On, January 31, 2023, Bankruptcy Judge Goldblatt issued a comprehensive opinion discussing Mareva injunctions which generally prohibit the defendant from transferring its assets when a plaintiff has only asserted a “legal claim” against the defendant/debtor and before a judgment is actually entered. The court also discussed how the U.S. Supreme Court opinion in the Grupo case (as discussed below) controlled his decision. See Miller v. Mott (In Re Team Systems Int., LLC).
In this highly contentious bankruptcy, Debtor was a small business government contractor whose work was done solely by its members and had no independent employees. The Chapter 7 trustee (the case was originally filed as a Chapter 11 but converted to a Chapter 7) initiated a fraudulent conveyance complaint (“Complaint”) against numerous defendants/insiders, their family members, and entities which they owned in an attempt to recover property worth in excess of $14 million. Per the Complaint, the trustee sought: (a) recovery of these conveyances; (b) the imposition of a preliminary injunction to prevent the alienation of 3 specific properties; (c) the enjoining of the transfer of other real estate and other assets; and (d) an accounting.
During the course of the litigation and the bankruptcy in general, it came to light that not only were there substantial prepetition transfers to insiders and that the insiders had taken steps to conceal the existence of these transfers, but that Debtor’s business records had been fabricated by the insiders to conceal substantial transfers to themselves. For example, some of the transfers were for the insiders’ purchase of multimillion dollar homes, expensive cars, etc., yet were listed by debtors on their business records as “payments to contractors” to lawyers for their legal services. Further, it appeared that some of the transfers of substantial sums of money were whited out on Debtor’s bank records in an effort to conceal these transactions.
The Court performed a thorough analysis under the U.S. Supreme Court decision in Grupo Mexicano de Desarrolla SA v. Alliance Bond Fund Inc., 527 U.S. 308 (1999), which held that a federal court may not freeze a defendant’s assets when a plaintiff only asserts a legal “claim” against the defendants as they only have a claim in general and not one against any particular asset. Importantly though, the Grupo court did not rule out the availability of an injunction when the Plaintiff seeks “equitable relief”.
In the case herein, the Court found that the trustee’s requests including one for an asset freeze was “equitable” in nature and therefore permissible. As aforestated, despite the fact that the Complaint was one for the return of fraudulent transfers (generally an action sounding in “law”), the trustee also requested a preliminary injunction to freeze certain assets. In deciding that Trustee’s request to “freeze cash” was a bit more troublesome, this Court still granted the relief as the Complaint also called for an accounting of the disposition of cash due to the incomplete business records and the uncertainty about the end result of the transferred funds. It appears that the Court’s granting of the trustee’s requested relief hinged on the “equitable exception” in the Grupo decision and thus concluded that it had the authority to impose the asset freeze here. Note that this Court also delved into an analysis of the U.S. Supreme Court case of Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), which discusses the availability of the requested relief where the trustee seeks the freezing of debtor’s cash. Herein, the trustee’s requests (albeit with a somewhat more limited scope than originally requested) were permitted since in addition to seeking to recover the value of the transferred cash as a fraudulent conveyance it also included a claim for an accounting in the disposition of that cash, which is categorized as equitable relief.
This opinion provides an extremely well-reasoned and analytical approach detailing the burdens which must be met and the scope in requesting an asset freeze of Debtor’s property.