Mareva Orders Fact or Fiction in the United States

Mareva Orders Fact or Fiction in the United States

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In light of the globalization of the economy, U.S. courts have shown a greater tendency in recent times to look to foreign precedent in determining how to apply and shape U.S. law. Perhaps in the case of Mareva injunctions, U.S. courts and lawmakers should more frequently adopt what has become the norm in other common-law jurisdictions. Indeed, despite appearances to the contrary, Mareva is already a part of the legal landscape, and it is important for practitioners to keep this in mind when framing their pleadings.

U.S. courts have historically looked with disfavor upon the use of prejudgment injunctions that restrain a defendant in a suit from dissipating or transferring assets where the plaintiff simply seeks money damages and claims no interest in specific property belonging to the defendant. Instead, some U.S. courts will sit idly by and allow a debtor to dissipate its assets, undertake a scheme of fraudulent transfers and wait for a trustee to be appointed in bankruptcy to try to "clean up the mess" afterwards. Might it be better to avoid making the mess in the first place?

By contrast, English, Australian and other common-law courts regularly consider and issue such prejudgment injunctions, known as Mareva orders. In England and throughout the rest of the common-law world, the general rule remains that a plaintiff alleging nothing more than a general claim for damages at law cannot seek an order prohibiting a defendant from disposing of his assets prior to obtaining a judgment. However, in 1975 an exception to the general rule was founded when the first Mareva order was issued, the use of which was espoused and clarified in Mareva Compania Naviera S.A. v. International Bulkcarriers S.A. [1975], 2 Lloyd's Rep. 509 (C.A.). A Mareva order can be issued when it appears that a debtor is undertaking a scheme designed to defraud certain creditors, and the basis for such an action can be either actual or constructive fraud. The order does not deprive the defendant of his property, but merely curtails the defendant's ability to arbitrarily dispose of his property. Since the Mareva decision, requests for Mareva injunctions have become commonplace in common-law jurisdictions.

Despite the almost unanimous common-law jurisdiction international support, the U.S. Supreme Court has considered and rejected application of Mareva orders in the United States.2 In Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund Inc., 119 S. Ct. 1961, 527 U.S. 308 (1999), the Supreme Court overturned the Second Circuit Court of Appeals and held that federal courts may not issue Mareva injunctions under their inherent equitable powers, citing the "well-established general rule that a judgment establishing the debt was necessary before a court of equity would interfere with the debtor's use of his property." Id. at 1969. In refusing to authorize the issuance of Mareva orders, the Supreme Court "punted" the issue to Congress, explicitly stating that such an expansion of a creditor's powers over debtors should be resolved by Congress. See Id. at 1975. But did the Supreme Court really foreclose the use of Mareva orders in the United States?

Since Grupo Mexicano, U.S. courts have facially adhered to the ruling of the Supreme Court.3 Nonetheless, courts and plaintiffs have discovered a means to "plead around" the Grupo Mexicano ruling. Now, if a plaintiff seeking an injunction prohibiting a defendant from dissipating his assets prejudgment includes some form of equitable component to the requested relief, recent decisions have distinguished Grupo Mexicano and been willing to issue the injunction on the basis that Grupo Mexicano only concerned a claim solely for money damages, a strictly legal claim. See, e.g., Walczak v. EPL Prolong Inc., 198 F.3d 725, 730 (9th Cir. 1999) (where minority shareholder brought action seeking to enjoin sale of substantially all of a company's assets, Ninth Circuit distinguished Grupo Mexicano by finding that the requested injunction did "not completely prohibit appellants from taking any action with regard to their assets" and "merely restrains appellants from either completing the 1998 agreement or liquidating [the company]."); United States, Rahman v. Oncology Assoc. P.C., 198 F.3d 489, 497-98 (4th Cir. 1999) (finding that where a plaintiff included a request for imposition of a constructive trust with its fraud claim, Grupo Mexicano was not implicated because "the bill contains allegations which, if proved, entitle petitioners to some equitable relief."); Slidell Inc. v. Millenium Inorganic Chem. Inc., 2002 WL 649086 at *3 (D. Minn. 2002) (plaintiff sought a preliminary injunction preventing defendant from disassembling partially constructed packing equipment pending judicial resolution of asserted claims. Court held that because plaintiff also sought equitable relief in the form of a constructive trust, equitable lien and specific performance, "Grupo does not deprive the court of jurisdiction to entertain [the plaintiff's] claim for equitable relief."); Newby v. Enron Corp., 188 F. Supp. 2d 684 (S.D. Tex. 2002) (court considered issuance of prejudgment injunctive relief where insider trading claim was brought against Enron officers and directors and plaintiff sought compensatory damages, restitution and constructive trust, and while court denied the injunction, it did so because of a failure on the merits and not because of a prohibition against issuing the injunction). In the bankruptcy context, some courts have been willing to go even further. See In re Dow Corning Corp., 280 F.3d 648, 657-58 (6th Cir. 2002) ("[w]e conclude that due to this statutory grant of power [referring to §105(a) of the Bankruptcy Code], the bankruptcy court is not confined to traditional equity jurisprudence, and therefore, the bankruptcy court's Grupo Mexicano analysis was misplaced.").

