
(granting permissive intervention under Fed.R.Civ.P. 24(b)).
“It is typical in cases involving a receivership imposed on a corporate
defrauder that the resources of the receivership estate are insufficient to allow all
the victims of the fraud to recoup their losses, as is the situation here.” SEC v.
Credit Bancorp, Ltd., 2000 WL 1752979, at *14 (S.D.N.Y. 2000) (approving
proposed distribution of receivership assets). “[F]ederal courts overseeing equity
receiverships imposed on a defrauder’s estate have taken different approaches as to
whether to approve the return of assets through tracing.” Id. (citations omitted).
“[W]hile a court sitting in equity may allow tracing, there is no entitlement on the
part of a defrauded customer to that measure as it may frustrate equity.” Id.
(quotations and citation omitted). See United States v. Real Property Located at
13328 and 13324 State Highway 75 North, Blaine County, Idaho, 89 F.3d 551,
553 (9th Cir. 1996) (funds administered by SEC for victims of fraud would be
divided pro rata and creditor would not be permitted to apply tracing).
K.
Assessment of Receivership Costs
In a corporate receivership, the court has discretion in assessing whether and
to what extent the corporation must bear the cost of the receivership. United States
v. Ianello, supra, 824 F.2d at 209 (in RICO receivership, United States would
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initially bear costs of receivership pending resolution of lawsuit; however, “[i]f it is
established that Umberto’s as a corporate entity has benefitted from the
receivership, it might then be appropriate to reimburse the government for some, or
perhaps all, of the expenses of the receiver”); CFTC v. Frankwell Bullion, Ltd., 99
F.3d 299, 306 (9th Cir. 1996) (after CFTC improperly obtained appointment of
temporary receiver, “the district court did not abuse its discretion in allocating
seventy-five percent of the receivership costs to the CFTC”); Pioche Mines
Consolidated, Inc. v. Dolman, supra, 333 F.2d at 276 (where party wrongfully
obtained appointment of receiver, “[t]he court has a discretion to charge the
receiver’s expenses either to the corporation or to the party who wrongfully obtained
the receiver’s appointment”).
L.
Appeal of Receivership Orders
Under 28 U.S.C. § 1292(a)(2), the following orders are subject to
interlocutory appeal: “Interlocutory orders appointing receivers, or refusing orders to
wind up receiverships or to take steps to accomplish the purposes thereof, such as
directing sales or other disposals of property.” Under Fed.R.Civ.P. 62(a), an
appeal from such an order does not operate as a stay, but Rule 62(a) does not
preclude the appellant from seeking a stay pending appeal. See Fed.R.Civ.P.
62(g).
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VI.
ASSET FORFEITURE ISSUES
A.
Civil Asset Forfeiture Reform Act
The Civil Forfeiture Reform Act of 2000 (“CAFRA” or “the Act”)), Pub.L. No.
106-185, was signed on April 25, 2000 and became effective 120 days later, i.e.,
August 23, 2000. Codified in part at 18 U.S.C. §§ 983 and 985, and amending
§§ 981, 984 and other statutes, CAFRA makes numerous procedural and
substantive changes to civil, judicial and administrative forfeiture proceedings. This
is the most sweeping reform of civil forfeiture law since the Comprehensive Crime
Control Act of 1984. CAFRA also authorizes criminal forfeiture for any offense for
which Congress has authorized civil forfeiture, thereby drastically expanding the
scope of criminal forfeitures. 28 U.S.C. § 2461(c). However, the provisions of
CAFRA (highlights of which follow) do not reform criminal forfeiture proceedings.
Prior to CAFRA’s enactment, the Supreme Court ruled that, without
supporting exigent circumstances, the ex parte seizure of a residence in a civil asset
forfeiture proceeding violates the Due Process Clause of the U.S. Constitution.
United States v. James Daniel Good Real Property, 510 U.S. 43, 53, 114 S.Ct.
492, 126 L.Ed.2d 490 (1993). In finding unconstitutional the seizure in that case,
the Court nevertheless commented that an ex parte restraining order would be
appropriate in certain circumstances:
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“If there is evidence, in a particular case, that an owner is
likely to destroy his property when advised of the pending
action, the Government may obtain an ex parte restraining
order, or other appropriate relief, upon a proper showing
in district court. See Fed.R.Civ.P. 65.” 510 U.S. at 59.
B.
CAFRA Imposes Various Procedures and Deadlines for Government
and Claimants
In general, the government is given less time, and the claimant is given more
time. 18 U.S.C. § 983(a). Remember to examine all seizure notices carefully for
choices between administrative and judicial forfeiture, and beware of deadlines and
waivers. If delays still seem unduly prejudicial, consider the applicability of a motion
to return property under Fed.R.Cr.P. 41(e). Such motions can be filed in the district
court where the seizure warrant was issued or in the court of the district in which
the property was seized. 18 U.S.C. § 981(b)(3).
C.
CAFRA Switches the Burden of Proof
CAFRA switches the burden of proof in civil forfeiture proceedings from the
claimant to the government. 18 U.S.C. § 983(c)(1). The government can meet its
burden through the use of evidence gathered after the filing of the complaint. Id., §
981(c)(2). Where the government seeks to forfeit property used to “commit or
facilitate” a criminal offense (i.e., boats or cars used for narcotics trafficking), the
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government must show a “substantial connection between the property and the
offense.” Id., § 983(c)(3). This should prevent, e.g., forfeiture of houses based
upon trivial or attenuated links to criminal activity.
