Assets Cannot Be Frozen By An Injunction
May 18, 2009
As mentioned in my May 4, 2007 post “Nuclear Weapon of the Law" Unavailable to Creditor in Recent Case, getting a judgment is one thing; collecting it is another. Secured lenders embroiled in commercial foreclosure litigation always focus upon their ability to collect any deficiency judgment, and defendant borrowers or guarantors may attempt to dispose of assets during the course of litigation. The March 16, 2009 opinion by Judge Simon in Yessenow v. Hudson, 2009 U.S. Dist. LEXIS 21393 (N.D. Ind. 2009) reminds us that the law prohibits courts from freezing a defendant’s assets to protect the recovery of damages. Indiana law offers a handful of remedies to deal with this concern, but an injunction is not one of them.
The situation. The Yessenow case arose out of a business deal in which two doctors and a banker invested in a hospital. Later, a venture capital company offered to purchase five of the hospital’s ancillary medical facilities through a sale/leaseback transaction, but the company required an initial security deposit of about $1,500,000 in case the hospital defaulted on any of the sale payments. One of the doctors, Yessenow, who became the plaintiff in the litigation, posted the security deposit. To do so, he obtained a letter of credit backed by a promissory note and secured by a mortgage on his condo in Chicago. Yessenow and the two other investors (the defendants) entered into an indemnification agreement that they and the hospital would indemnify (reimburse) Yessenow for any losses incurred as a result of the loan. A couple years later, the bank demanded a draw on the full amount of the letter of credit, and Yessenow filed suit for indemnification, which his partners/co-investors had refused to do. In the action, Yessenow filed a motion for preliminary injunction to freeze those defendants’ assets.
No injunction. One of the reasons Judge Simon denied Yessenow’s request for injunction, which sought a preliminary asset freeze, was the precedent set by the United States Supreme Court in Grupo Mexicano de Desarrolla v. Alliance Bond Fund, 527 U.S. 308 (1999):
[Trial courts have] no authority to issue a preliminary injunction preventing defendants from disposing of their assets pending adjudication of a plaintiff’s contract claim for money damages.
The rationale behind this rule is that “until a creditor has established title, he has no right to interfere with the debtor’s property, and it would lead to an unnecessary, and perhaps, a fruitless and oppressive interruption of the debtor’s rights.” Judge Simon concluded that the Grupo decision directly applied to this case. Plaintiff Yessenow had sued the defendants for damages and had feared that they would secrete their assets or reinvest their money into other ventures to evade paying such damages. “But fear that a debtor will avoid paying their debts is nothing new or exceptional.” Hence the development and purpose of the law of fraudulent conveyances and bankruptcy.
Other avenues for relief. In Indiana, secured lenders cannot invoke a trial court’s equitable power to restrict a defendant’s use of his unencumbered property before judgment. While a foreclosing lender could pursue the remedies of pre-judgment attachment and/or pre-judgment garnishment discussed in my 12-14-06 and 3-6-07 posts, pre-judgment remedies can be difficult and expensive to prosecute. (Remember that, after the fact, Indiana’s Uniform Fraudulent Transfer Act at I.C. 32-18-2 may apply.) Lenders may be better served to litigate their underlying actions as quickly as possible, and then utilize the post-judgment collection tools, prescribed by Indiana statutes, that are readily enforced by Indiana’s courts. The fact is - as frustrating as these situations may be, temporary restraining orders and injunctions are not the way to go.