4: Prejudgment remedies
© Charles Tabb 2010
Don’t Get Rid of my Money
Timing
• Postjudgment remedy:
–Complaint
–Judgment
–Remedy (e.g., execution, garnishment)
Timing
• Prejudgment remedy
–Complaint
–Remedy (e.g., attachment,
garnishment)
–Judgment
Essence of Prejudgment Remedy
• Sheriff takes debtor’s property and holds
it while the lawsuit is still pending – just
in case the creditor gets a judgment!
• And IF creditor does get judgment, then
sheriff can just execute on the alreadyseized property
Why creditor likes it
• Obviously, the idea of a prejudgment
remedy is a very sweet deal for the
creditor
– Secures any possible judgment they might
later get
– Claim spot in the priority line versus other
creditors, purchasers vs. debtor
Can they do that??
• But what about the poor debtor – loses
dominion and control over his property
before a court has held that he actually
owes creditor anything
• Enormous leverage for creditor for
debtor to “voluntarily” pay debt – even if
disputed
Due Process concern
• Prejudgment remedies raise serious due
process issue, because debtor is deprived
of property without having a chance to
be heard
• Supreme Court has issued series of
opinions detailing required procedural
safeguards
So how justify?
• Given extreme impact on debtor, and
extraordinary benefit to creditor, how
can we ever justify a prejudgment
remedy?
• i.e., what conditions must exist before it
makes sense to take this extreme step?
1st (and primary) Justification
• If don’t – judgment would be
worthless
• Prevailing creditor would not be able
to collect because debtor would have
transferred or hidden assets during
the trial
2nd Justification
• Even the threat of uncollectible
judgment isn’t enough
• ALSO have to have a high degree of
confidence that the creditor will WIN
the trial and get a judgment
Grupo Mexicano example
• Facts of Grupo Mexicano are
paradigmatic example of when need
a prejudgment remedy:
–1st – absolute certainty that if wait till
judgment, would be worthless
Why Judgment Worthless in Grupo
• 1st – Debtor insolvent
• 2nd – Debtor transferring its sole substantial
asset to other creditors (all of whom were in
Mexico), to exclusion of π
• 3rd –Debtor’s assets in Mexico – can’t reach by
judicial process
Grupo – 2nd aspect
• So – 1st establish sufficient “threat” to
security of judgment
• AND
• “almost certain” that π will succeed on
merits of claim -- indeed, “no plausible
defense” even presented
What traditional prejmt remedy?
• In Grupo, what would the traditional
prejudgment remedy be?
–Garnishment
• Why?
– Because the asset (Toll Road Notes) was a
debt owing from “concessionaries” to
debtor GMD
Federalism
• 1st – how was case in federal court?
–Diversity
• US creditor vs. Mexican debtor
State remedies in Federal court
• Are state remedies (such as
prejudgment garnishment) available
in federal court in diversity case?
• Sure – see Fed R Civ P rules 64
(prejmt) and 69 (postjmt)
State Garnishment in Grupo??
• So – why didn’t the creditor in Grupo
just get a prejmt garnishment of the
debtor’s asset – the debt on the Toll
Road Notes (i.e, the one issued by
the Mexican govt and owing to
debtor GMD from the
concessionaries)?
Garnishment Unavailable
• No garnishment because the prospective
garnishees (either the concessionaries or
Mexican govt) were located in Mexico –
• And thus no personal jurisdiction in USA
If not garnishment, then what?
• Garnishment was not available
• So π sought an injunction directly against
Dr in NY federal court, prohibiting Dr
from transferring its rights under the Toll
Road notes
Why was Dr subject to Personal
Jurisdiction in New York?
• Consent
• In the notes issued to π
“Mareva” injunction
• An “asset-freeze” injunction such as this is
now known as a “Mareva” injunction
• That was name of 1975 English case that 1st
granted such a remedy
Mareva injunction - grounds
Grounds:
• Debt due and owing
• Danger DR will dispose of assets
to defeat jmt
Why not use FRCP 64?