D.
CAFRA Codifies the “Innocent Owner” Affirmative Defense
CAFRA codifies the “innocent owner” affirmative defense for property interests
held before or after the time of the conduct giving rise to the forfeiture. 18 U.S.C.
§ 983(d).
E.
CAFRA Codifies Supreme Court Constitutional Law
CAFRA codifies Supreme Court constitutional law by permitted a claimant to
bear the burden of proving that “the forefeiture is grossly disproportional” to “the
gravity of the offense giving rise to the forfeiture.” 18 U.S.C. § 983(g). See
United States v. Bajakajian, 524 U.S. 321, 118 S.Ct. 2028, 141 L.Ed.2d 314
(1998).
F.
CAFRA Changes the Statute of Limitations
CAFRA changes the statute of limitations in 19 U.S.C. § 1621 – civil
forfeiture can be commenced either two years after the government’s discovery of
the property’s involvement in the alleged offense, or five years after discovery of the
offense, whichever is later. Time begins to run when the government is aware of
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facts that should trigger an investigation leading to the discovery of the property’s
involvement in the offense.
G.
CAFRA Extends Reach of Forfeiture
CAFRA extends the reach of forfeiture to “proceeds” of “specified unlawful
activity,” as defined in 18 U.S.C. § 1956(c)(7), i.e., the same long list of offenses
listed in the money laundering statute. Money laundering need not be proven – the
cross-reference is purely definitional. 18 U.S.C. § 981(a)(1)(c). “Proceeds” is
defined as property of any kind obtained as a result of the offense giving rise to
forfeiture and property traceable thereto, and is not limited to net gain or profit.
H.
CAFRA Expands Forfeiture of Fungible Property
CAFRA expands forfeiture of fungible property, (i.e., cash, funds on deposit,
bearer instruments, precious metals, if forfeiture is commenced within one year from
the date of the underlying offense), to all civil forfeitures, not just money laundering
forfeitures. 18 U.S.C. § 984.
I.
CAFRA Codifies Procedures for Forfeiting Real Property
CAFRA codifies procedures for forfeiting real property. 18 U.S.C. § 985.
J.
CAFRA Allows Recovery of Attorney Fees
CAFRA allows recovery of legal fees for the claimant substantially prevailing
and (unlike the Equal Access to Justice Act), CAFRA: 1) is not limited to cases
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where the government’s position was without substantial justification, and 2) is not
limited to the rate of $125 per hour. 28 U.S.C. § 2465. (Alternatively, if the
claimant’s claimed property interest is found “frivolous” after the government
prevails, then the court can impose a fine between $250 and $5,000, separate
from exposure under Fed.R.Civ.P. 11.)
K.
CAFRA Punishes as a Crime any Destruction, Transfer, or Disposal
of Property
CAFRA, by amending 18 U.S.C. § 2232, punishes as a crime any
destruction, transfer, or disposal of property (before, during or after any search for
or seizure of property), if done for the “purpose of preventing or impairing the
Government’s lawful authority to take such property into its custody or control or to
continue holding” such property. 18 U.S.C. § 2232(a). In addition, § 2232(b)
punishes as a crime the destruction or transfer of property for the purpose of
impairing or defeating a court’s continuing in rem jurisdiction of property in a civil
forfeiture proceeding.
L.
CAFRA Provides for Sanctions
CAFRA provides for sanctions (up to and including dismissal of the claim) if
the claimant in the forfeiture proceeding refuses to provide bank records located in a
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foreign country. 18 U.S.C. § 986(d). Attorneys for holders of accounts in the
Cayman Islands, Switzerland, and other bank secrecy havens, take note.
M.
CAFRA Reinstates Fugitive Disentitlement Doctrine
CAFRA reinstates the fugitive disentitlement doctrine, allowing the court to
reject claims by fugitives in civil forfeitures. 28 U.S.C. § 2466.
N.
CAFRA Maintains Pre-Trial Restraining Orders
CAFRA maintains pre-trial restraining order authority in criminal forfeitures to
preserve the property. 21 U.S.C. § 853(e). Assets of a business may be
restrained to ensure their availability for restitution 18 U.S.C. § 983(j). Section
983(j)(1) provides that, upon application of the United States, a federal court “may
enter a restraining order or injunction . . . or take any other action to seize secure,
maintain, or preserve the availability” of property subject to civil forfeiture.
In
addition, in limited circumstances, 18 U.S.C. § 983(j)(3) authorizes an ex parte
restraining order to be granted even before the United States files a civil forfeiture
complaint:
“(3) A temporary restraining order under this
subsection may be entered upon application of the United
States without notice or opportunity for a hearing when a
complaint has not yet been filed with respect to the
property, if the United States demonstrates that there is
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probable cause to believe that the property with respect to
which the order is sought is subject to civil forfeiture and
that provision of notice will jeopardize the availability of
the property for forfeiture. Such a temporary order shall
expire not more than 10 days after the date on which it is
entered, unless extended for good cause shown . . . .”
Prior to the enactment of CAFRA, the Ninth Circuit ruled that a pre-trial
restraining order is a form of injunction subject to interlocutory appeal under 28
U.S.C. § 1292(a)(1). United States v. Roth, supra, 912 F.2d at 1133 (“The
government’s argument that a pre-trial order restraining assets is a non-appealable
order ignores Crozier’s holding that such an order is a preliminary injunction for
procedural purposes and therefore appealable as a preliminary injunction under
1292(a)(1)”).
L.L.G.
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