“NUCLEAR WEAPON OF THE LAW” UNAVAILABLE TO CREDITOR IN RECENT CASE
May 04, 2007
Getting a judgment is one thing; collecting it is another. Creditors often are concerned about the ability to recover money from debtors that may have sufficient assets at the outset of a dispute but may squander those assets over the course of litigation. As previously mentioned in this blog, there are a few remedies under Indiana law that address this very legitimate concern. In a decision by Judge David F. Hamilton on March 20, 2007, another remedy, albeit one with virtually zero applicability to most commercial collection cases, is discussed - prejudgment injunctive relief. The lesson J&J Wehner, Inc. v. H&L Plating & Grinding, Inc., 2007 U.S. Dist. LEXIS 24366 (S.D. Ind.) [WehnerOpinion.pdf] teaches us is that, unlike prejudgment attachment and garnishment, injunctive relief usually is not the answer.
Case background. The dispute surrounded the sale of a chrome plating and grinding business. As a part of the sale, the purchasers gave the sellers an installment promissory note in the sum of $866,000. Not long after taking over the business, the purchasers learned that the site might have been contaminated with high levels of chromium and hexavalent chromium and that the sellers likely had actual knowledge of the contamination at the time of the sale. Several employees told the purchasers that the sellers had disposed of chromium waste on the premises. Remediation estimates were between $1.5 million and $2.25 million. Due to the hefty environmental liability exposure, the purchasers stopped making payments on the note, which they claimed they were fraudulently induced to sign. The note contained a warranty that the sellers were not in violation of any environmental laws affecting the properties or the business. One issue in the case was whether the purchasers’ default could be excused due to the sellers’ fraud.
Prejudgment relief requested. Given the potential delays associated with litigating the claims, the sellers sought a preliminary injunction under Ind. Code § 34-26-1-5, ordering the purchasers, at the outset of the case, to pay all amounts due and owing under the note either directly to the sellers or into an escrow account with the court. Wehner at 9. The sellers’ objective was to secure satisfaction of the judgment they ultimately hoped to receive. (Wishful thinking, perhaps, given the evidence of the environmental misconduct . . ..)
Relief denied. One of the elements to be established for preliminary injunctive relief is that the remedy at law must be inadequate - the injury cannot be rectified by the recovery of money. As a general rule, a party that suffers “mere economic injury” is not entitled to injunctive relief because an award of damages is sufficient to make the party whole. Id. at 10. There are, however, “unusual” cases in which the collection of damages may be “impossible, uncertain or unusually difficult” so that a preliminary injunction should be available. Id. In this particular case, at issue was the demand for a pre-trial payment to a creditor on a disputed debt or, in the alternative, an impoundment of money to the court. Such extraordinary relief can arise out of a procedural tool that the United States Supreme Court in Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308, 329 (1999) described as “the nuclear weapon of the law.” Id. at 11. The problem in Wehner was that, if the sellers prevailed on their underlying claim, the damages from the purchasers’ default would be entirely monetary and easy to quantify. Although there was a legitimate concern that the purchasers might not be ready to pay the full damages when due, “that is often the case in civil litigation.” Id. at 12. Judge Hamilton held that the sellers “have not shown that their case is so compelling as to justify use of ‘the nuclear weapon of the law,’ a pre-judgment injunction ordering payment of a general creditor or freezing assets to protect a general creditor.” Id.
Fraudulent inducement. Judge Hamilton also addressed, in part, whether the alleged fraud by the sellers could excuse nonperformance under the note. The note was, in fact, an unconditional promise to pay according to its terms. I.C. § 26-1-3.1-106(a). But, in this case, the note was not in the hands of a holder in due course. If it were, the purchasers’ fraudulent inducement defense would have no merit. I.C. § 26-1-3.1-305(a)(1)(C) . Because the purchasers were not holders in due course (defined in Indiana’s UCC at 26-1-3.1-302), common law defenses such as fraud in the inducement were available to them. I.C. § 26-1-3.1-306. Judge Hamilton denied the sellers’ motion for summary judgment on the defense and concluded that the fraudulent inducement issue must be tried.
In sum. For commercial lending institutions concerned about the dissipation of the assets of their borrowers during a foreclosure proceeding, remedies such as pre-judgment attachment and/or garnishment may be viable. Barring highly unique circumstances, however, an injunction is not. A motion for a prejudgment order to pay money almost always will fail. Lenders will be better served by prosecuting the underlying action as quickly as possible. Once a judgment is obtained, courts are much more accommodating in terms of collection efforts.