• Recall that Rule 64 incorporates state
prejudgment remedies in federal court
• So – IF New York state law allowed Mareva
injunctions, then the π could have sought such
an injunction under Rule 64 – rather than
under Rule 65
Federalism problem
• Apparently, then, NY state law did NOT
allow a Mareva injunction
• Since π could not get a Mareva injunction
under state law and thus under Rule 64,
have a federalism concern about allowing
the π to get such an injunction in federal
court
Erie concern
• Since is diversity case, under Erie doctrine
apply state law in matters of substance (as
opposed to procedure)
• Only way to grant injunction sought, then, is
to conclude that a Mareva injunction is a
matter of procedure only, not substance
Substance vs Procedure
• Question then is – is granting a prejmt
injunction freezing debtor’s assets a
matter of procedure only or does it affect
substance?
Substance implicated
• Majority in Grupo believes that the
requested injunction affects the
substance of the Dr-Cr relationship
• Would in effect give CR a property right
in Dr’s property, and alter Dr’s rights in
own property
Any Federal relief?
• So– is there any instance where federal
law DOES preempt state law and provide
a federal law of debtor-creditor
relations?
• If so, then no Erie problem
Federal relief -> BANKRUPTCY
• Sure – the Bankruptcy Code (title 11, US
Code) is a federal statutory law affecting
dr-cr relations, and is not constrained by
Erie
Aspects of Bankruptcy Relief
• Freeze DR’s assets pending resolution of
claims
• Prohibit preferential treatment of some
crs to exclusion of others
• Pro rata treatment of all unsecured crs
So why not file a Bankruptcy case?
• The core aspects of a bankruptcy proceeding
arte exactly what π needs here – preserve dr’s
assets and keep other crs from getting
everything
• Under US law Crs do have the power to file an
involuntary bankruptcy case against a Dr who
can’t pay its debts as they come due
– Which certainly seems to be true here
No US nexus
• Can only file a bankruptcy case in US if
have a nexus to the US
– E.g., place of business, assets, residence,
domicile
• DR GMD did not have that nexus
– Mexican corporation, all assets in Mexico
Mexican bankruptcy?
• Only bankruptcy option, then, for π
would be to file IN MEXICO
Nature of relief sought in Grupo?
• The relief π sought in Grupo, then, is
essentially what would be available in a
bankruptcy case
• Asking federal court to create as a matter of
federal common law a quasi-bankruptcy right
• Query whether appropriate under separation
of powers?
No jurisdiction in equity
• Supreme Court held that federal courts lacked
jurisdiction in equity to issue a Mareva
injunction
• i.e., had no POWER to issue the injunction at
all
Reasoning
• Not within traditional equity jurisdiction
at time of separation from England
Problem 1.15
• Feb 1: CR sues Dr for $5K
• March 1: Cr’s writ attachment issued &
delivered
• March 3: Sheriff levies on Dr’s pig Porky
• April 10: DR sells Porky to Purchaser
• June 1: Cr gets judgment
Answer to 1.15
• Cr wins over Purchaser
• Cr’s attachment lien arose upon levy on March
3
• Thus Purchaser acquired Porky subject to Cr’s
attachment lien
• Cr’s attachment lien became choate upon
entry of final judgment on June 1
• CR can have Porky sold to satisfy judgment
Fair to Purchaser?
• Sure – sheriff LEVIED on Porky prior to
Purchaser’s acquisition of Porky
• So P should have had notice that DR did
not have clear title to Porky
1.15 is why Cr needs attachment
• Indeed, the facts of 1.15 are precisely
why CR needs a prejmt remedy
– > threat that DR will sell assets during
pendency of lawsuit
– > would now be a lot easier for DR to hide
the $ that he got from P than a pig!
Problem 1.16
• Same facts as 1.15, except CR dismissed
her lawsuit vs DR when DR agreed to pay
$200/month
• Now who has priority to Porky?
Answer to 1.16
• Purchaser has priority
• Indeed, Purchaser has the ONLY claim against
Porky
• Once CR dismissed lawsuit, the inchoate
attachment lien evaporated
– > conditional on getting a judgment
Problem 1.17
• Year before: CR Z perfects security interest in
Dr art collection to secure debt of $18K
• May 1: CR A sued DR for $5k
• May 15: CR A writ attachment issued and
delivered
• May 17: sheriff levied on Debtor’s art
collection, valued at $20,000.
• August 1 Cr A final money judgment against
Debtor for $5K
Answer to 1.17
• Cr Z has priority
• Its perfected security interest was 1st in
time
• Cr A as “lien Cr” under UCC 9-317(a)(2) only
has priority as against an unperfected SI