Thus, knowledgeable counsel will include an equitable component with their legal claims when confronted with a potential pre-petition fraudulent transfer scheme in order to bypass the limitations of the Grupo Mexicano decision. Whereas the common-law jurisdictions allow for such relief on a relatively straightforward basis, U.S. claimants are forced to play these drafting games. Nonetheless, based on recent case law, Mareva orders appear to be available if the plaintiff drafts its complaint in a certain manner.

Fraudulent transfer law under §548 of the Bankruptcy Code and under state laws is intended to rectify past evils that an insolvent company has perpetrated on innocent creditors by favoring one creditor or groups of creditors ahead of similarly situated creditors. The avoidance powers under the Bankruptcy Code are powerful tools available to a trustee and a court in their continuing efforts to "bring equity" to the bankruptcy process. But why wait until after the fact? The avoidance process in a U.S. bankruptcy takes a tremendous amount of time and absorbs a tremendous amount of money that would otherwise be available for creditors. If there is a means to prevent the "bad" act prior to the bankruptcy, does it not behoove creditors to take advantage of that means? Of course, with any prejudgment seizure or injunction comes great risk and potential violation of due process and basic rights under our laws. These factors demand a cautious approach. Still, if a creditor can make a legitimate and reasonable showing that its debtor, pre-bankruptcy, is dissipating its assets, perhaps that creditor should be permitted to obtain a Mareva order.

Mareva orders do have a place in the United States. The fact that lawyers have devised drafting techniques that allow their clients to end-run around the Grupo Mexicano ruling further supports the conclusion that Mareva orders, while perhaps not by their accepted name, do have a place in the U.S. legal system and are a valuable tool in the insolvency arena. The fact that these drafting techniques, while transparent, are still finding acceptance in recent case law provides even further support for this conclusion. U.S. creditors should not have to wait until after the fact to take action.


Footnotes

1 Mr. Silverman is a partner of Bingham McCutchen LLP, resident in New York. Mr. Silverman's practice focuses on multinational financial restructuring and insolvency proceedings. Mr. Kirshner is an associate in the New York office of Bingham McCutchen. Mr. Kirshner's practice focuses on financial restructuring and insolvency proceedings. Return to article

2 Other authors have considered whether Mareva relief is already available under the Uniform Fraudulent Transfer Act and the Uniform Fraudulent Conveyance Act (see Young, David B., Mareva Orders in Australian and American Courts: Fraudulent Transfers, Preferences and Insolvency Issues, Oct. 18, 2001, prepared for the Fall 2001 Meeting of the Business Bankruptcy Committee of the Business Law Section of the American Bar Association). Return to article

3 The following is not a comprehensive list of all cases dealing with Mareva-like issues since Grupo Mexicano, but simply an overview sampling and summary of such cases. Return to article

Journal Date: 
Friday, November 1, 2002